This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 and the interim Unaudited Consolidated Financial Statements and Notes to Unaudited Consolidated Financial Statements hereto and financial information appearing elsewhere in this report. Unless the context requires otherwise, the terms "Company," "we," and "our" refer toWestern Alliance Bancorporation and its wholly-owned subsidiaries on a consolidated basis.
Forward-looking information
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2022 are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including statements that are related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements contained in this Form 10-Q reflect the Company's current views about future events and financial performance and involve certain risks, uncertainties, assumptions, and changes in circumstances that may cause the Company's actual results to differ significantly from historical results and those expressed in any forward-looking statement. Risks and uncertainties include those set forth in the Company's filings with theSEC and the following factors that could cause actual results to differ materially from those presented: 1) the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto; 2) other adverse financial market and economic conditions, including the effects of any recession inthe United States , the potential impact on borrowers of supply chain disruptions and the economic and market impacts of the military conflict betweenRussia andUkraine ; 3) changes in interest rates and increased rate competition; 4) exposure of financial instruments to certain market risks that may increase the volatility of earnings and AOCI; 5) the inherent risk associated with accounting estimates, including the impact to the Company's allowance, provision for credit losses, and capital levels under the CECL accounting standard; 6) exposure to natural and man-made disasters in markets that the Company operates and the impact of climate change on the Company and its customers; 7) dependency on real estate and events that negatively impact the real estate market; 8) high concentration of commercial real estate, residential mortgage, and commercial and industrial loans; 9) residual risk retained by the Company on reference pools covered by credit linked notes; 10) exposure to environmental liabilities related to the properties to which the Company acquires title; 11) the Company's ability to compete in a highly competitive market; 12) expansion strategies that may not be successful; 13) uncertainty associated with digital payment initiatives; 14) the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team; 15) dependence on low-cost deposits; 16) risks related to representations and warranties made on third-party loan sales; 17) ability to borrow from the FHLB or the FRB; 18) a change in the Company's creditworthiness; 19) information security breaches; 20) reliance on third parties to provide key components of the Company's infrastructure; 21) perpetration of fraud; 22) the Company's ability to implement and improve its controls and processes to keep pace with its growth; 23) the replacement of LIBOR; 24) the Company's ability to adapt to technological change; 25) risk of operating in a highly regulated industry and the Company's ability to remain in compliance; 26) failure to comply with state and federal banking agency laws and regulations; 27) results of any tax audit findings, challenges to the Company's tax positions, or adverse changes or interpretations of tax laws; 28) potential negative publicity and reputational harm from certain allegations with respect to thePhoenix Suns andRobert Sarver ; and 29) risks related to ownership and price of the Company's common stock. For more information regarding risks that may cause the Company's actual results to differ materially from any forward-looking statements, see "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 73
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Recent developments: Acquisition of Digital Disbursements
OnJanuary 25, 2022 , the Company completed its acquisition ofDigital Settlement Technologies LLC , doing business as Digital Disbursements, a digital payments platform for the class action legal industry. DST's proprietary platform enables claimants to select their payment method, including direct-to-bank account options and popular digital wallets. This provides the Company with the internal capability to significantly increase efficacy, reduce distribution costs and improve potential fraud detection for the legal class action market. The acquisition is expected to grow the Company's deposit base and continue to extend the suite of legal banking services offered while serving adjacent sectors that will benefit from digital payments technology.
Financial overview and highlights
WAL is a bank holding company headquartered inPhoenix, Arizona , incorporated under the laws of the state ofDelaware . WAL provides a full spectrum of customized loan, deposit and treasury management capabilities, including 24/7 funds transfer and other blockchain-based offerings through its wholly-owned banking subsidiary, WAB. WAB operates the following full-service banking divisions: ABA, BON and FIB, Bridge, and TPB. The Company also provides an array of specialized financial services across the country, including mortgage banking services through AmeriHome, and has added to its capabilities with the acquisition of DST onJanuary 25, 2022 , which provides digital payment services for the class action legal industry.
Second Quarter 2022 Financial Results Highlights
• Net profit available to ordinary shareholders of
• Diluted earnings per share of
•Net income from
• PPNR of
•Total HFI loans of$48.6 billion , up$9.5 billion , which includes transfer of$1.5 billion in government guaranteed EBO loans from HFS to HFI, fromDecember 31, 2021
• Total deposits of
• Equity of
• Non-performing assets (non-current loans and repossessed assets) decreased to 0.15% of total assets, from 0.20% at
• Annualized net write-offs of loans relative to average outstanding loans of 0.01%, compared to around 0.00% for the second quarter of 2021
• Net interest margin of 3.54%, compared to 3.51% in the second quarter of 2021
•Tangible common equity ratio of 6.1%, compared to 7.1% at
• Book value per common share of
• Tangible book value per share, net of tax,
• Efficiency ratio of 42.8% in the second quarter of 2022, compared to 47.5% in the second quarter of 20211
The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below as they pertain to the Company's overall comparative performance for the three and six months endedJune 30, 2022 .
1 See the Non-GAAP Financial Measures section beginning on page 78.
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As a bank holding company, management focuses on key ratios in evaluating the Company’s financial condition and results of operations.
Results of operations and financial situation
A summary of the Company’s results of operations, financial condition and selected measures is included in the following tables:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in millions, except per share amounts)
Net income $ 260.2 $ 223.8 $ 500.3 $ 416.3
Net income available to common
stockholders 257.0 223.8 493.9 416.3
Earnings per share - basic 2.40 2.18 4.63 4.09
Earnings per share - diluted 2.39 2.17 4.61 4.07
Return on average assets 1.62 % 1.86 % 1.63 % 1.89 %
Return on average equity 20.8 23.7 20.2 23.0
Return on average tangible common
equity (1) 25.6 28.1 24.8 26.2
Net interest margin 3.54 3.51 3.44 3.45
(1) See the Non-GAAP Financial Measures section beginning on page 78.
December 31,
June 30, 2022 2021
(in millions)
Total assets $ 66,055 $ 55,983
Loans HFS 2,803 5,635
Loans HFI, net of deferred loan fees and costs 48,572 39,075
Total deposits 53,712 47,612
Other borrowings 5,210 1,502
Qualifying debt 891 896
Stockholders' equity 4,959 4,963
Tangible common equity, net of tax (1) 3,971 4,035
(1) See the Non-GAAP Financial Measures section beginning on page 78.
Asset quality
For all banks and bank holding companies, asset quality plays a significant role
in the overall financial condition of the institution and results of operations.
The Company measures asset quality in terms of nonaccrual loans as a percentage
of gross loans and net charge-offs as a percentage of average loans. Net
charge-offs are calculated as the difference between charged-off loans and
recovery payments received on previously charged-off loans. The following table
summarizes the Company's key asset quality metrics for HFI loans:
June 30, 2022 December 31, 2021
(dollars in millions)
Nonaccrual loans $ 85 $ 73
Repossessed assets 12 12
Non-performing assets 100 87
Nonaccrual loans to funded loans 0.17 % 0.19 %
Nonaccrual and repossessed assets to total assets 0.15 0.15
Allowance for loan losses to funded loans 0.56 0.65
Allowance for credit losses to funded loans 0.67 0.74
Net charge-offs to average loans outstanding (1) 0.01 0.02
(1)Annualized on a real/real basis for the three months ended
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Growth in assets and deposits
The Company’s assets and liabilities consist primarily of loans and deposits. Therefore, the ability to issue new loans and attract new deposits is critical to the Company’s growth.
Total assets increased to$66.1 billion atJune 30, 2022 from$56.0 billion atDecember 31, 2021 . The increase in total assets of$10.1 billion , or 18.0%, was driven by continued organic loan and deposit growth, which contributed to an increase in cash of$1.4 billion as well as an increase in investment securities of$1.2 billion . HFI loans increased by$9.5 billion , or 24.3%, to$48.6 billion as ofJune 30, 2022 , compared to$39.1 billion as ofDecember 31, 2021 . The increase in HFI loans fromDecember 31, 2021 was driven by increases in residential real estate loans of$5.6 billion (includes a$1.5 billion transfer of EBO loans from HFS to HFI), commercial and industrial loans of$2.5 billion , CRE, non-owner occupied loans of$1.2 billion , and construction and land development loans of$208 million . These increases were partially offset by decreases in CRE, owner occupied loans of$50 million . In addition, HFS loans decreased by$2.8 billion , from$5.6 billion as ofDecember 31, 2021 , primarily related to a$1.5 billion transfer of EBO loans from HFS to HFI during the three months endedJune 30, 2022 . Total deposits increased$6.1 billion , or 12.8%, to$53.7 billion as ofJune 30, 2022 from$47.6 billion as ofDecember 31, 2021 . The increase in deposits fromDecember 31, 2021 was driven by increases of$2.4 billion in non-interest bearing demand deposits,$1.7 billion in savings and money market accounts,$1.5 billion in interest bearing demand deposits, and$522 million in certificates of deposit. RESULTS OF OPERATIONS The following table sets forth a summary financial overview for the comparable periods: Three Months Ended June 30, Increase Six Months Ended June 30, Increase 2022 2021 (Decrease) 2022 2021 (Decrease) (in millions, except per share amounts) Consolidated Income Statement Data: Interest income$ 579.6 $ 398.5 $ 181.1 $ 1,064.1 $ 732.6 $ 331.5 Interest expense 54.6 28.0 26.6 89.6 44.8 44.8 Net interest income 525.0 370.5 154.5 974.5 687.8 286.7 Provision for (recovery of) credit losses 27.5 (14.5) 42.0 36.5 (46.9) 83.4 Net interest income after provision for (recovery of) credit losses 497.5 385.0 112.5 938.0 734.7 203.3 Non-interest income 95.0 136.0 (41.0) 201.3 155.7 45.6 Non-interest expense 268.9 244.8 24.1 517.5 379.8 137.7 Income before provision for income taxes 323.6 276.2 47.4 621.8 510.6 111.2 Income tax expense 63.4 52.4 11.0 121.5 94.3 27.2 Net income 260.2 223.8 36.4 500.3 416.3 84.0 Dividends on preferred stock 3.2 - 3.2 6.4 - 6.4 Net income available to common stockholders$ 257.0 $ 223.8 $ 33.2 $ 493.9$ 416.3 $ 77.6 Earnings per share: Basic$ 2.40 $ 2.18 $ 0.22 $ 4.63$ 4.09 $ 0.54 Diluted 2.39 2.17 0.22 $ 4.61$ 4.07 $ 0.54 76
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Non-GAAP Financial Measures
The following discussion and analysis contains financial information determined by methods other than those prescribed by GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. Management believes presentation of these non-GAAP financial measures provides useful supplemental information that is essential to a complete understanding of the operating results of the Company. Since the presentation of these non-GAAP performance measures and their impact differ between companies, these non-GAAP 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.
Net income before provision
Banking regulations define PPNR as the sum of net interest income and non-interest income less expenses before adjusting for loss provisions. Management believes that this is an important metric as it illustrates the underlying performance of the Company, it enables investors and others to assess the Company's ability to generate capital to cover credit losses through the credit cycle, and provides consistent reporting with a key metric used by bank regulatory agencies.
The following table presents the components of the PPNR for the three and six month periods ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in millions)
Net interest income $ 525.0 $
$370.5 974.5
Total non-interest income
95.0 136.0 201.3 155.7 Net revenue$ 620.0 $
506.5
Total non-interest expense
268.9 244.8 517.5 379.8 Pre-provision net revenue$ 351.1 $
$261.7 658.3
Less:
Provision for (recovery of) credit losses 27.5 (14.5) 36.5 (46.9) Income tax expense 63.4 52.4 121.5 94.3 Net income$ 260.2 $ 223.8 $ 500.3$ 416.3 Efficiency Ratio
The following table shows the components used in the calculation of the efficiency ratio, which management uses as a metric to assess profitability:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in millions)
Total non-interest expense $ 268.9 $ 244.8 $ 517.5 $ 379.8
Divided by:
Total net interest income $ 525.0 $ 370.5 $ 974.5 $ 687.8
Plus:
Tax equivalent interest adjustment 8.2 8.5 16.2 16.5
Total non-interest income 95.0 136.0 201.3 155.7
$ 628.2 $ 515.0 $ 1,192.0 $ 860.0
Efficiency ratio - tax equivalent
basis 42.8 % 47.5 % 43.4 % 44.2 %
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Tangible common shares
The following table presents financial measures related to tangible common
equity. Tangible common equity represents total stockholders' equity, less
identifiable intangible assets and goodwill. Management believes that tangible
common equity financial measures are useful in evaluating the Company's capital
strength, financial condition, and ability to manage potential losses. In
addition, management believes that these measures improve comparability to other
institutions that have not engaged in acquisitions that resulted in recorded
goodwill and other intangible assets.
June 30 ,
2022
(dollars and shares in millions) Total stockholders' equity$ 4,959 $ 4,963 Less: Goodwill and intangible assets 695 635 Preferred stock 295 295 Total tangible common stockholders' equity 3,969 4,033 Plus: deferred tax - attributed to intangible assets 2 2 Total tangible common equity, net of tax $
3,971 $4,035
Total assets$ 66,055 $ 55,983 Less: goodwill and intangible assets, net 695 635 Tangible assets 65,360 55,348 Plus: deferred tax - attributed to intangible assets 2 2 Total tangible assets, net of tax $
$65,362 55,350
Tangible common equity ratio 6.1 % 7.3 % Common shares outstanding 108.3 106.6 Book value per common share$ 43.07 $ 43.78 Tangible book value per common share, net of tax 36.67 37.84 78
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The following table presents certain financial measures related to regulatory capital under Basel III, which includes common equity tier 1 and total capital. The FRB and other banking regulators use CET1 and total capital as a basis for assessing a bank's capital adequacy; therefore, management believes it is useful to assess financial condition and capital adequacy using this same basis. Specifically, the total capital ratio takes into consideration the risk levels of assets and off-balance sheet financial instruments. In addition, management believes that the classified assets to CET1 plus allowance measure is an important regulatory metric for assessing asset quality. As permitted by the regulatory capital rules, the Company elected to delay the estimated impact of CECL on its regulatory capital over a five-year transition period endingDecember 31, 2024 . Beginning in 2022, capital ratios and amounts include a 25% reduction to the capital benefit that resulted from the increased allowance for credit losses related to the adoption of ASC 326.June 30 ,
2022
(dollars in millions) Common equity tier 1: Common equity$ 4,700 $ 4,715 Less: Non-qualifying goodwill and intangibles 690 631 Disallowed deferred tax asset 6 - AOCI related adjustments (521) 16 Unrealized gain on changes in fair value liabilities 4 - Common equity tier 1$ 4,521 $ 4,068 Divided by: Risk-weighted assets$ 50,292 $ 44,697 Common equity tier 1 ratio 9.0 % 9.1 % Common equity tier 1$ 4,521 $ 4,068 Plus: Preferred stock and trust preferred securities 376 376 Tier 1 capital$ 4,897 $ 4,444 Divided by: Tangible average assets$ 64,085 $ 56,973 Tier 1 leverage ratio 7.6 % 7.8 % Total capital: Tier 1 capital$ 4,897 $ 4,444 Plus: Subordinated debt 816 815 Adjusted allowances for credit losses 288 240 Tier 2 capital$ 1,104 $ 1,055 Total capital$ 6,001 $ 5,499 Total capital ratio 11.9 % 12.3 %
Assets classified as Tier 1 capital plus allowance: Assets classified as
$ 346 $ 301 Divided by: Tier 1 capital 4,897 4,444 Plus: Adjusted allowances for credit losses 288 240
Total Tier 1 capital plus adjusted provisions for credit losses
6.7 % 6.4 %
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Net interest margin
The net interest margin is reported on a TEB. A tax equivalent adjustment is
added to reflect interest earned on certain securities and loans that are exempt
from federal and state income tax. The following tables set forth the average
balances, interest income, interest expense, and average yield (on a fully TEB)
for the periods indicated:
Three Months Ended June 30,
2022 2021
Average Average Average Average
Balance Interest Yield / Cost Balance Interest Yield / Cost
(dollars in millions)
Interest earning assets
Loans held for sale $ 4,333 $ 43.1 3.99 % $ 5,347 $ 42.7 3.21 %
Loans held for investment:
Commercial and industrial 19,576 205.6 4.27 13,897 148.2 4.37
CRE - non-owner-occupied 7,152 83.1 4.67 5,698 67.8 4.78
CRE - owner-occupied 1,836 22.7 5.05 2,025 24.1 4.88
Construction and land development 3,336 47.7 5.73 2,792 39.9 5.73
Residential real estate 13,698 113.8 3.33 3,748 30.7 3.29
Consumer 58 0.6 4.29 34 0.4 4.52
Total HFI loans (1), (2), (3) 45,656 473.5 4.19 28,194 311.1 4.48
Securities:
Securities - taxable 6,674 41.3 2.48 5,630 26.0 1.85
Securities - tax-exempt 2,017 18.0 4.53 2,166 17.5 4.07
Total securities (1) 8,691 59.3 2.94 7,796 43.5 2.47
Other 1,650 3.7 0.91 1,911 1.2 0.25
Total interest earning assets 60,330 579.6 3.91 43,248 398.5
3.77
Non-interest earning assets Cash and due from banks 262 458 Allowance for credit losses (266) (257) Bank owned life insurance 179 178 Other assets 3,766 4,518 Total assets$ 64,271 $ 48,145 Interest-bearing liabilities Interest-bearing deposits: Interest-bearing transaction accounts$ 8,346 $ 8.0 0.38 %$ 4,370 $ 1.5 0.14 % Savings and money market accounts 18,771 16.5 0.35 15,168 8.0 0.21 Certificates of deposit 2,040 2.6 0.52 1,737 2.1 0.49 Total interest-bearing deposits 29,157 27.1 0.37 21,275 11.6 0.22 Short-term borrowings 2,917 8.6 1.19 1,506 4.5 1.21 Long-term debt 786 10.3 5.24 353 4.7 5.30 Qualifying debt 894 8.6 3.85 701 7.2 4.12 Total interest-bearing liabilities 33,754 54.6 0.65 23,835 28.0
0.47
Interest cost of funding earning assets 0.37
0.26
Non-interest-bearing liabilities Non-interest-bearing demand deposits 24,327 18,385 Other liabilities 1,169 2,140 Stockholders' equity 5,021 3,785 Total liabilities and stockholders' equity$ 64,271 $ 48,145 Net interest income and margin (4)$ 525.0 3.54 %$ 370.5
3.51%
(1) Yields on loans and securities have been adjusted to a TEB. The taxable equivalent adjustment has been
(2) Included in the calculation of the yield are the net loan costs of
(3) Includes outstanding loans.
(4) Net interest margin is calculated by dividing net interest income by total average earning assets, annualized on an actual/actual basis.
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Six Months Ended June 30,
2022 2021
Average Average Average Average
Balance Interest Yield / Cost Balance Interest Yield / Cost
(dollars in millions)
Interest earning assets
Loans held for sale $ 5,421 $ 93.6 3.48 % $ 2,688 $ 42.7 3.21 %
Loans held for investment:
Commercial and industrial 18,537 371.5 4.10 13,925 299.1 4.43
CRE - non-owner occupied 6,922 156.2 4.56 5,674 132.9 4.73
CRE - owner occupied 1,847 45.5 5.06 2,059 48.5 4.86
Construction and land development 3,214 89.3 5.61 2,639 75.5 5.77
Residential real estate 12,050 194.1 3.25 3,131 52.7 3.39
Consumer 55 1.1 4.14 34 0.8 4.96
Total HFI loans (1), (2), (3) 42,625 857.7 4.09 27,462 609.5 4.53
Securities:
Securities - taxable 6,107 71.1 2.35 5,084 44.5 1.77
Securities - tax-exempt 2,076 36.2 4.41 2,074 33.0 4.03
Total securities (1) 8,183 107.3 2.86 7,158 77.5 2.42
Other 1,853 5.5 0.60 3,877 2.9 0.15
Total interest earning assets 58,082 1,064.1 3.75 41,185 732.6
3.67
Non-interest earning assets Cash and due from banks 254 313 Allowance for credit losses (264) (273) Bank owned life insurance 180 177 Other assets 3,534 2,904 Total assets$ 61,786 $ 44,306 Interest-bearing liabilities Interest-bearing deposits: Interest-bearing transaction accounts$ 8,046 $ 10.7 0.27 %$ 4,139 $ 2.8 0.14 % Savings and money market accounts 18,453 26.1 0.29 14,584 15.1 0.21 Certificates of deposit 1,981 4.4 0.45 1,709 4.5 0.54 Total interest-bearing deposits 28,480 41.2 0.29 20,432 22.4 0.22 Short-term borrowings 2,038 10.4 1.03 769 4.6 1.21 Long-term debt 778 21.0 5.45 178 4.7 5.30 Qualifying debt 895 17.0 3.83 625 13.1 4.24 Total interest-bearing liabilities 32,191 89.6 0.56 22,004 44.8
0.41
Interest cost of funding earning assets 0.31
0.22
Non-interest-bearing liabilities Non-interest-bearing demand deposits 23,458 17,186 Other liabilities 1,132 1,460 Stockholders' equity 5,005 3,656 Total liabilities and stockholders' equity$ 61,786 $ 44,306 Net interest income and margin (4)$ 974.5 3.44 %$ 687.8
3.45%
(1) Yields on loans and securities have been adjusted to a TEB. The taxable equivalent adjustment has been
(2) Included in the calculation of the yield are the net loan costs of
(3) Includes outstanding loans.
(4) Net interest margin is calculated by dividing net interest income by total average earning assets, annualized on an actual/actual basis.
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Three Months Ended June 30, Six Months Ended June 30,
2022 versus 2021 2022 versus 2021
Increase (Decrease) Due to Changes in (1) Increase (Decrease) Due to Changes in (1)
Volume Rate Total Volume Rate Total
(in millions)
Interest income:
Loans held for sale $ (10.1) $ 10.5 $ 0.4 $ 47.2 $ 3.7 $ 50.9
Loans:
Commercial and industrial 59.6 (2.2) 57.4 92.4 (20.0) 72.4
CRE - non-owner occupied 16.9 (1.6) 15.3 28.2 (4.9) 23.3
CRE - owner-occupied (2.3) 0.9 (1.4) (5.2) 2.2 (3.0)
Construction and land
development 7.8 - 7.8 16.0 (2.2) 13.8
Residential real estate 82.7 0.4 83.1 143.7 (2.3) 141.4
Consumer 0.2 - 0.2 0.4 (0.1) 0.3
Total HFI loans 164.9 (2.5) 162.4 275.5 (27.3) 248.2
Securities:
Securities - taxable 6.5 8.8 15.3 11.9 14.7 26.6
Securities - tax-exempt (1.3) 1.8 0.5 - 3.2 3.2
Total securities 5.2 10.6 15.8 11.9 17.9 29.8
Other (0.6) 3.1 2.5 (6.0) 8.6 2.6
Total interest income 159.4 21.7 181.1 328.6 2.9 331.5
Interest expense:
Interest-bearing transaction
accounts 3.8 2.7 6.5 5.2 2.7 7.9
Savings and money market 3.2 5.3 8.5 5.5 5.5 11.0
Certificates of deposit 0.4 0.1 0.5 0.6 (0.7) (0.1)
Short-term borrowings 4.2 (0.1) 4.1 6.5 (0.7) 5.8
Long-term debt 5.7 (0.1) 5.6 16.2 0.1 16.3
Qualifying debt 1.9 (0.5) 1.4 5.1 (1.2) 3.9
Total interest expense 19.2 7.4 26.6 39.1 5.7 44.8
Net change $ 140.2 $ 14.3 $ 154.5 $ 289.5 $ (2.8) $ 286.7
(1) Changes attributable to both volume and price are referred to as volume changes.
Comparison of interest income, interest expense and net interest margin
The Company's primary source of revenue is interest income. For the three months endedJune 30, 2022 , interest income was$579.6 million , an increase of$181.1 million , or 45.4%, compared to$398.5 million for the three months endedJune 30, 2021 . This increase was primarily the result of a$162.4 million increase in interest income from HFI loans that was driven by a$17.5 billion increase in the average HFI loan balance, coupled with a$15.8 million increase in interest income from investment securities due to an increase in the average investment balance of$895 million and higher investment yields. For the six months endedJune 30, 2022 , interest income was$1.1 billion , an increase of$331.5 million , or 45.2%, compared to$732.6 million for the six months endedJune 30, 2021 . This increase was primarily the result of a$15.2 billion increase in the average HFI loan balance, which drove a$248.2 million increase in HFI loan interest income for the six months endedJune 30, 2022 as well as an increase in the average HFS loan balance of$2.7 billion resulting in an increase of$50.9 million in HFS loan interest income. For the three months endedJune 30, 2022 , interest expense was$54.6 million , an increase of$26.6 million , or 95.0%, compared to$28.0 million for the three months endedJune 30, 2021 . Increased interest expense was due to an increase in interest expense on deposits of$15.5 million driven by increased interest rates and a$7.9 billion increase in the average interest-bearing deposit balance and a$9.7 million increase in interest expense on other borrowings resulting from an increase in the average balance of$1.8 billion . For the six months endedJune 30, 2022 , interest expense was$89.6 million , an increase of$44.8 million , or 100.0%, compared to$44.8 million for the six months endedJune 30, 2021 . Interest expense on total debt increased by$26.0 million driven by an increase in the average debt balance of$2.1 billion and an increase in average interest-bearing deposits of$8.0 billion , which drove an$18.8 million increase in interest expense. 82
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For the three months endedJune 30, 2022 , net interest income was$525.0 million , an increase of$154.5 million , or 41.7%, compared to$370.5 million for the three months endedJune 30, 2021 . The increase in net interest income reflects a$17.1 billion increase in average interest-earning assets, partially offset by an increase of$9.9 billion in average interest-bearing liabilities. The increase in net interest margin of 3 basis points to 3.54% is largely the result of an increase in loan balances, partially offset by higher deposit balances and rates compared to the same period in 2021. For the six months endedJune 30, 2022 , net interest income was$974.5 million , an increase of$286.7 million , or 41.7%, compared to$687.8 million for the six months endedJune 30, 2021 . The increase in net interest income reflects a$16.9 billion increase in average interest-earning assets, partially offset by an increase of$10.2 billion in average interest-bearing liabilities. The decrease in net interest margin of 1 basis point to 3.44% is the result of a decrease in loan yields due to a loan portfolio shift towards residential mortgage loans and higher deposit and borrowing costs. The decrease to net interest margin was partially offset by higher investment yields compared to the same period in 2021.
Provision for credit losses
The provision for credit losses in each period is reflected as a reduction in earnings for that period and includes amounts related to funded loans, unfunded loan commitments, and investment securities. The provision is equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb estimated lifetime credit losses inherent in the loan and investment securities portfolios at the time that the loan is originated or the security is purchased. The Company's CECL models incorporate historical experience, current conditions, and reasonable and supportable forecasts in measuring expected credit losses. For the three and six months endedJune 30, 2022 , the Company recorded a provision for credit losses of$27.5 million and$36.5 million , respectively, compared to a release of credit loss provisions of$14.5 million and$46.9 million , respectively, for the three and six months endedJune 30, 2021 . The increase in the provision for credit losses from the three and six months endedJune 30, 2021 is primarily related to loan growth and emerging economic uncertainty.
Non-interest income
The following table presents a summary of non-interest income for the periods
presented:
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2022 2021 (Decrease) 2022 2021 (Decrease)
(in millions)
Net loan servicing revenue
(expense) $ 45.4 $ (20.8) $ 66.2 $ 86.5 $ (20.8) $ 107.3
Net gain on loan origination
and sale activities 27.2 132.0 (104.8) 64.1 132.0 (67.9)
Gain on recovery from credit
guarantees 9.0 - 9.0 11.3 - 11.3
Service charges and fees 7.6 7.4 0.2 14.6 14.1 0.5
Commercial banking related
income 5.8 4.5 1.3 10.9 7.9 3.0
Income from equity investments 5.2 6.8 (1.6) 9.3 14.4 (5.1)
(Loss) gain on sales of
investment securities (0.2) - (0.2) 6.7 0.1 6.6
Fair value (loss) gain on
assets measured at fair value,
net (10.0) 3.2 (13.2) (16.6) 1.7 (18.3)
Other income 5.0 2.9 2.1 14.5 6.3 8.2
Total non-interest income $ 95.0 $ 136.0 $ (41.0) $ 201.3 $ 155.7 $ 45.6
Total non-interest income for the three months ended June 30, 2022 compared to
the same period in 2021 decreased $41.0 million . The decrease in non-interest
income was driven by a decrease in net gain on loan origination and sale
activities of $104.8 million due to lower mortgage loan production volume and a
decrease in gain on sale margins. Mark to market losses on equity securities
also resulted in a decrease to non-interest income of $13.2 million from the
prior year. These decreases were offset in part by an increase in net loan
servicing revenue of $66.2 million and gain on recovery from credit guarantees
of $9.0 million related to the credit risk transfer transactions undertaken by
the Company that transfer first loss exposure to unrelated third parties.
Total non-interest income for the six months ended June 30, 2022 compared to the
same period in 2021 increased $45.6 million . The increase in non-interest income
was driven by an increase in net loan servicing revenue of $107.3 million and
gain on recovery from credit guarantees of $11.3 million . These increases were
offset in part by a decrease of $67.9 million in net gain on loan origination
and sale activities and mark to market losses on equity securities, which
totaled $16.6 million for the six months ended June 30, 2022 .
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Non-interest expenses
The following table presents a summary of non-interest expense for the periods
presented:
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2022 2021 (Decrease) 2022 2021 (Decrease)
(in millions)
Salaries and employee benefits $ 139.0 $ 128.9 $ 10.1 $ 277.3 $ 212.6 $ 64.7
Legal, professional, and
directors' fees 25.1 14.0 11.1 49.1 24.1 25.0
Data processing 19.7 15.0 4.7 37.3 24.9 12.4
Deposit costs 18.1 7.1 11.0 27.4 13.4 14.0
Loan servicing expenses 14.7 22.3 (7.6) 25.5 22.3 3.2
Occupancy 13.0 10.4 2.6 25.8 19.0 6.8
Insurance 6.9 5.5 1.4 14.1 9.7 4.4
Loan acquisition and origination
expenses 6.4 10.5 (4.1) 12.9 10.5 2.4
Business development and
marketing 5.4 3.2 2.2 9.8 4.6 5.2
Net gain on sales and valuations
of repossessed and other assets (0.3) (1.5) 1.2 (0.2) (1.8) 1.6
Acquisition and restructure
expenses - 15.7 (15.7) 0.4 16.1 (15.7)
Other expense 20.9 13.7 7.2 38.1 24.4 13.7
Total non-interest expense
24.1$ 517.5 $ 379.8 $ 137.7 Total non-interest expense for the three months endedJune 30, 2022 increased$24.1 million compared to the same period in 2021. The increase in non-interest expense was driven by increases in legal, professional, and directors' fees, deposit costs, and salaries and employee benefits. Legal, professional, and directors' fees increased$11.1 million primarily related to an increase in IT and consulting initiatives. The increase in deposit costs primarily relates to an increase in deposit earnings credits paid to account holders due to higher balances and rising interest rates. Salaries and employee benefits increased$10.1 million from the addition of employees as part of the AmeriHome acquisition that closed onApril 7, 2021 . These increases to non-interest expense were offset in part by a reduction in acquisition and restructure expenses of$15.7 million incurred as part of the AmeriHome acquisition.
Total non-interest expenses for the six months ended
Income taxes
The Company's effective tax rate was 19.6% and 19.0% for the three months endedJune 30, 2022 and 2021, respectively. For the six months endedJune 30, 2022 and 2021, the Company's effective tax rate was 19.5% and 18.5%, respectively. The increase in the effective tax rate was primarily due to projected pretax book income growth outpacing growth in permanent tax benefit items for the year and an increase in state tax expense. 84
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Business segment results
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 consumer banking services, such as mortgage banking and commercial banking services to businesses in consumer-related sectors and from
•Business and Other segment: includes the Company’s investment portfolio, corporate borrowings and other related items, income and expense items not allocated to our other reportable segments and intersegment eliminations.
The following tables present selected operating segment information for the
periods presented:
Consolidated Consumer Corporate &
Company Commercial Related Other
At June 30, 2022 (in millions)
HFI loans, net of deferred loan fees and
costs $ 48,572 $ 29,448 $ 19,124 $ -
Deposits 53,712 29,482 19,690 4,540
At December 31, 2021
HFI loans, net of deferred loan fees and
costs $ 39,075 $ 25,092 $ 13,983 $ -
Deposits 47,612 30,467 15,363 1,782
Three Months Ended June 30, 2022 (in millions)
Pre-tax income (loss) $ 323.6 $ 239.9 $ 160.1
Six Months EndedJune 30, 2022 Pre-tax income (loss)$ 621.8 $ 476.6 $ 287.1
Three Months EndedJune 30, 2021 Pre-tax income (loss)$ 276.2 $ 209.1 $ 113.6
Six Months EndedJune 30, 2021 Pre-tax income (loss)$ 510.6 $ 430.0 $ 185.1 $ (104.5) 85
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ANALYSIS OF THE BALANCE SHEET
Total assets increased$10.1 billion , or 18.0%, to$66.1 billion atJune 30, 2022 , compared to$56.0 billion atDecember 31, 2021 . The increase in total assets was driven by continued organic loan and deposit growth, which contributed to an increase in cash of$1.4 billion as well as an increase in investment securities of$1.2 billion . HFI loans increased by$9.5 billion , or 24.3%, to$48.6 billion as ofJune 30, 2022 , compared to$39.1 billion as ofDecember 31, 2021 . The increase in HFI loans fromDecember 31, 2021 was driven by increases in residential real estate loans of$5.6 billion (includes a$1.5 billion transfer of EBO loans from HFS to HFI), commercial and industrial loans of$2.5 billion , CRE, non-owner occupied loans of$1.2 billion , and construction and land development loans of$208 million . These increases were partially offset by a decrease in CRE, owner occupied loans of$50 million . In addition, HFS loans decreased by$2.8 billion , down from$5.6 billion as ofDecember 31, 2021 , primarily related to a$1.5 billion transfer of EBO loans from HFS to HFI during the three months endedJune 30, 2022 . Total liabilities increased$10.1 billion , or 19.7%, to$61.1 billion atJune 30, 2022 , compared to$51.0 billion atDecember 31, 2021 . The increase in liabilities is due primarily to an increase in total deposits of$6.1 billion , or 12.8%, to$53.7 billion . The increase in deposits fromDecember 31, 2021 was driven by increases of$2.4 billion in non-interest bearing demand deposits,$1.7 billion in savings and money market accounts,$1.5 billion in interest bearing demand deposits, and$522 million in certificates of deposit. Other borrowings also increased$3.7 billion fromDecember 31, 2021 due to an increase in short-term borrowings of$3.2 billion and issuance of two credit linked notes inJune 2022 , with a principal balance totaling$494 million . Total stockholders' equity of$5.0 billion atJune 30, 2022 decreased by$4 million , or 0.1%, fromDecember 31, 2021 . The decrease in stockholders' equity is primarily a function of net income and net proceeds of$107.7 million from issuance of common stock during the six months endedJune 30, 2022 , offset by quarterly dividends to common and preferred shareholders and unrealized fair value losses on AFS securities recorded net of tax in other comprehensive income.
Investment security
Debt securities are classified at the time of acquisition as either HTM, AFS, or trading based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. HTM securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. AFS securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities classified as AFS are carried at fair value with unrealized gains or losses on these securities recorded as part of AOCI in stockholders' equity, net of tax. Amortization of premiums or accretion of discounts on MBS is periodically adjusted for estimated prepayments. Trading securities are reported at fair value, with unrealized gains and losses on these securities included in current period earnings.
The Company’s investment securities portfolio is used as collateral for borrowings, collateral required for public deposits and customer repurchase agreements, and to manage liquidity, capital and interest rate risks.
The following table summarizes the carrying value of the investment securities portfolio for each of the periods below:
Increase
June 30, 2022 December 31, 2021 (Decrease)
(in millions)
Debt securities
CLO $ 2,678 $ 926 $ 1,752
Commercial MBS issued by GSEs 61 69 (8)
Corporate debt securities 399 383 16
Private label residential MBS 1,519 1,725 (206)
Residential MBS issued by GSEs 1,821 1,993 (172)
Tax-exempt 1,935 2,105 (170)
U.S. treasury securities - 13 (13)
Other 73 82 (9)
Total debt securities $ 8,486 $ 7,296 $ 1,190
Equity securities
CRA investments $ 51 $ 45 $ 6
Preferred stock 119 114 5
Total equity securities $ 170 $ 159 $ 11
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HFS Loans
The Company purchases and originates residential mortgage loans through its AmeriHome mortgage banking business channel that are held for sale or securitization. AtJune 30, 2022 , the Company had$2.8 billion of loans HFS, compared to$5.6 billion atDecember 31, 2021 . The decrease in loans HFS fromDecember 31, 2021 relates to sales and a transfer of$1.5 billion of EBO loans during the three months endedJune 30, 2022 that were previously classified as HFS to HFI as management no longer intends to sell these loans.
HFI loans
The table below summarizes the distribution of the Company's held for investment
loan portfolio:
Increase
June 30, 2022 December 31, 2021 (Decrease)
(in millions)
Warehouse lending $ 5,132 $ 5,156 $ (24)
Municipal & nonprofit 1,548 1,579 (31)
Tech & innovation 1,648 1,418 230
Equity fund resources 4,752 3,830 922
Other commercial and industrial 7,832 6,465 1,367
CRE - owner occupied 1,681 1,723 (42)
Hotel franchise finance 3,112 2,534 578
Other CRE - non-owner occupied 4,625 3,952 673
Residential 12,967 9,243 3,724
Residential - EBO 1,897 - 1,897
Construction and land development 3,199 3,006 193
Other 179 169 10
Total loans HFI 48,572 39,075 9,497
Allowance for credit losses (273) (252) (21)
Total HFI loans, net of provision
Loans classified as HFI are stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums and discounts on acquired and purchased loans, and an allowance for credit losses. Net deferred loan fees of$122 million and$86 million reduced the carrying value of loans as ofJune 30, 2022 andDecember 31, 2021 , respectively. Net unamortized purchase premiums on acquired and purchased loans of$192 million and$185 million increased the carrying value of loans as ofJune 30, 2022 andDecember 31, 2021 , respectively.
Lending business concentrations
The Company monitors concentrations of lending activities at the product and borrower relationship level. The Company's loan portfolio includes significant credit exposure to the CRE market. Commercial and industrial loans made up 43% and 47% of the Company's HFI loan portfolio as ofJune 30, 2022 andDecember 31, 2021 , respectively. In addition, CRE related loans accounted for approximately 26% and 29% of total loans atJune 30, 2022 andDecember 31, 2021 , respectively. Substantially all of these CRE loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. Approximately 19% and 23% of these CRE loans, excluding construction and land loans, were owner-occupied atJune 30, 2022 andDecember 31, 2021 , respectively. No borrower relationships at both the commitment and funded loan level exceeded 5% of total HFI loans as ofJune 30, 2022 andDecember 31, 2021 . 87
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Non-performing assets
Total non-performing loans increased
June 30, 2022 December 31, 2021
(dollars in millions)
Total nonaccrual loans (1) $ 85 $ 73
Loans past due 90 days or more on accrual status (2) - -
Accruing troubled debt restructured loans 3 3
Total nonperforming loans $ 88 $ 76
Other assets acquired through foreclosure, net $ 12 $ 12
Nonaccrual loans to funded HFI loans 0.17 % 0.19 %
Loans past due 90 days or more on IFH-funded loan accrual status
- -
(1)Includes unaccrued TDR loans of
(2) Excludes residential mortgage loans guaranteed by the government of
million and zero to
Interest income that would have been recorded under the original terms of nonaccrual loans was$1.2 million and$1.5 million for the three months endedJune 30, 2022 and 2021, respectively, and$2.3 million and$3.0 million for the six months endedJune 30, 2022 and 2021, respectively. The composition of nonaccrual HFI loans by loan portfolio segment were as follows: June 30, 2022 Nonaccrual Percent of Nonaccrual Percent of Balance Balance Total HFI Loans (dollars in millions) Tech & innovation $ 5 5.9 % 0.01 % Other commercial and industrial 23 27.0 0.05 CRE - owner occupied 9 10.6 0.02 Hotel franchise finance 10 11.8 0.02 Other CRE - non-owner occupied 20 23.5 0.04 Residential 17 20.0 0.03 Construction and land development 1 1.2 0.00 Total non-accrual loans $ 85 100.0 % 0.17 % December 31, 2021 Nonaccrual Percent of Nonaccrual Percent of Balance Balance Total HFI Loans (dollars in millions) Tech & innovation $ 13 18.3 % 0.03 % Equity fund resources 1 0.8 0.00 Other commercial and industrial 16 22.2 0.05 CRE - owner occupied 13 17.9 0.03 Other CRE - non-owner occupied 13 18.0 0.03 Residential 15 20.8 0.05 Construction and land development 1 1.4 0.00 Other 1 0.6 0.00 Total non-accrual loans $ 73 100.0 % 0.19 %
Restructured distressed debt loans
A TDR loan is a loan on which the Company, for reasons related to a borrower's
financial difficulties, grants a concession to the borrower that the Company
would not otherwise consider. The loan terms that have been modified or
restructured due to a borrower's financial situation include, but are not
limited to, a reduction in the stated interest rate, an extension of the
maturity or renewal of the loan at an interest rate below current market, a
reduction in the face amount of the debt, a reduction in the accrued interest,
or deferral of interest payments. The majority of the Company's modifications
are extensions in terms or deferral of payments which result in no lost
principal or interest followed by reductions in interest rates or accrued
interest. Consistent with regulatory guidance, a TDR loan that is subsequently
modified in another restructuring agreement but has shown sustained performance
and classification as a TDR, will be removed from TDR status provided that the
modified terms were market-based at the time of modification.
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The following table presents the TDR loans:
June 30, 2022 December 31, 2021
Recorded Recorded
Number of Loans Investment Number of Loans Investment
(dollars in millions)
Tech & innovation 1 $ 4 2 $ 2
Other commercial and industrial 8 5 7 6
CRE - owner occupied 1 1 1 1
Other CRE - non-owner occupied 5 10 5 11
Construction and land development 1 1 1 1
Total 16 $ 21 16 $ 21
The allowance for credit losses on TDR loans totaled $1 million and zero as of
June 30, 2022 and December 31, 2021 , respectively. There were no outstanding
commitments on TDR loans as of June 30, 2022 and December 31, 2021 .
Provision for credit losses on HFI loans
The allowance for credit losses consists of the allowance for credit losses on loans and an allowance for credit losses on unfunded loan commitments. The allowance for credit losses on HTM securities is estimated separately from loans and is discussed within theInvestment Securities section.
The following table summarizes the breakdown of the allowance for credit losses on loans to HFIs by segment of the loan portfolio:
June 30, 2022 December 31, 2021
Percent of total Percent of loan Percent of total Percent of loan
Allowance for allowance for type to total Allowance for allowance for type to total
credit losses credit losses HFI loans credit losses credit losses HFI loans
(dollars in millions) (dollars in millions)
Warehouse lending $ 3.7 1.4 % 10.6 % $ 3.0 1.2 % 13.2 %
Municipal & nonprofit 13.6 5.0 3.2 13.7 5.4 4.1
Tech & innovation 25.4 9.3 3.4 25.7 10.2 3.6
Equity fund resources 14.0 5.1 9.8 9.6 3.8 9.8
Other commercial and industrial 119.2 43.6 16.1 103.6 41.0 16.5
CRE - owner occupied 7.5 2.7 3.4 10.6 4.2 4.4
Hotel franchise finance 33.8 12.4 6.4 41.5 16.4 6.5
Other CRE - non-owner occupied 22.1 8.1 9.5 16.9 6.7 10.1
Residential 18.8 6.9 26.7 12.5 5.0 23.7
Residential - EBO - - 3.9 - - -
Construction and land
development 12.2 4.5 6.6 12.5 5.0 7.7
Other 2.9 1.1 0.4 2.9 1.1 0.4
Total $ 273.2 100.0 % 100.0 % $ 252.5 100.0 % 100.0 %
In the three months ended
In addition to the allowance for credit losses on funded HFI loans, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments. This allowance balance totaled$53.8 million and$37.6 million atJune 30, 2022 andDecember 31, 2021 , respectively, and is included in Other liabilities on the Consolidated Balance Sheets. 89
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Problem Loans
The Company classifies loans consistent with federal banking regulations using a
nine category grading system. These loan grades are described in further detail
in "Note 1. Summary of Significant Accounting Policies" in the Notes to
Unaudited Consolidated Financial Statements" of this report. The following table
presents information regarding potential and actual problem loans, consisting of
loans graded as Special Mention, Substandard, Doubtful, and Loss, but which are
still performing:
June 30, 2022
Problem Loan Percent of Problem Percent of Total
Number of Loans Balance Loan Balance HFI Loans
(dollars in millions)
Municipal & nonprofit 1 $ 6 1.9 % 0.01 %
Tech & innovation 16 59 19.2 0.12
Other commercial and industrial 82 47 15.3 0.10
CRE - owner occupied 11 16 5.2 0.03
Hotel franchise finance 6 88 28.7 0.18
Other CRE - non-owner occupied 13 43 14.0 0.09
Residential 39 18 5.9 0.04
Other 20 30 9.8 0.06
Total 188 $ 307 100.0 % 0.63 %
Problem Loan Percent of Problem Percent of Total
Number of Loans Balance Loan Balance HFI Loans
(dollars in millions)
Tech & innovation 13 $ 39 11.4 % 0.10 %
Other commercial and industrial 66 60 17.9 0.16
CRE - owner occupied 14 16 4.7 0.04
Hotel franchise finance 9 139 40.9 0.35
Other CRE - non-owner occupied 5 11 3.4 0.03
Residential 35 16 4.6 0.04
Construction and land development 7 28 8.3 0.07
Other 17 30 8.8 0.08
Total 166 $ 339 100.0 % 0.87 %
Mortgage Servicing Rights
The fair value of the Company’s MSR related to residential mortgage loans totaled
The following is a summary of the UPB of loans underlying in the Company's MSR
portfolio by type:
June 30, 2022 December 31, 2021
(in millions)
FNMA and FHLMC $ 26,627 $ 38,754
GNMA 23,989 14,379
Non-agency 1,568 1,215
Total Outstanding Loan Principal Balance
54,348
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Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair value.Goodwill and other intangible assets acquired in a business combination that are determined to have an indefinite useful life are not subject to amortization, but are subsequently evaluated for impairment at least annually. The Company has goodwill totaling$530 million atJune 30, 2022 . The increase from$491 million atDecember 31, 2021 is attributable to the DST acquisition inJanuary 2022 . See "Note 2. Mergers, Acquisitions and Dispositions" for further discussion of the acquisition. The Company performs its annual goodwill and intangibles impairment tests as ofOctober 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable. During the three and six months endedJune 30, 2022 and 2021, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was necessary.
Deferred tax assets
As ofJune 30, 2022 , the net DTA balance totaled$223 million , an increase of$202 million from$21 million atDecember 31, 2021 . This overall increase in the net DTA was primarily the result of decreases in the fair market value of AFS securities and expected tax credit carryovers. These items were not fully offset by increases to MSRs.
To
Deposits
Deposits are the primary source for funding the Company's asset growth. Total deposits increased to$53.7 billion atJune 30, 2022 , from$47.6 billion atDecember 31, 2021 , an increase of$6.1 billion , or 12.8%. By deposit type, the increase in deposits is attributable to increases in non-interest bearing demand deposits of$2.4 billion , savings and money market accounts of$1.7 billion , interest bearing demand deposits of$1.5 billion , and certificates of deposit of$522 million . WAB is a participant in the IntraFi Network, a network that offers deposit placement services such as CDARS and ICS, which offer products that qualify large deposits forFDIC insurance. AtJune 30, 2022 , the Company had$685 million of CDARS deposits and$2.1 billion of ICS deposits, compared to$729 million of CDARS deposits and$1.8 billion of ICS deposits atDecember 31, 2021 . AtJune 30, 2022 andDecember 31, 2021 , the Company also had wholesale brokered deposits of$3.6 billion and$1.8 billion , respectively. In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled$14.5 billion and$10.8 billion atJune 30, 2022 andDecember 31, 2021 , respectively. The Company incurred$17.3 million and$6.6 million in deposit related costs on these deposits during the three months endedJune 30, 2022 and 2021, respectively. The Company incurred$26.0 million and$12.4 million in deposit related costs on these deposits during the six months endedJune 30, 2022 and 2021, respectively. These costs are reported in Deposit costs as part of non-interest expense. The increase in these costs from the prior year is due to an increase in deposit balances eligible for earnings credits or referral fees. The average balances and weighted average rates paid on deposits are presented below: Three Months Ended June 30, 2022 2021 Average Balance Rate Average Balance Rate (dollars in millions) Interest-bearing transaction accounts$ 8,346 0.38 % $ 4,370 0.14 % Savings and money market accounts 18,771 0.35 15,168 0.21 Certificates of deposit 2,040 0.52 1,737 0.49 Total interest-bearing deposits 29,157 0.37 21,275 0.22 Non-interest-bearing demand deposits 24,327 - 18,385 - Total deposits$ 53,484 0.20 % $ 39,660 0.12 % 91
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Six Months Ended June 30,
2022 2021
Average Balance Rate Average Balance Rate
(dollars in millions)
Interest-bearing transaction accounts $ 8,046 0.27 % $ 4,139 0.14 %
Savings and money market accounts 18,453 0.29 14,584 0.21
Certificates of deposit 1,981 0.45 1,709 0.54
Total interest-bearing deposits 28,480 0.29 20,432 0.22
Non-interest-bearing demand deposits 23,458 - 17,186 -
Total deposits $ 51,938 0.16 % $ 37,618 0.12 %
Other Borrowings
Short-Term Borrowings
The Company utilizes short-term borrowed funds to support short-term liquidity
needs generally created by increased loan demand. The majority of these
short-term borrowed funds consist of advances from the FHLB, federal funds
purchased from correspondent banks or the FHLB, and repurchase agreements. The
Company's borrowing capacity with the FHLB is determined based on collateral
pledged, generally consisting of securities and loans. In addition, the Company
has borrowing capacity from other sources, collateralized by securities,
including securities sold under agreements to repurchase, which are reflected at
the amount of cash received in connection with the transaction, and may require
additional collateral based on the fair value of the underlying securities. At
June 30, 2022 , total short-term borrowed funds consisted of FHLB advances of
$2.0 billion , federal funds purchased of $1.9 billion , repurchase agreements of
$79 million , and secured borrowings of $40 million . At December 31, 2021 , total
short-term borrowed funds consisted of federal funds purchased of $675 million ,
secured borrowings of $35 million , and repurchase agreements of $17 million .
Long-term borrowings
The Company's long-term borrowings consist of AmeriHome senior notes from the acquisition onApril 7, 2021 and credit linked notes issued, inclusive of issuance costs and fair market value adjustments. AtJune 30, 2022 , the carrying value of long-term borrowings was$1.2 billion , compared to$775 million atDecember 31, 2021 . The increase in long-term borrowings fromDecember 31, 2021 relates to new credit linked note issuances during the three months endedJune 30, 2022 , totaling$486 million , net of issuance costs.
Eligible debt
Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value adjustments. AtJune 30, 2022 , the carrying value of qualifying debt was$891 million , compared to$896 million atDecember 31, 2021 . 92
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Capital resources
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company's business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items (discussed in "Note 14. Commitments and Contingencies" to the Unaudited Consolidated Financial Statements) as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In connection with its adoption of CECL onJanuary 1, 2020 , the Company elected the five-year CECL transition option that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. As a result of this election, the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology was delayed for two years, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. Beginning in 2022, capital ratios and amounts include a 25% reduction to the capital benefit that resulted from the increased allowance for credit losses related to the adoption of ASC 326. As a result of the Company's continued commercial loan growth and the acquisition of AmeriHome, the Company continues to undertake various capital actions to ensure that its capital levels remain strong, which during the six months endedJune 30, 2022 , included sales of common stock under the Company's ATM program and two credit linked note issuances. As ofJune 30, 2022 andDecember 31, 2021 , the Company and the Bank exceeded the capital levels necessary to be classified as well-capitalized, as defined by the various banking agencies. The actual capital amounts and ratios for the Company and the Bank are presented in the following tables as of the periods indicated: Tangible Total Tier 1 Risk-Weighted Average Total Capital Tier 1
Tier 1 capital Leverage Common equity
Capital Capital Assets Assets Ratio Ratio Ratio Tier 1
(dollars in millions)
June 30, 2022
WAL $ 6,001 $ 4,897 $ 50,292 $ 64,085 11.9 % 9.7 % 7.6 % 9.0 %
WAB 5,638 5,126 50,228 64,051 11.2 10.2 8.0 10.2
Well-capitalized
ratios 10.0 8.0 5.0 6.5
Minimum capital ratios 8.0 6.0 4.0 4.5
December 31, 2021
WAL $ 5,499 $ 4,444 $ 44,697 $ 56,973 12.3 % 9.9 % 7.8 % 9.1 %
WAB 5,120 4,658 44,726 56,962 11.4 10.4 8.2 10.4
Well-capitalized
ratios 10.0 8.0 5.0 6.5
Minimum capital ratios 8.0 6.0 4.0 4.5
The Company is also required to maintain specified levels of capital to remain
in good standing with certain federal government agencies, including FNMA ,
FHLMC, GNMA, and HUD. These capital requirements are generally tied to the
unpaid balances of loans included in the Company's servicing portfolio or loan
production volume. Noncompliance with these capital requirements can result in
various remedial actions up to, and including, removing the Company's ability to
sell loans to and service loans on behalf of the respective agency. The Company
believes that it is in compliance with these requirements as of June 30, 2022 .
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Critical accounting estimates
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The critical accounting estimates upon which the Company's financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , and all amendments thereto, as filed with theSEC . There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.
Liquidity
Liquidity is the ongoing ability to accommodate liability maturities and deposit
withdrawals, fund asset growth and business operations, and meet contractual
obligations through unconstrained access to funding at reasonable market rates.
Liquidity management involves forecasting funding requirements and maintaining
sufficient capacity to meet the needs and accommodate fluctuations in asset and
liability levels due to changes in the Company's business operations or
unanticipated events.
The ability to have readily available funds sufficient to repay fully maturing
liabilities is of primary importance to depositors, creditors, and regulators.
The Company's liquidity, represented by cash and amounts due from banks, federal
funds sold, HFS mortgages, and non-pledged marketable securities, is a result of
the Company's operating, investing, and financing activities and related cash
flows. In order to ensure funds are available when necessary, on at least a
quarterly basis, the Company projects the amount of funds that will be required
over a twelve-month period and it also strives to maintain relationships with a
diversified customer base. Liquidity requirements can also be met through
short-term borrowings or the disposition of short-term assets.
The following table presents the available and outstanding balances on the
Company's lines of credit:
June 30, 2022
Available Outstanding
Balance Balance
(in millions)
Unsecured fed funds credit lines at correspondent banks $
3,408
In addition to lines of credit, the Company has borrowing capacity with the FHLB and FRB from pledged loans and securities and warehouse borrowing lines of credit. The borrowing capacity, outstanding borrowings, and available credit as ofJune 30, 2022 are presented in the following table: June 30, 2022 (in millions) FHLB: Borrowing capacity$ 9,774 Outstanding borrowings 2,000 Letters of credit 21 Total available credit$ 7,753 FRB: Borrowing capacity$ 4,728 Outstanding borrowings - Total available credit$ 4,728 Warehouse borrowings: Borrowing capacity$ 1,000 Outstanding borrowings - Total available credit$ 1,000 The Company has a formal liquidity policy and, in the opinion of management, its liquid assets are considered adequate to meet cash flow needs for loan funding and deposit cash withdrawals for the next 90-120 days. AtJune 30, 2022 , there was$10.2 billion in liquid assets, comprised of$1.9 billion in cash and cash equivalents,$2.8 billion in HFS mortgages, and$5.5 billion in unpledged marketable securities. AtDecember 31, 2021 , the Company maintained$8.7 billion in liquid assets, comprised of$516 million of cash and cash equivalents,$4.0 billion in HFS mortgages, and$4.2 billion of unpledged marketable securities. 94
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The Parent maintains liquidity that would be sufficient to fund its operations and certain non-bank affiliate operations for an extended period should funding from normal sources be disrupted. Since deposits are taken by WAB and not by the Parent, Parent liquidity is not dependent on the Bank's deposit balances. In the Company's analysis of Parent liquidity, it is assumed that the Parent is unable to generate funds from additional debt or equity issuances, receives no dividend income from subsidiaries and does not pay dividends to stockholders, while continuing to make non-discretionary payments needed to maintain operations and repayment of contractual principal and interest payments owed by the Parent and affiliated companies. Under this scenario, the amount of time the Parent and its non-bank subsidiary can operate and meet all obligations before the current liquid assets are exhausted is considered as part of the Parent liquidity analysis. Management believes the Parent maintains adequate liquidity capacity to operate without additional funding from new sources for over twelve months. WAB maintains sufficient funding capacity to address large increases in funding requirements, such as deposit outflows. This capacity is comprised of liquidity derived from a reduction in asset levels and various secured funding sources. On a long-term basis, the Company's liquidity will be met by changing the relative distribution of its asset portfolios (for example, by reducing investment or loan volumes, or selling or encumbering assets). Further, the Company can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from correspondent banks, the FHLB ofSan Francisco , and the FRB. AtJune 30, 2022 , the Company's long-term liquidity needs primarily relate to funds required to support loan originations, commitments, and deposit withdrawals, which can be met by cash flows from investment payments and maturities, and investment sales, if necessary. The Company's liquidity is comprised of three primary classifications: 1) cash flows provided by operating activities; 2) cash flows used in investing activities; and 3) cash flows provided by financing activities. Net cash provided by or used in operating activities consists primarily of net income, adjusted for changes in certain other asset and liability accounts and certain non-cash income and expense items, such as the provision for credit losses, investment and other amortization and depreciation. For the six months endedJune 30, 2022 and 2021, net cash provided by (used in) operating activities was$960.0 million and$(1.1) billion , respectively. The Company's primary investing activities are the origination of real estate and commercial loans, the collection of repayments of these loans, and the purchase and sale of securities. The Company's net cash provided by and used in investing activities has been primarily influenced by its loan and securities activities. The Company's cash balance during the six months endedJune 30, 2022 and 2021 was reduced by$8.0 billion and$3.5 billion , respectively, as a result of a net increase in loans as well as a net increase in investment securities of$1.8 billion and$2.4 billion , respectively. Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the six months endedJune 30, 2022 and 2021, net deposits increased$6.1 billion and$10.0 billion , respectively. Fluctuations in core deposit levels may increase the Company's need for liquidity as certificates of deposit mature or are withdrawn before maturity, and as non-maturity deposits, such as checking and savings account balances, are withdrawn. Additionally, the Company is exposed to the risk that customers with large deposit balances will withdraw all or a portion of such deposits, due in part to theFDIC limitations on the amount of insurance coverage provided to depositors. To mitigate the uninsured deposit risk, the Company participates in the CDARS and ICS programs, which allow an individual customer to invest up to$50.0 million and$150.0 million , respectively, through one participating financial institution or, a combined total of$200.0 million per individual customer, with the entire amount being covered byFDIC insurance. As ofJune 30, 2022 , the Company has$685 million of CDARS and$2.1 billion of ICS deposits. As ofJune 30, 2022 , the Company has$3.6 billion of wholesale brokered deposits outstanding. Brokered deposits are generally considered to be deposits that have been received from a third party who is engaged in the business of placing deposits on behalf of others. A traditional deposit broker will direct deposits to the banking institution offering the highest interest rate available. Federal banking laws and regulations place restrictions on depository institutions regarding brokered deposits because of the general concern that these deposits are not relationship based and are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts. Federal and state banking regulations place certain restrictions on dividends paid. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the bank. Dividends paid by WAB to the Parent would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. During the three and six months endedJune 30, 2022 , WAB paid dividends to the Parent of$50 million . Subsequent toJune 30, 2022 , WAB paid dividends to the Parent of$55 million . 95
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