Western Alliance Bancorporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Western Alliance is a bank holding company operating through Western Alliance Bank and regional banking divisions and specialized national business lines. Financial amounts below are in U.S. dollars; “$ million” and “$ billion” are used for readability.
Financial performance and condition
| Metric | Q3 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $284.7 million | Up 6.9% from Q3 2019 |
| Net interest margin | 3.71% | 4.41% in Q3 2019 |
| Provision for credit losses | $14.7 million | $3.8 million in Q3 2019 |
| Non-interest income | $20.6 million | Up $1.2 million from Q3 2019 |
| Non-interest expense | $124.1 million | Down $2.1 million from Q3 2019 |
| Net income | $135.8 million | $127.4 million in Q3 2019 |
| Diluted EPS | $1.36 | $1.24 in Q3 2019 |
| PPNR and efficiency ratio | $181.3 million; 39.7% | PPNR $159.7 million; ratio 43.2% in Q3 2019 |
- For the first nine months, net interest income was $852.2 million, up 10.9%; net interest margin was 4.03%, down from 4.56%. Provision for credit losses was $157.8 million versus $15.3 million in 2019. Net income was $313.0 million versus $371.1 million, and diluted EPS was $3.11 versus $3.59.
- Q3 net interest margin pressure reflected excess liquidity from deposit growth outpacing loan growth, lower rates and lower PPP loan fee accretion; lower deposit and funding costs partly offset these effects. Q3 interest expense fell 59.1% year over year.
- At September 30, total assets were $33.3 billion, loans held for investment were $26.0 billion before allowance, deposits were $28.8 billion, and stockholders’ equity was $3.2 billion. Since year-end 2019, assets rose 24.3%, loans 23.2%, and deposits 26.5%.
- The loan allowance was $310.6 million, or 1.19% of funded HFI loans; the separate allowance for unfunded commitments was $44.4 million. Nine-month net charge-offs were 0.16% of average loans. Nonaccrual loans, including $20.8 million of HFS loans, were $146.5 million; nonperforming assets were $212.4 million. These amounts increased from year-end 2019.
- Cash, cash equivalents and restricted cash totaled $1.42 billion. Management reported $4.6 billion in liquid assets, including $3.1 billion of unpledged marketable securities, and stated these were adequate for expected near-term needs. Available borrowing capacity included approximately $4.38 billion at the FHLB and $2.41 billion at the FRB; no FRB or federal funds line balances were outstanding.
- Nine-month operating cash flow was $450.1 million, versus $534.5 million a year earlier. Investing activities used $5.59 billion, principally reflecting $4.81 billion of net loan growth; financing activities provided $6.13 billion, including $6.05 billion of deposit growth.
- Qualifying debt was $618.8 million, including $225 million of subordinated debt issued in May. Total capital ratios were 13.0% for the holding company and 12.2% for the bank; both exceeded applicable well-capitalized thresholds. The company elected the regulatory CECL capital transition relief. The tangible common equity ratio was 8.9%, versus 10.3% at year-end 2019.
Material changes and unusual items
- CECL adoption on January 1, 2020 reduced opening retained earnings by $24.9 million and increased the allowance for loan and off-balance-sheet exposures. 2020 results use CECL; prior periods were not recast, limiting direct comparability.
- The nine-month provision increase reflected CECL’s expected-lifetime-loss approach and worsening economic forecasts related to COVID-19. Management said pandemic-related uncertainty could require materially higher future allowances; significant COVID-related writeoffs had not been experienced to date.
- Loans grew by $4.9 billion from year-end, including $1.7 billion of PPP loans. Deposits rose by $6.0 billion, driven especially by $4.5 billion growth in non-interest-bearing demand balances.
- Q3 non-interest income included a $5.9 million net fair-value gain, mainly from preferred stock valuations. Nine-month non-interest income included a $5.6 million one-time enhancement fee associated with surrender and replacement of certain bank-owned life insurance policies; a $3.2 million prior-year securities sale gain did not recur.
- Repurchases were suspended effective April 17, 2020. Before suspension, the company repurchased $71.7 million of shares during the first nine months. It continued paying a $0.25 quarterly dividend.
Outlook, commentary and risks
- The filing gives no specific earnings or growth guidance. Management said COVID-19’s duration and economic effects remain uncertain and could affect earnings, growth, asset quality and the allowance for credit losses. It anticipated no need for additional liquidity at the time of filing.
- COVID-sensitive exposures included hotels ($2.10 billion), investor-dependent borrowers ($1.34 billion), retail-dependent real estate ($674 million) and gaming ($510 million), together 17.8% of the loan portfolio. PPP loans outstanding were $1.7 billion; qualifying COVID-related loan modifications totaled $1.5 billion and residential mortgage forbearance balances were $127.3 million.
- Material risks include commercial real estate and commercial and industrial concentrations, geographic concentration in Arizona, California and Nevada, prolonged low rates and margin compression, credit losses exceeding estimates, deposit outflows, PPP compliance or guarantee risks, and cyber, operational and regulatory risks. CRE-related loans were approximately 38% of total loans at quarter-end.
- Management reported no material impact expected from the cited regulatory developments, no material pending legal proceedings, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How subsequent economic conditions, borrower performance and updated forecasts affect the allowance, provision and nonperforming assets.
- Credit performance and forgiveness, servicing and guarantee compliance for PPP loans; performance of modified loans and exposures in hotel, retail, gaming and investor-dependent sectors.
- Whether deposit growth and loan growth remain balanced, and the resulting effects on liquidity, funding costs and net interest margin.
- Capital and liquidity ratios, including the effect of CECL transition relief, subordinated debt and any post-quarter debt redemption.
- Whether fair-value gains, one-time insurance income and other unusual items recur; the filing does not provide a specific forward earnings forecast.