Western Alliance Bancorp.'s earnings were never going to knock it out of the park, but given the troubles it saw this spring, the bank arguably hit a double.
After bleeding deposits earlier this year and seeing headlines questioning its future, the Phoenix-based bank outperformed its prior guidance and grew deposits by $3.5 billion, or 7.3%. The bank added new customers and brought back old ones, and its mortgage subsidiary AmeriHome saw strong revenue growth.
The quarter wasn't without challenges, however. Western Alliance saw slight deterioration in borrowers' health and a sharp rise in interest expenses — the latter a function of this spring's turbulence.
But overall, the bank's results were what "we were all hoping for," said Timothy Coffey, an analyst at Janney Montgomery Scott.
Investors rewarded Western Alliance's results, sending the stock up nearly 8% to $46.42 on Wednesday. Its stock price remains far below where it started this year, but it's bounced back from a low of $18.20 in May.
"People are recognizing that this is actually a really good business that just happened to be an innocent bystander to Silicon Valley Bank's problems," Coffey said.
Western Alliance was one of the institutions hit hardest in this spring's banking crisis, as investors got spooked over regional banks in the West and depositors pulled money from them. The bank's deposit situation stabilized soon after SVB's failure, but it nonetheless continued to face doubts.
The second quarter was a "transitional period" for the $68 billion-asset bank, CEO Kenneth Vecchione said on the company's earnings call, adding that the lender and its clients have returned to "a sense of normality."
The return to normal happened through a series of conversations with Western Alliance clients, which Vecchione said often felt "like an earnings report." To reassure customers over the bank's stability, executives ran them through the bank's balance sheet and business model. Some larger customers got a more confidential look after they signed a nondisclosure agreement, The New York Times
But now Western Alliance is back on growth mode and "seeing the pipeline build" for business, Vecchione said.
"Now that has all changed, and it's about really the growth of the relationships, the growth of the business and how we work together," Vecchione said.
Total deposits ended the quarter at $51 billion, down from $53.6 billion at the end of 2022 but substantially recovered from $47.6 billion at the end of March.
The company's deposit outflows in March had been particularly notable among tech clients. But Bridge Bank, a Western Alliance subsidiary with a significant tech presence, has been driving some of the company's deposit rebound. Bridge is a "steady, consistent player in that market" that should continue driving deposit growth, Vecchione said.
Deposits also grew thanks to the company's focus on a diverse set of "deposit-intensive business lines" such as settlement services, business escrow products and corporate trust, said Janney's Coffey.
The disruptions in March had slowed the business pipeline from those customers, but it has come back and should rebound more after the earnings update, executives said.
Western Alliance borrowed heavily to accumulate cash as depositors pulled money, a factor that hampered its profitability last quarter due to the interest it paid on borrowings.
On the positive side, the company was able to pay down its short-term borrowings and reduce them by some $6 billion during the quarter.
But borrowings still stood at $9.6 billion at the end of June, up from $5.2 billion a year earlier. Interest rates have risen sharply since last year, making borrowing more costly and driving up interest expense on that line item to $190 million last quarter — up tenfold from the same period a year earlier.
The company also saw a significant increase in the cost of its deposits, adding more pressure to Western Alliance's net interest margin — which measures the difference between interest revenues and expenses.
Western Alliance's NIM fell to 3.42% during the quarter, down from 3.79% in the first quarter, though Vecchione described last quarter as the "trough."
A slight deterioration in credit also drew analysts' attention. Western Alliance set aside some $21.8 million to guard against credit losses last quarter, up from $19.4 million during the first quarter. The company said that was due to "heightened economic uncertainty, particularly in the commercial real estate market."
Charge-offs on loans remain exceedingly low, representing just 0.06% of average loans during the quarter.
But nonperforming loans grew by roughly $150 million, largely driven by office loans in central business districts — a sector that has seen more trouble due to lagging corporate return-to-work trends.
Executives said they've historically sought to identify potential issues in loans early, as that helps the company achieve quicker resolutions with clients and ultimately keeps charge-offs low.
Western Alliance has outperformed its targets on charge-offs for each of the last ten years, UBS analyst Brody Preston wrote in a note to clients, saying worries over the bank's credit quality are "overdone." It helps that a good chunk of the bank's executive bonuses are partly tied to credit quality, Preston wrote.
The company also works with strong sponsors on their CRE loans, Preston added, so it "wouldn't surprise us if the borrowers bring more equity to the table" on properties that are at more risk.
