Western Alliance Bancorp. Q3 FY2024 earnings call

• Western Alliance delivered solid Q3 results with $1.80 per share earnings, showing diversified loan and deposit momentum.
• Net interest income grew 25% annualized due to higher average earning assets, but margin compressed 2 basis points from lower yields on variable rate loans.
• $4B mortgage warehouse deposit growth from elevated refinance volumes impacted Q3 earnings but cemented customer relationships.
• Non-interest income up $11M QoQ, tempered by mortgage banking decline but offset by service charges, loan fees, BOLI, and securities gains.
• Pre-provision net revenue marginally up, tangible book value per share up 19% Y/Y. Asset quality stable with non-performing assets down 6 basis points.

Western Alliance generated pre-provision net revenue of $286 million, net income of $200 million, and earnings per share of $1.80. Net interest income increased $40 million from Q2 to $697 million, driven by loan growth. Non-interest income was $126 million, up $11 million QoQ. Loan growth was $916 million (7% annualized) in HFI loans, with deposits growing $1.8 billion (11% annualized). Tangible book value per share climbed 19% Y/Y. Asset quality remained stable with non-performing assets to total assets at 45 basis points, and net charge-offs at 20 basis points within guidance.

• Expect loan growth of ~$1.25B next quarter. Deposits expected to temporarily decline $2B in Q4 due to seasonal outflows.
• Net interest income to decline ~3% next quarter, but ECR related deposit costs expected to decline ~25% QoQ in Q4 and continue lower.
• Non-interest income expected to increase 8%-12% next quarter; non-interest expense to decline 5%-9% next quarter.
• Asset quality in line with expectations, net charge-offs expected 20 basis points in Q4, full-year 2024 net charge-offs no greater than 20 basis points. Effective tax rate for 2024 estimated 20%-22%.

• Seasonal declines in mortgage warehouse deposit balances impacting Q4 ECR related deposit costs.
• Uncertainty around mortgage rate movements and their impact on mortgage banking income and loan production.
• Dependence on continued market share gains in mortgage warehouse and other deposit segments.

Q: Hey, good morning. So I guess, first question -- just first question around deposits. Trying to understand, so we've -- I'm assuming you were aware of the seasonality last quarter when you raised the deposit guidance for the year. So I'm just trying to understand, if you can give us a little color on the settlement that impact and how pronounced is the seasonality versus just some of these chunkier outflows? And are there more such deposits that could leave the bank that could have some meaningful impact on near-term NII trajectory? Just if we can address NII, both in terms of larger outflows and then, how impactful is the 4Q seasonality because I'm not sure it was that prevalent in the fourth quarter of last year?

A: Yeah. Thank you. I think you've confused a few things. So let me straighten that out. Number one, in Q3, we did see a very large settlement out of our Juris Banking Group that was a little bit earlier than our expectations. We had expected it to happen into 2025, the settlement moved up earlier. Always hard to forecast when those things are going to be dependent on the court system and it depends on lawyers agreeing to what the settlement terms are, so that came out. And so absent that, we would have grown deposits in Q3 by $5 billion. So we actually grew deposits $2 billion, we paid down $200 million of broker deposits, and that got us to the net growth of $1.8 billion. In Q4, that's when you'll see the seasonal decline of warehouse lending group, which we always have in terms of deposits flowing out for escrow insurance and P&I payments that happen at the end of the year. And that's why we've said that outflow will push Q4's deposit levels down $2 billion. However, our balance sheet deposit growth or I'll say, our balance sheet growth all in, as you move forward into 2025, certainly for deposits remains unchanged which is, we expect to have $2 billion per quarter on average, $2 billion per quarter of deposit growth. We have a good line of sight into that. We've got clarity into that because of the number of home grown deposit platforms that we have built over the years starting with our granddaddy, which is the HOA business. Also, our warehouse lending group has a very strong deposit business and we added business escrow services in the last two years, settlement services, sometimes known as Juris Banking, and our consumer digital platform as well and also corporate trust. So these are all homegrown deposit businesses that a couple of years ago really never existed inside of our bank and now are beginning to perform admirably. In addition, we've got good deposit growth that comes from our commercial lines of business or previously known as our -- as the regional business. So that's sort of the deposits and while -- just on balance sheet, I'll just say, and we also expect, as we move forward into 2025 to see deposit on loan growth average $1 billion or so per quarter. And we're running a very -- a much lower deposit loan-to-deposit ratio. So if we have the opportunity to put on, as we say, good, safe and thoughtful loan growth, we have the liquidity to do that, and we could increase our loan growth throughout the year. Dale, some of these businesses report to you. Do you want to add any comments?

Q: Hey, good morning. I wanted to just get some clarity on the expectation for 4Q to be the NII trough. Is the expectation that 1Q maybe you get some additional margin compression from the asset sensitive balance sheet and then volume makes it up or should 4Q be the trough for NIM compression as well?

A: Yeah. I believe 4Q can be the trough as well on the NIM side. Yes.