Western Alliance Bancorporation (NYSE:WAL) has reported a strong second-quarter performance with earnings of $1.75 per share, indicating a successful transition from its repositioning strategy to one focused on earnings growth.
The bank saw a substantial increase in core deposits and loans held for investment (HFI), which contributed to a rise in net interest income. Maintaining a solid liquidity profile, the company also reported a significant growth in securities and cash.
Asset quality is showing signs of normalization, with a decrease in total classified assets. Looking ahead, Western Alliance expects continued growth in loans and deposits, with a Common Equity Tier 1 (CET1) capital ratio of 11%.
The bank forecasts net interest income to grow between 9-14% and non-interest income to increase by 15-25%, while non-interest expenses are projected to rise by 9-13%. Net charge-offs are expected to remain low, indicating a strong asset quality outlook.
Key Takeaways
- Earnings per share for Q2 stood at $1.75, reflecting strong growth.
- Core deposits increased by $4 billion; HFI loans grew by $1.7 billion.
- Net interest income is projected to grow 9-14%; non-interest income to increase 15-25%.
- Non-interest expense expected to rise 9-13%.
- Asset quality is normalizing with total classified assets down to 93 basis points.
- CET1 capital ratio held steady at 11%; tangible book value per share grew to $48.79.
- Net charge-offs are in the top third among peers, with a forecast of 15-20 basis points of average loans for the year.
Company Outlook
- WAL expects loan growth of $4.5 billion and deposit growth of $14 billion by 2024.
- Anticipates a consistent CET1 ratio of 11% or above.
- Net interest margin expected to remain close to current levels in the upcoming quarters.
Bearish Highlights
- Gain on sale margins in the mortgage banking business declined in Q2.
- Special mention credits saw an uptick, attributed to ongoing review processes and specific yield situations.
- Fee income is challenging to predict and significant changes are not anticipated soon.
Bullish Highlights
- WAL's allowance for credit losses covered the last four years of net charge-offs by 4.3 times, ranking second best in its peer group.
- The bank's tangible book value per share increased, with an annualized growth rate of approximately 13%.
- Positive ratings actions and a strong pipeline of deals in the Corporate Trust business show growth potential.
Misses
- Despite the strong performance, there was a noted decrease in gain on sale margins in the mortgage banking sector during Q2.
Q&A Highlights
- Executives expect net interest income to continue rising in Q3 and remain flat in Q4.
- The company is neutral on net interest income and deposit costs.
- WAL plans to reposition and sell a property in San Diego.
- Interest-rate sensitivity is expected to remain in line with previous quarters.
Throughout the earnings call, Western Alliance Bancorporation's executives expressed a stable credit quality outlook and satisfaction with the portfolio performance. They remain committed to supporting their clients and employees amid changing economic conditions, with a focus on maintaining strong asset quality. The bank's strategy includes gaining market share in the mortgage business as some competitors exit the market, and leveraging lower interest rates to benefit their mortgage fee income and loan volume. Despite the potential challenges posed by changing interest rates, Western Alliance Bancorporation is poised for continued growth and stability.
InvestingPro Insights
Western Alliance Bancorporation (WAL) has demonstrated robust financial performance in its latest quarterly report, with a notable earnings per share (EPS) of $1.75. The bank's strategic moves have positioned it well for sustainable growth, as reflected in several key metrics and InvestingPro Tips.
InvestingPro Data for WAL reveals a market capitalization of approximately $8.37 billion USD and a Price/Earnings (P/E) ratio of 11.55, which is adjusted to 12.1 when considering the last twelve months as of Q2 2024. This valuation measure is crucial for investors gauging the company's profitability relative to its share price. Additionally, the company's revenue has grown by 12.41% over the last twelve months, underscoring its successful expansion efforts.
An InvestingPro Tip highlights that WAL has raised its dividend for five consecutive years, showcasing its commitment to returning value to shareholders. This consistent increase in dividends could be particularly attractive to income-focused investors.
Moreover, the bank's shares are trading near their 52-week high, with a price percentage of 98.02% of that peak, indicating strong market confidence. This performance is supported by a significant return over the last year, with a price total return of 62.99%.
For readers interested in a deeper analysis, InvestingPro offers additional insights and tips. Currently, there are 11 more InvestingPro Tips available for WAL, which investors can explore for a more comprehensive understanding of the company's financial health and market position. To access these valuable insights, visit https://www.investing.com/pro/WAL and consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
Full transcript - Western Alliance BanCorp (WAL) Q2 2024:
Operator: Good day, everyone. Welcome to Western Alliance Bancorporation's Second Quarter 2024 Earnings Call. 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.
Miles Pondelik: Thank you. Welcome to Western Alliance Bank's second quarter 2024 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, assumptions, except as 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, included in 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.
Kenneth Vecchione: Thank you, Miles. Good morning, everyone. I'll make some brief comments about our second quarter earnings, before turning the call over to Dale, who will review our financial results in more detail. After I discuss our updated 2024 outlook, Tim Bruckner, backed by popular demand, our Chief Credit Banking Officer for Regional Banking will join us for Q&A. Western Alliance earned $1.75 per share in the second quarter and demonstrated the bank building momentum as our repositioning strategy has transitioned into earnings growth strategy. Growth will be accompanied by an elevated risk management architecture as well as enhanced liquidity profile and capital base. Thoughtful balance sheet growth in Q2 drove an upward inflection in net interest income from increased liquidity deployment into higher-yielding earning assets. We generated outsized core deposit growth of $4 billion and HFI loan growth of $1.7 billion or 14% on an annualized basis from Q1, which we expect will exceed our peers. CET1 capital remained at 11%. Deposit growth in excess of guidance lowered our HFI loan-to-deposit ratio by 2 points to 79%. Our liquidity profile was also bolstered by a $1.7 billion increase in securities and cash from quarter-end, which allowed us to pay down borrowings by $634 million and broker deposits by $222 million. Our differentiated national commercial banking franchise uniquely positions us to generate sustained deposit growth from various business lines and deploy this liquidity into attractive no-to-low loss C&I commercial loans where we have deep segment and product expertise. Asset quality overall is normalizing, which we expected. Total classified assets declined $33 million in the quarter to 93 basis points. Net charge-offs were 18 basis points of average loans, the majority of which relates to the downtown San Diego office property we identified on this call a year ago when it migrated to substandards. I think it's also important to note the renewed earnings power of our franchise strengthens our ability to consistently compound capital and generate risk adjusted earnings growth to support the Q3 and Q4 earnings ramp we have previously communicated. For the quarter, net interest income grew 39% annualized, driven by higher average earning assets and an expanding NIM. Annualized deposits and HFI loan growth of 26% and 14%, respectively, pushed net interest income higher. Higher ending balances compared to average balances establishes a higher jumping-off point to increase net interest income going forward. In total, pre-provision net revenue adjusted for the FDIC special assessments in Q4 and the rebate in Q1 is 22% annualized and is poised to continue its upward trajectory. At this point, I'll turn the call over to Dale for a review of the financial results.
Dale Gibbons: Thanks, Ken. During the second-quarter, Western Alliance generated pre-provision net revenue of $285 million, net income of $194 million and EPS of $1.75. Net interest income increased $58 million from Q1 to $657 million due to higher average earning asset balances and yields. Non-interest income of $115 million decreased $15 million quarter-over-quarter, primarily from lower income from equity investments as well as softer mortgage revenue. Mortgage loan production rose 14% and interest rate commitment volume increased 24% while the gain on sale margin compressed by 3 basis points. Non-interest expense was $487 million, deposit costs of $174 million growth quarter-over-quarter increased to fund attractive loan growth amidst an elevated rate environment. Net interest income growth exceeded the increase in deposit costs by $21 million this quarter as mortgage warehouse deposit growth continues to benefit from market share gains amidst industry disruption in the first quarter. We believe Western Alliance's Warehouse Lending Group has become the premier bank in the space. Considering our enhanced liquidity profile, we are well-positioned to proactively lower the ECR cost of these deposits as the first-rate cut approaches. Provision expense of $37 million resulted from loan growth above industry trends as well as $23 million of net charge-offs. Securities and cash increased $1.7 billion quarter-over-quarter and allowed for a further $634 million reduction in period end borrowings. Loans held-for-investment grew $1.7 billion to $52.4 billion, while deposits increased $4 billion to $66.2 billion at quarter-end. Finally, tangible book-value per share continued its expansion rising 3% or $1.49 from March 31 to $48.79. Loan growth was primarily driven in C&I categories of $1.9 billion, which offset continued purposeful reductions in residential and consumer loans of $179 million in construction and land of $69 million. Mortgage warehouse, tech and innovation and fund banking loan growth drove loan mix diversification while we reduced our CRE concentration. On a year-over-year basis, C&I loans have grown $5 billion. Deposit growth of $4 billion was led by mortgage warehouse and followed by growth in Jewish Banking and our digital consumer channel. Non-ECR, non-interest-bearing deposits have posted three consecutive quarters of growth and we are encouraged by the traction our diversified deposit channels are gaining, which should continue to drive growth in deposits that carry no direct or imputed interest costs. Turning now to our net interest drivers, the yield on total securities increased 21 basis points to 4.87%, recapturing two-thirds of the prior quarter's decline from the HQLA build conducted in the first quarter. Completing our accelerated liquidity build related to larger balance sheet repositioning efforts allowed us to add more higher-yielding securities. Our liquidity position remains solid as unencumbered high-quality liquid assets were 53% of securities and cash compared to 52% last quarter. Securities and cash in total held steady at 26% of assets. HFI loan yields increased 2 basis-points due to asset repricing benefits from the ongoing higher-rate environment. Back-weighted loan growth momentum led to period-end loan balances exceeding average balances by $1.7 billion. The cost of interest-bearing deposits was 6 basis-points higher from the first-quarter, while the total cost of funds declined 3 basis-points to 2.79% due to a deposit mix-shift towards noninterest-bearing and the paydown of short-term borrowings. In aggregate, net interest income increased $58 million from higher average earning asset balances, which includes the full quarter's impact of the deployment of liquidity into securities towards the end of Q1, as well as a 3 basis-point decline in the cost of liability funding. Net interest margin expanded 3 basis points from the first-quarter to 3.63% from the $5.9 billion increase in average earning assets as the growth was funded more from non-interest-bearing liabilities this quarter. Our adjusted efficiency ratio for the quarter was 52%. Net interest income growth was the primary contributor to this improvement. Deposit costs increased $37 million from higher average ETR-related deposit balances. As noted earlier, these higher balances funded commercial loan growth and purchased floating-rate securities that propelled strong net interest income growth. Other operating expenses were essentially flat quarter-over-quarter. As Ken mentioned earlier, asset quality continues to normalize. Total classified assets declined $33 million in the quarter to 93 basis points of total assets. Non performing assets were essentially flat from last quarter. Just under two-thirds of NPLs are paying degree when excluding the San Diego property that Ken cited earlier, which we expect to move into other real-estate. Turning to Slide 12, quarterly loan growth -- quarterly net loan charge-offs were $22.8 million or 18 basis-points of average loans. Most of the charge-offs this quarter were attributed to the San Diego office property. Provision expense of $37.1 million covered net charge-offs and added reserves in concert with loan growth. Our allowance for funded loans increased $12 million from the prior quarter to $352 million. Total loan ACL to fund loans ratio of 74 basis points was unchanged and covers 97% of non-performing loans. Our focus on growing loans in inherently low loss categories has resulted in a reserve level lower than some peers. Slide 13 shows our ACL lift from 74 basis points to 132 when incorporating the effect of credit-linked notes, which insulate us in first loss uncovered credits as well as loan to loan loss categories like equity fund resources, our low LTV residential portfolio and mortgage warehouse loans. More specifically, for the credit-linked notes, we have in our possession $447 million from insurers that we get conduct first losses on an $8.9 billion mortgage portfolio, leaving us with zero loss risk. For our residential loans not covered by insurance, these mortgages have an LTV at only 62% as origination, which is likely lower now to borrowers at FICO scores of 766 and debt-to-income ratios of 33% and have incurred no losses. For EFR capital call loans and mortgage warehouse credits, not only have we never had a loss, but other banks have had pristine credit experience as well. We include this in a for the ACL because we have a large proportion on our book in these very low-risk categories than other institutions. Our reserve level is supported by our low realized losses. We have consistently discussed our proactive mitigation strategy along with our low advanced lending discipline is employed to ultimately resume the credit exposure. On Slide 14, we present our historical look back on migration performance, which shows over the last three years will all bring forth approximately one-third of the peer median on-net charge-offs to average non-performing loans. Over the past decade, we ranked number one at only 9.6%. The table on the right shows our allowance covers over several times the last 12 months net charge-offs, inclusive of the second-quarter and places us in the top third among peers. Our ACL also covers our last four years of net charge-offs, which is the duration of our loan book by 4.3 times, which is the second best in the peer group during this timeframe. Our CET1 ratio remained 11%. Our tangible common equity duration of total assets moved down approximately 10 basis-points from Q1 to 6.7% as asset growth in low-risk categories exceeded organic capital accretion from higher earnings. I think it's helpful to consider other sources of loss-absorbing capital when evaluating our balance sheet, viewing our CET1 capital ratio with AOCI marks and loss reserves as a percentage of risk-weighted assets, we rank near the top third of our peer group. Notably, among the six peers on Slide 14, with higher ACL to net charge-off ratios over the last 12 months, only two have higher adjusted capital ratios than WAL. Finally, tangible book-value per share increased to $1.49 from the end of Q1 to $48.79 for retained earnings growth, which equates to an annualized growth rate of approximately 13%. Our consistent upward trajectory in tangible book value per share has outpaced peers by 7 times since the end of 2013. I'll now hand the call back to Ken.
Kenneth Vecchione: Okay. Thanks, Dale. Following our Q2 results, I would like to update the Bank's 2024 guidance as follows. A building pipeline provides clarity to continued loan growth at $1 billion per quarter in a safe, sound and [indiscernible] manner. Our current loan-to-deposit ratio provides flexibility to selectively make more loans as opportunities arise. For the full-year, loans are expected to grow $4.5 billion compared to the $4 billion previously and deposits are expected to grow $14 billion, which is $3 billion above our previous forecast. Deposit growth in Q3 is expected to be $2 billion. Turning to capital, we expect our CET1 ratio to remain at or above 11%, capturing the forecasted increase in loan volume as organic earnings growth supports rising loan and investments. Net interest income is now expected to grow 9% to 14% from the Q4 2023 annualized jumping-off point. Our rate outlook includes two 25 basis-point cuts in the back-half of the year. NIM is expected in the 360 area for the remainder of the year and Q2 ending loans balance versus the average for deposit and loans provides continued net interest income momentum for the back-half of the year. Non-interest income should increase 15% to 25% from adjusted 2023 baseline levels. Our upward revision reflects growth in commercial banking fees as well as incremental improvement in other fee segments. Non-interest expense, inclusive of the ECR-related deposit costs is now expected to rise 9% to 13% from an annualized adjusted Q4 baseline of $1.74 billion, primarily from the greater ECR-related deposits, which fund attractive balance sheet growth and grow earnings. In aggregate, these factors should enable WAL to sustain PPNR to provide the organic capital to support balance sheet growth and the CET1 target, while offering us the ability to maneuver around various economic and operating environments. Asset quality is normalizing from historic lows and net charge-offs are expected to remain low by industry standards at 15 to 20 basis-points of average loans for the year. At this time, Dale, Tim and I will take your questions.
Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Jared Shaw with Barclays (LON:BARC). Jared, please go ahead. Your line is now open.
Jared Shaw: Hi, good morning.
Kenneth Vecchione: Good morning, Jared.
Jared Shaw: Thanks. Maybe just looking at the loan growth, you've had great loan growth. Obviously this quarter as we go-forward, any change in sort of the geography of where that's coming? You look at the CRE portfolio that's been a little bit under pressure. Should we think that it still is coming from the same primary areas of C&I or could there be an expansion into some other areas?
Kenneth Vecchione: Yeah, thanks. Although for the year and also for the quarter and also year-over-year, the majority of our growth is becoming in the C&I categories. And again, that's in a no-or-low loss loan segments. And I think we're going to continue to move forward in that manner. I think what you can expect for the rest of the year is to see continuous downward movement in our residential loan portfolio as you saw this quarter. I think you'll find CRE overall will be relatively flat. We will look for opportunities to finance. We do like pockets of financing in the construction land and development, most notably, we've always talked about this, our lot banking segment will provide opportunity. But the short answer, I guess, is that mostly it's going to come in C&I, note financing, warehouse lending are the two areas that are going to lead the way.
Jared Shaw: Okay, thanks. And then just on the fee income side, are you assuming -- I guess you're still assuming the Fed funds cut flowing through to help with mortgage banking there as well. I guess what's the trajectory we could expect there following that -- those two cuts?
Kenneth Vecchione: Right. So for our forecast, we have a rate cut in September and a rate cut in December. We are forecasting a modestly declining mortgage income, mostly because the Q4 rate cut won't yet -- it comes in a quarter that's seasonally low in terms of volume. So we would expect to see pickup from the rate cut in terms of mortgage volume really follow into 2025, more so than the back end of Q4. So it's basically Q4 is a seasonally low quarter to begin with.
Jared Shaw: Okay, thanks. I'll step back. Thank you.
Operator: Our next question comes from Steven Alexopoulos with J.P. Morgan. Please go ahead, Steven. Your line is now open.
Steven Alexopoulos: Hi, everyone.
Kenneth Vecchione: Hey, Steve.
Steven Alexopoulos: Let me start on the ECR deposits. Could you just give more color on what drove such strong growth? And was the increase in the interest expense on those purely tied to the growth or did the rate -- the effective rate basically rise as well?
Dale Gibbons: Okay. Two questions there. So first, the growth came in warehouse lending, all right. And what we have found from the first quarter disruption in the market that West Alliance -- West Alliance's Warehouse Lending Group has become really the premier platform to hold your escrow accounts on and also come to us for warehouse lending and NSR loans. So that volume is coming in for that reason. Also, we've had a number of market share gains. New clients coming in, that's one-type of market-share gain and existing clients that we currently have, have given us more of their deposits. So that's kind of push on that segment, which carries a higher ECR. Now with that liquidity, we've been paying down and will continue to pay-down our short-term borrowings. And to your other question, we do have several initiatives that we are launching to kind of work on the rate and see if we can push that rate downward as we go into Q3 and exit Q4.
Steven Alexopoulos: Okay. That's helpful. Ken, in terms of the deposit growth getting lifted again, were you guys just very conservative? Is growth coming in much more than you guys expected? And it's funny when we look at the second half, you did $11 billion of deposits in the first half. I think you're guiding like $3 billion in the second-half. I know there's some seasonality in the fourth-quarter, but are you just being very conservative here?
Kenneth Vecchione: Yes. So let's talk about the seasonality first. In warehouse lending, we see an outflow of deposits every Q4. So some of the deposit growth in Q1 of 2024 was the return of those tax escrow payments that were made. And usually that runs between $3 billion and $4 billion that flows out in Q4. So while I'm saying $3 billion net growth, then you can see that we're accounting for the $3 billion to $4 billion that's going to fly-out the door or flows out-the-door at the end-of-the year. Where we're getting it from is what's interesting is for this quarter as an example, 58% of our growth really came from our deposit-only channels. And so we've launched a number of them, as you probably know, business escrow services, Corporate Trust, juris banking and of course, HOA, which started about 12 years ago when I first joined the bank. And that's where the deposit vertical growth is coming from. In addition, our consumer lending, our consumer digital platform has really taken off and we're doing quite well there. And we had another strong quarter in Q2 and we saw our deposit growth drive $673 million. So since we actually launched the consumer digital channel, I'll give you a number as of today because our folks are very proud of that they just shot as a note. But inside of a year and a half, that channel has moved up to about $4.5 billion and just provides another channel for us that we didn't have before at a cost point or price point, which is rather consistent with our commercial pricing, right? So we don't have a consumer base, as you know. So we don't have to worry about cannibalizing our consumer base and having them move from low rates to higher rates. Here, it's consistent with what's happening in our commercial book. And it provides another channel for us to use almost as a challenger channel to other deposits that are coming in to hold the line or try to push those deposits down over the long-term.
Steven Alexopoulos: Got it, okay. That's great color. Thanks for taking my questions.
Kenneth Vecchione: My pleasure.
Operator: Our next question comes from the line of Ebrahim Poonawala with Bank of America (NYSE:BAC). Please go-ahead, Ebrahim, your line is now open.
Ebrahim Poonawala: Thank you. I guess maybe as we think about lower rates and the NII outlook, Dale, if you don't mind reminding us including the ECR-related deposit costs, how should we expect sort of NII to trend if those rate cuts from September and December continue into '25, is that positive overall for the NII, NIM inclusive of ECR or negative? And secondly, what determines whether you end up at the 14% versus the 9% for this year on NII outlook?
Dale Gibbons: So yeah, regarding your first inquiry, Ebrahim. Yeah, so we're fairly neutral on an aggregate of net interest income plus our deposit expenses. And maybe as Ken was alluding to earlier with the discussion about our mortgage operation, we're not sure that that's really going to kick in until we get a little more than one for the fourth quarter and then two moving into the beginning of 2025, a little more rate relief on the mortgage rate environment. So we feel comfortable where we are. And I think within the relevant range that we're going to see later this year, we're going to be fairly neutral on, I'm going to say PPNR related to interest-rate movements, both inclusive of interest expense and deposit costs.
Kenneth Vecchione: And I'll take your second part of your question, which is what factors influence how we will perform in the second-half of the year? I think you can expect Q3 that you'll see net interest income continue to rise. And then in Q4, you can expect net interest income more or less to be flat to Q3. And one of the factors there, one, is our continued upward movement in loan growth. That's very important. And overall, our total revenue should in Q4 should be relatively flat to Q3. So we are making up some of the decline in yield by having higher volume in loans and also working some other fee-based channels that we have and then we've been working those fee-based channels and developing them over the last year.
Ebrahim Poonawala: Got it. And I guess just a second question, Ken, I do want you to address from a credit standpoint, these are really low numbers, of course I get it, but it's been overhang on the stock for three or four years. Just talk to us outside of things going through the pipe, your visibility in terms of credit quality outlook over the next six months, 12 months, 18 months? Where do you anticipate some weakness drivers of losses ex all the things that you've said are low loss kind of pieces of the loan book? Would appreciate that.
Kenneth Vecchione: Yes, I'll let Tim take that one.
Timothy Bruckner: Hi, yes. Thank you. So, Dale, I think did a nice job of really covering some key measures of success in the portfolio in his discussion. So I'd start by saying we're very pleased with our portfolio performance. And then when we look forward, we've taken every opportunity to describe, we focus on early elevation and early resolution. So we really take a forward-looking approach when we view troubled loans, portfolio performance and our ACL. So our forward estimates that Ken talked about at 15 basis points to 20 basis points include all current valuations, anticipated value-based changes to carry assets that may default and are based on the market conditions that we're living in today. So we update these values and assess each exposure always on an ongoing basis.
Ebrahim Poonawala: Got it. Thank you for taking my questions.
Operator: Our next question comes from the line of Brandon King with Truist Securities. Brandon, please go ahead. Your line is now open.
Brandon King: Hey, just a follow-up on the credit conversation. So the guide implies some increase in net charge-offs for the second-half of the year. But just wanted to get a sense of what changed from last quarter to imply kind of a higher run-rate?
Timothy Bruckner: Yeah, I think we really look at this all the time as a forward-looking estimate and we really didn't make a significant change in terms of percentage of dollars. We update based on current conditions and we'll continue to do that. So from our standpoint, we're optimistic and we are maintaining really a stable outlook on our portfolio. So we update our appraisals on our non-performing loans approximately every six months. And we're giving more clarity. Some of these markets don't have a lot of transactions. And so as that comes in, you know, we saw something in terms of the San Diego property, we took that immediately. You see that here to put us a little bit above the 15% kind of upper limit that we had as of our first quarter guidance. And so we expanded that to kind of 15% to 20%.
Brandon King: Okay. And just a follow-up on that San Diego loan. Could you expand on kind of the updates there -- news about being foreclosure and kind of your plan to deal with the asset?
Kenneth Vecchione: Yes. Look, we were moving to foreclosure. We took the appraisal charge as we described. We are going to work to reposition the asset, increase occupancy and then we'll also look to sell the building when we have the occupancy level at a higher-level than it is today. So it's what you would expect anyone to do. Think of it as acquiring -- think of it as you going out and buying a property. What would you do to enhance the value. That's what we're going to be doing.
Brandon King: Okay. And then just lastly, really leaning into mortgage warehouse deposits, any thoughts around concentration levels? I know it's continuing to creep up there, but how do you feel about the concentration of your total deposit base, particularly within Warehouse?
Dale Gibbons: Yes, first, so there's a good news and interesting story here, okay? The good news is, as we continue to become one of the premier platforms in the industry, we're seeing all these deposits come in. That's great. We are also getting market share wins. That also is great. The flip side of that is a higher concentration. And so you've seen our HQLA grow. And so we are not putting all that liquidity out to finance loans, but rather holding that liquidity on our balance sheet and making a small spread. What we will do over-time is work with our clients to work-through or reposition current pricing models given the liquidity that we have. So a year-ago, there was a premium place on liquidity and people said, if you want my liquidity, you have to pay-out for it. Well, things have changed a little bit now. And as a premier platform, I think there's a discount that people have to take when coming to our platform for our service levels for the ability to do multiple things, not only handle their escrow deposits, but also provide financing. And we're going to see if they value it that way. And so we're going to work-in that particular segment to scale-down or push down some of the rates that we're paying.
Timothy Bruckner: The growth we've had is a great problem to have and it gives us flexibility on leverage to be to be more aggressive in this repricing initiative that's underway.
Brandon King: Got it. Thanks for taking my questions.
Operator: Our next question comes from the line of Timur Braziler with Wells Fargo (NYSE:WFC). Please go-ahead, your line is open.
Timur Braziler: Hi, good morning. I'm wondering if you can provide us with an update on the large financial institution spend, kind of what's left to be done there? And I'm just wondering if the faster growth rate of the balance sheet, what that implies for the timing of completion of some of those projects?
Kenneth Vecchione: Yes. So we've indicated in the past that we're approximately 3/4 of the way through with complying with where we need to be to sip over $100 billion. I wouldn't extrapolate too much from our growth rate for the past few quarters and say make that trajectory in terms of when we're going to cross over $100 billion. We still have at about $6 billion of borrowed funds, about $6 billion of brokered deposits and we're going to be paying that down in a more accelerated fashion. So you're going to see our total assets grow at a slower rate than what you've seen over the past few quarters. That said, though, we're on track with this. We're developing whatever plans we need to finally get there. We do not see a significant step variable cost in front of us to be able to get over that hump, except for potentially what is related with this TLAC, total loss-absorbing capacity, we need to do more debt there. But even in that situation, based upon [indiscernible] end game prototype, which I think is being revised, we had until '28 to kind of get there.
Timur Braziler: Got it. And then maybe just following-up on Ebrahim's question around rates. I guess, how would the cadence of rate cuts potentially impact your ability to lower ECR costs and benefit some of the other mortgage-related activity, i.e., if we just have one rate cut or if the rate cuts are spread-out, how would that affect your ability to maybe lower some of those ECR-related expenses?
Kenneth Vecchione: Well, most importantly, the fee is broken on rates. I mean, so there's no places where others can go and get kind of substantially higher rates as we had when we were in an expected higher-rate environment, you could go to treasuries or some of these other products and to be a competitor against deposit rates. Plus, the situation within the banking space has become somewhat more relaxed as well. However, these are entities that control significant amounts of dollars and so they can get something you know at or near what would be kind of the market rate of interest. But as I said earlier, I mean we're in a position that we can, I think, start to kind of use our leverage with our strong balance sheet with our strong delivery system within this space that we think we're now kind of be the premier player to be able to affect a more significant cost mitigation strategy going forward. But a simple answer is as rates move, full ECR rates. The Fed cuts '25 in September, you'll see that flow-through starting immediately.
Timur Braziler: Got it. And then maybe if I could just sneak one more question in around mortgage banking. There was a comment in the release on maybe elevated loans held-for-sale and doing more conforming mortgages. And then in the deck, part of the rationale for the higher-fee income guide was that margins are firming up. It looks like gain on-sale margin actually declined a little bit here, but are we starting to reach an equilibrium kind of with the new production I guess, what are the expectations for gain on-sale margins in the context of the 2Q decline?
Kenneth Vecchione: Yes. So gain on sale margins in Q1 were higher than Q2. In Q2, you saw mortgage rates move back up above 7%. They're firming now and we are optimistic, but we don't haven't captured into our forecast yet that as more people get comfortable that rate cuts are coming and with the shortage of supply and housing in the market that more people will start returning. You're seeing a little tick-up now in refine activity, but we're looking-forward to the purchase activity to really drive us. But from a forecast point-of-view, we're going to wait to see that flow-through our P&L before we capture it in our go-forward consensus outlook.
Timur Braziler: Great. Thanks for the color.
Kenneth Vecchione: You're welcome.
Operator: Our next question comes from Matthew Clark with Piper Sandler. Please go-ahead, your line is now open.
Matthew Clark: Hey, good morning. Thanks for the questions. Maybe just on the margin, you held up a little better-than-expected up 3 bps. I think you had guided previously down 10 bps and that's despite kind of loans earning assets coming down. Updated thoughts on kind of the near-term margin outlook?
Dale Gibbons: Yes. So we did pop it up 3 basis points. And again, with the excess liquidity, we did two things. A lot of excess liquidity came in towards the back-end of the first-quarter. So we're able to deploy the average earning assets that helped. And then also we're paying down our -- and working hard to pay-down our short-term borrowings. As I said in my prepared remarks, going forward, Q3, Q4, you can see net interest margin holding very close to where we are now in the 360 area. And that includes, the two-rated cards.
Matthew Clark: Yes, got it. And then just shifting gears to credit. Any color on the uptick in special mention this quarter, what drove that increase?
Timothy Bruckner: Yes. Really it's a balance with the prior -- the prior four quarters of last year. So we were down from where we spent most of the year last year, slight uptick and it's just part of our early elevation as part of our ongoing review processes. I'd say that it was idiosyncratic or specific yield situations that brought credits into view and then we will quickly, as we always do work-through those to move them up or out. Yeah, I would note that whether you're looking at the settle mention ratio or total dollars, Q2 was still below the trailing fourth quarter averages. So nothing out-of-the ordinary in that special mention movement.
Matthew Clark: Great. Thank you.
Operator: Our next question comes from Bernard Von Gizycki with Deutsche Bank (ETR:DBKGn). Please go-ahead, your line is now open.
Bernard Von Gizycki: Hey guys, good morning. So just a question on your interest-rate sensitivity disclosures. I believe you might have made some changes in the 1Q disclosure versus the 10-K, given more granular assumptions on the deposit betas. So for 100 basis-point decline in rates, you showed net NII down about 7% at $331 million, but wonder if you could update that at $630 million and believe Net I could come in better given higher expected loan growth and benefit from wholesale deposit repricing. So just wanted to see if you could provide some puts and takes there?
Dale Gibbons: Well, okay. So net interest income should come in higher because of what you just said, but the volatility around that on a different interest-rate assumption, again, this is a shock that we show. It's probably going to be fairly similar to what we showed you in the first-quarter. So not a whole lot of difference there. And again, I mean, we look at it really looking at net interest income plus the delta that we're going to see in deposit costs, which is going to have kind of the opposite effect. And so the net between them gets to a fairly stable, I'll call net interest-related items in PPNR combining those two elements.
Bernard Von Gizycki: Got it. And then just separately, just on the fee income, just a question on this. I know the equity investments were about $4 million, which were much lower than the previous two quarters. And I think there's some benefits on warrant income in prior quarters. Just wondering if you can provide any color and expectations from here going forward?
Timothy Bruckner: Yes. That's a difficult thing to for us to really prognosticate. And so we have equity positions in more than 500 companies and which ones pop or which ones close is a process on how that looks. I mean, there is some correlation with maybe M&A activity. That's been a little restrained for reasons that I think everyone is aware of. And so maybe that's been a factor here. I can't really project you know what it's going to be in third and fourth quarter. Other than we don't see anything really change going on. So maybe we've got the parameters of where the higher or lower areas could be and maybe somewhere in there. But there's nothing going on there that we think is going to be magnitude change either better or worse respectively.
Bernard Von Gizycki: Okay, guys. Thanks for taking my questions.
Operator: Our next question comes from Chris McGratty with KBW. Please go-ahead, your line is now open.
Christopher McGratty: Great. Thanks. Dale, if I look at your guide and the ranges in your guide, it would seem that if you're at the midpoint of NII, you'll probably be at the midpoint of the expenses or the high-end, the high-end. Is there a scenario where you're perhaps at the high-end of expenses and maybe the midpoint of NII or should we just think about them whatever our assumptions are, they should be kind of consistent?
Dale Gibbons: Yes. I mean, I wouldn't put too much interdependence on the elements in here. There is a correlation, obviously, if net interest income moves up, what does that mean? Is that a relatively higher, you know either rates overall, maybe fewer rate cuts and/or better growth and that can affect what's going on the expense side. But in total, I mean I think these parameters are reasonably pretty fair. I mean, if anything, maybe we think we're going to do a little better on the non-interest income side, maybe toward the upper-end of that range, but the others I think kind of a midpoint is fairly on target with what we would consider.
Christopher McGratty: Okay. That's helpful. Thanks. And then on -- just going back to the balance sheet strategy, you talked about the expense build in HQLA and TLAC [indiscernible] and the capital target, the 11% plus that you've been with for the better part of the year. Is there a scenario where that changes in your view materially either way now that you're kind of we're through the worst of the crisis and were a little bit more confident in the outlook?
Kenneth Vecchione: Chris, you blunt down, we missed the first part of that question. Can you repeat it for us please?
Christopher McGratty: Sure. I guess just closing a loop on the $100 billion investment discussion. Is there a scenario where your 11% CET1 target, I guess, would move materially one-way or the other? I guess is the question.
Kenneth Vecchione: Yes. So I want to keep the 11% as a target more like before as we've said before, on the growth that we're generating from earnings are going to be used to fund loan growth. So the progression from the CET1 level of 11% upwards is going to be slower, it's not going to be as rampant as you've seen in the last six or seven quarters. And you know, we -- if you're asking is there a stock repurchase program in our immediate future, the answer would be no, because unlike many of our peers, we have a higher degree of comfort regarding loan growth coming from these low or no loss loan categories that we think over the long-term will propel the Company forward at a faster rate for EPS. So that's what we plan to do.
Christopher McGratty: Yes, I actually wasn't for this time, wasn't asking about the buyback. It was just more about balance sheet leverage from growth. Got you on there. Thanks, Ken.
Kenneth Vecchione: Okay. Got it. Sorry.
Operator: Thank you. Our next question comes from Samuel Varga with UBS. Please go-ahead, your line is now open.
Samuel Varga: Hey, good morning. I wanted to ask a question about the Corporate Trust business. Could you give us an update on where things stand sort of where the pipeline? You mentioned that the investment grade rating is a key catalyst here. Can you just give a broad update on where that business is at?
Kenneth Vecchione: Yes. So yes, I think we're the only bank, I'm pretty sure, we're the only bank that has had positive ratings actions, if you want to call them that from either Fitch or for Moody's (NYSE:MCO), we're both on outlook positive. Obviously, our ratings are not where we believe they should be, but -- but we think that is encouraging in terms of direction. We have gotten certainly good traction in our corporate trust operation and we tag team with our corporate finance group and deliver a combined product set for CLO administration, which we think has been helpful. So we're really quite optimistic of what that looks like. While I would be glad to have a ratings increase on for both of those entities, we don't think it's necessary for us to continue to grow strongly in that category. We have more than $0.5 billion in deposits there presently. So I was on the road last week with the Corporate Trust Group and our lender finance group. And combining those two together when calling on clients has put a pipeline of deals ready to close, not a -- these deals have been mandated to us of about -- there's like a pipeline of 30 clients decked up to close. And so putting those two things together has been very, very valuable where we have the ability to make investments or lend on the lender finance side and as we do that, we expect the mandate on the corporate trust side. But what's more importantly is the corporate trust program that we built. We took a few people from a large money centered bank and after chatting with them during the interview process, I said what is needed to make this program successful and it really was rebuilding the technology, the architecture that's currently out there at a higher-level of customer service. And I can tell you from the five or six calls I had last week, that is exactly how our clients feel about us that we have the better technology in the industry and the service levels are meeting their expectations is actually not exceeding them. So it's pretty exciting for us. We're going to see how this thing moves forward. This is a build, you know so our Corporate Trust group in terms of deposits should do between $150 million to $200 million on average a quarter. And as our name gets out there and we continue to expand the Group, I would hope for bigger and better things as we move into 2025. But right now, I'm very, very pleased with that activity.
Samuel Varga: Great. Thanks for that update. And then just wanted to switch back to ECR deposits for one last question on that. Dale, if I understand correctly, the mortgage warehouse deposits are sort of pulling up that paid rates. Is it fair to assume that if 4Q seasonality comes through and those deposits partially flow out that that alone will be enough to reduce the ECR rate regardless of whether we actually get customer or not?
Dale Gibbons: Sure, sure. So first-off, I mean, as Ken alluded to earlier, we're expecting 100% or a little bit above our deposit beta or I would say funding cost beta on the ECRs as rates come down. And so if you get that effect and then coupled with an expected outflow seasonally, not related to relationships in the fourth quarter, those should have a combined effect going from say a rate tech at their meeting in September into the fourth quarter, lower rate and lower balances, you're going to see a drop-in non-interest expense.
Kenneth Vecchione: Which gives us the confidence level that our EPS as we move through Q3 and into Q4 will be on an upward trajectory, which is what we've been communicating since the beginning part of the year.
Samuel Varga: Got it. Thanks for all the color. I appreciate it.
Operator: Our next question comes from the line of Jon Arfstrom with RBC (TSX:RY) Capital Markets. Please go-ahead, your line is open.
Jon Arfstrom: Hey, thanks. A couple of questions here. Can you guys talk about the competitive environment in your mortgage businesses? It seems like it's changed. You've kind of alluded to it, you've taken share. Just curious what happens when volumes pick up and how you take advantage of that?
Kenneth Vecchione: Okay. So what I'm talking about is the warehouse lending group, not the AmeriHome Group, right, that's going to be more-and-more dependent. But in the warehouse lending group, know, we've seen a couple of competitors recently drop-out of the market, one said that they're selling loans, one sold loans. And what's most important to our clients and maybe this is really when people always say, why is it that you guys grow while others don't. Well, first is that we're a commercial bank and we're national and we just don't stick to a region. So that's one answer. The second answer is, we don't move in and out of markets and people can count on us to always be there. Now terms and conditions may change because economic conditions change. But we don't pull out of the market and then jump back in. And our clients remember that, especially around warehouse lending, where those lines sometimes get shut-down rather quickly and larger banks can make a determination of whether or not they want to be in the business or not. And that's a little bit more serendipitous. For us, we want to be in the business and we look at economic terms and operating conditions, conditions tell us what it is we need to charge and how to be there to support our clients. And I think that's one of the reasons why we've become a premier go-to platform in that segment.
Jon Arfstrom: Okay. There's been a lot of discussion on interest rates. What do you guys prefer from a rate perspective? Do you want a couple of cuts? Do you want more than a couple of cuts? What's ideal for you?
Timothy Bruckner: Well, boy that's a question for me and my therapist but for the most part if rates keep coming down at a faster pace, what we would look for is the mortgage fee income to rise and that we can bring in volume on the loan side to help offset some of the rate decline that you would see on our loan portfolio. And that would be the -- that would be our approach. Dale, do you have a different opinion?
Dale Gibbons: No, I agree. The other thing I would say is, there's been a little bit about -- you can still think this phrase the Chinese water torture on CRE in particular related to a higher-rate environment where debt service cost has just has become burdensome over-time and it's little away at DSCRs, debt service coverage ratios over the past few years in LTVs as cap rates have climbed. So relief on that, I think would give the whole industry a little bit more headroom in terms of NPA materialization and issues related to maintaining strong asset quality.
Jon Arfstrom: Okay. Okay. Fair enough on that. And then Dale, just a quick one on the provision. Given the updated charge-off guide and the growth guide, I think it suggests a relatively stable provision. Am I looking at it the right way or is there something else to consider?
Dale Gibbons: Yes. Well, I think that's right. I would say, however, I mean, look, we've had good loan growth. We've had our loan-to-deposit ratio on a marginal basis for the past couple of quarters has been very low. We've kind of climbed into our comfort level in terms of our liquidity profile. So if we had higher loan growth, how [indiscernible] works, of course, that demands a load up on provision costs, irrespective of what earnings you've been able to draw from that in the present period.
Kenneth Vecchione: Which you saw in this quarter. Yeah.
Jon Arfstrom: Okay. All right. Fair enough. Thank you.
Kenneth Vecchione: Thank you, Jon.
Operator: We have no further questions, so I'll hand the call back to Ken Vecchione for closing remarks.
Kenneth Vecchione: Yes. Well, thank you all for joining us. We feel very good about the quarter. Just a very special thank you to the 3,600 plus people that worked throughout Western Alliance, they made this quarter happen and a big thank you to them, and we look-forward to our next conference call. Be well, everyone.
Operator: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
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