Western Alliance Bancorporation Q1 FY2025 Earnings Call

Good day, everyone. Welcome to Western Alliance Bancorporation's First Quarter 2025 Earnings Call. You may also view the presentation today via webcast through the company's website at 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. Welcome to Western Alliance Bank's first 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 our 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, and good afternoon, everyone. I'll make some brief comments about our first quarter earnings before handing the call over to Dale to review our financial performance and drivers in more detail. 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&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 want to express my appreciation to the other members of the executive leadership team for managing the company during my absence. 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 diversification of our business lines means we are able to consistently support profitability and risk-adjusted earnings while compounding tangible book value. In other words, we produced 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 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 million, which equates to a $31 million or 12% year-over-year increase. Driving this increase was net interest income, which grew $52 million year-over-year or 9%. Net interest income, inclusive of deposit costs, also grew $52 million 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 1 basis point from the prior quarter, while adjusted NIM, inclusive of deposit costs, 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 5 basis points in the quarter to 20 basis points, which aligns with our full year view. Provisioning for the quarter was $31 million, which was significantly below Q4 levels of $60 million. While classified assets rose $186 million, non-accrual loans declined by $25 million quarter-over-quarter to $451 million and moved 7 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 million and declined $16 million quarter-over-quarter, almost entirely from two fewer days in Q1. Our back-loaded loan growth places us in a good position to drive continued net interest income growth with ending held for investment balances $1.1 billion higher quarter-over-quarter versus a quarterly average increase of only $57 million. 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 million from the prior year and $22 million quarter-over-quarter. Noninterest income was relatively stable year-over-year at $127 million. 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 revenue stemmed from a lower MSR fair value change, net of hedging. The reduction in income from equity investments was driven by an approximately $8 million charge on investment due to change in timing of income recognition, which we expect to fully recover over time. Noninterest expense was reduced $19 million to $500 million from the prior quarter as deposit costs declined $38 million to $137 million. Provision expense of $31 million replenished $26 million of net charge-offs as well as provided an incremental benefit to the reserve for commercial real estate, which we view as prudent given the current macro volatility. As a reminder, we focus on mitigating future losses by requiring low advance rates at the time of underwriting. This standard is validated by recent appraisals that show collateral values exceed loan values. Turning to our net interest drivers. Continued improvement in interest-bearing deposit costs and overall liability funding outpaced lower loan and securities yields. In Q1, the yield on total securities compressed 4 basis points to 4.63%. Held for investment loan yields decreased 14 basis points to 6.20%, which 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 by adding 29 basis points below the average rate for the quarter. As discussed earlier, net interest income declined $16 million from Q4 to approximately $651 million, almost entirely due to the smaller day count. Net interest margin remained relatively stable from Q4 at 3.47%. The impact of reduced HFI loan yields was mostly mitigated by a comparable decrease in interest cost of funding average earning assets. Noninterest expenses declined $19 million quarter-over-quarter as deposit cost fell $38 million from both lower rates and smaller average balances. This decline offset normal seasonal increases in compensation and other expenses. Salaries and benefit expenses were higher from an annual incentive compensation plan bonuses 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 2024. While we remain asset sensitive on a net interest 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 25 basis point rate cuts before the end of 2025. The balance sheet expanded $2.1 billion from year-end to $83 billion in total assets, which reflected HFI loan and deposit growth of $1.1 billion and $3 billion, respectively. The seasonal rebound of mortgage warehouse deposits also allowed us to reduce borrowings by $1.4 billion. Total equity increased $508 million, inclusive of $293 million 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 $1.1 billion demonstrated gathering momentum toward the end of the quarter. C&I drove most of the growth, supported by smaller contributions from commercial real estate and construction. Residential loans decreased $63 million. C&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 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 amidst the changing macro backdrop. Regional Banking produced over $900 million of loan growth, led by contributions from homebuilder finance and end market relationship banking. National Business Lines provided the remainder, with lender finance, the main driver of its growth with 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 billion in Q1, mostly in noninterest-bearing and were complemented by growth in savings and money market balances. Seasonal strength in mortgage warehouse was augmented by a solid result in HOA and our specialty escrow services. HOA solidified its market-leading position by posting a $900 million increase in quarterly growth during a seasonally strong quarter and surpassed $10 billion in deposits for the first time. Among specialty escrow services, Corporate Trust was a standout with nearly $300 million of growth in business escrow services generating approximately $100 million. Corporate Trust momentum could continue to benefit from the positive rating actions Western Alliance received in February. Turning to asset quality. Criticized assets rose $254 million from increases of $68 million in special mention loans and $186 million in classified assets. These loans have been reserved or charged down to current as market values and are revalued on an ongoing basis. Nonperforming assets as a percent of total assets eased 5 basis points from year-end to 0.6%. Quarterly net charge-offs were $26 million or 20 basis points of average loans. Provision expense of $31 million added reserves to cover charge-offs that augmented our CRE reserves. Our ACL for funded loans increased $15 million from the prior quarter to $389 million. 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. The ACL walk we regularly provide to add more context behind our allowance methodology moved for 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 differences in embedded loss content across various portfolios. Relative to peers, Western Alliance's loan portfolio is much more weighted to categories with very limited risk of loss. We have over $8 billion of mortgage warehouse loans, which were 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 billion total compares to the peer median of just $69 million, with several having no exposure at all, which suppresses our relative reserve level. Our $14 billion in residential portfolio is larger than the peer median of $9.4 billion and also carries a high proportion of loans in high FICO, low LTV residential mortgages that we believe is not the case for the typical peer. Credit-linked notes ensure $8.5 billion of this portfolio, where 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 billion. 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 should 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 asset cohort. This supports our confidence that our capacity to absorb any losses in contrast with steady loan growth 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 million 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 1 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 $54.10 as a function of organic earnings combined with a $56 million 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. I'll now 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 billion of loan growth and $8 billion 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 2024'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 and a 5% decline. We expect ECR costs in Q2 of $140 million to $150 million. Our revised full year ECR cost outlook of $485 million to $535 million 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 approximately 20%. At this time, Dale, Tim and I will take your questions.

Our first question is from Casey Haire with Autonomous. Your line is now open.

Thanks. Good morning, everyone. Dale, I appreciate the insights you shared on the ACL. It certainly appears to be based on some very cautious macro assumptions, but it seems to be a significant concern for investors given how low the ACL is. I'm curious if there's any consideration to utilize some qualitative reserves to bring that number to a more acceptable level for the market.

I think we've demonstrated that our reserve is sufficient in both composition and in conjunction with the strength of our capital. I want to clarify that I don’t want anyone to think that having a reserve level lower than others indicates a problem. After becoming an owner of Western Alliance, is there a charge anticipated that will increase the reserve? We do not foresee that. We maintain a very thorough methodology for determining our allowance and supporting it based on current conditions. In the last quarter, we encountered a situation where we could have released reserves in the commercial real estate sector, but instead, we allocated that to a more conservative overlay on commercial real estate, leading us to higher reserve levels while applying the S4 scenario from Moody's for our commercial real estate office.

Fair enough. And then, just switching to the guide for '25, everything seems to be tracking pretty well with the exception of fees. It sounds like that's coming from just more traction with your commercial clients. Just wondering if it's down year-over-year and you've got a healthy high-single-digit expectation, is there any help coming from mortgage or just the cadence of what looks to be a pretty steep fee ramp in the remaining quarters here?

Yeah. We see fee income rising in the second half of the year, buttressed from the seasonal increase in mortgage income. We expect mortgage income to remain flat year-over-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. Maybe just the first, can you give a little color on some of the C&I growth dynamics where you're seeing strength and what was driving that this quarter?

Let me discuss the balance sheet as a whole to start. There is strong momentum on both sides. For loans, the client pipelines are active and robust. We expect loan growth in the second quarter to surpass the first. Our national homebuilder group, warehouse lending group, note finance, and lender finance will all contribute to growth in the upcoming quarters. Additionally, we anticipate our deposits will align with our full-year guidance to support this loan growth.

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 1 leverage? And are you happy with where that is now? Or could we expect to see some other maybe unique capital moves going forward?

Yeah. It was to raise the Tier 1 leverage ratio, and we are happy with our level in kind of the mid-8% range. Again, if you juxtapose our Tier 1 leverage ratio compared to peers, which 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 a 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 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, which will mitigate to some degree the cost of the preferred. So, we did a preferred deal with 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 we pay dividends out of the holding company, they're not tax deductible, they are just like common 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-Gizycki with Deutsche Bank. Your line is now open.

Hey, guys. Good morning. Just on insurance costs and deposit service charges, so I know you engage your larger depositors about passing over the deposit insurance costs over to them if they want to maintain the level of insurance. I know it just was over about $1 million for the quarter, but service charges increased over $5 million. So, I'm just wondering, is this mostly due to the larger depositors maintaining their insurance in accounts and you're benefiting from higher service charges, or was that the increase due to the change in pricing that you previously noticed from Jan 1?

This is Ken. I also think 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 this quarter. And if you really look at it year-over-year, it's really up significantly for us. And so, Tim Bruckner, who's sitting to my right, he's kind of led that charge to bring in more fee income. And we've been focusing on that for the last 18 months to two years, rolling out products, improving our products and service capabilities and delivery, and we're 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 Q2 $140 million to $150 million is a small uptick versus 1Q. And I think you just raised the guide on that for full year. Could you just break down? Like, is that higher expected ECR-related deposits, higher rate? What's driving that change?

The average balance is higher. In Q4, it decreased but is expected to rebound in the first quarter. As we move from Q1 to Q2, we anticipate an increase in average balances for ECR-related deposits, which is what's driving that change. We do not forecast an increase in spreads on ECRs from this point onward.

Okay, great. Thanks for taking my questions.

Our next question is from Ebrahim Poonawala 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? And when we think about the sequential improvement, is this more back-half weighted? Is it a big step up in the fourth quarter when you think about just how NII and the margin trajectory are going to play out for the remaining three quarters?

This is Ken. We expect net interest income to grow sequentially from quarter to quarter, particularly in Q2 and Q3. We have two rate cuts projected, one in June and another in September. Therefore, we anticipate a gradual increase in the net interest margin throughout the year. However, the adjusted net interest margin should see a more significant increase as ECR costs are expected to rise slightly in Q2 before leveling off or declining in Q3 and Q4, especially as we experience the seasonal decline in warehouse mortgage volume. Overall, the adjusted net interest margin will contribute to the growth of net interest income, and combined with loan growth, this supports our full-year guidance.

Got it. And, Ken, welcome back. I have another question regarding the reserves. I heard Dale's response, but when considering stock performance, it's currently trading at 7 times earnings. What do you think can be done to improve shareholder returns? I didn't hear much discussion about buybacks. How do you see the stock re-rating? What needs to happen for the stock to react differently as we move forward?

I believe we need to enhance our efforts in promoting our activities and showcasing the strength of our diversified business model. We mentioned earlier our ability to transition between different sectors or businesses based on what is currently favorable or at risk. For example, some companies have highlighted their operations in the Southeast, and we have $14 billion in loans and $14 billion in deposits in that region, which I don't think receives enough attention. We have offices and personnel there, as well as in around 40 states. However, we haven't widely advertised our presence, so it might not be easily visible in an FDIC scan. Nonetheless, we are actively engaged and achieving success.

Would you consider the possibility of a strategic partnership that could enhance franchise value, especially in light of discussions around bank mergers and acquisitions and the potential for an improved regulatory environment? How do you view this possibility?

No, 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 improved really tangible book value over the last 10 years. So, I don't think we're going to consider anything along those lines.

Thanks. Good morning. And, Ken, welcome back. A bit of a follow-up to that last question. Just in terms of if M&A is not on the docket, the stock is trading at 120% of tangible book and below your out tangible book and you don't have a big dividend payout ratio. So, any more openness to using some capital for a buyback at this level?

So, right now, in times of uncertainty, you want to have excess capital and liquidity to 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 want to have an 11% CET1 floor. We are there. We think that positions the bank best in terms of taking advantage of growth. Go back to my opening statements, where a bank that tends to grow through all different types of economic cycles. I understand that many of our peers are buying back their stock, but 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 strong and the top 10 banks in the country with our national business lines. And when we go in to talk to clients, we need to kind of look like they do in terms of their CET1 ratios and liquidity profile. And having a larger CET1 or a higher CET1 ratio is very helpful on us being awarded business. So, we do use it as a competitive strength in terms of growing the balance sheet, where 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 a 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?

Yeah. I 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 a 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, and 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 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.

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

Good morning, Ken. I have a quick question. I know this follows up on previous discussions, but considering the drop in interest-bearing deposit costs and spot rates down 29 basis points, resulting in a rate below 3 at the start of April, why is the margin only increasing gradually when loan growth has been strong in March? It seems like the increase in net interest income should be more significant. Am I missing something?

I believe we will see more stability in noninterest-bearing deposits moving forward. There has been a strong recovery, particularly with ECR-related deposits, as we head into the second quarter. However, we are also facing some pricing pressure. As a result, while we are confident in our loan growth, it will likely have a lower average spread compared to what we currently have on the balance sheet. This will modestly dilute our margin over time. Our primary focus remains on PPNR and how we can enhance it, rather than strictly managing the margin. It's important to note that PPNR also encompasses the ECR costs included in noninterest expenses.

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 dependence is hard to see six or seven quarters out. But when you think about just the investment spend associated with PPNR, i.e., non-ECR-related deposits, is there anything incremental to a non-run rate perspective on investment, i.e., to get over the $100 billion that you still need to do? Or if the rules were changed and $100 billion was more like $50 billion or something like that, would you be ready today?

We are incorporating our LFI readiness into our forecast and PPNR guidance. We expect that by the end of 2026 or early 2027, we will exceed $100 billion, and we are preparing for that transition. To embed this in our expense base, it will cost us approximately $30 million. If new regulations were to alter this timeline and delay our readiness for surpassing $100 billion, we would realize some expense savings due to postponing development. However, it's important to note that this effort poses a significant challenge for us, one that may not be fully recognized, especially as we manage to grow the company concurrently. The preparation for LFI or Category 4 levels is already enhancing our decision-making and allows for more informed discussions, leading to immediate benefits as we get ready to achieve that level in the future.

Got you. That's 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 C&I loans that were put on back end of the quarter. I'm just wondering given rate activity, could you actually see those loan yields increase in Q2 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 would expect you're going to see those loan yields increase over in Q2. Again, we have a 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 market. So, 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 middle of the month. And so, assuming it's a 25 basis point cut, that will move the preponderance of our loan book lower by 25 basis points as well. Again, it's only for one-sixth 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&I classified 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 macro change the way you potentially think about the risk profile of these upcoming maturities?

Sure, I'll address that. First, regarding our methodology and risk rating, we are prompt in identifying substandard conditions. We use the special mention category very sparingly because our culture emphasizes elevation and timely resolution. All movements in the substandard category are well-secured, thoroughly appraised, and backed by real estate, which is different from what we've discussed in previous calls. When appraising office properties, we ensure that our underwriting starts at 55% or below the appraised value. Additionally, any further funding is considered as positive support, contingent on signed leases and backing from the sponsors. Throughout this cycle, we've been diligent in maintaining that support, and when it isn't present, we act quickly to take control of the asset. As you observe increases in these movements, you will also notice that the appraisal basis shifts from fair market value to a more conservative as-is value that reflects current market conditions. Therefore, when you see changes in appraisals, it's important to understand that the number itself is just a small part of the overall picture; the more significant factor is the appraisal basis.

Great. Thank you.

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

Great. Thanks. Welcome back, Ken. If I'm looking at Slide 18, the guide, is there any reason why you would steer us away from the midpoint across PPNR? Are you leaning in any direction for any of the NII fees or expenses?

Sorry, Chris, your question again is what? I think...

Sure. If I'm looking at your near future guidance, is there any reason for us to not assume the midpoint of the various ranges? Or are you leaning to the high or low end in any one of the three components of pre-provision earnings?

I think the midpoint is appropriate. If I had my druthers in terms of what would happen by the end of 2025, we would have pushed a little harder on deposit growth and a little harder on loan growth based upon 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 changes in economic conditions, which, of course, have been rather frequent of late.

Okay. And on that point, Dale, if the revenue, either mortgage 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 higher. I think the flex on the expenses is pretty much what we've guided to at this point, and I would not change that guide or change that in your model.

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

Hey, thanks. Hello, everyone.

Hey, Jon.

A 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 10-year level where the volumes start to increase and maybe there's upside to that outlook?

Yeah. 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 30-year is 6.25% or lower. That's when we saw it 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 roses in terms of a 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 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 impact future consumer behavior, and we'll wait to see how it unfolds. But right now, we're sticking with the full year guide. It may come a little bit later in the second quarter and then into the third quarter. I think April was a little choppy for consumers for the obvious reasons.

We have consistently heard about the potential for refinancing, but it appears to be continually delayed. There are two factors affecting the rate spread issue. First, overall interest rates are higher, and second, there is volatility in the premium over the 10-year Treasury for mortgage refinancing. Some buyers are hesitant because they worry that if they purchase a mortgage now and there is a significant drop in rates—potentially due to factors like tariff changes or actions from the Federal Open Market Committee—both could lead to a downturn in the market. As a result, if you're financing mortgages, you will likely be involved in refinancing right from the start. Greater stability may help regulate the volatility and rates for 30-year mortgage properties when compared to independent market rates.

That makes sense. Do you have any thoughts on the gain on sale outlook? Do you think 19 basis points is unusually low?

I can't determine if it will expand, but I think 19 basis points is noticeably low.

Thanks, Jon.

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

Hey, good morning. And, Ken, welcome back. If I could ask on just, Dale, you mentioned in the prepared remarks the Moody's rating change back in February. I 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 have talked about for a couple of years now.

Well, I 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 timeline. And 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's helpful. But again, it kind of gets back in terms of kind of closer to where we've 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.

I want to emphasize how proud I am of the Corporate Trust team this quarter. They increased deposits by $270 million, bringing our Corporate Trust business to over $800 million in deposits. Our business escrow services are nearing $1 billion. We have six different deposit platforms performing exceptionally well, led by HOA, for which we believe we are the market share leader, having grown by $900 million. The recent upgrade in our investment-grade rating is likely to have a positive impact. However, it is important to remember that these processes take time; we need to be awarded deals, then they need to be funded, and that will bring in the deposits. We are optimistic about the progress across all of our deposit channels, which is further supported by the upgrades from Moody's and Fitch.

I appreciate the information. Could you provide the weighted average yield on new loans for the first quarter? I'm trying to understand how the new loans compare to the current book yield of around 6.20%. Thank you.

Currently, it's coming in at 3 basis points lower, but our deposit costs are down 29 basis points. We are experiencing a slight decline in loan yields, but we are recovering in deposits.

We have a question 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 in NII, it looks like you've got some pretty good visibility going into 2Q with the end-of-period loan growth, call it, 6.17%, and the drop in the spot rate. You would argue for a margin over 3.60% on a reported basis, but any sense for kind of where that margin ended at the end of the quarter, if you normalize it for any unusual fees?

We don't monitor what the margin is at the end of the month.

Yeah, end of the month. End of the month, yeah.

Yes. At the end of the month, I think the net interest margin will remain slightly upward in Q2, continue to increase a bit more in Q3, and then plateau from Q4 to Q3. For the adjusted net interest margin, which includes the ECR costs, we anticipate that Q2 and Q1 will be about the same, with improvements in the adjusted net interest margin in Q3 and again in Q4. That's the best guidance I can provide on that.

You're definitely going to see greater leverage on the adjusted margin compared to the reported margin. This is what we're primarily focused on, as it has a more direct relationship to PPNR. We don't want to refrain from underwriting even when there are reasonable credit opportunities with strong credit metrics, just because it might negatively impact loan yields under the margin.

Okay. Fair enough. And then just on the criticized increase this quarter, any thoughts on the outlook and migration in general, whether or not we might see some improvement, or is this kind of environment makes a little more skeptical?

Our migration, as I mentioned, is really focused on real estate related, particularly office secured loans. So, 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 developed these assets early. So, where I see it 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 Elian with JPMorgan. Your line is now open.

Ken, it's great to hear that you're feeling better, and welcome back. I want to discuss loan growth. You mentioned that loan growth in the second quarter should exceed that of the first quarter. Could you share any feedback you've received since Liberation Day regarding your customers' business investments or capital expenditures that might be on hold, as well as any adjustments they might be making given the ongoing uncertainty related to tariffs?

Yeah. 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 growth in Q2 come from longer-dated capital expenditure programs, i.e., national homebuilder finance, which we do a lot of financing, and then we do the vertical construction on that. Those folks make longer-term investment decisions, and we're funding them as such. And so, those folks are, of course, mindful, but not immediately impacting their business mostly because there's somewhat of a housing shortage in the U.S. On the C&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 market deals that are out there or taking market share. And so that's giving us some confidence as well.

Thank you. And then, my follow-up on credit. If 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.

We really focus on our diversified business model, which is our strategy for any economic condition, and it is proving effective in the current environment. We are continuously adjusting some of our businesses up and down, and we are seeing great results from that approach. As a bank, we are entering this period with almost no retail energy exposure and minimal consumer exposure, limited to our mortgage business. Most of our borrowers are domestic companies operating in the U.S. While this doesn’t eliminate risk, it allows us to maintain a manageable model through our diversified strategy, which we believe positions us to navigate this better than many others.

There are no further questions at this time. So, I'll pass it back to Ken Vecchione for any closing remarks.

Thank you all for joining us. I also appreciate your well wishes and look forward to meeting you at conferences and reconnecting during our next earnings call. Thank you once again.

That concludes today's call. Thank you all for your participation. You may now disconnect your lines.