EXHIBIT 13.1
(GRAPHIC)
WESTERN
ALLIANCE
BANCORPORATION
ANNUAL
REPORT
2005
CONTENTS
Financial Highlights 1
Chairman's Message 2
Products and Services 4
BankWest of Nevada President's Message 6
About BankWest of Nevada 7
BankWest of Nevada Case Study 8
Alliance Bank of Arizona President's Message 10
About Alliance Bank of Arizona 11
Alliance Bank of Arizona Case Study 12
Torrey Pines Bank President's Message 14
About Torrey Pines Bank 15
Torrey Pines Bank Case Study 16
Miller/Russell & Associates President's Message 18
About Miller/Russell 19
Miller/Russell & Associates Case Study 20
Premier Trust President's Message 22
About Premier Trust 23
Premier Trust Case Study 24
Directors and Officers 26
Employees 27
Regional Offices 28
Financial Report 29
WESTERN ALLIANCE BANCORPORATION
FINANCIAL HIGHLIGHTS
(in thousands, except earnings per share)
BALANCE SHEET SUMMARY 2005 2004 2003 2002 2001
- --------------------- ---------- ---------- ---------- -------- --------
Assets $2,857,271 $2,176,849 $1,576,773 $872,074 $602,703
Deposits 2,393,812 1,756,036 1,094,646 720,304 549,354
Loans 1,793,337 1,188,535 733,078 464,355 407,210
Investments 748,533 788,622 715,978 232,848 79,454
Total regulatory capital 300,198 178,784 141,321 103,033 56,757
INCOME STATEMENT SUMMARY
Interest income 134,910 90,855 53,823 39,117 35,713
Interest expense 32,568 19,720 12,798 9,771 9,140
Net interest income 102,342 71,135 41,025 29,346 26,573
Provision for loan losses 6,179 3,914 5,145 1,587 2,800
Net interest income after provision
for loan losses 96,163 67,221 35,880 27,759 23,773
Noninterest income 12,138 8,726 4,270 3,935 3,437
Noninterest expense 64,864 44,929 27,290 19,050 18,256
Income before income taxes 43,437 31,018 12,860 12,644 8,954
Income taxes 15,372 10,961 4,171 4,235 3,001
Net income 28,065 20,057 8,689 8,409 5,953
Diluted earnings per share 1.24 1.09 0.59 0.78 0.54
(BAR CHART)
2001 2002 2003 2004 2005
---- ---- ------ ------ ------
$ IN MILLIONS
NET INCOME $6.0 $8.4 $ 8.7 $ 20.1 $ 28.1
DILUTED EARNINGS
PER SHARE $.54 $.78 $ .59 $ 1.09 $ 1.24
QUALIFYING REGULATORY CAPITAL
WELL CAPITALIZED $ 46 $ 56 $ 98 $ 150 $ 217
ADDITIONAL CAPITAL $ 56 $103 $ 141 $ 178 $ 300
ASSETS $407 $464 $ 733 $1,189 $1,793
DEPOSITS $549 $720 $1,095 $1,756 $2,394
LOANS $602 $871 $1,577 $2,177 $2,857
1
WESTERN ALLIANCE BANCORPORATION
CHAIRMAN'S MESSAGE
To Our Shareholders
(PHOTO OF ROBERT SARVER)
Chairman, President and Chief Executive Officer
The year 2005 was a milestone for Western Alliance Bancorporation. It was
the year in which we completed our Initial Public Offering to trade on the New
York Stock Exchange and our twelfth consecutive year of record earnings. On
behalf of the Western Alliance team, I want to welcome you to our first annual
report as a public company.
Western Alliance Bancorporation reported net income of $28.1 million for
the year ended December 31, 2005, an increase of 39.9 percent from $20.1 million
reported in 2004, or $1.24 per share, up from $1.09 for 2004. Loans rose $605
million, or 51 percent to $1.79 billion in 2005 from the $1.19 billion posted a
year earlier and deposits grew to $2.39 billion, up 36 percent, or $638 million
from 2004.
BankWest of Nevada reported loan growth of $293 million for 2005 to $1.08
billion. Deposits increased $319 million to $1.61 billion and net income was
$25.3 million, up 24.7 percent from $20.3 million in 2004.
Alliance Bank of Arizona reported loan growth of $171 million for 2005 to
$405 million. Deposits increased $180 million to $457 million and net income was
$3.0 million, up 257.6 percent from $0.8 million in 2004.
Torrey Pines Bank reported loan growth of $141 million for 2005 to $305
million. Deposits increased $136 million to $335 million. For the year, net
income was $2.2 million, up 116.3 percent from $1.0 million in 2004.
Assets under management at Miller/Russell and Associates were $1.11 billion
at December 31, 2005, up 40.3 percent from $791 million at December 31, 2004. At
Premier Trust, assets under management increased 65.0 percent from $80 million
to $132 million from December 31, 2004 to December 31, 2005. Total trust assets
increased 42.3 percent from $208 million to $296 million for the same periods,
respectively.
Our proven business strategy of focusing on high-growth markets with
compelling demographics, entering new markets through de novo offices and
appropriately priced acquisitions, and leveraging competitive advantages is
manifesting eminent success.
2
WESTERN ALLIANCE BANCORPORATION
The primary markets in which Western Alliance operates, Las Vegas, San
Diego, Phoenix and Tucson have household incomes and projected population growth
rates that substantially exceed the national average.
The selection of these markets is a critical component of our overall
business strategy. Western Alliance's competitive advantages of strong local
banking relationships, comprehensive market knowledge and a culture of
flexibility with a rapid response to customer needs provides us with an
exceptionally strong and enduring basis for growth in these markets, as well as
a dynamic that allows us to quickly avail ourselves of new opportunities that
arise.
Early in 2006, we followed that strategy with two significant acquisitions
that are expected to close in the first half of 2006, in part, using the $85.1
million in proceeds from our initial public offering, which closed July 6, 2005.
In a cash and stock transaction valued at approximately $110 million,
Western Alliance will acquire Intermountain First Bancorp, the parent company of
Nevada First Bank. Intermountain First had deposits of $396 million, loans of
$374 million and stockholders' equity of $32 million at December 31, 2005. We
also signed a definitive agreement valued at approximately $74 million to
acquire Bank of Nevada, which had deposits of $254 million, loans of $217
million, and stockholder's equity of $26 million at the close of 2005.
These mergers will allow us to further solidify and broaden our already
strong position in Las Vegas and Henderson, Nevada as well as expand our
financial offerings into Reno and Mesquite. By the end of 2006, we expect to
have 18 offices in Nevada, more than triple the five we had when the year began.
In 2006, we will continue to provide exceptional service to our clients,
expand our current operations with the addition of nine new offices, and to seek
further opportunities for expansion through acquisitions.
In closing, I want thank our customers, our employees and our board of
directors for their loyalty, support and dedication.
/s/ Robert Sarver
- -------------------------------------
Robert Sarver
Chairman, President
and Chief Executive Officer
(BAR CHART)
2001 2002 2003 2004 2005
------ ------ ------ ------ ------
NUMBER OF OFFICES 4 5 10 13 16
DEPOSIT ACCOUNTS 14,499 15,361 18,364 22,424 26,845
NON-PERFORMING ASSETS
PERCENTAGE OF TOTAL .17 .41 .02 .07 0
3
WESTERN ALLIANCE BANCORPORATION
PRODUCTS AND SERVICES (GRAPHIC)
As the parent corporation of three of the nation's leading community banks
and two major regional financial services firms, Western Alliance
Bancorporation's strategic approach to managing its operating units is designed
to provide profound and dynamic synergies among these businesses, based on
strong, experienced and innovative management dedicated to the highest level of
customer service.
Our mission and objective is simple: Provide our customers and markets with
products and services that serve as a benchmark for the banking industry and
deliver them with a dispatch and efficiency that is unrivaled.
Our strategy to accomplish this is core to our business: We employ
experienced local relationship bankers and associates who drive success with our
broad range of product and service offerings.
Several Western Alliance products that came online over the past two years
have now ramped up fully and are yielding the customer benefits and revenues we
had anticipated.
The development of our cash management products, specifically our lockbox
offering which provides businesses and professionals with an efficient tool to
collect and process receivables, has been very well received by the business
community. We also provide commercial products that include Cash Concentration
Accounts, which allow a customer to combine accounts from several locations into
a single account, and Positive Pay, a fraud protection tool geared toward
commercial accounts.
In March 2006, each of the Western Alliance banks began offering their own
credit cards. These cards provide substantially better benefits to our customers
than the third party cards offered previously, including lower interest rates,
DreamMiles(R) and online access. By bringing this product in-house, Western
Alliance will also enhance its revenue stream with interchange fees and interest
income.
4
"2005 was not only a year in which we broadened our business banking
services, but also one in which we enhanced our personal banking services."
We continue to make products and services available to the "Not for Profit"
segment of the market comprising churches, synagogues, schools, colleges and
municipalities and provide a comprehensive range of business services to the
religious community, as well as other non-profits.
While our broad menu of products would be impressive anywhere, it is the
high caliber of personal banking service with which we deliver these products
that drives our success. Our experienced relationship bankers know the
importance of personal service and the culture of Western Alliance
Bancorporation strongly fosters that service. That perspective drove our success
in 2005 and will continue to do so in the coming year.
WEALTH MANAGEMENT
Estate Planning
Asset Allocation
Retirement Accounts
Investment Management
Trust Administration
Escrow & Custody
REAL ESTATE DEVELOPMENT
Construction Loans
Permanent Financing
Fixed and Floating
Owner-occupied
Subdivisions
Lot Financing
CASH MANAGEMENT
Lockbox & EDI
Positive Pay
Concentration Accounts
Sweep Services
Image & CD Services
PERSONAL BANKING
Free ATMs Worldwide
Online Banking
Mortgages
Equity Credit Lines
Leisure Craft
Cards & Cars
NOT FOR PROFIT
Churches & Synagogues
Schools & Colleges
Municipalities
Tax-exempt
COMMERCIAL LENDING
Working Capital Financing
Corporate Credit Cards
Participations and Syndications
SBA Preferred
Equipment Leasing
Merchant Services
Letters of Credit
Revolving Lines of Credit
(GRAPHIC)
5
BANKWEST OF NEVADA
PRESIDENT'S MESSAGE (PHOTO OF LARRY WOODRUM)
President and Chief Executive Officer
In 2005, while we continued our fast pace of growth, we remained committed
to our fundamental strategy: to build our business through our reputation for
delivering superior service and solutions as the financial business partner of
choice for local businesses, professionals and community organizations.
Sustaining and growing that reputation has been made possible by our
people. We are fortunate to have recruited and retained an outstanding team who
can take pride in contributing to the success of our organization through their
knowledge and commitment to serving our customers. I am particularly proud that
our Community Reinvestment Act rating has been "Outstanding" since the bank
began.
Since our inception, we have promoted a basic, but time-tested credo that
has been the cornerstone of our service philosophy: simply, treat others as you
would want to be treated. Not a sophisticated strategy, but one that has worked
to help bring us a broad base of loyal clients. While we look forward to the
future and changes that improve what we provide to our customers, in this
philosophy we remain constant, a course that has served us well with both our
relationships with our customers and among ourselves.
/s/ Larry Woodrum
- -------------------------------------
Larry Woodrum
President and Chief Executive Officer
(BAR CHART)
2001 2002 2003 2004 2005
---- ---- ------ ------ ------
$ IN MILLIONS
LOANS $407 $464 $ 558 $ 790 $1,084
DEPOSITS $549 $757 $ 918 $1,288 $1,607
ASSETS $602 $869 $1,245 $1,578 $1,887
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BANKWEST OF NEVADA
ABOUT US
(PHOTO OF BOARD OF DIRECTORS)
(front row, l to r) Sherry Colquitt,
James Nave, DVM, Edward Nigro, Larry
Woodrum, Chairman Arthur Marshall,
Marianne Boyd Johnson, (middle row) Todd
Marshall, Jack Wallis, Donald Snyder, M.
Nafees Nagy, MD, Robert Sarver. (back
row) Robert Clark, Bruno Mark, Robert
Boughner.
For BankWest of Nevada, 2005 was a highly successful year both in terms of
results and in laying the foundation for increased efficiency and expansion. The
hard work of our staff resulted in growth in net earnings of more than $5
million. Assets rose by more than $308 million, an increase of 20 percent. Loan
growth exceeded $290 million, an increase of 37 percent and deposits more than
$319 million, an increase of 25 percent. We also improved our efficiency ratio
to 46.0 percent, while increasing our staff by 13 percent with 39 new employees.
To continue to reach Las Vegas' rapidly growing suburban areas, we began
construction of three new branch locations, including our Centennial, Aliante
and Warm Springs offices. In November, we also launched a new 36,000 square foot
operations center which will be home to the customer service center, electronic
banking, network administration, courier service, lockbox, data processing and
central vault. We expect to open this state-of-the-art facility later this year.
To increase commercial loans and promote cross-selling opportunities, in
April the Bank initiated a small business lending campaign, focusing on loans up
to $250,000. Promoted as "Decision 23," the two-month campaign resulted in loans
of more than $14 million, exceeding the $8 million goal. Marketing included
billboards, print advertising, application brochures and employee incentives.
The Bank continued to build its affiliate referral relationships with
Miller/Russell and Premier Trust to cross sell our banking products while the
Bank promoted wealth management as a valued addition to our capabilities to
serve all their financial needs.
Launched in July, the Bank participated in the sponsorship of the new Las
Vegas Monorail. As part of the Bank's commitment to the Las Vegas community and
to promote Bank awareness, the Bank became a sponsorship partner providing ATMs
at each location and enjoys the visibility of a signature BankWest of Nevada
Monorail train. The 4.4 mile route Monorail system runs along Las Vegas' famed
resort corridor connecting major resorts and convention space.
(GRAPHIC)
7
BANKWEST OF NEVADA
NEVADA PARTNERS
A BankWest Case study in Community Responsibility
(PHOTO)
Hospitality industry student training at
Nevada Partners' Culinary Training
Academy.
In 1993, the nonprofit organization of Nevada Partners was formed with a
clear stated mission-- "to eliminate poverty." Supported by major hospitality
industry employers, Nevada Partners began by providing unskilled workers with
training to meet the employment demands of Las Vegas' booming hospitality
industry. Training initially focused on developing culinary and later,
housekeeping skills, when a move into a leased facility allowed the organization
to create mock hotel rooms replicating those in Las Vegas casinos.
Seven years later, Nevada Partners' training programs had generated such
great demand and extraordinary success that the growth required the construction
of a larger facility.
With a preliminary estimate of $2 million to construct the new kitchen
training facility, Nevada Partners' Executive Director Steven Horsford reached
out to large and small banks for financing.
"We knew we had a complicated income stream and that the financial analysis
would not be an easy undertaking for a financial institution. BankWest was the
only bank that responded to us. We were especially pleased that BankWest's point
men, Brad Tope and Mark Larson, from the outset, wanted to learn about us in
depth, and clearly understand what we wanted to accomplish."
Learning housekeeping skills at Nevada
Partners' Culinary Training Academy.
(PHOTO)
8
"...in part because of the completion of the kitchen facility, $5.5 million in
public funds have now been granted to complete the full training center."
(GRAPHIC)
Nevada Partners Center, Las Vegas
Headquarters.
By the end of the process, BankWest provided $3 million in financing that
was applied to the construction of a 12,000 square foot state-of-the-art
training kitchen. Enabled in part because of the completion of the kitchen
facility, $5.5 million in public funds have now been granted to complete the
full training center.
With Nevada Partners' final funding in place, Horsford pointed out that the
organization is able to consider new possibilities, including affordable
housing. "We've never had a banking relationship like with we have with
BankWest," Horsford said. "BankWest continues to seek ways to help us with other
initiatives. Since we're going to be paying interest to somebody, Horsford
notes, "we'd much rather be paying it to BankWest because of the level of
service it provides."
Front: Mark Larson, BankWest of Nevada, Executive Vice President and Regional
President, Northwest Regional Office, Steven Horsford, Chief Executive Officer,
Nevada Partners, Brad Tope, Senior Vice President, Regional Chief Lending
Officer, Northwest Regional Office, BankWest of Nevada. Back: Nevada Partners'
Culinary Training Academy students.
(PHOTO)
9
ALLIANCE BANK OF ARIZONA
PRESIDENT'S MESSAGE (PHOTO OF JIM LUNDY)
President and Chief Executive Officer
Alliance Bank continued to demonstrate why it is one of the fastest-growing
banks in the United States during 2005 with strong regional growth. And, as a
result of our progress, we achieved several significant milestones in 2005.
Alliance Bank surpassed $500 million in total assets just 29 months after
its founding in 2003 and opened a new corporate headquarters in the high-growth,
financial Biltmore district in Phoenix and a third Tucson location, bringing the
total number of statewide offices to seven. The bank also grew to 122 employees
strong during 2005, from 79 employees in 2004.
The banks Small Business Administration (SBA) Department expanded it's
Preferred Lender (PLP) Status to San Diego and Nevada and was recognized by the
SBA as leading all Arizona banks with the No. 1 ranking for "Most Jobs Created
and/or Retained per SBA loan: 57.4 jobs per loan."
Our experienced team continued to expand with the additions of several
prominent senior bankers, as well as the addition of two new board
members--Sharon Harper, President and Chief Executive Officer of The Plaza
Companies in Phoenix and Paul Weitman, President and Owner of Royal Automotive
Group in Tucson.
During 2006, Alliance Bank will expand three of its existing offices and
will open a new office in Downtown Phoenix to better serve our growing
professional client base in the downtown sector. Construction will also begin on
our new Mesa office which will be Alliance Banks first presence in the
high-growth region of the East Valley of Metro Phoenix. We will continue to look
for additional locations in each of our primary markets.
On behalf of our Board, our stockholders and our employees, I'd like to
thank all of our customers who have made our success possible.
/s/ James H. Lundy
- -------------------------------------
James H. Lundy,
President and Chief Executive Officer
10
ALLIANCE BANK OF ARIZONA
ABOUT US (PHOTO OF BOARD OF DIRECTORS)
(l to r) Bruce Beach, Thomas Rogers,
Dennis Miller, Chairman Richard Krivel,
Steven Hilton, James Lundy, Francis
Najafi, Duane Froeschle, R. Luther
Olson, Thomas Sullivan, Jr., Robert
Sarver. Not shown: Paul Baker, Sharon
Harper, Paul Weitman.
Alliance Bank of Arizona opened in February 2003 and has quickly become one
of the nation's fastest-growing banks. As of September 2005, Alliance Bank was
the fourth largest of more than 100 banks opened in 2003. This achievement
underscores the value Alliance Bank's customers place on "better banking" and a
regional focus delivered by experienced, relationship bankers.
With seven statewide offices located in Phoenix, Scottsdale and Tucson,
Alliance Bank continues to expand its reach by skillfully addressing the
specific needs of Arizona's businesses, real estate developers, professionals
and individuals seeking a personal banking relationship. Local decision-making
and veteran banking leadership enable Alliance Bank to be a "business partner"
by providing flexible and customized services tailored to the specific needs of
its clients.
Alliance Bank of Arizona is strongly positioned as a "super community" bank
to provide relationship-based, personal service, the latest in technology and
lending capabilities sufficient to meet the needs of virtually any Arizona-based
business.
(GRAPHIC)
(BAR CHART)
2003 2004 2005
---- ---- ----
$ IN MILLIONS
LOANS $106 $234 $405
DEPOSITS $116 $277 $457
ASSETS $187 $333 $520
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ALLIANCE BANK OF ARIZONA
THE LANDSCAPE BROKER
Digging up Financing -- An Alliance Bank Case Study
(GRAPHIC)
Streetscape at Mirabel,
North Scottsdale Arizona.
It's easy to get a loan when your business is doing well and times are
good," said Chris Besing, Owner of Scottsdale-based The Landscape Broker, Inc.
"But the real test of a banking relationship occurs when you need financing to
acquire or dramatically expand your business during the rough times."
For Mr. Besing, Alliance Bank of Arizona came through when he needed it
most and one year after one of the most difficult transactions of his career in
finance. He confidently says that Alliance Bank's performance and service has
earned the bank any future business from his company.
After two decades as a financial executive, Besing was ready to return to
the roots--literally. In July 2004, he traded his suit and tie for jeans and
work boots when he began negotiations to purchase a landscape company in
Scottsdale. In September 2004, he entered into a purchase agreement for the $5
million deal with another lender.
According to Besing, a key component of the deal was the repayment of
principal based on cash flow related to $2.2 million of subordinated debt raised
by Besing. Three months into the arduous process and only one month prior to
closing, the lender elected to substantially change the repayment terms of the
SBA loan and sub-debt. Besing presumed the deal was lost--enter Alliance Bank of
Arizona.
Based on a previous banking relationship and through a colleague's
recommendation, Besing contacted Ed Zito, a senior vice president for Alliance
Bank and a prominent face in Phoenix banking. Mr. Zito and Ben Danner, senior
vice president and commercial banking manager for Alliance's Scottsdale office,
met with Besing to discuss his situation.
"The Alliance Bank of Arizona team immediately took the time to understand
my business, the local business environment and the financing options
available," commented Besing. "Alliance Bank restructured the deal to include an
innovative bridge loan that enabled the deal to close on time with a prudent,
but workable financing package. Their ability to think 'out of the box' was very
impressive."
12
"They really put forth a great effort for me and my company and, as a business
owner, that's something I remember and appreciate."
(GRAPHIC)
Excavation work at Vistancia, Peoria Arizona.
Danner and the SBA Department at Alliance Bank used their expertise to
accelerate the transaction process to save the deal and close Besing's purchase.
With a collective team effort led by Danner, SBA Manager Ruth Giovacchini and
Senior Processor Irma Rodriguez, the bank was able to provide an additional
$500,000 in financing that the previous lender had overlooked.
Today, just over one year after becoming an Alliance Bank client, Besing's
Landscape Broker Inc. is thriving. The company generated more than $8 million in
revenue in 2005 and expects that amount to double in 2006. In addition to the
SBA loan, Besing's company keeps an operating line of credit and all of its
business checking accounts with Alliance Bank. He's also become one of the
bank's best referral sources, telling anyone who will listen that a good
business banker can make a real difference to the local business owner.
"Relationships matter," adds Besing. "Alliance Bank proved they have the
expertise to get a difficult deal done, but more importantly, they stepped up as
a business partner with their relationship-based banking style. They really put
forth a great effort for me and my company and, as a business owner, that's
something I remember and appreciate."
Club House at Mirabel, Scottsdale, Arizona.
(GRAPHIC)
13
TORREY PINES BANK
PRESIDENT'S MESSAGE
(PHOTO OF GARY CADY)
President
At Torrey Pines Bank we spend a lot of our time talking to our customers.
Then we respond to our customers' needs in ways that may appear unconventional
to some, but going the extra mile for customers is how we measure our success at
Torrey Pines Bank.
When we established Torrey Pines Bank in 2003 our plan was to achieve
steady and structured growth by employing a talented work force with a singular
focus on a level of service that would provide our customers with the best
possible client-banking relationship and banking experience.
Our executives and team, from the outset, have put our clients front and
center with professional attention and tailor-made solutions. This distinctive
approach has enabled us to achieve continued strong deposit and loan growth.
Looking ahead, we will continue our growth efforts by building upon our
suite of consumer products and services that will enable us to deepen existing
and generate new relationships.
Success won't be ours alone. We are a compassionate corporate citizen who
partners with many not-for-profit organizations to promote a healthier, more
vibrant San Diego County. We will bring the distinguishing strengths of this
organization to two new locations in 2006, with additional locations to follow
in 2007.
Our customers and staff are the very pulse of this organization. Through
their conversations we are assured that our business strategy continues to meet
the needs of our clients and community. That's what makes us special. And our
conversations will continue to be at the forefront of Torrey Pines Bank.
/s/ GARY CADY
- ---------------------------------
Gary Cady,
President
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TORREY PINES BANK
ABOUT US
(PHOTO OF BOARD OF DIRECTORS)
(l to r) Jason Hughes, Gary Cady,
Chairman Robert Sarver, Cary Mack, Peter
Davis, Sheryl White, Richard Doan, Mark
Schlossberg, Mark Johnson, Tom Murray.
Torrey Pines Bank is focused on serving San Diego's business and
professional communities with offices strategically located in downtown San
Diego, Carmel Valley, Golden Triangle and La Mesa. Soon, Torrey Pines will offer
and additional location downtown, as well as in Kearny Mesa and Carlsbad,
California.
Unlike many financial institutions that are built around "business units,"
Torrey Pines Bank is operated geographically and managed by local professionals
who are directly and actively involved in their respective communities. The
geographic management structure, coupled with dedicated customer attention
creates an unrivaled banking model that clients, current and prospective, are
seeking from their banking partner.
Torrey Pines Bank continually supports its customer service claim with a
steady stream of testimonials from clients in the medical and legal community to
business owners and not-for-profit executives. Our clients have said "We think
of our relationship with Torrey Pines Bank as a partnership. We know we can
depend on Torrey Pines executives for their expertise, their personal attention
and their willingness to go the "extra mile."
Big bank capabilities, small bank personal attention and a single point of
contact are the attributes that make Torrey Pines Bank especially appealing to
clients.
(GRAPHIC)
2003 2004 2005
---- ---- ----
$ IN MILLIONS
LOANS $ 69 $164 $305
DEPOSITS $ 82 $199 $335
ASSETS $157 $258 $405
15
TORREY PINES BANK
J.R. FILANC CONSTRUCTION COMPANY
A Torrey Pines Bank Case Study in Time Critical Conditions
J.R. Filanc Construction Company was founded in 1952 providing construction
project services to the water infrastructure industry. It's J.R. Filanc
Construction Company that builds many of our waste water treatment plants, water
treatment facilities and the like. The company is strategically managed by its
ownership team, including Filanc family members and senior managers.
Over the last 53 years, J.R. Filanc has grown to be a company of
substantial dimension, with revenues of approximately $100 million and over 350
employees throughout Southern California and Arizona. The company, at any time,
manages eight to ten large projects averaging $40 million each.
In early 2005 the company realized the need and opportunity to acquire a
new headquarters building in North San Diego County. The acquisition was the
front end of a time-critical, 1031 reverse exchange in which the company
acquires a "replacement" property for one to be sold later.
As one of the Bank's first clients, J.R. Filanc approached Torrey Pines
Bank for financing. There was a lot to do and little time in which to do it. And
in this case, because of the IRS regulations associated with the transactions,
there would be virtually no room for any of the providers not to make this
transaction their top priority.
The time contraint, just 30 days, propelled John Massab, Senior Vice
President of the Torrey Pines, and his team into high gear on this proposed $4.5
million transaction. The timing and coordinating efforts with external
professionals who hold busy schedules were vital and presented a challenge.
It was a complex transaction, but within a remarkably short period of time,
the Torrey Pines' team obtained and reviewed the appraisal, an environmental
study with a last minute geophysical test, as well as an abundance of other
legal and compliance documents. The team included Torrey Pines' executives, its
legal counsel, Head of Operations, a credit analyst who provided the reverse
exchange research, a documentation specialist and a closing agent.
16
" A lot of other banks want to shoehorn you into their system that fits their
computer programs and simply look at numbers only."
If all of this sounds like a "too many cooks" situation, consider what
Cathy Final, Chief Financial Officer of J.R. Filanc said: "John Massab commits
and moves more quickly and timely than any other banker I've ever known." This
speaks well of the local decision-making strategy employed at Torrey Pines Bank.
According to Ms. Final, "A lot of other banks want to shoehorn you into
their system that fits their computer programs and simply look at numbers only.
That's a formula for making a difficult transaction almost impossible. Torrey
Pines mode of operation is to make things as straight forward as possible with
the least use of my time, which benefits me because I can devote my time to my
'real' job at J.R. Filanc."
"From the very outset of our relationship with Torrey Pines," Ms. Final
said, "we saw the difference between the machine touch and the personal touch in
doing business with Torrey Pines. They are, indeed, our business partner as well
as our bank and showed it clearly when John and his team completed this
transaction in the critical time frame required."
J. R. Filanc Construction project for the R.M. Levy Water Treatment Plant
Upgrade, Expansion and Ozonation Facility in Southern California. The $38.4
million project, completed in 2002, was managed by Mark Filanc, Executive Vice
President, Filanc.
(GRAPHIC)
17
MILLER/RUSSELL & ASSOCIATES, INC.
PRESIDENT'S MESSAGE (PHOTO OF DENNIS MILLER)
President
In reflecting on 2005, I am very pleased with the forward progress
generated by the Miller/Russell team. This was our first full year as a Western
Alliance Bancorporation operating unit and our client base expanded
significantly, largely due to referrals from bank officers which helped to
increase our assets under management during the year by 40.3 percent to $1.11
billion.
During 2005, we opened new offices in San Diego and Las Vegas, bringing us
physically closer to BankWest of Nevada, Torrey Pines Bank and Premier Trust in
those locations, as well as expanded our Arizona presence with a new office in
Tucson.
Major strides were made in enhancing our compliance and regulatory
procedures, budgeting, administrative services and processes, and technology. We
anticipate that this investment will pay considerable dividends well into the
future.
The accumulation of wealth in our nation, both private and institutional,
is at historic highs and continues to rise. With a strong economy and aging
population we see the trend continuing into 2006. As a provider of wealth
management services to individuals, corporations, endowments and foundations,
Miller/Russell is now strongly positioned to prosper from this rising pool of
wealth. As such, we look forward to the coming year with enthusiasm and
excitement.
/s/ Dennis Miller
- -------------------------------------
Dennis Miller
President
18
ABOUT US
" We add significant value to our client base by offering financial planning
including retirement, insurance, tax and estate planning..."
Strategy, structure, discipline and innovation are the keystones of
Miller/Russell's approach to investment management and counsel. They provide the
firm with the tools to achieve its stated mission: The achievement of investment
goals by controlling risk and delivering above-average returns, with
above-average consistency.
Founded in 1991, and now with more than $1 billion in asstes under
management, Miller/Russell has grown to one of the Southwest's largest
registered investment advisory and wealth management firms.
In 2004, Western Alliance Bancorporation recognized its customers' need for
high level, strategic financial management and acquired Miller/Russell. Since
the acquisition Miller/Russell's services have achieved the synergies
anticipated and touched virtually all of the Western Alliance operating units.
Using state of the art technology tools, combined with solid analytics and
process discipline implemented and managed by a team of experienced
professionals, Miller/Russell tailors investment solutions to meet its clients'
precise needs and achieve their objectives.
As strategic wealth architects, Miller/Russell add significant value to its
client base by offering financial planning including retirement, insurance, tax
and estate planning, as well as providing the very strong synergies necessary to
ensure the growth of Western Alliance Bancorporation and its operating units.
(GRAPHIC)
(BAR CHART)
2002 2003 2004 2005
---- ---- ---- ------
$ IN MILLIONS
ASSETS UNDER MANAGEMENT $445 $601 $791 $1,110
19
MILLER/RUSSELL & ASSOCIATES, INC.
CRAGIN & PIKE
Synergism -- A Miller/Russell Case Study
(PHOTO OF TOM KERESTESI)
Tom Kerestesi, President of
Cragin & Pike.
Cragin & Pike, Las Vegas' oldest full service property and casualty
insurance broker, has been operating continuously in Las Vegas since 1909, just
a few years after the city was founded. The firm's offerings comprise both
personal and commercial lines, as well as bonding, but weighted primarily toward
commercial accounts.
It was a key Western Alliance Bancorporation strategy, hiring experienced,
local relationship bankers with a solid book of business, that first brought
Cragin & Pike into the Western Alliance fold. Originally banking with another
institution, Tom Kerestesi, President, said Cragin & Pike first became involved
with Western Alliance Bancorporation when his banker moved several years ago to
BankWest of Nevada.
"On a parallel course with our commercial banking, we had some requirements
for other financial services," Mr. Kerestesi explained. "Cragin & Pike has had
employee benefit plans in effect for more than three decades, but with all the
changes that occurred over the past few years with the Employment Retirement
Income Security Act (ERISA), we had some concerns about compliance issues," he
pointed out.
"We had a long term relationship with another investment advisor," Mr.
Kerestesi said, "but we wanted to ensure our compliance and turned to Western
Alliance's Premier Trust, with which several of our executives had personal
relationships. As part of the compliance review, Premier provided cursory
opinion on the investment performance of the assets and pointed out that the
performance could have been better. "If you'd like to see how that might play
out," Premier Trust said, "You might want to talk to Miller/Russell, the
investment advisory component of Western Alliance."
Cragin & Pike accepted the invitation and Dennis Miller, Miller/Russell
President, and Chris Wilkinson, an Investment Advisor, then made a comprehensive
presentation. "It was a compelling argument to change firms," Mr. Kerestesi
said, and we subsequently terminated our 30 year relationship with our old firm
and retained Miller/Russell in the fall of 2005."
20
"It was a key Western Alliance Bancorporation strategy, hiring experienced,
local relationship bankers with a solid book for business..."
But it wasn't simply dollars and cents that sealed the deal. "We had a
broader discussion of investment and compliance comprising the most minute
details: Who should be on the investment committee and meeting frequency, as
well as investment objectives, how to raise the quality of the plan," Mr.
Kerestesi said.
Miller/Russell developed a sophisticated financial model for the Cragin &
Pike portfolio that balanced risk tolerance, long term objectives, peer group
analysis and a balance between equity and bonds. That model was the point of
departure for discussions with the new client, and together a strategic
investment plan, was put in place that met Cragin & Pike's objectives, just 30
days following their first meeting.
Cragin & Pike has quarterly meetings with Miller/Russell to ensure strategy
is on course. During those meetings, the investment advisory firm outlines
investment portfolio performance and discusses specific metrics for each
portfolio manager, with benchmarks. Additionally, the investment philosophy
within confines of ERISA is reviewed. If there are concerns with the plan, they
are addressed with alacrity and adjustments from the investment fiduciary
perspective are made if required.
"It is an environment and a way of doing business that allows us a clear
path to grow our business without being distracted by the performance of our
employee benefit plan," Mr. Kerestesi said.
21
PREMIER TRUST
PRESIDENT'S MESSAGE
(PHOTO OF MARK DRESCHLER)
President
With the completion of our 4th year of business and 2nd year with Western
Alliance, Premier Trust continues to show significant growth in its revenue and
assets. In 2005, and into 2006, we have seen an increase in momentum, especially
from the professional community. Moreover, our colleagues at BankWest of Nevada
consistently show strong support through referrals for our fiduciary services.
Last year, we established a new office in Phoenix, Arizona, in the same
business complex as Alliance Bank of Arizona and Miller/Russell. We anticipate
the Camelback Road location will generate great synergies because of our close
working relationship, and of course, the proximity. We are working closely with
our Arizona partners to build referrals and are seeing good progress in
generating recognition in this large and competitive market for financial
services.
Our staff's commitment to customer service has developed many loyal
clients and we continue to seek better and more efficient ways to incorporate
our comprehensive systems technology. For example, our client's now have the
ability to access their accounts online.
We look forward to enhancing our relationship with the entire Western
Alliance family, as 2005 resulted in referring some very large and solid
relationships to them. We also developed a family of funds to use in our smaller
discretionary accounts and began utilizing Miller/Russell's excellent
performance record for our clients. This will continue to expand as we accept
more managed trusts in our company.
/s/ Mark Dreschler
- -------------------------------------
Mark Dreschler
President
22
ABOUT US
"...we have seen a steady increase in the amount and quality of referrals we
receive from the various senior level bankers."
Premier Trust was established in 2001 to provide quality, responsive and
localized fiduciary services to the Las Vegas market. From the outset, our
strategy was to establish relationships with local independent banks, which did
not have trustee powers, to provide them and their customers our services.
BankWest of Nevada was one such bank and thus began our very successful
relationship.
In the second year of that relationship, BankWest made a decision to offer
exclusive trust services to its growing client base. Subsequently, Premier Trust
was acquired by Western Alliance, and for the past two years we have seen a
steady increase in the amount and quality of referrals we receive from the
various senior level bankers, not only from BankWest, but also from all of the
other operating units in the Western Alliance enterprise, as well as attorneys
and accountants whose main line of business is Trust related planning.
From the Premier Trust perspective, as well as from that of the banking
industry, the banker's relationship with their client is enhanced whenever the
fiduciary component is added, as well as on the business side with Premier's
Employee Benefit Division. Moreover, there is clear added value throughout the
Western Alliance enterprise with this very personal side of the financial
services business.
(BAR CHART)
2002 2003 2004 2005
---- ---- ---- ----
$ IN MILLIONS
TRUST ASSETS $49 $104 $208 $296
23
PREMIER TRUST
TEACHERS HEALTH TRUST
A Premier Trust Case Study in the Benefits of Synergy
(PHOTO)
Teachers Health Trust, a client of Premier Trust, is both a study in
fiduciary management and in synergy, as it is a case that involves a Western
Alliance bank, Miller/Russell, and of course, Premier Trust. Teachers Health
Trust is a pension plan for the employees administering the Nevada Teachers
Pension Plans.
Premier Trust's relationship with Teachers Health Trust evolved over many
years as executives at Premier Trust and BankWest of Nevada had extended
relationships with Teachers' predecessor.
The Premier Trust relationship really began at the confluence of two
seemingly unrelated events. Jerrie Merritt joined BankWest a couple of years
earlier, bringing with her a banking relationship with Teachers Health. At the
same time, Premier Trust was expanding its offerings from personal trusts,
adding employee benefit services as a consequence of becoming part of the
Western Alliance family.
Knowing that Teachers Health was dissatisfied with its Trust company at the
time, Jerrie met with Mark Dreschler, Premier Trusts Chief Executive Officer, to
explore the possibility of providing benefit services to Teachers Health Trust.
A meeting was arranged with Peter Alpert, Teachers Health Chief Executive,
at which Premier Trust discerned the challenges Teachers was facing and the
requirements it had for its benefits plan. With employee benefit specialist Tom
Rhees, Premier Trust met several times with Teachers presenting successively
refined and well-honed plans and strategies outlining how Premier would
administer Teachers benefit plan.
24
"...Premier Trust engaged in several meetings with Teachers during which they
presented successively refined and well-honed plans..."
(PHOTO)
Early in 2005, Premier Trust was engaged by Teachers Health and immediately
initiated its outlined strategy through a series of meetings with employees to
explain the plan and their investment options.
Just a few months later, Premier discussed with Peter Alpert the potential
investment risk inherent in Teachers' pension plan and arranged a meeting with
Dennis Miller, Miller/Russell Chief Executive Officer, who presented a new
strategy for Teachers Health investments. Again, Teachers Health found the
presentation compelling and engaged Miller/Russell.
As a result of a strong, personal banking relationship, and a Western
Alliance strategy of a synergistic approach to business, Teachers Health Trust
is now working with three Western Alliance operating units: Premier Trust,
BankWest of Nevada and Miller/Russell. This is clearly a story of how the
overall Western Alliance business strategy of synergism, local autonomy and
personal service prevails and wins business.
Peter Alpert, Chief Executive Officer of Teachers' Health Trust.
(PHOTO OF PETER ALPERT)
25
WESTERN ALLIANCE BANCORPORATION
BOARD OF DIRECTORS
(PHOTO OF ROBERT SARVER) (PHOTO OF MARIANNE BOYD JOHNSON) (PHOTO OF JAMES NAVE, D.V.M.)
Chairman Senior Vice President Tropicana Animal
of the Board & Vice Chairman, Hospital
Boyd Gaming Corporation
(PHOTO OF PAUL BAKER) (PHOTO OF CARY MACK) (PHOTO OF EDWARD NIGRO)
President, Mack Barclay Inc. President,
Enterprise Group Nigro Associates
(PHOTO OF BRUCE BEACH) (PHOTO OF ARTHUR MARSHALL) (PHOTO OF DONALD SNYDER)
Chairman and Chief Chairman, Chairman,
Executive Officer, BankWest of Nevada, Las Vegas Performing
Beach,Fleischman & Co. Member, Nevada Arts Center
Gaming Commission Foundation
(PHOTO OF WILLIAM BOYD) (PHOTO OF TODD MARSHALL) (PHOTO OF LARRY WOODRUM)
Chairman and Chief Chief Executive Of President & Chief
Executive Officer, Boyd Oficer, Executive Officer,
Gaming Corporation Marshall Retail Group BankWest of Nevada
(PHOTO OF STEVE HILTON) (PHOTO OF M. NAFEES NAGY, M.D.)
Co-Chairman and President,
Co-Chief Executive Nevada Cancer Center
Officer, Meritage
Corporation
OFFICERS
ROBERT SARVER
President, Chief Executive
GARY CADY
Executive Vice President,
California Administration
DUANE FROESCHLE
Executive Vice President,
Chief Credit Officer
DALE GIBBONS
Executive Vice President,
Chief Financial Officer
JAMES LUNDY
Executive Vice President,
Arizona Administration
LINDA MAHAN
Executive Vice President, Operations
MERRILL WALL
Executive Vice President,
Chief Administrative Officer
LARRY WOODRUM
Executive Vice President,
Nevada Administration
SANFORD SADLER
Senior Vice President,
Credit Administration
RANDALL THEISEN
Senior Vice President,
General Counsel
STEPHEN WALLIS
Senior Vice President,
Risk Management
TERRY SHIREY
Senior Vice President,
Controller
(LOGO OF WESTERN ALLIANCE
BANCORPORATION)
2700 West Sahara Avenue
Las Vegas, Nevada 89102
800.764.7619
westernalliancebancorp.com
26
WESTERN ALLIANCE BANCORPORATION
OFFICERS
BANKWEST OF NEVADA
LARRY WOODRUM
Chief Executive Officer,
President
JACK WALLIS
Senior Executive Vice President,
Chief Operating Officer
EXECUTIVE VICE PRESIDENTS
SELMA BARTLETT
Regional President
RACHELLE CRUPI
Regional President
DIANE FEARON
Regional President
DALE GIBBONS
Cheif Financial Officer
BARRY HARRISON
Chief Real Estate Officer
JERRY HAYES
Regional President
BRUCE HENDRICKS
Regional President
LINDA KUHN
Regional President
MARK LARSON
Regional President
JERRIE MERRITT
Regional President
LINDA MAHAN
Operations
SANFORD SADLER
Chief Credit Officer
SENIOR VICE PRESIDENTS
JILL AMONICA
Mortgage Loan Officer
FLOSSIE CHRISTENSEN
Human Resources Director
JOSELYN COUSINS
Community Dev. Manager
MARIA FERNANDEZ
Senior Loan Officer
SARAH GUINDY
Relationship Manager
LORI HARRISON
Regional Chief Lending Officer
DALINE JANUIK
Senior Loan Officer
KEITH JARVIS
Senior Real Estate Loan Officer
JOEY JOHNSON
Regional Chief Lending
ROBERT LEASE
Professional Mortgage Lender
CATHY LYNCH
Loan Servicing Dept. Manager
BRIAN MADDOX
Community Dev. Director
GREG MANLEY
Credit Administrator
JOANN MCFARLAND
Compliance Officer
JACK MISHEL
Regional Chief Lending Officer
CARLOS MONTOYA
Operations Administrator
RON POCHOP
Chief Info Technology Officer
DAVID ROUSH
Business Development Officer
JANICE ROWE
Marketing Director
TERRY SHIREY
Controller
TODD SKADBERG
Senior Real Estate Loan Officer
IRA SLEASMAN
Consumer/Business Loan Manager
MARCIA SYNKO
Regional Chief Lending Officer
KATHRINE TAYLOR
Branch Manager
BRADFORD TOPE
Chief Regional Credit Officer
DONALD VALLECORSA
CLC Manager/Special Assets
DAVID WALL
Senior Loan Officer
DIANNE WEEKS-SWANSON
Business Development Officer
PAUL WORKMAN
Business Development Officer
VICE PRESIDENTS
PAMELA ACOSTA
LAURIE BORGNA
DAVID BOSER
SCOTT BROD
CAROLYN CARROLL
RODGER CASTELANO
PATRICIA CORDILLO
KATHY COSIO
ANDY DE LA CRUZ
NADINE GARCIA-VALDIVIA
NICOLE GARNIER
GINA GIBSON
KATHIE HIGGINS
MICHELE JADOTTE
SHENAZ JOHANSEN
STEVE JOHNSON
LOIS KACHNIK
ALLEN MCCONVILLE
KATHLEEN MCLAIN
NURALI MOOSA
KENT MORISHIGE
SHERMAN NEEDHAM
BRIAN PENDERGRASS
MICHAEL PICKETT
RON RISK
LAURENE ROGERS
MURAD ROSS
SALVATORE SAIA
CHRIS SCHLAFFMAN
STEPHEN SCHNEIDER
M. NANCY SCHULTZ
EDWINA SMITH-GARDNER
PATRICIA TINMAN
ANA MARIA TOBERMAN
JOHN ZABY
PREMIER TRUST
MARK DRESCHLER
Chief Executive Officer,
President
MICHAEL MCCARTNEY
Executive Vice President,
Regional Manager
TOM RHEES
Vice President
Trust Officer
ALLIANCE BANK OF ARIZONA
JAMES LUNDY
Chief Executive Officer,
President
RICHARD KRIVEL
Chairman of the Board,
Tucson Market Manager
DUANE FROESCHLE
Vice Chairman,
Chief Credit Officer
SENIOR VICE PRESIDENTS
BARBARA BOONE
Credit Training/CRA Officer
BENJAMIN DANNER
Commercial Banking Manager
DON GARNER
Commercial Real Estate Manager
RUTH GIOVACCHINI
SBA-Loan Administrator
HARRY HARVEY
Commercial/Corporate Banking
SHARON HUEBNER
Commercial Banking Manager
BRENDA KOEDYKER
Professional Banking Manager
JOAN LESSNER
Executive & Professional Banking
BRIAN MIDDLETON
Commercial Banking Manager
JOHN MOOTHART
Commercial Banking Manager
T. RYAN SULLIVAN
Chief Financial Officer
VICTORIA WILLIAMS
Commercial Real Estate Banking
KAY WILMA
Operations Administrator
EDMUND ZITO
Corporate/Commercial Banking
VICE PRESIDENTS
TIMOTHY COLLINS
KELLY CONNER
STEVE DEAN
TIMOTHY DODT
WULFRANO FERNANDEZ
DONNA GANDRE
MATTHEW GILBREATH
ROBERT GRAMHILL
GERALDINE HOM
DAVID JOHNSON
SANDRA LAMELL
PEGGY LOVIK
TEAL MAIN
GINA MCROSTIE
DEBBIE NILES
JOHN O'ROURKE
MICHAEL PADUONE
VICKI SMITH
SANDERS SOLOT
CYNTHIA SOUTHARD
SCOTT STOVALL
TROY TOOLSON
CHAD TWITTY
DARLENE WOODSON
TORREY PINES BANK
ROBERT SARVER
Chief Executive Officer,
Chairman
GARY CADY
President
EXECUTIVE VICE PRESIDENTS
JOHN MAGUIRE
Regional President
MERRILL WALL
Chief Adminstrative Officer
SENIOR VICE PRESIDENTS
STEVEN BLACK
Real Estate Lending
PHIL FOWLER
Chief Financial Officer
TIMOTHY HIMSTREET
Regional Manager
JOHN MASSAB
Regional Manager
ALAN MCEACHERN
Regional Manager
WILLIAM MCLENNAN
Real Estate Manager
LILA QUIGLEY
Deposit Services Manager
TEOFLA RICH
Regional Manager
THOMAS WOOLWAY
Corporate Banking Manager
VICE PRESIDENTS
PETER CARR
FRANCESCA CASTAGNOLA
MARCIA CHAREST
STEVEN CONNOLLY
CHRIS GRASSA
JOHN HARLESON
DENNIS ISABELLE
STEVE KENT
GAIL KING
STACY LOMBARDO
ROBERT MCNAMARA
MARIE PFEIFER
FIONA ROUSE
LINDA STOUFFER
ROSEMARY VON KLUEGL
CRYSTAL WATKINS
DIANE WUNDERLICH-SIPE
MILLER/RUSSELL
DENNIS MILLER
President
INVESTMENT COUNSELORS
JOEL BONNEMA
LORI BOOTHE-HOULE
RUSSELL BUCKLEW
BRADLEY LEMON
WILLIAM MOSS
MORGAN SMITH,JR.
JOHN STURTEVANT
CHRISTOPHER WILKINSON
MAUREEN RZEPPA
Administrative Manager
27
WESTERN ALLIANCE BANCORPORATION
(LOGO OF BANK WEST OF NEVADA)
Your Business Partner
www.bankwestnevada.com
SAHARA REGIONAL OFFICE
2700 W. Sahara Avenue, Las Vegas, NV 89102
(702) 248-4200
Bruce Hendricks, Regional President
CENTENNIAL HILLS REGIONAL OFFICE
8505 W. Centennial Parkway, Las Vegas, NV 89149
(702) 856-7160
Linda Kuhn, Regional President
EASTERN/SIENA HEIGHTS OFFICE
10199 S. Eastern Avenue, Henderson, NV 89052
(702) 940-8501
Kathy Taylor, Senior Vice President, Manager
HENDERSON REGIONAL OFFICE
2890 N. Green Valley Parkway, Henderson, NV 89014
(702) 451-0624
Selma Bartlett, Regional President
NORTHWEST REGIONAL OFFICE
7251 W. Lake Mead Boulevard, Las Vegas, NV 89128
(702) 240-1734
Mark Larson, Regional President
SOUTHWEST REGIONAL OFFICE
3985 S. Durango Drive Las Vegas, NV 89147
(702) 363-5140
Diane Fearon, Regional President
COMMERCIAL REAL ESTATE OFFICE
2700 W. Sahara Avenue, Las Vegas, NV 89102
(702) 248-4200
Barry Harrison, Executive Vice President
(LOGO OF ALLIANCE BANK)
Of ARIZONA
www.alliancebankofarizona.com
PHOENIX BILTMORE PARK OFFICE
2701 E. Camelback Road, Ste. 110, Phoenix, AZ 85016
(602) 952-5400
James Lundy, President
PHOENIX GATEWAY OFFICE
4646 E. Van Buren, Ste. 100, Phoenix, AZ 85008
(602) 797-3600
Brian Middleton, Senior Vice President, Manager
PHOENIX MIDTOWN OFFICE
2901 N. Central Avenue, Ste. 100, Phoenix, AZ 85012
(602) 629-1700
Kelly Conner, Vice President, Manager
SCOTTSDALE OFFICE
7373 N. Scottsdale Road, Ste. A-195, Scottsdale, AZ 85253
(480) 998-6500
Ben Danner, Senior Vice President, Manager
TUCSON SWAN OFFICE
4703 E. Camp Lowell Drive, Tucson, AZ 85712
(520) 784-6000
Rick Krivel, Chairman
TUCSON DOWNTOWN OFFICE
1 S. Church Avenue, Ste. 950, Tucson, AZ 85701
(520) 784-6070
Dave Johnson, Vice President, Manager
TUCSON WILLIAMS CENTRE OFFICE
200 S. Craycroft Road, Tucson, AZ 85711
(520) 322-7700
Martha Mahaffey, Customer Service Manager
(LOGO OF TORREY PINES BANK)
www.torreypinesbank.com
CARMEL VALLEY OFFICE
12220 E. Camino Real, Ste. 110, San Diego, CA 92130
(858) 523-4630
Alan McEachern, Senior Vice President, Manager
DOWNTOWN SAN DIEGO OFFICE
550 West C Street, Ste. 100, San Diego, CA 92101
(619) 233-2500
John Massab, SeniorVice President, Manager
GOLDEN TRIANGLE OFFICE
4350 Executive Drive, Suite 130, San Diego, CA 92121
(858) 523-4688
Tim Himstreet, Senior Vice President, Manager
LA MESA OFFICE
8379 Center Drive, La Mesa, CA 91942
(619) 233-2555
John Maguire, Senior Vice President, Manager
SYMPHONY TOWERS OFFICE
750 B Street, Ste. 100, San Diego, CA 92101
(619) 233-2518
Francesca Castagnola, Vice President, Manager
COMMERCIAL REAL ESTATE OFFICE
12220 E. Camino Real, Ste. 100, San Diego, CA 92130
(858) 523-4600,
Will McLennan, Senior Vice President
(LOGO OF MILLER RUSSELL)
www.miller-russell.com
PHOENIX OFFICE
2701 E. Camelback Rd., Ste. 120, Phoenix, AZ 85016
(800) 222-1232
Dennis Miller,President
TUCSON OFFICE
4703 E. Camp Lowell Drive, Tucson, AZ 85712
(520) 784-6090
John Sturtevant, Investment Counselor
LAS VEGAS OFFICE
2700 W. Sahara Avenue, Ste. 300, Las Vegas, NV 89102
(702) 252-6465
Russ Bucklew, Investment Counselor
SAN DIEGO OFFICE
12220 El Camino Real, Ste.120, San Diego, CA 92130
(858) 523-4681
Morgan Smith, Investment Counselor
(LOGO OF PREMIER TRUST)
www.premier trust.com
LAS VEGAS OFFICE
2700 W. Sahara Avenue, Ste. 300, Las Vegas, NV 89102
(702) 507-0750
Mark Dreschler,President
PHOENIX OFFICE
3131 E. Camelback Road, Ste. 230, Phoenix, AZ 85016
(480) 229-8243
Michael McCartney, Regional President
28
WESTERN ALLIANCE BANCORPORATION
FINANCIAL REPORT
Cautionary Note Regarding Forward-Looking Statements 30
Our Business 30
Market For Registrant's Common Equity and Related Stockholder Matters 33
Selected Financial Data 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations 35
Report of Independent Registered Public Accounting Firm 61
Consolidated Balance Sheets 62
Consolidated Statements of Income 63
Consolidated Statements of Stockholders' Equity 64
Consolidated Statements of Cash Flows 65
Notes to Consolidated Financial Statements 66
29
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Our Business" and elsewhere in
this annual report constitute forward-looking statements. Forward-looking
statements relate to expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. In some cases, you can identify forward
looking statements by terms such as "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential" or the
negative of these terms or other comparable terminology.
The forward-looking statements contained in this annual report reflect our
current views about future events and financial performance and are subject to
risks, uncertainties, assumptions and changes in circumstances that may cause
our actual results to differ significantly from historical results and those
expressed in any forward-looking statement. Some factors that could cause actual
results to differ materially from historical or expected results include:
- - changes in general economic conditions, either nationally or locally in the
areas in which we conduct or will conduct our business;
- - inflation, interest rate, market and monetary fluctuations;
- - changes in gaming or tourism in our primary market area;
- - risks associated with our growth and expansion strategy and related costs;
- - increased lending risks associated with our high concentration of
commercial real estate, construction and land development and commercial,
industrial loans;
- - increases in competitive pressures among financial institutions and
businesses offering similar products and services;
- - higher defaults on our loan portfolio than we expect;
- - changes in management's estimate of the adequacy of the allowance for loan
losses;
- - legislative or regulatory changes or changes in accounting principles,
policies or guidelines;
- - management's estimates and projections of interest rates and interest rate
policy;
- - the execution of our business plan; and
- - other factors affecting the financial services industry generally or the
banking industry in particular.
We do not intend and disclaim any duty or obligation to update or revise any
industry information or forward-looking statements set forth in this annual
report to reflect new information, future events or other wise, except as may be
required by the securities laws.
OUR BUSINESS
We are a bank holding company headquartered in Las Vegas, Nevada. We provide a
full range of banking and related services to locally owned businesses,
professional firms, real estate developers and investors, local non-profit
organizations, high net worth individuals and other consumers through our
subsidiary banks and financial services companies located in Nevada, Arizona and
California. On a consolidated basis, as of December 31, 2005, we had
approximately $2.9 billion in assets, $1.8 billion in total loans, $2.4 billion
in deposits and $244.2 million in stockholders' equity. We have focused our
lending activities primarily on commercial loans, which comprised 83.7% of our
total loan portfolio at December 31, 2005. In addition to traditional lending
and deposit gathering capabilities, we also offer a broad array of financial
products and services aimed at satisfying the needs of small to mid-sized
businesses and their proprietors, including cash management, trust
administration and estate planning, custody and investments and equipment
leasing.
BankWest of Nevada was founded in 1994 by a group of individuals with extensive
community banking experience in the Las Vegas market. We believe our success has
been built on the strength of our management team, our conservative credit
culture, the attractive growth characteristics of the markets in which we
operate and our ability to expand our franchise by attracting seasoned bankers
with long-standing relationships in their communities.
In 2003, with the support of local banking veterans, we opened Alliance Bank of
Arizona in Phoenix, Arizona and Torrey Pines Bank in San Diego, California. Over
the past two and a half years we have successfully leveraged the expertise and
strengths of Western Alliance and BankWest of Nevada to build and expand these
new banks in a rapid and efficient manner.
Through our wholly owned, non-bank subsidiaries, Miller/Russell & Associates,
Inc. and Premier Trust, Inc., we provide investment advisory and wealth
management services, including trust administration and estate planning. We
acquired Miller/Russell and Premier Trust in May 2004 and December 2003,
respectively. As of December 31, 2005, Miller/Russell had $1.11 billion in
assets under management, and Premier Trust had $132 million in assets under
management and $296 million in total trust assets.
30
WESTERN ALLIANCE BANCORPORATION
OUR BUSINESS
We currently operate our business in four operating segments: BankWest of
Nevada, Alliance Bank of Arizona, Torrey Pines Bank and Other (Western Alliance
Bancorporation, Miller/Russell & Associates, Inc. and Premier Trust, Inc.)
Please refer to Note 18 "Segment Reporting" to our Consolidated Financial
Statements for financial information regarding segment reporting.
LENDING ACTIVITIES
We provide a variety of loans to our customers, including commercial and
residential real estate loans, construction and land development loans,
commercial loans, and to a lesser extent, consumer loans. Our lending efforts
have focused on meeting the needs of our business customers, who have typically
required funding for commercial and commercial real estate enterprises.
Commercial loans comprised 83.7% of our total loan portfolio at December 31,
2005. We intend to continue expanding our lending activities and have recently
begun offering SBA 7(a) loans and equipment leasing.
Commercial Real Estate Loans. The majority of our lending activity consists of
loans to finance the purchase of commercial real estate and loans to finance
inventory and working capital that are secured by commercial real estate. We
have a commercial real estate portfolio comprised of loans on apartment
buildings, professional offices, industrial facilities, retail centers and other
commercial properties. As of December 31, 2005, 54.1% of our commercial real
estate and construction loans were owner occupied.
Construction and Land Development Loans. The principal types of our construction
loans include industrial/warehouse properties, office buildings, retail centers,
medical facilities, restaurants and, on occasion, luxury single-family homes.
Construction and land development loans are primarily made only to experienced
local developers with whom we have a sufficient lending history. An analysis of
each construction project is per formed as part of the underwriting process to
determine whether the type of property, location, construction costs and
contingency funds are appropriate and adequate. We extend raw commercial land
loans primarily to borrowers who plan to initiate active development of the
property within two years.
Commercial and Industrial Loans. In addition to real estate related loan
products, we also originate commercial and industrial loans, including working
capital lines of credit, inventory and accounts receivable lines, equipment
loans and other commercial loans. We focus on making commercial loans to small
and medium-sized businesses in a wide variety of industries. We also are a
"Preferred Lender" in Arizona with the SBA. We intend to increase our commitment
to this product line in the future.
Residential Loans. We originate residential mortgage loans secured by one- to
four-family properties, most of which serve as the primary residence of the
owner. Our primary focus is to maintain and expand relationships with realtors
and other key contacts in the residential real estate industry in order to
originate new mortgages. Most of our loan originations result from relationships
with existing or past customers, members of our local community, and referrals
from realtors, attorneys and builders.
Consumer Loans. We offer a variety of consumer loans to meet customer demand and
to increase the yield on our loan portfolio. Consumer loans are generally
offered at a higher rate and shorter term than residential mortgages. Examples
of our consumer loans include:
- - home equity loans and lines of credit;
- - home improvement loans;
- - new and used automobile loans; and
- - personal lines of credit.
INVESTMENT ACTIVITIES
Each of our banking subsidiaries has its own investment policy, which is
established by our board of directors and is approved by each respective bank's
board of directors. These policies dictate that investment decisions will be
made based on the safety of the investment, liquidity requirements, potential
returns, cash flow targets, and consistency with our interest rate risk
management. Each bank's chief financial officer is responsible for making
securities portfolio decisions in accordance with established policies. The
chief financial officer has the authority to purchase and sell securities within
specified guidelines established by the investment policy. All transactions for
a specific bank are reviewed by that bank's board of directors on a monthly
basis.
Our investment policies generally limit securities investments to U.S.
Government, agency and sponsored entity securities and municipal bonds, as well
as investments in preferred and common stock of government sponsored entities,
such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. The policies
also permit investments in mortgage-backed securities, including pass-through
securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as
well as collateralized mortgage obligations ("CMOs") issued or backed by
securities issued by these government agencies and privately issued investment
grade CMOs. Privately issued CMOs typically offer higher rates than those paid
on government agency CMOs, but lack the guaranty of such agencies and typically
there is less market liquidity than agency bonds. The policies also permit
investments in securities issued or backed by the SBA. Our current investment
strategy uses a risk management approach of diversified investing in fixed-rate
securities with short- to intermediate-term
31
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
OUR BUSINESS
INVESTMENT ACTIVITIES (continued)
maturities. The emphasis of this approach is to increase overall securities
yields while managing interest rate risk. To accomplish these objectives, we
focus on investments in mortgage-backed securities and CMOs.
All of our investment securities are classified as "available for sale" or "held
to maturity" pursuant to SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Available for sale securities are reported at fair
value, with unrealized gains and losses excluded from earnings and instead
reported as a separate component of stockholders' equity. Held to maturity
securities are those securities that we have both the intent and the ability to
hold to maturity. These securities are carried at cost adjusted for amortization
of premium and accretion of discount.
DEPOSIT PRODUCTS AND OTHER FUNDING SOURCES
We offer a variety of deposit products to our customers, including checking
accounts, savings accounts, money market accounts and other deposit accounts,
including fixed-rate, fixed maturity retail certificates of deposit ranging in
terms from 30 days to five years, individual retirement accounts, and non-retail
certificates of deposit consisting of jumbo certificates greater than or equal
to $100,000. We have historically focused on attracting low cost core deposits.
As of December 31, 2005, our deposit portfolio was comprised of 40.9% non-
interest bearing deposits, compared to 14.3% time deposits.
Our non-interest bearing deposits consist of non-interest bearing checking
accounts, which, as of December 31, 2005, were comprised of 31.9% title company
deposits, which consist primarily of deposits held in escrow pending the closing
of commercial and residential real estate transactions, and, to a lesser extent,
operating accounts for title companies; 61.6% other business deposits, which
consist primarily of operating accounts for businesses; and 6.5% consumer
deposits. We consider these deposits to be core deposits. We believe these
deposits are generally not interest rate sensitive since these accounts are not
created for investment purposes. The competition for these deposits in our
markets is strong. We believe our success in attracting and retaining these
deposits is based on several factors, including (1) the high level of service we
provide to our customers; (2) our ability to attract and retain experienced
relationship bankers who have strong relationships in their communities; (3) our
broad array of cash management services; and (4) our competitive pricing on
earnings credits paid on these deposits. We intend to continue our efforts to
attract deposits from our business lending relationships in order to maintain
our low cost of funds and improve our net interest margin. However, if we lost a
significant part of our low-cost deposit base, it would negatively impact our
profitability.
Deposit flows are significantly influenced by general and local economic
conditions, changes in prevailing interest rates, internal pricing decisions and
competition. Our deposits are primarily obtained from areas surrounding our
branch offices. In order to attract and retain deposits, we rely on providing
quality service and introducing new products and services that meet our
customers' needs.
Each subsidiary bank's asset and liability committee sets its own deposit rates.
Our banks consider a number of factors when determining their individual deposit
rates, including:
- - Information on current and projected national and local economic conditions
and the outlook for interest rates;
- - The competitive environment in the markets it operates in;
- - Loan and deposit positions and forecasts, including any concentrations in
either; and
- - FHLB advance rates and rates charged on other sources of funds.
FINANCIAL PRODUCTS & SERVICES
In addition to traditional commercial banking activities, we provide other
financial services to our customers, including:
- - Internet banking;
- - Wire transfers;
- - Electronic bill payment;
- - Lock box services;
- - Courier services;
- - Cash vault; and
- - Cash management services (including account reconciliation, collections and
sweep accounts).
We have a service center facility currently under development in the Las Vegas
metropolitan area, which we anticipate will become operational in the third
quarter of 2006. We expect that this facility, once completed, will increase our
capacity to provide courier, cash management and other business services.
32
WESTERN ALLIANCE BANCORPORATION
OUR BUSINESS
FINANCIAL PRODUCTS & SERVICES (continued)
Through Miller/Russell, we provide customers with asset allocation and
investment advisory services. In addition, we provide wealth management services
including trust administration of personal and retirement accounts, estate and
financial planning, custody services and investments through Premier Trust.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the New York Stock Exchange under the symbol
"WAL" on June 30, 2005.
Prior to our IPO there had been no public market for our common stock. To our
knowledge, there were no trades of our stock from January 1, 2004 through the
date of our initial public offering.
In the IPO shares of our common stock were sold for $22.00 per share. The
stock's price at the close of the market on June 30, 2005 was $25.40. The
following table sets forth the low and high closing prices for the two quarters
in the period from June 30, 2005 through December 31, 2005.
CLOSING PRICES
---------------
QUARTER ENDED LOW HIGH
- ------------- ------ ------
September 30, 2005 $25.75 $31.50
December 31, 2005 $24.39 $30.01
The closing price of our stock on March 10, 2006 was $35.39.
HOLDERS
As of March 10, 2006, there were approximately 301 stockholders of record of our
common stock. At such date, our directors and executive officers beneficially
owned approximately 50% of our outstanding shares. There are no other classes of
common equity outstanding.
DIVIDENDS
We have never declared a cash dividend as we have used our current and retained
earnings to support our rapid and continued growth. We do not foresee any
circumstances in the immediate future in which we would consider paying cash
dividends on our common stock.
Western Alliance is a legal entity separate and distinct from its bank
subsidiaries and our other non-bank subsidiaries. Since we are a holding company
with no significant assets other than the capital stock of our subsidiaries, we
depend upon dividends from our subsidiaries for a substantial part of our
revenue. Accordingly, our ability to pay dividends depends primarily upon the
receipt of dividends or other capital distributions from our subsidiaries. Our
subsidiaries' ability to pay dividends to Western Alliance is subject to, among
other things, their earnings, financial condition and need for funds, as well as
federal and state governmental policies and regulations applicable to us and
each of those subsidiaries, which limit the amount that may be paid as dividends
without prior approval. In addition, if any required payments on outstanding
trust preferred securities are not made, we will be prohibited from paying
dividends on our common stock.
SELECTED FINANCIAL DATA
The selected financial information in the table below as of and for the years
ended December 31, 2005, 2004, 2003, 2002 and 2001 is derived from our audited
consolidated financial statements. Results for past periods are not necessarily
indicative of results that may be expected for any future period.
33
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED INCOME DATA:
Interest income $ 134,910 $ 90,855 $ 53,823 $ 39,117 $ 35,713
Interest expense 32,568 19,720 12,798 9,771 9,140
----------- ----------- ----------- ----------- -----------
Net interest income 102,342 71,135 41,025 29,346 26,573
Provision for loans losses 6,179 3,914 5,145 1,587 2,800
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 96,163 67,221 35,880 27,759 23,773
Non-interest income 12,138 8,726 4,270 3,935 3,437
Non-interest expense 64,864 44,929 27,290 19,050 18,256
----------- ----------- ----------- ----------- -----------
Income before income taxes 43,437 31,018 12,860 12,644 8,954
Provision for income taxes 15,372 10,961 4,171 4,235 3,001
----------- ----------- ----------- ----------- -----------
Net Income $ 28,065 $ 20,057 $ 8,689 $ 8,409 $ 5,953
=========== =========== =========== =========== ===========
SHARE DATA:
Earnings per share--basic $ 1.36 $ 1.17 $ 0.61 $ 0.79 $ 0.55
Earnings per share--diluted $ 1.24 $ 1.09 $ 0.59 $ 0.78 $ 0.54
Book Value per share $ 10.71 $ 7.32 $ 5.84 $ 4.85 $ 3.31
Shares outstanding at period end 22,810,491 18,249,554 16,681,273 13,908,279 10,850,787
Weighted average shares outstanding--basic 20,583,022 17,189,687 14,313,611 10,677,736 10,730,738
Weighted average shares outstanding--diluted 22,666,161 18,405,120 14,613,173 10,715,448 11,038,275
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents $ 174,336 $ 115,397 $ 65,908 $ 159,683 $ 104,101
Investments and other securities 748,533 788,622 715,978 232,848 79,454
Gross loans, including net deferred loan fees 1,793,337 1,188,535 733,078 464,355 407,210
Allowance for loan losses 21,192 15,271 11,378 6,449 6,563
Assets 2,857,271 2,176,849 1,576,773 872,074 602,703
Deposits 2,393,812 1,756,036 1,094,646 720,304 549,354
Junior subordinated debt 30,928 30,928 30,928 30,928 15,464
Stockholders' equity 244,223 133,571 97,451 67,442 35,862
SELECTED OTHER BALANCE SHEET DATA:
Average assets $ 2,488,740 $ 1,902,947 $ 1,148,820 $ 687,927 $ 536,219
Average earning assets 2,324,463 1,776,362 1,069,990 642,734 473,462
Average stockholders' equity 195,284 114,765 71,276 43,370 39,573
SELECTED FINANCIAL AND LIQUDITY RATIOS:
Return on average assets 1.13% 1.05% 0.76% 1.22% 1.11%
Return on average stockholders' equity 14.37% 17.48% 12.19% 19.39% 15.04%
Net interest margin (1) 4.40% 4.00% 3.83% 4.57% 5.50%
Efficiency ratio (2) 56.66% 56.26% 60.25% 57.24% 60.83%
Loan to deposit ratio 74.92% 67.68% 66.97% 64.47% 74.13%
CAPITAL RATIOS (COMPANY):
Average stockholders' equity to average assets 7.8% 6.0% 6.2% 6.3% 7.4%
Leverage Ratio 10.2% 7.7% 8.9% 11.2% 8.5%
Tier 1 Risk-Based Capital ratio 12.8% 10.9% 13.3% 15.4% 10.4%
Total Risk-Based Capital ratio 13.8% 12.0% 14.4% 18.1% 12.3%
SELECTED ASSET QUALITY RATIOS:
Non-accrual loans to gross loans 0.01% 0.13% 0.03% 0.22% 0.17%
Non-accrual loans to total assets 0.00% 0.07% 0.01% 0.12% 0.11%
Loans past due 90 days or more and still
accruing to total loans 0.00% 0.00% 0.01% 0.04% 0.05%
Allowance for loan losses to total loans 1.18% 1.28% 1.55% 1.39% 1.61%
Allowance for loan losses to non-accrual loans 19,805.61% 959.84% 4,137.45% 181.71% 711.82%
Net charge-offs to average loans 0.02% 0.00% 0.17% 0.19% 0.27%
(1) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(2) Efficiency ratio represents noninterest expenses as a percentage of the
total of net interest income plus noninterest income.
34
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and related notes included elsewhere in this annual report. This discussion and
analysis contains forward-looking statements that involve risk, uncertainties
and assumptions. Certain risks, uncertainties and other factors, including but
not limited to those set forth under "Cautionary Note Regarding Forward-Looking
Statements" may cause actual results to differ materially from those projected
in the forward-looking statements.
OVERVIEW AND HISTORY
We are a bank holding company headquartered in Las Vegas, Nevada. We provide a
full range of banking and related services to locally owned businesses,
professional firms, real estate developers and investors, local nonprofit
organizations, high net worth individuals and consumers through our subsidiary
banks and financial services companies located in Nevada, Arizona and
California. In addition to traditional lending and deposit gathering
capabilities, we also offer a broad array of financial products and services
aimed at satisfying the needs of small to mid-sized businesses and their
proprietors, including cash management, trust administration and estate
planning, custody and investments and equipment leasing.
We generate the majority of our revenue from interest on loans, service charges
on customer accounts and income from investment securities. This revenue is
offset by interest expense paid on deposits and other borrowings and
non-interest expense such as administrative and occupancy expenses. Net interest
income is the difference between interest income on interest-earning assets such
as loans and securities and interest expense on interest-bearing liabilities
such as customer deposits and other borrowings which are used to fund those
assets. Net interest income is our largest source of net income. Interest rate
fluctuations, as well as changes in the amount and type of earning assets and
liabilities, combine to affect net interest income.
We provide a variety of loans to our customers, including commercial and
residential real estate loans, construction and land development loans,
commercial and industrial loans, and to a lesser extent, consumer loans. We rely
primarily on locally generated deposits to provide us with funds for making
loans. We intend to continue expanding our lending activities and have recently
begun offering Small Business Administration, or SBA, loans.
In addition to these traditional commercial banking capabilities, we also
provide our customers with cash management, trust administration and estate
planning, equipment leasing, and custody and investment services, resulting in
revenue generated from non-interest income. We receive fees from our deposit
customers in the form of service fees, checking fees and other fees. Other
services such as safe deposit and wire transfers provide additional fee income.
We may also generate income from time to time from the sale of investment
securities. The fees collected by us and any gains on sales of securities are
found in our Consolidated Statements of Income under "non-interest income."
Offsetting these earnings are operating expenses referred to as "non-interest
expense." Because banking is a very people intensive industry, our largest
operating expense is employee compensation and related expenses.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
($ IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net Income $ 28,065 $ 20,057 $ 8,689
Basic earnings per share 1.36 1.17 0.61
Diluted earnings per share 1.24 1.09 0.59
Total Assets 2,857,271 2,176,849 1,576,773
Gross Loans 1,793,337 1,188,535 733,078
Total Deposits 2,393,812 1,756,036 1,094,646
Net interest margin 4.40% 4.00% 3.83%
Efficiency Ratio 56.66 56.26 60.25
Return on average assets 1.13 1.05 0.76
Return on average equity 14.37 17.48 12.19
PRIMARY FACTORS IN EVALUATING FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a bank holding company, we focus on several factors in evaluating our
financial condition and results of operations, including:
- Return on Average Equity, or ROE;
- Return on Average Assets, or ROA;
- Asset Quality;
- Asset and Deposit Growth; and
- Operating Efficiency.
35
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PRIMARY FACTORS IN EVALUATING FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Return on Average Equity. Our net income for the year ended December 31, 2005
increased 39.9% to $28.1 million compared to $20.1 million for the year ended
December 31, 2004. The increase in net income was due primarily to increases in
net interest income of $31.2 million and other income of $3.4 million, partially
offset by an increase of $19.9 million in other expenses and an additional
provision for loan losses of $2.3 million. Basic earnings per share increased to
$1.36 per share for the year ended December 31, 2005, compared to $1.17 per
share for the same period in 2004. Diluted earnings per share increased to $1.24
per share for the year ended December 31, 2005, compared to $1.09 per share for
the same period last year. Average shares outstanding increased 3.4 million from
17.2 million for the year ended December 31, 2004 to 20.6 million for the year
ended December 31, 2005, and average stockholders' equity increased $80.5
million for the same periods. The increase in shares outstanding and average
stockholders' equity was due primarily to our initial public offering of 4.2
million shares which closed in July 2006. The increase in net income and shares
outstanding resulted in an ROE of 14.4% for the year ended December 31, 2005,
compared to 17.5% for the year ended December 31, 2004.
Return on Average Assets. Our ROA for the year ended December 31, 2005 increased
to 1.13% compared to 1.05% for the same period in 2004. The increase in ROA is
primarily due to the increase in net income discussed above.
Asset Quality. For all banks and bank holding companies, asset quality plays a
significant role in the overall financial condition of the institution and
results of operations. We measure asset quality in terms of non-accrual loans
and assets as a percentage of gross loans and assets, and net charge-offs as a
percentage of average loans. Net charge-offs are calculated as the difference
between charged-off loans and recovery payments received on previously
charged-off loans. As of December 31, 2005, non-accrual loans were $107,000
compared to $1.6 million at December 31, 2004. Non-accrual loans as a percentage
of gross loans were 0.01% as of December 31, 2005, compared to 0.13% as of
December 31, 2004. At December 31, 2005 and December 31, 2004, our
nonperforming assets were exclusively comprised of non-accrual loans and loans
past due 90 days or more and still accruing. For the year ended December 31,
2005, net charge-offs as a percentage of average loans were 0.02%, compared to
less than 0.01% for the year ended December 31, 2004.
Asset and Deposit Growth. The ability to produce loans and generate deposits is
fundamental to our asset growth. Our assets and liabilities are comprised
primarily of loans and deposits, respectively. Total assets increased 31.3% to
$2.9 billion as of December 31, 2005 from $2.2 billion as of December 31, 2004.
Gross loans grew 50.9% to $1.8 billion as of December 31, 2005 from $1.2 billion
as of December 31, 2004. Total deposits increased 36.3% to $2.4 billion as of
December 31, 2005 from $1.8 billion as of December 31, 2004.
Operating Efficiency. Operating efficiency is measured in terms of how
efficiently income before income taxes is generated as a percentage of revenue.
Our efficiency ratio (non-interest expenses divided by the sum of net interest
income and non interest income) was 56.66% for the year ended December 31, 2005
compared to 56.26% for the same period in 2004.
CRITICAL ACCOUNTING POLICIES
The Notes to Consolidated Financial Statements contain a summary of our
significant accounting policies, including discussions on recently issued
accounting pronouncements, our adoption of them and the related impact of their
adoption. We believe that certain of these policies, along with various
estimates that we are required to make in recording our financial transactions,
are important to have a complete picture of our financial position. In addition,
these estimates require us to make complex and subjective judgments, many of
which include matters with a high degree of uncertainty. The following is a
discussion of these critical accounting policies and significant estimates.
Additional information about these policies can be found in Note 1 of the
Consolidated Financial Statements.
Allowance for Loan Losses. The allowance for loan losses is a valuation
allowance for probable losses incurred in the loan portfolio. Our allowance for
loan loss methodology incorporates a variety of risk considerations in
establishing an allowance for loan losses that we believe is adequate to absorb
losses in the existing portfolio. Such analysis addresses our historical loss
experience, delinquency and charge-off trends, collateral values, changes in
nonperforming loans, economic conditions, peer group experience and other
considerations. This information is then analyzed to determine "estimated loss
factors" which, in turn, is assigned to each loan category. These factors also
incorporate known information about individual loans, including the borrowers'
sensitivity to interest rate movements. Changes in the factors themselves are
driven by perceived risk in pools of homogenous loans classified by collateral
type, purpose and term. Management monitors local trends to anticipate future
delinquency potential on a quarterly basis. In addition to ongoing internal loan
reviews and risk assessment, management utilizes an independent loan review firm
to provide advice on the appropriateness of the allowance for loan losses.
The allowance for loan losses is increased by the provision for loan losses
charged to expense and reduced by loans charged off, net of recoveries.
Provisions for loan losses are provided on both a specific and general basis.
Specific allowances are provided for watch, criticized, and impaired credits for
which the expected/anticipated loss may be measurable. General valuation
allowances are
36
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES (continued)
based on a portfolio segmentation based on collateral type, purpose and risk
grading, with a further evaluation of various factors noted above.
We incorporate our internal loss history to establish potential risk based on
collateral type securing each loan. As an additional comparison, we examine peer
group banks to determine the nature and scope of their losses. Finally, we
closely examine each credit graded "Watch List/Special Mention" and below to
individually assess the appropriate specific loan loss reserve for such credit.
At least annually, we review the assumptions and formulae by which additions are
made to the specific and general valuation allowances for loan losses in an
effort to refine such allowance in light of the current status of the factors
described above. The total loan portfolio is thoroughly reviewed at least
quarterly for satisfactory levels of general and specific reserves together with
impaired loans to determine if write downs are necessary.
Although we believe the levels of the allowance as of December 31, 2005 and 2004
were adequate to absorb probable losses in the loan portfolio, a decline in
local economic conditions or other factors could result in increasing losses
that cannot be reasonably estimated at this time.
Available-for-Sale Securities. Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities, requires
that available-for-sale securities be carried at fair value. Management utilizes
the services of a third party vendor to assist with the determination of
estimated fair values. Adjustments to the available-for-sale securities fair
value impact the consolidated financial statements by increasing or decreasing
assets and stockholders' equity.
Stock Based Compensation. We account for stock-based employee compensation
arrangements in accordance with provision of Accounting Principles Board, or
APB, Opinion No. 25, Accounting for Stock Issued to Employees and comply with
the disclosure provisions of Statement of Financial Accounting Standards, or
SFAS, No. 123 Accounting for Stock-Based Compensation. Therefore, we do not
record any compensation expense for stock options we grant to our employees
where the exercise price equals the fair market value of the stock on the date
of grant and the exercise price, number of shares eligible for issuance under
the options and vesting period are fixed. We comply with the disclosure
requirements of SFAS No. 123 and SFAS No. 148, which require that we disclose
our pro forma net income or loss and net income or loss per common share as if
we had expensed the fair value of the options.
In December 2004, the Financial Accounting Standards Board published FASB
Statement No. 123 (revised 2004), Share-Based Payment, or FAS 123(R). FAS 123(R)
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
Modifications of share-based payments will be treated as replacement awards with
the cost of the incremental value recorded in the financial statements.
The Statement will be effective at the beginning of the first quarter of 2006.
As of the effective date, we will apply the Statement using a modified version
of prospective application. Under that transition method, compensation cost will
be recognized for (1) all awards granted after the required effective date and
to awards modified, cancelled, or repurchased after that date and (2) the
portion of awards granted subsequent to completion of an IPO and prior to the
effective date for which the requisite service has not yet been rendered, based
on the grant-date fair value of those awards calculated for pro forma
disclosures under SFAS 123.
The impact of this Statement on the Company in 2006 and beyond will depend on
various factors; among them being our future compensation strategy. We estimate
that the Company will incur stock option compensation expense of $435,000 for
the year ended December 31, 2006 related to the adoption of FAS123(R), $307,000
of which is expected to be tax-effected.
TRENDS AND DEVELOPMENTS IMPACTING OUR RECENT RESULTS
Certain trends emerged and developments have occurred that are important in
understanding our recent results and that are potentially significant in
assessing future performance.
Growth in our market areas. Our growth has been fueled in particular by the
significant population and economic growth of the greater Las Vegas area where
we conduct the majority of our operations. The growth in this area has coincided
with significant investments in the gaming and tourism industry. The significant
population increase has resulted in an increase in the acquisition of raw land
for residential and commercial development, the construction of residential
communities, shopping centers and office buildings, and the development and
expansion of the businesses and professions that provide essential goods and
services to this expanded population. Similarly, growth in the Phoenix, Tucson
and San Diego markets has contributed to our growth.
Asset sensitivity. Management uses various modeling strategies to manage the
repricing characteristics of our assets and liabilities. These models contain a
number of assumptions and can not take into account all the various factors that
influence the sensitivities
37
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TRENDS AND DEVELOPMENTS IMPACTING OUR RECENT RESULTS (continued)
of our assets and liabilities. Despite these limitations, most of our models at
December 31, 2005 indicated that our balance sheet was asset sensitive. A
company is considered to be asset sensitive if the amount of its interest
earning assets maturing or repricing within a certain time period exceed the
amount of its interest-bearing liabilities also maturing or repricing within the
same period. Being asset sensitive means generally that in times of rising
interest rates, a company's net interest income will increase, and in times of
falling interest rates, net interest income will decrease.
Because many of our assets are floating rate loans, which are funded by our
relatively large non-interest bearing deposit base, we are asset sensitive.
During 2003 and 2004, we mitigated this asset sensitivity and increased earnings
by investing in mortgage-backed securities funded by short-term FHLB
borrowings. This strategy had the effect of leveraging our excess capital to
produce incremental returns without incurring additional credit risk. In light
of the rising interest rate environment, beginning in the third quarter of 2004,
we discontinued this strategy.
We expect that if market interest rates continue to rise, our net interest
margin and our net interest income will be favorably impacted. See "Quantitative
and Qualitative Disclosure about Market Risk."
Impact of expansion on non-interest expense. We plan to open 9 additional
branches in our existing markets over the next 12 months. We anticipate that the
expansion will result in a significant increase in occupancy and equipment
expense. The cost to construct and furnish a new branch is approximately $2.5
million, excluding the cost to lease or purchase the land on which the branch is
located. Consistent with our historical growth strategy, as we open new offices
and expand both within and outside our current markets, we plan to recruit
seasoned relationship bankers, thereby increasing our salary expenses.
Initially, this increase in salary expense is expected to be higher than the
revenues to be received from the customer relationships brought to us by the new
relationship bankers.
Prior to 2005, Robert Sarver's management company received an annual fee of
$60,000 pursuant to a consulting agreement. The consulting agreement was
terminated in 2005 and Mr. Sarver now receives an annual salary of $500,000. In
addition, for the year ended December 31, 2005, Mr. Sarver received a
discretionary bonus in the amount of $500,000. His salary for 2006 will be
$550,000, and his target bonus is expected to be 100% of his salary.
Impact of acquisitions on net income. In January 2006, we announced definitive
agreements to acquire Intermountain First Bancorp and Bank of Nevada, both of
which are Las Vegas, Nevada based financial institutions. We anticipate that
these acquisitions will close in the second quarter of 2006, at which point we
will realize a significant increase in compensation, occupancy, and other
non-interest expenses. We anticipate that the net interest income we will
realize from these acquisitions will exceed the increase in non-interest
expenses. We further expect that these transactions will be immediately
accretive to our earnings per share.
Impact of service center on non-interest income. We have a service center
facility currently under development in the Las Vegas metropolitan area, which
we anticipate will become operational in the third quarter of 2006. The
anticipated cost to construct and furnish our service center will be between
$13.0 and $15.0 million. We expect that this facility, once completed, will
increase our capacity to provide courier, cash management and other business
services. We anticipate this will have a favorable impact on our non-interest
income.
RESULTS OF OPERATIONS
Our results of operations depend substantially on net interest income, which is
the difference between interest income on interest-earning assets, consisting
primarily of loans receivable, securities and other short-term investments, and
interest expense on interest-bearing liabilities, consisting primarily of
deposits and borrowings. Our results of operations are also dependent upon our
generation of non-interest income, consisting of income from trust and
investment advisory services and banking service fees. Other factors
contributing to our results of operations include our provisions for loan
losses, gains or losses on sales of securities and income taxes, as well as the
level of our non-interest expenses, such as compensation and benefits, occupancy
and equipment and other miscellaneous operating expenses.
38
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
The following table sets forth a summary financial overview for the years ended
December 31, 2005 and 2004.
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004 INCREASE
-------- ------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
Interest income $134,910 $90,855 $44,055
Interest expense 32,568 19,720 12,848
-------- ------- -------
Net interest income 102,342 71,135 31,207
Provision for loan losses 6,179 3,914 2,265
-------- ------- -------
Net interest income after provision for loan losses 96,163 67,221 28,942
Other income 12,138 8,726 3,412
Other expense 64,864 44,929 19,935
-------- ------- -------
Net income before income taxes 43,437 31,018 12,419
Income tax expense 15,372 10,961 4,411
-------- ------- -------
Net income $ 28,065 $20,057 $ 8,008
======== ======= =======
Earnings per share - basic $ 1.36 $ 1.17 $ 0.19
======== ======= =======
Earnings per share - diluted $ 1.24 $ 1.09 $ 0.15
======== ======= =======
The 39.9% increase in net income in the year ended December 31, 2005 compared to
the year ended December 31, 2004 was due primarily to increases in net interest
income of $31.2 million and other income of $3.4 million, partially offset by an
increase of $19.9 million in other expenses and an additional provision for loan
losses of $2.3 million. The increase in net interest income was the result of an
increase in the volume of interest-earning assets, primarily loans, partially
offset by an increase in our cost of funds, due principally to a rising deposit
market rate environment and an increase in borrowing rates.
Net Interest Income and Net Interest Margin. The 43.9% increase in net interest
income for the year ended December 31, 2005 compared to the year ended December
31, 2004 was due to an increase in interest income of $44.1 million, reflecting
the effect of an increase of $548.1 million in average interest-bearing assets
which was funded with an increase of $619.9 million in average deposits, of
which $244.8 million were non-interest bearing.
The average yield on our interest-earning assets was 5.80% for the year ended
December 31, 2005, compared to 5.11% for the year ended December 31, 2004, an
increase of 13.5%. The increase in the yield on our interest-earning assets is
primarily a result of an increase in the yield earned on our loan portfolio and
a shift of funds previously held in securities into higher-yielding loans. The
increase in the yield on our loan portfolio from 6.26% in 2004 to 6.83% in 2005
was due to two factors: (1) market rates in 2005 were higher than those in 2004,
and therefore the new loans booked in 2005 were generally at higher rates than
the average portfolio rate at December 31, 2004; and (2) approximately one-half
of our loan portfolio is variable rate, and therefore these loans reprice at
higher rates in a rising rate environment as was seen in the year ended December
31, 2005.
The cost of our average interest-bearing liabilities increased to 2.27% in the
year ended December 31, 2005, from 1.68% in the year ended December 31, 2004,
which is a result of higher rates paid on deposit accounts and borrowings.
Our average rate on our interest-bearing deposits increased 46.2% from 1.43% for
the year ended December 31, 2004, to 2.09% for the year ended December 31, 2005,
reflecting increases in general market rates. Our average rate on total deposits
(including non-interest bearing deposits) increased 46.4% from 0.84% for the
year ended December 31, 2004, to 1.23% for the year ended December 31, 2005.
Our interest margin of 4.40% for the year ended December 31, 2005 was higher
than our margin for the previous year of 4.00% due to an increase in our yield
on interest-bearing assets, offset by a smaller relative increase in our overall
cost of funds.
Average Balances and Average Interest Rates. The table below sets forth balance
sheet items on a daily average basis for the years ended December 31, 2005 and
2004 and presents the daily average interest rates earned on assets and the
daily average interest rates paid on liabilities for such periods. Non-accrual
loans have been included in the average loan balances. Securities include
securities available for sale and securities held to maturity. Securities
available for sale are carried at amortized cost for purposes of calculating the
average rate received on taxable securities below.
39
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2005 2004
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
($ IN THOUSANDS) BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- -------- ---------- ---------- -------- ----------
EARNING ASSETS
Securities:
Taxable $ 729,884 $ 29,099 3.99% $ 781,407 $30,373 3.89%
Tax-exempt (1) 8,558 394 4.60 7,198 341 4.74
---------- -------- ---------- -------
Total securities 738,442 29,493 3.99 788,605 30,714 3.89
Federal funds sold and other 71,450 2,341 3.28 25,589 293 1.15
Loans (1) (2) (3) 1,501,089 102,481 6.83 947,848 59,311 6.26
Federal Home Loan Bank stock 13,482 595 4.41 14,320 537 3.75
---------- -------- ---------- -------
Total earnings assets 2,324,463 134,910 5.80 1,776,362 90,855 5.11
-------- -------
NON-EARNING ASSETS
Cash and due from banks 77,347 67,334
Allowance for loan losses (17,954) (13,370)
Bank-owned life insurance 36,200 25,544
Other assets 68,684 47,077
---------- ----------
TOTAL ASSETS $2,488,740 $1,902,947
========== ==========
INTEREST BEARING LIABILITIES
Interest-bearing deposits:
Interest checking $ 109,415 594 0.54% $ 73,029 142 0.19%
Savings and money market 827,886 16,908 2.04 561,744 7,585 1.35
Time deposits 287,083 8,044 2.80 214,515 4,396 2.05
---------- -------- ---------- -------
Total interest-bearing deposits 1,224,384 25,546 2.09 849,288 12,123 1.43
Short-term borrowings 117,703 3,234 2.75 239,175 4,472 1.87
Long-term debt 63,754 1,675 2.63 54,733 1,586 2.90
Junior subordinated debt 30,928 2,113 6.83 30,928 1,539 4.98
---------- -------- ---------- -------
Total interest-bearing liabilities 1,436,769 32,568 2.27 1,174,124 19,720 1.68
-------- -------
NON-INTEREST BEARING LIABILITIES
Noninterest-bearing demand deposits 845,581 600,790
Other liabilities 11,106 13,268
Stockholders' equity 195,284 114,765
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,488,740 $1,902,947
========== ==========
Net interest income and margin (4) $102,342 4.40% $71,135 4.00%
======== ==== ======= ====
Net interest spread (5) 3.53% 3.43%
==== ====
(1) Yields on loans and securities have not been adjusted to a tax equivalent
basis.
(2) Net loan fees of $1,202,000 and $872,000 are included in the yield
computation for 2005 and 2004, respectively.
(3) Includes average non-accrual loans of $481,000 in 2005 and $426,000 in
2004.
(4) Net interest margin is computed by dividing net interest income by total
average earning assets.
(5) Net interest spread represents average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
Net Interest Income. The table below sets forth the relative impact on net
interest income of changes in the volume of earning assets and interest-bearing
liabilities and changes in rates earned and paid by us on such assets and
liabilities. For purposes of this table, non-accrual loans have been included in
the average loan balances.
40
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
YEAR ENDED DECEMBER 31,
2005 V. 2004
INCREASE (DECREASE)
DUE TO CHANGES IN (1)
---------------------------
VOLUME RATE TOTAL
------- ------- -------
(IN THOUSANDS)
Interest on securities:
Taxable $(2,054) $ 780 $(1,274)
Tax-exempt 63 (10) 53
Federal funds sold and other 1,503 545 2,048
Loans 37,770 5,400 43,170
Federal Home Loan Bank stock (37) 95 58
------- ------- -------
Total interest income 37,245 6,810 44,055
------- ------- -------
Interest expense:
Interest checking 198 254 452
Savings and money market 5,435 3,888 9,323
Time deposits 2,033 1,615 3,648
Short-term borrowings (3,338) 2,100 (1,238)
Long-term debt 237 (148) 89
Junior subordinated debt -- 574 574
------- ------- -------
Total interest expense 4,565 8,283 12,848
------- ------- -------
Net increase (decrease) $32,680 $(1,473) $31,207
======= ======= =======
(1) Changes due to both volume and rate have been allocated to volume changes.
Provision for Loan Losses. The provision for loan losses in each period is
reflected as a charge against earnings in that period. The provision is equal to
the amount required to maintain the allowance for loan losses at a level that,
in our judgment, is adequate to absorb probable loan losses inherent in the loan
portfolio.
Our provision for loan losses increased to $6.2 million for the year ended
December 31, 2005, from $3.9 million for the year ended December 31, 2004. The
provision increased primarily because of loan growth of $604.8 million for the
year ended December 31, 2005, compared to loan growth of $455.5 million for the
year ended December 31, 2004, an increase of $149.3 million. Also, net
charge-offs increased from the year ended December 31, 2004 to the year ended
December 31, 2005 from $21,000 to $258,000.
Non-Interest Income. We earn non-interest income primarily through fees
related to:
- Trust and investment advisory services,
- Services provided to deposit customers, and
- Services provided to current and potential loan customers.
The following tables present, for the periods indicated, the major categories of
non-interest income:
YEAR ENDED
DECEMBER 31,
---------------- INCREASE
2005 2004 (DECREASE)
------- ------ ----------
(IN THOUSANDS)
Trust and investment advisory services $ 5,699 $2,896 $ 2,803
Service charges 2,495 2,333 162
Income from bank owned life insurance 1,664 1,203 461
Investment securities losses, net 69 19 50
Other 2,211 2,275 (64)
------- ------ -------
Total non-interest income $12,138 $8,726 $ 3,412
======= ====== =======
41
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
The $3.4 million, or 39.1%, increase in non-interest income was influenced by
several factors. Premier Trust, Inc. was purchased on December 30, 2003, and
Miller/Russell & Associates, Inc. was purchased on May 17, 2004. Collectively,
these subsidiaries produced $5.7 million in trust and investment advisory fees
in the year ended December 31, 2005, compared to $2.9 million in the year ended
December 31, 2004. The increase was due to a full year of activity recorded by
Miller/Russell & Associates, Inc. in 2005 compared to less than eight months
activity in the prior year. Also, trust assets and assets under management have
increased at both entities from a combined amount of $999 million at December
31, 2004 to $1.41 billion at December 31, 2005.
Service charges increased $162,000 from 2004 to 2005 due to higher deposit
balances and the growth in our customer base.
Income from bank owned life insurance, or BOLI, increased $461,000. We purchased
additional BOLI products with a cash surrender value of $24.0 million in the
third quarter of 2005 to help offset employee benefit costs.
Non-Interest Expense. The following table presents, for the periods indicated,
the major categories of non-interest expense:
YEAR ENDED
DECEMBER 31,
----------------- INCREASE
2005 2004 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
Salaries and employee benefits $36,816 $25,590 $11,226
Occupancy 9,819 7,309 2,510
Customer service 3,720 1,998 1,722
Advertising, public relations and business development 2,806 1,672 1,134
Legal, professional and director fees 2,051 1,405 646
Correspondent banking service charges and wire transfer costs 1,651 1,260 391
Audits and exams 1,538 935 603
Supplies 1,083 838 245
Data processing 1,053 641 412
Telephone 759 578 181
Insurance 752 540 212
Travel and automobile 684 467 217
Other 2,132 1,696 436
------- ------- -------
Total non-interest expense $64,864 $44,929 $19,935
======= ======= =======
Non-interest expense grew $19.9 million, or 44.4%. This growth is attributable
to our overall growth, and specifically to the opening of new branches and the
hiring of new relationship officers and other employees. At December 31, 2005,
we had 537 full-time equivalent employees compared to 424 at December 31, 2004.
Two banking branches were opened during 2005, and senior managers and
relationship officers for various branches expected to open in 2006 were hired
in late 2004 and into 2005. Miller/Russell & Associates, Inc. was acquired in
May 2004, and therefore 2005 was the first year for which a full twelve months
of activity is reflected. The increase in salaries and occupancy expenses
related to the growth discussed above totaled $13.7 million, which is 69% of the
total increase in non-interest expenses.
Also affecting non-interest expenses was the increase in our customer service
costs. This line item grew $1.7 million, or 86.2%, due primarily to an increase
in analysis earnings credits paid to certain title company depositors, due to
higher balances maintained by the title companies and higher earnings credit
rates during the year ended December 31, 2005 compared to those during the year
ended December 31, 2004. We provide an analysis earnings credit for certain
title company depositors, which is calculated by applying a variable crediting
rate to such customers' average monthly deposit balances, less any deposit
service charges incurred. We then purchase external services on their behalf
based on the amount of the earnings credit. These external services, which are
commonly offered in the banking industry, include courier, bookkeeping and data
processing services. The costs associated with these earnings credits will
increase or decrease based on movements in crediting rates and fluctuations in
the average monthly deposit balances.
Advertising, public relations and business development increased $1.1 million,
or 67.8%. During 2005, BankWest of Nevada entered into a sponsorship agreement
with the Las Vegas Monorail, whereby BankWest pays a fee in exchange for the
right to showcase the name of the bank on the exterior of one monorail train,
and to display promotional material on the interior of the train. Further,
BankWest of Nevada gained exclusive ATM rights to the Las Vegas Monorail
stations. The design and contract costs associated with this sponsorship are
reflected in this line item and account for the majority of the increase.
42
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
Other non-interest expense increased $3.3 million from December 31, 2004 to
December 31, 2005. Other non-interest expense increased, in general, as a result
of the growth in assets and operations of the Company, and due to the increased
costs associated with being a public company, including audit, legal, compliance
and insurance expenses.
Provision for Income Taxes. We recorded tax provisions of $15.4 million and
$11.0 million for the years ended December 31, 2005 and 2004, respectively. Our
effective tax rates were 35.4% and 35.3% for 2005 and 2004, respectively.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
The following table sets forth a summary financial overview for the years ended
December 31, 2004 and 2003.
YEAR ENDED
DECEMBER 31,
----------------- INCREASE
2004 2003 (DECREASE)
------- ------- ----------
($ IN THOUSANDS, EXCEPT PER
SHARE DATA)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
Interest income $90,855 $53,823 $ 37,032
Interest expense 19,720 12,798 6,922
------- ------- --------
Net interest income 71,135 41,025 30,110
Provision for loan losses 3,914 5,145 (1,231)
------- ------- --------
Net interest income after provision for loan losses 67,221 35,880 31,341
Other income 8,726 4,270 4,456
Other expense 44,929 27,290 17,639
------- ------- --------
Net income before income taxes 31,018 12,860 18,158
Income tax expense 10,961 4,171 6,790
------- ------- --------
Net income $20,057 $ 8,689 $ 11,368
======= ======= ========
Earnings per share - basic $ 1.17 $ 0.61 $ 0.56
======= ======= ========
Earnings per share - diluted $ 1.09 $ 0.59 $ 0.50
======= ======= ========
The 130.8% increase in net income in the year ended December 31, 2004 compared
to the year ended December 31, 2003 was attributable primarily to an increase in
net interest income of $30.1 million, a $4.5 million increase in other income
and a $1.2 million decrease to the provision for loan losses, partially offset
by a $17.6 million increase to other expenses. The increase in net interest
income was the result of an increase in the volume of interest-earning assets,
primarily loans, and a decrease in our cost of funds, due principally to an
increase in non-interest bearing deposits.
Net Interest Income and Net Interest Margin. The 73.4% increase in net interest
income for the year ended December 31, 2004 compared to the year ended December
31, 2003 was due to an increase in interest income of $37.0 million, reflecting
the effect of an increase of $706.4 million in average interest-bearing assets
which was funded with an increase of $558.7 million in average deposits, of
which $255.5 million were non-interest bearing.
The average yield on our interest-earning assets was 5.11% for the year ended
December 31, 2004, compared to 5.03% for the year ended December 31, 2003, an
increase of 1.6%. The slight increase in the yield on our interest-earning
assets is a result of an increase in the yield earned on our securities
portfolio and a shift of federal funds sold into higher-yielding securities,
offset by a decline in the yield on our loan portfolio as fixed rate loans
repriced at lower interest rate levels. The increase in the yield on our
securities portfolio from 3.70% in 2003 to 3.89% in 2004 was due to two factors:
(1) most of the growth of our securities portfolio was in mortgage-backed
securities, which typically yield more than our other securities classes; and
(2) premium amortization on our mortgage-backed securities portfolio decreased
from 2003 to 2004 due to less prepayment activity on the underlying mortgages.
The cost of our average interest-bearing liabilities decreased to 1.68% in the
year ended December 31, 2004, from 1.76% in the year ended December 31, 2003,
which is a result of lower rates paid on deposit accounts, offset by higher
average balances and rates paid on borrowings.
43
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
Our average rate on our interest-bearing deposits decreased 4.0% from 1.49% for
the year ended December 31, 2003, to 1.43% for the year ended December 31, 2004,
reflecting reductions in general market rates. Our average rate on total
deposits (including non-interest bearing deposits) decreased 8.7% from 0.92% for
the year ended December 31, 2003, to 0.84% for the year ended December 31, 2004.
Our interest margin of 4.00% for the year ended December 31, 2004 was higher
than our margin for the previous year of 3.83% due to an increase in our yield
on interest-bearing assets and a decrease in our overall cost of funds. Both of
which are primarily attributable to an increase in the volume of interest
earning assets and interest bearing liabilities as opposed to a change in rates.
Average Balances and Average Interest Rates. The table below sets forth balance
sheet items on a daily average basis for the years ended December 31, 2004 and
2003 and presents the daily average interest rates earned on assets and the
daily average interest rates paid on liabilities for such periods. Non-accrual
loans have been included in the average loan balances. Securities include
securities available for sale and securities held to maturity. Securities
available for sale are carried at amortized cost for purposes of calculating the
average rate received on taxable securities below.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
($ IN THOUSANDS) BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- -------- ---------- ---------- -------- ----------
EARNING ASSETS
Securities:
Taxable $ 781,407 $30,373 3.89% $ 432,425 $15,938 3.69%
Tax-exempt(1) 7,198 341 4.74 7,266 346 4.76
---------- ------- ---------- -------
Total securities 788,605 30,714 3.89 439,691 16,284 3.70
Federal funds sold 25,589 293 1.15 52,735 578 1.10
Loans(1)(2)(3) 947,848 59,311 6.26 571,501 36,792 6.44
Federal Home Loan Bank stock 14,320 537 3.75 6,063 169 2.79
---------- ------- ---------- -------
Total earnings assets 1,776,362 90,855 5.11 1,069,990 53,823 5.03
------- -------
NON-EARNING ASSETS
Cash and due from banks 67,334 41,415
Allowance for loan losses (13,370) (8,783)
Bank-owned life insurance 25,544 17,934
Other assets 47,077 28,264
---------- ----------
TOTAL ASSETS $1,902,947 $1,148,820
========== ==========
INTEREST BEARING LIABILITIES
Interest-bearing deposits:
Interest checking $ 73,029 142 0.19% $ 51,723 93 0.18%
Savings and money market 561,744 7,585 1.35 336,012 4,358 1.30
Time deposits 214,515 4,396 2.05 158,418 3,707 2.34
---------- ------- ---------- -------
Total interest-bearing deposits 849,288 12,123 1.43 546,153 8,158 1.49
Short-term borrowings 239,175 4,472 1.87 111,258 1,671 1.50
Long-term debt 54,733 1,586 2.90 37,701 1,475 3.91
Junior subordinated debt 30,928 1,539 4.98 30,928 1,494 4.83
---------- ------- ---------- -------
Total interest-bearing liabilities 1,174,124 19,720 1.68 726,040 12,798 1.76
------- -------
NON-INTEREST BEARING LIABILITIES
Noninterest-bearing deposits 600,790 345,274
Other liabilities 13,268 6,230
Stockholders' equity 114,765 71,276
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,902,947 $1,148,820
========== ==========
Net interest income and margin (4) $71,135 4.00% $41,025 3.83%
======= ==== ======= ====
Net interest spread (5) 3.43% 3.27%
==== ====
44
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
(1) Yields on loans and securities have not been adjusted to a tax equivalent
basis.
(2) Net loan fees of $872,000 and $810,000 are included in the yield
computation for 2004 and 2003, respectively.
(3) Includes average non-accrual loans of $426,000 in 2004 and $393,000 in
2003.
(4) Net interest margin is computed by dividing net interest income by total
average earning assets.
(5) Net interest spread represents average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
Net Interest Income. The table below sets forth the relative impact on net
interest income of changes in the volume of earning assets and interest-bearing
liabilities and changes in rates earned and paid by us on such assets and
liabilities. For purposes of this table, non-accrual loans have been included in
the average loan balances.
YEAR ENDED DECEMBER 31,
2004 V. 2003
INCREASE (DECREASE)
DUE TO CHANGES IN (1)
---------------------------
VOLUME RATE TOTAL
------- ------- -------
(IN THOUSANDS)
Interest on securities:
Taxable $13,565 $ 870 $14,435
Tax-exempt (3) (2) (5)
Federal funds sold (311) 26 (285)
Loans 23,550 (1,031) 22,519
Other investments 310 58 368
------- ------- -------
Total interest income 37,111 (79) 37,032
------- ------- -------
Interest expense:
Interest checking 41 8 49
Savings and Money market 3,048 179 3,227
Time deposits 1,150 (461) 689
Short-term borrowings 2,392 409 2,801
Long-term debt 494 (383) 111
Junior subordinated debt -- 45 45
------- ------- -------
Total interest expense 7,125 (203) 6,922
------- ------- -------
Net increase $29,986 $ 124 $30,110
======= ======= =======
(1) Changes due to both volume and rate have been allocated to volume changes.
Provision for Loan Losses. The provision for loan losses in each period is
reflected as a charge against earnings in that period. The provision is equal to
the amount required to maintain the allowance for loan losses at a level that,
in our judgment, is adequate to absorb probable loan losses inherent in the loan
portfolio.
Our provision for loan losses declined to $3.9 million for the year ended
December 31, 2004, from $5.1 million for the year ended December 31, 2003. The
provision declined because (1) net charge-offs decreased from $953,000 in 2003
to $21,000 in 2004; (2) our asset quality has remained high, with nonperforming
loans as a percentage of total loans at 0.13% at December 31, 2004 and 0.04% at
December 31, 2003; and (3) we have maintained a relatively low level of
charge-offs over the last five years, which yielded lower loss experience
factors in our required reserve calculations. These factors are adjusted
periodically to reflect this historical experience and were most recently
adjusted in December 2004.
Non-Interest Income. WE earn non-interest income primarily through fees related
to:
- Trust and investment advisory services,
- Services provided to deposit customers, and
- Services provided to current and potential loan customers.
The following tables present, for the periods indicated, the major categories of
non-interest income:
45
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
YEAR ENDED
DECEMBER 31,
---------------- INCREASE
2004 2003 (DECREASE)
------ ------- ----------
(IN THOUSANDS)
Trust and investment advisory services $2,896 $ -- $2,896
Service charges 2,333 1,998 335
Income from bank owned life insurance 1,203 967 236
Investment securities gains (losses), net 19 (265) 284
Other 2,275 1,570 705
------ ------- ------
Total non-interest income $8,726 $ 4,270 $4,456
====== ======= ======
The $4.5 million, or 104.4%, increase in non-interest income was influenced by
several factors. Premier Trust, Inc. was purchased on December 30, 2003, and
Miller/Russell & Associates, Inc. was purchased on May 17, 2004. Collectively,
these subsidiaries produced $2.9 million in trust and investment advisory fees
in the year ended December 31, 2004. We had no such income in 2003.
Service charges increased $335,000 from 2003 to 2004 due to higher deposit
balances and the growth in our customer base.
Income from bank owned life insurance, or BOLI, increased $236,000. We purchased
the BOLI products in 2003 to help offset employee benefit costs. The first year
for which we earned twelve months' income from BOLI was 2004.
Other income increased $705,000, due in part, to the sale and servicing of SBA
loans by Alliance Bank of Arizona, which resulted in other income of $341,000,
and the increase in ATM fees, income from wire transfer activity and debit card
income.
Non-Interest Expense. The following table presents, for the periods indicated,
the major categories of non-interest expense:
YEAR ENDED
DECEMBER 31,
----------------- INCREASE
2004 2003 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
Salaries and employee benefits $25,590 $15,615 $ 9,975
Occupancy 7,309 4,820 2,489
Customer service 1,998 752 1,246
Advertising, public relations and business development 1,672 989 683
Legal, professional and director fees 1,405 1,111 294
Correspondent banking service charges and wire transfer costs 1,260 512 748
Audits and exams 935 435 500
Supplies 838 619 219
Data processing 641 466 175
Telephone 578 424 154
Insurance 540 305 235
Travel and automobile 467 261 206
Organizational costs -- 604 (604)
Other 1,696 377 1,319
------- ------- -------
Total non-interest expense $44,929 $27,290 $17,639
======= ======= =======
Non-interest expense grew $17.6 million, or 64.6%. This growth is attributable
to our overall growth, and specifically to the opening of new branches and the
hiring of new relationship officers and other employees, particularly at
Alliance Bank of Arizona and Torrey Pines Bank, both of which opened during the
year ended December 31, 2003. At December 31, 2004, we had 454 full-time
equivalent employees compared to 317 at December 31, 2003. Miller/Russell was
acquired in 2004, Premier Trust was acquired on December 30, 2003, and three
banking branches were opened during 2004. Two bank branches were opened at the
end of 2003, causing a minimal impact on 2003 expenses. The increase in salaries
and occupancy expenses related to the above totaled $12.5 million, which is 71%
of the total increase in non-interest expenses.
Also affecting non-interest expenses was the increase in our customer service
costs. This line item grew $1.2 million, or 166%, due primarily to an increase
in analysis earnings credits paid to certain title company depositors of
$606,000, due to higher balances
46
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
maintained by the title companies and higher earnings credit rates at the end of
2004. We provide an analysis earnings credit for certain title company
depositors, which is calculated by applying a variable crediting rate to such
customers' average monthly deposit balances, less any deposit service charges
incurred. We then purchase external services on their behalf based on the amount
of the earnings credit. These external services, which are commonly offered in
the banking industry, include courier, bookkeeping and data processing
services. The costs associated with these earnings credits will increase or
decrease based on movements in crediting rates and fluctuations in the average
monthly deposit balances. The remaining increase is attributable to growth in
our customer base and branch locations.
Our correspondent banking service charges and wire transfer costs increased
$748,000, or 146.1%. At the end of 2003, we converted to a new wire transfer
system which allowed for a much more efficient wire transfer process. This
effectively allowed us to handle a much higher volume of wire transfers at
current staffing levels, although we incurred additional software and data
processing costs in 2004 that are reflected in this line item.
We incurred $604,000 of organizational costs in 2003 related to the opening of
Alliance Bank of Arizona and Torrey Pines Bank the same year. No new banks were
opened in 2004, and thus no organizational costs were incurred.
Other non-interest expense increased $1.3 million from December 31, 2003 to
December 31, 2004. Other non-interest expense increased, in general, as a result
of the growth in assets and operations of the two de novo banks and overall
growth of BankWest of Nevada. The first full year of operations for the two de
novo banks was 2004.
Provision for Income Taxes. We recorded tax provisions of $11.0 million and
$4.2 million for the years ended December 31, 2004 and 2003, respectively. Our
effective tax rates were 35.3% and 32.4% for 2004 and 2003, respectively. The
increase of the effective tax rates from 2003 to 2004 was primarily due to state
income taxes, as 2004 was the first full year of operations in Arizona and
California.
FINANCIAL CONDITION
TOTAL ASSETS
On a consolidated basis, our total assets as of December 31, 2005, December 31,
2004 and December 31, 2003 were $2.9 billion, $2.2 billion and $1.6 billion,
respectively. The overall increase from December 31, 2004 to December 31, 2005
was primarily due to a $604.8 million, or 50.9%, increase in gross loans, a
$58.9 million, or 51.1%, increase in cash and cash equivalents and a $29.1
million, or 99.0%, increase in premises and equipment. The growth in assets from
December 31, 2003 to December 31, 2004 was primarily due to a $455.5 million, or
62.1%, increase in gross loans and a $49.5 million, or 75.1%, increase in cash
and cash equivalents.
LOANS
Our gross loans, including deferred loan fees, on a consolidated basis as of
December 31, 2005, December 31, 2004, and December 31, 2003 were $1.8 billion,
$1.2 billion and $733.1 million, respectively. Since December 31, 2001,
residential real estate loans experienced the highest percentage growth within
the portfolio, growing from $18.1 million to $272.9 million as of December 31,
2005. Our overall growth in loans from December 31, 2001 to December 31, 2005 is
consistent with our focus and strategy to grow our loan portfolio by focusing on
markets which we believe have attractive growth prospects.
The following table shows the amounts of loans outstanding by type of loan at
the end of each of the periods indicated.
DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- -------- -------- --------
(IN THOUSANDS)
Construction and land development $ 432,668 $ 323,176 $195,182 $127,974 $ 82,604
Commercial real estate 727,210 491,949 324,702 209,834 208,683
Residential real estate 272,861 116,360 42,773 21,893 18,067
Commercial and industrial 342,452 241,292 159,889 94,411 85,050
Consumer 20,434 17,682 11,802 10,281 13,156
Net deferred loan fees (2,288) (1,924) (1,270) (38) (350)
--------- --------- ------- ------- -------
Gross loans, net of deferred fees 1,793,337 1,188,535 733,078 464,355 407,210
Less: Allowance for loan losses (21,192) (15,271) (11,378) (6,449) (6,563)
--------- --------- ------- ------- -------
$1,772,145 $1,173,264 $721,700 $457,906 $400,647
========= ========= ======= ======= =======
47
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LOANS (continued)
The following tables set forth the amount of loans outstanding by type of loan
as of December 31, 2005 which were contractually due in one year or less, more
than one year and less than five years, and more than five years based on
ramaining scheduled repayments of principal. Lines of credit or other loans have
no stated final maturity and no stated schedule of repayments are reported as
due in one year or less. The tables also present an analysis of the rate
structure for loans within the same maturity time periods.
DECEMBER 31, 2005
-----------------------------------------------
DUE WITHIN DUE 1-5 DUE OVER
ONE YEAR YEARS FIVE YEARS TOTAL
---------- -------- ---------- ----------
(IN THOUSANDS)
Construction and land development $322,875 $ 82,793 $ 27,000 $ 432,668
Commercial real estate 96,309 212,339 418,562 727,210
Residential real estate 17,184 19,105 236,572 272,861
Commercial and industrial 231,952 99,153 11,347 342,452
Consumer 13,089 6,957 388 20,434
Net deferred loan fees -- -- -- (2,288)
-------- -------- -------- ----------
Gross loans, net of deferred fees 681,409 420,347 693,869 1,793,337
Less: Allowance for loan losses -- -- -- (21,192)
-------- -------- -------- ----------
$681,409 $420,347 $693,869 $1,772,145
======== ======== ======== ==========
Interest rates:
Fixed $ 73,633 $248,559 $452,664 $ 774,856
Variable 607,776 171,788 241,205 1,020,769
Net deferred loan fees -- -- -- (2,288)
-------- -------- -------- ----------
Gross loans, net of deferred fees $681,409 $420,347 $693,869 $1,793,337
======== ======== ======== ==========
Concentrations. Our loan portfolio has a concentration of loans in commercial
real-estate related loans and includes significant credit exposure to the
commercial real estate industry. As of December 31, 2005, December 31, 2004 and
December 31, 2003, commercial real estate-related loans comprised 64.5%, 68.4%
and 70.7% of total gross loans, respectively. Substantially all of these loans
are secured by first liens with an initial loan to value ratio of generally no
more than 80%. Approximately one-half of these commercial real estate loans are
owner occupied. One-to-four family residential real estate loans have a lower
risk than commercial real estate and construction and land development loans due
to lower loan balances to single borrowers. Approximately 29% of our residential
real estate portfolio is comprised of interest only loans which have an average
loan-to-value of less than 60%. Our policy for requiring collateral is to obtain
collateral whenever it is available or desirable, depending upon the degree of
risk we are willing to accept. Repayment of loans is expected from the sale
proceeds of the collateral or from the borrower's cash flows. Deterioration in
the performance of the economy or real estate values in our primary market
areas, in particular, could have an adverse impact on collectibility, and
consequently have an adverse effect on our profitability.
Non-Performing Assets. Non-performing loans include loans past due 90 days or
more and still accruing interest, non-accrual loans, restructured loans, and
other real estate owned, or OREO. In general, loans are placed on non-accrual
status when we determine timely recognition of interest to be in doubt due to
the borrower's financial condition and collection efforts. Restructured loans
have modified terms to reduce either principal or interest due to deterioration
in the borrower's financial condition. OREO results from loans where we have
received physical possession of the borrower's assets. The following table
summarizes the loans for which the accrual of interest has been discontinued,
loans past due 90 days or more and still accruing interest, restructured loans,
and OREO.
48
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LOANS (continued)
DECEMBER 31,
---------------------------------------
2005 2004 2003 2002 2001
----- ------ ----- ------ -----
(IN THOUSANDS)
Total non-accrual loans $ 107 $1,591 $ 210 $1,039 $ 686
Loans past due 90 days or more and still accruing 34 2 65 317 236
Restructured loans -- -- -- 2,193 --
Other real estate owned (OREO) -- -- -- -- 79
Non-accrual loans to gross loans 0.01% 0.13% 0.03% 0.22% 0.17%
Loans past due 90 days or more and still
accruing to total loans 0.00 0.00 0.01 0.04 0.05
Interest income received on nonaccrual loans $ 1 $ 61 $ 6 $ 158 $ 49
Interest income that would have been recorded
under the original terms of the loans 10 96 29 242 108
As of December 31, 2005 and December 31, 2004, non-accrual loans totaled
$107,000 and $1.6 million, respectively. Non-accrual loans at December 31, 2005
consisted of 3 loans with no single loan having a principal balance greater than
$80,000.
OREO Properties. As of December 31, 2005 and December 31, 2004, we did not have
any OREO properties. One OREO property with a carrying value of $79,000 was sold
during February 2002.
Impaired Loans. A loan is impaired when it is probable we will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The categories of non-accrual loans and impaired loans overlap, although they
are not coextensive. A loan can be placed on non-accrual status due to payment
delinquency or uncertain collectibility but is not considered impaired, if it is
probable that we will collect all amounts due in accordance with the original
contractual terms of the loan. We consider all circumstances regarding the loan
and borrower on an individual basis when determining whether a loan is impaired
such as the collateral value, reasons for the delay, payment record, the amount
past due, and number of days past due.
As of December 31, 2005, December 31, 2004 and December 31, 2003, the aggregate
total amount of loans classified as impaired was $107,000, $1.7 million and
$333,000, respectively. The total specific allowance for loan losses related to
these loans was $26,000, $498,000 and $130,000 for December 31, 2005 and
December 31, 2004 and 2003, respectively.
The amount of interest income recognized on impaired loans for the years ended
December 31, 2005, 2004 and 2003 was $1,000, $61,000 and $6,000, respectively.
We would have recorded interest income of $10,000, $96,000 and $29,000 on
non-accrual loans had the loans been current for the years ended December 31,
2005, 2004 and 2003, respectively.
ALLOWANCE FOR LOAN LOSSES
Like all financial institutions, we must maintain an adequate allowance for loan
losses. The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when we believe that collectibility of the principal is unlikely.
Subsequent recoveries, if any, are credited to the allowance. The allowance is
an amount that we believe will be adequate to absorb probable losses on existing
loans that may become uncollectible, based on evaluation of the collectibility
of loans and prior credit loss experience, together with the other factors noted
earlier.
Our allowance for loan loss methodology incorporates several quantitative and
qualitative risk factors used to establish the appropriate allowance for loan
loss at each reporting date. Quantitative factors include our historical loss
experience, peer group experience, delinquency and charge-off trends, collateral
values, changes in non-performing loans, other factors, and information about
individual loans including the borrower's sensitivity to interest rate
movements. Qualitative factors include the economic condition of our operating
markets and the state of certain industries. Specific changes in the risk
factors are based on perceived risk of similar groups of loans classified by
collateral type, purpose and terms. Statistics on local trends, peers, and an
internal five-year loss history are also incorporated into the allowance. Due to
the credit concentration of our loan portfolio in real estate secured loans, the
value of collateral is heavily dependent on real estate values in Southern
Nevada, Arizona and Southern California. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic or other
conditions. In addition, the Federal Deposit Insurance Corporation, or FDIC, and
state banking regulatory agencies, as an integral part of their examination
processes, periodically review the Banks' allowance for loan losses, and may
require us to make additions to the allowance based on their judgment about
information available to them
49
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALLOWANCE FOR LOAN LOSSES (continued)
at the time of their examinations. Management periodically reviews the
assumptions and formulae used in determining the allowance and makes adjustments
if required to reflect the current risk profile of the portfolio.
The allowance consists of specific and general components. The specific
allowance relates to watch credits, criticized loans, and impaired loans. For
such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan are lower than the carrying value of that loan, pursuant to
Financial Accounting Standards Board, or FASB, Statement No. 114, Accounting by
Creditors for Impairment of a Loan. The general allowance covers non-classified
loans and is based on historical loss experience adjusted for the various
qualitative and quantitative factors listed above, pursuant to FASB Statement
No. 5, or FASB 5, Accounting for Contingencies. Loans graded "Watch List/Special
Mention" and below are individually examined closely to determine the
appropriate loan loss reserve.
The following table summarizes the activity in our allowance for loan losses for
the period indicated.
Allowance for Loan Losses
The table below presents information regarding our provision and allowance for
loan losses for the periods and years indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------ ------
(IN THOUSANDS)
Allowance for loan losses:
Balance at beginning of period $15,271 $11,378 $ 6,449 $6,563 $4,746
Provisions charged to operating expenses 6,179 3,914 5,145 1,587 2,800
Reclassification (1) -- -- 737 (850) --
Recoveries of loans previously charged-off:
Construction and land development -- -- -- -- --
Commercial real estate -- -- 140 -- --
Residential real estate 3 15 1 -- --
Commercial and industrial 164 132 272 464 921
Consumer 29 10 7 7 32
------- ------- ------- ------ ------
Total recoveries 196 157 420 471 953
Loans charged-off:
Construction and land development -- -- -- -- --
Commercial real estate -- -- 140 -- 132
Residential real estate -- 9 20 60 --
Commercial and industrial 194 115 1,090 1,201 1,601
Consumer 260 54 123 61 203
------- ------- ------- ------ ------
Total charged-off 454 178 1,373 1,322 1,936
Net charge-offs 258 21 953 851 983
------- ------- ------- ------ ------
Balance at end of period $21,192 $15,271 $11,378 $6,449 $6,563
======= ======= ======= ====== ======
Net charge-offs to average loans outstanding 0.02% 0.00% 0.17% 0.19% 0.27%
Allowance for loan losses to gross loans 1.18 1.28 1.55 1.39 1.61
(1) In accordance with regulatory reporting requirements and American Institute
of Certified Public Accountants' Statement of Position 01-06, Accounting by
Certain Entities that Lend to or Finance the Activities of Others, the
Company has reclassified the portion of its allowance for loan losses that
relates to undisbursed commitments during the year ended December 31, 2002.
During the year ended December 31, 2003, management reevaluated its
methodology for calculating this amount and reclassified an amount from
other liabilities to the allowance for loan losses.
The following table details the allocation of the allowance for loan losses to
the various categories. The allocation is made for analytical purposes and it is
not necessarily indicative of the categories in which future credit losses may
occur. The total allowance is available to absorb losses from any segment of
loans. The allocations in the table below were determined by a combination of
the following factors: specific allocations made on loans considered impaired as
determined by management and the loan review committee, a general allocation on
certain other impaired loans, and historical losses in each loan type category
combined with a weighting of the current loan composition.
50
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALLOWANCE FOR LOAN LOSSES (continued)
Allowance for Loan Losses at December 31,
----------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------- -------------------- -------------------- ------------------- -------------------
($ IN THOUSANDS)
% OF LOANS % OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN IN EACH IN IN EACH IN IN EACH IN IN EACH IN IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS
------- ----------- ------- ----------- ------- ----------- ------ ----------- ------ -----------
Construction and land
development $ 6,646 24.1% $ 4,920 27.1% $ 3,252 26.6% $1,050 27.6% $1,462 20.3%
Commercial real estate 3,050 40.5 2,095 41.3 1,446 44.2 2,531 45.2 1,566 51.2
Residential real estate 1,219 15.2 327 9.8 179 5.8 282 4.7 100 4.4
Commercial and
industrial 9,842 19.1 7,502 20.3 6,192 21.8 2,340 20.3 3,110 20.9
Consumer 435 1.1 427 1.5 309 1.6 246 2.2 325 3.2
------- ---- ------- ---- ------- ---- ------ ---- ------ ----
Total $21,192 100% $15,271 100% $11,378 100% $6,449 100% $6,563 100%
======= ==== ======= ==== ======= ==== ====== ==== ====== ====
In general, the "Commercial and Industrial Loans" category represents the
highest risk category for commercial banks. Historically, our largest source of
losses has been in this category. As a result, we utilize a larger estimated
loss factor for this category than we do for real estate secured loans. Our
commercial loan portfolio as of December 31, 2005 was $342.5 million, or 19.1%
of total loans. Other categories, such as stock and bond secured or assignment
of cash collateral loans are provided a nominal loss factor based upon a history
of comparatively lower losses. While the majority of our historical charge-offs
have occurred in the commercial portfolio, we believe that the allowance
allocation is adequate when considering the current composition of commercial
loans and related loss factors.
Our "Construction and Land Development" category reflects some borrower
concentration risk and carries the enhanced risk encountered with construction
loans in general. Currently, construction activity within our primary markets is
very competitive, presenting challenges in the timely completion of projects. A
construction project can be delayed for an extended period as unanticipated
problems arise. Unscheduled work can be difficult to accomplish due to the high
demand for construction workers and delays associated with permitting issues. As
a result, a higher loan loss allocation is devoted to this loan category than to
other loan categories except commercial and industrial loans as noted earlier,
and consumer loans.
Our "Commercial Real Estate" loan category contains a mixture of new and
seasoned properties, retail, office, warehouse, and some special purpose. Loans
on properties are generally underwritten at a loan to value ratio of less than
80% with a minimum debt coverage ratio of 1.20. Historically, our losses on this
product have been minimal and the portfolio continues to exhibit exceptionally
high credit quality. Moreover, a large percentage of the Commercial Real Estate
loan portfolio is comprised of owner-occupied relationships, which usually
reflect a relatively low risk profile. Consequently, the estimated loan loss
factor applied to this sub-category is comparatively low.
Investments
Securities are identified as either held-to-maturity or available-for-sale based
upon various factors, including asset/liability management strategies, liquidity
and profitability objectives, and regulatory requirements. Held-to-maturity
securities are carried at cost, adjusted for amortization of premiums or
accretion of discounts. Available-for-sale securities are securities that may be
sold prior to maturity based upon asset/liability management decisions.
Securities identified as available-for-sale are carried at fair value.
Unrealized gains or losses on available-for-sale securities are recorded as
accumulated other comprehensive income in stockholders' equity. Amortization of
premiums or accretion of discounts on mortgage-backed securities is periodically
adjusted for estimated prepayments.
We use our investment securities portfolio to ensure liquidity for cash
requirements, manage interest rate risk, provide a source of income and to
manage asset quality. The carrying value of our investment securities as of
December 31, 2005 totaled $748.5 million, compared to $788.6 million at December
31, 2004, and $716.0 million as of December 31, 2003. The decrease experienced
from December 31, 2004 to December 31, 2005 was a result of called U.S.
Government-sponsored agency obligations and principal received from
mortgage-backed obligations. The increase experienced from 2003 to 2004 was a
result of growth in deposits, as well as a strategy whereby we increased
earnings by investing in mortgage-backed securities funded by short-term FHLB
borrowings. This strategy had the effect of leveraging our excess capital to
produce incremental returns without incurring additional credit risk. In light
of the rising interest rate environment, beginning in the third quarter of 2004,
we discontinued this strategy, contributing to the decline in our investment
balances and increase in our federal funds sold from December 31, 2004 to
December 31, 2005.
51
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INVESTMENTS (continued)
Our portfolio of investment securities during 2005, 2004, and 2003 consisted
primarily of mortgage-backed obligations and U.S. Government agency obligations.
The carrying value of our portfolio of investment securities at December 31,
2005, 2004 and 2003 was as follows:
2005 2004 2003
-------- -------- --------
U.S. Treasury securities $ 3,498 $ 3,501 $ 3,014
U.S. Government-sponsored agencies 137,578 118,348 112,537
Mortgage-backed obligations 519,858 648,100 581,446
SBA Loan Pools 426 625 1,142
State and Municipal obligations 7,128 7,290 7,563
Auction rate securities 67,999 -- --
Other 12,046 10,758 10,276
-------- -------- --------
Total investment securities $748,533 $788,622 $715,978
======== ======== ========
The maturity distribution and weighted average yield of our available for sale
and held to maturity portfolios at December 31, 2005 are summarized in the table
below. Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment and has not
been tax affected on tax-exempt obligations. Securities available for sale are
carried at amortized cost in the table below for purposes of calculating the
weighted average yield received on such securities.
DUE UNDER 1 DUE UNDER 1
DECEMBER 31, 2005 YEAR DUE 1-5 YEARS DUE 5-10 YEARS YEAR TOTAL
($ IN THOUSANDS) AMOUNT/YIELD AMOUNT/YIELD AMOUNT/YIELD AMOUNT/YIELD AMOUNT/YIELD
- ----------------- --------------- -------------- -------------- --------------- ---------------
Available for Sale
U.S. Government-sponsored
Agency obligations $ 69,390 3.42% $32,400 3.36% $28,938 4.35% $ 8,059 4.47% $138,787 3.66%
Mortgage-backed obligations -- -- 6,385 3.47 -- -- 423,105 4.16 429,490 4.15
Auction rate securities 67,999 3.56 -- -- -- -- -- 67,999 3.56
Other 12,263 3.91 -- -- -- -- -- -- 12,263 3.91
-------- ------- ------- -------- --------
Total available for sale $149,652 3.52 $38,785 3.38 $28,938 4.35 $431,164 4.16 $648,539 3.98
======== ======= ======= ======== ========
Held to Maturity
U.S. Treasury securities $ 3,498 2.69 $ -- -- $ -- -- $ -- -- $ 3,498 2.69
State and Municipal obligations -- -- -- 1,686 4.67 5,442 4.93 7,128 4.87
Mortgage-backed obligations -- -- -- -- -- -- 104,119 4.44 104,119 4.44
SBA Loan Pools -- -- -- -- 188 4.21 238 4.32 426 4.27
-------- ------- ------- -------- --------
Total held to maturity $ 3,498 2.69% $ -- $ 1,874 4.62% $109,799 4.46% $115,171 4.41%
======== ======= ======= ======== ========
We had a concentration of U.S. Government sponsored agencies and mortgage-backed
securities during each of the years ended December 31, 2005, 2004 and 2003. The
aggregate carrying value and aggregate fair value of these securities at
December 31, 2005, 2004 and 2003 are as follows.
DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS)
Aggregate carrying value $657,436 $766,448 $693,983
======== ======== ========
Aggregate fair value $654,636 $765,453 $693,044
======== ======== ========
52
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PREMISES AND EQUIPMENT
On December 30, 2005, the Company purchased the corporate headquarters of
BankWest of Nevada for a total acquisition price of approximately $16.3 million.
The location was previously leased by the Company. In connection with this
purchase, the Company assumed a note on the building. The note amount at
December 31, 2005 is $9.8 million, has a fixed interest rate of 8.79%, and
matures in 2010. The note is secured by the purchased building.
OTHER ASSETS
During the third quarter of 2005, we purchased $24.0 million of bank owned life
insurance to offset the cost of employee benefits.
DEPOSITS
Deposits historically have been the primary source of funding our asset growth.
As of December 31, 2005, total deposits were $2.4 billion, compared to $1.8
billion as of December 31, 2004 and $1.1 billion as of December 31, 2003. The
increase in total deposits is attributable to our ability to attract a stable
base of low-cost deposits. As of December 31, 2005, non-interest bearing
deposits were $980.0 million, compared to $749.6 million as of December 31, 2004
and $441.2 million as of December 31, 2003. As of December 31, 2005, title
company deposits comprised 31.9% of our total non-interest bearing deposits.
Interest-bearing accounts have also experienced growth. As of December 31, 2005,
interest-bearing deposits were $1.4 billion, compared to $1.0 billion and $653.5
million as of December 31, 2004 and 2003, respectively. Interest-bearing
deposits are comprised of NOW accounts, savings and money market accounts,
certificates of deposit under $100,000, and certificates of deposit over
$100,000.
The average balances and weighted average rates paid on deposits for the years
ended December 31, 2005, 2003 and 2002, are presented below.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2005 AVERAGE 2004 AVERAGE 2003 AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------------ ---- ------------ ---- ------------ ----
($ IN THOUSANDS)
Interest checking (NOW) $ 109,415 0.54% $ 73,029 0.19% $ 51,723 0.18
Savings and money market 827,886 2.04 561,744 1.35 336,012 1.30
Time 287,083 2.80 214,515 2.05 158,418 2.34
---------- ---------- --------
Total interest-bearing deposits 1,224,384 2.09 849,288 1.43 546,153 1.49
Non-interest bearing demand deposits 845,581 -- 600,790 -- 345,274 --
---------- ---------- --------
TOTAL DEPOSITS $2,069,965 1.23% $1,450,078 0.84% $891,427 0.92
========== ========== ========
The remaining maturity for certificates of deposit of $100,000 or more as of
December 31, 2005 is presented in the following table.
DECEMBER 31, 2005
-----------------
(IN THOUSANDS)
3 months or less $171,135
3 to 6 months 76,349
6 to 12 months 60,137
Over 12 months 8,584
--------
Total $316,205
========
CAPITAL RESOURCES
Current risk-based regulatory capital standards generally require banks and bank
holding companies to maintain three minimum capital ratios. Tier 1 risk-based
capital ratio compares "Tier 1" or "core" capital, which consists principally of
common equity, and risk-weighted assets for a minimum ratio of at least 4%.
53
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAPITAL RESOURCES (continued)
Total risk-based capital ratio compares total capital, which consists of Tier 1
capital, certain forms of subordinated debt, a portion of the allowance for loan
losses, and preferred stock, to risk-weighted assets for a minimum ratio of at
least 8%. Risk-weighted assets are calculated by multiplying the balance in each
category of assets and certain off-balance sheet obligations by a risk factor,
which ranges from zero for cash assets and certain government obligations to
100% for some types of loans, and adding the products together.
The following table provides a comparison of our risk-based capital ratios and
leverage ratios to the minimum regulatory requirements for the periods
indicated.
ADEQUATELY- MIMIMUM FOR
CAPITALIZED WELL-CAPITALIZED
ACTUAL REQUIREMENTS (1) REQUIREMENTS
---------------- ---------------- ----------------
AS OF DECEMBER 31, 2005 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- -------- ----- -------- ----- -------- -----
($ IN THOUSANDS)
Total Capital (to Risk Weighted Assets)
BankWest of Nevada $148,180 11.1% $106,877 8.0% $133,597 10.0%
Alliance Bank of Arizona 50,374 10.5 38,371 8.0 47,963 10.0
Torrey Pines Bank 37,498 10.8 27,673 8.0 34,591 10.0
Company 300,198 13.8 173,759 8.0 217,198 10.0
Tier I Capital (to Risk Weighted Assets)
BankWest of Nevada 135,607 10.2 53,439 4.0 80,158 6.0
Alliance Bank of Arizona 44,817 9.3 19,185 4.0 28,778 6.0
Torrey Pines Bank 33,981 9.8 13,836 4.0 20,755 6.0
Company 278,550 12.8 86,879 4.0 130,319 6.0
Leverage ratio (to Average Assets)
BankWest of Nevada 135,607 7.4 73,422 4.0 91,777 5.0
Alliance Bank of Arizona 44,817 8.8 20,368 4.0 25,460 5.0
Torrey Pines Bank 33,981 8.7 15,608 4.0 19,510 5.0
Company 278,550 10.2 109,727 4.0 137,159 5.0
(1) Alliance Bank of Arizona and Torrey Pines Bank have agreed to maintain a
Tier 1 capital ratio of at least 8% for the first three years of their
existence.
We were well capitalized at all the banks and the holding company as of December
31, 2005.
SUBORDINATED DEBT
In order to manage our capital position more efficiently, we formed BankWest
Nevada Capital Trust I and BankWest Nevada Capital Trust II, both Delaware
statutory trusts, for the sole purpose of issuing trust preferred securities.
BankWest Nevada Capital Trust I. During the third quarter of 2001, BankWest
Nevada Capital Trust I was formed with $464,000 in capital and issued 15,000
Floating Rate Cumulative Trust Preferred Securities, or trust preferred
securities, with a liquidation value of $1,000 per security, for gross proceeds
of $15.0 million. The entire proceeds of the issuance were invested by BankWest
Nevada Capital Trust I in $15.5 million of Floating Rate Junior Subordinated
Debentures issued by us, with identical maturity, repricing, and payment terms
as the trust preferred securities. The subordinated debentures represent the
sole assets of BankWest Nevada Capital Trust I and mature on July 25, 2031. The
interest rate as of December 31, 2005 was 8.45% based on 6-month LIBOR plus
3.75% with repricing occurring and interest payments due semiannually. Proceeds
of $10 million was invested in BankWest of Nevada. The remaining proceeds were
retained by Western Alliance for general corporate purposes.
The subordinated debentures are redeemable by us, subject to our receipt of
prior approval from the Federal Reserve of San Francisco, on any January 25th or
July 25th on or after July 25, 2006, at the redemption price. The redemption
price is at a premium for a redemption occurring prior to July 25, 2011 as set
forth in the following table plus accrued and unpaid interest.
54
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUBORDINATED DEBT (continued)
YEAR BEGINNING PERCENTAGE
- -------------- ----------
July 25, 2006 107.6875%
July 25, 2007 106.1500%
July 25, 2008 104.6125%
July 25, 2009 103.0750%
July 25, 2010 101.5375%
July 25, 2011 and after 100.0000%
In the event of redemption under a special event occurring prior to July 25,
2006, the price of redemption is the greater of 100% of the principal amount and
the sum of the present values of the principal amount and the premium payable as
part of the redemption price together with the present value of interest
payments calculated at a fixed per annum rate of interest equal to 10.25% over
the remaining life of the security discounted to the special redemption date on
a semi-annual basis at the Treasury rate plus 0.50% plus accrued and unpaid
interest. Holders of the trust preferred securities are entitled to a cumulative
cash distribution on the liquidation amount of $1,000 per security at an
interest rate of 8.45% as of December 31, 2005. The rate will be adjusted to
equal the 6-month LIBOR plus 3.75% for each successive period beginning January
25 of each year provided, however, that prior to July 25, 2011, such annual rate
shall not exceed 12.5%. BankWest Nevada Capital Trust I has the option to defer
payment of the distributions for a period of up to five years, but during any
such deferral, we would be restricted from paying dividends on our common stock.
BankWest Nevada Capital Trust II. During the fourth quarter of 2002, BankWest
Nevada Capital Trust II was formed with $464,000 in capital and issued 15,000
Floating Rate Cumulative Trust Preferred Securities, or trust preferred
securities, with a liquidation value of $1,000 per security, for gross proceeds
of $15.0 million. The entire proceeds of the issuance were invested by BankWest
Nevada Capital Trust II in $15.5 million of Floating Rate Junior Subordinated
Debentures issued by us, with identical maturity, repricing, and payment terms
as the trust preferred securities. The subordinated debentures represent the
sole assets of BankWest Nevada Capital Trust II and mature January 7, 2033. The
interest rate as of December 31, 2005 was 7.89% based on 3-month LIBOR plus
3.35% with repricing occurring and interest payments due quarterly. All of the
net proceeds were retained by Western Alliance.
The subordinated debentures are redeemable by us, subject to our receipt of
prior approval from the Federal Reserve of San Francisco, on any January 7th,
April 7th, July 7th, or October 7th on or after January 7, 2008, at the
redemption price. The redemption price is par plus accrued and unpaid interest,
except in the case of redemption under a special event which is defined in the
debenture occurring prior to January 7, 2008 which is the greater of 100% of the
principal amount and the sum of the present values of the principal amount
together with the present value of interest payments calculated at a fixed per
annum rate of interest equal to 7.125% over the remaining life of the security
discounted to the special redemption date on a quarterly basis at the Treasury
rate plus 0.50% plus accrued and unpaid interest. Holders of the trust preferred
securities are entitled to a cumulative cash distribution on the liquidation
amount of $1,000 per security at an interest rate of 7.89% as of December 31,
2005. The rate will be adjusted to equal the 3-month LIBOR plus 3.35% for each
successive period beginning January 7 of each year provided, however, that prior
to January 7, 2008, such annual rate shall not exceed 12.5%. BankWest Nevada
Capital Trust II has the option to defer payment of the distributions for a
period of up to five years, but during any such deferral, we would be restricted
from paying dividends on our common stock.
A special event under which the trust preferred securities could be redeemed
includes a Tax Event, Capital Treatment Event, or an Investment Company Event. A
Tax Event includes any amendment or change in the laws or regulations of a
taxing authority, an official administrative pronouncement, or a judicial
decision interpreting or applying such laws or regulations that would subject
the trust to federal income tax, interest payable would not be deductible in
whole or part for federal income tax purposes, or subject the trust to more than
a de minimis amount of other taxes, duties, assessments or other government
charges. A Capital Treatment Event includes any amendment or change in the laws
or an official administrative pronouncement to treat the amount equal to the
aggregate liquidation amount of the capital securities as Tier 1 Capital for
purposes of the capital adequacy guidelines of the Federal Reserve. An
Investment Company Event includes changes, interpretation or application of laws
or regulations that would require the trust to be registered under the
Investment Company Act.
We have guaranteed, on a subordinated basis, distributions and other payments
due on the trust preferred securities. We own 100% of the common securities in
the trusts. For financial reporting purposes, our investment in the trusts is
accounted for under the equity method and is included in other assets on the
accompanying consolidated balance sheet. The subordinated debentures issued and
guaranteed by us and held by the trust are reflected on our consolidated balance
sheet in accordance with provisions
55
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUBORDINATED DEBT (continued)
of Interpretation No. 46 issued by the Financial Accounting Standards Board, or
FASB, No. 46, Consolidation of Variable Interest Entities. Under applicable
regulatory guidelines, all of the trust preferred securities currently qualify
as Tier 1 capital, although this classification is subject to future change.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
We routinely enter into contracts for services in the conduct of ordinary
business operations which may require payment for services to be provided in the
future and may contain penalty clauses for early termination of the contracts.
To meet the financing needs of our customers, we are also parties to financial
instruments with off-balance sheet risk including commitments to extend credit
and standby letters of credit. We have also committed to irrevocably and
unconditionally guarantee the following payments or distributions with respect
to the holders of preferred securities to the extent that BankWest Nevada Trust
I and BankWest Nevada Trust II have not made such payments or distributions: (1)
accrued and unpaid distributions, (2) the redemption price, and (3) upon a
dissolution or termination of the trust, the lesser of the liquidation amount
and all accrued and unpaid distributions and the amount of assets of the trust
remaining available for distribution. We do not believe that these off-balance
sheet arrangements have or are reasonably likely to have a material effect on
our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources.
However, there can be no assurance that such arrangements will not have a future
effect.
Long-Term Borrowed Funds.We also have entered into long-term contractual
obligations consisting of advances from Federal Home Loan Bank (FHLB). These
advances are secured with collateral generally consisting of securities. As of
December 31, 2005, these long-term FHLB advances totaled $63.7 million and will
mature by December 31, 2007. Interest payments are due semi-annually. The
weighted average rate of the long-term FHLB advances as of December 31, 2005 was
2.63%.
The following table sets forth our significant contractual obligations as of
December 31, 2005.
LESS THAN 1-3 3-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- -------- --------- ------- ------- -------
(IN THOUSANDS)
Long term borrowed funds $ 73,512 $34,501 $29,528 $ 9,483 $ --
Junior subordinated deferrable interest debentures 30,928 -- -- -- 30,928
Operating lease obligations 16,407 2,053 4,278 4,042 6,034
-------- ------- ------- ------- -------
Total $120,847 $36,554 $33,806 $13,525 $36,962
======== ======= ======= ======= =======
Our commitments associated with outstanding letters of credit, commitments to
extend credit, and credit card guarantees as of December 31, 2005 are summarized
below. Since commitments associated with letters of credit and commitments to
extend credit may expire unused, the amounts shown do not necessarily reflect
the actual future cash funding requirements.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL LESS THAN 1-3 3-5 AFTER
OTHER COMMITMENTS AMOUNTS 1 YEAR YEARS YEARS 5 YEARS
- ----------------- -------- --------- ------- ------- --------
(IN THOUSANDS)
Commitments to extend credit $750,349 $543,529 $77,566 $10,051 $119,203
Credit card guarantees 7,616 7,616 -- -- --
Standby letters of credit 28,720 12,400 15,022 1,298 --
-------- -------- ------- ------- --------
Total $786,685 $563,545 $92,588 $11,349 $119,203
======== ======== ======= ======= ========
Short-Term Borrowed Funds. Short-term borrowed funds are used to support
liquidity needs created by seasonal deposit flows, to temporarily satisfy
funding needs from increased loan demand, and for other short-term purposes. The
majority of these short-term borrowed funds consist of advances from FHLB. The
borrowing capacity at FHLB is determined based on collateral pledged, generally
consisting of securities, at the time of borrowing. We also have borrowings from
other sources pledged by securities including securities sold under agreements
to repurchase, which are reflected at the amount of cash received in connection
with the transaction, and may require additional collateral based on the fair
value of the underlying securities. As of December 31, 2005, total short-term
borrowed funds were $85.2 million with a weighted average interest rate at
period end of 2.85%, compared to total short-term borrowed funds of $185.5
million as of December 31, 2004 with a weighted average interest rate at year
end of 2.23%. The decrease of $100.3 million was, in general, a result of
short-term advances that had matured and were replaced by other sources of
funding.
56
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS (continued)
The following table sets forth certain information regarding FHLB advances and
repurchase agreements at the dates or for the periods indicated.
DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
($ IN THOUSANDS)
FHLB Advances and other:
Maximum month-end balance $155,400 $174,200 $163,211
Balance at end of year 7,000 159,900 163,211
Average balance 71,075 186,662 69,319
Customer Repurchase Accounts:
Maximum month-end balance $ 78,170 $ 78,050 $ 78,050
Balance at end of year 78,170 25,594 78,050
Average balance 46,628 52,513 41,939
Total Short-Term Borrowed Funds $ 85,170 $185,494 $241,261
Weighted average interest rate at end of year 2.85% 2.23% 1.31%
Weighted average interest rate during year 2.75% 1.87% 1.50%
Since growth in core deposits may be at intervals different from loan demand, we
may follow a pattern of funding irregular growth in assets with short-term
borrowings, which are then replaced with core deposits. This temporary funding
source is likely to be utilized for generally short-term periods, although no
assurance can be given that this will, in fact, occur.
LIQUIDITY
The ability to have readily available funds sufficient to repay fully maturing
liabilities is of primary importance to depositors, creditors and regulators.
Our liquidity, represented by cash and due from banks, federal funds sold and
available-for-sale securities, is a result of our operating, investing and
financing activities and related cash flows. In order to ensure funds are
available at all times, on at least a quarterly basis, we project the amount of
funds that will be required and maintain relationships with a diversified
customer base so funds are accessible. Liquidity requirements can also be met
through short-term borrowings or the disposition of short-term assets. We have
borrowing lines at correspondent banks totaling $84.0 million. In addition,
securities are pledged to the FHLB totaling $472.0 million on total borrowings
from the FHLB of $70.7 million as of December 31, 2005. As of December 31, 2005,
we had $82.9 million in securities available to be sold or pledged to the FHLB.
We have a formal liquidity policy, and in the opinion of management, our liquid
assets are considered adequate to meet our cash flow needs for loan funding and
deposit cash withdrawal for the next 60 to 90 days. At December 31, 2005, we had
$807.7 million in liquid assets comprised of $174.3 million in cash and cash
equivalents (including federal funds sold of $63.2 million) and $633.4 million
in available-for-sale securities.
The pending acquisitions discussed in Note 21 to the Consolidated Financial
Statements are expected to result in a total cash outlay of between $80 million
and $125 million. We intend to fund these acquisitions with cash held at the
holding company and through the issuance of trust preferred securities.
On a long-term basis, our liquidity will be met by changing the relative
distribution of our asset portfolios, for example, reducing investment or loan
volumes, or selling or encumbering assets. Further, we will increase liquidity
by soliciting higher levels of deposit accounts through promotional activities
and/or borrowing from our correspondent banks as well as the Federal Home Loan
Bank of San Francisco. At the current time, our long-term liquidity needs
primarily relate to funds required to support loan originations and commitments
and deposit withdrawals. All of these needs can currently be met by cash flows
from investment payments and maturities, and investment sales if the need
arises.
Our liquidity is comprised of three primary classifications: (i) cash flows from
operating activities; (ii) cash flows used in investing activities; and (iii)
cash flows provided by or used in financing activities. Net cash provided by
operating activities consists primarily of net income adjusted for changes in
certain other asset and liability accounts and certain non-cash income and
expense items such as the loan loss provision, investment and other
amortizations and depreciation. For the years ended December 31, 2005, 2004 and
2003 net cash provided by operating activities was $34.4, $27.3 million and
$12.7 million, respectively.
Our primary investing activities are the origination of real estate, commercial
and consumer loans and purchase and sale of securities. Our net cash provided by
and used in investing activities has been primarily influenced by our loan and
securities activities.
57
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY (continued)
The net increase in loans for the years ended December 31, 2005, 2004 and 2003
was $604.8 million, $455.5 million and $268.8 million, respectively. Proceeds
from maturities and sales of securities, net of purchases of securities
available-for-sale and held-to-maturity for the year ended December 31, 2005
were $50.3 million. Net purchases of securities for the years ended December 31,
2004 and 2003 were $133.5 million and $514.0 million, respectively.
Net cash provided by financing activities has been impacted significantly by
increases in deposit levels. During the years ended December 31, 2005, 2004 and
2003, deposits increased by $637.8 million, $661.4 million and $374.3 million,
respectively. In the year ended December 31, 2005, we completed our initial
public offering, resulting in net proceeds of $85.1 million.
Our federal funds sold increased $40.1 million from December 31, 2004 to
December 31, 2005. This is due to the growth in our deposits combined with the
decrease of our investment portfolio over the same period.
Federal and state banking regulations place certain restrictions on dividends
paid by the Banks to Western Alliance. The total amount of dividends which may
be paid at any date is generally limited to the retained earnings of each Bank.
Dividends paid by the Banks to the Company would be prohibited if the effect
thereof would cause the respective Bank's capital to be reduced below applicable
minimum capital requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market prices and rates, foreign currency exchange rates, commodity
prices and equity prices. Our market risk arises primarily from interest rate
risk inherent in our lending, investing and deposit taking activities. To that
end, management actively monitors and manages our interest rate risk exposure.
We do not have any market risk sensitive instruments entered into for trading
purposes. We manage our interest rate sensitivity by matching the re-pricing
opportunities on our earning assets to those on our funding liabilities.
Management uses various asset/liability strategies to manage the re-pricing
characteristics of our assets and liabilities designed to ensure that exposure
to interest rate fluctuations is limited within our guidelines of acceptable
levels of risk-taking. Hedging strategies, including the terms and pricing of
loans and deposits, and management of the deployment of our securities are used
to reduce mismatches in interest rate re-pricing opportunities of portfolio
assets and their funding sources.
Interest rate risk is addressed by our each bank's respective Asset Liability
Management Committee, or ALCO, which is comprised of senior finance, operations,
human resources and lending officers. ALCO monitors interest rate risk by
analyzing the potential impact on the net economic value of equity and net
interest income from potential changes in interest rates, and consider the
impact of alternative strategies or changes in balance sheet structure. We
manage our balance sheet in part to maintain the potential impact on economic
value of equity and net interest income within acceptable ranges despite changes
in interest rates.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by
the ALCO. Interest rate risk exposure is measured using interest rate
sensitivity analysis to determine our change in economic value of equity in the
event of hypothetical changes in interest rates. If potential changes to net
economic value of equity and net interest income resulting from hypothetical
interest rate changes are not within the limits established by each bank's Board
of Directors, the respective Board of Directors may direct management to adjust
the asset and liability mix to bring interest rate risk within board-approved
limits.
Economic Value of Equity. We measure the impact of market interest rate changes
on the net present value of estimated cash flows from our assets, liabilities
and off-balance sheet items, defined as economic value of equity, using a
simulation model. This simulation model assesses the changes in the market value
of interest rate sensitive financial instruments that would occur in response to
an instantaneous and sustained increase or decrease (shock) in market interest
rates.
At December 31, 2005, our economic value of equity exposure related to these
hypothetical changes in market interest rates was within the current guidelines
established by us. The following table shows our projected change in economic
value of equity for this set of rate shocks at December 31, 2005.
ECONOMIC VALUE OF EQUITY
----------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE OF
ECONOMIC CHANGE OF TOTAL EQUITY
INTEREST RATE SCENARIO VALUE FROM BASE ASSETS BOOK VALUE
- ---------------------- -------- ---------- ---------- -------------
($ IN MILLIONS)
Up 300 basis points $465.7 2.4% 16.3% 190.7%
Up 200 basis points 463.6 1.9 16.2 189.8
Up 100 basis points 459.5 1.0 16.1 188.2
BASE 455.0 -- 15.9 186.3
Down 100 basis points 445.4 (2.1) 15.6 182.4
Down 200 basis points 429.2 (5.7) 15.0 175.8
Down 300 basis points 403.9 (11.2) 14.1 165.4
58
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Quantitative and Qualitative Disclosures About Market Risk (continued) The
computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, asset prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions we may undertake in response to changes in interest rates. Actual
amounts may differ from the projections set forth above should market conditions
vary from the underlying assumptions.
Net Interest Income Simulation. In order to measure interest rate risk at
December 31, 2005, we used a simulation model to project changes in net interest
income that result from forecasted changes in interest rates. This analysis
calculates the difference between net interest income forecasted using a rising
and a falling interest rate scenario and a net interest income using a base
market interest rate derived from the current treasury yield curve. The income
simulation model includes various assumptions regarding the re-pricing
relationships for each of our products. Many of our assets are floating rate
loans, which are assumed to re-price immediately, and proportional to the change
in market rates, depending on their contracted index. Some loans and investments
include the opportunity of prepayment (embedded options), and accordingly the
simulation model uses indexes to estimate these prepayments and reinvest their
proceeds at current yields. Our non-term deposit products re-price more slowly,
usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the
given set of rate changes and assumptions. It assumes the balance sheet remains
static and that its structure does not change over the course of the year. It
does not account for all factors that impact this analysis, including changes by
management to mitigate the impact of interest rate changes or secondary impacts
such as changes to our credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change
regularly. Interest rate changes create changes in actual loan prepayment rates
that will differ from the market estimates incorporated in this analysis.
Changes that vary significantly from the assumptions may have significant
effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest
rate forecast was increased and decreased over twelve months by 300 basis
points. At December 31, 2005, our net interest margin exposure related to these
hypothetical changes in market interest rates was within the current guidelines
established by us.
SENSITIVITY OF NET
INTEREST INCOME
----------------------------
PERCENTAGE
ADJUSTED NET CHANGE
Interest Rate Scenario INTEREST INCOME FROM BASE
- ---------------------- --------------- ----------
(IN MILLIONS)
Up 300 basis points $118.7 4.7%
Up 200 basis points 118.1 4.1
Up 100 basis points 116.5 2.7
BASE 113.4 --
Down 100 basis points 110.4 (2.6)
Down 200 basis points 108.5 (4.3)
Down 300 basis points 107.9 (4.9)
59
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RECENT ACCOUNTING PRONOUNCEMENTS
FAS NO. 123(R), SHARED-BASED PAYMENT, REVISED DECEMBER 2004
In December 2004, the Financial Accounting Standards Board published FASB
Statement No. 123 (revised 2004), Share-Based Payment, or FAS 123(R). FAS
123(R) requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
Modifications of share-based payments will be treated as replacement awards with
the cost of the incremental value recorded in the financial statements.
The Statement will be effective at the beginning of the first quarter of 2006.
As of the effective date, we will apply the Statement using a modified version
of prospective application. Under that transition method, compensation cost will
be recognized for (1) all awards granted after the required effective date and
to awards modified, cancelled, or repurchased after that date and (2) the
portion of awards granted subsequent to completion of an IPO and prior to the
effective date for which the requisite service has not yet been rendered, based
on the grant-date fair value of those awards calculated for pro forma
disclosures under SFAS 123.
The impact of this Statement on the Company in 2006 and beyond will depend on
various factors; among them being our future compensation strategy. We estimate
that the Company will incur stock option compensation expense of approximately
$435,000 for the year ended December 31, 2006 related to the adoption of
FAS123(R), $307,000 of which is expected to be tax-effected. A significant
amount of the pro forma compensation costs have been calculated using a minimum
value method and may not be indicative of amounts which shall be expensed in
future periods.
SOP 03-3, ACCOUNTING FOR CERTAIN LOANS AND DEBT SECURITIES ACQUIRED IN A
TRANSFER
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-3, Accounting for Certain Loans and Debt
Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for
acquired loans that show evidence of having deteriorated in terms of credit
quality since their origination and for which a loss is deemed probable of
occurring. SOP 03-3 requires acquired loans to be recorded at their fair value,
defined as the present value of future cash flows including interest income, to
be recognized over the life of the loan. SOP 03-3 prohibits the carryover of an
allowance for loan loss on certain acquired loans within its scope considered in
the future cash flows assessment. In relation to the pending acquisitions
discussed in Note 21 to our Consolidated Financial Statements, we do not expect
SOP 03-3 will have a material effect on the Company's consolidated financial
statements.
60
WESTERN ALLIANCE BANCORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS
WESTERN ALLIANCE BANCORPORATION
LAS VEGAS, NEVADA
MCGLADREY & PULLEN
Certified Public Accountants
We have audited the accompanying consolidated balance sheets of Western
Alliance Bancorporation and subsidiaries as of December 31, 2005 and 2004 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material mistatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Western
Alliance Bancorporation and subsidiaries as of December 31, 2005 and 2004 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
MCGLADREY & PULLEN, LLP
Las Vegas, Nevada
February 10, 2006
McGladrey & Pullen, LLP is an independent member firm of RSM International, an
affiliation of independent accounting and consulting firms.
61
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
($ in thousands, except per share amounts) 2005 2004
---------- ----------
ASSETS
Cash and due from banks $ 111,150 $ 92,282
Federal funds sold and other 63,186 23,115
---------- ----------
CASH AND CASH EQUIVALENTS 174,336 115,397
---------- ----------
Securities held to maturity (approximate fair value $112,601
and $128,984, respectively) 115,171 129,549
Securities available for sale 633,362 659,073
Gross loans, including net deferred loan fees 1,793,337 1,188,535
Less: Allowance for loan losses (21,192) (15,271)
---------- ----------
LOANS, NET 1,772,145 1,173,264
---------- ----------
Premises and equipment, net 58,430 29,364
Bank owned life insurance 51,834 26,170
Investment in Federal Home Loan Bank stock 14,456 15,097
Accrued interest receivable 10,545 8,359
Deferred tax assets, net 10,807 5,949
Goodwill 3,946 3,946
Other intangible assets, net of accumulated amortization of
$405 and $183, respectively 1,218 1,440
Other assets 11,021 9,241
---------- ----------
TOTAL ASSETS $2,857,271 $2,176,849
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Non-interest bearing demand deposits $ 980,009 $ 749,550
Interest bearing deposits:
Demand 122,262 103,723
Savings and money market 949,582 665,425
Time, $100 and over 316,205 219,451
Other time 25,754 17,887
---------- ----------
2,393,812 1,756,036
Customer repurchase agreements 78,170 25,594
Federal Home Loan Bank advances and other borrowings
One year or less 7,000 159,900
Over one year 73,512 63,700
Junior subordinated debt 30,928 30,928
Accrued interest payable and other liabilities 29,626 7,120
---------- ----------
TOTAL LIABILITIES 2,613,048 2,043,278
---------- ----------
Commitments and Contingencies (Notes 6, 9, 10 and 11)
Stockholders' Equity
Preferred stock, par value $.0001; shares authorized
20,000,000; no shares issued and outstanding 2005 and
2004 -- --
Common stock, par value $.0001; shares authorized
100,000,000; shares issued and outstanding 2005: 22,810,
491; 2004: 18,249,554 2 2
Additional paid-in capital 167,996 80,459
Retained earnings 86,281 58,216
Deferred compensation - restricted stock (364) --
Accumulated other comprehensive loss - net unrealized on
available for sale loss securities (9,692) (5,106)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 244,223 133,571
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,857,271 $2,176,849
========== ==========
See Notes to Consolidated Financial Statements.
62
WESTERN ALLIANCE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
($ in thousands, except per share amounts) 2005 2004 2003
-------- ------- -------
Interest income on:
Loans, including fees $102,481 $59,311 $36,792
Securities - taxable 29,099 30,373 15,938
Securities - nontaxable 394 341 346
Dividends - taxable 595 537 169
Federal funds sold and other 2,341 293 578
-------- ------- -------
TOTAL INTEREST INCOME 134,910 90,855 53,823
-------- ------- -------
Interest expense on:
Deposits 25,546 12,123 8,158
FHLB advances and other borrowings, short-term 3,234 4,472 1,671
FHLB advances and other borrowings, long-term 1,675 1,586 1,475
Junior subordinated debt 2,113 1,539 1,494
-------- ------- -------
TOTAL INTEREST EXPENSE 32,568 19,720 12,798
-------- ------- -------
NET INTEREST INCOME 102,342 71,135 41,025
Provision for loan losses 6,179 3,914 5,145
-------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 96,163 67,221 35,880
-------- ------- -------
Other income:
Trust and investment advisory services 5,699 2,896 --
Service charges 2,495 2,333 1,998
Income from bank owned life insurance 1,664 1,203 967
Investment securities gains (losses), net 69 19 (265)
Other 2,211 2,275 1,570
-------- ------- -------
12,138 8,726 4,270
-------- ------- -------
Other expense:
Salaries and employee benefits 36,816 25,590 15,615
Occupancy 9,819 7,309 4,820
Customer service 3,720 1,998 752
Advertising, public relations and business development 2,806 1,672 989
Legal, professional and director fees 2,051 1,405 1,111
Correspondent banking service charges and wire transfer costs 1,651 1,260 512
Audits and exams 1,538 935 435
Supplies 1,083 838 619
Data processing 1,053 641 466
Telephone 759 578 424
Insurance 752 540 305
Travel and automobile 684 467 261
Organizational costs -- -- 604
Other 2,132 1,696 377
-------- ------- -------
64,864 44,929 27,290
-------- ------- -------
INCOME BEFORE INCOME TAXES 43,437 31,018 12,860
Income tax expense 15,372 10,961 4,171
-------- ------- -------
NET INCOME $ 28,065 $20,057 $ 8,689
======== ======= =======
Earnings per share:
Basic $ 1.36 $ 1.17 $ 0.61
======== ======= =======
Diluted $ 1.24 $ 1.09 $ 0.59
======== ======= =======
See Notes to Consolidated Financial Statements.
63
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
Common Stock
------------------ Additional
Comprehensive Shares Paid-in Treasury
Description Income Issued Amount Capital Stock
- ----------- ------------- ---------- ------ ---------- --------
($ in thousands)
Balance, December 31, 2002 13,908,279 $ 1 $ 35,693 $(2,372)
Stock options exercised, including tax
benefit of $256 108,042 -- 434 --
Issuance of 711,310 shares of common stock
$7.03 per share, net of offering cost of
$116 711,310 -- 4,884 --
Issuance of 2,297,560 shares of common stock
at $9 per share, net of offering costs of
$55 2,297,560 1 20,622 --
Issuance of 100,000 shares of common stock at
$9 per share in connection with merger 100,000 -- 900 --
Treasury stock purchased at $9 per share
(75,338 shares) -- -- -- (678)
Retirement of treasury stock (443,918) -- -- 3,050
Comprehensive income:
Net income $ 8,689 -- -- -- --
Other comprehensive income
Unrealized holding losses on securities
available for sale arising during the
period, net of taxes of $2,602 (5,018)
Less reclassification adjustment for
losses included in net income, net
of taxes of $90 175
-------
Net unrealized holding losses (4,843) -- -- -- --
-------
$ 3,846
=======
---------- --- -------- -------
Balance, December 31, 2003 16,681,273 2 62,533 --
Stock options exercised 97,800 -- 415 --
Stock warrants exercised 20,481 -- 156 --
Issuance of 1,250,000 shares of common stock
at $12 per share, net of offering costs of
$45 1,250,000 -- 14,955 --
Issuance of 200,000 shares of common stock at
$12 per share, in connection with merger 200,000 -- 2,400 --
Comprehensive income:
Net income $20,057 -- -- -- --
Other comprehensive income
Unrealized holding losses on securities
available for sale arising during the
period, net of taxes of $1,096 (1,850)
Less reclassification adjustment for
gains included in net income, net of
taxes of $6 (13)
-------
Net unrealized holding losses (1,863) -- -- -- --
-------
$18,194
=======
---------- --- -------- -------
Balance, December 31, 2004 18,249,554 2 80,459 --
Stock options exercised 228,114 -- 1,222 --
Stock warrants exercised 105,823 -- 806 --
Issuance of 4,200,000 shares of common stock,
net of offering costs of $7,337 4,200,000 -- 85,063 --
Restricted stock granted 27,000 -- 446 --
Compensation cost on restricted stock -- -- -- --
Comprehensive income:
Net income $28,065 -- -- -- --
Other comprehensive income
Unrealized holding losses on securities
available for sale arising during the
period, net of taxes of $2,679 (4,541)
Less reclassification adjustment for
gains included in net income, net of
taxes of $24 (45)
-------
Net unrealized holding losses (4,586) -- -- -- --
-------
$23,479
=======
---------- --- -------- -------
BALANCE, DECEMBER 31, 2005 22,810,491 $ 2 $167,996 $ --
========== === ======== =======
Accumulated
Deferred Other
Compensation Comprehensive
Retained - Restricted Income
Description Earnings Stock (Loss) Total
- ----------- -------- ------------ ------------- --------
($ in thousands)
Balance, December 31, 2002 $32,520 $ -- $ 1,600 $67,442
Stock options exercised, including tax
benefit of $256 -- -- -- 434
Issuance of 711,310 shares of common stock
$7.03 per share, net of offering cost of
$116 -- -- -- 4,884
Issuance of 2,297,560 shares of common stock
at $9 per share, net of offering costs of
$55 -- -- -- 20,623
Issuance of 100,000 shares of common stock at
$9 per share in connection with merger -- -- -- 900
Treasury stock purchased at $9 per share
(75,338 shares) -- (678)
Retirement of treasury stock (3,050) -- -- --
Comprehensive income:
Net income 8,689 -- -- 8,689
Other comprehensive income
Unrealized holding losses on securities
available for sale arising during the
period, net of taxes of $2,602
Less reclassification adjustment for
losses included in net income, net of
taxes of $90
Net unrealized holding losses -- -- (4,843) (4,843)
------- ----- ------- --------
Balance, December 31, 2003 38,159 -- (3,243) 97,451
Stock options exercised -- -- -- 415
Stock warrants exercised -- -- -- 156
Issuance of 1,250,000 shares of common stock
at $12 per share, net of offering costs of
$45 -- -- -- 14,955
Issuance of 200,000 shares of common stock at
$12 per share, in connection with merger -- -- -- 2,400
Comprehensive income:
Net income 20,057 -- -- 20,057
Other comprehensive income
Unrealized holding losses on securities
available for sale arising during the
period, net of taxes of $1,096
Less reclassification adjustment for
gains included in net income, net
of taxes of $6
Net unrealized holding losses -- -- (1,863) (1,863)
------- ----- ------- --------
Balance, December 31, 2004 58,216 -- (5,106) 133,571
Stock options exercised -- -- -- 1,222
Stock warrants exercised -- -- -- 806
Issuance of 4,200,000 shares of common stock,
net of offering costs of $7,337 -- -- -- 85,063
Restricted stock granted -- (446) -- --
Compensation cost on restricted stock -- 82 -- 82
Comprehensive income:
Net income 28,065 -- -- 28,065
Other comprehensive income
Unrealized holding losses on securities
available for sale arising during the
period, net of taxes of $2,679
Less reclassification adjustment for
gains included in net income, net of
taxes of $24
Net unrealized holding losses -- -- (4,586) (4,586)
------- ----- ------- --------
BALANCE, DECEMBER 31, 2005 $86,281 $(364) $(9,692) $244,223
======= ===== ======= ========
See Notes to Consolidated Financial Statements.
64
WESTERN ALLIANCE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
($ in thousands) 2005 2004 2003
--------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 28,065 $ 20,057 $ 8,689
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,783 2,629 1,804
Net amortization of securities premiums 1,219 3,698 2,937
Tax benefit from exercise of stock options -- -- 256
Stock dividends received, FHLB stock (890) (536) (167)
Provision for loan losses 6,179 3,914 5,145
Deferred taxes (2,158) (69) (1,470)
(Increase) in accrued interest receivable (2,186) (1,970) (2,811)
(Increase) in bank-owned life insurance (1,664) (1,203) (967)
(Increase) in other assets (479) (844) (2,732)
Increase in accrued interest payable and other liabilities 2,530 1,627 1,686
Other, net (40) (29) 326
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,359 27,274 12,696
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of securities held to maturity (13,209) (32,706) (121,192)
Proceeds from maturities of securities held to maturity 27,373 35,241 11,416
Purchases of securities available for sale (135,271) (441,986) (506,246)
Proceeds from maturities of securities available for sale 152,707 305,908 102,051
Proceeds from the sale of securities available for sale 18,728 41,775 30,051
Net cash (paid) received in settlement of acquisition -- (2,177) 246
Liquidation (purchase) of Federal Home Loan Bank stock 1,531 (1,933) (10,908)
Net increase in loans made to customers (574,456) (434,531) (268,828)
Purchased mortgages (30,346) (20,926) --
Purchase of premises and equipment (22,756) (13,899) (7,071)
Purchase of bank-owned life insurance (24,000) -- (24,000)
Other, net (264) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (599,963) (565,234) (794,481)
--------- --------- ---------
Cash Flows from Financing Activities:
Net increase in deposits 637,776 661,390 374,342
Net (repayments) proceeds from borrowings (100,324) (89,467) 288,661
Proceeds from exercise of stock options and stock warrants 2,028 571 178
Proceeds from stock issuance, net 85,063 14,955 25,507
Repurchase of treasury stock -- -- (678)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 624,543 587,449 688,010
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 58,939 49,489 (93,775)
Cash and Cash Equivalents, beginning of year 115,397 65,908 159,683
--------- --------- ---------
Cash and Cash Equivalents, end of year $ 174,336 $ 115,397 $ 65,908
========= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 32,373 $ 19,601 $ 11,675
Cash payments for income taxes $ 17,481 $ 10,129 $ 4,855
Supplemental Disclosure of Noncash Investing and Financing
Activities
Acquisition of premises and equipment funded with borrowings $ 9,812 $ -- $ --
Stock issued in connection with acquisitions $ -- $ 2,400 $ $900
Securities transferred from available for sale to held to maturity $ -- $ -- $ 16,862
Purchase of available for sale securities pending settlement $ 20,000 $ -- $ 9,750
Retirement of treasury stock $ -- $ -- $ 3,050
See Notes to Consolidated Financial Statements.
65
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Western Alliance Bancorporation is a bank holding company providing a full range
of banking services to commercial and consumer customers through its wholly
owned subsidiaries BankWest of Nevada, operating primarily in Nevada, Alliance
Bank of Arizona, operating primarily in Arizona, Torrey Pines Bank, operating
primarily in Southern California, Miller/Russell & Associates, Inc., operating
in Nevada, Arizona and Southern California, and Premier Trust, Inc., operating
in Nevada and Arizona. These entities are collectively referred to herein as the
Company. Alliance Bank of Arizona and Torrey Pines Bank began operations during
the year ended December 31, 2003. The accounting and reporting policies of the
Company conform to accounting principles generally accepted in the United States
of America and general industry practices.
A summary of the significant accounting policies of the Company follows:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change in the near term
relates to the determination of the allowance for loan losses.
PRINCIPLES OF CONSOLIDATION
With the exception of certain trust subsidiaries (Note 10) which do not meet the
criteria for consolidation pursuant to Financial Accounting Standards Board
(FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, the consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, BankWest of Nevada, Alliance Bank of
Arizona, Torrey Pines Bank (collectively referred to herein as the Banks),
Miller/Russell & Associates, Inc., and Premier Trust, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
In February 2005, BW Real Estate, Inc. (a real estate investment trust) was
formed as a wholly-owned subsidiary of BankWest of Nevada. Substantially all
real estate loans owned by BankWest of Nevada were transferred to the subsidiary
at that date. Substantially all mortgage-backed securities owned by BankWest of
Nevada were transferred to the subsidiary during the second quarter of 2005.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks (including cash items in process of clearing) and
federal funds sold. Cash flows from loans originated by the Company and deposits
are reported net.
The Company maintains amounts due from banks, which at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
SECURITIES
Securities classified as held to maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or general economic conditions. These
securities are carried at amortized cost. The sale of a security within three
months of its maturity date or after at least 85% of the principal outstanding
has been collected is considered a maturity for purposes of classification and
disclosure.
Securities classified as available for sale are equity securities and those debt
securities the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital considerations and other
similar factors. Securities available for sale are reported at fair value with
unrealized gains or losses reported as other comprehensive income (loss), net of
the related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in earnings.
Purchase premiums and discounts are generally recognized in interest income
using the interest method over the term of the securities. For mortgage-backed
securities, estimates of prepayments are considered in the constant yield
calculations.
Declines in the fair value of individual securities classified as available for
sale below their amortized cost that are determined to be other than temporary
result in write-downs of the individual securities to their fair value with the
resulting write-downs included in current earnings as realized losses. In
determining other-than-temporary losses, management considers (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
66
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned net loan
fees and allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance.
The allowance is an amount that management believes will be adequate to absorb
probable losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior credit loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem credits, peer bank information, and current economic conditions that may
affect the borrower's ability to pay. Due to the credit concentration of the
Company's loan portfolio in real estate secured loans, the value of collateral
is heavily dependent on real estate values in Southern Nevada, Arizona and
Southern California. While management uses the best information available to
make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic or other conditions. In addition, the
Federal Deposit Insurance Corporation (FDIC) and state banking regulatory
agencies, as an integral part of their examination processes, periodically
review the Banks' allowance for loan losses, and may require the Banks to make
additions to the allowance based on their judgment about information available
to them at the time of their examinations.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan, pursuant to FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative and environmental
factors, pursuant to FASB Statement No. 5 (FASB 5), Accounting for
Contingencies.
A loan is impaired when it is probable the Company will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses.
INTEREST AND FEES ON LOANS
Interest on loans is recognized over the terms of the loans and is calculated
under the effective interest method. The accrual of interest on impaired loans
is discontinued when, in management's opinion, the borrower may be unable to
make payments as they become due.
The Company determines a loan to be delinquent when payments have not been made
according to contractual terms, typically evidenced by nonpayment of a monthly
installment by the due date. The accrual of interest on loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days delinquent.
All interest accrued but not collected for loans that are placed on nonaccrual
status or charged off is reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment to the related loan's
yield. The Company is generally amortizing these amounts over the contractual
life of the loan. Commitment fees, based upon a percentage of a customer's
unused line of credit, and fees related to standby letters of credit are
recognized over the commitment period.
As a service for customers, the Company has entered into agreements with
unaffiliated mortgage companies to complete applications, loan documents and
perform pre-underwriting activities for certain residential mortgages. The
mortgage loan pre-underwriting fees from these agreements are recognized as
income when earned.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and
67
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
TRANSFERS OF FINANCIAL ASSETS (continued)
(3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
BANK OWNED LIFE INSURANCE
Bank owned life insurance is stated at its cash surrender value. The face amount
of the underlying policies is $138,771 as of December 31, 2005. There are no
loans offset against cash surrender values, and there are no restrictions as to
the use of proceeds.
FEDERAL HOME LOAN BANK STOCK
The Company's banks, as members of the Federal Home Loan Bank (FHLB) system, are
required to maintain an investment in capital stock of the FHLB in an amount
equal to 5% of its advances from the FHLB. These investments are recorded at
cost since no ready market exists for them, and they have no quoted market
value.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the assets. Improvements to leased property
are amortized over the lesser of the term of the lease or life of the
improvements. Depreciation and amortization is computed using the following
estimated lives:
Years
------
Bank premises 31
Equipment and furniture 5 - 10
Leasehold improvements 6 - 10
ORGANIZATION AND STAR T-UP COSTS
Organization and start-up costs were charged to operations as they were incurred
pursuant to Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. Organization and start-up costs charged to operations during the
years ended December 31, 2003 were approximately $604. There were no
organization and start-up costs charged to operations during the years ended
December 31, 2005 and 2004.
OTHER INTANGIBLE ASSETS
Intangible assets consist of investment advisory and trust customer
relationships, respectively, and are amortized over 6 and 10 years,
respectively.
GOODWILL
Goodwill is reviewed periodically by management for impairment. No impairment
charge was deemed necessary based on management's impairment analysis in 2005.
INCOME TAXES
Western Alliance Bancorporation and its subsidiaries, other than BW Real Estate,
Inc., file a consolidated federal tax return. Deferred taxes are provided on an
asset and liability method whereby deferred tax assets are recognized for
deductible temporary differences and tax credit carryfor wards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effect of changes in tax laws
and rates on the date of enactment.
STOCK COMPENSATION PLANS
The Company has the 2005 Stock Incentive Plan (the Plan) which is described more
fully in Note 12. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no stock-based employee
compensation cost has been recognized, as all options granted under those plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net income
and earnings per share had compensation cost for all of the stock-based
compensation plans been determined based on the grant date fair values of awards
(the method described in FASB Statement No. 123, Accounting for Stock-Based
Compensation):
68
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
STOCK COMPENSATION PLANS (continued)
2005 2004 2003
------- ------- ------
Net income:
As reported $28,065 $20,057 $8,689
Deduct total stock-based employee compensation expense
determined under fair value based method for all awards (1,011) (696) (440)
Related tax benefit for non-qualified stock options 60 33 9
------- ------- ------
Pro forma $27,114 $19,394 $8,258
======= ======= ======
Earnings per share:
Basic - as reported $ 1.36 $ 1.17 $ 0.61
Basic - pro forma 1.32 1.13 0.58
Diluted - as reported 1.24 1.09 0.59
Diluted - pro forma 1.20 1.05 0.56
The pro forma compensation cost was recognized for the fair value of the stock
options granted, which was estimated using the Black-Scholes method for options
granted after our June 2005 initial public offering (IPO), and the minimum value
method for stock options granted in 2005 before the IPO, 2004 and 2003 with the
following assumptions:
POST-IPO PRE-IPO
2005 2005 2004 2003
-------- ------- ----- ------
Expected life in years 6 7 7 7
Risk-free interest rate 4.21% 4.09% 3.93% 3.58%
Dividends rate None None None None
Fair value per optional share $8.91 $4.04 $2.84 $1.96
Volatility 29% NA NA NA
PREFERRED STOCK
No shares of preferred stock are issued and outstanding, and we have no current
intent to issue preferred stock in the immediate future. The Board of Directors
will have the authority, without further action by the stockholders, to issue
preferred stock in one or more series and to fix the number of shares,
designations, preferences, powers, and relative, participating, optional or
other special rights. The issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of the Company.
OFF-BALANCE SHEET INSTRUMENTS
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they are funded.
TRUST ASSETS AND INVESTMENT ADVISORY ASSETS UNDER MANAGEMENT
Customer property, other than funds on deposit, held in a fiduciary or agency
capacity by the Company is not included in the consolidated balance sheet
because they are not assets of the Company. Trust and investment advisory
service income is recorded on an accrual basis. At December 31, 2005 and 2004,
Premier Trust had $132 million and $80 million, respectively, in assets under
management and $296 million and $208 million, respectively, in total trust
assets. At December 31, 2005 and 2004, Miller/ Russell & Associates had $1.11
billion and $791 million, respectively, in assets under management.
FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value.
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction at December 31, 2005 or
2004. The estimated fair value amounts for 2005 and 2004 have been measured as
of their year end, and have not been reevaluated or updated for purposes of
these consolidated financial statements subsequent to those dates. As such, the
estimated fair values of these financial instruments subsequent to the reporting
date may be different than the amounts reported at year end.
69
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The information in Note 16 should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only required for
a limited portion of the Company's assets.
Due to the wide range of valuation techniques and the degree of subjectivity
used in making the estimate, comparisons between the Company's disclosures and
those of other companies or banks may not be meaningful.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash
and due from banks and federal funds sold approximate their fair value.
Securities
Fair values for securities are based on quoted market prices where
available or on quoted markets for similar securities in the absence of
quoted prices on the specific security.
Federal Home Loan Bank stock
The Company's subsidiary banks are members of the Federal Home Loan Bank
(FHLB) system and maintain an investment in capital stock of the FHLB. No
ready market exists for the FHLB stock and it has no quoted market value.
Loans
For variable rate loans that reprice frequently and that have experienced
no significant change in credit risk, fair values are based on carrying
values. Variable rate loans comprised approximately 57% and 58% of the loan
portfolio at December 31, 2005 and 2004, respectively. Fair value for all
other loans is estimated based on discounted cash flows using interest
rates currently being offered for loans with similar terms to borrowers
with similar credit quality. Prepayments prior to the repricing date are
not expected to be significant. Loans are expected to be held to maturity
and any unrealized gains or losses are not expected to be realized.
Accrued interest receivable and payable
The carrying amounts reported in the consolidated balance sheets for
accrued interest receivable and payable approximate their fair value.
Deposit liabilities
The fair value disclosed for demand and savings deposits is by definition
equal to the amount payable on demand at their reporting date (that is,
their carrying amount). The carrying amount for variable-rate deposit
accounts approximates their fair value. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
these deposits. Substantially all of the Company's certificates of deposit
at December 31, 2005 and 2004 mature in less than one year. Early
withdrawals of fixed-rate certificates of deposit are not expected to be
significant.
Federal Home Loan Bank and other borrowings
The fair values of the Company's borrowings are estimated using discounted
cash flow analyses, based on the Company's incremental borrowing rates for
similar types of borrowing arrangements.
Junior subordinated debt
The carrying amounts reported in the consolidated balance sheets for junior
subordinated debt instruments approximate their fair value due to the
variable nature of these instruments.
Off-balance sheet instruments
Fair values for the Company's off-balance sheet instruments (lending
commitments and standby letters of credit) are based on quoted fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
EARNINGS PER SHARE
Diluted earnings per share is based on the weighted average outstanding common
shares during each year, including common stock equivalents. Basic earnings per
share is based on the weighted average outstanding common shares during the
year.
Basic and diluted earnings per share, based on the weighted average outstanding
shares, are summarized as follows:
70
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
EARNINGS PER SHARE (continued)
2005 2004 2003
----------- ----------- -----------
Basic:
Net income applicable to common stock $ 28,065 $ 20,057 $ 8,689
Average common shares outstanding 20,583,022 17,189,687 14,313,611
----------- ----------- -----------
Earnings per share $ 1.36 $ 1.17 $ 0.61
=========== =========== ===========
Diluted:
Net income applicable to common stock $ 28,065 $ 20,057 $ 8,689
----------- ----------- -----------
Average common shares outstanding 20,583,022 17,189,687 14,313,611
Stock option adjustment 1,167,997 694,801 254,021
Stock warrant adjustment 915,142 520,632 45,541
----------- ----------- -----------
Average common shares outstanding 22,666,161 18,405,120 14,613,173
----------- ----------- -----------
Earnings per share $ 1.24 $ 1.09 $ 0.59
=========== =========== ===========
1,502,049 stock warrants are not included in the above calculations in the
first, second and third quarters of 2003, and 6,250 stock options are not
included in the above calculations in the third and fourth quarters of 2005 as
the effect would have been anti- dilutive.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements as of and for the years
ended December 31, 2004 and 2003 have been reclassified to conform with the
current presentation. The reclassifications have no effect on net income or
stockholders' equity as previously reported.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board published FASB
Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)). FAS 123(R)
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
Modifications of share-based payments will be treated as replacement awards with
the cost of the incremental value recorded in the financial statements.
The Statement will be effective for the Company at the beginning of the first
quarter of 2006. As of the effective date, the Company will apply the Statement
using a modified version of prospective application. Under that transition
method, compensation cost will be recognized for (1) all awards granted after
the required effective date and to awards modified, cancelled, or repurchased
after that date and (2) the portion of awards granted subsequent to completion
of an IPO and prior to the effective date for which the requisite service has
not yet been rendered, based on the grant-date fair value of those awards
calculated for pro forma disclosures under SFAS 123.
The impact of this Statement on the Company in 2006 and beyond will depend on
various factors; among them being our future compensation strategy. We estimate
that the Company will incur stock option compensation expense of approximately
$435 for the year ended December 31, 2006 related to the adoption of FAS123(R),
$307 of which is expected to be tax-effected. A significant amount of the pro
forma compensation costs (in the stock compensation plans table above) have been
calculated using a minimum value method and may not be indicative of amounts
which shall be expensed in future periods.
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-3, Accounting for Certain Loans and Debt
Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for
acquired loans that show evidence of having deteriorated in terms of credit
quality since their origination and for which a loss is deemed probable of
occurring SOP 03-3 requires acquired loans to be recorded at their fair value,
defined as the present value of future cash flows including interest income, to
be recognized over the life of the loan. SOP 03-3 prohibits the carryover of an
allowance for loan loss on certain acquired loans within its scope considered in
the future cash flows assessment. In relation to the pending acquisitions
discussed in Note 21, we do not expect SOP 03-3 will have a material effect on
the Company's consolidated financial statements.
NOTE 2. MERGERS AND ACQUISITION ACTIVITY
On May 17, 2004, the Company acquired all of the outstanding stock of
Miller/Russell & Associates, Inc., in exchange for 200,000 shares of the
Company's stock, valued at $2,400, and $2,300 in cash plus direct expenses. The
value of the common stock was consistent with a subsequent common stock
offering. Goodwill recorded as a result of the acquisition totaled $3,946.
Miller/Russell provides investment advisory services to clients primarily in
Arizona, Southern Nevada and Southern California.
On December 30, 2003, the Company acquired all of the outstanding stock of
Premier Trust, Inc. (formerly Premier Trust of Nevada, Inc.) in exchange for
100,000 shares of the Company's stock, valued at $900, and $100 in cash plus
direct expenses. The value of
71
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 2. MERGERS AND ACQUISITION ACTIVITY (continued)
the common stock was based on a recent common stock offering. $673 in customer
relationship intangible assets was recorded as a result of the acquisition.
Premier Trust, Inc. provides a full range of trust services to clients primarily
in Southern Nevada and Arizona.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the dates of acquisition:
Miller/Russell Premier Trust
-------------- -------------
Cash $ 230 $ 363
Furniture and equipment 67 18
Customer relationship intangible asset 950 673
Goodwill 3,946 --
Other assets 463 103
------ ------
Total assets acquired 5,656 1,157
------ ------
Other liabilities assumed 849 140
------ ------
Net assets acquired $4,807 $1,017
====== ======
Of the $3,946 of goodwill, $1,931 is expected to be deductible for tax purposes.
The mergers were effected to allow the Company to provide its customers with a
wider array of financial services. The results of operations of each acquired
entity are included in the accompanying statements of operations since the
respective acquisition date.
In January 2006, the Company announced two definitive agreements to acquire
financial institutions in Las Vegas, Nevada. These agreements are discussed in
more detail in Note 21.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain balances in cash or on deposit with the
Federal Reserve Bank. The total of those reserve balances was approximately
$7,548 and $15,555 as of December 31, 2005 and 2004, respectively.
NOTE 4. SECURITIES
Carrying amounts and fair values of investment securities at December 31 are
summarized as follows:
2005
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- --------
SECURITIES HELD TO MATURITY
U. S. Treasury securities $ 3,498 $ -- $ (43) $ 3,455
Small Business Administration loan pools 426 -- (2) 424
Municipal obligations 7,128 275 -- 7,403
Mortgage-backed securities 104,119 -- (2,800) 101,319
-------- ---- -------- --------
$115,171 $275 $ (2,845) $112,601
======== ==== ======== ========
SECURITIES AVAILABLE FOR SALE
U.S. Government-sponsored agencies $138,787 $ -- $ (1,209) $137,578
Mortgage-backed securities 429,490 14 (13,765) 415,739
Auction rate securities 67,999 -- -- 67,999
Other 12,263 -- (217) 12,046
-------- ---- -------- --------
$648,539 $ 14 $(15,191) $633,362
======== ==== ======== ========
2004
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
SECURITIES HELD TO MATURITY
U. S. Treasury securities $ 3,501 $ -- $ (26) $ 3,475
Small Business Administration loan pools 625 -- (8) 617
Municipal obligations 7,290 464 -- 7,754
Mortgage-backed securities 118,133 3 (998) 117,138
-------- ---- ------- --------
$129,549 $467 $(1,032) $128,984
======== ==== ======= ========
SECURITIES AVAILABLE FOR SALE
U.S. Government-sponsored agencies $118,798 $ 7 $ (457) $118,348
Mortgage-backed securities 537,382 631 (8,046) 529,967
Other 10,781 -- (23) 10,758
-------- ---- ------- --------
$666,961 $638 $(8,526) $659,073
======== ==== ======= ========
72
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 4. SECURITIES (continued)
Securities with carrying amounts of approximately $597,637 and $465,389 at
December 31, 2005 and 2004, respectively, were pledged for various purposes as
required or permitted by law.
Information pertaining to securities with gross unrealized losses at December
31, 2005 and 2004, aggregated by investment category and length of time that
individual securities have been in a continuous loss position follows:
2005
----------------------------------------------
Less Than Twelve Months Over Twelve Months
----------------------- --------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ------- ---------- -------
SECURITIES HELD TO MATURITY
U. S. Treasury securities $ 5 $ 992 $ 38 $ 2,463
Small Business Administration loan pools 1 156 1 17
Mortgage-backed securities 633 32,168 2,167 67,131
---- ------- ------ -------
$639 $33,316 $2,206 $69,611
==== ======= ====== =======
Less Than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- -------- ---------- --------
SECURITIES AVAILABLE FOR SALE
U.S. Government-sponsored agencies $ 214 $ 21,484 $ 995 $ 66,168
Mortgage-backed securities 1,523 92,384 12,242 321,103
Other 217 12,046 -- --
------ -------- ------- --------
$1,954 $125,914 $13,237 $387,271
====== ======== ======= ========
2004
----------------------------------------------
Less Than Twelve Months Over Twelve Months
----------------------- --------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ------- ---------- -------
SECURITIES HELD TO MATURITY
U. S. Treasury securities $ 26 $ 3,475 $ -- $ --
Small Business Administration loan pools 4 305 4 312
Mortgage-backed securities 795 84,144 203 26,050
---- ------- ---- -------
$825 $87,924 $207 $26,362
==== ======= ==== =======
Less Than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- -------- ---------- --------
SECURITIES AVAILABLE FOR SALE
U.S. Government-sponsored agencies $ 457 $105,589 $ -- $ --
Mortgage-backed securities 4,641 359,352 3,405 99,699
Other 23 10,758 -- --
------ -------- ------ -------
$5,121 $475,699 $3,405 $99,699
====== ======== ====== =======
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market conditions
warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
At December 31, 2005 and 2004, 125 and 94 debt securities, respectively, have
unrealized losses with aggregate depreciation of approximately 2.7% and 1.4%,
respectively, from the Company's amortized cost basis. These unrealized losses
relate primarily to fluctuations in the current interest rate environment. In
analyzing an issuer's financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and industry analysis reports.
Since no downgrades have occured and management has the ability and intent to
hold debt securities for the foreseeable future, no declines are deemed to be
other than temporary.
73
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 4. SECURITIES (continued)
The amortized cost and fair value of securities as of December 31, 2005 by
contractual maturities are shown below. The actual maturities of the
mortgage-backed securities and Small Business Administration loan pools may
differ from their contractual maturities because the loans underlying the
securities may be repaid without any penalties. The constructive maturity of
auction rate securities is typically much earlier than the contractual maturity.
Therefore, these securities are listed separately in the maturity summary.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
Cost Value
--------- --------
SECURITIES HELD TO MATURITY
Due in one year or less $ 3,498 $ 3,455
Due after one year through five years -- --
Due after five years through ten years 1,686 1,751
Due after ten years 5,442 5,652
Small Business Administration loan pools 426 424
Mortgage backed securities 104,119 101,319
-------- --------
$115,171 $112,601
======== ========
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 69,390 $ 69,137
Due after one year through five years 32,400 31,936
Due after five years through ten years 28,938 28,578
Due after ten years 8,059 7,927
Mortgage backed securities 429,490 415,739
Auction rate securities 67,999 67,999
Other 12,263 12,046
-------- --------
$648,539 $633,362
======== ========
Gross gains and losses from investment securities of $138 and $69 in 2005, $177
and $158 in 2004, and $0 and $265 in 2003, respectively, were recognized on the
sale of securities.
NOTE 5. LOANS
The components of the Company's loan portfolio as of December 31 are as follows:
2005 2004
---------- ----------
Construction and land development $ 432,668 $ 323,176
Commercial real estate 727,210 491,949
Residential real estate 272,861 116,360
Commercial and industrial 342,452 241,292
Consumer 20,434 17,682
Less: net deferred loan fees (2,288) (1,924)
---------- ----------
1,793,337 1,188,535
Less: Allowance for loan losses (21,192) (15,271)
---------- ----------
$1,772,145 $1,173,264
========== ==========
Information about impaired and non-accrual loans as of and for the years ended
December 31 is as follows:
2005 2004
---- ------
Total impaired loans, all with an allowance for loan losses $107 $1,718
==== ======
Related allowance for loan losses on impaired loans $ 26 $ 498
==== ======
Total non accrual loans $107 $1,591
==== ======
Loans past due 90 days or more and still accruing $ 34 $ 2
==== ======
74
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 5. LOANS (continued)
2005 2004 2003
---- ------ ----
Average balance during the year on impaired loans $115 $1,553 $434
==== ====== ====
Interest income recognized on impaired loans $ 1 $ 61 $ 6
==== ====== ====
The Company is not committed to lend significant additional funds on these
impaired loans.
Changes in the allowance for loan losses for the years ended December 31
are as follows:
2005 2004 2003
------- ------- -------
Balance, beginning $15,271 $11,378 $ 6,449
Provision charged to operating expense 6,179 3,914 5,145
Recoveries of amounts charged off 196 157 420
Less amounts charged off (454) (178) (1,373)
Reclassification from other liabilities -- -- 737
------- ------- -------
Balance, ending $21,192 $15,271 $11,378
======= ======= =======
In accordance with regulatory reporting requirements and American Institute of
Certified Public Accountants' Statement of Position 01-06, Accounting by Certain
Entities that Lend to or Finance the Activities of Others, the Company has
reclassified the portion of its allowance for loan losses that relates to
off-balance sheet risk during the year ended December 31, 2002. During the year
ended December 31, 2003, management reevaluated its methodology for calculating
this amount and reclassified an amount from other liabilities to the allowance
for loan losses. The liability amount was approximately $455 and $307 as of
December 31, 2005 and 2004, respectively.
NOTE 6. PREMISES AND EQUIPMENT
The major classes of premises and equipment and the total accumulated
depreciation and amortization as of December 31 are as follows:
2005 2004
-------- --------
Land $ 20,505 $ 13,355
Bank premises 24,214 6,246
Equipment and furniture 20,517 15,120
Leasehold improvements 2,870 4,306
Construction in progress 3,748 --
-------- --------
71,854 39,027
Less accumulated depreciation and amortization (13,424) (9,663)
-------- --------
Net premises and equipment $ 58,430 $ 29,364
======== ========
Our remaining commitment related to our construction in progress at December 31,
2005 is $16,166.
NOTE 7. INCOME TAX MATTERS
The cumulative tax effects of the primary temporary differences as of December
31 are shown in the following table:
2005 2004
------- -------
Deferred tax assets:
Allowance for loan losses $ 7,800 $ 5,500
Unrealized loss on available for sale securities 5,500 2,800
Organizational costs 200 200
Accrual to cash adjustment -- 200
Deferred compensation 200 100
Other 507 31
------- -------
Total deferred tax assets 14,207 8,831
------- -------
Deferred tax liabilities:
Deferred loan costs (1,600) (800)
Premises and equipment (1,300) (1,700)
Federal Home Loan Bank dividend (500) (300)
Other -- (82)
------- -------
Total deferred tax liabilities (3,400) (2,882)
------- -------
NET DEFERRED TAX ASSET $10,807 $ 5,949
======= =======
75
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 7. INCOME TAX MATTERS (continued)
As of December 31, 2005 and 2004, no valuation allowance was considered
necessary as management believes it is more likely than not that the deferred
tax assets will be realized due to taxes paid in prior years or future
operations. The provision for income taxes charged to operations consists of the
following for the years ended December 31:
2005 2004 2003
------- ------- -------
Current $17,530 $11,030 $ 5,641
Deferred (2,158) (69) (1,470)
------- ------- -------
Total provision for income taxes $15,372 $10,961 $ 4,171
======= ======= =======
The reasons for the differences between the statutorty federal income tax rate
and the effective tax rates are summarized as follows:
2005 2004 2003
------- ------- ------
Computed "expected" tax expense $15,203 $10,856 $4,501
Increase (decrease) resulting from:
State income taxes, net of federal benefits and
dividends received deductions 670 580 145
Bank-owned life insurance (582) (420) (338)
Tax-exempt income (133) (116) (116)
Nondeductible expenses 168 100 59
Other 46 (39) (80)
------- ------- ------
$15,372 $10,961 $4,171
======= ======= ======
NOTE 8. DEPOSITS
At December, 31 2005, the scheduled maturities of all time deposits are as
follows:
2006 $331,735
2007 6,151
2008 1,168
2009 2,616
2010 289
--------
$341,959
========
As of December 31, 2005 and 2004, approximately $313,033 and $255,415,
respectively, of the Company's non-interest bearing demand deposits consisted of
demand accounts maintained by title insurance companies. The Company provides an
analysis earnings credit for certain title company depositors, which credit is
calculated by applying a variable crediting rate to such customers' average
monthly deposit balances, less any internal charges incurred, which are
comprised of common deposit service charges. We then purchase external services
on behalf of these customers based on the amount of the earnings credit. These
external services, which are commonly offered in the banking industry, include
courier, bookkeeping and data processing services. The expense of these external
services totaled $2,105, $701 and $95 for the years ended December 31, 2005,
2004 and 2003, respectively, and is included in customer service expense in the
accompanying statements of income.
NOTE 9. BORROWED FUNDS
The Company has a line of credit available from the Federal Home Loan Bank
(FHLB). Borrowing capacity is determined based on collateral pledged, generally
consisting of securities, at the time of the borrowing. The Company also has
borrowings from other sources pledged by securities. A summary of the Company's
borrowings as of December 31, 2005 and 2004 follows:
2005 2004
------- --------
SHORT TERM
FHLB Advances and other (weighted average rate is 2005: 4.00% and 2004: 2.21%) $ 7,000 $159,900
Securities sold under agreement to repurchase (weighted average
rate is 2005: 2.74% and 2004: 2.32%) 78,170 25,594
------- --------
Due in one year or less $85,170 $185,494
======= ========
LONG TERM
FHLB Advances (weighted average rate is 2005 and 2004: 2.63%) $63,700 $ 63,700
Other long term debt (weighted average rate is 8.79%) 9,812 --
------- --------
Due in over one year $73,512 $ 63,700
======= ========
FHLB advances and other borrowings mature as of December 31, 2005 as follows:
76
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 9. BORROWED FUNDS (continued)
Year Ending December 31:
2006 $34,501
2007 29,410
2008 118
2009 131
2010 9,352
-------
$73,512
=======
On December 30, 2005, the Company purchased the corporate headquarters of
BankWest of Nevada. The location was previously leased by the Company. In
connection with this purchase, the Company assumed a note on the building. The
note amount at December 31, 2005 is $9,812, has a fixed interest rate of 8.79%,
and matures in 2010. The note is secured by the purchased building.
The Company's banks have entered into agreements under which they can borrow up
to $84,000 on an unsecured basis. The lending institutions will determine the
interest rate charged on borrowings at the time of the borrowing. The Company
has also entered into an agreement under which it can borrow up to $10,000. The
line of credit is secured by BankWest of Nevada stock and carries an interest
rate at the federal funds borrowing rate plus 1.50%. There were no borrowings
against these lines of credit at December 31, 2005 or 2004.
NOTE 10. JUNIOR SUBORDINATED DEBT
In December 2002, BankWest Nevada Capital Trust II was formed and issued
floating rate Cumulative Trust Preferred Securities, which are classified as
junior subordinated debt in the accompanying balance sheet in the amount of
$15,464. The rate is based on the three month London Interbank Offered Rate
(LIBOR) plus 3.35%. Three month LIBOR was 4.54% at December 31, 2005. The funds
raised from the capital trust's issuance of these securities were all passed to
the Company. The sole asset of the BankWest Nevada Capital Trust II is a note
receivable from the Company. These securities require quarterly interest
payments and mature in 2033. These securities may be redeemable at par beginning
in 2008.
In July 2001, BankWest Nevada Capital Trust I was formed and issued floating
rate Cumulative Trust Preferred Securities, which are classified as junior
subordinated debt in the accompanying balance sheet in the amount of $15,464.
The rate is based on the six month LIBOR plus 3.75%. Six month LIBOR was 4.70%
at December 31, 2005. The funds raised from the capital trust's issuance of
these securities were all passed to the Company. The sole asset of the BankWest
Nevada Capital Trust I is a note receivable from the Company. These securities
require semiannual interest payments and mature in 2031. These securities may be
redeemed in years 2006 through 2011 at a premium as outlined in the Indenture
Agreement.
In the event of certain changes or amendments to regulator y requirements or
federal tax rules, the preferred securities are redeemable. The Trusts are 100%
owned finance subsidiaries of the Company and the Trusts' obligations under the
preferred securities are fully and unconditionally guaranteed by the Company.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Financial instruments with off-balance sheet risk
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. They involve, to varying degrees, elements of credit risk in excess
of amounts recognized in the consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other parties to the financial instrument for these commitments is represented
by the contractual amounts of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. A summary of the contract amount of the Company's
exposure to off-balance sheet risk as of December 31 is as follows:
2005 2004
-------- --------
Commitments to extend credit, including unsecured loan
commitments of $111,522 in 2005 and $81,606 in 2004 $750,349 $423,767
Credit card guarantees 7,616 5,421
Standby letters of credit, including unsecured letters
of credit of $4,550 in 2005 and $1,264 in 2004 28,720 5,978
-------- --------
$786,685 $435,166
======== ========
77
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 11. COMMITMENTS AND CONTINGENCIES (continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties.
The Company guarantees certain customer credit card balances held by an
unrelated third party. These unsecured guarantees act to streamline the credit
underwriting process and are issued as a service to certain customers who wish
to obtain a credit card from the third party vendor. The Company recognizes
nominal fees from these arrangements and views them strictly as a means of
maintaining good customer relationships. The guarantee is offered to those
customers who, based solely upon management's evaluation, maintain a
relationship with the Company that justifies the inherent risk. All such
guarantees exist for the life of each respective credit card relationship. The
Company would be required to perform under the guarantee upon a customer's
default on the credit card relationship with the third party. Historical losses
under this program have been nominal. Upon entering into a credit card
guarantee, the Company records the related liability at fair value pursuant to
FASB Interpretation 45 (FIN 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. Thereafter, the related liability is evaluated pursuant to FASB 5. The
total credit card balances outstanding at December 31, 2005 and 2004 were $1,566
and $1,109, respectively.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required as the Company deems necessary. Essentially
all letters of credit issued have expiration dates within one year. Upon
entering into a letter of credit, the Company records the related liability at
fair value pursuant to FIN 45. Thereafter, the related liability is evaluated
pursuant to FASB 5.
The total liability for financial instruments with off-balance sheet risk as of
December 31, 2005 and 2004 was $455 and $307, respectively.
LEASE COMMITMENTS
The Company leases certain premises and equipment under noncancelable operating
leases expiring through 2015. The following is a schedule of future minimum
rental payments under these leases at December 31, 2005:
Year Ending December 31:
2006 $ 2,053
2007 2,168
2008 2,110
2009 1,999
2010 2,043
Thereafter 6,034
-------
$16,407
=======
Rent expense of $3,902, $3,174 and $2,017 is included in occupancy expenses for
the years ended December 31, 2005, 2004 and 2003, respectively.
CONCENTRATIONS
The Company grants commercial, construction, real estate and consumer loans to
customers through branch offices located in the Company's primary markets. The
Company's business is concentrated in these areas and the loan portfolio
includes significant credit exposure to the commercial real estate industry of
these areas. As of December 31, 2005 and 2004, commercial real estate related
loans accounted for approximately 65% and 68% of total loans, respectively, and
approximately 7% of commercial real estate loans are secured by undeveloped
land. Substantially all of these loans are secured by first liens with an
initial loan to value ratio of generally not more than 80%. Approximately
one-half of these real estate loans are owner occupied. In addition,
approximately 5% and 7% of total loans are unsecured as of December 31, 2005 and
2004, respectively. Approximately 29% of our residential real estate loan
portfolio is comprised of interest only loans. These loans have an average
loan-to-value of less than 60%.
The loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers. The Company's policy for requiring collateral
is to obtain collateral whenever it is available or desirable, depending upon
the degree of risk the Company is willing to take.
78
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 12. STOCK OPTIONS, STOCK WARRANTS AND STOCK APPRECIATION RIGHTS
During 2005, the stockholders approved the 2005 Stock Incentive Plan (the Plan).
The Plan is an amendment and restatement of our prior stock compensation plans,
and therefore supersedes the prior plans while preserving the material terms of
the prior plan awards. The Plan gives the Board of Directors the authority to
grant up to 3,253,844 stock awards consisting of unrestricted stock, stock
units, dividend equivalent rights, stock options (incentive and non-qualified),
stock appreciation rights, restricted stock, and performance and annual
incentive awards.
The Plan contains certain individual limits on the maximum amount that can be
paid in cash under the plan and on the maximum number of shares of common stock
that may be issued under the Plan in a calendar year. The maximum number of
shares subject to options or stock appreciation rights that can be issued under
the Plan to any person is 150,000 shares in any calendar year. The maximum
number of shares that can be issued under the Plan to any person, other than
pursuant to an option or stock appreciation right, is 150,000 in any calendar
year. The maximum amount that may be earned as an annual incentive award or
other cash award in any fiscal year by any one person is $5.0 million and the
maximum amount that may be earned as a performance award or other cash award in
respect of a performance period by any one person is $15.0 million.
The number of awards available to grant as of December 31, 2005 is 960,700.
STOCK OPTIONS
A summary of stock option activity during the years ended December 31 follows:
2005 2004 2003
---------- ---------- ----------
Outstanding options, beginning of year 1,986,008 1,680,308 1,359,850
Granted 406,500 439,500 442,000
Exercised (228,114) (97,800) (108,042)
Forfeited (39,600) (36,000) (13,500)
---------- ---------- ----------
Outstanding options, end of year 2,124,794 1,986,008 1,680,308
========== ========== ==========
Options exercisable, end of year 783,494 642,908 450,208
Weighted-average exercise price:
Outstanding options, beginning of year $ 7.96 $ 6.70 $ 5.87
Options granted, during the year $ 17.88 $ 12.17 $ 7.85
Options exercised, during the year $ 5.30 $ 4.24 $ 1.64
Options outstanding, end of year $ 10.10 $ 7.96 $ 6.70
Options forfeited, during the year $ 10.92 $ 3.79 $ 7.03
Options exercisable, end of year $ 7.43 $ 6.04 $ 4.90
Weighted-average expiration (in years) 7.63 8.03 8.43
A further summary of stock options outstanding at December 31, 2005 is as
follows:
Outstanding Options Exercisable options
- ----------------------------------------------------------------------------- -----------------------------------
Weighted average
Weighted average remaining contractual Weighted average
Exercise price Number of shares exercise price life (years) Number of shares exercise price
- -------------- ---------------- ---------------- --------------------- ---------------- ----------------
$1.39 - $3.79 27,500 $ 3.01 3.62 27,500 $ 3.01
$6.33 - $9.00 1,296,394 7.23 6.97 690,294 7.10
$12.00 - $16.50 733,650 14.09 8.80 62,700 12.05
$22.00 - $26.74 38,000 22.00 8.94 -- --
$26.75 - $30.75 29,250 28.51 9.28 3,000 28.00
During 2005, the Company granted 406,500 incentive and nonqualifying stock
options. Substantially all of these options vest over five years at 20% upon
each anniversary date of the grant. These options expire ten years from the date
of grant, and their weighted average exercise price is $17.88. Also, the Company
granted 27,000 shares of restricted stock. The restricted stock vests at 20% per
year, starting one year from the date of grant. The expense recorded in 2005
related to these restricted shares was $82.
During 2004, the Company granted 439,500 incentive and nonqualifying stock
options. All of these options vest over five years at 20% upon each anniversary
date of the grant. These options expire ten years from the date of grant, and
their weighted average exercise price is $12.17.
79
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 12. STOCK OPTIONS, STOCK WARRANTS AND STOCK APPRECIATION RIGHTS (continued)
STOCK OPTIONS (continued)
During 2003, the Company granted 442,000 incentive and nonqualifying stock
options. All of these options vest over five years at 20% upon each anniversary
date of the grant. These options expire ten years from the date of grant, and
their weighted average exercise price is $7.85.
STOCK APPRECIATION RIGHTS
On February 14, 2000, the Company's Board of Directors approved the 2000 Stock
Appreciation Rights Plan ("SAR Plan"). The SAR Plan authorized 150,000 rights to
be granted to certain directors, officers and key employees at the discretion of
the Board of Directors. Each right gave the grantee the right to receive cash
payment from the Company equal to the excess of (a) the exercise price of the
SAR over, (b) grant price of the SAR. Grantees may exercise their rights at any
time between the time a right vests and five years following the date of grant.
Rights granted under the SAR Plan vested in annual installments of 25% beginning
one year following the vesting commencement date. Pursuant to the plan, prior to
an initial public offering, the exercise price is equal to the book value. As
such, changes in the book value of the Company's common stock were reflected as
a charge to compensation expense for each period in which the rights are
outstanding pursuant to FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans. In 2003, the
Board of Directors approved an amendment to the plan that effectively tripled
the number of rights granted to each participating employee. In 2005, the SAR
Plan was superseded by the 2005 Stock Incentive Plan. The expense recorded in
2004 and 2003 was approximately $93 and $568, respectively. No SARs were
outstanding as of December 31, 2005 and no expense was recorded in 2005. All
outstanding rights were exercised in 2004 and total payments to the participants
in 2004 were approximately $820.
Information concerning stock appreciation rights for the year ended December 31
is as follows:
2005 2004 2003
---- -------- -------
Rights outstanding, beginning of year -- 216,000 72,000
Granted -- -- --
Forfeited -- -- --
Exercised -- (216,000) --
Shares granted through amendment of plan -- -- 144,000
--- -------- -------
Right outstanding, end of year -- -- 216,000
=== ======== =======
Rights exercisable, end of year -- -- 216,000
STOCK WARRANTS
In 2002, in connection with a common stock offering the Company entered into a
warrant purchase agreement in which the Company authorized the sale and issuance
of 1,502,049 stock warrants. The warrants are exercisable at $7.62 and expire in
2010. During the years ended December 31, 2005 and 2004, 105,823 and 20,481
warrants were exercised, respectively. 1,375,745 warrants are outstanding as of
December 31, 2005.
NOTE 13. REGULATORY CAPITAL
The Company and the Banks are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve qualitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2005, that the Company and the Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 2005, the most recent notification from federal banking
agencies categorized the Company, BankWest of Nevada, Alliance Bank of Arizona
and Torrey Pines Bank as well-capitalized as defined by the banking agencies. To
be categorized as well-capitalized, the Banks must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table below.
80
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 13. REGULATORY CAPITAL (continued)
The actual capital amounts and ratios for the Banks and Company as of December
31 are presented in the following table:
For Capital To Be
Actual Adequacy Purposes Well Capitalized
---------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
AS OF DECEMBER 31, 2005:
Total Capital (to Risk Weighted Assets)
BankWest of Nevada $148,180 11.1% $106,877 8.0% $133,597 10.0%
Alliance Bank of Arizona 50,374 10.5% 38,371 8.0% 47,963 10.0%
Torrey Pines Bank 37,498 10.8% 27,673 8.0% 34,591 10.0%
Company 300,198 13.8% 173,759 8.0% 217,198 10.0%
Tier I Capital (to Risk Weighted Assets)
BankWest of Nevada 135,607 10.2% 53,439 4.0% 80,158 6.0%
Alliance Bank of Arizona 44,817 9.3% 19,185 4.0% 28,778 6.0%
Torrey Pines Bank 33,981 9.8% 13,836 4.0% 20,755 6.0%
Company 278,550 12.8% 86,879 4.0% 130,319 6.0%
Tier I Capital (to Average Assets)
BankWest of Nevada 135,607 7.4% 73,422 4.0% 91,777 5.0%
Alliance Bank of Arizona 44,817 8.8% 20,368 4.0% 25,460 5.0%
Torrey Pines Bank 33,981 8.7% 15,608 4.0% 19,510 5.0%
Company 278,550 10.2% 109,727 4.0% 137,159 5.0%
As of December 31, 2004:
Total Capital (to Risk Weighted Assets)
BankWest of Nevada $105,544 10.4% $ 80,968 8.0% $101,210 10.0%
Alliance Bank of Arizona 35,258 12.6% 22,428 8.0% 28,035 10.0%
Torrey Pines Bank 28,809 14.4% 16,013 8.0% 20,016 10.0%
Company 178,784 12.0% 119,632 8.0% 149,540 10.0%
Tier I Capital (to Risk Weighted Assets)
BankWest of Nevada 95,449 9.4% 40,484 4.0% 60,726 6.0%
Alliance Bank of Arizona 31,810 11.3% 11,214 4.0% 16,821 6.0%
Torrey Pines Bank 26,774 13.4% 8,006 4.0% 12,010 6.0%
Company 163,205 10.9% 59,816 4.0% 89,724 6.0%
Tier I Capital (to Average Assets)
BankWest of Nevada 95,449 6.1% 62,970 4.0% 78,713 5.0%
Alliance Bank of Arizona 31,810 10.3% 12,394 4.0% 15,492 5.0%
Torrey Pines Bank 26,774 10.9% 9,830 4.0% 12,288 5.0%
Company 163,205 7.7% 85,321 4.0% 106,651 5.0%
Additionally, State of Nevada banking regulations restrict distribution of the
net assets of BankWest of Nevada (BankWest) because such regulations require the
sum of BankWest's stockholders' equity and reserve for loan losses to be at
least 6% of the average of BankWest's total daily deposit liabilities for the
preceding 60 days. As a result of these regulations, approximately $94,584 and
$74,283 of BankWest's stockholders' equity was restricted at December 31, 2005
and 2004, respectively.
Alliance Bank of Arizona and Torrey Pines Bank have agreed to maintain a total
Tier 1 capital to total assets ratio of at least 8% for their first three years
of existence.
The States of Nevada and Arizona require that trust companies maintain capital
of at least $300 and $500, respectively. Premier Trust meets these capital
requirements as of December 31, 2005 and 2004.
NOTE 14. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) employee benefit plan for all eligible
employees. Participants are able to defer between 1% and 15% (up to a maximum of
$14 for those under 50 years of age) of their annual compensation. The Company
may elect to contribute a discretionary amount each year. The Company's total
contribution was $596, $385 and $230 for the years ended December 31, 2005, 2004
and 2003, respectively.
81
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 15. TRANSACTIONS WITH RELATED PARTIES
Principal stockholders of the Company and officers and directors, including
their families and companies of which they are principal owners, are considered
to be related parties. These related parties were loan customers of, and had
other transactions with, the Company in the ordinary course of business. In
management's opinion, these loans and transactions were on the same terms as
those for comparable loans and transactions with unrelated parties.
LOAN TRANSACTIONS
The aggregate activity in such loans for the years ended December 31 was as
follows:
2005 2004
-------- --------
Balance, beginning $ 27,087 $ 18,222
New loans 31,650 44,380
Repayments (31,129) (35,515)
-------- --------
Balance, ending $ 27,608 $ 27,087
======== ========
None of these loans are past due, on nonaccrual or have been restructured to
provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower. There were no loans to
a related party that were considered classified loans at December 31, 2005 or
2004.
Total loan commitments outstanding with related parties total approximately
$25,824 and $35,418 at December 31, 2005 and 2004, respectively.
OTHER TRANSACTIONS
In 2003, the Company purchased land from a related party in the amount of
$1,165. In the fourth quarter of 2004, the Company began leasing office space to
a related party. Total rent income recognized under this lease during the years
ended December 31, 2005 and 2004 was $126 and $26, respectively.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December 31
is as follows:
2005 2004
----------------------- -----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 111,150 $ 111,150 $ 92,282 $ 92,282
Federal funds sold 63,186 63,186 23,115 23,115
Securities held to maturity 115,171 112,601 129,549 128,984
Securities available for sale 633,362 633,362 659,073 659,073
Federal Home Loan Bank stock 14,456 14,456 15,097 15,097
Loans, net 1,772,145 1,759,336 1,173,264 1,170,202
Accrued interest receivable 10,545 10,545 8,359 8,359
Financial liabilities:
Deposits 2,393,812 2,394,199 1,756,036 1,756,297
Accrued interest payable 2,634 2,634 2,439 2,439
Other borrowed funds 158,682 157,639 249,194 248,048
Junior subordinated debt 30,928 30,928 30,928 30,928
INTEREST RATE RISK
The Company assumes interest rate risk (the risk to the Company's earnings and
capital from changes in interest rate levels) as a result of its normal
operations. As a result, the fair values of the Company's financial instruments
as well as its future net interest income will change when interest rate levels
change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine our change in net portfolio value and net interest income resulting
from hypothetical changes in interest rates. If potential changes to net
portfolio value and net interest income resulting from hypothetical interest
rate changes are not within the limits established by the Board of Directors,
the Board of Directors may direct management to adjust the asset and liability
mix to bring interest rate risk within board-approved limits. As of December 31,
2005, the Company's interest rate risk profile was within all Board-prescribed
limits.
82
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
INTEREST RATE RISK (continued)
The Company manages its interest rate risk through its investment and repurchase
activities. The Company seeks to maintain a moderately asset sensitive position
(i.e., interest income in a rising rate environment would rise more than the
Company's interest expense and conversely in a falling interest rate
environment).
FAIR VALUE OF COMMITMENTS
The estimated fair value of the standby letters of credit at December 31, 2005
and 2004 is insignificant. Loan commitments on which the committed interest rate
is less than the current market rate are also insignificant at December 31, 2005
and 2004.
NOTE 17. PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
-------- --------
ASSETS
Cash and cash equivalents $ 12,518 $ 7,185
Securities available for sale 49,926 --
Investment in subsidiaries 212,970 156,826
Other assets 1,201 1,221
-------- --------
$276,615 $165,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest and other liabilities $ 1,464 $ 733
Junior subordinated debt 30,928 30,928
-------- --------
Total liabilities 32,392 31,661
-------- --------
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 167,996 80,459
Retained earnings 86,281 58,216
Deferred compensation - restricted stock (364) --
Accumulated other comprehensive loss (9,692) (5,106)
-------- --------
Total stockholders' equity 244,223 133,571
-------- --------
$276,615 $165,232
======== ========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
------- ------- -------
Interest income $ 929 $ 97 $ --
Interest expense on borrowings 2,112 1,539 1,494
------- ------- -------
Net interest expense (1,183) (1,442) (1,494)
------- ------- -------
Other income: 30,629 22,096 10,102
Income from consolidated subsidiaries
Other income 77 -- --
------- ------- -------
Total other income 30,706 22,096 10,102
Expenses:
Salaries and employee benefits 1,783 330 212
Other 466 383 218
------- ------- -------
2,249 713 430
------- ------- -------
Income before income tax benefit 27,274 19,941 8,178
Income tax benefit 791 116 511
------- ------- -------
Net income $28,065 $20,057 $ 8,689
======= ======= =======
83
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 17. PARENT COMPANY FINANCIAL INFORMATION (continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
-------- -------- --------
Cash Flows from Operating Activities:
Net income $ 28,065 $ 20,057 $ 8,689
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in net undistributed earnings of consolidated (30,629) (22,096) (10,102)
subsidiaries
Net accretion of securities discounts (877) -- --
(Increase) decrease in other assets 44 (92) 336
Increase in other liabilities 731 129 436
Other, net 26 -- --
-------- -------- --------
Net cash used in operating activities (2,640) (2,002) (641)
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of securities available for sale (49,118) -- --
Investment in subisidiaries (30,000) (27,623) (39,309)
-------- -------- --------
Net cash used in investing activities (79,118) (27,623) (39,309)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options and stock warrants 2,028 571 178
Proceeds from stock issuance, net 85,063 14,955 25,507
Repurchase of Treasury stock -- -- (678)
-------- -------- --------
Net cash provided by financing activities 87,091 15,526 25,007
-------- -------- --------
Increase (decrease) in cash and cash equivalents 5,333 (14,099) (14,943)
Cash and Cash Equivalents, beginning of year 7,185 21,284 36,227
-------- -------- --------
Cash and Cash Equivalents, end of year $ 12,518 $ 7,185 $ 21,284
======== ======== ========
NOTE 18. SEGMENT INFORMATION
The Company manages its core bank operations and prepares management reports
with a primary focus on each banking subsidiary. The operating segment
identified as "Other" includes Western Alliance Bancorporation and its non-bank
subsidiaries, Miller/Russell & Associates, Inc., and Premier Trust, Inc. These
non-bank operations are not significant relative to the entity as a whole, and
are therefore not disclosed separately. Non-interest income reflected for the
"Other" category relates to Western Alliance Bancorporation's income from
consolidated subsidiaries, and for 2005 and 2004 includes asset management fees
earned by the non-bank subsidiaries.
The accounting policies of the individual segments are the same as those of the
Company described in Note 1. Transactions between operating segments are
primarily conducted at fair value, resulting in profits that are eliminated for
reporting consolidated results of operations. The Company allocates centrally
provided services to the business segments based upon estimated usage of those
services.
The following is a summary of selected operating segment information as of and
for the years ended December 31, 2005, 2004 and 2003:
84
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 18. SEGMENT INFORMATION (continued)
BankWest Alliance Bank Torrey Pines Intersegment Consolidated
of Nevada of Arizona Bank Other Eliminations Company
---------- ------------- ------------ -------- ------------ ------------
2005:
Assets $1,886,742 $519,961 $405,011 $284,370 $(238,813) $2,857,271
Gross loans and deferred fees 1,083,599 404,644 305,094 -- -- 1,793,337
Less: Allowance for loan losses (12,291) (5,456) (3,445) -- -- (21,192)
---------- -------- -------- -------- --------- ----------
Net loans 1,071,308 399,188 301,649 -- -- 1,772,145
---------- -------- -------- -------- --------- ----------
Deposits 1,606,750 457,177 335,292 -- (5,407) 2,393,812
Stockholders' equity 127,969 43,627 33,386 251,283 (212,042) 244,223
Number of branch locations 5 7 4 -- -- 16
Full-time equivalent employees 299 122 77 39 -- 537
Net interest income (loss) $ 70,004 $ 18,878 $ 14,646 $ (1,168) $ (18) $ 102,342
Provision for loan losses 2,692 2,040 1,447 -- -- 6,179
---------- -------- -------- -------- --------- ----------
Net interest income (loss) after
provision for loan losses 67,312 16,838 13,199 (1,168) (18) 96,163
Noninterest income 5,335 1,359 738 36,377 (31,671) 12,138
Noninterest expense (34,669) (13,298) (10,234) (7,719) 1,056 (64,864)
---------- -------- -------- -------- --------- ----------
Income before income taxes 37,978 4,899 3,703 27,490 (30,633) 43,437
Income tax expense (benefit) 12,636 1,874 1,497 (635) -- 15,372
---------- -------- -------- -------- --------- ----------
Net income $ 25,342 $ 3,025 $ 2,206 $ 28,125 $ (30,633) $ 28,065
========== ======== ======== ======== ========= ==========
BankWest Alliance Bank Torrey Pines Intersegment Consolidated
of Nevada of Arizona Bank Other Eliminations Company
---------- ------------- ------------ -------- ------------ ------------
2004:
Assets $1,578,332 $332,805 $257,516 $173,748 $(165,552) $2,176,849
Gross loans and deferred fees 790,312 234,141 164,082 -- -- 1,188,535
Less: Allowance for loan losses (9,857) (3,416) (1,998) -- -- (15,271)
---------- -------- -------- -------- --------- ----------
Net loans 780,455 230,725 162,084 -- -- 1,173,264
---------- -------- -------- -------- --------- ----------
Deposits 1,287,615 277,231 199,382 -- (8,192) 1,756,036
Stockholders' equity 91,361 31,189 26,405 140,634 (156,018) 133,571
Number of branch locations 5 5 3 -- -- 13
Full-time equivalent employees 260 79 56 29 -- 424
Net interest income (loss) $ 54,215 $ 10,225 $ 8,141 $ (1,444) $ (2) $ 71,135
Provision for loan losses 1,417 1,657 840 -- -- 3,914
---------- -------- -------- -------- --------- ----------
Net interest income (loss) after
provision for loan losses 52,798 8,568 7,301 (1,444) (2) 67,221
Noninterest income 4,851 774 604 25,149 (22,652) 8,726
Noninterest expense (27,286) (8,074) (6,301) (3,705) 437 (44,929)
---------- -------- -------- -------- --------- ----------
Income before income taxes 30,363 1,268 1,604 20,000 (22,217) 31,018
Income tax expense (benefit) 10,033 422 584 (78) -- 10,961
---------- -------- -------- -------- --------- ----------
Net income $ 20,330 $ 846 $ 1,020 $ 20,078 $ (22,217) $ 20,057
========== ======== ======== ======== ========= ==========
85
2005 ANNUAL REPORT
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 18. SEGMENT INFORMATION (continued)
BankWest Alliance Bank Torrey Pines Intersegment Consolidated
of Nevada of Arizona Bank Other Eliminations Company
---------- ------------- ------------ -------- ------------ ------------
2003:
Assets $1,244,549 $187,314 $157,156 $130,953 $(143,199) $1,576,773
Gross loans and deferred fees 557,868 106,239 68,971 -- -- 733,078
Less: Allowance for loan losses (8,460) (1,759) (1,159) -- -- (11,378)
---------- -------- -------- -------- --------- ----------
Net loans 549,408 104,480 67,812 -- -- 721,700
---------- -------- -------- -------- --------- ----------
Deposits 917,983 115,726 82,265 -- (21,328) 1,094,646
Stockholders' equity 69,114 17,117 18,394 98,353 (105,527) 97,451
Number of branch locations 5 3 2 -- -- 10
Full-time equivalent employees 207 60 37 7 -- 311
Net interest income (loss) $ 37,615 $ 3,137 $ 1,768 $ (1,494) $ (1) $ 41,025
Provision for loan losses 2,227 1,759 1,159 -- -- 5,145
---------- -------- -------- -------- --------- ----------
Net interest income (loss) after
provision for loan losses 35,388 1,378 609 (1,494) (1) 35,880
Noninterest income 4,043 245 102 10,102 (10,222) 4,270
Noninterest expense (20,016) (4,319) (2,645) (430) 120 (27,290)
---------- -------- -------- -------- --------- ----------
Income (loss) before income
taxes 19,415 (2,696) (1,934) 8,178 (10,103) 12,860
Income tax expense (benefit) 6,352 (981) (689) (511) -- 4,171
---------- -------- -------- -------- --------- ----------
Net income (loss) $ 13,063 $ (1,715) $ (1,245) $ 8,689 $ (10,103) $ 8,689
========== ======== ======== ======== ========= ==========
NOTE 19. QUARTERLY DATA (UNAUDITED)
Years Ended December 31,
------------------------------------------------------------------------------------
2005 2004
----------------------------------------- ----------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- -------
Interest and dividend income $ 38,975 $ 35,700 $ 31,812 $ 28,423 $ 27,075 $ 24,145 $ 20,758 $18,877
Interest expense 10,360 8,369 7,430 6,409 5,936 5,148 4,458 4,178
-------- -------- -------- -------- -------- -------- -------- -------
Net interest income 28,615 27,331 24,382 22,014 21,139 18,997 16,300 14,699
Provision for loan losses 1,962 1,283 1,187 1,747 751 1,256 415 1,492
-------- -------- -------- -------- -------- -------- -------- -------
Net interest income, after
provision for loan losses 26,653 26,048 23,195 20,267 20,388 17,741 15,885 13,207
Noninterest income 3,403 3,233 2,918 2,584 2,552 2,619 1,991 1,564
Noninterest expenses (17,050) (17,274) (15,967) (14,573 (12,873) (11,740) (10,624) (9,692)
-------- -------- -------- -------- -------- -------- -------- -------
Income before income taxes 13,006 12,007 10,146 8,278 10,067 8,620 7,252 5,079
Income tax expense 4,564 4,258 3,593 2,957 3,638 3,071 2,602 1,650
-------- -------- -------- -------- -------- -------- -------- -------
Net income $ 8,442 $ 7,749 $ 6,553 $ 5,321 $ 6,429 $ 5,549 $ 4,650 $ 3,429
======== ======== ======== ======== ======== ======== ======== =======
Earnings per share:
Basic $ 0.37 $ 0.34 $ 0.35 $ 0.29 $ 0.35 $ 0.33 $ 0.28 $ 0.21
======== ======== ======== ======== ======== ======== ======== =======
Diluted $ 0.34 $ 0.31 $ 0.32 $ 0.27 $ 0.33 $ 0.31 $ 0.26 $ 0.19
======== ======== ======== ======== ======== ======== ======== =======
86
WESTERN ALLIANCE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
2005, 2004 AND 2003
NOTE 20. INITIAL PUBLIC OFFERING
On June 29, 2005, the Company's registration statement on Form S-1 related to
the initial public offering of shares of the Company's common stock was declared
effective. The Company signed an underwriting agreement on June 29, 2005, which
was on a firm commitment basis, pursuant to which the underwriters agreed to
purchase 3,750,000 shares of common stock. On July 1, 2005, the principal
underwriter exercised the over-allotment to purchase an additional 450,000
shares of the Company's common stock.
The total price to the public for the shares offered and sold by the Company,
including the over-allotment, was $92.4 million. The amount of expenses incurred
by the Company in connection with the offering includes approximately $6.0
million of underwriting discounts and commission and offering expenses of
approximately $1.3 million.
NOTE 21. SUBSEQUENT EVENTS
On January 17, 2006, the Board of Directors approved and granted 132,500
nonqualified stock options and 116,250 shares of restricted stock to various
employees. The options have an exercise price of $29.00, vest over four years at
25% per year, and expire in 7 years, and the shares of restricted stock vest 50%
on the second anniversary of the grant date and 50% on the third anniversary of
the grant date. We estimate the total tax deductible compensation expense we
will incur in 2006 related to these stock options and shares of restricted stock
is $1.4 million.
On January 3, 2006, the Company announced a definitive agreement to acquire
Intermountain First Bancorp (Intermountain), the parent company of Nevada First
Bank. At December 31, 2005, Intermountain had approximately $459.4 million in
assets, $374.2 million in total loans, $395.5 million in deposits and $31.7
million in stockholders' equity. Under the terms of the agreement, Intermountain
shareholders may elect to receive either 2.44 shares of the Company's common
stock or $71.30 in cash for each Intermountain share, subject to proration and
allocation procedures to ensure that at least 60% of the outstanding shares of
Intermountain common stock will be exchanged for shares of the Company's common
stock. The total value of the transaction is estimated to be approximately $110
million.
On January 17, 2006, the Company announced a definitive agreement to acquire
Bank of Nevada. At December 31, 2005, Bank of Nevada had approximately $283.0
million in assets, $217.4 million in total loans, $254.4 million on deposits and
$25.6 million in stockholders' equity. Under the terms of the Agreement, Bank of
Nevada shareholders will receive $80.187 in cash for each share of Bank of
Nevada common stock. The total value of the transaction is estimated to be
approximately $74 million.
87
WESTERN ALLIANCE BANCORPORATION
(MAP)
STOCK LISTING
Western Alliance Bancorporation is listed and trades on the New York Stock
Exchange. Our trading symbol is WAL
STOCKHOLDERS
12/31/05: 22,810,491 common shares outstanding.
FORM 10-K
The Company will send the Western Alliance Bancorporation Form 10-K for
2005 (including the financial statements filed with the Securities and
Exchange Commission) without charge to any stockholder who asks for a copy
in writing. Stockholders also can ask for copies of any exhibit to the Form
10-K. The Company will charge a fee to cover expenses to prepare and send
any exhibits. Please send requests to: Corporate Secretary, Western
Alliance Bancorporation, 2700 W. Sahara Avenue, Las Vegas, Nevada 89102.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
McGladrey & Pullen, LLP
300 S. 4th Street, Suite 600
Las Vegas, Nevada 89101
(702) 759-4100
STOCKHOLDER COMMUNICATIONS
American Stock Transfer
59 Maiden Lane, Plaza Level
New York, New York 10038
(800) 937-5449
CORPORATE INFORMATION ANNUAL STOCKHOLDERS' MEETING
8:00 a.m., Tuesday, April 18, 2006
The Ritz Carlton
2401 E. Camelback Road
Phoenix, Arizona 85016
Proxy statement and form of proxy will be mailed to stockholders beginning
on or about March 20, 2006.
CONTACT INFORMATION
Western Alliance Bancorporation
2700 W. Sahara Avenue
Las Vegas, Nevada 89102
(800) 764-7619
ONLINE
westernalliancebancorp.com
(WESTERN ALLIANCE BANCORPORATION LOGO)
2700 West Sahara Avenue www.westernalliancebancorp.com
Las Vegas, Nevada 89102 www.bankwestofnevada.com
(800) 764-7619 www.alliancebankofarizona.com
www.torreypinesbank.com
www.miller-russell.com
www.premiertrust.com