TOR Minerals International Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 28, 2025

There are 15 speakers on the call.

Operator

Good day, everyone. Welcome to Western Alliance Bancorporation's 4th 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 Pondelec, Director of Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Thank you, and welcome to Western Alliance Bank's Q4 2024 Conference Call. Our speakers today are Dale Gibbon, Interim CEO and CFO Steve Curley, Chief Banking Officer for the National Business Lines and Tim Bruckner, Chief Banking Officer for Regional Banking. Before I hand the call over to Dale, 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 a more complete discussion of risks and uncertainties that could cause actual results to differ materially from any forward looking statements, please refer to the company's SEC filings from the Form 8 ks filed yesterday, which are available on the company's website.

Speaker 1

Now for opening remarks, I'd like to turn the call over to Dale Gibbons. Good afternoon, everyone.

Speaker 2

I'll make some brief comments about our Q4 and full year 20242024 earnings, then review our financial results and drivers in more detail before handing the call over to the other two members of the executive committee leading the company during Ken's absence, who's doing quite well and we expect to be back soon. Steve Curley, our Chief Banking Officer for National Business Lines will discuss our business balance sheet composition and loan to deposit growth drivers. Tim Bruckner, our Chief Banking Officer for Regional Banking will then discuss asset quality trends. I'll close our prepared remarks by reviewing our 2025 outlook before opening the call up for questions and answers. Before addressing our financial results, I want to express our heartfelt sympathy to those affected by the Southern California wildfires.

Speaker 2

We have a long standing presence in the area and are saddened for those whose lives and livelihoods have been upended by this tragedy. Western Alliance has already taken actions and stands ready to support our employees, clients and communities in the rebuilding efforts. We are also currently in the process of providing direct financial support to relief efforts. Regarding borrower exposure for the company, we've identified 17 properties experiencing either a significant or total loss with a combined exposure of under 15,000,000 dollars Each of these properties had sufficient insurance coverage above our loan amounts with Western Alliance designated as a loss payee. Therefore, we expect negligible direct financial impact to the company.

Speaker 2

Looking back over 2024, Western Alliance completed a significant liquidity build where we purposefully prioritize growing deposits in excess of loans and deployed this excess liquidity into lower yielding high quality liquid assets, which is demonstrated in our 31% marginal loan to deposit ratio for the year. With this stout liquidity foundation, we are well positioned to resume deploying future incremental deposits into more normal earning asset mix that prioritizes higher yielding loan growth while maintaining a low 80s loan to deposit ratio. This positions Western Alliance in 2025 to further drive down cost of deposits, expand our net interest margin, improve profitability, generate significant operating leverage as our efficiency ratio closes in on 50% on an adjusted basis and a move toward a higher teens return on tangible common equity by year end. Looking at our financial performance, Western Alliance ended the year with solid earnings generating $1.95 per share for the Q4 and $7.09 for 2024. I'm also pleased to report pre provision net revenue growth was 12% linked quarter unannualized.

Speaker 2

These results demonstrate the power of our credit and deposit platforms and our gathering success in earning fee income from clients while proactively managing asset quality during a changing rate environment. Lastly, while Tim will discuss asset quality in detail later, I note the completion of a significant number of appraisals toward the end of 2024 and a material decline in special mention loans makes us increasingly confident the bulk of CRE migration to classifieds behind us and net charge offs in 2025 will be comparable to that experience in 2024. For the year, well produced net revenue of $3,200,000,000 net income of $788,000,000 and earnings per share of $709 Net revenue and pre provision net revenue increased 21% and 14% respectively from the prior year, demonstrating the strength of bank's earnings engine throughout the liquidity restocking process. Balance sheet repositioning actions that fortified our liquidity and capital basis now position the bank to resume greater risk adjusted balance sheet growth going forward. Notably, net interest income increased $24,000,000 more than ECR related deposit costs did during the following rate environment.

Speaker 2

Turning to 4th quarter trends and business drivers. Western Alliance generated pre provision net revenue of $319,000,000 net income of $217,000,000 and EPS of $1.95 Net interest income decreased $30,000,000 during the quarter to $667,000,000 from lower yields on interest earning assets along with approximately flat average earning balances. Loan growth was back weighted as we experienced some deferral of fundings into Q1 2025 and pay downs. Non interest income of $172,000,000 rose $46,000,000 quarter over quarter from higher mortgage banking revenue, commercial banking fees and income from equity investments. Mortgage banking revenue grew $34,000,000 quarterly to $93,000,000 as mortgage loan production rose 31% year over year with affirming gain on sale margin of 21 basis points in the 4th quarter.

Speaker 2

AmeriHome's earnings benefited from secondary sales from seasonally strong demand for CRA qualifying loans and mortgage servicing rights, where lack of industry supply benefits our business margins as a regular seller. Additionally, we are making product investments to tap into new mortgage customers that could benefit us in a higher mortgage rate environment. Non interest expense declined $18,000,000 quarterly to $519,000,000 as deposit costs fell over $33,000,000 to 174. Deposit cost reductions are poised to continue pulling overall expenses lower throughout 2025. In aggregate, deposit costs fell by $3,000,000 more than net interest income declines this quarter, which exemplifies our balance sheet flexibility and nominal net interest income related earnings volatility during a changing rate environment.

Speaker 2

Provision expense of $60,000,000 resulted from a $34,000,000 in net charge offs and an incremental qualitative adjustment on the CRE portfolio. Lastly, our tax rate was lower than expected in Q4 due to several factors, including an increase in solar tax credits from projects placed in service. Turning to our net interest drivers, you'll see the impact of falling rates on our asset yields, but continued accelerating deposit repricing is reducing the overall cost of liability funding, which will expand margins going forward. For the quarter, the yield on total securities declined 22 basis points to 4.67. However, investment loan yield decreased 31 basis points to 6.34 due to the impact of rate cuts on variable rate loans.

Speaker 2

The cost of interest bearing deposits declined 27 basis points from a reduction in deposit rates, which continues irrespective of potential future rate cuts. Indicative of our funding cost reductions are offsetting lower asset yields, the 20 basis point difference between the year end spot rate and the Q4 average rate for interest bearing deposits exceeds the 8 basis point difference for both held for investment loans and securities portfolio yields. Throughout the fall of last year, market expectations for steep successive rate cuts were so significant that 1 month 3 months SOFR were lower than Fed funds effective. This pressured our margin as most variable rate yields are tied to SOFR, but index deposits and ECRs are usually tied to the Fed funds rate. As rate cut forecasts have tempered significantly, this relationship has changed and now term SOFR is essentially aligned with Fed funds effective.

Speaker 2

This is why the difference between spot rates for loans and securities and those of deposits was 12 basis points wider to start 2025 than it was for the average during the Q4. Additionally, we have further reduced deposit rates and DCRs in January, while SOFR remains flat as no cut action is expected from the FOMC tomorrow. Total cost of funds declined 15 basis points to 2.52% and would have fallen further absent the typical seasonal decline in deposits causing a larger portion of earning assets to be funded by borrowings, which we expect to repay fairly rapidly. In other words, we are seeing funding cost tailwinds emerge outside of just ECR related deposits. In aggregate, net interest income declined $30,000,000 from lower yields on earning assets.

Speaker 2

Net interest margin compressed 13 basis points from Q3 to 348. However, I'll point out the overall balance sheet profitability continues to improve and as annualized ECR related deposit costs to average earning assets, which they fund, fell 16 basis points quarter over quarter, outpacing the net interest income decrease rooted in terms of our pricing moving ahead of effective Fed funds reductions. Overall, non interest expense declined $18,000,000 in Q4 as deposit cost fell $34,000,000 from lower rates and average balances, while other operating expenses increased $15,000,000 mostly from an accrual tree up due to the annual bonus. We expect continued reductions in deposit costs and ECR rates as the full benefit of the lower rate environment is realized. Our adjusted efficiency ratio for the quarter improved by 160 basis points to 51%, buoyed by higher mortgage banking revenue.

Speaker 2

Regarding interest rate sensitivity, we've included both a static shock and a dynamic balance sheet ramp scenario to better illustrate the factors that make Western Alliance interest rate neutral on an earnings at risk basis. We are forecasting 2 25 basis point rate cuts this year, which is similar to what the futures market currently expects. In the bottom left quadrant, you will see that our static balance sheet stock scenario interest sensitive earnings should increase modestly in both the up 100 and the down 100 shocks, making us essentially rate neutral. This is exactly what happened in Q4 with a decline in net interest income more than offset by growth in mortgage banking revenue and a material decline in ECR related costs. This dynamic is indicative of the interplay between our mortgage business and higher beta ECR related deposits, which act as a natural hedge to earning assets at our more variable rate and thus make us appear asset sensitive on a reported net interest income basis.

Speaker 2

Depending on the trajectory of interest rates, we are prepared to make adjustments to our loan and securities mixes to maintain our largely rate neutral and earnings profile if needed. Steve Kirill will now take us through the balance sheet dynamics.

Speaker 3

Thanks, Dale. The balance sheet ended the year at approximately $81,000,000,000 which reflected solid loan growth of $330,000,000 and an increase in securities and cash of 217,000,000 dollars As previously mentioned, deposits declined $1,700,000,000 primarily driven by expected short term seasonal mortgage warehouse factors, but still grew 20% year over year from diversified strength across the franchise. Q4 outflows were comparable on a relative basis to the prior year. Borrowings rose $2,600,000,000 to offset the lower deposits, but we expect to reduce these high cost balances as deposit growth resumes in the Q1. Echoing deals introductory comments throughout 2024, half of the $10,000,000,000 in balance sheet growth was in cash and securities while we also reduced borrowings by 1,500,000,000 dollars With this important liquidity build behind us, we are poised to generate strong risk adjusted earning asset growth going forward.

Speaker 3

Finally, tangible book value per share growth was suppressed by a negative AOCI charge in the 4th quarter, but still increased 12% year over year to $52.27 Western Alliance Credit Platforms provide expertise to a variety of industries and clients, which have allowed us to repeatedly produce loan growth better than overall industry. Loan growth of $330,000,000 was more muted than expected, but progress continues to be achieved in diversifying the loan mix into C and I loans, while design runoff occurs in our resi portfolio. This trend continued in the Q4 with nearly all growth in C and I, while construction loans were down $248,000,000 Resi and consumer loans decreased $74,000,000 C and I loans now account for 43% of the held for investment loan loan portfolio compared to 38% a year ago, while resi and consumer loans are now just over 26% of the portfolio compared to 29% at the end of 2023. In the 4th quarter, growth was fairly diverse as our regional and national business lines contributed $186,000,000 $110,000,000 in loans, respectively. Growth in regional banking was primarily driven by homebuilder finance, hotel franchise and tech and innovation.

Speaker 3

For the national business lines, mortgage warehouse and MSR Finance were the main growth contributors. Turning to Slide 12. Deposits grew $11,000,000,000 in 2024, primarily in money market accounts and ECR related non interest bearing. In the 4th quarter, deposit growth in our other businesses lines resulted from strength across regional banking business of $327,000,000 which fully funded its loan growth as well as $2,400,000,000 in contributions from escrow services businesses such as Juris, HOA and Corporate Trust. Combined with $111,000,000 of consumer digital deposit growth, growth in these channels allowed us to partially offset $5,700,000,000 in mortgage warehouse deposit outflow as expected.

Speaker 3

Our deposit focused businesses provide diversified, granular deposits that complement other deposit gathering efforts and support our loan growth. I'll now hand the call over to Tim Bruckner.

Speaker 4

Thanks, Steve. Overall asset quality continues to remain resilient. In quarter 4, criticized assets rose $61,000,000 as special mention loans declined $110,000,000 while classified assets increased to 171,000,000 dollars Gurtisized assets are only $87,000,000 higher from a year ago and declined from 1.85% to 1.73% as a percentage of total assets during the same time period, reflecting the interplay of upgrades and downgrades driven by our proactive risk mitigation strategy. We expect the total criticized asset pool remain stable in Q1 and then declining throughout 2025. Due in part to our proactive management of troubled situations, which requires pressing for re margin or ongoing borrower investment troubled loans, nonperforming assets as a percentage of total assets increased to 65 basis points during the quarter.

Speaker 4

We expect to see nonperforming loans decline as we work through the resolution process. These loans have been reserved or charged down to current as is values and are revalued on an ongoing basis. Our ACL was increased in support of revaluations in the context of our proactive strategy.

Speaker 5

As a

Speaker 4

green chute, we're beginning to see increased lease activity in office properties that have been reset. A compelling example of this is the Downtown San Diego property, which migrated into other real estate owned early in Q4. Since taking control of this asset and resetting the basis and rents to the market, we reached agreement to lease 5.5 additional floors. Occupancy has rebounded from 44% to 62% in just a little over 2 months. Quarterly net charge offs were $34,000,000 or 25 basis points of average loans and 18 basis points for the year.

Speaker 4

We expect charge offs to be relatively similar in Q1 followed by a generally declining trend throughout 2025 as we continue to make progress remediating our CRE portfolio. Provision expense of $60,000,000 added to reserves to cover charge offs and augmented our CRE reserve. Our classified loans are supported by as is valuations giving effect to the present market conditions. Our ACL for funded loans increased $17,000,000 from the prior quarter to $374,000,000 The total ACL to funded loans ratio of 77 basis points rose 3 basis points from the prior quarter. Slide 15 shows the updated ACL walk we've regularly provided to add more context behind our allowance methodology relative to our peers.

Speaker 4

Our ACL moves up from 77 basis points to 1.37 percent when incorporating the effect of credit linked notes as well as the low to no loss loan categories like equity fund resources, our low LTV and high FICO resi portfolio and mortgage warehouse. Compared to our $50,000,000,000 to $250,000,000,000 asset Peer Banks, we benefit from greater credit linked note support as well as a greater percentage of loans in the low to no loss categories. Emblematic of a balance sheet with a low risk profile, our risk weighted assets to tangible assets ratio is one of the lowest among the largest U. S. Banks at just under 70%.

Speaker 4

I'll now hand the call back to Dale.

Speaker 2

Thank you, Jim. Our CET1 ratio increased approximately 10 basis points to 11.3% during the quarter. Our tangible common equity to total assets remained flat at 7.2%. Given the evolving conversation on Basel III endgame, I'd have mentioned that our CET1 ratio including AOCI marks as well as the loan loss reserve is 11 percent, which is down slightly from 11.1% at September 30. Please note that peer data used in the appendix of this presentation are from Q3 when AOCI was pronounced across the industry for the peers.

Speaker 2

Even with our AOCI drag in Q4 applied to WAL, our adjusted capital still ranks above the median of the peer group. As previously mentioned, our tangible book value per share increased $0.29 to $52.27 at year end, which reflects solid earnings growth and mitigated negative AOCI impact from higher rates. Consistent upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by 7 times over the past decade. Turning to the management outlook. Exiting 2024, we have essentially completed our balance sheet transformation that considerably increased our deposits and liquidity buffer while still growing earnings and capital.

Speaker 2

In 2025, we expect continued thoughtful balance sheet growth driven by a diversified credit and deposit platforms with an origination mix designed to drive net interest income growth and margin expansion. We expect loan growth of approximately $5,000,000,000 for the year and should hold a loan to deposit ratio of around 80 basis points 80%. Deposits are expected to grow $8,000,000,000 with increased contributions from our regional banking and escrow businesses. Turning to capital. Our CET1 ratio should remain fairly consistent with our year end level of 11.3, providing balance sheet flexibility.

Speaker 2

Net interest income is expected to increase 6% to 8%, largely as a result of sustained thoughtful loan growth and expanding NIM at approximates 2024 level on a full year basis. Non interest income is also expected to grow 6% to 8% due to ongoing traction and and cultivating deeper client relationships with commercial banking fee opportunities and stable mortgage banking revenue. Non interest expense should decline 1% 6% with DCR related deposit costs between 475 dollars 525,000,000 which is notable moderation primarily driven by continued rate reductions. Other non ECR operating expenses should land between $1,425,000,000 and 1.475 as we continue to invest in future growth opportunities and crossing over the $100,000,000,000 asset threshold. We expect to make meaningful operating leverage that will drive our adjusted efficiency ratio below 50% by the end of this year.

Speaker 2

Regarding our ongoing LFI readiness efforts to transition to a Category 4 bank, we've completed significant foundational investments in risk and treasury management as well as data reporting capabilities over the last 4 years when we were $36,000,000,000 in assets and expect incremental investments of $55,000,000 to $65,000,000 over the next 3 years to make the bank CAF 4 ready. Of this amount, we only expect half to become incremental run rate operating expenses, which is already baked into our business plans and run rate and won't meaningfully impact our profitability. I'd also note these costs exclude total loss absorbing capacity considerations, which are uncertain at this point. As is Paul Hunter remains resilient and we expect full year charge offs of approximately 20 basis points compared to 18 basis points for 2024. Lastly, the effective tax rate for the full year should be approximately 21% as it was in 2024.

Speaker 2

So in conclusion in 2025, you should expect Western Alliance to enter renewed period of stronger profitability and robust earnings growth, significant operating leverage improvement and return on tangible common equity climbing into the upper teens. At this time, Steve, Shim and I look forward to answering your questions.

Operator

Thank Our first question comes from Ebrahim Poonawala from Bank of America. Please go ahead.

Speaker 6

Hi, Dale. Good afternoon. I guess maybe first question just on capital. When we look at the capital, I think you mentioned you are pretty much there on CET1 and maybe even TCE where you want to be. Like given the $5,000,000,000 loan growth outlook, see the bank as having excess capital?

Speaker 6

And if you do have excess capital, would you consider buybacks or just how you're thinking about capital deployment priorities?

Speaker 2

Yes. So we're generating and we expect to generate certainly enough capital to support the balance sheet growth that I outlined. And we think that's kind of the highest and best use for us. But when it makes sense to be able to do something, to take advantage of a displacement at some point, should that occur in the market, yes, I think that would be appropriate. That's not our first order of good business, however.

Speaker 6

Got it. And I guess just, Dale, when looking at Slide 9, when we think about rates, I guess from perception standpoint, it feels lower rates would be good for Western Alliance, both in terms of funding costs, mortgage banking pickup. Just give us remind us like what would be the ideal rate backdrop for the bank as we think about overall earnings growth, be it on the fee income side and as well as from a net interest margin factoring the ECR costs?

Speaker 2

Yes. I think the general rate decline is kind of best for the company. I mean, so right now, we're seeing, I'm going to say, maybe capitulation from homebuyers in terms of even going into 7% mortgages. If they were maybe in the low 6s, I think that would be maybe more substantial and maybe avoid kind of the flash in the pan type of thing, which may be occurred during the pandemic when they drop so sharply. So if we could have a slowly declining rate environment, that's what I would prefer that obviously eases maybe credit concerns as well as debt service coverage costs also ameliorate to some degree.

Speaker 2

So, but conversely, we're ready kind of for everything. I mean, we can handle an increase in rates. We can have a steeper decline. Right now, we're showing that most of our loan growth is originated in basically sulfur type variable rate. But we can swap that fixed, if it looks like that things are going to be falling more precipitously.

Speaker 6

Got it. And just a quick follow-up, your fee income guide, does it assume a big pullback in mortgage rates? Or are you assuming 30 years, 7% mortgage rates kind of holding for the rest of the year?

Speaker 2

Yes. We're not we're assuming basically we're really aligned with kind of the futures market right now, which I think would be ebbing in terms of rates throughout the year. The Mortgage Bankers Association just and I realize that's an industry entity, came out looking for something a little more optimistic. We're not. We're looking for basically flat from 24% to 25%.

Speaker 2

And I think we're kind of headed into that right now in the Q1. The Q1 of 2024 was really flat to the Q4 that we had of 2024. So we think we're in we think that looks fairly decent.

Speaker 6

That's helpful. Thanks for taking my questions.

Operator

Our next question comes from Matthew Clark at Piper Sandler. Please go ahead.

Speaker 7

Hey, good morning, everyone. Just on the ECR related cost outlook, You mentioned you're assuming 2 rate cuts this year. What about the average ECR deposit balances this year? Is there an expectation maybe that there's not as much growth in 2Q, 3Q and the balances are just a little bit lower and helps keep the cost down? Any update or change there?

Speaker 2

Yes. So we had the seasonality drop and I think we telegraphed that at the Q3 earnings call. I mean, the Q4, we have a lot of pay downs from ECR related mortgage warehouse funds for property taxes. That's kind of rebounded as expected. But I do expect us to have a broader growth of our deposit base in 2025 than we had in 2024.

Speaker 2

And getting to your point, Matt, that it's going to be there's going to be less expansion certainly in the mortgage side and we're growing in other categories. We have our other our escrow businesses, which I think are doing well. We've got our trust operation. We have our settlement services. We have our business escrow services.

Speaker 2

We think the outlook for that might be a little bit better this year with kind of the change in administration and maybe some more M and A activity going on. So we're looking for a broader diversification in 2025.

Speaker 3

And I would just add, Dale, I've managed that business for quite a while. I think deposits there will be flat, but economics will be a bit better. There's not quite as much pricing competition. So I think, you might see us improve the cost of funding beyond what just happens with the fed funds rate.

Speaker 7

Got it. Okay. And then just on average earning assets, at least in the near term, I think you're anticipating some growth in earning assets this year, but how should we think about earning assets, I guess, here in the near term? Should we just assume you're paying off that debt that you took on with the seasonal inflow of ECR deposits here in 1Q?

Speaker 2

Well, so yes, we said $8,000,000 for the year. And as we just saw, the Q4 tends to be a little bit of a contraction. So it means you got to do more than $8,000,000 for the 1st three quarters. And part of that is really kind of paying that down. No, I'm looking for loan growth to be more or less consistent throughout 2025.

Speaker 3

Okay. Thank you. I just think we carefully managed the loan growth in 2024 as we did the liquidity build. But I mean our people are out in the market making sales calls and I can kind of feel the pipeline filling up. So we have exposure to private credit.

Speaker 3

We like that business, good risk adjusted returns with our lender finance and bill finance business. So I'm bullish on loan growth.

Operator

Our next question comes from Bernard Vonnegut from Deutsche Bank. Please go ahead.

Speaker 8

Hi, guys. Good morning. Just on the expenses, if we talk about the deposit insurance expenses related of $37,000,000 in the quarter, I know the sequential increase was due to higher insured balances. Are these costs that you'll be able to pass on to depositors? Or do you see this expense expected to continue to increase and assume in the $25 outlook?

Speaker 2

Yes. That's a great question. No, we don't expect it to increase. And we got here in part after some of the volatility last year and whereby we basically volunteer clients said, why don't you move into an insured deposit in a network situation. And there's a cost associated with that both to the FDIC as well as to the network manager.

Speaker 2

And so we did that. And so what we just implemented in the Q4, I think December, we're now charging the client for that. We've had it's actually a little bit of a surcharge. And we said, look,

Speaker 4

we're going to set

Speaker 2

it up that either way, you can move funds at will from fully insured or just to insured to $250,000 but note that there's a 40 basis point charge if you're going to go to the fully insured piece of it. And so some of them move back and forth,

Speaker 9

a lot of

Speaker 2

them are keeping it kind of been fully insured. And so we're actually doing a little bit better than we expected with that. But no, we're we've pushed that back to the clients. We've given them optionality now and so far it seems working out.

Speaker 8

And then just maybe on credit. I know Tim, you mentioned the appraisals obtained at the end of the year. I know there is a pickup in net charge offs in C and I and I know that's been like kind of lumpy one offs really throughout the year, the big pickup in 4Q. Just thoughts on your outlook for 'twenty five. I know it seems to be kind of flat and more positive.

Speaker 8

But just anything on C and I that you're seeing? Any color you can elaborate on?

Speaker 4

Great question. Thanks. Tim Bruckner. Okay. First, outside of CRE office, we're not seeing any migration trends in any other segment.

Speaker 4

So our C and I has been stable and very predictable in terms of performance. We've made no changes in our business model or underwriting that would suggest that would change going forward. When we look at CRE office, I remind the listeners that we're a bridge lender in this area. So that entire portfolio is a floating rate portfolio that we underwrote on a path to stabilization or in a repositioning. So we don't have assets that come over the bow in that and surprise us.

Speaker 4

These are assets that receive high monitoring and very structured default provisions from the time we put the loan. So these same assets are the ones that we underwrote on a direct basis and we've been hand in hand with for the last 18 months as we work through the cycle. So your point of it is and can be chunky. When we talk about the San Diego asset, that's really a good news story. We show the ability to reset the basis to something close to being a low below market and how quickly we can lease a property like that up.

Speaker 4

Having that kind of strategy at our dispose gives us the ability to do that again and again. And so we've been a little more aggressive with the reserve. We stepped up our reserve a little bit to give us that kind of flexibility.

Speaker 2

We also note that our total Yes. I mean our total exposure as we mentioned been kind of relatively flat. So we don't have any more things kind of coming in the funnel in terms of this the criticized asset situation.

Operator

Our next question comes from Gary Tenner at D. A. Davidson. Please go ahead.

Speaker 1

Thanks. In terms of follow-up on the ECR question asked a few minutes ago, can you just remind me, is the rate paid on kind of the non mortgage warehouse ECRs, is that just a lower ECR rate? So it brings down the overall rate as the other segments grow.

Speaker 2

Yes. I mean most of them are really binary. You're either getting interest or you're getting ECR. There's maybe a unique case with our HOA group whereby interest goes to the HOA itself, the owner of the funds, and then an ECR can go to the manager and that's what they compensated for doing the work for these HOAs. And those are both lower, right?

Speaker 2

So you have a lower rate and a lower ECR for those that combined is still lower than obviously what a market rate would be.

Speaker 1

Okay. And then on the fee income guide for the year, just curious, does that include any embedded assumptions around equity gains? You had almost $40,000,000 this past year. Is there a base assumption as part of that 6% to 8% growth range? Or is that not incorporated?

Speaker 2

So that's not part of the growth. I mean, we do think that we're likely to see some. Those generally come about after acquisition or sale of the company, whether it's an IPO or from a larger what we call sequential buyers. But yes, we're not anticipating a growth in that in the equity piece to be able to get that growth rate.

Speaker 1

Well, sorry, not growth so much, Dale, but is there a base assumption that it stays flat? Because I guess what I'm trying to understand is if I think you've mentioned kind of expectations of flat total mortgage revenue in 2025. So where is the growth coming from effectively, especially if you kind of had a 0 on that equity investment line? So just trying to see if it's a 0 or flat or what the thought is.

Speaker 2

I understand your question, Gary. So yes, it's basically coming from 2 places. 1 of them is our regions, which we're getting good traction in and we expect to see growth there. We implemented a service charge fee increase on January 1 to pick that up. And then the second is what we're doing in the digital payment space with our digital disbursements, which is one of the is probably the largest in the world, I think, on some of these contracts that they've distributed and settlement services where there's payment revenue in there that we think is going to be stepping in.

Speaker 1

Okay. And that revenue shows up in the service charge line as well?

Speaker 2

It does. Sure. And other income at the bottom there, other. Got it. Thank you.

Speaker 2

Thank you.

Operator

The next question is from Chris McGratty at KBW. Please go ahead.

Speaker 9

Great. Thanks. Dale, if

Speaker 2

I look at your expense range and you take out DCRs, I guess, what would make you be at the top

Speaker 1

or the low end of that expense core expenses?

Speaker 2

Well, so I mean we've got LFI in there

Speaker 9

and that's certainly kind of a

Speaker 2

part of what's taken place. Frankly, I would hope that maybe we've got a little stronger performance than we're outlining here. I mean, we see where we've come out. I mentioned that we want to hold kind of an 80% loan to deposit ratio that would imply a little bit better growth based on an $8,000,000,000 deposit number. So things like that could be a factor which would affect elements of incentive compensation and things of that sort.

Speaker 10

Okay. And then I guess coming back to the margin for a minute, it sounds like if we connect the lag in the deposits and I think

Speaker 2

you said margins for the full year will be kind of high-350s,

Speaker 10

if I heard you right. So Q1 should be Q1 should see a rebound, if I'm interpreting the margin comments right?

Speaker 2

Yes. So if I look at the adjusted margin, which of course pushes the ECR costs as the interest expense, we were actually up. We're up 4 basis points from Q3 to Q4. And that's going to be that's going to show a more significant improvement than just the core margin itself, but the core margin itself, we believe, is also going to look okay.

Speaker 10

Okay, great. And then maybe if I could slip on more in the $8,000,000,000 I just want to put a finer point on the ECR deposits. The $8,000,000,000 that you've laid out, I think around half of your deposit growth this year was related to the ECR. Is that about what's factored into that $8,000,000,000 roughly half of that coming from or would you point it to a lower number?

Speaker 2

To a lower number, I believe it's less than a third.

Speaker 10

Okay, wonderful. Thank you.

Operator

Our next question is from Ben Gurlinger at Citi. Please go ahead.

Speaker 5

Hey, good morning. I just wanted to double check-in terms of the fee income assumption instead of mortgage. You said you're assuming flat year over year in terms of total national volume or are you assuming the MBA forecast?

Speaker 2

No, we're assuming flat revenue core us. The MBA forecast would be more optimistic than that, I would say, but that's what we've dialed in to show you the estimates and the guidance we have for 2025.

Speaker 5

Got you. Okay. So that's kind of leads to my next question. It seems like you guys seem to have a pretty healthy pipeline to put out $5,000,000,000 And then if mortgage starts to do better, it seems like both the revenue size, both NII and fees could be a little better than expected. Would that mean you'd probably spend a little bit more too, like you said, the incremental build for life above 100 or is that kind of just baked in over the next 24, 36 months?

Speaker 2

Yes, I appreciate that. I mean, we're in terms of the expense level, we're really focused on PPNR growth. And so if we can drive more revenue is what you're alluding to. Now, I got to tell you, I mean, the rate market has been so uneven since last summer. Here with now the 10 year up 100 basis points from when they first started cutting rates.

Speaker 2

So I'm not sure kind of what that means. And so we think that flat is a reasonable basis for going forward. But if that were to be more attractive, we're going to look at what can we do to again build businesses, but also coincident with driving our efficiency ratio below 50%. We think we can adjust on an adjusted basis. We think we'll be there by the end of this year irrespective of maybe the scenario you're outlining.

Speaker 5

Got you. That's helpful. Thanks.

Operator

Our next question is from Nick Holico at UBS. Please go ahead.

Speaker 11

Hi, good afternoon. Wanted to just circle back on the earnings at risk disclosure for the quarter. I know you pointed to the shock scenario and it seems like you are fairly neutral under that situation. But looking at the ramp scenario, it looks like you swung from a liability sensitive position to an asset sensitive position. So I was just wondering if you could unpack a little bit what drove exactly those changes there.

Speaker 11

Thank you.

Speaker 2

Yes. So I alluded to this a little bit earlier, but I'll maybe go into more depth. So the assumption set on the ramp scenario on both the net interest income and earnings at risk is that we are basically putting most of our earning assets loan growth on with a variable rate usually tied to 1 month SOFR or something like that. And we've done that in part because we think that that's been helpful to the clients to some degree. And so we've kind of let that go and of course we get fees for that.

Speaker 2

If we think this is going to play out where we are going to see rates down 100 basis points, and again we're not calling for that, but could happen certainly. We expect that we'll be swapping that fix and hold those asset yields higher than they would otherwise be if they fell. And that's how we can really manipulate this and have earnings at risk also positive in a declining rate environment as it was as you directly as you stated it was in the Q3.

Speaker 11

Got it. Thank you. And then maybe just one follow-up again on the ECR costs. I know they came down maybe a little bit less than you anticipated in the quarter. Is an 81% beta like you had assumed in the prior earnings at risk?

Speaker 11

Is that still a fair way to think about the sensitivity there to rates?

Speaker 2

Yes, it is. We think it's going to pick up a little bit. So we have this situation going in basically starting from mid of the third quarter where you were going to see these successive jumbo cuts, 50 basis points in a row. And as you know, we ended up getting 3 cuts aggregating to 100 basis points. And then the expectation, which was originally we were going to have 7 cuts in 2024, kind of really dissipated and now we're kind of at 2.

Speaker 2

So as that's taken place, we're not repricing our loans below a SOFR base rate in terms of what they were before. And so that has really kind of held that up. In terms of the catch up on the ECR side, those were also also it's a little bit of a I don't know, it's a leapfrog process in terms of what are we doing with the client, what are they seeing elsewhere, what are their other options. And so it's been a successive cut and so we've cut these several times. We cut them in December 1.

Speaker 2

We cut them again in January 1. And I think we basically kind of cut up. But that is why it's been a little slower on the ECR catch up than what we originally expected.

Speaker 3

Yes. And I think this is Steve again. I think we had some outliers where we had to pin a little bit more, but we were able to kind of trim those back in and that kind of readjustment is done. But it was kind of we did it in increments and now those cuts over and above Fed funds have now been made and you'll see the benefit of that starting in 2025.

Speaker 11

Got it. Thanks for taking my questions.

Speaker 5

Thanks. The

Operator

next question is from Andrew Terrell at Stephens. Please go ahead.

Speaker 9

Hey, good morning. Not to beat a dead horse on mortgage, but Dale, was there a fair value mark on the HFS book that came through the gain on sale income this quarter? And if so, are you able to quantify that?

Speaker 2

No, there wasn't. And it was stronger than kind of we anticipated. And seasonally, the Q4 tends to be a little bit lighter. I did mention that we sell CRA qualifying loan pools and securities pools. We'll securitize it for people that want some kind of a census track, zip code, whatever.

Speaker 2

And obviously, those bespoke types of securities and pools come with a premium price from us. That helps. Maybe there's some seasonal elements to that for year end window dressing for reporting purposes. But in any event, again, I look at the 4th quarter revenue from AmeriHome and I compare it to the Q1, which is now a seasonally stronger period that we're entering now, and it's really right on top of each other. So we think holding basically where we are in 4Q for mortgage revenue going into 2025 is reasonable.

Speaker 3

And this is Stevie. And I just think in the Q4 what ended up happening is we assume the loan will be sold to Fannie, Freddie or issued into Ginnie Security. But in the often case, I mean, AmeriHome is a wonderful company and they will build spec pools or they'll build a pool of loans and sell them to an insurance company or a bank that's exactly tailored. Hey, we want $200,000,000 in these five counties in Florida and they'll pull that from inventory. And so they'll kind of build you a semi custom suit and they get a premium for that.

Speaker 3

They do a really nice job of building to suit for people that want to buy loans. And that doesn't come through in the margin, it comes through in kind of secondary gain. We include margin as if, hey, we delivered the loan to Fannie Freddie, a gain over and above that, we take as a secondary marketing gain and we track it separately. But we saw a nice uptick in activity in the Q4 there.

Speaker 9

Got it. Okay. I appreciate that. And then on the fee income guidance for 2025, do you assume any securities gains within there?

Speaker 2

None.

Speaker 9

Okay. And then lastly, just Dale, I know we talked some on crypto back in 2022 timeframe. I think you guys were at one point working with Passit. This administration is clearly taking a bit of a different stance around crypto and we've seen a few banks talking about it more and more. I just want to gauge your appetite on kind of the crypto space overall and whether it's something interesting to Western Alliance.

Speaker 2

Yes. I mean, I have long been an advocate for blockchain technology. I mean, I look at SWIFT and what it takes to send money to Hong Kong versus USDC. I can do that in less than a minute. And so that there isn't a breakthrough here in terms of transferring funds.

Speaker 2

And with all the AML and everything else behind it, I think makes sense. We are a fully compliant process with regulators on this and we're working with them as we step into it. But we have about 2% of our deposits coming from this source presently. I think that there's kind of more opportunity there over time. But again, we're working with the best, most well heeled participants in the space.

Speaker 2

But you're right, I mean, I do think it is a little bit more accepted from this administration than maybe what it has been in the past.

Operator

Our next question is from Anthony Elion at JPMorgan. Please go ahead.

Speaker 12

Yes. Hi, everyone. Your NII outlook assumes 2 rate cuts in this year. Can you talk about the impact still to the ranges and outlook for both NII and ECR deposit costs if we don't get any cuts this year?

Speaker 2

Yes. I mean, we're I mean, I think that's kind of where we are. I mean, we're it's really flat for us, in terms of kind of this kind of net interest income guide. So again, the sensitivity report you see is changes off of the baseline. And we think those are imminently manageable by us within this kind of relevant range of plus or minus 100 basis points.

Speaker 2

The guidance we're giving you is really based upon what we think is going to happen. So and we've got 2 cuts in there, minus 50 basis points, say that 0, which I don't think is a very I think that's a reasonable probability that there aren't any cuts this year. We have the same guidance because our variability on our rate environments, both on a shock as well as a ramp scenario is, I think fairly negligible and easily within our management capability to be able to pin down.

Speaker 6

Thank you. And then just

Speaker 12

a follow-up on capital. I want to get your latest thoughts on M and A, just given you're getting close to the $100,000,000,000 threshold, but we now have a regulatory backdrop with the new administration that's likely going to be more favorable for all banks. Thank you.

Speaker 2

Yes. So I mean, I think different banks have different ideas of how they're going to cross over $100,000,000,000 There are additional costs associated with that that I think a lot of participants have kind of laid out. I mean, for us, we're not dependent upon doing an M and A deal to successfully move over. We have a strong organic growth engine over the next 2 years, as we kind of finally prepare for LFI status. We're going to focus on having our good kind of core growth deposits and loans, but also improving our performance metrics, I.

Speaker 2

E, we still have some borrowed funds, we still have some brokered deposits. We can push those down, we can get higher quality sources that will drive up our return on tangible common equity, that will drive up our ROA and our margin during this period of time. So we're not sitting back. And then let's say we're hovering kind of below $100,000,000,000 at that point in time, it's like, okay, we got a green light, let's go. We could put in a little bit of that and move through, say, to north of 110 or something with our capital ratios high enough and still maintain what we say is our floor above 11%.

Speaker 2

And we'll be able to do that and swallow any additional charges to do that. So we have a path to be able to do it without it. I got to tell you, if you're going to plan on doing M and A on this, it really does complicate your LFI transition life because now I've got to figure out a plan for how am I going to migrate all of their applications, either convert them to us or in advance or how are they going to be compliant such that on a consolidated basis you're compliant over 100. We think it's probably easier to wait until you're kind of through that hurdle before you do that, if any size.

Speaker 11

Great. Thank you.

Operator

Our next question is from Jon Arfstrom, RBC Capital Markets. Please go ahead.

Speaker 13

Hey, thanks. Good morning, guys.

Speaker 2

Good morning.

Speaker 13

Dale or Tim, on provision reserves, should we assume a provision that matches loan growth in your NCO guide? Is that too simple or is that the right way to look at it?

Speaker 2

Yes. I mean, it's too simple, but it's still the right way to look at it. I mean, it's obviously, there's complex computations here. There's overlays of what's going to transpire. We look at Moody's Analytics and what they expect on their adverse scenario and their consensus forecast.

Speaker 2

But at the end of the day, we put an overlay in that took us up a couple of basis points. We did that by taking a more dour view of the S-three, the adversary. We included an 80% weighting on that and that's how we came up with this additional overlay there. I don't think we need it, but we're aware that others have also have overlays. And so that's kind of a situation that we added to.

Speaker 2

I don't think that there's anything else that we need to do. And so I think that could go forward like that.

Speaker 4

Yes. I'd add the very nature of the HCL is if we had anything like that contemplated, it would already be in there. So we've looked as best as we can forward. We've taken that and brought it back to current and we feel very comfortable with our HCL.

Speaker 13

Okay. Good. Fair enough. And then maybe Dale, one for you, the crystal ball. Just your level of confidence in the high teen ROTCE level as you exit 25, I think, suggests a pretty strong step up in the earnings run rate exiting 25 when you flow through the model.

Speaker 13

And just curious, does the Dales crystal ball say 15% to 17%, 17% to 19% and just overall level of confidence in that? Thank you.

Speaker 2

Well, yes. So I mean, so we're 14.5% here. I see it pretty easy to get over 15%. And then where can we go from there? I mean, there could be some seasonality effects in there in the Q4 with maybe a little bit of a deposit drawdown, which has been our seasonal experience.

Speaker 2

But so but in terms of kind of what we see in front of us with the business opportunity, I don't think I'm going to necessarily kind of draw a straight line to something, but I mean to me upper teens is north of 16 and no higher than 19. So I'll call it that.

Speaker 13

All right. Well, thank you. And then just one more just on the expenses. You've got FTEs that have grown quite a bit sequentially in year over year. Is that all just Category 4 prep?

Speaker 13

Or how would you split that between business growth and maybe regulatory? Thanks.

Speaker 2

There has been Category 4 preparation. But in addition to that, we've actually been hiring people at AmeriHome, if you can believe it. So with what's transpired there, they've done some things that kind of help their revenue, including some kind of direct originations in a limited basis. Those margins are a big multiple over what they get on the wholesale side and that's been another kind of notable area of investment.

Speaker 10

Thank you.

Operator

Our next question is from Jared Shaw at Barclays. Please go ahead.

Speaker 14

Hi, this is John Rauhan for Jared. Just a couple of quick modeling questions. What portion of the securities book is floating rate?

Speaker 2

No, 15%. Okay, perfect.

Speaker 14

Okay, great. Thank you. And then just going into the components of loan growth for 2025, it sounds pretty broad based. Any differences in the spreads on those loans or the yields on those loans that you're adding on relative to what was added to the balance sheet in 2024 based on this different mix competition level, anything in there worth commenting on?

Speaker 2

Jan? Well, so I mean we sort through this regularly and look for opportunities based upon our risk assessment of these categories and obviously the return opportunity. Things that I mean what we're doing in lot banking kind of had strong returns. We've seen some areas that will kind of tighten up all those things that we've maybe been less interested in, but we've got opportunities in the top space and the regional banking space.

Speaker 1

I think we've tied up a little bit in the market and the mortgage warehouse and so I think we're going to

Speaker 2

see a little slower growth

Speaker 4

there than we've had. I'd just add, we've had some real lift

Speaker 1

in some projects as far as in our investor dependent cost

Speaker 14

Okay, perfect. Thank you. And then just one last one. The mortgage servicing portfolio looks like it has been trending down over the last few quarters. Should we expect that to continue shrinking?

Speaker 14

Just outlook for that, the size of that business.

Speaker 2

Yes. No, we're going to have that basically flat from here. I mean, it does move around a little bit just on valuation rates rise. It tends to increase, of course, the extension of those mortgages and how long they're going to last before the refi. But no, I think you should look for that to be fairly flat going through this year.

Speaker 3

Yes, Steve, we'll sell a pool and then it'll take a few months for us to replenish that. That. I mean when you can sell in larger blocks, you get better pricing. So you'll see it kind of move down, but then we'll replenish that over the next 2, 3 months. So it should be relatively average the same number.

Operator

This concludes the Q and A session. I will now hand the floor back to Dale Gibbons for any closing remarks.

Speaker 2

Thank you all for your participation today. We appreciate your continued interest in our company. Have a good day.

Operator

Thank you all for joining today's conference call. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
TOR Minerals International Q4 2024
00:00 / 00:00
Remove Ads