Edgar Filing: WESTERN ALLIANCE BANCORPORATION

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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 September 30, 2012 or

¨	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: 86,421,966 shares as of October 31, 2012.

Table of Contents


Index	Page
Part I. Financial Information
Item 1 – Financial Statements
Consolidated Balance Sheets as of Septemberber 30, 2012 (unaudited) December 31, 2011		3
Consolidated Income Statements for the three and nine months ended September 30, 2012 and 2011 (unaudited)		4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)		6
Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012 (unaudited)		7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)		8
Notes to Unaudited Consolidated Financial Statements		10

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		46
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		66
Item 4 – Controls and Procedures		68

Part II. Other Information
Item 1 – Legal Proceedings		68
Item 1A – Risk Factors		68
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		68
Item 3 – Defaults Upon Senior Securities		68
Item 4 – Mine Safety Disclosures		68
Item 5 – Other Information		68
Item 6 – Exhibits		69

Signatures		70

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2012			December 31, 2011
	(unaudited)
	(in thousands, except share amounts)
Assets:
Cash and due from banks	$	123,830		$	116,866
Securities purchased under agreement to resell		139,786			—
Interest-bearing demand deposits in other financial institutions		44,301			38,129

Cash and cash equivalents		307,917			154,995
Money market investments		5,766			7,343
Investment securities—measured, at fair value		5,505			6,515
Investment securities—available-for-sale, at fair value; amortized cost of $1,024,339 at September 30, 2012 and $1,198,185 at December 31, 2011		1,044,137			1,190,385
Investment securities—held-to-maturity, at amortized cost; fair value of $283,592 at September 30, 2012 and $290,035 at December 31, 2011		283,472			286,258
Investments in restricted stock, at cost		32,844			33,520
Loans:
Held for investment, net of deferred fees		5,332,932			4,780,069
Less: allowance for credit losses		97,410			99,170

Total loans		5,235,522			4,680,899
Premises and equipment, net		106,902			105,546
Goodwill		23,224			25,925
Other intangible assets, net		5,764			9,807
Other assets acquired through foreclosure, net		78,234			89,104
Bank owned life insurance		137,256			133,898
Deferred tax assets, net		36,605			61,724
Prepaid expenses		13,166			16,470
Other assets		87,251			42,093
Discontinued operations, assets held for sale		38			59

Total assets	$	7,403,603		$	6,844,541

Liabilities:
Deposits:
Non-interest-bearing demand	$	1,840,774		$	1,558,211
Interest-bearing		4,321,202			4,100,301

Total deposits		6,161,976			5,658,512
Customer repurchase agreements		73,063			123,626
Securities sold short		138,287			—
Other borrowings		223,614			353,321
Junior subordinated debt, at fair value		36,218			36,985
Other liabilities		72,434			35,414

Total liabilities		6,705,592			6,207,858

Commitments and contingencies (Note 9)
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 September 30, 2012 and December 31, 2011		141,000			141,000
Common stock — par value $.0001; 200,000,000 authorized; 83,455,403 shares issued and outstanding at September 30, 2012 and 82,361,655 at December 31, 2011		8			8
Additional paid in capital		751,125			743,780
Accumulated deficit		(206,232	)		(243,512	)
Accumulated other comprehensive income (loss)		12,110			(4,593	)

Total stockholders’ equity		698,011			636,683

Total liabilities and stockholders’ equity	$	7,403,603		$	6,844,541

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands, except per share amounts)
Interest income:
Loans, including fees	$	69,580		$	65,540		$	205,682		$	194,341
Investment securities—taxable		5,295			7,207			17,522			21,737
Investment securities—non-taxable		2,723			234			7,491			267
Dividends—taxable		305			278			899			859
Dividends—non-taxable		711			637			2,096			1,965
Other		55			237			262			576

Total interest income		78,669			74,133			233,952			219,745

Interest expense:
Deposits		3,974			6,982			12,904			22,428
Customer repurchase agreements		37			77			158			263
Other borrowings		2,225			2,024			6,624			6,229
Junior subordinated debt		487			465			1,458			1,856

Total interest expense		6,723			9,548			21,144			30,776

Net interest income		71,946			64,585			212,808			188,969
Provision for credit losses		8,932			11,180			35,343			33,112

Net interest income after provision for credit losses		63,014			53,405			177,465			155,857

Non-interest income:
Securities impairment charges recognized in earnings		—			—			—			(226	)
Gain on sales of securities, net		1,031			781			2,502			4,826
Mark to market (losses) gains, net		470			6,420			701			6,247
Service charges and fees		2,412			2,337			7,014			6,864
Income from bank owned life insurance		1,116			1,189			3,359			4,195
Amortization of affordable housing investments		(651	)		—			(710	)		—
Other		2,604			2,355			7,397			7,603

Total non-interest income		6,982			13,082			20,263			29,509

Non-interest expense:
Salaries and employee benefits		25,500			23,319			78,159			69,119
Occupancy expense, net		4,655			5,126			14,046			15,024
Net loss on sales/valuations of repossessed assets and bank premises, net		126			2,128			3,678			16,890
Insurance		2,121			2,664			6,323			8,878
Loan and repossessed asset expenses		1,236			2,059			4,573			6,465
Legal, professional and director fees		2,291			1,912			6,380			5,639
Marketing		1,231			1,090			4,061			3,382
Data processing		1,390			895			3,678			2,671
Intangible amortization		880			890			2,660			2,669
Customer service		653			900			1,926			2,620
Merger expenses		113			974			113			1,082
Goodwill and intangible impairment		3,435			—			3,435			—
Other		3,912			3,524			10,839			10,196

Total non-interest expense		47,543			45,481			139,871			144,635

Income from continuing operations before provision for income taxes		22,453			21,006			57,857			40,731
Income tax expense		6,752			7,514			16,452			14,838

Income from continuing operations		15,701			13,492			41,405			25,893
Loss from discontinued operations, net of tax benefit		(243	)		(481	)		(686	)		(1,500	)

Net income		15,458			13,011			40,719			24,393
Dividends and accretion on preferred stock		352			9,419			3,440			14,425

Net income available to common shareholders	$	15,106		$	3,592		$	37,279		$	9,968

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)

(continued)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(in thousands, except per share amounts)
Earnings per share from continuing operations:
Basic	$	0.19		$	0.05		$	0.47		$	0.14
Diluted	$	0.19		$	0.05		$	0.46		$	0.14
Loss per share from discontinued operations:
Basic	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Diluted	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Earnings per share applicable to common shareholders:
Basic	$	0.18		$	0.04		$	0.46		$	0.12
Diluted	$	0.18		$	0.04		$	0.45		$	0.12
Weighted average number of common shares outstanding:
Basic		81,758			80,931			81,570			80,870
Diluted		82,294			81,125			82,159			81,121
Dividends declared per common share	$	—		$	—		$	—		$	—

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(in thousands)
Net income	$	15,458		$	13,011		$	40,719		$	24,393

Other comprehensive income, net:
Unrealized gain on securities available-for-sale (AFS), net		8,478			3,357			18,803			9,376
Impairment loss on securities, net		—			—			—			144
Unrealized gain on cash flow hedge, net		9			—			17			—
Realized gain on cash flow hedge, net		—			—			(519	)		—
Realized gain on sale of securities AFS included in income, net		(668	)		(507	)		(1,598	)		(3,043	)

Net other comprehensive income		7,819			2,850			16,703			6,477

Comprehensive income	$	23,277		$	15,861		$	57,422		$	30,870

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

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

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)


											Accumulated
	Preferred Stock				Common Stock				Additional		Other						Total
									Paid In		Comprehensive			Accumulated			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		—		—		—		—		—		—			40,719			40,719
Exercise of stock options		—		—		372		—		2,620		—			—			2,620
Stock-based compensation		—		—		155		—		1,578		—			—			1,578
Restricted stock grants, net		—		—		566		—		3,147		—			—			3,147
Dividends on preferred stock		—		—		—		—		—		—			(3,440	)		(3,440	)
Other comprehensive income, net		—		—		—		—		—		16,703			—			16,703

Balance, September 30, 2012		141	$	141,000		83,455	$	8	$	751,125	$	12,110		$	(206,232	)	$	698,011

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Nine Months Ended September 30,
	2012			2011
	(in thousands)
Cash flows from operating activities:
Net income	$	40,719		$	24,393
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		35,343			33,112
Depreciation and amortization		7,319			8,083
Stock-based compensation		4,725			3,102
Deferred income taxes and income taxes receivable		16,125			13,879
Net amortization of discounts and premiums for investment securities		8,027			5,693
Goodwill and intangible impairment		3,435			—
Securities impairment		—			226
(Gains)/Losses on:
Sales of securities, AFS		(2,502	)		(4,826	)
Derivatives		148			173
Sale of repossessed assets, net		3,742			16,179
Sale of premises and equipment, net		(64	)		711
Sale of loans, net		6			—
Sale of minority interest in Miller/Russell & Associates, Inc.		(776	)		—
Changes in:
Other assets		(29,127	)		13,456
Other liabilities		2,715			990
Fair value of assets and liabilities measured at fair value		(701	)		(6,247	)
Servicing rights, net		10			189

Net cash provided by operating activities		89,144			109,113

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		954			4,465
Proceeds from sale of available-for-sale securities		143,553			453,984
Principal pay downs and maturities of available-for-sale securities		304,428			235,946
Purchase of available-for-sale securities		(277,619	)		(618,430	)
Purchases of securities held-to-maturity		—			(125,995	)
Proceeds from maturities of securities held-to-maturity		735			640
Loan originations and principal collections, net		(612,929	)		(356,565	)
Investment in money market		1,577			23,431
Liquidation of restricted stock		676			2,178
Purchase of investment tax credits		17,901			—
Sale and purchase of premises and equipment, net		(5,951	)		2,020
Proceeds from sale of other real estate owned and repossessed assets, net		26,640			31,794

Net cash (used) in investing activities		(396,590	)		(343,625	)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(continued)


	Nine Months Ended September 30,
	2012			2011
	(in thousands)
Cash flows from financing activities:
Net increase in deposits		503,464			294,447
Net increase (decrease) in borrowings		(42,276	)		33,177
Exercise of stock options		2,620			362
Proceeds from issuance of preferred stock		—			141,000
Redemption of preferred stock		—			(140,000	)
Cash dividends paid on preferred stock		(3,440	)		(5,252	)

Net cash provided by financing activities		460,368			323,734

Net increase in cash and cash equivalents		152,922			89,222
Cash and cash equivalents at beginning of year		154,995			216,746

Cash and cash equivalents at end of period	$	307,917		$	305,968

Supplemental disclosure:
Cash paid during the period for:
Interest	$	22,263		$	33,560
Income taxes		1,290			—
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net		19,512			27,011
Unfunded commitments to purchase investment tax credits		34,599			—

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, until October 31, 2012, WAL maintained an 80 percent interest in Shine Investment Advisory Services Inc. (“Shine”), a registered investment advisor. On October 31, 2012, the Company sold its interest in Shine. This transaction will not have a material impact to the Company’s fourth quarter consolidated financial statements. On October 17, 2012, the Company completed its acquisition of Western Liberty Bancorp (“Western Liberty”). The Company paid $27.5 million and issued 2,966,236 shares for all of the equity interests of Western Liberty. Western Liberty’s primary operating subsidiary, Service1st Bank of Nevada, is now a wholly-owned subsidiary of Western Alliance Bancorporation. The Company merged Service1st Bank into Bank of Nevada effective October 19, 2012. None of the assets or liabilities of Western Liberty are included in the Company’s financials at September 30, 2012, nor are the shares issued by the Company to consummate the merger. The merger was completed because the purchase price of Western Liberty was at a significant discount to its tangible book value and is expected to be accretive to capital at close. The combined bank had approximately $3.09 billion of assets and $2.55 billion of deposits immediately following the merger and continues to operate as Bank of Nevada. Acquisition related expenses incurred to date have been immaterial. The Company has undertaken an additional review and valuation of Western Liberty’s assets and liabilities, which will be reflected in the combined entities financial statements at December 31, 2012.

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 significant 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 nine months ended September 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 September 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 to twelve 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.

Investments in low income housing credits

During 2012, the Company has invested in Limited Partnerships formed for the purpose of investing in low income housing projects, which qualify for federal low income housing tax credits. These investments are expected to generate tax credits over the next ten years. The investment is accounted for under the equity method of accounting. Other assets include $51.8 million related to this investment and other liabilities include $34.6 million related to future unconditional equity commitments.

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 $36.6 million at September 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.

Based on its internal analysis, the Company believes that 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 September 30, 2012 or December 31, 2011. The estimated fair value amounts for September 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 34 in Note 10, “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 10, “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 10 “Fair Value 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 10, “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 10 “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.

In July 2012, the FASB issued guidance within ASU 2012-02 “Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in ASU 2012-02 to Topic 350, Intangibles – Goodwill and Other, allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible assets unless the entity determines, based on qualitative assessment, that it is more likely than not, the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently evaluating early adoption for its annual impairment test in the fourth quarter 2012. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

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 September 30, 2012 and December 31, 2011, the Company had $33.5 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 September 30, 2012 and December 31, 2011.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
				(in thousands)
Affinity card revenue	$	315		$	363		$	947		$	1,133
Non-interest expenses		(734	)		(1,192	)		(2,130	)		(3,719	)

Loss before income taxes		(419	)		(829	)		(1,183	)		(2,586	)
Income tax benefit		(176	)		(348	)		(497	)		(1,086	)

Net loss	$	(243	)	$	(481	)	$	(686	)	$	(1,500	)

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				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(in thousands, except per share amounts)
Weighted average shares—Basic		81,758		80,931		81,570		80,870
Dilutive effect of stock awards		536		194		589		251

Weighted average shares—Diluted		82,294		81,125		82,159		81,121

Net income available to common stockholders	$	15,106	$	3,592	$	37,279	$	9,968
Earnings per share—Basic		0.18		0.04		0.46		0.12
Earnings per share—Diluted		0.18		0.04		0.45		0.12

The Company had 1,057,116 and 2,092,932 stock options outstanding as of September 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:


	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(in thousands)
*Securities held-to-maturity*
Collateralized debt obligations	$	50	$	977	$	—		$	1,027
Corporate bonds		102,783		810		(7,536	)		96,057
Municipal obligations (1)		179,139		5,880		(11	)		185,008
CRA investments		1,500		—		—			1,500

	$	283,472	$	7,667	$	(7,547	)	$	283,592


			OTTI
			Recognized
			in Other			Gross		Gross
	Amortized		Comprehensive			Unrealized		Unrealized			Fair
	Cost		Loss			Gains		(Losses)			Value
			(in thousands)
*Securities available-for-sale*
Municipal obligations (1)	$	58,286	$	—		$	1,763	$	(47	)	$	60,002
Adjustable-rate preferred stock		68,278		—			3,512		(755	)		71,035
Mutual funds (2)		28,978		—			2,064		—			31,042
Corporate bonds		5,000		—			2		—			5,002
Direct U.S. obligations and GSE residential mortgage-backed securities (3)		782,147		—			21,244		(42	)		803,349
Private label residential mortgage-backed securities		21,096		(1,811	)		1,948		(458	)		20,775
Private label commercial mortgage-backed securities		5,390		—			330		—			5,720
Trust preferred securities		32,000		—			—		(9,108	)		22,892
CRA investments		23,164		—			1,156		—			24,320

	$	1,024,339	$	(1,811	)	$	32,019	$	(10,410	)	$	1,044,137

*Securities measured at fair value*
Direct U.S. obligations and GSE residential mortgage-backed securities (3)											$	5,505

(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)
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			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


			OTTI
			Recognized
			in Other			Gross		Gross
	Amortized		Comprehensive			Unrealized		Unrealized			Fair
	Cost		Loss			Gains		(Losses)			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 10 “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 September 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 nine months ended September 30, 2012 and the three months ended September 30, 2011. There was $0.2 million of securities impairment charges for the nine months ended September 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 September 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 September 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:


	September 30, 2012
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		Value
					(in thousands)
*Securities held-to-maturity*
Corporate bonds	$	593	$	14,407	$	6,943	$	63,057	$	7,536	$	77,464
Municipal obligations		11		1,118		—		—		11		1,118

	$	604	$	15,525	$	6,943	$	63,057	$	7,547	$	78,582

*Securities available-for-sale*
Adjustable-rate preferred stock	$	30	$	4,970	$	725	$	8,641	$	755	$	13,611
Direct U.S obligations and GSE residential mortgage-backed securities		—		7		42		7,427		42		7,434
Municipal obligations		47		5,566		—		—		47		5,566
Private label residential mortgage-backed securities		3		1,012		455		7,574		458		8,586
Trust preferred securities		—		—		9,108		22,893		9,108		22,893

	$	80	$	11,555	$	10,330	$	46,535	$	10,410	$	58,090


	December 31, 2011
	Less Than Twelve Months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		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 September 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 September 30, 2012 was 51 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 September 30, 2012, the net unrealized loss on trust preferred securities classified as AFS was $9.1 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. At September 30, 2012, the net unrealized loss on corporate bond portfolio classified as HTM was $6.7 million compared to $1.9 million at December 31, 2011. During the year, the Federal Reserve announced its intention to keep interest rates at historically low levels into 2015. The yields of most of the bonds in the portfolio are tied to LIBOR, thus negatively affecting their anticipated returns. Additionally, Moody’s had downgraded certain bonds held in the portfolio during the year. However, all of the bonds remain investment grade.

The amortized cost and fair value of securities as of September 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.


	September 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		13,598		13,670		8,389		8,093
After five years through ten years		114,295		107,957		114,748		114,098
After ten years		154,079		160,465		161,621		166,344

	$	283,472	$	283,592	$	286,258	$	290,035

Securities available-for-sale
Due in one year or less	$	57,722	$	61,117	$	52,815	$	53,399
After one year through five years		16,795		17,766		20,445		20,635
After five years through ten years		16,721		17,296		134,935		135,420
After ten years		150,954		144,609		134,162		116,347
Mortgage backed securities		782,147		803,349		855,828		864,584

	$	1,024,339	$	1,044,137	$	1,198,185	$	1,190,385

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


	As of September 30, 2012
			Split-rated
	AAA		AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,158	$	—	$	134,480	$	87,472	$	8,748	$	283	$	239,141
Direct U.S. obligations & GSE residential mortgage-backed securities		—		808,854		—		—		—		—		808,854
Private label residential mortgage-backed securities		1,612		—		3,295		13,826		—		2,042		20,775
Private label commercial mortgage-backed securities		5,720		—		—		—		—		—		5,720
Mutual funds (3)		—		—		—		—		31,042		—		31,042
Adjustable-rate preferred stock		—		—		830		1,218		57,220		8,641		67,909
Trust preferred securities		—		—		—		—		22,892		—		22,892
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		—		—		2,696		45,121		59,968		—		107,785

Total (1) (2)	$	15,490	$	808,854	$	141,301	$	147,637	$	179,870	$	11,016	$	1,304,168

(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 September 30, 2012. Unrated securities consist of CRA investments with a carrying value of $24.3 million, ARPS with a carrying value of $3.1 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 $666.8 million and $675.0 million at September 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 Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
				(in thousands)
Gross gains	$	1,073		$	1,106		$	2,786		$	5,172
Gross (losses)		(42	)		(325	)		(284	)		(346	)

	$	1,031		$	781		$	2,502		$	4,826

5. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES

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


	September 30, 2012			December 31, 2011
	(in thousands)
Commercial real estate—owner occupied	$	1,331,332		$	1,252,182
Commercial real estate—non-owner occupied		1,407,013			1,301,172
Commercial and industrial		1,450,339			1,120,107
Residential real estate		408,435			443,020
Construction and land development		379,834			381,676
Commercial leases		305,654			216,475
Consumer		56,642			72,504
Deferred fees and unearned income,net		(6,317	)		(7,067	)
		5,332,932			4,780,069
Allowance for credit losses		(97,410	)		(99,170	)

Total	$	5,235,522		$	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:


	September 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	$	1,313,261	$	4,338	$	6,113	$	7,620	$	18,071	$	1,331,332
Non-owner occupied		1,236,408		2,402		7,844		2,153		12,399		1,248,807
Multi-family		158,017		—		189		—		189		158,206
Commercial and industrial
Commercial		1,442,543		2,228		613		4,955		7,796		1,450,339
Leases		304,629		522		—		503		1,025		305,654
Construction and land development
Construction		223,187		—		—		—		—		223,187
Land		146,677		527		892		8,551		9,970		156,647
Residential real estate		391,466		1,073		1,676		14,220		16,969		408,435
Consumer		54,958		513		374		797		1,684		56,642

Total loans	$	5,271,146	$	11,603	$	17,701	$	38,799	$	68,103	$	5,339,249


	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:


	September 30, 2012								December 31, 2011
							Loans past								Loans past
	Non-accrual loans						due 90 days		Non-accrual loans						due 90 days
			Past Due/		Total		or more and				Past Due/		Total		or more and
	Current		Delinquent		Non-accrual		still accruing		Current		Delinquent		Non-accrual		still accruing
									(in thousands)
Commercial real estate
Owner occupied	$	19,116	$	16,432	$	35,548	$	—	$	6,951	$	14,202	$	21,153	$	439
Non-owner occupied		24,186		8,859		33,045		—		8,834		7,416		16,250		—
Multi-family		552		189		741		—		331		285		616		—
Commercial and industrial
Commercial		5,747		4,923		10,670		608		3,789		3,029		6,818		523
Leases		—		1,025		1,025		—		592		—		592		—
Construction and land development
Construction		—		—		—		—		11,011		3,435		14,446		—
Land		4,880		9,388		14,268		—		2,615		11,752		14,367		860
Residential real estate		10,547		15,214		25,761		486		2,891		12,856		15,747		—
Consumer		—		180		180		616		403		—		403		767

Total	$	65,028	$	56,210	$	121,238	$	1,710	$	37,417	$	52,975	$	90,392	$	2,589

The reduction in interest income associated with loans on nonaccrual status was approximately $1.3 million and $4.1 million for the three and nine months ended September 30, 2012, respectively, and $2.2 million and $4.6 million for the three and nine months ended September 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:


	September 30, 2012
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,206,211	$	57,347	$	67,774	$	—	$	—	$	1,331,332
Non-owner occupied		1,170,233		15,346		63,228		—		—		1,248,807
Multi-family		157,465		—		741		—		—		158,206
Commercial and industrial
Commercial		1,416,446		11,171		19,322		3,401		—		1,450,340
Leases		298,386		131		7,136		—		—		305,653
Construction and land development
Construction		222,985		202		—		—		—		223,187
Land		112,721		8,659		35,267		—		—		156,647
Residential real estate		367,224		3,875		37,336		—		—		408,435
Consumer		54,254		950		1,438		—		—		56,642

Total	$	5,005,925	$	97,681	$	232,242	$	3,401	$	—	$	5,339,249


	September 30, 2012
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	5,001,961	$	93,758	$	174,577	$	850	$	—	$	5,271,146
Past due 30—59 days		3,077		887		7,639		—		—		11,603
Past due 60—89 days		773		2,652		14,276		—		—		17,701
Past due 90 days or more		114		384		35,750		2,551		—		38,799

Total	$	5,005,925	$	97,681	$	232,242	$	3,401	$	—	$	5,339,249


	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:


	September 30,			December 31,
	2012			2011
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310	$	58,917		$	28,631
Impaired loans without a specific valuation allowance under ASC 310		165,179			180,860

Total impaired loans	$	224,096		$	209,491

Valuation allowance related to impaired loans	$	(15,448	)	$	(10,377	)

The following table presents the impaired loans by class:


	September 30,		December 31,
	2012		2011
	(in thousands)
Commercial real estate
Owner occupied	$	62,390	$	46,780
Non-owner occupied		61,289		43,123
Multi-family		741		809
Commercial and industrial
Commercial		21,455		25,138
Leases		1,025		592
Construction and land development
Construction		—		20,827
Land		37,402		41,084
Residential real estate		39,180		28,850
Consumer		614		2,288

Total	$	224,096	$	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 September 30, 2012 and December 31, 2011.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(in thousands)
Commercial real estate
Owner occupied	$	61,223	$	51,020	$	55,881	$	51,951
Non-owner occupied		60,207		43,192		57,433		52,384
Multi-family		882		1,676		983		2,109
Commercial and industrial
Commercial		25,616		13,830		26,097		12,648
Leases		1,030		3,429		839		3,491
Construction and land development
Construction		—		25,780		1,315		27,729
Land		35,215		21,931		37,440		23,174
Residential real estate		37,814		36,947		34,567		37,020
Consumer		794		468		1,256		527

Total	$	222,781	$	198,273	$	215,811	$	211,033

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(in thousands)
Commercial real estate
Owner occupied	$	841	$	960	$	1,696	$	2,113
Non-owner occupied		649		218		1,661		1,395
Multi-family		—		5		—		14
Commercial and industrial
Commercial		406		628		920		727
Leases		—		—		—		—
Construction and land development
Construction		—		119		—		391
Land		171		133		867		528
Residential real estate		78		33		199		222
Consumer		13		2		31		9

Total	$	2,158	$	2,098	$	5,374	$	5,399

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

The following table summarizes nonperforming assets:


	September 30,		December 31,
	2012		2011
	(in thousands)
Nonaccrual loans	$	121,238	$	90,392
Loans past due 90 days or more on accrual status		1,710		2,589
Troubled debt restructured loans		93,335		112,483

Total nonperforming loans		216,283		205,464
Foreclosed collateral		78,234		89,104

Total nonperforming assets	$	294,517	$	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 September 30,
	Construction and		Commercial		Residential			Commercial
	Land Development		Real Estate		Real Estate			and Industrial			Consumer		Total
	(in thousands)
2012
Beginning Balance	$	13,378	$	36,733	$	16,957		$	26,132		$	4,312	$	97,512
Charge-offs		2,315		1,470		2,242			4,100			799		10,926
Recoveries		567		633		153			501			38		1,892
Provision		18		2,324		(82	)		5,611			1,061		8,932

Ending balance	$	11,648	$	38,220	$	14,786		$	28,144		$	4,612	$	97,410

2011
Beginning Balance	$	16,913	$	35,062	$	21,276		$	26,089		$	5,035	$	104,375
Charge-offs		2,369		2,484		10,555			1,420			1,069		17,897
Recoveries		707		127		440			1,243			41		2,558
Provision		2,206		341		8,622			(803	)		814		11,180

Ending balance	$	17,457	$	33,046	$	19,783		$	25,109		$	4,821	$	100,216


	For the Nine Months Ended September 30,
	Construction and		Commercial		Residential		Commercial
	Land Development		Real Estate		Real Estate		and Industrial		Consumer		Total
	(in thousands)
2012
Beginning Balance	$	14,195	$	35,031	$	19,134	$	25,535	$	5,275	$	99,170
Charge-offs		10,587		12,023		5,756		12,687		3,571		44,624
Recoveries		870		2,897		765		2,695		294		7,521
Provision		7,170		12,315		643		12,601		2,614		35,343

Ending balance	$	11,648	$	38,220	$	14,786	$	28,144	$	4,612	$	97,410

2011
Beginning Balance	$	20,587	$	33,043	$	20,889	$	30,782	$	5,398	$	110,699
Charge-offs		8,083		12,884		17,176		8,753		3,690		50,586
Recoveries		1,800		1,402