Edgar Filing: WESTERN ALLIANCE BANCORPORATION

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2012

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-32550

WESTERN ALLIANCE BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Nevada		88-0365922
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer I.D. Number)

One E. Washington Street, Phoenix, AZ		85004
(Address of Principal Executive Offices)		(Zip Code)

(602) 389-3500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock issued and outstanding: 83,156,957 shares as of July 31, 2012.

Table of Contents

Index

Page

Part I.

Financial Information

Item 1 –

Financial Statements

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

Consolidated Income Statements for the three and six months ended June 30, 2012 and 2011 (unaudited)

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011 (unaudited)

Consolidated Statement of Stockholders’ Equity (unaudited)

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)

Notes to Unaudited Consolidated Financial Statements

Item 2 –

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 –

Quantitative and Qualitative Disclosures About Market Risk

Item 4 –

Controls and Procedures

Part II.

Other Information

Item 1 –

Legal Proceedings

Item 1A – Risk Factors

Item 2 –

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3 –

Defaults Upon Senior Securities

Item 4 –

Mine Safety Disclosures

Item 5 –

Other Information

Item 6 –

Exhibits

Signatures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2012			2011
	(unaudited)
	(in thousands, except share amounts)
Assets:
Cash and due from banks	$	137,933		$	116,866
Interest-bearing demand deposits in other financial institutions		40,987			38,129

Cash and cash equivalents		178,920			154,995
Money market investments		3,630			7,343
Investment securities - measured, at fair value		5,898			6,515
Investment securities - available-for-sale, at fair value; amortized cost of $1,099,963 at June 30, 2012 and $1,198,185 at December 31, 2011		1,107,129			1,190,385
Investment securities - held-to-maturity, at amortized cost; fair value of $284,389 at June 30, 2012 and $290,035 at December 31, 2011		284,891			286,258
Investments in restricted stock, at cost		34,225			33,520
Loans:
Held for investment, net of deferred fees		5,164,858			4,780,069
Less: allowance for credit losses		97,512			99,170

Total loans		5,067,346			4,680,899
Premises and equipment, net		106,895			105,546
Goodwill		25,925			25,925
Other intangible assets, net		8,028			9,807
Other assets acquired through foreclosure, net		76,994			89,104
Bank owned life insurance		136,141			133,898
Deferred tax assets, net		48,159			61,724
Prepaid expenses		13,464			16,470
Other assets		65,882			42,093
Discontinued operations, assets held for sale		45			59

Total assets	$	7,163,572		$	6,844,541

Liabilities:
Deposits:
Non-interest-bearing demand	$	1,842,125		$	1,558,211
Interest-bearing		4,159,323			4,100,301

Total deposits		6,001,448			5,658,512
Customer repurchase agreements		86,864			123,626
Other borrowings		303,514			353,321
Junior subordinated debt, at fair value		36,687			36,985
Other liabilities		62,939			35,414

Total liabilities		6,491,452			6,207,858


Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock - par value $.0001 and liquidation value per share of $1,000; 20,000,000 authorized; 141,000 issued and outstanding at June 30, 2012 and December 31, 2011		141,000			141,000
Common stock - par value $.0001; 200,000,000 authorized; 83,157,198 shares issued and outstanding at June 30, 2012 and 82,361,655 at December 31, 2011		8			8
Additional paid in capital		748,159			743,780
Accumulated deficit		(221,338	)		(243,512	)
Accumulated other comprehensive income (loss)		4,291			(4,593	)

Total stockholders’ equity		672,120			636,683

Total liabilities and stockholders’ equity	$	7,163,572		$	6,844,541

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(in thousands, except per share amounts)
Interest income:
Loans, including fees	$	68,342		$	64,919		$	136,102		$	128,801
Investment securities - taxable		5,815			7,633			12,227			14,530
Investment securities - non-taxable		2,528			13			4,768			33
Dividends - taxable		314			273			594			581
Dividends - non-taxable		732			623			1,385			1,328
Other		115			185			207			339

Total interest income		77,846			73,646			155,283			145,612

Interest expense:
Deposits		4,168			7,548			8,930			15,446
Customer repurchase agreements		58			100			122			186
Other borrowings		2,328			2,023			4,398			4,204
Junior subordinated debt		487			689			971			1,391

Total interest expense		7,041			10,360			14,421			21,227

Net interest income		70,805			63,286			140,862			124,385
Provision for credit losses		13,330			11,891			26,411			21,932

Net interest income after provision for credit losses		57,475			51,395			114,451			102,453

Non-interest income:
Securities impairment charges recognized in earnings		—			(226	)		—			(226	)
Gain on sales of securities, net		1,110			2,666			1,471			4,045
Mark to market (losses) gains, net		564			336			232			(173	)
Service charges and fees		2,317			2,243			4,602			4,527
Other fee revenue		870			1,039			1,870			1,799
Income from bank owned life insurance		1,120			1,822			2,243			3,006
Other		1,416			1,717			2,863			3,449

Total non-interest income (loss)		7,397			9,597			13,281			16,427

Non-interest expense:
Salaries and employee benefits		25,995			22,960			52,659			45,800
Occupancy expense, net		4,669			5,044			9,391			9,898
Net loss on sales/valuations of repossessed assets and bank premises, net		901			8,633			3,552			14,762
Insurance		2,152			2,352			4,202			6,214
Loan and repossessed asset expenses		1,653			2,284			3,337			4,406
Legal, professional and director fees		2,517			2,361			4,089			3,727
Marketing		1,459			1,135			2,830			2,292
Data processing		1,293			928			2,288			1,776
Intangible amortization		890			890			1,779			1,779
Customer service		682			828			1,274			1,720
Merger expenses		—			(109	)		—			109
Other		3,220			3,702			6,927			6,672

Total non-interest expense		45,431			51,008			92,328			99,155

Income from continuing operations before provision for income taxes		19,441			9,984			35,404			19,725
Income tax expense		5,259			3,295			9,700			7,324

Income from continuing operations		14,182			6,689			25,704			12,401
Loss from discontinued operations, net of tax benefit		(221	)		(460	)		(443	)		(1,019	)

Net income		13,961			6,229			25,261			11,382
Dividends and accretion on preferred stock		1,325			2,503			3,088			5,006

Net income available to common shareholders	$	12,636		$	3,726		$	22,173		$	6,376

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)

(continued)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Income (loss) per share - basic and diluted
Continuing operations	$	0.16		$	0.05		$	0.28		$	0.09
Discontinued		(0.00	)		(0.01	)		(0.01	)		(0.01	)

	$	0.15		$	0.05		$	0.27		$	0.08


Average number of common shares - basic		81,590			80,883			81,475			80,838
Average number of common shares - diluted		81,955			81,223			82,091			81,119
Dividends declared per common share	$	—		$	—		$	—		$	—

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Net income	$	13,961		$	6,229		$	25,261		$	11,382

Other comprehensive income, net:
Unrealized gain on securities available-for-sale (AFS), net		4,119			10,505			10,325			6,019
Impairment loss on securities, net		—			144			—			144
Unrealized gain on cash flow hedge, net		8			—			8			—
Realized gain on cash flow hedge, net		—			—			(519	)		—
Realized gain on sale of securities AFS included in income, net		(705	)		(1,703	)		(930	)		(2,536	)

Net other comprehensive income		3,422			8,946			8,884			3,627

Comprehensive income	$	17,383		$	15,175		$	34,145		$	15,009


Amount of impairment losses reclassified out of accumulated other comprehensive income into earnings	$	—		$	226		$	—		$	226

Income tax benefit related to impairment losses	$	—		$	82		$	—		$	82

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)


	Preferred Stock				Common Stock				Additional Paid In		Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Income (Loss)			Deficit			Equity
	(in thousands)
Balance, December 31, 2011:		141	$	141,000		82,362	$	8	$	743,780	$	(4,593	)	$	(243,512	)	$	636,683
Net income		—		—		—		—		—		—			25,261			25,261
Exercise of stock options		—		—		79		—		552		—			—			552
Stock-based compensation		—		—		122		—		1,184		—			—			1,184
Restricted stock grants, net		—		—		595		—		2,643		—			—			2,643
Dividends on preferred stock		—		—		—		—		—		—			(3,088	)		(3,088	)
Other comprehensive income (loss),		—		—		—		—		—		8,884			—			8,884

Balance, June 30, 2012		141	$	141,000		83,158	$	8	$	748,159	$	4,291		$	(221,338	)	$	672,120

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six Months Ended June 30,
	2012			2011
	(in thousands)
Cash flows from operating activities:
Net income	$	25,261		$	11,382
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		26,411			21,932
Depreciation and amortization		4,936			5,393
Stock-based compensation		3,827			1,658
Deferred income taxes and income taxes receivable		8,781			6,689
Net amortization of discounts and premiums for investment securities		5,371			4,172
Securities impairment		—			226
(Gains)/Losses on:
Sales of securities, AFS		(1,471	)		(4,045	)
Derivatives		99			121
Sale of repossessed assets, net		3,573			14,795
Sale of premises and equipment, net		(21	)		(33	)
Sale of loans, net		6			—
Changes in:
Other assets		8,082			7,311
Other liabilities		(898	)		11,745
Fair value of assets and liabilities measured at fair value		(232	)		173
Servicing rights, net		9			164

Net cash provided by operating activities		83,734			81,683

Cash flows from investing activities:
Proceeds from loan sales		3,445			—
Proceeds from sale of securities measured at fair value		—			2,907
Principal pay downs and maturities of securities measured at fair value		557			4,177
Proceeds from sale of available-for-sale securities		120,922			286,819
Principal pay downs and maturities of available-for-sale securities		225,833			109,234
Purchase of available-for-sale securities		(251,072	)		(242,658	)
Purchases of securities held-to-maturity		(3	)		(35,157	)
Proceeds from maturities of securities held-to-maturity		3			640
Loan originations and principal collections, net		(425,010	)		(219,857	)
Investment in money market		3,713			13,988
Liquidation of restricted stock		(705	)		991
Purchase of investment tax credits		(3,883	)		—
Sale and purchase of premises and equipment, net		(4,485	)		1,549
Proceeds from sale of other real estate owned and repossessed assets, net		17,238			27,566

Net cash (used) in investing activities		(313,447	)		(49,801	)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(continued)


	Six Months Ended June 30,
	2012			2011
	(in thousands)
Cash flows from financing activities:
Net increase in deposits		342,936			249,879
Net increase (decrease) in borrowings		(86,762	)		39,241
Exercise of stock options		552			312
Cash dividends paid on preferred stock		(3,088	)		(3,500	)

Net cash provided by financing activities		253,638			285,932

Net increase in cash and cash equivalents		23,925			317,814
Cash and cash equivalents at beginning of year		154,995			216,746

Cash and cash equivalents at end of period	$	178,920		$	534,560


Supplemental disclosure:
Cash paid during the period for:
Interest	$	14,801		$	21,297
Income taxes		1,290			—
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net		8,701			20,438
Unfunded commitments to purchase investment tax credits		28,617			—

See the accompanying notes.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Western Alliance Bancorporation (“WAL” or “the Company”), incorporated under the laws of the state of Nevada, is a bank holding company providing full service banking and related services to locally owned businesses, professional firms, real estate developers and investors, local non-profit organizations, high net worth individuals and other consumers through its three wholly owned subsidiary banks: Bank of Nevada, operating in Southern Nevada, Western Alliance Bank, operating in Arizona and Northern Nevada and Torrey Pines Bank, operating in California. In addition, its non-bank subsidiaries, Shine Investment Advisory Services, Inc. and Western Alliance Equipment Finance, offer an array of financial products and services aimed at satisfying the needs of small to mid-sized businesses and their proprietors, including financial planning, investment advice, and equipment finance nationwide. These entities are collectively referred to herein as the Company.

Basis of presentation

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses; fair value of other real estate owned; determination of the valuation allowance related to deferred tax assets; impairment of goodwill and other intangible assets and other than temporary impairment on securities. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.

Principles of consolidation

WAL has 10 wholly-owned subsidiaries: Bank of Nevada (“BON”), Western Alliance Bank (“WAB”), Torrey Pines Bank (“TPB”), which are all banking subsidiaries; Western Alliance Equipment Finance, Inc. (“WAEF”), which provides equipment finance services; and six unconsolidated subsidiaries used as business trusts in connection with issuance of trust-preferred securities. In addition, WAL maintains an 80 percent interest in Shine Investment Advisory Services Inc. (“Shine”), a registered investment advisor.

BON has three wholly-owned subsidiaries: BW Real Estate, Inc. which operates as a real estate investment trust and holds certain of BON’s real estate loans and related securities; BON Investments, Inc., which holds certain investment securities; and BW Nevada Holdings, LLC, which owns the Company’s 2700 West Sahara Avenue, Las Vegas, Nevada location.

WAB has one wholly-owned subsidiary, WAB Investments, Inc., which holds certain investment securities, and TPB has one wholly-owned subsidiary, TPB Investments, Inc., which holds certain investment securities.

The Company does not have any other entities that should be considered for consolidation. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the consolidated financial statements as of December 31, 2011 and for the three and six months ended June 30, 2011 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

Interim financial information

The accompanying unaudited consolidated financial statements as of June 30, 2012 and 2011 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company’s audited financial statements.

Investment securities

Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as held-to-maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.

Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are both equity and debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.

Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security using the interest method. For mortgage-backed securities, estimates of prepayments are considered in the constant yield calculations.

In estimating whether there are any other than temporary impairment losses, management considers 1) the length of time and the extent to which the fair value has been less than amortized cost, 2) the financial condition and near term prospects of the issuer, 3) the impact of changes in market interest rates, and 4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security.

Declines in the fair value of individual debt securities available for sale that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings, and 2) market or other factors is recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost.

For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the other than temporary impairment is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.

Derivative financial instruments

Derivatives are recognized on the balance sheet at their fair value, with changes in fair value reported in current-period earnings. These instruments consist primarily of interest rate swaps.

Certain derivative transactions that meet specified criteria qualify for hedge accounting. The Company occasionally purchases a financial instrument or originates a loan that contains an embedded derivative instrument. Upon purchasing the instrument or originating the loan, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where (1) the host contract is measured at fair value, with changes in fair value reported in current earnings, or (2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at fair value and is not designated as a hedging instrument.

Allowance for credit losses

Credit risk is inherent in the business of extending loans and leases to borrowers. Like other financial institutions, the Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when Management believes that the contractual principal or interest will not be collected. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount believed adequate to absorb probable losses on existing loans that may become uncollectable, based on evaluation of the collectability of loans and prior credit loss experience, together with other factors. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.

The Company’s allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets and the state of certain industries. Specific changes in the risk factors are based on perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and three-year loss history are also incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in Nevada, Arizona and California, which have declined substantially from their peak. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the FDIC and state bank regulatory agencies, as an integral part of their examination processes, periodically review our subsidiary banks’ allowances for credit losses, and may require us to make additions to our allowance based on their judgment about information available to them at the time of their examinations. Management regularly reviews the assumptions and formulae used in determining the allowance and makes adjustments if required to reflect the current risk profile of the portfolio.

The allowance consists of specific and general components. The specific allowance relates to impaired loans. In general, impaired loans include those where interest recognition has been suspended, loans that are more than 90 days delinquent but because of adequate collateral coverage, income continues to be recognized, and other criticized and classified loans not paying substantially according to the original contract terms. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310, Receivables (“ASC 310”). Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest rate. The amount to which the present value falls short of the current loan obligation will be set up as a reserve for that account or charged-off.

The Company uses an appraised value method to determine the need for a reserve on impaired, collateral dependent loans and further discounts the appraisal for disposition costs. Generally, the Company obtains independent collateral valuation analysis for each loan every six months.

The general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative and quantitative factors listed above. The change in the allowance from one reporting period to the next may not directly correlate to the rate of change of the nonperforming loans for the following reasons:

1. A loan moving from impaired performing to impaired nonperforming does not mandate an increased reserve. The individual account is evaluated for a specific reserve requirement when the loan moves to impaired status, not when it moves to nonperforming status, and is reevaluated at each subsequent reporting period. Because our nonperforming loans are predominately collateral dependent, reserves are primarily based on collateral value, which is not affected by borrower performance, but rather by market conditions.

2. Not all impaired accounts require a specific reserve. The payment performance of the borrower may require an impaired classification, but the collateral evaluation may support adequate collateral coverage. For a number of impaired accounts in which borrower performance has ceased, the collateral coverage is now sufficient because a partial charge off of the account has been taken. In those instances, neither a general reserve nor a specific reserve is assessed.

Other assets acquired through foreclosure

Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly leased) are classified as other real estate owned and other repossessed property and are initially reported at fair value of the asset less estimated selling costs. Subsequent adjustments are based on the lower of carrying value or fair value, less estimated costs to sell the property. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to non-interest expense. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances.

Income taxes

Western Alliance Bancorporation and its subsidiaries, other than BW Real Estate, Inc., file a consolidated federal tax return. Due to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent “temporary differences.” Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of Management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

Although realization is not assured, the Company believes that the realization of the recognized net deferred tax asset of $48.2 million at June 30, 2012 is more likely than not based on expectations as to future taxable income and based on available tax planning strategies as defined in FASB ASC 740, Income Taxes (“ASC 740”) that could be implemented if necessary to prevent a carryforward from expiring.

The most significant source of these timing differences are the credit loss reserve and net operating loss carryforwards, which account for substantially all of the net deferred tax asset.

As a result of the losses incurred in 2009 and 2010, the Company is in a three-year cumulative pretax loss position at June 30, 2012. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset. The Company has concluded that there is sufficient positive evidence to overcome this negative evidence. This positive evidence includes recent positive financial performance in 2011 and the first two quarters of 2012, and Company forecasts, exclusive of tax planning strategies, that show full utilization of the net operating losses by the end of 2013 based on current projections. In addition, the Company has evaluated tax planning strategies, including potential sales of businesses and assets in which it could realize the excess of appreciated value over the tax basis of its assets. The amount of deferred tax assets considered realizable, however, could be significantly reduced in the near term if estimates of future taxable income during the carryforward period are significantly lower than forecasted due to deterioration in market conditions.

Based on the above discussion, it is more likely than not that the Company will fully utilize deferred federal and state tax assets pertaining to the existing net operating loss carryforwards and any net operating loss (NOL) that would be created by the reversal of the future net deductions that have not yet been taken on a tax return.

Fair values of financial instruments

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:

•

Level 1 - Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2 - Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, matrix pricing or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly in the market.

•

Level 3 - Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of discounted cash flow models and similar techniques.

The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.

FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2012 or December 31, 2011. The estimated fair value amounts for June 30, 2012 and December 31, 2011 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.

The information on page 40 in Note 9, “Fair Value Accounting,” should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.

Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.

Money market investments

The carrying amounts reported in the consolidated balance sheets for money market investments approximate their fair value.

Securities

The fair values of U.S. Treasuries, corporate bonds, mutual funds, and exchange-listed preferred stock are based on quoted market prices and are categorized as Level 1 of the fair value hierarchy.

The fair value of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.

The Company owns certain collateralized debt obligations (“CDOs”) for which quoted prices are not available. Quoted prices for similar assets are also not available for these investment securities. In order to determine the fair value of these securities, the Company has estimated the future cash flows and discount rate using observable market inputs adjusted based on assumptions regarding the adjustments a market participant would assume necessary for each specific security. As a result, the resulting fair values have been categorized as Level 3 in the fair value hierarchy

Restricted stock

The Company’s subsidiary banks are members of the Federal Home Loan Bank (“FHLB”) system and maintain an investment in capital stock of the FHLB. The Company’s subsidiary banks also maintain an investment in their primary correspondent bank. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.

Loans

Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value based on a third party independent valuation. As a result, the fair value for loans disclosed in Note 9, “Fair Value Accounting,” is categorized as Level 2 in the fair value hierarchy.

Accrued interest receivable and payable

The carrying amounts reported in the consolidated balance sheets for accrued interest receivable and payable approximate their fair value. Accrued interest receivable and payable fair value measurements disclosed in Note 9 “Fair Accounting,” are classified as Level 3 in the fair value hierarchy.

Derivative financial instruments

All derivatives are recognized on the balance sheet at their fair value. The fair value for derivatives is determined based on market prices, broker-dealer quotations on similar product or other related input parameters. As a result, the fair values have been categorized as Level 2 in the fair value hierarchy.

Deposit liabilities

The fair value disclosed for demand and savings deposits is by definition equal to the amount payable on demand at their reporting date (that is, their carrying amount) which the Company believes a market participant would consider in

determining fair value. The carrying amount for variable-rate deposit accounts approximates their fair value. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on these deposits. The fair value measurement of the deposit liabilities disclosed in Note 9, “Fair Value Accounting,” is categorized as Level 2 in the fair value hierarchy.

Federal Home Loan Bank and Federal Reserve advances and other borrowings

The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The other borrowings have been categorized as Level 3 in the fair value hierarchy. The FHLB and FRB advances have been categorized as Level 2 in the fair value hierarchy due to their short durations.

Junior subordinated debt

Junior subordinated debt and subordinated debt are valued by comparing interest rates and spreads to benchmark indices offered to institutions with similar credit profiles to our own and discounting the contractual cash flows on our debt using these market rates. The junior subordinated debt has been categorized as Level 3 in the fair value hierarchy.

Off-balance sheet instruments

Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Recent Accounting Pronouncements

In April 2011, the FASB issued guidance within ASU 2011-03 “Reconsideration of Effective Control for Repurchase Agreements.” The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows.

In May 2011, the FASB issued guidance within ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in ASU 2011-04 generally represent clarifications of Topic 820, Fair Value Measurement but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The adoption of this guidance did not have a material impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows. See note 9 “Fair Value Accounting” for the enhanced disclosures required by ASU 2011-04.

In June 2011, the FASB issued guidance within ASU 2011-05 “Presentation of Comprehensive Income.” The amendments in ASU 2011-05 to Topic 220, Comprehensive Income, allow an entity the option to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows.

2. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

In the first quarter of 2010, the Company decided to discontinue its affinity credit card platform, PartnersFirst, and has presented certain activities as discontinued operations. The Company transferred certain assets to held-for-sale and reported a portion of its operations as discontinued. At June 30, 2012 and December 31, 2011, the Company had $34.6 million and $38.9 million, respectively, of outstanding credit card loans which will have continuing cash flows related to the collection of these loans. These credit card loans are included in loans held for investment as of June 30, 2012 and December 31, 2011.

The following table summarizes the operating results of the discontinued operations for the periods indicated:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(in thousands)
Affinity card revenue	$	336		$	399		$	631		$	770
Non-interest expenses		(717	)		(1,192	)		(1,395	)		(2,527	)

Loss before income taxes		(381	)		(793	)		(764	)		(1,757	)
Income tax benefit		(160	)		(333	)		(321	)		(738	)

Net loss	$	(221	)	$	(460	)	$	(443	)	$	(1,019	)

3. EARNINGS PER SHARE

Diluted earnings per share is based on the weighted average outstanding common shares during each period, including common stock equivalents. Basic earnings per share is based on the weighted average outstanding common shares during the period.

Basic and diluted earnings per share, based on the weighted average outstanding shares, are summarized as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(in thousands, except per share amounts)
Weighted average shares - Basic		81,590		80,883		81,475		80,838
Dilutive effect of options		365		341		616		281

Weighted average shares - Diluted		81,955		81,224		82,091		81,119


Net income available to common stockholders	$	12,636	$	3,726	$	22,173	$	6,376
Earnings per share - Basic		0.15		0.05		0.27		0.08
Earnings per share - Diluted		0.15		0.05		0.27		0.08

The Company had 1,071,030 and 2,092,932 stock options outstanding as of June 30, 2012 and December 31, 2011, respectively, that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive.

4. INVESTMENT SECURITIES

Carrying amounts and fair values of investment securities at the end of the period indicated are summarized as follows:


	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(in thousands)
*Securities held-to-maturity*
Collateralized debt obligations	$	50	$	972	$	—		$	1,022
Corporate bonds		102,784		478		(5,221	)		98,041
Municipal obligations (1)		180,557		3,344		(75	)		183,826
CRA investments		1,500		—		—			1,500

	$	284,891	$	4,794	$	(5,296	)	$	284,389


	Amortized Cost		OTTI Recognized in Other Comprehensive Loss			Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(in thousands)
*Securities available-for-sale*
U.S. Government-sponsored agency securities	$	30,012	$	—		$	51	$	—		$	30,063
Municipal obligations (1)		47,058		—			147		(562	)		46,643
Adjustable-rate preferred stock		74,881		—			3,560		(1,884	)		76,557
Mutual funds (2)		28,978		—			1,157		—			30,135
Corporate bonds		5,000		—			—		(37	)		4,963
Direct U.S. obligations and GSE residential mortgage-backed securities (3)		830,591		—			14,378		(76	)		844,893
Private label residential mortgage-backed securities		22,967		(1,811	)		1,818		(934	)		22,040
Private label commercial mortgage-backed securities		5,414		—			202		—			5,616
Trust preferred securities		32,001		—			—		(9,806	)		22,195
CRA investments		23,061		—			963		—			24,024

	$	1,099,963	$	(1,811	)	$	22,276	$	(13,299	)	$	1,107,129


*Securities measured at fair value*
Direct U.S. obligations and GSE residential mortgage-backed securities (3)											$	5,898

(1)	These consist of revenue obligations.

(2)	These are investment grade corporate bonds.

(3)	These are primarily agency collateralized mortgage obligations.


	December 31, 2011
	(in thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(in thousands)
*Securities held-to-maturity*
Collateralized debt obligations	$	50	$	972	$	—		$	1,022
Corporate bonds		102,785		171		(2,029	)		100,927
Municipal obligations (1)		181,923		4,695		(32	)		186,586
CRA investments		1,500		—		—			1,500

	$	286,258	$	5,838	$	(2,061	)	$	290,035


	Amortized Cost		OTTI Recognized in Other Comprehensive Loss			Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(in thousands)
*Securities available-for-sale*
U.S. Government-sponsored agency securities	$	155,898	$	—		$	368	$	(55	)	$	156,211
Municipal obligations (1)		5,555		—			47		(16	)		5,586
Adjustable-rate preferred stock		59,661		—			1,157		(6,142	)		54,676
Mutual funds (2)		28,978		—			65		(179	)		28,864
Corporate bonds		5,000		—			—		(425	)		4,575
Direct U.S. obligations and GSE residential mortgage-backed securities (3)		855,828		—			9,095		(339	)		864,584
Private label residential mortgage-backed securities		26,953		(1,811	)		1,815		(1,173	)		25,784
Private label commercial mortgage-backed securities		5,461		—			—		(30	)		5,431
Trust preferred securities		32,016		—			—		(10,857	)		21,159
CRA investments		22,835		—			680		—			23,515

	$	1,198,185	$	(1,811	)	$	13,227	$	(19,216	)	$	1,190,385


*Securities measured at fair value*
Direct U.S. obligations and GSE residential mortgage-backed securities (3)											$	6,515

(1)	These consist of revenue obligations.

(2)	These are investment grade corporate bonds.

(3)	These are primarily agency collateralized mortgage obligations.

For additional information on the fair value changes of the securities measured at fair value, see the trading securities table in Note 9 “Fair Value Accounting”.

The Company conducts an other-than-temporary impairment (“OTTI”) analysis on a quarterly basis. The initial indication of OTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. Another potential indication of OTTI is a downgrade below investment grade. In determining whether an impairment is OTTI, the Company considers the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. For marketable equity securities, the Company also considers the issuer’s financial condition, capital strength, and near-term prospects.

For debt securities and for adjustable-rate preferred stock (“ARPS”) that are treated as debt securities for the purpose of OTTI analysis, the Company also considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action. For ARPS with a fair value below cost that is not attributable to the credit deterioration of the issuer, such as a decline in cash flows from the security or a downgrade in the security’s rating below investment grade, the Company does not recognize an OTTI charge where it is able to assert that it has the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Gross unrealized losses at June 30, 2012 are primarily caused by interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The Company has reviewed securities on which there is an unrealized loss in accordance with its accounting policy for OTTI described above and determined there were no securities impairment charges for the three and six months ended June 30, 2012 and $0.2 million for the three and six months ended June 30, 2011. The impairment charges are attributed to the unrealized losses in the Company’s CDO portfolio.

The Company does not consider any other securities to be other-than-temporarily impaired as of June 30, 2012 and December 31, 2011. OTTI is reassessed quarterly. No assurance can be made that additional OTTI will not occur in future periods.

Information pertaining to securities with gross unrealized losses at June 30, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:


	June 30, 2012
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(in thousands)
*Securities held-to-maturity*
Corporate bonds	$	1,151	$	28,813	$	4,070	$	60,930	$	5,221	$	89,743
Municipal obligations		75		23,255		—		—		75		23,255

	$	1,226	$	52,068	$	4,070	$	60,930	$	5,296	$	112,998

*Securities available-for-sale*
Adjustable-rate preferred stock	$	373	$	8,340	$	1,511	$	7,610	$	1,884	$	15,950
Mutual funds		—		—		—		—		—		—
Corporate bonds		37		4,963		—		—		37		4,963
Direct U.S obligations and GSE residential mortgage-backed securities		5		10,125		71		8,057		76		18,182
Municipal obligations		562		27,838		—		—		562		27,838
Private label residential mortgage-backed securities		812		14,091		122		7,279		934		21,370
Private label commercial mortgage-backed securities		—		—		—		—		—		—
Trust preferred securities		—		—		9,806		22,195		9,806		22,195

	$	1,789	$	65,357	$	11,510	$	45,141	$	13,299	$	110,498


	December 31, 2011
	Less Than Twelve Months				Over Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(in thousands)
*Securities held-to-maturity*
Corporate bonds	$	2,029	$	77,931	$	—	$	—	$	2,029	$	77,931
Municipal obligations		32		7,774		—		—		32		7,774

	$	2,061	$	85,705	$	—	$	—	$	2,061	$	85,705

*Securities available-for-sale*
U.S. Government-sponsored agency securities	$	55	$	9,944	$	—	$	—	$	55	$	9,944
Adjustable-rate preferred stock		6,142		26,335		—		—		6,142		26,335
Mutual funds		179		15,879		—		—		179		15,879
Corporate bonds		425		4,575		—		—		425		4,575
Direct U.S obligations and GSE residential mortgage-backed securities		222		54,668		117		15,239		339		69,907
Municipal obligations		16		2,640		—		—		16		2,640
Private label residential mortgage-backed securities		465		20,045		708		5,034		1,173		25,079
Private label commercial mortgage-backed securities		30		5,431		—		—		30		5,431
Trust preferred securities		—		—		10,857		21,159		10,857		21,159

	$	7,534	$	139,517	$	11,682	$	41,432	$	19,216	$	180,949

At June 30, 2012 and December 31, 2011, the Company’s unrealized losses relate primarily to interest rate fluctuations, credit spreads widening and reduced liquidity in applicable markets. The total number of securities in an unrealized loss position at June 30, 2012 was 91 compared to 106 at December 31, 2011. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysis reports. Since material downgrades have not occurred and management does not intend to sell the debt securities for the foreseeable future, none of the securities described in the above table or in this paragraph were deemed to be other than temporarily impaired.

At June 30, 2012, the net unrealized loss on trust preferred securities classified as AFS was $9.8 million, compared with $10.9 million at December 31, 2011. The Company actively monitors its debt and other structured securities portfolios classified as AFS for declines in fair value.

The amortized cost and fair value of securities as of June 30, 2012 and December 31, 2011, by contractual maturities, are shown below. The actual maturities of the mortgage-backed securities may differ from their contractual maturities because the loans underlying the securities may be repaid without any penalties due to borrowers that have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these securities are listed separately in the maturity summary.


	June 30, 2012				December 31, 2011
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Securities held-to-maturity
Due in one year or less	$	1,500	$	1,500	$	1,500	$	1,500
After one year through five years		8,395		8,395		8,389		8,093
After five years through ten years		114,515		110,226		114,748		114,098
After ten years		160,481		164,268		161,621		166,344

	$	284,891	$	284,389	$	286,258	$	290,035

Securities available-for-sale
Due in one year or less	$	57,877	$	60,249	$	52,815	$	53,399
After one year through five years		13,828		14,446		20,445		20,635
After five years through ten years		33,606		34,856		134,935		135,420
After ten years		164,061		152,685		134,162		116,347
Mortgage backed securities		830,591		844,893		855,828		864,584

	$	1,099,963	$	1,107,129	$	1,198,185	$	1,190,385

The following table summarizes the Company’s investment ratings position as of June 30, 2012:


	As of June 30, 2012
	AAA		Split-rated AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,197	$	—	$	128,645	$	81,297	$	8,783	$	278	$	227,200
Direct U.S. obligations & GSE residential mortgage-backed securities		—		850,791		—		—		—		—		850,791
Private label residential mortgage-backed securities		1,738		—		3,495		14,733		—		2,074		22,040
Private label commercial mortgage-backed securities		5,616		—		—		—		—		—		5,616
Mutual funds (3)		—		—		—		—		30,135		—		30,135
U.S. Government-sponsored agency securities		—		30,063		—		—		—		—		30,063
Adjustable-rate preferred stock		—		—		—		—		64,823		7,637		72,460
Trust preferred securities		—		—		—		—		22,195		—		22,195
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		—		—		2,696		80,051		25,000		—		107,747

Total (1) (2)	$	15,551	$	880,854	$	134,836	$	176,081	$	150,936	$	10,039	$	1,368,297

(1)	The Company used the average credit rating of the combination of S&P, Moody’s and Fitch in the above table where ratings differed.

(2)	Securities values are shown at carrying value as of June 30, 2012. Unrated securities consist of CRA investments with a carrying value of $24 million, ARPS with a carrying value of $4.1 million and an other investment of $1.5 million.

(3)	At least 80% of mutual funds are investment grade corporate bonds.

The following table summarizes the Company’s investment ratings position as of December 31, 2011.


	As of December 31, 2011
	AAA		Split-rated AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,273	$	—	$	109,159	$	60,949	$	8,855	$	273	$	187,509
Direct U.S. obligations & GSE residential mortgage-backed securities		—		871,099		—		—		—		—		871,099
Private label residential mortgage-backed securities		13,349		—		4,104		6,438		—		1,893		25,784
Private label commercial mortgage-backed securities		5,431		—		—		—		—		—		5,431
Mutual funds (3)		—		—		—		—		28,864		—		28,864
U.S. Government-sponsored agency securities		—		156,211		—		—		—		—		156,211
Adjustable-rate preferred stock		—		—		—		—		46,530		7,126		53,656
Trust preferred securities		—		—		—		—		21,159		—		21,159
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		2,695		—		15,130		64,535		15,000		—		97,360

Total (1) (2)	$	29,748	$	1,027,310	$	128,393	$	131,922	$	120,408	$	9,342	$	1,447,123

(1)	The Company used the average credit rating of the combination of S&P, Moody’s and Fitch in the above table where ratings differed.

(2)

Securities values are shown at carrying value as of December 31, 2011. Unrated securities consist of CRA investments with a carrying value of $23.5 million, an HTM Corporate security with a carrying value of $10.0 million, one ARPS with a carrying value of $1.0 million and an other investment of $1.5 million.

(3)	At least 80% of mutual funds are investment grade corporate bonds.

Securities with carrying amounts of approximately $619.4 million and $675.0 million at June 30, 2012 and December 31, 2011, respectively, were pledged for various purposes as required or permitted by law.

The following table presents gross gains and (losses) on sales of investment securities:


	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Gross gains	$	1,157		$	2,686		$	1,713		$	4,066
Gross (losses)		(47	)		(20	)		(242	)		(21	)

	$	1,110		$	2,666		$	1,471		$	4,045

5. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s loans held for investment portfolio is as follows:


	June 30, 2012			December 31, 2011
	(in thousands)
Commercial real estate - owner occupied	$	1,310,340		$	1,252,182
Commercial real estate - non-owner occupied		1,440,353			1,301,172
Commercial and industrial		1,262,834			1,120,107
Residential real estate		430,414			443,020
Construction and land development		360,595			381,676
Commercial leases		310,801			216,475
Consumer		55,825			72,504
Deferred fees and unearned income, net		(6,304	)		(7,067	)

		5,164,858			4,780,069
Allowance for credit losses		(97,512	)		(99,170	)

Total	$	5,067,346		$	4,680,899

The following table presents the contractual aging of the recorded investment in past due loans by class of loans excluding deferred fees:


	June 30, 2012
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 days Past Due		Total Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,288,060	$	8,028	$	2,368	$	11,884	$	22,280	$	1,310,340
Non-owner occupied		1,257,071		738		—		2,150		2,888		1,259,959
Multi-family		180,186		—		—		208		208		180,394
Commercial and industrial
Commercial		1,252,707		6,255		1,505		2,367		10,127		1,262,834
Leases		310,298		—		—		503		503		310,801
Construction and land development
Construction		199,786		—		—		—		—		199,786
Land		147,940		1,632		2,063		9,174		12,869		160,809
Residential real estate		415,478		1,123		1,358		12,455		14,936		430,414
Consumer		54,270		326		239		990		1,555		55,825

Total loans	$	5,105,796	$	18,102	$	7,533	$	39,731	$	65,366	$	5,171,162


	December 31, 2011
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 days Past Due		Total Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,235,707	$	3,150	$	2,488	$	10,837	$	16,475	$	1,252,182
Non-owner occupied		1,168,616		—		2,365		5,051		7,416		1,176,032
Multi-family		124,855		—		—		285		285		125,140
Commercial and industrial
Commercial		1,114,881		683		1,146		3,397		5,226		1,120,107
Leases		216,475		—		—		—		—		216,475
Construction and land development
Construction		210,843		—		—		3,434		3,434		214,277
Land		151,618		6,217		375		9,189		15,781		167,399
Residential real estate		424,086		2,349		4,030		12,555		18,934		443,020
Consumer		70,759		376		602		767		1,745		72,504

Total loans	$	4,717,840	$	12,775	$	11,006	$	45,515	$	69,296	$	4,787,136

The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing interest by class of loans:


	June 30, 2012								December 31, 2011
	Non-accrual loans						Loans past due 90 days or more and still accruing		Non-accrual loans						Loans past due 90 days or more and still accruing
	Current		Past Due/ Delinquent		Total Non-accrual		Loans past due 90 days or more and still accruing		Current		Past Due/ Delinquent		Total Non-accrual		Loans past due 90 days or more and still accruing
	(in thousands)
Commercial real estate
Owner occupied	$	14,673	$	17,811	$	32,484	$	—	$	6,951	$	14,202	$	21,153	$	439
Non-owner occupied		19,441		2,150		21,591		—		8,834		7,416		16,250		—
Multi-family		749		208		957		—		331		285		616		—
Commercial and industrial
Commercial		7,102		5,778		12,880				3,789		3,029		6,818		523
Leases		534		503		1,037		—		592		—		592		—
Construction and land development
Construction		—		—		—		—		11,011		3,435		14,446		—
Land		3,574		11,566		15,140				2,615		11,752		14,367		860
Residential real estate		7,241		12,514		19,755				2,891		12,856		15,747		—
Consumer		285		195		480		795		403		—		403		767

Total	$	53,599	$	50,725	$	104,324	$	795	$	37,417	$	52,975	$	90,392	$	2,589

The reduction in interest income associated with loans on nonaccrual status was approximately $1.5 million and $2.9 million for the three and six months ended June 30, 2012, respectively, and $1.5 million and $2.3 million for the three and six months ended June 30, 2011, respectively.

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful”, and “Loss,” which correspond to risk ratings six, seven, eight, and nine, respectively. Substandard loans include those characterized by well defined weaknesses and carry the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful, or risk rated eight, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The final rating of Loss covers loans considered uncollectible and having such little

recoverable value that it is not practical to defer writing off the asset. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention, are deemed to be Watch, or risk rated six. Risk ratings are updated, at a minimum, quarterly. The following tables present loans by risk rating:


	June 30, 2012
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,194,772	$	50,667	$	64,901	$	—	$	—	$	1,310,340
Non-owner occupied		1,176,396		13,719		69,844		—		—		1,259,959
Multi-family		179,437		—		957		—		—		180,394
Commercial and industrial
Commercial		1,221,199		13,018		26,831		1,786		—		1,262,834
Leases		309,636		128		1,037		—		—		310,801
Construction and land development
Construction		199,584		202		—		—		—		199,786
Land		115,772		7,132		37,905		—		—		160,809
Residential real estate		390,861		6,262		33,232		59		—		430,414
Consumer		53,448		797		1,580		—		—		55,825

Total	$	4,841,105	$	91,925	$	236,287	$	1,845	$	—	$	5,171,162


	June 30, 2012
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	4,838,455	$	89,236	$	178,105	$	—	$	—	$	5,105,796
Past due 30 - 59 days		1,616		2,450		13,977		59		—		18,102
Past due 60 - 89 days		1,034		239		6,260		—		—		7,533
Past due 90 days or more		—		—		37,945		1,786		—		39,731

Total	$	4,841,105	$	91,925	$	236,287	$	1,845	$	—	$	5,171,162


	December 31, 2011
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,139,776	$	67,220	$	45,186	$	—	$	—	$	1,252,182
Non-owner occupied		1,103,593		33,470		38,969		—		—		1,176,032
Multi-family		123,917		414		809		—		—		125,140
Commercial and industrial
Commercial		1,067,602		20,657		31,648		200		—		1,120,107
Leases		215,778		105		592		—		—		216,475
Construction and land development
Construction		193,248		3,087		17,942		—		—		214,277
Land		120,858		8,551		37,990		—		—		167,399
Residential real estate		405,398		12,637		24,985		—		—		443,020
Consumer		68,546		971		2,987		—		—		72,504

Total	$	4,438,716	$	147,112	$	201,108	$	200	$	—	$	4,787,136


	December 31, 2011
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	4,429,291	$	143,908	$	144,641	$	—	$	—	$	4,717,840
Past due 30 - 59 days		6,475		661		5,639		—		—		12,775
Past due 60 - 89 days		2,950		2,104		5,952		—		—		11,006
Past due 90 days or more		—		439		44,876		200		—		45,515

Total	$	4,438,716	$	147,112	$	201,108	$	200	$	—	$	4,787,136

The table below reflects recorded investment in loans classified as impaired:


	June 30,			December 31,
	2012			2011
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310	$	48,701		$	28,631
Impaired loans without a specific valuation allowance under ASC 310		176,720			180,860

Total impaired loans	$	225,421		$	209,491


Valuation allowance related to impaired loans	$	(14,445	)	$	(10,377	)

The following table presents the impaired loans by class:


	June 30,		December 31,
	2012		2011
	(in thousands)
Commercial real estate
Owner occupied	$	61,997	$	46,780
Non-owner occupied		57,297		43,123
Multi-family		957		809
Commercial and industrial
Commercial		28,417		25,138
Leases		1,037		592
Construction and land development
Construction		—		20,827
Land		37,971		41,084
Residential real estate		36,842		28,850
Consumer		903		2,288

Total	$	225,421	$	209,491

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans have been charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable, in the table above as “Impaired loans without specific valuation allowance under ASC 310.” The valuation allowance disclosed above is included in the allowance for credit losses reported in the consolidated balance sheets as of June 30, 2012 and December 31, 2011.

The following table presents average investment in impaired loans by loan class:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(in thousands)
Commercial real estate
Owner occupied	$	57,466	$	59,990	$	53,210	$	58,652
Non-owner occupied		55,401		43,274		56,046		50,744
Multi-family		1,125		1,680		1,034		2,326
Commercial and industrial
Commercial		27,298		13,530		26,337		12,057
Leases		892		3,339		744		3,522
Construction and land development
Construction		—		28,150		1,972		28,704
Land		37,813		24,521		38,553		23,796
Residential real estate		34,614		34,899		32,943		37,057
Consumer		1,044		483		1,487		556

Total	$	215,653	$	209,866	$	212,326	$	217,414

The following table presents interest income on impaired loans by class:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(in thousands)
Commercial real estate
Owner occupied	$	441	$	802	$	855	$	1,153
Non-owner occupied		553		601		1,012		1,177
Multi-family		—		5		—		9
Commercial and industrial
Commercial		259		41		514		99
Leases		—		—		—		—
Construction and land development
Construction		—		137		—		272
Land		344		159		696		395
Residential real estate		63		133		121		189
Consumer		7		3		18		7

Total	$	1,667	$	1,881	$	3,216	$	3,301

The Company is not committed to lend significant additional funds on these impaired loans.

The following table summarizes nonperforming assets:


	June 30,		December 31,
	2012		2011
	(in thousands)
Nonaccrual loans	$	104,324	$	90,392
Loans past due 90 days or more on accrual status		795		2,589
Troubled debt restructured loans		115,036		112,483

Total nonperforming loans		220,155		205,464
Foreclosed collateral		76,994		89,104

Total nonperforming assets	$	297,149	$	294,568

Allowance for Credit Losses

The following table summarizes the changes in the allowance for credit losses by portfolio type:


	For the Three Months Ended June 30,
	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Total
	(in thousands)
2012
Beginning Balance	$	12,753	$	35,118	$	18,732	$	26,901	$	4,618	$	98,122
Charge-offs		3,185		5,641		2,094		4,933		770		16,623
Recoveries		217		561		274		1,417		214		2,683
Provision		3,593		6,695		45		2,747		250		13,330

Ending balance	$	13,378	$	36,733	$	16,957	$	26,132	$	4,312	$	97,512


2011
Beginning Balance	$	17,643	$	34,089	$	21,538	$	27,601	$	5,262	$	106,133
Charge-offs		1,516		4,286		3,339		5,926		1,005		16,072
Recoveries		677		804		172		726		44		2,423
Provision		109		4,455		2,905		3,688		734		11,891

Ending balance	$	16,913	$	35,062	$	21,276	$	26,089	$	5,035	$	104,375


	For the Six Months Ended June 30,
	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Total
	(in thousands)
2012
Beginning Balance	$	14,195	$	35,031	$	19,134	$	25,535	$	5,275	$	99,170
Charge-offs		8,272		10,553		3,514		8,587		2,772		33,698
Recoveries		303		2,264		612		2,194		256		5,629
Provision		7,152		9,991		725		6,990		1,553		26,411

Ending balance	$	13,378	$	36,733	$	16,957	$	26,132	$	4,312	$	97,512


2011
Beginning Balance	$	20,587	$	33,043	$	20,889	$	30,782	$	5,398	$	110,699
Charge-offs		5,714		10,400		6,621		7,333		2,621		32,689
Recoveries		1,093		1,275		441		1,555		69		4,433
Provision		947		11,144		6,567		1,085		2,189		21,932

Ending balance	$	16,913	$	35,062	$	21,276	$	26,089	$	5,035	$	104,375

The following tables present loans individually evaluated for impairment by class of loans:


	June 30, 2012
	Unpaid Principal Balance		Recorded Investment		Partial Charge-offs		Allowance for Credit Losses Allocated
	(in thousands)
With no related allowance recorded:
Commercial real estate
Owner occupied	$	61,414	$	55,863	$	5,551	$	—
Non-owner occupied		42,439		38,571		3,868		—
Multi-family		699		445		254		—
Commercial and industrial
Commercial		19,232		18,846		386		—
Leases		1,037		1,037		—		—
Construction and land development
Construction		—		—