Western Alliance Bancorporation (WAL) Q3 2026 earnings call transcript

com I would now like to turn the call over to Miles Pondelik head of investor relations and corporate development Please go ahead Thank you.

Welcome the Western Alliance Bank's third quarter 2026 conference call our speakers today are Ken Vechione chairman president and chief executive officer and Michelle Adnani 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 and certainties and assumptions except is required by law the company does not undertake any obligation update any forward-looking statements For more complete discussion the risk and certainty that could cause actual results that differ materially from any forward-looking statements Please refer to the company's SEC violence including the form 8k files yesterday, which are available on the company's website now for opening remarks I'd like to turn the call over to Ken Vechione Good afternoon everyone.

I'll make some brief comments about our third quarter 2026 performance Before handing the call 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 as usual West Alliance entered the quarter with three strategic objectives front and center Improve asset quality lower deposit costs and accelerate share repurchases We exited the quarter having made significant strides against each of these goals, which I'm pleased to update you on today As the quality improved meaningfully in the third quarter Non-acool loans declined 14% or $77 million from the prior quarter to 485 million dollars exceeding the expectations outlined in our guidance update last month We successfully resolved two additional credits from the six identified at May's investor day and the remaining two are on a glide path towards resolution Before year-end net charge offs also improved declining nine million dollars from the prior quarter to 46 million dollars Net charge offs decreased seven basis points to 30 basis points combined with a four basis point increase in the allowance to funded HFI loans to 93 basis points the reduction in non-acruals drove ACL coverage of non-acrual loans sharply higher increasing 22 percentage points to 118% Our second strategic objective was the intentional transition of higher cost deposits off the balance sheet to lower our overall funding costs and improved balance sheet profitability Here too, we made substantial progress during the quarter.

We transitioned three billion dollars of higher cost ECR related deposits while keeping total deposits essentially flat compared with the prior quarter This was a Herculean achievement supported by a strong quarter of commercial banking deposit growth of 1.8 billion dollars These actions reduced deposit costs by 14 million dollars from Q2 and supported a 10 basis point quarterly expansion in adjusted net interest margin Importantly this decline in deposit cost represents a positive departure from prior third quarters when funding costs have typically peaked We remain well positioned for additional deposit costs in Q4 We have a deposit cost reductions in Q4 as we realize the full quarter benefit of these lower balances We exceeded our original deposit optimization goal by 1.5 billion dollars With 4.5 billion deposits remixed over the prior two quarters one quarter earlier than expected With another 500 million dollars expected to transition in Q4 this initiative is nearly complete Finally our more balanced growth profile has enhanced our flexibility to prioritize share Repurchases while maintaining robust capital levels in Q3.

We repurchase shares of shares of 92 million dollars Against our 150 million dollar target for the second half of 2026 Representing approximately one one five million shares or roughly 1% of shares outstanding We have continued to repurchase shares at attractive valuations into Q4 and remain on track to achieve our second half repurchase objectives Taken together these accomplishments support sustainable risk-adjusted PP&R growth and increasing profitability Keeping us on track to achieve the medium-term goals outlined at investor day I'll hand the call over to the child to review our Q3 financial results Thanks Ken Western Alliance delivered another quarter of strong and steady financial performance with continued earnings growth improving credit trends and strong reserve coverage alongside increased capital return PP&R grew six percent year over year to 419 million while EPS increased seven and a half percent to two dollars and forty five cents Net interest income grew eight percent or fifty seven million driven by continued HFI loan growth while non-interest income increased 10% or 19 million reflecting continued momentum in commercial banking fee income Partially offset by rate-driven headwinds in mortgage banking Net revenue increased seventy six million over the past year compared with approximately 51 million of growth in non-interest expense and supported continued growth in pre-provision net revenue Credit trends also improved provision expense remained essentially flat year over year while non-acrual loans declined to 79 basis points of funded HFI loans and reserve coverage increased to a hundred and eighteen percent This helped drive net income of two hundred and seventy seven million up six percent from a year ago and while our strategic actions have moderated balance sheet growth over the past two quarters profitability has continued to improve ROATCE increased 20 basis points from Q2 to 15 and a half percent Overall we're encouraged by our financial trajectory the actions we've taken over the past two quarters Many of which we outlined at investor day in May are strengthening the durability of our earnings and positioning us well as we move forward Turning to the income statement on five five Net interest income of eight hundred and eight million increased five point four percent from the prior quarter on a linked quarter annualized basis benefiting from one and a half billion of growth in average HFI loans This more than offset lower average earning assets as our deposit optimization actions reduced excess liquidity and continued to improve balance sheet profitability Non-interest income increased eight million quarter over quarter or four percent to two hundred and seven million Commercial banking fee momentum continued to build increasing six million sequentially and 26 million year over year that growth along with higher securities gains more than offset lower mortgage banking revenue Mortgage banking revenue of 80 million declined only five million from the prior quarter despite a challenging rate environment Mortgage production decreased four percent and rate lock volume decreased 14% year over year while gain on sale margins remain stable at 27 basis points Our use of private label securitizations helps support secondary market revenue partially offsetting rate driven pressure on origination volumes and margins Non-interest expense increased 12 million from q2 to 595 million as Ken mentioned We were pleased with the 14 million dollar decrease in deposit costs Reflecting the four and a half billion of deposit optimization completed to date with another 500 million expected to transition in q4 This quarterly decline marks the welcome shifts from prior third quarters when we have typically experienced an increase in deposit costs as balances rebuild during the first half of the year we expect a further reduction in deposit costs in the fourth quarter Taken together the quarter reflects continued progress in shifting the balance sheet toward higher returning assets Building our commercial banking fee businesses and reducing the structural cost of our deposit base Turning to the balance sheet on slide six Securities and cash declined approximately one billion from q2 to 25.6 billion Reflecting deployment into loans and the impact of our deposit optimization strategy Securities and cash represented 26% of assets while our hfi loan to deposit ratio increased approximately one percentage point to 75% Moving closer to our medium-term target of 77 to 80%.

HFI loans grew 600 million during the quarter with more than half of the growth coming from CNI and a solid contribution from select CRE businesses Total deposits declined by only a hundred and nineteen million despite more than three billion of deposit optimization during the quarter Commercial banking deposits helped offset those actions growing 1.8 billion in q3 and increasing to 34% of total deposits Another benefit of our optimization efforts was a 10% quarterly decline in period and borrowings to 5.6 billion Which further supported quarterly improvements in both the adjusted and reported nymphs Overall total assets decreased 629 million from q2 to 98.1 billion while total equity decreased 188 million primarily reflecting the change in AOCI from higher interest rates and our share of purchases Tangible book value per share decreased $1.02 sequentially to 62 22 yet remained up more than 6% year over year Looking at loan growth on slide seven hfi loans grew 600 million in q3 with continued strength across our commercial businesses CNI loans grew nearly 350 million in the quarter and have driven approximately 90% of our 4.9 billion of hfi loan growth over the past year.

We also saw solid growth in select CRE businesses Commercial loan growth was partially offset by an approximately 350 million dollar decline in mortgage warehouse and MSR balances As softer mortgage demand reduced line utilization We remain focused on moving our hfi loan to deposit ratio toward our 77 to 80% medium term target and continue to expect commercial loan growth to lead us toward that goal Turning to deposits on slide eight commercial banking deposits grew 1.8 billion in the quarter Increasing to 34% of our deposit base from 31% last quarter This strong commercial banking growth offset most of the purposeful reduction in higher cost deposits Resulting in total deposits of 81.8 billion Essentially flat from q2 Our remixing efforts were concentrated in non-interest bearing deposits with associated ECRs As a result non-interest bearing deposits with no ECRs now represent 39% of total non-interest bearing deposits Compared to 33% at the end of q1 before we began our optimization efforts Turning to our net interest drivers on slide nine Securities yields decreased two basis points from q2 to 462 Reflecting a modest portfolio mix shift while hfi loan yields increased two basis points to 584 due to higher commercial loan yields The FOMC rate hike occurred just two weeks before quarter end So the benefit was not fully reflected in q3 earning asset yields The cost of interest bearing deposits increased two basis points to 276 Reflecting the active remix of our deposit base away from ECR related deposits and into interest bearing commercial deposits Interest bearing deposits increased approximately 2 billion during the quarter as part of that remix Overall liability funding costs increased six basis points to 202 as borrowing and debt costs increased Partially reflecting the full quarter impact of a subordinated debt rate reset late in q2 Looking at slide 10 net interest income grew 11 million from q2 or 5% annualized to 808 million Primarily reflecting higher average hfi loan balances Net interest margin expanded four basis points to 357 as average earning asset yields increased 10 basis points Partially offset by a six basis point increase in funding costs Average earning assets declined 785 million from q2 Primarily reflecting a $1.7 billion reduction in average cash as our deposit optimization efforts reduced excess liquidity While average hfi loans increased one and a half billion Turning to slide 11 the adjusted efficiency ratio increased 110 basis points from q2 to 50 As mentioned earlier non-interest expense increased approximately 12 million in q3 As higher salaries and employee benefits more than offset a 14 million dollar reduction in deposit costs That reduction reflected lower average ecr related deposit balances of 30.1 billion Down from 31.6 billion in q2 Higher salaries and employee benefits reflected an extra day in the quarter and targeted investments to support future growth and efficiency These investments included additional hiring to support our lower cost specialized deposit channels and new AI initiatives As well as converting technology consultants to full-time employees, which we expect will reduce contract or expense going forward On a sequential basis net revenue and non-interest expense each grew approximately 2 percent Resulting in an essentially flat reported efficiency ratio of 58 percent On slide 12 we remain slightly asset sensitive on a net interest income basis Of total earning assets 66 percent are variable with 52 52 percent re-pricing to sulfur while variable liabilities represent 86 percent of total earning assets Non-maturity deposit rates including ecr's are estimated to have a 65 Beta over the next 12 months When we incorporate the rate sensitivity of ecr related deposit costs and mortgage banking revenue That asset sensitivity largely moderates and our modeling indicates a neutral position on an earnings at risk basis Turning to slide 13.

I'll echo Ken's comments and highlight the continued improvement in our key asset quality metrics Classified assets declined 37 million to less than 1.1 billion Largely reflecting two additional non-acrual resolutions previously identified with two more expected to resolve this quarter Non-acrual loans declined 77 million or 14 percent from q2 to 485 million Reducing the ratio to funded h5 loans by 13 basis points to 79 basis points Classified accruing loans were essentially flat at 441 million or 72 basis points of funded loans While or you increased 39 million to 165 million Special mention loans increased 81 million as we continued to actively migrate loans to special mention in order to facilitate early identification Elevation and resolution as shown in the appendix western lines continues to compare favorably with our 50 billion to 350 billion asset peers Across special mention classified and criticized loan categories both currently and historically The improvement and non-acrual loans together with stable classified accruing balances kept overall criticized loans relatively flat at 1.3 billion On slide 14 provision expense with 80 million replenishing net charge off the 46 million and supporting incremental loan growth The resulting allowance for loan losses increased three basis points to 83 of funded h5 loans While our total loan ACL ratio increased four basis points to 93 bits Excluding loans covered by credit linked notes the total loan ACL to funded loans ratio increased Six basis points to 107 compared with 101 last quarter based on our c&i loan growth trends We expect the allowance to continue to build in the fourth quarter Continued execution on non-acrual resolutions Together with the increase in reserves growth total loan ACL coverage of non-acrual loans to 118 Up from 96 percent in q2 Looking at capital on slide 15 our tangible common equity detachable assets ratio decreased 10 basis points from q2 to 6.9 Primarily reflecting the change in a OCI from higher interest rates and accelerated share repurchases Partially offset by earnings growth and the reduction in our balance sheet from the deposit optimization I'd also note that the vast majority of our securities are classified as available for sale Our ct1 ratio decreased 10 basis points from q2 to 10.9 Reflecting loan growth and share repurchases while remaining above well capital ized levels Shuring q3 we repurchased 92.1 million or approximately one spot one five million shares at an average price of 7978 This brought cumulative repurchases since the program's inception to 212.5 million or about 2.7 million shares through september 30 Turning to slide 16 tangible book value per share increased six percent year over year And it's grown at a 16 percent year since the end of 2015 Over that period our tangible book value growth has been approximately four times the peer medium As a reminder the peer comparison is presented on a one-quarter lag with western alliance reflecting q3 results and peers reflecting q2 As q3 results are incorporated across the peer group We expect the comparison to better reflect the impact of the higher rate environment across the industry I'll now hand the call back to kin Okay, thanks fish all as I discussed in my opening remarks western alliance made significant progress during the quarter Against several of the priorities established at our investor day in may The non-acool resolution to continue reserve bill to help address a key credit overhang while further strengthening reserve coverage Our deposit optimization efforts have positioned the balance sheet for improved profitability Benefits of which are already evident in our third quarter results We also accelerated share repurchases reflecting both the trajectory of our business and our confidence in the long-term value of the franchise Given our current valuation we continue to view share repurchases as an attractive and disciplined use of capital With that context our updated 2026 outlook is as follows Deposit optimization is now expected to total at least five billion dollars by year end compared to the three billion dollars Previously identified on our second quarter earnings call as a result We are revising our deposit growth outlook lower by a comparable amount from six billion to a range of three and a half to four billion Strong momentum and commercial banking deposits combined with encouraging growth from our newer deposit verticals Continues to support a lower cost and more durable funding base for the remainder of the year The outperformance and deposit optimization naturally reduces the overall deposit growth outlook I would also remind everyone that the fourth quarter typically experiences seasonal deposit outflows which are incorporated into our forecast Long growth is being revised lower by one billion dollars in conjunction with the transition of excess deposits off the balance sheet In addition warehouse lending activity is expected to be restrained by two factors typically seasonal Softness in Q4 and elevated interest rates which continue to temper mortgage demand The higher marginal hfi loan to deposit growth should place us within our medium-term target range of 77 to 80 percent by year end That interest income is now expected to grow between 11 and 12 percent Revise outlook reflects the purpose for purposeful actions taken within our deposit base and the corresponding impact on average earning assets Compared with our prior expectation of 12 to 14 percent growth Our forecasting cooperates at 25 basis point rate increase in December While we are pleased with the net interest margin expansion delivered in the third quarter Nim typically experiences a three to four basis point headwind in the fourth quarter due to a due to seasonal deposit outflows And the resulting increase in borrows Total non-interest income is now projected to grow between 18 and 21 compared to 13 to 17 percent growth previously This revision reflects strong Q3 performance and continuum momentum in commercial banking fees Mortgage banking revenue Q4 is expected to be approximately 70 million dollars Reflecting the seasonal slowdown in mortgage applications and the recent rise in mortgage rates Turning to non-interest expense our deposit optimization efforts reverse the typical third quarter increase in deposit force We expect continued deposit cost reductions in Q4 supported by Meaningfully lower ECR related deposit balance of 26.7 billion at quarter rank compared to 29.9 billion at the end of Q2 Lower balances should move should more than offset the impact of the September rate height As a result, we're lowering the upper end of our deposit cost guidance range to 650 to 675 million dollars Importantly, we continue invest in lower cost deposit channels and AI initiatives where we are beginning to realize benefits from earlier investments As a result, the operating expense range of 1.6 to 1.65 billion remains unchanged Although based on Q3 results, we currently expect to finish towards the upper end of that range With respect to asset quality, we are reaffirming our core net charge off guidance of 25 to 35 basis points Consistent with our Q3 results.

So those are four POS trades. And why do I highlight them? Well, first uh, the MSR related to those POS trades Uh is about a third of the cost of our normal MSR So we get to hold an MSR balance That's two-thirds less than we used to hold but we get to keep all those deposits deposits Here to four we have a cap of 25 and as you know if you cross over 25 The risk-weighted asset is very punitive in terms of being two and a half times Uh, the value of the MSR so we'll be able to grow MSRs and keep those deposits with us Rather than selling MSRs and sometimes when we sell our MSRs the deposits move away from us I want to say the MSRs that are that are sorry the deposits that are attached to the MSRs come in at roughly 20 basis points.

So the PLS transaction has several benefits one It provides us extra margin, which is going to be helpful for the mortgage income It also provides us with a smaller MSR balance and also allows us to keep and retain balances that are To buy the balances that are very low cost Thanks, David That's that's super helpful.

Um anything within CNI or the CRE buckets and just maybe how you think about credit in the op the potential for credit leverage as we look forward Yeah, so um I think we did make a great progress on asset quality and taking a second to Collectively pat ourselves on the back a little bit We see continued asset quality progress heading into q4 with NPLs Again coming down from the two three levels as we complete the two credits that are still need to still need to be Resolved and again, as I said, we're on a glide path to Resolving them and we have a very high confidence level that those will be resolved And we also see charge offs being no greater than the level they were in q3 But more likely coming down from that as well So that kind of gives you a little bit of a q3 into q4 viewpoint of asset quality as relates to Stressing the portfolio and looking at the portfolio Uh, it is our nature that we always stress all credits before they're granted and we put in different Stress mechanisms, but generally for the long period of time we stress all the credits Up 150 basis points for the impact of rates So when we approve credits, we already are factoring in that rates will be 150 basis points higher than ever Whatever the then prevailing rate is and if the deal works at that time with debt service coverage ratio and so forth Then we feel comfortable to approve it right now.

We're not seeing any bubbles in the book All right, and we just did our our we just do our reviews every quarter and we always do them right before Uh, the earnings call so right now there isn't any Heightened concern in any one part of the book other than to say Uh, as my asset as my chief credit officer sits to the left of me Uh, she always is nervous and it is always cautious, but really there's no big bubble that we see in the book at this time Matthew clark with piper sandler.

Um, I don't know the word I use the word relief. I would say that in two three uh operating expenses rose because of the Investment that we are making structurally in the business. I think that's pretty important Uh to the first question that we've received about where do you think deposit growth is going to come from Uh, this quarter q3 we added more people count Uh to a number of our deposit channels to begin to staff up for the pipelines that we currently have So we're putting money into the deposit channel Uh businesses that's one place second place. We're putting money in is in a a ai Initiatives and we're beginning to see some early signs of positive Returns on what we're doing and others with other Initiatives will take a little longer Uh to be uh to be realized and then the third thing we're doing in the expenses is beginning to transition out Consultants and hiring our own folks and that will take probably another quarter or so before we begin to see the benefit And that will probably that benefit will probably come at us in the early part of 2027 Yes, I mad it's the shawl here.

I agree with that and I think what you're getting it is you do have the guidance range So you can back-solve into what we have for expenses So obviously you have the range for the deposit cost we did cut the top end if that down given the continued success We're having in the optimization so we do think you'll see a further decline in deposit costs there And then when you look at the non-interest expense excluding the deposit cost I do think you will see a reduction in the fourth quarter given some of the things we did in the third quarter That it will be a decline in some of those line items going into the fourth quarter in line with the full-year guidance We've given you yeah, I just want to add one other thing to which all hit on an important point with q4 deposit for us The fact that we've taken off four and a half or transitioned out four and a half billion dollars You can calculate what the implied deposit cost rate is but the savings on that four and a half billion is able to absorb the 25 basis point increase on the ecr related deposits in q4 and still have a decline in overall deposit costs So that is a very important benefit none along on deposit optimization that we're also able to bring down our overall Total deposit costs going into q4 Great and then just on c income.

I just want to make sure we're on the same page Yeah, no, I appreciate that question I think you've got it there which is if you take the range we gave which is up 18 to 21 percent And you back solve what the year-to-date fee income is we are providing that number on an all-in basis So that includes the securities gains in there So what that would imply when you look at it is there would be a decrease from the third to the fourth quarter It's hard to say exactly what that's going to be obviously mortgage We'll have to see where that lands up our best estimate right now is down 70 million I do think we're down to 70 million and I think you will be probably on the higher side of that range When you're thinking about fee income based on what we're seeing right now, but it will be dependent on mortgage Next question comes from Jared Shaw with Barkley capital.

I said yes, you're exactly correct.

No, I think there will be a normalization there and so if you back out the deposit fees and you look at the rest of the non-interest expense Ex-deposit fees given what we said here, you would see a decline there You know anywhere think about it given we said the higher end of the range by call it five to seven percent So there is going to be that decline that happens there in the fourth quarter There was a little bit of what we were doing in terms of hiring that happened in the third But there's a turn there as well. So I would not take the third quarter That is not the new run rate to grow expenses off of the expenses Ex-deposit fees will be down in the fourth quarter and I would back into it based on the full-year guidance We've given you of that range and towards the top end of that range Next question comes from Ben Drillinger with City Good morning.

So I'm sure you came in a little choppy Ben. I'm just gonna restate your question. You're asking How did the two credits get resolved in queue?

So we're For the year end, we're just looking at two more that will help reduce uh the mpls we We Will always be mindful and try To reduce reo It it we use it we use reo in a very strategic way. We take properties back Um, generally a whole reo book. I should say has revenues greater than operating expenses So it's a net contributor to earnings But really the importance for us is to take the property back Put in the value ad that's needed and then increase the vacancy And I'm sorry, increase the occupancy decrease the vacancy and then move it off our books And if you go back to say q2 of 2025 You'll see our reo as as high as 218 and then it came down by year end Uh to 137 million dollars So we move things in and out of there and we find it's better to take these properties back And make the changes that are necessary increase value and then uh sell them back to the market I also want to say when we take the reo or we take the properties back to the reo We do mock the market.

We do mock them to mock it And so uh they all come in at current valuations And then if they're there any longer than a year We also remark them again to make sure that the valuations are accurate If not then we we take a charge Uh for them if they go off we don't take any gain until we sell Next question comes from t more braziler UBS Hi, good morning Morning t more Wanted to talk quickly on the margin Um, I don't know if there was an outlook or just a reference point But the comment on margin is typically down three to four basis points on the fourth quarter Just how does that triangulate to this year where it seems like loan growth for the year has already been achieved Your your your assets sensitive on the balance sheet and the offset from ecr is somewhat mitigated given the fact that they're Exiting here and you're getting the full kind of average effect in four q So is the four q guide going to be more or less reference to that historical three to four basis point range Or is there going to be more net asset sensitivity here in the near term as ecr's are less of a mitigating factor Yeah, the q four guide is more directed to what has happened in this company historically And where we've seen the decrease in net interest margin is because uh, we have a higher proportion of Mortgage related deposits leave the bank And we have to backfill it with other borrowings and that the other borrowings obviously cost more than the deposit cost And it weighs a little bit more on the margin these deposits then come back in In q four and then the margin then returns moves upward, but historically We've seen three to four basis points for the last several years Of impact to the margin because of the exit or the temporary exit of these warehouse lending Deposits.

Yeah, I would just said while we typically have some compression in the fourth quarter Exactly because of what Ken said you've got the warehouse deposits coming out and you have to take out more borrowings Dollars of nii will be flat to up in the fourth quarter when you're thinking about q three to q four I think you'll see the dollar nii up slightly anywhere from call it, you know One to two percentage points which you can kind of look at sort of what the full year guide is and back into it But I think it will be up from a dollar perspective while there is going to be a little bit compression on the nim side Okay, and then maybe looking beyond kind of the near term once the deposit optimization Program is complete What's the next step for western alliance?

Yeah, we'll give you more specific guidance When we do our q four earnings call in January, but I think the guidance you can take away from investor day Is what we're still continuing to follow which is we're going to have slower Or more moderate. I'll say long growth to be in the top quartile of our peers Rather than to be outside of the top quartile and by doing that We're also going to have less of a need for the deposit growth And that's how we're structuring the business going forward and then the excess capital that we generate Assuming that the share price is where it's at We will continue to be at buyers of our shares Next question comes from chris mcgratty with kbw Great.

Thanks Yeah, I would say, you know when we were at investor day in may we said we were going to target that two and a half to three years out So I think you may just bring that in from there So it's still sort of two to two and a half years is where we think we're going to get there And remember the whole point of that range was it is where we can sustainably get to an ROE between the 16 to 17 Percent and we landed at 15 and a half percent In the third quarter so we don't think we're that far from the bottom end of the range And the way we're going to get there is all the different things we're talking about here And one thing i'd highlight is we're making a very big push on the treasury management side Trying to bring in more fee income even trying to get more of those core operating accounts Lower cost deposits.

There's a lot of different initiatives that are going on at the bank to get there But I would say chris with all the two two and a half years from now Hopefully we'll get there on the sooner side given where at 15 and a half today Okay, great and then on the buyback I mean just taking the 150 that you Put out earlier would would imply some modest acceleration.

Yeah There are a couple things that we will Consider as we go forward and come out of 26 into 27 First We do want to see what the final Basel three rules are and that will help inform us What we are going to do in 27 regarding buybacks But we also want to target continue to target that 11 percent area for cut1 And the reason why we're focused on that is that we're looking to get a Upgrade on our short-term and long-term ratings Credit ratings and why that's important go back to the first call about where deposit growth is going to come from we believe a higher Credit upgrade will give us more ability give us a greater ability to attract more deposits in some of our Emerging deposit channels and so that's what we're going to bounce that out against the short and the long-term Of course if the price looks as attractive as it is today We're going to we're going to be buyers But we're going to try to bounce that against the 11 percent and I don't want to give short Drift to the TCE.

I mean that we do think is important and for us We are working over time to bring our TCE which only went down 10 basis points And just so I can tell you that had we not done The deposit optimization we probably would have been down another 20 basis points So the deposit optimization added 20 biffs to TCE And so our goal is to kind of bring our TCE to TA up towards our peer group, which is in that 7 6 to 7 8 range and that's one of our goals as well, but uh, but we're going to look at all those things together Chris Chris is Michelle here. The only thing I'd add obviously is you can see where we bought back the 92 million at 79 78 And the stock right now is trading at 75 So you can imagine we think this is a very attractive price to be buying back shares Next question comes from David Smith with truest Hey, uh, good morning.

So um speak a little bit about the You know the the types of loans you expecting that to come from place Yeah, so the You know the hfi portfolio grew four percent on a link quarter annualized basis this quarter and it was across regional banking uh hotel franchise finance tech and innovation uh that growth supported by msr lending and note finance offset a mild decline in warehouse lending as mortgage production slowed in response to Mortgage rates, uh, and I would proceed those same areas driving Um the volume going forward, but tim rucker is our chief bank. You also can you want to add anything to that? Hey, hey To say I'm very pleased to see the growth and the specialty initiatives that we've identified and spoken about and uh that's paired with the corresponding growth and deposit and treasury management fee related business.

So it is a Growth as a function of our strategy and now in action Thank you.

So Uh, that trend is still going to continue Yes, now this is the typical seasonal stuff we see with the T and I payments it builds up over the first three quarters of the year You have those outflows in the fourth quarter then obviously you see that spike back up in the first quarter Something that's very typical for us.

Yeah, so um The peer group reserves are about 1.18 And Our ACL is 93 basis points Uh last quarter. I don't know what's going to happen slowly this quarter, but last quarter We went up two basis points and the rest of the peer group came down three and that narrowed to group Uh, so to be honest with you john, we don't necessarily target an absolute number But rather we target through our ceasal process Uh the quality of our portfolio book that we stress tested We then make certain decisions like this quarter when we added overlays into the Models for a higher interest rate environment on certainty with the macro economic environment And also some uncertainty with the geopolitical environment and that kind of moved us off All right in addition as you've heard us say many times We are moving away from being a little bit more c re centric to more c and i centric and that combination of the portfolio Composition change will kind of lead us up upward as we kind of look at where we're we're going for our strategic plan We have just basically said think of it as about two bips Up per quarter given where we see the the composition of the loan growth Moving throughout 2027 Good.

It is Well, um It's my nature to be more of an organic growing All right, and we've shown great results Uh as a company growing that way through total shareholder return Uh, we're we're reevaluating. We don't have a broken company here We are reevaluating how best to get valuation higher in this company And we weren't getting rewarded for that excess Growth above the peer group and so what we're doing is we're bringing in the excess growth as you know All right, we had a blipping q1's asset quality I think we're showing that that was in fact a blip and you go back and look at 15 years of track record here And we've averaged 10 basis points go back over the last five years and you see we've averaged 17 basis points of charge off Still lower than our peer group You can go back and look at our classified assets are criticized and our special mentioned Currently to our peer group you can see that we're in the top four pile of all that So we're bringing in long growth.

We're improving or reaffirming asset quality And we are Lowering the growth of the balance sheet and not taking in deposits like we normally did Where we were making a smaller spread on the income because some of those deposits had some volatility to them In terms of how long we can lend them out for so therefore we could have been to HQa We're making a small spread and hence we're trying to get more out of our base And to grow our return on Average tangible common equity and return on average assets. So that's the growth. We're going to that's the plan very clear about that on investor day and we're still working towards that and And so what that's going to mean and actually helpful somewhat is that Tim Bruckner sitting to my right Gets to be far more selective about what loans he wants and should in fact be able to bring in loans at higher spread Then just having bringing all this deposit growth where you need to put it back out into lower into low alone growth Tim Thanks Ken What's what's neat about this the growth that you're seeing is exactly in the segments and sectors That we have indicated is being desirable And it's bringing with it exactly the deposit And fee business that we sought out we are prescriptive And how we approach that growth and we're seeing Seeing the results those results are encouraging Next question comes from kc hair auto gnomis research Great.

Thank kc. Obviously, uh, these are estimates based on the best information We have right now. We're currently expecting our blended cumulative deposit beta to be about 65 Over the pet next year and that includes both the non maturity deposits and the ECR related deposits To your point though, there is some nuance here between the types of deposits So as we think about, you know, non maturity deposits excluding ECRs We're expecting a beta anywhere from 55 to 60 Percent and when you think about the ECR specifically those deposits You could see a beta of about 70 to 75 Given we do have you know those warehouse deposits which come closer to a 90 to 100 beta.

So which one which one is is the all-in beta to 60 65 is the all-in beta Non maturity deposits plus ECRs if you were to exclude the ECRs 55 to 60 On the ECR specifically call it 70 to 75 So when you blend those two ranges, you'd get an overall beta of about 65 Okay And there's one more on the mpl resolution Front so, you know, I heard you guys, you know, talking about you stress the portfolio for prior interest rates But what do you guys have a minus side on on how much further the mpl resolution came out?

I do see that that the CRE loan yields were down a little bit Wanted to see if there's any Meaningful changes in the competition on the lending side Sure, it's it's a competitive environment and the acknowledgement Of that is foundational in the plan that we've undertaken. We don't look at relationships Clearly on a loan yield basis. We look at that on a relationship basis and we've done a really good job of maximizing our relationship income Including deposits including the the fee business In the in the segments that we pursue and how we evaluate and pursue those segments So we're pleased with what we're saying if you approach this as a loan only business today.

uh, John right now The five billion seems like the appropriate number uh, I said all along that this had to be finesse and In terms of how pleased we are we were able to transition to five or soon to be five billion dollars off of the balance sheet We have not lost a single customer. We have not lost any loan opportunities as as well. And um, I think uh, we're gonna we're gonna pause here And and see how the rest of the year shakes out Um, you know, we're uh, not many banks Act could have the precision to take out three billion dollars in a quarter And still keep deposits flat I mean, I said it in my opening remarks.

That's herculean. I mean that is that is precision bombing Okay, uh to be able to do that. This was no easy task Uh, and to also accelerate in the deposit transitioning Uh faster than we expected.

Yeah, I I believe it's really going to be in 27. There's you know, there's a couple of big cases out there Um, google being the most notable, um, but that's still in, um, a process Even though settlement discussions, I think are well along Um, so that's probably 27 of them Uh, Michelle, I think in 2q, you know, you highlighted, uh, trying to hedge the volatility in mortgage market You'd sell some covered call options.

We we did have a little bit of that in here as a couple of million bucks Nothing material in the quarter and then I say going forward opportunistically will continue to look at that Next question comes from Anthony alien with jp morgan Hi, vishal.

Yeah, sure. Thanks. So In terms of the nii, I'd say a couple of things. So one we've as can mentioned typically in the fourth quarter We do see a little bit of a contraction in nim And if you go back the last three years, you can take a look at that And again, it's due to the seasonality in the warehouse business As those tini payments come out as we kind of refund some of that with borrowings You've got some higher costs there. So that's why you see a little bit of nim compression In the fourth quarter that could be anywhere from as can said historically it's been three to four bits That being said, obviously the balance sheet is continuing to grow.

We do have optimization We have a remixing on the balance sheet So when we think about the dollars of nii, I think we're going to be flat to slightly up q3 to q4 from a dollar perspective So hopefully that helps on the first question on the second question about the cost of interest bearing deposits They were up two bits quarter over quarter from 274 to 276 Obviously we had the rate hike in september in the middle of the month So we are going to see you know and we expect to see cost of interest bearing deposits up into the fourth quarter When we look at where that sits today if I look at the month of september You know, it's up to about 281 up five bits from where we were for the quarter But that doesn't fairly capture the full projected increase obviously given the time of the hike So I would say just going forward based on sort of the beta assumptions we put out there And you know what we're looking at in terms of 25 bits I think you can back into our range there for cost of interest bearing deposits to go up call it anywhere from 10 to 15 bits There are no further questions at this time.

We were very pleased with the quarter very pleased against The progress we made against our strategic initiatives and we look forward to talking to you again in early january.