Western Alliance Bancorporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Western Alliance is a bank holding company with commercial banking, mortgage banking and digital payments operations. Unless noted, dollar amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $550.3 million | Up 4.8% from Q2 2022 |
| Net interest margin | 3.42% | 3.54% in Q2 2022 |
| Non-interest income | $119.0 million | $95.0 million in Q2 2022 |
| Non-interest expense | $387.4 million | $268.9 million in Q2 2022 |
| Net income / common diluted EPS | $215.7 million / $1.96 | $260.2 million / $2.39 in Q2 2022 |
| Pre-provision net revenue (PPNR), adjusted | $282.1 million | Down 21.9% from $361.3 million in Q2 2022 |
| Efficiency ratio | 57.1% | 42.8% in Q2 2022 |
For the six months, net income was $357.9 million, versus $500.3 million a year earlier; diluted EPS was $3.24 versus $4.61. Net interest income was $1.16 billion, and net interest margin was 3.60% versus 3.44%. Six-month non-interest income fell to $61.0 million from $201.3 million, primarily reflecting balance-sheet repositioning losses.
- Balance sheet at June 30: Assets were $68.2 billion; HFI loans were $47.9 billion, down $4.0 billion from year-end 2022; deposits were $51.0 billion, down $2.6 billion; and stockholders’ equity was $5.7 billion.
- Cash flow, six months: Operating activities used $100.1 million; investing activities provided $366.6 million; financing activities provided $843.3 million. Cash and cash equivalents ended at $2.15 billion.
- Funding and liquidity: Other borrowings were $9.6 billion, including $1.3 billion drawn under the BTFP. Management reported $4.8 billion of liquid assets and stated these were adequate for anticipated cash needs over the next 90–120 days. Available credit included $6.2 billion at the FHLB and $16.0 billion at the FRB.
- Capital: Company CET1 was 10.1%, total capital 13.0%, and tier 1 leverage 8.1%. The bank’s CET1 ratio was 11.4%. Tangible common equity ratio was 7.0%.
- Credit quality: Nonaccrual loans were $256 million, or 0.53% of funded HFI loans, versus $85 million and 0.16% at year-end. Nonperforming assets were $322 million, or 0.39% of assets. The funded-loan allowance was $321 million, or 0.67% of HFI loans; annualized Q2 net charge-offs were 0.06% of average loans.
Material changes versus prior periods
- Deposit and borrowing costs rose sharply as rates increased and funding shifted: Q2 deposit interest expense was $251.1 million versus $27.1 million; other borrowing expense was $189.9 million versus $18.9 million. Higher funding costs contributed to the year-over-year decline in Q2 margin and earnings.
- Non-interest expense increased $118.5 million in Q2, principally due to deposit costs and insurance costs. The efficiency ratio rose to 57.1% from 42.8%.
- In response to banking-industry volatility, the company transferred $5.9 billion of loans from HFI to HFS in Q1, sold assets and increased borrowing capacity. Q2 loan dispositions from the transferred pool totaled $3.5 billion; $0.7 billion was transferred back to HFI. At quarter-end, $1.8 billion of transferred loans remained HFS.
- For the first six months, the company recorded $135.1 million of net fair-value losses, primarily associated with loans transferred to HFS, and $26.1 million of losses on securities sales. It also recorded a $13.4 million gain on extinguishment of debt. Management’s adjusted six-month diluted EPS, excluding these items and tax effects, was $4.26; GAAP diluted EPS was $3.24.
- Deposits stabilized after March 20 and increased thereafter through June 30, but remained 4.9% below December 31, 2022. The insured-deposit ratio increased from 45% to 77%; insured and collateralized deposits together were 81% at quarter-end.
Outlook, commentary and risks
The filing provides no specific earnings or margin guidance. Management said the duration of banking-sector volatility and economic conditions could affect credit-loss estimates, asset quality, earnings and growth. It also cautioned that elevated borrowings could pressure future net interest margin. The company disclosed $4.3 billion of technology-industry deposits, equal to 8.4% of total deposits.
- The FDIC had proposed a special assessment to recover losses from bank failures. If adopted as proposed, the company expected a one-time charge of approximately $65 million; the final rule was still pending.
- Unrealized losses were $826 million on AFS securities and $182 million on HTM securities at June 30. Management stated it did not intend, and was more likely than not would not be required, to sell the remaining AFS securities before recovery.
- Commercial real estate was a notable exposure: non-owner-occupied CRE was approximately 21% of HFI loans. Office loans were $2.3 billion, or 4.8% of HFI loans. Management described underwriting protections, but deterioration in real estate markets remains a risk.
- Other disclosed risks include deposit volatility and reliance on wholesale funding, interest-rate and market risk, credit losses, regulatory and capital requirements, and potential goodwill impairment if adverse conditions worsen. Management reported no material pending legal proceedings and no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether deposit balances remain stable and the cost and mix of deposits and wholesale funding improve or worsen.
- Progress in selling or reclassifying the remaining $1.8 billion of transferred HFS loans, and any resulting valuation adjustments or credit losses.
- Trends in nonaccrual loans, classified and problem loans, CRE exposures, charge-offs and allowance adequacy.
- The final FDIC special-assessment rule and whether the expected charge is near management’s $65 million estimate.
- How borrowing levels, liquidity sources, securities valuation and capital ratios evolve; also note that management’s adjusted EPS and PPNR are non-GAAP measures and should be assessed alongside GAAP results.