Western Alliance Bancorporation - Q3 2023
October 20, 2023
Transcript
Operator (participant)
Good day, everyone. Welcome to Western Alliance Bancorporation's Q3 2023 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I'd now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
Miles Pondelik (Director of Investor Relations and Corporate Development)
Thank you, and welcome to Western Alliance Bank's Q3 2023 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Officer, and Tim Bruckner, our Chief Credit Officer, will join for Q&A. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-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.
Ken Vecchione (President and CEO)
Thank you, Miles. Good morning, everyone. I'll make some brief comments about our Q3 2023 results, and then I'll turn the call over to Dale. One year ago, on our Q3 2022 call, we discussed our plans to temper balance sheet growth to bolster capital and liquidity in order to reinforce our financial foundation and position the bank to navigate through a volatile rate environment. The events of the spring caused by duration mismatch at several regional banks validated the importance of our strategy and accelerated its implementation through surgical balance sheet repositioning. The recalibration of our business model to enhance overall liquidity and deposit granularity is designed to make the balance sheet unassailable in the event of another significant market disruption.
As a result, our CET1 capital has grown from 8.7% a year ago to 10.6% today. Our HFI loan-to-deposit ratio has improved from 94% to 91%. To provide enhanced protection to depositors and cement the stability of our deposit base, insured and collateralized deposits have risen from 47% at year-end to 82%. In order to fortify our liquidity position, we have materially increased our cash and investment securities and now have $3.2 billion of high-quality liquid asset treasuries. Having established strong capital, liquidity, and deposit granularity, a sturdy foundation has been laid to deliver earnings improvement going forward. Over the last several quarters, we have prioritized stabilizing and growing deposits, as well as optimizing the liability structure by paying down borrowings.
This has led to net interest margin growing from our Q2 trough as we have sustained improvement in our funding structure, lowered our adjusted efficiency, and produced above-peer return on average assets and return on average tangible common equity. Over the next 1-2 quarters, we will complete the optimization of our funding structure and be well-positioned to deploy excess core deposits into loan growth. In the Q3, Western Alliance's profitability, strong liquidity generation, and stable asset quality are proof points to the dexterity of our diversified business model. Before handing the call over to Dale, I wanted to highlight the drivers of our strong deposit growth in Q3. Core commercial clients, both new and existing, were the primary sources contributing to $3.1 billion of growth.
Mortgage Warehouse and HOA pushed growth upward, and the regional network posted a second consecutive quarter of vigorous deposit contributions. Overall, deposit costs increased 27 basis points, though overall cost of interest-bearing liabilities compressed 5 basis points to 0.8% in Q3, as we utilized deposits to pay down higher cost borrowings, which Dale will comment on later. Liquidity came in ratably over the quarter to push down our average borrowings. Core commercial deposits cost a marginal 4.04%, including cost of earnings credit rates. Cultivating multi-product customer relationships remains critical for solidifying and growing client relationships, which has held in the mid-80% range in recent quarters. Our digital consumer channel, a source of liquidity uncorrelated with our core commercial business lines, generated approximately $800 million this quarter at attractive rates relative to the marginal cost of repaid borrowings.
In short, I feel confident in the vitality of our deposit franchise and how it sets up for future success. Now, Dale will take you through our financial performance.
Dale Gibbons (Vice Chairman and CFO)
Thanks, Ken. For the quarter, Western Alliance generated net income of $217 million, EPS of $1.97, and pre-provision net revenue of $290 million. Net interest income increased $37 million during the quarter to $587 million from favorable repricing of earning assets, as well as a reduction in higher-cost borrowings. Non-interest income increased $10 million to $129 million, which included approximately $6.5 million of non-recurring pre-tax items, such as fair value adjustments. AmeriHome was moderately impacted by rising mortgage rates and treasury yields, with mortgage banking revenue declining $7 million to $79 million, as lock volume fell 5% quarter-over-quarter, and production margins compressed slightly to 38 basis points. Non-interest expense growth was primarily driven by higher deposit costs and software licensing and depreciation expenses.
Deposit costs of $128 million demonstrated our deposit share gains from new customers and previous clients returning funds to the bank. Provision expense was $12 million due to stable asset quality and loan growth concentrated in low-loss categories. Our provision modeling remains conservative given the weighting of the Moody's consensus forecast into severely adverse scenarios, which in aggregate implies an 80% probability of recession. Lastly, our tax rate rose because of discrete nondeductible items in the quarter. We expect our tax rate to fall back to between 20% and 21% going forward. Overall, we made substantial progress in increasing on-balance-sheet liquidity, with investments and cash 19% higher quarter-over-quarter, mostly from adding more High-Quality Liquid Assets. Deposit share gains and balance-sheet remixing also pushed wholesale borrowings lower.
Cash and cash equivalents alone totaled $3.5 billion, up from $2.2 billion last quarter. With our strong deposit growth and capital levels, we elected to reclassify $1.3 billion of non-AmeriHome held-for-sale loans back to held for investment, or as organic loan growth has slowed. These transferred loans are short duration, low credit risk assets, which we believe are better served generating interest income for the bank going forward. The remaining loans held for sale consist entirely of AmeriHome residential inventory to be sold to the GSEs and have an average duration of only about two weeks. Including $1.3 billion of loans transferred from held for sale, loans held for investment rose $1.6 billion to $49.4 billion. As Ken mentioned, deposits increased $3.2 billion to $54 billion at quarter end.
Mortgage servicing rights increased in part due to the higher rate environment and stood at $1.2 billion on September 30th. Total borrowings declined by $820 million to $9.6 billion at quarter end, but average borrowings declined nearly $6 billion quarter-over-quarter, primarily from the repayment of Federal Home Loan Bank borrowings and private equity lines obtained from March earlier this year. Organic held-for-investment loans grew $240 million, primarily from C&I and centered around mortgage warehouse, MSR financing, and corporate finance, with smaller contributions from regional banking. HFI construction and land loan growth of $241 million derived mostly from lot banking loans reclassified from held-for-sale status. Given the national undersupply of homes, we still view the macro backdrop for this product favorably, despite the elevated rate environment.
Total deposit growth of $3.2 billion resulted primarily from an increase in core deposits and also reflects a reduction in wholesale broker deposits of over $400 million. Core deposit growth was fueled by $1.3 billion in non-interest-bearing DDA growth, led by Mortgage Warehouse, and $1.6 billion in savings and money market growth. Non-interest-bearing DDA comprised a third of our total deposits, of which approximately 40% have no cash payment of earnings credits. Quarter to date, deposit growth has surpassed $3 billion, though semiannual seasonality of Mortgage Warehouse deposits and tax and insurance escrow funds will pull this number down as payments are made this quarter. Turning now to net interest drivers. Favorable repricing in a higher rate environment increased the yield on earning assets.
Optimization of the liability structure by growing deposits to pay down more to short-term borrowings led to a lower cost of funding, liability funding. The securities portfolio grew $1 billion to $11.4 billion as we prioritized adding HQLA to the balance sheet. The yield on total investments expanded 15 basis points to 4.91. $1.8 billion in securities yielding 4.77 are also expected to mature by year-end, with another $2 billion yielding 4.98 maturing in 2024. Similarly, HFI loans increased 25 basis points to 6.73%, with a quarter-end spot rate of 6.99. In a higher-for-longer rate environment, we expect to benefit from favorable asset pricing tailwinds. Total fixed and variable loan maturities are expected to average $2.4 billion per quarter for the first three quarters of 2024.
Our strategy to rightsize the liability funding structure through increased savings and money market accounts resulted in a 41 basis point increase in the cost of interest-bearing deposits. Importantly, this enabled a $5.9 billion reduction in average short-term borrowings to 14% of interest-bearing liabilities, which resulted in a five basis point reduction in the overall cost of interest-bearing liabilities to 2.8% in the Q3. As noted on our last earnings call, we believe net interest income and net interest margin reached a cycle trough in the Q2. Net interest income grew nearly 7%, despite a modest contraction in average earning assets, and as the margin expanded 25 basis points quarter-over-quarter to 3.67. Considering the impact of future rate changes, our rate risk profile is modestly asset sensitive.
Our +100 basis point rate shock analysis on a static balance sheet indicates net interest income is expected to lift approximately 4% and decrease a similar amount on a -100 basis points shock. However, considering a more comprehensive review of interest rate risk, we project a 2.2% increase in earnings at risk from a 100 basis point negative shock on a static balance sheet, which is inclusive of estimated declines in ECR-related deposit costs. Additionally, in a lower rate environment, mortgage banking acts as a shock absorber to our asset-sensitive balance sheet from increased refinance activity and gain on sale margin expansion.
Our efficiency ratio of 58.8% was 170 basis points higher than in Q2, though our adjusted efficiency ratio, excluding the impact of ECRs, fell 50 basis points to 50%, as Mortgage Warehouse average balances with ECRs increased $2.4 billion-11 billion in the Q3. Lower compensation expense resulted from normal seasonal factors and mitigated higher software licensing and data processing costs. We still view a mid- to upper-40% efficiency ratio as indicative of the right medium-term level of investments to fund new business initiatives and the ongoing evolution of our risk management framework. Pre-provision net revenue was $290 million for the quarter. Solid profitability was maintained in Q3, with a stable return on average assets of 1.24% on a larger balance sheet.
Our total funded ACL increased $6 million from the prior quarter to $327 million, as HFI growth occurred almost entirely in near-zero loss categories, most prominently in mortgage warehouse. As a reminder, even after repaying two credit-linked notes, 22% of our loan portfolio was still protected, with any losses incurred to be covered by a third party. The total loan ACLs for funded loans ticked down two basis points to 74 basis points, but did increase 13 basis points to 154% of non-performing loans. We view our allowance as appropriate, especially when considering the material portion of loans covered by first-loss credit protection from credit-linked notes and low-loan-loss categories. Additionally, a sizable portion of our loan growth has been concentrated in low-to-no-loss products.
Our loan portfolio is diversified across segments, with almost a quarter of it either credit protected, government guaranteed, or cash secured, and over half of the portfolio is either insured or resistant to economic volatility. If adjusted for these factors, our ACL ratio rises to 1.34% of loans. Our strong organic capital growth lifted the CET1 ratio to 10.6%, or 8.8% when adjusted for AOCI and tax-affected unrealized held-to-maturity securities marks. Our tangible common equity to total assets decreased approximately 20 basis points from Q2 to 6.8% as the balance sheet expanded modestly, while capital growth was curtailed by our higher AOCI mark. Given the 45 basis point rise in the five-year Treasury during the quarter, AOCI reduced tangible common equity by $732 million.
Inclusive of our quarterly cash dividend payment of $0.36 per share, our tangible book value per share increased $0.57 in the quarter to $43.66. The quarter-over-quarter increase resulted from our earnings outpacing industry-wide AOCI headwinds stemming from rising rates. I'll now turn the call back to Ken.
Ken Vecchione (President and CEO)
Thanks, Dale. Our guidance for the rest of 2023 continues to be informed by the strategies and priorities laid out in our prior earnings call. As we look forward to Q4, you can expect loans and core deposits are expected to be fairly flat to several hundred million dollars higher in Q4. Net deposit growth will be impacted by normal Q4 seasonal reductions in mortgage warehouse deposits, offset by growth in the regional divisions and in the digital consumer channel. Deposits should still outpace loan growth. Going into 2024, we expect loan and deposit growth to return to our prior guidance. Regarding capital, having closed the 40 basis points of our medium-term CET1 target of 11%, we forecast continued, although more gradual progress towards this goal, which we remain on track to achieve in 2024.
Net interest margin should remain in line with our Q3 level in a range of 3.60-3.70, supported by asset pricing tailwinds and additional, if more temperate, borrowing repayment opportunities. Our Adjusted Efficiency Ratio, which excludes the impact of deposit costs, should remain consistent with Q3 levels. Regarding operating PPNR, we expect Q4 to be generally consistent with Q3, excluding the one-time items noted and acknowledging that mortgage banking revenue will be influenced by the impact of the rate environment on mortgage gain on sale. Asset quality remains manageable. Projects continue to be supported by sponsors based on our conservative underwriting and low advance rates. Credit losses are still expected to be 5-15 basis points through this economic cycle. At this time, Dale, Tim, and I are happy to take your calls, questions. Sorry.
Operator (participant)
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypads now. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Casey Haire of Jefferies. Casey, your line is open. Please go ahead.
Casey Haire (VP)
Yeah, great. Thanks. Good morning, everyone. First question on the NIM. Can you just walk us through, I guess, what the NIM guide presumes in the way of borrowings? Obviously, your deposit growth very strong quarter-to-date. I think, Ken, you'd mentioned you do expect that to pay down. Just that would bring the borrowings, which were up pretty significantly period-end versus the average in 3Q. Just wondering where that would end up in the Q4 here.
Dale Gibbons (Vice Chairman and CFO)
Yeah. We have some seasonality within deposit categories that affects this number, but the direction of borrowings is going to continue to be down. We paid off several of our more expensive funding sources that we achieved or acquired late in the Q1, and there's a little bit left. I expect we're to pay down that amount as well. We should continue to see kind of, you know, improvement there. Where you see we are, you know, in terms of reasonably balanced on target for loan and deposit growth this quarter, I think you should see some kind of, you know, modest improvement in ending balances as well.
I think the average balances should improve somewhat as well, but not to the degree they did in the Q3 over the second.
Ken Vecchione (President and CEO)
Yeah, Casey, you know, as you've seen, we took down our short-term borrowings by $817 million, but anytime we have any excess liquidity floating around, we use it to pay down borrowings. The average borrowings declined $6 billion in the quarter, and that helped bring down our lower funding rate.
Casey Haire (VP)
Okay, great. Just, Dale, I wanted to follow up on your comments on the fixed-rate asset repricing benefit in the first three quarters of 2024. I think you said $2.4 billion per quarter. Can you give us a sense of where?
Dale Gibbons (Vice Chairman and CFO)
Right
Casey Haire (VP)
Like, what the blended yield is on that and what that can reprice to? Just trying to quantify what the repricing benefit could be.
Dale Gibbons (Vice Chairman and CFO)
I mean, in terms of what the repricing could be, you know, these are coming off at, you know, something in the kind of around the higher 7s. You know, rates today have spreads of, you know, really not less than 300 basis points-350 basis points from there. I think maybe you don't have another rate increase in there, so I would take that on top of SOFR today. You know, something in the lower 8s.
Casey Haire (VP)
Okay. Over $7 billion of loans in the first three quarters with 100 basis points left?
Dale Gibbons (Vice Chairman and CFO)
You know, approximately.
Casey Haire (VP)
Okay. All right, just last one from me. On the expenses, you know, obviously, that was the one thing that kind of surprised negatively this quarter on the deposit costs. I have the deposit with ECR. The DDA with ECR up 15%, but the deposit costs were up 40%. I'm just trying to like, why the disconnect? You know, is there a different pricing dynamic today than there was historically? Just trying to understand that.
Dale Gibbons (Vice Chairman and CFO)
Well, we had higher balances and higher rates, and I think the average balance was elevated. The average balance was up 28% during the quarter. Let me approach it differently. In terms of the spreads that these clients receive, they're virtually no change.
Casey Haire (VP)
Okay, all right. We don't have the average balances. It's just a period-end was up 15%, the averages was up higher, and then-
Dale Gibbons (Vice Chairman and CFO)
We, we-
Casey Haire (VP)
The absorption was up as well.
Dale Gibbons (Vice Chairman and CFO)
Yeah.
Casey Haire (VP)
Okay, great. Thank you.
Dale Gibbons (Vice Chairman and CFO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Steven Alexopoulos of JP Morgan. Steven, your line is open. Please proceed.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Hi, everybody. I want to start.
Dale Gibbons (Vice Chairman and CFO)
Hi.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Regarding getting back to the $500 million per quarter loan growth target at $2 billion deposit growth in 2024. Once you guys get to the mid-80% loan-to-deposit ratio target, what's more likely that you guys dial up the loan growth expectation at that point or that you dial down the deposit growth?
Dale Gibbons (Vice Chairman and CFO)
You'll see it on the asset side. You'll see that will be the lever that will be used.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Okay. You're thinking to keep the $2 billion deposit target intact and then dial up expectations for asset growth?
Ken Vecchione (President and CEO)
Yeah, this is Ken. I think so. I think some of the investments that we've made in a number of our deposit-centric business lines will continue to propel deposits forward along the guide that we gave. As we recalibrate to a mid-80s loan-to-deposit ratio, we'll then turn off the loan growth machine. We've proven here over time that we can generate sound, thoughtful, reasonable loan growth with very little asset quality problems.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Got it. Okay. Going back to Casey's question on expenses, excluding the ECR-related deposit costs, which flow through, so if we put those aside, how are you guys thinking about expense growth over the next year?
Ken Vecchione (President and CEO)
All right, running from Q3 to Q4, expenses absent the deposits costs will be relatively flat. Okay? As we enter into 2024, there will be marginal expense growth, and that marginal expense growth will be predicated on continuing to invest in new products, new services, new business lines, continuing to build out our risk management framework. The hallmark of Western Alliance has been this continuous investment through all cycles to kind of grow the business for future quarters and years. As long as the risk return and the investment returns are there, we'll continue to do that.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Got it. From an efficiency ratio perspective, are you thinking that we'll have improvement through 2024, or that will keep about where you end in the Q4?
Ken Vecchione (President and CEO)
Yeah, I'd say about where we landed in the Q4. You know, back to your-
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Got it.
Ken Vecchione (President and CEO)
Back to your first question, as we probably exit the Q2 and we achieve our loan-to-deposit ratio, we'll be able to step on the accelerator of loan growth, and that will generate higher interest income, which should provide the denominator of that equation to grow at a faster pace. Right now, if you're modeling, I would say keep it consistent with Q4.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Right. It sounds like revenue is set to accelerate here with the margin being more stable, like you said, more loan growth coming in next year. We should think you're going to spend more of that, at least at this juncture, right? Because it seems like the setup is efficiency ratio improvement next year, but you're saying, at least at this point, don't expect that.
Ken Vecchione (President and CEO)
LDR is Loan-to-Deposit Ratio. Wait, "85% of the deposit growth". Correct. Wait, "a couple more quarters". Correct. Wait, "Well, I think it is set up that way, but it's a little bit deferred in terms of when that takes place because of the reasons Ken's talking about that we're going to be sluggish on having the loan growth really kind of match to 85% of the deposit growth as we continue to pull that number, the LDR number down for, you know, a couple more quarters.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Got it. Okay. Thanks for taking my questions.
Ken Vecchione (President and CEO)
Thanks, Steve.
Operator (participant)
Our next question comes from Chris McGratty of KBW. Chris, your line is open. Please go ahead.
Chris McGratty (Head of U.S. Bank Research and Managing Director)
Oh, great. Thanks. Dale and Ken, I want to go about that one a little bit different. You're going to be at your 11% target within a couple of quarters, if not 1-2 quarters. I'm not sure I'm prepared to ask this, but, like, wouldn't you be thinking about a share buyback at some point next year, given the capital accumulation and your stock price?
Ken Vecchione (President and CEO)
Yeah, I think that's a fair question to ask. I think there are a couple of things that will inform our decision. One, as we continue to grow and we continue to get closer and closer to the $100 billion threshold, we have to take into account the AOCI charge that will be applied against it. We want to continue to grow our CET1 ratio. Really, 11% is the target. It's not the goal. We expect to grow through that. All right? That's one. Number two, you'll see the CET1 ratio moderate in the back half of the year in terms of growth, because we'll probably step on the accelerator for loan growth once we achieve our loan-to-deposit ratio.
Dale Gibbons (Vice Chairman and CFO)
One of the reasons our ratio has climbed so quickly is because we have really curtailed our risk-weighted asset increases, and that will pick up again as loan growth reaccelerates.
Yeah. I mean, I just, you know, for the numbers' sake, we've improved our CET1 ratio 190 basis points since we went on this risk-weighted asset diet and really paid a lot more attention to that, and we slowed our loan growth. With our organic earnings, we were able to move that number rather quickly from a year ago, which was 8.7%, to where we are now at 10.6%.
Chris McGratty (Head of U.S. Bank Research and Managing Director)
Okay, that makes sense. It feels like there's a combination of maybe both that could be considered in the back half of the year as the OCI mark narrows and you get through your targets. It feels like a little bit of both. Okay. Okay, that's fair.
Ken Vecchione (President and CEO)
Even if.
Chris McGratty (Head of U.S. Bank Research and Managing Director)
Maybe a bigger-picture question.
Ken Vecchione (President and CEO)
Yeah, Chris.
Chris McGratty (Head of U.S. Bank Research and Managing Director)
No, keep going. I'm sorry. Sorry, guys.
Ken Vecchione (President and CEO)
I was just going to say, even if we're higher for longer on rates, you know, we will see that AOCI mark decline simply because the, you know, duration of the portfolio with, you know, under five years is going to continue to come down.
Chris, just so that I say to you and the rest of the folks on the line, you know, we're looking to build a very strong foundational balance sheet here. All right? Not be sucked into any of the problems that you saw in the Q1 with a number of banks having their duration mismatched. We just want to never go through that again, or if we have to, have it have a minimal effect on us. That's where our intent is to continue to raise capital levels and also to build our liquidity.
Chris McGratty (Head of U.S. Bank Research and Managing Director)
Great. Maybe just one follow-up. I think you've talked about a mid-teens ROE, you know, through the cycle. I guess, updated thoughts on that, given higher for longer?
Ken Vecchione (President and CEO)
Well, I think there's. You know, as our loan-to-deposit ratio, you know, continues to show kind of, you know, kind of where we're headed, we are going to have more High-Quality Liquid Assets.
You know, I think we can over time, our expense ratio can fall, you know, into the 40s on an adjusted basis. I think high teens works for us, kind of, you know, intermediate to longer term.
Chris McGratty (Head of U.S. Bank Research and Managing Director)
High teens. Okay, thanks.
Operator (participant)
Thank you. Our next question comes from Bernard Von Gizycki of Deutsche Bank. Bernard, your line is open. Please go ahead.
Bernard Von Gizycki (Equity Research Analyst)
Yes. Hi, good morning. Just on deposit costs, maybe I can ask it a little differently. You know, when you think of how your ECR-related deposit growth, based on your guidance expectations could go for 2024, if rates, you know, are steady from here throughout 2024, versus if, you know, we do see rate cuts in the second half of 2024, how would you think the deposit costs could migrate under those two different rate paths?
Dale Gibbons (Vice Chairman and CFO)
Well, ECRs are going to have a very high beta. They have on the way up, and we expect them to have a high beta on the way down. If we get rate cuts, we'll be able to, I think we'll be able to push those down kind of almost in lockstep. In addition, you know, some of these have ECRs that are effective Fed Funds plus some, you know, number of basis points. Part of the reason why I think pressure really came on the industry overall on deposits is because of the competition from the bond market.
As people are comfortable that the FOMC is done with what, you know, whatever rate increases they're going to contemplate, I do think that that's going to relax some of the pressure on deposit costs, you know, for the industry kind of writ large. I think that may give us an opportunity to tweak some of those adjustment figures that we might have on some of those ECRs.
Ken Vecchione (President and CEO)
Yeah, Dale gave you the rate side, and I'd also add, you know, for us, we expect another 25 basis points in Q4, with several cuts towards the back end of next year. You know, deposit costs will rise and fall along with those rate cuts. If you're talking about total dollars, also keep in mind, if we exceed our guide, which we have in the last two quarters, you'll see the volume aspect take hold, and you'll see dollar-wise, the ECRs rise. It's going to be a little bit of a rate-volume mix as we go forward.
Dale Gibbons (Vice Chairman and CFO)
You know, in addition, you know, what Ken was alluding to earlier in terms of these deposit initiatives we have, but we think that some of these will grow more quickly than what our warehouse deposits, which is kind of heavy ECR-dependent, have done, and that would give us a broader distribution and more diversification on our funding structure.
Bernard Von Gizycki (Equity Research Analyst)
Great, and I appreciate that color. Maybe just on office CRE, I know your credit's been really good, but if I look at the 3Q exposure, I believe it increased from $2.3 billion in 2Q to $2.6 billion. Just wondering, any color you could provide on the increase and if there's any loan sales?
Tim Bruckner (Chief Credit Officer)
Hi, Tim Bruckner here, I can take that. Any increase would have been in-flight balance increases, you know, fund up of tenant improvements. It'd be good news money with signed leases. We didn't increase new exposure in office.
Dale Gibbons (Vice Chairman and CFO)
Yeah. I'll just say, as long as you brought that up, remember, 89% of our office portfolio sits in suburban locations. Only 3% sits in central business districts. About 7% sits in Midtown. Our office book represents new construction or new vintage Class A in core submarkets. Again, we go with experienced sponsors, proven track records in adding value and repositioning. Our LTV there is about 60%.
Bernard Von Gizycki (Equity Research Analyst)
Great. Thanks for taking my questions.
Ken Vecchione (President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Brandon King of Truist Securities. Brandon, your line is open. Please proceed.
Brandon King (Managing Director and Senior Equity Research Analyst)
Hey, good morning.
Dale Gibbons (Vice Chairman and CFO)
Morning.
Brandon King (Managing Director and Senior Equity Research Analyst)
I wanted to follow up on the topic of ECR deposits. Just to confirm, are you expecting that composition of DDAs, the DDA-based ECR deposits, are you expecting that to march higher over the course of next year?
Dale Gibbons (Vice Chairman and CFO)
Well, I think the acquisition of DDA funds in this elevated rate environment is quite challenging. I mean, the DDA that we had increase in the Q3 was kind of overwhelmingly a mortgage warehouse. I think that, you know, straight, flat-out DDA, I mean, we have had success in, you know, the regions during the quarter as well to some degree. Yeah, I think most of the deposits we're going to be getting are going to be in either, you know, interest-bearing checking or money market accounts.
Brandon King (Managing Director and Senior Equity Research Analyst)
Okay. Got it. Makes sense. I wanted to talk about, you know, the shift from the Held for Sale loans to Held for Investment, and particularly the lot banking loans. Could you walk us through, you know, the original thought process of, you know, designating those Held for Sale, and then elaborate more on the decision to bring those back as Held for Investment?
Ken Vecchione (President and CEO)
Yeah, let me take that. This was a liquidity decision, right? In Q2, we grew our total deposits by about $3.5 billion. This quarter, we grew a little over $3.2 billion. I also want to emphasize, we paid down broker deposits by $441 million, so otherwise, we would have grown it by $3.7 billion. You know, back from Q1, we put some loans into HFS in order to be ready to create additional pools of liquidity, which aren't needed. So we moved these loans from HFS back into HFI. You know, regarding your lot banking question that you alluded to there, you know, generally, our lot banking programs are all on schedule with the builders.
Really, the builders cannot afford to lose any of this inventory and lose control of their for-sale demand. Again, this is a mark, this is a segment of loans category that we like a great deal and has a very good risk-reward attribute to it. We've never, since we've been doing it here at the bank, suffered a loss on that.
Brandon King (Managing Director and Senior Equity Research Analyst)
Got it. That's all I had. Thanks. Take my questions.
Ken Vecchione (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question is from Ebrahim Poonawala of Bank of America. Ebrahim, your line is open. Please go ahead.
Ebrahim Poonawala (Head Managing Director of American Banks Research)
Hey, good morning. Just maybe, Dale, when we think about the $2 billion per quarter deposit outlook for next year per quarter, just talk to us the source of that deposit growth, where that's coming at, and what is your assumption around the rate at which these deposits are coming on? Is it meaningfully below SOFR? Just some color around how we should think about that and just how that's probably going to impact your NII NIM outlook until rates get cut. Thanks.
Ken Vecchione (President and CEO)
I'll take the first half of that and toss it over to Dale for the second half. Regarding where is the source of the deposit strength coming from next year, I think you'll see, first of all, you'll see it from some of our traditional lines. HOA is projected to have a good year next year. Warehouse lending, note financing generally is traditionally strong year after year. The critical item there is what happens in the mortgage industry. That it could accelerate a little bit more if rates pull back, and we'll see a little bit more deposit growth there. Into next year, we are looking for a number of our newer business lines to contribute in greater sums than they previously have, namely our settlement service business, our business escrow services business, and our corporate trust business.
Those three should have above growth rate to prior years history here and should really contribute. I'll also say that the regions, you know, this is the Q2 in a row, the regions have had very solid growth. What we like most about the regions, it's a little more granular. Okay? It's not as big and chunky as some of the other parts of our business. Last but not least, we've had tremendous success with our consumer, our digital consumer platform, and that has really exceeded any of our wildest imaginations in terms of the numbers we initially forecasted for it. That, too, will continue throughout 2024.
Dale Gibbons (Vice Chairman and CFO)
The larger preponderance of the pricing that we're getting for new business ranges from the 3%s, and that's really in the regions, to the 5%s, and that includes, you know, some of the things we talked about earlier in Mortgage Warehouse and, as you know, the bank and some of these other channels. I think we're going to be kind of in the middle there. We weighted average something with, you know, in the 4%s, and I think that's probably a good target for 2024.
Ebrahim Poonawala (Head Managing Director of American Banks Research)
Got it. That's helpful. Maybe, Dale, sorry if I missed it, just in terms of your outlook, and given just where mortgage rates are at 8%, how are you thinking about what origination gain on sale fees could look like in the absence of any rate release?
Ken Vecchione (President and CEO)
Yeah, thanks. I'll take that one. As we look forward, Q3-Q4, mortgage servicing income should be sustained quarter-to-quarter, maybe even a slight growth as our MSR balances grow. In Q4, you know, you generally have a seasonal fall that happens. I think it may be a little more acute with the higher rates that we see here presently.
Ebrahim Poonawala (Head Managing Director of American Banks Research)
Got it. Thank you.
Ken Vecchione (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Matthew Clark of Piper Sandler. Matthew, your line is open. Please go ahead.
Matthew Clark (Managing Director and Senior Research Analyst)
Hey, thank you. Just a few questions around credit, or maybe one or two here. Just the reduction in special mention nonaccruals, can you speak to how, you know, these credits were resolved? Did most of them cure, or did you push them out of the bank? Just trying to get a sense for the workout process.
Tim Bruckner (Chief Credit Officer)
Sure. Yeah, Tim Bruckner again. I'm going to take the nonaccrual, nonperforming first. About half of the improvement in that area is pay out or pay down. Okay? The other half would be upgrade to performing categories. With regard to special mention, we base our credit culture on early elevation, and so we use that category very much as a transitional category. As we signaled on the prior calls,
We complete a deep portfolio review, we move assets into that category, and then we press for speedy resolution. With respect to the movements in and out, those are dictated then by our strategy, which generally involves required remargin in this environment.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. The other one for me around expenses. Can you speak to the investments you may still need to make to become or be considered a 100+ billion-dollar bank, assuming you get treated like one beforehand by the regulators?
Dale Gibbons (Vice Chairman and CFO)
Yeah, I think the second part of that question is right on, which is most banks in our size category will start to be treated like a 100 billion-dollar bank well before you get there, and you've got to build that framework in advance. You know, that framework is beginning to look and feel a little more sophisticated around capital stress testing, around liquidity stress testing, and the framework that kind of evolves around that. As we get bigger, we'll have to make more investments into reporting that the larger banks over $100 billion will have to do.
We believe that starting it early and kind of building it into the run rate, because then there's going to be costs that you're going to have to continue with not only the development, but the reporting and the management and the monitoring. We're trying to build it in now and kind of build out towards that.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay, thanks again.
Dale Gibbons (Vice Chairman and CFO)
Thank you.
Operator (participant)
Our next question comes from Gary Tenner of D.A. Davidson. Gary, your line is open. Please go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning. A couple of questions. In terms of the ECR deposits, can you give us the average for that in the quarter versus the 17.1 quarter-end?
Dale Gibbons (Vice Chairman and CFO)
Let me get back to you on that one.
Gary Tenner (Managing Director and Senior Research Analyst)
Thank you. In terms of your comments on kind of 2024 expenses and kind of marginal growth, is that inclusive of the FDIC special assessment that kicks in the Q1?
Dale Gibbons (Vice Chairman and CFO)
No.
Gary Tenner (Managing Director and Senior Research Analyst)
Or should we think of that as being on top of?
Dale Gibbons (Vice Chairman and CFO)
Well-
Gary Tenner (Managing Director and Senior Research Analyst)
Core growth?
Dale Gibbons (Vice Chairman and CFO)
Well, with the special assessment, we're considering the special assessment, which, you know, hasn't been defined yet in terms of exactly how it's going to come out. I mean, I think it could be revised. Yeah, that excludes that. We think that's just really kind of below the line, and I think that's how the Street will treat it.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Last question. In terms of, Ken, when you were kind of rolling through the Q4 outlook and you mentioned net charge-offs, if I heard you correctly, you kind of also suggested net charge-offs through the economic cycle in the 5-15 basis point range beyond just the Q4.
Ken Vecchione (President and CEO)
Yeah.
Gary Tenner (Managing Director and Senior Research Analyst)
Did I hear that correctly?
Ken Vecchione (President and CEO)
That's correct.
Gary Tenner (Managing Director and Senior Research Analyst)
All right. Thank you.
Ken Vecchione (President and CEO)
Thanks, Gary.
Operator (participant)
Our next question comes from Andrew Terrell of Stephens. Andrew, your line is open. Please proceed.
Andrew Terrell (Managing Director)
Thanks. Good morning. Just one quick one for me. I wanted to ask on page 11 of the presentation, the Earnings at Risk disclosure that you provide in the down 100 scenario, the up 2.2% for earnings there. Can you talk about just your comfortability with that level? Is that where you would like the company to holistically be at, or any changes you'd like to make to that position? Can you also talk about what the underlying mortgage assumptions are in the down 100 scenario from a gain on sale margin and volume perspective?
Ken Vecchione (President and CEO)
They're not dramatically different. We do think margins would increase. I mean, if you look at kind of what happened during, you know, going into the pandemic, where margins basically tripled during that period of time. You know, we're comfortable with this, you know, in terms of, you know, kind of a decline and that we're a little bit better off, a little tighter on net interest income, but stronger in terms of expenses related to those ECRs, as well as AmeriHome revenue. A 100 basis point decline is not enough to gen up a meaningful refinance business, but we do think it would help on the purchase side in terms of what we'd be seeing on volume.
If we went down 200 basis points, we really think that that's going to open a window for a fair amount of refinancing that's been done over, let's say, the past year, as well as have something close enough that you'll get more refinance activity on a cash-out basis. You know, somebody moving from a 4%, you know, to a 6, rather than all the way up to something in the mid to higher 7s.
Andrew Terrell (Managing Director)
Okay, thanks for taking the question.
Ken Vecchione (President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Timur Braziler of Wells Fargo. Timur, your line is open. Please go ahead.
Timur Braziler (Senior Equity Analyst)
Hi, good morning. One more on ECR for me. I guess as you look at Q4, specifically, how much of that DDA growth is expected to stick around? Should we see a commensurate reduction in ECR during the Q4 if DDA balances do go down?
Dale Gibbons (Vice Chairman and CFO)
Yeah, you should, I mean, the volatility in deposits in Q4 is around the mortgage warehouse business, which carries most of the ECR credits, and as that volume drops, you should see a corresponding decline in the ECRs in the operating expense line.
Timur Braziler (Senior Equity Analyst)
Okay. I guess just given the seasonality in the warehouse business, how likely is it that, you know, $1.3 billion of DDA growth that's on the Q3, how much of that actually rolls off with that seasonality next quarter?
Dale Gibbons (Vice Chairman and CFO)
I think there are two things going on. The growth that we had in the Q3 was a baseline improvement, which I think that has legs and staying power. The decline we're going to see in the Q4 is from, you know, taxes and insurance, escrow funds explicitly. While that will come down in the Q4, we expect to retain the higher deposit levels kind of moving forward into 2024. We should see a more pronounced rebound coming into Q1 than the decline that we see in Q4.
Timur Braziler (Senior Equity Analyst)
Okay, got it.
Dale Gibbons (Vice Chairman and CFO)
The balance.
Timur Braziler (Senior Equity Analyst)
Last quarter... Okay, that's understood. Thank you. Last quarter, you had made a point to mention that the borrowings that were being paid down are quite expensive. I think the number was SOFR plus 200. I'm just wondering, with the remaining borrowings left, what's some of the higher cost borrowings that we should continue to see coming down over the next couple of quarters? How much of that expensive borrowings are still left on the balance sheet?
Dale Gibbons (Vice Chairman and CFO)
Yeah. As of quarter end, we still had $500 million that is an S+2. I expect that will be paid off this quarter, and there's also a little bit of an average balance benefit because not all of the payoffs that were done in the Q3, you know, they were, I'll call it, ratably over the quarter. So some of that benefit is not recognized in the Q3.
Tim Bruckner (Chief Credit Officer)
That helps support our.
Timur Braziler (Senior Equity Analyst)
Lastly, for me, just on the mention of HQLA and tying that back into the 100 billion-dollar threshold, I know you've been growing HQLA now for a couple of quarters, but is any of that build in relation to that 100 billion-dollar threshold? I guess, what's the remixing of the bond book look like with additional HQLA purchases, and how punitive might that be in this rate environment?
Dale Gibbons (Vice Chairman and CFO)
Well, I think it is all a bit related, and there is maybe a gentle slope in terms of HQLA looking for, you know, kind of the $100 billion number over time, which obviously we're not close to. But I think that's part of it. I think part of it is as well as we pull down the Loan-to-Deposit Ratio, you know, those funds are going to be invested in something, you know, with higher levels of liquidity, like we've talked about. So it is, you know, I don't want it to appear that it's not a big step variable here. It's going to be, but a gentle climb into higher High-Quality Liquid Assets over the next couple of years.
Timur Braziler (Senior Equity Analyst)
Great. Thank you for the questions.
Dale Gibbons (Vice Chairman and CFO)
Thanks.
Operator (participant)
Our next question comes from David Chiaverini of Wedbush Securities. David, your line is open. Please go ahead.
David Chiaverini (Managing Director of Equity Research)
Hi, thanks. I had a follow-up on the rate sensitivity. In an environment where the Fed does pivot and we see 100 basis points of rate cuts, I see NII, you know, down 4%, but clearly on the ECR side, we should see, you know, some cuts there as well, or declines there. How should we think about the PPNR impact of 100 basis point cut in rates?
Dale Gibbons (Vice Chairman and CFO)
Well, if you go to PPNR, that's really going to be your earnings at risk. You're going to see, you know, lower levels of expenses like you identified, but you're also going to see higher levels of revenue from AmeriHome, the mortgage operation. On an EAR basis, this really is, you know, we're really talking about a kind of a PPNR kind of framework, and that would pick up.
David Chiaverini (Managing Director of Equity Research)
Got it. Thanks for that. Shifting over to a follow-up on credit quality. You mentioned about the roughly $2.5 billion of quarterly CRE maturities next year. Can you talk about the health of your borrowers and their ability to withstand higher rates as these loans mature and reprice higher?
Tim Bruckner (Chief Credit Officer)
All right, sure. First, I think that discussion was in the context of the investment for.
Dale Gibbons (Vice Chairman and CFO)
Well, it was $2.4 billion, but it was of total loans.
Tim Bruckner (Chief Credit Officer)
Yeah, total loans, not just CRE.
Dale Gibbons (Vice Chairman and CFO)
Yeah.
Tim Bruckner (Chief Credit Officer)
Our CRE is entirely floating rate one. I think that's important. And is entirely for the not central business district. When we underwrite an office, we underwrite suburban office.
We've already dealt with the roll, so to speak, because the interest rates have already come up, and we've already made the grading decisions, and then we've already executed our strategy. At this point, over 75% of that portfolio, we've either affirmed the structure that exists or we've restructured and remargined in the present environment.
David Chiaverini (Managing Director of Equity Research)
Great. Thanks very much.
Ken Vecchione (President and CEO)
Thanks.
Operator (participant)
Our next question comes from David Smith of Autonomous. David, your line is open. Please proceed.
David Smith (Analyst)
Thank you. Within the deposit outlook for the Q4, can you give us some more details on what's embedded about the mortgage warehouse decline? If we take the regional deposit growth of $1.5 billion and $0.8 billion digital consumer this past quarter, that would imply something like a $2 billion reduction or so in mortgage warehouse. Does that sound reasonable?
Ken Vecchione (President and CEO)
Yeah, that sounds very reasonable. That's what's going to happen in mortgage warehouse, and then you would have the digital consumer platform, the regions, and some of the specialty lines picking up that slack to kind of get us back to even. Just so I'll say this, it's kind of important.
David Smith (Analyst)
Right, and-
Ken Vecchione (President and CEO)
This is grammatically awkward but word-for-word accurate. *Wait, "starting in, on December first"* "starting on December 1st". (Removed "in,"). *Wait, "deposi-- uh, deposit"* "deposit". (Removed "deposi-- uh,"). *Wait, "with our, with our"* "with our". (Removed "with our,"). *Wait, "And so you don't see..."* "You don't see..." (Removed "And so"). *Wait, "So this should have..."* "This should have..." (Removed "So"). *Wait, "So by these balances build up..."* "By these balances build up..." (Removed "So"). *Wait, "month to month"* "month-to-month".
David Smith (Analyst)
Thank you. Given how much of the ECR balances are in mortgage warehouse, you know, is it possible that we could see deposit costs down quarter-on-quarter in the Q4, or is that going to happen too late in the quarter?
Ken Vecchione (President and CEO)
No, I think you could see it down in Q4. Absolutely.
David Smith (Analyst)
Just thinking about the NIM guide of 3.6-3.7 against 3.67 in the Q3, you've got the tailwinds of the fixed loan repricing, you've got some more borrowing paydown. Seems like more tailwinds. I just wonder if you could break out some more of the headwinds you see there that are going to stop it from elevating higher than 3.7.
Ken Vecchione (President and CEO)
Yeah. You also saw that we had an increase in our cash position at quarter end relative to the last quarter and the average balance for the quarter. That is going to consume, you know, some of that otherwise opportunity to have a higher yield, higher spread.
David Smith (Analyst)
Lastly, on capital, are you saying you think CET1 ratio could decline in absolute terms as you step up loan growth in the second half next year, or it'll just continue to grow more slowly?
Ken Vecchione (President and CEO)
You know, we don't expect it to decline. As I said, the target's 11%, and then we'll push through that target. We just expect it to grow at a slower pace once we cross over or cross through 11%.
David Smith (Analyst)
Are there any more inorganic levers you can pull here, you know, after like the CLN repayments, or is it basically going to be a function of earnings and asset growth from here?
Ken Vecchione (President and CEO)
It's going to be a function of earnings and continuing to watch our risk weighted assets and making sure we optimize that quarter-to-quarter.
David Smith (Analyst)
All right. Thank you.
Ken Vecchione (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question is from Brody Preston of UBS. Brody, your line is open. Please go ahead.
Brody Preston (Equity Research Analyst)
Hi, everyone. How are you?
Ken Vecchione (President and CEO)
Good, Brody.
Brody Preston (Equity Research Analyst)
I wanted just to follow up, just make sure I was following the warehouse commentary correctly and just trying to piece it together from last quarter. I think you were up $3 billion in July during the last conference call, and it looks like you ended up $1.6 billion for this quarter, and so it came down at the end of the quarter, and then we're expecting another $2 billion of potential runoff from there in the Q4, just as on a seasonal kind of low point. Am I following that math correctly, Dale?
Dale Gibbons (Vice Chairman and CFO)
As Ken was alluding to earlier, you know, what we have, there's the escrow funds from a mortgage warehouse client are bifurcated into two pieces. One is taxes and insurance. That's the one that we think is more attractive because it's a little more stable profile. The other is principal and interest. Well, principal and interest is on a monthly cycle. The funds build up and then, you know, somewhere around the 20th, 24th of the month, they get spun out to the government-sponsored enterprises. The other ones, you know, build up for six months, some even longer than that.
Then they're paid to the taxing authority. The preponderance of our portfolio comes from, you know, California. California taxes, I think, are due in, like, November or something like this, and so you're going to see that come down. What you saw earlier was really just normal, typical behavior. In, say, in the middle of the month, you're going to have a higher number in principal and interest that then comes back down. Even though that number came down from where it was maybe in mid-July to the end of September, the actual balance trend is actually still positive, growing during that particular time. We're just hitting a high point on the monthly sine wave that you get on P&I payments.
That trend looks strong because of the balance from quarter-end to quarter-end looks good. What we're saying is the balance from quarter-end to quarter-end for the Q4 is going to be down, not because of P&I, which looks good, but because of P&I, and not because of client impairment, just simply because that's the cycle in terms of how those funds are distributed.
Brody Preston (Equity Research Analyst)
Got it. Okay. I appreciate the clarification. I wanted just to ask on the spot loan yields. I think if I'm remembering the slide correctly, it was 6.99 on the spot rate for the yield, which I guess I wanted to relate that to the residential portfolio. To kind of get towards that spot yield, it implies that you have to get more expansion in that residential yield. How should we be thinking about residential loan yields going forward?
Dale Gibbons (Vice Chairman and CFO)
Well, I don't think residential loan yields are going to move much. I mean, you know, the CPRs on that stuff today are 5%, you know, kind of about the lowest, you know, anyone's ever seen. That's just kind of gently leading off. You know, that said, this is kind of the point on why we mentioned, hey, we have, you know, about $2.5 billion-2.4 billion of loans, you know, rolling off, repricing every quarter, and so that could come up. Now, a small piece of that is going to be residential, but the rest of it as well. If you say the residential and those loans, you know, are again coming in, you know, that's something that begins with an 8.
I mean, you know, they're basically, you know, it looks SOFR today, add 3-3.5 to that. Those run off and are being replaced at, you know, kind of notably higher rates. Even the variable rate ones are being replaced at higher spreads because of, you know, maybe uncertainty in the economy and the.
Brody Preston (Equity Research Analyst)
Can you guys still hear me?
Ken Vecchione (President and CEO)
Relative, you know, tightness.
Brody Preston (Equity Research Analyst)
Yeah, it just cut out there for a minute. No, I guess that makes sense. It's just that the loan yields jumped up a bit this quarter on the resi book, and that it kind of caught me by surprise.
Dale Gibbons (Vice Chairman and CFO)
Well, we did some modest dispositions of residential loans.
Brody Preston (Equity Research Analyst)
I feel like I'm.
Operator (participant)
I believe we've lost audio with Brody there.
Dale Gibbons (Vice Chairman and CFO)
Okay.
Operator (participant)
Oh, sorry. Our final question of today comes from John Armstrong of RBC Capital Markets. John, your line is open. Please go ahead.
Jon Arfstrom (Managing Director)
Hey, thanks. We're going to get out of the weeds here for a second. Are you signaling flat EPS for the Q4? Just when I look at the guidance on slide 19, is that what you're signaling?
Dale Gibbons (Vice Chairman and CFO)
Yeah. We're signaling flat PPNR with some sensitivity to the gain on sale on the mortgage business, depending on the backup on rates that you're seeing here. That's what we're signaling.
Jon Arfstrom (Managing Director)
Okay. Okay. That's difficult for us to model, but you're saying PPNR, excluding that, it's going to be relatively stable? Okay.
Dale Gibbons (Vice Chairman and CFO)
Yeah, I think that's a fair answer.
Jon Arfstrom (Managing Director)
Um-
Dale Gibbons (Vice Chairman and CFO)
Yeah.
Jon Arfstrom (Managing Director)
Yep. Okay. Okay. What's your level of confidence in loan growth returning in early 2024? You know, Dale mentioned the organic loan growth has slowed, but what's your level of confidence in getting that greater than $500 million a quarter back in the run rate?
Dale Gibbons (Vice Chairman and CFO)
Yeah. If you're talking about getting it back, say, starting in Q3 or towards the end of Q2, I'm confident about that. Yeah.
Jon Arfstrom (Managing Director)
Mm-hmm.
Dale Gibbons (Vice Chairman and CFO)
We have enough channels.
Jon Arfstrom (Managing Director)
Okay
Dale Gibbons (Vice Chairman and CFO)
You know, to bring in that loan growth. I will say, subject to macroeconomic events, right? Subject to the economy and what we see. It's not loan growth for loan growth sake. If we don't like the credit, we're not lending against it. Everything being equal, we have a high degree of confidence in this company to grow loans in excess of $500 million, and loan growth will follow the deposit growth that we've laid out.
Jon Arfstrom (Managing Director)
Right. Okay. How about as you look to 2024? I mean, it seems like you have a couple of quarters left, maybe one or two left, to do what you need to do on funding. I'm assuming that means that the margin starts to, especially if the Fed is done, I'm assuming that means the margin starts to lift in early 2024, which means PPNR also starts to lift in early 2024. Am I looking at that the right way?
Ken Vecchione (President and CEO)
We've got a rate increase in December, which will carry into the first two quarters of 2024. At the end of the Q2, we have three rate decreases modeled in there to the back end of the year, so you got to keep that in mind. As we think about 2024, as I said, with deposits following the $2 billion guide and loans growing at a moderate pace, which is that $500 million, we see sort of the dexterity and agility of the national business line framework, and the regional growth gives us confidence in that balance sheet construction going forward. That's sort of what we're seeing, along with stable asset quality as we go into 2024.
Jon Arfstrom (Managing Director)
* *Wait, let's look at "eight dollar consensus number":* "$8 consensus number". * *Wait, let's look at "five times earnings":* "five times earnings". * *Wait, let's look at "eight percent":* "8%".
Ken Vecchione (President and CEO)
directionally correct and model from there." * Is "You know" a starter conjunction? No. * Wait, "but I think..." * Is "but" a starter conjunction? No, it's in the middle of the sentence. * Wait, "I'm also surprised that the stock is down -8%." * Is "I'm" a starter conjunction? No. * Wait, "I'm also surprised that the stock is down -8%." *
Jon Arfstrom (Managing Director)
All right. $8 for me anyway. All right. Thank you. See you in November.
Ken Vecchione (President and CEO)
Okay. Thanks, John.
Operator (participant)
Ladies and gentlemen, this is all the time we have questions for. I'll hand back over to Ken Vecchione of the team for any closing remarks.
Ken Vecchione (President and CEO)
Yeah, thank you all for your questions and your participation. We look forward to the Q4 earnings call. Thanks again.
Operator (participant)
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.