Q2 2025 Western Alliance Bancorp Earnings Call

Operator: Thank you for standing by. Today's call will be beginning momentarily.

Hello everyone, and thank you for standing by. Today's call will be beginning momentarily.

Miles Pondelik: Good day everyone. Welcome to Western Alliance Bancorporation's second quarter 2025 earnings call.

Miles Pondelik: You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development.

2025 earnings call.

You may also view the presentation today via webcast through the company's website at

Miles Pondelik: Please go ahead. Thank you and welcome to Western Alliance Bank's second quarter 2025 conference call.

I would now like to turn the call over to Mi pondok director of investor relations and corporate development. Please go ahead.

Miles Pondelik: Our speakers today are Ken Vecchione, President, Chief Executive Officer, and Dale Gibbons, Chief Financial Officer.

Miles Pondelik: 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 a forward-looking statement.

Miles Pondelik: For a 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 8K filed yesterday, which are available in the company's website.

Ken Vecchione: Now, for opening remarks, I'd like to turn the call over to Ken. Thanks, Miles. Good afternoon, everyone.

Speaker Change: Thank you, and welcome to Western lines Banks. Second quarter 2025 conference call. Our speakers today are Ken beckon President, Chief Executive Officer and Dale, Gibbons Chief Financial Officer before, I hand the call over to Ken, please note that today's presentation contains 4. We're looking statements, which are subject to risk, uncertainties and assumptions, except is required by law to come and design or take any obligation updated. Forward looking statements for more complete discussion of the risk. Uncertainties that could cause actual results to differ materially Forum any forward-looking statements, please refer to the company's SEC filings including the form AK filed yesterday which are available on the company's website.

Ken Vecchione: I'll make some brief comments about our second quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail.

Ken Vecchione: I'll then close with some prepared remarks by reviewing our updated 2025 Outlook.

Ken Vecchione: Our Chief Banking Officer for Regional Banking, Tim Bruckner, will then join us for Q&A.

Ken Vecchione: But before diving into my prepared comments, I'd like to take a moment to address a planned CFO succession announcement. Dale has been an outstanding CFO for Western Alliance for an impressive 22 years, which is more than five times longer than the average CFO tenure. Throughout his tenure, Dale has been an instrumental leader, guiding the bank through both prosperous and challenging times. His unwavering dedication and availability at all hours of the day have made him an invaluable partner and friend to the senior management team. After the new year, Dale will transition his CFO responsibilities to Vishal following a thorough transition period.

Speaker Change: Now, for opening remarks, I'd like to turn the call over to Ken beckon. Thanks miles. Uh, good afternoon everyone. I'll make some brief comments about our second quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail, I'll then close our clothes with, uh, some prepared remarks. By reviewing, our updated, 2025 Outlook, our chief banking officer, for regional banking to brockner, we'll then join us for Q&A. Uh, but before diving into my prepared, comments, I'd like to take a moment to address the plan CFO 66.

Ken Vecchione: In his new role as Chief Banking Officer of Deposit Initiatives and Innovation, Dale will oversee six standalone deposit verticals, which generate strong liquidity. His contributions to the company are too numerous to list, but his skill and leadership were particularly evident during my absence at the beginning of the year. The board, the management team, and I are very excited to see him thrive in his new leadership role.

Speaker Change: Session announcement Dell has been an outstanding CFO for Western Alliance for an impressive. 22 years, which is more than 5 times longer the average CFO tenure. Throughout. His tenure Dale has been an instrumental leader, guiding the bank through, both prosperous and challenging times, his unwavering dedication and availability at all hours of the day, have made him an invaluable partner and friend to the senior management team. After the New Year, Dale, will transition his CFO responsibilities to the shop following a thorough transition period in his new role, as Chief banking officer of deposit initiatives and Innovation, Gail will oversee 6 Standalone deposit verticals which generate strong liquidity. His contributions to the company are too numerous to list, but a skill and Leadership where particularly evident during my absence at the beginning of the year.

Ken Vecchione: Someone should pass the tissues over to Dale. Vishal will join us early in the fourth quarter, and after a 90-day transition period, he will assume the CFO responsibilities. Vishal has been a trusted advisor to the company and knows the bank very well. Over the past eight years, I have developed a strong professional relationship with him, and I am looking forward to fostering the same partnership I have had with Dale.

The board, uh, the management team and I are very excited to see him thrive in his new leadership role.

Ken Vecchione: Just feel free to reach out to both Dale and Vishal to congratulate them on their new assignments when you have a moment.

Speaker Change: Uh, someone should pass the tissues over to Del. Um, The Shaw will join us early in the fourth quarter and after a 90-day transition period, he will assume uh, the CFO responsibilities. The Shah has been a trusted advisor to the company and knows the bank very well over the past 8 years, I have developed a strong professional relationship with him. And I am looking forward to fostering the same partnership. I have had with Dell. Uh just feel free.

Ken Vecchione: Okay, let's get to the financial highlights in the quarter. Western Alliance, again, delivered A Strong Financial Results, Exceeding Expectations in the Second Quarter as Strong Business Momentum Drove a Meaningful Acceleration Across a Broad Array of Financial Missions. Sustained success in acquiring new client relationships supported by our deep sector expertise, fueled strong risk-adjusted balance sheet growth, robust net interest income expansion, and enhanced profitability, which resulted in continued earnings growth. We generated over $1 billion of sequential loan growth for the second straight quarter, which was funded by nearly $2 billion of quarterly deposit. Net Interest Margin rose 6 basis points sequentially, rebounding back above 3.5% from robust average-earning asset growth and CD repricing tailwinds, which lowered interest-bearing deposit costs.

To reach out to both Dale and paschall to congratulate them on their new assignments when you have a moment. Okay, let's get to the financial highlights and the quarter Western lines uh again delivered.

Uh strong financial results. Exceeding expectations, in the second quarter, as strong business momentum drove, a meaningful acceleration across a broad array of financial metrics.

Speaker Change: Sustained success and acquiring new client relationships supported by our deep sector, expertise fuel, strong risk, adjusted balance sheet growth, robust, net interest income expansion and enhanced profitability which resulted in continued earnings growth. We generated over 1 billion dollars of sequential loan growth for the second straight quarter which was funded by nearly 2 billion dollars of quarterly deposit growth

Ken Vecchione: Asset quality continued to perform as expected, as criticized loans declined $118 million in aggregate from Q1.

Ken Vecchione: Other real estate owned increased $167 million as we elected to repossess office properties where we can accelerate our normal credit resolution process and see value creation potential due to improving leasing, occupancy, and NOI trends. We have already secured an NOI for one property that we expect to be sold by quarter end. Total criticized assets increased negligibly and remained at approximately $1.7 billion, which we expect to be the high watermark for this credit cycle and to drift downward in coming quarters.

That interest margin wrote 6 basis, points sequentially, rev rebounding back above 3 and a half percent from robust average earning asset growth and CD repricing Tailwind which lowered interest bearing deposit costs as the quality continues to to perform as expected. As criticized loans declined, 118 million dollars in aggregate from q1

Speaker Change: All the real estate owned increased 167 million as we elected to repossess office properties where we can accelerate our normal credit resolution process and see value creation potential due to improving leasing occupancy and noi Trends. We have already secured an Loi for 1 property that we expect to be sold by quarter end.

Ken Vecchione: Our liquidity position and capital base both remain stout and able to support our solid and improving PPNR, tangible book value, and total shareholder return.

Ken Vecchione: Earlier this week, we announced plans to unify six legacy division bank brands under the Western Bank brand by year-end. These brands have operated under the Western Alliance Bank charter for over a decade, so this action will simply present a unified marketing presence emblematic of the much larger national bank Western Alliance has become.

Speaker Change: Base both remained Stout and able to support our solid and improving ppnr tangible Book value and total shareholder return.

Ken Vecchione: Importantly, we are encouraged by the inflection and profitability experienced in Q2. Return on average tangible common equity of 14.9% and return on average assets of 1.1% were both notably higher from Q1. We continue to target upper teams' return on tangible common equity as our near-term profitability North Star.

Earlier this week, we announced plans to unify 6 Legacy division, Bank Brands under the Western Bank brand. By year end, these brands have operated under the Western Alliance Bank Charter for over a decade. So this action will simply present a unified marketing, uh, present emblematic of uh, the much larger National Bank Western Alliance has become

Dale Gibbons: Dale will now take you through the results in more detail.

Dale Gibbons: Thank you, Jen, for your kind words and tissues, and I hope you'd ask for more. Looking closer at the income statement, net interest income of almost $700 million, or 7.2% quarter-over-quarter, or nearly 29% annualized, driving PPNR up $331 million. equates to a 19% increase from Q1. Strong organic loan growth and higher average securities balances produced average earning asset growth of 17.3% on the late quarter end of last year. Non-interest income rose 16.4%, quarter over quarter to $148 million. Mortgage loan production volume increased 25% from last year, and the gain on sale margin edged up one basis point from the prior quarter to resulting in mortgage banking revenue of approximately $78 million.

Speaker Change: Importantly, we are encouraged by the inflection and profitability experienced in Q2 return on average tangible. Common Equity of 14.9% and return. On average assets of 1.1% were both notably higher from q1. We continue to talk at upper teens return on tangible. Common Equity as our near-term. Profitability. Northstar Dale will now take you through the results in more detail.

Dale Gibbons: Uh, thank you again for your kind words and tissues. I hope you could ask for more looking closer at the income statement. Net interest income of almost 700 million through 7.2% Court recorder or nearly 29%, annualized, driving ppnr up of 13331 million for the quarter, which equates to a 19% increase from q1.

Strong organic loan growth and higher average Securities. Balances produce average, earning asset growth is 17.3% on the late quarter annualized basis.

Dale Gibbons: Overall, we characterize core mortgage banking revenue as still tracking to flat year-over-year performance. In response to the volatility that ensued from proposed tariffs early in Q2, the company undertook a hedging initiative to mitigate earnings volatility by purchasing variable rate securities. As spreads tightened, we sold these securities, which produced $8 million of the total $11 million gain of securities gains realized during the quarter, negating hedging at $11 million. Non-interest expense increased $14 million from the prior quarter to $515 million, mostly from the seasonal rebound and average ECR-related deposits, which drove the $11 million increase in deposit costs from Q1.

Non-interest income Rose 16.4% Quarter over quarter to 148 million. Mortgage, Loan Production, volume increased 25% from last year and the gain on sale margin and stuff. 1 basis points from the prior quarter to 20, resulting in Mortgage Banking revenue of approximately 78 million.

Overall, we characterize core Mortgage Banking Revenue as still tracking to Flat year-over-year performance. In response to the volatility that ensued from proposed tariffs early in Q2 the company undertook, a hedging initiative to mitigate earnings volatility by purchasing variable rate, Securities as spreads tightened, we sold these Securities, which produced 8 million of the total 11 million gain of Securities, gains realized, during the quarter negating hedging losses at Amaro,

Dale Gibbons: Net interest income, inclusive of deposit costs, however, grew 7 percent from the prior quarter to $36 million. Overall, we delivered solid operating leverage this quarter, with net revenue growing nearly 9 percent, which outpaced sub-3 percent in non-interest expense. Provision expense of $40 million resulted from organic loan growth and a replenishment of approximately $30 million of net charge. In our financial statements, you'll also notice a new line item for net income attributable to non-controlling interest that captures the pre-tax dividend impact from our recently issued REIT preferred � Turning to our net interest drivers, continued improvement in interest-bearing deposit costs, and overall liability funding outpaced slightly lower loan yields.

Non-interest expense increased, 14 million from the prior quarter to 515 million mostly from the seasonal rebound and average ECR related deposits, which drove the 11 million increase in in deposit costs from q1.

And that interesting, um, inclusive of deposit costs. However, grew 7% from their prior quarter to 36 million overall, we delivered solid operating leverage this quarter with net revenue. Growing nearly 9% which outpaced sub, 3% growth and non-interest expense

provision expense is 40 million resulted from organic loan growth and a replenishment of approximately 30 million of net charge offs.

Dale Gibbons: in our financial statements, you'll also notice a new line item for net income attributable, to noncontrolling interests that captures the pre-tax dividend impact from our recently, issued re preferred shares

Dale Gibbons: The securities portfolio yield increased 18 basis points to 481 from the prior quarter as a result of greater liquidity deployment into higher yielding floating rate securities. The HFI low yield decreased just 3 basis points to 617, reflecting a mixed shift away from higher yielding construction into CNI. The cost of interest bearing deposits declined seven basis points to 319 from CD costs compressing 22 basis points, as well as our ongoing efforts to manage IBD rates lower absent additional FOMC rate . For the month of June, the average IBD rate was also 319, but we expect continued improvement from the deposit mix, shifting away from CD.

Returning to our net, interest drivers continue to Improvement in interest-bearing deposit costs and overall liability funding outpaced slightly lower loan yields.

Securities portfolio, yield increased 18 basis points to 481 from the prior quarterly results of Greater liquidity deployment into higher yielding floating rate securities.

the HFI loan deal decreased just 3 basis points to 617 reflecting a mixed shift away from higher yielding construction into cni

The cost of interest bearing, deposits declined, 7 basis points, to 319 from CD costs. Compressing 22 basis points as well as our ongoing efforts to manage IBD rates, lower absent, additional fomc rate cuts

For the month of June, the average IBD rate was also 3/19 who were expecting continued improvement from the deposit. Mix shifting away from CDs.

Dale Gibbons: As mentioned earlier, net interest income rose $47 million from Q1 to $698 million from strong loan growth as average earning assets increased $3.3 billion. Net interest margin expanded six basis points to $3.53 as the reduction in funding costs exceeded the one basis point reduction in total earning asset yield. Non-interest expense increased $14 million, or 3% quarter over quarter, as deposit cost rose $10.6 million due to the normal seasonal rebuild in mortgage warehouse deposits, which pushed average balances higher. Our adjusted efficiency ratio of 52% improved from 56% in Q1 as we continue to achieve positive operating leverage from revenue growth outpacing deposit cost operating expenses, non-deposit cost operating which includes the incremental cost of incurring anticipation of becoming a large financial institution.

As mentioned earlier net interest income Rose, 47 million from q1 to 698 million from strong loan growth at average earning assets. Increased 3.3 billion net interest margin expanded 6 basis points to 353 and the reduction in funding costs. Exceeded the 1 basis, point reduction in total earning asset yield

Non-interest, expense increased 14 million or 3%, quarter over quarter as the pasta cost Rose 10.6 million due to the normal seasonal, pre-build, the mortgage Warehouse deposits, which pushed average, balances higher.

Our adjusted efficiency ratio of 52%.

Dale Gibbons: Expenses, which includes the incremental costs. We're incurring, anticipation of becoming a large financial institution.

Dale Gibbons: remain asset sensitive on a net interest income basis, but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a material projected ECR related deposit cost decline this year, and an increase in mortgage banking revenue in this scenario based upon our rate cut forecast.

Remain asset sensitive on a net interest income basis. But essentially interest rate neutral on an earnings at risk basis, in a ramp scenario.

Dale Gibbons: Our updated rate forecast calls for two 25 basis point rate cuts each in September and December. The balance sheet increased $3.7 billion from Q1 to $86.7 billion in total assets, which reflected strong HFI loan and deposit growth of $1.2 billion and $1.8 billion respectively. borrowings increased $1.9 billion due to the higher average HFS loan.

This offset is supported by a material. Projected ECR related deposit caustic line this year and an increase in Mortgage Banking Revenue in this scenario based upon our rate cut forecast.

Dale Gibbons: Our updated rate forecast calls for 225 basis, point rate cuts each in September and December.

The balance sheet increased 3.7 billion from q1 to 86.7 in total assets, which reflected strong HFI loan and deposit, growth of 1.2 billion and 1.8 million respectively.

Dale Gibbons: Securities Portfolio Balances and Excess of Deposit Growth. Finally, total equity grew to $7.4 billion and tangible book value per share climbed 15% year over year. HFI loans grew $1.2 billion quarterly, with end-of-period balances $1 billion greater than average levels in the quarter. CNI continues to lead this long momentum contributing over two-thirds of the quarterly growth from both regional and national business. Regional Banking produced over $660 million of loan growth, with CNI contributions from in-market commercial banking and innovation and technology banks. while HomeBuilder Finance drove the CRE increase to the bank. With quarterly loan growth of over $150 million in innovation and tech, we continue to experience gathering momentum in banking the innovation economy nationally, following competitive disruptions over the past two years.

Dale Gibbons: Borrowing increased 1.9 billion due to the higher average, HFS loan and securities portfolio. Balances in excess of deposit growth.

Dale Gibbons: Finally, total Equity grew to 7.4 billion and cans will book value per share, applying 15% year-over-year.

Dale Gibbons: Has.

Dale Gibbons: She and I continues to lead this low momentum contributing over 2/3 of the quarterly growth from both Regional and National businesses.

Dale Gibbons: Regional banking produced over 660 million of loan growth with cni contributions from in Margaret Commercial Banking and Innovation and Technology banking.

While home builder Finance drove, the CRA increase for the bank.

Dale Gibbons: With quarterly loan growth of over 150 million in Innovation and Tech. We continue to experience Gathering momentum in banking. The Innovation economy, nationally following competitor disruptions over the past 2 years.

Dale Gibbons: National Business Lines provided the remainder of the growth with Mortgage Warehouse and Note Finance being the primary contributors. Note Finance remains a key area where our private credit relationships provide complementary opportunities with non-bank. Deposits grew $1.8 billion in Q2, inclusive of a $300 million decline in wholesale brokerage Solid growth was achieved in non-interest bearing and savings and money market products. Mortgage warehouse seasonal inflows were the primary drivers of higher non-interest bearing balance. But we also generated another quarter of a non-interest bearing, non-ECR balances of $140 million at a 7.5% annual rate. CDs were also higher quarter over quarter, but we expect runoffs to turn going forward.

Dale Gibbons: National Business lines provided the remainder of the growth with mortgage warehouse and old Finance being the primary contributors note for finance remains a key area. Where our private credit relationships, provide complimentary opportunities, with non-bank partners

Dale Gibbons: Deposits through 1.8 billion in Q2 inclusive of a hundred million dollar decline in wholesale broker deposits.

Dale Gibbons: Solid growth was achieved in non-interest bearing and and Savings in money market. Products mortgage Warehouse, seasonal inflows with a primary drivers of higher non-interest, bearing balances.

But we also generated another quarter of a non-interest 9 years, respiring, non-ecr, balances of 140 million at a sub or a 7 and a half percent annual rate.

Dale Gibbons: Regional banking deposits were up nearly $800 million from the prior quarter, demonstrating continued relationship momentum with in-footprint commercial clients. National Business Alliance posted a $650 million quarterly increase, primarily from the normal rebuild and mortgage warehouse, as well as steady growth in our consumer digital channel. Specialty escrow deposits continue to add to our growth as well, contributing nearly $300 million of deposits in Q2. Of note, our digital asset banking program generated $400 million of quarterly growth as we provide services for blockchain. Turning to asset quality, criticized loans declined $118 million quarterly and benefited from special mentioned loans decreasing $16 million, classified accruing loans declining $77 million, and non-accruing loans falling $24.

Dale Gibbons: CDs were also higher quarter over quarter, but we expect to run off to to her going forward.

Dale Gibbons: Regional banking, deposits were up nearly 800 million from the prior quarter demonstrating continued relationship momentum with in footprint commercial clients.

Dale Gibbons: National Business lines posted at 650 million quarterly, increase primarily from the norm, normal building, rebuild and mortgage Warehouse, as well as steady steady growth in our consumer digital channel.

Specialty, escrow deposits. Continue to add to our growth as well. Contributing nearly 300 million of deposits. In Q2 of note, our digital asset banking program generated 400 million in quarterly growth, as we provide services for blockchain payments.

Dale Gibbons: As Ken explained earlier, other real estate owned increased $167 million as we took possession of a handful of office properties we have been closely monitoring for some time. We do not expect these properties to have an adverse effect on financial results as their aggregate operating revenues exceed expenses. We expect steady movement toward resolution and to begin dispositions this year of this portfolio. Stabilizing leasing and occupancy rates, as well as improving net operating income on these properties reinforce our confidence that we will recover our recovering values as indicated by the positive cash flow from these assets.

Dale Gibbons: Attorney asset quality criticized loans in declined, 118 million quarterly and benefited from special mentioned loans, decreasing 16 million classified, recurring loans, declining 77 million and non-recurring Loans, filing 24.

Dale Gibbons: Its kind of explained earlier other real estate owned increased 167 million. As we took possession of a handful of office properties. We have been closely monitoring for some time. We do not expect these properties to have an adverse effect on financial results as their aggregate operating revenues exceed expenses.

We expect steady movement toward resolution and to begin dispositions this year of this portfolio.

Dale Gibbons: All in, criticized assets rose 50 million from March 31st. As we achieve resolution of these assets, we would expect total criticized assets to begin to decline in the current quarter. Quarterly net loan charge-offs were approximately $30 million or 22 basis points of average loans, provision expense of $40 million added to reserves in concert with loan growth and to cover charge-offs. Our ACL for funded loans moved $6 million higher from the prior quarter to $395 million. The total loan ACL for funded loans ratio nudged up one basis point from the prior quarter to $78. On slide 14, you can see Western Alliance's concentration in low-loss loan categories.

Stabilizing Leasing and occupancy rates, as well as improving net, operating income among these properties, reinforce our confidence, that we will recover our recovering values as indicated by the positive cash flow from these assets. All in criticize assets, Rose 50 million for March, 31st, as we achieve resolution of these assets, we would expect total criticize assets to begin to decline in the current quarter.

Quarterly, net loan charge offs for approximately 30 million or 22 basis points of average loans.

For vision, expense of 40, million, added to reserves and concert with loan growth and to cover charge offs.

Dale Gibbons: our HCL for funded loans, moved 6 million higher from the prior quarter to 395 million, the total loan ACL to funded loans ratio, nudged up, 1 basis, point from the prior quarter to 78,

Dale Gibbons: ECU's are ACL ratio lower relative to peers, reflecting the portfolio's lower embedded loss context. The top chart is our updated Adjusted Total Loan ACL walk, which illustrates how credit enhancements such as credit late notes and structurally low-risk segments like fund banking, our low-loan LTV and high FICO residential portfolio, and mortgage warehouse elevate our normalized reserve coverage from 78 basis points to 135.

UCL ratio lower relative to peers reflecting the portfolios, lower embedded loss content.

Dale Gibbons: Bye. Bottom table demonstrates that applying an industry median loan mix to our portfolio while still using our reserve allocations by loan type, but reducing our outsized proportions of loans in lower risk categories like mortgage, warehouse, and residential, and increasing our proportion of loans in higher risk categories like consumer, our allowance would exceed 1% today. Our C21 capital ranks near median peer levels. If you add our lower adverse AOCI marks and the ACL, our adjusted capital ratio is 11%, which is flat since the prior quarter and ranks slightly above the median for our asset peer group on a one quarter lag basis.

The top chart is our updated adjustable adjusted total loan, ACL walk, which illustrates how credit and enhancements such as credit, linked notes, and structurally low-risk segments, like fund banking, our low low LTV and high FICO residential portfolio and mortgage Warehouse Elevate. Our normalized Reserve coverage from 78 basis points to 135

Dale Gibbons: Bottom table demonstrates that applying an industry. Median loan, mix to our portfolio while still using our Reserve, allocations by loan type, but reducing our outside proportions of loans and lower risk categories like mortgage warehouse and residential and increasing our proportion of loans at higher risk categories like consumer are allowance would exceed 1% today.

Dale Gibbons: We remain confident in our capacity to absorb any losses in concert with steady loan growth, as we view this adjusted capital as the total amounts available to absorb losses and support balance sheet growth. Our C21 ratio rose to 11.2% despite our low growth and SMSR sales provided some RWA relief. Tangible Common Equity, the total assets ratio was unchanged at 7.2%. Tangible book value per share increased $1.77 from Q1 to $55.87 as a function of retained earnings. Consistent upward growth in tangible book value per share remains a hallmark of Western Alliance, and it's exceeded peers by over seven times for the past decade.

Dale Gibbons: Our c21 Capital ranks near median per levels. If you add our lower inverse, aoci marks, and the ACL are adjusted. Capital ratio is 11%, which is flat since the prior quarter and rates, slightly above the median for our asset per group on a 1 quarter lag basis.

Remain confident in our capacity to absorb any losses in concert with steady loan growth. We we as we view this adjusted Capital as a total amounts available to absorb losses and support balance sheet growth.

Dale Gibbons: Our c21 ratio loss to 11.2% despite our loan growth and smsr.

Dale Gibbons: Sales provided some rwa relief.

our tangible common Equity total assets ratio was unchanged at 7.2%

Dale Gibbons: And we'll book value per share, increase to $1.77, from q1 to 55.87 as a function of retained earnings.

Consistent upward growth and tangible Book. Value for share remains, a Hallmark of Western Alliance and is exceeded peers by over 7 times for the past decade.

Dale Gibbons: Our strong track record in compounding tangible value per share stems from sustained green investment in our diversified and dynamic business model, which has consistently produced top tier balance sheet profitability and growth for more than 10 years. This has led to excellent revenue growth and operating leverage, strong ROTC and EPS growth, as well as leading tangible book value per share accumulation. Ultimately, these are the drivers of long term superior total shareholder return. Additionally, the metrics in the bottom row that track the last four quarters, which are NIM, Efficiency, and ROTC, are poised to improve from here.

Our strong track record in compounding, tangible book, value per share comes from sustained. Free investment in our Diversified and dynamic business model, which is consistently produced, top tier balance, sheet, profitability and growth for more than 10 years.

This has led to excellent Revenue growth and operating, leverage, strong, Roi and EPS growth as well as leading tangible book. Value per share, accumulation ultimately these are the drivers of long term Superior total shareholder return

Ken Vecchione: return the call back to Ken. Dale okay let's talk about our 2025 guidance We reiterate our loan and deposit growth outlooks of $5 billion and $8 billion, respectively, based on healthy pipelines remaining intact. Despite recent tariff-related noise. Regarding capital, we expect our CET1 ratio to hold above 11%, balancing our loan growth outlook with improving capital generation from an increasing return on tangible common equity. We are revising our net interest income outlook higher to 8% to 10% growth as our projection for two 25-basis point rate cuts have shifted back to September and later in Q4. As our loan portfolio is more variable-weighted, delayed rate cuts combined with sustained strong loan growth should lift net interest income.

Dale Gibbons: Additionally, the metrics on the bottom row that tracks, the last 4 quarters which are in efficiency and Roxy are poised to improve from year.

I will return the call back to 10. Thanks Dale. Okay let's talk about our 2025 guidance.

Ken Vecchione: Additionally, net interest margin for the full year should approximate 2024's upper 3.5% level. We are also revising our non-interest income outlook higher to 8% to 10% growth. We are pleased with the momentum in cultivating holistic relationships with our customers and the traction we've made in earning more commercial banking fees. Higher interest rates should also benefit servicing income and support MSR valuation. Non-interest expense is now expected to be 1 to 4% for the year. ECR-related deposit costs are now projected to land between $550 million and $590 million for the year and between $170 and $180 million in Q3.

Uh, we re re excuse me, we re reiterate our loan and deposit growth, outlooks of 5 billion and 8 billion respectively, based on healthy pipelines remaining intact. Uh, despite recent Towers related noise regarding Capital. We expect our C1 ratio to hold above 11% balancing. Our loan growth Outlook with improving Capital generation from an increasing return on tangible. Common Equity we are revising. Our net interest income Outlook higher to 8 to 10% growth as our projection for 225 basis. Point rate Cuts, have shifted back to September and later in Q4 as our loan portfolio is more variable rate weighted delayed rate Cuts combined with sustained, strong long, long loan growth should lift that interest income. Additionally then it is margin for the full year. Should approximate 2024 as upper 3.5% level. We are also revising our non-interest income Outlook higher to

8 to 10% growth. We are pleased with the momentum and cultivating holistic relationships with our customers on the traction. We are we've made in earning more Commercial Banking fees, higher interest rates should also benefit servicing income and support MSR valuations.

Ken Vecchione: ECR revision is attributed to a more backloaded rate cut forecast. Our improved revenue outlook should also drive higher associated incentive competition. Operating expenses are now expected to be $1,495,000,000 to $1,515,000,000 for the full year. Asset quality should continue to perform as expected with full-year net charge-offs of approximately 20 basis points while criticized assets are expected to decline over the next several quarters.

Dale Gibbons: Non-interest expense is now expected to be 1 to 4% for the year ECR related deposit costs are now projected to land between 550 million and 5990 million for the year and between 170, uh, and 180 million dollars in Q3 ECR. Revision is tribute to a more back-loaded rate. Cut forecast, our improved Revenue Outlook should also Drive higher Associated incentive compensation.

Ken Vecchione: Finally, we are maintaining our full year 2025 effective tax rate forecast of approximately $25,000.

Dale Gibbons: Operating expenses are now expected to be uh 1 billion 495 to 1 billion, 515 for the full year. Asset quality, shoot continued to perform as expected with full year. Net charge offs up approximately 20 basis points while criticizing assets are expected to decline over the next several quarters.

Ken Vecchione: At this time, Dale, Tim, and I will take your questions. Thank you.

Dale Gibbons: 5 effective tax rate, forecasts of approximately 20% at this time, Dale. Tim and I will take your questions.

Operator: We will now begin the question and answer session. If you would like to ask a question today, please do so now by pressing start followed by the number 1 on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press start followed by 2 to withdraw yourself from the queue.

Dale Gibbons: Thank you. We will now begin the question and answer session.

If you would like to ask a question today, please do so. Now by pressing star, followed by the number 1 on your telephone keypad.

Operator: As a reminder to please ensure that your device or your microphone are unmuted locally.

Dale Gibbons: If you change your mind or you feel like your question has already been answered. You can press Start followed by 2 to withdraw yourself from the queue.

as a reminder to please ensure that your device or your microphone are unmuted locally,

Chris Mcgratty: Our first question today comes from Chris McGratty with KBW. Please go ahead Chris, your line is now open. Oh, great. Thanks. Thanks for the question.

Speaker Change: Our first question today comes from Chris McGregor with KBW.

Speaker Change: Please go ahead, Chris. Your line is now open.

Dale Gibbons: Want to start on the CFO transition. It feels like a big moment for the company. I'm interested, Dale, a little bit on the timing, Dale, what you plan on kind of focusing your efforts on, you know, the background of the new, of your successor, and ultimately, broader succession conversation. So I know a lot's in there, but love to hear your thoughts. Sure.

Oh great thanks. Uh, thanks for the question. Um,

Want to start on the CFO transition. She feels like a big moment for the company. Um, I'm interested Dale can a little bit on the, the timing feel what you plan on kind of focusing your efforts on, you know, the background of of the new, uh, of your successor, um, and ultimately broader succession conversation. So, I know A lot's been there, but, um, love to hear your thoughts.

Dale Gibbons: Well, I can't say how thrilled enough I am about this organizational change, which I had suggested. Augmenting the skill set of the team is going to make us more versatile, capitalize on new opportunities, and it's going to free up my time to immerse myself in the array of deposit services we offer. Every single one of them appears to be at an inflection point in their growth trajectory. We are in the midst of a sea change in some of our business lines, not unlike when Moses parted one of them. And I see pathways opened, I see obstacles being removed.

Speaker Change: Sure. Um well I can't say how thrilled enough I am about this. Uh, this organizational change which I had suggested augmenting. The skill set of the team is going to will make us more versatile with capitalize on New Opportunities. And it's going to free up my time to immerse, myself, in the array of deposit Services. We offer.

Speaker Change: Every single 1 of them appears to be at an inflection point in their growth, trajectory we are in the midst of a sea change and some of our business lines. Not unlike when Moses parted 1 of them. And I got a, i c,

Dale Gibbons: And I'm not just referring to genius or the digital asset space, but also executive orders and changes at the FTC. The time to move on them is right now and I'm just delighted to be stepping in.

Pathways opened, I see obstacles being removed and I'm not just referring to genius or the digital asset space, but also executive orders and changes that the FTC

Dale Gibbons: I'll just add one other thing. It's important to note that this transition does not signal a change in the direction for the bank. Our focus remains steadfast on achieving organic growth up to and through the $100 billion large financial institution level. And that's where our focus will be on the next 18 Back to you, Chris, if you're there.

the time to move on them is right now and I'm just delighted to be stepping into that.

Speaker Change: I'll just add 1 of the thing. Um,

it's important to note that this transition does not signal a change in the direction for the bank, our Focus remains steadfast on achieving organic growth up to and through um, 100 billion dollar Lodge financial institution, uh, level and that's where our Focus will be on the next uh, 18 months.

Speaker Change: A few Chris, if you're there.

Chris Mcgratty: Oh, sorry about that. I just wanted to, you know, extend our thoughts and Dale, you've done a great job navigating this company with the team.

Chris Mcgratty: I guess my follow-up would be on the back half, the deposit growth, the $8 billion, to get to the $8 billion. Can you help us reconcile getting there?

Dale Gibbons: I think Q4 is typically slow, which I think implies Q3 is going to be pretty big. Any color on the cadence of deposit flow? Sure, sure. One of the things that we did was to our deposit growth this, you know, the past two quarters is we have, through pricing, pared down some of the more volatile mortgage warehouse funds, and which has really been the driver of what you're referring to in the seasonal kind of dip that we've had, particularly in the mortgage warehouse deposits in the fourth quarter. So that's going to be more muted. And so we're not expecting that that's going to, we need to necessarily cover that.

Speaker Change: Oh sorry about that. I just wanted to, you know, extend our thoughts and and you know, daily done, a great job. Navigating this company with uh with the team, um, I guess my follow-up would be on the the back half. Uh, the deposit growth, the 8 billion to get to the 8 billion. Um, can you help us reconcile getting there? I think Q4 is typically slow, uh, which I think implies Q3 is going to be pretty big. Any, any color on the Cadence of deposit flows?

Speaker Change: Sure.

Dale Gibbons: So we're on track. We see for the $8 billion target. Yeah, I'd add that, you know, year to date, we're up about $1 billion. And some of the things that Dale will be addressing, specifically in the digital asset banking, should also increase deposits as we go forward. It had a good quarter this quarter, and grew $400 million. And our technology and innovation group also had an incredibly strong quarter, with their balances rising nearly $600 million. I think that is proof positive, that staying reliable and accessible in that market, both on the loan and the deposit side, has begun to pay dividends for us.

Speaker Change: Sure. What is the things that we did was uh, um, to our deposit growth? This, you know, the past 2 quarters is we have through pricing paired down some of the more volatile mortgage Warehouse funds and which has really been the driver of what you're referring to on a seasonal. Kind of a dip that we've had uh, particularly in the mortgage Warehouse deposits in the fourth quarter. So that's going to be more muted. And so uh, we're not expecting that that that's going to we need to necessarily cover that. So we're on track. We see for the R 8 billion dollar Target. Yeah, I'd add that you know uh year to date we're up about the billion dollars and some of the things that Dale will be addressing uh specifically in the digital asset banking should also increase uh deposits as we go forward. It had a good quarter of this quarter and grew uh, 400 million dollars and our technology.

Technology and Innovation group also had an incredibly strong quarter with their balances Rising, nearly 600 million dollars. Um, and I think that uh, is proof positive that staying reliable and accessible, uh, in that market both on the loan and the deposit side has begun to pay uh, dividends for us.

Chris Mcgratty: Great, thanks again. All right, you got it. Thank you.

Speaker Change: Great. Thanks again.

All right, you got it, Chris.

Jared Shaw: Our next question comes from Jared Shaw with Barclays. Please go ahead. Hey, good morning. Thanks for the question. Dale, congratulations. role as well. Thank you.

Thank you. Our next question comes from Jared, Shaw with Barkley's. Please go ahead.

Jared: Hey, good morning uh thanks for the question and Dale congratulations on the new role as well.

Speaker Change: um,

Dale Gibbons: Yeah, maybe looking at the fee income and looking at the guide for fee income, where What are some of the broader assumptions, I guess? underneath that. Mortgage. You said earlier, I guess, still looking at flat year over year. Is that where's the where's the growth? Yeah, so We anticipate a rise in C income the back part of the year driven by an increase in generally mortgage related revenue from seasonal activities, and also commercial banking activities linked to the growth in our C&I business. All in, the mortgage business is forecasted to have the same flat year over year revenue growth.

yeah, maybe uh, looking at at the fee income and looking at the the guide for fee income where

You said earlier, I guess still looking at flat year-over-year. Is that uh, where's the, where's the growth going to be coming from I guess. Um,

Dale Gibbons: And we do that as a way to focus on our commercial banking activities, which will generate the bulk of earnings, not only fee income, but the bulk of earnings for the bank so that investors can feel comfortable that the year-over-year growth is coming from these commercial banking activities, while the mortgage business being flat at the moment will be prepared or be available to deliver alpha in terms of earnings if and when interest rates get cut and that mortgage buying begins to rise. When that happens, then we have an interesting decision to make here around the table, and that will be, do we put some of those alpha earnings back into the business to support future growth, or do we let it fall to the bottom line, grow net income, improve our returns on average assets, and tangible common equity, and or have different options for capital.

Speaker Change: On the, on the feed side. Yeah. So um, we anticipate, uh, a rise in C income in the back, part of the Year, driven by an increase, in generally mortgage related revenue from seasonal activities and also Commercial Banking activities, linked to the growth in our cni uh business. All in the mortgage business is forecasted to have the same flat year-over-year Revenue growth and we do that as a way to

Focus on our Commercial Banking activities, which will generate the, the bulk of earnings, not only fee income, but the bulk of earnings for the bank. So that

Speaker Change: investors can feel comfortable about the year-over-year growth is coming from. These Commercial Banking activities, while the mortgage business being flat at the moment will be prepared or be available to deliver Alpha in terms of earnings. If and when interest rates, get cut and that mortgage buying and begins to rise when that happens, then we have an interesting decision to make here around the table and that will be, uh, do we put some of those, uh, Alpha earnings? Back into the business to support future growth, or do we let it fall to the bottom line? Uh, grow net income improve our returns.

Dale Gibbons: The mortgage industry had a muted spring selling season as a result of one of the higher rate environments and also the volatility perhaps introduced from the tariff activity. And I don't think that that destroyed that demand, it just postponed it to some degree. So I think some of it as things stabilize might come forward. And again, everyone is projecting that, you know, we're going to have some rate relief sometime later in 2020.

On average assets and tangible common Equity Andor. I'll have different options for Capital deployment. You know the more the more industry had a a muted spring selling season uh as a result of 1 of the higher rate environments is Al also the volatility perhaps introduced from the Tariff activity and I don't think that that destroyed that demand it's just postponed it to some degree. So I think some of it as being stabilized might come forward. And again everyone is projecting that you know we're going to have some great relief. Sometime later in 2025.

Dale Gibbons: And then I guess on the expenses, my follow up, you know, when we look at Hire a Guide on Expenses Ex-ECR. What's driving that? Is that incremental new investments to support some of Unknown Executive. And then I guess If we do see relief on Category 4. Thresholds, Is There an Opportunity?

Speaker Change: Okay, thanks and then I guess on on the expenses, it's my follow-up. You know when you look at the the higher guide on uh,

Dale Gibbons: See you next time. Safe Bets, Stay Safe, High Volteage, Load, Integrity, Survived, adapter, Yeah, you've got, you've got two, two questions in there. First, you know, let me just say, for Q2, our total expenses only rose by 2.9%, or, or $14 million, of which nearly 11 million of the 14 were deposit related costs. So our operating expenses were rather flat, Q1 to Q2. Okay. And this modest rise actually The operating expense number is about 30 of that 30, $35 million that'll be in the year, and that will be a little bit more back end loaded as we prepare to cross over $100 billion.

Expenses x, uh ECR. What's what's driving? That is that is that incremental new Investments uh to support some of these these initiatives. And then I guess, you know, if we do see relief on category 4 um thresholds. Is there an opportunity uh to maybe uh see that?

Speaker Change: Come in lower than the range or what's, what's sort of the the the investment cycle. Moving to category 4 looking like.

Yeah.

Yeah, you've got um You've Got 2 um, 2 questions in there. Um first, you know, let me just say for Q2, our total expense is only Rose by 2.9% or or 14 million dollars of which nearly 11 million of the 14, were deposited related costs. So,

Dale Gibbons: Now, as relates to tailoring, okay, you know, we've been closely following the tailoring conversations and their potential impact on the bank. If we postpone or slow that down, and the LFI threshold is not raised, then we put ourselves at risk of impeding our total loan and deposit growth. So, at this point, we have to continue as if the LFI threshold raise is not going to happen. But once it does, and we hope it does, then we'll adjust our spending accordingly. So, I hope that answers your question.

Operating expenses where we're at a flat q1 to Q2. Okay. Uh, and this modest rise actually improved our efficiency ratio by 400 basis points, quarter over quarter to, uh, 51.8 percent. I should say, adjusted efficiency. Ratio is the way we, we look at it now going forward in the rest of the year, yes. Uh, I think we've been very clear that we have, uh, we are going to spend about 35 million dollars, cash spend in 2025 and another 35 million in 2026, which is embedded in our numbers. The operating expense number is about 30 of that 3035, uh, million dollars that'll be in the year and that will be a little bit more, uh, back-end loaded as we prepare, uh, to cross over, uh, a hundred billion dollars now as it relates to tailoring, okay, you know, we've been uh, closely following the tailoring conversation.

Speaker Change: And their potential impact on the bank. Uh, I'll say first, we're in favor of moving. The lfi category for threshold to 250 million, or having it at least indexed to inflation. Uh, this adjustment would allow us to navigate through the threshold, more deliberately while permitting the bank to continue, its organic growth Journey, right? And the short run, the other benefits to moving the lfi threshold to 250 billion, would be to free up technology.

Speaker Change: Doing, uh, because we anticipate crossing over the 100 billion threshold somewhere. In early 2027, q1, maybe Q2 if we postpone or slow that down and the lfi threshold is not raised. Then we, uh, put ourselves at risk of impeding, our total loan and deposit growth. So at this point, we have to continue as if that, uh, the 200, the lfi, uh, threshold rates is not going to happen happen, but once it does, and we hope it does then we'll adjust our spending accordingly. So I hope that answers uh your your questions there.

Yeah, it's a great detail. Thank you.

Dale Gibbons: Thank you.

Matthew Clark: Our next question comes from Matthew Clark with Piper Sandler. Please go ahead Matthew. Thank you for the questions and congrats, Dale.

Thank you. Our next question comes from Matthew Clark with Piper Sandler. Please go ahead. Matthew

Matthew Clark: Uh, thank you uh, for the questions and congrats Dale.

Matthew Clark: Honing on the margin a little bit. Just give us a spot rate on deposits at the end of June. I think you gave it last quarter, but didn't see it this time around. And what's your kind of blended beta assumption through the cycle if you include non-maturity deposits that you touched on in the deck? Yeah, so We see that our margin is going to continue to inflect positively from here both on a reported basis as well as an adjusted basis including kind of the ECR piece going forward. Yeah, I would say that, you know, on a spot rate at the moment, investments, our investment book is running higher than our average rate for the second quarter.

Speaker Change: um, can you just, uh,

Holding on the margin a little bit, just give us a spot rate on deposits at the end of June. I think you gave it last quarter but it didn't see it. This this time around and and and what's your kind of Blended beta assumption through the cycle if you include non maturity deposits um that you touched on in the deck.

Speaker Change: Yeah. So um

We uh we see that our our margin is going to continue to uh inflect positively from here, both on a, on a reported basis as well as an adjusted basis, including kind of the ECR piece.

Dale Gibbons: We also see deposits and borrowings being down a few basis points as well. And so I think that gives some confidence to our guide that the net interest margin will stay or grow from the level it was at the end of Q2. We had a notable increase in the securities yield. That's not done. And I think that's going to be also an impetus for expansion on both of our margins. Got it, got it.

Speaker Change: Um, going forward? Um, yeah, I would, I would say that, you know, on a spot rate at the moment, um, uh, Investments. Our investment book is running higher, uh, than our average rate for the second quarter. Um, we also see, uh, uh, deposits and borrowings being down a few basis points as well. Um, and so, um, I think that

Speaker Change: Gives some confidence uh to our guide that the net interest margin will stay or grow uh, from the level. It was at the end of, uh, Q2 we we had a notable increase in the Securities yield um uh that's not done and um I think that's going to be also an impetus for expansion on both of our margin metrics.

Dale Gibbons: And then on the fee income side, and in terms of the lift, you're expecting there, part of it's coming from commercial, commercial banking income, I think it's a line item, you no longer disclose, but can you maybe update us on how much that contributes to fee income and how that might have changed from the prior quarter? question is how much how much is coming from commercial banking versus the mortgage? Is that the question? Yeah, yeah, it's a, you know, it's probably embedded in, you know, the service charge line now, I guess, but I was just trying to get a sense for the magnitude of commercial banking fees, in fee income, just to try to get a sense of how much that's growing.

Got it, got it. And then on the theme income side, and in terms of the lift, You're Expecting their part of it's coming from commercial. Commercial banking income, I think it's a line item, you know, longer disclosed. But can you just maybe update us on how much that contributes to fee income and how that might have changed from the prior quarter?

The question is, how much how much is coming from Commercial Banking versus the mortgage? Is that the question?

Speaker Change: Yeah, yeah. It's a you know it's probably embedded in

You know, the service charge line. Now, I guess, but I was just trying to get a sense for the magnitude of commercial.

Speaker Change: Banking fees in fee income just to try to get a sense for how much that's growing.

Dale Gibbons: Now, the mortgage business is going to stay flat year over year, which is about $328 million. We generated revenues in 24 and the same amount in 25. A non-interest, another non-interest income, which is what you want to know, probably will rise in the order of, you know, 20 plus percent year over year. Yeah, commercial banking related income is 15% of, you know, of our revenue presently. Perfect. Thank you.

Now, the mortgage business is going to um, uh, stay flat year over year, which is about 328 million. We generated revenues in 24 in the same amount in, in 25. Um, and non-interest, um, uh, an other non-interest income, which is what you want to know, uh, probably, uh, will rise in the order of, um, you know, 20 plus percent year-over-year.

Speaker Change: In related income is 15% of, you know, uh, of our Revenue presently and yeah.

Perfect, thank you.

Timur Braziler: Our next question comes from Timur Braziler with Wells Fargo. Please come ahead. Hi, good morning. Starting on the funding side, just me.

Speaker Change: Thank you. Our next question comes from T-Mobile with Wells Fargo.

Please go ahead.

Speaker Change: Hi, good morning.

Dale Gibbons: Maybe provide a little bit more color to the rationale on growing the borrowings as much as you did to deploy that into the bond book. And I think, Dale, you just said that bond yields are higher today than where the average book is. And that's not done yet.

Speaker Change: starting on the funding side, um, just maybe

Dale Gibbons: Is that implying that this strategy of lowering our borrowings to put into the bond book maybe continues here to the back end of the year? Yeah, we what we've seen is, is, you know, spreads widened in the wake of Liberation Day. And, and as a result, you know, we're not incurring any interest rate risk here, we're not incurring any credit risk here, because these are our treasury obligations. But, but we see a, I don't know, a lack of continuity or similarity, you know, within that space. And so we're augmenting, you know, returns at this time related to that.

Speaker Change: Maybe provide a little bit more color to the rationale on on growing the borrowings as much as you did to deploy that into the bond book. And I think Dale, you just said that, you know, by yields are are higher, um, today than they were, the average book is and that's not done yet. Is that implying that this strategy of, uh, lowering a borrowing to, to put into the bond, both maybe continues here into the back end of the year.

Dale Gibbons: And, you know, that's going to be based upon market conditions.

Dale Gibbons: But certainly presently, Okay, and then the increase in OREO, just some more color there, how many properties can you provide any color on just kind of the carrying cost LPVs here? And I'm wondering if some of the increased costs or increased expense guide is related to the higher carry cost of OREO.

Day and uh and as a result, you know, we're not tinkering any interest rate risk here. We're not creating a credit risk here because these are our treasury obligations but but we see um a um I don't know, a lack of uh, continuity or similarity, you know, within that space. And so we're augmenting, you know, returns. Um, at this time related to that and and I would you know, that that's going to be based upon where conditions but certainly presently it's working.

Speaker Change: okay, and then

Speaker Change: The increase in oreo. Um just some more color there. How many properties can you provide any color on? Just kind of the carrying cost ltvs here and I'm wondering if some of the The increased cost

or increased expense guide is related to the higher carry costs of of Oreo.

Ken Vecchione: Yeah, this is Ken. So we took in five properties and let me give you the big picture of what we're trying to do here. Right now, those properties generate, the revenues that the properties generate are in excess of the expenses. So yes, expenses show up in the expense line, the revenue show up in the fee income line, but net, it's a positive carrying number to the overall performance. Now, what we'll do here is a couple things. We have found that the sooner that we could take these properties in, manage them ourselves, we've had much more success in leasing them up and improving the occupancy rates, as well as getting better rental rates.

Ken Beckon: Yeah, this is Ken. So so we took in 5 properties and uh let me give you the big picture and what we're trying to do here right now. Those properties generate the revenues that are uh that the properties generate or in excess of the expenses. So yes, expenses, show up in the expense line, the revenue show up in the in the fee income line, but net net. Uh it's a positive carrying um uh number to the overall performance. Now what we'll do here is a couple things we have found that the sooner that we could take these properties in manage them ourselves, we've had much

Ken Vecchione: And that's what we did. The fact that revenues will grow in excess of expense also gives us the opportunity, if we need to, to fund improvements in these properties to bring them up to competitive levels in the cities that they're in. So it gives us that flexibility as well. And the last thing I'll say is when we take in these properties to REO, they're at current valuation values, less liquidation costs. So by taking them in now, these properties will not impact charge-off behavior unless there is a significant decline in the revenues or the valuations in those markets.

Dale Gibbons: And we just don't see that now. So it also helps stabilize charge-offs as well. So for all those reasons and the fact that we feel more comfortable running these ourselves, rather than having them wait and sit out there in a substandard category, we're able to take them in quicker and be more proactive.

More success in, leasing them up and improving the occupancy rates, as well as getting better rental rates, and that's what we did. The fact that, uh, revenues will grow in excess of expense also gives us the opportunity. If we need to, to fund improvements in these properties to bring them up to, uh, competitive levels in the, uh, in the cities, uh, that they're in. So it gives us that that, that, um, that that flexibility as well. And the last thing I'll say is, uh, when we take in these properties that Aro, they're at the current valuation of values less liquidation costs. So by taking them in now, these properties will not impact charge off Behavior. Unless there is a significant decline in the uh, revenues or the valuations in those markets and we, we just don't see that now. So it also helps stabilize charge offs as well.

So, for all those reasons, and the fact that we feel more comfortable running these properties ourselves, rather than having them wait, and sit out there in a substandard category, we're able to take them in quicker and be more proactive with it.

Dale Gibbons: Great.

Dale Gibbons: And just maybe if I can one more just as that pertains to the allowance. I know you guys get this question quite often, but now if you look kind of at the non-performing asset coverage ratio, it's closer to 60%. Is there any consideration in increasing the allowance just given the increase in non-performing assets? And I guess just how are you thinking about that from an investor perception standpoint versus what's actually coming in through the results?

Speaker Change: Great and just maybe if I can 1 more just as I as that pertains to the allowance, I know you guys get this question quite often. But now if you look kind of at the non-performing asset coverage ratio, it's closer to 60%. Is there any consideration in in in the allowance just given the, uh, increase in non-performing assets? Um, and I guess just how are you thinking about that from? Uh, any kind of an investor perception standpoint versus what's actually coming in through the uh, through the results.

Dale Gibbons: Yeah, well, let me let me start on this. And then and then I think Tim can pick it up. So just just talking about the you know, the reserve to NPAs. Um, you know, if, if there were to be a charge, or a recovery in one of these Oriel properties, it would not touch the allowance. The allowance is only for non, only for the loan book. These are already written down these properties that Ken's alluding to, as is appraised value, less disposition costs, they're rock bottom, they're cash flow positive. We don't see any risk there.

Dale Gibbons: But even if there were, it wouldn't affect the ACL number, it's really less relative to the loan growth. And we've talked about, you know, kind of what our reserve is.

Dale Gibbons: Yeah, thanks, Dale. The ACL, we have a lot of constituents in the ACL and the foundation of the ACL is built up from the asset values. Our assets that build the ACL are predominantly real estate secured assets. They're valued with conservative values. As those assets get distressed, we value more frequently. And as Dale just said, less the disposition cost. So with the clear line of sight that we have into the assets in our portfolio and our strategy around the disposition of those assets.

Speaker Change: Yeah, well, let me, let me start on this, and then and then I think Tim can pick it up. So just just talking about the, you know, the reserve to npas. Um, you know, if if there were to be a charge or a recovery in 1 of these Oreo properties, it would not touch the allowance. The allowance is only for non-performance only for the long book. Um, these are already written down these properties against alluding to as is appraised value. Less disposition costs, The Rock bottoms their cash flow positive. We don't see any any risk there, but even if there were, it wouldn't affect the ACL number. It's really that's relative to the loan growth that we've talked about, you know, kind of what our Reserve levels are.

Speaker Change: Yes, thanks Dale. Um,

the the ACL we we have a a lot of constituents in the ACL and the foundation of the acl's build up from the asset value. So our our assets uh in in the the build the ACL are predominantly uh, real estate secured assets. Uh, they're valued with conservative values as those assets get distressed, we value more frequently and uh, as as Dale just said, less the disposition cost. So, with the clear line of sight that we have

Dale Gibbons: We're absolutely comfortable with the values that we're carrying in our I might as well chime in to make it three for three. You know, not only do we believe our ACL reserve is not only adequate in its construction, but when you add it to CET-1, inclusive of AOCI, adjusted other comprehensive income, all right, otherwise known as adjusted CET-1, we are above our peer group median, peer group being $50 to $250 billion. And so I think that's the way we look at it. Are we appropriately capitalized? Yes, we are. And reserved? Yes, we are. And what you're seeing in the reporting so far to date, we're seeing a number of banks beginning to lower their reserve ratios and not increase them.

Dale Gibbons: We're keeping our steady at this.

3. Um, you know, not only do we believe our ACL Reserve is not only adequate and its construction, but when you added, uh, to C1 inclusive of aoci Justice, other comprehensive income. All right, otherwise known as adjusted C1 C1. We are above our peer group medium, peer group, being 50 to 250, uh, uh, billion dollars. And I so I think that's the way we look at it our way appropriately capitalized. Uh, yes we are. And reserved, yes, we are. And what you're seeing in the reporting so far to date, we're seeing a number of banks, beginning to lower their Reserve ratios, um, uh, and not increase them. We're, we're keeping our steady, uh, at this moment.

Dale Gibbons: Great, thank you for the question.

Speaker Change: Great, thank you very much. I think we expected this question.

David Smith: Thank you.

David Smith: Our next question comes from David Smith with Truist Securities. Please go ahead, David. Thank you. Can you help us understand the moving parts behind the deposit cost outlook? The 15 to 20% sequential increase in 3Q looked about in line with what we saw in 3Q last year, but the full year outlook seems to imply a 30 or 40% or so decline in 4Q, which is twice as big as what we saw in 4Q of last year, even though there was a benefit from falling rates last year. I think you just said that you lowered some of the more high cost, more seasonal mortgage warehouse deposits, which seems like it would dampen the seasonality, if anything.

Thank you.

David: Curious security case. Please go ahead. David

Thank you. Uh, can you help us understand the moving Parts behind the deposit cost Outlook the 15 to 20% sequential increase in 3. Key looks the bottom line with what we saw in 3 key last year but the full year outlook seems to imply a 30 or 40%, or so declining for a queue, which is twice as big as what we saw in 4k of last year even though there was a benefit from filing rates last year. And I think you just said that

Dale Gibbons: So if you could help us understand the cadence and the moving pieces behind that outlook, please.

David: you lowered, some of the more high cost more seasonal, mortgage Warehouse deposits, which seems like it would

Dampen the seasonality of anything. So if you could help us understand the, the Cadence and the moving pieces behind that Outlook please.

Dale Gibbons: Well, a couple things going on. So so we we have our ECRs don't aren't only from the mortgage warehouse piece, our HOA group pays ECRs at lower rates than and the MW sector. And so and that's continuing. and and so that's kind of part of what we're doing. We're also we're also showing that you know we do have you know a rate a rate decrease in September and another one in December so that you know kind of adds to that as well. Okay, so you're still expecting a mixed shift overall towards out of the mortgage warehouse towards the HOA and escrow and other lower ECR deposits?

Well, a couple things going on. So so we we have um, you know, our ecrs don't aren't only from the mortgage Warehouse piece. Our HOA group pays ecrs at lower rates than, um, than the MW sector and so and that's continuing to call. Um, and uh, and so that's kind of part of what we're doing. We're also, we're also showing that, you know, we do have, you know, a rate, a rate, decrease in September, and another 1 in December so that, um, you know, kind of adds to that as well.

Okay, so you're still expecting a mix shift, overall towards out of the mortgage Warehouse towards the HOA, and escrow and other lower ECR deposits.

Dale Gibbons: We are, we are, you know, and there's other areas that also, you know, we have, we're optimistic about what our near term prospects are.

Dale Gibbons: Some of the ones that, you know, that I was alluding to a little bit in my in my comments earlier, in terms of, you know, the digital space, our corporate trust operation, I mean, you know, we've only been at corporate trust for two years. And I'm not a lead table kind of person, because we don't have a lot of businesses that they actually produce lead tables for, but we're the seventh largest CLO trustee in the world. in a very short period of time, and frankly with bright prospects. Thank you.

We we we are we are we're you know as there's other areas that also you know we have we're optimistic about what our near-term prospects are. Um some of the ones that you know, that I was alluding to a little bit in my in my comments earlier um in terms of, you know, the digital space um our corporate trust operation. I mean you know we've only been at corporate trusts for 2 years and I'm not a lead table kind of person because we don't have a lot of businesses that they actually produce lead tables for but we're at the seventh largest Co trustee in the world.

uh, in a very short period of time,

Um and and frankly with bright prospects.

David: Thank you.

Ebrahim Poonawala: Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Think Good Morning. I guess just wanted to follow up. and Dale on the topic of, one, Dale's new role sort of overseeing all these deposit strategies and you emphasize . . Some of the regulatory changes, we are seeing movement on sort of the Digital Assets Act or Genius Act today. Is there a case to be made that... All of this combined should lead to a significant pickup on the deposit growth front relative to where we've been over the last 6-12 months for this year.

Thank you. Our next question comes from Abraham, Pune with Bank of America

Speaker Change: Please go ahead.

Speaker Change: Hey, good morning.

Speaker Change: I guess just wanted to follow up, uh,

Ken Beckon: Ken and Dale on.

Ken Beckon: the topic of 1, uh, Deals Deals, new role, sort of overseeing all these departments strategies and you emphasized,

Some of the regulatory changes we're seeing uh movement on sort of the digital assets act or genius act today.

Speaker Change: Is there?

Speaker Change: Is there a case to be made that?

Dale Gibbons: I'm just wondering, is there a pickup that we should anticipate?

Dale Gibbons: And obviously you've not given 26 guidance, but I'm trying to figure out if there's an inflection there in terms of where things are going. I think we have an opportunity to execute on these changes that you're alluding to, Ebrahim, and grow these businesses faster than they have in the recent years. I'm not sure that's going to drive total deposits a lot higher, as Ken indicated, that what we're, you know, we're also looking at, you know, this LFI, you know, hurdle at $100 billion. And we don't want to cross over that until we're ready. But we have opportunities within the deposit mix, both in terms of some broker costs, as well as additional maybe mortgage warehouse that has an elevated ECR, whereby we could swap that out, and should continue to push our NIM and our adjusted NIM higher throughout our forecast.

All of this combined should lead to a significant pickup on the deposit growth front, relative to where we've been over the last 6 to 12 months for for this year. I'm I'm just wondering, is there a pickup that we should anticipate? And obviously you've not given 26 guidance. But I'm, I'm trying to figure out if there's an infection there in terms of where things are going.

Speaker Change: I, I think we have an opportunity.

To execute on these, you know, changes that you're alluding to Abraham and um, and and grow these businesses, you know, faster than they have, uh, in the, in the recent past.

Speaker Change: Why we could swap that out and, um, and should continue to push our Nim and our adjusted Nim higher throughout our forecast Horizon.

Ken Vecchione: That's helpful. And I guess just on the topic of LFI, would the Fed moving the LFI threshold higher to, I think Ken mentioned, maybe to 250 billion, is that enough? Or would you want to see a change to sort of the legislation? I think Dodd-Frank had a threshold that moved from 50 to 100 back in 2018-19. Like, would you want to see that? Or just the Fed moving that through sort of the proposal process enough for you to start thinking about things differently? I was going to say, moving to 250, that gives us plenty of room to flex our muscles at a faster pace.

That's helpful and I guess just on the topic of lfi what the FED moving the lfi threshold higher to I think Ken mentioned maybe to 250 billion is that enough? Or would you want to see a change to sort of the legislation? I think Frank had a threshold that moved from 50 to 100 back in 2018, 19. Like would you want to see that or just the FED moving that through sort of The Proposal process enough for you to start thinking about things differently?

Speaker Change: Yeah, I

Ken Vecchione: First, I'll say there are some things that we like as we approach LFI readiness, and we're going to do them anyway, but this would give us a lot more room to grow at a faster pace. As I said, it also changes around the priority order in our technology stack of what we want to do, and allows us to focus a little faster on AI development, and more so on improvements either in our product and service offerings we have today, or bring in new products and services that we would do. So yeah, it would be a net benefit to us if they were to move it upwards.

Speaker Change: yeah, I I was going to say the same move with the 250 that gives us plenty of room uh, to uh, Flex our muscles at a faster Pace first. I'll say there are some things that we like, as we approach, uh, lfi Readiness and we're going to do that anyway. But, um, this would give us a lot more room to grow at a faster Pace. As I said it also changes around the priority order, in our technology stack of what we want to do and allows us to focus on a a little faster uh on AI development and uh more so on improvements either in our product and service offerings. We have today or bring in new products and services that we would do so uh yeah, it would be a net benefit.

Ken Vecchione: If they only moved it up to, say, 140 or 150 for indexing, as some people I've read have suggested, that would still give us a benefit, but it would say to us that if and when we were ready to do an acquisition of another bank, we'd still need to be ready to be LFI ready, because just an acquisition of a third of our current size would just put us about right at that revised 140, 150 level. But we're hopeful, and again, we hear this a lot from other people, not directly from the regulators themselves, that the consideration of 250 is in play, and if so, it would be beneficial to us.

to us if they were to, uh, move it upwards, if they only moved it up to say 140 or 150 for, um,

For, um, for indexing, as some people. I've read, uh, have suggested that would still give us a benefit, but it would say to us that, uh, if and, when we were ready to do an acquisition, uh, of another bank, we'd still need to be ready to be lfi. Ready? Because just an acquisition of a third of our current size would just put us about right at that revised 140150 level but we're hopeful um and again we hear this a lot from other people, not not directly from the from The Regulators themselves, uh, that the consideration of 250 um, uh, is in play and if so it would be beneficial to us.

Ken Vecchione: That's helpful, Kenan. You think the Fed can move on this? You don't need an act of Congress here at all in terms of making this happen, correct? No, not in terms of not in terms of these levels, you know, I wouldn't want to wait for Congress to do something there. Right.

Speaker Change: That's helpful Canon you think the FED can move on this? You don't need an act of Congress here at all in terms of making this happen, correct.

Ebrahim Poonawala: Got it. Thank you.

No, no not. Not in terms of not, in terms of these levels. Um, you know, I wouldn't want to wait for Congress to to do something there. Okay.

Speaker Change: Got it. Thank you.

Casey Hare: Our next question comes from Casey Hare with Autonomous Research.

Casey Hare: Please go ahead. Great, thanks.

Thank you. Our next question comes from Casey hair. With autonomous research. Please go ahead.

Dale Gibbons: Good morning, guys.

Dale Gibbons: Dale, congrats on the new role. I got some fun questions for you, but I do want to follow up on credit. So you guys obviously sound pretty optimistic that things are going to get better. But we heard that before in the fourth quarter, right, with the San Diego office. Is there anything you can disclose around the size of the marks? And then also, you know, what gives you so much confidence that this migration is behind you? Well, Casey, just to kind of reflect a little bit, this is the first time that we've called that we believe we're at a top.

Great. Thanks. Good morning, guys. Congrats on the new role.

um, I got some fun questions for you, but, uh, I do want to follow up on credit, um, so

You guys obviously sound pretty optimistic, um, that things are going to are going to get better. Um, but we, we heard that before in the fourth quarter, right? With the, the San Diego office. Um, is there anything you can disclose around the size of the marks? Um, and then also, you know what gives you so much confidence that this this migration is behind you.

Dale Gibbons: You know, we've said we previously we've said, you know, things are, you know, Steadyish, but we never said we think that this is the definitive, you know, kind of peak of where we are. And, and so, you know, what that looks like, you know, kind of going forward, what we're seeing in terms of, you know, kind of lease up activity, you know, dispositions of by other institutions, we think that things are stabilizing. And, and like I said, in these particular properties, it all comes down to, you know, what do you have, you know, we've taken, we've taken these back, they're they're, they're making money.

Well, thank you again Casey just to kind of reflect a little bit. Um, this is the first time that we've called that we believe we're at a top.

Uh, you know, we've said we previously, we said, you know, things are are you know, steady ish, but we never said, we think that this is the definitive, you know, kind of peak of where we are. And um, and and so, you know what that looks like, you know, kind of going forward. Um, what we're seeing in terms of, you know, kind of lease up activity, uh, you know, dispositions of by other institutions. Um, we think that things are stabilizing uh, and and like I said in these particular properties,

Speaker Change: It all comes down to, you know, what do you have?

Dale Gibbons: And, and so that should continue to support, you know, what's transpiring in terms of valuation. And in addition, you know, you had a big spike up in, in some of the in the, in the cap rates, you know, back when, you know, a lot of concern about a recession, which seems to have largely abated. And as a result of that, if these cap rates come down, that should improve not just the appraisal process, but the valuations and Okay, all right. Well, I mean, you guys talk about this being, you know, a shorter duration book, primarily, we're not really seeing these balances amortized lower, they're about the same size that they were two years ago.

Speaker Change: Um, you know, we've taken we've taken these back, they're, they're making money. Um, and uh, and so that should continue to support, you know, what's transpiring in terms of valuation and it in addition, you know, you had a big spike up in, uh, in some of the in the in the cap rates, you know, back when, you know a lot of concern about a recession which seems to have largely abated, and as a result of that, if these cap rates come down, that should improve, not just the appraisal process, but the valuations in the markets itself,

Dale Gibbons: So what is What is what is happening? When do we start to see this this this loan portfolio taper out?

Speaker Change: We're, we're not really seeing these balances advertised lower, you know, that they're about the same size that they were 2 years ago. So what is

What is uh what is happening? Like when do we start to see this? This this loan portfolio uh taper out.

Dale Gibbons: Hi, I'll take that. First on San Diego, we've taken every opportunity to describe the market that we played in here as not being central business district. I think we've often said, you know, 85 to 90% is outside of central business district, that San Diego asset happened to be the area that we deviated from that. So if I didn't say that clearly on prior calls, I'll say that now. So that truly is uncharacteristic of the portfolio. We've also said that these, these assets were bridge assets. This isn't a perm portfolio, this And in the repositioning, that goes with the fund.

Hi, uh, I'll take that first first on on San Diego. We we've taken every opportunity to describe, uh, the market that we played in here is not being, uh, Central business district. I think, I think we've often said, you know, 85 to 90% is outside of central, uh, business district that San Diego asset happens to be, uh, the area that we deviated, uh, from that. So, uh, if I, if I didn't say that clearly on prior calls, I I'll say that now, so that truly is uncharacteristic of the portfolio.

Um, we've also said that these these assets uh were Bridge assets. This isn't a perm portfolio, this this was not structured going in as a perm portfolio. So these assets reside their their sponsor back with institutional sponsorship and they uh,

They had resided in funds alongside of other other assets. So the assets are in footprint. Predominantly they're in our backyard, their assets that we know that were highly familiar with and uh,

Dale Gibbons: So if the fund isn't funding its portfolio, we take those assets, get them repositioned, get them on a faster path. So we're confident because we know the assets. We have the assets marked at what we feel are conservative values, less the disposition cost, and we've got a plan and strategy on each of the assets that we can see unfold out in front of us. Gotcha.

And in the repositioning that goes with the with the fund. So if the if the fund isn't funding its portfolio we take those assets get them repositioned get them on a a faster uh faster path. So we're we're confident because we know the assets because we have the assets marked at what we feel are conservative values less uh the disposition costs and we've got a plan and strategy on each of the assets that we can uh we can see uh on fold out in front of us.

Dale Gibbons: Thank you.

Dale Gibbons: Just one more on the loan growth front. I know you guys, you guys are about the halfway mark of your guide. headquarters in. Historically, the second half has been very strong for you. You know, just how are pipelines? Is there an opportunity to do better than that five billion? And and how? How do you expect loan yields to play out in the back? So on the loan growth, I would say that we're not going to move off of a $5 billion guide. We're tracking to that. I think we're at a run rate that's above, on your annualized R, number for the second quarter growth.

Gotcha, thank you, just 1, 1 more uh on the loan growth front. Um, I know you guys you guys are about the halfway mark of your guide. Um, 2 quarters in you historically? The second half has been very strong for you, you know? Just how our pipelines is there an opportunity to do better than that 5 billion and and how uh how do you expect the loan yields to play out in the back half?

Speaker Change: So um on the loan growth, I would say that uh we're not going to move off of a 5 billion dollar guide. We're tracking to that um

Dale Gibbons: We're at a run rate that's above other reporting banks and above the industry. So $5 billion seems to be the appropriate level. And you'll see loan yields come down a little bit as you go through the course of the year, just because, as Dale mentioned, we're forecasting a September rate cut of 25 and then one in December of 25. So naturally, you'll see our loan yields follow that. Thank you.

I think, uh, you know, we're we're at a run rate that's above on your annualized. R number for the second quarter growth. We're at a run rate, uh, that's above, uh, other reporting Banks and above the industry. So, uh, 5 billion seems to be, uh, the uh, appropriate level. Um, and uh, you know, you'll see, uh, loan yields come down, uh, a little bit as you go through the course of the year. Uh, just because as Dale mentioned, we have, we're forecasting, a, a September rate cut of 25 and then uh 1 in December of 25. So naturally you'll see our loan yields follow that path.

Andrew Terrell: Our next question comes from Andrew Terrell with Steven. Please go ahead, your line is now open. Hey, good morning.

Speaker Change: Thank you. Our next question comes from Andrew Terrell with Stevens.

Speaker Change: Please go ahead. Your line is now open.

Dale Gibbons: And Dale, congrats on the new role. um just a question on uh kind of the oreo and and also kind of a point on the the criticized loans but just following the move this quarter i mean the way you describe it it sounds like it's an advantageous situation for you guys to take these in should we expect um you know we could see more oreo built throughout the throughout the year into into 2026 even or have you guys kind of identified all the properties that that make sense from that standpoint Sure, thanks. We expect to see this flat to declining as we move forward.

Andrew Terrell: Good morning. Um, and Dale, congrats on the, uh, the new role.

um just a question on uh kind of the Oreo and and also kind of a point on the the criticized loans but just following the move this court, I mean the way you described it it sounds like

Andrew Terrell: It's an advantageous situation for you guys to take these in.

Should we expect? Um, you know, we could see more Oreo built throughout the throughout the year or into into 2026 even or have you guys kind of identified all the properties that that make sense from that standpoint.

Dale Gibbons: So we will move assets out. If additional assets come in, we expect that the pace of moving assets out will outpace that. Again, we've been working the same portfolio, as we've discussed predominantly office. In fact, it's all office. And we're familiar down to the asset level at the most senior levels of our management. So the management is fully engaged in the strategy. We know the assets well, and we've got a clear line of sight. Yeah, the occupancy is up to 71% now. And we took that in at the very end of October. So that's a good working example of getting our hands around that property and being very constructive around leasing it up and rental rates.

Yeah, sure. Thanks we uh, we expect to see this flat to declining as, as we move forward, so, uh, we will move assets out.

Speaker Change: Okay, I appreciate it. And then, on the, on the San Diego loan that was put into Oreo in 4, q last year. I think, at the time, you, you mentioned that

The occupancy had improved, I think it was mid-40s up to mid-60s in a in a very short time frame. I was hoping you could just refresh this on on the status of that, that individual property.

whether occupancy is continued to to improve their just any more color, you can provide

Dale Gibbons: And that's what gives us some of the confidence that we could go ahead and do it with the other properties. And we are beginning to do it with the other properties. Thank you.

Speaker Change: Yeah, so the occupancy is up to 71% now and we took that in at the very end of October. So that's a, a good working example of getting our hands around that property and and uh, being very constructive around, leasing it up. Uh, around rental rates and that's what gives us some of the confidence that we could go ahead and and do it with the other properties. And we are beginning to do it with the other properties.

Bernard Von Gizycki: Our next question comes from Bernard von Gizycki with Deutsche Bank. Please go ahead. Hey guys, good morning.

Thank you.

Speaker Change: Our next question.

Speaker Change: Bernhard Von guziki with Deutsche Bank.

Speaker Change: Please go ahead.

Dale Gibbons: Just a modeling question. Just on the insurance costs, you have initiatives to pass them back to large depositors after previously absorbing them. The insurance costs were down slightly during the quarter. I know you can charge them through service charges if they want to keep the insurance, but any color or migration, are there still accounts you need to pass costs to or has this been mostly taken care of?

Dale Gibbons: For more information visit www.FEMA.gov It's largely behind us, I think, in terms of kind of the migration of what we're pushing back. Your mix matters there, too. I was pleased to see that, you know, with our deposits climbing, and it actually fell a little bit. Part of that is, you know, we've been paying down broker deposits every quarter and consecutively, including in Q2 here. And there's an elevated cost associated with those. If you swap out broker deposits for a non-broker, you're going to see a lower FDIC charge from that.

Speaker Change: Uh Hey guys. Good morning. Uh just have a modeling question um just on the insurance costs. You have initiative to pass them back to large depositors after previously absorbing them uh the insurance costs were down slightly during the quarter. I know you can charge them through service charges that they want to keep the insurance. But any color or migration, are there still accounts you need to pass cost to or has this been mostly taken care of?

It's largely behind us. I think in terms of kind of the the migration of what we're pushing back. Um you know your mix matters there too. I you know I was I was pleased to see that, you know, with our deposits climbing and it and it's actually fell uh, a little bit. Um, a part of part of that is um, you know, we've been paying down a broker deposits, every quarter, uh in consecutively including uh including in Q2 here. And um and there's a there's an elevated cost associated with those. So if you swap out broker deposits for non-brokered, um you're going to see a lower FTA if you charge from that alone,

Dale Gibbons: And then just another modeling question just on the equity investments, the 3 million gains during the quarter, was that mostly related to the reversal of losses from 1Q? Or just any color expectations you expect for those losses to accrue back? Or anything you can just share for expectations in the second half for equity investment? You know, you know, that wasn't a recovery of a prior charge. But we see, you know, we don't see anything there that leads us to believe that there, you know, that we're going to be, you know, you know, slower than what we've been, you know, historically, there's a loose correlation with market valuations.

And then just uh, another modeling question just on the equity Investments. Uh, the 3 million games during the quarter. Uh, was that mostly related to the reversal of losses from 1 Q uh or just any color or expectations, you expect for those losses to crew back uh or anything can just share for, um, expectations in the second half for Equity investment lines.

Dale Gibbons: As you see, you tend to see more liquidity events from, you know, say, a public company, or even a private one, that now has an elevated valuation from looking at other public companies, that that tends to move it forward also. And if anything, you know, we're, we're in that kind of environment.

You know, you know, we that wasn't a recovery of a prior charge, um, but we see, uh, you know, we don't see anything there that leaves us to believe that they're, you know, that we're going to be, you know, you know slower than what we've been, you know, historically there's a, a loose correlation with Market valuations. Um, as you see, you tend to see more liquidity events from, you know, say a public company or even a private 1. That that now has an elevated valuation from looking at other public companies, uh, that that tends to move it forward. Also, um, and uh, if anything, you know, we're we're in that kind of environment presently.

Dale Gibbons: Thank you.

Anthony Elian: Our next question comes from Anthony Elian with JP Morgan. Please go ahead. Hi, everyone.

Anthony Alan: Thank you. Our next question comes from Anthony Alan with JP Morgan.

Please go ahead.

Dale Gibbons: Dale, congrats on the new role, and I look forward to working with Vishal when he joins. My first question, you raised the outlook for ECR deposit cost two consecutive quarters. Now, I get that the rate outlook is volatile, but if we don't get any rate cuts in the second half, could you size up the impact to ECR deposit cost expense, assuming the same dollars of ECR deposit growth? Maybe we can pick that up on the later call, you know, kind of with that kind of detail. But yeah, yeah, we can discuss that. Fair enough. Okay, then keep my phone.

Anthony Alan: Hi, everyone Dale. Congrats on the new role and I look forward to working with Michelle when he joins. Uh, my first question, you raised the outlook for ECR deposit costs 2 consecutive quarters. Now I get that the rate Outlook is volatile but if we don't get any rate Cuts in the second half, could you size up the impact to ECR deposit cost expense assuming the same dollars of ECR deposit growth?

Uh, maybe we can pick that up on the, uh, on the later call. Um, you know, kind of with that kind of detail. But um, yeah, yeah. We we can discuss that.

Dale Gibbons: Go ahead.

Fair enough. Okay. And then go ahead.

Dale Gibbons: I would just like to keep in mind that our adjusted net interest margin, which includes the deposit costs, we have it projected to rise for the year. So when you talk about deposit costs and you talk about rate movement when you get to the call later on, keep in mind that if there is no rate reduction in the back half of the year, that means our net interest income is also going to be higher as well. So you can't look at any one item in isolation and say, what will it do to expenses? You've got to look at it as what will it do to PP&R, that's all.

Anthony Alan: I was just I was just in mind that our adjusted, uh, net interest margin, which includes the deposit costs. You know, we have it projected to, to rise for the year. So, when you talk about deposit cost and you talk about rate movement, when you get to the call later on, uh, keep in mind that uh, if the, if rates, if if there is no rate reduction in the back half of the year, that means our net interest income is also going to be higher as well. So you can't look at any 1 item in isolation and say what we'll do to expenses. You got to look at is what we'll do to ppnr, that's all I'd say.

Dale Gibbons: Thank you.

Dale Gibbons: And then my follow up from Ebrahim's question earlier on the deposit opportunities, Dale, you noted in the prepared remark, you saw 400 million of quarterly deposit growth in the digital assets segment. And that's without the impacts from the Genius Act that passed yesterday. I know you've previously said that digital assets are about 2% of the company's deposits, but how large could you see that concentration getting to over time? And then is all the infrastructure in place to support additional deposit growth from the digital assets segment and from the deposit segments that you'll be leading up?

Dale Gibbons: Thank you. Yeah, yeah. So we have a limit right now of 4% on that category. I can see that moving higher. I got to tell you, one thing we're not going to do is we're not going to compromise our diversification, you know, even with the, you know, a, you know, a fast, fast moving, you know, track on or a particular business line, digital or something else. So, so we think having that balance is really important in terms of our funding architecture. But, but I think there's room to have that continue to move forward. You know, you know, like I said, I'm, I'm really enthusiastic about, you know, kind of what I see on the horizon in this space and others among these business lines.

Impact from the genius act that passed yesterday. I know you've previously said that digital assets are about 2% of the company's deposits. But how large could you see that concentration getting to over time? And then is all the infrastructure in place to support additional deposit growth from the digital asset segment and from the deposit segments that you'll be leading up. Thank you.

Dale Gibbons: And I think that will give us optionality in terms of, you know, pushing out more expensive funds, you know, having, having growth liquidity to be able to continue, you know, good underwriting on our loan portfolio. Thank you.

Yeah. Yeah. So we have a limit right now at 4% on that category. I could see that moving higher. I got to tell you 1 thing, we're not going to do is we're not going to compromise our diversification, you know, even with the, you know, you know, a fast, a fast moving, you know, track on or a particular business line, digital, or, or something else. So so we we think having that balance is is really important in terms of our funding architecture. But, uh, but I think there's room to, to have that continue to move forward. Um, you know, you know, like I said, I'm, I'm I'm really enthusiastic about, you know, kind of what I see on the horizon, uh, in this space and others among these business lines. And I think that will give us optionality in terms of, you know, pushing out, more expensive funds, you know, having um having growth liquidity to be able to continue, you know, good underwriting on our loan portfolio.

Ken Vecchione: We have no further questions and so I'll turn the call back over to Ken Vecchione for closing remarks. Okay, well, thank you very much for your time and attention today.

Ken Vioni: Thank you, we have no further questions and so I'll turn the call back over to Ken vioni for closing remarks.

Operator: We look forward to our next earnings call and have a great day and a good weekend. Thank you all. Thank you everyone for joining us today.

Okay. Well uh thank you very much for your time and attention today. Uh we look forward to our next uh earnings call and uh have a great day and a good weekend. Thank you. All

Operator: This concludes our call and you may now disconnect your lines.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.