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 March 31, 2013

¨	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: 86,946,543 shares as of April 30, 2013.

Table of Contents


	Page
Index
Part I. Financial Information
Item 1 – Financial Statements
Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012		3
Consolidated Income Statements for the three months ended March 31, 2013 and 2012 (unaudited)		4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited)		6
Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2013 (unaudited)		7
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)		8
Notes to Unaudited Consolidated Financial Statements		10
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		44
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		62
Item 4 – Controls and Procedures		64

Part II. Other Information		64
Item 1 – Legal Proceedings		64
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		64
Item 3 – Defaults Upon Senior Securities		64
Item 4 – Mine Safety Disclosures		64
Item 5 – Other Information		64
Item 6 – Exhibits		64

Signatures		66

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31, 2013			December 31, 2012
	(unaudited)
	(in thousands, except share amounts)
Assets:
Cash and due from banks	$	125,490		$	141,789
Securities purchased under agreement to resell		134,010			—
Interest-bearing deposits in other financial institutions		296,775			62,836

Cash and cash equivalents		556,275			204,625
Money market investments		796			664
Investment securities—measured, at fair value		4,781			5,061
Investment securities—available-for-sale, at fair value; amortized cost of $994,056 at March 31, 2013 and $926,050 at December 31, 2012		1,006,185			939,590
Investment securities—held-to-maturity, at amortized cost; fair value of $296,018 at March 31, 2013 and $292,819 at December 31, 2012		290,591			291,333
Investments in restricted stock, at cost		29,767			30,936
Loans:
Held for sale		27,942			31,124
Held for investment, net of deferred fees		5,827,414			5,678,194
Less: allowance for credit losses		95,494			95,427

Total loans		5,731,920			5,582,767
Premises and equipment, net		107,105			107,910
Goodwill		23,224			23,224
Other intangible assets, net		5,942			6,539
Other assets acquired through foreclosure, net		77,921			77,247
Bank owned life insurance		139,372			138,336
Deferred tax assets, net		54,060			51,757
Prepaid expenses		10,017			12,029
Other assets		108,206			119,495

Total assets	$	8,174,104		$	7,622,637

Liabilities:
Deposits:
Non-interest-bearing demand	$	1,930,426		$	1,933,169
Interest-bearing		4,804,488			4,522,008

Total deposits		6,734,914			6,455,177
Customer repurchase agreements		64,692			79,034
Securities sold short		132,614			—
Other borrowings		293,822			193,717
Junior subordinated debt, at fair value		36,687			36,218
Other liabilities		130,080			98,875

Total liabilities		7,392,809			6,863,021

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 March 31, 2013 and December 31, 2012		141,000			141,000
Common stock — par value $.0001; 200,000,000 authorized; 87,079,016 shares issued and outstanding at March 31, 2013 and 86,465,050 at December 31, 2012		9			9
Additional paid in capital		786,941			784,852
Accumulated deficit		(153,860	)		(174,471	)
Accumulated other comprehensive income		7,205			8,226

Total stockholders’ equity		781,295			759,616

Total liabilities and stockholders’ equity	$	8,174,104		$	7,622,637

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)


	Three Months Ended March 31,
	2013			2012
	(in thousands except per share amounts)
Interest income:
Loans, including fees	$	74,725		$	67,760
Investment securities—taxable		3,832			6,412
Investment securities—non-taxable		3,129			2,240
Dividends—taxable		359			280
Dividends—non-taxable		838			653
Other		225			92

Total interest income		83,108			77,437

Interest expense:
Deposits		3,732			4,762
Customer repurchase agreements		35			63
Other borrowings		2,672			2,071
Junior subordinated debt		466			484

Total interest expense		6,905			7,380

Net interest income		76,203			70,057
Provision for credit losses		5,439			13,081

Net interest income after provision for credit losses		70,764			56,976

Non-interest income:
Gain on sales of securities, net		147			361
Mark to market gains (losses), net		(471	)		(333	)
Service charges and fees		2,534			2,285
Investment advisory fees		—			619
Other fee revenue		957			1,000
Income from bank owned life insurance		1,036			1,123
Amortization of affordable housing investments		(900	)		—
Other		596			829

Total non-interest income		3,899			5,884

Non-interest expense:
Salaries and employee benefits		26,574			26,664
Occupancy expense, net		4,846			4,722
Net loss on sales/valuations of repossessed assets and bank premises, net		519			2,651
Insurance		2,370			2,050
Loan and repossessed asset expense		1,596			1,684
Legal, professional and director fees		2,784			1,572
Marketing		1,764			1,371
Data processing		1,865			995
Intangible amortization		597			890
Customer service		643			591
Merger/restructure expenses		195			—
Operating lease depreciation		142			208
Other		3,034			3,499

Total non-interest expense		46,929			46,897

Income from continuing operations before provision income taxes		27,734			15,963
Income tax provision		6,808			4,441

Income from continuing operations		20,926			11,522
Income (loss) from discontinued operations, net of tax benefit		38			(222	)

Net income		20,964			11,300
Dividends and accretion on preferred stock		353			1,763

Net income available to common shareholders	$	20,611		$	9,537

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)

(continued)


	Three Months Ended March 31,
	2013		2012
	(in thousands except per share amounts)
Earnings per share from continuing operations:
Basic	$	0.24	$	0.12
Diluted	$	0.24	$	0.12
Income (loss) per share from discontinued operations:
Basic	$	0.00	$	(0.00	)
Diluted	$	0.00	$	(0.00	)
Earnings per share applicable to common shareholders:
Basic		85,324		81,359
Diluted		85,980		82,227
Dividends declared per common share	$	—	$	—

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Three Months Ended
	March 31,
	2013			2012
	(in thousands)
Net income	$	20,964		$	11,300

Other comprehensive income, net:
Unrealized (loss) gain on securities available-for-sale (AFS), net		(890	)		6,205
Unrealized (loss) on cash flow hedge, net		(34	)		—
Realized gain on cash flow hedge, net		—			(519	)
Realized gain on sale of securities AFS included in income, net		(97	)		(225	)

Net other comprehensive (loss) income		(1,021	)		5,461

Comprehensive income	$	19,943		$	16,761

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)


											Accumulated
									Additional		Other						Total
	Preferred Stock				Common Stock				Paid In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Income (Loss)			Deficit			Equity
									(in thousands)
Balance, December 31, 2012:		141	$	141,000		86,465	$	9	$	784,852	$	8,226		$	(174,471	)	$	759,616
Net income		—		—		—		—		—		—			20,964			20,964
Exercise of stock options		—		—		156		—		1,118		—			—			1,118
Stock-based compensation		—		—		59		—		803		—			—			803
Restricted stock grants, net		—		—		399		—		168		—			—			168
Dividends on preferred stock		—		—		—		—		—		—			(353	)		(353	)
Other comprehensive loss, net		—		—		—		—		—		(1,021	)		—			(1,021	)

Balance, March 31, 2013		141	$	141,000		87,079	$	9	$	786,941	$	7,205		$	(153,860	)	$	781,295

See the accompanying notes.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Three Months Ended March 31,
	2013			2012
	(in thousands)
Cash flows from operating activities:
Net income	$	20,964		$	11,300
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		5,439			13,081
Depreciation and amortization		2,153			3,228
Stock-based compensation		971			1,811
Deferred income taxes and income taxes receivable		(1,754	)		3,487
Net amortization of discounts and premiums for investment securities		2,577			2,656
Accretion of discounts on loans acquired		(3,288	)		—
(Gains)/Losses on:
Sales of securities, AFS		(147	)		(361	)
Derivatives		48			49
Sale of repossessed assets, net		562			2,587
Sale of premises and equipment, net		(43	)		64
Sale of loans, net		6			6
Changes in:
Other assets		7,138			6,356
Other liabilities		828			(8,169	)
Fair value of assets and liabilities measured at fair value		471			333

Net cash provided by operating activities		35,925			36,428

Cash flows from investing activities:
Proceeds from loan sales		—			3,445
Principal pay downs and maturities of securities measured at fair value		279			303
Proceeds from sale of available-for-sale securities		4,072			15,224
Principal pay downs and maturities of available-for-sale securities		51,196			163,449
Purchase of available-for-sale securities		(124,909	)		(106,995	)
Purchases of securities held-to-maturity		—			(3	)
Loan originations and principal collections, net		(124,390	)		(168,648	)
Investment in money market		(132	)		2,489
Liquidation of restricted stock		1,169			934
Purchase of investment tax credits		5,084			—
Sale and purchase of premises and equipment, net		(761	)		(1,911	)
Proceeds from sale of other real estate owned and repossessed assets, net		5,343			9,986

Net cash (used) in investing activities		(183,049	)		(81,727	)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(continued)


	Three Months Ended March 31,
	2013			2012
	(in thousands)
Cash flows from financing activities:
Net increase in deposits		279,737			240,542
Net increase (decrease) in borrowings		218,272			(169,274	)
Proceeds from exercise of stock options		1,118			552
Cash dividends paid on preferred stock		(353	)		(1,763	)

Net cash provided by financing activities		498,774			70,057

Net increase in cash and cash equivalents		351,650			24,758
Cash and cash equivalents at beginning of year		204,625			154,995

Cash and cash equivalents at end of period	$	556,275		$	179,753

Supplemental disclosure:
Cash paid during the period for:
Interest	$	7,132		$	9,256
Income taxes		1,450			1,040
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net		7,035			4,914
Unfunded commitments to purchase investment tax credits		46,582			—

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, two non-bank subsidiaries, Western Alliance Equipment Finance, which offers equipment finance services nationwide, and Las Vegas Sunset Properties, which holds certain non-performing assets. 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 determinations related to acquisitions; 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 11 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; Las Vegas Sunset Properties (“LVSP”), which holds certain non-performing assets; 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. WAL divested its formerly owned 80 percent interest in Shine Investment Advisory Services, Inc. as of October 31, 2012. On April 30, 2013, the Company completed its acquisition of Centennial Bank (“Centennial”). The Company paid $57.5 million for all equity interests in Centennial. The Company merged Centennial Bank into WAB effective April 30, 2013. None of the assets or liabilities of Centennial are included in the Company’s financials at March 31, 2013. The merger was completed because the purchase price of Centennial was at a discount to tangible book value and is expected to be accretive to capital at close. The combined bank had approximately $3.27 billion of assets and $2.78 billion of deposits immediately following the merger and continues to operate as Western Alliance Bank. As of March 31, 2013, acquisition related expenses have been minimal. The Company has undertaken an additional review and valuation of Centennial’s assets and liabilities, which will be reflected in the combined entities financial statements as of the acquisition date.

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

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, 2012 and for the three months ended March 31, 2012 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 March 31, 2013 and 2012 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, 2012.

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 actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and five-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. However, in those instances, although the specific reserve calculation results in no allowance, the Company may record a reserve due to qualitative considerations.

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

Starting in 2012, the Company 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 investments are accounted for under the equity method of accounting. At March 31, 2013, other assets included $74.8 million related to these investments and other liabilities include $46.6 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. 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. 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 $54.1 million at March 31, 2013 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.

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 March 31, 2013 or December 31, 2012. The estimated fair value amounts for March 31, 2013 and December 31, 2012 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 beginning on page 32 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 and certificates of deposit investments

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

Investment 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 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 January 2013, the FASB issued guidance within ASU 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2013-01 to Topic 210, Balance Sheet, clarify that the scope of ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities,” would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse agreements, and securities borrowing and securities lending transactions that are either offset or subject to a master netting arrangement. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated cash flows.

In February 2013, the FASB issued guidance within ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in ASU 2013-02 to Topic 220, Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated cash flows and will only impacted the presentation of other comprehensive income in the consolidated financial statements.

In February 2013, the FASB issued guidance within ASU 2013-04 “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the Update is fixed at the reporting date, except for obligations addressed with existing U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated cash flows.

2. DISCONTINUED OPERATIONS

The Company has discontinued its affinity credit card platform, PartnersFirst, and has presented these activities as discontinued operations. At March 31, 2013 and December 31, 2012, the outstanding credit card loans held for sale were $27.9 million and $31.1 million, respectively.

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


	Three Months Ended
	March 31,
	2013			2012
	(in thousands)
Affinity card revenue	$	1,139		$	295
Non-interest expenses		(1,074	)		(678	)

Income (loss) before income taxes		65			(383	)
Income tax expense (benefit)		27			(161	)

Net income (loss)	$	38		$	(222	)

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
	March 31,
	2013		2012
	(in thousands, except per share amounts)
Weighted average shares—basic		85,324		81,359
Dilutive effect of stock awards		656		868

Weighted average shares—diluted		85,980		82,227

Net income (loss) available to common shareholders	$	20,611	$	9,537
Earnings per share—basic		0.24		0.12
Earnings per share—diluted		0.24		0.12

The Company had 770,135 and 1,053,045 stock options outstanding as of March 31, 2013 and December 31, 2012, respectively, that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive.

4. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated other comprehensive income by component, net of tax for the period indicated:


	Three Months Ended March 31, 2013
	Unrealized
	holding gains (losses)			Unrealized gain on
	on AFS			cash flow hedge			Total
	(in thousands)
Beginning balance	$	8,209		$	17		$	8,226
Other comprehensive income before reclassifications		(890	)		(34	)		(924	)
Amounts reclassified from accumulated other comprehensive income		(97	)		—			(97	)

Net current-period other comprehensive income		(987	)		(34	)		(1,021	)

Ending Balance	$	7,222		$	(17	)	$	7,205

The following table presents reclassifications out of accumulated other comprehensive income:


Three Months Ended March 31, 2013
Details about accumulated other	Amount reclassified from accumulated			Affected line item in the statement
comprehensive income components	other comprehensive income			where net income is presented
	(in thousands)
Unrealized gains and losses on AFS
	$	147		Realized gain on sale of Investment securities
		(50	)	Income tax expense

	$	97		Net of tax

5. INVESTMENT SECURITIES

Carrying amounts and fair values of investment securities at March 31, 2013 and December 31, 2012 are summarized as follows:


	March 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(in thousands)
*Securities held-to-maturity*
Collateralized debt obligations	$	50	$	1,095	$	—		$	1,145
Corporate bonds (2)		97,780		1,009		(4,724	)		94,065
Municipal obligations (1)		191,161		8,225		(178	)		199,208
CRA investments		1,600		—		—			1,600

	$	290,591	$	10,329	$	(4,902	)	$	296,018


			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	$	18,692	$	—		$	—	$	(124	)	$	18,568
Municipal obligations (1)		87,193		—			1,960		(759	)		88,394
Adjustable-rate preferred stock		72,653		—			4,467		(19	)		77,101
Mutual funds (2)		32,422		—			1,466		—			33,888
Direct U.S. obligations and GSE residential mortgage-backed securities (3)		688,206		—			12,396		(903	)		699,699
Private label residential mortgage-backed securities		34,086		(1,811	)		1,856		(631	)		33,500
Private label commercial mortgage-backed securities		5,341		—			316		—			5,657
Trust preferred securities		32,000		—			—		(6,800	)		25,200
CRA investments		23,463		—			715		—			24,178

	$	994,056	$	(1,811	)	$	23,176	$	(9,236	)	$	1,006,185

*Securities measured at fair value*
Direct U.S. obligations and GSE residential mortgage-backed securities (3)											$	4,781

(1)	These consist of revenue obligations.

(2)	These are investment grade corporate bonds.

(3)	These are primarily agency collateralized mortgage obligations.


	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(in thousands)
*Securities held-to-maturity*
Collateralized debt obligations	$	50	$	1,401	$	—		$	1,451
Corporate bonds (2)		97,781		984		(6,684	)		92,081
Municipal obligations (1)		191,902		5,887		(102	)		197,687
CRA investments		1,600		—		—			1,600

	$	291,333	$	8,272	$	(6,786	)	$	292,819


			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)	$	71,777	$	—		$	1,578	$	(184	)	$	73,171
Adjustable-rate preferred stock		72,717		—			3,591		(753	)		75,555
Mutual funds (2)		36,314		—			1,647		—			37,961
Direct U.S. obligations and GSE residential mortgage-backed securities (3)		648,641		—			14,573		(10	)		663,204
Private label residential mortgage-backed securities		35,868		(1,811	)		2,067		(517	)		35,607
Private label commercial mortgage-backed securities		5,365		—			376		—			5,741
Trust preferred securities		32,000		—			—		(7,865	)		24,135
CRA investments		23,368		—			848		—			24,216

	$	926,050	$	(1,811	)	$	24,680	$	(9,329	)	$	939,590

*Securities measured at fair value*
Direct U.S. obligations and GSE residential mortgage-backed securities (3)											$	5,061

(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 March 31, 2013 and December 31, 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 needed for the three months ended March 31, 2013 and 2012.

The Company does not consider any other securities to be other-than-temporarily impaired as of March 31, 2013 and December 31, 2012. 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 March 31, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:


	March 31, 2013
	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	$	—	$	—	$	4,724	$	80,276	$	4,724	$	80,276
Municipal obligations		178		9,264		—		—		178		9,264

	$	178	$	9,264	$	4,724	$	80,276	$	4,902	$	89,540

*Securities available-for-sale*
U.S. Government-sponsored agency securities	$	124	$	18,569	$	—	$	—	$	124	$	18,569
Adjustable-rate preferred stock		19		5,787						19		5,787
Direct U.S obligations and GSE residential mortgage-backed securities		897		105,310		6		1,793		903		107,103
Municipal obligations		759		30,761		—		—		759		30,761
Private label residential mortgage-backed securities		538		23,433		93		6,534		631		29,967
Private label commercial mortgage-backed securities		—		—		—		—		—		—
Trust preferred securities		—		—		6,800		25,200		6,800		25,200

	$	2,337	$	183,860	$	6,899	$	33,527	$	9,236	$	217,387


	December 31, 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	$	206	$	14,794	$	6,478	$	63,522	$	6,684	$	78,316
Municipal obligations		102		10,908		—		—		102		10,908

	$	308	$	25,702	$	6,478	$	63,522	$	6,786	$	89,224

*Securities available-for-sale*
Adjustable-rate preferred stock	$	110	$	7,811	$	643	$	8,723	$	753	$	16,534
Direct U.S obligations and GSE residential mortgage-backed securities		2		557		8		1,938		10		2,495
Municipal obligations		184		15,713		—		—		184		15,713
Private label residential mortgage-backed securities		120		16,901		397		6,986		517		23,887
Trust preferred securities		—		—		7,865		24,135		7,865		24,135

	$	416	$	40,982	$	8,913	$	41,782	$	9,329	$	82,764

The total number of securities in an unrealized loss position at March 31, 2013 was 68 compared to 66 at December 31, 2012. 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 March 31, 2013, the net unrealized loss on trust preferred securities classified as AFS was $6.8 million, compared with $7.9 million at December 31, 2012. The Company actively monitors its debt and other structured securities portfolios classified as AFS for declines in fair value. At March 31, 2013, the gross unrealized loss on the corporate bond portfolio classified as HTM was $4.7 million compared to $6.7 million at December 31, 2012. During last 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 last year. However, all of the bonds remain investment grade.

The amortized cost and fair value of securities as of March 31, 2013 and December 31, 2012, 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.


	March 31, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Securities held to maturity
Due in one year or less	$	1,600	$	1,600	$	1,600	$	1,600
After one year through five years		13,594		14,034		13,596		13,934
After five years through ten years		121,075		118,175		121,238		116,020
After ten years		154,322		162,209		154,899		161,265

	$	290,591	$	296,018	$	291,333	$	292,819

Securities available for sale
Due in one year or less	$	57,745	$	59,954	$	65,190	$	67,794
After one year through five years		27,820		29,817		24,261		25,906
After five years through ten years		26,313		26,092		8,165		8,000
After ten years		193,972		190,623		179,793		174,686
Mortgage backed securities		688,206		699,699		648,641		663,204

	$	994,056	$	1,006,185	$	926,050	$	939,590

The following table summarizes the Company’s investment ratings position as of March 31, 2013:


	As of March 31, 2013
			Split-rated
	AAA		AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,081	$	—	$	134,992	$	121,336	$	14,873	$	273	$	279,555
Direct U.S. obligations & GSE residential mortgage-backed securities		—		704,480		—		—		—		—		704,480
Private label residential mortgage-backed securities		14,720		—		396		6,719		5,038		6,627		33,500
Private label commercial mortgage-backed securities		5,657		—		—		—		—		—		5,657
Mutual funds (3)		—		—		—		—		33,888		—		33,888
U.S. Government-sponsored agency securities		—		18,568		—		—		—		—		18,568
Adjustable-rate preferred stock		—		—		825		—		57,157		15,896		73,878
Trust preferred securities		—		—		—		—		25,200		—		25,200
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		—		—		2,697		40,112		54,971		—		97,780

Total (1) (2)	$	28,458	$	723,048	$	138,910	$	168,167	$	191,127	$	22,846	$	1,272,556

(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 March 31, 2013. Unrated securities consist of CRA investments with a carrying value of $24.2 million, ARPS with a carrying value of $3.2 million and an other investment of $1.6 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, 2012:


	As of December 31, 2012
			Split-rated
	AAA		AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,120	$	—	$	149,352	$	92,401	$	14,922	$	278	$	265,073
Direct U.S. obligations & GSE residential mortgage-backed securities		—		668,265		—		—		—		—		668,265
Private label residential mortgage-backed securities		15,219		—		1,649		6,069		5,249		7,421		35,607
Private label commercial mortgage-backed securities		5,741		—		—		—		—		—		5,741
Mutual funds (3)		—		—		—		—		37,961		—		37,961
Adjustable-rate preferred stock		—		—		826		—		60,807		10,838		72,471
Trust preferred securities		—		—		—		—		24,135		—		24,135
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		—		—		2,696		40,116		54,969		—		97,781

Total (1) (2)	$	29,080	$	668,265	$	154,523	$	138,586	$	198,043	$	18,587	$	1,207,084

(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, 2012. Unrated securities consist of CRA investments with a carrying value of $24.2 million, one ARPS security with a carrying value of $3.1 million and an other investment of $1.6 million.

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

Securities with carrying amounts of approximately $753.6 million and $711.7 million at March 31, 2013 and December 31, 2012, 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
	March 31,
	2013			2012
	(in thousands)
Gross gains	$	200		$	556
Gross (losses)		(53	)		(195	)

	$	147		$	361

6. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES

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


	March 31,			December 31,
	2013			2012
	(in thousands)
Commercial real estate—owner occupied	$	1,414,257		$	1,396,797
Commercial real estate—non-owner occupied		1,538,477			1,505,600
Commercial and industrial		1,809,596			1,659,003
Residential real estate		388,663			407,937
Construction and land development		381,078			394,319
Commercial leases		275,308			288,747
Consumer		26,014			31,836
Deferred fees and unearned income, net		(5,979	)		(6,045	)
		5,827,414			5,678,194

Allowance for credit losses		(95,494	)		(95,427	)

Total	$	5,731,920		$	5,582,767

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


	March 31, 2013
			30-59 Days		60-89 Days		Over 90 days		Total
	Current		Past Due		Past Due		Past Due		Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,393,080	$	4,853	$	3,052	$	13,272	$	21,177	$	1,414,257
Non-owner occupied		1,355,197		15,593		—		1,913		17,506		1,372,703
Multi-family		165,587		—		187		—		187		165,774
Commercial and industrial
Commercial		1,804,566		2,624		120		2,286		5,030		1,809,596
Leases		274,176		—		156		976		1,132		275,308
Construction and land development
Construction		205,085		—		—		—		—		205,085
Land		173,178		280		—		2,535		2,815		175,993
Residential real estate		370,265		4,147		631		13,620		18,398		388,663
Consumer		53,668		288		—		—		288		53,956

Total loans	$	5,794,802	$	27,785	$	4,146	$	34,602	$	66,533	$	5,861,335


	December 31, 2012
			30-59 Days		60-89 Days		Over 90 days		Total
	Current		Past Due		Past Due		Past Due		Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,372,550	$	13,153	$	1,757	$	9,337	$	24,247	$	1,396,797
Non-owner occupied		1,327,481		917		4,416		8,573		13,906		1,341,387
Multi-family		164,213		—		—		—		—		164,213
Commercial and industrial
Commercial		1,654,787		3,109		121		986		4,216		1,659,003
Leases		287,768		515		—		464		979		288,747
Construction and land development
Construction		215,597		—		—		—		—		215,597
Land		171,919		826		571		5,406		6,803		178,722
Residential real estate		387,641		3,525		1,837		14,934		20,296		407,937
Consumer		62,271		524		—		165		689		62,960

Total loans	$	5,644,227	$	22,569	$	8,702	$	39,865	$	71,136	$	5,715,363

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:


	March 31, 2013								December 31, 2012
							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	$	14,265	$	18,000	$	32,265	$	686	$	14,392	$	18,394	$	32,786	$	1,272
Non-owner occupied		15,933		10,958		26,891		917		18,299		8,572		26,871		—
Multi-family		—		187		187		—		318		—		318		—
Commercial and industrial
Commercial		2,596		2,441		5,037		37		2,549		3,194		5,743		15
Leases		—		1,133		1,133		—		—		979		979		—
Construction and land development
Construction		—		—		—		—		—		—		—		—
Land		3,510		2,815		6,325		—		4,375		6,718		11,093		—
Residential real estate		7,345		14,565		21,910		—		11,561		15,161		26,722		101
Consumer		—		—		—		—		39		165		204		—

Total	$	43,649	$	50,099	$	93,748	$	1,640	$	51,533	$	53,183	$	104,716	$	1,388

The reduction in interest income associated with loans on nonaccrual status was approximately $1.2 million and $1.3 million for the three months ended March 31, 2013 and 2012, 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.” 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. Risk ratings are updated, at a minimum, quarterly. The following tables present gross loans by risk rating:


	March 31, 2013
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,303,225	$	49,475	$	61,248	$	309	$	—	$	1,414,257
Non-owner occupied		1,299,585		22,394		50,724		—		—		1,372,703
Multi-family		165,587		—		187		—		—		165,774
Commercial and industrial
Commercial		1,782,067		10,248		17,136		145		—		1,809,596
Leases		268,603		5,572		1,133		—		—		275,308
Construction and land development
Construction		186,983		18,102		—		—		—		205,085
Land		138,184		13,579		24,230		—		—		175,993
Residential real estate		349,275		5,871		33,517		—		—		388,663
Consumer		52,973		420		563		—		—		53,956

Total	$	5,546,482	$	125,661	$	188,738	$	454	$	—	$	5,861,335


	March 31, 2013
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	5,540,730	$	121,858	$	132,179	$	37	$	—	$	5,794,804
Past due 30 – 59 days		4,687		3,763		19,334		—		—		27,784
Past due 60 – 89 days		79		40		4,026		—		—		4,145
Past due 90 days or more		986		—		33,199		417		—		34,602

Total	$	5,546,482	$	125,661	$	188,738	$	454	$	—	$	5,861,335


	December 31, 2012
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,280,337	$	50,552	$	65,908	$	—	$	—	$	1,396,797
Non-owner occupied		1,257,011		21,065		63,311		—		—		1,341,387
Multi-family		163,895		—		318		—		—		164,213
Commercial and industrial
Commercial		1,630,166		12,370		15,499		968		—		1,659,003
Leases		282,075		5,693		979		—		—		288,747
Construction and land development
Construction		215,395		202		—		—		—		215,597
Land		141,436		5,641		31,645		—		—		178,722
Residential real estate		365,042		7,559		32,446		2,890		—		407,937
Consumer		61,469		469		1,022		—		—		62,960

Total	$	5,396,826	$	103,551	$	211,128	$	3,858	$	—	$	5,715,363


	December 31, 2012
	Pass		Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	5,387,543	$	100,549	$	152,827	$	3,308	$	—	$	5,644,227
Past due 30 – 59 days		4,410		1,310		16,849		—		—		22,569
Past due 60 – 89 days		4,450		1,692		2,560		—		—		8,702
Past due 90 days or more		423		—		38,892		550		—		39,865

Total	$	5,396,826	$	103,551	$	211,128	$	3,858	$	—	$	5,715,363

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


	March 31,			December 31,
	2013			2012
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310	$	42,284		$	51,538
Impaired loans without a specific valuation allowance under ASC 310		154,857			146,617

Total impaired loans	$	197,141		$	198,155

Valuation allowance related to impaired loans	$	(11,004	)	$	(12,866	)

The following table presents the impaired loans by class:


	March 31,		December 31,
	2013		2012
	(in thousands)
Commercial real estate
Owner occupied	$	60,147	$	58,074
Non-owner occupied		58,109		52,146
Multi-family		187		318
Commercial and industrial
Commercial		16,049		15,531
Leases		1,133		979
Construction and land development
Construction		—		—
Land		27,532		32,492
Residential real estate		33,373		37,851
Consumer		611		764

Total	$	197,141	$	198,155

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 are 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 March 31, 2013 and December 31, 2012.

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


	Three Months Ended
	March 31,
	2013		2012
	(in thousands)
Commercial real estate
Owner occupied	$	60,065	$	48,385
Non-owner occupied		52,986		45,490
Multi-family		230		943
Commercial and industrial
Commercial		15,088		26,957
Leases		1,028		595
Construction and land development
Construction		—		14,339
Land		29,362		39,293
Residential real estate		37,040		31,067
Consumer		705		1,929

Total	$	196,504	$	208,998

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


	Three Months Ended
	March 31,
	2013		2012
	(in thousands)
Commercial real estate
Owner occupied	$	420	$	414
Non-owner occupied		404		459
Multi-family		—		—
Commercial and industrial
Commercial		150		255
Leases		—		—
Construction and land development
Construction		—		—
Land		259		352
Residential real estate		5		58
Consumer		8		11

Total	$	1,246	$	1,549

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

The following table summarizes nonperforming assets:


	March 31,		December 31,
	2013		2012
	(in thousands)
Nonaccrual loans	$	93,748	$	104,716
Loans past due 90 days or more on accrual status		1,640		1,388
Troubled debt restructured loans		94,531		84,609

Total nonperforming loans		189,919		190,713
Foreclosed collateral		77,921		77,247

Total nonperforming assets	$	267,840	$	267,960

Allowance for Credit Losses

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


	For the Three Months Ended March 31,
	Construction and		Commercial		Residential		Commercial
	Land Development		Real Estate		Real Estate		and Industrial		Consumer			Total
	(in thousands)
2013
Beginning Balance	$	10,554	$	34,982	$	15,237	$	32,860	$	1,794		$	95,427
Charge-offs		614		2,887		2,493		1,770		275			8,039
Recoveries		701		942		569		441		14			2,667
Provision		398		1,864		1,282		2,654		(759	)		5,439

Ending balance	$	11,039	$	34,901	$	14,595	$	34,185	$	774		$	95,494

2012
Beginning Balance	$	14,195	$	35,031	$	19,134	$	25,535	$	5,275		$	99,170
Charge-offs		5,087		4,912		1,420		3,654		2,002			17,075
Recoveries		86		1,703		338		777		42			2,946
Provision		3,559		3,296		680		4,243		1,303			13,081

Ending balance	$	12,753	$	35,118	$	18,732	$	26,901	$	4,618		$	98,122

The following table presents impairment method information related to loans and allowance for credit losses by loan portfolio segment:


	Commercial		Commercial
	Real Estate-		Real Estate-		Commercial		Residential		Construction
	Owner		Non-Owner		and		Real		and Land		Commercial				Total
	Occupied		Occupied		Industrial		Estate		Development		Leases		Consumer		Loans
	(in thousands)
Loans Held for Investment as of March 31, 2013:
Recorded Investment:
Impaired loans with an allowance recorded	$	11,700	$	9,744	$	3,617	$	13,723	$	2,831	$	669	$	—	$	42,284
Impaired loans with no allowance recorded		48,447		48,552		12,432		19,650		24,701		464		611		154,857

Total loans individually evaluated for impairment		60,147		58,296		16,049		33,373		27,532		1,133		611		197,141
Loans collectively evaluated for impairment		1,347,463		1,467,195		1,793,069		353,178		353,037		274,175		25,403		5,613,520
Loans acquired with deteriorated credit quality		6,647		12,986		478		2,112		509		—		—		22,732

Total loans held for investment	$	1,414,257	$	1,538,477	$	1,809,596	$	388,663	$	381,078	$	275,308	$	26,014	$	5,833,393

Unpaid Principal Balance
Impaired loans with an allowance recorded	$	14,892	$	9,744	$	3,937	$	14,998	$	2,831	$	669	$	—		47,071
Impaired loans with no allowance recorded		53,426		51,397		16,106		26,656		25,282		464		623		173,954

Total loans individually evaluated for impairment		68,318		61,141		20,043		41,654		28,113		1,133		623		221,025
Loans collectively evaluated for impairment		1,347,463		1,467,195		1,793,069		353,178		353,037		274,175		25,403		5,613,520
Loans acquired with deteriorated credit quality		11,815		17,778		1,620		3,794		865		—		—		35,872

Total loans held for investment	$	1,427,596	$	1,546,114	$	1,814,732	$	398,626	$	382,015	$	275,308	$	26,026	$	5,870,417

Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	2,316	$	1,381	$	1,506	$	4,217	$	1,153	$	431	$	—		11,004
Impaired loans with no allowance recorded		—		—		—		—		—		—		—		—

Total loans individually evaluated for impairment		2,316		1,381		1,506		4,217		1,153		431		—		11,004
Loans collectively evaluated for impairment		15,252		15,267		29,613		10,378		9,886		2,635		774		83,805
Loans acquired with deteriorated credit quality		—		685		—		—		—		—		—		685

Total loans held for investment	$	17,568	$	17,333	$	31,119	$	14,595	$	11,039	$	3,066	$	774	$	95,494


	Commercial		Commercial
	Real Estate-		Real Estate-		Commercial		Residential		Construction
	Owner		Non-Owner		and		Real		and Land		Commercial				Total
	Occupied		Occupied		Industrial		Estate		Development		Leases		Consumer		Loans
	(in thousands)
Loans Held for Investment as of December 31, 2012:
Recorded Investment:
Impaired loans with an allowance recorded	$	13,615	$	15,217	$	4,700	$	16,482	$	844	$	515	$	165	$	51,538
Impaired loans with no allowance recorded		44,459		37,247		10,831		21,369		31,648		464		599		146,617

Total loans individually evaluated for impairment		58,074		52,464		15,531		37,851		32,492		979		764		198,155
Loans collectively evaluated for impairment		1,332,185		1,440,214		1,642,313		368,034		361,074		287,768		31,072		5,462,660
Loans acquired with deteriorated credit quality		6,538		12,922		1,159		2,052		753		—		—		23,424

Total loans held for investment	$	1,396,797	$	1,505,600	$	1,659,003	$	407,937	$	394,319	$	288,747	$	31,836	$	5,684,239

Unpaid Principal Balance
Impaired loans with an allowance recorded	$	13,634	$	18,746	$	9,877	$	17,837	$	848	$	515	$	540	$	61,997
Impaired loans with no allowance recorded		54,947		43,208		11,248		27,098		35,669		464		612		173,246

Total loans individually evaluated for impairment