Western Alliance Bancorporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing covers Western Alliance Bancorporation and subsidiaries, including Western Alliance Bank and AmeriHome Mortgage.
Financial results and position
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $587.0 million | $602.1 million in Q3 2022 |
| Net interest margin | 3.67% | 3.78% in Q3 2022 |
| Net revenue | $716.2 million | $663.9 million in Q3 2022 |
| Pre-provision net revenue (PPNR) | $290.0 million | $358.1 million in Q3 2022 |
| Net income | $216.6 million | $264.0 million in Q3 2022 |
| Net income available to common stockholders | $213.4 million | $260.8 million in Q3 2022 |
| Diluted EPS | $1.97 | $2.42 in Q3 2022 |
| Non-interest expense | $426.2 million | $305.8 million in Q3 2022 |
- For the first nine months of 2023, net interest income was $1.747 billion, net income was $574.5 million, and diluted EPS was $5.21, versus $1.577 billion, $764.3 million, and $7.03, respectively, in the first nine months of 2022. Nine-month net interest margin was 3.62%, versus 3.56%.
- At September 30, 2023, assets were $70.9 billion; HFI loans were $49.4 billion gross ($49.1 billion net of allowance); deposits were $54.3 billion; other borrowings were $8.7 billion; qualifying debt was $890 million; and stockholders’ equity was $5.7 billion.
- Cash and cash equivalents were $3.5 billion. Management reported $8.9 billion of liquid assets, including $5.4 billion of unpledged marketable securities, and said liquidity was adequate for anticipated cash-flow needs over the next 90–120 days. Parent-company liquidity was considered sufficient for more than 12 months under management’s stated assumptions.
- For the nine months, operating cash flow was negative $669.8 million, investing cash flow was negative $279.0 million, and financing cash flow was positive $3.402 billion. Cash and cash equivalents ended the period at $3.497 billion, up from $1.043 billion at year-end 2022.
- Regulatory capital at September 30 included Western Alliance Bancorporation CET1 of 10.6% and total capital of 13.5%; Western Alliance Bank CET1 was 11.8% and total capital was 12.9%. Both were above disclosed well-capitalized thresholds.
Material changes and management commentary
- Year over year, Q3 net interest income declined despite higher interest income: sharply higher deposit and borrowing costs more than offset asset-yield increases. Q3 deposit interest expense was $316.2 million versus $77.6 million, and total interest expense was $439.6 million versus $137.3 million.
- Q3 non-interest expense rose by $120.4 million, primarily from deposit costs and insurance costs. The efficiency ratio increased to 58.8% from 45.5%.
- Deposits rose $643 million, or 1.2%, from December 31, 2022, but their mix shifted: non-interest-bearing deposits fell $1.7 billion, while certificates of deposit increased $3.7 billion. Reciprocal deposits increased to $12.5 billion from $2.8 billion. The insured deposit ratio rose to 77%; insured and collateralized deposits together were 82% of deposits.
- HFI loans declined $2.4 billion from year-end 2022. As part of its balance-sheet repositioning and liquidity actions, the company transferred approximately $6.0 billion of loans to held for sale in Q1, disposed of $4.3 billion from that pool through September, and returned the remaining pool to HFI at period-end after a change in management’s intentions.
- Nine-month results included a $117.3 million net fair-value loss, primarily related to the loan transfers, a $26.0 million loss on investment-security sales, and a $13.4 million gain on extinguishment of debt. Management’s adjusted nine-month diluted EPS, excluding these items and their tax effect, was $6.10; this is a non-GAAP measure.
- Gross unrealized losses were $987 million on available-for-sale securities and $261 million on held-to-maturity securities. AOCI included a $733 million accumulated loss at September 30.
Credit, outlook, risks, and contingencies
- Provision for credit losses was $12.1 million in Q3 and $53.3 million for the first nine months. The funded-loan allowance was $327 million, or 0.66% of funded loans; the separate allowance for unfunded commitments was $37.9 million.
- Nonaccrual loans increased to $237 million from $85 million at year-end 2022. Nonperforming assets were $352 million, or 0.35% of assets; nonaccrual loans were 0.48% of funded loans. Problem loans classified as special mention or worse totaled $738 million, up from $379 million at year-end.
- Commercial real estate non-owner-occupied loans were about 20% of HFI loans. Office loans were $2.6 billion, or 5.3% of HFI loans. Management described the office portfolio as primarily suburban, shorter-term bridge loans and discussed underwriting and collateral mitigants; CRE deterioration remains a stated risk.
- Technology-industry deposits were $4.1 billion, or 7.6% of total deposits. The filing cautions that renewed banking-sector stress or deposit outflows could affect liquidity, funding costs, earnings, and credit estimates. Borrowings remaining elevated could further pressure net interest margin.
- The FDIC had proposed a special assessment related to earlier bank failures. If adopted as proposed, the company expected a one-time charge of approximately $62 million, with collection expected over eight quarters beginning in 2024.
- Management provided no specific quantitative earnings or operating guidance in the supplied filing text. It identified risks including interest-rate and deposit competition, economic and real-estate conditions, credit losses, market-value volatility, reliance on funding sources, and regulatory changes. The company said routine litigation was not expected to have a material effect and reported no material pending legal proceedings.
Investor verification priorities
- Track deposit stability, deposit mix and pricing, reciprocal and brokered funding, and the availability and cost of secured borrowing facilities.
- Monitor net interest margin and funding costs, particularly if borrowings remain elevated or deposit competition intensifies.
- Review changes in criticized, classified, nonaccrual, and modified loans; pay particular attention to CRE office, construction, and technology-related exposures.
- Reconcile reported results with the loan-transfer and securities-sale losses, and assess any future FDIC special-assessment charge.
- Evaluate the size and potential realization of securities losses, AOCI, liquidity, and regulatory capital under changing market conditions.