Western Alliance Bancorporation (WAL) Q2 2026 earnings call transcript

I would now like to turn the call over to Miles Pondelick, Director of Investor Relations and Corporate Development. Please go ahead, Miles.

Good day, everyone. Welcome to Western Alliance Bank Corporation second quarter, 2026 earnings call. You may also view the presentation today via webcast through the company's website at www. westernalliancebankcorporation. com.

Our speakers today are Ken Vecchione, Chairman, President and Chief Executive Officer and the Charlotte Nani, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risk uncertainties and assumptions except this is required by law. The company does not undertake any obligation update in forward-looking statements. For more complete discussion of the risk uncertainties that could cause actual results, differ materially from any forward-looking statements. Please refer to the company's SEC filings including the form A. K. filed yesterday, which are available on the company's website.

Now for opening remarks, I'd like to turn the call over to Ken Vecchione.

Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our second quarter performance before handing the call over to the child to discuss our financial results and drivers in more detail. After reviewing our revised 2026 outlook, Dale, Tim and Lynn will join us for Q&A. I am very pleased with what's aligned strong second quarter performance and our early execution against the objectives outlined at Investor Day. Results were highlighted by broad base, CNI-driven loan growth, strong net interest income, PP&R expansion, stable net interest margin, and continued balance sheet strength.

Credit trends remain constructive with criticized assets and net charge off both declining from prior quarter. Ongoing resolution activity gives us confidence that nonacool loan balances will improve meaningfully during the second half of 2026. Just as important, we have already begun executing several key strategic initiatives we discussed in May, including deposit optimization efforts designed to enhance profitability and a more robust share repurchase program supported by our strengthening capital position.

As we approach the $100 billion asset milestone later this year, what's aligned is entering its next phase from a position of strength, combining industry leading growth, improving profitability, and increased capital returns to drive long-term shareholder value.

Turning to our financial results, quarterly health or investment loan growth of $1.8 billion was led by CNI growth across our commercial platforms. As discussed at Investor Day, we began executing our deposit optimization strategy during the quarter, reducing higher cost deposits by well over $1 billion towards quarter end. While this contributed to lower period end deposits, it positions us to improve funding costs and enhance profitability going forward.

Early indications so far in the third quarter are that interest expense and deposit costs will continue to decline. Strong average earning asset growth of $2.7 billion drove net interest income up 31 million or 16% on a linked quarter annualized basis compared to 14% year over year growth. This performance was achieved while maintaining a stable net interest margin.

Quarterly, non-interest income of $199 million was consistent with adjusted Q1C income, which excludes securities gains of $50.5 million. Mortgage banking improved from prior quarter, so higher rate and tighter spread are creating headwinds. Overall, we generated strong operating leverage as total revenue growth outpaced total expense growth by a three to one margin, excluding last year's quarter securities gains.

In total, PP&R increased 25% year over year to $412 million. After quality remains stable, reductions in criticized assets combined with quarterly net charge offs declining to 37 basis points reinforce our expectations for non-acrual loans to decline in the second half of the year. The increase in non-acruals during the quarter was driven by the credit disclosed in the first quarter 10Q, which remains current on all contractual gains.

As a follow-up to investor day commentary, we successfully resolved two of the six non-acrual loans discussed with the remaining four on track for resolution in the second half of 2026. Before handing the call over to Vishal, I'd like to briefly preview our revised 2026 management outlook. Since the disruptions in 2023, West Alliance has delivered one of the strongest regional bank growth stories highlighted by predictable loan growth, ample liquidity, robust capital levels, and scaling PP&R. As a result, we remain confident in strategic objectives and medium-term financial targets outlined at investor days.

The more balanced growth profile will create additional capacity for capital returns to shareholders. West Alliance shares trade at a meaningful discount to our estimate of intrinsic value and the earning style of the franchise. Greater share repurchase activity around the current price represents an attractive investment in one of our highest returning assets, our own equity. Our competitive advantage going forward will be to pair industry-leading growth with disciplined capital allocation.

The shall will now walk into our results in more detail before I review the outlook.

Thanks, Ken. Turning to the income statement on slide four, net interest income of $797 million increased 4% from the prior quarter, primarily from average earning asset growth of $2.7 billion, which included $1.1 billion of average HFI loan growth. NII also increased 14% year over year. Lower funding costs, driven by declines in interest-bearing deposit costs, offset the slight margin impact from remixing loans into CNI from CRE.

Net interest margin remained relatively flat as the deposit remixing strategy offset nominally lower average earning asset yields. These factors supported another quarter of NII growth. Non-interest income of $199 million was essentially unchanged from Q1 when excluding $50.5 million of elevated securities gains realized last quarter. Year over year growth of approximately $51 million or 34% reflected building momentum in service charges and fees through greater commercial banking treasury management and FX offerings.

Mortgage banking revenue was higher from the prior quarter and year over year despite the headwinds created by higher mortgage rates. Loan production and lock commitment volume were both up double digit percentages from the prior quarter and year over year. The gain on sale margin did compress eight basis points from Q1 to 29 basis points from lower secondary gains which reflected softer investor demand due to higher rates.

Servicing revenue rebounded to 31 million, mostly from slower prepayment speeds in a higher rate environment. To hedge volatility in the mortgage market, we sold covered call options on mortgage bonds which produced gains of $6 million and are embedded in fair value gain adjustments. We expect to regularly execute these types of trades and in fact have already realized $3 million of income in July.

Non-interest expense increased less than $9 million from the prior quarter to $583 million. Deposit costs rose $16 million due to a full quarter impact of significant back-weighted mortgage warehouse deposit growth in Q1. Pre-provision net revenue of $412 million was 25% higher compared to Q2 2025, highlighting the continued growth in the earnings power of the franchise. Provision expense of 80 million was mostly a function of loan growth and net charge off replenishment. Earnings per share of $2.36 was 6% above our adjusted EPS of $2.22 in Q1 or 14% higher year over year.

Turning to the balance sheet on slide five, securities and cash declined $2.4 billion, primarily driven by a $2.6 billion reduction in cash as we deployed more liquidity into increased loan growth. Securities and cash as the percentage of assets moved closer to the mid-20% area while our HFI loan-to-deposit ratio increased to 74% and closer to our medium-term target of 77 to 80%.

Total quarterly HFI loan growth was $1.8 billion and generated mostly from CNI growth, an area which continues to drive overall loan growth momentum. CNI growth was spread across our commercial banking businesses. As Ken discussed earlier, total deposits declined by $849 million during the quarter, reflecting the intentional reduction of approximately $1.2 billion of higher cost deposits as part of our ongoing deposit optimization efforts.

Total assets remained just below $99 billion though total equity expanded $227 million mostly from retained earnings growth. Tangible book value per share rose $2.10 from the end of Q1 to $63.24 or 13% over the prior year from retained earnings growth and modest relief in our AOCI position.

Looking closer at our loan growth trends on slide six, CNI growth continues to fuel our overall HFI loan growth. Over 80% of quarterly HFI growth occurred in CNI categories. From a business line perspective, commercial banking grew $950 million primarily from our specialty commercial banking verticals and hotel franchise finance within CRE. Our multi-year diversification efforts have led to CNI accounting for nearly 49% of the HFI portfolio, while CRE X construction has declined about two points over the past year to 19 and a half percent of the book.

Looking at slide seven, deposits totaled $81.9 billion in Q2, an increase of $10.8 billion year over year. The $849 million decline in deposits from the prior quarter reflected our deposit optimization strategy resulting in a reduction of over $1 billion in higher cost balances towards the end of the quarter with another billion of additional reductions made during the first few weeks of Q3. Growth in commercial banking and specialty escrow channels, particularly business escrow services, as well as HOA helped balance the overall decline.

Demonstrating our early success in improving funding costs, June's end of month total cost of deposits was approximately one to two basis points below Q2's total average cost of 178.

Turning to our net interest drivers on slide eight, the securities yield expanded five basis points to 464, reflecting continued reinvestment at higher yields. HFI loan yields decreased three basis points to 582 as a function of ongoing remixing efforts into more CNI loans compared to CRE. On the liability side, interest bearing deposit costs compress one basis point to 274 from Q1. Overall liability funding costs declined three basis points from the prior quarter to 196, which was helped by higher average balances and non-interest bearing deposits.

The cost of funding earning assets also declined as average earning assets grew 3% from the prior quarter to 91.7 billion.

Looking at slide nine, net interest income grew 31 million quarterly or 16% annualized to 797 million, primarily from CNI driven average HFI loan growth and higher average securities, which powered strong average earning asset growth. Net interest margin was relatively stable, compressing one basis point from Q1 to 353 as the interest cost of earning assets declined two basis points while the earning asset yield declined three basis points.

Turning to slide 10, the adjusted efficiency ratio of 49% increased 140 basis points from the prior quarter. When excluding the security gains of Q1, however, this ratio would have declined by about 150 basis points. On a year over year basis, the adjusted efficiency ratio dropped by almost three points. As mentioned earlier, non-interest expense increased approximately 9 million in Q2 from higher deposit costs related to higher average mortgage warehouse deposit balances.

Excluding deposit costs, non-interest expense decreased 7 million from the prior quarter. Excluding the Q1 securities gains, operating leverage resumed in the second quarter with revenue growing three times more than non-interest expense on a quarterly basis. We believe these transposition as well to continue improving operating leverage over time through a combination of disciplined expense management, deposit optimization efforts and continued business momentum.

On slide 11, you see we remain asset sensitive on a net interest income basis. Among total earning assets, 67% are variable while variable liabilities represent 87% of total earning assets. Non-maturity deposit rates, including ECRs, are estimated to have a beta of 59% over the next 12 months. When factoring in the potential impact on earnings from mortgage banking revenue and also deposit fees, our modeling now indicates we are rate neutral on an earnings at risk basis.

Earnings are expected to rise 0.8% in both an up 100 and a down 100 basis point ramp scenario. Turning to slide 12, we see core asset quality remain stable. Special mention loans decreased 87 million to 316 million and as a percentage of funded HFI loans dropped 16 basis points to 52 bits. Classified accruing loans edged down 15 million to 440 million or 72 basis points from 77 last quarter.

Non-acrual loans increased 70 million, but nearly all of this change was related to the migration of the loan mentioned previously that is now current. As detailed in the appendix, Western Alliance continues to compare favorably to our $50 to $300 billion asset peers in special mention, classified, and criticized loan categories.

On slide 13, you see our allowance and coverage ratios. Provision expense with 80 million and replenish net charge off as well as supporting incremental loan growth, primarily in CNI. Our allowance for loan losses moved higher to 487 million or 80 basis points of funded HFI loans and our allowance for credit losses also increased two basis points to 89.

Excluding loans covered by credit linked notes, the total loan ACL to funded loans ratio is 101. Regarding non-acrual loan coverage, the loan previously discussed was the primary driver of ACL coverage dipping below 100%. We expect this to be temporary given stable core asset quality trends and expected near term non-acrual resolution.

Looking at capital on slide 14, our tangible common equity to tangible assets ratio listed approximately 20 basis points from year end to 7%, from solid retained earnings growth, as well as a slight decrease in tangible assets and an incremental improvement in our AOCI position. Our C-T1 ratio was maintained at our targeted level of 11%.

Turning to slide 15, tangible book value per share increased 13% year over year and has grown at a 17% Kager since the end of 2015. The gap between historical tangible book value accumulation and peers stands at more than four times.

Western Alliance has been a consistent leader in creating shareholder value over the medium and long term. On slide 16, we have provided 10 metrics that highlight how we stacked against our peers on earnings growth, profitability, and other critical factors that drive financial results and create durable franchise value. We view these metrics as important in compounding tangible book value and ultimately generating a long term superior total shareholder return.

For the last 10 years, our EPS growth and TDVPS accumulation have ranked in the top quartile relative to peers. We are also the leader in organic 10 year loan deposit and revenue growth as well as adjusted efficiency. We continue to make strides toward achieving top quartile returns on average assets and average tangible common equity as well as our medium term targets of 1.2 to 1.3% and 16 to 17% respectively.

I'll now hand the call back to Ken.

Thanks, Vishal. As we outlined at our investor day, Western Alliance has spent the last several years purposefully strengthening the foundation of the franchise. We have materially improved our capital liquidity and deposit profile, creating a more resilient balance sheet while preserving the flexibility to pursue attractive growth opportunities. At the same time, our diversified business model and specialized platforms have continued to generate strong earnings momentum as we progress towards our profitability targets of 16 to 17% return on average tangible common equity. Having achieved our targeted 11% CET1 ratio, we now have greater flexibility in how we deploy capital to maximize shareholder value. Importantly, our revised outlook continues to reflect growth among the strongest in our peer group while enhancing profitability, compounding tangible book value and returning additional capital to shareholders.

With that as a backdrop, our updated 2026 outlook is as follows. In order to prioritize share repurchases, we are revising our loan growth outlook to $5 billion. The positive optimization efforts prioritizing profitability have reduced higher cost deposits by approximately $2 billion, including $1 billion since quarter end. As a result, we are lowering our deposit growth outlook to $6 billion, reflecting lower funding needs and our continued efforts to remix the deposit base in order to improve our funding costs.

Our revised loan growth outlook will allow us to notably increase share buybacks with $150 million planned for the back half of 2026 and still maintain capital levels. We are revising our net interest's income growth forecast to 12 to 14% compared to our prior forecast of 11 to 14%. Our new outlook incorporates a 25 basis point hike in September.

We did not have rate changes assumed in our prior guidance. We expect NIM to remain stable going forward as double digit average earning asset growth generates higher net interest income. Total non-interest income is now projected to grow between 13 and 17% compared to 20 to 25% growth previously. We continue to see strength in commercial banking fees. However, the current geopolitical environment and the backup and the 10 year treasury note and mortgage rates will hold Q3 and Q4's mortgage banking revenue in line to Q2 level.

Looking at non-interest expense, our deposit costs range of 650 million to 700 million dollars is unchanged. Deposit optimization efforts should lower average balances for ECR related deposits and offset the impact of an expected rate hike. Operating expenses are still expected to land between 1.6 and 1.65 billion dollars. With respect to asset quality, we reaffirm our core net charge of guidance of 25 to 35 basis points with non-performing loans falling in the back half of the year.

Lastly, on a full year, lastly, I should say our full year 2026 effective tax rate outlook is 19%. With that, Vishal, Dale, Tim, Lynn and I are here to take your question.

Good morning, David. Could you speak a little bit more about the decision to pivot a little bit away from as strong balance sheet growth more towards buybacks, which was about the opportunity set that you saw for good luck deposit originations being a little bit reduced or just reflect the fact that you think your stock is undervalued and you haven't been getting rewarded for your pre-leading growth output.

And then what do you need to see to return to putting that same priority on growth? Or do you think there's anything you can see to go back there?

Okay, a couple of questions there. Let me start with the pivot. So the revised guidance, as we said, reduced $1 billion in loan growth outlook. And that reflected a delivered capital allocation decision. So we see an opportunity to enhance shareholder value by modestly reducing our loan growth and reallocating excess capital towards share repurchases. Now redirecting the $1 billion of incremental growth capacity into an expanded repurchase program allows the company to capitalize on what we view as a meaningful discount between current share at price and intrinsic value. I wanna say even with the $1 billion loan origination reduction, Western Alliance within the $50 billion, the $300 billion asset peer group would still post the highest organic year over year percentage loan growth, excluding anyone, any bank that did an acquisition.

So we still out distance peers and we're also able to return capital to shareholders. Now we did say on investor day that we did preview that we would do $300 million of repurchase activity. But I think you asked and answered the question simultaneously, which is the share price doesn't reflect our intrinsic value, the growth of the company, the historical growth of the company and we're not getting rewarded for the excess growth. So we can still be the top performing loan growth bank inside of the peer group, but we're just better. We don't need to be better by a very wide margin because that wide margin, we were not getting compensated for.

And in fact, some people would say you grow so quickly that you must have more, you must be taking on more risk. And we explained during investor day how we have this S curve philosophy and how we kind of grow our businesses. So we don't see it as taking on more risk. But we think this is a better positioning for the street and it moves us from maximizing balance sheet growth to maximizing value or value optimization of capital out returning capital.

So would you kind of be open to leaning into the buyback on a continued basis if the share price isn't materially up at the end of the year?

Yeah, we will do that. So we're gonna have a, it'll be a constant review between loan growth, the adjusted risk returns that we see, keeping our capital at 11% and then taking the excess capital that we have and repurchasing our shares. I'll also tell you, and we'll wait for the Basel III rules to be finalized, but on the first reading of them, all right? We mentioned, I think on the last call, we had 81 basis points of incremental CDT1 that would be offered to us or delivered to us. We would use some of that as we move into 2027 as well to buy back our stock if we don't think it reflects the appropriate price or appropriate value of our company.

All right, thank you.

Yeah, so I'll lead off and Vishal can pick up where I may have left off a factor too. So let's talk about what we expect and what we've done. We took off about $1.2 billion of higher price or transitions, I should say $1.2 billion of higher price deposits to other banks. That's at the end of Q2. In Q3, we already transitioned a billion dollars and we expect to transition another $750 million by the end of Q3. I should say we plan to do this all while continuing to grow total deposits in Q3 up or near a billion dollars. So Q3 is going to see $1.75 billion transition off the balance sheet, but yet we're still going to grow, it's our intent to grow a billion dollars or about just about a billion dollars for Q3.

So that's the volume side. And then we also plan to take down Q4, I'll say by several hundred million dollars and all in for the year, we're expecting to target $3 billion and then we'll wait, we'll pause, we'll look at what we plan to do in 2027 and we'll make our next set of assumptions to move forward based upon our 2027 plan.

As it relates to your specific question on deposit costs, we do expect deposit costs to decline in Q3 and some more and in Q4 from the deposit remixing optimization strategy. But in Q4, you're going to see the impact of the 25 basis points times the beta of the outstanding ECR balances that we have that will offset some of that impact in Q4. So all in, what we've given guidance is our total deposits from last guidance to this guidance remain flat, but we're able to absorb the 25 basis points of increase to the ECR deposit levels.

Yeah, I completely agree with that. That's exactly what's going on here, Tony. So in the fourth quarter with the 125 dip rate hike, obviously that's back weighted towards the end of the year. So the impact will be a little bit more muted for the full year, but that's how we're able to offset it. So the deposit cost would have gone up a little bit because of the rate hike, but due to the $3 billion optimization program that's bringing the number back down, I would also just add that the majority of the $3 billion we're targeting does hit that sort of ECR deposit balance.

And you know, everyone talks about the deposit costs as it's as it's asymmetric. I just want to make sure you know that when deposit costs go down, there's also decline in net interest income because we're not putting those deposits out into investment. So the net impact to the balance sheet is much smaller than calculating just what the deposit cost reduction is within operating expense.

Yeah, I think the balance sheet will continue to grow just naturally given the opportunities that we have in front of us. Just to remind folks, at the end of Q1, we only grew $400 million. And we said that we had a very, very strong pipeline moving into Q2. And in fact, we did accomplish that by generating $1.8 billion of loan growth. We still see a very good loan origination pipeline.

And what we did with taking down the loans by a billion dollars for the full year, that was the beginning of the optimization. We will continue to look at that going forward. But my sense is that the balance sheet will continue to rise over time. As it relates to optimizing the P&L or looking at our operating expenses.

You know, this quarter we ran three to one. We have a very good efficiency ratio. We continue to look at that all the time. I think what we don't get credit for is the fact that we have absorbed a great deal of the expense to prepare, to go over or cross over into LFI status, $100 billion threshold.

We absorb that and our efficiency ratio has remained steady to actually drop during that same time. So I would say that's a pretty nifty trick being able to absorb that increase in LFI preparation costs as well as bring down our efficiency ratio.

Yeah, so I'm gonna return to one of the things that we said during investor day, which is we've got a number of deposit channels, HOA, Business Escrow Services, Corporate Trust, Juris Banking, our digital asset group, which all have basically lower cost of funds than more of our traditional business loans. And it is our expectation to grow those business loans or those deposit channels at a faster pace than our traditional channels. And the badad, I'd also be a warehouse lending slash MSR group, which usually brings in somewhat of the higher price deposits.

Yeah, I think that's exactly what we're trying to do here. We've got all these different deposit initiatives. The cost is very attractive to them. When you think about each one, the cost is a little bit different there, but that's really the plan going forward as a remixing. As those lower cost deposits come in, we're gonna reduce the higher cost deposits. Net, net, as Ken mentioned, we're gonna grow deposits in the third quarter, but we do think the cost is gonna continue to improve from here. I'll give you just sort of where we are from a spot perspective so you can kind of see the early efforts here. And it's not just the ECR deposits, it's across the bank, we're trying to see where there's potential reduction.

So our cost of total deposits in the second quarter declined three basis points from 181 to 178. As we're coming out of June, we see that trending down one to two basis points. And when you look at cost of interest bearing deposits was down about one basis points in the second quarter, 274 from 275. We're also exiting June with that being down about one to two basis points. So I think the direction and the trajectory looks encouraging from here. This is Dale. I might also add that during our investor day, we talked about our new deposit businesses and what growth they have. Well, the past year, they have grown two and a half times as fast as the rest of the balance sheet.

And they've also had a decline in their funding costs at a cheaper rate than what the rest of the balance sheet has been. I think that's gonna continue into third and fourth quarter given the declines that we're gonna continue to see and kind of mortgage warehouse deposits that can outline. And again, so the mix is gonna be changing to lower costs, more diversified, and faster growing sources than we've had in the past.

Well, the guide was really lowered from several vantage points. First, the mortgage, and that goes without saying the macro or economic environment, geopolitical environment is just how some natural headwinds there. And so we will be pleased if we continue to see mortgage income in Q3 and Q4 consistent with Q2. We hope to do better, but that's our baseline approach.

In the first half of the year, what we saw was, and then maybe I'll turn this part over to Dale again, because it's his business, but Juris Banking has a component in there called DSP. That's our payment network to handle large claims and we make fee income as we handle those large claims. We had a couple of them that were in the first half of the year that accelerated income, which we thought would be in the back half to the front half of the year. Dale, do you want to pick that up?

Yeah, you may recall we discussed Cambridge Analytica before, but we had significant volume in terms of payments in the fourth quarter running into the first quarter. Thought it'd be a little bit earlier, and I would tell you our Q in this particular channel is very strong. What we have difficulty doing is depending down exactly when those revenues are gonna come in because they're subject to motions, the federal court system, and a number of other variables that we don't control. But that said, we do see this picking up, we don't see it picking up immediately, but maybe by fourth quarter, it's certainly in the 2027, we have some big cases that we think are gonna be coming to fruition for distribution.

Okay, thank you for the question. So let's take the first one on capital allocation. One of the factors that we have set up in our model is maintaining a 11% DET1 ratio. Now many of our competitors will run between 10.2 and 10.5, right? And we're very aware of that. But for us, keeping the CT1 ratio at 11% allows us to have the right credit rating that affords with the ability for sales businesses that he just mentioned, the BES, the corporate trust, digital assets, I'm sure I'm missing a couple off top of my head. But those five to six businesses to grow at an outsized pace.

So we're trying to optimize the balance sheet also through lower deposit costs. We need to keep that 11% DET1 ratio there to maintain our investment grade rating or actually improve it as we go forward to help bring in the lower cost of deposits. So that is a factor that we keep in mind when looking to buyback shares. Now, if the stock is undervalue and continues to be undervalue, do I want to buyback more shares?

The answer is you bet. And we're going to look for or look towards two things. One, if we see a continued spread compression at a point where we don't like the risk adjusted returns, we may slow down long growth again and still be ahead of all our peers, by the way, and buyback more shares. And or, let's see what happens as we get to the end of the third quarter when we believe the Basel III rules will be published.

And at a minimum, we hope that the 81 basis points that I already referenced will be available for us to use to buyback more shares and or increase our CET-1 ratio. And or also support greater growth if we have it, if it's an opportunity for us for based upon our loan origination challenge. So we kind of look at all three of those, and it's dynamic.

And we do think that being in a place where you can actually grow faster than peers and also buyback shares, positions to bank to be in a good place in terms of delivering, continuing to deliver value both in the short term and in the long term for shareholders. So you asked a short question, I decided to give you a long answer on the first item.

On the second one, on operating efficiency, we are always focused on operating efficiency. And what we do there, to be honest, is we'll trade off a little, since we have our operating efficiency is generally so much lower than the other banks. And again, we absorb $25 million a year for the last couple of years in terms of being LFI ready and compliant, right?

That we will use some of those funds to continue to look at opportunities to either bring on new business development officers and channels that we think provided through the good risk adjusted return or continue to build new deposit channels that we're always working at as well, or even new loan channels or businesses. And so we continue to do that. Plus, we're putting money into our, a bunch of AI initiatives inside of the company. And that's gonna cost some money.

And, you know, we have nothing to report on what the return on that is yet. Right now, we're seeing just benefits around the edges, but we're trying to mobilize that inside of the company to make that a more significant event or production going forward or return. Not production, I should say the word return going forward.

Yeah, sure, I think you've heard one of the points there, and that's something we're clearly focused on. That's the whole point of the deposit optimization program. You know, as Ken has mentioned before, there's definitely, and these are long standing client relationships that go back a long time, and where this is definitely gonna involve some finesse in terms of how we're working through this. So it's hard to tell you right now sort of what the end state is. What I would tell you is we're very focused on this. We're working to bring the cost down. We've gone across the bank. We're looking at some of the most expensive deposits that we have across the different business lines.

We're trying to see where we could reprice it down with our six different deposit initiatives, where we're having a lot of success there, and a lot of the costs that I'll tell you in business escrow services, the cost is well less than 1%. Really, we are having traction getting these lower cost deposits in, but it naturally will take some time for us to do this. I wouldn't expect anyone to think this is gonna change overnight, but over the medium term, we think we will be able to move the needle here.

I just wanna add something else to that. Deposit costs, interest expense, they're just one or two of the inputs to the output, which is PP&R growth. And our PP&R growth is rather robust. This quarter was 1.68% of average assets, and look at that PP&R growth and look what we're doing with it, right? This quarter, we also put an additional $14 million into the loan loss reserve. That's worth about 10 cents to us, because we continue to move forward more with C&I loans and de-emphasize, say, the residential loans. And so, the PP&R is what we really focus on.

Net interest margin should rise in the future with the activities that we're talking about, adjusted net interest margin. That's where we move the deposit out of operating expense into revenue that should increase over time. But the benefit here, that will be to the benefit of a higher PP&R, which will give us all the flexibility that we want going forward to our long-term goals of getting to a return on average tangible common equity of 16 to 17%, which, by the way, we were at 15.4% for this quarter.

Ebrim, the only other thing I would add is also we're having a lot of traction on the treasury management side, as we're targeting more C&I loans and focused on our commercial clients, you actually see like a noticeable uptick so far in our treasury management fees. And we think that direction is going to continue going forward.

OK. So we've got several things going on for the back half of the year. We said there were six credits that we needed to resolve to bring the MTLs down, two of which have been resolved by the end of the quarter. A third should be resolved in the next one week to 10 days. We've got everything signed up ready to go. We just got a close.

We have that's three. The fourth one is being targeted and looks like right now, it's on track for the end of Q3 with the last two to happen in Q4, all right? So that's the path. That's the track. We're still on the same track as we disclosed on investor day.

Could one of those credits move out of Q3 into Q4? Yeah, you bet. But the trend will be down between now and the end of the year, all right? And that's what we're focused on. And we also think that the charge-off level or the dollars have peaked. The charge-off rate has peaked. In Q1 and Q2, you could see they both remain flat.

Actually, charge-off rate was down a couple of basis points. And we see that with a gently sloping coming down in Q3 and Q4. I'll look to Lynn. Did I take everything away from you, Lynn? Our Lynn Hedren is our chief credit officer sitting in here today. Do you want to add anything?

No, exactly. What you said, high confidence in those six assets, resolutions, and continued focus on the rest to bring that non-acral number down. And I'll also just say, it's worth you to look at the appendix here of this deck and just look at how we compare on special mention loans, criticized, and classified loans relative to the peer group. We're not just a little better.

We are significantly better. Yes, our MPLs are a little bit higher than we'd like. And we're working on them, bringing them down. But overall, the asset quality is rather firm here.

Yeah, Janet, it's Michelle here. I just want to hit the second point of your question about the charge-off and what to think about for the back half of the year. So we're still reaffirming for the full year we'll be between the 25 to 35 Vips. And I understand your point about, what would you put at the back half to get there? I would say right now, it seems like we're tracking a little bit above the midpoint of that 25 to 35 when you think about charge-offs for the back half of the year as you're doing your modeling.

Somewhat, for the back half of the year, the service fee charges coming out of the Juris banking group should be less in the back half of the year than the first half of the year. The service fee charges, treasury management services that come out of the rest of the bank, regional banking and our commercial business lines that Tim Bruckner runs sitting across from me, those should tick up somewhat.

But it will not tick up to the extent that you have those big settlements that you have in Q1 and Q2 from Juris. So the fee income, total fee income will be down compared to Q1 and Q2. The other things that are important to note, what was in Q1 and Q2? Well, we started this new program and we're excited by it, which is this, we're hedging the mortgage business, I'll say at the corporate level, by selling options against MBS bonds. We made $6.2 million in Q2. We already locked in 3 million in Q3, and we hope to kind of do that going forward as somewhat of a hedge against the Ameri-Home business. So that's new that you'll see going forward.

The other thing in Q2 that you had that is hard to predict when it happens in Q3 and Q4 is in our tech and innovation business, it's common or it's not uncommon, I should say, to get an exit fee or a warrant position attached to the credit that we're giving to some of these tech and innovation companies.

And when those companies have an exit event and we have warrants attached to that, then the value, we obviously receive the value, okay? Sometimes we receive it right away, if it's an exit event that has a bonus fee attached to it, sometimes we have to wait a couple of months if it's attached to an exit where we have to hold on to the stock as something went public.

But that was in Q2, hard to predict when those things happen in Q3 and Q4. And so for us, we have very low expectations of that, just as a general rule. And when the good news comes in, we do the happy dance when it comes in. So that's how we kind of projected out for Q3 and Q4. I would not project anything into 2027 for DST.

I'm excited about the pipeline and I've learned one thing working with Dell, the pipeline always looks great, but somehow lawyers get in the way of it, motions get in the way of it, judges may have different rulings or changed their minds and then everything just keeps moving back versus when I expected. So I've tempered my enthusiasm short term but long term that pipeline continues to grow.

Hey Casey, it's Michelle, thanks for the question. I think you're spot on. I think the reserve is going to continue to move up incrementally from here. That's driven by, we're reducing sort of the growth on the mortgage side and moving more into the CNI side. As you could see this quarter, we have the one and a half billion of the 1.8 billion came from CNI and when we look at the loan pipeline, that's where we're seeing a lot of the growth. So I think what you're going to see is a comparable increase that we had in the second quarter, which is the two BIPs. I think you could see a comparable increase in both the third and the fourth quarter.

So I think that ACL will move up from here, given sort of the mix of the loan portfolio going forward.

And Casey, an interesting data point that we monitor, the peer group banks probably brought down their loan, allowance of loan loss reserve or ACL, down about three or so basis points on average as a group. We've come up to basis points. So we've closed that gap by five basis points. And so as the other banks continue to bring that down, we're continuing to rise upward and over time the difference or the gap between where we stand and where they stand will be different. It will be smaller. The other thing I just want to bring to your attention, and we've said this many times, we really look at our ACL to be over 1%. You cannot ignore the fact that we have CLMs on our residential portfolio, right?

And the CLMs is an insurance policy whereby we've already received all the money in. It's sitting on our balance sheet and we can use that money if there are losses against the residential book. So that's protecting our business. And so we really kind of see our position closer to 1%, not withstanding that. It will rise very naturally, as Vishal said, as we remix the loan composition.

Yeah, I think that question can also be put to the deposit side as well as the loan side. I'll start off and I'll turn it over to Tim Bruckner.

First on the deposit side, I keep using the word finesse, and we're helping our clients transition their deposits to other banks who are willing to pay the price that we're paying or even a higher price to get those deposits. So we've got to give them ample notice, right? We're not looking to push anything out of the bank. We're looking to transition with them, all right? And keep the relationship as robust as it is because there are other aspects to it. There's the loan origination aspect. There is operating accounts that come with it as well. And of course, treasury management services.

On the other side, on the loan side, we have, and maybe this is deleted for Bruckner, we have just so many different loan verticals that we can move on and off of. Tim, you want to take it from there?

Yeah, I'm glad this question was asked. We have an incredibly broad bank. We've taken every opportunity to tell anyone we can about the different S-curve engines that we have, the different businesses that we have. Generally speaking, as we have slightly slower growth, we're allocating from non-relationship lending in some cases and to full relationship banking. So when we, and you can see it in our numbers, you can see where the investor commercial real estate has come down and the CNI numbers have gone up. At the same time, for the past three years, we've put incredible product improvements into our treasury management complement.

And we're now seeing the benefits of that. So there is no difficulty in relationship continuity. In fact, we're moving to relationship and we're de-emphasizing some of the lending that we were doing that didn't have that depth of relationship and cross-self.

So some of that will be a natural outcome of that. So for example, we will not look to push as hard on capital and subscription lines, where we see those spreads compressing at a very fast pace. So yeah, you could see that. The other thing on the NDFI also is a reflection of what we're doing in warehouse lending and MSR lending, which is a reflection of the mortgage market. So the mortgage market has pulled back somewhat and therefore the amounts of credit that our warehouse on the clients need has dropped back as well.

The only thing I want to reemphasize something Ken said before, which is even though we have a pivot here, right? So the loan growth, we've projected about 10% growth, now coming to 8.5% for the year and deposits were about 10.5 now, about 8%. I just want to reemphasize these growth rates, our top quartile growth rates, not only top quartile, but when we looked and I appreciate estimates are moving around, it really put us at the number one or number two, when you look at all banks between 50 to 300 billion from a growth perspective this year. So I think it's a very unique thing we're able to do here, which is still have top quartile growth and high risk adjusted returns, but at the same time, see the opportunity in our share price being undervalued and go out there and do a significant share repurchase.

So I think the combination of the two, I think is a very attractive opportunity moving forward.

So we grew on HFI loans, 400 million in Q1, 1.8 in Q2. So that's 2.2. We said 5 billion. So, you know, you're looking at a billion two to a billion three in each of the next two quarters. Our pipelines indicate that that's what we're going to achieve.

So what I'll share on the credit, and first of all, we haven't got the appraisal in. So we just thought with that, okay? But what we've got to share on the credit is the bar has brought the credit current. So that's good as of the end of June, they brought it current. They have indicated that they're going to make the next one or two payments going forward because they have a tenant, potential tenant, I should say, that is looking at taking a sizable piece, renting a sizable piece of the building.

And so we think at this moment, based on all the facts that we know, that we have that property fairly valued on our balance sheet. And I don't want to say I'm optimistic about how this thing's going to be resolved, but I am pleased that the bar brought the credit current as of the end of June, and has indicated that they're going to make the next couple of payments, the next couple of monthly payments, as they work and we help them bring in a potential tenant to this building.

You're welcome.

So that'd be driven by some of Gail's initiatives. There's a hundred billion getting lifted in all kind of influence that trajectory. And then I'm thinking in terms of 20, 27 and beyond balance sheet growth, the levels this year is this kind of a good jumping off point for what we should think about 27 growth?

You've got a couple of things there. First, getting ready to cross over 100 billion has not influenced any of this. There's a byproduct of it, which is you've got to be on average the over 100 billion to be considered into category four. And the fact that maybe we've slowed down growth by a quarter or so puts us into that next category, next year, but the filing of a number of reports actually gets extended for months after that, actually quarters after that. So it just gives us more time to be prepared. That's sort of just a regulatory thing, but nothing that we're doing is designed, purposely designed to bring down the growth so that we could stay under 100 billion dollars.

At this point, and I'll come back and say, we're really finessing what we do here and so we're looking at taking down overall deposits in the ECR land by about three billion by the end of the year, all right?

That's pretty considerable, all right? And also looking to improve total deposits in two, three by a billion dollars and roughly staying flat in Q4, which is as you know, our seasonal drop off with warehouse lending clients. And so at this point, three billion looks pretty, pretty good. We'll give you a little more guidance as we get closer to 2027 on what we plan to do.

A lot of that's gonna be predicated upon opportunities that we have on the loan side where we wanna place our loans at deposit ratio, which we continue to bring up. It's now 74 and change, where it used to be 71 and change. We can bring that up a little bit. So I'm not gonna commit to what the 27 levels are gonna be until we do a little bit more planning. We are, you have to appreciate, we're in early stages of doing this in terms of remixing. We mentioned it on May 12th. We said we have to give plenty of time for our clients to reposition their deposits. We wanna work with them because we have so many other relationships with them.

Yeah, so actually the six loans that we mentioned at Investor Day did not include the life science loan that Ken was referencing a little bit earlier. We are clearly working to expedite the resolution of that one as quickly as possible. But the six that were mentioned there specifically don't include that. Again, two of them have already closed and are off the books.

And we're working really quickly on the one to two that we do expect to close in this quarter.

No, the life science loan was brought current. It's still an NPL. And we have not forecasted. And at this point are not forecasting that to roll out of NPLs. Yet we're still telling you that total NPLs will be climbed in the back half of the year. That's it.

Tantimal common equity, how important is the TC ratio in this discussion with CET1? I think the TCE is at a reasonable level right now at the 7%. I think when you think about it, we tend to manage more to the CET1 ratio. Appreciating we look at all the different capital metrics. As you've heard us say, 11% CET1 is the target. The reason we're OK at the 7% level, TC to TA, we believe it's solid.

I would point you to Chris. Obviously, if you look at the assets, 27% of our assets are sitting in cash and security. And a quarter of our loan book is sitting in like res the mortgages, low LTV, high FICO. So we feel good with the TCE where it is. I think depending on where rates go, AOCI and how we kind of continue to optimize from here, you could see it go up. But we feel good about the 7%.

Yeah. And the deposit optimization program has a benefit of bringing up the TCE to TA. And so that will, we should see an upward bent on that ratio as we move forward into the back half of the year.

Thank you all for your time today. I hope we thoroughly answered all your questions about the second quarter. And we look forward to having another call with you soon to talk about our key three results. Enjoy the rest of the day, everyone.

Good bye.