Western Alliance Bank
Annual Report 2019
Kenneth A. Vecchione
President and Chief Executive Officer
Dear Fellow Shareholders,
As I write, coronavirus (COVID-19) is making
an unprecedented impact in the United States
and around the world. This requires that all of
us at Western Alliance apply our considerable
expertise and energy to supporting our clients,
caring for our communities and helping our
people navigate through this challenging time.
While the current crisis is unlike any other, we arrive
here uniquely prepared to address what’s ahead.
Western Alliance achieved a record-breaking year in
2019, reaching a number of milestones – $27 billion
in assets, industry-leading performance in all key
financial metrics, robust capital and liquidity levels,
and high-profile industry awards – all due, we
believe, to our talented and entrepreneurial people.
01
Our experiences steering through the financial crisis of
2008 have helped prepare us for today’s challenges. In the
interim, we have expanded our organization’s strengths,
including higher capital ratios, ample liquidity, and asset
quality that is strong and stable due to lower loan-to-value
ratios. At year-end 2019, the bank had $3.3 billion in total
regulatory capital and tangible common equity of more
than 10% – among the highest in the banking industry.
Importantly, our robust and diverse deposit sources support
our capital position and have helped create a sustainable
balance sheet.
Finally, in the years since 2008, our bank now lends
primarily to companies that are themselves stronger and
better positioned for the current crisis, with greater liquidity
and capitalization. Another key strength of our bank is our
seasoned and invested leadership team, many of whom
played key roles at Western Alliance in working through the
major impacts of the last recession.
Right now, Western Alliance is incredibly focused on
helping businesses manage the economy’s significant
short-term challenges. During this all-encompassing health
and economic crisis, we are working diligently and around
the clock, in most cases remotely, to help our clients
make the most of critical federal aid for small businesses,
including the substantial relief of the Paycheck Protection
Program in the CARES Act and the Main Street Lending
Program from the Federal Reserve. Both of these programs
will provide clients with the liquidity necessary to keep
their people employed and meet overhead expenses.
02
Since the beginning of this crisis, I am pleased that
Western Alliance has been able to protect the well-being
of our people. The bank’s business continuity plans
and training have prepared us to work effectively from
home, but I especially want to recognize our dedicated
people who continue to serve clients at our offices.
I am proud of our people who make us so resilient during
these demanding times.
The qualities that differentiate Western Alliance, and
contributed to our exceptional 2019, remain in place to
manage present circumstances and pursue future
opportunities. Our stakeholders can count on our prudent,
clearheaded decision-making as we move Western Alliance
forward. Our capabilities, in fair days as well as in times of
uncertainty, start with our people.
The qualities that differentiate
Western Alliance, and contributed to
our exceptional 2019, remain in place
to manage present circumstances
and pursue future opportunities.”
03
People, Performance, Possibilities
People have always been the foundation of our
extraordinary culture: People, Performance, Possibilities.
Everyone across our organization – from our experienced
board of directors to every person in every discipline
that supports our front line – is committed to building
long-term customer relationships and providing banking
solutions that produce results for customers and for
the bank. Our values are the precepts that guide everything
we do at Western Alliance: integrity, creativity, teamwork,
passion and excellence.
These core values power our flexible, differentiated
business model that makes the most of our national
presence and regional footprint. This proved especially
effective in 2019 and will enable us to pivot to where
we need to go in 2020 and beyond. In both good times
and more trying ones, we have the ability to adapt quickly.
Our unique organizational structure offers us various
levers to optimize performance, including responsive and
focused decision-making at the point of delivery.
While we remain reasonably optimistic about the longer-
term economic outlook, we are ready today to manage and
optimize the variables at play as the coronavirus response
shifts near-term parameters. As we work with clients, we
will also ask them to invest, using collateral as an even more
important tentpole to secure performance. We believe our
hands-on management style and diversified loan portfolio
will help us to mitigate the risks in the current landscape,
support our clients, and position Western Alliance for the
ultimate recovery.
04
Conservative Credit Culture Shapes Decision-making
Our diversified business model is the centerpiece of our
ability to prudently manage credit risk and allocate capital,
and is not found at other similarly sized institutions. We
underwrite considering stress-case scenarios in all business
units. We understand the businesses we finance and
understand what it takes to work through difficult situations.
Our full executive leadership team is active in relationship
management to continuously assess the state of
our borrowers’ businesses. We are thoroughly involved
in every part of the underwriting and ongoing evaluation
process – a culture we believe will continue to serve
us well in coming months. Western Alliance’s approach to
managing credit weakness is based on our philosophy
of early identification, escalation and resolution that brings
executive attention and heightened bank resources to
bear for problem credits.
As I mentioned earlier, we see the Paycheck Protection
Program and Main Street Lending Program as vital to
our economy and our clients, and we are working closely
with them to take advantage of these important relief
programs. In addition, we are taking other specific actions,
including providing liquidity on undrawn lines of credit
and, where appropriate, we have granted increases to
credit lines to help clients conduct business. Crucially,
we are working with our clients to solve for the next year,
not just the next 90 days. While we certainly hope this
crisis doesn’t extend through the longer time frame,
we believe it is pragmatic to be fully prepared – and to
help clients prepare – as the best way through to the
other side of this crisis.
05
Caring for Our Communities
Now and always, Western Alliance people care deeply about
improving quality of life in our local communities. In 2019
we increased our support, making nearly $50 million in new
community development loans in the bank’s assessment
areas, contributions of more than $1.3 million to nonprofits
and nearly $62 million in new community investments.
In another important way we give back to our communities,
our teams across the country volunteered 10,000+ CRA-
eligible hours last year.
The current economic environment calls for us to be
even more engaged and creative in bringing resources
and expertise to our communities and to our clients.
Last year, we were gratified to be recognized as the
#1 Regional Bank on Bank Director Magazine’s Bank
Performance Scorecard; in the Top 10 of the Forbes
“Best Banks in America” list for the fifth consecutive year;
and as the #1 best-performing of the 50 largest public
U.S. banks by S&P Global Market Intelligence.
I’d like to thank our client-oriented, caring and committed
people all across the bank, who are the core of Western
Alliance’s success. I am also grateful for the leadership and
active engagement of our board of directors.
Finally, to our shareholders, thank you for your
confidence in Western Alliance.
Kenneth A. Vecchione
President and Chief Executive Officer
April 13, 2020
06
Our stakeholders can
count on our prudent,
clearheaded decision-
making as we move
Western Alliance forward.
Our capabilities, in fair
days as well as in times
of uncertainty, start with
our people.”
07
Robert G. Sarver
Executive Chairman of the Board
A Message From Our
Executive Chairman
Amid this turbulent time for our nation and
our world, it’s worthwhile to look in the rear-view
mirror at our bank’s transformation since the
last recession. Capital accumulation, liquidity
management, geographic and product
diversification, and stronger credit standards
were designed to position us to better weather
today’s financial environment.
Guiding the overarching business strategy and execution
for Western Alliance is the highest priority of our board. As
always and even more so during the current circumstances,
our board works actively with management to monitor
performance against goals and priorities, adhere to
appropriate governance, and underscore sound asset
quality and risk management practices.
08
Right now, the board is actively supporting our bank’s
management in their concerted efforts to manage through
the economic shutdown caused by COVID-19, working
with clients to provide liquidity so these businesses can
make it through to the other side. As we navigate this
crisis, our nimble organization – which has always focused
on bankers who understand the individual businesses
and industries they bank, led by a hands-on executive
management team – is ready to meet today’s challenges as
well as prosper from the future opportunities they will bring.
In these circumstances and always, understanding what
it takes to guide our company so that we deliver for all our
stakeholders is a central responsibility of our board.
Our nimble organization – which has
always focused on bankers who understand
the individual businesses and industries
they bank, led by a hands-on executive
management team – is ready to meet
today’s challenges as well as prosper from
the future opportunities they will bring.”
09
This year, we are pleased to nominate to our board
of directors two highly accomplished individuals:
Juan Figuereo, C.P.A., currently a Venture Partner with
Ocean Azul Partners, an early stage investment
fund, who has extensive CFO experience with a number
of public companies including Revlon, NII Holdings
and Newell Rubbermaid; and Bryan Segedi, C.P.A., former
Deputy Global Vice Chair of Ernst & Young and Executive
in Residence at Arizona State University. Both Juan
and Bryan will bring extensive financial and business
perspectives to our board.
At this time, we wish to sincerely thank Dr. Jim Nave
for his 26 years of outstanding service to our company.
As a founding board member, Jim has been an invaluable
supporter of the bank and contributor to our success.
Jim has been a trusted advisor and an important voice
for sound business principles as an accomplished
veterinary entrepreneur.
On behalf of Western Alliance’s board of directors, we are
grateful and proud of what our company and stakeholders
accomplished together in 2019, and how our organization
is responding to the current situation. I would like to
thank our customers and recognize our own people and
loyal business partners for their contributions, and our
shareholders for their support of Western Alliance Bank.
We look forward to continuing to earn your support in
2020 and the years to come.
Robert G. Sarver
Executive Chairman of the Board
April 13, 2020
10
We are grateful and proud
of what our company and
stakeholders accomplished
together in 2019, and how our
organization is responding to
the current situation.”
11
Financial highlights
Balance Sheet ($ in millions)
Total Assets
2017
2018
2019
20,329
23,109
26,822
Total Loans, net of deferred fees
15,094
17,711
21,123
Total Deposits
Total Equity
Profitability
16,973
19,177
22,796
2,230
2,614
3,017
Net Interest Income ($000)
784,664
915,879
1,040,412
Net Income ($000)
325,492
435,788
499,171
ROAA (%)
ROATCE (%)
Net Interest Margin (%)
Operating Efficiency Ratio1 (%)
Tangible Common Equity / Tangible Assets (x)
Asset Quality (%)
Non-Performing Assets2 / Total Assets
Loan Loss Reserves / Gross Loans
Tier 1 Common Capital (CET1) Ratio
Per Share Information ($)
Common Dividends Declared per Share 3
Earnings Per Share
1.72
2.05
2.00
18.31
20.64
19.60
4.65
41.5
9.6
0.36
0.93
10.4
–
3.10
4.68
41.9
10.2
0.20
0.86
10.7
–
4.14
4.52
42.7
10.3
0.26
0.80
10.6
0.50
4.84
12
Growth in TBV per Share4
WAL
WAL with Dividends Added Back
Peer Average
Peer Average with Dividends Added Back
Net Interest Income, NIM and
Average Interest on Earning Assets
Net Interest Income
Average Interest Earning Assets
NIM
4.65%
4.68%
4.58%
4.52%
$1.0B
$916M
$785M
$657M
4.51%
4.42%
$493M
$385M
$9.3B
$11.6B
$15.1B
$17.8B
$20.1B
$23.6B
165%
160%
70%
57%
2014
2015
2016
2017
2018
2019
2014
2015
2016
2017
2018
2019
Deposits, Borrowings, and Cost of Funds
Dollars in Billions
Loan and Loan Yields
Dollars in Billions
Total Borrowings
Non-Interest Bearing Deposits
Interest Bearing Deposits
29.9% CAGR
16.7% CAGR
Cost of Funds
0.36%
0.30%
0.31%
0.37%
$0.8
$7.4
$0.5
$5.6
$8.9
$9.5
$0.4
$4.1
$7.9
$0.5
$2.3
$6.6
0.86%
$0.4
$8.5
0.64%
$0.9
$7.5
$14.3
$11.7
Loans
Yield
20.2% CAGR
5.23%
5.18%
5.40%
5.62%
5.82%
5.83%
$21.1
$17.7
$15.1
$13.2
$11.1
$8.4
2014
2015
2016
2017
2018
2019
2014
2015
2016
2017
2018
2019
1. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2019 as filed with the Securities and Exchange Commission.
2. Non-performing assets include nonaccrual loans, excluding troubled debt restructured loans, plus other real estate owned.
3. Quarterly cash dividend initiated in 3Q 2019.
4. Peers consist of 55 major exchange traded banks with total assets between $15B and $150B as of December 31, 2019, excluding target banks of pending acquisitions; S&P Global Market Intelligence.
13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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)
Delaware
88-0365922
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One E. Washington Street, Suite 1400
Phoenix
Arizona
(Address of principal executive offices)
85004
(Zip Code)
(602) 389-3500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 Par Value
6.25% Subordinated Debentures due 2056
WAL
WALA
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes
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, or
emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer" "smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) 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
The aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $4.28 billion based on the June 30, 2019 closing price of
said stock on the New York Stock Exchange ($44.72 per share).
As of February 24, 2020, Western Alliance Bancorporation had 102,479,213 shares of common stock outstanding.
Portions of the registrant’s definitive proxy statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
INDEX
PART I
Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Page
3
5
14
26
26
26
26
27
29
31
67
69
145
145
147
148
148
148
148
148
148
150
151
2
PART I
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (this “Form 10-
K”) are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform
Act”). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through
the inclusion of words such as “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,”
“future,” “goals,” “guidance,” “intend,” “may,” “opportunity,” “plan,” “position,” “potential,” “project,” “ seek,” “should,”
“strategy,” “target,” “will,” “would” or similar statements or variations of such words and other similar expressions. All statements
other than historical fact are “forward-looking statements” within the meaning of the Reform Act, including statements that are
related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions that are not historical facts. These forward-looking statements reflect the
Company's current views about future events and financial performance and involve certain risks, uncertainties, assumptions, and
changes in circumstances that may cause the Company's actual results to differ significantly from historical results and those
expressed in any forward-looking statement. Factors that may cause actual results to differ materially from those contemplated
by such forward-looking statements include, but are not limited to, those described in “Risk Factors” in Item 1A of this Form 10-
K. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to publicly
update or revise any forward-looking statements included in this Form 10-K or to update the reasons why actual results could
differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the
extent required by federal securities laws. In light of these risks, uncertainties and assumptions, the forward-looking events discussed
in this Form 10-K might not occur, and you should not put undue reliance on any forward-looking statements.
3
GLOSSARY OF ENTITIES AND TERMS
The acronyms and abbreviations identified below are used in various sections of this Form 10-K, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in Item 7 and the Consolidated Financial Statements
and the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K:
ABA
BON
Bridge
Alliance Bank of Arizona
Bank of Nevada
Bridge Bank
Company
Western Alliance Bancorporation and subsidiaries
CSI
FIB
HFF
ACL
AFS
ALCO
ALLL
AOCI
APIC
ARRC
ASC
ASU
CS Insurance Company
First Independent Bank
Hotel Franchise Finance
Allowance for Credit Losses
Available-for-Sale
Asset and Liability Management Committee
Allowance for Loan and Lease Losses
Accumulated Other Comprehensive Income
Additional paid in capital
Alternative Reference Rate Committee
Accounting Standards Codification
Accounting Standards Update
Basel Committee
Basel Committee on Banking Supervision
Basel III
BHCA
BOD
BOLI
CAMELS
Banking Supervision's December 2010 final capital framework
Bank Holding Company Act of 1956
Board of Directors
Bank Owned Life Insurance
Capital Adequacy, Assets, Management Capability, Earnings,
Liquidity, Sensitivity
Capital Rules
The FRB, the OCC, and the FDIC 2013 approved final rules
CCO
CDARS
CDO
CECL
CEO
CET1
CFO
CFPB
CLO
CMO
COSO
CRA
CRE
DIF
Chief Credit Officer
Certificate Deposit Account Registry Service
Collateralized Debt Obligation
Current Expected Credit Loss
Chief Executive Officer
Common Equity Tier 1
Chief Financial Officer
Consumer Financial Protection Bureau
Collateralized Loan Obligation
Collateralized Mortgage Obligation
Community Reinvestment Act
Commercial Real Estate
FDIC's Deposit Insurance Fund
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010
DTA
DTL
EGRRCPA
EPS
EVE
Deferred Tax Asset
Deferred Tax Liability
The Economic Growth, Regulatory Relief, and Consumer Protection
Act
Earnings per share
Economic Value of Equity
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
FCRA
FDIA
FDIC
FHLB
FHLMC
FICO
FNMA
FRA
Financial Accounting Standards Board
Fair Credit Reporting Act of 1971
Federal Deposit Insurance Act
Federal Deposit Insurance Corporation
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
The Financing Corporation
Federal National Mortgage Association
Federal Reserve Act
ENTITIES / DIVISIONS:
HOA Services
Homeowner Associations Services
LVSP
TPB
WA PWI
Las Vegas Sunset Properties
Torrey Pines Bank
Western Alliance Public Welfare Investments, LLC
WAB or Bank
Western Alliance Bank
WABT
Western Alliance Business Trust
WAL or Parent
Western Alliance Bancorporation
TERMS:
FRB
FVO
GAAP
GLBA
GNMA
GSE
HFI
HFS
HTM
ICS
IRC
ISDA
IT
LIBOR
LIHTC
MBS
MOU
NBL
NOL
NPV
NYSE
OCC
OCI
OFAC
OREO
OTTI
Federal Reserve Bank
Fair Value Option
U.S. Generally Accepted Accounting Principles
Gramm-Leach-Bliley Act
Government National Mortgage Association
Government-Sponsored Enterprise
Held for Investment
Held for Sale
Held-to-Maturity
Insured Cash Sweep Service
Internal Revenue Code
International Swaps and Derivatives Association
Information Technology
London Interbank Offered Rate
Low-Income Housing Tax Credit
Mortgage-Backed Securities
Memorandum of Understanding
National Business Lines
Net Operating Loss
Net Present Value
New York Stock Exchange
Office of the Comptroller of the Currency
Other Comprehensive Income
Office of Foreign Asset Control
Other Real Estate Owned
Other-than-Temporary Impairment
Purchased Credit Impaired
Pre-Provision Net Revenue
Right of use
Small Business Administration
Small Business Investment Company
Small Business Lending Fund
Securities and Exchange Commission
Supplemental Executive Retirement Plan
Senior Loan Committee
Secured Overnight Funding Rate
Supervision and Regulation Letters
Tax Cuts and Jobs Act of 2017
Troubled Debt Restructuring
Tax Equivalent Basis
Total Shareholder Return
United States Department of Agriculture
Variable Interest Entity
eXtensible Business Reporting Language
PCI
PPNR
ROU
SBA
SBIC
SBLF
SEC
SERP
SLC
SOFR
SR
TCJA
TDR
TEB
TSR
USDA
VIE
XBRL
4
Committee of Sponsoring Organizations of the Treadway
Commission
PCAOB
Public Company Accounting Oversight Board
Item 1.
Business.
Organization Structure and Description of Services
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL
provides a full spectrum of deposit, lending, treasury management, international banking, and online banking products and services
through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON, Bridge, FIB, and TPB. The Company also serves business
customers through a national platform of specialized financial services. In addition, the Company has two non-bank subsidiaries,
LVSP, which held and managed certain OREO properties, and CSI, a captive insurance company formed and licensed under the
laws of the State of Arizona, and established as part of the Company's overall enterprise risk management strategy.
WAL also has eight unconsolidated subsidiaries used as business trusts in connection with issuance of trust-preferred securities
as described in "Note 9. Qualifying Debt" in Item 8 of this Form 10-K.
Bank Subsidiary
At December 31, 2019, WAL has the following bank subsidiary:
Bank Name Headquarters
Location Cities
Western
Alliance
Bank
Phoenix,
Arizona
Arizona: Chandler, Flagstaff, Gilbert, Mesa, Phoenix,
Scottsdale, and Tucson
Nevada: Carson City, Fallon, Reno, Sparks,
Henderson, Las Vegas, Mesquite, and North Las Vegas
California: Beverly Hills, Carlsbad, Costa Mesa, La
Mesa, Los Angeles, Menlo Park, Oakland, Palo Alto,
Pleasanton, San Diego, San Francisco, and San Jose
Other: Atlanta, Georgia; Boston, Massachusetts; and
Reston, Virginia
WAB also has the following significant wholly-owned subsidiaries:
Total
Assets
Net
Loans
(in millions)
Deposits
$
26,862.7
$
20,955.5
$
23,086.0
• Western Alliance Business Trust holds certain investment securities, municipal and non-profit loans, and leases.
• WA PWI, LLC holds certain limited partnerships invested primarily in low income housing tax credits and small business
investment corporations.
• BW Real Estate, Inc. operates as a real estate investment trust and holds certain real estate loans and related securities.
• Helios Prime, Inc. holds certain equity interests in renewable energy tax credit transactions.
Market Segments
The Company’s reportable segments are defined primarily by geographic location, services offered, and markets served. The
Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full service
banking and related services to their respective markets. The Company's NBL segments provide specialized banking services to
niche markets. These NBLs are managed centrally and are broader in geographic scope than the Company's other segments, though
still predominately within the Company's core market areas. The Corporate & Other segment consists of the Company's investment
portfolio, corporate borrowings and other related items, income and expense items not allocated to other reportable segments, and
inter-segment eliminations.
Loan and deposit accounts are typically assigned directly to the segments where these products are originated and/or serviced.
Equity capital is assigned to each segment based on the risk profile of their assets and liabilities with a funds credit provided for
the use of this equity as a funding source. Any excess equity not allocated to segments based on risk is assigned to the Corporate
& Other segment.
5
Net interest income, provision for credit losses, and non-interest expense amounts are recorded in their respective segments to the
extent that the amounts are directly attributable to those segments. Net interest income of a reportable segment includes a funds
transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Using
this funds transfer pricing methodology, liquidity is transferred between users and providers. Net income amounts for each
reportable segment are further derived by the use of expense allocations. Certain expenses not directly attributable to a specific
segment are allocated across all segments based on key metrics, such as number of employees, average loan balances, and average
deposit balances. Income taxes are applied to each segment based on the effective tax rate for the geographic location of the
segment. Any difference in the corporate tax rate and the aggregate effective tax rates in the segments are adjusted in the Corporate
& Other segment.
Lending Activities
General
Through WAB and its banking divisions and operating subsidiaries, the Company provides a variety of financial services to
customers, including CRE loans, construction and land development loans, commercial loans, and consumer loans. The Company’s
lending has focused primarily on meeting the needs of business customers.
Commercial and Industrial: Commercial and industrial loans are a significant portion of the Company's loan portfolio and include
working capital lines of credit, inventory and accounts receivable lines, mortgage warehouse lines, equipment loans and leases,
and other commercial loans. Loans to technology companies, tax-exempt municipalities, and not-for-profit organizations are also
categorized as commercial and industrial loans.
CRE: Loans to fund the purchase or refinancing of CRE for investors (non-owner occupied) or owner occupants are a significant
portion of the Company's loan portfolio. These CRE loans are secured by multi-family residential properties, professional offices,
industrial facilities, retail centers, hotels, and other commercial properties. As of December 31, 2019 and 2018, 31% and 36% of
the Company's CRE loans were owner occupied. Owner occupied CRE loans are loans secured by owner occupied non-farm
nonresidential properties for which the primary source of repayment (more than 50%) is the cash flow from the ongoing operations
and activities conducted by the borrower who owns the property. Non-owner occupied CRE loans are CRE loans for which the
primary source of repayment is rental income generated from the collateral property.
Construction and Land Development: Construction and land development loans include single family and multi-family residential
projects, industrial/warehouse properties, office buildings, retail centers, medical office facilities, and residential lot developments.
These loans are primarily originated to experienced local developers with whom the Company has a satisfactory lending history.
An analysis of each construction project is performed as part of the underwriting process to determine whether the type of property,
location, construction costs, and contingency funds are appropriate and adequate. Loans to finance commercial raw land are
primarily to borrowers who plan to initiate active development of the property within two years.
Residential: The Company has a residential mortgage acquisition program, in which it partners with strategic third parties to
execute flow and bulk residential loan purchases that meet the Company's goals and underwriting criteria. These loan purchases
consist of both conforming and non-conforming loans. Non-conforming loan purchases are considered to be high quality as the
borrowers have high FICO scores and the loans generally have low loan-to-values. Residential loans made up 10% of the Company's
total loan portfolio as of December 31, 2019, compared to 7% as of December 31, 2018.
Consumer: Limited types of consumer loans are offered to meet customer demand and to respond to community needs. Examples
of these consumer loans include home equity loans and lines of credit, home improvement loans, personal lines of credit, and
loans to individuals for investment purposes.
6
At December 31, 2019, the Company's loan portfolio totaled $21.12 billion, or approximately 79% of total assets. The following
table sets forth the composition of the Company's HFI loan portfolio as of the periods presented:
Commercial and industrial
Commercial real estate - non-owner occupied
Commercial real estate - owner occupied
Construction and land development
Residential real estate
Consumer
Loans, net of deferred loan fees and costs
Allowance for credit losses
Total loans HFI
December 31,
2019
2018
Amount
Percent
Amount
Percent
(dollars in thousands)
$
$
$
9,382,043
5,245,634
2,316,913
1,952,156
2,147,664
57,083
21,101,493
(167,797)
20,933,696
44.5% $
24.8
11.0
9.2
10.2
0.3
7,762,642
4,213,428
2,325,380
2,134,753
1,204,355
70,071
43.8%
23.8
13.1
12.1
6.8
0.4
100.0% $
17,710,629
100.0%
(152,717)
$
17,557,912
For additional information concerning loans, see "Note 3. Loans, Leases and Allowance for Credit Losses" of the Consolidated
Financial Statements contained herein or "Management's Discussion and Analysis of Financial Condition and Results of Operations
—Financial Condition – Loans discussions" in Item 8 of this Form 10-K.
The Company adheres to a specific set of credit standards that are intended to ensure appropriate management of credit risk.
Furthermore, the Bank's senior management team plays an active role in monitoring compliance with such standards.
Loan originations are subject to a process that includes the credit evaluation of borrowers, utilizing established lending limits,
analysis of collateral, and procedures for continual monitoring and identification of credit deterioration. Loan officers actively
monitor their individual credit relationships in order to report suspected risks and potential downgrades as early as possible. The
BOD approves all material changes to loan policy, as well as lending limit authorities. The Bank's lending policies generally
incorporate consistent underwriting standards across all geographic regions in which the Bank operates, customized as necessary
to conform to state law and local market conditions. The Bank's credit culture emphasizes timely identification of troubled credits
to allow management to take prompt corrective action, when necessary.
Loan Approval Procedures and Authority
The Company's loan approval procedures are executed through a tiered loan limit authorization process, which is structured as
follows:
•
Individual Credit Authorities. The credit approval levels for individual divisional and senior credit officers are set by
policy and certain credit administration officers' approval authorities are established on a delegated basis.
• Management Loan Committees. Credits in excess of individual divisional or senior credit officer approval authority are
submitted to the appropriate divisional or NBL loan committee. The divisional committees consist of members of the
Bank's senior management team of each division and the NBL loan committees consist of the Bank's divisional or senior
credit officers.
• Credit Administration. Credits in excess of the divisional or NBL loan committee approval authority require the additional
approval of the Bank's CCO and any credits in excess of the CCO's individual approval authority are submitted to the
WAB SLC. In addition, the SLC reviews all other loan approvals to any one new borrower in excess of established
thresholds. The SLC is chaired by the WAB CCO and includes the Company’s CEO.
Loans to One Borrower. In addition to the limits set forth above, subject to certain exceptions, state banking laws generally limit
the amount of funds that a bank may lend to a single borrower. Under Arizona law, the obligations of one borrower to a bank
generally may not exceed 20% of the bank’s capital, plus an additional 10% of its capital if the additional amounts are fully secured
by readily marketable collateral. Arizona law does not specifically require aggregation of loans to affiliated entities in determining
compliance with the lending limit. As a matter of longstanding practice, the Arizona Department of Financial Institutions uses the
same aggregation analysis as applied to national banks by the OCC.
7
Concentrations of Credit Risk. The Company's lending policies also establish customer and product concentration limits, which
are based on commitment amounts, to control single customer and product exposures. The Company's lending policies have several
different measures to limit concentration exposures. Set forth below are the primary segmentation limits and actual measures as
of December 31, 2019:
CRE
Commercial and industrial
Construction and land development
Residential real estate
Consumer
Asset Quality
General
Percent of Total Capital
Policy Limit
Actual
435%
400
85
100
5
232%
289
59
66
2
To measure asset quality, the Company has instituted a loan grading system consisting of nine different categories. The first five
are considered satisfactory "pass" ratings. The other four "non-pass" grades range from a “Special mention” category to a “Loss”
category and are consistent with the grading systems used by federal banking regulators. All loans are assigned a credit risk grade
at the time they are made, and each assigned loan officer reviews the credit with his or her immediate supervisor on a quarterly
basis to determine whether a change in the credit risk grade is warranted. In addition, the grading of the Company's loan portfolio
is reviewed on a regular basis by its internal Loan Review Department.
Collection Procedure
If a borrower fails to make a scheduled payment on a loan, Bank personnel attempt to remedy the deficiency by contacting the
borrower and seeking payment. Contacts generally are made within 15 business days after the payment becomes past due. The
Bank maintains regional Special Assets Departments, which generally service and collect loans rated Substandard or worse. Each
division is responsible for monitoring activity that may indicate an increased risk rating, including, but not limited to, past-dues,
overdrafts, and loan agreement covenant defaults. Loans deemed uncollectible are charged-off.
Nonperforming Assets
Nonperforming assets include loans past due 90 days or more and still accruing interest, non-accrual loans, TDR loans, and
repossessed assets, including OREO. In general, loans are placed on non-accrual status when the Company determines that ultimate
collection of principal and interest is in doubt due to the borrower’s financial condition, collateral value, and collection efforts. A
TDR loan is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the
borrower that the Company would not otherwise consider. Other repossessed assets result from loans where the Company has
received title or physical possession of the borrower’s assets. The Company generally re-appraises OREO and collateral dependent
impaired loans every 12 months. The total net realized and unrealized gains and losses of repossessed and other assets was not
significant during each of the years ended December 31, 2019, 2018, and 2017. However, losses may be experienced in future
periods.
Criticized Assets
Federal bank regulators require banks to classify its assets on a regular basis. In addition, in connection with their examinations
of the Bank, examiners have authority to identify problem assets and, if appropriate, re-classify them. A loan grade of "Special
Mention" from the Company's internal loan grading system is utilized to identify potential problem assets and loan grades of
"Substandard," "Doubtful," and "Loss" are utilized to identify actual problem assets.
8
The following describes the potential and actual problem assets using the Company's internal loan grading system definitions:
•
•
•
•
"Special Mention" (Grade 6): Generally these are assets that possess potential weaknesses that warrant management's
close attention. These loans may involve borrowers with adverse financial trends, higher debt to equity ratios, or weaker
liquidity positions, but not to the degree of being considered a “problem loan” where risk of loss may be apparent. Loans
in this category are usually performing as agreed, although there may be non-compliance with financial covenants.
“Substandard” (Grade 7): These assets are characterized by well-defined credit weaknesses and carry the distinct
possibility that the Company will sustain some loss if such weakness or deficiency is not corrected. All loans 90 days or
more past due and all loans on non-accrual status are considered at least "Substandard," unless extraordinary circumstances
would suggest otherwise.
“Doubtful” (Grade 8): These assets have all the weaknesses inherent in those classified as "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, but because of certain known factors which may work to the
advantage and strengthening of the asset (for example, capital injection, perfecting liens on additional collateral and
refinancing plans), classification as an estimated loss is deferred until a more precise status may be determined.
“Loss” (Grade 9): These assets are considered uncollectible and having such little recoverable value that it is not practical
to defer writing off the asset. This classification does not mean that the loan has absolutely no recovery or salvage value,
but rather that it is not practicable or desirable to defer writing off the asset, even though partial recovery may be achieved
in the future.
Allowance for Credit Losses
The Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a
provision for credit losses and is reflected as a reduction in earnings. Loans are charged against the allowance for credit losses
when management believes that collectability of the contractual principal or interest is unlikely. Subsequent recoveries, if any, are
credited to the allowance. The allowance is reported at 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. For a detailed discussion of the Company’s methodology see “Management’s Discussion and Analysis and Financial
Condition – Critical Accounting Policies – Allowance for Credit Losses” in Item 7 of this Form 10-K.
The Company also records estimated losses on unfunded loan commitments, which are classified as non-interest expense, with
corresponding reserves in other liabilities.
Investment Activities
The Company has an investment policy, which was approved by the BOD. This policy dictates that investment decisions be made
based on the safety of the investment, liquidity requirements of the Bank and holding company, potential returns, cash flow targets,
and consistency with the Company's interest rate risk management. The Bank’s ALCO is responsible for making securities portfolio
decisions in accordance with established policies. The CFO and Treasurer have the authority to purchase and sell securities within
specified guidelines. All investment transactions for the Bank and for the holding company were reviewed by the ALCO and BOD.
Generally, the Company's investment policy limits new securities investments to the following: securities backed by the full faith
and credit of the U.S. government, including U.S. treasury bills, notes, and bonds, direct obligations of Ginnie Mae, USDA and
SBA loans; MBS or CMO issued by a GSE, such as Fannie Mae or Freddie Mac; debt securities issued by a GSE, such as Fannie
Mae, Freddie Mac, and the FHLB; tax-exempt securities with a rating of “Single-A” or higher; preferred stock where the issuing
company is rated “BBB” or higher; corporate debt with a rating of “Single-A” or better; investment grade corporate bond mutual
funds; private label collateralized mortgage obligations with a single rating of “AA” or higher; commercial mortgage-backed
securities with a rating of “AAA;” low income housing development bonds; and mandatory purchases of equity securities of the
FRB and FHLB.
9
Investment securities are further subject to the following quantitative limits of the Bank:
Securities Category
Basis Limit
Preferred stock
Tax-exempt municipal securities
Tax-exempt low income housing development bonds
Investment grade corporate bond mutual funds
Corporate debt holdings
Common equity tier 1
Total assets
Total capital
Tier 1 capital
Total assets
Percentage or
Dollar Limit
10.0%
5.0%
30.0%
5.0%
2.5%
Commercial mortgage-backed securities
Aggregate purchases
$50.0 million
The Company no longer purchases (although it may continue to hold previously acquired) CDOs. The Company's policies also
govern the use of derivatives, and provide that the Company prudently use derivatives in accordance with applicable regulations
as a risk management tool to reduce the overall exposure to interest rate risk, and not for speculative purposes.
As of December 31, 2019, the Company's investment securities portfolio includes debt and equity securities. Debt securities are
classified as AFS or HTM pursuant to ASC Topic 320, Investments and ASC Topic 825, Financial Instruments. Equity securities
are reported at fair value in accordance with Topic 321, Equity Securities. For further discussion of significant accounting policies
related to the Company's investment securities portfolio refer to "Note 1. Summary of Significant Accounting Policies" in Item 8
of this Form 10-K.
As of December 31, 2019, the Company's investment securities portfolio totals $4.0 billion, representing approximately 14.8%
of the Company's total assets, with the majority of the portfolio invested in AAA/AA+ rated securities. The average duration of
the Company's investment securities is 4.6 years as of December 31, 2019.
The following table summarizes the carrying value of investment securities as of December 31, 2019 and 2018:
Available-for-sale debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total debt securities
Equity securities
CRA investments
Preferred stock
Total equity securities
Total investment securities
December 31,
2019
2018
Amount
Percent
Amount
Percent
(dollars in thousands)
0.3% $
2.4
2.5
0.2
28.4
35.6
26.2
0.7
0.3
0.0
15,327
100,106
99,380
—
924,594
1,530,124
841,573
28,617
38,188
1,984
10,142
94,253
99,961
7,773
1,129,227
1,412,060
1,039,962
27,040
10,000
999
0.4%
2.7
2.7
—
25.0
41.4
22.8
0.8
1.0
0.1
3,831,417
96.5% $
3,579,893
96.9%
52,504
86,197
138,701
1.3% $
2.2
3.5% $
51,142
63,919
115,061
1.4%
1.7
3.1%
3,970,118
100.0% $
3,694,954
100.0%
$
$
$
$
$
As of December 31, 2019 and 2018, the Company had investments in BOLI of $174.0 million and $170.1 million, respectively.
BOLI is used to help offset employee benefit costs. For additional information concerning investments, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” in Item 7 of this
Form 10-K.
10
Deposit Products
The Company offers a variety of deposit products, including checking accounts, savings accounts, money market accounts, and
other types of deposit accounts, including fixed-rate, fixed maturity certificates of deposit. The Company has historically focused
on growing its lower cost core customer deposits. As of December 31, 2019, the deposit portfolio was comprised of 37% non-
interest-bearing deposits and 63% interest-bearing deposits.
The competition for deposits in the Company's markets is strong. The Company has historically been successful in attracting and
retaining deposits due to several factors, including its:
•
•
•
knowledgeable and empowered bankers committed to providing personalized and responsive service that translates into
long lasting relationships;
broad selection of cash management services offered; and
incentives to employees for business development and retention.
Deposit balances are generally influenced by national and local economic conditions, changes in prevailing interest rates,
competiveness of the Company's offered rates, perceived stability of financial institutions and competition. In order to attract and
retain deposits, the Company relies on providing quality service and introducing new products and services that meet the needs
of its customers.
The Bank's deposit rates are determined through an internal oversight process under the direction of its ALCO. The Bank considers
a number of factors when determining deposit rates, including:
•
•
•
•
current and projected national and local economic conditions and the outlook for interest rates;
local competition;
loan and deposit positions and forecasts, including any concentrations in either; and
rates charged on FHLB advances and other funding sources.
The following table shows the Company's deposit composition:
Non-interest-bearing demand deposits
Interest-bearing transaction accounts
Savings and money market accounts
Time certificates of deposit ($250,000 or more)
Other time deposits
Total deposits
December 31,
2019
2018
Amount
Percent
Amount
Percent
$
8,537,905
2,760,865
9,120,747
1,426,133
950,843
(in thousands)
37.4% $
12.1
40.0
6.3
4.2
7,456,141
2,555,609
7,330,709
1,009,900
825,088
$
22,796,493
100.0% $
19,177,447
38.9%
13.3
38.2
5.3
4.3
100.0%
Although the Company does not pay interest to depositors of non-interest-bearing accounts, earnings credits are awarded to some
account holders, which offset charges incurred by account holders for other services. Earnings credits earned in excess of charges
incurred by account holders are recorded in deposit costs as part of non-interest expense and fluctuate as a result of deposit balances
eligible for earnings credits, along with the earnings credit rates on these deposit balances.
In addition to the Company's deposit base, it has access to other sources of funding, including FHLB and FRB advances, Federal
funds purchased, repurchase agreements, and unsecured lines of credit with other financial institutions. Previously, the Company
has also accessed the capital markets through trust preferred, subordinated debt, and Senior Note offerings. For additional
information concerning the Company's deposits, see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Balance Sheet Analysis – Deposits” in Item 7 of this Form 10-K.
Other Financial Products and Services
In addition to traditional commercial banking activities, the Company offers other financial services to its customers, including
internet banking, wire transfers, electronic bill payment and presentment, lock box services, courier, and cash management services.
11
Customer, Product, and Geographic Concentrations
Approximately 45% and 49% of the Company's loan portfolio at December 31, 2019 and 2018, respectively, was represented by
CRE and construction and land development loans. The Company’s business is concentrated primarily in the Las Vegas, Los
Angeles, Phoenix, Reno, San Francisco, San Jose, San Diego and Tucson metropolitan areas. Consequently, the Company is
dependent on the trends of these regional economies.
Although commercial and industrial loans make up approximately 44% of the Company's loan portfolio as of December 31, 2019
and 2018, the Company does not consider this to be a significant concentration risk as these loans are well diversified in terms of
customers and product offerings.
The Company's lending activities, including those within its NBLs, are driven in large part by the customers served in the market
areas where the Company has offices in the states of Arizona, Nevada, and California. The following table presents a breakout of
the in-footprint and out-of-footprint distribution of loans:
December 31, 2019
December 31, 2018
Arizona
Nevada
Southern California
Northern California
HOA Services
Hotel Franchise Finance
Public & Nonprofit Finance
Technology & Innovation
Other NBLs
Total
Total
In-Footprint
In-Footprint
16.2%
10.0
10.7
5.7
0.3
2.8
6.8
2.4
Out-of-
Footprint
2.0%
0.7
—
0.5
0.8
6.3
1.0
4.9
18.2%
10.7
10.7
6.2
1.1
9.1
7.8
7.3
13.7
68.6%
15.2
31.4%
28.9
100.0%
Out-of-
Footprint
2.5%
0.2
—
0.5
0.9
6.9
1.0
4.4
Total
20.6%
11.3
12.2
7.3
1.2
8.4
8.8
6.8
13.1
29.5%
23.4
100.0%
18.1%
11.1
12.2
6.8
0.3
1.5
7.8
2.4
10.3
70.5%
The Company is not dependent upon any single or limited number of customers, the loss of which would have a material adverse
effect on the Company. Neither the Company nor any of its reportable segments have customer relationships that individually
account for 10% or more of consolidated or segment revenues. No material portion of the Company’s business is seasonal.
Competition
The financial services industry is highly competitive. Many of the Company's competitors are much larger in total assets and
capitalization, have greater access to capital markets, offer a broader range of financial services than the Company can offer, and
may have lower cost structures.
This increasingly competitive environment is primarily a result of long-term changes in regulation that made mergers and
geographic expansion easier, changes in technology and product delivery systems and web-based tools, and the accelerating pace
of consolidation among financial services providers. The Company competes for loans, deposits, and customers with other banks,
credit unions, brokerage companies, mortgage companies, insurance companies, finance companies, financial technology firms,
and other non-bank financial services providers. This strong competition for deposit and loan products directly affects the interest
rates on those products and the terms on which they are offered to customers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.
Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses,
and increase revenues to remain competitive. The competitive environment is also significantly impacted by federal and state
legislation that makes it easier for non-bank financial institutions to compete with the Company.
Employees
As of December 31, 2019, the Company has 1,835 full-time equivalent employees. The Company’s employees are not represented
by a union or covered by a collective bargaining agreement. Management believes that its employee relations are good.
Supervision and Regulation
The Company and its subsidiaries are extensively regulated and supervised under both federal and state laws. A summary description
of the laws and regulations that relate to the Company’s operations are discussed in Item 7 of this Form 10-K.
12
Additional Available Information
The Company maintains an internet website at http://www.westernalliancebancorporation.com. The Company makes available
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports
filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act and other information related to the Company free of
charge, through this site, as soon as reasonably practicable after it electronically files those documents with, or otherwise furnishes
them to the SEC. The SEC maintains an internet site at http://www.sec.gov, from which all forms filed electronically may be
accessed. The Company’s internet website and the information contained therein are not incorporated into this Form 10-K.
In addition, copies of the Company’s annual report will be made available, free of charge, upon written request.
13
Item 1A.
Risk Factors.
Investing in the Company’s common stock involves various risks, many of which are specific to the Company’s business. The
discussion below addresses the material risks and uncertainties, of which the Company is currently aware, that could have a
material adverse effect on the Company’s business, results of operations, and financial condition. Other risks that the Company
does not know about now, or that the Company does not currently believe are significant, could negatively impact the Company’s
business or the trading price of the Company’s securities. See additional discussions about credit, interest rate, market, and litigation
risks in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Risks Relating to the Company's Business
The Company’s financial performance may be adversely affected by conditions in the financial markets and economic conditions
generally.
The Company’s financial performance is highly dependent upon the business environment in the markets where the Company
operates and in the U.S. as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in
economic growth, business activity, or investor or business confidence, limitations on the availability or increases in the cost of
credit and capital, increases in inflation or interest rates, government shutdowns, the imposition of tariffs on trade, natural disasters,
the emergence of widespread health emergencies or pandemics, terrorist attacks, acts of war, or a combination of these or other
factors. The specific impact on the Company of many of these factors is difficult to predict, could be long or short term, and may
be indirect, such as disruptions in our customers' supply chain or a reduction in the demand for their products or services. A
worsening of business and economic conditions generally or specifically in the principal markets in which the Company conducts
business could have adverse effects, including the following:
•
•
•
•
•
•
a decrease in deposit balances or the demand for loans and other products and services the Company offers;
an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on
their loans or other obligations to the Company, which could lead to higher levels of nonperforming assets, net charge-
offs, and provisions for credit losses;
a decrease in the value of loans and other assets or in the value of collateral;
a decrease in net interest income from the Company’s lending and deposit gathering activities;
an impairment of certain intangible assets such as goodwill; and
an increase in competition resulting from increasing consolidation within the financial services industry.
In the U.S. financial services industry, the commercial soundness of financial institutions is closely interrelated as a result of credit,
trading, clearing or other relationships between the institutions. As a result, concerns about, or a default or threatened default by,
one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is
sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms, and exchanges, with which the Company interacts on a daily basis, and therefore could adversely
affect the Company.
It is possible that the business environment in the U.S. will experience volatility in the future. There can be no assurance that these
conditions will improve in the near term or that conditions will not worsen. Such conditions could adversely affect the Company’s
business, results of operations, and financial condition.
The Company is highly dependent on real estate and events that negatively impact the real estate market will hurt the Company’s
business and earnings.
The Company is located in areas in which economic growth is largely dependent on the real estate market, and a majority of the
Company’s loan portfolio is secured by or otherwise dependent on real estate. The market for real estate is cyclical and the outlook
for this sector is uncertain. A decline in real estate activity would likely cause a decline in asset and deposit growth and negatively
impact the Company’s earnings and financial condition.
14
The Company’s loan portfolio consists primarily of commercial and industrial and CRE loans, which contain concentrations
in certain business lines or product types that have unique risk characteristics and may expose the Company to increased
lending risks.
The Company’s loan portfolio consists primarily of commercial and industrial and CRE loans, which contain material
concentrations in certain business lines or product types, such as mortgage warehouse, real estate, corporate finance, municipal
and nonprofit loans, as well as in specific business sectors such as technology and innovation. These loan concentrations present
unique risks and involve specialized underwriting and management as they often involve large loan balances to a single borrower
or group of related borrowers. Consequently, an adverse development with respect to one commercial loan or one credit relationship
may adversely affect the Company. In addition, based on the nature of lending to these specialty markets, repayment of loans may
be dependent upon borrowers receiving additional equity financing or, in some cases, a successful sale to a third party, public
offering, or other form of liquidity event. Unforeseen adverse events, changes in regulatory policy, or a general decline in the
borrower's industry may have a material adverse effect on the Company’s financial condition and results of operations.
Due to the inherent risk associated with accounting estimates, the Company’s allowance for credit losses may be insufficient,
which could require the Company to raise additional capital or otherwise adversely affect the Company’s financial condition
and results of operations.
Credit losses are inherent in the business of making loans. Management makes various assumptions and judgments about the
collectability of the Company’s consolidated loan portfolio and maintains an allowance for estimated credit losses based on a
number of factors, including the size of the portfolio, asset classifications, economic trends, industry experience and trends, industry
and geographic concentrations, estimated collateral values, management’s assessment of the credit risk inherent in the portfolio,
historical loan loss experience, and loan underwriting policies. In addition, the Company evaluates all loans identified as problem
loans and augments the allowance based upon its estimation of the potential loss associated with those problem loans. Additions
to the allowance for credit losses recorded through the Company’s provision for credit losses decrease the Company’s net income.
If such assumptions and judgments are incorrect, the Company’s actual credit losses may exceed the Company’s allowance for
credit losses.
At December 31, 2019, the Company's allowance for credit losses and loss contingency on unfunded loan commitments and letters
of credit is $167.8 million and $9.0 million, respectively. Deterioration in the real estate market or general economic conditions
could affect the ability of the Company’s loan customers to service their debt, which could result in additional loan provisions and
increases in the Company’s allowance for credit losses. In addition, the Company may be required to record additional loan
provisions or increase the Company’s allowance for credit losses based on new information regarding existing loans, input from
regulators in connection with their review of the Company’s allowance, changes in regulatory guidance, regulations or accounting
standards, identification of additional problem loans, changes in economic outlook, and other factors, both within and outside of
the Company’s management’s control. Moreover, because future events are uncertain and because the Company may not
successfully identify all deteriorating loans in a timely manner, there may be loans that deteriorate in an accelerated time frame.
Any increases in the provision or allowance for credit losses will result in a decrease in the Company’s net income and, potentially,
capital, and may have a material adverse effect on the Company’s financial condition and results of operations. If actual credit
losses materially exceed the Company’s allowance for credit losses, the Company may be required to raise additional capital,
which may not be available to the Company on acceptable terms or at all. The Company’s inability to raise additional capital on
acceptable terms when needed could materially and adversely affect the Company’s financial condition, results of operations, and
capital.
Recent changes to the FASB accounting standards will result in a significant change to the Company’s recognition of credit
losses and may materially impact the Company’s financial condition or results of operations.
The incurred loss model for recognizing credit losses was replaced with an expected loss model referred to as CECL, which became
effective on January 1, 2020 and will be reported in the Company's first quarter 2020 financial results. Under the incurred loss
model, the Company delays recognition of losses until it is probable that a loss has been incurred. The CECL model represents a
dramatic departure from the incurred loss model. The CECL model requires the Company to present certain financial assets carried
at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
Additionally, the measurement of expected credit losses will take place at the time the financial asset is first added to the balance
sheet (with periodic updates thereafter) and will be based on current conditions, information about past events, including historical
experience, and reasonable and supportable forecasts that impact the collectability of the reported amount. As such, the CECL
model will materially impact how the Company determines its ACL and the Company’s ACL may experience more fluctuations
under the CECL model, which may result in significant volatility in the provision for credit losses and, therefore, earnings. Upon
transition from the incurred loss model to the CECL model, on January 1, 2020, the Company recognized an increase to its
allowance for credit losses on loans and unfunded loan commitments of $19 million and $15 million, respectively, and established
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an allowance of $3 million on its HTM securities. These increases resulted in a one-time cumulative adjustment to retained earnings
of $25 million, which is net of related tax effects.
The Company could be subject to tax audits, challenges to its tax positions, or adverse changes or interpretations of tax laws.
The Company is subject to federal and applicable state income tax laws and regulations. Income tax laws and regulations are often
complex and require significant judgment in determining the Company’s effective tax rate and in evaluating its tax positions. The
Company’s determination of its tax liability is subject to review by applicable tax authorities. Any audits or challenges of such
determinations may adversely affect the Company’s effective tax rate, tax payments or financial condition.
U.S. tax legislation enacted in late 2017 made significant changes to federal tax law, including the taxation of corporations, by,
among other things, reducing the corporate income tax rate, disallowing certain deductions that had previously been allowed, and
altering the expensing of capital expenditures. Further changes in tax laws, changes in interpretations, guidance or regulations that
may be promulgated, or challenges to judgments or actions that the Company may take with respect to tax laws could negatively
impact the Company's business.
Because of the geographic concentration of the Company’s assets, changes in local economic conditions could adversely affect
the Company’s business and results of operations.
The Company’s business is primarily concentrated in selected markets in Arizona, California, and Nevada. As a result of this
geographic concentration, the Company’s financial condition and results of operations depend largely upon economic conditions
in these market areas. Deterioration in economic conditions in these markets could result in one or more of the following: an
increase in loan delinquencies and charge-offs; an increase in problem assets and foreclosures; a decrease in the demand for the
Company’s products and services; or a decrease in the value of collateral for loans, especially real estate.
The Company’s financial instruments expose the Company to certain market risks and may increase the volatility of earnings
and AOCI.
The Company holds certain financial instruments measured at fair value. For those financial instruments measured at fair value,
the Company is required to recognize the changes in the fair value of such instruments in earnings or AOCI each quarter. Therefore,
any increases or decreases in the fair value of these financial instruments have a corresponding impact on reported earnings or
AOCI. Fair value can be affected by a variety of factors, many of which are beyond the Company’s control, including the Company’s
credit position, interest rate volatility, capital markets volatility, and other economic factors. Accordingly, the Company is subject
to mark-to-market risk and the application of fair value accounting may cause the Company’s earnings and AOCI to be more
volatile than would be suggested by the Company’s underlying performance.
If the Company loses a significant portion of its core deposits or a significant deposit relationship, or its cost of funding deposits
increases significantly, the Company's liquidity and/or profitability would be adversely impacted.
The Company’s success depends on its ability to maintain sufficient liquidity to fund its current obligations and support loan
growth and, specifically, to attract and retain a stable base of relatively low-cost deposits. The competition for these deposits in
the Company's markets is strong and customers may demand higher interest rates on their deposits or seek other investments
offering higher rates of return. The Company offers reciprocal deposit products, through third party networks to customers seeking
federal insurance for deposit amounts that exceed the applicable deposit insurance limit at a single institution. The Company also
from time to time offers other credit enhancements to depositors, such as FHLB letters of credit and, for certain deposits of public
monies, pledges of collateral in the form of readily marketable securities. Any event or circumstance that interferes with or limits
the Company's ability to offer these products to customers that require greater security for their deposits, such as a significant
regulatory enforcement action or a significant decline in capital levels at the Company's bank subsidiary, could negatively impact
the Company's ability to attract and retain deposits. If the Company were to lose a significant deposit relationship or a significant
portion of its low-cost deposits, the Company would be required to borrow from other sources at higher rates and the Company's
liquidity and profitability would be adversely impacted.
From time to time, the Company has utilized borrowings from the FHLB and the FRB, and there can be no assurance these
programs will be available as needed.
As of December 31, 2019, the Company has no borrowings from the FHLB of San Francisco or the FRB. However, in the past,
the Company has utilized borrowings from the FHLB of San Francisco and the FRB to satisfy its short-term liquidity needs. The
Company’s borrowing capacity is generally dependent on the value of its collateral pledged to these entities. These lenders could
reduce the Company’s borrowing capacity or eliminate certain types of collateral and could otherwise modify or even terminate
their loan programs. Any change or termination could have an adverse effect on the Company’s liquidity and profitability.
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The Company's business may be adversely affected by fraud.
As a financial institution, the Company is inherently exposed to a wide range of operational risks, including, but not limited to,
theft and other fraudulent activity by employees, customers, and other third parties targeting the Company and/or the Company’s
customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social
engineering and other dishonest acts.
Although the Company devotes substantial resources to maintaining effective policies and internal controls to identify and prevent
such incidents, given the persistence and increasing sophistication of possible perpetrators, the Company may experience financial
losses or reputational harm as a result of fraud.
A failure in or breach of the Company’s operational or security systems or infrastructure, or those of the Company’s third-
party vendors and other service providers, including as a result of cyber-attacks, could disrupt the Company’s businesses, result
in the disclosure or misuse of confidential or proprietary information, damage the Company’s reputation, increase the
Company’s costs, and cause losses.
The Company’s operations rely on the secure processing, storage, and transmission of confidential and other information. Although
the Company takes numerous protective measures to maintain the confidentiality, integrity, and availability of the Company’s and
its customers’ information across all geographies and product lines, and endeavors to modify these protective measures as
circumstances warrant, the nature of the threats continues to evolve. As a result, the Company’s computer systems, software, and
networks and those of the Company’s customers and third-party vendors may be vulnerable to unauthorized payments and account
access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer
viruses or other malicious code, cyber-attacks, and other events that could have an adverse security impact and result in significant
losses to the Company and/or its customers. These threats may originate externally from increasingly sophisticated third parties,
including foreign governments, organized criminal groups, and other hackers, or from outsourced or infrastructure-support
providers and application developers, or the threats may originate from within the Company’s organization.
The Company also faces the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties
that facilitate the Company’s business activities, including vendors, exchanges, clearing agents, clearing houses, or other financial
intermediaries. Such parties could also be the source or cause of an attack on, or breach of, the Company’s operational systems,
data or infrastructure. In addition, the Company may be at risk of an operational failure with respect to its customers’ systems.
The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of
these threats, the outsourcing of many of the Company’s business operations, and the continued uncertain global economic
environment. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to
continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.
The Company maintains insurance policies that it believes provide reasonable coverage at a manageable expense for an institution
of the Company’s size and scope with similar technological systems. However, the Company cannot assure that these policies will
afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, or penalties, including lost
revenues, should the Company experience any one or more of its or a third party’s systems failing or experiencing an attack.
The Company relies on third parties to provide key components of its business infrastructure.
The Company relies on third parties to provide key components for its business operations, such as data processing and storage,
recording and monitoring transactions, online banking interfaces and services, internet connections, and network access. While
the Company selects these third-party vendors carefully, it does not control their actions. Any problems caused by these third
parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure
of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide
services for any reason, or poor performance by a vendor, could adversely affect the Company’s ability to deliver products and
services to its customers and otherwise conduct its business. Financial or operational difficulties of a third-party vendor could also
hurt the Company’s operations if those difficulties interfere with the vendor's ability to serve the Company. Replacing these third-
party vendors also could create significant delays and expense. Any of these things could adversely affect the Company’s business
and financial performance.
A change in the Company’s creditworthiness could increase the Company’s cost of funding or adversely affect its liquidity.
Market participants regularly evaluate the Company’s creditworthiness and the creditworthiness of the Company’s long-term debt
based on a number of factors, some of which are not entirely within the Company’s control, including the Company’s financial
strength and conditions within the financial services industry generally. There can be no assurance that the Company's perceived
creditworthiness will remain the same. Changes could adversely affect the cost and other terms upon which the Company is able
to obtain funding and its access to the capital markets, and could increase the Company’s cost of capital. Likewise, any loss of or
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decline in the credit rating assigned to WAB could impair its ability to attract deposits or to obtain other funding sources, or increase
its cost of funding.
The Company's controls and processes, its reporting systems and procedures, and its operational infrastructure may not be
able to keep pace with its growth, which could cause it to experience compliance and operational problems or lose customers,
or incur additional expenditures beyond current projections, any one of which could adversely affect the Company’s financial
results.
The Company’s future success will depend on the ability of officers and other key employees to effectively implement solutions
designed to improve operational, credit, financial, management and other internal risk controls and processes, as well as improve
reporting systems and procedures, while at the same time maintaining and growing existing businesses and client relationships.
The Company may not successfully implement such changes or improvements in an efficient or timely manner, or it may discover
deficiencies in its existing systems and controls that adversely affect the Company’s ability to support and grow its existing
businesses and client relationships, and could require the Company to incur additional expenditures to expand its administrative
and operational infrastructure. If the Company is unable to maintain and implement improvements to its controls, processes, and
reporting systems and procedures, the Company may lose customers, experience compliance and operational problems or incur
additional expenditures beyond current projections, any one of which could adversely affect the Company’s financial results.
The Company’s expansion strategy may not prove to be successful and its market value and profitability may suffer.
The Company continually evaluates expansion through acquisitions of banks and other financial assets and businesses. Like
previous acquisitions by the Company, any future acquisitions will be accompanied by risks commonly encountered in such
transactions, including, among other things:
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•
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time and expense incurred while identifying, evaluating and negotiating potential acquisitions and transactions;
difficulty in accurately estimating the value of target companies or assets and in evaluating target companies' or assets’
credit, operations, management, and market risks;
potential payment of a premium over book and market values that may cause dilution of the Company’s tangible book
value or earnings per share;
exposure to unknown or contingent liabilities of the target company;
potential exposure to asset quality issues of the target company;
difficulty of integrating the operations and personnel;
potential disruption of the Company’s ongoing business;
failure to retain key personnel at the acquired business;
inability of the Company’s management to maximize its financial and strategic position by the successful implementation
of uniform product offerings and the incorporation of uniform technology into the Company’s product offerings and
control systems; and
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failure to realize any expected revenue increases, cost savings, and other projected benefits from an acquisition.
The Company expects that competition for suitable acquisition candidates may be significant. The Company may compete with
other banks or financial service companies with similar acquisition strategies, many of which are larger and have greater financial
and other resources. The Company cannot assure that it will be able to successfully identify and acquire suitable acquisition targets
on acceptable terms and conditions, or that it will be able to obtain the regulatory approvals needed to complete any such transactions.
The Company cannot provide any assurance that it will be successful in overcoming these risks or any other problems encountered
in connection with acquisitions. Potential regulatory enforcement actions could also adversely affect the Company's ability to
engage in certain acquisition activities. The Company’s inability to overcome the risks inherent in the successful completion and
integration of acquisitions could have an adverse effect on the achievement of the Company's business strategy.
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There are substantial risks and uncertainties associated with the introduction or expansion of lines of business or new products
and services within existing lines of business.
From time to time, the Company may implement new lines of business, offer new products and services within existing lines of
business, or offer existing products or services to new industries or market segments. There are substantial risks and uncertainties
associated with these efforts, particularly in instances where the markets are not fully developed or industries are heavily regulated.
In developing and marketing new lines of business and/or new products and services, the Company may invest significant time
and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services
may not be achieved and price and profitability targets may not prove attainable. External factors, such as compliance with laws
and regulations, competitive alternatives, and shifting market preferences or government policies, may also impact the successful
implementation of a new line of business, product or service or the offering of existing products and services to an emerging
industry. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness
of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation
of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of
operations, and financial condition.
The Company’s future success depends on its ability to compete effectively in a highly competitive and rapidly evolving market.
The Company faces substantial competition in all phases of its operations from a variety of different competitors. The Company’s
competitors, including large commercial banks, community banks, thrift institutions, mutual savings banks, credit unions, finance
companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds,
and other financial institutions, compete with lending and deposit-gathering services offered by the Company. Increased competition
in the Company’s markets may result in reduced loans and deposits or less favorable pricing.
There is competition for financial services in the markets in which the Company conduct its businesses, including from many
local commercial banks, as well as numerous national and regionally based commercial banks. In particular, the Company has
experienced intense price and terms competition in some of the lending lines of business and deposits in recent years. Many of
these competing institutions have much greater financial and marketing resources than the Company has. Due to their size, larger
competitors can achieve economies of scale and may offer a broader range of products and services or more attractive pricing than
the Company. In addition, some of the financial services organizations with which the Company competes are not subject to the
same degree of regulation as is imposed on bank holding companies and federally insured depository institutions. As a result,
these non-bank competitors have certain advantages over the Company in accessing funding and in providing various services.
The banking business in the Company’s primary market areas is very competitive, and the level of competition facing the Company
may increase further, which may limit its asset growth and financial results. In particular, the Company's predominate source of
revenue is net interest income from its loan portfolio. Therefore, if the Company is unable to compete effectively, including
sustaining loan and deposit growth at its historical levels, its business and results of operations may be adversely affected.
The financial services industry also is facing increasing competitive pressure from the introduction of disruptive new technologies,
often by non-traditional competitors and financial technology companies. Among other things, technology and other changes are
allowing customers to complete financial transactions that historically have involved banks at one or both ends of the transaction.
The elimination of banks as intermediaries for certain transactions, as well as further disruption of traditional bank businesses and
products by non-banks, could result in the loss of fee income and deposits and otherwise adversely affect our business and results.
The Company’s success is dependent upon its ability to recruit and retain qualified employees, including members of its
divisional and business line leadership and management teams.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and
employees at every level. In particular, the Company’s relative success to date has been partly the result of its management’s ability
to identify and retain highly qualified employees in administrative support roles, as well as those with expertise in certain specialty
areas or that have long-standing relationships in their communities or markets. These professionals bring with them valuable
knowledge, specialized skills and expertise, and customer relationships and have been an integral part of the Company’s ability
to attract deposits and to expand its market share.
Additionally, as part of the Company's strategy, the Company depends on divisional and business line leadership and management
teams in each of its significant geographic locations. In addition to their skills and experience as bankers, these persons provide
the Company with extensive ties within markets upon which the Company’s competitive strategy is based.
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The Company’s ability to retain these highly qualified and motivated persons may be hindered by the fact that it has not entered
into employment agreements with most of them. The Company incentivizes employee retention through its equity incentive plans;
however, the Company cannot guarantee the effectiveness of its equity incentive plans in retaining these key employees and
executives. Were the Company to lose key employees, it may not be able to replace them with equally qualified persons who bring
the same knowledge of and ties to the communities and markets within which the Company operates. If the Company is unable
to hire or retain qualified employees, it may not be able to successfully execute its business strategy or may incur additional costs
to achieve its objectives.
The Company could be harmed if its succession planning is inadequate to mitigate the loss of key members of its senior
management team.
The Company believes that its senior management team, including, but not limited to, Robert Sarver, its Executive Chairman and
Kenneth Vecchione, its CEO, have contributed greatly to its performance. In addition, the Company from time to time experiences
retirements and other changes to its senior management team. The Company's future performance depends on a smooth transition
of its senior management, including finding and training highly qualified replacements who are properly equipped to lead the
Company. The Company has adopted retention strategies, including equity awards, from which its senior management team benefits
in order to achieve its goals, and entered into an employment agreement with Mr. Vecchione, which expires in 2020. However,
the Company cannot assure its succession planning and retention strategies will be effective and the loss of senior management
could have an adverse effect on the Company’s business.
The Company's risk management practices may prove to be inadequate or not fully effective.
The Company's risk management framework seeks to mitigate risk and appropriately balance risk and return. The Company has
established policies and procedures intended to identify, monitor, and manage the types of risk to which it is subject, including,
but not limited to, credit risk, market risk, liquidity risk, operational risk, legal and compliance risk, and reputational risk. A BOD
level risk committee approves and reviews the Company's key risk management policies and oversees operation of the Company's
risk management framework. Although the Company has devoted significant resources to developing its risk management policies
and procedures and expects to continue to do so in the future, these policies and procedures, as well as the Company's risk
management techniques, may not be fully effective. In addition, as regulations and the markets in which the Company operates
continue to evolve, the Company's risk management framework may not always keep sufficient pace with those changes. If the
Company's risk management framework does not effectively identify or mitigate its risks, the Company could suffer unexpected
losses or other material adverse impact. Management of the Company's risks in some cases depends upon the use of analytical
and/or forecasting models. If the models the Company uses to mitigate these risks are inadequate, or are subject to ineffective
governance, the Company may incur increased losses. In addition, there may be risks that exist, or that develop in the future, that
the Company has not appropriately anticipated, identified, or mitigated.
The Company's internal controls and procedures may fail or be circumvented and the accuracy of the Company's judgments
and estimates about financial and accounting matters may impact operating results and financial condition.
The Company's management regularly reviews and updates its internal controls over financial reporting, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of controls and procedures, however well designed
and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives
of the system are met. Any failure or circumvention of the Company's controls and procedures, or failure to comply with regulations
related to controls and procedures, could result in materially inaccurate reported financial statements and/or have a material adverse
effect on the Company's business, results of operations, and financial condition. Similarly, the Company's management makes
certain estimates and judgments in preparing the Company's financial statements. The quality and accuracy of those estimates
and judgments will impact the Company's operating results and financial condition.
If the Company is unable to understand and adapt to technological change, the Company’s business could be adversely affected.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-
driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better
serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating
costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology
to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many
of the Company’s competitors, because of their larger size and available capital, have substantially greater resources to invest in
technological improvements. The Company may not be able to effectively implement new technology-driven products and services
or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, its
financial condition and results of operations.
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The markets in which the Company operates are subject to the risk of both natural and man-made disasters.
Many of the real and personal properties securing the Company's loans are located in California. Much of California experiences
wildfires from time to time that cause significant damage throughout the state. While these wildfires did not significantly damage
the Company's own properties, it is possible that its borrowers may experience losses as a result, which may materially impair
their ability to meet the terms of their obligations. California is also prone to other natural disasters, including, but not limited to,
drought, earthquakes, flooding, and mudslides. Additional significant natural or man-made disasters in the state of California or
in the Company's other markets could lead to damage or injury to the Company's own properties and/or employees, and could
increase the risk that many of its borrowers may experience losses or sustained job interruption, which may materially impair their
ability to maintain deposits or meet the terms of their loan obligations. Therefore, additional natural disasters, a man-made disaster
or a catastrophic event, or a combination of these or other factors, in any of the Company's markets could have a material adverse
effect on the Company's business, financial condition, results of operations, and cash flows.
Risks Related to the Banking Industry
The Company operates in a highly regulated environment and the laws and regulations that govern the Company’s operations,
corporate governance, executive compensation, and accounting principles, or changes in them, or the Company’s failure to
comply with them, may adversely affect the Company.
The Company is subject to extensive regulation, supervision, and legislation that govern almost all aspects of its operations.
Intended to protect customers, depositors, and the DIF, these laws and regulations, among other matters, prescribe minimum capital
requirements, impose limitations on the business activities in which the Company can engage, require monitoring and reporting
of suspicious activity and of customers who are perceived to present a heightened risk of money laundering or other illegal activity,
limit the dividends or distributions that WAB can pay to the Company or that the Company can pay to its stockholders, restrict
the ability of affiliates to guarantee the Company’s debt, impose certain specific accounting requirements on the Company that
may be more restrictive and may result in greater or earlier charges to earnings or reductions in the Company’s capital than does
GAAP, among other things. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations
often impose significant additional compliance costs. To the extent the Company continues to grow larger and become more
complex, regulatory oversight and risk and the cost of compliance will likely increase, which may adversely affect the Company.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Supervision and Regulation”
included in this Form 10-K for a more detailed summary of the regulations and supervision to which the Company are subject.
Changes to the legal and regulatory framework governing the Company’s operations, including the passage and continued
implementation of the Dodd-Frank Act and EGRRCPA, have drastically revised the laws and regulations under which the Company
operates. In general, bank regulators have increased their focus on risk management and regulatory compliance, and the Company
expects this focus to continue. Additional compliance requirements may be costly to implement, may require additional compliance
personnel, and may limit the Company’s ability to offer competitive products to its customers.
The Company is also subject to changes in federal and state law, as well as regulations and governmental policies, income tax
laws, and accounting principles. Regulations affecting banks and other financial institutions are undergoing continuous review
and frequently change, and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any
time, and new legislation may be enacted that will affect the Company, WAB, and the Company’s other subsidiaries. Any changes
in federal and state law, as well as regulations and governmental policies, income tax laws, and accounting principles, could affect
the Company in substantial and unpredictable ways, including ways that may adversely affect the Company’s business, financial
condition, or results of operations. Failure to appropriately comply with any such laws, regulations or principles or an alleged
failure to comply, even if the Company acted in good faith or the alleged failure reflects a difference in interpretation, could result
in sanctions by regulatory agencies, civil money penalties or damage to the Company’s reputation, all of which could adversely
affect the Company’s business, financial condition, or results of operations.
21
State and federal banking agencies periodically conduct examinations of the Company’s business, including compliance with
laws and regulations, and the Company’s failure to comply with any supervisory actions to which the Company is or becomes
subject as a result of such examinations may adversely affect the Company.
State and federal banking agencies periodically conduct examinations of the Company’s business, including for compliance with
laws and regulations. If, as a result of an examination, an agency were to determine that the financial condition, capital resources,
asset quality, earnings prospects, management, liquidity, or other aspects of any of the Company’s operations had become
unsatisfactory, or that the Company or its management was in violation of any law or regulation, federal banking agencies may
take a number of different remedial or enforcement actions it deems appropriate to remedy such a deficiency. These actions include
the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the Company’s capital,
to restrict the Company’s growth, and to assess civil monetary penalties against the Company and/or officers or directors, and to
remove officers and directors. If the FDIC concludes that such conditions cannot be corrected or there is an imminent risk of loss
to depositors, it may terminate WAB’s deposit insurance. Under Arizona law, the state banking supervisory authority has many
of the same enforcement powers with respect to its state-chartered banks. Finally, the CFPB has the authority to examine the
Company and has authority to take enforcement actions, including the issuance of cease-and-desist orders or civil monetary
penalties against the Company if it finds that the Company offers consumer financial products and services in violation of federal
consumer financial protection laws or in an unfair, deceptive, or abusive manner.
If the Company were unable to comply with regulatory directives in the future, or if the Company were unable to comply with
the terms of any future supervisory requirements to which the Company may become subject, then it could become subject to a
variety of supervisory actions and orders, including cease and desist orders, prompt corrective actions, MOUs, and/or other
regulatory enforcement actions. If the Company’s regulators were to take such supervisory actions, then the Company could,
among other things, become subject to restrictions on its ability to enter into acquisitions and develop any new business, as well
as restrictions on its existing business. The Company also could be required to raise additional capital, dispose of certain assets
and liabilities within a prescribed period of time, or both. Failure to implement the measures in the time frames provided, or at
all, could result in additional orders or penalties from federal and state regulators, which could result in one or more of the remedial
actions described above. In the event the Company was ultimately unable to comply with the terms of a regulatory enforcement
action, it could fail and be placed into receivership by the FDIC or the chartering agency. The terms of any such supervisory action
and the consequences associated with any failure to comply therewith could have a material negative effect on the Company’s
business, operating flexibility, and financial condition.
Uncertainty about the future of LIBOR, and its accepted alternatives, may adversely affect our business.
The United Kingdom Financial Conduct Authority, the agency that regulates LIBOR, has announced it intends to stop compelling
banks to submit rates for the calculation of LIBOR after 2021, which may result in the use of LIBOR in financial contracts being
phased out by the end of 2021. The ARRC has proposed that the SOFR represents best practice as the alternative to LIBOR for
use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition
plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it
relates to derivatives and cash markets exposed to LIBOR. It is not possible at this time to predict what rate or rates may become
accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-
indexed financial instruments. The market transition away from LIBOR to an alternative reference rate, such as the SOFR, is
complex and could have a range of adverse effects on our loan and lease and investment portfolios, asset-liability management,
business, financial condition and results of operations. LIBOR is the reference rate for many transactions in which the Company
lends and borrows money, issues, purchases and sells securities and enters into derivative contracts to manage its or its customers’
risk related to these transactions. Accordingly, management has established a LIBOR transition team to lead the Company in the
execution of its project plan. Despite these efforts, the manner and impact of this transition and related developments, as well as
the effect of these developments on the Company's funding costs, investment and trading securities portfolios, and business, is
uncertain and could have a material adverse impact on the Company's profitability.
22
Changes in interest rates and increased rate competition could adversely affect the Company’s profitability, business, and
prospects.
Most of the Company’s assets and liabilities are monetary in nature, which subjects the Company to significant risks from changes
in interest rates and can impact the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in
prevailing interest rates could have an adverse effect on the Company’s business, asset quality, and prospects. The Company
derives substantially all of its revenue from net interest income and, therefore, its operating income and net income depend to a
great extent on its net interest margin. Net interest margin is the difference between the interest yields the Company receives on
loans, securities, and other earning assets and the interest rates the Company pays on interest-bearing deposits, borrowings, and
other liabilities. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general
economic conditions, and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. In
a rising rate environment, the rate of interest the Company pays on its interest-bearing deposits, borrowings, and other liabilities
may increase more quickly than the rate of interest the Company receives on loans, securities, and other earning assets, which
could adversely impact the Company’s net interest income and earnings. The Company’s earnings also could be adversely affected
in a declining rate environment if the rates on the Company’s loans and other investments fall more quickly than those on its
deposits and other liabilities. Because of the Company's relatively high reliance on net interest income, its revenue and earnings
are more sensitive to changes in market rates than other financial institutions that have more diversified sources of revenue. The
Company experiences substantial competition on the basis of interest rates for both loans and deposits.
In addition, loan volumes are affected by market interest rates on loans. Lower interest rates are usually associated with higher
loan originations, while rising interest rates are generally associated with a lower volume of loan originations. Conversely, in
falling interest rate environments, loan repayment rates will increase and, in rising interest rate environments, loan repayment
rates will decline. The Company cannot guarantee that it will be able to minimize interest rate risk. In addition, an increase in the
general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their
obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases.
Accordingly, changes in market interest rates could materially and adversely affect the Company’s net interest income, asset
quality, loan origination volume, business, financial condition, results of operations, and cash flows.
The Company is exposed to risk of environmental liabilities with respect to properties to which the Company obtains title.
Approximately 55% of the Company’s loan portfolio at December 31, 2019 was secured by real estate. In the course of the
Company’s business, the Company may foreclose on and take title to real estate, and could be subject to environmental liabilities
with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage,
personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or
may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated
with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a
contaminated site, the Company may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. These costs and claims could be substantial and adversely affect the
Company’s business and prospects.
23
Risks Related to the Company's Common Stock
The price of the Company’s common stock may fluctuate significantly in the future.
The price of the Company’s common stock on the New York Stock Exchange constantly changes. The Company expects that the
market price of its common stock will continue to fluctuate and there can be no assurances about the market price for its common
stock.
The Company’s stock price may fluctuate as a result of a variety of factors, many of which are beyond the Company’s control.
These factors include:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated changes in the political climate or public policy, including international trade policy;
sales of the Company’s equity securities;
the Company’s financial condition, performance, creditworthiness, and prospects;
quarterly variations in the Company’s operating results or the quality of its assets;
operating results that vary from the expectations of management, securities analysts, and investors;
changes in expectations as to the Company’s future financial performance;
announcements of strategic developments, acquisitions, and other material events by the Company or its competitors;
the operating and securities price performance of other companies that investors believe are comparable to the Company;
the credit, mortgage, and housing markets, the markets for securities relating to mortgages or housing, and developments
with respect to financial institutions generally;
changes in interest rates and the slope of the yield curve;
changes in national and global financial markets and economies and general market conditions, such as interest or foreign
exchange rates, stock, commodity or real estate valuations or volatility and other geopolitical, regulatory or judicial
events; and
•
the Company’s past and future dividend and share repurchase practices.
There may be future sales or other dilution of the Company’s equity, which may adversely affect the market price of the
Company’s common stock.
The Company is not restricted from issuing additional common stock, including any securities that are convertible into or
exchangeable for, or that represent the right to receive, common stock. The Company also grants a significant number of shares
of common stock to employees and directors under the Company’s Incentive Plan each year. The issuance of any additional shares
of the Company’s common stock or preferred stock or securities convertible into, exchangeable for or that represent the right to
receive common stock, or the exercise of such securities could be substantially dilutive to stockholders of the Company’s common
stock. Holders of the Company’s common stock have no preemptive rights that entitle such holders to purchase their pro rata share
of any offering of shares of any class or series. Because the Company’s decision to issue securities in any future offering will
depend on market conditions, its acquisition activity, and other factors, the Company cannot predict or estimate the amount, timing,
or nature of its future offerings. Thus, the Company’s stockholders bear the risk of the Company’s future offerings reducing the
market price of the Company’s common stock and diluting their stock holdings in the Company.
There can be no assurance that the Company will continue to declare cash dividends or repurchase stock.
On June 4, 2019, the Company announced that its BOD authorized the initiation of regular quarterly dividends pursuant to which
the Company intends to pay dividends on its common stock, subject to quarterly declarations by the BOD. During 2019, the
Company declared and paid two quarterly cash dividends of $0.25 per common share. In December 2018, the Company adopted
a common stock repurchase program, pursuant to which the Company was authorized to repurchase up to $250.0 million of its
outstanding common stock through December 2019. During 2019, the Company repurchased an aggregate of 2,822,402 shares
of common stock. The common stock repurchase program was renewed through December 2020, authorizing the Company to
repurchase up to an additional $250.0 million of its outstanding common stock.
24
The Company’s dividend payments and/or stock repurchases may change from time-to-time, and no assurance can be provided
that it will continue to declare dividends and/or repurchase stock in any particular amounts or at all. Dividends and/or stock
repurchases are subject to capital availability and the discretion of the Company’s BOD, which must evaluate, among other things,
whether cash dividends and/or stock repurchases are in the best interest of its stockholders and are in compliance with all applicable
laws and any agreements containing provisions that limit the Company’s ability to declare and pay cash dividends and/or repurchase
stock. In addition, the amount the Company spends and the number of shares that it is able to repurchase under its stock repurchase
program may be further affected by a number of other factors, including the stock price and blackout periods in which the Company
is restricted from repurchasing shares. A reduction in or elimination of the Company’s dividend payments, dividend program and/
or stock repurchases could have a negative effect on the Company’s stock price.
Offerings of debt, which would be senior to the Company’s common stock upon liquidation, and/or preferred equity securities
that may be senior to the Company’s common stock for purposes of dividend distributions or upon liquidation, may adversely
affect the market price of the Company’s common stock.
The Company may from time to time issue debt securities, borrow money through other means, or issue preferred stock. From
time to time the Company borrows money from the FRB, the FHLB, other financial institutions, and other lenders. At December
31, 2019, the Company had outstanding $175,000,000 of 6.25% subordinated debentures with a maturity date of July 1, 2056,
and WAB had outstanding $150,000,000 aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes due
July 15, 2025. All of these securities or borrowings have priority over the common stock in a liquidation, which could affect the
market price of the Company’s stock.
The Company’s BOD is authorized to issue one or more classes or series of preferred stock from time to time without any action
on the part of the stockholders. The Company’s BOD also has the power, without stockholder approval, to set the terms of any
such classes or series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over the
Company’s common stock with respect to dividends or upon the Company’s dissolution, winding-up, and liquidation and other
terms. If the Company issues preferred stock in the future that has a preference over its common stock, with respect to the payment
of dividends or upon the Company’s liquidation, dissolution, or winding up, or if the Company issues preferred stock with voting
rights that dilute the voting power of its common stock and/or the rights of holders of its common stock, the market price of its
common stock could be adversely affected.
Anti-takeover provisions could negatively impact the Company’s stockholders.
Provisions of Delaware law and provisions of the Company’s Certificate of Incorporation, as amended, and its Amended and
Restated Bylaws could make it more difficult for a third party to acquire control of the Company or have the effect of discouraging
a third party from attempting to acquire control of the Company. Additionally, the Company’s Certificate of Incorporation, as
amended, authorizes the Company’s BOD to issue additional series of preferred stock and such preferred stock could be issued
as a defensive measure in response to a takeover proposal. These provisions could make it more difficult for a third party to acquire
the Company even if an acquisition might be in the best interest of the Company’s stockholders.
25
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The Company and WAB are headquartered at One E. Washington Street in Phoenix, Arizona. WAB operates 38 domestic branch
locations, which include six executive and administrative offices, of which 20 of these locations are owned and 18 are leased. The
Company also has several loan production offices across the United States. In addition, WAB owns and occupies a 36,000 square
foot operations facility in Las Vegas, Nevada. See "Item 1. Business” for location cities. For information regarding rental payments,
see "Note 4. Premises and Equipment" of the Consolidated Financial Statements included in this Form 10-K.
Item 3.
Legal Proceedings
There are no material pending legal proceedings to which the Company is a party or to which any of its properties are subject.
There are no material proceedings known to the Company to be contemplated by any governmental authority. See the “Supervision
and Regulation” section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of
this Form 10-K for additional information. From time to time, the Company is involved in a variety of litigation matters in the
ordinary course of its business and anticipates that it will become involved in new litigation matters in the future.
Item 4.
Mine Safety Disclosures
Not applicable.
26
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
The Company’s common stock began trading on the New York Stock Exchange under the symbol “WAL” on June 30, 2005. The
Company has filed, without qualifications, its 2019 Domestic Company Section 303A CEO Certification regarding its compliance
with the NYSE’s corporate governance listing standards.
Holders
At December 31, 2019, there were approximately 1,476 stockholders of record. This number does not include stockholders who
hold shares in the name of brokerage firms or other financial institutions. The Company is not provided the exact number of or
identities of these stockholders. There are no other classes of common equity outstanding.
Dividends
During the fourth quarter of 2019, the Company's Board of Directors approved a cash dividend of $0.25 per share. The dividend
payment to shareholders totaled $25.6 million and was paid on November 29, 2019.
Share Repurchases
The following table provides information about the Company's purchases of equity securities that are registered by the Company
pursuant to Section 12 of the Exchange Act for the periods indicated:
October 2019
November 2019
December 2019
Total
(1)
(2)
Total Number of
Shares
Purchased (1)(2)
Average Price Paid
Per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or
Programs (2)
Approximate Dollar Value of
Shares That May Yet to be
Purchased Under the Plans
or Programs
21,998
$
44,399
24,530
90,927
$
48.80
51.43
53.23
51.28
20,000
$
44,399
24,400
88,799
$
97,874,800
95,591,561
94,293,079
94,293,079
Shares purchased during the period outside of the publicly announced repurchase program were transferred to the Company from employees in
satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards during the period.
On December 12, 2018, the Company announced that it had adopted a common stock repurchase program, pursuant to which the Company was
authorized to repurchase up to $250 million of its shares of common stock through December 31, 2019. The Company had $94.3 million in authorized
common stock repurchase capacity that expired under the original program as of December 31, 2019. The Company's common stock repurchase
program was renewed through December 2020, authorizing the Company to repurchase up to an additional $250.0 million of its outstanding common
stock.
27
Performance Graph
The following graph summarizes a five year comparison of the cumulative total returns for the Company’s common stock, the
Standard & Poor’s 500 stock index and the KBW Regional Banking Total Return Index, each of which assumes an initial value
of $100.00 on December 31, 2014 and reinvestment of dividends.
Total Return Performance
250
200
e
u
l
a
V
t
n
e
l
a
v
i
u
q
150E
100
Dec '14
Dec '15
Dec '16
Dec '17
Dec '18
Dec '19
Western Alliance
S&P 500 Index
KBW Regional Banking Index
28
Item 6.
Selected Financial Data.
The following selected financial data have been derived from the Company’s consolidated financial condition and results of
operations, as of and for the years ended December 31, 2019, 2018, 2017, 2016, and 2015, and should be read in conjunction with
the Consolidated Financial Statements and the related notes included elsewhere in this report:
Results of Operations:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Income tax expense
Net income
2019
2018
2017
2016
2015
Year Ended December 31,
(in thousands)
$
1,225,045
$
1,033,483
$
845,513
$
700,506
$
525,144
184,633
1,040,412
18,500
1,021,912
65,095
482,781
604,226
105,055
117,604
915,879
23,000
892,879
43,116
425,667
510,328
74,540
60,849
784,664
17,250
767,414
45,344
360,941
451,817
126,325
43,293
657,213
8,000
649,213
42,915
330,949
361,179
101,381
32,568
492,576
3,200
489,376
29,768
260,606
258,538
64,294
$
499,171
$
435,788
$
325,492
$
259,798
$
194,244
29
Per Share Data:
Earnings per share available to common stockholders - basic
$
Earnings per share available to common stockholders - diluted
Dividends paid per share
Book value per common share
Tangible book value per share1
Shares outstanding at period end
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
Selected Balance Sheet Data:
Cash and cash equivalents
As of and for the Year Ended December 31,
2019
2018
2017
2016
2015
(dollars in thousands, except per share data)
4.86
4.84
0.50
29.42
26.54
102,524
102,667
103,133
$
$
4.16
4.14
—
24.90
22.07
104,949
104,669
105,370
$
3.12
3.10
—
21.14
18.31
105,487
104,179
104,997
2.52
2.50
—
18.00
15.17
105,071
103,042
103,843
$
2.05
2.03
—
15.44
12.54
103,087
94,570
95,219
$
434,596
$
498,572
$
416,768
$
284,491
$
224,640
Investment securities and money market investments
3,970,118
3,694,961
3,754,569
2,702,512
1,984,126
Loans, net of deferred loan fees and costs
21,123,296
17,710,629
15,093,935
13,208,436
11,136,663
Allowance for credit losses
Total assets
Total deposits
Other borrowings
Qualifying debt
Total stockholders' equity
Selected Other Balance Sheet Data:
Average assets
Average earning assets
Average stockholders' equity
Selected Financial and Liquidity Ratios:
Return on average assets
Return on average tangible common equity1
Net interest margin
Loan to deposit ratio
Capital Ratios:
Tier 1 leverage ratio
Tier 1 capital ratio
Total capital ratio
Selected Asset Quality Ratios:
167,797
26,821,948
22,796,493
—
393,563
3,016,748
152,717
140,050
124,704
119,068
23,109,486
20,329,085
17,200,842
14,275,089
19,177,447
16,972,532
14,549,863
12,030,624
491,000
360,458
390,000
376,905
80,000
367,937
150,000
210,328
2,613,734
2,229,698
1,891,529
1,591,502
$ 24,914,123
$ 21,246,315
$ 18,869,553
$ 16,134,263
$ 12,420,803
23,586,512
20,064,545
17,770,939
15,117,364
11,621,977
2,845,379
2,411,709
2,079,287
1,770,914
1,323,952
2.00%
2.05%
1.72%
1.61%
1.56 %
19.60
4.52
92.66
10.6%
10.9
12.8
20.64
4.68
92.35
10.9%
11.1
13.2
18.31
4.65
88.93
10.3%
10.8
13.3
17.71
4.58
90.78
9.9%
10.5
13.2
17.83
4.51
92.57
9.8 %
10.2
12.2
Net charge-offs (recoveries) to average loans outstanding
0.02%
0.06%
0.01%
0.02%
(0.06)%
Non-accrual loans to gross loans
Non-accrual loans and repossessed assets to total assets
Loans past due 90 days or more and still accruing to gross loans
Allowance for credit losses to gross loans
0.27
0.26
—
0.80
0.16
0.20
0.00
0.86
0.29
0.36
0.00
0.93
0.31
0.51
0.01
0.95
0.44
0.65
0.03
1.07
Allowance for credit losses to non-accrual loans
299.81
550.41
318.84
309.65
246.10
1 See Non-GAAP Financial Measures section beginning on page 33.
30
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is designed to provide insight on the financial condition and results of operations of Western
Alliance Bancorporation and its subsidiaries and should be read in conjunction with “Item 8. Financial Statements and
Supplementary Data.” This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and
assumptions. Certain risks, uncertainties, and other factors, including, but not limited to, those set forth under “Forward-Looking
Statements” at the beginning of Part I of this Form 10-K and those discussed in Part I, Item 1A of this Form 10-K under the heading
"Risk Factors," may cause actual results to differ materially from those projected in the forward-looking statements.
For a comparison of the 2018 results to the 2017 results and other 2017 information not included herein, refer to the "Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2018.
Financial Overview and Highlights
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL
provides a full spectrum of deposit, lending, treasury management, international banking, and online banking products and services
through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON and FIB, Bridge, and TPB. The Company also serves
business customers through a national platform of specialized financial services.
Financial Results Highlights of 2019
• Net income of $499.2 million for 2019, compared to $435.8 million for 2018
• Diluted earnings per share of $4.84 for 2019, compared to $4.14 per share for 2018
• Net operating revenue of $1.1 billion, constituting year-over-year growth of 13.1%, or $127.0 million, compared to an
increase in operating non-interest expenses of 14.9%, or $62.2 million1
• Operating PPNR increased $64.8 million to $618.3 million, compared to $553.5 million in 20181
•
Income tax expense increased $30.5 million to $105.1 million, compared to $74.5 million in 2018
• Total loans of $21.1 billion, up $3.4 billion from December 31, 2018
• Total deposits of $22.8 billion, up $3.6 billion from December 31, 2018
•
Stockholders' equity of $3.0 billion, an increase of $403.0 million from December 31, 2018
• Nonperforming assets (nonaccrual loans and repossessed assets) increased to 0.26% of total assets, from 0.20% at
December 31, 2018
• Net loan charge-offs to average loans outstanding of 0.02% for 2019, compared to 0.06% for 2018
• Net interest margin of 4.52% in 2019, compared to 4.68% in 2018
• Return on average assets of 2.00% for 2019, compared to 2.05% for 2018
• Tangible common equity ratio of 10.3%, compared to 10.2% at December 31, 20181
• Tangible book value per share, net of tax, of $26.54, an increase of 20.3% from $22.07 at December 31, 20181
• Operating efficiency ratio of 42.7% in 2019, compared to 41.9% in 20181
The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below
as they pertain to the Company’s overall comparative performance for the year ended December 31, 2019.
1 See Non-GAAP Financial Measures section beginning on page 33.
31
As a bank holding company, management focuses on key ratios in evaluating the Company's financial condition and results of
operations.
Results of Operations and Financial Condition
A summary of the Company's results of operations, financial condition, and selected metrics are included in the following tables:
Net income
Earnings per share - basic
Earnings per share - diluted
Return on average assets
Return on average tangible common equity1
Net interest margin
Operating efficiency ratio1
Total assets
Total loans, net of deferred loan fees and costs
Securities and money market investments
Total deposits
Other borrowings
Qualifying debt
Stockholders' equity
Tangible common equity, net of tax1
1 See Non-GAAP Financial Measures section beginning on page 33.
Asset Quality
Year Ended December 31,
2019
2018
2017
(dollars in thousands, except per share amounts)
$
499,171
$
435,788
$
325,492
4.86
4.84
2.00%
19.60
4.52
42.68
4.16
4.14
2.05%
20.64
4.68
41.93
3.12
3.10
1.72%
18.31
4.65
41.51
December 31,
2019
2018
(in thousands)
$
26,821,948
$
21,123,296
3,970,118
22,796,493
—
393,563
3,016,748
2,721,061
23,109,486
17,710,629
3,694,961
19,177,447
491,000
360,458
2,613,734
2,316,464
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution
and results of operations. The Company measures asset quality in terms of non-accrual loans as a percentage of gross loans and
net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and
recovery payments received on previously charged-off loans. The following table summarizes the Company's key asset quality
metrics:
Non-accrual loans
Repossessed assets
Non-performing assets
Loans past due 90 days and still accruing
Non-accrual loans to gross loans
Nonaccrual and repossessed assets to total assets
Loans past due 90 days and still accruing to gross loans
Allowance for credit losses to gross loans
Allowance for credit losses to non-accrual loans
Net charge-offs to average loans outstanding
At or for the Year Ended December 31,
2019
2018
2017
(dollars in thousands)
$
55,968
$
27,746
$
13,850
98,174
—
0.27%
0.26
—
0.80
299.81
0.02
17,924
82,722
594
0.16%
0.20
0.00
0.86
550.41
0.06
43,925
28,540
114,939
43
0.29%
0.36
0.00
0.93
318.84
0.01
32
Asset and Liability Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits. Therefore, the ability to originate new loans
and attract new deposits is fundamental to the Company’s growth.
Total assets increased to $26.8 billion at December 31, 2019 from $23.1 billion at December 31, 2018. The increase in total assets
of $3.7 billion, or 16.1%, relates primarily to organic loan growth of $3.4 billion or 19.3%, to $21.1 billion as of December 31,
2019, compared to $17.7 billion as of December 31, 2018. The increase in loans from December 31, 2018 was driven by commercial
and industrial loans of $1.6 billion, CRE non-owner occupied loans of $1.0 billion, and residential real estate loans of $943.3
million. Total deposits increased $3.6 billion, or 18.9%, to $22.8 billion as of December 31, 2019 from $19.2 billion as of December
31, 2018. The increase in deposits from December 31, 2018 was driven by an increase in savings and money market deposits of
$1.8 billion, non-interest-bearing demand deposit of $1.1 billion, and certificates of deposits of $542.0 million from December
31, 2018.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable periods:
Consolidated Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Income tax expense
Net income
Earnings per share - basic
Earnings per share - diluted
Non-GAAP Financial Measures
Year Ended December 31,
2019
2018
Increase
(Decrease)
(in thousands, except per share amounts)
$
1,225,045
$
1,033,483
$
184,633
1,040,412
18,500
1,021,912
65,095
482,781
604,226
105,055
499,171
4.86
4.84
$
$
$
$
$
$
117,604
915,879
23,000
892,879
43,116
425,667
510,328
74,540
435,788
4.16
4.14
$
$
$
191,562
67,029
124,533
(4,500)
129,033
21,979
57,114
93,898
30,515
63,383
0.70
0.70
The following discussion and analysis contains financial information determined by methods other than those prescribed by GAAP.
The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These
measurements typically adjust GAAP performance measures to exclude the effects of certain activities or transactions that, in
management's opinion, do not reflect recurring period-to-period comparisons of the Company's performance. Management believes
presentation of these non-GAAP financial measures provides useful supplemental information that is essential to a complete
understanding of the operating results of the Company's core businesses. Since the presentation of these non-GAAP performance
measures and their impact differ between companies, these non-GAAP disclosures should not be viewed as a substitute for operating
results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may
be presented by other companies.
Operating Pre-Provision Net Revenue
Operating PPNR is defined by the Federal Reserve in SR 14-3, which requires companies subject to the rule to project PPNR over
the planning horizon for each of the economic scenarios defined annually by the regulators. Banking regulations define PPNR as
net interest income plus non-interest income less non-interest expense. Management has further adjusted this metric to exclude
any non-recurring or non-operational elements of non-interest income or non-interest expense, which are outlined in the table
below. Management believes that this is an important metric as it illustrates the underlying performance of the Company, enables
investors and others to assess the Company's ability to generate capital to cover credit losses through the credit cycle, and provides
consistent reporting with a key metric used by bank regulatory agencies.
33
The following table shows the components of operating PPNR for the years ended December 31, 2019, 2018, and 2017:
Total non-interest income
Less:
Gain (loss) on sales of investment securities, net (1)
Fair value gain (loss) adjustments on assets measured at fair value, net (1)
Total operating non-interest income
Plus: net interest income
Net operating revenue
Total non-interest expense
Less:
Contribution to charitable foundation (2)
401(k) plan change and other miscellaneous items (2)
Net loss (gain) on sales / valuations of repossessed and other assets (1)
Total operating non-interest expense
Operating pre-provision net revenue
Plus:
Revenue adjustments
Less:
Provision for credit losses
Expense adjustments
Income before provision for income taxes
Income tax expense
Net income
Year Ended December 31,
2019
2018
2017
(in thousands)
65,095
$
43,116
$
45,344
3,152
5,119
56,824
1,040,412
1,097,236
482,781
—
—
3,818
478,963
618,273
$
$
$
$
(7,656)
(3,611)
54,383
915,879
970,262
425,667
7,645
1,218
9
416,795
553,467
$
$
$
$
2,343
(1)
43,002
784,664
827,666
360,941
—
—
(80)
361,021
466,645
$
$
$
$
$
8,271
(11,267)
2,342
18,500
3,818
604,226
105,055
23,000
8,872
510,328
74,540
$
499,171
$
435,788
$
17,250
(80)
451,817
126,325
325,492
(1)
(2)
The operating PPNR non-GAAP performance metric is adjusted to exclude the effects of this non-operational item.
The operating PPNR non-GAAP performance metric is adjusted to exclude the effects of these non-recurring items. See "Note 19. Related Party
Transactions" for further information regarding the charitable contribution.
34
Tangible Common Equity
The following table presents financial measures related to tangible common equity. Tangible common equity represents total
stockholders' equity, less identifiable intangible assets and goodwill. Management believes that tangible common equity financial
measures are useful in evaluating the Company's capital strength, financial condition, and ability to manage potential losses. In
addition, management believes that these measures improve comparability to other institutions that have not engaged in acquisitions
that resulted in recorded goodwill and other intangible assets.
Total stockholders' equity
Less: goodwill and intangible assets
Total tangible stockholders' equity
Plus: deferred tax - attributed to intangible assets
Total tangible common equity, net of tax
Total assets
Less: goodwill and intangible assets, net
Tangible assets
Plus: deferred tax - attributed to intangible assets
Total tangible assets, net of tax
Tangible common equity ratio
Common shares outstanding
Book value per share
Tangible book value per share, net of tax
Operating Efficiency Ratio
$
$
$
December 31
2019
2018
(dollars and shares in thousands)
3,016,748
$
2,613,734
297,608
2,719,140
1,921
2,721,061
26,821,948
297,608
26,524,340
1,921
$
$
299,155
2,314,579
1,885
2,316,464
23,109,486
299,155
22,810,331
1,885
$
26,526,261
$
22,812,216
10.3%
10.2%
102,524
29.42
26.54
$
104,949
24.90
22.07
$
The following table shows the components used in the calculation of the operating efficiency ratio, which management uses as a
metric for assessing cost efficiency:
Total operating non-interest expense
Divided by:
Total net interest income
Plus:
Tax equivalent interest adjustment
Operating non-interest income
Net operating revenue - TEB
Operating efficiency ratio - TEB
Year Ended December 31,
2019
2018
2017
(dollars in thousands)
478,963
1,040,412
$
$
416,795
915,879
$
$
25,094
56,824
23,809
54,383
1,122,330
$
994,071
$
$
$
$
361,021
784,664
41,989
43,002
869,655
42.7%
41.9%
41.5%
35
Regulatory Capital
The following table presents certain financial measures related to regulatory capital under Basel III, which includes Common
Equity Tier 1 and total capital. The FRB and other banking regulators use Common Equity Tier 1 and total capital as a basis for
assessing a bank's capital adequacy; therefore, management believes it is useful to assess financial condition and capital adequacy
using this same basis. Specifically, the total capital ratio takes into consideration the risk levels of assets and off-balance sheet
financial instruments. In addition, management believes that the classified assets to Common Equity Tier 1 plus allowance measure
is an important regulatory metric for assessing asset quality.
Common Equity Tier 1:
Common Equity
Less:
Non-qualifying goodwill and intangibles
Disallowed deferred tax asset
AOCI related adjustments
Unrealized gain on changes in fair value liabilities
Common Equity Tier 1
Divided by: Risk-weighted assets
Common Equity Tier 1 ratio
Common Equity Tier 1
Plus:
Trust preferred securities
Less:
Disallowed deferred tax asset
Unrealized gain on changes in fair value liabilities
Tier 1 capital
Divided by: Tangible average assets
Tier 1 leverage ratio
Total Capital:
Tier 1 capital
Plus:
Subordinated debt
Qualifying allowance for credit losses
Other
Less: Tier 2 qualifying capital deductions
Tier 2 capital
Total capital
Total capital ratio
Classified assets to Tier 1 capital plus allowance for credit losses:
Classified assets
Divided by:
Tier 1 capital
Plus: Allowance for credit losses
Total Tier 1 capital plus allowance for credit losses
December 31,
2019
2018
(dollars in thousands)
$
3,016,748
$
2,613,734
295,607
2,243
21,379
3,629
296,769
768
(47,055)
13,432
2,693,890
25,390,142
$
$
2,349,820
21,983,976
10.6%
10.7%
2,693,890
$
2,349,820
81,500
81,500
—
—
—
—
2,775,390
26,110,275
$
$
2,431,320
22,204,799
10.6%
10.9%
2,775,390
$
2,431,320
305,732
167,797
8,955
—
482,484
3,257,874
$
$
305,131
152,717
8,188
—
466,036
2,897,356
12.8%
13.2%
171,246
$
242,101
2,775,390
167,797
2,431,320
152,717
2,943,187
$
2,584,037
$
$
$
$
$
$
$
$
$
$
Classified assets to Tier 1 capital plus allowance
5.8%
9.4%
36
Net Interest Margin
The net interest margin is reported on a TEB. A tax equivalent adjustment is added to reflect interest earned on certain securities
and loans that are exempt from federal and state income tax. The following tables set forth the average balances, interest income,
interest expense, and average yield (on a fully TEB) for the periods indicated:
Average
Balance
2019
Interest
Year Ended December 31,
Average
Yield / Cost
Average
Balance
(dollars in thousands)
2018
Interest
Average
Yield / Cost
Interest earning assets
Loans:
Commercial and industrial
CRE - non-owner occupied
CRE - owner occupied
Construction and land development
Residential real estate
Consumer
Loans held for sale
Total loans (1), (2), (3)
Securities:
Securities - taxable
Securities - tax-exempt
Total securities (1)
Other
$
8,200,542
$
4,629,580
2,284,746
2,176,595
1,663,544
64,291
5,556
461,918
270,353
120,607
155,459
80,669
3,712
352
19,024,854
1,093,070
2,904,567
1,008,655
3,913,222
648,436
79,124
36,765
115,889
16,086
Total interest earning assets
23,586,512
1,225,045
5.78% $
7,039,090
$
5.85
5.38
7.16
4.85
5.77
6.34
5.83
2.72
4.57
3.20
2.48
5.30
3,952,702
2,263,112
1,975,587
616,159
54,078
—
387,422
234,753
118,351
137,227
29,681
3,143
—
15,900,728
910,577
2,803,350
879,888
3,683,238
480,579
78,630
33,042
111,672
11,234
20,064,545
1,033,483
145,246
(146,288)
168,685
1,014,127
Non-interest earning assets
Cash and due from banks
Allowance for credit losses
Bank owned life insurance
Other assets
Total assets
Interest-bearing liabilities
Interest-bearing deposits:
214,470
(159,907)
171,960
1,101,088
$
24,914,123
$
21,246,315
Interest-bearing transaction accounts
$
2,545,806
$
Savings and money market accounts
Certificates of deposit
Total interest-bearing deposits
Short-term borrowings
Qualifying debt
Total interest-bearing liabilities
Interest cost of funding earning assets
Non-interest-bearing liabilities
Non-interest-bearing demand deposits
Other liabilities
Stockholders’ equity
8,125,832
2,117,177
12,788,815
134,622
379,675
13,303,112
8,246,232
519,400
2,845,379
Total liabilities and stockholders' equity
$
24,914,123
20,988
95,533
41,884
158,405
2,838
23,390
184,633
0.82% $
1,891,160
$
6,501,241
1,748,675
10,141,076
260,662
362,410
1.18
1.98
1.24
2.11
6.16
1.39
0.78%
11,584
54,962
23,918
90,464
4,853
22,287
10,764,148
117,604
7,712,791
357,667
2,411,709
$
21,246,315
Net interest income and margin (4)
$
1,040,412
4.52%
$
915,879
4.68%
(1)
(2)
(3)
(4)
Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $25.1 million and $23.8 million for 2019 and 2018,
respectively.
Included in the yield computation are net loan fees of $56.2 million and accretion on acquired loans of $12.7 million for 2019, compared to $44.8
million and $18.6 million for 2018, respectively.
Includes non-accrual loans.
Net interest margin is computed by dividing net interest income by total average earning assets.
37
5.68%
5.95
5.34
6.96
4.82
5.81
—
5.82
2.80
4.69
3.26
2.34
5.27
0.61%
0.85
1.37
0.89
1.86
6.15
1.09
0.59%
Interest income:
Loans:
Commercial and industrial
CRE - non-owner occupied
CRE - owner occupied
Construction and land development
Residential real estate
Consumer
Loans held for sale
Total loans
Securities:
Securities - taxable
Securities - tax-exempt
Total securities
Other
Total interest income
Interest expense:
Interest-bearing transaction accounts
Savings and money market
Time certificates of deposit
Short-term borrowings
Qualifying debt
Total interest expense
Net increase
Year Ended December 31,
2019 versus 2018
Increase (Decrease) Due to Changes in (1)
Volume
Rate
Total
(in thousands)
$
65,422
$
9,074
$
39,528
1,142
14,357
50,790
590
352
(3,928)
1,114
3,875
198
(21)
—
74,496
35,600
2,256
18,232
50,988
569
352
172,181
10,312
182,493
2,757
4,693
7,450
4,164
183,795
(2,263)
(970)
(3,233)
688
7,767
$
5,397
$
4,007
$
19,100
7,290
(2,657)
1,064
30,194
21,471
10,676
642
39
36,835
494
3,723
4,217
4,852
191,562
9,404
40,571
17,966
(2,015)
1,103
67,029
$
153,601
$
(29,068) $
124,533
(1)
Changes due to both volume and rate have been allocated to volume changes.
Comparison of interest income, interest expense and net interest margin
The Company's primary source of revenue is interest income. For the year ended December 31, 2019, interest income was $1.2
billion, an increase of $191.6 million, or 18.5%, compared to $1.0 billion for the year ended December 31, 2018. This increase
was primarily the result of a $3.1 billion increase in the average loan balance that drove a $182.5 million increase in loan interest
income for the year ended December 31, 2019. Interest income from investment securities increased by $4.2 million for the
comparable period primarily due to an increase in the average investment balance of $230.0 million, partially offset by a decrease
in interest rates from December 31, 2018. Other interest income increased $4.9 million from the comparable period due primarily
to an increase in interest-bearing cash account balances. Average yield on interest earning assets increased to 5.30% for the year
ended December 31, 2019, compared to 5.27% in 2018, which was primarily the result of increased yields on the Company's
interest-bearing cash accounts.
For the year ended December 31, 2019, interest expense was $184.6 million, compared to $117.6 million for the year ended
December 31, 2018. Interest expense on deposits increased $67.9 million for the same period as average interest-bearing deposits
increased $2.6 billion, which was paired with a 35-basis point increase in the average cost of interest-bearing deposits. Interest
expense on short-term borrowings decreased by $2.0 million as a result of a $126.0 million decrease in average short-term
borrowings for the year ended December 31, 2019 compared to the same period in 2018. Interest expense on qualifying debt
increased by $1.1 million due to changes in related interest rate swap expense arising from fluctuations in interest rates.
For the year ended December 31, 2019, net interest income was $1.0 billion, compared to $915.9 million for the year ended
December 31, 2018. The increase in net interest income reflects a $3.5 billion increase in average interest earning assets, offset
by a $2.5 billion increase in average interest-bearing liabilities. The decrease in net interest margin of 16 basis points compared
to 2018 is the result of higher deposit and funding costs.
38
Provision for Credit Losses
The provision for credit losses on loans in each period is reflected as a reduction in earnings for that period. The provision is equal
to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb probable credit losses inherent
in the loan portfolio. For the year ended December 31, 2019, the provision for credit losses was $18.5 million, compared to $23.0
million for the year ended December 31, 2018. The decrease in the provision was primarily due to a reduction in net charge-offs
and loan mix.
The Company may also establish an additional allowance for credit losses on PCI loans through provision for credit losses when
impairment is determined as a result of lower than expected cash flows. As of December 31, 2019 and 2018, the allowance for
credit losses on PCI loans was $0.1 million. For non-PCI loans, an additional allowance for credit losses is established when the
remaining credit marks on these loans are lower than the Company's calculated allowance for similar types of organic loans. As
of December 31, 2019 and 2018, the allowance for credit losses on non-PCI loans was $0.9 million and $3.4 million, respectively.
The Company also records estimated losses on unfunded loan commitments, which are classified as non-interest expense, with
corresponding reserves in other liabilities. For the years ended December 31, 2019 and 2018, the Company recorded $0.8 million
and $2.0 million, respectively, in non-interest expense for estimated losses on unfunded loan commitments. As of December 31,
2019 and 2018, the loss contingency for unfunded loan commitments and letters of credit was $9.0 million and $8.2 million as of
December 31, 2019 and 2018, respectively.
Non-interest Income
The following table presents a summary of non-interest income for the periods presented:
Service charges and fees
Income from equity investments
Card income
Foreign currency income
Income from bank owned life insurance
Lending related income and gains (losses) on sale of loans, net
Gain (loss) on sales of investment securities, net
Fair value gain (loss) adjustments on assets measured at fair value, net
Other income
Total non-interest income
Year Ended December 31,
2019
2018
(in thousands)
$
23,353
$
22,295
$
8,290
6,979
4,987
3,901
3,158
3,152
5,119
6,156
8,595
8,009
4,760
3,946
4,340
(7,656)
(3,611)
2,438
$
65,095
$
43,116
$
Increase
(Decrease)
1,058
(305)
(1,030)
227
(45)
(1,182)
10,808
8,730
3,718
21,979
Total non-interest income for the year ended December 31, 2019 compared to 2018, increased by $22.0 million, or 51.0%. The
increase is due to sales of investment securities and fair value adjustments. The net gain on sales of investment securities of $3.2
million during the year ended December 31, 2019 was the result of a portfolio re-balancing initiative. The net loss on sales of
investment securities of $7.7 million during the year ended December 31, 2018 relates to sales of low yielding investment securities,
which were replaced with investment securities with shorter durations and higher yields, as well as losses on sales of equity
securities. The net fair value gain on assets measured at fair value was $5.1 million for the year ended December 31, 2019, compared
to a net loss of $3.6 million for the year ended December 31, 2018, which resulted from changes in the fair market value of the
Company's equity securities. Other increases in non-interest income were due to increases in service charges and fees and other
non-interest income. The increase in service charges and fees of $1.1 million is due to continued growth in the Company's deposit
base, which increased $3.6 billion during the year ended December 31, 2019. The increase in other non-interest income of $3.7
million is due primarily to an increase in rental income on equipment leases. These increases were partially offset by a decrease
in lending income of $1.2 million due to fewer gains on the sale of loans compared to the same period in 2018.
39
Non-interest Expense
The following table presents a summary of non-interest expense for the periods presented:
Salaries and employee benefits
Legal, professional, and directors' fees
Occupancy
Deposit costs
Data processing
Insurance
Loan and repossessed asset expenses
Business development
Marketing
Card expense
Intangible amortization
Net loss (gain) on sales / valuations of repossessed and other assets
Other expense
Total non-interest expense
Year Ended December 31,
2019
2018
(in thousands)
$
279,274
$
253,238
$
37,009
32,507
31,719
30,577
11,924
7,571
7,043
4,199
2,346
1,547
3,818
33,247
28,722
29,404
18,900
22,716
14,005
4,578
5,960
3,770
4,301
1,594
9
38,470
$
482,781
$
425,667
$
Increase
(Decrease)
26,036
8,287
3,103
12,819
7,861
(2,081)
2,993
1,083
429
(1,955)
(47)
3,809
(5,223)
57,114
Total non-interest expense for the year ended December 31, 2019 compared to 2018, increased $57.1 million, or 13.4%. This
increase primarily relates to salaries and employee benefits, deposit costs, legal, professional, and directors' fees, data processing,
net loss on sales/valuations of repossessed and other assets, and occupancy expenses. Salaries and employee benefits have increased
as the Company supports its continued growth through hiring and incentives. Full-time equivalent employees increased 2.7% to
1,835 during the year ended December 31, 2019. Deposit costs consist of fees to the Promontory Interfinancial Network and others
for reciprocal deposits as well as earnings credits on select deposits. The increase in deposit costs of $12.8 million for 2019
compared to 2018 relates primarily to an increase in deposit earnings credits paid to account holders due to a higher amount of
deposits eligible for these credits. The increase to legal, professional, and directors' fees of $8.3 million largely relates to consulting
projects aimed at the implementation of CECL and other technology initiatives that will help position the Company for continued
growth. The net loss on sales/valuations of repossessed and other assets of $3.8 million primarily relates to valuation adjustments
on OREO properties. The other significant increases to non-interest expense consist of increases in data processing and occupancy
of $7.9 million and $3.1 million, respectively, which relate to the Company's support of its continued growth. These increases
were partially offset by a decrease in other non-interest expense of $5.2 million, which primarily relates to a non-recurring charitable
donation of $7.6 million made in 2018 as well as a decrease in FDIC insurance costs of $2.4 million due to the elimination of the
FDIC assessment surcharge in the fourth quarter of 2018. The decrease in other non-interest expense was offset in part by a $3.2
million increase in depreciation expense on leased equipment.
Income Taxes
For the years ended December 31, 2019, 2018, and 2017 the Company's effective tax rate was 17.39%, 14.61%, and 27.96%,
respectively. The increase in the effective tax rate from 2018 to 2019 is due primarily to management's decision during the third
quarter of 2018 to carryback its 2017 federal NOLs. The decrease in the effective tax rate from 2017 to 2018 is due primarily to
the decrease in the federal statutory rate effective in 2018, a reduction in excise taxes, and management's decision during the third
quarter 2018 to carryback its 2017 federal NOLs. The reduction in excise taxes from 2017 to 2018 resulted from not deferring
WAB's 2018 dividend from BW Real Estate as was the case in 2017. The Company's 2017 federal NOLs resulted from the
acceleration of deductions into and deferral of revenue from 2017. As the federal income tax rate was higher in the years to which
the carryback is applicable, a larger tax benefit results from the decision to carryback the 2017 federal NOLs, rather than
carryforward these losses to future taxable years.
40
Business Segment Results
The Company's reportable segments are defined primarily based on geographic location, services offered, and markets served.
The Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full
service banking and related services to their respective markets. The Company's NBL segments, which include HOA services,
Public & Nonprofit Finance, Technology & Innovation, HFF, and Other NBLs, provide specialized banking services to niche
markets. These NBLs are managed centrally and are broader in geographic scope than the Company's other segments, though still
predominately located within the Company's core market areas. The Corporate & Other segment consists of corporate-related
items, income and expense items not allocated to the Company's other reportable segments, and inter-segment eliminations.
The following tables present selected operating segment information for the periods presented:
December 31, 2019
Regional Segments
Consolidated
Company
Arizona
Nevada
(in millions)
Southern
California
Northern
California
Loans, net of deferred loan fees and costs
$
21,123.3
$
3,847.9
$
2,252.5
$
2,253.9
$
Deposits
December 31, 2018
22,796.5
5,384.7
4,350.1
2,585.3
Loans, net of deferred loan fees and costs
$
17,710.6
$
3,647.9
$
2,003.5
$
2,161.1
$
Deposits
19,177.4
5,090.2
3,996.4
2,347.5
1,311.2
2,373.6
1,300.2
1,839.1
Year Ended December 31, 2019
Income (loss) before income taxes
Year Ended December 31, 2018
Income (loss) before income taxes
$
$
604,226
$
156,493
$
111,001
$
73,649
$
53,079
(in thousands)
510,328
$
139,047
$
99,322
$
59,334
$
48,132
December 31, 2019
Loans, net of deferred loan fees and costs
Deposits
December 31, 2018
Loans, net of deferred loan fees and costs
Deposits
Year Ended December 31, 2019
Income (loss) before income taxes
Year Ended December 31, 2018
Income (loss) before income taxes
$
$
$
$
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBL
Corporate &
Other
237.2
$
1,635.6
$
1,552.0
$
1,930.8
$
6,098.7
$
3,210.1
0.1
3,771.5
—
36.9
(in millions)
210.0
$
1,547.5
$
1,200.9
$
1,479.9
$
4,154.9
$
2,607.2
—
2,559.0
—
—
3.5
1,084.2
4.7
738.0
49,823
$
5,668
$
93,748
39,935
$
78,895
$
(58,065)
(in thousands)
35,097
$
8,288
$
72,334
42,467
$
44,281
$
(37,974)
41
BALANCE SHEET ANALYSIS
Total assets increased $3.7 billion, or 16.1%, to $26.8 billion at December 31, 2019 compared to $23.1 billion at December 31,
2018. The increase in total assets relates primarily to organic loan growth. Loans increased $3.4 billion, or 19.3%, to $21.1 billion
at December 31, 2019, compared to $17.7 billion at December 31, 2018. The increase in loans from December 31, 2018 was driven
by commercial and industrial loans of $1.6 billion, CRE, non-owner occupied loans of $1.0 billion, and residential real estate
loans of $943.3 million.
Total liabilities increased $3.3 billion, or 16.1%, to $23.8 billion at December 31, 2019, compared to $20.5 billion at December
31, 2018. The increase in liabilities is due primarily to an increase in total deposits. Total deposits increased $3.6 billion, or 18.9%,
to $22.8 billion at December 31, 2019. The increase in deposits from December 31, 2018 was driven by an increase in savings
and money market deposits of $1.8 billion, non-interest-bearing demand deposit of $1.1 billion, and certificates of deposits of
$542.0 million from December 31, 2018.
Total stockholders’ equity increased by $403.0 million, or 15.4%, to $3.0 billion at December 31, 2019 compared to $2.6 billion
at December 31, 2018. The increase in stockholders' equity relates primarily to net income for the year ended December 31, 2019
and an increase in the fair value of the Company's AFS portfolio, which is recognized as part of AOCI, partially offset by share
repurchases under its common stock repurchase plan and dividends paid to shareholders.
Investment securities
Debt securities are classified at the time of acquisition as either HTM, AFS, or trading based upon various factors, including asset/
liability management strategies, liquidity and profitability objectives, and regulatory requirements. HTM securities are carried at
amortized cost, adjusted for amortization of premiums or accretion of discounts. AFS securities are securities that may be sold
prior to maturity based upon asset/liability management decisions. Investment securities classified as AFS are carried at fair value.
Unrealized gains or losses on AFS securities are recorded as part of AOCI in stockholders’ equity. Amortization of premiums or
accretion of discounts on MBS is periodically adjusted for estimated prepayments. Trading securities are reported at fair value,
with unrealized gains and losses included in current period earnings.
The Company's investment securities portfolio is utilized as collateral for borrowings, required collateral for public deposits and
customer repurchase agreements, and to manage liquidity, capital, and interest rate risk.
The following table summarizes the carrying value of the investment securities portfolio for each of the periods below:
Debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal securities
Private label commercial MBS
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total debt securities
Equity securities
CRA investments
Preferred stock
Total equity securities
2019
2018
2017
2016
2015
At December 31,
(in thousands)
$
10,142
$
15,327
$
21,857
$
13,490
$
94,253
99,961
7,773
—
1,129,227
1,412,060
1,039,962
27,040
10,000
999
100,106
99,380
—
—
924,594
1,530,124
841,573
28,617
38,188
1,984
109,077
103,483
—
—
868,524
1,689,295
765,960
28,617
61,462
2,482
117,792
64,144
—
—
433,685
1,356,258
500,312
26,532
56,022
2,502
10,060
19,114
13,251
—
4,691
257,128
1,171,702
334,830
24,314
—
2,993
$
3,831,417
$
3,579,893
$
3,650,757
$
2,570,737
$
1,838,083
$
$
52,504
86,197
138,701
$
$
51,142
63,919
115,061
$
$
50,616
53,196
103,812
$
$
37,113
94,662
131,775
$
$
34,685
111,236
145,921
42
Weighted average yield on investment securities is calculated by dividing income within each maturity range by the outstanding
amount of the related investment and has not been tax-effected on tax-exempt obligations. For purposes of calculating the weighted
average yield, AFS securities are carried at amortized cost in the table below. The maturity distribution and weighted average yield
of the Company's investment security portfolios at December 31, 2019 are summarized in the table below:
Due Under 1 Year
Due 1-5 Years
Due 5-10 Years
Due Over 10 Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
December 31, 2019
(dollars in thousands)
Held-to-maturity
Tax-exempt
$
7,330
5.27% $
17,414
4.30% $
—
—% $ 460,363
4.57% $ 485,107
4.57%
Available-for-sale
CDO
$
Commercial MBS issued
by GSEs (1)
Corporate debt securities
Municipal securities
Private label residential
MBS (1)
Residential MBS issued
by GSEs (1)
Tax-exempt
Trust preferred securities
U.S. government
sponsored agency
securities
U.S. treasury securities
—
—
—
—
99
3
—
—
—
999
—% $
—
—% $
—
—% $
50
—% $
50
—%
—
—
—
5.39
5.26
—
—
—
1.68
18,445
5,015
—
—
1,423
9,751
—
—
—
2.26
4.32
—
—
2.74
3.58
—
—
—
1,680
100,000
—
—
8,429
39,236
—
10,000
—
4.28
2.35
—
—
2.53
3.43
—
2.40
—
74,937
—
7,494
2.28
—
5.57
95,062
105,015
7,494
2.31
2.45
5.57
1,129,886
3.24
1,129,985
3.24
1,396,739
481,742
32,000
—
—
2.66
3.01
2.45
—
—
1,406,594
530,729
32,000
10,000
999
2.66
3.05
2.45
2.40
1.68
Total AFS securities
$
1,101
2.02% $
34,634
2.95% $ 159,345
2.65% $3,122,848
2.92% $3,317,928
2.91%
Equity
CRA investments
Preferred stock
Total equity securities
$
$
44,555
2.89% $
5,250
2.51% $
3,000
3.00% $
—
—% $
52,805
2.86%
—
—
—
—
—
—
82,514
5.81
82,514
5.81
44,555
2.89% $
5,250
2.51% $
3,000
3.00% $
82,514
5.81% $ 135,319
4.66%
(1)
MBS are comprised of pools of loans with varying maturities, the majority of which are due after 10 years.
The Company does not own any subprime MBS in its investment portfolio. The majority of its MBS are GSE issued. The remaining
MBS that are not GSE issued consist of $1.1 billion rated AAA, $30.7 million rated AA, $0.2 million rated A, $0.3 million rated
BBB, and $1.2 million non-investment grade.
Gross unrealized losses at December 31, 2019 relate primarily to market interest rate increases since the securities' original purchase
date. The Company has reviewed securities on which there is an unrealized loss in accordance with its accounting policy for OTTI
securities described in "Note 2. Investment Securities" to the Consolidated Financial Statements contained herein. There were no
impairment charges recorded during the years ended December 31, 2019, 2018, and 2017.
The Company does not consider any securities to be other-than-temporarily impaired as of December 31, 2019, 2018, and 2017.
However, the Company cannot guarantee that OTTI will not occur in future periods. At December 31, 2019, the Company has the
intent and ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in fair value.
43
Loans
The table below summarizes the distribution of the Company’s held for investment loan portfolio at the end of each of the periods
indicated:
Loans, held for investment
Commercial and industrial
Commercial real estate - non-owner occupied
Commercial real estate - owner occupied
Construction and land development
Residential real estate
Consumer
Deferred loan fees and costs
2019
2018
2017
2016
2015
December 31,
(in thousands)
$
9,391,760
$
7,765,100
$
6,841,247
$
5,859,446
$
5,264,856
5,261,018
2,320,237
1,971,633
2,147,652
56,932
(47,739)
4,223,427
2,329,205
2,155,625
1,203,613
69,995
(36,336)
3,911,313
2,245,060
1,647,726
425,291
48,583
(25,285)
3,549,876
2,015,671
1,489,488
258,734
38,572
(22,260)
2,289,480
2,085,738
1,143,228
322,265
26,474
(19,187)
Loans, net of deferred loan fees and costs
21,101,493
17,710,629
15,093,935
13,189,527
11,112,854
Allowance for credit losses
Total loans HFI
(167,797)
(152,717)
(140,050)
(124,704)
(119,068)
$
20,933,696
$
17,557,912
$
14,953,885
$
13,064,823
$
10,993,786
Loans that are held for investment are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums
and discounts, purchase accounting fair value adjustments, and an allowance for credit losses. Net deferred loan fees as of December
31, 2019 and 2018 total $47.7 million and $36.3 million, respectively, which is a reduction in the carrying value of loans. Net
unamortized purchase premiums on secondary market loan purchases total $29.9 million and $2.0 million as of December 31,
2019 and 2018, respectively. Total loans held for investment are also net of interest rate and credit marks on acquired loans, which
are a net reduction in the carrying value of loans. Interest rate marks were $3.8 million and $7.1 million as of December 31, 2019
and 2018, respectively. Credit marks were $6.5 million and $14.6 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Company also had $21.8 million of HFS loans. There were no HFS loans as of December 31, 2018.
44
The following table sets forth the amount of loans, including HFS loans, outstanding by type of loan as of December 31, 2019
that were contractually due in one year or less, more than one year and less than five years, and more than five years based on
remaining scheduled repayments of principal. Lines of credit or other loans having no stated final maturity and no stated schedule
of repayments are reported as due in one year or less. The table also presents an analysis of the rate structure for loans within the
same maturity time periods. Actual cash flows from these loans may differ materially from contractual maturities due to prepayment,
refinancing, or other factors.
Commercial and industrial
Floating rate
Fixed rate
Commercial real estate — non-owner occupied
Floating rate
Fixed rate
Commercial real estate — owner occupied
Floating rate
Fixed rate
Construction and land development
Floating rate
Fixed rate
Residential real estate
Floating rate
Fixed rate
Consumer
Floating rate
Fixed rate
Total
Due in one year or
less
Due after one year
to five years
Due after five
years
Total
(in thousands)
$
2,451,864
$
3,441,591
$
1,369,159
$
91,335
833,937
1,215,960
543,071
190,053
82,498
51,837
746,293
24,303
25,962
3,218
31,735
3,477
2,113,368
1,194,158
192,699
301,032
932,849
57,846
35,122
6,888
12,063
3,509
642,467
562,517
929,909
758,938
142,057
48,808
719,539
1,356,935
2,350
3,949
7,262,614
2,141,232
3,298,906
1,946,728
1,205,106
1,111,807
1,821,199
130,957
780,623
1,367,041
46,148
10,935
$
4,245,646
$
9,125,062
$
7,752,588
$
21,123,296
As of December 31, 2019, approximately $9.7 billion, or 67.6%, of total variable rate loans were subject to rate floors with a
weighted average interest rate of 4.8%. At December 31, 2018, approximately $8.3 billion, or 69.3% of total variable rate loans
were subject to rate floors with a weighted average interest rate of 4.8%. At December 31, 2019, total loans consisted of 68.2%
with floating rates and 31.8% with fixed rates, compared to 67.3% with floating rates and 32.7% with fixed rates at December 31,
2018.
Concentrations of Lending Activities
The Company monitors concentrations within four broad categories: product, collateral, geography, and industry. The Company’s
loan portfolio includes significant credit exposure to the CRE market. At December 31, 2019 and 2018, CRE related loans accounted
for approximately 45% and 49% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial
loan to value ratio of generally not more than 75%. Approximately 31% and 36% of these CRE loans, excluding construction and
land loans, were owner occupied at December 31, 2019 and 2018, respectively.
Impaired loans
A loan is identified as impaired when it is no longer probable that interest and principal will be collected according to the contractual
terms of the original loan agreement. Impaired loans are measured for reserve requirements in accordance with ASC 310 based
on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral less applicable disposition costs if the loan is collateral dependent.
The amount of an impairment reserve, if any, and any subsequent changes are charged against the allowance for credit losses.
In addition to the Company's own internal loan review process, regulators may from time to time direct the Company to modify
loan grades, loan impairment calculations, or loan impairment methodology.
45
Total non-performing loans increased by $19.5 million, or 30.1%, at December 31, 2019 to $84.3 million from $64.8 million at
December 31, 2018.
Total non-accrual loans (1)
Loans past due 90 days or more on accrual status
Accruing troubled debt restructured loans
Total nonperforming loans, excluding loans acquired with
deteriorated credit quality
Other impaired loans
Total impaired loans
Other assets acquired through foreclosure, net
Non-accrual loans to gross loans held for investment
Loans past due 90 days or more on accrual status to gross loans
held for investment
Interest income that would have been recorded under the original
terms of non-accrual loans
December, 31
2019
2018
2017
2016
2015
(dollars in thousands)
$
55,968
$
27,746
$
43,925
$
40,272
$
—
28,356
84,324
31,979
116,303
13,850
$
$
594
36,458
64,798
47,454
112,252
17,924
$
$
$
$
43
42,431
86,399
12,155
98,554
28,540
$
$
1,067
53,637
94,976
4,233
99,209
47,815
$
$
48,381
3,028
70,707
122,116
6,758
128,874
43,942
0.27%
0.16%
0.29%
0.31%
0.44%
—
2,170
0.00
2,268
0.00
2,444
0.01
2,045
0.03
2,549
(1)
Includes non-accrual TDR loans of $10.6 million and $8.0 million at December 31, 2019 and 2018, respectively.
The composition of non-accrual loans by loan type and by segment were as follows:
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total non-accrual loans
Arizona
Nevada
Southern California
Northern California
Public & Nonprofit Finance
Technology and Innovation
Other NBLs
Total non-accrual loans
December 31, 2019
December 31, 2018
Non-accrual
Balance
Percent of
Non-Accrual
Balance
Percent of
Total HFI
Loans
Non-accrual
Balance
Percent of
Non-Accrual
Balance
Percent of
Total HFI
Loans
(dollars in thousands)
$
24,501
23,720
2,147
5,600
—
43.77%
0.12% $
15,090
54.39%
0.09%
42.38
3.84
10.01
—
0.11
0.01
0.03
—
—
476
11,939
241
—
1.71
43.03
0.87
—
0.00
0.07
0.00
$
55,968
100.00%
0.27% $
27,746
100.00%
0.16%
December 31, 2019
December 31, 2018
Nonaccrual Loans
Percent of
Segment's Total
HFI Loans
Nonaccrual Loans
Percent of
Segment's Total
HFI Loans
$
29,062
0.76% $
(dollars in thousands)
8,001
1,759
5,193
2,147
5,867
3,939
0.36
0.08
0.40
0.13
0.38
0.06
8,312
6,374
8,564
4,255
—
—
241
$
55,968
0.27% $
27,746
0.23%
0.32
0.40
0.33
—
—
0.00
0.16%
46
Troubled Debt Restructured Loans
A TDR loan is a loan that is granted a concession, for reasons related to a borrower’s financial difficulties, that the lender would
not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but
are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below
current market, a reduction in the face amount of the debt, a reduction in accrued interest, extensions, deferrals, renewals, and
rewrites. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest is no
longer disclosed as a TDR in years subsequent to the restructuring if it is performing based on the terms specified by the restructuring
agreement. However, such loans continue to be considered impaired.
As of December 31, 2019 and 2018, the aggregate amount of loans classified as impaired was $116.3 million and $112.3 million,
respectively, a net increase of 3.6%. The total specific allowance for credit losses related to these loans was $2.8 million and $0.7
million at December 31, 2019 and 2018, respectively. The Company had $28.4 million and $36.5 million in loans classified as
accruing restructured loans at December 31, 2019 and 2018, respectively.
The following tables present a breakdown of total impaired loans and the related specific reserves for the periods indicated:
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total impaired loans
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total impaired loans
December 31, 2019
Impaired
Balance
Percent of
Impaired
Balance
Percent of
Total HFI
Loans
Reserve
Balance
Percent of
Reserve
Balance
Percent of
Total
Allowance
$
48,984
53,274
8,421
5,600
24
42.12%
45.81
7.23
4.82
0.02
(dollars in thousands)
0.23% $
0.25
0.04
0.03
0.00
1,050
1,219
507
—
—
37.83%
0.62%
43.91
18.26
—
—
0.73
0.30
—
—
$
116,303
100.00%
0.55% $
2,776
100.00%
1.65%
December 31, 2018
Impaired
Balance
Percent of
Impaired
Balance
Percent of
Total HFI
Loans
Reserve
Balance
Percent of
Reserve
Balance
Percent of
Total
Allowance
$
63,896
18,937
9,403
19,744
272
(dollars in thousands)
56.92%
0.36% $
16.87
8.38
17.59
0.24
0.11
0.05
0.11
0.00
$
112,252
100.00%
0.63% $
621
—
—
60
—
681
91.19%
0.41%
—
—
8.81
—
—
—
0.04
—
100.00%
0.45%
Impaired loans by segment at December 31, 2019 and 2018 were as follows:
Arizona
Nevada
Southern California
Northern California
Public & Nonprofit Finance
Technology & Innovation
Other NBLs
Total impaired loans
December 31,
2019
2018
$
(in thousands)
62,175
$
25,667
6,630
9,878
2,147
5,867
3,939
$
116,303
$
34,899
33,860
8,576
4,928
—
29,748
241
112,252
47
The amount of interest income recognized on impaired loans for the years ended December 31, 2019, 2018, and 2017 was
approximately $5.0 million, $4.5 million, and $4.0 million, respectively.
Allowance for Credit Losses
The following table summarizes the activity in the Company's allowance for credit losses for the period indicated:
Allowance for credit losses:
Balance at beginning of period
Provision charged to operating expense:
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total Provision
Recoveries of loans previously charged-off:
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total recoveries
Loans charged-off:
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total charged-off
Net charge-offs (recoveries)
Balance at end of period
Net charge-offs (recoveries) to average loans outstanding
Allowance for credit losses to gross loans
Allowance for credit losses to gross organic loans
2019
2018
2017
2016
2015
Year Ended December 31,
(dollars in thousands)
$
152,717
$
140,050
$
124,704
$
119,068
$
110,216
13,198
2,177
1,482
5,867
276
14,268
5,347
(2,805)
318
122
23,000
17,250
3,039
11,674
1,431
2,620
(264)
18,500
(4,265)
(909)
(91)
(412)
(25)
(5,702)
(2,427)
(1,237)
(1,433)
(947)
(43)
(6,087)
8,120
15,034
139
141
594
128
9,122
3,420
233
1
1,038
114
16,420
10,333
(3,112)
(2,897)
(1,229)
(1,778)
(84)
(9,100)
8,186
2,269
—
447
102
11,004
1,904
10,638
(2,449)
1,732
(2,137)
216
8,000
(3,991)
(5,690)
(485)
(875)
(144)
18,411
(9,762)
(1,454)
(3,539)
(456)
3,200
(3,754)
(4,139)
(1,872)
(2,181)
(203)
(11,185)
(12,149)
12,477
5,550
728
18
165
161
13,549
2,364
—
—
820
127
6,497
(5,652)
$
167,797
$
152,717
$
140,050
$
124,704
$
119,068
0.02%
0.80
0.82
0.06%
0.86
0.92
0.01%
0.93
1.03
0.02%
0.95
1.11
(0.06)%
1.07
1.23
48
The following table summarizes the allocation of the allowance for credit losses by loan type. However, the allocation of a portion
of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Commercial
and
Industrial
Commercial
Real Estate
Construction
and Land
Development
Residential
Real Estate
Consumer
Total
(dollars in thousands)
December 31, 2019
Allowance for credit losses
$
82,302
$
47,273
$
23,894
$
13,714
$
614
$
167,797
Percent of total allowance for credit losses
Percent of loan type to total HFI loans
49.0%
44.5
28.2%
35.8
14.2%
9.2
8.2%
10.2
0.4%
0.3
100.0%
100.0
December 31, 2018
Allowance for credit losses
$
83,118
$
34,829
$
22,513
$
11,276
$
981
$
152,717
Percent of total allowance for credit losses
Percent of loan type to total HFI loans
54.4 %
43.8
22.8 %
36.9
14.8 %
12.1
7.4 %
6.8
0.6 %
0.4
100.0 %
100.0
December 31, 2017
Allowance for credit losses
$
82,527
$
31,648
$
19,599
$
5,500
$
776
$
140,050
Percent of total allowance for credit losses
Percent of loan type to total HFI loans
58.9 %
45.2
22.6 %
40.8
14.0 %
10.9
3.9 %
2.8
0.6 %
0.3
100.0 %
100.0
December 31, 2016
Allowance for credit losses
$
73,333
$
25,673
$
21,175
$
3,851
$
672
$
124,704
Percent of total allowance for credit losses
Percent of loan type to total HFI loans
58.8 %
44.3
20.6 %
42.1
17.0 %
11.3
3.1 %
2.0
0.5 %
0.3
100.0 %
100.0
December 31, 2015
Allowance for Credit Losses
$
71,181
$
23,160
$
18,976
$
5,278
$
473
$
119,068
Percent of Total Allowance for Credit Losses
Percent of loan type to total HFI loans
59.8 %
47.4
19.5 %
39.3
15.9 %
10.2
4.4 %
2.9
0.4 %
0.2
100.0 %
100.0
Problem Loans
The Company classifies loans consistent with federal banking regulations using a nine category grading system. These loan grades
are described in further detail in "Item 1. Business” of this Form 10-K. The following table presents information regarding potential
and actual problem loans, consisting of loans graded Special Mention, Substandard, Doubtful, and Loss, but still performing, and
excluding acquired loans:
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total
Number of Loans
Loan Balance
Percent of Loan
Balance
Percent of Total
HFI Loans
December 31, 2019
(dollars in thousands)
$
73
37
10
3
1
96,464
107,839
18,971
727
10
43.06%
48.14
8.47
0.33
0.00
0.46%
0.51
0.09
0.00
0.00
124
$
224,011
100.00%
1.06%
December 31, 2018
Number of Loans
Loan Balance
Percent of Loan
Balance
Percent of Total
HFI Loans
(dollars in thousands)
107
$
42
3
1
2
125,585
71,116
4,040
527
75
62.37%
35.32
2.01
0.26
0.04
155
$
201,343
100.00%
0.71%
0.40
0.02
0.00
0.00
1.13%
49
Goodwill and Other Intangible Assets
Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair value. Goodwill
and other intangible assets acquired in a business combination that are determined to have an indefinite useful life are not subject
to amortization, but are subsequently evaluated for impairment at least annually. The Company has goodwill of $289.9 million
and intangible assets totaling $7.7 million as of December 31, 2019, which have been allocated to the Nevada, Northern California,
Technology & Innovation, and HFF operating segments.
The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events
or circumstances indicate that the carrying value may not be recoverable. During the years ended December 31, 2019, 2018, and
2017, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was
necessary and, based on the Company's annual goodwill and intangibles impairment tests as of October 1 of each of these years,
it was determined that goodwill and intangible assets are not impaired.
The following is a summary of acquired intangible assets:
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in thousands)
Subject to amortization
Core deposit intangibles
$
14,647
$
7,284
$
7,363
$
14,647
$
5,737
$
8,910
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
(in thousands)
$
350
$
— $
350
$
350
$
— $
350
Not subject to amortization
Trade name
Deferred Tax Assets
Net deferred tax assets decreased $14.0 million to $18.0 million from December 31, 2018. This overall decrease in net deferred
tax assets was primarily the result of increases in the fair market value of AFS securities. In addition, there was a large decrease
to the overall estimated loss reserve, which was largely offset by increases to DTLs related to premises and equipment and income
associated with tax credits for lease pass-through transactions (50(d) income).
As of December 31, 2019, the Company has no deferred tax valuation allowance. As of December 31, 2018, the Company's
deferred tax valuation allowance of $2.4 million related to net capital loss carryovers.
Deposits
Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $22.8 billion at December
31, 2019 from $19.2 billion at December 31, 2018, an increase of $3.6 billion, or 18.9%. The increase in deposits is attributable
to an increase across all deposit types, with the largest increases in savings and money market deposits of $1.8 billion and non-
interest-bearing demand deposits of $1.1 billion from December 31, 2018.
WAB is a participant in the Promontory Interfinancial Network, a network that offers deposit placement services such as CDARS
and ICS, which offer products that qualify large deposits for FDIC insurance. At December 31, 2019, the Company has $407.7
million of CDARS deposits and $661.8 million of ICS deposits, compared to $322.9 million of CDARS deposits and $706.9
million of ICS deposits at December 31, 2018. At December 31, 2019 and 2018, the Company also has $1.1 billion and $718.2
million, respectively, of wholesale brokered deposits.
In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled $3.1 billion
and $2.3 billion at December 31, 2019 and 2018, respectively. The Company incurred $30.5 million and $18.0 million in deposit
related costs on these deposits during the year ended December 31, 2019 and 2018, respectively. These costs are reported in deposit
costs as part of non-interest expense. The increase in these costs relates to both an increase in deposits eligible for earnings credits,
along with higher average earnings credits paid during the first half of 2019.
50
The average balances and weighted average rates paid on deposits are presented below:
Year Ended December 31,
2019
2018
2017
Average
Balance
Rate
Average
Balance
Rate
Average
Balance
Rate
(dollars in thousands)
Interest-bearing transaction accounts
$
2,545,806
0.82% $
1,891,160
0.61% $
1,467,231
0.27%
Savings and money market accounts
Certificates of deposit
Total interest-bearing deposits
Non-interest-bearing demand deposits
8,125,832
2,117,177
12,788,815
8,246,232
1.18
1.98
1.24
—
6,501,241
1,748,675
10,141,076
7,712,791
0.85
1.37
0.89
—
6,208,057
1,560,896
9,236,184
6,788,783
0.42
0.76
0.45
—
Total deposits
$
21,035,047
0.75% $
17,853,867
0.51% $
16,024,967
0.26%
Certificates of Deposit of $100,000 or More
The table below discloses the remaining maturity for certificates of deposit of $100,000 or more:
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
Total
Other Borrowings
December 31,
2019
2018
(in thousands)
945,551
$
596,467
597,496
101,615
682,549
446,847
409,736
99,211
2,241,129
$
1,638,343
$
$
The Company from time to time utilizes short-term borrowed funds to support short-term liquidity needs generally created by
increased loan demand. The majority of these short-term borrowed funds consist of advances from the FHLB, Federal funds
purchased, and customer repurchase agreements. The Company’s borrowing capacity with the FHLB is determined based on
collateral pledged, generally consisting of securities and loans. In addition, the Company has borrowing capacity from other
sources, including Federal funds purchased and securities sold under agreements to repurchase. Federal funds purchased are
unsecured borrowings with other banks. Securities sold under agreements to repurchase are collateralized by securities and are
reflected at the amount of cash received in connection with the transaction, and may require additional collateral based on the fair
value of the underlying securities. At December 31, 2019, total short-term borrowed funds consist of customer repurchase
agreements of $16.7 million. At December 31, 2018, total short-term borrowed funds consisted of Federal funds purchased of
$256.0 million, FHLB overnight advances of $235.0 million, and customer repurchase agreements of $22.4 million.
51
Qualifying Debt
Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value
adjustments. At December 31, 2019, the carrying value of all subordinated debt issuances, which includes the fair value of related
hedges, was $319.2 million, compared to $299.4 million at December 31, 2018.
The junior subordinated debt has contractual balances and maturity dates as follows:
Name of Trust
At fair value
BankWest Nevada Capital Trust II
Intermountain First Statutory Trust I
First Independent Statutory Trust I
WAL Trust No. 1
WAL Statutory Trust No. 2
WAL Statutory Trust No. 3
Total contractual balance
FVO on junior subordinated debt
Junior subordinated debt, at fair value
At amortized cost
Bridge Capital Holdings Trust I
Bridge Capital Holdings Trust II
Total contractual balance
Purchase accounting adjustment, net of accretion (1)
Junior subordinated debt, at amortized cost
Total junior subordinated debt
Maturity
2019
2018
December 31,
2033
2034
2035
2036
2037
2037
2035
2036
(in thousands)
$
15,464
$
10,310
7,217
20,619
5,155
7,732
66,497
(4,812)
61,685
12,372
5,155
17,527
(4,845)
12,682
74,367
$
$
$
$
$
$
$
$
15,464
10,310
7,217
20,619
5,155
7,732
66,497
(17,812)
48,685
12,372
5,155
17,527
(5,155)
12,372
61,057
(1)
The purchase accounting adjustment is being amortized over the remaining life of the trusts, pursuant to accounting guidance.
The weighted average interest rate of all junior subordinated debt as of December 31, 2019 was 4.25%, which is three-month
LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 5.15% at December 31, 2018.
52
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could
have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance sheet items (discussed in "Note 15. Commitments and
Contingencies" to the Consolidated Financial Statements) as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
As of December 31, 2019 and 2018, the Company and the Bank's capital ratios exceeded the well-capitalized thresholds, as defined
by the banking agencies. The actual capital amounts and ratios for the Company and the Bank are presented in the following tables
as of the periods indicated:
Total
Capital
Tier 1
Capital
Risk-
Weighted
Assets
Tangible
Average
Assets
Total
Capital
Ratio
Tier 1
Capital
Ratio
Tier 1
Leverage
Ratio
Common
Equity
Tier 1
(dollars in thousands)
December 31, 2019
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
December 31, 2018
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
$ 3,257,874
$ 2,775,390
$ 25,390,142
$ 26,110,275
12.8%
10.9%
10.6%
10.6%
3,030,301
2,703,549
25,452,261
26,134,431
11.9
10.0
8.0
10.6
8.0
6.0
10.3
5.0
4.0
10.6
6.5
4.5
$ 2,897,356
$ 2,431,320
$ 21,983,976
$ 22,204,799
13.2 %
11.1 %
10.9 %
10.7 %
2,628,650
2,317,745
22,040,765
22,209,700
11.9
10.0
8.0
10.5
8.0
6.0
10.4
5.0
4.0
10.5
6.5
4.5
Common Stock Repurchase Plan
On December 12, 2018, the Company announced that it had adopted a common stock repurchase plan, pursuant to which the
Company was authorized to repurchase up to $250 million of its shares of common stock through December 31, 2019. The Company
had $94.3 million in authorized common stock repurchase capacity that expired under the original program as of December 31,
2019. The Company's common stock repurchase program was renewed through December 2020, authorizing the Company to
repurchase up to an additional $250.0 million of its outstanding common stock.
Contractual Obligations and Off-Balance Sheet Arrangements
The Company enters into contracts for services in the ordinary course of business that may require payment for services to be
provided in the future and may contain penalty clauses for early termination of the contracts. To meet the financing needs of
customers, the Company has financial instruments with off-balance sheet risk, including commitments to extend credit and standby
letters of credit. The Company has also committed to irrevocably and unconditionally guarantee the payments or distributions
with respect to the holders of preferred securities of the Company's eight statutory business trusts to the extent that the trusts have
not made such payments or distributions, including: 1) accrued and unpaid distributions; 2) the redemption price; and 3) upon a
dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount
of assets of the trust remaining available for distribution. The Company does not believe that these off-balance sheet arrangements
have or are reasonably likely to have a material effect on its financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such
arrangements will not have a future effect.
53
The following table sets forth the Company's significant contractual obligations as of December 31, 2019:
Time deposit maturities
Qualifying debt
Operating lease obligations
Purchase obligations
Total
Payments Due by Period
Total
Less Than 1
Year
1-3 Years
3-5 Years
After 5 Years
(in thousands)
$
2,376,976
$
2,259,182
$
113,190
$
4,604
$
409,024
90,145
103,303
—
12,369
42,683
—
19,637
49,301
—
18,067
11,319
—
409,024
40,072
—
$
2,979,448
$
2,314,234
$
182,128
$
33,990
$
449,096
Purchase obligations primarily relate to contracts for software licensing, maintenance, and outsourced service providers.
Off-balance sheet commitments associated with outstanding letters of credit, commitments to extend credit, and credit card
guarantees as of December 31, 2019 are summarized below. Since commitments associated with letters of credit and commitments
to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Amount of Commitment Expiration per Period
Total
Amounts
Committed
Less Than 1
Year
1-3 Years
3-5 Years
After 5 Years
(in thousands)
Commitments to extend credit
Credit card commitments and financial guarantees
Letters of credit
Total
$
8,348,421
$
2,873,303
$
3,170,848
$
1,299,506
$
1,004,764
302,909
175,778
302,909
156,375
—
18,786
—
617
—
—
$
8,827,108
$
3,332,587
$
3,189,634
$
1,300,123
$
1,004,764
The following table sets forth certain information regarding short-term borrowings as of December 31, 2019 and the respective
prior year-end balances for customer repurchase agreements, FHLB advances, and Federal funds purchased:
Customer Repurchase Accounts:
Maximum month-end balance
Balance at end of year
Average balance
Federal Funds Purchased
Maximum month-end balance
Balance at end of year
Average balance
FHLB Advances:
Maximum month-end balance
Balance at end of year
Average balance
Total Short-Term Borrowed Funds
Weighted average interest rate at end of year
Weighted average interest rate during year
December 31,
2019
2018
2017
(dollars in thousands)
$
$
20,288
16,675
17,182
335,000
—
67,851
380,000
—
49,589
16,675
$
$
30,559
22,411
24,421
256,000
256,000
20,542
625,000
235,000
215,699
$
513,411
$
0.15%
1.99
2.46%
1.73
41,153
26,017
33,842
—
—
—
440,000
390,000
29,781
416,017
1.33%
0.53
54
Critical Accounting Policies
The Notes to the Consolidated Financial Statements contain a discussion of the Company's significant accounting policies, including
information regarding recently issued accounting pronouncements, adoption of such policies, and the related impact of their
adoption. The Company believes that certain of these policies, along with various estimates that it is required to make in recording
its financial transactions, are important to have a complete understanding of the Company's financial position. In addition, these
estimates require management to make complex and subjective judgments, many of which include matters with a high degree of
uncertainty. The following is a summary of these critical accounting policies and significant estimates.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers, for which the Company must maintain an adequate
allowance for credit losses. The allowance for credit losses is established through a provision for credit losses recorded 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 estimated 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 allowance consists of specific and general components. The specific allowance applies to impaired loans. For impaired
collateral dependent loans, the reserve is calculated based on the collateral value, net of estimated disposition costs. Generally,
the Company obtains independent collateral valuation analysis for each loan over a specified dollar threshold every 12 months.
Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest
rate.
The general allowance covers all non-impaired loans and incorporates several quantitative and qualitative factors, which are used
for all of the Company's portfolio segments. Quantitative factors include company-specific, 10-year historical net charge-offs
stratified by loans with similar characteristics. Qualitative factors include: 1) levels of and trends in delinquencies and impaired
loans; 2) levels of and trends in charge-offs and recoveries; 3) trends in volume and terms of loans; 4) changes in underwriting
standards or lending policies; 5) experience, ability, depth of lending staff; 6) national and local economic trends and conditions;
7) changes in credit concentrations; 8) out-of-market exposures; 9) changes in quality of loan review system; and 10) changes in
the value of underlying collateral.
Due to the credit concentration of the Company's loan portfolio in real estate secured loans, the value of collateral is heavily
dependent on real estate values in Arizona, Nevada, and California. 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, regulators, as an integral part of their examination processes, periodically review the Bank's allowance
for credit losses, and may require the Bank to make additions to the allowance based on their judgment about information available
to them at the time of their examination. 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.
Income taxes
The Company’s income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect
management’s best estimate of current and future taxes to be paid. The Company is subject to federal and state income taxes in
the United States. Significant judgments and estimates are required in the determination of the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts
in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating the Company's ability
to recover its deferred tax assets in the jurisdictions from which they arise, all available positive and negative evidence is considered,
including scheduled reversals of deferred tax liabilities, tax planning strategies, projected future taxable income, and recent
operating results. The assumptions about future taxable income require the use of significant judgment and are consistent with the
plans and estimates used to manage the underlying business.
Liquidity
Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business
operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity
management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate
fluctuations in asset and liability levels due to changes in the Company's business operations or unanticipated events.
55
The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors,
creditors, and regulators. The Company's liquidity, represented by cash and amounts due from banks, federal funds sold, and non-
pledged marketable securities, is a result of the Company's operating, investing, and financing activities and related cash flows.
In order to ensure that funds are available when necessary, on at least a quarterly basis, the Company projects the amount of funds
that will be required over a 12-month period and it also strives to maintain relationships with a diversified customer base. Liquidity
requirements can also be met through short-term borrowings or the disposition of short-term assets.
The following table presents the available and outstanding balances on the Company's lines of credit:
Unsecured fed funds credit lines at correspondent banks
$
1,215.0
$
—
In addition to lines of credit, the Company has borrowing capacity with the FHLB and FRB from pledged loans and securities.
The borrowing capacity, outstanding borrowings, and available credit as of December 31, 2019 are presented in the following
table:
December 31, 2019
Available
Balance
Outstanding
Balance
(in millions)
FHLB:
Borrowing capacity
Outstanding borrowings
Letters of credit
Total available credit
FRB:
Borrowing capacity
Outstanding borrowings
Total available credit
December 31, 2019
(in millions)
$
$
$
$
4,483.4
—
21.0
4,462.4
1,149.4
—
1,149.4
The Company has a formal liquidity policy and, in the opinion of management, its liquid assets are considered adequate to meet
cash flow needs for loan funding and deposit cash withdrawals for the next 90-120 days. At December 31, 2019, there is $2.9
billion in liquid assets, comprised of $434.6 million in cash and cash equivalents and $2.5 billion in unpledged marketable securities.
At December 31, 2018, the Company maintained $3.0 billion in liquid assets, comprised of $498.6 million of cash, cash equivalents,
and money market investments, and $2.5 billion in unpledged marketable securities.
The Parent maintains liquidity that would be sufficient to fund its operations and certain non-bank affiliate operations for an
extended period should funding from normal sources be disrupted. Since deposits are taken by WAB and not by the Parent, Parent
liquidity is not dependent on the Bank's deposit balances. In the Company's analysis of Parent liquidity, it is assumed that the
Parent is unable to generate funds from additional debt or equity issuances, receives no dividend income from subsidiaries and
does not pay dividends to stockholders, while continuing to make nondiscretionary payments needed to maintain operations and
repayment of contractual principal and interest payments owed by the Parent and affiliated companies. Under this scenario, the
amount of time the Parent and its non-bank subsidiaries can operate and meet all obligations before the current liquid assets are
exhausted is considered as part of the Parent liquidity analysis. Management believes the Parent maintains adequate liquidity
capacity to operate without additional funding from new sources for over 12 months.
WAB maintains sufficient funding capacity to address large increases in funding requirements, such as deposit outflows. This
capacity is comprised of liquidity derived from a reduction in asset levels and various secured funding sources. On a long-term
basis, the Company’s liquidity will be met by changing the relative distribution of its asset portfolios (for example, by reducing
investment or loan volumes, or selling or encumbering assets). Further, the Company can increase liquidity by soliciting higher
levels of deposit accounts through promotional activities and/or borrowing from the FHLB of San Francisco and the FRB. At
December 31, 2019, the Company's long-term liquidity needs primarily relate to funds required to support loan originations,
commitments, and deposit withdrawals, which can be met by cash flows from investment payments and maturities, and investment
sales, if necessary.
56
The Company’s liquidity is comprised of three primary classifications: 1) cash flows provided by operating activities; 2) cash
flows used in investing activities; and 3) cash flows provided by financing activities. Net cash provided by or used in operating
activities consists primarily of net income, adjusted for changes in certain other asset and liability accounts and certain non-cash
income and expense items, such as the provision for credit losses, investment and other amortization and depreciation. For the
years ended December 31, 2019, 2018, and 2017, net cash provided by operating activities was $717.8 million, $541.0 million,
and $383.8 million, respectively.
The Company's primary investing activities are the origination of real estate and commercial loans, the collection of repayments
of these loans, and the purchase and sale of securities. The Company's net cash provided by and used in investing activities has
been primarily influenced by its loan and securities activities. The net increase in loans for the years ended December 31, 2019,
2018, and 2017, was $3.4 billion, $2.6 billion, and $1.9 billion, respectively. The net increase in investment securities for the years
ended December 31, 2019, 2018, and 2017 was $109.5 million, $12.4 million, and $1.1 billion, respectively.
Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the years ended
December 31, 2019, 2018, and 2017, net deposits increased $3.6 billion, $2.2 billion, and $2.4 billion, respectively.
Fluctuations in core deposit levels may increase the Company's need for liquidity as certificates of deposit mature or are withdrawn
before maturity, and as non-maturity deposits, such as checking and savings account balances, are withdrawn. Additionally, the
Company is exposed to the risk that customers with large deposit balances will withdraw all or a portion of such deposits, due in
part to the FDIC limitations on the amount of insurance coverage provided to depositors. To mitigate the uninsured deposit risk,
the Company participates in the CDARS and ICS programs, which allow an individual customer to invest up to $50.0 million and
$120.0 million, respectively, through one participating financial institution, or a combined total of $185.0 million per individual
customer, with the entire amount being covered by FDIC insurance. As of December 31, 2019, the Company has $407.7 million of
CDARS and $661.8 million of ICS deposits.
As of December 31, 2019, the Company has $1.1 billion of wholesale brokered deposits outstanding. Brokered deposits are
generally considered to be deposits that have been received from a third party who is engaged in the business of placing deposits
on behalf of others. A traditional deposit broker will direct deposits to the banking institution offering the highest interest rate
available. Federal banking laws and regulations place restrictions on depository institutions regarding brokered deposits because
of the general concern that these deposits are not relationship based and are at a greater risk of being withdrawn and placed on
deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits
in significant amounts.
Federal and state banking regulations place certain restrictions on dividends paid. The total amount of dividends that may be paid
at any date is generally limited to the retained earnings of the bank. Dividends paid by WAB to the Parent would be prohibited if
the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. During the year
ended December 31, 2019, WAB and LVSP paid dividends to the Parent of $130.0 million and $4.0 million, respectively. Subsequent
to December 31, 2019, WAB paid dividends to the Parent of $35.0 million.
Recent accounting pronouncements
See "Note 1. Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements contained in Item
8. Financial Statements and Supplementary Data for information on recent and recently adopted accounting pronouncements and
their expected impact, if any, on the Company's Consolidated Financial Statements.
57
SUPERVISION AND REGULATION
WAL, WAB, and certain of its non-banking subsidiaries are subject to comprehensive regulation under federal and state laws. The
regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, the DIF,
and the U.S. banking system as a whole. This system is not designed to protect equity investors in bank holding companies such
as WAL.
Set forth below is a summary of the significant laws and regulations applicable to WAL and its subsidiaries. The description that
follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such
statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory
agencies. A change in any of the statutes, regulations, or regulatory policies applicable to WAL and its subsidiaries could have a
material effect on the results of the Company.
Overview
WAL is a separate and distinct legal entity from WAB and its other subsidiaries. As a registered bank holding company, WAL is
subject to inspection, examination, and supervision by the FRB, and is regulated under the BHCA. WAL is also under the jurisdiction
of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the
Exchange Act, as administered by the SEC. The Company’s common stock is listed on the NYSE under the trading symbol “WAL”
and the Company is subject to the rules of the NYSE for listed companies. The Company is a financial institution holding company
within the meaning of Arizona law. WAL provides a full spectrum of deposit, lending, treasury management, and online banking
products and services through WAB, its wholly-owned banking subsidiary. WAB is an Arizona chartered bank and a member of
the Federal Reserve System. WAB operates the following full-service banking divisions: ABA, BON, Bridge, FIB, and TPB. WAB
is subject to the supervision of, and to regular examination by, the Arizona Department of Financial Institutions, the FRB as its
primary federal regulator, and the FDIC as its deposit insurer. WAB's deposits are insured by the FDIC up to the applicable deposit
insurance limits in accordance with FDIC laws and regulations. The Company also serves business customers through a national
platform of specialized financial services providers.
WAL and WAB are also supervised by the CFPB for compliance with federal consumer financial protection laws. The Company’s
non-bank subsidiaries are subject to federal and state laws and regulations, including regulations of the FRB.
The Dodd-Frank Act significantly changed the financial regulatory regime in the United States. Since the enactment of the Dodd-
Frank Act, U.S. banks and financial services firms have been subject to enhanced regulation and oversight. Several provisions of
the Dodd-Frank Act are subject to further rulemaking, guidance, and interpretation by the federal banking agencies. While the
current administration and its appointees to the federal banking agencies have expressed interest in reviewing, revising, and perhaps
repealing portions of the Dodd-Frank Act and certain of its implementing regulations, is not clear whether any such legislation or
regulatory changes will be enacted or, if enacted, what the effect on the Company would be.
EGRRCPA
On May 24, 2018, the President signed into law the EGRRCPA which, among other things, amended certain provisions of the
Dodd-Frank Act. The EGRRCPA provides limited regulatory relief to certain financial institutions while preserving the existing
framework under which U.S. financial institutions are regulated. The EGRRCPA relieves bank holding companies with less than
$100 billion in assets, such as the Company, from the enhanced prudential standards imposed under Section 165 of the Dodd-
Frank Act (including, but not limited to, resolution planning and enhanced liquidity and risk management requirements). In addition
to amending the Dodd-Frank Act, the EGRRCPA also includes certain additional banking-related provisions, consumer protection
provisions and securities law-related provisions. While many of the EGRRCPA’s changes have been implemented through rules
adopted by federal agencies, the Company expects to continue to evaluate the potential impact of the EGRRCPA as it is further
implemented.
Bank Holding Company Regulation
WAL is a bank holding company as defined under the BHCA. The BHCA generally limits the business of bank holding companies
to banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking
as to be a proper incident thereto. Business activities that have been determined to be related to banking, and therefore appropriate
for bank holding companies and their affiliates to engage in, include securities brokerage services, investment advisory services,
fiduciary services, and certain management advisory and data processing services, among others. Bank holding companies that
have elected to become financial holding companies may engage in any activity, or acquire and retain the shares of a company
engaged in any activity that is either: (i) financial in nature or incidental to such financial activity (as determined by the FRB in
consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial
risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB).
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Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant
banking investments.
Mergers and Acquisitions
The BHCA, the Bank Merger Act, and other federal and state statutes regulate the direct and indirect acquisition of depository
institutions. The BHCA requires prior FRB approval for a bank holding company to acquire, directly or indirectly, 5% or more of
any class of voting securities of a commercial bank or its parent holding company and for a company, other than a bank holding
company, to acquire 25% or more of any class of voting securities of a bank or bank holding company. Under the Change in Bank
Control Act, any person, including a company, may not acquire, directly or indirectly, control of a bank without providing 60 days’
prior notice and receiving a non-objection from the appropriate federal banking agency.
Under the Bank Merger Act, the prior approval of the appropriate federal banking agency is required for insured depository
institutions to merge or enter into purchase and assumption transactions. In reviewing applications seeking approval of merger
and purchase and assumption transactions, the federal banking agencies will consider, among other things, the competitive effect
and public benefits of the transactions, the capital position of the combined banking organization, the applicant's performance
record under the CRA, and the effectiveness of the subject organizations in combating money laundering activities. For further
information relating to the CRA, see the section titled “Community Reinvestment Act and Fair Lending Laws.”
Under Section 6-142 of the Arizona Revised Statutes, no person may acquire control of a company that controls an Arizona bank
without the prior approval of the Arizona Superintendent of Financial Institutions, or Arizona Superintendent. A person who has
the power to vote 15% or more of the voting stock of a controlling company is presumed to control the company.
Enhanced Prudential Standards
Section 165 of the Dodd-Frank Act imposes enhanced prudential standards on larger banking organizations, with certain of these
standards applicable to banking organizations over $10 billion, including WAL and WAB, as of the quarter ending June 30, 2014.
In October 2012, the FDIC, the OCC, and the FRB issued separate but similar rules requiring covered banks and bank holding
companies with $10 billion to $50 billion in total consolidated assets to conduct an annual company-run stress test. WAL and
WAB conducted a company-run capital stress test as required by the Dodd-Frank Act in 2017 and provided the results to the FRB.
WAL found the Company would have sufficient capital to maintain regulatory capital levels throughout an economic downturn.
As a result of passage of the EGRRCPA, bank holding companies with less than $100 billion in assets, such as the Company, are
exempt from the enhanced prudential standards imposed under Section 165 of the Dodd-Frank Act (including, but not limited to,
the resolution planning and enhanced liquidity and risk management requirements therein). Notwithstanding these changes, the
capital planning and risk management practices of the Company and the Bank will continue to be reviewed through the regular
supervisory processes of the FRB.
In February 2014, the FRB issued a rule further implementing the enhanced prudential standards required by the Dodd-Frank Act.
Although most of the standards apply only to bank holding companies with more than $50 billion in assets, as directed by the
Dodd-Frank Act, the rule contains certain standards that apply to bank holding companies with more than $10 billion in assets,
including a requirement to establish a risk committee of the Company's BOD to manage enterprise-wide risk. The Company meets
these requirements. The EGRRCPA increased the asset threshold for requiring a bank holding company to establish a separate
risk committee of independent directors from $10 billion to $50 billion. Notwithstanding this change, the Company has retained
its separate risk committee of independent directors.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as the
Company and WAB, from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain covered funds, subject
to certain limited exceptions. Under the Volcker Rule, the term "covered funds" is defined as any issuer that would be an investment
company under the Investment Company Act but for the exemption in Section 3(c)(1) or 3(c)(7) of that Act, which includes CLO
and CDO securities. There are also several exemptions from the definition of covered fund, including, among other things, loan
securitizations, joint ventures, certain types of foreign funds, entities issuing asset-backed commercial paper, and registered
investment companies. Further, the final rules permit banking entities, subject to certain conditions and limitations, to invest in
or sponsor a covered fund in connection with: (1) organizing and offering the covered fund; (2) certain risk-mitigating hedging
activities; and (3) de minimis investments in covered funds. The EGRRCPA and subsequent promulgation of inter-agency final
rules have aimed at simplifying and tailoring requirements related to the Volcker Rule, including by eliminating collection of
certain metrics and reducing the compliance burdens associated with other metrics for banks with less than $20 billion in average
trading assets and liabilities. Compliance with the Volcker Rule was required by July 21, 2017 and the Company believes it is
fully compliant.
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Dividends
Historically, the Company has not declared or paid cash dividends on its common stock, electing instead to retain earnings for
growth. On July 30, 2019, WAL's BOD authorized the payment of regular quarterly dividends, declaring the Company's first
quarterly cash dividend of $0.25 per share of common stock, which was paid on August 30, 2019. Whether the Company continues
to pay quarterly dividends and the amount of any such dividends will be at the discretion of WAL's BOD and will depend on the
Company’s earnings, financial condition, results of operations, business prospects, capital requirements, regulatory restrictions,
contractual restrictions, and other factors that the BOD may deem relevant.
The Company’s ability to pay dividends is subject to the regulatory authority of the FRB. The supervisory concern of the FRB
focuses on a bank holding company’s capital position, its ability to meet its financial obligations as they come due, and its capacity
to act as a source of financial strength to its insured depository institution subsidiaries. In addition, FRB policy discourages the
payment of dividends by a bank holding company that is not supported by current operating earnings.
As a Delaware corporation, the Company is also subject to limitations under Delaware law on the payment of dividends. Under
the Delaware General Corporation Law, dividends may only be paid out of surplus or out of net profits for the year in which the
dividend is declared or the preceding year, and no dividends may be paid on common stock at any time during which the capital
of outstanding preferred stock or preference stock exceeds the Company's net assets.
From time to time, the Company may become a party to financing agreements and other contractual obligations that have the
effect of limiting or prohibiting the declaration or payment of dividends under certain circumstances. Holding company expenses
and obligations with respect to its outstanding trust preferred securities and corresponding subordinated debt also may limit or
impair the Company’s ability to declare and pay dividends.
Since the Company has no significant assets other than the voting stock of its subsidiaries, it currently depends on dividends from
WAB and, to a lesser extent, its non-bank subsidiaries, for a substantial portion of its revenue and as the primary sources of its
cash flow. The ability of a state member bank, such as WAB, to pay cash dividends is restricted by the FRB and the State of
Arizona. The FRB’s Regulation H states that a member bank may not declare or pay a dividend if the total of all dividends declared
during that calendar year exceed the bank’s net income during that calendar year and the retained net income of the prior two
years. Further, without receiving prior approval from both the FRB and two-thirds of its shareholders, a bank cannot declare or
pay a dividend that would exceed its undivided profits or withdraw any portion of its permanent capital.
Under Section 6-187 of the Arizona Revised Statutes, WAB may pay dividends on the same basis as any other Arizona corporation,
except that cash dividends paid out of capital surplus require the prior approval of the Arizona Superintendent. Under Section
10-640 of the Arizona Revised Statutes, a corporation may not make a distribution to stockholders if to do so would render the
corporation insolvent or unable to pay its debts as they become due. However, an Arizona bank may not declare a non-stock
dividend out of capital surplus without the approval of the Arizona Superintendent.
Federal Reserve System
As a member of the Federal Reserve System, WAB is required by law to maintain reserves against its transaction deposits. The
reserves must be held in cash or with the FRB. Banks are permitted to meet this requirement by maintaining the specified amount
as an average balance over a two-week period. The total of reserve balances was approximately $164.1 million and $145.9 million as
of December 31, 2019 and 2018, respectively.
Source of Strength Doctrine
FRB policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks.
Section 616 of the Dodd-Frank Act codified the requirement that bank holding companies act as a source of financial strength.
As a result, the Company is expected to commit resources to support WAB, including at times when the Company may not be in
a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The U.S. Bankruptcy Code
provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal
banking agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of
payment.
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Capital Adequacy and Prompt Corrective Action
The Capital Rules established a comprehensive capital framework for U.S. banking organizations. The Capital Rules generally
implement the Basel Committee's Basel III final capital framework for strengthening international capital standards. The Capital
Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in
banking institutions’ regulatory capital ratios. The Capital Rules also address asset risk weights and other matters affecting the
denominator in banking institutions’ regulatory capital ratios and replaced the existing general risk-weighting approach with a
more risk-sensitive approach.
The Capital Rules: (i) include CET1 and the related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier
1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that
most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv)
expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules,
for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock,
and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in
each case, subject to the Capital Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum capital ratios are as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called “leverage ratio”).
The Capital Rules also include a “capital conservation buffer,” composed entirely of CET1, in addition to these minimum risk-
weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face
constraints on dividends, equity, and other capital instrument repurchases and compensation based on the amount of the shortfall.
The Capital Rules became fully phased-in on January 1, 2019. Thus, the capital standards applicable to the Company include an
additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation
buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total
capital to risk-weighted assets of at least 10.5%.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement
that mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net
operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent
that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. The Capital Rules
further prescribe that the effects of accumulated other comprehensive income or loss items reported as a component of stockholders’
equity be included in CET1 capital; however, non-advanced approaches banking organizations may make a one-time permanent
election to exclude these items. The Company, as a non-advanced approaches institution, has made this one-time election.
The Capital Rules also preclude certain hybrid securities, such as trust preferred securities, issued on or after May 19, 2010 from
inclusion in bank holding companies’ Tier 1 capital. The Company has used trust preferred securities in the past as a tool for raising
additional Tier 1 capital and otherwise improving its regulatory capital ratios. Although the Company may continue to include its
existing trust preferred securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1 capital going forward
may limit the Company’s ability to raise capital in the future.
The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending
on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity
exposures, and resulting in higher risk weights for a variety of asset classes.
In September 2017, the federal banking agencies proposed simplifying the Capital Rules. On July 9, 2019, the federal banking
agencies adopted a final rule (replacing a substantially similar interim rule) to simplify several requirements of the regulatory
capital rules for non-advanced approaches institutions, such as the Company. The final rule simplifies the capital treatment for
mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions,
and minority interest. The final rule will be effective as of April 1, 2020 for the amendments to simplify the capital rules.
Management believes the Company is in compliance, and will continue to be in compliance, with the targeted capital ratios.
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Prompt Corrective Action and Safety and Soundness
Pursuant to Section 38 of the FDIA, federal banking agencies are required to take “prompt corrective action” should a depository
institution fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution
is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits,
restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an
insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration
plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon
its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though
it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
For purposes of prompt corrective action, to be: (i) well-capitalized, a bank must have a total risk based capital ratio of at least
10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio
of at least 5%; (ii) adequately capitalized, a bank must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital
ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized,
a bank would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk
based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, a bank would
have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital
ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%; (v) critically undercapitalized, a bank would have a ratio of
tangible equity to total assets that is less than or equal to 2%.
Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of severity by
the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation,
condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement
actions may include: (i) the issuance of directives to increase capital; (ii) the issuance of formal and informal agreements; (iii)
the imposition of civil monetary penalties; (iv) the issuance of a cease and desist order that can be judicially enforced; (v) the
issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; (vi) the termination
of the bank’s deposit insurance; (vii) the appointment of a conservator or receiver for the bank; and (viii) the enforcement of such
actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such
equitable relief was not granted.
Transactions with Affiliates and Insiders
Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B
of the FRA and implementing Regulation W. In a bank holding company context, at a minimum, the parent holding company of
a bank, and any companies which are controlled by such parent holding company, are affiliates of the bank. Generally, Sections
23A and 23B of the FRA are intended to protect insured depository institutions from losses arising from transactions with non-
insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate
and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms consistent with safe and sound
banking practices.
Further, Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal
stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other
outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified
amounts must receive the prior approval of the BOD. Further, under Section 22(h) of the FRA, loans to directors, executive officers,
and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons,
except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available
to the bank's employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional
limitations on loans to executive officers.
Lending Limits
In addition to the requirements set forth above, state banking law generally limits the amount of funds that a state-chartered bank
may lend to a single borrower. Under Section 6-352 of the Arizona Revised Statutes, the obligations of one borrower to a bank
may not exceed 20% of the bank’s capital, plus an additional 10% of its capital if the additional amounts are fully secured by
readily marketable collateral.
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Brokered Deposits
Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept, renew or roll over any brokered
deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” However, as a result of the EGRRCPA,
the FDIC has undertaken a comprehensive review of its regulatory approach to brokered deposits, including reciprocal deposits,
and interest rate caps applicable to banks that are less than “well capitalized.” On December 12, 2019, the FDIC issued a notice
of proposed rulemaking to modernize its brokered deposit regulations. At this time, it is difficult to predict what changes, if any,
to the brokered deposit regulations will actually be implemented or the effect of such changes on the Bank.
Consumer Protection and CFPB Supervision
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent agency
charged with responsibility for implementing, enforcing, and examining compliance with federal consumer financial protection
laws. The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various
sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Fair Debt Collection Procedures Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement
Practices Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which is part of the Dodd-Frank
Act. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial
products and potential enforcement actions could also adversely affect the Company’s business, financial condition, or operations.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative
expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured,
non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such
insured depository institution.
Federal Deposit Insurance
Substantially all of the deposits of WAB are insured up to applicable limits by the FDIC’s DIF. The basic limit on FDIC deposit
insurance is $250,000 per depositor. WAB is subject to deposit insurance assessments to maintain the DIF.
The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account
a bank's CAMELS rating. The risk matrix utilizes different risk categories distinguished by capital levels and supervisory ratings.
As a result of the Dodd-Frank Act, the base for insurance assessments is now consolidated average assets less average tangible
equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. WAB is
classified as, and subject to the scorecard for, a large and highly complex institution to determine its total base assessment rate.
The Dodd-Frank Act requires that the FDIC raise the minimum reserve ratio of the DIF from 1.15% to 1.35%, and that the FDIC
offset the effect of this increase on insured depository institutions with total consolidated assets of less than $10 billion. In March
2016, the FDIC finalized a rule to impose a surcharge of 4.5 cents per $100 of their assessment base on deposit insurance assessment
rates paid by insured depository institutions with total consolidated assets of more than $10 billion. As of June 30, 2016, the
minimum reserve ratio reached 1.17% and as such, WAB was subject to the surcharge beginning July 1, 2016. At September 30,
2018, the reserve ratio reached 1.36%, exceeding the statutorily required minimum. As a result, WAB was no longer subject to
the surcharge as of September 30, 2018. The FDIC also has authority to further increase deposit insurance assessments. FDIC
deposit insurance expense also includes FICO assessments related to outstanding FICO bonds. These assessments will continue
until the FICO bonds mature, with such maturities beginning in 2017 and continuing through 2019.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The Company’s management is not aware of any practice, condition, or violation that might
lead to the termination of its deposit insurance.
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Financial Privacy and Data Security
The Company is subject to federal laws, including the GLBA, and certain state laws containing consumer privacy protection
provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about
consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-
affiliated institutions. These provisions require notice of privacy policies to consumers and, in some circumstances, allow consumers
to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in”
authorizations.
For example, in August 2018, the CFPB published its final rule to update Regulation P pursuant to the amended GLBA. Under
this rule, certain qualifying financial institutions are not required to provide annual privacy notices to customers. To qualify, a
financial institution must not share nonpublic personal information about customers except as described in certain statutory
exceptions that do not trigger a customer’s statutory opt-out right. In addition, the financial institution must not have changed its
disclosure policies and practices from those disclosed in its most recent privacy notice. The rule sets forth timing requirements
for delivery of annual privacy notices in the event that a financial institution that qualified for the annual notice exemption later
changes its policies or practices in such a way that it no longer qualifies for the exemption.
The GLBA also requires that financial institutions implement comprehensive written information security programs that include
administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance
issued under the GLBA and certain state laws, financial institutions are required to notify customers of security breaches that result
in unauthorized access to their nonpublic personal information.
For example, under California law, every business that owns or licenses personal information about a California resident must
maintain reasonable security procedures and policies to protect that information and comply with specific requirements relating
to the destruction of records containing personal information and disclosure of breaches to customers, and restrictions on the use
of customer information unless the customer "opts in." Other states, including Arizona and Nevada where WAB has branches,
may also have applicable laws requiring businesses that retain consumer personal information to develop reasonable security
policies and procedures, notify consumers of a security breach, or provide disclosures about the use and sharing of consumer
personal information.
The federal banking agencies, including the FRB, through the Federal Financial Institutions Examination Council, have adopted
guidelines to encourage financial institutions to address cybersecurity risks and identify, assess, and mitigate these risks, both
internally and at critical third-party services providers. In October 2016, the federal bank regulatory agencies issued proposed
rules on enhanced cybersecurity risk management and resilience standards that would apply to very large financial institutions
and to services provided by third parties to these institutions. The comment period for these proposed rules has closed and a final
rule has not been published. Although the proposed rules would apply only to bank holding companies and banks with $50 billion
or more in total consolidated assets, these rules could influence the federal bank regulatory agencies’ expectations and supervisory
requirements for information security standards and cybersecurity programs of financial institutions with less than $50 billion in
total consolidated assets.
These laws and regulations impose compliance costs and create obligations and, in some cases, reporting obligations, and
compliance with these laws, regulations, and obligations require significant resources of WAL and WAB.
Community Reinvestment Act and Fair Lending Laws
WAB has a responsibility under the CRA to help meet the credit needs of its communities, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that it believes are best suited to its particular community,
consistent with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending
practices on the basis of characteristics specified in those statutes. WAB’s failure to comply with the provisions of the CRA could,
at a minimum, result in regulatory restrictions on its activities and the activities of the Company. WAB’s failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions. WAB received a rating of
“Satisfactory” in its most recent CRA examination, in January 2019.
On December 17, 2019, the OCC and the FDIC issued a joint notice of proposed rulemaking to modernize the regulations
implementing the CRA. While the proposed rule will not apply to WAB because its primary federal regulator is the FRB, it may
impact the overall environment as it relates to CRA compliance and portend future changes by the FRB. Under the rulemaking,
the federal banking agencies intend to: (i) clarify which activities qualify for CRA credit; (ii) update where activities count for
CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more
transparent, consistent, and timely CRA-related data collection, record keeping, and reporting. WAL and WAB expect to monitor
64
developments with respect to this rulemaking and assess the impact, if any, of changes to the CRA regulations proposed by the
federal banking agencies.
Federal Home Loan Bank of San Francisco
WAB is a member of the FHLB of San Francisco, which is one of 12 regional FHLBs that provide funding to their members to
support residential lending, as well as affordable housing and community development loans. Each FHLB serves as a reserve, or
central bank, for the members within its assigned region. Each FHLB makes loans to its members in accordance with policies and
procedures established by the board of directors of the FHLB. As a member, WAB must purchase and maintain stock in the FHLB
of San Francisco. At December 31, 2019, WAB’s total investment in FHLB stock was $17.3 million.
Incentive Compensation
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting
incentive-based payment arrangements at specified regulated entities, including the Company and WAB, with at least $1 billion
in total consolidated assets, that encourage inappropriate risks by providing an executive officer, employee, director, or principal
shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal
banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized.
If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is
structured.
The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation
at least every three years and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions.
WAL gives stockholders a non-binding vote on executive compensation annually.
Preventing Suspicious Activity
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers,
prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies.
Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement
agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to
complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold
correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures
to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering
concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The
primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these
provisions. The new Customer Due Diligence Rule, that was effective beginning May 11, 2018, clarified and strengthened the
existing obligations for identifying new and existing customers and explicitly included risk-based procedures for conducting
ongoing customer due diligence. All financial institutions also are required to establish internal anti-money laundering programs.
The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application
submitted by the financial institution under the Bank Merger Act. The Company has a Bank Secrecy Act and USA PATRIOT Act
Board-approved compliance program and engages in relatively few transactions with foreign financial institutions or foreign
persons.
The FCRA’s Red Flags Rule requires financial institutions with covered accounts (e.g., consumer bank accounts and loans) to
develop, implement, and administer an identity theft prevention program. This program must include reasonable policies and
procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such as inconsistencies in personal
information or changes in account activity.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others.
These are typically known as the OFAC rules based on their administration by the OFAC. The OFAC-administered sanctions
targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on
trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a
sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or
providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government
or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S.
jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot
be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions
could have serious legal and reputational consequences.
65
Future Legislative Initiatives
Federal and state legislatures may introduce legislation that will impact the financial services industry. In addition, federal banking
agencies may introduce regulatory initiatives that are likely to impact the financial services industry, generally. However it is not
clear whether such changes will be enacted or, if enacted, what their effect on the Company will be. New legislation could change
banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance
among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such
legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition
or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to WAL or any of its
subsidiaries could have a material effect on the business of the Company.
66
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency
exchange rates, commodity prices, and equity prices. The Company's market risk arises primarily from interest rate risk inherent
in its lending, investing, and deposit taking activities. To that end, management actively monitors and manages the Company's
interest rate risk exposure. The Company generally manages its interest rate sensitivity by evaluating re-pricing opportunities on
its earning assets to those on its funding liabilities.
Management uses various asset/liability strategies to manage the re-pricing characteristics of the Company's assets and liabilities,
all of which are designed to ensure that exposure to interest rate fluctuations is limited to within the Company's guidelines of
acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits and management of the
deployment of its securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their
funding sources.
Interest rate risk is addressed by the ALCO, which includes members of executive management, finance, and operations. ALCO
monitors interest rate risk by analyzing the potential impact on the net EVE and net interest income from potential changes in
interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The Company manages its
balance sheet in part to maintain the potential impact on EVE and net interest income within acceptable ranges despite changes
in interest rates.
The Company's exposure to interest rate risk is reviewed at least quarterly by the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine its change in both EVE and net interest income in the event of hypothetical
changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are
not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest
rate risk within Board-approved limits.
Net Interest Income Simulation. In order to measure interest rate risk at December 31, 2019, the Company uses a simulation model
to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference
between a baseline net interest income forecast using current yield curves that do not take into consideration any future anticipated
rate hikes, compared to forecasted net income resulting from an immediate parallel shift in rates upward or downward, along with
other scenarios directed by ALCO. The income simulation model includes various assumptions regarding the re-pricing
relationships for each of the Company's products. Many of the Company's assets are floating rate loans, which are assumed to re-
price immediately and, proportional to the change in market rates, depending on their contracted index, including the impact of
caps or floors. Some loans and investments contain contractual prepayment features (embedded options) and, accordingly, the
simulation model incorporates prepayment assumptions. The Company's non-term deposit products re-price concurrently with
interest rate changes taken by the Federal Open Market Committee.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes
the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors
that could impact the Company's results, including changes by management to mitigate interest rate changes or secondary factors,
such as changes to the Company's credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in
actual loan prepayment speeds that will differ from the market estimates incorporated in this analysis. Changes that vary significantly
from the modeled assumptions may have significant effects on the Company's actual net interest income.
This simulation model assesses the changes in net interest income that would occur in response to an instantaneous and sustained
increase or decrease (shock) in market interest rates. At December 31, 2019, the Company's net interest income exposure for the
next 12 months related to these hypothetical changes in market interest rates was within the Company's current guidelines.
67
Sensitivity of Net Interest Income
Interest Income
Interest Expense
Net Interest Income
% Change
Interest Income
Interest Expense
Net Interest Income
% Change
Parallel Shift Rate Scenario
(change in basis points from Base)
Down 100
Base
Up 100
Up 200
(in thousands)
$ 1,198,091
$
1,302,915
$
1,437,503
$
1,576,092
96,043
1,102,048
(3.8)%
157,552
222,366
287,172
1,145,363
1,215,137
1,288,920
6.1%
12.5%
Interest Rate Ramp Scenario
(change in basis points from Base)
Down 100
Base
Up 100
Up 200
(in thousands)
$ 1,253,569
$
1,302,915
$
1,359,077
$
1,421,736
127,741
1,125,828
(1.7)%
157,552
172,436
186,619
1,145,363
1,186,641
1,235,117
3.6%
7.8%
Economic Value of Equity. The Company measures the impact of market interest rate changes on the NPV of estimated cash flows
from its assets, liabilities, and off-balance sheet items, defined as EVE, using a simulation model. This simulation model assesses
the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous
and sustained increase or decrease (shock) in market interest rates.
At December 31, 2019, the Company's EVE exposure related to these hypothetical changes in market interest rates was within
the Company's current guidelines. The following table shows the Company's projected change in EVE for this set of rate shocks
at December 31, 2019:
Economic Value of Equity
Assets
Liabilities
Net Present Value
% Change
Interest Rate Scenario (change in basis points from Base)
Down 100
Base
Up 100
Up 200
Up 300
Up 400
(in thousands)
$ 27,618,706
$
27,087,840
$ 26,546,699
$ 26,026,259
$ 25,542,390
$ 25,085,162
22,634,719
4,983,987
(1.4)%
22,035,566
21,519,248
21,072,481
20,685,165
20,346,458
5,052,274
5,027,451
4,953,778
4,857,225
4,738,704
(0.5)%
(1.9)%
(3.9)%
(6.2)%
The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, asset prepayments, and deposit decay, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates.
Actual amounts may differ from the projections set forth above should market conditions vary from the underlying assumptions.
Derivative Contracts. In the normal course of business, the Company uses derivative instruments to meet the needs of its customers
and manage exposure to fluctuations in interest rates. The following table summarizes the aggregate notional amounts, market
values, and terms of the Company’s derivative positions as of December 31, 2019 and 2018:
Outstanding Derivatives Positions
2019
2018
December 31,
Notional
Net Value
Weighted Average
Term (Years)
Notional
Net Value
Weighted Average
Term (Years)
(dollars in thousands)
$
872,595
$
(53,667)
16.1
$
1,017,773
$
(42,477)
15.8
68
Item 8.
Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Supplementary Data included in this Annual Report is immediately
following the Index to Consolidated Financial Statements page to this Annual Report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
PAGE
70
72
73
75
76
77
79
69
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Western Alliance Bancorporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Western Alliance Bancorporation and Subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated
financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally
accepted in the United States of America.
in accordance with
the Public Company Accounting Oversight Board
We have also audited,
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013, and our report, dated March 2, 2020, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
the standards of
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Allowance for Credit Losses
As described in Notes 1 and 3 of the consolidated financial statements, the Company’s allowance for credit losses totaled $168
million as of December 31, 2019. The allowance for credit losses represents an amount considered adequate to absorb estimated
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 allowance for credit losses consists of two components: the specific allowance for impaired loans and the general allowance
for non-impaired loans. The general allowance is comprised of a quantitative reserve based on the Company’s historical charge-
off experience and a qualitative reserve based on management’s evaluation of several judgmental factors. The qualitative factors
evaluated by management include levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs
70
and recoveries; trends in volume and terms of loans; changes in underwriting standards and lending policies; experience, ability
and depth of lending staff; national and local economic trends and conditions; changes in credit concentrations; out-of-market
exposures; changes in quality of loan review system; and changes in the value of underlying collateral. The evaluation and
measurement of these qualitative factors requires management to apply a significant amount of judgment and involves a high
degree of estimation.
We identified the qualitative reserve of the allowance for credit losses as a critical audit matter because auditing the underlying
qualitative factors used in the qualitative reserve involved a high degree of auditor judgment given the high degree of subjectivity
exercised by management in developing the qualitative adjustment, which resulted in high estimation uncertainty.
Our audit procedures related to management’s evaluation and establishment of the qualitative reserve of the allowance for credit
losses include the following, among others:
• We obtained an understanding of the relevant controls related to the evaluation and establishment of the qualitative reserve
of the allowance for credit losses and tested such controls for design and operating effectiveness, including controls
related to management’s assessment and review of the qualitative factor changes and conclusions.
• We tested management’s process and significant judgments in the evaluation and establishment of the qualitative reserve
of the allowance for credit losses, which included:
Evaluating management’s considerations and data utilized as a basis for the adjustments relating to qualitative
reserve factors, as well as testing the completeness and accuracy of the underlying data.
Evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment
of the considerations and data utilized in the determination of qualitative general reserve factors and the resulting
qualitative component of the allowance for credit losses.
/s/ RSM US LLP
We have served as the Company’s auditor since 1994.
Phoenix, Arizona
March 2, 2020
71
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and due from banks
Interest-bearing deposits in other financial institutions
Cash, cash equivalents, and restricted cash
Money market investments
Investment securities - AFS, at fair value; amortized cost of $3,317,928 at December 31, 2019 and
$3,339,888 at December 31, 2018
Investment securities - HTM, at amortized cost; fair value of $516,261 at December 31, 2019 and $298,648
at December 31, 2018
Investment securities - equity
Investments in restricted stock, at cost
Loans - HFS
Loans, net of deferred loan fees and costs
Less: allowance for credit losses
Net loans held for investment
Premises and equipment, net
Operating lease right of use asset
Other assets acquired through foreclosure, net
Bank owned life insurance
Goodwill
Other intangible assets, net
Deferred tax assets, net
Investments in LIHTC and renewable energy
Other assets
Liabilities:
Deposits:
Total assets
Non-interest-bearing demand
Interest-bearing
Total deposits
Customer repurchase agreements
Other borrowings
Qualifying debt
Operating lease liability
Other liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock - par value $0.0001; 200,000,000 authorized; 104,527,544 shares issued at December 31,
2019 and 106,741,870 at December 31, 2018
Treasury stock, at cost (2,003,873 shares at December 31, 2019 and 1,793,231 shares at December 31, 2018)
Additional paid in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
(in thousands,
except shares and per share amounts)
$
185,977
$
248,619
434,596
—
180,053
318,519
498,572
7
3,346,310
3,276,988
$
$
485,107
138,701
66,509
21,803
21,101,493
(167,797)
20,933,696
125,838
72,558
13,850
174,046
289,895
7,713
18,025
409,365
283,936
302,905
115,061
66,132
—
17,710,629
(152,717)
17,557,912
119,474
—
17,924
170,145
289,895
9,260
31,990
369,648
283,573
26,821,948
$
23,109,486
8,537,905
$
14,258,588
22,796,493
16,675
—
393,563
78,112
520,357
23,805,200
10
(62,728)
1,374,141
25,008
1,680,317
3,016,748
7,456,141
11,721,306
19,177,447
22,411
491,000
360,458
—
444,436
20,495,752
10
(53,083)
1,417,724
(33,622)
1,282,705
2,613,734
$
26,821,948
$
23,109,486
See accompanying Notes to Consolidated Financial Statements.
72
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Year Ended December 31,
2019
2018
2017
(in thousands, except per share amounts)
Interest income:
Loans, including fees
Investment securities
Dividends
Other
Total interest income
Interest expense:
Deposits
Other borrowings
Qualifying debt
Other
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income:
Service charges and fees
Income from equity investments
Card income
Foreign currency income
Income from bank owned life insurance
Lending related income and gains (losses) on sale of loans, net
Gain (loss) on sales of investment securities, net
Fair value gain (loss) adjustments on assets measured at fair value, net
Other income
Total non-interest income
Non-interest expense:
Salaries and employee benefits
Legal, professional, and directors' fees
Occupancy
Deposit costs
Data processing
Insurance
Loan and repossessed asset expenses
Business development
Marketing
Card expense
Intangible amortization
Net loss (gain) on sales / valuations of repossessed and other assets
Other expense
Total non-interest expense
Income before provision for income taxes
Income tax expense
Net income
$
1,093,070
$
910,577
$
111,939
6,133
13,903
106,752
7,915
8,239
1,225,045
1,033,483
158,405
1,372
23,390
1,466
184,633
1,040,412
18,500
1,021,912
23,353
8,290
6,979
4,987
3,901
3,158
3,152
5,119
6,156
65,095
279,274
37,009
32,507
31,719
30,577
11,924
7,571
7,043
4,199
2,346
1,547
3,818
33,247
482,781
604,226
105,055
90,464
4,329
22,287
524
117,604
915,879
23,000
892,879
22,295
8,595
8,009
4,760
3,946
4,340
(7,656)
(3,611)
2,438
43,116
253,238
28,722
29,404
18,900
22,716
14,005
4,578
5,960
3,770
4,301
1,594
9
38,470
425,667
510,328
74,540
$
499,171
$
435,788
$
73
747,510
83,354
7,740
6,909
845,513
41,965
561
18,273
50
60,849
784,664
17,250
767,414
20,346
4,496
6,313
3,536
3,861
2,212
2,343
(1)
2,238
45,344
214,344
29,814
27,860
9,731
19,225
14,042
4,617
6,128
3,804
3,413
2,074
(80)
25,969
360,941
451,817
126,325
325,492
Earnings per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
Year Ended December 31,
2019
2018
2017
(in thousands, except per share amounts)
$
$
4.86
4.84
$
4.16
4.14
102,667
103,133
104,669
105,370
3.12
3.10
104,179
104,997
74
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), net:
Unrealized gain (loss) on AFS securities, net of tax effect of $(23,205), $13,354, and
$(3,973), respectively
Unrealized (loss) gain on SERP, net of tax effect of $138, $24, and $(79), respectively
Unrealized (loss) gain on junior subordinated debt, net of tax effect of $3,197,
$(1,857), and $2,220, respectively
Realized (gain) loss on sale of AFS securities included in income, net of tax effect of
$776, $(1,883), and $899, respectively
Net other comprehensive income (loss)
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
Year Ended December 31,
2019
2018
2017
(in thousands)
$
499,171
$
435,788
$
325,492
71,222
(412)
(9,804)
(2,376)
58,630
(40,808)
(77)
5,693
5,773
(29,419)
6,334
264
(3,604)
(1,444)
1,550
$
557,801
$
406,369
$
327,042
75
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Shares
Amount
Additional
Paid in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Total
Stockholders’
Equity
Balance, December 31, 2016
Balance, January 1, 2017 (1)
Net income
Exercise of stock options
Restricted stock, performance stock units, and
other grants, net
Restricted stock surrendered (2)
Other comprehensive income, net
Balance, December 31, 2017
Balance, January 1, 2018 (3)
Net income
Exercise of stock options
Restricted stock, performance stock units, and
other grants, net
Restricted stock surrendered (2)
Stock repurchase
Other comprehensive loss, net
Balance, December 31, 2018
Net income
Exercise of stock options
Restricted stock, performance stock unit, and
other grants, net
Restricted stock surrendered (2)
Stock repurchase
Dividends paid
Other comprehensive income, net
105,071
$
105,071
—
38
648
(270)
—
105,487
$
105,487
—
22
564
(223)
(901)
—
104,949
$
—
3
605
(211)
(2,822)
—
—
Balance, December 31, 2019
102,524
$
(in thousands)
$ 1,400,140
$
(26,362) $
(4,695) $
522,436
$
1,891,529
1,400,140
(26,362)
(4,695)
—
846
23,554
—
—
—
—
—
(13,811)
—
—
—
—
—
1,550
522,974
325,492
—
—
—
—
1,892,067
325,492
846
23,554
(13,811)
1,550
$ 1,424,540
$
(40,173) $
(3,145) $
848,466
$
2,229,698
1,424,540
(40,173)
(4,203)
—
554
25,711
—
—
—
—
(12,910)
(33,081)
—
—
—
—
—
—
—
—
(29,419)
849,524
435,788
—
—
—
(2,607)
—
2,229,698
435,788
554
25,711
(12,910)
(35,688)
(29,419)
$ 1,417,724
$
(53,083) $
(33,622) $
1,282,705
$
2,613,734
—
80
26,238
—
(69,901)
—
—
—
—
—
(9,645)
—
—
—
—
—
—
—
—
—
58,630
499,171
—
—
—
(50,230)
(51,329)
—
499,171
80
26,238
(9,645)
(120,131)
(51,329)
58,630
$ 1,374,141
$
(62,728) $
25,008
$
1,680,317
$
3,016,748
10
10
—
—
—
—
—
10
10
—
—
—
—
—
—
10
—
—
—
—
—
—
—
10
(1) As adjusted for adoption of ASU 2017-12. The cumulative effect of adoption of this guidance at January 1, 2017 resulted in an increase to retained
earnings of $0.5 million and a corresponding increase to loans for the fair market value adjustment on the swaps.
(2) Share amounts represent Treasury Shares, see "Note 1. Summary of Significant Accounting Policies" for further discussion.
(3) As adjusted for adoption of ASU 2016-01 and ASU 2018-02. The cumulative effect of adoption of this guidance at January 1, 2018 resulted in an
increase to retained earnings of $1.1 million and a corresponding decrease to accumulated other comprehensive income.
See accompanying Notes to Consolidated Financial Statements.
76
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses
Depreciation and amortization
Stock-based compensation
Deferred income taxes
Amortization of net premiums for investment securities
Amortization of tax credit investments
Amortization of operating lease right of use asset
Accretion of fair market value adjustments on loans acquired from business combinations
Accretion and amortization of fair market value adjustments on other assets and liabilities
acquired from business combinations
Income from bank owned life insurance
(Gains) / Losses on:
Sales of investment securities
Assets measured at fair value, net
Sale of loans
Other assets acquired through foreclosure, net
Valuation adjustments of other repossessed assets, net
Sale of premises, equipment, and other assets, net
Changes in other assets and liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Investment securities - trading
Proceeds from sales
Investment securities - AFS
Purchases
Principal pay downs and maturities
Proceeds from sales
Investment securities - HTM
Purchases
Principal pay downs and maturities
Proceeds from sales
Equity securities carried at fair value
Purchases
Redemption of principal (reinvestment of dividends)
Proceeds from sales
Purchase of investment tax credits
Purchase of SBIC investments
Sale (purchase) of money market investments, net
Proceeds from bank owned life insurance
(Purchase) liquidation of restricted stock, net
Loan fundings and principal collections, net
Purchase of premises, equipment, and other assets, net
Proceeds from sale of other real estate owned and repossessed assets, net
Net cash used in investing activities
2019
December 31,
2018
(in thousands)
2017
$
499,171
$
435,788
$
325,492
18,500
18,457
26,238
(5,129)
17,095
41,501
10,458
(12,678)
1,857
(3,901)
(3,152)
(5,119)
(690)
(604)
4,144
278
111,346
717,772
23,000
14,319
25,711
(16,709)
14,247
35,898
—
(18,565)
1,904
(3,946)
7,656
3,611
(2,638)
(1,214)
1,267
(44)
20,687
540,972
17,250
13,393
23,554
88,471
16,938
25,355
—
(28,235)
2,385
(3,861)
(2,343)
1
(945)
(228)
120
28
(93,564)
383,811
—
—
994
(927,589)
785,659
150,377
(131,384)
21,594
10,000
(32,725)
14,598
—
(141,668)
(8,688)
7
—
(377)
(520,734)
425,151
154,434
(56,575)
8,987
—
(71,728)
(577)
48,639
(109,598)
(4,129)
(7)
1,655
(347)
(1,429,434)
430,934
110,104
(169,400)
6,174
—
—
—
—
(38,098)
(5,819)
—
607
(535)
(3,429,014)
(2,586,703)
(1,873,387)
(35,148)
1,325
(11,313)
9,412
(8,862)
21,195
(3,723,033)
(2,713,433)
(2,955,527)
77
Cash flows from financing activities:
Net increase (decrease) in deposits
Net (decrease) increase in borrowings
Proceeds from exercise of common stock options
Cash paid for tax withholding on vested restricted stock
Common stock repurchases
Cash dividends paid on common stock
Net cash provided by financing activities
Net (decrease) increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosure:
Cash paid (received) during the period for:
Interest
Income taxes, net of refunds
Non-cash operating, investing, and financing activity:
Transfers to other assets acquired through foreclosure, net
See accompanying Notes to Consolidated Financial Statements.
2019
December 31,
2018
(in thousands)
2017
$
3,619,046
$
2,204,915
$
(496,736)
80
(9,645)
(120,131)
(51,329)
2,941,285
(63,976)
498,572
97,394
554
(12,910)
(35,688)
—
2,254,265
81,804
416,768
$
$
434,596
$
498,572
$
180,436
$
(23,403)
113,507
$
18,760
898
5,744
2,422,669
294,289
846
(13,811)
—
—
2,703,993
132,277
284,491
416,768
59,838
99,430
1,812
78
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operation
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL
provides a full spectrum of deposit, lending, treasury management, international banking, and online banking products and services
through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON, FIB, Bridge, and TPB. The Company also serves business
customers through a national platform of specialized financial services. In addition, the Company has two non-bank subsidiaries,
LVSP, which held and managed certain OREO properties, and CSI, a captive insurance company formed and licensed under the
laws of the State of Arizona and established as part of the Company's overall enterprise risk management strategy.
Basis of presentation
The accounting and reporting policies of the Company are in accordance with GAAP and conform to practices within the financial
services industry. The accounts of the Company and its consolidated subsidiaries are included in the Consolidated Financial
Statements.
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. Management's estimates and judgments
are ongoing and are based on experience, current and expected future conditions, third-party evaluations and various other
assumptions that management believes are reasonable under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment
with respect to commitments and contingencies. Actual results may differ from those estimates and assumptions used in the
Consolidated Financial Statements and related notes. Material estimates that are particularly susceptible to significant changes in
the near term relate to: the determination of the allowance for credit losses; certain assets and liabilities carried at fair value; and
accounting for income taxes.
Principles of consolidation
As of December 31, 2019, WAL has the following significant wholly-owned subsidiaries: WAB and eight unconsolidated
subsidiaries used as business trusts in connection with the issuance of trust-preferred securities.
The Bank has the following significant wholly-owned subsidiaries: WABT, which holds certain investment securities, municipal
and nonprofit loans, and leases; WA PWI, which holds certain limited partnerships invested primarily in low income housing tax
credits and small business investment corporations; and BW Real Estate, Inc., which operates as a real estate investment trust and
holds certain of WAB's real estate loans and related securities.
The Company does not have any other significant entities that should be consolidated. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain amounts reported in prior periods may have been reclassified in the Consolidated Financial Statements to conform to the
current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash
items in process of clearing), and federal funds sold. Cash flows from loans originated by the Company and customer deposit
accounts are reported net.
The Company maintains deposit accounts with other banks, which at times may exceed federally insured limits. The Company
has not experienced any losses in such accounts.
79
Cash reserve requirements
Depository institutions are required by law to maintain reserves against their transaction deposits. The reserves must be held in
cash or with the FRB. Banks are permitted to meet this requirement by maintaining the specified amount as an average balance
over a two-week period. The total of reserve balances was approximately $164.1 million and $145.9 million as of December 31,
2019 and 2018, respectively.
Investment securities
Investment securities include debt securities and equity securities. Debt securities may be classified as HTM, AFS, or trading. The
appropriate classification is initially decided at the time of purchase. Securities classified as HTM are those debt securities that
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 an HTM 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 securities are reported as an asset on the Consolidated Balance Sheet at their estimated fair
value. As the fair values of AFS debt securities change, the changes are reported net of income tax as an element of OCI, except
for other-than-temporarily-impaired securities. When AFS debt securities are sold, the unrealized gains or losses are 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 securities that the Company does not have the positive intent and ability to hold 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.
Equity securities are reported as an asset on the Consolidated Balance Sheet at their estimated fair value, with fair value changes
recognized as part of non-interest income in the Consolidated Income Statement.
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, adjusted for prepayments estimates, using the interest
method.
In estimating whether there are any OTTI losses on AFS securities, management considers the: 1) length of time and the extent
to which the fair value has been less than amortized cost; 2) financial condition and near term prospects of the issuer; 3) impact
of changes in market interest rates; and 4) 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 whether it is not more-likely-than-not the Company would be required to
sell the security.
Declines in the fair value of individual AFS securities 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) interest rate, market, or other factors is recognized in OCI.
For individual debt securities where the Company either intends to sell the security or when it is more-likely-than-not the Company
will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the security's
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 in income on a cash basis.
Restricted stock
WAB is a member of the Federal Reserve System and, as part of its membership, is required to maintain stock in the FRB in a
specified ratio to its capital. In addition, WAB is a member of the FHLB system and, accordingly, maintains an investment in
capital stock of the FHLB based on the borrowing capacity used. The Bank also maintains an investment in its primary correspondent
bank. These investments are considered equity securities with no actively traded market. Therefore, the shares are considered
restricted investment securities. These investments are carried at cost, which is equal to the value at which they may be redeemed.
The dividend income received from the stock is reported in interest income. The Company conducts a periodic review and evaluation
of its restricted stock to determine if any impairment exists. No impairment has been recorded to date.
80
Loans held for sale
Loans held for sale consist of loans that the Company originates (or acquires) and intends to sell. These loans are carried at the
lower of aggregate cost or fair value. Fair value is determined based on available market data for similar assets, expected cash
flows, and appraisals of underlying collateral or the credit quality of the borrower. Gains and losses on the sale of loans are
recognized pursuant to ASC 860, Transfers and Servicing. Interest income on these loans is accrued daily and loan origination
fees and costs are deferred and included in the cost basis of the loan. The Company issues various representations and warranties
associated with these loan sales. The Company has not experienced any losses as a result of these representations and warranties.
Loans, held for investment
The Company generally holds loans for investment and has the intent and ability to hold loans until their maturity. Therefore, they
are reported at book value. Net loans are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums
and discounts, purchase accounting fair value adjustments, and an allowance for credit losses. In addition, the book values of loans
subject to a fair value hedge are adjusted for changes in value attributable to the effective portion of the hedged benchmark interest
rate risk.
The Company may also acquire loans through a business combination. These acquired loans are recorded at their estimated fair
value on the date of purchase, which is comprised of unpaid principal adjusted for estimated credit losses and interest rate fair
value adjustments. Loans are evaluated individually at the acquisition date to determine if there has been credit deterioration since
origination. Such loans may then be aggregated and accounted for as a pool of loans based on common characteristics. When the
Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company’s estimate
of undiscounted cash flows expected to be collected over the Company’s initial investment in the loan. The excess of contractual
cash flows over the cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation
allowance. Subsequent increases in cash flows expected to be collected generally are recognized prospectively through adjustment
of the loan’s yield over the remaining life. Subsequent decreases to cash flows expected to be collected are recognized as impairment
losses. The Company may not carry over or create a valuation allowance in the initial accounting for loans acquired under these
circumstances. For purchased loans that are not deemed impaired at the acquisition date, fair value adjustments attributable to
both credit and interest rates are accreted (or amortized) over the contractual life of the individual loan. For additional information,
see "Note 3. Loans, Leases and Allowance for Credit Losses" of these Notes to Consolidated Financial Statements.
Deferred loan fees and costs, premiums and discounts, and certain purchase accounting fair value adjustments, are amortized over
the contractual life of the loan through interest income. If a loan has scheduled payments, the amortization of the net deferred loan
fee is calculated using the interest method over the contractual life of the loan. If a loan does not have scheduled payments, such
as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the
loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters
of credit are recognized over the commitment period. When loans are repaid, any remaining unamortized balances of premiums,
discounts, or net deferred fees are recognized as interest income.
Non-accrual loans: When a borrower discontinues making payments as contractually required by the note, the Company must
determine whether it is appropriate to continue to accrue interest. The Company ceases accruing interest income when the loan
has become delinquent by more than 90 days or when management determines that the full repayment of principal and collection
of interest according to contractual terms is no longer likely. The Company may decide to continue to accrue interest on certain
loans more than 90 days delinquent if the loans are well secured by collateral and in the process of collection.
For all loan types, when a loan is placed on non-accrual status, all interest accrued but uncollected is reversed against interest
income in the period in which the status is changed, and the Company makes a loan-level decision to apply either the cash basis
or cost recovery method. The Company recognizes income on a cash basis only for those non-accrual loans for which the collection
of the remaining principal balance is not in doubt. Under the cost recovery method, subsequent payments received from the
customer are applied to principal and generally no further interest income is recognized until the principal has been paid in full
or until circumstances have changed such that payments are again consistently received as contractually required.
Impaired loans: A loan is identified as impaired when it is no longer probable that interest and principal will be collected according
to the contractual terms of the original loan agreement. Impaired loans are measured for reserve requirements in accordance with
ASC 310, Receivables, based on the present value of expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair value of the collateral less applicable disposition costs if
the loan is collateral dependent. The amount of an impairment reserve, if any, and any subsequent changes are recorded as a
provision for credit losses. Losses are recorded as a charge-off when losses are confirmed. In addition to management's internal
loan review process, regulators may from time to time direct the Company to modify loan grades, loan impairment calculations,
or loan impairment methodology.
81
Troubled Debt Restructured Loans: A TDR loan is a loan in which the Company, for reasons related to a borrower’s financial
difficulties, grants a concession to the borrower that the Company would not otherwise consider. The loan terms that have been
modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest
rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount
of the debt, a reduction in the accrued interest, or deferral of interest payments. A TDR loan is also considered impaired. A TDR
loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured
terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual restructured
principal and interest is no longer in doubt. However, such loans continue to be considered impaired. Consistent with regulatory
guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and
classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of
modification.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers, for which the Company must maintain an adequate
allowance for credit losses. The allowance for credit losses is established through a provision for credit losses recorded 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 estimated 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 allowance consists of specific and general components. The specific allowance applies to impaired loans. For impaired
collateral dependent loans, the reserve is calculated based on the collateral value, net of estimated disposition costs. Generally,
the Company obtains an independent collateral valuation analysis for each loan over a specified dollar threshold every 12 months.
Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest
rate.
The general allowance covers all non-impaired loans and incorporates several quantitative and qualitative factors, which are used
for all of the Company's portfolio segments. Quantitative factors include company-specific, 10-year historical net charge-offs
stratified by loans with similar characteristics. Qualitative factors include: 1) levels of and trends in delinquencies and impaired
loans; 2) levels of and trends in charge-offs and recoveries; 3) trends in volume and terms of loans; 4) changes in underwriting
standards or lending policies; 5) experience, ability, depth of lending staff; 6) national and local economic trends and conditions;
7) changes in credit concentrations; 8) out-of-market exposures; 9) changes in quality of loan review system; and 10) changes in
the value of underlying collateral.
Due to the credit concentration of the Company's loan portfolio in real estate secured loans, the value of collateral is heavily
dependent on real estate values in Arizona, Nevada, and California. 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, regulators, as an integral part of their examination processes, periodically review the Bank's allowance
for credit losses, and may require the Bank to make adjustments to the allowance based on their judgment about information
available to them at the time of their examination. 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.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed surrendered when the: 1) assets have been isolated from the Company; 2) transferee obtains the right to pledge
or exchange the transferred assets; and 3) Company no longer maintains effective control over the transferred assets through an
agreement to repurchase the transferred assets before maturity.
82
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of
the lease or the estimated life of the improvement, whichever is shorter. Depreciation and amortization is computed using the
following estimated lives:
Bank premises
Furniture, fixtures, and equipment
Leasehold improvements (1)
Years
31
3 - 10
3 - 10
(1)
Depreciation is recorded over the lesser of the relevant 3 to 10 year term or the remaining life of the lease.
Management periodically reviews premises and equipment in order to determine if facts and circumstances suggest that the value
of an asset is not recoverable.
Leases (lessee)
At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are
determined to be an operating lease, a corresponding ROU asset and operating lease liability are recorded in separate line items
on the Consolidated Balance Sheet. A ROU asset represents the Company’s right to use an underlying asset during the lease term
and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU
assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments
over the lease term. The measurement of the operating lease ROU asset includes any lease payments made and is reduced by lease
incentives that are paid or are payable to the Company. Variable lease payments that depend on an index or rate such as the
Consumer Price Index are included in lease payments based on the rate in effect at the commencement date of the lease. Lease
payments are recognized on a straight-line basis as part of occupancy expense over the lease term.
As the rate implicit in the lease is not readily determinable, the Company's incremental collateralized borrowing rate is used to
determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates
and is based on the information available at the commencement date. The Company has elected to apply the short-term lease
measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded
on the Company’s Consolidated Balance Sheet, but rather, lease expense is recognized over the lease term on a straight-line basis.
The Company’s lease agreements may include options to extend or terminate the lease. These options are included in the lease
term when it is reasonably certain that the options will be exercised.
In addition to the package of practical expedients, the Company also elected the practical expedient that allows lessees to make
an accounting policy election to not separate non-lease components from the associated lease component, and instead account for
them all together as part of the applicable lease component. This practical expedient can be elected separately for each underlying
class of asset. The majority of the Company’s non-lease components such as common area maintenance, parking, and taxes are
variable, and are expensed as incurred. Variable payment amounts are determined in arrears by the landlord depending on actual
costs incurred.
Goodwill and other intangible assets
The Company records as goodwill the excess of the purchase price in a business combination over the fair value of the identifiable
net assets acquired in accordance with applicable guidance. The Company performs its annual goodwill and intangibles impairment
tests as of October 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable.
The Company can first elect to assess, through qualitative factors, whether it is more likely than not that goodwill is impaired. If
the qualitative assessment indicates potential impairment, a quantitative impairment test is necessary. If, based on the quantitative
test, a reporting unit's carrying amount exceeds its fair value, a goodwill impairment charge for this difference is recorded to
current period earnings as non-interest expense.
The Company’s intangible assets consist primarily of core deposit intangible assets that are amortized over periods ranging from
five to 10 years. The Company considers the remaining useful lives of its core deposit intangible assets each reporting period, as
required by ASC 350, Intangibles—Goodwill and Other, to determine whether events and circumstances warrant a revision to the
remaining period of amortization. If the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying
amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company has not revised its
estimates of the useful lives of its core deposit intangibles during the years ended December 31, 2019, 2018, or 2017.
83
Low income housing and renewable energy tax credits
The Company holds ownership interests in limited partnerships and limited liability companies that invest in affordable housing
and renewable energy projects. These investments are designed to generate a return primarily through the realization of federal
tax credits and deductions, which may be subject to recapture by taxing authorities if compliance requirements are not met. The
Company accounts for its low income housing investments using the proportional amortization method. Renewable energy projects
are accounted for under the deferral method, whereby the investment tax credits are reflected as an immediate reduction in income
taxes payable and the carrying value of the asset in the period that the investment tax credits are claimed. See "Note 14. Income
Taxes" of these Notes to Consolidated Financial Statements for further discussion.
The Company evaluates its interests in these entities to determine if it has a variable interest and whether it is required to consolidate
these entities. A variable interest is an investment or other interest that will absorb portions of an entity's expected losses or receive
portions of the entity's expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates
whether such interest is in a variable interest entity. A VIE is broadly defined as an entity where either: 1) the equity investors as
a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact
the entity's economic performance or 2) the equity investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support. The Company is required to consolidate any VIE when it is determined to be the primary
beneficiary of the VIE's operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has both the power to direct the activities of a
VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of, or the right to
receive benefits from, the entity that could potentially be significant to the VIE. The Company’s assessment of whether it is the
primary beneficiary of a VIE includes consideration of various factors such as: 1) the Company's ability to direct the activities
that most significantly impact the entity's economic performance; 2) its form of ownership interest; 3) its representation on the
entity's governing body; 4) the size and seniority of its investment; and 5) its ability and the rights of other investors to participate
in policy making decisions and to replace the manager of and/or liquidate the entity. The Company is required to evaluate whether
to consolidate a VIE both at inception and on an ongoing basis as changes in circumstances require reconsideration.
The Company’s investments in qualified affordable housing and renewable energy projects meet the definition of a VIE as the
entities are structured such that the limited partner investors lack substantive voting rights. The general partner or managing
member has both the power to direct the activities that most significantly impact the economic performance of the entities and the
obligation to absorb losses or the right to receive benefits that could be significant to the entities. Accordingly, as a limited partner,
the Company is not the primary beneficiary and is not required consolidate these entities.
Bank owned life insurance
BOLI is carried at its cash surrender value with changes recorded in other non-interest income in the Consolidated Income
Statements. The face amount of the underlying policies including death benefits was $359.0 million and $358.7 million as of
December 31, 2019 and 2018, respectively. There are no loans offset against cash surrender values, and there are no restrictions
as to the use of proceeds.
Customer repurchase agreements
The Company enters into repurchase agreements with customers, whereby it pledges securities against overnight investments
made from the customer’s excess collected funds. The Company records these at the amount of cash received in connection with
the transaction.
Stock compensation plans
The Company has the Incentive Plan, as amended, which is described more fully in "Note 10. Stockholders' Equity" of these Notes
to Consolidated Financial Statements. Compensation expense for stock options and non-vested restricted stock awards is based
on the fair value of the award on the measurement date which, for the Company, is the date of the grant and is recognized ratably
over the service period of the award. Forfeitures are estimated at the time of the award grant and revised in subsequent periods if
actual forfeitures differ from those estimates. The Company utilizes the Black-Scholes option-pricing model to calculate the fair
value of stock options. The fair value of non-vested restricted stock awards is the market price of the Company’s stock on the date
of grant.
See "Note 10. Stockholders' Equity" of these Notes to Consolidated Financial Statements for further discussion of stock options
and restricted stock awards.
84
Dividends
WAL is a legal entity separate and distinct from its subsidiaries. As a holding company with limited significant assets other than
the capital stock of its subsidiaries, WAL's ability to pay dividends depends primarily upon the receipt of dividends or other capital
distributions from its subsidiaries. The Company's subsidiaries' ability to pay dividends to WAL is subject to, among other things,
their individual earnings, financial condition, and need for funds, as well as federal and state governmental policies and regulations
applicable to WAL and each of those subsidiaries, which limit the amount that may be paid as dividends without prior approval.
In addition, the terms and conditions of other securities the Company issues may restrict its ability to pay dividends to holders of
the Company's common stock. For example, if any required payments on outstanding trust preferred securities are not made, WAL
would be prohibited from paying cash dividends on its common stock.
Treasury shares
The Company separately presents treasury shares, which represent shares surrendered to the Company equal in value to the statutory
payroll tax withholding obligations arising from the vesting of employee restricted stock awards. Treasury shares are carried at
cost.
Common stock repurchases
On December 11, 2018, the Company adopted its common stock repurchase program, pursuant to which the Company was
authorized to repurchase up to $250.0 million of its shares of common stock through December 31, 2019. All shares repurchased
under the plan are retired upon settlement. The Company has elected the method to allocate the excess of the repurchase price
over the par value of its common stock between APIC and retained earnings, with the portion allocated to APIC limited to the
amount of APIC that was recorded at the time that the shares were initially issued, which is calculated on a last-in, first-out
basis. The Company's common stock repurchase program was renewed through December 2020, authorizing the Company to
repurchase up to an additional $250.0 million of its outstanding common stock.
Derivative financial instruments
The Company uses interest-rate swaps to mitigate interest-rate risk associated with changes to the fair value of certain fixed-rate
financial instruments (fair value hedges).
The Company recognizes derivatives as assets or liabilities on the Consolidated Balance Sheet at their fair value in accordance
with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset or liability
attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value
of the hedged asset or liability that are attributable to the hedged risk, are recorded in current-period earnings. Changes in the fair
value of derivatives not considered to be highly effective in hedging the change in fair value of the hedged item are recognized
in earnings as non-interest income during the period of the change.
The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as
well as its risk management objectives and strategies for undertaking the hedge transaction after the derivative contract is executed.
At inception, the Company performs a quantitative assessment to determine whether the derivatives used in hedging transactions
are highly effective (as defined in the guidance) in offsetting changes in the fair value of the hedged item. Retroactive effectiveness
is assessed, as well as the continued expectation that the hedge will remain effective prospectively. After the initial quantitative
assessment is performed, on a quarterly basis, the Company performs a qualitative hedge effectiveness assessment. This assessment
takes into consideration any adverse developments related to the counterparty's risk of default and any negative events or
circumstances that affect the factors that originally enabled the Company to assess that it could reasonably support, qualitatively,
an expectation that the hedging relationship was and will continue to be highly effective. The Company discontinues hedge
accounting prospectively when it is determined that a hedge is no longer highly effective. When hedge accounting is discontinued
on a fair value hedge that no longer qualifies as an effective hedge, the derivative instrument continues to be reported at fair value
on the Consolidated Balance Sheet, but the carrying amount of the hedged item is no longer adjusted for future changes in fair
value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is
amortized over the remaining life of the hedged item into earnings.
Derivative instruments that are not designated as hedges, so called free-standing derivatives, are reported on the Consolidated
Balance Sheet at fair value and the changes in fair value are recognized in earnings as non-interest income during the period of
change.
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The Company may in the normal course of business purchase a financial instrument or originate 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 the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the host contract and 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 the host contract is measured at fair value, with changes in fair value reported in
current earnings, or 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 Consolidated Balance Sheet at fair value and is not designated as a hedging instrument.
Off-balance sheet instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements consisting
of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Financial
Statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on
the Consolidated Balance Sheet. Losses could be experienced when the Company is contractually obligated to make a payment
under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period
as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract and, in certain instances, may be unconditionally cancelable.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company
enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other
event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on
management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
As with outstanding loans, the Company applies qualitative factors and utilization rates to its off-balance sheet obligations in
determining an estimate of losses inherent in these contractual obligations. The estimate for credit losses on off-balance sheet
instruments is included in other liabilities and the charge to income that establishes this liability is included in non-interest expense.
The Company also has off-balance sheet arrangements related to its derivative instruments. Derivative instruments are recognized
in the Consolidated Financial Statements at fair value and their notional values are carried off-balance sheet. See "Note 12.
Derivatives and Hedging Activities" of these Notes to Consolidated Financial Statements for further discussion.
Business combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business
Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets
and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair
value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net
assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. Changes
to estimated fair values from a business combination are recognized as an adjustment to goodwill during the measurement period
and are recognized in the proper reporting period in which the adjustment amounts are determined. Results of operations of an
acquired business are included in the Consolidated Income Statement from the date of acquisition. Acquisition-related costs,
including conversion and restructuring charges, are expensed as incurred.
86
Fair values of financial instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820, Fair Value
Measurement, establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value
measurement, as well as 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 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities.
• Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all
significant assumptions are observable, either directly or indirectly, in the market.
• Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable,
either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of
matrix pricing, 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 may purchase the asset or
assume 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.
ASC 825, Financial Instruments, 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 December 31, 2019
and 2018. The estimated fair value amounts for December 31, 2019 and 2018 have been measured as of period-end, and have not
been re-evaluated 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 period-end.
The information in "Note 16. Fair Value Accounting" of these Notes to Consolidated Financial Statements 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.
87
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash, cash equivalents, and restricted cash
The carrying amounts reported on the Consolidated Balance Sheet for cash and due from banks approximate their fair value.
Money market investments
The carrying amounts reported on the Consolidated Balance Sheet for money market investments approximate their fair value.
Investment securities
The fair values of CRA investments, exchange-listed preferred stock, trust preferred securities, and certain corporate debt securities
are based on quoted market prices and are categorized as Level 1 in the fair value hierarchy.
The fair values of debt securities are primarily 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. For a small subset of securities,
other pricing sources are used, including observed prices on publicly-traded securities and dealer quotes.
Restricted stock
WAB is a member of the Federal Reserve System and the FHLB and, accordingly, maintains investments in the capital stock of
the FRB and the FHLB. WAB also maintains an investment in its 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 its restricted stock to determine if any impairment exists. The fair values of these investments have been categorized
as Level 2 in the fair value hierarchy.
Loans
The fair value of 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 and 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 is categorized
as Level 2 in the fair value hierarchy, excluding impaired loans, which are categorized as Level 3.
Accrued interest receivable and payable
The carrying amounts reported on the Consolidated Balance Sheet for accrued interest receivable and payable approximate their
fair value.
Derivative financial instruments
All derivatives are recognized on the Consolidated Balance Sheets at their fair value. The fair value for derivatives is determined
based on market prices, broker-dealer quotations on similar products, or other related input parameters. As a result, the fair values
have been categorized as Level 2 in the fair value hierarchy.
Deposits
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 is
categorized as Level 2 in the fair value hierarchy.
FHLB advances and customer repurchase agreements
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 FHLB advances and customer repurchase agreements have been categorized as
Level 2 in the fair value hierarchy due to their short durations.
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Subordinated debt
The fair value of subordinated debt is based on the market rate for the respective subordinated debt security. Subordinated debt
has been categorized as Level 2 in the fair value hierarchy.
Junior subordinated debt
Junior subordinated debt is valued based on a discounted cash flow model which uses as inputs Treasury Bond rates and the 'BB'
rated financial index. Junior subordinated debt has been categorized as Level 3 in the fair value hierarchy.
Off-balance sheet instruments
The fair value of the Company’s off-balance sheet instruments (lending commitments and letters of credit) is 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.
Income taxes
The Company is subject to income taxes in the United States and files a consolidated federal income tax return with all of its
subsidiaries, with the exception of BW Real Estate, Inc. Deferred income taxes are recorded to reflect the effects of temporary
differences between the financial reporting carrying amounts of assets and liabilities and their income tax bases using enacted tax
rates that are expected to be in effect when the taxes are actually paid or recovered. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes.
Net deferred tax assets are recorded to the extent that these assets will more-likely-than-not be realized. In making these
determinations, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities,
tax planning strategies, projected future taxable income, and recent operating results. If it is determined that deferred income tax
assets to be realized in the future are in excess of their net recorded amount, an adjustment to the valuation allowance will be
recorded, which will reduce the Company's provision for income taxes.
A tax benefit from an unrecognized tax benefit may be recognized when it is more-likely-than-not that the position will be sustained
upon examination, including related appeals or litigation, based on technical merits. Income tax benefits must meet a more-likely-
than-not recognition threshold at the effective date to be recognized.
Interest and penalties related to unrecognized tax benefits are recognized as part of the provision for income taxes in the Consolidated
Income Statement. Accrued interest and penalties are included in the related tax liability line with other liabilities on the Consolidated
Balance Sheets. See "Note 14. Income Taxes" of these Notes to Consolidated Financial Statements for further discussion on income
taxes.
Non-interest income
Non-interest income includes service charges and fees, income from equity investments, card income, foreign currency income,
income from bank owned life insurance, lending related income, net gain or loss on sales of investment securities, net unrealized
gains or losses on assets measured at fair value, and other income. Service charges and fees consist of fees earned from performance
of account analysis, general account services, and other deposit account services. These fees are recognized as the related services
are provided in accordance with ASC 606, Revenue from Contracts with Customers. Income from equity investments includes
gains on equity warrant assets, SBIC equity income, and success fees. Card income includes fees earned from customer use of
debit and credit cards, interchange income from merchants, and international charges. Card income is generally within the scope
of ASC 310, Receivables; however, certain processing transactions for merchants, such as interchange fees, are within the scope
of ASC 606. Foreign currency income represents fees earned on the differential between purchases and sales of foreign currency
on behalf of the Company’s clients. Income from bank owned life insurance is accounted for in accordance with ASC 325,
Investments - Other. Lending related income includes fees earned from gains or losses on the sale of loans, SBA income, and letter
of credit fees. Gains and losses on the sale of loans and SBA income are recognized pursuant to ASC 860, Transfers and Servicing.
Net unrealized gains or losses on assets measured at fair value represent fair value changes in equity securities and are accounted
for in accordance with ASC 321, Investments - Equity Securities. Fees related to standby letters of credit are accounted for in
accordance with ASC 440, Commitments. Other income includes operating lease income, which is recognized on a straight-line
basis over the lease term in accordance with ASC 840, Leases. Net gain or loss on sales / valuations of repossessed and other assets
is presented as a component of non-interest expense, but may also be presented as a component of non-interest income in the event
that a net gain is recognized. Net gain or loss on sales of repossessed and other assets are accounted for in accordance with ASC
610, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. See "Note 22. Revenue from Contracts
with Customers" of these Notes to Consolidated Financial Statements for further details related to the nature and timing of revenue
recognition for non-interest income revenue streams within the scope of the new standard.
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Recent accounting pronouncements
In June 2016, the FASB issued guidance within ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new
standard significantly changes the impairment model for most financial assets that are measured at amortized cost, including off-
balance sheet credit exposures, from an incurred loss model to an expected loss model. The amendments in ASU 2016-13 to Topic
326, Financial Instruments - Credit Losses, require that an organization measure all expected credit losses for financial assets held
at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also
requires enhanced disclosures, including qualitative and quantitative disclosures that provide additional information about the
amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on AFS debt securities
and purchased financial assets with credit deterioration. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. The Company has completed its implementation of the new
CECL standard, in all material respects, as model findings have been addressed, the Company's internal control CECL framework
has been implemented, and accounting policies and governance processes have been finalized.
The following table summarizes the estimated allowance for credit losses related to financial assets and off-balance sheet credit
exposures upon adoption of ASC 326:
Assets:
Allowance for credit losses on HTM securities
Tax-exempt
Allowance for credit losses on loans
Liabilities:
Off-balance sheet credit exposures
Pre-ASC 326
Adoption
January 1, 2020
Post-ASC 326
Adoption
(in millions)
Impact of ASC
326 Adoption
$
$
$
— $
3
$
168
$
187
$
9
$
24
$
3
19
15
As the impact to the Company was not significant, management elected to take the full charge to regulatory capital at the adoption
date.
In August 2018, the FASB issued guidance within ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement. The amendments within ASU 2018-13 remove, modify, and supplement the disclosure requirements
for fair value measurements. Disclosure requirements that were removed include: the amount and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for
Level 3 fair value measurements. The amendments clarify that the measurement uncertainty disclosure is to communicate
information about the uncertainty in measurement as of the reporting date. Additional disclosure requirements include: the changes
in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements
held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements. With the exception of the above additional disclosure requirements, which will be applied
prospectively, all other amendments should be applied retrospectively to all periods presented upon their effective date. The
amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2019. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial
Statements.
In August 2018, the FASB issued guidance within ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in
this Update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic
350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense.
The amendments in this Update also require that the capitalized implementation costs of a hosting arrangement that is a service
contract be expensed over the term of the hosting arrangement. Presentation requirements include: expense related to the capitalized
implementation costs should be presented in the same line item in the statement of income as the fees associated with the hosting
element (service) of the arrangement, payments for capitalized implementation costs in the statement of cash flows should be
classified in the same manner as payments made for fees associated with the hosting element, and capitalized implementation
costs in the statement of financial position should be presented in the same line item that a prepayment for the fees of the associated
90
hosting arrangement would be presented. The amendments in this ASU should be applied either retrospectively or prospectively
to all implementation costs incurred after the date of adoption. The amendments in this ASU are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this guidance is not expected to
have a significant impact on the Company's Consolidated Financial Statements.
In April 2019, the FASB issued guidance within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments
- Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in ASU 2019-04
clarify or correct the guidance in these Topics. With respect to Topic 326, ASU 2019-04 addresses a number of issues as it relates
to the CECL standard including consideration of accrued interest, recoveries, variable-rate financial instruments, prepayments,
and extension and renewal options, among other things, in the measurement of expected credit losses. The amendments to Topic
326 have the same effective dates as ASU 2016-13 and are not expected to have a significant impact on the Company’s Consolidated
Financial Statements. With respect to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies issues related to partial-term
hedges, hedged debt securities, and transitioning from a quantitative method of assessing hedge effectiveness to a more simplified
method. The Company does not have partial-term hedges or any hedged debt securities and the transition issues discussed in the
ASU 2019-04 are not applicable to the Company. Accordingly, the amendments to Topic 815 will not have an impact on the
Company's Consolidated Financial Statements. With respect to Topic 825, Financial Instruments, on recognizing and measuring
financial instruments, ASU 2019-04 addresses: 1) the scope of the guidance; 2) the requirement for remeasurement under ASC
820 when using the measurement alternative; 3) certain disclosure requirements; and 4) which equity securities have to be
remeasured at historical exchange rates. The amendments to Topic 825 are effective for interim and annual reporting periods
beginning after December 15, 2019 and are not expected to have a material impact on the Company’s Consolidated Financial
Statements.
In May 2019, the FASB issued guidance within ASU 2019-05, Financial Instruments - Credit Losses, to provide entities with an
option to irrevocably elect the fair value option for eligible financial assets measured at amortized cost. The election is to be applied
on an instrument-by-instrument basis upon adoption of Topic 326 and is not available for either AFS or HTM debt securities. The
amendments in ASU 2019-05 should be applied on a modified-retrospective basis through a cumulative-effect adjustment to the
opening balance of retained earnings as of the date that an entity adopts the amendments in ASU 2016-13. The Company did not
elect this fair value option as part of its adoption of ASU 2016-13 on January 1, 2020.
In November 2019, the FASB issued guidance within ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments
—Credit Losses. The amendments in ASU 2019-11 clarify or address specific issues about certain aspects of the amendments in
ASU 2016-13, Measurement of Credit Losses on Financial Instruments. These issues include measurement and reporting
requirements related to: 1) the allowance for credit losses for purchased assets with credit deterioration; 2) prepayment assumptions
on existing troubled debt restructurings; 3) extension of disclosure relief for accrued interest receivable balances; and 4) expected
credit losses on collateralized financial assets. The adoption of ASU 2019-11 is concurrent with ASU 2016-13 and, adoption of
these amendments on January 1, 2020, did not have a significant impact on the Company's Consolidated Financial Statements.
In December 2019, the FASB issued guidance within ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes. The amendments in ASU 2019-12 are intended to reduce the cost and complexity of applying ASC 740. The
amendments that are applicable to the Company address: 1) franchise and other taxes partially based on income; 2) step-up in
basis of goodwill in a business combination; 3) allocation of tax expense in separate entity financial statements; and 4) interim
recognition of enactment of tax laws or rate changes. The amendments to Topic 740 are effective for interim and annual reporting
periods beginning after December 15, 2020 and are not expected to have a material impact on the Company’s Consolidated
Financial Statements.
Recently adopted accounting guidance
In February 2016, the FASB issued guidance within ASU 2016-02, Leases. The amendments in ASU 2016-02 to Topic 842, Leases,
require lessees to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position.
The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The Company adopted the
amendments to Topic 842 on January 1, 2019 using the modified retrospective approach. The Company elected the transition
option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allows entities to continue to apply the
legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results
and disclosures have not been adjusted. The Company also elected to apply the package of practical expedients permitting entities
to forgo reassessment of: 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing
leases; and 3) initial direct costs for any existing leases. The Company established internal controls and implemented lease
accounting software to facilitate the preparation of financial information and disclosures related to leases. The most significant
impact of the new standard on the Company’s Consolidated Financial Statements was the recognition of a ROU asset and lease
liability for operating leases for which the Company is the lessee. The accounting for finance and operating leases for which the
Company is the lessor remains substantially unchanged. Upon adoption of this guidance on January 1, 2019, the Company recorded
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a ROU asset and corresponding lease liability of $42.5 million and $46.1 million, respectively, on the Consolidated Balance Sheet.
No cumulative effect adjustment to retained earnings resulted from adoption of this guidance. The new standard did not have a
material impact on the Company’s results of operations or cash flows.
In March 2017, the FASB issued guidance within ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities.
The amendments in ASU 2017-08 to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, shorten the amortization
period for certain purchased callable debt securities held at a premium to the earliest call date, which more closely align the
amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Under
current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The
amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to
maturity. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of adoption. As of December 31, 2019, the Company does not hold
these types of securities; therefore, adoption of this guidance did not have an impact on the Company's Consolidated Financial
Statements.
In June 2018, the FASB issued guidance within ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.
The amendments in ASU 2018-07 to Topic 718, Compensation-Stock Compensation, are intended to align the accounting for
share-based payment awards issued to employees and nonemployees. Changes to the accounting for nonemployee awards include:
1) equity classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the
previous requirement to remeasure the awards through the performance completion date; 2) for performance conditions,
compensation cost associated with the award will be recognized when achievement of the performance condition is probable,
rather than upon achievement of the performance condition; and 3) the current requirement to reassess the classification (equity
or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments.
The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606,
Revenue from Contracts with Customers. The Company's share-based payment awards to nonemployees consist only of grants
made to the Company's BOD as compensation solely related to the individual's role as a Director. As such, in accordance with
ASC 718, the Company accounts for these share-based payment awards to its Directors in the same manner as share-based payment
awards for its employees. Accordingly, the adoption of this guidance did not have an impact on the accounting for the Company's
share-based payment awards to its Directors.
In July 2018, the FASB issued guidance within ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 are
intended to clarify or correct unintended guidance in the FASB Codification and affect a wide variety of Topics in the Codification.
The topics that are applicable to the Company include: 1) debt modifications and extinguishments; 2) stock compensation; and
3) derivatives and hedging. For debt modifications and extinguishments, the amendment clarifies that, in an early extinguishment
of debt for which the fair value option has been elected, the net carrying amount of the extinguished debt is equal to its fair value
at the reacquisition date, and upon extinguishment, the cumulative amount of the gain or loss on the extinguished debt that resulted
from changes in instrument-specific credit risk should be presented in net income. The Company has junior subordinated debt
that is recorded at fair value at each reporting period due to election of the FVO. Accordingly, if, in the future, the Company
chooses to repay this debt prior to its contractual maturity, this amendment would be applicable. For stock compensation, the
amendment clarifies that excess tax benefits or tax deficiencies should be recognized in the period in which the amount of the tax
deduction is determined, which is typically when an award is exercised (in the case of share options) or vests (in the case of non-
vested stock awards). The Company already records excess tax benefits or tax deficiencies in the periods in which the tax deduction
is determined. Therefore, adoption of this amendment did not have an effect on the Company's accounting for excess tax benefits
or tax deficiencies. For derivatives and hedging, previous guidance permits derivatives to be offset only when all four conditions
(including the intent to set off) are met. This amendment clarifies that the intent to set off is not required to offset fair value amounts
recognized for derivative instruments that are executed with the same counterparty under a master netting agreement. This
amendment did not have an effect on the offsetting of the Company's derivative assets and liabilities.
92
2. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities at December 31, 2019 and 2018 are summarized as follows:
Held-to-maturity
Tax-exempt
Available-for-sale debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total AFS debt securities
Equity securities
CRA investments
Preferred stock
Total equity securities
Held-to-maturity
Tax-exempt
Available-for-sale debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total AFS debt securities
Equity securities
CRA investments
Preferred stock
Total equity securities
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
(Losses)
Fair Value
December 31, 2019
(in thousands)
485,107
$
31,303
$
(149) $
516,261
50
$
10,092
$
— $
95,062
105,015
7,494
1,129,985
1,406,594
530,729
32,000
10,000
999
366
112
279
3,572
9,283
24,548
—
—
—
(1,175)
(5,166)
—
(4,330)
(3,817)
(422)
(4,960)
—
—
10,142
94,253
99,961
7,773
1,129,227
1,412,060
554,855
27,040
10,000
999
3,317,928
$
48,252
$
(19,870) $
3,346,310
52,805
82,514
135,319
$
$
— $
3,881
3,881
$
(301) $
(198)
(499) $
52,504
86,197
138,701
December 31, 2018
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
(Losses)
Fair Value
(in thousands)
302,905
$
3,163
$
(7,420) $
298,648
50
$
15,277
$
— $
106,385
105,029
948,161
1,564,181
542,086
32,000
40,000
1,996
82
—
945
1,415
4,335
—
—
—
(6,361)
(5,649)
(24,512)
(35,472)
(7,753)
(3,383)
(1,812)
(12)
15,327
100,106
99,380
924,594
1,530,124
538,668
28,617
38,188
1,984
3,339,888
$
22,054
$
(84,954) $
3,276,988
52,210
65,954
118,164
$
$
— $
148
148
$
(1,068) $
(2,183)
(3,251) $
51,142
63,919
115,061
$
$
$
$
$
$
$
$
$
$
93
The Company conducts an OTTI analysis on a quarterly basis. The initial indication of OTTI is a decline in the market value
below the amount recorded for an investment, and taking into account 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 debt securities, for the purpose of an OTTI analysis, the Company also considers the cause of the price decline (general level
of interest rates, credit spreads, and industry and issuer-specific factors), whether downgrades by bond rating agencies have
occurred, the issuer’s financial condition, near-term prospects, and current ability to make future payments in a timely manner, as
well as the issuer’s ability to service debt, and any change in agencies’ ratings at the evaluation date from the acquisition date and
any likely imminent action.
At December 31, 2019 and 2018, the Company’s unrealized losses relate primarily to market interest rate increases since the
securities' original purchase date. The total number of AFS securities in an unrealized loss position at December 31, 2019 is 158,
compared to 373 at December 31, 2018. The Company has reviewed securities for which there is an unrealized loss in accordance
with its accounting policy for OTTI described above and determined that there are no impairment charges for the years ended
December 31, 2019, 2018, and 2017. The Company does not consider any securities to be other-than-temporarily impaired as of
December 31, 2019 and 2018. No assurance can be made that OTTI will not occur in future periods.
Information pertaining to securities with gross unrealized losses at December 31, 2019 and 2018, aggregated by investment category
and length of time that individual securities have been in a continuous loss position follows:
December 31, 2019
Less Than Twelve Months
More Than Twelve Months
Total
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
(in thousands)
149
$
24,325
$
— $
— $
149
$
24,325
85
—
1,776
1,740
422
—
$
9,035
$
1,090
$
54,604
$
1,175
$
—
337,285
385,643
67,150
—
5,166
2,554
2,077
—
4,960
94,834
258,791
150,419
—
27,040
5,166
4,330
3,817
422
4,960
63,639
94,834
596,076
536,062
67,150
27,040
$
$
$
4,023
$
799,113
$
15,847
$
585,688
$
19,870
$
1,384,801
Held-to-maturity
Tax-exempt
Available-for-sale debt securities
Commercial MBS issued by GSEs
Corporate debt securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
Total AFS securities
94
$
$
December 31, 2018
Less Than Twelve Months
More Than Twelve Months
Total
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
(in thousands)
3,868
$
91,095
$
3,552
$
69,991
$
7,420
$
161,086
— $
— $
6,361
$
98,275
$
6,361
$
16
5,173
1,363
3,562
—
—
—
5,013
217,982
141,493
209,767
—
—
—
5,633
19,339
34,109
4,191
3,383
1,812
12
94,367
537,316
1,215,490
72,382
28,617
38,188
1,984
5,649
24,512
35,472
7,753
3,383
1,812
12
98,275
99,380
755,298
1,356,983
282,149
28,617
38,188
1,984
$
10,114
$
574,255
$
74,840
$
2,086,619
$
84,954
$
2,660,874
Held-to-maturity debt securities
Tax-exempt
Available-for-sale debt securities
Commercial MBS issued by GSEs
Corporate debt securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total AFS securities
The amortized cost and fair value of securities as of December 31, 2019, by contractual maturities, are shown below. MBS are
shown separately as individual MBS are comprised of pools of loans with varying maturities. Therefore, these securities are listed
separately in the maturity summary.
Held-to-maturity
Due in one year or less
After one year through five years
After ten years
Total HTM securities
Available-for-sale
Due in one year or less
After one year through five years
After five years through ten years
After ten years
Mortgage-backed securities
Total AFS securities
December 31, 2019
Amortized Cost
Estimated Fair
Value
(in thousands)
$
$
$
7,330
$
17,414
460,363
485,107
$
999
$
14,765
149,236
521,287
2,631,641
$
3,317,928
$
7,384
17,947
490,930
516,261
999
14,971
144,996
549,804
2,635,540
3,346,310
95
The following tables summarize the carrying amount of the Company’s investment ratings position as of December 31, 2019 and
2018:
AAA
Split-rated
AAA/AA+
AA+ to
AA-
A+ to A-
BBB+ to
BBB-
BB+ and
below
Unrated
Totals
December 31, 2019
(in thousands)
— $
— $
— $
— $
— $
— $
485,107
$
485,107
— $
— $
— $
— $
— $
10,142
$
— $
10,142
Held-to-maturity debt securities
Tax-exempt
Available-for-sale debt securities
CDO
Commercial MBS issued by
GSEs
Corporate debt securities
Municipal securities
$
$
—
—
—
94,253
—
—
—
—
—
—
30,675
—
—
—
66,530
33,431
—
181
—
Private label residential MBS
1,096,909
Residential MBS issued by GSEs
—
1,412,060
Tax-exempt
Trust preferred securities
U.S. government sponsored
agency securities
U.S. treasury securities
52,610
—
—
—
2,856
—
10,000
999
327,657
171,732
—
—
—
—
—
—
—
—
—
1,174
—
—
—
—
—
—
—
7,773
—
—
—
—
—
—
94,253
99,961
7,773
1,129,227
1,412,060
554,855
27,040
10,000
999
—
288
—
—
27,040
—
—
Total AFS securities (1)
$ 1,149,519
$ 1,520,168
$
358,332
$
238,443
$
60,759
$
11,316
$
7,773
$ 3,346,310
Equity securities
CRA investments
Preferred stock
Total equity securities (1)
$
$
— $
25,375
—
—
— $
25,375
$
$
— $
—
— $
— $
— $
— $
27,129
—
82,851
2,105
1,241
— $
82,851
$
2,105
$
28,370
$
$
52,504
86,197
138,701
(1)
Where ratings differ, the Company uses an average of the available ratings by major credit agencies.
AAA
Split-rated
AAA/AA+
AA+ to
AA-
A+ to A-
BBB+ to
BBB-
BB+ and
below
Unrated
Totals
December 31, 2018
(in thousands)
— $
— $
— $
— $
— $
— $
302,905
$
302,905
— $
— $
— $
— $
— $
15,327
$
— $
15,327
Held-to-maturity debt securities
Tax-exempt
Available-for-sale debt securities
CDO
Commercial MBS issued by
GSEs
Corporate debt securities
$
$
Private label residential MBS
887,520
Residential MBS issued by GSEs
—
1,530,124
—
—
100,106
—
—
—
—
34,342
—
—
—
66,515
32,865
343
—
Tax-exempt
66,160
12,146
306,409
152,330
Trust preferred securities
U.S. government sponsored
agency securities
U.S. treasury securities
—
—
—
—
38,188
1,984
—
—
—
—
—
—
—
—
1,442
—
—
—
—
—
—
—
—
—
1,623
—
—
—
100,106
99,380
924,594
1,530,124
538,668
28,617
38,188
1,984
947
—
—
28,617
—
—
Total AFS securities (1)
$
953,680
$ 1,682,548
$
340,751
$
219,188
$
62,429
$
16,769
$
1,623
$ 3,276,988
Equity securities
CRA investments
Preferred stock
Total equity securities (1)
$
$
— $
25,375
—
—
— $
25,375
$
$
— $
—
— $
— $
— $
— $
25,767
—
45,771
3,693
14,455
— $
45,771
$
3,693
$
40,222
$
$
51,142
63,919
115,061
(1)
Where ratings differ, the Company uses an average of the available ratings by major credit agencies.
96
Securities with carrying amounts of approximately $962.5 million and $788.4 million at December 31, 2019 and 2018, 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:
Available-for-sale securities
Gross gains
Gross losses
Net gains (losses) on AFS securities
Equity securities
Gross gains
Gross losses
Net gains (losses) on equity securities
Year Ended December 31,
2019
2018
2017
(in thousands)
$
$
$
$
3,152
—
3,152
$
$
— $
—
— $
8,074
(7,738)
336
$
$
— $
(7,992)
(7,992) $
3,204
(861)
2,343
—
—
—
During the year ended December 31, 2019, the Company sold certain AFS securities as part of a portfolio re-balancing initiative.
These securities had a carrying value of $147.2 million and a net gain of $3.2 million was recognized on the sale of these securities.
During the year ended December 31, 2019, the Company also sold one of its securities classified as HTM. The security had a par
value of $10.0 million and no gain or loss was realized upon the sale. The sale of this HTM security was made as a result of
significant deterioration in the issuer’s creditworthiness, representative of a change in circumstance contemplated in ASC 320-10-25
that would not call into question the Company’s intent to hold other debt securities to maturity in the future. Accordingly,
management concluded that the Company’s remaining HTM securities continue to be appropriately classified as such.
During the year ended December 31, 2018, the Company sold certain available-for-sale securities with a carrying value of $119.8
million and recognized a loss on sale of these securities of $7.7 million. The sales resulted from management’s review of its
investment portfolio, which led to its decision to sell lower yielding securities and reinvest in securities with higher yields and
shorter durations.
97
3. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Company’s held for investment loan portfolio is as follows:
Commercial and industrial
Commercial real estate - non-owner occupied
Commercial real estate - owner occupied
Construction and land development
Residential real estate
Consumer
Loans, net of deferred loan fees and costs
Allowance for credit losses
Total loans HFI
December 31,
2019
2018
(in thousands)
$
9,382,043
$
5,245,634
2,316,913
1,952,156
2,147,664
57,083
21,101,493
(167,797)
7,762,642
4,213,428
2,325,380
2,134,753
1,204,355
70,071
17,710,629
(152,717)
$
20,933,696
$
17,557,912
Loans that are held for investment are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums
and discounts, purchase accounting fair value adjustments, and an allowance for credit losses. Net deferred loan fees as of December
31, 2019 and 2018 total $47.7 million and $36.3 million, respectively, which is a reduction in the carrying value of loans. Net
unamortized purchase premiums on secondary market loan purchases total $29.9 million and $2.0 million as of December 31,
2019 and 2018, respectively. Total loans held for investment are also net of interest rate and credit marks on acquired loans, which
are a net reduction in the carrying value of loans. Interest rate marks were $3.8 million and $7.1 million as of December 31, 2019
and 2018, respectively. Credit marks were $6.5 million and $14.6 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Company also had $21.8 million of HFS loans. There were no HFS loans as of December 31, 2018.
The following table presents the contractual aging of the recorded investment in past due loans held for investment by class of
loans:
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total loans
Current
30-59 Days
Past Due
60-89 Days
Past Due
Over 90 Days
Past Due
Total
Past Due
Total
December 31, 2019
(in thousands)
$
9,376,377
$
2,501
$
637
$
2,528
$
5,666
$
9,382,043
2,316,165
5,007,644
221,416
1,176,908
775,248
2,134,346
57,083
624
4,661
—
—
—
7,627
—
—
—
—
—
—
1,721
—
124
11,913
—
—
—
3,970
—
748
16,574
—
—
—
2,316,913
5,024,218
221,416
1,176,908
775,248
13,318
2,147,664
—
57,083
21,101,493
$
21,065,187
$
15,413
$
2,358
$
18,535
$
36,306
$
98
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total loans
Current
30-59 Days
Past Due
60-89 Days
Past Due
Over 90 days
Past Due
Total
Past Due
Total
December 31, 2018
(in thousands)
$
7,753,111
$
3,187
$
416
$
5,928
$
9,531
$
7,762,642
2,320,321
4,051,837
161,591
1,382,664
751,613
1,182,933
69,830
4,441
—
—
—
—
9,316
—
—
—
—
—
476
4,010
—
618
—
—
—
—
8,096
241
5,059
—
—
—
476
21,422
241
2,325,380
4,051,837
161,591
1,382,664
752,089
1,204,355
70,071
$
17,673,900
$
16,944
$
4,902
$
14,883
$
36,729
$
17,710,629
The following table presents the recorded investment in non-accrual loans and loans past due ninety days or more and still accruing
interest by class of loans:
December 31, 2019
Non-accrual loans
Current
Past Due/
Delinquent
Total
Non-
accrual
Loans past
due 90 days
or more and
still accruing
December 31, 2018
Non-accrual loans
Current
Past Due/
Delinquent
Total
Non-accrual
Loans past
due 90 days
or more and
still accruing
(in thousands)
Commercial and industrial
$
19,080
$
5,421
$
24,501
$
— $
7,639
$
7,451
$
15,090
$
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
4,418
7,265
—
2,147
—
1,231
—
124
11,913
—
—
—
4,369
—
4,542
19,178
—
2,147
—
5,600
—
—
—
—
—
—
—
—
—
—
—
—
—
552
—
—
—
—
476
—
11,387
241
—
—
—
476
—
11,939
241
$
34,141
$
21,827
$
55,968
$
— $
8,191
$
19,555
$
27,746
$
594
The reduction in interest income associated with loans on non-accrual status was approximately $2.2 million, $2.3 million, and
$2.4 million for the years ended December 31, 2019, 2018, and 2017, 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 Special Mention, 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 as 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 warrant management’s close attention, are deemed to be Special
Mention. Risk ratings are updated, at a minimum, quarterly.
99
—
594
—
—
—
—
—
—
The following tables present loans held for investment by risk rating:
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2019
(in thousands)
$
9,265,823
$
65,893
$
49,878
$
449
$
— $
9,382,043
2,265,566
4,913,007
221,416
1,157,169
773,868
2,141,336
57,073
9,579
64,161
—
17,592
1,380
366
10
41,768
47,050
—
2,147
—
5,962
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,316,913
5,024,218
221,416
1,176,908
775,248
2,147,664
57,083
$
20,795,258
$
158,981
$
146,805
$
449
$
— $
21,101,493
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2019
(in thousands)
Current (up to 29 days past due)
$
20,785,118
$
158,907
$
120,897
$
265
$
— $
21,065,187
Past due 30 - 59 days
Past due 60 - 89 days
Past due 90 days or more
Total
8,263
1,481
396
58
16
—
7,092
861
17,955
$
20,795,258
$
158,981
$
146,805
$
—
—
184
449
—
—
—
$
— $
15,413
2,358
18,535
21,101,493
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2018
(in thousands)
$
7,574,506
$
61,202
$
126,356
$
578
$
— $
7,762,642
2,255,513
4,030,350
161,591
1,378,624
751,012
1,191,571
69,755
12,860
12,982
—
1,210
—
527
75
57,007
8,505
—
2,830
1,077
12,257
241
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,325,380
4,051,837
161,591
1,382,664
752,089
1,204,355
70,071
$
17,412,922
$
88,856
$
208,273
$
578
$
— $
17,710,629
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2018
(in thousands)
Current (up to 29 days past due)
$
17,400,616
$
87,264
$
186,020
$
— $
— $
17,673,900
Past due 30 - 59 days
Past due 60 - 89 days
Past due 90 days or more
Total
11,255
719
332
1,580
12
—
4,109
3,767
14,377
$
17,412,922
$
88,856
$
208,273
$
—
404
174
578
—
—
—
16,944
4,902
14,883
$
— $
17,710,629
100
The table below reflects the recorded investment in loans classified as impaired:
Impaired loans with a specific valuation allowance under ASC 310 (1)
Impaired loans without a specific valuation allowance under ASC 310 (2)
Total impaired loans
Valuation allowance related to impaired loans
(1)
(2)
Includes no TDR loans at December 31, 2019 and 2018.
Includes TDR loans of $38.9 million and $44.5 million at December 31, 2019 and 2018, respectively.
The following table presents impaired loans by class:
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
December 31,
2019
2018
(in thousands)
$
$
$
20,979
$
95,324
116,303
$
(2,776) $
986
111,266
112,252
(681)
December 31,
2019
2018
(in thousands)
$
48,984
$
63,896
17,736
35,538
—
2,147
6,274
5,600
24
$
116,303
$
6,530
12,407
—
—
9,403
19,744
272
112,252
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 written down to realizable value instead of establishing a valuation allowance and
are included, when applicable, in the table above as “Impaired loans without a specific valuation allowance under ASC 310.”
However, before concluding that an impaired loan needs no associated valuation allowance, an assessment is made to consider
all available and relevant information for the method used to evaluate impairment and the type of loan being assessed. The valuation
allowance disclosed above is included in the allowance for credit losses reported on the Consolidated Balance Sheets as of December
31, 2019 and 2018.
101
The following table presents average investment in impaired loans by loan class:
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
Year Ended December 31,
2019
2018
2017
(in thousands)
$
45,223
$
52,496
$
33,519
15,829
25,163
—
13,315
7,716
13,882
159
7,682
15,375
—
—
9,547
19,425
300
$
121,287
$
104,825
$
18,692
22,000
—
—
13,558
16,893
204
104,866
The average investment in TDR loans for the years ended December 31, 2019, 2018, and 2017 was $52.9 million, $51.2 million,
and $55.5 million, respectively.
The following table presents interest income on impaired loans by class:
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
Year Ended December 31,
2019
2018
2017
$
1,857
$
2,113
$
(in thousands)
815
821
—
715
474
329
1
491
937
—
—
566
381
2
1,077
677
1,074
—
—
699
516
3
$
5,012
$
4,490
$
4,046
The Company is not committed to lend significant additional funds on these impaired loans.
The following table summarizes nonperforming assets:
Non-accrual loans (1)
Loans past due 90 days or more on accrual status
Accruing troubled debt restructured loans
Total nonperforming loans
Other assets acquired through foreclosure, net
Total nonperforming assets
December 31,
2019
2018
(in thousands)
55,968
$
—
28,356
84,324
13,850
98,174
$
27,746
594
36,458
64,798
17,924
82,722
$
$
(1)
Includes non-accrual TDR loans of $10.6 million and $8.0 million at December 31, 2019 and 2018, respectively.
102
Loans Acquired with Deteriorated Credit Quality
Changes in the accretable yield for loans acquired with deteriorated credit quality are as follows:
Balance, at beginning of period
Additions due to acquisition
Reclassifications from non-accretable to accretable yield (1)
Accretion to interest income
Reversal of fair value adjustments upon disposition of loans
Balance, at end of period
Year Ended December 31,
2019
2018
2017
(in thousands)
3,767
$
9,324
$
—
—
(570)
(923)
—
683
(1,018)
(5,222)
2,274
$
3,767
$
15,177
—
2,086
(2,797)
(5,142)
9,324
$
$
(1)
The primary drivers of reclassification from non-accretable to accretable yield resulted from changes in estimated cash flows.
Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses by portfolio type:
2019
Beginning Balance
Charge-offs
Recoveries
Provision
Ending balance
2018
Beginning Balance
Charge-offs
Recoveries
Provision
Ending balance
2017
Beginning Balance
Charge-offs
Recoveries
Provision
Ending balance
Year Ended December 31,
Construction
and Land
Development
Commercial
Real Estate
Residential
Real Estate
Commercial
and
Industrial
Consumer
Total
(in thousands)
$
$
$
$
$
$
22,513
$
34,829
$
11,276
$
83,118
$
141
(91)
1,431
23,894
19,599
1
(1,433)
1,482
22,513
21,175
—
(1,229)
(2,805)
$
$
$
$
139
(909)
11,674
47,273
31,648
233
(1,237)
2,177
34,829
25,673
2,269
(2,897)
5,347
$
$
$
$
594
(412)
2,620
13,714
5,500
1,038
(947)
5,867
11,276
3,851
447
(1,778)
318
$
$
$
$
8,120
(4,265)
3,039
82,302
82,527
15,034
(2,427)
13,198
83,118
73,333
8,186
(3,112)
14,268
$
$
$
$
19,599
$
31,648
$
5,500
$
82,527
$
981
128
(25)
(264)
614
776
114
(43)
276
981
672
102
(84)
122
776
$
152,717
$
$
$
$
9,122
(5,702)
18,500
167,797
140,050
16,420
(6,087)
23,000
152,717
124,704
11,004
(9,100)
17,250
$
140,050
103
The following table presents impairment method information related to loans and allowance for credit losses by loan portfolio
segment:
Commercial
Real Estate-
Owner
Occupied
Commercial
Real Estate-
Non-Owner
Occupied
Commercial
and
Industrial
Construction
and Land
Development
Residential
Real Estate
(in thousands)
Consumer
Total Loans
$
— $
11,913
$
6,919
$
— $
2,147
$
— $
20,979
17,736
23,625
42,065
17,736
35,538
48,984
5,600
5,600
6,274
8,421
24
24
95,324
116,303
2,296,342
5,159,921
9,333,059
2,142,045
1,943,735
57,059
20,932,161
2,835
50,175
—
19
—
—
53,029
$
2,316,913
$
5,245,634
$
9,382,043
$
2,147,664
$
1,952,156
$
57,083
$ 21,101,493
$
— $
11,949
$
9,844
$
— $
2,262
$
— $
24,055
18,681
24,738
43,848
18,681
36,687
53,692
5,708
5,708
6,413
8,675
52
52
99,440
123,495
2,297,168
5,177,477
9,312,100
2,113,893
1,963,116
57,383
20,921,137
3,577
60,191
—
72
—
—
63,840
Loans as of December 31, 2019;
Recorded Investment
Impaired loans with an
allowance recorded
Impaired loans with no
allowance recorded
Total loans individually
evaluated for impairment
Loans collectively evaluated
for impairment
Loans acquired with
deteriorated credit quality
Total recorded investment
Unpaid Principal Balance
Impaired loans with an
allowance recorded
Impaired loans with no
allowance recorded
Total loans individually
evaluated for impairment
Loans collectively evaluated
for impairment
Loans acquired with
deteriorated credit quality
Total unpaid principal balance
$
2,319,426
$
5,274,355
$
9,365,792
$
2,119,673
$
1,971,791
$
57,435
$ 21,108,472
Related Allowance for Credit Losses
Impaired loans with an
allowance recorded
Impaired loans with no
allowance recorded
Total loans individually
evaluated for impairment
Loans collectively evaluated
for impairment
Loans acquired with
deteriorated credit quality
$
— $
1,219
$
1,050
$
— $
507
$
— $
2,776
—
—
—
—
1,219
1,050
—
—
—
507
13,842
32,114
81,252
13,714
23,387
—
98
—
—
—
—
—
614
—
—
2,776
164,923
98
Total allowance for credit losses
$
13,842
$
33,431
$
82,302
$
13,714
$
23,894
$
614
$
167,797
104
Commercial
Real Estate-
Owner
Occupied
Commercial
Real Estate-
Non-Owner
Occupied
Commercial
and Industrial
Residential
Real Estate
(in thousands)
Construction
and Land
Development
Consumer
Total Loans
$
— $
— $
623
$
363
$
— $
— $
986
6,530
6,530
12,407
63,273
19,381
12,407
63,896
19,744
9,403
9,403
272
272
111,266
112,252
2,314,871
4,121,464
7,698,746
1,184,592
2,125,350
69,799
17,514,822
3,979
79,557
—
19
—
—
83,555
$
2,325,380
$
4,213,428
$
7,762,642
$
1,204,355
$
2,134,753
$
70,071
$ 17,710,629
$
— $
— $
1,482
$
363
$
— $
— $
1,845
11,852
18,155
103,992
27,979
25,624
10,632
198,234
11,852
18,155
105,474
28,342
25,624
10,632
200,079
2,314,871
4,121,464
7,698,746
1,184,592
2,125,350
69,799
17,514,822
5,315
95,680
4,352
72
—
—
105,419
Loans as of December 31, 2018;
Recorded Investment
Impaired loans with an
allowance recorded
Impaired loans with no
allowance recorded
Total loans individually
evaluated for impairment
Loans collectively evaluated
for impairment
Loans acquired with
deteriorated credit quality
Total recorded investment
Unpaid Principal Balance
Impaired loans with an
allowance recorded
Impaired loans with no
allowance recorded
Total loans individually
evaluated for impairment
Loans collectively evaluated
for impairment
Loans acquired with
deteriorated credit quality
Total unpaid principal balance
$
2,332,038
$
4,235,299
$
7,808,572
$
1,213,006
$
2,150,974
$
80,431
$ 17,820,320
Related Allowance for Credit Losses
Impaired loans with an
allowance recorded
Impaired loans with no
allowance recorded
Total loans individually
evaluated for impairment
Loans collectively evaluated
for impairment
Loans acquired with
deteriorated credit quality
$
— $
— $
621
$
60
$
— $
— $
—
—
—
—
—
621
—
60
—
—
14,286
20,456
82,488
11,216
22,513
—
87
9
—
—
—
—
981
—
681
—
681
151,940
96
Total allowance for credit losses
$
14,286
$
20,543
$
83,118
$
11,276
$
22,513
$
981
$
152,717
105
Troubled Debt Restructurings
A TDR loan is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the
borrower that the Company would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s
financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of
the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or
deferral of interest payments. The majority of the Company's modifications are extensions in terms or deferral of payments which
result in no lost principal or interest followed by reductions in interest rates or accrued interest. A TDR loan is also considered
impaired. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but
has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms
were market-based at the time of modification.
The following table presents information on the financial effects of TDR loans by class for the periods presented:
Pre-
Modification
Outstanding
Recorded
Investment
Number of
Loans
Year Ended December 31, 2019
Forgiven
Principal
Balance
Lost Interest
Income
(dollars in thousands)
Post-
Modification
Outstanding
Recorded
Investment
Waived Fees
and Other
Expenses
4
2
2
—
1
—
—
—
9
$
11,451
$
— $
— $
11,451
$
2,026
11,546
—
17,022
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,026
11,546
—
17,022
—
—
—
$
42,045
$
— $
— $
42,045
$
—
—
—
—
—
—
—
—
—
Pre-
Modification
Outstanding
Recorded
Investment
Number of
Loans
Year Ended December 31, 2018
Forgiven
Principal
Balance
Lost Interest
Income
(dollars in thousands)
Post-
Modification
Outstanding
Recorded
Investment
Waived Fees
and Other
Expenses
11
$
35,132
$
— $
— $
35,132
$
—
—
—
—
—
1
—
12
—
—
—
—
—
294
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
294
—
$
35,426
$
— $
— $
35,426
$
—
—
—
—
—
—
—
—
—
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
106
Pre-
Modification
Outstanding
Recorded
Investment
Number of
Loans
Year Ended December 31, 2017
Forgiven
Principal
Balance
Lost Interest
Income
(dollars in thousands)
Post-
Modification
Outstanding
Recorded
Investment
Waived Fees
and Other
Expenses
11
$
3,513
$
— $
— $
3,513
$
—
3
—
—
—
1
—
15
—
2,993
—
—
—
122
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,993
—
—
—
122
—
$
6,628
$
— $
— $
6,628
$
—
—
—
—
—
—
—
—
—
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
The following table presents TDR loans by class for which there was a payment default during the period:
Year Ended December 31,
2019
2018
2017
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
— $
—
—
—
—
—
2
—
2
$
—
—
—
—
—
—
371
—
371
(dollars in thousands)
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
1
1
1
—
2
—
1
—
6
$
87
135
308
—
1,119
—
48
—
$
1,697
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Multi-family
Construction and land development
Construction
Land
Residential real estate
Consumer
Total
A TDR loan is deemed to have a payment default when it becomes past due 90 days, goes on non-accrual, or is restructured again.
Payment defaults, along with other qualitative indicators, are considered by management in the determination of the allowance
for credit losses.
At December 31, 2019 and 2018, commitments outstanding on TDR loans totaled $0.2 million and $1.5 million, respectively.
107
Loan Purchases and Sales
The Company has a residential mortgage acquisition program, in which it partners with strategic third parties to execute flow and
bulk residential loan purchases that meet the Company's goals and underwriting criteria. The following table presents these
residential and other secondary market loan purchases and sales by loan portfolio segment:
Loan purchases
Commercial and industrial
Commercial real estate - non-owner occupied
Construction and land development
Residential real estate
Total
Loan sales
Carrying value
Gain on sale
4. PREMISES AND EQUIPMENT
The following is a summary of the major categories of premises and equipment:
Bank premises
Land and improvements
Furniture, fixtures, and equipment
Leasehold improvements
Construction in progress
Total
Accumulated depreciation and amortization
Premises and equipment, net
5. LEASES
Adoption of ASU 2016-02, Leases
Year Ended December 31,
2019
2018
(in thousands)
1,014,894
$
49,211
34,490
1,434,812
690,122
—
27,517
883,179
2,533,407
$
1,600,818
98,963
$
690
66,477
2,638
$
$
$
December 31,
2019
2018
(in thousands)
$
91,574
$
32,954
53,621
28,477
10,449
217,075
(91,237)
$
125,838
$
89,930
32,954
42,729
25,919
6,302
197,834
(78,360)
119,474
On January 1, 2019, the Company adopted the amendments to ASC 842, Leases, which requires lessees to recognize lease assets
and liabilities arising from operating leases on the balance sheet. The Company adopted the new lease guidance using the modified
retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements,
allowing entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements.
Accordingly, prior period financial results and disclosures have not been adjusted.
The Company has operating leases under which it leases its branch offices, corporate headquarters, other offices, and data facility
centers. Upon adoption of the new lease guidance, on January 1, 2019, the Company recorded a ROU asset and corresponding
lease liability of $42.5 million and $46.1 million, respectively, on the Consolidated Balance Sheet. As of December 31, 2019, the
Company's operating lease ROU asset and operating lease liability totaled $72.6 million and $78.1 million, respectively. The
increase in the operating lease ROU asset and the operating lease liability from the adoption date is due to execution of multiple
office lease extensions and new office lease agreements subsequent to the adoption date. A weighted average discount rate of
3.08% was used in the measurement of the ROU asset and lease liability as of December 31, 2019.
The Company's leases have remaining lease terms of one to 11 years, with a weighted average lease term of 8.4 years at December
31, 2019. Some leases include multiple five-year renewal options. The Company’s decision to exercise these renewal options is
based on an assessment of its current business needs and market factors at the time of the renewal. Currently, the Company has
108
no leases for which the option to renew is reasonably certain and therefore, options to renew were not factored into the calculation
of its ROU asset and lease liability as of December 31, 2019.
The following is a schedule of the Company's operating lease liabilities by contractual maturity as of December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest
Total present value of lease liabilities
(in thousands)
12,369
10,413
9,224
9,060
9,007
40,072
90,145
12,033
78,112
$
$
$
The Company also has additional operating leases for its corporate headquarters and a branch location that have not yet commenced
as of December 31, 2019. The aggregate future commitment related to the additional leases total $3.1 million. These operating
leases will commence within the next 12 months and will have lease terms of five and 11 years.
Total operating lease costs of $12.9 million and other lease costs of $4.0 million, which include common area maintenance, parking,
and taxes during the year ended December 31, 2019, were included as part of occupancy expense. Short-term lease costs were not
material for the year ended December 31, 2019. For the years ended December 31, 2018 and 2017, rent expense associated with
the Company's operating leases totaled $11.0 million and $10.4 million, respectively.
The below table shows the supplemental cash flow information related to the Company's operating leases for the year ended
December 31, 2019:
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
6. GOODWILL AND OTHER INTANGIBLE ASSETS
(in thousands)
$
12,435
43,681
Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair value. Goodwill
and other intangible assets acquired in a business combination that are determined to have an indefinite useful life are not subject
to amortization, but are subsequently evaluated for impairment at least annually. The Company has goodwill of $289.9 million as
of December 31, 2019, which has been allocated to the Nevada, Northern California, Technology & Innovation, and HFF operating
segments.
The Company performs its annual goodwill and intangibles impairment tests as of October 1 of each year, or more often if events
or circumstances indicate that the carrying value may not be recoverable. During the years ended December 31, 2019, 2018, and
2017, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was
necessary and, based on the Company's annual goodwill and intangibles impairment tests as of October 1 of each of these years,
it was determined that goodwill and intangible assets are not impaired.
109
The following is a summary of the Company's acquired intangible assets:
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in thousands)
Subject to amortization
Core deposit intangibles
$
14,647
$
7,284
$
7,363
$
14,647
$
5,737
$
8,910
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
(in thousands)
Not subject to amortization
Trade name
$
350
$
— $
350
$
350
$
— $
350
As of December 31, 2019, the Company's core deposit intangible assets had a weighted average estimated useful life of 5.5 years.
The Company's remaining core deposit intangible assets consist of those acquired in the acquisition of Bridge and are being
amortized using an accelerated amortization method over a period of 10 years. Amortization expense recognized on amortizable
intangibles totaled $1.5 million, $1.6 million, and $2.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Below is a summary of future estimated aggregate amortization expense:
2020
2021
2022
2023
2024
Thereafter
Total
December 31, 2019
(in thousands)
$
$
1,494
1,433
1,364
1,289
1,206
577
7,363
110
7. DEPOSITS
The table below summarizes deposits by type:
Non-interest-bearing demand deposits
Interest-bearing transaction accounts
Savings and money market accounts
Time certificates of deposit ($250,000 or more)
Other time deposits
Total deposits
December 31,
2019
2018
(in thousands)
$
8,537,905
$
2,760,865
9,120,747
1,426,133
950,843
7,456,141
2,555,609
7,330,709
1,009,900
825,088
$
22,796,493
$
19,177,447
The summary of the contractual maturities for all time deposits as of December 31, 2019 is as follows:
2020
2021
2022
2023
2024
Total
$
December 31,
(in thousands)
2,259,182
105,237
7,953
3,502
1,102
$
2,376,976
WAB is a participant in the Promontory Interfinancial Network, a network that offers deposit placement services such as CDARS
and ICS, which offer products that qualify large deposits for FDIC insurance. Federal banking law and regulation places restrictions
on depository institutions regarding brokered deposits because of the general concern that these deposits are not relationship-based
and are at a greater risk of being withdrawn, thus posing liquidity risk for institutions that gather brokered deposits in significant
amounts. At December 31, 2019 and 2018, the Company had $407.7 million and $322.9 million, respectively, of reciprocal CDARS
deposits and $661.8 million and $706.9 million, respectively, of ICS deposits. At December 31, 2019 and 2018, the Company had
$1.1 billion and $718.2 million, respectively, of wholesale brokered deposits. In addition, non-interest-bearing deposits for which
the Company provides account holders with earnings credits or referral fees totaled $3.1 billion and $2.3 billion at December 31,
2019 and 2018, respectively. The Company incurred $30.5 million and $18.0 million in deposit related costs on these deposits
during the years ended December 31, 2019 and 2018, respectively.
111
8. OTHER BORROWINGS
The following table summarizes the Company’s borrowings as of December 31, 2019 and 2018:
Short-Term:
Federal funds purchased
FHLB advances
Total short-term borrowings
December 31,
2019
2018
(in thousands)
$
$
— $
—
— $
256,000
235,000
491,000
The Company maintains federal fund lines of credit totaling $1.2 billion as of December 31, 2019, which have rates comparable
to the federal funds effective rate plus 0.10% to 0.20%. As of December 31, 2019, there were no outstanding balances on the
Company's lines of credit. As of December 31, 2018, outstanding balances on these federal fund lines of credit totaled $256.0
million.
The Company also maintains secured lines of credit with the FHLB and the FRB. The Company’s borrowing capacity is determined
based on collateral pledged, generally consisting of investment securities and loans, at the time of the borrowing. At December
31, 2019, the Company had no short-term FHLB overnight advances. At December 31, 2018, short-term FHLB advances of $235.0
million had an interest rate of 2.56%.
Other short-term borrowing sources available to the Company include customer repurchase agreements, which have a weighted
average rate of 0.15% and totaled $16.7 million and $22.4 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, the Company had additional available credit with the FHLB of approximately $4.5 billion
and $2.5 billion, respectively, and with the FRB of approximately $1.1 billion and $1.3 billion, respectively.
9. QUALIFYING DEBT
Subordinated Debt
The Parent has $175.0 million of subordinated debentures, which were recorded net of issuance costs of $5.5 million, and mature
July 1, 2056. Beginning on or after July 1, 2021, the Company may redeem the debentures, in whole or in part, at their principal
amount plus any accrued and unpaid interest. The debentures have a fixed interest rate of 6.25% per annum.
WAB has $150.0 million of subordinated debt, which was recorded net of debt issuance costs of $1.8 million, and matures July
15, 2025. The subordinated debt has a fixed interest rate of 5.00% through June 30, 2020 and then converts to a variable rate of
3.20% plus three-month LIBOR through maturity.
To hedge the interest rate risk on the Company's subordinated debt issuances, the Company entered into fair value interest rate
hedges with receive fixed/pay variable swaps.
The carrying value of all subordinated debt issuances, which includes the fair value of the related hedges, totals $319.2 million
and $299.4 million at December 31, 2019 and 2018, respectively.
112
Junior Subordinated Debt
The Company has formed or acquired through acquisition eight statutory business trusts, which exist for the exclusive purpose of
issuing Cumulative Trust Preferred Securities.
The Company's junior subordinated debt has contractual balances and maturity dates as follows:
Name of Trust
At fair value
BankWest Nevada Capital Trust II
Intermountain First Statutory Trust I
First Independent Statutory Trust I
WAL Trust No. 1
WAL Statutory Trust No. 2
WAL Statutory Trust No. 3
Total contractual balance
FVO on junior subordinated debt
Junior subordinated debt, at fair value
At amortized cost
Bridge Capital Holdings Trust I
Bridge Capital Holdings Trust II
Total contractual balance
Purchase accounting adjustment, net of accretion (1)
Junior subordinated debt, at amortized cost
Total junior subordinated debt
Maturity
2019
2018
December 31,
2033
2034
2035
2036
2037
2037
2035
2036
(in thousands)
$
15,464
$
10,310
7,217
20,619
5,155
7,732
66,497
(4,812)
61,685
12,372
5,155
17,527
(4,845)
12,682
74,367
$
$
$
$
$
$
$
$
15,464
10,310
7,217
20,619
5,155
7,732
66,497
(17,812)
48,685
12,372
5,155
17,527
(5,155)
12,372
61,057
(1)
The purchase accounting adjustment is being accreted over the remaining life of the trusts, pursuant to accounting guidance.
With the exception of debt issued by Bridge Capital Trust I and Bridge Capital Trust II, junior subordinated debt is recorded at
fair value at each reporting date due to the FVO election made by the Company under ASC 825. The Company did not make the
FVO election for the junior subordinated debt acquired as part of the Bridge acquisition. Accordingly, the carrying value of these
trusts does not reflect the current fair value of the debt and includes a fair market value adjustment established at acquisition that
is being accreted over the remaining life of the trusts.
The weighted average interest rate of all junior subordinated debt as of December 31, 2019 was 4.25%, which is three-month
LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 5.15% at December 31, 2018.
In the event of certain changes or amendments to regulatory requirements or federal tax rules, the debt is redeemable in whole.
The obligations under these instruments are fully and unconditionally guaranteed by the Company and rank subordinate and junior
in right of payment to all other liabilities of the Company. Based on guidance issued by the FRB, the Company's securities continue
to qualify as Tier 1 Capital.
113
10. STOCKHOLDERS' EQUITY
Stock-Based Compensation
Restricted Stock Awards
The Incentive Plan, as amended, gives the BOD the authority to grant up to 10.5 million in stock awards consisting of unrestricted
stock, stock units, dividend equivalent rights, stock options (incentive and non-qualified), stock appreciation rights, restricted
stock, and performance and annual incentive awards. The Incentive Plan limits the maximum number of shares of common stock
that may be awarded to any person eligible for an award to 300,000 per calendar year and also limits the total compensation (cash
and stock) that can be awarded to a non-employee director to $600,000 in any calendar year. Stock awards available for grant at
December 31, 2019 were 2.9 million.
Restricted stock awards granted to employees generally vest over a three-year period. Stock grants made to non-employee WAL
directors in 2019 became fully vested on July 1, 2019. The Company estimates the compensation cost for stock grants based upon
the grant date fair value. Stock compensation expense is recognized on a straight-line basis over the requisite service period for
the entire award. Stock compensation expense related to restricted stock awards and stock options granted to employees are
included in Salaries and employee benefits in the Consolidated Income Statement. For restricted stock awards granted to WAL
directors, related stock compensation expense is included in Legal, professional, and directors' fees. For the year ended December
31, 2019, the Company recognized $17.4 million in stock-based compensation expense related to these stock grants, compared
to $16.6 million in 2018, and $14.3 million in 2017.
In addition, the Company previously granted shares of restricted stock to certain members of executive management that had both
performance and service conditions that affect vesting. There were no such grants made during the years ended December 31,
2019 and 2018; however, expense is still being recognized for the grants made in 2017 as they also have a three-year vesting
period. For the year ended December 31, 2019, the Company recognized $1.9 million in stock-based compensation expense related
to these performance-based restricted stock grants, compared to $2.5 million in 2018, and $2.3 million in 2017.
A summary of the status of the Company’s unvested shares of restricted stock and changes during the years then ended is presented
below:
Balance, beginning of period
Granted
Vested
Forfeited
Balance, end of period
December 31,
2019
2018
Shares
Weighted
Average Grant
Date Fair Value
Shares
Weighted
Average Grant
Date Fair Value
(in thousands, except per share amounts)
1,027
$
516
(469)
(114)
960
$
47.53
46.04
39.60
50.80
49.98
1,142
$
425
(477)
(63)
1,027
$
36.96
58.02
32.31
43.62
47.53
The total weighted average grant date fair value of all stock awards, including the performance-based restricted stock awards,
granted during the years ended December 31, 2019, 2018, and 2017 was $23.7 million, $24.7 million, and $26.1 million, respectively.
The total fair value of restricted stock that vested during the years ended December 31, 2019, 2018, and 2017 was $21.3 million,
$27.4 million, and $29.1 million, respectively.
As of December 31, 2019, there was $23.0 million of total unrecognized compensation cost related to unvested share-based
compensation arrangements granted under the Incentive Plan. That cost is expected to be recognized over a weighted average
period of 1.62 years.
114
Performance Stock Units
The Company grants to members of its executive management performance stock units that do not vest unless the Company
achieves a specified cumulative EPS target and a TSR performance measure over a three-year performance period. The number
of shares issued will vary based on the cumulative EPS target and relative TSR performance factor that is achieved. The Company
estimates the cost of performance stock units based upon the grant date fair value and expected vesting percentage over the three-
year performance period. For the year ended December 31, 2019, the Company recognized $6.9 million in stock-based
compensation expense related to these performance stock units, compared to $6.4 million and $6.5 million in stock-based
compensation expense for such units in 2018 and 2017, respectively.
The three-year performance period for the 2016 grant ended on December 31, 2018, and the Company's cumulative EPS for the
performance period exceeded the level required for a maximum award under the terms of the grant. As a result, executive
management members were entitled to the maximum award of 202,776 shares, which was paid out in the first quarter of 2019.
The three-year performance period for the 2017 grant ended on December 31, 2019, and the Company's cumulative EPS and TSR
performance measure for the performance period exceeded the level required for a maximum award under the terms of the grant.
As a result, 163,901 shares will become fully vested and distributed to executive management in the first quarter of 2020.
Common Stock Repurchase
On December 12, 2018, the Company announced that it had adopted a common stock repurchase plan, pursuant to which the
Company was authorized to repurchase up to $250 million of its shares of common stock through December 31, 2019. During the
year ended December 31, 2019, the Company repurchased 2,822,402 shares of its common stock, pursuant to the repurchase plan.
The shares were repurchased at a weighted average price of $42.53, for a total payment of $120.1 million. The Company's common
stock repurchase program was renewed through December 2020, authorizing the Company to repurchase up to an additional $250.0
million of its outstanding common stock.
Cash Dividend
During the year ended December 31, 2019, the Company's Board of Directors declared two quarterly cash dividends of $0.25 per
share of common stock, totaling $51.3 million.
Treasury Shares
Treasury share purchases represent shares surrendered to the Company equal in value to the statutory payroll tax withholding
obligations arising from the vesting of employee restricted stock awards. During the year ended December 31, 2019, the Company
purchased treasury shares of 210,657 at a weighted average price of $45.80 per share, compared to 223,125 shares at a weighted
average price per share of $57.88 in 2018, and 269,865 shares at a weighted average price per share of $51.16 in 2017.
115
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of tax, for the
periods indicated:
Unrealized
holding gains
(losses) on AFS
Unrealized
holding gains
(losses) on SERP
Unrealized
holding gains
(losses) on junior
subordinated debt
(in thousands)
Impairment loss
on securities
Total
Balance, December 31, 2016
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive
income (loss)
Balance, December 31, 2017
Balance, January 1, 2018 (1)
Other comprehensive (loss) income
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Net current-period other comprehensive
(loss) income
Balance, December 31, 2018
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
Net current-period other
comprehensive income (loss)
Balance, December 31, 2019
$
$
$
$
(14,916) $
121
$
9,956
$
144
$
6,334
(1,444)
4,890
(10,026) $
(12,556)
(40,808)
5,773
(35,035)
(47,591) $
71,222
(2,232)
68,990
21,399
$
$
264
—
264
385
469
(77)
—
(77)
(3,604)
—
(3,604)
6,352
$
7,740
5,693
—
5,693
$
—
—
—
144
144
—
—
—
392
$
13,433
$
144
$
(412)
—
(412)
(20) $
(9,804)
—
(9,804)
3,629
$
—
(144)
(144)
— $
(4,695)
2,994
(1,444)
1,550
(3,145)
(4,203)
(35,192)
5,773
(29,419)
(33,622)
61,006
(2,376)
58,630
25,008
(1)
As adjusted for adoption of ASU 2016-01 and ASU 2018-02. The cumulative effect of adoption of this guidance at January 1, 2018 resulted in an
increase to retained earnings of $1.1 million and a corresponding decrease to accumulated other comprehensive income.
The following table presents reclassifications out of accumulated other comprehensive income:
Income Statement Classification
2019
2018
2017
Year Ended December 31,
Gain (loss) on sales of investment securities, net
Income tax (expense) benefit
Net of tax
$
$
(in thousands)
3,152
(776)
2,376
$
$
(7,656) $
1,883
(5,773) $
2,343
(899)
1,444
116
12. DERIVATIVES AND HEDGING ACTIVITIES
The Company is a party to various derivative instruments. Derivative instruments are contracts between two or more parties that
have a notional amount and an underlying variable, require a small or no initial investment, and allow for the net settlement of
positions. A derivative’s notional amount serves as the basis for the payment provision of the contract and takes the form of units,
such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign
exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the
number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary type of derivatives that the Company uses are interest rate swaps. Generally, these instruments are used to help manage
the Company's exposure to interest rate risk and meet client financing and hedging needs.
Derivatives are recorded at fair value on the Consolidated Balance Sheets, after taking into account the effects of bilateral collateral
and master netting agreements. These agreements allow the Company to settle all derivative contracts held with the same
counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable.
As of December 31, 2019, 2018, and 2017, the Company does not have any outstanding cash flow hedges.
Derivatives Designated in Hedge Relationships
The Company utilizes derivatives that have been designated as part of a hedge relationship in accordance with the applicable
accounting guidance to minimize the exposure to changes in benchmark interest rates and volatility of net interest income and
EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps,
which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another
interest rate index.
The Company has entered into pay fixed/receive variable interest rate swaps designated as fair value hedges of certain fixed rate
loans. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the
lives of the contracts without exchanging the notional amounts.
The Company has also entered into receive fixed/pay variable interest rate swaps, designated as fair value hedges on its fixed rate
subordinated debt offerings. As a result, the Company is paying a floating rate of three month LIBOR plus 3.16% and is receiving
semi-annual fixed payments of 5.00% to match the payments on the $150.0 million subordinated debt. For the fair value hedge
on the Parent's $175.0 million subordinated debentures issued on June 16, 2016, the Company is paying a floating rate of three-
month LIBOR plus 3.25% and is receiving quarterly fixed payments at 6.25% to match the payments on the debt.
Derivatives Not Designated in Hedge Relationships
Management also enters into certain foreign exchange derivative contracts and back-to-back interest rate swaps that are not
designated as accounting hedges. Foreign exchange derivative contracts include spot, forward, and forward window contracts.
The purpose of these derivative contracts is to mitigate foreign currency risk on transactions entered into or on behalf of customers.
Contracts with customers, along with the related derivative trades the Company places, are both remeasured at fair value, and are
referred to as economic hedges since they economically offset the Company's exposure. The Company's back-to-back interest rate
swaps are used to manage long-term interest rate risk.
117
As of December 31, 2019 and 2018, the following amounts are reflected on the Consolidated Balance Sheet related to cumulative
basis adjustments for fair value hedges:
December 31, 2019
December 31, 2018
Carrying Value of
Hedged Assets/
(Liabilities)
Cumulative Fair
Value Hedging
Adjustment (1)
Carrying Value of
Hedged Assets/
(Liabilities)
Cumulative Fair
Value Hedging
Adjustment (1)
(in thousands)
Loans - HFI, net of deferred loan fees and costs
$
578,063
$
53,292
$
650,428
$
Qualifying debt
(319,197)
401
(299,401)
23,039
19,691
(1)
Included in the carrying value of the hedged assets/(liabilities)
For the Company's derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings
in the same line item as the offsetting loss or gain on the related interest rate swaps. For loans, the gain or loss on the hedged item
is included in interest income and for subordinated debt, the gain or loss on the hedged item is included in interest expense.
Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of the Company's derivative instruments on a gross and net basis as of December
31, 2019, 2018, and 2017. The change in the notional amounts of these derivatives from December 31, 2017 to December 31,
2019 indicates the volume of the Company's derivative transaction activity during these periods. The derivative asset and liability
balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative
assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow the
Company to settle all derivative contracts with the same counterparty on a net basis and to offset the net derivative position with
the related collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, the Company
does not adjust those derivative amounts with counterparties. The fair value of derivative contracts, after taking into account the
effects of master netting agreements, is included in other assets or other liabilities on the Consolidated Balance Sheets, as indicated
in the following table:
December 31, 2019
December 31, 2018
December 31, 2017
Fair Value
Fair Value
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
(in thousands)
Derivatives designated as hedging instruments:
Fair value hedges
Interest rate swaps
$ 862,952
$
1,778
$
55,471
$ 965,705
$
2,162
$
44,892
$ 993,432
$
1,703
$
53,581
Total
Netting adjustments (1)
Net derivatives in the balance
sheet
862,952
—
1,778
21
55,471
965,705
21
—
2,162
2,162
44,892
2,162
993,432
—
1,703
896
53,581
896
$ 862,952
$
1,757
$
55,450
$ 965,705
$
— $
42,730
$ 993,432
$
807
$
52,685
Derivatives not designated as hedging instruments:
Foreign currency contracts
Interest rate swaps
$
$
6,711
2,932
9,643
$
$
44
81
125
$
$
18
81
99
$
$
49,690
2,378
52,068
$
$
454
27
481
$
$
201
$
85,335
27
36,969
228
$ 122,304
$
$
1,232
776
2,008
$
$
983
776
1,759
Total
(1)
Netting adjustments represent the amounts recorded to convert the Company's derivative balances from a gross basis to a net basis in accordance with
the applicable accounting guidance.
118
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive
replacement value of the contracts. Management generally enters into bilateral collateral and master netting agreements that provide
for the net settlement of all contracts with the same counterparty. Additionally, management monitors counterparty credit risk
exposure on each contract to determine appropriate limits on the Company's total credit exposure across all product types. In
general, the Company has a zero credit threshold with regard to derivative exposure with counterparties. Management reviews
the Company's collateral positions on a daily basis and exchanges collateral with counterparties in accordance with standard ISDA
documentation and other related agreements. The Company generally holds collateral in the form of cash deposits or highly rated
securities issued by the U.S. Treasury or government-sponsored enterprises, such as GNMA, FNMA, and FHLMC. The total
collateral netted against net derivative liabilities totaled $55.5 million at December 31, 2019, $44.9 million at December 31, 2018,
and $53.6 million at December 31, 2017.
The following table summarizes the Company's largest exposure to an individual counterparty at the dates indicated:
Largest gross exposure (derivative asset) to an individual counterparty
Collateral posted by this counterparty
Derivative liability with this counterparty
Collateral pledged to this counterparty
Net exposure after netting adjustments and collateral
Credit Risk Contingent Features
2019
December 31,
2018
(in thousands)
2017
$
$
1,757
$
1,610
—
—
1,411
$
—
23,906
25,761
147
$
— $
893
—
40,340
60,476
—
Management has entered into certain derivative contracts that require the Company to post collateral to the counterparties when
these contracts are in a net liability position. Conversely, the counterparties may be required to post collateral when these contracts
are in a net asset position. The amount of collateral to be posted is based on the amount of the net liability and exposure thresholds.
As of December 31, 2019, 2018, and 2017, the aggregate fair value of all derivative contracts with credit risk contingent features
(i.e., those containing collateral posting provisions) held by the Company that were in a net liability position totaled $55.5 million,
$44.9 million, and $53.6 million, respectively. As of December 31, 2019, the Company was in an over-collateralized net position
of $29.2 million after considering $84.7 million of collateral held in the form of cash and securities. As of December 31, 2018
and 2017, the Company was in an over-collateralized position of $7.6 million and $25.0 million, respectively.
13. EARNINGS PER SHARE
Diluted EPS is based on the weighted average outstanding common shares during the period, including common stock equivalents.
Basic EPS is based on the weighted average outstanding common shares during the period.
The following table presents the calculation of basic and diluted EPS:
Weighted average shares - basic
Dilutive effect of stock awards
Weighted average shares - diluted
Net income
Earnings per share - basic
Earnings per share - diluted
Year Ended December 31,
2019
2018
2017
(in thousands, except per share amounts)
102,667
466
103,133
104,669
701
105,370
$
499,171
$
435,788
$
4.86
4.84
4.16
4.14
104,179
818
104,997
325,492
3.12
3.10
The Company had no anti-dilutive stock options outstanding as of December 31, 2019 and 2018.
119
14. INCOME TAXES
The provision for income taxes charged to operations consists of the following:
Current
Deferred
Total tax provision
Year Ended December 31,
2019
2018
2017
(in thousands)
$
$
110,184
(5,129)
105,055
$
$
91,249
(16,709)
74,540
$
$
37,854
88,471
126,325
The reconciliation between the statutory federal income tax rate and the Company’s effective tax rate is summarized as follows:
Income tax at statutory rate
Increase (decrease) resulting from:
State income taxes, net of federal benefits
Tax-exempt income
Change in federal rate applied to deferred items
Federal NOL and other carryback items
Excise tax
Investment tax credits
Other, net
Total tax provision
Year Ended December 31,
2019
2018
2017
(in thousands)
$
126,888
$
107,169
$
158,136
11,004
(19,527)
—
—
—
(15,000)
1,690
9,015
(18,322)
—
(15,341)
(137)
(6,673)
(1,171)
9,765
(26,403)
(10,411)
—
9,689
(7,361)
(7,090)
$
105,055
$
74,540
$
126,325
For the years ended December 31, 2019, 2018, and 2017 the Company's effective tax rate was 17.39%, 14.61%, and 27.96%,
respectively. The increase in the effective tax rate from 2018 to 2019 is due primarily to management's decision during the third
quarter of 2018 to carryback its 2017 federal NOLs. The decrease in the effective tax rate from 2017 to 2018 is due primarily to
the decrease in the federal statutory rate effective in 2018, a reduction in excise taxes, and management's decision to carryback
its 2017 federal NOLs. The reduction in excise taxes from 2017 to 2018 resulted from not deferring WAB's 2018 dividend from
BW Real Estate as was the case in 2017. The Company's 2017 federal NOLs resulted from the acceleration of deductions into and
deferral of revenue from 2017. As the federal income tax rate was higher in the years to which the carryback is applicable, a larger
tax benefit results from the decision to carryback the 2017 federal NOLs, rather than carry forward these losses to future taxable
years.
120
The cumulative tax effects of the primary temporary differences are shown in the following table:
Deferred tax assets:
Allowance for credit losses
Lease liability (1)
Stock-based compensation
Net operating loss carryovers
Unrealized loss on AFS securities
Other
Total gross deferred tax assets
Deferred tax asset valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Right of use asset (1)
Unrealized gain on AFS securities
Unrealized gain on junior subordinated debt
Deferred loan costs
Insurance premiums
Premises and equipment
Estimated loss reserve
50(d) income
Other
Total deferred tax liabilities
Deferred tax assets, net
December 31,
2019
2018
(in thousands)
$
44,809
$
20,264
7,351
5,619
—
19,361
97,404
—
97,404
(18,823)
(7,264)
(1,229)
(10,789)
(4,514)
(8,372)
(14,890)
(6,792)
(6,706)
(79,379)
$
18,025
$
42,833
—
8,718
6,255
16,047
20,687
94,540
(2,373)
92,167
—
—
(5,833)
(9,528)
(6,527)
(1,201)
(31,592)
(1,624)
(3,872)
(60,177)
31,990
(1)
Upon adoption of ASC 842 on January 1, 2019, a lease liability DTA and a right of use asset DTL were established and totaled $9.7 million and $9.1
million, respectively. While there may be significant changes in the separate DTA and DTL balances of these two items, the aggregate effect of these
two changes will generally offset and therefore are not discussed as significant changes to the net deferred balance.
Deferred tax assets and liabilities are included in the Consolidated Financial Statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are expected to be reversed. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Net deferred tax assets decreased $14.0 million to $18.0 million from December 31, 2018. This overall decrease in net deferred
tax assets was primarily the result of the increases in the fair market value of AFS securities. In addition, there was a large decrease
to the overall estimated loss reserve, which was largely offset by increases to DTLs related to premises and equipment and income
associated with tax credits for lease pass-through transactions (50(d) income).
Although realization is not assured, the Company believes that the realization of the recognized net deferred tax asset of $18.0
million at December 31, 2019 is more-likely-than-not based on expectations as to future taxable income and based on available
tax planning strategies that could be implemented if necessary to prevent a carryover from expiring.
As of December 31, 2019, the Company has no deferred tax valuation allowance. As of December 31, 2018, the Company had a
deferred tax valuation allowance of $2.4 million related to net capital loss carryovers.
As of December 31, 2019, the Company’s gross federal NOL carryovers, all of which are subject to limitations under Section 382
of the IRC, totaled $45.8 million, for which a deferred tax asset of $5.5 million has been recorded, reflecting the expected benefit
of these federal NOL carryovers remaining after application of the Section 382 limitation. The Company also has varying gross
amounts of state NOL carryovers, primarily in Arizona. The gross Arizona NOL carryovers totaled approximately $2.2 million.
A deferred tax asset of $0.2 million has been recorded to reflect the expected benefit of all state NOL carryovers remaining. If not
utilized, a portion of the federal and state NOL carryovers will begin to expire in 2024. As of December 31, 2019, the Company
had no federal tax credit carryovers and $1.4 million of state tax credit carryovers. If not utilized, a portion of the state tax credit
carryovers will begin to expire in 2023. In management’s opinion, it is more-likely-than-not that the results of future operations
will generate sufficient taxable income to realize all of the deferred tax benefits related to these NOL and tax credit carryovers.
121
The Company files income tax returns in the U.S. federal jurisdiction and in various states. With few exceptions, the Company is
no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before 2015.
When tax returns are filed, it is highly certain that most positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would
be ultimately sustained. The benefit of a tax position is recognized in the Consolidated Financial Statements in the period in which,
based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized
tax benefits on the accompanying Consolidated Balance Sheets along with any associated interest and penalties payable to the
taxing authorities upon examination.
The total gross activity of unrecognized tax benefits related to the Company's uncertain tax positions are shown in the following
table:
Beginning balance
Gross increases
Tax positions in prior periods
Current period tax positions
Gross decreases
Tax positions in prior periods
Settlements
Lapse of statute of limitations
Ending balance
December 31,
2019
2018
(in thousands)
$
484
$
1,038
—
1,255
—
—
—
$
1,739
$
—
—
(247)
(307)
—
484
During the year ended December 31, 2019, the Company added a new current year position, which resulted in a tax detriment of
$0.8 million, inclusive of interest and penalties.
As of December 31, 2019 and 2018, the total amount of unrecognized tax benefits, net of associated deferred tax benefits, that
would impact the effective tax rate, if recognized, is $1.1 million and $0.3 million, respectively. The Company anticipates that
$0.1 million of the unrecognized tax benefits will be resolved within the next 12 months.
During the years ended December 31, 2019, 2018, and 2017, the Company recognized no additional amounts for interest and
penalties. As of December 31, 2019 and 2018, the Company has accrued total liabilities of $0.1 million for penalties and no
amounts for interest.
LIHTC and renewable energy projects
As discussed in "Note 1. Summary of Significant Accounting Policies," the Company holds ownership interests in limited
partnerships and limited liability companies that invest in affordable housing and renewable energy projects. These investments
are designed to generate a return primarily through the realization of federal tax credits and deductions. The limited liability entities
are considered to be VIEs; however, as a limited partner, the Company is not the primary beneficiary and is not required to
consolidate these entities.
At December 31, 2019, the Company’s exposure to loss as a result of its involvement in these entities was limited to $487.3 million,
which reflects the Company’s recorded investment in these projects, net of certain unfunded capital commitments, and previously
recorded tax credits which remain subject to recapture by taxing authorities. During the years ended December 31, 2019, 2018,
and 2017, the Company did not provide financial or other support to these entities that was not contractually required.
Investments in LIHTC and renewable energy total $409.4 million and $369.6 million as of December 31, 2019 and 2018,
respectively. Unfunded LIHTC and renewable energy obligations are included as part of other liabilities on the Consolidated
Balance Sheet and total $191.0 million and $196.3 million as of December 31, 2019 and 2018, respectively. For the years ended
December 31, 2019, 2018, and 2017, $41.5 million, $35.9 million, and $25.4 million of amortization related to LIHTC investments
was recognized as a component of income tax expense, respectively.
122
15. COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and letters of credit. They involve, to
varying degrees, elements of credit risk in excess of amounts recognized on the Consolidated Balance Sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrower's current financial condition may
indicate less ability to pay than when the commitment was originally made. In the case of letters of credit, the risk arises from the
potential failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on
the letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with
interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as
it would for a loan to that customer.
Letters of credit and financial guarantees are commitments issued by the Company to guarantee the performance of a customer
to a third party in borrowing arrangements. The Company generally has recourse to recover from the customer any amounts paid
under the guarantees. Typically, letters of credit issued have expiration dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
Commitments to extend credit, including unsecured loan commitments of $895,175 at December 31, 2019
and $770,114 at December 31, 2018
Credit card commitments and financial guarantees
Letters of credit, including unsecured letters of credit of $5,850 at December 31, 2019 and $21,879 at
December 31, 2018
Total
December 31,
2019
2018
(in thousands)
$
$
8,348,421
$
302,909
175,778
8,827,108
$
7,556,741
237,312
390,161
8,184,214
The following table represents the contractual commitments for lines and letters of credit by maturity at December 31, 2019:
Commitments to extend credit
Credit card commitments and financial
guarantees
Letters of credit
Total
$
$
Total Amounts
Committed
Less Than 1 Year
1-3 Years
3-5 Years
After 5 Years
Amount of Commitment Expiration per Period
8,348,421
$
2,873,303
$
3,170,848
$
1,299,506
$
1,004,764
(in thousands)
302,909
175,778
302,909
156,375
—
18,786
—
617
—
—
8,827,108
$
3,332,587
$
3,189,634
$
1,300,123
$
1,004,764
Commitments to extend credit are agreements to lend to a customer provided that there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a
fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant
violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets
used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed
on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are included in other
liabilities as a separate loss contingency and are not included in the allowance for credit losses reported in "Note 3. Loans, Leases
and Allowance for Credit Losses" of these Consolidated Financial Statements. This loss contingency for unfunded loan
commitments and letters of credit was $9.0 million and $8.2 million as of December 31, 2019 and 2018, respectively. Changes to
this liability are adjusted through other expense in the Consolidated Income Statements.
123
Concentrations of Lending Activities
The Company’s lending activities are driven in large part by the customers served in the market areas where the Company has
branch offices in the states of Arizona, Nevada, and California. Despite the geographic concentration of lending activities, the
Company does not have a single external customer from which it derives 10% or more of its revenues. The Company monitors
concentrations within four broad categories: geography, industry, product, and collateral. The Company's loan portfolio includes
significant credit exposure to the CRE market. As of December 31, 2019 and 2018, CRE related loans accounted for approximately
45% and 49% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan-to-value
ratio of generally not more than 75%. Approximately 31% and 36% of these CRE loans, excluding construction and land loans,
were owner occupied as of December 31, 2019 and 2018, respectively.
Contingencies
The Company is involved in various lawsuits of a routine nature that are being handled and defended in the ordinary course of
the Company’s business. Expenses are being incurred in connection with these lawsuits, but in the opinion of management, based
in part on consultation with outside legal counsel, the resolution of these lawsuits and associated defense costs will not have a
material impact on the Company’s financial position, results of operations, or cash flows.
16. FAIR VALUE ACCOUNTING
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an
orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such
asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach,
the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques
include the assumptions that market participants would use in pricing an asset or liability. ASC 825 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 825 are described in "Note 1. Summary of
Significant Accounting Policies" of these Notes to Consolidated Financial Statements.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair
value is based upon internally-developed models that primarily use, as inputs, observable market-based parameters. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts
to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters.
Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair
value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes
the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of
fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the
presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts
presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value
is set forth below. Transfers between levels in the fair value hierarchy are recognized as of the end of the month following the
event or change in circumstances that caused the transfer.
Under ASC 825, the Company elected the FVO treatment for junior subordinated debt issued by WAL. This election is irrevocable
and results in the recognition of unrealized gains and losses on these items at each reporting date. These unrealized gains and
losses are recognized as part of other comprehensive income rather than earnings. The Company did not elect FVO treatment for
the junior subordinated debt assumed in the Bridge Capital Holdings acquisition.
For the years ended December 31, 2019, 2018, and 2017, unrealized gains and losses from fair value changes on junior subordinated
debt were as follows:
Unrealized gains/(losses)
Changes included in OCI, net of tax
Year Ended December 31,
2019
2018
2017
(in thousands)
$
(13,001) $
(9,804)
7,550
$
5,693
(5,824)
(3,604)
124
Fair value on a recurring basis
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
AFS securities: Securities classified as AFS are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities,
the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider
observable data that may include quoted prices in active markets, dealer quotes, market spreads, cash flows, the U.S. Treasury
yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s
terms and conditions, among other things.
Equity securities: Preferred stock and CRA investments are reported at fair value utilizing Level 1 inputs.
Independent pricing service: The Company's independent pricing service provides pricing information on the majority of the
Company's Level 1 and 2 AFS securities. For a small subset of securities, other pricing sources are used, including observed prices
on publicly-traded securities and dealer quotes. Management independently evaluates the fair value measurements received from
the Company's third-party pricing service through multiple review steps. First, management reviews what has transpired in the
marketplace with respect to interest rates, credit spreads, volatility, and mortgage rates, among other things, and develops an
expectation of changes to the securities' valuations from the previous quarter. Then, management selects a sample of investment
securities and compares the values provided by its primary third-party pricing service to the market values obtained from secondary
sources, including other pricing services and safekeeping statements, and evaluates those with notable variances. In instances
where there are discrepancies in pricing from various sources and management expectations, management may manually price
securities using currently observed market data to determine whether they can develop similar prices or may utilize bid information
from broker dealers. Any remaining discrepancies between management's review and the prices provided by the vendor are
discussed with the vendor and/or the Company's other valuation advisors.
Interest rate swaps: Interest rate swaps are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations
to value its interest rate swaps.
Junior subordinated debt: The Company estimates the fair value of its junior subordinated debt using a discounted cash flow
model which incorporates the effect of the Company’s own credit risk in the fair value of the liabilities (Level 3). The Company’s
cash flow assumptions are based on contractual cash flows as the Company anticipates that it will pay the debt according to its
contractual terms.
125
The fair value of assets and liabilities measured at fair value on a recurring basis was determined using the following inputs as of
the periods presented:
Fair Value Measurements at the End of the Reporting Period Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Fair Value
December 31, 2019
Assets:
Available-for-sale debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total AFS debt securities
Equity securities
CRA investments
Preferred stock
Total equity securities
Loans - HFS
Derivative assets (1)
Liabilities:
Junior subordinated debt (2)
Derivative liabilities (1)
$
— $
10,142
$
— $
—
5,127
—
—
—
—
27,040
—
—
32,167
52,504
86,197
138,701
$
$
$
— $
—
— $
—
$
$
$
$
$
94,253
94,834
7,773
1,129,227
1,412,060
554,855
—
10,000
999
—
—
—
—
—
—
—
—
—
10,142
94,253
99,961
7,773
1,129,227
1,412,060
554,855
27,040
10,000
999
3,314,143
$
— $
3,346,310
— $
—
— $
21,803
$
1,903
— $
—
— $
— $
—
— $
61,685
$
55,570
—
52,504
86,197
138,701
21,803
1,903
61,685
55,570
(1)
(2)
Derivative assets and liabilities relate to interest rate swaps, see "Note 12. Derivatives and Hedging Activities." In addition, the carrying value of loans
is increased by $53,292 and the net carrying value of subordinated debt is decreased by $401 as of December 31, 2019 for the effective portion of the
hedge, which relates to the fair value of the hedges put in place to mitigate against fluctuations in interest rates.
Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.
126
December 31, 2018
Assets:
Available-for-sale debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored agency securities
U.S. treasury securities
Total AFS debt securities
Equity securities
CRA investments
Preferred stock
Total equity securities
Derivative assets (1)
Liabilities:
Junior subordinated debt (2)
Derivative liabilities (1)
Fair Value Measurements at the End of the Reporting Period Using:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
(in thousands)
$
— $
15,327
$
— $
—
—
—
—
—
—
—
—
100,106
99,380
924,594
1,530,124
538,668
28,617
38,188
1,984
—
—
—
—
—
—
—
—
15,327
100,106
99,380
924,594
1,530,124
538,668
28,617
38,188
1,984
$
$
$
$
$
— $
3,276,988
$
— $
3,276,988
51,142
63,919
115,061
$
$
— $
—
— $
— $
2,643
$
— $
—
— $
— $
— $
—
— $
48,684
$
45,120
—
51,142
63,919
115,061
2,643
48,684
45,120
(1)
(2)
Derivative assets and liabilities relate to interest rate swaps, see "Note 12. Derivatives and Hedging Activities." In addition, the carrying value of loans
is increased by $23,039 and the net carrying value of subordinated debt is decreased by $19,691 as of December 31, 2018, which relates to the effective
portion of the hedges put in place to mitigate against fluctuations in interest rates.
Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.
For the years ended December 31, 2019, 2018, and 2017, the change in Level 3 liabilities measured at fair value on a recurring
basis was as follows:
Beginning balance
Change in fair value (1)
Ending balance
Junior Subordinated Debt
Year Ended December 31,
2019
2018
2017
(in thousands)
$
$
(48,684) $
(13,001)
(61,685) $
(56,234) $
7,550
(48,684) $
(50,410)
(5,824)
(56,234)
(1)
Unrealized gains/(losses) attributable to changes in the fair value of junior subordinated debt are recorded as part of OCI, net of tax, and totaled $(9.8)
million, $5.7 million, and $(3.6) million for the years ended December 31, 2019, 2018, and 2017, respectively.
127
For Level 3 liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, the significant unobservable
inputs used in the fair value measurements were as follows:
Junior subordinated debt
$
61,685 Discounted cash flow
Implied credit rating of the Company
5.09%
December 31, 2019
Valuation Technique
Significant Unobservable Inputs
Input Value
(in thousands)
Junior subordinated debt
$
48,684 Discounted cash flow
Implied credit rating of the Company
7.82%
December 31, 2018
Valuation Technique
Significant Unobservable Inputs
Input Value
(in thousands)
The significant unobservable input used in the fair value measurement of the Company’s junior subordinated debt as of December
31, 2019 and 2018 was the implied credit risk for the Company, calculated as the difference between the 15-year 'BB' rated financial
index over the corresponding swap index.
As of December 31, 2019, the Company estimates the discount rate at 5.09%, which represents an implied credit spread of 3.18%
plus three-month LIBOR (1.91%). As of December 31, 2018, the Company estimated the discount rate at 7.82%, which was a
5.01% credit spread plus three-month LIBOR (2.81%).
Fair value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring basis. That is, the assets are not measured at fair value on an ongoing
basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The
following table presents such assets carried on the balance sheet by caption and by level within the ASC 825 hierarchy:
Fair Value Measurements at the End of the Reporting Period Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Active Markets for
Similar Assets
(Level 2)
Unobservable
Inputs
(Level 3)
Total
As of December 31, 2019
Impaired loans with specific valuation allowance
Impaired loans without specific valuation allowance (1)
Other assets acquired through foreclosure
As of December 31, 2018
Impaired loans with specific valuation allowance
Impaired loans without specific valuation allowance (1)
Other assets acquired through foreclosure
$
$
18,203
$
92,069
13,850
305
$
91,821
17,924
(in thousands)
— $
—
—
— $
—
—
— $
—
—
— $
—
—
18,203
92,069
13,850
305
91,821
17,924
(1)
Net of loan balances with charge-offs of $3.3 million and $19.4 million as of December 31, 2019 and 2018, respectively.
For Level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2019 and 2018, the significant unobservable
inputs used in the fair value measurements were as follows:
December 31, 2019
(in thousands)
Valuation Technique(s)
Significant
Unobservable Inputs
Range
Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
Impaired loans
$
110,272
Discounted cash flow
method
Discount rate
Scheduled cash
collections
Proceeds from non-real
estate collateral
Contractual loan rate
4.0% to 7.0%
Probability of default
0% to 20.0%
Loss given default
0% to 70.0%
Other assets acquired through
foreclosure
13,850 Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
128
December 31, 2018
(in thousands)
Valuation Technique(s)
Significant
Unobservable Inputs
Range
Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
Impaired loans
$
92,126
Discounted cash flow
method
Discount rate
Scheduled cash
collections
Proceeds from non-real
estate collateral
Contractual loan rate
4.0% to 7.0%
Probability of default
0% to 20.0%
Loss given default
0% to 70.0%
Other assets acquired through
foreclosure
17,924 Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
Impaired loans: The specific reserves for collateral dependent impaired loans are based on collateral value, net of estimated
disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals
or internally-developed discounted cash flow analyses. Appraisals may utilize a single valuation approach or a combination of
approaches, including comparable sales and the income approach. Fair value is determined, where possible, using market prices
derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable
inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. In addition, when
adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the
market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a
Level 3 measurement. Internal discounted cash flow analyses are also utilized to estimate the fair value of impaired loans, which
considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity.
Total Level 3 impaired loans had an estimated fair value of $110.3 million and $92.1 million at December 31, 2019 and 2018,
respectively. Impaired loans with a specific valuation allowance had a gross estimated fair value of $21.0 million and $1.0 million
at December 31, 2019 and 2018, respectively, which was reduced by a specific valuation allowance of $2.8 million and $0.7
million, respectively.
Other assets acquired through foreclosure: Other assets acquired through foreclosure consist of properties acquired as a result of,
or in-lieu-of, foreclosure. These assets are initially reported at the fair value determined by independent appraisals using appraised
value less estimated cost to sell. Such properties are generally re-appraised every 12 months. There is risk for subsequent volatility.
Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged
to expense.
Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be
Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as
Level 3 in the fair value hierarchy. When significant adjustments are based on unobservable inputs, such as when a current appraised
value is not available or management determines the fair value of the collateral is further impaired below the appraised value and
there is no observable market price, the resulting fair value measurement has been categorized as a Level 3 measurement. The
Company had $13.9 million and $17.9 million of such assets at December 31, 2019 and 2018, respectively.
Credit vs. non-credit losses
Under the provisions of ASC 320, Investments-Debt and Equity Securities, OTTI is separated into the amount of total impairment
related to the credit loss and the amount of the total impairment related to all other factors. The amount of the total OTTI related
to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in OCI.
For the years ended December 31, 2019, 2018, and 2017, the Company determined that there were no securities that experienced
credit losses.
There is no OTTI balance recognized in comprehensive income as of December 31, 2019 and 2018.
129
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company’s financial instruments is as follows:
December 31, 2019
Fair Value
Carrying Amount
Level 1
Level 2
Level 3
Total
(in thousands)
$
485,107
$
— $
516,261
$
— $
3,346,310
138,701
1,903
20,955,499
108,694
32,167
138,701
—
—
—
3,314,143
—
1,903
—
108,694
—
—
—
21,256,462
—
516,261
3,346,310
138,701
1,903
21,256,462
108,694
$
22,796,493
$
— $
22,813,265
$
— $
22,813,265
16,675
393,563
55,570
24,661
—
—
—
—
16,675
332,635
55,570
24,661
—
74,155
—
—
16,675
406,790
55,570
24,661
December 31, 2018
Fair Value
Carrying Amount
Level 1
Level 2
Level 3
Total
(in thousands)
$
302,905
$
3,276,988
115,061
2,643
17,557,912
101,275
— $
—
298,648
$
3,276,988
115,061
—
—
—
—
2,643
16,857,852
101,275
— $
—
—
—
92,126
—
298,648
3,276,988
115,061
2,643
16,949,978
101,275
$
19,177,447
$
— $
19,188,216
$
— $
19,188,216
22,411
491,000
360,458
45,120
20,463
—
—
—
—
—
22,411
491,000
323,572
45,120
20,463
—
—
57,924
—
—
22,411
491,000
381,496
45,120
20,463
Financial assets:
Investment securities:
HTM
AFS
Equity securities
Derivative assets
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Customer repurchase agreements
Qualifying debt
Derivative liabilities
Accrued interest payable
Financial assets:
Investment securities:
HTM
AFS
Equity securities
Derivative assets
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Customer repurchase agreements
Other borrowings
Qualifying debt
Derivative liabilities
Accrued interest payable
Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a
result of its normal operations. As a result, the fair values of the Company’s financial instruments, as well as its future net interest
income will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in EVE and net
interest income resulting from hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting
from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to
adjust the asset and liability mix to bring interest rate risk within BOD-approved limits.
WAB has an ALCO charged with managing interest rate risk within the BOD-approved limits. Limits are structured to preclude
an interest rate risk profile that does not conform to both management and BOD risk tolerances without ALCO approval. There
130
is also ALCO reporting at the Parent level for reviewing interest rate risk for the Company, which gets reported to the BOD and
its Finance and Investment Committee.
Fair value of commitments
The estimated fair value of standby letters of credit outstanding at December 31, 2019 and 2018 is insignificant. Loan commitments
on which the committed interest rates are less than the current market rate are also insignificant at December 31, 2019 and 2018.
17. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could
have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
As of December 31, 2019 and 2018, the Company and the Bank's capital ratios exceeded the well-capitalized thresholds, as defined
by the federal banking agencies. The actual capital amounts and ratios for the Company and the Bank are presented in the following
tables as of the periods indicated:
Total
Capital
Tier 1
Capital
Risk-
Weighted
Assets
Tangible
Average
Assets
Total
Capital
Ratio
Tier 1
Capital
Ratio
Tier 1
Leverage
Ratio
Common
Equity
Tier 1
(dollars in thousands)
December 31, 2019
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
December 31, 2018
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
$ 3,257,874
$ 2,775,390
$ 25,390,142
$ 26,110,275
12.8%
10.9%
10.6%
10.6%
3,030,301
2,703,549
25,452,261
26,134,431
11.9
10.0
8.0
10.6
8.0
6.0
10.3
5.0
4.0
10.6
6.5
4.5
$ 2,897,356
$ 2,431,320
$ 21,983,976
$ 22,204,799
13.2 %
11.1 %
10.9 %
10.7 %
2,628,650
2,317,745
22,040,765
22,209,700
11.9
10.0
8.0
10.5
8.0
6.0
10.4
5.0
4.0
10.5
6.5
4.5
131
18. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) employee benefit plan for all eligible employees. Participants are able to defer between 1%
and 75% (up to a maximum of $19,000 for those under 50 years of age and up to a maximum of $25,000 for those over 50 years
of age in 2019) of their annual compensation. The Company may elect to match a discretionary amount each year, which is 75%
of the first 6% of the participant’s compensation deferred into the plan. The Company’s contributions to this plan total $6.2 million,
$5.6 million, and $3.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.
In addition, the Company maintains a non-qualified 401(k) restoration plan for the benefit of executives of the Company and
certain affiliates. Participants are able to defer a portion of their annual salary and receive a matching contribution based primarily
on the contribution structure in effect under the Company’s 401(k) plan, but without regard to certain statutory limitations applicable
under the 401(k) plan. The Company’s total contribution to the restoration plan was $0.1 million for the years ended December
31, 2019, 2018, and 2017.
In connection with the Bridge acquisition, the Company assumed Bridge's SERP, an unfunded noncontributory defined benefit
pension plan. The SERP provides retirement benefits to certain Bridge officers based on years of service and final average salary.
The Company uses a December 31 measurement date for this plan.
The following table reflects the accumulated benefit obligation and funded status of the SERP:
Change in benefit obligation
Benefit obligation at beginning of period
Service cost
Interest cost
Actuarial losses/(gains)
Expected benefits paid
Projected benefit obligation at end of year
Unfunded projected/accumulated benefit obligation
Additional liability
Weighted average assumptions to determine benefit obligation
Discount rate
Rate of compensation increase
December 31,
2019
2018
(in thousands)
9,991
$
8,891
632
569
834
(270)
11,756
$
(11,756)
— $
614
512
41
(67)
9,991
(9,991)
—
$
$
$
5.25%
3.00%
5.75%
3.00%
The components of net periodic benefit cost recognized for the year ended December 31, 2019 and 2018 and the amounts in
accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost during 2020 are
as follows:
Components of net periodic benefit cost
Service cost
Interest cost
Amortization of prior service cost
Amortization of actuarial (gains)/losses
Net periodic benefit cost
Other comprehensive income (cost)
Year Ended December 31,
2020
2019
2018
(in thousands)
$
$
$
$
511
612
19
(35)
$
632
569
64
(159)
1,107
$
1,106
$
614
512
103
(164)
1,065
(16) $
(95) $
(61)
132
19. RELATED PARTY TRANSACTIONS
Principal stockholders, directors, and executive officers of the Company, their immediate family members, and companies they
control or own more than a 10% interest in, are considered to be related parties. In the ordinary course of business, the Company
engages in various related party transactions, including extending credit and bank service transactions. All related party transactions
are subject to review and approval pursuant to the Company's Related Party Transactions policy.
Federal banking regulations require that any extensions of credit to insiders and their related interests not be offered on terms more
favorable than would be offered to non-related borrowers of similar creditworthiness. The following table summarizes the aggregate
activity in such loans for the periods indicated:
Balance, beginning
New loans
Advances
Repayments and other
Balance, ending
Year Ended December 31,
2019
2018
(in thousands)
4,580
$
—
323
(1,091)
3,812
$
5,918
—
—
(1,338)
4,580
$
$
None of these loans are past due, on non-accrual status or have been restructured to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were
considered classified loans at December 31, 2019 or 2018. The interest income associated with these loans was approximately
$0.2 million, $0.3 million and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Loan commitments outstanding with related parties totaled approximately $10.6 million and $30.7 million at December 31, 2019
and 2018, respectively.
The Company also accepts deposits from related parties, which totaled $100.1 million and $87.9 million at December 31, 2019
and 2018, respectively, with related interest expense totaling approximately $0.3 million during the year ended December 31,
2019, and $0.2 million during each of the years ended December 31, 2018 and 2017.
Donations, sponsorships, and other payments to related parties totaled less than $1.0 million during the years ended December
31, 2019 and 2017 and totaled $8.1 million during the year ended December 31, 2018. Total related party payments of $8.1 million
for the year ended December 31, 2018 include a donation to the Company's charitable foundation of $7.6 million, which consisted
of a non-cash donation of OREO property of $6.9 million and a cash donation of $0.7 million.
During the year ended December 31, 2018, the Company sold an OREO property to a related party with a carrying value $0.9
million and recognized a loss of $0.2 million on the sale.
133
20. PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of the holding company are presented in the following tables:
WESTERN ALLIANCE BANCORPORATION
Condensed Balance Sheets
ASSETS:
Cash and cash equivalents
Money market investments
Investment securities - AFS
Investment securities - equity
Investment in bank subsidiaries
Investment in non-bank subsidiaries
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY:
Qualifying debt
Accrued interest and other liabilities
Total liabilities
Total stockholders’ equity
Total liabilities and stockholders’ equity
WESTERN ALLIANCE BANCORPORATION
Condensed Income Statements
December 31,
2019
2018
(in thousands)
$
75,885
$
—
12,767
47,123
115,721
7
16,454
49,824
3,063,470
2,568,027
52,337
22,488
3,274,070
242,000
15,322
257,322
$
$
3,016,748
3,274,070
$
80,019
27,200
2,857,252
211,376
32,142
243,518
2,613,734
2,857,252
$
$
$
Income:
Dividends from subsidiaries
Interest income
Non-interest income
Total income
Expense:
Interest expense
Non-interest expense
Total expense
Income before income taxes and equity in undistributed earnings of subsidiaries
Income tax benefit
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Year Ended December 31,
2019
2018
2017
(in thousands)
$
134,000
$
152,116
$
2,818
5,112
141,930
14,554
19,543
34,097
107,833
5,628
113,461
385,710
2,905
761
155,782
13,949
19,025
32,974
122,808
10,436
133,244
302,544
$
499,171
$
435,788
$
97,264
2,547
2,470
102,281
11,459
16,293
27,752
74,529
5,229
79,758
245,734
325,492
134
Western Alliance Bancorporation
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net undistributed earnings of subsidiaries
Other operating activities, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities
Principal pay downs, calls, maturities, and sales proceeds of securities
Capital contributions to subsidiaries
Other investing activities, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Share repurchases
Other financing activities, net
Dividends paid on common stock
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2019
2018
2017
(in thousands)
$
499,171
$
435,788
$
325,492
(385,710)
9,885
123,346
(10,841)
19,032
—
7
8,198
(120,131)
80
(51,329)
(171,380)
(39,836)
115,721
(302,544)
(5,889)
127,355
(44,409)
11,362
—
(7)
(33,054)
(35,688)
554
—
(35,134)
59,167
56,554
$
75,885
$
115,721
$
(245,734)
16,921
96,679
(11,765)
23,196
(50,000)
—
(38,569)
—
(12,965)
—
(12,965)
45,145
11,409
56,554
135
21. SEGMENTS
The Company's reportable segments are aggregated based primarily on geographic location, services offered, and markets served.
The Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full
service banking and related services to their respective markets. The operations from the regional segments correspond to the
following banking divisions: ABA in Arizona, BON and FIB in Nevada, TPB in Southern California, and Bridge in Northern
California.
The Company's NBL segments provide specialized banking services to niche markets. The Company's NBL reportable segments
include HOA Services, Public & Nonprofit Finance, Technology & Innovation, HFF, and Other NBLs. These NBLs are managed
centrally and are broader in geographic scope than the Company's other segments, though still predominately located within the
Company's core market areas.
The Corporate & Other segment consists of corporate-related items, income and expense items not allocated to the Company's other
reportable segments, and inter-segment eliminations.
The Company's segment reporting process begins with the assignment of all loan and deposit accounts directly to the segments
where these products are originated and/or serviced. Equity capital is assigned to each segment based on the risk profile of their
assets and liabilities. With the exception of goodwill, which is assigned a 100% weighting, equity capital allocations ranged from
0% to 12% during the year, with a funds credit provided for the use of this equity as a funding source. Any excess or deficient equity
not allocated to segments based on risk is assigned to the Corporate & Other segment.
Net interest income, provision for credit losses, and non-interest expense amounts are recorded in their respective segment to the
extent that the amounts are directly attributable to those segments. Net interest income is recorded in each segment on a TEB with
a corresponding increase in income tax expense, which is eliminated in the Corporate & Other segment.
Further, net interest income of a reportable segment includes a funds transfer pricing process that matches assets and liabilities with
similar interest rate sensitivity and maturity characteristics. Using this funds transfer pricing methodology, liquidity is transferred
between users and providers. A net user of funds has lending/investing in excess of deposits/borrowings and a net provider of funds
has deposits/borrowings in excess of lending/investing. A segment that is a user of funds is charged for the use of funds, while a
provider of funds is credited through funds transfer pricing, which is determined based on the average life of the assets or liabilities
in the portfolio.
Net income amounts for each reportable segment is further derived by the use of expense allocations. Certain expenses not directly
attributable to a specific segment are allocated across all segments based on key metrics, such as number of employees, average
loan balances, and average deposit balances. These types of expenses include information technology, operations, human resources,
finance, risk management, credit administration, legal, and marketing.
Income taxes are applied to each segment based on the effective tax rate for the geographic location of the segment. Any difference
in the corporate tax rate and the aggregate effective tax rates in the segments are adjusted in the Corporate & Other segment.
136
The following is a summary of operating segment balance sheet information for the periods indicated:
At December 31, 2019:
Assets:
Regional Segments
Consolidated
Company
Arizona
Nevada
(in millions)
Southern
California
Northern
California
Cash, cash equivalents, and investment securities
$
4,471.2
$
1.8
$
9.0
$
2.3
$
Loans, net of deferred loan fees and costs
Less: allowance for credit losses
Total loans
Other assets acquired through foreclosure, net
Goodwill and other intangible assets, net
Other assets
Total assets
Liabilities:
Deposits
Borrowings and qualifying debt
Other liabilities
Total liabilities
Allocated equity:
21,123.3
(167.8)
20,955.5
13.9
297.6
1,083.7
26,821.9
22,796.5
393.6
615.1
23,805.2
3,016.7
$
$
$
$
3,847.9
(31.6)
3,816.3
—
—
48.6
3,866.7
5,384.7
—
17.8
5,402.5
453.6
$
$
2,252.5
(18.0)
2,234.5
13.0
23.2
59.4
2,339.1
4,350.1
—
11.9
4,362.0
301.0
$
$
2,253.9
(18.3)
2,235.6
0.9
—
15.0
2,253.8
2,585.3
—
1.2
2,586.5
253.3
$
$
Total liabilities and stockholders' equity
$
26,821.9
$
5,856.1
$
4,663.0
$
2,839.8
$
Excess funds provided (used)
—
1,989.4
2,323.9
586.0
2.2
1,311.2
(9.7)
1,301.5
—
154.6
19.8
1,478.1
2,373.6
—
15.9
2,389.5
312.5
2,702.0
1,223.9
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
Assets:
(in millions)
Cash, cash equivalents, and investment securities
$
— $
— $
— $
— $
10.1
$
4,445.8
Loans, net of deferred loan fees and costs
Less: allowance for credit losses
Total loans
Other assets acquired through foreclosure, net
Goodwill and other intangible assets, net
Other assets
Total assets
Liabilities:
Deposits
Borrowings and qualifying debt
Other liabilities
Total liabilities
Allocated equity:
237.2
(2.0)
235.2
—
—
1.2
236.4
3,210.1
—
1.8
3,211.9
84.5
$
$
1,635.6
(13.7)
1,621.9
—
—
18.3
1,640.2
0.1
—
52.9
53.0
131.6
$
$
1,552.0
(12.6)
1,539.4
—
119.7
7.3
1,666.4
3,771.5
—
0.1
3,771.6
317.5
$
$
1,930.8
(12.6)
1,918.2
—
0.1
8.8
6,098.7
(49.3)
6,049.4
—
—
64.3
$
$
1,927.1
$
6,123.8
— $
—
—
—
158.5
36.9
—
2.8
39.7
494.3
3.5
—
3.5
—
—
841.0
5,290.3
1,084.2
393.6
510.7
1,988.5
509.9
$
$
Total liabilities and stockholders' equity
$
3,296.4
$
184.6
$
4,089.1
$
158.5
$
534.0
$
2,498.4
Excess funds provided (used)
3,060.0
(1,455.6)
2,422.7
(1,768.6)
(5,589.8)
(2,791.9)
137
At December 31, 2018:
Assets:
Regional Segments
Consolidated
Company
Arizona
Nevada
(in millions)
Southern
California
Northern
California
Cash, cash equivalents, and investment securities
$
4,259.7
$
2.5
$
10.9
$
2.5
$
Loans, net of deferred loan fees and costs
Less: allowance for credit losses
Total loans
Other assets acquired through foreclosure, net
Goodwill and other intangible assets, net
Other assets
Total assets
Liabilities:
Deposits
Borrowings and qualifying debt
Other liabilities
Total liabilities
Allocated equity:
17,710.6
(152.7)
17,557.9
17.9
299.2
974.8
23,109.5
19,177.4
851.5
466.9
20,495.8
2,613.7
$
$
$
$
3,647.9
(30.7)
3,617.2
0.8
—
46.9
3,667.4
5,090.2
—
10.4
5,100.6
441.0
$
$
2,003.5
(18.7)
1,984.8
13.9
23.2
57.8
2,090.6
3,996.4
—
14.5
4,010.9
277.4
$
$
2,161.1
(19.8)
2,141.3
—
—
14.2
2,158.0
2,347.5
—
4.5
2,352.0
242.9
$
$
3.0
1,300.2
(10.7)
1,289.5
—
155.5
23.9
1,471.9
1,839.1
—
12.2
1,851.3
304.1
Total liabilities and stockholders' equity
$
23,109.5
$
5,541.6
$
4,288.3
$
2,594.9
$
2,155.4
Excess funds provided (used)
—
1,874.2
2,197.7
436.9
683.5
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
Assets:
(in millions)
Cash, cash equivalents, and investment securities
$
— $
— $
— $
— $
— $
4,240.8
Loans, net of deferred loan fees and costs
Less: allowance for credit losses
Total loans
Other assets acquired through foreclosure, net
Goodwill and other intangible assets, net
Other assets
Total assets
Liabilities:
Deposits
Borrowings and qualifying debt
Other liabilities
Total liabilities
Allocated equity:
210.0
(1.9)
208.1
—
—
0.9
209.0
2,607.2
—
2.1
2,609.3
70.7
$
$
1,547.5
(14.2)
1,533.3
—
—
20.1
1,200.9
(10.0)
1,190.9
—
120.4
6.3
$
$
1,553.4
$
1,317.6
— $
2,559.0
—
25.2
25.2
123.9
—
0.1
2,559.1
268.7
1,479.9
(8.5)
1,471.4
—
0.1
7.2
4,154.9
(38.2)
4,116.7
—
—
37.1
4.7
—
4.7
3.2
—
760.4
1,478.7
$
4,153.8
$
5,009.1
— $
— $
—
0.4
0.4
122.3
—
49.6
49.6
340.0
738.0
851.5
347.9
1,937.4
422.7
$
$
Total liabilities and stockholders' equity
$
2,680.0
$
149.1
$
2,827.8
$
122.7
$
389.6
$
2,360.1
Excess funds provided (used)
2,471.0
(1,404.3)
1,510.2
(1,356.0)
(3,764.2)
(2,649.0)
138
The following is a summary of operating segment income statement information for the periods indicated:
Year Ended December 31, 2019:
Net interest income
Provision for (recovery of) credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Regional Segments
Consolidated
Company
Arizona
Nevada
(in thousands)
Southern
California
Northern
California
$
1,040,412
$
249,083
$
161,801
$
131,053
$
95,697
18,500
1,021,912
65,095
(482,781)
604,226
105,055
3,181
245,902
7,169
(96,578)
156,493
39,124
545
161,256
12,021
(62,276)
111,001
23,310
1,243
129,810
4,149
(60,310)
73,649
20,621
$
499,171
$
117,369
$
87,691
$
53,028
$
(500)
96,197
8,591
(51,709)
53,079
14,862
38,217
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
(in thousands)
Net interest income
$
86,594
$
13,342
$
130,299
$
52,905
$
125,467
$
(5,829)
60
57
2,844
3,790
7,280
—
Provision for (recovery of) credit losses
Net interest income after provision for credit
losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
86,534
367
(37,078)
49,823
11,459
13,285
—
(7,617)
5,668
1,304
127,455
14,267
(47,974)
93,748
21,562
49,115
—
(9,180)
39,935
9,185
118,187
5,269
(44,561)
78,895
18,146
(5,829)
13,262
(65,498)
(58,065)
(54,518)
(3,547)
Net income
$
38,364
$
4,364
$
72,186
$
30,750
$
60,749
$
139
Year Ended December 31, 2018:
Net interest income
Provision for (recovery of) credit losses
Net interest income (expense) after provision for credit losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Regional Segments
Consolidated
Company
Arizona
Nevada
(in thousands)
Southern
California
Northern
California
$
915,879
$
224,754
$
148,085
$
115,561
$
23,000
892,879
43,116
(425,667)
510,328
74,540
2,235
222,519
7,689
(91,161)
139,047
34,824
(2,447)
150,532
11,326
(62,536)
99,322
20,951
2,292
113,269
3,800
(57,735)
59,334
16,709
$
435,788
$
104,223
$
78,371
$
42,625
$
92,583
1,809
90,774
9,932
(52,574)
48,132
13,565
34,567
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
(in thousands)
Net interest income
$
67,154
$
15,149
$
105,029
$
55,332
$
80,073
$
12,159
Provision for (recovery of) credit losses
281
(1,101)
5,657
3,275
11,046
(47)
Net interest income (expense) after provision for
credit losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
66,873
614
(32,390)
35,097
8,072
16,250
158
(8,120)
8,288
1,905
99,372
14,121
(41,159)
72,334
16,637
52,057
13
(9,603)
42,467
9,768
69,027
2,076
(26,822)
44,281
10,184
12,206
(6,613)
(43,567)
(37,974)
(58,075)
Net income
$
27,025
$
6,383
$
55,697
$
32,699
$
34,097
$
20,101
Year Ended December 31, 2017:
Net interest income (expense)
Provision for (recovery of) credit losses
Net interest income (expense) after provision for credit losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Regional Segments
Consolidated
Company
Arizona
Nevada
(in thousands)
Southern
California
Northern
California
$
784,664
$
198,622
$
145,001
$
109,177
$
17,250
767,414
45,344
(360,941)
451,817
126,325
1,153
197,469
4,757
(76,118)
126,108
49,317
(4,724)
149,725
9,135
(61,066)
97,794
34,133
100
109,077
3,396
(51,808)
60,665
25,529
$
325,492
$
76,791
$
63,661
$
35,136
$
85,360
4,575
80,785
10,000
(48,387)
42,398
17,591
24,807
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
(in thousands)
Net interest income (expense)
$
54,102
$
28,485
$
82,473
$
56,961
$
65,908
$
(41,425)
Provision for (recovery of) credit losses
341
593
Net interest income (expense) after provision for
credit losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
53,761
558
(28,289)
26,030
9,676
27,892
—
(8,522)
19,370
6,317
2,821
79,652
8,422
4,493
52,468
52
56,179
1,772
(36,726)
(10,166)
(20,550)
51,348
19,255
42,354
15,883
37,401
14,000
(39,594)
7,252
(19,309)
(51,651)
(65,376)
9,729
(1,831)
Net income
$
16,354
$
13,053
$
32,093
$
26,471
$
23,401
$
13,725
140
22. REVENUE FROM CONTRACTS WITH CUSTOMERS
ASC 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all
contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically
excluded from its scope. The majority of the Company’s revenue streams including interest income, credit and debit card fees,
income from equity investments, including warrants and SBIC equity income, income from bank owned life insurance, foreign
currency income, lending related income, and gains and losses on sales of investment securities are outside the scope of ASC 606.
Revenue streams including service charges and fees, interchange fees on credit and debit cards, and success fees are within the
scope of ASC 606.
Disaggregation of Revenue
The following table represents a disaggregation of revenue from contracts with customers for the periods indicated along with the
reportable segment for each revenue category:
Year Ended December 31, 2019
Revenue from contracts with customers:
Service charges and fees
Debit and credit card interchange (1)
Success fees (2)
Other income
Total revenue from contracts with customers
Revenues outside the scope of ASC 606 (3)
Total non-interest income
Regional Segments
Consolidated
Company
Arizona
Nevada
(in thousands)
Southern
California
Northern
California
$
$
$
23,353
$
4,781
$
8,131
$
3,012
$
5,839
1,580
288
31,060
34,035
65,095
$
$
1,151
—
15
5,947
1,222
7,169
$
$
1,212
—
14
9,357
2,664
12,021
$
$
583
—
5
3,600
549
4,149
$
$
3,885
2,859
—
65
6,809
1,782
8,591
Year Ended December 31, 2019
Revenue from contracts with customers:
Service charges and fees
Debit and credit card interchange (1)
Success fees (2)
Other income
Total revenue from contracts with customers
Revenues outside the scope of ASC 606 (3)
Total non-interest income
$
$
$
National Business Lines
HOA
Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
(in thousands)
329
$
— $
3,211
$
— $
34
—
3
366
1
367
$
$
—
—
—
— $
—
—
1,580
4
4,795
9,472
— $
14,267
$
$
—
—
—
— $
—
— $
4
—
—
171
175
5,094
5,269
$
$
$
—
—
—
11
11
13,251
13,262
(1)
(2)
(3)
Included as part of Card income in the Consolidated Income Statement.
Included as part of Income from equity investments in the Consolidated Income Statement.
Amounts are accounted for under separate guidance. Refer to discussion of revenue sources not subject to ASC 606 under the Non-interest income
section in "Note 1. Summary of Significant Accounting Policies."
141
Year Ended December 31, 2018
Revenue from contracts with customers:
Service charges and fees
Debit and credit card interchange (1)
Success fees (2)
Other income
Total revenue from contracts with customers
Revenues outside the scope of ASC 606 (3)
Total non-interest income
Regional Segments
Consolidated
Company
Arizona
Nevada
(in thousands)
Southern
California
Northern
California
$
$
$
22,295
$
3,902
$
8,151
$
2,666
$
6,801
3,335
626
33,057
10,059
43,116
$
$
1,132
—
181
5,215
2,474
7,689
$
$
1,379
—
194
9,724
1,602
11,326
$
$
650
—
59
3,375
425
3,800
$
$
3,795
3,616
96
161
7,668
2,264
9,932
National Business Lines
HOA Services
Public &
Nonprofit
Finance
Technology &
Innovation
Hotel
Franchise
Finance
Other NBLs
Corporate &
Other
Year Ended December 31, 2018
Revenue from contracts with customers:
Service charges and fees
Debit and credit card interchange (1)
Success fees (2)
Other income
Total revenue from contracts with customers
Revenues outside the scope of ASC 606 (3)
Total non-interest income
$
$
$
(in thousands)
585
$
— $
3,201
$
— $
— $
24
—
4
613
1
614
$
$
—
—
—
— $
158
158
—
3,239
—
6,440
7,681
—
—
—
— $
13
13
$
—
—
1
1
2,075
2,076
$
$
$
$
$
14,121
(5)
—
—
26
21
(6,634)
(6,613)
(1)
(2)
(3)
Included as part of Card income in the Consolidated Income Statement.
Included as part of Income from equity investments in the Consolidated Income Statement.
Amounts are accounted for under separate guidance. Refer to discussion of revenue sources not subject to ASC 606 under the Non-interest income
section in "Note 1. Summary of Significant Accounting Policies."
Performance Obligations
Many of the services the Company performs for its customers are ongoing, and either party may cancel at any time. The fees for
these contracts are dependent upon various underlying factors, such as customer deposit balances, and as such may be considered
variable. The Company’s performance obligations for these services are satisfied as the services are rendered and payment is
collected on a monthly, quarterly, or semi-annual basis. Other contracts with customers are for services to be provided at a point
in time, and fees are recognized at the time such services are rendered. The Company had no material unsatisfied performance
obligations as of December 31, 2019. The revenue streams within the scope of ASC 606 are described in further detail below.
Service Charges and Fees
The Company performs deposit account services for its customers, which include analysis and treasury management services, use
of safe deposit boxes, check upcharges, and other ancillary services. The depository arrangements the Company holds with its
customers are considered day-to-day contracts with ongoing renewals and optional purchases, and as such, the contract duration
does not extend beyond the services performed. Due to the short-term nature of such contracts, the Company generally recognizes
revenue for deposit related fees as services are rendered. From time to time, the Company may waive certain fees for its customers.
The Company considers historical experience when recognizing revenue from contracts with customers, and may reduce the
transaction price to account for fee waivers or refunds.
Debit and Credit Card Interchange
When a credit or debit card issued by the Company is used to purchase goods or services from a merchant, the Company earns
an interchange fee. The Company considers the merchant its customer in these transactions as the Company provides the merchant
with the service of enabling the cardholder to purchase the merchant’s goods or services with increased convenience, and it enables
the merchants to transact with a class of customer that may not have access to sufficient funds at the time of purchase. The Company
acts as an agent to the payment network by providing nightly settlement services between the network and the merchant. This
transmission of data and funds represents the Company’s performance obligation and is performed nightly. As the payment network
142
is in direct control of setting the rates and the Company is acting as an agent, the interchange fee is recorded net of expenses as
the services are provided.
Success Fees
Success fees are one-time fees detailed as part of certain loan agreements and are earned immediately upon occurrence of a
triggering event. Examples of triggering events include a borrower obtaining its next round of funding, an acquisition, or completion
of a public offering. Success fees are variable consideration as the transaction price can vary and is contingent on the occurrence
or non-occurrence of a future event. As the consideration is highly susceptible to factors outside of the Company’s influence and
uncertainty about the amount of consideration is not expected to be resolved for an extended period of time, the variable
consideration is constrained and is not recognized until the achievement of the triggering event.
Principal versus Agent Considerations
When more than one party is involved in providing goods or services to a customer, ASC 606 requires the Company to determine
whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a
principal and therefore records revenue on a gross basis, if it controls a promised good or service before transferring that good or
service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is
to arrange for another entity to provide the goods or services. The Company most commonly acts as a principal and records revenue
on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the Company
acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal.
Contract Balances
The timing of revenue recognition may differ from the timing of cash settlements or invoicing to customers. The Company records
contract liabilities, or deferred revenue, when payments from customers are received or due in advance of providing services to
customers. The Company generally receives payments for its services during the period or at the time services are provided, and
therefore does not have material contract liability balances at period-end. The Company records contract assets or receivables
when revenue is recognized prior to receipt of cash from the customer. Accounts receivable totals $1.6 million and $1.4 million
as of December 31, 2019 and December 31, 2018, respectively, and are presented in Other Assets on the Consolidated Balance
Sheets.
143
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2019
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
$
$
$
$
$
$
$
(in thousands, except per share amounts)
$
315,420
$
315,608
$
302,848
$
43,447
271,973
4,000
267,973
16,027
(129,699)
154,301
26,236
128,065
1.26
1.25
$
$
$
49,186
266,422
4,000
262,422
19,441
(125,955)
155,908
28,533
127,375
1.25
1.24
$
$
$
48,167
254,681
7,000
247,681
14,218
(114,213)
147,686
24,750
122,936
1.19
1.19
$
$
$
291,168
43,832
247,336
3,500
243,836
15,410
(112,914)
146,332
25,536
120,796
1.16
1.16
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2018
(in thousands, except per share amounts)
281,968
$
265,216
$
251,602
$
38,455
243,513
6,000
237,513
13,611
(111,129)
139,995
20,909
119,086
1.14
1.13
$
$
$
31,178
234,038
6,000
228,038
4,418
(113,841)
118,615
7,492
111,123
1.06
1.05
$
$
$
27,494
224,108
5,000
219,108
13,444
(102,548)
130,004
25,325
104,679
1.00
0.99
$
$
$
234,697
20,477
214,220
6,000
208,220
11,643
(98,149)
121,714
20,814
100,900
0.97
0.96
144
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out by the Company’s
management, with the participation of its CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rule 13a-15(e), under the Exchange Act). Based upon that evaluation, the Company’s CEO and CFO concluded
that the disclosure controls and procedures were effective as of the end of the period covered by this report. No changes were
made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the
last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of WAL is responsible for establishing and maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is a process designed under the supervision of the Company’s CEO and CFO
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2019, management assessed the effectiveness of the Company’s internal control over financial reporting based
on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework” issued
by the COSO in 2013. Based on this assessment, management determined that the Company maintained effective internal control
over financial reporting as of December 31, 2019, based on those criteria.
RSM US LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements of the Company
included in this Annual Report on Form 10-K, has audited the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2019. Their report, which expresses an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2019, is included herein.
145
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Western Alliance Bancorporation
Opinion on the Internal Control Over Financial Reporting
We have audited Western Alliance Bancorporation and Subsidiaries’ (the Company) internal control over financial reporting as
of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019
of the Company and our report, dated March 2, 2020, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Phoenix, Arizona
March 2, 2020
146
Item 9B.
Other Information
On February 25, 2020, the BOD of WAL approved the Western Alliance Bancorporation Severance and Change in Control Plan,
as amended and restated effective February 25, 2020 (the “Plan”). The Plan amends and restates and replaces in its entirety the
prior Western Alliance Bancorporation Change in Control Severance Plan, originally effective September 19, 2012.
Under the Plan, certain executives, including WAL’s named executive officers, who are designated by the BOD and who enter
into individual participation agreements (“Executives”) are eligible to participate in the Plan and to receive severance and certain
other payments under the circumstances set forth in the Plan.
The Plan generally provides that severance benefits will be paid upon (i) the termination of an Executive’s employment for
unsatisfactory work performance (“Poor Performance”) that does not provide grounds for termination with Cause (as defined in
the Plan), (ii) the termination of an Executive’s employment without Cause (other than a termination for Poor Performance), (iii)
a retirement at or after age sixty with at least ten years of continuous service (a “Qualified Retirement”), and (iv) the termination
of an Executive’s employment without Cause (other than a termination for Poor Performance) or by the Executive for Good Reason
(as defined in the Plan), in either case within the twenty-four month period following a Change in Control (as defined in the Plan)
(a “Change in Control Termination”).
Under the Plan, in the event of a qualifying termination of employment in any of the circumstances described above, and contingent
upon the Executive’s execution of a binding release agreement and waiver of claims, the Executive will be entitled to receive
accrued benefits, payable in accordance with WAL’s normal payroll practice, and the severance and other payments set forth in
the Plan. Following a termination for Poor Performance, the Executive will receive a lump sum cash payment in an amount equal
to nine months of the Executive’s annual base salary for the year in which the termination occurs. Following a termination without
Cause (other than a termination for Poor Performance), the Executive will receive (i) a lump sum cash payment in an amount
equal to one-and-a-half times the Executive’s annual base salary for the year in which the termination occurs, plus (ii) a lump sum
cash payment in an amount equal to WAL’s portion of premiums paid for continuation coverage for up to twenty-four months
following termination of employment pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (the “COBRA
Premium Payment”). Following a Qualified Retirement, the Executive will be entitled to receive a lump sum cash payment of a
pro rata amount of the Executive’s annual bonus for the year in which the Qualified Retirement occurs, based on WAL’s actual
projected performance at the time of the Qualified Retirement.
Following a Change in Control Termination, the Executive will receive (i) a lump sum cash payment in an amount equal to the
sum of (a) two times the Executive’s annual base salary (using the greater of the base salary for the year in which the Change in
Control occurs or the year in which the termination occurs), and (b) two times the Executive’s target annual bonus (using the
greater of the annual bonus for the year in which the Change in Control occurs or the year in which the termination occurs), plus
(ii) a lump sum cash payment in an amount equal to the COBRA Premium Payment. In addition, upon a Change in Control, each
Executive will receive any unpaid annual bonus that was earned by the Executive in the year prior to the year in which the Change
in Control occurs, regardless of whether the Executive’s employment is terminated.
In order to be eligible to receive benefits under the Plan, each Executive must comply with the confidentiality, non-solicitation
and non-disparagement covenants set forth in the Plan. In addition, an Executive whose employment terminates due to a Qualified
Retirement or a Change in Control Termination must also comply with the non-competition covenants set forth in the Plan. If
any amount or benefits to be paid or provided to an Executive under the Plan or any other arrangement would trigger the excise
tax imposed on “excess parachute payments,” the Executive’s payments and benefits will be reduced to the one dollar less than
the amount that would cause the payments and benefits to be subject to the excise tax, unless the Executive would be better off
(on an after-tax basis) receiving all payments and benefits and paying all applicable excise and income taxes.
The foregoing description is a summary of the material terms of the Plan and related participation agreements. This summary
does not purport to be complete and is qualified in its entirety by reference to the full and complete terms of the Plan and form of
participation agreement, copies of which are filed as Exhibit 10.8 and Exhibit 10.13, respectively, to this Annual Report on Form
10-K and are incorporated herein by reference.
147
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference from the Company’s Definitive Proxy Statement for the 2020
Annual Meeting of Stockholders to be held on June 11, 2020.
Item 11.
Executive Compensation
The information required by this item is incorporated by reference from the Company’s Definitive Proxy Statement for the 2020
Annual Meeting of Stockholders to be held on June 11, 2020.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from the Company’s Definitive Proxy Statement for the 2020
Annual Meeting of Stockholders to be held on June 11, 2020.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the Company’s Definitive Proxy Statement for the 2020
Annual Meeting of Stockholders to be held on June 11, 2020.
Item 14.
Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the Company’s Definitive Proxy Statement for the 2020
Annual Meeting of Stockholders to be held on June 11, 2020.
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The following financial statements are incorporated by reference from Item 8 hereto:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Income Statements for the three years ended December 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2019, 2018, and
2017
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows for the three years ended December 31, 2019, 2018, and 2017
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Not applicable.
70
72
73
75
76
77
79
148
EXHIBITS
3.1
3.2
3.3
3.4
3.5
4.1*
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8*
10.9
10.10
Amended and Restated Certificate of Incorporation of Western Alliance, effective as of May 19, 2015 (incorporated by
reference to Exhibit 3.1 of Western Alliance's Form 10-K filed with the SEC on March 1, 2019).
Amended and Restated Bylaws of Western Alliance, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.2
of Western Alliance's Form 8-K filed with the SEC on May 22, 2015).
Articles of Conversion, as filed with the Nevada Secretary of State on May 29, 2014 (incorporated by reference to Exhibit
3.1 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
Certificate of Conversion, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to
Exhibit 3.2 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
Certificate of Designation of Non-Cumulative Perpetual Preferred Stock, Series B, as filed with the Delaware Secretary of
State on May 29, 2014 (incorporated by reference to Exhibit 3.4 of Western Alliance’s Form 8-K filed with the SEC on June
3, 2014).
Description of Securities of the Registrant, effective as of December 31, 2019.
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Western Alliance’s Form 8-K filed with the
SEC on June 3, 2014).
Senior Debt Indenture, dated August 25, 2010, between Western Alliance and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.1 of Western Alliance’s Form 8-K filed with the SEC on August 25, 2010).
Form of Senior Debt Indenture (incorporated by reference to Exhibit 4.2 of Western Alliance's Form S-3 filed with the SEC
on May 7, 2015).
Form of Subordinated Debt Indenture (incorporated by reference to Exhibit 4.3 of Western Alliance's Form S-3 filed with
the SEC on May 7, 2015).
Form of 5.00% Fixed to Floating Rate Subordinated Bank Note due July 15, 2025 (incorporated by reference to Exhibit 4.1
of Western Alliance's Form 8-K filed with the SEC on July 2, 2015).
Subordinated Debt Indenture, dated June 16, 2016, between Western Alliance and The Bank of New York Mellon Trust
Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Western Alliance's Form 8-K filed with the SEC on
June 16, 2016).
First Supplemental Indenture (including Form of Debenture) dated June 16, 2016 between Western Alliance and The Bank
of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 of Western Alliance's Form
8-K filed with the SEC on June 16, 2016).
Form of Global Debenture dated June 16, 2016 (incorporated by reference to Exhibit 4.3 of Western Alliance's Form 8-K
filed with the SEC on June 16, 2016).
Western Alliance 2005 Stock Incentive Plan, as amended (incorporated by reference to Appendix G of the Registrant's
definitive Proxy Statement on Schedule 14A filed with the Commission on April 2, 2014). ±
Bridge Capital Holdings 2006 Equity Incentive Plan (incorporated by reference to Exhibit 4.11 of Western Alliance's Form
S-8 filed with the SEC on July 2, 2015). ±
Form of BankWest Nevada Corporation Incentive Stock Option Plan Agreement (incorporated by reference to Exhibit 10.3
of Western Alliance’s Registration Statement on Form S-1 filed with the SEC on April 28, 2005). ±
Form of Western Alliance Incentive Stock Option Plan Agreement (incorporated by reference to Exhibit 10.4 of Western
Alliance’s Registration Statement on Form S-1 filed with the SEC on April 28, 2005). ±
Form of Western Alliance 2002 Stock Option Plan Agreement (incorporated by reference to Exhibit 10.5 of Western
Alliance’s Registration Statement on Form S-1 filed with the SEC on April 28, 2005). ±
Form of Western Alliance 2002 Stock Option Plan Agreement (with double trigger acceleration clause) (incorporated by
reference to Exhibit 10.6 of Western Alliance’s Registration Statement on Form S-1 filed with the SEC on April 28, 2005).
±
Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.8 of Western Alliance’s Registration
Statement on Form S-1 filed with the SEC on April 28, 2005). ±
Western Alliance Severance and Change in Control Plan. ±
Form of Indemnification Agreement, by and between Western Alliance and each of Western Alliance's directors and
executive officers (incorporated by reference to Exhibit 10.10 of Western Alliance's Form 10-K/A filed with the SEC on
March 1, 2017). ±
Offer Letter, dated May 1, 2017, by and between Kenneth A. Vecchione and Western Alliance (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 5, 2017). ±
149
10.11
10.12*
10.13*
10.14*
10.15*
21.1*
23.1*
24.1*
31.1*
31.2*
32**
Employment Letter Agreement, dated February 7, 2018, by and between Barbara J. Kennedy and Western Alliance
(incorporated by reference to Exhibit 10.1 of Western Alliance's Form 10-Q filed with the SEC on April 30, 2019). ±
Separation and Release of Claims Agreement, dated November 2, 2019, by and between James Haught and Western
Alliance. ±
Form of participation agreement under the Company's Change in Control Severance Plan. ±
Form of Performance-Based Stock Unit Agreement pursuant to the Company's 2005 Stock Incentive Plan. ±
Form of Executive Restricted Stock Agreement pursuant to the Company's 2005 Stock Incentive Plan. ±
List of Subsidiaries of Western Alliance.
Consent of RSM US LLP.
Power of Attorney (see signature page).
CEO Certification Pursuant Rule 13a-14(a)/15d-14(a).
CFO Certification Pursuant Rule 13a-14(a)/15d-14(a).
CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes Oxley
Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
** Furnished herewith.
± Management contract or compensatory arrangement.
Stockholders may obtain copies of exhibits by writing to: Dale Gibbons, Western Alliance Bancorporation, One East Washington
Street Suite 1400, Phoenix, AZ 85004.
Item 16.
FORM 10-K SUMMARY
Not applicable.
150
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 2, 2020
WESTERN ALLIANCE BANCORPORATION
By:
/s/ Kenneth A. Vecchione
Kenneth A. Vecchione
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kenneth
A. Vecchione and Dale Gibbons, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and
all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he or she might or could do in person hereby ratifying and confirming all that
said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant in their listed capacities on March 2, 2020.
151
Name
Title
/s/ Kenneth A. Vecchione
Kenneth A. Vecchione
/s/ Robert Sarver
Robert Sarver
/s/ Dale Gibbons
Dale Gibbons
/s/ J. Kelly Ardrey Jr.
J. Kelly Ardrey Jr.
/s/ Bruce D. Beach
Bruce D. Beach
/s/ Howard Gould
Howard Gould
/s/ Steven J. Hilton
Steven J. Hilton
/s/ Marianne Boyd Johnson
Marianne Boyd Johnson
/s/ Robert Latta
Robert Latta
/s/ Todd Marshall
Todd Marshall
/s/ Adriane C. McFetridge
Adriane C. McFetridge
/s/ James Nave
James Nave
/s/ Michael Patriarca
Michael Patriarca
/s/ Donald D. Snyder
Donald D. Snyder
/s/ Sung Won Sohn
Sung Won Sohn
President and Chief Executive Officer
Executive Chairman
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
152
WESTERN ALLIANCE BANCORPORATION
LIST OF SUBSIDIARIES
(As of December 31, 2019)
Exhibit 21.1
Name
Doing Business As
Jurisdiction of Incorporation or
Organization
Western Alliance Bank
Alliance Bank of Arizona
Bridge Bank
First Independent Bank
Bank of Nevada
Torrey Pines Bank
Alliance Association Bank
Western Alliance Corporate Finance
Western Alliance Public Finance
Western Alliance Resort Finance
Western Alliance Warehouse Lending
CS Insurance Co.
Las Vegas Sunset Properties
Helios Prime, Inc.
Western Alliance Business Trust
WA PWI, LLC
Western One, LLC
Western Alliance Equipment Finance
BW Real Estate, Inc.
BankWest Nevada Capital Trust II
Intermountain First Statutory Trust I
First Independent Statutory Trust I
WAL Trust No. 1
WAL Statutory Trust No. 2
WAL Statutory Trust No. 3
Bridge Capital Holdings Trust I
Bridge Capital Holdings Trust II
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Arizona
Arizona
Nevada
Delaware
Delaware
Arizona
Arizona
Arizona
Nevada
Delaware
Connecticut
Delaware
Delaware
Connecticut
Connecticut
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in Registration Statement (Nos. 333-205437, 333-199727, 333-127032, 333-145548,
333-162107, and 333-183574) on Forms S-8 and Registration Statement (No. 333-203959) on Form S-3 of Western Alliance
Bancorporation and Subsidiaries of our reports dated March 2, 2020 relating to the consolidated financial statements and the
effectiveness of internal control over financial reporting of Western Alliance Bancorporation and Subsidiaries appearing in this
Annual Report on Form 10-K of Western Alliance Bancorporation and Subsidiaries for the year ended December 31, 2019.
Phoenix, Arizona
March 2, 2020
/s/ RSM US LLP
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Kenneth A. Vecchione, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Western Alliance Bancorporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 2, 2020
/s/ Kenneth A. Vecchione
Kenneth A. Vecchione
Chief Executive Officer
Western Alliance Bancorporation
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Dale Gibbons, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Western Alliance Bancorporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 2, 2020
/s/ Dale Gibbons
Dale Gibbons
Chief Financial Officer
Western Alliance Bancorporation
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is given by the undersigned Chief Executive Officer and Chief Financial Officer of Western Alliance
Bancorporation (the “Registrant”) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Each of the undersigned hereby certifies, with respect to the Registrant's annual report on Form 10-K for
the year ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the "Report"),
that, to each of their knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Registrant.
Date: March 2, 2020
Date: March 2, 2020
/s/ Kenneth A. Vecchione
Chief Executive Officer
Western Alliance Bancorporation
/s/ Dale Gibbons
Chief Financial Officer
Western Alliance Bancorporation
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One East Washington Street, Suite 1400
Phoenix, Arizona 85004
(602) 389-3500 | westernalliancebank.com
Alliance Association Bank, Alliance Bank of Arizona, Bank of Nevada, Bridge Bank, First Independent Bank and Torrey Pines Bank are divisions of Western Alliance Bank.
Member FDIC. Western Alliance Bank is the primary subsidiary of Western Alliance Bancorporation. ©2020 Western Alliance Bancorporation