Western Alliance Bancorporation Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 15 speakers on the call.

Operator

Day, everyone. Welcome to the Western Alliance Bancorporation's 2nd Quarter 2023 Earnings Call. 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 Myles Ponalik, Director of Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Thank you, and welcome to Western Alliance Bank's Q2 2023 conference call. Our speakers today are Ken Vecchione, President, Chief Executive Officer and Dale Gibbons, Chief Financial Officer and Tim Bruckner, Chief Credit Officer. Before I hand the call over to Ken, please note that today's presentation contains forward looking statements, which are subject to risks, Uncertainties and assumptions. Except as required by law, the company does not undertake any obligation to update any forward looking statement. For 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 8 ks filed yesterday, which are available on the company's website.

Speaker 1

Now for opening remarks, I'd like to turn the call over to Ken Baccione. Thanks, Miles, and good morning, everyone. As usual, I'll make some brief comments about our financial results and action items, And then I'll turn the call over to Dale, who will review the quarterly results in more detail before opening the call for Q and A. Our Chief Credit Officer, Tim Bruchter, as Byl said, is here with us In many ways, this quarter represented a transitional period for Western Alliance following the events of mid March as our firm and our clients increasingly return to a sense of normalcy. We continue to successfully execute on the balance sheet repositioning strategy we laid out last We exceeded our liquidity guidance by growing deposits by $3,500,000,000 and repaying over $6,000,000,000 in short term borrowings.

Speaker 1

For the Q2, WALT generated total net revenues of $669,000,000 net income of 216,000,000 and EPS of $1.96 We maintain strong profitability with return on average asset and return on average tangible common equity of 1.23% 18.2%, respectively, which grew tangible book value per share by $1.53 to $43.09 or 18% year over year and will continue to support building capital levels in the quarters to come. We achieved significant progress On the immediate and short term objectives identified last quarter to establish a sound foundation for Wall to sustain ongoing client and financial success. Notably, deposits grew $3,500,000,000 and exceeded our $2,000,000,000 quarterly guidance. Growth was diversified across business lines and included brisk core deposit growth from new and returning customers. Net liquidity growth of $2,000,000,000 allowed us to significantly reduce higher cost wholesale borrowings.

Speaker 1

We'll continue to expeditiously execute our balance sheet repositioning strategy and completed $4,000,000,000 in total asset dispositions in Q2, which included $3,500,000,000 in loan dispositions ahead of the $3,000,000,000 outlined in Q1. Meaningful deposit growth and asset dispositions Rolling Walls loan to deposit ratio to 94% and allowed us to rapidly reduce reliance on higher cost FHLB borrowings by $6,100,000,000 over the quarter. I'm proud to report core deposits have rebounded Another $3,200,000,000 quarter to date, meaning loss deposit levels are now $600,000,000 above our year end 2022 balance. CET1 capital of 10.1 percent Increased from 9.4% on March 31 and 8.7% or 140 basis points since Q3 2022 And we initially announced the bank's capital building initiative through organic capital generation without equity issuance. Finally, we continue to focus on meeting our core client banking needs in order to cultivate strong long term relationships.

Speaker 1

Leveraging third party products Specifically, Euro reciprocal deposits has lifted our insured and collateralized deposit levels to 81%, one of the highest among large U. S. Banks. As we move through the back half of the year, we believe bank investors will place more emphasis on balance sheet strength, stressing the fundamentals of growing capital, Good liquidity, deposit cost composition and granularity, stable asset quality, moderate and thoughtful loan growth and producing predictable and sustainable PPNR. The bank's diversified funding strategy continued to focus on growing Attractive funds from a diverse set of clients and channels in order to prioritize repayment of the more expensive wholesale funding sources And then to optimize deposit balances from lower cost sources to deploy into superior risk adjusted lending opportunities as we have done historically.

Speaker 1

Driving the $3,500,000,000 of deposit growth was significant new and return on customer activity throughout Western Alliance. In Q2, we attracted $1,000,000,000 from approximately 1,000 new and returning commercial relationships at an attractive average total deposit cost 1.98 percent with notable contributions from mortgage warehouse, regional banking and settlement services. Over $400,000,000 of net new deposit money was in non interest bearing DDA. Our commitment to Forrester multiproduct customer relationships The key to onboarding new deposits in a very competitive environment. Additionally, we will utilize other diversified sources of deposits to accelerate repayment of wholesale borrowings and return to prudent rulebook.

Speaker 1

Our recently launched online consumer channel Demonstrating steady progress providing another source of uncorrelated liquidity and generated approximately $700,000,000 this quarter at attractive rates compared to the marginal cost of repaid borrowers. Going forward, continued deposit channel optimization and growth, New and returning core client commercial relationships will lower the proportion of funds generated in broker CD market. Now, Dale will take you through our financial performance.

Speaker 2

Thanks, Ken. For the quarter, Western Alliance generated net income of 216,000,000 EPS of $1.96 and pre provision net revenue of $282,000,000 Net interest income decreased $60,000,000 during the quarter to 550, Mostly from elevated higher cost short term borrowings that were materially reduced per quarter end. Q2's net interest income should be considered a trough in which Q3 and Q4 levels should ascend. Non interest income increased to $119,000,000 from an adjusted level of $102,000,000 in the second quarter. As a reminder, loans marked in Q1 at a net loss of $141,000,000 as part of our balance sheet repositioning efforts Responsible for negative fee income last quarter on a reported basis.

Speaker 2

On an operating basis, non interest income was $18,000,000 higher from Q1. The green shoots we signed with mortgage last quarter were evident again in the Q2 as Americold revenue increased to $13,000,000 to $86,000,000 We We remain cautiously optimistic continued stabilization, improving margins and profitability momentum is sustainable as AmeriHome capitalizes on the exit of a major competitor from the correspondent lending channel earlier this year. Production margins widened closer to normalized levels of 43 basis points as the industry is rationalized and win rates continue to improve. Other non interest expense growth was driven by higher insurance costs related to elevated insured $22,000,000 is indicative of a return to a more normalized credit environment. We remain conservative on macro assumptions.

Speaker 2

And as a commercial bank, the outlook Commercial real estate is a key driver that informs our opportunities. Our allowance for credit losses modeling assumes an 80% likelihood of a recession using Moody's Analytics scenarios. A lower tax rate was beneficial to earnings this quarter, and we expect to go forward normalized rate as an average of the last 2. We made substantial progress in our balance sheet repositioning and surgical asset disposition efforts in the Q2 to accelerate higher capital and liquidity building. These dispositions complemented our organic earnings and contributed approximately 43 basis points of incremental CET1 capital.

Speaker 2

$4,000,000,000 of asset dispositions were completed, including loan sales and run offs, primarily in an Equity Fund Resources, syndicated loans and mortgage warehouse businesses. The Equity Fund Resource credit link note was also fully unwound. Loans held for investment increased $1,400,000,000 to $47,900,000,000 Deposits increased $3,500,000,000 which brought balances to $51,000,000,000 at quarter end. Mortgage servicing rights balances of $1,000,000,000 rose 11% during the quarter. Total borrowings were reduced by $6,300,000,000 to $11,500,000,000 due mostly to pay downs of Federal Home Loan Bank borrowings.

Speaker 2

At March 31, Remaining EFR credit linked note was also fully redeemed, which completed the unwind of $532,000,000 of CLNs year to date. Deposit momentum has continued into the Q3 as deposits are $3,200,000,000 higher from June 30. Total held for investment loan growth of $1,400,000,000 consisted of $700,000,000 of organic loan growth, primarily from mortgage warehouse, Regional Banking Divisions and Resort Finance. Improved liquidity from deposit growth well in excess of loan growth allowed us to reclassify $700,000,000 of held Non interest bearing DDAs comprise a third of our total deposit mix with approximately half having no cash payments of earnings credits. Turning now to our net interest drivers.

Speaker 2

The securities portfolio grew $1,000,000,000 to $10,100,000,000 as we look to bolster our high quality liquid asset balances. The yield expanded 8 basis points to 4.76 percent, largely from floating rate securities benefiting from higher rates. We continue to benefit from higher reinvestment rates as approximately $1,300,000,000 and securities are expected to mature in the second half of this year, $1,100,000 additionally in 2024. The spot rate for the entire portfolio was 4.85% at quarter end. Healthcare investment loans increased $1,400,000 and the portfolio yield decreased 20 basis points to 6.48.

Speaker 2

At quarter end, the spot rate was 6.74. Interest bearing deposit costs rose 33 basis points to 3.08 percent on a $3,000,000,000 or $3,000,000,000 increase to 34,000,000,000 The elevated costs resulted from higher interest rate environment, which offset more tempered non interest bearing demand deposit growth. Total cost of funding rose 58 basis points to 2.85 percent from higher utilization of wholesale borrowings at an average cost of 5.6%. $6,000,000,000 of these borrowings were repaid, which produced a $3,400,000,000 difference between average and end of period balances. Optimizing the funding mix with more core and reciprocal deposits in conjunction with the $6,000,000,000 in Federal Home Loan Bank pay off pay downs later in the quarter.

Speaker 2

This is just for improving funding costs to support our net interest margin guide. Moving down further into our funding base, we have actively utilized We believe these core client relationships have been fortified through this product enhancement, making them exceptionally stable. Overall, net interest income decreased approximately $60,000,000 or 9.8 percent over the prior quarter due to compressed net interest margin and average earning assets $562,000,000 mostly stemming from balance sheet repositioning actions. Net interest margin compressed 37 basis points to 3.42 With a higher interest expense from outsized higher cost borrowings. This excess liquidity is generated with deposit growth greater than loan growth and non AmeriHome held for Sales are liquidated.

Speaker 2

We expect to pay down additional repo lines costing sulfur plus 2% and should contribute to funding cost tailwinds. The effect of these dynamics can start to be seen in the expansion of the June NIM to 3.5%. Our efficiency ratio of 57% improved by about 500 basis points from the 2nd quarter, though our adjusted efficiency ratio increased from 50% to 50% from 43% in the prior quarter. Higher insurance costs from elevated brokered and insured deposits as well as lower net interest income from increased interest expense were the main reasons for this change. We still view mid to upper 40s Adjusted efficiency is the right level and expect expenses to align with our core run rate of revenue as we look to optimize additional work streams throughout the bank.

Speaker 2

Information net revenue was $282,000,000 during the quarter. Solid profitability was sustained with Q2 return on average assets of 1.23 percent return on average tangible common equity of 18.2 Strong PPNR provides capital flexibility to absorb provision expense and credit losses if warranted, while still growing the balance sheet and attaining higher CET1 Given the increased attention of the commercial real estate sector, we're providing additional details on our CRE investor and office portfolios, as as well as our overall early identification and elevation credit mitigation strategy. This proactive migration approach has historically produced Lower Loss to Merchants. Our CRE investor underwriting strategy rests on a foundation of low loan to cost underwriting in submarkets We have deep experience with strong financial sponsors. As a reminder, our financing structures carry no junior liens or mezzanine debt.

Speaker 2

This enables maximum flexibility in working with clients and sponsors. We have low uncovered tail risk as 92% of the portfolio has LTVs below 70%. And these LTVs are based upon the most recent appraisals and assuming commitments are fully funded. The International Real Estate Office accounts for just 5% of total loans. We have previously discussed our focus on shorter term bridge loans repositioning office projects in suburban areas.

Speaker 2

Our exposure to true central business strict areas that we will be most vulnerable to work from home risks are minimal to just 3% of office loans. We have redesignated some midterm exposure away from For example, we do not have CBD office loans in New York, Boston, Chicago, Atlanta, Houston or Dallas. With LTVs, you'll notice only 3% of office and then 80% are greater loans of value, which aligns with our central business district exposure, primarily focused on in demand Class A to B plus office properties and 94% of Class A properties have LTVs below 70 The entire Omnice book carries LTV of 55%. Finally, we are not facing a large maturity Well, as approximately 3 quarters of loans come due in 2025 or later. Earnings and asset quality trends in light of the present environment and due to With a sharp increase in interest rates over the past 12 months, we have completed a proactive comprehensive review of our commercial real estate portfolio, and the presentation is reflected in loan migrations this quarter.

Speaker 2

As part of our early identification and early elevation credit mitigation strategy, and has served us well. We proactively move loans into special mention when cash flow may be curtailed in the present environment Despite having well supported collateral values and excess in the gains rates, sponsorship remains strong and the loans still turn. We do this to ensure attention and monitoring at the highest levels within our credit organization as we require the sponsors to re margin the loan established This is an important element of our credit control process and established process for more than 10 years. As a result of these efforts, special management loans increased to $694,000,000 or 1.45 percent of funded loans with $250,000,000 or 2 The third, the migration coming from office and hotels. Classified assets increased $145,000,000 to 89 basis points of total assets.

Speaker 2

The increase in classified assets was driven by $175,000,000 office loan in Downtown San Diego, which makes up the preponderance of the Central We don't anticipate meaningful losses at this property as 82% leased, Earnings appraisal exceeds the outstanding loan amount and all cash flow will go to pay down this credit. Our proactive identification and resolution process results in lower realized losses. Over the last 10 years, less than 1% of special mention loans have become losses. And within commercial real estate investor properties, less than 10 basis points of special mention loans have migrated to loss. Looking at the next two slides, you'll see the results of our early identification, elevation, negotiation and resolution process as a result of in best in class loss rates over the last 10 years.

Speaker 2

For us at Western Alliance, it's about the process, which sometimes produces earlier criticized and Classified designations, but at the end of the day leads to low net charge offs. On average, we have ranked in the top third among asset peers for adjusted credit loans as The difference between our ranking on adversely graded loans Our number one position of historical credit losses highlight the success of our proactive credit mitigation strategy. Quarterly net loan charge offs were $7,400,000 or 6 basis points of average loans compared to net loan charge offs of $6,000,000 or 5 basis points in the Q1. Our total loan ACL rose almost $13,000,000 from the prior quarter to $362,000,000 due to higher provisioning and low loan loss rates. Total loan allowance for credit losses to funded loans increased 1 basis point to 76 basis points in Q1.

Speaker 2

It is 94 basis points when loans covered by credit linked notes are excluded. The allowance for was 141% We feel well positioned in an uncertain economic environment based on the business transformation since the global financial Our loan portfolio is diversified across risk segments with almost a quarter of it either credit protected, government guaranteed or cash secured. And over half of the portfolio is either insured or resistant to economic volatility. These percentages align with weightings recorded before we embarked on our balance sheet repositioning initiative late in the Q1. Of note, our lower average loss rates in the resilient and more sensitive We discussed reprioritizing building capital back to pre merger levels on our Q3 2022 earnings call.

Speaker 2

Hence then, CET1 Capital has grown from 8.7% to 10.1% and is up over 70 basis points since the Q1. Our tangible common equity to total assets rose 50 basis points from the Q1 to 7%. We remain committed to achieving a medium term CET1 Our target of 11% is prudent considering the heightened regulatory tension regarding appropriate capital levels. We also expect increased excess capital will provide more financial and strategic optionality in the future. Looking at the strong combination of insured deposits and high capital to make depositors comfortable with the stability of their financial institution, Western Alliance has materially moved its insured deposit levels to among the highest in the nation compared to the largest banks.

Speaker 2

Capital has also lifted into the top third even adjusting for fair value marks in both the available for sale and healthy maturity securities portfolios. Inclusive of our quarterly cash dividend payment of $0.36 per share, our tangible book value per Share increased to $1.53 in the quarter to $4,309 Western Alliance's compelling long term tangible book value per share divergence from peers remains intact. It increased over 6 times that of the peer group since the end of 2013, which compares to a compound annual growth rate of nearly 20% of economic cycles and market disruptions. This outperformance is still 4 times that appears when adding common dividends back. I'll now hand the call back to Ken to conclude with closing comments.

Speaker 1

Thanks, Mel. Our guidance for the rest of 2023 continues to be driven by the strategies and priorities laid out in our prior earnings calls. So let me tell you what you can expect from here. Regarding capital, Having exceeded our immediate CET1 target of 10% in Q2, we expect continued, although more gradual growth in our capital ratios It was a medium term CET1 ratio target of 11% in 2024. This will be driven by our continued strong return on average Core deposits are expected to grow at approximately $2,000,000,000 per quarter and exceed more muted loan growth by approximately $1,500,000,000 This will lower our loan to deposit ratio over time towards a mid-eighty percent target.

Speaker 1

Net interest margin is expected to rise modestly from our Q2 trough of 3.42% and land in the range of 3.5% to 3.6% for the second half of twenty twenty three based on our successful repayment of borrowings this past quarter and the cost of new deposit funding. Our efficiency ratio, excluding the impact of deposit costs, Should decline slightly to the high 40s given the reduced borrowing costs and higher asset yields. Asset quality remains manageable as it returns to more normalized levels. We expect credit losses to be 5 to 15 basis points through the economic cycle. Overall, for the second half of twenty twenty three, we expect quarterly operating PPNR to remain consistent to Q3 results and begin to climb as we exit the year.

Speaker 1

As we continue to reposition the balance sheet and We continue to reestablish our core deposit and loan growth trajectory. We see Western Reliant as an even better institution and well positioned for the future. We view our earnings performance being driven by balance sheet growth, improving margins and efficiency along with continued strengthening in our mortgage operations that should result in quarterly operating PP and R consistent to Q2 2023 results and then grow thereafter. At this time, Dale and Tim and I are happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. If for any reason you would like to remove that question, please press star followed by a 2. As a reminder, if you are using a speakerphone, please remember to pick of your handset before asking your question. The first question will be from the line of Ben Gurlinger with Hovde Group.

Operator

Your line is now open.

Speaker 3

Hey, good morning everyone.

Speaker 1

Good morning, Ben.

Speaker 3

I was curious if we could I mean, I'm sure we're going to get a lot of questions on credit because Deposits seem to have cleared themselves up, but if we could just take a moment to kind of just walk through the guidance a little bit further. I was curious on what are you guys assuming for just average earning assets for the back half of the year with that margin guide? And it seems like You already have that spread difference of plus $2,000,000,000 per quarter, which gives you $4,000,000,000 in deposits. And then on loans, it's plus $1,000,000,000 So you already have that $3,000,000,000 essentially now. Can we see pay downs of debt pretty immediate in the Q3?

Speaker 3

Or do you think it's A bit more granular throughout the second half of the year.

Speaker 2

Well, we still have Couple of $1,000,000,000 that fund our $3,000,000,000 that we have in our held for sale loans, with repo relationships with another commercial bank. And those loans and those funds that we have borrowed from them cost us SOFR plus 200 basis points. So Paying that down with some of the liquidity we bring in is going to help improve our net interest income, but doesn't really change But in addition to that, we do expect that a portion of these dollars we bring in Are going to be used to provide new credit opportunities to our clients. And so it's going to be a combination of the 2. So I'm looking for earning assets Continue to climb, but not as fast as the deposit growth.

Speaker 3

Got you. Okay, that's helpful. And If we could just take a moment to think just kind of holistically about credit here. It seems like you've got a decent amount of NPL increases. And the reserve was essentially the same, a modest uptick.

Speaker 3

So with Credit like notes being a little bit less of importance now that we've kind of had the strategic repositioning. How do we think about the allowance going forward in terms of like a GAAP percentage relative to loans?

Speaker 2

Well, a couple of things. In terms of what the ratio is, I think it's really important to note How much would our charge offs have been and why that number may be screens lower relative to other institutions. We don't have consumer loans, which have a constant burn rate of losses. And in addition, I mentioned the Moody's scenario as well. So we took 60% of their consensus forecast.

Speaker 2

That is that has 2 2nd quarters, Q3 and Q4 of this year of a recession in it. And then we took 20% weighted on S4, which is the severe recession whereby You are seeing contraction in commercial real estate values in excess of 30%. What's important about that is because we're a low advanced rate lender, Even with significant reductions in terms of valuation, we still don't incur losses because the bar borrower still has Skin in the game, these sell off equities they want to protect and they're still willing to negotiate with us in terms of how we can come to a solution set together. So it's really if you were to lend it at a much higher rate, we wouldn't be in that position. But because of our low advance rate, that's been a really key to our strong asset quality.

Speaker 1

But if you're asking a question about the provisioning going forward, I would say it's about in the same vicinity going forward as Q2's provision For Q3 and Q4.

Speaker 3

Got you. That's very helpful color. Great to see you guys go from defense to offense so quickly. Appreciate the color guys. Thank you.

Operator

Thank you. The next question will be from the line of Casey Haire with Jefferies. Your line is now open.

Speaker 4

Yes, great. Thanks. Good morning, guys. Just want to follow-up on the borrowing pay down. So just you guys have a PPNR guide of around $280,000,000 what you have here in the second quarter.

Speaker 4

Just wondering the pace Of what the guide assumes for borrowing pay down and timing as well? Like how low does that $10,000,000,000 go?

Speaker 2

Well, I don't have a number for you, Casey, exactly. What I would say is we're trying to do 2 things here. 1 is pay down further, Particularly the more expensive lines I mentioned. But secondly as well to provide more liquidity for our clients. So the combination of those 2.

Speaker 2

So is it going to I don't have a number in terms of what exactly that looks like, That's the trajectory we're on. That's the trajectory we started to be on in the second quarter. And I think we're going to be more focused on that as we complete to 2023.

Speaker 4

Okay. And given your given the progress you guys have made on the deposits quarter to date, which is Pretty strong. Have you has there been any pay down Quarter to date, you're making use of that deposit growth. Do you have a borrowing balance as of July 17?

Speaker 1

Yes, this is Ken. Yes, we do. Let me just take you to the deposits. Yes, we're seeing great deposit growth so far early into the quarter. To remind everyone, that's the natural flow of our deposits.

Speaker 1

They grow early. And just about in the next couple of days, we're going to see some pay downs Coming from our warehouse lending group for P and I and T and I accounts. And so those deposits will shrink, Okay. So for us, we have the borrowing scheduled to be paid down probably closer to the back end of the quarter is a safer way of thinking about it As we grow our deposits to $2,000,000,000 we actually hope we can do better, but as we grow our deposit growth to 2,000,000,000

Speaker 4

Okay. Very good. And just, I guess, switching to the dispositions, about $1,800,000,000 left. So apologies if I missed this, but is can you get that done this quarter and within the original fair value mark of 2% that you took?

Speaker 2

We've updated our marks. We think that they're good. What we did initially, I think, proved to be pretty accurate. I don't think it's all going to get done this quarter, but we expect to make kind of significant progress on that. And as I mentioned, that will be coincident with paying down higher cost.

Speaker 4

Okay. Dale, any color on what's causing the delay? Because I mean, what's left does not look like A lot of high risk stuff for you guys.

Speaker 5

Tim Bruckner. Yes. We're actually receiving much stronger values on some of these indiscreet single note Sales related to some of the assets and just in the normal course that takes a little bit longer They're doing a large pool of sale.

Speaker 4

I just want to make sure that we

Speaker 6

have the

Speaker 1

power here. Thanks for the question, Casey. But We were pretty early in moving assets to HFS, and I think our aggressive Posturing of that helped us keep the dispositions inside of our mocks. And that's sort of the Hallmark and the culture here at the company and which connects to the asset quality that we're approach that we take as well. So we tend to be early on everything and try to execute early on.

Speaker 1

We have found whether it's disposition of assets, whether it's asset quality and talking to clients, Being there early, being there first produces better results. So I just wanted to add that little color commentary. Great. Thanks guys.

Operator

Thank you. The next question will be from the line of Bernard Von Giske with Deutsche Bank. Your line is now open.

Speaker 7

Yes. Hi, good morning. So on Slide 5 of your presentation, you show some nice detail on the growth drivers of that $3,400,000,000 of deposits during the quarter. It looks like, as you mentioned in your prepared remarks, about $1,000,000,000 in core deposit growth, with the new and return client deposits and existing client Net Growth. So that's about 1 third returning funds and 2 thirds new money.

Speaker 7

So that mix is right. Is this the type of mix between new money and returning money you would expect, say, over the next few quarters, potentially improve over time? And maybe if you could give us a sense what that mix was for the $3,200,000,000 you noted quarter to date?

Speaker 2

Regarding where the funds have come from, I think that there are some clients That we're really waiting for our Q2 results. Wanted to make sure that the noise related to Q1 had cleared. There weren't other kind of financial institution failures during this kind of interim period. And so I think we have a strong ability to pull in funds for in the near term for some of the returning clients. That of course will diminish over time when there's less funds to return to begin with.

Speaker 2

But at the same time, We can gen up again some of our deposit business lines, which were a little hamstrung after what happened in with the Silicon Valley Bank. So some of the initiatives, particularly in settlement services and our corporate trust operation, Clients gave pause after seeing what had happened to that institution. And so that's not new that's not old money returning, But that is acceleration of new opportunity.

Speaker 1

Yes, I would take that question and just maybe add a little bit Different perspective or observations, which is the March disruption really disrupted our pipeline going forward. And we had a very, very strong pipeline in business escrow services in corporate trust. Let's just say Corporate Trust was a developing pipeline, but really in settlement services. And so the disruption in March actually disrupted our pipeline. We're seeing that pipeline reappear.

Speaker 1

It's stronger. As Dale said, a lot of people wanted to wait Until we are announcing our quarterly earnings, I think that will make people feel comfortable. And we have Great deal of comfort on that pipeline returning, which gives us comfort to the $2,000,000,000 guide that we've put out there for deposit growth. So I think what you'll see is besides the regions, which are seeing healthy deposit growth, and also led by Bridge Bank in our tech and innovation space, You'll see growth come for the rest of the year in business escrow services, in settlement services, in HOA. By the way, those are 3 Standalone deposit channels, which we have been developing over the past couple of years and also in our online consumer Platform as well.

Speaker 7

Okay, got it. Thanks for that color. Just as a follow-up, I'm just wondering, I believe a big chunk of the deposit growth was also in CDs. Just curious, how far are you going on, say, some of the promotional pricing, Given you and the industry are leading with rates paid, just given the current environment, just trying to get a sense of how much of these balances can be sticky Or how can you deepen the relationship so these deposits do become sticky?

Speaker 2

On the brokerage element, I wouldn't call those sticky. However, I would call them cheaper. So what we borrow from some of these credit lines as well as from the Federal Home Loan Bank Those rates are higher than the brokered CD channel. In addition to that, brokered CDs do not consume liquidity Opportunity. So if we borrow, we have a credit line that is over $10,000,000,000 from the Federal Home Loan Bank.

Speaker 2

But as you borrow against it, you have less availability. Bringing broker deposits that cost less and at least that availability open. So this is something we're going to wean ourselves down from over time, But you're not going to see a chop off during Q3. But all the guide that Ken mentioned that we have in terms of our deposit growth respectively Does not assume any broker deposit increases from where we were at June 30.

Speaker 7

Okay, great. Thanks for taking my questions.

Operator

The next question will be from the line of Steven Alexopoulos with JPMorgan. Your line is now open.

Speaker 8

Hi, everybody. I wanted to start And drill down a little bit into the $3,200,000,000 you're calling out through July 17. What's the rough composition Of that, are those more new and returning client funds? Are you using any brokered in there? And very roughly, what's the cost so far?

Speaker 1

As it relates to the composition, it's very little is coming from the broker CD channel, as Dale mentioned. It's actually 0. Where you're seeing it come from is our warehouse lending and note financing group, which generally builds up In the early parts of the month and then pace down towards the 3rd week and then restarts its build process in the 4th week. So you're seeing those funds come in. Generally, they're non interest bearing deposits.

Speaker 1

They do carry ECR credits, which you'll see in the operating expense. We also are showing very early on signs of a very strong HOA deposit build as well. So primarily that's where the funds are coming from.

Speaker 2

I think there's also been some repatriation from our tech group. We did have losses from that in March and those dollars are up month to date as well.

Speaker 1

Yes. I think that brings an important point up on the Tech Group. There's been a lot of disruption with the demise of SVB there. And our brand, Bridge, Is a steady, consistent player in that market. And what you're seeing is a lot of disruption with clients, with former people that had worked at SVB and their new companies establishing their Operating Processes and Credit Policies.

Speaker 1

Now that has all been established for us and people know our players and they know the type of bank we are. And I think that's going to lead to more deposit growth out of Bridge, which is going to support the overall regional deposit growth as we move forward.

Speaker 8

Got it. That's helpful. I'm curious in terms of the deposits that left in the aftermath of SIPPI, what Rough percentage, would you say returns is like 5%? Is it a material percentage at this point? And then what are you hearing from, 1, the customers returning?

Speaker 8

Yes. I think you mentioned they were waiting to see your 2Q numbers. But and then for the customers that haven't returned, what are you hearing from them why they haven't returned yet?

Speaker 2

Well, yes, I mean, I'm going to say roughly 30%, maybe a third have come back. And why haven't they? Why haven't we seen more? I think a lot of them I mean some of these are related to types of actions. So I'll give you an example.

Speaker 2

In a settlement services, you might have a settlement fund and then that's moved to another institution. And what we get back It's the promise that we're not going to move that one back, but future settlements will come to us. I think that's part of it. I think that there was some question about what's the new landscape going to look like. I think it's well publicized that SVB And you don't have a policy.

Speaker 2

You've got to bank with us and you can't bank anywhere else. That has proven to have been kind of damaging and damaging to Some of these franchises, and so some of them are like, okay, we were banking with you as most of them were just single entity institutions And now they're building relationships at 2 or 3 banks.

Speaker 1

Yes. The other thing is back to we recaptured one large client That left us out of warehouse lending. And in bringing that client back, They have a lot of funds in what we call P and I principal and interest accounts. And those build up rather quickly, come down, pay build up, come down Every month and it just oscillates back and forth. Well, when we went back to them and we established the relationship, we now took in T and I, Accident insurance accounts, which have a more steady stream to it.

Speaker 1

So what we've also done here is traded off volatility of volume for more consistency, And we've done that too. So as we bring clients back, we're trying to get better quality deposits longer term and stickier. And so this has allowed us to have a lot of great conversations with our client base. But I can tell you, I spend more time With depositors in meetings that feel like an earnings report, That's what we did in coming out of Q1 and Q2. Now that has all changed and it's about really the growth of the relationships, the growth of the business And how we work together.

Speaker 1

So that's some color there.

Speaker 8

Well, this quarter should help those conversations. Final question. Yes.

Speaker 2

We're seeing the pipeline build.

Speaker 8

Yes. Even with the increase in more expensive type funding, if I just look at the sequential role In both interest bearing deposit costs and total funding, these are decelerating pretty nicely over the past few quarters. Do you guys expect that trend to Continue through the back half of this year. Thanks.

Speaker 1

So that's what gives us a little bit of comfort To provide the net interest margin guide going up. And again, as you saw, June was 3.50 And we think it rises from there. And it also gives us comfort to why we think net interest income is going to be higher in Q3 Then in Q2, only a modest part of that net interest income rise is coming actually from loan growth, because we're going to grow $500,000,000 to 1,000,000,000 Probably closer to $500,000,000 is a good number to use. That's going to come in ratably across the quarter. So you won't see that benefit until Q4.

Speaker 1

So most of the growth in Net interest income for Q3 is really coming from minimizing the rise in cost of funds, which we're very excited about.

Speaker 8

Got it. Okay. Thanks for taking my questions.

Speaker 1

Thanks, Steve.

Operator

Thank you. The next question will come from the line of Chris McGratty with KBW. Your line is now open.

Speaker 1

Hey, Chris.

Speaker 6

Great. Thanks. In terms of the PPNR guide, you addressed the net interest income component. Wondered if you could spend a minute on both the expenses and the AmeriHome aspect of just getting a full circle on PPNR. Obviously, the deposit and the Insurance lines are biased, I will have a comment there and then also kind of comments on the gain on sale margins approaching normalized.

Speaker 6

Is there room to go there On AmeriHome. Thanks.

Speaker 1

Okay. So AmeriHome generated about $88,000,000 of total banking revenue. For us, we model that out at about the same amount for Q3 and Q4. I will say It is early on. It's only 17 or 18 days into July, but they are having a very, very strong July.

Speaker 1

And why is that? And what we saw was the retreat of 1 very large money center bank from the correspondent lending market, Combined with the industry capacity rationalization has paved the path towards higher margins, higher win rates. And that's what's giving us a good deal of comfort. With that, we're also building an MSR, which gets valued and is producing double digit returns. And so with the growing our growing our capital allows us to bring in more servicing income.

Speaker 1

So that's the AmeriHome story. So for us, it's steady total mortgage banking revenue going forward with potential upside Given what we're seeing in the current market, that's how I would describe AmeriHome. Related to the expense efficiency, We'll call it the adjusted expense efficiency. We see that over time coming back into the high 40s. I think what's very important here is that to remember that Wahl has always made investments With a viewpoint towards longer term returns for its business, product and service development, we focus on generating consistent earnings with the appropriate returns.

Speaker 1

And so over the last several years, what we're talking about today, business escrow services, settlement services, corporate trust, The online consumer platform and the growth the continued growth in HOA were all funded by consistent expense investments in our P and L. So we are going to balance the efficiency ratio for future growth as well as looking to get to our PPNR And our PPR guides are at the high consider the adjusted efficiency ratio to remain At the high in the high 40s to achieve the PPNR guide that we've given.

Speaker 2

Chris, I mean, I think we've had a reputation that we're pretty efficient. You've been in the low 40s for a number of years. And now we find ourselves elevated from that level. But we've also grown very quickly during that period of time. And it's It's natural as one is in kind of a strong growth mode that some things are done that aren't as efficient as they could have been structured or organized at that time.

Speaker 2

We're going through a process now to streamline that and look through some of these elements in terms of whether it's vendors or consultants and things like this We think also can push down some of these extra costs that we've had in our operating expense line.

Speaker 3

That's great color. If I could

Speaker 6

ask a follow-up, you talked about net interest income growing, Exiting year. If I take a step back and think about PPNR, the stable number for the back half of The year. As the balance sheet normalizes and everything gets back to normal, is the expectation that the PPNR dollars should grow off that Low 280s as we enter 2024?

Speaker 1

Yes. So the way I would think about it, it's a little more stable in Q3 As we look to pay down our borrowings, we maintain that Q3 PP and R to Q2 and then Seeing that begin to rise in Q4 as we exit the year into 2024.

Speaker 6

Okay. But as you get into the Q4 and entering next year, if everything else is Consider that the balance sheet your PPNR should grow again in 2024.

Speaker 1

I'm saying it should grow in Q4 and then it will continue on from there.

Speaker 2

All right. Thanks, Ken. Okay. Thank you.

Operator

Thank you. The next question will be from the line of David Chiaverini with Wedbush. Your line is now open.

Speaker 1

Hello, David.

Speaker 9

Hi, thanks. Hi. So I wanted to follow-up on the expense question. So you mentioned about optimizing work streams through the bank. Could you elaborate on that?

Speaker 9

Are we talking Kind of trimming on the edges or are you contemplating exiting any businesses?

Speaker 1

So we're talking about trimming on the edges here predominantly. And some of the expense savings that we are going to find throughout the company We'll be repositioned into risk control, risk management infrastructure. I think you have to keep in mind and the regulators have clearly signaled this that they're going to have a higher standard of supervisory Review for banks under $250,000,000 but above $100,000,000,000 But I think they're going to drop that below $100,000,000,000 And as we continue to grow, we need to be prepared for that and we've been preparing all along. But some of that expense savings we're going to take And we're going to reinvest in the risk control infrastructure that we're going to need to cross $100,000,000,000 We'd rather do it early on And have a steady growth of expenses related to that rather than to wait and try to put it in just before you get to 100,000,000,000 So David, so we're going to see some of the work stream repositioning in terms of lower cost that they also have vendor management, Eliminating growth in FTE, we don't need, that's like cutting air. That will help us a little bit.

Speaker 1

And then looking at vendor management using technology, a lot of those cost savings will be repositioned into the risk management side. So we can continue to grow unabated as the rules change for the $100,000,000,000 and above and the $100,000,000,000 and below banks.

Speaker 9

Thanks for that. And then a follow-up on credit quality related to the increase And special mention loans, what does it take or what do you have to see for you to designate a loan as special mention? Does the borrower Have to trip a covenant for that to happen and what actions do you take with a borrower after it goes on special mention?

Speaker 5

Let me take this one. Thank you, Tim Bruckner.

Speaker 2

And this is something that we're,

Speaker 5

I think, pretty proud of. Dale mentioned throughout the initial discussion comments,

Speaker 2

there's a few things that

Speaker 5

are just foundational to our credit process. 1st, in all areas, we assess risk as covered and uncovered, okay? So, we really minimize tariff by that. Cover means you've gotten out always by collateral. Early identification and elevation are key And then time is of the assets in solving problems.

Speaker 5

We manage tail risk By managing our uncovered exposure by getting to that early. To do that, we have to be pretty mechanical in our process. So to answer your question directly, In all cases, special mention loans are current and paying as agreed. Okay. So special mention The regulatory definition means potential weakness, not default or late payment.

Speaker 5

So we're not looking for A monetary default. We're looking for situations where there might be potential weakness so that we can elevate those within our credit architecture and make the appropriate changes before those become problems. So we use special mention to elevate the situation and drive to a satisfactory Resolution before we're dealing with it, DePaul, or a late payment. Another thing that you can say here is everything that's in special mention, We believe that we're going to reach that resolution, which would be a satisfactory re margining or additional support from sponsorship that would return that to pass or we'd have that credit as substandard. So that's how we use the categories mechanical in our process.

Speaker 2

Thank you.

Speaker 10

Thanks very much.

Operator

Thank you. The next question will be from the line of Timur Braziler with Wells Fargo. Your line is now open.

Speaker 9

Hi, good morning. Thanks for the question. Most have been asked and answered, but just looking at the loan growth this quarter, I guess it's surprise to the upside. Just curious as to what drove that, how much of that was kind of contractual funding? And As you look forward, what gives you confidence in getting to that $500,000,000 number versus the growth that we saw in 2Q?

Speaker 1

Okay, great. Well, the $1,400,000,000 of loan growth, you can break it in half, 50%, $700,000,000 It was really a reclass from held for sale going back into held for investment, which means that our Deposit drive, our increase in liquidity, did not necessitate us having to sell those loans. And so we were pleased with that. Then we had $700,000,000 of organic growth this quarter. And most of that came from the warehouse lending, but note financing MSR lines of business.

Speaker 1

And why that's important is those businesses carry when we make credit decisions there, We usually get a fair amount of deposits that come along with this. So they almost self fund themselves. So that was the beauty of having that loan growth that it also drove our deposit growth. And it's part of what we've been saying even from the last couple of calls, And as part of what we've been saying even from the last couple of calls that we're looking at a full client relationships and we're not we're no longer just giving credit And then worry about how we fund it away from the client. The client needs to have a full relationship with us.

Speaker 1

As we go forward and what we may have, what gives us some credit Our confidence, I guess, on the $500,000,000 guide, we see a few areas that we're going to focus on a little bit more in C and I at this point. But we see MSR lending providing opportunity, note financing providing opportunity. We do resort lending, which we think will provide opportunity. And we're doing tech and innovation loans, and these are small sized loans, Our loan commitments under $15,000,000 where we see there's a great opportunity to bring with it a great deal of deposits. So those are some of the areas that We are focusing on that gives us a comfort level to the $500,000,000 guide.

Speaker 9

Okay, great. And then I asked this question last quarter and I think it may be a little bit early, but with some of the return of technology Related customers, I guess where do you see Western Alliance fitting into the tech ecosystem going forward? Are you going to be playing a larger role in Taking up some of the market share abandoned by Silicon Valley or should we think about the technology offering of Western Alliance similar to what had happened prior?

Speaker 1

So it's an interesting question, a good strategic question. I think we're going to continue to play in the space that we've been playing in, Which is usually stage 2. We're not going to be playing and taking up the role of SVP in early stage lending. That's not what we do. We prefer to be in the middle stage And a little bit in the late stage.

Speaker 1

So that's where we're going to continue to keep our focus. I will say that what we're seeing is that current and prior SVB customers and bankers, as I said earlier before, continue to evaluate the changing landscape as both constituencies are making judgments Regarding long term commitments to the industry by new players and they're waiting to see how those new players, credit policies, operating practices will be administered. For us, Bridge Bank, as I keep saying, is uniquely positioned as a known brand and a consistent player in the market. And I think that approach is continuing to get traction. So I have some Great expectations from our Tech and Innovation Group, Bridge Bank, in terms of deposit growth in Q3 and going into As we continue to be the steady player and the steady hand in that market that people can go to.

Speaker 1

When they come to us, They know what our policies are. They know who they're talking to. They know what our credit decisioning process is. They know how to reach senior management, and we have A track record with these folks. So, we think it's an opportunity for us and we're excited by it.

Speaker 9

Okay, great. And then just lastly for me, maybe following up on Bernard's question for the some of the promotional products. Just given how Strong the deposit growth has been and the momentum you're gaining in bringing back some prior customers. I guess, why not pull back Some of the promotional rates, is this nearly kind of a near term dynamic as you continue to build the liquidity? Or Are we still in an environment where the more the better regardless of the cost?

Speaker 2

There is a little bit of the more the better, but Maybe more significantly is those rates which seem to be I get their market rate pricing, but they're still less than what we're paying for other sources. So here we have a more stable source and it's a lower cost and we're going to keep doing that. Now over time, I think we are going to be able to pay that. But So where we're headed is more liquidity is a good thing. And to the degree we can do that, Less expensively, we're going to do that.

Speaker 2

I just wanted to mention to you, right, the timing on your note that that was great earlier this week.

Speaker 9

Thanks guys. Appreciate it.

Operator

Thank you. The next question will be from the line of Gary Tenner with D. A. Davidson. Your line is now open.

Speaker 11

Thanks. Good morning. A couple of questions. First on the as it relates to the PPNR guide, you talked about fees in terms of what How you're thinking about mortgage, but the service charge line this quarter increased from $9,500,000 to almost $21,000,000 I don't recall you Kind of mentioning that at all. Just curious what the driver was there.

Speaker 11

I guess, ultimately, how is that level baked into the PPNR guide for the back half of the year?

Speaker 1

Well, let me say it differently. Our Total fee income, we are looking at, which is primarily driven by AmeriHome, is going to stay consistent for the next couple of quarters. So when you think about the PPNR guide, I would say fee income Consistent with Q2, possibly with an arrow upward, if some of the early signs of mortgage income Success in July continues throughout the quarter, and that's what's driving the PPNR guys that we gave earlier.

Speaker 11

Okay. And then on the AOCI, Dell, I think you mentioned about $2,500,000,000 of securities scheduled To mature back half of this year and through 2024, what amount of the kind of AFS related AOCI just based on maturities would you expect to recover Over that 18 month period?

Speaker 2

Well, I mean, obviously, Those costs are related to kind of what the discount rate is. So if it's that close to maturity and We have a yield that is less than what that looks like, then it's going to be fairly short. I mean, I think to really get dollar improvement on the AOCI At AOCI piece, what we really need is we really need lower rates. So it will roll over all forward. If you take 18 months, we have a duration of 4 years on that.

Speaker 2

So Take one third of that back, so maybe a couple of $100,000,000 comes back, but not from maturities, just from a slower or shorter duration remaining on those The full year coming down by about a third. Regarding the service charge income, so that yes, it is elevated from where we were, and it's going to continue.

Speaker 11

Okay. And last question, if I could. In terms of the office or the investor office Portfolio, can you tell us kind of what your allowances specific to that portfolio?

Speaker 5

Yes, I can take that. Not counting, well, Counting earnings, what about $50,000,000

Speaker 3

50, sorry.

Speaker 2

I'm sorry, dollars 100,000,000 Also $100,000,000 Yes,

Speaker 5

I'm sorry, I misquoted that.

Speaker 3

Okay. Thank

Operator

you. Thank you. The next question will be from the line of Ebrahim Poonawala with Bank of America. Your line is now open.

Speaker 12

Hey, good morning. Just a quick follow-up. 1, in terms of the margin outlook, as you talked about the 3rd quarter NIM Higher versus 2Q. Does that trend continue into Q4 as we think about on a go forward basis? Or could we see some volatility in the margin where Or if you could be lower and same with an eye?

Speaker 2

Well, what we're seeing is, I think I think it's all but certain that they're going to raise next week. We have a modest kind of asset sensitive profile, so that should augment the NIM in that regard. More significantly, kind of what we talked about a couple of times, the pay down in some of these more expensive funding sources. So I've talked about these lines that we have that are sulfur plus 2%. We haven't paid those down yet.

Speaker 2

I expect that we will be doing that Significantly, this quarter, I don't can't tell you exactly when, but let's say we did it in August or September or we're going to see a follow through effect On that into 4Q. So yes, I would expect that we should be looking for kind of continued improvement. Ken kind of alluded to this What you said that we're our PPNR number kind of flat for Q3 versus Q2, but then on a more positive trajectory, as we go into Q4

Speaker 12

Got that. And to my last name, in terms of the actual loan book, how much of the loan book is Yet to reprice in terms of just reflecting the current rate backlog, like how should we think about loan betas going forward and repricing of the fixed rate book maybe?

Speaker 2

Well, I mean, the fixed rate book is predominantly residential real estate and prepayment rates on those loans are quite low. So at some point in time, I mean, I think probably rates have to come down a little bit before those are really going to start to accelerate. So aside from that, I don't know that there's a whole lot of repricing opportunity in the low book. I think the securities book probably has more of where we've got, as I mentioned, dollars 1,200,000,000 The back half of this year and another $1,000,000,000 next year. We have within the loan book, we've got Yes, another $1,000,000,000 that we can that is going to kind of roll in.

Speaker 2

So I really think that the margin improvement And a big driver of the PPNR improvement is really coming from swapping, lower cost and funding sources Compared to some of the elements that we have supporting us today.

Speaker 12

Understood. Thank you.

Operator

Thank you. The next question will be from the line of Jon Arfstrom with RBC. Your line is now open.

Speaker 13

Hey, thanks. Good questions for you. Tim, that Slide 17, the asset quality slide, You guys talked about being proactive. What do you think those lines look like in Q3 and Q4? Should we be prepared for those to go higher?

Speaker 13

Or do you think that this proactiveness is going to keep those relatively flat?

Speaker 5

Yes. Thanks. That's a good and understandable question. I think relatively flat. And I think that because that's been our experience with this approach And other cycles.

Speaker 5

We, barring severe changes and we're already Contemplating a tougher economy going forward, we've elevated the situations. We don't by name. We're not dealing with A large portfolio here in the absolute. We call those out, discuss them monthly. We don't wait till quarter end to see the changes.

Speaker 5

So I feel I'm comfortable saying relatively flat.

Speaker 1

John, this is Ken. We also completed our Q2, a very exhaustive And comprehensive review of CRE Office. So we did a very, very deep dive into that. As we mentioned, I

Speaker 2

mean, we're looking at this with the view toward a recession, which may or may not take place, but that's the outlook we've had.

Speaker 13

Yes. Okay. Yes, that ties into my next question. And I guess instead of poking and prodding, I'll just ask it. You guys are saying stable PPNR And then relatively stable provision based on Moody's and then the S-four weighting that you referred to.

Speaker 13

You guys usually give EPS guidance. Is this the trough on EPS? I'm Looking at the $815,000,000 consensus for 2024, it feels like a layup given what you just put up, but am I missing something on that?

Speaker 2

Well, we're not ready to project on 2024. But I mean, I think the direction of What we've laid out for the 3rd Q4, I think we have good confidence in. We obviously hope that we can We continue to execute in terms of bringing back lower cost funding and expanding our underwriting prospectively. I'm not sure a recession is in the offing. I think our expenses are don't have a lot of elevation coming in them either.

Speaker 2

So I'm optimistic to what the future holds here.

Speaker 13

Okay. So said another way, Dale, it feels like There's at least stability going into Q3, assuming nothing changes materially from a credit point of view?

Speaker 1

Right. That's a good assumption,

Speaker 13

John. Okay. And then one more for you, Ken, kind of a Fun question, but it's been a hell of a 4 months and you guys have managed through it well given the hand you had. But do Do you feel like there's been any permanent damage done to your franchise? I know you mentioned Bridge and I think the different brands help.

Speaker 13

But do you think Is the pressure faded and it's going to be a distant memory and you're back to normal or you think there's been some damage done?

Speaker 1

So I don't think there's any permanent damage done, but I think there was disruption is the word I would continue to use. It took us off of our trajectory of growth. We had to rely on wholesale funding for a shorter period of time. That's why you're hearing all the answers about the rise in NIM because we're going to swap out these borrowings and bring in on more deposits. This was all something that, believe it or

Speaker 2

not, in Q3 of the

Speaker 1

Q3 earnings call of 2022, We had, I want to say, anticipated that the world was going to change a little bit. We didn't anticipate what was going to happen on March 9, We started to move into a slower loan growth, higher liquid world with greater capital. And that's sort of the model that We are using and we're moving forward. I think if there was any damage done, it was done a

Speaker 2

little bit, as I said, In the

Speaker 1

deposit pipeline in some of our businesses that are still relatively new relative to the other businesses in the company. And that gave people pause because they hadn't they weren't with us for a long period of time. But we are rebuilding those deposit pipelines And that's giving me some optimism through the $2,000,000,000 guide for Q3 and the deposit guides going forward. John, there's actually been a little bit

Speaker 2

of a silver lining on some of this. And that is, it has really Got our attention and made us focus on our business model and we've honed it. So to the degree that we were doing some syndicated deals, we We're doing some writing credit. We didn't have a deposit relationship. It's much more reciprocal today.

Speaker 2

On our EFR For example, we started by making $100,000,000 commitments and $1,000,000,000 syndication line. Well, we're not doing that. We don't we didn't we never got the liquidity from the clients, in that situation. But instead, what we do is we do bilateral transactions that are better priced And it's a closer relationship that we have with them and of course we get their funding as well. We've also taken a little bit of a different tack.

Speaker 2

We don't want to do this again. And so what we've done is we have taken our insured deposit levels to about the highest in the nation. We're moving our capital. I want to I want to spin it around so that when somebody is looking at who can we attack when the next situation might arise, Western Alliance isn't anywhere near on that list because we are a stalwart for capital strength, liquidity and performance.

Speaker 3

Okay. Very helpful. Thank you.

Speaker 1

Thanks, John.

Operator

Thank you. The next question will be from the line of Brody Preston with UBS. Your line is now open.

Speaker 14

Hey, everyone. Thanks for taking my questions. Dale, I was just hoping to dig a little deeper on the moving parts on the margin. But I wanted to follow-up on Steve's question and I'm sorry if you guys said it and I missed it. But on the 3,200,000,000 of new deposits.

Speaker 14

I know it's weighted towards mortgage warehouse, but I was interested in if you have an idea as to what the cost is just because When I look at the new and returned deposit growth and the existing client growth, it looks like it had about a 2% cost On it for this quarter, is that $3,200,000,000 close to that cost?

Speaker 1

So again, a lot of that this is Kent Brody. A lot of that deposit growth is coming From our warehouse lending group, which means it's growing in our non interest bearing deposits. And from an interest expense point of view, That comes with a zero cost, although the ECR credits are in the operating expense line. So that's going to skew more towards Having a lower interest expense for both the non for the warehouse lending business as well as some growth is coming Early on from HOA, which is a lower cost channel as well.

Speaker 14

Got it. So if you're getting a lot The growth in the I know it's got an ECR, but it's non interest bearing. I'm looking at that interest bearing deposit cost and the spot rate of 305 It's lower than the $308,000,000 you did on average for the quarter. Why I guess if you're growing the interest bearing deposit costs at A blended rate with those new clients or the total deposit costs, I guess, at 2, like why wouldn't that interest bearing deposit costs continue to move lower From here in Q3.

Speaker 2

Well, so I mean warehouse deposits, they have an earnings credit rate, Which is much higher than 3. It's close to kind of effective debt funds generally, so it's going to be higher than that. But you're correct, Brody, in that, yes, these funds, they're not wholesale. They're not brokered. So there's a lower No charge associated with them in terms of what that is and their client relationships.

Speaker 2

And so we're trading down in terms of what it's costing us From there, I mean HOA was a significant contributor. Some of those have ECRs as well, but those dollars, those are going to be in the 3 range As opposed to 5. Well, your premise about a cost of funds

Speaker 1

Equal to Q2 or Q3 going forward. That's not a bad premise.

Speaker 14

Got it. Okay. And then just on the loan yields, the average loan yields for the quarter, the difference Between the spot and the average for the quarter is relatively large. So the spot rate is 6.74. If we think About the Q3 and we think about a potential for another rate hike here.

Speaker 14

I guess, how does that How does the loan yield move off of that $6.74 for the Q3 assuming that that happens?

Speaker 2

Yes. I mean, I think we're going to see something like 40% of that.

Speaker 14

Got it. So I guess if I take those two pieces combined then, Dale, just with like the deposit costs Kind of stalling out at this level and loan yields continuing to move higher. I just look at that 3.50 to 3.60 NIM guide, the implied NII guide and the PPNR guide that you have for the back half of the year, and it just feels exceptionally conservative. And so I guess, why shouldn't we be thinking about something well north of 282 by the time we hit the Q4 of the year?

Speaker 2

Well, I would argue with exceptionally. I think it is. I think I mean, we want to lean conservative obviously a little bit. The other thing I would say that I think Maybe you need to consider or recognize is that a lot of these deposit costs we have are going to be moving up with when the FOMC moves next week as well. So to the degree that we've got kind of brokered funding and some of these other sources relatively short term earnings credit rates for some of these large balances Related to mortgage warehouse clients, those are going to move almost in lockstep.

Speaker 2

May not it doesn't show up necessarily in interest expense, but it shows up in terms of Cost of our PPNR number. So there is going to be a push up in terms of funding charges related to that as well. But as I mentioned, We are asset sensitive and so the net effect of what happens next week should be a plus.

Speaker 14

Got it. And then just last couple on credit for me. I just wanted to ask, was there You mentioned you did the office CRE deep dive. Was that what kind of drove the reappraisals on those office those CBD office loans, Ken, or was there something else specifically that drove that?

Speaker 1

No, that was it. That was it.

Speaker 14

Okay. And then just I know that when you're working through the special mention.

Speaker 1

Yes. Sorry, Scott. I was answering the other question, which was I was going to say, we basically only have one Credit in CBD, and that we moved to substandard and then we reappraised it and we appraised higher than the loan amount. So That's the answer for that. I'm sorry, I cut you off on the other question.

Speaker 14

No, that's okay. I was just going to say, I know that when you're working through the special mention loans, At least this is what you did with the hotels during COVID is you kind of as you mentioned, you asked them to re margin the I guess it's early days, but with any of those conversations with your sponsors, has Has anybody bought that the idea of bringing more equity to the table, to help re margin these loans?

Speaker 1

No. So the reason why they're in special mention, there is some weakness, as Tim Bruckner said, but also there is a spirit of cooperation that they want to get to a positive outcome that will either require re margining or restructuring in some way, shape or form. What's interesting, maybe I'll leave you with this fun fact, Brody. Our average LTV It's about 55%. We're a low, advanced rate lender.

Speaker 1

So on our $2,300,000,000 Of CRE all in for the company, there's about $2,000,000,000 of equity in front of us. And so I'm talking about the whole book And that gives a lot of motivation for sponsors to sit and work with us in

Speaker 2

the any assets that have been moved into special mention.

Speaker 14

Got it. Okay. Yes, just given how proactive it is and it sounds like the borrowers are willing to kind of meet you there. To me again, It sounds like maybe special mention loans will be heading lower and classified loans heading lower into the year end, but I guess we'll watch that going forward. Thanks for taking the questions guys.

Speaker 2

Thank you.

Operator

Thank you. The next question will be from the line of David Smith with Autonomous Research. Your line is now open.

Speaker 10

Good morning. So the strong liquidity Growth this quarter led you to bring back on about $700,000,000 from held for sale back to held for investments. Of the remaining $1,800,000,000 in held for sale, are you Viewing any of that as potentially coming back as well if you have another strong quarter of deposit growth?

Speaker 1

A good portion of that in the held for sale relates to our

Speaker 2

I mean, this is something we're just going to always evaluate, so based upon kind of where we are. But the $1,800,000,000 is queued up, it's marked, And we'll see how that goes, but most of that we expect to exit.

Speaker 10

And would you expect the CET1 benefit from that to be proportional to the benefit you saw from the $4,000,000,000 of sales that you've already executed?

Speaker 2

So, I mean, the CET1 elements are I mean, most of the Assets we're talking about are all 100% risk weighted. That goes for what's already been done, but not all as well as what's in there presently. So I mean but at the same time, I mean, as those loans come off the books, that is beneficial to CET1. Conversely, I mean, I think the industry is looking at a special charge probably this quarter to recapitalize the insurance fund related to the demise of those 3 institutions. So that will be some chart.

Speaker 2

That will be maybe 10 basis points against our capital growth in Q3 as presently

Speaker 10

proposed. Sure. And lastly, you talked about laying the groundwork For eventually crossing the $100,000,000,000

Speaker 9

asset mark,

Speaker 10

I guess, if you're just continuing to Build, dollars 2,000,000,000 if deposits a quarter, that's $8,000,000,000 a year, the $32,200,000,000 would take you about 4 years from now. That seems very proactive. What we need to see to take up your growth targets and growth goals, but before that hit If you're going to hit that mark any sooner, what would give you comfort to open the growth back up?

Speaker 1

So, let me just give some color commentary about being very early. I think what you're going to see is supervisory review From the regulators starting much earlier and holding you to a higher standard well before 100,000,000,000 So the process isn't, hey, you hit $100,000,000,000 you're going to be reviewed differently. The process starts well before that, that are you ready to We go across over $100,000,000,000 and that starts before that. That would be my just color commentary on how that review process works and why we're building it. In terms of opening the gates, I think our growth is going to be determined by our deposits and our growth in deposits.

Speaker 1

And we have traditionally been A little bit more heavier weighted to the left side of the balance sheet, which we can turn that machine on. We're really good at growing loans. What we've turned around here is said, wait a minute, we need to have a more holistic relationship with our client base and growing the deposits are critical, Obviously, to our future growth. And investing in future deposit channels and the deposit Samuels that we've talked about here today, that will drive the deposit growth in the future. So we said $2,000,000,000 last quarter that we thought we'd grow deposits.

Speaker 1

We came in at $3,500,000,000 Yes, there was a lot of brokered in there. This quarter, we say $2,000,000,000 without brokered And we're going to try to exceed and do better than that and then we'll kind of grow our way into 2024.

Speaker 10

All right. That's helpful. Thank you.

Operator

Thank you. At this time, there are no additional questions registered in the queue. I would like to pass the call back over to our host, Ken Baccioni, for some concluding remarks.

Speaker 1

I just want to thank you all for attending the call. Pretty Earnings call today, and we're happy to field all your questions. And we look forward to the next quarterly call. Thanks again.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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Earnings Conference Call
Western Alliance Bancorporation Q2 2023
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