Western Alliance Bancorporation — Q1 2021 Form 10-Q
Business context and period. Western Alliance Bancorporation is a bank holding company operating through Western Alliance Bank and specialized banking businesses. This unaudited report covers the quarter ended March 31, 2021; income and cash flow comparisons are against Q1 2020, while balance-sheet comparisons are against December 31, 2020. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 / Mar. 31, 2021 | Comparable |
|---|---|---|
| Net interest income | $317.3 million | $269.0 million in Q1 2020 |
| Net interest margin | 3.37% | 4.22% in Q1 2020 |
| Non-interest income / expense | $19.7 million / $135.0 million | $5.1 million / $120.5 million in Q1 2020 |
| Net income; diluted EPS | $192.5 million; $1.90 | $83.9 million; $0.83 in Q1 2020 |
| Pre-provision net revenue (PPNR); efficiency ratio | $202.0 million; 39.1% | $153.6 million; 42.9% in Q1 2020 |
| Total assets | $43.4 billion | $36.5 billion at Dec. 31, 2020 |
| Loans, gross of allowance; deposits | $28.7 billion; $38.4 billion | $27.1 billion; $31.9 billion at Dec. 31, 2020 |
| Allowance for loan credit losses | $247.1 million | $278.9 million at Dec. 31, 2020 |
| Nonaccrual loans; nonperforming assets | $113.6 million; $150.6 million | $115.2 million; $149.8 million at Dec. 31, 2020 |
| Regulatory capital | CET1 ratio 10.3%; total capital ratio 12.6% | CET1 9.9%; total capital 12.5% at Dec. 31, 2020 |
| Tangible common equity ratio | 7.9% | 8.6% at Dec. 31, 2020 |
Q1 cash flow: operating activities provided $100.1 million, investing activities used $4.1 billion, and financing activities provided $6.6 billion. Cash, cash equivalents and restricted cash ended the quarter at $5.3 billion, up from $2.7 billion at year-end. Management reported $11.5 billion in liquid assets, including $6.2 billion in unpledged marketable securities. Available credit included approximately $4.2 billion from the FHLB and $2.7 billion from the Federal Reserve; the company reported no outstanding Federal Reserve borrowings.
Qualifying debt was $543.7 million at quarter-end. Short-term FHLB borrowings were $5.0 million, and customer repurchase agreements were $15.9 million. The company raised $209.2 million net by issuing 2.3 million shares in a registered direct offering. It paid a $0.25-per-share dividend during the quarter.
Material changes versus comparable periods
- Net income rose to $192.5 million from $83.9 million. Net interest income increased 18.0%, supported by loan and securities growth and lower deposit costs.
- Net interest margin declined 85 basis points year over year. Management attributed the decline mainly to excess liquidity from deposit growth outpacing loan growth and lower asset yields in the lower-rate environment.
- Credit-loss provision shifted to a $32.4 million recovery from a $51.2 million provision in Q1 2020, which management attributed primarily to an improved economic outlook. The loan allowance declined from year-end, while loans grew.
- Non-interest income increased to $19.7 million from $5.1 million, largely reflecting smaller fair-value losses and higher equity-investment income. Non-interest expense rose 12.0% to $135.0 million, mainly due to higher salaries and employee benefits.
- Deposits rose $6.5 billion, or 20.2%, from year-end; loans rose $1.7 billion, or 6.1%. Cash and investment securities also increased substantially.
- Other comprehensive income was a $72.4 million loss, principally from unrealized losses on available-for-sale securities; accumulated other comprehensive income fell to $19.9 million from $92.3 million at year-end.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management said its liquid assets were adequate for projected near-term needs and that parent-company liquidity could support operations for over twelve months under its stated assumptions.
- COVID-19 and credit: Loans to industries identified as particularly affected by the pandemic totaled $4.69 billion, or 16.3% of the loan portfolio, including hotel, investor-dependent, retail and gaming exposures. Outstanding qualifying COVID-related loan modifications were $271.4 million; residential mortgage loans in forbearance totaled $65.0 million. The company reported $1.5 billion of PPP loans outstanding at quarter-end.
- Concentrations and economic sensitivity: CRE-related loans were approximately 37% of total loans. Management highlighted risks from real estate exposure, geographic concentration, economic conditions and the assumptions used in CECL credit-loss estimates. Classified assets were $280.9 million, up from $223.7 million at year-end.
- Acquisition after quarter-end: On April 7, 2021, the company completed its acquisition of Aris Mortgage Holding Company, parent of AmeriHome Mortgage. Consideration was approximately $1.22 billion, including a $275 million cash premium. Acquisition accounting and valuation were incomplete at filing, and pro forma revenue and earnings were not provided.
- Acquisition risks: The filing cites integration costs and execution, realization of expected synergies, mortgage-market and refinancing sensitivity, regulatory and compliance obligations, personnel and technology retention, and potential loan repurchase, indemnification and counterparty exposures.
- Other items: The company reported no material pending legal proceedings and no material changes in internal control over financial reporting. Interest-rate sensitivity models showed projected next-12-month net interest income increases of 6.1% under an immediate +100-basis-point shock and 17.1% under +200 basis points; management cautioned that these are assumption-dependent projections, not forecasts.
Important facts for investors to verify
- How the $1.22 billion AmeriHome acquisition is reflected in subsequent-period results, including purchase accounting, goodwill, pro forma results, integration costs and realized synergies.
- Whether the improved economic outlook and Q1 credit-loss recovery prove sustainable, especially across hotel, CRE, investor-dependent and other COVID-affected borrowers.
- How rapid deposit growth and excess liquidity affect future loan growth, funding costs and net interest margin.
- How the available-for-sale securities portfolio, unrealized losses and tangible common equity ratio respond to market-rate changes.
- Whether reported liquidity and capital remain adequate if deposits leave, commitments are drawn or credit conditions deteriorate; review uninsured and brokered deposit exposure and off-balance-sheet commitments.