Western Alliance Bancorporation (WAL) Q3 2025 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to Western Alliance Bancorporation's Third Quarter 2025 Earnings Call. To one question and one follow-up only. 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 Bancorporation's third quarter 2025 conference call. Our speakers today are Kenneth A. Vecchione, President and Chief Executive Officer, and Dale M. 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, including the Form 8-Ks 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.

Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our third quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail. I'll then close our prepared remarks by reviewing our updated outlook for the remainder of 2025. As usual, our Chief Banking Officer for Regional Banking, Timothy R. Bruckner, will then join us for Q&A. Also sitting in today is Vishal Adani, who recently joined the team as he and Dale begin their CFO transition. Western Alliance continued our solid business momentum in the third quarter that generated record net revenue and pre-provision net revenue of $938 million and $394 million, respectively. Healthy and broad-based balance sheet growth, with $6.1 billion in deposits along with stable net interest margin supported a 30% linked quarter annualized expansion in net interest income. Firming mortgage banking revenue from lower rates bolstered a $40 million increase in noninterest income. This contributed to a high operating leverage as our efficiency improved almost 3% in the quarter to 57.4%. The adjusted efficiency ratio excluding ECR deposit costs dropped below 50%. In total, Western Alliance generated EPS of $2.28 and improved profitability with return on average assets of 1.13% and return on average tangible common equity of 15.6%. 11.3% as we moved our loan loss reserve to 78 basis points from 71 basis points in the previous quarter. Asset quality performed in line with guidance as total criticized assets declined 17% with reductions in three of the four major subcategories and net charge-offs of 22 basis points. In light of the recent news regarding two credit relationships, let me address those head-on because I and the entire Western Alliance management team take these and any potential credit migrations extremely seriously. You have heard me say previously, early identification and elevation are the hallmarks of our credit migration strategy to protect collateral and minimize potential losses. And that's what's paying dividends now. For the $98.5 million note finance loan to Cantor Group V, which was the subject of our October 16 8-Ks, we believe our circumstances are different than other organizations and that our loan to this specific investment vehicle is secured by loans with a perfected interest in the CRE properties. We have confirmed our lien position through lien searches and title company verification. However, we have determined that in some cases we are junior to other lenders in violation of the credit agreement, hence our allegation of fraud. Although the most recent appraisals indicate sufficient collateral coverage, our reserve methodology for a $98 million non-accrual loan resulted in a reserve of $30 million. This reserve and our portfolio's qualitative overlays raised total loan ACL to funded loans ratio to 85 basis points. We believe the collateral coverage, limited and unlimited springing guarantees, as well as up to $25 million of insurance coverage for mortgage fraud losses will cover losses from this credit if any. Excluding this fraud, non-accrual loans would have remained flat. Once learning of the fraud, we initiated a title review of our $2 billion note finance portfolio. To date, we have reverified titles and liens for all notes greater than $10 million and have found no irregularities and are in the process of confirming titles for more granular notes. No additional derogatory filings or lien discrepancies have been discovered today. While incredibly frustrating, we believe this is a one-off issue in our note finance business and have adjusted our onboarding and ongoing portfolio monitoring practices. Regarding our ABL facility to Leucadia Asset Management subsidiary Pointe Benita Fund One as of October 20, the current balance stands at $168 million with a loan to value of below 20%. This facility is backed by $189 million in accounts receivable from investment-grade retailers led by Walmart, AutoZone, O'Reilly Auto Parts, NAPA, and other investment-grade borrowers. None of these companies have disavowed their obligation. The loan remains current and we continue to receive principal and interest payments as modeled. Jefferies has publicly stated they feel confident in PointBenita's near-term ability to pay off all debt due to the diverse set of assets apart from the First Brands related receivables. Jefferies remains confident and so do we. Overall, this is part of a small ABL portfolio of approximately $500 million and we do not see any other similar risks for this well-secured structured facility. As further support, we have investment-grade obligors that cover our loan balance greater than four times. As a reference point, it's important to remember we have operated in private credit business for over fifteen years. We view our underwriting expertise, ability to evaluate structured credit, and sophisticated approach to minimizing uncovered risks through strong collateral with low advance rates as core competencies of the bank that prevent and mitigate losses. Over the past five and ten years, our net annual charge-offs averaged just ten and eight basis points, respectively. Placing us among the top five U.S. Banks with assets greater than $50 billion. Our deep sector expertise in these areas will continue to separate Western Alliance from our peers and enable us to deliver superior commercial banking services to our clients. And now Dale will take you through the results in more detail.

Thank you, Ken. I'd first like to start just clarify one comment that Ken made. The facility from Leucadia Asset Management the collateral behind our loan amount is $890 million. That's how you get to this, this 19% advance rate. On the total. Looking closer at the income statement, net interest income of $750 million grew $53 million or 8% quarter over quarter as a result of solid organic loan growth and higher average earning asset balances. Non-interest income rose nearly 27% from Q2 to $188 million led by firming mortgage banking results as AmeriHome grew revenue $17 million quarter over quarter. Overall, lower mortgage spreads and rate volatility are beginning to improve home affordability and demand for adjustable-rate mortgages in particular. Loan production volume increased 13% year over year and the gain on sale margin improved seven basis points to twenty-seven. Non-interest expenses increased $30 million from the prior quarter to $5.44 mostly from the normal seasonally elevated balances and average ECR related deposits in advance of tax and insurance payments made in the fourth quarter. Overall, we delivered solid operating leverage this quarter with net revenue growing nearly 11% which outpaced sub-six percent growth in non-interest expense. Similarly, net interest income inclusive of deposit costs rose 5% or $25 million over the prior quarter driving adjusted efficiency ratio below 50%. Record pre-provision net revenue of $394 million grew 19% over the prior quarter. Overall, total provision expense of $80 million primarily rose from Q2 levels as a result of $30 million reserve and augmented portfolio qualitative overlays to reflect portfolio composition mix change towards C and I providing greater absorption for tail risks. Turning to our net interest drivers, interest-bearing deposit costs were stable. However, overall liability funding costs compressed eight basis points from the prior quarter and benefited from lower rates on borrowings and growth in ECR paying DDA accounts. The held for investment loan yield was relatively stable, ticking up one basis point despite resumption of FOMC rate cuts toward the end of the quarter. The securities yield declined nine basis points from Q2 to 04/1972 its average holdings of lower-yielding securities increased $2.1 billion quarter over quarter. As discussed earlier, net interest income rose $53 million from Q2 to $750 million driven by healthy loan growth as higher average earning assets increased $4.8 billion. Net interest margin was stable from Q2 at three point five three. As the impact of a slightly higher loan yield and lower debt costs offset lower securities yields and stable net interest bearing deposit costs. Non-interest expenses increased $30 million or percent quarter over quarter. Deposit costs of $175 million landed squarely in the middle of our Q3 guidance. Excluding deposit costs, however, non-interest expense was only $2 million higher compared to Q2. Our adjusted efficiency ratio of 48% declined 400 basis points from the prior quarter as we continue to achieve positive operating leverage from revenue growth outpacing non-deposit costs operating expenses. We remain asset sensitive on a net interest income basis but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a projected ECR related deposit cost decline and an increase in mortgage banking revenue based upon our rate cut forecast. Our updated forecast is for two twenty-five basis point cuts next week and another one in December. The balance sheet increased $4.2 billion from Q2 to $91 billion in total assets which resulted from sustained healthy held for investment loan and deposit growth $7.00 $7 billion and $6.1 billion respectively. This strong deposit growth allowed us to reduce borrowings by $2.2 billion. On this slide, we also see the allowance for loan loss growth relative to the increase in loans. Over the past year, the allowance rose from 67 to 78 basis points. This explains how our strong year to over year EPS growth of 27% is dwarfed by our industry leading PPNR growth of 38% over the same period. This reflects our robust revenue growth alongside with rising efficiency. Finally, equity increased to $7.7 billion and tangible book value per share climbed 13% year over year. Hold for investment loans grew $7.00 $7 billion quarterly though average loan balances were up $1.3 billion from Q2. Which supported our strong net interest income growth Commercial and Industrial continues to lead loan growth momentum while construction loans fell $460 million as these loans converted to term financing. Regional banking produced $150 million of loan growth with leading contributions from end market commercial banking and homebuilder finance. National business lines provided the remainder of the growth with mortgage warehouse and mortgage servicing rights financing being the primary contributors. Deposits grew $6.1 billion in Q3 with mortgage warehouse clients only contributing $2.8 billion. Solid growth was achieved in non-interest bearing and savings in money market products and mitigated the impact of $635 million in designed higher cost CD runoff. Deposit growth was well diversified across all areas of the bank. Of note, during the quarter, regional banking deposits grew $1.1 billion with over $600 million in end market commercial banking $500 million from innovation banking. Specialty escrow deposits grew $1.8 billion in Q3 with contributions of over $750 million from Juris Banking and approximately $400 million each from our Corporate Trust and business escrow services businesses. This growth positions us to meet our funding for 2025 while incorporating the normal seasonal mortgage warehouse outflows in Q4. As Ken explained, asset quality continues to perform in line with guidance from last quarter. Criticized assets dropped $284 million from $196 million decline in criticized loans. And an $88 million reduction in OREO properties. The decline in criticized loans resulted from special mention loans falling $152 million and classified accruing loans decreasing $139 million. As for our resolution efforts with other real estate owned properties, stabilizing leasing and occupancy rates as well as improved net operating income on these properties reinforce our confidence in the current carrying values. Quarterly net charge-offs were $31 million or 22 basis points of average loans. Provision expense of $80 million was primarily driven by replenishment of charge-offs in the Cantor V reserve. Our allowance for funded loans moved from 46,000,000 higher from the prior quarter to $440 million. The total loan ACL to funded loans ratio rose seven basis points to 85. Relevant to current our current discussions with working with non-depository financial or NDFI clients, it is important to consider that some of the safest asset classes in commercial banking are categorized as NDFI. As mortgage warehouse and capital call and subscription lines of credit, have had virtually no losses across the entire industry. Our overall NDFI loan exposure is disproportionately weighted to mortgage warehouse lines but we have never experienced a loss. Our NDFI loan exposure excluding mortgage credit intermediaries would represent 8% of loan balances, which is aligned with peer averages and below a number of larger banks as seen on Slide 24 in the appendix. On slide 14, will see that Western Alliance's concentration and load loss category skews our ACL lower relative to peers. Reflecting the portfolio's lower embedded loss content. The top chart is our updated adjusted adjusted total loan ACL walk illustrates how credit enhancements such as credit linked notes in structurally low risk segments like fund banking, our low LTV, high FICO residential portfolio and mortgage warehouse elevate our normalized reserve coverage from 85 basis points to 1.4%. The bottom table demonstrates how a applying an industry median loan mix to our portfolio reducing our outside proportion of loans in lower risk categories like mortgage warehouse and residential loans while also increasing our proportion of loans at higher risk loan risk categories like consumer, which shift our allowance above 1%. Our CET1 capital ranks around median for the peer group If you add our less adverse AOCI marks and the loss reserve, our adjusted CET1 ratio capital would be 11.3% The 30 basis point quarterly increase reflects organic growth generating higher stated CET1 supported by improved AOCI marks. The augmented reserve ranks in line with the median for our asset peer group on a one quarter lag basis. We remain confident in our capacity to absorb any losses in concert with steady loan growth review the adjusted capital as the total amount available to absorb losses and support balance sheet expansion. Our CET1 ratio shifted higher to 11.3% from organic earnings accumulation. Our tangible common equity to total assets ratio edged down 10 basis points to 7.1%. Our stable capital levels demonstrate our ability to generate sufficient or capital organically to support balance sheet growth and given stock price volatility, the company is evaluating to issue subordinated debt and using a portion of the proceeds to augment its share repurchase program. We believe will be accretive to EPS. Tangible book value per share increased 2.69 from June 30 to 58.56¢ as a function of organic retained earnings. Of note, since initiating our $300 million share buyback program in September, we completed $25 million in purchases through October 17. Consistent with upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by five times over the past decade. Western Alliance has been a consistent leader in creating shareholder value. On Slide 18, we have provided nine metrics we believe are key factors in driving leading financial results strong profitability, sustainable franchise value that ultimately compounds tangible book value and produces long term superior total shareholder returns. For the last ten years, our TSR EPS intangible book value per share accumulation has ranked in the top quartile relative to peers. Based on business metrics, we are the leader in ten year loan deposit and revenue growth while maintaining top tier performance for the net interest margin. Lastly, return on tangible common equity should approach top quartile performance as we generated higher equity returns this quarter and should continue the upward trend in 2026. I'll now hand the call back to Ken.

Thanks, Dale. Our 2025 outlook is as follows: We reiterate our loan growth outlook of $5 billion and raise year-end deposit growth expectations to $8.5 billion. Pipelines remain in good shape, but we remain flexible to changes in the macro environment. Regarding capital, our CET1 is comfortably above 11% and we expect that to hold during the last quarter of the year. Net interest income remains on track for 8% to 10% growth and should lead to a mid-3.5 percent net interest margin for the full year, which has been our expectation. Non-interest income was up sharply in Q3 and positions us to exceed our lofty targets and finish the year up 12% to 16%. Non-interest expense is expected to be up 2.5% to 4% for the year. ECR related deposit costs are projected to land between $140 million and $150 million in Q4, which implies slightly above $600 million for the full year. Operating expenses absent ECR costs now expect to be $1.465 billion to $1.505 billion for the full year. Asset quality should remain should continue to perform as expected with full year net charge-offs in the 20 basis point area. Finally, our fourth quarter effective tax rate is forecasted to be about 20%. At this time, Dale and I and Tim will take your calls.

Thank you. We will now begin the question and answer session. During Q&A, ask questions for your colleagues who request that you please limit yourself to one and Our first question today comes from the line of Christopher Edward McGratty with KBW. Chris, please go ahead.

Hello, Greg. Good morning. Kennard Dale, the buybacks post quarter end and the comments about being supportive with the capital arbitrage. Could you just unpack that a little bit? Sure. Sure. So you know, we authorized a $300 million stock buyback We're not changing that number. We executed $25 million against it in advance of this call. And and but to perhaps accelerate some of that usage of that $300 million providing more liquidity at the parent would be helpful and doing a a subordinated debt deal at the bank will take our capital ratios, and you can see that we're about 14% kind of flat. Our capital is really supported Our capital growth has really supported our balance sheet growth, but it would it would enable us to have a little more with that. As you know, though, we also have another goal of 11% CET one, So I can see us come down from where we are at eleven three. That 11 number near there. Yeah. Chris, I'll add just a few other points there. So for the quarter, we purchased 101,000 shares at $83.08. Notably, a 128,000 of those shares were acquired at $77.83. And what that should tell you before the announcement of first brands, and the canter, we were feeling very confident to be buying this stock back in the mid to high eighties, and we even got more confidence to buy it back when the stock dropped. And so, the rest is what Dale said, is we'll we'll put out a subordinated deal and sometime in the future, and we'll look to continue to support the stock, which is what we said when we announced the authorization. Yep. If there was a disruption in the stock, we'd be to support it. Okay. So you chip away to 300 sooner versus you're not raising the 300. Got it. Then a follow-up just on the guidance, we have one quarter left, but the ranges are are fairly wide. Could you just speak to biases within the range for for the various items, would you steer us in any direction for NII fees expenses? Thanks. Well, I mean, maybe go with a couple of things. I mean, so coming out of the out of the second quarter for performance, there were some discussions about our about kind of our fee income levels. And we had a stronger in the other category and noninterest income, you can see it was up significantly. Think that's at least going to continue into the fourth quarter. We're in the process now of distributing one of the largest class action settlements of all time. And that will come in through. On the expense side, based upon kind of where we're headed, we believe that there are incentive accruals may need to be bolstered in the fourth quarter. To get to where we think our where we're going to be on a relative to our bonus targets, which were outlined in the proxy earlier this year. So that'll be a factor there. On the insurance piece, you can see that we had a significant significant decrease in FDIC costs. We've been talking about how we're going to continue to roll back, you know, what we've done in terms of, you know, network deposit like Intrify. We've also been scaling back broker. This is largely the fruits of that but we also had a benefit in the in the third quarter from a rebate from prior, overpaid insurance cost a little bit. That said, I think the fourth quarter we're going to earn through that that add back that we had or the benefit we had. And I think insurance costs are going to be fairly stable. Yeah. I want to take a step back here. You know, based on consensus estimates that you guys all produce, we're gonna grow earnings somewhere between 1719% for 2025. Just wanna make sure people remember, as we entered this year, the earnings trajectory had a very steep back end curve, and we're on track to achieving that curve. So, it's also noteworthy that I think there are very few banks at or above our size growing EPS at this pace.

Thank you. Our next question comes from Andrew Terrell with Stephens. Andrew, please go ahead.

Hey, good morning. Had a question just around the seasonal kind of deposit flows. I appreciate $8.5 billion plus of deposit growth guidance for the year. You just talk about expectations of the seasonal component in the fourth quarter or how much that takes out specifically the ECR balances? And then just the strength you're seeing in other verticals that would, I'm assuming, offset some of that?

Yeah. I mean, really, the ECR pickup, you know, that we saw or that half of the deposits that we gained in the in the third quarter was really related to the mortgage cycle. We've talked about this, and those payments are gonna be made you know, sometime around the November, December. And so that's what's really gonna come off. So it ramped up and then it comes down, but it's here for most of the quarter, you know, in terms of an average balance basis, which, of course, is how we compute earnings credit rates. And then and then, you know, kind of more stabilized after that going into 2026.

Got it. And if I could ask on on the mortgage banking piece, I know fourth quarter of last year benefited pretty heavily from, I think, direct securities and loan sales directly to banks. I know that's something you guys invested in. Did you guys experience any of that in the third quarter of this year? Led to some of the margin increase? And is that something we should expect again in the fourth quarter of this year?

So for the third quarter, there was less fall volatility, so vol did not take a bite out of the revenue growth that we are showing here for the quarter. That's number one. Number two, we did take a position that rates were going to come down and we held on to a lot of a lot of our securities bonds, if you will, and did not sell them until later in the quarter. And we caught we caught the rise up in price on that. And that helped us a little bit. I I'm not we are not modeling that in our Q4 expectations again. As I said, I I just think Q4 mortgage revenues, come down a little bit from Q3 just because of the seasonal nature. And also, November and February are the two worst mortgage months of the year. And, you know, starting around Thanksgiving through the end of the year, activity begins to slow somewhat. Yeah. We we had some dispositions as we generally do on mortgage servicing rights, but it wasn't, it wasn't for any any type of a gain here.

Thank you. Next question comes from Jared Shaw with Barclays. Jared, please go ahead.

Thanks. Hi, everybody. Thanks for the color on credit. I guess looking at more broadly the trends in classified loans, What was driving driving that reduction? Was that credits leaving the bank or was that improving underlying fundamentals? And or was any of that from Cantor and First Brands potentially moving out of classified and into nonperforming?

No. So there's a lot of stuff there. So, let me kinda break it down. Our REO decreased $88 million. That is one property that was sold at a marginal profit to what we brought it in at. And another property that was transitioned out of REO. So that's the 88 million. Special mention declined because several credits got resolved with borrowers putting up incremental margin to make us comfortable, and then we were able to elevate the quality of that loan or the rating of that loan. And same thing I would say in terms of sub accruing substandard loans. Where we just got we just resolved a few credits, and those got upgraded in terms of its rating. In terms of nonaccrual substandard, the Cantor loan is in that category. Okay? So that's the one that went up. Right? So special mention went down by one fifty two. Accruing substandard loans fell by one thirty eight. REO decreased by $88 million, and the increase in non-accrual loans was the 95 was $95 million, which all that was for the Cantor Group five. Had that not happened, we would have been flat there. So that hopefully, unpacks it a little bit for you.

Yeah. That's great. Thank you. And then I guess just as a follow-up Dale, you mentioned growth in Corporate Trust. Deposits. How is that market share gain? I mean, what's what's going on there? Should we expect to see sort of continued continued momentum and growth on Corporate Trust?

Yes. It is market share gain. I mean, I'm really proud of kind of how we've executed in this category. We we started two and a half years ago, really. And, really, with the the focus we have on CLOs to start, we're now going to be expanding into municipal. But we have become the the seventh largest CLO trust depository in the world. In just two years. And so I think we're gonna be continuing to move up that those ranks, in that in that in that group. It you know, I can't say it's gonna be exactly what's gonna do for the for the fourth quarter. Because some of these are, you know, these are $50 million deals, let's say, and and and there's some you said some of them are refinanced and things like this until they get they get taken out. But we have, we have strong expectations, for how this is gonna go in 2026.

I'll add one other thing too here, which, we've got a very powerful one two punch here. Which is our corporate finance where some of the private credit lending is done. Works alongside of corporate trust when we go in and see clients. And so we get the corporate trust business as well as a credit mandate. And those two things work really well. And what we are seeing, and this is really we're very excited about this on the corporate trust side, is once we get in there, our service level is so superior to some of the larger banks which have not invested in this area. That we get repeat business. And there are repeat businesses coming a fairly nice pace. So we have a great expectations for next year on the deposit growth. From corporate trust.

Thank you. Our next question comes from Timothy Coffey with Ginne. Timothy, please go ahead.

Thanks. Everybody, thanks for helping us Looking at the loan to deposit ratio, that clearly come down the past couple of years. Is that a level now that you think is the right size for it? I've got kind of the mid to low 70% range.

So Actually, we think it's a little too low. Alright? And we'd like to see that be higher. And and so we're working on that. So we have plenty of liquidity to put to work. And what we're looking for are good, safe, sound loans that we can do very thoughtful credit underwriting. On. And if we find those loans, then we have the liquidity in front of us. Right now, that liquidity is probably not making any money, not losing any money for us, maybe on the on the on the margin, maybe it makes a couple of bps. But we like to put it to to good use. And so we can see strong activity which we're seeing decent activity in the in the in our markets, we'll put that liquidity to work.

Okay. Another question was on the OREO, that you your operating rental income on right now. How should how should we be thinking about that that line item going forward? Is that kind of a recurring revenue line item for right now?

Yeah. So it has two places. It has a place in other revenue where that's where we get the revenue the the collection of the rents. And then it has an operating expense, is in the other expense category. The net of those two are just marginally profitable, maybe a million to $2 million over the year. And so we took in these properties because we thought we could execute faster upon leasing up these buildings than the sponsors were. And the sponsors were happy to give it to us and we were able to we think we believe we were able to maintain the value of those properties and actually improve them over time. So our goal is as we are able to increase the occupancy of these buildings and then sell them, those the revenues from that will be adjusted accordingly. But right now, you know, the net benefit to the PPNR is really marginal at 1,000,000 to $2 million for the year.

Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Hey. Good good morning. I just wanted to follow-up Ken. So I I think credit's obviously a huge overhang on the stock, and I heard your comments around asset quality. But but just speak to us in terms of one, I think within the NDFI, the business services piece, on a macro level, like, you seen, and this is not just for Western Alliance, but have you seen underwriting standards weaken where we should be expecting more issues coming out of this area? And banks being exposed to non bank financials around this one. Just your comfort level in this space given your still quite active, would be helpful And then beyond this, as we think about asset quality, we had some commercial real estate issues you had in last quarter. Now this as you look forward, I think just your level of comfort when we talk about tested, are they getting better, at as if versus risk of, like, one offs popping up. Thank you.

Okay. You came in a little choppy. And so if I miss something in terms of one of your questions, just just do a follow-up. Or if Dale heard it, clearer than I did, then he'll jump in there. You know, right now, think the overall backdrop to the economy is is pretty good. You've got GDP growing at 3.8 to 3.9% You got the ten year rate coming down to under 4%. Employment for as much as people are talking about and nervous about it, are still in a rather low 4% area. You have greater investments being made into the country from foreign countries. So so that should help continue with economic growth. And you've got a a pro business president. So that's the backdrop to a lot of things that we're seeing. As it relates to us, and some of your question was, I think how do we feel about the non depository financial institution loans? Let me say that a good chunk of those are all mortgage related and MSR related. And as Dale said in some of his prepared comments, we've never the industry has not experienced any losses. And for those people that aren't really knowledgeable, what happens on these mortgage warehouse lines the average loan that we put on there stays for sixteen to eighteen days. And it rolls off very, very quickly. And so these are government generally qualified loans These are government loans, government backed. Credits. They're very high FICO scores. We we like these these these credits, meaning the specialized mortgage credits, the warehouse lending, they're very strong and so are the MSR credits that we have on our books. And we have not seen any weakness in the in that at all. Okay? As it relates to the other part of of our nondepository financial institutions, has gotten some exposure through the Point Bonita controversy that was disclosed about two weeks ago. We like private credit. And I think, for us, it's important that people understand why we like private credit. How it works here in the bank. First, we lend to lenders. Just remember that. We're lending to people that are lending to private equity. Our interests are automatically aligned. And anytime we recommend a covenant, if that means it's good for us, it's gotta be good for the private equity credit lender. And so we're very much aligned. Number two, we are working only with the brand name private credit funds. And we went back and looked at what their average loss rates were, only 25 basis points. All right? Now we still underwrite the losses in the funds because that's the right thing to do. K? But our attachment point which is defined as where will we first take a loss, is at 35%. So the fund has to lose 35% before we take $1 of loss. Right? Contrast that to the 25 basis points that their average loss rates are from these private credit shops. Alright? Most of our structures are rated either double a or triple a. Right? And that's what gets a lower risk weighting on these structures. Now on top of that, we have an active portfolio management process that connects with an active portfolio management process at the private equity private credit shops. And lastly, we have the ability we've got kick out in eligibility rights. On these credits as well. Right? And as we said, we don't think there's a loss here. With the Point Bonita credit. It's paying as we expected. It's unfortunate that our name got put out there. We put it out there, but it's unfortunate that it did. We've never we're we we were not worried because of the diversity of retailers and their investment grade and the fact that we have a loan to value relationship of 20% there when we have $890 million of credit accounts receivable backing up our loan amount, which, as I said, is over four times. So unless I missed anything, Dale, did I miss anything? Did I hear anything? Got it. Okay. Dale said I got it. Hopefully, I got it.

Got it. Alright. So that is full response. On the buybacks, I think, Dale, you mentioned you were at 11.3 versus the 11% that you're targeting. Is there an implication there given where the stock is right now? You could accelerate some of the buybacks the first 30 basis points of CET1, you could do in short order if the stock remains where it is today?

I think that's a I think that's a safe inference. Ibrahim. I mean, we haven't done our debt deal yet. But, but, yeah, do I think we're gonna come down from eleven three closer to our target? Yes.

And key. Our next question comes from Casey Haire with Autonomous. Please go ahead.

Great. Thanks. Good morning, guys. Ken, great answer. Long answer on the, NDFI, but I do have a follow-up. Specifically on on the collateral and how it's validated, You know, it it's all of these I mean, it sounds like you scrubbed the the note finance book the big ticket items there, which is $2 billion, but that leaves about $11 billion of NDFI exposure. It just seems like it's as long as you're not afraid to go to jail, seems easy to double pledge collateral. So what are you doing to validate your collateral and safeguard against future frauds?

Well, as as Ken indicated and, you know, in his in his remarks, you know, we are you know, confirming through direct sources, you know, with know, with the title insurance or with the title itself, that our lien has been placed in the first position, and then we and then we periodically check those to make sure nothing happened that pushed us down a second. I mean, the issue we had with, you know, with the Cantor deal is we were supposed to be in first position. And in some cases, we see that we are now in second. And, and but the reason why we say that we're okay with collateral is because if I net out the first in front of us, relative to the as is appraisals that we have that we're getting updated, we still have enough money to cover the entire amount of this loan of $98 million. Dollars which excludes the springing guarantees, from two individuals that are ultra high net worth as well as as well as the insurance policy that that we have to for fraud losses ourselves for '25 And, Casey, I wanna just correct you. I I I think I heard a number that Our note finance portfolio is only $2 billion. Okay?

No. I'm Right. And I think you're including that, but I'm talking about the the remaining in the exposure of $11 billion The rest of the NDFI exposure is the overwhelming preponderance. Is, is really these you know, basically lines for residential mortgage. And and those loans are only they only last two weeks, maybe seventeen days. So, you know, so the loan is cable funded to close a house or do a refi. You put the money in, we hold it, then it's pushed off to a GSE you know, two weeks later. So those those clear out all the time.

Gotcha. Okay. Alright. Just switching to the guide on on loans and deposits. It sounds like loan growth is going to have to have a pretty strong quarter. You guys you know, are certainly capable of that, but it's been some time to to that you've put up a $2 billion quarter. So just some color on the pipelines. And then on the deposit side of things, I think you guys had said that you are pricing it differently so that mortgage runoff would be less than the $1 billion that you've experienced last year. But the guide implies about $3 billion of of runoff. So just just looking for some clarification there.

I will split it up. I'll take the loans. I'll let Dale take deposits. You know, so we grew $700 million this quarter. That was a little below what our internal projections were. Had two, maybe three loans that were pushed out For closing from the end of the Q3, and they're coming into Q4. So, that's what gives us sort of the confidence that We'll have a much better Q4 than we did Q3.

Yeah. If you you'll go to the the deposit guide, like you mentioned, that that your your your analysis is is correct, Casey. So so what's transpired is, you know, gosh, we had this kind of, you know, kind of a rocket third quarter in terms of deposit growth. Mike, My instinctive reaction is, does that give us pricing leverage? Whereby we can we can maybe put put something down and still have, you know, a strong performance. So I think in some respects, in some respects, you know, our our guide, you know, anticipates maybe the run up would be a little bit higher. If we did that. But I hope we'd be able to save on pricing, in that scenario. I would say, that there is one other caveat though, So, you know, if the AmeriHome operation and mortgage banking generally picks up, what goes into those deposits is normally it's just, you know, your principal and interest. You make a payment, you know, for x thousand dollars. You know, we're gonna go in there and we're gonna see those funds. We're gonna have them for three weeks and then we're gonna remit them to a GSE typically. But, you know, if somebody does a purchase, you know, then maybe it's $500,000 that goes in there. And so those deposits could rise if we get into more of a purchase and or refi business moving in as rates continue to decline.

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

Hey, good morning. Thank you. Morning. Just on that lawsuit in the in the Juris Banking division, just quantify the the settlement or that you anticipate to realize here in the fourth quarter?

Yeah. So, so so the the the lawsuit was a it was I guess I'll it was Facebook. Cambridge Analytica deal. You probably heard about it. It has more plaintiffs or more participants in the class than anything ever. In the over 10 million. And, and that that process is taking place now. And so and and and if we're the distributor of that, gonna take, you know, a few months to do it. But, but get fees associated with distributing 15 million payments and going through the the process of verification of the individual you know, are they are they certified for the class, things like this?

Got it. And then I don't think I saw it in the slide deck, but if you had spot rate on deposits at the September and the beta, we should assume as we go through you know, a rate cutting cycle here potentially?

Yeah. So so the the ending rate was $3.17. For interest bearing deposits. Know, the the beta that we've, you know, we've got, you know, it's we're a little bit little bit faster on the ECR, so it's going to be a little slower than that. In terms of what we're doing. But you know, hence, you know, you see on the net interest income guide in total, we're showing that we're know, slightly, you know, asset sensitive with maybe a little bit of compression as rates come down. But we more than make up for that with what we save on ECR costs and what we save in additional income from the Emera home operation.

Thank you. Next question comes from Ben Gerlinger with Citi. Please go ahead.

Hi. Hi. Good morning. I know we talked through Oreo a little bit. With respect to the properties of the office properties last quarter, seems like you've already sold one and you're leasing up others. I know, Ken, that you you acknowledge that, like, fees and and rent rolls going to in that in or fee income, and then expenses are basically de minimis to one another. Towards your net impact to the income statement. But as you roll those out, it seems like on occupancy levels, you probably acknowledge some gains over the next twelve months was just kinda curious if any timeline you might project on getting rid of the other four that you still have on the REO.

Yeah. I I really don't have a timeline for you. We We'd like to get them off our balance sheet as quickly as possible. The best way to do that is to lease these properties up. We see good leasing activity on the properties, as Dale said, in his prepared remarks. In addition, we're getting some tailwinds. With interest rate cuts coming, which should really improve cap rates. So the best I can say is fingers crossed, that I like to see a couple of those leave us sometime during the course of next year. But we're looking to maximize value here. We're looking to improve our tangible book value now that we brought them on And so we don't wanna sell them too cheaply. Because I we're kind of optimistic that we could we could improve the occupancy of these buildings.

Every one of these, we have a reasonably current appraisal on, and they're two values in that appraisal every time. Like, one is the as stabilized value, which is, hey. If this thing is operating normally and isn't under some kind of, you know, duress or distress. And then the, the as is guys, nope. Here's what it is today. You know, yes. Of the things don't work. You just see us at you know, you gotta take those into consideration as the buyer. So we're in a situation now that the disparity between the as is value and the as stabilized values on these are some of the highest we've ever seen. And so what you're getting at is, gosh, would it, you know, would it be nice as we stabilize these that maybe we can migrate those numbers up? I'd love to do that. We're obviously never gonna forecast anything like that.

Got it. Okay. That makes sense. Are you looking to buy a building? Nothing. Not for what you're selling it for. I don't have that money. But in terms of in terms of danger, it might be a naive question, but was that an NDFI loan? And if so, what what kind of subcategory was it?

Yeah. It it was an India pie loan. And it was in, you know, you know, know, the mortgage cap or yeah. It's in our net in our you know, yeah, market banking situation and be you know? So so it it was because as a financial institution that it it's gonna be in there. And, as Ken indicated, you know, what we're doing in our know, our our advances here is our numbers would have been very strong had we had the first position as the borrower you know, presented that they did and as their contracts demand. That's where we get into this fraud situation. Otherwise, this would have never even come up.

Thank you. Our next question comes from David Smith with Truist Securities. Please go ahead, David.

Hi there. You give us some more details on the mortgage assumptions in your overall earnings sensitivity guide for down rates? Just with a 75% ECR beta on top of what you disclosed about your NII sensitivity, Seems like there's very little, if any, mortgage upside in there. I was wondering if you could help us unpack that some. Thank you.

Well, so we we you know, one of the key factors in terms of how we do on our it's basically the valuation on the MSR relative to what we have as our hedge against it, is is the spreads that have increased over the past few years. We're seeing today those spreads compress. As if that continues, as spreads compress to historical levels, likely to see higher revenue. In that scenario, because the volatility is something that doesn't really work in our favor. And we saw the inverse of this at the beginning of the the basically, the tariff situation back in April. In terms of what the Mortgage Bankers Association is actually projecting a little bit a little bit better, in terms of, you know, purchase activity or total one to four family in the fourth quarter than in the third. We're not really counting on that. We're thinking it's going to maybe slip slightly just because that's been the seasonal trend. But maybe there will be some higher level of activity because of the rate cuts as long as people are comfortable that the shutdown and things like this aren't gonna move, unemployment higher.

Yeah. The numbers from the MBA for next year they they expect mortgage activity to rise, 10% to $2.2 trillion. Where almost $1.5 trillion will be purchased volume, and then about $700 billion will be refinancings. So again, Q4 revenues for mortgage should be just a little weaker than Q3. Although, you know, I've got some I got my fingers crossed here that could maybe get some tailwinds here. But we we are becoming more optimistic about where that revenue stream is gonna be for 2026.

Okay. And then just to circle back to the earnings at risk scenario, could you help us just roughly size how much of the offset to the NII asset sensitivity is coming from ECR benefiting and down rates versus mortgage benefiting and down rates for you?

Yeah. I think the preponderance is gonna be kind of in the mortgage side. But, yeah, but they're both contributors. And if there's more variability, in terms of it improving better in the earnings at risk, it's gonna be the mortgage related as well. I think we're gonna have have a higher beta on the beta based upon kind of what could happen there versus the ECRs, which we talked about those betas already.

Thank you. Our next question comes from Bernard von-Gizycki with Deutsche Bank. Please go ahead.

Hey, guys. Good morning. So you have a bit over a third of your total deposit base that has ECRs related to them. And when we think about the composition of the deposit base, and the ECR related costs, which represent about 30% of the total expenses, Can you just talk to expectations of how these change? Know, Dale, you're moving over to a new role next year focusing on deposit initiatives. But are you looking to drive down the percentage of the ECR related balances? Have them grow but more focused on reducing, ECR costs related to them or a combination of both? Any color, you can share with these dynamics?

Yeah. So so the ECR is really driven by two sectors. The largest, of course, is the kind of what we're doing in the mortgage warehouse deposits. We've talked about that. And the other one is our homeowners association. So going forward, I believe that the homeowners association deposits are not going to shrink. They're not going to grow as quickly as the overall footings of deposits for the company. So proportionately that will decline Meanwhile, I our HOA group, you know, we're the largest in the nation, in terms of what we provide services there. That growth is continuing to be strong. And I think that was going to at least keep pace with the overall size of the company as it grows. So in total, think you're gonna see that it becomes kind of less significant. And in terms of the expenses associated with it, you know, as you go to lower rate levels, you know, numbers just come down and there's really not as much of an offset anywhere else. It's just the dollars are going to fall back a bit. You know, to, to lower levels if, say, we get, you know, four rate cuts over the next twelve months.

Okay. And then just on equity income, the uptick there in 3Q, was that primarily due to the reversal in losses from 1Q? Just curious if that's come back. And just given the cap markets activity picking up, how should we look at this line item from here?

I we don't have that reversal yet. Thanks for remembering that. But, that's still that's still pending. I know this was this these were other types of things. Look. That number does bounce around a bit. You can obviously see that. So, you know, this $8 million handle you know, certainly higher than usual. A little bit of a haircut there. Going forward, but we don't have anything that indicates that anything is either getting dramatically better or worse.

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

Hi, everyone. You increased the range for ECR costs again this quarter, but this time you maintained the NII range of up 8% to 10%. The increase in the ECR deposit cost range tied to just higher balances or because of a lower ability to reprice? Down those deposits?

It's it's really balance driven. You know, I mean, frankly, we got a little more in the third quarter than we thought we would. So it's it's balance driven, and and there's been you know, we you know, it's it's a I guess it's a good problem to have in that, you know, some of these dollars grown more quickly, but, know, it does show up in expenses and and it contributes to, you know, the situation where you've gotta look at adjusted you know, adjusted, efficiency ratio, adjusted NIM.

Okay. And then on my follow-up on your earlier comments, reviewing the note finance portfolio, have you given any thought to potentially casting a wider net in your reviewing the loan portfolio credit procedures more broadly? Beyond note finance and NDFIs. Just investor concerns on the company's credit quality? Thank you.

Hi. Yeah. The I I wanna quell any misconceptions that might be implied through even some of the questions. No one is is more concerned about credit governance, asset quality, than than our executive management. We we've got an entire construct built around the control environment for credit The the second line or credit risk review that's intimately involved. And so the at the earliest stages of something that didn't work, as we expected, those teams are involved inside of our company. We're we're we're listening and and reviewing on a much broader scale. So this work's been ongoing. It goes on all the time as part of our quarterly full portfolio review process. But in addition to that, we we we hold ourselves accountable and we hold our our business accountable through our second and third line who are actively, engaged in that. And so we're not asking ourselves, could this happen again? We're receiving validation of those things through through our internal control network.

Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Jon, please go ahead.

Hey, thanks. Hi, everyone. Hey, John. Ken, maybe for you. Hey, do do you have any balance sheet size limitations It looks like you're going through $100 billion very quickly the next couple of quarters. Anything for us to consider and how are you thinking about no. Not really. Think you're right. You know, of course, not gonna have a lot of growth in the balance sheet for Q4 just because as we've talked about the seasonal outflow of the warehouse lending deposits or the mortgage deposits. But two things we're doing. One, we're growing the business based upon opportunities that we have, and we're not holding our ourselves back. Because we're gonna cross over a $100 billion. Number two, we continue to build out the infrastructure to crossover a $100 billion and be LFI ready. Number three, we're waiting and we're hopeful that the tailing rules will come out probably sometime in the middle of next year. That will move it to $2.50. Alright? But, you know, in all the expense numbers, remember, non non ECR operating expenses quarter to quarter only went up $2 million For the first 3 quarters of this year, non ECR operating expenses were in a band of $5 million and that includes all the development and investment we're making to be LFI ready. So to your balance sheet question, we know we'll cross over a 100 when it's the right time. Based on the opportunities that are in front of us. Okay? And we'll be ready and we continue to invest And if the tail end rules come out, then we may slow some of our investment down to match what some of the tailwind rules are.

Okay. Alright. Fair enough. And then, Dale, for you, in your prepared comments, talked about an upward bias in ROTCE. And top quartile and ability to show improvement I'm assuming you're thinking a starting point that includes a more normalized provision So maybe normalized ROTCE right now is high teens rather than the mid teens you printed? And you can do better from there. Is that fair?

Sure. Yeah. Yeah. Yeah. Know that that that's completely fair, John. You know, maybe just talk timing a little bit here as well. Yeah, normalized provision, you know, that would have obviously augmented the number, in in the third quarter. As we get to the first quarter in particular, it's a little bit strange. You know, we we lose a couple of days. That's meaningful for us. And, also, you step up again, everyone knows, on, you know, certain types of tax and things like this, you know, kind of starting the new year. So I'm looking for I'm looking for something to, you know, that kind of kick in you know, kind of in the back half of 2016 to hopefully get to the levels you're talking about.

Yeah. You know, one of the things that can really supercharge the return on average tangible common equity will be the mortgage business next year and the growth in the mortgage business. You know, if it grows more than moderately, that's gonna really provide excess earnings and that will improve the return on equity, John. Thank you.

Our next question is a follow-up from Ebrahim Poonawala with Bank of America. Please go ahead.

Thanks for taking my question. Dale, just follow-up, I think it's important Just wanna make sure sure in your slide 24, the 16% loans NDFI loans, mortgage intermediaries is about $9.1 billion. The warehouse is about $6 billion and change. I'm trying to figure what the balance is between the 6 and 9, and are those nonresidential warehouse loans, so, like, commercial real estate driven. And would you be holding reserves against those loans, as opposed to the resi mortgage where you show on the slide where you don't need reserves because of the zero loss nature. Just clarify that for us.

You know, I think we maybe need to pick this up you know, at maybe at the next call, Ebrahim, in terms of in terms of what this what this looks like. I mean, so we you know, we've talked about the the the warehouse piece. And and where we are on the, you know, the NDFI elements whereby we're assuming a first out position and another lender is, is in front of us with the, with the higher level of risk against loans that typically have low loss to begin with. So let's pick this up later today.

Thank you. Our next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Hi, good morning. Just I guess looking at the Cantor relationship specifically, what internal controls maybe failed to detect some of the collateral deficiencies there? And then it looks like in going through the lawsuit that the credit was converted from the line of of credit in July to a term loan, and then the the suit was filed in August. Was the loan re underwritten in July and the new issues kind of identified we later? Maybe just give me a little bit of a timeline as to what happened around, July, August there.

Yeah. So I'll provide some updates. But, you know, appreciate that this is an active litigation. And our discussion here is gonna be somewhat limited. I'll try to help you with your question. First, we had a long term relationship with this borrower. Alright? It dates back to 2017. And as of this past August, the borrower was current. We made the decision to exit the relationship and convert the revolving loan to a term loan with a May 2026 maturity. It was during that time that we discovered the borrower failed to disclose material facts to us. Consequently, we wasted no time in filing a lawsuit alleging fraud. So that's probably as much as I can tell you given that we have an active lawsuit here. We're working hard to get a receiver in there as soon as possible. And with that, we're gonna have greater insight into the books and records of Cantor five.

Thank you. This concludes our Q&A session. And I would now like to turn the call back over to Kenneth A. Vecchione for closing remarks.

Yes. Thank you all for attending the meeting. Appreciate all your questions. We look forward to the next call. Be well.

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