Western Alliance Bancorporation — 2011 Form 10-K
Business context and reporting period. Western Alliance Bancorporation is a Phoenix-based bank holding company operating Bank of Nevada, Western Alliance Bank and Torrey Pines Bank, with additional equipment-finance and investment-advisory businesses. This Form 10-K covers the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. The company reported unaudited fourth-quarter net income of $7.1 million, or $0.07 per diluted share; income available to common stockholders was $5.3 million.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $257.7 million | $232.6 million |
| Provision for credit losses | $46.2 million | $93.2 million |
| Net income (loss) | $31.5 million | ($7.2 million) |
| Net income (loss) available to common stockholders | $15.3 million | ($17.1 million) |
| Net interest margin | 4.37% | 4.23% |
| Net charge-offs | $57.7 million | $91.1 million |
- Net interest income rose 10.8%, supported by growth in average earning assets and lower deposit funding costs. Average cost of interest-bearing deposits fell to 0.69% from 1.07%; average yield on earning assets declined to 5.02% from 5.12%.
- Total assets were $6.84 billion, up 10.5%. Gross loans were $4.78 billion, up approximately 12.7%, and deposits were $5.66 billion, up 6.0%. Commercial real estate-related lending represented about 61% of loans; commercial real estate, construction and land development, and commercial and industrial loans together represented about 85%.
- Noninterest income fell 26.4% to $34.5 million, principally because securities-sale gains declined to $4.8 million from $19.8 million. Noninterest expense was nearly flat at $195.6 million; lower insurance and repossessed-asset costs were partly offset by higher salaries and benefits.
- Asset quality improved year over year: nonaccrual loans were $90.4 million (1.89% of gross loans), versus $117.0 million (2.76%); nonperforming assets were $294.6 million versus $342.8 million. The allowance for credit losses was $99.2 million, or 2.07% of gross loans, compared with $110.7 million, or 2.61%. Troubled debt restructured loans totaled $112.5 million.
- Cash and cash equivalents were $155.0 million. Operating cash flow was $142.5 million; investing cash outflow was $812.4 million and financing cash inflow was $608.2 million. Management reported $891.2 million of liquid assets, including $728.9 million of unpledged marketable securities, and judged liquidity adequate for expected needs over the next 90–120 days.
- Funding included $5.66 billion of deposits, $123.6 million of customer repurchase agreements, $280.0 million of FHLB advances and $75.0 million of senior notes due 2015 bearing 10% interest. Junior subordinated debt had a $37.0 million carrying value. Total stockholders’ equity was $636.7 million. The consolidated total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 12.6%, 11.3% and 9.8%, respectively; all banks met well-capitalized thresholds, subject to Bank of Nevada’s additional supervisory requirement.
Material changes versus 2010
- The company returned to profitability: common-stockholder results improved by $32.4 million, while net income improved by $38.7 million. All three bank subsidiaries were profitable in 2011.
- The lower credit-loss provision and charge-offs materially aided results; however, the allowance-to-loans ratio also declined, making ongoing credit performance and reserve adequacy important to monitor.
- Loans grew faster than deposits, and short-term borrowings increased, including $280.0 million of FHLB advances at year-end.
- The company issued $141.0 million of Treasury Small Business Lending Fund preferred stock and used approximately $140.8 million of proceeds to redeem its $140.0 million TARP preferred stock, plus accrued dividends. It repurchased and retired the remaining Treasury warrant for $0.4 million. The preferred-stock redemption generated a one-time $6.9 million charge to retained earnings.
Outlook, risks and unusual items
- Management provided no specific earnings or growth guidance. The filing says weakness in real estate-related loan portfolios was expected to continue through 2012 and anticipates elevated nonperforming assets and charge-offs.
- Key risks include concentrated exposure to commercial real estate and regional economies in Arizona, California and Nevada; further collateral-value declines or credit losses; competition for low-cost deposits; funding access and interest-rate sensitivity; and evolving regulatory requirements.
- Bank of Nevada remained subject to a memorandum of understanding requiring heightened oversight, enhanced plans and policies, higher Tier 1 capital, and prior regulatory approval for dividends to the parent. The company said the bank was in compliance. The MOU restricts the parent’s access to that bank’s capital distributions.
- The company recognized a $61.7 million net deferred tax asset despite a cumulative three-year pretax loss, relying on forecasts that net operating losses would be used by the end of 2013. Underperformance could require a valuation allowance and reduce capital.
- The IRS had proposed a $136.7 million taxable-income adjustment connected with a 2008 deduction and an approximately $40.0 million tax-refund claim. An IRS appeals official agreed with the company, but Joint Committee on Taxation approval was still pending; no reserve had been accrued.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the improvement in credit quality persists, particularly in Bank of Nevada, and whether the allowance remains adequate as loans grow.
- Current status and terms of Bank of Nevada’s supervisory MOU, including its capital requirement and restrictions on dividends or balance-sheet changes.
- Whether forecast taxable income supports realization of the deferred tax asset and whether the IRS refund matter received final approval.
- Deposit stability, reliance on FHLB advances and other wholesale funding, and available borrowing capacity under current collateral conditions.
- How recurring earnings perform excluding securities-sale gains, fair-value changes, preferred-stock effects and other unusual items.