Q2 2023 Western Alliance Bancorp Earnings Call
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Good day everyone. Welcome to the Western Alliance Band Corporation second quarter 2023 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebandcorporation.com. I would now like to turn the call over to Miles Ponelik.
Director of Investor Relations and Corporate Development. Please go ahead.
Thank you and welcome to Western Alliance Bank's second quarter 2023 conference call. Our speakers today are Ken Vecchione, President, Chief Executive Officer, and Dale Gibbons, Chief Financial Officer, and Tim Bruckner, Chief Credit Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risks.
uncertainties and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statement. For more complete discussion of the risk and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filing including the form 8K filed yesterday, which are available on the company's website.
Now for opening remarks would like to turn the call over to Ken Becchione Thanks, Miles and good morning everyone as usual I'll make some brief comments about our financial results and action items And then I'll turn the call over to Dale who will review the quarter results in more detail before opening the call for a Q&A Our Chief Credit Officer Tim Brockler as Miles said is here with us as well.
In many ways this quarter represented a transitional period for Western Alliance following the events of bid-barging as Our firm and our client increasingly returned to a sense of normalcy.
We continue to successfully execute on the balance sheet repositioning strategy we laid out last quarter. We exceeded our liquidity guidance by growing deposits by $3.5 billion and repaying over $6 billion in short term borrowings.
The second quarter wall generated total net revenues of six hundred sixty nine million dollars the income of two hundred and sixteen million and EDF of about 96
We maintain strong profitability with return on average asset and return on average tangible common equity of 1.23% and 18.2% respectively, which grew tangible book value per share by $1.53 to $43.09 or 18% year over year.
and will continue to support building capital levels in the quarters to come.
We achieved significant progress on the immediate and short-term objectives identified last quarter to establish a sound foundation for WALL to sustain ongoing client and financial success. Notably, deposits grew $3.5 billion and exceeded our $2 billion quarterly guidance.
Growth was diversified across business lines and included brisk core deposit growth from new and returning customers.
Net liquidity growth of 2 billion dollars allowed us to significantly reduce higher cost wholesale borrowing. WOLL continues to expeditiously execute our balance sheet repositioning strategy.
and completed $4 billion in total assets.
in Q2, which included 3.5 billion in all disposition.
ahead of the $3 billion outlined in Q1.
meaningful deposit growth and asset dispositions lower the loan to deposit ratio to 94% and allow us to rapidly reduce reliance on higher cost FHLV borrowings by $6.1 billion over the quarter.
I'm proud to report core deposits have rebounded another $3.2 billion quarter to date.
Meaning Wall Deposit Levels are now $600 Million above our year-end 2022 balance.
CET1 capital of 10.1% increased from 9.4% on March 31st and 8.7% or 140 basis points since Q3 2022.
when we initially announced the bank's capital building initiative to organic capital generation without equity.
Finally, we continue to focus on meeting our core client banking needs.
in order to cultivate strong long-term relationships.
leveraging third-party products to specifically grow reciprocal deposits.
has lifted our insured and collateralized deposit levels to 81%, one of the highest among large U.S. banks. As we move into the back half of the year, we believe bank investors will place more emphasis on the
balance sheet strength.
Stressing the fundamentals of growing capital, improved liquidity, deposit cost composition and granularity, stable asset quality, honored and thoughtful loan growth, and producing predictable and sustainable PPR.
The bank's diversified funding strategy continues to focus on growing attractive funds from a diverse set of clients and channels in order to prioritize repayment of the more expensive wholesale funding sources and then to optimize deposit balances from lower-cost sources to deploy into superior risk-adjusted lending opportunities as we have done historically.
Driving the $3.5 billion in deposit growth was significant new and return on customer activity throughout Western Alliance.
In Q2, we attracted $1 billion from approximately 1,000 new and returning commercial relationships.
attractive average total deposit cost of 1.98%, with notable contributions from mortgage warehouse, regional banking, and settlement services.
Over $400 million of net new deposit money was in non-interest bearing DDA.
commitment to foster multi-product customer relationships.
to foster multi-product customer relationships has been the key to onboarding new deposits.
in a very competitive environment. Additionally, we will utilize other diversified sources of deposits to accelerate repayment of wholesale borrowings and return to prove no good.
Our recently launched online consumer channel is demonstrating steady progress providing another source of uncorrelated liquidity and generated approximately $700 million this quarter.
at attractive rates compared to the marginal cost of repaid borrowing.
Going forward, continued deposit channel optimization and growth, new and returning corporate line commercial relationships will lower the proportion of funds generated at the brokers CD market.
Now Dale will take you through our financial report. Thanks again. For the border, Western Alliance generated net income of $216 million EPS of $1.96 and pre-provision net revenue
Net interest income decreased $60 million during the quarter to $550,000, mostly from elevated higher cost short-term borrowings that were materially reduced near quarter end.
Q2's net interest income should be considered a trough in which Q3 and Q4 levels should ascend.
Non-interest income increased to $119 million from an adjusted level of $102 million in the second quarter.
As a reminder, loans marked in Q1 and a net loss of $141 million are part of our balance sheet repositioning efforts, responsible for negative fee income last quarter on a reported basis.
On an operating basis non-interest income was 18 million hired from Q1.
The green shoots we cited with mortgage last quarter were evident again in the second quarter as AmeriHome revenue increased $13 million to $86 million. We remain cautiously optimistic continued stabilization, improving margins, and profitability momentum is sustainable as AmeriHome capitalizes.
I'm the exit of a major competitor from the correspondent on the channel earlier this week.
year. Production margins widen closer to normalized levels of 43 basis points.
as the industry is rationalized and wind rates continue to improve. Other non-induced expense growth was driven by higher insurance costs related to elevated insured and broker deposit levels, which also include poor reciprocal deposits above a certain threshold. The recent expense of $22 million is indicative of a return to a more normalized credit environment.
We remain conservative on macro assumptions and as a commercial bank, the outlook for commercial real estate is a key driver that informs our particular business.
Our allowance for credit losses modeling assumes an 80% likelihood of a recession using Moody's analytics scenarios. A lower tax rate was beneficial to earnings this quarter and we expect to go forward at a normalized rate as an average of the last two.
We made substantial progress in our balance sheet repositioning in search of classes.
efforts in the second quarter to accelerate higher capital in the liquidity building. These dispositions complemented our organic earnings and contributed approximately 43 basis points of incremental CET1 capital.
Four billion of asset dispositions were completed including loan sales and run-offs, primarily in equity fund resources, civic aid loans, and mortgage and warehouse businesses.
The equity fund resource credit link note was also fully unwound.
Loans held for investment increased $1.4 billion to $47.9 billion. Deposits increased $3.5 billion, which brought balances to $51 billion at quarter end. Morgan's servicing rights balances of $1 billion rose 11% during the quarter.
Total borrowings were reduced by $6.3 billion to $11.5 billion due mostly to pay downs of federal home loan bank borrowings.
On March 31st, the remaining EFR credit link note was also fully redeemed. We completed the unwind of $500.2 million of CLNs year to date.
The positive momentum has continued into the third quarter as deposits are 3.2 billion higher from June 30th.
Total health for investment loan growth of 1.4 billion consisted of $700 million of mechanical loan growth.
primarily from mortgage warehouse, regional banking divisions, and resort finance.
Improved liquidity from deposit growth well in excess of loan growth allowed us to reclassify $700 million of help for sale loans back to help for investment.
which will improve the company's return profile.
Deposit growth of $3.5 billion resulted from remixing the deposit base into interest-bearing EDA from savings and money market.
as well as CD growth from client promotions and broker CDs. Non-interest bearing DDA is comprised in third of our total deposit mix with approximately half having no cash payment of earnings credits.
Turning now to our net interest drivers, the securities portfolio grew 1 billion to 10.1 billion as we look to bolster our high quality liquid asset balances. The yield expanded 8 basis points to 4.76%, largely from floating rate securities benefiting from higher rates. It should continue to benefit from higher reinvestment rates at approximately 1.7% from what you just saw.
to 648 and quarter end the spot rate for 6.74.
Interest-bearing deposit cost rose 33 basis points to 3.08%.
But a 3 billion or a 3 billion increase to 34 billion
The elevated cost resulted from a higher interest rate environment which offset more tempered non-interest bearing demand deposit growth.
Total cost of funding rose 58 basis points to 2.85% from higher utilization of post-sale borrowings and an average cost of 5.6%.
6 billion of these borrowings were repaid to produce a 3.4 billion difference between average and end of period of balances.
Optimizing the funding mix with more core and reciprocal deposits in conjunction with the $6 billion Federal Home Loan Bank payouts.
funding mix of more core and reciprocal deposits in conjunction with $6 billion in federal loan bank pay-up pay-downs, which occur later in the quarter.
This is just for improving funding costs to support our net interest margin guide. Going down further into our funding base, we have actively utilized reciprocal deposit channels.
drive growth and provide greater insurance coverage for larger depositors. 62% of broker deposits consist of sticky reciprocal deposits. We believe these core client relationships have been fortified through this product enhancement.
growth and provide greater insurance coverage for larger depositors. 62% of broker deposits consists of sticky reciprocal deposits. We believe these core client relationships have been fortified through this product enhancement, making them exceptionally stable.
Overall, net interest income decreased approximately 60 million, or 9.8%, over the prior quarter to compress net interest margin and average earning assets declining 562 million.
Overall, net interest income decreased approximately 60 million, or 9.8%, over the prior quarter to a compressed net interest margin and average earning assets declining 562 million, mostly stemming from balance sheet resubmissioning actions.
And interest margin compressed 37 basis points to 342 with a higher interest expense from outsized higher cost borrowings.
Excess liquidity is generated with deposit growth greater than loan growth and non-Amera home helper sales are liquidated. We expect to pay down additional repo lines costing Zofer plus 2% that should contribute to funding cost tailwinds.
The effects of these dynamics can start to be seen in the expansion of the June NIMH to 3.5. Our efficiency ratio of 57% improved by about 500 basis points from the second quarter, though our adjusted efficiency ratio increased from 50% to 50% from 43% in the prior quarter.
Higher insurance costs from elevated broker and insured deposits as well as lowered net interest income from Increased interest expense were the main reasons for this change.
We still view mid to upper 40s adjusted efficiency at the right level and expect expenses to align with our core run rate of revenue.
We look to optimize additional work streams throughout the bank.
Pre-provision net revenue was $282 million during the quarter.
Solid profitability was sustained with a Q2 return on average assets of 1.23% return on average annual common equity of 18.2%
Strong PP&R provides capital flexibility to absorb the recent expense of credit loss that's important while still growing the balance sheet and attaining higher CEP1 at below.
Given the increased attention on the commercial real estate sector, we are providing additional details on our CRE investor and office portfolios, as well as our overall early identification and elevation credit mitigation strategy.
This proactive migration approach has historically produced lower-loss emergence. Our CRE investor underwriting strategy rests on a foundation of low loan-to-cost underwriting and sub-markets where we have deep experience in the market.
financial sponsors.
As a reminder, our financing structures carry no tuner lanes or mezzanine deck. This enables maximum flexibility in working with clients and sponsors.
We have low uncovered jail risk. 92% of the portfolio has LDPs, a low 70%.
these LTVs are based upon the most recent appraisals and assuming commitments are fully funded.
We begin from our surreal estate office.
We have previously discussed our focus on shorter term bridge loans, repositioning office projects in suburban areas. Our exposure to true central business district areas that will be our most vulnerable to home risk are minimal to just 3% of office loans.
We have redefinated some midterm exposure away from the CPT classification.
As an ARVIEW, the dynamics in these markets make them less susceptible to the work-promote risks present in larger cities. For example, we do not have CBD office loans in New York, Boston, Chicago, Atlanta, Houston, or Dallas.
Looking at LTBs, you'll notice only 3% of office...
and 80% are greater loans of value. It aligns with our central business district exposure. We primarily focus on in-demand Class A to B-plus office properties, and 94% of Class A properties have LTVs below 70%.
The entire office book carries an LTP of 55%.
Finally, we are not facing a large maturity while approximately three quarters of the close comes due in 2025 or later.
For a passive quality trend in the light of the present environment and due to the sharp increase in interest rates over the past 12 months, we have completed a proactive, comprehensive review of our Commercial Real Estate Proposal. We have collected and loaned migrations this quarter.
As part of our early identification and early elevation of the strategy and has served us well, we proactively move loans into special mention when cash flow may be curtailed in the present environment.
Despite having well supported collateral values and excess money, I've clearly shown winners in both remaining strong and alone Still Trying.
We do this to ensure attention and monitoring at the highest levels within our credit organization as we require the sponsors to re-margin the loan to be established
for some satisfactory cash reserves to support a pass rating. This is an important element of our credit control process, an established process for more than 10 years.
As a result of these efforts, special financial loans increased to $694 million, with 1.45% of funds and loans with $250 million or two-thirds of the migration coming from office and hotels.
classified assets increased 145 million to 89 basis points total assets.
Half of the increase in classified assets was driven by one $75 million office loan in downtown San Diego, which makes up the preponderance of the central business district and the third-half exposure I mentioned.
We don't anticipate meaningful losses if this property is 82% lease current appraisal exceeds the outstanding loan amount and all cash flow will go to pay down this credit.
Our proactive identification and resolution process results in lower realized losses. Over the last 10 years, less than 1% of special mention loans have become losses. In commercial real estate investor properties, less than 10 basis points of special mention loans have migrated to class.
Looking at the next two slides, you'll see the results of our early identification, elevation, negotiation, and resolution process as it resulted in best of class loss rates over the last 10 years.
For us at Western Alliance, it's about the process which sometimes produces earlier criticized and classified designations, but the end of the day leads to low net charge-offs.
On average, we have ranked in the top third among ASHA peers for diversity gradient loans.
among asset peers, progressive rate of loans is a percentage of total loans.
hold the best ranking on losses. The difference between our ranking on adversely braided loans compared to our number one position of historical credit losses highlighting.
success of our proactive credit mitigation strategy. Quarterly net loan charge-offs were $7.4 million or 6 basis points of average loans compared to net loan charge-offs of $6 million or 5 basis points in the first quarter. Our total loan ACL rose almost $13 billion from the prior quarter.
to $362 million due to higher provisioning and low loss rates.
Total loan allowance for credit losses to funded loans increased 1 basis point to 76 basis points in Q1. It is 94 basis points when loans covered by CreditLink notes are excluded.
The allowance was 141% of non-performing loans at the end of the quarter. We feel well positioned in an uncertain economic environment based on the business transformation
Our loan portfolio is diversified across risk segments with almost a quarter of it either credit protected, government guaranteed, or cash secured. And over half of the portfolio is either insured or resistant to economic volatility. These percentages align with wadings reported before we embarked on our balance sheet repositioning initiative late in the first quarter.
Of note, our lower average loss rates in the resilient and more sensitive categories are indicative of conservative underwriting and highly responsive remediation actions.
We discussed reprioritizing capital back to pre-merger levels on our Q3 2022 earnings call.
Since then, CDT1 capital has grown from 8.7% to 10.1% and is up over 70 basis points.
capital has grown from 8.7% to 10.1% and is up over 70 basis points since the first quarter.
Our tangible common equity to total assets rose 50 basis points from the first quarter to 7 percent. We remain committed to achieving a medium term CET1 target of 11 percent. This review is prudent considering the heightened regulatory tension regarding appropriate capital levels.
We also expect increased excess capital will provide more financial and strategic optionality in the future. Looking at the strong combination of insured deposits and high capital to make depositors comfortable with the stability of their financial institutions.
Western Alliance has materially moved its insured deposit levels to among the highest in the nation compared to the largest banks.
Capital has also lifted into the top third, even adjusting for fair value marks in both the available for sale and the ultimate maturity of securities portfolio.
Inclusive of our quarterly cash dividend payment is 36% cents per share. Our tangible book value per share increased to $1.53 in the quarter to $43.09.
Western Alliance's compelling long-term tangible book value for shared diversions from peers remains intact.
is increased over six times out of the peer groups since the end of 2013, which leads to a compound annual growth rate of nearly 20 percent, economic cycles, and market disruptions.
This outperformance is still four times that appears when adding common dividends back.
I'll now hand the call back to Ken to conclude with closing comments. Thanks, Bill. Our guidance to the rest of 2023 continues to be driven by the strategies and priorities laid out in our prior earnings calls. Let me tell you what you can expect from here.
Regarding capital, having exceeded our immediate CEP1 target of 10% in Q2, we expect continued, although more gradual growth in our capital ratios towards a medium term CEP1 ratio target of 11% in 2024. This will be driven by our continued strong return on average tangible common equity.
and capital generation.
Core deposits are expected to grow at approximately $2 billion per quarter and exceed more muted low growth by approximately $1.5 billion. This will lower our low deposit ratio over time towards a mid 80% target.
That interest margin is expected to rise modestly from our Q2 trough of 3.42 percent and Lands in the range of three and a half to three point six percent for the second half of 2023 Based on our successful repayment of borrowings this past quarter and the cost of new deposit our efficiency ratio excluding the impact of deposit cost
should decline slightly to the high 40s given the reduced borrowing cost and higher asset yield. Asset quality remains manageable as it returns to more normalized levels.
We expect credit losses to be 5 to 15 basis points through the economic cycle. Overall, for the second half of 2023, we expect quarterly operating PP&R to remain consistent to Q3 results and begin to climb as we exit the year. As we continue to reposition the balance sheet and continue to re-establish our core deposit.
consistent to Q2 2023 results and then grow thereafter.
At this time Dale and Tim and I are happy to introduce...
your questions. Thank you. We will now begin the question and answer session. If you would like to ask a question please press star followed by a1 on your telephone keypad. If for any reason you would like to remove that question please press star followed by a2.
As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, it is star followed by a 1 on your telephone keypad. The first question will be from the line of Ben Gerlinger with HOVD Group. Your line is now open.
Hey, good morning, everyone. Good morning, Ben. I was curious if we could – I mean, I'm sure we're going to get a lot of questions on credit because deposits seem to have cleared themselves up, but if we could just take a moment to kind of just walk through the guidance a little bit further. I was curious on what are you guys assuming for just average earning assets for the back half of the year with that mark?
bit more granular throughout the second half of the year.
Well, we still have a couple of billion dollars that fund our $3 billion that we have in our health and retail loans with repo relationships with another commercial bank. And those loans and those funds that we have borrowed from them cost us SOFR plus 200 basis points.
So, paying that down with some of the liquidity we bring in is going to help improve our net interest rate, but doesn't really change earning assets.
But in addition to that, we do expect that a portion of these dollars we bring in are going to be used to provide new credit opportunities to our clients. And so it's going to be a combination of the two. So I'm looking for inverting assets to continue to climb, but not as fast as the deposit growth.
Gotcha, okay that's helpful. And if we could just take a moment to think just kind of holistically about credit here. Seems like we've got a decent amount of NPL increases and the reserve was essentially the same up modest uptick. So with credit link notes being a little bit less.
of importance now that we've kind of had the strategic repositioning.
How do we think about the allowance going forward in terms of like a gap percentage relative to loans?
Well, a couple of things. In terms of what the ratio is, I think it's really important to note how much what our charge-offs have been and why that number maybe screens lower relative to other institutions. We don't have consumer loans which have a constant burn rate of losses. In addition, I mentioned the Moody scenario as well.
So we took 60% of their consensus forecast, that has two consecutive quarters, third quarter and fourth quarter this year of a recession in it. And then we took 20% weighted on S4, which is the severe recession whereby you are seeing, you are seeing, you know, contraction in commercial real estate values in excess of 30%. What's important about that is because we are a low advanced rate lender.
Even with significant reductions in terms of valuation, we still don't incur losses because the borrower still has skin in the game, they still have equity that they want to protect, and they're still willing to negotiate with us in terms of how we can come to a solution set together. So, it's really, if you were lending at a much higher rate.
We wouldn't be in that position but because our low advance rate that's been a really key to our strong asset quality But if you're asking a question about the provisioning going forward, I would say it's about in the same vicinity going forward as Q2's provisioning for Q3 and Q4.
Gotcha, that's a very helpful color. Great to see you guys go from defense to offense so quickly. Appreciate the call guys.
Gotcha, that's a very helpful color. Great to see you guys go from defense to offense so quickly. Appreciate the color guys. Thank you. Thank you.
The next question will be from the line of Casey Hare with Jefferies. Your line is now open. Yeah, great. Thanks. Good morning, guys. Just want to follow up on the borrowing pay down. So just you guys have a PP&R guide of around $280 million, what you have here in the second quarter. Just wondering that.
try to do two things here. One is pay down further, particularly the more expensive lines I mentioned, but secondly as well to provide more liquidity for our clients. So the combination of those two, so I don't have a number in terms of what exactly that looks like.
That's the trajectory we're on, that's the trajectory we started to be on in the second quarter, and I think we're going to be more focused on that as we complete 2023.
That's a trick we started to be on in the second quarter and I think we're going to be more focused on that as we complete 2023.
Given the progress you guys have made on the deposits quarter date, which is pretty strong, have you, you know, has there been any pay down quarter to date in making use of that deposit growth? Do you have a borrowing balance as of July 17th?
Yeah, this is Ken. Yeah, we do. Let me just take you to the deposits. Yeah, we're seeing great deposit growth so far early into the quarter. To remind everyone, that's the natural flow of our deposits. They grow early and just about in the next couple days we're going to see some pay downs.
coming from our funding group for P&I and T&I accounts and so that those deposits will shrink Okay So for us we have the we have the borrowing schedule to be paid down Probably closer to the back end of a quarter is a safer way of thinking about it as we grow our deposits To 2 billion. We actually hope we can do better, but as we grow our deposit growth to 2 billion
Okay, very good and just I guess switch into the dispositions about a billion eight left. So apologies if I missed this, but is can you get that done this quarter and within the original fair value mark of two percent that you took?
We've updated our marks. We think that they're good. What we did initially proved to be pretty accurate. I don't think it's all going to get done this quarter, but we expect to make significant progress on that. As I mentioned, that will be coincident with paying down higher costs.
Okay, Dale, any color on what's causing the delay? Because what's left does not look like a lot of high-risk stuff for you guys.
Well, let me take hi to to Bruckner. Yeah We're actually receiving much stronger values on some of these on discrete single note sales related to some of the assets and And it just in the normal course that takes a little bit longer
Hi, Tim Bruckner. Yeah, we're actually receiving much stronger values on some of these on discrete single note sales related to some of the assets and It just in the normal course that takes a little bit longer than doing a large pool sale.
I just want to tell you a major parallel here. Thanks for the question, Casey. We were pretty early.
in moving assets to HFS and I think our aggressive ushering of that helped us keep the dispositions inside of our box and that's sort of the hallmark and the culture here at the company and which connects to.
the asset quality that we're approached that we take as well. So we tend to be early on everything and try to execute early on. We have found whether it's disposition of assets, whether it's asset quality and talking to clients, being there early, being there first, produces better results. So I just wanted to add that little color commentary.
Great, thanks guys. Thank you. The next question will be from the line of Bernard Von Giski with Dosho Bank. Your line is now open. Hi, good morning. On slide five of your presentation, you show some nice detail on the growth drivers of
new money. So if that mix is right, is this the type of mix between new money and returning money you would expect, say, over the next few quarters, potentially improve over time? And maybe if you could give us a sense what that mix was for the $3.2 billion you noted a quarter to date. Thank you.
this kind of interim period and so I think we have a strong ability to pull in funds for in the near term for some of the returning clients that of course will diminish over time when there's less funds to return to begin with but but at the same time
we can gen up again some of our deposit business lines, which were a little hamstrung after what happened in you know with the Silicon Valley Bank. So some of the initiatives, particularly in settlement services and our corporate trust operation.
Clients gain pause after seeing what had happened to that institution And so that's not new that's not old money returning, but that is an acceleration of new opportunities Yeah, I would take that question and just maybe add a little bit
different perspective or observations, which is the March disruption really disrupted our pipeline going forward. And we had a very, very strong pipeline in business escrow services, in corporate trust, let's just say corporate trust was a developing pipeline, but really in settlement services.
And so the disruption in March actually disrupted our pipeline. We're seeing that pipeline reappear, it's stronger. As Dale said, a lot of people want to wait until we are announcing our quarterly earnings. I think it'll make people feel comfortable. And we have some great deal of comfort on that pipeline returning. Q&A with Dr. Wh Princeton
of the year, InBes Business Escrow Services, InSettlement Services, InHOA. By the way, those are three standalone deposit channels which we have been developing over the past couple years and also in our online consumer platform as well.
Thanks for that color. Just as a follow-up, I'm just wondering, I believe a big chunk of the deposit growth was also in CDs. Just curious, how far are you going on, say, some of the promotional pricing, given you in the industry are leaving with rates paid, just given the current environment? Just trying to get a sense of how much of these balances can be sticky.
or how can you deepen the relationship so these deposits do become sticky? On the broker element, I wouldn't call those sticky. However, I would call them cheaper. So what we borrow from some of these credit lines as well as from the Federal Home Loan Bank are at those rates are higher than the broker CD channel. In addition to that...
Brokered CDs do not consume liquidity opportunities. So if we borrow, we have a credit line that's over $10 billion from the Federal Home Loan Bank, but as you borrow against it, you have less availability to bring in broke deposits that cost less, and it leaves that availability open. So this is something we're going to wean ourselves down from over time.
But you're not going to see it chop off during third quarter. But all the guides that Ken mentioned that we have in terms of our deposit growth, has not assumed any broker deposit increases from where we were at June 30th.
chop off during third quarter but all the guys that Ken mentioned that we have in terms of our deposit growth prospectively does not assume any broker deposit increases from where we were at June 30th. Okay great thanks for taking my questions.
Thank you. The next question will be from the line of Steven Alexopoulos with JP Morgan. Your line is now open.
Thank you. The next question will be from the line of Steven Alexopoulos with JP Morgan. Your line is now open. Hi, everybody.
I wanted to start and drill down a little bit into the 3.2 billion you're calling out through July 17th. What's the rough composition of that? Are those more new and returning client funds? Using any broker in there? Very roughly, what's the cost so far?
As it relates to the composition, very little is coming from the Brokers CD channel as Dale mentioned. There's actually zero. Where you're seeing it come from is our Warehouse Lending and No Financing group which generally builds up.
in the early parts of the month and then pays down towards the third week and then restarts its build process in the fourth week. So you're seeing those funds come in. Generally, they're non-interest bearing deposits. They do carry ECR credits, which we'll see in the operating expense. We also are showing very early on signs of a very strong...
well. Yeah I think that brings an important point up on the tech group. There's been a lot of disruption with the demise of SVB there and our brand Bridge is a steady consistent player in that market and what you're seeing is a lot of disruption with clients.
with former people that had worked at SVB and their new companies establishing their operating processes and credit policies. Now that has all been established for us and people know our players and they know the type of bank we are and I think that's going to lead to more deposit growth out of bridge which is going to support your overall regional.
I think you mentioned they were waiting to see your two queue numbers, but then for the customers that haven't returned, what are you hearing from them, why they haven't returned yet?
I'm going to say roughly 30%, maybe a third, have come back and why haven't they?
Haven't we seen more? I think a lot of them, I mean some of these are related to particular types of actions. So I'll give you an example in a settlement services you might have a settlement fund and then that's moved to another institution and what we get back is the promise that they're not going to move that one back but future settlements will come to us.
Think that's I think that's part of it. I think that there was you know some question about you know what you know What's the new landscape going to look like I think it's well publicized that SPB and you know had a policy You know you got a bank with us, and you can't make anywhere else That has proven to been Okay, damaging and damaging to some of these franchises so some of them are like okay. We were banking with you
Most of them were just single entity institutions and now they're building, you know relationships in two or three banks Yeah, you know the other thing is back to we recaptured one large client that left us out of warehouse lending Rather than re J Jake and Wade notice that walletier took us to theug muscle C policy office
In bringing that client back, they have a lot of funds in what we call P&I, principal and interest accounts. And those build up rather quickly, come down, pay, build up, come down every month and it just oscillates back and forth. Well when we went back to them and we established the relationship, we now took in P&I, tax and insurance accounts which have a more steady stream to it.
So what we've also done here is traded off volatility of volume for more consistency and we've done that too. So as we bring clients back we're trying to get better quality deposits longer term and stickier and so this has allowed us to have a lot of great conversations with our client base. But I can tell you I spend more time
with depositors in meetings that feel like a, um, an earnings report. Um, that's what we did in coming out of Q1 and Q2. Now that has all changed and it's about really the growth of the relationships, the growth of the business, and how we work together.
That's some color there. Well, this quarter should help those conversations. Final question. What game of pipeline built?
Yeah, even with the increase in more expensive type funding if I just look at the sequential role in both the interest-bearing deposit costs And total funding these are decelerating pretty nicely over the past few quarters Do you guys expect that trend to continue through the back half of this year? Thanks? So that's what gives us a little bit of comfort
to provide the net interest margin guide going up. And again, as you saw June was 350, and we think it rises from there. And it also gives us comfort to why we think net interest income is going to be higher in Q3.
than in Q2. Only a modest part of that net interest income rise is coming actually from loan growth. We're going to grow 500 to a billion, probably closer to 500 is a good number to use. That's going to come in rapidly across the quarter, so you won't see that benefit until Q4. Most of the growth in...
Ned's income for Q3 is really coming from minimizing the rise in cost of funds.
which we're very excited by. Got it. Okay, thanks for taking my questions.
which we're very excited about. Got it. Okay, thanks for taking my questions. Thanks, Steve.
Thank you. The next question will come from the line of Chris McGrady with KBW. Your line is now open. Hey, Chris. Oh, great. Thanks. In terms of the PPNR guide, you addressed the net interest income component.
I wonder if you could spend a minute on both the expenses and the AmeriHome aspect of just getting it full circle on PP&R. Obviously, the deposit and the insurance lines are biased up while the comment there and then also kind of...
You know comments on the gain on sale margins approaching normal. I deserve them to go there on their home. Thanks Okay, so a mirror home generated about 80 million dollars of total banking revenue For us we model that out at about the same amount for Q3 and Q4.
I will say it is early on, it's only 17 or 18 days into July , but they are having a very, very strong July . And why is that? Well, production margins are stabilized and actually return to more historic levels. So they're running closer to 43, 44, 45 bps.
And what we saw was the retreat of one very large money center bank from a correspondent lending market combined with the industry capacity rationalization has paved the path towards higher margins, higher win rates, and that's what's giving us a good deal of comfort. With that we're also building an MSR.
which gets valued and is producing double digit returns. And so with the growing our capital allows us to bring in more servicing income. So that's the AmeriHome story. So for us, it's steady.
total mortgage banking revenue going forward with potential upside given what we're seeing in the current market. That's how I would describe a Marihole. Related to the expense efficiency, or what we'll call the adjusted expense efficiency.
You know, we see that over time coming back into the high 40s. I think what's very important here is to remember that law has always made investments.
with a viewpoint towards longer term returns for its business, product, service development. We focus on generating consistent earnings with the appropriate returns. And, you know, so over the last several years, what we're talking about today, this is escrow services, settlement services, corporate trusts.
the online consumer platform, and the growth, the continued growth in HOA are all funded by consistent expense.
And the growth, the continued growth in HOA are all funded by consistent expense investments.
in our P&L. So we are going to balance the efficiency ratio for future growth as well as looking to get to our PP&R guides. And our PP&R guides are at the high considered the adjusted efficiency ratio to remain at the high in the high 40s to achieve the PP&R guide that we've given.
Chris, you know, I mean I think we've had a reputation that we're pretty efficient. You've been in the low 40s for a number of years and now we find ourselves, you know, elevated from that level. But we've also grown very quickly during that period of time and it's just natural as one that's in kind of a strong growth mode that some things are done that aren't as efficient as they could have been structured or organized at that time. We're going through a process now.
to streamline that and look through some of these elements in terms of whether it's vendors or Consultants and things like this that we think also can push down, you know, some of these extra costs that we've had in our operating expense line. That's great color. If I could follow up, you talked about net interest income growing.
exit in year, if I take a step back and think about PP&R, the stable number for the back half of the year, as the balance sheet normalizes and everything gets back to normal, is the expectation that the PP&R dollars should grow off that low 280s as we enter 24? Yeah, so the way I would think about it, it's a little more stable in Q3 as we look to pay down our borrowings.
maintain that Q3 PP&R to Q2 and then seeing that begin to rise in Q4 as we exit the year into 2024. Okay but as you get into the fourth quarter and and entering next year if everything else is.
considered with the balance sheet and your PP&R should grow again in 24. I'm saying it should grow in Q4 and then you know it'll continue on from there.
considered with the balance sheet and your PP&R should grow again in 24. I'm saying it should grow in Q4 and then you know it'll continue on from there. All right, thanks Ken.
Thank you. Thank you. The next question will be from the line of David Chiavarini with Wedbush. Your line is now open.
Hi, thanks. I wanted to – hi. So, I wanted to follow up on the expense question. So, you mentioned about optimizing work streams through the bank. Could you elaborate on that? Are we talking kind of trimming on the edges or are you contemplating exiting any businesses?
So we're talking about trimming on the edges here predominantly and you know some of the expense savings that we are going to find throughout the company will be repositioned into risk control, risk management infrastructure. I think you have to keep in mind and the
regulators have clearly signaled this that they're going to have a higher standard or supervisory review for banks under 250 but above a hundred billion but I think they're going to drop that below a hundred billion dollars and as we continue to grow we need to be prepared for that and we've been preparing all along but some of that expense savings we're going to take
and we're going to reinvest in the risk control infrastructure that we're going to need to cross $100 billion. We'd rather do it early on and have a steady growth of expenses related to that, rather than to wait and try to put it in just before you get to $100 billion. So David, so we're going to see some of the workstream repositioning in terms of lower costs, as Dale said, vendor management, eliminating growth in FTE.
We don't need that's like cutting air that will help us a little bit and then looking at vendor management using technology a lot of those cost savings will be Repositioned into the tech into the risk management side so we can continue to grow unabated As as the rules change for the hundred billion and above and the hundred billion and below banks
Thanks for that. And then a follow-up on credit quality related to the increase in special mention loans. What does it take or what do you have to see for you to designate a loan as special mention? Does the borrower have to trip a covenant for that to happen? And what actions do you take with a borrower after it goes on special mention?
Let me take this one. Thank you, Tim Bruckner. This is something that works.
I'm pretty proud of. Dale mentioned throughout the initial discussion comments there's a few things that are just foundational to our credit process.
First, in all areas, we assess risk as covered and uncovered. So we really minimize risk by that.
First, in all areas we assess risk as covered and uncovered. Okay, so we really minimize terrorists by that.
covered means you've gotten out always by collateral. Early identification and elevation are key and then time is of the essence in solving problems. We manage tail risk by managing our uncovered exposure by getting to that early. To do that we have to be pretty mechanical in our process. So to answer your question directly, in all cases
Special Mention loans are current and paying as agreed. Okay, so Special Mention in the regulatory definition means potential weakness, not default or late payment. So we're not looking for a monetary default, we're looking for situations.
where there might be potential weakness so that we can elevate those within our credit architecture and make the appropriate changes before those become problems. We use special mention to elevate the situation and drive to a satisfactory resolution before we're dealing with a default.
or a late payment. Another thing that you can say here is everything that's in special mention we believe that we're going to reach that resolution which would be a satisfactory remargining or additional support from sponsorship that would return that to pass or we have that credit substandard. So that's how we use the categories mechanical.
Thank you. Thanks very much. Thank you. The next question will be from the line that's Timur Brazeler with Wells Fargo. Your line is now open. Hi good morning thanks for the question.
Most have been asked and answered, but just looking at the loan growth this quarter, I guess it's a surprise to the upside. Just curious as to what drove that, how much of that was kind of contractual funding. And as you look forward, what gives you confidence in getting to that $500 million number versus the growth that we saw in 2Q?
Okay, great. Well, you know, the billion for a loan growth, you can break it in half. 50%, $700 million was really a reclass from help for sale going back into help for investment, which means that our deposit drive, our increase in liquidity did not necessitate us having to sell those loans. And so we're pleased with that.
then we had $700 million of organic growth this quarter. And most of that came from the warehouse lending, but those financing MSR lines of business. And why that's important is those businesses carry, when we make credit decisions there, we usually get a fair amount of deposits that come along with this.
So they almost self fund themselves. So that was the beauty of having that loan growth that it also drove our deposit growth And it's part of what we've been saying even from the last couple of calls that we're looking at a full client Relationships, and we're not no longer just giving credit and then worrying about how we fund it away from the client The client needs to have a full relationship with us as we go forward and what we may have What gives us some credit or confidence I guess?
And we're doing tech and innovation loans and these are small size loans or loan commitments under $15 million Where we see there's a great opportunity to bring with it a great deal of deposits So those are some of the areas that we are focusing on that gives us a comfort level to the $500 million dollar guide
Okay, great. And then, now I asked this question last quarter and I think it may be a little bit early, but with some of the return of technology related customers, I guess where do you see Western Alliance fitting into the tech ecosystem going forward? Are you going to be playing a larger role in...
taking up some of the market share abandoned by Silicon Valley or should we think about the technology offering a Western alliance similar to what had happened prior.
So it's an interesting question, a good strategic question. I think we're going to continue to play in the space that we've been playing in, which is usually stage two. We're not going to be playing and taking up the role of SVP in early stage lending. That's not what we do. We prefer to be in the middle stage and a little bit in the late stage.
So that's where we're going to continue to keep our focus. I will say that what we're seeing is that current and prior SVB customers and bankers, as I said earlier before, continually evaluate the changing landscape as both constituencies are making judgments regarding long-term commitments to the industry.
by new players and they're waiting to see how those new players, credit policies, operating practices will be administered.
For us bridge bank as I keep saying is uniquely positioned as a known brand and a consistent player in the market And I think that approach is continuing to get traction so I have some
great expectations from our tech and innovation group, Bridge Bank, in terms of deposit growth in Q3 and going into Q4 as we continue to be the steady player and the steady hand in that market that people can go to. When they come to us, we're going to be the steady hand in that market.
They know what our policies are, they know who they're talking to, they know what our credit decision process is, they know how to reach senior management, and we have a track record with these folks. We think it's an opportunity for us and we're excited by it.
Okay, great. And then just lastly for me, maybe following up on Bernard's question for the some of the promotional products, just given how strong the deposit growth has been and the momentum you're gaining in bringing back some prior customers, I guess why not pull back from some of the promotional rates?
Is this nearly kind of a near-term dynamic as you continue to build the liquidity or are we still in an environment where the more the better regardless of the cost? There is a little bit of the more the better but maybe more significantly is those rates which seem to be I get their market rate pricing but they're still less than what we're paying for other sources.
So here we have a more stable source and it's a lower cost and we're going to keep doing that now you know over time I think we are going to be able to fade that but so where we're headed is is more liquidity is a good thing and if we can do that you know less expensively we're going to do that. I just wanted to mention to you the timing on your note that that was great earlier this week. Thanks guys. Appreciate it.
Thank you. The next question will be from the line of Gary Tenner with DA Davidson. Your line is now open. Thanks, good morning. A couple questions. First on the, as it relates to the DNR guide, you talked about fees in terms of what, how you're thinking about mortgage. But thank you very much.
The service charge line this quarter increased from nine and a half to almost 21 million dollars. I don't recall you mentioning that at all, just curious what the driver was there. I guess ultimately, is that level baked into the BP&R guide for the back half of the year? Let me say it differently, our total fee income...
July continues throughout the quarter and that's what's driving the PP&R guides that we gave earlier.
Okay. And then on the AOCI, Dale, I think you mentioned about $2.5 billion of securities governance to mature back after this year in 2020-24. What amount of the kind of AFS-related AOCI, just based on maturities, would you expect to recover over that 18-month period?
Well, you know, I mean, obviously those costs are related to kind of what the discount rate is. So if it's that close to maturity and we have a yield that is less than what that looks like, then it's going to be fairly short. I think to really get dollar improvement on the AOCI piece, what we really need is we really need lower rates.
So it will roll a world forward. If you take 18 months, we have a duration of four years on that. So you take one third of that back. So maybe a couple hundred billion comes back, but not from maturity. It's just from a slower or a shorter duration remaining on those securities, with the four year coming down by about a third. Regarding the service charge income, so that, yeah, it is elevated from where we were, and it's going to continue.
Last question, if I could, in terms of the office or the investor office portfolio, can you tell us what your allowance is specific to that portfolio? Yeah, I can take that. I'm counting, well, I'm counting here at least about 50.
50 million. Five zero? I'm sorry. 100 million. I'm sorry. I'm sorry.
Okay, thank you.
Okay, thank you. Thank you.
The next question will be from the line of Ibrahim Poonawalla with Bank of America. Your line is now open. Hey, good morning. Just a quick follow up. One in terms of the margin outlook as you talked about the third quarter NIM higher versus 2Q, does that trend continue into fourth quarter as we think about on a go forward basis or could we see some volatility in the margin where 4Q could be lower and same with NNI?
Well what we're saying is I think I think it's all but certain that they're going to raise next week. We have you know a modest kind of asset sensitive profile so that should augment the NIM in that regard. More significantly, kind of what we talked about a couple of times, you know the pay down and some of these more expensive funding sources. So I've talked about these lines that we have that are so for plus two plus two percent.
We haven't paid those down yet. I expect that we will be doing that Significantly this quarter. I don't tell you exactly when let's say we did it in August or September or you know We're going to see a follow-through effect on that into 4q. So yes, I would I would expect that that we should be
looking for you know kind of continue to prove it again alluded to this what he said that we're PPNR number and a flat for q3 versus q2 but then on a more positive trajectory as we actually go into q4 and exit 2023.
Got that. And to my understanding in terms of the actual loan book, how much of the loan book is yet to be priced in terms of just reflecting the current state background? How should we think about loan betas going forward and the pricing of the fixed rate book maybe? Well, I mean the fixed rate book is predominantly residential real estate.
the loan book. I think the securities book probably has more where we've got to know as I mentioned a billion to you know the back half of this year and another billion next year. Within the loan book we've got another billion dollars that we can and is going to kind of roll in. So I really think that the margin improvement.
a big driver of the PPNR improvement is really coming from swapping, lower cost, and funding sources you know compared to some of the elements that we have supporting us today. Understood. Thank you.
Thank you. The next question will be from the line of John Arfstrom with RBC. The line is now open.
Hey, thanks. A few questions for you. Tim, that slide 17, the asset quality slide, you guys talked about being proactive. What do you think those lines look like?
In q3 and q4 Should we be prepared for those to go higher or do you think that this proactiveness is going to keep those relatively flat? Yeah, thanks. That's a good.
I think relatively flat and I think that because that's been our experience with this approach and other cycles we you know barring severe changes
And we're already contemplating a type of economy going forward. We've elevated the situations. We know them by name. We're not dealing with a large portfolio here in the absolute. We call those out and discuss them monthly.
we don't wait to see the changes. So I feel comfortable saying relatively flat. John , this is Ken. We also completed our Q2, a very exhaustive and comprehensive review of CRA Office. So we did a very, very cheap dive into that.
As you mentioned, we are looking at this with the huge border recession which may or may not take place but that's the outlet we have.
Yep, okay. Yeah, that ties into my next question. And I guess instead of poking and prodding, I'll just ask it. You guys are saying stable PPNR and then relatively stable provision based on Moody's and then the S4 weighting that you referred to. You guys usually give EPS guidance. Is this the trough on EPS? I'm looking at the 815 consensus.
fourth quarter. I think we have confidence and we obviously hope that we can continue to execute in terms of bringing back lower cost funding and expanding our underwriting prospectively. I'm not sure a recession is in the opting. I think our expenses are, don't have a lot of elevation coming in them either. So I'm optimistic to what the future holds.
And one more for you, Ken, kind of a fun question, but it's been a hell of a four months.
And you guys have managed through it well, given the hand you had. But do you feel like there's been any permanent damage done to your franchise? You mentioned Bridge and I think the different brands help, but do you think
Is the pressure faded and it's gonna be a distant memory and you're back to normal or you think there's been some damage done? So I don't think there's any permanent damage done, but I think there was a disruption is the word I would continue to use.
It took us off of our trajectory of growth. We had to rely on wholesale funding for a shorter period of time. That's why you're hearing all the answers about the rise in NIM because we're going to swap out these borrowings and bring in more deposits. This was all something that, believe it or not, in Q3 of the Q3 of the NIM, we had to do a lot of work to get the NIM to grow.
moving forward. I think if there was any damage done, it was done a little bit, as I said, in the deposit pipeline in some of our businesses that are still relatively new relative to the other businesses in the company. And that gave people pause because they hadn't, they weren't with us for a long period of time. But we are rebuilding those deposit pipelines.
And that's giving me some optimism to the $2 billion guide for Q3 and the deposit guides going forward. There's actually been a little bit of a silver lining on some of this. And that is, it is really, you know, a lot of people are saying, well, what do you do with your money?
got our attention and made us focus on our business model and we've honed it. So to the degree that we were doing some syndicated deals, we were doing some you know writing credit, you know we didn't have a deposit relationship, you know it's much more reciprocal today. We you know we on our on our EFR case for example we started by you know
Making a hundred million dollar commitments in a billion dollar, you know syndication line. Well, we we're not doing that We don't we think we never got the liquidity from the clients in that situation But instead what we do is we do bilateral Transactions that are better priced and it's a closer relationship that we have with them And of course we get we get their funding as well. We've also taken a little bit different tack, you know You know, we don't want to do this again. And so what we've done is we have we have
taken our insured deposit levels to about the highest in the nation. We're moving our capital. I want to spin it around so that when somebody's looking at what you know, who can we attack, you know, when the next, you know, situation might arise, Western Alliance isn't anywhere near on that list because we're stalwart for capital, strength, liquidity, and performance.
Okay, very helpful. Thank you. Thanks, Sean. Thank you. The next question will be from the line of Brody Preston with UBS. Your line is now open. Your line is now open.
Everyone, thanks for taking my questions. I was just hoping to dig a little deeper on the moving parts on the margin. But I wanted to follow up on Steve's question. I'm sorry if you guys said it and I missed it, but on the 3.2 billion of new deposits, I know it's weighted towards mortgage warehouse. But I was interested in if you have an idea as to what the cost is, just because when I look at the-
coming from our warehouse lending group which means it's growing in our non-interest bearing deposits and from an interest expense point of view that comes with a zero cost although the ECR credits are in the operating expense line. So that's going to skew more towards having a lower interest expense for both the knowledge for the warehouse lending business.
as well as some growth is coming early on from HOA, which is a lower cost channel as well. Got it. So if you're getting a lot of growth in the, you know, I know it's got an ECR, but it's not interest-bearing, you know, I'm looking at that interest-bearing deposit cost and the spot rate at $305 is lower than the $308 you did on average for the quarter.
I guess if you're growing the interest bearing deposit costs at a blended rate with those new clients or the total deposit costs I guess at two, why wouldn't that interest bearing deposit cost continue to move lower from here in the third quarter? Well, so I mean warehouse deposits, they have an earnings credit rate which is much higher than three.
why I guess if you're growing the interest-bearing deposit costs at a blended at a blended rate with those new clients or the total deposit costs I guess at two you know like why why wouldn't that interest-bearing deposit cost continue to move lower from here in the third quarter? Well so I mean warehouse deposits they have an earnings credit rate which is much higher than three. It's close to kind of effective.
funds generally so it's going to be higher than that but but you know but you're correct Brody in that and that yeah these funds are not wholesale you know they're not brokers so there there's a lower you know charge associated with them in terms of what that is and they're in their client relationships and so we're trading down
In terms of what it's costing us from there. I mean each away was a significant contributor Some of those have ECRs as well, but those dollars, you know, those are going to be in the three range as opposed to what your premise about
that's costing us from there. I mean, each way was a significant contributor. Some of those have ECRs as well, but those dollars, those are gonna be in the three range as opposed to five. For your premise about a cost of funds.
equal to Q2 or Q3 going forward, that's not a bad premise. Got it. Okay. And then just on the loan yields, you know, the average loan yields for the quarter, the difference between the spot and the average for the quarter is relatively large, so the spot rate is 674. You know, if we think about the third quarter and we think about, you know, potential for a, you know, another rate hike...
and low-neilds continue to move higher. I just look at that 350 to 360 NIM guide, the implied NII guide, and the PP&R guide that you have for the back half of the year, and it just feels exceptionally conservative. And so I guess, you know, why shouldn't we be thinking about something, you know, well north at 282 by the time we hit the fourth quarter of the year?
Well I would argue with exceptionally. I think it is, I mean we want to lean conservative obviously a little bit. The other thing I would say that I think you need to consider and recognize is that a lot of these deposit costs we have are going to be moving up when the FOMC moves next week as well. So to the degree that we have got kind of brokered funding and some of these other sources, relatively short term earnings credit rates.
should be a plus.
got it and then just last couple on credit from me I just wanted to ask was there that you mentioned you did the office CRE deep dive was was that what kind of drove the the reappraisals on those office those those CBD office loans can or was it was there something else specifically that drove that okay and then just I know that when you're working through the special mention
I'm sorry, Scott, I was answering the other question, which was, we basically only have one credit in CBD, and that we moved to substandard, and then we re-appraised it, and it re-appraised higher than the loan amount. So that's the answer to that. I'm sorry, I cut you off on the other question. No, that's okay. I was just going to say, I know that when you're working through the special mention questions, you know, at least above 17 percentile. I'll leave it at that.
there is some weakness as Tim Bruckner said, but also there's a spirit of cooperation that they want to get to a positive outcome that will either require re-margining or restructuring in some way, shape or form. You know what's interesting, maybe I'll leave you with just a fun fact.
in front of us. And so I'm talking about the whole book and that gives a lot of motivation for sponsors to sit and work with us in the assets that have been moved into special mention.
Got it. Okay. Yeah, just giving out pro-activism, it sounds like the borrowers are willing to kind of meet you there. To me, again, it sounds like maybe special-mention loans will be heading lower, and classified loans heading lower into the year-end, but I guess we'll watch that going forward. Thanks for taking the questions, guys.
Thank you. Thank you. The next question will be from the line of David Smith with Autonomous Research. Your line is now open. Good morning. So the strong liquidity growth this quarter led you to bring back on about $700 million from health for sale back to health for investment.
Of the remaining 1.8 billion in helper sale, are you doing any of that as essentially coming back as well? If you have another strong quarter of deposit growth.
A good portion of that in the help for sale relates to our... This is something we're just going to always evaluate based upon where we are. The $1.8 billion is queued up, it's marked, and we'll see how that goes. But most of that we expect to exit. However, we continues to in watch issued to be a little disappointed with the huh overhand being effectively reIA is completely metric on our personal
Would you expect the CET1 benefit from that to be proportional to the benefit you saw from the $4 billion of sales that you've already executed? So the CET1 elements, most of the assets we're talking about are all 100% risk weighted.
That goes for what's already been done, but not all as well as as well as what's in there presently So so I mean but at the same time, I mean, you know as those loans, you know come off the books That is beneficial to see if you want, you know conversely I mean, I think the industry is looking at a special charge probably this quarter to recapitalize the insurance fund
related to the demise of those three institutions. So that'll be some chart. That'll be maybe 10 basis points against our capital growth in two, three as presently proposed. Sure, and lastly, you talked about laying the groundwork for eventually crossing the 100 billion asset mark. I guess we're just continuing to...
Build 2 billion as opposed to the quarter. You know, that's 8 billion a year. The 32 billion 200 take you about 4 years from now. It seems very proactive what we need to see to take up your growth targets and growth goals. But before that, if you're going to hit that mark any sooner, but would give you comfort to. Open the growth back up.
So let me just give some commentary about being very early.
I think what you're going to see is supervisory review from the regulators starting much earlier and holding you to a higher standard.
well before 100 billion. So the process isn't, hey you hit 100 billion, you're going to be reviewed differently. The process is, so it's well before that, that are you ready to go cross over 100 billion and that starts before that. That would be my just common color commentary.
how that review process works and why we're building it. In terms of opening the gates, I think our growth is going to be determined by our deposits and our growth in deposits and we have traditionally been a little bit more heavier weighted to the left side of the balance sheet which
We can turn that machine on. We're really good at growing loans. What we've turned around here is said wait a minute We need to have a more holistic relationship with our client base and growing the deposits are critical obviously to our future growth and investing in future deposit channels and the deposit channels that we've talked about here today That will drive the deposit growth in the future. So we said 2 billion last quarter that we thought we'd grow deposits We came in at three and a half billion. Yes. There was a lot of
a brokered in there. This quarter, we say two billion without brokered, and we're gonna try to exceed and do better than that, and then we'll kinda grow our way into 2024. All right, that's helpful, thank you. Thank you. Thank you.
At this time, there are no additional questions registered in the queue, so I would like to pass the call back over to our host, Ken Vecchione, for some concluding remarks. I just want to thank you all for attending the call. Pretty exhaustive earnings call today. We're happy to field all your questions, and we look forward to the next quarterly call. Thanks again. That concludes today's conference call. Thank you for your participation.