Western Alliance (WAL) Q1 2026 Earnings Transcript

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DATE

Wednesday, April 22, 2026 at 12 p.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — Kenneth A. Vecchione
• Chief Financial Officer — Vishal Idnani
• Chief Credit Officer — Timothy R. Bruckner

TAKEAWAYS

• Adjusted EPS -- $2.22, up 24% year over year, excluding fraud-related loan charge-offs and security gains.
• Deposit Growth -- $5.6 billion added, surpassing pace required to achieve the $8 billion annual target; management plans deposit growth to be flat in Q2 due to optimization efforts.
• Net Interest Margin -- 3.54%, increasing by 3 basis points quarter over quarter, with interest-bearing deposit costs down 21 basis points over the same period.
• Net Interest Income -- $766 million, stable sequentially and up 18% year over year, supported by $1.1 billion in average earning asset growth.
• Total Loans -- Increased $903 million quarter over quarter, evenly divided between held-for-investment (HFI) and held-for-sale (HFS) portfolios.
• HFI Loan Growth -- Annualized sequential growth of 3.2% and 8% growth year over year; two-thirds of quarterly HFI growth came from C&I loans.
• Noninterest Income -- $253 million, up 18% versus the prior quarter; excluding security gains, noninterest income modestly decreased by $5 million due to mortgage activity.
• Mortgage Banking Revenue -- Flat year over year but down $18 million sequentially; gain-on-sale margin rose 18 basis points year over year to 37 basis points, and loan production up 18%.
• Net Charge-offs -- $126.4 million charge-off on a Lucadia Asset Management (LAM) loan fully executed; $26 million charged off on the Cantor Group 5 loan, with further recoveries expected and related specific reserve validated.
• Allowance for Credit Losses (ACL) -- $461 million, or 87 basis points of funded HFI loans, constant quarter over quarter; coverage of nonperforming loans increased to 105% from 102% sequentially.
• Classified Assets Ratio -- 1.08% of total assets, down 9 basis points quarter over quarter and 36 basis points year over year.
• Efficiency Ratio -- 56%, with adjusted ratio at 48%, both improving by approximately 8 percentage points from the prior year as revenues grew roughly three times faster than expenses.
• CET1 Ratio -- Stable at 11%, in line with the company’s targeted level, despite active share repurchases and balance sheet expansion.
• Tangible Book Value per Share -- Increased 13% annually, compounding at an 18% CAGR since 2015.
• Share Repurchases -- 700,000 shares bought back during the quarter at a weighted average price “in the low seventies,” totaling $50 million in Q1.
• 2026 Outlook -- Net interest income growth of 11%-14% anticipated, “now expected to trend towards the upper end of the range;” deposit growth target reaffirmed at $8 billion, HFI loan growth at $6 billion, and expense growth guided at 7%-11%.
• Asset Sensitivity -- On net interest income basis, the bank remains asset sensitive; on an earnings-at-risk basis, slightly liability sensitive in a down 100 basis point scenario, with earnings projected to rise 1.7% due to mortgage banking improvement.
• Allowance Ratio Outlook -- Management expects loss reserves to trend to the low 80 basis points, with total ACL to funded loans trending into the low 90s as the portfolio mix shifts further to C&I loans.

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RISKS

• Fully charged off $126.4 million on a Lucadia Asset Management loan, “the outcome may take time to resolve, and we will not provide further commentary while the matter is ongoing.”
• Charged off $26 million on the Cantor Group 5 loan, with company indicating, “Due to the complexity and potential duration of the resolution process, we charged off $26 million of this loan during the quarter.”
• Noninterest expense rose $22 million sequentially, attributed to “higher compensation expenses related to annual merit increases and other typical Q1 costs.”
• Mortgage banking earnings pressured by “the sharp backup in interest rates, highlighted by the 10-year Treasury yield rising 33 basis points in March” and elevated rate volatility, with management noting a temporary decline in March results.

SUMMARY

Management executed a complete charge-off on a significant Lucadia Asset Management loan and absorbed major fraud-related expenses, offsetting much of the combined impact through security sales and cost reductions. Deposit gathering far surpassed expectations, enabling an active deposit optimization program that will prioritize reducing funding costs even if it results in temporarily flat deposit growth for the next quarter. Loan growth continued with a deliberate portfolio mix favoring C&I lending and dynamic capital management, while share repurchases continued without compromising the targeted CET1 ratio. The allowance ratio held steady, and reserves were increased to anticipate a portfolio shift toward higher-return, but potentially riskier, C&I credits. Asset quality metrics improved, and the outlook calls for further nonperforming loan reduction with the expectation of net charge-offs normalizing at or slightly above midpoint guidance as the year progresses.

• Management stated, “We are trying to finesse the deposit growth and deposit pricing in this bank,” describing an active strategy to accelerate the outflow of higher-cost deposits in Q2 to improve net interest margin and lower funding costs.
• Company identified a one-time $50.5 million pretax gain from security sales and implemented $50 million of projected expense savings, with incremental expense increases attributed to variable compensation and growth in Juris banking fee income.
• The bank’s private credit exposure in technology and software is under 5% of the total private credit book, with average individual commitments of $4 million and management reporting, “we are not seeing any problems in that book at this time, and it is not reflected in our criticized or classified asset viewpoint.”
• Company’s loan loss reserves are expected to move from 78 basis points to the low 80s, with the total ACL ratio to funded HFI loans anticipated to trend from 87 basis points into the low 90s as portfolio composition shifts.
• Basel III implementation is expected to increase CET1 by 81 basis points, described by management as “very positive for us.”
• The largest single credit in private credit is approximately $60 million in commitment, $30 million funded, with additional monitoring through acting as trustee on about 60% of the lender finance book.
• Noninterest income service fees from the Juris business are forecast to decline in Q2 and Q3 and rise in Q4, owing to timing around large legal settlement activities; fee growth guidance for the year is 15%.
• Mortgage banking revenues are projected to grow about 15% for the year, supported by “increased retail recapture volume at AmeriHome.”
• Management does not plan material share repurchases in the near term, preferring to maintain ratings and capital “to support that long-term growth.”

INDUSTRY GLOSSARY

• HFI (Held-For-Investment) Loans: Loans intended to be kept on the balance sheet until maturity or payoff, not marked to market.
• HFS (Held-For-Sale) Loans: Loans that a bank intends to sell and therefore are marked to market, impacting earnings sensitivity to interest rate changes.
• ACL (Allowance for Credit Losses): The aggregate reserve set aside to absorb estimated credit losses from the loan portfolio, including unfunded commitments.
• Juris Banking: Specialized division focusing on settlement banking for mass tort and legal settlement payments, driving lumpy but substantial service fee revenue.
• ECR (Earnings Credit Rate): Rate banks credit to business customers on non-interest bearing deposit balances to offset service fees.
• AOCI (Accumulated Other Comprehensive Income): Component of equity reflecting unrealized gains or losses on certain assets, notably fixed income securities.

Full Conference Call Transcript

Kenneth A. Vecchione: Good afternoon, everyone. I will make some brief comments about our first quarter 2026 performance before handing the call over to Vishal to discuss our financial results and drivers in more detail. After reviewing our revised 2026 outlook, Dale and Tim will join us for Q&A as usual. Western Alliance Bancorporation’s financial results in the first quarter reflect strong core business performance alongside decisive actions taken on two previously disclosed fraud-related credits. Adjusting for these actions, we generated earnings per share of $2.22, which is consistent with where we were tracking on a reported basis prior to the charge-off announced on March 6. Importantly, these matters are now largely behind us.

By removing these lingering distractions, we can refocus attention on the trajectory of our underlying operating performance. I will briefly review these related charge-offs and mitigating actions before discussing our core results. As previously announced, we fully charged off the remaining $126.4 million balance of the loan to a fund of Lucadia Asset Management. We initiated legal action at the time of the announcement and are actively pursuing recovery through those proceedings. Given the nature of this process, the outcome may take time to resolve, and we will not provide further commentary while the matter is ongoing. As discussed last month, we executed security sales, which generated $50.5 million of pretax gains.

These gains, together with identified expense savings and other revenue initiatives, substantially offset the impact of this charge. We are also providing an update on the Cantor Group 5 loan. We believe the $29.6 million specific reserve established in Q3 has been validated by current as-is appraisal values across all the collateral properties as well as our updated lien positions. We believe recoveries on this loan will be realized in the future from multiple sources, including springing guarantees from ultra-high-net-worth guarantors and a mortgage fraud policy. Due to the complexity and potential duration of the resolution process, we charged off $26 million of this loan during the quarter. Turning to Q1 results.

Deposit growth was exceptional at $5.6 billion on a quarterly basis, putting us ahead of pace to reach our $8 billion deposit growth target for 2026. This outperformance positions us to accelerate deposit optimization programs, which should further reduce funding costs and support net interest margin, even absent interest rate cuts this year. In the first quarter, interest-bearing deposit costs declined 21 basis points, contributing to a 3 basis point quarterly increase in net interest margin to 3.54%. Total loans grew $903 million this quarter, split nearly evenly between the HFI and HFS portfolios. We grew HFI loans 3.2% on a linked-quarter annualized basis and 8% compared to the prior year.

We deliberately grew the HFS portfolio with lower risk-adjusted weighting so we could repurchase shares and remain at our target CET1 ratio of 11%. This strategy afforded us the opportunity to delay loan growth into Q2 and reevaluate the credit, macroeconomic, and geopolitical environments. We have not backed away from our $6 billion target. Overall, core asset quality remained steady as net charge-offs for the quarter, excluding fraud-related credits, were marginally higher than the upper end of guidance. We believe the portfolio is past peak stress, particularly within office CRE, as we have seen classified loans increasingly migrate towards resolution instead of further deterioration. Classified assets to total assets declined 9 basis points from the prior quarter to 1.08%.

We are positioning nonperforming loans to decline in the back half of the year, with several credits to be resolved by Q3. We continue to manage our capital dynamically in an evolving macro environment. During the quarter, we repurchased 700,000 shares at a weighted average price in the low seventies, reflecting our conviction in the intrinsic value of the franchise. Strong capital generation drove an adjusted return on average assets and return on average tangible common equity of 1.0% and 14.2%, respectively. This supported a stable CET1 ratio of 11% and ACL ratio of 87 basis points, while compounding tangible book value per share 13% year over year.

Overall, we delivered strong balance sheet growth, net interest margin expansion, and sustained core earnings momentum underpinned by healthy risk-adjusted PPNR, while also opportunistically defending the stock through accelerated share repurchases. Western Alliance Bancorporation continues to benefit from a highly diversified franchise, differentiated market positioning, and deep integrated relationships with our clients that enable us to perform across a wide range of economic scenarios. At this time, Vishal will now walk you through our results in more detail.

Vishal Idnani: Thanks, Ken. In the bottom right corner of slide three, we highlight two earnings adjustments this quarter. The execution of a series of security sales generated aggregate pretax gains of $50.5 million. These gains partially offset the impact of the LAM provision and together reduced net income by $62.1 million, or $0.57 per share on a net basis. As a result, my comments on our adjusted performance exclude these items, as we do not view them as reflective of the ongoing run-rate outlook of the business. Turning to the income statement on slide four, net interest income of $766 million was in line with the fourth quarter and increased approximately 18% year over year.

Lower funding costs, driven by declines in interest-bearing deposit costs, helped offset pressure from lower loan yields, while higher average earning assets also supported NII stability. Noninterest income increased 18% quarter over quarter to approximately $253 million. Excluding securities gains realized in both Q1 and Q4, noninterest income would have declined modestly by $5 million, largely due to lower mortgage activity. Service charges and fees increased $15 million sequentially, primarily reflecting strong performance in our Juris banking business, with the corresponding but smaller offset flowing through other noninterest expense. Mortgage banking revenue was stable year over year but declined $18 million from the prior quarter.

Importantly, fundamentals across the mortgage business continued to improve, with gain-on-sale margin expanding 18 basis points year over year to 37 basis points and loan production volume increasing 18%. Q1 mortgage earnings were impacted by the sharp backup in interest rates, highlighted by the 10-year Treasury yield rising 33 basis points in March. Elevated rate volatility during the month also created modest headwinds for hedging performance and servicing income. Early April results indicate mortgage banking is reverting to levels seen in January and February before rates backed up. Noninterest expense increased about $22 million from the prior quarter to $574 million. Excluding the FDIC special assessment rebate last quarter, noninterest expense only increased about $15 million.

The increase reflects higher compensation expenses related to annual merit increases and other typical Q1 costs. Deposit costs declined from a full-quarter impact of two Fed funds rate cuts in Q4. As mentioned earlier, the increase in other noninterest expense was partly driven by higher Juris banking fee revenue and related expenses. Adjusted pre-provision net revenue was $394 million, up 42% from the same quarter a year ago. Provision expense was $87 million, excluding the LAM charge-off cited earlier. Adjusted net income available to common stockholders was $241 million, representing a meaningful increase from a year ago, and generated adjusted EPS of $2.22, up 24% compared to reported EPS in the prior-year period.

Now turning to the balance sheet on slide five. Cash and securities rose meaningfully toward quarter-end, driven by strong deposit growth. As we execute our deposit optimization strategy, we expect the relative size of cash and securities to total assets to return to more normalized levels seen in Q4, while our loan-to-deposit ratio returns to the mid-70s. Total loans increased $903 million from the prior quarter. Diversified and meaningful contributions from mortgage warehouse, Juris, HOA, and regional banking drove $5.6 billion of quarterly deposit growth. We view this outsized growth as providing flexibility to further optimize deposit funding costs throughout the year.

As deposit growth approaches our 2026 target of $8 billion, our balance sheet expanded in total by $6.1 billion from year-end to just shy of $99 billion in assets. The slight decline in total equity resulted from more active share repurchases and a rate-driven change in our AOCI position, mitigating the impact from continued organic earnings growth. We opportunistically repurchased $50 million of shares during the quarter, bringing program-to-date repurchases to 1.6 million shares, or $120.4 million at an average price of $76.55. Looking closer at loan growth trends on slide six, HFI loan growth continues to be powered by C&I loan categories. Nearly two thirds of quarterly HFI growth came from C&I, with the remainder concentrated in residential loans.

From a business line perspective, regional banking was a primary driver of quarterly growth, led by homebuilder finance with solid contributions across businesses. Interest-bearing deposit costs declined 21 basis points from sustained cost reduction, despite growth in average balances. Overall, liability funding costs moved 12 basis points lower from Q4, mostly from lower deposit costs as well as reduced borrowing costs stemming from less reliance on short-term FHLB borrowings. On the asset side, the securities yield rose 5 basis points from the prior quarter to 4.59% due to a shorter day count. Despite the elevated level of security sales during the quarter, we were able to reinvest at slightly higher rates due to the recent backup in rates.

The HFI loan yield compressed 16 basis points following a full-quarter impact of rate cuts made in late October and December. Looking at slide nine, net interest income was stable versus Q4 at $766 million, supported by $1.1 billion of average earning asset growth and lower funding costs. Earning asset growth was driven by C&I loan growth as well as higher held-for-sale balances. Net interest margin expanded 3 basis points sequentially to 3.54%, reflecting meaningful reductions in funding costs. The interest cost of earning assets declined 12 basis points while the earning asset yield compressed only 8 basis points, with rounding accounting for the net 3 basis point improvement in margin.

Strong back-loaded deposit momentum increased liquidity toward quarter-end, as evidenced by the significantly higher period-end cash balance despite a slight decline in average balances during the quarter. Turning to slide 10, the efficiency ratio of 56% and adjusted efficiency ratio of 48% both improved by approximately 8 percentage points year over year. We continue to realize strong operating leverage as year-over-year revenue growth outpaced noninterest expense growth by approximately 3 times. As discussed earlier, noninterest expense increased $22 million in Q1, or approximately $15 million when adjusting for the FDIC special assessment rebate recorded in Q4. The increase was primarily driven by seasonally elevated compensation costs as well as incremental expenses incurred to support higher Juris banking fee revenue.

Deposit costs declined $8 million due to lower rates, although higher balances driven by momentum in HOA and Juris partially offset the benefit from the rate reductions. On slide 11, you will see we remain asset sensitive on a net interest income basis. When factoring in the potential impact on earnings from mortgage banking revenue growth and also reduced deposit fees, our model now indicates we are slightly liability sensitive on an earnings-at-risk basis in a down 100 basis point ramp scenario. In this scenario, earnings are now expected to rise 1.7%, mostly from improved forecasts in mortgage banking. On slide 12, we highlight several metrics demonstrating core asset quality remains stable, excluding fraud-related charge-offs.

Classified assets as a percentage of total assets continued to improve, declining 36 basis points year over year to 1.08%. Criticized assets were largely stable sequentially, increasing modestly by $60 million to approximately $1.47 billion, while special mention loans increased $78 million quarter over quarter. The change was not thematic, and the balance remains $57 million below first quarter 2025 levels. Nonperforming loans and OREO declined 7 basis points quarter over quarter as a percentage of total assets. Now let us move to slide 13 to review our allowance and coverage ratios. Provision expense was $87 million, excluding the LAM charge-off, and replenished other net charge-offs as well as supporting incremental loan growth, primarily in C&I.

Our allowance for loan losses remained constant at $461 million, or 78 basis points of funded HFI loans. The total loan ACL to funded loans ratio also remained constant at 87 basis points. Over the medium term, we expect the allowance for loan losses to trend into the low-80 basis point range, reflecting a higher proportion of C&I loan growth within the portfolio. Our total ACL still fully covers nonperforming loans, shifting higher to 105% coverage at the end of Q1 compared to 102% a quarter ago.

Looking at capital on slide 14, our tangible common equity to tangible assets ratio declined approximately 50 basis points from year-end to 6.8% due to approximately $6 billion in asset growth, increased share repurchases of $50 million, and a rate-driven change in our AOCI position. We believe our active buybacks in Q1 were prudent uses of capital, given the modest difference between where our stock was trading in early March and our tangible book value per share. Nevertheless, our CET1 ratio remained at our targeted level of 11%. Turning to slide 15, tangible book value per share increased 13% year over year and has grown at an 18% CAGR since 2015.

The gap between historical tangible book value accumulation and peers stands at four times. Western Alliance Bancorporation has been a consistent leader in creating shareholder value over the medium and long term. On slide 16, we have provided 10 metrics that highlight how we stack up against our peers on earnings growth, profitability, and other critical factors that drive financial results and create durable franchise value. We view these metrics as important in compounding tangible book value and ultimately generating a long-term superior total shareholder return. For the last ten years, our EPS growth and tangible book value per share accumulation have ranked in the top quartile relative to peers. We are also the leader in tenure and adjusted efficiency.

We continue to make strides towards top quartile returns on average assets, deposit and revenue growth, and average tangible common equity. I will now hand the call back to Ken.

Kenneth A. Vecchione: Thanks, Vishal. Our updated 2026 outlook is as follows. We reiterate our expectation for $6 billion of HFI loan growth, as our business pipelines remain robust. We will continue to actively evaluate risk-adjusted returns across the pipeline.

Vishal Idnani: Should spreads become less compelling, our appetite for some of these loans may change. Our $8 billion deposit growth target remains unchanged. As you heard during our prepared remarks, excellent year-to-date deposit growth provides ample liquidity and flexibility to remix deposit concentrations in order to lower interest-bearing deposit costs, improve the NIM, and better position the bank to achieve EPS targets, while still achieving 2026 deposit balance objectives. As a result, it is reasonable to assume deposit balances should be flat in Q2, with performance returning to more normalized levels beginning in the third quarter. Our CET1 target remains 11%. We continue to evaluate capital levels relative to peers and believe our current position remains appropriate.

Accordingly, we do not expect capital ratios to meaningfully change from these levels over the near term. Net interest income growth continues to be projected in the range of 11% to 14%. While the range is unchanged, we now expect results to trend towards the upper end of the range. This reflects three key factors. First, our largely variable-rate loan portfolio benefits from an outlook which now assumes no rate cuts this year, compared to one cut previously assumed in Q2 and one in Q3. Second, our full-year loan growth outlook is unchanged. Third, optimizing deposit composition will provide opportunities to mitigate interest expense as interest income accelerates with loan growth.

Taken together, we expect the net interest margin to experience modest expansion relative to full-year 2025 levels. Noninterest income, excluding the impact of security sales, is projected to grow between 13% and 17%. This reflects strong underlying momentum across the franchise, driven by higher expected growth in our Juris banking business and a return to the solid trajectory in mortgage banking activity experienced prior to the March rate volatility. Previewing April’s results, mortgage performance has begun to return to January and February levels. Improved growth in commercial banking fees is also expected to contribute to higher fee income growth. Total noninterest expense is now expected to increase between 7% and 11%.

Our deposit cost range of $650 million to $700 million reflects higher average balances from stronger performance in select deposit businesses as well as the removal of projected rate cuts from our 2026 forecast. Operating expenses are now expected to be between $1.6 billion and $1.65 billion, driven by higher variable compensation, incremental costs associated with increased banking fee revenue, and continued investments in new business and technology. Importantly, these projections incorporate the $50 million of projected expense savings identified in early March, which will not impact LFI readiness or our key strategic growth initiatives. Our revenue and expense outlook continues to reflect solid operating leverage supported by continued improvement in our adjusted efficiency ratio.

With respect to asset quality, we reaffirm our core net charge-off guidance of 25 to 35 basis points, excluding the two fraud-related charge-offs recognized in Q1. Based on current migration trends and the expected cadence of NPL resolution efforts, we anticipate full-year results will be at or slightly above the midpoint of this range, with charge-offs declining in the back half of the year. Our full-year 2026 effective tax rate outlook remains approximately 19%. And finally, we are excited to host our inaugural investor day in less than three weeks. We look forward to seeing many of you there in person on May 12. We will now open the call for questions.

Operator: We kindly ask that you limit your questions to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Timothy Clark with Piper Sandler. Please go ahead.

Matthew Timothy Clark: Hey. Good morning.

Vishal Idnani: Good morning.

Matthew Timothy Clark: Just to touch on the five, you wrote off $26 million, I believe, of the just under $30 million that you had reserved. And I think that suggests you have just around $70 million left tied to that exposure. Can you just give us a little color on whether or not you are relying on personal guarantees to cover the remaining amount here? Because I believe they are suing one another and not sure how easy it is to get at that liquidity.

Kenneth A. Vecchione: I think I got your question. On our last earnings call, we said that we were in the process of getting and receiving appraisal values. All the properties have been appraised and all the appraisal values held to what we originally had forecasted or originally had in the old appraiser. That was good news, point one. Second bit of good news was that the liens in front of us were less than what we thought. So what we have done is mapped out several different strategies to resolve this issue, trying to collect on the equity that sits behind these buildings.

At this time, we feel taking the charge-off of $26.5 million is reflective of the strategies we are going to put forward to collect the remaining equity value that sits behind all the properties. We have not incorporated any of the ultra-high-net-worth individuals’ guarantees in coming up with the $26.5 million, nor have we captured the mortgage bond, which is up to $20 million after a $5 million deductible. So that is why we said we took the $26.5 million now. We have a number of resolution strategies. This will take some time.

We are not going to talk about this every quarter, but as we go through the resolution strategies and finally get to the outcome, we will then turn our attention to the high-net-worth individuals and go after them, and then also whatever we do not collect from them, we will then put against the mortgage bond. So we think the $26.5 million is appropriate now. We do not see any other charge-offs or reserves coming from this point, and we believe recoveries will come later on in the process. I hope that answers your question.

Matthew Timothy Clark: That is helpful. Thank you. And then just on the service charges up again, driven by Juris. How should we think about a normalized run rate there? I know it is difficult, I am sure, to guesstimate, but what do you view as a more normal run rate? And I assume we would see a reset in related expenses from that business.

Vishal Idnani: It is Vishal here. Thanks for the question. We agree it is hard to do this. These fees tend to be a little bit lumpy. As we mentioned, we have a leading practice with the mass tort settlement here. We did talk about the Facebook Cambridge Analytica settlement that we had, and I think we got more of the revenue from that in the first quarter than we initially anticipated. So that is why you have the elevated number in Q4 and Q1. We do anticipate that number going down in Q2 and Q3, and then in Q4, you could see a higher spike as well.

But it is hard to give you more clarity around that because it will just depend on how that comes through. What we will say is that the business continues to do well, and we have won the next large settlement. It is just a matter of timing around that.

Operator: Your next question comes from the line of Jared David Shaw with Barclays Capital. Please go ahead.

Jared David Shaw: Hey. Good morning. Thanks.

Vishal Idnani: Good morning.

Jared David Shaw: When we look at the deposit costs on the guide there, how should we think about the ECR beta in this environment with now no cuts? Where should we think that ultimately settles out?

Vishal Idnani: Hey. It is Vishal here. Overall, when we think about the ECR deposit beta, I think it is in line with what we were thinking before, which is 65% to 70% when you think about the three businesses that have ECRs. Obviously, they are very specific to each one. In the mortgage warehouse, we tend to think of the beta as up to 100%, maybe in the 90% to 100% range. The other two businesses we have are Juris and HOA. The deposit beta on that tends to be around 35%. So when you blend those together, you get that 65% to 70%.

The next piece of your question is our deposit costs went up because we did take the rate cuts out of the forecast. Where do we anticipate that going? We are continuing to push down on the cost. Given the big increase in deposits in the first quarter, we are going to make a concerted effort here to optimize the deposit cost across the company throughout the rest of the year. I would also tell you on the mix of the ECRs, we are planning to hold the mortgage warehouse deposits more flat and focus more growth in HOA and Juris. That should also help push the ECR cost down over the course of the year.

Jared David Shaw: Okay. Thanks. And then as my follow-up, looking at asset quality, and maybe the criticized/classified, how are you looking at your exposure to software companies in the tech and innovation sector? Is that driving any credit migration here?

Kenneth A. Vecchione: No. It is not driving any credit migration at this time. The conversation that is out in the marketplace is really around private credit. We have a very limited exposure inside of our private credit book to technology, and specifically software companies are under 5% of our total book. More importantly, we have such a granular approach in that book of business whereby all the credit that we have granted to the clients is roughly $4 million on average in commitment and $2 million drawn against the $4 million of commitments. So we are not seeing any problems in that book at this time, and it is not reflected in our criticized or classified asset viewpoint.

Operator: Your next question comes from the line of Casey Haire with Autonomous. Please go ahead.

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

Kenneth A. Vecchione: Good morning.

Casey Haire: I have a million questions on NIM. I guess I will start with the loan-to-deposit ratio. Vishal, I heard you say you plan to get normalized cash and get back to a mid-70% loan-to-deposit ratio. Just in terms of timing, how quickly do you expect to get there? And a little more color on the deposit optimization plan if you can.

Vishal Idnani: On the loan-to-deposit ratio, that is the target. When you think about our loan and deposit growth targets, $6 billion and $8 billion, that is 75% when you think about the target. I would say by the end of the year, that is the plan. It will also come down to the deposit optimization. We might actually see deposits in the second quarter not at the typical run rate you would see from us given this optimization. Plan for it at the end of the year. Hopefully, we will get there on the sooner side because we are trying to bring loan growth up to the earlier part of the year.

On the deposit optimization, we are going to continue to work through that. As you can see from the first quarter, up $5.6 billion in deposits, close to our $8 billion target already, I think it just gives us a lot of flexibility to go to the highest-cost deposits in the bank and see where we can push those rates down.

Casey Haire: Okay. Great. And then on the capital front, have you guys looked at the Basel III proposal and what that means for you guys in terms of capital ratio lift?

Kenneth A. Vecchione: Yeah. Actually, it is very positive for us. All in, we expect it, based on the rules that we are reading, to increase CET1 by 81 basis points.

Operator: Your next question comes from the line of David Charles Smith with Truist Securities. Please go ahead.

David Charles Smith: Hey. Good morning.

Vishal Idnani: Morning.

David Charles Smith: If the operating expense guide is $20 million lower than January following the $50 million in mitigating actions, does that mean that you are expecting an extra $30 million of variable comp for production? Or is there anything else underpinning that as well?

Vishal Idnani: You are right. We mentioned $50 million. We are only down $20 million. The answer there is twofold. One, our Juris banking fee income was higher than we anticipated, and therefore, what you are seeing are the expenses which find their way into operating expenses. And the second thing that we said in our prepared remarks is that we expect the mortgage business to do better than we initially planned, and the variable compensation relates to the fact that we will be hiring up people to support increases in mortgage income. So those two or three things taken together bring the operating expenses down by $20 million.

David Charles Smith: Okay. And then you mentioned the plan to hold mortgage warehouse deposits flat over the course of the year. If the market is rebounding from a depressed level in March, does that mean that you are expecting to lose share somewhat in mortgage warehouse? Or can you expand on that?

Vishal Idnani: So let us be very candid here. We are trying to finesse the deposit growth and deposit pricing in this bank. We are starting with warehouse lending where we have some of the higher-cost deposits. We are going to work with our clients to see if we can move some of those higher-priced deposits out of the bank. We expect that our overall deposit growth for Q2 will be flat because we will be accelerating some of these deposits outside of the bank. We then expect Q3 to have its seasonally high production, and we expect less runoff in Q4 since we moved a lot of the deposits out of the bank in Q2. This is a finesse operation.

We will give you more update on this, a little more color, at the investor day as we work with our clients to do this as well. This is a little bit of a tougher one to forecast, but the direction is very clear, which is we are trying to lower deposit costs, lower interest expense, help support NIM going forward, and actually bring up our loan-to-deposit ratio so we do not have to carry this excess liquidity at either a flat or negative drag to the bank.

Operator: Your next question comes from the line of Timur Felixovich Braziler with UBS. Please go ahead.

Timur Felixovich Braziler: Hi. Good morning.

Kenneth A. Vecchione: Good morning.

Timur Felixovich Braziler: Ken, you had made a comment about reevaluating credits, the macroeconomic backdrop, and the geopolitical environment when talking about pushing out some of the loan growth into the second quarter. Can you maybe unpack that comment a little bit? And maybe what does that mean for loan composition going forward, if that changes at all?

Kenneth A. Vecchione: I think we were just a touch conservative here, and we did not push to accelerate closings in this quarter. We had the time to negotiate. There was not an urgent press from the clients to close before the quarter end, and we just took a little bit of a wait-and-see approach. What we are seeing and what we are feeling and what we are reading—and this is your guess as good as ours—we feel there will be some type of ceasefire that will continue on. We are certainly seeing the robust pipelines that are in front of us, and we are still encouraged that we will achieve the $6 billion on a go-forward basis. Timothy R.

Bruckner runs regional; he is sitting here. Tim, do you have anything you want to add to that?

Timothy R. Bruckner: Yeah. I think when you really look at Q1 in particular, and it signals a view into our look-forward, we really saw the preponderance of the asset growth in those core commercial full-relationship segments that we have consistently talked about on this call. Where we pulled back a little bit or showed some hesitancy was in some of the asset-specific finance-oriented segments, predominantly the commercial real estate-related segment. So we are really committed to that full relationship. Growth in our pipelines in those segments is robust and, of course, with appropriate sensitivity to the market conditions.

Timur Felixovich Braziler: Okay. And then one on credit for me. Just maybe reconcile your comment on being past peak credit with just the pickup in special mention and 30- to 89-day delinquencies. And I am wondering, with the allowance ratio here at 78 basis points, if there is anything incremental that would need to be done there as we get closer to or breach that $100 billion level.

Kenneth A. Vecchione: I am going to team up here with Bruckner on this answer, but first part on the special mention: special mention increasing $75 million is really no big whoop, alright, and I would not get nervous about it. When we looked at fourth quarter results for our peer group, for example, which consists of 22 banks, our total criticized assets, which includes special mention, were 15.7% of criticized assets to Tier 1 capital plus ACL. That is well below the peer median of 25.5%. It actually puts us at the third best of the 22 peer group.

So, at our size, having something move in and move out does not necessarily mean our asset quality is deteriorating or getting materially better. What we do here—you have heard this—is an early process of early identification, escalation, and then resolution.

Timothy R. Bruckner: I would really say on special mention, that is a transitional rating. That is a rating that signals early warning and a potential problem loan, and we use it in a very directed way as transition. If something has the characteristics that, with the passage of time, would result in a problem, we mark that as a problem loan. Our credit process is conservative in that respect, and we push resolution. Early elevation, early resolution is our mantra there.

Kenneth A. Vecchione: And on ACL reserves, I think what we said last quarter and still holds true this quarter: as we migrate and change the loan composition here, moving more into C&I, you will see the loan loss reserve move up from where it is today at 78 basis points into the low 80s. You will see that all throughout the year, and I would expect the provision will follow that. So you ought to plan accordingly, and that is very consistent with what we said last time.

Operator: Your next question comes from the line of Christopher Edward McGratty with KBW. Please go ahead.

Christopher Edward McGratty: Great. Good morning.

Kenneth A. Vecchione: Good morning.

Christopher Edward McGratty: Ken and Vishal, on the pace of buybacks, you mentioned, obviously, being there to step in when the stock was weak in the quarter. How do we think about balancing the benefit from Basel over time, the low valuation in your stock, and the strong capital position? Is there a scenario where you could perhaps slow or further optimize the balance sheet and just lean more on the buyback given the valuation?

Kenneth A. Vecchione: Strategically, what is very important for us is to work to continue to lower deposit costs. We have several businesses—corporate trust, business escrow services, our digital asset group, and Juris Banking—that really depend on credit ratings from the rating agencies, and we are investment grade. It is very important to sustain that or improve those investment ratings. We think keeping our CET1 ratio at 11% is the appropriate thing to do and, slightly over time, continue to migrate that number upward. For long-term value, it is more important for us to maintain the ratings. Secondly, unlike many of our peers, we still see a very strong pipeline in front of us.

Longer term, we think having the capital to support that long-term growth will help investors and will support investors’ trust in us as we continue to grow the bank. So, Chris, we are not expecting to go deep back into the market to do stock buybacks. They are not in our models right now. If there is a reason for the stock—if it gets disrupted in the market—then we will come back and look to support it as we did in Q1.

Christopher Edward McGratty: Understood. Thanks for that. And then just digging into the mortgage a little bit, could you help us on a Q2 estimate for mortgage revenues? You mentioned trends in April reverted back to early Q1. I know there have been moving parts—servicing and production. Thanks.

Vishal Idnani: I can jump in on this. I will make a couple of comments on mortgage banking. We were in line with the same quarter a year ago. Obviously, the business is seasonal. We were down $18 million from the fourth quarter of last year. As Ken mentioned, we are very constructive on the trajectory of mortgage banking in 2026, especially given the current administration’s focus on home affordability. January and February were good months. In March, there was a slowdown with the spike in interest rates. Fortunately, we are seeing that activity come back in April. For the full year, we are expecting revenue from mortgage banking to grow about 15% over last year’s level.

Encouragingly, the gain-on-sale margin was up 7 basis points quarter over quarter and up 18 basis points from the same quarter a year ago. That margin improvement is being driven by increased retail recapture volume at AmeriHome, and we hope to see that continue. While volumes were down in Q1 compared to Q4, volumes were materially up 18% from Q1 last year, and the trajectory looks good for the rest of the year.

Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner: Thanks. Good morning. I just wanted to check to make sure I understood the way you are parsing that lender finance data on slide 20, that private credit slide. Does that $2.3 billion basically represent the rightmost slide, the NDFI—slide 24—or make up the vast majority of it? Is that the right way to think about it?

Vishal Idnani: I think if I got your question right, you are trying to figure out, on page 24 where we break out the NDFI bucket, where that lender finance sits. It is going to be in that business credit intermediary. The large proportion of that 5% of the loans—call it about $3-something billion—is going to be our lender finance book. Our lender finance book on page 20 is $2.3 billion within that category when you look at the NDFI loans.

Gary Tenner: Okay. That makes sense, and that is what I was thinking. I am just curious—you point out that the average funded amount per obligor is quite light. I am just curious on the level, the average would be around $40 million I think. So I am wondering what the range is and what the top end of exposure is on the fund level.

Kenneth A. Vecchione: The top end for any one credit inside of our private credit portfolio is about $60 million of commitment, of which we have about $30-odd million funded, and that is the largest credit that we have. As we said, it is very granular inside of our private credit book.

Gary Tenner: Alright. That is very helpful. Thank you.

Kenneth A. Vecchione: I will just add on that: I did a tour maybe three, four weeks ago, as soon as all the private credit noise hit the market, with our largest private credit clients—and you would all know them by brand names. What they were telling us was exactly what we were seeing inside of our book, which was credit was performing well. There were redemption requests mostly coming from the retail side of their LP base, and institutional LPs were remaining confident about performance. We are clearly seeing that as well inside of our book.

Vishal Idnani: And, Ken, if I can add just a couple of things on the book. On page 20, you will see how granular it is. The other thing we would flag here in this bottom right bullet is we actually also serve as the trustee on about 60% of this, which helps us a lot in terms of oversight and monitoring the cash flows in and out on a bunch of these deals.

Operator: Your next question comes from the line of Analyst with TD Cowen. Please go ahead.

Analyst: Hello. So just to piggyback on the earlier question, can I interpret that as within the lender finance, there is no loan that is over $100 million in size? And if we broaden that outside of lender finance—just overall—are you able to share the number of exposures that are over $100 million in size as an example?

Kenneth A. Vecchione: No, we are not going to share that, but loans to funds are much larger. Inside of the fund, the composition of the clients inside of that fund—or the borrowers that they are lending to—are the numbers that I just reported. But, yes, we have larger size. We have about 40 major funds that we are doing business with, and the size is larger.

Analyst: Got it. And if I look at the lender finance portfolio, the $2.3 billion, when you were talking about the reserve ratio over time in the medium term coming down to low 80s—Is there any change in reserve methodologies that you would embed differently on the lender finance portfolio going forward? Or how should we think about—

Kenneth A. Vecchione: Let me just change that statement for you. We are moving the loan loss reserve from 78 to the low 80s. We are not taking it down, okay? You are not going to be seeing releases here. We are looking to build our provision over time. In fact, looking at this last night, from about three or four quarters ago, our peer group has increased their reserve by 11 basis points on average, and over that same time, we have increased our reserve by 10 basis points. But we do not plan to release anything.

Vishal Idnani: You may be looking at the total ACL to funded HFI loans, which sits at 87 basis points right now. You are going to see that trend into the low 90s. As Ken mentioned, the loan loss reserve to funded HFI loans is at 78 basis points. That was flat quarter over quarter. We are going to push that into the low 80s. You will see that with the natural movement in the loan balances, and the total ACL to funded loans is going to go from 87 to the low 90s.

Analyst: Right. That is what I was referring to. Thank you for the clarification. Is the lender finance portfolio going to grow further from here along with the size of the rest of your loan book, or would you like to slow the growth in this segment for any reason?

Kenneth A. Vecchione: I think it will grow as the rest of the portfolio grows. I do not think we are going to put any incremental acceleration to the private credit book at this time.

Operator: Your next question comes from the line of Analyst with Wells Fargo. Please go ahead.

Analyst: Hi. Thanks for taking the question. I just want to follow up on Timur’s question earlier. What would it take for the loan reserves—the all-in measure, if you will—to go to 1%?

Kenneth A. Vecchione: If you want the numeric number, take the percentage and multiply it by ending loans. But if you are wondering what it would take, it would take a change in the economy. We are not seeing that. The economy is strong. We have a process here whereby the first line presents and develops the loan loss reserves. Second line comes in and reviews and comments on it. We have a third line that comes in to make sure that the first and the second lines are doing it correctly. Then we have the Federal Reserve, and our outside auditors come in and review the whole process.

So I cannot walk in here and say, “Let us move it up 20 basis points.” I have to have a foundation for that. Everything is based on economic forecasts, and we base them off of Moody’s, and then we look at our overall portfolio. I will remind you, half of our portfolio really has never had a loss.

Vishal Idnani: And when you look at the total ACL to funded loans—the 87 basis points—and we have about $8 billion of resi mortgages where we have sold credit, if you just move that out of the loan base, the ACL to funded loans is 1%.

Analyst: Got it. Thank you. And then just for clarification, is there a run-rate number you can give for the service fees at all, or did you just give some directional commentary on where it is going over the next few quarters?

Vishal Idnani: We are not going to provide a run rate here. We have given guidance for what the fee income is going to do over the course of the year, and you can back out the securities gains and see that growth of 15%. We have also given guidance around what we think mortgage banking will do within there. You can back into the number. We do see that number trending down in the second and third quarter on service charges and fees and then back up in the fourth quarter, but it will get you to the full run-rate guide that we are giving here in the deck.

Operator: Your next question comes from the line of Bernard von-Gizycki with Deutsche Bank. Please go ahead.

Bernard von-Gizycki: Hey, guys. Just on the resolution process that you previously mentioned during the quarter—the $126 million charge-off against the LAM loan—you identified the $50 million security gains and the $50 million of cost savings. The remaining $26 million, that may be already covered in the updated fee guide, but any updated color on this?

Kenneth A. Vecchione: You are right. We took $50 million in revenue and $50 million in expenses. We have not articulated how we are going after the last $20 million or $26 million. We will see if we can work our way to resolving that during the course of the year. But we have enough in front of us to do. Quite frankly, you and many of your colleagues were suggesting that we should not fully resolve the $126 million charge-off, to ensure that we have enough money available for product development, enhanced services, and also to ensure that our loan growth and deposit growth continue on the trajectory that they are at.

So we have been taking that advice to heart, and we only offset $100 million against the $126 million as a solve.

Bernard von-Gizycki: Great. And then from here, the Investor Day is coming up. Any preview on what you intend to convey? Any big-picture messaging you can share with us today?

Kenneth A. Vecchione: We are not like MGM where we give a preview, but one of the things that we are going to talk about is the question we get all the time: why can we grow when other banks cannot? We are going to spend time showing you how we grow and how we think about growth over several horizons, and how the growth that we have is not by accident, and it is not that we run forward to anything that is fashionable today. It has been well thought out for an extended period of time. I think it will be interesting to have you look under the hood and see how we position ourselves for growth inside the bank.

Operator: Your next question comes from the line of Anthony Albert Elian with JPMorgan. Please go ahead.

Anthony Albert Elian: Hi. Ken, your earlier comment on accelerating some deposits out of the company—I do not think I have heard that before, from a company that has grown as fast as you do. Is that entirely driven by taking a sharper focus on ECR costs now? Will the plan to move deposits out of the company be fully completed here in 2Q? And any other areas of focus as part of this deposit optimization plan?

Kenneth A. Vecchione: Stepping back and taking a big-picture look, our bank grows every year about the size of a small regional bank. Most banks do not do that. That is point one. Point two, we had a phenomenal deposit growth quarter. It exceeded our wildest imagination. We thought we would maybe get to $3 billion; coming in at $5.6 billion was far greater than we thought. Third, where those deposits came from—they came in from some of our higher-priced customers, which led us to take a step back and ask, how do we optimize here?

What we are trying to do—and as I said earlier, this is a finesse game—we have already started the process to remix, maybe reprice, and encourage some deposits to leave the bank. We are trying to be aggressive on it, and we are trying to get it done quickly by the end of the second quarter. That is why we have given the guidance that our deposits may be flat quarter to quarter. But a lot of this is also going to depend on our clients and what they want to do. That is the game plan, and we will be able to report on it in a little more detail on Investor Day.

The goal is to work to bring deposit costs down by doing that. It is either interest expense or it is on the deposit cost side.

Anthony Albert Elian: Thank you. And then is the outlook for higher ECR costs entirely coming from now assuming no cuts versus the two cuts previously? Or is this mix shift change—the deposit optimization plan—embedded in the deposit growth outlook of what you expect? Thank you.

Vishal Idnani: Sure thing. I would say the large preponderance of it is removing the two rate cuts. More than half of that delta—you will see the deposit costs are going up $115 million at the midpoint—more than half of that is backing those two rate cuts out. The other driver has to do with volume. Volume was much higher in the first quarter. If you actually were to maintain those balances, you are going to just have higher deposit costs as well. The offset to this is what Ken talked about, which we are going to work through here over the next quarter: how do you adjust for that and optimize it?

Basically, we are giving you the higher deposit guide here. It includes the base-case run rate we have right now. It is a mix of rate and volume, driven primarily by rate.

Operator: That concludes our question and answer session. I will now turn the call back over to Kenneth A. Vecchione for closing remarks.

Kenneth A. Vecchione: The only thing I will say is we look forward to seeing you all on May 12 in New York. I think the start time is 08:30 for our first investor day. We look forward to spending more time with you. Thanks again for your time and attention today.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect.