Good day, everyone. Welcome to Western Alliance Bancorporation's Second Quarter 2025 Earnings Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.

Thank you, and welcome to Western Alliance Bank's Second Quarter 2025 Conference Call. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, 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 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.

Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our second quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail. I'll then close with some prepared remarks by reviewing our updated 2025 outlook. Our Chief Banking Officer for Regional Banking, Tim Bruckner, will then join us for Q&A. But before diving into my prepared comments, I'd like to take a moment to address a planned CFO succession announcement. Dale has been an outstanding CFO for Western Alliance for an impressive 22 years, which is more than five times longer than the average CFO tenure. Throughout his tenure, Dale has been an instrumental leader guiding the bank through both prosperous and challenging times. His unwavering dedication and availability at all hours of the day have made him an invaluable partner and friend to the senior management team. After the new year, Dale will transition his CFO responsibilities to Vishal following a thorough transition period. In his new role as Chief Banking Officer of Deposit Initiatives and Innovation, Dale will oversee six stand-alone deposit verticals, which generate strong liquidity. His contributions to the company are too numerous to list, but his skill and leadership were particularly evident during my absence at the beginning of the year. The Board, the management team, and I are very excited to see him thrive in his new leadership role. Someone should pass the tissues over to Dale. Vishal will join us early in the fourth quarter, and after a 90-day transition period, he will assume the CFO responsibilities. Vishal has been a trusted adviser to the company and knows the bank very well. Over the past eight years, I have developed a strong professional relationship with him, and I'm looking forward to fostering the same partnership I have had with Dale. Just feel free to reach out to both Dale and Vishal to congratulate them on their new assignments when you have a moment. Okay. Let's get to the financial highlights in the quarter. Western Alliance again delivered strong financial results, exceeding expectations in the second quarter as strong business momentum drove a meaningful acceleration across a broad array of financial metrics. Sustained success in acquiring new client relationships, supported by our deep sector expertise fueled strong risk-adjusted balance sheet growth, robust net interest income expansion and enhanced profitability, which resulted in continued earnings growth. We generated over $1 billion of sequential loan growth for the second straight quarter, which was funded by nearly $2 billion of quarterly deposit growth. Net interest margin rose six basis points sequentially, rebounding back above 3.5% from robust average earning asset growth and CD repricing tailwinds, which lowered interest-bearing deposit costs. Asset quality continued to perform as expected as criticized loans declined $118 million in aggregate from Q1. Other real estate owned increased $167 million as we elected to repossess office properties where we can accelerate our normal credit resolution process and see value creation potential due to improving leasing, occupancy and NOI trends. We have already secured an LOI for one property that we expect to be sold by quarter-end. Total criticized assets increased negligibly and remained at approximately $1.7 billion, which we expect to be the high watermark for this credit cycle and to drift downward in coming quarters. Our liquidity position and capital base both remain stout and able to support our solid and improving PPNR tangible book value and total shareholder return. Earlier this week, we announced plans to unify six legacy division bank brands under the Weston Bank brand by year-end. These brands have operated under the Western Alliance Bank charter for over a decade. So this action will simply present a unified marketing emblematic of the much larger national bank Western Alliance has become. Importantly, we are encouraged by the inflection profitability experienced in Q2. Return on average tangible common equity of 14.9% and return on average assets of 1.1% were both notably higher from Q1. We continue to target upper teens return on tangible common equity as our near-term profitability North Star. Dale will now take you through the results in more detail.

Thank you, Ken, for your kind words and tissues, and I couldn't ask for more. Looking closer at the income statement. Net interest income of almost $700 million grew 7.2% quarter-over-quarter or nearly 29% annualized, driving PPNR up to $331 million for the quarter which equates to a 19% increase from Q1. Strong organic loan growth and higher average securities balances produced average earning asset growth of 17.3% on a linked quarter annualized basis. Noninterest income rose 16.4% quarter-over-quarter to $148 million. Mortgage loan production volume increased 25% from last year, and the gain on sale margin edged up one basis point from the prior quarter to 20%, resulting in mortgage banking revenue of approximately $78 million. Overall, we characterize core mortgage banking revenue as still tracking to flat year-over-year performance. In response to the volatility that ensued from proposed tariffs early in Q2, the company undertook a hedging initiative to mitigate earnings volatility by purchasing variable rate securities. As spreads tightened, we sold these securities, which produced $8 million of the total $11 million gain of securities gains realized during the quarter, negating hedging losses at Amerihome. Noninterest expense increased $14 million from the prior quarter to $515 million, mostly from the seasonal rebound in average ECR-related deposits, which drove the $11 million increase in deposit costs from Q1. Net interest income, inclusive of deposit costs, however, grew 7% from the prior quarter to $36 million. Overall, we delivered solid operating leverage this quarter, with net revenue growing nearly 9%, which outpaced sub-3% growth in noninterest expense. Provision expense of $40 million resulted from organic loan growth and a replenishment of approximately $30 million of net charge-offs. In our financial statements, you'll also notice a new line item for net income attributable to noncontrolling interest that captures the pretax dividend impact from our recently issued REIT preferred shares. Turning to our net interest drivers. Continued improvement in interest-bearing deposit costs and overall liability funding outpaced slightly lower loan yields. The securities portfolio yield increased 18 basis points to 4.81% from the prior quarter, as a result of greater liquidity deployment into higher-yielding floating rate securities. The HFI loan yield decreased just three basis points to 6.17% and reflects a mix shift away from higher-yielding construction into C&I. The cost of interest-bearing deposits declined seven basis points to 3.19% from CD costs compressing 22 basis points as well as our ongoing efforts to manage IBD rates lower, absent additional FOMC rate cuts. For the month of June, the average IBD rate was also 3.19%, but we expect continued improvement from the deposit mix shifting away from CDs. As mentioned earlier, net interest income rose $47 million from Q1 to $698 million from strong loan growth as average earning assets increased $3.3 billion. Net interest margin expanded six basis points to 3.53% as the reduction in funding costs exceeded the one basis point reduction in total earning asset yield. Noninterest expense increased $14 million or 3% quarter-over-quarter as deposit costs rose $10.6 million due to the normal seasonal rebuild in mortgage warehouse deposits, which pushed average balances higher. Our adjusted efficiency ratio of 52% improved from 56% in Q1 as we continue to achieve positive operating leverage from revenue growth outpacing deposit cost operating expenses. We remain asset sensitive on a net interest income basis, but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. Our updated rate forecast calls for two 25 basis point rate cuts each in September and December. The balance sheet increased $3.7 billion from Q1 to $86.7 million in total assets, which reflected strong HFI loan and deposit growth of $1.2 billion and $1.8 million, respectively. Borrowings increased $1.9 billion due to the higher average HFS loan and securities portfolio balances in excess of deposit growth. Finally, total equity grew to $7.4 billion and tangible book value per share climbed 15% year-over-year. HFI loans grew $1.2 billion quarterly with end-of-period balances $1 billion greater than average levels in the quarter. C&I continues to lead this loan momentum, contributing over two-thirds of the quarterly growth from both regional and national businesses. Regional Banking produced over $660 million of loan growth, with C&I contributions from in-market Commercial Banking and Innovation and Technology Banking, while homebuilder finance drove the CRE increase for the bank. With quarterly loan growth of over $150 million in innovation and tech, we continue to experience gathering momentum in banking the innovation economy nationally, following competitor disruptions over the past two years. National Business Lines provided the remainder of the growth, with mortgage warehouse and Note Finance being the primary contributors. Note Finance remains a key area where our private credit relationships provide complementary opportunities with nonbank partners. Deposits grew $1.8 billion in Q2, inclusive of a $300 million decline in wholesale broker deposits. Solid growth was achieved in noninterest-bearing and savings in money market products. Mortgage warehouse seasonal inflows were the primary drivers of higher noninterest-bearing balances, but we also generated another quarter of noninterest-bearing non-ECR balances of $140 million at a 7.5% annual rate. CDs were also higher quarter-over-quarter, but we expect runoff to concur going forward. Regional banking deposits were up nearly $800 million from the prior quarter, demonstrating continued relationship momentum with in-footprint commercial clients. National Business Lines posted a $650 million quarterly increase, primarily from the normal rebuild in mortgage warehouse as well as steady growth in our consumer digital channel. Specialty escrow deposits continue to add to our growth as well, contributing nearly $300 million of deposits in Q2. Of note, our digital asset banking program generated $400 million of quarterly growth as we provide services for blockchain payments. Turning to asset quality. Criticized loans declined $118 million quarterly and benefited from special mention loans decreasing $16 million, classified accruing loans declining $77 million and nonaccruing loans falling $24 million. As Ken explained earlier, other real estate owned increased $167 million as we took possession of a handful of office properties we have been closely monitoring for some time. We do not expect these properties to have an adverse effect on financial results as their aggregate operating revenues exceed expenses. We expect steady movement toward resolution and to begin dispositions this year of this portfolio. Stabilizing leasing and occupancy rates as well as improving net operating income on these properties reinforce our confidence that we will recover our recovering values as indicated by the positive cash flow from these assets. All in, criticized assets rose $50 million from March 31. As we achieve resolution of these assets, we would expect total criticized assets to begin to decline in the current quarter. Quarterly net loan charge-offs were approximately $30 million or 22 basis points of average loans. Provision expense of $40 million added to reserves in concert with loan growth and to cover charge-offs. Our ACL for funded loans moved $6 million higher from the prior quarter to $395 million. The total loan ACL for funded loans ratio notched up one basis point from the prior quarter to 0.78. On Slide 14, you can see Western Alliance's concentration in loan loss loan category skews our ACL ratio lower relative to peers, reflecting the portfolio's lower embedded loss content. The top chart is our updated adjusted total loan ACL walk, which illustrates how credit enhancements such as credit-linked notes and structurally low-risk segments like fund banking, our low loan-to-value and high-FICO residential portfolio and mortgage warehouse elevate our normalized reserve coverage from 78 basis points to 135. The bottom table demonstrates that applying an industry median loan mix to our portfolio while still using our reserve allocations by loan type, but reducing our outsized proportions of loans in lower-risk categories like mortgage warehouse and residential and increasing our proportion of loans at higher-risk categories like consumer, our allowance would exceed 1% today. Our CET1 capital ranks near median peer levels. If you add our lower adverse AOCI marks and the ACL, our adjusted capital ratio is 11%, which is flat since the prior quarter and ranked slightly above the median for our asset peer group on a one-quarter lag basis. We remain confident in our capacity to absorb any losses in concert with steady loan growth, as we view this adjusted capital as the total amount available to absorb losses and support balance sheet growth. Our CET1 ratio rose to 11.2% despite our loan growth, and SMSR sales provided some RWA relief. Our tangible common equity to total assets ratio was unchanged at 7.2%. Tangible book value per share increased to $1.77 from Q1 to $55.87 as a function of retained earnings. Consistent upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by over seven times for the past decade. Our strong track record in compounding tangible book value per share stems from sustained reinvestment in our diversified and dynamic business model, which has consistently produced top-tier balance sheet profitability and growth for more than ten years. This has led to excellent revenue growth and operating leverage, strong ROTCE and EPS growth as well as leading tangible book value per share accumulation. Ultimately, these are the drivers of long-term superior total shareholder return. Additionally, the metrics in the bottom row that track the last four quarters, which are NIM, efficiency and ROTCE are poised to improve from here. I'll return the call back to Ken.

Thanks, Dale. Okay. Let's talk about our 2025 guidance. We reiterate our loan and deposit growth outlook of $5 billion and $8 billion, respectively, based on healthy pipelines remaining intact despite recent tariff-related noise. Regarding capital, we expect our CET1 ratio to hold above 11%, balancing our loan growth outlook with improving capital generation from an increasing return on tangible common equity. We are revising our net interest income outlook higher to 8% to 10% growth as our projection for 225 basis point rate cuts have shifted back to September and later in Q4. As our loan portfolio is more variable rate weighted, delayed rate cuts combined with sustained strong loan growth should lift net interest income. Additionally, net interest margin for the full year should approximate 2024's upper 3.5% level. We are also revising our noninterest income outlook higher to 8% to 10% growth. We are pleased with the momentum in cultivating holistic relationships with our customers and the traction we've made in earning more commercial banking fees. Higher interest rates should also benefit servicing income and support MSR valuations. Noninterest expense is now expected to be 1% to 4% for the year. ECR-related deposit costs are now projected to land between $550 million and $590 million for the year and between $170 million and $180 million in Q3. ECR revision is attributed to a more backloaded rate cut forecast. Our improved revenue outlook should also drive higher associated incentive compensation. Operating expenses are now expected to be $1.495 billion to $1.515 billion for the full year. Asset quality should continue to perform as expected, with full year net charge-offs of approximately 20 basis points, while criticized assets are expected to decline over the next several quarters. Finally, we are maintaining our full year 2025 effective tax rate forecast of approximately 20%. At this time, Dale, Tim, and I will take your questions.

Our first question today comes from Chris McGratty with KBW.

I want to start with the CFO transition. It seems like a significant moment for the company. I'm interested in hearing from you, Dale and Ken, about the timing. Dale, what will you focus on in relation to your successor and the overall succession discussions? There's a lot to consider, and I would appreciate your insights.

Sure. I can't express how excited I am about this organizational change that I proposed. Enhancing the team's skills will make us more adaptable to seize new opportunities. It will also allow me to dedicate more time to our diverse range of deposit services. Each one seems to be at a crucial point in its growth. We are experiencing significant shifts in some of our business areas, and I see new opportunities emerging and barriers being removed. This isn't just about Genius or the digital asset space, but also involves executive orders and changes at the FTC. The right moment to act is now, and I'm extremely pleased to be taking on this challenge.

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

I want to acknowledge the excellent job Dale has done leading the company with the team. My follow-up question is regarding the deposit growth target of $8 billion. Can you clarify how we will achieve that? I understand that Q4 is usually slow, which suggests Q3 will be significant. Can you provide any insights into the timing of the deposit flows?

Sure. One of the things we did regarding our deposit growth over the past two quarters was to reduce some of the more volatile mortgage warehouse funds through pricing. This has been a significant factor in the seasonal dip we've experienced, particularly in fourth quarter mortgage warehouse deposits. As a result, we expect this to be more subdued, and we don't anticipate needing to address it significantly. We remain on track to reach our $8 billion target.

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

Our next question comes from Jared Shaw with Barclays.

Congratulations, Dale, on your new role. Regarding the fee income, can you elaborate on the broader assumptions related to mortgage? You mentioned earlier that you're expecting a flat year-over-year performance. Where do you anticipate growth in terms of fee income?

Yes. So we anticipate a rise in fee income in the back part of the year, driven by an increase in generally mortgage-related revenue from seasonal activities and also commercial banking activities linked to the growth in our C&I business. All in, the mortgage business is forecasted to have the same flat year-over-year revenue growth. And we do that as a way to focus on our commercial banking activities, which will generate the bulk of earnings not only fee income, but the bulk of earnings of the bank so that investors can feel comfortable that the year-over-year growth is coming from these commercial banking activities, while the mortgage business being flat at the moment will be prepared to deliver additional earnings if and when interest rates get cut and that mortgage volume begins to rise. When that happens, then we have an interesting decision to make here around the table, and that will be do we put some of those additional earnings back into the business to support future growth? Or do we let them go to the bottom line, grow net income, improve our returns on average assets and tangible common equity and/or have different options for capital deployment.

The mortgage industry had a muted spring selling season as a result of one of the higher rate environments and also the volatility perhaps introduced from the tariff activity. And I don't think that, that destroys that demand. It just postpones it to some degree. So I think some of it as things stabilize might come forward. And again, everyone is projecting that we're going to have some rate relief sometime later in 2025.

Okay. And then I guess on the expenses, as my follow-up. When we look at the higher guide on expenses ex ECR, what's driving that? Is that incremental new investments to support some of these initiatives? And then, I guess, if we do see relief on Category 4 thresholds, is there an opportunity to maybe see that come in lower than the range? Or what's sort of the investment cycle moving to Category 4 looking like?

Yes. You've got two questions in there. First, let me just say for Q2, our total expenses only rose by 2.9% or $14 million, of which nearly $11 million of the $14 million were deposit-related costs. So our operating expenses were rather flat Q1 to Q2, okay? And this modest rise actually improved our efficiency ratio by 400 basis points quarter-over-quarter to 51.8%, I should say, adjusted efficiency ratio is the way we look at it. Now going forward in the rest of the year, yes, I think we've been very clear that we are going to spend about $35 million cash spend in 2025, and another $35 million in 2026, which is embedded in our numbers. The operating expense number is about $30 million of that $30 million, $35 million that will be in the year. And that will be a little bit more back-end loaded as we prepare to cross over $100 billion. Now as it relates to tailoring, okay? We've been closely following the tailoring conversations and their potential impact on the bank. I'll say, first, we're in favor of moving the LFI Category 4 threshold to $250 billion or having it at least indexed to inflation. This adjustment would allow us to navigate through the threshold more deliberately while permitting the bank to continue its organic growth journey, right? In the short run, the other benefits to moving the LFI threshold of $250 billion would be to free up technology resources to support our product line and service improvement development. And it also would enable us to help build out some of our AI functions and features at a faster pace. But one of the things that we have to balance here is just because we have a scuttlebutt that Category 4 will be moved up to a higher number, we cannot stop doing what we're doing because we anticipate crossing over the $100 billion threshold somewhere in early 2027, Q1, maybe Q2. If we postpone or slow that down and the LFI threshold is not raised, then we put ourselves at risk of impeding our total loan and deposit growth. So at this point, we have to continue as if that the LFI threshold raise is not going to happen. But once it does, and we hope it does, then we'll adjust our spending accordingly. So I hope that answers your questions there.

Our next question comes from Matthew Clark with Piper Sandler.

Congrats, Dale. Can you just hone in on the margin a little bit, just give us the spot rate on deposits at the end of June. I think you gave it last quarter, but I didn't see it this time around. And what's your kind of blended beta assumption through the cycle if you include nonmaturity deposits that you touched on in the deck?

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

Currently, our investment book is performing better than our average rate for the second quarter. We are also noticing a slight decrease in deposits and borrowings. This suggests that we are confident the net interest margin will either remain steady or improve from its level at the end of Q2.

We had a notable increase in the securities yield. That's not done. And I think that's going to be also an impetus for expansion on both of our margin metrics.

Got it. Got it. And then on the fee income side and in terms of the lift you're expecting there, part of it is coming from commercial banking income. I think it's a line item you no longer disclosed, but can you just maybe update us on how much that contributes to fee income and how that might have changed from the prior quarter?

The question is how much is coming from commercial banking versus the mortgage? Is that the question?

Yes. Yes. It's probably embedded in the service charge line now, I guess. But I was just trying to get a sense for the magnitude of commercial banking fees and fee income. Just to try to get a sense of how much that's growing.

Yes, the mortgage business is going to stay flat year-over-year, which is about $328 million. We generated revenues in '24 million and the same amount in '25. And noninterest and other noninterest income, which is what you want to know, probably will rise in the order of 20-plus percent year-over-year.

Yes. Commercial banking-related income is 15% of our revenue presently in year-end.

Our next question comes from Timur Braziler with Wells Fargo.

Starting on the funding side, just maybe provide a little bit more color to the rationale on growing the borrowings as much as you did to deploy that into the bond book. And I think, Dale, you just said that bond yields are higher today than where the average book is, and that's not done yet. Is that implying that this strategy of lowering borrowings to put into the bond book maybe continues here into the back end of the year?

We have noticed that spreads have widened since Liberation Day. As a result, we are not taking on any interest rate or credit risk because these are our treasury obligations. However, we do see a lack of continuity or similarity in that area. Therefore, we are enhancing returns now, depending on market conditions, and currently, this approach is working effectively.

Okay. And then the increase in OREO, just some more color there, how many properties? Can you provide any color on just kind of the carrying cost LTVs here? And I'm wondering if some of the increased cost or increased expense guide is related to the higher carrying cost of OREO.

Yes, this is Ken. We acquired five properties, and I want to give you an overview of our strategy. Currently, the revenue these properties generate exceeds their expenses. While expenses are recorded in the expense line and revenues in the fee income line, the overall impact is positive. We have found that the earlier we manage these properties ourselves, the more successful we are in increasing occupancy rates and improving rental prices. This revenue growth over expenses also allows us to fund property improvements to ensure they remain competitive in their respective locations, giving us added flexibility. Additionally, when we take in these properties as OREO, we do so at current valuation levels minus liquidation costs. Therefore, these properties won't affect charge-off behavior unless there's a significant drop in revenue or market valuations, which we do not anticipate. This approach helps stabilize our charge-offs as well. For all these reasons, we feel more confident managing these properties directly instead of leaving them in a substandard category.

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

Yes. Let me start, and then Tim can add. Regarding the reserve to nonperforming assets, any charge or recovery from our OREO properties won’t impact the allowance, which is only meant for the loan book. These properties have already been written down to their appraised value minus disposition costs. They are at their lowest value and are cash flow positive. We don’t see any risk there, and even if there were, it wouldn’t affect the allowance for credit losses number. It’s relatively minor compared to the loan growth we’ve discussed regarding our reserve levels.

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

Yes. I might as well chime in to make it three for three. Not only do we believe our ACL reserve is not only adequate in its construction, but when you add it to CET1 inclusive of AOCI, adjusted other comprehensive income, otherwise known as adjusted CET1, we are above our peer group median, peer group being $50 billion to $250 billion. And so I think that's the way we look at it. Are we appropriately capitalized? Yes, we are. And reserved? Yes, we are. And what you're seeing in the reporting so far to date, we're seeing a number of banks beginning to lower their reserve ratios and not increase them. We're keeping ours steady at this moment. I think we expected this question.

Our next question comes from David Smith with Truist Securities.

Can you help us understand the moving parts behind the deposit cost outlook? The 15% to 20% sequential increase in 3Q looks about in line with what we saw in 3Q last year, but the full year outlook seems to imply a 30% or 40% or so decline in 4Q, which is twice as big as what we saw in 4Q of last year, even though there was a benefit from falling rates last year. And I think you just said that you lowered some of the more high-cost, more seasonal mortgage warehouse deposits, which seems like it would dampen the seasonality, if anything. So if you could help us understand the cadence and the moving pieces behind that outlook, please?

Several factors are at play here. Our ECRs are not solely derived from the mortgage warehouse segment; our HOA group also contributes ECRs, and they do so at lower rates compared to the mortgage warehouse sector. This trend is ongoing. Additionally, we experienced a rate decrease in September and anticipate another reduction in December, which also influences our situation.

Okay. So you're still expecting a mix shift overall towards out of the mortgage warehouse towards the HOA and escrow and other lower ECR deposits?

We are optimistic about our near-term prospects in several areas, particularly in the digital space and our corporate trust operations. We have only been in the Corporate Trust sector for two years, and while we don't have many businesses that produce league tables, we have become the seventh-largest CLO trustee in the world in this short time and have strong growth potential ahead.

Our next question comes from Ebrahim Poonawala with Bank of America.

I guess just wanted to follow up, Tim and Dale, on the topic of, one, Dale's new role sort of overseeing all these deposit strategies and you've emphasized some of the regulatory changes, we have seen movement on sort of the Digital Assets Act or Genius Act today. Is there a case to be made that all of this combined should lead to a significant pickup on the deposit growth front relative to where we've been over the last 6, 12 months for this year? I'm just wondering is there a pickup that we should anticipate? And obviously, you've not given '26 guidance, but I'm trying to figure out if there's an inflection there in terms of where things are going.

I think we have an opportunity to execute on these changes that you're alluding to, Ebrahim, and grow these businesses faster than they have in the recent past. I'm not sure that's going to drive total deposits a lot higher. As Ken indicated that what we're also looking at this LFI hurdle at $100 billion, and we don't want to cross over that until we're ready. But we have opportunities within the deposit mix, both in terms of some broker costs as well as additional maybe mortgage warehouse that has an elevated ECR, whereby we could swap that out and should continue to push our NIM and our adjusted NIM higher throughout our forecast horizon.

That's helpful. And I guess just on the topic of LFI, would the Fed moving the LFI threshold higher to, I think Ken mentioned maybe to $250 billion. Is that enough? Or would you want to see a change to sort of the legislation? I think Dodd-Frank had a threshold that moved from $50 billion to $100 billion back in 2018, '19. Like would you want to see that? Or just the Fed moving that through sort of the proposal process enough for you to start thinking about things differently?

Yes, I wanted to mention that if the Fed raises the threshold to $250 billion, it would provide us significant opportunities to expand more quickly. There are several initiatives we plan to pursue as we prepare for LFI readiness, and this change would enhance our growth prospects. It would also alter our priorities regarding technology and enable us to prioritize advancements in AI and improve our existing products and services or introduce new offerings. Thus, an increase would be advantageous for us. Even if the threshold were raised to around $140 billion or $150 billion as some have suggested, it would still be beneficial. However, it would require us to ensure we are LFI ready before considering acquiring another bank, as even acquiring a bank one-third our current size would place us near that revised level. We are optimistic, and we hear from various sources—not directly from regulators—that the $250 billion threshold is being considered, and if it happens, it would be advantageous for us.

That's helpful, Ken. And do you think the Fed can move on this? You don't need an act of Congress here at all in terms of making this happen, correct?

No, not in terms of these levels. I wouldn't want to wait for Congress to do something there.

Our next question comes from Casey Haire with Autonomous Research.

Dale, congrats on the new role. I got some fun questions for you, but I do want to follow up on credit. So you guys obviously sound pretty optimistic that things are going to get better. But we've heard that before in the fourth quarter, right, with the San Diego office. Is there anything you can disclose around the size of the marks? And then also, what gives you so much confidence that this migration is behind you?

Well, Casey, to reflect a little, this is the first time we believe we've reached a peak. Previously, we mentioned things were somewhat steady, but we never indicated we thought this was the definitive peak. Moving forward, based on the lease-up activity and dispositions by other institutions, we believe things are stabilizing. We've taken these properties back, they are generating income, and that should continue to support the valuations. Additionally, there was a significant increase in cap rates due to recession concerns, which seems to have largely eased. As these cap rates decrease, we expect improvements in both the appraisal process and market valuations.

Yes. Agreed. We are absolutely optimistic. This is Ken. So we feel good about stabilizing leasing and improving valuations, as Dale mentioned, with the properties we have in our portfolio. I think 71% occupancy on the San Diego asset is a great example of the progress we're making.

Okay. All right. Well, and then you guys talked about this being a shorter duration book primarily. We're not really seeing these balances amortize lower. They're about the same size as they were two years ago. So what is happening? Like when do we start to see this loan portfolio taper out?

I'll take that. First, on San Diego, we've taken every opportunity to describe the market we played in here is not being central business district. I think we've often said 85% to 90% is outside of central business district. That San Diego asset happened to be the area that we deviated from that. So if I didn't say that clearly on prior calls, I'll say that now. So that truly is uncharacteristic of the portfolio. We've also said that these assets were bridge assets. This isn't a perm portfolio. This was not structured going in as a perm portfolio. So these assets reside. They're sponsor-backed with institutional sponsorship, and they have resided in funds alongside of other assets. So the assets are in footprint predominantly, they're in our backyard. They're assets that we know that we're highly familiar with. And in the repositioning, that goes with the fund. So if the fund isn't funding its portfolio, we take those assets, get them repositioned, get them on a faster path. So we're confident because we know the assets, because we have the assets marked at what we feel are conservative values less the disposition costs, and we've got a plan and strategy on each of the assets that we can see unfold out in front of us.

So on the loan growth, I would say that we're not going to move off of a $5 billion guide. We're tracking to that. I think we're at a run rate that's above on your annualized, our number for the second quarter growth, we're at a run rate that's above other reporting banks and above the industry. So $5 billion seems to be the appropriate level. And you'll see loan yields come down a little bit as you go through the course of the year, just because, as Dale mentioned, we're forecasting a September rate cut of '25 and then one in December of '25. So naturally, you'll see our loan yields follow that path.

Our next question comes from Andrew Terrell with Stephens.

Dale, congrats on the new role. Just a question on kind of the OREO and also kind of a point on the criticized loans. But just following the move this quarter, I mean, the way you describe it, it sounds like it's an advantageous situation for you guys to take these in. Should we expect we could see more OREO build throughout the year into 2026 even? Or have you guys kind of identified all the properties that make sense from that standpoint?

Sure. Thanks. We expect to see this flat to declining as we move forward. So we will move assets out. If additional assets come in, we expect that the pace of moving assets out will outpace that. Again, we've been working the same portfolio, as we've discussed, predominantly office. In fact, it's all office. And we're familiar down to the asset level at the most senior levels of our management. So the management is fully engaged in the strategy. We know the assets well, and we've got a clear line of sight here.

Okay. I appreciate it. And then on the San Diego loan that was put in OREO in 4Q last year. I think at the time, you mentioned that the occupancy had improved. I think it was mid-40s up to mid-60s in a very short timeframe. I was hoping you could just refresh us on the status of that individual property, whether occupancy has continued to improve there? Just any more color you can provide?

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

Our next question comes from Bernard Von Gizycki with Deutsche Bank.

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

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

Our next question is from Anthony Elian with JPMorgan.

Dale, congrats on the new role, and I look forward to working with Vishal when he joins. My first question, you raised the outlook for ECR deposit costs two consecutive quarters now. I get that the rate outlook is volatile. But if we don't get any rate cuts in the second half, could you size up the impact to ECR deposit cost expense, assuming the same dollars of ECR deposit growth?

Maybe we can address that in a later call with that level of detail. But yes, we can discuss it.

Just keep in mind that our adjusted net interest margin, which includes the deposit costs, is projected to rise for the year. So when discussing deposit costs and rate movement later on, remember that if there is no rate reduction in the second half of the year, our net interest income will also be higher. It's important to consider the overall impact on PPNR rather than focusing on any single item in isolation. That's all I'd say.

And then my follow-up from Ebrahim's question earlier on the deposit opportunities. Dale, you noted in the prepared remarks, you saw $40 million of quarterly deposit growth in the digital asset segment. And that's without the impact from the Genius Act that passed yesterday. I know you've previously said that digital assets are about 2% of the company's deposits. But how large could you see that concentration getting to over time? And then is all the infrastructure in place to support additional deposit growth from the digital asset segment and from the deposit segments that you'll be leading up?

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

Thank you. We have no further questions, and so I'll turn the call back over to Ken Vecchione for closing remarks.

Okay. Well, thank you very much for your time and attention today. We look forward to our next earnings call, and have a great day and a good weekend. Thank you all.

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