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WAL > SEC Filings for WAL > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for WESTERN ALLIANCE BANCORPORATION

Form 10-Q for WESTERN ALLIANCE BANCORPORATION


9-Aug-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 a 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.


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 Second Quarter of 2013

Net income for the Company of $34.0 million, or $0.39 per diluted share, for the second quarter of 2013 compared to net income of $14.0 million, or $0.15 per diluted share, for the second quarter of 2012.

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

Net income available to common shareholders of $33.7 million for the second quarter of 2013 compared to $12.6 million for the second quarter 2012.

Net interest income increased by 16.0% to $82.2 million for the second quarter of 2013 compared to $70.8 million for the second quarter of 2012.

Net interest margin for the second quarter of 2013 was 4.36% compared to 4.46% for the second quarter of 2012.

Provision for credit losses decreased to $3.5 million for the second quarter of 2013 compared to $13.3 million for the second quarter of 2012.

The Company experienced net loan growth in the second quarter of 2013 of $556.0 million to $6.41 billion. This increase was driven by growth in commercial and industrial loans and commercial real estate loans. Total loans increased $1.25 billion over the last twelve months from $5.16 billion at June 30, 2012.

Total deposits increased during the quarter by $266.0 million to $7.00 billion at June 30, 2013, with growth primarily in certificates of deposits and savings and money market deposits. Deposits increased $1.00 billion over the last twelve months from $6.00 billion at June 30, 2012.

Net charge-offs (annualized) to average loans outstanding declined to 0.17% in the second quarter of 2013 from 1.11% in the second quarter of 2012.

Nonperforming assets (nonaccrual loans and assets acquired through foreclosure) decreased to 1.9% of total assets from 2.5% in the second quarter 2012.

Other assets acquired through foreclosure declined to $76.5 million at June 30, 2013 from $77.0 million at June 30, 2012.

On April 30, 2013, the Company completed its acquisition of Centennial Bank ("Centennial") and recognized a bargain purchase gain of $10.0 million.

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 six months ended June 30, 2013 throughout the analysis sections of this report.

Acquisition of Centennial Bank

On April 30, 2013, the Company completed its acquisition of Centennial Bank. Under the terms of the merger, the Company paid $57.5 million in cash for all equity interests in Centennial. The Company merged Centennial into Western Alliance Bank ("WAB") effective April 30, 2013, reporting combined assets for the resulting bank of $3.16 billion and deposits of $2.76 billion. The merger was undertaken, in part, because the purchase price of Centennial was at a discount to its tangible book value and was accretive to capital at close.

Centennial's results of operations are included in the Company's results beginning April 30, 2013. Expenses related to the Centennial acquisition of $2.5 million for the three and six months ended June 30, 2013 have been included in non-interest expense. The acquisition was accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. Assets purchased and liabilities assumed were all recorded at their respective acquisition date fair values. A bargain purchase gain of $10.0 million resulted from the acquisition and is included as a component of non-interest income in the Consolidated Income Statement. The amount of gain is equal to the amount by which the fair value of net assets purchased exceeded the consideration paid.


Table of Contents

The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:

                                                  (in thousands)
                 Assets:
                 Cash and cash equivalents (1)   $         70,349
                 Federal funds sold (1)                     8,355
                 Investment securities                     26,014
                 Loans                                    351,474
                 Deferred tax assets                       21,666
                 Premises and equipment                        44
                 Other real estate owned                    5,622
                 Other assets                               6,007

                 Total assets acquired                    489,531

                 Liabilities:
                 Deposits                                 338,811
                 FHLB advances                             79,943
                 Other liabilities                          3,233
                 Total liabilities assumed       $        421,987

                 Net assets acquired                       67,544

                 Consideration paid (1)                    57,500

                 Bargain purchase gain           $         10,044

(1) Cash acquired, net of cash consideration paid of $57.5 million represents the net cash and cash equivalents acquired of $21.2 million as part of the acquisition

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

                                                    Three Months Ended                Six Months Ended
                                                         June 30,                         June 30,
                                                  2013              2012             2013           2012
                                                        (in thousands, except per share amounts)
Net income available to common stockholders    $    33,663       $    12,636       $ 54,275       $ 22,173
Basic earnings per share                              0.39              0.15           0.63           0.27
Diluted earnings per share                            0.39              0.15           0.63           0.27
Total assets                                   $ 8,593,684       $ 7,163,572
Gross loans                                    $ 6,411,519       $ 5,164,858
Total deposits                                 $ 7,001,286       $ 6,001,448
Net interest margin                                   4.36 %            4.46 %         4.36 %         4.49 %
Return on average assets                              1.64 %            0.80 %         1.37 %         0.48 %
Return on average stockholders' equity               17.11 %            8.48 %        14.07 %         5.10 %

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:


Table of Contents
                                                      Three Months Ended               Six Months Ended
                                                           June 30,                        June 30,
                                                    2013             2012             2013            2012
                                                        (in thousands)
Non-accrual loans                                 $  82,899        $ 104,324
Non-performing assets                               251,091          297,149
Non-accrual loans to gross loans                       1.29 %           2.02 %
Net charge-offs (annualized) to average loans          0.17 %           1.11 %          0.27 %         1.15 %

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 $8.59 billion at June 30, 2013 from $7.62 billion at December 31, 2012. Total gross loans including net deferred fees and unearned income, increased by $702.2 million, or 12%, to $6.41 billion as of June 30, 2013 compared to December 31, 2012. Total deposits increased $546.1 million, or 8%, to $7.00 billion as of June 30, 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 and six months ended June 30, 2013 and 2012:



                                      Three Months Ended                               Six Months Ended
                                           June 30,                Increase                June 30,                Increase
                                      2013           2012         (Decrease)         2013           2012          (Decrease)
                                                           (in thousands, except per share amounts)
Consolidated Income Statement
Data:
Interest income                     $  89,285      $ 77,846      $     11,439      $ 172,393      $ 155,283      $     17,110
Interest expense                        7,133         7,041                92         14,038         14,421              (383 )

Net interest income                    82,152        70,805            11,347        158,355        140,862            17,493
Provision for credit losses             3,481        13,330            (9,849 )        8,920         26,411           (17,491 )

Net interest income after
provision for credit losses            78,671        57,475            21,196        149,435        114,451            34,984
Non-interest income                    10,862         7,397             3,465         14,761         13,281             1,480
Non-interest expense                   48,531        45,431             3,100         95,460         92,328             3,132

Net income from continuing
operations before income taxes         41,002        19,441            21,561         68,736         35,404            33,332
Income tax provision                    6,817         5,259             1,558         13,625          9,700             3,925

Income from continuing operations      34,185        14,182            20,003         55,111         25,704            29,407
Loss from discontinued
operations, net of tax benefit           (169 )        (221 )              52           (131 )         (443 )             312

Net income                          $  34,016      $ 13,961      $     20,055      $  54,980      $  25,261      $     29,719

Net income available to common
stockholders                        $  33,663      $ 12,636      $     21,027      $  54,275      $  22,173      $     32,102

Income per share-basic              $    0.39      $   0.15      $       0.24      $    0.63      $    0.27      $       0.36

Income per share-diluted            $    0.39      $   0.15      $       0.24      $    0.63      $    0.27      $       0.36

Net Interest Margin

The net interest margin is reported on a tax equivalent basis. 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
                                                                        Six Months Ended June 30,
                                                          2013                                            2012
                                                                         (dollars in thousands)
                                                                        Average                                         Average
                                         Average                      Yield/Cost         Average                       Yield/Cost
                                         Balance        Interest          (6)            Balance        Interest          (6)
      Interest-Earning Assets
Securities:
Taxable                                $   940,265      $   8,101            1.72 %    $ 1,153,926      $  12,821             2.22 %
Tax-exempt (1)                             349,415          7,879            6.67 %        266,285          6,153             7.11 %

Total securities                         1,289,680         15,980            3.06 %      1,420,211         18,974             3.14 %
Federal funds sold and other                 2,681             -             0.00 %          9,493              1             0.01 %
Loans (1) (2) (3)                        5,856,986        155,818            5.41 %      4,898,476        136,102             5.59 %
Short term investments                     372,472            121            0.06 %         89,351            110             0.25 %
Restricted stock                            31,076            474            3.05 %         33,386             96             0.58 %

Total earnings assets                    7,552,895        172,393            4.73 %      6,450,917        155,283             4.94 %
         Nonearning Assets
Cash and due from banks                    122,861                                         113,320
Allowance for credit losses                (96,765 )                                       (99,139 )
Bank-owned life insurance                  139,220                                         134,848
Other assets                               427,308                                         352,418

Total assets                           $ 8,145,519                                     $ 6,952,364

    Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                      $   617,766      $     671            0.22 %        511,314            624             0.24 %
Savings and money market                 2,695,173          3,918            0.29 %      2,264,769          4,124             0.36 %
Time deposits                            1,517,154          3,072            0.40 %      1,372,494          4,182             0.61 %

Total interest-bearing deposits          4,830,093          7,661            0.32 %      4,148,577          8,930             0.43 %
Short-term borrowings                      183,005            428            0.47 %        286,870            551             0.38 %
Long-term debt                             319,272          5,028            3.15 %         73,417          3,969            10.81 %
Junior subordinated                         36,475            921            5.05 %         37,127            971             5.23 %

Total interest-bearing liabilities       5,368,845         14,038            0.52 %      4,545,991         14,421             0.63 %
  Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits      1,876,772                                       1,694,908
Other liabilities                          107,407                                          48,680
Stockholders' equity                       792,495                                         662,785

Total Liabilities and Stockholders'
Equity                                 $ 8,145,519                                     $ 6,952,364

Net interest income and margin (4)                      $ 158,355            4.36 %                     $ 140,862             4.49 %

Net interest spread (5)                                                      4.21 %                                           4.31 %


Table of Contents
                                                                             Three Months Ended June 30,
                                                                2013                                            2012
                                                                               (dollars in thousands)
                                                                              Average                                         Average
                                               Average                      Yield/Cost         Average                       Yield/Cost
                                               Balance        Interest          (6)            Balance        Interest          (6)
         Interest-Earning Assets
Securities:
Taxable                                      $   944,628      $   3,910            1.66 %    $ 1,132,950      $   6,129             2.16 %
Tax-exempt (1)                                   351,274          3,912            6.33 %        284,194          3,260             7.06 %

Total securities                               1,295,902          7,822            2.92 %      1,417,144          9,389             3.15 %
Federal funds sold and other                       5,285             -             0.00 %         18,833              1             0.00 %
Loans (1) (2) (3)                              6,100,831         81,093            5.40 %      5,014,126         68,342             5.50 %
Short term investments                           371,043             80            0.09 %         80,894             60             0.30 %
Restricted stock                                  31,291            290            3.71 %         33,416             54             0.65 %

Total earnings assets                          7,804,352         89,285            4.73 %      6,564,413         77,846             4.88 %
            Nonearning Assets
Cash and due from banks                          119,209                                         113,124
Allowance for credit losses                      (96,672 )                                       (97,531 )
Bank-owned life insurance                        139,740                                         135,408
Other assets                                     432,740                                         346,831

Total assets                                 $ 8,399,369                                     $ 7,062,245

       Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                            $   626,768      $     370            0.24 %    $   518,367      $     310             0.24 %
Savings and money market                       2,768,656          2,007            0.29 %      2,295,976          1,956             0.34 %
Time deposits                                  1,584,029          1,552            0.39 %      1,320,696          1,902             0.58 %

Total interest-bearing deposits                4,979,453          3,929            0.32 %      4,135,039          4,168             0.40 %
Short-term borrowings                            188,833            214            0.45 %        352,256            400             0.45 %
Long-term debt                                   365,152          2,535            2.78 %         73,466          1,986            10.81 %
Junior subordinated                               36,723            455            4.96 %         37,263            487             5.23 %

Total interest-bearing liabilities             5,570,161          7,133            0.51 %      4,598,024          7,041             0.61 %
     Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits            1,898,237                                       1,744,078
Other liabilities                                124,621                                          52,238
Stockholders' equity                             806,350                                         667,905

Total Liabilities and Stockholders' Equity   $ 8,399,369                                     $ 7,062,245

Net interest income and margin (4)                            $  82,152            4.36 %                     $  70,805             4.46 %

Net interest spread (5)                                                            4.22 %                                           4.27 %

(1) Yields on loans and securities have been adjusted to a tax-equivalent basis. The tax-equivalent adjustments for the three months ended June 30, 2013 and 2012 were $2,929 and $2,310, respectively.

(2) Net loan fees of $1.2 million and $1.7 million are included in the yield computation for the three months ended June 30, 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
                                                                        Six Months Ended June 30,
                                                          2013                                            2012
                                                                         (dollars in thousands)
                                                                        Average                                         Average
                                         Average                      Yield/Cost         Average                       Yield/Cost
                                         Balance        Interest       (6), (7)          Balance        Interest        (6), (7)
      Interest-Earning Assets
Securities:
Taxable                                $   940,265      $   8,101            1.72 %    $ 1,153,926      $  12,821             2.22 %
Tax-exempt (1)                             349,415          7,879            6.67 %        266,285          6,153             7.11 %
. . .
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