Release Date: October 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Western Alliance Bancorp (WAL, Financial) delivered solid third-quarter results with earnings of $1.80 per share, demonstrating the bank's ability to sustain diversified loan and deposit momentum.
- The bank achieved healthy deposit growth of $1.8 billion or 11% annualized, and HFI loan growth of $916 million or 7% annualized, despite sluggish demand for overall credit in the economy.
- Net interest income grew 25% annualized due to higher average earning assets, showcasing the bank's ability to capitalize on a changing rate environment.
- Non-interest income increased by $11 million or 10% quarter-over-quarter, driven by higher service charges and loan fees, indicating strong performance in commercial banking fees.
- Asset quality remains stable with non-performing assets to total assets declining 6 basis points to 45 basis points, and net charge-offs of 20 basis points landing within guidance range.
Negative Points
- Net interest margin compressed by 2 basis points due to lower yields on variable rate loans, indicating pressure on profitability.
- Q3 earnings were modestly impacted by elevated deposit costs due to $4 billion of mortgage warehouse deposit growth, which could affect future earnings if not managed.
- Provision expense of $34 million was necessary due to sustained loan growth and $27 million of net charge-offs, reflecting ongoing credit risk management challenges.
- The bank anticipates a temporary decline of $2 billion in deposits in Q4 due to typical seasonal outflows, which could impact liquidity management.
- Non-interest income growth was tempered by a decline in mortgage banking income, highlighting potential vulnerabilities in revenue streams.
Q & A Highlights
Q: Can you explain the impact of seasonality and settlement on deposits, and how it affects the near-term net interest income (NII)?
A: Kenneth Vecchione, President and CEO, clarified that a large settlement from their Juris banking group occurred earlier than expected, impacting Q3 deposits. Without this, deposits would have grown by $5 billion. Seasonal declines in mortgage warehouse deposits are expected in Q4, reducing deposits by $2 billion. However, the bank anticipates $2 billion in quarterly deposit growth moving forward, supported by various homegrown deposit platforms.
Q: What is the outlook for non-interest income in Q4, considering the MSR adjustment and other factors?
A: Dale Gibbons, CFO, explained that the MSR adjustment was due to increased prepayment rates. The bank expects consistent revenues from a new BOLI transaction and stable service charges. Securities gains are anticipated but at a smaller magnitude than in Q3, which will improve liquidity and allow for higher return assets.
Q: Where are you seeing opportunities for loan growth, particularly in the C&I segment, and what are your expectations for 2025?
A: Kenneth Vecchione highlighted growth in regional banking, warehouse lending, leveraged finance, and resource financing. The bank expects $1 billion in quarterly loan growth, driven by strong pipelines in note financing, MSR lending, and warehouse lending. These areas offer good risk-reward and allow for continuous credit evaluation.
Q: How do you view the potential for ROE in a down-rate environment over the next few years?
A: Dale Gibbons stated that the bank's ROE potential is not heavily dependent on the rate environment. They aim for an efficiency ratio beginning with a four, leading to an ROE in the upper teens. The bank's leverage is lower due to a higher CET1 ratio, but they are confident in achieving these targets.
Q: What are your expectations for the mortgage market, and at what rate level do you anticipate increased production volumes?
A: Kenneth Vecchione noted that mortgage rates need to drop below 6% to see significant volume increases. The sweet spot is between 5.50% and 5.75%, which would drive more activity. A gradual rate decline is preferred to avoid a rush of refinancing that may not be sustainable.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
