Western Alliance Bancorp (WAL) 2025 Q3 法說會逐字稿

Good day everyone. Welcome to Western Alliance Bank Corporation's third-quarter 2025 earnings call.

(Operator Instructions)

You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com.

I would now like to turn the call over to Miles 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 is required by law, the company does not undertake any obligation to update any forward-looking statements. 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 8-K 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 Idnani, 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] (technical difficulty) and pre-provision 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 elevation 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 V, which was the subject of our October 16 [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 -- as well as up to $25 million of insurance coverage for mortgage fraud losses, we'll 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 re-verified 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 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 Leucadia Asset Management subsidiary Point Bonita Fund1 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 obligations. The loan remains current and we continue to receive principal and interest payments as modeled.

Jefferies has publicly stated they feel confident in Point Bonita's near-term ability to pay off all debt due to the diverse set of assets apart from the first brands 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 4 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 5 and 10 years, our net annual charge-offs averaged just 10 and 8 basis points respectively, placing us among the top 5 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 Leucadia 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 firming 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 7 basis points to 27%.

Non-interest expenses increased $30 million from the prior quarter to $544 million, 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 an adjusted efficiency ratio below 50%.

Record pre-provision net revenue of $394 million, grew 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 mix change towards C&I and providing greater absorption for tail risks.

Turning to our net interest drivers, interest-bearing deposit costs were stable. However, overall liability funding costs comprised 8 basis points from the prior quarter and benefited from lower rates on borrowings and growth in ECR paying DDA accounts.

The health for investment loan yield was relatively stable, ticking up 1 basis point despite the resumption of FOMC rate cuts toward the end of the quarter. The securities yield declined 9 basis points from Q2 to 4.72%. 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 yields and stable -- net -- not -- interest-bearing deposit costs.

Non-interest expenses increased $30 million or 6% quarter over quarter. Deposit cost 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 forecasts. 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 -- 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 PPNR growth of 38% over the same period. This reflects our robust revenue growth alongside with rising efficiency.

Finally, total equity increased to $7.7 billion and tangible book value per share climbed 13% year over year.

[Hope for] investment loans through $707 million quarterly, so 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 and 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 Juris 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 OREO 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 V 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 7 basis points to [0.85%].

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 and low loss categories 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 [loss], which illustrates how credit enhancements such as credit-linked notes in 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 makes 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 would shift our allowance above 1%.

Our CET1 capital ranks around median for the peer group. If you add our less adverse AOCI marks and the loss reserve, our adjusted CET1 ratio capital would be 11.3%. A 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 CET1 ratio shifted higher to 11.3% from organic earnings accumulation. Our tangible common equity 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 30 to $58.56 as a function of organic retained earnings. Of note, since initiating our $300-million share buyback programs in September, we completed $25 million in purchases through October 17, consistent with upward growth in tangible book value per share remains a hallmark of Western Alliance that has exceeded peers by 5 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 trends in 2026.

I'm going to 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, but 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 positioned us to exceed our lofty targets and finished 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 million 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 -- should continue to perform as expected with full-year net charge-offs 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.

(Operator Instructions)

Janet Lee, TD Cowen.

So it seems like the credit picture that you guys are laying out is that you guys are fairly comfortable with and with the limited loss potential on either first brands, Cantor exposures. As you are assessing your exposure to NDFI, I understand that that is a very broader -- of 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?

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 V 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 V 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 alternate 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 guidance update on interest expense, it really looks like it's driven by the higher ECR deposits because of the larger balances on non-interest-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 types of ECR-related deposits. Am I correct in thinking that? And how are -- 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% where the growth has been coming has been in ECR-related -- credit-related deposits that are 100% beta. So they have -- we have -- we start with the funds effective rate and then it's, minus x basis points or plus a few basis points based upon. That and so when we get the action next week, 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 because they have a lower rate to begin with and so we only get maybe, 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. 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 6.15%. What we have seen is when we get into the low 6s%, 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. And -- 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 the low seasonal reduction in Q4, we are becoming optimistic about what 2026 looks like.

Chris McGratty, KBW.

Ken and Dale, the buybacks post quarter end and the comments about being supportive with the capital arbitrage, could you just unpack that a little bit?

Sure. So we authorize the $300-million stock buyback. We're not changing that number. We executed $25 million against it in advance of this call, and -- 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 them we're about 14% kind of flat. Our capital is really supported. Our capital growth is really supporting 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 it come down from where we are at 11.3% to that 11% number near there.

Yeah, Chris, I had 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 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 confidence 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 (technical difficulty) to support it.

Okay, so you chip away 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.

Well, I mean, maybe ignored a couple of things. I mean, so coming out of the second quarter performance, there were some discussions about our kind of our fee income levels, and we had a stronger in the other category of non-interest income you can see it was up significantly. I think that's at least going to continue into the fourth quarter. We're in the process now of distributing one of the largest class action settlements of all time and that will come in through.

On the expense side, based upon kind of where we're headed, we believe that there are incentive accruals we may need to be bolstered in the fourth quarter to get to where we think -- where we're going to be on a relative to our bonus targets which are 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 IntraFi. 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 burn -- we're going to earn through that ad 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. 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.

Andrew Terrell, Stephens.

I had a question just around the seasonal kind of deposit flows. I appreciate the $8.5 billion-plus of deposits growth guidance for the year. Can you just talk about expectations of the seasonal component in the fourth quarter, how much that takes out of specifically the ECR balances, and then just the strange you're seeing in other verticals that would I'm assume offset some of that.

Yeah, I mean, really, the ECR pick up, that we saw or the half of the deposits that we gained 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 or December, 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 in terms of an average balance basis, which of course is how we compute earnings credit rates and then, kind of more stabilized after that going into 2026.

Got it. And if I could ask on the mortgage banking piece.

Yeah, I know 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 again in the fourth quarter of this year?

So for the third quarter there was less volatility, so ball did not take a bite out of the revenue growth that we are showing here for the quarter. That's number 1. Number 2, 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.

I am not -- 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 and also November and February are the two worst mortgage months of the year and 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.

Jared Shaw, Barclays.

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 and 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 OREO 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 OREO. 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 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]. OREO decreased by $88 million, and the increase in non-accrual loans was $95 million which is all that was for the Cantor Group V. 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. How -- 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 2.5 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 2 years. And so I think we're going to be continuing to move up that 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 -- these are $50-million deals, let's say, and there's some. They said some of them are refinanced and things like this and so they get 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 there are repeat businesses coming at a fairly nice pace, so we have great expectations for next year and the deposit growth from corporate trusts.

Timothy Coffey, Janney.

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

So, actually, we think it's a little too low, right? And we'd like to see that be higher and so we're working on that. So we have plenty of liquidity to put to work and 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 bps, but we like to put it to good use and so we can see strong activity, which we're seeing decent activity in our markets, we'll put that liquidity to work.

Another question was on the OREO that you're operating and collecting rental income on right now. How should you 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 revenue, 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 $1 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, the net benefit to the PPNR is really marginal at $1 million to $2 million for the year.

Ebrahim Poonawala, Bank of America.

I just wanted to follow-up, Ken, so 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, like, have you seen, and this is not just for Western Alliance, but have you seen underwriting standards we can 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, you came in a little choppy and so if I miss something in terms of one of your questions, just do a follow-up or if Dale heard it clearer than I did, and he'll jump in there.

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 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 it 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 credits, meaning the specialized mortgage credits to the warehouse lending. They're very strong and so are the MSR credits that we have on our books, and we have not seen any weakness in that at all, okay.

As it relates to the other part of our non-depository financial institutions, which has gotten some exposure through the Point Bonita 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 anytime we recommend the 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 2, 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. All right. Now, we still underwrite the losses in the funds because that's the right thing to do. Okay but our attachment point, which is defined as where we first take a loss, is that 35%. So the fund has to lose 35% before we take $1 of loss, right? Contrast that to the 25 basis points that their average loss rates are from these private credit shops. All right. Most of our structures are rated either AA or AAA, right? 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 equity or private credit shops. And lastly, we have the ability, we've got kick out eligibility rights on these credits as well, right? 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 never -- 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 4 times. So unless I missed anything, Dale that I'm missing you anything. Okay, Dale said I got it. Hopefully, I got it.

Got it. Alright, so that is a full response.

On the buybacks I think Dale, you mentioned you're 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 CET1 you could do in short order if the stock remains where it is today.

I think that's a safe inference Ebrahim. 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.

Casey Haire, Autonomous.

Ken, great answer, long answer on the NDFI, but I do have a follow-up.

Specifically on the collateral and how it's validated. I mean, it sounds like you scrubbed the note finance book of 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-fledge 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 through direct sources with the title [insurances] or 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 a 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.

And 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 to for fraud losses ourselves for '25.

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

Right, no (multiple speakers) that, 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 basically lines for residential mortgage and those loans are only -- they only last two weeks, maybe 17 days. So the loan is cable funded to close a house or do a refi to put the money in, we hold it and then it's pushed off to a GSE two weeks later. So those clear out all the time.

Gotcha. Okay. All right, just switching to the guide on loans and deposits, and 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.

I'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 that 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, 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 refi business kind of moving in as rates continue to decline.

Matthew Clark, Piper Sandler.

Just on that lawsuit in the Juris Banking division, just quantify the settlement or that you anticipate to realize here in the fourth quarter.

Yeah, so the lawsuit was a -- it was, I guess it was Facebook, Cambridge Analytica deal, you probably heard about it. It has more plaintiffs or more participants in the class than anything ever in the over $10 million and that process is taking place now and so and -- and if we're the distributor of that, it's going to take 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 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, but, as you see on the net interest income guide in total, we're showing that we're slightly 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.

Ben Gerlinger, Citi.

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. 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, but 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 at any timeline you might project on getting rid of the other 4 that you still have on the OREO.

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've 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. But 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 that it's like, no, here's what it is today, yes, some of the things don't work, you just see it as, you 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 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 (multiple speakers)-- (laughter)

(laughter)

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

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

David Smith, Truist Securities.

Can you give us some more details on the mortgage assumptions in your overall earnings sensitivity guide for down rates? Just with a 75% ECR beta on top of what you disclosed about your NII sensitivity, 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 -- one of the key factors in terms of how we do on our -- it's basically the evaluation 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 compressed, as if that continues as spreads compressed 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 the of the basically the tariff situation back in April.

In terms of what the Mortgage Bankers Association is actually projecting a little bit -- a little bit better in terms of, purchase activity or total 1 to 4 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 the seasonal trend, but maybe there'll 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 purchased 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 some -- I 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 NII asset sensitivity is coming from ECR benefiting and down rates versus mortgage benefiting and 1down 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.

Bernard Von-Gizycki, Deutsche Bank.

So you have a bit 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 the ECR costs related to them or a combination of both. Any color you can share these dynamics?

Yeah, so the ECR is really driven by two sectors. The largest, of course, is the kind of what we're doing in the mortgage warehouse deposits. We've talked about that and the other one is our homeowners association. So 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 was 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, as you go to lower rate levels, these numbers just come down and there's really not as much of an asset anywhere else. So it's just the dollars are going to fall back a bit to lower levels if say we get four rate cuts over the next 12 months.

Okay, and then just on, equity income, the uptake there in 3Q, was that primarily due to the reversal and losses from 1Q? Just curious if that's come back and just given the cap market activity picking up, 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. I know this was -- these were other types of things. Look, that number does bounce around a bit. You can obviously see that. So this $8-million handle, 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.

Anthony Elian, JPMorgan.

You increased the range for ECR cost again this quarter, but this time you maintain 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 balanced driven. 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 -- I guess it's a good problem to have and that some of these dollars have grown more quickly, but, it does show up in expenses and it contributes to the situation where you've got to look at adjusted -- efficiency ratio adjusted NIM.

Okay, and then on 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.

I want to quell any misconceptions that might be implied through even some of the questions. No one is more concerned about a credit governance asset quality than our executive management. We've got an entire construct build 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 as 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. And so we're not asking ourselves, could this happen again. We're receiving validation of those things through our internal control network.

Jon Arfstrom, RBC Capital Markets.

Ken, maybe for you. 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 and 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 2, we continue to build out the infrastructure to cross over $100 billion and be LFI ready.

Number 3, we're waiting and we're hopeful that the tailing rules will come out probably sometime in the middle of next year that we'll move it to [250]. All right, 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.

So to your balance sheet question, we'll cross over $100 billion 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.

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

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

Yeah, 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. If it grows more than moderately, that's going to really provide excess earnings, and that will improve the return on equity, John.

Ebrahim Poonawala, Bank of America.

Thanks for taking my question. Dale, just to follow-up, I think it's important -- just want to make sure in your slide 24, the 16% loans, NDFI loans, the 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 $6 billion and $9 billion 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 refi mortgage where you show on the slide where you don't need reserves because of the zero loss nature? Just clarify that for us.

I think we maybe need to pick this up, it may be at the next call, Ebrahim in terms of what this looks like. I mean, so we've talked about the warehouse piece and where we are on the NDFI elements whereby we're assuming 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.

Timur Braziler, Wells Fargo.

Just 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 the line of credit in July to a term loan 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 I 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 borrow, all right. It dates back to 2017. And as of this past August, the bar 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 filing 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 V.

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.