Western Alliance Bancorporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Western Alliance is a bank holding company with commercial banking, mortgage banking through AmeriHome, and digital payment services. It acquired Digital Disbursements (DST) on January 25, 2022. The unaudited interim results may not indicate full-year performance.
Financial performance and condition
| Metric | Q2 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $525.0 million | $370.5 million in Q2 2021 |
| Non-interest income | $95.0 million | $136.0 million in Q2 2021 |
| Net revenue | $620.0 million | $506.5 million in Q2 2021 |
| Provision for credit losses | $27.5 million expense | $14.5 million recovery in Q2 2021 |
| Non-interest expense | $268.9 million | $244.8 million in Q2 2021 |
| Net income | $260.2 million; $257.0 million available to common shareholders | $223.8 million in Q2 2021 |
| Diluted EPS | $2.39 | $2.17 in Q2 2021 |
| Net interest margin | 3.54% | 3.51% in Q2 2021 |
| Efficiency ratio | 42.8% | 47.5% in Q2 2021 |
For the first six months, net income was $500.3 million and diluted EPS was $4.61, compared with $416.3 million and $4.07, respectively, in the first half of 2021. Net interest margin was 3.44% versus 3.45%; the six-month efficiency ratio was 43.4% versus 44.2%. Management reported Q2 pre-provision net revenue of $351.1 million, up 34.2% year over year.
- Growth and funding: Total assets were $66.1 billion, up 18.0% from December 31, 2021. HFI loans were $48.6 billion, up $9.5 billion, and deposits were $53.7 billion, up $6.1 billion. Non-interest-bearing demand deposits totaled $23.7 billion.
- Credit quality: Allowance for credit losses on HFI loans was $273 million, or 0.56% of funded loans; including unfunded commitments, the allowance measure was 0.67%. Nonaccrual loans were $85 million, or 0.17% of funded loans. Q2 annualized net charge-offs were 0.01% of average loans. Separately, $827 million of government-guaranteed EBO residential loans were 90 days or more past due and still accruing.
- Cash flow: First-half operating cash flow was $960 million, versus cash used of $1.1 billion in 2021. Investing activities used $9.7 billion, principally reflecting $8.0 billion of net HFI loan growth and securities investment. Financing activities provided $10.1 billion, including $6.1 billion of deposit growth and increased borrowings. Cash and equivalents ended at $1.9 billion.
- Debt and liquidity: Other borrowings were $5.21 billion, up from $1.50 billion at year-end; qualifying debt was $891 million. Management reported $10.2 billion of liquid assets and available credit of approximately $7.8 billion from the FHLB, $4.7 billion from the FRB, and $3.4 billion from unsecured fed-funds lines. Management considered liquidity adequate for 90–120 days of needs and Parent liquidity sufficient for over twelve months without new funding.
- Capital and equity: Stockholders’ equity was $4.96 billion, approximately unchanged from year-end. The company’s CET1 ratio was 9.0%, total capital ratio 11.9%, and tier 1 leverage ratio 7.6%; the Bank’s CET1 ratio was 10.2%. The company remained above stated well-capitalized thresholds. Tangible common equity ratio was 6.1%, down from 7.3% at year-end.
Material changes and unusual items
- Q2 net interest income rose 41.7%, primarily on higher average loan balances; higher deposit and borrowing costs partly offset the benefit. First-half margin edged down as loan yields and funding costs changed.
- Q2 non-interest income fell $41.0 million year over year, mainly due to lower mortgage origination and sale gains. Net loan servicing revenue improved by $66.2 million, partly offsetting that decline. First-half non-interest income increased $45.6 million, reflecting stronger servicing revenue and credit-guarantee recoveries.
- The first-half credit-loss provision was $36.5 million, compared with a $46.9 million recovery in the prior-year period; management cited loan growth and emerging economic uncertainty.
- AFS securities had $701 million of gross unrealized losses at June 30, 2022, and accumulated other comprehensive loss was $518 million, compared with AOCI income of $16 million at year-end. Management attributed securities losses mainly to interest rates and market conditions, reported no AFS credit-loss allowance, and stated it did not expect to be required to sell the securities before recovery.
- The company transferred $1.5 billion of EBO loans from held for sale to held for investment because management no longer intended to sell them. This contributed to the increase in HFI loans and decline in HFS loans.
- DST acquisition consideration was $67.8 million, including $17.2 million of estimated contingent consideration, and generated $40.0 million of goodwill. The prior-year comparison also includes AmeriHome only from its April 7, 2021 acquisition date, so mortgage-related comparisons are affected by acquisition timing.
Outlook, commentary and risks
The filing provides no specific earnings, revenue, or margin guidance. Management described continued organic loan and deposit growth and said it was taking capital actions, including ATM stock sales and credit-linked note issuances, to support growth. Its interest-rate simulations estimated that an immediate parallel 100-basis-point increase would raise next-12-month net interest income by 5.3%, while a 100-basis-point decrease would reduce it by 6.9%; results depend on modeling assumptions and are not forecasts.
Disclosed risks include economic recession and borrower impacts, rising rates and deposit competition, credit and real-estate concentration, dependence on low-cost deposits, potential withdrawals of large or brokered deposits, market-driven AOCI and earnings volatility, and retained risk under credit-linked notes. Other cited risks include mortgage representations and warranties, cybersecurity and third-party systems, regulatory compliance, LIBOR transition, and uncertainty in digital payments. The company reported routine litigation without expected material financial impact, no material pending legal proceedings, and no material changes to previously reported risk factors.
Investor verification priorities
- Track deposit mix, pricing, brokered deposits ($3.6 billion), and the sustainability of deposit growth as rates rise.
- Review EBO loan performance, including the $827 million past-due accruing balance, and the rationale and credit treatment for loans moved to HFI.
- Assess whether loan growth, commercial real estate exposure, and the higher provision are matched by adequate credit reserves and capital.
- Monitor AFS securities valuation losses, AOCI, and any securities sales or effects on regulatory capital.
- Evaluate mortgage banking production and sale margins, MSR valuations, and results following the AmeriHome and DST acquisitions.
- Check actual results against the interest-rate sensitivity assumptions and available liquidity and borrowing capacity.