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WAL > SEC Filings for WAL > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for WESTERN ALLIANCE BANCORPORATION

Form 10-K for WESTERN ALLIANCE BANCORPORATION


21-Feb-2014

Annual Report


Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with "Item
8. Financial Statements and Supplementary Data." This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors, including, but not limited to, those set forth under "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements. Financial Overview and Highlights
WAL is a bank holding company headquartered in Phoenix, Arizona that provides comprehensive business banking and related financial services through its wholly-owned banking subsidiary, WAB Consolidated, headquartered in Phoenix, Arizona. Prior to December 31, 2013, the Company operated through its three wholly-owned subsidiary banks: BON in Southern Nevada, WAB in Arizona and Northern Nevada, and TPB in California. On December 31, 2013, the Company merged TPB and BON into WAB, forming a single bank (WAB Consolidated), headquartered in Phoenix, Arizona.
Financial Result Highlights of 2013
Net income available to common stockholders for the Company of $113.1 million, or $1.31 per diluted share for 2013, compared to $69.0 million, or $0.83 per diluted share for 2012.
The significant factors impacting earnings of the Company during 2013 were:
The acquisition of Centennial completed on April 30, 2013, which resulted in recognition of a bargain purchase gain of $10.0 million.

All bank operating segments increased net income in 2013 over 2012. WAB reported net income of $51.4 million for 2013 compared to $36.8 million for 2012. BON reported net income of $52.7 million compared to $18.1 million in 2012. TPB (which excludes the discontinued operations of PartnersFirst), reported net income of $22.8 million for 2013 compared to $22.7 million for 2012.

Pre-tax, pre-provision operating earnings (see Non-GAAP Financial Measures beginning on page 35) increased $27.2 million to $161.2 million compared to $134.0 million for 2012.

The Company experienced loan growth of $1.09 billion to $6.80 billion at December 31, 2013 from $5.71 billion at December 31, 2012.

During 2013, the Company increased deposits by $1.38 billion to $7.84 billion at December 31, 2013 from $6.46 billion at December 31, 2012.

Other assets acquired through foreclosure declined by $10.5 million to $66.7 million at December 31, 2013 from $77.2 million at December 31, 2012.

Provision for credit losses for 2013 decreased by $33.6 million to $13.2 million compared to $46.8 million for 2012 as net charge-offs also declined by $42.0 million to $8.6 million in 2013 compared to $50.6 million in 2012.

Key asset quality ratios improved for 2013 compared to 2012. Nonaccrual loans and repossessed assets to total assets improved to 1.53% from 2.39% in 2012 and nonaccrual loans to gross loans improved to 1.11% at the end of 2013 compared to 1.83% at the end of 2012.

The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below as they pertain to the Company's overall comparative performance for the year ended December 31, 2013. Acquisitions
On April 30, 2013, the Company completed its acquisition of Centennial. Under the terms of the acquisition, the Company paid $57.5 million in cash for all equity interests in Centennial. The Company merged Centennial into WAB effective April 30, 2013, creating 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 of the transaction.


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Centennial's results of operations are included in the Company's results beginning April 30, 2013. Merger / restructure expenses related to the Centennial acquisition of $2.7 million for the year ended December 31, 2013 have been included in non-interest expense, of which $1.0 million are acquisition related costs as defined by ASC 805, Business Combinations. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC
805. 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 estimated fair value of net assets purchased exceeded the consideration paid. Pursuant to the terms of the transaction, $12.7 million in loan receivables were not acquired by the Company. The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:

                                                                       April 30, 2013
                                                                       (in thousands)
Assets:
Cash and cash equivalents (1)                                        $         70,349
Federal funds sold (1)                                                          8,355
Investment securities - available-for-sale                                     26,014
Loans                                                                         351,474
Deferred tax assets, net                                                       21,666
Premises and equipment                                                             44
Other assets acquired through foreclosure                                       5,622
Other assets                                                                    6,007
  Total assets                                                                489,531
Liabilities:
Deposits                                                                      338,811
FHLB advances                                                                  79,943
Other liabilities                                                               3,233
  Total liabilities                                                           421,987
     Net assets acquired                                                       67,544
     Consideration paid                                                        57,500
     Bargain purchase gain                                           $         10,044


(1) Cash acquired, less cash consideration paid of $57.5 million, resulted in net cash and cash equivalents increasing by $21.2 million following the acquisition.

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to acquired loans which have shown evidence of credit deterioration since origination.
The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. With the exception of the deferred tax asset, the above stated acquisition date fair values of assets and liabilities are considered to be final.
On October 17, 2012, the Company acquired Western Liberty, including its two wholly-owned subsidiaries, Service 1st Bank of Nevada and LVSP. The Company subsequently merged Service 1st Bank of Nevada into its wholly-owned subsidiary, BON, on October 19, 2012. LVSP remains a wholly-owned subsidiary of WAL. Under the terms of the Western Liberty merger, the Company exchanged either $4.02 of cash for each Western Liberty share or 0.4341 shares of the Company's common stock for each Western Liberty share, which resulted in the payment of a total of $27.5 million and 2,966,236 shares of the Company's common stock. The merger was undertaken because the purchase price of Western Liberty was at a significant discount to its tangible book value and was accretive to capital at close. The combined bank had approximately $3.09 billion of assets and $2.55 billion of deposits immediately following the merger, operating as BON. Western Liberty's results of operations have been included in


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the Company's results beginning October 18, 2012. Acquisition related expenses of $0.4 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively, have been included in non-interest expense. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC
805. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. There were no measurement period adjustments made to the acquisition date fair values of acquired assets or assumed liabilities from Western Liberty. Accordingly, these acquisition date fair values are final. A bargain purchase gain of $17.6 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. The statement of net assets acquired and the resulting bargain purchase gain are presented in the following table:

                                                                      October 17,
                                                                          2012
                                                                     (in thousands)
Assets:
Cash and cash equivalents (1)                                        $     76,692
Certificates of deposit (1)                                                 1,988
Investment securities                                                         446
Loans                                                                      90,747
Federal Home Loan bank stock                                                  493
Deferred tax assets, net                                                   17,446
Premises and equipment                                                         19
Other assets acquired through foreclosure                                   5,094
Identified intangible assets                                                1,578
Other assets                                                                  949
Total assets                                                              195,452
Liabilities:
Deposits                                                                  117,191
Other liabilities                                                           1,252
Total liabilities                                                         118,443
Net assets acquired                                                        77,009
Consideration paid                                                         59,447
Bargain purchase gain                                                $     17,562


(1) Cash acquired, less cash consideration paid of $27.5 million, resulted in net cash and cash equivalents increasing by $51.2 million following the acquisition.


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

                                                              Year Ended December 31,
                                                       2013               2012            2011
                                                      (in thousands, except per share amounts)
Net income available to common stockholders      $      113,113       $    69,041     $    15,288
Earnings per share applicable to common
shareholders--basic                                        1.32              0.84            0.19
Earnings per share applicable to common
shareholders--diluted                                      1.31              0.83            0.19
Total assets                                     $    9,307,095       $ 7,622,637     $ 6,844,541
Loans, net of deferred loan fees and costs            6,801,415         5,709,318       4,780,069
Total deposits                                        7,838,205         6,455,177       5,658,512
Net interest margin                                        4.39 %            4.49 %          4.37 %
Return on average assets                                   1.35              1.01            0.49
Return on average stockholders' equity                    14.34             10.54            4.99

As a bank holding company, management focuses on key ratios in evaluating the Company's financial condition and results of operations. 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:

                                          Year Ended December 31,
                                      2013         2012          2011
                                              (in thousands)
Non-accrual loans                  $ 75,680     $ 104,716     $ 90,392
Non-performing assets               233,509       267,960      294,568
Non-accrual loans to gross loans       1.11 %        1.83 %       1.89 %
Net charge-offs to average loans       0.14          0.99         1.32

Asset and Deposit Growth
The Company's assets and liabilities are comprised primarily of loans and deposits; therefore, the ability to originate new loans and attract new deposits is fundamental to the Company's growth. Total assets increased to $9.31 billion at December 31, 2013 from $7.62 billion at December 31, 2012. Total loans, net of deferred fees and costs, increased by $1.09 billion, or 19.1%, to $6.80 billion as of December 31, 2013, compared to $5.71 billion as of December 31, 2012. Total deposits increased $1.38 billion, or 21.4%, to $7.84 billion as of December 31, 2013 from $6.46 billion as of December 31, 2012.


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RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:

Year Ended Year Ended
December 31, Increase December 31, Increase
2013 2012 (Decrease) 2012 2011 (Decrease)
(in thousands, except per share amounts)

Consolidated Income Statement Data:
Interest income           $ 362,655     $ 318,295     $    44,360     $ 318,295     $ 296,591     $    21,704
Interest expense             29,760        28,032           1,728        28,032        38,923         (10,891 )
Net interest income         332,895       290,263          42,632       290,263       257,668          32,595
Provision for credit
losses                       13,220        46,844         (33,624 )      46,844        46,188             656
Net interest income
after provision for
credit losses               319,675       243,419          76,256       243,419       211,480          31,939
Non-interest income          17,229        44,726         (27,497 )      44,726        34,457          10,269
Non-interest expense        196,266       188,860           7,406       188,860       195,598          (6,738 )
Net income from
continuing operations
before income taxes         140,638        99,285          41,353        99,285        50,339          48,946
Income tax provision         25,254        23,961           1,293        23,961        16,849           7,112
Income from continuing
operations                  115,384        75,324          40,060        75,324        33,490          41,834
Loss from discontinued
operations, net of tax
benefit                        (861 )      (2,490 )         1,629        (2,490 )      (1,996 )          (494 )
Net income                $ 114,523     $  72,834     $    41,689     $  72,834     $  31,494     $    41,340
Net income available to
common stockholders       $ 113,113     $  69,041     $    44,072     $  69,041     $  15,288     $    53,753
Earnings per share
applicable to common
shareholders-basic        $    1.32     $    0.84     $      0.48     $    0.84     $    0.19     $      0.65
Earnings per share
applicable to common
shareholders-diluted      $    1.31     $    0.83     $      0.48     $    0.83     $    0.19     $      0.64

Non-GAAP Financial Measures
The following discussion and analysis contains financial information determined by methods other than those prescribed by GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These measurements typically adjust GAAP performance measures to exclude the effects unrealized gains (losses) on assets/liabilities measured at fair value as well as adjust income available to common shareholders for certain significant activities or transactions that, in management's opinion, do not reflect recurring period-to-period comparisons of the Company's performance. Since the presentation of these GAAP performance measures and their impact differ between companies, management believes presentation of these non-GAAP financial measures provide useful supplemental information that is essential to a complete understanding of the operating results of the Company's core businesses. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Pre-Tax, Pre-Provision Operating Earnings Pre-tax, pre-provision operating earnings adjusts the level of earnings to exclude the impact of income taxes, provision for credit losses and non-recurring or other items not considered part of the Company's core operations. Management believes that eliminating the effects of these items makes it easier to analyze underlying performance trends and enables investors to assess the Company's ability to generate capital to cover credit losses.


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The following table shows the components of pre-tax, pre-provision operating earnings for the years ended December 31, 2013 and 2012:

                                                           Year Ended December 31,
                                                           2013                2012
                                                               (in thousands)
Total non-interest income                           $        17,229      $       44,726
Less:
Unrealized (losses) gains on assets/liabilities
measured
at fair value, net                                           (6,483 )               653
Gain on sale of subsidiary/non-controlling interest               -                 892
Loss on extinguishment of debt                               (1,387 )                 -
Bargain purchase gain from acquisitions                      10,044              17,562
Legal settlements                                                38                 879
Mutual fund gains                                                 -                 483
Amortization of affordable housing investments               (5,018 )            (1,779 )
(Losses) gains on sales of investment securities,
net                                                          (1,195 )             3,949
Total operating non-interest income                          21,230              22,087
Add: Net interest income                                    332,895             290,263
Net operating revenue                               $       354,125      $      312,350
Total non-interest expense                          $       196,266      $      188,860
Less:
Net (gain) loss on sales and valuations of
repossessed assets                                           (2,387 )             4,207
Merger / restructure expense                                  5,752               2,819
Goodwill and other intangibles impairment                         -               3,435
Total operating non-interest expense                $       192,901      $      178,399
Pre-tax, pre-provision operating earnings           $       161,224      $      133,951


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Tangible Common Equity
The following table presents financial measures related to tangible common
equity. Tangible common equity represents total stockholders' equity less
identifiable intangible assets and goodwill and preferred stock. Management
believes that tangible common equity financial measures are useful in evaluating
the Company's capital strength and ability to manage potential losses.
                                                                  December 31,
                                                           2013                   2012
                                                        (dollars and shares in thousands)
Total stockholders' equity                          $        855,251       $        759,616
Less:
 Goodwill and intangible assets                               27,374                 29,763
Total tangible stockholders' equity                          827,876                729,853
Less:
  Preferred stock                                            141,000                141,000
Total tangible common equity                                 686,876                588,853
Add:
  Deferred tax - attributed to intangible assets               1,452                  2,289
Total tangible common equity, net of tax            $        688,328       $        591,142
Total assets                                        $      9,307,095       $      7,622,637
Less:
 Goodwill and intangible assets                               27,374                 29,763
Tangible assets                                            9,279,721              7,592,874
Add:
  Deferred tax - attributed to intangible assets               1,452                  2,289
Total tangible assets, net of tax                   $      9,281,173       $      7,595,163
Tangible equity ratio                                            8.9 %                  9.6 %
Tangible common equity ratio                                     7.4                    7.8
Return on tangible common equity                                16.7                   12.4
Common shares outstanding                                     87,186                 86,465
Tangible book value per share, net of tax           $           7.89       $           6.84

Efficiency Ratio
The following table shows the components used in the calculation of the
efficiency ratio, which management uses as a metric for assessing cost
efficiency:
                                                      Year Ended December 31,
                                                     2013                   2012
                                                 (dollars and shares in thousands)
Total operating non-interest expense         $         192,901        $      178,399
Divided by:
Total net interest income                    $         332,895        $      290,263
Add:
 Tax equivalent interest adjustment                     13,312                 9,738
  Operating non-interest income                         21,230                22,087
Net operating revenue - tax equivalent basis           367,340               322,088
Efficiency ratio - tax equivalent basis                   52.5 %                55.4 %


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Tier 1 Common Equity
The following tables present certain financial measures related to Tier 1 common
equity, which is a component of Tier 1 risk-based capital. The FRB and other
banking regulators have used Tier 1 common equity as a basis for assessing a
bank's capital adequacy; therefore, management believes it is useful to assess
capital adequacy using this same basis.
                                                                  December 31,
                                                           2013                   2012
                                                        (dollars and shares in thousands)
Stockholders' equity                                $        855,251       $        759,616
Less:
 Accumulated other comprehensive (loss) income               (21,546 )                8,226
 Non-qualifying goodwill and intangibles                      25,991                 27,520
 Other non-qualifying assets                                       -                      2
 Disallowed unrealized losses on equity securities             8,059                      -
Add:
 Qualifying trust preferred securities                        48,485                 44,819
Tier 1 capital (regulatory)                                  891,232                768,687
Less:
 Qualifying trust preferred securities                        48,485                 44,819
 Preferred stock                                             141,000                141,000
Tier 1 common equity                                $        701,746       $        582,851
Divided by:
Risk-weighted assets (regulatory)                   $      8,016,500       $      6,797,170
Tier 1 common equity ratio                                       8.8 %                  8.6 %


                                                              December 31,
                                                           2013           2012
                                                         (dollars in thousands)
Classified assets                                     $    270,375     $ 294,519
Divide:
Tier 1 capital (regulatory)                                891,232       768,670
Plus: Allowance for credit losses                          100,050        95,427
Total Tier 1 capital plus allowance for credit losses $    991,282     $ 864,097
Classified assets to Tier 1 capital plus allowance              27 %          34 %


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Net Interest Margin
The net interest margin is reported on a TEB. A tax equivalent adjustment is
. . .
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