Q2 2022 Western Alliance Bancorp Earnings Call
Good day, everyone welcome to Western Alliance Bank Corporation's second quarter 2022 earnings call.
You May also view the presentation today via webcast through the company's website at W. W. W. Dot Western Alliance Bank Corporation Dot Com I.
I would now like to turn today's call over to miles PON Delek <unk> director of Investor Relations and corporate development. Please go ahead Sir.
Thank you and welcome to Western Alliance Bank second quarter 2022 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Chief Financial Officer, Tim Bruckner, Our 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 actual results to differ materially from any forward looking statements. Please refer to the company.
SEC filings, including the form 8-K filed yesterday, which are available on the company's web site now for opening remarks, I'd like to turn the call over to Ken Vecchione.
We had solid performance this quarter as the company past $66 billion asset milestone and the strong earnings power of our diversified asset sensitive business model was on display even as we are keenly focused on the economic uncertainty around us for the second quarter Wal Jenna.
Total net revenues of $620 million net income of $260 million and EPS of $2 39.
Record earnings were propelled by accelerating net interest income quarterly guidance of $75 million or 17% from prior quarter.
$525 million as the rising rate environment expanded our net interest margin 22 basis points to 354%.
Interest income rose three times faster than interest expenses inclusive of deposit costs and Ecr's, we maintain industry, leading performance with return on average assets and return on average tangible common equity of 162% at 25, 6%, respectively, which will continue to support <unk>.
<unk> accumulation and strong capital levels in the quarters to come.
Balance sheet expansion continued with quarterly organic growth of $5 3 billion.
Or 52% year over year, excluding the $1 9 billion of loans transferred from held for sale to held for investment which was done to avoid income volatility a rising rate marks Dale will speak to this later.
<unk> rose by $1 $6 billion or 28% from the prior year as we continue to effectively attract and deploy liquidity loan growth was broadly diversified this quarter with regional banking divisions, contributing 16% of organic growth or $863 million or specialized national business.
Lines, adding 55% or almost $3 billion and residential loans closing, 28% or one 5 billion, excluding the held for sale transfer.
Deposit growth trailed loan growth in our $2 billion guidance as a few large customers were pushed to July .
Mortgage banking related income modestly declined by $5 $4 million as the mortgage origination market continues to face headwinds from higher rates affordability issues and inventory constraints. We believe the rationalization of the mortgage sector will take time, but we have already positioned to marijuana to profitably operate in a lower.
Asian market and to unlock value.
Hank on mortgage business by attracting custodial deposits and deploying liquidity into low credit risk loans.
Finally asset quality continues to remain stable as total nonperforming assets declined $6 million to 15 basis points of total assets and net charge offs were only $1 4 million we're cognizant.
And of the macro uncertainties, and possibly more difficult credit environment in the future, but we have deliberately positioned the portfolio to expand these pressures through credit linked note issuance government guarantees and cash collateral that now cover 27% of our portfolio.
In addition, another 33% of our loans are in low to no loss loan categories. At this time deal will take you through our financial performance.
Thanks, Ken for the quarter Western Alliance generated net income of $260 million EPS $2 39 in PPE at our 351.
Total net revenue was $620 million, an increase of $64 million during the quarter and $114 million or 22% year over year.
Net interest income increased $75 billion to 525 during the quarter driven by robust loan growth and the impact of higher rates on the margin.
Overall, non interest income declined $11 million to $95 million from the prior quarter, driven primarily by a $10 million loss on mark to market adjustments for preferred securities as credit spreads widened and lower mortgage banking related income, which fell $5 4 million during the quarter to $72 six.
This decline was partially offset by a $9 million gain on credit recoveries related to credits pick those sold during the quarter, which is recorded in non interest income is really a contra expense to the provision for credit losses, using the same seasonal methodology.
Finally, noninterest expense increased $20 million in the quarter, resulting in an efficiency ratio of 42, 8%, primarily due to higher deposit costs from earnings credit rates as rates rose and processing expenses from a large balance sheet. All in net revenues grew three ex that it the increase in expenses.
Total turning now to our net interest drivers are growing asset sensitive balance sheet benefited from right. The rising rate environment investment yields increased 17 basis points for the prior quarter to 294% on a linked quarter basis loan yields increased 21 basis points to 419 loans held for sale also benefited from rising mortgage rates.
<unk> and increased 85 basis points to $3 99.
R&D costs were higher with interest bearing deposit costs, increasing 17 basis points to 37, while balances grew $1 4 billion.
Total cost of funds increased 11 basis points to 38.
And utilization of short term borrowings increased as loan growth exceeded deposit growth.
Net interest income increased $75 million during the quarter or 17% annualized to $525 billion as average interest, earning assets grew $4 5 billion and NIM expanded 22 basis points to $3 54.
Our asset sensitivity into perspective, our total funding costs inclusive. These ECR expenses only grew 30% of the $95 million increase in interest income for the quarter.
Yeah.
After after recent fed actions to rapidly increase interest rates, we continue to remain materially asset sensitive since our variable rate loans moved above their floors given that the fed has increased rates by 125 basis points since last quarter, our proportion of variable rate loans at their floors is now over.
<unk>, 16% down from 80% in Q1.
Based upon expectations of an additional 75 basis point rate increase by the fed next week nearly all of our loans will be access variable rate at that point in time.
And our rate shock scenario of 100 basis points over 12 months and on a static balance sheet net interest income is expected to rise five 3% using the same scenario on a gross balance sheet, we expect NII to grow over 25%.
Under plus 200 basis point rate shock scenario on a static balance sheet net interest income is expected to decline by 10, 8% in the coming year and over 40%. If this rate environment were to materialize when balance sheet growth expectations are also incorporated.
Our efficiency ratio fell to 42, 8% from $44. One in Q1 future rapidly increasing net interest income noninterest expenses rose $20 3 million or 8% during the quarter, primarily due to $8 8 million increase in ECR related deposit cost our noninterest bearing deposits.
Higher loan servicing and data processing expense or a larger balance sheet.
Total deposits subject to ECR for $14 5 billion at quarter end, we expect our efficiency ratio to remain in the lower <unk>.
Third quarter 2022.
Pre provision net revenue was a record $351 million during the quarter or 34% increase from the same period last year, an increase of $44 million or 14% quarter over quarter.
This resulted in a <unk> ROA of two 9% for the quarter, an increase of 90 basis points compared to 210 in Q1.
Our strong balance sheet growth and volatile rate environment. Our <unk> ROA has remained quite stable over time.
Strong balance sheet momentum continued during the quarter as loans held for sale held for investment increased $5 3 billion net of the HFF to HFF loan transfer, our 13% to $48 4 billion and deposit growth of one 6 billion balance is back to $53 7 billion.
Okay. Thanks.
As Ken mentioned during Q2, we transferred $1 9 billion of government guaranteed early buyout residential loans from the held for sale to held for investment portfolio to eliminate the mark to market volatility of Hff's logos.
Since these loans are targeted to re perform a roll off the balance sheet in various forums liquidation they have significantly lower duration than other mortgages mortgage servicing rights balances declined $124 million in the quarter to $826 million as we optimize capital through certain MSR portfolio sales.
<unk>.
Total borrowings increased $4 $4 billion over the prior quarter to $6, one primarily due to an increase in short term borrowings of $3 9 billion and the issuance of $494 million in credit linked notes, providing first slash credit protection on a pool of $2 2 billion in capital call capital call loans and $3 9 billion.
In residential loans.
Finally, tangible book value per share increased 46 cents.
Decreased 46 tenths of one 2% over the prior quarter to $36 67, primarily due to unrealized fair value losses on available for sale Securities recorded in all other comprehensive income.
Tangible book value per share increased by 11, 6% year over year.
We continue to generate attractive organic loan growth from our flexible commercial business strategy and see broad based slow demand between our regional banking divisions and national business lines.
Held for investment grew $5 3 billion driven by an increase in C&I loans of $2 9 billion as demand for capital call lines and regional banking remained strong contributing $1 $1 billion and $863 million to growth.
Secondly.
Commercial real estate loans grew $969 million at residential grew $1 5 billion, representing 28% of loan growth excluding the <unk> transfer during the quarter, we expect residential loans to remain at this lower proportion of loan growth going forward than it has been historically.
Turning to deposits, we continue to see deposit.
Growth across our diversified channels that will generate stable low cost funding in different rate environments through deep rooted banking relationships with our clients.
This quarter, our specialty deposit national business lines drove most of the net deposit growth, while our regional banking divisions were flat and total deposits grew $1 6 billion or 11, 9% annualized in the second quarter driven by increases in term Cds of $760 million interest bearing deposits.
$592 million and noninterest bearing DDA or $201 million.
Noninterest bearing accounts comprised 44% of our total deposit mix.
The deposit franchises continued to provide ample opportunities to generate attractive funding to support loan growth with deposits from warehouse lending higher by $520 million HOA up $219 million and settlement services up 135 billion going forward, we expect deposit growth to more closely match our loan growth as <unk> is.
Impacted by a few deferrals of new deposit relationships to the current quarter.
Our asset quality continues to remain strong and total classified assets and special mentioned loans as a percentage of total assets and funded loans are lower than 2019 levels.
Total classified assets declined $19 million during the quarter to 346 or 52 basis points of total assets as the temporary impact of the <unk> variant on hotel loans continues to way.
Special mention loans decreased $33 million during the quarter to 66 basis points of funded loans and they are at historical lows as a percentage of assets.
If the economic environment continues to evolve we believe that our portfolio is structurally well positioned to sustain superior asset quality through cycles based on our deliberate decade long business transformation and diversification strategy that emphasizes underwriting discipline.
Our national reach and deep segment expertise enable selected relationships with the strongest counterparties leading profitability.
And superior accompanied risk management.
Approximately 56% of our loans are being low to no boss categories and 27% of the portfolio was credit protections for government guarantees credit linked notes first loss protection or is cash secured.
Or at least see signs of a notable recession or credit stress better prepare for these events.
Should they arise.
Quarterly net credit losses were $1 4 billion or one basis point of average loans, our total loan allowance for credit losses increased $26 million from the prior quarter to 327 as the provision exceeded losses due to strong loan growth and we adjusted economic assumptions for unexpected tail risks.
In all our total loan the ACL to funded loans declined five basis points to 68 basis points adjusting for the $11 2 billion of loans covered by credit linked notes were ample first loss coverage is assumed by a third party. The ACL coverage ratio rises to 88.
Finally, given our industry, leading return on equity and assets, we continue to generate capital to fund organic growth and maintain well capitalized regulatory capital ratios. Our CET one ratio was stable at 9% as our net income and risk weighted asset reduction from credit linked notes offset the capital necessary to some.
<unk>, our exceptional loan growth.
However, our tangible common equity to total assets fell to six 1% this quarter, reflecting negative fair value marks on available for sale securities.
Notable that the TCA rig TCE ratio does not consider the increased value of low cost deposits and this higher rate environment.
Inclusive of our quarterly cash dividend payments at <unk> 35 per share our tangible book value per share declined 46 cents during the quarter to 36, 67%, primarily reflecting the adverse available for sale Mark at quarter end.
Rates rates are rates have continued to rise the rate of increase we witnessed in the first quarter and the second should subside later this year given our robust capital generation, we still expect that 2022 will again be a year of tangible book value growth.
I'll now hand, the call back to Ken.
Thanks Dale.
Very pleased with Q2's results and the management team's ability to adapt to the changing interest rate and economic environments loan and deposit growth was strong net interest growth accelerated with expanding NIM credit remains solid and clean and expenses were balanced for both the near term.
<unk> and long term investments looking forward, we expect loans held for investment as deposits to grow in excess of $2 billion per quarter, our loan and deposit pipelines Ulster by client confidence gives us reassurance that our balance sheet, we will continue to grow in a safe and sound.
And balanced manner net interest margin is expected to grow throughout the year accelerating net interest income growth and driving higher <unk> net.
Net interest income expansion there in the third quarter is expected to exceed the increase in the second quarter.
Strong net interest income growth will continue to drive total revenue higher inclusive of mortgage banking slowdown mortgage banking related income is likely to more closely track changes in overall mortgage sector volumes going forward. The bank's asset quality remained solid we are not seeing emerging to Lincoln.
Cesar defaults within any segment. However, we believe we are in a technical recession and are planning for a further slowdown and are preparing for a more dour economy. If that occurs regarding capital. We believe our internal capital generation can support up to $3 to $4 billion of loan growth.
Depending on mix, we expect capital ratios to remain fairly stable at current levels throughout the remainder of the year in conclusion, we continue to see EPS of $9 80 for full year 2022, as a floor from which 2023, 10% at this time now.
And I would be happy to take your questions.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press the star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press the star followed by the number too.
Please standby, while we compile the roster.
Your first question comes from Casey Haire of Jefferies. Please go ahead.
Thanks, Good morning, everyone.
Question on the funding strategy.
The borrowings up.
To $5 2 billion at quarter end.
I know everyone see short term and they think.
It's overnight I was just wondering are those one year.
Borrowings what is the spot rate at $6 30 versus 119 and then.
What is the appetite.
How aggressively are you going to use this going forward.
Yeah. So it's true it's two items in there one of them is we have some other than.
Credit linked notes are in there too, but so 90% of it really is is it.
Predominantly federal home loan bank borrowings.
Short term short term duration.
I expect that as basically kind of a 100%.
Beta response.
So what we're seeing.
But our loan growth is also overwhelmingly 100% data.
I do believe that we're going to see deposit growth and loan growth really kind of.
Merge.
In the third quarter. Unlike the disparity we had in Q2, so we're comfortable continuing our growth strategy and over time I think that our funding from wholesale sources would probably wait.
Okay.
It sounds like borrowings homeless level.
Non inclusion potentially decline.
Good news on the deposit growth side.
Yes, I think I think we're I think we're going to be trending lower we have.
We have.
The initiatives that are underway at underdevelopment on deposits that I think are going to are going to take hold.
Sure, we're going to see much of a drop in the third quarter, I think youre going to see more balanced loan and deposit increases Hey, Casey It's Ken.
We're trying to balanced loan growth and deposit growth, but that's very hard to do and sometimes loan growth gets a little bit of ahead of deposit growth in which case, we're going to use short term borrowings. If we faced the loans were putting on the balance sheet are good loans good asset quality. So while we try to have a balanced approach any particular quarter.
We could be slightly out of balance.
Gotcha Okay.
Got your comments on the on the NII growth exceeding that.
The <unk> level and <unk>.
Can you just give us a flavor for where asset yields are.
Exiting the quarter, specifically spot loan yields versus 2019, and then the hff's loan yields at 630 versus the 399 in the quarter.
Yes, sure. So we're looking for rates to be up.
Kind of where we're ending something in about 30 basis points.
Again, that's going to get overwhelmed by what we expect to happen next week and we have dialed in and another 50 basis points and our estimates for the September meeting.
Just to remember.
After the July I think will almost be nearly 100% above all the floors on the loans and thats going to add a little bit of an extra kick to.
Through the third quarter as well.
Got you Okay. All right last one for me just Big picture question for you.
Dan.
You guys. You mentioned that you are planning for a slowdown.
Just wondering.
I know you guys are a growth story and you've made some promises on the EPS front.
Building on our 980 and into next year, but just wondering is there a thought to maybe get a little more aggressive on the ACL build.
Just given the overhang on on credit normalization for Western Alliance.
So I'd say a few things on the ACL built.
I'll give you a <unk>.
Smaller answer and then I'll give you the larger macro answer but on the ACL build.
One.
Remember that 27% of our total loans happened to be credit protected so what you see in the ACL was also offset in the fee income on the game. There that's number one number two.
Number of our loans certainly on the C&I side have an average life of 26 months, so youre not going to see a big build there just because of the average life. So short and on the real estate side. It's a bill it's an average life of a little more than three and a half years ourselves. So we don't have long duration loans that we will.
Buildup.
And ACL credit loss reserve and Additionally, what we've been doing for a vote.
Last several years is focused on these low loss or no loss loan segments and when you go back and you look at history for the last 10 years and use that to calculate your seasonal.
Provision.
Numbers are very low so we move the provision up from 9 million to 27 $5 million. This quarter you saw we only had one 4 million.
Losses are special mentioned loans dropped and our classified assets dropped so I think we are.
Appropriately positioned.
At this time and.
And I think the provision will stay around this number.
As we go forward, depending on loan growth I think our our response to what happened during kind of during the pandemic and what you saw in terms of our in terms of losses that we incurred which were almost nil I think really is borne out in terms of our underwriting strategy, it's really a low LTV. So I mean the hotels.
Group is just such a such a good example here in terms of what was a direct hit from the pandemic occupancy rates fell into the low teens and yet we didn't lose a dime in that portfolio. Because we came in low in terms of advanced rates, we had strong sponsorship with entities with liquidity and.
That pervades the underwriting we do on our balance sheet. So I mean as you know for the past.
10 years losses had been almost nil.
The ratio that we have today if you if you look at the duration of our loan book as Ken mentioned under four years and the basis points, where Korea losses, and then multiply that by four that would tell you set the reserve ratio would really old need to be a single digit number and here. We are at 88 basis points excluding the.
What we already have coverage on from the insurance of visa credit linked notes.
Great color thanks, guys.
Your next question comes from Ebrahim <unk> of Bank of America. Please go ahead.
Hey, good morning.
Okay.
I just wanted to follow up one I think a.
A few things that you mentioned.
We wanted to make sure we.
Interpreted this correctly one you expect loan to deposit ratio went from 80% to 90% you don't see that going higher given what you said about funding loans with deposits.
And then secondly can you give us a sense of just the pace of loan growth. When you think about the third in the fourth quarter.
E book is now all the way up to 30% of the total loan portfolio. So we'd love to you just in terms of that piece of the loan growth.
The makeup of that Youre, adding some others around the slowdown in capital call line lending as well.
Any color would be helpful. Thank you.
Yes.
First on the loan to deposit ratio.
Four.
If we execute our plans to have loans and deposits balance each other every quarter. The 90% is about the right level, but I will say that.
There will be some quarters that could be out of balance and that number could go up a little bit.
Or come down so in Q1 for example, we had $4 billion of deposit growth that exceeded loan growth. So.
I think youll see it flowed around 90%, but don't be surprised if it if it should rise a little bit above that.
That's the first thing.
Second question was what again.
The pace of loan growth in the makeup of loan growth and all that.
Could you have hit 30% target that you had.
Yes.
Okay.
Our loan pipeline is.
He is very very strong.
And we're talking about.
Credit commitments that we're going to be making that are straight down the middle of the fairway.
They're not different than anything we've been doing for the last couple of years, we're not looking to steal someone elses market share on loan growth and do something that we're not comfortable with and so the straight down the middle of a fairway loan growth is in front of us and it's going to come from capital call lines.
Come from our entertainment and media business line that we started off it's going to come actually at the National business lines are all.
Showing good pipeline growth and so all of the regions quite frankly, and so what we get a chance to do here is pick the best of the best credit quality that we want to put on our balance sheet and so.
The loan growth, we will continue to grow 2 billion as a floor and.
I see the amount of residential loans that comprised the $2 billion to continue to drop and right now I would assume it wouldnt be any more than maybe 25%.
Got it so at NSE down 25% of that growth.
And.
I just don't know.
Cepheid note when you think about.
<unk> expense outlook, you talked about the low forty's efficiency the HSA, good, but just talk to it.
Ian NII guidance implies a pretty decent revenue lift.
Give us a perspective of.
Investment spend where the expenses are going to be targeting technology et cetera.
Okay.
So.
Are we haven't stopped investing in the company, we haven't stopped investing both for the short term and the long term sure things continue improvement and technology continue to improvement in risk management, we are keenly focused on crossing over the 100 billion.
Dollar.
Asset level, and we need to be prepared for that well in advance and a lot of our spending is going into tech and risk management. Additionally, we're spending a lot of money on the deposit side of our national business lines, putting in place new.
Our new products and services that we think will be hopefully up and running either at the end of this year or maybe into the early part of 2023. So that has all been more of an intermediate outlook to it but we are spending on that stuff today nearer term.
We'll see expenses rise a little bit and that's because the deposit costs are going to rise, but when you look at that deposit costs cost rise in connection with very strong net interest income rising.
I think youll see efficiency ratio drift up somewhat in Q3, and then come back down in Q4.
Got it and just one quick follow up the helpful.
Our portfolio is that done declining after the transfer you made or could we see held for sale balances continued to drift lower.
Yes, it will track the mortgage industry and it should stay roughly at the at the number it is today.
Got it thanks for taking my questions.
Okay all pleasure.
Your next question comes from Brad Millsaps of Piper.
Piper Sandler. Please go ahead.
Hey, good morning, guys.
Right.
Dale.
Just curious on deposits can you remind us what percentage of the DDA are subject to the earnings credit rate and.
Maybe kind of what spot deposit rates, where as you exited the quarter.
Yes, its approximately half deposit deposit rates were up about.
A little less than what we saw in the spot loan rates.
Again, we're focused on is we're not managing betas, we're managing net interest income growth RP PNR and earnings per share and so we're less concerned about that I do think that there is there's two different kinds of betas theres, a theres a beta to maintain a balance and then theres a beta to acquire new business.
And since we are acquiring more business than other institutions, we're going to have a greater proportion of our growth come in at probably a higher beta numbers in terms of the delta So again.
Spot rates were up about.
And 23 basis points and in going forward.
Expect to kind of continue to drive net interest income as Kent indicated.
Great and it looks like you added some more bonds in the quarter are you still.
Adding variable bonds or I think it was about a third of the mix in the second quarter or the first quarter. Just curious if that was maintained.
Those were in the early early part in Q and Q2.
All 100% beta bonds basically.
Collateralized loan obligations subject to only 20% risk weighted asset category categorization and that has basically stopped.
Got it and then the <unk> that you did I presume those are at the end of the quarter.
It didn't really have a huge impact in the quarter.
What were the rates there similar to the other credit linked notes that you did.
Yes. So the rates are basically sofa, plus 600, theres a little difference between them, but on each of them that is picked up in the when the total funding cost beta I mentioned earlier, but you are right. They were both down in June .
Got it and then maybe final question for me on the loan transfer.
I understand.
We're in the mark to market, but.
As those launch yield themselves.
Are they do they come off your books any differently than they would have otherwise.
Is there something else you have to trigger or is it just it just goes back.
Same way would have if it were in held for sale.
Yes. The reason why they are why they are so much shorter is because they had some type of a credit distress again. These are 100% guaranteed by Ginnie Mae So theres no theres no risk to us and and as a result, youre going to get faster liquidation.
Most of these are going to be sold probably by the current borrower I mean, they've got a good opportunity to do that if their personal situation has changed.
Youre also going to see a good portion of them refinanced debt now current rates puts them into a probably a lower fee per month or something like that and then also some of them are getting it's going to go through kind of a foreclosure process, we expect that to be about half of that total. So those are either going to get remarked to current rates or move out move off completely the ballot.
It will probably be adjusted.
A brief perform at the current note rate and those will have a longer a longer life to them, but but half of them are going to have a shorter life. So you know again it does as we said to kind of avoid the mark to market effects on them and.
And there is no risk of credit.
Great. Thanks for the color.
Yeah.
Your next question comes from Timur, Brazil, There of Wells Fargo. Please go ahead.
Hi, good morning.
Alright.
Following up on the credit linked notes Dale if you can give us just some color as to how you choose the credits that these are applied to.
You gave us the balance of the capital call on the residential loans, but what's the process in deciding which which credits.
Choose to go the credit link route versus traditional.
Sure. So I mean, so I mean, a key feature of this.
Basically strategy is to reduce the risk weighted assets of these so we wanted to pick something that we can get good leverage on our risk weighted asset reduction.
Also want some things that the expectation of losses is probably low to begin with such that the rates that we pay on the note. This sofa plus a 600 is lower.
If you had something that was maybe more certain in terms of what the credit risk was maybe that note rate is going to have to be higher to cover that so that's how we kind of got into these.
We've seen whereas the trail been placed already.
<unk> real estate and we did one last year in warehouse lending we've seen those before we're not aware of anyone that's actually done one in domestically for capital call lines, but we thought that would work well too in terms of kind of queuing that up and we've been active in that space.
It's I think it's working well.
Okay. Let me just add one follow on to the excuse me because I can let me just add one follow on to the credit linked note.
We went down that path, mostly too.
Also our capital position, but I want to make sure. It's not lost on folks that because of the three deals that we've done several deals we've done four deals that we've done.
Since last year.
27% of our book of business is now insured.
I don't think there is a bank that can say at least none that we know what we were looking at 20, so over 25% of their book.
Has credit insurance on it.
And so very important aspect to what we've done really gives us a lot of confidence.
Our asset quality.
I use it by getting relief on risk weighted assets has saved us $500 million.
Capital.
Great Thanks for that color.
Maybe switching over.
Bridge.
Good to see that the lending activity is still pretty strong.
Deposits deal out of that business.
So <unk>.
Tech and innovation loans just had a.
Very small outflow this quarter of 100.
Just over $100 million.
Year to date.
Deposits over a branch has remained rather steady.
They are really flat to the beginning of the year.
Okay, and do you have the warehouse balances at quarter end.
Good morning.
Yes, we do.
Our when we talk about warehouse lending we group it with two other categories because it's run by the same manager so we have warehouse lending.
We have MSR lending and we have known finance lending.
I don't think we've ever provided information on each one of those things broken out.
So I would for competitive reasons, rather not do that but say to you that on a cumulative basis. Those three groups those three things MSR note finance and warehouse lending.
We're up for the quarter.
Okay, Great and then just lastly for me.
Glad to see that it made it to this part of the call before you get your first.
And Meera home question, but.
With with production kind of being more or less flat sequentially in a pretty marked reduction in the gain on sale margin are we nearing the bottom kind of gain on sale.
Revenue and then for the MSR revenue. If you can provide a breakout of kind of what's core versus what was the fair value adjustment for the quarter.
So as we've said I think almost from day, one we look at everything together its mortgage banking revenue and I would say that based upon the industry data that we are seeing and what.
What we are seeing in that day to day activity.
Be a natural drifting downward from the numbers that we posted in Q2.
All that was taken into account.
When we provided the floor of the $9 <unk> EPS guide.
Okay.
Okay. Thank you for the questions.
Your next question comes from Chris Mcgratty of K B W. Please go ahead.
Oh great.
Ken I want to come back to the the 90 day for a minute and just make sure I understand all the pieces.
Can you talk about the investments that you're making you talk about the conservatism you're making on the provision, but then you say that the NII increase in Q3 is going to be larger than Q2.
To me it feels like that number should be decently higher than 980, and so I'm interested in.
Some color there and I think.
On prior calls you've talked about I think 275 fourth quarter run rate, just maybe an update would be great.
Yes.
I think by the way, we started putting out the 984 number and keyword there is Florida.
In the back half of 2021, and we haven't moved off of that.
And well keep direct you to the word floor. So at this point, we feel very comfortable saying that 980 as a floor number.
There are some upward biases that you could see in our P&L that could raise that number.
And our Q4 number exiting Q4, I think is $2 75, if not higher than that.
Okay.
Is there anything you're doing in the back half of the year, just because the NII.
Momentum is so significant to set up for maybe some expense the easing of expenses next year since since the year's kind of youre going to hit that number or you're doing things in the back half I guess to make the comps easier for next year.
No I mean, we're we've been running the business for the long term for the longest time so projects that we have in place have been in place probably.
Since going back to some of them in 2019, and 2020 that continue to be invested in so we're not accelerating expenses to offset revenue.
The acceleration in revenue I think youll see a little higher as I said expense growth just because of deposit cost in the ECR credits, but that will be more than made up in the net interest.
<unk> growth.
The provision is.
Something that we continue to look at and the provision is also predicated upon loan growth and again, we're looking at a $2 billion loan growth floor. So.
The provision could could be equal to or.
Where we are for Q for Q2 going forward in Q3 Q4.
Great and if I could sneak one in for Dale I know you managed to NII, but one of the themes in the quarter has been peak margins for the industry when do we get there.
Maybe just interested in your thoughts about the cadence of the margin given the futures curve and when do you think timing and about where that would that would occur.
Well, yes, we're fairly.
We're fairly invisible the longest lag of this upgraded right now.
And maybe maybe that starts to add in the fourth quarter or first I do think that there may be a little bit of momentum EBIT after that as say fixed rate loans.
Repriced at higher levels.
We've had this for strategy that was so successful.
During the during the pandemic, but right now and rates are moving this quickly before as fall away from the current variable rate, it's a very fast and they're not of much use. So I would prefer that we kind of flatten out here for maybe the first half of next year and then and then maybe trail down from there and then maybe that's a little optimistic.
In terms of how fast we get through this but but I think it's probably early in 'twenty three.
Okay. Thanks.
Yeah.
Yeah.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one at this time.
Your next question comes from Brandon King.
Of <unk> Securities. Please go ahead.
Yeah.
Hey, I wanted to get a sense of the compensation of the pot.
Deposit growth going forward competition on deposit growth going forward.
I noticed most of the growth in the quarter came from CD and money market accounts and savings. So I was curious if that will be kind of a similar composition for the back half of the year.
I think it is going to be a little more balance to our current mix I don't think Cds are going to be as large a piece I think it is probably going to be money market and some interest bearing checking I would say that kind of garnering real DDA without an ECR in this environment with a very elevated level of awareness of what's happening with that with rates.
Probably challenging so I don't think were going to hold that mix at 44% DDA.
But I don't think it's going to be skewed to Cds as wages.
Got it got it.
And then just broader picture look now.
<unk>.
Comments on the strong pipeline near term and for this year, but is there any sort of possibility of slowing loan growth depending on if we get a more severe downturn theories that that potential where do you think you can continue to achieve this growth even if we get some sort of mild to moderate recession next year.
This is Kevin I'm going to I'm going to let Tim Bruckner, our chief Credit Officer, all it gets a chance to speak take that one.
Thanks, Kent.
Hi.
It's a good question.
His focus the whole business on.
Appropriate lending in every economic certain circumstance. So there's there's things naturally naturally that we will do less of as we head into <unk>.
Might be recessionary economy, and there are segments that we.
Began adjustments in the second half of last year. So we've already seen muted volume in some segments, we will achieve appropriate balance really for any any economic scenario, but we do that in a deliberate way and we do it in advance.
Okay, Okay, so I get the sense that.
You could achieve the same loan growth with just the composition would change is that fair to say.
Yes.
That's definitely possible.
We would generally be less aggressive and stressed economic circumstance.
If that presents you'd see likely a little a little bit less a little more deliberate and a little higher margin.
We kind of divide we've been doing this what I'm about to say for the last four or five years, but we break.
Loan commitments into a couple of different categories.
The first and the easiest one is insurable risk, which is what <unk>. That's on one end of the spectrum on the other end of the spectrum, our economic sensitive loans.
Tied more to the economy and so we've been pulling back on that for a while now and so less growth will come from that and then our middle two categories of what we call economic resilience.
And economic.
Okay resistance resistant sorry.
So we balance what we we balance our loan growth into those into those categories to ensure that we can grow in a very.
Very balanced and safe manner, and as I said, we've been doing this for several years now so entering into a downturn.
There is an intellectual curiosity on our part that.
I think we prepared the balance sheet for the stresses that are going to come forward.
I'd like to tie back to one thing that you said when we talked about ACL and it's important as foundational to the way that we underwrite here, we have a short tenured portfolio.
Very deliberately we underwrite and the current economic circumstance, we underwrite within our line of sight underwriting the short tenor permits that it also lets us reset those assets that are on our books.
And then appropriate way based on the current economic circumstance. So it all really ties together. Thanks.
Thanks, Ken.
Okay. Thanks for all the color.
Okay. Thank you Brandon.
Your next question comes from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, Good morning.
I wanted to kind of the flip of the peak margin question and just thinking out whether it be next year 2024, if we get lower rates.
Anything any thoughts around.
<unk> anything to protect some of the margin gains that youre going to do.
Generally over the next several quarters and that sooner.
Sure sure.
Sometimes those are more difficult to time without the benefit of I think.
But we would we would look for that we put on a few billion dollars of swaps when we could get swaps three three to three year deals for eight basis points.
And that seems to have made sense now obviously in retrospect so.
We have multiple ways to do that one of which of course is just a shift to mix.
What we're engaged in so we can maybe go back to a heavier residential component then we could also put in swaps.
I think.
What I think is most attractive about our business model is our ability to pivot that we have these different business lines and just like during the pandemic.
When things change rates fell everyone else is pulling back on credit we said, okay. Let's go to capital all of US go to residential real estate in a really safe assets when we sustained loan growth throughout that period of time.
We are in a good maybe a situation as you mentioned on the timing I think it's probably you know before the presidential election that will see it certainly see it turn.
I think we'd like to be in that scenario and we may play that play that car to get.
Alright. Thank you and then secondly, just in terms of <unk>.
<unk> wondering if you could kind of provide any progress update there in terms of in terms of integration launch et cetera, and you kind of customer reception at this point.
Well sure so.
We have some clients on it I would say that it's still under.
Beta testing of some sort so.
It's not a big number we didn't talk about it for that reason, we have nominal kind of deposit balances from that space.
Presently.
But despite.
Despite the volatility that's taken place, we think there's probably a big opportunity for stable clients.
Financial services going forward.
Thank you.
Your next question comes from John Armstrong of RBC Capital markets. Please go ahead.
Thanks, Good morning.
Good morning, John .
A couple of quick ones.
Can you go back to the.
The message you want us to take away on Q3 expenses can you kind of alluded to it but.
I just wanted to make sure I understand it it sounds like Youre talking about a step up in Q3, just curious how material you want us to.
Through that how material was that.
So.
Expenses are going to rise.
As deposit costs rise and the impact of the ECR changes that are happening at the end of Q2 take hold into Q3.
And as I said.
Those those deposit costs are gone.
Earn their way back to the bottom of the P&L through net interest income and so I guess I would tell you.
Don't get pulse and always look at the efficiency ratio here because.
Because it will it will move up in Q3, but it will then come back down to.
About where we are now in Q4.
So for US it's looking at the net interest income thats being generated from interest expense and incremental deposit costs. As we said in Q2 that was a three to one ratio probably as we go forward in Q3, and Q4 that ratio will compress somewhat it won't be.
<unk>.
Three to one but it should be above two to one to two five and so that's what we're focused on and just to give me a platform here John So I'm going to take it you know and that is we.
Or just focused.
Very heavily on net interest income growth and.
And pushing that net interest income growth down to the bottom line and preparing US also for 2023.
Okay got it.
I appreciate that and then.
Last one I think this is probably a platform for Dale.
But your comments about capital and your TCE ratio in OCI impact.
You talked about.
No not marking your low cost deposits.
Two part question do you feel like the TCE ratio, where it sits now does that limit you at all in terms of how you run the company.
And then the second thing is what kind of value would you put on your deposit base.
No I don't think the TCE ratio limits our capacity I am sure. You are aware there is a number of banks, including some of the global cities that are appointed below us or nearly a point below us. So we think theres kind of latitude. There obviously has been primarily driven by the OCI Mark.
We have had strong most of the debt I think that can come down I think I think the kind of the regulatory view. The one that we're focused on is really consider it.
The denominator is risk weighted assets and that's kind of the CET CET CET one level.
So, yes, we feel strongly about that.
But I.
I would say, we target at or around 9% for CET, one John and Thats what were more focused on.
Okay, and that drives us still making decisions about risk weighted assets, which drives us to the seal and it all gets it all gets combined together, which drives us to.
Ensuring 27% of our portfolio. So when you take down the waterfall thought.
That's how we think about it when you think about a 9% CET one ratio.
Okay.
And then any bigger picture thoughts on your deposit base.
So, yes, I mean, we.
Yes, we've had a number of different initiatives that we've had strong success with that we've got some more queued up and we think we're going to have kind of continued growth with what we've had already we acquired digital's first months in the first quarter.
We're still seeing that kind of coming to fruition in terms of accelerating that performance and.
Our philosophy has been having a strong stable core deposit franchise really gives you the opportunity to underwrite good credit and and that hasn't changed that's been going on for quite a while a few years.
And and we expect that to kind of.
Rebalanced with where we've been and loans.
Got it going forward. So we're looking forward to it and we think this is a good opportunity for us to shine. The volatility is something that we can we can.
Make our way through we think better than most as we have more opportunities to pivot where appropriately.
Okay, Alright, I'll just leave it there thank you.
Okay.
There are no further questions at this time I will turn the conference back over to Ken Vecchione for closing remarks.
Yes.
Pleased with the quarter, we like the results very much and we look forward to talking to you all.
On our third quarter earnings call. Thank you all and have a great day.
Ladies and gentlemen, this does conclude your conference call for today, we would like to thank everyone for participating and ask you to please disconnect your lines.
Goodbye.
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