Western Alliance Bancorporation Price & Performance (WAL)

And then I'll close with some prepared remarks regarding our 2025 outlook. And our Chief Banking Officer for Regional Banking, Tim Bruckner, will then join us for Q and A. Before turning to our financial results, I want to thank the people of Western Alliance as well as our customers and investors for the many kind notes and well wishes received during my leave of absence. I also wanna express my appreciation to the other members of the executive leadership team for managing the company during my absence. I feel I'm feeling great and excited to be back at work. We often refer to Western Alliance as a bank for all seasons. That is always ready to serve our commercial clients' needs irrespective of the macro environment. This is because our extensive sector expertise enables us to evaluate and structure business around perceived risks. The significant diversity of diversification of our business lines means we are able to consistently support profit profitability and risk adjusted earnings while compounding tangible book value. In other words, we produce growth through all seasons. Different pistons in our growth engine fire at different times during the economic cycle. But the net result is consistent, safe and sound loan and deposit growth even during times of uncertainty like the present.

Over the past two years, Western Alliance has significantly increased its capital and liquidity to fortify our balance sheet against potential market fluctuations. Ensuring we are all well prepared for any changes in The U. S. Economy, including from tariffs. We have preliminarily evaluated our borrowers and do not see a meaningful number of them with significant transaction volume with China, Canada and Mexico since Western Alliance serves U. S. Companies dependent on largely domestic supply chains with limited international exposure. Looking back on the first quarter, we are pleased with our execution that delivered financial results in line with expectations as we continue to prudently grow the balance sheet and maintain asset quality.

Western Alliance's balance sheet growth supported solid pre provision net revenue of $278,000,000 which equates to a $31,000,000 or 12% year over year increase. Driving this increase was net interest income, which grew $52,000,000 year over year, or 9%.

Net interest income, inclusive of deposit costs, also grew $52,000,000 year over year as ECR costs reverted to the prior year's first quarter level. Net interest margin held steady at 3.47% declining only one basis point from the prior quarter, while adjusted NIM inclusive of deposit cost expanded 17 basis points to 2.75% as a result of our accelerated ECR cost reduction efforts. Asset quality was stable. Net charge offs declined five basis points in the quarter to 20 basis points, which aligns with our full year view. Provisioning for the quarter was $31,000,000 which was significantly below Q4 levels of $60,000,000,000 While classified assets rose $186,000,000 Non accrual loans declined by $25,000,000 quarter over quarter to $451,000,000 and moved seven basis points lower as a percentage of funded HFI loans to 82 basis points.

I know collateral values are affirmed by recent appraisals above loan values. Dale will now take you through the rest of the results in more detail. Thank you, Ken. Looking closer at the income statement, Net interest income grew 9% year over year to $651,000,000 and declined $16,000,000 quarter over quarter almost entirely from two fewer days in Q1. Our back loaded loan growth places us in good position to drive continued net interest income growth with ending held for investment balances $1,100,000,000 higher quarter over quarter versus a quarterly average increase of only $57,000,000 This loan growth is indicative of the improving profitability of our balance sheet and points to expanded NII going forward. As Ken mentioned, net interest income inclusive of deposit costs increased $52,000,000 from the prior year $22,000,000 quarter over quarter. Non interest income was relatively stable year over year at 127,000,000 Mortgage loan production volume increased 25% annually and the gain on sale margin was 19 basis points. This quarterly decline in mortgage banking revenue was primarily related to lower gain on sale due to a decline in secondary trading gains. The smaller quarterly decline in net servicing revenues stemmed from a lower MSR fair value change net of hedging.

The result the reduction in income from equity investments was driven by an approximately $8,000,000 charge on investment due to change in timing of income recognition, which we expect to fully recover over time. Non interest expense was reduced $19,000,000 to $500,000,000 from the prior quarter as deposit costs declined $38,000,000 to 137,000,000 provision expense of $31,000,000 replenished $26,000,000 of net charge offs as well as provided an incremental benefit to the reserve for commercial real estate which we see as prudent given the current macro volatility. As a reminder, we focus on mitigating future losses by requiring low advanced rates at the time of underwriting. This standard is validated by recent appraisals that show collateral values exceed low values. Turning to our net interest drivers. Continued improvement in net interest interest bearing deposit costs and overall liability funding updates lower loan and securities yields. In Q1, the yield on total securities compressed four basis points to 4.63 Held for investment loan yields decreased 14 basis points to six twenty reflected a full quarter's impact of rate cuts made during Q4 on our variable rate loan book. Our cost of interest bearing deposits declined 23 basis points as a function of our active management of deposit rates even without additional FOMC rate cuts since Q4.

We continue to sustain momentum in lowering the bank's cost of funding as demonstrated by the interest bearing deposit cost spot rate landing 29 basis points below the average rate for the quarter. As discussed earlier, net interest income declined $16,000,000 from to approximately $651,000,000 almost entirely due to the smaller day count. Net interest margin remained relatively stable from Q4 at three forty seven. The impact of reduced HFI loan yields was mostly mitigated by a comparable decrease in interest cost of funding average earning assets. Non interest expenses declined $19,000,000 quarter over quarter as Apostol cost fell $38,000,000 both lower rates and smaller average balances. This decline offset normal seasonal increase in compensation and other expenses. Salaries and benefit expenses were higher from an annual incentive compensation plan bonus earned from the achievement of various performance goals as well as higher payroll taxes. Our adjusted efficiency ratio of 56% compares favorably to the 57% ratio reported in the first quarter of twenty twenty four. I'll remain asset sensitive on a net income basis, we are essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a material projected ECR related deposit cost decline this year and an increase in mortgage banking revenue.

Our updated rate forecast calls for two twenty five basis point rate cuts before the end of twenty twenty five. The balance sheet expanded 2,100,000,000.0 from year end to $83,000,000,000 in total assets. Which reflect the HFI loan and deposit growth of $1,100,000,000 and $3,000,000,000 respectively. The seasonal rebound of mortgage warehouse deposits also allowed us to reduce borrowings by 1,400,000,000.0 Total equity increased $5.00 $8,000,000 inclusive of $293,000,000 in proceeds from the issuance of REIT preferred equity. Finally, tangible book value per share climbed 14% year over year aided by sustained organic profitability and some rate driven relief for a negative AOCI position. HFI loan growth of $1,100,000,000 demonstrated gathering momentum toward the end of the quarter. C and I drove most of the growth supported by smaller contributions from commercial real estate and construction. Residential loans decreased 63,000,000 dollars C and I loans now account for 44% of the HFI loan portfolio compared to 39% a year ago, while residential loans are now 26% of the portfolio compared to 29%. These results exemplify the deep sector extra expertise and strong client relationships the company has fostered. I'd also like to add this expertise is concentrated in areas with inherently low embedded risk of loss, which we view as increasingly valuable in this a changing macro backdrop.

Regional Banking produced over $900,000,000 of loan growth, led by contributions from Home Builder Finance, and end market relationship banking. National business lines provided the remainder with lender finance the main driver of the growth with both smaller diversified increases from other areas. Our growth in lender finance has continued to gain traction from our relationships with private credit clients. Deposits grew $3,000,000,000 in Q1, mostly a non interest bearing and were complemented by growth in savings and money market balances. Seasonal strength in mortgage warehouse was augmented by solid results in HOA and our specialty escrow services. HOA solidified its market leading position by posting a 900,000,000 increase in quarterly growth during a seasonally strong quarter and surpassed $10,000,000,000 in deposits for the first time. Among specialty escrow services, corporate trust was a standout with nearly $300,000,000 of growth in business escrow services generating $100,000,000 Corporate spreads momentum could continue to benefit from the positive rating actions Western Alliance received in February. Turning to asset quality. Criticized assets rose $254,000,000 from increases of $68,000,000 in special mention loans $186,000,000 in classified assets. These loans have been reserved or charged down to current as is market values and are revalued on an ongoing basis.

Nonperforming assets as a percentage of total assets eased five basis points from year end to 0.6%.

Quarterly net charge offs were $26,000,000 or 20 basis points of average loans. Provision expense of $31,000,000 added reserves to cover charge offs augmented our CRE reserves. Our ACL for funded loans increased $15,000,000 from the prior quarter to $289,000,000 The total loan ACL to funded loans was unchanged from the prior quarter at 77 basis points. Our ACL ratio is conservatively weighted to economic scenarios more pessimistic than economists are forecasting. Which include a weighted peak unemployment rate above 6% continued reductions in CRE valuations with greater than 50% peak to trough contraction in office values. And several quarters of negative GDP growth. [indiscernible] provide to add more context behind our allowance methodology moves our ACL from 77 basis points to 1.35%. This incorporates the effect of credit linked notes, as well as low to no loss loan categories like equity fund resources, our low LTV and high FICO residential portfolio, and mortgage warehouse. Additionally, we applied another method to compare our loan portfolio to peers since loan mix matters when establishing loss reserves from different in embedded loss content across various portfolios. Relative to peers, Western Alliance's loan portfolio is much more weighted categories with very limited risk of loss.

We have over $8,000,000,000 of mortgage warehouse loans, are advances on mortgage properties while being escrowed for the GSEs with an average duration of about two weeks. We know of no bank that has incurred loan losses in this category. Our $8,000,000,000 total compares to the pure median of just 69,000,000 with several having no exposure at all. Which suppresses our relative reserve level. Our $14,000,000,000 in residential portfolio is larger than the peer median of $9,400,000,000 and also carries a high proportion of loans in Hi Fico, low LTV residential mortgages that we believe is not the case for the typical peer. Credit lien notes ensure $8,500,000,000 of this portfolio, we already have the funds to cover any losses that might emerge. Conversely, Western Alliance has de minimis consumer loans compared to a peer median of 3,000,000,000 These loans require substantially higher reserve levels as they are generally supported by a single source of repayment and more easily disrupted by adverse life events. If you apply the peer median loan mix to our portfolio, the comparable allowance would be over 1%. Turning to another look at capital levels. We believe reserves be considered in the context of adjusted capital.

Our CET1 capital ranks around the median of the peers.

However, if you add to that our lower adverse AOCI mark, and the ACL to address that some peers may have capital trapped in their reserve. You can see our adjusted capital is 11%. Which is flat since year end and ranks above the peer median for our asset co burn. This supports our confidence in our capacity to absorb any loss in contract with steady loan growth will remains strong. Our CET1 ratio decreased approximately 13 basis points to 11.1% during the quarter as a result of strong loan growth. Our tangible common equity to total assets ratio remained 7.2%.

In late March, we received proceeds of $293,000,000 from the sale of preferred equity at our REIT subsidiary. We issued out of the REIT in order to generate ongoing material after tax dividend cost savings instead of issuing at the holding company. This issuance lifts our Tier one leverage ratio from 8.1% at year end to 8.6%. Emblematic of a balance sheet with a lower risk profile, our risk weighted assets to tangible assets ratio is among the lowest of peers at 70%. Tangible book value per share increased $1.83 from year end to $54.1 as a function of organic earnings combined with $56,000,000 reduction in negative AOCI position from a lower rate environment. Consistent upward growth in tangible book value per share remains a hallmark of Western Alliance as it exceeded peers by six times over the past decade. And I'll turn the call back to Ken. Okay. Thanks, Dale. Our updated 2025 guidance is as follows. While we remain attentive to economic and macro developments, our balance sheet guidance remains unchanged at $5,000,000,000 of loan growth and $8,000,000,000 of deposit growth for the full year as pipelines, remain healthy with strong client engagement. Turning to capital, our CET1 ratio should remain above 11%, a level we have been above for a year as we produce solid risk weighted loan growth.

Net interest income should ascend sequentially throughout the year and is still expected to increase 6% to 8% for 2025 largely as a result of sustained loan growth and expanding net interest margin that approximates twenty twenty four's level on a full year basis. Noninterest income will follow net interest income's trajectory of 6% to 8% growth, due to the ongoing traction in cultivating deeper client relationships with commercial banking fee opportunities.

Noninterest expense assisted by declining ECR costs from two rate cuts expected before December, should land between 0% growth a 5% decline. We expect ECR costs in Q2 of $140,000,000 to $150,000,000 Our revised full year ECR cost outlook of $485,000,000 to $535,000,000 incorporates our current rate assumptions and typical seasonal outflows of mortgage warehouse deposits in Q4. Asset quality should remain stable with full year net charge offs hovering around 20 basis points. And lastly, we now expect the effective tax rate for 2025 to be 20%. At this time, Dale, Tim and I will take your questions.

Great. If you'd like to queue for a question, you can do so by pressing Our first question is from Casey Haire with Autonomous. Line is now open. Thanks. Good morning, guys. Gail Good morning, Casey. Appreciate all the color you gave. Morning, guys. Yeah. I appreciate all the color you gave on the on the ACL, and it certainly does seem like it's predicated on some very conservative macro assumptions. But it's just obviously, it's a major overhang on the stock for investors. It's to see the ACL that low. Just wondering is there any thought to use some qualitative reserves to just get that into a more powerful level for the market.

Well, think we've shown that our reserve is adequate both in composition and when you add it with, you know, the use of capital. [indiscernible] what I don't wanna have happen is I don't want people to think, oh my gosh. You know? They have a reserve level that's lower than somebody else. Is there you know, after I become an an owner of Western Alliance, is there a charge coming that's going to take the reserve to a higher level? We do not see that. Continue to have a very rigorous methodology for determining our allowance and supporting that by what's taking place. We actually had a scenario this last quarter where we would have had a release of reserves in the CRE, but we instead put that into, additional overlay on CRE and, again, gets us to the higher levels we have now. With a more conservative view using the S-four scenario, from Moody's to be able to put on our commercial real estate Fair enough. And then just switching to the to the guide for twenty five. The you know, seems to be tracking pretty well with the exception of [indiscernible] It it sounds like that's coming from know, just more traction with your commercial clients.

Just wondering, if it's down your down year over year, and you've got a healthy high single digit expectation. Is there any help coming from mortgage? You know, just just the cadence of what looks to be a breached fee? Map in the remaining quarters here? Yeah. We see fee income rising in the second half of the year, but just from the seasonal increase in mortgage income. We expect mortgage income to remain flat year over year. To prior year. Although I will say we are mindful that the recent rate volatility could impact consumer behavior. But all in, we expect noninterest income at this point to follow the net interest income trajectory.

Our next question is from Jared Shaw with Barclays Capital. Your line is now open.

Hey, good morning everybody. Ken, it's great to have you back on the call. Looking forward to hearing more as we go through the summer. Just the first can you give a little color on some of the C and I growth dynamics where you're seeing strength and what was driving driving that this quarter? Yes. So let me just talk about the balance sheet. I think in in its entirety, to begin. But there's strong momentum on both sides of the balance sheet. For loans, the client pipelines are active and full And at this point, we expect Q2 loan growth to actually top Q1 Our National Home Builder Group warehouse lending group, Note Finance, lender finance, will all fuel the growth for the following quarters. All right? And then with that, we see our deposits also tracking to our full year guide. To support the loan growth that we're bringing in. Okay. Thanks for that color. And then I guess, looking at the capital raise, that was an interesting structure was the primary goal for that to raise Tier one leverage and are you happy with where that is now? Or could we expect to see some other maybe unique capital moves going forward?

Yes. It was to raise the Tier one leverage ratio, and we are with our level in kind of the mid-eight range. If you look again, if you juxtapose our Tier one leverage ratio compared to peers, maybe is a little below the median, but a much higher than median level of risk weighted assets to total assets, we think that gives you good balance. And also shows you really confirmed by where we stand on a CET1 ratio of north of 11%. I might also note that that we have a subordinated debt transaction that becomes callable this quarter. And we expect to call at least part of that in the near term will mitigate to some degree the cost of the preferred. So we did a preferred deal at the REIT. A lot of banks don't have this option because they don't have a REIT to be able to do that.

The rate on that preferred less that those dividends are tax deductible, if I if we pay dividends out of the holding company, they're not tax deductible. They're just like share. Dividends. But out of the REIT, they are tax deductible. And so the net to us is a lower cost after taxes than what it would have been if we had issued out of the parent. Great. Thanks for that detail. Appreciate it.

Our next question is from Bernard von Gazzecchi with Deutsche Bank. Your line is now open. Hey guys, good morning. Just on insurance costs, and deposit service charges, so I know you've engaged your larger depositors about passing over deposit insurance costs over to them. If they wanna maintain the level of insurance. I I know it just was over about 1,000,000 for the quarter. But service charges increased over 5,000,000. I'm just wondering, mostly due to the larger depositors maintaining their insurance accounts? And you benefiting from higher service charges? Or was that the increase due to the change in pricing that you previously noticed from Jan one?

This is Ken. I also think that the answer here is that we've put a full court press on improving our treasury management services and outreach to our clients. And I think what you're seeing is that increase is showing up in, the service charges, for the for this quarter. And if you really look at it year over year, it's really up significantly for us. And so know, Tim Bruckner, who's sitting to my right, he's kinda led that charge to bring in more fee income, and we've been focusing on that for the last eighteen months to two years. Rolling out products, improving our products and service capabilities and delivery. And pleased to see that type of improvement.

Okay. And then my follow-up, just on the expenses for ECR related deposit costs. I know the 2Q $1.40 to $150,000,000 is a small uptick. Versus one q. And I think you just raised the guide on that for full year. Could you just break down, like, is that higher expected UCLA deposits, higher rate What's driving that change?

It's really a higher average balance. So Q4 was it came down and it built back up in the first quarter. So as it go from Q1 to Q2, we expect a higher average balance in ECR related deposits. And that's what's kicking that up. We do not see spreads on ECR climbing from here.

Okay, great. Thanks for taking my questions. Our next question is from Ebrahim Koonawala with Bank of America. Your line is now open.

Hey, good morning. Thank you.

I guess maybe, Dale, just following up on the NII and the margin trajectory. One, remind us whether rate cuts including of ECR costs are helpful or neutral to the NII outlook when we think about the sequential improvement, is this more back half weighted? Is there a big step up in the fourth quarter when you think about just how NI and the margin trajectory are gonna play out for the remaining three quarters?

Yeah. This is Ken. So on net interest income, we kinda see the net interest income sequentially growing. Quarter to quarter, certainly for Q2 and Q3. We do have two rate cuts in there, one in June and think the other in September is forecast. And so what you'll see from us is net interest margin increasing gradually through the year, but I think you'll see more of an increase in the adjusted net interest margin as ECR costs kind of rise a little bit in Q2 and then flatten to decline in Q3 and really in Q4. As volume also leaves us, right, for the warehouse seasonal mortgage exit. So you'll see the adjusted net interest margin grow, and that's going to bring the net interest income to that sequential pattern of growth.

Plus, the loan growth itself is going to help us. And so to the extent that we could accelerate our loan growth and increase it at a faster pace that will give an increase to our average earning assets, which will give more support to the net interest income. And that's how we get to the our full year guide.

Got it. And, Ken, welcome back. I guess another question [indiscernible] heard Dale's response from the reserves, but I think when you think about an know you spend a lot of time. When you think about the stock performance, trading at seven times earnings. Like, what do you think you can do to improve shareholder returns I'm not sure if I heard, any sort of discussion around buybacks, but how do you get the stock to rerate? How do you improve shareholder returns like what do you think needs to happen for the stock to really react differently as we move forward.

I think we need to do a better job, you know, kind of really promoting what we're doing and the strength of our diversified business model. We talked about that a little bit, about being able to pivot from one to sector or one business to another, depending on what's in favor, what might be at risk. Kind of going forward. And we were talking about this earlier. Seen how some companies have brought up the Southeast you know, and what they're doing there. Well, we have $14,000,000,000 in loans and $14,000,000,000 in deposits in the Southeast. I don't know that, that gets enough attention. We have offices there. We've people there. We've got people in some 40 states. But we put a flag in some of those, so they don't it doesn't show up necessarily on an FDIC scan. But we're there, we're active, and we're successful.

And would you consider some sort of an m like, talked about bank M and A and maybe the regulatory environment improving. Like, would some sort of a strategic partnership that better sort of extract franchise value? Is that something that you would consider? Like, how would you think about that?

No. I I don't think so. I mean, look, It's hard to find another bank in our peer group that can grow the way we can grow on the balance sheet side and improve earnings the way we generally have improved earnings and improve really tangible book value over the last ten years. So I don't think So I don't think we're going to consider anything along those lines.

Got it. Thank you.

Thank you. Our next question is from Gary Tenner with D. A. Davidson. Your line is now open.

Thanks. Good morning and Ken welcome back. A bit of a follow-up to that last Just in terms of if M and A is not on the docket, the stock's trading at 120 of tangible book and below year out tangible book, And you have a big dividend payout ratio. So any any more openness to using some capital for buyback at this level? So right now, in times of uncertainty, you want to have excess capital and liquidity. Either defend the bank against market or economic disruptions or be well positioned to take advantage of these disruptions. We've said since 2023 that we wanna have a 11% CET one floor. We are we are there. We think that positions the bank best in terms of taking advantage of growth. Go back to my opening statements. We're a bank that tends to grow through all different types of economic cycles. I understand that there are many of our peers are buying back their stock. That is more of a temporarily improving EPS through those stock repurchase programs. For us, we look to have that capital. We can deploy that capital into sound, safe and thoughtful loan growth. We believe we can deliver a return on average tangible common equity in Q1 was 13%, but we see that rising as we go forward.

Into the mid teens percentage. And we think over time that is the best use of our capital. Additionally, we compete against very strongly against the top 10 banks in the country. With our national business lines. And when we go into talk to clients, we need to kinda look like they do in terms of their CET1 ratios and liquidity profile. And having a larger CET1 or higher CET1 ratio is very helpful on us being awarded business. So we do use it as a competitive strength in terms of growing balance sheet. We're at this point, we're still not inclined to use it to buy back stock. We think the best longer term value is doing what we're doing, and it's growing the company.

Fair enough. Appreciate the thoughts there. And then as it relates to the positive second quarter loan growth commentary, I know it's still bit early in the quarter, but any visibility as to kind of how that may layer in over the course of the quarter given the commentary about the first quarter loan growth being pretty late quarter? Yes. Mean, to be honest, that's the hardest thing for us to forecast. My viewpoint is it always should come in early, and it always should come in on the first day.

Of the quarter. It just never works out that way, unfortunately. You've always got deals to be done and completed by our clients. You've got lawyers in the way. It's always a little later than we think. We're confident about our loan growth for the second quarter. My guess, it comes more towards the middle of the second quarter to the back half of the of the second quarter. But we make a very concerted effort here to push it up as quickly as we can into a quarter. But that is a hard task for us to accomplish every quarter.

Thank you. Thanks.

Our next question is from Ben Gurlinger with Citi. Your line is now open.

Good morning. Welcome back, Ken. Just quick question. I know it follows up a little bit on the past.

Couple hate to beat a dead horse here. But if you look at, like you said, interest bearing deposit costs, spot rates down 29 bps. So it gets you below three to end [indiscernible] Why is the margin only going up gradually considering loan growth is pretty healthy in the month of March? I'm thinking it's a little bit more than gradual when you look at just the pace of which NII should increase. Missing something here? I do think that we're gonna be more a little more stable on on, non interest bearing from here. I mean, that, you know, that has strong recovery with a primarily ECR related deposits going into the second quarter. I would say as well that there is a little bit of issue with with pricing pressure. So we are seeing our loan growth, which we're confident about achieving, it is going to have a lower average spread relative to kind of the current what's currently on the balance sheet. And so that's going to be modestly dilutive to the margin over time. Again, we're really focused on PPNR and what we can do to drive that. More than we are about managing the margin per se.

And so we look and so PPNR ops obviously also includes the ECR costs that are in the noninterest expense. Right. No. That makes sense. It seems like PPNR is going to go higher seemingly every quarter for the next year or two here. But, obviously, rate dependent's hard to see. Six or seven quarters out, but when you when you think about just the investment spend, associated with FPPNR, I e, non ECR related deposits, is there anything incremental to a non run rate per perspective on investment, I. E, get over the hundred billion that you still need to do? Or if the rules were changed and hundred billion was more like 50 or something like that, would you be ready today? So, embedded in our forecast and certainly in in our PPNR guide, is the fact that we continue to build out our LFI readiness. And we assume on a natural growth curve, that somewhere at the end of 'twenty six, early 'twenty seven, will be over $100,000,000,000 and we are preparing to do that. And embedded in our expense base, is about $30,000,000 to do that. Okay? Now if your question is [indiscernible] if new rules or regulations come out and kind of push that out a little bit and we don't have to be ready to cross over $100,000,000,000 then yes, there would be some expense savings as we would push out the development, for that.

But I'll tell you, just on a as much as this is a heavy lift for us inside of the company, and I don't think it really gets appreciated that what type of heavy lift we're doing inside the company and simultaneously being able to grow the company the way we're growing it. The preparation for the LFI or category four levels actually helps us make better decisions. It provides a better discourse around the table, with better data. And so we are seeing some benefits from it immediately as we prepare to cross over that level in the future. Got you. Helpful. Thank you.

Our next question is from Timur Braziler. With Wells Fargo. Your line is now open.

Hi, good morning.

Going back to the loan yield conversation, just the the the the C and I loans that were put on back end of the quarter, I'm just wondering, given rate activity, could we actually see those loan yields increase in 2Q or just some of the pricing pressures that you're talking through The loan production was below the kind of average balance for the first quarter?

Yeah. I was not you're gonna see those loan yields increase over in q two. Again, we have a we have rate decrease occurring in the second quarter. So that will put some pressure on the loan yields. Dale mentioned this in his comments. That we are seeing some pricing pressure in the markets. We're still winning deals. But there are a number of banks that are out there really searching and groping for loan growth. And sometimes they come in with pricing that for us doesn't make any sense and we'll walk away from those deals. But there is some gradual downward pressure on loan yields. As Ken mentioned, we have two rate cuts. Expected. The first of those is at the June FOMC meeting, which is in the 25 basis point cut, that will move the preponderance of our loan book lower by 25 bps as well. Again, it's only for onesix of the quarter, but you're going to get a haircut of a few basis points from that too.

Okay, great. And then my follow-up just on credit. Maybe can you talk through the increase in C and I classifies this quarter? And then as you look at the office portfolio, just the reappraisal rates when I'm looking at Page 22 of the deck, just over the last couple of quarters, that's grown from 7% over 80% LTV in 3Q. That's over 25% of the portfolio today.

Granted much of that did occur last quarter. I'm just wondering how granular was some of those reappraisals that are now over 80% and just with 40% of the office book maturing in '25, 75% maturing through '26. Does the current uncertainty in the in the macro change the way you potentially think about the risk profile these upcoming maturities?

Sure. Yeah. I'll take that. So first, with with the substandard, in in our methodology, in our risk rating, we we are quick to move in into substandard. We use special mention very sparingly. And we do that be because we have built our culture around elevation and then timely resolution. So that moves those loans into a a very direct remediation strategy. So the movements in substandard are all fully secured. Fully appraised, and real estate [indiscernible] Not unlike the discussion we've had on past calls.

So when we look at the appraisal rates, everything that we underwrite and let's talk about office.

Everything that we underwrite in office, we go in at 55% or below on on the appraised on the appraised value. And then we have any additional fundings that would move on from there as we call it good news money with signed leases and co support from the the the sponsorship.

So through this cycle, we've been rigorous to make sure that we have that support dynamic And then if we don't have that dynamic, we take very timely moves to control over the asset. So as you see those move up, you also see the basis of appraisal move from a a fair market value to a very as is value giving effect to current market conditions. So when you see those appraisal movements, numbers, small part of the story. The bigger part is the the basis of the appraisal.

Great. Thank you. Our next question is from Chris McGratty with KBW. Your line is now open.

Great. Thanks. Welcome back, Ken. I'm looking at slide 18, the the guide. Is there any reason why you you would steer us away from the midpoint across PPNR? Are you leaning either in any direction for each for any of the NII fees or expenses? I'm sorry. Is your is your your question again is is what? I think Oh, sure. What was it? If if I'm looking at your your guidance, is there any reason for us to to not assume the midpoint of the various ranges? Or are you leaning to the higher low end in any one of the three components of pre provision earnings? I think the midpoint is appropriate. If I had my brothers in terms of what would happen by the end of twenty twenty five, we'd have pushed a little harder. On deposit growth and a little harder on loan growth.

Based upon from the guidance we have here, and that would be kind of the primary driver of improved performance. But again, we want to be very attentive to change changes in economic conditions, of course have been know, rather frequently late.

Okay. And and then that point, Dale, if if the revenue, either mortgage or or the growth doesn't come through but can you speak to the degree to flex the expenses a little harder?

I think if there's any flex that's really going to drive PPNR upward, will be higher loan growth and higher average earning assets that would drive the PPNR up higher. I think the flex on the expenses is pretty much what we've guided to at this point, and I would I would not change that guide. Or change that in your model.

Okay.

Thank you.

Have a question from Jon Arfstrom with RBC. Your line is now open.

Hey, thanks. Hello, everyone.

Hey, John. Hey.

Question for you guys on the mortgage banking outlook.

I think, Ken, you mentioned earlier flat mortgage revenues year over year. Can you talk a little bit about your rate assumptions around those expectations? And is there a ten year level where the volumes start to increase and maybe there's upside to that outlook?

Yes. I mean, in terms of mortgage rates and what we saw last year, the pickup in volume begins somewhere when the mortgage yield for the thirty year is six twenty five or or lower, that's when we started to really see a pickup in volume. If you talk to the mortgage folks at AmeriHome, they'll tell you anything that cracks 6% would really be a race for the for the roses in terms of much, much higher volume. So we're assuming that rates kind of stay where they are to getting a little bit better throughout the year. And that's sort of what gives us this this projection to keep mortgage income flat year over year. I will tell you that we are watching consumer behavior and we're mindful that the recent rate and market volatility could could impact future consumer behavior. And we'll wait to see how that unfolds. But right now, we're sticking with the full year guide. It may come a little bit later in second quarter and then into the third quarter. I think April was a little choppy for consumers for the obvious reasons. And we've heard this persistent cry, refis are coming, refis are and yet they seem to be kind of perpetually put off.

There's two pieces, as Ken was mentioning, there's two pieces to that rate spread issue that we have. One of them is overall rates higher and then the other is the volatility in the premium price above, like, say, the ten year treasury for mortgage refinance. And that's because, in part, they some are concerned buyers are concerned. Well, if I buy this mortgage now, but yet we see the volatility crush, or we see rates decline for whatever reason that could happen, maybe a pullback in terms of tariff action, maybe action from the FOMC, could see both of those collapse. And so if you're going to be buying financing mortgages, you're going to be in a refi business kind of out of the gate. And so I think just more stability might mute the vol and the rates for what we have in thirty year mortgage property relative to market. Independent market rates anyway. [indiscernible] That makes sense. Any thoughts on the gain on sale? Outlook? Would you do you think 19 basis points is unusually low or any thoughts on that outlook?

I don't I can't say whether it's going to expand. I would say that 19 basis points isn't usually low. Okay.

Thanks, guys.

Thanks John. We have a question from Andrew Terrell with Stephens. Your line is now open.

Hey, good morning and again welcome back.

If I could ask on just Dale you mentioned in the prepared remarks the Moody's rating change back in February. Was hoping you could maybe just discuss a bit more any incremental traction you're gaining in the Corporate Trust business following that news? I know it's been a point you guys talked about for a couple of years Well, think primarily what it does is it again, reinforces confidence in terms of the strength and stability of the company. It was also upgraded by Fitch at that same time line. And and you know? So a lot of those are based upon kind of deposit ratings as opposed to debt ratings, which already were an A rated situation. So we think that, that's helpful. But again, it kind of gets back in terms of kind of closer to where been historically. And we think overall, it just promotes confidence, not just in Corporate Trust, but with our business escrow services, with our digital account products as well. And I'll just add to that. You know, Very proud of the Corporate Trust folks this quarter. They grew deposits $270,000,000 Our [indiscernible] is now over $800,000,000 in deposits or business escrow services is just about touching $1,000,000,000 And so we've got six different digital six different deposit platforms that are going gangbusters led by course, HOA, which we now we now think we are the market share leader.

And as Dale mentioned earlier, $900,000,000 So, yeah, I think the the upgrade in investment grade rating is gonna help I just think these deals take time. We've got to be awarded deals. And then they got to fund the deals, and then we get those deposits. But we're encouraged by what's happening in all of our deposit channels. And I think it's supported by that upgrade by Moody's and by Fitch.

Great. I appreciate the color. If I can go back to just some of the commentary around loan yields, I don't know if you guys have it, but could you share the the weighted average yield on the new production for the first quarter. I'm just trying to get a sense of I hear you on the competitive front. Just trying to get a sense for how different, you know, new loans being put on are from the call it, six twenty or so, book yield today.

The right thing is coming in at three basis points lower but our deposit costs are coming in 29 basis points lower. So we're seeing a a slight decline in yields, loan yields, but we're picking it back up. In deposits.

Okay. Thanks for taking the questions.

Our next question is from Matthew Clark with Piper Sandler. Your line is now open.

Hey, thanks. Good morning, and welcome back, Ken.

Just on the kind of round out the discussion on margin and NII. It looks like you've got some pretty good visibility going to 2Q with the end of period loan growth, called 06/17 and the drop in the spot rate, You would argue for a margin over three sixty a reported basis, but any sense for kind of where that margin ended at the end of the quarter you know, if you normalize it for any unusual fees?

Well, we we don't. We don't we don't track to what the margin is at oh, sorry. At the end of the month or [indiscernible] Yeah. End of the month.

End of the month.

Yep. Yeah. So so end of the month. Right. You know, I'll just say let me try to give you this guide. Think when you think about the net interest margin, we kind of see it staying rather kinda moving slightly upwards in Q2 a little bit more in Q3, and then plateau in Q4 to Q3. That's the net interest margin. The adjusted net interest margin, inclusive of ECR costs, we kind of see second quarter and first quarter kind of being about the same, and then we kind of see it growing, adjusted net interest margin improving stronger in Q3 and then again in Q4. That's probably the best guidance I can give you on that.

Yes. You're definitely going to see more leverage over the adjusted margin than just the reported margin. That's really that's closer to what we're focused on. It's more direct relationship to PPNR.

What we don't want to do is we don't want to not underwrite a we have liquidity, a reasonable credit opportunity that has strong credit metrics, just because might be detrimental to the loan yields under the margin.

Okay. Fair enough. And then just on the the criticized increase this quarter, any thoughts on the outlook and migration in general, whether or we might see some improvement, or is this kind of environment making a little more, [indiscernible] Our our migration, as I as I mentioned, is is really focused on real estate related, particularly office. Secured loans. When we look at those, those have been in view now for a couple of years, and we've been working our strategies on that. So when we look forward, we see the path to resolution as well as the necessary steps.

And we know the assets by name. Again, this is a floating rate portfolio. We're not waiting for balloons. Or maturities here. So we've dealt with these assets early. So where I see it, is is flat in the coming quarter. We see it begin to move downward in the later part of the year.

Great. Thank you.

We have a question from Anthony Elion with JPMorgan. Your line is now open.

Ken, good to hear you're feeling much better, and welcome back.

I want to start on loan growth. Know you mentioned that second quarter should talk I know you mentioned that second quarter loan growth should top first quarter growth.

But can you just share with us anecdotally anything you've heard since Liberation Day on what you've heard from your customers in terms of business investment, CapEx they may be thinking about, but that's on pause now. If they're making any adjustments now given the elevated uncertainty from tariffs? Yes. So our clients are certainly mindful and cautious of what's going on. I would say the longer the tariff discussion stays in limbo, the more uncertainty and angst will be added to their outlook. But we're seeing a lot of our our growth in Q2 come from longer dated capital expenditure programs, I. E, national homebuilder finance, which we, do a lot financing, and then we do the vertical construction on that. Those folks make a longer term investment decisions and we're funding them as such. And so those folks are, of course, mindful, but, not immediately impacting their their business, mostly because there's somewhat of a housing shortage in The U. S. On the C and I side, lender finance seems to continue to push forward. We're actually seeing some improvements in tech and innovation. Although overall, that sector has slowed a little bit, certainly in deposit generation and liquidity events.

But we seem to be winning more than our fair share of of market deals that are out there or taking market share. And so that's giving us some confidence as as well. Thank you. And then my follow-up on credit, I think back to the early days of COVID, you guys were early in terms of proactiveness diving deeper into potential problem portfolios.

Ken, it sounds like you did that again based on your prepared remarks, and you don't see a significant number of borrowers or meaningful exposures to China or Canada. But are there any segments now within national business lines that you're just paying a little bit more attention to given the outsized uncertainty? Thank you. [indiscernible] We you know, we we really look at our as as Ken entrode with our our diversified business model as a strategy, for any type of economy, and it plays out in this this type of economy. So we're we're constantly at the table dialing some of our businesses up a little bit, and we're seeing great results. And we're and we're dialing other businesses down. So we're a bank going into this period with virtually no retail or energy exposure. No consumer exposure outside of our mortgage business And all of our borrowers, for the most part, are domestic companies doing business in The U. S. That doesn't take the risk away, but it gives us a very manageable model with our diverse diversified strategy where we can, we think, manage through this better than most.

Thank you.

There are no further questions at this time. So I'll pass it back to Ken Vecchione. For any closing remarks. [indiscernible] you all for joining us, and thank you for again, for all your well wishes. And look forward to seeing you on the road at conferences and then picking up again with you on our next earnings call. Thanks again.

That concludes today's call. You all for your participation. You may now disconnect your line.