Q4 2023 Western Alliance Bancorp Earnings Call
[music].
Yeah.
Speaker Change: Good day, everyone and welcome to Western Alliance Bank Corporation fourth quarter 2023 earnings call.
Speaker Change: You May also view the presentation state via webcast through the company's website at Ww don't Western Alliance Bank Corporation don't come.
Miles: I'd now like to turn the call over 10 miles from Delek director of Investor Relations and corporate development. Please go ahead.
Miles: Thank you Youre welcome Western Alliance Bank fourth quarter 2023 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Officer, and Tim Bruckner, Chief Banking Officer will join for Q&A before I hand, the call over to Ken. Please note that today's presentation contains forward looking statements which are.
Miles: Subject to risks uncertainties assumptions, except as required by law the companies to undertake any obligation to update any forward looking statement for more complete discussion of the risks uncertainties that cause actual results to differ materially from any forward looking statements. Please refer to the company's SEC filings, including the form 8-K filed yesterday, which are available on the company's website now for opening remarks, I'd like to turn.
Miles: On the call over to Ken Vecchione, Thank you miles and good morning, everyone I'll make some brief comments about our fourth quarter and full year 2023 earnings before turning the call over to Dale who will review our financial results in more detail. After I discuss our 2024 outlook, Tim Bruckner will join us as usual for Q&A.
Kenneth A. Vecchione: Western Alliance's diversified national commercial business strategy continued to drive strong momentum in the fourth quarter as we generated earnings per share of $1 33, or $1 91, excluding 58.
Kenneth A. Vecchione: One time notable items the quarter featured both healthy balance sheet growth and additional balance sheet repositioning actions to further optimize our funding base looking past. These notable items, which Dale will explain shortly highlights for the quarter included solid loan and deposit growth ongoing capital and liquidity.
Kenneth A. Vecchione: Quiddity accumulation and continued stable asset quality.
Deposit growth of $1 billion allowed us to continue to selectively reduce debt and borrowings in Q4, we fully repaid $1 $3 billion of advances from the bank term funding program as well as <unk>.
Kenneth A. Vecchione: $300 million six 5% Amira Holmes senior notes, which were not replaced with new borrowings regarding the Amira home notes, we seized an opportunity to repay this higher cost debt at a discount. Additionally, our portion of the industry wide FDIC special assessment to replenish the.
Kenneth A. Vecchione: Insurance fund totaled $66 3 million loans.
Kenneth A. Vecchione: Loans rose $850 million in the quarter bolstered by C&I growth within our regional footprint.
Kenneth A. Vecchione: <unk> begins 2024 supported by a strong capital base and liquidity position.
Kenneth A. Vecchione: One expanded approximately 150 basis points during the year to 10, 8%.
Kenneth A. Vecchione: Which equates to nine 8% when including a OCI, 80% of our deposits are either insurer collateralized, which ranks among the highest levels of the 50 largest U S bank despite.
Kenneth A. Vecchione: Despite the industry challenges, our total deposits increased 3% year over year asset quality also remains in very good shape with limited net charge offs of only six basis points of average loans in 2023 limited realized losses amidst a normalized credit backdrop is indicative in our view.
Kenneth A. Vecchione: You have the merits of lending with low advance rates adhering to concern conservative underwriting standards and approaching credit mitigation proactively kantar.
Kenneth A. Vecchione: Continuing to shift our funding base from borrowings to core deposits better positions us to grow loans in a rate environment and flux likely to decline later this year, we have made investments and leadership.
Kenneth A. Vecchione: <unk> in order to drive increase C&I growth in our regional footprint expand fee income opportunities across client relationships and complement the growth in our national business lines, particularly our leading Nash a leading deposit focus verticals overall in 2024, we look forward to consistent balance sheet in <unk>.
Kenneth A. Vecchione: Growth with higher liquidity and improving capital this will empower western aligns to continue partnering with our clients on their most important projects that we will now take you through the financial performance after which I will provide you with our 2020 for outlook.
Speaker Change: Thanks again for the year Western Alliance produced net revenue of $2 6 billion net income of 722 million and EPS of $6 54, net revenue increased 3% from the prior year, demonstrating the durability and flexibility of our business model net.
Net interest income rose $123 million or approximately 6% to over $2 3 billion, notwithstanding our curtailed loan growth and the completion of a series of asset sales earlier in the year non.
Speaker Change: Noninterest income declined $44 million or 281, our repositioning actions the impact of fair value marks as well as the slower mortgage purchase market.
Speaker Change: Noninterest expense of $1 6 billion increased 466 million a year over year, primarily due to higher earnings credit rates and deposit costs driven by the rising rate environment.
Speaker Change: Turning to the fourth quarter trend and business drivers, we generated reported pre provision net revenue of $220 million net income of 148 million and EPS of $1 33, as part of the balance sheet optimization efforts conducted earlier to support and improve our earnings trajectory.
Good day, everyone. Welcome to Western Alliance Bank Corporation's fourth quarter 2023 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebankcorporation.com. I'd now like to turn the call over to Miles Pundelic, Director of Investor Relations and Corporate Development. Please go ahead.
Speaker Change: Prepaid $300 million of American <unk> senior notes at a discount we utilize these gains to better position the balance sheet by selling securities as well as MSR fair value adjustments in sales, which combined to produce a pre tax loss of $4 5 million. In addition to the $66 million FDIC special assessment.
Brad Milsaps: Thank you and welcome to Western Alliance Bank's fourth quarter 2023 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Officer, and Tim Bruckner, Chief Banking Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements that are subject to risk, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the form I gave out yesterday, which Now, for opening remarks, I'd like to turn the call over to Ken Vecchione. Thank you, Miles, and good morning, everyone.
Speaker Change: Including these onetime notable items, we generated adjusted net income of $211 million and EPS of $1 91.
Speaker Change: Net interest income increased $4 $7 million during the quarter to $592 million from higher average, earning asset balances and reduced higher bar higher cost borrowings.
GAAP noninterest income was $91 million or excluding notable items of $126 million, which was down approximately $3 million from Q3 during the quarter. While also approximately $200 million of mortgage servicing rights, which improved our capital ratios. Despite incurring a loss of $11 million on disposition.
Kenneth A. Vecchione: I'll make some brief comments about our fourth quarter and full year 2023 earnings before turning the call over to Dale, who will review our financial results in more detail. After I discuss our 2024 outlook, Tim Bruckner will join us, as usual, for Q&A. Western Alliance's diversified national commercial business strategy continued to drive strong momentum in the fourth quarter as we generated earnings per share of $1.33, or $1.91 excluding $0.58 of one-time notable items.
Speaker Change: As prepayment speeds began to recover from historically low levels the valuation of mortgage servicing rights move lower at an accelerated pace, which resulted in a $14 million fair value adjustments net of hedging.
We don't believe this aggregate $25 million charge is indicative of the earnings profile of our mortgage banking business locked volumes rebound and 29% year over year and may be indicative of continued momentum into 2024.
Kenneth A. Vecchione: The quarter featured both healthy balance sheet growth and additional balance sheet repositioning actions to further optimize our funding base. Looking past these notable items, which Dale will explain shortly, highlights for the quarter included solid loan and deposit growth, ongoing capital and liquidity accumulation, and continued stable asset quality. The positive growth of $1 billion allowed us to continue to selectively reduce debt and borrowings. In Q4, we fully repaid $1.3 billion of advances from the bank term funding program as well as $300 million, 6.5% from Merrill Holmes' senior notes, which were not replaced with new borrowings. Regarding the AmeriHolm notes, we seized an opportunity to repay this higher-cost debt at a discount.
Speaker Change: Since the December rate rally, and resulting lower mortgage rates, we have experienced incremental refinance volume and Permian margins should mortgage rates trend lower in future quarters. We would expect this business to benefit which has not been captured in our go forward guidance.
Speaker Change: Additionally income from equity investments was elevated by approximately $8 million due to outsized gains from solar tax credit investments with higher than expected performance during the quarter.
Speaker Change: GAAP non interest expense was $462 million or excluding noted items 435 million quarterly increase of 9 million.
Speaker Change: Deposit cost growth growth slowed markedly increasing $3 million in Q4, as our settlement services and homeowners Association businesses experienced strong growth from new customers surpassed seasonal declines in mortgage warehouse.
Kenneth A. Vecchione: Additionally, our portion of the industry-wide FDIC special assessment to replenish the Deposit Insurance Fund totaled $66.3 million. Loans rose $850 million in the quarter, bolstered by C&I growth within our region. West Alliance begins 2024 supported by a strong capital base and liquidity position. CDT-1 expanded approximately 150 basis points during the year to 10.8%, which equates to 9.8% when including AOCR. 80% of our deposits are either insured or collateralized, which ranks among the highest levels of the 50 largest U.S. banks.
Speaker Change: Provision expense was $9 3 million, reflecting steady asset quality lastly, our effective tax rate of approximately 30% was temporary temporarily elevated in Q4, primarily because of timing issues related to low income housing units that were not placed into service in 2023.
<unk> thousand 20 for tax rates should reset the 22% to 23%.
Speaker Change: Loans held for investment grew $850 million to $50 3 billion, while deposits increased $1 billion to $55 three at quarter end.
Speaker Change: Mortgage servicing rights declined to $1 1 billion from MSR sales and reduced valuations, resulting from the lower rate environment overall.
Speaker Change: Overall, we continue to build high quality liquid asset levels and on balance sheet liquidity will be a strong deposit growth.
Kenneth A. Vecchione: Despite the industry's challenges, our total deposits increased 3% year-over-year. Asset quality also remains in very good shape, with limited net charge-offs of only six basis points of average loans in 2023. Limited realized losses amidst a normalized credit backdrop is indicative, in our view, of the merits of lending with low advance rates, adhering to conservative underwriting standards, and approaching credit mitigation proactively. Continued to shift our funding base from borrowings to core deposits better positions us to grow loans in a rate environment and with volatility likely to decline later this year. We have made investments and leadership additions in order to drive increased C&I growth in our regional footprint, expand fee income opportunities across client relationships, and complement the growth in our national business lines, particularly our leading deposit business. Overall, in 2024, we look forward to consistent balance sheet and BPNR growth with higher liquidity and improving capital. This will empower Western Alliance to continue partnering with our clients on their most important projects.
Speaker Change: Debt repayments previously discussed reduced investments in cash by $351 million from September 30th strong deposit growth over the last three quarters has allowed us to cut total borrowings and debt by half from the end of Q1.
Speaker Change: Finally, tangible book value per share increased $3, six or 7% over the prior quarter and 16% year over year to $46 72 from retained earnings and reduced drag from negative all other comprehensive income.
Loans held for investment growth was predominantly from C&I categories, some of which we made at higher end line utilization.
Construction and land loans are up $220 million with a little under half of this contribution from lot banking given the national under supply of homes at a greater likelihood of near term rate cuts. We are still positive about the macroeconomics for this business.
Speaker Change: Deposit growth of $1 billion was achieved despite typical seasonal declines in mortgage warehouse deposits related to tax and insurance payments. We continue to experience broad based growth from our specialized value added deposit channels HOA had its best Q4 ever and we believe it will retain and possibly extend its leading.
Kenneth A. Vecchione: Dale will now take you through the financial performance, and afterwards, I will provide you with our 2024 outlook. Thank you, Ken.
Speaker Change: Market share in the country that achieved in Q3 of last year.
Dale M. Gibbons: For the year, Western Alliance produced net revenue of $2.6 billion, net income of $722 million, and EPS of $654 million. Net revenue increased 3% from the prior year, demonstrating the durability and flexibility of our business model. That interest income rose $123 million, or approximately 6%, to over $2.3 billion, notwithstanding our curtailed loan growth and the completion of a series of asset sales earlier in the year. Non-interest income declined $44 million to $281 million due to repositioning actions, the impact of fair value marks, as well as the slower mortgage purchase market.
Settlement services Tech and innovation corporate Trust and our digital consumer channel all grew materially contributed to well diversified growth.
Noninterest bearing DDA comprised 26% of total deposits of which 45% have no cash payment of earnings credits.
Speaker Change: The decline in noninterest bearing balances was primarily driven by the expected 3 billion decrease from typical mortgage warehouse seasonality of property tax and insurance escrow funds. There has been no client attrition associated with these outflows and this decline is recovering as anticipated this quarter.
Dale M. Gibbons: Non-interest expense of $1.6 billion increased $466 million year-over-year primarily due to higher earnings credit rates and deposit costs driven by the rising rate environment. Turning to the fourth quarter trends in business drivers, we generated reported pre-provisioned net revenue of $220 million, net income of $148 million, and EPS of $1.33. As part of the balance sheet optimization efforts conducted earlier to support and improve our earnings trajectory, we repaid $300 million of AmeriHome Senior Nodes at a discount. We utilized this gain to better position the balance sheet by selling securities, as well as MSR fair value adjustments and sales, which combined produced a pre-tax loss of $4.5 million, in addition to the $66 million FBIC special assessment. When excluding these one-time notable items, we generated an adjusted net income of $211 million, with EPS of $1.91. Net interest income increased $4.7 million during the quarter to $592 million from higher average earning asset balances and reduced higher cost borrowing. Gap non-interest income was $91 million, or excluding notable items, $126 million, which was down approximately $3 million from Q3.
Speaker Change: Turning now to net deposits net interest drivers <unk> loan yield decreased eight basis points due to the full quarter impact of the $1 $3 billion reclassification of loans from held for sale to held for investment at the end of Q3. This coincided with.
Speaker Change: Sequentially resulted in held for sale yields climbing 31 basis points going forward, we anticipate <unk> yields to continue to be supported by an average of $2 9 billion of loans repricing or maturing per quarter in 2024.
Speaker Change: The yield on total investments expanded eight basis points in Q4 to $4 99%.
Speaker Change: Securities portfolio grew $1 9 billion to $13 billion from the ongoing <unk> build which is increased treasuries for $900 million at the end of Q1 of last year to approximately $4 9 billion at year end.
Speaker Change: The cost of interest bearing deposits increased seven basis points markedly slower than the prior quarter and the total cost of funds increased two basis points to 282 due to an increase in demand deposits and lower short term borrowings.
Speaker Change: Growth in April to $768 million increase.
Speaker Change: Reduction in average short term borrowings as well as six basis points of improvement in the cost of interest bearing liabilities.
Speaker Change: In aggregate net interest income increased approximately $5 million, while the net interest margin of 365 came in at the midpoint of our Q4 guidance.
Dale M. Gibbons: During the quarter, Wall sold approximately $200 million of mortgage servicing rights, which improved our capital ratios, despite incurring a loss of $11 million on disposition. As prepayment speeds began to recover from historically low levels, the valuation of mortgage servicing rights moved lower at an accelerated pace, which resulted in a $14 million fair value adjustment net of hedging. We don't believe this aggregate $25 million charge is indicative of the earnings profile of our mortgage banking business.
Speaker Change: Net interest income growth was exceeded by the growth rate of average earning assets.
Speaker Change: Noninterest expenses were impacted by $27 million net notable items this quarter adjusting for these onetime items as well as deposit costs. Our adjusted efficiency ratio was what rose 100 basis points to 51% we.
We expect deposit costs will experience really from a cessation of rate hikes and should fall as rates decline.
Speaker Change: For historical context average ECR balances were $19 9 billion in the fourth quarter compared to $17 billion in Q3, and $15 4 billion in Q4 of 'twenty two.
Dale M. Gibbons: Loss volume has rebounded to 29% year-over-year and may be indicative of continued momentum into 2024. Since the December rate rally and the resulting lower mortgage rates, we have experienced incremental refinance volume and firming margins. Should mortgage rates trend lower in future quarters, we would expect this business to benefit, which has not been captured in our go-forward guidance. Additionally, income from equity investments was elevated by approximately $8 million due to outside gains from solar tax credit investments with higher than expected performance during the quarter.
Speaker Change: We expect ECR related deposits to remain a consistent relative proportion of our deposit base as total deposits grow based upon our rate forecast will generally high beta repricing for ECR related deposits, we expect <unk> pricing to largely decline in lockstep lockstep with rate cuts offsetting any potential net interest.
Speaker Change: Margin declines.
Speaker Change: Asset quality metrics continued to remain stable and in line with what we reported last quarter. The aggregate net increase in special mentioned loans and classified assets was only $7 million from the Q3 level.
Speaker Change: Nonperforming assets increased to $281 million equating to 40 basis points of total assets, which is five basis points above the third quarter.
Quarterly net loan charge offs were $8 5 million or seven basis points of average loans, which was aligned with Q3 net charge offs.
Dale M. Gibbons: The afternoon interest expense was $462 million, or excluding noted items, $435 million, a quarterly increase of $9 million. Deposit cost growth slowed markedly, increasing $3 million in Q4 as our settlement services and homeowners association businesses experienced strong growth from new customers that surpassed seasonal declines in mortgage warehouses. Provision expense was $9.3 million, reflecting steady asset quality. Lastly, our effective tax rate of approximately 30% was temporarily elevated in Q4, primarily because of timing issues related to low-income housing units that were not placed into service in 2023.
Speaker Change: Provision expense of $9 3 million was a function of loan growth and a slightly improved Moody's consensus forecast.
Speaker Change: Though our consensus and severely burst weightings for our ACL sills incorporated 80% recessionary outlook.
Speaker Change: Our allowance increased $10 million from the prior quarter to $337 million in the ACL ratio was 73 basis points covering 135% of nonperforming loans.
Looking at the reserve block Youll see an updated look on that on the context behind our allowance, which when considering insured loans and those in localized categories. The allowance shifts up to 131% of loans.
Speaker Change: Our CET one ratio rose 20 basis points to 10, 8% or nine 8% when adjusted for the OCI debit.
Speaker Change: Tangible common equity to total assets grew approximately 50 basis points from Q3 to seven 3% from earnings and the improvement in the.
Dale M. Gibbons: The 2024 tax rate should reset to 22% to 23%. Lotel for investment grew $850 million to $50.3 billion, while deposits increased $1 billion to $55.3. Morgan Servicing Rights declined to $1.1 billion from MSR sales and reduced valuations resulting from the lower rate environment.
Speaker Change: The improved OCI position.
Speaker Change: Tangible book value per share increased $3 six from Q3 to 46 72 from earnings and recapture of OCI marks the $220 million improvement in iOS.
Speaker Change: Resulted from substantial decreases in intermediate term treasury rates during the quarter.
Speaker Change: Our consistent upward trajectory intangible book value per share has outpaced peers by almost <unk> in 2013, including strong growth in 2023.
Speaker Change: Over most of our time periods Western Alliance continues to generate a top quartile total shareholder return relative to both asset size peers and the regional banking index.
Dale M. Gibbons: Overall, we continue to build high-quality liquid asset levels and on-balance sheet liquidity via strong deposit growth. However, debt repayments as previously discussed reduced investments in cash by $351 million from September 30th. Strong deposit growth over the last three quarters has allowed us to cut total borrowings and debt by half from the end of Q1. Finally, TANs' book value per share increased $3.06, or 7%, over the prior quarter and 16% year-over-year to $46.72 for retained earnings and reduced drag from negative all other comprehensive income. Most help for investment growth was predominantly from C&I categories, some of which we rooted in higher-end line utilization. Construction and land loans grew by $220 million, with a little under half of this contribution from lot banking. Given the national undersupply of homes and a greater likelihood of near-term rate cuts, we are still positive about the macroeconomics for this business. The deposit growth of $1 billion was achieved despite typical seasonal declines in mortgage warehouse deposits related to tax and insurance payments.
Kenneth A. Vecchione: Call back to Ken.
Kenneth A. Vecchione: Thanks to all our guidance for 2024 is to build on the second half momentum momentum on 2023 and progress towards returning to above industry returns in the first half of 2024, the company will emphasize liquidity growth over loan growth drive capital above 11% and further build our HQ.
Kenneth A. Vecchione: July portfolio, which will temper our earnings growth for the first half of the year. As these goals are achieved earnings momentum will accelerate in the second half of 2024 and into 2025. So for the full year of 2024, we expect continue.
Kenneth A. Vecchione: Continued thoughtful balance sheet growth driven by our diversified business model within our origination mix designed to drive net interest income above 2023 levels loan and core deposits are expected to grow 2 billion and $8 billion, respectively for the year core deposits driven growth should continue to push our loan.
Kenneth A. Vecchione: The deposit ratio towards the mid 80% level by the middle of this year.
Regarding capital, we are targeting a CET one ratio above 11%, reflecting steady organic capital accumulation in concert with balance sheet growth.
Dale M. Gibbons: We continue to experience broad-based growth from our specialized, value-added deposit channels. HOA had its best Q4 ever, and we believe it will retain and possibly extend its leading market share in the country that it achieved in Q3 of last year. Settlement Services, Tech and Innovation, Corporate Trust, and our Digital Consumer Channel all grew materially and contributed to well-diversified growth. Non-interest bearing DDAs comprise 26% of total deposits, of which 45% have no cash payment of earnings credit.
Kenneth A. Vecchione: Net interest income should grow 5% to 10% from Q4 2023 annualized jumping off point. This forecast assumes for 25 basis point cut back loaded in the year, we expect any future NIM compression, resulting from the rate cuts to be matched by comparable depart.
Kenneth A. Vecchione: Is it cost declines in noninterest expense, which will be accretive to earnings noninterest income should increase increased 10% to 20% from an adjusted 2023 baseline level of 397 $397 million, which excludes 2020 threes mark to market adjustments and the impact of asset sales as we price.
Dale M. Gibbons: The decline in non-interest-bearing balances was primarily driven by the expected $3 billion decrease from typical mortgage warehouse seasonality of property tax and insurance escrow funds. There has been no client attrition associated with these outflows, and this decline is recovering as anticipated this quarter. Printing out a net interest driver's HFI loan yield decreased eight basis points due to the full quarter impact of the $1.3 billion reclassification of loans from held for sale to held for investment at the end of Q3, which coincidentally resulted in helper sale yields climbing 31 basis points. Going forward, we anticipate HFI yields to continue to be supported by an average of $2.9 billion of loans repricing or maturing per quarter in The Obama total investments expanded 8 basis points in Q4 to 4.99%.
Kenneth A. Vecchione: <unk> growing commercial banking related fee income from holistic customer relationships mortgage banking related income will be somewhat dependent on the rate environment and mortgage volume.
Kenneth A. Vecchione: I should say and mortgage buying but we are encouraged that with the recent low rate environment application volume is picking up with firmer margins. Thus far in early 2020 for noninterest expense inclusive of the ECR related deposit costs should rise only zero to 2% from an annualized.
Kenneth A. Vecchione: Adjusted Q4 baseline of $1 $7 million 741 billion and.
Kenneth A. Vecchione: And allow for continued operating leverage in aggregate. These factors will enable wall to consistently grow <unk> throughout the year.
Asset quality remains manageable.
Kenneth A. Vecchione: Rejects continuum, we project continue.
Kenneth A. Vecchione: <unk> from our sponsors based on our conservative underwriting and low advance rates net charge offs are expected to be 10 to 15 basis points for the year as the economic cycle Normalizes Lastly, we expect the effective tax rate to revert between 22 and 23% starting in Q1.
Dale M. Gibbons: The securities portfolio grew $1.9 billion to $13 billion from the ongoing H2OA bill, which increased Treasuries from $900 million at the end of Q1 of last year to approximately $4.9 billion at year-end. The cost of interest-bearing deposits increased 7 basis points, markedly slower than the prior quarter, and the total cost of funds increased 2 basis points to 2.82 due to an increase in demand deposits and lower short-term borrowing. Foster Group enabled a $768 million increase, a reduction in average short-term borrowings as well as expansive points of improvement in the cost of interest-bearing liabilities. In aggregate, net interest income increased approximately $5 million, while the net interest margin of $365 came in at the midpoint of our Q4 guidance. This net interest income growth was exceeded by the growth rate of average earning assets. Non-interest expenses were impacted by $27 million in net notable items this quarter.
Kenneth A. Vecchione: At this time.
Kenneth A. Vecchione: Tim down line are happy to take your questions.
Speaker Change: As a reminder, lighthouse question E compression slipped by one on the telephone keypad.
Speaker Change: <unk>, you're on mute locally when asking a question.
Speaker Change: Yeah.
Speaker Change: Our first question today comes from Casey Haire of Jefferies.
Casey Haire: Please go ahead.
Casey Haire: Yes, thanks, good morning, everyone.
So wanted to start on.
Casey Haire: The four cuts and how that impacts.
Casey Haire: The PPA in our guide obviously hits you guys a number of ways.
Dale I think you said that it does not.
Casey Haire: <unk> does not account for any upside in mortgage banking.
Casey Haire: It sounds like the deposit costs with an expenses are 100% beta.
Casey Haire: Can you just confirm that and then.
The four cuts how would that what kind of deposit beta are you.
<unk> four.
Casey Haire: The non ECR component.
Casey Haire: And how that would impact your NII.
Speaker Change: Yeah in aggregate I mean getting into <unk> that the net impact is fairly nominal.
Speaker Change: As we've indicated in the past if you just look at net interest income were modestly asset sensitive so that would be a little bit of a decorate but of course, you alluded to the ECR price deposits, which we expect to fall and fall in lockstep. So put those together, we think we're again down modestly.
Dale M. Gibbons: Adjusting for these one-time items, as well as deposit costs, our adjusted efficiency ratio rose 100 basis points to 51 percent. We expect deposit costs will experience relief from a cessation of rate hikes and should fall as rates decline. For historical context, average UCR balances were $19.9 billion in the fourth quarter compared to $17 billion in Q3 and $15.4 billion in Q4 of 22. We expect ECR-related deposits to remain a consistent, relative proportion of our deposit base as total deposits grow. Based upon our rate forecast and generally high beta repricing for ECR-related deposits, we expect such pricing to largely decline in lockstep with rate cuts, offsetting any potential net interest margin decline. Asset quality metrics continue to remain stable and in line with what we reported last quarter.
Speaker Change: Modestly liability sensitive and we have a net benefit than in <unk>, excluding the <unk> piece, which which has the option on this.
Speaker Change: Call option, if things get that much better in this space.
Speaker Change: Okay. So a marathon would be gravy, if it did but obviously if it's back half loaded it might it might be modest.
Speaker Change: Yes, yes, so the mix might look a little different I mean, if you had a more accelerated rate decline, maybe youre going to see.
Speaker Change: A faster decline, perhaps in net interest income, reflecting the net interest income profile that we have but again, we layer in the deposit cost I think it's going to eliminate that.
Okay.
Speaker Change: And then so the loan to deposit growth guide for 'twenty for you got $6 billion of liquidity to play with what is what is the plan for that build build the bond book build cash pay down borrowings just wondering what your plans are there.
Speaker Change: Yes, so when I think about the year I think about it.
Dale M. Gibbons: The aggregate net increase in special mentioned loans and classified assets was only $7 million from the Q3 level. Non-performing assets increased to $281 million, equating to 40 basis points in total assets, which is 5 basis points above the third quarter. Quarterly net loan charge-offs were $8.5 million, or seven basis points of average loans, which was aligned with Q3 net charge-offs. The provision expense of $9.3 million was a function of loan growth and a slightly improved Moody's consensus forecast. The group, though our consensus and severely burst weightings for our ACL still incorporate an 80% recessionary outlook, is allowed to increase $10 million from the prior quarter to $337 million, and the ACL ratio was 73 basis points, covering 135% of non-performing loans.
Speaker Change: The first half of the year, we are building the liquidity profile as you mentioned with that we're really going to build our HQ.
Portfolio and we're looking to drive our loan to deposit ratios as I said in the mid eighties from there.
Speaker Change: It's.
Speaker Change: It's growth.
Speaker Change: It's a much bigger and better 2025, so we need to continue to reposition ourselves. We think we'll have that done by the end of the.
Speaker Change: The second quarter.
Speaker Change: And then it'll be a little bit more traditional earnings as you see them as you have seen historically from us.
Speaker Change: But I would say.
Speaker Change: When you think about it the deposit and loans are more coming in across the year and are in a ratable fashion and about 500 million per.
Dale M. Gibbons: Looking at the reserve loss, you'll see an updated look at the context behind our allowance, which when considering insured loans and those in low-loss categories, the allowance shifts up to 1.31% of loans. Our CG1 ratio rose 20 basis points to 10.8%, or 9.8% when adjusted for the AOCI debit, tangible common equity to total assets increased by approximately 50 basis points from Q3 to 7.3% from earnings and the improved AOCI position. Tangible book value per share increased $3.06 from Q3 to $46.72 from earnings and recapture of AOCI marks. The $220 million improvement in AOCI resulted from substantial decreases in intermediate-term treasury rates during the quarter. Our consistent upward trajectory and tangible growth value per share has outpaced peers by almost 5x since 2013, including strong growth in 2023. Over most time periods, Western Alliance continues to generate a top quartile total shareholder return relative to both asset size peers and the Regional Banking Index. I'm going to call back to Ken.
Speaker Change: Per quarter for loans, and approximately $2 billion per quarter for deposits.
Speaker Change: Gotcha. Thank you and then just last one Dale you mentioned the <unk>.
Speaker Change: The DDA.
Speaker Change: It sounds like it's recovering seasonally within mortgage warehouses, just any update you can share on how much of that $3 billion has come back in.
Dale M. Gibbons: Well, so it's really based upon semiannual property tax payments largely in California.
Dale M. Gibbons: And so so we would expect that we're going to get.
Dale M. Gibbons: No.
Dale M. Gibbons: Half of that or two thirds of that this quarter and then the rest that would start coming in.
Dale M. Gibbons: The payments due in may are less dramatic in terms of kind of the.
Dale M. Gibbons: The dip that we see Meanwhile, other warehouse bonds.
Dale M. Gibbons: To be look to be growing.
Dale M. Gibbons: Distantly and and we're also off to a good start in our HOA bids for Q1.
Speaker Change: Let me just add.
Speaker Change: Right now we're on track to beat the $2 billion for our Q1.
Kenneth A. Vecchione: Thanks, Dale. Our guidance for 2024 is to build on the second-half momentum of 2023 and progress towards returning to above-industry returns. In the first half of 2024, the company will emphasize liquidity growth over loan growth, drive capital above 11 percent, and further build our HQIA portfolio, which will temper earnings growth for the first half of the year. However, as these goals are achieved, earnings momentum will accelerate in the second half of 2024 and into 2025. So for the full year of 2024, we expect continued, thoughtful, balance sheet growth driven by our diversified business model with an origination mix designed to drive net interest income above 2023 levels. Loan and core deposits are expected to grow $2 billion and $8 billion, respectively, for the year.
Speaker Change: And that's inclusive of the HOA deposits coming back in.
Speaker Change: Great. Thanks, guys.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Next question comes from Steven Alexopoulos from J P. Morgan.
Operator: It is now open. Please go ahead.
Steven A. Alexopoulos: Hi, everybody.
Steven A. Alexopoulos: Wanted to start on the margin. So you were $3 65 in the quarter right in the middle of what you had guided to.
Steven A. Alexopoulos: Neal for you how should we think about the NIM trending the backdrop of four cuts and then it's funny when I look at where the NIM was when we had a more normal curve. I mean, you guys are like $4 50, but just a completely different balance sheet today so assuming.
Steven A. Alexopoulos: Get a normal curve normal level of rates.
Steven A. Alexopoulos: What's a reasonable NIM for this balance sheet.
Steven A. Alexopoulos: So.
Kenneth A. Vecchione: Core deposits-driven growth should continue to push our loan-to-deposit ratio towards a mid-80% level by the middle of this year. Regarding capital, we are targeting a CDP-1 ratio above 11%, reflecting steady organic capital accumulation in concert with balance sheet growth. That interest income should grow 5 to 10% from a Q4 2023 annualized jumping off point. This forecast assumes four 25 basis point cuts backloaded during the year. We expect any future NIM compression resulting from the rate cuts to be matched by comparable deposit cost declines in non-interest expense, which will be accretive to earnings.
Speaker Change: Hello, Steve US Ken what I would say is again thinking about the year. The first two quarters of the year NIM should track.
Speaker Change: Consistent with our Q4 NIM of $3 65, and then Q3 and Q4, the NIM will gently roll down as the price as the rate cuts to come into play, but offsetting that NIM decline will be.
Speaker Change: The reduction in ECR expenses.
So what's transpired is we have and we expect to continue to have considerably more liquidity on the balance sheet.
Speaker Change: Is going to kind of depressed NIM and it basically a permanent basis, where can we be kind of going forward I think we could be closer to kind of where we are maybe the three and a half range is kind of sustainable kind of over and over.
Kenneth A. Vecchione: Non-interest income should increase 10 to 20% from an adjusted 2023 baseline level of $397 million, which excludes 2023's mark-to-market adjustments and the impact of asset sales as we prioritize growing commercial banking-related fee income from holistic customer relations. Mortgage banking-related income will be somewhat dependent on the rate environment and mortgage volume, I should say. But we're encouraged that with the recent low rate environment, application volume is picking up with firmer margins thus far in early 2024. Non-interest expense, inclusive of the ECR-related deposit costs, should rise only 0 to 2 percent from an annualized adjusted Q4 baseline of $1,740,000,000 and allow for continued operating leverage. In aggregate, these factors will enable Wall to consistently grow PP&R throughout the year. Asset quality remains manageable, and we project continued support from our sponsors.
Speaker Change: Our broader economic cycle than what we would see we would probably have a little bit better return on the on the residential portfolio that we presently have but for the most part I think our numbers rather than being in the forest I think were destined for the three level here.
Speaker Change: Forward.
Speaker Change: Got it okay.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: On the expense guide. So you guys were $4 $37 million of ECR deposit costs in 'twenty three.
Speaker Change: What's assumed within this expense guidance for 2024 for the cost of ECR deposits like where is that roughly.
Speaker Change: Okay.
Speaker Change: Yes, so thats fairly fairly stable.
Speaker Change: We get to as we indicated earlier, we have a backend loaded.
Speaker Change: Pork cuts starting in June.
And the rate and so that would that would kind of curtail.
Speaker Change: Based upon based upon kind of how that plays out.
Speaker Change: That sounds good.
Speaker Change: That asset.
Speaker Change: Yes.
Kenneth A. Vecchione: Based on our conservative underwriting and low advance rates, net charge-offs are expected to be 10 to 15 basis points a year as the economic cycle normalizes. Lastly, we expect the effective tax rate to revert between 22% and 23% starting in Q1. At this time, Tim, Dale, and I are happy to take your questions. Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on the telephone keypad. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Casey Haire of Jefferies. The line is now open; please go ahead. Yeah, thanks. Good morning, everyone.
Speaker Change: Yes, sorry, so you guys all have a view.
Speaker Change: On that.
Speaker Change: Okay.
Speaker Change: Okay.
Since you're on a choppy line a little bit Steve.
Speaker Change: But I would say.
Speaker Change: Sales point.
Speaker Change: Yes.
Speaker Change: Is there.
Steve: Yes, I'm here.
Steve: Steve.
Steve: Got you that I would say just keep in mind.
Steve: Youre thinking about your question is based on total dollars and so the rate will be coming down.
Steve: Dollars may still rise as we continue to push up on deposit growth. So just keep in mind, the right volume impact there okay.
Speaker Change: Got it okay.
Speaker Change: Kevin can I, just finally ask you a big picture question. So when I look at the company right.
Kevin: We had the financial crisis, and you guys made quite a few changes after that right built out national businesses.
Casey Haire: So wanted to start on the four cuts and how that impacts the PPNR guide. Obviously, it hits you guys in a number of ways. Dale, I think you said that it does not, your fees do not account for any upside in mortgage banking. It sounds like the deposit costs within expenses are 100% beta. Can you just confirm that?
Kevin: Top decile growth for a long time, then we added March Madness, you again pivoted right. He made adjustments pushing that sure deposits changes liquidity et cetera.
Kevin: When I look at the 2024 guide it looks like more of the same in the first half, but then when we get to the second half of the year and then 2025.
Casey Haire: And then... forecasts, how would that, what kind of deposit beta are you expecting for, you know, the non-East and how that would impact? Yeah, in aggregate, I mean, to get to PP&R, the net impact is fairly nominal. I mean, as we've indicated in the past, if you just look at net interest income, we're modestly asset-sensitive, so that would be a little bit of a decrement, but, of course, you alluded to the ETR price deposits, which we expect to fall and fall in lockstep. So put those together, we think we're, again, now modestly liability-sensitive, and we'd have a Okay, so a marijuana would be gravy if it did, but obviously if it's back half-loaded... Yeah, so the mix might look a little different.
Kevin: Or does this company that look like.
Kevin: Loan growth from where we already have throttled that deposit growth are you back to a growth bank like how do you see the world right now.
Longer term for the company.
Speaker Change: Yes, good question.
Speaker Change: We started to pivot by the way.
Speaker Change: In the third quarter of 2022.
Speaker Change: With.
Speaker Change: Higher liquidity and higher capital and we certainly were very happy.
Speaker Change: Happy that we did as.
Speaker Change: As we entered March madness, it really served us well and that's informed our decision making as to why we want to keep that moving forward and as you said, we'll hop back from basically completed by the first half of 2024, then I think what youre going to see is a little bit of the same.
<unk> bank, but I don't think were going to put our foot on the accelerator as hard as we used to put it.
Casey Haire: I mean, if you had a more accelerated rate decline, maybe you're gonna see a faster decline, perhaps a net interest income, reflecting the net interest income profile that we have. But again, when you layer in the deposit cost, I think it's gonna eliminate that. And then, so the loan to deposit growth guide for 24, you got 6 billion of liquidity to play with. What is the plan for that?
Speaker Change: Pushed down on the throttle there and one reason is we never got really paid for that so up until the end of 2022, we're probably growing deposits and loans about 24%, 25% per year, and we didn't see that in our in our valuation and in fact people, we've got nervous with that and said Gee there.
Speaker Change: Must be a credit problem that was that was lurking behind but really over that period of time, we only had $29 million of net losses. So what we're going to do is we're going to be targeting for above industry trend growth.
Speaker Change: Build the bond book, build cash, pay down borrowings, just wondering what your plans are. Yeah, so when I think about the year, I think about the first half of the year, we're building the liquidity profile, as you mentioned. With that, we're really going to build our HQLA portfolio, and we're looking to drive our loan-to-deposit ratios, as I said, into the mid-80s. From there, it's growth towards a much bigger and better 2025. So we need to continue to reposition ourselves. We think we'll have that done by the end of the second quarter.
Speaker Change: Going forward in the back half of 'twenty, four and into 'twenty five and we think we will get rewarded for that and takeaway concerns that are always linger about going way back even into 2006, and seven and eight that people bring up and I think we will run from there, but we should be hiring.
Speaker Change: Our return on equity higher on return on assets.
Speaker Change: But not to the old levels of coming back to 2000 2010 to 2013 2014 2015.
Speaker Change: Okay got it.
Speaker Change: Okay. That's great color thanks for taking my questions.
Speaker Change: Well.
Speaker Change: Thank you next.
Speaker Change: And then it'll be a little bit more traditional earnings as you have seen them historically from us. But, you know, I would say, and when you think about it, the deposited loans are more coming in across the year in a routable fashion, about $500 million per quarter for loans and approximately $2 billion per quarter for deposits. Gotcha. Thank you. And then just this last one, Dale, you mentioned the...
Speaker Change: Our next question comes from Ebrahim <unk> from Bank of America.
Ebrahim: Your line is now open. Please go ahead.
Ebrahim: Hey, good morning.
Ebrahim: I guess, maybe just one bigger picture question around earnings if I have the math right.
Ebrahim: In terms of your earnings outlook.
Ebrahim: You could probably shake out on eight Bucks, an EPS for 'twenty for sure.
Should we expect EPS to dip in the first half for the accelerating in the back half of the year. How do you think about earnings growth relative to the 191, you printed in the fourth quarter, just given the moving pieces around what youre doing with each Q&A.
Speaker Change: The DDA sounds like it's recovering seasonally within mortgage warehouses. Just any update you can share on how much of that $3 billion has come back in? Well, it's really based upon semi-annual property tax payments, largely in California.
Ebrahim: The benefit of rate cuts in the back half, but would love to just the earnings trajectory that youre looking at.
Speaker Change: And so we would expect that we're going to get half of that, or two-thirds of that this quarter, and then the rest that would start coming in. The payments due in May are less dramatic in terms of the dip that we see. Meanwhile, other warehouse bonds look to be growing consistently.
Ebrahim: That's a good that's a really good question ebrahim so.
Ebrahim: Maybe implicitly in your in your comments. So the first quarter generally does have a dip and you can see this in prior years relative to <unk> and some of this is seasonal or broad based higher fiber cost of course, there is a few.
Speaker Change: And we're also off to a good start in our HOA bid for Q1. Casey, let me just add, right now we're on track to beat the $2 billion for our Q1. And that's inclusive of the HOA deposits coming back in. Great. Thanks, guys.
Ebrahim: Number of days in Q1, so as we step into that should be that should have a bit of a softer point at the beginning of the year moving into Q2.
Speaker Change: Thank you. Our next question comes from Steven Alexopoulos from J.P. Morgan. Your line is now open, please go ahead.
Ebrahim: Is going to be impacted by weekend is talking about in terms of continuing to build out and finish.
Ebrahim: At the end of the second quarter early in the third our <unk> positioning so that would result in a little lower earnings growth. During those first two periods as basically the deposit growth, which we think is going to be fairly strong is diverted into an asset class that doesn't yield as much as that changes and as our loan to deposit ratio was.
Steven A. Alexopoulos: Hi everybody, start on the margin. So you were 365 and a quarter right in the middle of what you were guided to. Dale, for you, what should we think about... the backdrop of four cuts, and then it's funny when I look at where the NIM was when we had a more normal curve. This is a completely different balance sheet. So assuming we eventually get a normal curve, a normal level of rate, what's a reasonable nymph for this?
Ebrahim: The avs.
Ebrahim: By the summer that's going to be a more proportionate growth in loans as well as deposits and so you do get.
Ebrahim: Growth rate picking up through the end of 'twenty, four and carrying into 'twenty five.
Speaker Change: That's helpful and then I guess the other question you mentioned about navigating based on the loan growth back in the day. When we think about how you are acquiring and what type of deposits you had acquiring today may begin is it different.
Steven A. Alexopoulos: So, Steve, it's Ken. What I would say is, you know, again, thinking about the year, the first two quarters of the year, NIM should track consistent with our Q4 NIM of 365. And then in Q3 and Q4, the NIM will gently roll down as the price as the rate cuts come into play. But offsetting that NIM decline will be the reduction in ECR. So what's transpired is we, you know, we have, and we expect to continue to have, considerably more liquidity on the balance sheet. And that is going to, you know, kind of depress NIM on a, basically, a permanent basis.
Speaker Change: You've obviously emphasize the regions and the deposit growth from the regions, but I'm just wondering.
If your view around large chunky deposits.
Speaker Change: Has changed given sort of the emphasis on liquidity and and then result of that should we expect you to kind of go about differently than when it comes to deposit growth and client acquisition.
Speaker Change: Yes, so thanks for the question and I think.
Your questions insightful, because thats, how we are changing around the business. So we've been working on a number of new deposit verticals that are really getting legs behind them and the first is settlement services.
Speaker Change: Where can we be kind of going forward? I think we could be close to where we are. So, you know, maybe the three and a half range is kind of sustainable, kind of over, over a broader economic cycle. And what we'd see, we'd probably have a little bit better return on the residential portfolio than we presently have. But for the most part, I think our numbers, you know, rather than being in the fours, I think we're destined for the three level here, forward, got it, and Ralph Zuranski. Thank you. Take care.
Speaker Change: And just this quarter alone we grew settlement services $2 1 billion and so theyre the deposits are a little larger.
Speaker Change: And but the growth rate is steady and consistent so as you get to a certain level large deposits will flow off and then you've got to bring all of the large deposits. In Additionally, we have our business escrow and corporate trust business and that too is beginning to get some legs and in this quarter that grew by $350 million.
Now that business will continue to grow but it really will be held once we get our investment grade ratings back and go back to the pit.
Speaker Change: Good-bye. Thank you. Good-bye. Good-bye. Good-bye. Good-bye. Thank you. Good-bye. Thank you. Good-bye.
Speaker Change: Is it the pivot is to get to our investment grade ratings. So that corporate trust can be a bigger contributor to our deposits and we think with an over 11% CET one ratio mid eighty's.
Speaker Change: On the expense guide, so you guys were at $437 million on the ECR deposit, costing $23. What's assumed within this expense guide? for the cost of EZR, where, Yeah, so that's fairly stable until we get to, as we indicated earlier, we have a back-end loaded forecast starting in June on the rate. And so that would, that would kind of curtail, you know, based upon how that plays out. That's something, you know, when Dale gave that answer, I looked at it. Sorry, Steve, I thought I would be the only one on.
Speaker Change: Our loan to deposit ratio steady asset quality, we will position ourselves to get upgraded their now HOA its been a long.
Speaker Change: Actually walk was probably off first national business line and that continues to knock the ball out of the park and usually what is a slower quarter for.
Speaker Change: That is they grew $300 million.
Speaker Change: For the year, they grew about $1 2 billion and those of our steady smaller.
Speaker Change: Deposits they come in from either new business that we win and the existing clients growing their book of business. So we get that two ways.
Speaker Change: Good. You're on a choppy line a little bit, Steve, but I would say, to Dale's point, if you could, you there? Yeah. I would say, just keep in mind your question is based on total dollars. The rate will be coming down, but total dollars may still rise as we continue to push up on deposit growth. So just keep in mind the rate volume impact. OK. Yup, got it.
Speaker Change: Another business that we're very pleased with was the one we started in early January January 4th of 2023, which is our consumer digital platform.
This quarter alone that brought in nearly $800 million.
Speaker Change: And thats been a real homerun for us and Thats, where we see deposits more than the 53 to 57.
Speaker Change: Range for each client now for going forward in 'twenty four into 25, we're going to try to shift the platform from an outside vendor to an internal platform and so we're going to probably run two platforms for a while as we come up to speed with our own platform that will help us also longer.
Speaker Change: Can I just finally ask you a big picture question? So when I look at the company, years back, we had the financial crisis, and you guys made quite a few changes after that, right, built out national businesses. You had top decile growth for a long time. Then we had March Madness. You again pivoted, right?
Speaker Change: Term and it will reduce not in 'twenty, four but going forward in 'twenty five 'twenty six it will reduce some of our maintenance expenses and then last but not least let's not forget what we are in our traditional ballgame here and that is the regions and we've been rethinking redesigning the region.
Speaker Change: You made adjustments, pushing up insured deposits, changing liquidity, etc. But when I look at the 2024 guide, it looks like more of the same in the first half. But then when we get to the second half of the year and then 2025, what does this company then look like? Do you throttle up loan growth from where we are? Do you throttle that deposit growth? Are you back to a growth bank? Like, how do you see the world right now for the company in the longer term? Thanks.
Speaker Change: The reason why we moved Tim.
Speaker Change: Chief Credit officer role into the Chief Banking officer for the regions. That's why we brought in wind hurting to take over the Chief credit officer role and fixed charge is to rethink and re imagine the regions and have them be more C&I focus and with that focus in C&I and of course, there will be more in deposits and I should mentioned that.
Speaker Change: Yeah, good question. We started to pivot, by the way, in the third quarter of 2022 with higher liquidity and higher capital. And we certainly were very happy that we did. As we entered March Madness, it really served us well.
Speaker Change: $600 million payment this quarter from the regions as well as deposits, but it will also help us grow our fee income and so we're going to get a twofer there over the long term it'll be easier to bring in the deposits first and then that fee income as we continue to sell cross sell of Treasury management services will help us towards the back.
Speaker Change: And that's informed our decision making as to why we want to keep that moving forward. And as you said, we'll have that basically completed by the first half of 2024. Then I think what you're going to see is a little bit of the same bank, but I don't think we're going to put our foot on the accelerator as hard as we used to push down on the throttle there. And one reason is that we never really got paid for that.
Speaker Change: End of 'twenty, four, but again pick up some steam into the new year of 2025. So I hope that kind of gives you a sense of what we've been doing and we're looking at some other deposit verticals that are just.
Speaker Change: Early early stages, and we will probably work on them this year and hope to have them ready to go either in the back end of 'twenty four or early 'twenty five.
Speaker Change: So, you know, up until the end of 2022, we were probably growing deposits and loans by about 24 to 25 percent per year. And we didn't see that in our evaluation. And in fact, people always got nervous with that and said, gee, there must be a credit problem that was lurking behind. But really, over that period of time, we only had $29 million in net losses. So what we're going to do is, we're going to be targeting above-industry-trend growth going forward in the back half of 2024 and into 2025. And we think we'll get rewarded for that and take away any concerns that will always linger about going way back to 2006 and 2007, and 2008 that people bring up. And I think we'll run from there. But we should be higher in return on equity, higher in return on assets, but not to the old levels of coming back to 2010, 2013, 2014, 2015. OK. That's a great color.
Speaker Change: So that is helpful. Thanks for the rundown, Ken what I didn't care was.
Speaker Change: Does this change at all your view around doing any bank M&A that you pick up a retail franchise.
Kenneth A. Vecchione: The deposit sort of generating engine.
Speaker Change: Is that kind of part of the equation today.
Kenneth A. Vecchione: So today, it's not part of the equation, we're not talking about M&A at all.
Kenneth A. Vecchione: Again, we're talking about 11% CET, one kind of move that offered.
Kenneth A. Vecchione: But it will at some point the M&A question.
Conversation will come in play as we continue to get bigger and bigger we kind of do what we think we're going to do with deposits than we are that will be brought into play as we approach a 100 billion, but frankly, that's a premature conversation at this point I think we still have a couple of years before we get to a 100 billion.
Speaker Change: Perfect. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you next.
Speaker Change: Next question comes from Matthew Clark of Piper Sandler your.
Your line is now open. Please go ahead.
Speaker Change: Thanks for taking my question. Thank you. Our next question comes from Ibrahim Poonawalla from Bank of America. Your line is now open, please go ahead. Hey, good morning.
Speaker Change: Okay.
Matthew Clark: Hey, good morning, everyone.
Matthew Clark: Just the first one on on the loan growth guide of $2 billion.
Ibrahim Poonawalla: I guess maybe just one bigger picture question around earnings if I have the math right in terms of your earnings outlook. You probably shake out on eight bucks in EPS for 24. Should we expect EPS to dip in the first half before re-accelerating in the second half of the year? How do you think about earnings growth relative to the 191 you printed in the fourth quarter? Just given the moving pieces around what you're doing with each QLA, and the benefit of rate cuts in the back half, we'd love to hear just the earnings trajectory that you're looking at. That's a really good question, and maybe implicitly in your comments, so the first quarter generally does have a dip, and you can see this in prior years relative to 4-2, and some of this is seasonal, everyone pays higher bike costs, and of course there are fewer number of days in Q1, so if we step into that, that should have a bit of a softer peak at the beginning of the year.
Matthew Clark: 500 million a quarter.
Speaker Change: <unk> previously talked about maybe some acceleration in loan growth in the second half is that just you all being a little conservative in the guide to start the year or.
Or should we not necessarily expect a step up in loan growth in the second half.
Speaker Change: So.
Speaker Change: First let me say Q4, we thought loan growth was going to be between zero and $300 million and so we were a little surprised that it came in at 850.
I'd, rather be surprised on the upside as a general trend, but we're still going to be a little cautious about economic activity going forward and so we're going to be mined mindful of this recession or slowdown that always advertise to come but it has not showed up yet and then we.
Speaker Change: Have sort of deemphasize certain asset classes for now those fee, obviously CRE office and residential just named too so.
Ibrahim Poonawalla: Moving into Q2 and Q1, it's going to be impacted by what Ken's talking about in terms of continuing to build out and finish, you know, by the end of the second quarter and early in the third, our HQLA, positioning, so that would result in a little lower earnings growth during those first two periods as basically the deposit growth, which we think is going to be fairly strong, is diverted into an asset class that doesn't yield as As that changes, and as our loan-to-deposit ratio is in the 80s, you know, by summer, that's going to be a more proportionate growth rate in loans as well as deposits, and hence you do get a growth rate picking up through the end of 24 and carrying into 25. That's helpful.
Speaker Change: So construction areas as well and so we're just going to stay with the guide of $500 million a quarter, we think that's reasonable and if the liquidity comes in faster than we think then we will look to deploy it in and loan growth as a general rule, we've never had problems deploy.
Speaker Change: <unk>, our liquidity and getting.
Speaker Change: Good safe sound and thoughtful loan growth.
Okay and then.
Speaker Change: On the on the fee income guide.
Speaker Change: If you look at the fourth quarter run rate I think when you make the fair value adjustments.
Deno.
Speaker Change: Exclude the.
Speaker Change: Securities losses.
Speaker Change: I'm coming up with a run rate closer to $124 million correct me, if I'm wrong and you annualize that you're talking about.
Ibrahim Poonawalla: And I guess the other question you mentioned about never getting paid on loan growth back in the day. When we think about how you're acquiring and what type of deposits you're acquiring today, maybe Ken, is it different? I mean, you've obviously emphasized the regions and the deposit growth from the regions.
Speaker Change: Call it.
Speaker Change: For <unk> two and your guide at the midpoint is roughly 457 of the last year's base.
Speaker Change: So maybe correct me if I'm wrong on that $1 24.
Speaker Change: And if it is but if it is correct.
Speaker Change: Implies implies you're down 7%.
Speaker Change: This year, and obviously you talked about not assuming any uptick in mortgage but.
Kenneth A. Vecchione: But I'm just wondering if your view around large, chunky deposits has changed given sort of the emphasis on liquidity. And as a result of that, should we expect you to kind of go about differently when it comes to deposit growth and client acquisition? Yeah, so thanks for the question, and I think your question's insightful because that's how we're changing around the business. So, you know, we've been working on a number of new deposit verticals that are really getting legs behind them. And the first is settlement services, and just this quarter alone, we grew settlement services by $2.1 billion.
Speaker Change: I just wanted to get the puts and takes there of what we might.
Would be thinking about.
Speaker Change: Well, so we have a few things going on in the on the noninterest income side, some of which we're kind of implementing now we've got I'd say.
Kind of a service charge revision that we're going to be undertaking we think as rates decline and ECR has come down that puts more clients into a position where the earnings credit rate does not necessarily cover all of their consumption of internal services and that could that could also kind of pushed that up so so we.
Speaker Change: Thank you.
Again, we're looking for growth in that category, certainly kind of going forward and.
Kenneth A. Vecchione: And so there, the deposits are a little larger, but the growth rate is steady and consistent. So as you get to a certain level, large deposits will slow down, and then you've got to bring in other large deposits. Additionally, we have our business escrow and corporate trust business, and that, too, is beginning to get some legs, and in this quarter, that grew by $350 million. Now, that business will continue to grow, but it will really be helped once we get our investment-grade ratings back. And then go back to the pivot.
Speaker Change: We.
Speaker Change: Expect to see that.
Okay.
Speaker Change: And then just last one for me on the.
Speaker Change: Interest bearing deposits can you update us on the spot rate at the end of the year.
Speaker Change: It seems like the pressure there is subsiding and kind of how you think about.
Sure.
Speaker Change: The beta on the way down on interest bearing specifically.
Speaker Change: Yes, the interest bearing deposit spot rate was $3 63 at year end.
Kenneth A. Vecchione: The pivot is to get to our investment-grade ratings so that corporate trust can be a bigger contributor to our deposits. And we think with an over 11% TDK-1 ratio, the mid-80s, you know, loan-to-deposit ratio, and steady asset quality, we will position ourselves to get upgraded there. Now, HOA has been a long, actually, what was probably our first national business line, and that continues to knock the ball out of the park. And usually, what is a slow quarter, the fourth, that is, they grew $300 million. For the year, they grew by about $1.2 billion, and those are steady, smaller deposits.
Speaker Change: And in terms of in terms of the baby the beta coming down.
Speaker Change: We think it's going to be.
Speaker Change: Very wrong, we expect <unk> to be certainly no slower on the way down than they were on the way up you may recall that our betas have been have been faster than industry norms kind of this entire time and our clients are expecting that that is that we're watching that closely and so are they so.
So I expect that we're going to.
Speaker Change: To be able to pull down interest bearing cost for those that are ECR related pull those down as well and the imputed yields some of them have which might be types of effective fed funds.
Speaker Change: Got it okay, great. Thank you.
Speaker Change: Thank you.
Kenneth A. Vecchione: They come in from either new business that we win or existing clients growing their books of business, so we get that two ways. Then another business that we're very pleased with was the one we started in early January, January 4th, 2023, which is our consumer digital platform. This quarter alone, that brought in nearly $800 million. And that's been a real home run for us.
Speaker Change: Next question comes from Chris Mccarthy of <unk>.
Chris Mccarthy: Please go ahead.
Chris Mccarthy: Okay.
Chris Mccarthy: Great good afternoon.
Chris Mccarthy: Ken maybe a question on on the balance sheet and capital.
Chris Mccarthy: You talked about not wanting to be in the 98 percentile or so in terms of growth perspective, because you don't get paid for it but youre at youre going to be at 11% pretty soon can you open open the door a little bit on the comments about appetite for buyback maybe in the back half of the year.
Kenneth A. Vecchione: And that's where we see deposits more in the $53,000 to $57,000 range for each client. Now, going forward in 24 into 25, we're going to try to shift the platform from an outside vendor to an internal platform. And so we're going to probably run two platforms for a while as we come up to speed with our own platform. That will help us also in the long term, and it will reduce, not in 24, but going forward in 25 and 26, it will reduce some of our maintenance. And last but not least, let's not forget, you know, what we are in our traditional ballgame here, and that is the regents.
Speaker Change: Yes, right now we have no plans to do a buyback and 11% is a little more of a floor for us I know we call. It a target, but it's more of a floor. So we want to build above that and then we will have growth capital and as we enter 2005.
Speaker Change: We're going to have a lot of decisions to make.
Speaker Change: We see a lot of internal growth in front of us, that's where I would like to deploy the money first got to tell me what the economic environment is and I will tell you if we're going to do a buyback, but really its the buyback conversation has not been on the table in this company and again, the 11% is up as a floor for us.
Speaker Change: Okay. So nothing for 'twenty, four, but perhaps you'll weigh the alternatives between accelerating the growth and using the capital.
Speaker Change: For 2025 conversation.
Kenneth A. Vecchione: And we've been rethinking, redesigning the regents. That was the reason why we moved Tim out of his chief credit officer role into the chief banking officer role for the regents. And that's why we brought in Lynn Herden to take over the chief credit officer role. And Tim's charge is to rethink and reimagine the regents and have them be more C&I-focused.
Speaker Change: We spent a lot of time talking about 'twenty five year, I don't want to get through before.
Speaker Change: And make everything we just told you but for 'twenty four I can definitely tell you.
Speaker Change: There is no buyback on the table.
Kenneth A. Vecchione: And with that focus on C&I, of course, there'll be more deposits. And I should mention that $600 million came in this quarter from the regents as well in deposits. But it will also help us grow our fee income, and so we're going to get a double-fer there over the long term. It'll be easier to bring in the deposits first, and then that fee income as we continue to sell or cross-sell our treasury management services will help us towards the back end of 24. But again, pick up some steam in the new year of 2025.
Speaker Change: Okay.
Speaker Change: In terms of deal in terms of the balance sheet you mentioned the HLA Bill how are you targeting a percent of your balance sheet and securities. How do we think of the outcome of this quarter, how do we think about just the absolute.
Bridging the $8 billion 2 billion, how much will go to buying incremental bonds.
Speaker Change: Yes.
You can you can impute this from kind of our guidance whereby we're showing.
1 billion and a half if you just did it ratably.
Growth in deposits in excess of loans and the preponderance of that is certainly going to go to <unk> as we talked about earlier.
Speaker Change: The first half of the year kind of getting over that hurdle that we think will be added by in the summer.
Speaker Change: It's going to do that so if you just did that'd be $3 billion more in terms of in terms of <unk> that would take us to there and then at that point in time, maybe there is a more a more proportional growth rate between loans and deposits, but thats kind of the range numbers, we're talking about.
Speaker Change: So I hope that kind of gives you a sense of what we've been doing. And we're looking at some other deposit verticals that are just in the early, early stages. And we'll probably work on them this year and hope to have them ready to go either in the back end of 24 or early 25. So that is helpful. Thanks for the rundown, Ken. And what I didn't hear was, does this change at all your view around doing any bank M&A where you pick up a retail franchise and bring in another deposit-generating engine? Or is that not kind of part of the equation today?
Okay, great. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you next.
Ethanol: Our next question comes from ethanol.
Deutsche Bank: <unk> of Deutsche Bank your.
Ethanol: Your line is now open. Please go ahead.
Ethanol: Hi, guys just a question on ECR pricing dynamics.
Kenneth A. Vecchione: So today it's not part of the equation. We're not talking about M&A at all. You know, again, we're talking about the 11% CET1, kind of moving that upward. But it will, at some point, the M&A question or conversation will come into play as we continue to get bigger and bigger. If we kind of do what we think we're going to do with deposits, then that will be brought into play as we approach $100 billion. But, frankly, that's a premature conversation at this point.
Ethanol: Yes, certainly.
Deutsche Bank: <unk> costs are expected to decline.
Deutsche Bank: And the volume just on rates I believe you have some deposits that pain fed funds and.
Speaker Change: And others that are in the large 2% range. So you've got a 25 basis point cut.
Speaker Change: With 100% data does that flow through all customers are just the higher class ECR deposits and then you need additional rate cuts to get to the more screen before cutting them or are well ECR rates declined for all <unk>.
Speaker Change: Deposits 1000 relationships.
Speaker Change: The preponderance of our ECR priced price deposits are of the type that you.
Kenneth A. Vecchione: I think we still have a couple of years before we get to $100 billion. Perfect. Thank you. Thank you. Our next question comes from Matthew Clark of Piper Sandler. The line is now open, please go ahead. Hey, good morning, everyone.
Speaker Change: Initially we talked about I E. Those that are really tied to effective fed funds and we think debated with those is going to be very near 100%.
Speaker Change: The second piece where rates are significantly lower.
Matthew Clark: The first one on, on the loan growth guide to 2 billion or 500 million a quarter. I thought we had previously talked about maybe some acceleration in loan growth in the second half. Is that just you all being a little conservative in the guide to start the year?
Speaker Change: We probably have maybe a stutter step, but the first rate increase we're not necessarily going to be able to kind of fully kind of pass through but after that I think we can put them on a trajectory as well, but that those betas will will be significantly lower and maybe we can get to 50 on that on that piece of it but the but the larger piece.
Matthew Clark: Or should we not necessarily expect a step up in loan growth in the second half? So, you know, First, let me say, you know, Q4, we thought loan growth was going to be between zero and 300 million, and so we were a little surprised that it came in at 850. I'd rather be surprised on the upside as a general trend, but, you know, we're still going to be a little cautious about economic activity going forward, and so we're going to be mindful of this recession or slowdown that' And then, you know, we have sort of de-emphasized certain asset classes for now, those being obviously CRE office and residential, just to name the two, some construction areas as well, and so we're just going to stay with the guide of 500 million a quarter.
Speaker Change: It's gonna battery or hybrid.
Speaker Change: And if we think about the volumes between those two are the balances are the much higher for the 3% like the lower ones. So.
Speaker Change: Once we start getting cuts, even though you have a 100% beta.
Speaker Change: For the ones I think that fund and just a smaller balance I'm not sure. If you can size that or give us a magnitude.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yes so.
Speaker Change: Between what Youre going to see in terms of warehouse lending some of the things that our settlement services some of our some of our.
Speaker Change: HOA deposits you are probably approximately two thirds of the number is going to have a couple of database.
Speaker Change: Okay, and then if I could just ask one more just on your outlook guidance.
Speaker Change: Just when you think about net interest income you have the upside and up 10%.
Speaker Change: Could you just give us the underlying assumptions just the difference between the two year like what gets you to the 10%.
Speaker Change: The 10% on net interest income is a combination of Av.
Matthew Clark: We think that's reasonable, and if the liquidity comes in faster than we think, then we'll look to deploy it in loan growth. As a general rule, we've never had problems deploying our liquidity and getting good, safe, sound, and thoughtful loan growth. Okay, and then on the fee income guide. You know, if you look at the fourth quarter run rate, I think when you make the fair value adjustment, you should exclude the securities losses. Coming up with a run rate close to $124 million, correct me if I'm wrong, and you annualize that, you're talking about... call it... 492 and your guide at the midpoint is roughly 457 off the last year's base.
Speaker Change: Really the loan growth as we move forward, that's what's going to move us in that direction.
Speaker Change: And the additional liquidity, we are bringing in and placing that into investments.
Speaker Change: Yield curve look like I mean, if the yield curve tends to be flat or it remains inverted that's going to probably look a little bit better on some of these commercial loan what does that mix look like and how is competitive pricing changing.
Speaker Change: For all of those items.
Speaker Change: Have a lot of insight into what that might be.
Speaker Change: As the parameters around around a number that might be more media.
Speaker Change: Okay got it thanks for taking my questions.
Speaker Change: So, maybe correct me if I'm wrong on that 124, and if it is, but if it is correct, you know, it only implies, you know, you're down 7% this year, and obviously, we talked about not assuming any uptick in mortgage rates but just want to get the puts and takes there what we might not be thinking about. Well, we have a few things going on on the non-interest income side, some of which we're kind of implementing now. We've got kind of a service charge revision, you know, that we're going to be undertaking. We think, as rates decline and ECRs come down, that that puts more clients into a position where their earnings credit rate does not necessarily cover all of their consumption of internal services, and that could also kind of push that up. So we think that, you know, again, we're looking for growth in that category, certainly, kind of going forward. And I expect to see that.
Speaker Change: Thank you next.
Speaker Change: Next question comes from Ben <unk> of Citi.
Ben: Your line is now open. Please go ahead.
Hey, good morning, everyone.
Ben: Good morning.
Ben: Just had a question.
Ben: Obviously, a bit more technical in nature, but it sounds like loan yields were down linked quarter and almost every lending category. I was curious if you can just kind of touch base on them.
Speaker Change: Maybe the nuance of why it might be just a technicality like I said.
Speaker Change: Yes, so I didn't talk about a little bit on the.
Speaker Change: What happened on the loans held for sale versus investment whereby we did a transfer from from held for held for sale through investment it really as I've done in the last day or the just before that.
Speaker Change: Third quarter, so that will affect their.
Speaker Change: Dropped loan yields back up.
Speaker Change: To some degree there is.
Speaker Change: There's also been some mixed revisions in there going forward.
Speaker Change: Still seeing pricing opportunity on the repricing elements, we've talked about the $2 $9 billion that on average we have a rolling or this year and and while the piece of that is fixed rate that's probably in at.
Speaker Change: OK. And then just last one for me on the interest-bearing deposits. Can you update us on the spot rate at the end of the year and, it seems like the pressure there is subsiding, and kind of how you think about the beta on the way down on interest-bearing specifically. Yeah, the interest-bearing deposit spot rate was 363 at year-end. In terms of, you know, in terms of the beta coming down, we think it's going to be very strong. You know, we expect betas to be certainly no slower on the way down than they were on the way up. You may recall that our betas have been faster than industry norms, you know, kind of this entire time. And our clients are expecting that, that is, that we're watching that closely, and so are they.
Speaker Change: And about 20% of that number.
Speaker Change: Those have a more ratable increase even on the vertical side were still looking at elevated spreads relative to when those loans were originated two or three years ago.
Speaker Change: Got you. So the next question I had was the spreads you are seeing in the market today.
Speaker Change: It seems like a lot of the.
Speaker Change: 100, plus billion dollars banks are stepping back in certain categories are you seeing.
Speaker Change: Spreads because theres less lenders available are blending being done from the bigger banks or is it more just calling the shots and he does you are not seeing it.
Speaker Change: So I expect that we're going to, you know, be able to pull down the interest-bearing costs and, for those that are ECR-related, pull those down as well, and the imputed yields that some of them have, which might be tied to effective set funds. Got it.
Speaker Change: Too many different.
Speaker Change: Because I mean, you do bank solid clients. So they typically would have the best rate available because it's a competitive market I'm just trying to think what the yields going forward.
Speaker Change: Pricing in a couple of cuts in the back half of the year.
Speaker Change: Okay, great. Thank you. Thank you. Our next question comes from Chris McGratty of KBW. The line is now open, please go ahead. Well, great. Good afternoon.
Speaker Change: Yes.
Speaker Change: It's almost market by market dependent.
Speaker Change: Things going on in different markets for us.
Christopher McGratty: Ken, maybe a question on the balance sheet and capital. You talked about not wanting to be in the 98th percentile or so in terms of growth perspective because you weren't getting paid for it. But you're going to be at 11% pretty soon.
If youre talking tech and innovation.
Speaker Change: Spreads there really hasnt moved but a little more competitive because there is less deal flow because the raising of us.
Christopher McGratty: Can you open the door a little bit on comments about appetite for buybacks, maybe in the back half of the interview? Yeah, right now, we have no plans to do a buyback, and 11% is a little more of a floor for us. I know we call it a target, but it's more of a floor, so we want to build above that.
Speaker Change: Less cash there if you're talking.
Speaker Change: So I'm very specific a lot banking deals spreads are strong and we were getting our pricing.
Christopher McGratty: And then we'll have growth capital, and as we enter 25, well, we're going to have a lot of decisions to make. If we see a lot of internal growth in front of us, that's where I like to deploy the money first. You've got to tell me what the economic environment is, and I'll tell you if we're going to do a buyback. But really, the buyback conversation has not been on the table at this company, and again, 11% is a floor for us. Okay, so nothing for 24, but perhaps you'll weigh the alternatives between accelerating growth and using capital. Is that a fair conversation topic for 2025? You know, we've spent a lot of time talking about 25-year olds.
Speaker Change: And some of these banks are moving in and moving out.
Speaker Change: Really hard to one generic answer as to why they all pulling back or not.
Speaker Change: Got it okay. If I could just sneak one more in it seems like you said, 11% below the floor going forward on capital.
Speaker Change: You also referenced the credit rating.
Speaker Change: When we get a public announcement from a credit rating agency is that a catalyst events for you guys or is it more just so you get to the 11, that's kind of what you guys agreed upon and once you hit at 11, you can kind of operate a bit more autonomy.
Speaker Change: Honestly.
Christopher McGratty: I want to get through 24 and do everything we just told you, but for 24, I can definitely tell you there's no buyback on the table. Okay, thank you. In terms of Dale, in terms of the balance sheet, you mentioned the HQLA bill. How are you targeting a percent of your balance sheet in securities? What do we think of the outcome this quarter? What do we think about just the outcome?
Speaker Change: No.
Speaker Change: The 11% is as I said a floor for us.
Speaker Change: Have to engage our continuing to engage with the rating agencies. That's usually a two step process. They usually put you on outlook positive and then come back and make a change as.
Speaker Change: As far as I know so far we got.
Speaker Change: A change in our outlook from Fitch, but I don't know if theres any other bank that had a change in their outlook. So my sense is there any agencies may be a little slower to pull the trigger but when we go in there we want to go in there with.
Christopher McGratty: kind of bridging the $8 billion and the $2 billion. How much will go to buying incremental bonds? Yeah, so you can compute this from kind of our guidance whereby we're showing, you know, a billion and a half, if you just did it relatively, of growth in deposits and excess of loans. And the preponderance of that is certainly going to go to HQLA.
Speaker Change: Capital levels.
Speaker Change: Firm steady stable asset quality.
Speaker Change: And very strong liquidity and that's how we're positioning the company in the meantime, our corporate Trust group is.
Speaker Change: It is still operating and bringing in good business, maybe just bringing in more business with us.
Speaker Change: As we talked about earlier, you know, the first half of the year kind of getting over that hurdle that we think will be added by the summer is going to do that. So if you just did, that'd be 3 billion more in terms of HQLA, that would take us there. And then at that point in time, maybe there's a more proportional growth rate between loans and deposits. But that's kind of the range of numbers we're talking about. Okay, great. Thank you. Thank you. The next question comes from Bernhard von Goesecke of Deutsche Bank. Your line is now open; please go ahead.
Speaker Change: Great to investment rating, so theyre doing just fine and we're just.
Speaker Change: This will just accelerate there are opportunities to bring in more business.
Speaker Change: Gotcha, Okay. I appreciate you've probably got 12 time, you can get that announcement, but I appreciate the time guys.
Speaker Change: Okay.
Speaker Change: Thank you next.
Speaker Change: Our next question comes from Brody Preston of UBS.
Brad Milsaps: Your line is now open. Please go ahead.
Brad Milsaps: Yes. Thanks.
Brad Milsaps: Yes. Thanks.
Brad Milsaps: Wanted to follow up on the on the loan yields.
Brad Milsaps: I understand the move from the Hff's HSI, but I was hoping Dale if you could provide what the spot rate was for the loan portfolio at the end of the quarter.
Speaker Change: Hi guys, just a question on ECR pricing dynamics. I know you noted the ECR-related deposit costs are expected to decline with rates and volume. Just on rates, I believe you have some deposits that pay the said funds and others that are in the lower 3% range. So if you get a 25 basis point cut with 100% beta, does that flow through all customers or just the higher-cost ECR deposits, and then you need additional rate cuts to get to the lower 3s before cutting them? Or will ECR rates decline for all ECR deposits regardless of relationship?
Brad Milsaps: 703.
Dale M. Gibbons: Okay. Thank you very much.
Dale M. Gibbons: I also wanted to get a better sense for the Bts P.
Dale M. Gibbons: Is the rationale behind paying off the Bts P, but not more expensive borrowings I think the last time in your <unk> 10-Q, I think the rate on the Bts P was $4 76.
Dale M. Gibbons: Average short term borrowing rate of $5 74, this quarter I just wanted to better understand the thought process there.
Speaker Change: Frankly, we just thought we didn't need to be borrowing from the federal reserve.
Speaker Change: No.
Speaker Change: So we did that.
Speaker Change: Agree with you instead of instead of modest path it was going to mature or any way. This is something that we had acquired in March.
Speaker Change: The preponderance of our ECR price deposits are of the type that you initially talked about, i.e., those that are really tied to effective VET funds, and we think the beta with those is going to be very near 100%. The second piece, where rates are significantly lower, we probably have a stutter step at the first rate increase. We're not necessarily going to be able to fully pass through, but after that, I think we can put them on a trajectory as well.
Speaker Change: Last year. It was a 12 month deal. So it was a couple of months early relative to what it would have been.
Speaker Change: But we thought we thought we just it was part of the 2023 situation and leave it behind in 2023.
Speaker Change: Yes. Thank you I wanted to clarify just on the ECR related to deposits I think the slide says you have $17 8 billion of ECR deposits at quarter end.
Speaker Change: But you've got about 14 5 billion.
Speaker Change: So is there is there another component of the ECR related deposits thats technically still interest bearing but also it gets compensated through ECR.
Speaker Change: But those betas will be significantly lower. Maybe we can get to 50% on that piece of it. But the larger piece, I think it's going to be at or near 100%. And if we think about the volumes between those two, or the balances, are they much higher for the 3%? Like the lower ones?
Speaker Change: Yes, correct. So so what will happen is.
Speaker Change: Depending on what type of what type of client it is.
Speaker Change: We could have a situation whereby the manager gets the ECR and the older gets the interest income so you.
Speaker Change: So once we start getting cuts, even though you have 100% beta, for the ones paying Fed funds, is it just a smaller balance? I'm not sure you could size it or give a magnitude between the two. Yeah, so, you know, between what you're going to see in terms of, you know, warehouse lending, some of the things that are settlement services, some of our HOA deposits, you're probably approximately two-thirds of the number is going to have elevated beta. Okay, and then if I could just ask one more question, just on your outlook guidance, just so we think about net interest income, you have the up five and up 10%. Could you just give us the underlying assumptions, just the difference between the two, like what gets you to the 10%?
Speaker Change: You don't really see that in mortgage warehouse because those are really non interest bearing deposits, but on an HOA. For example, it's a dual situation most commonly whereby the aggregator.
Speaker Change: <unk> gets a.
Speaker Change: Earnings credit rate on the on the dollars that are owned by the by the HOA itself that is not interest.
Speaker Change: Spence.
Speaker Change: Because if they simply have no claim on that on that liability to us in the deposits of that enterprise. So that's why it's doubled up.
Speaker Change: Got it and then the last question I had was just on the MSR loss I just wanted to maybe understand the mechanics, a little bit Dale did you.
Speaker Change: Throughout the course of this past year did you maybe put a higher mark on the MSR and the correspondent production capitalize it at a higher rate than that.
Speaker Change: The 10% on managed income is a combination of really the loan growth as we move forward. That's what's going to move us in that direction. And the additional liquidity we're bringing in and placing that into investment. Yeah, what does the yield curve look like? I mean, if the yield curve tends to be flat or remains inverted, that's going to probably look a little bit better on some of these commercial loans. What does that mix look like?
Speaker Change: That impact of the gain on sale margin at all and then you'd have to take a loss on it when rates moved against you and you sold the MSR. This quarter I just wanted to understand the moving parts there.
Speaker Change: No no no I would say that I mean, it was kind of the volatility around what happens. So we saw we saw CPR declined to the slowest that I think I think I've ever seen and maybe somebody in the business had been around but they were like 3% to 4% constant prepayment rates and and that is.
Speaker Change: And how is competitive pricing changing for all those items? We don't have a lot of insight into what that might be, you know, hence the parameters around a number that might be more median. Okay, got it. Thanks for taking my question. Thank you. Our next question comes from Ben Gerlinger of Sissi. Your line is now open, please go ahead. Good morning, everyone.
Speaker Change: Exceptionally low.
Speaker Change: And then when rates picked up again.
Speaker Change: <unk> jumped and maybe it was a little bit of a catch up from from Refis or whatever that had been delayed and so as a result of that we had a we had a we had a gain in our in our hedge that fell short of the loss.
Brad Milsaps: I just had a question. It seems, obviously, a bit more technical in nature, but it seems like loan yields are down late in the quarter in almost every lending category. I was curious if you could just kind of touch base on that. Maybe the nuance of why might be just a technicality, like I said. Yeah, so I talked about a little bit what happened with the loans held for sale versus investment, whereby we did a transfer from held for sale to investment. It really was done in the last day, or just before that, of the third quarter.
Speaker Change: In terms of evaluation so.
Speaker Change: The result was the value of those servicing rights fell by $100 million in the fourth quarter, and we were $14 million shy of what we picked up in terms of gain on the hedge and that was because we had such a rapid velocity change between a very low CPR, maybe the lowest ever to it to something that was more normalized.
Brody I'd, just remind you that.
Speaker Change: By the end of Q4, the 10 year Treasury dropped 69 basis points from $4 57 to 388, just punctuate sales point and.
Brad Milsaps: So that toll effect there dropped loan yields back to some degree. There's also got to have been some mixed revisions in there going forward. We're still seeing pricing opportunities on the repricing elements. We talked about the $2.9 billion that, on average, we have rolling this year. And while the piece of that that is fixed rate, that's probably in about 20% of that number. Those have a more rateable increase. So even on the variable side, we're still looking at elevated spreads relative to when those loans were originated two or three years ago. Gosh, yeah, that's good.
Speaker Change: The MSR balance we have several outside valuation firms that come in and look at that MSR and value it for us to make sure that whatever then the appropriate range.
Speaker Change: Got it understood. Thank you very much for taking my questions guys.
Speaker Change: Welcome.
Speaker Change: Thank you next.
Speaker Change: Next question will come from Andrew <unk> of Stephens.
Andrew: Please go ahead.
Andrew: Hey, good morning.
Andrew: Dale if I could start just.
Speaker Change: So the next question I had was the spreads you're seeing in the market today. Like it seems like a lot of the, And hundred plus billion dollar bankers stepping back in certain categories, better spread because there are fewer lenders available or less lending being done from the bigger banks? Or is it kind of more just calling your shots, and you're not seeing too many different?
Andrew: I hear your comments around the mortgage banking and kind of the.
Andrew: Potential upside there not being captured on the go forward guide.
Dale M. Gibbons: To the extent the mortgage market does turn and we do end up seeing kind of upside on the fee income front over time can you just remind us.
Dale M. Gibbons: The incremental efficiency in that business and maybe just to give us a better sense of how the expenses what would fluctuate with the lift in fees.
Speaker Change: Because, I mean, you bank solid clients. So they typically would have the best rate available because it's a competitive market. I'm just trying to think about the yields going forward and especially pricing in a couple cuts in the back half of the year. Yeah, you know, it's almost market-by-market dependent.
Dale M. Gibbons: Yes, I mean, so when they were Standalone enterprise they were running about 50% and when we acquired them. We were in kind of the low forties and they came in and that took us to kind of the mid to mid.
Speaker Change: There are just things going on in different markets for us. You know, if you're talking tech and innovation, spreads there really haven't moved, but they're a little more competitive because there's less deal flow, because they're raising less cash there. If you're talking about some very specific lot banking deals, spreads are strong, and we got our pricing. And some of these banks are moving in and moving out. It's really hard to give one generic answer as to whether they are all pulling back or not. Gotcha. Okay, if I could just sneak one more in.
The mid $40 I think thats basically attack today.
Speaker Change: Yes, so it's frankly, they're marginal.
Speaker Change: <unk> of efficiency is pretty close to the bank's overall now that the bank has invested in elements of our higher cost with technology and some of this risk management infrastructure and lower investment yields related to the building of the HQ away. So right now our efficiency ratios are comparable at about 50%.
Speaker Change: Okay I appreciate it.
Speaker Change: It seems like you said 11% is a bit of the floor to go for in capital. Then you also referenced the credit rating. The moment we get a public announcement from a credit rating agency, is that a catalyst event for you guys, or is it more just you get to the 11th, kind of what you guys agreed upon? And once you hit 11, you can kind of operate a bit more autonomously.
Speaker Change: And then just.
Speaker Change: Looking at the deposit cost expense line this quarter, if I compare the disclosed expense on deposit cost versus the average balance of ECR deposits. It looks like on a percentage basis.
Speaker Change: Cost ticked down a few basis points this quarter.
Speaker Change: Have you lowered rates anywhere on the product already or is that more of a function of mix this quarter.
Speaker Change: You havent lowered rates, but what we have done is we have a one off.
Speaker Change: Well, you know, um... The 11% is, as I said, a flaw for us. We have to engage or continue to engage with the rating agencies. That's usually a two-step process. They usually put you on Outlook Positive and then come back and make a change.
Speaker Change: Clients and said look your spread relative to say effective fed funds has been acts.
Speaker Change: And where.
Speaker Change: We're going to make it X minus and some of this is going to happen a little maybe perhaps a little bit later on today, but we've given them options. If you want to take the rate cut now will we will skip the next maybe the first one you get so we're pushing those down on a.
Speaker Change: As far as I know so far, we got a change in our Outlook from Fitch, but I don't know if there's any other bank that had a change in their Outlook. My sense is the rating agencies may be a little slow to pull the trigger, but when we go in there, we want to go in there with great capital levels, a firm, steady, stable asset quality, and very strong liquidity. That's how we're positioning the company. In the meantime, our corporate trust group is still operating and bringing in good business; they could just bring in more business with an upgrade to an investment rating. So they're doing just fine.
Speaker Change: Basically individually as we kind of go through this so we are picking that up now I think thats going to continue into.
Speaker Change: Into January and February.
Speaker Change: And did you see any attrition as a result of those conversations are.
Speaker Change: Any color there.
Speaker Change: So there hasnt been any attrition and then I think and I think that's an input point for us in terms of what is our pricing wise relative to alternatives elsewhere I think what it means is that the fever has broken on the rate cycle, certainly and and the opportunity to move into either other financial institutions or to move.
Speaker Change: This would just accelerate their opportunities to bring in more business. Gotcha. Okay, I appreciate it. You'll probably be at 12 by the time you get that announcement, but appreciate the time, guys.
Speaker Change: Thank you. Our next question comes from Brodie Preston of UBS. The line is now open, please go ahead.
Speaker Change: And to some kind of off balance sheet thing that may be divested at treasury. All of those have had fallen in terms of what the what the opportunity is and what they might be able to migrate to and I think that has helped us in this negotiation. We do these one off and to some degree sequentially in case, we run into a situation like that where we're starting.
Brad Milsaps: Yeah, thanks. I just wanted to follow up on the loan yields. I understand the move from the HFS to HFI, but I was hoping Dale, could you provide what the spot rate was for the loan portfolio at the end of the quarter? Yeah, 703.
Speaker Change: To see some expression like okay, well, that's it and that's an important point and then we will ease off in terms of how many were doing or what we're asking for them to give up.
Brad Milsaps: Okay, thank you very much. I also wanted to get a better sense for the BTFP; what was the rationale behind paying off the BTFP but not more expensive borrowings? I think the last time in your 3Q and 10Q, I think the rate on the BTFP was $476 versus the average short-term borrowing rate of $574 this quarter. I just wanted to better understand the thought process there.
Speaker Change: Okay, Great really appreciate the time this morning.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from David Smith of Autonomous David.
David Smith: Please go ahead.
Thank you I wanted to circle back to those normalized NIM comments earlier in the call are you, saying that three 5% should be a slower or more the middle range for NIM in a typical rate cycle.
Speaker Change: We all, you know, frankly, we just thought we didn't need to be borrowed from the Federal Reserve, and so, you know, so we did that. I agree with you. It's at a modest cost. It was going to mature anyway.
Speaker Change: Well that was kind of.
David Smith: That was in the kind of an extended conversation.
David Smith: Where might we had over time.
Speaker Change: This is something that we acquired in March of last year, and it was a 12-month deal, so it was a couple months early relative to what it would have been. We thought we would just leave it behind in 2023. Yeah, thank you.
David Smith: And getting back to a number a four handle.
Speaker Change: I don't see that so so.
Speaker Change: Thats an extended extra.
Speaker Change: Expectation of maybe kind of where we might be I do feel like that we are approaching kind of an equilibrium level now and so that three and a half number is not that far from that but that.
Speaker Change: That is into our guidance in terms of kind of where we're headed in 2024.
Speaker Change: I wanted to clarify just on the ECR-related deposits. I think the slide says you have 17.8 billion of ECR deposits at quarter end. But you got about 14 and a half billion of NIB. So is there another component of the ECR-related deposits that's technically still interest bearing but also gets compensated through ECR?
Speaker Change: Yes, we do.
Speaker Change: <unk> indicated in capital.
Speaker Change: Alright.
Speaker Change: Yes, David look David go ahead.
Speaker Change: Aye.
Speaker Change: Yeah.
So if there's nothing else on the NIM.
David Smith: Talking about capital.
David Smith: Yes, youre going to keep doing a high teens ROTC and.
Speaker Change: Yes, correct. So, depending on what type of client it is, we could have a situation whereby the manager gets the ECR, and the owner gets the interest income. So you don't really see that in a mortgage warehouse because those are really not interest-bearing deposits. But on an HOA, for example, it's a dual situation, most commonly, whereby the aggregator gets an earnings credit rate on the dollars that are owned by the HOA itself. All of these companies are now in a position to make a big expense because they simply have no claim on that liability to us and the deposits of that enterprise. So that's why it's doubled up.
David Smith: With your loan growth guide I think the only imply something like four 5% <unk> growth. This year. So that just seems to imply a ton of excess capital being generated and.
David Smith: You should reach 11% CET one pretty soon.
David Smith: And 11% as a floor, but is there a level where.
David Smith: You think that's just starting to get excessive and even regardless.
David Smith: Less of a change in ratings.
David Smith: It starts to make sense to turn on the buyback.
David Smith: If you could still be measured with well.
David Smith: Yes.
David Smith: Okay.
David Smith: As we climb above 11, I think it introduces optionality you can you can build capital and then that could be part of an M&A transaction there could be multiple things that one can be done with it.
Speaker Change: Got it. And then the last question I had was just on the MSR loss. I just wanted to maybe understand the mechanics a little bit.
Speaker Change: Dale, did you, you know, throughout the course of this past year, maybe put a higher mark on the MSR and the correspondent production, you know, like capitalize it at a higher rate? And did that impact the gain on sale margin at all? And then you'd have to take a loss on it when rates moved against you and you sold the MSRs this quarter? I just want to understand the moving parts there.
David Smith: It again.
Speaker Change: We're not we're not there right now.
Speaker Change: And we're again cleaning up kind of in the last few things that we want to change on our balance sheet and by the summer time, I think we will it will be there in terms of the profile, we're looking for liquidity.
Speaker Change: And lastly on deposits can you share how much of the interest bearing deposits are.
Dale M. Gibbons: No, I wouldn't say that. I mean, it was kind of the volatility around what happened. So we saw CPRs decline to the slowest that I think I'd ever seen. And maybe somebody in the business had been around, but they were at like 3 to 4% constant prepayment rates, which is exceptionally low.
Indexed to a rate as opposed to having some some level of discretion at the bank in terms of pricing.
Speaker Change: Well I mean, so I mean, if you look at our interest bearing deposit cost.
Speaker Change: You can you can see that that is not as large.
Speaker Change: Our component relative to kind of some of these ECR outlets, we've been talking about so.
Dale M. Gibbons: And then when rates picked up again, I mean, rates fell, CPRs jumped, and maybe it was a little bit of a catch-up from refis or whatever that had been delayed. And so as a result of that, we had a gain on our hedge that fell short of the loss in terms of valuation. The result was that the value of those servicing rights fell by $100 million in the fourth quarter. And we were $14 million shy of what we picked up in terms of gain on the hedge. And that was because we had such a rapid velocity change from a very low CPR, maybe the lowest ever, to something that was more normalized.
Speaker Change: There is some that is.
Speaker Change: A little bit higher beta, but it is it is.
Speaker Change: Less significant than on the ECR fees.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Tim <unk> of Wells Fargo. Your line is now open. Please go ahead.
Dale M. Gibbons: Now, Brody, I just want to remind you that, you know, by the end of Q4, the 10-year Treasury dropped 69 basis points from 457 to 388 to just punctuate Dale's point. And, you know, the MSR balance; we have several outside valuation firms that come in and look at that MSR and value it for us to make sure that, you know, we're within the appropriate range. Got it. Understood. Thank you very much for taking my questions, guys. Thank you. Our next questions come from Andrew Terrell of Stevens. Your line is now open; please go ahead. Hey, good morning.
Tim Bruckner: Oh, sorry, Kim Your line is now open. Please go ahead.
Speaker Change: Timber has disconnected at this time, we have no further questions. So I'll hand back to Ken Vecchione for any further remarks.
Kenneth A. Vecchione: Well. Thank you very much for joining us today, and we look forward to talking to you about 2024.
Kenneth A. Vecchione: A couple of months from now thanks again.
Andrew Terrell: Dale, if I could start by saying, I hear your comments around mortgage banking and kind of the potential upside there not being captured on the go-for-guide. Just to the extent the mortgage market does turn, and we do end up seeing some kind of upside on the fee income front over time. Can you just remind us of the incremental efficiency in that business and maybe just to give us a better sense of how the expenses would fluctuate with the lift in fees? Yeah, I mean, when they were a standalone enterprise, they were running about 50%.
Speaker Change: Thank you for joining today's call you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Andrew Terrell: And when we acquired them, you know, we were in kind of the low 40s, and they came in, and that took us to kind of the mid, the mid, the mid 40s. I think that's, that's basically intact today. So yeah, so it's, frankly, their marginal rate of efficiency is pretty close to the bank's overall now that the bank has invested in, you know, elements of that that are higher cost with technology and some of this risk management infrastructure and lower investment yields related to the building of the HQLA.
Andrew Terrell: So right now, our efficiency ratios are comparable at about 50%. Okay, I appreciate it. Looking at the deposit cost expense line this quarter, if I compare the disclosed expense on deposit costs versus the average balance of ECR deposits, it looks like, on a percentage basis, the cost ticked down a few basis points this quarter. Have you lowered rates anywhere in the product already? Or is that more of a function of the mix this quarter?
Speaker Change: We haven't lowered rates, but what we have done is we have one-off clients and said, look, your spread relative to, say, affected set funds has been X, and we're, you know, we're going to make it X minus. And some of this is going to happen a little, maybe perhaps a little bit later if you're going to do something today, but we've given them options. You know, if you want to take a rate cut now, we'll, you know, skip the next one, maybe the first one you get. So we're pushing those down individually as we kind of go through this.
Speaker Change: So we are picking that up now. I think that's going to continue into January and February. And did you see any attrition as a result of those conversations, or is there any color there? No.
Speaker Change: So there hasn't been any attrition, and I think that's an influence point for us in terms of, you know, what is our pricing like relative to alternatives elsewhere. I think what it means is that, you know, the fever is broken on the rate cycle, certainly, and the opportunity to move into either other financial institutions or to move into some kind of off-balance sheet thing that maybe is invested in Treasury, all of those have fallen in terms of what the opportunity is and what they might be able to migrate to. And I think that has helped us in this negotiation. We do these one at a time and, to some degree, sequentially, in case we run into a situation like that, where we're starting to see some attrition, and we're like, okay, well, that's an important point.
Speaker Change: And then we'll ease off in terms of how many we're doing or what we're asking for them to give up. Okay, great. Really appreciate the time this morning. Thank you. Our next question comes from David Smith of Autonomous. David, your line is now open, please go ahead. Thank you.
David Smith: Are you saying that 3.5% should be a floor or more the middle range for NIM in a typical rate cycle? Well, that was kind of an extended conversation of where we might head over time, and getting back to a number, a four-handle, I don't see that. So, I mean, that's an extended expectation of maybe kind of where we might be. I do feel like we're approaching kind of an equilibrium level now, and so the three-and-a-half number is not that far from that, but, you know, I'm not suggesting that isn't our guidance in terms of kind of where we're headed, you know, in 2024. Yeah, we do say thanks to North Carolina Gated.
Speaker Change: I'm capital. Go ahead, Juan. David, go ahead. I'm. Yeah.
Speaker Change: So, if there's nothing else on the MIM, talking about capital. You're going to keep doing the high teens ROTC, and with your loan growth guide, I think that only implies something like 4 or 5% RWA growth this year. So that just seems to imply a ton of excess capital being generated, and should reach 11% CET1 pretty soon. I know 11% is the floor, but is there a level where? You think that it just starts to get excessive.
Speaker Change: And, you know, even regardless of a change in ratings, just it starts to make sense to turn on the buyback, still being measured with... Okay, as we're as we climb above 11, I think it introduces optionality, you can build capital, and then that could be part of an M&A transaction, there could be multiple things that, you know, that one could be done with it. But again, you know, it's just we're, you know, we're not, we're not there right now. And, you know, we're, again, cleaning up, you know, kind of the last few things that we want to change on our balance sheet. And by summertime, I think we'll, you know, we'll, we'll be there in terms of the profile we're looking for in terms of liquidity.
Speaker Change: And lastly, on deposits, can you share how much of the interest-bearing deposits are indexed to a rate as opposed to having some level of discretion at the bank in terms of pricing? Well, you know, I mean, if you look at our interest-bearing deposit costs, you can see that it's not as large of a component relative to some of these ECR outlets we've been talking about. So there's some that is a little bit higher in beta, but it is... less significant than on the EGR piece.
Speaker Change: Thank you. Our next question comes from Timur Braziler of Wells Fargo. Your line is now open; please go ahead. Sorry, Timur. Your line is now open. Please go ahead. Timur has disconnected at this time. We currently have no further questions. So I'll hand it back to Ken at Vecchione for any further remarks. Well, thank you very much for joining us today. We look forward to talking to you about 2024, a couple of months from now. Thanks again. Thank you for joining today's call. You may now disconnect your lines.