Annual Report 2020
Everything our clients expect
from Western Alliance –
seamless decision-making,
responsiveness, true expertise
and a focus on their needs –
was exactly what we continued
to deliver.
Kenneth A. Vecchione
President and Chief Executive Officer
1
Excellence
In Turbulent Times
Dear Fellow Shareholders,
Our country and our company have come through an exceptionally
difficult year. Now, in spring 2021, we’re acting on an increasingly
positive outlook as vaccine availability and adoption give all of us the
footing to move forward in an economy poised for greater recovery.
COVID-19 led to a cascade of unexpected struggles for people, for communities and
certainly for businesses. For Western Alliance Bank, this created a challenging and complex
environment, but our remarkable people more than met the moment. With grit and a
defining entrepreneurial spirit, our people at every level supported clients and each other to
deliver extraordinary results.
Western Alliance successfully sustained results through our nimble national commercial
bank strategy in which we allocate capital and liquidity to business units and markets with
strong asset quality to deliver robust returns in various economic cycles. This strategy
distinguishes us from our bank peers and uniquely positions us in the industry to pivot
growth between regional commercial segments and our national business lines.
In 2020, Western Alliance Bank broke many of our own records for balance sheet growth,
net interest income and earnings.
Kenneth A. Vecchione
President and Chief
Executive Officer
2
3
Because the core of our business model is a relationship with customers, our in-depth
knowledge helped us help them – from round-the-clock efforts to secure Paycheck
Protection Program (PPP) loans to working with clients to manage through a challenging
business climate.
Our longstanding conservative credit approach, combined with our overarching strategy
to align with strong borrowers nationwide, provided us the strength and flexibility we
needed to navigate economic volatility and grow our balance sheet and income, while
simultaneously managing asset quality.
All of this gave us an even greater ability to continue to expand and diversify our business
through a meaningful acquisition in 2021: the $1 billion transaction to acquire AmeriHome
Mortgage. This leading national business-to-business mortgage acquirer and servicer
extends our national commercial bank strategy in support of our solid growth trajectory.
Record-Breaking Results in 2020
This past year represented our eleventh consecutive year of rising earnings. In 2020, we
produced record net revenues of $1.2 billion, net income of $506.6 million, and earnings per
share (EPS) of $5.04, hitting a mark that is 4% greater than 2019, even as we increased the
provision expense from $19.3 million in 2019 to $123.6 million in 2020. Our focus continues
to be on pre-provision net revenue (PPNR) growth, which rose approximately 20% to $746.1
million, as net interest income increased $126.5 million, or 12%. At the same time, total
expenses increased a modest $9.6 million. To put this in perspective, revenue expanded
more than 13 times expenses, despite the many economic roadblocks of 2020.
Tangible book value per share grew 16.4% year over year to $30.90. This measure has
grown nearly three times that of peer institutions over the last five years. In other key
metrics, return on average assets and return on average tangible common equity were
1.61% and 17.7%, respectively. Western Alliance Bank remains one of the most profitable
banks in the industry.
Overall, outstanding loan and deposit growth lifted total assets to $36.5 billion, driven by
broad-based growth throughout our business lines and geographies as clients began to
look toward future opportunities. The bank’s ability to profitably grow deposits is both a key
differentiator and a core driver of our long-term value creation.
For the full year, loans increased $4.5 billion (excluding PPP loans) or 21%, and deposits grew
a record-shattering $9.1 billion, which we believe creates a durable funding foundation for
ongoing loan and earnings growth as the economy continues to heal from COVID shutdowns.
4
$1.2b
Record net
revenues of
$1.2 billion
13x
Revenue
expanded more
than 13 times
expenses
3x
Tangible book value
has grown nearly
three times that of
peer institutions over
the last five years
$4.5b
Loans increased
$4.5 billion
(excluding PPP
loans) or 21%
$9.1b
Deposits grew a
record-shattering
$9.1 billion
150k
150,000 employees
supported by PPP
loans we generated
Notably, our asset quality has continued to improve. As a percentage of total assets,
classified assets were 61 basis points at year-end, which is lower than the first quarter
of 2020, before the pandemic took hold. Net charge-offs stood at only 6 basis points of
average loans for the year. Visibly positive credit trends, a brightening consensus economic
outlook and loan growth in low-risk asset classes drove a $34.2 million release in loan loss
reserves in the fourth quarter.
A Culture of Performance
While no company could have fully prepared for the upending public health crisis that
shaped 2020, Western Alliance Bank clearly was ready. Our people stepped into action
in the first round of PPP to help secure loans totaling $1.8 billion for 4,800 organizations
and loans of $600 million for 2,200 companies in the second round. The PPP loans we
generated supported 150,000 employees at these organizations.
Early on, we began a process of credit mitigation that contributed to better outcomes
for clients and for the bank. Much of this hard and important work was led by our people
working remotely – efforts that relied on robust technology as well as the collective
strength of our entire organization working in unison to protect our borrowers by providing
counsel and funding, while offering to restructure credit or temporarily deferring payments.
Throughout this experience, the bond with our clients grew tighter and credit quality
remained steady.
Everything our clients expect from Western Alliance – seamless decision-making,
responsiveness, true expertise and a focus on their needs – was exactly what we continued
to deliver. We take pride in our client-first ethos that leads to peer-leading performance
in good times, but above all during the most challenging moments. Today, this culture of
performance powerfully positions us to continue to maximize opportunities in 2021.
Positioning for Continued Growth
With clients across the country, Western Alliance is actively growing our national
commercial bank strategy. Our high-performance specialized banking groups serve as
flexible levers that help us calibrate our efforts to optimize results, no matter the economic
cycle. This expanding array of national business lines enables us to answer more needs for
more of our banking clients.
Most recently, Western Alliance announced the acquisition of AmeriHome Mortgage, the
nation’s third-largest correspondent mortgage producer. This is a unique opportunity to
further diversify our business and create ongoing EPS and return on equity accretion.
Acquiring this successful company continues to enhance our scalability, flexibility and
consistency of profitability. Importantly, this well-run organization has been a client of our
Mortgage Warehouse Lending team for more than four years and we know them well. With
leadership continuity in place, AmeriHome Mortgage is poised to be a strong cultural fit.
6
7
Capital Management
As always, we continue to be focused on thoughtfully returning capital to our shareholders
through share buybacks and dividends. In 2020, we repurchased 2,066,479 shares at an
average price of $34.65 per share. Then, in connection to our AmeriHome acquisition in
early 2021, we raised capital by issuing approximately 41% fewer shares (2.3 million shares
in total) than was originally announced at $91.00 per share.
Doing More for Our Communities in 2020
As much as our teams focused on supporting clients in 2020, we also amplified support for
our communities, which faced widening need during this trying year. Our company donated
$2.2 million to high-impact local organizations in response to COVID-19, targeting PPE
for first responders, help for hungry families and more. In a metric that says a great deal
about the people of Western Alliance, we volunteered more than 6,000 hours to support 83
community organizations – despite stay-at-home orders, heightened family demands and
concerns about well-being.
Looking Forward
As I write this letter, I’m pleased to see that our stock performance has begun to mirror
our superior business performance and we now stand as a nearly $10 billion market cap
company. As we look to 2021, I am optimistic about our loan and deposit growth and the
continued momentum from 2020. Our expectation is that 2021 will exceed 2020 results as
our company performance parallels the economic benefits of reopening from COVID-19.
Finally, our people are the essence of our bank and I am profoundly appreciative of the ways
everyone strived to overcome the enormous hurdles of 2020 to help Western Alliance reach
new heights. This year particularly, I am grateful for the insights and counsel of our board of
directors. As always, thank you to our valued shareholders.
Kenneth A. Vecchione
President and Chief Executive Officer
People are the essence of our
bank and I am profoundly
appreciative of the ways
everyone strived to overcome
the enormous hurdles of 2020
to help Western Alliance reach
new heights.
8
9
Caring for Our
Communities in 2020
While people everywhere faced disruptions
and challenges in 2020 stemming from
the pandemic, low- and moderate-income
communities and individuals often
experienced more hardship. On behalf of
our committed people across the country,
Western Alliance Bank worked to respond
in meaningful ways.
$2.2m
$2.2 million in donations directly to organizations in our markets that
provide critical food, shelter and workforce development for low- and
moderate-income individuals, as well as PPE supplies for essential workers
6,071
6,071 volunteer hours in support
of 83 community organizations
Investing in key community assets that enhance quality of life for the long
term, specifically:
$7.5m
$16m
$7.5 million in
affordable housing in
Phoenix and Tucson
$16 million for a
Title I school in
Northern California
$16.6m
$16.6 million in the
Los Angeles Unified
School District, in
support of Title I
schools
10
11
A Message
From Our Executive Chairman
Looking back over the year, I am pleased that the core strengths of
Western Alliance Bank held firm in 2020. While the pandemic was
something no one had seen before, our experience through other
challenging economic cycles prepared us for the rigors demanded by
new uncertainty.
We benefited from our long-term focus on quality clients and careful credit oversight,
combined with our diversified business model and solid balance sheet metrics. Our bank
also more than kept pace with the needs of our markets through deliberate lending,
thoughtful growth and a commitment to our clients that doesn’t waver even in the most
difficult environments, including 2020.
Robert G. Sarver
Executive Chairman
12
13
From the time the health crisis emerged last spring, our board of directors worked to ensure
stability and steer us through its impacts, with an eye toward preserving and increasing
shareholder value during an unprecedented year. The board brought tempered perspectives
and experiences to this moment in support of our management team, which relied on sound
fundamentals to shape their strategies and achieve significant successes.
Our board of directors as a whole was able to deliver strong expertise on urgent matters
ranging from health and safety decisions as COVID-19 demanded new protocols to
evaluating timely acquisition opportunities, resulting in the purchase of AmeriHome
Mortgage. The board also greenlit a timely stock buyback, subordinated debt issuance
and an equity offering earlier this year that will continue to support growth and drive
shareholder value.
Changes in board composition last year added valuable diversity and deepened skillsets.
Our newest board members made immediate contributions to the board’s discussions
and decision-making. Bryan Segedi brought to the board his experience as vice chairman
of Ernst & Young, where he led their assurance and advisory services. Juan Figuereo’s
extensive background as a public company CFO, along with his board experience and M&A
expertise, was similarly valuable during the year.
This spring, it’s an appropriate moment to recognize the many contributions of outgoing
board member Todd Marshall. Highly knowledgeable about the business climate in
Nevada, Todd over many years built the Marshall Retail Group into a premier casino and
airport retail company.
The Marshall family has been important to Western Alliance since the company’s early
days – many of you will remember when Todd’s father, Art Marshall, was chairman of
BankWest of Nevada, the original business unit of Western Alliance Bancorporation.
Todd, along with our Director Emeritus Bill Boyd and Directors Don Snyder and Marianne
Boyd Johnson, launched our organization in 2002. In his role with us, Todd has been a
tremendous advocate for the bank and senior management, and for our client-focused and
entrepreneurial style of business banking.
This can-do spirit, matched
with working knowledge of our
markets and our customers,
was integral to helping
businesses make the most of a
demanding year.
14
15
Grounded optimism animates our dedication to clients and the goals we help them achieve.
This can-do spirit, matched with working knowledge of our markets and our customers,
was integral to helping businesses make the most of a demanding year. Because of this, we
also were able to realize record performance for Western Alliance Bank. As the economy
continues to recover, we are ready to capitalize on new opportunities for our shareholders,
customers and employees.
Robert G. Sarver
Executive Chairman
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©
One of Forbes’
Best Banks in America
Year After Year
#1 Best-Performing Among 50
Largest Public U.S. Banks
S&P GLOBAL MARKET INTELLIGENCE 2020
One of the “Most Honored
Companies in America”
INSTITUTIONAL INVESTOR 2021
16
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Financial Highlights
Growth in TBV per Share4
Net Interest Income, NIM and
Average Interest on Earning Assets
Balance Sheet ($ in millions)
Total Assets
2018
2019
2020
23,109
26,822
36,461
Total Loans, net of deferred fees
17,711
21,123
27,053
Total Deposits
Total Equity
Profitability
PPNR1 (in millions)
Net Interest Income ($000)
Net Income (in millions)
ROAA (%)
ROATCE1 (%)
Net Interest Margin (%)
Efficiency Ratio1 (%)
Tangible Common Equity / Tangible Assets1 (%)
Asset Quality (%)
Non-Performing Assets2 / Total Assets
Loan Loss Reserves / Funded Loans
Tier 1 Common Capital (CET1) Ratio
Per Share Information ($)
Common Dividends Declared per Share 3
Earnings Per Share
19,177
22,796
31,930
2,614
3,017
3,413
535.3
623.5
746.1
915.9
1,040.4
1,166.9
435.8
499.2
506.6
2.05
20.6
4.68
43.1
10.2
0.20
0.86
10.7
–
4.14
2.00
19.6
4.52
42.7
10.3
0.26
0.80
10.6
0.50
4.84
1.61
17.7
3.97
38.8
8.6
0.32
1.03
9.9
1.00
5.04
WAL
WAL with Dividends Added Back
Peer Average
Peer Average with Dividends Added Back
Net Interest Income
Average Interest Earning Assets
NIM
4.65%
4.68%
4.58%
4.51%
$916M
$785M
$657M
$493M
$1.2B
3.97%
4.52%
$1.0B
160%
148%
68%
54%
2015
2016
2017
2018
2019
2020
2015
2016
2017
2018
2019
2020
$11.6B
$15.1B
$17.8B
$20.1B
$23.6B
$30.1B
Deposits, Borrowings, and Cost of Funds
Loan and Loan Yields
Dollars in Billions
Dollars in Billions
Total Borrowings
26.9% CAGR
Non-Interest Bearing Deposits
18.4% CAGR
Loans
Yield
19.5% CAGR
Interest Bearing Deposits
Cost of Funds
0.30%
0.31%
0.37%
$0.8
$7.4
$9.5
$0.5
$5.6
$8.9
$0.4
$4.1
$7.9
0.64%
$0.9
$7.5
$11.7
0.34%
$0.6
$13.4
0.86%
$0.4
$8.5
5.40%
5.18%
5.62%
5.82%
5.83%
$27.1
$21.1
4.79%
$18.5
$14.3
$13.2
$11.1
$17.7
$15.1
2015
2016
2017
2018
2019
2020
2015
2016
2017
2018
2019
2020
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, 2020 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 61 major exchange traded banks with total assets between $15B and $150B as of December 31, 2020, excluding target banks of pending acquisitions; S&P Global Market Intelligence.
18
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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. AmeriHome Mortgage
is a subsidiary of Western Alliance Bank. Western Alliance Bank, Member FDIC, is the primary subsidiary of Western Alliance Bancorporation. ©2021 Western Alliance Bancorporation
Table of Contents
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, 2020
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
Common Stock, $0.0001 Par Value
6.25% Subordinated Debentures due 2056
Trading Symbol(s)
WAL
WALA
Name of each exchange on which registered
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ☒
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 $3.54 billion based on the June 30, 2020 closing price of
said stock on the New York Stock Exchange ($37.87 per share).
As of February 19, 2021, Western Alliance Bancorporation had 101,097,102 shares of common stock outstanding.
Portions of the registrant’s definitive proxy statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
Table of Contents
INDEX
PART I
Forward-Looking Statements
Item 1.
Item 1A.
Business
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
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
15
29
29
29
29
30
32
34
74
77
155
155
157
157
157
157
157
157
157
159
160
2
Table of Contents
PART I
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (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 (including statements regarding the anticipated acquisition of AmeriHome and any
effects related thereto) 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
Table of Contents
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
Alliance Bank of Arizona
BON
Bridge
Company
Bank of Nevada
Bridge Bank
Western Alliance Bancorporation and
subsidiaries
CSI
FIB
LVSP
TPB
ENTITIES / DIVISIONS:
CS Insurance Company
First Independent Bank
Las Vegas Sunset Properties
Torrey Pines Bank
TERMS:
Allowance for Credit Losses
DIF
FDIC's Deposit Insurance Fund
Available-for-Sale
Dodd-Frank
Act
The Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010
WA PWI
Western Alliance Public Welfare
Investments, LLC
WAB or Bank Western Alliance Bank
WABT
Western Alliance Business Trust
WAL or
Parent
LIHTC
MBS
Western Alliance Bancorporation
Low-Income Housing Tax Credit
Mortgage-Backed Securities
Deferred Tax Asset
MOU
Memorandum of Understanding
DTA
EAD
Asset and Liability Management
Committee
Accumulated Other Comprehensive
Income
Additional Paid in Capital
Alternative Reference Rate
Committee
Accounting Standards Codification
Accounting Standards Update
Exposure at Default
EGRRCPA
The Economic Growth, Regulatory
Relief, and Consumer Protection Act
EPS
Earnings per Share
MSA
NBL
NOL
Metropolitan Statistical Area
National Business Lines
Net Operating Loss
EVE
Exchange Act Securities Exchange Act of 1934, as
Economic Value of Equity
NPV
NYSE
Net Present Value
New York Stock Exchange
Amended
Basel Committee on Banking
Supervision
FASB
Financial Accounting Standards
Board
OCC
Office of the Comptroller of the
Currency
Fair Credit Reporting Act of 1971
OCI
Other Comprehensive Income
Banking Supervision's December
2010 Final Capital Framework
Bank Holding Company Act of 1956 FDIA
FDIC
Board of Directors
FCRA
Bank Owned Life Insurance
Capital Adequacy, Assets,
Management Capability, Earnings,
Liquidity, Sensitivity
FHLB
FHLMC
Federal Deposit Insurance Act
Federal Deposit Insurance
Corporation
Federal Home Loan Bank
Federal Home Loan Mortgage
Corporation
Capital Rules The FRB, the OCC, and the FDIC
FICO
The Financing Corporation
CARES Act
2013 Approved Final Rules
Coronavirus Aid, Relief and
Economic Security Act
FNMA
Federal National Mortgage
Association
OFAC
OREO
OTTI
PCAOB
PCD
PCI
Office of Foreign Asset Control
Other Real Estate Owned
Other-than-Temporary Impairment
Public Company Accounting
Oversight Board
Purchased Credit Deteriorated
Purchased Credit Impaired
Commercial Banking Development
Program
Chicago Board Options Exchange
Chief Credit Officer
Certificate Deposit Account Registry
Service
Centers for Disease Control and
Prevention
Collateralized Debt Obligation
Current Expected Credit Loss
FOMC
Federal Open Market Committee
PD
Probability of Default
FRA
FRB
FVO
GAAP
GLBA
GNMA
Federal Reserve Act
Federal Reserve Bank
Fair Value Option
PPNR
PPP
ROU
Pre-Provision Net Revenue
Paycheck Protection Program
Right of Use
U.S. Generally Accepted Accounting
Principles
SBA
Small Business Administration
Gramm-Leach-Bliley Act
Government National Mortgage
Association
SBIC
SEC
Small Business Investment Company
Securities and Exchange Commission
Chief Executive Officer
GSE
Government-Sponsored Enterprise
SERP
Common Equity Tier 1
Chief Financial Officer
Consumer Financial Protection
Bureau
Collateralized Loan Obligation
Committee of Sponsoring
Organizations of the Treadway
Commission
Community Reinvestment Act
Commercial Real Estate
HELOC
Home Equity Line of Credit
HFI
HFS
HTM
ICS
IRC
ISDA
LGD
Held for Investment
Held for Sale
Held-to-Maturity
Insured Cash Sweep Service
Internal Revenue Code
International Swaps and Derivatives
Association
Loss Given Default
SLC
SOFR
SR
TDR
TEB
TSR
VIE
XBRL
COVID-19
Coronavirus Disease 2019
Diversity and Inclusion
LIBOR
London Interbank Offered Rate
4
Supplemental Executive Retirement
Plan
Senior Loan Committee
Secured Overnight Funding Rate
Supervision and Regulation Letters
Troubled Debt Restructuring
Tax Equivalent Basis
Total Shareholder Return
Variable Interest Entity
eXtensible Business Reporting
Language
ACL
AFS
ALCO
AOCI
APIC
ARRC
ASC
ASU
Basel
Committee
Basel III
BHCA
BOD
BOLI
CAMELS
CBDP
CBOE
CCO
CDARS
CDC
CDO
CECL
CEO
CET1
CFO
CFPB
CLO
COSO
CRA
CRE
D&I
Table of Contents
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 provides an
array of specialized financial services to business customers across the country. 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, 2020, WAL has the following bank subsidiary:
Bank Name Headquarters
Location Cities
Total
Assets
Net
Loans
(in millions)
Deposits
Arizona: Chandler, Flagstaff, Gilbert, Mesa, Phoenix,
Scottsdale, and Tucson
Nevada: Carson City, Fallon, Reno, Sparks,
Henderson, Las Vegas, Mesquite, and North Las Vegas
Western
Alliance
Bank
Phoenix,
Arizona
California: Beverly Hills, Carlsbad, Costa Mesa, La
Mesa, Los Angeles, Menlo Park, Oakland, Pleasanton,
San Diego, San Francisco, and San Jose
$
36,574.8 $
26,774.1 $
32,189.9
Other: Atlanta, Georgia; Boston, Massachusetts;
Chicago, Illinois; Denver, Colorado; Durham, North
Carolina; Minneapolis, Minnesota; Tysons Corner,
Virginia; and Seattle, Washington
WAB also has the following significant wholly-owned subsidiaries:
• Western Alliance Business Trust holds certain investment securities, municipal and non-profit loans, and leases.
• WA PWI 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 has made changes to its reportable segments, which have been reflected in the Company's operating segment
results as of and for the year ended December 31, 2020. The Company's reportable segments are aggregated with a focus on
products and services offered and consist of three reportable segments:
•
•
•
Commercial segment: provides commercial banking and treasury management products and services to small and
middle-market businesses, specialized banking services to sophisticated commercial institutions and investors within
niche industries, as well as financial services to the real estate industry.
Consumer Related segment: offers both commercial banking services to enterprises in consumer-related sectors and
consumer banking services, such as residential mortgage banking.
Corporate & Other segment: consists of the Company's investment portfolio, Corporate borrowings and other related
items, income and expense items not allocated to our other reportable segments, and inter-segment eliminations.
5
Table of Contents
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. Any excess 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 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, number of transactions
processed for loans and deposits, and average loan and 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, 2020 and
2019, 28% and 31% 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.
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
Table of Contents
At December 31, 2020, the Company's loan portfolio totaled $27.1 billion, or approximately 74% 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,
2020
2019
Amount
Percent
Amount
Percent
(dollars in millions)
$
14,324.4
52.9 % $
5,654.7
2,156.8
2,431.3
2,434.6
51.2
27,053.0
(278.9)
26,774.1
$
$
20.9
8.0
9.0
9.0
0.2
100.0 % $
$
9,382.0
5,245.6
2,316.9
1,952.2
2,147.7
57.1
21,101.5
(167.8)
20,933.7
44.5 %
24.8
11.0
9.2
10.2
0.3
100.0 %
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" in Item 7 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
Table of Contents
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, 2020:
CRE
Commercial and industrial
Construction and land development
Residential real estate
Consumer
Asset Quality
General
Percent of Total Capital
Actual
Policy Limit
325 %
400
85
150
5
202 %
370
63
63
1
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 formally reviewed on a quarterly basis as part of the Company's loan grade certification
process 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, 2020, 2019, and 2018. 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
Table of Contents
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 provision for credit losses in each period is reflected as a reduction in earnings for that period and, upon the adoption of
CECL, includes amounts related to funded loans, unfunded loan commitments, and investment securities. The provision is
equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb estimated lifetime
credit losses inherent in the loan and investment securities portfolios as well as off-balance sheet credit exposures. Subsequent
recoveries, if any, are credited to the allowance. The allowance for credit losses on funded loans and investment securities are
presented as a reduction to the respective asset balance on the Consolidated Balance Sheet. The allowance for credit losses on
unfunded loan commitments is classified in other liabilities on the Consolidated Balance Sheet. 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.
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.
9
Table of Contents
The Company's investment policy limits new securities purchases to certain eligible investment types and, in the aggregate, 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
Commercial mortgage-backed securities
Collateralized loan obligations
Common equity tier 1
Total assets
Total capital
Tier 1 capital
Total assets
Aggregate purchases
Aggregate purchases
Percentage or
Dollar Limit
10.0 %
5.0 %
30.0 %
5.0 %
2.5 %
$50.0 million
$500.0 million
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, 2020, 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, 2020, the Company's investment securities portfolio totals $5.4 billion, representing approximately 15% 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 6.4 years as of December 31, 2020.
The following table summarizes the carrying value of investment securities as of December 31, 2020 and 2019:
Available-for-sale debt securities
CDO
CLO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal (taxable) 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,
2020
2019
Amount
Percent
Amount
Percent
(dollars in millions)
0.1 % $
2.7
1.5
5.0
0.4
27.1
27.3
32.3
0.5
—
—
10.1
—
94.3
99.9
7.8
1,129.2
1,412.1
1,040.0
27.0
10.0
1.0
6.9
146.9
84.6
270.2
22.5
1,476.9
1,486.6
1,756.2
26.5
—
—
0.3 %
—
2.4
2.5
0.2
28.4
35.6
26.2
0.7
0.2
0.0
5,277.3
96.9 % $
3,831.4
96.5 %
53.4
113.9
167.3
1.0 % $
2.1
3.1 % $
52.5
86.2
138.7
1.3 %
2.2
3.5 %
5,444.6
100.0 % $
3,970.1
100.0 %
$
$
$
$
$
As of December 31, 2020 and 2019, the Company had investments in BOLI of $176.3 million and $174.0 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
Table of Contents
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, 2020, the deposit portfolio was comprised of
42% non-interest-bearing deposits and 58% 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,
competitiveness 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,
2020
2019
Amount
Percent
Amount
Percent
$
$
13,463.3
4,396.4
12,413.4
602.0
1,055.4
31,930.5
(in millions)
42.2 % $
13.8
38.9
1.9
3.2
8,537.9
2,760.9
9,120.8
1,426.1
950.8
37.4 %
12.1
40.0
6.3
4.2
100.0 % $
22,796.5
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
Table of Contents
Customer, Product, and Geographic Concentrations
Approximately 38% and 45% of the Company's loan portfolio at December 31, 2020 and 2019, respectively, was represented
by CRE and construction and land development loans. The Company’s business is concentrated primarily in the Phoenix, Las
Vegas, Los Angeles, 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 53% and 44% of the Company's loan portfolio as of
December 31, 2020 and 2019, respectively, 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 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.
Human Capital Resources
The Company’s culture is defined by its corporate values of integrity, creativity, teamwork, passion and excellence. People are
the foundation of the Company and the Company invests in their success. Our people are committed to our clients’ success and,
by putting clients first, we create strong shareholder performance. This leads to tremendous possibilities to fuel client growth
and support the Company’s communities, and in turn provide expanding opportunities to attract and retain its people.
As of December 31, 2020, the Company employed 1,915 full-time equivalent employees in its branches and loan production
offices across the United States, an increase of 4.4% from December 31, 2019 due to the Company’s growth. The Company’s
employees are not represented by a union or covered by a collective bargaining agreement.
Diversity and Inclusion
The Company is committed to improving workforce diversity at all levels of the organization. In 2020, the Company made
progress towards enhancing its ability to attract and retain a diverse population of employees. The Company began building
relationships with community and educational institutions to strengthen its pipelines of talent in underrepresented communities.
The Company has established an executive-led Diversity & Inclusion Opportunity Council, which guides and sponsors
initiatives, sets goals designed to increase diversity of thought and access to leadership, evaluates organizational and best
practice D&I strategies, and creates subcommittees to activate goals. One aspect of this work is the active support of Business
Resource Groups. Among the groups’ activities are opportunities to engage in programs, network with peers, and connect with
Bank leadership. Overall, the Opportunity Council is focused on accelerating D&I activities and results.
The Company employs a diverse population that is a reflection of its communities, with 38% of its employees belonging to a
minority group. Nearly 58% of its employees are women, with women filling 50% of roles that involve supervising and
managing other employees. The Company is committed to increasing the share of women and minority groups in the ranks of
its senior leadership.
12
Table of Contents
Recruiting, Retention, and Talent Development
The Company recognizes that its success is highly dependent on its ability to attract, retain and develop employees. To foster
this development, the Company has created two early talent identification programs, a college internship program and
Commercial Banking Development Program, each of which enhance management’s ability to hire outstanding people. Campus
recruitment initiatives and partnerships also fuel the Company’s pipeline of talent. Within the internship program, college
students and recent graduates are paired with leaders across the Company to create a valuable, immersive experience, with an
objective of retaining the most promising interns and eventually bringing this talent into the Bank through the CBDP or other
appropriate positions. The CBDP is an 18-month, on-the-job development program to train successful credit analysts that offers
progressive assignments, mentoring, opportunities to learn the business and various aspects of leadership, with the objective of
growing these individuals into future leaders of the Company. Additionally, the Company is expanding its sales training and
mentoring efforts to foster internal development within its commercial lending teams.
As a growing company, recruiting new talent to the organization is key to the Company’s success and part of that objective
includes building a diverse workforce that is representative of the communities that the Company serves. The Company has
made a commitment to growing the share of its employee population from diverse communities and has experienced some
success in recent years, although the Company believes there is still an opportunity for additional advancement in this area. For
example, through focused recruiting efforts, the Company was able to increase the share of 2020 hires who are Black or African
American to 7.6%, higher than the Company's current Black or African American employee population of 5.8%.
Retaining employees who have been key contributors to the Company's success story remains an important objective. The
Company has achieved a multi-year decline in its turnover rate, falling to 12.5% for 2020, down 2.1% year-over-year, and
down nearly 7% from 2017. An internal review of turnover rates of various employee categories, including ethnicity, gender,
and age, reveals that turnover occurs at roughly the same rate as the group’s total representation. For example, White employees
represent 62% of the Company's employee population and account for 61% of the Company's turnover. Similarly, Millennials
and women represent 31% and 57% of the Company's employee population, respectively, and account for 31% and 51% of the
turnover, respectively. The Company's turnover rate is highest among employees from the Builders (born 1900 to 1945) and
Baby Boomers (born 1946 to 1964) generations as they reach retirement age in greater numbers.
The Company also offers a variety of resources to help its employees grow in their current roles and build new skills, including
online development programs and workshops, mentoring programs, and internal webinars that feature speakers from across the
Company, sharing information about their business line, division, or functional area. The Company encourages its employees to
take an active role in their career and through the annual performance management process, employees are able to identify
individual development goals and create an action plan to achieve these goals.
With the understanding that bias is a larger societal issue, the Company offers training to create awareness and understanding of
everyday biases and micro-behaviors, and helps individuals to implement solutions to create a more inclusive workplace. This
training is required for all employees and additional, focused trainings are required for all managers, including one specifically
promoting inclusion.
Compensation and Benefits
The Company’s compensation and benefits programs are designed to attract, retain, motivate, and reward employees to deliver
strong performance and excellence. In addition to salaries, these programs include annual bonuses, stock awards, a 401(k) Plan
with an employer matching contribution, healthcare and life insurance benefits, health savings and flexible spending accounts,
paid time off, various time off benefits for new parents, sick leave, company-paid short-term and long-term disability benefits,
an employee assistance program, benefits concierge service, wellness program and premium credit opportunity, as well as
company-sponsored voluntary benefit programs for ID theft protection, pet insurance, and supplemental income programs for
accident, illness, and hospitalization. Throughout the organization, 99% of employees participate in the annual bonus plan and
everyone, except for executive management, is eligible to receive business incentives.
Health and Wellness
The Company is committed to supporting the wellness of its people, to enable their personal and professional productivity,
improve physical and mental well-being, and provide support for optimal health at work and at home. To support these efforts,
the Company has established Wellness Committees to engage its people in well-being initiatives that provide opportunities for
employees to develop healthier lifestyles by promoting habits and attitudes that support wellness.
Throughout the ongoing COVID-19 pandemic, the Company's focus has been on the well-being of its people. These health
measures are discussed in Item 7 of this Form 10-K, under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Developments: COVID-19 and the CARES Act."
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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.
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.
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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 material, 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 Proposed Acquisition of AmeriHome
The Company’s proposed acquisition of AmeriHome is subject to regulatory approvals and other closing conditions and may
be more difficult, costly or time-consuming to complete than the Company expects.
On February 16, 2021, WAB entered into an Agreement to acquire the parent company of AmeriHome Mortgage Company,
LLC (“AmeriHome”) in a merger with an indirect subsidiary of WAB for cash consideration (the “Merger”). If completed, the
Merger will extend WAB’s national commercial businesses with a complementary national mortgage franchise. However, the
completion of the Merger is subject to customary closing conditions, including certain state regulatory and government-
sponsored enterprise approvals and expiration or early termination of the applicable waiting period under federal antitrust law.
While the Company anticipates that the Merger will be completed in the second quarter of 2021, there can be no assurance that
the required regulatory and other approvals necessary to complete the Merger will be obtained, or whether all of the other
conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed. Any delays, additional
costs, or other unexpected developments with respect to satisfaction of the closing conditions could delay or prevent the
completion of the Merger. As a result, the Company may not realize some or all of the benefits that it expects to achieve if the
Merger is successfully completed within its expected time frame, which may adversely impact the Company’s results of
operations.
If the Merger is completed, the addition of AmeriHome’s national mortgage franchise would present risks that could cause
the Company to not realize the strategic and financial goals contemplated at the time it entered into the agreement to acquire
AmeriHome or otherwise adversely affect the Company’s results of operations.
Risks the Company may face if the Merger is completed include:
• Management’s estimates regarding AmeriHome’s future earnings potential may not be achievable, because
AmeriHome’s performance could be adversely impacted by a rising rate environment, changes in the mix of purchase
versus refinancing volumes, or other factors not known or anticipated by the Company;
•
•
•
•
•
The integration of AmeriHome into WAB may be more costly or time-consuming than expected despite the fact that
AmeriHome will continue to operate under its existing brand and management team;
The Company may not realize the benefits it expects to achieve from the Merger such as those anticipated from
funding, cross-selling, and other integration synergies;
The Company will become subject to increased compliance costs and risks with respect to aspects of AmeriHome’s
business that differ from or are larger in scope than WAB’s current similar operations, including:
◦
◦
◦
The need to maintain various state licenses and federal and government-sponsored agency approvals required
to conduct AmeriHome’s business, and the risk of adverse consequences resulting from periodic
examinations by such state and federal agencies or from changes in laws or regulations that may be
promulgated in the future;
Increased compliance risk and cost associated with federal, state and local laws, regulations and judicial and
administrative decisions relating to mortgage loans and consumer protection, including those designed to
discourage predatory lending, collections and servicing practices with respect to mortgage loans; and
Increased compliance risk and costs associated with federal, state and local laws related to data privacy and
the handling of non-public personal financial information of AmeriHome’s customers, including the
California Consumer Protection Act and similar regulations that have been or may be enacted by other states;
The Company may have difficulties retaining key personnel from AmeriHome or managing AmeriHome’s technology
platform;
The Company’s operating results may be adversely impacted by claims or liabilities related to AmeriHome’s business
including, among others, (i) claims from government agencies, current or former customers or employees, consumers,
financing providers, vendors and other business partners or third parties; (ii) repurchase and indemnification
obligations with respect to sold loans or any failure to be able to enforce repurchase and indemnification obligations of
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counterparties with respect to purchased loans; and (iii) counterparty and interest rate risk with respect to derivative
and hedging instruments;
AmeriHome’s business may be further affected by the continuation or worsening of the COVID-19 pandemic; and
AmeriHome’s business may be adversely impacted by changes in the competitive or regulatory landscape.
•
•
Risks Relating to the Company's Business
The COVID-19 pandemic and resulting adverse economic conditions have adversely impacted the Company's business and
results and could have a more material adverse impact on our business, financial condition and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and
international economies and financial markets. Although the Company has continued operating, the COVID-19 pandemic has
caused disruptions to its business and could cause material disruptions to the Company's business and operations in the future.
Impacts to the Company's business have included the transition of a significant portion of its workforce to home locations,
increases in costs due to additional health and safety precautions implemented at branches, and an increase in draws on
unfunded loan commitments and requests for forbearance and loan modifications at the onset of the pandemic. To the extent
that commercial and social restrictions remain in place or increase, the Company's expenses, delinquencies, foreclosures and
credit losses may materially increase. In addition, the unprecedented nature of COVID-19 related disruptions heighten the
inherent uncertainty of forecasting future economic conditions and their impact on the Company's loan portfolio, and therefore
increases the risk that the assumptions, judgments and estimates used to determine the appropriate allowance for future credit
losses may prove to be incorrect, resulting in actual credit losses that exceed the Company’s recorded allowance.
The Company is continuing to monitor the COVID-19 pandemic, its economic impact and related risks, although the rapid
development and fluidity of the situation precludes any specific prediction as to its ultimate impact. Among the factors outside
the Company's control that are likely to affect the impact the COVID-19 pandemic will ultimately have on the Company's
business are:
•
•
•
•
•
•
•
•
•
•
•
the pandemic’s course and severity, including the impact related to the distribution and effectiveness of the COVID-19
vaccines and the willingness of the public to be vaccinated;
the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to
employment, wages and benefits, commercial activity, consumer spending and real estate market values;
political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on
commerce and banking, such as moratoria and other suspensions of collections, foreclosures, and related obligations;
the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on
commercial activity and incentives of employers and individuals to resume or increase employment, wages and
benefits and commercial activity;
the timing and availability of direct and indirect governmental support for various financial assets, including mortgage
loans;
the potential long-term impact on the tourism and hospitality industries, which could affect the Company's hotel
franchise finance business and portfolio;
the long-term effect of the economic downturn on the Company's intangible assets such as its deferred tax asset and
goodwill;
potential longer-term effects of increased government spending on the interest rate environment and borrowing costs
for non-governmental parties;
the ability of the Company's employees and third-party vendors to work effectively during the course of the pandemic;
potential longer-term shifts toward mobile banking, telecommuting and telecommerce; and
geographic variation in the severity and duration of the COVID-19 pandemic, including in states in which the
Company operates physically such as Arizona, California and Nevada.
If the COVID-19 pandemic results in a continuation or worsening of current economic conditions and commercial
environments, our business, financial condition and results of operations could be materially adversely affected. Additional
potential effects related to the COVID-19 pandemic are discussed in the other risk factors contained in this report.
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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 ongoing COVID-19 pandemic has caused significant disruption in the U.S. economy and financial
markets, including in Arizona, where we are headquartered, and California and Nevada, where we have significant operations.
The specific impact on the Company of unfavorable or uncertain economic or market conditions 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 continue to be challenging or experience additional volatility in the
future. There can be no assurance that such 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 a participating lender in the PPP and may be exposed to risks related to noncompliance with the program.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help
eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic.
Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. Certain ambiguities in the laws, rules and
guidance regarding the requirements and operation of the PPP may expose the Company to risks relating to noncompliance with
the PPP. For instance, other financial institutions have experienced litigation related to their policies and procedures for
accepting and processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP
related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition,
the Company may be exposed to credit risk on a PPP loan if a determination is made by the SBA that there is a deficiency in the
manner in which the loan was originated, funded or serviced. In such a case, the SBA may deny its liability under the guaranty,
reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any related loss from the
Company.
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.
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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.
Recent changes to the FASB accounting standards resulted in a significant change to the Company’s recognition of credit
losses and may continue to 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. Under the incurred loss model, the Company delayed recognition of losses until it was
probable that a loss had 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 takes 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. The CECL model also applies to off-
balance sheet credit exposures, such as unfunded loan commitments and standby letters of credit, and requires that the estimate
of credit losses consider both the likelihood that funding will occur and an estimate of expected credit losses on commitments
expected to be funded. The CECL model materially impacted 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.
The worsening of forecasted economic conditions from December 31, 2019 through much of 2020 attributable to the
COVID-19 pandemic contributed to the $123.6 million provision for credit losses recognized during the year ended December
31, 2020, under the new CECL accounting standard. While the Company has not to date experienced significant writeoffs
related to the COVID-19 pandemic, the continued uncertainty regarding the severity and duration of the pandemic and related
economic effects will continue to affect the Company’s estimate of its allowance for credit losses and resulting provision for
credit losses. To the extent the impact of the pandemic is prolonged and economic conditions continue to worsen or persist
longer than forecast, such estimates may be insufficient and may change significantly in the future.
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, loan underwriting policies, historical loan loss experience, and reasonable and supportable forecasts. In addition, the
Company individually evaluates all loans identified as problem loans and establishes an 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.
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At December 31, 2020, the Company's allowance for credit losses and loss contingency on unfunded loan commitments and
letters of credit is $278.9 million and $37.0 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.
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. 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. In
addition, 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.
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. Like
the rest of the United States, economic conditions in these states have been adversely affected by the COVID-19 pandemic, and
there can be no assurance as to if or when such conditions will improve or that such conditions will not worsen.
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. 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.
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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.
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, 2020, the Company has five 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.
The Company is exposed to risk of environmental liabilities with respect to properties to which the Company obtains title.
Approximately 47% of the Company’s loan portfolio at December 31, 2020 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.
Risks Related to the Company's Operations, Technology, and Personnel
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.
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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. As a
result of the COVID-19 pandemic, the number of our employees working remotely at least some of the time has increased
substantially. 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 ongoing
COVID-19 pandemic, 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, poor performance by a vendor, or service issues caused by the effects of COVID-19 or a similar
pandemic on 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 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.
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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:
•
•
•
•
•
•
•
•
•
•
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
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 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.
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.
Further, as it relates to the pandemic, the Company has taken and is continuing to take actions to protect the safety and well-
being of its employees and customers, however, no assurance can be given that the steps being taken will be adequate or
appropriate. The continued or renewed spread of COVID-19 or a similar pandemic could negatively impact the availability of
key personnel necessary to conduct the Company's business. A sizable percentage of the Company's workforce has returned to
working in its office buildings, and it is possible that one or more members of senior management or other key employees
contracts the virus and is unable to perform their essential duties.
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. 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.
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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.
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
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.
to maintain deposits or meet
their ability
terms of
impair
their
the
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Risks Related to Banking, Markets, and Legal Matters
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.
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, including the FRB, FDIC, and CFPB, 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.
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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.
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.
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. The publication cessation date of U.S. dollar LIBOR has been
extended to June 30, 2023. 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.
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, the valuation of its assets and liabilities, and the Company's
ability to effectively manage its interest rate risk.
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
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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, although the unfavorable economic conditions brought on by the pandemic may make it more difficult for us
to maintain our loan origination volume. In falling interest rate environments, loan repayment rates will increase and, in rising
interest rate environments, loan repayment rates will decline and also generally result in a lower volume of loan originations.
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.
In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, in part
as a result of the pandemic. A prolonged period of very low interest rates or an increase in interest rates that affects the
Company's borrowers' ability to repay loans could reduce the Company's net interest income and have a material adverse
impact on the Company's cash flows.
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 ongoing COVID-19
pandemic has resulted in severe volatility in the financial markets. Depending on the extent and duration of the COVID-19
pandemic, the price of the Company's common stock may continue to experience volatility or decline. There can be no
assurances about the market price for the Company's 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:
•
•
•
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•
•
•
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•
•
•
•
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
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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.
The Company has paid regular quarterly dividends on its common stock, subject to quarterly declarations by the BOD, since the
third quarter of 2019. The Company has previously adopted common stock repurchase programs, pursuant to which the
Company has repurchased shares of its outstanding common stock, the most recent of which expired in December 2020.
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, 2020, the Parent had outstanding $175.0 million of 6.25% subordinated debentures with a maturity date of July 1,
2056, and WAB had outstanding $300.0 million of subordinated debentures. WAB's subordinated debentures consist of two
issuances, an issuance of $75.0 million aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes due
July 15, 2025 and another issuance of $225.0 million aggregate principal amount of 5.25% Fixed-to-Floating Rate Subordinated
Notes due June 1, 2030. 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.
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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 and other 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.
29
Table of Contents
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 2020 Domestic Company Section 303A CEO Certification regarding its
compliance with the NYSE’s corporate governance listing standards.
Holders
At December 31, 2020, there were approximately 1,578 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 2020, the Company's Board of Directors approved a cash dividend of $0.25 per share. The dividend
payment to shareholders totaled $25.2 million and was paid on November 27, 2020.
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 2020
November 2020
December 2020
Total
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
675 $
—
—
675 $
41.40
—
—
41.40
— $
—
—
— $
178,392,414
178,392,414
178,392,414
178,392,414
(1)
(2)
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.
The Company has previously adopted common stock repurchase programs, the most recent of which authorized the Company to repurchase up to
$250.0 million of its common stock. The Company had $178.4 million in authorized common stock repurchase capacity that expired under the
program as of December 31, 2020.
30
Table of Contents
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, 2015 and reinvestment of dividends.
31
Equivalent ValueTotal Return PerformanceWestern AllianceS&P 500 IndexKBW Regional Banking IndexDec '15Dec '16Dec '17Dec '18Dec '19Dec '20100150200250 Table of Contents
Item 6.
Selected Financial Data.
The following selected financial data have been derived from the Company’s statements of consolidated financial condition and
results of operations, as of and for the years ended December 31, 2020, 2019, 2018, 2017, and 2016, 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
2020
2019
2018
2017
2016
Year Ended December 31,
(in millions)
$
1,261.8 $
1,225.0 $
1,033.5 $
845.5 $
94.9
1,166.9
123.6
1,043.3
70.8
491.6
622.5
115.9
184.6
1,040.4
19.3
1,021.1
65.1
482.0
604.2
105.0
117.6
915.9
25.0
890.9
43.1
423.7
510.3
74.5
60.8
784.7
16.5
768.2
45.3
361.7
451.8
126.3
$
506.6 $
499.2 $
435.8 $
325.5 $
700.5
43.3
657.2
4.7
652.5
42.9
334.2
361.2
101.4
259.8
32
Table of Contents
Per Share Data:
Earnings per share - basic
Earnings per share - 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
Investment securities and money market investments, net
Loans, net of deferred loan fees and costs
Allowance for loan 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:
As of and for the Year Ended December 31,
2020
2019
2018
2017
2016
(dollars in millions, except per share data)
$
$
5.06
5.04
1.00
33.85
30.90
100.8
100.2
100.5
$
4.86
4.84
0.50
29.42
26.54
102.5
102.7
103.1
$
4.16
4.14
—
24.90
22.07
104.9
104.7
105.4
$
3.12
3.10
—
21.14
18.31
105.5
104.2
105.0
2.52
2.50
—
18.00
15.17
105.1
103.0
103.8
$
2,671.7
$
434.6
$
498.6
$
416.8
$
284.5
5,504.8
27,053.0
278.9
36,461.0
31,930.5
5.0
548.7
3,413.5
4,036.6
21,123.3
167.8
26,821.9
22,796.5
—
393.6
3,016.7
3,695.0
17,710.6
152.7
23,109.5
19,177.4
491.0
360.5
2,613.7
3,754.6
15,093.9
140.1
20,329.1
16,972.5
390.0
376.9
2,229.7
2,702.5
13,208.4
124.7
17,200.8
14,549.9
80.0
367.9
1,891.5
$ 31,373.4
$ 24,914.1
$ 21,246.3
$ 18,869.6
$ 16,134.3
30,080.9
3,151.8
23,586.5
2,845.4
20,064.5
2,411.7
17,770.9
2,079.3
15,117.4
1,770.9
1.61 %
2.00 %
2.05 %
1.72 %
1.61 %
17.7
3.97
84.7
9.2 %
10.2
12.5
19.6
4.52
92.7
10.6 %
10.9
12.8
20.6
4.68
92.4
10.9 %
11.1
13.2
18.3
4.65
88.9
10.3 %
10.8
13.3
17.7
4.58
90.8
9.9 %
10.5
13.2
Net charge-offs to average loans outstanding
0.06 %
0.02 %
0.06 %
0.01 %
0.02 %
Non-accrual loans to funded loans
Non-accrual loans and repossessed assets to total assets
Loans past due 90 days or more and still accruing to funded
loans
Allowance for loan losses to funded loans
Allowance for loan losses to non-accrual loans
0.43
0.32
—
1.03
242
0.27
0.26
—
0.80
300
0.16
0.20
0.00
0.86
550
0.29
0.36
0.00
0.93
319
0.31
0.51
0.01
0.95
310
1 See Non-GAAP Financial Measures section beginning on page 40.
33
Table of Contents
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion 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 2019 results to the 2018 results and other 2018 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, 2019.
Recent Developments: Pending Acquisition of AmeriHome
On February 16, 2021, the Company entered into a definitive agreement with Aris Mortgage Holding Company, LLC ("Aris"),
the parent company of AmeriHome Mortgage Company, LLC (“AmeriHome”), and certain other parties, pursuant to which
Aris will merge with an indirect subsidiary of the Bank. Following the merger, AmeriHome will continue to use its trade name,
continuing to operate as AmeriHome, a Western Alliance Bank company. Pursuant to the agreement, WAB will pay cash
consideration of $275 million plus the adjusted tangible book value of Aris at closing, for an estimated aggregate cash
consideration of $1.0 billion (inclusive of certain transaction expenses and management bonus payments) based on December
31, 2020 financial statements of Aris. James Furash, Chief Executive Officer of AmeriHome, and other founding management
team members of AmeriHome will continue in their roles following the merger. The merger, which remains subject to required
regulatory approvals, is expected to close in the second quarter of 2021.
Recent Developments: COVID-19 and the CARES Act
The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and
international economies and financial markets. The spread of COVID-19 in the United States has caused illness, quarantines,
cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions,
supply chain interruptions, increased unemployment, and overall economic and financial market instability. Many states,
including Arizona, where we are headquartered, and California and Nevada, in which we have significant operations, continue
to be significantly impacted by the pandemic.
The CARES Act was enacted in March 2020 and provides for approximately $2.2 trillion in emergency economic relief
measures including, among other things, loan programs for small and mid-sized businesses and other economic relief for
impacted businesses and industries, including financial institutions. Separately, and also in response to COVID-19, the Federal
Reserve’s FOMC has set the federal funds target rate - i.e., the interest rate at which depository institutions such as the Bank
lend reserve balances to other depository institutions overnight on an uncollateralized basis - to a historic low. In March 2020,
the FOMC set the federal funds target rate at 0 to 0.25 percent.
The COVID-19 pandemic and certain provisions of the CARES Act and other recent legislative and regulatory relief efforts
have had and are expected to continue to have a material impact on the Company's operations, as further discussed below.
Financial position and results of operations
The Company's financial position and results of operations as of and for the year ended December 31, 2020 have been
significantly impacted by the COVID-19 pandemic. The current uncertainty in the overall economy attributable to the pandemic
contributed to the $123.6 million provision for credit losses recognized during the year ended December 31, 2020, under the
new CECL accounting standard adopted by the Company on January 1, 2020. While the Company has not to date experienced
significant writeoffs related to the COVID-19 pandemic, the continued uncertainty regarding the severity and duration of the
pandemic and related economic effects will continue to affect the Company’s estimate of its allowance for credit losses and
resulting provision for credit losses. To the extent the impact of the pandemic is prolonged and economic conditions continue to
worsen or persist longer than forecast, such estimates may be insufficient and may change significantly in the future. The
Company’s interest income also may be negatively impacted in future periods as we continue to work with our affected
borrowers to defer payments, interest and fees. Additionally, net interest margin may be reduced generally as a result of the low
rate environment. These uncertainties and the economic environment will continue to affect earnings, slow growth, and may
result in deterioration of asset quality in the Company's loan and investment portfolios.
34
Table of Contents
The below table details the Company's exposure to borrowers in industries generally considered to be the most impacted by the
COVID-19 pandemic:
December 31, 2020
Loan Balance
Percent of Total
Loan Portfolio
(dollars in millions)
$
$
2,163.9
1,240.5
659.8
491.4
4,555.6
8.0 %
4.6
2.4
1.8
16.8 %
Industry (1):
Hotel
Investor dependent
Retail (2)
Gaming
Total
(1)
(2)
Balances capture credit exposures in the business segments that manage the significant majority of industry relationships.
Consists of real estate secured loan amounts that have significant retail dependency.
While the Company has not experienced disproportionate impacts among its business segments to date, borrowers in the
industries detailed in the table above could have greater sensitivity to the economic downturn with potentially longer recovery
periods than other business lines.
Lending operations and accommodations to borrowers
The Company assisted our customers with applications for resources through the PPP and approved over 4,700 applications
under the original program. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if
borrowers maintain their staff and payroll and if loan amounts are used to cover eligible expenses, such as payroll, mortgage
interest, rents and utilities payments. These loans have a two-year term and will earn interest at a rate of 1%. As of December
31, 2020, the outstanding balance of loans originated under the original PPP totaled $1.5 billion.
The original PPP terminated on August 8, 2020, but was reopened in January 2021, with $284 billion in additional funding. As
part of the resumption of program, significant clarifications and modifications were made related to the scope of businesses
eligible, expansion of the scope of expenses eligible for forgiveness, and simplification of forgiveness mechanisms for loans of
$150,000 or less. Eligible businesses may apply for and receive PPP loans through March 31, 2021 and certain small businesses
that previously received a loan under the original program may be eligible to obtain an additional loan. These loans have a five-
year term and will earn interest at a rate of 1%.
The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers
affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term
modification that would not meet the definition of a TDR. This includes the following (i) the loan modification is made
between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency
declaration, and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The Company is applying
this guidance to qualifying loan modifications. The types of loan modifications granted to borrowers include extensions of loan
maturity dates, covenant waivers, interest only payments for a specified period of time, and loan payment deferrals. As of
December 31, 2020, the Company has outstanding modifications meeting these conditions on loans with a net balance of
$538.3 million as of December 31, 2020, of which, modifications involving loan payment deferrals total $190.0 million.
Further, residential mortgage loans in forbearance have a net balance of $77.1 million as of December 31, 2020. As of January
31, 2020, the balance of loans with an outstanding loan modification was reduced to $293.0 million, with only $10.7 million
involving a loan payment deferral.
The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of
the COVID-19 pandemic. The MSLP operates through five facilities: the Main Street New Loan Facility, the Main Street
Priority Loan Facility, the Main Street Expanded Loan Facility, the Nonprofit Organization New Loan Facility, and the
Nonprofit Organization Expanded Loan Facility. As of December 31, 2020, the Company has not originated a significant
amount of these loans.
35
Table of Contents
Capital and liquidity
While the Company has sufficient capital and does not anticipate any need for additional liquidity in response to the uncertainty
regarding the severity and duration of the COVID-19 pandemic, the Company has taken several actions to ensure the strength
of its capital and liquidity position. These actions include issuance of $225 million in subordinated debt at our bank subsidiary
in May 2020, establishing a Federal Reserve lending facility in connection with funding loans to small and medium-sized
businesses, and temporarily suspending stock repurchases since mid-April. In addition, the Company is also in a position to
pledge additional collateral to increase its borrowing capacity with the FRB, if necessary. Further, management has elected to
take advantage of the capital relief option that delays the estimated impact on regulatory capital by up to two years, with a
three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.
Asset valuation
Continued and sustained declines in the Company's stock price and/or other credit related impacts could give rise to triggering
events in the future that could result in a write-down in the value of our goodwill, which could have a material adverse impact
on our results of operations.
Our processes, controls and business continuity plan
The Company has focused first on ensuring the well-being of our people, customers, and communities. Preventive health
measures were put in place, which included establishing social distancing precautions for all employees in the office and
customers visiting branches, preventive cleaning at offices and branches, and elimination of business related travel. The
Company has returned employees to the office in certain locations subject to applicable health and safety procedures in
accordance with guidance from the CDC and local authorities, including regular symptom checks, requiring face cloth
coverings, increasing physical space between employees, monitoring the number of employees in the workplace, and requiring
employees with COVID-19 related symptoms or exposure to quarantine away from the office.
The Company has also concentrated on implementing additional business continuity measures that include establishing a cross-
functional COVID-19 team, monitoring potential business interruptions, making improvements to its remote working
technology, and conducting regular discussions with its technology vendors. The Company has not experienced significant
disruption to its business as the Company has been able to facilitate remote work for its employees and has online tools in place
for its customers. The Company believes that it is positioned to continue these business continuity measures for the foreseeable
future; however, no assurances can be provided as these circumstances may change depending on the duration of the pandemic.
36
Table of Contents
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
provides an array of specialized financial services to its business customers across the country.
Financial Results Highlights of 2020
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Net income of $506.6 million for 2020, compared to $499.2 million for 2019
Diluted earnings per share of $5.04 for 2020, compared to $4.84 per share for 2019
Net revenue of $1.2 billion, constituting year-over-year growth of 12.0%, or $132.2 million, compared to an increase
in non-interest expenses of 2.0%, or $9.6 million
PPNR1 increased $122.6 million to $746.1 million, compared to $623.5 million in 2019
Income tax expense increased $10.9 million to $115.9 million, compared to $105.0 million in 2019
Total loans of $27.1 billion, up $5.9 billion from December 31, 2019
Total deposits of $31.9 billion, up $9.1 billion from December 31, 2019
Stockholders' equity of $3.4 billion, an increase of $396.8 million from December 31, 2019
Nonperforming assets (nonaccrual loans and repossessed assets) increased to 0.32% of total assets, from 0.26% at
December 31, 2019
Net loan charge-offs to average loans outstanding of 0.06% for 2020, compared to 0.02% for 2019
Net interest margin of 3.97% in 2020, compared to 4.52% in 2019
Return on average assets of 1.61% for 2020, compared to 2.00% for 2019
Tangible common equity ratio1 of 8.6%, compared to 10.3% at December 31, 2019
Tangible book value per share, net of tax1, of $30.90, an increase of 16.4% from $26.54 at December 31, 2019
Efficiency ratio1 of 38.8% in 2020, compared to 42.7% in 2019
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, 2020.
1 See Non-GAAP Financial Measures section beginning on page 40.
37
Table of Contents
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
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 40.
Asset Quality
Year Ended December 31,
2020
2019
2018
(dollars in millions, except per share amounts)
$
506.6
$
499.2
$
5.06
5.04
1.61 %
17.7
3.97
38.8
4.86
4.84
2.00 %
19.6
4.52
42.7
435.8
4.16
4.14
2.05 %
20.6
4.68
43.1
December 31,
2020
2019
(in millions)
$
36,461.0 $
27,053.0
5,444.6
31,930.5
5.0
548.7
3,413.5
3,116.6
26,821.9
21,123.3
3,970.1
22,796.5
—
393.6
3,016.7
2,721.0
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 nonaccrual 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:
Nonaccrual loans
Repossessed assets
Non-performing assets
Loans past due 90 days and still accruing
Nonaccrual loans to funded loans
Nonaccrual and repossessed assets to total assets
Loans past due 90 days and still accruing to funded loans
Allowance for loan losses to funded loans
Allowance for loan losses to nonaccrual loans
Net charge-offs to average loans outstanding
At or for the Year Ended December 31,
2020
2019
2018
(dollars in millions)
$
115.2
$
1.4
149.8
—
$
56.0
13.9
98.2
—
27.7
17.9
82.7
0.6
0.43 %
0.27 %
0.16 %
0.32
—
1.03
242
0.06
0.26
—
0.80
300
0.02
0.20
0.00
0.86
550
0.06
38
Table of Contents
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 $36.5 billion at December 31, 2020 from $26.8 billion at December 31, 2019. The increase in total
assets of $9.6 billion, or 35.9%, relates primarily to loan growth. Total loans increased by $5.9 billion, or 28.1%, to $27.1
billion as of December 31, 2020, compared to $21.1 billion as of December 31, 2019. The increase in loans from December 31,
2019, which includes $1.5 billion in PPP loans, was driven by commercial and industrial loans of $4.9 billion, with smaller
increases in construction and land development, CRE, non-owner occupied, and residential real estate loans of $479.2 million,
$409.1 million, and $286.9 million, respectively. These increases were partially offset by a decrease in CRE, owner occupied
loans of $160.1 million.
Total deposits increased $9.1 billion, or 40.1%, to $31.9 billion as of December 31, 2020 from $22.8 billion as of December 31,
2019. The increase in deposits from December 31, 2019 was driven by an increase of $4.9 billion in non-interest bearing
demand deposits, $3.3 billion in savings and money market accounts, and interest bearing demand deposits of $1.6 billion.
These increases were offset in part by a decrease in certificates of deposit of $719.5 million.
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
Year Ended December 31,
2020
2019
Increase
(Decrease)
(in millions, except per share amounts)
$
1,261.8 $
1,225.0 $
94.9
1,166.9
123.6
1,043.3
70.8
491.6
622.5
115.9
184.6
1,040.4
19.3
1,021.1
65.1
482.0
604.2
105.0
$
$
$
506.6 $
5.06 $
5.04 $
499.2 $
4.86 $
4.84 $
36.8
(89.7)
126.5
104.3
22.2
5.7
9.6
18.3
10.9
7.4
0.20
0.20
39
Table of Contents
Non-GAAP Financial Measures
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.
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. 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.
Pre-Provision Net Revenue
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 believes that this is an important metric as
it illustrates the underlying performance of the Company, it 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.
The following table shows the components of PPNR for the years ended December 31, 2020, 2019, and 2018:
Net interest income
Total non-interest income
Net revenue
Total non-interest expense
Pre-provision net revenue
Less:
Provision for credit losses
Income tax expense
Net income
Year Ended December 31,
2020
2019
(in millions)
2018
1,166.9 $
1,040.4 $
70.8
1,237.7 $
491.6
746.1 $
123.6
115.9
65.1
1,105.5 $
482.0
623.5 $
19.3
105.0
506.6 $
499.2 $
915.9
43.1
959.0
423.7
535.3
25.0
74.5
435.8
$
$
$
$
40
Table of Contents
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
Efficiency Ratio
December 31
2020
2019
(dollars and shares in millions)
$
3,413.5
$
$
$
298.5
3,115.0
1.6
3,116.6
36,461.0
298.5
36,162.5
1.6
$
$
3,016.7
297.6
2,719.1
1.9
2,721.0
26,821.9
297.6
26,524.3
1.9
$
36,164.1
$
26,526.2
8.6 %
10.3 %
100.8
33.85
30.90
$
102.5
29.42
26.54
$
The following table shows the components used in the calculation of the efficiency ratio, which management uses as a metric
for assessing cost efficiency:
Total non-interest expense
Divided by:
Total net interest income
Plus:
Tax equivalent interest adjustment
Total non-interest income
Year Ended December 31,
2020
2019
2018
(dollars in millions)
$
491.6
$
482.0
$
423.7
1,166.9
1,040.4
28.4
70.8
25.1
65.1
$
1,266.1
$
1,130.6
$
915.9
23.8
43.1
982.8
Efficiency ratio - tax equivalent basis
38.8 %
42.7 %
43.1 %
41
Table of Contents
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 CET1 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 CET1 plus allowance measure is an important
regulatory metric for assessing asset quality.
As permitted by the regulatory capital rules, the Company elected to delay the estimated impact of CECL on its regulatory
capital over a five-year transition period ending December 31, 2024. As a result, capital ratios and amounts as of December 31,
2020 exclude the impact of the increased allowance for credit losses related to the adoption of ASC 326.
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
Adjusted allowances for credit losses
Less: Tier 2 qualifying capital deductions
Tier 2 capital
Total capital
Total capital ratio
Classified assets to tier 1 capital plus allowance:
Classified assets
Divided by: Tier 1 capital
Plus: Adjusted allowances for credit losses
Total Tier 1 capital plus adjusted allowances for credit losses
Classified assets to tier 1 capital plus allowance
42
December 31,
2020
2019
(dollars in millions)
$
3,465.9
$
3,016.7
296.9
—
91.8
0.5
295.6
2.2
21.4
3.6
3,076.7
31,015.4
$
$
2,693.9
25,390.1
9.9 %
10.6 %
3,076.7
$
81.5
—
—
2,693.9
81.5
—
—
3,158.2
34,349.3
$
$
2,775.4
26,110.3
9.2 %
10.6 %
$
$
$
$
$
$
3,158.2
$
2,775.4
454.8
259.0
—
713.8
3,872.0
12.5 %
$
$
305.7
176.8
—
482.5
3,257.9
12.8 %
223.7
$
3,158.2
259.0
3,417.2
$
171.2
2,775.4
176.8
2,952.2
6.5 %
5.8 %
$
$
$
$
Table of Contents
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
2020
Interest
Year Ended December 31,
Average
Yield / Cost
Average
Balance
(dollars in millions)
2019
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
$
12,032.1 $
5,370.1
2,244.6
2,183.5
2,318.6
47.0
20.0
549.6
262.9
109.8
129.9
89.4
2.4
0.3
24,215.9
1,144.3
2,936.5
1,476.4
4,412.9
1,452.1
63.1
49.3
112.4
5.1
Total interest earning assets
30,080.9
1,261.8
4.91
5.00
5.97
3.85
5.19
1.63
4.79
2.15
4.20
2.84
0.36
4.29
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:
Interest-bearing transaction accounts
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
171.2
(277.7)
177.9
1,221.1
$
3,488.3 $
10,008.9
1,997.6
15,494.8
119.7
514.1
16,128.6
11,465.5
627.5
3,151.8
4.67 % $
8,200.5 $
4,629.6
2,284.7
2,176.6
1,663.5
64.3
5.6
461.9
270.3
120.6
155.5
80.7
3.7
0.3
19,024.8
1,093.0
2,904.6
1,008.7
3,913.3
648.4
79.1
36.8
115.9
16.1
23,586.5
1,225.0
214.5
(159.9)
171.9
1,101.1
9.0
34.8
26.6
70.4
0.6
23.9
94.9
0.26 % $
2,545.8 $
0.35
1.33
0.45
0.49
4.66
0.59
0.32 %
8,125.8
2,117.2
12,788.8
134.6
379.7
13,303.1
21.0
95.5
41.9
158.4
2.8
23.4
184.6
8,246.2
519.4
2,845.4
$
24,914.1
5.78 %
5.85
5.38
7.16
4.85
5.77
6.29
5.83
2.72
4.57
3.20
2.48
5.30
0.82 %
1.18
1.98
1.24
2.11
6.16
1.39
0.78 %
$
31,373.4
$
24,914.1
Total liabilities and stockholders' equity
$
31,373.4
Net interest income and margin (4)
$
1,166.9
3.97 %
$
1,040.4
4.52 %
(1)
(2)
(3)
(4)
Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $28.4 million and $25.1 million for the year
ended December 31, 2020 and 2019, respectively.
Included in the yield computation are net loan fees of $94.9 million and $56.2 million for the year ended December 31, 2020 and 2019, respectively.
Includes non-accrual loans.
Net interest margin is computed by dividing net interest income by total average earning assets.
43
Table of Contents
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
Year Ended December 31,
2020 versus 2019
Increase (Decrease) Due to Changes in (1)
Volume
Rate
(in millions)
Total
$
175.0 $
(87.3) $
36.3
(2.0)
0.4
25.3
(0.9)
0.2
234.3
0.7
15.6
16.3
2.8
253.4
(43.7)
(8.8)
(26.0)
(16.6)
(0.4)
(0.2)
(183.0)
(16.7)
(3.1)
(19.8)
(13.8)
(216.6)
$
2.4 $
(14.4) $
6.5
(1.6)
(0.1)
6.3
13.5
(67.2)
(13.7)
(2.1)
(5.8)
(103.2)
87.7
(7.4)
(10.8)
(25.6)
8.7
(1.3)
—
51.3
(16.0)
12.5
(3.5)
(11.0)
36.8
(12.0)
(60.7)
(15.3)
(2.2)
0.5
(89.7)
Net change
$
239.9 $
(113.4) $
126.5
(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, 2020, interest income was $1.3
billion, an increase of $36.8 million, or 3.0%, compared to $1.2 billion for the year ended December 31, 2019. This increase
was primarily the result of a $5.2 billion increase in the average loan balance that drove a $51.3 million increase in loan interest
income for the year ended December 31, 2020. Interest income from investment securities decreased by $3.5 million for the
comparable period primarily due to a decrease in interest rates from December 31, 2019, partially offset by an increase in the
average investment balance of $499.6 million. Other interest income decreased $11.0 million from the comparable period due
primarily to a decrease in interest rates from December 31, 2019, despite an increase in interest-bearing cash account balances
of $803.7 million. Average yield on interest earning assets decreased to 4.29% for the year ended December 31, 2020,
compared to 5.30% in 2019, which was primarily the result of a lower rate environment.
For the year ended December 31, 2020, interest expense was $94.9 million, compared to $184.6 million for the year ended
December 31, 2019. Interest expense on deposits decreased $88.0 million for the same period while average interest-bearing
deposits increased $2.7 billion, which due to the lower rate environment, reduced the average cost of interest-bearing deposits
by 79 basis points. Interest expense on short-term borrowings decreased by $2.2 million as a result of a $14.9 million decrease
in average short-term borrowings for the year ended December 31, 2020 compared to the same period in 2019.
For the year ended December 31, 2020, net interest income was $1.2 billion, compared to $1.0 billion for the year ended
December 31, 2019. The increase in net interest income reflects a $6.5 billion increase in average interest earning assets, offset
by a $2.8 billion increase in average interest-bearing liabilities. The decrease in net interest margin of 55 basis points compared
to 2019 is the result of lower deposit and funding costs in a lower rate environment.
44
Table of Contents
Provision for Credit Losses
The provision for credit losses in each period is reflected as a reduction in earnings for that period and, upon the adoption of
CECL, includes amounts related to funded loans, unfunded loan commitments, and investment securities. The provision is
equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb estimated lifetime
credit losses inherent in the loan and investment securities portfolios. For the year ended December 31, 2020, the provision for
credit losses was $123.6 million, compared to $19.3 million for the year ended December 31, 2019. The significant increase in
the provision for credit losses from the year ended December 31, 2019 is primarily related to the current economic environment
and estimating expected credit losses under the new CECL accounting standard. This standard changes the methodology for
estimating credit losses on financial instruments from an incurred loss model to an expected total loss model. This results in the
recognition of expected losses over the life of loans and HTM investment securities at the time that the loan is originated or the
security is purchased, rather than after a loss has been incurred, which results in an acceleration in the timing of loss
recognition. Further, as the Company's CECL models incorporate historical experience, current conditions, and reasonable and
supportable forecasts in measuring expected credit losses, the worsening of economic assumptions due to the ongoing pandemic
has also contributed to an elevated provision for credit losses for the year ended December 31, 2020.
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
Income from bank owned life insurance
Card income
Foreign currency income
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,
2020
2019
(in millions)
$
23.3 $
23.3 $
Increase
(Decrease)
12.7
10.2
6.5
5.6
1.0
0.2
3.8
7.5
8.3
3.9
7.0
5.0
3.2
3.1
5.1
6.2
$
70.8 $
65.1 $
—
4.4
6.3
(0.5)
0.6
(2.2)
(2.9)
(1.3)
1.3
5.7
Total non-interest income for the year ended December 31, 2020 compared to 2019, increased by $5.7 million, or 8.8%. The
increase is due primarily to a one-time BOLI enhancement fee and an increase in income from equity investments from the
prior year. A BOLI enhancement fee of $5.6 million was the predominant driver of the $6.3 million increase in income from
BOLI from the prior year, and resulted from a surrender and replacement of certain policies, which was intended to offset an
increase in tax expense related to the surrender. Income from equity investments was $12.7 million for the year ended
December 31, 2020, compared to $8.3 million for the year ended December 31, 2019. The increase is attributable to an increase
in SBIC and warrant income of $3.5 million and $1.7 million, respectively. These increases to non-interest income were
partially offset by a decrease in investment security sales and lending related income. During the year ended December 31,
2019, the Company sold investment securities as part of a portfolio balancing initiative that resulted in a net gain on sale of $3.1
million that did not recur during the current year. The decrease in lending related income of $2.2 million is primarily due to
loan sales during the year ended December 31, 2020 that resulted in a net loss of $1.7 million, compared to a net gain of $0.7
million in 2019.
45
Table of Contents
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
Data processing
Occupancy
Deposit costs
Insurance
Loan and repossessed asset expenses
Business development
Marketing
Card expense
Intangible amortization
Net (gain) loss on sales / valuations of repossessed and other assets
Other expense
Total non-interest expense
Year Ended December 31,
2020
2019
(in millions)
$
303.6 $
279.3 $
42.2
35.7
34.1
18.5
13.3
7.1
5.5
4.1
2.2
1.6
(1.5)
25.2
$
491.6 $
37.0
30.6
32.6
31.7
11.9
7.6
7.0
4.2
2.2
1.6
3.8
32.5
482.0 $
Increase
(Decrease)
24.3
5.2
5.1
1.5
(13.2)
1.4
(0.5)
(1.5)
(0.1)
—
—
(5.3)
(7.3)
9.6
Total non-interest expense for the year ended December 31, 2020 compared to 2019, increased $9.6 million, or 2.0%. This
increase primarily relates to salaries and employee benefits, legal, professional, and director's fees, and data processing costs.
Salaries and employee benefits have increased as the Company supports its continued growth through hiring efforts and
performance incentives offered to employees. Full-time equivalent employees increased 4.4% to 1,915 from December 31,
2019. Legal, professional, and directors' fees and data processing expenses increased year-over-year by $5.2 million and $5.1
million, respectively, as the Company continues to build out its infrastructure through technology initiatives that position the
Company for continued growth. These increases to non-interest expense were partially offset by a decrease in deposit costs,
other non-interest expenses, and net losses on the sale of other assets. Deposit costs consist of earnings credits on select deposits
and fees to the Promontory Interfinancial Network and others for reciprocal deposits. The decrease in deposit costs of $13.2
million for 2020 compared to 2019 relates primarily to a decline in deposit earnings credits paid to account holders due to a
lower rate environment. The decrease in other non-interest expense of $7.3 million is primarily due to decreases in business
related travel and entertainment expenses of $5.3 million as a result of COVID-19 restrictions. The change in net (gain) loss on
sales/valuations of repossessed and other assets of $5.3 million primarily relates to gains recognized in the current year on the
sale of OREO properties, compared to a net loss in the prior year from impairment charges on OREO.
Income Taxes
For the years ended December 31, 2020, 2019, and 2018 the Company's effective tax rate was 18.62%, 17.39% and 14.61%,
respectively. The increase in the effective tax rate from 2019 to 2020 is due primarily to tax expense associated with the
surrender of bank owned life insurance, no valuation allowance release in 2020 and return to provision adjustments. 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.
Business Segment Results
The Company has made changes to its reportable segments, which have been reflected in the Company's operating segment
results as of and for the year ended December 31, 2020. The Company's reportable segments are aggregated with a focus on
products and services offered and consist of three reportable segments:
•
•
•
Commercial segment: provides commercial banking and treasury management products and services to small and
middle-market businesses, specialized banking services to sophisticated commercial institutions and investors within
niche industries, as well as financial services to the real estate industry.
Consumer Related segment: offers both commercial banking services to enterprises in consumer-related sectors and
consumer banking services, such as residential mortgage banking.
Corporate & Other segment: consists of the Company's investment portfolio, Corporate borrowings and other related
items, income and expense items not allocated to our other reportable segments, and inter-segment eliminations.
46
Table of Contents
The following tables present selected operating segment information for the periods presented:
December 31, 2020
Loans, net of deferred loan fees and costs
Deposits
December 31, 2019
Loans, net of deferred loan fees and costs
Deposits
Year Ended December 31, 2020
Income (loss) before income taxes
Year Ended December 31, 2019
Income (loss) before income taxes
BALANCE SHEET ANALYSIS
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(in millions)
$
27,053.0 $
20,245.8 $
6,798.2 $
31,930.5
21,448.0
9,936.8
$
21,123.3 $
16,767.3 $
4,352.5 $
22,796.5
17,067.6
4,644.7
9.0
545.7
3.5
1,084.2
(in millions)
622.5 $
612.7 $
220.5 $
(210.7)
604.2 $
555.9 $
106.3 $
(58.0)
$
$
Total assets increased $9.6 billion, or 35.9%, to $36.5 billion at December 31, 2020 compared to $26.8 billion at December 31,
2019. The increase in total assets relates primarily to organic loan growth and increases in cash and investment securities. Loans
increased $5.9 billion, or 28.1%, to $27.1 billion at December 31, 2020, compared to $21.1 billion at December 31, 2019. The
increase in loans from December 31, 2019 was driven by commercial and industrial loans of $4.9 billion, construction and land
development loans of $479.2 million, CRE, non-owner occupied loans of $409.1 million, and residential real estate loans of
$286.9 million.
Total liabilities increased $9.2 billion, or 38.8%, to $33.0 billion at December 31, 2020, compared to $23.8 billion at December
31, 2019. The increase in liabilities is due primarily to an increase in total deposits. Total deposits increased $9.1 billion, or
40.1%, to $31.9 billion at December 31, 2020. The increase in deposits from December 31, 2019 was driven by an increase in
non-interest-bearing demand deposits of $4.9 billion, savings and money market deposits of $3.3 billion, and interest-bearing
demand deposits of $1.6 billion, offset in part by a decrease in certificates of deposit of $719.5 million.
Total stockholders’ equity increased by $396.8 million, or 13.2%, to $3.4 billion at December 31, 2020 compared to $3.0
billion at December 31, 2019. The increase in stockholders' equity relates primarily to net income for the year ended December
31, 2020 and an increase in the fair value of the Company's AFS portfolio, which is recognized as part of AOCI, partially offset
by dividends paid to shareholders and share repurchases under its common stock repurchase plan.
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 debt securities are recorded as part of AOCI in stockholders’ equity, net
of tax. 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.
47
Table of Contents
The following table summarizes the carrying value of the investment securities portfolio for each of the periods below:
Debt securities
CDO
CLO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal (taxable) 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
2020
2019
2018
2017
2016
At December 31,
(in millions)
$
6.9 $
10.1 $
15.3 $
21.9 $
146.9
84.6
270.2
22.5
1,476.9
1,486.6
1,756.2
26.5
—
—
—
94.3
99.9
7.8
1,129.2
1,412.1
1,040.0
27.0
10.0
1.0
—
100.1
99.4
—
924.6
1,530.1
841.5
28.6
38.2
2.0
—
109.1
103.5
—
868.5
1,689.3
765.9
28.6
61.5
2.5
13.5
—
117.8
64.1
—
433.7
1,356.3
500.3
26.5
56.0
2.5
$
5,277.3 $
3,831.4 $
3,579.8 $
3,650.8 $
2,570.7
$
$
53.4 $
52.5 $
51.2 $
50.6 $
113.9
86.2
63.9
53.2
167.3 $
138.7 $
115.1 $
103.8 $
37.1
94.7
131.8
Debt securities increased $1.4 billion from December 31, 2019. The increase is largely attributable to purchases of tax-exempt
municipal securities during the year, an increase of $716.2 million from December 31, 2019. The Company increased its
investments in these types of securities to take advantage of dislocations in the municipal market as credit spreads widened
significantly during the onset of the COVID-19 pandemic. The majority of these purchases consisted of essential service
revenue bonds, rated AA to A.
The Company also deployed excess liquidity during the year ended December 31, 2020, with purchases of private label
residential MBS, corporate debt securities, and CLOs. Private label residential MBS increased $347.7 million from December
31, 2019 and consist of senior tranche bonds, rated AAA. The Company's corporate debt securities portfolio increased $170.3
million from December 31, 2019, resulting from purchases of subordinated debt of other financial institutions. The Company
considered the financial condition of these financial institutions and the yield relative to other similarly rated securities in its
decision to increase its corporate debt securities portfolio. The Company also began purchasing CLOs as these are floating rate
investments that generate yields that are higher than those for MBS and will benefit from future increases in interest rates. The
Company's CLO portfolio consists of second or third credit tranche bonds of structured transactions, rated AA to A.
48
Table of Contents
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, 2020 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, 2020
(dollars in millions)
$
7.3
5.27 % $
17.1
4.25 % $
—
— % $
544.4
4.16 % $
568.8
4.17 %
$
$
$
$
—
—
—
—
—
—
0.4
—
—
0.4
— % $
—
—
—
—
—
2.50
—
—
—
—
16.8
9.0
— % $
—
— % $
—
2.52
4.66
104.7
1.96
9.3
257.1
2.18
2.72
0.1
42.2
54.7
5.0
— % $
0.1
— %
1.89
2.29
3.70
146.9
1.94
80.8
271.1
2.32
2.80
—
—
—
—
22.0
4.10
22.0
4.10
0.1
5.50
6.1
2.75
1,455.5
2.56
1,461.7
2.56
4.5
1.0
—
2.67
4.30
—
2.0
63.3
—
2.46
2.96
—
1,455.6
1,045.0
32.0
1.99
2.81
2.39
1,462.5
1,109.3
32.0
1.83
2.74
2.39
2.50 % $
31.4
3.22 % $
442.5
2.56 % $ 4,112.1
2.42 % $ 4,586.4
2.37 %
35.8
2.30 % $
11.3
3.93 % $
—
—
—
—
35.8
2.30 % $
11.3
3.93 % $
6.0
—
6.0
4.75 % $
—
— % $
53.1
2.93 %
—
4.75 % $
107.0
107.0
5.55
5.55 % $
107.0
160.1
5.55
4.68 %
Held-to-maturity
Tax-exempt
Available-for-sale
CDO
CLO
Commercial MBS issued
by GSEs (1)
Corporate debt securities
Municipal (taxable)
securities
Private label residential
MBS (1)
Residential MBS issued
by GSEs (1)
Tax-exempt
Trust preferred securities
Total AFS securities
Equity
CRA investments
Preferred stock
Total equity securities
(1)
MBS are comprised of pools of loans with varying maturities, the majority of which are due after 10 years.
The Company does not hold any subprime MBS in its investment portfolio. Approximately half of its MBS are GSE issued.
The MBS that are not GSE issued consist primarily of $1.4 billion rated AAA, $90.1 million rated AA, with only $0.9 million
that are non-investment grade.
Gross unrealized losses at December 31, 2020 relate primarily to changes in interest rates and other market conditions that are
not considered to be credit-related issues. The Company has reviewed its securities on which there is an unrealized loss in
accordance with its allowance for credit losses policy described in "Note 1. Summary of Significant Accounting Policies" to the
Consolidated Financial Statements contained herein. Based on the analysis performed, management determined that an
allowance for credit losses on the Company's AFS securities was not necessary at December 31, 2020.
The credit loss model under ASC 326-20, applicable to HTM debt securities, requires recognition of lifetime expected credit
losses through an allowance account at the time the security is purchased. For the year ended December 31, 2020, the provision
for credit losses on HTM debt securities was $4.1 million resulting in a total allowance of $6.8 million as of December 31,
2020.
49
Table of Contents
Loans
The Company's primary portfolio segments have changed to align with the methodology applied in estimating the allowance for
credit losses under CECL. In addition, as the concept of impaired loans does not exist under CECL, disclosures that related
solely to impaired loans have been removed.
The table below summarizes the distribution of the Company’s held for investment loan portfolio at the end of each of the
periods indicated:
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total loans HFI
Allowance for credit losses
Total loans HFI, net of allowance
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
Loans, net of deferred loan fees and costs
Allowance for credit losses
Total loans HFI
December 31, 2020
(in millions)
$
$
4,340.2
1,728.8
2,548.3
5,911.2
1,909.3
1,983.9
3,640.2
2,378.5
2,429.4
183.2
27,053.0
(278.9)
26,774.1
December 31,
2019
2018
2017
2016
(in millions)
$
9,391.8 $
7,765.1 $
6,841.2 $
5,261.0
2,320.2
1,971.6
2,147.7
56.9
(47.7)
4,223.4
2,329.2
2,155.6
1,203.6
70.0
(36.3)
3,911.3
2,245.1
1,647.7
425.3
48.6
(25.3)
5,859.4
3,549.9
2,015.7
1,489.5
258.7
38.6
(22.3)
21,101.5
17,710.6
15,093.9
13,189.5
(167.8)
(152.7)
(140.0)
(124.7)
$
20,933.7 $
17,557.9 $
14,953.9 $
13,064.8
Loans that are held for investment are stated at the amount of unpaid principal, adjusted for net deferred fees and costs,
premiums and discounts on acquired and purchased loans, and an allowance for credit losses. Net deferred loan fees of $75.4
million and $47.7 million reduced the carrying value of loans as of December 31, 2020 and December 31, 2019, respectively.
Net unamortized purchase premiums on acquired and purchased loans of $26.0 million and $19.6 million increased the carrying
value of loans as of December 31, 2020 and December 31, 2019, respectively.
As of December 31, 2019, the Company also had $21.8 million of HFS loans.
50
Table of Contents
The following table sets forth the amount of loans outstanding by type of loan as of December 31, 2020 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 millions)
$
4,386.6 $
4,703.6 $
1,385.3 $
345.9
777.7
217.4
50.6
16.2
954.5
15.0
16.1
2.0
26.8
0.9
2,146.7
1,356.3
2,430.3
1,188.0
241.7
419.7
1,195.6
87.4
31.1
3.7
16.6
5.4
474.2
567.1
774.9
653.7
153.3
25.5
630.9
1,750.8
1.2
0.3
10,475.5
3,848.9
3,682.2
1,972.5
1,067.2
1,089.6
2,303.4
127.9
678.1
1,756.5
44.6
6.6
$
6,809.7 $
12,469.8 $
7,773.5 $
27,053.0
As of December 31, 2020, approximately $13.7 billion, or 75.3%, of total variable rate loans were subject to rate floors with a
weighted average interest rate of 4.4%. At 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, 2020, total loans consisted of 67.5%
with floating rates and 32.5% with fixed rates, compared to 68.2% with floating rates and 31.8% with fixed rates at December
31, 2019.
Concentrations of Lending Activities
The Company monitors concentrations within three broad categories: industry, product, and collateral. The Company’s loan
portfolio includes significant credit exposure to the CRE market. At December 31, 2020 and 2019, CRE related loans accounted
for approximately 38% and 45% 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 28% and 31% of these CRE loans, excluding
construction and land loans, were owner-occupied at December 31, 2020 and 2019, respectively.
51
Table of Contents
Non-performing Assets
Total non-performing loans increased by $64.1 million, or 76.0%, at December 31, 2020 to $148.4 million from $84.3 million
at December 31, 2019.
2020
2019
2018
2017
2016
December, 31
Total nonaccrual loans (1)
Loans past due 90 days or more on accrual status
Accruing troubled debt restructured loans
Total nonperforming loans
$
115.2
$
—
33.2
148.4
Other assets acquired through foreclosure, net
$
1.4
$
Nonaccrual HFI and HFS loans to funded HFI loans
Nonaccrual HFI loans to funded HFI loans
Loans past due 90 days or more on accrual status to funded HFI
loans
0.43 %
0.43
(dollars in millions)
$
$
56.0
—
28.3
84.3
13.9
0.27 %
0.27
$
$
27.7
0.6
36.5
64.8
17.9
0.16 %
0.16
$
$
43.9
0.1
42.4
86.4
28.5
0.29 %
0.29
40.3
1.1
53.6
95.0
47.8
0.31 %
0.31
—
—
0.00
0.00
0.01
(1)
Includes non-accrual TDR loans of $28.4 million and $10.6 million at December 31, 2020 and 2019, respectively.
The composition of nonaccrual HFI loans by loan type and by segment were as follows:
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total non-accrual loans
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total non-accrual loans
December 31, 2020
Nonaccrual
Balance
Percent of
Nonaccrual Balance
Percent of
Total HFI Loans
(dollars in millions)
— %
— %
1.7
11.7
14.9
29.9
—
31.7
9.9
—
0.2
0.01
0.05
0.06
0.13
—
0.14
0.04
—
—
—
1.9
13.5
17.2
34.5
—
36.5
11.4
—
0.2
115.2
100.0 %
0.43 %
Nonaccrual
Balance
December 31, 2019
Percent of
Nonaccrual Balance
(dollars in millions)
Percent of
Total HFI Loans
24.5
23.7
2.2
5.6
—
56.0
43.8 %
0.12 %
42.4
3.8
10.0
—
0.11
0.01
0.03
—
100.0 %
0.27 %
$
$
$
$
52
Table of Contents
Troubled Debt Restructured Loans
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.
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 CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for
loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any
determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020
or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past
due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial
institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they
will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically
categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan
modifications. The types of loan modifications granted to borrowers include extensions of loan maturity dates, covenant
waivers, interest only payments for a specified period of time, and loan payment deferrals. As of December 31, 2020, the
Company has outstanding modifications meeting these conditions on loans with a net balance of $538.3 million as of December
31, 2020, of which, modifications involving loan payment deferrals total $190.0 million. Further, residential mortgage loans in
forbearance have a net balance of $77.1 million as of December 31, 2020.
As of December 31, 2020, the Company's TDR loans totaled $61.6 million. During the year ended December 31, 2020, the
Company had 17 new TDR loans with a recorded investment of $37.3 million. The Company has a $2.7 million allowance
allocated to these loans as of December 31, 2020 and has committed to lend additional amounts totaling $0.6 million.
The following table presents TDR loans for the periods presented:
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Total
December 31, 2020
Number of Loans
Recorded
Investment
(dollars in millions)
4
9
4
2
3
22
20.4
22.9
2.6
5.5
10.2
61.6
53
Table of Contents
Allowance for Credit Losses
The following table summarizes the activity in the Company's allowance for credit losses for the period indicated:
Year Ended December 31, 2020
Balance,
January 1, 2020
(1)
Provision for
(Reversal of) Credit
Losses
Writeoffs
(in millions)
Recoveries
Balance,
December 31, 2020
(1)
Warehouse lending
$
0.2 $
3.2 $
— $
— $
Municipal & nonprofit
Tech & Innovation
Other commercial and
industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned
occupied
Residential
Construction and land
development
Other
Total
17.4
22.4
95.8
10.4
14.1
10.5
3.8
6.2
6.1
(1.5)
24.0
1.8
8.3
29.2
29.8
(3.1)
15.7
(0.9)
—
11.1
6.4
0.2
—
2.1
0.3
—
0.3
—
—
(3.5)
(0.1)
—
(1.7)
(0.4)
(0.1)
(0.1)
$
186.9 $
106.5 $
20.4 $
(5.9) $
Net charge-offs to average loans outstanding
(1)
Includes an estimate of future recoveries.
3.4
15.9
35.3
94.7
18.6
43.3
39.9
0.8
22.0
5.0
278.9
0.06 %
54
Table of Contents
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
Balance at end of period
Net charge-offs to average loans outstanding
Allowance for credit losses to funded HFI loans
Allowance for credit losses to gross organic loans
Year Ended December 31,
2019
2018
2017
2016
$
152.7
$
140.0
$
124.7
$
119.1
3.0
11.7
1.4
2.6
(0.3)
18.4
(4.3)
(0.9)
(0.1)
(0.4)
—
(5.7)
8.1
0.1
0.1
0.6
0.1
9.0
3.3
13.2
2.2
1.5
5.8
0.3
23.0
(2.4)
(1.3)
(1.4)
(1.0)
—
(6.1)
15.0
0.2
—
1.1
0.1
16.4
10.3
14.3
5.3
(2.8)
0.3
0.1
17.2
(3.1)
(2.9)
(1.2)
(1.8)
(0.1)
(9.1)
8.2
2.3
—
0.4
0.1
11.0
1.9
10.6
(2.4)
1.7
(2.1)
0.2
8.0
(4.0)
(5.7)
(0.5)
(0.9)
(0.1)
(11.2)
12.5
0.7
—
0.2
0.2
13.6
2.4
$
167.8
$
152.7
$
140.0
$
124.7
0.02 %
0.81
0.82
0.06 %
0.86
0.92
0.01 %
0.93
1.03
0.02 %
0.95
1.11
The following table summarizes the allocation of the allowance for credit losses by loan type.
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total
Allowance for credit
losses
$
3.4
15.9
35.3
94.7
18.6
43.3
39.9
0.8
22.0
5.0
December 31, 2020
Percent of total
allowance for credit
losses
(dollars in millions)
Percent of loan type
to total HFI loans
1.2 %
16.0 %
5.7
12.7
33.9
6.7
15.5
14.3
0.3
7.9
1.8
6.4
9.4
21.8
7.1
7.3
13.5
8.8
9.0
0.7
$
278.9
100.0 %
100.0 %
55
Table of Contents
December 31, 2019
Commercial
and
Industrial
Commercial
Real Estate
Construction
and Land
Development
Residential
Real Estate
Consumer
Total
(dollars in millions)
Allowance for credit losses
$
82.3
$
47.3
$
23.9
$
13.7
$
0.6
$
167.8
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
$
83.1
$
34.8
$
22.5
$
11.3
$
1.0
$
152.7
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
$
82.5
$
31.6
$
19.6
$
5.5
$
0.8
$
140.0
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
$
73.3
$
25.7
$
21.2
$
3.8
$
0.7
$
124.7
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
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:
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Construction and land development
Other
Total
Commercial and industrial
Commercial real estate
Construction and land development
Residential real estate
Consumer
Total
December 31, 2020
Number of Loans
Loan Balance
Percent of Loan
Balance
Percent of Total
HFI Loans
(dollars in millions)
4 $
71
37
9
9
7
21
158 $
15.3
74.3
79.8
116.9
15.8
47.3
73.4
422.8
3.6 %
0.06 %
17.6
18.9
27.6
3.7
11.2
17.4
0.27
0.30
0.43
0.06
0.17
0.27
100.0 %
1.56 %
December 31, 2019
Number of Loans
Loan Balance
Percent of Loan
Balance
Percent of Total
HFI Loans
(dollars in millions)
73 $
37
10
3
1
124 $
96.5
107.8
19.0
0.7
0.0
224.0
43.1 %
48.1 %
8.5 %
0.3 %
— %
100.0 %
0.46 %
0.51
0.09
0.00
0.00
1.06 %
56
Table of Contents
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
totaling $289.9 million as of December 31, 2020.
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. While the Company’s stock price has experienced
volatility and periodic declines in value during the pandemic, management did not consider this decline to be a triggering event
that would indicate that an interim goodwill impairment test was necessary during 2020. Based on the Company's annual
goodwill and intangibles impairment tests as of October 1 during the years ended December 31, 2020, 2019, and 2018, it was
determined that goodwill and intangible assets are not impaired.
The following is a summary of acquired intangible assets:
December 31, 2020
December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in millions)
$
$
14.6 $
2.5
17.1 $
8.8 $
0.1
8.9 $
5.8 $
14.6 $
2.4
—
8.2 $
14.6 $
7.3 $
—
7.3 $
7.3
—
7.3
December 31, 2020
December 31, 2019
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
(in millions)
$
0.4 $
— $
0.4 $
0.4 $
— $
0.4
Subject to amortization
Core deposit intangibles
Customer relationship intangibles
Not subject to amortization
Trade name
Deferred Tax Assets
Net deferred tax assets increased $13.3 million to $31.3 million from December 31, 2019. This overall increase in net deferred
tax assets was primarily the result of an increase in the allowance for credit losses under the new CECL accounting guidance
and deferred insurance premiums deduction which were not fully offset by additional unrealized gains on AFS securities and
increases to unearned insurance premiums.
As of December 31, 2020 and 2019, the Company has no deferred tax valuation allowance.
Deposits
Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $31.9 billion at December
31, 2020, from $22.8 billion at December 31, 2019, an increase of $9.1 billion, or 40.1%. The increase in deposits is attributable
to increases in non-interest-bearing demand deposits of $4.9 billion, savings and money market deposits of $3.3 billion, and
interest-bearing demand deposits of $1.6 billion, partially offset by a decrease in certificates of deposit of $719.5 million from
December 31, 2019.
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, 2020, the Company
has $496.4 million of CDARS deposits and $1.3 billion of ICS deposits, compared to $407.7 million of CDARS deposits and
$661.8 million of ICS deposits at December 31, 2019. At December 31, 2020 and 2019, the Company also has wholesale
brokered deposits of $554.8 million and $1.1 billion, respectively.
In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled $5.9 billion
and $3.1 billion at December 31, 2020 and 2019, respectively. The Company incurred $17.0 million and $30.5 million in
deposit related costs on these deposits during the year ended December 31, 2020 and 2019, respectively. These costs are
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reported in deposit costs as part of non-interest expense. The decrease in these costs largely relates to a decrease in earnings
credits paid in 2020 due to a lower rate environment.
The average balances and weighted average rates paid on deposits are presented below:
Year Ended December 31,
2020
2019
2018
Average
Balance
Rate
Average
Balance
Rate
Average
Balance
Rate
Interest-bearing transaction accounts
$
3,488.3
0.26 % $
Savings and money market accounts
Certificates of deposit
Total interest-bearing deposits
Non-interest-bearing demand deposits
10,008.9
1,997.6
15,494.8
11,465.5
0.35
1.33
0.45
—
(dollars in millions)
2,545.8
8,125.8
2,117.2
12,788.8
8,246.2
0.82 % $
1.18
1.98
1.24
—
1,891.2
6,501.2
1,748.7
10,141.1
7,712.8
0.61 %
0.85
1.37
0.89
—
Total deposits
$
26,960.3
0.26 % $
21,035.0
0.75 % $
17,853.9
0.51 %
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,
2020
2019
(in millions)
425.5 $
403.1
494.4
128.8
945.6
596.4
597.5
101.6
1,451.8 $
2,241.1
$
$
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 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, collateralized
by securities, including securities sold under agreements to repurchase, which 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, 2020, total short-term borrowed funds consist of customer repurchase agreements of $16.0 million and short-
term FHLB advances of $5.0 million. At December 31, 2019, total short-term borrowed funds consisted of customer repurchase
agreements of $16.7 million.
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Qualifying Debt
Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value
adjustments. At December 31, 2020, the carrying value of qualifying debt was $469.8 million, compared to $319.2 million at
December 31, 2019. The increase in qualifying debt from December 31, 2019 is due to issuance of $225.0 million of
subordinated debt, recorded net of issuance costs, in May 2020, offset in part by a $75 million redemption of subordinated debt
in October 2020.
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
2020
2019
December 31,
2033
2034
2035
2036
2037
2037
2035
2036
$
$
$
$
$
(in millions)
15.5 $
10.3
7.2
20.6
5.2
7.7
66.5
(0.6)
65.9 $
12.4 $
5.1
17.5
(4.5)
13.0 $
78.9 $
15.5
10.3
7.2
20.6
5.2
7.7
66.5
(4.8)
61.7
12.4
5.1
17.5
(4.8)
12.7
74.4
(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, 2020 was 2.58%, which is three-month
LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 4.25% at December 31, 2019.
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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.
In March 2020, the federal bank regulatory authorities issued an interim final rule that delays the estimated impact on
regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement
CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to
regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out
the aggregate amount of capital benefit provided during the initial two-year delay. The Company has elected the five-year
CECL transition option in connection with its adoption of CECL on January 1, 2020. As a result, capital ratios and amounts as
of December 31, 2020 exclude the impact of the increased allowance for credit losses related to the adoption of ASC 326.
As of December 31, 2020 and 2019, the Company and the Bank exceeded the capital levels necessary to be classified as well-
capitalized, 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 millions)
December 31, 2020
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
December 31, 2019
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
$
3,872.0 $
3,158.2 $ 31,015.4 $ 34,349.3
12.5 %
10.2 %
9.2 %
9.9 %
3,619.4
3,078.2
31,140.6
34,367.0
11.6
10.0
8.0
9.9
8.0
6.0
9.0
5.0
4.0
9.9
6.5
4.5
$
3,257.9 $
2,775.4 $ 25,390.1 $ 26,110.3
12.8 %
10.9 %
10.6 %
10.6 %
3,030.3
2,703.5
25,452.3
26,134.4
11.9
10.0
8.0
10.6
8.0
6.0
10.3
5.0
4.0
10.6
6.5
4.5
Common Stock Repurchase Plan
The Company has previously adopted common stock repurchase programs, the most recent of which authorized the Company
to repurchase up to $250.0 million of its common stock. The Company had $178.4 million in authorized common stock
repurchase capacity that expired under the program as of December 31, 2020.
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.
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The following table sets forth the Company's significant contractual obligations as of December 31, 2020:
Time deposit maturities
Qualifying debt
Other borrowings
Operating lease obligations
Purchase obligations
Total
Payments Due by Period
Total
Less Than 1
Year
1-3 Years
3-5 Years
After 5 Years
$
1,657.4 $
1,515.8 $
138.3 $
3.3 $
(in millions)
559.0
5.0
89.8
97.5
—
5.0
12.5
35.0
—
—
23.3
40.2
—
—
21.7
22.3
—
559.0
—
32.3
—
$
2,408.7 $
1,568.3 $
201.8 $
47.3 $
591.3
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, 2020 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 millions)
Commitments to extend credit
Credit card commitments and financial guarantees
Letters of credit
Total
$
9,425.2 $
2,369.4 $
4,070.1 $
1,737.8 $
1,247.9
291.5
186.9
291.5
145.3
—
32.9
—
8.7
—
—
$
9,903.6 $
2,806.2 $
4,103.0 $
1,746.5 $
1,247.9
The following table sets forth certain information regarding short-term borrowings as of December 31, 2020 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
2020
December 31,
2019
(dollars in millions)
2018
$
$
33.7
16.0
23.3
690.0
—
75.1
130.0
5.0
21.3
21.0
$
$
20.3
16.7
17.2
335.0
—
67.9
380.0
—
49.6
16.7
$
$
30.6
22.4
24.4
256.0
256.0
20.5
625.0
235.0
215.7
513.4
0.12 %
0.46
0.15 %
1.99
2.46 %
1.73
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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
Effective January 1, 2020, the Company adopted the ASUs related to credit losses, which include ASU 2016-13, Measurement
of Credit Losses on Financial Instruments, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments -
Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial
Instruments - Credit Losses, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit
Losses. The new standards significantly change 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 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. Determining the appropriateness of the
allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future
periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant
changes in the allowance for credit losses and credit loss expense in those future periods. The allowance level is influenced by
loan volumes, loan asset quality ratings, delinquency status, historical credit loss experience, loan performance characteristics,
and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.
Changes to the assumptions in the model in future periods could have a material impact on the Company's Consolidated
Financial Statements. See "Note 1. Summary of Significant Accounting Policies" for a detailed discussion of the Company's
methodologies for estimating expected credit losses.
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, including
the ongoing COVID-19 pandemic.
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 funds are available when necessary, on at least a quarterly basis, the Company projects the amount of
funds that will be required over a twelve-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.
While the Company does not anticipate any need for additional liquidity, in response to the uncertainty regarding the severity
and duration of the COVID-19 pandemic, the Company has taken several actions to ensure the strength of its liquidity position.
These actions include establishing a $1.5 billion Federal Reserve lending facility in connection with funding loans to small and
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medium-sized businesses and suspending stock repurchases effective as of April 17, 2020. In addition, the Company is also in a
position to pledge additional collateral to increase its borrowing capacity with the FRB, if necessary.
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.
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
$
2,452.0 $
—
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, 2020 are presented in the following
table:
December 31, 2020
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, 2020
(in millions)
$
$
$
$
3,986.8
5.0
21.0
3,960.8
2,706.8
—
2,706.8
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, 2020, there is $6.6
billion in liquid assets, comprised of $2.7 billion in cash and cash equivalents and $3.9 billion in unpledged marketable
securities. At December 31, 2019, the Company maintained $2.9 billion in liquid assets, comprised of $434.6 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
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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, 2020, 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.
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, 2020, 2019, and 2018, net cash provided by operating activities was $670.2 million, $717.8 million,
and $541.0 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, 2020,
2019, and 2018, was $5.9 billion, $3.4 billion, and $2.6 billion, respectively. The net increase in investment securities for the
years ended December 31, 2020, 2019, and 2018 was $1.5 billion, $109.5 million, and $12.4 million, respectively.
Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the years ended
December 31, 2020, 2019, and 2018, net deposits increased $9.1 billion, $3.6 billion, and $2.2 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 $150.0 million, respectively, through one participating financial institution, or a combined total
of $200.0 million per individual customer, with the entire amount being covered by FDIC insurance. As of December 31, 2020,
the Company has $496.4 million of CDARS and $1.3 billion of ICS deposits.
As of December 31, 2020, the Company has $554.8 million 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, 2020, WAB paid dividends to the Parent of $160.0 million. Subsequent to December 31,
2020, WAB paid dividends to the Parent of $15.0 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.
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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.
Enacted in 2018, the EGRRCPA, 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
CARES Act
The CARES Act was enacted in March 2020 to provide economic relief in response to the public health and economic impacts
of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of U.S. financial
institutions like the Company and the Bank. These programs have been implemented through rules and guidance adopted by
federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve, and other federal bank
regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the
COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance and regulations with respect
to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific
recovery procedures for COVID-19.
The Company continues to assess the impact of the CARES Act, the potential impact of new COVID-19 legislation, and other
statutes, regulations, and supervisory guidance related to the COVID-19 pandemic.
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The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan
program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19.
In December 2020, Congress revived the PPP and allocated additional PPP funds for 2021. As a result, the SBA is anticipated
to modify prior guidance and promulgate new regulations and guidance to conform with and implement the new provisions
during the first quarter of 2021. As a participating PPP lender, the Bank continues to monitor legislative, regulatory, and
supervisory developments related thereto.
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). 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. In April 2020,
the Federal Reserve adopted a final rule codifying the presumptions used in determinations of whether a company has the
ability to exercise a controlling influence over another company for purposes of the BHCA, and providing greater transparency
on the types of relationships that the Federal Reserve generally views as supporting a determination of control. 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.
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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. Compliance with the Volcker Rule was
required by July 21, 2017.
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. In June 2020, the
Federal Reserve - along with the Commodity Futures Trading Commission, FDIC, the Office of the Comptroller of the
Currency, and the SEC - issued a final rule modifying the Volcker Rule’s prohibition on banking entities investing in or
sponsoring hedge funds or private equity funds (“covered funds”). The Volcker Rule generally prohibits banking entities from
engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain
relationships with a hedge fund or private equity fund. The final rule modifies three areas of the Volcker Rule by: (1)
streamlining the covered funds portion of the rule; (2) addressing the extraterritorial treatment of certain foreign funds; and (3)
permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker
Rule was intended to address. The new rule became effective October 1, 2020. The Company believes it is fully compliant with
the Volcker Rule, including as modified by the new rule.
Dividends
The Company has paid regular quarterly dividends since the third quarter of 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.
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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 has historically been required by law to maintain reserves against its
transaction deposits, which were to be held in cash or with the FRB. Effective on March 26, 2020, the Board of Governors of
the Federal Reserve System reduced the reserve requirement ratios to zero percent. The total of reserve balance was $164.1
million as of December 31, 2019.
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.
Capital Adequacy
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”).
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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.
As of April 1, 2020, final rules became effective simplifying the capital treatment for mortgage servicing assets, certain
deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest.
Management believes the Company is in compliance, and will continue to be in compliance, with the targeted capital ratios.
Concurrent with enactment of the CARES Act, the federal bank regulatory authorities issued an interim final rule in late March
2020 that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. Subsequently, on August 26,
2020, the federal banking agencies issued a final rule that allows institutions that adopt the CECL accounting standard in 2020
to mitigate CECL’s estimated effects on regulatory capital for two years. The CECL final rule is substantially similar to the
interim final rule issued in March 2020 in connection with other CARES Act related regulatory relief. The final rule gives
eligible institutions the option to mitigate the estimated capital effects of CECL for two years, followed by a three-year
transition period. The Company has elected this capital relief option.
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
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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.
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 15, 2020, the
FDIC issued final rules that amend the FDIC's methodology for calculating interest rate caps, provide a new process for banks
that seek FDIC approval to offer a competitive rate on deposits when the prevailing rate in the bank's local market exceeds the
national rate cap, and provides specific exemptions and streamlined application and notice procedures for certain deposit-
placement arrangements that are not subject to brokered deposit restrictions. These final rules are effective on April 1, 2021.
The Company and the Bank do not anticipate a material impact at this time from the new rule.
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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.
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.
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.
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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.
On May 20, 2020, the OCC issued its final rule on CRA modernization. However, at the same time, the FDIC announced its
withdrawal from the joint rulemaking with the OCC, citing the impact of the COVID-19 pandemic as the reason for its
withdrawal. WAL and WAB expect to monitor developments with respect to the OCC's final rule and assess the impact, if any,
of changes to the CRA regulations as a result thereof, including any further proposals from the FRB or FDIC.
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, 2020, 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.
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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.
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.
73
Table of Contents
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, 2020, 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, 2020, 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.
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Table of Contents
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 millions)
$
1,361.8
$
1,399.7 $
1,557.4
$
1,761.9
34.9
1,326.9
(0.9) %
60.4
1,339.3
141.5
1,415.9
222.6
1,539.3
5.7 %
14.9 %
Interest Rate Ramp Scenario
(change in basis points from Base)
Down 100
Base
Up 100
Up 200
(in millions)
$
1,370.6
$
1,399.7 $
1,472.1
$
1,555.7
43.2
1,327.4
(0.9) %
60.4
78.7
1,339.3
1,393.4
96.0
1,459.7
4.0 %
9.0 %
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, 2020, the Company's EVE exposure related to these hypothetical changes in market interest rates was within
the Company's current guidelines for all up-rate scenarios. The Company's EVE exposure in the down-rate scenario was not
within the Company's guideline of (10.0)%. The breach is the result of excess liquidity and the valuation of the Company's
investment securities portfolio in the current low rate environment. The Board and ALCO has accepted the breach and believe
that as excess cash is deployed, the EVE exposure in the down-rate scenario will be reduced. The following table shows the
Company's projected change in EVE for this set of rate shocks at December 31, 2020:
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 millions)
$ 37,807.2
$
37,359.8 $ 36,758.0
$ 36,114.9
$ 35,488.2
$ 34,906.0
33,108.2
4,699.0
(12.3) %
31,999.9
30,968.1
5,359.9
5,789.9
29,981.2
6,133.7
29,007.4
6,480.8
28,124.8
6,781.2
8.0 %
14.4 %
20.9 %
26.5 %
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.
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Table of Contents
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, 2020 and 2019:
Outstanding Derivatives Positions
2020
2019
December 31,
Notional
Net Value
Weighted Average
Term (Years)
Notional
Net Value
Weighted Average
Term (Years)
(dollars in millions)
$
1,812.6 $
(83.3)
16.0 $
872.6 $
(53.7)
16.1
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Table of Contents
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
78
81
82
83
84
85
86
77
Table of Contents
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, 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 February 25, 2021, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses on
financial instruments in 2020 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses).
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 Matter
The critical audit matter communicated below is a matter 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 a critical audit matter 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 matter below, providing separate opinions on the critical audit matter or on the
accounts or disclosures to which they relate.
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Table of Contents
Allowance for Credit Losses – Loans Held for Investment
As described in Notes 1 and 3 to the financial statements, the Company’s allowance for credit losses for loans held for
investment (Loans) totaled $278.9 million as of December 31, 2020. On January 1, 2020, the Company adopted Accounting
Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which changes the impairment model from an incurred loss model to an expected loss model. The allowance for
credit losses under the expected loss model is an estimate of life-of-loan losses for the Company’s loans held for investment.
The measurement of expected credit losses is based on evaluation of the collectibility, prior credit loss experience, current
conditions, and reasonable and supportable economic forecasts, together with other factors.
The allowance for credit losses for Loans consists of two components: an asset-specific component for estimating credit losses
for individual loans that do not share risk characteristics with other loans, which totals $11.2 million; and a pooled component
for estimating credit losses for pools of loans that share similar risk characteristics, which totals $267.7 million. The allowance
for the pooled component is derived from an estimate of expected credit losses primarily using an expected loss methodology
that incorporates risk parameters (probability of default (PD), loss given default (LGD) and exposure at default (EAD)), which
are derived from various vendor models, internally-developed statistical models or non-statistical estimation approaches.
Probability of default is projected in these models or estimation approaches using multiple economic scenarios, whose
outcomes are weighted based on the Company’s economic outlook and were developed to incorporate relevant information
about past events, current conditions, and reasonable and supportable forecasts. These quantitative estimates are then adjusted
to incorporate considerations of current trends and conditions that are not captured in the quantitative credit loss estimates
through the use of qualitative and/ or environmental factors. The allowance level is influenced by loan volumes, mix, loan
performance metrics, asset quality characteristics, delinquency status, historical loss experiences, and the inputs and
assumptions of economic forecasts, such as macroeconomic inputs, length of reasonable and supportable forecast periods and
reversion methods.
The estimation of the allowance for credit losses under the new accounting standard involves many new inputs and
assumptions, many of which are derived from various vendor and in-house models. These inputs and assumptions include,
among others, the selection, evaluation and measurement of the reasonable and supportable forecast scenarios and qualitative
factors, which requires management to apply a significant amount of judgment and involves a high degree of estimation.
We identified the determination and evaluation of the PD, LGD and EAD assumptions and forecasted economic scenarios,
along with qualitative reserve components of the allowance for credit losses for Loans as a critical audit matter because auditing
the underlying assumptions, forecasts and qualitative factors used in the allowance for credit losses involved a high degree of
complexity and auditor judgment given the high degree of subjectivity exercised by management in developing the allowance
for credit losses, which resulted in high estimation uncertainty.
Our audit procedures related to management’s evaluation and establishment of the PD, LGD and EAD assumptions, forecasted
economic scenarios and qualitative reserve components of the allowance for credit losses for Loans included the following,
among others:
• We obtained an understanding of the relevant controls related to the evaluation and establishment of the key PD, LGD and
EAD assumptions, forecasted economic scenarios and qualitative reserve components of the allowance for credit losses for
Loans and tested such controls for design and operating effectiveness.
• We tested management’s process and significant judgments in the evaluation and establishment of the key PD, LGD and
EAD assumptions, forecasted economic scenarios and qualitative reserve components of the allowance for credit losses,
which included:
a. We evaluated management’s considerations and data utilized as a basis for the key PD, LGD and EAD assumptions,
selection of forecasted economic scenarios and weightings, and adjustments relating to qualitative reserve components,
and tested the completeness and accuracy of the underlying data that was available to management.
b. We evaluated the reasonableness of management’s judgments related to the key PD, LGD and EAD assumptions,
forecasted scenarios, and qualitative and quantitative assessment of the considerations and data utilized in the
determination of the forecasted economic scenarios, the magnitude of the qualitative reserve factors and the resulting
components of the allowance for credit losses for Loans.
c. We evaluated the reasonableness of management’s judgments related to the establishment of the various models being
used in determining the PD, LGD and EAD assumptions.
79
Table of Contents
d. We utilized internal specialists to assist in evaluating the statistical documentation and process used by management in
validating the models established by vendors.
/s/ RSM US LLP
We have served as the Company’s auditor since 1994.
Phoenix, Arizona
February 25, 2021
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Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2020
2019
(in millions,
except shares and per share amounts)
$
174.2 $
2,497.5
2,671.7
4,708.5
568.8
(6.8)
562.0
167.3
67.0
—
27,053.0
(278.9)
26,774.1
134.1
72.5
176.3
298.5
31.3
405.6
392.1
186.0
248.6
434.6
3,346.3
485.1
—
485.1
138.7
66.5
21.8
21,101.5
(167.8)
20,933.7
125.8
72.6
174.0
297.6
18.0
409.4
297.8
$
$
36,461.0 $
26,821.9
13,463.3 $
18,467.2
31,930.5
16.0
5.0
548.7
79.9
467.4
8,537.9
14,258.6
22,796.5
16.7
—
393.6
78.1
520.3
33,047.5
23,805.2
1,390.9
(71.1)
92.3
2,001.4
3,413.5
$
36,461.0 $
1,374.1
(62.7)
25.0
1,680.3
3,016.7
26,821.9
Assets:
Cash and due from banks
Interest-bearing deposits in other financial institutions
Cash, cash equivalents and restricted cash
Investment securities - AFS, at fair value; amortized cost of $4,586.4 at December 31, 2020 and $3,317.9 at
December 31, 2019
Investment securities - HTM, at amortized cost; fair value of $611.8 at December 31, 2020 and $516.3 at
December 31, 2019
Less: allowance for credit losses
Net HTM investment securities
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
Bank owned life insurance
Goodwill and intangible assets, net
Deferred tax assets, net
Investments in LIHTC and renewable energy
Other assets
Total assets
Liabilities:
Deposits:
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; 103,013,290 shares issued at December 31, 2020
and 104,527,544 at December 31, 2019) and additional paid in capital
Treasury stock, at cost (2,169,397 shares at December 31, 2020 and 2,003,873 shares at December 31, 2019)
Accumulated other comprehensive income
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
81
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Year Ended December 31,
2020
2019
2018
(in millions, except per share amounts)
Table of Contents
Interest income:
Loans, including fees
Investment securities
Dividends and other
Total interest income
Interest expense:
Deposits
Qualifying debt
Other short-term borrowings
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
Income from bank owned life insurance
Card income
Foreign currency income
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
Data processing
Occupancy
Deposit costs
Insurance
Loan and repossessed asset expenses
Business development
Marketing
Card expense
Intangible amortization
Net (gain) loss 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
Earnings per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
$
1,144.3 $
1,093.0 $
107.8
9.7
1,261.8
70.4
23.9
0.6
94.9
1,166.9
123.6
1,043.3
23.3
12.7
10.2
6.5
5.6
1.0
0.2
3.8
7.5
70.8
303.6
42.2
35.7
34.1
18.5
13.3
7.1
5.5
4.1
2.2
1.6
(1.5)
25.2
491.6
622.5
115.9
111.9
20.1
1,225.0
158.4
23.4
2.8
184.6
1,040.4
19.3
1,021.1
23.3
8.3
3.9
7.0
5.0
3.2
3.1
5.1
6.2
65.1
279.3
37.0
30.6
32.6
31.7
11.9
7.6
7.0
4.2
2.2
1.6
3.8
32.5
482.0
604.2
105.0
$
$
506.6 $
499.2 $
5.06 $
5.04
4.86 $
4.84
100.2
100.5
102.7
103.1
82
910.6
106.8
16.1
1,033.5
90.5
22.3
4.8
117.6
915.9
25.0
890.9
22.3
8.6
3.9
8.0
4.8
4.3
(7.6)
(3.6)
2.4
43.1
253.2
28.7
22.7
29.4
18.9
14.0
4.6
6.0
3.8
4.3
1.6
—
36.5
423.7
510.3
74.5
435.8
4.16
4.14
104.7
105.4
Table of Contents
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 $(23.1), $(23.2), and
$13.4, respectively
Unrealized loss on SERP, net of tax effect of $0.1, $0.1, and $0, respectively
Unrealized (loss) gain on junior subordinated debt, net of tax effect of $1.1, $3.2, and
$(1.9), respectively
Realized (gain) loss on sale of AFS securities included in income, net of tax effect of
$0, $0.7, and $(1.8), respectively
Net other comprehensive income (loss)
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
Year Ended December 31,
2020
2019
(in millions)
2018
$
506.6 $
499.2 $
435.8
70.9
(0.3)
(3.1)
(0.2)
67.3
71.2
(0.4)
(9.8)
(2.4)
58.6
$
573.9 $
557.8 $
(40.8)
(0.1)
5.7
5.8
(29.4)
406.4
83
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balance, December 31, 2017
Balance, January 1, 2018 (1)
Net income
Restricted stock, performance stock units, and
other grants, net
Restricted stock surrendered (2)
Stock repurchase
Other comprehensive income, net
Balance, December 31, 2018
Net income
Restricted stock, performance stock units, and
other grants, net
Restricted stock surrendered (2)
Stock repurchase
Dividends paid
Other comprehensive loss, net
Balance, December 31, 2019
Balance, January 1, 2020 (3)
Net income
Restricted stock, performance stock unit,
and other grants, net
Restricted stock surrendered (2)
Stock repurchase
Dividends paid
Other comprehensive income, net
Balance, December 31, 2020
Common Stock
Shares
Amount
Additional
Paid in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders’
Equity
105.5
105.5
—
0.5
(0.2)
(0.9)
—
— $ 1,424.6 $
(40.2) $
(3.1) $
848.4 $
(in millions)
—
—
—
—
—
—
1,424.6
(40.2)
(4.2)
—
26.2
—
(33.1)
—
—
—
(12.9)
—
—
—
—
—
—
(29.4)
849.5
435.8
—
—
(2.6)
—
2,229.7
2,229.7
435.8
26.2
(12.9)
(35.7)
(29.4)
104.9
— $ 1,417.7 $
(53.1) $
(33.6) $
1,282.7 $
2,613.7
499.2
499.2
—
0.6
(0.2)
(2.8)
—
—
102.5
102.5
—
0.6
(0.2)
(2.1)
—
—
—
—
—
—
—
—
—
26.3
—
(69.9)
—
—
—
—
(9.6)
—
—
—
—
—
—
—
—
58.6
—
—
(50.3)
(51.3)
—
— $ 1,374.1 $
(62.7) $
25.0 $
1,680.3 $
—
—
—
—
—
—
—
1,374.1
(62.7)
—
29.1
—
(12.3)
—
—
—
—
(8.4)
—
—
—
25.0
—
—
—
—
—
67.3
1,655.4
506.6
—
—
(59.3)
(101.3)
—
26.3
(9.6)
(120.2)
(51.3)
58.6
3,016.7
2,991.8
506.6
29.1
(8.4)
(71.6)
(101.3)
67.3
100.8
— $ 1,390.9 $
(71.1) $
92.3 $
2,001.4 $
3,413.5
(1) As adjusted for adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. 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.
(2) Share amounts represent Treasury Shares, see "Note 1. Summary of Significant Accounting Policies" for further discussion.
(3) As adjusted for adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The cumulative effect of adoption of this
guidance at January 1, 2020 resulted in a decrease to retained earnings of $24.9 million due to an increase in the allowance for credit losses. See
"Note 1. Summary of Significant Accounting Policies" for further discussion.
See accompanying Notes to Consolidated Financial Statements.
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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
Amortization of net deferred loan fees and net purchase premiums
Income from bank owned life insurance
(Gains) / Losses on:
Sales of investment securities
Assets measured at fair value, net
Sale of loans
BOLI
Sales / valuations of repossessed and other assets, net
Changes in other assets and liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
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 other investments
Proceeds from bank owned life insurance, net
Net increase in loans
Purchase of premises, equipment, and other assets, net
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Net proceeds from issuance of subordinated debt
Redemption of subordinated debt
Net increase (decrease) in other borrowings
Cash paid for tax withholding on vested restricted stock and other
Common stock repurchases
Cash dividends paid on common stock
Net cash provided by financing activities
Net increase (decrease) 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
See accompanying Notes to Consolidated Financial Statements.
85
2020
December 31,
2019
(in millions)
2018
$
506.6 $
499.2 $
435.8
123.6
22.9
28.7
(25.1)
28.2
49.2
11.7
(51.2)
(4.6)
(0.2)
(3.8)
1.7
(5.6)
(1.5)
(10.4)
670.2 $
(2,966.2)
1,515.5
156.6
(182.7)
17.4
—
(34.5)
7.6
—
(132.2)
(0.9)
5.9
(5,897.2)
(26.8)
(7,537.5) $
9,134.0 $
221.9
(75.0)
4.3
(7.9)
(71.6)
(101.3)
9,104.4 $
2,237.1
434.6
2,671.7 $
19.3
18.5
26.2
(5.1)
17.1
41.5
10.5
(42.7)
(3.9)
(3.1)
(5.1)
(0.7)
—
3.8
142.3
717.8 $
(927.6)
785.7
150.4
(131.4)
21.6
10.0
(32.7)
14.6
—
(141.7)
(9.1)
—
(3,429.0)
(33.8)
(3,723.0) $
3,619.0 $
—
—
(496.7)
(9.6)
(120.2)
(51.3)
2,941.2 $
(64.0)
498.6
434.6 $
25.0
14.3
25.7
(16.7)
14.2
35.9
—
(40.4)
(3.9)
7.6
3.6
(2.6)
—
—
42.5
541.0
(520.7)
425.2
154.4
(56.6)
9.0
—
(71.7)
(0.6)
48.6
(109.6)
(4.5)
1.7
(2,586.7)
(1.9)
(2,713.4)
2,204.9
—
—
97.4
(12.4)
(35.7)
—
2,254.2
81.8
416.8
498.6
108.6 $
44.2
180.4 $
(23.4)
113.5
18.8
$
$
$
$
$
$
Table of Contents
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.
Recent accounting pronouncements
Convertible Debt and Derivatives and Hedging
In August 2020, the FASB issued guidance within ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in this update
affect entities that issue convertible instruments and/or contracts indexed to and potentially settled in an entity’s own equity.
The new ASU simplifies the convertible accounting framework through elimination of the beneficial conversion and cash
conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own
equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance
modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted
EPS computation. The amendments to Subtopics 470 and 815 are effective for interim and annual reporting periods beginning
after December 15, 2021 and are not expected to have a material impact on the Company’s Consolidated Financial Statements.
Reference Rate Reform
In March 2020, the FASB issued guidance within ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR on December 31,
2021. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR has been extended to June 30, 2023.
The amendments in this Update provide optional guidance designed to provide relief from the accounting analysis and impacts
that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings)
necessitated by reference rate reform.
The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are
permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1)
modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by
prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be
accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate
or remeasurements of lease payments that otherwise would be required under this Topic for modifications not accounted for as
separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that
contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host
contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics or Industry
Subtopics in the Codification, the amendments in this Update also include a general principle that permits an entity to consider
contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the
modification date or reassessment of a previous accounting determination. An entity may make a one-time election to sell,
transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate
reform and that are classified as held to maturity before January 1, 2020.
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In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in order to clarify that certain
optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition.
Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for
margining, discount, or contract price alignment that is modified as a result of reference rate reform.
The amendments in these Updates are effective immediately for all entities and apply to contract modifications through
December 31, 2022. The adoption of this accounting guidance is not expected to have a material impact on the Company's
Consolidated Financial Statements.
Income Taxes
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
Measurement of Credit Losses on Financial Instruments
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 Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets
measured at amortized cost and off-balance sheet credit exposures. The Company's financial results for reporting periods
beginning after January 1, 2020 are presented in accordance with ASC 326, while prior-period amounts continue to be reported
in accordance with legacy GAAP. The Company recorded a cumulative effect adjustment to retained earnings, which resulted
in a total decrease to retained earnings of $24.9 million as of January 1, 2020. This adjustment was due primarily to expected
total losses under the new model in the Company's loan portfolio and, to a lesser extent, its off-balance sheet credit exposures.
The Company applied the prospective transition approach for loans purchased with credit deterioration that were previously
classified as PCI and previously accounted for under ASC 310-30. In accordance with the new standard, management did not
reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. As of January 1, 2020, the amortized cost
basis of the PCD loans was adjusted to reflect an allowance for credit losses of $3.3 million. The remaining noncredit discount
(based on the adjusted amortized cost basis) related to PCD loans of $1.1 million will be accreted into interest income at the
loan's effective interest rate as of January 1, 2020. The Company has elected not to maintain its pools of loans accounted for
under ASC 310-30.
The Company applied the prospective transition approach for debt securities for which other-than-temporary impairment had
been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective
date. The effective interest rate on these debt securities was not changed. Recoveries of amounts previously written off relating
to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.
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The following table summarizes the estimated allowance for credit losses related to financial assets and off-balance sheet credit
exposures and the corresponding impacts on the deferred tax asset and retained earnings upon adoption of ASC 326:
Assets:
Allowance for credit losses on HTM securities
Allowance for credit losses on loans
Deferred tax asset
Liabilities:
Off-balance sheet credit exposures
Equity:
Retained earnings
Pre-ASC 326
Adoption
January 1, 2020
Post-ASC 326
Adoption
(in millions)
Impact of ASC 326
Adoption
$
$
$
— $
2.6 $
167.8
18.0
186.9
26.7
9.0 $
24.0 $
2.6
19.1
8.7
15.1
1,680.3 $
1,655.4 $
(24.9)
Management has elected to take advantage of the capital relief option that delays the estimated impact of the adoption of ASC
326 on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to
regulatory capital provided during the two-year delay.
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 were adopted concurrently with ASU 2016-13 and did not 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 did 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 for equity securities without readily
determinable fair values; 3) certain disclosure requirements; and 4) which equity securities have to be remeasured at historical
exchange rates. The amendments to Topic 825 were effective January 1, 2020 and did not 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. 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.
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Fair Value Measurements
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: 1) the amount and
reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; 2) the policy for timing of transfers between
levels; and 3) the valuation processes for Level 3 fair value measurements. The amendments clarify that the measurement
uncertainty disclosure is intended to communicate information about the uncertainty in measurement as of the reporting date.
Additional disclosure requirements include: 1) 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 2) 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 did not have a significant impact
on the Company's Consolidated Financial Statements.
Internal-Use Software
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:
1) 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; 2) 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 3) 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 hosting arrangement would be presented. The adoption of this guidance did not
have a significant impact on the Company's 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 susceptible to
significant changes in the near term, particularly to the extent that economic conditions worsen or persist longer than expected
in an adverse state, 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, 2020, 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 interests in certain limited partnerships invested primarily in
low income housing tax credits and small business investment corporations; Helios Prime, which holds interests in certain
limited partnerships invested in renewable energy projects; 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.
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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.
Cash reserve requirements
Effective on March 26, 2020, the Board of Governors of the Federal Reserve System reduced the reserve requirement ratios to
zero percent. Prior to this decision, depository institutions were required by law to maintain reserves against their transaction
deposits. The Company's total reserve balance was approximately $164.1 million as of December 31, 2019.
Investment securities
Investment securities include debt 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. 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 are securities that the Company intends to hold for an indefinite period of time, but not necessarily 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.
HTM securities are carried at amortized cost. AFS securities are carried at their estimated fair value, with unrealized holding
gains and losses reported in other comprehensive income, net of tax. When AFS debt securities are sold, the unrealized gains or
losses are reclassified from OCI to non-interest income. Trading securities are carried at their estimated fair value, with changes
in fair value reported in earnings as part of non-interest income.
Equity securities are carried at their estimated fair value, with changes in fair value reported in earnings as part of non-interest
income.
Interest income is recognized based on the coupon rate and includes the amortization of purchase premiums and the accretion of
purchase discounts. Premiums and discounts on investment securities are generally amortized or accreted over the contractual
life of the security using the interest method. For the Company's mortgage-backed securities, amortization or accretion of
premiums or discounts are adjusted for anticipated prepayments. Gains and losses on the sale of investment securities are
recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time its principal or interest payments become 90 days past due. Interest
accrued but not received for a security placed on nonaccrual is reversed against interest income.
Allowance for credit losses on investment securities
On January 1, 2020, the Company adopted the amendments within ASU 2016-13, which replaces the legacy US GAAP OTTI
model with a credit loss model. The credit loss model under ASC 326-20, applicable to HTM debt securities, requires
recognition of lifetime expected credit losses through an allowance account at the time the security is purchased. The Company
measures expected credit losses on its HTM debt securities on a collective basis by major security type. The Company's HTM
securities portfolio consists of low income housing tax-exempt bonds, which share similar risk characteristics with the
Company's CRE, non-owner occupied or construction and land loan pools, given the similarity in underlying assets or
collateral. Accordingly, expected credit losses on HTM securities are estimated using the same models and approaches as these
loan pools, which utilize risk parameters (probability of default, loss given default, and exposure at default) in the measurement
of expected credit losses. The historical data used to estimate probability of default and severity of loss in the event of default is
derived or obtained from internal and external sources and adjusted for the expected effects of reasonable and supportable
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forecasts over the expected lives of the securities on those historical losses. Accrued interest receivable on the HTM securities,
which is included in other assets on the Consolidated Balance Sheet, is excluded from the estimate of expected credit losses.
The credit loss model under ASC 326-30, applicable to AFS debt securities, requires recognition of credit losses through an
allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become
impaired. For AFS debt securities, a decline in fair value due to credit loss results in recognition of an allowance for credit
losses. Impairment may result from credit deterioration of the issuer or collateral underlying the security. The assessment of
determining if a decline in fair value resulted from a credit loss is performed at the individual security level. Among other
factors, the Company considers: 1) the extent to which the fair value is less than the amortized cost basis; 2) the financial
condition and near term prospects of the issuer, including consideration of relevant financial metrics or ratios of the issuer; 3)
any adverse conditions related to an industry or geographic area of an issuer; 4) any changes to the rating of the security by a
rating agency; and 5) any past due principal or interest payments from the issuer. If an assessment of the above factors
indicates that a credit loss exists, the Company records an allowance for credit losses for the excess of the amortized cost basis
over the present value of cash flows expected to be collected, limited to the amount that the security's fair value is less than its
amortized cost basis. Subsequent changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit
loss expense. Interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is
recognized in earnings. Any interest received after the security has been placed on nonaccrual status is recognized on a cash
basis. Accrued interest receivable on AFS securities, which is included in other assets on the Consolidated Balance Sheet, is
excluded from the estimate of expected credit losses.
For each AFS security in an unrealized loss position, the Company also considers: 1) its intent to retain the security until
anticipated recovery of the security's fair value; and 2) whether it is more-likely-than not that the Company would be required
to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is
met, the debt security is written down to its fair value and the write-down is charged against the allowance for credit losses with
any incremental impairment recorded in earnings.
Writeoffs are made through reversal of the allowance for credit losses and direct writeoff of the amortized cost basis of the AFS
security. The Company considers the following events to be indicators that a writeoff should be taken: 1) bankruptcy of the
issuer; 2) significant adverse event(s) affecting the issuer in which it is improbable for the issuer to make its remaining
payments on the security; and 3) significant loss of value of the underlying collateral behind a security. Recoveries on debt
securities, if any, are recorded in the period received.
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. 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.
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 quoted fair market values or, when not available,
discounted cash flows or 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
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at
amortized cost. Amortized cost is the amount of unpaid principal, adjusted for unamortized net deferred fees and costs,
premiums and discounts, and writeoffs. In addition, the amortized cost 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 purchase loans or acquire loans through a business combination. At the purchase or acquisition date,
loans are evaluated to determine if there has been more than insignificant credit deterioration since origination. Loans that have
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experienced more than insignificant credit deterioration since origination are referred to as PCD loans. In its evaluation of
whether a loan has experienced more than insignificant deterioration in credit quality since origination, the Company takes into
consideration loan grades, loan-to-values greater than policy limits, past due and nonaccrual status, and TDR loans. The
Company may also consider external credit rating agency ratings for borrowers and for non-commercial loans, FICO score or
band, probability of default levels, number of times past due, and standard deviations corresponding to FICO score or band. The
initial estimate of credit losses on PCD loans is added to the purchase price on the acquisition date to establish the initial
amortized cost basis of the loan; accordingly, the initial recognition of expected credit losses has no impact on net income.
When the initial measurement of expected credit losses on PCD loans are calculated on a pooled loan basis, the expected credit
losses are allocated to each loan within the pool. Any difference between the initial amortized cost basis and the unpaid
principal balance of the loan represents a noncredit discount or premium, which is accreted (or amortized) into interest income
over the life of the loan. Subsequent changes to the allowance for credit losses on PCD loans are recorded through the provision
for credit losses. For purchased loans that are not deemed to have experienced more than insignificant credit deterioration since
origination, any discounts or premiums included in the purchase price 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.
In applying the effective yield method to loans, the Company generally applies the contractual method whereby loan fees
collected for the origination of loans less direct loan origination costs (net of deferred loan fees), as well as premiums and
discounts and certain purchase accounting 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.
Conversely, with respect to loans originated under the PPP, the Company incorporates projected prepayments in calculating
effective yield. As a result, net deferred fees are accreted into interest income faster than would be the case when applying the
contractual method based upon the timing and amount of estimated forgiven loan balances. The Company expects that a
majority of PPP loans will qualify for forgiveness under the SBA program, based on requested loan amounts largely
representing qualifying expenses at the time of application.
Nonaccrual 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. Past due status is based on the contractual terms of the loan. 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 nonaccrual 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 may recognize income on a cash basis when a payment is received and only for those
nonaccrual 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. Loans are returned to accrual status when all of the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Troubled Debt Restructured Loans
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. In order to determine whether a borrower is experiencing
financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt
in the foreseeable future without the modification. The evaluation is performed under the Company's internal underwriting
policy. The loan terms that may be 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 may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual
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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. 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 CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for
loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any
determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020
or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past
due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial
institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they
will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically
categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan
modifications.
Credit quality indicators
Loans are regularly reviewed to assess credit quality indicators and to determine appropriate loan classification and grading in
accordance with applicable bank regulations. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 9,
where a higher rating represents higher risk. The Company differentiates its loan segments based on shared risk characteristics
for which expected credit loss is measured on a pool basis.
The nine risk rating categories can be generally described by the following groupings for loans:
"Pass" (grades 1 through 5): The Company has five pass risk ratings, which represent a level of credit quality that ranges from
no well-defined deficiency or weakness to some noted weakness; however, the risk of default on any loan classified as pass is
expected to be remote. The five pass risk ratings are described below:
Minimal risk. These consist of loans that are fully secured either with cash held in a deposit account at the Bank or by
readily marketable securities with an acceptable margin based on the type of security pledged.
Low risk. These consist of loans with a high investment grade rating equivalent.
Modest risk. These consist of loans where the credit facility greatly exceeds all policy requirements or with policy
exceptions that are appropriately mitigated. A secondary source of repayment is verified and considered sustainable.
Collateral coverage on these loans is sufficient to fully cover the debt as a tertiary source of repayment. Debt of the borrower
is low relative to borrower’s financial strength and ability to pay.
Average risk. These consist of loans where the credit facility meets or exceeds all policy requirements or with policy
exceptions that are appropriately mitigated. A secondary source of repayment is available to service the debt. Collateral
coverage is more than adequate to cover the debt. The borrower exhibits acceptable cash flow and moderate leverage.
Acceptable risk. These consist of loans with an acceptable primary source of repayment, but a less than preferable secondary
source of repayment. Cash flow is adequate to service debt, but there is minimal excess cash flow. Leverage is moderate or
high.
"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 nonaccrual 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 that 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. Due to the high probability
of loss, loans classified as "Doubtful" are placed on nonaccrual status.
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"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 on loans
Prior to January 1, 2020, the allowance for credit losses on loans was based on incurred credit losses in accordance with
accounting policies disclosed in "Note 1. Summary of Significant Accounting Policies" in the accompanying Notes to
Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31,
2019.
On January 1, 2020, the Company adopted the amendments within ASU 2016-13, Measurement of Credit Losses on Financial
Instruments, which changes the impairment model for most financial assets carried at amortized cost from an incurred loss
model to an expected loss model. The discussion below reflects the current expected credit loss model methodology. Credit risk
is inherent in the business of extending loans and leases to borrowers and is continuously monitored by management and
reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of life-of-loan losses for
the Company's loans held for investment. The allowance for credit losses is a valuation account that is deducted from the
amortized cost basis of a loan to present the net amount expected to be collected on the loan. Accrued interest receivable on
loans, which is included in other assets on the Consolidated Balance Sheet, is excluded from the estimate of expected credit
losses. Expected recoveries of amounts previously written off and expected to be written off are included in the valuation
account and may not exceed the aggregate of amounts previously written off and expected to be written off. The Company
formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters
that are inherently uncertain. In future periods, evaluations of the overall loan portfolio or particular segments of the loan
portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance for credit losses
and credit loss expense in those future periods. The allowance level is influenced by loan volumes, mix, loan performance
metrics, asset quality characteristics, delinquency status, historical credit loss experience, and the inputs and assumptions in
economic forecasts, such as macroeconomic inputs, length of reasonable and supportable forecast periods, and reversion
methods. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has
two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with
other loans and the measurement of expected credit losses for such individual loans and; second, a pooled component for
estimated expected credit losses for pools of loans that share similar risk characteristics.
Loans that do not share risk characteristics with other loans
Loans that do not share risk characteristics with other loans are evaluated on an individual basis. Loans evaluated individually
are not included in the collective evaluation. These loans consist of loans with unique features or loans that no longer share risk
characteristics with other pooled loans. The process for determining whether a loan should be evaluated on an individual basis
begins with determination of credit rating. All loans graded substandard or worse and all PCD loans, irrespective of credit
rating, are assigned a reserve based on an individual evaluation. For these loans, the allowance is based primarily on the fair
value of the underlying collateral, utilizing independent third-party appraisals.
Loans that share similar risk characteristics with other loans
In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans,
such loans are segregated into loan segments. The Company's primary portfolio segments have changed due to adoption of the
amendments within ASU 2016-13 to align with the methodology applied in estimating the allowance for credit losses under
CECL. Loans are designated into loan segments based on loans pooled by product types, business lines, and similar risk
characteristics or areas of risk concentration. Accordingly, the loan portfolio segments discussed below are based upon CECL-
defined shared risk characteristics and are not comparable to the segments reported prior to adoption of the new accounting
guidance.
In determining the allowance for credit losses, the Company derives an estimate of expected credit losses primarily using an
expected loss methodology that incorporates risk parameters (probability of default, loss given default, and exposure at default),
which are derived from various vendor models, internally-developed statistical models, or non-statistical estimation approaches.
Probability of default is projected in these models or estimation approaches using multiple economic scenarios, whose
outcomes are weighted based on the Company's economic outlook and were developed to incorporate relevant information
about past events, current conditions, and reasonable and supportable forecasts. With the exception of the Company's residential
loan segment, the Company's PD models share a common definition of default, which include loans that are 90 days past due,
on nonaccrual status, have a writeoff, or obligor bankruptcy. Input reversion is used for all loan segment models, except for the
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commercial and industrial and CRE, owner-occupied loan segments. Output reversion is used for the commercial and industrial
and CRE, owner-occupied segments by incorporating, after the forecast period, a one-year linear reversion to the long-term
reversion rate in year three through the remaining life of the loans within the respective segments. LGDs are typically derived
from the Company's historical loss experience. However, for the residential, warehouse lending, and municipal and nonprofit
loan segments, where the Company has either zero (or near zero) losses, or has a limited loss history through the last economic
downturn, certain non-modeled methodologies are employed. Factors utilized in calculating average LGD vary for each loan
segment and are further described below. Exposure at default refers to the Company's exposure to loss at the time of borrower
default and is calculated using an amortization schedule based on contractual loan terms, adjusted for a prepayment rate
assumption. Prepayment trends are sensitive to interest rates and the macroeconomic environment. Fixed rate loans are more
influenced by interest rates, whereas variable rate loans are more influenced by the macroeconomic environment. After the
quantitative expected loss estimates are calculated, management then adjusts these estimates to incorporate considerations of
current trends and conditions that are not captured in the quantitative loss estimates, through the use of qualitative and/or
environmental factors.
The following provides credit quality indicators and risk elements most relevant in monitoring and measuring the allowance for
credit losses for each of the loan portfolio segments identified:
Warehouse lending
The warehouse lending portfolio segment consists of loans that have a monitored borrowing base to mortgage companies and
similar lenders and are primarily structured as commercial and industrial loans. These loans are collateralized by real estate
notes and mortgages or mortgage servicing rights and the borrowing base of these loans is tightly monitored and controlled by
the Company. The primary support for the loan takes the form of pledged collateral, with secondary support provided by the
capacity of the financial institution. The collateral-driven nature of these loans distinguish them from traditional commercial
and industrial loans. These loans are impacted by interest rate shocks, residential lending rates, prepayment assumptions, and
general real estate stress. As a result of the unique loan characteristics, limited historical default and loss experience, and the
collateral nature of this loan portfolio segment, the Company uses a non-modeled approach to estimate expected credit losses,
leveraging grade information, grade migration history, and management judgment.
Municipal and nonprofit
The municipal and nonprofit portfolio segment consists of loans to local governments, government-operated utilities, special
assessment districts, hospitals, schools and other nonprofits. These loans are generally, but not exclusively, entered into for the
purpose of financing real estate investment or for refinancing existing debt and are primarily structured as commercial and
industrial loans. Loans are supported by taxes or utility fees, and in some cases tax liens on real estate, operating revenue of the
institution, or other collateral support the loans. Unemployment rates and the market valuation of residential properties have an
effect on the tax revenues supporting these loans; however, these loans tend to be less cyclical in comparison to similar
commercial loans as these loans rely on diversified tax bases. The Company uses a non-modeled approach to estimate expected
credit losses, leveraging grade information and historical municipal default rates.
Tech & Innovation
The Tech & Innovation portfolio segment is comprised of commercial loans that are originated within this business line and not
collateralized by real estate. The source of repayment of these loans is generally expected to be the income that is generated
from the business. The models used to estimate expected credit losses for this loan segment include a combination of a vendor
model and an internally-developed model. These models incorporate both market level and company-specific factors such as
financial statement variables, adjusted for the current stage of the credit cycle and for the Company's loan performance data
such as delinquency, utilization, maturity, and size of the loan commitment under specific macroeconomic scenarios to produce
a probability of default. Macroeconomic variables include the Dow Jones Index, credit spread between the BBB Bond Yield
and 10-Year Treasury Bond Yield, unemployment rate, and CBOE VIX Index quarterly high. LGD and the prepayment rate
assumption for EAD for this loan segment are driven by unemployment levels.
Other commercial and industrial
The other commercial and industrial segment is comprised of commercial and industrial loans that are not originated within the
Company's specialty business lines and are not collateralized by real estate. The models used to estimate expected credit losses
for this loan segment is the same as those used for the Tech & Innovation portfolio segment.
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Commercial real estate, owner-occupied
The CRE, owner-occupied portfolio segment is comprised of commercial loans that are collateralized by real estate, where the
primary source of repayment is the business that occupies the property. These loans are typically entered into for the purpose of
providing real estate finance or improvement. The primary source of repayment of these loans is the income generated by the
business and where rental or sale of the property may provide secondary support for the loan. These loans are sensitive to
general economic conditions as well as the market valuation of CRE properties. The probability of default estimate for this loan
segment is modeled using the same model as the commercial and industrial loan segment. LGD for this loan segment is driven
by property appreciation and the prepayment rate assumption for EAD is driven by unemployment levels.
Hotel Franchise Finance
The Hotel Franchise Finance segment is comprised of loans that are originated within this business line and are collateralized
by real estate, where the owner is not the primary tenant. These loans are typically entered into for the purpose of financing or
the improvement of commercial investment properties. The primary source of repayment of these loans are the rents paid by
tenants and where the sale of the property may provide secondary support for the loan. These loans are sensitive to the market
valuation of CRE properties, rental rates, and general economic conditions. The vendor model used to estimate expected credit
losses for this loan segment projects probabilities of default and exposure at default based on multiple macroeconomic scenarios
by modeling how macroeconomic conditions affect the commercial real estate market. Real estate market factors utilized in this
model include vacancy rate, rental growth rate, net operating income growth rate, and commercial property price changes for
each specific property type. The model then incorporates loan and property-level characteristics including debt coverage,
leverage, collateral size, seasoning, and property type. LGD for this loan segment is derived from a non-modeled approach that
is driven by property appreciation and the prepayment rate assumption for EAD is driven by the property appreciation for fixed
rate loans and unemployment levels for variable rate loans.
Other commercial real estate, non-owner occupied
The other commercial real estate, non-owner occupied segment is comprised of loans that are not originated within the
Company's specialty business lines and are collateralized by real estate, where the owner is not the primary tenant. The model
used to estimate expected credit losses for this loan segment is the same as the model used for the Hotel Franchise Finance
portfolio segment.
Residential
The residential loan portfolio segment is comprised of loans collateralized primarily by first liens on 1-4 residential family
properties and home equity lines of credit that are collateralized by either first liens or junior liens on residential properties. The
primary source of repayment of these loans is the value of the property and the capacity of the owner to make payments on the
loan. Unemployment rates and the market valuation of residential properties will impact the ultimate repayment of these loans.
The residential mortgage loan model is a vendor model that projects probability of default, loss given default severity,
prepayment rate, and exposure at default to calculate expected losses. The model is intended to capture the borrower's payment
behavior during the lifetime of the residential loan by incorporating loan level characteristics such as loan type, coupon, age,
loan-to-value, and credit score and economic conditions such as Home Price Index, interest rate, and unemployment rate. A
default event for residential loans is defined as 60 days or more past due, with property appreciation as the driver for LGD
results. The prepayment rate assumption for exposure at default for residential loans is based on industry prepayment history.
Probability of default for HELOCs is derived from an internally-developed model that projects PD by incorporating loan level
information such as FICO score, lien position, balloon payments, and macroeconomic conditions such as property appreciation.
LGD for this loan segment is driven by property appreciation and lien position. Exposure at default for HELOCs is calculated
based on utilization rate assumptions using a non-modeled approach and incorporates management judgment.
Construction and land development
The construction and land portfolio segment is comprised of loans collateralized by land or real estate, which are entered into
for the purpose of real estate development. The primary source of repayment of loans is the eventual sale or refinance of the
completed project and where claims on the property provide secondary support for the loan. These loans are impacted by the
market valuation of CRE and residential properties and general economic conditions that have a higher sensitivity to real estate
markets compared to other real estate loans. Default risk of a property is driven by loan-specific drivers, including loan-to-
value, maturity, origination date, and the MSA in which the property is located, among other items. The variables used in the
internally-developed model include loan level drivers such as origination loan-to-value, loan maturity, and macroeconomic
drivers such as property appreciation, MSA level unemployment rate, and national GDP growth. LGD for this loan segment is
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driven by property appreciation. The prepayment rate assumption for EAD is driven by the property appreciation for fixed rate
loans and unemployment levels for variable rate loans.
Other
This portfolio consists of those loans not already captured in one of the aforementioned loan portfolio segments, which include,
but may not be limited to, overdraft lines for treasury services, credit cards, consumer loans not collateralized by real estate, and
small business loans collateralized by residential real estate. The consumer and small business loans are supported by the
capacity of the borrower and the valuation of any collateral. General economic factors such as unemployment will have an
effect on these loans. The Company uses a non-modeled approach to estimate expected credit losses, leveraging average
historical default rates. LGD for this loan segment is driven by unemployment levels and lien position. The prepayment rate
assumption for EAD is driven by the BBB corporate spread for fixed rate loans and unemployment levels for variable rate
loans.
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.
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.
Off-balance sheet credit exposures, including unfunded loan commitments
The Company maintains a separate allowance for credit losses on off-balance-sheet credit exposures, including unfunded loan
commitments, financial guarantees, and letters of credit, which is classified in other liabilities on the Consolidated Balance
Sheet. The allowance for credit losses on off-balance sheet credit exposures is adjusted through increases or decreases to the
provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, an estimate of
exposure at default that is derived from utilization rate assumptions using a non-modeled approach, and PD and LGD estimates
that are derived from the same models and approaches for the Company's other loan portfolio segments described above as
these unfunded commitments share similar risk characteristics with these loan portfolio segments. No credit loss estimate is
reported for off-balance sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts
under such arrangements that may be drawn prior to the cancellation of the arrangement.
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.
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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,
2020, 2019, or 2018.
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.
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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 $465.8 million and $359.0 million as of
December 31, 2020 and 2019, 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 on 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 fair value of non-vested restricted stock awards is the market price of the
Company’s stock on the date of grant.
The Company's performance stock units have a cumulative EPS target and a TSR performance measure component. The TSR
component is a market-based performance condition that is separately valued as of the date of the grant. A Monte Carlo
valuation model is used to determine the fair value of the TSR performance metric, which simulates potential TSR outcomes
over the performance period and determines the payouts that would occur in each scenario. The resulting fair value of the TSR
component is based on the average of these results. Compensation expense related to the TSR component is based on the fair
value determination on the date of the grant and is not subsequently revised based on actual performance. Compensation
expense on the EPS component for these awards is based on the fair value (market price of the Company's stock on the date of
the grant) of the award. Compensation expense related to both the TSR and EPS components is recognized ratably over the
service period of the award.
See "Note 10. Stockholders' Equity" of these Notes to Consolidated Financial Statements for further discussion of stock awards.
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.
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Common stock repurchases
The Company has previously adopted common stock repurchase programs pursuant to which the Company has repurchased
shares of its outstanding common stock, the most recent of which expired in December 2020. All shares repurchased under
the plan were retired upon settlement. The Company has elected 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 was calculated on a last-in, first-out basis.
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.
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.
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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.
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 8. 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.
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, and also sets forth 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
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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 that the
Company 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, 2020 and 2019. The estimated fair value amounts for December 31, 2020 and 2019 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.
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. 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 3 in the fair value hierarchy.
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Accrued interest receivable and payable
The carrying amounts reported on the Consolidated Balance Sheet for accrued interest receivable and payable approximate their
fair values.
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), as these deposits do not have a contractual term. 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.
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' and 'BBB' rated financial indexes. 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 Sheet. See "Note 14. Income Taxes" of these Notes to Consolidated Financial Statements for
further discussion on income taxes.
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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 fair value
gain or loss adjustments 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 842,
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 standard.
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2. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities at December 31, 2020 and 2019 are summarized as follows:
Held-to-maturity
Tax-exempt
Available-for-sale debt securities
CDO
CLO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal (taxable) securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred 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
Municipal (taxable) 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, 2020
(in millions)
$
$
$
$
$
$
$
$
$
$
568.8 $
43.0 $
— $
611.8
0.1 $
6.8 $
— $
146.9
80.8
271.1
22.0
1,461.7
1,462.5
1,109.3
32.0
—
3.8
4.8
0.5
15.7
27.9
78.1
—
—
—
(5.7)
—
(0.5)
(3.8)
—
(5.5)
4,586.4 $
137.6 $
(15.5) $
53.1 $
107.0
160.1 $
0.3 $
7.3
7.6 $
— $
(0.4)
(0.4) $
December 31, 2019
6.9
146.9
84.6
270.2
22.5
1,476.9
1,486.6
1,187.4
26.5
4,708.5
53.4
113.9
167.3
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
(Losses)
Fair Value
(in millions)
485.1 $
31.3 $
(0.1) $
516.3
— $
10.1 $
— $
95.1
105.0
7.5
1,130.0
1,406.6
530.7
32.0
10.0
1.0
0.4
0.1
0.3
3.5
9.3
24.6
—
—
—
(1.2)
(5.2)
—
(4.3)
(3.8)
(0.4)
(5.0)
—
—
10.1
94.3
99.9
7.8
1,129.2
1,412.1
554.9
27.0
10.0
1.0
3,317.9 $
48.3 $
(19.9) $
3,346.3
52.8 $
82.5
135.3 $
— $
3.9
3.9 $
(0.3) $
(0.2)
(0.5) $
52.5
86.2
138.7
Securities with carrying amounts of approximately $778.0 million and $962.5 million at December 31, 2020 and 2019,
respectively, were pledged for various purposes as required or permitted by law.
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The following tables summarize the Company's AFS debt securities in an unrealized loss position at December 31, 2020 and
2019, aggregated by major security type and length of time in a continuous unrealized loss position:
December 31, 2020
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 millions)
$
0.1 $
17.3 $
5.6 $
94.3 $
5.7 $
0.5
3.8
—
149.7
231.9
—
—
—
5.5
—
—
26.5
0.5
3.8
5.5
$
4.4 $
398.9 $
11.1 $
120.8 $
15.5 $
111.6
149.7
231.9
26.5
519.7
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 millions)
$
$
0.1 $
24.3 $
— $
— $
0.1 $
24.3
0.1 $
9.0 $
1.1 $
54.6 $
1.2 $
—
1.8
1.7
0.4
—
—
337.3
385.7
67.2
—
5.2
2.5
2.1
—
5.0
94.8
258.8
150.4
—
27.0
5.2
4.3
3.8
0.4
5.0
63.6
94.8
596.1
536.1
67.2
27.0
$
4.0 $
799.2 $
15.9 $
585.6 $
19.9 $
1,384.8
Available-for-sale debt securities
Corporate debt securities
Private label residential MBS
Residential MBS issued by GSEs
Trust preferred securities
Total AFS securities
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
The total number of AFS securities in an unrealized loss position at December 31, 2020 is 49, compared to 158 at December 31,
2019.
On January 1, 2020, the Company adopted the amendments within ASU 2016-13, which replaces the legacy US GAAP OTTI
model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS debt securities, requires
recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are
recognized once securities become impaired. For a detailed discussion of the impact of adoption of ASU 2016-13 and
information related to investment securities, including accounting policies and methodologies used to estimate the allowance
for credit losses on securities, see "Note 1. Summary of Significant Accounting Policies."
Residential MBS issued by GSEs held by the Company are issued by U.S. government entities and agencies. These securities
are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long
history of no credit losses. As the Company does not intend to sell these securities and it is more likely than not that the
Company will not be required to sell the securities prior to their anticipated recovery, no credit losses have been recognized on
these securities during the year ended December 31, 2020.
Qualitative factors used in the Company's credit loss assessment of its securities that are not guaranteed by the U.S. government
included consideration of any adverse conditions related to a specific security, industry, or geographic region of its securities,
any credit ratings below investment grade, the payment structure of the security and the likelihood of the issuer to be able to
make payments that increase in the future, and failure of the issuer to make any scheduled principal or interest payments. For
the Company's corporate debt, municipal, and tax-exempt securities, the Company also considered various metrics of the issuer
including days of cash on hand, the ratio of long-term debt to total assets, the net change in cash between reporting periods, and
consideration of any breach in covenant requirements. For the Company's private label residential MBS, the Company also
considered metrics such as securitization risk weight factor, current credit support, whether there were any mortgage principal
losses resulting from defaults in payments on the underlying mortgage collateral, and the credit default rate over the last twelve
months.
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As of December 31, 2020, no credit losses on the Company's corporate debt securities have been recognized. The Company's
corporate debt securities continue to be highly rated, issuers continue to make timely principal and interest payments, and the
unrealized losses on these security portfolios primarily relate to changes in interest rates and other market conditions that are
not considered to be credit-related issues. Further, the Company does not intend to sell these securities and it is more likely than
not that the Company will not be required to sell these securities prior to their anticipated recovery.
The Company's private label residential MBS are non-agency collateralized mortgage obligations and primarily carry
investment grade credit ratings as of December 31, 2020. These securities are secured by pools of residential mortgage loans.
Credit losses have not been recognized on these securities as of December 31, 2020 as principal and interest payments on these
securities continue to be made on a timely basis, credit support for these securities is considered adequate, and as the Company
does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities
prior to their anticipated recovery.
The Company's trust preferred securities are investment grade and the issuers continue to make timely principal and interest
payments.
Based on the qualitative factors discussed above, no allowance for credit losses for the Company's AFS debt securities has been
recognized as of December 31, 2020. Prior to adoption of ASC 326, no impairment charges on the Company's AFS securities
were recognized during the years ended December 31, 2019 and 2018.
The credit loss model under ASC 326-20, applicable to HTM debt securities, requires recognition of lifetime expected credit
losses through an allowance account at the time the security is purchased. The following tables present a rollforward by major
security type of the allowance for credit losses for the Company's HTM debt securities:
Balance,
January 1, 2020
Provision for Credit
Losses
Writeoffs
(in millions)
Year Ended December 31, 2020
Recoveries
Balance,
December 31, 2020
Held-to-maturity debt securities
Tax-exempt
$
2.7 $
4.1 $
— $
— $
6.8
Accrued interest receivable on HTM securities totaled $2.0 million at December 31, 2020 and is excluded from the estimate of
credit losses.
107
—
—
—
—
—
—
—
Table of Contents
The following tables summarize the carrying amount of the Company’s investment ratings position as of December 31, 2020
and 2019, which are updated quarterly and used to monitor the credit quality of the Company's securities:
AAA
Split-rated
AAA/AA+
AA+ to
AA-
A+ to A-
BBB+ to
BBB-
BB+ and
below
Unrated
Totals
December 31, 2020
(in millions)
— $
— $
— $
— $
— $
— $
568.8 $
568.8
— $
— $
— $
— $
— $
6.9 $
— $
—
139.6
84.6
—
—
—
1,486.6
57.3
—
—
19.2
12.3
90.1
—
454.7
—
7.3
—
28.1
—
0.1
—
599.3
—
—
—
194.5
2.6
0.3
—
—
26.5
—
—
28.4
—
0.9
—
—
—
—
—
—
7.6
—
—
31.8
—
6.9
146.9
84.6
270.2
22.5
1,476.9
1,486.6
1,187.4
26.5
$
$
Held-to-maturity
Tax-exempt
Available-for-sale debt securities
CDO
CLO
Commercial MBS issued by
GSEs
Corporate debt securities
Municipal (taxable) securities
Private label residential MBS
1,385.5
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
—
44.3
—
Total AFS securities (1)
$
1,429.8 $
1,628.5 $
715.9 $
634.8 $
223.9 $
36.2 $
39.4 $
4,708.5
Equity securities
CRA investments
Preferred stock
Total equity securities (1)
$
$
— $
27.8 $
— $
— $
— $
— $
25.6 $
—
—
—
—
73.2
39.0
1.7
— $
27.8 $
— $
— $
73.2 $
39.0 $
27.3 $
53.4
113.9
167.3
(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, 2019
(in millions)
— $
— $
— $
— $
— $
— $
485.1 $
485.1
— $
— $
— $
— $
— $
10.1 $
— $
10.1
94.3
—
—
—
1,412.1
2.8
—
10.0
1.0
—
—
—
30.7
—
327.6
—
—
—
—
66.5
—
0.1
—
171.9
—
—
—
—
33.4
—
0.3
—
—
27.0
—
—
—
—
—
1.2
—
—
—
—
—
—
—
7.8
—
—
—
—
—
—
94.3
99.9
7.8
1,129.2
1,412.1
554.9
27.0
10.0
1.0
Held-to-maturity
Tax-exempt
Available-for-sale debt securities
CDO
Commercial MBS issued by
GSEs
Corporate debt securities
Municipal (taxable) securities
$
$
Private label residential MBS
1,096.9
Residential MBS issued by GSEs
Tax-exempt
Trust preferred securities
U.S. government sponsored
agency securities
U.S. treasury securities
—
52.6
—
—
—
Total AFS securities (1)
$
1,149.5 $
1,520.2 $
358.3 $
238.5 $
60.7 $
11.3 $
7.8 $
3,346.3
Equity securities
CRA investments
Preferred stock
Total equity securities (1)
$
$
— $
25.4 $
— $
— $
— $
— $
27.1 $
—
—
—
—
82.8
2.1
1.3
52.5
86.2
— $
25.4 $
— $
— $
82.8 $
2.1 $
28.4 $
138.7
(1)
Where ratings differ, the Company uses an average of the available ratings by major credit agencies.
A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement. As of
December 31, 2020, there were no investment securities that were past due. In addition, the Company does not have a
108
Table of Contents
significant amount of investment securities on nonaccrual status or securities that are considered to be collateral-dependent as of
December 31, 2020.
The amortized cost and fair value of the Company's debt securities as of December 31, 2020, 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
After one year through five years
After five years through ten years
After ten years
Mortgage-backed securities
Total AFS securities
December 31, 2020
Amortized Cost
Estimated Fair
Value
(in millions)
$
$
$
$
7.3 $
17.1
544.4
568.8 $
10.0 $
425.1
1,146.3
3,005.0
4,586.4 $
7.3
17.5
587.0
611.8
10.3
425.1
1,225.0
3,048.1
4,708.5
The following table presents gross gains and losses on sales of investment securities:
Available-for-sale securities
Gross gains
Gross losses
Net gains on AFS securities
Equity securities
Gross gains
Gross losses
Net losses on equity securities
Year Ended December 31,
2020
2019
(in millions)
2018
$
$
$
$
0.4 $
(0.2)
0.2 $
— $
—
— $
3.1 $
—
3.1 $
— $
—
— $
8.1
(7.7)
0.4
—
(8.0)
(8.0)
During the year ended December 31, 2020, the Company did not have significant investment security sale activity.
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 $3.1 million was recognized on the sale of
these securities. In addition, 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 AFS 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.
109
Table of Contents
3. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
On January 1, 2020, the Company adopted the amendments within ASU 2016-13 using the modified retrospective method for
all financial assets measured at amortized cost and off-balance sheet credit exposures. Accordingly, the Company's financial
results for 2020 are presented in accordance with ASC 326 while prior period amounts have not been adjusted and continue to
be reported in accordance with legacy GAAP. For a detailed discussion of the impact of adoption of ASU 2016-13 and
information related to loans and credit quality, including accounting policies and methodologies used to estimate the allowance
for credit losses on loans, see "Note 1. Summary of Significant Accounting Policies."
The Company's primary portfolio segments have changed to align with the methodology applied in estimating the allowance for
credit losses under CECL. In addition, as the concept of impaired loans does not exist under CECL, disclosures that related
solely to impaired loans have been removed.
The composition of the Company's held for investment loan portfolio is as follows:
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total loans HFI
Allowance for credit losses
Total loans HFI, net of allowance
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, 2020
(in millions)
$
$
4,340.2
1,728.8
2,548.3
5,911.2
1,909.3
1,983.9
3,640.2
2,378.5
2,429.4
183.2
27,053.0
(278.9)
26,774.1
December 31, 2019
(in millions)
$
$
9,382.0
5,245.6
2,316.9
1,952.2
2,147.7
57.1
21,101.5
(167.8)
20,933.7
Loans that are held for investment are stated at the amount of unpaid principal, adjusted for net deferred fees and costs,
premiums and discounts on acquired and purchased loans, and an allowance for credit losses. Net deferred loan fees of $75.4
million and $47.7 million reduced the carrying value of loans as of December 31, 2020 and 2019, respectively. Net unamortized
purchase premiums on acquired and purchased loans of $26.0 million and $19.6 million increased the carrying value of loans as
of December 31, 2020 and 2019, respectively.
As of December 31, 2019, the Company also had $21.8 million of HFS loans.
110
Table of Contents
Nonaccrual and Past Due Loans
Loans are placed on nonaccrual status when management determines that the full repayment of principal and collection of
interest according to contractual terms is no longer likely, generally when the loan becomes 90 days or more past due.
The following tables present nonperforming loan balances by loan portfolio segment:
Nonaccrual with No
Allowance for
Credit Loss
Nonaccrual with an
Allowance for
Credit Loss
Total Nonaccrual
Loans Past Due 90
Days or More and
Still Accruing
December 31, 2020
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
$
— $
(in millions)
— $
— $
1.9
9.6
10.9
34.5
—
36.5
11.4
—
0.1
—
3.9
6.3
—
—
—
—
—
0.1
1.9
13.5
17.2
34.5
—
36.5
11.4
—
0.2
Total
$
104.9 $
10.3 $
115.2 $
—
—
—
—
—
—
—
—
—
—
—
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
Current
Non-accrual loans
Past Due/
Delinquent
Total
Non-accrual
Loans past due 90
days or more and still
accruing
$
19.1 $
(in millions)
5.4 $
24.5 $
4.4
7.3
—
2.2
—
1.2
—
0.1
11.9
—
—
—
4.4
—
4.5
19.2
—
2.2
—
5.6
—
$
34.2 $
21.8 $
56.0 $
—
—
—
—
—
—
—
—
—
The reduction in interest income associated with loans on nonaccrual status was approximately $5.0 million, $2.2 million, and
$2.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
111
Table of Contents
The following table presents an aging analysis of past due loans by loan portfolio segment:
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total 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, 2020
$
4,340.2 $
— $
— $
— $
— $
(in millions)
1,728.8
2,548.3
5,911.0
1,909.3
1,983.9
3,640.2
2,368.0
2,429.4
182.7
—
—
0.2
—
—
—
9.1
—
0.4
—
—
—
—
—
—
1.4
—
0.1
—
—
—
—
—
—
—
—
—
—
—
0.2
—
—
—
10.5
—
0.5
4,340.2
1,728.8
2,548.3
5,911.2
1,909.3
1,983.9
3,640.2
2,378.5
2,429.4
183.2
$
27,041.8 $
9.7 $
1.5 $
— $
11.2 $
27,053.0
Current
30-59 Days
Past Due
60-89 Days
Past Due
Over 90 days
Past Due
Total
Past Due
Total
December 31, 2019
$
9,376.3 $
2.5 $
0.7 $
2.5 $
5.7 $
9,382.0
(in millions)
2,316.2
5,007.6
221.4
1,177.0
775.2
2,134.4
57.1
0.6
4.7
—
—
—
7.6
—
—
—
—
—
—
1.7
—
0.1
11.9
—
—
—
4.0
—
0.7
16.6
—
—
—
13.3
—
2,316.9
5,024.2
221.4
1,177.0
775.2
2,147.7
57.1
$
21,065.2 $
15.4 $
2.4 $
18.5 $
36.3 $
21,101.5
112
Table of Contents
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their
debt such as current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. This
analysis is performed on a quarterly basis. The risk rating categories are described in "Note 1. Summary of Significant
Accounting Policies." The following tables present risk ratings as of December 31, 2020 by loan portfolio segment:
Term Loan Amortized Cost Basis by Origination Year
December 31, 2020
2020
2019
2018
2017
2016
Prior
(in millions)
Revolving
Loans
Amortized
Cost Basis
Total
Warehouse lending
Pass
Special mention
Classified
Total
Municipal & nonprofit
Pass
Special mention
Classified
Total
Tech & Innovation
Pass
Special mention
Classified
Total
Other commercial and industrial
Pass
Special mention
Classified
Total
CRE - owner occupied
Pass
Special mention
Classified
Total
Hotel Franchise Finance
Pass
Special mention
Classified
Total
Other CRE - non-owned occupied
Pass
Special mention
Classified
Total
Residential
Pass
Special mention
Classified
Total
$
135.2 $
— $
0.9 $
1.6 $
0.1 $
— $
4,202.4 $
4,340.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
135.2 $
— $
0.9 $
1.6 $
0.1 $
— $
4,202.4 $
4,340.2
219.3 $
156.6 $
81.6 $
231.2 $
129.1 $
905.6 $
3.5 $
1,726.9
—
—
—
—
—
—
—
1.9
—
—
—
—
—
—
—
1.9
$
219.3 $
156.6 $
81.6 $
233.1 $
129.1 $
905.6 $
3.5 $
1,728.8
$
609.7 $
207.4 $
76.9 $
2.0 $
0.9 $
— $
1,608.8 $
2,505.7
10.7
25.2
4.6
2.0
—
—
—
—
—
—
—
—
—
0.1
15.3
27.3
$
645.6 $
214.0 $
76.9 $
2.0 $
0.9 $
— $
1,608.9 $
2,548.3
$
2,069.5 $
819.8 $
447.7 $
250.7 $
99.7 $
114.6 $
1,935.7 $
5,737.7
2.2
0.9
52.1
8.4
32.1
3.2
22.1
1.6
1.7
9.7
0.2
0.8
34.3
4.2
144.7
28.8
$
2,072.6 $
880.3 $
483.0 $
274.4 $
111.1 $
115.6 $
1,974.2 $
5,911.2
$
252.2 $
307.1 $
302.1 $
402.4 $
148.4 $
323.5 $
39.5 $
1,775.2
$
$
0.9
1.4
12.4
7.5
9.3
4.8
24.3
8.5
4.4
6.2
10.5
19.5
22.4
2.0
84.2
49.9
254.5 $
327.0 $
316.2 $
435.2 $
159.0 $
353.5 $
63.9 $
1,909.3
161.6 $
792.0 $
464.1 $
139.9 $
— $
101.5 $
162.6 $
1,821.7
—
8.9
32.7
—
56.9
—
27.3
12.6
—
2.1
18.2
3.5
—
—
135.1
27.1
$
170.5 $
824.7 $
521.0 $
179.8 $
2.1 $
123.2 $
162.6 $
1,983.9
$
1,032.6 $
912.5 $
560.8 $
384.3 $
164.7 $
208.4 $
281.0 $
3,544.3
1.4
7.4
—
26.4
7.0
—
5.4
20.3
1.0
6.5
7.4
13.1
—
—
22.2
73.7
$
1,041.4 $
938.9 $
567.8 $
410.0 $
172.2 $
228.9 $
281.0 $
3,640.2
$
759.5 $
869.3 $
402.0 $
108.9 $
113.8 $
74.1 $
39.5 $
2,367.1
—
—
—
4.4
—
5.9
—
1.1
—
—
—
—
—
—
—
11.4
$
759.5 $
873.7 $
407.9 $
110.0 $
113.8 $
74.1 $
39.5 $
2,378.5
113
Table of Contents
Term Loan Amortized Cost Basis by Origination Year
December 31, 2020
2020
2019
2018
2017
2016
Prior
(in millions)
Construction and land development
Revolving
Loans
Amortized
Cost Basis
Total
Pass
Special mention
Classified
Total
Other
Pass
Special mention
Classified
Total
Total by Risk Category
Pass
Special mention
Classified
Total
$
677.8 $
704.2 $
429.6 $
15.4 $
1.2 $
15.0 $
537.4 $
2,380.6
$
$
8.5
—
0.4
—
38.0
1.5
—
—
—
—
—
—
0.4
—
47.3
1.5
686.3 $
704.6 $
469.1 $
15.4 $
1.2 $
15.0 $
537.8 $
2,429.4
21.1 $
15.6 $
14.5 $
5.8 $
1.8 $
75.8 $
45.7 $
180.3
—
—
—
0.1
0.1
0.2
1.7
—
—
0.1
0.5
0.2
—
—
2.3
0.6
$
21.1 $
15.7 $
14.8 $
7.5 $
1.9 $
76.5 $
45.7 $
183.2
$
5,938.5 $
4,784.5 $
2,780.2 $
1,542.2 $
659.7 $
1,818.5 $
8,856.1 $ 26,379.7
23.7
43.8
102.2
48.8
143.4
15.6
80.8
46.0
7.1
24.6
36.8
37.1
57.1
6.3
451.1
222.2
$
6,006.0 $
4,935.5 $
2,939.2 $
1,669.0 $
691.4 $
1,892.4 $
8,919.5 $ 27,053.0
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 millions)
$
9,265.8 $
65.9 $
49.9 $
0.4 $
— $
9,382.0
2,265.5
4,913.0
221.4
1,157.3
773.8
2,141.3
57.1
9.6
64.2
—
17.6
1.4
0.4
—
41.8
47.0
—
2.1
—
6.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,316.9
5,024.2
221.4
1,177.0
775.2
2,147.7
57.1
$
20,795.2 $
159.1 $
146.8 $
0.4 $
— $
21,101.5
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
December 31, 2019
(in millions)
Current (up to 29 days past due)
$
20,785.1 $
159.0 $
120.9 $
0.2 $
— $
21,065.2
Past due 30 - 59 days
Past due 60 - 89 days
Past due 90 days or more
Total
Troubled Debt Restructurings
8.2
1.5
0.4
0.1
—
—
7.1
0.9
17.9
—
—
0.2
—
—
—
15.4
2.4
18.5
$
20,795.2 $
159.1 $
146.8 $
0.4 $
— $
21,101.5
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.
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.
114
Table of Contents
As of December 31, 2020, the Company's TDR loans totaled $61.6 million. During the year ended December 31, 2020, the
Company had 17 new TDR loans with a recorded investment of $37.3 million. No principal amounts were forgiven and there
were no waived fees or other expenses resulting from these TDR loans. The Company has an allowance of $2.7 million
allocated to these loans as of December 31, 2020 and has committed to lend additional amounts totaling $0.6 million.
The following table presents TDR loans for the periods presented:
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Total
December 31, 2020
Number of Loans
Recorded
Investment
(dollars in millions)
4 $
9
4
2
3
22 $
20.4
22.9
2.6
5.5
10.2
61.6
During the year ended December 31, 2019, the Company had nine new TDR loans with a recorded investment of $42.0 million.
No principal amounts were forgiven and there were no waived fees or other expenses resulting from these TDR loans. As of
December 31, 2019, commitments outstanding on TDR loans totaled $0.2 million.
A TDR loan is deemed to have a payment default when it becomes past due 90 days under the modified terms, goes on
nonaccrual status, or is restructured again. Payment defaults, along with other qualitative indicators, are considered by
management in the determination of the allowance for credit losses. During the year ended December 31, 2020, there were three
loans, two CRE owner occupied and one CRE non-owner occupied, with a recorded investment of $5.8 million for which there
was a payment default within 12 months following the modification. There was no increase to the allowance for credit losses or
a writeoff that resulted from these TDR redefaults during the year ended December 31, 2020. During the year ended December
31, 2019, there were two TDR loans with a recorded investment of $0.4 million for which there was a payment default.
The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for
loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any
determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020
or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past
due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial
institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they
will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically
categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan
modifications. The types of loan modifications granted to borrowers include extensions of loan maturity dates, covenant
waivers, interest only payments for a specified period of time, and loan payment deferrals. As of December 31, 2020, the
Company has outstanding modifications meeting these conditions on loans with a net balance of $538.3 million as of December
31, 2020, of which, modifications involving loan payment deferrals total $190.0 million. Further, residential mortgage loans in
forbearance have a net balance of $77.1 million as of December 31, 2020.
The terms of certain other loans were modified during the year ended December 31, 2020 that did not meet the definition of a
TDR. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not
experiencing financial difficulties prior to the pandemic or a delay in a payment that was considered to be insignificant.
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Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans as of December 31, 2020:
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total
Real Estate
Collateral
December 31, 2020
Other Collateral
Total
(in millions)
$
— $
— $
—
—
—
42.6
27.1
73.7
—
1.5
—
—
27.3
23.6
—
—
—
—
—
0.4
—
—
27.3
23.6
42.6
27.1
73.7
—
1.5
0.4
$
144.9 $
51.3 $
196.2
The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans,
whether because of a general deterioration or some other reason during the period ended December 31, 2020.
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Allowance for Credit Losses
Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit
losses inherent within the Company's loans held for investment portfolio as of December 31, 2020.
The below tables reflect the activity in the allowance for credit losses for loans held for investment by loan portfolio segment:
Year Ended December 31, 2020
Balance,
January 1, 2020
(1)
Provision for
(Reversal of)
Credit Losses
Writeoffs
Recoveries
(in millions)
Balance,
December 31, 2020
(1)
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total
$
0.2 $
3.2 $
— $
— $
17.4
22.4
95.8
10.4
14.1
10.5
3.8
6.2
6.1
(1.5)
24.0
1.8
8.3
29.2
29.8
(3.1)
15.7
(0.9)
—
11.1
6.4
0.2
—
2.1
0.3
—
0.3
—
—
(3.5)
(0.1)
—
(1.7)
(0.4)
(0.1)
(0.1)
3.4
15.9
35.3
94.7
18.6
43.3
39.9
0.8
22.0
5.0
$
186.9 $
106.5 $
20.4 $
(5.9) $
278.9
(1)
Includes an estimate of future recoveries.
Accrued interest receivable on loans totaled $142.1 million at December 31, 2020 and is excluded from the estimate of credit
losses.
Year Ended December 31, 2019
December 31, 2018
Charge-offs
Recoveries
(in millions)
Provision for
(Reversal of) Credit
Losses
December 31, 2019
Construction and land
development
Commercial real estate
Residential real estate
Commercial and industrial
Consumer
Total
$
$
22.5 $
0.1 $
(0.1) $
1.4 $
34.8
11.3
83.1
1.0
0.1
0.6
8.1
0.1
(0.9)
(0.4)
(4.3)
—
11.7
2.6
3.0
(0.3)
152.7 $
9.0 $
(5.7) $
18.4 $
23.9
47.3
13.7
82.3
0.6
167.8
In addition to the allowance for credit losses on funded loan balances, the Company maintains a separate allowance for credit
losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other
liabilities on the consolidated balance sheets.
The below tables reflect the activity in the allowance for credit losses on unfunded loan commitments:
Balance, beginning of period
Beginning balance adjustment from adoption of CECL
Provision for credit losses
Balance, end of period
Year Ended December 31,
2020
2019
$
$
(in millions)
9.0 $
15.1
12.9
37.0 $
8.2
—
0.8
9.0
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The following tables disaggregate the Company's allowance for credit losses and loan balance by measurement methodology:
December 31, 2020
Collectively
Evaluated for
Credit Loss
Loans
Individually
Evaluated for
Credit Loss
Total
Collectively
Evaluated for
Credit Loss
Allowance
Individually
Evaluated for
Credit Loss
Total
$
4,340.2 $
— $
4,340.2 $
3.4 $
— $
(in millions)
1,726.9
2,521.1
5,883.1
1,857.9
1,927.0
3,553.6
2,367.1
2,427.9
182.6
1.9
27.2
28.1
51.4
56.9
86.6
11.4
1.5
0.6
1,728.8
2,548.3
5,911.2
1,909.3
1,983.9
3,640.2
2,378.5
2,429.4
183.2
15.9
31.4
90.3
18.6
40.4
39.9
0.8
22.0
5.0
—
3.9
4.4
—
2.9
—
—
—
—
3.4
15.9
35.3
94.7
18.6
43.3
39.9
0.8
22.0
5.0
$
26,787.4 $
265.6 $
27,053.0 $
267.7 $
11.2 $
278.9
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
CRE - owner occupied
Hotel Franchise Finance
Other CRE - non-owned occupied
Residential
Construction and land development
Other
Total
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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
Commercial
Real Estate-
Owner
Occupied
Commercial
Real Estate-
Non-Owner
Occupied
Commercial
and Industrial
Residential
Real Estate
(in millions)
Construction
and Land
Development
Consumer
Total Loans
$
— $
11.9 $
6.9 $
— $
2.2 $
— $
21.0
17.7
17.7
23.6
35.5
42.1
49.0
5.6
5.6
6.3
8.5
—
—
95.3
116.3
2,296.4
5,159.9
9,333.0
2,142.1
1,943.7
57.1
20,932.2
2.8
50.2
—
—
—
—
53.0
$
2,316.9 $
5,245.6 $
9,382.0 $
2,147.7 $
1,952.2 $
57.1 $
21,101.5
$
— $
12.0 $
9.8 $
— $
2.3 $
— $
24.1
18.7
18.7
24.7
36.7
43.8
53.6
5.7
5.7
6.4
8.7
0.1
0.1
99.4
123.5
2,297.1
5,177.5
9,312.1
2,113.9
1,963.1
57.4
20,921.1
3.6
60.2
—
0.1
—
—
63.9
$
2,319.4 $
5,274.4 $
9,365.7 $
2,119.7 $
1,971.8 $
57.5 $
21,108.5
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
$
— $
1.2 $
1.1 $
— $
0.5 $
— $
—
—
13.8
—
—
1.2
32.1
0.1
—
1.1
81.3
—
—
—
13.7
—
—
0.5
23.4
—
—
—
0.6
—
Total allowance for credit losses
$
13.8 $
33.4 $
82.4 $
13.7 $
23.9 $
0.6 $
2.8
—
2.8
164.9
0.1
167.8
Loan Purchases and Sales
The following tables present loan purchases by portfolio segment:
Warehouse lending
Municipal & nonprofit
Tech & Innovation
Other commercial and industrial
Other CRE - non-owned occupied
Residential
Other
Total
Year Ended
December 31, 2020
(in millions)
$
$
99.4
50.6
808.5
382.4
44.0
1,317.5
6.0
2,708.4
There were no loans purchased with more-than-insignificant deterioration in credit quality during the year ended December 31,
2020.
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Table of Contents
Commercial and industrial
Commercial real estate - non-owner occupied
Construction and land development
Residential real estate
Total
The following table presents loan sales:
Carrying value
Gain on sale
Year Ended December 31,
2019
2018
(in millions)
1,014.9 $
49.2
34.5
1,434.8
2,533.4 $
690.1
—
27.5
883.2
1,600.8
$
$
Year Ended December 31,
2020
2019
(in millions)
2018
$
77.3 $
1.7
99.0 $
0.7
66.5
2.6
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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
December 31,
2020
2019
$
(in millions)
92.0 $
33.0
68.2
29.7
17.4
240.3
(106.2)
$
134.1 $
91.6
32.9
53.6
28.5
10.4
217.0
(91.2)
125.8
The Company has operating leases under which it leases its branch offices, corporate headquarters, other offices, and data
facility centers. As of December 31, 2020, the Company's operating lease ROU asset and operating lease liability totaled $72.5
million and $79.9 million, respectively. A weighted average discount rate of 2.80% was used in the measurement of the ROU
asset and lease liability as of December 31, 2020.
The Company's leases have remaining lease terms of one to 10 years, with a weighted average lease term of 7.7 years at
December 31, 2020. 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 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, 2020.
The following is a schedule of the Company's operating lease liabilities by contractual maturity as of December 31, 2020:
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total present value of lease liabilities
(in millions)
12.5
11.3
12.0
11.1
10.6
32.3
89.8
9.9
79.9
$
$
$
The Company also has additional operating leases for increased space at its corporate headquarters and another office location
that have not yet commenced as of December 31, 2020. The aggregate future commitment related to the additional leases total
$13.3 million. These operating leases will commence within the next 12 months and will have lease terms between six and ten
years.
Total operating lease costs of $14.0 million and other lease costs of $3.9 million, which include common area maintenance,
parking, and taxes during the year ended December 31, 2020, were included as part of occupancy expense. Short-term lease
costs were not material for the year ended December 31, 2020. For the years ended December 31, 2019 and 2018, rent expense
associated with the Company's operating leases totaled $12.9 million and $11.0 million, respectively.
The below table shows the supplemental cash flow information related to the Company's operating leases for the year ended
December 31, 2020:
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
(in millions)
$
13.0
11.8
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6. 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 as of December 31, 2020.
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. While the Company’s stock price has experienced
volatility and periodic declines in value during the pandemic, management did not consider this decline to be a triggering event
that would indicate that an interim goodwill impairment test was necessary during 2020. Based on the Company's annual
goodwill and intangibles impairment tests as of October 1 during the years ended December 31, 2020, 2019, and 2018, it was
determined that goodwill and intangible assets are not impaired.
The following is a summary of the Company's acquired intangible assets:
Subject to amortization
Core deposit intangibles
Customer relationship intangibles
December 31, 2020
December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in millions)
$
$
14.6 $
2.5
17.1 $
8.8 $
0.1
8.9 $
5.8 $
14.6 $
2.4
—
8.2 $
14.6 $
7.3 $
—
7.3 $
7.3
—
7.3
December 31, 2020
December 31, 2019
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
Gross
Carrying
Amount
Impairment
Net Carrying
Amount
(in millions)
Not subject to amortization
Trade name
$
0.4 $
— $
0.4 $
0.4 $
— $
0.4
As of December 31, 2020, the Company's core deposit and customer relationship intangible assets had a weighted average
estimated useful life of 4.6 years. The Company's 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. The Company's customer
relationship intangible assets relates to the purchase of a residential mortgage conduit platform during 2020 that is being
amortized on a straight-line basis over a period of five years. Amortization expense recognized on amortizable intangibles
totaled $1.6 million for each of the years ended December 31, 2020, 2019, and 2018.
Below is a summary of future estimated aggregate amortization expense:
2021
2022
2023
2024
2025
Total
December 31, 2020
(in millions)
$
$
1.9
1.9
1.8
1.7
0.9
8.2
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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,
2020
2019
(in millions)
$
13,463.3 $
4,396.4
12,413.4
602.0
1,055.4
8,537.9
2,760.9
9,120.8
1,426.1
950.8
$
31,930.5 $
22,796.5
The summary of the contractual maturities for all time deposits as of December 31, 2020 is as follows:
2021
2022
2023
2024
2025
Total
December 31,
(in millions)
$
1,515.8
131.8
6.5
2.4
0.9
$
1,657.4
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, 2020 and 2019, the Company had $496.4 million and $407.7
million, respectively, of reciprocal CDARS deposits and $1.3 billion and $661.8 million, respectively, of ICS deposits. At
December 31, 2020 and 2019, the Company had $554.8 million and $1.1 billion, 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 $5.9 billion and $3.1 billion at December 31, 2020 and 2019, respectively. The Company incurred $17.0 million and
$30.5 million in deposit related costs on these deposits during the years ended December 31, 2020 and 2019, respectively.
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8. OTHER BORROWINGS
The following table summarizes the Company’s borrowings as of December 31, 2020 and 2019:
Short-Term:
Federal funds purchased
FHLB advances
Total short-term borrowings
December 31,
2020
2019
(in millions)
$
$
— $
5.0
5.0 $
—
—
—
The Company maintains federal fund lines of credit totaling $2.5 billion as of December 31, 2020, which have rates comparable
to the federal funds effective rate plus 0.10% to 0.20%. As of December 31, 2020, and 2019 there were no outstanding balances
on the Company's federal fund lines of credit.
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.
The Company has a PPP lending facility with the FRB that allows the Company to pledge loans originated under the PPP in
return for dollar for dollar funding from the FRB, which would provide up to $1.5 billion in additional credit. The amount of
available credit under the PPP lending facility will decline each period as these loans are paid down. At December 31, 2020, the
Company had no amounts outstanding under its line of credit or its PPP lending facility with the FRB and had $5.0 million in
borrowings under its lines of credit with the FHLB. As of December 31, 2020 and 2019, the Company had additional available
credit with the FHLB of approximately $4.0 billion and $4.5 billion, respectively, and with the FRB of approximately $2.7
billion and $1.1 billion, respectively.
Other short-term borrowing sources available to the Company include customer repurchase agreements, which totaled $16.0
million and $16.7 million as of December 31, 2020 and 2019, respectively. The weighted average rate on customer repurchase
agreements was 0.15% as of December 31, 2020 and 2019, respectively.
9. QUALIFYING DEBT
Subordinated Debt
The Company's subordinated debt consists of three separate issuances. The Parent issued $175.0 million of subordinated
debentures in June 2016, 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.
In June 2015, WAB issued $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 is currently redeemable by WAB, in whole or in part, for a price equal to the
principal amount plus accrued and unpaid interest. The subordinated debt had a fixed interest rate of 5.00% through June 30,
2020, which then converted to a variable rate of 3.20% plus three-month LIBOR through maturity. On October 15, 2020, WAB
redeemed $75 million of this subordinated debt issuance.
In May 2020, WAB issued $225.0 million of subordinated debt, which was recorded net of debt issuance costs of $3.1 million,
and matures June 1, 2030. The subordinated debt is redeemable by WAB, in whole or in part, on or after June 1, 2025 and on
every interest payment date thereafter, at a redemption price equal to the principal amount plus accrued and unpaid interest. The
subordinated debt has a fixed interest rate of 5.25% through June 1, 2025 and then converts to a floating rate per annum equal
to the three-month SOFR plus 512 basis points for each quarterly interest period during the floating rate period.
To hedge the interest rate risk on the Company's 2015 and 2016 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 $469.8 million
and $319.2 million at December 31, 2020 and 2019, respectively.
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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
2020
2019
December 31,
2033
2034
2035
2036
2037
2037
2035
2036
$
$
$
$
$
(in millions)
15.5 $
10.3
7.2
20.6
5.2
7.7
66.5
(0.6)
65.9 $
12.4 $
5.1
17.5
(4.5)
13.0 $
78.9 $
15.5
10.3
7.2
20.6
5.2
7.7
66.5
(4.8)
61.7
12.4
5.1
17.5
(4.8)
12.7
74.4
(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, 2020 was 2.58%, which is three-month
LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 4.25% at December 31, 2019.
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.
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10. STOCKHOLDERS' EQUITY
Stock-Based Compensation
Restricted Stock Awards
The Incentive Plan, as amended, gives the BOD the authority to grant up to $11.8 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, 2020 were $3.4 million.
Restricted stock awards granted to employees generally vest over a 3-year period. Stock grants made to non-employee WAL
directors in 2020 were fully vested on July 1, 2020. 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 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, 2020, the
Company recognized $20.3 million in stock-based compensation expense related to these stock grants, compared to $17.4
million in 2019, and $16.6 million in 2018.
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, 2020 and 2019, however expense is still being recognized for a grant made in 2017 with a four-year vesting period. For the
year ended December 31, 2020, the Company recognized $1.2 million in stock-based compensation expense related to these
performance-based restricted stock grants, compared to $1.9 million in 2019, and $2.5 million in 2018.
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,
2020
2019
Shares
Weighted
Average Grant
Date Fair Value
Shares
Weighted
Average Grant
Date Fair Value
(in millions, except per share amounts)
1.0 $
0.4
(0.4)
0.0
1.0 $
49.98
51.53
51.86
49.79
50.12
1.0 $
0.5
(0.4)
(0.1)
1.0 $
47.53
46.04
39.60
50.80
49.98
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, 2020, 2019, and 2018 was $22.7 million, $23.7 million, and $24.7 million,
respectively. The total fair value of restricted stock that vested during the years ended December 31, 2020, 2019, and 2018 was
$19.6 million, $21.3 million, and $27.4 million, respectively.
As of December 31, 2020, there was $21.5 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 1.7 years.
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Performance Stock Units
The Company grants performance stock units to members of its executive management 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, 2020, the Company recognized $7.1 million in stock-
based compensation expense related to these performance stock units, compared to $6.9 million and $6.4 million in stock-based
compensation expense for such units in 2019 and 2018, respectively.
The three-year performance period for the 2018 grant ended on December 31, 2020, 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, 152,418 shares will become fully vested and distributed to executive management in the first quarter of
2021.
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, 136,334 shares became fully vested and was distributed to executive management in the first quarter of
2020.
Common Stock Repurchase
The Company's common stock repurchase program was renewed through December 2020, authorizing the Company to
repurchase up to $250.0 million of its outstanding common stock. Effective April 17, 2020, the Company temporarily
suspended its stock repurchase program. Prior to this decision and pursuant to the repurchase plan, the Company repurchased
2,066,479 shares of its common stock at a weighted average price of $34.65 for a total payment of $71.6 million. During the
year ended December 31, 2019, the Company repurchased 2,822,402 shares of its common stock at a weighted average price of
$42.53 for a total payment of $120.2 million.
Cash Dividend
During the year ended December 31, 2020, the Company declared and paid a quarterly cash dividend of $0.25 per share, for a
total dividend payment to shareholders of $101.3 million. During the year ended December 31, 2019, the Company declared
and paid two quarterly cash dividend of $0.25 per share, for a total dividend payment to shareholders of $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, 2020, the
Company purchased treasury shares of 165,489 at a weighted average price of $50.80 per share, compared to 210,657 shares at
a weighted average price per share of $45.80 in 2019, and 223,125 shares at a weighted average price per share of $57.88 in
2018.
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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 millions)
Impairment loss
on securities
Total
Balance, December 31, 2017
Balance, January 1, 2018 (1)
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive
income (loss)
Balance, December 31, 2018
Other comprehensive (loss) income
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Net current-period other comprehensive
(loss) income
Balance, December 31, 2019
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
Net current-period other
comprehensive income (loss)
Balance, December 31, 2020
$
$
$
$
(10.0) $
(12.5)
(40.8)
5.8
(35.0)
(47.5) $
71.2
(2.3)
68.9
21.4 $
70.9
(0.2)
70.7
92.1 $
0.4 $
0.5
(0.1)
—
(0.1)
6.4 $
7.7
5.7
—
5.7
0.1 $
0.1
—
—
—
0.4 $
13.4 $
0.1 $
(0.4)
—
(0.4)
— $
(0.3)
—
(0.3)
(0.3) $
(9.8)
—
(9.8)
3.6 $
(3.1)
—
(3.1)
—
(0.1)
(0.1)
— $
—
—
—
0.5 $
— $
(3.1)
(4.2)
(35.2)
5.8
(29.4)
(33.6)
61.0
(2.4)
58.6
25.0
67.5
(0.2)
67.3
92.3
(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
2020
Year Ended December 31,
2019
(in millions)
2018
Gain (loss) on sales of investment securities, net
Income tax (expense) benefit
Net of tax
$
$
0.2 $
—
0.2 $
3.1 $
(0.7)
2.4 $
(7.6)
1.8
(5.8)
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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, 2020, 2019, and 2018, 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) from
either a fixed rate to a floating rate, or from a floating rate to a fixed rate.
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.
During the year ended December 31, 2020, the Company entered into interest rate swap contracts, designated as fair value
hedges using the last-of-layer method to manage the exposure to changes in fair value associated with fixed rate loans, resulting
from changes in the designated benchmark interest rate (Federal Funds rate). These last-of-layer hedges provide the Company
the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby
the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. Under these interest rate
swap contracts, the Company receives a floating rate and pays a fixed rate on the outstanding notional amount.
The Company has also entered into receive fixed/pay variable interest rate swaps, designated as fair value hedges on its fixed
rate 2015 and 2016 subordinated debt offerings. As a result, the Company was paying a floating rate of three-month LIBOR
plus 3.16% and was receiving semi-annual fixed payments of 5.00% to match the payments on the $150.0 million subordinated
debt. In July 2020, the interest payment on this subordinated debt issuance converted from a fixed rate to a floating rate, at
which time, the Company unwound this swap. 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 of 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 which are not
designated as accounting hedges. Foreign exchange derivative contracts include spot, forward, forward window, and swap
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 that 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.
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As of December 31, 2020 and 2019, the following amounts are reflected on the Consolidated Balance Sheets related to
cumulative basis adjustments for fair value hedges:
December 31, 2020
December 31, 2019
Carrying Value of
Hedged Assets/
(Liabilities)
Cumulative Fair
Value Hedging
Adjustment (1)
Carrying Value of
Hedged Assets/
(Liabilities)
Cumulative Fair
Value Hedging
Adjustment (1)
Loans - HFI, net of deferred loan fees and costs (2)
$
1,587.1 $
Qualifying debt
(247.6)
(in millions)
85.5 $
(2.7)
578.1 $
(319.2)
53.3
0.4
(1)
(2)
Included in the carrying value of the hedged assets/(liabilities)
The Company designated $1.0 billion as the hedged amount (from a closed portfolio of prepayable fixed rate loans with a carrying value of
$1.9 billion as of December 31, 2020) in this last-of-layer hedging relationship, which commenced in the fourth quarter of 2020.The cumulative
basis adjustment included in the carrying value of these hedged items totaled $0.6 million as of December 31, 2020.
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, as shown in the table below.
2020
Year Ended December 31,
2019
2018
Income Statement
Classification
Gain/(Loss) on
Swaps
Gain/(Loss) on
Hedged Item
Gain/(Loss) on
Swaps
Gain/(Loss) on
Hedged Item
Gain/(Loss) on
Swaps
Gain/(Loss) on
Hedged Item
Interest income
Interest expense
$
(32.2) $
3.1
32.2 $
(3.1)
(in millions)
(30.3) $
19.3
30.3 $
(19.3)
18.8 $
(9.7)
(18.8)
9.7
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, 2020, 2019, and 2018. The change in the notional amounts of these derivatives from December 31, 2018 to
December 31, 2020 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, 2020
December 31, 2019
December 31, 2018
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 millions)
Derivatives designated as hedging instruments:
Fair value hedges
Interest rate swaps (1)
$ 1,689.9 $
3.3 $
86.1 $
863.0 $
1.8 $
55.5 $
965.7 $
2.2 $
1,689.9
—
3.3
0.6
86.1
0.6
863.0
—
1.8
0.0
55.5
0.0
965.7
—
2.2
2.2
44.9
44.9
2.2
Total
Netting adjustments (2)
Net derivatives in the balance
sheet
$ 1,689.9 $
2.7 $
85.5 $
863.0 $
1.8 $
55.5 $
965.7 $
— $
42.7
Derivatives not designated as hedging instruments:
Foreign currency contracts
$
119.2 $
0.7 $
1.2 $
6.7 $
0.0 $
0.0 $
49.7 $
0.5 $
Interest rate swaps
3.5
0.2
0.2
2.9
0.1
0.1
2.4
0.0
Total
$
122.7 $
0.9 $
1.4 $
9.6 $
0.1 $
0.1 $
52.1 $
0.5 $
0.2
0.0
0.2
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(1)
(2)
Interest rate swap amounts include a notional amount of $1.0 billion related to the last-of-layer hedges.
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.
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected
replacement value of the contracts. Management 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,
which may require the Company to post collateral to counterparties when these contracts are in a net liability position and
conversely, for counterparties to post collateral to the Company when these contracts are in a net asset position. 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 posts or 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 pledged by the Company to counterparties exceeded its net derivative liabilities as of
December 31, 2020, December 31, 2019, and December 31, 2018, resulting in excess collateral postings of $31.7 million, $29.2
million, and $7.6 million, respectively.
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
13. EARNINGS PER SHARE
2020
December 31,
2019
(in millions)
2018
2.7 $
1.8 $
—
—
—
1.6
—
—
2.7 $
0.1 $
1.4
—
23.9
25.8
—
$
$
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,
2020
2019
2018
(in millions, except per share amounts)
100.2
0.3
100.5
102.7
0.4
103.1
$
506.6 $
499.2 $
5.06
5.04
4.86
4.84
104.7
0.7
105.4
435.8
4.16
4.14
The Company had no anti-dilutive stock options outstanding as of December 31, 2020 and 2019.
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14. INCOME TAXES
The provision for income taxes charged to operations consists of the following:
Current
Deferred
Total tax provision
Year Ended December 31,
2020
2019
(in millions)
2018
$
$
141.0 $
(25.1)
115.9 $
110.1 $
(5.1)
105.0 $
91.2
(16.7)
74.5
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
Federal NOL and other carryback items
Investment tax credits
Other, net
Total tax provision
Year Ended December 31,
2020
2019
(in millions)
2018
$
130.7 $
126.9 $
107.2
13.9
(21.7)
—
(13.9)
6.9
11.0
(19.6)
—
(15.0)
1.7
$
115.9 $
105.0 $
9.0
(18.3)
(15.4)
(6.7)
(1.3)
74.5
For the years ended December 31, 2020, 2019, and 2018 the Company's effective tax rate was 18.62%, 17.39%, and 14.61%,
respectively. The increase in the effective tax rate from 2019 to 2020 is due primarily to tax expense associated with the
surrender of bank owned life insurance, no valuation allowance release in 2020, and return to provision adjustments. 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.
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The cumulative tax effects of the primary temporary differences are shown in the following table:
Deferred tax assets:
Allowance for credit losses (1)
Lease liability
Stock-based compensation
Net operating loss carryovers
Insurance premiums
Passthrough income
Other
Total gross deferred tax assets
Deferred tax asset valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Right of use asset
Unrealized gain on AFS securities
Deferred loan costs
Insurance premiums
Unearned premiums
Leasing basis differences
Premises and equipment
Estimated loss reserve
50(d) income
Other
Total deferred tax liabilities
Deferred tax assets, net
December 31,
2020
2019
(in millions)
$
84.6 $
21.1
6.9
4.8
18.9
8.4
21.0
165.7
—
165.7
(19.2)
(31.2)
(12.8)
—
(16.8)
(11.1)
(7.6)
(17.5)
(9.8)
(8.4)
$
(134.4)
31.3 $
44.8
20.3
7.4
5.6
—
3.4
15.9
97.4
—
97.4
(18.8)
(7.3)
(10.8)
(4.5)
—
—
(8.4)
(14.9)
(6.8)
(7.9)
(79.4)
18.0
(1)
Upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, the Company recognized an increase
to the DTA of $8.7 million, resulting from an increase in the allowance for credit losses.
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 increased $13.3 million to $31.3 million from December 31, 2019. This overall increase in net deferred
tax assets was primarily the result of increases in the allowance for credit losses under the new CECL accounting guidance and
deferred insurance premiums deduction which were not fully offset by additional unrealized gains on AFS securities and
increases to unearned insurance premiums. Although realization is not assured, the Company believes that the realization of the
recognized net deferred tax asset of $31.3 million at December 31, 2020 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, 2020 and 2019, the Company has no deferred tax valuation allowance.
As of December 31, 2020, the Company’s gross federal NOL carryovers, all of which are subject to limitations under Section
382 of the IRC, totaled $42.9 million, for which a deferred tax asset of $4.8 million has been recorded, reflecting the expected
benefit of these federal NOL carryovers remaining after application of the Section 382 limitation. The Company does not
currently have any remaining state NOL carryovers. 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 2016.
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
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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,
2020
2019
$
(in millions)
1.7 $
—
2.2
—
(0.1)
(0.4)
$
3.4 $
0.5
—
1.2
—
—
—
1.7
During the year ended December 31, 2020, the Company added a new current year position, which resulted in a tax detriment
of $1.1 million, inclusive of interest and penalties. The Company also settled a prior period position and removed positions due
to lapse of statute which resulted in net tax benefits of $0.3 million, inclusive of interest and penalties.
As of December 31, 2020 and 2019, the total amount of unrecognized tax benefits, net of associated deferred tax benefits, that
would impact the effective tax rate, if recognized, is $2.1 million and $1.1 million, respectively. The Company does not
anticipate that the unrecognized tax benefits will be resolved within the next 12 months.
During the years ended December 31, 2020, 2019, and 2018, the Company recognized no additional amounts for interest and
penalties. As of December 31, 2020 and 2019, the Company has accrued total liabilities of less than $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, 2020, the Company’s exposure to loss as a result of its involvement in these entities was limited to $538.8
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,
2020, 2019, and 2018, the Company did not provide financial or other support to these entities that was not contractually
required.
Investments in LIHTC and renewable energy total $405.6 million and $409.4 million as of December 31, 2020 and 2019,
respectively. Unfunded LIHTC and renewable energy obligations are included as part of other liabilities on the Consolidated
Balance Sheet and total $151.7 million and $191.0 million as of December 31, 2020 and 2019, respectively. For the years ended
December 31, 2020, 2019, and 2018, $49.2 million, $41.5 million, and $35.9 million of amortization related to LIHTC
investments was recognized as a component of income tax expense, respectively.
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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 $1,077.2 at December 31, 2020
and $895.2 at December 31, 2019
Credit card commitments and financial guarantees
Letters of credit, including unsecured letters of credit of $9.9 at December 31, 2020 and $5.9 at December 31,
2019
Total
December 31,
2020
2019
(in millions)
$
$
9,425.2 $
291.5
186.9
9,903.6 $
8,348.4
302.9
175.8
8,827.1
The following table represents the contractual commitments for lines and letters of credit by maturity at December 31, 2020:
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
9,425.2 $
2,369.4 $
4,070.1 $
1,737.8 $
1,247.9
(in millions)
291.5
186.9
291.5
145.3
—
32.9
—
8.7
—
—
9,903.6 $
2,806.2 $
4,103.0 $
1,746.5 $
1,247.9
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 $37.0 million and $9.0 million as of December 31, 2020 and 2019, respectively. Changes
to this liability are adjusted through the provision for credit losses in the Consolidated Income Statement. In addition, upon
adoption of ASU 2016-13 on January 1, 2020, the Company recorded an increase of $15.1 million to this liability, which was
recorded as an adjustment to retained earnings, net of tax.
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Concentrations 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 three broad categories: industry, product, and collateral. The Company's loan portfolio includes
significant credit exposure to the CRE market. As of December 31, 2020 and 2019, CRE related loans accounted for
approximately 38% and 45% 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 28% and 31% of these CRE loans, excluding construction
and land loans, were owner-occupied as of December 31, 2020 and 2019, 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.
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, 2020, 2019, and 2018, unrealized gains and losses from fair value changes on junior
subordinated debt were as follows:
Unrealized (losses)/gains
Changes included in OCI, net of tax
Year Ended December 31,
2020
2019
(in millions)
2018
$
(4.2) $
(3.1)
(13.0) $
(9.8)
7.6
5.7
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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 primarily 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 level 2 AFS and equity 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.
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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:
December 31, 2020
Assets:
Available-for-sale debt securities
CDO
CLO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal (taxable) securities
Private label residential MBS
Residential MBS issued by GSEs
Tax-exempt
Trust preferred 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)
(in millions)
Fair Value
$
— $
6.9 $
— $
—
—
—
—
—
—
—
26.5
26.5 $
27.8 $
113.9
141.7 $
— $
— $
—
146.9
84.6
270.2
22.5
1,476.9
1,486.6
1,187.4
—
—
—
—
—
—
—
—
—
4,682.0 $
— $
25.6 $
—
25.6 $
4.2 $
— $
87.5
— $
—
— $
— $
65.9 $
—
$
$
$
$
$
6.9
146.9
84.6
270.2
22.5
1,476.9
1,486.6
1,187.4
26.5
4,708.5
53.4
113.9
167.3
4.2
65.9
87.5
(1)
(2)
Derivative assets and liabilities relate primarily to interest rate swaps on loans and subordinated debt, see "Note 12. Derivatives and Hedging
Activities." In addition, the carrying value of loans is increased by $85.5 million and the net carrying value of subordinated debt is increased by $2.7
million as of December 31, 2020 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.
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December 31, 2019
Assets:
Available-for-sale debt securities
CDO
Commercial MBS issued by GSEs
Corporate debt securities
Municipal (taxable) 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)
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 millions)
$
— $
10.1 $
— $
—
5.1
—
—
—
—
27.0
—
—
94.3
94.8
7.8
1,129.2
1,412.1
554.9
—
10.0
1.0
—
—
—
—
—
—
—
—
—
10.1
94.3
99.9
7.8
1,129.2
1,412.1
554.9
27.0
10.0
1.0
$
$
$
$
$
32.1 $
3,314.2 $
— $
3,346.3
52.5 $
86.2
138.7 $
— $
—
— $
—
— $
—
— $
21.8 $
1.9
— $
55.6
— $
—
— $
— $
—
61.7 $
—
52.5
86.2
138.7
21.8
1.9
61.7
55.6
(1)
(2)
Derivative assets and liabilities relate primarily to interest rate swaps on loans and subordinated debt, see "Note 12. Derivatives and Hedging
Activities." In addition, the carrying value of loans is increased by $53.3 million and the net carrying value of subordinated debt is decreased by $0.4
million as of December 31, 2019, 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, 2020, 2019, and 2018, 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,
2020
2019
(in millions)
2018
$
$
(61.7) $
(4.2)
(65.9) $
(48.7) $
(13.0)
(61.7) $
(56.2)
7.5
(48.7)
(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
$(3.1) million, $(9.8) million, and $5.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.
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For Level 3 liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019, the significant
unobservable inputs used in the fair value measurements were as follows:
Junior subordinated debt
$
65.9 Discounted cash flow
Implied credit rating of the Company
2.87 %
December 31, 2020
Valuation Technique
Significant Unobservable Inputs
Input Value
(in millions)
December 31, 2019
Valuation Technique
Significant Unobservable Inputs
Input Value
(in millions)
Junior subordinated debt
$
61.7 Discounted cash flow
Implied credit rating of the Company
5.09 %
The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debt as of
December 31, 2020 and 2019 consist of the implied credit risk for the Company. As of December 31, 2020, the implied credit
risk spread was calculated as the difference between the average of the 15-year 'BB' and 'BBB' rated financial indexes over the
corresponding swap index. As of December 31, 2019, the implied credit risk spread was calculated as the difference between
the 15-year 'BB' rated financial index over the corresponding swap index.
As of December 31, 2020, the Company estimates the discount rate at 2.87%, which represents an implied credit spread of
2.64% plus three-month LIBOR (0.24%). As of December 31, 2019, the Company estimated the discount rate at 5.09%, which
was a 3.18% credit spread plus three-month LIBOR (1.91%).
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 credit
deterioration). The following table presents such assets carried on the Consolidated Balance Sheet by caption and by level
within the ASC 825 hierarchy:
As of December 31, 2020
Loans
Other assets acquired through foreclosure
As of December 31, 2019
Loans
Other assets acquired through foreclosure
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
$
$
187.3 $
1.4
110.3 $
13.9
(in millions)
— $
—
— $
—
— $
—
— $
—
187.3
1.4
110.3
13.9
For Level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019, the significant
unobservable inputs used in the fair value measurements were as follows:
December 31, 2020
(in millions)
Valuation Technique(s)
Significant
Unobservable Inputs
Range
Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
Loans
$
187.3
Discounted cash flow
method
Discount rate
Scheduled cash
collections
Proceeds from non-real
estate collateral
Contractual loan rate
2.0% to 7.0%
Probability of default
0% to 20.0%
Loss given default
0% to 70.0%
Other assets acquired through
foreclosure
1.4 Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
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Table of Contents
December 31, 2019
(in millions)
Valuation Technique(s)
Significant
Unobservable Inputs
Range
Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
Loans
$
110.3
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
13.9 Collateral method
Third party appraisal
Costs to sell
4.0% to 10.0%
Loans: Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The
specific reserves for these 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 these loans, which considers internally-developed,
unobservable inputs such as discount rates, default rates, and loss severity.
Total Level 3 collateral dependent loans had an estimated fair value of $187.3 million and $110.3 million at December 31, 2020
and 2019, respectively, net of a specific valuation allowance of $8.9 million and $2.8 million at December 31, 2020 and 2019,
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 twelve 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 $1.4 million and $13.9 million of such assets at December 31, 2020 and 2019, respectively.
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company’s financial instruments is as follows:
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
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
Carrying Amount
Level 1
December 31, 2020
Fair Value
Level 2
(in millions)
Level 3
Total
$
568.8 $
— $
611.8 $
— $
4,708.5
167.3
4.2
26,774.1
166.1
26.5
141.7
—
—
—
4,682.0
25.6
4.2
—
166.1
—
—
—
27,231.0
—
611.8
4,708.5
167.3
4.2
27,231.0
166.1
$
31,930.5 $
— $
31,935.9 $
— $
31,935.9
16.0
5.0
548.7
87.5
11.0
—
—
—
—
—
16.0
5.0
488.1
87.5
11.0
—
—
79.3
—
—
16.0
5.0
567.4
87.5
11.0
Carrying Amount
Level 1
December 31, 2019
Fair Value
Level 2
(in millions)
Level 3
Total
$
485.1 $
— $
516.3 $
— $
3,346.3
138.7
1.9
20,955.5
108.7
32.2
138.7
—
—
—
3,314.1
—
1.9
—
108.7
—
—
—
21,256.5
—
516.3
3,346.3
138.7
1.9
21,256.5
108.7
$
22,796.5 $
— $
22,813.3 $
— $
22,813.3
16.7
393.6
55.6
24.7
—
—
—
—
16.7
332.6
55.6
24.7
—
74.2
—
—
16.7
406.8
55.6
24.7
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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
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, 2020 and 2019 approximates zero as there
have been no significant changes in borrower creditworthiness. Loan commitments on which the committed interest rates are
less than the current market rate are insignificant at December 31, 2020 and 2019.
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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.
In March 2020, the federal bank regulatory authorities issued an interim final rule that delays the estimated impact on
regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement
CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to
regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out
the aggregate amount of capital benefit provided during the initial two-year delay. The Company has elected the five-year
CECL transition option in connection with its adoption of CECL on January 1, 2020. As a result, capital ratios and amounts as
of December 31, 2020 exclude the impact of the increased allowance for credit losses related to the adoption of ASC 326.
As of December 31, 2020 and 2019, 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 millions)
December 31, 2020
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
December 31, 2019
WAL
WAB
Well-capitalized ratios
Minimum capital ratios
$
3,872.0 $
3,158.2 $ 31,015.4 $ 34,349.3
12.5 %
10.2 %
9.2 %
9.9 %
3,619.4
3,078.2
31,140.6
34,367.0
11.6
10.0
8.0
9.9
8.0
6.0
9.0
5.0
4.0
9.9
6.5
4.5
$
3,257.9 $
2,775.4 $ 25,390.1 $ 26,110.3
12.8 %
10.9 %
10.6 %
10.6 %
3,030.3
2,703.5
25,452.3
26,134.4
11.9
10.0
8.0
10.6
8.0
6.0
10.3
5.0
4.0
10.6
6.5
4.5
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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 $19,500 for those under 50 years of age and up to a maximum of $26,000 for those over 50
years of age in 2020) 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
$7.1 million, $6.2 million, and $5.6 million for the years ended December 31, 2020, 2019, and 2018, 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 $0.2 million for each
of the years ended December 31, 2020 and $0.1 million for the years ended December 31, 2019 and 2018.
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,
2020
2019
(in millions)
$
11.7
$
0.6
0.6
1.1
(0.4)
13.6
(13.6)
—
$
$
$
$
10.0
0.6
0.6
0.8
(0.3)
11.7
(11.7)
—
5.25 %
3.00 %
5.25 %
3.00 %
The components of net periodic benefit cost recognized for the year ended December 31, 2020 and 2019 and the amounts in
accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost during 2021 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,
2021
2020
(in millions)
2019
$
$
$
0.5 $
0.6 $
0.6
0.0
0.0
0.6
0.0
(0.1)
1.1 $
1.1 $
0.0 $
(0.1) $
0.6
0.6
0.1
(0.2)
1.1
(0.1)
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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,
2020
2019
(in millions)
3.8 $
—
—
(0.5)
3.3 $
4.6
—
0.3
(1.1)
3.8
$
$
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, 2020 or 2019. The interest income associated with these loans was approximately
$0.2 million, $0.2 million and $0.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Loan commitments outstanding with related parties totaled approximately $10.3 million and $10.6 million at December 31,
2020 and 2019, respectively.
The Company also accepts deposits from related parties, which totaled $156.9 million and $100.1 million at December 31, 2020
and 2019, respectively, with related interest expense totaling approximately $0.2 million, $0.3 million and $0.2 million during
the year ended December 31, 2020, 2019, and 2018, respectively.
Donations, sponsorships, and other payments to related parties totaled less than $1.0 million during the years ended December
31, 2020, 2019 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 of
$0.9 million and recognized a loss of $0.2 million on the sale.
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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
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,
2020
2019
(in millions)
$
55.5 $
5.1
49.8
3,493.5
49.9
18.0
75.9
12.8
47.1
3,063.4
52.3
22.5
$
$
$
3,671.8 $
3,274.0
251.5 $
6.8
258.3
3,413.5
3,671.8 $
242.0
15.3
257.3
3,016.7
3,274.0
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,
2020
2019
(in millions)
2018
$
160.0 $
134.0 $
3.1
4.7
167.8
10.6
19.7
30.3
137.5
4.5
142.0
364.6
2.8
5.1
141.9
14.6
19.5
34.1
107.8
5.7
113.5
385.7
$
506.6 $
499.2 $
152.1
2.9
0.8
155.8
13.9
19.0
32.9
122.9
10.4
133.3
302.5
435.8
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Table of Contents
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
Other investing activities, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Common stock repurchases
Cash dividends paid on common stock
Other financing activities, net
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,
2020
2019
(in millions)
2018
$
506.6 $
499.2 $
435.8
(364.6)
8.0
150.0
(6.9)
7.7
1.2
2.0
(71.6)
(101.3)
0.5
(172.4)
(20.4)
75.9
(385.7)
9.9
123.4
(10.8)
19.0
—
8.2
(120.2)
(51.3)
0.1
(171.4)
(39.8)
115.7
$
55.5 $
75.9 $
(302.5)
(5.9)
127.4
(44.4)
11.4
—
(33.0)
(35.7)
—
0.5
(35.2)
59.2
56.5
115.7
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Table of Contents
21. SEGMENTS
The Company has made changes to its reportable segments, which have been reflected in the Company's operating segment
results as and for the year ended December 31, 2020. The Company's reportable segments are aggregated with a focus on
products and services offered and consist of three reportable segments:
•
•
•
Commercial segment: provides commercial banking and treasury management products and services to small and
middle-market businesses, specialized banking services to sophisticated commercial institutions and investors within
niche industries, as well as financial services to the real estate industry.
Consumer Related segment: offers both commercial banking services to enterprises in consumer-related sectors and
consumer banking services, such as residential mortgage banking.
Corporate & Other segment: consists of the Company's investment portfolio, Corporate borrowings and other related
items, income and expense items not allocated to our 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. 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 segments 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. Residual funds transfer pricing mismatches are allocable to the Corporate & Other
segment and presented as part of net interest income.
The net income amount 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,
number of transactions processed for loans and deposits, and average loan and 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.
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Table of Contents
The following is a summary of operating segment balance sheet information for the periods indicated:
At December 31, 2020:
Assets:
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(in millions)
Cash, cash equivalents, and investment securities
$
8,176.5 $
12.0 $
45.6 $
8,118.9
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:
Total liabilities and stockholders' equity
Excess funds provided (used)
At December 31, 2019:
Assets:
27,053.0
20,245.8
(278.9)
(263.4)
26,774.1
19,982.4
1.4
298.5
1,210.5
1.4
296.1
257.0
6,798.2
(15.4)
6,782.8
—
2.4
96.6
9.0
(0.1)
8.9
—
—
856.9
36,461.0 $
20,548.9 $
6,927.4 $
8,984.7
31,930.5 $
21,448.0 $
9,936.8 $
553.7
563.3
33,047.5
3,413.5
—
170.4
21,618.4
1,992.2
—
3.3
9,940.1
579.1
545.7
553.7
389.6
1,489.0
842.2
$
$
$
36,461.0 $
23,610.6 $
10,519.2 $
2,331.2
—
3,061.7
3,591.8
(6,653.5)
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(in millions)
Cash, cash equivalents, and investment securities
$
4,471.2 $
15.4 $
10.1 $
4,445.7
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:
Total liabilities and stockholders' equity
Excess funds provided (used)
21,123.3
16,767.3
(167.8)
(134.2)
20,955.5
16,633.1
13.9
297.6
1,083.7
13.9
297.6
202.6
4,352.5
(33.6)
4,318.9
—
—
40.1
3.5
—
3.5
—
—
841.0
26,821.9 $
17,162.6 $
4,369.1 $
5,290.2
22,796.5 $
17,067.6 $
4,644.7 $
1,084.2
393.6
615.1
23,805.2
3,016.7
—
95.4
17,163.0
2,060.0
—
9.2
4,653.9
446.8
393.6
510.5
1,988.3
509.9
$
$
$
26,821.9 $
19,223.0 $
5,100.7 $
2,498.2
—
2,060.4
731.6
(2,792.0)
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Table of Contents
The following is a summary of operating segment income statement information for the periods indicated:
Year Ended December 31, 2020:
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
Year Ended December 31, 2019:
Net interest income
Provision for 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
Year Ended December 31, 2018:
Net interest income
Provision for 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
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(in millions)
$
1,166.9 $
999.7 $
302.5 $
(135.3)
123.6
1,043.3
70.8
491.6
622.5
115.9
128.6
871.1
50.5
308.9
612.7
147.6
(9.0)
311.5
1.6
92.6
220.5
52.3
$
506.6 $
465.1 $
168.2 $
4.0
(139.3)
18.7
90.1
(210.7)
(84.0)
(126.7)
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
$
1,040.4 $
837.2 $
209.0 $
(in millions)
19.3
1,021.1
65.1
482.0
604.2
105.0
11.1
826.1
50.4
320.6
555.9
134.7
7.4
201.6
1.4
96.7
106.3
24.8
$
499.2 $
421.2 $
81.5 $
(5.8)
0.8
(6.6)
13.3
64.7
(58.0)
(54.5)
(3.5)
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
$
915.9 $
741.7 $
162.0 $
(in millions)
25.0
890.9
43.1
423.7
510.3
74.5
18.9
722.8
48.3
309.5
461.6
112.1
4.2
157.8
1.4
72.6
86.6
20.5
$
435.8 $
349.5 $
66.1 $
12.2
1.9
10.3
(6.6)
41.6
(37.9)
(58.1)
20.2
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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, 2020
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
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
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
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(in millions)
$
23.3 $
21.7 $
1.6 $
5.2
0.8
0.6
5.2
0.8
0.6
$
$
29.9 $
28.3 $
40.9
22.2
70.8 $
50.5 $
—
—
—
1.6 $
—
1.6 $
—
—
—
—
—
18.7
18.7
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(dollars in millions)
$
23.3 $
21.9 $
1.4 $
5.9
1.6
0.3
5.8
1.6
0.3
$
$
31.1 $
29.6 $
34.0
20.8
65.1 $
50.4 $
0.1
—
—
1.5 $
(0.1)
1.4 $
—
—
—
—
—
13.3
13.3
Consolidated
Company
Commercial
Consumer
Related
Corporate &
Other
(dollars in millions)
$
22.3 $
21.0 $
1.3 $
6.5
3.3
0.6
32.7 $
10.4
43.1 $
6.8
3.3
0.6
31.7 $
16.6
48.3 $
$
$
—
—
—
1.3 $
0.1
1.4 $
—
(0.3)
—
—
(0.3)
(6.3)
(6.6)
(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."
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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, 2020. 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 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 total $1.6 million as
of December 31, 2020 and December 31, 2019, respectively, and are presented in Other assets on the Consolidated Balance
Sheets.
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23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest income
Interest expense
Net interest income
(Recovery of) 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
24. SUBSEQUENT EVENTS
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2020
$
331.6 $
304.8 $
318.2 $
(in millions, except per share amounts)
16.8
314.8
(34.2)
349.0
23.8
(132.2)
240.6
47.0
20.1
284.7
14.6
270.1
20.6
(124.1)
166.6
30.8
19.8
298.4
92.0
206.4
21.3
(114.8)
112.9
19.6
$
$
$
193.6 $
135.8 $
93.3 $
1.94 $
1.93 $
1.36 $
1.36 $
0.93 $
0.93 $
307.2
38.2
269.0
51.2
217.8
5.1
(120.5)
102.4
18.5
83.9
0.83
0.83
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2019
$
315.4 $
315.6 $
302.9 $
(in millions, except per share amounts)
43.4
272.0
4.0
268.0
16.0
(129.7)
154.3
26.2
49.2
266.4
3.8
262.6
19.3
(126.1)
155.8
28.5
48.2
254.7
7.0
247.7
14.4
(114.3)
147.8
24.8
$
$
$
128.1 $
127.3 $
123.0 $
1.26 $
1.25 $
1.25 $
1.24 $
1.19 $
1.19 $
291.1
43.8
247.3
4.5
242.8
15.4
(111.9)
146.3
25.5
120.8
1.16
1.16
On February 16, 2021, the Company entered into a definitive agreement with Aris Mortgage Holding Company, LLC ("Aris"),
the parent company of AmeriHome Mortgage Company, LLC (“AmeriHome”), and certain other parties, pursuant to which
Aris will merge with an indirect subsidiary of the Bank. Following the merger, AmeriHome will continue to use its trade name,
continuing to operate as AmeriHome, a Western Alliance Bank company. Pursuant to the agreement, WAB will pay cash
consideration of $275 million plus the adjusted tangible book value of Aris at closing, for an estimated aggregate cash
consideration of $1.0 billion (inclusive of certain transaction expenses and management bonus payments) based on December
31, 2020 financial statements of Aris. James Furash, Chief Executive Officer of AmeriHome, and other founding management
team members of AmeriHome will continue in their roles following the merger. The merger, which remains subject to required
regulatory approvals, is expected to close in the second quarter of 2021.
154
Table of Contents
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, 2020, 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, 2020, 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, 2020. Their report, which expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2020, is included herein.
155
Table of Contents
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020,
of the Company and our report, dated February 25, 2021, 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
February 25, 2021
156
Table of Contents
Item 9B.
Other Information
Not applicable.
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
2021 Annual Meeting of Stockholders to be held on June 15, 2021.
Item 11.
Executive Compensation
The information required by this item is incorporated by reference from the Company’s Definitive Proxy Statement for the
2021 Annual Meeting of Stockholders to be held on June 15, 2021.
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
2021 Annual Meeting of Stockholders to be held on June 15, 2021.
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
2021 Annual Meeting of Stockholders to be held on June 15, 2021.
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
2021 Annual Meeting of Stockholders to be held on June 15, 2021.
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, 2020 and 2019
Consolidated Income Statements for the three years ended December 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the three years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Not applicable.
78
81
82
83
84
85
86
157
Table of Contents
EXHIBITS
2.1
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
4.10
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Agreement and Plan of Merger, dated February 16, 2021, by and among Western Alliance Bank, Western Alliance
Equipment Finance, Inc., WAB Mortgage Sub, LLC, Aris Mortgage Holding Company, LLC, A-A Mortgage Opportunities,
LP, and the individual members set forth on the signature page thereto (incorporated by reference to Exhibit 2.1 of Western
Alliance's Form 8-K filed with the SEC on February 16, 2021).
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 (incorporated by reference to Exhibit 4.1 of Western Alliance's Form 10-K filed
with the SEC on March 2, 2020).
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).
Form of 5.25% Fixed to Floating Rate Subordinated Bank Note due June 1, 2030 (incorporated by reference to Exhibit 4.1
of Western Alliance's Form 8-K filed with the SEC on May 22, 2020).
Western Alliance 2005 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 of Western
Alliance's Form 8-K filed with the SEC on June 1, 2020). ±
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). ±
158
Table of Contents
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
21.1*
23.1*
24.1*
31.1*
31.2*
32**
101*
104*
Western Alliance Severance and Change in Control Plan (incorporated by reference to Exhibit 10.8 of Western Alliance's
Form 10-K filed with the SEC on March 2, 2020). ±
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). ±
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 (incorporated by reference to Exhibit 10.12 of Western Alliance's Form 10-K filed with the
SEC on March 2, 2020). ±
Form of participation agreement under the Company's Change in Control Severance Plan (incorporated by
reference to Exhibit 10.13 of Western Alliance's Form 10-K filed with the SEC on March 2, 2020). ±
Form of Performance-Based Stock Unit Agreement pursuant to the Company's 2005 Stock Incentive Plan (incorporated by
reference to Exhibit 10.14 of Western Alliance's Form 10-K filed with the SEC on March 2, 2020). ±
Form of Executive Restricted Stock Agreement pursuant to the Company's 2005 Stock Incentive Plan (incorporated by
reference to Exhibit 10.15 of Western Alliance's Form 10-K filed with the SEC on March 2, 2020). ±
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.
The following materials from Western Alliance’s Annual Report on Form 10-K Report for the year ended December 31,
2020, formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Income Statements, (iii) the
Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
The cover page of Western Alliance's Annual Report on Form 10-K for the year ended December 31, 2020, formatted in
Inline XBRL (contained in Exhibit 101).
* 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.
159
Table of Contents
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.
February 25, 2021
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 February 25, 2021.
160
Table of Contents
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/ Juan Figuereo
Juan Figuereo
/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/ Michael Patriarca
Michael Patriarca
/s/ Bryan Segedi
Bryan Segedi
/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
Director
161
WESTERN ALLIANCE BANCORPORATION
LIST OF SUBSIDIARIES
(As of December 31, 2020)
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
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Western Alliance Equipment Finance, Inc. Not applicable
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
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. 333-239570, 333-205437, 333-199727,
333-127032, 333-145548, 333-162107, and 333-183574) on Forms S-8 and Registration Statement (No. 333-224888) on Form
S-3 of Western Alliance Bancorporation and Subsidiaries of our reports dated February 25, 2021, 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, 2020.
Phoenix, Arizona
February 25, 2021
/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: February 25, 2021
/s/ Kenneth A. Vecchione
Kenneth A. Vecchione
President and 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: February 25, 2021
/s/ Dale Gibbons
Dale Gibbons
Vice Chairman and 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, 2020, 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: February 25, 2021
Date: February 25, 2021
/s/ Kenneth A. Vecchione
President and Chief Executive Officer
Western Alliance Bancorporation
/s/ Dale Gibbons
Vice Chairman and Chief Financial Officer
Western Alliance Bancorporation