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How 1 Little-Known Bank Expects to Outlast Coronavirus Fears

By Dan Caplinger – Apr 17, 2020 at 2:20PM

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It's harder for some regional financial institutions, but this one's got an interesting strategy.

The coronavirus pandemic continues to spread around the world, and the health impacts have been severe. Financial consequences of the outbreak have also taken a big toll, and although much of the attention has gone to the too-big-to-fail national banking institutions, regional banks have been closer to the front lines in dealing with the ramifications for small and mid-sized businesses forced to shut down because of COVID-19 concerns. In the Western U.S., Western Alliance Bancorporation (WAL -2.79%) has seen its stock fall dramatically on worries about how the crisis will play out.

Coming into Thursday's first-quarter financial report, Western Alliance shareholders were prepared to see some big declines in the bank's results. Nevertheless, they hoped to see signs that the regional financial institution was working to overcome longer-term concerns, and in that respect, Western Alliance delivered.

A tough start to 2020 for Western Alliance

Western Alliance's first-quarter results weren't all that surprising in showing the economic damage done by the COVID-19 outbreak. Net income came in at $84 million, down 30% from year-ago levels. That resulted in earnings of $0.83 per share. Western Alliance did manage to boost net operating revenue, which rose almost 10% year over year to $285.4 million.

Welder working on metal sculpture.

Image source: Western Alliance.

Despite the pressure on the bottom line, the expansion that Western Alliance has enjoyed in much of its business seemed to continue unchecked. Total loans were up almost 28%, rising by $5 billion to $23.1 billion. Deposits jumped 23% to $24.8 billion. Tangible book value was up 15% over the past 12 months to $26.73 per share -- roughly $1 per share below where the stock traded coming into the report.

Some headwinds did hold Western Alliance back. Net interest margin fell by nearly half a percentage point to 4.22%, reflecting the plunge in interest rates that we've seen in the past year. The bank also elected to make a $51 million provision for credit losses, adding to reserves in anticipation of a potential deterioration in credit quality. Tangible common equity ratios dropped almost a full percentage point to 9.4%. Still, the immediate signs of such problems weren't evident, as nonperforming assets represented just 0.33% of total assets and charge-offs disappeared during the period.

From a segment perspective, Western Alliance's two California divisions saw the biggest pressure on pretax income, as Arizona and Nevada posted modest gains in profit. Niche areas like homeowners' associations and the company's technology and innovation segment had mixed performance but generally showed substantial interest in loans and deposits.

How will Western Alliance recover?

CEO Ken Vecchione seemed optimistic about the future. "We arrive here uniquely prepared to address what's ahead," Vecchione said. "As we all experience the pressure that the COVID-19 pandemic has caused around the world, the people at Western Alliance remain actively engaged and are focused on helping our clients navigate through this challenging time."

What Western Alliance is doing to help customers hit by the coronavirus looks a lot like what many small and mid-sized banks are striving to achieve. The bank has taken care of its own employees, instituting safety measures and establishing procedures for business continuity. At the same time, helping customers get federal assistance through programs like the Paycheck Protection Program has been a priority. Western Alliance is also concentrating on maintaining asset quality while still giving existing customers the flexibility to deal with temporary financial struggles. That balancing act is the key to making it through the pandemic with as little damage as possible.

In response, Western Alliance shareholders seemed quite pleased with the results, and the stock jumped almost 10% by midday Friday following the late-Thursday report. Things won't be smooth sailing for Western Alliance for quite a while, but it looks like the regional bank is doing everything it can to keep itself in position to enjoy long-term success.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Western Alliance Bancorp. The Motley Fool has a disclosure policy.

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