Western Alliance Bancorporation Common Stock (DE)

Hello, everyone, and thank you for standing by. The Western Alliance Bank Corporation's third quarter 2025 earnings call will be beginning shortly. We thank you for your patience. Good day, everyone. Welcome to Western Alliance Bank Corporation's third quarter 2025 earnings call. During the Q&A session, out of courtesy for your colleagues, we request that you please limit yourself to one question and one follow-up only. 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. Welcome to Western Alliance Bank's third quarter 2025 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, and Dale Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements, which are subject to risks, uncertainties, and assumptions, except as required by law to companies not undertake any obligation to update in a forward-looking statement. For more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8K filed yesterday. which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione.

Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our third quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail. I'll then close our prepared remarks by reviewing our updated outlook for the remainder of 2025. As usual, our Chief Banking Officer for Regional Banking, Tim Bruckner, will then join us for Q&A. And also sitting in today is Vishal Adani, who recently joined the team as he and Dale begin their CFO transition. Western Alliance continued our solid business momentum in the third quarter that generated record net revenue and pre-provisioned net revenue of $938 million and $394 million, respectively. Healthy and broad-based balance sheet growth, especially with $6.1 billion in deposits, along with stable net interest margins, supported a 30% linked quarter annualized expansion in net interest income. Firming mortgage banking revenue from lower rates bolstered a $40 million increase in non-interest income. This contributed to a high operating leverage as our efficiency ratio improved almost 3% in the quarter to 57.4%. The adjusted efficiency ratio, excluding ECR deposit costs, dropped below 50%. In total, Western Alliance generated EPS of $2.28 and improved profitability with return on average assets of 1.13% and return on average tangible common equity of 15.6%. CET1 grew to 11.3% as we moved our loan loss reserve to 78 basis points from 71 basis points in the previous quarter. Asset quality performed in line with guidance. as total criticized assets declined 17% with reductions in three of the four major subcategories and net charge-offs of 22 basis points. In light of the recent news regarding two credit relationships, let me address those head-on because I and the entire Western Alliance management team take these and any potential credit migrations extremely seriously. You have heard me say previously, early identification and elevations are the hallmarks of our credit migration strategy to protect collateral and minimize potential losses. And that's what's paying dividends now. For the $98.5 million note finance loan to Cantor Group 5, which was the subject of our October 16th 8K, we believe our circumstances are different than other organizations and that our loan to this specific investment vehicle is secured by loans with a perfected interest in the CRE properties. We have confirmed our lien position through lien searches and title company verification. However, we have determined that in some cases we are junior to other lenders in violation of the credit agreement, hence our allegation of fraud. Although the most recent appraisals indicate sufficient collateral coverage, our reserve methodology for a $98 million non-accrual loan resulted in a reserve of $30 million. This reserve and our portfolio's qualitative overlays raised total loan ACL to funded loans ratio to 85 basis points. We believe the collateral coverage, limited and unlimited springing guarantees, as well as up to a $25 million, well, sorry, excuse me, as well as up to $25 million of insurance coverage for mortgage fraud losses will cover losses from this credit, if any. Excluding this fraud, non-accrual loans would have remained flat. Once learning of the fraud, we initiated a title review of our $2 billion note finance portfolio. To date, we have reverified titles and liens for all notes greater than $10 million and have found no irregularities and are in the process of confirming titles for more granular notes. No additional derogatory filings or lien discrepancies have been discovered to date. While incredibly frustrating, we believe this is a one-off issue in our note finance business and have adjusted our onboarding and ongoing portfolio monitoring practices. Regarding our ABL facility to Lucadia Asset Management subsidiary, Point Bonita Fund One, as of October 20th, the current balance stands at $168 million with a loan to value of below 20%. This facility is backed by $189 million in accounts receivable from investment grade retailers led by Walmart, AutoZone, O'Reilly Auto Parts, Napa, and other investment-grade borrowers. None of these companies have disavowed their obligation. The loan remains current, and we continue to receive principal and interest payments as modeled. Jefferies has publicly stated they feel confident in Point Benita's near-term ability to pay off all debt due to the diverse set of assets apart from the first brand's related receivables. Jefferies remains confident, and so do we. Overall, this is part of a small ABL portfolio of approximately $500 million, and we do not see any other similar risks for this well-secured, structured facility. As further support, we have investment-grade obligors that cover our loan balance greater than four times. As a reference point, it's important to remember we have operated in private credit business for over 15 years. We view our underwriting expertise ability to evaluate structured credit, and sophisticated approach to minimizing uncovered risks through strong collateral with low advance rates as core competencies of the bank that prevent and mitigate losses. Over the past five and 10 years, our net annual charge loss averaged just 10 and 8 basis points, respectively, placing us among the top five US banks with assets greater than $50 billion. Our deep sector expertise in these areas will continue to separate Western Alliance from our peers and enable us to deliver superior commercial banking services to our clients. And now Dale will take you through the results in more detail.

Thank you, Ken. I'd first like to start, just clarify one comment that Ken made. The facility from Lucadia Asset Management, the collateral behind our loan amount is $890 million. That's how you get to this 19% advance rate on the total. Looking closer at the income statement, net interest income of $750 million grew $53 million, or 8% quarter over quarter, as a result of solid organic loan growth and higher average earning asset balances. Non-interest income rose nearly 27% from Q2 to $188 million, led by Fermi Mortgage Banking results as AmeriHome grew revenue $17 million quarter over quarter. Overall, lower mortgage spreads and rate volatility are beginning to improve home affordability and demand for adjustable rate mortgages in particular. Loan production volume increased 13% year-over-year, and the gain on sale margin improved seven basis points to 27. Non-interest expenses increased 30 million from the prior quarter to 544, mostly from the normal seasonally elevated balances and average ECR-related deposits, in advance of tax and insurance payments made in the fourth quarter. Overall, we delivered solid operating leverage this quarter, with net revenue growing nearly 11%, which outpaced sub-6% growth in non-interest expense. Similarly, net interest income, inclusive of deposit costs, rose 5% or $25 million over the prior quarter, driving adjusted efficiency ratio below 50%. Record pre-provision net revenue of $394 million through 19% over the prior quarter. Overall total provision expense of 80 million primarily rose from Q2 levels as a result of 30 million reserve and augmented portfolio qualitative overlays to reflect portfolio composition mixed change towards CNI and providing greater absorption for tail risks. Turning to our net interest drivers, interest-bearing deposit costs were stable. However, overall liability funding costs compressed eight basis points from the prior quarter and benefited from lower rates on borrowings and growth in ECR paying DDA accounts. The held for investment loan yield was relatively stable, ticking up one basis point despite resumption of FOMC rate cuts toward the end of the quarter. The securities yield declined nine basis points from Q2 to 472. Its average holdings of lower yielding securities increased 2.1 billion quarter over quarter. As discussed earlier, net interest income rose $53 million from Q2 to $750 million, driven by healthy loan growth as higher average earning assets increased $4.8 billion. Net interest margin was stable from Q2 at 3.53, as the impact of a slightly higher loan yield and lower debt costs offset lower securities yield and stable interest-bearing deposit costs. Non-interest expenses increased $30 million, or 6% quarter over quarter. Deposit costs of $175 million landed squarely in the middle of our Q3 guidance. Excluding deposit costs, however, non-interest expense was only $2 million higher compared to Q2. Our adjusted efficiency ratio of 48% declined 400 basis points from the prior quarter as we continue to achieve positive operating leverage from revenue growth outpacing non-deposit costs operating expenses. We remain asset sensitive on a net interest income basis, but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a projected ECR related deposit cost decline and an increase in mortgage banking revenue based upon our rate cut forecast. Our updated forecast is for two 25 basis point cuts next week and another one in December. The balance sheet increased 4.2 billion from Q2 to 91 billion in total assets which resulted from sustained healthy, held for investment loan and deposit growth of 707 million and 6.1 billion respectively. This strong deposit growth allowed us to reduce borrowings by 2.2 billion. On this slide, we also see the allowance for loan loss growth relative to the increase in loans. Over the past year, the allowance rose from 67 to 78 basis points. This explains how our strong year-over-year EPS growth of 27% is dwarfed by our industry-leading PP&R growth of 38% over the same period. This reflects our robust revenue growth alongside with rising efficiency. Finally, total equity increase to $7.7 billion and tangible book value per share climbed 13% year-over-year. Helper investment loans grew $707 million quarterly, though average loan balances were up $1.3 billion from Q2, which supported our strong net interest income growth. Commercial and industrial continues to lead loan growth momentum, while construction loans fell $460 million as these loans converted to term financing. Regional banking produced $150 million of loan growth, leading contributions from in-market commercial banking and home builder finance. National business lines provided the remainder of the growth, with mortgage warehouse and mortgage servicing rights financing being the primary contributors. Deposits grew $6.1 billion in Q3 with mortgage warehouse clients only contributing $2.8 billion. Solid growth was achieved in non-interest bearing and savings in money market products and mitigated the impact of $635 million in designed higher cost CD runoff. Deposit growth was well diversified across all areas of the bank. Of note during the quarter, regional banking deposits grew $1.1 billion with over $600 million in in-market commercial banking and $500 million from innovation banking. Specialty escrow deposits grew $1.8 billion in Q3, with contributions of over $750 million from jurist banking and approximately $400 million each from our corporate trusts and business escrow services businesses. This growth positions us to meet our funding objectives for 2025 while incorporating the normal seasonal mortgage warehouse outflows in Q4. As Ken explained, asset quality continues to perform in line with guidance from last quarter. Criticized assets dropped $284 million from $196 million decline in criticized loans and an $88 million reduction in Oriel properties. The decline in criticized loans resulted from special mention loans falling $152 million and classified accruing loans decreasing $139 million. As for our resolution efforts with other real estate-owned properties, Stabilizing leasing and occupancy rates, as well as improved net operating income on these properties, reinforce our confidence in the current carrying values. Quarterly net charge-offs were 31 million, or 22 basis points of average loans. Provision expense of 80 million was primarily driven by replenishment of charge-offs and the Cantor 5 reserve. Our allowance for funded loans moved from 46 million higher from the prior quarter to 440 million. The total loan ACL to funded loans ratio rose seven basis points to 85. Relevant to our current discussions with working with non-depository financial institutions or NDFI clients, it is important to consider that some of the safest asset classes in commercial banking are categorized as NDFI, such as mortgage warehouse and capital call and subscription lines of credit, which have had virtually no losses across the entire industry. Our overall NDFI loan exposure is disproportionately weighted to mortgage warehouse lines, but we have never experienced a loss. Our NDFI loan exposure, excluding mortgage credit intermediaries, would represent 8% of loan balances, which is in line with peer averages and below a number of larger banks as seen on slide 24 in the appendix. On slide 14, you will see that Western Alliance's concentration in loan loss category skews our ACL lower relative to peers. reflecting the portfolio's lower embedded loss content. The top chart is our updated adjusted total loan ACL walk, which illustrates how credit enhancements, such as credit link notes and structurally low-risk segments like fund banking, our low LTV, high FICO residential portfolio, and mortgage warehouse elevate our normalized reserve coverage from 85 basis points to 1.4%. The bottom table demonstrates how applying an industry median loan mix to our portfolio, reducing our outside proportion of loans in lower risk categories like mortgage warehouse and residential loans, while also increasing our proportion of loans in higher risk categories like consumer, which shifts our allowance above 1%. Our CE21 capital ranks around median for the peer group. If you add our less adverse AOCI marks and the lost reserve, our adjusted CET1 ratio capital would be 11.3%. The 30 basis point quarterly increase reflects organic growth generating higher stated CET1 and supported by improved AOCI marks. And the augmented reserve ranks in line with the median for our asset peer group on a one-quarter lag basis. We remain confident in our capacity to absorb any losses in concert with steady loan growth Review the adjusted capital as the total amount available to absorb losses and support balance sheet expansion. Our CE21 ratio shifted higher to 11.3% from organic earnings accumulation. Our tangible common equity to total assets ratio edged down 10 basis points to 7.1%. Our stable capital levels demonstrate our ability to generate sufficient capital organically to support balance sheet growth. and given stock price volatility, the company is evaluating to issue subordinated debt and using a portion of the proceeds to augment its share repurchase program, which we believe will be accretive to EPS. Tangible book value per share increased 2.69 from June 30th to $58.56 as a function of organic retained earnings. Of note, since initiating our $300 million share buyback program in September, We completed 25 million in purchases through October 17th. Consistent with upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by five times over the past decade. Western Alliance has been a consistent leader in creating shareholder value. On slide 18, we have provided nine metrics we believe are key factors in driving leading financial results, strong profitability, and sustainable franchise value that ultimately compounds tangible book value and produces long-term superior total shareholder returns. For the last 10 years, our TSR, EPS, and tangible book value per share accumulation has ranked in the top quartile relative to peers. Based on business metrics, we are the leader in 10-year loan, deposit, and revenue growth while maintaining top tier performance for the net interest margin. Lastly, return on tangible common equity should approach top quartile performance as we generated higher equity returns this quarter and should continue the upward trend in 2026. I'll now hand the call back to Ken. Thanks, Dale.

Our 2025 outlook is as follows. We reiterate our loan growth outlook of $5 billion and raise year-end deposit growth expectations to $8.5 billion. Pipelines remain in good shape, though we remain flexible to changes in the macro environment. Regarding capital, our CET1 is comfortably above 11%, and we expect that to hold during the last quarter of the year. Net interest income remains on track for 8% to 10% growth and should lead to a mid-3.5% net interest margin for the full year, which has been our expectation. Non-interest income was up sharply in Q3 and positions us to exceed our lofty targets and finish the year up 12% to 16%. Non-interest expense is expected to be up 2.5% to 4% for the year. ECR-related deposit costs are projected to land between $140 and $150 million in Q4, which implies slightly above $600 million for the full year. Operating expenses absent ECR costs now expect to be $1.465 billion to $1.505 billion for the full year. Asset quality should remain, excuse me, should continue to perform as expected with full year net charge off in the 20 basis point area. Finally, our fourth quarter effective tax rate is forecasted to be about 20%. At this time, Dale and I and Tim will take your calls.

Thank you. We will now begin the question and answer session. If you would like to ask a question today, please do so now by pressing Start followed by the number 1 on your telephone keypad. During Q&A, ask courtesy for your colleagues who request that you please limit yourself to one question and one follow-up only. Our first question today comes from the line of Janet Lee with TD Cohen. Janet, please go ahead.

Good morning. So it seems like the credit picture that the credit picture that you guys are laying out is that you guys are fairly comfortable with the limited loss potential on either First Brands or Cantor exposures. As you are assessing your exposure to NDFI, I understand that that is a very broader category, but as you're reassessing your underwriting and your exposure, Are you comfortable with your current level of reserves or is there any sort of pressure that you're seeing that there might need to be further increase just based on the current circumstance?

So, good morning, Jen. First, let me say you're right. We feel comfortable with our asset quality. We think it remains stable from here. We mentioned that in the Q2 earnings call that we thought criticized assets had crested and would come down, and in fact, they have. As we look at our facts and circumstances regarding Cantor 5 and the Point Bonita loan, we do not see any losses in the future. That will, of course, potentially change if we discover new information regarding the Cantor 5 discovery that we are in the process of doing in our lawsuit. But at this point, we think we have the right amount of collateral to support that loan. We've got high ultra net individuals behind that with guarantees and springing guarantees. And I think a new bit of news here for everyone is that we have a $25 million mortgage insurance policy. As it relates to the provision or loan loss reserves going forward, we constantly do our CECL review at the end of every quarter. And we look at a number of factors, the macroeconomic environment where interest rates are going, portfolio composition. And based upon that, as part of our normal process, we determine what our reserves are. So if you're asking, do we see another big, large increase in reserves? No, but that will also be dictated by the factors that I just mentioned.

That's fair. Thank you. And obviously, the PPNR growth was very strong in the quarter. If I look at the the guidance update on interest expense, it really looks like it's driven by the higher ECR deposits because of the larger balances on noninterest-bearing deposits that you saw. In terms of the beta expectations for ECR, I assume there's no material change and you should be able to cut deposit beta as previously expected. I think it was around 65% for these type of ECR-related deposits. Am I correct in thinking that? And what's your view on mortgage revenue? Obviously, that's been a very strong quarter for the third quarter.

Yeah, so I mean, I think you're largely correct. And thanks for your observation on this. Yeah, we think the loaded beta is going to be closer to about 70%. You know, where the growth has been coming has been in ECR credit-related deposits that are 100% beta. So we start with TAB, Mark McIntyre, With the funds effective rate and then it's you know it's you know minus X basis points or plus a few basis points based upon that, and so, when we get the action next week. TAB, Mark McIntyre, Those will drop 100% some of the lower price pieces, including for our homeowners association group, those are the ones that are a little slower. TAB, Mark McIntyre, Because they have a lower rate to begin with, and so we only get maybe you know 40% of that you win it all together, I think we're going to be about 70.

I'll take the mortgage part of that. You know, we were very pleased with the mortgage-related income, which saw a significant rise to $95 million, which is a notable increase of 17 million or 21% from the previous quarter. Really, the key factors contributing to that is the decline in the 30-year mortgage rate, which is being supported by a lower 10-year note rate, which is below 4%. As of this morning, the 30-year fixed rate is 615. What we have seen is when we get into the low sixes, we really begin to see activity pick up, and that's, in fact, what's happening. So, looking ahead for, say, Q4, we anticipate tailwinds from low rates, which we've experienced in September and seeing here in October. But I want to make sure everyone, I caution everyone, while there's always a seasonal drop in volumes in Q4, which can range between 6% to 10%, we expect to be on the lower range of that decline. But all things considered, our mortgage revenue should continue to maintain their momentum. And absent a slow seasonal reduction in Q4, we are becoming optimistic about what 2026 looks like.

Thank you. Our next question comes from Chris McGrathie with KBW. Chris, please go ahead.

Oh, great. Good morning. Um, Kennedy LD, um, the buybacks post quarter end and the comments about, you know, being supportive with, uh, the capital arbitrage. Could you just unpack that a little bit?

Sure. Uh, sure. So, um, you know, we authorized the $300 million stock buyback. Uh, we're not changing that number. We executed $25 million against it in advance of this call. But to perhaps accelerate some of that usage of that $300 million, providing more liquidity at the parent would be helpful. And doing a subordinated debt deal at the bank will take our capital ratios, and you can see that we're about 14% kind of flat. Our capital is really supported. Our capital growth is really supported, our balance sheet growth. But it would enable us to have a little more latitude with that. As you know, though, we also have another goal of 11% CET1. So I can see us come down from where we are at 11.3 to that 11 number near there.

Yeah, Chris, I'll add up just a few other points there. So for the quarter, we purchased 301,000 shares at $83.08. Notably, 128,000 of those shares were acquired at $77.83. And what that should tell you is before the announcement of first brands, and the Cantor, we were feeling very confident to be buying this stock back in the mid to high 80s. And we even got more confident to buy it back when the stock dropped. And so the rest is what Dale said, which is we'll put out a subordinated deal sometime in the future, and we'll look to continue to support the stock, which is what we said when we announced the authorization. If there was a disruption in the stock, we'd be able to support it.

Okay, so you chip away at the $300 sooner versus you're not raising the $300. Got it. And then a follow-up just on the guidance. We have one quarter left, but the ranges are fairly wide. Could you just speak to biases within the range for the various items? Would you steer us in any direction for NII fees, expenses? Thanks.

Um, well, I mean, maybe ignored a couple of things. I mean, so coming out of the, out of the second quarter performance, there was some discussions about our, about our kind of our fee income levels. Uh, you know, and we had a stronger in the other, other category and non-interest income, you can see was up significantly. I think that's at least going to continue into the fourth quarter. Um, we're in the process now of distributing one of the largest class action settlements of all time. Um, and that will come in through on the expense side. Based upon kind of where we're headed, we believe that our incentive accruals may need to be bolstered in the fourth quarter to get to where we think we're going to be relative to our bonus targets, which were outlined in the proxy earlier this year. So that'll be a factor there. On the insurance piece, you can see that we had a significant decrease in FDIC costs. We've been talking about how we're going to continue to roll back what we've done in terms of network deposits like Intrify. We've also been scaling back Brokered. This is largely the fruits of that, but we also had a benefit in the third quarter from a rebate from prior overpaid insurance costs a little bit. That said, I think the fourth quarter, we're going to earn through that add back that we had or the benefit we had, and I think insurance costs are going to be fairly stable.

Yeah, I want to take a step back here. You know, based on consensus estimates that you guys all produce, we're going to grow earnings somewhere between 17% and 19% for 2025. I just want to make sure people remember, as we entered this year, the earnings trajectory had a very steep back-end curve, and we're on track to achieving that curve. So it's also noteworthy that I think there are very few banks at or above our size growing EPS at this pace.

Thank you. Our next question comes from Andrew Terrell with Stevens. Andrew, please go ahead.

Hey, good morning. I had a question just around the seasonal kind of deposit flows. I appreciate the $8.5 billion plus of deposit growth guidance for the year. Can you just talk about, you know, expectations of the seasonal component in the fourth quarter, how much that takes out of specifically the ECR balances? And then just the strength you're seeing in other, other verticals that would, I'm assuming offset some of that.

Yeah. I mean, really the ECR pickup, you know, that we saw, or the half of the deposits that we gained in the, in the third quarter was really related to the mortgage cycle. We've talked about this and those payments are going to be made sometime around the end of November, December. Um, and so that's, what's really going to come off. So it ramped up and then it comes down, but it's here for most of the quarter. you know, in terms of an average balance basis, which, of course, is how we compute earnings credit rates. And then, you know, kind of more stabilized after that going into 2026.

Got it. And if I could ask on the mortgage banking piece, you know, I know the fourth quarter of last year benefited pretty heavily from, I think, some direct securities and loan sales directly to banks. I know that's something you guys invested in. Did you guys experience any of that in the third quarter of this year that led to some of the margin increase? And is that something we should expect to get in the fourth quarter of this year?

So for the third quarter, there was less volatility. So vol did not take a bite out of the revenue growth that we are showing here for the quarter. That's number one. Number two, we did take a position that rates were going to come down. And we held on to a lot of our securities bonds, if you will, and did not sell them until later in the quarter. And we caught the rise up in price on that. And that helped us a little bit. We are not modeling that in our Q4 expectations again. And as I said, I just think Q4 mortgage revenues come down a little bit from Q3 just because of the seasonal nature of And also November and February are the two worst mortgage months of the year. And, you know, starting around Thanksgiving through the end of the year, activity begins to slow somewhat.

Yeah, we had some dispositions as we generally do on mortgage servicing rights, but it wasn't for any type of a gain here.

Thank you. Our next question comes from Jared Shaw with Barclays. Jared, please go ahead.

Thanks. Hi, everybody. Thanks for the color on credit. I guess looking at more broadly the trends in classified loans, what was driving that reduction? Was that credits leaving the bank or was that improving underlying fundamentals? Or was any of that from Cantor and First Brands potentially moving out of classified and into non-performing?

No, so there's a lot of stuff there. So let me kind of break down. Our REO decreased $88 million. That is one property that was sold at a marginal profit to what we brought it in at, and another property that was transitioned out of REO. So that's the $88 million. Special mention declined because several credits got resolved with borrowers putting up incremental margin to make us comfortable. And then we were able to elevate the quality of that loan or the rating of that loan. And same thing I would say in terms of sub accruing substandard loans where we just got we just resolved a few credits and those got upgraded in terms of its rating in terms of non accrual substandard. The Cantor loan is in that category. Okay, so that's the one that went up, right? So special mention went down by 152. Accruing substandard loans fell by 138. REO decreased by 88 million. And the increase in non-accrual loans was 95 million, which all that was for the Cantor Group 5. Had that not happened, we would have been flat there. So hopefully that unpacks it a little bit for you.

Yeah, that's great. Thank you. And then I guess this is a follow-up, Dale, you mentioned growth in corporate trust deposits. Is that market share gain? I mean, what's going on there? Should we expect to see sort of continued momentum and growth on corporate trust?

Yeah, it is market share gain. I mean, I'm really proud of kind of how we've executed in this category. We started two and a half years ago, really. And really with the focus we have on CLOs to start, we're now going to be expanding into municipal. But we have become the seventh largest CLO trust depository in the world in just two years. And so I think we're going to be continuing to move up those ranks in that group. I can't say it's going to be exactly what's going to do for the fourth quarter. because some of these are $50 million deals, let's say, and some of them are refinanced and things like this, and so they get taken out. But we have strong expectations for how this is going to go in 2026.

Yeah, I'll add one other thing, too, here, which we've got a very powerful one-two punch here, which is our corporate finance, where some of the private credit lending is done, works alongside of corporate trust when we go in and see clients. And so we get the corporate trust business as well as a credit mandate. And those two things work really well. And what we are seeing, and this is really, we're very excited about this on the corporate trust side, is once we get in there, our service level is so superior to some of the larger banks, which have not invested in this area, that we get repeat business. And the repeat business is coming at a fairly nice pace. So we have great expectations for next year on the deposit growth from corporate trusts.

Thank you. Our next question comes from Timothy Coffey with GMA. Timothy, please go ahead.

Thanks, everybody. Thanks for the opportunity to ask a question. Looking at the loan to deposit ratio, that's clearly come down the past couple of years. Is that a level now that you think is the right size for it? I've got kind of the mid to low 70% range.

So, um, actually we think it's a little too low. All right. And we'd like to see that, um, uh, be higher. And, um, and so we're working on that. Uh, so we have, uh, plenty of liquidity, uh, to put to work and, uh, what we're looking for are good, safe, sound loans. that we can do very thoughtful credit underwriting on. And if we find those loans, then we have the liquidity in front of us. Right now, that liquidity is probably not making any money, not losing any money for us, maybe on the margin, maybe it makes a couple of bips, but we like to put it to good use. And so if we can see strong activity, which we're seeing decent activity in our markets, we'll put that liquidity to work.

Okay. And another question was on the Oreo that you're operating and collecting rental income on right now. How should we be thinking about that line item going forward? Is that kind of a recurring revenue line item for right now? Yeah.

So it has two places. It has a place in other revenue where that's where we get the collection of the rents. And then it has an operating expense, which is in the other expense category. The net of those two are just marginally profitable, maybe a million to $2 million over the year. And so we took in these properties because we thought we could execute faster upon leasing up these buildings than the sponsors were. And the sponsors were happy to give it to us. And we were able to, we think, we believe we were able to maintain the value of those properties and actually improve them over time. So our goal is as we are able to increase the occupancy of these buildings and then sell them those the revenues from that will be adjusted accordingly but right now um you know the net benefit to the pp and r is really marginal at one to two million dollars for the year thank you our next question comes from abraham punwala with bank of america please go ahead

Hey, good morning. I just want to follow up, Ken. I think credit's obviously a huge overhang on the stock, and I heard your comments around asset quality, but just speak to us in terms of, one, I think within the NDFI, the business services piece, on a macro level, have you seen, and this is not just for Western Alliance, but have you seen Underwriting standards weaken where we should be expecting more issues coming out of this area and banks being exposed to non-bank financials around this one. Just your comfort level in this space, given you're still quite active, would be helpful. And then beyond this, as we think about asset quality, we had some commercial real estate issues you handled last quarter. Now this, as you look forward, I think just

your level of comfort when we talk about things have tested are they getting better versus risk of like one offs popping up thank you okay uh you came in a little choppy and so if i missed something in terms of one of your questions just uh just do a follow-up or if dale heard it clearer than i did then he'll jump in there um You know, right now, I think the overall backdrop to the economy is pretty good. You've got GDP growing at 3.8% to 3.9%. You've got the 10-year rate coming down to under 4%. Employment, for as much as people are talking about and nervous about it, are still in a rather low 4% area. You have greater investments being made into the country from foreign countries, so that should help continue with economic growth, and you've got a pro-business president. So that's the backdrop to a lot of things that we're seeing. As relates to us, and some of your question was, I think, how do we feel about the non-depository financial institution loans? Let me say that a good chunk of those are all mortgage-related and MSR-related. And as Dale said in some of his prepared comments, we've never, the industry has not experienced any losses. And for those people that aren't really knowledgeable, what happens on these mortgage warehouse lines, the average loan that we put on there stays for 16 to 18 days, and it rolls off very, very quickly. And so these are government, generally qualified loans. These are government loans, government-backed credits. They're very high FICO scores. We like these loans. uh, these, these credits, meaning the specialized mortgage credits to the warehouse lending, they're very strong. And so are the MSR, uh, uh, credits that we have on our books. And we have not seen any weakness in, uh, in that at all. Okay. Um, as it relates to the other part of, of our non-depository financial institutions, which has gotten some exposure through the point Benita, um, controversy that was disclosed about two weeks ago. We like private credit. And I think for us, it's important that people understand why we like private credit and how it works here in the bank. First, we lend to lenders. Just remember that. We're lending to people that are lending to private equity. Our interests are automatically aligned. And any time we recommend a covenant, that means it's good for us. It's got to be good for the private equity credit lender. And so we're very much aligned. Number two, we are working only with the brand name private credit funds. And we went back and looked at what their average loss rates were. Only 25 basis points. Now, we still underwrite the losses in the funds, because that's the right thing to do. But our attachment point, which is defined as where would we first take a loss, is at 35%. So the fund has to lose 35% before we take $1 of loss. Contrast that to the 25 basis points that their average loss rates are from these private credit shops. Most of our structures are rated either double A or triple A. And that's what gets a lower risk weighting on these structures. Now, on top of that, we have an active portfolio management process that connects with an active portfolio management process at the private credit shops. And lastly, we have the ability, we've got kick-out and eligibility rights on these credits as well. And as we said, we don't think there's a loss here. with the Point Bonita credit. It's paying as we expected, and it's unfortunate that our name got put out there. We didn't put it out there, but it's unfortunate that it did. We were not worried because of the diversity of retailers and their investment grade and the fact that we have a loan-to-value relationship of 20% there when we have $890 million of credit accounts receivable backing up our loan amount, which as I said, is over four times. So unless I missed anything, Dale, did I miss anything? Did you hear anything? Got it. Okay. Dale said I got it. Hopefully I got it.

Got it. All right. So that is a full response. On the buybacks, I think, Dale, you mentioned you were at 11.3%. versus the 11% that you're targeting, is there an implication there, given where the stock is right now, that you could accelerate some of the buybacks where the first 30 basis points of CT1 you could do in short order if the stock remains where it is today?

I think that's a safe inference, Ibrahim. I mean, we haven't done our debt deal yet, but yeah, do I think we're going to come down from 11.3 closer to our target? Yes.

Thank you. Our next question comes from Casey Hare with Autonomous. Please go ahead.

Great, thanks. Good morning, guys. Ken, great answer, long answer on the NDFI, but I do have a follow-up. Specifically on the collateral and how it's validated, you know, it's all of these, I mean, it sounds like you scrubbed the note finance book, the big ticket items there, which is $2 billion, but That leaves about 11 billion of NDFI exposure. It just seems like it's, as long as you're not afraid to go to jail, it seems easy to double pledge collateral. So what are you doing to validate your collateral and safeguard against future frauds?

Well, as Ken indicated in his remarks, we are confirming that through direct sources with the title insurer, with the title itself, that our lien has been placed in the first position. And then we periodically check those to make sure that nothing happened that pushed us down to second. I mean, the issue we had with the Cantor deal is we were supposed to be in first position. And in some cases, we see that we are now in second. But the reason why we say that we're okay with collateral is because if I net out the first in front of us relative to the as-is appraisals that we have that we're getting updated, we still have enough money to cover the entire amount of this loan of $98 million, which excludes the springing guarantees from two individuals that are ultra-high net worth, as well as the insurance policy that we have for fraud losses ourselves for $25 million.

And Casey, I want to just correct you. I think I heard a number of that. Our note finance portfolio is only $2 billion. Okay.

Right. No, I'm right. But I'm talking about the remaining NDFI exposure of $11 billion.

Well, the rest of the NDFI exposure is, I mean, the overwhelming preponderance is really these, you know, It's basically lines for residential mortgage. And those loans are only, they only last two weeks, maybe 17 days. So, you know, so a loan is table funded to close a house or do a refi. We put the money in, we hold it, and then it's pushed off to a GSE, you know, two weeks later. So those clear out all the time.

Gotcha. Okay. All right. Just switching to the guide on loans and deposits. It sounds like loan growth is going to have to have a pretty strong quarter. You guys are certainly capable of that, but it's been some time that you've put up a $2 billion quarter. So just some color on the pipelines. And then on the deposit side of things, I think you guys had said that you are pricing it differently so that mortgage runoff would be less than the $1.7 billion that you experienced last year. But the guide implies about $3 billion of runoff. So just looking for some clarification there.

We'll split it up. I'll take the loans. I'll let Dale take deposits. So we grew $700 million this quarter. That was a little below what our internal projections were. We had two, maybe three loans that were pushed out for closing from the end of the Q3, and they're coming into Q4. So that's what gives us sort of the confidence that we'll have a much better Q4 than we did Q3.

Yeah, if you go to the deposit guide, like you mentioned, your analysis is correct, Casey. So what's transpired is, gosh, we had this kind of a rocket third quarter in terms of deposit growth. My instinctive reaction is, huh, does that give us pricing leverage whereby we can maybe put something down and still have a strong performance? So I think in some respects, our guide anticipates that maybe the runoff would be a little bit higher if we did that, but I hope we'd be able to save on pricing in that scenario. I would say that there is one other caveat though. So if the AmeriHome operation and mortgage banking generally picks up, what goes into those deposits is normally it's just your principal and interest. You make a payment for X thousand dollars, we're going to go in there and we're going to see those funds, we're going to have them for three weeks, and then we're going to remit them to a GSE typically. But if somebody does a purchase, then maybe it's $500,000 that goes in there. And so those deposits could rise if we get into more of a purchase and or a refi business kind of moving in as rates continue to decline.

Thank you. Our next question comes from Matthew Clark with Piper Sandler. Matthew, please go ahead.

Good morning. Thank you. Morning, just on that lawsuit in the, in the jurors banking division, just quantify the settlement or that you anticipate to, uh, realize here in the fourth quarter.

Yeah. So, um, so, so the, the, the lawsuit was a, it was, uh, I guess I'll, it was Facebook Cambridge analytical deal. You probably heard about it. It has more plaintiffs or more participants in the class than anything ever, uh, in the over 10 million. And that process is taking place now. And so, and if we're the distributor of that, it's going to take, you know, a few months to do it. But we get fees associated with distributing 15 million payments and going through the process of verification, the individual, you know, are they certified for the class, things like this.

Got it. And then I don't think I saw it on the slide deck, but if you had the spot rate on deposits at the end of September and the beta we should assume as we go through a rate cutting cycle here potentially?

Yeah, so the ending rate was 317 for interest-bearing deposits. The beta that we've got, we're a little bit faster on the ECR, so it's going to be a little slower than that in terms of what we're doing. you know, hence, you know, you see on the net interest income guide in total, we're showing that we're, you know, slightly, you know, asset sensitive, maybe a little bit of compression as rates come down, but we more than make up for that with what we save on ECR costs and what we save in additional income from the AmeriHome operation.

Thank you. Our next question comes from Ben Gerlinger with Citi. Please go ahead.

Hi, good morning. I know we talked through Oreo a little bit. With respect to the properties of the office properties last quarter, it seems like you've already sold one and you're leasing up others. And I know, Ken, that you acknowledge that like fees and rent rolls going to in that fee income and then expenses are basically de minimis to one another towards your net impact, the income statement. As you roll those out, it seems like on occupancy levels, you probably acknowledge some gains over the next 12 months. I was just kind of curious if any timeline you might project on getting rid of the other four that you still have on the REO.

Yeah. I really don't have a timeline for you. We'd like to get them off our balance sheet as quickly as possible. The best way to do that is to lease these properties up. We see good leasing activity on the properties, as Dale said in his prepared remarks. In addition, we're getting some tailwind with interest rate cuts coming, which should really improve cap rates. So the best I can say is, fingers crossed, that I'd like to see a couple of those leave us sometime during the course of next year. But we're looking to maximize value here. and we're looking to improve our tangible book value now that we brought them on. And so we don't want to sell them too cheaply because we're kind of optimistic that we could improve the occupancy of these buildings.

Every one of these, we have a reasonably current appraisal on, and there's two values in that appraisal every time. One is the as-stabilized value, which is, hey, if this thing is operating normally and isn't under some kind of duress or distress, And then the as-is value, it's like, nope, here's what it is today. Yes, some of the things don't work. You've got to take those into consideration as the buyer. So we're in a situation now that the disparity between the as-is value and the as-stabilized values on these are some of the highest we've ever seen. And so what you're getting at is, gosh, would it be nice as we stabilize these that maybe we can migrate those numbers up? I'd love to do that. We're obviously never going to forecast anything like that.

Got it. Okay. That makes sense.

Are you looking to buy a building?

Not for what you're selling it for. I don't have that money. But in terms of cancer, it might be a naive question, but was that an NDFI loan? And if so, what kind of subcategory was it?

Yeah, it wasn't in DFI loan, and it was in, you know, the mortgage category. It's in our, you know, market banking situation. So it was because as a financial institution that it's going to be in there. And, again, as Ken indicated, you know, what we're doing in our – our advances here is, you know, our numbers would have been very strong, you know, had we had the first position as the borrower, you know, presented that they did and as their contracts demand. That's where you get into this fraud situation. Otherwise, this would have never even come up.

Thank you. Our next question comes from David Smith with True Securities. Please go ahead, David.

Hi there. Can you give some more details on the mortgage assumptions in your overall earnings sensitivity guide for down rates? Just, you know, with a 75% ECR beta on top of what you disclosed about your NII sensitivity, it seems like there's very little, if any, mortgage upside in there. I was wondering if you could help us unpack that some. Thank you.

Well, so we, you know, One of the key factors in terms of how we do on our, it's basically the valuation on the MSR relative to what we have as our hedge against it, is the volatility or the spreads that have increased over the past few years. We're seeing today those spreads compress. If that continues, as spreads compress to historical levels, we're likely to see higher revenue. in that scenario because the volatility is something that doesn't really work in our favor. And we saw the inverse of this at the beginning of basically the tariff situation back in April. In terms of where the Mortgage Bankers Association is actually projecting a little bit better in terms of purchase activity or total one to four family in the fourth quarter than in the third. We're not really counting on that. We're thinking it's going to maybe slip slightly just because that's been the seasonal trend. But maybe there will be some higher level of activity because of the rate cuts, as long as people are comfortable that the shutdown and things like this aren't going to move unemployment higher.

Yeah, the numbers from the NBA for next year, they expect mortgage activity to rise 10% to $2.2 trillion, where Almost $1.5 trillion will be purchase volume, and then about $700 million will be refinancing. So again, Q4 revenues for mortgage should be just a little weaker than Q3, although I've got my fingers crossed here that we could maybe get some tailwinds here. But we are becoming more optimistic about where that revenue stream is going to be for 2026.

Okay. And just to circle back to the earnings at risk scenario, could you help us just roughly size how much of the offset to the NI asset sensitivity is coming from ECR benefiting and down rates versus mortgage benefiting and down rates for you?

Yeah, I think the preponderance is going to be kind of in the mortgage side, but they're both contributors. And if there's more variability in terms of it improving better in the earnings at risk, it's going to be the mortgage-related as well. I think we're going to have a higher beta on the beta based upon kind of what could happen there versus the ECRs, which we talked about those betas already.

Thank you. Our next question comes from Bernard Vongiziki with Deutsche Bank. Please go ahead.

Hey, guys. Good morning. So you have a bid over a third of your total deposit base that has ECRs related to them. And when we think about the composition of the deposit base and the ECR-related costs, which represent about 30% of the total expenses, can you just talk to expectations of how these change? I know, Dale, you're moving over to a new role next year, focusing on deposit initiatives. But are you looking to drive down the percentage of the ECR-related balances or have them grow but more focused on reducing ECR costs related to them or a combination of both? Any caller, you can share these dynamics.

Yeah, so the ECR is really driven by two sectors. The largest, of course, is kind of what we're doing in the mortgage warehouse deposits. We've talked about that. And the other one is our homeowners association. Going forward, I believe that the homeowners association deposits are not going to shrink, but they're not going to grow as quickly as the overall footings of deposits for the company. So proportionately, that will decline. Meanwhile, our HOA group, we're the largest in the nation in terms of what we provide services there. That growth is continuing to be strong. And I think that is going to at least keep pace with the overall size of the company as it grows. So in total, I think you're going to see that it becomes kind of less significant. And in terms of the expenses associated with it, you know, as you go to lower rate levels, you know, these numbers just come down and there's really, you know, not as much of an offset anywhere else. So it's just the dollars are going to fall back a bit, you know, to lower levels if, say, we get, you know, four rate cuts over the next 12 months.

Okay, and then just on equity income, the uptick there in 3Q, was that primarily due to the reversal in losses from 1Q? Just curious if that's come back. And just, you know, given the cap market activity picking up, you know, how should we look at this line item from here?

We don't have that reversal yet. Thanks for remembering that. But that's still pending. No, this was, these were other types of things. Look, you know, that number does bounce around a bit. You can obviously see that. So, you know, this $8 million handle, you know, certainly higher than usual. A little bit of a haircut there going forward. We don't have anything that indicates that anything is either getting dramatically better or dramatically worse.

Thank you. Our next question comes from Anthony Alien with JP Morgan. Please go ahead, Anthony.

Hi, everyone. You increased the range for ECR costs again this quarter, but this time you maintained the NII range of up 8% to 10%. Was the increase in the ECR deposit cost range tied to just higher balances or because of a lower ability to reprice down those deposits?

It's really balance-driven. You know, I mean, frankly, we got a little more in the third quarter than we thought we would. So it's balance-driven, and there's been – You know, I guess it's a good problem to have in that, you know, some of these dollars have grown more quickly, but, you know, it does show up in expenses, and it contributes to, you know, the situation where you've got to look at adjusted, you know, adjusted efficiency ratio, adjusted NIM.

Okay, and then my follow-up on your earlier comments on reviewing the note finance portfolio, Have you given any thought to potentially casting a wider net and reviewing the loan portfolio credit procedures more broadly beyond note finance and NDFIs, just given investor concerns on the company's credit quality?

Thank you. Hi. Yeah. I want to quell any misconceptions that might be implied through even some of the questions. No one is more concerned about credit governance asset quality than our executive management. We've got an entire construct built around the control environment for credit, the second line or credit risk review that's intimately involved. And so at the earliest stages of something that didn't work as we expected, those teams are involved inside of our company. We're listening and reviewing on a much broader scale. So this work's been ongoing. It goes on all the time. It's part of our quarterly full portfolio review process. But in addition to that, we hold ourselves accountable and we hold our business accountable through our second and third line who are actively engaged in that process. And so we're not asking ourselves, could this happen again? We're receiving validation of those things through our internal control network.

Thank you. Our next question comes from John Ostrom with RBC Capital Markets. John, please go ahead.

Hey, thanks. Hi, everyone.

Hey, John.

Ken, maybe for you. Hey, do you have any balance sheet size limitations? It looks like you're going through $100 billion very quickly the next couple of quarters. Anything for us to consider in how you're thinking about that?

No, not really. I think you're right. Of course, we're not going to have a lot of growth in the balance sheet for Q4 just because, as we've talked about, the seasonal outflow of the warehouse lending deposits or the mortgage deposits. But two things we're doing. One, we're growing the business based upon opportunities that we have, and we're not holding ourselves back because we're going to cross over $100 billion. Number two, we continue to build out the infrastructure to cross over $100 billion and be LFI ready. Number three, we're waiting and we're hopeful that the tailoring rules will come out probably sometime in the middle of next year that will move it to $250 billion. But in all the expense numbers, remember, non-ECR operating expenses, quarter to quarter, only went up $2 million. For the first three quarters of this year, non-ECR operating expenses were in a band of $5 million. And that includes all the development and investment we're making to be LFI ready. To your balance sheet question, we know we'll cross over 100 when it's the right time based on the opportunities that are in front of us, okay? And we'll be ready, and we continue to invest. And if the tailoring rules come out, then we may slow some of our investment down to match what some of the tailoring rules are.

Okay. All right. Fair enough. Um, and then Dale, for you, um, in your prepared comments, you talked about an upward bias and ROTC and top quartile and ability to show improvement. I'm assuming you're thinking of starting point that includes a more normalized provision. So maybe normalized ROTC right now is high teens rather than the mid teens you printed and you can do better from there. Is that fair?

Sure. Yeah. Yeah, I know that that's completely fair, John. Um, and you know, maybe just talk timing a little bit here as well. So, yeah, normalized provision, you know, that would have obviously augmented the number in the third quarter. You know, as we get to the first quarter in particular, it's a little bit strange. You know, we lose a couple of days. That's meaningful for us. And also you step up again, everyone knows, on, you know, certain types of taxes and things like this, you know, kind of starting the new year. So I'm looking for something to, you know, to kind of kick in, you know, kind of in the back half of 2016 to hopefully get to the levels you're talking about.

Yeah. You know, one of the things that can really supercharge the return on average tangible common equity will be the mortgage business next year and the growth in the mortgage business. You know, if it grows more than moderately, that's going to really provide excess earnings, and that will improve the return on equity, John.

Thank you. Our next question is a follow-up from Ibrahim Poonwala with Bank of America. Please go ahead.

Thanks for taking my question. Dale, just to follow up, I think it's important. I just want to make sure in your slide 24, the 16% loans, NDFI loans, mortgage intermediaries is about $9.1 billion. The warehouse is about $6 billion and change. And I'm trying to figure what the balance is between the six and nine and are those non-residential warehouse loans, so like commercial real estate driven? And would you be holding reserves against those loans as opposed to the resi mortgage where you show on the slide where you don't need reserves because of the zero loss nature? Just clarify that for us.

You know, I think we maybe need to pick this up, you know, maybe at the next call, Ibrahim, in terms of what this, you know, what this looks like. I mean, so we talked about the warehouse piece and where we are on the, you know, the NDFI elements whereby we're assuming a, you know, a first out position and another lender is in front of us with the higher level of risk against loans that typically have low loss to begin with. So let's pick this up later today.

Thank you. Our next question comes from Timo Brasile with Wells Fargo. Please go ahead.

Hi. Good morning. I guess looking at the Cantor relationship specifically, what internal controls maybe failed to detect some of the collateral deficiencies there? And then it looks like in going through the lawsuit that the credit was converted from a line of credit in July to a term. and then the suit was filed in August. Was the loan re-underwritten in July and the new issues kind of identified weeks later? Maybe just give me a little bit of a timeline as to what happened around July, August there.

Yeah, so I'll provide some updates, but, you know, appreciate that this is an active litigation and our discussion here is going to be somewhat limited. but I'll try to help you with your question. First, we had a long-term relationship with this borrower, all right? It dates back to 2017. And as of this past August, the borrower was current. We made the decision to exit the relationship and convert the revolving loan to a term loan with a May 2026 maturity. It was during that time that we discovered the bar failed to disclose material facts to us. And consequently, we wasted no time in following a lawsuit alleging fraud. So that's probably as much as I can tell you, given that we have an active lawsuit here. We're working hard to get a receiver in there as soon as possible. And with that, we're going to have greater insight into the books and records of Cantor 5.

Thank you. This concludes our Q&A session, and I would now like to turn the call back over to Ken Vecchione for closing remarks.

Yeah, thank you all for attending the meeting. Appreciate all your questions. We look forward to the next call. Be well.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.