Good day, everyone. Welcome to Western Alliance Bancorporation's first quarter 2026 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
Thank you, and welcome to Western Alliance Bank's first quarter 2026 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, and Vishal Idnani, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-K filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione.
Good afternoon, everyone. I'll 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 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 are tracking on a reported basis prior to the charge-off announced on March 6th. 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 Leucadia Asset Management. We initiated legal action at that 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 pre-tax 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 Five 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 reaching 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 three 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 or 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've 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 non-performing 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 $70s, 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 1.07% 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 continues to benefit from a highly diversified franchise, differentiated marketing 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.
Thanks, Ken. In the bottom right corner of Slide 3, 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 4, 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.
Non-interest income increased 18% quarter-over-quarter to approximately $253 million. Excluding securities gains realized in both Q1 and Q4, non-interest 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 a corresponding but smaller offset flowing through other non-interest 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. Non-interest expense increased about $22 million from the prior quarter to $574 million. Excluding the FDIC special assessment rebate recognized last quarter, non-interest 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 federal funds rate cuts in Q4. As mentioned earlier, the increase in other non-interest 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 shares during the quarter, bringing program-to-date repurchases to 1.6 million shares for $120.4 million at an average price of $76.55. Looking closer at loan growth trends on Slide 6, 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 the primary driver of quarterly growth, led by homebuilder finance with solid contributions from Innovation Banking, in-market commercial banking, and Hotel Franchise Finance. Now flipping to Slide 7, robust deposit growth of $5.6 billion was a standout of our balance sheet growth in Q1. Strong growth in Mortgage Warehouse deposits and solid growth in specialty deposit channels like Juris and HOA put us well ahead of plan for the year. Average deposits grew $1.8 billion, or $3.8 billion less than period end deposit growth. Turning to our net interest drivers on Slide 8, interest-bearing deposit costs declined 21 basis points from sustained cost reductions 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 9, 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 backloaded 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 non-interest expense growth by approximately three times. As discussed earlier, non-interest 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 modeling 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 continue to improve, declining 36 basis points year-over-year to 108. 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. Non-performing loans in OREO declined 7 basis points quarter-over-quarter as a percentage of total assets. Now let's 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 non-performing 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 the end of 2015. The gap between historical tangible book value accumulation and peers stands at four times. Western Alliance 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 10 years, our EPS growth and tangible book value per share accumulation have ranked in the top quartile relative to peers. We're also the leader in 10-year loan, deposit, and revenue growth, as well as adjusted efficiency.
We continue to make strides towards top quartile returns on average assets and average tangible common equity. I'll now hand the call back to Ken.
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. 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 to 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%, consistent where we ended Q1.
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%-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.
Non-interest income, excluding the impact of security sales, is projected to grow 13%-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 non-interest expense is now expected to increase 7%-11%. Our deposit cost range of $650 million-$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-$1.65 billion, driven by higher variable compensation, incremental costs associated with increased Juris Banking fee revenue, and continued investments in new businesses 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 25-35 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%. 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 12th. With that, Vishal, Dale, Tim, and I will now address your questions.
At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. 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 Clark with Piper Sandler. Please go ahead.
Hey, good morning.
want to just touch on the Cantor Five. You wrote off $26 million, I believe, of the just under $30 million that you had reserved. 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're relying on personal guarantees to cover the remaining amount here? Because I believe they're suing one another, and not sure how easy it is to get at that liquidity.
Yeah. I think I got your question. On our last earnings call, we said that we're 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 appraisals. 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. What we've done is we've mapped out several different strategies to resolve this issue with 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're 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. That's why we said we took the $26.5 million now. We've got a number of resolution strategies. This will take some time. We're not going to talk about this every quarter. As we go through the resolution strategies and finally get to the outcome, we'll then turn our attention to the high-net-worth individuals and go after them, and then also whatever we don't collect from them, we will then put against the mortgage bond. We think the $26.5 million is appropriate now. We don't 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.
That's helpful. Thank you. Just on the service charges up again driven by Juris. How should we think about a normalized run rate there? I know it's difficult to, I'm sure, to guesstimate, but what do you view as a more normal run rate? I assume we would see a reset in related expenses from that business.
Yeah. It's Vishal here. Thanks for the question. What we'd say is we agree, it is hard to do this. These fees tend to be a little bit lumpy. As we mentioned, we've got 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. That's why you've got 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. It's hard to give you more clarity around that because it'll just depend on how that comes through.
what we will say is that the business continues to do well, and we've won the next large settlement, so it's just a matter of timing around that.
Your next question comes from the line of Jared Shaw with Barclays Capital. Please go ahead.
Hey, good morning. Thanks. 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?
Yeah. Hey, it's Vishal here. I'd say just overall, when we think about the ECR deposit beta, I think it's in line with what we were thinking before, which is call it 65%-70%. When you think about the three businesses that have ECRs, obviously they're very specific to each one. In the mortgage warehouse business, we tend to think of the beta as up to 100%, maybe in the 90%-100% range. The other two businesses we have is Juris and HOA. I think the deposit beta on that tends to be around 35%. When you blend those together, you get that 65%-70%. The next piece of your question obviously 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 costs.
Given the big increase in deposits in the first quarter, we're going to make a concerted effort here to optimize the deposit costs across the company throughout the rest of the year. What I'd also tell you is on the mix of the ECRs, we're 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.
Okay. All right, thanks. As my follow-up, looking at asset quality, and maybe the criticized and classified, how are you looking at your exposure to software companies in the tech and innovation sector? Is that driving any credit migration here?
No, it's not driving any credit migration at this time. The conversation that's 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, 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've granted to the clients is roughly $4 million on average in commitments and $2 million drawn against those $4 million of commitments. We're not seeing any problems in that book at this time, and it's not reflected in our criticized or classified asset viewpoint.
Your next question comes from the line of Casey Haire with Autonomous Research. Please go ahead.
Yeah, great. Thanks. Good morning, guys. I've got a million questions on NIM. I guess I'll start with 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? A little more color on the deposit optimization plan, if you can.
Yeah. I'd say on the loan to deposit ratio, that's the target. When you think about our loan and deposit, $6 billion, $8 billion, that's 75% when you think about the target. I'd say by the end of the year, that's the plan. It will all come down to the deposit optimization and kind of we might actually see deposits in the second quarter, not the typical run rate you'd see from us given this optimization. I would say plan for it at the end of the year. Hopefully, we'll 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're going to continue to work through that. I think 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 kind of see where we can push those rates down.
Okay, great. 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?
Yeah. Actually, it's very positive for us. All in, we expect it based on the rules that we're reading to increase our CET1 by 81 basis points.
Your next question comes from the line of David Smith with Truist Securities. Please go ahead.
Hey, good morning.
If the operating expense guide is $20 million lower than January following the $50 million in mitigating actions, does that mean that you're expecting an extra $30 million of variable comp for production, or is there anything else underpinning that as well?
You're right. We mentioned 50, but we're only down 20. The answer there is twofold. One, our Juris Banking fee income was higher than we anticipated, and therefore what you're seeing are the expenses which find its way into operating expenses. The second thing that we've said in our prepared remarks is that we expect the mortgage business to do better than we initially planned. The variable compensation relates to the fact that we will be hiring up people to support increase in mortgage income. Those three things taken together bring the operating expenses down by $20 million.
Okay. You mentioned the plan to hold mortgage warehouse deposits flat over the course of the year. If the market's rebounding from a depressed level in March, does that mean that you're expecting to lose share somewhat in mortgage warehouse, or can you expand on that?
Yeah. 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 price deposits out of the bank. We expect that our overall deposit growth for Q2 will be flat because we'll be accelerating some of these deposits outside of the bank. We then expect Q3 to have a 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, and we'll 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 loans to deposit ratio so we don't have to carry this excess liquidity at either a flat or a negative drag to the bank.
Your next question comes from the line of Timur Braziler with UBS. Please go ahead.
Hi. Good morning.
Good morning.
Ken, you had made a comment about reevaluating credit, 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? Maybe what does that mean for loan composition going forward if that changes at all?
Yeah. I just think we were just a little bit too conservative here, and we didn't push to accelerate closings in this quarter. We had the time to negotiate. There wasn't an urgent pressure from the clients to close before the end of Q1, and we just took a little bit of a wait and see approach. What we're seeing and what we're feeling and what we're reading, and your guess is as good as ours, but we feel there'll be some type of ceasefire that will continue on. We're certainly seeing the robust pipelines that are in front of us. We are still encouraged that we'll achieve the $6 billion on a go-forward basis. Tim Bruckner runs Regional. He's sitting here. Tim, do you have anything you want to add to that?
Yeah. I think when you really look at Q1 in particular, and it signals to you and 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. We're really committed to that full relationship, full growth, and our pipelines in those segments are robust and, of course, with appropriate sensitivity to the market conditions.
Okay. 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. I'm wondering, the allowance ratio here at 78 basis points, is there anything incremental that would need to be done there as we get closer to or breach that $100 billion level?
Yeah. I'm going to team up here with Bruckner on this answer. First part on the special mention. Special mention increase in $75 million is really no big whoop. All right? I wouldn't 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, okay, which includes special mention, was 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. At our size, having something move in and move out doesn't necessarily mean our asset quality is deteriorating or getting materially better. What we do here, you've heard this, an early process of early identification, escalation, and then resolution.
Tim, I don't know if you want to add anything on the other parts of the credit.
Well, I'd really say on special mention, that's a transitional rating. That is a rating that signals early warning in a problem loan, and we use it in a very directed way as transitional. 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 to resolution. Early elevation, early resolution is our mantra there.
Yeah. On ACL and reserves, I think what we've said last quarter and still holds true this quarter, as we migrate and change the loan composition here, moving more into C&I, you'll see the loan loss reserve move up from where it is today at 78 basis points into the low 80s. You'll see that all throughout the year. I would expect the provision will follow that. You ought to plan accordingly. That's very consistent with what we said last time.
Your next question comes from the line of Christopher McGratty with KBW. Please go ahead.
Good morning. Ken Vecchione or Vishal Idnani, 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?
Strategically, what's 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. Long-term value, it's 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 support that long-term growth will help investors and will support investors' trust in us as we continue to grow the bank.
Chris, we're not expecting to go deep back into the market to do stock buybacks. They're not in our models right now. If there is a reason for the stock, if it gets disrupted in the market, then we'll come back and look to support it as we did in Q1.
Okay. Understood. Thanks for that. Just digging on the mortgage a little bit. You mentioned trends in April kind of reverted back to early Q1. Can you just help us on a Q2 estimate for mortgage revenues? Maybe I missed it, but I know there's been moving parts between servicing and production. Thanks.
Just give me a second here, Chris.
Yeah. Chris, I can jump in on this. I'll make a couple of comments on the mortgage banking, and we can talk about that. The first thing I'd say is that 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. Obviously in March, there was a slowdown with the spike in interest rates. Fortunately, we actually are seeing that activity come back in April. Now for the full year, we're actually expecting revenue from mortgage banking to grow about 15% over last year's level.
What I'd say is very encouraging when you look at the underlying trends in the mortgage business is 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's actually 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 up materially, up 18% from Q1 last year, and the trajectory looks good for the rest of the year.
Your next question comes from the line of Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning. I just wanted to make sure I understood the way you're parsing that lender finance data on Slide 20, that private credit slide. Does that $2.3 billion, does that basically represent the right-most slide, the MDI Slide 24, or make up the vast majority of it? Is that the right way to think about it?
I'm sorry. I didn't hear that. Was that you, Chris?
Yeah, I got it.
Okay.
I think if I got your question right, you're trying to figure out on page 24 where we break out the MDI bucket, sort of where that lender finance sits. It's going to be in that business credit intermediaries. The large proportion of that 5% of the loan book, call it about $3 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 MDI loans.
Okay. That makes sense, and that's what I was thinking. I'm just curious, and you point out that the average funded amount per obligor is quite light. I'm just curious on the fund level. The average would be around $40 million, I think. I'm just wondering kind of what the range is and what the top end of exposure is on the fund level.
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. That's the top end, the largest credit that we have. As we've said, very granular inside of our private credit book.
All right. That's very helpful. Thank you.
Yeah. I'll 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 names, brand names. What they were telling us was exactly what we were seeing inside of our book, which was credit was performing well. There was redemption requests mostly coming from the retail side of their LP base, and institutional LPs were remaining confident about performance. We're clearly seeing that as well inside of our book.
Yeah. Ken, if I can add just a couple of things on the book. I think on this page 20, you'll see how granular it is. I think the other thing we'd flag here in this bottom right bullet is we actually also serve as the trustee on about 60% of this, which I think actually helps us a lot in terms of oversight and monitoring the cash flows in and out on a bunch of these deals.
Your next question comes from the line of Janet Lee with TD Cowen. Please go ahead.
Hello.
Hi
Piggyback on the earlier question. Is it? Can I interpret that as within the lender finance, there is no loan that is over $100 million in terms of the 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?
No, we're not going to share that. Loans to funds are much larger. Inside of the fund, the composition of the clients inside of that fund or the borrowers that they're lending to were the numbers that I just reported. Yeah, we have 40 major funds or thereabout that we're doing business with, and the size is larger.
Okay. Got it. 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 eighties, 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?
Let me just change that statement for you. We're moving the loan loss reserve from 78 to the low 80s. We're not taking it down. Okay? You're not going to be seeing releases here. We're looking to build our provision over time. In fact, I was looking at this last night, from about three quarters ago, maybe four quarters ago, our peer group has decreased, on average, their provision by 11 basis points, and we have over that same time decreased their reserve by 11 basis points, and over that same time, we have increased our reserve by 10 basis points. We don't plan to release anything.
Yeah. Janet, you may be looking at the total ACL to funded HFI loans, which sits at 87 basis points right now. You're going to see that trend into the low 90s. So as Ken mentioned, the loan loss reserve to funded HFI loans is at 78 basis points. That was flat quarter-over-quarter. We're going to push that into the low 80s. You'll see that with the natural movement in the loan balances. The total ACL to funded loans is going to go from 87 to the low 90s.
Right. That's 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? Would you like to slow the growth in this segment for any reason?
I think it'll grow as the rest of the portfolio grows. I don't think we're going to put any incremental acceleration to the private credit book at this time.
Your next question comes from the line of Christopher Spahr with Wells Fargo. Please go ahead.
Hi. Thanks for taking the question. I just want to kind of follow up on Timur's question earlier. Just what would it take for the loan reserves, the all-in measure, if you will, to go to 1%?
Well, just take the number, multiply it by ending loans. That's your number.
Sure.
If you want to know the numeric number. If you're asking what it would take.
No, I'm just wondering.
It would take a deterioration in the economy, and we're not seeing that. The economy is strong. All right? We have a process here whereby the first line presents and develops the loan loss reserve. 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. We've got the Federal Reserve, and then our outside auditors come in and review the whole process. I can't walk in here and say, "Gee, let's move it up 20 basis points." I've got 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'll remind you, half of our portfolio really has never had a loss.
Chris, I'll just add one thing, which is when you look at the total ACL to funded loans, the 87 basis points, and we've got $8 billion of resi mortgages where we've sold credit-linked notes. Just move that out of the loan base. The ACL to funded loans is 1%.
Yeah.
Got it. Okay. Thank you. Just for clarification, was there a run rate number you can give for the service fees at all? Or you just kind of gave some direction where it's going to go over the next few quarters?
Yeah. We're not going to provide a run rate here. I think we've 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%. I think we've given guidance around what we think mortgage banking will do within there. I think you can back into the number. We would tell you is 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. It will get you to the full run rate guide that we're giving here in the deck.
Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.
Hey, guys. Just on the resolution process that you previously mentioned during the quarter. The $126 million charge-off against the land loan, you identified the $50 million of securities gains, the $50 million of cost savings. The remaining $26 million, that may be already covered in the updated fee guide, but just any updated color on this?
No. Sorry. You're right. We took $50 million in revenue, $50 million in expenses. We have not articulated how we're going after the last $20 or $26 million. We'll see if we can work our way to resolving that during the course of the year. We have enough in front of us to do. Quite frankly, you and many of your colleagues were suggesting that we shouldn't fully resolve the $126 million charge-off and to ensure that we have enough money available for product development, enhanced services, and also to ensure that our loan growth and deposit growth continues on the trajectory that it's at. We've been taking that guidance or that advice to heart. We only offered $100 million against the $126 million as a solve.
Okay, great. I guess from here, the Investor Day is coming up. Just any preview on what you intend to convey, any maybe big-picture messaging you can share with us today?
Well, we're not like MGM, where we give a preview coming, but I think one of the things that we're going to talk about is the question we get all the time is why can you grow when other banks cannot? We're 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. It's not that we run forward to anything that is fashionable today, but has been well thought out for an extended period of time. I think that'll be interesting to kind of have you look underneath the hood and see how we position ourselves for growth inside of the bank.
Your next question comes from the line of Anthony Elian with J.P. Morgan. Please go ahead.
Hi. Ken, your earlier comment on accelerating some deposits out of the company. I don't think I've heard that before, right, for 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? Any other areas of focus as part of this deposit optimization plan?
Yeah. Stepping back and taking a big picture look, our bank grows every year about the size of a small regional bank, right? Most other banks don't do that. That's point one. Point two, we had a phenomenal deposit growth quarter. It exceeded our wildest imagination. We thought we'd maybe get to $3 billion. Coming in at $5.6 billion was far greater than we thought. Third, where those deposits came, they came in from some of our higher priced customers, which led us to take a step back and then ask, "How do we optimize here?" What we're 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're trying to be aggressive on it, and we're trying to get it done quickly by the end of the second quarter. That's why we've given the advice or guidance that our deposits may be flat quarter to quarter. Right? A lot of this is also going to depend on the people, our clients, and what they want to do. That's the game plan, and we'll 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's either interest expense or it's on the deposit cost side.
Thank you. Is the outlook for higher ECR costs entirely coming from now assuming no cuts versus the two cuts previously? Is this big shift change, the deposit optimization plan, embedded in the deposit growth outlook of what you expect? Thank you.
Yeah, Tony. Sure thing. Happy to take that one. I'd say the large preponderance of it is removing the 2 rate cuts, right? I think more than half of that delta, you'll see the deposit costs are going up $115 million at the midpoint. More than half of that is backing those 2 rate cuts out. The other thing has to do with just volume, right? Volume was much higher in the first quarter. If you actually were to maintain those balances, you're going to just have higher deposit costs as well. The offset to this is going to be what Ken talked about, which we're going to work through here over the next quarter, is how do you adjust for that? How do you optimize it? Basically, we're giving you the higher deposit guide here.
It includes sort of the base case run rate we have right now. It is a mix of rate and volume that's driving it, primarily rate.
That concludes our question and answer session. I will now turn the call back over to Ken Vecchione for closing remarks.
Yeah. The only thing I'll say is we look forward to seeing you all on May 12th in New York. I think the start time is 8:30 A.M. for our first Investor Day, and we look forward to spending more time with you. Thanks again for your time and attention today.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.