Western Alliance Bancorporation (NYSE:WAL):

¹See reconciliation of Non-GAAP Financial Measures.

Income Statement

Net interest income was $609.9 million in the first quarter 2023, a decrease of $29.8 million from $639.7 million in the fourth quarter 2022, and an increase of $160.4 million, or 35.7%, compared to the first quarter 2022. The decrease in net interest income from the fourth quarter 2022 is due to an increase in average balances of short-term borrowings and interest bearing deposits, combined with higher average interest rates. These were partially offset by higher yields on HFI loans and an increase in the average cash balance. The net interest income increase from the first quarter 2022 was driven by HFI loan growth and higher yields on HFI loans, partially offset by an increase in other borrowings and higher interest rates on liabilities.

The Company recorded a provision for credit losses of $19.4 million in the first quarter 2023, an increase of $16.3 million from $3.1 million in the fourth quarter 2022, and an increase of $10.4 million from $9.0 million in the first quarter 2022. The provision for credit losses during the first quarter 2023 is primarily due to a charge-off of a corporate debt security from a financial institution issuer and heightened economic uncertainty, offset by a decrease in HFI loans as the Company transferred $6.0 billion of held for investment loans to held for sale as part of its balance sheet repositioning plan to strengthen regulatory capital.

The Company’s net interest margin in the first quarter 2023 was 3.79%, a decrease from 3.98% in the fourth quarter 2022, and an increase from 3.32% in the first quarter 2022. Higher balances and rates on borrowings and interest bearing deposits drove a decrease in net interest margin, with higher yields on HFI loans partially offsetting the decrease. The increase in net interest margin from the first quarter 2022 was driven by HFI loan growth plus an increase in rates, partially offset by higher deposits and borrowings balances and rates.

Non-interest income was $(58.0) million, or $102.3 million after adjusting for losses on security sales and fair value adjustments, for the first quarter 2023, compared to $61.5 million for the fourth quarter 2022, and $106.3 million for the first quarter 2022. Fair value loss adjustments of $147.8 million are primarily related to the transfer of $6.0 billion of held for investment loans to held for sale. This decrease in non-interest income for the quarter was partially offset by a $20.5 million increase in net loan servicing revenue due to an increase in fees and the value of MSRs as well as a $6.0 million increase in net gain on loan origination and sale activities from an increase in spreads and gains from trading activity. The $164.3 million decrease from the first quarter 2022 was driven by fair value loss adjustments from HFI loans transferred to HFS and losses from sales of investment securities.

Net revenue was $551.9 million for the first quarter 2023, compared to $701.2 million and $555.8 million for the fourth quarter 2022 and first quarter 2022, respectively. After adjusting for losses on security sales and fair value adjustments, net revenue¹ was $712.2 million for the first quarter 2023, an increase of $1.9 million, compared to $710.3 million for the fourth quarter 2022, and an increase of $156.7 million, or 28.2%, compared to $555.5 million for the first quarter 2022.

Non-interest expense was $347.9 million, or $360.6 million after adjusting for gain on extinguishment of debt from payoff of credit linked notes, for the first quarter 2023, compared to $333.4 million for the fourth quarter 2022, and $248.6 million for the first quarter 2022. The Company’s adjusted efficiency ratio¹ was 43.2% for the first quarter 2023, compared to 39.4% in the fourth quarter 2022, and 43.2% for the first quarter 2022. The increase in non-interest expense from the fourth quarter 2022 is due primarily to higher salaries and benefits costs. The increase in non-interest expense from the first quarter 2022 is attributable to increased deposit costs.

Income tax expense was $42.4 million for the first quarter 2023, compared to $71.7 million for the fourth quarter 2022, and $58.1 million for the first quarter 2022.

Net income was $142.2 million for the first quarter 2023, a decrease of $150.8 million from $293.0 million for the fourth quarter 2022, and a decrease of $97.9 million from $240.1 million for the first quarter 2022. Earnings per share totaled $1.28 for the first quarter 2023, compared to $2.67 for the fourth quarter 2022, and $2.22 for the first quarter 2022. Earnings per share¹ adjusted for losses on security sales, fair value loss adjustments and gain on extinguishment of debt was $2.30 for the first quarter 2023, compared to $2.74 and $2.22 for the fourth quarter 2022 and first quarter 2022, respectively.

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 revenue¹ less non-interest expense¹. For the first quarter 2023, the Company’s PPNR¹ was $351.6 million, down $25.3 million from $376.9 million in the fourth quarter 2022, and up $44.7 million from $306.9 million in the first quarter 2022.

The Company had 3,340 full-time equivalent employees and 57 offices at March 31, 2023, compared to 3,365 employees and 56 offices at December 31, 2022, and 3,170 employees and 60 offices at March 31, 2022.

¹ See reconciliation of Non-GAAP Financial Measures.

Balance Sheet

HFI loans, net of deferred fees totaled $46.4 billion at March 31, 2023, compared to $51.9 billion at December 31, 2022, and $41.1 billion at March 31, 2022. The decrease in HFI loans of $5.4 billion from the prior quarter was driven by a decrease of $5.2 billion in commercial and industrial loans as $5.4 billion of commercial and industrial loans were transferred to HFS as of quarter-end. In addition, residential real estate loans decreased $904 million ($490 million transferred to HFS), partially offset by increases of $394 million in construction and land development and $298 million in CRE non-owner occupied loans ($110 million transferred to HFS). From March 31, 2022, HFI loan growth of $5.3 billion, was primarily driven by residential real estate, CRE non-owner occupied, and construction and land development loans which increased $3.8 billion, $2.8 billion, and $1.1 billion, respectively, offset by commercial and industrial loans which decreased $2.4 billion.

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 March 31, 2023, the allowance for loan losses to funded HFI loans ratio was 0.66%, compared to 0.60% at December 31, 2022, and 0.63% at March 31, 2022. The allowance for credit losses, which includes the allowance for unfunded loan commitments, to funded HFI loans ratio was 0.75% at March 31, 2023, compared to 0.69% at December 31, 2022, and 0.73% at March 31, 2022. The Company is a party to credit linked note transactions, which effectively transfer a portion of the risk of losses on reference pools of loans to the purchasers of the notes. As of March 31, 2023, December 31, 2022, and March 31, 2022, the Company is protected from first credit losses on reference pools of loans totaling $11.0 billion, $12.0 billion, and $5.4 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 $20.8 million as of March 31, 2023, $21.9 million as of December 31, 2022, and $9.5 million as of March 31, 2022, 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 0.95% at March 31, 2023, 0.89% at December 31, 2022, and 0.84% at March 31, 2022.

Deposits totaled $47.6 billion at March 31, 2023, a decrease of $6.1 billion from $53.6 billion at December 31, 2022, and a decrease of $4.6 billion from $52.2 billion at March 31, 2022. By deposit type, the decrease from the prior quarter is attributable to a decrease of $5.6 billion from savings and money market accounts and $3.2 billion from non-interest bearing demand deposits, partially offset by increases of $1.5 billion from certificates of deposits and $1.2 billion from interest bearing demand deposits. From March 31, 2022, non-interest bearing demand deposits and savings and money market accounts decreased $7.1 billion and $4.7 billion, respectively. These decreases were partially offset by increases in certificates of deposit and interest-bearing demand deposits of $4.7 billion and $2.5 billion, respectively. Non-interest bearing deposits were $16.5 billion at March 31, 2023, compared to $19.7 billion at December 31, 2022, and $23.5 billion at March 31, 2022.

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 97.6% at March 31, 2023, compared to 96.7% at December 31, 2022, and 78.8% at March 31, 2022.

Borrowings were $15.9 billion at March 31, 2023, $6.3 billion at December 31, 2022, and $833 million at March 31, 2022. Borrowings increased from December 31, 2022 due primarily to an increase in short-term borrowings of $9.8 billion offset by payoffs of credit linked notes of $265 million. The increase in borrowings from March 31, 2022 is due to an increase in short-term borrowings of $14.7 billion and issuance of $579 million of credit linked notes, net of issuance costs, during 2022, less payoffs of credit linked notes in the first quarter of 2023.

Qualifying debt totaled $895 million at March 31, 2023, compared to $893 million at December 31, 2022 and March 31, 2022.

Stockholders’ equity was $5.5 billion at March 31, 2023, compared to $5.4 billion at December 31, 2022 and $5.0 billion at March 31, 2022. The increase in stockholders’ equity quarter over quarter was due to net income and unrealized fair value gains of approximately $71 million on the Company's available for sale securities, which are recorded in other comprehensive (loss) income, net of tax, partially offset by dividends to shareholders. A cash dividend of $0.36 per share was paid to common shareholders on March 3, 2023, totaling $39.4 million, and a cash dividend of $0.27 per depository share was paid to preferred shareholders on March 30, 2023, totaling $3.2 million. The increase in stockholders' equity from March 31, 2022 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 March 31, 2023, tangible common equity, net of tax¹, was 6.5% of tangible assets¹ and total capital was 12.1% of risk-weighted assets. The Company’s tangible book value per share¹ was $41.56 at March 31, 2023, an increase of 3.3% from $40.25 at December 31, 2022, and up 11.9% from $37.13 at March 31, 2022. The increase in tangible book value per share from December 31, 2022 is attributable to net income and unrealized fair value gains on the Company's available for sale securities.

Total assets increased 4.9% to $71.0 billion at March 31, 2023, from $67.7 billion at December 31, 2022, and increased 17.3% from $60.6 billion at March 31, 2022. The increase in total assets from December 31, 2022 and March 31, 2022 was driven by an increase in cash and investments.

¹ See reconciliation of Non-GAAP Financial Measures.

Asset Quality

Provision for credit losses totaled $19.4 million for the first quarter 2023, compared to $3.1 million for the fourth quarter 2022, and $9.0 million for the first quarter 2022. Net loan charge-offs in the first quarter 2023 were $6.0 million, or 0.05% of average loans (annualized), compared to $1.8 million, or 0.01%, in the fourth quarter 2022, and $0.2 million, or approximately 0.00%, in the first quarter 2022.

Nonaccrual loans increased $22 million to $107 million during the quarter and increased $16 million from March 31, 2022. Loans past due 90 days and still accruing interest were $1 million (excluding government guaranteed loans of $494 million) at March 31, 2023, compared to zero at December 31, 2022 and March 31, 2022 (excluding government guaranteed loans of $582 million and zero at December 31, 2022 and March 31, 2022, respectively). Loans past due 30-89 days and still accruing interest totaled $58 million (excluding government guaranteed loans of $281 million) at March 31, 2023, a decrease from $70 million at December 31, 2022, and flat from $58 million at March 31, 2022 (excluding government guaranteed loans of $334 million and zero at December 31, 2022 and March 31, 2022, respectively).

Repossessed assets totaled $11 million at March 31, 2023, flat from December 31, 2022, and a $1 million decrease from $12 million at March 31, 2022. Classified assets totaled $459 million at March 31, 2023, an increase of $66 million from $393 million at December 31, 2022, and an increase of $94 million from $365 million at March 31, 2022.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 7.8% at March 31, 2023, compared to 6.8% at December 31, 2022, and 7.4% at March 31, 2022.

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:

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 $27.3 billion at March 31, 2023, a decrease of $4.1 billion during the quarter, and an increase of $1.5 billion during the last twelve months. The Commercial segment also has loans held for sale of $4.7 billion at March 31, 2023. Deposits for the Commercial segment totaled $22.0 billion at March 31, 2023, a decrease of $7.5 billion during the quarter, and a decrease of $8.1 billion during the last twelve months.

Pre-tax income for the Commercial segment was $159.4 million for the three months ended March 31, 2023, a decrease of $161.1 million from the three months ended December 31, 2022, and a decrease of $77.4 million from the three months ended March 31, 2022.

The Consumer Related segment reported an HFI loan balance of $19.2 billion at March 31, 2023, a decrease of $1.3 billion during the quarter, and an increase of $3.8 billion during the last twelve months. The Consumer Related segment also has loans held for sale of $2.3 billion at March 31, 2023, an increase of $1.1 billion during the quarter, and a decrease of $2.5 billion during the last twelve months. Deposits for the Consumer Related segment totaled $20.0 billion, an increase of $1.5 billion during the quarter and during the last twelve months.

Pre-tax income for the Consumer Related segment was $56.8 million for the three months ended March 31, 2023, a decrease of $13.0 million from the three months ended December 31, 2022, and a decrease of $70.1 million from the three months ended March 31, 2022.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its first quarter 2023 financial results at 12:00 p.m. ET on Wednesday, April 19, 2023. Participants may access the call by dialing 1-833-470-1428 and using access code 192362 or via live audio webcast using the website link https://events.q4inc.com/attendee/218206682. 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 April 19th through 11:00 p.m. ET May 19th by dialing 1-866-813-9403, using access code 279348.

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, 2022 and the Company's subsequent Quarterly Reports on Form 10-Q, each as filed with the Securities and Exchange Commission; adverse developments in the financial services industry generally such as the recent bank failures and any related impact on depositor behavior; risks related to the sufficiency of liquidity; 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.