Western Alliance Bancorporation: Form 10-Q for the period ended Sep 30, 2024

This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2023 and the interim Unaudited Consolidated Financial Statements and Notes to Unaudited Consolidated Financial Statements hereto and financial information appearing elsewhere in this report. Unless the context requires otherwise, the terms "Company," "we," and "our" refer to Western Alliance Bancorporation and its wholly-owned subsidiaries on a consolidated basis.

Forward-Looking Information

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including without limitation, statements regarding our expectations with respect to our business, financial and operating results, including our deposits, liquidity and funding, changes in economic conditions and the related impact on the Company's business, and statements that are related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.

The forward-looking statements contained in this Form 10-Q reflect the Company's current views about future events and financial performance and involve certain risks, uncertainties, assumptions, and changes in circumstances that may cause the Company's actual results to differ significantly from historical results and those expressed in any forward-looking statement. Risks and uncertainties include those set forth in the Company's filings with the SEC and the following factors that could cause actual results to differ materially from those presented: 1) adverse financial market and economic conditions, including the effects of any recession in the United States, adverse developments in the financial services industry generally, such as the bank failures in 2023, and any related impact on depositor behavior, the potential impact on borrowers of supply chain disruptions and the economic and market impacts of the military conflicts in Ukraine and the Middle East; 2) changes in interest rates and increased rate competition; 3) exposure of financial instruments to certain market risks that may increase the volatility of earnings and AOCI; 4) the inherent risk associated with accounting estimates, including the impact to the allowance, provision for credit losses, and capital levels; 5) exposure to natural and man-made disasters in markets that we operate and the impact of climate change and ESG practices on us and our customers; 6) the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, geopolitical conflicts or public health events (such as the COVID-19 pandemic), and of governmental and societal responses thereto; 7) dependency on real estate and events that negatively impact the real estate market; 8) concentrations in certain business lines or product types within our loan portfolio; 9) residual risk retained by us on reference pools covered by credit linked notes; 10) exposure to environmental liabilities related to the properties to which we acquire title; 11) ability to compete in a highly competitive market; 12) expansion strategies through acquisitions or implementation of new lines of business or new products and services that may not be successful and supervisory actions by regulatory agencies which may limit our ability to pursue certain growth opportunities; 13) uncertainty associated with digital payment initiatives; 14) ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of our senior management team; 15) ability to meet capital adequacy and liquidity requirements; 16) dependence on low-cost deposits; 17) risks related to representations and warranties made on third-party loan sales; 18) ability to borrow from the FHLB or the FRB; 19) a change in our creditworthiness; 20) information security breaches; 21) reliance on third parties to provide key components of our infrastructure; 22) perpetration of fraud; 23) ability to implement and improve our controls and processes to keep pace with growth; 24) the discontinuation of or substantial changes to interest rate benchmarks utilized in our lending, borrowing and hedging activities; 25) risk of operating in a highly regulated industry and our ability to remain in compliance; 26) ability to adapt to technological change; 27) failure to comply with state and federal banking agency laws and regulations; 28) results of any tax audit findings, challenges to our tax positions, or adverse changes or interpretations of tax laws; 29) risks related to ownership and price of our preferred and common stock; 30) ability to continue to declare quarterly dividends; 31) additional regulatory requirements resulting from our continued growth; 32) management's estimates and projections of interest rates and interest rate policies; and 33) the execution of our business plan.

For more information regarding risks that may cause the Company's actual results to differ materially from any forward-looking statements, see “Risk Factors” in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2023 and “Risk Factors” in Part II, Item 1A of this Form 10-Q. All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Recent Market and Banking Industry Developments

Market Developments

The Company's loan portfolio includes significant credit exposure to the CRE market, with CRE related loans comprising approximately 31% and 33% of total loans at September 30, 2024 and December 31, 2023, respectively. Approximately 16% of CRE loans, excluding construction and land loans, were owner occupied at September 30, 2024 and December 31, 2023, and approximately 5% were non-owner occupied office loans at September 30, 2024 and December 31, 2023. As elevated focus on the evolving industry dynamics facing the CRE market have emerged over the past year, the Company has been proactive in establishing enhanced monitoring policies and procedures as it relates to its CRE loans and has undertaken actions to limit growth of its CRE portfolio, as further discussed in “Item 1. Business, Lending Activities – Asset Quality” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. During the three and nine months ended September 30, 2024, the Company recognized gross charge-offs on CRE non-owner occupied loans totaling $21.7 million and $44.3 million, respectively, which primarily related to office properties. While the Company believes that its increased monitoring efforts to provide earlier identification of potential stressed loans and proactive engagement with borrowers has helped the Company assess its credit related exposure to this portfolio segment and establish adequate reserve levels, CRE market conditions may worsen, which could result in further deterioration of asset quality in this portfolio.

Banking Industry

In November 2023, the FDIC approved a final rule implementing a special assessment to recover losses to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The assessment base is equal to an institution’s estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion of estimated uninsured deposits. The special assessment will be collected over an eight-quarter collection period, at a quarterly rate of 3.36 basis points, with the first quarterly assessment period beginning on January 1, 2024. The amount of the total special assessment is subject to adjustment and will not be finalized by the FDIC until after termination of the receiverships. The Company recognized a reduction to expense of $2.2 million during the three months ended September 30, 2024 and a net charge of $9.4 million during the nine months ended September 30, 2024 due to adjustments to the loss estimate.

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 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 digital payment services for the class action legal industry.

Financial Results Highlights for the Third Quarter of 2024

• Net income available to common stockholders of $196.6 million, compared to $213.4 million for the third quarter 2023
• Diluted earnings per share of $1.80, compared to $1.97 per share for the third quarter 2023
• Net revenue of $823.1 million, compared to $716.2 million for the third quarter 2023, with non-interest expense of $537.4 million, compared to $426.2 million for the third quarter 2023
• PPNR of $285.7 million, down 1.5% from $290.0 million in the third quarter 20231
• Total loans HFI of $53.3 billion, up $3.0 billion, or 6.1%, from December 31, 2023
• Total deposits of $68.0 billion, up $12.7 billion, or 23.0%, from December 31, 2023
• Stockholders' equity of $6.7 billion, an increase of $599 million from December 31, 2023
• Nonaccrual loans and repossessed assets increased to 0.45% of total assets compared to 0.40% at December 31, 2023
• Annualized net loan charge-offs to average loans outstanding of 0.20%, compared to 0.07% for the third quarter 2023
• Net interest margin of 3.61%, decreased from 3.67% in the third quarter 2023
• Tangible common equity ratio of 7.2%, a decrease compared to 7.3% at December 31, 20231
• Book value per common share of $57.97, an increase of 9.8% from $52.81 at December 31, 2023
• Tangible book value per share, net of tax, of $51.98, an increase of $5.26, or 11.3%, from $46.72 at December 31, 20231
• Efficiency ratio of 64.5% in the third quarter 2024, compared to 58.8% in the third quarter 20231

The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below as they pertain to the Company’s overall comparative performance for the three and nine months ended September 30, 2024.

1 See Non-GAAP Financial Measures section beginning on page 64.

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:

(in millions, except per share amounts)

(1) See Non-GAAP Financial Measures section beginning on page 64.

(in millions)

(1) See Non-GAAP Financial Measures section beginning on page 64.

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:

(dollars in millions)

(1) Annualized on an actual/actual basis for the three months ended September 30, 2024. Actual year-to-date for the year ended December 31, 2023.

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 $80.1 billion at September 30, 2024 from $70.9 billion at December 31, 2023. The increase in total assets of $9.2 billion, or 13.0%, was primarily driven by an increase in deposits, which contributed to increases in investment securities and cash of $3.7 billion and $1.0 billion, respectively, and funded HFI loan growth of $3.0 billion. Loans HFI increased by $3.0 billion, or 6.1%, to $53.3 billion as of September 30, 2024, compared to $50.3 billion as of December 31, 2023. Commercial and industrial loans primarily drove the increase in loans HFI, increasing $3.4 billion from December 31, 2023, which was partially offset by decreases in residential real estate and construction and land development loans of $383 million and $162 million, respectively. In addition, loans HFS increased $925 million from $1.4 billion as of December 31, 2023 primarily due to an increase in agency-conforming and non-EBO loans.

Total deposits increased $12.7 billion, or 23.0%, to $68.0 billion as of September 30, 2024 from $55.3 billion as of December 31, 2023. By type, the increase in deposits from December 31, 2023 was driven by increases of $10.4 billion and $4.8 billion in non-interest bearing deposits and savings and money market accounts, respectively, partially offset by decreases of $2.1 billion and $452 million in interest bearing demand deposits and certificates of deposit, respectively.

RESULTS OF OPERATIONS

The following table sets forth a summary financial overview:

(in millions, except per share amounts)

63

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:

(in millions)

Pre-Provision Net Revenue, Excluding FDIC Special Assessment

The following table shows PPNR for the three and nine months ended September 30, 2024, adjusted to exclude the FDIC special assessment, which management believes is more comparable to historical earnings trends:

(in millions)

64

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:

(dollars in millions)

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 reduced by 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.

(dollars and shares in millions)

65

(dollars in millions)

66

Regulatory Capital

The following table presents certain financial measures related to regulatory capital under Basel III, which includes CET1 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 the CECL transition option that delayed the estimated impact on regulatory capital resulting from the adoption of CECL over a five-year transition period ending December 31, 2024. Accordingly, capital ratios and amounts for 2024 include a 25% capital benefit that resulted from the increased ACL related to the adoption of ASC 326, compared to a 50% capital benefit for 2023.

(dollars in millions)

67

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:

(dollars in millions)

(1) Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $10.0 million and $8.9 million for the three months ended September 30, 2024 and 2023, respectively.

(2) Included in the yield computation are net loan fees of $21.7 million and $28.0 million for the three months ended September 30, 2024 and 2023, respectively.

(3) Includes non-accrual loans.

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

(dollars in millions)

(1) Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $29.5 million and $26.4 million for the nine months ended September 30, 2024 and 2023, respectively.

(2) Included in the yield computation are net loan fees of $86.9 million and $100.4 million for the nine months ended September 30, 2024 and 2023, respectively.

(3) Includes non-accrual loans.

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

(in millions)

(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 three months ended September 30, 2024, interest income was $1.2 billion, an increase of $173.4 million, or 16.9%, compared to $1.0 billion for the three months ended September 30, 2023. This increase was primarily the result of a $74.3 million increase in interest income from investment securities resulting from an increase in the average investment balance of $6.2 billion and a $64.9 million increase in interest income from loans HFI that was driven by higher average HFI loan balances of $4.6 billion. Higher average balances for loans HFS and cash and other also contributed $19.6 million and $14.6 million, respectively, to the increase in interest income.

For the nine months ended September 30, 2024, interest income was $3.4 billion, an increase of $406.2 million, or 13.6%, compared to $3.0 billion for the nine months ended September 30, 2023. This increase was primarily the result of a $200.3 million increase in investment income from investment securities due primarily to an increase in the average investment balance of $5.5 billion and a $197.9 million increase in interest income from loans HFI driven by a $2.2 billion increase in the average HFI loan balance coupled with higher yields. These increases were offset in part by a decrease in interest income from loans HFS of $34.7 million driven by a lower average HFS loan balance of $665.5 million.

For the three months ended September 30, 2024, interest expense was $503.1 million, an increase of $63.5 million, or 14.4%, compared to $439.6 million for the three months ended September 30, 2023. The increase in interest expense was due to an increase in interest expense on deposits of $105.9 million driven by an $8.8 billion increase in the average interest bearing deposit balance and increased interest rates, partially offset by a $42.4 million decrease in interest expense on total borrowings resulting from a decrease in average borrowing balances of $2.2 billion.

For the nine months ended September 30, 2024, interest expense was $1.5 billion, an increase of $201.0 million, or 16.1%, compared to $1.2 billion for the nine months ended September 30, 2023. Interest expense on deposits increased $414.1 million for the same period driven by a $9.3 billion increase in average interest bearing deposits and increased interest rates, partially offset by a $213.4 million decrease in interest expense on total borrowings resulting from a decrease in average borrowing balances of $5.0 billion.

For the three months ended September 30, 2024, net interest income totaled $696.9 million, an increase of $109.9 million, or 18.7%, compared to $587.0 million for the three months ended September 30, 2023. The increase in net interest income was driven by a $13.3 billion increase in average interest-earning assets, partially offset by an increase in funding costs driven by the higher rate environment. The decrease in net interest margin of 6 basis points to 3.61% is largely the result of an increase in both the average balances and rates of deposits, partially offset by an increase in average loans HFI and investment securities balances and yields compared to the same period in 2023.

For the nine months ended September 30, 2024, net interest income was $2.0 billion, an increase of $205.2 million, or 11.7%, compared to $1.7 billion for the nine months ended September 30, 2023. The increase in net interest income reflects a $7.8 billion increase in average interest-earning assets and related yields, partially offset by an increase of $4.3 billion in average interest bearing liabilities. The decrease in net interest margin of 1 basis point to 3.61% is the result of a higher rate environment as explained in the above paragraphs.

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 three and nine months ended September 30, 2024, the Company recorded a provision for credit losses of $33.6 million and $85.9 million, respectively, compared to $12.1 million and $53.3 million for the three and nine months ended September 30, 2023, respectively. The provision for credit losses for the three and nine months ended September 30, 2024 is primarily reflective of net charge-offs of $26.6 million and $59.2 million, respectively, and loan growth.

Non-interest Income

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

(in millions)

Total non-interest income for the three months ended September 30, 2024 compared to the same period in 2023 decreased $3.0 million. The decrease in non-interest income from the three months ended September 30, 2023 was primarily driven by decreases in net loan servicing revenue of $14.9 million and fair value gain adjustments, net of $13.7 million, partially offset by an increase in other income of $12.7 million from new bank owned life insurance policies and an increase in gain on sales of investment securities of $8.7 million.

Total non-interest income for the nine months ended September 30, 2024 increased $181.1 million compared to the same period in 2023. Non-interest income for the nine months ended September 30, 2023 was impacted by the Company's balance sheet repositioning actions, which were largely completed by the end of 2023. These actions resulted in losses of $117.3 million related to fair value adjustments from transferring loans from HFI to HFS and losses on sales of investment securities of $26.0 million during the nine months ended September 30, 2023, which did not reoccur in the current period.

Non-interest Expense

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

(in millions)

Total non-interest expense for the three months ended September 30, 2024 increased $111.2 million compared to the same period in 2023. The increase in non-interest expense was primarily driven by an increase in deposit costs related to higher ECR balances and rates. ECR balances increased $9.0 billion to $26.1 billion as of September 30, 2024 from $17.1 billion as of September 30, 2023.

Total non-interest expense for the nine months ended September 30, 2024 increased $344.5 million compared to the same period in 2023. The increase in non-interest expense for this period was primarily driven by an increase in deposit and insurance costs. Higher ECR balances and rates drove the increase in deposit costs. The increase in insurance costs is due to elevated insured and brokered deposit levels and a net FDIC special assessment charge of $9.4 million recognized during the nine months ended September 30, 2024.

Income Taxes

The Company's effective tax rate was 20.7% and 22.1% for the three months ended September 30, 2024 and 2023, respectively, and 22.0% and 20.5% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in the effective tax rate for the three months ended September 30, 2024 compared to the same period in 2023 was primarily due to a decrease in pre-tax book income. The increase in the effective tax rate for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to a decrease in expected investment tax credit benefits, an increase in nondeductible insurance premiums, and shortfalls from stock compensation expense during 2024.

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 both commercial banking services to enterprises in consumer-related sectors and consumer banking services, such as residential mortgage banking.
• 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 reportable segment information:

(in millions)

(in millions)

73

BALANCE SHEET ANALYSIS

Total assets increased $9.2 billion to $80.1 billion at September 30, 2024, compared to $70.9 billion at December 31, 2023. The increase in total assets was primarily driven by an increase in deposits, which contributed to increases in investment securities and cash of $3.7 billion and $1.0 billion, respectively, and funded HFI loan growth of $3.0 billion. Loans HFI increased $3.0 billion, or 6.1%, to $53.3 billion as of September 30, 2024, compared to $50.3 billion as of December 31, 2023. The increase in loans HFI from December 31, 2023 was driven by a $3.4 billion increase in commercial and industrial loans from December 31, 2023, partially offset by decreases in residential real estate and construction and land development loans of $383 million and $162 million, respectively. Loans HFS increased $925 million from $1.4 billion as of December 31, 2023 due to an increase in agency-conforming and non-EBO loans.

Total liabilities increased $8.6 billion to $73.4 billion at September 30, 2024, compared to $64.8 billion at December 31, 2023. The increase in liabilities is due primarily to an increase in total deposits of $12.7 billion, or 23.0%, to $68.0 billion. By type, the increase in deposits from December 31, 2023 was driven by increases of $10.4 billion in non-interest bearing deposits and $4.8 billion in savings and money market accounts, partially offset by decreases in interest bearing demand deposits and certificates of deposit of $2.1 billion and $452 million, respectively. Other borrowings decreased $4.2 billion from December 31, 2023 primarily due to a decrease in short-term borrowings, partially offset by a $1.0 billion increase in long-term borrowings from FHLB advances.

Total stockholders’ equity of $6.7 billion at September 30, 2024 increased by $599 million, or 9.9%, from December 31, 2023. The increase in stockholders' equity is primarily a function of net income and unrealized fair value gains on AFS securities, recorded net of tax in other comprehensive income, offset by quarterly dividends to common and preferred stockholders.

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:

(in millions)

The increases in Residential MBS issued by GSEs and U.S. Treasury securities from December 31, 2023 are primarily due the Company's efforts to shift its investment portfolio mix toward high quality liquid assets, which also included the sale of CLOs.

Loans HFS

The Company purchases and originates residential mortgage loans through its AmeriHome mortgage banking business channel that are held for sale or securitization. As of September 30, 2024, loans HFS totaled $2.3 billion, compared to $1.4 billion at December 31, 2023, an increase of $925 million primarily related to an increase in agency-conforming and non-EBO loans.

Loans HFI

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

(in millions)

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 $107 million and $108 million reduced the carrying value of loans as of September 30, 2024 and December 31, 2023, respectively. Net unamortized purchase premiums on acquired and purchased loans of $173 million and $177 million increased the carrying value of loans as of September 30, 2024 and December 31, 2023, respectively.

Concentrations of Lending Activities

The Company monitors concentrations of lending activities at the product and borrower relationship level. As of September 30, 2024 and December 31, 2023, no borrower relationships at both the commitment and funded loan level exceeded 5% of total loans HFI.

Commercial and industrial loans made up 42% and 38% of total loans HFI as of September 30, 2024 and December 31, 2023, respectively.

In addition, the Company's loan portfolio includes significant credit exposure to the CRE market as CRE related loans accounted for approximately 31% and 33% of total loans at September 30, 2024 and December 31, 2023 respectively. Non-owner occupied CRE loans are CRE loans for which the primary source of repayment is rental income generated from the collateral property. Owner occupied CRE loans are loans secured by owner occupied non-farm nonresidential properties for which the primary source of repayment (more than 50%) is the cash flow from the ongoing operations and activities conducted by the borrower who owns the property. These CRE loans are secured by multi-family residential properties, professional offices, industrial facilities, retail centers, hotels, and other commercial properties.

The following tables present the composition by property type and weighted average LTV of the Company’s CRE non-owner occupied loans:

(dollars in millions)

(1) The weighted average LTVs in the above table are based on the most recent available information, if current appraisals are not available.

(dollars in millions)

(1) The weighted average LTVs in the above table are based on the most recent available information, if current appraisals are not available.

The following table presents the Company’s CRE non-owner occupied loans by origination year as of September 30, 2024:

(in millions)

The following table presents the scheduled maturities of the Company’s CRE non-owner occupied loans as of September 30, 2024:

(in millions)

76

Approximately $2.4 billion, or 4.5%, of total loans HFI consisted of CRE non-owner occupied office loans as of September 30, 2024, compared to $2.4 billion, or 4.7%, as of December 31, 2023. Of the non-owner occupied office loan balance as of September 30, 2024, $166 million is scheduled to mature in the remainder of 2024. These office loans primarily consist of shorter-term bridge loans that enable borrowers to reposition or redevelop projects with more modern standards attractive to in-office employers in today’s environment, including enhanced on-site amenities. The vast majority of these projects are located in suburban locations in the Company's core footprint states (Arizona, California, and Nevada), with central business district and midtown exposure totaling approximately 2% and 10% of office loans as of September 30, 2024, respectively.

The office loan portfolio largely consists of value-add loans that require significant up-front cash equity contributions from institutional sponsors and large regional and national developers. The properties underlying these loans have stable business trends and low vacancy rates. To a large extent, the financing structures of these loans do not carry junior liens or mezzanine debt, which enables maximum flexibility when working with clients and sponsors. In addition to adhering to conservative underwriting standards, asset-specific credit risk is mitigated through continued sponsor support of projects by re-appraisal rights of the Company, re-margining requirements and ongoing debt service, and debt yield covenants.

As of September 30, 2024 and December 31, 2023, 16% of the Company's CRE loans, excluding construction and land loans, were owner occupied, with substantially all of these loans secured by first liens and had an initial loan-to-value ratio of generally not more than 75%.

Non-performing Assets

Total non-performing loans increased $79 million to $489 million at September 30, 2024, from $410 million at December 31, 2023.

(dollars in millions)

(1) Includes loan modifications to borrowers experiencing financial difficulty of $136 million and $129 million at September 30, 2024 and December 31, 2023, respectively.

(2) Excludes government guaranteed residential mortgage loans of $313 million and $399 million at September 30, 2024 and December 31, 2023, respectively.

Interest income that would have been recorded under the original terms of nonaccrual loans was $6.6 million and $4.5 million for the three months ended September 30, 2024 and 2023, respectively, and $18.4 million and $8.1 million for the nine months ended September 30, 2024 and 2023, respectively.

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

(dollars in millions)

(dollars in millions)

Restructurings for Borrowers Experiencing Financial Difficulty

The following tables present loan modifications during the period to borrowers experiencing financial difficulty:

(in millions)

(dollars in millions)

78

(dollars in millions)

(dollars in millions)

The performance of these modified loans is monitored for 12 months following the modification. As of September 30, 2024, modified loans of $136 million were current with contractual payments and $136 million were on nonaccrual status. As of December 31, 2023, modified loans of $95 million were current with contractual payments and $111 million were on nonaccrual status.

In the normal course of business, the Company also modifies EBO loans, which are delinquent FHA, VA, or USDA insured or guaranteed loans repurchased under the terms of the GNMA MBS program and can be repooled or resold when loans are brought current either through the borrower's reperformance or completion of a loan modification. During the three and nine months ended September 30, 2024, the Company completed modifications of EBO loans with an amortized cost of $106 million and $285 million, respectively. During the three and nine months ended September 30, 2023, the Company completed modifications of EBO loans with an amortized cost of $84 million and $176 million, respectively. These modifications were largely payment delays and term extensions. Certain of these loans were repooled or resold after modification and are no longer included in the pool of loan modifications being monitored for future performance. As of September 30, 2024, modified EBO loans consisted of $39 million in loans that were current to 89 days delinquent and $9 million in loans 90 days or more delinquent. As of December 31, 2023, modified EBO loans consisted of $38 million in loans that were current to 89 days delinquent and $12 million in loans 90 days or more delinquent.

Allowance for Credit Losses on Loans HFI

The ACL consists of an ACL on loans and on unfunded loan commitments. The ACL on AFS and 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:

(dollars in millions)

During the three months ended September 30, 2024 and 2023, annualized net loan charge-offs to average loans outstanding were 0.20% and 0.06%, 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 $38 million and $32 million at September 30, 2024 and December 31, 2023, respectively, and is included in Other liabilities on the Consolidated Balance Sheet.

Problem Loans

The Company classifies loans consistent with federal banking regulations using a nine category grading system. 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:

(dollars in millions)

(dollars in millions)

81

Mortgage Servicing Rights

The fair value of the Company's MSRs related to residential mortgage loans totaled $1.0 billion and $1.1 billion as of September 30, 2024 and December 31, 2023, respectively.

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

(in millions)

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 and intangible assets totaling $661 million and $669 million at September 30, 2024 and December 31, 2023, respectively.

The Company performs its annual goodwill and intangible assets 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 three and nine months ended September 30, 2024, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was necessary. For the three and nine months ended September 30, 2023, the Company evaluated whether the effects from the bank failures in 2023 gave rise to a triggering event and elected to perform a Step 0 goodwill impairment assessment, which included assessing the financial performance of the Company and analyzing qualitative factors applicable to the Company. Based on this assessment, the Company determined that it was more likely than not the fair value of the Company and its reporting units exceeded their respective carrying values as of September 30, 2023.

Deferred Tax Assets

As of September 30, 2024, the net DTA balance totaled $254 million, a decrease of $33 million from $287 million at December 31, 2023. This overall decrease in the net DTA was primarily the result of an increase in the fair market value of AFS securities, partially offset by an increase in credit carryovers and state net operating losses.

Deposits

Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $68.0 billion at September 30, 2024, from $55.3 billion at December 31, 2023, an increase of $12.7 billion, or 23.0%. By deposit type, the increase in deposits is attributable to increases of $10.4 billion in non-interest bearing deposits and $4.8 billion in savings and money market accounts, partially offset by decreases of $2.1 billion in interest bearing demand deposits and $452 million in certificates of deposit.

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 September 30, 2024, the Company had $13.1 billion of these reciprocal deposits, compared to $13.3 billion at December 31, 2023. At September 30, 2024 and December 31, 2023, the Company also had wholesale brokered deposits of $6.0 billion and $6.6 billion, respectively.

In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled $26.1 billion and $17.8 billion at September 30, 2024 and December 31, 2023, respectively. Costs related to these deposits are primarily reported as Deposit costs in non-interest expense. Deposit costs include $201.7 million and $123.7 million in deposit related costs on these deposits for the three months ended September 30, 2024 and 2023, respectively, and $500.4 million and $297.1 million, respectively, for the nine months ended September 30, 2024 and 2023. The increase in these costs from the prior year is due to an increase in average deposit balances eligible for earnings credits or referral fees as well as an increase in earnings credit rates.

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

(dollars in millions)

(dollars in millions)

Other Borrowings

Short-Term Borrowings

The Company utilizes short-term borrowed funds to support short-term liquidity needs. The majority of these short-term borrowed funds consist of advances from the FHLB, repurchase agreements, and federal funds purchased from correspondent banks or the FHLB. 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 repurchase facilities, collateralized by securities, including assets 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 assets. Total short-term borrowings decreased $5.2 billion to $1.6 billion at September 30, 2024 from $6.8 billion at December 31, 2023. The decrease was driven by decreases in FHLB advances of $4.7 billion, repurchase agreements of $377 million, and federal funds purchased of $175 million.

Long-Term Borrowings

The Company's long-term borrowings consist of long-term FHLB borrowings and credit linked notes, inclusive of issuance costs. At September 30, 2024, the carrying value of long-term borrowings was $1.4 billion, compared to $446 million at December 31, 2023. The increase in long-term borrowings of $982 million was driven by long-term advances with the FHLB entered into during the three months ended September 30, 2024.

Qualifying Debt

Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value adjustments. At September 30, 2024, the carrying value of qualifying debt was $898 million, compared to $895 million at December 31, 2023.

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items (discussed in "Note 14. Commitments and Contingencies" to the Unaudited Consolidated Financial Statements) as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As permitted by the regulatory capital rules, the Company elected the CECL transition option that delayed the estimated impact on regulatory capital resulting from the adoption of CECL over a five-year transition period ending December 31, 2024. Accordingly, capital ratios and amounts in 2024 include a 25% capital benefit that resulted from the increased ACL related to the adoption of ASC 326, compared to a 50% capital benefit for 2023.

As of September 30, 2024 and December 31, 2023, 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:

(dollars in millions)

The Company and the Bank are also subject to liquidity and other regulatory requirements as administered by the federal banking agencies. These agencies have broad powers and at their discretion, could limit or prohibit the Company's payment of dividends, payment of certain debt service and issuance of capital stock and debt as they deem appropriate and as such, actions by the agencies could have a direct material effect on the Company’s business and financial statements.

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 September 30, 2024.

Critical Accounting Estimates

Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The critical accounting estimates upon which the Company's financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and all amendments thereto, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

Liquidity

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in the Company's business operations or unanticipated events.

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors, and regulators. The Company's liquidity, represented by cash and amounts due from banks, federal funds sold, 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:

(in millions)

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 are presented in the following table:

(in millions)

The Company has a formal liquidity policy and, in the opinion of management, its liquid assets are considered adequate to meet financial obligations and support client activity during normal and stressed operating conditions. At September 30, 2024, there were $14.1 billion in liquid assets, comprised of $1.6 billion in cash on deposit at the FRB and $12.5 billion in securities not currently used as collateral for borrowings or other purposes. At December 31, 2023, the Company maintained $6.9 billion in liquid assets, comprised of $785 million in cash on deposit at the FRB and $6.1 billion in liquid securities not currently used as collateral for borrowings or other purposes.

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 the Parent is unable to generate funds from additional debt or equity issuances, receives no dividend income from subsidiaries and does not pay dividends to stockholders, while continuing to make non-discretionary payments needed to maintain operations and repayment of contractual principal and interest payments owed by the Parent and affiliated companies. Under this scenario, the amount of time the Parent and its non-bank subsidiary can operate and meet all obligations before the current liquid assets are exhausted is considered as part of the Parent liquidity analysis. Management believes the Parent maintains adequate liquidity capacity to operate without additional funding from new sources for over twelve months.

WAB maintains sufficient funding capacity to address large increases in funding requirements, such as deposit outflows. This capacity is comprised of liquidity derived from a reduction in asset levels and various secured funding sources. On a long-term basis, the Company’s liquidity will be met by changing the relative distribution of its asset portfolios (for example, by reducing investment or loan volumes, or selling or encumbering assets). Further, the Company can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from correspondent banks, the FHLB of San Francisco, and the FRB. At September 30, 2024, 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 nine months ended September 30, 2024 and 2023, net cash used in operating activities was $2.1 billion and $669.8 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 used in investing activities has been primarily influenced by its loan and securities activities. During the nine months ended September 30, 2024, the Company's cash balance decreased by $3.2 billion as a result of a net increase in loans, compared to an increase in cash of $1.9 billion during the nine months ended September 30, 2023 from a net decrease in loans. A net increase in investment securities of $3.2 billion for the nine months ended September 30, 2024 contributed to the decrease to the Company's cash balance during the nine months ended September 30, 2024, while a net increase in investment securities of $2.6 billion for the nine months ended September 30, 2023, partially offset the increase in cash.

Net cash provided by financing activities has been impacted significantly by deposit levels. During the nine months ended September 30, 2024, net deposits increased $12.7 billion, compared to an increase in net deposits of $642.9 million during the nine months ended September 30, 2023.

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 million and $225 million, respectively, through one participating financial institution or, a combined total of $275 million per individual customer, with the entire amount being covered by FDIC insurance. As of September 30, 2024, the Company has $1.7 billion of CDARS and $9.9 billion of ICS deposits.

As of September 30, 2024, the Company has $6.0 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 these deposits are not relationship based and are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts.

Federal and state banking regulations place certain restrictions on dividends paid. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the bank. Dividends paid by WAB to the Parent would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. During the three and nine months ended September 30, 2024, WAB paid dividends to the Parent of $60 million and $180 million, respectively.

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending, investing, and deposit taking activities. To that end, management actively monitors and manages the Company's interest rate risk exposure.

Management uses various asset/liability strategies to manage the re-pricing characteristics of the Company's assets and liabilities, all of which are designed to ensure that exposure to interest rate fluctuations is within the Company's guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits and management of the deployment of its securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources. Derivatives in a hedging relationship are also used to minimize the Company's exposure to changes in benchmark interest rates and volatility of net interest income and EVE to interest rate fluctuations, with their impact reflected in the model results discussed below.

Interest rate risk is addressed by ALCO, which includes members of executive management, finance, and operations. ALCO monitors interest rate risk by analyzing the potential impact on EVE and earnings from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The Company manages its balance sheet in part to keep the potential impact on EVE and earnings within acceptable ranges despite changes in interest rates.

The Company's exposure to interest rate risk is reviewed at least quarterly by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine its change in both EVE and earnings in the event of hypothetical changes in interest rates. If potential changes to EVE and earnings resulting from hypothetical interest rate changes are not within the limits established by the BOD or, ALCO determines that interest rate exposures should be reduced, ALCO will either take hedging actions or adjust the asset and liability mix to bring interest rate risk within BOD-approved limits or in line with ALCO's proposed reduction. ALCO may also decide the best course of action for a limit breach is to accept the breach and present justification to the BOD. If the BOD does not agree to accept the limit breach, it will direct ALCO to remediate the breach. The Company's EaR and EVE exposure limits are approved by the BOD on an annual basis, or more often if market conditions warrant. During the nine months ended September 30, 2024, there have been no changes to the Company's exposure limits.

Net Interest Income Simulation. To measure interest rate risk at September 30, 2024, the Company used a simulation model to project changes in net interest income resulting from forecasted changes in interest rates. This analysis calculates the difference between a baseline net interest income forecast using forward yield curves, compared to forecasted net income results from an immediate, parallel shift in rates upward or downward, along with other scenarios directed by ALCO. The simulation model includes various assumptions regarding re-pricing relationships for each of the Company's products. Many of the Company's assets are variable rate loans, which are assumed to re-price at the next rate re-set period and, proportional to the change in market rates, depending on their contracted index, including the impact of caps or floors. The simulation model also incorporates prepayment assumptions for applicable loans and investments with such optionality. The Company's non-term deposit products re-price with a certain beta to underlying market rate changes. These betas are derived separately by deposit product and are based on both observed and projected market rate and balance trends. Current product-level deposit beta assumptions range between 47% to 94%, depending on product, with an average interest bearing deposit beta of 56%.

This analysis illustrates the impact of changes in net interest income for the given set of rate changes and assumptions. It does not account for all factors that could impact the Company's results, including changes by management to mitigate interest rate changes or secondary factors, such as changes to the Company's credit risk profile as interest rates change. The results will also be impacted by seasonality in the balance sheet. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes impact actual loan prepayment speeds and these changes may result in differences in the market estimates incorporated in this analysis. These assumptions are inherently uncertain and as a result, actual results may differ from simulated results due to factors such as timing, magnitude and frequency of interest rate changes as well as changes in market conditions, customer behavior, management strategies, and changes that vary significantly from the modeled assumptions may have a significant effect on the Company's actual net interest income.

The table below presents the changes in net interest income that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates based on a dynamic balance sheet. In addition, the table provides results from additional scenarios in response to gradual, parallel changes (ramp) in market interest rates over twelve months. The Company continues to evaluate the scenarios that are presented as interest rates change and will update these scenario disclosures as appropriate.

Sensitivity of Net Interest Income

In addition, certain rate-sensitive non-interest income and expense items are also subject to market risk, including mortgage banking and servicing income and ECR deposit costs. Mortgage originations and prepayments are sensitive to interest rates and therefore, mortgage banking and servicing income can be impacted by volatility in interest rates. The Company’s EaR simulation model expands on its net interest income simulation, as described above, by incorporating these non-interest income and expenses amounts to measure the impact of forecasted changes in interest rates on earnings (defined as net interest income plus rate-sensitive non-interest income and expense). In the Company’s EaR simulation model as of September 30, 2024, deposits eligible for ECRs re-price with a beta assumption of 81% to underlying market rate changes, and total non-maturity deposits, inclusive of ECRs, re-price with a weighted average beta assumption of 65%. As a result of the higher deposit betas on deposits eligible for ECRs, in the down simulation scenarios, the Company will benefit from lower deposit costs. In a shock down 100 basis points scenario, ECR related deposit costs would decrease 23% from the baseline forecast over the next twelve months. At September 30, 2024, the Company’s earnings exposure for the next twelve months related to these hypothetical changes in market interest rates was within the Company’s current guidelines.

Economic Value of Equity. The Company measures the impact of market interest rate changes on the NPV of estimated cash flows from its assets, liabilities, and off-balance sheet items, defined as EVE, using a simulation model. The Company's simulation model focuses on parallel interest rate shocks and takes into account assumptions related to loan prepayment trends that are sourced using a combination of third-party prepayment models and internal historical experience, terminal maturity for non-maturity deposits, decay attrition, and pricing sensitivity derived from the Company's data and other internally-developed analysis and models. These assumptions are reviewed at least annually and are adjusted periodically to reflect changes in market conditions and the Company's balance sheet composition. As simulated model results are based on a number of assumptions outlined above, including forecasted market conditions, actual amounts may differ significantly from the projections set forth below should market conditions vary from the underlying assumptions.

This simulation model assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates. The Company continues to evaluate the scenarios that are presented as interest rates change and will update these scenario disclosures as appropriate.

The following table shows the Company's projected change in EVE for this set of rate shocks at September 30, 2024:

Economic Value of Equity

At September 30, 2024, the Company's EVE exposure related to these hypothetical changes in market interest rates was within the Company's current guidelines.

Derivative Contracts. In the normal course of business, the Company uses derivative instruments to meet the needs of its customers and manage exposure to fluctuations in interest rates. For additional discussion on how derivatives in a hedging relationship (fair value hedges) are used to manage the Company's interest rate risk, see "Note 11. Derivatives and Hedging Activities" to the Unaudited Consolidated Financial Statements.

Evaluation of Disclosure Controls

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the CEO and CFO have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Additionally, the Company's disclosure controls and procedures were also effective in ensuring that information required to be disclosed by the Company in the reports it files or is subject to under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting during the quarter ended September 30, 2024, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have not been any material changes to the risk factors previously disclosed in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.