WESTERN ALLIANCE BANCORPORATION (WAL) FY 2023 MD&A

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 2022 results to the 2021 results and other 2021 information not included herein, refer to "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, 2022.

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Recent Banking Industry and Market Developments

Banking Industry

The bank failures in 2023 caused significant disruption in the United States banking industry, particularly among mid-sized banks, such as the Company. The closures of these banks triggered a surge in deposit outflows and stock price volatility at many mid-sized banks, including the Company.

Regulatory actions in response to these bank failures included establishment of the BTFP, which offered loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral valued at par. The Company drew $1.3 billion from the BTFP during the first quarter of 2023, all of which was repaid as of December 31, 2023.

Additionally, the Department of the Treasury, FRB, and FDIC issued a joint statement, which stated that losses to support uninsured deposits of those failed banks would be recovered via a special assessment on banks. In November 2023, the FDIC approved an annual special assessment rate of approximately 13.4 basis points. The assessment base for the special assessments 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 assessments will be collected over an eight-quarter collection period, at a quarterly special assessment rate of 3.36 basis points, with the first quarterly assessment period beginning on January 1, 2024. However, 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 charge of $66.3 million during the year ended December 31, 2023 in connection with the special assessment.

The recent volatility in the banking industry and other recent regulatory actions have had and may continue to have a material impact on the Company's operations, as further discussed below.

Capital and liquidity

While the Company believes it has sufficient capital, funding, and access to contingent sources of liquidity, the Company has taken several actions to ensure the strength of its capital and liquidity position. These actions included disposition of selected assets, including $1.6 billion of AFS securities and $4.3 billion of loans during the year ended December 31, 2023, and increasing its borrowing capacity with the FRB. With these actions, the Company strengthened its capital position, increasing its CET1 ratio 150 basis points to 10.8%, grew high quality liquid assets1 $5.5 billion to $7.4 billion as of December 31, 2023, and reduced its loan to deposit ratio from 96.7% as of December 31, 2022 to 90.9% as of December 31, 2023.

The Company's deposit balances stabilized as of March 20, 2023 and increased $1.7 billion as of December 31, 2023 when compared to December 31, 2022. The Company also strengthened its insured deposit ratio from 45% as of December 31, 2022 to 73% as of December 31, 2023. Insured and collateralized deposits as a percentage of total deposits was 80% at December 31, 2023, compared to 47% at December 31, 2022.

Financial position and results of operations

The Company's financial position and results of operations as of and for the year ended December 31, 2023 have been impacted by this disruption. These events contributed to the $62.6 million provision for credit losses recognized during the year ended December 31, 2023, of which $17.1 million related to a charge-off of a corporate debt security from a financial institution issuer. The Company's actions to strengthen its capital and liquidity position contributed to a $116.0 million pre-tax fair value loss adjustment primarily related to the transfer of loans to HFS, a net loss of $40.8 million on sales of investment securities, partially offset by a $52.7 million gain on extinguishment of debt. The continued uncertainty regarding the severity and duration of the volatility in the banking industry and related economic effects may continue to affect the Company’s estimate of its allowance for credit losses and resulting provision for credit losses. To the extent the impact of the banking industry volatility is prolonged and economic conditions worsen or persist longer than forecast, such estimates may be insufficient and may change significantly in the future. The Company’s net interest margin also may be negatively impacted in future periods if the Company's borrowings remain elevated. These uncertainties and the economic environment will continue to affect earnings, growth, and may result in deterioration of asset quality in the Company's loan and investment portfolios.

Depositors in the technology industry were generally considered to be the most impacted by these adverse events and may have greater sensitivity to the volatility in the banking industry with potentially longer recovery periods than other types of businesses. The Company's deposit exposure to the technology industry totaled $4.4 billion, or 8.0% of total deposits, as of December 31, 2023.

1 Includes U.S. Treasury securities, U.S. government agency securities, and MBS issued by GSEs that are liquid and readily marketable.

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Asset valuation

Sustained declines in the Company's stock price and/or other liquidity related impacts, such as increases in deposit outflows, could give rise to triggering events in the future that could result in a non-cash write-down in the value of our goodwill, which could have a material adverse impact on our results of operations.

Market Developments

The Company's loan portfolio includes significant credit exposure to the CRE market, with CRE related loans comprising approximately 33% of total loans at December 31, 2023, which includes 16% of loans that were owner occupied and 4.7% of non-owner occupied office loans. As elevated focus on the evolving industry dynamics facing the CRE market have emerged during the 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” of this Form 10-K. While the Company has not incurred significant charge-offs on its CRE portfolio during the year ended December, 31, 2023, CRE market conditions may worsen, which could result in deterioration of asset quality in this portfolio.

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, treasury management services to the homeowner's association sector, and digital payment services for the class action legal industry.

2023 Financial Highlights

•Net income available to common stockholders of $709.6 million for 2023, a decrease from $1.0 billion for 2022

•Diluted earnings per share of $6.54 for 2023, a decrease from $9.70 per share for 2022

•Net revenue of $2.6 billion, constituting year-over-year growth of 3.1%, or $78.7 million, compared to an increase in non-interest expenses of 40.3%, or $466.7 million

•PPNR1 decreased $388.0 million to $1.0 billion, compared to $1.4 billion in 2022

•Effective tax rate of 22.6% for 2023, compared to 19.7% for 2022

•Total loans HFI of $50.3 billion, down $1.6 billion from December 31, 2022

•Total deposits of $55.3 billion, up $1.7 billion from December 31, 2022

•Stockholders' equity of $6.1 billion, an increase of $722 million from December 31, 2022

•Nonperforming assets (nonaccrual loans and repossessed assets) increased to 0.40% of total assets, from 0.14% at December 31, 2022

•Net loan charge-offs to average loans outstanding of approximately 0.06% for 2023, compared to approximately 0.00% for 2022

•Net interest margin of 3.63% in 2023, decreased from 3.67% in 2022

•Return on average assets of 1.03% for 2023, compared to 1.62% for 2022

•Tangible common equity ratio1 of 7.3%, compared to 6.5% at December 31, 2022

•Tangible book value per share, net of tax1, of $46.72, an increase of 16.1% from $40.25 at December 31, 2022

•Efficiency ratio1 of 61.1% in 2023, compared to 44.9% in 2022

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, 2023.

1 See Non-GAAP Financial Measures section beginning on page 37.

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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:

(1) See Non-GAAP Financial Measures section beginning on page 37.

(1) See Non-GAAP Financial Measures section beginning on page 37.

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:

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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 $70.9 billion at December 31, 2023 from $67.7 billion at December 31, 2022. The increase in total assets of $3.1 billion, or 4.6%, was driven primarily by an increase in deposits and borrowings, which contributed to an increase in investment securities of $4.2 billion, or 48.9%, and an increase in cash of $533 million. As a result of loan dispositions undertaken as part of the Company's balance sheet repositioning strategy, loans HFI decreased by $1.6 billion, or 3.1%, to $50.0 billion as of December 31, 2023, compared to $51.9 billion as of December 31, 2022. By loan type, commercial and industrial and residential real estate loans decreased $1.6 billion and $1.2 billion, respectively, from December 31, 2022. This decrease in loans HFI was partially offset by increases in construction and land development and CRE, non-owner occupied loans of $876 million and $331 million, respectively.

Total deposits increased $1.7 billion, or 3.1%, to $55.3 billion as of December 31, 2023 from $53.6 billion as of December 31, 2022. By type, the increase in deposits from December 31, 2022 was driven by increases of $6.4 billion of interest bearing demand deposits and $5.1 billion in certificates of deposits, partially offset by decreases of $5.2 billion in non-interest bearing demand deposits and $4.6 billion in savings and money market accounts.

RESULTS OF OPERATIONS

The following table sets forth a summary financial overview:

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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 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:

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:

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Earnings Per Share, Adjusted

The Company's earnings for the year ended December 31, 2023 were impacted broadly by the bank failures in 2023 and resulting actions undertaken by the Company to reposition its balance sheet to ensure the strength of its capital and liquidity position. The following table shows the components used in the calculation of earnings per share for the year ended December 31, 2023, adjusted to exclude certain items, which management believes is more comparable to historical earnings trends:

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 tangible common equity financial measures are useful in evaluating the Company's capital strength, financial condition, and ability to manage potential losses.

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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 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 2022 include a 25% reduction to the capital benefit that resulted from the increased ACL related to the adoption of ASC 326, which has increased to include a 50% reduction beginning in 2023.

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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:

(1)Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $35.5 million and $33.7 million for the year ended December 31, 2023 and 2022, respectively.

(2)Included in the yield computation are net loan fees of $131.2 million and $132.2 million for the year ended December 31, 2023 and 2022, 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.

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(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, 2023, interest income was $4.0 billion, an increase of $1.3 billion, or 49.9%, compared to $2.7 billion for the year ended December 31, 2022. This increase was primarily the result of a $983.3 million increase in interest income from loans HFI, driven by higher yields and to a lesser extent an increase in the average HFI loan balance of $2.2 billion for the year ended December 31, 2023. Interest income from investment securities also increased by $194.9 million for the comparable period due to increased investment yields and a $1.7 billion increase in average investment balances. Average yield on interest earning assets increased to 6.22% for the year ended December 31, 2023, compared to 4.45% for 2022, which was primarily the result of a higher rate environment.

For the year ended December 31, 2023, interest expense was $1.7 billion, compared to $475.5 million for the year ended December 31, 2022. Interest expense on deposits increased $866.2 million for the same period due to increasing deposit rates, coupled with a $5.6 billion increase in average interest-bearing deposits. Interest expense on short-term borrowings increased $342.5 million for the year ended December 31, 2023 compared to the same period in 2022 as a result of an increase of $4.4 billion in the average balance.

For the year ended December 31, 2023, net interest income was $2.3 billion, compared to $2.2 billion for the year ended December 31, 2022. The increase in net interest income was driven by a $4.1 billion increase in average interest earning assets, partially offset by an increase of $9.9 billion in average interest-bearing liabilities. The decrease in net interest margin of 4 basis points compared to 2022 is the result of higher funding costs on deposits and borrowings, partially offset by higher loan and investment security yields during 2023.

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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 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, 2023 and 2022, the Company recorded a provision for credit losses of $62.6 million and $68.1 million, respectively. The decrease in the provision for credit losses from the year ended December 31, 2022 is due to a significant decline in loan growth during 2023, offset by heightened economic uncertainty, particularly in the commercial real estate market.

Non-interest Income

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

Total non-interest income for the year ended December 31, 2023 compared to the same period in 2022 decreased by $43.9 million. The decrease in non-interest income was primarily driven by an increase in fair value loss adjustments, a net loss on sales of investment securities, and a decrease in loan servicing revenue. Fair value loss adjustments and the net loss on sales of investment securities during the year ended December 31, 2023 were driven by balance sheet repositioning charges incurred primarily during the first quarter following execution of the Company's balance sheet repositioning strategy, which included sales of select loans and investment securities. The decrease in net loan servicing revenue of $28.6 million is primarily related to lower MSR valuations, partially offset by a reduction in MSR hedging losses and an increase in base service fee revenue. These decreases were offset in part by an increase in net gain on loan origination and sale activities of $89.5 million from higher spreads and an increase in service charges and fees of $49.3 million.

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Non-interest Expense

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

Total non-interest expense for the year ended December 31, 2023 increased $466.7 million compared to the same period in 2022. The increase in non-interest expense was primarily driven by increased deposit costs, insurance, data processing, and salaries and employee benefits. The increase in deposits costs of $270.9 million primarily relates to higher earnings credit deposit balances and rates, as ECR related deposits increased $5.0 billion to $17.8 billion as of December 31, 2023. Insurance costs increased $159.3 million due to elevated insured and brokered deposit levels and the FDIC special assessment of $66.3 million. The increase in data processing of $39.0 million was driven by an increase in software licensing costs. Salaries and employee benefits increased $26.8 million due to an increase in base salary and a reduction in deferred origination costs from lower loan origination volume during the year, partially offset by a reduction in corporate bonuses.

Income Taxes

For the years ended December 31, 2023 and 2022, the Company's effective tax rate was 22.6% and 19.7%, respectively. The increase in the effective tax rate from 2022 to 2023 is primarily due to a decrease in pretax book income, decreases in investment tax credits and increases in nondeductible insurance premium expenses during 2023.

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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 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:

BALANCE SHEET ANALYSIS

Total assets increased to $70.9 billion at December 31, 2023 from $67.7 billion at December 31, 2022. The increase in total assets of $3.1 billion, or 4.6%, was driven by an increase in investment securities of $4.2 billion as the Company has focused on increasing its holdings of high quality liquid assets. As a result of loan dispositions undertaken as part of the Company's balance sheet repositioning strategy, loans HFI decreased by $1.6 billion, or 3.0%, to $50.3 billion as of December 31, 2023, compared to $51.9 billion as of December 31, 2022. By loan type, commercial and industrial and residential real estate loans decreased $1.6 billion and $1.2 billion, respectively, from December 31, 2022, partially offset by increases in construction and land development and CRE, non-owner occupied loans of $876 million and $331 million, respectively during the same period. In addition, loans HFS increased $218 million at December 31, 2023, up from $1.2 billion as of December 31, 2022.

Total liabilities increased $2.4 billion, or 3.9%, to $64.8 billion at December 31, 2023, compared to $62.4 billion at December 31, 2022. The increase in liabilities is due primarily to an increase in total deposits and borrowings. Total deposits increased $1.7 billion, or 3.1%, to $55.3 billion at December 31, 2023. The increase in deposits from December 31, 2022 was driven by increases in interest-bearing demand deposits of $6.4 billion and certificates of deposit of $5.1 billion, partially offset by decreases in non-interest-bearing demand deposits of $5.2 billion and savings and money market accounts of $4.6 billion. Other borrowings also increased $931 million due to an increase in overnight borrowings, partially offset by decreases in long-term borrowings.

Total stockholders’ equity increased by $722 million, or 13.5%, to $6.1 billion at December 31, 2023, compared to $5.4 billion at December 31, 2022. 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 dividends to common and preferred stockholders.

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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:

The carrying value of debt securities increased $4.2 billion, or 50.3%, from December 31, 2022. The increase in investment securities is largely attributable to purchases of U.S. Treasury securities, offset by sales of CLOs, MBS, and tax-exempt securities. The Company increased its investment in U.S. Treasury securities during 2023 as part of its balance sheet repositioning efforts and to hold additional high quality liquid assets. The Company's U.S. Treasury security portfolio consists primarily of U.S. Treasury bills maturing in one year or less.

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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, 2023 are summarized in the table below:

(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 65% of its MBS are GSE issued. The MBS that are not GSE issued consist primarily of investment grade securities, including $1.1 billion rated AAA and $26 million rated AA.

Gross unrealized losses on the Company's AFS securities at December 31, 2023 relate primarily to changes in interest rates and other market conditions 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 an ACL of $1 million on the Company's AFS securities was required at December 31, 2023.

The credit loss model 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, 2023, the Company recognized $2.6 million provision for credit losses on HTM securities, compared to no provision of credit losses of for the same period in 2022, resulting in a total allowance of $7.8 million and $5.2 million as of December 31, 2023 and 2022, respectively.

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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. These loans have historically made up substantially all of the balance of loans HFS. However, as part of the Company's balance sheet repositioning strategy, the Company transferred $6.6 billion of loans, net of a fair value loss adjustment (primarily commercial and industrial loans) to HFS during the year ended December 31, 2023. The Company completed loan dispositions from this transferred loan pool totaling $4.3 billion through September 30, 2023 and transferred all remaining HFS loans back to HFI at the end of the period as a result of a change in management's intentions. At December 31, 2023, the loans HFS balance totaled $1.4 billion, compared to $1.2 billion at December 31, 2022. The increase in loans HFS from December 31, 2022 relates to agency conforming loans.

Loans HFI

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

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 $108 million and $141 million reduced the carrying value of loans as of December 31, 2023 and 2022, respectively. Net unamortized purchase premiums on acquired and purchased loans of $177 million and $195 million increased the carrying value of loans as of December 31, 2023 and 2022, respectively.

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The following table sets forth the amount of loans outstanding by type of loan as of December 31, 2023 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.

At December 31, 2023, total loans consisted of 58.3% with variable rates and 41.7% with fixed rates, compared to 55.9% with variable rates and 44.1% with fixed rates at December 31, 2022. As of December 31, 2023, approximately $22.3 billion, or 76.2%, of total variable rate loans were subject to rate floors with a weighted average interest rate of 4.6%. At 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%.

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Concentrations of Lending Activities

The Company monitors concentrations of lending activities at the product and borrower relationship level. As of December 31, 2023 and 2022, no borrower relationships at both the commitment and funded loan level exceeded 5% of total loans HFI.

Commercial and industrial loans made up 38% and 40% of the Company's HFI loan portfolio as of December 31, 2023 and 2022, respectively.

In addition, the Company's loan portfolio includes significant credit exposure to the CRE market as CRE related loans accounted for approximately 33% and 29% of total loans at December 31, 2023 and 2022 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 table presents the composition by property type and weighted average LTV of the Company’s CRE non-owner occupied loans:

(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 December 31, 2023:

The following table presents the scheduled maturities of the Company’s CRE non-owner occupied loans as of December 31, 2023:

Approximately $2.4 billion, or 4.7%, of total loans HFI consisted of CRE non-owner occupied office loans as of December 31, 2023, compared to $2.4 billion, or 4.6%, as of December 31, 2022. Of the non-owner occupied office loan balance as of

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December 31, 2023, $477 million is scheduled to mature in 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 December 31, 2023, 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. For additional discussion of the Company’s credit risk monitoring practices, see “Business – Lending Activities – Asset Quality” in Item 1 of this Form 10-K.

As of December 31, 2023 and 2022, 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 by $323 million at December 31, 2023 to $410 million from $87 million at December 31, 2022.

(1)Includes loan modifications and borrowers experiencing financial difficulty of $111 million and TDR loans of $12 million at December 31, 2023 and 2022, respectively.

(2)Excludes government guaranteed residential mortgage loans of $399 million and $582 million at December 31, 2023 and 2022, respectively.

Interest income that would have been recorded under the original terms of nonaccrual loans was $12.3 million, $4.7 million, and $5.3 million for the years ended December 31, 2023, 2022, and 2021, respectively.

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

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Restructurings for Borrowers Experiencing Financial Difficulty

The Company adopted the amendments in ASU 2022-02, which eliminated the accounting guidance on TDR loans for creditors and requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty made on or after January 1, 2023.

The following table presents the amortized cost of loans HFI that were modified during the period by loan portfolio segment:

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

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. During the year ended December 31, 2023, the Company completed modifications of EBO loans with an amortized cost of $225 million. These modifications were largely payment delays and term extensions, or both.

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Troubled Debt Restructured Loans

Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. The loan terms that were modified or restructured due to a borrower’s financial situation included, but were 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 were extensions in terms or deferral of payments which result in no lost principal or interest. Consistent with regulatory guidance, a TDR loan subsequently modified in another restructuring agreement but had shown sustained performance and classification as a TDR, was removed from TDR status provided that the modified terms were market-based at the time of modification.

The following table presents TDR loans:

As of December 31, 2022, the ACL on TDR loans totaled $4 million and there were no outstanding commitments on TDR loans.

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:

During the years ended December 31, 2023 and 2022, net loan charge-offs to average loans outstanding were 0.06% and approximately 0.00%, 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 $31.6 million and $47.0 million at December 31, 2023 and 2022, respectively, and is included in Other liabilities on the Consolidated Balance Sheets. The decrease in the ACL related to off-balance sheet credit exposures is due to lower unfunded loan commitments at December 31, 2023 compared to December 31, 2022.

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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:

Mortgage Servicing Rights

The fair value of the Company's MSRs related to residential mortgage loans totaled $1.1 billion as of December 31, 2023 and 2022.

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

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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, 2023 and 2022.

The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events or circumstances indicate the carrying value may not be recoverable. During the year ended December 31, 2023, the Company performed an interim Step 0 goodwill impairment assessment as of each interim quarter end date, based on the industry disruption from the bank failures in 2023. The Step 0 assessment included assessing the financial performance of the Company and analyzing qualitative factors applicable to the Company. As of each interim testing date, the Company did not believe these events or circumstances significantly altered the long-term financial performance of the Company. Accordingly, it was determined that it was more likely than not the fair value of the Company and its reporting units exceeded their respective carrying values. The Company elected to perform a Step 1 goodwill impairment assessment as of October 1, 2023 and determined the fair value of the Company and its reporting units exceeded their respective carrying values and therefore, no goodwill impairment was recorded as a result of the evaluation.

During the years ended December 31, 2022 and 2021, 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:

Deferred Tax Assets

As of December 31, 2023, the net DTA balance totaled $287 million, a decrease of $24 million from $311 million as of December 31, 2022. This decrease in the net deferred tax asset was primarily the result of increases in the fair market value of AFS securities and decreases to credit carryforwards that were not fully offset by the decrease to MSR DTLs.

As of December 31, 2023 and 2022, 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 $55.3 billion at December 31, 2023 from $53.6 billion at December 31, 2022, an increase of $1.7 billion, or 3.1%. By deposit type, the increase in deposits is attributable to increases in interest-bearing demand deposits of $6.4 billion and certificates of deposit of $5.1 billion, partially offset by decreases in non-interest-bearing demand deposits of $5.2 billion and savings and money market accounts of $4.6 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, 2023, the Company had $13.3 billion of these reciprocal deposits, compared to $2.8 billion at December 31, 2022. At December 31, 2023 and 2022, the Company also had wholesale brokered deposits of $6.6 billion and $4.8 billion, respectively.

In addition, deposits for which the Company provides account holders with earnings credits or referral fees totaled $17.8 billion and $12.9 billion at December 31, 2023 and 2022, respectively. The Company incurred $422.5 million and $162.8 million in deposit related costs on these deposits during the year ended December 31, 2023 and 2022, respectively. These costs are

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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.

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

At December 31, 2023 and 2022, the Company had total uninsured deposits of $15.2 billion and $29.5 billion, respectively. Total U.S. time deposits in excess of the FDIC insurance limit were $1.0 billion and $1.1 billion at December 31, 2023 and 2022, respectively.

The table below discloses the remaining maturity for estimated uninsured time deposits as of December 31, 2023: