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WAL > SEC Filings for WAL > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for WESTERN ALLIANCE BANCORPORATION


3-May-2013

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, 2012 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:

conditions in the financial markets and the economy may adversely impact financial performance;

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;

the geographic concentrations of our assets increase risks related to economic conditions;

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;

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;

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.

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, 2012 and in item 1A of Part II of this Quarterly Report.


Table of Contents

Financial Overview and Highlights

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

Financial Result Highlights for the First Quarter of 2013

Net income for the Company of $21.0 million, or $0.24 per diluted share, for the first quarter of 2013 compared to net income of $11.3 million, or $0.12 per diluted share, for the first quarter of 2012.

The significant factors impacting earnings of the Company during the first quarter of 2013 were:

Net income available to common shareholders of $20.6 million for the first quarter of 2013 compared to $9.5 million for the first quarter 2012.

Net interest income increased by 8.7% to $76.2 million for the first quarter of 2013 compared to $70.1 million for the first quarter of 2012.

Net interest margin for the first quarter of 2013 was 4.36% compared to 4.53% for the first quarter of 2012.

Provision for credit losses decreased to $5.4 million for the first quarter of 2013 compared to $13.1 million for the first quarter of 2012.

The Company experienced net loan growth in the first quarter of 2013 of $146 million to $5.86 billion. This increase was driven by growth in commercial and industrial loans and commercial real estate loans. Total loans increased $929 million over the last twelve months from $4.93 billion at March 31, 2012.

Total deposits increased during the quarter by $280 million to $6.73 billion at March 31, 2013, with growth primarily in money market accounts and interest-bearing demand deposits partially offset by declines in non-interest bearing demand and certificates of deposits. Deposits increased $836 million over the last twelve months from $5.90 billion at March 31, 2012.

Net charge-offs (annualized) to average loans outstanding declined to 0.38% in the first quarter of 2013 from 1.18% in the first quarter of 2012.

Nonperforming assets (nonaccrual loans and assets acquired through foreclosure) decreased to 2.1% of total assets for 2.7% in the first quarter 2012.

Other assets acquired through foreclosure declined to $77.9 million at March 31, 2013 from $81.4 million at March 31, 2012.

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 months ended March 31, 2013 throughout the analysis sections of this report.

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

                                                               Three Months Ended
                                                                   March 31,
                                                       2013                         2012
                                                    (in thousands, except per share amounts)
Net income available to common stockholders     $            20,611          $             9,537
Basic earnings per share                                       0.24                         0.12
Diluted earnings per share                                     0.24                         0.12
Total assets                                    $         8,174,104          $         6,925,292
Gross loans                                     $         5,855,356          $         4,926,223
Total deposits                                  $         6,734,914          $         5,899,054
Net interest margin                                            4.36 %                       4.53 %
Return on average assets                                       1.08 %                       0.67 %
Return on average stockholders' equity                        10.92 %                       6.97 %


Table of Contents

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
                                                             March 31,
                                                        2013           2012
                                                           (in thousands)
      Non-accrual loans                               $  93,748      $ 103,486
      Non-performing assets                             267,840        289,951
      Non-accrual loans to gross loans                     1.60 %         2.10 %
      Net charge-offs (annualized) to average loans        0.38 %         1.18 %

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 $8.17 billion at March 31, 2013 from $7.62 billion at December 31, 2012. Total gross loans including net deferred fees and unearned income, increased by $146 million, or 2.6%, to $5.86 billion as of March 31, 2013 compared to December 31, 2012. Total deposits increased $280 million, or 4.2%, to $6.73 billion as of March 31, 2013 from $6.46 billion as of December 31, 2012.

RESULTS OF OPERATIONS

The following table sets forth a summary financial overview for the comparable
three months ended March 31, 2013 and 2012:



                                                      Three Months Ended
                                                           March 31,                     Increase
                                                    2013               2012             (Decrease)
                                                     (in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income                                 $      83,108       $    77,437        $      5,671
Interest expense                                        6,905             7,380                (475 )

Net interest income                                    76,203            70,057               6,146
Provision for credit losses                             5,439            13,081              (7,642 )

Net interest income after provision for
credit losses                                          70,764            56,976              13,788
Other non-interest income                               3,899             5,884              (1,985 )
Non-interest expense                                   46,929            46,897                  32

Net income from continuing operations before
income taxes                                           27,734            15,963              11,771
Income tax provision                                    6,808             4,441               2,367

Income from continuing operations                      20,926            11,522               9,404
Income (loss) from discontinued operations,
net of tax benefit                                         38              (222 )               260

Net income                                      $      20,964       $    11,300        $      9,664

Net income available to common stockholders     $      20,611       $     9,537        $     11,074

Income per share-basic                          $        0.24       $      0.12        $       0.12

Income per share-diluted                        $        0.24       $      0.12        $       0.12

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:


Table of Contents
                                                                            Three Months Ended March 31,
                                                                2013                                            2012
                                                                               (dollars in thousands)
                                                                              Average                                         Average
                                               Average                      Yield/Cost         Average                       Yield/Cost
                                               Balance        Interest          (6)            Balance        Interest          (6)
         Interest-Earning Assets
Securities:
Taxable                                      $   935,842      $   4,191            1.79 %    $ 1,174,901      $   6,692             2.28 %
Tax-exempt (1)                                   347,536          3,967            7.02 %        248,377          2,893             7.17 %

Total securities                               1,283,378          8,158            3.21 %      1,423,278          9,585             3.13 %
Federal funds sold and other                          -              -                               153             -              0.00 %
Loans (1) (2) (3)                              5,610,432         74,725            5.42 %      4,782,815         67,760             5.68 %
Short term investments                           373,918             41            0.04 %         96,726             50             0.21 %
Restricted stock                                  30,858            184            2.39 %         33,355             42             0.50 %

Total earnings assets                          7,298,586         83,108            4.74 %      6,336,327         77,437             5.00 %
            Nonearning Assets
Cash and due from banks                          126,429                                         114,835
Allowance for credit losses                      (96,859 )                                      (100,747 )
Bank-owned life insurance                        138,694                                         134,288
Other assets                                     421,873                                         358,067

Total assets                                 $ 7,888,723                                     $ 6,842,770

       Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                            $   608,663      $     301            0.20 %    $   504,261      $     315             0.25 %
Savings and money market                       2,620,874          1,911            0.29 %      2,233,563          2,168             0.39 %
Time deposits                                  1,449,535          1,520            0.42 %      1,424,291          2,279             0.64 %

Total interest-bearing deposits                4,679,072          3,732            0.32 %      4,162,115          4,762             0.46 %
Short-term borrowings                            176,445            214            0.49 %        221,483            151             0.27 %
Long-term debt                                   272,882          2,493            3.65 %         73,369          1,983            10.81 %
Junior subordinated                               36,224            466            5.15 %         36,991            484             5.23 %

Total interest-bearing liabilities             5,164,623          6,905            0.53 %      4,493,958          7,380             0.66 %
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits            1,855,070                                       1,645,737
Other liabilities                                 90,669                                          45,716
Stockholders' equity                             778,361                                         657,359

Total Liabilities and Stockholders' Equity   $ 7,888,723                                     $ 6,842,770

Net interest income and margin (4)                            $  76,203            4.36 %                     $  70,057             4.53 %

Net interest spread (5)                                                            4.21 %                                           4.34 %

(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 March 31, 2013 and 2012 were $3,382 and $1,761 respectively.

(2) Net loan fees of $2.6 million and $1.4 million are included in the yield computation for the three months ended March 31, 2013 and 2012, 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.


Table of Contents

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 the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.

                                                 Three Months Ended March 31
                                                       2013 versus 2012
                                                     Increase (Decrease)
                                                   Due to Changes in (1)(2)
                                              Volume         Rate         Total
                                                        (in thousands)
        Interest on investment securities:
        Taxable                              $ (1,070 )    $ (1,431 )    $ (2,501 )
        Tax-exempt                                283           791         1,074
        Federal funds sold and other               -             -             -
        Loans                                  11,023        (4,058 )       6,965
        Short term investments                     28           (37 )          (9 )
        Restricted stock                          (15 )         157           142

        Total interest income                  10,249        (4,578 )       5,671
        Interest expense:
        Interest checking                          52           (66 )         (14 )
        Savings and money market                  281          (538 )        (257 )
        Time deposits                              27          (786 )        (759 )
        Short-term borrowings                     (55 )         118            63
        Long-term debt                          1,821        (1,311 )         510
        Junior subordinated debt                  (10 )          (8 )         (18 )

        Total interest expense                  2,116        (2,591 )        (475 )

        Net increase                         $  8,133      $ (1,987 )    $  6,146

(1) Changes due to both volume and rate have been allocated to volume changes.

(2) Changes due to mark-to-market gains/losses under ASC 825 have been allocated to volume changes.

Comparison of interest income, interest expense and net interest margin

The Company's primary source of revenue is interest income. Interest income for the three months ended March 31, 2013 was $83.1 million, an increase of 7.4% when comparing interest income for the three months ended March 31, 2012. This increase was primarily from interest income from loans. Interest income from loans increased by $7.0 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Interest income from investment securities decreased by $1.4 million to $8.2 million for the three month period ended March 31, 2013 compared to $9.6 million for the three months ended March 31, 2012. Other interest income increased slightly by $0.1 million for the comparable three month periods. Despite the increased interest income, average yield on interest earning assets dropped 26 basis points to 4.74% for the three months ended March 31, 2013 compared to 2012, primarily the result of decreased yields on loans of 26 basis points.

Interest expense for the three months ended March 31, 2013 compared to 2012 decreased by $0.5 million to $6.9 million from $7.4 million. This decline was primarily due to decreased average cost of deposits, which declined 14 basis points to 0.32% for the three months ended March 31, 2013 compared to the same period in 2012. Interest paid on borrowings increased to $3.2 million for the three months ended March 31, 2013 compared to $2.6 million for the three months ended March 31, 2012 as the Company extended its fixed rate funding to mitigate future margin contraction.

Net interest income was $76.2 million for the three months ended March 31, 2013 compared to $70.1 million for the first quarter 2012, an increase of $6.1 million, or 8.7%. The increase in net interest income reflects a $962.3 million increase in average earning assets, offset by a $670.7 million increase in average interest bearing liabilities. Net interest margin was 4.36% for the three months ended March 31, 2013 compared to 4.53% for the three months ended March 31, 2012. The decreased net interest margin of 17 basis points was mostly due to a decrease in yields on loans partially offset by a decrease in average cost of funds primarily as a result of downward repricing of deposits.


Table of Contents

Provision for Credit Losses

The provision for credit 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 credit losses at a level that is adequate to absorb probable credit losses inherent in the loan portfolio. The provision for credit losses decreased by $7.7 million to $5.4 million for the three months ended March 31, 2013, compared with $13.1 million for the three months ended March 31, 2012. The provision decrease for the three month comparable periods was mostly due to decreased provision of $3.2 million on construction and land development loans, $2.1 million on consumer loans, $1.6 million on commercial and industrial loans, and $1.4 million on commercial real estate loans. Provision for credit losses on residential real estate loans increased by $0.6 million for the comparable first quarter 2013 to 2012. The Company has been experiencing a downward trend in net charge-offs and increased credit quality, which released some reserves due to improved quantitative factors. The Company may establish an additional allowance for credit losses for the purchased credit impaired ("PCI") loans through a charge to provision for loan losses when impairment is determined as a result of lower than expected cash flows. For the three months ended March 31, 2013, the Company held additional allowance for the PCI loans of $0.7 million.

Non-interest Income

The Company earned non-interest income primarily through fees related to services, services provided to loan and deposit customers, bank owned life insurance, investment securities gains, mark to market gains (losses) and other.

The following table presents a summary of non-interest income for the periods presented:

                                                         Three Months
                                                        Ended March 31,            Increase
                                                      2013          2012          (Decrease)
                                                                  (in thousands)
Gain on sales of investment securities, net          $   147       $   361       $       (214 )
Unrealized gain (loss) on assets and liabilities
measured at fair value, net                             (471 )        (333 )             (138 )
Service charges and fees                               2,534         2,285                249
Income from bank owned life insurance                  1,036         1,123                (87 )
Other fee revenue                                        957         1,000                (43 )
Investment advisory fees                                  -            619               (619 )
Operating lease income                                   195           273                (78 )
Amortization of affordable housing investments          (900 )          -                (900 )
Other                                                    401           556               (155 )

Total non-interest income                            $ 3,899       $ 5,884       $     (1,985 )

Total non-interest income for the three months ended March 31, 2013 compared to 2012 decreased by $2.0 million, or 33.7%, primarily from increased amortization of affordable housing investments of $0.9 million which the Company did not participate in these investments in the first quarter of 2012 and the decline in investment advisory fees due to the Company's exit from this business line in the third quarter of 2012.


Table of Contents

Non-interest Expense

The following table presents a summary of non-interest expenses for the periods
indicated:



                                                       Three Months Ended
                                                            March 31,                 Increase
. . .
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