WAL - Western Alliance Q1 Earnings: Stock Roars Higher On A Surge Of Clarity

2023-04-19 01:49:53 ET

Summary

• The management team at Western Alliance announced financial results covering the first quarter of the company's 2023 fiscal year.
• In response to a significant amount of clarity provided by management, the picture for shareholders looks much better.
• The stock has reacted appropriately, but it likely belongs far higher than it is now.

Beyond any doubt, April 18th proved to be a fantastic day for shareholders of Western Alliance Bancorporation ( WAL ). After the market closed, management reported financial results covering the first quarter of the company's 2023 fiscal year. The stock shot up roughly 17% in after-hours trading in response to some rather bullish results. The good news for the company extends far beyond the fact that it beat expectations when it came to both revenue and profits. The key driver behind the increase, instead, seems to have been an update provided by management that shows that the company has weathered this downturn quite well. In fact, I would go so far as to say that the crisis for the company is essentially over and that the stock would likely move up significantly from here before it settles at fair value.

The veil was lifted

During times of crises, it's important for the companies that are most affected to be as transparent as possible with shareholders and the investment community. In an article that I wrote about Western Alliance, as well as about First Republic Bank ( FRC ), I complained that both enterprises were not providing the kind of clarity that shareholders deserved and that the market desperately needed. Because of this, I could not be bullish about either company until clarity was offered. The good news is that, as part of its first quarter earnings release for the 2023 fiscal year, the management team at Western Alliance has finally given the investment community precisely what it has needed all along.

Before we get into the fun details, we should touch on the headline news that investors are always initially drawn to. According to management, adjusted net revenue for the company came out at $712.2 million. That actually beat analysts' expectations by $45.1 million and is significantly outperformed the $555.5 million in adjusted net revenue that the company reported the same time one year earlier. The key driver behind this sales beat was net interest income. In addition to benefiting from a higher value of loans on its books, the company also benefited nicely from rising interest rates. Combined, these factors pushed net interest income for the company up to $609.9 million for the quarter. That compares favorably to the $449.5 million reported for the first quarter of the 2022 fiscal year.

On the bottom line, the business reported earnings per share of $1.28. That did fall significantly short of the $1.94 analysts anticipated. But on an adjusted basis, the reading came in at $2.30, which was up compared to the $2.03 per share that analysts thought adjusted earnings would come in at. This massive swing from GAAP earnings to adjusted earnings was driven largely by a $147.8 million fair value loss adjustment that the company incurred during the most recent quarter.

With the headline items out of the way, we now get to touch on the fun topics. At top of mind for investors was definitely the amount of deposits that the company was going to report. After all, the entire crisis in the banking sector has been driven by an outflow of deposits from companies that had a significant portion of their capital classified as uninsured. At the end of the 2022 fiscal year, the business had $53.6 billion in deposits. Of this amount, 55%, or $29.5 billion, was classified as uninsured. A big portion of these deposits subsequently left the bank. The largest chunk of the outflow was $3.3 billion associated with technology and innovation clients.

The good news for the company is that it did not take long for the picture to stabilize. From the end of 2022 to the end of the first quarter, deposits did shrink, falling to $47.6 billion. Uninsured deposits were cut nearly in half from $29.5 billion to $15.2 billion. But a good portion of this was offset by a rise in insured deposits, which grew from $24.1 billion to $32.4 billion. This trend continued through April 14th of this year, with overall deposits actually climbing to $49.6 billion even as uninsured deposits shrank to $13.4 billion. This was made possible by insured deposits totaling $36.2 billion, leaving only 27% of deposits as uninsured. In fact, subsequent to the end of the quarter, the company actually saw a net inflow of deposits from the same technology and innovation customers that initially pulled their capital out. That inflow was modest, but still promising to see, totaling $0.4 billion.

There were some other interesting changes during this time. Loans, for instance, also managed to fall from the end of 2022 to the end of the first quarter of this year. But that decline was very modest, with the number dropping from $51.9 billion to $46.4 billion. The bulk of this decline involved commercial and industrial loans, which dropped from $20.7 billion to $15.5 billion, with $5.9 billion in held-for-investment loans being reclassified as held-for-sale. This did result in a one-time loan fair value charge of $123 million on a pre-tax basis. And it also led the way to the company selling $1.74 billion worth of assets. It is worth noting that if we include loans that are being held for sale, that the loan balance for the company actually increased. This number grew from $53.1 billion at the end of last year to $53.4 billion by the end of the first quarter.

Although the company seems to be in much better shape right now, it is important to keep in mind that it required access to capital in order to stabilize. For instance, as of the end of the first quarter, the company had $9.5 billion that it had borrowed from the Federal Home Loan Bank. Though the business does have $5.3 billion worth of assets that it was selling in order to reduce this figure. The company also had another $2.8 billion in borrowings at the end of the first quarter. But after factoring in additional capacity that it has, and the aforementioned asset sales, it boasts nearly $33.6 billion in liquidity. In fact, management also told investors that the bank had a coverage ratio relative to uninsured deposits of 158% as of April 14th of this year.

The last thing worth mentioning involves the company's book value. You would expect this to decline materially. But oddly enough, it didn't. In fact, tangible book value for the company managed to end at $41.56 per share at the end of the latest quarter. This number one year earlier was $37.13 per share. And at the end of the 2022 fiscal year, it came in at $40.25 per share. This shows a capacity for growth even during some of the toughest times.

Takeaway

From all that I can see, Western Alliance appears to be in really solid shape at this moment. The company has significantly reduced its exposure to uninsured deposits. It brought in outside financing, sold off assets, and worked hard in other ways in order to prevent the contagion from spreading to it. Revenue and profits are on the rise, with tangible book value also climbing nicely. With deposits on the rise and nothing significantly negative sticking out, I must say that the company makes for a very solid prospect at this time that investors who like banking should consider.

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