Good day, everyone. Welcome to Western Alliance Bancorporation's Second Quarter 2024 Earnings Call. You may also view the presentation today via webcast through the Company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.

Thank you. Welcome to Western Alliance Bank's second quarter 2024 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements, which are subject to risks, uncertainties, 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 the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the Company's SEC filings, included in the Form 8-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.

Thank you, Miles. Good morning, everyone. I'll make some brief comments about our second quarter earnings before turning the call over to Dale, who will review our financial results in more detail. After I discuss our updated 2024 outlook, Tim Bruckner, our Chief Credit Banking Officer for Regional Banking will join us for Q&A. Western Alliance earned $1.75 per share in the second quarter and demonstrated the bank building momentum as our repositioning strategy has transitioned into an earnings growth strategy. Growth will be accompanied by an elevated risk management architecture as well as an enhanced liquidity profile and capital base. Thoughtful balance sheet growth in Q2 drove an upward inflection in net interest income from increased liquidity deployment into higher-yielding earning assets. We generated outsized core deposit growth of $4 billion and HFI loan growth of $1.7 billion or 14% on an annualized basis from Q1, which we expect will exceed our peers. CET1 capital remained at 11%. Deposit growth in excess of guidance lowered our HFI loan-to-deposit ratio by 2 points to 79%. Our liquidity profile was also bolstered by a $1.7 billion increase in securities and cash from quarter-end, which allowed us to pay down borrowings by $634 million and broker deposits by $222 million. Our differentiated national commercial banking franchise uniquely positions us to generate sustained deposit growth from various business lines and deploy this liquidity into attractive no-to-low loss C&I commercial loans where we have deep segment and product expertise. Asset quality overall is normalizing, which we expected. Total classified assets declined $33 million in the quarter to 93 basis points. Net charge-offs were 18 basis points of average loans, the majority of which relate to the downtown San Diego office property we identified on this call a year ago when it migrated to substandards. I think it's also important to note that the renewed earnings power of our franchise strengthens our ability to consistently compound capital and generate risk-adjusted earnings growth to support the Q3 and Q4 earnings ramp we have previously communicated. For the quarter, net interest income grew 39% annualized, driven by higher average earning assets and an expanding NIM. Annualized deposits and HFI loan growth of 26% and 14%, respectively, pushed net interest income higher. Higher ending balances compared to average balances establish a higher jumping-off point to increase net interest income going forward. In total, pre-provision net revenue adjusted for the FDIC special assessments in Q4 and the rebate in Q1 is 22% annualized and is poised to continue its upward trajectory. At this point, I'll turn the call over to Dale for a review of the financial results.

Thanks, Ken. During the second quarter, Western Alliance achieved pre-provision net revenue of $285 million, net income of $194 million, and earnings per share of $1.75. Net interest income rose by $58 million to $657 million compared to Q1, driven by increased average earning asset balances and yields. Non-interest income fell by $15 million from the previous quarter to $115 million, mainly due to lower income from equity investments and reduced mortgage revenue. Mortgage loan production increased by 14%, and interest rate commitment volume went up by 24%, although the gain on sale margin decreased by 3 basis points. Non-interest expenses stood at $487 million; deposit costs rose to $174 million to support strong loan growth in a high-rate environment. Net interest income growth surpassed the rise in deposit costs by $21 million this quarter as mortgage warehouse deposit growth benefited from market share gains during the industry disruption in the first quarter. We believe that Western Alliance's Warehouse Lending Group has established itself as the leading bank in this sector. With our improved liquidity profile, we are well-positioned to proactively reduce the cost of these deposits as we anticipate the first-rate cut. The provision expense of $37 million was due to loan growth above industry trends, alongside $23 million in net charge-offs. Securities and cash saw an increase of $1.7 billion quarter-over-quarter, which enabled a further $634 million decrease in period-end borrowings. Loans held-for-investment rose by $1.7 billion to $52.4 billion, and deposits increased by $4 billion to $66.2 billion by the end of the quarter. Additionally, tangible book value per share continued to grow, rising 3% or $1.49 since March 31 to $48.79. Loan growth was primarily attributed to commercial and industrial categories, which increased by $1.9 billion, counterbalancing significant reductions in residential and consumer loans by $179 million and in construction and land by $69 million. Loan growth in mortgage warehouse, technology and innovation, and fund banking contributed to diversifying our loan mix while we decreased our concentration in commercial real estate. Year-over-year, commercial and industrial loans increased by $5 billion. The $4 billion growth in deposits was primarily driven by mortgage warehouse funding and was supported by increases in Jewish Banking and our digital consumer channel. Non-ECR, non-interest-bearing deposits have now seen growth for three consecutive quarters, and we are optimistic about the momentum of our diverse deposit channels, which should continue to enhance deposits that incur no direct or imputed interest costs. Looking at our net interest drivers, the yield on total securities rose by 21 basis points to 4.87%, regaining two-thirds of the prior quarter's decrease due to high-quality liquid asset growth from the first quarter. Our efforts in liquidity management have allowed us to incorporate more higher-yielding securities into our portfolio. Our liquidity remains strong, with unencumbered high-quality liquid assets constituting 53% of securities and cash, compared to 52% last quarter. Overall, securities and cash accounted for 26% of our assets. Yields on loans held for investment improved by 2 basis points as a result of asset repricing benefits from the persistently high-rate environment. The momentum in back-weighted loan growth resulted in period-end loan balances surpassing average balances by $1.7 billion. The cost of interest-bearing deposits increased by 6 basis points from the previous quarter, while the total cost of funds decreased by 3 basis points to 2.79% because of a shift in deposit mix toward non-interest-bearing accounts and the paydown of short-term borrowings. Overall, net interest income grew by $58 million due to higher average earning asset balances, reflecting the full quarter's impact of liquidity deployment into securities towards the end of Q1, along with a 3 basis point decline in the cost of liability funding. Net interest margin expanded by 3 basis points from the first quarter to 3.63% due to the $5.9 billion growth in average earning assets, with funding primarily sourced from non-interest-bearing liabilities this quarter. Our adjusted efficiency ratio for the quarter was 52%, with net interest income growth being the main contributor to this improvement. Deposit costs rose by $37 million attributable to higher average ETR-related deposit balances. As previously mentioned, these increased balances supported commercial loan growth and financed floating-rate securities that contributed to robust net interest income growth. Other operating expenses remained largely stable from the previous quarter. As noted earlier, asset quality is returning to normal. Total classified assets decreased by $33 million this quarter to 93 basis points of total assets, and non-performing assets were roughly unchanged from last quarter. Approximately two-thirds of non-performing loans are paying, excluding the San Diego property previously mentioned, which we anticipate moving into other real estate. In the most recent quarter, net loan charge-offs amounted to $22.8 million, or 18 basis points of average loans, primarily linked to the San Diego office property. Provision expense of $37.1 million addressed net charge-offs and increased reserves to align with loan growth. Our allowance for funded loans rose by $12 million from the preceding quarter to $352 million. The total loan allowance to funded loans ratio remained steady at 74 basis points, covering 97% of non-performing loans. Our strategy to grow loans in inherently low-loss categories has resulted in a reserve level that is lower than that of some peers. Incorporating the impact of credit-linked notes, our allowance for credit losses increased from 74 basis points to 132, shielding us from first-loss uncovered credits and supporting low loan-to-loan loss categories such as equity fund resources, our low loan-to-value residential portfolio, and mortgage warehouse loans. Specifically, we hold $447 million from insurers linked to first losses on an $8.9 billion mortgage portfolio, leaving us with no loss risk. Residential loans not covered by insurance have a loan-to-value of 62% at origination and likely even lower currently, with borrowers holding FICO scores of 766 and debt-to-income ratios of 33%, having incurred no losses. We have also experienced no losses on capital call loans and mortgage warehouse credits, reflecting strong credit quality. A significant portion of our portfolio is in these low-risk categories compared to other institutions. Our reserve level is reinforced by our low realized losses. We have consistently discussed our proactive mitigation strategies and our disciplined lending approach. Our historical migration performance, as illustrated, shows that over the last three years, we have reported approximately one-third of the peer median in net charge-offs relative to average non-performing loans. In the past decade, we ranked first with a mere 9.6% net charge-off rate. The table indicates that our allowance substantially exceeds net charge-offs over the last 12 months, placing us among the top third of peers. Our allowance for credit losses covers our net charge-offs from the last four years by 4.3 times, marking the second-best performance in our peer group over that time. Our CET1 ratio remained at 11%. Our tangible common equity percentage of total assets dipped by around 10 basis points from Q1 to 6.7% because asset growth in low-risk categories surpassed organic capital formation from higher earnings. It is worth considering additional sources of loss-absorbing capital when assessing our balance sheet; in this regard, our CET1 capital ratio, inclusive of AOCI marks and loss reserves as a percentage of risk-weighted assets, positions us in the top third among peers. Notably, among the six peers shown on Slide 14 that hold higher allowance to net charge-off ratios over the last year, only two possess superior adjusted capital ratios to ours. Lastly, tangible book value per share rose by $1.49 since Q1 to $48.79 due to growth in retained earnings, representing an annualized growth rate of around 13%. Our steady increase in tangible book value per share has outperformed peers by seven times since the end of 2013. I'll now turn the call back over to Ken.

Okay. Thanks, Dale. Following our Q2 results, I would like to update the Bank's 2024 guidance as follows. A building pipeline provides clarity to continued loan growth at $1 billion per quarter in a safe, sound, and manageable manner. Our current loan-to-deposit ratio provides flexibility to selectively make more loans as opportunities arise. For the full year, loans are expected to grow $4.5 billion compared to the $4 billion previously, and deposits are expected to grow $14 billion, which is $3 billion above our previous forecast. Deposit growth in Q3 is expected to be $2 billion. Turning to capital, we expect our CET1 ratio to remain at or above 11%, capturing the forecasted increase in loan volume as organic earnings growth supports rising loan and investments. Net interest income is now expected to grow 9% to 14% from the Q4 2023 annualized jumping-off point. Our rate outlook includes two 25 basis-point cuts in the back half of the year. NIM is expected in the 360 area for the remainder of the year and Q2 ending loans balance versus the average for deposit and loans provides continued net interest income momentum for the back half of the year. Non-interest income should increase 15% to 25% from adjusted 2023 baseline levels. Our upward revision reflects growth in commercial banking fees as well as incremental improvement in other fee segments. Non-interest expense, inclusive of the ECR-related deposit costs is now expected to rise 9% to 13% from an annualized adjusted Q4 baseline of $1.74 billion, primarily from the greater ECR-related deposits, which fund attractive balance sheet growth and grow earnings. In aggregate, these factors should enable WAL to sustain PPNR to provide the organic capital to support balance sheet growth and the CET1 target while offering us the ability to maneuver around various economic and operating environments. Asset quality is normalizing from historic lows, and net charge-offs are expected to remain low by industry standards at 15 to 20 basis points of average loans for the year. At this time, Dale, Tim, and I will take your questions.

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

Hi, good morning.

Good morning, Jared.

Thanks. Maybe just looking at the loan growth, you've had great loan growth. Obviously, this quarter, as we go forward, any change in sort of the geography of where that's coming? You look at the CRE portfolio that's been a little bit under pressure. Should we think that it still is coming from the same primary areas of C&I, or could there be an expansion into some other areas?

Yeah, thanks. Although for the year, and also for the quarter, and also year-over-year, the majority of our growth is coming in the C&I categories. And again, that's in a no-or-low loss loan segments. And I think we're going to continue to move forward in that manner. I think what you can expect for the rest of the year is to see continuous downward movement in our residential loan portfolio as you saw this quarter. I think you'll find CRE overall will be relatively flat. We will look for opportunities to finance. We do like pockets of financing in the construction land and development, most notably, we've always talked about this. Our lot banking segment will provide opportunity. But the short answer, I guess, is that mostly it's going to come in C&I, note financing, and warehouse lending are the two areas that are going to lead the way.

Okay, thanks. On the fee income side, are you still expecting the Fed funds cut to positively impact mortgage banking? What trajectory should we anticipate following those two cuts?

Right. So for our forecast, we have a rate cut in September and a rate cut in December. We are forecasting a modestly declining mortgage income, mostly because the Q4 rate cut won't yet come in a quarter that's seasonally low in terms of volume. So we would expect to see a pickup from the rate cut in terms of mortgage volume really follow into 2025, more so than the back end of Q4. So it’s basically Q4 which is a seasonally low quarter to begin with.

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

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

Hi, everyone.

Hey, Steve.

Let me start by asking about the ECR deposits. Can you provide more insight into what led to such significant growth? Additionally, was the increase in interest expense solely related to this growth, or did the effective rate also rise?

Okay. Two questions there. So first, the growth came in warehouse lending. All right. And what we have found from the first quarter disruption in the market that Western Alliance's Warehouse Lending Group has become really the premier platform to hold your escrow accounts on and also come to us for warehouse lending and NSR loans. So that volume is coming in for that reason. Also, we've had a number of market share gains. New clients coming in, that's one-type of market-share gain and existing clients that we currently have, have given us more of their deposits. So that's kind of push on that segment, which carries a higher ECR. Now with that liquidity, we've been paying down and will continue to pay down our short-term borrowings. And to your other question, we do have several initiatives that we are launching to kind of work on the rate and see if we can push that rate downward as we go into Q3 and exit Q4.

Okay. That's helpful. Ken, in terms of the deposit growth getting lifted again, were you guys just very conservative? Is growth coming in much more than you guys expected? And it's funny when we look at the second half, you did $11 billion of deposits in the first half. I think you're guiding like $3 billion in the second half. I know there's some seasonality in the fourth quarter, but are you just being very conservative here?

Yes. So let's talk about the seasonality first. In warehouse lending, we see an outflow of deposits every Q4. So some of the deposit growth in Q1 of 2024 was the return of those tax escrow payments that were made. And usually, that runs between $3 billion and $4 billion that flows out in Q4. So while I'm saying $3 billion net growth, then you can see that we're accounting for the $3 billion to $4 billion that's going to fly-out the door or flows out-the-door at the end of the year. Where we're getting it from is what's interesting is for this quarter, as an example, 58% of our growth really came from our deposit-only channels. And so we've launched a number of them, as you probably know, business escrow services, Corporate Trust, juris banking, and of course, HOA, which started about 12 years ago when I first joined the bank. And that's where the deposit vertical growth is coming from. In addition, our consumer lending, our consumer digital platform has really taken off, and we're doing quite well there. And we had another strong quarter in Q2, and we saw our deposit growth drive $673 million. So since we actually launched the consumer digital channel, I'll give you a number as of today because our folks are very proud of that they just shot as a note. But inside of a year and a half, that channel has moved up to about $4.5 billion and just provides another channel for us that we didn't have before at a cost point or price point, which is rather consistent with our commercial pricing. Right? So we don't have a consumer base, as you know. So we don't have to worry about cannibalizing our consumer base and having them move from low rates to higher rates. Here, it's consistent with what's happening in our commercial book. And it provides another channel for us to use almost as a challenger channel to other deposits that are coming in to hold the line or try to push those deposits down over the long-term.

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

My pleasure.

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

Thank you. I guess maybe as we think about lower rates and the NII outlook, Dale, if you don't mind reminding us including the ECR-related deposit costs, how should we expect sort of NII to trend if those rate cuts from September and December continue into '25, is that positive overall for the NII, NIM inclusive of ECR or negative? And secondly, what determines whether you end up at the 14% versus the 9% for this year on NII outlook?

So yeah, regarding your first inquiry, Ebrahim. Yeah, so we're fairly neutral on an aggregate of net interest income plus our deposit expenses. And maybe as Ken was alluding to earlier with the discussion about our mortgage operation, we're not sure that that's really going to kick in until we get a little more than one for the fourth quarter and then two moving into the beginning of 2025, a little more rate relief on the mortgage rate environment. So we feel comfortable where we are. And I think within the relevant range that we're going to see later this year, we're going to be fairly neutral on, I'm going to say, PPNR related to interest-rate movements, both inclusive of interest expense and deposit costs.

And I'll take your second part of your question, which is what factors influence how we will perform in the second half of the year? I think you can expect Q3 that you'll see net interest income continue to rise. And then in Q4, you can expect net interest income more or less to be flat to Q3. And one of the factors there, one, is our continued upward movement in loan growth. That's very important. And overall, our total revenue should in Q4 should be relatively flat to Q3. So we are making up some of the decline in yield by having higher volume in loans and also working some other fee-based channels that we have and then we've been working those fee-based channels and developing them over the last year.

Got it. And I guess just a second question, Ken, I do want you to address from a credit standpoint, these are really low numbers, of course I get it, but it's been an overhang on the stock for three or four years. Just talk to us outside of things going through the pipe, your visibility in terms of credit quality outlook over the next six months, 12 months, 18 months? Where do you anticipate some weakness drivers of losses ex all the things that you've said are low loss kind of pieces of the loan book? Would appreciate that.

Hi, yes. Thank you. So, Dale, I think did a nice job of really covering some key measures of success in the portfolio in his discussion. So I'd start by saying we're very pleased with our portfolio performance. And then when we look forward, we've taken every opportunity to describe, we focus on early elevation and early resolution. So we really take a forward-looking approach when we view troubled loans, portfolio performance, and our ACL. So our forward estimates that Ken talked about at 15 basis points to 20 basis points include all current valuations, anticipated value-based changes to carry assets that may default and are based on the market conditions that we're living in today. So we update these values and assess each exposure always on an ongoing basis.

Got it. Thank you for taking my questions.

Our next question comes from the line of Brandon King with Truist Securities. Brandon, please go ahead. Your line is now open.

Hey, just a follow-up on the credit conversation. So the guide implies some increase in net charge-offs for the second half of the year. But just wanted to get a sense of what changed from last quarter to imply kind of a higher run-rate?

Yeah, I think we really look at this all the time as a forward-looking estimate and we really didn't make a significant change in terms of percentage of dollars. We update based on current conditions, and we'll continue to do that. So from our standpoint, we're optimistic and we are maintaining really a stable outlook on our portfolio. So we update our appraisals on our non-performing loans approximately every six months, and we're giving more clarity. Some of these markets don't have a lot of transactions. And so as that comes in, you know, we saw something in terms of the San Diego property, we took that immediately. You see that here to put us a little bit above the 15% kind of upper limit that we had as of our first quarter guidance. And so we expanded that to kind of 15% to 20%.

Could you provide more details about the San Diego loan, specifically regarding the updates on its foreclosure status and your plan to manage the asset?

Yes. We were in the process of moving towards foreclosure and we took the appraisal charge as mentioned. Our plan is to reposition the asset, increase occupancy, and eventually sell the building once the occupancy level is higher than it currently is. This is the typical approach anyone would take; it's similar to how you would enhance the value of a property after purchasing it. That’s exactly what we aim to do.

Okay. And then just lastly, really leaning into mortgage warehouse deposits, any thoughts around concentration levels? I know it's continuing to creep up there, but how do you feel about the concentration of your total deposit base, particularly within Warehouse?

Yes, first, so there's good news and an interesting story here, okay? The good news is, as we continue to become one of the premier platforms in the industry, we're seeing all these deposits come in. That's great. We are also getting market share wins. That also is great. The flip side of that is a higher concentration. And so you've seen our HQLA grow. And so we are not putting all that liquidity out to finance loans but rather holding that liquidity on our balance sheet and making a small spread. What we will do over time is work with our clients to work through or reposition current pricing models given the liquidity that we have. So a year ago, there was a premium place on liquidity and people said, if you want my liquidity, you have to pay out for it. Well, things have changed a little bit now. And as a premier platform, I think there's a discount that people have to take when coming to our platform for our service levels for the ability to do multiple things, not only handle their escrow deposits, but also provide financing. And we're going to see if they value it that way. And so we're going to work in that particular segment to scale down or push down some of the rates that we're paying.

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

Got it. Thanks for taking my questions.

Our next question comes from the line of Timur Braziler with Wells Fargo. Please go-ahead, your line is open.

Hi, good morning. I'm wondering if you can provide us with an update on the large financial institution spend, kind of what's left to be done there? And I'm just wondering if the faster growth rate of the balance sheet, what that implies for the timing of completion of some of those projects?

Yes. So we've indicated in the past that we're approximately 3/4 of the way through with complying with where we need to be to sit over $100 billion. I wouldn't extrapolate too much from our growth rate for the past few quarters and say make that trajectory in terms of when we're going to cross over $100 billion. We still have about $6 billion of borrowed funds, about $6 billion of brokered deposits and we're going to be paying that down in a more accelerated fashion. So you're going to see our total assets grow at a slower rate than what you've seen over the past few quarters. That said, though, we're on track with this. We're developing whatever plans we need to finally get there. We do not see a significant step variable cost in front of us to be able to get over that hump, except for potentially what is related with this TLAC, total loss-absorbing capacity, we need to do more debt there. But even in that situation, based upon the end game prototype, which I think is being revised, we have until '28 to kind of get there.

Got it. And then maybe just following up on Ebrahim's question around rates. I guess, how would the cadence of rate cuts potentially impact your ability to lower ECR costs and benefit some of the other mortgage-related activity, i.e., if we just have one rate cut or if the rate cuts are spread out, how would that affect your ability to maybe lower some of those ECR-related expenses?

Well, most importantly, the fee is broken on rates. I mean, there are no places where others can go and get kind of substantially higher rates as we had when we were in an expected higher-rate environment, you could go to treasuries or some of these other products and to be a competitor against deposit rates. Plus, the situation within the banking space has become somewhat more relaxed as well. However, these are entities that control significant amounts of dollars and so they can get something, you know, at or near what would be kind of the market rate of interest. But as I said earlier, I mean, we're in a position that we can, I think, start to kind of use our leverage with our strong balance sheet with our strong delivery system within this space that we think we're now kind of be the premier player to be able to affect a more significant cost mitigation strategy going forward. But a simple answer is as rates move, full ECR rates. The Fed cuts in September, you'll see that flow-through starting immediately.

Got it. And then maybe if I could just sneak one more question in around mortgage banking. There was a comment in the release on maybe elevated loans held-for-sale and doing more conforming mortgages. And then in the deck, part of the rationale for the higher-fee income guide was that margins are firming up. It looks like gain on sale margin actually declined a little bit here, but are we starting to reach an equilibrium kind of with the new production? I guess, what are the expectations for gain on-sale margins in the context of the 2Q decline?

Yes. So gain on sale margins in Q1 were higher than Q2. In Q2, you saw mortgage rates move back up above 7%. They're firming now, and we are optimistic, but we don't haven't captured into our forecast yet that as more people get comfortable that rate cuts are coming and with the shortage of supply and housing in the market that more people will start returning. You're seeing a little tick-up now in refinance activity, but we're looking forward to the purchase activity to really drive us. But from a forecast point-of-view, we're going to wait to see that flow-through our P&L before we capture it in our go-forward consensus outlook.

Great. Thanks for the color.

You're welcome.

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

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

Yes, we increased it by 3 basis points. With the excess liquidity, we made two significant moves. A lot of this excess liquidity came in towards the end of the first quarter, allowing us to deploy average earning assets effectively. Additionally, we are actively working on reducing our short-term borrowings. As mentioned in my earlier comments, for the upcoming quarters, you can expect the net interest margin to remain close to our current level, around the 360 area, which includes the two-rated cards.

Yes, got it. And then just shifting gears to credit. Any color on the uptick in special mention this quarter, what drove that increase?

Yes, it's really a balance with the previous four quarters of last year. We experienced a slight increase from where we spent most of last year, and this is just part of our ongoing review processes. I would say that specific yield situations brought certain credits to our attention, and we will promptly work through those to either elevate them or move them out. It's worth noting that both the special mention ratio and total dollars in Q2 were still lower than the averages from the previous fourth quarter, so there was nothing unusual about that movement in special mentions.

Great. Thank you.

Our next question comes from Bernard Von Gizycki with Deutsche Bank. Please go-ahead, your line is now open.

Hey guys, good morning. So just a question on your interest-rate sensitivity disclosures. I believe you might have made some changes in the 1Q disclosure versus the 10-K, given more granular assumptions on the deposit betas. So for a 100 basis-point decline in rates, you showed net NII down about 7% at $331 million, but wonder if you could update that at $630 million and believe Net I could come in better given higher expected loan growth and benefit from wholesale deposit repricing. So just wanted to see if you could provide some puts and takes there?

Well, okay. So net interest income should come in higher because of what you just said, but the volatility around that on a different interest-rate assumption, again, this is a shock that we show. It's probably going to be fairly similar to what we showed you in the first quarter. So not a whole lot of difference there. And again, I mean, we look at it really looking at net interest income plus the delta that we're going to see in deposit costs, which is going to have kind of the opposite effect. And so the net between them gets to a fairly stable, I'll call net interest-related items in PPNR, combining those two elements.

Got it. And then just separately, just on the fee income, just a question on this. I know the equity investments were about $4 million, which were much lower than the previous two quarters. And I think there's some benefits on warrant income in prior quarters. Just wondering if you can provide any color and expectations from here going forward?

Yes. That's a difficult thing for us to really prognosticate. And so we have equity positions in more than 500 companies and which ones pop or which ones close is a process on how that looks. I mean, there is some correlation with maybe M&A activity. That's been a little restrained for reasons that I think everyone is aware of. And so maybe that's been a factor here. I can't really project you know what it's going to be in the third and fourth quarter. Other than we don't see anything really change going on. So maybe we've got the parameters of where the higher or lower areas could be and maybe somewhere in there. But there's nothing going on there that we think is going to be a magnitude change either better or worse respectively.

Okay, guys. Thanks for taking my questions.

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

Great. Thanks. Dale, if I look at your guide and the ranges in your guide, it would seem that if you're at the midpoint of NII, you'll probably be at the midpoint of the expenses or the high-end, the high-end. Is there a scenario where you're perhaps at the high-end of expenses and maybe the midpoint of NII, or should we just think about them, whatever our assumptions are, they should be kind of consistent?

Yes. I mean, I wouldn't put too much interdependence on the elements in here. There is a correlation, obviously, if net interest income moves up, what does that mean? Is that a relatively higher, you know either rates overall, maybe fewer rate cuts and/or better growth and that can affect what's going on the expense side. But in total, I mean, I think these parameters are reasonably fair. I mean, if anything, maybe we think we're going to do a little better on the non-interest income side, maybe toward the upper-end of that range, but the others I think kind of a midpoint is fairly on target with what we would consider.

Okay, that's helpful, thanks. Regarding the balance sheet strategy, you mentioned the expense buildup in HQLA and TLAC and the capital target of over 11% that has been maintained for most of the year. Is there a situation in which that target might change significantly now that we seem to be past the worst of the crisis and have a bit more confidence in the outlook?

Chris, you blunt down, we missed the first part of that question. Can you repeat it for us, please?

Sure. I guess just closing a loop on the $100 billion investment discussion. Is there a scenario where your 11% CET1 target, I guess, would move materially one-way or the other? I guess is the question.

Yes. I want to maintain the 11% target as we have discussed previously, as the growth generated from earnings will be directed towards funding loan growth. The increase in the CET1 level above 11% will occur at a slower pace compared to what we've experienced in the last six or seven quarters. If you’re asking about a stock repurchase program in the near future, the answer is no. Unlike many of our peers, we feel more comfortable with loan growth driven by low or no loss loan categories, which we believe will enhance the Company’s growth rate for earnings per share over the long term. That is our plan.

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

Thank you. Our next question comes from Samuel Varga with UBS. Please go-ahead, your line is now open.

Hey, good morning. I wanted to ask a question about the Corporate Trust business. Could you give us an update on where things stand, sort of where the pipeline? You mentioned that the investment grade rating is a key catalyst here. Can you just give a broad update on where that business is at?

I believe we may be the only bank that has received positive ratings actions from either Fitch or Moody's, both of which are currently on a positive outlook. While our ratings aren't where we want them to be, we see this as a positive trend. We've made significant progress in our corporate trust operations by collaborating with our corporate finance group to offer a combined product for CLO administration, which we find beneficial. We're quite hopeful about the future. While I would appreciate a ratings upgrade from both agencies, I don't believe it's essential for our continued strong growth in that area, where we currently have over $0.5 billion in deposits. Recently, I traveled with the Corporate Trust Group and our lender finance group, and by combining efforts during client outreach, we have created a pipeline of about 30 clients ready to close deals. This has proven valuable, as we’re able to make investments or lend on the lender finance side, which we expect will lead to mandates on the corporate trust side. More importantly, we've developed a strong corporate trust program. After speaking with individuals from a major bank during the interview process, I identified the need to enhance the technology and customer service levels associated with this program. Based on my conversations last week, I can confirm that our clients feel we have superior technology and that our service levels meet or exceed their expectations. This is very encouraging for us. As we move forward, our Corporate Trust group is expected to generate between $150 million to $200 million in deposits each quarter on average. As we continue to enhance our visibility and expand the group, I am optimistic for greater opportunities as we approach 2025. Overall, I am very pleased with our current activity.

Great. Thanks for that update. And then just wanted to switch back to ECR deposits for one last question on that. Dale, if I understand correctly, the mortgage warehouse deposits are sort of pulling up that paid rates. Is it fair to assume that if 4Q seasonality comes through and those deposits partially flow out, that that alone will be enough to reduce the ECR rate regardless of whether we actually get customer or not?

Sure, sure. So first off, I mean, as Ken alluded to earlier, we're expecting 100% or a little bit above our deposit beta or I would say funding cost beta on the ECRs as rates come down. And so if you get that effect, and then coupled with an expected outflow seasonally, not related to relationships in the fourth quarter, those should have a combined effect going from say a rate tech at their meeting in September into the fourth quarter, lower rate and lower balances, you're going to see a drop-in non-interest expense.

Which gives us the confidence level that our EPS as we move through Q3 and into Q4 will be on an upward trajectory, which is what we've been communicating since the beginning part of the year.

Got it. Thanks for all the color. I appreciate it.

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

Hey, thanks. A couple of questions here. Can you guys talk about the competitive environment in your mortgage businesses? It seems like it's changed. You've kind of alluded to it, you've taken share. Just curious what happens when volumes pick up and how you take advantage of that?

Okay. So what I'm talking about is the warehouse lending group, not the AmeriHome Group, right, that's going to be more and more dependent. But in the warehouse lending group, we've seen a couple of competitors recently drop out of the market, one said that they're selling loans, one sold loans. And what's most important to our clients is maybe this is really when people always say, why is it that you guys grow while others don't. Well, first is that we're a commercial bank and we're national, and we just don't stick to a region. So that's one answer. The second answer is, we don't move in and out of markets and people can count on us to always be there. Now terms and conditions may change because economic conditions change, but we don't pull out of the market and then jump back in. And our clients remember that, especially around warehouse lending, where those lines sometimes get shut down rather quickly and larger banks can make a determination of whether or not they want to be in the business or not. And that's a little bit more serendipitous. For us, we want to be in the business and we look at economic terms and operating conditions, conditions tell us what it is we need to charge and how to be there to support our clients. And I think that's one of the reasons why we've become a premier go-to platform in that segment.

Okay. There's been a lot of discussion on interest rates. What do you guys prefer from a rate perspective? Do you want a couple of cuts? Do you want more than a couple of cuts? What's ideal for you?

That's a question for me and my therapist, but primarily, if rates continue to decrease at a rapid pace, we would anticipate an increase in mortgage fee income and expect to generate more volume on the loan side to help mitigate the impact of the rate decline on our loan portfolio. That would be our strategy. Dale, do you have a different perspective?

No, I agree. I would also mention that there has been some discussion about the ongoing effects of a high-rate environment on commercial real estate, where the cost of debt service has become increasingly challenging over time. This situation has gradually impacted debt service coverage ratios and loan-to-value ratios as capitalization rates have risen. Some relief in this area could provide the entire industry with more breathing room regarding the materialization of non-performing assets and issues connected to maintaining strong asset quality.

Okay. Okay. Fair enough on that. And then Dale, just a quick one on the provision. Given the updated charge-off guide and the growth guide, I think it suggests a relatively stable provision. Am I looking at it the right way, or is there something else to consider?

Yes, I agree with that. However, I would note that we have experienced good loan growth. Our loan-to-deposit ratio has been quite low for the last few quarters, and we have reached a comfortable level with our liquidity profile. If we were to see higher loan growth, it would require us to increase our provision costs, regardless of the earnings we generated from that in the current period.

Which you saw in this quarter. Yeah.

Okay. All right. Fair enough. Thank you.

Thank you, Jon.

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

Yes. Well, thank you all for joining us. We feel very good about the quarter. Just a very special thank you to the 3,600 plus people that worked throughout Western Alliance; they made this quarter happen, and a big thank you to them, and we look forward to our next conference call. Be well, everyone.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.