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WAL > SEC Filings for WAL > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for WESTERN ALLIANCE BANCORPORATION

Form 10-Q for WESTERN ALLIANCE BANCORPORATION


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is designed to provide insight into Management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and unaudited interim consolidated financial statements and notes hereto and financial information appearing elsewhere in this report. Unless the context requires otherwise, the terms "Company," "we," and "our" refer to Western Alliance Bancorporation and its wholly-owned subsidiaries on a consolidated basis.

Forward-Looking Information

This report contains certain forward-looking statements, within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. In addition, the words "anticipates," "expects," "believes," "estimates" and "intends" or the negative of these terms or other comparable terminology 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. Except as required by law, the Company disclaims any obligation to update any such forward-looking statements or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Forward-looking statements contained in this Quarterly Report on Form 10-Q involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission and the following factors that could cause actual results to differ materially from those presented:

dependency on real estate and events that negatively impact real estate;

high concentration of commercial real estate, construction and development and commercial and industrial loans;

actual credit losses may exceed expected losses in the loan portfolio;

possible need for a valuation allowance against deferred tax assets;

the effects of interest rates and interest rate policy;

exposure of financial instruments to certain market risks may cause volatility in earnings;

dependence on low-cost deposits;

ability to borrow from Federal Home Loan Bank ("FHLB") or Federal Reserve Bank ("FRB";

events that further impair goodwill;

increase in the cost of funding as the result of changes to our credit rating;

expansion strategies may not be successful,

our ability to control costs,

risk associated with changes in internal controls and processes;

our ability to compete in a highly competitive market;

our ability to recruit and retain qualified employees, especially seasoned relationship bankers;

the effects of terrorist attacks or threats of war;

risk of audit of U.S. federal tax deductions;

perpetration of internal fraud;

risk of operating in a highly regulated industry and our ability to remain in compliance;

possible need to revalue our deferred tax assets if stock transactions result in limitations on deductibility of net operating losses or loan losses;

exposure to environmental liabilities related to the properties we acquire title;

recent legislative and regulatory changes including Emergency Economic Stabilization Act of 2008, or EESA, the American Recovery and Reinvestment Act of 2009, or ARRA, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations that might be promulgated thereunder;

cyber security risks; and

risks related to ownership and price of our common stock.


Table of Contents

For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and in item 1A of Part II of this Quarterly Report.

Financial Overview and Highlights

Western Alliance Bancorporation is a multi-bank holding company headquartered in Phoenix, Arizona that provides full service banking, lending, financial planning and investment advisory services through its subsidiaries.

Financial Result Highlights for the Third Quarter of 2012

Net income for the Company of $15.5 million, or $0.18 per diluted share, for the third quarter of 2012 compared to net income of $13.0 million, or $0.04 per diluted share, for the third quarter of 2011.

The significant factors impacting earnings of the Company during the third quarter of 2012 were:

Net income available to common shareholders of $15.1 million for the third quarter of 2012 compared to $3.6 million for the third quarter 2011.

Net interest income increased by 11.3% to $71.9 million for the third quarter of 2012 compared to $64.6 million for the third quarter of 2011.

Net interest margin for the third quarter of 2012 was 4.41% compared to 4.29% for the third quarter of 2011.

Provision for credit losses decreased to $8.9 million for the third quarter of 2012 compared to $11.2 million for the third quarter of 2011.

The Company experienced net loan growth in the third quarter of 2012 of $168 million to $5.33 billion. This increase was driven by growth in commercial and industrial loans and construction and land development loans. Total loans increased $806 million over the last twelve months from $4.53 billion at September 30, 2011.

Total deposits increased during the quarter by $161 million to $6.16 billion at September 30, 2012 from $6.0 billion at June 30, 2012, with growth primarily in money market accounts, certificates of deposits and savings accounts partially offset by declines in interest bearing demand and non-interest bearing demand. Deposits increased $529 million over the last twelve months from $5.63 billion at September 30, 2011.

Net charge-offs (annualized) to average loans outstanding declined to 0.70% in the third quarter of 2012 from 1.40% in the third quarter of 2011.

Other assets acquired through foreclosure declined to $78.2 million at September 30, 2012 from $89.1 million at December 31, 2011 and $86.7 million at September 30, 2011.

The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company's overall comparative performance for the three and nine months ended September 30, 2012 throughout the analysis sections of this report.


Table of Contents

A summary of our results of operations and financial condition and select metrics is included in the following table:

                                                    Three Months Ended                Nine Months Ended
                                                       September 30,                    September 30,
                                                  2012              2011             2012           2011
                                                                 (dollars in thousands)
Net income available to common stockholders    $    15,106       $     3,592       $  37,279       $ 9,968
Earnings per share-Basic                              0.18              0.04            0.46          0.12
Earnings per share-Diluted                            0.18              0.04            0.45          0.12
Total assets                                   $ 7,403,603       $ 6,545,890
Gross loans                                    $ 5,332,932       $ 4,526,501
Total deposits                                 $ 6,161,976       $ 5,632,888
Net interest margin                                   4.41 %            4.29 %          4.47 %        4.32 %
Return on average assets                              0.85 %            0.79 %          0.77 %        0.51 %
Return on average stockholders' equity                8.95 %            8.13 %          8.09 %        5.22 %

As a bank holding company, management focuses on key ratios in evaluating the Company's financial condition and results of operations. In the current economic environment, key ratios regarding asset credit quality and efficiency are more informative as to the financial condition of the Company than those utilized in a more normal economic environment such as return on equity and return on assets.

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. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, 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. The following table summarizes asset quality metrics:

                                                Three Months Ended               Nine Months Ended
                                                  September 30,                    September 30,
                                              2012             2011             2012             2011
                                                              (dollars in thousands)
Non-accrual loans                           $ 121,238        $ 113,713
Non-performing assets                         294,517          282,263
Non-accrual loans to gross loans                 2.27 %           2.51 %
Net charge-offs to average loans
(annualized)                                     0.70 %           1.40 %           0.99 %         1.35 %

Asset and Deposit Growth

The ability to originate new loans and attract new deposits is fundamental to the Company's asset growth. The Company's assets and liabilities are comprised primarily of loans and deposits. Total assets increased to $7.40 billion at September 30, 2012 from $6.84 billion at December 31, 2011. Total gross loans including net deferred fees and unearned income increased by $552.9 million, or 11.6%, to $5.33 billion as of September 30, 2012 compared to December 31, 2011. Total deposits increased $503.5 million, or 8.9%, to $6.16 billion as of September 30, 2012 from $5.66 billion as of December 31, 2011.


Table of Contents

RESULTS OF OPERATONS

The following table sets forth a summary financial overview for the three and
nine months ended September 30, 2012 and 2011:



                                      Three Months Ended                              Nine Months Ended
                                         September 30,             Increase             September 30,              Increase
                                      2012           2011         (Decrease)         2012           2011          (Decrease)
                                                            (in thousands, except per share amounts)
Consolidated Income Statement
Data:
Interest income                     $  78,669      $ 74,133      $      4,536      $ 233,952      $ 219,745      $     14,207
Interest expense                        6,723         9,548            (2,825 )       21,144         30,776            (9,632 )

Net interest income                    71,946        64,585             7,361        212,808        188,969            23,839
Provision for credit losses             8,932        11,180            (2,248 )       35,343         33,112             2,231

Net interest income after
provision for credit losses            63,014        53,405             9,609        177,465        155,857            21,608
Non-interest income                     6,982        13,082            (6,100 )       20,263         29,509            (9,246 )
Non-interest expense                   47,543        45,481             2,062        139,871        144,635            (4,764 )

Net income from continuing
operations before income taxes         22,453        21,006             1,447         57,857         40,731            17,126
Income tax expense                      6,752         7,514              (762 )       16,452         14,838             1,614

Income from continuing operations      15,701        13,492             2,209         41,405         25,893            15,512
Loss from discontinued
operations, net of tax benefit           (243 )        (481 )             238           (686 )       (1,500 )             814

Net income                          $  15,458      $ 13,011      $      2,447      $  40,719      $  24,393      $     16,326

Net income available to common
stockholders                        $  15,106      $  3,592      $     11,514      $  37,279      $   9,968      $     27,311

Income per share-basic              $    0.18      $   0.04      $       0.14      $    0.46      $    0.12      $       0.34

Income per share-diluted            $    0.18      $   0.04      $       0.14      $    0.45      $    0.12      $       0.33

The Company's primary source of income is interest income. Interest income for the three and nine months ended September 30, 2012 was $78.7 million and $234.0 million an increase of 6.1% and 6.5%, respectively, when comparing interest income for the three and nine months ended September 30, 2011. The increase was primarily from interest income from loans and investment securities. Interest income from loans increased by $4.0 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Interest income from investment securities increased by $0.7 million for the three month period ended September 30, 2012 compared to September 30, 2011. Despite the increased interest income, average yield on interest earning assets dropped 11 basis points for the three months ended September 30, 2012 compared to 2011, primarily the result of decreased yields on loans. Interest income from loans for the nine months ended September 30, 2012 grew by $11.3 million compared to the same period in 2011, while interest income from securities improved by $3.2 million for the first nine months of 2012 compared to 2011.

Interest expense for the three and nine months ended September 30, 2012 compared to 2011 decreased by 29.6% and 31.3%, respectively, to $6.7 million and $21.1 million, respectively. This decline was primarily due to decreased average cost of deposits, which declined 30 basis points to 0.38% for the three months ended September 30, 2012 compared to the same period in 2011 and declined 34 basis points to 0.41% for the nine months ended September 30, 2012 compared to the first nine months of 2011. Interest paid on borrowings and other debt increased slightly for the third quarter of 2012 compared to 2011, mostly the result of increased activity in FHLB advances, and decreased by $0.1 million for the nine months ended September 30, 2012 compared to 2011, primarily due to a change in the rate of one of the junior subordinated debt obligations from fixed to floating and a decrease in the outstanding customer repurchase balance partially offset by increased FHLB borrowings.

Net interest income increased by $7.4 million, or 11.4%, to $71.9 million for the three months ended September 30, 2012 compared to $64.6 million for the three months ended September 30, 2011. The increase in net interest income reflects a $723.8 million increase in average earning assets, offset by a $346.9 million increase in average interest bearing liabilities. The increased net interest margin was primarily due to a decrease in our average cost of funds by 30 basis points mostly the result of downward re-pricing of deposits. For the nine months ended September 30, 2012, net interest income increased by $23.8 million, or 12.6% to $212.8 million compared to $189.0 million for the nine months ended September 30, 2011. The increase in net interest income is attributable to increased loan and investment income, as well as decreased cost of funds.


Table of Contents

Net Interest Margin

The net interest margin is reported on a tax equivalent basis ("TEB"). A tax
equivalent adjustment is added to reflect interest earned on certain municipal
securities and loans that are exempt from Federal income tax. The following
tables set forth the average balances and interest income on a tax equivalent
basis and tax expense for the periods indicated:



                                                                               Three Months Ended September 30,
                                                                2012 (7)                                               2011
                                               Average                          Average             Average                          Average
                                               Balance        Interest       Yield/Cost (6)         Balance        Interest       Yield/Cost (6)
                                                                                    (dollars in thousands)
Interest-Earning Assets
Securities:
Taxable                                      $ 1,062,835      $   5,600                 2.11 %    $ 1,117,645      $   7,485                 2.66 %
Tax-exempt (1)                                   309,543          3,434                 6.83 %        107,085            871                 5.58 %

Total securities                               1,372,378          9,034                 3.17 %      1,224,730          8,356                 2.91 %
Federal funds sold and other                         851              0                 0.19 %            894              1                 0.44 %
Loans (1) (2) (3)                              5,191,175         69,580                 5.42 %      4,393,222         65,540                 5.92 %
Short term investments                           160,966             16                 0.04 %        380,831            213                 0.22 %
Restricted stock                                  33,504             39                 0.47 %         35,443             23                 0.26 %

Total earnings assets                          6,758,874         78,669                 4.81 %      6,035,120         74,133                 4.92 %
Nonearning Assets
Cash and due from banks                          120,128                                              121,712
Allowance for credit losses                      (98,169 )                                           (105,302 )
Bank-owned life insurance                        136,522                                              131,942
Other assets                                     356,643                                              374,825

Total assets                                 $ 7,273,998                                          $ 6,558,297

Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                            $   510,462      $     296                 0.23 %    $   466,177      $     410                 0.35 %
Savings and money market                       2,414,194          1,990                 0.33 %      2,127,756          3,184                 0.59 %
Time deposits                                  1,286,512          1,688                 0.52 %      1,499,269          3,388                 0.90 %

Total interest-bearing deposits                4,211,168          3,974                 0.38 %      4,093,202          6,982                 0.68 %
Short-term borrowings                            382,064            275                 0.29 %        147,549             77                 0.21 %
Long-term debt                                    73,575          1,987                10.80 %         73,183          2,024                10.97 %
Junior subordinated and subordinated debt         36,672            487                 5.31 %         42,664            465                 4.32 %

Total interest-bearing liabilities             4,703,479          6,723                 0.57 %      4,356,598          9,548                 0.87 %
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits            1,813,050                                            1,532,912
Other liabilities                                 70,702                                               33,873
Stockholders' equity                             686,767                                              634,914

Total Liabilities and Stockholders' Equity   $ 7,273,998                                          $ 6,558,297

Net interest income and margin (4)                            $  71,946                 4.41 %                     $  64,585                 4.29 %

Net interest spread (5)                                                                 4.24 %                                               4.05 %

(1) Yields on loans and securities have been adjusted to a tax-equivalent basis. Interest income has not been adjusted to a tax-equivalent basis. The tax-equivalent adjustments for the three months ended September 30, 2012 and 2011 were $2,655 and $634, respectively.

(2) Net loan fees of $1.8 million and $1.0 million are included in the yield computation for the three months ended September 30, 2012 and 2011, respectively.

(3) Includes nonaccrual loans.

(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.

(6) Annualized.

(7) Yields for 2012 were calculated on a 30-day month 360 days per year basis.


Table of Contents
                                                                               Nine Months Ended September 30,
                                                                2012 (7)                                               2011
                                               Average                          Average             Average                          Average
                                               Balance        Interest       Yield/Cost (6)         Balance        Interest       Yield/Cost (6)
                                                                                        (in thousands)
Interest-Earning Assets
Securities:
Taxable                                      $ 1,123,340      $  18,421                 2.19 %    $ 1,158,887      $  22,596                 2.61 %
Tax-exempt (1)                                   280,810          9,587                 7.00 %         99,104          2,232                 5.15 %

Total securities                               1,404,150         28,008                 3.15 %      1,257,991         24,828                 2.81 %
Federal funds sold and other                         407              1                 0.33 %             -               2                 0.00 %
Loans (1) (2) (3)                              4,996,754        205,682                 5.53 %      4,311,584        194,341                 6.03 %
Short term investments                           119,657            126                 0.14 %        288,041            502                 0.23 %
Restricted stock                                  33,425            135                 0.54 %         36,149             72                 0.27 %

Total earnings assets                          6,554,393        233,952                 4.90 %      5,893,765        219,745                 5.02 %
Nonearning Assets
Cash and due from banks                          115,677                                              121,449
Allowance for credit losses                      (98,813 )                                           (107,655 )
Bank-owned life insurance                        135,410                                              131,146
Other assets                                     353,801                                              390,432

Total assets                                 $ 7,060,468                                          $ 6,429,137

Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                                511,028            920                 0.24 %        479,204          1,427                 0.40 %
Savings and money market                       2,314,941          6,114                 0.35 %      2,082,031         10,426                 0.67 %
Time deposits                                  1,343,624          5,870                 0.58 %      1,459,609         10,575                 0.97 %

Total interest-bearing deposits                4,169,593         12,904                 0.41 %      4,020,844         22,428                 0.75 %
Short-term borrowings                            318,833            827                 0.35 %        150,879            263                 0.23 %
Long-term debt                                    73,470          5,955                10.81 %         73,098          6,229                11.39 %
Junior subordinated and subordinated debt         36,974          1,458                 5.26 %         42,909          1,856                 5.78 %

Total interest-bearing liabilities             4,598,870         21,144                 0.61 %      4,287,730         30,776                 0.96 %
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits            1,734,576                                            1,487,249
Other liabilities                                 56,092                                               28,897
Stockholders' equity                             670,930                                              625,261

Total liabilities and stockholders' equity   $ 7,060,468                                          $ 6,429,137

Net interest income and margin (4)                            $ 212,808                 4.47 %                     $ 188,969                 4.32 %

Net interest spread (5)                                                                 4.29 %                                               4.06 %

(1) Yields on loans and securities have been adjusted to a tax-equivalent basis. Interest income has not been adjusted to a tax-equivalent basis. The tax-equivalent adjustments for the nine months ended September 30, 2012 and 2011 were $6,726 and $1,588, respectively.

(2) Net loan fees of $4.9 million and $3.0 million are included in the yield computation for the nine months ended September 30, 2012 and 2011, respectively.

(3) Includes nonaccrual loans.

(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.

(6) Annualized.

. . .

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