Western Alliance Bancorporation (WAL) — Q3 2021 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. The bank holding company provides commercial banking and related services; results include AmeriHome Mortgage (AMH) from its April 7, 2021 acquisition.
Financial results and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $410.4 million | $284.7 million | $1,098.2 million | $852.1 million |
| Net interest margin | 3.43% | 3.71% | 3.44% | 4.03% |
| Net income available to common stockholders | $236.9 million | $135.8 million | $653.2 million | $313.0 million |
| Diluted EPS | $2.28 | $1.36 | $6.35 | $3.11 |
| Net non-interest income | $138.1 million | $20.6 million | $293.8 million | $47.0 million |
| Non-interest expense | $233.8 million | $124.1 million | $613.6 million | $359.4 million |
| Provision for (recovery of) credit losses | $12.3 million | $14.6 million | $(34.6) million | $157.8 million |
- Growth and earnings quality: Q3 net revenue was $548.5 million, up 79.7%, and PPNR was $317.1 million, up 75.0%. The reported efficiency ratio was 41.5%, versus 39.7%. AMH contributed materially to mortgage banking income and also added operating costs.
- Balance sheet at September 30: Assets were $52.8 billion, up 44.7% from December 31, 2020. HFI loans were $34.8 billion, up 28.6%; deposits were $45.3 billion, up 41.8%. Loan growth included a $5.0 billion increase in residential loans.
- Credit and asset quality: Nonaccrual loans were $78.1 million, down from $115.2 million at year-end 2020; nonperforming assets were $116.4 million. Annualized Q3 net charge-offs were 0.04% of average loans, and the allowance for HFI loan losses was $246.9 million, or 0.71% of funded HFI loans. CRE-related loans represented about 31% of total loans.
- Liquidity and cash flow: Cash and equivalents totaled $917.9 million; management reported $5.4 billion of liquid assets, including $4.5 billion of unpledged marketable securities. Available credit included about $4.2 billion at the FHLB and $3.2 billion at the FRB. For the nine months, operating cash flow was negative $3.3 billion, investing cash flow negative $10.7 billion, and financing cash flow positive $12.2 billion; mortgage loan production and sales materially affected operating cash flow.
- Debt and capital: Other borrowings were $1.0 billion and qualifying debt $1.1 billion. WAL issued $600 million of subordinated debt and $242 million of credit-linked notes during 2021; it also issued $294.5 million of preferred stock. Regulatory ratios were 8.7% CET1, 9.6% Tier 1 capital, 12.6% total capital, and 7.9% Tier 1 leverage. Tangible common equity ratio was 6.9% at quarter-end.
- Profitability and dividends: Q3 return on average assets was 1.83% and return on average equity 22.5%. The quarterly common dividend was $0.35 per share, increased from $0.25 in each of the first two quarters.
Material changes versus prior periods
- Net income rose 74% year over year in Q3; nine-month income more than doubled. Higher net interest income reflected larger average earning assets, while mortgage origination and sale gains from AMH drove much of the increase in non-interest income.
- Margin compressed: net interest margin fell 28 basis points year over year in Q3 and 59 basis points for the nine-month period. Management attributed pressure to lower loan and securities yields and AMH funding costs, partly offset by lower deposit costs.
- Non-interest expense increased 88% in Q3 year over year, including AMH staffing, servicing and loan-origination costs. Acquisition and restructuring expense was $2.4 million in Q3 and $18.5 million year to date.
- The nine-month credit-loss recovery contrasts with the large provision in 2020, reflecting an improved economic outlook, according to management. Q3 still had a $12.3 million provision.
- AMH added a national mortgage origination and servicing business, $6.5 billion of HFS loans, and $604.8 million of mortgage servicing rights at quarter-end. The Company sold substantial MSRs, citing their regulatory capital impact.
Outlook, risks, and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management said liquidity was adequate for anticipated near-term needs and that interest-rate exposure was within Board-approved guidelines. Its model projected next-12-month net interest income changes of -2.8% for an immediate 100-basis-point decline, +5.2% for a 100-basis-point increase, and +14.0% for a 200-basis-point increase; these are scenario estimates, not forecasts.
- Management highlighted uncertainty from COVID-19 and supply-chain disruption, real estate and CRE/C&I concentrations, deposit competition and potential withdrawals, interest rates and LIBOR transition, and the integration, performance, regulation, and compliance demands of AMH. COVID-19-exposed industries listed—hotel, investor-dependent, retail, and gaming—totaled $4.6 billion, or 11.2% of the loan portfolio.
- At September 30, commercial COVID-related loan modifications totaled $189.7 million, with no payment deferrals; residential mortgage loans in forbearance totaled $39.1 million. Management reported no significant COVID-related write-offs to date.
- Cash-flow presentation adjustment: The filing says a $837.7 million classification adjustment was made to the previously reported six-month cash flow presentation, moving residential loans originated through AmeriHome from held-for-sale operating activity to held-for-investment investing activity. The reported nine-month cash flow figures reflect the current presentation.
- AMH-related fair values remain provisional and subject to measurement-period adjustment. Routine litigation was not expected by management to have a material effect; no material pending legal proceedings were reported.
Important facts for investors to verify
- How much of the revenue and earnings increase is attributable to AMH, and whether mortgage banking gains and servicing results are sustainable.
- Whether margin pressure, rising-rate effects, and AMH funding and integration costs develop as modeled.
- Credit performance in CRE, hotel, and other COVID-affected exposures, including loan grades, charge-offs, and allowance adequacy.
- Deposit stability and composition, brokered and other potentially rate-sensitive deposits, and the availability of contingent liquidity.
- AMH MSR valuations and sensitivities, repurchase and indemnification obligations, and the full implications of the cash-flow classification adjustment.