Western Alliance Bancorp (NYSE:WAL) Q3 2020 Earnings Conference Call - Final Transcript
Oct 23, 2020 • 12:00 pm ET
Kenneth A. Vecchione
will be seen near term in our reduced provisioning expense and longer term in lower net charge-offs. We are encouraged by our expanding pipeline as clients have applied lessons learned from prior recessions to right-size cost structures and to begin to plan for future opportunities.
In the quarter, high average interest earning assets of $1.9 billion were offset by lower rates, substantial liquidity build and a one-time adjustment to PPP loan fee recognition to reflect modification and extension of the CARES Act forgiveness timeframe, which pushed our net interest margin downward to 3.71%, as net interest income declined $13.7 million from the second quarter to $285 million, but improved $18.3 million from a year ago period. Excluding the impact of PPP loans, net interest income would have only fallen by $4 million, which was largely the impact of interest expense on our new subordinated debt issued in middle of the second quarter.
We believe approximately 21 basis points of this compression is transitory in nature and NIM is expected to rise as excess liquidities put to work through balance sheet growth, deposit seasonality and warehouse lending, driving balances lower and PPP loan forgiveness assumptions normalize. Given these margin trends and balance sheet growth, we believe Q4's net interest income performance returns to Q2 levels and PPNR rises above Q3. Provision for credit losses was $14.7 million in the third quarter considerably less than the $92 million in the second quarter, which was primarily attributable to stable to modest improvements in macroeconomic forecast assumptions, loan growth in low-risk asset classes and limited net charge-offs of $8.2 million or 13 basis points of average assets. Dale, will go into more detail on the specific drivers of our provision but our total loan ACL to funded loans ratio now stands at 1.37% or $355 million and 1.46%, excluding PPP loans, which are guaranteed by the CARES Act. If macroeconomic trends remain stable or begin to improve, future provision expense will likely mirror net charge-offs and reserve levels could decline.
Loan deferrals trended lower for the quarter as many of our clients have returned to paying as agreed following their deferral period. As of Q3, $1.3 billion of loans are on deferral or 5% of the total portfolio, which represents a 55% decline from Q2. We expect $1.1 billion of loan deferrals will expire next quarter, which will continue to drive down our outstanding modifications. Our quarterly efficiency ratio improved to 39.7% compared to 43.2% from the year ago period, becoming more efficient during the economic uncertainty provides the incremental flexibility to maintain PPNR. Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $29.03, or 4.3% over the previous quarter and 13.4% year-over-year. Supported by our robust PPNR generation, capital rose $121.6 million with a CET1 ratio of 10%, supporting 15.6% annualized loan growth.
Dale, will now take you through our financial performance. Thanks, Ken. Over the last three months Western Alliance generated record net income