Q3 2022 Western Alliance Bancorp Earnings Call
Good day everyone.
Welcome to the Western Alliance Bancorporation third quarter, 2022 earnings call.
You May also view the presentation today via webcast.
The company's web site at.
At Www Dot Western Alliance Bancorporation dotcom.
I would now like to turn the call over to Myles public director of Investor Relations and corporate development.
Please go ahead.
Thank you you're welcome to Western line banks third quarter 2022 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Officer, before I hand, the call over to Ken. Please note that today's presentation contains forward looking statements, which are subject to risks and uncertainties.
Assumptions.
Sept as required by law the companies 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's SEC filings, including the form 8-K filed yesterday, which are available on the company's website now for opening remarks, I'd like to turn the call over to Ken.
Thanks miles.
This quarter the company continued its strong financial performance.
Diversified national commercial bank again delivered record net interest income P. PNR and earnings complemented by strong deposit and loan growth supporting higher net interest margins with stable asset quality.
Third quarter personal lines generated record total net revenues of $664 million net income of $264 million and EPS of $2.42 earnings were propelled by accelerating net interest income quarterly growth of $77 million or 15% from the prior quarter to 600.
Three 2 million as the rising rate.
<unk> expanded our net interest margin 24 basis points to 378%, we maintain industry, leading performance with return on average assets and return on average tangible common equity a 1.53% and 24, 9%, respectively, which will continue to support building capital levels in the quarter.
Hum sound balance sheet expansion continued with quarterly loan growth of $3 6 billion or 75%.
And deposits rose by $1 9 billion or three 5% quarterly mostly from noninterest bearing DDA accounts loan demand remained healthy with 27% of growth coming from our regional banking divisions, and 50% from national business lines.
<unk> growth of one 9 billion trailed strong loan growth this quarter in Q3, our regional banking divisions contributed 32% of deposit growth and our specialized deposit franchises added 63%.
We are proud that one of our new deposit business lines business escrow services is gaining meaningful traction and contributed $424 million. This quarter, we expect business escrow services settlement services and other deposit initiatives to meaningfully contribute to growth continue to enhance our funding profile in 'twenty.
'twenty three.
Mortgage banking related income declined $35 million as the origination market continues to face major.
Market disruption, the speed and level to which rates have climbed at greatly reduced refinance activity extreme affordability in the purchase market.
Servicing revenue was negatively impacted by a $22 million of MSR hedge loss driven by volatility that spike towards the back end of the quarter.
We are positioned emera, all to profitably operate in a lower origination market focus on becoming the industry's leading low cost operator and have implemented a strategy to prioritize profitability against volume market share.
Finally asset quality continues to remain in great shape, and we do not see issues on the horizon for the quarter Wal recorded net loan recoveries of $1 $9 billion or a negative two basis points and year to date, we are in a net recovery position at this point, Dan will take you through our financial performance.
For the quarter Western Alliance generated net income of $264 million EPS, two <unk> and <unk> of $358 million.
Excluding a $2 8 million mark to market loss on preferred securities and a $4 million charge related to severance and other compensation charges, primarily at a miracle our EPS was $2 47.
13% higher on a linked quarter annualized basis.
<unk> loan growth of $1 3 billion in excess of consensus added approximately $10 million in incremental provisions, which is frontloaded due to diesel total provision expense of $28 5 million also captures our somewhat softer outlook on the economy.
Total net revenue of 664 million with an increase of $44 million during the quarter and $115 million or 21% year over year net interest income increased by 15% from Q2 to $602 million was driven by loan growth and further NIM expansion.
Overall, noninterest income declined $33 million or <unk> $62 million from the prior quarter due to lower mortgage banking related income, which fell 35% to 37 and a half gain on sale revenue was $14 5 million due to lower purchase volumes, well servicing fell to $23 million as volatility rose, which led to an MSR hedge loss laser in it.
Quarter, while the mortgage industry has made strides in right sizing over overcapacity to adjust to lower volumes and a higher rate environment. If this process is ongoing and normalized margins have not yet returned.
Noninterest expense increased 13, 7% or $37 million, resulting in an efficiency ratio of 45, and a half primarily due to higher deposit costs related to earnings credits if conditions. He ratio was adjusted to reclassify deposit costs as interest expense it would before you're at 5% as remaining operating expenses were flat.
Turning now to net interest drivers are growing asset sensitive balance sheet benefited from the rising rate environment investment yields increased 72 basis points from the prior quarter to $3 66 and variable rate Securities repriced.
Quarter basis loan yields increased 65 basis points with an end of quarter spot rate of 543 loans held for sale benefited from rising mortgage rates increased 88 basis points to 487.
Total funding costs, including borrowings and deposits increased 50 basis points to 88 basis points the spot rate of 112 as the average rates and balances for deposits Rose short term borrowings and credit links credit linked notes also five long term debt expense increased $13 5 million this quarter due to a $940 million.
In total <unk>, we have issued program to date, which is preserved nearly 400 million in equity capital and minimized stock issuance.
Higher interest expense and little capital issuance also provides credit protection on 24% of our loan book.
As mentioned earlier net interest income growth of $77 million or 15% linked quarter benefited from average, earning interest earning asset growth of three 8 billion and NIM expansion of 24 basis points to 378 interest income grew 32% more quarter over quarter and our total funding costs inclusive of ECR.
Expenses as we remain asset sensitive.
Our rate shock analysis shows with a 100 basis point rise for 12 months and on a static balance sheet net interest income is expected to deliver 6% using the same scenario to grow balance sheet. We expect net interest income to grow over 15%.
If you any effect of a 200 basis point shock on our growth balance sheet net interest income is expected to rise over 25% over the 12 months from the current run rate.
Our efficiency ratio increased 270 basis points to 45, and a half after reclassifying deposit cost as interest expense.
It improved from 41, 1% in the second quarter to 40 and a half in the third demonstrating the high operating leverage of the company composite has increased $38 million from the prior quarter due to higher earnings credit earnings credit rates on deposits of $15 9 billion of which 13 11 3 billion is in noninterest bearing.
DDA.
Pre provision net revenue rose to a record $358 million during the quarter, a 14% increase from the same period last year, and an increase of $7 million or 2% from the prior quarter.
This resulted in P P and our way of two O eight a decline of 11 basis points compared to $2 19 last quarter, while its leading organic capital generation produces approximately 45 basis points and CET one capital on a static balance sheet per quarter and provide significant financial flexibility to fund balance sheet growth we're building capital.
Our ratios.
Balance sheet momentum continued during the quarter as loans held for investment increased $3 6 billion to 52.2 and deposit growth of one nine billions off balances to $55 6 billion at quarter end.
Mortgage servicing rights balances increased $218 million during the quarter to $1 billion in part from decline in prepayment speeds.
Total borrowings increased $1 1 billion over the prior quarter to $7 2 billion, primarily due to an increase in short term borrowings to fund loan growth in excess of deposit expansion.
Tangible book value per share increased 49 are.
Or one 3% over the prior quarter to $37 16, primarily due to strong organic earnings that offset unrealized marks on available for sale securities recorded in OCI.
Tangible book value increased seven 2% over the prior year.
This quarter, we generated sound organic growth from our national business lines and regional banking divisions loans held for investment grew $3 6 billion driven by $1 6 billion in C&I loans $893 million in sponsor backed commercial real estate and $766 million of ratio for graduate real estate Geo.
Growth was driven by $534 million in Tech and innovation 392 million in warehouse lending and $350 million in capital call lines.
43% of our loan growth this quarter came from our core very low to no lives national business lines.
Turning to deposits, we continue to experience growth across our diversified funding channels. This quarter, our regional banking divisions generated approximately 32% of our net deposit growth was especially positive mpls drove the remainder and total deposits grew $1 9 billion or 13, 9% annualized.
Third quarter with noninterest bearing DDA of $1 2 billion <unk> $533 million in savings and money market of 176.
Noninterest bearing DDA is now comprised 45% of our total deposit mix of which 55% or $13 6 billion have no associated earnings credit rate.
Our diversified deposit franchise continues to provide ample opportunities to generate attractive funding to support loan growth with warehouse lending of $1 2 billion regional banking divisions up 604 in business escrow services up $424 million.
Is this escrow services is going to continue to establish new relationships with large corporate acquirers attorneys.
And private investment firms that support the growth ramp this quarter.
Going forward, we expect our scalable national deposit businesses, such as HOA settlement services and business escrow to continue to generate attractive deposits should find ongoing balance sheet growth and tempered the impact of elevated rates on our overall funding costs.
Our asset quality remains stable and strong as classified and nonperforming assets as a percentage of total assets are still lower than pre pandemic levels.
Total classified assets increased $39 million in Q3 to $385 million or 56 basis points of total assets.
Subsequent to quarter end approximately half of this increase in classified has been resolved and we see nothing to demonstrate a trend.
Total nonperforming assets to total assets remained stable at 15 basis points, and we realized net recoveries of $1 9 million.
Special mention loans decreased $5 million during the quarter to 60 basis points of funded loans, which represents a further decline from already historical lows last quarter.
As the prospects for additional economic volatility continues to evolve we believe our underwriting discipline. We're now through that our national business line strategies has prepared us for any credit stress that may accompany additional macro headwinds.
We have not observed any preliminary signs of credit migration or client pressure.
We believe our safe and sound asset quality decisions will dictate our thoughtful diversified loan growth trajectory and enable us to navigate through heightened economic uncertainty.
Approximately 55% of our loans are now in a low to no loss categories and 24% of the portfolio is credit protected through government guarantees seal that a first loss or is cash secured.
Quarterly net recoveries were $1 9 million two basis points of average loans, which brought us to a net recovery position on a year to date basis.
Our total loan ACL increased $29 million from the prior quarter to $356 million is now greater than our pandemic high watermark.
That was set in 2020.
Year to date, our ACL days increased by 66 million.
Total ACL to funded loans remained flat quarter over quarter at 68 basis points, while our ACL to nonperforming loans rose from 385% in the prior quarter to 396% this quarter.
Adjusting for the $10 8 billion of loans covered by credit linked notes are ample first loss coverage is assumed by a third party.
The ACL coverage ratio rises to 86 basis points.
We believe these superior asset quality trends are sustainable throughout economic cycles, do western Alliance's deliberate post GST business transformation strategy to become a national commercial bank focused on deep underwriting specialization and greater business diversification, while its national reach and deep segment expertise.
<unk> enables selected relationships with the strongest counterpart parties on their motion tracking projects with superior company risk management.
The global financial crisis, 67% of Western Alliance's losses came from loan categories, comprising 44% of the 2009 loan portfolio, which today makes up less than 6% of total loans.
Western Alliance has spent the last decade working to minimize these risks and diversify the business.
If you're a primary impediment to a higher stock valuation is misplaced concern.
The credit risk heading into a likely recession cumulative net charge offs for the past decade have totaled only $27 million against 356 million in current reserves, 55% of our loan book is too low to no loss categories.
Lastly, the intended consequences of credit linked notes issuance has 24 percentage of the whole portfolio of credit protected when the new up North a bank that can make this claim.
Excellent asset quality has been a hallmark of the new wall rapid improvement drove ratios due to the top quartile, where they have essentially held even through the height of the pandemic classified and nonaccrual loans continue to hold below peers, while charge offs have been minimal with a net recovery recognized year to date non accruals.
And net charge offs have consistently ranked among.
Among the best in the industry and classified loans in the top quartile, even during the pandemic our credit risk mitigation expertise shine during 2020 in 2021 and will be critical if the economy weakens further.
A hallmark of <unk> business model is that greater diversification needs to sustain superior earnings growth with reduced volatility.
To a traditional sharpe ratio of restock, reaching rings are risk adjusted net income growth has been excellent relative to other large peers.
133, domestic publicly held publicly traded banks in the U S with assets between 25 850 billion walnuts produced the highest risk adjusted average net income growth.
They weren't the leader in earnings growth or the lowest in earnings volatility separately or combined strong and steady growth has produced a top risk adjusted return.
Given our industry, leading return on equity and assets, we continue to generate significant capital to fund organic growth and maintain well capitalized regulatory ratios.
Our tangible common equity to total assets of five 9% and common equity tier one ratio of $8 seven were both slightly lower again quarter over quarter.
With a OCI dynamics impacting tangible book value ratios across the industry, we utilized our ATM to strengthen capital. In addition to our solid earnings we do not anticipate any share issuance will be needed a CET one builds throughout next year.
Finally, inclusive of our quarterly cash dividend and a 36 cents per share our tangible book value per share increased 49 tenths of one 3% quarter over quarter to $37 16, which is slightly above our Q1 level.
Notably our tangible book value has grown 19, 4% annually since 2013, three and a half times the raise in the peer group.
I'll now hand, the call back to Ken for closing comments. Thanks, Dale I was pleased with the management team's ability to adapt to the changing interest rate and economic environment to produce record operating results thoughtful balance sheet growth in conjunction with operating and execution will focus positioned the bank to capitalize on net interest income sensitivity off.
Simultaneously growing both sides of the balance sheet with industry, leading performance our superior operating leverage offset the decline in mortgage banking income asset quality remains stable and solid with no signs of elevated stress organic earnings should grow capital as we reposition the company for slower growth ahead of.
Potential slowdown so let me tell you what you can expect going forward here.
Given the uncertain future economic and operating environment, we believe it's prudent to prioritize more measured but still double digit loan growth targeting up to one 5 billion bottles per quarter, we plan to surgically reduce loan growth through increased pricing and tighter credit criteria, while deemphasizing loan growth.
<unk> accompanied by high quality deposits deposits are expected to grow at approximately $2 billion a quarter. This will lower our loan to deposit ratio overtime, which currently stands at 94% our goal over the next year is to bolster key capital ratios back to pre <unk> levels, including.
10% CET one.
Bank industry, leading return on average tangible common equity produces significant organic capital of approximately 45 basis points of CET, one net of dividends per quarter, which provides us with significant flexibility to grow capital ratios and funding the balance sheet.
We expect to achieve our 10% CET target by mid 2023, 80 buyers strained balance sheet growth and risk weighted asset optimization programs.
Net interest margin is expected to continue to expand in Q4 at a similar pace to Q3, given the anticipated rising rate environment. We expect a continued we excuse me. We expect continued quarterly expansion of NIM and growth in net interest income throughout 2023, even after the fed pause.
As rate increases as fixed rate securities and loans reprice and balance sheet growth continues.
Total revenue should continue to climb due to strong net interest income with a drag from mortgage banking likely to moderate assuming beauty volatility.
Our expense ratio, excluding the impact of deposit costs should remain in the low forties, given inherent operating leverage of our business.
Asset quality remains well positioned and ranks among the industry's best technical recession. We believe we have entered may move some key ratio slightly higher but we do not anticipate any material deterioration that we change our above peer standing in conclusion, we continue to see an EPS of 980 for 2022.
<unk> as a launching pad from which 2023 EPS, 10% at this time, we're happy to take your questions and I should also said that Tim Bruckner, Our Chief credit officer is with US here today as well.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the number one are you touched a phone.
You'll hear three tone prompt acknowledging your request.
Western will be pulled in the order that they were received.
Should you wish to decline from the polling process. Please press the star key followed by the number two if you're using a speaker phone. Please lift the handset before pressing any keys.
One moment for your first question.
Your first question is from K Sierra from Jefferies. Please go ahead.
Yes, thanks, good morning, guys.
Well I was hoping to get some color on the comments about NIM expanding through next year.
Obviously, if you're it sounds like it would be a little more selective on the on the loan growth front.
Which could help on the yield side.
But but but it does obviously seem a little bit tougher.
Deposit betas and the funding pressure there so what kind of what kind of and I know you guys don't manage to deposit betas, but what kind of deposit beta is in your forecast that is that is still allowing you to to drive NIM expansion through next year.
Okay. So we'll tag team. This let me start off and then I'll throw it over to Dale.
Want to make sure we're clear that for Q4 and through 2023.
We are projecting a growing and vibrant net interest income using the consensus F. OFC forecast. So net net interest income and NIM will continue to grow into 2023, even after the <unk> concludes raising rates and we feel comfortable with this forecast for several reasons number one.
The increased or excess liquidity that we're going to get from having law deposits grow faster than loan growth will drive federal home loan bank borrowings downward lowering funding costs.
Current and future loan growth is being priced at the higher levels as we've seen liquidity withdrawn from the banking system.
Third item is a one 5 billion of loans repriced every quarter with about 50% rolling over at higher spreads and our fixed rate securities and loans totaling $800 million also repriced quarterly, which we see we think we can get some benefit from the.
The other thing I would say is.
Since my return to the company taking over as CEO , we focused on net interest income.
Rather than net interest margin rate and then focusing on net interest income allows us to also produced the EPS results that we have achieved and so in our mind. What we have done is going forward, we have priced a 100% deposit beta with 100% loan data.
And we kind of see the spreads which have been materially increasing for us certainly since the beginning of Q3, but even before that to carry us for the rest of the year do you want to add anything to that sure.
So we.
We have lower levels of interest bearing deposits and other funding sources borrowings in <unk> than we do in terms of interest asset, earning loans and securities.
Primarily because of our DDA that Hasnt no ECR I mentioned that is $13 6 billion.
And so.
Okay, bringing on high data funding, so long as it's going into a 100% beta assets.
And we're going to continue to see that I think some of the other institutions have been challenged because they've actually held back on on their on their deposit raising those deposit cost they have consumer or something else and they believe that it's going to withstand that and then they've been surprised and so now they have made is in excess of 100 at least for sub accounts, we haven't been there.
We know what they are finding it looks like we haven't relied that we can kind of sneak things by and so we have been are our pricing is right. There in terms of where it needs to be and what we're seeing in terms of our spot rates kind of confirms there. So so for example on our loan yet loan yield.
Not right at the end of the second quarter was $4 51 at the end of the third quarter was $5 43 up 92 basis points. Meanwhile, for our funding cost or deposit side. Both in US was up from 63 to 112, so up 51 basis points and again, what we had during the second and third quarter is we had loan yields tempered because.
If we were forced we're still active that's not the case anymore and so we see that picking up and then we're going to have more dollars rolling over in terms of maturities and right now those fixed rate loans are about 300 basis points below the current offer rate that we would do today that is going to reprice more than what we're going to see our liabilities because liability.
Pricing for us Hasnt lack.
So I'm going to give you a quick start I think everyone on the phone will like.
I'm going to ask you for a pop quiz here okay.
We turned down.
<unk> 31 loans in our senior loan committee that was most amongst $25 million or greater not because of credit we like the credit a great deal, but we turned them down because of pricing either the initial price wasn't a high enough or the step downs were coming down too quickly or we didn't like the floors, and we decided to move to Florida.
And so here's your pop quiz how did we do against 31 loans, we went back to the borrowers and asked them.
If they would accept the higher pricing level.
Not very well.
Wrong [laughter], we want 100 for 131 to 31.
Right, which are they all took the higher part of all of it.
Well have a 31 people came back and said, yes of our higher price Youre right.
That told US a few things.
This almost feel like you've put your house on the market on day, one and you sell it first thing you say Oh My God I.
They solve it too cheaply so what we really determined from that and that was over a couple of week period. When we went back and looked at the 31 loans, but what we really determined what the liquidity is leaving the system alright, and one of the things that's natural for us and what's different.
Thank versus others is that we tried to be a bank for all seasons and we try to remain open for all seasons now that may mean that we tightened credit criteria, which we have it may mean that we asked for more equity into deals, which we have and it may mean that we're asking for higher pricing, but we remain open in one of those things where you have one of the reasons you see the volume.
Loan volumes continue to come in above what our previous guide has been is because we've developed this loyalty and people come to us because they know they can get a deal done and the incremental short term costs are higher cost of funding doesn't compare to the longer term value that they're getting.
I just wanted to you ask the simple question, we decided to give you a long answer.
Yeah, No I appreciate it.
Okay, just on the on the 10% CET one target by mid year is so is there anything that youre going to do that organically right just moderating the loan growth or.
Or is there and yes and without the ATM is there any like bond book run off is that part of it or anything else that that help.
To help you get there on that in short order.
Well there are few things that we're doing.
Certainly just a repositioning of our loan growth to up to one 5 billion is gone up.
US probably grow net.
The 14 basis points per quarter, we generally do 45 basis points of organic growth subtract out for the one $5 billion and that's how you get to 12 or so basis points quarter by quarter. The other thing is Tim Bruckner sitting here with us, but he's led this re optimization of our optimization of our risk weighted assets.
Specifically around unfunded commitments, and we expect that to grow as well there may be a C. O N note that youll see.
A deal happened, maybe this quarter or maybe in quarters, one or two and it's the combination of those things and a bunch of other smaller activities. I. Just don't think are worthwhile going through at this time that drive us to a 10% level Q2, we think latest Q3.
And it's all without you asked a very specific question, it's all without.
Hitting the ATM.
Okay very good thanks, I'll step back thanks, guys.
Your next question comes from Ethan <unk> from Bank of America. Please go ahead.
Hey, Ebrahim here.
I guess, just maybe going back to comments around $2 billion plus in deposit growth.
For some perspective.
Your comfort around that obviously, there's a lot of concern around the industry around deposit pricing deposit growth.
<unk>.
Your conviction level and meeting with deposit growth numbers and then how should we think about its impact on deposit costs and mix shift as we think to 2023.
I'm going to split this one up in tax payment as well I'll take the volume side Dale will take the.
Cost side, and so if I heard you clearly enough.
Correct me, if I'm wrong or you really want to know what gives us the confidence around the $2 billion right well, we've been running that and then some on that.
Go back looking at our history, but we've got several deposit franchises that are very strong we have our HOA business. Okay. That's strong settlement services is something we started to build in 2018, we rolled out in 2019. It now has $3 billion of deposits and so.
Going back couple of years, when everyone. When I say, everybody I mean other banks achieve we don't want any more deposits. We always said no deposit franchises will really determine what our market capitalization will be in the future and how well we performed so we rolled out settlement services, we rolled out business escrow services.
We also have a tech business that produces $3 of deposits for every one dollar and loans.
Warehouse lending has also been a very strong provider of deposit growth and I want to bring you back to <unk> for a moment and this is very important when we bought <unk>. We said we bought it because we saw an emerging regional bank.
In the seven quarters that we've owned a Merrill home, we've taken tomorrow homes deposits from a standing start ups zero to $7 billion 7 billion in seven quarters.
No I don't I would tell you not to extrapolate that going forward, but it goes to show you that that 7 billion really found it really sits in the on the bank side of the of the company and has been generating that incremental.
Interest income from us. So those are those are the growth channels you wanted to take the cost side deal yeah. So on the cost side of it.
When you talk about that we brought in $420 million of and deposits from vicious escrow service as well as 300 million of that is in non ECR DDA. So that should help US you know on the cost side and we're getting traction there I got to tell you. We've got an application pending with the OCC to commence a corporate trust.
The operation.
Think that that is likely to kick off. This particular time, we hired a team from from Wells Fargo. After they sold their operation and we think that's going to be a source of funding for its also kind of going forward.
And then and then tertiary deposits again.
Were there that we're not trying to necessarily Russell you know that everything has to come in you know it's super cheap.
Standard rates are or.
And not market rates, but we have the ability and we've demonstrated this to bring in funds consistently I would say our pipelines going forward or at least as good as what they've been the past couple of quarters and.
It has been a little harder than we thought we did exceed loan growth versus deposit growth were right sizing that from Q4 forward you know, let me just tie it back to a question that.
Casey asked us as well.
And tie back to net interest income if you don't have loan growth.
But you're it's harder to bring in deposit growth because that deposit growth is coming in at a very high incremental cost to it.
We have the ability to grow loans in excess of one 5 billion and you've seen that right.
And so the fact that we can match off deposit growth at a.
At a marginal rate compared with 100% beta to it compared to 100%, 100% beta on the loan side allows us to make the spread and as we've said we've increased those spreads. So that's what kind of gives us the benefits and again I'll point, you right back to and I don't think we get enough credit for this and I'm going to start harping on it.
That our business model is different than almost every other bank's business model and this is what our model allows us to do.
But as far as I know Paul This is I'm fine with that and I guess just another follow up question, Dan you talked about credit cost.
When you look at the CL 86 basis points.
What should that what does that embedding in terms of the macro understanding our portfolio is very different.
If the economy is headed into a recession, where do you see that deserve nishu building because that's the other piece of downside EPS. This because we think about the next few quarters.
Yeah, Yeah. So so we use the Moody's model. It was like I think most do we.
We take weights the preponderance design is on the kind of consensus and then we have a much heavier weight on S. Four versus S. One.
And so you know as those numbers have become kind of more impaired as they did in three third quarter over second.
You know it did pull up a little bit more in terms of whatever.
Appropriate ACL would be.
I would say you know we're.
We're not expecting.
Charge offs to occur.
Along as we are right side up on on Ltvs, and we're a low LTV lender across the board our residential book as you know was under underwritten at 65. It is now probably under 60% in terms of LTV or commercial real estate is done anywhere from 45 to about 65 and so we.
Feel strongly that.
The Moody's model showed this that you know.
Unless there's something really severe happening, we're going to be able to do well and that it might go back to the pandemic.
You know the hotel booking hotels, clearly took a direct hit from from travel during 2020 in 2021 and people were throwing numbers back at me in terms of what we're looking at in terms of losses, we didn't lose a dime and hotels the entire time.
Because we had good sponsorship low loan to value and we're in the type of loans. We were doing we weren't doing central business big boxes, where people were coming anymore and that have very brittle cost structures in terms of not a lot of flexibility. These are these are like select service deals like a residence Inn.
Hotels. They closed every other floor to hold their costs down and that worked and it worked for us.
Got it and just sure Ken I heard you correctly I think you mentioned full year EPS 980, I'm talking about.
70, 778, EPS run rate for fourth quarter do you believe you can drill things off of that.
I'm, sorry, I didn't hear that.
I didn't hear it clearly.
If I could if I heard you correctly Ebrahim I mean, yes, we think that the 980 as a period from that we can that's a fourth quarter number.
Recently, obviously and then from there given what we expect to happen in terms of you know.
Continued loan growth a little bit more tempered than maybe what the street has had attack, but but margin expansion, which is the opposite of what the street has had effect at least we can continue to sustain that throughout 2023.
Again this is the backdrop of what.
What the epilepsy actions are going to be is as predicted and the futures curve.
Okay.
Thanks for taking my questions.
Welcome.
Your next question is from Steven Alexopoulos from J P. Morgan. Please go ahead.
Hi, everybody.
But I wanted to started the deposit cost side. If I include the cost you got to talk up well, Steve Steve We can't really hear you can you.
I'll pick up the receiver or get closer to the phone. We're just not hearing you clearly does.
Is that any better.
Much better.
Hey.
On the deposit cost side. If I include the cost of the earnings credit related deposits and the cost of total we calculate these change by about 61 basis points quarter over quarter, earning assets are up 71 basis points up from a spread view, it's up about 10.
Looking at it through that lens, how do you see that spread trending over the next few quarters.
Probably most likely parallel I mean, I think we have a little bit of warm at more like them and they and the loan side because of kind of they were held back but because of Florida, but yes.
We're comfortable with the parallels with the parallel shift there and also were getting better pricing on the on the loan side.
Don't think that there's much more to go on funding cost increases.
Okay.
On the ECR deposits, how much of the $2 billion per quarter growth you assume will come from that and how should we think about that cost moving forward.
So we're not.
We're not expecting that our that our deposit.
Structure on the liability side is going to be improving at all.
And so what we've dialed in is growth predominantly in either interest bearing or in ECR related I do think that we've got opportunities to bring some other stuff in as I mentioned, the best growth business escrow services in some of these others, but that is not a.
Major factor in terms of moving that needle I think we're going to be paying for deposits.
Okay, and then finally in terms of pulling back the lending a bit which categories are you planning to deemphasize here. Thanks.
Yeah. Good question there Steve.
And so as I said, we've tried to do this in a very surgical way.
So we're going to pull back our resi loan growth. This quarter was 750, <unk> I would expect that to drop to under $2 50 in Q4, and then dropped to under $100 million going forward, but just to refresh the memory for those on the phone it wasn't too long ago that.
We had $6 billion sitting in liquidity of 10 basis points and so building up our residential book seem to be the appropriate thing to do back then we're not going to be emphasizing it now going forward. The other places youll see us.
Be more circumspect on is in the capital call and subscription line space, We really haven't seen the cross lending portfolio company opportunities that we hope to have materialized that they did not and so we're going to pull back there that business eats up a lot of our unfunded lines, our unfunded commitments as well.
Tim Bruckner is working on that in terms of the optimization and and I said I guess I would say the other thing is you know.
Continue to stay close to all our clients and no loan gets approved certainly at the at the at the most senior level in this company without a significant deposit relationship coming over and we've made that a big focus as well.
Therefore, if you're not bringing over deposits than some of our loan growth will slow naturally.
Quite frankly.
Entrepreneurial bank that as always.
Outperformed on the loan growth side. This is a challenge for us is to a certain extent to be more surgical on where we're going to grow now. We think we can we can do that and we think we could keep the loan growth to under a one $5 billion and that kind of connects back to the CET one ratio of why we're trying to also.
<unk> moved it up to 10%, we're not getting credit for the loan growth state and people are saying, while youll probably blending into a recession. We just we just we'll pull back and we will look for higher yields on all that.
Got it.
Okay. Thanks for taking my questions.
Your next question comes from Brad Millsaps from Piper Sandler. Please go ahead.
Hey, good afternoon.
Good afternoon, Brad.
Ken I think I heard you mentioned that you thought the efficiency ratio would stay.
And the low forties sort of ex the impact of each.
ECR deposit costs I want to make sure I heard that correctly.
There are some severance small severance costs in the quarter and wondering if what the benefit from those might be going forward and then finally, because you're pulling back on growth does that mean, we should maybe think about pulling back on the expense growth as well just trying to get a sense of.
Kind of the expenses ex the ECR.
Yeah. So you did hear me correctly that ex deposit costs are the efficiency ratio should stay in the low forties, Brad if we don't keep it there I mean look we could take it down, but we're not going to do that for.
For several reasons and I think I've been clear about this on previous calls number one we're preparing for the day that we grow over the $100 billion threshold and we always need to continue to invest in risk management and technology, which we're doing we also are continuing to invest in new products and new services, New Rollouts and Dale mentioned one.
One actually.
I got a little ahead of what I was going to say about that on the corporate Trust I was going to wait until we brought in some deposits, but we've built that into our expense base next year as well, which is a new product our new business lines. So it's important for us to continue to build up these new business lines and that's why we're going to keep it in the low forties.
That will help us.
That will not deter our growth in total EPS as we roll into 2023.
There were a couple of components to your question did I answer all of them.
Yes.
Yes, Yes, I think so and then maybe as my follow up question to Dale I just.
On the ECR deposits again.
Do you see a change in the pace.
That beta or that.
Right in which those costs are going up.
Do you see that accelerating I'm sure, it's not decelerating, but just kind of curious your thought around you know just kind of the pace of that change going forward.
Yeah, I don't I mean out of the gate, we had some that were a little more sluggish than others.
But this has been the most widely telegraphed rate rise scenario I think in history and and no. One is not aware of it not not not at Western Alliance anyway, and so yeah. So we're fully participating they are basically moving in lock step with epilepsy or <unk>.
The fed funds.
Okay, great. Thank you.
Okay.
Thanks, Craig.
Your next question comes from TMR, Brazil from Wells Fargo. Please go ahead.
Hi, good morning.
What are you looking at looking at the MSR hedge loss. This quarter can you just help us kind of frame our thoughts around that.
Is that kind of going to continue in the fourth quarter, just given the pace of rates or is that a little bit more idiosyncratic with just the shift in volume and any color on kind of broader direction for a mirror home and a gain on sale revenue would be greatly appreciated.
Yeah, Let me, let me give you the broader direction and tell you what we are planning for and.
2023, so we are using the Q3 total mortgage servicing revenues of $37 million as our base.
Going forward throughout 2023, and we hope to do much better than that but for our planning purposes twenty-three I'm, sorry $37 million as the base as we go forward.
So that's I think the first thing.
Guarding the $22 million.
Vol.
I'll hit that we had you know our models when we model things we model out the life of the loan for 30 years. All the cash flows and then we you know we discounted back and we hedge that in our model, but we hedge it out to 18 months after that there's not enough liquidity in some of the hedging instruments and so we took a little bit of a hit.
Yeah in the volatility going out above 18 months now, but I should say and we should have said in the in the opening statements here, we pulled back half of that in the MSR valuations, we have outside firms look at the MSR valuations and so while we took a $22 million bought back about $10 million.
So that so the net impact was was $12 million, but we're also doing something different in the business. We continue to rightsize that business, we're probably down about 29% and total people count there. So we're trying to make sure we are the low cost.
Operator in that space and we're not trying to win share for share purposes. Only we are trying to win profitable share. So the volume of correspondence that we purchased will be less but we are pushing and hopefully the market will see this and also follow that but the margins will.
Increase and so far early results early.
Q4 is that strategy is beginning to work.
Okay.
That's great color I appreciate that thank you and then maybe just going back to one of <unk> comments on talking on asset quality.
Mentioned, the provision kind of capture a softer view of the economy I know youre pulling back on some lending verticals, but that doesn't seem credit related I guess as you look out across your landscape.
What are those softer areas that you're kind of focusing on here.
The <unk> software with them or are they are they have more opportunity.
Two opportunistic areas actually I'll, let Tim answer that.
You bet.
We signaled that we saw some headwinds in the economy, where we're have we.
Old back of Wearables.
Our response is that correct.
Yes, that's right.
Okay, great. So a year ago, we started adding a real heavy distress.
To.
Everything.
Development construction related and commercial real estate. Okay. So that's one so we had tempered our underwriting.
We've maintained that we've we've become more conservative in advance.
And underwritten with a significantly heavier interest rate stress.
I think thats positioned us well in that segment on the on the Investor dependent site starting in November October and November of last year.
Okay.
Our enterprise valuation methodology. So those two areas are areas that given our portfolio weighting would receive more stress and we adjust it early.
We are also breaking our portfolio when we did this coming out of last year into four major categories.
The insurable portfolio, which the Dell referenced which is about 24% of our portfolio was it's a credit protected insurers.
And guarantee to it.
The economics are resilient economic resistant.
And then we have economic sensitive and we've bid.
Deemphasizing the economic sensitivity.
And staying with the other three actually basically the.
<unk> category and the economic resistant categories are where we've been spending more of our time in terms of our lending pursuits.
Got it and then just as a follow up.
You guys have certainly outpaced the market when it comes to warehouse lending and then a good component of that is just kind of tapping into their in their home network I guess, how big of an opportunity is left there.
Maybe just broader thoughts around warehouse would be appreciated.
Yeah. So when we say warehouse lending we've got a couple of components to that one is the traditional warehouse lending, but also competitive fundings.
Our note financing opportunity that's node on node financing, where we will see ltvs of about maybe 40% or lower and will be in our first position. The note financing business is really.
Very strong at this point and so it's me is helping lift the warehouse lending side.
Side, a little bit but to be honest with you. We're still seeing a lot of good growth coming in warehouse lending and there I would say is that where we're taking some market share as other people are pulling back and as other people are struggling to deliver the type of service. We deliver we're also seeing MSR lending is embedded in that group too and that.
<unk> has a lot of interest from borrowers and we have some comfort level that we can grow that throughout <unk>.
2023.
Great. Thank you for the color I appreciate it.
Yeah.
Your next question comes from Chris Mcgratty from K VW.
Please go ahead.
Okay, great. Thanks.
Dan I want to go back to the the Bill.
One and deposit repricing, if I could move it a little slow today.
Can you just repeat the comments about incremental betas on both sides of the balance sheet I'm, just trying to make sure I get what the messaging is.
On repricing of assets and liabilities.
So if I look at our spot rates, we have a greater momentum coming from Q2 to Q3 that isn't captured in the average rates on the loan side more significantly than it is on the funding side.
And I think that's because in part the loans were held back because of because of Florida. No. Nothing is close to a four today and so I think that carries us in terms of what that looks like going forward. So.
And so so long as we have a loan beta from here that is you know no lower than the loan the deposit beta and we're anticipating deposit beta Suvs very high.
We're going to continue to do well and especially if we can reprice things higher as Ken mentioned with these with these 31 returns that we had from our senior loan Committee all of which came back with yes, we will take will take the underwriting even at a higher cost. So so we think we're well situated to security that now for the fourth quarter.
You know I mean, I think we're dialing in 75, and then 50 and then we don't have anything in 2000, 22023, I think maybe theres going to be a little bit of a bit of a tail, but with that kind of a profile and with really the repricing were doing on our loan book that is it I don't see that in our funding book because our funding.
Book is already really fully moving in lock step now we do have some benefit opportunities like we had in <unk> where.
$300 million of our of our DDA was not ECR related I think some of those things are going to kick in but we don't have to do that so long as we all we have to do is have our loan betas be no lower than our deposit betas the loan book and with the Securities book, which is demonstrated variable rate as well largely.
We're gonna be able to continue to have expansion of net interest margin and then couple that with a more modest expansion of the balance sheet.
Yes, how about you said a very high deposit betas did you did you put a number on that for kind of future betas.
No no I mean look it really as Ken mentioned, that's not that's not our management they were not trying to optimize betas, we're trying to optimize net interest income and D. PNR.
Okay.
Last one just to make sure I understand the 980 that you.
Reiterated is that Ah just remind me that's full year net income earnings per share or is that fourth quarter annualize just trying to get the right starting off point.
Yes, yes.
That's the full year of kind of what.
And operating income would be correct.
Okay.
Thanks.
Yes.
Your next question comes from Andrew <unk> from Stephens, Inc.
Please go ahead.
Hey, good morning.
Most of mine have been awesome addressed already but Dale can you remind us just expectation for the size of the average loans held for sale portfolio and then do you have the spot rate on that book at the end of the quarter.
Yeah, the spot rate on that book was $5 29.
And and we think that balance is going to be.
Modestly lower than where we ended at 930.
Okay perfect. Thank you.
Your next question comes from Brandon King from True Security. Please go ahead.
Hey, just one question for me.
I understand.
Hi.
It seems the benefits when the rates are rising, but I'm curious what are the actions you've taken.
Today, you know we have a recession it theoretically rates will fall just curious if there've been any actions that are taking place to kind of protect against that.
Yeah. So you know one thing that really helped us during the pandemic is is we are active in basically mandate anything that isn't a syndicated situation led by somebody else and we get a little hoarse.
And so we did that and that held up or are loan yields are much better than some others and if kind of improved our net interest income yeah.
We're still doing that today, they're really I would say largely ineffective at this point in time, because you know you put a floor in maybe that floor is 100 basis points lower than that lower than the current rate based upon the variable rate instrument. There and then if it's going up another 150 in the next 90 days I'm, just going to be way out of the money but.
If we hold at higher rates for say like a year, we'll be able to reprice a lot of those floors much closer to the current rate, which will give us a lot of installation in terms of in terms of what that would be like the other thing I would say is.
Oh, My Gosh, I mean in a lower rate environment.
I think the mortgage market as you know is going to get Jumpstarted and and we're certainly ready for that also.
Okay and no other I guess hedges interest rate collar is being put on the balance sheet is that made contemplated as well.
Okay.
Always debate that we have we put some we put some term kind of hedges on we have some fixed swaps.
When rates were in the.
Low double digit basis points.
So we'll evaluate that at that time, but.
Again, that's just to mitigate the downturn.
Alright, thanks for taking my questions.
Yeah.
Yeah.
Your next question is from John Armstrong from RBC capital markets. Please go ahead.
Hey, Thanks are you guys doing.
Good job.
Just a few cleanup questions.
One on Chris Mcgratty <unk> question on the run rate deal I know, it's kind of nitpicky, but if.
If you take the annualized 980 to get to $2 45 for the fourth quarter. I think you are saying that's too low but.
But we kind of have to stretch to get to 980, just just clarifying that for us on the 980 number what are you guys.
So the 980 as the full year operating EPS, so you have to be above that.
Maybe I misunderstood Christine's question, a little bit you have to be above that that's going to take you to kind of the $2 70 range or somewhere in there to be able to do that.
For the fourth quarter, and you're saying that's the jumping off point for 2003.
Yes.
Okay.
I've had a couple of questions. So I think people know arm that last guy on the call maybe but can you talk about the ECR expenses and talk about the efficiency ratio with ECR on how you want us to think about that expense in the model.
Well, so we're showing.
We're showing it both ways I mean to me.
It.
It looks action smells like something maybe that's why you should call. It I think it really <unk> interest expense, that's not really how the GAAP maps. It geographically. So so here we are.
We look at it both ways I do think that taking it out and considering it as interest expense. It gives one a much better view in terms of one is the banks you know asset sensitive or not how do I always revenue.
Rising interest income relative to expense.
And we're still higher not as much higher if we keep it in expense and then and then you look at your operating kind of architecture and we're in the low <unk>. If you just eliminate it completely and I think those are kind of both appropriate as Ken said I think our efficiency ratio going forward.
Roughly the same position of the low forty's is appropriate and and again, we're looking for continued improvement on net interest income.
Gross relative to interest expense, including including deposit cost.
I mean I don't know.
I think probably one of them.
And I'd add only one thing to that as you know you'll see deposit costs rise in Q4 again.
Near maybe the same level as Q3.
But as we begin to enter into 2023.
That rise will be temp.
Tempered and it wont be as noticeable as we go through 2023 based on <unk>.
Projected rate increases.
Okay. Okay I just have two more if I can just kind of on that topic. When do you think the margin.
The top kind of winter, where because if I look back in my model and I know your business is a little different but you were you were approaching the high fours and the west hiking cycle and I'm. Just curious if that's just out of the question and just the timing on when do you think this all might peak.
So again.
Everything is predicated at least right now for us on what the <unk> going to do which for US is seven.
75 bps in <unk>.
And a couple of weeks followed by 50, that's in our that's at what's in our forecast.
We actually don't have anything in there at all.
Any upward actions in 2023, but we see in terms of the NIM the rate, we see that continuing to rise quarter to quarter.
It may flatten a little bit out towards the very end of the year, but right now we even still have that kind of rising as a as a nice slope throughout the year.
In excess of what we see in consensus.
Yes, but certainly lower than lower than the historical highs that you alluded to.
Okay Alright.
Alright, and then the last one I have.
Like what you guys are doing but I have to ask this one when you grow 31 for 41 on higher pricing.
I understand that as a positive but you could take it the other way as well.
Got.
It could.
Thank you the question.
Pricing in the competitive environment as well, but what does that what are you really learn from that 31 for 31, what does that say about the competitive environment and maybe what did you learn from that thanks.
Yeah. Thanks, John on the competitive side, it's telling us that other.
Other banks other competitors have pulled back probably for several reasons.
First and foremost we think it's because they don't have that deposit base that we have or that fresh liquidity coming into their bank.
One number two they.
They may be more regionalized.
In their lending or they may be just more product niche focused.
We have the ability to deploy liquidity and capital to at least 17 different national business lines that we're that we have inside the bank.
So it gives us an opportunity to really flex our business models and capability.
The third may be.
Different perception on on the economy now we are expecting a recession and we are modeling that and we are doing our underwriting as if a recession is going to occur and of course, we stress test everything for much higher rates and lower vacancies and lower.
Rents and all the other things you would expect us to do.
But we feel comfortable with our underwriting and the quality of borrowers that were getting in and the reason why I think we feel comfortable one of the reasons is back to being a bank for all seasons.
We remain open and as I've said this to every client will always remain open to try to help you with that.
Given the economic either uncertainty where environment, we're going to just change around credit criteria.
Equities are we're going to require in the deal and pricing.
But you all you should be able to get a loan from us assuming that the deal pencils out and then we're dealing with a good bar and <unk> as always you know grouse, a little bit about higher interest rates, they come back and pay them because they realize the short term cost of that interest rate is nothing compared to the longer term benefits, they're going to get.
And so this comes back to the service side dependability, the ability to close when we say we're going to close we close and once we shake hands, we don't reach rate and that has.
A lot of positive.
Fourth to having our clients continue to return to us.
And we will provide a commodity service I mean.
So and even you know even in normal times, our pricing is.
<unk> always higher than others, but because of what Ken said in terms of our ability to deliver on time and.
Consistent structure and as promised that's worth something to our clients and.
And they're willing to pay for it.
Okay, Alright, thank you very much.
Thanks, John .
There are no further questions at this time.
Please proceed.
Okay. Thank you all for attending the call good questions, we'd like to quarter that we had.
Sure.
A positive about what we can do going forward and we look forward to speaking to you on our next call in January for those that I don't talk to I know, it's early but have a have a good holiday. Thanks, everyone.
Ladies and gentlemen, this concludes your conference call for today.
You for participating and ask that you. Please disconnect your lines.
Goodbye.