Q3 2020 Western Alliance Bancorp Earnings Call
Thursday
good day everyone and welcome to the earnings call for Western Alliance Bank Corporation for the third quarter 2020. Our speakers today are Ken vecchione president and chief executive officer and Dale Gibbons Chief Financial Officer. You may also view the presentation today via webcast through the company's website at ww.w Western Alliance Bank or Corporation. The call will be recorded and made available for after 2 p.m. Eastern time, October 23rd, 2020 through November 23rd, 2028 at 9 a.m. Eastern time by dialing 187-7344.
7529 and entering passcode 101
48637 the discussion during this call may contain forward-looking statements that relate to expectations beliefs projections future plans and strategies anticipated events or Trends and similar Expressions concerning matters that are not historical facts, the forward-looking statements contained herein reflect. Our current views about future events and financial performance and are subject to risks uncertainties assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statements some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission wage except as required by law. The company does not undertake any obligation to update any forward-looking statements now for the opening remarks, I would now like to turn the call over to Ken vecchione, please
Go ahead.
Operator good afternoon. Welcome to Western Alliance is third-quarter earnings call joining me on the call. Today are Dale Gibbons and Tim Bruckner our Chief Financial Officer and chief credit officer. I will provide an overview of our quarterly results and how we are managing the business in this current economic environment. And then they'll walk you through the bank's financial performance afterwards. We were both on the line to take your questions. I'd like to focus on three trends that Define our third-quarter results and will continue into the future robust balance sheet growth provision reflecting as to Quality and consensus Outlook and Strong net interest income and ppnr that continue to build Capital the combination of these variables generated record income of 135.8 million dollars and EPS of a dollar $36 each up more than 45% versus the prior quarter and exceeding our pre-owned. No,
Performance in 2019. The possibility of Western lines is the first five business model was again demonstrated this quarter as our deep segment and product expertise unable us to actively adapt our business in response to the changing environment and continue to achieve industry-leading profitability and growth while maintaining prudent credit risk management total loan screwed $985 for the quarter to $26 billion and deposits increased 1.3 billion to $29 billion dollars reducing our loan-to-deposit ratio to 90.2% our loan growth continues to be concentrated in low-loss asset classes such as Warehouse lending which accounted for over 100% off of the loan growth and 56% of the deposit growth and $267 in capital call lines where the risk-reward equation is heavily skewed in our favour dead.
The impact of this strategy will be seen near term in our reduced provisioning expense and longer-term in lower net charge-offs. We are encouraged by our expanding pipe fine as clients has applied Lessons Learned From prior recessions to right-size cost structures and to begin to plan for future opportunities in the corner High average interest-earning assets of one point. Nine billion dollars were offset by lower rates substantial liquidity build and a one-time adjustment to Triple P loan fears mission to reflect modification and extension of the cares act forgiveness time frame, which pushed our net interest margin downward to 3.71% as net income declined 13.7 million from the second quarter to $285 million dollars, but improved 18.3 million from a year ago. Yep.
excluding the impact of Truth
4p Long's that interest income would have only Fallen by four million dollars, which is largely the impact of interest expense on our new subordinated debt issued in Middleburg. Second quarter We Believe approximately 21 basis points of this compression is transitory in nature. And Nim is expected to rise as excess liquidity is off to work through balance sheet growth deposit seasonality and Warehouse lending driving balances lower and triple P loan forgiveness assumptions normalize.
Given these margin Trends and Bounds given these margin Trends and balance sheet growth We Believe q4s net interest income performance took turns to Q2 levels and ppnr rises above Q3 provision for credit losses was fourteen point seven million dollars in the third quarter considerably less than the $92 million in the second quarter, which was primarily attributable to stable too modest improvements in macroeconomic forecasts assumptions loan growth in low-risk off classes and limited net charge-offs of eight point two million dollars or thirteen basis points of average assets. Dale will go into more detail of a specific drivers of our provision, but our total loan ACL to fund it loans ratio now stands at 1.37% or $355 and 1.4 years.
6% excluding Triple-T loans which are guaranteed by the cares act if macroeconomic Trends remained stable or begin to improve future provision expense will likely mirror net charge-offs and Reserve levels could decline load deferrals trended lower for the quarter as many of our clients have returned to paying agreed following their deferral. As of Q3, 1.3 billion dollars of loans are on deferral or 5% of the total portfolio, which represents a 55% decline from Q2. We expect 1.1 billion of loan deferrals will expire next quarter which will continue to drive down our outstanding modification our quarterly efficiency ratio improved to 39.7% compared to forty 3.2% from a year ago. Becoming more efficient during the birth.
Samet uncertainty provides the incremental flexibility to maintain VPN are finally Western Alliance continues to generate significant excess Capital which grew tap book value per share to $29.03 or 4.3% over the previous quarter and 13.4% year-over-year supported by our life and our generation Capital grows one hundred twenty one point six billion dollars with a c e t 1 ratio of 10% supporting 15.6% Annualized loan growth Dell will now take you through our financial performance.
Thanks again.
Over the last three months Western Alliance generated record net income 135.8 million or $2.30 per share, which was a 46% on a linked quarter basis as Ken mentioned net income tax reduction in provision expense for credit losses to fourteen point seven million primarily driven by stability and economic Outlook during the quarter and a release of specific reserves associated with a fully resolved credit net interest income grew 18.3 million year-over-year at a 284.7 million but declined 13.7 million during the quarter primarily a result of changes in life repayment assumptions on Triple P loans that impacted the accretion recognition the sba's interim final rule published in August more than double the amount of time that people have to receive leads us on their loans and coupled with the system's delay in a forgiving forgiveness request processing. We now expect that forgiveness processes to be elongated and the average time. The loans will be out song.
Is projected to double as well as a result using the effective interest method we reversed out six point four million of the fees recognized in Q2 and overall tripathi recognition has been extended. This is purely a change in timing impacting them. But with no change to cumulative fee Revenue ultimately recognized from this program to $43 off our to receive will simply be booked to income more slowly than our original expectations net interest income was impacted in Q3 as a result of this time. We changed by 10.6 million months non-interest income fell 700020 point six million from the prior quarter. We benefited from a recovery of an additional five million and mark-to-market loss on preferred stocks that we recognized in the first quarter over the last two quarters. We recovered 80% of that eleven million dollar original off.
Finally nine interest expense increased 9.3 million is to deferral of loan origination costs fell as PPP loan origination drop as well as an increase in incentive accruals off our third quarter pandemic as a third-quarter performance, exceeded our original third-quarter budget, which was established before the pandemic.
Strong ongoing balance sheet momentum coupled with diligent expense management drove pre-provision net revenue to 181.3 million up 13.5% year-over-year and consistent with our overall growth trend from the first quarter as the second quarter benefited from one time fee recognition a bully restructuring in fast 91 loan cost referral a month.
Turning out a net interest drivers investment yields decreased 23 basis points from the prior quarter to 2.79% and 29 basis points from the prior-year wage due to the lower rate environment loan yields decreased thirty five basis points following declines across most loan types, mainly driven by changing loan mix and in the reduction of birth Triple-T loan fees resulting in lower PP Lo kneeled during the quarter notably for both Investments and Loans spot rates, as of September 30th are higher than the third quarter average yield cost of interest bearing deposits was reduced by 9 basis points include 3 to 31 basis points with an end of quarter spot rate of 27 continue to lower posted deposit rates and push out higher higher costs exception price funds the spot rate for total deposits which includes non-interest-bearing deposits with yep.
basis point when
All the companies funding sources are considered total funding costs declined by 2 basis points within end-of-quarter spot rate of 25.
Unlike last quarter was spot rates indicated a likely margin compression in the third quarter these rates appear to demonstrate that the margin will improve as both earning asset yields will rise and funding will fall in the fourth quarter additionally in October. We called seventy-five million of subordinated debt that has the has diminishing Capital treatment with a current rate of 3.4 per month and
Despite the transition to a substantially lower rate environment during 2020 net interest income increased 6.9% year-over-year to 284.7 million as mentioned earlier during our extraordinary bills and liquidity and adjustments to a triple P loan fee recognition compressed our net interest margin to 3.71% has net interest income declined 13.7 month. However, the majority of these reduction drivers are transitory.
Triple P loans loans reduced our name during the quarter by 13 basis points is changes to prepayment assumptions reduced recognize resulting in PPP loan yields of Long Point seven 6% excluding this timing difference net interest income declined only four million quarter-over-quarter primarily due to interest expense on the new subordinated debt that we issued a resulting in an editor's margin of 380 for referring to the bar chart on the lower left section of the page of the forty-three million dollars in total tripletail own fears of origination cost that we received only 3.3 million was recognized in the third quarter. We recognized reversal of triple P of six point four million in Q3 and expect fee wreckage to be approximately 6.9 million in the fourth quarter and taper off is prepayments and forgiveness are realized in reality. These assumptions are dependent on actual give this from the dead.
VA
additionally average excess liquidity relative to loans increased one point three million in the quarter the majority of which are held at the Federal Reserve Bank earning minimal returns, which impacted in by 1021 basis points in aggregate given are healthy loan Pipeline and ability to deploy These funds to higher-yielding earning assets. We expect this margin drag to dissipate in the coming quarters regarding efficiency on a linked quarter basis our efficiency ratio increased to 39.7% as we continue to invest in our business to support growth opportunities as described earlier than an interest expense increase is largely related to a net increase in compensation cost as we now have greater confidence in our ability to execute on a budget and are no longer benefiting from deferred costs for Triple-T loan originations.
excluding
That loan fees and interest efficiency ratio for the quarter would have been 40.7% which as we indicated last quarter should be moving closer to our historical levels in the low 40s return on assets increased 44 basis points from the prior quarter to 1.66% while provision styles p p n r r o a decreased 40,000 basis points to 222 as it tracks the decline in margin from the prior quarter discontinued strong performance and capital generation provides a significant flexibility to fund ongoing wage growth Capital Management actions or meet our credit demands.
Are strong balance sheet momentum continued during the quarter as loans increased $985 billion to $26 billion and deposit growth 1.3 billion and brought our total deposit balance to 22.8 billion a quarter in inclusive inclusive of PPP both loans and deposits grew approximately 29% year-over-year with our focus on low lost segments in d d a home alone to deposit ratio decreased to 90.2% from 90.9% in Q2. It's our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs dead.
Our cash position remains elevated at one point four billion a quarter in compared to two point 1 billion quarterly average as deposit growth continues to outpace low origination off. This doesn't pair margin near-term. We believe it provides us inventory for selected credit growth this demand resumes. Finally Angela book value per share increased $2.90 over the prior quarter to $29 or $3 an increase of $3.43 or 13.4% over the past twelve months.
The vast majority of the $985 billion in loan growth was driven by increases in my loans of $192 billion supplement supplemented by construction loan increases thousand and three residential and Consumer loans now comprise 9.3% of our portfolio. Well construction loan concentration remains flat at 8.8% of total loans within a cni growth with a quarter and highlighting our focus on low-risk assets that can mention Capital call lines through 267 million mortgage Warehouse loans grew over 1 billion in cash or Finance Loans decrease 241 million this quarter residential loan originations were offset by higher prepayment activity leaving the balance fairly flat.
We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our firm's long-term value-creation. No Takagi over a year deposit growth of 6.4 million is higher than the annual deposit growth in any previous calendar year.
Deposits grew 1.3 billion or 4.7% in the third quarter driven by increases in non-interest-bearing DDA of 777 million, which now comprise over 45% of our dog awesome base plus group and savings and money market accounts of 752 million market share gains and mortgage warehouse and robust activity and Tech and Innovation continue to be significant drivers of deposit growth.
As we initially prescribed described on our q1 earnings call while his unique credit risk management strategy is focused on establishing individual borrow level strategies and Direct Customer dialogue to develop long-term Financial plans are approach to payment deferral request is to look for a resourceful ways to partner with our clients along with assessing their willingness and capacity to support their business interests. We ask our clients to work with us hand in hand or by our clients contribute liquidity capital or Equity as an integral component to modify prepayment plans change. Our approach collectively uses the resources of the borrower government and the banks balance sheet develop solutions that extend beyond the six-month window provided for in the cares Act.
By quarter in the pearls had declined by one point six billion or 55% reducing total loan referrals from 11:00 and half percent acute 225 excluding the hotel guys Finance segment in which we executed and unique sector-specific to hurl strategy. The banquet deferral rate is approximately 1.6% We have received minimal additional request for further deferrals and 98% Appliance with expired deferrals are now current and payments.
We expect 1.1 billion of long curls will expire in the current quarter which will substantially drive down outstanding modifications consistent with this trend as of yesterday girls are down 420 million in October bringing the current total to $880 million.
Regarding acid quality or non-performing assets to an Oreo low ratio remained flat and 47 basis points for total assets while total classified assets increased $28 a month or four basis points 8898 basis points in total assets.
Classified accruing loans Rose by Twenty 1 million explainable by a few loans 90 days past due as of September 30th. All of these loans are now current special mention loans in south. East eighty 1 million during the quarter to 1.83% to fund his loans, which is a result of our credit mitigation strategy to early identify Elevate and apply tighten monetary loans and segments impacted by the current moment over sixty percent of the increase in special mention loans are from previously identified segments uniquely impacted by the Panthers such as the hotel portfolio in a component component of our corporate finance division credits determined to have some level of repayment dependency on travel Leisure or entertainment.
As we've discussed in the past special mention loans are not predictive of future migration to classified or loss sent over the past five years less than 1% has moved to reach our jobs.
If borrowers do not have through cycle liquidity and cash and capital plans, we downgrade to some standard immediately to remediate.
Our total allowance for credit losses Rose a modest seven million from the prior quarter due to Improvement in macroeconomic forecasts and Loan growth in portfolio segments with low expected loss raging. Additionally. We covered eight point two million of net charge-offs.
The ending allowance related to low losses was $355 Million.
For Cecil, we are using a consensus economic forecast Outlook of blue-chip blue-chip forecasters as attracts management review in the recession and Recovery.
The economic forecast improved during the quarter which would have implied a reserve release. However, given the still unknown time Horizon of covert in packs political uncertainty and the unknown status of birth simulus. We adjusted our scenario weightings to a less optimistic Outlook.
You know total loan allowance for credit losses to funded loans to find a modest two basis points to 1.37% or 1.46% when excluding triple P loans off on a more granular level our loan-loss segments account for approximately one-third of our portfolio includes mortgage Warehouse residential an HOA lending Capital called lines and Resort Lindbergh when we exclude these segments. The ACLS are funded loans on the remainder of the portfolio is 2%
Provision expense decreased to 14.7 million for Q3 driven by loan growth and lower last segments and improved macroeconomic factors while fully covering charge-offs netcredit boxes of 8.2 million or 13 basis points of average loans were recognized during the quarter compared to five point five million in Q2 relative to other banking companies are lower consumer exposure continues to result in much lower total loan losses.
We continue to generate significant capital and maintain strong regulatory Capital ratios with tangible common Equity to total assets of 8.9% and a, next tier one ratio of ten decrease of 20 basis points during the quarter due to our strong loan growth, excluding PPP loans tce. The tangible assets is 9.3% a month decline of ten basis points from the first quarter.
Inclusive our quarterly cash dividend payments are $0.25 per share are tangible book value per share Rose of dollars in the quarter to 2903 up 13.4% in the last year. We continue to grow our tangible book value per share rapidly as it is increased three times out of the peers over the last five and half years.
And I'll turn the call back to Ken to conclude with comments and a few of our specific portfolios. I would not like to briefly update you on our credit risk mitigation efforts and the current status of a few exposed Industries generally considered to be the most impacted by COVID-19 pandemic throughout the quarter Tim Bruckner and the credit Administration team led ongoing Focus portfolio reviews by risk assessment to monitor credit exposures and performance against cash budgets operating plans through the liquidity trough. We are not waiting to run out to make great changes or affect remediation strategies. If borrowers are not performing against the find operating plans or determined to not have a sufficient wage through cycle liquidity. We downgrade them now to substandard and enact remediation strategies to ensure the best outcomes. We do not hold loans in SMS special mention.
For a time, too.
Eventually downgrade and as a result special mention graded loans slowly migrated to classified or substandard these facts and daily conversations with our people and our clients help me feel confident that our credit mitigation strategy and early approach to proactively manage. Our risk segments is bearing fruit and puts Western lines in a strong position to come out on the the other side of the pandemic in better shape than our peers in our five hundred million dollar gaming book focused on off-strip middle-market gaming linked company's total deferrals were raised from 37% of the portfolio to only 4% And as of today it's zero as our clients are now as open for business and are performing at or above their reopening plants. The one point three billion dollar investor dependent portion of our technology and Innovation segment has continued to benefit from significant sponsor support for wage.
Knology firms best position to succeed in this code environment and an active fundraising environment as well since March 2020 65 our clients have raised over one point seven billion dollars in capital resulting in Eighty 87% of bars with greater than six months remaining liquidity up from 77% in q1 e r c r e retail book of $674 billion dollars focus on local local personal services based retail centers with no destination loss continues to modestly exceed National trends that shows rent collections rising from 50% May to 80% in August. Similarly this put the portfolios the first month on the phone from 176 million to 31 million dollars.
Lastly are 2.1 Billion Dollar Hotel franchise Finance business focused on select service hotels with greater Financial flexibility and LTE at origination of approximately 60% continues to Trend towards stabilization occupancy rates are tracking National averages currently around 50% which have two years old from April lows at approximately 55% occupancy select service hotels are estimated to cover advertising Debt Service. So typical hotel is operating at break furthermore. We have seen deferrals declined from 83% of the portfolio to 44% of the portfolio and currently we do not anticipate granting any additional deferral in the hotel portfolio. We are proactively engaging with Hotel sponsors to validate ongoing support and hotel performance against operating plants as mentioned earlier. Yep.
You're not waiting for deferrals to end before migrating to ensure remediation options with strong. Sponsor support the worst a great Hotel typically receives is found more special mention. We just finished up with our management Outlook. We believe that our third-quarter performance is the Baseline for future balance sheet and earnings growth wage record quarter. We beat our quarterly budget that was established prevent damming. Our pipelines are strong and we expect loan growth to return to previously anticipated levels of six $800 off next several quarters and low-risk asset classes. However, there will be some offsets as triple P Loans pay off or forgiven depending on timing of the realized tripathi forgiveness organic loan growth should be more than offset triple P run off in Q4. We expect to see the seasonal declines associated with our mortgage Warehouse clients them.
for the Positive Growth will be
At the lower end of the target range reducing our excess liquidity to supplement our residential lending initiative. We acquired funding a Residential Mortgage platform that specializes in the acquisition of prime non-agency residential home loans. The acquisition is a low-risk low cost entry point to build a meaningful Residential Mortgage business line at an accelerated timeframe with over a hundred additional mortgage originator relationships. We anticipate that the Golan team will be fully integrated by the end of October and be contributing to loan growth by the end of the year as Dale mentioned our current spot rates indicate that the net response your pressure experienced this quarter will subside and then if it's Mangia Trend upwards towards 3.9% in Q4, we expect net interest income to rise in Q4 ATB above an increase demand higher end of quarter loan balance.
Compared to the quarterly average additionally it is expected that triple P fee income will pick up next quarter as forgiveness is granted this will however a bay during twenty Twenty-One years to paying our is expected to increase as that interest income growth for more than offset any increase in non-interest expense looking ahead. We will continue to invest in new product offerings and infrastructure to maintain operational efficiency, but Q2 and Q3 efficiency ratios a temporary and will eventually return to a sustainable level in the low 40s on a long-term asset quality and Loan loss reserves are informed by economic consensus forecasts, which if consistent going forward could imply Reserve releases in the coming quarters, we believe that the provisions in excess of charge offs, year-to-date are more than sufficient to cover charge of through the cycle as we do not see any indicators that imply material.
Sausage are on the horizon filing Western Alliance is one of the most prolific Capital generators in the industry are strong Capital base and access to ample liquidity allowed to take advantage of any Market dislocations to maintain leading risk-adjusted returns to address any future credit demands all while maintaining flexibility to improve shareholder return wage at this time. They lie and Tim will take your questions operator if you want to open up the line.
We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. Took your handset before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Our first question comes from Brad Milsap, please. Go ahead.
Hey, good morning guys morning Brad.
Dale or can I just wanted to make sure I understood kind of all the moving parts around the balance sheet. It sounds like you know, a lot of the growth is he saw, you know, the end of the quarter was mortgage Warehouse waited, um, which you know, obviously be very volatile and uh into the corridor can be very different than the average as you go into. The fourth quarter is your expectation that you're going to be able to replace that. Um, you know, if it does Wayne a little bit with other types of loan growth you also mention that you also just expect deposits, you know from that from the warehouses to go down. So you'll you'll get some liquidity be there as well just understand kind of what the moving Parts would be within average earning assets as you go into 4q with kind of everything you talked about.
Yeah, so mortgage warehouse at a great quarter as you can see by the results they are.
Increasing marketshare simultaneously as Warehouse lending clients increase their activity or see increased activity. So we're getting a two-for-one and that's why you saw the increase the large increase in loan balances. This quarter Q4 is traditionally a little lighter and so we're just sticking to our queue for them or analysis or historical Viewpoint that loan growth there will be less and yes, our model is designed such that we can replace loan growth there with all the lounge around the company and that's why we're giving you the $6,800 million dollar range for Q4 loan growth and also the same for deposits they lose some of their deposits in a 244s taxes are paid threat. I would also say that we have a senior loan committee that meets weekly that approves the largest credits in the company and in the activity level of loans come.
Coming in from the line to that committee, which is loans about 15 million has really stepped up significantly over the past couple of months compared to where we were say in the second quarter. And so we're seeing where we think we're seeing broader strength. We can other other classes of of loan credit and at the same time on the deposit side, you know, despite what we may it may happen on in terms of the the warehouse lending piece. We're seeing some increase in some of these other channels as well that I think are going to Bear fruition in the in the Fairly near term. It's just add the Dell. I mean we're seeing strength and capital call business. We're seeing strength in the cre business certainly around the industrial side where there are we're we're doing a lot of deals for distribution center bulb and then Tech an innovation to seeing a lot of new opportunities as well and maybe just a follow-up on on the loan growth where are dead?
you know kind of new loan yields coming on the books and any mention the spot rate of $450, but kind of curious where you know new production is coming on and then
Can you talk a little bit more about the impact of the acquisition that you made you know how much you paid, you know kind of what the incremental, you know benefit you kind of see over the next, you know, six to twelve months off.
Sure. So in terms of the yeah, that spot rate is is really a spot on in terms of kind of where the numbers are. So the actual loans that have come on have been about five basis points higher yielding what the average was and I think that's kind of reflected there. You know again, you know, we have a lot of discipline with our team in terms of putting in floors. So let's suppose somebody makes a loan, you know at Birth + 3 + 3 and 1/2. Well, we'll Define and loan docs that L is L can't go below 1% in that situation. That's a really common structure for us. So the floor is active on the first day and and that's how we're able to sustain new origination really right on top of the current of the deal. So I'll take the second half Golden Corral. We didn't pay much money for it at all. All right, and it's a mortgage business that specializes on buying non-qm loans from Warehouse lenders and so nganh khong
For mortgages have a slightly different feature than standard agency paper that you sometimes offer interest-only features or they have more self employed bars, but they underwrite to very low LTE these in the sixty-seven sixty-eight percent range and the paper carries higher yields than the standard agency paper. So standard agency paper could be like 2 and a quarter and this will be three and a quarter to three and half percent. The acquisition came with 12 people for sales people and eight operations people and it provides us with a dedicated sales force and servicing operations. So this will allow us to wrap up a residential purchase volume while improving customer service with knowledgeable experts. It provides cross-selling opportunities to call customer base go and has a hundred Warehouse lenders that they work with 30% of which is an overlap with us, but the other seventy percent will allow us to authors
Warehouse lending lines and then remove remove mortgages off of the warehouse lending line on to our balance sheet. If they fit our credit box. We've seen them in an operation for a couple of years. We've probably seen over a thousand mortgages that they've underwritten. So we have a real sense that they're approached credit mirrors ours and we think the the big impact here will be seen middle of next year as this thing continues to ramp up and we bring them into the fold here. So where we were dead residential merge Residential Mortgages either bulk purchases or forward flow agreements off the side of our desk, meaning other people had other responsibilities. We now have or dedicated team to do this and that's and knowledgeable people and that's what excites us about the this opportunity.
Right. Thank you guys.
Go back to you. Thanks.
Our next question comes from Kristin, please. Go ahead.
Great. Thanks for the question. I just want to make sure I got the the fourth quarter guide accurately. I was writing writing pretty quickly the the 390 I believe that's 390. Margin. Is that a is that a fully loaded margin with with the impact of of the fees from the PVP, correct? Yeah, the 6.9 million level that we show on that on that one page. So rebounding from home from the second quarter, but much lower than what we had Reuben from the third quarter but lower than we had the second. Okay, and based on the balance sheet. The comment was fourth quarter of reported all in net interest income higher than second quarter reported, right? Yes, great in terms of the the growth strategy. Can you just suck size of how big the warehouse is and the and the capital call book? Yeah. So the uh, the warehouse book is
Yeah, three point nine billion.
and in capital call is
737 million give me to your question Chris. Yeah. No, we see we see that we have kind of stability here. We have an opportunity to continue wage earning asset growth. So so we believe we can even if there were margin pressure in 2021 that we have. We've got the growth trajectory that we can sustain wage increases in that interesting, huh?
Got understood and and if we look maybe one more on just a mix of the earning asset if we look at the mix between cash and securities. It's Kali roughly 20% of your assets. Is that the same is that the promotional mix you'd expect, you know of the balance you going forward maybe, you know toggling between cash and securities 20%
Well, I think you know we can we can take our cash down to Something in kind of the low-to-mid hundreds of millions. We think that's really kind of the for for us. And so we were up at you know billion 9 a.m. That gives us a fair amount of room, you know, and the Federal Reserve. I mean, you're not a criticism but but they pay ten basis points. So, you know, we think that you know, the the we no liquidity is abundantly Thursdays banking companies, but we think that actually, you know, garnering more relationships and even if they're you know flat or even slightly negative, you know, in terms of you know, in terms of price and obviously they crushed the margin cuz you get a big balance it gets a zero spread or something like that. But we think that's going to bode well in the future as you know, we come out of this situation and there's you know can mention with golfing in among other channels where we've got opportunities to to really grow safely on the credit side.
Okay, and then the investment?
Portfolio Del just is that just kind of you solved for that based on the deposit? I mean, how are you thinking about the size of the bond book? Yeah. I think the Bond book had actually I don't know that it's got a lot of room but we're comfortable with you know, our loan-to-deposit ratio in the nineties. So that's going to drive some of the you know, some of the investment Securities portfolio, but you know, we've got a couple of billion dollars two and a half billion off of you know, mortgage-backed Securities in there that are yielding a hundred a hundred and fifty less than if we buy we think similar risk credit with low LTV first mortgages. So so there's a possibility that you know, after we stopped up our current liquidity through residential and other channels that that maybe maybe we don't need to grow the MSR book anymore and that could become a smaller proportion of the balance sheet in aggregate.
Got it. And then and then last one if I could just everyone's topic on taxes anything, you know meaningfully different in in your tax structure and strategy today if if we got a tax tax increase but you know the same mass opposite direction wouldn't work next year. Yeah. Yeah. So I mean I think you could the proportion of holes pretty well. So even though our tax rate may be lower than some authors. You're basically looking if you're going to 28 and you're at twenty one, that's a 33% increase in the tax rate. If you take our tax expense say for the third quarter, which was you know, Thirty million and say gosh if that would not go into affect. Our tax recognition expense would be up for this similar quarter would be about ten million higher about a third higher.
Got it. Okay. Thanks a lot.
Our next question comes from Michael Young of truest, please. Go ahead.
Hey, thanks for taking the question was kind of curious. You know, it sounds like there's an effort to grow the balance sheet, you know, maybe would with some more residential but or or Warehouse, I was kind of curious just about the the trade-off between growing the balance sheet and some of those more non relationship oriented areas versus maybe just looking at a share buyback program and and you know the proportion so just kind of growing balance sheet vs. Returning capital and how you guys are thinking about the trade-off between the two. Yeah, I would argue that we do have that relationships and what we're doing is uh with each Warehouse lending customer. We have a warehouse lending relationship. We could have an MSR relationship. We can have no financing relationships. They provide deposits to us and they also provide us with a go-forward flow on Residential Mortgages. So don't think about the relation wage.
Ship as the End customer in their home think of it as the mortgage servicer which controls a lot of business and we see an opportunity now, there's this location in the market with a number of of mergers. And also I just say poor performance that we're coming in with higher high touch customer service off now we're getting business that's coming to us and we're not having to struggle to bring that business in so that to us is very important and that's what's driving the balance sheet growth. We're not trying to buy mortgages for mortgages sake it's really the warehouse lenders and those relationships that we have with them.
In terms of in terms of the repurchases. I mean where we are with this is we we can sustain, you know, a balance sheet growth and while we're we we don't have an idea of being opportunistic in terms of in terms of share price month. We we think those, you know, the long-term value-creation is from expanding the expanding the franchise.
Okay, that's fair. I appreciate it. And then maybe just on on credit if you will actually closed on or liquidated any the hotel assets or any other c r e e s s that have given you, you know any more confidence or anything any color you can provide um on on those books. There's been no obligation. No foreclosure. You know, the hotel book is, you know, given its circumstances performing. Okay, 45% of the book has a debt service coverage ratio above 1% 45% is is below it and then we've got a few construction loans. So we we don't have a debt service coverage ratio on that. You can see Hotel occupancy coming back to 50 per month. That's about where are hotels are tracking to the National averages again, when we underwrote these hotels we under Road good liquid sponge.
That had the ability to call on Capitol from their LPS. And uh, they did that to enter into many of the 3 + 3 or 6 + 6 the pro relationships CoQ10. Do you want to say anything else? Hey think it's important to remember. We we started this dialogue particularly with hotel in February. We we brought together in a moment. We put Dynamic leadership let some of our senior-most Executives in place and we've maintained that dialogue around liquidity Opera performance and in forward-looking capital clients that that has allowed us to be way out ahead of problems that arise here. So, we we've got strong sponsorship. We've got an active dialogue and we're seeing good progress towards stabilization.
Okay. Thanks. Our next question comes from Gary tenor of the Davison, please go ahead. Thanks morning. Just wanted to ask on the mortgage acquisition that we talked about earlier day one. Are there any other name is the revenue coming off that purely the mortgages that you put on balance sheet or are there any is there any other Associated revenue or fees anything that would be related to that? You know, it comes off of the truck new comes off of the mortgage just put on balance sheet and we've been just integrating the team over the last three weeks or so. So we're not looking for any mortgages to log into at the balance sheet on maybe for another two or three weeks.
Okay, and they'll email you may have alluded to this and you talked about kind of balancing the Investment Portfolio against you know, the resi book, uh, you know, you've been hanging around in the kind of nine and half percent off or plus or minus in terms of residential loans. Where where would you take that buggy to now that you've got this other kind of streaming product coming up? Well, I think it's got a lot of money a lot of runway in front of it. I don't have a number for you for where it might stop. But you know, as you know, a typical bank that number is going to be about trippel that concentration level which is dead, you know, even at even with the growth rates that we're talking about, you know augmented with Carlton and and what we've been doing before, you know, jeeze. I mean if we could take it to 20% and on a growing balance sheet that's going to be a substantial increase in the balance is outstanding. So so I think we've got years for this thing to run. We think it's a strong asset class to be in. Uh, we think you know, the rates were wage.
Now we've been you know, as you know, asset-sensitive or really now kind of asymmetric in this balance, is that out as well? So we think it's a it's a good place to be to lower risk-weighted asset category long or one of the smallest out there in terms of relative exposure. Okay. Thanks for other questions. We're already answered. Thanks.
Our next question comes from Brock vandervliet of UPS, please go ahead.
Oh great. Thanks for the questions deal. I guess if you could talk about you touched on this in your prepared remarks, I guess in terms of the deposits off. So how much are those do you think you can kind of hold onto going forward? You know, what's the the volatility of the deposit mix at this point? I thought well, I think there's I think it's good but there's two areas that that you know, that that I want to keep my eye on you know, one of them is I'll call it triple P deposits, you know, so often we would just a billion date of loans that we made and we deposited into these accounts and we track how much money is still there. And that number is still over a billion dollars and it's like was that going to get burned somehow at some point in time? Maybe that's a little bit lazy because we're in this kind of know rate environment. So we want to keep our eye on that piece of the thing Thursday.
The second piece is kind of the mortgage Warehouse area. Obviously. It's been a torrid pace of refinancing that's going to increase volumes generally. And so I think you know, is there is there space for kind of take a breather in that scenario now my read of what's transpiring is well, maybe the refi business is going to change temperature to some degree. There's still a lot of people that are eligible for refi in terms of putting themselves in a lower area. So but you know, you know, is there is there some error that can come out of that. You know, I think I think there is you know, what do we have? Well, you know, we've talked about, you know our our to you know, our two business lines that are deposit generating, you know, those both, you know, did run into a dead a little bit of a Sidetrack regard because of the pandemic they each of them benefits from you know, kind of in-person contact for you know development of personal relationships with these Enterprises that they service dead.
You think that's coming out of it. Now? We think those pipelines look strong also.
Ken mentioned the tech and Innovation space and and in one of our competitors, you know who was you know was fairly was fairly bullish in terms of what that Outlook is like and and we would we would second that assessment. So so while we may see softness in a couple of these categories that have been really powerful in 2020, we think we've got handoffs that we can make to kind of sustained the the performance in 2021 to to the some of these new areas got it and in separately just on the the golden acquisition and the the non-compete a minute that encompasses many different flavors of mortgage origination is this, you know generally paper that just doesn't quite check the the agent took the box or is it more of a, you know, heavier credit component to it and I guess separately. What's the step up from, you know vanilla agency origination dead.
To step up and rate with this paper. Yeah. It just doesn't check the box for the for the agencies and the step up and Vapor is about 1% Okay, that's pretty fat. Thank you.
Our next question comes from Brazil of Wells Fargo, please go ahead. Hi. Good morning.
Morning starting with efficiency. It seems like has seemingly reached a bottom here in the third quarter and just start improving in the fourth quarter as well. Look ahead. Should we expect a similar level of operating leverage? Whether it's 2 to 1 or 3 to 2 as we've seen in in recent years or does the month current rate environment presented of challenges where it's likely going to be lower than that for the foreseeable future. I think we can sustain where we are in terms of, you know, in terms of the operating expense level. So yeah, we we think the margin is is fairly stable, even if rates kind of stay at this level for you know, maybe in perpetuity for certainly an extended period of time and and then our offense is running at around $0.40 relative to the revenue. We bring in we think that's pretty sustainable as well. So we had some volatility in the second quarter for a variety of reasons.
We talked about really underscores that we're looking at the third quarter of 2020 is really being a pretty good base line. I know some of you know, some of you have commented or looked at you know, that way that these you know, we had this gain, you know from security settings kind of recovery about five million bucks in the third quarter, which of course we did but I in my view I don't back that out in terms of what's great is because I'm off setting that with the reversal we had and triple P kind of going forward. So we think the revenues a good base to come from we think the expense basis is good base from which to grow but again holding in fact the low 40s on efficiency. Okay. Thanks and then I just want to make sure I'm thinking about deferrals correctly. So the one point 1 billion of deferrals that are rolling off in the fourth quarter. How much of that was part of the 6 + 6 program. And for those loans is it now the the liquidity that was collected as part of the initial deferral process Thursday?
Now kicking in for another six months.
Or is that entire balance going to be moving into performing status? Essentially? Yeah, so I mean they they prepaid I mean so before they got six months of deferral they prepaid another six months and this is what we recommended that they do because it takes them out until the second quarter of next year which you know, you can different assumptions in terms of when we get out of this but with their wage and I think vaccines are just you know, frankly pretty close to around the corner that I think by that point in time the you know, what we're these entities these those hotels are going to be able to benefit from you know, I'm relaxed social distancing. And so if they prepaid it also, yes, they are paying us agree cuz they we are dipping into you know, basically a control account that is making the principal and interest I get service as they've come off of deferral.
Okay. And is that is that around 50% That's that's six plus six of that or is it going to be a smaller amount that that's what that one point 1 billion? Well, you know of those that are that are coming off in the fourth quarter. It's predominantly the 6 plus 6 because they were they were done. You know, I mean, we did somewhere that were three plus three, you know, those typically came off mostly in in the second in the third quarter, right the fourth quarter for the those the 6-plus 6s that were done in the second quarter of this year.
Okay, and then one last one for me just looking at the technology sector another strong quarter of growth, but I notice that the allowance for that sector declined on the link water-based was that the specific Reserve release that you spoke of or was there something else going on in that portfolio that the winds what a reduction in allowance know that was that was part of it that drove. The decline in imbalances was a reserve release on an asset that we were able to get off our books and we were happy to get off our books.
Okay, great. Thank you very much.
Our next question comes from David. Do you have their name of wedbush Securities, please? Go ahead.
Hi. Thanks a couple of questions for you. And the first one is a strategic question on mortgage Warehouse with it now for billion of of loans and you addressed a little bit about this with a deposit discussion, but I was curious get some investors have expressed concern generally about you know, seasonality and volatility around the mortgage Warehouse business. Can you talk about how you're viewing that business and addressing that volatility over time as we look ahead.
Yeah, so I mean we thought this was you know, again, if you look at you kind of the business lines with which we can select from in which to grow. This was a great time to go into mortgage Warehouse the balance, you know, the demand was something wrong the quality is excellent and and because of the cycle where we are interest rates after the, you know, after the fomc actions, you know, it's it's a robust. It's a robust wrong area. So yeah, I mean, I don't think that what's gone on there is sustainable long-term, you know, if rates start to rise, I you know, I think it's going to it's going to come down significantly all the money to purchase Market is pretty active cell and and that maybe has you know more legs to it unless the locality but in any event, I mean, it's just I think it's just a good example of hey, we we can go here, This is safe. This has activity. This is something where we can move to, you know in the immediate time frame that we did that basically earlier earlier this year, you know, if that pulls back in 20, yep.
One which I think is a reasonable probability as I mentioned, you know, we're looking at are the things that are coming to our credit committee and they're and they're and they're strong.
And they're Diversified and we think that that's where we can kind of pivot to is this when we is this when we wait a bit, let me just add first. Remember that while we have three point nine billion. I'm sitting out there in loans. We have almost an equal amount 3.6 billion sitting out there and deposits. So it's a great strength of deposit for growth for us. And so I think that's important too to remember. The other thing is when we say Warehouse Lundy you got to remember that includes MSR lending that includes note financing and Warehouse lending. All right, so it's a combination of all those things. So we do have some other levers to pull when we dealing with some of the clients.
Great, that's really helpful color and then shifting gears you mentioned about the potential for Reserve releases looking out over the next, you know few quarters or Thursday, maybe middle or end of twenty Twenty-One, but nonetheless, I was curious. Do you have a Target reserved loan ratio in mind?
You know, we we don't because it's so dependent on on each particular asset type. So that number has as we've grown in these, you know categories that are about a third of our faith now that are little 2-0 loss mortgage Warehouse, um Public Finance Capital call lines Residential Mortgages rates Finance as those because I have become a larger proportion that number is going to fall and and so I think you need to look at it more on a on a category by category basis. I mean, if you look back to home kind of what a standard normal situation might be, you know, if you take if you take where you know numbers were as of twelve-thirty one ninety-nine before this, you know pandemic started off and then add in the overlay that was done at the beginning of this year for the adoption of cisa, which front loads provisioning is. Everyone's well aware. That number is was about a 1% number for us in terms of
Serve level, you know, I think in a more, you know, kind of benign environment and less uncertainty. I think you kind of go back to that level with that mix if the mix is lower. I think that number could even fall further.
Great. Thanks very much.
Our next question comes from Andrew Terrell of Stevens, please go ahead.
Hey, good morning morning. The most of my questions have been asked and answered at this point. I just want to touch on on the increase in compensation this quarter was there included in that same type of ketchup from prior quarters that we would see fall out of the porky run-rate. Yeah, that's exactly it as we moved closer to our performance targets. We get caught up for the first two quarters as well.
Okay, that's helpful. And then maybe just a bigger picture question these two I guess overall Revenue are consistently just around the mid single-digit range. If if we're not a lower for longer interest rate environment. Are there any thoughts to potentially growing out any any specific offerings in the fee income base wage?
So what?
We're always looking at that as you know, we're very well, you know, we lead the industry in many different categories. We do not leave the industry and fee income and so we are working on a few things. I would say they're going to be marginal at this point. There's nothing that's going to move the needle, uh, as we as we look towards twenty Twenty-One. So we're spread business and for us it's important for that balance sheet growth to occur good asset quality. Of course, that will negate some of the some of the the lower ugh funding lower interest rate environment. But remember, you know, we're able to get floors on our loans and 78% of our loans have flowers. And so the impact to us on an in basis will not be as great.
That's helpful. Thanks for taking my question.
Our next question will come from John Armstrong of our please. Go ahead. Hey, thanks. Good morning. Everyone morning.
Maybe I think everything's pretty much been covered. But touchy-feely philosophical question for Tim Marc m i kind of look at this and you're you're making more than you were prepend. Emma returns are tangent returning Stan's was almost 20% but. V 30% So the Gap is probably credit concerned you feel like we're all reacting to that or should we expect some kind of a sturgeon losses over the next few quarters. That doesn't seem like you're indicating but but you know where we missing something here with the short answer is yes. I mean, if you if you peace through everything we said today we said that the Baseline of like a hundred thirty-six million dollars is quarter. He's going to be the Baseline going forward for the upcoming quarters into twenty twenty-one.
Assuming at this point the same provisioning of about 15 million now, we don't see large losses on the horizon. We don't see charge-offs Rising dramatically. It's hard to find them in our in our book of business at this point. So even our provision maybe a little high and certainly would be a little high if the consensus economic forecast is changed to be more favorable for the vaccines and what have you and more States opening up after the election. So I think that the a lot of investors I'll say that way over reacted to what they thought our losses could be. All right, almost $10 billion dollars of our book is in really really low lost categories. And as I said, we don't see the losses coming our way home.
We're feeling good.
About where our net interest income is going to be 4 and we're feeling good that the Baseline for earnings is what you see this quarter.
Okay, that's all I had. Thank you.
Okay. Well, thank you all for attending to call. We look forward to speaking to you in the fourth quarter and everyone enjoy your weekend.
The conference has now concluded thank you for attending today's presentation and you may now disconnect.