Western Alliance Bancorporation — Q1 2020 Form 10-Q
Business context and reporting period. Western Alliance Bancorporation is a Phoenix-based bank holding company serving customers through Western Alliance Bank and regional and specialized banking divisions. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The quarter was significantly affected by COVID-19 uncertainty, market volatility, and adoption of the expected-credit-loss standard (CECL).
Key financial results
- Earnings: Net income was $84.0 million, down 30.5% from $120.8 million in Q1 2019. Diluted EPS was $0.83 versus $1.16. Return on average assets was 1.22%, compared with 2.12%.
- Interest income and margin: Net interest income increased 8.8% to $269.0 million. Net interest margin fell 49 basis points to 4.22%, as lower asset yields more than offset reduced funding costs.
- Credit provision: Provision for credit losses was $51.2 million, versus $4.5 million a year earlier. The increase reflected loan growth, CECL’s expected-loss methodology, and economic uncertainty. The allowance for funded loans was $235.3 million, or 1.02% of funded held-for-investment loans; the separate allowance for unfunded commitments was $29.6 million.
- Non-interest income and expenses: Non-interest income was $5.1 million, down $10.3 million, mainly because fair-value adjustments shifted from a $2.8 million gain to an $11.3 million loss, predominantly on preferred stock of other banks. Non-interest expense rose 7.7% to $120.5 million. Management-reported operating PPNR increased 10.3% to $163.4 million; the operating efficiency ratio was 41.8% versus 42.0%.
- Balance sheet and growth: Assets increased 8.7% to $29.2 billion. Loans increased 9.7% to $23.2 billion, led by commercial and industrial lending. Deposits rose 8.9% to $24.8 billion, including growth in non-interest-bearing demand deposits.
- Asset quality: Nonaccrual loans were $86.6 million, including $20.9 million of loans held for sale; total nonperforming loans were $108.6 million. Nonaccrual loans were 0.37% of gross loans, up from 0.27% at year-end. Net recoveries were 0.06% of average loans, annualized.
- Cash flow: Operating activities provided $124.0 million; investing activities used $2.396 billion, primarily reflecting net loan fundings; financing activities provided $2.253 billion, mainly from deposit growth and borrowings. Cash and restricted cash ended at $415.7 million, down $18.9 million from year-end.
- Debt and liquidity: Period-end borrowings included $308.0 million of federal funds purchased and $23.0 million of customer repurchase agreements. Qualifying debt was $389.9 million. The company reported $3.1 billion of liquid assets, $4.36 billion of available FHLB credit, and $1.26 billion of available Federal Reserve credit. Management said liquidity was adequate and did not anticipate needing additional liquidity.
- Capital: Western Alliance reported a 10.0% Common Equity Tier 1 ratio, 12.3% total capital ratio, and 10.2% Tier 1 leverage ratio. It remained above regulatory well-capitalized thresholds. Stockholders’ equity was $3.0 billion; the tangible common equity ratio was 9.4%.
Material changes and unusual items
- CECL adoption on January 1, 2020 reduced opening retained earnings by $24.9 million, primarily from higher expected losses on loans and off-balance-sheet commitments. The company elected regulatory-capital transition relief.
- Average interest-earning assets increased substantially year over year, supporting net interest income growth, while lower rates reduced average loan and securities yields. The Federal Reserve’s target rate was 0%–0.25% at quarter-end.
- CRE-related loans represented approximately 42% of loans at March 31, down from 45% at year-end. The filing identifies meaningful exposure to hotels, investor-dependent technology, retail, and gaming: $4.416 billion combined, or 19.1% of the loan portfolio.
- The company repurchased $62.5 million of stock and paid $25.6 million in dividends during Q1. It subsequently suspended repurchases effective April 17 through the end of Q2 2020.
- No material pending legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Outlook, commentary, and risks
The filing provides no specific earnings or financial guidance. Management cautioned that a prolonged or worsening pandemic could increase credit losses and the provision, weaken collateral values and asset quality, delay loan payments and fees, reduce net interest income and margin, and slow growth. Credit-loss estimates depend on forecasts and judgments that may change materially. The company also identified interest-rate, CRE concentration, geographic concentration, deposit funding, market valuation, and operational risks.
After quarter-end, the bank reported approximately 4,630 Paycheck Protection Program applications approved, totaling $1.9 billion; modifications on approximately 150 loans totaling $570 million; residential mortgage forbearance on approximately 270 loans totaling $158 million; and approximately $455 million in draws on unfunded commitments during April. Management described tighter underwriting and limits on originations to higher-risk industries. PPP-related processing, compliance, and SBA-guarantee risks were also disclosed.
Important facts for investors to verify
- How subsequent-quarter credit performance, modifications, draws, and economic forecasts affect the allowance and future provision.
- Whether concentrations in hotels, technology, retail, gaming, and CRE lead to rising delinquencies, nonaccrual loans, or collateral losses.
- Whether deposit growth and available borrowing capacity remain sufficient as customer funding needs and deposit behavior change.
- How the low-rate environment affects net interest margin, and whether reported operating measures reconcile with GAAP results.
- Whether PPP loan processing and servicing satisfy SBA requirements and preserve the government guarantee.
- That reported regulatory capital benefits from the elected CECL transition relief and excludes the full immediate effect of CECL adoption.