Good day, everyone. Welcome to Western Alliance Bancorporation's Second Quarter 2021 Earnings Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. And Alliance Bancorporation dotcom. The call will be recorded and made available for replay after 3 pm Eastern Time, July 16 through August 16, 2021, at 11 pm Eastern Time by dialing 1-eight hundred-five 85 8,367 using conference ID 3,676,158.
I would now like to turn the call over to Miles Pon Delek, Director of Investor Relations and Corporate Development, please go ahead.
Thank you, and welcome to the Western Alliance Q2 2021 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer and Dale Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward looking statements, which are subject to risks, Uncertainties and assumptions. Except as required by law, the company does not undertake any obligation to update any forward looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements, Please refer to the company's SEC filings, including the Form 8 ks filed yesterday, which are available on the company's Web Now for opening remarks, I'd like to turn the call over to Ken Dacchioni.
Thanks, Miles, and good afternoon, everyone. And as Miles said, welcome to the Western Alliance's 2nd quarter earnings call. This quarter's results continue to demonstrate the unique benefits of Western Alliance's National commercial business strategy to position Western Alliance as one of the country's premier growth commercial Banks that can consistently generate leading balance sheet and earnings growth with superior asset quality across economic cycles. This quarter, the bank produced record net revenues, PPNR and EPS, while expanding our net Margins generating the highest return on tangible common equity in the Bank's history and returning asset quality to pre pandemic levels. For the Q2, Western Alliance earned total net revenues of $506,500,000 Net income before merger and restructuring charges of $236,500,000 and adjusted EPS of $2.29 an increase of 20.5 percent from the prior quarter.
These results benefited from a $14,500,000 reversal of Credit loss provision, consistent with our excellent asset quality results. Strong balance sheet growth continued With loans rising $2,000,000,000 excluding PPP loans or 29% on a linked quarter annualized basis And deposits by $3,500,000,000 or 37%. Our deposit and loan Pipelines are very active and total assets now stand at $49,100,000,000 Net interest income totaled $370,500,000 up $53,200,000 or 16.8 percent for the quarter As robust balance sheet growth, rising NIM and excess liquidity deployment significantly moved the earnings needle. Strong loan growth led to a 5.5 percent or $1,500,000,000 increase in average loan balances quarter over quarter. Additionally, after closing the AmeriHome acquisition on April 7, we added $4,500,000,000 in held for sale mortgages, Primarily GSE qualified or 12.4% of our average interest earning assets Optimizing our interest earning asset mix helped NIM expand from 3.37% to 3.51% in the 2nd quarter.
Fee income was a record $136,000,000 representing 27% of total revenue as we began to integrate and optimize Merrell Homes mortgage banking related activities throughout the rest of Western Alliance. Mortgage banking Related income was $111,200,000 in the 2nd quarter, demonstrating our ability to adjust wind share As gain on sale margins fluctuate to maintain earnings, I think it's worth reemphasizing that Excuse me. I think it's worth re emphasizing that what most attracted us to AmeriHome's business model was their low cost mortgage production and servicing ecosystem that leverages their complementary correspondent and consumer direct channels to feed and enhance value throughout Western Alliance's commercial businesses while minimizing risk. Business to business correspondent mortgage lenders have several business levers and the flexibility to sustain earnings throughout the rate Or throughout rate and economic cycles. Despite the evolving mortgage sector fundamentals, AmeriHome continues to meet our expectations and contributed $0.39 to EPS in Q2.
We have optimized AmeriHome's balance sheet to Westernline's capital levels With a servicing portfolio of $57,100,000,000 in unpaid balances UPB, sorry, Expanded the number of correspondent sellers by 57 to 8 19 and taking advantage of market dislocations to drive value. In the Q2 since April 7, when the transaction closed, the MeriHome generated $20,700,000,000 in loan production or 25% above levels for the full quarter period a year ago and only down 3.6% from Q1 was 47% from traditional home purchases. Gain on sale margin was 64 basis points for the quarter, in line with 20 19 63 basis Given the flexibility of AmeriHome's business model, we continue to stand by our full year guidance of $1.41 Asset quality continued to improve this quarter As the economic recovery extended in breadth, total classified assets declined $43,000,000 in Q2 to 49 basis points of total assets, Which is lower than Q1 2020's levels on both a relative and absolute dollar amount just as the pandemic impact was beginning to be felt. For the quarter, net loan charge offs were 0. Finally, Western Alliance is one of the most profitable With a return on average assets and a record return on average tangible common equity of 1.86% and 28.1% respectively, Which will continue to support capital accumulation and strong capital levels.
Tangible book value per share modestly declined to 32.86 $0.32 as goodwill on intangibles doubled to $611,000,000 in Q2, mainly from recognizing the AMH platform value. At this time, Dale will take you through the financial performance.
Thank you, Ken. For the quarter, Western Reliance generated adjusted net income of $236,000,000 or $2.29 adjusted earnings per share, Up 22.9% 20.5% from the prior quarter. This is inclusive of a reversal of credit provisions that Ken mentioned, the 14,500,000 It includes pre merger pre tax merger and restructuring expenses of $15,700,000 related to AmeriHome. Additionally, pre provision net revenue of $277,000,000 rose 37% quarter over quarter, excluding those same charges. After the AmeriHome acquisition, total net revenue grew $169,500,000 during the quarter to 506.5 an increase of over 50% from the prior quarter.
Net interest income rose $53,000,000 during the quarter to $370,500,000 Average earning assets increased $4,100,000,000 while lower yielding cash proportion held with the Fed fell to 4.4% from 15%. Non interest income increased $116,300,000 to 130 from the prior quarter and now represents 27% of total revenue due to mortgage banking related income of $111,000,000 from AmeriHome. But we're far exceeded by gains on sale of mortgage loans. Pre AmeriHomeWall contributed 18% Non interest income were $24,800,000 in the 2nd quarter compared to $19,700,000 in the first, increased $94,500,000 mainly due to the acquisition of AmeriHome, which increased compensation as we added approximately 1,000 new members to the Wall team, as well as new costs related to loan servicing and origination expenses. Turning now to our net interest drivers, you can begin to see the benefit of AmeriHome to our strategy to expedite optimize the deployment of excess liquidity into higher yielding assets as we added $4,500,000,000 in loans held for sale, yielding 3.2% as opposed to cash yielding 10 basis points.
Investment yields improved to 10 basis points from the prior quarter to 2.47, while on a linked quarter basis, loan yields excluding HFS 11 basis points following ongoing mix shift towards residential loans and a slight reduction in non commercial real estate loan returns. Interest bearing deposit costs were flat from the prior quarter at 22 basis points. The total cost of funds increased 8 basis points to 27 Based on the due to the issuance of $600,000,000 of subordinated debt and the assumption of AmeriHome borrowings, the As a result, net interest income grew $53,200,000 to $370,500,000 during the quarter We're 24% year over year as average earning assets increased 4,100,000,000 Cash as a portion of average interest earning assets fell to 4.4% from 15% in the quarter, which drove NIBIT expansion by 14 basis points to 3.51%. Additionally, excluding the impact of PPP loans, the margin would have increased 22 basis points. Our efficiency ratio rose to 44.5% from 39% in the first quarter, mainly driven by the addition of AmeriHome employees $75,000,000 or 37 percent from the prior quarter and 35.4% from the same period last year.
This resulted in pre provision net revenue return on assets of 2.31 for the quarter, an increase of 28 basis points compared to 2.03 in the 1st quarter. This continued strong performance and leading capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands. Balance sheet momentum continued during the quarter as loans held for investment increased $1,300,000,000 or 4.6 percent to $30,000,000,000 and deposit growth of $3,500,000,000 brought balances to $41,900,000,000 at quarter end. In all, total Assets have grown 54% year over year as we approach the $50,000,000,000 asset level. Borrowings increased $1,200,000,000 over the prior quarter to 1.8 primarily due to $600,000,000 subordinated debt issuance as well as the assumption of AmeriHome borrowings.
Finally, tangible book value per share decreased $0.16 over the prior quarter to $32.86 but increased 18% year over year, Again, driven by the AmeriHome acquisition of intangible assets that were largely offset by Q2 earnings and the issuance of common stock from our ATM of 700,000 shares for $70,000,000 Despite heightened competition and pricing pressure, we continue to generate consistent, Strong organic loan growth from our flexible national commercial business strategy. Loans held for investments were $1,300,000,000 in the quarter or $2,000,000,000 BBB payoffs of approximately $700,000,000 Majority of growth this quarter was driven by an increase in residential real estate loans of 2,000,000,000 which now comprise 17% of total loans as we look to deploy excess liquidity and integrated new flow arrangements from the recent Galton and AmeriHome transactions. This was supplemented by growth in capital call lines of $162,000,000 and construction and land loans of 89,000,000 Turning to deposits, we continue to see broad based core deposit growth across business channels. Deposits grew $3,500,000,000 or 9.2 percent in the 2nd quarter, driven by increases in non interest bearing DDA of $2,600,000,000 which now comprise 48% of our deposit base and savings and money market deposits of $534,000,000 Market share gains in mortgage warehouse Robust fundraising activity in tech and innovation and seasonal inflows from the HOA banking relationships.
Our asset quality continued to significantly improve this quarter. Total classified assets fell $43,000,000 in the 2nd quarter to $238,000,000 to 49 basis points of total assets, while our total classified assets ratio declined 16 basis points to 49 basis points due to continued improvement in COVID impacted clients. Finally, special mention loans declined $69,000,000 during the quarter to 1.35 percent of funded loans. Similarly, quarterly net credit losses were negligible $100,000 for the quarter or 0 basis points of average loans compared to a $1,400,000 net loss in the 1st quarter. Our loan allowance for credit losses fell $16,000,000 from the prior quarter to $264,000,000 Total loan ACLs of funded loans just lie 9 basis points to 88 or 91 basis points when excluding triple fee loans.
For comparison purposes, the loan allowance for credit losses to funded loans was 84 basis points at year end 2019 before CECL was adopted. Finally, given our industry leading return on equity and assets, we continue to generate significant capital organic growth and maintain regular capital ratios. Our tangible common equity to total assets of 7.1% and common equity Tier 1 ratio of 9.2% were weighted down this quarter by the Mira Home acquisition and strong asset growth. However, we issued 700,000 shares under our ATM shelf during this quarter and completed a $242,000,000 credit linked note Transaction that reduced risk weighted assets as we continue to look for ways to optimize our capital levels to support ongoing growth. Additionally, we completed $844,000,000 in mortgage servicing rights dispositions and have already completed our expected Q3 mortgage servicing sales.
Capital levels should build from here. Inclusive of our quarterly cash dividend payment of 0.2 I'll now hand the call back to Ken for closing comments.
Thanks, Dale. At the midpoint of the year, I thought I would take this opportunity to reflect Back upon our performance. We deployed excess liquidity and turbocharged our net interest income. Year to date, non PPP loans have grown $3,600,000,000 and deposits have grown $10,000,000,000 or 2.75 times The amount of loan growth providing us an opportunity to deploy liquidity and growth and grow net interest income. AmeriHome surpassed Q2 guidance is tracking to full year projections.
Asset quality improved with substandard special mention and non accrual loans tracking downward with nearly no net charge offs for the quarter. Return on tangible common equity was 28.1% for the quarter. PPNR, a key metric for the company earnings power, was 37.1% grew 37.1% And we executed several capital raising transactions that Dale just mentioned. So for the second half of the year, I think you can expect loan and deposits to continue to grow between $1,000,000,000 $1,500,000,000 per quarter, net interest income to grow Quarter to quarter with incremental liquidity deployed into loans and investments to overcome the interest drag of the new sub debt and credit linked note issuances. NIM will continue to see some pressure as competition interest rates and loan mix nudge loan yields downward.
PP and R will follow net interest income and fee income growth and will continue to rise throughout the year. Asset quality will remain steady, Although with net charge offs tracking to prior year's performance or prior quarter's performance, we continue to believe we will Exit the year at a $9 EPS run rate level. And lastly, we will deploy growth based capital strategy to support Above trend balance sheet growth. And finally, I would be remiss in the outlook section of the presentation If I didn't predict the suns in 6. At this time, Dale, Tim Bruckner, who is sitting to my left here, our
For our first question, we have Brook Van Vliet from UBS. Brook, your line is open.
Thank you. Ken, does that $1,500,000,000 loan guide include AmeriHome or is that kind of standalone?
That's net loan growth for the company.
So we don't really expect Loan growth from AmeriHome, I mean AmeriHome has their held for sale piece that can fluctuate some. So I mean we're talking about No, held for investment loans, core loan growth, that's $30,000,000,000 That's what the $1,500,000,000 is attributable to.
Okay, got it. And shifting to The biggest question is just overall origination volume and gain on sale. Is this Yes. And obviously, the parts of the sector are under pretty heavy pressure. How do you look at things the remainder The year for volumes and gain on sale margin.
So, I'll take
half the question. I'll give the other half to Dale. First, we don't see any change to the guidance that we gave, which is $1.41 Of course, we made $0.39 For this quarter, we do think there is some pressure in the marketplace On volumes and on margins as you've seen. But Brock, you gave me an opportunity here to The question in a larger way and I'd like to frame it the way we think about it here For everyone on the call, so I'm going to take advantage of your question with a one minute answer here. First, AMH contributed only 17% of our operating EPS.
So it's not the majority of our earnings of our company, although Today, I assume it's going to be the majority of the questions, okay. We believe that you should consider, evaluate or Compare AMH to other standalone mortgage companies and for the following reasons. 1, AMH has many tributaries that feed into the bank's net interest income. And this is the acquisition rationale That we have for making this purchase. So of course, they help our investment mortgages, which absorbed excess liquidity and help us generate Constant loan growth, that's 1.
Number 2, MSR loans, we'll be able to generate MSR loans that will accompany MSR sales. In addition, we expect custodial deposits not bundled along with MSR sales That will help us fund in the future investments and loans, again helping our net interest income grow. We've paid down the AMH Outstanding credit lines with our excess liquidity and once again that relates back to net interest income, lower interest expense. We are going to be able to mine, we think, our HOA book for consumer direct mortgage opportunities. We've purchased EBO loans, that's early buyout loans, that produce a positive Carry for us when we buy them, but also produce a future gain on sale that's more equivalent To our consumer direct business, I.
E, a much larger gain on sale when we execute to pay against this. And then also, AmeriHome has 800 warehouse lending clients And we haven't even begun yet to scratch the surface of cross selling into those warehouse lending clients, which in turn, Once again, back to net interest income will generate greater net interest income for us. So Because of the interconnectivity with the bank, we kind of see AmeriHome as a provider Of not only loan growth, but really a provider of incremental net interest income for us. And the acquisition of AmeriHome was designed to unlock and capture many of the revenue streams that are generally hidden Inside of a mortgage company. And I hope that kind of gives you a larger perspective on how we think about AmeriHome And how we think it's going to help enhance our earnings going forward.
Brock, I know we had a During the quarter about seeing the volatility in this sector and what that might mean for us. And we view of Aerohome as really a low cost producer. And that's an enviable place to be because that puts them in a position Such that when there is a musical chairs game going on, and I think there is in this space at this time, they have the ability, Capacity to expand their win rate and their buy rate. So they were doing 7% in 2020. That number is about 12% to It could go higher still.
And so you saw this pivot. It's like, okay, well, if the margins are under duress, Then we can make it up in volume. And so the gain on sale number was higher than we thought it would be, Obviously, in part mitigated by this acceleration of amortization that we had and the charge we ended up taking in the servicing revenue Right. So we're confident that that gain can continue. And again, just to echo Ken's comment, I mean, the real power to AmeriHome It's not just what they can do on their own, but how much better they make the bank perform Because of this don't you class to fill up our liquidity that we have.
Thank you. Thanks.
For the next question, we have Casey Haire from Jefferies. Casey, your line is open.
Yes, thanks. Good morning, everyone. Good morning. Dale, just wanted to follow-up on the AmeriHome side, specifically that The mortgage servicing drag that you mentioned, can you just think about give us a way to think about how that line should run going forward and what the MSR MSR impairment was in the quarter. Apologies if I missed that.
Yes. So I'm not going to really rephrase it as an impairment that took place. I mean, These models are trying to predict human behavior. There's a lot of things related to human behavior that Aren't necessarily picked up in these models. And I think in particular what you had in the Q1, Q2 coming in is you had Very substantial volatility in the tenure.
So everyone thought, oh gosh, we missed the bottom of the rate. And so that actually based on the models, it should see a slowdown in prepayment behavior because rates are higher. But no, that's not what happened. You had an acceleration of prepayment behavior. And to me, my closest analogy is just like last call.
It's like, you know what, it's 2 am, you got to get in here, otherwise you're going to miss out on the lowest rates in a generation. But then what happened? Wow, we thought The 10 year get up to 190 and now we're back to 1 in the 130 range. And so are we getting now with even an echo wave of that? So these prepayment speeds have come in higher than we thought.
That resulted in accelerated amortization. I'm not going to necessarily call these impairments. But getting to your point, a more normalized level, we would be looking for about a $10,000,000 quarterly positive in that You can't just say, oh, gosh, it's under by $30,000,000 on a run rate basis, though, because of Kind of the comment I just made in terms of the gain on sale number is better probably because Because the servicing revenue was impaired. Servicing revenue being impaired means there's a lot of refi business going on. There's a lot more activity generating in the system.
And so the GOS opportunity, the gain on sale opportunity is a bit higher. So it's not kind of a one for one deal. But yes, in a steady state, we'd look for about a plus And that, I mean, it's in the revenue, it's a contra revenue for a reason because if not, those would be a contra.
Okay, got you. So I mean, You're standing by the $1.41 and so that implies basically this AmeriHome contribution Is running around $0.50 in the back half of 21, correct? Yes. Correct. Okay.
All right. And then just On your comment, Dale, that capital will build from here, what does that assume? Like if you guys You know, continue to beat your loan growth guide, will you just continue to use the at the market offering or how should we think about is that Capital build line, is that does that just assume that loans and deposits grow $1,500,000,000 or you could just use the ATM to true up?
Perhaps a little bit of both, but I think the balance sheet growth number is going to be higher to be higher than $1,500,000,000 and not even need to touch the ATM Because as you saw this last quarter, overwhelmingly our loan growth was in residential. I don't think it's going to be that high proportionately to the other categories Going forward, but it will be preponderant. And that is a 50% asset class assignment. And so based on that, you could grow if it was just that, you could grow $3,000,000,000 to get to $1,500,000,000 of risk weighted asset increases, which would It will be the same. So, our earnings this year were $230,000,000 Based on that, that would support $2,300,000,000 It was all 50%.
You can do the math on that. So I think we've got more capacity with just Capital generation that we have going on irrespective of ATM, which we could we will cap as needed, but right now we don't think that's going to be Significant.
Okay, great. And just last one for me. The borrowings that you assume from AmeriHome, if I'm reading the margin tables right, it appears there's about $595,000,000 left at period end. Is that correct? Correct.
And so that's a lever that you also have to pull to help I mean, I'm assuming you're going to continue to pay that down to 0.
It is. Some of those a good chunk of those borrowings have high rates and are not callable For an extended period of time. So don't look for that to drop off to 0 as much as we'd like it to. Understood. Thank you.
Thanks.
For the next question, we have Brad Milsaps from Piper Sandler. Brad, your line is open.
Dale, just wanted to follow-up sort of around the loan growth guidance commentary. Last quarter, you mentioned getting to a 90% loan deposit ratio Maybe by the end of this year or early next, I don't know if that contemplated another $3,500,000,000 of deposit growth as you saw this quarter. But just kind of curious to think about that 90% loan deposit ratio number and maybe as that pertains to that the held for sale loans, those came in a bit higher than I Looking for and then is there incremental AmeriHome production that you plan to retain Above and beyond the $1,000,000,000 to $1,500,000,000 loan growth guide.
Yes. So I mean, a few things going on there. So yes, Remy, here we wanted to get to kind of 90 ish or whatever, and we actually paid it back a little bit because the Deposit growth was so robust. I don't have a timeline of exactly kind of when we're going to get there. I do believe that we've got Quarters in front of us where loan growth is going to exceed deposit growth and that will pull that up.
When I talk about loans deposit ratio, I do not include the held for sale loans. I think held for sale is a much better Comparison to the cash and investment portfolio, those are the average life of those loans is only a few weeks. And so it has a much more liquidity relative to those other categories away from loans. So I do think that there I mean, I like the held for sale portfolio because basically you get the note rate on those loans predominantly. And yes, they flip every 3 weeks.
And so it's a very sensitive asset at the same time. But we will have to have a situation To do that, we're going to have loan growth and AmeriHome is going to be the primary conduit for this, kind of well in excess Of deposit growth. Right now, deposit growth, Ken just iterated, looks continues to look strong. So I'm not exactly sure when that's going to be. But We do have several things going on.
One is we have feeds from AmeriHome today that go on our balance sheet for Higher yielding origination activity that they have. These are things like vacation homes. They're going to be coming out this quarter with a jumbo product that they had years ago, Reintroducing that, that can come up on our balance sheet too because it's a higher yield, low LTV, great credit quality as well as non qualified mortgages. So we're getting these from the Galton relationships. We're getting these from our own warehouse clients.
And as Ken said, we're going to start mining Warehouse clients among the 800 clients that AmeriHome has that they buy from. And with that, We can put in our own direct conduits to feed our appetite for high quality, low LTV, high yielding because they're not
And then Just switching gears a little bit, maybe to the expense side of the equation. What type of expense flexibility should we think about as The mortgage business sort of ebbs and flows over the next several quarters?
Well, We see I mean, there can be some flexibility within this. We think that the AmeriHome Pivoted really well in the volatility that took place in the Q2 in terms of finding ways to increase gain on sale, We're looking for that to continue. We're looking for the kind of the total contribution, which we mentioned on the previous call, $0.50 in Q3, dollars 0.50 in Q4, plus $0.40 that puts us $1.41 and that's the same run rate that we have for getting to the number that we had for 20 So I think there is multiple channels to manage through that process with all the levers that Ken enumerated. And so I'm not too concerned about that. We're looking at kind of the total.
I think we are going to stay in the mid-40s. And I think that's pretty reasonable.
Okay, great. Just final follow-up for me. Can you comment on the change in bond yields linked quarter? You guys had some Nice improvement there. I'm just kind of curious, are you kind of things you might be buying, just saw some nice improvement there and just Curious if you could provide any color.
Yes. But maybe a couple of things. One of them, we do have in our bond portfolio low income housing bonds. We think that's a growing sector likely to continue. Those yields are higher than certainly the average in our book.
And in the Q1, again, volatility, same issue comes out as a little bit of a different animal, but we had Increased amortization of premium on MBS bonds that we had purchased that slowed down in the second And so we had less of a debit to hold against that, and so that helped the local bond yields pick up.
Great. Thank you, guys.
For our next question, we have Brandon King from Churhust Securities. Brandon, your line is open.
Thank you. Hi. So loan growth was once I mean, deposit growth was once again strong this Could I get a breakdown of the verticals on a dollar basis of where deposit growth came from?
Did you say deposit?
Yes, deposit growth.
Well, warehouse lending grew about $1,700,000,000 Our new deposit verticals Grew a little over $300,000,000 HOA business, where the Q1 is very seasonally strong, Still had a good quarter. This quarter, it grew $210,000,000 and technology, which is a wash in liquidity, Was up $936,000,000 So I would take a little exception that we didn't have a great quarter. I mean, dollars 3,500,000,000 Oh, you did. Oh, I'm sorry. You came across take it back.
Sorry. Came across a little fuzzy. So that's how the $3,500,000,000 But basically, when you look at all the sectors, It was pretty much broad based throughout all our silos and all our regions.
Okay. Thank you. And for mortgage warehouse, obviously, you continue to grow deposits there, but it looks like the loan growth is softened there. What is the outlook For warehouse balances for the remainder of the year.
So, yes, I agree with you. It was a little bit softer This quarter, when we think about warehouse lending, we have a couple of other business lines get wrapped in there. Our MSR lending and our note financing should offset some of the weakness in warehouse Funding overall or warehouse funding proper. But we think going forward as we begin to roll out our cross Which will be towards the end of the year, to be quite honest. We think we'll be able to gain or hold market share going forward.
Okay. And just lastly, the reserve came down again in the face of loan growth. Do you think we hit a bottom on an absolute dollar basis of the reserve going forward? Or do you see continued to be down Even though you're still getting growth in those lower costs, credit cost business lines.
Yes. I don't know if I'd Call the bottom. I mean, I appreciate that we're going to hit a bottom on the reserve in dollars certainly sooner than we're going to hit a hit to bottom on the ratio. I mean negligible charge offs this past quarter throughout this recession and admittedly a very Recession in terms of credit quality behavior primarily driven by federal intervention. But that would point you that our reserve could still be very substantial.
We had 7 basis points of losses. The average remaining life on our loan book It's 2.4 years. If you said, well, I can either hold 2.4 years or for a duration on 7 basis points, that's a 20 basis point reserve, if that were to be the math. Obviously, we're not getting anywhere near to there, but you could see how even on a dollar basis, it could continue to have. Most significantly Is that even compared to our balance sheet pre CECL is we've been growing in these categories that have had Historically, 0 and prospectively low or if not 0 anticipated losses And low LTV residential loans, capital call lines, mortgage warehouse, public finance.
And as that proportion is growing larger and larger, that also that tends to push the numbers lower. I personally don't think that the outlook for the Economy is going to improve in the near term as dramatically as the forecasted, whether it was Moody's, whether it was blue chip in the second quarter. So I don't know if we're at the bottom or not, but I do think there's certainly a preponderance of the reserve releases that are behind us.
Okay. Thanks for all the answers. Thanks.
Next, we have Chris McGrathie from KBW. Chris, your line is open.
Great. Thanks for the question. Maybe talking about the mortgage business a little bit differently, Dale. The proportion that you're holding on your balance sheet is around 17%. And I think we all agree that's a great trade relative to buying a bond at these levels.
I'm interested in kind of where you see that peaking or where your comfort range is from that proportional piece of the loan book.
Well, so I mean, I think I first want to address this from our interest rate risk profile. So we have a very naturally asset Sensitive balance sheet compared to most. C and I loans are a big piece of We've got even some of the securities we've been purchasing have the variable rate element to them. And then our funding is structured, 48% DDA, very low in terms of CDs and the administered rate categories like money market Our client relationships, and I think they're going to have lower than kind of mean beta of what you'd see. So we start from a position that we can tolerate Higher levels of residential.
We've been below the peer group for a long time, which I'm going to hang at about 30% now at 17%. It has moved up significantly, obviously. And I think we're going to go to that 30% number And kind of see where we are. I think we see a lot of opportunity in front of us in terms of improving yield. These are low risk credit trades.
And with the deposit growth, we can kind of do this and this can but I do think it's not going to be as sharply climbing as it certainly did this last quarter. We are seeing increased Breadth in terms of credit demand, we believe. And so I think we're going to see a little more balanced growth prospectively. But yes, we're going to be moving up to 30%.
Okay. It's good color. In terms of the liquidity, You guys, I think, were one of the more aggressive in deploying it. With cash around 4% to 5%, I mean, what's the reasonable level that you need to run Proportional to the balance sheet?
Yes. So as of right now, we have $3,400,000,000 in cash. So we've got Money to deploy today. I don't think that number needs to be very large. And in part, I look to The held for sale portfolio to drive that portfolio from AmeriHome, the A large preponderance in there as well has those clear out in 2 to 3 weeks.
And so that is a near cash element that we can use. So I'm comfortable with kind of with where we are. I think that number could drop down a bit more To 1% to 2% with liquidity behind it from loans that have already been pledged for delivery to the GSEs.
Okay.
Chris, I might also mention, we have an $8,000,000,000 credit line with the Federal Home Loan Bank that is unused. We've got a multibillion dollar credit line with the Federal Reserve that is unused. We've got multibillion dollar credit lines, credit funds lines with other institutions. They're not necessarily Committed, but we think that they're certainly there that are also unused. So we've got well over $10,000,000,000 that we could drop on as needed.
And then
if I could just sneak in to housekeeping. I think when you announced AmeriHome, you talked about the tax rate maybe going up 100 basis points. So I'm looking for a little guidance on there. And then The card income was strong this quarter. I'm wondering if that's a run rate.
Thanks.
So on the tax rate, I think I'm expecting that number to ebb up a little bit from where we are At the 'nineteen, I think it's I could see it climbing closer to 'twenty. The card income, there has been kind of A difference in activity, ours is really a P card. I don't know that I would expect that to extrapolate from there, but I think business levels
For the next question, we have Timur Braziler from Wells Fargo. Timur, your line is open.
Hi, good morning. Maybe just circling back on the expense side, I think you had said that the AmeriHome deal added 1,000 employees So the organization, I know you mentioned that the efficiency ratio is likely to be maintained in the mid-40s or at least the near term. I'm just wondering As that business is fully integrated and run kind of the Western Alliance way, is there an opportunity to Sumize that business at some point or are the 2 different enough where you can't really Touch the expense side of the AmeriHome?
I think for the company overall, You need to think about the efficiency ratio being just about where it is, 44.5%, 45%, and that's where we're going to probably run the That will allow us to continue to invest in new products and services, Look to bring on new business teams, maybe you look to develop organically new business silos and also as we continue to grow at the pace that we're Growing, so we're a $50,000,000,000 asset based company today. We need to also ensure that we put the right investment Into the technology and then to the risk management side of the business. So, when we think about our numbers, when we think about the guidance leaving this Here at a $9 EPS run rate, we don't have it moving off of 45%. That allows us to grow EPS earnings the way we think we And also invest at the same time.
Okay, that's helpful. And then just One last one on AmeriHome origination. You said the win rate now is 12% to 13%, up from 7%. I think Previously, you had mentioned that that number can go as high as 20% and it doesn't really sound like the non Q1 component is really ramping up yet. So as that ramps up, is that going to go through the production and increase Kind of the gain on sales volume is more of that going to be portfolioed in the near term?
And then kind of corollary to that, if you can just talk about where the revenue yields that were put on the book today are and where those can go once you start bringing on some of the non QM paper?
Yes. So I mean, the primary goal of increasing or broadening what they're buying is to give The bank, another channel of growth in residential with, again, low LTV, better yielding assets. So AmeriHome, for the most part now, has generated a product that we like the business, but we like it going to the GSEs because the yields Not necessarily high enough for what we think the best kind of risk adjusted returns would be. And so but as they add That in, we'll be able to pick up even more from AmeriHome to kind of put on our balance sheet. I think that number is going to be around 3%, What we can do kind of going forward?
I mean, this is what we get paid for. There's a lot of interconnectivity between AmeriHome and on the banking side. If we have strong loan demand on the banking side, we will not hold on to as much on the residential mortgage side, and AmeriHome will have a higher If there's any soft demand or more excess liquidity than what we anticipated, we'll take Loans from AmeriHome and we'll keep them on our balance sheet and the gain on sale will be less for AmeriHome, but you'll see a higher flowing net Income for the bank. And so that's what we balance out every day here.
Okay. And then so as you start bringing on more non QM paper, I guess how fast should we expect to see the win rate So, it's elevated. I mean, you're going to stay at the 12%, 13% level for now and the mix shift is just going to change? Or do you foresee the non tier end channel being additive to what's currently being produced.
So I'm hesitant to give you a forecast going forward what the win rate is Because you got to add a few other factors in there. What's the margin? What's happening overall with the 10 year? But what I'll say is and what we learned when we were doing the due diligence for AmeriHome is that they have the ability to And the win rate in order to keep the gain on sale income high enough to achieve what we want to achieve in terms of our EPS guidance. And so that's going to be balanced between margin and between the win rate.
And as we said, they're at 12%, It's been as high as about 17%. So we've got room there to move that around.
Okay. Thank you for taking the questions. Thank you.
For the next question, we have Jon Arfstrom from RCBC Capital Markets.
Ken, one of your quotes in the release is you began to unlock value from AmeriHome. I'm just curious what's next. Is it the things you referenced like mining the warehouse and HOA? Or is there Something else that's more near term and right in front of us when you say you're just beginning to unlock value?
Yes. Thanks, John. It's really everything I mentioned as a little bit of a prelude On the earnings call here, so we've got a list of things that we're just going down and executing upon. Certainly, the easiest one was Let's unlock the value by paying down their outstanding credit lines done. As we're selling MSRs, Let's see if we can give loan commitments to the buyers, which we've done this Let's see if we can hold on to deposits, which we've done this quarter, but it's not a one and done thing, of course.
We're going to continue to work on that As we go forward, a little further down is the cross sell into the warehouse lending line. That's going to take a little bit longer. As you Can expect we were focused on Legal Day 1 and Legal Day 90, but the warehouse lending cross sale will happen towards At the end of the year. We've got the AmeriHome folks working on the jumbo mortgage program. We have them working on the non QM program.
So, and those are just some of the things I can I referenced? So we've got a lot of things going on here. What we're trying to do is find the value that we can unlock in AmeriHome, which translates over into our net interest income, which just gives us greater value And in terms of valuation on the banking side. And that's how we've always thought about the deal, John.
Okay. Any of this stuff new? Have you found more synergies or things that you think could be larger than you originally anticipated? Yes.
Actually, the first place where we saw one of the bigger opportunities where we said, oh my God, we weren't thinking about this, It was on the EVO side. That's the early buyout of loans from Ginnie Mae. You're able to buy them at par And then turn around and sell them at very close to consumer direct margin spreads, which is in that 500 basis point range. The reason why AmeriHome was active but not overly active was that they had a negative carry to that because their cost of funds It was probably all in around LIBOR 200. Well, we took 10 basis point money and we put it against a large purchase of VBO loans And now we're able to carry that DBO loans in a positive carry until we're ready to sell the loans down the road.
So I think that one really surprised us at how quickly that opportunity appeared. And frankly, it wasn't really discussed During the due diligence period, we were doing more of the normal blocking and tackling conversations during due diligence.
Okay. Two more questions here. I understand why you're breaking out the profitability now, is this something you plan to do or you want to do in the future? Is breaking out that profitability? Or do we expect this to eventually Very much integrated in the consumer piece of the business.
Yes, good question. For this year, we're going to continue to kind of give you the guidance Of the $1.41 because it's a new business line, but we don't break out any of the other business lines. As I said, this is only 17% of our total net income. So as we start giving you the you can see we're doing it now. We're giving you the guidance that we're exiting the year at $9 That's the number we're focused on for the whole company exiting at $9 This year, we're talking to you a little bit more about the 1.41 Because we want to make sure the comfort level is there that you know that we're executing Upon that acquisition, upon that trade, if you will.
But longer term, we're just going to talk about our total EPS.
Yes. I mean, the more that's disintegrated, the more murky and difficult it is to try to distill it all. I mean, if we're cross selling into their warehouse And then we're getting direct sales to our mortgage portfolio holdings. What does AmeriHome get allocated for that? We're not into that game.
We're more interested in moving the whole ball rather than trying to see who gets how APs in each side of the play.
Yes, interesting because you hit on a hot for us as we were thinking about this not too long ago. If we take more mortgages from AmeriHome and we keep it on the balance sheet, Of course, we've just lowered AmeriHome's gain on sale. So this is the murkiness that Dale talked about. Is that good or bad? Well, I kind of think it's Good that we're keeping it on our balance sheet.
We're getting that net interest income and it's going to stay out there for an extended period of time. Others could say, well, gee, I would have liked that gain Happened immediately because I want that immediate recognition. So we try to balance this stuff and that's why we think it's much better to Look at the overall total EPS number than it is just to look at a segment of the EPS.
Yes, that's good. I was going to ask that, but I thought it was Too deep for this call, but just in terms of the allocations. But just one more for you, Dale. Not everyone that holds your stock is a mortgage expert, and this is Probably annoying and a simple question, but how would you think about the main inputs into that gain on loan origination and sale line, that 132,000,000 Just big picture, what should we be thinking about when we model that line?
Well, so I mean AmeriHome has been a large producer in this I think that their activity level can continue at what they've been running. That's their core business. We think that's certainly an opportunity. We think they can expand that as We talked about in terms of some of these other business lines. We think there's maybe a cross sell into our HOA business and things like this.
But again, that's going to get kind of Overwhelmed by the benefit we get. So I mean AmeriHome's numbers, they had $15,000,000 of net interest income in the quarter from mostly holding Their held for sale loans, the other $38,000,000 was core Western Alliance on net interest income, And that was in part because of liquidity deployment. So, I'm looking for AmeriHome to continue to deliver as they have. And but again, these cross sells, I think, are really where the key is in terms of driving higher EPS.
Okay. Okay. Thanks for everything. I think SUNS in 7, you have to win at home and it has to be a little dramatic. So that's my call.
Well, we have like 3000 SUNS Championship T shirts on order. So we're already heavily invested into that. If not, we'll be selling them very cheaply to anyone who wants them.
All right. Thanks. Thanks.
For the next question, we have Gary Tenner from D. A. Davidson. Gary, your line is open.
Thanks. Good morning.
If you go back to mortgage for a second, just wanted to kind of ask about the credit linked notes for a moment. Obviously, as part of that transaction, you're free to a good amount of risk based capital and structure Capacity for lending, I just wonder if you would draw a direct line to that capacity as it relates to the cross sell opportunities into ANH's warehouse Pines are increasing the warehouse business or would you think of it more holistically as just creating additional capacity for wherever those higher Risk weighted assets number?
Yes, I think it's more holistic in terms of what that is. I mean, again, we're On generating strong risk adjusted returns, the warehouse space is one that not just us, but I think the industry's Experience from a credit perspective has been very strong. The credit link note does strengthen the That strengthened the credit quality of the bank and provides more insulation to it. We have somebody who's now in a first loss position, Not us, if there's any losses within that portfolio. So we do get a relief on the Like you mentioned, the risk weighted assets, I think it's warranted because somebody else away from us, an investor has first loss for anything that So in that sense, we're a stronger credit profile.
But what we look at is, gosh, now our RWA is lower. We can continue to grow. From a shareholder perspective, it's much cheaper to do the credit linked note That it is to issue shares on the ATM, that's obviously a substitute alternative to get there. And it reinforces the value of that business line because we can have a direct method to support the Capital needs from there that is significantly less expensive than the returns that we get from our clients.
Thank you. And then just to ask about the $9 run rate that you've talked about the last couple of quarters exiting this year. You give us a sense of what that contemplates from a provision line item? Because obviously in a given quarter that could have some volatility to it. So just any Thoughts on what that contemplates or if you wanted to kind of equate that $9 run rate to a PPNR per share kind Run rate as any additional detail.
Well, again, it includes a normalized provision. It does not include Releases or underfunding or nor does it include the reverse of Another kind of global challenge like we had in 2020. So, but what does that look like in terms of basis points? I don't have a number for you, But I think if you look at the composition of our loan growth and where it comes from, what would it take to support that kind of going forward, We don't perceive substantial credit losses coming anytime in the future, We've covered charge offs. So we've covered charge offs and we've covered growth in a relatively low risk Growth profile as we're putting on the books in 2021 and I think we're going to be looking at in 2022.
Yes, I would echo that. I mean, I Look back, look what our
last year's charge offs were and maybe use that as a guide as What the provision would be. But
to be very clear, we don't anticipate launch releases to generate that $9 EPS run rate. That's Not included in our logic.
All right.
Thanks guys.
Thank you.
For the next question, we have David Chiaverini from Wedbush Securities. David, your line is open.
Hi, thanks. I had a follow-up on deposits. You mentioned about how the mortgage warehouse deposits were up Very strongly at $1,700,000,000 I was curious, is there any seasonality in the mortgage warehouse deposits that could be a headwind as look out to the Q3 and Q4.
There is some seasonality. It's I'm going to say Q4 and maybe primarily driven by California taxes, property taxes are due. And so as you know, those warehouse deposits are overwhelmingly Funds held from escrow funds from servicers, so which people escrow their insurance payments and they escrow their tax payments. But as you get one particular state that is skews heavily for the overall, I think they were doing November, I'm not a California resident. So there you're going to see a dip whereby the servicer is writing a check drawn on us to the state Or to the relevant counties there coming in.
So, yes, there's a piece with that.
Thanks for that. And then shifting to the resi mortgage portfolio that you're keeping. Just wanted to clarify that what you are keeping Historically and continues to be jumbo in non QM.
Yes, it does. I mean what so again, The trade that we're making is we're willing to give up liquidity for Yield and strong asset quality. We're not going to compromise in AQ, but if we can get if we can give up some liquidity to get a better return, So what I mean by that is, say you have a non qualified mortgage, something that isn't saleable to the GSEs, It's going to trade at a lower price, a higher yield. Something that is jumbo is going to trade at a lower price, higher yield. So we have these are about 65% loan to value loans.
The debt to income is in the mid-30s. The FICO scores are 760, so we think it's pretty good quality stuff. But because it's not salable, it trades at a lower price and that and we're like, well gosh, we can handle that. We want to put On our balance sheet, kind of going forward. Just let me note that just because it's not liquid to the GSEs, it doesn't mean it's not Liquid to us.
So for example, all of these loans we can pledge on our Federal Home Loan Bank line and they give us advances on them. It wouldn't be difficult at all even if you wanted to, to securitize these loans and sell them to private investors.
Great. Thanks very
much. Thanks.
We don't have any further question.
Okay. Just wanted to thank you all for attending the phone call and we look forward to speaking to you
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.