Next up this afternoon is Western Alliance Bancorporation. Western Alliance is an $83 billion bank headquartered in Phoenix that has undergone a deliberate business transformation since 2010. Today, the company operates a national commercial bank in attractive regional markets as well as several specialty business lines. This diversified business model allows the flexibility to sustain risk-adjusted returns. Over the last year, loans have increased almost $4 billion in deposit growth, an impressive $18.8 billion, and about a third of deposits today are non-interest-bearing. With us today, we have Dale Gibbons, the Vice Chairman of Western Alliance. Dale's been the CFO as well since May of 2003, and he has more than 30 years of experience in commercial banking, including serving as the Chief Financial Officer and Secretary of the Board of Zions Bank. So with that, I'll turn it over to Dale.
He'll make a 10-ish minute presentation, then we'll do some Q&A, and then open it up to questions.
Thank you, Jerry. Yeah, I'm just going to highlight a couple of points from our most recent earnings deck in terms of what we've done, executed on during the third quarter. Starting in the middle of the page, loans and deposits. We are consistently growing loans and deposits each and every quarter. And really, that ratable, sustainable achievement we have really is the backdrop for what we think has been one of the strongest tangible book value creators in the company overall. And we've done that with a really interest rate risk neutral position significantly. And you can see our margin was essentially flat, down two basis points from 363- 361 from the second quarter to the third. Credit quality, we think, is fairly consistent, fairly flat in here. We have basically $2.5 billion worth of 5% of our loans are commercial real estate office.
We've had one issue that has been in there, and that's been stabilized. We're at 20 basis points of losses now, which is, again, I think, lower than the average in the industry. We think our outlook looks pretty consistent from where we're headed going forward. Looking at our loan composition, kind of where our growth has been. You can see on the second line there what our growth has been in billions per quarter. We've been targeting about $1 billion per quarter based on our guidance of $2 billion in deposit growth per quarter, and it's a fraction of that.
But really, what we've been doing is we've been curtailing our loan opportunities as we built up our high-quality liquid assets and bolstered our liquidity position, partly to address some of the issues from March of 2023, as well as preparing for LFI status, large financial institution, crossing over $100 billion. We want to be able to certainly sustain kind of what we can do going forward. We are now there. So we've targeted that our loan-to-deposit ratio is going to be about 85%. We're a little under 80% presently. And so we can stand to grow that up a little bit. We've guided that deposits are going to grow on average in 2025, $2 billion per quarter. If you take 80% of that number, that's $1.6 billion.
So I think our loan growth is going to be a little higher going forward than what it's been in the more recent past as we've achieved what our liquidity needs are to be. The deposit side, so we've been guiding to $2 billion. We've kind of been exceeding that going forward. The fourth quarter, we have a little bit of a seasonal outflow related to mortgage warehouse clients. There are some taxes and insurance payments made for mortgages that have a paydown in basically November, December related to the state of California predominantly. But that should turn around beginning in Q1. We have the largest homeowners association depository in the country, and that is seasonally a strong period. And also, mortgage warehouse tends to pick up again.
So we're looking to come out of the gate in 2025 strong on the liability growth side, and that will, again, fund what we can do in terms of credit disbursement as well. Our rate risk profile. So if you just look at us from interest rate risk for net interest income, we're a little bit asset sensitive. And that is a little bit of a contraction should rates decline, as obviously happened today a little bit. But overlay what goes on on the expense side for us, it puts us more into a really liability-sensitive profile. And two particular things go on in that category. And that is we pay funds we call earnings credit rates to mortgage warehouse depositors predominantly, and that shows up in non-interest expense. And so as rates decline, those expenses fall.
Consequently, we are going to have more sensitivity in our non-interest expense than most banks would have, and that would benefit in a declining rate environment. In addition to that, we have the second largest correspondent mortgage originator in the country, AmeriHome. And as the mortgage business, I think, will pick up as rates decline, that also would kick in and result in higher revenues from that operation, hence resulting in an improvement in a declining rate environment. What we'd like to see is something that rates continue to ebb off, but not rapidly. Of course, he went today. I'm fine if they don't go again this year. And just maybe one per quarter in 2025, I think, would be ideal for us.
We'd like to be able to sustain a refi boom, if there is one, in the mortgage business, rather than just a flash in the pan, something that has consistency over time. Our reserve level. So we have one of the safest loan provisions and loan portfolios in the country. And the reason why is because of where it's allocated to. So this takes our reserve level, starting for ACL to funded loans at 74 basis points, and then walks forward what that reserve would be. So the first thing here is loans covered by credit-linked notes. So we've issued credit-linked notes on a portion of our residential book. And this is where a third party has given us funds that are on our balance sheet. And we pay them an interest rate on those funds less any claims for losses on that portfolio over the life of those loans.
And so consequently, those loans have zero risk of loss to us. And so if I compare our performance on reserve relative to, say, the other institutions, I would add that back in and come up, so go from 74- 88 basis points if I consider the loans that are covered by these credit-linked notes. Then we have some we call them Equity Fund Resources. These are capital call subscription lines to basically venture capital firms. And we know of no entity that has ever incurred a loss on those except one, and that was SVB, and it was a fraud case. But these are very strong credits whereby you're lending against letters provided from some of the largest pension funds, sovereign wealth funds in the world, and where you can actually pull the claim against that.
So the bank is covered to be able to have that capital call to be drawn upon. And so that modestly improves that number a little bit. The next one is our residential portfolio. So we have a larger than average residential loan exposure. And this is away from the CLNs, whereby at origination, these loans had advance rates of about 65% of value. And today, with the run-up that we've seen in residential valuations, that number is in the 50s%. So we think this is an inherently very strong credit quality portfolio, near zero risk of loss. We've never had a loss in it. And if I adjust for that relative to our exposure there, it takes us to a little over 1%. And then finally is our mortgage warehouse operation, where basically we are table funding loans that are for loan purchases or transfers of houses.
And then those are remitted to the GSEs in about three weeks. So they're very short loans. The advance rates are under 100%. And again, we've never had a loss with that. And I think the only loss that I'm really aware of that others have had have also been fraud-related. And so that takes us to a more normalized kind of reserve ratio. I include this in here because at first glance, some people say, "Gosh, your reserve is lower than others." Yes, it's because our loan quality is also higher than others. And you can see this as well if you consider our risk-weighted assets divided by our total assets ratio. That number is also kind of below peers, which also supports that. Then if I look at total capital, I'm going to add together three things.
One is adjusted CET1, and then including AOCI losses from unrealized marks available for sale securities, and then also adding in the loan loss reserve. So these are all the sources of capital for loss. And we're among the peer group. And these peers are between $50 billion-$250 billion in assets. And so we are in basically the bottom of the top quartile at just over 11% on this ratio. So again, we think that our capital is strong as well and addresses where we are in terms of our ACL. And finally, we end all of our reports like this, which is our growth of tangible book value per share. And I call this is like the tortoise and the hare. And this is the tortoise that has come along here, whereby we have grown TBVPS really faster than the peer group.
And it becomes a strong multiple over time where the peers are up. Maybe they're up 100% if you add back dividends, and we're up over 600% from where we were 10 years ago. So again, we're really focused on consistency of balance sheet improvement and performance. So yeah, glad to discuss questions.
Perfect. I'll let you take a seat. Let's start with the solid loan growth that you've reported in an industry that's been relatively soft. What industries and customers are you most excited about today to drive future growth?
One thing that's really working well for us is what we call lot banking, whereby we provide credit to the largest home builders as they expand different parcels. That first horizontal and then vertical development. We have a very low loan-to-value ratios on this. These tend to be in, say, the mid-50s%. We see a very wide disparity between the supply and demand balance for housing for about as far as the eye can see. We're across the country, but if we're concentrated, it's probably in the Southeast. We just approved a deal in California earlier this week. That has really strong performance. Again, another area where we've never experienced a loss, a delinquency, or anything of the kind. That's one that has worked out well for us.
Another thing that we're doing is note finance, whereby we provide leverage to private equity companies that do their own lending. And these loans may not be bank qualified. So they could be kind of asset-based in terms of what the valuation might be. And so we'll come in and give them leverage based upon the leverage they've given to somebody else. And so our loan-to-value on these tends to be around 40%. So we're in there with a strong underwriter at a very low advance rate and covenant performance, again, something that we've never experienced a loss in. But that is a growing sector of the market with the growth of private debt that is out there as well.
And on the other side of the balance sheet, you talked about the deposit growth in recent quarters. How do you expect to sustain that generation of low-cost deposit growth? And do you expect balance sheet growth will really be a function of deposit growth?
Let me take the second question first. We've always considered that the real strength of a bank balance sheet is on the liability side. If you have a good, strong fortress-like funding sources, then you have opportunity to lend it out in different avenues. We look at what we can do on the funding side, the stability of that, and then that determines what our appetite is going to be for credit development. In this case, as I mentioned, so $8 billion next year, let's call it. With that, we're going to be north of $6 billion, $6-$7 billion of loan growth in terms of kind of where that would focus on.
You discussed the earnings at risk relative to your interest rate sensitivity. I guess, what is the ideal rate scenario for WAL?
Like I was alluding to a little bit earlier, I think a gentle declining rate environment would work best. So you can see already that what's transpired. I mean, I think the questions regarding asset quality for the industry have really fallen since you saw the Fed move in September. I don't think that's necessarily coming back. So if we can keep that in abeyance based upon that there's no issues with kind of debt service coverage escalation that went on for three years prior to that, I think that that puts us in a position to be able to benefit from kind of where we are today and also kind of improving metrics for both the mortgage side and for kind of the economy overall with a slowly declining rate environment. And so we have one today. I don't think we need one in December.
I guess we'll see what happens. Not that that's how they're going to respond. But moving into next year, a tapering of rates, I think, would probably work well.
And the theme of the conference is "Need for Scale, Fact or Fiction." You're in a number of unique businesses. Could you just talk about scale in some of those businesses that are, again, specific to Western Alliance and how important they are? And what is the longer-term upside should you improve the scale?
Yeah. So as I mentioned, we're the largest HOA depository. We're in, I think, about 44 states. We started a corporate trust operation at the beginning of 2023. That is on a strong ramp as well, growing well into double-digit % growth. We have an escrow business in terms of business services whereby we basically hold funds for mostly M&A transactions from maybe a public company or a large private company acquiring a smaller private company. There's generally holdbacks in there related to these could be performance metrics or earnouts or reps and warranties. And we hold those funds. And frankly, with the change in administration, that may be a little more positive. I think a new administration may have a more relaxed view in terms of what can pass through the FTC for a transaction. That would also be helpful.
We have a large, what we call our settlement services operation, whereby class action and mass tort transactions that have been taken nationwide, some worldwide, that we hold those funds during the pendency of those dispositions. We distributed the largest class action litigation ever, which was Facebook. There were more than 15 million claimants on that transaction, but we've been involved in Camp Lejeune, basically, anything you hear right on TV in terms of asbestos, whatever, we've got a piece of that.
And when I look at your organic growth trajectory, you may be the next bank to cross $100 billion. So you just talk about the time frame, what's on the to-do list, and the strategy behind that. And I understand maybe the rules of the game have changed a bit this week.
Yeah. Yeah. So we started what we called our scalability plan, anticipating bumping our head against $100 billion back in 2021 when we were 36. And we have made a lot of progress on that. We do not have any step variables in front of us in terms of cost escalation. They're already embedded in our run rate. It is part of the reason why our efficiency ratio has climbed from what was in the 40s to the low 50s if I take out the earnings credit costs that we talked about that are more quasi-interest expense. And so we think we're really well positioned to be able to kind of phase into that. If you penciled it in, I think we think that that's probably something in two and a half years from now or something whereby we'd step over $100 billion.
What our plan is to do is we're $80 billion-ish right now. We could shrink down. We have a little bit of broker deposits. We have a bit of borrowings from the Federal Home Loan Bank. That could shrink our balance sheet about 10%. So that would result in growing basically our core business, our core deposits, and our loan portfolio consistent with what we've done, but holding back in terms of the total asset growth to a slower pace. That would result in greater kind of ratio performance as we continue to improve. So that could be margin, ROA, ROTC, things like this over that point in time or over the next couple of years and what that would look like. Then we could be in a situation whereby we're hovering below $100 billion, and we have a choice then.
We can control our own destiny. And we can say, "Okay, well, we're ready to go. We've got all the infrastructure in place to be able to do this, all the new reporting requirements, all the capital assurance and liquidity demands that we know we're going to have." And then we could draw down on some of that and be able to punch through $100 billion with authority and not get stuck at $106 billion where everyone knows would be kind of a reversal trade in terms of a stutter step on earnings. We could earn through that because we could draw down on some of these pools of liquidity that would then be untapped that we could be able to put forward and not rely upon, "Oh, is there an M&A transaction that's going to work?" Well, maybe. And that wouldn't be off the table.
But there are a lot of complications with that, particularly crossing over $100 billion because now you need to bring that entity onto your platform within a sufficient period of time such that you're entirely in unison compliant with crossing over that. So we think that this gives us the most optionality and the most clarity in terms of our ability to sustain performance and not just kind of meander in this category of institutions that are approaching $100 billion but don't really have an execution plan to be able to get over it.
Kimball, question on capital. How do you think about the appropriate level of capital for the company? I believe your target right now is a CET1 of 11%.
Yeah. We're just over 11% right now. We think that's really the right number for us where we need to be. You can imagine that if we are in a scenario whereby our balance sheet's going to slow down a little bit at the total footings, that that capital ratio would climb. We're projecting that there is going to be an inflection point where the velocity of our capital improvement would increase over time as we approach that, and that gives us, again, optionality to do something with that.
And when I look at the third quarter, charge-offs were within your guidance. Non-performing assets were down. So could you share with us your thoughts about near-term asset quality expectations?
Yeah. I think our AQ is going to be fairly stable from here. We have one particular property that we've mentioned in the past in San Diego. We identified a couple of situations last year. And there has been no new kind of migration or expectations that there are any other developments within the AQ space. So I think we're stable with the level that we're at in terms of both our kind of non-performing assets and our ultimate loss recognition.
Thanks. And I'll stop there and see if there's any questions in the audience.
Hey, Dale. Jon Arfstrom, RBC.
Hey, Jon.
Can you give us an update on what you think a natural ROTCE range is for the company and you feel like your return on tangible is depressed at this point?
Yeah. So before maybe this kind of rate environment change, we had a little lower capital level. We would be around 9% CET1 versus 11% today. So capital is a little bit higher now. And that would obviously pull that down. And in addition to that, we've now incurred infrastructure costs related to approaching $100 billion. But at that time, our ROTCE was in kind of the low- to mid-20s. So if I take that out and I adjust for the capital levels and really a higher cost level kind of going forward and also more liquidity going forward where we had a loan-to-deposit ratio that was in the low 90s, now we're going to target something in the mid-80s. That results in a level that is, I'm going to say, kind of high teens on a ROTCE basis.
I think as we progress through this $100 billion line, I think, well, that's where we'll end up.
And then just a separate question. Any other regulatory headwinds that you're thinking about or dealing with other than the $100 billion threshold? Is there anything else that's on your mind?
No. I think embedded in what you said, Jon, was this end game proposal, and so I think our expectations are we know what that looks like. I think there's still maybe not complete clarity around what this TLAC, total loss-absorbing capacity, needs to be. I'm anticipating that there's going to be charges associated with that. Hence, that's one of the things that we could swallow as we cross $100 billion and pay for that cost without affecting the shareholder adversely by being able to increase the size of the balance sheet with some velocity to have the increased net interest income to cover the upside debt situation you would have from higher senior debt and things like this.
Hi, Dale. Timur Braziler.
Hi, Timur.
Wells Fargo. Just going back to your M&A comment, I know historically you guys have looked at M&A and not wanting to do something that was potentially dilutive to either your organic earnings growth or your organic loan growth, deposit growth type engines. Is that still a consideration, or does this new $100 billion threshold maybe change your outlook as to what you would look for in a potential candidate?
We certainly want something that's going to continue to be accretive to the shareholder. We have done some M&A in the past. In 2015, we acquired Bridge Bank, which was basically focused on the tech space in Silicon Valley. That worked out well, complemented what we were doing. We acquired a hotel lending portfolio from GE Capital in 2016, and we brought in teams, so there's different ways to kind of get there. I think a whole bank acquisition might make sense at some point in the future as well, but again, obviously, facts and circumstances dependent, but again, if we're going to undertake M&A, the first thing we're looking for is, hey, is this complementary to our business? Does it open a new avenue for us? Does it give us scale in something that we believe is important?
Does it bring in maybe expertise so that we can lend it to something else? And absolutely, what does it do for the shareholder? What is that going to look like? So we've had one of the strongest growth trajectories, including our tangible book value, of others. And so when we've looked at a lot of banks to potentially acquire, where we get stuck is even if the price point is such that it works out of the gate, it's like, well, are we confident that we can change their growth trajectory to be more similar to ours such that it doesn't unwind and become dilutive, say, at the end of the second year, which isn't uncommon. And so we want to make sure we kind of get over that. But that doesn't mean that that isn't something that isn't surmountable.
Maybe a quick question, Dale, on the fee income. Your fourth quarter outlook incorporated some firming mortgage banking fees, higher commercial banking fees. Any insights into the trends you're seeing there this quarter?
So, right out of the gate, we had, after the Fed moved, I mean, rates really kind of came down significantly. And now they've backed up rather sharply, including yesterday. And so that has been a bit of a damper on the mortgage banking activity. We had mortgage rates that were, say, in the mid-6s, and now they're about 7.30. So it's maybe too soon to tell kind of what that looks like. I think some of this was maybe kind of an impulsive reaction based upon kind of the results of the election or some expectation that, gosh, what does this mean in terms of deficits or anything going forward? To me, that all seems a little bit premature. I thought maybe part of the reason why rates even went up is because people were concerned about whatever volatility or uncertainty was out there.
You saw that in the VIX related to Tuesday, and that fell down so I'm not sure that it's sustained where it is right now. Obviously, the employment gains for the month of October were relatively anemic. I know there was an issue with the strike and with the hurricanes in part of that, but the number did seem a bit light so are we going to sustain up here at the 10-year in the 440 area? I don't know, but otherwise, I think that could otherwise have a damper on mortgage activity in the fourth quarter.
And you talked a lot about deposit growth. Could you talk about deposit pricing competition in your strategy to manage down deposit rates as rates come down?
So yeah. So I got to tell you, after the Bank of England went this morning, we thought, sure thing, that the Fed was going to go today. And so we cut our rates today just a few hours before the Fed acted in anticipation of this rate increase. So we're trying to really stay on top of that in terms of what we're addressing on our deposit costs. We're going to look at that again. I think some others were probably going to follow suit in the next few days or whatever. And we'll look and see about what we can do. I mean, I'm determined to get north of 100% beta on some of these higher cost funds and ECRs that we have. And I think we're going to achieve it.
I appreciate the disclosure in the presentation of $575 million of multifamily loans. I think it's all in footprint. Any comments or insight into how that portfolio is performing?
It's performing great. Most of that is related to low-income housing. They come in a public finance type structure with some guarantees, tax credits on occasion, things like this. So that's really where our multifamily is, and certainly nothing in a rate-controlled area.
And then on the expenses, I don't know if you provided 2025 guidance at all, but any early thoughts into expenses in 2025 given some of the conversation we just had on investing for the $100 billion?
We've already seen the escalation. I'm going to talk about this in terms of our efficiency ratio, excluding the ECR cost. That's taken us up into the low 50s on our efficiency ratio. We believe that as we move through this cycle before crossing $100 billion, we'll be able to push that down into the upper 40s. Then after that point in time, I think we can get back to maybe the mid-40s. We used to be in the low 40s. I don't see that again just with kind of the enhanced or higher infrastructure costs that we have related to risk management and redundancy on some of these layers and requirements and higher reporting required for a large financial institution.
And last year at this event, Ken provided some really insightful insight into what you guys did during the spring of 2023 and how proactive you were and the phenomenal presentation. So can you reflect on that lessons learned and how that may have impacted concentration and your balance sheet and how you manage that business?
Yeah. So we have been very clear about that we want to increase diversification in terms of funding. So we brought in also some what we'll call consumer channels that are available now to us. And so they've brought in. It's about now more than 10% of our deposits that are in these channels. And that really does provide, I think, another source, another avenue of liquidity. And during the situation of the volatility of last spring, it didn't matter new cycle, anything. The average balance in these funds is only about $50,000 a count. And so that was an example of kind of what we've done. But we've also continued to foster some of these other business lines like I talked about with our corporate trust operation. We're also doing just kind of more in our branches themselves and what we're doing.
When we make credit available to an enterprise, I mean, there's tied into that expectations in terms of coverage for deposits and of what that loan amount is going to be, and pricing adjustments on the loan if that is not complied with.
Any other questions for Dale and Western Alliance? Okay. Thank you, Dale.
Thank you.
Appreciate it.