Good day, everyone. Welcome to the earnings call for Western Alliance Bancorp for First Quarter 2020 1. Our speakers today are Ken Vecchione, President and Chief Executive Officer and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 3 p.
M. Eastern Time, April 16 through May 16, 2021 at 11 p. M. Eastern Time by dialing in 1-eight hundred-five eighty five-eight thousand three hundred and sixty seven using conference ID number 9,750,7,965. The discussion during this call may contain forward looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historically facts.
The forward looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward looking statements. Factors that could cause actual results to differ materially from historical Our expected results are included in this presentation, the related earnings release and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward looking mix. Now for the opening remarks, I would now like to turn the call over to Mr. Ken Vecchione.
Please go ahead.
Good afternoon, and welcome to Westernline's Q1 earnings call. Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer. I will first provide an overview of our quarterly results and how we are managing the business in Current economic environment and then Dale will walk you through the bank's financial performance. Afterwards, we'll open the line and we will take your questions. The continued growth in Western Alliance's national commercial business strategy drove financial results and balance sheet growth to record quarterly highs to kick Off 2021.
Mirroring the company's strong 4th quarter performance and underlying fundamental Wall earned net income of $192,500,000 and earnings per share of $1.90 for the quarter, up $108,000,000 year over year and nearly flat to Q4. Net revenue expanded 4.5 times the rate of expenses As improvement in asset quality and economic conditions drove a $32,400,000 release in the loan loss reserve this quarter. Our focus continues to be on PPN and R growth, which rose approximately 31% year over year to $202,000,000 while marginally lower than last quarter due to 2 fewer days. Regarding the acquisition of AmeriHome, I am pleased that the closing Took place approximately 3 weeks ahead of schedule. While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergy with the pay down of external credit lines.
Additionally, we signed agreements for the sale of approximately $750,000,000 Our mortgage servicing rights is strong counterparty that will allow Western Alliance to retain substantially all the custodial deposits. We expect this to be completed in early May. AmeriHome was an attractive strategic acquisition, expanding Western Alliance's fee income and lowering the company's reliance on spread income while providing growth optionality to our commercial portfolio of businesses. Turning to the Q1 balance sheet trends, outstanding quarterly loan and deposit growth of 1,700,000,000 at $6,500,000,000 respectively, lifted total assets to $43,400,000,000 up 49% from the prior year. Our near term focus on growing loans in low risk asset classes was on display as loan growth was primarily driven by warehouse funding, Residential loan purchases and increased activity throughout our traditional banking and regional footprint.
Our deposit growth was broad based across our franchise, which pushed down our loan to deposit ratio to 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition. The continued excess liquidity from our improving deposit franchise is at the expense of short term NAND Impression, but it's a trade off we are willing to accept for long term value creation. This impressive loan growth drove Net interest income was $317,300,000 or $2,500,000 higher than last quarter and up 18% on a year over year basis. Quarterly net interest margin was 3.37%, down 47% from the 4th quarter as we continued to Excess liquidity into loans and investment securities. Non interest income totaled $19,700,000 for the quarter, $87,300,000 of warrant income from Bridge Bank.
Asset quality remained stable this quarter as the economic recovery gained For the quarter, net loan charge offs were $1,400,000 or 2 basis points on an annualized basis. Credit losses may not appear in any meaningful way as prior and proposed stimulus packages continue to positively impact Consumer spending habits and many businesses were provided the liquidity to weather the pandemic. Finally, Western It continues to generate significant excess capital, which proved tangible book value per share to $33.02 or 23.5% year over year or 23.5% year over year. We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.93% and 24.2% respectively. This strong momentum coupled with economic reopening positions Western Alliance well for an industry leading 1.
At this time, I'll let Dale take you through the financial performance.
Thanks, Ken. For the quarter, Western Reliance generated net income of 192 point $5,000,000 or $1.90 per share, each down about 1% from the prior quarter. This is inclusive of reversal credit loss provisions of 32 $400,000 due to continued improvement in economic forecasts relative to year end 2020 and continued loan segments with historically very low loss Additionally, merger expenses related to the Meritome acquisition of $400,000 were recognized. We expect total merger charges to be approximately $15,000,000 preponderance of which will be incurred in Q2 as integration continues. Net interest income grew $2,500,000 during the quarter to $317,300,000 an increase of 18% year over year, primarily as a result of our significant balance sheet growth.
However, while average earning assets grew 5 $7,000,000,000 The relative proportion held in cash, the lower yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy adjusted liquidity into AmeriHome generated assets and higher yielding commercial loans. Quarter over quarter, Our loan to deposit ratio fell to 75% from 85% in Q4 as we proactively look to grow low cost deposits as dry Our securities measured at fair value, partially offset by $7,300,000 in the warrant income. Non interest expense increased $2,800,000 mainly due Higher deposit costs as lower rates were offset by higher average balance. Continued balance sheet growth generating superior net At the same time, we grew pre provision net revenue of $202,000,000 up over 30% from a year ago. Turning now to net interest drivers.
As our strong core deposit growth continued throughout the quarter, we look to deploy redeploy excess liquidity into the investment portfolio and loans. Total investments grew $2,400,000,000 for the quarter or 43 percent to $7,900,000,000 compared to an average of $6,500,000,000 Investment yields declined 24 basis points from the prior quarter to 2.37% due to lower reinvestment rates in the current environment. Similarly, on a linked quarter basis, linked loan yields declined 8 basis points following ongoing mix shift Residential loans and asset class with generally lower yields in the remainder of the portfolio and low credit risk. This was partially offset by higher PPP fees, strong loan growth and liquidity deployment towards the end of the quarter. Significantly, quarter end balances for loans and investments were $3,300,000,000 higher than the average balances and yielded 3.5% more than our Fed account.
Higher income from this already deployed liquidity positions us well for Q2. Interest bearing deposit costs were reduced by 3 basis points in Q1 to 2022 Due to ongoing repricing efforts and maturities of higher cost CDs, the spot rate for total deposits, which includes non interest bearing, was 11 basis We expect funding costs have generally stabilized at these levels. Net interest income increased 2,500,000 $317,300,000 during the quarter or 18% year over year as higher loan and investment balances offset net interest margin compression. NIM declined 47 basis points to 3.37 as our purposeful strong deposit growth in advance of closing the Mira Home acquisition negatively impacted the margin by 43 basis points. To put this in perspective, average securities and cash balances The interest earning assets increased meaningfully in Q1 to 32% from 22%.
Given our Higher end quarter loan balances, healthy loan pipeline and ability to deploy this excess liquidity over the coming quarters into Higher yielding earning assets, we expect this margin drag to moderate while net interest income lies. Additionally, a PPP loan yield 4.9% benefited the NIM by 8 basis points, which was similar to the 4th quarter benefit. Cumulatively, over the remainder of 2021, we 39.1 percent, an increase from 38.2 percent in Q4. This higher efficiency ratio was driven by a modest decline in non interest income and an increase in expenses partially offset by increased net interest income. Non interest expense linked quarter growth increased by 2.1%, driven by higher deposit fees related to the 82% annualized rise in deposit balances.
Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 41%. Inclusive of AmeriHome, we expect the efficiency ratio to rise to the mid-40s this quarter. Pre provision net revenue declined $4,400,000 or 2.1 percent from the prior quarter, but increased 31% from the same period last year. This results in PP and R ROA of 2.03% for the quarter, a decrease of 21 basis points compared to 2.24% for the year ago period, partially impacted by a much larger asset base. This continued strong performance in 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 increased $1,700,000,000 or 6.1 percent to 28,700,000,000 And deposit growth of $6,500,000,000 brought balances to $38,400,000,000 at quarter end. Inclusive of the 2nd round of PPP funding, loans grew 24% year over year, while deposits grew approximately 55% year over year with our focus on low loss low loan loss segments and DDA. In all, total assets have grown 49% year over year as we approach the $50,000,000,000 asset level, including AmeriHome. Finally, tangible book value per share increased $2.12 over the prior quarter to $3,302 an increase of $6.29 or 23.5 percent over the prior year, attributable to both net income And the common stock offering of 2,300,000 shares completed during Q1 in anticipation of the AmeriHome acquisition. Our strong loan growth continues to benefit from flexible national commercial business strategy.
The majority of the $1,700,000,000 in growth was driven by an increase in C and I loans of 746,000,000 Loan growth was also strong in residential real estate loans of $675,000,000 supplemented by construction loans of 337,000,000 And CRE non owner occupied loans of 27. Residential and consumer loans now comprise 10.9% Our loan portfolio, an increase from 9.9 percent a year ago. Within the C and I growth for the quarter and highlighting our focus on low risk assets, Mortgage warehouse loans grew $562,000,000 and round 2 3P loans originations were 5 $2,000,000 which were nearly offset by $479,000,000 from round 1 of the payoffs. We continue to believe our ability to grow core deposits from diversified funding channels is our key to long term value creation. Given the ability to deploy funds into attractive assets in the near term, we purposely looked to expand balance sheet liquidity in Q1.
In Q1. Deposits grew $6,500,000,000 or 20% in the Q1, driven by increases in non interest bearing DDA of $4,100,000,000 which now comprise 46 percent of our deposit base and savings in money market of $2,900,000,000 Market share gains in mortgage warehouse continue to be a significant driver of deposit growth during the quarter along with robust activity in tech and innovation and Our asset quality remains strong and borrowers are stable, liquid and supported by strong sponsors. Total classified assets This increased $57,000,000 in Q1 to $281,000,000 due to migration of a few borrowers in COVID impacted industries Such as travel, leisure and entertainment as reopening continues, but at an uneven pace. We see the potential for these credits to be upgraded as Travel and events increased in the coming quarters. Our non performing loans plus OREO ratio declined to 27 basis points to total assets And total classified assets rose 4 basis points to total assets to 0.65% compared to the ratio at the end of 2020.
Special mentioned loans increased $23,000,000 during the quarter to 1.65 percent of funded loans. As we've discussed SM loans are a result of our credit mitigation strategy to early identify, elevate and apply heightened monitoring 2 loans or segments impacted by the current COVID environment and fluctuate as credits migrate in and out. We do not see credit losses emerging from special mention Volatility. Regarding loan deferrals, as of quarter end, we had $68,500,000 of deferrals, all of which They're in low LTV residential loans. Quarterly net credit losses were modest at $1,400,000 or 2 basis points Average loans compared to $3,900,000 in the 4th quarter.
Our loan ACL fell $36,000,000 from the prior quarter to $280,000,000 due to an improvement in macroeconomic forecast and loan growth in portfolio segments with low expected loss rates. In all, total loan ACL to funded loans declined 20 basis points to 97 basis points or 1.03% when excluding We continue to generate capital and maintain strong regulatory ratios, with tangible common equity to total assets of 7.9%, We're down this quarter by strong asset growth and the common equity Tier 1 ratio of 10.3%, an increase of 40 basis points during the quarter, mainly driven by our common stock offering and growth in low risk assets. Inclusive of our quarterly cash dividend payment of $0.25 a share, our tangible book value per share rose $2.12 in the quarter to $33.02 an increase of 23% in the past year. I'll now hand the call back over to Ken.
Thanks, Phil. QuestionAlliance is one Of only a handful growth banks in the industry with double digit loan growth, liquidity to fund the growth, strong improving net interest income that generates Peer leading ROA and return on average tangible common equity with steady asset quality and low net charge offs. Going forward, based on our current pipeline, we expect loan to deposit growth of $1,000,000,000 to $1,500,000,000 per quarter, which will drive higher net interest income and PPNR growth. We expect new pressure to subside Through the deployment of liquidity into attractive asset classes. One of the characteristics of AmeriHome that we found very attractive Is that it provides a natural solution to walls excess liquidity.
AmeriHome will be expanding its product array to include Higher yielding non QM and jumbo loans that fit our established credit box. Placing and holding these loans on our balance sheet It enhances our existing residential mortgage purchase program and is a worthy credit solution for the swift deployment of excess liquidity. To keep pace with balance sheet performance, our risk management programs and technology platforms are evolving and expenses will rise, but will be offset by the revenue generated from excess liquidity deployment. There will be no drag on PPNR or EPS Inclusive of AmeriHome, the efficiency ratio will rise to the midpoint. Finally, our long term asset quality and home loss Reserves are informed by the economic consensus forecast incorporating risks for tail economic events, which is consistent going forward, could imply a A steady reserve balance.
Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, But we do not expect material migrations into substandard. We believe the provisions in excess of charge offs Since the pandemic began, I'm more than sufficient to cover charge offs through the cycle as we do not see any indicators that Supply material losses are on the horizon. To conclude, Western Alliance is well positioned for balance sheet growth, extending asset quality. PPNR should continue its upward trajectory from Q1 along with industry leading return on assets
And Equity. At this time, Dale, Tim and I are happy to take your questions.
Thank you. At this time, we would like to take any questions you might have for us today. GPAD. We have our first question from the line of Brock Vandervliet from UBS. Your line is now open.
Great. Thanks very much.
Dale, if you could review
with the closing of AmeriHome, What does the debt pay down picture look like and how is that going to Shape your ability to kind of soak up this excess liquidity in the near term?
Yes. So, we're doing that Now, they had about a little over $3,000,000,000 worth of borrowings and we're phasing those out kind of going forward. I think we're going to I think that's going to be done, say, by sometime in the Q2. We're also going to be getting from AmeriHome And if we're going to be able to have a kind of ready deployment into mortgages that we want us to put in our balance Gene, we prefer to have something that is low LTV, but higher yielding, which pushes you toward kind of a non QM solution, which they're going We'll be rolling that product out as well. So as our ability to do that happens, and I think over the next couple of quarters, that's going to be the case.
It wasn't random that we had this kind of massive deposit growth during the quarter. We let It go in terms of bringing in more deposits because now we have a near term ready access to an almost limitless So we're seeing a good quality asset deployment. And I think you're going to see that in 2021.
Okay. And I think the on AmeriHome, the gain on sale picture has darkened somewhat since You announced the deal. Can you give us any sense of what their gain on sale was in Q1 and how that may have compared to the prior quarter or prior year?
But we can't talk about their Q1 performance because they're part of a public enterprise Dean hasn't announced yet. But what we did mention was AmeriHome has the ability to pivot. So we expected that That margins were going to be coming down. That is taking place today. And but they have also the ability to take what we call their win rate, which was about 7%, That is buying about 7% of the loans that they look at, to and to increasing that.
And so they've been doing that As well. So, so they're pivoting appropriately and we're standing by the $1.41 That we indicated AmeriHome was going to benefit us in 2021. I think you're going to see $0.30 to $0.35 of that In the Q2, as we phase this in, including the thing you just inquired about, ROC, regarding being able to On their loans and
stuff like that, so we're
in that process, but that's
where we are. Brock, it's Ken.
I just want to
add a few things. If you recall back to our earnings call and our conference call in early February when we announced in our home, we said that there were other opportunities To earn more than the accretion numbers that we provided. We held those back because of some uncertainty that we saw coming Actually with rising rates. And we're using all of those as we intended to in order to maintain our earnings estimates For AmeriHome. Got it.
Okay. Appreciate the color.
Thank you. We have our next question from the line of Casey Haire from Jefferies. Please go ahead.
Great. Thanks. Good morning, guys.
Good morning.
Wanted to touch on the deposit growth.
I mean, you
guys I mean, even with the updated with bumping up the guide, I mean, this quarter, you've really massively outperformed that. Just wondering, is there still it feels like the environment is still right to continue to do that. Is it possible that the deposit growth Is conservative based on the current environment, based on what you're seeing?
So, we think it's conservative because we told you $1,000,000
and we came in at $6,500,000,000
Maybe.
Look, We bumped it up to $1,000,000,000 to $1,500,000,000 We've been performing at this level or better for the last 6 to 8 quarters. We have some real visibility into the pipeline based on either all commitments or things we're just finishing up the paperwork on now. So yes, there is a possibility to exceed both the deposit guide As well as the loan guidance.
Okay. And on so on the cash balance at 15% on average in the quarter. And I realize that you guys did get to work in the back half of the quarter with securities and loans. But Even with the pay down on the AmeriHome debt, you're still probably at around 7% of cash. What is your target level?
How comfortable are you driving Matt, at what level?
Yes. So I mean the $1,000,000,000 $1,500,000,000 is what we consider to be kind of a core number. But as we deploy that and pull that number down, and that number can fall substantially. And frankly, the Securities book is at least a third or 40% higher than it needs to be too. Now that's better than cash, but not as good as some of these other loan based 1?
So I do expect that we're going to have a couple of quarters where we're going to right size our loan to deposit ratio. It wasn't that long ago, but we were in the 90s. Now we're down at 75. Well, doing that means that loan growth will be well in excess Of $1,500,000,000 as we increase that loan to deposit ratio. That's going to get underway In the next in the not too distant future.
Okay, great. And then just some follow ups on the NIM side of things. The new money loan yields that you're seeing in on mortgage as well as New money yields on securities purchases?
Yes. So the securities purchases, the yields that we got was 220, And new loan yields that we're putting on are running about 20 to 25 basis Points lower than what the average is. I think we are experiencing pricing pressure. I think that the Velocity that the industry and the economy has come out of this pandemic has resulted in kind of reduced expectations for credit losses industry wide And that's being reflected in price. But again, what we've got the ability to do is to drive volume And to shift our focus in terms of where the best kind of risk adjusted returns will be.
Okay. Just to clarify, Dale, so 25 percent, I mean your existing loan yield in the quarter was around 4.6%. I would think resi mortgages is lower than that, right?
Yes. No, resi mortgages that we are putting on our books are around 3.
Got you. Okay. Thank you.
Thank you. Your next question is from the line of Brad Melzaps from Piper Sandler. Your line is now open.
Hey, good afternoon guys.
Hey, Brad.
Just wanted to stick with some questions around AmeriHome. Just kind of curious How much the change in increase in loan guidance is related to you guys retaining more production from AmeriHome? And what And if so, does that have any impact on kind of what AmeriHome would contribute on a standalone basis going forward? Or is it all kind of interconnected?
Well, so I mean, our kind of our core number, I wouldn't say is AmeriHome dependent. I mean, we've been buying mortgages from other sources that was happened in the Q1 and last What AmeriHome gives us is a more profitable way to do that rather than going to other We can kind of keep it all in the family and also kind of a ready full bore in terms of ability to do that. So what we're going to get from AmeriHome is also on top of that is to be able to again kind of right size our loan to deposit No. In a way that's certainly accretive to net interest income.
Yes. I guess maybe ask differently, Dale, is Are the 2 sort of exclusive one another? You're increasing loan guidance, but then you still think AmeriHome can contribute what it was going to When you initially announced this back in February?
Yes. We increased our loan guidance irrespective of AmeriHome. That is that we all of last year, we certainly didn't have AmeriHome and we were in a pandemic and never once were we under $1,000,000,000 So it's impart acknowledgment of that. So we can do this without AmeriHome, but AmeriHome gives us, I don't know, more confidence to be able to execute A better price point for the residential real estate
we pick up. They're going
to be expanding their product line. That's going to give us kind of even more volume. So AmeriHome doesn't affect the $1,000,000,000 to $1,500,000,000 because that's kind of what you're getting surprised. Yes. Yes.
Got it. Got it. That's helpful.
And then I know when you announced the deal, your intention was to sell some of the MSRs. Did this come in line with about what you were thinking, sort of how does that impact kind of their run rate in terms of gain on loan sale margin going forward?
Yes, this is Ken. We actually sold the MSRs Well, more money than we had anticipated. So we feel good about that in terms of the transaction. By getting these getting this large amount off our books, it allows us to do smaller MSR transactions Going forward, which we think we should get better pricing on.
Okay, great. Thank you, guys.
Thank you. The next question is from the line of Chris McGratty from KBW. Please go ahead.
Great. Thanks. Good afternoon. Gail, I'm wondering if you can parse out the $6,500,000,000 of deposit growth By your verticals, specifically tech and innovation, HOA and kind of mortgage?
Yes. So the HOA group was up about
okay. So The regions all in did about $1,900,000,000 all right. Warehouse funding is about 2,100,000,000 2nd innovation is about $760,000,000 Our HOA business, Just under $700,000,000 By the way, HOA did as much in this quarter as it did almost all of last year. So those are the big drivers of HOA of the positive growth, Chris.
Okay, great.
And then I
should just add I'm sorry, there's a couple of things in there too, which we're excited about. We never give you the names of our new deposit businesses, but our Deposit Business 1 grew $500,000,000 in Q1 and Deposit Business 2, which we always said was Well behind deposit business, number 1, grew $50,000,000 So we're getting excited about what these businesses can do for Okay. It's great color. In terms of the C and I growth, can you Maybe I missed in your prepared remarks. Did you I know last quarter you said that your guidance was inclusive of growth in the warehouse, but did you Tell us what the warehouse balance changes were in the commercial book.
Are you asking I'm not certain with your question. Ask it again.
Sure. The mortgage warehouse, how much
of that in the lending side, how much
Oh, the growth this quarter was warehouse.
Okay. All right.
The warehouse funding this quarter And we include 3 items in there. We include warehouse lending, MSR lending and our note finance, which is a separate business, but we have it on the warehouse That collectively grew $560,000,000 for this quarter. We came in with an understanding this year that we keep warehouse lending basically flat to its ending balance of 2020. But we keep telling you, we keep winning share there and it manifests itself here in Q1 as you can
Okay. Thank you very much.
Thank you. 1. The next is Gary Tenner from D. A. Davidson.
Please go ahead.
Thanks. Good morning. Just a
couple of questions. One just kind of housekeeping on PPP. Can you give us what the average loans outstanding were the quarter?
We have about $1,500,000,000 in Loews remain. Including 2, of course.
Right. Got you. Okay. In terms of as you kind of thinking forward and knowing that obviously adding more resi mortgages will change this, but Can you kind of just run through from a loan sensitivity perspective, what amount of your loans are variable rate today and kind of Status of in the money floors as we start thinking a little further out to be a prospective rate hike?
So today, the floors are active in the preponderance of our portfolio. So we are we're behaving as if we're 80% fixed. We have, I think, an interesting asymmetrical profile whereby if rates go lower, we see very little Contraction of net interest income because they're asset floors. But if rates rise, our loan yields become even more asset Sensitive because they'll be lifting off of the floors, kind of going forward. So it's an asymmetrical benefit for us Relative to where we are.
So we yes, 80% of our book today is behaving as That's a fixed rate.
Okay. And just
in terms of if there is is it one rate hike to your rate hikes And so there's an actual upward benefit in those variable rate volumes?
Yes. I mean, it's It's staggered. Some are immediate. They're kind of others are 100 basis points away. So I would say on average, you're going to need to see probably 2, or rate increases before you're going to start seeing kind of notable improvement in terms of loan yield.
Okay. Even though these loans are variable, we're putting them on at the floor so that they're looking like they're fixed rate loans,
Okay, great. And then just last question. You talked about mortgage warehouse and continuing to win Business there taking share and obviously the warehouse deposit balances grew pretty significantly. Can you just talk about the Kind of sensitivity of mortgage or asset related deposits relative to overall volume, Overall, what you're buying?
So warehouse lending, I think, Started out 10, 12 years ago as an interesting idea, and we see if we can get another channel going. So something today where it's just a very important strategic weapon for us. It's delivering More in deposits than we anticipated, because primarily of the service we deliver And the fact that we moved upscale upmarket in dealing with some of the larger, More sophisticated clients. They are feeling more comfortable consolidating more and more of their deposits with us,
all right?
And there's some of the large clients, there's a disproportion between we have much more in deposits than we have on their loan in their loan balances. But we're continuing to gain share in both the loan side and the deposit side. I just would say Some of the competitors that we normally see are just not performing as well as they should in terms of service levels. And we've got I think I said this maybe at the last earnings call, if you think of us as an airport, we've got planes circling overhead looking to land They
give us their business. And for
us, it's a matter of how quickly we can onboard both the deposit and the loan business.
I think it's important to remember that the deposit balances aren't really the business. So it's not operating accounts So let's say the refi business contracts dramatically. That can affect the actual balances of that enterprise, But that is a very small piece of the deposit balances we have. The deposit balances we have that drive that number It is the escrow relationships, and that's based upon the mortgage servicing that some of these enterprises own. So you can see volatility in the origination side, but the MSRs drive the deposit balances, and that It tends to be much more stable, because people maintain mortgages on their house.
Great. Thank you.
Thank you. Your next question is from the line of Timur Braziler from Wells Fargo. Your line is now open.
Hi, good morning. Maybe just following up on that last mortgage warehouse discussion. I guess how sensitive is that business speaking of yield curve and if Broader industry trends start to slow down. With the circling runway, is that kind Perspective of what's happening industry wide as you onboard new clients or if there is a broader slowdown, we should expect to to volumes and growth rates low as well at Western Oregon?
Yes. So good question there. When we came into 2021 in the planning year for our overall growth, we did not have warehouse lending stepping up In terms of balances. But while obviously, we had a good Q1, we're going to continue that trend going into quarters 2, 3 and 4. What we're seeing is 2 things.
1, there's just a natural rise in terms of taking market share With the clientele that we have today and then on top of that, we will get a benefit From penetrating the AmeriHome client list. So they've got, as I said, 7 20 clients. We've got about 100 or so that overlap and we're going to be able to penetrate going into their clients. So if you can Picture that we go into one of the AmeriHome clients and say, look, we give you a line of credit, just call it $25,000,000 for argument's sake, And we'll also buy after you accumulate loans on that line, we'll also take you out of that line. That's a very powerful argument to offer sort of a 2 for 1 opportunity to the AmeriHome clients.
So we haven't fully factored that into our numbers yet, but that gives us some confidence that we should be able to continue to grow Our warehouse lending business on the loan side.
Okay. That's helpful. So as we So thinking about your new loan growth guidance, it shouldn't just be what you've been putting on existing plus The rest of the increased debt coming directly from resi, we can actually see mortgage warehouse continue to ramp Higher and the larger component of that growth guidance as well.
Well, I'm just trying to clarify what you said. The $1,000,000,000 to $1,500,000,000 is basically business
as we do it today, all right.
So you'll see our resi purchases continue And you'll see warehouse lending grow as if we never had the AmeriHome acquisition. The AmeriHome acquisition, As we ramp that up, we'll provide either comfort to achieving that $1,000,000,000 to $1,500,000,000 or if we do it really well, It will help us exceed that number.
Okay. That's helpful. Thank you. On the residential side, I think in quarters past, You guys have talked about the concentration of 20%. Do you have
a concentration limit in mind?
And I guess as we are building out What residential loan growth could look like? How big of an overall loan portfolio could the Envision might be coming?
Well, I think we can easily punch through 20. I mean, the average bank our size is 30. First Republic is just under 60. So I mean, what we like about this space is, I mean, very good quality Performance, now we've got kind of an unlimited channel into that. There are some other kind of cross sell opportunities, some of which we've talked about That we can pick up.
So we're definitely going through 2020 and towards the median at least for half.
I mean, that's a very strong book we have, right, 7.59 Michael, DTI of about between 34% 36%, below 70% LTV. We could probably give you a list of all the Both that have been, call it, 90 day delinquents. It's usually just an unusual event, and we've not had a loss in So it really helps bring a lot of asset quality to good asset quality To our loan composition.
Okay. And then just last one for me, Beth, on the deposit I'm wondering how much of the growth, if any, is coming from the extension of the tax deadline and what that could look like for balances So much better to pay pass sales in the next month, okay?
Yes, that's more of a consumer phenomenon, I'd say. And our liquidity It has been coming in strong all through 'twenty. Remember, 2020, we did $9,100,000,000 of liquidity, Which far, far exceeded our best, best year ever. And this quarter, we did $6,500,000,000 which is just in 1 quarter.
Okay. Thank you.
Thank you. The next question is from the line of David Chiaverini from Wedbush Securities. Please go ahead.
Hi, thanks. I wanted
to ask
about the pace of securities purchases. You had a strong ramp up in the Q1. Going forward, should we expect that pace to slow somewhat as you pay down debt with the closing of AmeriHome?
Yes, it will absolutely slow. What we did is we've been sitting on a lot of growth from the Q4, also the Q1. And so we wanted
to deploy some of that. Again, because the balancing
act we're trying to do is, look, we can get 10 basis Points if we keep it at the fed, that's pretty meaningless. We can get 3% if we can put it out into low LTV whole loans or we can go into the securities book and as I said, we got 220. So it's a little bit
of a compromise there because
It is going to take us sometime within this year, but sometime to deploy the liquidity that we have and also the new Positive growth that we expect to continue to generate. So but over time, yes, I think our securities book can actually bleed down, But I wouldn't expect to see that anytime soon. But no, I think the growth in the book in the security side is largely behind us. We're using our current liquidity to pay off all of the AmeriHome debt and then also to begin to purchase non QM
Great. That's helpful. And I also wanted to Follow-up on the NIM commentary. You mentioned about how the drag should moderate going forward. And I see in the slide deck how the spot rate on loans It's about 13 basis points lower than the portfolio average in the quarter.
In terms of magnitude Of being down. Well, I guess the clarification is to expect continued margin compression, but just not Clearly as much as the 47 basis points in the Q1. Is that the way to think about it?
Yes. I mean, again, what we're focused on is We're focused on how do we increase the earning power of the company and translate that into EPS. Margin has very little to do with that. We're so earning power, we think, hey, low cost, stable core deposits that we can deploy into profitable assets. Now got you.
I'd love to get 5% for that without risk. We're not seeing those opportunities at Gale at that price point. So what are we doing? Well, we're going to residential where we have unlimited and that's 2 points less. But if I add mortgage loans at 3% and our margins at 3.37%, that's going to decrement that margin a little bit.
But instead, if I think about it, I've got investments at 10 basis points of stuff that's already on the books and I can put that out of 3, that would help the margin even though that spread is actually lower because I'm taking 10 basis points to 300 basis points. So the combination of those two things, is it possible the margin comes down a little bit? Yes, I think that would actually be A good thing because what it really means is that we're continuing to move the fundamental footings of the balance sheet that we can then deploy into earning assets. I just want to add one other thing
to what Dale said. Our focus on net interest income rather than NIM Started in early 2018. So this is not a new phenomenon for us. We have talked about this since the early part of 2018 that this was the direction That we're going to take, which is prioritize net interest income growth over NIM. Simply said, net interest income is going to drive EPS.
Yes. One of the things I'm very proud of this quarter, with 2 less days, we made more in net interest income than we made in Q4. So our strategy is being executed upon. And as Dale said, Our goal is to keep that net interest income looking robust for the next several quarters as we continue to deploy The excess liquidity and continue to upgrade our guidance as to what we're going to bring in.
That all makes sense. And then a last housekeeping item. I think you mentioned merger charges, you're expecting $15,000,000 roughly $15,000,000 mostly in the second quarter. Are you is your expectation now, that it's going to be in total lower Then the $35,000,000 that was discussed at the announcement of AmeriHome?
Yes. Ken was alluding to that earlier in terms of the pricing that we got on the disposition Of the MSR book. I mean the preponderance of those fees that we're going to be incurring are basically deconversion costs from our outsourced mortgage servicer To the purchaser. That transaction should close within the next few weeks.
Got it. Thanks very much.
Thank you. The next is Michael Young from Drew West. Your line is now open.
Hey, thanks. Good morning.
Good morning.
I wanted to follow-up, Ken, on your comments about the reserve level maybe maintaining more of a flat level going forward, is that sort of on a relative basis to loans outstanding? In other words, I guess CECL impacts maybe are more muted and loan growth coming more from commercial going forward, so we kind of stay more stable?
Yes, that was really it's a numerator denominator thing. What I was trying to say is the balance is going to stay relatively flat. With the way we're growing, you can see the ratio drop, but the balance we think will be relatively flat. A lot of that, as you know, with CECL is driven by the economic outlook, which can which would really move the numbers. But what should not be lost upon our shareholders, investors, the analyst community is that 42% Of our portfolio is in loans or asset categories that we've never ever had a loss on or loss in, I I should say.
And that's what also drives the CECL calculation.
Okay, great. And maybe just as a follow-up, just thinking about the pace of growth relative to capital, capital levels gotten a little skinny even with the issuance This quarter, I know PPP kind of has an impact on the TCE ratio. But just should we think about
you guys are willing to
grow if growth is there and you'll Is capital as needed or would you temper some of the mortgage growth areas that may be more of a flex area on the balance sheet to stay within kind of capital ratios?
No, if we need capital to grow, I think you can look to look for us to do the right thing and raise
Okay. And if I can sneak in one last one just for AmeriHome kind of on the books I guess now. Ken, just trying to think about sort of the buy versus build equation going forward. You guys always have some deposit loan growth verticals in the pipeline that you're building. But has this changed your view on that equation or what you'd like to
do on a go forward basis?
No, not
at all. I mean, the AmeriHome team has a couple of things that they like to look at in terms of new opportunities, I've mentioned them non QM channel, jumbo channel are just 2 of them that jump right out. But that's separate. That team can work on that As the commercial side of Western Alliance can work on other business opportunities. And we're continuing to work on those opportunities now.
We're probably one of the few banks that is sitting here working on 20 22's growth levels. That's how far out we are in what we think in terms of our pipeline and our visibility.
Okay. Thank you.
Thank you. Your next question is from Tim Coffey from Janney. Please go ahead.
Great. Thank you, gentlemen. So in the quarter, residential mortgages were about 40% of your net loan growth. Would you expect it to be that level going forward?
Yes. Yes. I think that's going to continue. And as I mentioned, that's kind of the core piece. I think $40,000,000 is not a bad number.
When we stop up our excess liquidity, it's going to skew much higher than that because a lot of that is going to be directly toward No mortgage acquisitions, it's where we see something kind of well in excess of $1,500,000,000
Okay. And on the efficiency ratio, is kind of You think as we go given the growth of the solid quarter, as you go through the year adding Mira Home and Sash, do you think 45% is going to be kind of a new level for you?
Yes. It's going to be 45%, 46% ish or something in there. But yes, mid-40s. I think that's kind of where it's fairly stable at that level, something under 50% I believe.
Okay. And can you talk a
little bit about what What it is about Western Alliance that allows you to maintain kind of expense growth at a level well below asset growth? Yes. So let me try to I think a lot of that When we talk about our national commercial business line strategy, we generally talk about it in terms of The growth that it brings in, and that's very helpful to keeping the efficiency ratio low. But these businesses are, for the most part, Have very, very high operating leverage. And that's one of the characteristics.
There are several characteristics of the national strategy. Generally, very few competitors, pricing power or stability, great asset quality. And then the 4th one we love is very high operating leverage. And as the growth shifts over to that, coming from those national business lines, Just the natural calculation of the efficiency ratio will keep us more moderate as Compared to our peer group. The other thing is we're just growing revenues, as I said upfront, 4 times faster than expenses And that's who will keep the efficiency ratio in line.
Great. Those are my questions. Thank you very much.
Thank you. The next question is from Jon Arfstrom from RBC Capital Markets. Your line is now open.
Thanks. Good morning, everyone.
Good morning, Josh.
Hey. Dale, question for you. Can you go back and review The loan to deposit comments you made earlier and where you think you might sit at end of the second quarter and maybe end of the year? Can you help us with that a bit?
Yes. So I mean, it's something we're trying to get underway now. I think that at the end of the second quarter, I expect we maybe we'll be close to where we are presently, maybe a little bit better With the $1,500,000,000 in growth in each, I think we're going to be able to get these kind of new products out For the VeriHome, maybe by the end of the second quarter into 3rd. And then with AC 1,000,000,000 of dollars certainly In volume, and so we can move rapidly on that. I personally would like to be kind of at the 90% range back to loan to deposit ratio at the end of the year.
So I I mean, if you take where we are, where we right sided that, where we have very substantial growth from just Where we are as of threethirty one. We had $3,500,000,000 of loan growth at a 3.5% spread. That's already In the books, as of threethirty one, that generates about nearly $10,000,000 a month of increased PPNR Just from deploying that out of liquidity. Then you add in AmeriHome with this. We expect to be at an EPS run rate Of $9 as we exit 2021.
I was going to ask later if you
I just want to punctuate what Dale said for a moment there, John, everyone's talking about the liquidity and loan to deposit ratio. We're talking about net interest margin versus net interest income. What Dale just said is the crux of how we structured the business that the $3,500,000,000 that we just put out And the $10,000,000 that we're making a month pre tax, dollars 30,000,000 a quarter, that is very, very powerful and that's what leads us to have A certain degree of confidence along with the AmeriHome acquisition that we can exit the year at that $9 EPS run rate.
Okay. I
was going to ask if you think numbers should go up, but you answered that for me. I do want to ask one more question, And it won't be on deposits. But can you talk about lending outside of your national businesses, Some of the pipeline trends and what you're seeing in construction, just as kind of a gut check on what you're thinking on the overall economy.
Yes. So actually, what we're seeing inside of our footprint is exactly what we're seeing outside of our footprint. So on the construction Beside residential, that's very hot for us at this moment. Homes take 5 to 7 months to build. They're extending out a little bit longer than that because of some labor shortages and The cost is a little bit higher.
But once they're built, boom, they're sold rather quickly. So one of our struggles, of course, is how you keep those really good loans outstanding for a longer period of time. But the construction side of single family residences are really hot. Build to rent opportunities, which for us are mostly in our footprint more so than outside of our footprint. Yes, Arizona seems to be the built to rent capital.
The outskirts of Phoenix In the West Valley, it seems to be very, very active and we're doing a number of deals there. I'm going to let our Chief Credit Officer We've been sitting here patiently and hasn't said a word. Tim Proctor, Tim,
do you want to comment on this? Sure.
Residential and commercial both,
I think there were definitely some The things that sat on the shelf last year with the uncertainties of the pandemic. So projects delayed, So we're seeing that move forward. And so we as we look out across 2021, we don't see Any big shifts in loan demand. We see stability Across the major food groups within our real estate portfolio. So we're not seeing Trends and rent payment, they're alarming.
We're seeing things that give us comfort. And we're maintaining a very close and direct Monthly or weekly dialogue even with our borrowers that gives us that information. So I think outlook is very positive for us across all the segments.
And we're very active in the net migration in states as you would expect as They're seeing even more activity. But I should have said it does not only pertains to construction of single family residences, On the industrial side, we started or financed a number of spec projects for industrial warehouses. And before the shell is even completed, they're already leased up, but no longer are they spec. They're all pre leased. So that's the I just give you an example of how hot the CRE market is for us.
Yes.
Just a data point on that. That portfolio is stabilizing and has stabilized faster now than at any time in the past 4 years, our portfolio. So it is moving
very quickly.
John, we didn't have time to give you a short answer. We hope the long one.
No, that's fine. And I guess just one thing. You did flag this, and I want to make sure it's out there. But you did say you're expecting some movement in special mention in classified, but it doesn't sound like you're concern about that at all?
The answer the short answer is yes. We've looked around. We don't see anything on the horizon that's going to give us a little bit of trouble, and we feel good about where the asset quality is.
Okay. All right. Thank you.
Thank you. There are no further questions at this time. I will turn the call over back 2. Mr. Ken Vaccian.
Thank you. Listen, thanks to everyone for dialing in and listening to our story. We're feeling very good about it. We are very proud of the results and we look forward to talking to you in 90 days from now about the Q2. Thanks again and everyone enjoy their weekend.