Western Alliance Bancorporation (NYSE:WAL) Q4 2023 Earnings Call Transcript

Western Alliance Bancorporation (NYSE:WAL) Q4 2023 Earnings Call Transcript January 26, 2024

Western Alliance Bancorporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone. Welcome to Western Alliance Bancorporation’s Fourth Quarter 2023 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, and welcome to Western Alliance Bank’s fourth quarter 2023 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer; Dale Gibbons, Chief Financial Officer; and Tim Bruckner, Chief Banking Officer will join for Q&A. Before I hand the call over to Ken, please note that today’s presentation contains forward-looking statements which are subject to risks, uncertainties, and assumptions. Except 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 cause the actual results to differ materially from any forward-looking statements, please refer to the Company’s SEC filings, including the Form 8-K filed yesterday, which are available on the Company’s website. Now, for opening remarks, I’d like to turn the call over to Ken Vecchione.

Ken Vecchione: Thank you, Miles, and good morning, everyone. I’ll make some brief comments about our fourth quarter and full year 2023 earnings before turning the call over to Dale, who will review our financial results in more detail. After I discuss our 2024 outlook, Tim Bruckner will join us as usual for Q&A. Western Alliance’s diversified national commercial business strategy continued to drive strong momentum in the fourth quarter, as we generated earnings per share of $1.33 or $1.91 excluding $0.58 of one-time notable items. The quarter featured both healthy balance sheet growth, and additional balance sheet repositioning actions to further optimize our funding base. Looking past these notable items which Dale will explain shortly, highlights for the quarter included solid loan and deposit growth, ongoing capital and liquidity accumulation, and continued stable asset quality.

Deposit growth of $1 billion allowed us to continue to selectively reduce debt and borrowings. In Q4, we fully repaid $1.3 billion of advances from the Bank Term Funding Program, as well as a $300 million 6.5% AmeriHome Senior Notes, which were not replaced with new borrowings. Regarding the AmeriHome Notes, we seized an opportunity to repay this higher-cost debt at a discount. Additionally, our portion of the industry-wide FDIC special assessment to replenish the Deposit Insurance Fund totaled $66.3 million. Loans rose $850 million in the quarter, bolstered by C&I growth within our regional footprint. Western Alliance begins 2024 supported by a strong capital base and liquidity position. CET1 expanded approximately 150 basis points during the year to 10.8%, which equates to 9.8% when including AOCI.

80% of our deposits are either insured or collateralized, which ranks among the highest levels of the 50 largest U.S. banks. Despite the industry’s challenges, our total deposits increased 3% year-over-year. Asset quality also remains in very good shape. We’ve limited net charge-offs of only 6 basis points of average loans in 2023. Limited realized losses amidst a normalized credit backdrop is indicative, in our view, of the merits of lending with low advance rates adhering to conservative underwriting standards, and approaching credit mitigation proactively. Continuing to shift our funding base from borrowings to core deposits, better positions us to grow loans in a rate environment in flux likely to decline later this year. We have made investments and leadership additions in order to drive increased C&I growth in our regional footprint, expand fee income opportunities across client relationships, and complement the growth of our national business lines, particularly our leading national — our leading deposit focus verticals.

Overall in 2024, we look forward to consistent balance sheet and PPNR growth, with higher liquidity and improving capital. This will empower Western Alliance to continue partnering with our clients on their most important projects. Dale will now take you through the financial performance. Afterwards, I will provide you with our 2024 outlook.

Dale Gibbons: Well, thank you, Ken. For the year, Western Alliance produced net revenue of $2.6 billion, net income of $722 million, and EPS of $6.54. Net revenue increased 3% from the prior year, demonstrating the durability and flexibility of our business model. Net interest income rose $123 million or approximately 6% to over $2.3 billion, notwithstanding our curtailed loan growth and the completion of a series of asset sales earlier in the year. Non-interest income declined $44 million to $281 million for repositioning actions, the impact of fair value marks, as well as the slower mortgage purchase market. Non-interest expense of $1.6 billion, increased $466 million year-over-year, primarily due to higher earnings credit rates and deposit costs driven by the rising rate environment.

Moving on to fourth quarter trends and business drivers, we generated reported pre-provision net revenue of $220 million, net income of $148 million, and EPS of $1.33. As part of the balance sheet optimization efforts conducted earlier to support and improve our earnings trajectory, we repaid $300 million of AmeriHome Senior Notes at a discount. We utilized this gain to better position the balance sheet by selling securities, as well as MSR fair-value adjustments in sales, which combined to produce a pre-tax loss of $4.5 million, in addition to the $66 million FDIC special assessment. When excluding these one-time notable items, we generated adjusted net income of $211 million and EPS of $1.91. Net interest income increased $4.7 million during the quarter to $592 million, from higher average earning asset balances and reduced higher-cost borrowings.

GAAP non-interest income was $91 million, or excluding notable items a $126 million, which was down approximately $3 million from Q3. During the quarter, loans sold approximately $200 million of Mortgage Servicing Rights, which improved our capital ratios despite incurring a loss of $11 million on disposition. As prepayment speeds began to recover from historically low levels, the valuation of Mortgage Servicing Rights moved lower at an accelerated pace, which resulted in a $14 million fair-value adjustment net of hedging. We don’t believe this aggregate $25 million charge is indicative of the earnings profile of our Mortgage Banking business. Lock volumes rebounded 29% year-over-year and may be indicative of continued momentum into 2024. Since the December rate rally and resulting lower mortgage rates, we have experienced incremental refinance volume and firming margins.

Should mortgage rates trend lower in future quarters, we would expect this business to benefit which has not been captured in our go-forward guidance. Additionally, income from equity investments was elevated by approximately $8 million due to outsized gains from solar tax credit investments with higher-than-expected performance during the quarter. GAAP non-interest expense was $462 million, or excluding noted items, $435 million, a quarterly increase of $9 million. Deposit cost growth slowed markedly, increasing $3 million in Q4 as our Settlement Services and Homeowners Association businesses experienced strong growth in new customers that have surpassed seasonal declines in Mortgage Warehouse. Provision expense was $9.3 million, reflecting steady asset quality.

Lastly, our effective tax rate of approximately 30% was temporarily elevated in Q4 primarily because of timing issues related to the low-income housing units that were not placed into service in 2023. The 2024 tax rate should reset at 22% to 23%. Loans Held For Investment grew $850 million to $50.3 billion, while deposits increased $1 billion to $55.3 billion at quarter-end. Mortgage Servicing Rights declined to $1.1 billion from MSR sales and reduced valuations resulting from the lower rate environment. Overall, we continue to build high-quality liquid asset levels and on-balance sheet liquidity via strong deposit growth. Debt repayments previously discussed, reduced investments in cash by $351 million from September 30th. Strong deposit growth over the last three quarters has allowed us to cut total borrowings and debt by half from the end of Q1.

Finally, tangible book value per share increased $3.06 or 7% over the prior quarter, and 16% year-over-year to $46.72 from retained earnings and reduced drag from negative all other comprehensive income. Loans Held For Investment growth was predominantly from C&I categories, some of which we’re moving at higher-end line utilization. Construction and land loans were up $220 million with a little under half of this contribution from lot banking. Given the national undersupply of homes and a greater likelihood of near-term rate cuts, we are still positive about the macroeconomics for this business. Deposit growth of $1 billion was achieved despite typical seasonal declines in Mortgage Warehouse deposits related to tax and insurance payments. We continue to experience broad-based growth from our specialized value-added deposit channels.

HOA had its best Q4 ever and we believe it will retain and possibly extend its leading market share in the country as achieved in Q3 of last year. Settlement Services, Tech and Innovation, Corporate Trust, and our Digital Consumer Channel, all grew materially and contributed to well-diversified growth. Non-interest-bearing DDA comprised 26% of total deposits, of which 45% have no cash payment of earnings credits. The decline in non-interest-bearing balances was primarily driven by the expected $3 billion decrease from typical Mortgage Warehouse seasonality of property tax and insurance escrow funds. There has been no client attrition associated with these outflows and this decline is recovering as anticipated this quarter. Moving on to net interest drivers, HFI loan yield decreased 8 basis points due to the full quarter impact of the $1.3 billion reclassification of loans from Held For Sale to Held For Investment at the end of Q3.

This coincided with — coincidently resulted in Held For Sale yields climbing 31 basis points. Going forward, we anticipate HFI yields to continue to be supported by an average of $2.9 billion of loans repricing or maturing third quarter in 2024. The yields on total investments expanded 8 basis points in Q4 to 4.99%. The Securities portfolio grew $1.9 billion to $13 billion from the ongoing HQLA goal, which has increased treasury from $900 million at the end of Q1 last year to approximately $4.9 billion at year-end. The cost of interest-bearing deposits increased 7 basis points, markedly slower than the prior quarter, and the total cost of funds increased 2 basis points to 2.82% due to an increase in demand deposits and lower short-term borrowings.

Deposit growth enabled the $768 million increase, a reduction in average short-term borrowings, as well as 6 basis points of improvement in the cost of interest-bearing liabilities. In aggregate, net interest income increased approximately $5 million, while the net interest margin of 3.65% came in at the mid-point of our Q4 guidance. Our net interest income growth was exceeded by the growth rate of average earning assets. Non-interest expenses were impacted by $27 million at net notable items this quarter. Adjusting for these one-time items, as well as deposit costs, our adjusted efficiency ratio rose 100 basis points to 51%. We expect deposit costs will experience relief from a cessation of rate hikes and should fall as rates decline. For historical context, average ECR balances were $19.9 billion in the fourth quarter compared to $17 billion in Q3 and $15.4 billion in Q4 of ’22.

We expect ECR-related deposits to remain a consistent relative proportion of our deposit base as total deposits grow. Based upon our rate forecast and generally a high beta repricing for ECR-related deposits, we expect such pricing to largely decline and lockstep with the rate cuts, offsetting any potential net interest margin declines. Asset quality metrics continue to remain stable and in line with what we reported last quarter. The aggregate net increase in Special Mention loans and classified assets was only $7 million from the Q3 level. Non-performing assets increased to $281 million, equating to 40 basis points of total assets, which is 5 basis points above the third quarter. Quarterly net loan charge-offs were $8.5 million, or 7 basis points of average loans, which was aligned with Q3 net charge-offs.

Provision expense of $9.3 million was a function of loan growth and has slightly improved Moody’s consensus forecast. Though our consensus and some early risk ratings for our ACL still incorporated 80% recessionary outlook. Our allowance increased $10 million from the prior quarter to $337 million and the ACL ratio with 73 basis points covered a 135% of non-performing loans. Looking at the reserve block, you’ll see an updated look on the context behind our allowance, which when considering insured loans and those in no-loss categories, the allowance shifts up to 1.31% of loans. Our CET1 ratio rose 20 basis points to 10.8% or 9.8% when adjusted for the AOCI debit. Our tangible common equity to total assets grew approximately 50 basis points from Q3 to 7.3%, from earnings and the improved AOCI position.

Tangible book value per share increased $3.06 from Q3 to $46.72 from earnings and recapture of AOCI marks. The $220 million improvement in AOCI resulted from substantial decreases in intermediate-term treasury rates during the quarter. Our consistent upward trajectory in tangible book value per share has outpaced peers by almost 5 times from 2013, including strong growth in 2023. Over most time periods, Western Alliance continues to generate a top-quartile total shareholder return relative to both asset-light peers and the Regional Banking index. Turning the call back to Ken.

Ken Vecchione: Thanks, Dale. Our guidance for 2024 is to build on the second-half momentum of 2023 and progress towards returning to above-industry returns. In the first half of 2024, the Company will emphasize liquidity growth over loan growth, drive capital above 11%, and further build our HQLA portfolio, which will temper earnings growth for the first half of the year. As these goals are achieved, earnings momentum will accelerate in the second half of 2024 and into 2025. So, for the full year of 2024, we expect continued thoughtful balance sheet growth driven by our diversified business model, with an origination mix designed to drive net interest income above 2023 levels. Loan and core deposits are expected to grow $2 billion and $8 billion respectively for the year.

Core deposits-driven growth should continue to push our loan-to-deposit ratio towards the mid-80% level by the middle of this year. Regarding capital, we are targeting a CET1 ratio above 11%, reflecting steady organic capital accumulation in concert with balance sheet growth. Net interest income should grow 5% to 10% from a Q4 2023 annualized jumping-off point. This forecast assumes four 25 basis point cuts back-loaded in the year. We expect any future NIM compression resulting from the rate cuts to be matched by comparable deposit cost declines in non-interest expense, which will be accretive to earnings. Non-interest income should increase 10% to 20% from an adjusted 2023 baseline level of $397 million, which excludes 2023’s mark-to-market adjustments and the impact of asset sales, as we prioritize growing commercial banking-related fee income from holistic customer relationships.

Mortgage banking-related income will be somewhat dependent on the rate environment and mortgage buying — I should say, and mortgage buying. But we’re encouraged that with the recent low rate environment, application volume is picking up with firmer margins thus far in early 2024. Non-interest expense, inclusive of the ECR-related deposit costs, should rise only 0% to 2% from an annualized adjusted Q4 baseline of $1.740 billion and allow for continued operating leverage. In aggregate, these factors will enable WAL to consistently grow PPNR throughout the year. Asset quality remains manageable and projects continue — and we project continued support from our sponsors. Based on our conservative underwriting and low advance rates, net charge-offs are expected to be 10 basis points to 15 basis points for the year as the economic cycle normalizes.

Lastly, we expect the effective tax rate to revert between 22% and 23% starting in Q1. At this time, Tim, Dale, and I are happy to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question for today comes from Casey Haire of Jefferies. Your line is now open. Please go ahead.

Casey Haire: Yes. Thanks. Good morning, everyone. So, I wanted to start on the four cuts and how that impacts the PPNR guide. Obviously, it hits you guys a number of ways. Dale, I think you said that it does not — your fees does not account for any upside in mortgage banking. It sounds like the deposit costs within expenses are 100% beta. Can you just confirm that? And then, the four cuts, how would that — what kind of deposit beta are you expecting for the non-ECR component, and how that would impact NII?

Dale Gibbons: Yes. In aggregate, I mean to getting to PPNR, the net impact is fairly nominal. I mean, as we’ve indicated in the past, if you just look at net interest income, we’re modestly asset-sensitive. So, that would be a little bit of a decrement. But of course, you alluded to the ECR price deposits, which we expect to fall and fall in line. Yes, so put those together, we think we’re getting now modestly liability-sensitive and we have a net benefit then in PPNR, excluding the AmeriHome piece which is the option on — this is a call option if things get much better and that’s good space.

Casey Haire: So, AmeriHome would be gravy if it did, but obviously, if it’s back-half-loaded, it might be modest.

Dale Gibbons: Yes. So, the mix will look a little different. I mean, if you had a more accelerated rate decline, maybe you’re going to see a faster decline perhaps in net interest income, reflecting the net interest income profile that we have. But again, when you layer-in the deposit costs, I think it’s going to eliminate that.

Casey Haire: Okay. And then, so the loan-to-deposit growth guide for ’24, you’ve got $613 million of liquidity to play with. What is the plan for that? Build the bond book? Build cash? Pay down borrowings? Just wondering what your plans are there.

Dale Gibbons: Yes. So, when I think about the year, I think about it — the first half of the year, we’re building the liquidity profile as you mentioned. With that, we’re really going to build our HQLA portfolio. And we’re looking to drive our loan-to-deposit ratio as I just said, in the mid-80%s. From there, it’s growth towards a much bigger and better 2025. So, we need to continue to reposition ourselves. We think we’ll have that done by the end of the second quarter. And then, it will be a little bit more traditional earnings as you see them — as you have seen them historically from us. But, I would say — and when you think about it, the deposit and loans are more coming in across the year in a ratable fashion, about $500 million per quarter for loans and approximately $2 billion per quarter for deposits.

Casey Haire: Got you. Thank you. And then just last one. Dale, you mentioned the DDA. It sounds like it’s recovering seasonally within Mortgage Warehouse, just any update you can share on how much of that $3 billion has come back in?

Dale Gibbons: Well, so, it’s really based upon the semi-annual property tax payments, largely in California. And so, we would expect that we’re going to get half of that or two-thirds of that this quarter. And then the rest of it would start coming in. The payments due in May are less dramatic in terms of kind of the dip that we see. Meanwhile, other Warehouse funds look to be growing consistently, and we’re also off to a good start in our HOA business for Q1.

Ken Vecchione: Casey, let me just add, right now we’re on track to beat the $2 billion for our Q1. And that’s inclusive of the HOA deposits coming back in.

Casey Haire: Great. Thanks, guys.

Dale Gibbons: Thanks.

Operator: Thank you. Our next question comes from Steven Alexopoulos from J.P. Morgan. Your line is now open. Please go ahead.

Steven Alexopoulos: Hi, everybody. I wanted to start on the margin. So, you were 3.65% in the quarter, right in the middle of what you had guided to. Dale, for you, how should we think about the NIM trending the backdrop of four cuts? And then it’s funny, when I look at where the NIM was when we had a more normal curve, I mean, you guys were like 4.50%, but this is a completely different balance sheet today. So, assuming we eventually get a normal curve, normal level rates, like what’s a reasonable NIM for this balance sheet?

Ken Vecchione: So, hello, Steve, it’s Ken. What I would say is, again, thinking about the year, the first two quarters of the year, NIM should track consistent with our Q4 NIM of 3.65%. And then Q3 and Q4, the NIM will gently roll down as the price — as the rate cuts come into play. But offsetting that NIM decline will be the reduction in ECR expenses.

Dale Gibbons: So, what’s transpired is, we have and we expect to continue to have considerably more liquidity on the balance sheet, and that is going to kind of depress NIM at basically a permanent basis. Where can we be kind of going forward, I think we can be close to kind of where we are. So, maybe the 3.5% range is kind of sustainable kind of over kind of a broader economic cycle than what we have seen. We’ll probably have a little bit better return on the Residential portfolio that we presently have. But for the most part, I think our numbers rather than being in the 4%s, I think we’re destined for the 3%-level here going forward.

Steven Alexopoulos: Got it.

Dale Gibbons: Preamble.

Steven Alexopoulos: Okay. And then on the expense guide, so you guys were $437 million on the ECR deposit cost in ’23, what’s assumed within this expense guidance for 2024 for the cost of ECR deposits, like where is that roughly?

Dale Gibbons: Yes. So, that’s fairly — it’s fairly stable, and so we get to — as we indicated earlier, we have a back-end-loaded forecast starting in June in the rate and so that would kind of curtail based upon kind of how that plays out.

Ken Vecchione: That’s something that — we don’t do…

Steven Alexopoulos: Go ahead.

Ken Vecchione: Steve, you’re on a choppy line a little bit, Steve. But, I would say, to Dale’s point — you there?

Steven Alexopoulos: Yes. I’m here.

Ken Vecchione: Got you. I would say, just keep in mind, you’re either thinking about — your question is based on total dollars and so, while rate will be coming down, total dollars may still rise as we continue to push off on deposit growth. So, just keep in mind the rate volume impact there. Okay?

Steven Alexopoulos: Yes. Got it. Okay. Ken, can I just finally ask you a big-picture question? So, when I look at the Company, right, years back, we had the financial crisis and you guys made quite a few changes after that, right, built-out national businesses, you had top-decile growth for a long time. Then we had March Madness, you again pivoted, right, you made adjustments, pushing up insured deposits, chained-in liquidity, et cetera. When I look at the 2024 guide, it looks like more of the same in the first-half, but then when we get to the second-half of the year and then 2025, what does this company then look like? Do you throttle up loan growth from where we are? Do you throttle that deposit growth? Are you back to a growth Bank? Like, how you see the world right now and a longer-term for the Company? Thanks.

Ken Vecchione: Yes. Good question. We started to pivot by the way in the third quarter of 2022 with higher liquidity and higher capital. And we certainly were very happy that we did. As we entered March Madness, it really served us well. And that’s informed our decision-making as to why we want to keep that moving forward. And as you said, we’ll have that basically completed by the first half of 2024. Then, I think what you’re going to see is a little bit of the same Bank, but I don’t think we’re going to put our foot on the accelerator as hard as we used to put — push down on the throttle there. And one reason is, we never got really paid for that. So, up until the end of 2022, we were probably growing deposits and loans about 24% to 25% per year and we didn’t see that in our evaluation.

And in fact, people always got nervous with that and said, geez, there must be a credit problem that was lurking behind, but really over that period of time, we only had $29 million of net losses. So, what we’re going to do is, we’re going to be targeting for above-industry trend growth going forward in the back-half of ’24 and into ’25, and we think we’ll get rewarded for that, and takeaway concerns that they’ll always linger about going way back even to 2006 and ’07 and ’08, that people bring up and I think we’ll run from there. But we should be higher in our return on equity, higher on return on assets, but not to the old levels of coming back to 2010 to 2013, 2014, 2015. Okay?

Steven Alexopoulos: Got it. Yes. That’s great color. Thanks for taking my questions.

Ken Vecchione: You’re welcome.

Operator: Thank you. Our next question comes from Ebrahim Poonawala from Bank of America. Your line is now open. Please go ahead.

Ebrahim Poonawala: Hey, good morning.

Ken Vecchione: Good morning.

Ebrahim Poonawala: I guess maybe just one bigger-picture question around earnings. If I have the math right, in terms of your earnings outlook, you probably shake-out on $8 in EPS for ’24, should we expect EPS to dip in the first half before re-accelerating in the back half of the year? How do you think about earnings growth relative to the $1.91 you printed in the fourth quarter? Just given the moving pieces around what you’re doing with HQLA, the benefit of rate cuts in the back half, I would love to hear just the earnings trajectory that you are looking at.

Dale Gibbons: That’s a good — that’s a really good question, Ebrahim So — and maybe implicitly in your comments, so the first quarter generally does have a dip and you can see this in prior years, but as we get to 4Q — and some of it is diesel, or we pay some higher fiber costs. Of course, there’s a fewer number of days in Q1. So, as we get into that, that should be — that should have a bit of a softer point at the beginning of the year. Moving into Q2 and Q1, it’s going to be impacted by what Ken was talking about in terms of continuing to build out and finish by the end of the second quarter, early in the third, our HQLA position there. So, that would result in a little lower earnings growth during those first two periods as basically the deposit growth, which we think is going to be fairly strong, is diverted into an asset class that doesn’t yield as much.

As that changes and as the loan-to-deposit ratio is in the 80%s, you’re going to find this by the — by summer, that’s going to be a more proportionate growth rate in loans, as well as deposits, and hence, you do get a growth rate picking up through the end of ’24 and carrying into ’25.

Ebrahim Poonawala: That’s helpful. And I guess the other question, you mentioned about never getting paid on the — for loan growth back in the day. When we think about how you are acquiring and what type of deposits you are acquiring today, may Ken, is it different? Means, you’ve obviously emphasized the regions and the deposit growth from the regions, but I’m just wondering if your view around large chunky deposits has changed given sort of the emphasis on liquidity? And as a result of that, should we expect you to kind of go about differently when it comes to deposit growth and client acquisition?

Ken Vecchione: Yes. So, Ebrahim, thanks for the question and I think your question is insightful because that’s how we’re changing around the business. So, we’ve been working on a number of new deposit verticals that are really getting legs behind them. And the first is Settlement Services. And just this quarter alone, we grew Settlement Services $2.1 billion. And so, there the deposits are a little larger and — but the growth rate is steady and consistent. So, as you get to a certain level, large deposits will flow off and then you got to bring on the large deposits in. Additionally, we have our business escrow and Corporate Trust business and that too is beginning to get some legs. And in this quarter, that grew by $350 million.

Now, that business will continue to grow, but it really will be helped once we get our investment-grade ratings back. And go back to the pivot, the pivot is to get to our investment-grade ratings, so that Corporate Trust could be a bigger contributor to our deposits and we think with an overall 11% CET1 ratio, mid-80%s loan-to-deposit ratio, steady asset quality, we will position ourselves to get upgraded there. Now, HOA, it’s been a long — actually, what was probably our first national business line, and that continues to knock the ball out of the park. And usually, what is a slow quarter, the fourth that is, they grew $300 million. For the year, they grew about $1.2 billion and those are steady, smaller deposits. They come in from either new business that we win and the existing clients growing their book of business.

So, we get that two ways. Then, another business that we are very pleased with was the one we started in early January, January 4th of 2023, which is our Consumer Digital Platform. This quarter alone, that brought in nearly $800 million. And that’s been a real home run for us and that’s where we see deposits more in $53,000 to $57,000 range for each client. Now for — going forward in ’24 into ’25, we’re going to try to shift the platform from an outside vendor to an internal platform. And so, we’re going to probably run two platforms for a while as we come up to speed with our own platform. But that will help us also longer-term and it will reduce, not in ’24, but going forward ’25 and ’26, it will reduce some of our maintenance expenses. And then, last but not least, let’s not forget what we are in our traditional ball game here and that is the regions, and we’ve been rethinking and redesigning the regions, that was the reason why we moved Tim out of his Chief Credit Officer role into the Chief Banking Officer for the regions.

That’s why we brought in Lynne Herndon to take over the Chief Credit Officer role and Tim’s charge is to rethink and re-imagine the regions and how to be more C&I-focused. And with that focus in C&I, of course, there’ll be more deposits. And I should mention that $600 million came in this quarter from the regions as well in deposits. But it will also help us grow our fee income. And so, we’re going to get a two for there over the long term. It will be easier to bring in the deposits first and then that fee income as we continue to sell or cross-sell our Treasury Management Services, will help us towards the back-end of ’24, but again pick up some steam into the new year of 2025. So, I hope that kind of gives you a sense of what we’ve been doing, and we’re looking at some other deposit verticals that are just early, early stages and we’ll probably work on them this year and hope to have them ready to go either in the back-end of ’24 or early ’25.

Ebrahim Poonawala: So, that is helpful. Thanks for the rundown, Ken. And what I didn’t hear was, does this change at all your view around doing any Bank M&A where you pick up a retail franchise, bring in another deposit sort of generating engine or is that not kind of part of the equation today?

Ken Vecchione: So, today, it’s not part of the equation. We’re not talking about M&A at all. You know, again, we’re talking about 11% CET1, kind of move that upward. But it will at some point — the M&A question or conversation will come into play as we continue to get bigger and bigger. We kind of do what we think we’re going to do with deposits, then, where that will be brought into play as we approach a $100 billion. But frankly, that’s a premature conversation at this point. I think we still have a couple of years before we get to a $100 billion.

Ebrahim Poonawala: Perfect. Thank you.

Operator: Thank you. Our next question comes from Matthew Clark of Piper Sandler. Your line is now open. Please go ahead.

Matthew Clark: Hey, good morning, everyone. Just the first one on the loan growth guide, $2 billion of — $500 million a quarter, is that — we had previously talked about maybe some acceleration in loan growth in the second half, is that just you all being a little conservative and then again either to start the year or should we not necessarily expect a step-up in loan growth in the second-half?

Ken Vecchione: So, you know, the further we take, Q4, we thought loan growth was going to be doing zero on the $300 million, and so, we were a little surprised that it came in at $850 million. I’d rather be surprised on the upside as a general trend, but we’re still going to be a little cautious about economic activity going forward. And so, we’re going to be mindful of this recession or slowdown that only at least advertised to come but has not shown up yet. And then, we have sort of deemphasized certain asset classes for now, those being obviously CRE office and residential just to name the two, some construction areas as well. And so, we’re just going to stay with the guide of $500 million a quarter. We think that’s reasonable. And if the liquidity comes in faster than we think, then we’ll look to deploy it in loan growth. As a general rule, we’ve never had problem deploying our liquidity and getting good, safe, sound, and thoughtful loan growth.

Matthew Clark: Okay. And then, on the fee income guide, if you look at the fourth quarter run rate, I think would you make the fair-value adjustments, that exclude the Securities losses. I’m coming up with a run rate closer to a $124 million, correct me if I’m wrong. And you annualize that, you’re talking about call it $492 million and your guide at the mid-point is roughly $457 off the last year’s base. So, maybe correct me if I’m wrong on that $124 million, and if it is — but if that is correct, it only implies — it implies you’re down 7% this year and obviously, you talked about not assuming any uptick in Mortgage, but just want to get the puts and takes there of what we might not be thinking about.

Dale Gibbons: Well, so we have a few things going on in the — on the non-interest income side, some of which we’re kind of implementing now. We’ve got a kind of a service charge revision that we’re going to be undertaking. We think as rates decline and ECRs come down, that that puts more clients into a position where their earnings credit rate does not necessarily cover all of their consumption of internal services. And that could also kind of push that up. So, we think that, again, we’re looking for growth in that category certainly kind of going forward and kind of expect to see that.

Matthew Clark: Okay. And then just last one for me, on the interest-bearing deposits. Can you update us on the spot rate at the end of the year? And it seems like the pressure there is subsiding and kind of how you think about the beta on the way down on interest-bearing specifically?

Dale Gibbons: Yes. Interest-bearing deposit spot rate was 3.63% at year-end. In terms of the beta coming down, we think it’s going to be very strong. We expect betas to be certainly no slower on the way down than they were on the way up. You may recall that our betas have been faster than industry norms, kind of, this entire time, and our clients are expecting that, that is that we’re watching that closely, and so are they. So I expect that we’re going to be able to pull down the interest-bearing costs. And for those that are ECR-related, pull those down as well on the imputed yields that some of them have, which might be tied to effective Fed funds.

Matthew Clark: Got it. Okay, great. Thank you.

Dale Gibbons: Thanks. Operator Thank you. Our next question comes from Chris McGratty of KBW. Your line is now open. Please go ahead.

Chris McGratty: Great, good afternoon. Ken, maybe a question on the balance sheet and capital. You talked about not wanting to be in the 98th percentile or so in terms of growth perspective because you weren’t getting paid for it. But you’re going to be at 11% pretty soon. Can you open the door a little bit on comments about appetite for buyback maybe in the back half of the year?

Ken Vecchione: Yes. Right now, we have no plans to do a buyback. And 11% is a little more of a floor for us. I know we call it a target, but it’s more of a floor. So we want to build above that. And then we’ll have growth capital. And as we enter ’25, well, we’re going to have a lot of decisions to make. If we see a lot of internal growth in front of us, that’s where I like to deploy the money. First, you got to tell me what the economic environment is and I’ll tell you if we’re going to do a buyback. But really, the buyback conversation has not been on the table in this company. And again, the 11% is a floor for us.

Chris McGratty: Okay. So nothing for ‘24, but perhaps you’ll weigh the alternatives between accelerating the growth and using the capital. Is that a fair for 2025 conversation?

Ken Vecchione: We spend a lot of time talking about ‘25 year. I want to get through ‘24 and make everything we just told you. But for ’24, I could definitely tell you, there’s no buyback on the table.

Chris McGratty: Okay. Thank you. In terms of, Dale, in terms of the balance sheet. You mentioned the HQLA, Dale. How — are you targeting a percent of your balance sheet in securities? How do we think of the odds this quarter? How do we think about just the absolute, kind of bridging the $8 billion, the $2 billion, how much will go to buying incremental bonds?

Dale Gibbons: Yes. So I mean you can impute this from kind of our guidance, whereby we’re showing $1.5 billion, if you just did it ratably, of growth in deposits in excess of loans. And the preponderance of that is certainly going to go to HQLA. As we talked about earlier, the first half of the year, kind of getting over that hurdle that we think will be added by — in the summer, is going to do that. So if you just did, that would be $3 billion more in terms of HQLA that would take us to there. And then at that point in time, maybe there is a more proportional growth rate between loans and deposits. But that’s kind of the range of numbers we’re talking about.

Chris McGratty: Okay, great,. Thank you.

Operator: Thank you. Our next question comes from Bernard von-Gizycki of Deutsche Bank. Your line is now open. Please go ahead.

Bernard von-Gizycki: Hi, guys. Just a question on ECR pricing dynamics. I know you noted the ECR-related deposit costs are expected to decline with rates and volume. Just on rates, I believe you have some deposits that pay in Fed funds and others that are in the lower 2% range. So you get a 25 basis point cut with 100% beta, does that flow through all customers or just the higher cost ECR deposits? And then you need additional rate cuts to get to the lower 3s before cutting them? Or will ECR rates decline for all ECR deposits for balance relationship?

Dale Gibbons: The preponderance of our ECR price deposits are of the type that you initially talked about, i.e., those that are really tied to effective Fed funds. And we think the beta with those is going to be very near 100%. The second piece where rates are significantly lower, we probably have maybe a stutter step with the first rate increase. We’re not necessarily going to be able to kind of fully kind of pass through. But after that, I think we can put them on a trajectory as well. But those betas will be significantly lower, maybe we can get to 50% on that piece of it. But the larger piece, I think it’s going to be at or near 100%.

Bernard von-Gizycki: And if we think about the volumes between those two or the balances, are they much higher for the 3%, like the lower ones? So once we start getting the cuts, even though you have the 100% beta for the ones paying Fed funds, is it just a smaller balance? I’m not sure if you could size it or give a magnitude between the two.

Dale Gibbons: Yes. So between what you’re going to see in terms of warehouse lending, some of the things that are settlement services, some of our HOA deposits, you’re probably approximately two-third of the number is going to have an elevated beta.

Bernard von-Gizycki: Okay. And then if I could just ask one more. Just on your outlook guidance. Just as we think about net interest income, you have the up 5% and up 10%. Could you just give us the underlying assumptions just the difference between the two? Like what gets you to the 10%?

Ken Vecchione: The 10% on management income is a combination of really the loan growth as we move forward, that’s what’s going to move us in that direction. And the additional liquidity we’re bringing in, and placing that into investments.

Dale Gibbons: Yes, what does the yield curve look like? I mean if the yield curve tends to be flat or it remains inverted, that’s going to probably look a little bit better on some of these commercial loans. What does that mix look like? And how is competitive pricing changing for all those items? We don’t have a lot of insight into what that might be, hence, the parameters around a number that might be more median.

Bernard von-Gizycki: Okay, got it. Thanks for taking my questions.

Operator: Thank you. Our next question comes from Ben Gerlinger of Citi. Your line is now open. Please go ahead.

Ben Gerlinger: Hey, good morning, everyone.

Dale Gibbons: Good morning.

Ben Gerlinger: Just had a question. It seems obviously a bit more technical in nature, but it seems like loan yields were down linked-quarter on almost every lending category. I was curious if you can just kind of touch base on maybe the nuance of why? Might be just a technicality, like I said.

Dale Gibbons: Yes. So I did talk about a little bit on what happened on the loans held for sale versus investment, whereby we did a transfer from held for sale to investments. It really was done in the last day or just before that, of the third quarter. So that will affect their dropped loan yields back to some degree. There’s also kind of been some mix revisions in there going forward. We’re still seeing pricing opportunity on the repricing elements. We talked about the $2.9 billion that on average we have are rolling or — this year. And while the piece of that, that is fixed rate, that’s probably in about 20% of that number, those have a more ratable increase. But even on the variable side, we’re still looking at elevated spreads relative to when those loans were originated two or three years ago.

Ben Gerlinger: Got you. No, that’s good. So the next question I had was the spreads you’re seeing in the market today. Like it seems like a lot of the $100-plus billion bank are stepping back in certain categories. Are you seeing better spreads because there’s less lenders available or less lending being done from the bigger banks? Or is it kind of more just calling your shots and you’re not seeing too many different — because I mean, you do bank solid clients, so they typically would have the best rate available because it’s a competitive market. I’m just kind of thinking about the yields going forward and especially pricing in a couple of cuts in the back half of the year.

Ken Vecchione: Yes. It’s almost market-by-market dependent. There are just things going on in different markets for us. If you’re talking tech and innovation, spreads there really haven’t moved, but a little more competitive because there’s less deal flow because they’re raising less cash there. If you’re talking some very specific lot banking deals, spreads are strong and we were getting our pricing. And some of these banks are moving in and moving out. It’s really hard to give one generic answer as to, well, are they all pulling back or not.

Ben Gerlinger: Got it. Okay. If I could just sneak one more in. It seems like you said 11% is a bit of the floor going forward in capital. You also referenced the credit rating. The moment we get a public announcement from a credit rating agency, is that a catalyst event for you guys? Or is it more just you get to the 11% is kind of what you guys agreed upon? And once you hit 11%, you kind of operate a bit more autonomously?

Ken Vecchione: Well, the 11% is, as I said, a floor for us. We have to engage or continue to engage with the rating agencies. That’s usually a two-step process. They usually put you on outlook positive and then come back and make the change. As far as I know so far, we got a change in our outlook from Fitch, but I don’t know if there’s any other bank that had a change in their outlook. So my friends at the rating agencies may be a little slow to pull the trigger. But when we go in there, we want to go in there with great capital levels, a firm, steady, stable asset quality and very strong liquidity. And that’s how we’re positioning the company. In the meantime, our corporate trust group is still operating and bringing in good business. They could just bring in more business with the upgrade to an investment rating. So they’re doing just fine. This would just accelerate their opportunities to bring in more business.

Ben Gerlinger: Got you. Okay. I appreciate it. You’d probably be at 12 by the time you get that announcement. But I appreciate the time, guys. Thanks.

Operator: Thank you. Our next question comes from Brody Preston of UBS. Your line is now open. Please go ahead.

Brody Preston: Yes, thanks. I just wanted to follow-up on the loan yields. I understand the move from the HFS to HFI. I was hoping, Dale, if you could provide what the spot rate was for the loan portfolio at the end of the quarter?

Dale Gibbons: Yes, 703.

Brody Preston: Okay. Thank you very much. I also wanted to get a better sense for the BTFP. What was the rationale behind paying off the BTFP but not more borrowings. I think the last time in your 3Q 10-Q, I think the rate on the BTFP was 4.76 versus the average short-term borrowing rate of 5.74 this quarter. I just wanted to better understand the thought process there.

Dale Gibbons: We don’t — frankly, we just thought we didn’t need to be borrowing from the Federal Reserve. And so we did that. I agree with you it’s at a modest cost. It was going to mature anyway. This is something that we had acquired in March of last year, and it was a 12-month deal. So it was a couple of months early relative to what it would have been. We thought we just — it was part of the 2023 situation and leave it behind in 2023.

Brody Preston: Got it. Thank you. I wanted to clarify just on the ECR-related deposits. I think the slide says you have $17.8 billion of ECR deposits at quarter end. But you got about $14.5 billion of NIB. So is there another component of the ECR-related deposits that’s technically still interest-bearing but also gets compensated through ECR?

Dale Gibbons: Yes, correct. So what will happen is, depending on what type of client it is, we could have a situation whereby the manager gets the ECR and the owner gets the interest income. So you don’t really see that in mortgage warehouse because those are really non-interest-bearing deposits. But on an HOA, for example, it’s a dual situation most commonly, whereby the aggregator get an earnings credit rate on the dollars that are owned by the HOA itself. That is not interest expense because they simply have no claim on that liability to us and the deposits of that enterprise. So that’s why that doubled up.

Brody Preston: Got it. And then the last question I had was just on the MSR loss. I just wanted to maybe understand the mechanics a little bit, Dale. Did you — throughout the course of this past year, did you maybe put a higher mark on the MSR and the correspondent production? Capitalize it at a higher rate? And did that impact the gain on sale margin at all and then you’d have to take a loss on it when rates moved against you and you sold the MSRs this quarter? I just want to understand the moving parts there.

Dale Gibbons: No, I think — no, no, I wouldn’t say that. I mean, it was kind of the volatility around what happened. So we saw CPRs decline to the slowest that I think I’ve ever seen, and maybe somebody in the business has been around. But they were like 3% to 4% of constant prepayment rate, and that is exceptionally low. And then when rates picked up again, I mean, rates fell, CPRs jumped, and maybe it was a little bit of a catch-up from refis or whatever that had been delayed. And so as a result of that, we had a gain in our hedge that fell short of the loss in terms of the valuation. And the result was the value of those servicing rights fell by $100 million in the fourth quarter, and we were $14 million shy of what we picked up in terms of gain on the hedge. And that was because we had such a rapid velocity change between a very low CPR, maybe the lowest ever, to something that was more normalized.

Ken Vecchione: Brody, I’d remind you that, by the end of Q4, the 10-year treasury dropped 69 basis points, from 4.57 to 3.88, just punctuate Dale’s point. And these — the MSR balance, we have several outsized valuation firms that come in and look at that MSR and value it for us to make sure that we’re within the appropriate range.

Brody Preston: Got it. Understood. Thank you very much for taking my questions, guys.

Ken Vecchione: Welcome.

Operator: Thank you. Our next question comes from Andrew Terrell of Stephens. Your line is now open. Please go ahead.

Andrew Terrell: Hey, good morning. Dale, if I could start just — I hear your comments around the mortgage banking and kind of the potential upside there not being captured on the go-forward guide. Just to the extent the mortgage market does turn and we do end up seeing kind of upside on the fee income front over time, can you just remind us the incremental efficiency in that business? And maybe just to give us a better sense of how the expenses would fluctuate with the lift in fees?

Dale Gibbons: Yes. I mean so when they were a stand-alone enterprise, they were running at about 50%. And when we acquired them, we were in kind of the low 40s, and they came in, and that took us to kind of the mid-40s. I think that’s basically intact today. So yes, so it’s — frankly, they’re marginal rate of efficiencies, pretty close to the banks overall now that the bank has invested in elements of higher cost with technology and some of this risk management infrastructure and lower investment yields related to the building of the HQLA. So right now, our efficiency ratios are comparable at about 50%.

Andrew Terrell: Okay. I appreciate it. And then just looking at the deposit cost expense line this quarter, if I compare the disclosed expense on deposit costs versus the average balance of ECR deposits. It looks like on a percentage basis, the cost ticked down a few basis points this quarter. Have you lowered rates anywhere on the product already? Or is that more of a function of mix this quarter?

Dale Gibbons: We haven’t lowered rates. But what we have done is we have one-off clients and said, “Look, your spread relative to, say, effective Fed funds has been x and we’re going to make it X minus.” And some of this is going to happen a little — maybe perhaps a little bit later, if you’re going to do something today, but we’ve given them options. If you want to take a rate cut now, will skip to maybe the first one you get. So we’re pushing those down on a basically individually as we kind of go through this. So we are picking that up now. I think that’s going to continue into January, February.

Andrew Terrell: And did you see any attrition as a result of those conversations? Or is there any color there?

Dale Gibbons: There hasn’t been any attrition. And I think that’s an input point for us in terms of what is our pricing like relative to alternatives elsewhere. I think what it means is that the fever is broken on the rate cycle, certainly, and the opportunity to move into either other financial institutions or to move it to some kind of off-balance sheet thing that maybe is invested in treasury, all of those have fallen in terms of what the opportunity is and what they might be able to migrate to. And I think that has helped us in these negotiations. We do these one-off and, to some degree, sequentially, in case we run into a situation like that, where we’re starting to see some attrition like, okay, that’s an important point. And then we’ll ease off in terms of how many we’re doing or what we’re asking for, for them to give up.

Andrew Terrell: Okay, great. Really appreciate the time this morning.

Operator: Thank you. Our next question comes from David Smith of Autonomous. David, your line is now open. Please go ahead.

David Smith: Thank you. I wanted to circle back to those normalized NIM comments earlier in the call. Are you saying that 3.5% should be a floor or more the middle range for NIM in a typical rate cycle?

Dale Gibbons: Well, that was kind of — that was in the kind of an extended conversation of where might we head over time. And getting back to a number for handle, I don’t see that. So I mean that’s an extended expectation of maybe kind of where we might be. I do feel like we’re approaching kind of an equilibrium level now. And so the 3.5% number is not that far from that. But I’m not — that isn’t our guidance in terms of kind of where we’re headed in 2024. [Multiple Speakers]

David Smith: Yes. So if there’s nothing else on the NIM, talking about capital, you’re going to keep doing a high-teens ROTCE, and with your loan growth guide, I think that only implies something like 4% or 5% RWA growth this year. So that just seems to imply a ton of excess capital being generated and you should reach 11% CET1 pretty soon. I know 11% is a floor, but is there a level where you think that it just starts to get excessive? And even regardless of a change in ratings, just starts to make sense to turn on the buyback? If you’re still being measured with loan growth?

Dale Gibbons: Look, as we climb above 11%, I think it introduces optionality. You can build capital and then that could be part of an M&A transaction. There could be multiple things that one could be done with it. But again, it’s just — we’re not there right now. And we’re, again, cleaning up kind of the last few things that we want to change on our balance sheet. And by the summertime, I think we’ll be there in terms of the profile we’re looking for, for liquidity.

David Smith: Got it. And lastly, on deposits. Can you share how much of the interest-bearing deposits are indexed to a rate as opposed to having some level of discretion at the bank in terms of pricing?

Dale Gibbons: Well, I mean — so I mean, if you look at our interest-bearing deposit costs, you can see that that is not as large of a component relative to kind of some of the ECR elements we’ve been talking about. So there is some it is a little bit higher beta, but it is less significant than on the ECR piece.

Operator: Thank you. Our next question comes from Tim Braziler of Wells Fargo. Tim has disconnected. At this time, we currently have no further questions. So I’ll hand back to Ken Vecchione for any further remarks.

Ken Vecchione: Well, thank you very much for joining us today, and we look forward to talking to you about 2024 in a couple of months from now. Thanks again.

Operator: Thank you for joining today’s call. You may now disconnect your lines.