Western Alliance Bancorporation Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2024

Key Takeaways

  • Western Alliance reported Q2 earnings of $1.75 EPS, with net interest income up 39% annualized and net interest margin expanding 3 basis points to 3.63%, driven by higher yielding asset deployment.
  • Core deposits grew by $4 billion and held-for-investment loans increased by $1.7 billion (14% annualized), led by C&I, mortgage warehouse and digital consumer channels.
  • Liquidity and capital were bolstered with a $1.7 billion rise in securities and cash, $634 million of borrowings paid down and a stable CET1 ratio of 11%, while tangible book value per share rose 3% to $48.79.
  • Asset quality is normalizing: total classified assets declined to 0.93% of assets and net charge-offs were 18 bps (largely one San Diego CRE property), with annual charge-off guidance of 15–20 bps.
  • 2024 guidance was raised to $4.5 billion in loan growth and $14 billion in deposits, with net interest income expected to grow 9–14%, NIM around 3.60%, non-interest income up 15–25% and expenses up 9–13%.
AI Generated. May Contain Errors.
Earnings Conference Call
Western Alliance Bancorporation Q2 2024
00:00 / 00:00

There are 13 speakers on the call.

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 Myles Ponderlic, Director of Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Thank you. Welcome to Western Alliance Bank's Q2 2024 Conference Call. Our speakers today are Ken Baccioni, President and Chief Executive Officer 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.

Speaker 1

For a 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 ks filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Baccioni. Thank you, Myles. Good morning, everyone. I'll make some brief comments about our 2nd 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.

Speaker 1

Tim Bruckner, backed by popular demand, our Chief Credit Banking Officer for Regional Banking will join us for Q and A. Western Alliance earned $1.75 per share in the Q2 and demonstrated the bank's 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 $4,000,000,000 and HFI loan growth of $1,700,000,000 or 14% on an annualized basis from Q1, which we expect will exceed our peers.

Speaker 1

CET1 capital remained at 11%. Profit 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 $1,700,000,000 increase in securities and cash from quarter end, which allowed us to pay down borrowings by $634,000,000 and broker deposits by $222,000,000 Our differentiated national commercial banking franchise uniquely positions us to generate the same deposit growth from various business lines and deploy this liquidity into attractive no to low loss D and I commercial loans where we have deep segment and product expertise. Asset quality overall is normalizing, which we expected. Total classified assets declined $33,000,000 in the quarter to 93 basis points.

Speaker 1

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 substandard. 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% 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.

Speaker 1

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. Thanks, Ken. During the Q2, Western Alliance generated pre provision net revenue of $285,000,000 net income of $194,000,000 and EPS of $1.75 Net interest income increased $58,000,000 from Q1 to $657,000,000 due to higher average earning asset balances and yields. Non interest income of $115,000,000 decreased $15,000,000 quarter over quarter, primarily from lower income from equity investments as well as softer mortgage revenue.

Speaker 1

Mortgage loan production rose 14% and intrastate lock commitment volume increased 4%, while the gain on sale margin compressed by 3 basis points. Non interest expense was 487,000,000 dollars deposit cost of $174,000,000 growth quarter over quarter increase to find attractive loan growth amidst an elevated rate environment. Net interest income growth exceeded the increase in deposit costs by $21,000,000 this quarter as mortgage warehouse deposit growth continues to benefit from market share gains amidst industry destruction in the Q1. We believe Western Alliance's Warehouse Planning 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.

Speaker 1

Operating expenses of $37,000,000 resulted from loan growth above industry trends as well as $23,000,000 of net charge offs. Securities and cash increased $1,700,000,000 quarter over quarter and allowed for a further $634,000,000 reduction in period end borrowings. Loans held for investment grew $1,700,000,000 to $52,400,000,000 while deposits increased $4,000,000,000 to $66,200,000,000 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 and I categories of $1,900,000 which offset continued purposeful reductions in residential and consumer loans of $179,000,000 dollars and construction and land of $69,000,000 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 and I loans have grown 5,000,000,000 dollars Deposit growth of $4,000,000,000 was led by mortgage warehouse and followed by growth in Juris Banking and our digital consumer channel.

Speaker 1

Non ECR, non interest bearing deposits have posted 3 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 2 thirds of prior bonus decline from the HQLA build conducted in the Q1. Completing our accelerated liquidity build related to larger balance repositioning efforts allow us to add more higher yielding securities. Our liquidity position remains solid as unencumbered high quality liquid assets were 53 percent of securities and cash compared to 52% last quarter. Securities and cash in total held steady at 26% of assets.

Speaker 1

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 1,700,000,000 dollars The cost of interest bearing deposits was 6 basis points higher from the Q1, while the total cost of funds declined 3 basis points to 2.79 due to a deposit mix shift towards non interest bearing and a pay down of short term borrowings. In aggregate, net interest income increased 58,000,000 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 Q1 to 3.63 from the $5,900,000,000 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%.

Speaker 1

Net interest income growth was the primary contributor to this improvement. Deposit costs increased $37,000,000 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.

Speaker 1

Total classified assets declined $33,000,000 in the quarter to 93 basis points of total assets. Non performing assets were essentially flat from last quarter. Just under 2 thirds of NPLs are paying this agreed 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 of $22,800,000 or 18 basis points of average loans. Most of the charge offs this quarter were attributed to the San Diego office property.

Speaker 1

Provision expense of $37,100,000 covered net charge offs and added reserves in concert with loan growth. Our allowance for funded loans increased $12,000,000 from the prior quarter to $352,000,000 Total loan A CL for funded loans ratio of 74 basis points was unchanged and covers 97% of non performing loans. Our focus on growing loans is inherently low loss categories has resulted in a reserve level lower than some peers. Slide 13 slows our ATL lift from 74 basis points to 132 when incorporating the effect of credit linked notes, which insulate us in the 1st loss uncovered credits as well as low to no 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 $447,000,000 from insurers that we get conduct first losses on an $8,900,000,000 mortgage portfolio, leaving us with 0 loss risk.

Speaker 1

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 with 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 lockup 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 resend the credit exposure.

Speaker 1

On Slide 14, we present our historical look back on migration performance, which shows over the last 3 years, we're all ranked 4th or approximately 1 third of the peer median on net charge offs to average non performing loans. Over the past decade, we ranked number 1 at only 9.6%. The table on the right shows our allowance covers over 7 times the last 12 months net charge offs, which is the duration of our loan book by 4.3 times, which is the 2nd best in the peer group during this time frame. Our CET1 ratio remained 11%. Our tangible comp and equity ratio of the total assets moved down approximately 10 basis points from Q1 to 6.7% as asset growth in low risk category of exceeded organic capital accretion from higher earnings.

Speaker 1

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 ranked in the top third of our peer group. Notably, among the 6 peers on Slide 14, with higher ACL to net charge operations the last 12 months, only 2 have higher adjusted capital ratios than Lal. Finally, tangible book value per share increased to 1.49 dollars 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 and tangible book value per share has outpaced peers by 7 times since the end of 2013.

Speaker 1

I'll now hand the call back to Ken. 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 continue loan growth at $1,000,000,000 per quarter in a safe, sound and thoughtful manner.

Speaker 1

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 $4,500,000,000 compared to the $4,000,000,000 previously and deposits are expected to grow $14,000,000,000 which is $3,000,000,000 above our previous forecast. Deposit growth in Q3 is expected to be $2,000,000,000 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 loans 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 2 25 basis point cuts in the back half of the year.

Speaker 1

NIM is expected in the 3.60 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 $1,740,000,000 primarily from the greater ECR related deposits, which fund attractive balance sheet growth and grow earnings. In aggregate, these factors should enable Wall to sustain PP and R 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.

Speaker 1

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 Our first question today comes from the line of Jared Shaw with Barclays. Jared, please go ahead. Your line is now open.

Speaker 2

Hi, good morning.

Speaker 1

Good morning, Jared.

Speaker 2

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 and I or could there be an expansion into some other areas?

Speaker 1

Yes, thanks. Well, for the year and also for the quarter and also year over year, the majority of our growth is becoming in the C and I categories. And again, that's in 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.

Speaker 1

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 structure, 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 and I, note financing, warehouse lending are the 2 areas that are going to lead the way.

Speaker 2

Okay, thanks. And then just on the fee income side, are you assuming I guess you're still assuming that 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

Speaker 3

that those two cuts? Right.

Speaker 1

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 following to 2025 more so than the back end of Q4. So it's basically Q4 is a seasonally low quarter to begin with.

Speaker 2

Okay, thanks. I'll step back. Thank you.

Operator

Our next question comes from Steven Alexopoulos with JPMorgan. Please go ahead, Steven. Your line is now open.

Speaker 3

Hi, everyone. Let me start on the ECR deposits. Can 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?

Speaker 1

Okay. Two questions there. So first, the growth came in warehouse lending, all right. And what we have found from the Q1 disruption in the market that Western 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 MSR loans. So that volume is coming in for that reason.

Speaker 1

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 we'll continue to pay down our short term borrowings.

Speaker 1

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.

Speaker 3

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 $11,000,000,000 of deposits in the first half. I think you're guiding like $3,000,000,000 in the second half.

Speaker 3

I know there's some seasonality in the Q4, but you're just being very conservative here?

Speaker 4

So let's talk about

Speaker 1

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 $3,000,000,000 $4,000,000,000 that flows out in Q4. So while I'm saying $3,000,000,000 net growth, then you can see that we're accounting for the $3,000,000,000 to $4,000,000,000 that's going to fly out the door or flows out the door at the end of the year.

Speaker 1

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. So we 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 got first joined the bank. And that's where the deposit vertical growth is coming from. In addition, our consumer lending or 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 brought $673,000,000 So since we've actually launched the consumer digital channel, I'll give you a number as of today because our folks are very proud that they just shot me a note.

Speaker 1

But inside of a year and a half, that channel has moved up to about $4,500,000 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 challenge 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.

Speaker 3

Got it. Okay. That's great color. Thanks for taking my questions.

Speaker 1

My pleasure.

Operator

Our next question comes from the line of Ebrahim Poonwala with Bank of America. Please go ahead, Ebrahim. Your line is now open.

Speaker 4

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 December continue into 'twenty five? Is that positive overall for the NII in 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?

Speaker 1

So, yes, regarding your first inquiry, Ebrahim. Yes, so we're fairly neutral on an aggregate of net interest income plus 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 1 from the Q4 and then 2 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, PP and R related to interest rate movements, both inclusive of interest expense and deposit costs.

Speaker 1

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 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, 1, is our continued upward movement in loan growth. That's very important.

Speaker 1

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.

Speaker 4

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, I get it, but it's been a overhang on the stock for 3 or 4 years. Just talk to us outside of things going through the pipe, your visibility in terms of credit quality outlook over the next 6, 12, 18 months. Where do we 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.

Speaker 1

Yes, I'm going to let Tim take that one.

Speaker 5

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, the 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.

Speaker 5

So our forward estimates that Ken talked about a 15 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.

Speaker 4

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.

Speaker 6

Hey, just to follow-up on the credit conversation. So the guide implies some increase in net charge offs for 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?

Speaker 5

Yes. 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 or 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.

Speaker 1

So we update our appraisals on our non performing loans approximately every 6 months. And we're getting more clarity. Some of these markets don't have a lot of transactions. And so as that comes in, we saw something in terms of the San Diego property. We took that immediately.

Speaker 1

You see that here to put us a little bit above the 15% kind of upper limit that we had as of our Q1 guidance and so we expanded that to kind of 15% to 20%.

Speaker 6

Okay. And just following up on that San Diego loan. Did you expand on kind of the updates there, news about being foreclosure and kind of your plan to deal with the asset?

Speaker 1

Yes. Look, we're 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.

Speaker 1

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.

Speaker 6

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 mortgage warehouse?

Speaker 1

Yes. 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.

Speaker 1

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 those all that liquidity out to finance loans, but rather holding that liquidity on our balance sheet and making a smaller spread. What we will do over time is work with our clients to work through or reposition current pricing levels, given the liquidity that we have.

Speaker 1

So a year ago, there was a premium placed on liquidity and people said, if you want my liquidity, you have to pay up 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, 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.

Speaker 1

The growth we've had is a great problem to have. And it gives us flexibility on leverage to be more aggressive in this repricing initiative that's underway.

Speaker 6

Got it. Thanks for taking my questions.

Operator

Our next question comes from the line of Timo Brisele with Wells Fargo. Please go ahead. Your line is open.

Speaker 7

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?

Speaker 1

Yes. So we've indicated in the past that we're approximately 3 quarters of the way through with complying with where we need to be to tip over 100. 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 $100,000,000,000 We still have about $6,000,000,000 of borrowed funds, about $6,000,000,000 of broker 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, we're on track with this.

Speaker 1

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 TLAG total loss absorbing capacity. We need to do more debt there. But even in that situation, based upon 1,003 ending prototype, which I think is being revised,

Speaker 7

we had until 20 28 to kind of get there. 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?

Speaker 1

Most importantly, the fever is broken on rates. 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 and to be a competitor against the positive rate. Plus, you could go to treasuries or some of these other products and to be a competitor against the positive rate. 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 at or near what would be kind of a market rate of interest.

Speaker 1

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 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, how the Fed cuts 25 in September, you'll see that flow through starting immediately. Got it. And then maybe if I

Speaker 7

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?

Speaker 7

I guess, what are the expectations for gain on sale margins in the context of the 2Q decline?

Speaker 1

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 have it 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 refi activity, but we're looking forward to the purchase activity to really drive us.

Speaker 1

But from a forecast point of view, we're going to wait to see that flow through our P and L before we capture it in our go forward consensus outlook. Great. Thanks for the color.

Speaker 8

You're welcome.

Operator

Our next question comes from Matthew Clark with Piper Sandler. Please go ahead. Your line is now open.

Speaker 9

Hey, good morning. Thanks for the questions. Maybe just on the margin, held up a little better than expected up 3 bps. I think you had guided previously down 10. And that's despite kind of loans to earning assets coming down.

Speaker 9

Updated thoughts on kind of the near term margin outlook?

Speaker 1

Yes. So we did pop it up 3 basis points. And again, with the excess liquidity, we did 2 things. A lot of excess liquidity came in towards the back end of the Q1. So we're able to deploy the average earning assets that helped.

Speaker 1

And then also we're paying down our working hard to pay down our short term borrowings. As I said in my prepared remarks, going forward, Q3, Q4, you can see managers' margin holding very close to where we are now in the 3 60 area. And that includes the 2 rate cuts. Great. Yes, got it.

Speaker 9

And then just shifting gears to credit, any color on the uptick in special mention

Speaker 1

this quarter, what drove that increase?

Speaker 5

Really, it's a balance with the prior 4 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 deal situations that brought credit into view. And then we will quickly, as we always do, work through those to move them up or out. Yes.

Speaker 1

I would note that whether you're looking at the special mention ratio or total dollars, Q2 is still below the trailing 4 quarter averages. So nothing out of the ordinary in that special mention move.

Speaker 9

Great. Thank

Speaker 4

you. Our

Operator

next question comes from Bernard Von Gazzicchi with Deutsche Bank. Please go ahead. Your line is now open.

Speaker 10

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 ks, given more granular assumptions on the deposit betas. So for 100 basis points decline in rates, you showed NetEye down about 7% at threethirty 1.

Speaker 10

But whenever you could update that at 6:30 and believe NetEye 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.

Speaker 1

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, is probably going to be fairly similar to what we showed you in the Q1. 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 PP and R combining those two elements.

Speaker 10

Got it. And then just separately, just on the fee income, just a question on this. I know the equity investments were about 4,000,000 dollars 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 brought any color and expectations from here going forward?

Speaker 1

Yes. That's a difficult thing 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 and A activity. That's been a little restrained for reasons that I think everyone is aware of.

Speaker 1

So maybe that's been a factor here. I can't really project what it's going to be in 3rd Q4. Other than we don't see anything really change going on. So we can maybe we've got the parameters of where the higher or lower areas could be and maybe somewhere in there. There's nothing going on there that we think is going to be magnitude change either better or worse, respectively.

Speaker 10

Okay, got it. Thanks for taking my questions.

Operator

Our next question comes from Chris McGratty with KBW. Please go ahead. Your line is now open.

Speaker 1

Great. Thanks. Dale, if I look

Speaker 11

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 any

Speaker 1

is there a scenario where you're perhaps at

Speaker 11

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?

Speaker 1

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 relatively higher 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, we're maybe we think we're going to do a little better on the non interest income side, maybe toward the upward of that range.

Speaker 1

But the others, I think kind of a midpoint is fairly on target with what we would consider.

Speaker 11

Okay. That's helpful. Thanks. And then on the just going back to the balance sheet strategy, you talked about the expense build and HQLA and TLAC.

Speaker 7

The capital target, the 11% plus

Speaker 11

that you've been with for the better part of the year,

Speaker 1

is there a scenario where that changes

Speaker 11

in your view materially either way now that you're kind of through the we're through the worst of the crisis and we're a little bit more confident in the outlook?

Speaker 1

Chris, you blinds out. We missed the first part of that question. Could you repeat it for us, please?

Speaker 11

Sure. I guess just closing the loop on the $100,000,000,000 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?

Speaker 1

So, want to keep the 11% as a target more or like a 4, as we've said before. 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 7 quarters. And 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.

Speaker 1

So that's what we plan to do.

Speaker 11

Yes. I actually wasn't for this time, wasn't asking about the buyback. It was just more about balance sheet leverage and growth. But got you on there. Thanks, Ken.

Speaker 1

Okay. Scott is on.

Operator

Our next question comes from Samuel Vargas with UBS. Please go ahead. Your line is now open.

Speaker 12

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 are the pipeline? You'd mentioned that the investment grade rating

Speaker 1

is a catalyst here. Can you just give a broad update on where that business is at? 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 from Moody's. We're both on outlook positive.

Speaker 1

Obviously, our ratings are not where we believe they should be, but we think that is encouraging in terms of direction. We have gotten certainly good traction in our Corporate Trust operation and we've tag teamed 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 our ratings increase on from both of those entities. We don't think it's necessary for us to continue to grow strongly in that category.

Speaker 1

We have more than $500,000,000 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 2 together when calling on clients has put a pipeline of deals ready to close, not 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.

Speaker 1

But what's more importantly is the corporate trust program that we built. We took a few people from a large money center bank. 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 and a higher level of customer service. And I can tell you from the 5 or 6 calls I had last week, that's 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.

Speaker 1

We're going to see how this thing moves forward. This is a build. So our Corporate Trust Group in terms of deposits should do between $150,000,000 to $200,000,000 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, very, very pleased with that activity.

Speaker 12

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

Speaker 11

that paid rate.

Speaker 12

Is it fair to assume that if 4Q seasonality comes through and those deposits partially flow out that alone will be enough to reduce the ECR rate regardless of whether we actually get cuts or not?

Speaker 1

Sure, sure. So first off, I mean, as Ken alluded to earlier, we're expecting 100% or a little bit above deposit beta or I would say funding cost beta on the DTRs 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 Q4, Those should have a combined effect going from say a rate tech at their meeting in September into the 4th quarter, lower rate and lower balances, you're going to see a drop in non interest expense. Which gives us the confidence level that our EPS as it as we move through Q3 and into Q4 we'll be on an upward trajectory, which is what we've been communicating since the beginning part of the year. Got it.

Speaker 1

Thanks for all the color. I appreciate it.

Operator

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead. Your line is open.

Speaker 8

Hey, thanks. 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.

Speaker 8

You've taken share. Just curious what happens when volumes pick up and how you take advantage of that?

Speaker 1

Okay. So what I'm talking about is the warehouse lending group, not the AmeriHome group, all right. That's going to be more and more dependent. But in the warehouse lending group, we've seen a couple of competitors recently drop out of the market. 1 has said that they're selling loans, 1 sold loans.

Speaker 1

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 other don't? Well, first is that we're a commercial bank and we're a 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.

Speaker 1

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 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've got the economic terms and operating 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 the premier go to platform in that segment.

Speaker 8

Okay.

Speaker 1

What there's been a lot

Speaker 8

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?

Speaker 1

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 our approach. Dale, do you have a different opinion? No, I agree.

Speaker 1

The other thing I would say is, there's been a little bit of a you can still say this phrase, the Chinese water torture on CRE in particular related to a higher rate environment where debt service costs is just has become burdensome over time and it's whittled away at DSTRs, Exits Service Coverage Ratios over the past few years and 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.

Speaker 8

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, think it suggests a relatively stable provision.

Speaker 8

Am I looking at it the right way or is there something else to consider?

Speaker 1

I think that's right. I would say, 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 kind of climbed into our comfort level in terms of our liquidity profile. So if we had higher loan growth, how CECL 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.

Speaker 1

Which you saw in this quarter. Yes. Okay.

Speaker 8

All right. Fair enough. Thank you.

Speaker 6

Thanks, John.

Operator

We have no further questions. So I'll hand the call back to Ken Vecchione for closing remarks.

Speaker 1

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 work throughout Western Alliance. They made this quarter happen and a big thank you to them and we look forward to our next conference call.

Speaker 1

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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