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spk01: 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 Myles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
spk03: Thank you and welcome to Western Alliance Bank's first quarter 2024 conference call. Our speakers today are Ken Becchione, 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 updating a forward-looking statement. For more complete discussion of the risks and uncertainties that can cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8 file yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Becchione.
spk02: Good morning, everyone. 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 outlook, and then Tim Bruckner, our Chief Banking Officer, will join us for Q&A. 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 March. 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. We reached our CET1 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 allows us to pay down borrowings by $1 billion. In summary, our repositioning goals have largely been accomplished. I'm pleased that during the quarter of outsized liquidity growth, Western Lions 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 remained steady with special mention loans and classified assets declining $139 million in aggregate from Q4. Net charge-offs remain low at only eight basis points of average loans. Our excellent liquidity positions us to drive stronger loan growth starting in Q2. Loan growth should track proportionally with deposits to maintain our improved loan-to-deposit ratio and allow us to exit 2024 in line with market expectations. Dale will now take you through the financial results. Thanks, Ken.
spk07: During the first quarter, West Nines Generated reported pre-provisioned net revenue of $247 million net income of $177, and earnings per share of $1.60. Excluding the $18 million FDIC special assessment charge, PPNR was $265 million, net income $191, 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 borrowings. Noninterest 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. GAAP non-interest expense was $482 million, or $464, including the FDIC, as a special assessment. Deposit costs of $137 million were $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 a continued rebound in mortgage warehouse from seasonal lows. 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 expense of $15 million resulted from loan growth, as well as $9.8 million in net charge-offs, while our economic outlook remained stable. Lastly, our effective tax rate fell to 23.5% from a temporarily elevated rate last quarter. Loans held for investment grew $403 million to $50.7 billion, while deposits increased $6.9 billion to $62.2 billion at quarter end. As a result, our health for investment loan to deposit ratio fell to 81% from 91 last quarter. 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. Finally, tangible book value per share expanded $0.58 for the quarter to $47.30 from retained earnings, which more than offset a modest rate-driven increase in our negative AOCI position. Helper investment loan growth of $403 million occurred predominantly in CNI 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 innovations. CNI 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 CNI production, which has been a point of emphasis for the bank. Outstanding deposit growth of $6.9 billion resulted from broad-based growth in 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 million, and corporate trust added $160 million. Mortgage warehouse deposits reacquired the $3.5 billion and fully replaced Q4 outflows as our DDA deposit balance at 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, overinvestment loan yields increased 12 basis points due to the higher rate environment. Loan growth was weighted toward the end of the quarter as demonstrated by period end loan balances exceeding average balances by $1 billion. 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 23% from 21% in the fourth quarter as a result of these repositioning efforts, which have largely been completed. These efforts position as 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. cost of total interest-bearing deposits expanded 11 basis points, while the total cost of funds was flat at 282, as average short-term borrowing supplied 1.8 billion to 8% of average interest-bearing liabilities. 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 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 4.6%, quarter over quarter, even though average balances of VCR-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 produce low realized losses. In aggregate, special mention loans and classified assets declined $139 million from Q4. Non-performing assets increased $126 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. 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 than the nation at large. We see that in our submarkets, 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 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 funded loans of 74 basis points was stable, covering 94% of non-performing loans. Evaluation of NPLs, which primarily consist of real estate secured credits, are confirmed by fair value appraisals of collateral. Our CEC-1 ratio, again, drew 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 for retained earnings growth outpacing the higher AOCI offsets. 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.
spk02: Thanks, Dale. 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 Bridge Bank to enter into 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. In 2018 and 19, the bank entered, developed, and launched three specialty deposit verticals, settlement services, business escrow services, and corporate trust that expanded business diversification strategy and produced 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 which can be used as the foundation to reignite earnings, grow the balance sheet, and generate organic capital while ensuring asset quality remains safe and protected. So what does law look like in the future? Well, using and reinforcing the disciplines I 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 to deliver consistent upper teams, 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. We have fortified our balance sheet, which will allow the company to generate earnings velocity through the back half of 2024 and into 2025. To that end, from our first quarter results, we update our 2024 guidance as follows. Continue 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. For the full year, loans are expected to grow $4 billion, up from $2 billion, given the new client wins in 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 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 loans repricing in an elevated rate environment. Our expectation is that net interest margin will trough in Q2, but the full quarter effect of all liquidity bills, I'm sorry, with the full effect of all liquidity bills. while that interest income will continue to move higher from Q1 levels. NIMS should ascend due to repricing of existing loans and new loan originations, which all N should generate a full year NIM in the low 350s. Non-interest 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. Non-interest expense inclusive of ECR-related deposit costs is now expected to rise 6% to 9% from an annualized adjusted Q4 baseline of $1.74 billion, primarily from 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. 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.
spk01: 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.
spk17: Hey, good morning, guys. Just looking at the guidance with the expense growth primarily coming from the ECR, I guess, 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 spread early stages to the ECR?
spk07: No, it will help drive NII. The issue is that growth came in kind of randomly over the first quarter. We haven't genned 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, and that's going to hold that second quarter back a bit.
spk02: The prior guide, let me just add, 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.
spk17: Okay. All right. Thanks for that. I guess maybe shifting a little to the 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 link notes impact that? going forward and sort of the timing on that?
spk02: Yeah, so we see capital remaining modestly at or above 11% for the remainder of the year. Increasing loan growth above trend will absolve the excess capital formation for the rest of the year. I will note that since we started our repositioning strategy on capital from 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.
spk07: Yeah, as you recall, we collapsed two of our CLMs last year, the mortgage warehouse and capital call. We've got a few residentials that don't have substitution credits in them, so they are just running off. we're gaining about 40 to 50 basis points in CET1 from that.
spk01: Thank you. The next question comes from the line of Casey Hare with Jefferies. Casey, please go ahead.
spk14: Great, thanks. Good morning, guys. question on uh the loan and deposit growth just just wondering how you guys um got to those numbers i mean you guys have demonstrated um that you you're capable of of putting up um stronger stronger growth than that um and uh just wondering if it's conservative or if you're just looking to manage um manage the growth and and have an eye on obviously the the 100 billion uh line um so just just some color there
spk02: Yeah. So, Casey, 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 of $1 billion per quarter. And we feel rather comfortable with that based on the pipeline that get reviewed on a weekly basis. So, we are de-emphasizing certain areas, as you would expect, CRE office, residential, general construction, little cautious on multifamily, but we see better opportunities in warehouse lending group, MSR lending, the regional C&I business is beginning to take hold, resort lending, and maybe lot banking also give us the best risk-reward dynamics on the long side. So if we could do better than a billion, we will, as long as it's safe, sound, and possible growth. and the economic environment hasn't changed. But right now, we feel comfortable with a billion dollars. As it relates to the deposit guide, you know, we certainly had a monster quarter at $6.9 billion. A lot of that came in because of our, 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 monstrous. And in fact, we think we are now the leader in HOA deposits in the industry. And then the region also had a very good quarter as well for $1 billion. So taking together all that informs us that we think we're comfortable growing deposits $2 billion a quarter for the rest of the year. I will say, and this is 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 a year. And that kind of gives us the confidence level to say that $2 billion seems very reasonable and practical.
spk14: Yep. Okay. And then just switching to the expense front, just to clarify, does the expense guide do 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. 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, you know, what's the new expectation on that front?
spk07: 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 was some seasonality in cost, which we talked about a little bit, primarily related to, you know, compensation and FICA. we do believe that that we can get that number back to beginning with a four again um and uh but we would hope to have you know better performance i think is always much stronger from amerihome in that process we do think that uh there's a significant kind of pent-up demand uh with uh with amerihome um and that there's a lot of people that do want to you know move out of their house but they're kind of they're in love with their mortgage rate presently as the, when we had that dip down at the FOMC, you know, commentary after the, after the CPI in January, that really kind of came back, and we saw a lot more activity. You saw that in our numbers. So, with that, on the, you know, on the denominator side, you know, more steady, you know, situation on the numerator side regarding our ECRs, we think that number can trail down over time, but for now, I keep it in the mid-50s.
spk02: 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 what I would say. Okay?
spk14: Great. Thank you.
spk01: Thank you. The next question comes from the line of Steven Alexopoulos with JPMorgan. Steven, please go ahead.
spk18: Hi, everybody. I want to start.
spk02: Can you get a little closer to the phone? You're coming in muted.
spk18: Yeah. Could you hear me now? Much better. Thank you. Okay. So let me start on the deposit side. Ken, I thought you said 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.
spk02: Well, on average, $2 billion a quarter, but Q4 is a little softer, as you've seen last quarter, where the warehouse lending deposits roll out. So we think that's more of a practical guide. Basically, we're just trying to tell you, think about the end number of $11 billion is where we think we'll end up.
spk18: Got it. Okay. 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 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 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 about this now that you're at target, maybe that 5 billion-ish growth per year balance sheet?
spk02: So we've got a number of levers to pull, and we have a great deal of optionality. So first thing I'd say is, and the way we're thinking about it is, 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 could stay between that 80% and 85% level. And that's what we're going to try to target going forward. 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 it documented. 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 staying 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. Dale, you want to add anything to that?
spk07: Yeah, I mean, to say it another way, I expect that we can exceed those numbers, Steve, a bit, because paying down borrowings coincident with growing deposits faster than your $5 billion a year number.
spk01: Thank you. The next question comes from a line of Chris McGrady with KBW. Chris, please go ahead.
spk05: Oh, great morning. Ken and Dale, it feels like the $100 billion has obviously got a ton of attention. It feels like you've more or less addressed every piece of it. Obviously, there's ongoing regulation, but liquidity, expenses, capital, is that the message you're trying to send with the last actions of the last few quarters?
spk02: Yeah, so we are taking actions today and preparing to cross 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 And we wanted to get that done, and we've accomplished that. The other thing was let's get capital out of the way. We think 11% around that number is the right number going forward. So we've done all that. But behind the scenes also, Chris, is a lot more risk management bills that have to occur that's been basically built into the company over the last couple years. So where we are today, you know, we'll say we're about 75% of the way So it's being ready to be $100 billion. $100 billion is just a number for us. We're not looking to get there sooner. It will 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 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. It does have a return in how we think and manage the company. So we're happy that we're doing that as well.
spk05: Okay, great. Thank you.
spk01: Thank you. The next question comes from the line of Bernard Von Giziki with Deutsche Bank. Your line is now open.
spk13: Hi, good morning. So you guys had a nice quarter with fees, but you didn't change the full-year non-interest income guide outlook. You noted mortgage will be dependent on rate, 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? You know, additionally, you know, equity investments have picked up 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.
spk02: So, there are a couple of questions inside of that. I'll take a shot at it and then we'll fill in if I miss anything. 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 for mortgage is always lighter because of seasonal reasons. The gains you mentioned on the warrants, that's 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. 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 the lower point of the cycle.
spk07: Dale, would you add anything? Yeah, just a couple things. Other seasonality implications. So HOA, their best quarter is Q1, and that helped contribute to, you know, to 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 towards the upper end of our guidance. that's in the book regarding that interest income. And frankly, we're a little above the midpoint for non-interest income as well.
spk13: Okay, got it. And, Darrell, I think you noted earlier that you don't expect much 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 the 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 know, you kind of said the minimal mix. You know, where are you kind of thinking for the additional $4 billion? Would it be kind of similar as we kind of look at to the outside quarters?
spk07: 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 noninterest-bearing deposits. And I would hope that we could actually show growth there. We saw growth in the first quarter, and we're looking for that to continue. As you, maybe 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 money market.
spk01: Thank you. The next question comes from the line of Ben Gerlinger with Citi. Your line is now open.
spk15: Good morning, guys. Sorry about the background noise. I had to step out. I just had a question in terms of the ECR. I know you guys lowered the cut expectations to kind of two in the latter half of this year. But 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, do you think next year's expenses could actually be flat, if not down?
spk07: Yeah, I think that can certainly be the case. Also, it would probably help with revenue significantly on AmeriHome, as we discussed as well. Seth, another way, we were talking about this earlier.
spk02: 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
spk07: One more point, you know, getting to Ken's comment earlier about optionality. You know, one thing that this, you know, pool of liquidity gives us to enable us to do is to really one-off some of our higher-cost ECRs now, which we are undertaking, to push them down, 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, of course.
spk15: Gotcha. That's great. And it's nice to see Wall get back to the kind of the powerhouse that it 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 over 100, but just full-time technology or any kind of FinTechs, just any sort of capital deployment outside of the share purchase?
spk02: So it's still for us a little premature 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.
spk01: Thank you. The next question comes from the line of Matthew Clark with Piper Sandler. Matthew, please go ahead.
spk12: Hey, thanks. Good morning, everyone. On your interest-bearing deposit costs, they were up 11 bits this quarter. I think the prior quarter 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 and maybe stabilize next quarter or two?
spk07: Yeah, we're looking at really kind of stability across the board, both on asset repricing and on kind of liabilities here. There hasn't been, you know, since it's obviously been, you know, since last, you know, September, kind of the last kind of rate changes we were talking about in July. You know, 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's no great disparities between, you know, spot rates and kind of average rates presently.
spk02: 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 low 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 securities.
spk12: Yep, got it. Okay, and then just last one for me. The uptick in classified assets and non-performers, can you just speak to what drove those increases and kind of plan for resolution there?
spk19: Sure, sure. Jim Brockner, I'll take that. First, I'll just say the majority is related to secured investor real estate loans. This really revolves in the function of how we manage our portfolio. So we, as we've taken every opportunity to tell all of our constituents, we press hard for re-margining and have since early in the rate increase cycle. That drives to resolution. So the classified loans will move up as we reach the endpoint of a negotiation that doesn't result in an effective re-margin. We then take those loans and we ledger the balance appropriately based on the value of the asset. We apply all principal and interest payments received to reduce that loan balance. And 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 action here. And all the ones we moved in this quarter were all paid? Correct. Thank you.
spk01: Thank you. The next question comes from the line of Timmer Brazzler with Wells Fargo. Your line is now open.
spk16: Maybe just following up on that last line of questioning, could you just talk us through the interplay between non-performing loan migration and the allowance? I guess I was a little surprised to see MPLs move higher while overall allowance level is pretty much flat quarter on quarter.
spk19: Sure. Tim again. I think it's important to note in this context that The majority, we have a very small charge off every quarter. The majority of the charge that we took this quarter was really associated with adjusting the balances of those loans as they migrate so that we have plenty of coverage based on 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 that.
spk16: Okay. So, just the migration itself doesn't necessarily... What was that?
spk19: 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, 58, 59% is where we're at. So we look at this in the economy of credit underwriting collateral, 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 stay in balance.
spk07: Our charge 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. We're on a reserve level at 74 basis points, and the appendix of the earnings relief, we walk that up to the 130 level, considering the things that we have that we do that others don't do, like a higher levels of residential real estate, as well as CLMs we talked about a little bit. 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 our duration of our loan book is under four.
spk19: Yeah, I'd add more than anything, When we look at this category, it's performing as expected and moving to resolution as expected.
spk16: Okay. And then maybe as my follow-up, just looking at the securities purchases this quarter, can you give us the average purchase just to get a sense of what that blended effect will look like in 2Q?
spk02: We didn't hear that clearly enough.
spk16: For the securities purchases made during the quarter, 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 will look like.
spk07: Yeah, so the rate that we have on average for the quarter, which you saw back 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. 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.
spk01: Thank you. The next question comes from the line of David Smith with Autonomous Research. Your line is now open.
spk08: TAB, Mark McIntyre:" Could you uh could you just confirm what you think your your true asset sensitivity is today, you know the tenant case said that 100 basis point higher shock would boost and I. TAB, Mark McIntyre:" By 3% and I thought I heard you saying earlier that the guide is towards the high end, but the better loan growth is being offset by there being two fewer cuts in the model which which would imply liability sensitivity, so if you just. expand on that. I know the 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?
spk07: Yeah, 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, I'm going to call it a stable environment. We did have a, you know, a bit of a slope upward in yields as net interest income 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 ECRs, and then it also considers what might happen in the AmeriHome context. And if I put all those together, we would prefer a lower rate environment rather than higher because of kind of the additional leverage pickup we would get in AmeriHome in particular. solely would still increase at a rising rate environment and decline in the lower one.
spk08: Okay. And then just in terms of the NII guide staying the same, although maybe moving to the higher end of the range, how that works with there being fewer cuts and the better outlook for loan growth?
spk07: Yeah, I mean, it's up. Yeah, I mean, it's, you know, If you were, you know, fewer rate cuts, that results in a, you know, 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 were the additional, 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. into higher yielding assets rather than into kind of short-term securities that satisfy high-quality liquid asset requirements.
spk02: 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.
spk01: Thank you. The next question comes from the line of Brandon King with Truist Securities. Brandon, please go ahead.
spk09: Hey, so I understand NIM is supposed to trough 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 quarter?
spk07: Yeah, so as we dip down five in Q1 from Q4, you saw that. I think that we can dip down another 10 on higher volumes.
spk09: T. Okay, and then the expectation is that as you 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?
spk07: T. 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 accretive. to the market overall.
spk01: Thank you. The next question comes from the line of Gary Tenner with DA Davidson. Your line is now open.
spk04: Thanks. Good morning. I had 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 share re-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 C&I side. So I just wonder if you could, you know, comment about within the C&I book, what your experience and there were any, you know, particular business lines that were weaker and got more movement this quarter.
spk19: 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 all the segments. Outside of the more pronounced movements that we've talked about in office, really any other movements that we see are idiosyncratic and related to a specific business, not a trend in a portfolio.
spk04: All right, thanks, Tim. And then just one question on the income statement, the service charge line down by about half versus the fourth quarter and kind of where it had run previous to that. Do you remind us what happened there? Any thoughts going forward?
spk07: 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 have more follow-on executions. of some things we're doing in service charges in basically the regions.
spk01: Thank you. The next question comes from the line of John Arfstrom with RBC. John, please go ahead.
spk00: Thanks. Good morning. A couple quick ones here. Dale, you used the term on the mortgage-related deposits that you reacquired 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?
spk07: 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 interim month kind of sine wave. Regarding the taxes and insurance, though, that's a longer cycle. And particularly, I think taxes are usually semi-annual. Some are annual. And so we have a dip from tax payments, property taxes, in those deposits, and it's very pronounced in the fourth quarter. That's what really drove that number lower from where we were at September 30th. And so we say reacquired in terms of those funds have been depleted as they're paid to the taxing agencies, 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 to boost it up because normally it wouldn't have recovered quite that quickly. You'd have to be in the second quarter to do it, but that didn't happen.
spk02: Well, now in Q4, I came back in 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 that's what bail means.
spk00: Yep. Okay. Thanks on that. It's just bigger than I thought, and that helps me understand that. 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 sustainability of that longer term?
spk02: Yeah, well, we wouldn't 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 and this one, is about the earnings exit or velocity rate out of 24 into 2025. Now, that return could actually spike up in the event that the Fed does take some more actions and reduces rates, and then you'll see a greater share of fee income come from AmeriHome. Right now, we kind of have that at a basic steady state of where it is today, but rates come down James Meeker- Say 100 basis points over the next four quarters, or whatever you can see marijuana really gearing up and reducing far more income and generating a higher higher return on equity for the entire company.
spk01: Thank you, the next question comes from the line of Eric zwick with hubby group your line is now open.
spk06: Good morning, everyone. 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 your portfolio has received updated valuations, say, in the past six months? And, you know, the reason I guess I'm asking is that CRE transaction volume has, in certain markets, has been somewhat muted in recent quarters. 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?
spk19: Sure. Thanks. That's a good question. I'll take it. Tim, again. 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 that are benefiting from a long-term fixed rate that was put in place in a different environment. These are floating rate loans, and we value them against appraisal and performance on an ongoing basis. All of our documentation includes terms for reappraisal and remargin. So those thoughts around value are critical to us, and that isn't something that we wait for a default or a maturity to handle. Additionally, we have substantial submarket data that we track to track trends and value. But in advance of that, we're tracking the trends in sub-market occupancy so that we can really understand how that will translate to a value in situations when there's limited market sale activity.
spk06: Thanks, Tim. I appreciate your color. That's all for me today.
spk01: Thank you. Thank you. The final question comes from the line of Zach Westerlund with UBS. Zach, please go ahead.
spk10: All right, just a quick follow-up on the ECRs. Dale, I know you said that you guys are trying to get ahead of those kind of higher cost accounts. Do you think that the beta on the ECR rate on the way down when the site starts cutting, do you think that could be equal to or exceed the beta that we saw on the way up?
spk07: You know, I mean, you have to kind of, segment that into what types of the ECRs 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. 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 it may be in some cases even a bit better.
spk09: Understood. Thank you. Thank you.
spk01: Thank you. I would now like to hand the call over to Ken Becchione for closing remarks.
spk02: 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.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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