Western Alliance Bancorp WAL CEO Kenneth Vecchione on Q1 2020 Results

Today everyone, welcome to the earnings call for Western Alliance Bancorporation for the first quarter of 2020. Our speakers today are Ken Vecchione, President and Chief Executive Officer, and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the webcast through the Company's website at www.att.com/biz. After 2:00 p.m. Eastern, April 17th, 2020 through May 17th, 2020 at 9:00 a.m. Eastern, by dialing 1-800-455-1052. Risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Factors that could cause actual results to differ materially from historical or expected results are included in this presentation, the related earnings release, and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. Now for the opening remarks, I would like to turn the call over to Ken Vecchione. Please go ahead.

Western Alliance generated net income of $84 million, or $0.83 earnings per share. Net income was reduced by a $51.2 million provision for credit losses driven by the adoption of CECL, balance sheet growth, as well as the change in the economic outlook through the pandemic. Strong ongoing balance sheet momentum coupled with diligent expense management drove operating pre-provision net revenue to $163.4 million, up 10% from a year ago, which we believe is the most relevant metric to evaluate the ongoing earnings power of the company. Net interest income and NIM remained relatively stable, producing net operating revenue of $285.3 million, primarily a result of lower yields on loans which was partially offset by lower rates on deposits and borrowings. Non-interest income declined $10.9 million to $5.1 million from the prior quarter due to a mark-to-market on preferred stock holdings of primarily large money center banks of $11.3 million, partially offset by a $3.8 million equity investment gain. To date, of the $11.3 million mark, $3.5 million has been recovered. As credit spreads widened during the last quarter, the yield on preferred stocks followed, impacting valuations. We do not believe this represents a permanently reduced valuation and that preferred stock values will continue to recover over time. Finally, non-interest expense declined $9.3 million as compensation and other operating expenses declined. Regarding implementing CECL and our allowance for credit losses, in our 10-K we disclosed the adoption impact of $37 million: $19 million attributable to funded loans, $15 million for unfunded commitments, and $2.6 million for held-to-maturity securities. This resulted in a combined January 1st allowance of $214 million. During Q1, loan growth drove an additional $24 million of required reserves, and another $30 million was driven by changes in the economic outlook as a result of the pandemic. In total, the reserve build during the first quarter was $91 million, an increase of 50% from year-end. The reserve at quarter end, ACL of $268 million, was 1.14% of funded loans, up 30 basis points. Provision expense for the quarter was $51.2 million, which is over 10 times the average quarterly provision during 2019. As of March 31st, the reserve build reflects our best estimate of the future economic environment, including the impact of government stimulus programs. We utilized an assimilation to various Moody's macroeconomic outlook scenarios to capture the most likely economic outcomes and a more severe scenario for potential tail risks. As the economy continues to change, we will adjust our ACL modeling accordingly. Turning to net interest drivers, net interest income for the quarter declined a modest $3 million from the prior quarter to $269 million, as there was one less day during the quarter compared to Q4, and margin compression was offset by loan and deposit growth. Investment yield showed a modest improvement of 2 basis points from the prior quarter to 2.98%. However, on a linked quarter basis, loan yields increased 31 basis points due to the lower rate environment. The average yield of our portfolio at quarter end, or the spot rate, was 5.02%. Interest-bearing deposit costs increased 18 basis points in Q1 to 90 basis points as a result of immediate steps taken to reduce our deposit costs after the FOMC cut rates twice in March. The spot rate of total deposits at quarter end was 29 basis points. Total funding cost decreased 11 basis points when all the company's funding sources are considered, including non-interest bearing and borrowings. Through the transition to a substantially lower rate environment during the quarter, net interest income was $269 million, a decline of 1.1% from Q4. Continued strong balance sheet growth and immediate steps taken to reduce the cost of interest-bearing deposits counteracted the decline in prime and LIBOR. Net interest margin declined 17 basis points to 4.22% during the quarter, as our earning assets repriced lower, partially offset by a 19 basis point decline in deposit costs. With regards to our asset sensitivity, our rate risk profile has declined notably as the majority of our variable rate loan portfolio has flipped to a fixed rate as floors have been triggered in the declining rate environment. Presently, 82%, or $8.1 billion, of variable rate loans with floors are at the floors. With the addition of our mix shift primarily to fixed-rate residential loans, $16.2 million, or 70% of loans, are now behaving as a fixed-rate portfolio. This has reduced our interest rate risk in a 100 basis point parallel shock lower scenario to 3% at March 31st from 6.5% one year ago, and assumes that rates are held flat at zero across the term structure. Turning now to operating efficiency, on a linked quarter basis, our efficiency ratio decreased 200 basis points to 41.8%. As mentioned earlier, the improvement was attributed to decreases in compensation and other operating expenses while our revenues increased modestly. As a core component of our strategy, we continue disciplined expense management to sustain industry-leading operating leverage and profitability. Our core underlying earnings power remains strong, as pre-provision net revenue ROA was 2.38%, flat from the prior quarter, while return on assets was down 70 basis points to 1.22%, directly related to our provision expense in excess of charge-offs of $54.4 million. As Ken mentioned earlier, our strong balance sheet momentum from 2019 continued into Q1. During the quarter, loans increased $2 billion to $23.2 billion, and deposits also grew $2 billion to $24.8 billion. The loan-to-deposit ratio increased to 93.2% from 92.7% in the fourth quarter. Our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. Shareholders' equity declined by $17 million as dividends and share repurchases were matched by net income. Tangible book value per share increased $0.19 over the prior quarter to $26.73 per share as our share count declined. We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform's long-term value creation. Q1 is a seasonally strong deposit quarter, and coupled with the rollout of our deposit initiatives, deposits grew $2 billion. The increase was driven by growth of $1.3 billion in non-interest bearing DDA, primarily from market share gains and our mortgage warehouse operations. Additionally, HOA continues to perform well and contributed $330 million of low-cost deposits during the quarter. The relative proportion of non-interest bearing DDA grew to nearly 40% of deposits from 37.5% on a linked quarter basis. Turning to loan growth, in line with the industry, the vast majority of growth was driven by increases in C&I loans totaling $1.8 billion, followed by $107 million in construction and land development, and $92 million in residential loans. Residential loans now comprise 9.7% of our portfolio, while construction loans decreased as a relative proportion of the portfolio to 8.9% from 9.2% in the fourth quarter. At the segment level, tech and innovation loans grew $626 million, with $124 million from capital call and subscription lines and $176 million from existing technology loan draws, in turn bolstering technology-related deposits by $383 million. Corporate finance loans grew $408 million, which was primarily due to line draws, two-thirds of which were from investment grade borrowers, bringing utilization rates to 38% from 13% during the prior quarter. Mortgage warehouse also contributed loan growth of $550 million. Approximately 50% of which was due to line draws. Across the bank, about $500 million of our net new loan growth was driven by drawdowns on existing loan commitments from the beginning of the quarter. In total, loan growth of $1.2 billion for the quarter was fully funded by deposit growth of the same amount. Overall asset quality was stable during the quarter, with total adversely graded assets increasing $10 million during the quarter to $351 million, while non-performing assets comprised of loans on non-accrual and repossessed real estate increased $27 million to $97 million, or 0.33% of total assets, and is now held for sale. Within these categories, we had migration from special mention to substandard, and some of the normal investor funding was delayed in tech and innovation as a precaution. When remaining liquidity declines below six months, we bring those loans into either special mention or substandard for enhanced monitoring and engagement. This quarter, we also saw the cumulative impact of our efforts of managing certain special mention and substandard loans as several resolved in our favor with no losses. $100 million of adversely graded loans resolved during the past quarter: 37 loans, or $50 million, paid off in full, while the other $50 million were upgraded to pass. As Ken mentioned in his introduction, we are well positioned entering this economic cycle. We only incurred $100,000 of gross credit losses during the quarter, which was more than offset by $3.3 million in recoveries, resulting in net recoveries of $3.2 million. We typically have one or two one-off credit charges every quarter; however, highlighting the strength of our loan book, we didn't experience any of these in Q1. We believe early identification and conservative management helps mitigate losses on these assets. The ACL to funded loans increased 30 basis points to 1.14% in Q1 as a result of CECL adoption and the resultant provision expense related to Q1 loan growth and changes in the economic outlook. We continue to generate capital and maintain strong regulatory capital ratios, with tangible common equity to total assets of 9.4% and a CET1 ratio of 9.7%. In Q1, our reduction of TCE to total assets was mainly driven by a $2.3 billion increase in tangible assets due to our significant loan growth, while tangible common equity was affected by the $54 million of provisions and excessive charge-offs due to CECL adoption. In spite of reduced quarterly earnings and the payment of quarterly cash dividends of $0.25 per share, our tangible book value per share rose $0.19 in the quarter to $26.73, and is up 15.2% in the past year. Our diversified deposit generation platform and access to significant liquidity resources is critical in times of economic stress. Overall, we have access to over $10 billion in liquidity, primarily through our $4.7 billion investment portfolio, of which $2.7 billion is investment grade, readily marketable, and not pledged on any borrowing base. Additionally, we have $7 billion in unused borrowing capacity with the Fed, Federal Home Loan Bank, and correspondents. Our strong capital base, access to liquidity, and diversified business model will allow us to address any credit demands in the future. I'll now hand the call back to Ken to conclude with comments on a few of our specific portfolios.

We will now begin the question and answer session. To ask your question, you may press star then one on your touch-tone phones. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Jason Hare of Jefferies. Please go ahead.

Thanks. Good morning, guys. Just a question on the reserve build. Obviously, it's a tricky proposition here, but trying to get a sense—you guys mentioned you used a bunch of Moody's scenarios. Could you just give us some color on how much weighting was given to the Moody's adverse scenario, what kind of recovery you guys are assuming, how much government help, the stimulus stuff that the government is doing, is offsetting it, and the duration? I know that's a lot, but just trying to get some color as to the magnitude of the reserve build here.

So we primarily used the baseline case as of March 31st, and then we looked at S1 and we looked at S3. S3 is the kind of the adverse scenario, which is obviously more critical and a longer recovery period. We do struggle with what the timeline of this type of thing is and how much things come back. We do think that the institutions and the plans done by the federal government, both on the Congressional side as well as the FOMC, have an effect in terms of being able to mitigate this and draw a bridge to when we can start to turn the economy back on. I don't have a timeline for you in terms of when that is going to be, but we will look at this. We fully reserved as of March 31st, and we'll look at this again at the end of the second quarter.

Okay, great. And just following up on the loan modifications, if I heard you right, I think you said $400 million to date. This is just specifically—what exactly are you guys doing there? And then any color as to how much you've improved upon that $400 million as of April 17th here?

Okay, great. This last one for me. Clearly prioritizing the PPP program for loan growth. Just a question: how are you guys funding this? Just trying to get a sense for what the margin, the incremental NIM might be, and how willing you are to go much higher on the loan-to-deposit ratio as well as on the TCE ratio.

So you may have noticed our ending balances—our loans and deposits were significantly above the average balance for the first quarter. So we had $1.7 billion more in loans and $1.5 billion more in deposits. Two-thirds of the deposit number was DDA, which gives us good momentum in terms of expanding PPP and NIM into Q2. You layer this $1.5 billion on top of that, and we have a myriad of ways to fund this. One is we think we have additional deposit opportunities. Two is the Federal Reserve has said they'll advance 100% on these loans. And three, we have another $10 billion of liquidity that we could get elsewhere. So we're not really concerned about funding that. The cost is going to be something around 25 basis points if we put it to the Fed; it's 35 basis points to do that. So again, I think that shows you that we expect continued balance sheet growth into the second quarter, primarily driven by these PPP notes.

Okay, so if I'm understanding the PPP, it comes on at around 2% with the fees associated, so it looks like about a 175 incremental margin?

Yes, our weighted average on the $1.5 billion we've done is 2.4%. And these loans, the preponderance of this is fairly short term—we're going to call it six months—but for the part that isn't forgivable, that has the tail that goes out two years, the actual loan rate on the entire program is 1%. So you get 2.4% on the entire bucket, and some of that is going to be accelerated in terms of recognition based upon the short-term nature of the forgivable element.

Great, thank you. I'll step back.

The next question today comes from Aaron Seguinovitch of Citi. Please go ahead.

Thanks. I was wondering if you could just talk a little bit about working with the customers. I appreciate all the commentary. I guess I just want to have a better understanding of what proportion of your customers are actually getting deferrals now and how those are categorized relative to the modifications that you're discussing.

Thank you. This is Tim, the Chief Credit Officer. I think this is a nice follow-on to the discussion we've just had. The prioritization of the customer conversation, that dialogue, is of top priority. That started for us back in February. We've got two parts to this that have come into our common language: there's the trough, and then there's the recovery and stabilization and a new normal. As a bank and as a business, we know that the better we do and the better we help our borrowers through that trough in terms of proper planning, the better that asset stabilizes in the new normal. So the conversations are actually going very well, but there are obvious differences between borrowers and industries and businesses, and so necessarily there are different conversations and discussions. But what that lets us do as a business is then monitor that cash and liquidity through the trough and be best positioned in the recovery and stabilization and normal, whatever it is for their business. So it's really a dialogue that started in February and it'll continue throughout this entire process. PPP is just part of it.

Yeah, that's very helpful. I appreciate it. Thank you.

The next question today comes from Brock Vandervliet of UBS. Please go ahead.

Thanks. Good morning. A bigger picture to start: do you think this is going to be a mild or severe recession, and the scale of recessions that we've experienced in the past?

And more specifically around investors' real concerns here for the hotel book, what percentage of properties would you say go bankrupt in an average recession?

I just want to add one thing to that. I think if you really look at our sponsorship and sophistication of investor composition, it's a lot different than that legacy portfolio as well. We really have the larger operators, the higher level of sophisticated investor. When we have these dialogues and say, 'Come on, we're solving for something here that isn't 90 days,' we have folks that understand why and how we can work together and do that. And that's going to keep the leverage down on this portfolio. How we do on that puts us in the position in the rebound that we want to be in.

The debt service coverage ratios that you show on page 20, are those as of Q1 or those through April? Because clearly hotel performance has gotten worse.

Got it. Okay, all right. Thanks for the color.

The next question today comes from Brad Milsaps of Piper Sandler. Please go ahead.

Hey, good morning, guys.

Ken, I think you gave the stat on the tech book that 14% of the companies had cash on hand six months or less, which was pretty consistent with history. I was curious if you could give that same kind of stat for the hotel book. Obviously, I know the PPP program is having an impact there as well, but just want to get any kind of sense on a forward look on debt service coverage for that book if you could look at it in a similar way as you look at the tech book.

Okay. And just maybe a follow-up to follow-ups: one, how large is the gaming book? And secondly, I think at the end of last year you had about $8.5 billion of unfunded commitments in total for the whole loan portfolio. Can you talk about the potential for those to be drawn down, where you see those going, and implications of that on capital?

So the most significant draw we've ever had on unfunded has been 8% of that amount, which frankly got close to where we were with this drawdown. We're not seeing any more additional draws at this time. In fact, we've had some repayment of some of those draws. So we don't see a lot of these draws. I mean, there are these commitment lines, but we don't think they would really ever be drawn down in terms of the structure behind some of these credits. So while we have these unfunded elements to them, and we did have a drawdown in March predominantly, we're not seeing anything else subsequent to that.

Okay, great. Thank you, guys. I'll hop back in queue.

The next question today comes from Chris McGratty of KBW. Please go ahead.

Great. A quick question on the balance sheet trajectory given the comments about the growth and the draws. Any thoughts on adjusting the resi mortgage strategy in light of the capital and liquidity?

Okay. And just if I could follow up, Dale, in terms of the CET1 or the tangible common equity, obviously this quarter had a big jump down just because of the growth. Where do you comfortably run those ratios in this environment over the next few quarters?

Well, we saw a decline in those. Now with the PPP program, that could pull down our TCE, but it really won't have an effect on CET1 because those are all 0% risk-weighted as SBA-backed. But we can see this number come down into the 8s.

Okay. And then maybe the last one, if I could. The color on the hotel history of losses is great. Could you do a similar run-through of the tech book in terms of peak losses? I think when you didn't own it, they were kind of in a mystical digit, but blended I think there were around 2-3%. Any color would be great.

Your recollection is correct. I don't have those in front of me, but we'll pull them up. As you know, they're available on SNL. A lot of times I looked at it, and it was a while ago, and it wasn't for this particular situation. As I said in my prepared remarks, there was a two-times coverage of warrant income to credit losses. And as you know, credit losses come early and warrant income comes later, but when you look at it overall, the warrant income that we get has covered the cumulative credit losses.

I might add one more point to that. We've seen the support from the sponsorship. We're in these transactions at a low loan-to-value with a number of rounds in front of us before we're in. So what we're seeing is, if anything takes a hit here, it's a hit on valuation before it impacts our loan. So the rounds are clearing, the funding is occurring, the valuations might be slightly lower, but the capital is still flowing in this segment, and that gives me some comfort.

Great. Thanks for the color.

The next question comes from Sameer Baisiwala of Morgan Stanley. Please go ahead.

Hi, good morning. Maybe for Dale first. You have indicated that you're starting to see some of the utilization come back. Is that in the technology book as well, or are those utilization rates still increasing?

The utilization rates are fairly stable for where we are right now on both sides, both on the tech and innovation as well as in the corporate finance area.

Okay. And of the 14% of the tech loans which have six months or less liquidity, have any of those been funded up in the last couple weeks, or was your commentary in the prepared remarks for other relationships?

No, they have not been funded up. We had a couple of sponsors put money into a couple projects right before the end of the quarter, which was helpful to us. But overall, that number has been relatively steady in Bridge's history. However, we are encouraged by what we're seeing away from us with sponsors completing their rounds. We actually had a credit that wasn't in any trouble in our life science group yesterday that got a substantial amount of sponsor financing. So we're not seeing the sponsor financing run away from us or run away from the industry.

Okay. And then just one more on the loan modification. It looks like at least through quarter end, the majority of it was within your Arizona and Nevada portfolios. I guess what's driving that? Is that forbearance on residential loans, or why such a high number out of those two geographies?

It's really the pace and cadence of those customer discussions. The discussion results in an assessment of liquidity. Liquidity necessary to bridge the trough. In some cases, that liquidity already exists. The solution, which may include some form of modification, is tailored to the liquidity gap. So it's really just the pace and cadence of those discussions.

Okay. And then last question for me for Ken. With your commentary that you're a little more pessimistic now than you were in mid-to-late March, I'm just wondering how that correlates with using the baseline Moody's assumption for allowance. Do you see another take higher for adjustment on the existing portfolio, or at this time are you still comfortable with the $30 million that was provided for the existing book?

I'm comfortable with the provision that we provided at quarter end based on everything we knew at that time.

Good commentary. Thank you.

The next question today comes from John Ostrom of RBC Capital Markets. Please go ahead.

Thanks. Good morning, guys.

Thanks for that comment, Ken. I was just going to ask about that, but maybe we'll go at it a different way. In the provision, Dale, what you're saying is if things are a little better by late June, early July, that $30 million incremental in the provision would go away for Q2? That's the right way to think about it?

Well, I wouldn't necessarily say that that $30 million would be reversed. If the outlook at the end of June is similar to what it was at the end of the first quarter, I think that there's no additional amount given for deterioration of credit conditions. So I think that holds with that $30 million. For that to be released back into income, I think we probably have to get to a further period down the road and say we actually are well on our way toward reducing our unemployment rate, bringing people back in, and so the outlook is better than what the base case for Moody's was at the end of the first quarter. And when we have which you know that has an extent of return, I think some of that really is held down through the end of 2021. If you get back to something that resembles more of a V or U instead of a lazy U or an L, I think there's a possibility that you could release that. What Ken said was we're not really expecting to experience charge-offs, and if and when they come, it will be after these periods of the PPP program, the Main Street lending program, as well as the rules allowing for certain types of restructurings that can be done in the midst of this pandemic. That's going to push out recognition of loss at least a couple of quarters.

That makes sense. And I'm not saying reversal, I'm just saying it doesn't show up again in Q2. The other question is on margin. It appears like you're set up reasonably well from a margin perspective. I appreciate all that disclosure, but give us an idea of some of the near-term and longer-term puts and takes. How are you thinking about the margin?

We have a lot of clients that are at their floors, we talked about that. I would say competitively at this point in time, spreads have widened out as rates came down and uncertainty rose. If that settles in, you could see that maybe some of the spreads would actually come down over time, which could put pressure on earning asset yields on a more longer-term basis. I think that assumes that things are getting better economically. If things are getting better economically, maybe the Fed is then inclined to look at where we are on the zero bound and start putting rates back up. So you could have a scenario where you actually don't see rates coming down in terms of loans generally because at the same time spreads are declining, maybe overall base rates start to rise because people are comfortable with the recovery of the economy. But those are two dynamics that I really don't know how to gauge. However, we are at the zero bound here. I don't see things getting lower. The Fed has come and said that they're against negative rates, and I think that would certainly be a mistake to go there. So you may have this kind of overall lighter compression over time, but as of right now, that's certainly not the case. On the residential side in particular, we actually have seen rates rise, and in fact, spreads in residential loans have increased in some cases and really haven't participated in terms of the rate cuts that have taken place.

Okay. And then Ken, maybe one more for you. You talked earlier about $1.5 billion in organic loan growth, and maybe a third of it was drawdowns. You talked a little bit about the quality of that growth. How do you think about that? It seems like still a big number for a lot of uncertainty in the economy. So maybe just bigger picture, broader talk about the quality of the growth and maybe some of the drivers of that.

All right. Thanks a lot, guys. Appreciate it.

The next question today comes from Tyler Stafford of Stephens. Please go ahead.

Hey, good morning, guys. Maybe just to start on that last question there or last comment, Ken, can you talk about the balance sheet growth expectations this year? Obviously a strong start here in the first quarter. You mentioned some of the drawdowns on the lines, but just how do you actually think about both loan and deposit growth for the remainder of the year relative to that prior kind of $600 to $800 million range? Thanks.

Fair enough. Fully recognized there's lots of moving parts. Thanks. The rest of my questions have been asked.

The next question today comes from David Chiaverini of Wedbush Securities. Please go ahead.

Hi. I want to follow up on the hotel book. You mentioned that loan modifications are going through at the end of the year. Hypothetically, if hotels remain empty until a vaccine is developed, which could be 12 to 18 months from now, at what point and under what scenario would you move to foreclose on a hotel property?

That's helpful. Thanks for that. And then shifting gears, you mentioned about how the Main Street lending program should benefit some of your larger customers. I was wondering, will you be able to swap out your existing loans for the new loan under the facility and essentially transfer the risk to the government?

Okay. And do you believe the program is big enough to make a difference? Because looking at the SBA PPP program, those funds were exhausted fairly quickly.

And the last one for me. In the slide deck, you mentioned about 82% of the variable rate loans with floors are at those floors. Can you remind us what the average life or average stated maturity of those loans is?

The average life of our loan book is just under four years, and it's going to track pretty closely with that.

Thanks very much.

The next question today comes from Gary Tenner of D.A. Davidson. Please go ahead.

Hey, thanks. Good morning, guys. I wanted to ask a technical question on the PPP. Dale, I think you mentioned that as those get funded, they'll be on the balance sheet for up to six months. I thought the timeline for when the bank or borrower could apply to have the loan forgiven was about seven weeks. Is there something different there?

Let me clarify a little bit. You would obtain a PPP loan, and the portion of that that is forgivable—i.e., that's used to cover employee compensation, certain elements of rent and other basic expenses—that's the part that can be forgiven by the SBA. That is going to be a shorter timeline. The actual PPP loans themselves are two years. So what we see is, somebody gets a loan for X amount. What is the usage? About two-thirds of the amount used for these loans has been for something that should be ultimately forgivable because those funds are going to be used to support those particular items identified in the legislation. The remaining third is something that isn't forgivable, and so that's going to be more of a term structure for two years.

Okay, thanks. And the fees on that, you'll be recognizing them as income or is that what? Obviously, it'll go through spread income and it'll be front-end loaded because of the odd nature of how these loans are going to amortize with payment forgiveness and then the borrower responsible for the rest, right? So it would artificially inflate the margin in the second quarter and then have a lesser impact as it gets paid off beyond that.

Yes, that's correct.

Okay. And then just a follow-up in terms of the paydowns. Ken, I think you mentioned some paydowns from those loans that were drawn in March. You've seen some repayment. Can you maybe quantify what you've seen in terms of the repayments on some of those lines?

It's been modest. What I meant to say is we're not seeing additional draws of any significance, and there's been some modest payments. It seems to have stabilized. And that echoes what I'm hearing from other institutions. I think the Fed made a particular comment about this. But if you look at where these corporate finance loans are, the indicator is JP Morgan, Bank of America, Wells Fargo—it's larger institutions. And I think what we're seeing really mirrors what they're talking about.

Thanks.

The next question comes from Michael Young of SunTrust Robinson Humphrey. Please go ahead.

Hey, thanks for taking the question. Maybe just to follow up, Ken, on your comments about net charge-offs and when they'd be realized. I guess maybe in particular, could you just talk about high level where you think those will come from at this point? It sounds like maybe you don't expect as much from hotel given the collateral base there, but would it be more tech and life sciences businesses with less collateral base, or some of the C&I categories, in particular shared national credits or anything like that that maybe we're not seeing or focusing on right now?

Okay. And then maybe just on the shared national credit book. I think that was a strategy that you guys had pursued on a small basis, and maybe it got to about a billion in outstanding at one point. Can you just tell us the balance at this point and anything that we should be looking at there in terms of mitigating factors?

We're probably at about a billion. Most of the draws that have come down have come down in SNCs. And as we've talked about in the past, this is a low investment grade portfolio. The indicators are, as I just mentioned, the large banking companies that we participated in. We've at times tried to do so that we can augment our ability to push for deposits from some of these enterprises that are in our markets, and so we've taken a little piece of them.

Okay. And then maybe just last one for me. Just on expenses, obviously a pretty even step down this quarter, unrelated to lower comp expectations. But is that kind of a new run rate that we should base growth off of from here, or are there any other factors that may have shifted meaningfully with everyone working from home, etc.?

I think we're on a lower trajectory from where we were with this step down. We're continuing to do the necessary investments in technology to make sure our platform continues to support what we're doing today, which is basically executing on our business resumption continuity programs.

Okay, that's all for me. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.