Western Alliance Bancorporation — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021. Western Alliance is a bank holding company with commercial banking and specialized financial services businesses. Its results include AmeriHome Mortgage (AMH), acquired April 7, 2021; AMH operates a national business-to-business mortgage acquisition and servicing platform.
Key financial results
Amounts are in millions of dollars except per-share amounts, ratios, and where noted.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $370.5 | $298.4 | $687.8 | $567.4 |
| Net interest margin | 3.51% | 4.19% | 3.45% | 4.20% |
| Non-interest income | $136.0 | $21.3 | $155.7 | $26.4 |
| Non-interest expense | $244.8 | $114.8 | $379.8 | $235.3 |
| Credit loss provision/(recovery) | $(14.5) | $92.0 | $(46.9) | $143.2 |
| Net income | $223.8 | $93.3 | $416.3 | $177.2 |
| Diluted EPS | $2.17 | $0.93 | $4.07 | $1.76 |
Balance sheet and capital at June 30, 2021. Total assets were $49.1 billion, up 34.6% from year-end 2020, reflecting AMH and organic growth. HFI loans were $30.0 billion, up $3.0 billion from year-end; deposits were $41.9 billion, up $10.0 billion. Stockholders’ equity was $4.0 billion. The allowance for credit losses on HFI loans was $232.9 million, or 0.78% of funded HFI loans. Nonaccrual loans were $96.3 million, 0.32% of funded HFI loans; nonperforming assets were $124.5 million, or 0.20% of total assets.
- Liquidity: Cash and cash equivalents were $3.4 billion; management reported $7.9 billion of liquid assets, including $4.5 billion of unpledged marketable securities. Available credit included approximately $3.0 billion of unsecured federal funds lines, $6.0 billion from the FHLB, $2.8 billion from the FRB, and up to $865 million through the PPP facility. Management considered liquid assets adequate for the next 90–120 days.
- Borrowings and debt: Other borrowings totaled $615.4 million and qualifying debt was $1.14 billion. The company issued $600 million of 3.00% fixed-to-floating subordinated notes due 2031 and $242 million of credit-linked notes due 2024; AMH brought $300 million of senior notes due 2028. The credit-linked notes transfer first-loss risk on a $1.9 billion warehouse-loan reference pool.
- Capital: Company CET1 ratio was 9.2%, total capital ratio 12.8%, and tier 1 leverage ratio 7.3%. The tangible common equity ratio was 7.1%. The company and bank reported capital above well-capitalized thresholds; regulatory ratios reflect the elected CECL transition.
- Cash flows, six months: Operating cash flow was $(2.0) billion, investing cash flow $(5.4) billion, and financing cash flow $8.1 billion. Cash increased $724.1 million to $3.4 billion. Mortgage loan purchases/originations and sales, AMH acquisition spending, loan growth, securities investment, deposit inflows, and borrowings materially affected these flows.
Material changes versus prior periods
- Q2 net income rose to $223.8 million from $93.3 million; six-month net income increased to $416.3 million from $177.2 million. Results benefited from credit-loss provision releases versus substantial provisions in 2020 and from AMH-related mortgage banking income.
- Q2 net interest income increased 24.2%, but net interest margin fell 68 basis points year over year to 3.51%. For the first half, margin declined 75 basis points to 3.45%. Management attributed the declines mainly to lower asset yields and AMH borrowing costs, partly offset by lower deposit costs.
- Q2 non-interest income included $132.0 million of net gain on loan purchase, origination, and sale activities, while net loan servicing revenue was negative $20.8 million. AMH also added servicing and loan-acquisition costs and approximately 1,000 employees, contributing to higher expenses.
- AMH acquisition-related and restructuring expenses were $15.7 million in Q2 and $16.1 million for the six-month period. The acquisition added $175 million of provisional goodwill and $139.5 million of identified intangible assets.
- HFI loans grew 11.0% from year-end, particularly residential real estate and construction and land development. Non-interest-bearing deposits rose $6.6 billion; savings and money-market deposits rose $3.4 billion.
- Net interest margin and tangible common equity ratio were lower than the respective prior-year and year-end comparisons; the company also issued equity, raising $279 million net in the first half.
Outlook, commentary, risks, and unusual items
- Management cited an improved economic outlook as the principal reason for $14.5 million of Q2 and $46.9 million of first-half credit-loss recoveries. It said it continued monitoring borrowers in COVID-affected industries and had not experienced significant pandemic-related write-offs to date. The filing provides no specific earnings or revenue guidance.
- COVID-sensitive exposures included hotels of $2.31 billion, investor-dependent borrowers of $1.02 billion, retail of $714.5 million, and gaming of $557.9 million—$4.61 billion, or 13.4% of the loan portfolio in total. CRE-related loans were approximately 35% of total loans.
- At June 30, outstanding qualifying COVID-related HFI loan modifications totaled $228.4 million, none involving payment deferrals; residential mortgage loans in forbearance totaled $49.8 million. PPP loans had a carrying value of $864.8 million.
- AMH integration, mortgage market conditions, interest-rate changes, refinancing-versus-purchase mix, loan repurchase and indemnification obligations, mortgage regulation and licensing, and mortgage servicing valuation are notable risks. The filing also highlights CRE and C&I concentrations, deposit outflows, geographic concentration, credit-loss estimate uncertainty, cybersecurity, and LIBOR transition risks.
- AMH servicing rights are measured at fair value using significant unobservable assumptions. Their June 30 fair value was $726.2 million; the filing presents substantial hypothetical sensitivity to interest rates, prepayment speeds, discount rates, and servicing costs. AMH acquisition fair values remain provisional.
- Management stated that the company and bank were above well-capitalized levels and that liquidity was adequate. Interest-rate simulations showed projected 12-month net interest income changes of negative 1.3% under an immediate 100-basis-point decline and positive 7.5% and 18.6% under 100- and 200-basis-point increases; the filing cautions that model assumptions may not match actual outcomes.
- The filing reports no material pending legal proceedings and no material changes to internal control over financial reporting during the quarter. It does not identify a material litigation contingency.
Most important facts for investors to verify
- How much of earnings growth is recurring banking performance versus AMH mortgage gains, acquisition effects, and credit-loss releases.
- AMH integration progress, ongoing expenses, servicing-rights valuation and hedging, loan repurchase exposure, and performance if mortgage volumes or rates change.
- Loan quality and reserve adequacy, especially CRE, hotel, and other pandemic-sensitive exposures; track criticized loans, modifications, nonaccruals, and charge-offs.
- Deposit composition, concentration and sensitivity to withdrawals, as well as the availability and cost of alternative funding.
- Net interest margin, interest-rate exposure, regulatory capital and tangible common equity after acquisition-related balance-sheet growth.
- Cash flow interpretation: reported operating cash flow was negative, partly reflecting mortgage banking loan flows; assess cash generation alongside financing and investing activity.