Western Alliance Bancorp
NYSE:WAL
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Western Alliance Bancorp
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Good day, everyone. Welcome to Western Alliance Bancorporation's First Quarter 2022 Earnings Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com.
I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
Thank you, and welcome to Western Alliance Bank's first quarter 2022 conference call. Your speakers today are Ken Vecchione, President and CEO; 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-K filed yesterday, which are available on the company's website.
Now for opening remarks, I'd like to turn the call over to Ken Vecchione.
Good morning, everyone.
Besides Dale, sitting alongside of me, Tim Bruckner, our Chief Credit Officer, is also here today as well. So we had solid performance this quarter as the company passed the $60 billion asset milestone, and we're excited by the business opportunities before us.
For the first quarter, WAL generated total net revenues of $555 million, net income of $240 million and EPS of $2.22. We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.64% and 23.9%, respectively, which will continue to support capital accumulation and strong capital levels in the quarters to come.
Balance sheet expansion continued with quarterly loan growth of $2 billion or 21.2% annualized, and deposits rose by $4.5 billion or 38.7% annualized as we continue to effectively attract and deploy liquidity. Excluding PPP runoff, loans grew $2.2 billion in the first quarter, with residential loans increasing $2 billion.
Healthy commercial loan demand continued but this quarter witnessed seasonal runoff of our warehouse lending loans by $640 million caused by mortgage supply constraints associated with lower inventories industry-wide.
Western Alliance diverse loan drivers continue to propel growth in the regional banking division, up $533 million; tech and innovation, up $131 million; and hotel franchise finance, up $158 million. The flexibility of our national commercial bank franchise provides material opportunities to grow both sides of the balance sheet. And in the event of an economic slowdown, allows for alternative growth avenues by product and geographic mix, unlike many of our competitors.
Asset quality continues to remain stable as total nonperforming assets modestly increase $19 million to 17 basis points of total assets and net charge-offs were only $200,000. As the economic environment continues to evolve, we believe that our deliberate strategy to responsibly grow in the national business lines, where we possess specialized sector and underwriting expertise and in low to no loss loan categories, which now comprise 53% of total loans, will allow us to maintain a superior credit risk profile to the overall commercial banking sector.
Regarding AmeriHome, mortgage banking revenue increased $2.5 million quarterly to $78 million as gain on sale margin compression and lower production volumes were offset by a rise in loan servicing revenue.
As discussed at the time of acquisition, the natural macro hedge between servicing income, rising MSR valuation and decline in gain on sale margins was on display this quarter. Additionally, AMH continues to unlock value as an emerging commercial bank leveraging our ability to efficiently deploy liquidity into low credit risk held for investment assets with attractive yields.
AmeriHome continues to demonstrate the unique opportunities to unlock value as a bank-owned mortgage business such as $4.9 billion in low-cost custodial deposits, $2.5 billion in EBO loan purchases, $370 million in warehouse referral loans already generated to date and residential loans purchased through their correspondent loan business. These opportunities drive additional value from AmeriHome that cannot be matched by other stand-alone mortgage companies.
Dale will now take you through the financial performance.
For the quarter, Western Alliance generated net income of $240 million, EPS of $2.22 and preprovision net revenue of $307 million. Total net revenue of $555 million has increased 65% year-over-year, but declined $5 million during the quarter, primarily due to certain noninterest income items.
Net interest income modestly declined $1 million during the quarter to $449 million as strong held-for-investment loan growth of $2 billion was impacted by two fewer business days in the quarter and interest expense on our credit line notes issued in late December.
Overall, noninterest income increased $4 million to $106 million from the prior quarter, driven primarily by $6.6 million mark-to-market losses on equity securities and a smaller benefit from credit guarantees of $4.9 million from the prior quarter, which was partially offset by a gain on the sale of municipal investment securities.
As Ken noted, mortgage banking-related income increased $2.5 million quarterly as lower production volume and a decline in net gain on loans originated and sold was offset by a rise in loan servicing revenue as rising interest rates and falling prepayment speeds benefit MSR valuations, net of hedges and servicing income.
Gain on sale revenues fell by half to $37 million, while servicing revenue jumped to $41 million. Mortgage prepayment speeds fell as new mortgage rates rose at the fastest rate in four years, making refinancing uneconomic and thereby extending the lives of our servicing assets. This is the natural hedge of the mortgage business and why we manage the business for total mortgage revenue.
If we had rapidly increased the value of our servicing rights we manufactured in the quarter, we would have booked a higher gain on sale and lower servicing income in lockstep. Finally, noninterest expense increased $10.8 million in the quarter, resulting in an efficiency ratio of 44.1%. Q1 expenses have historically run modestly higher, and we expect this is the high watermark for this ratio and declining in 2022.
Turning to our net interest drivers. Investment yields increased 26 basis points from the prior quarter to 2.77 as rates rose and as prepayments fell on residential mortgage-backed securities, reducing purchase price premium amortization. Near quarter end, through the securities sales and reinvesting, we moved over $1 billion of securities to 100% repricing beta without a give up in yield that will increase sensitivity in the third quarter.
On a linked-quarter basis, loan yields declined five basis points, driven by a greater proportion of residential loans and lower prepayments and PPP fees. Yields on loan held for sale benefited from rising mortgage rates and increased 10 basis points to 3.14%. The end-of-quarter spot rate for HFS loans was 373.
Total cost of funds increased by two basis points from the prior quarter to 27, primarily due to the credit note transactions entered into in December, demonstrating the strength of our deposit franchise to raise low-cost, the key sources of funding, interest-bearing deposit costs remained fairly flat at 21 basis points, while the balances grew $2.3 billion during the quarter.
Net interest income of $450 million was 42% higher year-over-year but declined slightly from the prior quarter. Overall, average earning assets increased $1.2 billion or 8.5% annualized. Net interest margin was relatively stable at 3.32%, down one basis point from the prior quarter as our strong deposit growth led to the greater proportion of assets being held in cash and looked at - and lower loan yields due to residential loan growth. This excess cash provides us with optionality to deploy into higher yielding loans in future periods.
After the recent 25 basis point move by the Fed, our asset sensitivity has increased from last quarter, driven by increased liquidity as deposit growth exceeded loan growth by $2.5 billion and variable rate loans moved above their floors. In a rate shock scenario of plus 100 basis points over - for the next 12 months and on a static balance sheet, net interest income is expected to rise 6.8%.
Using the same scenario on a growth balance sheet, we expect net interest income to grow over 25% over the base case - over the base rate. Under a 200 basis point rate shock scenario on a static balance sheet, net interest income is expected to rise for 15.4% and a multiple of this impact and balance sheet growth expectations are also incorporated.
Given our first quarter net interest income run rate of $450 million, or $1.8 billion per year, we should see at least a 40% increase in net interest income in the shock plus 200 scenario, or $720 million annually, which the market projects we'll see on an accelerated rate increase trajectory later this year. An important driver of this projected increase in net interest income is due to moving off of our rate floors.
The rate floor schedule shows that 84% of our loans will be off their floor with a 100 basis point increase in rates, which should happen by the second FOMC meeting to be held in mid-June, and they become completely irrelevant in the third quarter. I would note that these floor served us well in sustaining net interest income for two years during the pandemic.
Our efficiency ratio increased to 44% from 41.8% in Q4. Certain seasonal expenses outpaced net revenue growth. Noninterest expense rose $11 million from last quarter due to lower loan origination cost deferrals and higher seasonal expenses in Q1. Again, at 44%, we believe the efficiency ratio will decrease through successful quarters this year.
Preprovision net revenue was $307 million for the quarter, a 52% increase from the same period last year. This resulted in a PPNR ROA of 2.1%, a decline of 13 basis points compared to last quarter, primarily driven by balance sheet growth outpacing PPNR. This continued strong performance in leading capital generation provides us with significant flexibility to fund ongoing balance sheet growth, manage capital actions and meet credit demand.
Balance sheet momentum continued during the quarter as loans held for investment increased $2 billion or 5.2% to $41 billion and deposit growth of $4.5 billion brought balances to $52 billion at quarter end. Mortgage servicing rights balances grew $250 million in the quarter to $950 million as no MSR sales were completed during Q1 as we expect this asset will continue to benefit from a rising rate environment.
Goodwill and intangibles increased $63 million, primarily due to our acquisition of Digital Disbursements in January. Tangible book value per share decreased $0.71 or 1.9% over the prior quarter to $37.13, primarily due to fair value losses on available-for-sale securities reported in all of its apprehensive income. Tangible book value increased 12.4% over the prior year.
We continue to generate consistent organic loan growth for our national commercial business strategy seeing balanced demand between regional banking divisions and national business lines. Loans held for investment grew $2 billion in the quarter with continued strong growth in residential real estate.
However, drivers of loan growth this quarter, in particular, net C&I growth was negatively impacted by $228 million in PPP loan payoffs and a $640 million decline in mortgage warehouse balances where lower housing inventory at higher rates held back the typical seasonal upturn in purchase home volume. Given current pipeline strength, especially in note finance and MSR lending businesses, where the team is onboarding new AmeriHome clients, we still expect mortgage warehouse balances in aggregate to be flat year-over-year for 2022.
Mortgage warehouse has already rebounded $270 million quarter-to-date. C&I growth benefited from healthy contributions of our regional banking divisions of $209 million and other national business lines of $223 million, especially in tech and innovation, restaurant franchise finance. CRE investor and construction of land also contributed $320 million and $250 million of net loan growth, respectively. Our national commercial franchise provides optionality to deploy liquidity by business mix and geography.
Turning to deposits. We continue to see broad-based core deposit growth across our diversified channels that will generate stable, low-cost funding in different rate environments. Deposits grew $4.5 billion or 38.7% annualized in the first quarter, driven by increases in noninterest-bearing DDA of $2.2 billion, interest-bearing DDA of $1.3 billion and savings and money marketing of $1.3 billion. These were partially offset by a decrease in the most expensive category of CDs, $238 million. Noninterest-bearing DDAs comprised 45% of our total deposit mix.
Our specialty deposit franchise continue to provide ample opportunities to generate attractive funding to support loan growth with deposits from HOA up by $632 million, settlement services increased to $308 million, and tech and innovation up by $158 million. Settlement services have successfully incorporated Digital Disbursements into the franchise and has already begun benefiting from synergies through expanded relationships and new affiliations with claims and base rates and law firms.
Our asset quality continues to remain stable and total classified assets and special mention loans as a percentage of total loans are lower than they were in 2019. As the economic environment continues to evolve, we believe our deliberate strategy to responsibly grow national business lines where we possess specialized sector and underwriting expertise and in low to no loss categories, which now composes 53% of total loans, will allow us to maintain a superior credit risk profile through the overall commercial banking sector.
Special mention loans remained relatively stable on a proportion of total funded loans at 85 basis points. Total classified assets rose $64 million in Q1 to $365 million or 60 basis points in total assets due to the temporary impact of the Omicron variant.
Quarterly net losses were negligible for the first quarter. Our total loan ACL increased $11 million from the prior quarter to $301 million as the provision exceeded losses. In all, total loan ACL to funded loans declined one basis point to 73 at quarter end. Adjusting for the $5.4 billion loans that are covered by credit-linked notes were ample first quarter - first loss coverage is assumed by a third party, the ACL coverage ratio rises to 84 basis points.
Given our industry-leading return on equity and assets, we continue to generate significant capital to fund organic growth and maintain well-capitalized regulatory ratios. Our tangible common equity to total assets of 6.7% was bolstered by net income and 1.3 million shares issued at $408 million in proceeds under the ATM, but also affected this quarter by negative fair value marks on available-for-sale debt securities.
Our CET1 ratio was essentially flat at 9%. Inclusive of our quarterly cash dividend of $0.35 per share, our tangible book value per share declined $0.71 to $37, primarily reflecting the adverse AFS mark at quarter end. While rates have continued to rise in April, the rate of increase we witnessed in the term structure in the first quarter of the yield curve should subside later this year. Given our robust capital generation, we still expect that 2022 will again be a year of tangible book value growth.
I'll now hand the call back to Ken to conclude his closing comments.
I was very pleased with Q1 results and the management team's ability to adapt to the changing interest rate and economic environments. Loan growth was strong, deposits grew more than double that amount, credit remains solid and clean, expenses are balanced both for both near-term efficiency and long-term investments and net interest income sensitivity increased as variable rate loans are projected to rise above their floors.
Our AmeriHome's first quarter results remain consistent with our overall pro forma guidance that we gave at the time of acquisition, which was $2.02, and we are tracking above this. The composition of our performance is more skewed towards net interest income, which is consistent with our expectations, but more pronounced with rising rates. Deposit growth and loan growth from AmeriHome have both exceeded our expectations and taken on greater significance in this rapidly rising rate environment.
Going forward, we expect mortgage banking revenues to be in line with Q1 levels and any disruption to this may be made up with balance sheet growth. For the remainder of the year, we continue to support our full year $9.80 EPS floor. Loan and deposit growth expectations remain at $2 billion per quarter with a bias to the upside. Our loan and deposit pipelines, bolstered by client confidence, gives us reassurance that our balance sheet will continue to grow in a safe, sound and thoughtful manner.
We have modeled six rate hikes in 2022, starting with 50 basis points in May and then 25 basis points in June, July, September and December. Admittedly, this is conservative. Net interest margin is expected to grow throughout the year, lifting net interest income sequentially as loan growth provides incremental revenue support.
Net interest income sensitivity has climbed substantially from the prior quarter. It is our expectation based upon the projected forward yield curve that nearly all of our variable rate loans with floors will be in the money next quarter, further giving support to PPNR progressively increasing throughout the year as our efficiency ratio declines.
The bank asset quality remains solid. We've not seen emerging delinquencies or defaults within any segment. Our base economic model is for a slowdown, but not a recession. And then lastly, capital, we believe our internal capital generation can support up to $4 billion of loan growth without returning to the equity markets.
At this time, Dale, Tim and I would be happy to take your questions.
[Operator Instructions] And your first question comes from the line of Ebrahim Poonawala from Bank of America. Your line is open.
I guess, Ken, Dale, just going back to your earnings outlook for $9.80 unchanged from last quarter. Just talk to us around how? And the trajectory of NII, as you mentioned, right? I think the market's pricing in maybe 50 basis points hike in May, June. So you should have meaningfully more rate sensitivity on the asset side coming for the back half of the year. Just wondering, Dan, if the forward curve plays out as expected, what does that mean in terms of year-over-year NII growth? And what's the offset in terms of why your EPS outlook didn't change and move higher? Is it just because you're assuming lower mortgage earnings? So I would appreciate if you could address both.
Yes. So I think as Ken mentioned, he gave the rate scenario that basically reconciles to the $9.80. What we show on Slide 7 is a more accelerated rate path, which is perhaps more in line with what expectations are from the FOMC actions. So between both of those, we can get to $9.80 based upon a more gentle rate path forward than maybe what we'll see.
Yes. I'm pretty optimistic about what you're going to see in the next three quarters in terms of net interest income growth. And I think it's going to be some of the largest quarter-to-quarter increases that this company has posted organically in its history.
And so yes, you could say that the $9.80 - again, I keep telling you the $9.80 is a floor is what we said last quarter, and we feel very comfortable with the $9.80, and we'll go from there, and we're going to update - we'll update in the middle of the year, our EPS guidance.
Got it. And a follow-up, Dale. Just talk to us around, one, my sense is you expect deposit growth, so the level of deposit growth. And what you're assuming in terms of deposit betas as we go through the rate hikes? And just mix shift moving from NIB to interest bearing?
Yes. So our deposit betas ran in the 40s on money market accounts last time. We think we're going to be in that same area this time around interest-bearing checking, about 10 points lower than that. Again, we think that that's probably going to be somewhat similar. I could make arguments for why it could be accelerated, but then with liquidity away, it could actually be a little bit lower than that.
Regarding earnings, those were in the 20% range last time. We think those are likely to be accelerated in terms of what we're looking at. But even from there, even going into the 30s, we think that, again, you can see that with a lot of our loan book, 57% variable that, that is going to have a gaining yield relative to a more muted expansion of cost structure.
Let me just add a couple of points there to Dale. One, we kind of feel our geographic and product and national business segments provide growth through diversified channels. And that's, again, what gives us a great deal of comfort to say deposit growth, $2 billion floor.
And as you can see what we just did this quarter, we feel very comfortable with the $2 billion. We also feel very comfortable that AmeriHome continues to attract and bring in deposit growth, which we always expected, and you're seeing that as well.
As it relates to maybe deposit pricing pressure near term, that's been relatively muted for us. And only a handful of clients have been looking to recalibrate their pricing. And I think Dale might have said this on the last call, but we're going to hold back repricing deposits until many of our clients have gone past their floors, and we're trying to put - link those two together. So just a little more color on the deposits for you.
Your next question comes from the line of Casey Haire from Jefferies. Your line is open.
Dale, I had a question on the efficiency ratio. You - you're talking about it being the high watermark here in this quarter with gain on sale flat. What does that mean? I mean because the MSR reval, if we strip that out, that would obviously launch it higher, so - in the high 40s. So what does it - what are the steps to get that efficiency ratio back to that low 40% besides a stable gain on sale? If you could just give some color there, that would be helpful.
Well, so - I mean, it's going to be much more muted growth relative to the revenue line. So as we indicated, we have a lot of kind of first quarter charges. This has always been the case. Kind of stepping up in terms of incentives, rewards, just general compensation, all those reviews are effective in February.
FAS 91 costs were also lower - deferrals were lower in Q1. We don't have much of a deferral when loan growth comes from residential. We expect a broadening out in terms of loan growth activity in Q2 and beyond, and that will result in more deferrals of those costs kind of going forward.
So I mean, seasonally, I think you can see this as well. It's a little murky for 2021 because in the second quarter is when we acquired AmeriHome, and AmeriHome had an efficiency ratio in the - at 50. So pulling that in, pull this up a little bit, I think it's notable that we brought them in and now our efficiency ratio on a combined basis is where it was before we acquired AmeriHome on a stand-alone.
You know, Case, the simple calculus is that we expect net interest income growth, total revenue growth to grow at a much faster multiple than expense growth. And so while we manage our efficiency towards the low 40% range, we are also mindful of all the investments that we need to make in this company, and we are doing that in order to become a $100 billion company unimpeded. So we continue to invest in risk management and technology. We have people, new hires, the education and the training of the recently hired.
We continue to build out and improve settlement services and business escrow services, and these two businesses present great opportunities for us to increase franchise value and it also carries with it a low-cost funding.
So we've got that going on plus several new initiatives in the loan and deposit areas, which we hope will help us towards 2023. And then we've also looked selectively at regional expansion and new business development hires, so that's all embedded into that efficiency ratio and the fact that the revenues are growing at a, I'll say, a geometric pace versus the expenses that are growing more asymmetrically, allows us to lower the expense efficiency ratio for the year, while simultaneously making all the investments we need for the out years. So we're in a good position doing that.
Okay. Very good. And just following up on the loan growth, the broadening out in the more traditional C&I. You guys have talked about a 30% cap on resi. If the commercial side comes in a little lighter, would - is that 30% cap on resi still a hard cap? Or would you - could you potentially take that higher?
Yes. Let me describe it. I mean, I think we saw that as more of a benchmark guidepost or whatever, some place to kind of reflect. And what that reflection is going to consider is where do we see our capital position? Where do we see our interest rate risk profile? What opportunities are going to be in front of us in terms of other credit opportunities. So I could see us going through 30% so long as all those other criteria are met. And I think that's the case this time. But I think it's notable.
So in the first quarter, yes, we did put on $2 billion of residential and those are basically 30-year fixed rate mortgages, but that was matched by two - a little over $2 billion of noninterest-bearing DDA. On top of that, we had another $2.5 billion of deposit growth in deposit types with betas in the 30s and the 40s that is now either sitting in 100% increased betas on what we did in our securities book or in cash. Again, poised to take advantage of a higher rate environment, which we think is imminent.
Okay. Very good. Just last one for me. The Cash It launch, I think you guys talked about that last quarter being - starting up this - in early 2Q. Just wondering if some updated thoughts there? And if you could, any visibility on what kind of deposit balances that might generate?
Yes. It's in beta testing. We brought in a few clients, and we're working on it. And what we do with all our national business lines is we put it through beta testing and we're slow to roll out. And once we feel comfortable, we then put our foot down on the accelerator.
And so we're not there yet. And so any of our deposit growth projections do not have anything coming from this initiative. And as we get more comfortable with the initiative, we'll provide more details as we go forward throughout the year.
Your next question comes from the line of Brock Vandervliet from UBS. Your line is open.
Let's see, did I miss it? What was the MSR fair value mark?
Yes. So we had MSR or servicing revenue was $41 million in the first quarter. It's been lower in the fourth quarter and other periods. And I think if you look at our balance of $950 million and what would be an expected return just on servicing a loan, that would have been about $16 million.
So we're saying $16 million was kind of normalized. But we didn't - what we didn't do is we were maybe a little slower to increase the value of the servicing rights we were creating as we bought aggregated and presented loans to the GSEs. We did this because we thought it was actually going to be increasing in value in the fourth quarter, and we didn't see that.
And I think we've talked about this before, Brock, but initially, what happened was even though rates were rising, and you would typically see an extension of CPR lives, it was a little bit like, I'll call it, last call, where everyone said, I've got to get in and get my refi done in time. Well, now that market has dramatically changed refi businesses, I think, all bet over.
And as a result, we've seen the significant extension. So if we had done that earlier, what we would have had in the first quarter earnings instead of showing $41 million of servicing revenue and $37 million of being on sale, that number, the gain on sale number, would have been higher and the servicing revenue would have been down. And I put that - our core earning rate was 25 - $16 million.
Okay. A lot to unpack there, so if I look at - so one question is, do you intend to build above the 950 level in MSR? Or you a seller going forward?
So I might note that we actually contracted to sell $209 million of servicing rights in the second week of April. And that would hold us basically flattish to the 950 level. We do think that within certainly these lower coupons that they're not going to get any better than they are so liquidating them can make sense. So I don't expect our MSR number to change considerably from where we were.
Just to add that the sale of the MSRs that we just did also came in at a higher valuation than what we marked the MSR at the end of the quarter.
Okay. Yes, I guess we're all struggling with what that line, what mortgage revs could look like, assuming for example, a positive mark in Q2 just because of where rates have risen and maybe a stable servicing number. Could you speak to that? I know you gave guidance that you expect mortgage revs to be relatively flat, but just kind of boil that down a bit.
Let me speak to it a little bit and also take you back to our thought process at the acquisition. So again, we think the total mortgage servicing revenues, that's how we look at it or banking revenues, I should say, are going to remain relatively flat, which is at or near Q1 levels as we go forward during the course of the year.
If those revenues should fall somewhat short, we believe we'll be able to make that up in net interest income and the deposit growth we are seeing and the MSR loan growth we expect during the course of the year coming from AmeriHome. And the reason I want to bring this up and bring you back to the acquisition is, I think it's real important to remember why we did the AmeriHome acquisition.
We didn't see it as a mortgage company that we bought for a three multiple on a forward basis. We wouldn't have bought AmeriHome for a three forward multiple. That did not interest us. But when we sat with their management team, and we saw the number of revenue streams that could be created inside of the bank that could get a much higher multiple, we really concluded that we were buying an emerging bank at a three multiple. And that got us very excited.
And as you can see now, as mortgage revenues in the industry are falling short on the production side because of volume and of course, a compression on the margin side, we're one of the few mortgage companies that can actually - or segments that can actually generate offsetting revenues coming from deposit and coming from loan growth and also being able to generate loans to go into our book on the held for investment to soak up this extra liquidity we have. So I just wanted to bring you back to why we did the deal and we have a number of levers here. And therefore, we don't get hung up solely on the mortgage banking income.
Brock, I mean, I looked at where we're going to see in terms of the rapid expansion of net interest income based upon the rate environment and the liquidity that Ken mentioned. And I do think that with a stable revenue from mortgage, direct mortgage operations, gain on sale and servicing revenue combined, that number is going to continue to be dwarfed by what we're going to see on net interest income for the combined bank, including what we get from the enhanced deposit growth that we've had from AmeriHome bias.
Your next question comes from the line of Brad Milsaps from Piper Sandler. Your line is open.
Dale, I wanted to follow up on the ECR deposits. I think at last quarter, they were around $11 billion. Did that number remain relatively stable? And will those - will the cost of those deposits continue to manifest themselves on - in noninterest expense as opposed to interest expense? Just curious if that's kind of where you're going to keep those going forward? And I assume that's not part of your kind of new interest rate sensitivity guidance in those tables? Or is that included in there as well?
Yes to all three questions. So they - it is about the same number. Approximately, half of our DDA is subject to these cash ECRs. That number, we think, is going to be essentially kind of fairly stable going forward and know that the cost of that is not shown in our net interest income pickup because as you indicated, it doesn't show up, but it will continue to show up in deposit costs in noninterest expense.
And so - and you said those deposit betas are typically run in the 30s?
The last time they ran in the 20s, but we're projecting they're going to be in the 30s this time.
Okay. Great. And then just as my follow-up. It feels like the loans held for sale, at least on average, held in better maybe than you initially thought. It sounds also like the spot rate is up fairly significantly. Can you kind of speak to that line item? And kind of what you guys kind of foresee coming there as you kind of think about managing liquidity, et cetera?
Yes. I think that balance is going to be fairly flat kind of going forward. As you indicated, it is very sensitive. Those things roll every three or four weeks. That rate was 373 at the end of Q1 and up from what the average was just in anticipation of rates rising. You saw LIBOR and other rates climbing along the way. So - but that's - what we see right now is we saw our cash increase a little bit. We do think we're going to get a broader base and more significant loan quarter this quarter, and we'll see, I believe, effective deployment of that.
Got it. And just one more on the cash. You kind of said previously, you might wait to deploy some of that into the bond portfolio. If, in fact, deposits do run ahead of loans until rates maybe stabilize or move higher, is that still your thinking? Or just kind of curious have you changed your mind on the cash management?
Yes. So I mean you did see that our bond portfolio climbed in the first quarter, that was mostly towards the end of the quarter. It's actually grown further this quarter already. But those purchases have all been in basically AA securities, 100% repricing beta off of SOFR. And so we think that you're going to see the duration of the securities book fall down a little bit here as well in Q2.
The gain on sale that we took last quarter was well timed, and we've taken an extra - we took the gain and then we took the liquidity and reinvested it with - for higher returns. So we like that trade that we did.
Your next question comes from the line of Brandon King from Truist Securities. Your line is open.
I just wanted to get a little more clarification on activity analysis for NII. I'm just curious what is the growth balance sheet assumption for that was? Is it kind of assuming the $2 billion in loans in the profit role? I just wanted to clarify that.
Well, our internal growth assumptions are stronger than the floor that we've indicated. We're saying basically kind of at least $2 billion in loans and deposits each. And we think we've got kind of - the pipelines and the product rate to be able to do that. I don't have a number to tell you, but they are greater than that. I think it's notable that Ken mentioned that we expect to be able to do this without having to touch the capital markets going up to $4 billion per quarter.
Okay. And then all that being said, with the current interest rate environment forward curve, is it possible to get a sub-40% efficiency ratio by the end of this year and especially next year?
Yes. I wouldn't talk to that. We are...
It's not something we want. If we have the efficiency ratio dropping and dropping, we'll look to - an efficiency ratio to me is just the exhaust fumes from the business and how we allocate our capital and liquidity. And quite frankly, we'll probably allocate - put more money into the expense line for other investment projects that we have on the board, but have yet begun to fund.
And so I think, instead of getting it below 40%, we would take a longer time horizon, which has served us very well in this company and look to continue to work on the growth projections for 2023 and 2024. That's how we would use the money.
Okay. That's helpful. And then lastly, could you give us an update on the non-QM transition with AmeriHome? And if you could quantify potentially any benefits for that this year and maybe next year?
So AmeriHome continues to generate non-QM and jumbo loans for us. Probably, today's rates are in the 475 area, maybe a little more, a little higher than that. Probably, the last time we talked, I think we were saying they were doing about $200 million a month. They're probably up to now a little over $300 million a month, and we expect that to continue to decline throughout the year.
And your next question comes from the line of Gary Tenner from D.A. Davidson. Your line is open.
Sorry to beat a dead horse on the mortgage question, but as we look out to the second quarter and assuming the first quarter MSR valuation adjustment was kind of maybe overstated, maybe it was a bit of a catch-up as, Dale, you may have alluded to from the fourth quarter, and rates not moving up quite as much.
So if the valuation adjustment is lower this quarter, can you just help me understand or maybe position what the offset would be on the mortgage banking line to kind of keep that number flat sequentially? Is it kind of volume driven? Or what are the other moving parts that are going to...
Yes, I appreciate that. No, it would be rate driven on gain on sale. So what happened is, is - so we have independent third parties, two of them that we go to, and they value our mortgage book - our servicing rights book. And they were both indicated that we were low on our valuation. We also get broker quotes in there. And so we raised that valuation, and that resulted in, late in the quarter, a larger servicing revenue than would have otherwise been the case.
Now going into the second quarter, we take these now higher basis points of value from MSRs and we put them into basically the MSR manufacturing model. And so now when we do a deal and then we sell it to Fannie or Freddie, we're recognizing a larger gain on sale at the time and posting a larger mortgage servicing right. And so now if we sell those MSRs going forward, we're going to recognize a smaller gain, so that number is going to be lower. And in lock step, gain on sale revenue will be higher.
As Ken indicated, we did the sale already. Hasn't closed yet, it closes the next month for about 20%, 22% of our mortgage servicing rights book at valuations above what we had marked them to. So we've taken that again and said, they're still low on valuation. Now that is in the machine that produces the value for MSR valuations and gain on sale. And so that is still higher again. So you're going to see that gain on sale.
Not to beat a dead horse on this side, if there's any disruption to our forecast about mortgage banking revenues, it will be offset by the growth in net interest income that AmeriHome brings. So certainly the deposits and the loans they bring in this environment with in a higher rate environment will mute or offset any of the disruption in the mortgage revenue line, if it occurs at all.
Right. And I think we get that from a holistic perspective, but obviously more difficult on our side to kind of pull out those parts. If I can just ask one more question on the loans held for sale, I thought I had recall from last quarter that kind of where the combust quarter's average was about where you wanted it.
So in terms of - I understand now that where the quarter was this quarter is about right. So I'm just curious if that was a change in your thought process? Because I assume you could have extended the dwell times a little bit to keep that aperture if you wanted to, but I just want to make sure I'm thinking about it correctly going forward.
Yes. So I was - so we had this - we thought a pretty cool little trick whereby we could hold these loans longer, and it basically earned the coupon rate on the loan for what it's effectively only a 4-week investment. So instead of getting, at the time, 20 - 15 basis points held with cash at the Federal Reserve, we're getting something north of 3%.
I would just say that I - that maybe somebody caught on to us and the pricing dynamics for that trade have changed, and so we're using it less.
Okay. So where the balances are now is kind of the sweet spot?
Yes.
And your next question comes from the line of Steven Alexopoulos from JPMorgan. Your line is open.
Our next question comes from the line of Jon Arfstrom from RBC. Your line is open.
Just a couple of questions here. This is a crazy question. Can you talk a little bit about regional banking? And what's going on there in terms of loan growth?
A little bit harder for us to do that. And the reason why is a lot of our competitions for new clients, we go up against the large regionals and large - and the money transfer banks. And we like doing that. And more times than not, we can win that with a higher price and greater service. But a lot of smaller regionals, we don't see - they're not really competing against us as much or we're not competing against them.
Average loan sizes for us have risen. And as we moved upscale to be with stronger, more liquid clients, we've just kind of left some of the regional banking in the dust. The only place we really see them is a little bit in our metro C&I book, we'll run into them. But that's not a huge growing book of business for us.
Okay. So if it feels healthy, it feels like you can take share there?
Yes.
Okay. Dale, a question for you. This is kind of the opposite of the question I asked last quarter, but would you guys talk about the $9.80 EPS - $9.80-plus EPS guide? Last quarter, I asked you about what it means for the first quarter. But if you reverse that, it suggests an exit rate that's 2.75 or higher for the year. I guess the question is, are you blessing that kind of an exit rate for the year, which makes us more comfortable for 2023?
Yes. Yes. We - I think that's - like you said, I think that your area is where you're going to end up to do that. And with the rate sensitivity, the rate rises that we're, I think, right in front of us, we get there.
Okay. And under that scenario, I think you touched on it. It sounds like you're saying mortgage fee revenues are probably under 10% of total?
Yes. I mean I think that's where that would end up also.
Okay. Okay. And then just one other question. Ken, you've alluded to this, but it sounds like despite maybe a hostile rate environment for mortgage, you're saying that the accretion numbers, the earnings numbers that you laid out when you did AmeriHome about a year ago, it's - maybe the geography is different, but they're still valid. Is that what you're trying to say?
Yes, that's exactly it.
Your next question comes from the line of Timur Braziler from Wells Fargo. Your line is open.
Looking at the cost structure for AmeriHome, is it based on kind of total added revenues to the bank? Or is there a component of variable comp to the gain on sale of revenues? And with that, we should see some leveling off of...
You faded out there a little bit, but I think I got the gist. Are we adding a cost structure to AmeriHome for producing the banking-related traditional banking-related net interest income? The answer would be no. That's being handled. AmeriHome is providing the leads and helping win the business. And then we have the infrastructure on the traditional commercial bank side to absorb that business.
And if we have to add people, it would be added on that side of the house where the expertise is.
Okay. And then how about on the gain on sale business, is there a variable component to that business? And with gain on sale revenues coming down, should we expect the likewise reduction in some of their home costs?
Okay. Again, for something, it's a little cloudy in what you're asking, but I think I got it. Yes, there is a variable component of expenses there. AmeriHome has decreased its people count from the time that we bought them, also decreased their people count expectation from the time that we bought them. And they run a pretty low-cost shop. So they're very quick to size up appropriately for the volume and the margins that they generate. We're very confident that they move pretty quickly there.
Yes. About 60% of their costs are variable based upon kind of the volume counts.
Okay. Great. And then just lastly, in regards to the ATM that was exercised again this quarter. Can you just remind us if there's anything left on that program?
Yes. The ATM has about 1.5 million shares in capacity in it still. As we indicated, we think we can kind of grow without it. I mean in the first quarter, we did take on some goodwill. And so we had covering that with the reason, otherwise, we have needed to do it then either.
We also grew our mortgage servicing rights, which are a little bit of a capital hog but we think it made sense based upon valuation. But going forward, we don't see either of those kinds of things. It's back to the kind of the basics of the balance sheet, and that balance sheet can handle more than $2 billion worth of loan growth per quarter without touching any external capital sources.
Okay. Yes. And then you hit on the next point. So the MSR, I think if I remember correctly, that the cap is kind of 25% of CET1 before it becomes more punitive to - from a capital standpoint. Is that the right way of thinking about it? And that...
That would be a good line for us. That's about $1.1 billion in terms of MSRs. Yes.
Your next question comes from the line of Chris McGratty from KBW. Your line is open.
This is Chris O'Connell filling in for Chris McGratty. Just want to get your thoughts on the longer-term loan trajectory? And how you think about the sustainability of loan growth given that - I know the near-term growth outlook is fairly clear, but with residential mortgage now close to 30% of the portfolio, how you think about sustaining your growth rates kind of in the 12- to 24-month time line into 2023 and beyond?
Yes. So I'll say we do a loan pipeline meeting every week here. And the loan pipeline is busy, active, clients have not exhibited a reluctance to slow their growth plans, although they are mindful of the economic backdrop, I am out with clients quite often, and they are still optimistic about their business. But as I said, mindful of the economic backdrop.
The beautiful thing that we have set up with AmeriHome is we can always bring in residential loans to offset our liquidity. We are targeting residential growth to be about 50% of our total loan growth. And back to your question about loan growth, I think between the geographic and the business segment mix that we have established in this company, we feel very comfortable with the growth guide that we gave and that growth guide continuing into 2023. So very active pipeline these days. So we're very comfortable of where the future is taking us.
I mean our dependence on residential growth, which picked up during the pandemic, I think you're going to see that weigh in here as these other channels become more robust. And frankly, capital call was a big player. We see capital call as maybe being an area of more accelerated growth in the near term, along with other technology.
And we have a follow-up question from Brock Vandervliet from UBS. Your line is open.
Just a follow-up on that comment, Dale, in terms of the growth in capital call and other tech. Just maybe stepping back, it seems like the innovation economy has gotten a bit of a karate chop lately, what makes you so confident about those segments?
Brock, I'm going to take this, this is Ken. First, a lot of our capital call line and subscription line business is really not to the innovation economy. It's more to the traditional brand name, PE firms and hedge PE - basically PE through our firms that you would know. And they are very active there. They are raising lots of funds was with one about that three or four months ago, and basically said to me, "We can't get enough credit." It was down at the lenders of the finance - the Fund Finance Conference down in Miami a couple of weeks ago. And again, there, too, just a huge demand for subscription lines and capital call lines. So we're feeling optimistic about that channel for us.
Okay. And another segment, warehouse. We've seen some really rough numbers across the sector here with little recovery expected. You mentioned that even quarter-to-date, there's been a pickup. Is that a sign of the marketing effort through AmeriHome gaining traction?
Yes. So first, when we came into the year and we gave a $2 billion loan guide per quarter, we said we expected the warehouse lending group to remain flat for the full year, and we still expect it to be flat for the full year. We're hopeful that it rises. But we are doing a lot of cross-selling. We've got a lot of loans now in underwriting from AmeriHome's client base. And that's on the warehouse lending side and also on the MSR financing side as well.
Thank you. And ladies and gentlemen, we have reached the end of our Q&A session. I would now like to hand the conference back to Ken Vecchione for closing remarks.
Yes. I just want to say thank you all for joining us today, and we look forward to speaking to you in about three months about Q2's results. Be well.
Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.