Western Alliance Bancorporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Western Alliance is a bank holding company offering commercial banking, specialized financial services and mortgage banking through AmeriHome. It acquired digital payments provider Digital Disbursements in January 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net interest income | $602.1 million | $410.4 million | +46.7% |
| Net interest margin | 3.78% | 3.43% | +35 basis points |
| Net income | $264.0 million | $236.9 million | +$27.1 million |
| Net income available to common shareholders | $260.8 million | $236.9 million | +$23.9 million |
| Diluted EPS | $2.42 | $2.28 | +$0.14 |
| Net revenue (company-defined) | $663.9 million | $548.5 million | +21.0% |
| PPNR (non-GAAP) | $358.1 million | $314.7 million | +13.8% |
| Efficiency ratio (tax-equivalent basis) | 45.5% | 42.0% | Higher |
For the first nine months, net income was $764.3 million versus $653.2 million, diluted EPS was $7.03 versus $6.35, and net interest margin was 3.56% versus 3.44%.
Balance sheet, funding and capital
- Total assets were $69.2 billion at September 30, up 23.5% from year-end 2021. Held-for-investment loans were $52.2 billion, up $13.1 billion (33.6%); deposits were $55.6 billion, up $8.0 billion (16.8%).
- Cash and cash equivalents were $1.6 billion. Total other borrowings rose to $6.3 billion from $1.5 billion at year-end, including $4.0 billion of FHLB advances; qualifying debt was $889 million.
- Management reported $9.0 billion of liquid assets and $7.1 billion of available FHLB credit, $5.0 billion of available FRB credit and $4.7 billion of available unsecured federal-funds lines. It considered liquidity adequate for expected needs over the next 90–120 days. Brokered deposits were $3.8 billion, versus $1.8 billion at year-end.
- Stockholders’ equity was $5.0 billion. AOCI shifted to a $736 million loss from $16 million of income at year-end, primarily reflecting unrealized AFS securities losses. The tangible common equity ratio was 5.9%, versus 7.3% at year-end.
- Regulatory CET1 and total capital ratios were 8.7% and 11.4%, respectively, down from 9.1% and 12.3% at year-end; the company and bank remained above the stated well-capitalized thresholds.
Cash flow and credit quality
For the nine months, operating cash flow was $1.45 billion, compared with cash used of $3.27 billion in 2021; investing cash used was $13.62 billion, and financing cash provided was $13.26 billion. Cash, cash equivalents and restricted cash ended at $1.61 billion. Investing outflows primarily reflected loan growth and securities activity, funded in part by deposit growth and borrowings.
The funded-loan allowance was $304 million, or 0.58% of funded loans; the separate allowance for unfunded commitments was $52 million. Provision for credit losses was $28.5 million in Q3 and $65.0 million year to date, versus $12.3 million and a $34.6 million recovery in the respective 2021 periods. Management attributed the increase chiefly to loan growth and heightened economic uncertainty. Nonaccrual loans were $90 million; nonperforming assets were $103 million. The $644 million of loans more than 90 days past due and still accruing consisted entirely of government-guaranteed EBO residential loans. Annualized Q3 net loan recoveries were 0.02% of average loans.
Material changes and management commentary
- Higher average loan balances and yields drove interest income growth, while higher rates and balances increased deposit and borrowing costs. Q3 interest expense rose to $137.3 million from $32.4 million.
- Q3 non-interest income fell $76.3 million to $61.8 million, mainly because mortgage origination and sale gains declined $106.5 million amid compressed margins and lower production. Higher loan servicing revenue partly offset the decline.
- Q3 non-interest expense increased $72.0 million to $305.8 million, led by deposit costs, professional fees and data-processing expense. Nine-month expenses also reflected higher staffing costs.
- The mortgage servicing rights portfolio was valued at $1.04 billion, up from $698 million at year-end; its value is sensitive to interest rates, prepayments, discount rates and servicing costs.
- Digital Disbursements was acquired for stated total consideration of $57.0 million, including contingent consideration; the provisional purchase accounting included $36.6 million of goodwill. Management described the platform as supporting digital payments and expansion of legal-industry services.
Outlook, risks and contingencies
The filing provides no specific earnings or balance-sheet guidance. Management reported that modeled 12-month net interest income remained within internal guidelines: an immediate 100-basis-point rise increased modeled NII by 6.0%, while a 100-basis-point decline reduced it by 5.1%; results depend on assumptions and a static balance sheet. Modeled EVE declined 8.8% under an immediate 100-basis-point rise and 16.5% under a 200-basis-point rise.
Disclosed risks include rate changes and deposit competition, reliance on low-cost and potentially less stable brokered deposits, CRE and other loan concentrations, economic and real-estate weakness, credit losses, AFS valuation and AOCI volatility, mortgage-market and MSR sensitivity, funding access, cyber and operational risks, and the LIBOR transition. Off-balance-sheet commitments and letters of credit totaled $18.9 billion. The company reported routine litigation but said it did not expect the matters to materially affect its financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether deposit pricing and borrowing costs continue to rise faster than asset yields, and the resulting effect on NIM and earnings.
- The quality and performance of rapidly growing loan portfolios, including CRE, residential EBO and hotel franchise exposures, and the adequacy of credit-loss allowances.
- Liquidity composition and funding resilience, including brokered and uninsured deposits, collateral availability and reliance on FHLB or other borrowing.
- The effect of AFS unrealized losses on capital and tangible common equity, and the sensitivity of MSR valuations to rates and prepayments.
- Mortgage banking profitability as production and gain-on-sale margins change, and the financial contribution and integration progress of Digital Disbursements.