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spk10: Good day, everyone. Welcome to the Western Alliance Band Corporation's second quarter 2023 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebandcorporation.com. I would now like to turn the call over to Myles Ponelik, Director of Investor Relations and Corporate Development. Please go ahead.
spk14: Thank you and welcome to Western Alliance Bank's second quarter 2023 conference call. Our speakers today are Ken Vecchione, President, Chief Executive Officer, and Dale Gibbons, Chief Financial Officer, and Tim Bruckner, Chief Credit 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 more complete discussion of the risks and uncertainties that could cause action results to differ materially from any forward-looking statements, please refer to the company's SEC filing, including the form 8K filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Beccione.
spk05: Thanks, Miles, and good morning, everyone. As usual, I'll make some brief comments about our financial results and action items, and then I'll turn the call over to Dale, who will review the quarterly results in more detail before opening the call for Q&A. Our Chief Credit Officer, Tim Bruckner, as Miles said, is here with us as well. In many ways, this quarter represented a transitional period for Western Alliance following the events of mid-March, as our firm and our clients increasingly returned to a sense of normalcy. We continued to successfully execute on the balance sheet repositioning strategy we laid out last quarter. We exceeded our liquidity guidance by growing deposits by $3.5 billion and repaying over $6 billion in short-term borrowing. The second quarter, Wall generated total net revenues of $669 million, net income of $216 million, and EPS of $1.96. We maintained strong profitability with return on average assets and return on average tangible common equity of 1.23% and 18.2% respectively, which grew tangible book value per share by $1.53 to $43.09, or 18% year over year. and will continue to support building capital levels in the quarters to come. We achieved significant progress on the immediate and short-term objectives identified last quarter to establish a sound foundation for Wall to sustain ongoing client and financial success. Notably, deposits grew $3.5 billion and exceeded our $2 billion quarterly guidance. Growth was diversified across business lines, and included brisk core deposit growth from new and returning customers. Net liquidity growth of $2 billion allowed us to significantly reduce higher-cost wholesale borrowings. We will continue to expeditiously execute our balance sheet repositioning strategy and completed $4 billion in total asset dispositions in Q2, which included $3.5 billion in loan dispositions ahead of the $3 billion outlined in Q1. Meaningful deposit growth and asset dispositions lowered Wall's loan-to-deposit ratio to 94% and allowed us to rapidly reduce reliance on higher-cost FHLB borrowings by $6.1 billion over the quarter. I'm proud to report core deposits have rebounded another $3.2 billion quarter to date, meaning Wall's deposit levels are now $600 million above our year-end 2022 balance. CET1 capital of 10.1% increased from 9.4% on March 31st and 8.7% or 140 basis points since Q3 2022 when we initially announced the bank's capital building initiative through organic capital generation without equity issuance. Finally, we continue to focus on meeting our core client banking needs in order to cultivate strong long-term relationships, leveraging third-party products to significantly grow reciprocal deposits has lifted our insured and collateralized deposit levels to 81%, one of the highest among large U.S. banks. As we move through the back half of the year, we believe bank investors will place more emphasis on balance sheet strength, stressing the fundamentals of growing capital, improved liquidity, deposit cost composition and granularity, stable asset quality, moderate and thoughtful loan growth, and producing predictable and sustainable returns. The bank's diversified funding strategy continued to focus on growing attractive funds from a diverse set of clients and channels in order to prioritize repayment of the more expensive wholesale funding sources and then to optimize deposit balances from lower cost sources to deploy into superior risk-adjusted lending opportunities as we have done historically. Driving the $3.5 billion in deposit growth was significant new and return on customer activity throughout Western Alliance. Q2, we attracted $1 billion from approximately 1,000 new and returning commercial relationships at an attractive average total deposit cost of 1.98%, with notable contributions from mortgage warehouses, regional banking, and settlement services. Over $400 million of net new deposit money was in non-interest-bearing DDA. Our commitment to foster multi-product customer relationships has been the key to onboarding new deposits a very competitive environment. Additionally, we will utilize other diversified sources of deposits to accelerate repayment of wholesale borrowings and return to prudent movement. Our recently launched online consumer channel is demonstrating steady progress, providing another source of uncorrelated liquidity and generated approximately $700 million this quarter at attractive rates compared to the marginal costs of repaid borrowing. Going forward, continued deposit channel optimization and growth in new and returning core client commercial relationships will lower the proportion of funds generated from the broker CD market. Now, Dale will take you through our financial report.
spk04: Thanks, Ken. For the quarter, Western Alliance generated net income of $216 million, EPS of $1.96, and pre-provision net revenue of $282 million. Net interest income decreased $60 million during the quarter to $550 million, mostly from elevated higher cost short-term borrowings that were materially reduced per quarter end. Q2's net interest income should be considered a trough from which Q3 and Q4 levels should ascend. Non-interest income increased up to $119 million from an adjusted level of $102 million in the second quarter. As a reminder, loans marked in Q1 at a net loss of $141 million as part of our balance sheet repositioning efforts were responsible for negative fee income last quarter on a reported basis. On an operating basis, non-interest income was $18 million higher from Q1. The green shoots we cited with mortgage last quarter were evident again in the second quarter as AmeriHome revenue increased $13 million to $86 million. We remain cautiously optimistic continued stabilization, improving margins, and profitability momentum is sustainable as AmeriHome capitalizes on the exit of a major competitor from the correspondent funding channel earlier this year. Production margins widened closer to normalized levels of 43 basis points as the industry is rationalized and wind rates continue to improve. Other non-interest expense growth was driven by higher insurance costs related to elevated insured and broker deposit levels, which also include core reciprocal deposits above a certain threshold. Revision expense of 22 million is indicative of a return to a more normalized credit environment. We remain conservative On macro assumption and as a commercial bank, the outlook for commercial real estate is a key driver that informs our opportunity. Our allowance for credit losses modeling assumes an 80% likelihood of a recession using Moody's analytic scenarios. A lower tax rate was beneficial to earnings this quarter, and we expect to go forward at a normalized rate as an average of the last two. We made substantial progress in our balance sheet repositioning and surgical asset disposition efforts in the second quarter, to accelerate higher capital and liquidity building. These dispositions complemented our organic earnings and contributed approximately 43 basis points of incremental CET1 capital. Four billion of asset dispositions were completed, including loan sales and run-offs, primarily in equity fund resources, syndicated loans, and mortgage warehouse businesses. The equity fund resource credit link note was also fully unwound. Loan sales for investment increased $1.4 billion to $47.9 billion, Deposits increased $3.5 billion, which brought balances to $51 billion at quarter end. Organ servicing rights balances of $1 billion rose 11% during the quarter. Total borrowings were reduced by $6.3 billion to $11.5 billion due mostly to pay downs to federal home loan bank borrowings. On March 31st, the remaining EFR credit link note was also fully redeemed, which completed the unwind of $542 million of CLNs year-to-date. Deposit momentum has continued into the third quarter, as deposits are $3.2 billion higher from June 30th. Total health for investment loan growth of $1.4 billion consisted of $700 million of organic loan growth, primarily from mortgage warehouse, regional banking divisions, and resort finance. Improved liquidity from deposit growth, well in excess of loan growth, allowed us to reclassify $700 million of health for sale loans back to health for investment, which will improve the company's return profile. Deposit growth of $3.5 billion resulted from remixing the deposit base into interest-bearing DDA from savings and money market, as well as CD growth from client promotions and broker CDs. Non-interest-bearing DDAs comprise a third of our total deposit mix, with approximately half having no cash payments or earnings credits. Turning now to our net interest drivers, the securities portfolio grew $1 billion to $10.1 billion as we look to bolster our high-quality liquid asset balances. The yield expanded eight basis points to 4.76%, largely from floating rate securities benefiting from higher rates, and should continue to benefit from higher reinvestment rates as approximately 1.3 billion securities are expected to mature in the second half of this year, and 1.1 million additionally in 2024. The spot rate for the entire portfolio was 4.85% at quarter end. Health care investment loans increased 1.4 million, and the portfolio yield increased 20 basis points to 648. At quarter end, the spot rate was 6.74. Interest-bearing deposit costs rose 33 basis points to 3.08% on a $3 billion increase to $34 billion. The elevated costs resulted from a higher interest rate environment, which offset more tempered non-interest-bearing demand deposit growth. Total cost of funding rose 58 basis points to 2.5% from higher utilization of wholesale borrowings at an average cost of 5.6%. 6 billion of these borrowings were repaid, which produced a 3.4 billion difference between average and end of period balances. Optimizing the funding mix with more core and reciprocal deposits in conjunction with the 6 billion of federal home loan payouts, which occurred later in the quarter, positions us for improving funding costs to support our net interest margin guide. Going down further into our funding base, we have actively utilized reciprocal deposit channels to drive growth and provide greater insurance coverage for larger depositors. 62% of broker deposits consist of sticky reciprocal deposits. We believe these core client relationships have been fortified through this product enhancement, making them exceptionally stable. Overall, net interest income decreased approximately $60 million, or 9.8% over the prior quarter, due to compressed spending $562 million, mostly stemming from balance sheet rescissioning actions. Net interest margin compressed 37 basis points to 342, with a higher interest expense from outsized higher-cost borrowings. Excess liquidity is generated with deposit growth greater than loan growth and non-AmeriHome helper sales are liquidated. We expect to pay down additional repo lines, costing SOFR plus 2%, and should contribute to funding cost tailwinds. The effect of these dynamics can start to be seen in the expansion of the June NIM to 3.5. Our efficiency ratio of 57% improved by about 500 basis points from the second quarter, though our adjusted efficiency ratio increased from 50% to 50% from 43% in the prior quarter. Higher insurance costs from elevated brokered and insured deposits, as well as lower net interest income from increased interest expense, were the main reasons for this change. We still view mid to upper 40s adjusted efficiency at the right level and expect expenses to align with our core run rate of revenue as we look to optimize additional work streams throughout the bank. Pre-provision net revenue was $282 million during the quarter. Solid profitability was sustained with a Q2 return on average assets of 1.23% and return on average tangible common equity of 18.2%. Strong PPNR provides capital flexibility to absorb while still growing the balance sheet and attaining higher CET1 capital levels. Given the increased attention on the commercial real estate sector, we're providing additional details on our CRE investor and office portfolios, as well as our overall early identification and elevation credit mitigation strategy. This proactive migration approach has historically produced lower loss emergence. Our CRE investor underwriting strategy rests on a foundation of low loan-to-cost underwriting in sub-markets where we have deep experience and strong financial sponsors. As a reminder, our financing structures carry no junior lanes or mezzanine debt. This enables maximum flexibility in working with clients and sponsors. We have low uncovered tail risk as 92% of the portfolio has LTVs below 70%. And these LTVs are based upon the most recent appraisals and assuming commitments are fully funded. The commercial real estate office accounts for just 5% of total loans. We have previously discussed our focus on shorter-term bridge loans repositioning office projects in suburban areas. Our exposure to true central business district areas that we believe are most vulnerable to work-from-home risk are minimal to just 3% of office loans. We have re-designated some mid-term exposure away from the CBD classifications, because in our view, dynamics in these markets make them less susceptible to the work-from-home risk present in larger cities. For example, we do not have CBD office loans in New York, Boston, Chicago, Atlanta, Houston, or Dallas. Looking at LTVs, you'll notice only 3% of office and then 80% are greater loans of value, which aligns with our central business district exposure. primarily focused on in-demand Class A to B-plus office properties, and 94% of Class A properties have LTVs below 70%. The entire office book carries an LTV of 55%. Finally, we are not facing a large maturity at all as approximately three-quarters of loans come due in 2025 or later. Turning to asset quality trends in light of the present environment and due to the sharp increase in interest rates over the past 12 months, we have completed a proactive comprehensive review of our commercial real estate portfolio, which is reflected in loan migrations this quarter. As part of our early identification and early allocation and mitigation strategy, it has served us well. We proactively moved loans into special mention when cash flow may be curtailed in the present environment, despite having well-supported collateral values and excess interest rates. Sponsorship remaining strong and the loans still turning. We do this to ensure attention and monitoring at the highest levels within our credit organization, as we require the sponsors to re-margin the loan of established or unsatisfactory tax reserves to support a pass rating. This is an important element of our credit control process, an established process for more than 10 years. As a result of these efforts, special financial loans increased to $694 million, or 1.45% of funded loans, with $250 million, or two-thirds migration coming from offices and hotels. Classified assets increased $145 million to 89 basis points of total assets. After the increase in classified assets was driven by one $75 million office loan in downtown San Diego, which makes up the preponderance of the central business district office exposure I mentioned. We don't anticipate meaningful losses if this property is 82% leased. Current appraisal exceeds the outstanding loan amount. and all cash flow will go to pay down this credit. Our proactive identification and resolution process results in lower realized losses. Over the last 10 years, less than 1% of special mention loans have become losses. And within commercial real estate investment properties, less than 10 basis points to special mention loans have migrated to loss. When looking at the next two slides, you'll see the results of our early identification, elevation, negotiation resolution process, It has resulted in best-of-class loss rates over the last 10 years. For us at Western Alliance, it's about the process, which sometimes produces earlier criticized and classified designations, but at the end of the day leads to low net charge-offs. On average, we are ranked in the top third among asset peers per diversity-graded loans as a percentage of total loans. We hold the best ranking on losses. The difference between our ranking on adversely graded loans compared to our number one position of historical credit losses highlight the success of our proactive credit mitigation strategy. Quarterly net loan charge-offs were 7.4 million or six basis points of average loans compared to net loan charge-offs of 6 million or five basis points in the first quarter. Our total loan, ACL, rose almost 13 million from the prior quarter $362 million due to higher provisioning and low loan loss rates. Total loan allowance for credit losses to funded loans increased one basis point to 76 basis points in Q1. That is 94 basis points when loans covered by credit link notes are excluded. The allowance was 141% for non-performing loans at the end of the quarter. We feel well positioned in an uncertain economic environment based on the business transformation since the global financial crisis. Our loan portfolio is diversified across risk segments with almost a quarter of it either credit protected, government guaranteed, or cash secured. And over half of the portfolio is either insured or resistant to economic volatility. These percentages align with weightings reported before we embarked on our balance sheet repositioning initiative late in the first quarter. Of note, Our lower average loss rates in the resilient and more sensitive categories are indicative of conservative underwriting and highly responsive remediation actions. We discussed reprioritizing building capital back to pre-merger levels on our Q3 2022 earnings call. Since then, CET1 capital has grown from 8.7% to 10.1% and is up over 70 basis points since the first quarter. Our tangible common equity to total assets rose 50 basis points from the first quarter to 7%. We remain committed to achieving a medium-term CET1 target of 11%, which we view as prudent considering the heightened regulatory tension regarding appropriate capital levels. We also expect increased excess capital will provide more financial and strategic optionality in the future. Looking at the strong combination of insured deposits and high capital to make depositors comfortable with the stability of their financial institution, Western Alliance has materially moved its insured deposit levels to among the highest in the nation compared to the largest banks. Capital has also lifted into the top third, even adjusting for fair value marks in both the available for sale and healthy maturity securities portfolios. Inclusive of our quarterly cash dividend payment of 36% cents per share, our tangible book value per share increased to $1.53 in the quarter to $43.09. Western Alliance's compelling long-term tangible book value per share divergence from peers remains intact. It's increased over six times out of the peer group since the end of 2013, which equates to a compound annual growth rate of nearly 20% from economic cycles and market disruptions. This outperformance is still four times that of peers when adding common dividends back. I'll now hand the call back to Ken to conclude with closing comments.
spk05: Thanks, Dale. Our guidance for the rest of 2023 continues to be driven by the strategies and priorities laid out in our prior earnings calls. So let me tell you what you can expect from here. Regarding capital, having exceeded our immediate CET1 target of 10% in Q2, we expect continued, although more gradual, growth in our capital ratios towards a medium-term CET1 ratio target of 11% in 2024. This will be driven by our continued strong return on average tangible common equity and capital generation. Core deposits are expected to grow at approximately $2 billion per quarter and exceed more muted low growth by approximately $1.5 billion. This will lower our low deposit ratio over time towards a mid-80% target. Net interest margin is expected to rise modestly from our Q2 trough of 3.42% and land in the range of 3.5% to 3.6% for the second half of 2023 based on our successful repayment of borrowings this past quarter and the cost of new deposit funds. Our efficiency ratio, excluding the impact of deposit costs, should decline slightly to the high 40s given the reduced borrowing costs and higher asset yield. Asset quality remains manageable as it returns to more normalized levels. We expect credit losses to be 5 to 15 basis points through the economic cycle. Overall, for the second half of 2023, we expect quarterly operating PPNR to remain consistent to Q3 results and begin to climb as we exit the year. As we continue to reposition the balance sheet and continue to reestablish our quarter deposit and loan growth trajectory, see West Reliant as an even better institution and well-positioned for the future. We view our earnings performance being driven by balance sheet growth, improving margins and efficiency, along with continued strengthening in our mortgage operations that should result in quarterly operating PPNR consistent to Q2 2023 results and then growth thereafter. At this time, Dale and Tim and I are happy to take your questions.
spk10: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by A1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by A2. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, it is star followed by A1 on your telephone keypad. The first question will be from the line of Ben Gerlinger with Hoft Group. Your line is now open.
spk13: Hey, good morning, everyone. Morning, Ben. I was curious if we could, I mean, I'm sure we're going to get a lot of questions on credit because deposits seem to have cleared themselves up. But if we could just take a moment to kind of just walk through the guidance a little bit further. I was curious on what are you guys assuming for just average earning assets for the back half of the year with that margin guide? And it seems like you already have that spread difference of plus $2 billion per quarter, which gets you $4 billion in deposits. And then on loans, it's plus $1 billion. So you already have that three essentially now. Can we see paydowns of debt pretty immediate in the third quarter? Or do you think it's a bit more granular throughout the second half of the year?
spk04: Well, we still have a couple of billion dollars that fund our $3 billion that we have in our health for sale loans with repo relationships with another commercial bank. And those loans and those funds that we have borrowed from them cost us SOFR plus 200 basis points. So paying that down with some of the liquidity we bring in is going to help improve our net interest income, but doesn't really change, you know, earning assets. But in addition to that, we do expect that a portion of these dollars we bring in are going to be used to provide, you know, new credit opportunities to our clients. And so it's going to be a combination of the two. So I'm looking for earning assets to continue to climb, but not as fast as the deposit growth.
spk13: Gotcha. Okay, that's helpful. And if we could just take a moment to think just kind of holistically about credit here. It seems like you've got a decent amount of NPL increases. And the reserve was essentially the same, a modest uptick. So with credit-linked notes being a little bit less of importance now that we've kind of had the strategic repositioning, how do we think about the allowance going forward in terms of like a gap percentage relative to loans?
spk04: Well, a couple of things. In terms of what the ratio is, I think it's really important to note how much what our charge-offs have been and why that number maybe screens lower relative to other institutions. We don't have consumer loans, which have a constant burn rate of losses. And in addition, I mentioned the Moody scenarios. Well, so we took 60% of their consensus forecast. That has two consecutive quarters, third quarter and fourth quarter this year, of a recession in it. And then we took 20% weighted on S4, which is the severe recession whereby you are seeing contraction in commercial real estate values in excess of 30%. What's important about that is because we're a low advance rate lender, even with significant reductions in terms of valuation, we still don't incur losses because our borrowers still have skin in the game. They still have equity that they want to protect, and they're still willing to negotiate with us in terms of how we can come to a solution set together. So it's really, if we were lending at a much higher rate, we wouldn't be in that position. But because our low advance rates, that's been really key to our strong asset quality.
spk05: But if you're asking a question about the provisioning going forward, I would say it's about in the same vicinity going forward as Q2's provisioning for Q3 and Q4.
spk13: Gotcha. That's a very helpful call. Great to see you guys go from defense to offense so quickly. Appreciate the call, guys. Thank you.
spk10: Thank you. The next question will be from the line of Casey Hare with Jefferies. Your line is now open.
spk08: Yeah, great. Thanks. Good morning, guys. Just want to follow up on the borrowing pay down. So just you guys have a PPNR guide of around $280 million, what you have here in the second quarter. Just wondering the pace of what the guide assumes for borrowing pay down and timing as well. How low does that $10 billion go?
spk04: Well, I don't have a number for you, Casey, exactly. What I would say is we're trying to do two things here. One is pay down further, particularly the more expensive lines I mentioned, but secondly as well to provide more liquidity for our clients. So the combination of those two. I don't have a number in terms of what exactly that looks like, That's the trajectory we're on. That's the trajectory we started to be on in the second quarter. And I think we're going to be more focused on that as we lead to 2023.
spk08: Okay. And given the progress you guys have made on the deposits quarter to date, which is pretty strong, has there been any paydowns? quarter to date, making use of that deposit growth? Do you have a borrowing balance as of July 17th?
spk05: Yeah, this is Ken. Yeah, we do. Let me just take you to the deposits. Yeah, we're seeing great deposit growth so far early into the quarter. To remind everyone, that's the natural flow of our deposits. They grow early, and just about in the next couple days, we're going to see some paydowns. coming from our, uh, warehouse lending group for P and I and D and I accounts. And so that's those deposits will shrink. Okay. So for us, we have the, we have the borrowing schedule to be paid down probably closer to the back end of a quarter is a safer way of thinking about it. As we grow our deposits, uh, to 2 billion, we actually hope we can do better, but as we grow our deposit growth, uh, to 2 billion.
spk08: Okay. Very good. And just, uh, I guess switching to the dispositions, about $1.8 billion left. Apologies if I missed this, but can you get that done this quarter and within the original fair value mark of 2% that you took?
spk04: We've updated our marks. We think that they're good. What we did initially, I think, proved to be pretty accurate. You know, I don't think it's all going to get done this quarter, but we expect to make kind of significant progress on that. And as I mentioned, you know, that'll be coincident with paying down higher cost of budget.
spk08: Okay. Dale, any color on what's causing the delay? Because, I mean, what's left does not look like, you know, a lot of high-risk stuff for you guys.
spk03: Let me take it. Hi, Tim Bruckner. Yeah, we're actually receiving... much stronger values on some of these on discrete single note sales related to some of the assets. And just in the normal course, that takes a little bit longer than doing a large pooled sale.
spk05: Gotcha. Thank you. Thanks for the question, Casey. But, you know, we were pretty early in moving assets to HFS. And I think our aggressive... Posturing of that helped us keep the dispositions inside of our marks. And that's sort of the hallmark and the culture here at the company and which connects to the asset quality approach that we take as well. So we tend to be early on everything and try to execute early on. We have found, whether it's disposition of assets, whether it's asset quality and talking to clients, Being there early, being there first produces better results. So I just wanted to add that little call of commentary.
spk08: Great. Thanks, guys.
spk10: Thank you. The next question will be from the line of Bernard Von Giske with Dosha Bank. Your line is now open.
spk01: Yeah. Hi. Good morning. So on slide five of your presentation, you show some nice detail on the growth drivers of that $3.4 billion. of deposits during the quarter. It looks like, as you mentioned in your prepared remarks, about $1 billion in core deposit growth with the new and returned client deposits and existing client net growth. So, that's about one-third returning funds and two-thirds new money. So, if that mix is right, is this the type of mix between new money and returning money you would expect, say, over the next few quarters, potentially improve over time? And maybe if you could give us a sense what that mix was for the $3.2 billion quarter to date.
spk04: Regarding where the funds have come from, I think that there are some clients that were really waiting for our second quarter results, wanted to make sure that the noise related to Q1 had cleared. There weren't other financial institution failures during this interim period. And so I think we have a strong ability to pull in funds in the near term for some of the returning clients. That, of course, will diminish over time when there's less funds to return to begin with. But at the same time, we can gen up, again, some of our deposit business lines, which were a little hamstrung after what happened with Silicon Valley Bank. So some of the initiatives, particularly in settlement services and our corporate trust operation, clients gave pause after seeing what had happened to that institution. And so that's not old money returning, but that is an acceleration of new opportunity.
spk05: Yeah, I would take that question and just maybe add a little bit. going forward and we had a very very strong pipeline in business escrow services in corporate trust let's just say corporate trust was a developing pipeline but really in settlement services and and and so the disruption in March actually disrupted our pipeline we're seeing that pipeline reappear it's stronger as Dale said a lot of people wanted to wait until we were announcing our quarterly earnings I think It'll make people feel comfortable, and we have a great deal of comfort on that pipeline returning, which gives us comfort to the $2 billion guide that we've put out there for deposit growth. So I think what you'll see is besides the regions which are seeing healthy deposit growth, and also led by Bridge Bank and our tech and innovation space, you'll see growth come for the rest By the way, those are three standalone deposit channels, which we have been developing over the past couple of years, and also in our online consumer platform as well.
spk01: Okay, got it. Thanks for that color. Just as a follow-up, I'm just wondering, I believe a big chunk of the deposit growth was also in CDs. You know, just curious, you know, how far are you going on, say, some of the promotional you know, given you and the industry are leading with, you know, rates paid, you know, just given the current environment, just trying to get a sense of, you know, how much of these balances can be sticky or, you know, how can you deepen the relationship so these deposits do become sticky?
spk04: On the brokered element, I wouldn't call those sticky. However, I would call them cheaper. So, you know, what we borrow from, you know, from some of these credit lines as well as from the Federal Home Loan Bank are at those rates are higher than the brokered CD channel. In addition to that, brokered CDs do not consume liquidity opportunities. So if we borrow, we have a credit line that, you know, over $10 billion from the federal home loan bank. But as you borrow against it, you have less availability. To bring in broker deposits, it costs less and it leaves that availability open. So this is something we're going to wean ourselves, you know, down from over time. But you're not going to see it chop off, you know, during third quarter. But all the guides that Ken mentioned that we have in terms of our deposit growth prospectively does not assume any broker deposit increases from where we were at June 30th.
spk16: Okay, great. Thanks for taking my questions.
spk10: Thank you. The next question will be from the line of Steven Alexopoulos with JP Morgan. Your line is now open.
spk02: Hi, everybody. I wanted to start and drill down a little bit into the $3.2 billion you're calling out through July 17th. What's the rough composition of that? Are those more new and returning client funds? Do you use any brokered in there? And very roughly, what's the cost so far?
spk05: As it relates to the composition, very little is coming from the broker CD channel, as Dale mentioned. It's actually zero. Where you're seeing it come from is our warehouse lending and no financing group, which generally builds up in the early parts of the month and then pays down towards the third week and then restarts its build process in the fourth week. So you're seeing those funds come in. Generally, they're non-interest-bearing deposits. They do carry ECR credits, which we'll see in the operating expenses. We also are showing very early on signs of a very strong HOA deposit bill as well. So primarily that's where the funds are coming from.
spk04: I think there's also been some repatriation from our tech group. We did have losses from that in March, and those dollars are up months to date as well.
spk05: Yeah, I think Dale brings up an important point up on the tech group. There's been a lot of disruption with the demise of SVB there. And our brand, Bridge, is a steady, consistent player in that market. And what you're seeing is a lot of disruption with clients, with former people that had worked at SVB, and their new companies establishing their operating processes and credit policies. Now, that has all been established for us, and people know our players, and they know the type of bank we are. And I think that's going to lead to more deposit growth out of bridge, which is going to support the overall regional deposit growth as we move forward.
spk02: Got it. That's helpful. I'm curious, in terms of the deposits that are left in the aftermath of SIDB, what rough percentage would you say returned? Is it like 5%? Is it a material percentage at this point? And then what are you hearing from, one, the customers returning? Dale, I think you mentioned they were waiting to see your 2Q numbers. And then for the customers that haven't returned, what are you hearing from them, why they haven't returned yet?
spk04: Yeah, I mean, I'm going to say roughly 30%, maybe a third, have come back. And why haven't they? Haven't we seen more? I think a lot of them, I mean, some of these are related to particular types of actions. So I'll give you the example. In a settlement services, you might have a settlement fund, and then that's moved to another institution. And what we get back is the promise that we're not going to move that one back, but future settlements will come to us. I think that's part of it. I think that there was some question about what's the new landscape going to look like? I think it's well publicized that SBB had a policy, you know, you've got to bank with us and you can't bank anywhere else. That has proven to have been damaging and damaging to some of these franchises. So some of them are like, okay, we were banking with you as most of them were just single entity institutions, and now they're building relationships in two or three banks.
spk05: Yeah, you know, the other thing is back to we recaptured one large client that left us out of warehouse lending. And in bringing that client back, they have a lot of funds in what we call P&I, principal and interest accounts. And those build up rather quickly, come down, pay, build up, come down every month, and it just oscillates back and forth. Well, when we went back to them and we established the relationship, we now took in P&I, tax and insurance accounts, which have a more steady stream to it. So what we've also done here is traded off volatility of volume for more consistency. And we've done that too. So as we bring clients back, we're trying to get better quality deposits, longer term and stickier. And so this has allowed us to have a lot of great conversations with our client base. But I can tell you, I spend more time with depositors in meetings that feel like an earnings report That's what we did coming out of Q1 and Q2. Now that has all changed, and it's about really the growth of the relationships, the growth of the business, and how we work together. That's some color there.
spk02: Well, this quarter should help those conversations. We're seeing the pipeline build. Yeah. Even with the increase in more expensive-type funding, if I just look at the sequential role, in both interest-bearing deposit costs and total funding. These are decelerating pretty nicely over the past few quarters. Do you guys expect that trend to continue through the back half of this year? Thanks.
spk05: So that's what gives us a little bit of comfort to provide the net interest margin guide going up. And again, as you saw, June was 350, and we think it rises from there. And it also gives us comfort to why we think net interest income is going to be higher in Q3 than in Q2. Only a modest part of that net interest income rise is coming actually from loan growth, Garcia. We're going to grow 500 to a billion probably closer to 500 is a good number to use. That's going to come in rapidly across the quarter, so you won't see that benefit until Q4. So most of the growth in interest income for Q3 is really coming from minimizing the rise in cost of funds, which we're very excited about. Got it. Okay. Thanks for taking my questions.
spk02: Thanks, Steve.
spk10: Thank you. The next question will come from the line of Chris McGrady with KBW. Your line is now open.
spk16: Hey, Chris. Oh, great. Thanks. In terms of the PPNR guide, you addressed the net interest income component. I wonder if you could spend a minute on both the expenses and the AmeriHome aspect of just getting a full circle on PPNR. Obviously, the deposit and the insurance lines are biased. I love the comment there. And then also kind of... comments on the gain on sale margins approaching normalized. Is there room to go there on AmeriHome? Thanks.
spk05: Okay. So AmeriHome generated about $88 million of total banking revenue. For us, we modeled that out at about the same amount for Q3 and Q4. I will say it is early on. It's only 17 or 18 days into July, but they are having a very, very strong July. And why is that? Well, production margins have stabilized and actually returned to more historic levels. So they're running closer to 43, 44, 45 bps. And what we saw was the retreat of one very large money center bank from the correspondent lending market combined with the industry capacity rationalization has paved the path towards higher margins, higher win rates. And that's what's giving us a good deal of comfort. With that, we're also building an MSR, which gets valued and is producing double-digit returns. And so with the growing our capital allows us to bring in more servicing income. So that's the AmeriHome story. So for us, it's steady total mortgage banking revenue going forward with potential upside given what we're seeing in the current market. That's how I would describe AmeriHome. Related to the expense efficiency, or what we'll call the adjusted expense efficiency, you know, we see that over time coming back into the high 40s. But I think what's very important here is that to remember that Wall has always made investments with a viewpoint towards longer-term returns for its business, product, and service development. We focus on generating consistent earnings with the appropriate returns. And so over the last several years, what we're talking about today, business escrow services, settlement services, corporate trusts, the online consumer platform, and the growth, the continued growth in HOA, were all funded by consistent expense investments in our P&L. So we are going to balance the efficiency ratio for future growth as well as looking to get to our PPNR guides. And our PPNR guides are at the high, consider the adjusted efficiency ratio to remain at the high, in the high 40s to achieve the PPNR guide that we've given.
spk04: Chris, you know, I mean, I think we've had a reputation that we're pretty efficient. We've been in the low 40s for a number of years. And now we find ourselves, you know, elevated from that level. Well, we've also grown very quickly during that period of time. And it's just natural, as one is in kind of a strong growth mode, that some things are done that aren't as efficient as they could have been structured or organized at that time. We're going through a process now to streamline that and look through some of these elements in terms of whether it's vendors or consultants and things like this that we think also can push down some of these extra costs that we've had in our operating expense line.
spk13: That's great, Kelly.
spk16: If I could ask a follow-up, you talked about net interest income growing exiting the year. If I take a step back and think about PPNR, the stable number for the back half of the year, as the balance sheet normalizes and everything gets back to normal, is the expectation that the PPNR dollar should grow off that low 280s as we enter 2024?
spk05: Yeah, so the way I would think about it, it's a little more stable in Q3 as we look to pay down our borrowings. We maintain that Q3 PPNR to Q2, and then seeing that begin to rise in Q4 as we exit the year into 2024.
spk16: Okay, but as you get into the fourth quarter and entering next year, if everything else is considered with the balance sheet, and your PPNR should grow again in 24? Yes.
spk05: I'm saying it should grow in Q4, and then, you know, it'll continue on from there.
spk16: All right. Thanks, Ken.
spk05: Okay.
spk04: Thank you.
spk10: Thank you. The next question will be from the line of David Chiaverini with Wedbush. Your line is now open.
spk07: Hello, David. Hi, thanks. Hi. So I wanted to follow up on the expense question. So you mentioned about optimizing work streams through the bank. Could you elaborate on that? Are we talking kind of trimming on the edges, or are you contemplating exiting any businesses?
spk05: So we're talking about trimming on the edges here predominantly. And some of the expense savings that we are going to find throughout the company will be repositioned into risk control, risk management infrastructure. I think you have to keep in mind, and the regulators have clearly signaled this, that they're going to have a higher standard or supervisory review for banks under 250 but above $100 billion. But I think they're going to drop that below $100 billion. And as we continue to grow, we need to be for that and we've been preparing all along but some of that expense savings we're going to take and we're going to reinvest in the risk control infrastructure that we're going to need to cross a hundred billion we'd rather do it early on and have a steady growth of expenses related to that rather than to wait and try to put it in just before you get to a hundred billion So, David, so we're going to see some of the work stream repositioning in terms of lower cost, as Dale said, vendor management, eliminating growth in FTE that we don't need. That's like cutting air. That will help us a little bit. And then looking at vendor management, using technology, a lot of those cost savings will be repositioned into the risk management side so we can continue to grow unabated as the rules change for the $100 billion and above and the $100 billion and below banks.
spk07: Thanks for that. And then a follow-up on credit quality related to the increase in special mention loans. What does it take or what do you have to see for you to designate a loan as special mention? Does the borrower have to trip a covenant for that to happen? And what actions do you take with a borrower after it goes on special mention?
spk03: Let me take this one. Thank you, Tim Bruckner. This is something that we're, I think, pretty proud of. Dale mentioned throughout the initial discussion comments, there's a few things that are just foundational to our credit process. First, in all areas, we assess risk as covered and uncovered, okay? So we really minimize tab risk by that. Covered means you've gotten out always by collateral. Early identification and elevation are key. And then time is of the essence in solving problems. We manage tail risk by managing our uncovered exposure, by getting to that early. To do that, we have to be pretty mechanical in our process. So to answer your question directly, in all cases, special mention loans are current and paying as agreed. So special mention in the regulatory definition means potential weakness, not default or late payment. So we're not looking for a monetary default. We're looking for situations where there might be potential weakness so that we can elevate those within our credit architecture and make the appropriate changes before those become a problem. So we use special mention to elevate the situation and drive to a satisfactory resolution before we're dealing with a default or a late payment. Another thing that you can say here is everything that's in special mention, we believe that we're going to reach that resolution, which would be a satisfactory remargining or additional support from sponsorship that would return that to pass, or we'd have that credit as substandard. That's how we use the categories mechanical in our process. Thank you.
spk07: Thanks very much.
spk10: Thank you. The next question will be from the line of Timmer Braziller with Wells Fargo. Your line is now open.
spk06: Hi, good morning. Thanks for the question. Most have been asked and answered, but just looking at the loan growth this quarter, I guess it's a surprise to the upside, just curious as to what drove that, how much of that was kind of contractual funding. As you look forward, what gives you confidence in getting to that $500 million number versus the growth that we saw in 2Q?
spk05: Okay, great. Well, the billion four of loan growth, you can break it in half. 50%, $700 million was really a reclass from held for sale, going back into held for investment, which means that our deposit drive, our increase in liquidity did not necessitate us having to sell those loans. And so we were pleased with that. Then we had $700 million of organic growth this quarter. And most of that came from the warehouse lending, but no financing MSR lines of business. And why that's important, is those businesses carry, when we make credit decisions there, we usually get a fair amount of deposits that come along with this. So they almost self-fund themselves. So that was the beauty of having that loan growth that it also drove our deposit growth. And it's part of what we've been saying even from the last couple of calls that we're looking at a full client relationships and we're no longer just giving credit and then worrying about how we fund it away from the client. The client needs to have a full relationship with us. As we go forward and what gives us some credit or confidence, I guess, on the $500 million guide, we see a few areas that we're going to focus on. A little bit more in CNI at this point. But we see MSR lending providing opportunity, no financing providing opportunity. We do resort lending, which we think will provide opportunity. And we're doing tech and innovation loans. And these are small-sized loans. our loan commitments under $15 million, where we see there's a great opportunity to bring with it a great deal of deposits. So those are some of the areas that we are focusing on that gives us a comfort level to the $500 million guide.
spk06: Okay, great. And then, you know, I asked this question last quarter, and I think it may have been a little bit early, but with some of the return of technology-related customers, I guess where do you see Western Alliance fitting into the tech ecosystem going forward? Are you going to be playing a larger role in taking up some of the market share abandoned by Silicon Valley, or should we think about the technology offering of Western Alliance similar to what had happened prior?
spk05: That's an interesting question, a good strategic question. I think we're going to continue to play in the space that we've been playing in. which is usually stage two. We're not going to be playing and taking up the role of SVB in early stage lending. That's not what we do. We prefer to be in the middle stage and a little bit in the late stage. So that's where we're going to continue to keep our focus. I will say that what we're seeing is that current and prior SVB customers and bankers, as I said earlier before, continue to evaluate the changing landscape. as both constituencies are making judgments regarding long-term commitments to the industry by new players. And they're waiting to see how those new players' credit policies, operating practices will be administered. For us, Bridge Bank, as I keep saying, is uniquely positioned as a known brand and a consistent player in the market. And I think that approach is continuing to get traction. So I have some great expectations. from our tech and innovation group, Bridge Bank, in terms of deposit growth in Q3 and going into Q4 as we continue to be the steady player and the steady hand in that market that people can go to. When they come to us, they know what our policies are. They know who they're talking to. They know what our credit decision-making process is. They know how to reach senior management, and we have a track record with these folks. We think it's an opportunity for us, and we're excited by it.
spk06: Okay, great. And then just lastly for me, maybe following up on Bernard's question for some of the promotional products, just given how strong the deposit growth has been and the momentum you're gaining in bringing back some prior customers, I guess why not pull back from some of the promotional rates? Is this nearly kind of a near-term dynamic as you continue to build the liquidity, or Are we still in an environment where the more the better, regardless of the cost?
spk04: There's a little bit of the more the better, but maybe more significantly is those rates, which seem to be, I get their market rate pricing, but they're still less than what we're paying for other sources. So here we have a more stable source, and it's a lower cost, and we're going to keep doing that. Now, over time, I think we are going to be able to fade that. So where we're headed is more liquidity is a good thing. And to the degree we can do that, you know, less expensively, we're going to do that. I just wanted to mention, Tim, the timing on your note, I thought that was great earlier this week.
spk07: Thanks, guys. Appreciate it.
spk11: Thank you.
spk10: The next question will be from the line of Gary Tenner with DA Davidson. Your line is now open.
spk17: Thanks. Good morning. A couple questions. First, as it relates to the PPR guide, you talked about fees in terms of how you're thinking about mortgage, but the service charge line this quarter increased from $9.5 to almost $21 million. I don't recall you kind of mentioning that at all. I'm just curious what the driver was there. Okay. And I guess ultimately, is that level baked into the PPNR guide for the back half of the year?
spk05: Let me say it differently. Our total fee income we are looking at, which is primarily driven by AmeriHome, is going to stay consistent for the next couple of quarters. So when you think about the PPNR guide, I would say fee income consistent with Q2 is possibly with an arrow upward if some of the early signs of mortgage income success in July continues throughout the quarter. And that's what's driving the PPNR guides that we gave earlier.
spk17: Okay. And then on the AOCI, Dale, I think you mentioned about $2.5 billion of securities government to mature back after this year and through 2024. What amount of the kind of AFS-related AOCI, just based on maturities, would you expect to recover over that 18-month period?
spk04: Well, I mean, obviously those costs are related to kind of what the discount rate is. So if it's that close to maturity and we have a yield that is less than – we have a yield that is less than what that looks like, then it's going to be fairly short. I mean, I think to really get dollar improvement on the AOCI piece, what we really need is we really need lower rates. So it will roll forward. If you take 18 months, we have a duration of four years on that. So you take one-third of that back. So maybe a couple hundred billion comes back, but not from maturity. It's just from a slower or a shorter duration remaining on those securities. the four-year coming down by about a third. Regarding the service charge income, so that, yeah, it is elevated from where we were, and it's going to continue.
spk17: Okay, and last question, if I could. In terms of the office or the investor office portfolio, can you tell us kind of what your allowance is specific to that portfolio?
spk03: Yeah, I can take that. not counting uh well counting areas what about 50 50 million um five zero sorry oh i'm sorry 100 100 million also 100 million yeah i'm sorry i misquoted that okay thank you thank you
spk10: The next question will be from the line of Ibrahim Poonawalla with Bank of America. Your line is now open.
spk11: Hey, good morning. Just a quick follow-up. One, in terms of the margin outlook, as you talked about the third quarter NIM higher versus 2Q, does that trend continue into fourth quarter as we think about on a go-forward basis, or could we see some volatility in the margin where 4Q could be lower and see them with an eye?
spk04: Well, what we're seeing is I think it's all but certain that they're going to raise next week. We have a modest kind of asset-sensitive profile, so that should augment the NIM in that regard. More significantly, kind of what we talked about a couple of times, the pay down of some of these more expensive funding sources. So I've talked about these lines that we have that are SOFR plus 2%, We haven't paid those down yet. I expect that we will be doing that significantly this quarter. I can't tell you exactly when, but let's say we did it in August or September or, you know, we're going to see a follow-through effect on that into 4Q. So, yes, I would expect that we should be looking for, you know, kind of continued improvement. Kent has alluded to this when he said that our PPNR number kind of flat for Q3 versus Q2, but then on a more positive trajectory as we go into Q4 and exit 2023.
spk11: Got that. And to my understanding, in terms of the actual loan book, how much of the loan book is yet to reprice in terms of just reflecting the current rate backdrop? Like, how should we think about loan betas going forward and repricing of the fixed rate book, maybe?
spk04: Well, I mean, the fixed rate book is predominantly residential real estate and, you know, prepayment rates on those loans are quite low. So, you know, at some point in time, I mean, I think probably rates have to come down a little bit before those are really going to start to accelerate. So, you know, aside from that, I don't know that there's a whole lot of repricing opportunity in the loan book. I think the securities book probably has more where we've got, you know, as I mentioned, $1.2 billion You know, the back half of this year and another billion next year. We have, within the loan book, we've got another billion dollars that we can, that is going to kind of roll in. So I really think that the margin improvement and a big driver of the PPNR improvement is really coming from swapping lower costs and funding sources, you know, compared to some of the elements that we have supporting us today.
spk11: Understood. Thank you.
spk10: Thank you. The next question will be from the line of John Arfstrom with RBC. Your line is now open.
spk09: Hey, thanks. A few questions for you. Tim, that slide 17, the asset quality slide, you guys talked about being proactive. What do you think those lines look like
spk03: in q3 and q4 should we be prepared for those to go higher or do you think that this proactiveness is going to keep those relatively flat yeah thanks that's a good and understandable questions uh i i think relatively flat and i i think that um because that's been uh our experience with this approach and and other cycles we You know, barring severe changes, and we're already contemplating a tougher economy going forward, we've elevated the situations. We know them by name. We're not dealing with a large portfolio here in the absolute. We call those out and discuss them monthly. we don't wait until a quarter to see the changes. So I feel comfortable saying relatively flat.
spk05: John, this is Ken. We also completed our Q2, a very exhaustive and comprehensive review of CRE office. So we did a very, very deep dive into that.
spk04: As you mentioned, I mean, we're looking at this with the future recession, which may or may not take place, but that's the outlook we've had.
spk09: Yep, okay. Yeah, that ties into my next question, and I guess instead of poking and prodding, I'll just ask it. You guys are saying stable PTNR and then relatively stable provision based on Moody's and then the S4 weighting that you referred to. You guys usually give EPS guidance. Is this the trough on EPS? I'm looking at the 815 consensus for 2024. It feels like a layup given what you just put up, but am I missing something on that?
spk04: Well, we're not ready to project on 2024. But I mean, I think the direction of what we've laid out for the third and fourth quarter, I think we have the confidence and we obviously hope that we can continue to execute in terms of bringing back, you know, lower cost funding, and, you know, expanding our writing prospectively. I'm not sure recession is in the offing. I think our expenses don't have a lot of elevation coming in them either. So I'm optimistic to what the future holds here.
spk09: Okay. So said another way, Dale, it feels like there's at least stability going into Q3, assuming nothing changes materially from a credit point of view.
spk05: Correct. That's a good assumption.
spk09: Okay. Okay. And then one more for you, Ken, kind of a fun question, but you know, it's been a hell of a four months and I, you guys have managed to do it well given that, you know, the hand you had, but do you feel like there's been any permanent damage done to your franchise? I know you mentioned bridge and I think the different brands help, but do you think is the pressure faded and, and it's going to be a distant memory and you're back to normal or you think there's been some damage done?
spk05: So I don't think there's any permanent damage done, but I think there was a disruption is the word I would continue to use. It took us off of our trajectory of growth. We had to rely on wholesale funding for a shorter period of time. That's why you're hearing all the answers about the rise in NIM because we're going to swap out these borrowings and bring in more deposits. This was all something that, believe it or not, in Q3, the Q3 earnings call of 2022, we had, I want to say, anticipated that the world was going to change a little bit. We didn't anticipate what was going to happen on March 9th, but we started to move into a slower long-growth, higher liquid world with greater capital. And that's sort of the model that we are using and we're moving forward. I think if there was any damage done, it was done a little bit, as I said, in the deposit pipeline in some of our businesses that are still relatively new relative to the other businesses in the company. And that gave people pause because they weren't with us for a long period of time. But we are rebuilding those deposit pipelines, and that's giving me some optimism through the $2 billion guide for Q3 and the deposit guides going forward.
spk04: John, there's actually been a little bit of a silver lining on some of this, and that is it has really, you know, got our attention and made us focus on our business model, and we've honed it. So to the degree that we were doing some syndicated deals, we were doing some, you know, writing credit, you know, where we didn't have a deposit relationship, you know, it's much more reciprocal today. On our EFR case, for example, we started by, you know, making $100 million commitments in a billion dollar syndication line. Well, we're not doing that. We never got the liquidity from the clients in that situation. But instead, what we do is we do bilateral transactions that are better priced, and it's a closer relationship that we have with them. And of course, we get their funding as well. We've also taken a little bit of a different tack. We don't want to do this again. And so what we've done is we have taking our insured deposit levels to about the highest in the nation. We're moving our capital. I want to spin it around so that when somebody's looking at who can we attack when the next situation might arise, Western Alliance isn't anywhere near on that list because we are stalwart for capital, strength, liquidity, and performance.
spk09: Okay. Very helpful. Thank you.
spk00: Thanks, John.
spk10: Thank you. The next question will be from the line of Brody Preston with UBS. Your line is now open.
spk12: Hey everyone. Thanks for taking my questions. Um, Dale, I was just hoping to dig a little deeper on the, on the moving parts on the margin. Um, but I wanted to follow up on Steve's question and I'm sorry if you guys said it and I missed it, but on the 3.2 billion, uh, of, of new deposits, I know it's weighted towards mortgage warehouse. But I was interested in if you have an idea as to what the cost is, just because when I look at the new and returned deposit growth and the existing client growth, it looks like it had about a 2% cost on it for this quarter. Is that $3.2 billion close to that cost?
spk05: So, again, a lot of that – This is Ken Brody. A lot of deposit growth is coming from our warehouse lending group, which means it's growing in our non-interest-bearing deposits, and from an interest expense point of view, that comes with a zero cost, although the ECR credits are in the operating expense line. So that's going to skew more towards having a lower interest expense for both the warehouse lending business as well as some growth is coming early on from HOA, which is a lower cost channel as well.
spk12: Got it. So if you're getting a lot of growth in the, you know, I know it's got an ECR, but it's not interest-bearing. You know, I'm looking at that interest-bearing deposit cost, and the spot rate at 305 is lower than the 308 you did on average for the quarter. I guess if you're growing the interest-bearing deposit costs at a blended rate with those new clients or the total deposit costs, I guess, at two, why wouldn't that interest-bearing deposit cost continue to move lower from here in the third quarter?
spk04: Well, so, I mean, Workhouse deposits, they have an earnings credit rate, which is much higher than three. It's close to kind of effective fed funds generally, so it's going to be higher than that. But you're correct, Brody, in that, yeah, these funds, they're not wholesale. They're not brokered, so there's a lower charge associated with them in terms of what that is, and they're client relationships. And so we're trading down... You know, in terms of what it's costing us, you know, from there. I mean, each away was a significant contributor. Some of those have VCRs as well, but those dollars, you know, those are going to be in the three range as opposed to five.
spk05: Well, your premise about a cost of funds equal to Q2 or Q3 going forward, that's not a bad premise.
spk12: Got it. Okay. And then just on the loan yields, you know, the average loan yields for the quarter, the difference between the spot and the average for the quarter is relatively large. So the spot rate is 674. You know, if we think about the third quarter and we think about, you know, potential for, you know, another rate hike here, I guess, how does the loan yield move off of that 674 for the third quarter, assuming that that happens?
spk04: Yeah, I mean, I think we're going to see, you know, something like 40% of that.
spk12: Got it. So I guess if I take those two pieces combined, then, Dale, just with, like, the deposit costs combined, you know, kind of stalling out at this level and low yields continue to move higher. I just look at that 350 to 360 NIM guide, the implied NII guide, and the PPNR guide that you have for the back half of the year, and it just feels exceptionally conservative. And so I guess, you know, why shouldn't we be thinking about something, you know, well north at 282 by the time we hit the fourth quarter of the year?
spk04: Well, I would argue with exceptionally. I think it is. I mean, we want to lean conservative, obviously, a little bit. The other thing I would say that I think you maybe need to consider, recognize, is that a lot of these deposit costs we have are going to be moving up when the FOMC moves next week as well. So to the degree that we've got kind of brokered funding and some of these other sources, relatively short-term earnings credit rates for some of these large balances related to related to mortgage warehouse clients, those are going to move almost in lockstep may not doesn't show up necessarily an interest expense, but it shows up in terms of the cost of our PPR number. So, so there is going to be a push up, you know, in terms of funding charges related to that as well. But as I mentioned, we are asset sensitive. And so the net effect of what happens next week should be a plus.
spk12: Got it. And then just last couple on credit from me, I just wanted to ask, was there, you mentioned you did the office CRE deep dive. Was that what kind of drove the reappraisals on those office, those CBD office loans, Ken, or was there something else specifically that drove that?
spk05: No, that was it. That was it.
spk12: Okay. And then just, I know that when you're working through the special mention,
spk05: I'm sorry. I was answering the other question, which was I was going to say, we basically only have one credit in CBD, and that we moved to substandard, and then we reappraised it, and it reappraised higher than the loan amount. So that's the answer for that. I'm sorry I cut you off on the other question.
spk12: No, that's okay. I was just going to say, I know that when you're working through the special mention loans, at least this is what you did with the hotels during COVID. As you mentioned, you asked them to re-margin the loan. I guess it's early days, but with any of those conversations with your sponsors, has anybody balked at the idea of bringing more equity to the table to help re-margin these loans?
spk05: No, so the reason why they're in special mention, there is some weaknesses, as Tim Bruckner said, but also there's a spirit of cooperation that they want to get to a positive outcome that will either require re-margining or restructuring in some way, shape, or form. You know, what's interesting, maybe I'll leave you with this fun fact, Brody. Our average LTV is about 55%. We're a low advance rate lender. So on our $2.3 billion of CRE all in for the company, there's about $2 billion of equity in front of us. And so I'm talking about the whole book. And that gives a lot of motivation for sponsors to sit and work with us in the assets that have been moved into special mentions.
spk12: Got it. Okay. Yeah, just given how proactive it is and it sounds like the borrowers are willing to kind of meet you there. To me, again, it sounds like maybe special mention loans will be heading lower and classified loans heading lower into the year end. But I guess we'll watch that going forward. Thanks for taking the questions, guys.
spk05: Thank you.
spk10: Thank you. The next question will be from the line of David Smith with Autonomous Research. Your line is now open.
spk15: Good morning. So the strong liquidity growth this quarter led you to bring back on about $700 million from health for sale back to health for investment. Of the remaining $1.8 billion in health for sale, are you viewing any of that as potentially coming back as well if you have another strong quarter of deposit growth?
spk05: A good portion of that in the health for sale relates to our – no? I've got to bring it up.
spk04: You know, I mean, this is something we're just going to always evaluate. So, you know, based upon kind of where we are. But, you know, with the $1.8 billion, you know, it's queued up, it's marked, and we'll see how that goes. But most of that we expect to exit.
spk15: And would you expect the CET1 benefit from that to be proportional to the benefit you saw from the $4 billion of sales that you've already executed?
spk04: So, I mean, you know, the CET1 elements are, you know, I mean, most of the assets we're talking about are all 100% risk-weighted. That goes for what's already been done, but not all, as well as what's in there presently. So, I mean, but at the same time, I mean, you know, as those loans, you know, come off the books, that is beneficial to CET1. You know, conversely, I mean, I think the industry is looking at a special charge probably this quarter to recapitalize the insurance fund. related to the demise of those three institutions. So that'll be a, that'll be some chart. That'll be maybe 10 basis points against our capital growth in Q3 as presently proposed.
spk15: Sure. And lastly, you know, you talked about laying the groundwork for eventually crossing the 100 billion asset mark. I guess if you're just continuing to build 2 billion of deposits a quarter, That's $8 billion a year. The $32 billion to $100 billion would take you about four years from now. That seems very proactive. What would you need to see to take up your growth targets and growth goals before that if you were going to hit that mark any sooner? What would give you comfort to open the growth back up?
spk05: Let me just give some commentary about being very early. I think what you're going to see is supervisory review from the regulators starting much earlier and holding you to a higher standard well before $100 billion. So the process isn't, hey, you hit $100 billion, you're going to be reviewed differently. The process starts well before that, that are you ready to go across over $100 billion, and that starts before that. That would be my just color commentary on how that review process works and why we're building it. In terms of opening the gates, I think our growth is going to be determined by our deposits and our growth in deposits. And we have traditionally been a little bit more heavier weighted to the left side of the balance sheet, which we can turn that machine on. We're really good. at growing loans. What we've turned around here is said, wait a minute, we need to have a more holistic relationship with our client base. And growing the deposits are critical, obviously, to our future growth. And investing in future deposit channels and the deposit channels that we've talked about here today, that will drive the deposit growth in the future. So we said $2 billion last quarter that we thought we'd grow in deposits. We came in at $3.5 billion. Yes, there was a lot of brokered in there. This quarter, we say $2 billion without brokered, and we're going to try to exceed and do better than that, and then we'll kind of grow our way into 2024. All right, that's helpful.
spk15: Thank you. Thank you.
spk10: Thank you. At this time, there are no additional questions registered in the queue, so I would like to pass the call back over to our host Ken Vecchione for some concluding remarks.
spk05: I just want to thank you all for attending the call. Pretty exhaustive earnings call today. We're happy to field all your questions and we look forward to the next quarterly call. Thanks again.
spk10: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.
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