Hello, everyone, and a warm welcome to the Western Alliance Bancorporation Q3 2024 Earnings Call. My name is Emily, and I'll be coordinating your call today. After the presentation, there will be the opportunity for you to ask any questions. I will now turn the call over to our host, Miles Pondelik, Head of Investor Relations. Please go ahead, Miles.

Thank you, and welcome to Western Alliance Bank's third quarter 2024 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer; and Tim Bruckner, our Chief Banking Officer for Regional Bank, who will join for Q&A. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements, which are subject to risks, uncertainties and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For 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, including the Form 8-K filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione.

Good morning. As always, I'll make some brief comments about our third quarter earnings before turning the call over to Dale, who will review our financial results in more detail. After I discuss our outlook for the remainder of 2024, Tim Bruckner will join us for Q&A. Western Alliance delivered solid third quarter results and earned $1.80 per share. These results demonstrated the bank's ability to sustain diversified loan and deposit momentum, as well as grow earnings during a changing rate environment. We produced healthy deposit growth of $1.8 billion or 11% annualized and HFI loan growth of $916 million, or 7% annualized, despite sluggish demand overall for credit in the economy. Our national diversified credit origination and deposit platforms uniquely position us to sustain strong deposit growth and then deploy this liquidity into attractive commercial loans where we can provide deep segment and product expertise. During a transitional period for the rate cycle that began in Q3, net interest income grew 25% annualized due to higher average earning assets. Net interest margin compressed 2 basis points because of lower yields on variable rate loans. Continued interest rate cuts will enable Western Alliance to realize significant funding cost savings in both interest-bearing and ECR-related deposits going forward. We anticipate a more meaningful benefit from lower rates in Q4 from a full quarter impact of lower rates. Q3 results were modestly impacted by $4 billion of mortgage warehouse deposit growth driven by elevated mortgage refinance volumes, validating our operational excellence as we continue to win market share following several competitors retreating from the market. After the money center banks, Western Alliance is now the largest bank operating in this space. This excess deposit growth somewhat impacted Q3 earnings from elevated deposit costs, but these deposits have helped cement core customer relationships, which will continue to drive strong risk-adjusted loan volume and spread income. Typical seasonal declines in mortgage warehouse deposit balances are poised to push Q4 ECR-related deposit costs materially lower. Non-interest income increased $11 million or 10% quarter-over-quarter, but this growth was tempered by a decline in mortgage banking income. Our franchise remains poised specifically benefit from a resumption of stronger mortgage volume. Pre-provision net revenue grew marginally from Q2, while tangible book value per share climbed 19% year-over-year. Lastly, asset quality remains stable as non-performing assets to total assets declined 6 basis points to 45 basis points. Net charge-offs of 20 basis points landed within our guidance range. Dale will now take you through the results in more detail.

Thanks, Ken. During this quarter, Western Alliance generated pre-provision net revenue of $286 million, net income of $200 million and earnings per share of $1.80. Net interest income increased $40 million from Q2 to $697 million, equating to nearly 25% annualized growth because of higher average earning asset balances driven by loan growth. Non-interest income of $126 million rose $11 million quarter-over-quarter from higher service charges and loan fees, benefiting from commercial banking fees and a new bank-owned life insurance policy, which along with securities gains helped mitigate lower mortgage banking income. Securities gains were taken as we sold the collateral held for a large bankruptcy deposit as it went into distribution. Mortgage loan production rose 21% from Q2 and 10% year-over-year. Loan servicing revenue was negatively impacted by prepayment speeds accelerating due to the declining rate environment, which caused a negative change in the MSR fair value net of hedging of $15 million. Non-interest expense for the quarter was $537 million. Deposit costs of $208 million drove the quarter-over-quarter increase due to strong demand in mortgage warehouse. In aggregate, net interest income growth exceeded deposit growth by $6 million this quarter. It is important to emphasize that the recent 50 basis point reduction in the Fed funds target rate occurred less than two weeks before the end of Q3. Consequently, rate reduction actions for ECR-related deposits were also backloaded. Seasonal outflows in mortgage warehouse from Q4 tax and insurance payments and a full quarter impact of lower rates make us confident Q3 will prove to be the high watermark in ECR-related deposit costs for this rate cycle. Provision expense of $34 million resulted from sustained loan growth and $27 million of net charge-offs. The balance sheet remained at approximately $80 billion with solid loan and deposit growth offset by a decline in securities and cash of $2.4 billion quarter-over-quarter and a further $2.6 billion reduction in period-end borrowings. A large distribution of bankruptcy settlement funds drove a notable decline in Juris Banking deposits, which allowed us to sell the collateralizing securities. Loans held for investment grew $916 million to over $53 billion while deposits grew $1.8 billion to $68 billion at quarter end. Tangible book value per share continues its expansion, rising 6.5% quarter-over-quarter to $51.98 and was aided by a large improvement in our AOCI position. Loan growth of $916 million resulted from contributions from regional banking as well as mortgage warehouse and MSR lending. We continue to diversify the loan portfolio as shown by C&I loans growing over $4 billion year-over-year and now accounting for 42% of the held for investment loan portfolio compared to 37% one year ago. At the same time, we lowered the overall allocation for commercial real estate investor and CLD categories from 29% to 27%. Deposit growth of $1.8 billion was generated from seasonal inflows at mortgage warehouse which grew $4.1 billion, while our consumer digital channel increased $1.3 billion and continues to add more granular deposits uncorrelated with our commercial banking business lines. Homeowners Association deposits also posted growth in a seasonally softer quarter. As mentioned before, Juris Banking deposits have decreased by $2.7 billion. Overall core deposit growth was $2 billion as we modestly reduced wholesale broker deposits by approximately $200 million. Turning to our net interest drivers. The yield on total securities increased 2 basis points to 4.89%. Our liquidity position remains solid as unencumbered high-quality liquid assets were 64% of securities and cash, while securities and cash were 24% of total assets. HFI loan yields decreased 14 basis points to 6.65% due to asset repricing for SOFR type loans in advance of the Fed's rate decision. The cost of interest-bearing deposits was 3 basis points higher as a result of $1.3 billion of quarterly deposit growth in our consumer digital channel. The total cost of funds declined 12 basis points to 2.67% due to the deposit mix shifting towards non-interest-bearing and a smaller proportion of earning assets funded by borrowings. Our adjusted efficiency ratio for the quarter was 53%, modestly higher operating expense growth compared to the revenue growth drove the 120 basis point increase from last quarter. Overall, asset quality remains stable. Non-performing assets as a percentage of total assets declined 6 basis points to 45% due to payoffs and sales. Our non-performing assets consist primarily of CRE office loans, which is unsurprising given the environment characterized by still elevated interest rates and lower office property valuations. Quarterly net loan charge-offs were $26.6 million or 20 basis points of average loans. Provision expense of $34 million added reserves in concert with loan growth in addition to replenishing net charge-offs. The total loan ACL with a funded loan ratio of 74 basis points was unchanged and covered 113% of non-performing loans. Our CET1 ratio increased approximately 20 basis points to 11.2%. Our tangible common equity to total assets ratio moved up approximately 50 basis points from Q2 to 7.2% as our all other comprehensive income loss position recovered substantially due to a lower rate environment. We expect the total criticized asset pools to remain relatively stable. Our CET1 ratio, including AOCI and our loss reserve is 11.1%, which is 50 basis points above the second quarter adjusted CET1 ratio of 10.6% and ranks in the top quartile of our asset class peers. Lastly, tangible book value per share increased $2.19 quarter-over-quarter to $51.98 from earnings growth and our negative AOCI position improving by almost one-third.

Thanks, Dale. Following our Q3 results, we updated our 2024 and Q4 guidance as follows: we expect loan growth of approximately $1.25 billion next quarter to be achieved in a safe, sound and thoughtful manner. Our current 78% HFI loan-to-deposit ratio provides ample flexibility to selectively originate attractive loans. Deposits are expected to temporarily decline $2 billion in Q4 due to typical seasonal outflows of property tax and insurance payments in mortgage warehouse and active management of our deposit mix to maximize deposit betas and lower the cost of interest-bearing and ECR-related deposit costs. Turning to capital. We reiterate that our CET1 ratio will remain at 11% as loan growth continues. Net interest income is expected to decline approximately 3% next quarter due to market tied variable loans repricing slightly ahead of funding costs. This dynamic is a function of the transitional period to a lower rate environment that got underway in Q3. However, ECR-related deposit costs are expected to significantly decline by approximately 25% quarter-over-quarter in Q4 and outpace a decline in net interest income. We expect net interest margin incorporating ECR cost to have bottomed in Q3 and to experience continued expansion into future periods. Non-interest income should increase around 8% to 12% next quarter from traction in cultivating commercial banking fee opportunities and firming mortgage banking income. Non-interest expense should decline between 5% and 9%, mostly from the expected drop in ECR-related deposit costs, given the pivot in the rate environment and the typical Q4 seasonal factors previously discussed. Asset quality remains in line with our expectations. We expect steady net charge-offs in Q4 in the 20 basis point area, which implies full year 2024 net charge-offs should be no greater than 20 basis points. We believe this will still rank among the best of our peers. Lastly, the effective tax rate for full year 2024 is now estimated to fall between 20% and 22%. At this time, Dale, Tim and I look forward to answering your questions.

Thank you. Our first question today comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning. My first question is about deposits. I want to clarify if you were aware of the seasonality last quarter when you increased the deposit guidance for the year. Can you provide some insight on the settlement's impact and how significant the seasonality is compared to these larger outflows? Are there additional deposits that might leave the bank and affect the near-term net interest income trajectory? Let's discuss net interest income, focusing on the larger outflows and the impact of 4Q seasonality, as it didn't seem as prominent in the fourth quarter of last year. Thank you.

Thank you. It seems there has been some confusion. Let me clarify. In the third quarter, we experienced a significant settlement from our Juris Banking Group that arrived sooner than we anticipated; we expected it in 2025, but it happened earlier. It's challenging to predict when such events will occur since they depend on the legal system and agreements between lawyers on settlement terms. Without that settlement, we would have increased deposits by $5 billion in Q3. Instead, we actually increased deposits by $2 billion, reduced broker deposits by $200 million, leading to a net growth of $1.8 billion. In the fourth quarter, we will experience a typical seasonal decline in our warehouse lending group, which always results in outflows for escrow insurance and principal and interest payments at year-end. This will likely decrease Q4's deposit levels by $2 billion. Nevertheless, we foresee our deposit growth remaining steady moving into 2025, targeting an average of $2 billion per quarter. We have good visibility on this due to the variety of homegrown deposit platforms we've developed over the years, including our HOA business and a robust deposit business in our warehouse lending group, along with business escrow services, settlement services, our consumer digital platform, and corporate trust. These deposit businesses, which were not part of our bank a few years ago, are now performing well. Additionally, we are seeing solid deposit growth from our commercial lines of business, previously referred to as our regional business. While discussing deposits on the balance sheet, we also anticipate an average deposit on loan growth of around $1 billion per quarter as we move into 2025. We maintain a much lower loan-to-deposit ratio, allowing us to pursue safe and thoughtful loan growth as liquidity permits, which could enhance our loan growth throughout the year. Dale, since some of these businesses report to you, do you have any comments to add?

No. I think that's pretty comprehensive, Ken. But maybe an addition, yeah, so we see that we have kind of the liquidity that we need to be able to proceed. And as such, pushing up our loan-to-deposit ratio into the 80s from below 80 principally on an HFI basis, we should be able to do that. And there isn't anything like, Ebrahim, on the balance sheet sell. I mean, this was our largest depositor in the whole bank. And so, there aren't anything like follow-through coming in Q4, Q1 or whatever.

Yeah, Ebrahim. I think we might have left that one of the last pieces of your question. You asked if I heard correctly sort of directionally what's going to happen with net interest income? Was that one of your questions as well?

It was going to be my follow-up. So, yes, please, I think you've given the guidance. Just talk to us how that goes, NII plus ECR deposit costs with or without rate cuts?

I feel like I already addressed your question, so I’ll provide an answer. As we look ahead, our plan includes two more rate cuts this year, in November and December, and four cuts scheduled for next year at the end of each quarter. Overall, when you examine our balance sheet, which includes deposit costs, we are sensitive to liabilities. Therefore, our adjusted net interest margin, which is the net interest margin minus deposit costs, is expected to rise in Q4 and continue to increase throughout 2025. Additionally, net interest income after accounting for deposit costs will also rise steadily in Q4 and into 2025. This is due to the decline in deposit costs and the robust growth of the balance sheet, which should lead to a volume increase contributing to the growth of net interest income after deposit costs from 2024. In fact, Q4 2024 is anticipated to be higher than Q3 2024, if that wasn't clear.

Okay. All very clear. I'll let Jon ask you whether or not you can earn $9 plus next year. Thanks for taking my questions.

Our next question comes from Chris McGratty with KBW. Chris, please go ahead.

Hey, good morning. Dale, I was wondering if you could help or Ken on the outlook for non-interest income for the fourth quarter. I know this quarter had an MSR adjustment, but maybe unpack the 8% to 12% growth in fees for Q4 because some of the line items moved around a little bit? Thanks.

The MSR component was largely influenced by the change in interest rates. We experienced a 50% rise in constant prepayment rates on our mortgage book at the onset of lower mortgage rates, which had a notable effect on our results. We expect not to see a similar occurrence, although there might be more pent-up behavior than we anticipated. Consequently, the value of that asset decreased more than the gain we allocated to maintain its valuation. Looking ahead, we have implemented a BOLI transaction that will continue, generating consistent new revenues. Our service charges have risen since the second quarter, and we believe that number will remain steady. We also recorded some securities gains, and while we have additional collateralized deposits, they are not nearly as significant as the one we mentioned going into distribution in the third quarter. We anticipate further securities gains as we liquidate the collateral related to those deposits. Overall, this enhances our liquidity because collateralized deposits limit our options. As we are able to reorganize and substitute different deposits, it allows us to invest in higher-return assets compared to what we currently have.

Okay. And then just, I guess, my follow-up. The security gains you mentioned, is that in the guide? And I guess, a similar magnitude?

Yeah. It would be in the guide for a smaller magnitude than what we had in the third quarter.

Our next question comes from Jared Shaw with Barclays. Jared, please go ahead.

Hi, good morning. Yeah. Maybe looking at the loan growth that you had referenced, especially on the C&I side, where are you seeing opportunities for that and maybe if you could just give us a little bit of early look at ‘25 in terms of sort of the pipelines and the expectation for the sustainability of that growth?

Yeah. So as I said, this quarter, we grew $900 million, that's about 7% annualized to total loans of about $53.3 billion. It really came from three or four segments of our portfolio. The regional group grew all in about $300 million, warehouse lending grew almost $400 million, some leveraged finance and some resource financing when you combine those together, grew another $300 million. So it was almost our diverse lending strategy that got us to nearly $1 billion of loan growth for this quarter. So as we look going forward, we see a couple of areas that give us confidence to continue to restate and reiterate the guide of $1 billion in quarterly loan growth. First, our note financing, MSR lending, warehouse lending group businesses are showing good pipelines and we like this type of financing because they are generally shorter duration loans with a good risk-reward profile. They also allow us to evaluate credit decisions and collateral on a continuous basis, which goes to our allowance for loan loss reserves, and it goes to our lower credit losses that we have. But this is good collateral. Additionally, we've never taken a loss in any of those categories since we've been in these businesses. Then I would say lot banking, resort financing and our regional commercial lending also provide additional value for growing our loans, but also provide loan growth that comes along with more treasury management fee income and also allows us to gather lower cost operating accounts. Overall, if you look at our performance year-to-date, we really have focused more on the C&I side, and you see our total growth for the year has been all on C&I, and we've downplayed construction lending and development. And we've also kept our CRE owner-occupied loans flat as well, and that hasn't grown. We've also taken down our residential loans, which carry a lower yield. So we will have some opportunity to put new loans on the books to have them come in at a higher yield. So I hope that kind of gives you a sense of how we're thinking about 2025 and what we're doing to prepare for it.

Okay. That's good. Thanks. And then just as my follow-up, looking at capital with the 11% sort of, I won't call it target, but calling out 11% or above that. Should we expect you to continue to grow CET1 from this 11% too or would there be other capital management alternatives that you'd utilize here?

I understand the question. For our forecasts for 2025, we expect CET1 to remain at or above 11%. We anticipate more loan growth than $1 billion per quarter, so we want to maintain that CET1 as a buffer. This forms the basis of our strategy. Additionally, as we grow—currently at $80 billion, though our total assets slightly decreased from Q2 to Q3—we will be closer to benchmarks for bank comparisons. We are examining other metrics like adjusted CET1, which accounts for AOCI and the allowance for loan loss reserves. We aim to be in the upper quartile, as Dale mentioned in his prepared remarks. This will guide us as we continue our growth.

Our next question comes from Matthew Clark with Piper Sandler. Matthew, please go ahead.

Hey, good morning. Thank you. First question around the ECR-related costs. Given the volume and rate dynamic going forward and assuming either your rate assumptions that you laid out earlier or the forward curve, what is the good range of expectations for customer service cost dollars in 2025?

The increase is primarily due to a shift towards the mortgage warehouse, which has a beta of about 100%. We anticipate that this will reverse in a similar manner to how it increased. Consequently, we believe there will be a 25% decrease in ECR costs in the fourth quarter compared to the third quarter, and this trend should continue into next year. Our HOA deposits have steadily increased each year and we expect that to persist, although growth in the mortgage warehouse will be moderated. There will be a reduction primarily due to insurance payments made in the fourth quarter, which will lower the overall deposit figures. Additionally, we're planning to focus less on this area for growth moving forward. This means we will have opportunities to reduce costs in alignment with FOMC actions, and in some instances, even exceeding 100%.

Yes, to address your question about the dollar amount, Dale provided a percentage response. The approximately 25% decrease for Q4 translates to around a $50 million drop from Q3 to Q4. Just to clarify, it's about $50 million when comparing Q3 to Q4. Additionally, keep in mind that there's a 50 basis point reduction that occurred in Q3. Therefore, instead of modeling that as a consistent $50 million decline each quarter, consider it as a gradual decrease in rates.

Okay. So it sounds like it's more rate-driven, not volume-driven. Got it. Okay. And then just on your kind of a blended question around loan yields. I know SOFR came down ahead of the Fed cuts, and I'm sure that hurt a little bit. It also looked like your loan fees came down to 15 basis points from 24 basis points in the prior quarter. I guess just what happened there and then how do we think about the overall NIM in the near term?

I think the low fee number is related to the current run rate we had during that period. Regarding the net interest income, we mentioned in our slide that we are expecting a contraction in the fourth quarter. However, this will more than be compensated for. As Ken mentioned earlier, we are anticipating a combined net interest margin, including the ECRs, which we believe reached its global peak in the third quarter of 2024 and will increase in each following quarter throughout next year.

The next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Bernard, please go ahead.

Hey, guys. Good morning. Just on mortgage, you previously obviously guided to 3Q being seasonally weaker with the loan production volumes up nicely versus 2Q while the gain on sale margins declined. And obviously, you called out the negative MSR mark. Could you just talk to the puts and takes on how high demand maybe needs to pick up to see a pickup in the gain on sale margins?

That is something that is a little difficult to handicap to be very honest with you. Coming into the quarter, mortgage rates at the end of Q2 were around 7%, and they declined during the quarter to about 6.05% and today, they're in the 6.50% area. For us to handicap that has been a little bit of a struggle. It's based on consumer behavior of cost, and it's also based on consumer timing, i.e., if you know there are a couple of the rate cuts coming at you, would you go out today and buy a home when you know rates are coming? And so what we say in the mortgage business is, at least what we have been saying is people love their mortgage rates, they hate their home. And now we're trying to see if people want to find a new home and just rent their mortgage rate and then refinance as they go forward.

Okay. And then just as we think about maybe mortgage more broadly and just the dynamics like you mentioned with mortgage rates coming down closer to 6% and then backing off. What really gets mortgage for you guys? I think in the past, you've said maybe like the three, four rate cuts kind of help and maybe a low 6% is really what's meaningful to increase production. But just kind of wanted to get your thoughts like maybe the 6.5% hopefully comes down again, but it is based on some of the pull forward of the rate cut expectation. So just want to get your thoughts on maybe a mortgage rate level that you think the production volumes kind of pick up and revenues follow?

Yeah. I think if you start beginning to see a repeat of the early part of Q3, where rates come down into the low 6s, that begins to pick up the volume. You then start to gather some speed once you break the 6 barrier; for those that remember, that's like breaking the 4-minute mile. And once you break that 4-minute mile of under 6 and have a 5 handle to begin with, then we really think if the sweet spot is somewhere in that 5.50 to 5.75, those rates are key opportunities for us. That's sort of how we think. So we need to break the 6 barrier, and then as it drops into that 5.50 area, that's where we think there's a lot more volume coming our way.

A more moderate decline in rates actually benefits us. A sudden drop could trigger a surge in refinancing that might not be sustainable. One reason mortgage rates are high compared to the 10-year treasury is the expectation that if you refinance now, you may have to refinance again in six months, making the processing costs not worthwhile. If this expectation lessens, I'm encouraged that futures market predictions for rate cuts in 2025 have decreased, which could lead to more stability over time. Consequently, we might see a reduction in the gap between mortgage rates and the 10-year treasury from historical levels.

The next question comes from the line of Timur Braziler with Wells Fargo. Timur, please go ahead.

Hi. Good morning. I wanted to just get some clarity on the expectation for Q4 to be the NII trough. Is the expectation that Q1 maybe you get some additional margin compression from the asset-sensitive balance sheet and then volume makes it up or should Q4 be the trough for NIM compression as well?

Yeah. I believe Q4 can be the trough as well on the NIM side. Yes.

Okay. And then just to maybe put a finer point on Bernie's question. So for the earnings at risk analysis, I guess, what are you assuming for mortgage rates and kind of mortgage revenues within that earnings at risk analysis?

Yeah. So that we would tail into maybe something that ticks into a 5 by the end of next year, the 5 handle, high 5.

Sorry, I just wanted to add a point to Dale's comments when talking about NIM. He was referencing the adjusted NIM. When you think about it, that's the way I think about it is that adjusted NIM is just net interest income less the deposit costs. That is all going to flow upward or move upward throughout the year. I just want to make that little clarification.

No. I appreciate that clarification. And then, just lastly for me, just thinking about HQLA deposits in a rate-down environment. I'm assuming just the short-term nature, there are going to be a little bit punitive to NII. Just how are you thinking about HQLA levels growing, maybe commensurate with the asset base or asset growth and then what that might look like from a rate perspective?

We think we're kind of attacked in terms of where we are on what we have in HQLA presently. That number kind of came down a little bit because we've disposed of some of these deposits that were collateralized all with HQLA categories. So from here, again, it gives us latitude to grow our loans commensurate with the growth rate we're going to show in deposits. As Ken mentioned, if we're going to grow deposits $2 billion on average, that includes the fourth quarter decline that's already built into higher growth earlier in those quarters. If you can grow at 75% to 80%, you should be looking at about $6 billion of deposit growth and that loan growth to match that. The rest will fall into other categories like HQLA.

Our next question comes from the line of Anthony Elian with JPMorgan. Please go ahead, Anthony.

Hi, everyone. Does your Q4 deposit guide of down $2 billion include any additional paydowns of broker deposits or is the decline really coming from the seasonality of warehouse?

It's really the seasonality of warehouse. We expect our broker deposits to be fairly flat.

Got it. Okay. And then my follow-up also on deposits. I understand the warehouse is going to seasonally outflow in Q4, but I guess are there not enough deposit opportunities from other areas of the company to be able to offset that seasonal headwind for this quarter specifically? Thank you.

The other channels do help mitigate some of the outflow you're noticing, but the Warehouse Lending Group is a major contributor to our deposit growth. It's important to note that several competitors in the warehouse lending industry have exited or significantly reduced their presence, resulting in an inflow that exceeds our typical expectations. This inflow occurred in Q3 and is likely to reverse in Q4. Therefore, it will be challenging for other deposit channels to compensate for that larger inflow in Q4. However, once these deposits pause, which we refer to as a hiatus, they tend to return in Q1 and will support our liquidity as we progress through 2025.

The next question comes from the line of Gary Tenner with D.A. Davidson. Gary, please go ahead.

Thanks. Good morning. I appreciate the thoughts on the combined NII and ECR costs. I just wonder if you're willing to put a finer time on just the GAAP NII outlook. Obviously, the fourth quarter is a lower guide. Based on your rate forecast for next year, kind of the 25 basis points per quarter, how deep into the year would you think it would be until you could turn dollars of GAAP NII from a bottom?

At this point, I think we've provided more clarity about 2025 and our expectations. Unlike any other conference call I've seen so far, we will offer more details about the full year of 2025 when we announce our Q4 earnings. However, I believe we have given ample guidance on how to anticipate what 2025 will look like.

The next question comes from the line of Samuel Varga with UBS. Please go ahead, Samuel.

Hey, good morning. Dale, I wanted to revisit the CRA. Could you share your thoughts on what the ECR rates might floor at if Fed funds stabilize around the 3% mark that many are predicting? I realize the beta is expected to start near 100%, but at what point does it begin to stabilize and decrease?

If you look back to when rates were even lower during the pandemic, our ECR mostly bottomed at around 40 basis points. There is still significant room to push rates down. Ultimately, it comes down to what alternatives exist for money. With the funds available, I doubt that any other financial institution will offer more than a 3% rate, perhaps reaching 350 or 360, because that would generally mean funds are readily available elsewhere. We have diversified funding sources and various channels to meet our credit demand. I don't anticipate a situation where we will move significantly away from the market rate for money in terms of how low it can go.

Thank you for that. For my follow-up regarding the earnings at risk, could you provide some insight into what more effectively offsets the NII compression? Is it the CRAs or the mortgage benefit from AmeriHome on the fee income side?

What offsets the mortgage income on the fee income side. They have funds that come from kind of their origination of mortgage servicing, right? They manufacture these. Depending on what that estimated value is, that determines what the gain on sale is, and then we have the servicing rights that we value and amortized down. That's why I look at them more in concert rather than as a singular element. I think it was more important in the third quarter where they were more bifurcated in terms of the response. That was really related to the 50% increase we had in constant prepayment rates that took place in August that was in excess of what most models would have captured.

The next question comes from Chris McGratty with KBW. Please go ahead, Chris.

Great. Thanks for the follow-up. Dale or Ken, longer-term question about ROE potential in a down rate environment. How are you thinking about ROE over the next couple of years?

We don't think that our ROE potential is really that dependent upon the rate environment. We're based on the balance sheet that we have, the capital that we need, the spreads that we can obtain, and we can continue to efficiently manage the organization. We know our costs have come up for the past couple of years or so. But we believe we're going to get back to an efficiency ratio that begins with the four instead of five on an adjusted basis, i.e., with the deposit costs netted against interest income. That should leave us with a ROTCE in the upper teens. We believe we're on our way to get there. We're not going to get back to the 20s that we were at before because our leverage is lower with our higher CET1 ratio.

Our next question comes from Jon Arfstrom with RBC. Jon, please go ahead.

Hey, thanks. Good morning. Ebrahim set me up, I guess. But Ken, I hear you on your 2025 thoughts. Are you more optimistic on 2025 with the recent rate cuts and the current rate outlook? Is this good for the company generally?

I am optimistic, primarily due to the balance sheet. We have set targets of $1 billion for loans and an average of $2 billion for deposits, which we have maintained over the past couple of years. Our credit origination platforms are operating effectively, and we have also enhanced our deposit platforms. I am confident that we can meet our balance sheet goals. The bank's overall liability-sensitive nature, especially in a falling rate environment, supports this. With upcoming rate cuts, we anticipate improvements, adding to my confidence. Currently, asset quality appears stable. While I believe that the upcoming year will always present more challenges than the previous one, I maintain a strong sense of confidence that we can achieve our objectives.

Yeah. Okay. You guys used the word transitional a lot, and I understand that. It feels like this was kind of an unusual quarter for you, and I hear you on transitional, but do you have like a non-GAAP core EPS number in your mind for the quarter? I think you've got MSR, BOLI, I don't know, gains, lower gain on sale, ECR pressure, a lot going on. I guess it would be helpful if you have some kind of a shot at a repeatable, sustainable quarterly EPS run rate in your mind just because there was a lot going on here.

Yeah, I think that's a fair question. We kind of get to $1.80, which is what was reported. The decline from the mortgage business was offset by gains from the collateralized deposits and securities that help collateralize deposits, and those two things kind of equal out for us. As we don't think we're going to see that MSR valuation decline in Q4 and as Dale said, we have other collateralized deposits and settlements that are rolling off where we have gains in Q4 that I think it was Chris who asked the question that we think it's captured in the run rate.

Our next question comes from Brandon King with Truist. Brandon, please go ahead.

Hey. Just one for me on core expenses. Stripping out ECR deposit costs, it looks like the growth run rate was around 5% in the quarter. And taking your commentary on deposit costs, next quarter seems like I noticed a higher of 4%. So that 5% to 4% quarterly run rate of growth, is that something we should expect over the foreseeable future or anything temporary within that core expense run rate over the next few quarters?

So the way I'd come at it is I think about it as the adjusted efficiency ratio as we come out of Q4 through 2025, which excludes deposit fees. We think over the course of the year that will get at or near 50% by the end of 2025. So we see the adjusted efficiency ratio declining through 2025. No, that's embedded in there. That's embedded in there.

Those are all the questions we have. And so I'll turn the call back to Ken Vecchione for any closing remarks.

Thank you all for attending the call. We look forward to talking to you in January about our Q4 results, so thanks again.

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