The regional banking crisis of mid-March seems long in the past, but it is easy to forget that some of these midsized banks were slammed particularly hard. As years of super-low interest rates came to an end, some banks experienced losses. Western Alliance (WAL 0.09%) was no exception, though it recovered quickly as it took aggressive steps to trim its sails to the new environment. The company just reported second-quarter earnings that beat expectations and showed that it has put the regional banking crisis behind it.
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The Silicon Valley Bank failure triggered a run on the regional banks
In March, the regional banks went through a crisis when Silicon Valley Bank failed. Silicon Valley Bank had invested in Treasuries and mortgage-backed securities during the years when the Federal Reserve held interest rates at 0% in order to support the economy in the aftermath of the COVID-19 pandemic. Silicon Valley Bank had characterized its investments in Treasuries and mortgage-backed securities as "held for investment," which meant the company could carry them at par or 100 cents on the dollar.
Once the Fed started hiking interest rates, the value of these securities declined, and people recognized the bank had a lot less book value than it was reporting in its financial statements. Silicon Valley Bank had a lot of tech company deposits, and depositors pulled their money in the course of a week, which caused a bank run. To meet deposit outflows, the bank was forced to sell its investment securities at such a deep loss that it became insolvent almost overnight.
As Silicon Valley Bank went under, the shares of other regional banks with tech customers also sold off, and Western Alliance's stock took a nosedive as deposits fled. The issue with the most vulnerable regional banks was large uninsured deposits, which lacked a guarantee from the Federal Deposit Insurance Corp.
In the immediate aftermath of the crisis, Western Alliance did see deposit outflows, though they stabilized by April. Western Alliance also began selling some of its assets to bolster its capital ratios. These sales had an upfront impact on earnings, but it will mean higher earnings down the road.
Western Alliance is more than just a tech bank
Western Alliance recently reported second-quarter earnings, which came in better than expected. The most important number was the $3.5 billion increase in deposits, which shows that deposits are flowing back to the bank. Unlike Silicon Valley Bank, which was more or less a checking account for big tech firms, Western Alliance has other business lines aside from tech banking. Many of its deposits are sticky because they are associated with other products the lender offers, particularly mortgages.
Second-quarter earnings impressed the Street
Earnings per share rose to $1.96 compared to $1.28 in the first quarter, though down from $2.39 in the second quarter of 2022. Book value per share rose 18% on a year-over-year basis. The company described the quarter as a "transitional period" on its earnings conference call, noting that it repaid some $6 billion in short-term borrowings.
Net interest margin did narrow, which was disappointing, but with all of the financial repositioning noise, it might just be temporary. Provisions for credit losses rose compared to the first quarter of 2023, but were lower than the same quarter last year. Investors are beginning to worry about commercial real estate in general, though Western Alliance's provisions don't telegraph any problems yet. Finally, the mortgage banking side of things improved compared to the first quarter of 2023 as volumes and gains on sales increased. Investors liked the numbers as well, with the stock rising 9% on the day of earnings and another 8% the day after.
Data source: YCharts.
Western Alliance seems to have put the regional bank crisis behind it, and it was probably unfairly tarred as a tech bank in the first place. It does have a tech banking unit called Bridge Bank, but it's only a small part of the overall business. Western Alliance is no longer trading at a discount to tangible book value per share and is trading less than 6 times estimated 2023 earnings per share. The stock also has a dividend yield of 3.1%. It looks like the worst is pretty much over for the stock.
