Q1 2024 Western Alliance BancorporationEarnings Call

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Yeah.

Operator: Good day, everyone. Welcome to Western Alliance Bank Corporation's first quarter 2024 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebankcorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.

Speaker Change: Good day, everyone welcome to Western Alliance Bank Corporation's first quarter 2024 earnings call.

Speaker Change: You May also view the presentation today via webcast through the company's website at Www Dot Western Alliance Bank Corporation Dot com.

Speaker Change: I'd now like to turn the call over to Myles Pollock director of Investor Relations and corporate development. Please go ahead.

Miles Pondelik: Thank you and welcome to Western Alliance Bank's first quarter 2024 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Officer, and Tim Bruckner, our Chief Banking Officer for Regional Banking, will join for Q&A. 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 a forward-looking statement.

Myles Pollock: Thank you and welcome of Western Alliance Bank first quarter 2024 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, Dale Gibbons, Chief Financial Officer, and Tim Bruckner, Our Chief Banking Officer Regional banking will join for Q&A before I hand, the call over to Kevin.

Myles Pollock: Please note that today's presentation contains forward looking statements, which are subject to risks uncertainties and assumptions.

Myles Pollock: As required by law the company does not undertake any obligation to update any forward looking statement for more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements. Please refer to the company's SEC filings, including the form 8-K filed yesterday, which are available on the company's website now for opening remarks, I'd like to turn the call over to Ken Vecchione.

Miles Pondelik: For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statement, please refer to the company's SDG filings, including the form and K-file from yesterday, which are available on the company's website. Now, for opening remarks, I'd like to turn the call over to Ken Vecchione. Good morning, everyone.

Kenneth A. Vecchione: Good morning, everyone I'll make some brief comments about our first quarter earnings before turning the call over to Dow who will review the financial results in more detail.

Kenneth A. Vecchione: I'll make some brief comments about our first quarter earnings before turning the call over to Dale. He will review the financial results in more detail. I'll come back and discuss the 24-month outlook, and then Tim Bruckner, our Chief Banking Officer, will join us for Q&A.

Dow: I'll come back and discuss the 24 outlook and then Tim Bruckner, our Chief banking officer will join us for Q&A.

Kenneth A. Vecchione: For the last three quarters, the mission of the company has been to reposition the balance sheet and optimize our funding structure to establish an unassailable foundation of higher capital, liquidity, and insured and collateralized deposits and further distance us from last month. Together, these factors should provide a bulwark to better insulate the bank from future industry and market volatility, as well as support more predictable, superior, long-term returns. This quarter, we generated exceptional deposit growth of $6.9 billion that accelerated our repositioning plans at a faster pace than anticipated.

Dow: For the last three quarters. The mission of the company has been to reposition the balance sheet and optimize our funding structure to establish an unassailable foundation of higher capital liquidity and ensuring collateralized deposits and further distance us from last March together. These factors should provide a bulwark too.

Dow: Better insulate the bank from future industry and market volatility as well as support more predictable superior long term returns. This quarter, we generated exceptional deposit growth of $6 $9 billion that accelerated our repositioning plans at a faster pace than anticipated we reached our CET one <unk>.

Kenneth A. Vecchione: We reached our CEP1 capital target of 11 percent, lowered our HFI loan to deposit ratio by 10 points to 81 percent, and increased our already leading insured deposit ratio to 81%. Our liquidity profile was also enhanced by a $6.5 billion increase in unencumbered securities and cash from year end, which also allowed us to pay down borrowings by $1 billion. In summary, our repositioning goals have largely been accomplished.

Dow: Capital target of 11% lowered our <unk> loan to deposit ratio by 10 points to 81% and increase our already leading insured deposit ratio to 81%. Our liquidity profile was also enhanced by a $6 $5 billion increase in unencumbered securities and cash.

Dow: From year end, which also will allow us to pay down which also allow us to pay down borrowings by $1 billion.

Dow: In summary, our repositioning goals have largely been accomplished.

Kenneth A. Vecchione: I'm pleased that during the quarter of outsized liquidity growth, Western Alliance earned $1.72 per share, excluding the increased special assessment from the FDIC, and tangible book value continued to climb despite rate headwinds. Asset quality remains steady with special mention loans and classified assets declining $139 million, and aggregates from Q4 of Q4. Net charge-offs remain low at only eight basis points of average loans.

Dow: Pleased that during the quarter of outsized liquidity growth Western lines earned $1 72 per share excluding the increased special assessment from the FDIC and tangible book value continue to climb despite rate headwinds asset quality remained steady with special mentioned loans and classified assets declining 130.

$9 million.

Dow: In the aggregate from Q4.

Dow: From Q4 net charge offs remained low at only eight basis points of average loans are excellent liquidity positions us to drive stronger loan growth starting in Q2 loan growth should track proportionately with deposits to maintain our improved loan to deposit ratio and allow us to exit 2024 in line with market expectations.

Kenneth A. Vecchione: Our excellent liquidity positions us to drive stronger loan growth starting in Q2. Loan Grants should track proportionally with deposits to maintain our improved loan to deposit ratio and allow us to exit 2024 in line with the market. Dale will now take you through the financials. Thanks again.

Dow: Dan will now take you through the financial results. Thanks, Ken during the first quarter Western Alliance generated reported pre provision net revenue of $247 million net income of 177 in earnings per share of $1 16, excluding the $18 million FDIC special assessment charge.

Dale M. Gibbons: During the first quarter, Western Alliance Generated reported pre-provisioned net revenue of $247 million, net income of $177 million, and earnings per share of $1.60. Excluding the $18 million FDIT special assessment charge, CPNR was $265 million, net income of $191 million, and earnings per share was $1.72. Net interest income increased $7 million from Q4 to $599 million from higher average earning asset balances as well as lower average borrowing. Non-interest income of $130 million increased $39 million quarter over quarter from consistent performance in mortgage banking, including an improved MSR valuation from a higher balance of servicing rights owned. We look at mortgage revenue holistically because our conservative valuation process, when servicing rights are created, often results in understated MSR values, which dampen gain-on-sale revenue.

PNR was $265 million net income of 191 in earnings per share was $1 72.

Dan: Net interest income increased $7 million from Q4 to $599 million from higher average, earning asset balances as well as lower average borrowings.

Dan: Noninterest income was $130 million increased $39 million quarter over quarter from consistent performance in mortgage banking, including an improved MSR valuation from a higher balance of servicing rights owned.

Dan: We look at mortgage revenue holistically, because our conservative valuation process when servicing rights are created operating results, an understated MSR values, which dampen gain on sale revenue.

Dale M. Gibbons: The after-non-interest expense was $482 million, or $464 million, including the SBID as a special assessment. The deposit cost of $137 million was $6 million above Q4 levels, essentially offsetting the net interest income growth during the quarter and driven by strong deposit growth from both existing and new clients in our HOA and jurors banking businesses, along with the continued rebound in Mortgage Warehouse from Seasonal Loans. Typical seasonal factors, as well as the reset of incentive compensation accruals, which were discounted in 2023, were the primary reasons for the increase in salaries and employee benefits in Q1.

Dan: GAAP noninterest expense was $4 $82 million or $4 64, excluding the FDIC especial assessment deposit costs of $137 million was $6 million above Q4 levels essentially offsetting the net interest income growth during the quarter and driven by strong deposit growth from both existing and new clients in our HOA.

Dan: And jurors baking businesses, along with the continued rebound in mortgage warehouse from seasonal lows.

Dan: Typical seasonal factors as well as the reset of incentive compensation accruals, which were discounted in 2023 were the primary reasons for the increase in salaries and employee benefits in Q1 provision.

Dale M. Gibbons: Provision expense of $15 million resulted from low growth as well as $9.8 million in net charge losses, while our economic outlook remained stable. Lastly, our effective tax rate fell to 23.5% from a temporarily elevated rate last quarter.

Dan: Provision expense of $15 million, resulting from loan growth as well as $9 $8 million and net charge offs, while our economic outlook remains stable and lastly, our effective tax rate fell to 23, 5% from a temporarily elevated rate last quarter.

Dale M. Gibbons: Loans held for investment grew $4.3 billion to $50.7 billion, while deposits increased $6.9 billion to $62.2 billion at quarter end. As a result, our held-for-investment loan-to-deposit ratio fell to 81% from 91% last quarter. Outside deposit growth accelerated our liquidity-building efforts. Securities and cash increased $5.4 billion quarter-over-quarter and allowed for a further $1 billion reduction in borrowing. Finally, tangible book value per share expanded 58 cents for the quarter to $47.30 from retained earnings, which more than offset a modest rate-driven increase in our negative AOCI position.

Dan: Loans held for investment grew $403 million to $50 7 billion, while deposits increased $6 9 million to $62 2 billion at quarter end as a result, our held for investment loan to deposit ratio fell to 81% from 91 last quarter.

Dan: Outsized deposit growth accelerated our liquidity building efforts securities and cash increased $5 4 billion quarter over quarter and allowed for a further $1 billion reduction in borrowings.

Dan: Finally, tangible book value per share expanded 58 for the quarter to $47 30.

Dan: From retained earnings, which more than offset a modest rate driven increase in our negative Aoc acquisition.

Dan: Held for investment loan growth of $403 million occurred predominantly in C&I categories, commercial and industrial growth of $646 million.

Dan: Demonstrated noteworthy progress in our regional commercial banking strategy as well as success in both mortgage warehouse and tech and innovation.

Dale M. Gibbons: Health investment loan growth of $403 million occurred predominantly in C&I categories. Commercial and industrial growth of $646 million demonstrated noteworthy progress in our regional commercial banking strategy, as well as success in both mortgage warehouse and tech innovation. CNI Group also mitigated a purposeful reduction in commercial real estate.

Dan: G&A growth also mitigated a purposeful reduction in commercial real estate.

On a year over year basis total loans increased $4 3 billion almost entirely from C&I production, which has been appointed to emphasis for the bank.

Dan: Outstanding deposit growth of $6 9 billion resulted from by broad based growth and market share gains from our regions commercial deposit businesses and digital consumer channels more specifically our regions contributed approximately $1 billion HOA and digital consumer each over $800 million Juris banking over 400.

Dale M. Gibbons: On a year-over-year basis, total loans increased $4.3 billion, almost entirely from C&I production, which has been a point of emphasis for the bank. Outstanding deposit growth of $6.9 billion resulted from broad-based growth and market-share gains from our regions, commercial deposit businesses, and digital consumer channels. More specifically, our regions contributed approximately $1 billion, HOA, and digital consumer each over $800 million, jurist banking over $400 million, and corporate trust added $160 million.

Dan: In corporate trust added $160 million.

Dan: Mortgage warehouse deposits reacquired, the $3 5 billion and fully replace Q4 outflows as our DDA deposit balance at March 31 surpassed where we were at September 30.

Dan: Overall in the more stable rate environment, we are expensing minimal mixed shift of existing client funds into higher cost deposits.

Dan: Turning now to our net interest drivers ultra investment loan yields increased 12 basis points due to the higher rate environment loan growth was weighted towards the end of the quarter as demonstrated by period end loan balances exceeded average balances by $1 billion.

Dale M. Gibbons: Mortgage Warehouse Deposits reacquired the $3.5 billion and fully replaced Q4 outflows as our DDA deposit balance of March 31st surpassed where we were at September 30th. Overall, in the more stable rate environment, we are experiencing minimal mixed shift of existing client funds into higher cost deposits. Turning now to our net interest drivers, all investment loan yields increased 12 basis points due to the higher rate environment. However, loan growth was weighted toward the end of the quarter as demonstrated by period and loan balances exceeding average balances by 1 billion.

Dan: Yield on total securities decreased 33 basis points to 466 from our efforts to significantly enhance our liquidity profile, which resulted in a total high quality liquid securities increasing $4 8 billion from Q4.

Dan: In addition, the proportion of average interest, earning assets invested in securities and cash increased to 23% from 21% in the fourth quarter. As a result of these repositioning efforts, which have largely been completed.

Dan: These efforts position us well to deploy incremental funds into higher yielding commercial loans earlier than initially expected as well as to manage the cost of deposits lower ahead of fed rate cuts.

Dan: The cost of total interest bearing deposits expanded 11 basis points, while the total cost of funds was flat at $2 82 as average short term borrowings declined $1 8, billion% to 8% of average interest bearing liabilities.

Dale M. Gibbons: The yield on total securities decreased 33 basis points to 466 from our efforts to significantly enhance our liquidity profile, which resulted in total high-quality liquid securities increasing $4.8 billion from Q4. In addition, the proportion of average interest-earning assets invested in securities and cash increased to 23% from 21% in the fourth quarter as a result of these repositioning efforts, which have largely been completed. These efforts position us well to deploy incremental funds into higher-yielding commercial loans earlier than initially expected, as well as to manage the cost of deposits lower ahead of that rate cut.

Dan: An aggregate net interest income increased approximately $7 million, while net interest margin of 360 compressed five basis points due to the earning asset mix shift into securities we discussed.

Dan: Additionally, adjusting for the increased FDIC special assessment and deposit costs, our adjusted efficiency ratio for the quarter was 54, 4%, which also reflected higher seasonal costs deposit costs moved up only $6 million or four 6% quarter over quarter, even though average balances of ECR related to pause.

Dan: <unk> grew $1 4 billion or 7%.

Dale M. Gibbons: The cost of total interest-bearing deposits expanded 11 basis points while the total cost of funds was flat at $282,000 as average short-term borrowings declined $1.8 billion to 8% of average interest-bearing liability. In aggregate, net interest income increased approximately $7 million while net interest margin of 360 compressed five basis points due to the earning asset mix shift in securities we discussed. Additionally, adjusting for the increased FDIT special assessment and deposit costs, our adjusted efficiency ratio for the quarter was 54.4%, which also reflected higher seasonal costs.

Dan: Asset quality metrics continued to remain steady and are reflective of our ongoing forward looking portfolio monitoring and proactive credit mitigation strategy, which produce low realized losses and aggregate special mentioned loans and classified assets declined $139 million from Q4 nonperforming assets increased to 102.

Dan: 26 million to $407 million or 53 basis points of total assets as we execute our strategy to accelerate resolution for this subset of loans and proactively address them before reaching maturity.

Dan: <unk> about two thirds of our Npls are paying as agreed with regard to debt service obligations.

Stated previously we have largely avoided the largest urban centers for commercial real estate lending and have experienced more value contraction in the nation at large we see that in our submarkets, which we watched closely our borrowers projections continue to perform better with more stable appraisals that other markets.

Dale M. Gibbons: The deposit cost moved up only $6 million, or 4.6% quarter-over-quarter, even though average balances of ECR-related deposits grew $1.4 billion, or 7%. Asset quality metrics continue to remain steady and are reflective of our ongoing forward-looking portfolio monitoring and proactive credit mitigation strategy, which produced low realized losses. In aggregate, special mention loans and classified assets declined $139 million from Q4.

Dan: Quarterly net loan charge offs were $9 8 million or eight basis points of average loans provision expense of $15 2 million covered net charge offs and provided reserves in concert with loan growth our allowance for funded loans increased $4 million from the prior quarter to $340 million and the allowance for credit loss ratio to fund is low.

Owns a 74 basis points with stable covering 94% of nonperforming loans evaluation.

Evaluation of Npls, which primarily consist of real estate secured credits are confirmed by fair value appraisals of collateral.

Dan: Our CET one ratio of Green again through 'twenty two.

Dale M. Gibbons: Non-performing assets increased $126 million to $407 million, or 53 basis points in total assets, as we execute our strategy to accelerate resolution for this subset of loans and proactively address them before reaching maturity. Notably, about two-thirds of our NPLs are paying as agreed with regard to debt service obligations. As stated previously, we've largely avoided the largest urban centers for commercial real estate lending that have experienced more value contraction in the nation at large.

Dan: To 11% or 10% when adjusted for our negative Aoc acquisition, which is 160 basis points higher year over year, and 230 basis points above our Q3 2022 level when our repositioning efforts began our tangible common equity to total assets ratio move down approximately 50 basis points.

Dan: From Q4 to six 8% as asset growth in low risk categories exceeded organic capital accretion from higher earnings.

Dan: Tangible book value per share increased 58 during December 31 to $47 30 for retained earnings growth outpacing the higher <unk> are consistent upward trajectory intangible book value per share has outpaced peers by over four times since 2013, including strong growth in 2020.

Dale M. Gibbons: We see that in our sub-markets, which we watch closely, our borrowers' projections continue to perform better with more stable appraisals than other markets. Quarterly net loan charge-offs were $9.8 million, or 8 basis points of average loans. Provision expense of $15.2 million covered net charge-offs and provided reserves in concert with loan growth. Our allowance for funded loans increased $4 million from the prior quarter to $340 million, and the allowance for credit loss ratio to funded loans of 74 basis points was stable, covering 94% of non-performing loans. The evaluation of NPLs, which primarily consists of real estate secured credits, is confirmed by fair value appraisals of collateral.

Dan: Great.

Dan: Turn the call back to Ken Thanks, Phil we have transformed the bank several times in the company's history, starting as of last thing Las Vegas Bank, and $19 94, and expanding the Arizona and California, 2003, and 2010 after the GSC during which we were landmark and some of the most stressed markets nationally.

Kenneth A. Vecchione: We began our diversification strategy into national business lines, with HOA and mortgage warehouse by created diversity growth and sustainable earnings without undue risk in 2015 and 2016, we added bridge bank to enter into the Tech and innovation economy and that purchased the hotel franchise finance business.

Kenneth A. Vecchione: <unk>, which provide an expertise and deep industry knowledge, enabling us to become a leader in that vertical in 2018 and 19. The bank entered developed and launched three specialty deposit verticals settlement services business escrow services and corporate trust that expanded.

Kenneth A. Vecchione: Our CEC-1 ratio again grew 20 points to 11% or 10% when adjusted for our negative AOCI position, which is 160 basis points higher year over year and 230 basis points above our Q3 2022 level when our repositioning efforts began. Our tangible common equity to total assets ratio moved down approximately 50 basis points from Q4 to 6.8% as asset growth in low-risk categories exceeded organic capital accretion from higher earnings. Tangible book value per share increased 58 cents from December 31st to 4730, with retained earnings growth outpacing the higher AOCI offset. Our consistent upward trajectory in tangible book value per share has outpaced peers by over four times since 2013, including strong growth in 2023. And I'll hand the call back to Ken. Okay, thanks, Dale.

Kenneth A. Vecchione: Business diversification strategy and produce access to new deposits sources in 2023, we launched the digital consumer deposit strategy to gain access to a granular deposit base now in 2024. The company has worked hard to reposition and fortified balance sheet and liquidity in.

Kenneth A. Vecchione: Formed by the events of last March the management team continues to optimize funding significantly improved capital and carry higher levels of insured and collateralized deposits to form a solid sturdy balance sheet, which can be used as the foundation to reignite earnings grow the balance sheet and generate organic capital.

Kenneth A. Vecchione: <unk>, while ensuring asset quality remains safe and protected.

Kenneth A. Vecchione: So whats along what is what it looked like in the future, while using and reinforcing the disciplined by just mentioned Western Alliance has and will continue to add risk management architecture that will enhance the company's guardrails as we continue to develop new organic avenues for growth deliver consistent upper teens return.

Kenneth A. Vecchione: On tangible common equity and sustainable earnings growth that maintains historical capital accumulation at multiples higher than other banks. We are excited about the repositioning strategy has been largely completed we are fortifying our balance sheet, which we will which will allow the company to generate earnings velocity through the <unk>.

Kenneth A. Vecchione: We have transformed the bank several times in the company's history, starting as a Las Vegas bank in 1994 and expanding into Arizona and California in 2003. In 2010, after the GFC, during which we were landlocked in some of the most stressed markets nationally, we began our diversification strategy into national business lines with HOA and mortgage warehouse that created diversity, growth, and sustainable earnings without undue risk. In 2015 and 2016, we added Ridge Bank to enter the tech and innovation economy and then purchased the hotel franchise finance business, which provided expertise and deep industry knowledge, enabling us to become a leader in that vertical.

Kenneth A. Vecchione: Back half of 2024 and into 2025 to that and from our first quarter results. We update our 2024 guidance as follows continued thoughtful balance sheet growth at a slightly higher level building on the momentum of Q1 and more focus on deploying incremental liquidity into sound safe and.

Kenneth A. Vecchione: Total loans are current loan to deposit ratio provides flexibility to selectively make more loans as opportunities arise for the full year loans are expected to grow $4 billion.

Up from 2 billion, given the new client wins and current pipelines. We also expect deposits to end the year up $11 billion, which is $3 billion above our previous consensus turning to capital. We expect our CET one ratio to remain steady at or near 11% capturing the forecasted increase in loan.

Kenneth A. Vecchione: In 2018, and 2019, the bank entered, developed, and launched three specialty deposit verticals—settlement services, business escrow services, and corporate trust—that expand the business diversification strategy and provide access to new deposit sources. In 2023, we launched a digital consumer deposit strategy to gain access to a granular deposit base. Now, in 2024, the company has worked hard to reposition and fortify its balance sheet and liquidity. Informed by the events of last March, the management team continues to optimize funding, significantly improve capital, and carry higher levels of insured and collateralized deposits to form a solid, sturdy balance sheet that can be used as the foundation to reignite earnings, grow the balance sheet, and generate organic capital while ensuring asset quality. So what does Wall look like in the future?

Kenneth A. Vecchione: Volume.

Kenneth A. Vecchione: Regarding net interest income, we reaffirm our 5% to 10% growth expectation from Q4, 2020, Three's annualized jumping off point and are tracking to the upper end of this range.

Kenneth A. Vecchione: Rate outlook includes $2 25 basis point cuts in the back half of the year and a higher for longer rate environment without rate cuts by the FRB, we would expect NIM to incrementally benefit.

Kenneth A. Vecchione: By mid single digit basis points from loans repricing and an elevated rate environment. Our expectation is that net interest margin will trough in Q2, but the full.

Kenneth A. Vecchione: Quarter effect on liquidity build.

Kenneth A. Vecchione: So with the full effect of our liquidity build while net interest income will continue to move higher from Q1 levels.

Kenneth A. Vecchione: NIM should a secondary.

Kenneth A. Vecchione: NIM should ascent due to repricing of existing loans and new loan originations, which all in should generate a full year NIM in the low <unk>.

Kenneth A. Vecchione: Well, using and reinforcing the disciplines I just mentioned, Western Alliance has and will continue to have risk management architecture that will enhance the company's guardrails as we continue to develop new organic avenues for growth to deliver consistent upper-team results, return on tangible common equity, and sustainable earnings growth that maintains historical capital accumulation at multiples higher than other banks. We are excited that the repositioning strategy has been largely completed.

Kenneth A. Vecchione: Noninterest income should increase 10% to 20% from an adjusted 2023 baseline level of $397 million mortgage banking related income remains somewhat dependent on the rate environment and mortgage volume, but we are encouraged by the resilience of the Q1 results.

Kenneth A. Vecchione: Noninterest expense inclusive of ECR related deposit cost is now expected to rise 6% to 9% from an annualized adjusted Q4 baseline of $1 74 billion.

Kenneth A. Vecchione: We have fortified our balance sheet, which we believe will allow the company to generate earnings velocity to the back half of 2024 and into 2025. To that end, based on our first quarter results, we update our 2024 guidance as follows. Continued thoughtful balance sheet growth at a slightly higher level, building on the momentum of Q1, and more focused on deploying incremental liquidity into sound, safe, and thoughtful loans. Our current loan-to-deposit ratio provides flexibility to selectively make more loans as opportunities arise.

Primarily from the accelerated ECR related deposit growth, we achieved in Q1, which helped the company reached liquidity targets earlier than expected in aggregate. These factors should enable western line to consistently grow PNR throughout the year and establish a higher baseline headed into 2020.

Asset quality continues to remain steady and it's performing as expected with continued sponsored support of projects. Our full year net charge off guidance remains 10% to 15 basis points of average loans at this time del Tim and I look forward to answering your questions.

Speaker Change: We will now begin the question and answer session.

Kenneth A. Vecchione: For the full year, loans are expected to grow $4 billion, up from $2 billion, given the new client wins in the current pipeline. We also expect deposits to end the year off by $11 billion, which is $3 billion above our previous consensus.

Speaker Change: I would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: If for any reason you would like to remove your question or your question has been answered. Please press star two.

Speaker Change: If you are using a speakerphone please pick up your handset before asking your question.

Kenneth A. Vecchione: Turning to capital, we expect our CET1 ratio to remain steady at or near 11%, capturing the forecasted increase in loan volume. Regarding net interest income, we reaffirm our 5 to 10% growth expectation from Q4 2023's annualized jumping off point and are tracking to the upper end of this range. Our rate outlook includes two 25 basis point cuts in the back half of the year in a higher for longer rate environment. Without rate cuts by the FRB, we would expect them to incrementally benefit by mid single digit basis points from long-term pricing in an elevated rate environment.

Speaker Change: The first question comes from the line of Jared Shaw with Barclays. Please go ahead.

Jared Shaw: Hey, good morning, guys.

Jared Shaw: One just looking at the.

Jared Shaw: Looking at the guidance with the expense growth primarily coming from from the ECR I guess why.

Jared Shaw: Why wouldn't that also helped drive higher expectation for NII.

Speaker Change: Saying looking at the higher end of that but if we just think deposit.

Speaker Change: Deposit growth and the opportunity for loan growth I guess whats.

Speaker Change: Are we giving up all of that spread.

Kenneth A. Vecchione: Our expectation is that net interest margin will trough in Q2, but the full quarter effect of our liquidity bill, I'm sorry, with the full effect of our liquidity bill, while that interest income will continue to move higher from the Q1 level. NIMS should increase due to repricing of existing loans and new loan originations, which should all end up generating a full year NIMS in the low three-fifths. Non-interest income should increase 10% to 20% from an adjusted 2023 baseline level of $397 million.

Speaker Change: Early stages to the to the ECR.

Speaker Change: No.

Speaker Change: <unk> helped drive NII.

Speaker Change: The issue is is that that growth came in kind of ratably over the over the first quarter, we havent jammed up to the degree we can.

Speaker Change: Origination or good quality credit to disperse though.

Speaker Change: Traditional fund that's going to take a process within say the second quarter. So it will catch up with the second quarter is a little bit of a pivot point, whereby we're going to look for higher asset growth and we had in Q1 and that's been the whole deck second quarter back a bit the prior guide let me just add the prior guide included four rate cuts, which have now.

Kenneth A. Vecchione: Mortgage banking-related income remains somewhat dependent on the rate environment and mortgage volume, but we are encouraged by the resilience of the Q1 results. Non-interest expense inclusive of ECR-related deposit costs is now expected to rise 6-9% from an annualized adjusted Q4 baseline of $1.74 billion, primarily due to the accelerated ECR-related deposit growth we achieved in Q1, which helped the company reach liquidity targets earlier than expected. In aggregate, these factors should enable Western Alliance to consistently grow PPNR throughout the year and establish a higher baseline headed into 2025.

Speaker Change: Revised the two cuts to offset that we've also increased our loan growth from $500 million a quarter to a $1 billion a quarter and thats what helps our net interest income throughout the rest of the year continue to grow quarter to quarter.

Speaker Change: Okay Alright.

Speaker Change: Thanks for that.

Speaker Change: Maybe shifting.

Speaker Change: A little to the to the.

Speaker Change: The capital and now that Youre at the target for a 11% how should we be thinking about that.

The desire to grow that from here and can you give an update on how the credit linked notes.

Speaker Change: That going forward in sort of the timing on that.

Speaker Change: Yes, so we see capital remaining modestly at or above 11% for the remainder of the year, increasing loan growth above trend will absorb the excess capital formation for the rest of the year I will note that since we started our repositioning strategy.

Kenneth A. Vecchione: As the quality continues to remain steady and is performing as expected with continued sponsor support of projects, our full-year net charge-off guidance remains 10 to 15 basis points of average loans. At this time, Dale, Tim, and I look forward to answering your questions.

On capital from Q3 of 2023, we've increased the CET, one ratio of 230 basis points without raising capital.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If for any reason you would like to remove your question or your question has been answered, please press star two. If you are using a speakerphone, please pick up your handset before asking your question. The first question comes from the line of Jared Shaw with Barclays. Jared, please go ahead.

Speaker Change: We do have a couple of <unk> embedded into these numbers and the runoff of the <unk> is very modest year over year.

Speaker Change: As you May recall, we collapsed to <unk> last year on the mortgage warehouse and capital call. We've got a few residential that are that don't have substitution.

Jared David Wesley Shaw: Just looking at the, thanks, looking at the guidance with the expense growth primarily coming from the ECRSY, why wouldn't that also help drive a higher expectation for NII? You're saying, you know, looking at the higher end of that, but if with this big deposit growth and the opportunity for loan growth, I guess, are we giving up all of that in the early stages to the ECR?

Speaker Change: Credits in them. So they are just running we're gaining about 40 to 50 basis points and CET one from that.

Speaker Change: Thank you.

The next question comes from the line of Casey Haire with Jefferies. Casey. Please go ahead.

Casey Haire: Great. Thanks, Good morning, guys.

Casey Haire: Question on the <unk>.

Casey Haire: Loan and deposit growth just I'm just wondering how you guys.

Casey Haire: Got to those numbers I mean, you guys have demonstrated.

Kenneth A. Vecchione: No, no; it will help drive NII. The issue is that that growth came in kind of rapidly during the first quarter. We haven't ginned up to the degree we can the origination of good quality credit to disperse those additional funds. That's going to take a process within, say, the second quarter. So it will catch up, but the second quarter is a little bit of a pivot point whereby we're going to look for, you know, higher asset growth than we had in Q1.

Casey Haire: That you're capable of putting up.

Casey Haire: Stronger stronger growth on that.

Casey Haire: And I was just wondering if that's conservative or if youre just looking to manage.

Casey Haire: Manage the growth and have an eye on obviously the 100 billion.

Casey Haire: <unk>.

So just some color there.

Speaker Change: Yes, yes, okay.

Speaker Change: While we continue to remain cautious about the future economic activity and we have de emphasized certain asset classes. We do believe that we can actively grow loans $1 billion per quarter.

Kenneth A. Vecchione: And that's going to hold that for the second quarter back. The prior guide included four rate cuts, which have now been revised to two cuts. To offset that, we've also increased our loan growth from $500 million a quarter to $1 billion a quarter, and that's what helps our net interest income throughout the rest of the year continue to grow quarter to quarter.

Speaker Change: And we feel rather comparable with that based on the pipeline that get reviewed on a weekly basis. So we are deemphasizing certain areas as you would expect CRE office residential general construction little cautious on multifamily, we see better opportunities in warehouse lending group MSR.

Jared David Wesley Shaw: Okay, all right. Thanks for that. I guess maybe shifting a little to capital, and now that you're at the target floor of 11%, how should we be thinking about the desire to grow that from here? And can you give an update on how the credit-linked notes will impact that going forward and sort of the timing on that?

Speaker Change: Our lending the regional C&I business is beginning to take hold resort lending and maybe lot banking also gives us the best risk reward dynamics on the loan side. So as Bob if we can do better than 1 billion, we will as long as it's safe sound and thoughtful growth and the economic environment Hasnt.

Kenneth A. Vecchione: Yeah, so we see capital remaining modestly at or above 11% for the remainder of the year. However, increasing loan growth above trend will absorb the excess capital formation for the rest of the year. I will note that since we started our repositioning strategy on capital in Q3 of 2023, we've increased the CET1 ratio 230 basis points without raising capital. We do have a couple of CLMs embedded into these numbers, and the runoff of the CLMs is very modest year over year.

Speaker Change: But right now we feel comfortable with the $1 billion.

As it relates to the deposit guide.

Speaker Change: Certainly had a monster quarter at $6 9 billion.

Speaker Change: A lot of that came in because the bar, we think because of our better service levels and we had a number of market share wins as well as a number of our new deposit verticals have really begun to take hold settlement services had a good quarter corporate trust is growing HOA had its best quarter ever it was.

Kenneth A. Vecchione: Yeah, as you recall, we collapsed two of our CLNs last year in mortgage warehouse and capital calls. We've got a few residentials that don't have substitution, you know, credits in them. So they are just running off. We're gaining about 40 to 50 basis points in CET1 from that.

Speaker Change: Monsters, Okay and in fact, we think we are now the leader.

Speaker Change: In HOA deposits in the industry and then the region also had a very good quarter as well for $1 billion.

Casey Haire: Thank you. The next question comes from the line of Casey Haire with Jeffries. Casey, please go ahead.

So taken together all of that informs us that we think we are comfortable growing deposits $2 billion a quarter for the rest of the year.

Kenneth A. Vecchione: Great, thanks. Good morning, guys. Question on the loan and deposit growth. Just wondering how you guys got to those numbers. I mean, you guys have demonstrated that you're capable of putting up a stronger, stronger growth than that. And just wondering if it's conservative, or if you're just looking to manage the growth and have an eye on, obviously, the 100 billion line.

Speaker Change: I will say, it's something we're proud of here when you look at when you look back over a year, we have grown total deposits by $14 3 billion.

Speaker Change: If you take out $1 billion for broker deposits, we grew $13 billion in a year and that kind of gives us the confidence level to say that $2 billion seems very reasonable and practical.

Casey Haire: So just just some color there.

Kenneth A. Vecchione: Yeah, so Casey, while we continue to remain cautious about future economic activity and we have de-emphasized certain asset classes, we do believe that we can actively grow loans of a billion dollars per quarter. And we feel rather comfortable with that based on the pipelines that get reviewed on a weekly basis.

Speaker Change: Yes, okay.

Speaker Change: And then just switching to the expense front.

Speaker Change: Just to clarify.

Speaker Change: Does the expense guide to include the $17 million FDIC assessment.

Speaker Change: For this year and then.

Speaker Change: If I.

Speaker Change: Layer in your guide it looks like it's delivering an efficiency ratio in the low 60%. That's obviously with the deposit costs, but it's obviously running a little bit higher than than what you've been guiding to in the past I think it's been around 50%. So just wondering.

Kenneth A. Vecchione: So we are de-emphasizing certain areas, as you would expect, CRE office, residential, general construction. And then the region also had a very good quarter, as well, for a billion dollars. So taking together all that informs us that we think we're comfortable growing deposits by $2 billion a quarter for the rest of the year. I will say something we're proud of here. When you look back over a year, we've grown total deposits by $14.3 billion. If you take out a billion for broker deposits, we grew $13 billion in, And that kind gives us the confidence level to say that $2 billion seems very reasonable and practical.

Speaker Change: What's the new.

Speaker Change: Expectation on that front.

Speaker Change: Yes, yes, yes.

Speaker Change: Would look for something in kind of the mid fifties, we were 54.

Speaker Change: For the first quarter as you saw there there were some seasonality in costs, which we talked about a little bit primarily related to compensation and Quaker.

Speaker Change: But we.

Speaker Change: But we do believe that we can get that number back to beginning with a four again.

Speaker Change: But we would hope to have better performance I think is always much stronger from <unk> home in that process, we do think that.

Casey Haire: Okay, and then just switching to the expense front, just to clarify, does the expense guide include the $17 million FDIC assessment for this year? And then, you know, if I... layer in your guide, it looks like it's delivering an efficiency ratio in the low 60s.

Speaker Change: There is a significant kind of pent up demand.

Speaker Change: With him are at home and that there is a lot of people that do want to move out of their house, but they are kind of they are in love with their mortgage rate presently.

As the when we had that dip down at the <unk>.

Dale M. Gibbons: That's obviously with the deposit costs, but it's obviously running a little bit higher than what you've been guiding to in the past. I think it's been around 50%. So just wondering, you know, what's the new expectation on that front?

Speaker Change: Commentary after the after this CPI.

In January that it really kind of came back and and we saw a lot more activities out of that in our numbers so with that on the on the denominator side.

Speaker Change: More steady.

Situation on the on the numerator side regarding our ECR, we think that number can trail down over time, but for now I'd keep it in the mid fifties ACR. The FDIC special assessment, that's not in our job our numbers are an archive and our adjusted efficiency is going to be in the low fifties as we worked out.

Dale M. Gibbons: Yeah, yeah, I would look for something in kind of the mid-50s. We were 54, you know, for the first quarter. As you saw there, there were some seasonality and costs, which we talked about a little bit, primarily related to, you know, compensation and FICA. But we do believe that we can get that number back to beginning with a four again. And, but we would hope to have better performance, which I think is always much stronger from AmeriHome in that process.

Speaker Change: Down towards a high forty's, but that's so that's what I would say.

Speaker Change: Okay, great. Thank you.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Steven Alexopoulos with Jpmorgan Steven. Please go ahead.

Dale M. Gibbons: We do think that there's a significant kind of pent-up demand for AmeriHome and that there are a lot of people that do want to, you know, move out of their house, but they're kind of in love with their mortgage rates presently, as when we had that dip down at the FOMC, you know, commentary after the CPI, in January, that really kind of came back. And we saw a lot more activity; you saw that in our numbers.

Steven A. Alexopoulos: Hi, everybody.

I wanted to start.

Steven A. Alexopoulos: Again, a little closer to the phone, we're putting a muted.

Steven A. Alexopoulos: Yes could you hear me now.

Steven A. Alexopoulos: Much better thank you.

Steven A. Alexopoulos: Okay.

Speaker Change: Let me start on the deposit side can I thought you said that you thought you could grow deposits 2 billion per quarter is that right because that would take you above the 11 billion for the year.

Speaker Change: Well on average $2 billion of quarter, but Q4 is a little softer as you've seen last quarter, where we are.

Dale M. Gibbons: So with that, on the, you know, on the denominator side, a more steady situation on the, on the numerator side regarding their ECRs, we think that number can fluctuate, fluctuate down over time. But, for now, I keep it in the mid-50s. Casey, on the FDIC special assessment, that's not in our numbers on our guide, and our adjusted efficiency is going to be in the low 50s as we work that down towards the high 40s. But that's, that's what I would say. Okay, great.

Speaker Change: Warehouse lending deposits rollout. So we think thats more of a practical guy basically we're just trying to tell you think about the end number of $11 billion is where we think we'll end up.

Speaker Change: Got it okay.

Speaker Change: And Tony Kenney I've asked you I don't know, maybe two or three calls in a row. Once you get to your targets how should we think about western alliance and growth.

Speaker Change: The higher appetite, where you could be long term. So if we think about.

Speaker Change: We average this out Youll, probably 121 3 billion per quarter loans and deposits run rate.

Casey Haire: Okay. Great. Thank you.

Speaker Change: Paul at $5 billion per year.

Steven A. Alexopoulos: The next question comes from the line of Steven Alexopoulos with J.P. Morgan. Steven, please.

Speaker Change: Each is that about adjusting for a loan to deposit ratio is that how we should think about this now that you're at target maybe that $5 billion ish growth per per year balance sheet.

Steven A. Alexopoulos: See if you can get a little closer to the phone; we're coming in muted. Yeah, can you hear me now?

Operator: Much better. Thank you.

Steven A. Alexopoulos: Okay, so let me start on the deposit side. Ken, I thought you said you thought you could grow deposits by $2 billion per quarter. Is that right? Because that would take you above $11 billion for the year.

Paul: So we've got a number of levers to pull and we have a great deal of Optionality. So.

Paul: First thing I'd say is in the way we're thinking about it is.

Paul: From here whatever liquidity, we bring in whatever deposit growth, we bring in we would like to put out at about 80% loan to deposit ratio. So we can stay between that 80% to 85% level and that's what we're going to try to target going forward. It will take a little time to build up that loan growth engines, because obviously, if we're talking $2 billion in deposits in.

Kenneth A. Vecchione: Well, on average, $2 billion a quarter, but Q4 is a little softer, as you've seen last quarter, when the warehouse lending deposits roll out. So we think that's more of a practical guide. Basically, we're just trying to tell you to think about the end number of $11 billion, which is where we think we'll end up.

Paul: 1 billion in loans Thats, not 80%, while we're getting that back up again, you have got to get the deals done you've got against documents. It you've got to have clients put.

Steven A. Alexopoulos: And it's funny, Ken, I've asked you, I don't know, maybe two or three calls in a row. Once you get to your targets, how should we think about the Western Alliance and growth, you know, desire appetite, where you could be long term. So if we think about, you know, if we average this out, you'll probably get 1, 2, 1, 3 billion per quarter loans and deposits, run rate, so call it 5 billion per year for each. Is that about adjusting for the loan to deposit ratio? Is that how we should think?

Paul: Their cash and before we put our funding and that will just build up as we go throughout 2024 and into 2025, and then if we do better than.

Paul: Then that meaning a higher deposits are the loans stay in that $1 billion plus range and we will use some of that incremental liquidity and we'll use it to pay down borrowings and that will also use the growth of the balance sheet Dale you want to add anything to that.

Dale M. Gibbons: Stated another way.

Dale M. Gibbons: I expect that we can exceed those numbers, Steve a bit.

Dale M. Gibbons: Because we've been paying down borrowings coincident with growing deposits faster than your $5 billion a year number.

Kenneth A. Vecchione: So we've got a number of levers to pull, and we have a great deal of optionality. So the first thing I'd say is, in the way we're thinking about it, from here on, whatever liquidity we bring in, whatever deposit growth we bring in, we would like to put out at about an 80% loan-to-deposit ratio, so we can stay between that 80% and 85% level. And that's what we're going to try to target going forward.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Chris Mcgratty with <unk> W. Chris. Please go ahead.

Christopher Edward McGratty: Alright, good morning.

Christopher Edward McGratty: Kevin It feels like the 100 billion has obviously got a ton of attention.

Christopher Edward McGratty: It feels like you've more or less addressed every piece of it.

Christopher Edward McGratty: Obviously, there's ongoing regulation, but liquidity expenses capital is that the message you're trying to send with the last actions over the last few quarters.

Speaker Change: Yeah. So.

Kenneth A. Vecchione: It'll take a little time to build up that loan growth engine because obviously, if we're telling you $2 billion in deposits and $1 billion in loans, that's not 80%, but we're getting that back up again. You've got to get the deals done. You've got to get them documented.

Speaker Change: Taking actions today and preparing for.

Speaker Change: Across all of our 100 billion.

Speaker Change: In a few years.

Speaker Change: Okay.

Speaker Change: The improvements we've made in our risk management architecture.

Speaker Change: On capital analysis liquidity analysis and planning.

Indicated to us that it was better to build that liquidity.

Speaker Change: Reservoir early on and we wanted to get that done.

Dale M. Gibbons: You've got to have clients put their cash in before we put our funding in, and that will just build up as we go throughout 2024 and into 2025. And then if we do better than that, meaning higher deposits or the loans stay in that billion plus range, then we'll use some of that incremental liquidity, and we'll use it to pay down borrowings, and that will also mute the growth of the balance sheet.

Speaker Change: And we've accomplished that the other thing was let's get capitalized the way, we think 11% around that number is the right number going forward. So we've done all of that but behind the scenes also Chris is a lot more risk management build that has to occur that's been basically built in to the company of a lot.

Speaker Change: Full of years, so where we are today, we'll say, we're about 75% of the way towards being ready to be 100 billion. Collectability is just the number for us we're not looking to get there sooner or it all depends on again the economy and the opportunities that we have in front of us, but what we what we don't want to happen is we don't want to.

Dale M. Gibbons: Dan, do you want to add anything to that? Yeah, I mean, to say it another way, I expect that we can exceed those numbers, Steve, a bit because paying down borrowings coincides with growing deposits faster than your $5 billion a year.

Speaker Change: We stop when we hit that level. So we want to grow in an unencumbered way in the meantime, the risk architecture that we're putting into the company.

Speaker Change: Dividends is that type of return and how we think and manage the company. So we're happy that we're doing that as well.

Speaker Change: Okay, great. Thank you.

Christopher Edward McGratty: The next question comes from the line of Chris McGratty with KBW. Chris, please go ahead.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Bernard funds does a key with Deutsche Bank. Your line is now open.

Kenneth A. Vecchione: We are taking actions today in preparing, across over 100 billion, in a few years. Okay, the improvements we've made in our risk management architecture, both on capital analysis, liquidity analysis, and planning, indicated to us that it was better to build that liquidity. Reservoir early on.

Hi, good morning so.

Bernard: So you guys had a nice quarter with fees, but you didn't change the full year noninterest income guide outlook.

Note that mortgage will be dependent on rate, but you were encouraged by the resilient results.

Bernard: How should we think about maybe the seasonality after <unk> the different key lines for the rest of the year. Additionally, equity investments have picked up the past two quarters wondering if you could provide any color there and how do you think it's a trend for the rest of the year.

Kenneth A. Vecchione: And we wanted to get that done. And we've accomplished that. The other thing was, let's get capital out of the way. And we think 11% around that number is the right number going forward. So we've done all that. But behind the scenes, Chris, there are a lot more risk management costs that have to occur. That's basically been built into the company over the last couple years.

Speaker Change: So there are a couple of questions inside of that I'll take a shot at it and then we will fill in if I Miss anything.

Speaker Change: But a good portion of the fee income comes from mortgage I would say that mortgage hangs around the hoop for the next couple of quarters similar to that of Q1 and of course Q4 from mortgages always liner because of seasonal.

Kenneth A. Vecchione: So where we are today, you know, we'll say we're about 75% of the way towards being ready to be 100 billion. 100 billion is just a number for us. We're not looking to get there sooner, but it would all depend on, again, the economy and the opportunities that we have in front of us. But what we don't want to happen is that we don't want to be stopped when we hit that level, so we want to grow in an unencumbered way. In the meantime, the risk architecture that we're putting into the company is paying dividends and does have a return on how we think and manage the company. So we're happy that we're doing that as well.

Speaker Change: Reason.

Speaker Change: The the.

Speaker Change: The gains you mentioned on the on the warrants.

Speaker Change:

That's very consistent with the prior quarter.

Speaker Change: System valuing over 500 positions every quarter.

Speaker Change: And as the Tech business grows we expect there to be more positions to be value and right now we don't see a retracement in value.

Speaker Change: At this time and we think the way we value we had based on where the tech industry is valuing it at the lower point of the cycle.

Speaker Change: Yes.

Speaker Change: Yes, just a couple of things so.

Bernard Von Gizycki: The next question comes from the line of Bernard von Gizycki with Deutsche Bank. Your line is now open.

Seasonality implications. So HOA their first quarter is Q1 and that helped contributed to nearly $7 billion increase there as well as the recovery in kind of a mortgage warehouse deposits. So I would expect that that future quarters are going to be lower than what we put out in the first quarter.

Bernard Von Gizycki: Hi, good morning. So you guys had a nice quarter for fees, but you didn't change the full year non-interest income guide outlook. You noted mortgage will be dependent on rates, but you were encouraged by the resilient results. You know, how should we think about, maybe, the seasonality after 1Q for the different fee lines for the rest of the year? Additionally, you know, equity investments have picked up in the past two quarters. Wondering if you could provide any color there and how you think it should trend for the rest of the year.

Speaker Change: And in terms of our guidance.

Speaker Change: We are tracking towards the upper end of our guide.

Speaker Change: In the book regarding net interest income and frankly, we're a little above the above the mid point for non interest income as well.

Speaker Change: Yeah.

Speaker Change: Okay got it and I think you noted earlier that you don't expect much deposit mix shift from here, obviously the quarter was great with the with the amount of deposits you brought in but the mix shift was obviously favorable mostly the noninterest bearing and then obviously in the interest bearing there is less.

Kenneth A. Vecchione: So there are a couple of questions inside of that. I'll take a shot at it, and Dale will fill in if I miss anything.

Kenneth A. Vecchione: But a good portion of the fee income comes from mortgages. I would say that mortgage activity hangs around the loop for the next couple of quarters, similar to that of Q1, and, of course, Q4 for mortgages is always lighter because of seasonal reasons. The gains you mentioned on the warrants are very consistent with the prior quarter. It consists of valuing over 500 positions every quarter, and as the tech business grows, we expect there to be more positions to be valued.

Speaker Change: Focus on the higher cost Cds.

Speaker Change: When you think about the rest of the year.

Speaker Change: The minimal mix, where you're kind of thinking for the additional $4 billion would be kind of similar as you kind of look out to the outside quarters.

Speaker Change: Well, if I put on my optimistic at I mean, we're really doing some some creative things in the regions, which would be our primary source of where he might get noninterest bearing deposits and I would hope that we could actually show growth. There. We certainly saw growth in the first quarter and we're looking for that to continue.

Kenneth A. Vecchione: And right now, we don't see a retracement in value at this time, and we think the way we're valuing it based on where the tech industry is, we're valuing it at a lower point in the cycle. Yeah, just a couple things.

Dale M. Gibbons: So other seasonality implications. So HOA, their best quarter is Q1, and that helped contribute to, you know, our nearly $7 billion increase there, as well as the recovery in kind of mortgage warehouse deposits. So I would expect that, you know, future quarters are going to be lower than what we put out in the first quarter. And in terms of our guidance, you know, we are tracking toward the upper end of our guidance that's in the book regarding net interest income. I'm afraid we're a little above the midpoint for non-interest income as well.

Speaker Change: Maybe the trend you alluded to in terms of Cvs I think that that is going to continue to taper off as we run through 2024 and of course, the preponderance of the growth is going to come in money market.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Ben Garlinger with Citi. Your line is now open.

Benjamin Tyson Gerlinger: Good morning, guys, sorry about the bad thing is I had to step out just had a question in terms of.

Benjamin Tyson Gerlinger: HCR <unk>.

Benjamin Tyson Gerlinger: This lowered the expectations to kind of tune that latter half of this year.

Benjamin Tyson Gerlinger: Just kind of thinking philosophically, if we have two more in the early part of next year. So a total of four just kind of pushed it out in six months.

Bernard Von Gizycki: Okay, got it. And, Dale, I think you noted earlier that you don't expect much of a deposit mix shift from here. Obviously, the quarter was great with the amount of deposits you brought in, but the mix shift was obviously favorable, mostly non-interest bearing. And then obviously, in the interest bearing, there's less focus on the higher cost CDs. You know, when you think about the rest of the year, you kind of said the minimal mix. Where are you kind of thinking the additional $4 billion would be kind of similar? As you kind of look at the outside quarters?

Benjamin Tyson Gerlinger: Do you think next year's expenses could actually be flat if not down.

Benjamin Tyson Gerlinger: Yeah.

Benjamin Tyson Gerlinger: Yes, I think thats that can certainly be the case also would probably help with revenue significantly on the marathon was as we discussed as well.

Benjamin Tyson Gerlinger: Yes.

Benjamin Tyson Gerlinger: So we're talking about this earlier.

Benjamin Tyson Gerlinger: I was going to say any any future rate cuts into 2025 will help fund any inflation, we have in the base and so I think that's what you're suggesting one more point getting to Ken's comment earlier about Optionality. One thing that this pool of liquidity gives us to enable us to do is to really one.

Dale M. Gibbons: Well, if I put on my optimistic hat, I mean, we're really doing some creative things in the regions, which would be a primary source of where we might get non-interest-bearing deposits. And I would hope that we could actually show growth there. We certainly saw growth in the first quarter, and we're looking for that to continue. As you may have noticed, the trend you alluded to, in terms of CDs, I think that that is going to continue to taper off as we run through 2024. And, of course, the preponderance of growth is going to come in the money market.

Benjamin Tyson Gerlinger: Some of our higher cost ECR is now, which we are undertaking to push them down and so we can get in front of epilepsy action with them with lower funding costs, you saw that a little bit in Q4 to Q3 work when the average ECR actually declined slightly we'd like to see more of that of course.

Speaker Change: Got you that's great and nice to see you all get back to the kind of a powerhouse that used to be in terms of the growth potential.

Speaker Change: And have you guys thought about any sort of potential M&A.

Speaker Change: Over 100, but just bolt on technology or any kind of fintech, just any sort of capital deployment outside of the share repurchase.

Benjamin Tyson Gerlinger: Thank you. The next question comes from the line of Ben Gerlinger with Citi. Your line is now open.

Speaker Change: So it's still for us a little premature to think about M&A.

Speaker Change: And I would say.

Benjamin Tyson Gerlinger: Good morning, guys. Sorry about the background noise; I had to step out.

Speaker Change: Given the prospects that we see in front of us wed like to take any excess.

Speaker Change: Capital that we have and put it into organic growth.

Benjamin Tyson Gerlinger: I just had a quick question in terms of the ECR. I know you guys lowered the expectations to kind of two in the latter half of this year. But just kind of thinking philosophically, if we had two more in the early part of next year, so a total of four, just kind of pushed it out six months, do you think next year's expenses could actually be flat if not down?

Speaker Change: We think that would serve us best.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Matthew Clark with Piper Sandler Matthew. Please go ahead.

Matthew Timothy Clark: Hey, Thanks, good morning, everyone.

Speaker Change: Yes.

Matthew Timothy Clark: On your interest bearing deposit cost they were up 11 bps. This quarter I think the prior quarter up seven.

Matthew Timothy Clark: Can you give us a spot rate.

Matthew Timothy Clark: Non interest bearing deposits and what's your outlook. There is it is it fair to assume that that rate of change will start to slow here, maybe stabilize next quarter or two.

Dale M. Gibbons: Yeah, I think that that can certainly be the case, and it would also probably help with revenue significantly on AmeriHome, as we discussed as well. Yeah, that's what we were talking about earlier. I was going to say, any future rate cuts into 2025 will help fund any inflation we have in the base. And I think that's what you're suggesting. One more point, you know, getting to Ken's comment earlier about optionality, you know, one thing that this pool of liquidity gives us to enable us to do is to really one-off some of our higher-cost ECRs now, which we're undertaking, to push them down.

Matthew Timothy Clark: Yes.

Speaker Change: We're looking at really.

Speaker Change: Stability across the board both on asset repricing.

Speaker Change: The abilities here.

Speaker Change: There hasnt been since.

Speaker Change: <unk> has obviously been.

Speaker Change: Since last us.

Speaker Change: September kind of the last kind of rate changes, we're talking about our July.

Speaker Change: It's really kind of tapered off and the volatility is very stable as I mentioned earlier I think you see that net interest income going up.

Speaker Change: It came out of these areas credit costs rose. So so there is no great disparities between spot rates and.

Dale M. Gibbons: And so we can get in front of, you know, FOMC action with lower funding costs. You saw that a little bit in Q4 to Q3, where the average ECR actually declined slightly. We'd like to see more of that.

Speaker Change: And it kind of average rates primarily.

Speaker Change: What I would add is that while deposit costs went up we got rid of a $1 billion of borrowings and our overall cost of funds space flat quarter to quarter. So when you think about what happened for the quarter relative to the net interest margin our loan yields went up 12 basis points. Our deposit cost went up 11, we pay.

Benjamin Tyson Gerlinger: Gotcha. That's great.

Benjamin Tyson Gerlinger: Nice to see you all get back to the kind of a powerhouse that you used to be in terms of growth potential. Kind of with that, though, have you guys thought about any sort of potential M&A? Not necessarily going for 100, but just bolting on technology or any kind of fintechs, just any sort of capital deployment outside of the share purchase?

Speaker Change: Down debt and really the bottom line here is the March it dropped a little bit because of the excess liquidity we brought in.

Speaker Change: That we're keeping on the balance sheet.

Speaker Change: Cash and investment Securities.

Kenneth A. Vecchione: So it's still a little premature for us to think about M&A. And I would say, given the prospects that we see in front of us, we'd like to take any excess capital that we have and put it into organic growth. We think that would serve us best.

Speaker Change: Yep got it.

Okay, and then just last one for me.

Speaker Change: The uptick in classified assets and non performers can you just speak to what drove those.

Speaker Change: Increases in kind of a plan for resolution there.

Matthew Timothy Clark: The next question comes from the line of Matthew Clark with Piper Sandler. Matthew, please go ahead.

Yes, sure sure Tim Brown neurology.

Timothy R. Bruckner: I'll take that so.

Timothy R. Bruckner: First I'll just say the majority is related to secured investor real estate loans.

Matthew Timothy Clark: Hey, thanks. Good morning, everyone.

Timothy R. Bruckner: Really resolves as a function of how we.

Dale M. Gibbons: On your interest-bearing deposit costs, I mean, they were up 11 bits this quarter; I think the prior quarter was up seven. Can you give us a spot rate on interest-bearing deposits and what's your outlook there? Is it fair to assume that that rate of change will start to slow here, maybe stabilize in the next quarter or two? Yeah, we're looking at really stable across the board, both on asset repricing and on kind of liabilities here.

Speaker Change: Manage our portfolio so as we've taken every opportunity to tell.

Speaker Change: All of our constituents we press.

Speaker Change: Re margining and half cents.

Speaker Change: Early in the rate increase cycle that drives to resolution so.

Speaker Change: The classified loans will move up as as we as we reach the.

Speaker Change: The endpoint of a negotiation that doesn't resolve effectively margin.

Speaker Change: Then take those loans and we led to the balance appropriately.

Speaker Change: Based on the value of the asset we apply all principal and interest payments received to reduce that loan balances I think it's important to note on our books that two thirds of these are current in terms of in terms of payments being made so we're not waiting for delinquency to take our action here and all the ones we have.

Dale M. Gibbons: There hasn't been, you know, since it's obviously been, you know, since last September, the kind of last rate changes we were talking about in July. It's really kind of tapered off, and the volatility is very stable. As I mentioned earlier, I think you see that net interest income going up, you know, approximately the same amount as earnings credit costs rose. So, there are no great disparities between, you know, spot rates and, and kind of average rates.

Speaker Change: Move in this quarter were all pain correct as well.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Kumar <unk> with Wells Fargo. Your line is now open.

Kumar: Hi, Thanks.

Kumar: Maybe just following up on that last line of questioning can you just talk us through the interplay between nonperforming loan migration and the allowance I guess I was a little surprised to see npls move higher while overall allowance level, it's pretty much flat quarter on quarter.

Dale M. Gibbons: Well, what I'd add is that while deposit costs went up, we got rid of a billion dollars in borrowings, and our overall cost of funds stayed flat quarter to quarter. So when you think about what happened for the quarter relative to net interest margin, our loan yields went up 12 basis points, our deposit costs went up 11, we paid down debt, and really, the bottom line here is the margin dropped a little bit because of the excess liquidity we brought in that we're keeping on the balance sheet in cash and in investment security.

Kumar: Sure.

Kumar: Tim again, I think it's important to note in this context.

Kumar: The majority of we have a very small charge off every quarter.

Kumar: The majority of the charge that we took this quarter was really associated with adjusting the.

Kumar: Balances of those loans as they migrate so that we have plenty of coverage based on current.

Kumar: The appraised value of the asset less the cost of liquidity. So we move.

Kumar: Early aggressively enter into nonperforming, we adjust our balance.

Dale M. Gibbons: Yep, got it. Okay, and then just last one for me, the uptick in classified assets and non-performing assets. Can you just speak to what drove those increases and kind of a plan for resolution there? Sure, sure. Tim Bruckner. I'll, I'll take that. So first, I'll just say the majority is related to secured investors.

Kumar: As opposed as opposed to placing just reserves on that.

Kumar: Okay.

Kumar: Looking at the migration itself doesn't necessarily.

Kumar: What was that as absolutely absolutely right and so when we talk about our philosophy here were a low loan to cost lender. When you look at office underwritten office.

Kumar: <unk> hundred 50, 859% is where we're at so.

Timothy R. Bruckner: Mr. Real Estate Law

Timothy R. Bruckner: We've taken every opportunity to tell all of our constituents that we press hard for re-margining and have since early in the rate increase cycle. That drives to resolution.

Kumar: We look at this in the economy credit underwriting collab.

Kumar: Collateral in our collateral position creates.

Kumar: Character increased support from sponsorship.

Kumar: And that's what we see demonstrated so.

Timothy R. Bruckner: We move up as we reach the end point of an negotiation that doesn't resolve on an effective remargin. We then take those loans, and we ledger the balance appropriately based on the value of the asset.

It carries through that we typically have very.

Kumar: Low loan to carrying values throughout the entire throughout the process, where we get close we'll make an adjustment and take a charge and stay in balance.

Timothy R. Bruckner: I think it's important to note on our books that two-thirds of these are current in terms of payments being made. So, we're not waiting for a delinquency to take our account, and all the ones we moved in this quarter were all paying as well.

Kumar: Large off rate for the quarter annualized was eight basis points, which is only about maybe a fifth or a fourth of what the industry is maybe not a reserve level at 74 basis points.

Timur Felixovich Braziler: The next question comes from the line of Timur Braziler with Wells Fargo. Your line is now open.

Kumar: In the appendix of the earnings release, we walk that up to the $1 30 level of considering the things that we have that we do that others don't do like a higher levels of residential real estate.

Timur Felixovich Braziler: Maybe just following up on that last line of questioning, could you talk us through the interplay between non-performing loan migration and the allowance? I guess I was a little surprised to see NPLs move higher while the overall allowance level is pretty much flat quarter on quarter.

Kumar: As well as <unk>, we talked about a little bit and so we think that's actually a pretty strong level at 74 basis points. So if you. If you take eight basis points to 74, you've got nine years of loss coverage within there while our duration of our loan book is under four yes.

Timothy R. Bruckner: Sure. Tim said again. I think it's important to note in this context that the majority of us have a very small charge off every quarter. The majority of the charge that we took was

Kumar: I would add more than anything when we look at this category is performing as expected and moving to resolution as expected.

Timothy R. Bruckner: was really associated with adjusting the balances of those loans as they migrate so that we have plenty of coverage based on the current appraised value of the asset less the cost of liquidity. So we move fairly aggressively into non-performing. We adjust our balance as opposed to placing just reserves on it.

Speaker Change: Okay, and then maybe as my follow up just looking at the securities purchases. This quarter can you give us.

Speaker Change: Bridge just.

Speaker Change: Just to get a sense of.

Timur Felixovich Braziler: Okay, just the integration itself doesn't necessarily...

Speaker Change: What that blended effect will look like in Tokyo.

Timothy R. Bruckner: Absolutely right. And so when we talk about our philosophy here, we're a low loan to cost lender. When you look at office, underwritten office, 50, 58, 59% is where we're at. So we look at this in the economy of credit underwriting, collateral, and our collateral position creates character and creates support from sponsorship. And that's what we see demonstrated. So it carries through that we typically have very low loan-to-carrying values throughout the entire, throughout the process, where we get close, we make an adjustment, take a charge, and

Speaker Change: Yeah.

Speaker Change: Uh huh.

Speaker Change: We didn't hear that clearly.

Speaker Change: Okay.

Speaker Change: For the securities purchases made during the quarter, just trying to get a sense of what the rate was on those purchases to get a idea of what the blended rate in the second quarter will look like.

Speaker Change: Yes so.

<unk>.

Speaker Change: The rate that we have on average for the quarter, which you saw back down 33 basis points of the 460 <unk>.

Speaker Change: That should be fairly consistent with what's been done.

Speaker Change: The purchases that were done were fairly short term, we expect to make the rollout of some of that and.

Speaker Change: Maybe more at the federal reserve as well, so thats, probably a little bit of stronger a stronger profile.

Dale M. Gibbons: and Andrew Vodick. Our operating charge for the quarter annualized was eight basis points, which is only about maybe a fifth or a fourth of what the industry is. I mean, at a reserve level, it's 74 basis points. But, in the appendix of the earnings relief, we walked that up to the 130 level considering the things that we have that we do that others don't do, like the higher levels of residential real estate, as well as TLMs, which we talked about a little bit.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of David Smith with Autonomous Research. Your line is now open.

Speaker Change: Okay.

Could you.

David Smith: Could you just confirm what you think your true asset sensitivity is today. The 10-K, you said that 100 basis points higher shock would boost NII by.

David Smith: About 3% and I thought I heard you, saying earlier that the NII guidance.

Dale M. Gibbons: And so we think that's actually a pretty strong level at 74 basis points. So if you take eight basis points into 74, you've got nine years of loss coverage within there, while the duration of our loan book is under four.

David Smith: Towards the high end, but the better loan growth is being offset by there being two fewer cuts in the Mato, which would imply a liability sensitivity. So if you can just.

David Smith: Expand on that I know that NII is just one piece for you with the deposit costs in the mortgage income benefiting from lower rates, but just strictly for NII like how you view the impact of a higher or lower fed today.

Timothy R. Bruckner: I'd add that, more than anything, when we look at this category, it's performing as expected.

Timothy R. Bruckner: performing as expected and moving to resolution as expected.

Operator: Okay, and then maybe as my follow-up, just looking at the securities purchases this quarter, can you give us the Bridge just to get a sense of what that blended effect will look like in 2Q.

Speaker Change: Yes, correct I mean, NII is going to be is going to be increasing in a higher rate environment and you saw that a little bit here, even though that's a stable stable environment. We did have.

Speaker Change: A bit of a slope upward and yields as net interest income was up $7 million what.

Dale M. Gibbons: We didn't hear that clearly at all.

Operator: For the securities purchases made during the quarter, I was just trying to get a sense of what the rate was on those purchases to get an idea of what the blended rate in the second quarter would look like.

Speaker Change: What's changed though is that we're really looking more at what we call earnings at risk. So it considers eni. It considers the ECR and then also considers what might happen in the Amira home context, if I put all those together, we would prefer a lower rate environment, rather than higher because of kind of.

Dale M. Gibbons: Yeah, so the rate that we have on average for the quarter, which you saw was down 33 basis points in the 460s, that should be fairly consistent with what's been done. The purchases that were done were fairly short-term. We expect to maybe roll out of some of that and keep maybe more at the Federal Reserve as well. So that's probably a little bit of a stronger profile.

Speaker Change: The additional leverage pick up we would get with <unk> in particular, but yes, NII solely would still increase in a rising rate environment and declining.

Speaker Change: And a lot of it.

Speaker Change: Okay, and then just in terms of the NII guide staying the same although maybe at the higher end of the range, how that works with there being fewer cuts and better outlook for loan growth.

David Smith: Thank you. The next question comes from the line of David Smith with Autonomous Research. Your line is now open.

David Smith: Could you just confirm what you think your true asset sensitivity is today? You know, the 10k said that a 100 basis point higher shock would boost NII by 3%. And I thought I heard you saying earlier that the NII guide is towards the high end, but the better loan growth is being offset by there being two fewer cuts in the model, which would imply liability sensitivity. So if you just expand on that, I know that NII is just one piece for you with the deposit costs and the mortgage income benefiting from lower rates, but just strictly for the NII, like how you view the impact of a higher or lower Fed today?

Speaker Change: Yes.

Speaker Change: It's up.

Speaker Change: Yes.

Speaker Change: <unk>.

Speaker Change: If you were fewer rate cuts that resulted in a higher number because we're not going to get into a compression on the way down and kind of the volume element, we've kind of talked about as we deploy the $7 billion in deposits that we got in Q1 and what were the additional the additional at least $4 billion that we're looking for for the rest of the year into.

Speaker Change: <unk>.

At least on a prospective basis into higher yielding assets rather than into kind of short term securities to satisfy high quality liquid asset requirements, it will build quarter to quarter.

Dale M. Gibbons: Correct. I mean, NII is going to be increasing in a higher rate environment. And you saw that a little bit here, even though it's a stable environment. We did have a bit of a slope upward in yields as the net interest rate was up $7 million. What's changed, though, is that we're really looking more at what we call earnings at risk. So it considers the NII, it considers the ECR, and then it also considers what might happen in the AmeriHome context.

Speaker Change: Slight improvement in Q2, as we put the loans out and then it begins to grow.

Speaker Change: <unk> in Q3 and Q4.

Speaker Change: Thank you.

Speaker Change: Next question comes from the line of Brandon <unk> with <unk> Securities Brandon. Please go ahead.

Speaker Change: Okay.

Hey, so understand NIM, it's close to trough in the second quarter, just given the HOA build at the end of the first quarter, but could you quantify.

Dale M. Gibbons: And if I put all those together, we would prefer a lower rate environment rather than higher rates because of the kind of additional leverage pickup we would get in AmeriHome in particular. But yes, NII solely would still increase in a rising rate environment and decline in a lower one. Okay.

Brandon: Particularly how much NIM compression youre expecting for the second quarter.

Speaker Change: Yes, so if we dip down 5% in Q1 from Q4, you saw that I think that we can get down another turn on on higher volumes.

David Smith: Okay, and then just in terms of the NII guide staying the same, although maybe moving to the higher end of the range, how does that work with there being fewer cuts and a better outlook for loan growth?

Speaker Change: Okay.

And the expectation is that as you.

Speaker Change: The second half of the year if rates stay stable from here at mid single digit experiencing quarter over quarter. That's that's correct right.

Dale M. Gibbons: Yeah, I mean, it's, it's up. Yeah, I mean, if you were, you know, fewer rate cuts, that would result in a higher number because we're not going to get the compression on the way down. And then kind of the volume element, we've kind of talked about, as we deploy, you know, the $7 billion in deposits that we got in Q1, and what are the additional, at least $4 billion that we're looking for for the rest of the year into, you know, at least on a prospective basis, higher yielding assets rather than into kind of short-term security to satisfy high quality liquid asset requirements. It will build quarter to quarter, with a slight improvement in Q2, as we put the loans out, and then it begins to grow stronger in Q3 and Q4.

Yes, we would look for it to increase because the marginal spread we're going to pick up between deposits and loans they were lending out 80% of the.

Speaker Change: The increase in deposit that's going to be that's going to be that's going to be.

Speaker Change: Be accretive to the margin overall.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Gary Tenner with D. A Davidson your line is now open.

Speaker Change: Sure.

Thanks, Good morning.

Gary Peter Tenner: Another follow up on the credit side of things if I look at the total classified increase a little over $100 million in the quarter, the investor CRE side.

Brandon Thomas King: The next question comes from the line of Brandon King with Truist Securities. Brandon, please go ahead.

Gary Peter Tenner: The lower hotel and an increase in office was basically flat, but the delta was a little more on the C&I side. So I just wonder if you could.

Brandon Thomas King: Hey, so I understand NIM is supposed to draw off in the second quarter, just given the HQA build at the end of the first quarter. But could you quantify, particularly, how much NIM compression you're expecting for the second?

Gary Peter Tenner: Comment about within the C&I book, what Youre experiencing there were any.

Gary Peter Tenner: Particular business lines.

Gary Peter Tenner: Were weaker.

Dale M. Gibbons: Yeah, so we've dipped down five in Q1 from Q4, you saw that. I think that we can drop down another 10 on higher volume.

<unk> got more movement this quarter.

Gary Peter Tenner: Yes.

Speaker Change: Sure. Thanks, Tim again.

Our portfolio.

Brandon Thomas King: Okay, and then the expectation is that throughout the second half of the year, if rates stay, I guess, stable from here at mid single-digit expansion quarter over quarter, that's correct, right? Yeah.

Speaker Change: <unk> remained stable.

Speaker Change: We remain vigilant.

Speaker Change: This elevated interest rate environment, but were really seeing stable performance across all the segments.

Speaker Change: I would say.

Speaker Change: The more pronounced movements that we've talked about in office.

Dale M. Gibbons: Yeah, we look for it to increase because the marginal spread that we're going to pick up between, you know, deposits and loans, say we're lending out at 80% of the, you know, the increase in deposits, that's going to be, that's going to be, accretive to the margin overall.

Speaker Change: Really any other movements that we see are idiosyncratic and related to its specific business not a trend in our portfolio.

Speaker Change: All right, Thanks, Tim and then.

Speaker Change: Just one question on the income statement the service charge line down down by about half versus the fourth quarter and kind of where it would run previous to that you remind us what happened there.

Gary Peter Tenner: The next question comes from the line of Gary Tenner with D.A. Davidson. Your line is now open.

Speaker Change: And thoughts going forward.

Speaker Change: Yes.

Gary Peter Tenner: Thanks. Good morning. Another follow-up on the credit side of things, if I look at the total classified increase, you know, a little over $100 million in the quarter, the investor series side, you know, inclusive of, you know, lower hotel and an increase in office, was basically flat, but the Delta was a little more on the CNI side. So I just wonder if you could, you know, comment on the experience within the CNI book about what your experience has

Speaker Change: <unk>.

Speaker Change: Yes, we've had elevated service charges here for a little bit.

Speaker Change: Came down in Q1, I think they are going to remain lower.

Speaker Change: Until we have more follow on execution of some things we're doing in service charges and basically the regions.

Speaker Change: Okay.

Speaker Change: Thank you.

The next question comes from the line of John Armstrong with RBC. John. Please go ahead.

John Armstrong: Thanks, Good morning.

John Armstrong: Couple of quick ones here, they will use the term on the mortgage related deposits that you reacquired $3 5 billion that was a big chunk of the growth what do you mean by that and are you kind of signaling the deposits.

Timothy R. Bruckner: and there were any, you know, particular business lines that were weaker and got more movement.

Timothy R. Bruckner: and got more movement this quarter.

Timothy R. Bruckner: Sure, thanks, Tim, again. Okay, our portfolio remains stable. We remain vigilant in this elevated interest rate environment, but we're really seeing stable performance across

John Armstrong: Latin out or maybe decline a bit in Q2, just so we understand that.

Hello.

John Armstrong: I mean is that.

Gary Peter Tenner: [inaudible]

John Armstrong: So the mortgage warehouse deposits primarily come from two sources, one is principal and interest and those are on a monthly cycle as we get funds in from mortgage payments and then we admit them to the GSC. Some three weeks later and so you get this kind of interim months kind of sideways on it regarding the taxes and insurance so that's on <unk>.

Dale M. Gibbons: All right, thanks, Tim. And then just one question on the income statement, the service charge line down demo that half versus the fourth quarter and kind of where it ran previous to that. Can you remind us what happened there? [inaudible] Yeah, we.

Dale M. Gibbons: Yeah, we've had elevated service charges here for a little bit. They came down in Q1. I think they're going to remain lower until we, you know, have more follow-on execution of some things we're doing with service charges in basically the regions.

John Armstrong: Longer cycle, and particularly I think taxes are usually semiannual some are annual and so we have a dip from tax payments of property taxes.

John Armstrong: Those deposits and its <unk>.

Jon Glenn Arfstrom: The next question comes from the line of Jon Arfstrom with RBC. Jon, please go ahead.

John Armstrong: Very pronounced in the fourth quarter, that's what really drove that number lower from where we were at September 30 at that so we say reacquired in terms of both those funds and then depleted as they are paid to the taxing agency and then they start building up again and they built up quickly and frankly, we brought in some other clients there too which kind of helped.

Jon Glenn Arfstrom: Thanks. Good morning. A couple of quick ones here.

Dale M. Gibbons: Dale, you used the term on the mortgage-related deposits that you reacquired $3.5 billion. That was a big chunk of the growth. What do you mean by that, and are you kind of signaling that deposits flatten out or maybe decline a bit in Q2, just so we understand that?

John Armstrong: Keep it up because normally it would have recovered quite that quickly impact would be in the second quarter to do it but that didn't happen.

Dale M. Gibbons: Well, what I mean is that the mortgage warehouse deposits primarily come from two sources. One is principal and interest. And those are on a monthly cycle as we get funds in, you know, from mortgage payments, and then we remit them to the GSEs, you know, some three weeks later. And so you get this kind of intramonth kind of sideways.

John Armstrong: In Q4 came back from Q1, John a little stronger than we thought because we had some market share wins at the end of last year that began to finance fund up in Q1 and Thats what that means.

Okay. Thanks.

John Armstrong: Thanks, Amit is just bigger than I thought.

Jon Glenn Arfstrom: Thanks for that. It's just bigger than I thought, and that helps me understand that.

Speaker Change: <unk> me understand that Ken.

Kenneth A. Vecchione: Ken, you mentioned very early in your prepared comments an upper team return on tangible as your goal. How do you view the sustainability of that? I mean, if you can do that, the stock goes up. But is that the key metric you look at, and what do you think about the sustainability of that longer term?

Speaker Change: You mentioned very early in your prepared comments.

Speaker Change: <unk>.

Speaker Change: Return on tangible is your goal how do you view the sustainability of that I mean, if you can do that the stock goes up but does that is that the key metrics you look at and what do you think about sustainability of that longer term.

Kenneth A. Vecchione: Yeah, well, we want to put it in there. If we didn't think that we had a high confidence level of getting there, it'll build up through 2024. And again, everything we talked about on the last earnings call in this one is about the earnings exit or velocity rate out of 24 into 2025. And now, that return could actually spike in the event that the Fed does take some more actions and reduces rates.

Speaker Change: Yes.

Speaker Change: While we want to put it in there if we didn't think that we have a high confidence level of getting there.

Speaker Change: Buildup through 2024 and again.

Everything we talked about on the last earnings call and this one is about the earnings exit or velocity rate out of 24 into 2025.

Speaker Change: Now that that return could actually spike up in the event that the fed does take some more actions and reduces rates and then youll see a greater share of fee income coming from our marrow home right now we kind of have that at a basic steady state of where it is today, but rates.

Kenneth A. Vecchione: And then you'll see a greater share of fee income comes from marijuana. Right now, we kind of have that at a basic steady state of where it is today. But if rates come down, say 100 basis points over the next four quarters or whatever, you can see marijuana really gearing up and producing far more income and generating a higher return on equity for the entire company.

Speaker Change: Come down say, a 100 basis points over the next four quarters or whatever you can see.

Speaker Change: Meera home really gearing up and producing far more income and generating a higher.

Speaker Change: Return on.

Speaker Change: Equity for the entire company.

Erik Edward Zwick: Thank you. The next question comes from the line of Eric Zwick with the Hovde Group. Your line is now open.

Speaker Change: Thank you.

Speaker Change: Next question comes from the line of Erik Zwick with Husky Group. Your line is now open.

Erik Edward Zwick: A quick follow-up question, maybe kind of a multi-part question regarding your loans that are secured by Real Estate Collateral. First, I'm just curious, you know, how often are the individual property valuations refreshed, and what percentage of those are paid?

Erik Zwick: Good morning, everyone.

Erik Zwick: A quick follow up question, maybe kind of a multipart question regarding your loans that are secured by real estate collateral.

First I'm just curious to know how often are the individual property valuations refreshed and what percentage of your portfolio has received updated.

Erik Edward Zwick: Group Portfolio has received an updated evaluation say in the past six months.

<unk> say in the past six months and the reason I guess I'm asking is it CRE transaction volume has in certain markets has been somewhat muted in recent quarters.

Erik Edward Zwick: And, you know, the reason I guess I'm asking is that CRE transaction volume, in certain markets, has been somewhat muted in recent quarters, you know, and that can potentially obscure or slow market recognition of changes in values in either direction, right, up or down, but with current concerns that higher rates have put pressure on values, how comfortable are you that the valuations you're currently using and reserving against are reflective of current market valuations?

Erik Zwick: And that can potentially obscure our slow market recognition of changes in values in either direction up or down, but with current concerns at higher rates or put pressure on values like how comfortable you argue that the valuations you're currently using and reserving against are reflective of current market valuations.

Erik Edward Zwick: Executive of Current Market Valuation

Erik Zwick: Okay.

Sure. Thanks.

Timothy R. Bruckner: Sure, thanks. That's a good question. I'll take it, Tim, again.

Speaker Change: A good question I'll take it.

Speaker Change: Tim again, okay. So so couple of things just to level set.

Timothy R. Bruckner: Okay, so a couple of things, just to level set: we're a bridge and construction lender in commercial real estate. Okay, so there isn't a scenario here where we have term loans that we're waiting for maturity to look at, or they're benefiting from a long-term fixed rate that was put in place in a different environment. These are floating rate loans.

Speaker Change: We're a bridge and construction lender and commercial real estate.

Speaker Change: So there isn't a scenario here, where we had term loans that were waiting for a maturity to look at or they're benefiting from a.

Speaker Change: Our long term fixed rate that was put in place a different environment. These are floating rate loans and and we value them.

Speaker Change: Against appraisal and performance on an ongoing.

Basis all of our.

Timothy R. Bruckner: We value them.

Speaker Change: Documentation includes terms for reappraisal and re margin so those thoughts around around value are critical.

Timothy R. Bruckner: [inaudible]

Timothy R. Bruckner: Submarket data that we track to track trends and value. But in advance of that, we're tracking the trends in submarket occupancy so that we can really understand how that will translate to value in situations when there's limited market sales.

Speaker Change: So that isn't something that we wait for it to fall or.

Speaker Change: Our maturity to handle Additionally, we have substantial sub market data that we track.

Timothy R. Bruckner: in situations when there's limited market sale.

Speaker Change: Track trends in value, but in advance of that we're tracking and trends in submarket occupancy. So that we can really understand how that will translate to a value in situations when there's limited market sale activity.

Zach Westerlund: The final question comes from the line of Zach Westerlund with UBS. Zach, please go ahead.

Zach Westerlund: All right, just a quick follow up on the ECRs. Dale, I know you said that you guys are

Speaker Change: Yeah.

Speaker Change: Thanks, Tim I appreciate the color that's all for me today.

Speaker Change: Thank you.

Speaker Change: The final question comes from the line of Zach Westerlund with UBS. Please go ahead.

Dale M. Gibbons: Dale, I know you said that you guys are trying to get ahead of the kind of higher cost accounts. Do you think that the beta on the ECR rate on the way down when the site starts cutting could be equal to or exceed the beta that we saw on the way up?

Zach Westerlund: Hi, just a quick follow up on the ECR.

Zach Westerlund: I know you said that you guys are trying to get ahead of those kind of higher cost accounts.

Zach Westerlund: Do you think that the data.

Zach Westerlund: On the ECR rate on the way down with the site starts cutting do you think that could be equal to or exceed the beta that we saw on the way up.

Dale M. Gibbons: You know, I mean, you have to kind of segment that into, you know, what types of ECRs there are. Within the mortgage warehouse side, yes, I think we're going to be at or near 100 percent, perhaps even over 100 percent for some clients. But in total, it'll be lower than that as we use ECRs for HOA deposits as well, but those start at a much lower rate to begin with. So I do think that we'll be at least as fast as we were on the way up on the way down, and maybe in some cases even a bit better.

Yes.

Zach Westerlund: You have to kind of segment that into what types of ECR. There are within the mortgage warehouse side, yes, I think we're going to be at or near 100%, perhaps even over 100% for some clients.

Zach Westerlund: But in total.

Zach Westerlund: It will be lower than that as we use <unk> for HOA deposits as well.

Zach Westerlund: But those started at a much lower rate to begin with so I do think that will be at least as fast as we were on the way up on the way down and it may be in some cases, even a bit better.

Speaker Change: Understood. Thank you.

Kenneth A. Vecchione: I would now like to hand the call over to Ken Vecchione for his closing remarks.

Speaker Change: Thank you. Thank you I would now like to hand, the call over to Ken Vecchione for closing remarks.

Kenneth A. Vecchione: Thanks, everyone. Look, we think we had a good quarter. We're very pleased with the balance sheet repositioning, as we stated, and we look forward to the next call to tell you more about our progress. Thanks again for spending some time with us today.

Kenneth A. Vecchione: Thanks, everyone look we think we had a good quarter, we're very pleased with the balance sheet repositioning as we stated and we look forward to the next call. We'll tell you more about our progress. Thanks again for spending some time with us today.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect your lines.