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WAL > SEC Filings for WAL > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for WESTERN ALLIANCE BANCORPORATION


31-Oct-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 Quarterly Report on 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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 Third Quarter of 2013

Net income for the Company of $28.2 million, or $0.32 per diluted share, for the third quarter of 2013, compared to net income of $15.5 million, or $0.18 per diluted share, for the third quarter of 2012.

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

Net income available to common shareholders of $27.8 million for the third quarter of 2013, compared to $15.1 million for the third quarter 2012.

Net interest income increased by 17.5% to $84.6 million for the third quarter of 2013, compared to $71.9 million for the third quarter of 2012.

Net interest margin for the third quarter of 2013 remained flat at 4.41%, compared to the third quarter of 2012.

Provision for credit losses decreased to zero for the third quarter of 2013, compared to $8.9 million for the third quarter of 2012.

Net loan growth in the third quarter of 2013 of $104.8 million to $6.52 billion. Total loans increased $1.18 billion over the last twelve months from $5.33 billion at September 30, 2012.

Total deposits increased during the quarter by $274.0 million to $7.28 billion at September 30, 2013. Deposits increased $1.11 billion over the last twelve months from $6.16 billion at September 30, 2012.

Net recoveries (annualized) to average loans outstanding were 0.10% in the third quarter of 2013, compared to net charge-offs of 0.70% in the third quarter of 2012.

Nonperforming assets (nonaccrual loans and assets acquired through foreclosure) decreased to 1.7% of total assets from 2.7% in the third quarter 2012.

Other assets acquired through foreclosure declined to $76.5 million at September 30, 2013 from $78.2 million at September 30, 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 and nine months ended September 30, 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                Nine Months Ended
                                                       September 30,                    September 30,
                                                  2013              2012             2013           2012
                                                        (in thousands, except per share amounts)
Net income available to common stockholders    $    27,840       $    15,106       $ 82,114       $ 37,279
Basic earnings per share                              0.32              0.18           0.96           0.46
Diluted earnings per share                            0.32              0.18           0.95           0.45
Total assets                                   $ 8,921,429       $ 7,403,603
Gross loans                                    $ 6,516,283       $ 5,332,932
Total deposits                                 $ 7,275,311       $ 6,161,976
Net interest margin                                   4.41 %            4.41 %         4.38 %         4.47 %
Return on average assets                              1.30 %            0.85 %         1.35 %         0.77 %
Return on average stockholders' equity               13.63 %            8.95 %        14.01 %         8.09 %


Table of Contents

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 these asset quality metrics:

                                                 Three Months Ended                Nine Months Ended
                                                    September 30,                    September 30,
                                               2013              2012             2013             2012
                                                            (in thousands)
Non-accrual loans                            $  76,641         $ 121,238
Non-performing assets                          245,959           294,517
Non-accrual loans to gross loans                  1.18 %            2.27 %
Net (recoveries) charge-offs to average
loans-annualized                                 (0.10 )%           0.70 %           0.22 %         0.99 %

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 $8.92 billion at September 30, 2013 from $7.62 billion at December 31, 2012. Total gross loans, including net deferred fees and unearned income, increased by $807.0 million, or 14%, to $6.52 billion as of September 30, 2013, compared to $5.71 billion at December 31, 2012. Total deposits increased $820.1 million, or 13%, to $7.28 billion as of September 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 nine months ended September 30, 2013 and 2012:



                                      Three Months Ended                              Nine Months Ended
                                         September 30,             Increase             September 30,              Increase
                                      2013           2012         (Decrease)         2013           2012          (Decrease)
                                                            (in thousands, except per share amounts)
Consolidated Income Statement
Data:
Interest income                     $  92,680      $ 78,669      $     14,011      $ 265,073      $ 233,952      $     31,121
Interest expense                        8,121         6,723             1,398         22,159         21,144             1,015

Net interest income                    84,559        71,946            12,613        242,914        212,808            30,106
Provision for credit losses                -          8,932            (8,932 )        8,920         35,343           (26,423 )

Net interest income after
provision for credit losses            84,559        63,014            21,545        233,994        177,465            56,529
Non-interest income                     2,625         6,982            (4,357 )       17,386         20,263            (2,877 )
Non-interest expense                   49,675        47,543             2,132        145,135        139,871             5,264

Net income from continuing
operations before income taxes         37,509        22,453            15,056        106,245         57,857            48,388
Income tax provision                    9,288         6,752             2,536         22,913         16,452             6,461

Income from continuing operations      28,221        15,701            12,520         83,332         41,405            41,927
Loss from discontinued
operations, net of tax benefit            (29 )        (243 )             214           (160 )         (686 )             526

Net income                          $  28,192      $ 15,458      $     12,734      $  83,172      $  40,719      $     42,453

Net income available to common
stockholders                        $  27,840      $ 15,106      $     12,734      $  82,114      $  37,279      $     44,835

Income per share-basic              $    0.32      $   0.18      $       0.14      $    0.96      $    0.46      $       0.50

Income per share-diluted            $    0.32      $   0.18      $       0.14      $    0.95      $    0.45      $       0.50

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
                                                                          Three Months Ended September 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                                      $   955,263      $   4,263            1.79 %    $ 1,062,835      $   5,600             2.11 %
Tax-exempt (1)                                   348,055          4,023            6.37 %        309,543          3,434             6.83 %

Total securities                               1,303,318          8,286            3.01 %      1,372,378          9,034             3.17 %
Loans (1) (2) (3)                              6,306,394         83,994            5.44 %      5,191,175         69,580             5.42 %
Federal funds sold and other                     364,580            400            0.11 %        195,321             55             0.03 %

Total earnings assets                          7,974,292         92,680            4.81 %      6,758,874         78,669             4.81 %
Nonearning Assets
Cash and due from banks                          119,209                                         120,128
Allowance for credit losses                      (96,672 )                                       (98,169 )
Bank-owned life insurance                        139,740                                         136,522
Other assets                                     492,035                                         356,643

Total assets                                 $ 8,628,604                                     $ 7,273,998

Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                            $   641,695      $     376            0.23 %    $   510,462      $     296             0.23 %
Savings and money market                       2,828,113          2,172            0.31 %      2,414,194          1,990             0.33 %
Time deposits                                  1,675,482          1,684            0.40 %      1,286,512          1,688             0.52 %

Total interest-bearing deposits                5,145,290          4,232            0.33 %      4,211,168          3,974             0.38 %
Short-term borrowings                            182,683          2,420            5.30 %        382,064            275             0.29 %
Long-term debt                                   392,084          1,009            1.03 %         73,575          1,987            10.80 %
Junior subordinated                               39,920            460            4.61 %         36,672            487             5.31 %

Total interest-bearing liabilities             5,759,977          8,121            0.56 %      4,703,479          6,723             0.57 %
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits            1,931,127                                       1,813,050
Other liabilities                                114,750                                          70,702
Stockholders' equity                             822,750                                         686,767

Total Liabilities and Stockholders' Equity   $ 8,628,604                                     $ 7,273,998

Net interest income and margin (4)                            $  84,559            4.41 %                     $  71,946             4.41 %

Net interest spread (5)                                                            4.25 %                                           4.24 %

(1) Yields on loans and securities have been adjusted to a tax-equivalent basis. The tax-equivalent adjustments for the three months ended September 30, 2013 and 2012 were $3,272 and $2,655, respectively.

(2) Net loan fees of $1.8 million are included in the yield computation for the each of the three month periods ended September 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.

(7) Yields for 2013 and 2012 were calculated on a 30-day month 360 days per year.


Table of Contents
                                                                     Nine Months Ended September 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                                $   945,316      $  12,432            1.75 %    $ 1,123,340      $  18,421             2.19 %
Tax-exempt (1)                             348,957         11,834            6.55 %        280,810          9,587             7.00 %

Total securities                         1,294,273         24,266            3.05 %      1,404,150         28,008             3.15 %
Loans (1) (2) (3)                        6,008,435        239,812            5.42 %      4,996,754        205,682             5.53 %
Federal funds sold and other               392,193            995            0.25 %        153,489            262             0.17 %

Total earnings assets                    7,694,901        265,073            4.76 %      6,554,393        233,952             4.90 %
Nonearning Assets
Cash and due from banks                    130,258                                         115,677
Allowance for credit losses                (97,238 )                                       (98,813 )
Bank-owned life insurance                  139,687                                         135,410
Other assets                               440,660                                         353,801

Total assets                           $ 8,308,268                                     $ 7,060,468

Interest-Bearing Liabilities
Sources of Funds
Interest-bearing deposits:
Interest checking                      $   625,830      $   1,047            0.22 %        511,028            920             0.24 %
Savings and money market                 2,739,973          6,090            0.30 %      2,314,941          6,114             0.35 %
Time deposits                            1,570,510          4,756            0.40 %      1,343,624          5,870             0.58 %

Total interest-bearing deposits          4,936,313         11,893            0.32 %      4,169,593         12,904             0.41 %
Short-term borrowings                      182,237          2,848            2.08 %        318,833            827             0.35 %
Long-term debt                             343,809          6,037            2.34 %         73,470          5,955            10.81 %
Junior subordinated                         37,636          1,381            4.89 %         36,974          1,458             5.26 %

Total interest-bearing liabilities       5,499,995         22,159            0.54 %      4,598,870         21,144             0.61 %
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits      1,895,090                                       1,734,576
Other liabilities                          110,716                                          56,092
Stockholders' equity                       802,467                                         670,930

Total Liabilities and Stockholders'
Equity                                 $ 8,308,268                                     $ 7,060,468

Net interest income and margin (4)                      $ 242,914            4.38 %                     $ 212,808             4.47 %

Net interest spread (5)                                                      4.22 %                                           4.29 %

(1) Yields on loans and securities have been adjusted to a tax-equivalent basis. The tax-equivalent adjustments for the nine months ended September 30, 2013 and 2012 were $9,583 and $6,726, respectively.

(2) Net loan fees of $5.6 million and $4.9 million are included in the yield computation for the nine months ended September 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.

(7) Yields for 2013 and 2012 were calculated on a 30-day month 360 days per year.


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 September 30,               Nine Months Ended September 30,
                                                 2013 versus 2012                               2013 versus 2012
                                                Increase (Decrease)                           Increase (Decrease)
                                             Due to Changes in (1)(2)                       Due to Changes in (1)(2)
                                       Volume             Rate         Total          Volume           Rate          Total
                                                  (in thousands)                                 (in thousands)
Interest on investment securities:
Taxable                              $      (632 )      $    647      $     15      $   (2,570 )     $  (2,135 )    $ (4,705 )
Tax-exempt                                   464          (1,227 )        (763 )         3,089          (2,126 )         963
Loans                                     15,167            (753 )      14,414          41,012          (6,882 )      34,130
Federal funds sold and other                  46             299           345             453             280           733

Total interest income                     15,045          (1,034 )      14,011          41,984         (10,863 )      31,121
Interest expense:
Interest checking                             75               5            80             189             (62 )         127
Savings and money market                     321            (139 )         182             954            (978 )         (24 )
Time deposits                                389            (393 )          (4 )           679          (1,793 )      (1,114 )
Short-term borrowings                     (2,642 )         4,787         2,145          (2,125 )         4,146         2,021
Long-term debt                               820          (1,798 )        (978 )         4,731          (4,649 )          82
Junior subordinated debt                      37             (64 )         (27 )            24            (101 )         (77 )

Total interest expense                    (1,000 )         2,398         1,398           4,452          (3,437 )       1,015

Net increase (decrease)              $    16,045        $ (3,432 )    $ 12,613      $   37,532       $  (7,426 )    $ 30,106

(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 September 30, 2013 was $92.7 million, an increase of 18% when comparing interest income for the three months ended September 30, 2012. For the nine months ended September 30, 2013, interest income was $265.1 million, compared to $234.0 million for the nine months ended September 30, 2012. This increase was primarily from interest income from loans, as a result of an increase in the loan portfolio. Interest income from loans increased by $14.4 million for the three months ended September 30, 2013, compared to the three months ended September 30, 2012 and by $34.1 million for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. This increase was a result of loan growth, including results from acquired loans. Interest income from investment securities decreased by $0.7 million to $8.3 million for the three month period ended September 30, 2013, compared to $9.0 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, interest income from investment securities decreased by $3.7 million to $24.3 million, compared to $28.0 million for the nine months ended September 30, 2012. Other interest income increased slightly by $0.3 million for the comparable three month periods and by $0.7 million for the comparable nine month periods. Despite the increased interest income, average . . .

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