Western Alliance Bancorporation Barclays 24th Annual Global Financial Services Conference

Good morning, everybody. Thank you for joining us on day three of our financial services conference. This morning, we're excited to have Western Alliance joining us, and Ken Vecchione, the Chairman, President, and CEO. Ken, thanks for being here. Appreciate you making the trip out.

My pleasure. Thank you for inviting me.

Well, I think there's a lot to discuss, clearly, with Western Alliance. Maybe we just kick it off with, at Investor Day in May, you laid out medium-term targets, and later in the second quarter, you began acting on them. Reframing the story from maximizing balance sheet growth towards optimizing profitability and returning capital. Walk us through what changed and how you think about growth versus value creation and what you want us to understand about the kind of company that Western Alliance is becoming over the next two to three years.

Yeah. There's a lot to unpack in that simple question. Let me start with why did we pivot? We are generally a strong organic growth company. What we found was that we weren't being paid for our excess growth, and it wasn't being reflected in the share price. In addition, the excess growth was being considered as risky growth, which also weighed on our share price. We saw our share price where it is, and we said, "Look, the best thing we can do is buy back our shares." We started to do that. So we took that excess capital and we purchased our shares with it, and we continue to do it. What we think the market doesn't fully understand yet is the improvements we made in asset quality, how the business is positioned, the success we're having with our deposit optimization strategy.

I assume all these things you're going to ask, and that we're taking advantage of that by buying back our shares. We had expected to buy back $150 million in the second half of the year. That's correct. We're buying a little bit more in Q3 than in Q4. As I said, the company's on sale, and we're taking advantage. As it relates to the Investor Day targets, certainly around share repurchase, we only had $200 million to $300 million in there over a three-year horizon. Here we are buying back $150 million now, and we'll probably continue with that process into 2027. We'll accelerate that on our way towards hitting our Investor Day goals of return on average assets of 120 to 130, and return on equity of between 16% and 17%.

Great. As you said, the focus has really shifted. Now it's really on deposit optimization on the right side of the balance sheet. As you move deeper into that, how do you decide which relationships are no longer earning an adequate return? Where is there still room to reprice or reposition funding without disrupting the broader relationship, I guess, given how many of these clients touch multiple products?

Right. Deposit optimization was clearly laid out as one of our key strategic initiatives at our Investor Day. There's a three-pronged strategy to the deposit initiatives. Number one, those clients that were carrying excess liquidity, we helped transition that to other banks. Second, for select clients, we changed the pricing grid and capped what we pay for deposits. Third, and most importantly for our long-term growth, we are accelerating and putting more time and attention against our deposit-only channels, such as Business Escrow Services, Corporate Trust, Juris Banking, our Digital Assets Group, and HOA is a couple of them. Now, what does all this mean in the progress we've made? In Q2, we transitioned $1.4 billion of deposits outside of the bank. In Q3, we've already transitioned $2.5 billion. So now we're a total of $4 billion. We set as our goal $3 billion for the year.

We actually accelerated deposits that were going to transition in Q4 into Q3. We're now ahead of our full-year goal at $4 billion versus $3 billion. The net benefit of all this is several things you'll see. One, our deposit fees, which located in our operating expense line, will be down near slightly over double digits in the millions. You'll see a significant improvement in deposit fees. That will lead to a higher adjusted net interest margin by several basis points. Then our headline NIM will just be down maybe about a basis point because of the deposit remix from the deposit optimization strategy. We're very pleased that one of the key items that we wanted to take care of coming out of Investor Day, we have done so, and we've done it at an accelerated pace.

For the rest of the year, we are not going to look to move any more deposits out of the bank. We are going to review it again, and we will give additional guidance either on our Q3 call or as we enter into the new year.

That $3 billion is now $4 billion, but you are still seeing growth in the other areas.

Oh, yeah. Let me just say, the thing is, not only did we get $2.5 billion out of this quarter, we expect to still be positive deposit growth. That is kind of a Herculean trick to be able to move that much out and be able to also grow.

Where are you seeing the most benefit or the most success on the deposit growth side on the areas that you are focusing?

A couple of things. For this quarter, you will see it, one, in Technology and Innovation. That specialty finance line. There is a lot of venture capital financing, and deposits are growing above trend for Q3. BES, which is Business Escrow Services, which caters to private M&A transactions. They are very busy, and they too will be above-trend growth for Q3. Corporate Trust, which has a long or deep pipeline will continue to grow as it has a couple hundred million dollars per quarter, but they have got a deep pipeline. Those three business lines, which I just mentioned, have also lower cost of funds related to them, and over time, that will help change the mix of our deposit composition, but also lower our deposit costs.

Yeah, I think the deposit optimization gets a lot of the attention, but you also have fixed-rate asset repricing and securities being reinvested at higher yields. Independent of what the Fed does, how much of the next leg of margin improvement is driven by the asset side versus the funding side? I guess what gives you that confidence in that 360-370 medium-term margin target?