# WESTERN ALLIANCE BANCORPORATION (WAL) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WESTERN ALLIANCE BANCORPORATION's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1212545/000121254523000093/wal-20221231.htm
Accession: 0001212545-23-000093
Filing date: 2023-02-23
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WAL/
All MD&A years: /company/WAL/mda/
Previous year: /company/WAL/mda/fy2021/ (FY 2021)
Next year: /company/WAL/mda/fy2023/ (FY 2023)

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is designed to provide insight on the financial condition and results of operations of Western Alliance Bancorporation and its subsidiaries and should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and assumptions. Certain risks, uncertainties, and other factors, including, but not limited to, those set forth under “Forward-Looking Statements” at the beginning of Part I of this Form 10-K and those discussed in Part I, Item 1A of this Form 10-K under the heading "Risk Factors," may cause actual results to differ materially from those projected in the forward-looking statements.

For a comparison of the 2021 results to the 2020 results and other 2020 information not included herein, refer to the "Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Financial Overview and Highlights

WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL provides a full spectrum of customized loan, deposit and treasury management capabilities, including 24/7 funds transfer and other digital payment 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 on January 25, 2022, which provides digital payment services for the class action legal industry.

Acquisition of Digital Disbursements

On January 25, 2022, the Company completed its acquisition of DST, 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.

2022 Financial Highlights

•Net income available to common stockholders of $1.0 billion for 2022, an increase from $895.7 million for 2021

•Diluted earnings per share of $9.70 for 2022, an increase from $8.67 per share for 2021

•Net revenue of $2.5 billion, constituting year-over-year growth of 30.1%, or $587.9 million, compared to an increase in non-interest expenses of 35.9%, or $305.3 million

•PPNR1 increased $282.6 million to $1.4 billion, compared to $1.1 billion in 2021

•Effective tax rate of 19.7% for 2022, compared to 19.9% for 2021

•Total loans HFI of $51.9 billion, up $12.8 billion from December 31, 2021

•Total deposits of $53.6 billion, up $6.0 billion from December 31, 2021

•Stockholders' equity of $5.4 billion, an increase of $393 million from December 31, 2021

•Nonperforming assets (nonaccrual loans and repossessed assets) decreased to 0.14% of total assets, from 0.15% at December 31, 2021

•Net loan charge-offs to average loans outstanding of approximately 0.00% for 2022, compared to 0.02% for 2021

•Net interest margin of 3.67% in 2022, increased from 3.41% in 2021

•Return on average assets of 1.62% for 2022, compared to 1.83% for 2021

•Tangible common equity ratio1 of 6.5%, compared to 7.3% at December 31, 2021

•Tangible book value per share, net of tax1, of $40.25, an increase of 6.4% from $37.84 at December 31, 2021

•Efficiency ratio1 of 44.9% in 2022, compared to 42.9% in 2021

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 year ended December 31, 2022.

1 See Non-GAAP Financial Measures section beginning on page 34.

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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 Condition

A summary of the Company's results of operations, financial condition, and selected metrics are included in the following tables: 

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["","","(dollars in millions, except per share amounts)"],["Net income","","$","1,057.3","","","$","899.2","","","$","506.6"],["Net income available to common stockholders","","1,044.5","","","895.7","","","506.6"],["Earnings per share - basic","","9.74","","","8.72","","","5.06"],["Earnings per share - diluted","","9.70","","","8.67","","","5.04"],["Return on average assets","","1.62","%","","1.83","%","","1.61","%"],["Return on average equity","","20.7","","","22.3","","","16.1"],["Return on average tangible common equity (1)","","25.4","","","26.2","","","17.7"],["Net interest margin","","3.67","","","3.41","","","3.97"]]
[[/GREPCENT_TABLE]]

(1) See Non-GAAP Financial Measures section beginning on page 34.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","2021"],["","","(in millions)"],["Total assets","","$","67,734","","","$","55,983"],["Loans HFS","","1,184","","","5,635"],["Loans HFI, net of deferred loan fees and costs","","51,862","","","39,075"],["Investment securities","","8,541","","","7,454"],["Total deposits","","53,644","","","47,612"],["Other borrowings","","6,299","","","1,502"],["Qualifying debt","","893","","","896"],["Stockholders' equity","","5,356","","","4,963"],["Tangible common equity, net of tax1","","4,383","","","4,035"]]
[[/GREPCENT_TABLE]]

(1) See Non-GAAP Financial Measures section beginning on page 34.

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 loans HFI: 

[[GREPCENT_TABLE]]
[["","","At or for the Year Ended December 31,"],["","","2022","","2021","","2020"],["","","(dollars in millions)"],["Nonaccrual loans","","$","85","","","$","73","","","$","115"],["Repossessed assets","","11","","","12","","","1"],["Non-performing assets","","98","","","87","","","150"],["Nonaccrual loans to funded loans","","0.16","%","","0.19","%","","0.43","%"],["Nonaccrual and repossessed assets to total assets","","0.14","","","0.15","","","0.32"],["Allowance for loan losses to funded loans","","0.60","","","0.65","","","1.03"],["Allowance for credit losses to funded loans","","0.69","","","0.74","","","1.17"],["Allowance for loan losses to nonaccrual loans","","364","","","348","","","242"],["Allowance for credit losses to nonaccrual loans","","419","","","400","","","274"],["Net charge-offs to average loans outstanding","","0.00","","","0.02","","","0.06"]]
[[/GREPCENT_TABLE]]

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Asset and Deposit Growth

The Company’s assets and liabilities are comprised primarily of loans and deposits. Therefore, the ability to originate new loans and attract new deposits is fundamental to the Company’s growth.

Total assets increased to $67.7 billion at December 31, 2022 from $56.0 billion at December 31, 2021. The increase in total assets of $11.7 billion, or 20.9%, was driven by continued organic loan and deposit growth. loans HFI increased by $12.8 billion, or 32.7%, to $51.9 billion as of December 31, 2022, compared to $39.1 billion as of December 31, 2021. The increase in loans HFI from December 31, 2021 was driven by increases of $6.6 billion in residential real estate (including EBO loans transferred from HFS to HFI in 2022 with a $1.9 billion balance at December 31, 2022), $2.8 billion in CRE, non-owner occupied, $2.4 billion in commercial and industrial, and $990 million in construction and land development loans. This increase in loans HFI was partially offset by a decrease in loans HFS of $4.5 billion from $5.6 billion as of December 31, 2021. The decrease in loans HFS was attributable to sales, a decline in production volumes, and transfer of the remaining EBO loan balance to HFI during the year ended December 31, 2022.

Total deposits increased $6.0 billion, or 12.7%, to $53.6 billion as of December 31, 2022 from $47.6 billion as of December 31, 2021. The increase in deposits from December 31, 2021 was driven by increases of $3.0 billion in certificates of deposits, $2.6 billion of interest bearing demand deposits, and $2.1 billion in savings and money market accounts, partially offset by a decrease of $1.7 billion in non-interest bearing demand deposits.

RESULTS OF OPERATIONS

The following table sets forth a summary financial overview:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Increase"],["","","2022","","2021","","(Decrease)"],["","","(in millions, except per share amounts)"],["Consolidated Income Statement Data:"],["Interest income","","$","2,691.8","","","$","1,658.7","","","$","1,033.1"],["Interest expense","","475.5","","","109.9","","","365.6"],["Net interest income","","2,216.3","","","1,548.8","","","667.5"],["Provision for (recovery of) credit losses","","68.1","","","(21.4)","","","89.5"],["Net interest income after provision for (recovery of) credit losses","","2,148.2","","","1,570.2","","","578.0"],["Non-interest income","","324.6","","","404.2","","","(79.6)"],["Non-interest expense","","1,156.7","","","851.4","","","305.3"],["Income before provision for income taxes","","1,316.1","","","1,123.0","","","193.1"],["Income tax expense","","258.8","","","223.8","","","35.0"],["Net income","","1,057.3","","","899.2","","","158.1"],["Dividends on preferred stock","","12.8","","","3.5","","","9.3"],["Net income available to common stockholders","","$","1,044.5","","","$","895.7","","","$","148.8"],["Earnings per share:"],["Basic","","$","9.74","","","$","8.72","","","$","1.02"],["Diluted","","$","9.70","","","$","8.67","","","$","1.03"]]
[[/GREPCENT_TABLE]]

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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.

Pre-Provision Net Revenue

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 shows the components used in the calculation of PPNR:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["","","(in millions)"],["Net interest income","","$","2,216.3","","","$","1,548.8","","","$","1,166.9"],["Total non-interest income","","324.6","","","404.2","","","70.8"],["Net revenue","","$","2,540.9","","","$","1,953.0","","","$","1,237.7"],["Total non-interest expense","","1,156.7","","","851.4","","","491.6"],["Pre-provision net revenue","","$","1,384.2","","","$","1,101.6","","","$","746.1"],["Less:"],["Provision for (recovery of) credit losses","","68.1","","","(21.4)","","","123.6"],["Income tax expense","","258.8","","","223.8","","","115.9"],["Net income","","$","1,057.3","","","$","899.2","","","$","506.6"]]
[[/GREPCENT_TABLE]]

Efficiency Ratio

The following table shows the components used in the calculation of the efficiency ratio, which management uses as a metric for assessing cost efficiency:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(dollars in millions)"],["Total non-interest expense","$","1,156.7","","","$","851.4","","","$","491.6"],["Divided by:"],["Total net interest income","2,216.3","","","1,548.8","","","1,166.9"],["Plus:"],["Tax equivalent interest adjustment","33.7","","","33.3","","","28.4"],["Total non-interest income","324.6","","","404.2","","","70.8"],["","$","2,574.6","","","$","1,986.3","","","$","1,266.1"],["Efficiency ratio - tax equivalent basis","44.9","%","","42.9","%","","38.8","%"]]
[[/GREPCENT_TABLE]]

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Tangible Common Equity and Return on Average Tangible Common Equity

The following tables present financial measures related to tangible common equity. Tangible common equity represents total stockholders' equity less goodwill and intangible assets and preferred stock. 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.

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021"],["","(dollars and shares in millions)"],["Total stockholders' equity","$","5,356","","","$","4,963"],["Less:"],["Goodwill and intangible assets","680","","","635"],["Preferred stock","295","","","295"],["Total tangible common stockholders' equity","4,381","","","4,033"],["Plus: deferred tax - attributed to intangible assets","2","","","2"],["Total tangible common equity, net of tax","$","4,383","","","$","4,035"],["Total assets","$","67,734","","","$","55,983"],["Less: goodwill and intangible assets, net","680","","","635"],["Tangible assets","67,054","","","55,348"],["Plus: deferred tax - attributed to intangible assets","2","","","2"],["Total tangible assets, net of tax","$","67,056","","","$","55,350"],["Tangible common equity ratio","6.5","%","","7.3","%"],["Common shares outstanding","108.9","","","106.6"],["Book value per common share","$","46.47","","","$","43.78"],["Tangible book value per common share, net of tax","40.25","","","37.84"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021","","2020"],["","(dollars in millions)"],["Net income available to common shareholders","$","1,044.5","","","$","895.7","","","$","506.6"],["Divided by:"],["Average stockholders' equity","5,099.0","","","4,033.8","","","3,151.8"],["Less:"],["Average goodwill and intangible assets","(688.0)","","","(528.6)","","","(297.6)"],["Average preferred stock","(294.5)","","","(81.5)","","","\u2014"],["Average tangible common equity","$","4,116.5","","","$","3,423.7","","","$","2,854.2"],["Average accumulated other comprehensive loss (income)","407.5","","","(56.9)","","","(63.8)"],["Average tangible common equity, excluding AOCI","$","4,524.0","","","$","3,366.8","","","$","2,790.4"],["Return on average tangible common equity","25.4","%","","26.2","%","","17.7","%"],["Return on average tangible common equity, excluding AOCI","23.1","","","26.6","","","18.2"]]
[[/GREPCENT_TABLE]]

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Regulatory Capital

The following table presents certain financial measures related to regulatory capital under Basel III, which includes CET 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 ending December 31, 2024. Beginning in 2022, capital ratios and amounts include a 25% reduction to the capital benefit that resulted from the increased ACL related to the adoption of ASC 326.

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021"],["","(dollars in millions)"],["Common equity tier 1:"],["Common equity","$","5,097","","","$","4,715"],["Less:"],["Non-qualifying goodwill and intangibles","672","","","631"],["Disallowed deferred tax asset","12","","","\u2014"],["AOCI related adjustments","(664)","","","16"],["Unrealized gain on changes in fair value liabilities","4","","","\u2014"],["Common equity tier 1","$","5,073","","","$","4,068"],["Divided by: Risk-weighted assets","$","54,461","","","$","44,697"],["Common equity tier 1 ratio","9.3","%","","9.1","%"],["Common equity tier 1","$","5,073","","","$","4,068"],["Plus: Preferred stock and trust preferred securities","376","","","376"],["Tier 1 capital","$","5,449","","","$","4,444"],["Divided by: Tangible average assets","$","69,814","","","$","56,973"],["Tier 1 leverage ratio","7.8","%","","7.8","%"],["Total capital:"],["Tier 1 capital","$","5,449","","","$","4,444"],["Plus:"],["Subordinated debt","817","","","815"],["Adjusted allowances for credit losses","320","","","240"],["Tier 2 capital","$","1,137","","","$","1,055"],["Total capital","$","6,586","","","$","5,499"],["Total capital ratio","12.1","%","","12.3","%"],["Classified assets to tier 1 capital plus allowance:"],["Classified assets","$","393","","","$","301"],["Divided by: Tier 1 capital","5,449","","","4,444"],["Plus: Adjusted allowances for credit losses","320","","","240"],["Total Tier 1 capital plus adjusted allowances for credit losses","$","5,769","","","$","4,684"],["Classified assets to tier 1 capital plus allowance","6.8","%","","6.4","%"]]
[[/GREPCENT_TABLE]]

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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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021"],["","","Average Balance","","Interest","","Average Yield / Cost","","Average Balance","","Interest","","Average Yield / Cost"],["","","(dollars in millions)"],["Interest earning assets"],["Loans HFS","","$","4,364","","","$","180.3","","","4.13","%","","$","5,476","","","$","174.4","","","3.18","%"],["Loans HFI:"],["Commercial and industrial","","20,083","","","1,002.8","","","5.05","","","14,979","","","624.8","","","4.26"],["CRE - non-owner occupied","","7,769","","","416.4","","","5.37","","","5,829","","","271.3","","","4.67"],["CRE - owner occupied","","1,841","","","93.2","","","5.16","","","2,030","","","97.7","","","4.92"],["Construction and land development","","3,426","","","229.1","","","6.69","","","2,790","","","160.0","","","5.74"],["Residential real estate","","13,771","","","468.5","","","3.40","","","5,129","","","158.9","","","3.10"],["Consumer","","61","","","3.1","","","5.07","","","39","","","1.7","","","4.43"],["Total loans HFI (1), (2), (3)","","46,951","","","2,213.1","","","4.74","","","30,796","","","1,314.4","","","4.32"],["Securities:"],["Securities - taxable","","6,325","","","195.3","","","3.09","","","5,284","","","95.8","","","1.81"],["Securities - tax-exempt","","2,067","","","77.3","","","4.68","","","2,137","","","68.9","","","4.05"],["Total securities (1)","","8,392","","","272.6","","","3.48","","","7,421","","","164.7","","","2.46"],["Other","","1,574","","","25.8","","","1.64","","","2,718","","","5.2","","","0.19"],["Total interest earning assets (4)","","61,281","","","2,691.8","","","4.45","","","46,411","","","1,658.7","","","3.65"],["Non-interest earning assets"],["Cash and due from banks","","260","","","","","","","293"],["Allowance for credit losses","","(280)","","","","","","","(261)"],["Bank owned life insurance","","180","","","","","","","178"],["Other assets","","3,948","","","","","","","2,487"],["Total assets","","$","65,389","","","","","","","$","49,108"],["Interest-bearing liabilities"],["Interest-bearing deposits:"],["Interest-bearing transaction accounts","","$","8,331","","","$","78.8","","","0.95","%","","$","4,751","","","$","5.9","","","0.13","%"],["Savings and money market accounts","","18,518","","","158.6","","","0.86","","","15,814","","","33.1","","","0.21"],["Certificates of deposit","","2,772","","","39.0","","","1.40","","","1,850","","","8.5","","","0.46"],["Total interest-bearing deposits","","29,621","","","276.4","","","0.93","","","22,415","","","47.5","","","0.21"],["Short-term borrowings","","3,424","","","92.1","","","2.69","","","1,206","","","8.2","","","0.68"],["Long-term debt","","1,008","","","72.0","","","7.14","","","373","","","21.1","","","5.65"],["Qualifying debt","","893","","","35.0","","","3.92","","","827","","","33.1","","","4.00"],["Total interest-bearing liabilities","","34,946","","","475.5","","","1.36","","","24,821","","","109.9","","","0.44"],["Interest cost of funding earning assets","","","","","","0.78","","","","","","","0.24"],["Non-interest-bearing liabilities"],["Non-interest-bearing demand deposits","","24,133","","","","","","","19,416"],["Other liabilities","","1,211","","","","","","","837"],["Stockholders\u2019 equity","","5,099","","","","","","","4,034"],["Total liabilities and stockholders' equity","","$","65,389","","","","","","","$","49,108"],["Net interest income and margin (5)","","","","$","2,216.3","","","3.67","%","","","","$","1,548.8","","","3.41","%"]]
[[/GREPCENT_TABLE]]

(1)Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $33.7 million and $33.3 million for the year ended December 31, 2022 and 2021, respectively.

(2)Included in the yield computation are net loan fees of $132.2 million and $131.7 million for the year ended December 31, 2022 and 2021, respectively.

(3)Includes non-accrual loans.

(4)Net yield on interest earning assets based on the balance at December 31, 2022 and 2021 was 3.56% and 2.96%, respectively.

(5)Net interest margin is computed by dividing net interest income by total average earning assets, annualized on an actual/actual basis.

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022 versus 2021"],["","","Increase (Decrease) Due to Changes in (1)"],["","","Volume","","Rate","","Total"],["","","(in millions)"],["Interest income:"],["Loans HFS","","$","(45.9)","","","$","51.8","","","$","5.9"],["Loans HFI:"],["Commercial and industrial","","254.9","","","123.1","","","378.0"],["CRE - non-owner occupied","","104.0","","","41.1","","","145.1"],["CRE - owner occupied","","(9.6)","","","5.1","","","(4.5)"],["Construction and land development","","42.5","","","26.6","","","69.1"],["Residential real estate","","294.0","","","15.6","","","309.6"],["Consumer","","1.1","","","0.3","","","1.4"],["Total loans HFI","","686.9","","","211.8","","","898.7"],["Securities:"],["Securities - taxable","","32.1","","","67.4","","","99.5"],["Securities - tax-exempt","","(2.6)","","","11.0","","","8.4"],["Total securities","","29.5","","","78.4","","","107.9"],["Other","","(18.7)","","","39.3","","","20.6"],["Total interest income","","651.8","","","381.3","","","1,033.1"],["Interest expense:"],["Interest-bearing transaction accounts","","$","33.9","","","$","39.0","","","$","72.9"],["Savings and money market accounts","","23.2","","","102.3","","","125.5"],["Time certificates of deposit","","13.0","","","17.5","","","30.5"],["Short-term borrowings","","59.7","","","24.2","","","83.9"],["Long-term debt","","45.3","","","5.6","","","50.9"],["Qualifying debt","","2.6","","","(0.7)","","","1.9"],["Total interest expense","","177.7","","","187.9","","","365.6"],["Net change","","$","474.1","","","$","193.4","","","$","667.5"]]
[[/GREPCENT_TABLE]]

(1)Changes attributable to both volume and rate are designated 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 year ended December 31, 2022, interest income was $2.7 billion, an increase of $1.0 billion, or 62.3%, compared to $1.7 billion for the year ended December 31, 2021. This increase was primarily the result of a $898.7 million increase in interest income from loans HFI that was driven by a $16.2 billion increase in the average HFI loan balance for the year ended December 31, 2022 and to a lesser extent higher rates. Interest income from investment securities also increased by $107.9 million for the comparable period due to increased investment yields driven by a higher rate environment and investment securities mix as the Company held a higher proportion of variable rate securities in 2022 compared to 2021. Average yield on interest earning assets increased to 4.45% for the year ended December 31, 2022, compared to 3.65% for 2021, which was primarily the result of a higher rate environment.

For the year ended December 31, 2022, interest expense was $475.5 million, compared to $109.9 million for the year ended December 31, 2021. Interest expense on deposits increased $228.9 million for the same period due to increasing deposit rates, coupled with a $7.2 billion increase in average interest-bearing deposits. Interest expense across all debt types increased $136.7 million for the year ended December 31, 2022 compared to the same period in 2021 as a result of an increase of $2.9 billion in average total debt. The increase in average total debt during the year ended December 31, 2022 is attributable to increases in overnight borrowings and $579 million of credit linked notes issuances, net of issuance costs.

For the year ended December 31, 2022, net interest income was $2.2 billion, compared to $1.5 billion for the year ended December 31, 2021. The increase in net interest income reflects a $14.9 billion increase in average interest earning assets, partially offset by an increase of $10.1 billion in average interest-bearing liabilities. The increase in net interest margin of 26 basis points compared to 2021 is the result of an increase in average loan balances couple with higher loan and investment security yields due to a rising rate environment, partially offset by higher funding costs on deposits and borrowings during 2022.

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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 ACL at a level that is adequate to absorb estimated lifetime credit losses inherent in the loan and investment securities portfolios based on remaining contractual maturity, adjusted for estimated prepayments as of each period end. The Company's CECL models incorporate historical experience, current conditions, and reasonable and supportable forecasts in measuring expected credit losses. For the year ended December 31, 2022, the Company recorded a provision for credit losses of $68.1 million, which is primarily attributable to the Company's strong loan growth during the year and to a lesser extent, the current weakened economic outlook. For the year ended December 31, 2021, the Company recorded a recovery of credit losses of $21.4 million due to improvement in economic forecasts relative to 2020.

Non-interest Income

The following table presents a summary of non-interest income: 

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Increase (Decrease)"],["","","2022","","2021"],["","","(in millions)"],["Net loan servicing revenue (expense)","","$","130.9","","","$","(16.3)","","","$","147.2"],["Net gain on loan origination and sale activities","","104.0","","","326.2","","","(222.2)"],["Service charges and fees","","27.0","","","28.3","","","(1.3)"],["Commercial banking related income","","21.5","","","17.4","","","4.1"],["Income from equity investments","","17.8","","","22.1","","","(4.3)"],["Gain on recovery from credit guarantees","","14.7","","","7.2","","","7.5"],["Gain on sales of investment securities","","6.8","","","8.3","","","(1.5)"],["Fair value loss on assets measured at fair value, net","","(28.6)","","","(1.3)","","","(27.3)"],["Other income","","30.5","","","12.3","","","18.2"],["Total non-interest income","","$","324.6","","","$","404.2","","","$","(79.6)"]]
[[/GREPCENT_TABLE]]

Total non-interest income for the year ended December 31, 2022 compared to the same period in 2021 decreased by $79.6 million. The decrease in non-interest income was primarily driven by a decrease in net gain on loan origination and sale activities of $222.2 million as the rise in interest rates throughout 2022 impacted the Company's residential mortgage banking business, resulting in compressed margins, a decline in production volume, and reduced gains due to fair value changes. The rising rate environment also contributed to mark-to-market losses on the Company's equity securities, which was the primary driver of the $27.3 million increase to fair value loss on assets measured at fair value, net. These decreases were partially offset by an increase in net loan servicing revenue of $147.2 million from lower payoffs, gain on sales of MSRs, and higher servicing fees.

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Non-interest Expense

The following table presents a summary of non-interest expense:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Increase (Decrease)"],["","2022","","2021"],["","(in millions)"],["Salaries and employee benefits","$","539.5","","","$","466.7","","","$","72.8"],["Deposit costs","165.8","","","29.8","","","136.0"],["Legal, professional, and directors' fees","99.9","","","58.6","","","41.3"],["Data processing","83.0","","","58.2","","","24.8"],["Loan servicing expenses","55.5","","","53.5","","","2.0"],["Occupancy","55.5","","","43.8","","","11.7"],["Insurance","31.1","","","23.0","","","8.1"],["Loan acquisition and origination expenses","23.1","","","28.8","","","(5.7)"],["Business development and marketing","22.1","","","13.5","","","8.6"],["Net gain on sales and valuations of repossessed and other assets","(0.7)","","","(3.5)","","","2.8"],["Acquisition and restructure expenses","0.4","","","15.3","","","(14.9)"],["Loss on extinguishment of debt","\u2014","","","5.9","","","(5.9)"],["Other expense","81.5","","","57.8","","","23.7"],["Total non-interest expense","$","1,156.7","","","$","851.4","","","$","305.3"]]
[[/GREPCENT_TABLE]]

Total non-interest expense for the year ended December 31, 2022 increased $305.3 million compared to the same period in 2021. The increase in non-interest expense was primarily driven by increases in deposit costs, salaries and employee benefits, legal, professional, and directors' fees, and data processing costs. The increase in deposits costs of $136.0 million primarily relates to higher earnings credit rates as a result of the rising rate environment in 2022. Salaries and employee benefits increased $72.8 million due to an increase in headcount from the prior year to support the Company's continued growth, higher incentive compensation from loan and deposit growth during the year, and inclusion of a full year of compensation costs in 2022 for AmeriHome employees. The increase in legal, professional, and directors' fees of $41.3 million relates to an increase in project initiatives and consulting work to support ongoing implementations and the increase in data processing costs of $24.8 million was driven by an increase in software licensing costs.

Income Taxes

For the years ended December 31, 2022 and 2021, the Company's effective tax rate was 19.7% and 19.9%, respectively. There was not a significant change in the effective tax rate from 2021 to 2022.

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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: 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: offers consumer banking services, such as mortgage banking and commercial banking services to enterprises in consumer-related sectors and beginning on January 25, 2022, includes the financial results of DST.

•Corporate & Other: consists of the Company's investment portfolio, Corporate borrowings and other related items, income and expense items not allocated to other reportable segments, and inter-segment eliminations.

The following tables present selected operating segment information:

[[GREPCENT_TABLE]]
[["","","Consolidated Company","","Commercial","","Consumer Related","","Corporate & Other"],["December 31, 2022","","(in millions)"],["Loans HFI, net of deferred loan fees and costs","","$","51,862","","","$","31,414","","","$","20,448","","","$","\u2014"],["Deposits","","53,644","","","29,494","","","18,492","","","5,658"],["December 31, 2021"],["Loans HFI, net of deferred loan fees and costs","","$","39,075","","","$","25,092","","","$","13,983","","","$","\u2014"],["Deposits","","47,612","","","30,467","","","15,363","","","1,782"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Year Ended December 31, 2022"],["Income (loss) before provision for income taxes","","$","1,316.1","","","$","1,095.3","","","$","450.1","","","$","(229.3)"],["Year Ended December 31, 2021"],["Income (loss) before provision for income taxes","","$","1,123.0","","","$","861.5","","","$","496.1","","","$","(234.6)"]]
[[/GREPCENT_TABLE]]

BALANCE SHEET ANALYSIS

Total assets increased to $67.7 billion at December 31, 2022 from $56.0 billion at December 31, 2021. The increase in total assets of $11.7 billion, or 20.9%, was driven by continued organic loan and deposit growth. Loans HFI increased by $12.8 billion, or 32.7%, to $51.9 billion as of December 31, 2022, compared to $39.1 billion as of December 31, 2021. The increase in loans HFI from December 31, 2021 was driven by increases in residential real estate loans of $6.6 billion (including EBO loans transferred from HFS to HFI in 2022 with a $1.9 billion balance at December 31, 2022), CRE, non-owner occupied loans of $2.8 billion, commercial and industrial loans of $2.4 billion, and construction and land development loans of $990 million. In addition, loans HFS decreased $4.5 billion, down from $5.6 billion as of December 31, 2021, related to sales, a decline in production volumes, and transfer of the remaining EBO loan balance to loans HFI during the year ended December 31, 2022.

Total liabilities increased $11.4 billion, or 22.3%, to $62.4 billion at December 31, 2022, compared to $51.0 billion at December 31, 2021. The increase in liabilities is due primarily to an increase in total deposits and borrowings. Total deposits increased $6.0 billion, or 12.7%, to $53.6 billion at December 31, 2022. The increase in deposits from December 31, 2021 was driven by increases in certificates of deposit of $3.0 billion, interest-bearing demand deposits of $2.6 billion, and savings and money market accounts of $2.1 billion, partially offset by a decrease in non-interest-bearing demand deposits of $1.7 billion. Other borrowings also increased $4.8 billion due to an increase in overnight borrowings and issuance of credit linked notes during the year.

Total stockholders’ equity increased by $393 million, or 7.9%, to $5.4 billion at December 31, 2022, compared to $5.0 billion at December 31, 2021. The increase in stockholders' equity is primarily a function of net income and net proceeds of $157.7 million from issuance of common stock during the year, 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.

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Investment securities

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 debt 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 in 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 utilized as collateral for borrowings, required collateral for public deposits and repurchase agreements, and to manage liquidity, capital, and interest rate risk.

The following table summarizes the carrying value of the Company's investment securities portfolio: 

[[GREPCENT_TABLE]]
[["","","December 31,","","Increase (Decrease)"],["","","2022","","2021"],["","","(in millions)"],["Debt securities"],["CLO","","$","2,706","","","$","926","","","$","1,780"],["Commercial MBS issued by GSEs","","97","","","69","","","28"],["Corporate debt securities","","390","","","383","","","7"],["Private label residential MBS","","1,397","","","1,725","","","(328)"],["Residential MBS issued by GSEs","","1,740","","","1,993","","","(253)"],["Tax-exempt","","1,982","","","2,105","","","(123)"],["U.S. treasury securities","","\u2014","","","13","","","(13)"],["Other","","69","","","82","","","(13)"],["Total debt securities","","$","8,381","","","$","7,296","","","$","1,085"],["Equity securities"],["Common stock","","$","3","","","$","\u2014","","","$","3"],["CRA investments","","49","","","45","","","4"],["Preferred stock","","108","","","114","","","(6)"],["Total equity securities","","$","160","","","$","159","","","$","1"]]
[[/GREPCENT_TABLE]]

The carrying value of debt securities increased $1.1 billion, or 14.9%, from December 31, 2021. The increase in investment securities is largely attributable to purchases of CLOs, offset by paydowns and unrealized fair value losses. The Company continued to increase its investment in CLOs during 2022 as these variable rate securities generate yields that are higher than those for MBS and benefited from the rising rate environment. The Company's CLO portfolio consists of second or third credit tranche bonds of structured transactions, rated AA to A. The rates on these securities will convert to a SOFR index when LIBOR is discontinued in June 2023.

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The weighted average yield on investment securities is calculated by dividing income within each maturity range by the outstanding amount of the related investment. For purposes of calculating the weighted average yield, AFS securities are carried at amortized cost in the table below and tax-exempt obligations have not been tax-effected. The maturity distribution and weighted average yield of the Company's investment security portfolios at December 31, 2022 are summarized in the table below: 

[[GREPCENT_TABLE]]
[["","","Due Under 1 Year","","Due 1-5 Years","","Due 5-10 Years","","Due Over 10 Years","","Total"],["","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield"],["","","(dollars in millions)"],["Held-to-maturity"],["Private label residential MBS (1)","","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","198","","","2.20","%","","$","198","","","2.20","%"],["Tax-exempt bonds","","9","","","4.10","","","17","","","5.21","","","29","","","4.80","","","1,036","","","4.33","","","1,091","","","4.36"],["Total HTM securities","","$","9","","","4.10","%","","$","17","","","5.21","%","","$","29","","","4.80","%","","$","1,234","","","3.99","%","","$","1,289","","","4.03","%"],["Available-for-sale"],["CLO","","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","817","","","6.13","%","","$","1,979","","","6.03","%","","$","2,796","","","6.06","%"],["Commercial MBS issued by GSEs (1)","","\u2014","","","\u2014","","","21","","","2.77","","","37","","","7.02","","","46","","","2.45","","","104","","","4.16"],["Corporate debt securities","","\u2014","","","\u2014","","","157","","","4.28","","","267","","","3.78","","","5","","","3.70","","","429","","","3.97"],["Private label residential MBS (1)","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","31","","","4.37","","","1,411","","","2.49","","","1,442","","","2.53"],["Residential MBS issued by GSEs (1)","","\u2014","","","\u2014","","","3","","","2.70","","","5","","","2.82","","","2,115","","","2.16","","","2,123","","","2.17"],["Tax-exempt","","\u2014","","","\u2014","","","5","","","2.85","","","42","","","3.06","","","957","","","2.66","","","1,004","","","2.68"],["Other","","1","","","2.00","","","8","","","2.65","","","10","","","5.06","","","56","","","4.84","","","75","","","4.59"],["Total AFS securities","","$","1","","","2.00","%","","$","194","","","3.99","%","","$","1,209","","","5.46","%","","$","6,569","","","3.50","%","","$","7,973","","","3.81","%"]]
[[/GREPCENT_TABLE]]

(1)MBS are comprised of pools of loans with varying maturities, the majority of which are due after 10 years.

The Company does not hold any subprime MBS in its investment portfolio. Approximately 58% of its MBS are GSE issued. The MBS that are not GSE issued consist primarily of investment grade securities, including $1.2 billion rated AAA and $41 million rated AA.

Gross unrealized losses on the Company's AFS securities at December 31, 2022 relate primarily to changes in interest rates and other market conditions that are not considered to be credit-related issues. The Company has reviewed its securities on which there is an unrealized loss in accordance with its ACL policy described in "Note 1. Summary of Significant Accounting Policies" in Item 8 of this Form 10-K. Based on the analysis performed, management determined that an ACL on the Company's AFS securities was not necessary at December 31, 2022.

The credit loss model under ASC 326-20, applicable to HTM securities, requires recognition of lifetime expected credit losses through an allowance account at the time the security is purchased. For the year ended December 31, 2022, the Company recognized no provision for credit losses on HTM securities, compared to a recovery of credit losses of $1.6 million for the same period in 2021, resulting in a total allowance of $5.2 million as of December 31, 2022 and 2021.

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Loans HFS

The Company purchases and originates residential mortgage loans through its AmeriHome mortgage banking business channel that are held for sale or securitization. At December 31, 2022, the Company had $1.2 billion of loans HFS, compared to $5.6 billion at December 31, 2021. The decrease in loans HFS from December 31, 2021 relates to sales, a decline in production volumes, and transfer of the remaining EBO loan balance to loans HFI.

Loans HFI

The table below summarizes the distribution of the Company’s held for investment loan portfolio: 

[[GREPCENT_TABLE]]
[["","","December 31,","","Increase (Decrease)"],["","","2022","","2021"],["","","(in millions)"],["Warehouse lending","","$","5,561","","","$","5,156","","","$","405"],["Municipal & nonprofit","","1,524","","","1,579","","","(55)"],["Tech & innovation","","2,293","","","1,418","","","875"],["Equity fund resources","","3,717","","","3,830","","","(113)"],["Other commercial and industrial","","7,793","","","6,465","","","1,328"],["CRE - owner occupied","","1,656","","","1,723","","","(67)"],["Hotel franchise finance","","3,807","","","2,534","","","1,273"],["Other CRE - non-owner occupied","","5,457","","","3,952","","","1,505"],["Residential","","13,996","","","9,243","","","4,753"],["Residential - EBO","","1,884","","","\u2014","","","1,884"],["Construction and land development","","3,995","","","3,006","","","989"],["Other","","179","","","169","","","10"],["Total loans HFI","","51,862","","","39,075","","","12,787"],["Allowance for credit losses","","(310)","","","(252)","","","(58)"],["Total loans HFI, net of allowance","","$","51,552","","","$","38,823","","","$","12,729"]]
[[/GREPCENT_TABLE]]

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 ACL. Net deferred loan fees of $141 million and $86 million reduced the carrying value of loans as of December 31, 2022 and 2021, respectively. Net unamortized purchase premiums on acquired and purchased loans of $195 million and $185 million increased the carrying value of loans as of December 31, 2022 and 2021, respectively.

44

Table of Contents

The following table sets forth the amount of loans outstanding by type of loan as of December 31, 2022 that were contractually due in under one year, one through five years, after five through 15 years, and more than 15 years based on remaining scheduled repayments of principal. Lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less. The table also presents an analysis of the rate structure for loans within the same maturity time periods. Actual cash flows from these loans may differ materially from contractual maturities due to prepayment, refinancing, or other factors.

[[GREPCENT_TABLE]]
[["","","Due Under 1 Year","","Due 1 - 5 Years","","Due 5 - 15 Years","","Due Over 15 Years","","Total"],["","","(in millions)"],["Warehouse lending"],["Variable rate","","$","2,180","","","$","2,991","","","$","7","","","$","\u2014","","","$","5,178"],["Fixed rate","","149","","","234","","","\u2014","","","\u2014","","","383"],["Municipal & nonprofit"],["Variable rate","","\u2014","","","44","","","420","","","15","","","479"],["Fixed rate","","48","","","72","","","647","","","278","","","1,045"],["Tech & innovation"],["Variable rate","","211","","","2,016","","","16","","","\u2014","","","2,243"],["Fixed rate","","\u2014","","","50","","","\u2014","","","\u2014","","","50"],["Equity fund resources"],["Variable rate","","2,015","","","984","","","7","","","\u2014","","","3,006"],["Fixed rate","","544","","","167","","","\u2014","","","\u2014","","","711"],["Other commercial and industrial"],["Variable rate","","821","","","3,271","","","1,405","","","11","","","5,508"],["Fixed rate","","111","","","1,671","","","495","","","8","","","2,285"],["CRE - owner occupied"],["Variable rate","","65","","","310","","","379","","","91","","","845"],["Fixed rate","","15","","","286","","","477","","","33","","","811"],["Hotel franchise finance"],["Variable rate","","378","","","2,531","","","58","","","\u2014","","","2,967"],["Fixed rate","","45","","","572","","","223","","","\u2014","","","840"],["Other CRE - non-owner occupied"],["Variable rate","","844","","","2,874","","","396","","","17","","","4,131"],["Fixed rate","","164","","","772","","","390","","","\u2014","","","1,326"],["Residential"],["Variable rate","","2","","","16","","","3","","","747","","","768"],["Fixed rate","","\u2014","","","1","","","51","","","13,176","","","13,228"],["Residential - EBO"],["Variable rate","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Fixed rate","","8","","","\u2014","","","2","","","1,874","","","1,884"],["Construction and land development"],["Variable rate","","1,095","","","2,560","","","55","","","7","","","3,717"],["Fixed rate","","131","","","135","","","12","","","\u2014","","","278"],["Other"],["Variable rate","","104","","","18","","","14","","","2","","","138"],["Fixed rate","","1","","","21","","","19","","","\u2014","","","41"],["Total","","$","8,931","","","$","21,596","","","$","5,076","","","$","16,259","","","$","51,862"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022, approximately $21.6 billion, or 74.5%, of total variable rate loans were subject to rate floors with a weighted average interest rate of 4.1%. At December 31, 2021, approximately $18.3 billion, or 74.3% of total variable rate loans were subject to rate floors with a weighted average interest rate of 4.0%. At December 31, 2022, total loans consisted of 55.9% with variable rates and 44.1% with fixed rates, compared to 63.0% with variable rates and 37.0% with fixed rates at December 31, 2021.

The Company began offering three alternative rate indices (including Ameribor, SOFR, and BSBY) on its lending products to its customers in the second half of 2021, with Ameribor as its preferred rate index. Existing variable rate loan contracts contain LIBOR replacement language, which allow for conversion to a different rate index and spread adjustment, if necessary.

45

Table of Contents

Concentrations of Lending Activities

The Company monitors concentrations of lending activities at the product and borrower relationship level. As of December 31, 2022 and 2021, no borrower relationships at both the commitment and funded loan level exceeded 5% of total loans HFI.

Commercial and industrial loans made up 40% and 47% of the Company's HFI loan portfolio as of December 31, 2022 and 2021, respectively.

In addition, the Company's loan portfolio includes significant credit exposure to the CRE market as CRE related loans accounted for approximately 29% of total loans at December 31, 2022 and 2021. Approximately 16% and 13% of the Company's CRE investor portfolio consisted of office loans as of December 31, 2022 and 2021, respectively. These office loans are primarily shorter-term bridge loans that enable borrowers to reposition or redevelop projects and are geographically well diversified, with the vast majority located in midtown or suburban locations. At the time of origination, these loans have an initial loan-to-value ratio of less than 55% and a weighted average loan-to-cost of less than 60%. The properties underlying these loans have stable business trends and low vacancy rates. Substantially all of the Company's remaining CRE loans are secured by first liens with an initial loan-to-value ratio of generally not more than 75%. Approximately 16% and 23% of these CRE loans, excluding construction and land loans, were owner-occupied at December 31, 2022 and 2021, respectively.

Non-performing Assets

Total non-performing loans increased by $11 million at December 31, 2022 to $87 million from $76 million at December 31, 2021.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","2021"],["","","(dollars in millions)"],["Total nonaccrual loans (1)","","$","85","","","$","73"],["Loans past due 90 days or more on accrual status (2)","","\u2014","","","\u2014"],["Accruing troubled debt restructured loans","","2","","","3"],["Total nonperforming loans","","87","","","76"],["Other assets acquired through foreclosure, net","","$","11","","","$","12"],["Nonaccrual loans to funded loans HFI","","0.16","%","","0.19","%"],["Loans past due 90 days or more on accrual status to funded loans HFI","","\u2014","","","\u2014"]]
[[/GREPCENT_TABLE]]

(1)Includes non-accrual TDR loans of $12 million and $18 million at December 31, 2022 and 2021, respectively.

(2)Excludes government guaranteed residential mortgage loans of $582 million and zero at December 31, 2022 and 2021, respectively.

Interest income that would have been recorded under the original terms of nonaccrual loans was $4.7 million, $5.3 million, and $5.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.

The composition of nonaccrual loans HFI by loan portfolio segment were as follows: 

[[GREPCENT_TABLE]]
[["","","December 31, 2022"],["","","Nonaccrual Balance","","Percent of Nonaccrual Balance","","Percent of Total Loans HFI"],["","","(dollars in millions)"],["Municipal & nonprofit","","$","7","","","8.2","%","","0.01","%"],["Tech & innovation","","1","","","1.2","","","0.00"],["Other commercial and industrial","","24","","","28.2","","","0.04"],["CRE - owner occupied","","12","","","14.1","","","0.02"],["Hotel franchise finance","","10","","","11.8","","","0.02"],["Other CRE - non-owner occupied","","8","","","9.4","","","0.02"],["Residential","","19","","","22.4","","","0.04"],["Construction and land development","","4","","","4.7","","","0.01"],["Total non-accrual loans","","$","85","","","100.0","%","","0.16","%"]]
[[/GREPCENT_TABLE]]

46

Table of Contents

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","Nonaccrual Balance","","Percent of Nonaccrual Balance","","Percent of Total Loans HFI"],["","","(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","%"]]
[[/GREPCENT_TABLE]]

Troubled Debt Restructured 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. 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.

The following table presents TDR loans:

[[GREPCENT_TABLE]]
[["","December 31, 2022","","December 31, 2021"],["","Number of Loans","","Recorded Investment","","Number of Loans","","Recorded Investment"],["","(dollars in millions)"],["Tech & innovation","\u2014","","","$","\u2014","","","2","","","$","2"],["Other commercial and industrial","4","","","2","","","7","","","6"],["CRE - owner occupied","1","","","1","","","1","","","1"],["Hotel franchise finance","1","","","10","","","\u2014","","","\u2014"],["Other CRE - non-owner occupied","1","","","1","","","5","","","11"],["Construction and land development","\u2014","","","\u2014","","","1","","","1"],["Total","7","","","$","14","","","16","","","$","21"]]
[[/GREPCENT_TABLE]]

The ACL on TDR loans totaled $4 million and zero as of December 31, 2022 and 2021, respectively. There were no outstanding commitments on TDR loans as of December 31, 2022 and 2021.

47

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Allowance for Credit Losses on Loans HFI

The ACL consists of the ACL on loans and an ACL on unfunded loan commitments. The ACL on HTM securities is estimated separately from loans and is discussed within the Investment Securities section.

The following table summarizes the allocation of the ACL on loans HFI by loan portfolio segment:

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","December 31, 2021"],["","","Allowance for credit losses","","Percent of total allowance for credit losses","","Percent of loan type to total loans HFI","","Allowance for credit losses","","Percent of total allowance for credit losses","","Percent of loan type to total loans HFI"],["","","(dollars in millions)","","(dollars in millions)"],["Warehouse lending","","$","8.4","","","2.7","%","","10.7","%","","$","3.0","","","1.2","%","","13.2","%"],["Municipal & nonprofit","","15.9","","","5.1","","","3.0","","","13.7","","","5.4","","","4.1"],["Tech & innovation","","30.8","","","9.9","","","4.4","","","25.7","","","10.2","","","3.6"],["Equity fund resources","","6.4","","","2.1","","","7.2","","","9.6","","","3.8","","","9.8"],["Other commercial and industrial","","85.9","","","27.7","","","15.0","","","103.6","","","41.0","","","16.5"],["CRE - owner occupied","","7.1","","","2.3","","","3.2","","","10.6","","","4.2","","","4.4"],["Hotel franchise finance","","46.9","","","15.1","","","7.4","","","41.5","","","16.4","","","6.5"],["Other CRE - non-owner occupied","","47.4","","","15.3","","","10.5","","","16.9","","","6.7","","","10.1"],["Residential","","30.4","","","9.8","","","27.0","","","12.5","","","5.0","","","23.7"],["Residential - EBO","","\u2014","","","\u2014","","","3.6","","","\u2014","","","\u2014","","","\u2014"],["Construction and land development","","27.4","","","8.8","","","7.7","","","12.5","","","5.0","","","7.7"],["Other","","3.1","","","1.0","","","0.3","","","2.9","","","1.1","","","0.4"],["Total","","$","309.7","","","100.0","%","","100.0","%","","$","252.5","","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

During the years ended December 31, 2022 and 2021, net loan charge-offs to average loans outstanding were approximately 0.00% and 0.02%, respectively.

In addition to the ACL on funded loans HFI, the Company maintains a separate ACL related to off-balance sheet credit exposures, including unfunded loan commitments. This allowance balance totaled $47.0 million and $37.6 million at December 31, 2022 and 2021, respectively, and is included in Other liabilities on the Consolidated Balance Sheets.

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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 "Item 1. Business” of this Form 10-K. 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: 

[[GREPCENT_TABLE]]
[["","","December 31, 2022"],["","","Number of Loans","","Problem Loan Balance","","Percent of Problem Loan Balance","","Percent of Total Loans HFI"],["","","(dollars in millions)"],["Warehouse lending","","1","","","$","43","","","11.3","%","","0.08","%"],["Tech & innovation","","27","","","81","","","21.4","","","0.16"],["Other commercial and industrial","","50","","","36","","","9.5","","","0.07"],["CRE - owner occupied","","8","","","4","","","1.0","","","0.01"],["Hotel franchise finance","","2","","","26","","","6.9","","","0.05"],["Other CRE - non-owner occupied","","9","","","55","","","14.5","","","0.10"],["Residential","","39","","","20","","","5.3","","","0.04"],["Construction and land development","","2","","","98","","","25.9","","","0.19"],["Other","","18","","","16","","","4.2","","","0.03"],["Total","","156","","","$","379","","","100.0","%","","0.73","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","Number of Loans","","Problem Loan Balance","","Percent of Problem Loan Balance","","Percent of Total Loans HFI"],["","","(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","%"]]
[[/GREPCENT_TABLE]]

Mortgage Servicing Rights

The fair value of the Company's MSRs related to residential mortgage loans totaled $1.1 billion and $698 million as of December 31, 2022 and 2021, respectively. The increase in MSRs is primarily related to new production that was not fully offset by sales of MSRs.

The following is a summary of the UPB of loans underlying the Company's MSR portfolio by type:

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","2021"],["","","(in millions)"],["FNMA and FHLMC","","$","38,113","","","$","38,754"],["GNMA","","31,046","","","14,379"],["Non-agency","","1,690","","","1,215"],["Total unpaid principal balance of loans","","$","70,849","","","$","54,348"]]
[[/GREPCENT_TABLE]]

49

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Goodwill and Other Intangible Assets

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 $527 million as of December 31, 2022. The increase from $491 million at December 31, 2021 is attributable to the DST acquisition in January 2022. See "Note 2. Mergers, Acquisitions and Dispositions" in Item 8 of this form 10-K for further discussion of the acquisition.

The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable. During the years ended December 31, 2022, 2021, and 2020, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was necessary.

The following is a summary of acquired intangible assets:

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","December 31, 2021"],["","","Gross Carrying Amount","","Accumulated Amortization","","Net Carrying Amount","","Gross Carrying Amount","","Accumulated Amortization","","Net Carrying Amount"],["","","(in millions)"],["Subject to amortization"],["Core deposits","","$","14","","","$","11","","","$","3","","","$","14","","","$","10","","","$","4"],["Correspondent customer relationships","","76","","","7","","","69","","","76","","","3","","","73"],["Customer relationships","","18","","","3","","","15","","","3","","","1","","","2"],["Developed technology","","4","","","1","","","3","","","\u2014","","","\u2014","","","\u2014"],["Operating licenses","","56","","","2","","","54","","","56","","","1","","","55"],["Trade names","","10","","","1","","","9","","","9","","","0","","","9"],["","","$","178","","","$","25","","","$","153","","","$","158","","","$","15","","","$","143"]]
[[/GREPCENT_TABLE]]

Deferred Tax Assets

As of December 31, 2022, the net DTA balance totaled $311 million, an increase of $290 million from $21 million as of December 31, 2021. This overall increase in the net DTA was primarily the result of decreases in the fair market value of AFS securities, an increase to expected tax credit carryovers, and an increase to the ACL.

As of December 31, 2022 and 2021, the Company had no deferred tax valuation allowance.

Deposits

Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $53.6 billion at December 31, 2022 from $47.6 billion at December 31, 2021, an increase of $6.0 billion, or 12.7%. By deposit type, the increase in deposits is attributable to increases in certificates of deposit of $3.0 billion, interest-bearing demand deposits of $2.6 billion, and savings and money market accounts of $2.1 billion, partially offset by a decrease in non-interest-bearing demand deposits of $1.7 billion.

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 for FDIC insurance. At December 31, 2022, the Company had $683 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 at December 31, 2021. At December 31, 2022 and 2021, the Company also had wholesale brokered deposits of $4.8 billion and $1.8 billion, respectively.

In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled $13 billion and $11 billion at December 31, 2022 and 2021, respectively. The Company incurred $162.8 million and $27.4 million in deposit related costs on these deposits during the year ended December 31, 2022 and 2021, respectively. These costs are reported as Deposit costs in non-interest expense. The increase in these costs from the prior year is due to an increase in earnings credit rates as well as an increase in average deposit balances eligible for earnings credits or referral fees.

50

Table of Contents

The average balances and weighted average rates paid on deposits are presented below:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["","","Average Balance","","Rate","","Average Balance","","Rate","","Average Balance","","Rate"],["","","(dollars in millions)"],["Interest-bearing transaction accounts","","$","8,331","","","0.95","%","","$","4,751","","","0.13","%","","$","3,488","","","0.26","%"],["Savings and money market accounts","","18,518","","","0.86","","","15,814","","","0.21","","","10,009","","","0.35"],["Certificates of deposit","","2,772","","","1.40","","","1,850","","","0.46","","","1,998","","","1.33"],["Total interest-bearing deposits","","29,621","","","0.93","","","22,415","","","0.21","","","15,495","","","0.45"],["Non-interest-bearing demand deposits","","24,133","","","\u2014","","","19,416","","","\u2014","","","11,466","","","\u2014"],["Total deposits","","$","53,754","","","0.51","%","","$","41,831","","","0.11","%","","$","26,961","","","0.26","%"]]
[[/GREPCENT_TABLE]]

At December 31, 2022 and 2021, the Company had total uninsured deposits of $29.5 billion and $26.9 billion, respectively. Total U.S. time deposits in excess of the FDIC insurance limit were $1.1 billion and $466 million at December 31, 2022 and 2021, respectively.

The table below discloses the remaining maturity for estimated uninsured time deposits as of December 31, 2022: 

[[GREPCENT_TABLE]]
[["","","(in millions)"],["3 months or less","","$","423"],["3 to 6 months","","378"],["6 to 12 months","","274"],["Over 12 months","","51"],["Total","","$","1,126"]]
[[/GREPCENT_TABLE]]

Uninsured deposit information presented herein is estimated using the same methodologies utilized for regulatory reporting, where applicable. Specific to uninsured time deposits, the Company made certain assumptions to estimate uninsured amounts by maturity. At the account level, deposit insurance was assumed to apply first to non-time deposits, then any remaining insurance amounts were applied to maturity groupings on a pro-rata basis, based on the depositor's total amount of time deposits.

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 December 31, 2022, total short-term borrowed funds consisted of FHLB advances of $4.3 billion, federal funds purchased of $640 million, repurchase agreements of $27 million, and secured borrowings of $25 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 on April 7, 2021 and credit linked notes, inclusive of issuance costs and fair market value adjustments. At December 31, 2022, the carrying value of long-term borrowings was $1.3 billion, compared to $775 million at December 31, 2021. The increase in long-term borrowings from December 31, 2021 relates to 2022 credit linked note issuances, totaling $579 million, net of issuance costs.

Qualifying Debt

Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value adjustments. At December 31, 2022, the carrying value of qualifying debt was $893 million, compared to $896 million at December 31, 2021.

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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 18. Commitments and Contingencies" in Item 8 of this Form 10-K) 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.

As permitted by the regulatory capital rules, the Company elected the CECL transition option that delays the estimated impact on regulatory capital resulting from the adoption of CECL over a five-year transition period ending December 31, 2024. Beginning in 2022, capital ratios and amounts include a 25% reduction to the capital benefit that resulted from the increased ACL 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 year ended December 31, 2022, included sales of common stock under the Company's ATM program and three credit linked note issuances. As of December 31, 2022 and 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:

[[GREPCENT_TABLE]]
[["","","Total Capital","","Tier 1 Capital","","Risk-Weighted Assets","","Tangible Average Assets","","Total Capital Ratio","","Tier 1 Capital Ratio","","Tier 1 Leverage Ratio","","Common Equity Tier 1"],["","","(dollars in millions)"],["December 31, 2022"],["WAL","","$","6,586","","","$","5,449","","","$","54,461","","","$","69,814","","","12.1","%","","10.0","%","","7.8","%","","9.3","%"],["WAB","","6,280","","","5,737","","","54,411","","","69,762","","","11.5","","","10.5","","","8.2","","","10.5"],["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"]]
[[/GREPCENT_TABLE]]

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 December 31, 2022.

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Critical Accounting Estimates

The Notes to the Consolidated Financial Statements contain a discussion of the Company's significant accounting policies, including information regarding recently issued accounting pronouncements, adoption of such policies, and the related impact of their adoption. The Company believes that certain of these policies, along with various estimates that it is required to make in recording its financial transactions, are important to have a complete understanding of the Company's financial position. In addition, these estimates require management to make complex and subjective judgments, many of which include matters with a high degree of uncertainty. The following is a summary of these critical accounting policies and significant estimates.

Allowance for credit losses

The ACL guidance requires that an organization measure all expected credit losses for financial assets held at the reporting date, including off-balance sheet credit exposures, based on historical experience, current conditions, and reasonable and supportable forecasts. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the ACL and credit loss expense in those future periods. The allowance level is influenced by loan volumes and mix, average remaining maturities, loan performance metrics, asset quality characteristics, delinquency status, historical credit loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. During the year ended December 31, 2022, the allowance level was most impacted by the Company's strong loan growth, which resulted in recognition of a provision for credit losses of $68.1 million. Changes to the assumptions in the model in future periods could have a material impact on the Company's Consolidated Financial Statements. See "Note 1. Summary of Significant Accounting Policies" in Item 8 of this Form 10-K for a detailed discussion of the Company's methodologies for estimating expected credit losses.

Fair value of financial instruments

The Company uses fair value measurements to recognize certain financial instruments at fair value. The Company holds financial instruments, including loans HFS, MSRs, and derivative instruments, that are recorded at fair value and require management to make significant judgments in estimating the fair value of these financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are actively traded and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate the fair value of these financial instruments. The fair value of MSRs is determined using a discounted cash flow model based on unobservable inputs, as MSRs are not traded in active markets. Assumptions used to value the Company’s MSRs represent management’s best estimate of assumptions that market participants would use to value this asset and may require significant judgement. The primary risk of material changes to the value of the MSRs resides in the potential volatility and judgment in the assumptions used, specifically prepayment speeds, option adjusted spreads, and discount rates. Hypothetical changes in the value of MSRs based on assumed immediate changes in certain inputs are disclosed in “Note 6. Mortgage Servicing Rights” in Item 8 of this Form 10-K.

Income taxes

The Company’s income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to federal and state income taxes in the United States. Significant judgments and estimates are required in the determination of the consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating the Company's ability to recover its DTAs in the jurisdictions from which they arise, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, tax planning strategies, projected future taxable income, and recent operating results. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates used to manage the underlying business.

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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, loans HFS, and non-pledged marketable securities, is a result of the Company's operating, investing, and financing activities and related cash flows. The Company actively monitors and manages liquidity, and no less than quarterly will estimate probable liquidity needs on a 12-month horizon. Liquidity needs 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 as of December 31, 2022:

[[GREPCENT_TABLE]]
[["","","Available Balance","","Outstanding Balance"],["","","(in millions)"],["Unsecured fed funds credit lines at correspondent banks","","$","3,989","","","$","640"]]
[[/GREPCENT_TABLE]]

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 of December 31, 2022 are presented in the following table:

[[GREPCENT_TABLE]]
[["","","(in millions)"],["FHLB:"],["Borrowing capacity","","$","11,133"],["Outstanding borrowings","","4,300"],["Letters of credit","","21"],["Total available credit","","$","6,812"],["FRB:"],["Borrowing capacity","","$","5,249"],["Outstanding borrowings","","\u2014"],["Total available credit","","$","5,249"],["Warehouse borrowings:"],["Borrowing capacity","","$","1,000"],["Outstanding borrowings","","\u2014"],["Total available credit","","$","1,000"]]
[[/GREPCENT_TABLE]]

The Company also plans for potential funding needs related to operating expenses, which in some cases involve contracts that contain penalties for early termination. Further, the Company has entered into certain letters of credit or other commitments to extend credit to customers of the Bank.

The following table sets forth the Company's significant contractual obligations as of December 31, 2022:

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","Total","","Less Than 1 Year","","1-3 Years","","3-5 Years","","After 5 Years"],["","","(in millions)"],["Time deposit maturities","","$","5,049","","","$","4,904","","","$","143","","","$","2","","","$","\u2014"],["Qualifying debt","","909","","","\u2014","","","\u2014","","","\u2014","","","909"],["Other borrowings","","6,320","","","5,289","","","97","","","77","","","857"],["Operating lease obligations","","209","","","18","","","62","","","52","","","77"],["Purchase obligations","","55","","","17","","","20","","","18","","","\u2014"],["Total","","$","12,542","","","$","10,228","","","$","322","","","$","149","","","$","1,843"]]
[[/GREPCENT_TABLE]]

Purchase obligations primarily relate to contracts for software licensing, maintenance, and outsourced service providers.

54

Table of Contents

Off-balance sheet commitments associated with outstanding letters of credit, commitments to extend credit, and credit card guarantees as of December 31, 2022 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. 

[[GREPCENT_TABLE]]
[["","","","","Amount of Commitment Expiration per Period"],["","","Total Amounts Committed","","Less Than 1 Year","","1-3 Years","","3-5 Years","","After 5 Years"],["","","(in millions)"],["Commitments to extend credit","","$","18,674","","","$","4,496","","","$","7,307","","","$","4,902","","","$","1,969"],["Credit card commitments and financial guarantees","","379","","","379","","","\u2014","","","\u2014","","","\u2014"],["Letters of credit","","265","","","253","","","7","","","5","","","\u2014"],["Total","","$","19,318","","","$","5,128","","","$","7,314","","","$","4,907","","","$","1,969"]]
[[/GREPCENT_TABLE]]

The following table sets forth certain information regarding short-term borrowings: 

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","2021","","2020"],["","","(dollars in millions)"],["Repurchase Agreements:"],["Maximum month-end balance","","$","523","","","$","22","","","$","34"],["Balance at end of year","","27","","","17","","","16"],["Average balance","","76","","","20","","","23"],["Federal Funds Purchased"],["Maximum month-end balance","","1,860","","","2,283","","","690"],["Balance at end of year","","640","","","675","","","\u2014"],["Average balance","","568","","","419","","","75"],["FHLB Advances:"],["Maximum month-end balance","","6,000","","","4,200","","","130"],["Balance at end of year","","4,300","","","\u2014","","","5"],["Average balance","","2,526","","","393","","","21"],["Warehouse borrowings:"],["Maximum month-end balance","","160","","","820","","","\u2014"],["Balance at end of year","","\u2014","","","\u2014","","","\u2014"],["Average balance","","201","","","442","","","\u2014"],["Total Short-Term Borrowed Funds","","$","4,967","","","$","692","","","$","21"],["Weighted average interest rate at end of year","","4.64","%","","0.16","%","","0.12","%"],["Weighted average interest rate during year","","2.28","","","0.67","","","0.46"]]
[[/GREPCENT_TABLE]]

The Company has also committed to irrevocably and unconditionally guarantee the payments or distributions with respect to the holders of preferred securities of the Company's eight statutory business trusts to the extent that the trusts have not made such payments or distributions, including: 1) accrued and unpaid distributions; 2) the redemption price; and 3) upon a dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the trust remaining available for distribution. The Company does not believe that these off-balance sheet arrangements have or are reasonably likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have a future effect.

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. At December 31, 2022, there were $7.7 billion in liquid assets, comprised of $1.1 billion in cash and cash equivalents, $1.1 billion in loans HFS, and $5.5 billion in unpledged marketable securities. At December 31, 2021, the Company maintained $8.7 billion in liquid assets, comprised of $516 million of cash and cash equivalents, $4.0 billion in loans HFS, and $4.2 billion of unpledged marketable securities.

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. 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.

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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 of San Francisco, and the FRB. At December 31, 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 years ended December 31, 2022, 2021, and 2020, net cash provided by (used in) operating activities was $2.2 billion, $(2.7) billion, and $670.2 million, 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 years ended December 31, 2022, 2021, and 2020, was reduced by $11.2 billion, $12.7 billion, and $5.9 billion, respectively, as a result of a net increase in loans as well as a net increase in investment securities of $1.8 billion, $2.0 billion, and $1.5 billion, respectively.

Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the years ended December 31, 2022, 2021, and 2020, net deposits increased $6.0 billion, $15.7 billion, and $9.1 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 the FDIC 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 by FDIC insurance. As of December 31, 2022, the Company has $683 million of CDARS and $2.1 billion of ICS deposits.

As of December 31, 2022, the Company has $4.8 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 year ended December 31, 2022, WAB and CSI paid dividends to the Parent of $105.0 million and $155.0 million, respectively. Subsequent to December 31, 2022, WAB paid dividends to the Parent of $55.0 million.

Recent accounting pronouncements

See "Note 1. Summary of Significant Accounting Policies," in Item 8 of this Form 10-K for information on recent and recently adopted accounting pronouncements and their expected impact, if any, on the Company's Consolidated Financial Statements.

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SUPERVISION AND REGULATION

WAL, WAB, and certain of its non-banking subsidiaries are subject to comprehensive regulation under federal and state laws. The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, the DIF, and the U.S. banking system as a whole. This system is not designed to protect equity investors in bank holding companies such as WAL.

Set forth below is a summary of the significant laws and regulations applicable to WAL and its subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to WAL and its subsidiaries could have a material effect on the results of the Company.

Overview

WAL is a separate and distinct legal entity from WAB and its other subsidiaries. As a registered bank holding company, WAL is subject to inspection, examination, and supervision by the FRB, and is regulated under the BHCA. WAL is also under the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Exchange Act, as administered by the SEC. The Company’s common stock is listed on the NYSE under the trading symbol “WAL” and the Company is subject to the rules of the NYSE for listed companies. The Company is a financial institution holding company within the meaning of Arizona law. WAL provides a full spectrum of deposit, lending, treasury management, and online banking products and services through WAB, its wholly-owned banking subsidiary. WAB is an Arizona chartered bank and a member of the Federal Reserve System. WAB operates the following full-service banking divisions: ABA, BON, Bridge, FIB, and TPB. WAB is subject to the supervision of, and to regular examination by, the Arizona Department of Financial Institutions, the FRB as its primary federal regulator, and the FDIC as its deposit insurer. WAB's deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations. The Company also serves business customers through a national platform of specialized financial services providers.

WAL and WAB are also supervised by the CFPB for compliance with federal consumer financial protection laws. The Company’s non-bank subsidiaries are subject to federal and state laws and regulations, including regulations of the FRB.

The Dodd-Frank Act significantly changed the financial regulatory regime in the United States. Since the enactment of the Dodd-Frank Act, U.S. banks and financial services firms have been subject to enhanced regulation and oversight. Several provisions of the Dodd-Frank Act are subject to further rulemaking, guidance, and interpretation by the federal banking agencies.

Enacted in 2018, the EGRRCPA, among other things, amended certain provisions of the Dodd-Frank Act. The EGRRCPA provides limited regulatory relief to certain financial institutions while preserving the existing framework under which U.S. financial institutions are regulated. The EGRRCPA relieves bank holding companies with less than $100 billion in assets, such as the Company, from the enhanced prudential standards imposed under Section 165 of the Dodd-Frank Act (including, but not limited to, resolution planning and enhanced liquidity and risk management requirements). In addition to amending the Dodd-Frank Act, the EGRRCPA also includes certain additional banking-related provisions, consumer protection provisions and securities law-related provisions. While many of the EGRRCPA’s changes have been implemented through rules adopted by federal agencies, the Company expects to continue to evaluate the potential impact of the EGRRCPA as it is further implemented.

Supervision, Regulation and Licensing of AmeriHome

AmeriHome is a residential mortgage producer and servicer that operates in a heavily regulated industry. In addition to supervision by the federal banking agencies with primary jurisdiction over the Company and WAB, AmeriHome is subject to the rules, regulations and oversight of certain federal, state and local governmental authorities, including the CFPB, HUD, and GNMA, and government-sponsored enterprises in the mortgage industry such as FHLMC and FNMA.

Further, AmeriHome must comply with a large number of federal consumer protection laws and regulations including, among others:

•the Real Estate Settlement Procedures Act and Regulation X, which require lenders, mortgage brokers, or servicers to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the settlement process and prohibit specific practices related thereto;

•the Truth In Lending Act and Regulation Z, which require disclosures and timely information on the nature and costs of the residential mortgages and the real estate settlement process;

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•the Secure and Fair Enforcement for Mortgage Licensing Act, which applies to businesses and individuals engaging in the residential mortgage loan business;

•the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, and the rules and regulations of the FTC and CFPB that prohibit unfair, abusive or deceptive acts or practices;

•the Fair Credit Reporting Act (as amended by the Fair and Accurate Credit Transactions Act) and Regulation V, which address the accuracy, fairness, and privacy of information in the files of consumer reporting agencies; and

•the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Homeowners Protection Act, and the Home Mortgage Disclosure Act and Regulation C, which generally disallow discrimination on a prohibited basis, provide applicants and borrowers rights with respect to credit decisioning and the residential mortgage process, and require disclosures and impose obligations on financial businesses conducting residential lending and mortgage servicing.

The CFPB as well as the FTC have rulemaking authority with respect to many of the federal consumer protection laws applicable to mortgage lenders and servicers, and their rulemaking and regulatory agendas relating to the residential mortgage industry continues to evolve. In particular, as part of its enforcement authority, the CFPB can order, among other things, rescission or reformation of contracts, the refund of moneys or the return of real property, restitution, disgorgement or compensation for unjust enrichment, the payment of damages or other monetary relief, public notifications regarding violations, remediation of practices, external compliance monitoring and civil money penalties.

AmeriHome is also subject to state and local laws, rules and regulations and oversight by various state agencies that license and oversee consumer protection, loan servicing, origination and collection activities of mortgage industry participants. Despite the fact that AmeriHome is the operating subsidiary of a depository institution, it must comply with regulatory and licensing requirements in certain states in order to conduct its business, and does (and will continue to) incur significant costs to comply with these requirements. These laws, rules and regulations may change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced.

Supervision and Regulation of WATC

WATC is an OCC-chartered, non-depository national trust bank. WATC will offer levered loan facility administration, loan administration, and securities custody products. As a national trust bank, the ability of WATC to engage in fiduciary activities is governed by federal law at 12 U.S.C. § 92a and the OCC regulations at 12 C.F.R. Part 9, as well as certain state laws to the extent not preempted by federal law and regulation. WATC may engage in any of the enumerated activities or roles permitted for national trust banks listed in federal statutes and regulations as well as any other capacity that the OCC authorizes pursuant to federal law. As a non-depository national trust bank, WATC may not accept deposits and is not subject to legal requirements to maintain FDIC deposit insurance.

The OCC has primary supervisory and regulatory authority over the operations of WATC. As part of this authority, WATC is required to file periodic reports with the OCC and is subject to supervision and periodic examination by the OCC. To support its supervisory function, the OCC has the authority to assess and charge fees on all national banks, including non-depository national trust banks like WATC.

Bank Holding Company Regulation

WAL is a bank holding company as defined under the BHCA. The BHCA generally limits the business of bank holding companies to banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. Business activities that have been determined to be related to banking, and therefore appropriate for bank holding companies and their affiliates to engage in, include securities brokerage services, investment advisory services, fiduciary services, and certain management advisory and data processing services, among others. Bank holding companies that have elected to become financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity that is either: (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments.

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Mergers and Acquisitions

The BHCA, the Bank Merger Act, and other federal and state statutes regulate the direct and indirect acquisition of depository institutions. The BHCA requires prior FRB approval for a bank holding company to acquire, directly or indirectly, 5% or more of any class of voting securities of a commercial bank or its parent holding company and for a company, other than a bank holding company, to acquire 25% or more of any class of voting securities of a bank or bank holding company. In April 2020, the Federal Reserve adopted a final rule codifying the presumptions used in determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHCA, and providing greater transparency on the types of relationships that the Federal Reserve generally views as supporting a determination of control. Under the Change in Bank Control Act, any person, including a company, may not acquire, directly or indirectly, control of a bank without providing 60 days’ prior notice and receiving a non-objection from the appropriate federal banking agency.

Under the Bank Merger Act, the prior approval of the appropriate federal banking agency is required for insured depository institutions to merge or enter into purchase and assumption transactions. In reviewing applications seeking approval of merger and purchase and assumption transactions, the federal banking agencies will consider, among other things, the competitive effects and public benefits of the transactions, the capital position of the combined banking organization, the applicant's performance record under the CRA, and the effectiveness of the subject organizations in combating money laundering activities. For further information relating to the CRA, see the section titled “Community Reinvestment Act and Fair Lending Laws.”

Under Section 6-142 of the Arizona Revised Statutes, no person may acquire control of a company that controls an Arizona bank without the prior approval of the Arizona Superintendent of Financial Institutions, or Arizona Superintendent. A person who has the power to vote 15% or more of the voting stock of a controlling company is presumed to control the company.

Enhanced Prudential Standards

Section 165 of the Dodd-Frank Act imposes enhanced prudential standards on larger banking organizations, with certain of these standards applicable to banking organizations over $10 billion, including WAL and WAB, as of the quarter ending June 30, 2014. In October 2012, the FDIC, the OCC, and the FRB issued separate but similar rules requiring covered banks and bank holding companies with $10 billion to $50 billion in total consolidated assets to conduct an annual company-run stress test. WAL and WAB conducted a company-run capital stress test as required by the Dodd-Frank Act in 2017 and provided the results to the FRB. WAL found the Company would have sufficient capital to maintain regulatory capital levels throughout an economic downturn.

As a result of passage of the EGRRCPA, bank holding companies with less than $100 billion in assets, such as the Company, are exempt from the enhanced prudential standards imposed under Section 165 of the Dodd-Frank Act (including, but not limited to, the resolution planning and enhanced liquidity and risk management requirements therein). Notwithstanding these changes, the capital planning and risk management practices of the Company and the Bank will continue to be reviewed through the regular supervisory processes of the FRB. Further, in connection with the FRB’s rules implementing the enhanced prudential standards required by Dodd-Frank (and as subsequently modified by application of the EGRRCPA’s higher consolidated asset thresholds for bank holding companies), the Company has established a risk committee of the BOD to manage enterprise-wide risk and has retained its separate risk committee of independent directors.

Further, in connection with the FRB’s rules implementing the enhanced prudential standards required by Dodd-Frank (and as subsequently modified by application of the EGRRCPA’s higher consolidated asset thresholds for bank holding companies), the Company has established a risk committee of the BOD to manage enterprise-wide risk and has retained its separate risk committee of independent directors.

Volcker Rule

Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as the Company and WAB, from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain covered funds, subject to certain limited exceptions. Under the Volcker Rule, the term "covered funds" is defined as any issuer that would be an investment company under the Investment Company Act but for the exemption in Section 3(c)(1) or 3(c)(7) of that Act, which includes CLO and CDO securities. There are also several exemptions from the definition of covered fund, including, among other things, loan securitizations, joint ventures, certain types of foreign funds, entities issuing asset-backed commercial paper, and registered investment companies. Further, the final rules permit banking entities, subject to certain conditions and limitations, to invest in or sponsor a covered fund in connection with: (1) organizing and offering the covered fund; (2) certain risk-mitigating hedging activities; and (3) de minimis investments in covered funds. Compliance with the Volcker Rule was required by July 21, 2017.

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The EGRRCPA and subsequent promulgation of inter-agency final rules have aimed at simplifying and tailoring requirements related to the Volcker Rule, including by eliminating collection of certain metrics and reducing the compliance burdens associated with other metrics for banks with less than $20 billion in average trading assets and liabilities. In June 2020, the Federal Reserve - along with the Commodity Futures Trading Commission, FDIC, the OCC, and the SEC - issued a final rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds (“covered funds”). The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. The final rule modifies three areas of the Volcker Rule by: (1) streamlining the covered funds portion of the rule; (2) addressing the extraterritorial treatment of certain foreign funds; and (3) permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address. The new rule became effective October 1, 2020. The Company believes it is fully compliant with the Volcker Rule, including as modified by the new rule.

Dividends

The Company has paid regular quarterly dividends since the third quarter of 2019. Whether the Company continues to pay quarterly dividends and the amount of any such dividends will be at the discretion of WAL's BOD and will depend on the Company’s earnings, financial condition, results of operations, business prospects, capital requirements, regulatory restrictions, contractual restrictions, and other factors that the BOD may deem relevant.

The Company’s ability to pay dividends is subject to the regulatory authority of the FRB. The supervisory concern of the FRB focuses on a bank holding company’s capital position, its ability to meet its financial obligations as they come due, and its capacity to act as a source of financial strength to its insured depository institution subsidiaries. In addition, FRB policy discourages the payment of dividends by a bank holding company that is not supported by current operating earnings.

As a Delaware corporation, the Company is also subject to limitations under Delaware law on the payment of dividends. Under the Delaware General Corporation Law, dividends may only be paid out of surplus or out of net profits for the year in which the dividend is declared or the preceding year, and no dividends may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the Company's net assets.

From time to time, the Company may become a party to financing agreements and other contractual obligations that have the effect of limiting or prohibiting the declaration or payment of dividends under certain circumstances. Holding company expenses and obligations with respect to its outstanding trust preferred securities and corresponding subordinated debt also may limit or impair the Company’s ability to declare and pay dividends.

Since the Company has no significant assets other than the voting stock of its subsidiaries, it currently depends on dividends from WAB and, to a lesser extent, its non-bank subsidiaries, for a substantial portion of its revenue and as the primary sources of its cash flow. The ability of a state member bank, such as WAB, to pay cash dividends is restricted by the FRB and the State of Arizona. The FRB’s Regulation H states that a member bank may not declare or pay a dividend if the total of all dividends declared during that calendar year exceed the bank’s net income during that calendar year and the retained net income of the prior two years. Further, without receiving prior approval from both the FRB and two-thirds of its shareholders, a bank cannot declare or pay a dividend that would exceed its undivided profits or withdraw any portion of its permanent capital.

Under Section 6-187 of the Arizona Revised Statutes, WAB may pay dividends on the same basis as any other Arizona corporation, except that cash dividends paid out of capital surplus require the prior approval of the Arizona Superintendent. Under Section 10-640 of the Arizona Revised Statutes, a corporation may not make a distribution to stockholders if to do so would render the corporation insolvent or unable to pay its debts as they become due. However, an Arizona bank may not declare a non-stock dividend out of capital surplus without the approval of the Arizona Superintendent.

Federal Reserve System

As a member of the Federal Reserve System, WAB has historically been required by law to maintain reserves against its transaction deposits, which were to be held in cash or with the FRB. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective on March 26, 2020.

Additionally, on June 4, 2021, the Federal Reserve adopted amendments to Regulation D (Reserve Requirements of Depository Institutions, 12 C.F.R. Part 204) to eliminate references to an “interest on required reserves” rate and to an “interest on excess reserves” rate and replace them with a reference to a single “interest on reserve balances” rate. The amendments also simplified the formula used to calculate the amount of interest paid on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks, and to made other conforming amendments. The rule became effective on July 29, 2021.

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Source of Strength Doctrine

FRB policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Section 616 of the Dodd-Frank Act codified the requirement that bank holding companies act as a source of financial strength. As a result, the Company is expected to commit resources to support WAB, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The U.S. Bankruptcy Code provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal banking agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Capital Adequacy

The Capital Rules established a comprehensive capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee's Basel III final capital framework for strengthening international capital standards. The Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replaced the existing general risk-weighting approach with a more risk-sensitive approach.

The Capital Rules: (i) include CET1 and the related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Capital Rules’ specific requirements.

Pursuant to the Capital Rules, the minimum capital ratios are as follows:

•4.5% CET1 to risk-weighted assets;

•6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

•8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

•4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called “leverage ratio”).

The Capital Rules also include a “capital conservation buffer,” composed entirely of CET1, in addition to these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity, and other capital instrument repurchases and compensation based on the amount of the shortfall. The Capital Rules became fully phased-in on January 1, 2019. Thus, the capital standards applicable to the Company include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. The Capital Rules further prescribe that the effects of accumulated other comprehensive income or loss items reported as a component of stockholders’ equity be included in CET1 capital; however, non-advanced approaches banking organizations may make a one-time permanent election to exclude these items. The Company, as a non-advanced approaches institution, has made this one-time election.

The Capital Rules also preclude certain hybrid securities, such as trust preferred securities, issued on or after May 19, 2010 from inclusion in bank holding companies’ Tier 1 capital. The Company has used trust preferred securities in the past as a tool for raising additional Tier 1 capital and otherwise improving its regulatory capital ratios. Although the Company may continue to include its existing trust preferred securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1 capital going forward may limit the Company’s ability to raise capital in the future.

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The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and higher risk weights for a variety of asset classes.

As of April 1, 2020, final rules became effective simplifying the capital treatment for mortgage servicing assets, certain DTAs, investments in the capital instruments of unconsolidated financial institutions, and minority interest. Management believes the Company is in compliance, and will continue to be in compliance, with the targeted capital ratios.

In response to the COVID-19 pandemic, the federal bank regulatory authorities issued a final rule in late August 2020 that allows institutions that adopted the CECL accounting standard in 2020 to mitigate CECL’s estimated effects on regulatory capital for two years, followed by a three-year transition period. The Company has elected this capital relief option.

Prompt Corrective Action and Safety and Soundness

Pursuant to Section 38 of the FDIA, federal banking agencies are required to take “prompt corrective action” should a depository institution fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.

For purposes of prompt corrective action, to be: (i) well-capitalized, a bank must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, a bank must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized, a bank would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, a bank would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%; (v) critically undercapitalized, a bank would have a ratio of tangible equity to total assets that is less than or equal to 2%.

Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement actions may include: (i) the issuance of directives to increase capital; (ii) the issuance of formal and informal agreements; (iii) the imposition of civil monetary penalties; (iv) the issuance of a cease and desist order that can be judicially enforced; (v) the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; (vi) the termination of the bank’s deposit insurance; (vii) the appointment of a conservator or receiver for the bank; and (viii) the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.

Transactions with Affiliates and Insiders

Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B of the FRA and implementing Regulation W. In a bank holding company context, at a minimum, the parent holding company of a bank, and any companies which are controlled by such parent holding company, are affiliates of the bank. Generally, Sections 23A and 23B of the FRA are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms consistent with safe and sound banking practices.

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Further, Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the BOD. Further, under Section 22(h) of the FRA, loans to directors, executive officers, and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank's employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.

Lending Limits

In addition to the requirements set forth above, state banking law generally limits the amount of funds that a state-chartered bank may lend to a single borrower. Under Section 6-352 of the Arizona Revised Statutes, the obligations of one borrower to a bank may not exceed 20% of the bank’s capital, plus an additional 10% of its capital if the additional amounts are fully secured by readily marketable collateral.

Brokered Deposits

Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept, renew or roll over any brokered deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” On December 15, 2020, the FDIC issued rules to revise brokered deposit regulations in light of modern deposit-taking methods. The rules established a new framework for certain provisions of the “deposit broker” definition and amended the FDIC’s interest rate methodology calculating rates and rate caps. The rules became effective on April 1, 2021 and, to date, there has been no material impact to either the Company or the Bank from the rules.

Consumer Protection and CFPB Supervision

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent agency charged with responsibility for implementing, enforcing, and examining compliance with federal consumer financial protection laws. The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Procedures Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Practices Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which is part of the Dodd-Frank Act. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect the Company’s business, financial condition, or operations.

Depositor Preference

The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Federal Deposit Insurance

Substantially all of the deposits of WAB are insured up to applicable limits by the FDIC’s DIF. The basic limit on FDIC deposit insurance is $250,000 per depositor. WAB is subject to deposit insurance assessments to maintain the DIF.

The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's CAMELS rating. The risk matrix utilizes different risk categories distinguished by capital levels and supervisory ratings. As a result of the Dodd-Frank Act, the base for insurance assessments is now consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. WAB is classified as, and subject to the scorecard for, a large and highly complex institution to determine its total base assessment rate.

Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Company’s management is not aware of any practice, condition, or violation that might lead to the termination of its deposit insurance.

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Financial Privacy and Data Security

The Company is subject to federal laws, including the GLBA, and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated institutions. These provisions require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations.

For example, in August 2018, the CFPB published its final rule to update Regulation P pursuant to the amended GLBA. Under this rule, certain qualifying financial institutions are not required to provide annual privacy notices to customers. To qualify, a financial institution must not share nonpublic personal information about customers except as described in certain statutory exceptions that do not trigger a customer’s statutory opt-out right. In addition, the financial institution must not have changed its disclosure policies and practices from those disclosed in its most recent privacy notice. The rule sets forth timing requirements for delivery of annual privacy notices in the event that a financial institution that qualified for the annual notice exemption later changes its policies or practices in such a way that it no longer qualifies for the exemption.

The GLBA also requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued under the GLBA and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information.

For example, under California law, every business that owns or licenses personal information about a California resident must maintain reasonable security procedures and policies to protect that information and comply with specific requirements relating to the destruction of records containing personal information and disclosure of breaches to customers, and restrictions on the use of customer information unless the customer "opts in." Other states, including Arizona and Nevada where WAB has branches, may also have applicable laws requiring businesses that retain consumer personal information to develop reasonable security policies and procedures, notify consumers of a security breach, or provide disclosures about the use and sharing of consumer personal information.

The federal banking agencies, including the FRB, through the Federal Financial Institutions Examination Council, have adopted guidelines to encourage financial institutions to address cybersecurity risks and identify, assess, and mitigate these risks, both internally and at critical third-party services providers. In October 2016, the federal bank regulatory agencies issued proposed rules on enhanced cybersecurity risk management and resilience standards that would apply to very large financial institutions and to services provided by third parties to these institutions. The comment period for these proposed rules has closed and a final rule has not been published.

On November 18, 2021, the federal bank regulatory agencies issued final rule to improve the sharing of information about cyber incidents that may affect the U.S. banking system. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. Notification is required for incidents that have materially affected—or are reasonably likely to materially affect—the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. In addition, the rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. The rule became effective May 1, 2022.

These laws and regulations impose compliance costs and create obligations and, in some cases, reporting obligations, and compliance with these laws, regulations, and obligations require significant resources of WAL and WAB.

Community Reinvestment Act and Fair Lending Laws

WAB has a responsibility under the CRA to help meet the credit needs of its communities, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. WAB’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of the Company. WAB’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions. WAB received a rating of “Satisfactory” in its most recent CRA examination, in January 2019.

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Federal Home Loan Bank of San Francisco

WAB is a member of the FHLB of San Francisco, which is one of 12 regional FHLBs that provide funding to their members to support residential lending, as well as affordable housing and community development loans. Each FHLB serves as a reserve, or central bank, for the members within its assigned region. Each FHLB makes loans to its members in accordance with policies and procedures established by the board of directors of the FHLB. As a member, WAB must purchase and maintain stock in the FHLB of San Francisco. At December 31, 2022, WAB’s total investment in FHLB stock was $134 million.

Incentive Compensation

The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Company and WAB, with at least $1 billion in total consolidated assets, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.

The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. WAL gives stockholders a non-binding vote on executive compensation annually.

Preventing Suspicious Activity

Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Company has a Bank Secrecy Act and USA PATRIOT Act Board-approved compliance program and engages in relatively few transactions with foreign financial institutions or foreign persons.

The FCRA’s Red Flags Rule requires financial institutions with covered accounts (e.g., consumer bank accounts and loans) to develop, implement, and administer an identity theft prevention program. This program must include reasonable policies and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such as inconsistencies in personal information or changes in account activity.

Office of Foreign Assets Control Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the OFAC rules based on their administration by the OFAC. The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

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Future Legislative Initiatives

Federal and state legislatures may introduce legislation that will impact the financial services industry. In addition, federal banking agencies may introduce regulatory initiatives that are likely to impact the financial services industry, generally. However it is not clear whether such changes will be enacted or, if enacted, what their effect on the Company will be. New legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to WAL or any of its subsidiaries could have a material effect on the business of the Company.