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1/28/2025
Good day, everyone. Welcome to Western Alliance Bank Corporation's fourth quarter 2024 earnings call. 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 Myles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
Thank you and welcome to Western Alliance Bank's fourth quarter 2024 conference call. Our speakers today are Dale Gibbon, Interim CEO and CFO, Steve Curley, Chief Banking Officer for the National Business Lines, and Tim Bruckner, Chief Banking Officer for Regional Banking. 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, That could cause actual results to differ materially from any forwarded statements. Please refer to the company's SEC filing, including the form AK filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to 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. Steve Curley, our Chief Banking Officer for National Business Lines, will discuss our business balance sheet composition and loaded deposit growth drivers. Tim Bruckner, our Chief Banking Officer for Regional Banking, will then discuss asset quality trends. I'll close our prepared remarks for reviewing our 2025 outlook before opening the call up for questions and answers. 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. 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. 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. Each of these properties had sufficient insurance coverage above our loan amounts with Western Alliance designated as a loss payee. Therefore, we expect negligible direct financial impact to the company. 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. With this 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. 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% on an adjusted basis, and a move toward a higher team's return on tangible common equity by year end. 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-provision net revenue growth was 12% linked quarter unannualized. 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. Lastly, while Tim will discuss asset quality in detail later, I note the completion of a significant number of appraisals toward the end of 24 And a material decline in special mention loans makes us increasingly confident the bulk of CRE migration to classify is behind us, and net charge-offs in 2025 will be comparable to that experience in 2024. For the year, well-produced net revenue of $3.2 billion, net income of $788 million, and earnings per share of $709. Net revenue and pre-provision net revenue increased 21% and 14%, respectively, from the prior year, demonstrating the strength of the bank's earnings engine throughout the liquidity restocking process. 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. Turning to fourth quarter trends and business drivers, Western Alliance generated pre-provisioned net revenue of 319 million, net income of 217, and EPS of 195. Net interest income decreased 30 million during the quarter to 667 from lower yields on interest earning assets, along with approximately flat average earning balances. Loan growth was back-weighted as we experienced some deferral of fundings into Q1 2025 and paydowns. The uninterest income of $172 million rose $46 million quarter over quarter from higher mortgage banking revenue, commercial banking fees, and income from equity investments. 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. 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. Additionally, we are making product investments to tap into new mortgage customers that could benefit us in a higher mortgage rate environment. Non-interest expense declined 18 million quarterly to 519, as deposit costs fell over 33 million to 174. Deposit cost reductions are poised to continue pulling overall expenses lower throughout 2025. In aggregate, deposit costs 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. Provision expense of $60 million resulted from $34 million in net charge-offs and an incremental qualitative adjustment on the CRE portfolio. 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. 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, 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. The cost of interest-bearing deposits declined 27 basis points from a reduction in deposit rates, which continues irrespective of potential future rate cuts. 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. Throughout the fall of last year, market expectations for steep successive rate cuts were so significant that one month and three months SOFR were lower than Fed funds effective. This pressured our margin as most variable rate yields are tied to SOFR, but index deposits and ECRs are usually tied to the Fed funds rate. As rate cut forecasts have tempered significantly, this relationship has changed, and now term SOFR is essentially aligned with Fed funds effective. 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. 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. 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 borrowings, which we expect to repay fairly rapidly. In other words, we are seeing funding cocktail winds emerge outside of just ECR-related deposits. In aggregate, net interest income declined $30 million from lower yields on earning assets. Net interest margin compressed 13 basis points from Q3 to 348. However, I'll point out the overall balance sheet profitability continues to improve as annualized ECR-related deposit costs to average earning assets, which is a fund, 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. 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 accrual tree-ups due to the annual bonus. We expect continued reductions in deposit costs and ECR rates as the full benefit of a lower rate environment is realized. Our adjusted efficiency ratio for the quarter improved by 160 basis points to 51%, buoyed by higher mortgage banking revenue. 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. We are forecasting two 25 basis point rate cuts this year, which is similar to what the futures market currently expects. 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 shocks, making us essentially rate neutral. 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. This dynamic is indicative of the interplay between our mortgage business and higher beta EGR-related deposits, which act as a natural hedge to earning assets that are more variable rate and thus make us appear asset sensitive on a reported net interest income basis. 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. C. 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. As previously mentioned, deposits declined $1.7 billion, primarily driven by expected short-term seasonal mortgage warehouse factors, but still grew 20% year over year from diversified strength across the franchise. Q4 outflows were comparable on a relative basis to the prior year. Bargains 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. 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 bargains by $1.5 billion. With this important liquidity build behind us, we are poised to generate strong, risk-adjusted, earning asset growth going forward. 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. 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. LOAN GROWTH OF $330 MILLION WAS MORE MUTED THAN EXPECTED but progress continues to be achieved in diversifying the loan mix into CNI loans while design runoff occurs in our resi portfolio. This trend continued in the fourth quarter with nearly all growth in CNI while construction loans were down $248 million. Resi and consumer loans decreased $74 million. CNI loans now account for 43% of the held for investment loan portfolio compared to 38% a year ago. while resident consumer loans are now just over 26% of the portfolio compared to 29% at the end of 2023. In the fourth quarter, growth was fairly diverse as our regional and national business lines contributed $186 million and $110 million in loans, respectively. Growth in regional banking was primarily driven by home builder finance, hotel franchise, and tech and innovation. For the national business lines, Mortgage 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. 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, as well as $2.4 billion in contributions from escrow services businesses such as Juris, HOA, and Corporate Trust. 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. 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 continues to remain resilient. In quarter four, criticized assets rose $61 million, as special mention loans declined $110 million, while classified assets increased $171 million. 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, reflecting the interplay of upgrades and downgrades driven by our proactive risk mitigation strategy. We expect the total criticized asset pool to remain stable in Q1 and then declining throughout 2025. Due in part to our proactive management of troubled situations, which requires pressing For re-margin or ongoing borrower investment troubled loans, non-performing assets as a percentage of total assets increased to 65 basis points during the quarter. We expect to see non-performing loans decline as we work through the resolution process. These loans have been reserved or charged down to current as-is values and are revalued on an ongoing basis. Our ACL was increased in support of revaluations in the context of our proactive strategy. As a green shoot, we're beginning to see increased lease activity and 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. 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. Quarterly net charge-offs were $34 million or 25 basis points of average loans and 18 basis points for the year. We expect charge-offs to be relatively similar in Q1, followed by a generally declining trend throughout 2025 as we continue to make progress remediating our CRE portfolio. Provision expense of $60 million added to reserves to cover charge-offs and augmented our CRE reserve. Our classified loans are supported by as-is valuations giving effect to the present market conditions. Our ACL for funded loans increased $17 million from the prior quarter to $374 million. The total ACL to funded loans ratio of 77 basis points rose three basis points from the prior quarter. Mike Valdes, slide 15 shows the updated acl walk we've regularly provided to add more context behind our allowance methodology relative to our peers. Mike Valdes, Our acl moves up from 77 basis points to 1.37% when incorporating the effect of credit link notes, as well as the low to no loss loan categories like equity fund resources are 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. 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 US banks at just under 70%. I'll now hand the call back to Dale.
Thank you, Jim. Our CET1 ratio increased approximately 10 basis points to 11.3 during the quarter. Our tangible common equity to total assets remained flat at 7.2. Given the evolving conversation on Basel III endgame, but I mentioned that our CET1 ratio, including AOCI marks, as well as the loan loss reserve is 11%, which is down slightly from 11.1 at September 30th. 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 in Q4 applied to all, our adjusted capital still ranks above the median of the peer group. As previously mentioned, our tangible book value per share increased 29 cents to $52.27 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. 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. 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. We expect loan growth of approximately $5 billion for the year that should hold a loan to deposit ratio of around 80 basis points, 80%. Deposits are expected to grow $8 billion with increased contributions from our regional banking and escrow businesses. Turning to capital, our CET1 ratio should remain fairly consistent with our year-end level of 11.3 providing balance sheet flexibility. Net interest income is expected to increase 6% to 8% largely as a result of sustained thoughtful loan growth and expanding NIM that approximates 2024 level on a full year basis. Non-interest income is also expected to grow 6% to 8% due to ongoing traction and cultivating deeper client relationships with commercial banking fee opportunities and stable mortgage banking revenue. Non-interest expense should decline 1% and 6% with ECR-related deposit costs between $475 and $525 million, which is notable moderation primarily driven by continued rate reductions. Other non-ECR operating expenses should land between $1.425 billion and $1.475 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 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. and expect incremental investments of $55 to $65 million over the next three years to make the bank cash flow ready. 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. 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. 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. At this time, Steve, Tim, and I look forward to answering your questions.
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. Our first question comes from Ibrahim Poonawalla from Bank of America. Please go ahead.
Hi, Dale. Good afternoon. I guess maybe first question just on capital. When we look at the capital, I think you mentioned you are pretty much there on CET1 and maybe even TCE where you want to be. Like given the $5 billion loan growth outlook, just see the bank as having excess capital. And if you do have excess capital, would you consider buybacks or just how you're thinking about capital deployment priorities?
Yeah, so, you know, we're generating and we expect to generate certainly enough capital to support the balance sheet growth that I outlined. And we think that's kind of the highest and best use for us. But, you know, when it makes sense to be able to do something, you know, to take advantage of a displacement at some point, should that occur in the market, yeah, I think that would be appropriate. That's not our first order of good business, however.
Got it. And I guess just when looking at slide nine, when we think about rates, I guess from a perception standpoint, it feels lower rates would be good for Western Alliance, both in terms of funding costs, mortgage banking pickup. Just remind us what would be the ideal rate 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 standpoint. factoring in the ECR costs?
Yeah, I think the gentle rate decline is kind of best for the company. So, you know, right now we're seeing, I'm going to say, maybe capitulation from homebuyers in terms of even going into 7% mortgages. You know, if they were, you know, 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 maybe occurred during the pandemic when they dropped so sharply. So if we could have a slowly declining rate environment, that's what I would prefer. That obviously eases maybe credit concerns as well as debt service coverage costs also ameliorate to some degree. But conversely, we're ready kind of for everything. I mean, we can handle an increase in rates. We can have a steeper decline. You know right now we're showing that you know we're most of our loan growth is originated in basically so for tied variable rate, you know, but we can swap that fixed if it looks like that things are going to be falling more precipitously.
But, and just a quick follow up your fee income guide does it assume a big pullback in mortgage rates or are you assuming 30 years seven year 7% mortgage rates kind of holding for the rest of the year.
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, and 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. And I think we're kind of headed into that, you know, right now in the first quarter. The first quarter of 24 was really flat to the fourth quarter that we had of 24. So we think that looks fairly decent.
That's helpful. Thanks for taking my questions.
Our next question comes from Matthew Clark and Piper Sandler. Please go ahead.
Hey, good morning, everyone. Just on the ECR-related cost outlook, You mentioned you're assuming two rate cuts this year. What about the average ECR deposit balances this year? Is there an expectation maybe that there's not as much growth in 2Q, 3Q, and the balances are just a little bit lower and help keep the cost down? Any update or change there?
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 TAB, Mark McIntyre, A lot of pay downs from ECR related mortgage warehouse funds for for property taxes, you know that's kind of rebounded as expected, but I do expect us to have. TAB, Mark McIntyre, A broader growth of our deposit base in 25 and we had a 24 and getting to your getting to your point method that it's going to be there's going to be. TAB, Mark McIntyre, Less expansion, certainly in the mortgage side and we're growing in other categories, we have our you know our other our escrow businesses. TAB, Mark McIntyre, which I think are doing well, you know we've got our trust operation, we have our settlement services. TAB, Mark McIntyre, We have our business escrow services, we think the outlook for that might be a little bit better this year with the kind of the change in administration and maybe some more m&a activity going on so we're looking for a broader diversification in 25.
TAB, Mark McIntyre, And I just add daily 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. You know, you might see us improve the cost of funding beyond what just happens with the Fed funds rate.
Got it. Okay. And then just on average earning assets, at least in the near term, I think you're anticipating some growth 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 earnings? TAB, Mark McIntyre, In flow of your deposits here in one queue.
TAB, Mark McIntyre, Well, so yeah we said eight for the year and, as we just saw you know the fourth quarter tends to be a little bit of a contraction, so it means you got to do more than eight for the first three quarters. TAB, Mark McIntyre, And part of that is really kind of you know kind of paying that down now 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 think, you know, we carefully managed the loan growth in 2024 as we did the liquidity build. But, I mean, our people are out in the market making sales calls. And, you know, I can kind of feel the pipeline filling up. So, you know, we have exposure to private credit. We like that business. Good risk-adjusted returns with our lender finance and no finance business. So, yeah, I'm bullish on loan growth.
Our next question comes from from Deutsche Bank. Please go ahead.
Hi, guys. Good morning. Just on the expenses, we talked about the deposit insurance expenses related of $37 million in the quarter. I know the sequential increase was due to the 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?
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 and whereby, you know, we basically volunteered clients and said, you know what, why don't you move into an insured deposit network situation And there's a cost associated with that, both to the FDIC as well as to the network manager. And so we did that. And so what we just implemented in the fourth quarter, I think December, we're now charging the client for that. It's actually a little bit 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 piece of it. And so some of them move back and forth. A lot of them are 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 no, we've pushed that back to the clients. We've given them optionality now. And so far, it seems to be working out.
And then just maybe on credit, I know, Tim, you mentioned the appraisals obtained at the end of the year. I know there's a pickup in that charge-offs in CNI, and I know that's been like kind of lumpy, you know, one-offs really throughout the year, the big pickup in 4Q. 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 code you can elaborate on?
Great question. Thanks. Tim Bruckner. Okay, first, outside of CRE office, we're not seeing any migration trends in any other segment. So our CNI has been stable and very predictable in terms of performance. We've made no 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 is a floating rate portfolio that we underwrote on a path to stabilization or in a repositioning. So we don't have assets that come over the bow in that and surprise us. These are assets that receive high monitoring and – TAB, Mark McIntyre, And very structured default provisions from the time we put the loan, so the same assets are the ones that we you know we underwrote on a direct basis. TAB, Mark McIntyre, And we've been hand in hand with for the last you know 18 months as we as we work through the cycle, so your point of. TAB, Mark McIntyre, It is, it is and can be chunky when we talk about the San Diego asset that's a really a good news story. We show the ability to reset the basis to something close to being a low below market and how quickly we can lease a property like that up. 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.
I would note that, you know, that our our total. 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 in terms of this, you know, the criticized asset situation.
Thank you.
Our next question comes from Gary Tenner at DA Davidson. Please go ahead.
Thanks. In terms of follow-up on the ECR question asked a few minutes ago, can you just remind me, is the rate paid on kind of the non-mortgage warehouse ECRs, is that just a lower ECR rate so it brings down the overall rate as the other segments grow?
Yeah, I mean, 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 interest goes to the HOA itself, the owner of the funds, and then an ECR can go to the manager, and that's going to get compensated for doing the work for these HOAs. And those are both lower, right? So that you have a lower rate and a lower ECR for those that combined is still lower than obviously what a market rate would be.
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 $40 million this past year. Uh, is there a base assumption as part of that 68% growth range or is that not incorporated?
So that's not part of the growth. I mean, you know, I mean, we, we do think that we're, we're likely to see some, you know, those generally come about after an acquisition or sale of a company, whether it's an IPO or from a, you know, from a larger, you know, you know, what we call, um, you know, uh, sequential buyers. But, yeah, we're not anticipating a growth in the equity piece to be able to get that growth rate.
Well, sorry, not growth so much, Dale, but is there a base assumption that it stays flat? Because I guess what I'm trying to understand is I think you mentioned kind of expectations of flat total mortgage revenue in 2025. 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.
I understand your question, Gary. So yeah, it's basically coming from two places. One of them is our regions, which we're getting good traction in and we expect to see growth there. We implemented a service charge fee increase on January 1st to pick that up. And then the second 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.
Okay, and that revenue shows up in the service charge on as well? It does.
And other income at the bottom there, other, other. Got it. Thank you.
Thank you. The next question is from Chris McGrathy at KBW. Please go ahead.
Oh, great. Thanks.
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?
Well, so I mean, we're, you know, we've got LFI in there. And that's certainly kind of a part of what's taken place. You know, you know, frankly, you know, I would hope that that maybe we've got a little stronger performance than we're outlining here, you know, I mean, we're gonna we've, we see where we've come out, you know, I mentioned that we want to hold kind of an 80%, you know, loan to deposit ratio, that would imply a little bit better growth based on an $8 billion deposit number. So things like that, you know, could could be a factor. which would affect elements of incentive compensation and things of that sort.
Okay. And then I think it's coming back to the margin for a minute. It sounds like if we connect the lag and 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 see a rebound, if I'm interpreting the margin comments right.
Yeah, so if I look at the adjusted margin, which of course pushes the ECR cost to the interest expense, we were actually up. We're at four basis points from third quarter to fourth quarter. And 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.
Okay, great. And then maybe if I could slip a little more in the 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 it's less than a third.
Okay. Wonderful. Thank you.
Our next question is from Ben Gerlinger at Citi. Please go ahead.
Hey, good morning. I just wanted to double check in terms of the fee income assumption instead of mortgage. You said you're assuming flat year over year in terms of total national volume, or you're assuming the MBA forecast?
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 to show you the estimates and the guidance we have for 2025.
Gosh, OK. So that kind of leads to my next question. It seems like you guys seem to have a pretty healthy pipeline to put a $5 billion. And then if mortgage starts to do better, it seems like both the revenue size, 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, the incremental build for life above 100? Or is that kind of just baked in over the next 24, 36 months?
Yeah, I appreciate that. I mean, in terms of the expense level, you know, we're really focused on PPNR growth. 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. So I'm not sure kind of what that means. And so we think that flat is a reasonable basis for going forward. But if that were to be more attractive, we're going to look at what can we do to, 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.
Our next question is from Nick Holico at UBS. Please go ahead.
Good afternoon. 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. 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.
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 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. 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've kind of let that go. And of course we get fees for that. You know, if we think this is going to play out where we are going to see rates down 100 basis points, And again, we're not calling for that, but it could happen, certainly. We expect that we'll be swapping that fix and hold those asset yields higher than 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.
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?
Yeah, it is. We think it's going to pick up a little bit. So, you know, so we have this, you know, situation as, you know, going in, you know, basically starting from, you know, mid of the third quarter, 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, we're not repricing our loans below a SOFR base rate in terms of what they were before. And so that has really kind of held that up. In terms of the catch up on the ECR side, those were also, it's a little bit of a, I don't know, it's a leapfrog process in terms of what are we doing with the client? What are they seeing elsewhere? What are their other options? And so it's been a successive cut. And so we've cut these several times We cut them in December 1st. We cut them again in January 1st. And I think we 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.
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. But we were able to kind of trim those back in and that kind of readjustment is done. But, you know, it was kind of a, you know, we did it in increments, you know, and now those cuts, you know, over and above fed 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.
The next question is from Andrew Terrell at Stevens. Please go ahead.
Hey, good morning. 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. And it was stronger than kind of we anticipated. And, you know, seasonally, the fourth quarter tends to be a little bit lighter. I did mention that, you know, we sell CRA qualifying items. loan pools and securities polls will securitize them for people that want, you know, some kind of a census tract, zip code, whatever. And obviously, those bespoke types of securities and pools come with a premium price per month. That helps. Maybe there's some seasonal elements to that, you know, for year-end window dressing for reporting purposes. 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, so we think, you know, holding basically where we are in 4Q for mortgage revenue going into 2025 is, is, is reasonable.
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 security. But an often case, I mean, you know, Mayor Holmes, 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, 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 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. 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. But we saw a nice uptick in activity in the fourth quarter there.
Got it. Okay. I appreciate that. And then on the fee income guidance for 2025, do you assume any securities gains within there?
None.
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. 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 want to gauge your appetite on kind of the crypto space overall and whether it's something interesting to Western Alliance.
Yeah, I mean, I have long been, you know, an advocate for blockchain technology. I mean, you know, I look 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. 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. You know, we are a fully compliant process with regulators on this, and we're working with them, you know, as we step into it. But we have about 2% of our deposits, you know, coming from this source 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 best, most well-heeled participants in the space. But you're right. I mean, I do think it is a little bit more you know, from this administration than maybe what it has been in the past.
Our next question is from Anthony Ellion at JPMorgan. Please go ahead.
Yeah. Hi, everyone. Your NII outlook assumes two rate cuts in this year. Can you talk about the impact still to the ranges and outlook for both NII and ECR deposit costs if we don't get any cuts this year?
TAB, Mark McIntyre:" yeah I mean we're you know I mean, I think that's you know kind of where we are, I mean we're it's really flat for us. TAB, Mark McIntyre:" In terms of kind of this kind of net interest income guide so so again, you know the the sensitivity report, you see, is changes off of the baseline. TAB, Mark McIntyre:" And we think those are eminently manageable by us, you know you know within this you know kind of relevant range of plus or minus 100 basis point the guidance we're giving you. is really based upon what we think is going to happen. And we've got two cuts in there, minus 50 basis points. Say that's zero, which I don't think is a very – I think that's a reasonable probability that there aren't any cuts this year. We have the same guidance because our variability on our rate environments, both on a shock as well as a ramp scenario, is, I think, fairly negligible and easily within our management capability to be able to pin down.
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, you know, I think different banks have different ideas of, you know, how they're going to cross over 100 billion. You know, there are additional costs associated with that that I think a lot of participants have kind of laid out. You know, for us, you know, 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, you know, LFI status. We're going to focus on, you know, having our good kind of core growth deposits and loans, but also improving our our performance metrics, i.e., we still have some borrowed funds. We still have some, you know, broker 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 and our margin, you know, during this period of time. So we're not sitting back. And then let's say we're hovering, you know, kind of below $100 billion at that point in time. It's like, okay, we got a green light. Let's go. You know, we could put in a little bit of that. TAB, Mark McIntyre, and move through say to you know north of 110 or something with our capital ratios, you know high enough and still maintain you know what we say is our floor of above 11%. TAB, Mark McIntyre, And we'll be able to do that and swallow any additional charges to do that, so we have a path to be able to do it without it, I gotta tell you if you're going to plan on doing m&a on this, it really does complicate your. your LFI transition life because now I've got to figure out a plan for how am I going to migrate all of their applications, either convert them to us 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. Our next question is from John Armstrong, RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning, guys. 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?
I mean, it's too simple, but it's still the right way to look at it. You know, obviously there's complex computations here. There's overlays of what's going to 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 up a couple of basis points. We did that by taking a more dour view of the S3, the adverse scenario, we included an 80% weighting on that, and that's how we came up with this additional overlay there. I don't think we need it, but we're aware that others also have overlays, and so 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.
Yeah, I'd add the very nature of the S3 is if we had anything like that contemplated, it would already be in there. So 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.
OK. 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, suggest a pretty strong step up in the earnings run rate exiting 25 when you float through the model. And, you know, just curious, does the Dales 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, You know, so we're, you know, what, 14 and a half here. I see pretty easy to get over 15, you know, and then, 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. 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. 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.
TAB, Mark McIntyre:" All right, well, thank you, and then just want one more just on the expenses, you know you've got fts that have grown quite a bit sequentially in year over year is that all just category for prep or how would you split that between business growth and maybe regulatory things.
TAB, Mark McIntyre:" You know it, you know, there has been category for preparation, but in addition to that we've actually been hiring people at America home, 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. Our next question is from Jared Shaw at Barclays. Please go ahead.
Hi, this is John Rauhunter, Jared. Just a couple of quick modeling questions. What portion of the securities book is floating rate?
No.
15. Okay, perfect.
Okay, great. Thank you. And then just going into the components of loan growth for 2025 sounds pretty broad-based. Any differences in the spreads on those loans or the yields on those loans that you're adding on relative to what was added to the balance sheet in 2024 based on Just different mix, competition level, anything in there worth commenting on?
Well, 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 in lot banking, you know, kind of has strong returns in some. You know, some areas will kind of tighten up on pricing that, you know, we've maybe been less interested in. But, you know, we've had opportunities in the tech space, in the regional banking space. I think we've tied up a little bit in front of the mortgage warehouse. And so I think we're going to see a little slower growth than we've had.
I'd just add, we've had some real lift, you know, and uh final positive surprises in our industry sciences state uh we see uh momentum as we move into uh 2025. okay perfect thank you um and then just one last one uh
TAB, Mark McIntyre, The mortgage servicing portfolio looks like it has been trending down the last few quarters, should we accept that expect that to continue shrinking. TAB, Mark McIntyre, Just look for that.
TAB, Mark McIntyre, yeah we're going to have that basically flat. TAB, Mark McIntyre, From you know from here, and 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. 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. I mean, when you can sell in larger blocks, you get better pricing. So you'll see it kind of move down, but then we'll replenish that over the next two, three months. So it should be relatively average, the same number.
This concludes the Q&A session. I will now hand the floor back to Dale Gibbons for any closing remarks.
Thank you all for your participation today. We appreciate your continued interest in our company. Have a good day.
Thank you all for joining today's conference call. You may now disconnect.