Western Alliance Bancorporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with FY2019. The company is a Phoenix-based bank holding company whose principal subsidiary, Western Alliance Bank, provides commercial and consumer banking, lending, deposit, and treasury services.
Financial results and position
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Net income | $506.6 million | $499.2 million |
| Diluted EPS | $5.04 | $4.84 |
| Net interest income | $1,166.9 million | $1,040.4 million |
| Provision for credit losses | $123.6 million | $19.3 million |
| Net interest margin | 3.97% | 4.52% |
| Total assets | $36.5 billion | $26.8 billion |
| Loans, before allowance | $27.1 billion | $21.1 billion |
| Deposits | $31.9 billion | $22.8 billion |
| Stockholders’ equity | $3.4 billion | $3.0 billion |
- Total net revenue was $1.238 billion, up 12.0%; pre-provision net revenue (a non-GAAP measure) rose to $746.1 million from $623.5 million. Non-interest expense increased 2.0% to $491.6 million. The efficiency ratio improved to 38.8% from 42.7%.
- Return on average assets was 1.61%, down from 2.00%. Return on average tangible common equity was 17.7%, versus 19.6% (non-GAAP).
- Net cash provided by operating activities was $670.2 million; investing activities used $7.54 billion; financing activities provided $9.10 billion. Cash and cash equivalents increased to $2.67 billion from $434.6 million.
- Liquidity included $6.6 billion in cash and unpledged marketable securities. Management considered liquidity adequate for the next 90–120 days; unused borrowing capacity included approximately $4.0 billion from the FHLB and $2.7 billion from the Federal Reserve.
- Year-end regulatory capital ratios were 9.9% CET1, 10.2% Tier 1, 12.5% total capital, and 9.2% Tier 1 leverage. The company and bank exceeded well-capitalized thresholds. Ratios reflect elected transitional relief for CECL’s regulatory-capital impact.
- Qualifying debt was $548.7 million at year-end. The bank issued $225 million of subordinated debt in May and redeemed $75 million in October; the parent also had $175 million of 6.25% subordinated debentures. Year-end other borrowings were $5 million.
Changes, credit quality, and unusual items
- Net income increased only modestly despite revenue growth, primarily because the provision for credit losses rose sharply amid COVID-19 uncertainty and adoption of the CECL expected-loss standard. CECL adoption reduced opening retained earnings by $24.9 million.
- The lower-rate environment reduced funding costs: interest expense fell $89.7 million, while net interest income rose $126.5 million. Net interest margin nevertheless declined 55 basis points as asset yields compressed.
- Loans grew 28.1%; commercial and industrial loans increased about $4.9 billion, including $1.5 billion of PPP loans. Deposits grew 40.1%, with non-interest-bearing deposits reaching 42.2% of year-end deposits.
- Credit indicators weakened: nonaccrual loans rose to $115.2 million from $56.0 million; nonperforming assets were 0.32% of assets versus 0.26%; and net charge-offs were 0.06% of average loans versus 0.02%. The allowance for funded loans was $278.9 million; the separate allowance for unfunded commitments and letters of credit was $37.0 million.
- COVID-sensitive hotel, investor-dependent, retail, and gaming exposures totaled $4.56 billion, or 16.8% of loans. COVID-related modifications totaled $538.3 million at year-end, including $190.0 million with payment deferrals; residential mortgage forbearance was $77.1 million.
- FY2020 non-interest income included a $5.6 million one-time BOLI enhancement fee. The company also recorded gains on OREO sales, while travel-related expenses declined amid pandemic restrictions.
- Fourth-quarter net income was $193.6 million, versus $128.1 million a year earlier. The quarter included a $34.2 million recovery of credit losses, compared with a $4.0 million provision in fourth-quarter 2019.
Outlook, risks, and contingencies
- The filing provides no specific numeric earnings or growth guidance. Management said pandemic duration, economic conditions, borrower performance, and low interest rates could affect credit costs, interest income, margin, growth, and asset quality; it cautioned that credit-loss estimates could prove insufficient.
- On February 16, 2021, after year-end, the bank agreed to acquire AmeriHome Mortgage Company’s parent for estimated aggregate cash consideration of approximately $1.0 billion, based on year-end 2020 financials. Closing was expected in Q2 2021, subject to regulatory approvals and other conditions; completion and anticipated benefits were not assured.
- Key risks include exposure to real estate and concentrated regional markets, COVID-19 impacts (especially hospitality), credit losses and CECL estimate uncertainty, interest-rate and LIBOR-transition risk, deposit competition and liquidity, cybersecurity and third-party operations, and regulatory compliance. The company reported an out-of-guideline 12.3% decline in modeled economic value of equity under a 100-basis-point rate decrease; the board and ALCO accepted the breach, attributing it to excess liquidity and securities valuation in a low-rate environment.
- Commitments to extend credit were $9.43 billion and letters of credit were $186.9 million. Management did not expect ordinary-course litigation to materially affect the company; no material pending legal proceedings were reported. The auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Track hotel and other pandemic-sensitive borrowers, modification and forbearance balances, nonaccrual loans, criticized assets, charge-offs, and whether the allowance remains adequate as forecasts change.
- Confirm the sustainability of earnings as PPP-related fees and balances run off, interest rates remain low, and net interest margin responds to changes in rates and deposit costs.
- Review deposit growth, composition and stability, uninsured and brokered funding exposure, liquidity capacity, and the large unfunded commitment book.
- Verify AmeriHome closing conditions, final purchase consideration, integration costs, funding, and realized strategic benefits.
- Assess regulatory capital trends, including the effect when CECL capital relief phases out, and the company’s plans for capital returns after its repurchase authorization expired.