David Smith: Thank you. So within the deposit outlook for the fourth quarter, 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?
Kenneth Vecchione: Yes, that sounds very reasonable. So that’s what’s going to happen in the mortgage warehouse. And then you would have the digital consumer platform, the regions and some of the specialty lines picking up that flat to kind of get us back to even. Just so I’ll say this as kind of a point. We made a strategic change with our warehouse lending business over the last year or so, where we used to have more P&I accounts, which saw a lot more volatility month-to-month. We moved more to tax and insurance accounts, right? Same clients, different liquidity deposits. And so you don’t see the big swings month-to-month, but you do get them towards the middle of the year and towards the end of the year when they drop down and then have to built up.
So as these balances build up, they’ll build up starting on December 1 thereabouts this year, and they’ll build up for the next six months going out into 2024. So this should have a little more stability. That’s just a change that we made here.
David Smith: And given how much of the ECR balances are in mortgage warehouse, is it possible that we could see deposit costs down quarter-on-quarter in the fourth quarter? Or is that going to happen too late in the quarter?
Kenneth Vecchione: No. I think you can see it down in Q4. Absolutely.
David Smith: And just thinking about the NIM guide of 3.6% to 3.7% against 3.67% in the third quarter, you’ve got the tailwinds of the fixed loan repricing. You’ve got some more borrowing pay down. It seems like more tailwinds. I just — I wonder if you could break out some more of the headwinds you see there that going to stop it from elevating higher than 3.7%?
Dale Gibbons: Yes. So 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. And so that is going to consume some of that otherwise opportunity to have a higher yield, higher spread.
David Smith: And 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?
Kenneth Vecchione: We don’t expect a decline. As I said, the target is 11%, and then we’ll push through that target. We just expect it to grow at a slower pace once we cross over — cross through 11%.
David Smith: Are there any more inorganic levers you can pull here after like the CLN repayments? Or is it basically going to be a function of earnings and asset growth from here?
Kenneth Vecchione: 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: All right. Thank you.
Operator: Thank you. Our next question is from Brody Preston of UBS. Brody, your line is open. Please go ahead.
Brody Preston: Hi, everyone. How are you.
Kenneth Vecchione: Good.
Brody Preston: I want to just follow-up to make sure I was following the warehouse commentary correctly and just kind of piece it together from last quarter. So 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 fourth quarter just on a seasonal and a low point. Am I following that math correctly, Dale?
Dale Gibbons: So what Ken was alluding to earlier, what we have, there’s the escrow funds from a mortgage warehouse client are bifurcated into two pieces. One is tax as an insurance, that’s the one that we think is more attractive because it’s a little more stable profile. And the other was principal and interest. Well, principal and interest is on a monthly cycle. But funds build up and then somewhere around the 20, 24th of the month, they get spun out to the government-sponsored enterprises. The other one is build up for six months, some even longer than that. And then they’re paid to the taxing authority. So the preponderance of our portfolio comes from California. And so California taxes, I think, they’re due in like November or something like this.
And so you’re going to see that come down. So what you saw earlier was really just normal cyclical behavior. And so in, say, in the middle of the month, you’re going to have a higher number in principal and interest that then comes back out. So 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 we get on P&I payments. So 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 fourth quarter is going to be down, not because of P&I, which looks good.
but because of T&I and not because of client impairment, just simply because that’s the cycle in terms of how those funds are distributed.
Brody Preston: Got it. Okay. I appreciate the clarification. And then I wanted to just ask on the spot loan yields. I think if I remember in 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. And so how should we be thinking about residential loan yields going forward?
