Western Alliance Bancorporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. Amounts are U.S. dollars. Western Alliance is a bank holding company whose principal subsidiary, Western Alliance Bank, provides commercial banking, mortgage banking and related services. The company acquired Digital Disbursements (DST), a class-action payments platform, on January 25, 2022.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $2.216 billion | $1.549 billion |
| Net interest margin | 3.67% | 3.41% |
| Non-interest income | $324.6 million | $404.2 million |
| Non-interest expense | $1.157 billion | $851.4 million |
| Provision for (recovery of) credit losses | $68.1 million | $(21.4) million |
| Net income | $1.057 billion | $899.2 million |
| Net income available to common stockholders | $1.045 billion | $895.7 million |
| Diluted EPS | $9.70 | $8.67 |
| Efficiency ratio (non-GAAP) | 44.9% | 42.9% |
Net revenue was $2.541 billion, up 30.1%; pre-provision net revenue was $1.384 billion, up from $1.102 billion. Return on average assets was 1.62% (1.83% in 2021), and return on average equity was 20.7% (22.3%). The effective tax rate was 19.7%.
At year-end, total assets were $67.7 billion, up 20.9%; loans held for investment were $51.9 billion, up 32.7%; and deposits were $53.6 billion, up 12.7%. Stockholders’ equity was $5.36 billion. Other borrowings were $6.30 billion and qualifying debt was $893 million. Common equity Tier 1 was 9.3% at the holding company and 10.5% at the bank; the holding-company tangible common equity ratio was 6.5%, compared with 7.3% a year earlier.
Cash and cash equivalents were $1.04 billion. Management reported $7.7 billion in liquid assets, including cash, loans held for sale and unpledged marketable securities, and said these were adequate for anticipated funding needs over the next 90–120 days. Available credit included $6.8 billion from the FHLB, $5.2 billion from the Federal Reserve and $3.35 billion of unused correspondent-bank federal funds lines. Operating cash flow was $2.245 billion; investing cash flow was $(13.130) billion; financing cash flow was $11.412 billion.
Material changes versus 2021
- Net interest income rose $667.5 million as average earning assets grew and asset yields increased; higher deposit and borrowing costs partly offset the benefit. Interest expense increased to $475.5 million from $109.9 million.
- Non-interest income fell $79.6 million. Loan origination and sale gains declined $222.2 million as higher rates reduced mortgage production and compressed margins; higher servicing revenue, including lower payoffs and MSR-related activity, partly offset the decline.
- Non-interest expense rose $305.3 million, led by deposit costs, salaries and benefits, professional fees, and data processing. The provision shifted from a $21.4 million recovery to a $68.1 million expense, primarily reflecting loan growth and, to a lesser extent, a weaker economic outlook.
- Nonperforming assets were 0.14% of total assets versus 0.15%; net charge-offs were approximately 0.00% of average loans versus 0.02%. Nonaccrual loans increased to $85 million from $73 million, while criticized/classified loan balances reported as problem loans rose to $379 million from $339 million.
- Non-interest-bearing deposits declined to $19.7 billion from $21.4 billion, while wholesale brokered deposits increased to $4.8 billion from $1.8 billion. Uninsured deposits were $29.5 billion, up from $26.9 billion.
- Accumulated other comprehensive loss was $661 million, compared with $16 million of accumulated other comprehensive income, primarily reflecting unrealized losses on available-for-sale securities as interest rates rose. The filing states these losses were primarily market- and rate-related, not credit-related.
Outlook, risks and unusual items
The filing does not provide a specific earnings or balance-sheet forecast. Management describes interest-rate effects as uncertain: higher rates may improve asset yields but also increase funding costs and affect borrower performance, mortgage activity and securities valuations. Its year-end interest-rate simulation estimated next-12-month net interest income increases of 3.1% and 5.9% under immediate parallel rate increases of 100 and 200 basis points, respectively, and a 3.0% decrease under a 100-basis-point decline. These are model outputs, not guidance. Management disclosed a slight breach of its EVE guideline in the +100-basis-point scenario, which the board and ALCO accepted.
Key risks include deposit competition and potential outflows, the large uninsured-deposit balance, reliance on borrowings for liquidity, rising funding costs, credit deterioration, and real-estate and geographic concentrations. CRE-related loans were about 29% of the loan portfolio; office loans were about 16% of the CRE investor portfolio. The company also identifies risks from economic weakness, interest-rate and fair-value volatility, cyber incidents and third-party providers, regulation, and its digital-payments initiatives. It reported $19.3 billion in commitments to extend credit, credit-card commitments and letters of credit; these may expire unused. The allowance for funded loans was $310 million, with a separate $47 million allowance for unfunded commitments.
The company issued $579 million of credit-linked notes during 2022; these transfer specified first-loss exposure, but the company retains risk beyond the covered layer. It acquired DST for $57 million of total consideration, including contingent consideration. The independent auditor gave an unqualified opinion on the financial statements and internal controls. No material pending legal proceedings were reported.
Important facts for investors to verify
- Deposit stability and composition: uninsured, brokered and non-interest-bearing deposits; maturity profile and funding costs.
- Liquidity under stress: the availability and collateral requirements of FHLB, Federal Reserve and correspondent-bank facilities, alongside potential deposit outflows.
- Capital and valuation effects: CET1 and tangible common equity trends, and the potential effects of AFS unrealized losses and further rate changes.
- Credit quality: trends in criticized loans, CRE and office exposures, residential EBO loans, and the adequacy of funded and unfunded credit-loss allowances.
- Mortgage and digital-payments performance: sustainability of servicing income and MSR valuations, and DST’s contribution and integration costs.