Western Alliance Bancorporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 1, 2013. The company is a Phoenix-based bank holding company operating Bank of Nevada, Western Alliance Bank and Torrey Pines Bank, primarily in Nevada, Arizona and California.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $290.3 million | $257.7 million |
| Provision for credit losses | $46.8 million | $46.2 million |
| Non-interest income | $44.7 million | $34.5 million |
| Non-interest expense | $188.9 million | $195.6 million |
| Net income | $72.8 million | $31.5 million |
| Net income available to common shareholders | $69.0 million; diluted EPS $0.83 | $15.3 million; diluted EPS $0.19 |
| Net interest margin | 4.49% | 4.37% |
| Net charge-offs / average loans | 0.99% | 1.32% |
| Operating cash flow | $112.0 million | $142.5 million |
- Total assets grew 11.4% to $7.62 billion. Gross loans rose 19.4% to $5.71 billion and deposits increased 14.1% to $6.46 billion. Non-interest-bearing deposits were $1.93 billion, or 29.9% of deposits.
- Cash and cash equivalents were $204.6 million; management reported $702.7 million of liquid assets, including unpledged securities, and considered liquidity adequate for the next 90–120 days. Available borrowing capacity was reported as $952.8 million at the FHLB and $600.6 million at the FRB, plus $110 million in unsecured correspondent lines.
- Year-end borrowings included $120 million of FHLB advances, $79.0 million of customer repurchase agreements, and $75 million of senior notes due 2015 bearing 10% interest. Junior subordinated debt was carried at $36.2 million fair value; its contractual principal was $66.5 million. The loan-to-deposit ratio was 88.45%.
- Consolidated regulatory capital ratios were 12.6% total risk-based, 11.3% Tier 1 risk-based and 10.1% Tier 1 leverage. Each bank met the applicable well-capitalized thresholds; Bank of Nevada was also subject to a higher leverage requirement under its regulatory memorandum.
- Nonperforming assets were $268.0 million, down from $294.6 million. Nonaccrual loans, however, increased to $104.7 million from $90.4 million; the ratio to gross loans improved to 1.83% from 1.89%. The allowance for credit losses was $95.4 million, or 1.67% of gross loans, compared with $99.2 million, or 2.07%, in 2011.
- Cash flows were $112.0 million provided by operations, $536.5 million used in investing and $474.2 million provided by financing. Loan growth was the principal investing cash use; deposit growth supported financing cash inflows.
Changes versus the prior year
- Common earnings rose substantially, reflecting 11.2% growth in net interest income, lower funding costs, reduced non-interest expense and the Western Liberty acquisition gain. Net interest margin increased 12 basis points as deposit costs fell faster than earning-asset yields.
- Credit metrics were mixed: net charge-offs fell to $50.6 million from $57.7 million and foreclosed assets declined to $77.2 million from $89.1 million, while nonaccrual loan balances and provision expense edged higher.
- Loan mix shifted toward commercial and industrial lending, which increased to 29.2% of held-for-investment loans from 23.4%; commercial real estate-related loans remained a substantial concentration.
- Investment securities declined to $1.24 billion from $1.48 billion. Total stockholders’ equity rose to $759.6 million from $636.7 million, including $32.0 million of common stock issued in the acquisition and 2012 earnings.
- For the fourth quarter, net income available to common shareholders was $31.8 million, or diluted EPS of $0.37, versus $5.3 million and $0.07 in fourth-quarter 2011. The 2012 quarter included the acquisition-related bargain purchase gain.
Outlook, commentary, risks and unusual items
- Management said real estate market weakness could persist through 2013 and anticipated that nonperforming assets and charge-offs would remain elevated. The filing provides no quantitative earnings or margin guidance.
- Western Liberty Bancorp was acquired in October 2012; the transaction produced a $17.6 million bargain purchase gain, a material non-recurring contributor to 2012 non-interest income. Acquisition-related expenses were also recorded.
- The company recorded a $3.4 million goodwill and intangible impairment related to Shine, which it sold in October. It also discontinued its affinity credit-card platform and transferred $31.1 million of card loans to held for sale, recording a $2.6 million charge.
- A January 2013 agreement to acquire Centennial Bank for $57.5 million in cash, specified loan distributions and up to $1.0 million of expenses remained subject to regulatory approval; management expected it to close in 2013 and be accretive to EPS.
- Bank of Nevada remained under an informal regulatory memorandum of understanding requiring enhanced oversight and plans for asset quality, credit administration and risk management. It could not pay dividends to the parent without prior regulatory approval. The company stated that the bank was in compliance.
- Key risks include geographic and real-estate concentration, commercial real estate and C&I credit exposure, collateral-value declines, dependence on low-cost deposits, interest-rate and funding risks, regulatory requirements, and cyber and operational threats. The company noted that the expiration of unlimited FDIC coverage for non-interest-bearing transaction accounts on January 1, 2013 could affect deposits.
- The company reported no material pending legal proceedings. The financial statement audit and the auditor’s internal-control review both received unqualified opinions; the acquired Western Liberty operations were excluded from the 2012 internal-control assessment during the permitted integration period.
Investor verification priorities
- Separate recurring earnings from the $17.6 million bargain purchase gain and other acquisition, divestiture and credit-card platform items.
- Track nonaccrual loans, troubled debt restructurings, criticized loans, charge-offs and the allowance as rapid loan growth continues.
- Review Bank of Nevada’s progress against its memorandum of understanding, enhanced capital requirement and restrictions on dividends and balance-sheet changes.
- Assess the durability and cost of deposit growth, including brokered and reciprocal deposits, and liquidity after the end of unlimited transaction-account FDIC coverage.
- Confirm Centennial Bank closing conditions, final consideration and integration effects; assess exposure to commercial real estate and local economic conditions.