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WAL > SEC Filings for WAL > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for WESTERN ALLIANCE BANCORPORATION

Form 10-Q for WESTERN ALLIANCE BANCORPORATION


30-Jul-2014

Quarterly Report


Item 2. Management's Discussions 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, 2013 and the interim unaudited Consolidated Financial Statements and Notes to Unaudited Consolidated Financial Statements 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
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 are "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. The Company intends such forward-looking statements be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including statements that are related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and financial performance and involve certain risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading "Risk Factors" in this Form 10-Q. Risks and uncertainties include those set forth in our filings with the SEC and the following factors that could cause actual results to differ materially from those presented: 1) financial market and economic conditions adversely effecting financial performance; 2) dependency on real estate and events that negatively impact real estate; 3) high concentration of commercial real estate, construction and development and commercial and industrial loans; 4) actual credit losses may exceed expected losses in the loan portfolio; 5) the geographic concentrations of our assets increase the risks related to local economic conditions; 6) sovereign credit rating downgrades; 7) exposure of financial instruments to certain market risks may cause volatility in earnings; 8) dependence on low-cost deposits; 9) ability to borrow from the FHLB or the FRB; 10) events that further impair goodwill; 11) a change in the our creditworthiness; 12) expansion strategies may not be successful; 13) risk associated with the recent consolidation of our bank subsidiaries; 14) our ability to compete in a highly competitive market; 15) our ability to recruit and retain qualified employees, especially seasoned relationship bankers and senior management; 16) the effects of terrorist attacks or threats of war; 17) perpetration of internet fraud; 18) information security breaches; 19) reliance on other companies' infrastructure; 20) risk management policies not fully effective; 21) risks associated with new lines of businesses; 22) risk of operating in a highly regulated industry and our ability to remain in compliance; 23) failure to comply with state and federal banking agency laws and regulations; 24) changes in interest rates and increased rate competition; 25) exposure to environmental liabilities related to the properties to which we acquire title; and 26) risks related to ownership and price of our common stock.
For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Financial Overview and Highlights
WAL is a bank holding company headquartered in Phoenix, Arizona, originally incorporated under the laws of the state of Nevada. On May 29, 2014, WAL was re-incorporated under the laws of the state of Delaware. WAL provides comprehensive business banking and related financial services through its wholly-owned subsidiary bank: WAB, doing business as ABA in Arizona, as FIB in Northern Nevada, as BON in Southern Nevada, as TPB in California, and as AAB throughout the U.S. In addition, the Company has two non-bank subsidiaries, WAEF, which offers equipment finance services nationwide, and LVSP, which holds and manages certain non-performing loans and OREO. On July 1, 2014, WAEF was contributed to WAB by WAL and is now a subsidiary of the Bank. Financial Result Highlights for the Second Quarter of 2014 Net income available to common stockholders for the Company of $35.2 million, or $0.40 per diluted share, for the second quarter of 2014, compared to $33.7 million, or $0.39 per diluted share, for the second quarter of 2013. For the six months ended June 30, 2014, net income available to common stockholders was $65.9 million, or $0.76 per diluted share, compared to $54.3 million, or $0.63 per diluted share, for the six months ended June 30, 2013.
The significant factors impacting earnings of the Company during the second quarter of 2014 were:


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Pre-tax, pre-provision operating earnings (see Non-GAAP Financial Measures beginning on page 60) for the second quarter of 2014 increased $7.3 million to $47.4 million, compared to $40.1 million for the second quarter of 2013. For the comparable six month periods, pre-tax, pre-provision operating earnings increased $16.6 million to $91.8 million, compared to $75.2 million for the six months ended June 30, 2013.

The Company experienced loan growth of $743.2 million to $7.54 billion at June 30, 2014 from $6.80 billion at December 31, 2013.

Other assets acquired through foreclosure declined by $7.4 million to $59.3 million at June 30, 2014 from $66.7 million at December 31, 2013.

The Company increased deposits by $631.3 million to $8.47 billion at June 30, 2014 from $7.84 billion at December 31, 2013.

Provision for credit losses for the second quarter of 2014 decreased by $3.0 million to $0.5 million, compared to $3.5 million for the second quarter of 2013, as net charge-offs also declined by $4.2 million to net recoveries of $1.5 million in the second quarter of 2014, compared to net charge-offs of $2.7 million for the second quarter of 2013. For the comparable six month periods, provision for credit losses decreased by $4.9 million to $4.0 million, compared to $8.9 million for the six months ended June 30, 2013 as net charge-offs declined by $9.9 million to net recoveries of $1.9 million, compared to net charge-offs of $8.0 million for the six months ended June 30, 2013.

Net interest margin increased to 4.39%, compared to 4.36% for the second quarter of 2013. For the comparable six month periods, net interest margin increased to 4.40%, compared to 4.36% for the six months ended June 30, 2013.

Key asset quality ratios improved at June 30, 2014 compared to December 31, 2013. Nonaccrual loans and repossessed assets to total assets improved to 1.23% from 1.53% at December 31, 2013 and nonaccrual loans to gross loans improved to 0.85% at the end of the second quarter of 2014 compared to 1.11% at December 31, 2013.

Tangible book value per share, net of tax, at June 30, 2014 increased by $1.12 to $9.02, compared to $7.90 at December 31, 2013.

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 three and six months ended June 30, 2014.
Results of Operations and Financial Condition A summary of our results of operations, financial condition and select metrics are included in the following tables:

                                          Three Months Ended June 30,           Six Months Ended June 30,
                                            2014               2013              2014               2013
                                                     (in thousands, except per share amounts)
Net income available to common
stockholders                          $      35,186       $      33,719     $     65,918       $     54,252
Earnings per share applicable to
common stockholders--basic                     0.41                0.39             0.76               0.63
Earnings per share applicable to
common stockholders--diluted                   0.40                0.39             0.76               0.63
Net interest margin                            4.39 %              4.36 %           4.40 %             4.36 %
Return on average assets                       1.46                1.62             1.39               1.35
Return on average tangible common
equity                                        17.41               21.41            16.77              17.66


                                              June 30, 2014      December 31, 2013
                                                         (in thousands)
Total assets                                 $    10,023,587    $         9,307,342
Loans, net of deferred loan fees and costs         7,544,567              6,801,415
Total deposits                                     8,469,505              7,838,205


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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:

                                                              June 30, 2014     December 31, 2013
                                                                        (in thousands)
Non-accrual loans                                            $     64,345      $          75,680
Non-performing assets                                             216,341                233,509
Non-accrual loans to gross loans                                     0.85  %                1.11 %
Net (recoveries) charge-offs to average loans - annualized          (0.09 )                 0.13

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 $10.02 billion at June 30, 2014 from $9.31 billion at December 31, 2013. Total loans, net of deferred loan fees and costs, increased by $743.2 million, or 10.9%, to $7.54 billion as of June 30, 2014, compared to $6.80 billion as of December 31, 2013. Total deposits increased $631.3 million, or 8.1%, to $8.47 billion as of June 30, 2014 from $7.84 billion as of December 31, 2013.

RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable
periods:
                                        Three Months Ended June 30,         Increase         Six Months Ended June 30,        Increase
                                          2014                2013         (Decrease)           2014             2013        (Decrease)
                                                                  (in thousands, except per share amounts)
Consolidated Income Statement
Data:
Interest income                     $      101,973       $     89,285     $    12,688     $     200,674       $ 172,393     $    28,281
Interest expense                             8,075              7,133             942            15,999          14,038           1,961
Net interest income                         93,898             82,152          11,746           184,675         158,355          26,320
Provision for credit losses                    507              3,481          (2,974 )           4,007           8,920          (4,913 )
Net interest income after
provision for credit losses                 93,391             78,671          14,720           180,668         149,435          31,233
Non-interest income                          5,773             11,762          (5,989 )          10,608          16,561          (5,953 )
Non-interest expense                        52,416             48,531           3,885           102,165          95,460           6,705
Income from continuing operations
before provision for income taxes           46,748             41,902           4,846            89,111          70,536          18,575
Income tax expense                          10,706              7,661           3,045            21,330          15,448           5,882
Income from continuing operations           36,042             34,241           1,801            67,781          55,088          12,693
Loss from discontinued
operations, net of tax                        (504 )             (169 )          (335 )          (1,158 )          (131 )        (1,027 )
Net income                          $       35,538       $     34,072     $     1,466     $      66,623       $  54,957     $    11,666
Net income available to common
stockholders                        $       35,186       $     33,719     $     1,467     $      65,918       $  54,252     $    11,666
Earnings per share applicable to
common stockholders--basic          $         0.41       $       0.39     $      0.02     $        0.76       $    0.63     $      0.13
Earnings per share applicable to
common stockholders--diluted        $         0.40       $       0.39     $      0.01     $        0.76       $    0.63     $      0.13


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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 of unrealized gains (losses) on assets/liabilities measured at fair value as well as other items to 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 non-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 earnings power and ability to generate capital to cover credit losses.
The following table shows the components of pre-tax, pre-provision operating earnings for the three and six months ended June 30, 2014 and 2013:

                                         Three Months Ended June 30,          Six Months Ended June 30,
                                           2014               2013               2014              2013
                                                                 (in thousands)
Total non-interest income            $       5,773       $      11,762     $      10,608       $   16,561
Less:
Unrealized gains (losses) on
assets/liabilities measured at fair
value, net                                     235              (3,290 )          (1,041 )         (3,761 )
Bargain purchase gain from
acquisition                                      -              10,044                 -           10,044
(Loss) gain on sales of investment
securities, net                               (163 )                (5 )             203              143
Legal settlements                                -                   -                 -               38
Total operating non-interest income          5,701               5,013            11,446           10,097
Add: net interest income                    93,898              82,152           184,675          158,355
Net operating revenue                $      99,599       $      87,165     $     196,121       $  168,452
Total non-interest expense           $      52,416       $      48,531     $     102,165       $   95,460
Less:
Net loss (gain) on sales and
valuations of repossessed and other
assets                                         184              (1,124 )          (2,363 )           (605 )
Merger / restructure expense                    26               2,620               183            2,815
Total operating non-interest expense $      52,206       $      47,035     $     104,345       $   93,250
Pre-tax, pre-provision operating
earnings                             $      47,393       $      40,130     $      91,776       $   75,202


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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, goodwill and preferred stock. Management
believes that tangible common equity financial measures are useful in evaluating
the Company's capital strength, financial condition, and ability to manage
potential losses. In addition, management believes that these measures improve
comparability to other institutions that have not engaged in acquisitions that
resulted in recorded goodwill and other intangibles.
                                                          June 30, 2014      December 31, 2013
                                                           (dollars and shares in thousands)
Total stockholders' equity                              $       957,664     $         855,498
Less:
 Goodwill and intangible assets, net                             26,475                27,374
Total tangible stockholders' equity                             931,189               828,124
Less:
  Preferred stock                                               141,000               141,000
Total tangible common equity                                    790,189               687,124
Add:
  Deferred tax - attributed to intangible assets                  1,138                 1,452
Total tangible common equity, net of tax                $       791,327     $         688,576
Total assets                                            $    10,023,587     $       9,307,342
Less:
 Goodwill and intangible assets, net                             26,475                27,374
Tangible assets                                               9,997,112             9,279,968
Add:
  Deferred tax - attributed to intangible assets                  1,138                 1,452
Total tangible assets, net of tax                       $     9,998,250     $       9,281,420
Tangible equity ratio                                               9.3 %                 8.9 %
Tangible common equity ratio                                        7.9                   7.4
Return on tangible common equity                                   18.0                  18.3
Common shares outstanding                                        87,774                87,186
Tangible book value per share, net of tax               $          9.02     $            7.90

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:
                                         Three Months Ended June 30,          Six Months Ended June 30,
                                           2014                2013              2014              2013
                                                             (dollars in thousands)
Total operating non-interest expense $       52,206       $     47,035     $     104,345       $   93,250
Divided by:
Total net interest income            $       93,898       $     82,152     $     184,675       $  158,355
Add:
 Tax equivalent interest adjustment           6,029              2,929            11,734            6,311
  Operating non-interest income               5,701              5,013            11,446           10,097
Net operating revenue - tax
equivalent basis                     $      105,628       $     90,094     $     207,855       $  174,763
Efficiency ratio - tax equivalent
basis                                          49.4 %             52.2 %            50.2 %           53.4 %


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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
financial condition and capital adequacy using this same basis. In addition,
management believes that the classified assets to Tier 1 capital plus allowance
measure is a critical regulatory metric for assessing asset quality.
                                                          June 30, 2014      December 31, 2013
                                                           (dollars and shares in thousands)
Stockholders' equity                                    $       957,664     $         855,498
Less:
 Accumulated other comprehensive income (loss)                    8,472               (21,546 )
 Non-qualifying goodwill and intangibles                         25,204                25,991
 Disallowed unrealized losses on equity securities                    -                 8,059
Add:
 Qualifying trust preferred securities                           49,039                48,485
Tier 1 capital (regulatory)                                     973,027               891,479
Less:
 Qualifying trust preferred securities                           49,039                48,485
 Preferred stock                                                141,000               141,000
Tier 1 common equity                                    $       782,988     $         701,994
Divided by:
Risk-weighted assets (regulatory)                       $     8,673,807     $       8,016,500
Tier 1 common equity ratio                                          9.0 %                 8.8 %


                                                         June 30, 2014      December 31, 2013
                                                                (dollars in thousands)
Classified assets                                       $      263,910     $         270,375
Divide:
Tier 1 capital (regulatory)                                    973,027               891,479
Plus: Allowance for credit losses                              105,937               100,050
Total Tier 1 capital plus allowance for credit losses   $    1,078,964     $         991,529
Classified assets to Tier 1 capital plus allowance                24.5 %                27.3 %


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Net Interest Margin
The net interest margin is reported on a 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 fully tax equivalent basis and interest
expense for the periods indicated:
                                                               Three Months Ended June 30,
                                                2014                                                2013
                                                              Average Yield                                         Average
                           Average Balance       Interest        / Cost        Average Balance      Interest      Yield / Cost
                                                                 (dollars in thousands)
Interest earning assets
Loans (1) (2) (3)         $      7,178,255     $   90,583         5.29 %      $      6,100,831     $  81,093           5.40 %
Securities (1)                   1,629,950         10,894         3.08               1,295,902         7,822           2.92
Federal funds sold and
other                              292,386            496         0.68                 407,619           370           0.36
Total interest earning
assets                           9,100,591        101,973         4.75               7,804,352        89,285           4.73
Non-interest earning
assets
Cash and due from banks            138,660                                             119,209
Allowance for credit
losses                            (105,024 )                                           (96,672 )
Bank owned life
insurance                          141,844                                             139,740
Other assets                       462,051                                             432,740
Total assets              $      9,738,122                                    $      8,399,369
Interest-bearing
liabilities
Interest-bearing
deposits:
Interest-bearing
transaction accounts      $        791,501     $      385         0.19 %      $        626,768     $     370           0.24 %
Savings and money
market                           3,583,500          2,691         0.30               2,768,656         2,007           0.29
Time certificates of
deposit                          1,700,412          1,854         0.44               1,584,029         1,552           0.39
Total interest-bearing
deposits                         6,075,413          4,930         0.32               4,979,453         3,929           0.32
Short-term borrowings              236,197            216         0.37                 188,833           214           0.45
Long-term debt                     280,356          2,486         3.55                 365,152         2,535           2.78
Junior subordinated
debt                                42,834            443         4.14                  36,723           455           4.96
Total interest-bearing
liabilities                      6,634,800          8,075         0.49               5,570,161         7,133           0.51
. . .
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