Western Alliance Bancorporation Reports Third Quarter 2022 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

THIRD QUARTER 2022 FINANCIAL RESULTS

Income Statement

Net interest income was $602.1 million in the third quarter 2022, an increase of $77.1 million from $525.0 million in the second quarter 2022, and an increase of $191.7 million, or 46.7%, compared to the third quarter 2021. The increase in net interest income from the second quarter 2022 is due to HFI loan growth and a higher rate environment, which drove an increase in yields on interest earning assets and also pushed interest rates higher on deposits and short-term borrowings. HFI loan growth and higher yields on HFI loans, partially offset by higher interest rates on deposits and an increase in other borrowings, drove the increase in net interest income from the third quarter 2021.

The Company recorded a provision for credit losses of $28.5 million in the third quarter 2022, an increase of $1.0 million from $27.5 million in the second quarter 2022, and an increase of $16.2 million from $12.3 million in the third quarter 2021. The provision for credit losses during the third quarter 2022 is primarily due to loan growth and heightened economic uncertainty.

The Company’s net interest margin in the third quarter 2022 was 3.78%, an increase from 3.54% in the second quarter 2022, and an increase from 3.43% in the third quarter 2021. The higher rate environment drove an increase in net interest margin, with yields on interest earning assets more than offsetting the increase in rates on deposits and debt. The increase in net interest margin from the third quarter 2021 was driven by HFI loan growth, partially offset by higher debt and deposit balances coupled with higher rates.

Non-interest income was $61.8 million for the third quarter 2022, compared to $95.0 million for the second quarter 2022, and $138.1 million for the third quarter 2021. The $33.2 million decrease in non-interest income from the second quarter 2022 was primarily related to a decrease in mortgage banking related income as a result of lower production volume and overall gain on sale margin attributable to the rising rate environment. Loan servicing revenue decreased $22.4 million as losses on MSR hedges increased, which was partially offset by an increase to the value of MSRs. Net gain on loan origination and sale activities decreased $12.7 million as a result of valuation losses on HFS loans and locks, partially offset by a reduction in losses on loan sales. The $76.3 million decrease from the third quarter 2021 was driven by a decrease in net gain on loan origination and sale activities of $106.5 million from lower production volume, partially offset by a $20.8 million increase in loan servicing revenue.

Net revenue was $663.9 million for the third quarter 2022, an increase of $43.9 million, or 7.1%, compared to $620.0 million for the second quarter 2022, and an increase of $115.4 million, or 21.0%, compared to $548.5 million for the third quarter 2021.

Non-interest expense was $305.8 million for the third quarter 2022, compared to $268.9 million for the second quarter 2022, and $233.8 million for the third quarter 2021. The Company’s efficiency ratio¹ was 45.5% for the third quarter 2022, compared to 42.8% in the second quarter 2022, and 42.0% for the third quarter 2021. Non-interest expense increased from the second quarter 2022 due primarily to increased deposit costs. The increase in non-interest expense from the third quarter 2021 is attributable to increased deposit costs, legal, professional, and director's fees, and data processing costs, partially offset by lower loan acquisition and origination expenses as well as lower acquisition and restructure expenses.

Income tax expense was $65.6 million for the third quarter 2022, compared to $63.4 million for the second quarter 2022, and $65.5 million for the third quarter 2021.

Net income was $264.0 million for the third quarter 2022, an increase of $3.8 million from $260.2 million for the second quarter 2022, and an increase of $27.1 million from $236.9 million for the third quarter 2021. Earnings per share was $2.42 for the third quarter 2022, compared to $2.39 for the second quarter 2022, and $2.28 for the third quarter 2021.

The Company views its pre-provision net revenue¹ ("PPNR") as a key metric for assessing the Company’s earnings power, which it defines as net revenue less non-interest expense. For the third quarter 2022, the Company’s PPNR¹ was $358.1 million, up $7.0 million from $351.1 million in the second quarter 2022, and up $43.4 million from $314.7 million in the third quarter 2021.

The Company had 3,368 full-time equivalent employees and 60 offices at September 30, 2022, compared to 3,254 employees and 60 offices at June 30, 2022, and 3,061 employees and 54 offices at September 30, 2021.

¹ See reconciliation of Non-GAAP Financial Measures.

Balance Sheet

HFI loans, net of deferred fees totaled $52.2 billion at September 30, 2022, compared to $48.6 billion at June 30, 2022, and $34.8 billion at September 30, 2021. HFI loan growth of $3.6 billion from the prior quarter was driven by increases of $1.6 billion in commercial and industrial, $893 million in CRE non-owner occupied, $766 million in residential real estate, and $390 million in construction and land development loans. From September 30, 2021, HFI loan growth of $15.6 billion (which excludes a transfer of government guaranteed early buyout ("EBO") residential loans from HFS to HFI in the second quarter of 2022 with a balance of $1.8 billion at September 30, 2022), was primarily driven by residential real estate, commercial and industrial, and CRE non-owner occupied loans which increased $6.4 billion, $5.8 billion, and $2.8 billion, respectively.

The Company's allowance for credit losses on HFI loans consists of an allowance for funded HFI loans and an allowance for unfunded loan commitments. At September 30, 2022, the allowance for loan losses to funded HFI loans ratio was 0.58%, compared to 0.56% at June 30, 2022, and 0.71% at September 30, 2021. The allowance for credit losses, which includes the allowance for unfunded loan commitments, to funded HFI loans ratio was 0.68% at September 30, 2022, compared to 0.68% at June 30, 2022, and 0.80% at September 30, 2021. The decrease in the allowance for credit loss ratios from the prior year is due to loan mix changes resulting from growth in low loss segments. The Company is a party to credit linked note transactions, which effectively transfers a portion of the risk of loan losses on reference pools of loans to the purchasers of the notes. As of September 30, 2022, June 30, 2022, and September 30, 2021, the Company is protected from credit losses on reference pools of loans totaling $10.8 billion, $11.1 billion, and $1.9 billion, respectively, under these transactions. However, as these note transactions are considered to be free standing credit enhancements, the allowance for credit losses cannot be reduced by the expected credit losses that may be mitigated by these notes. Accordingly, the allowance for loan and credit losses ratios include an allowance of $19 million as of September 30, 2022 and June 30, 2022 and $0.4 million as of September 30, 2021 related to these pools of loans. The allowance for credit losses to funded HFI loans ratio, adjusted to reduce the HFI loan balance by the amount of loans in covered reference pools, was 0.86% at September 30, 2022 and 0.88% at June 30, 2022.

Deposits totaled $55.6 billion at September 30, 2022, an increase of $1.9 billion from $53.7 billion at June 30, 2022, and an increase of $10.3 billion from $45.3 billion at September 30, 2021. By deposit type, the increase from the prior quarter is attributable to an increase of $1.2 billion from non-interest bearing demand deposits, $533 million from certificates of deposits, and $176 million from savings and money market accounts. From September 30, 2021, deposits increased across all deposit types, with increases in non-interest bearing demand deposits of $3.9 billion, interest-bearing demand deposits of $3.4 billion, savings and money market accounts of $1.8 billion, and certificates of deposit of $1.3 billion. Non-interest bearing deposits were $24.9 billion at September 30, 2022, compared to $23.7 billion at June 30, 2022, and $21.1 billion at September 30, 2021.

The table below shows the Company's deposit types as a percentage of total deposits:

The Company’s ratio of HFI loans to deposits was 93.9% at September 30, 2022, compared to 90.4% at June 30, 2022, and 76.9% at September 30, 2021.

Borrowings were $6.3 billion at September 30, 2022, $5.2 billion at June 30, 2022, and $1.0 billion at September 30, 2021. The increase in borrowings from June 30, 2022 is due primarily to an increase in short-term borrowings of $1.1 billion. The increase in borrowings from September 30, 2021 is due to an increase in short-term borrowings of $4.6 billion and the issuance of $486 million of credit linked notes in the second quarter 2022 and $225 million in the fourth quarter 2021.

Qualifying debt totaled $889 million at September 30, 2022, compared to $891 million at June 30, 2022, and $1.1 billion at September 30, 2021. The decrease in qualifying debt from September 30, 2021 is primarily related to a $175 million subordinated debt redemption during the fourth quarter 2021.

Stockholders’ equity was $5.0 billion at September 30, 2022, compared to $5.0 billion at June 30, 2022, and $4.5 billion at September 30, 2021. Stockholders’ equity remained consistent quarter over quarter as net income and $50 million of sales of common stock under the Company's ATM program was offset by dividends to shareholders and unrealized fair value losses of approximately $220 million on the Company's available for sale securities, which are recorded in other comprehensive (loss) income, net of tax. A cash dividend of $0.36 per share was paid to common shareholders on August 26, 2022, totaling $39.0 million, and a cash dividend of $0.27 per depository share was paid to preferred shareholders on September 30, 2022, totaling $3.2 million. The increase in stockholders' equity from September 30, 2021 is primarily a function of net income and sales of common stock under the Company's ATM program, partially offset by dividends to shareholders and unrealized fair value losses on available for sale securities.

At September 30, 2022, tangible common equity, net of tax¹, was 5.9% of tangible assets¹ and total capital was 11.4% of risk-weighted assets. The Company’s tangible book value per share¹ was $37.16 at September 30, 2022, an increase of 1.3% from $36.67, and up 7.2% from $34.67 at September 30, 2021. The increase in tangible book value per share from June 30, 2022 is attributable to net income and sales of common shares under the ATM program offset by fair value marks on the Company's available for sale securities, which are recorded in other comprehensive (loss) income, net of tax.

Total assets increased 4.7% to $69.2 billion at September 30, 2022, from $66.1 billion at June 30, 2022, and increased 31.1% from $52.8 billion at September 30, 2021. The increase in total assets from June 30, 2022 and September 30, 2021 was driven by continued organic loan and deposit growth.

¹ See reconciliation of Non-GAAP Financial Measures.

Asset Quality

Provision for credit losses totaled $28.5 million for the third quarter 2022, compared to $27.5 million for the second quarter 2022, and $12.3 million for the third quarter 2021. Net loan (recoveries) charge-offs in the third quarter 2022 were $(1.9) million, or (0.02)% of average loans (annualized), compared to $1.4 million, or 0.01%, in the second quarter 2022, and $3.0 million, or 0.04%, in the third quarter 2021.

Nonaccrual loans increased $5 million to $90 million during the quarter and increased $12 million from September 30, 2021. Loans past due 90 days and still accruing interest were zero (excluding government guaranteed loans of $644 million) at September 30, 2022, compared to zero at June 30, 2022 and September 30, 2021 (excluding government guaranteed loans of $827 million and zero at June 30, 2022 and September 30, 2021, respectively). Loans past due 30-89 days and still accruing interest totaled $56 million (excluding government guaranteed loans of $245 million) at September 30, 2022, a decrease from $117 million at June 30, 2022, and an increase from $24 million at September 30, 2021 (excluding government guaranteed loans of $202 million and zero at June 30, 2022 and September 30, 2021, respectively).

Repossessed assets totaled $11 million at September 30, 2022, a $1 million decrease from $12 million at June 30, 2022 and September 30, 2021. Classified assets totaled $385 million at September 30, 2022, a increase of $39 million from $346 million at June 30, 2022, and an increase of $120 million from $265 million at September 30, 2021.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 7.1% at September 30, 2022, compared to 6.7% at June 30, 2022, and 6.3% at September 30, 2021.

¹ See reconciliation of Non-GAAP Financial Measures.

Segment Highlights

The Company's reportable segments are aggregated with a focus on products and services offered and consist of three reportable segments:

• Commercial segment: provides commercial banking and treasury management products and services to small and middle-market businesses, specialized banking services to sophisticated commercial institutions and investors within niche industries, as well as financial services to the real estate industry.
• Consumer Related segment: offers both commercial banking services to enterprises in consumer-related sectors and consumer banking services, such as residential mortgage banking and beginning on January 25, 2022 includes the financial results of Digital Disbursements.
• Corporate & Other segment: consists of the Company's investment portfolio, Corporate borrowings and other related items, income and expense items not allocated to our other reportable segments, and inter-segment eliminations.

Key management metrics for evaluating the performance of the Company's Commercial and Consumer Related segments include loan and deposit growth, asset quality, and pre-tax income.

The Commercial segment reported an HFI loan balance of $32.1 billion at September 30, 2022, an increase of $2.6 billion during the quarter, and an increase of $9.2 billion during the last twelve months. Deposits for the Commercial segment totaled $30.0 billion at September 30, 2022, an increase of $524 million during the quarter, and an increase of $1.6 billion during the last twelve months.

Pre-tax income for the Commercial segment was $298.2 million for the three months ended September 30, 2022, an increase of $58.3 million from the three months ended June 30, 2022, and an increase of $105.0 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the Commercial segment reported total pre-tax income of $774.8 million, an increase of $151.7 million compared to the nine months ended September 30, 2021.

The Consumer Related segment reported an HFI loan balance of $20.1 billion at September 30, 2022, an increase of $1.0 billion during the quarter, and an increase of $8.2 billion during the last twelve months. The Consumer Related segment also has loans held for sale of $2.2 billion at September 30, 2022, a decrease of $599 million during the quarter, and a decrease of $4.3 billion during the last twelve months. Deposits for the Consumer Related segment totaled $21.0 billion, an increase of $1.3 billion during the quarter, and an increase of $5.2 billion during the last twelve months.

Pre-tax income for the Consumer Related segment was $93.2 million for the three months ended September 30, 2022, a decrease of $66.9 million from the three months ended June 30, 2022, and a decrease of $82.8 million from the three months ended September 30, 2021. Pre-tax income for the Consumer Related segment for the nine months ended September 30, 2022 totaled $380.3 million, an increase of $19.2 million compared to the nine months ended September 30, 2021.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its third quarter 2022 financial results at 12:00 p.m. ET on Friday, October 21, 2022. Participants may access the call by dialing 1-888-396-8049 and using the conference ID 11467649 or via live audio webcast using the website link https://events.q4inc.com/attendee/649968884. The webcast is also available via the Company’s website at www.westernalliancebancorporation.com. Participants should log in at least 15 minutes early to receive instructions. The call will be recorded and made available for replay after 3:00 p.m. ET October 21st through 11:00 p.m. ET November 21st by dialing 1-877-674-7070, using passcode 467649.

Reclassifications

Certain amounts in the Consolidated Income Statements for the prior periods have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

Use of Non-GAAP Financial Information

This press release contains both financial measures based on GAAP and non-GAAP based financial measures, which are used where management believes them to be helpful in understanding the Company’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this press release. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Cautionary Note Regarding Forward-Looking Statements

This release contains forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Examples of forward-looking statements include, among others, statements we make regarding our expectations with regard to our business, financial and operating results, future economic performance and dividends. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Some factors that could cause actual results to differ materially from historical or expected results include, among others: the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the Company's subsequent Quarterly Reports on Form 10-Q, each as filed with the Securities and Exchange Commission; the potential adverse effects of unusual and infrequently occurring events such as the COVID-19 pandemic and any governmental or societal responses thereto; changes in general economic conditions, either nationally or locally in the areas in which we conduct or will conduct our business; the impact on financial markets from geopolitical conflicts such as the war between Russia and Ukraine; inflation, interest rate, market and monetary fluctuations; increases in competitive pressures among financial institutions and businesses offering similar products and services; higher defaults on our loan portfolio than we expect; changes in management’s estimate of the adequacy of the allowance for credit losses; legislative or regulatory changes or changes in accounting principles, policies or guidelines; supervisory actions by regulatory agencies which may limit our ability to pursue certain growth opportunities, including expansion through acquisitions; additional regulatory requirements resulting from our continued growth; management’s estimates and projections of interest rates and interest rate policy; the execution of our business plan; and other factors affecting the financial services industry generally or the banking industry in particular.

Any forward-looking statement made by us in this release is based only on information currently available to us and speaks only as of the date on which it is made. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements, whether written or oral, that may be made from time to time, set forth in this press release to reflect new information, future events or otherwise.

About Western Alliance Bancorporation

With more than $65 billion in assets, Western Alliance Bancorporation (NYSE:WAL) is one of the country’s top-performing banking companies. Through its primary subsidiary, Western Alliance Bank, Member FDIC, business clients benefit from a full spectrum of tailored banking solutions and outstanding service delivered by industry experts who put customers first. Major accolades include #2 best-performing of the 50 largest public U.S. banks in the S&P Global Market Intelligence listing for 2021, and #1 Best Emerging Regional Bank for 2022 by Bank Director. Serving clients across the country wherever business happens, Western Alliance Bank operates individual, full-service banking and financial brands with offices in key markets nationwide. For more information, visit westernalliancebank.com.