Q4 2024 Western Alliance Bancorporation Earnings Call
The End
Speaker Change: Good day, everyone. Welcome to Western Alliance Bank Corporation's fourth quarter 2024 earnings call.
Speaker Change: You may also view the presentation today via webcast through the company's website at www.westernalliancebankcorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
Speaker Change: Thank you and welcome to Western Alliance Banks fourth quarter 2024 conference call. Our speakers today are Dale Gibbons, interim CEO and CFO, Steve Curley, Chief Banking Officer for the National Business Lines, and Tim Bruckner, Chief Banking Officer for Regional Bank.
Speaker Change: Before I hand the call over to Dale, please note that today's presentation contains forward-looking statements which are subject to risks, 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, please visit www.dale.com.
Speaker Change: That could cause actual results to differ materially from any forward-looking statement. Please refer to the company's SEC filing, whom the form a.k.a. filed yesterday, which are available on the company's website. And for opening remarks, I'd like to turn the call over to Dale Gibbons.
Dale Gibbons: Good afternoon everyone. I'll make some brief comments about our fourth quarter and full year 2024 earnings, then review our financial results and drivers in more detail before handing the call over to the other two members of the executive committee leading the company during Ken's absence, who's doing quite well and we expect to be back soon.
Speaker Change: Steve Curley, our Chief Banking Officer for National Business Lines, will discuss our business balance sheet composition and loan and deposit growth drivers. Tim Bruckner, our Chief Banking Officer for Regional Banking, will then discuss asset quality trends.
Dale Gibbons: I'll close our prepared remarks for reviewing our 2025 Outlook before opening the call up for questions and answers.
Speaker Change: Before addressing our financial results, I want to express our heartfelt sympathy to those affected by the Southern California wildfires. We have a long-standing presence in the area and are saddened for those whose lives and livelihoods have been upended by this tragedy.
Speaker Change: Western Alliance has already taken actions and stands ready to support our employees, clients, and communities in the rebuilding efforts. We are also currently in the process of providing direct financial support to relief efforts.
Speaker Change: Regarding borrower exposure for the company, we've identified 17 properties experiencing either significant or total loss, with a combined exposure of under $15 million.
Speaker Change: Each of these properties had sufficient insurance coverage above our loan amounts, with Western Alliance designating it as a lost payee. Therefore, we expect negligible direct financial impact to the company.
Speaker Change: Looking back over 2024, Western Alliance completed a significant liquidity build where we purposefully prioritized growing deposits in excess of loans and deployed this excess liquidity into lower yielding high-quality liquid assets, which is demonstrated in our 31% marginal loan to deposit ratio for the year.
Speaker Change: With the Stout Liquidity Foundation, we are well-positioned to resume deploying future incremental deposits into more normal earning asset mix that prioritizes higher-yielding loan growth while maintaining a low 80s loan-to-deposit ratio.
Speaker Change: This positions Western Alliance in 2025 to further drive down cost of deposits, expand our net interest margin, improve profitability, generate significant operating leverage as our efficiency ratio closes in on 50%,
Speaker Change: on an adjusted basis and a move toward a higher teens return on tangible common equity by year-end.
Speaker Change: Looking at our financial performance, Western Alliance ended the year with solid earnings generating $1.95 per share for the fourth quarter and $7.09 for 2024. I'm also pleased to report pre-provisioned net revenue growth was 12% linked quarter unannualized.
Speaker Change: These results demonstrate the power of our credit and deposit platforms and our gathering success in earning fee income from clients while proactively managing asset quality during a changing rate environment.
Speaker Change: and a material decline in special mention loans makes us increasingly confident the bulk of CRE migration to classifieds behind us and net charge-offs in 2025 will be comparable to that experience in 2024.
Speaker Change: with a year of well-produced net revenue of $3.2 billion, net income of $788 million, and earnings per share of $709 million.
Speaker Change: Net Revenue and Pre-Provisioned Net Revenue increased 21% and 14%, respectively, from the prior year, demonstrating the strength of banks' earnings engines throughout the liquidity restocking process.
Speaker Change: Balance sheet repositioning actions that fortified our liquidity and capital basis now position the bank to resume greater risk-adjusted balance sheet growth going forward. Notably, net interest income increased 24 million more than ECR related deposit costs did during the falling rate environment.
Speaker Change: Turning to fourth quarter trends and business drivers, Western Alliance generated pre-provisioned net revenue of $319 million, net income of $217 million, and EPS of $195 million.
Speaker Change: That interest income decreased $30 million during the quarter to $667 from lower yields on interest earning assets along with approximately flat average earning balances.
Speaker Change: Loan growth was back-weighted as we experienced some deferral of funding into Q1 2025 and paydowns.
Speaker Change: Non-interest income of $172 million rose $46 million quarter-over-quarter from higher mortgage banking revenue, commercial banking fees, and income from equity investments.
Speaker Change: Mortgage banking revenue grew $34 million quarterly to $93 million as mortgage loan production rose 31% year-over-year, with a firming gain on sale margin of 21 basis points in the fourth quarter.
Speaker Change: AmeriHomes earnings benefited from secondary sales from seasonally strong demand for CRA qualifying loans and mortgage servicing rights, where lack of industry supply benefits our business margins as a regular seller.
Speaker Change: Additionally, we are making product investments to tap into new mortgage customers that could benefit us in a higher mortgage rate environment.
Speaker Change: Non-interest expense declined $18 million quarterly to $519 million as deposit costs fell over $33 million to $174 million. Deposit cost reductions are poised to continue pulling overall expenses lower throughout 2025.
Speaker Change: An aggregate deposit cost fell by $3 million more than net interest income declines this quarter, which exemplifies our balance sheet flexibility and nominal net interest income-related earnings volatility during a changing rate environment.
Speaker Change: Provision expense of $60 million resulted from $34 million in net charge offs and an incremental qualitative adjustment on the CRE portfolio.
Speaker Change: Lastly, our tax rate was lower than expected in Q4 due to several factors, including an increase in solar tax credits from projects placed in service.
Speaker Change: Turning to our net interest drivers you'll see the impact of falling rates on our asset yields but continued accelerating deposit repricing is reducing the overall cost of liability funding.
Speaker Change: which will expand margins going forward. For the quarter, the yield on total securities declined 22 basis points to 467. However, investment loan yields decreased 31 basis points to 634 due to the impact of rate cuts on variable rate loans.
Speaker Change: The cost of interest-bearing deposits declined 27 basis points from a reduction in deposit rates, which continues irrespective of potential future rate cuts.
Speaker Change: Indicative of how funding cost reductions are offsetting lower asset yields, the 20 basis point difference between the year-end spot rate and the Q4 average rate for interest bearing deposits exceeds the eight basis point difference for both held for investment loans and securities portfolio yields.
Speaker Change: Throughout the fall of last year, market expectations for steep successive rate cuts were so significant that one-month and three-month SOFR were lower than Fed funds expected.
Speaker Change: This pressured our margin as most variable rate yields are tied to SOFR, but indexed deposits and ECRs are usually tied to the Fed Funds Rate.
Speaker Change: As rate cut forecasts have tempered significantly, this relationship has changed, and now term SOFR is essentially aligned with Fed Funds Effective.
Speaker Change: This is why the difference between spot rates for loans and securities and those of deposits was 12 basis points wider to start 2025 than it was for the average during the fourth quarter.
Speaker Change: Additionally, we have further reduced deposit rates and DCRs in January while SOFR remains flat as no cut action is expected from the FOMC tomorrow.
Speaker Change: Total cost of funds declines 15 basis points to 2.52% and would have fallen further absent the typical seasonal decline in deposits causing a larger portion of earning assets to be funded by borrowing.
Speaker Change: which we expect to repay fairly rapidly. In other words, we are seeing funded hostile ones emerge outside of just ECR-related deposits.
Speaker Change: In aggregate, net interest income declined $30 million from lower yields on earning assets. Net interest margin compressed 13 basis points from Q3 to Q3'48.
Speaker Change: However, I'll point out the overall balance sheet profitability continues to improve and its annualized ECR-related deposit costs to average earning assets, which is a fund.
Speaker Change: fell 16 basis points quarter over quarter, outpacing the net interest income decrease rooted in term SOFR pricing, moving ahead of effective Fed funds reductions.
Speaker Change: Overall, non-interest expense declined $18 million in Q4 as deposit costs fell $34 million from lower rates and average balances, while other operating expenses increased $15 million, mostly from an accrual tree-up due to the annual bonus.
Speaker Change: We expect continued reductions in deposit costs and ECR rates as the full benefit of a lower rate environment is realized.
Speaker Change: Our adjusted efficiency ratio for the quarter improved by 160 basis points to 51%, buoyed by higher mortgage banking revenue.
Speaker Change: Regarding interest rate sensitivity, we've included both a static shock and a dynamic balance sheet ramp scenario to better illustrate the factors that make Western Alliance interest rate neutral on an earnings at-risk basis.
Speaker Change: We are forecasting two 25 basis point rate cuts this year, which is similar to what the futures market currently expects.
Speaker Change: In the bottom left quadrant, you will see that our Static Balance Sheet Stock Scenario interest-sensitive earnings should increase modestly in both the up 100 and the down 100 stocks, making us essentially rate-neutral.
Speaker Change: This is exactly what happened in Q4, with a decline in net interest income more than offset by growth in mortgage banking revenue and a material decline in ECR-related costs.
Speaker Change: This dynamic is indicative of the interplay between our mortgage business and higher beta ECR-related deposits, which act as a natural hedge to earning assets at a more variable rate and thus make us appear asset-sensitive on a reported net interest income basis.
Speaker Change: Depending on the trajectory of interest rates, we are prepared to make adjustments to our loan and securities mixes to maintain our largely rate-neutral earnings profile if needed.
Speaker Change: Steve Curley will now take us through the balance sheet dynamics. Thanks, Dale. The balance sheet ended the year at approximately $81 billion, which reflected solid loan growth of $330 million and an increase in securities and cash of $217 million.
Steve Curley: As previously mentioned, deposits declined $1.7 billion, primarily driven by expected short-term seasonal mortgage warehouse factors.
Steve Curley: Q4 outflows were comparable on a relative basis to the prior year.
Steve Curley: Farms rose $2.6 billion to offset the lower deposits, but we expect to reduce these high-cost balances as deposit growth resumes in the first quarter.
Steve Curley: Echoing Dale's introductory comments, throughout 2024, half of the $10 billion in balance sheet growth was in cash and securities, while we also reduced borrowings by $1.5 billion.
Steve Curley: With this important liquidity build behind us, we are poised to generate strong, risk-adjusted, earning asset growth going forward.
Steve Curley: Finally, tangible book value per share growth was suppressed by a negative AOCI charge in the fourth quarter, but still increased 12% year-over-year to $52.27.
Thank you for listening.
Steve Curley: Western Alliance Credit Platforms provide expertise to a variety of industries and clients which have allowed us to repeatedly produce loan growth better than overall industry.
Steve Curley: Loan growth of $330 million was more muted than expected, but progress continues to be achieved in diversifying the loan mix into C&I loans while design runoff occurs in our RESI portfolio.
Steve Curley: This trend continued in the fourth quarter, with nearly all growth in C&I, while construction loans were down $248 million.
Resident Consumer Loans decreased $74 million.
Steve Curley: C&I loans now account for 43% of the held for investment loan portfolio compared to 38% a year ago, while resi and consumer loans are now just over 26% of the portfolio compared to 29% at the end of 2023.
Steve Curley: In the fourth quarter, growth was fairly diverse as our regional and national business lines contributed $186 million and $110 million in loans, respectively.
Steve Curley: Growth in regional banking was primarily driven by home builder finance, hotel franchise, and tech and innovation.
Steve Curley: For the National Business Line, Mooridge Warehouse and MSR Finance were the main growth contributors.
Turning to slide 12, deposits grew $11 billion in 2024.
primarily in money market accounts and ECR-related non-interest bearing.
Steve Curley: In the fourth quarter, deposit growth in our other businesses lines resulted from strength across regional banking business of $327 million, which fully funded its loan growth.
Steve Curley: as well as $2.4 billion in contributions from escrow services businesses such as Juris, HOA, and Corporate Trust.
Steve Curley: Combined with $111 million of consumer digital deposit growth, growth in these channels allowed us to partially offset $5.7 billion in mortgage warehouse deposit outflow as expected.
Thank you for your time. Have a great day.
Steve Curley: Our deposit-focused businesses provide diversified, granular deposits that complement other deposit-gathering efforts and support our loan growth.
I'll now hand the call over to Tim Bruckner.
Thanks, Steve. Overall asset quality
Steve Curley: and Quarter 4 criticized assets rose $61 million as special mention loans declined $110 million while classified assets increased to $171 million.
Steve Curley: Criticized assets are only 87 million higher from a year ago and declined from 1.85% to 1.73% as a percentage of total assets during the same time period.
Steve Curley: reflecting the interplay of upgrades and downgrades driven by our proactive risk mitigation strategy.
Steve Curley: We expect the Total Criticized Asset Pool to remain stable in Q1 and then declining throughout 2025.
Steve Curley: Due in part to our proactive management of troubled situations, which requires pressing for re-margin or ongoing borrower investment in troubled loans, non-performing assets as a percentage of total assets increase to 65 basis points during the quarter.
Steve Curley: We expect to see non-performing loans decline as we work through the resolution process.
Steve Curley: These loans have been reserved or charged down to current as-is values and are revalued on an ongoing basis.
Steve Curley: Our ACL was increased in support of re-evaluations in the context of our practice strategy.
Steve Curley: As a green shoot, we're beginning to see increased lease activity in office properties that have been reset. A compelling example of this is the downtown San Diego property, which migrated into other real estate owned early in Q4.
Steve Curley: Since taking control of this asset and resetting the basis and rents to the market, we reached agreement to lease five and a half additional floors. Occupancy has rebounded from 44% to 62% in just a little over two months.
Steve Curley: Quarterly net charge-offs were $34 million or 25 basis points of average loans.
Steve Curley: and 18 basis points for the year. We expect charge-offs to be relatively similar in Q1.
Steve Curley: followed by a generally declining trend throughout 2025 as we continue to make progress remediating our CRE portfolio.
Steve Curley: Provision expenses $60 million added to reserves to cover charge-offs and augmented our CRE reserve. Our classified loans are supported by ASIS valuations.
Steve Curley: giving effect to the present market conditions. Our ACL for funded loans increased $17 million from the prior quarter to $374 million.
Steve Curley: The total ACL-to-funded loans ratio of 77 basis points rose 3 basis points from the prior quarter.
Steve Curley: Slide 15 shows the updated ACL walk we've regularly provided to add more context behind our allowance methodology relative to our peers. Our ACL moves up from 77 basis points to 1.37% when incorporating the effect of credit link notes.
Steve Curley: as well as the low-to-no-loss loan categories like equity fund resources,
Steve Curley: our low LTV and high FICO resi portfolio and mortgage warehouse. Compared to our $50 to $250 billion asset peer banks, we benefit from greater credit link note support as well as a greater percentage of loans in the low to no loss categories.
Dale Gibbons: Emblematic of a balance sheet with a low risk profile, our risk-weighted assets to tangible assets ratio is one of the lowest among the largest U.S. banks at just under 70 percent. I'll now hand the call back to Dale.
Dale Gibbons: Thank you, Jim. Our CET1 ratio increased approximately 10 basis points to 11.3 during this quarter.
Dale Gibbons: Our tangible common equity to total assets remains flat at 7.2.
Dale Gibbons: given the evolving conversation on Basel III endgame. But I mentioned that our CET1 ratio, including AOCI marks, as well as the low-loss reserve, is 11%, which is down slightly from 11.1% at September 30th.
Dale Gibbons: Please note the peer data used in the appendix of this presentation are from Q3 when AOCI was pronounced across the industry for the peers. Even with our AOCI DRAG and Q4 applied to all, our adjusted capital still ranks above the median of the peer group.
Dale Gibbons: As previously mentioned, our tangible book value per share increased 29 cents.
Dale Gibbons: to 5227 at year-end, which reflects solid earnings growth that mitigated negative AOCI impact from higher rates. Consistent upward growth and tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by seven times over the past decade.
Dale Gibbons: Turning to the management outlook, exiting 2024, we have essentially completed our balance sheet transformation that considerably increased our deposits and liquidity buffer, while still growing earnings and capital.
Dale Gibbons: In 2025, we expect continued thoughtful balance sheet growth driven by a diversified credit and deposit platforms with an origination mix designed to drive net interest income growth and margin expansion.
Dale Gibbons: We expect loan growth of approximately $5 billion for the year that should hold the loan to deposit ratio of around 80 basis points.
Dale Gibbons: 80%. Deposits are expected to grow $8 billion with increased contributions from our regional banking and escrow businesses.
Dale Gibbons: Turning to capital, our CET1 ratio should remain fairly consistent with our year-end level of 11.3, providing balance sheet flexibility.
Dale Gibbons: Net interest income is expected to increase 6-8% largely as a result of sustained thoughtful loan growth and expanding NIM that approximates 2024 level on a full year basis.
Dale Gibbons: Non-interest income is also expected to grow 6-8% due to ongoing traction and cultivating deeper client relationships with commercial banking fee opportunities and stable mortgage banking revenue.
Dale Gibbons: Non-interest expense should decline 1% and 6% with DCR-related deposit costs between $475 and $525 million, which is notable moderation primarily driven by continued rate reductions.
Dale Gibbons: as we continue to invest in future growth opportunities and crossing over the $100 billion asset threshold. We expect to make meaningful operating leverage that will drive our adjusted efficiency ratio below 50% by the end of this year.
regarding our ongoing LFI readiness.
Dale Gibbons: efforts to transition to a Category 4 bank, we've completed significant foundational investments in risk and treasury management as well as data reporting capabilities over the last four years when we were $36 billion in assets.
Dale Gibbons: and expect incremental investments of $55 million to $65 million over the next three years to make the bank cap 4 ready.
Dale Gibbons: Of this amount, we only expect half to become incremental run rate operating expenses, which is already baked into our business plans and run rate and won't meaningfully impact our profitability. I'd also note these costs exclude total loss-absorbing capacity considerations, which are uncertain at this point.
Dale Gibbons: Asset quality remains resilient and we expect full year charge offs of approximately 20 basis points compared to 18 basis points for 2024. Lastly, the effective tax rate for the full year should be approximately 21% as it was in 2024.
Dale Gibbons: So in conclusion, in 2025 you should expect Western Alliance to enter a renewed period of stronger profitability and robust earnings growth, significant operating leverage improvement, and return on tangible common equity climbing into the upper teens.
Speaker Change: At this time, Steve, Kim, and I look forward to answering your questions.
Speaker Change: Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. Our first question comes from Ibrahim Poonawalla from Bank of America. Please go ahead.
Good afternoon.
Speaker Change: I guess maybe first question, just on capital, when we look at the capital you I think you mentioned you are pretty much there on C81 and maybe even TCE where you want to be. Like given the five billion dollar loan growth outlook
Speaker Change: See the bank is having excess capital and if you do have excess capital would you consider buybacks or just how you're thinking about capital deployment priorities?
Speaker Change: Yeah so you know we're generating and we expect to generate certainly enough capital to support the balance sheet growth that that I outlined and we think that's kind of the highest and best use for us but you know you know when it makes sense to be able to do something you know to take advantage of a displacement at some point if should that occur in the market yeah I think that would that would be appropriate it's not our first first order of good business however.
and Miles Pondelik.
Speaker Change: And I guess just, Dale, when looking at slide 9, when we think about rates with, I guess,
Speaker Change: just give us, remind us like what would be the ideal grade backdrop for the bank as we think about overall earnings growth, be it on the fee income side and as well as from a net interest margin factoring in the ECR costs.
Dale Gibbons: Yeah, I think the initial rate decline worked out best for the company.
Speaker Change: So, you know, right now we're seeing, I'm going to say...
maybe
Dale Gibbons: capitulation from homebuyers in terms of even going into 7% mortgages.
Dale Gibbons: If they were maybe in the low sixes, I think that would be maybe more substantial. And maybe avoid kind of the flash in the pan type of thing, which may be occurring during the pandemic when they drop so sharply. So if we could have a slowly declining rate environment, that's what I would prefer that obviously eases.
Dale Gibbons: may be credit concerns as well as debt service coverage costs also ameliorate to some degree, so
Dale Gibbons: But, you know, conversely, you know, we're ready kind of for everything. I mean, we can handle, you know, an increase in rates. We can have, you know, a steeper decline. You know, right now, we're showing that, you know, we're, most of our loan growth has originated in basically SOFR tied variable rate.
Dale Gibbons: But we can swap that fixed if it looks like things are going to be falling more precipitously.
Speaker Change: And just a quick follow-up, your fee income guide, does it assume a big pullback in mortgage rates or are you assuming 30 year, 7 year, 7% mortgage rates kind of holding for the rest of the year?
Thank you for your time. Thank you.
Speaker Change: Yeah, we're not, we're assuming, but basically, we're really aligned with kind of the futures market right now, which I think would be ebbing, you know, in terms of rates throughout the year. You know, the Mortgage Bankers Association just came, I realize that's an industry entity, you know, came out looking for something a little more optimistic. We're not. We're looking for basically flat from 24 to 25.
Speaker Change: and I think we're kind of headed into that, you know, right now in the first quarter. You know, the first quarter of 24 was really flat to the fourth quarter that we had of 24, so we think we're in, we think that looks fairly decent.
That's helpful. Thank you for taking my questions.
Speaker Change: Our next question comes from Matthew Clark and Piper Sandler. Please go ahead.
Good morning, everyone.
Just on the ECR-related cost outlook,
Speaker Change: You mentioned you're assuming two rate cuts this year. What about the average?
Speaker Change: ECR deposit balances this year. Is there an expectation maybe that there's not as much growth in 2Q3Q and that balances are just a little bit lower and help keep the cost down? Any update or change there?
Speaker Change: Yeah, so we had the seasonality drop, and I think we telegraphed that at the third quarter earnings call. In the fourth quarter, we have a lot of paydowns from ECR-related mortgage warehouse funds.
Speaker Change: for property taxes, you know, that's kind of rebounded as expected, but I do expect us to have a broader growth of our deposit base in 2025 than we had in 2024. And getting to your point, Matt, that there's going to be less expansion certainly in the mortgage side, and we're growing in other categories. We have our, you know, our escrow businesses.
Speaker Change: which I think are doing well. You know, we've got our trust operation. We have our settlement services. We have our business escrow services. We think the outlook for that might be a little bit better this year with kind of the change in administration and maybe some more M&A activity going on. So we're looking for a broader diversification.
Speaker Change: I've managed that business for quite a while. I think deposits there will be flat, but economics will be a bit better. There's not quite as much pricing competition, so I think
Speaker Change: You know, you might see us improve the cost of funding beyond what just happens with the fed funds rate.
Speaker Change: Got it. Okay, and then just on average earning assets, at least in the near term, I think you're anticipating some growth.
Speaker Change: in earning assets this year, but how should we think about earning assets, I guess, here in the near term? Should we just assume you're paying off that debt that you took on with the seasonal inflow of ECR deposits here in 1Q?
Thank you.
Speaker Change: Well, so, yeah, we said $8 million for the year, and it's...
Speaker Change: We just saw, you know, the fourth quarter tends to be a little bit of a contraction. So it means you've got to do more than eight for the first three quarters. And part of that is really kind of, you know, kind of paying that down. No, I'm looking for, I'm looking for loan growth to be, you know, more or less consistent, you know, throughout 2025.
Okay, thank you.
I just said.
Speaker Change: I think, you know, we kept carefully managed the loan growth in 2024 as we did the liquidity bill, but
Speaker Change: I mean, our people are out in the market making sales calls and I can kind of feel the pipelines filling up. So, you know, we have exposure to private credit. We like that business, good risk adjusted returns with our lender finance and built finance business. So, I'm bullish on loan growth.
Speaker Change: Our next question comes from Bernard Von Gizisky from Deutsche Bank. Please go ahead.
Speaker Change: Hi guys, good morning. Just on the expenses, we talked about the deposit, insurance,
Speaker Change: expenses related of $37 million in the quarter. I know the sequential increase was due to higher insured balances. Are these costs that you'll be able to pass on to depositors, or do you see this expense expected to continue to increase and assume in the $25 outlook?
Speaker Change: Yeah, that's a great question. No, we don't expect it to increase. And, you know, we got here, you know, in part after some of the volatility last year.
Speaker Change: and whereby, you know, we basically volunteer clients said, you know what, why don't you move into an insured deposit in a...
Speaker Change: network situation. And there's a cost associated with that both to the FDIC as well as to the network manager. And, and so we did that. And so what we just just implemented in the fourth quarter, I think December
Speaker Change: We're now charging the client for that. It's actually a little bit of a surcharge. And we said, look, we're going to set it up that either way. You can move funds at will from fully insured or just to insured to $250,000. But note that there's a 40 basis point charge if you're going to go to the fully insured.
Speaker Change: Piece of it, and and so something moved back and forth. A lot of we're keeping it. You know, kind of in fully insured and so we're actually doing a little bit better Than we expected with that. But nowhere. We push that back to the clients who give them optionality now and and so far, he's working out
Speaker Change: And then just maybe on credit, I noticed you mentioned the appraisals obtained at the end of the year.
Speaker Change: I know there was a pickup in that charge-offs in CNI, and I know that's been like kind of lumpy, you know, one-offs really.
Speaker Change: throughout the year, the big pickup in core Q. Just thoughts on, you know, your outlook for 25. I know it seems to be kind of flat and more positive, but just anything on CNI that you're seeing, any color you can elaborate on?
Great question. Thanks, Tim Bruckner.
Speaker Change: Okay, first, outside of CRE office, we're not seeing any migration trends.
Speaker Change: and any other, and any other saying that. So RCNI has been...
stable and very predictable.
In terms of performance, we've made no...
Speaker Change: You know, changes in our business model or underwriting that would suggest that would change going forward. When we look at CRE Office, I remind the listeners that we're a bridge lender in this area. So that entire portfolio...
Speaker Change: It is a floating rate portfolio that we underwrote on a path to stabilization or in a repositioning.
Speaker Change: So, we don't have assets that come over the bow in that and surprise us.
Speaker Change: These are assets that receive high monitoring and very structured default provisions from the time we took the loan. So these same assets are the ones that we underwrote on a direct basis and we've been hand-in-hand with for the last year.
Speaker Change: You know, 18 months as we work through the cycle. So your point of, it is and can be chunky. When we talk about the San Diego asset, that's really a good news story. We show the ability to reset the basis.
Speaker Change: to something close to being a low below market and how quickly we can lease a property like that up.
Speaker Change: Having that kind of strategy at our dispose gives us the ability to do that again and again. And so we've been a little more aggressive with the reserve. We stepped up our reserve a little bit to give us that kind of flexibility.
We also note that, you know, that our total...
Speaker Change: Yeah, I mean our total exposure, you know, as we mentioned, been kind of relatively flat, so we don't have any more things kind of coming in the funnel in terms of this, you know, the criticized asset situation.
Any other questions?
Thank you.
Speaker Change: Thank you. Our next question comes from Gary Tenor at DA Davidson. Please go ahead.
Gary Tenor: Thanks. In terms of follow-up on the ECR question asked a few minutes ago, can you just remind me, is the the rate paid on kind of the non-mortgage warehouse
Speaker Change: ECRs, is that just a lower ECR rate? So it brings down the overall rate as the other segments grow?
Speaker Change: yeah I mean most you know so most of them are really binary you're either getting interest or you're getting ECR
There's maybe a unique case with our HOA group whereby...
Speaker Change: Interest goes to the HOA itself, the owner of the funds, and then an ECR can go to the manager, and that's how they get compensated for doing the work for these HOAs. And those are both lower, right? So you have a lower rate and a lower ECR for those that combined is still lower than obviously what a market rate would be.
Speaker Change: Okay, and then on the fee income guide for the year, just curious, does that include any embedded assumptions around equity gains? You had almost forty million dollars this past year. Is there a base assumption as part of that six to eight percent growth range or is that not incorporated?
Speaker Change: So that's not part of the growth. I mean, you know, I mean, we do think that we're likely to see some, you know, those generally come about after acquisition or sale of a company, whether it's an IPO or from a, you know, from a larger, you know,
Speaker Change: you know, what we call sequential buyers. But yeah, we're not anticipating a growth in that, in the equity piece to be able to get that growth rate.
Dale Gibbons: Well, sorry, not growth so much, Dale, but is there a base assumption that it stays fly? Because I guess what I'm trying to understand is, I think you mentioned kind of expectations of flat total mortgage revenue in 2025.
Dale Gibbons: So where is the growth coming from effectively, especially if you kind of had a zero on that equity investment line? So trying to see if it's a zero or flat or what the thought is.
Dale Gibbons: I understand your question, Gary. So yeah, it's basically coming from two places. One of them is our regions.
Dale Gibbons: which we're getting good traction in and we expect to see growth there. We implemented a service charge fee increase on January 1st.
I'll pick that up in a second.
Dale Gibbons: is what we're doing in the digital payment space, you know, with our digital disbursements, which, you know, is probably the largest in the world, I think, on some of these, you know, contracts that they've distributed, and settlement services where there's payment revenue in there that we think is going to be stepping in.
Dale Gibbons: Okay, and that revenue shows up in the service charge line as well.
It does.
and another income at the bottom there, other, other.
Got it. Thank you. Thank you.
Speaker Change: The next question is from Chris McGrathie at KBW. Please go ahead.
Chris McGrathie: Dale, if I look at your expense range and you take out the ECRs, I guess what would make you be at the top or the low end of that expense?
core expenses.
Chris McGrathie: We've got LFI in there, that's certainly a part of what's
Chris McGrathie: Frankly, I would hope that maybe we've got a little stronger performance than we're outlining here. I mean, we see where we've come out. I mentioned that we want to hold kind of an 80% loan-to-deposit ratio. That would imply a little bit better growth based on an $8 billion deposit number.
Chris McGrathie: So things like that, you know, could be a factor which would affect, you know, elements of incentive compensation and things.
of that sort.
Chris McGrathie: Okay and then it gets coming back to the to the margin for a minute it sounds like if we connect the the lag in the deposits and I think you said margins for the full year will be kind of high 350s if I heard you right so Q1 should be
Chris McGrathie: Q1 should see a rebound if I'm interpreting the margin comments right.
Chris McGrathie: We were actually up. We were up four basis points from third quarter to fourth quarter.
Chris McGrathie: And that's going to be, that's going to show a more significant improvement than just the core margin itself, but the core margin itself we believe is also going to look okay.
Chris McGrathie: Okay, great. And then maybe if I could slip a little more in the...
Chris McGrathie: The $8 billion, I just want to put a finer point on the ECR deposits, the $8 billion that you've laid out, I think around half of your deposit growth this year was related to the ECR. Is that about what's factored into that $8 billion, roughly half of that coming from
or would you point it to a lower number?
to a lower number, I believe, less than a third.
Okay, wonderful. Thank you.
Speaker Change: Our next question is from Ben Gerlinger at City. Please go ahead.
Ben Gerlinger: Hey, good morning Phoenix Time. I just wanted to double check in terms of the
Ben Gerlinger: The fee income assumption you said on mortgage, were you assuming flat year-over-year in terms of total national volume, or were you assuming the MBA forecast?
Ben Gerlinger: No, we're assuming flat revenue for us. The MBA forecast would be more optimistic than that, I would say, but that's what we've dialed in, you know, to show you the, you know, the estimates and the guidance we have for 2025.
Speaker Change: Okay, so that kind of leads to my next question. It seems like.
Speaker Change: You guys seem to have a pretty healthy pipeline to put out $5 billion, and then if mortgage starts to do better, it seems like it's both the revenue sides, both NII and fees could be a little better than expected. Would that mean you'd probably spend a little bit more, too? Like you said, that incremental build for life above $100? Or is that kind of just baked in over the next 24-36 months?
Speaker Change: Yeah, I appreciate that. I mean, we're, you know, in terms of the expense level, you know, we're really focused on PPNR growth.
Speaker Change: And so, you know, if we can drive more revenue, is what you're alluding to. Now, I got to tell you, I mean, the rate market has been so uneven since last summer. You know, here with, you know, now the 10-year up 100 basis points from when they first started cutting rates.
Speaker Change: So, so I'm not sure kind of what that means. And so we think that flat is a, you know, is a reasonable basis for going forward. But if that were to be more attractive.
Speaker Change: You know, we're going to look at what can we do to, you know, again, build businesses, but also coincident with driving our efficiency ratio below 50%. We think we can adjust on an adjusted basis. We think we'll be there by the end of this year, irrespective of maybe the scenario you're outlining.
Gotcha, that's helpful. Thank you.
Nick Holico: Our next question is from Nick Holico at UBS. Please go ahead.
Hi, good afternoon.
Nick Holico: Wanted to just circle back on the earnings at risk disclosure for the quarter. I know you pointed to the shock scenario and it seems like you are fairly neutral under that situation.
Nick Holico: But looking at the RAMP scenario, it looks like you swung from a liability-sensitive position to an asset-sensitive position, so I was just wondering if you could unpack a little bit what drove exactly those changes there. Thank you.
Nick Holico: Yeah, yeah, so I alluded to this a little bit earlier, but let me go into more depth. So the assumption set on the RAMP scenario on both the net interest income and earnings at risk is that we are basically putting most of our earning assets, loan growth, on with a variable rate, usually tied to, you know, one month SOFR or something like that.
Nick Holico: And we've done that in part because, you know, we think that that's, you know, been helpful to, you know, to the clients to some degree. And so we kind of let that go and of course we get fees for that.
Nick Holico: You know, if we think this is going to play out where we are going to see rates down 100 basis points
Nick Holico: And again, we're not calling for that, but it could happen certainly.
Nick Holico: We expect that we'll be swapping that fix and hold those asset yields higher.
Nick Holico: then they would otherwise be, you know, if they fell, and that's how we can really manipulate this and have earnings at risk also positive in a declining rate environment, as it was, as you, directly as you stated, as it was in the third quarter.
Speaker Change: Got it. Thank you. And then maybe just one follow-up again on the ECR costs. I know they came down maybe a little bit less than you anticipated in the quarter. Is an 81% beta, like you had assumed in the prior earnings at risk, is that still a fair way to think about the sensitivity there to rates?
Speaker Change: Yeah, it is. We think it's going to pick up a little bit. So, you know, so we have this, you know, situation, you know, going in, you know, basically starting from, you know,
Speaker Change: where, you know, you were going to see these successive, you know, jumbo cuts, 50 basis points in a row. And, you know, we ended up getting three cuts aggregating to 100 basis points. And then the expectation, which was originally we were going to have seven cuts in 2024, you know, kind of really dissipated. And now we're kind of at two. So as that's taken place,
Speaker Change: We're not repricing our loans below a SOFR base rate, you know, in terms of what, you know, what they were before. And so that has really, you know, kind of, you know, held that held that up, you know, in terms of in terms of the catch up on
The ECR side
Speaker Change: You know, those were also, you know, it's a little bit of a, I don't know, it's a leapfrog process, you know, in terms of what are we doing with the client? What are they seeing elsewhere? What are their other options?
Speaker Change: And so it's been a successive cut, and so we've cut these several times.
Speaker Change: We cut them in December 1st, we cut them again in January 1st, and I think we've basically kind of caught up. But that is why it's been a little slower on the ECR catch-up than what we originally expected.
Speaker Change: Yeah, and I think, you know, this is Steve again. I think, you know, we had some outliers, you know, where we had to pin a little bit more.
Speaker Change: But we were able to kind of trim those back in and that kind of readjustment done, but, you know, it was kind of a, you know, we did it in an increment, you know, and now those cuts, you know, over and above said funds have now been made and you'll see the benefit of that, you know, starting in 2025.
Got it. Thanks for taking my questions.
Thank you.
Speaker Change: The next question is from Andrew Terrell at Stevens. Please go ahead.
Hey, good morning.
Speaker Change: Not to beat a dead horse on a mortgage, but Dale, was there a fair value mark on the HFS book that came through the gain on sale income this quarter? And if so, are you able to quantify that?
No, there wasn't.
Speaker Change: And it was stronger than we anticipated, and seasonally the fourth quarter tends to be a little bit lighter.
Speaker Change: I did mention that we sell CRA-qualifying loan pools and securities pools, we'll securitize them for people that want some kind of a census tract, zip code, whatever, and obviously those bespoke types of securities and pools come with a premium price from us.
Speaker Change: That helps. Maybe there's some seasonal elements to that, you know, for year-end window dressing for...
reporting.
Speaker Change: But in any event, again, I look at the fourth quarter revenue from AmeriHome and I compare it to the first quarter, which is now a seasonally stronger period that we're entering now, and it's really right on top of each other. So we think, you know, holding basically where we are in 4Q for mortgage revenue going into 2025.
is reasonable.
Speaker Change: And this is Stevie, and I just think, you know, in the fourth quarter, what ended up happening is we assume the loan will be sold to Fannie, Freddie, or issued into Jenny's Security.
Speaker Change: But in often case, I mean, you know, Marihomes, you know, a wonderful company and they will, you know, build spec pools or they'll build a pool of loans and sell them to an insurance company or a bank that's exactly tailored, hey, we want.
Speaker Change: You know, $200 million in these five counties in Florida, and they'll pull that from inventory, and so they'll kind of build you a semi-custom suit, and then they get a premium for that. They do a really nice job of, you know, building to suit for people that want to buy loans.
Speaker Change: And that doesn't come through in the margin, it comes through in kind of secondary gain, we include margin as if, hey, we delivered the loan to Fannie Freddie, a gain over and above that we take as a secondary marketing gain, and we track it separately.
Speaker Change: But we saw a nice uptick in activity in the fourth quarter there.
Speaker Change: Got it. Okay, I appreciate that. And then on the fee income guidance for 2025, do you assume any securities gains within there?
All right, 9.
Dale Gibbons: Dale Gibbons, Miles Pondelik, Dale Gibbons, Miles Pondelik, Dale Gibbons, Miles Pondelik,
Speaker Change: Okay, and then lastly, just Dale, I know we talked some on crypto back in, you know, 2022 timeframe. I think you guys were at one point working with Passit.
Dale Gibbons: This administration is clearly taking a bit of a different stance around crypto and we've seen a few banks talking about it more and more. I just wanted to gauge your appetite on the crypto space overall and whether it was something interesting to Western Alliance.
Dale Gibbons: Yeah, I mean, I have long been, you know, an advocate for blockchain technology. I mean, you know, I looked at Swift and what it takes to send money to Hong Kong, versus, you know, USDC, you know, I can do that in less than a minute.
Dale Gibbons: And so, you know, that there isn't a breakthrough here in terms of, you know, transferring funds. And with, you know, all the AML and everything else behind it, I think makes sense.
Dale Gibbons: You know, we are a fully compliant process with regulators on this, and we're working with them as we step into it. But we have about 2% of our deposits coming from this source.
Dale Gibbons: presently. I think that there's, you know, kind of more opportunity there over time, but again, we're, you know, we're working with, you know, the, you know, the best, most well-heeled participants in the space, but, but you're right. I mean, I do think it's a...
Dale Gibbons: It is a little bit more accepted, you know, from this administration than maybe what it has been in the past.
Speaker Change: Our next question is from Anthony Ellion at J.P. Morgan. Please go ahead.
Anthony Ellion: Yeah, hi everyone. Your NII Outlook assumes two rate cuts this year. Can you talk about the impact still to the ranges in Outlook for both NII and ECR deposit costs if we don't get any cuts this year?
Anthony Ellion: Yeah, I mean, I think that's kind of where we are. I mean, it's really flat for us in terms of kind of this kind of net interest income guide. So again, the sensitivity report you see is changes off of the baseline.
to be able to pin down.
Speaker Change: Thank you. And then just to follow up on capital, I want to get your latest thoughts on M&A, just given you're getting close to the $100 billion threshold, but we now have a regulatory backdrop with a new administration that's likely going to be more favorable for all banks. Thank you.
Yeah, so, you know, I mean,
Speaker Change: I think different banks have different ideas of how they're going to cross over $100 billion. There are additional costs associated with that that I think a lot of participants have kind of laid out. I mean, you know, for us...
Speaker Change: We're not dependent upon doing an M&A deal to successfully move over. We have a strong organic growth engine over the next two years as we kind of finally prepare for LFI status.
Speaker Change: We're going to focus on, you know, having our good kind of core growth deposits and loans.
Speaker Change: but also improving our performance metrics, i.e. we still have some borrowed funds, we still have some, you know, brokered deposits. We can push those down. We can get higher quality sources. That will drive up our return on tangible common equity. That will drive up our ROA.
https://www.larryweaver.com
Speaker Change: or, you know, in advance, or how are they going to be compliant such that on a consolidated basis you're compliant over 100? We think it's probably easier to wait until you're, you know, kind of through that hurdle before you do that, of any size.
Great, thank you.
John Armstrong: Our next question is from John Armstrong, RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning, guys.
John Armstrong: Dale or Tim, on provision reserves, should we assume a provision that matches loan growth in your NCO guide? Is that too simple or is that the right way to look at it?
John Armstrong: Yeah, I mean, it's too simple, but it's still the right way to look at it. I mean, it's, you know, obviously there's a, you know, there's
John Armstrong: there's complex computations here, there's overlays of what's gonna transpire. We look at Moody's analytics and what they expect on their adverse scenario and their consensus forecast. But at the end of the day, we put an overlay in that took us to...
John Armstrong: took us up a couple of basis points. We did that by taking a more dour view of, you know, of the S3, the adverse scenario. We included an 80% weighting on that. And that's how we came up with this, you know, additional overlay there. I don't think we need it.
John Armstrong: But, you know, we're aware that, you know, others have, you know, also have overlays and so, you know, that's kind of a situation that we added to. I don't think that there's anything else that we need to do, and so I think that could go forward like that.
John Armstrong: Yeah, I'd add, you know, the very nature of the HTML is if we had anything like that contemplated, it would already be in there.
John Armstrong: So, we've, you know, we've looked as best as we can forward, we've taken that and brought it back to current, and we feel very comfortable with our ACL.
John Armstrong: Okay, good, fair enough. And then maybe, Dale, one for you, the crystal ball, just your level of confidence in the high teen ROTC level as you exit 25, I think, you know, suggests a pretty strong step up in the earnings run rate exiting 25 when you float through the model.
John Armstrong: and you know just curious does the Dale's crystal ball say 15 to 17, 17 to 19 and just you know overall level of confidence in that. Thank you.
Well, yeah, so, I mean...
John Armstrong: You know, so we're, you know, what, 14 and a half here. I see pretty easy to get over 15.
John Armstrong: You know, and then, you know, we're kind of, you know, where can we go from there? I mean, there could be some seasonality effects in there, you know, the fourth quarter with, you know, maybe a little bit of a deposit drawdown.
which is, you know, been our seasonal experience.
John Armstrong: But, you know, so but in terms of kind of, you know, what we see in front of us with the business opportunity, you know, I don't know that I mean, I'm not going to necessarily kind of draw a straight line to something. But, you know, I mean, to me, upper teens is, you know, north of 16. And, you know, you know, no higher than 19. So I'll call it that.
Thank you for listening. We'll see you next time.
John Armstrong: All right. Well, thank you. And then just one more just on the expenses. You know, you've got FTEs that have grown quite a bit sequentially in year over year. Is that all just Category 4 prep, or how would you split that between business growth and maybe regulatory things?
You know, there has been category for our preparation.
John Armstrong: But in addition to that, we've actually been hiring people at AmeriHome, if you can believe it. So, with what's transpired there, they've done some things that, you know, kind of help their revenue, including some, you know, kind of direct originations in a limited basis. Those margins are a big multiple over what they get on the wholesale side, and that's been another kind of notable area of investment.
Thank you.
Speaker Change: Our next question is from Jared Shaw at Barclays. Please go ahead.
Hi, this is John Rauch. I'm for Jared.
Thank you.
Thank you.
Thank you. Bye. Bye. Bye.
Uh 15.
Fifteen percent. Okay. Perfect.
Okay, great, thank you.
and then
Bye-bye.
Speaker Change: Well, so, I mean, we sort through this regularly and look for opportunities based upon our risk assessment of these categories, and obviously the return opportunity, you know, things that, you know, I mean, what we're doing and lot banking, you know, you know, kind of has strong returns.
Speaker Change: in some areas, we'll kind of tighten up on funding that we've maybe been less interested in. But, you know, we do offer some of these in the public boat, in the regional banking boat.
Speaker Change: I can see it's tied up a little bit in one of the morphing, in one of the morphing flow halls. And so I think we're going to see a little slower growth there than we've had. I just add, we've had some real lift.
2025.
Okay, perfect. Thank you.
Speaker Change: And then just one last one. The mortgage servicing portfolio looks like it has been trending down the last few quarters. Should we expect that to continue shrinking?
Yeah, we're going to have that basically flat.
Speaker Change: from here. It does move around a little bit just on valuation rates rise, you know, it tends to increase of course with the extension of the
Speaker Change: of those mortgages and how long they're going to last before the refi. But no, I think you should look for that to be fairly flat going through this year. Yeah, Steve, we'll sell a pool and then it'll take a few months for us to replenish that, you know, I mean, when you can sell in larger blocks.
Speaker Change: you get better pricing. So you'll see it kind of move down, but then we'll replenish that, you know, over the next two, three months. So it should be relatively average, the same number.
Speaker Change: This concludes the Q&A session. I will now hand the floor back to Dale Gibbons for any closing remarks.
Dale Gibbons: Thank you all for your participation today. We appreciate your continued interest in our company.
Have a good day.
Dale Gibbons: Thank you all for joining today's conference call. You may now disconnect.