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 2023 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 Bancorporation's first quarter 2023 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer; and Tim Bruckner, Chief Credit 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 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.
Thank you Miles. I would like to start by thanking our clients for the trust they placed in Western Alliance and to the people of Western Alliance for their extraordinary efforts over the last month. Since the collapse of three competitor bankers in mid-March, our team has worked relentlessly to meet our clients' banking needs.
Flexibility of our diversified national commercial banking strategy with a broad range of value-added deposit and deep commercial customer relationships in a wide variety of sectors and geography, all contributed to our firm's resilience in the face of recent turbulence in the banking industry.
We believe our focus on sound financial fundamentals, stable asset quality, and rebuilding capital and liquidity levels over the past several quarters have all helped us navigate through this challenging time.
As we move forward with a renewed perspective, we are well-positioned to expand our client relationships and continue to achieve strong return profile. Balance sheet repositioning included surgical sales of assets and loan reclassifications resulted in after-tax net non-operating charges of $110 million, will have an immediate accretive impact, regulatory capital, and allow us to prioritize core client relationships with holistic lending, deposit, and treasury management needs.
Company earned through these charges and achieved net income of $142 million and earnings per share of $1.28 for the quarter, increasing tangible book value per share, 3.3% to $41.56 from year end to the CET ratio of 9.4%.
Immediately after the exogenous events of mid-March, WAL experienced elevated net deposit outflows that soon returned to normalized levels. Outflows were concentrated in a few key client groups that will inform our funding strategy going forward.
Suffering from the taint of SVB's failure, approximately $3.3 billion or 42% of our technology and innovation deposits were withdrawn, less than anticipated given that 50% also have lending relationships.
Our mortgage warehouse business remained fairly stable on a net base, with only the loss of a single customer that we expect to return to Western Alliance with more stable deposits.
While settlement services experienced some initial volatility from very recently acquired clients, lows normalized quickly. Balances were stable quarter over quarter. Our regional divisions, the strong local brands and small, mid-sized metro business relationships acted as a core source of strength and saw only modest deposit attrition.
Non-core regions, which included title companies and other fiduciaries, we acted more reflexively, stock market volatility, and withdrew approximately $2.6 billion. These are non-deposit that we are prioritizing going forward.
Since March 20th, our deposit flow stabilized and returned to a healthy growth trajectory with deposits of $2.9 billion to $49.6 billion as of April 14th. Some business lines were never impacted, including HOA with deposits higher by $900 million since the beginning of the year to -- excuse me, since beginning of the year to April 14th.
Our flexible diversified business model proved its worth in Q1, while monoline banking models depended on single industries or concentrated customer types failed. 85% of our customers already have more than one product or service with us and we will continue to prioritize client segments with fulsome banking service needs that include credit and treasury management, while deemphasizing credit-only relationships.
Overall, we'll successfully retain deep-rooted relationships and those for which we offer proprietary integrated treasury management technology solutions like HOA and we'll continue to do more of these. It is also worth mentioning that not a single deposit channel of ours represented greater than 16% of total deposits at the onset of the deposit crisis.
We responded to our client's desire for and the market scrutiny surrounding enhanced deposit protection. Since year end, we have taken concrete steps to dramatically grow our insured deposits of approximately 45% of total deposits to 73% as of April 14th. This place us well in the top decile among the 50 largest US banks.
Also as of April 14th, uninsured deposit coverage now stands at 158%. This results resulted from the shift towards insured deposits to accommodate depositors' desires to have their funds safe and protected.
We will continue to provide client deposit alternatives that accentuate safety in these uneasy times. I think it's important to offer some thoughts on the volatility experienced in our industry since mid-March. WAL navigate through these developments through strategies initiated in 2022 and initially described in our Q3 and Q4 earnings calls, such as deemphasizing loan growth in advance of an economic slowdown, growing deposits on liquidity faster than loan growth, and achieving a greater than 10% CET1 ratio.
Formed [ph] by lessons learned in the recent stress of the banking system, we have moved up our medium term CET1 goal to 11% and we are targeting a mid-80s loan to deposit ratio.
At the onset of this turmoil, we acted decisively to tap various source to enhance our liquidity position engaged with stakeholders through measured, but impactful financial updates and maintained normal business operations.
Looking forward, we will remain focused on building additional liquidity and capital while reaffirming our deposit-led growth strategy. [Indiscernible] increased diversification and additional deposit streams are also our top strategic goals.
To ensure adequate liquidity over the medium term, we will aim to drive our loan to deposit ratio to the mid-80s by cultivating deeper client relationships. We look to organically, but expeditiously rebuild capital with greater than 10% before the end of the second quarter. Our medium term CET1 target is 11%.
Emulating larger banks that typically have larger capital efficiency will be an important step to drive sustained core deposit growth in the regulatory environment that will likely become stricter in response to recent industry turmoil.
Higher capital, higher liquidity, and lower dependence on moderate rate funding should attract more core deposits and hopefully lead to higher investment-grade ratings.
Accelerating HQLA growth in securities book, also something that we planned. WAL total liquidity and capital, we chose to reposition our balance sheet through very targeted reclassification of certain loans and assets from held for investment to held for sale and specific non-core assets sales.
We reclassified approximately $6 billion of HFI loans, recognizing an approximately 2% fair value adjustment of $92.2 million after-tax that includes expected future P&L and capital impacts.
After-tax charge will be immediately accretive to regulatory capital as the loans are liquidated and allows us to develop efforts to full client relationships with lending, deposit, and treasury management needs.
We already made significant progress in executing this strategy with actions that adds 51 basis points to CET1. Q1 $920 million of loan sales were executed before quarter end with another $3 billion already under contract, but not close by 3/31.
MSR sales of $360 million, select security sales of $460 million, and the unwind of high cost mortgage warehouse equity fund resource CLMs all contributed to help offset the HFI reclassification on time charge.
In addition, we are moving expeditiously to execute the remaining $3 billion of HFS loan sales. Such sales realized smaller losses than we expected. Note [Technical Difficulty] on the remaining HFS loans are incorporated into our Q1 numbers.
These actions reaffirmed our plans to surpass 10% CET1 capital by June 30th. Even with the mark-to-market adjustments from balance sheet repositioning, we still advanced our CET1 ratio 6 basis points to 9.38%.
When considering the contracted loan sales for this month and the unwind of our EFR, CLM, [Technical Difficulty] and subscription lines, we've already locked in CET1 ratio above 9.71% before considering our organic capital generation or completing sales of the remainder of the HFS loans, which should ultimately push CET1 above 10%.
Finally, Western Alliance has significantly accessed to more than $21 billion in contingent sources of liquidity, to be customer and operating needs. Access to loan balancing cash and unused borrowing capacity increases to greater than $26 billion with the near-term completion of HFS asset sales, $3 billion of which are contractually agreed to and will be used to pay down higher cost BTFP and FHLB short-term borrowings and return to more normal sources of financing. We continue to evaluate additional opportunities to establish secured borrowing facilities from other sources.
At this time, I'll let Dale take you through the financial results.
Thanks Ken. Turning to the first quarter results, Western Alliance earned total adjusted net revenue of $712 million excluding non-operating charges. Net income was $142 million, while adjusted net income was $252 million.
Earnings per share was $1.28 with an adjusted EPS of $2.3. Quarterly loans decreased $5.4 million as $6 billion was transferred to HFS matching the deposit decline of $6 billion.
Total adversely [ph] graded assets increased $35 million and quarterly net loan charge-offs were $6 million or five basis points annualized. Operating return on average assets and return on average tangible common equity of 1.43% and 21.9% provides sustainable go-forward earnings.
In the quarter, Western Alliance generated pre-provision net revenue of $352 million. Total adjusted group net revenue was $712 million, was an increase of 28% year-over-year and an increase of $1.9 million for the quarter.
Net interest income decreased during the quarter to $610 million. Average earning assets increased $1.5 billion, while lower yielding cash grew 5% from 2.1% of interest earning assets, creating a drag on the new.
GAAP non-interest income decreased $120 million to the negative $58 million, while adjusted non-interest income grew $31.7 million from the prior quarter. Mortgage banking revenue increased $26 million quarterly to $73.3 million as AmeriHome continues to see green shoots in its operating environment.
Production margins have widened to more historically normalized levels of 26 basis points and the industry capacity has been rationalized. Retreat of a large money center bank from the corresponding lending market has paved the way for higher margins and win rates.
The servicing rights assets continue to produce attractive returns, given the lower prepayment speeds, strong underlying asset quality and continue to attract interest from investors.
Q1 sale of $360 million of MSRs at par provides flexibility and a long life path before we come to the market again. Held for Investment decreased $5.4 million to $46.4 million and deposits decreased $6 billion with our [Indiscernible] to $47.6 million at quarter end.
MSR balances decreased $238 million in the quarter to $910 million. Total borrowings increased $9.6 billion over the prior quarter to $16.7 billion due to an increase in short-term borrowings of $9.8, partially offset by redemptions of credit lien notes of $265 million.
Finally tangible book value per share increased $1.31 or 3.3% over the prior quarter to $41.56 and up nearly 12% over the prior year. We announced the decomposition of our quarterly go-forward and go-forward debt interest drivers, our investment securities portfolio grew approximately $600 million to $9.1 billion as we sold $460 million of securities predominantly credit CLOs.
Other investments increased approximately $900 million, which primarily consists of high quality liquid assets such as treasury bills, part of our strategy to further enhance our liquidity position.
Investment yields increased 24 basis points from the third quarter to 4.69% with an end of quarter spot rate of 4.60%.
Given the uncertain economic environment, we curtailed loan growth early in the first quarter. This slowdown in credit accelerated in March as we right-sized existing loan balances through reclassification to held for sale and targeted loan sales of approximately at least $7 billion, primarily from limited credit -- relationship credits or with limited credit spreads. These actions lowered our period end balance to $46.4 billion.
Loan yields continue to benefit from repricing into the higher rate environment and wider overall spread with an end of quarter spot rate of 6.45% compared to an average rate of 6.28%. Our residential loan portfolio of $15 billion is match-funded with non-interest bearing deposits of 16.5%.
Turning to a decomposition of our held for investment loan reclassification, loans transferred to HFS nearly half were syndicated credits and capital call and subscription lines. Areas we have previously mentioned we would be deemphasizing. $5.9 billion loan held for sale portfolio had a quarter end spot yield of 7.34%, which are now funded by FHLB borrowings with the current spot cost of 5.05%, resulting in a modest 2.3% margin. Leading the sales transaction, lend support, and buoyancy to our net interest margin guide.
Total cost of deposit spot rates increased 45 basis points to 1.85% at quarter end compared to an average of 1.72%. This was primarily driven by a $1.5 billion increase in CDs that now comprise 14% of deposits, while non-interest bearing DDAs comprised 35% of our total deposit mix of which 52% of no cash payment to earnings credits.
Notably, the spot rate for interest bearing DDA is lower than the average for the quarter as migration from non-interest bearing checking was accomplished at lower rates than the average interest checking rate.
But savings and money market rates were also lower as balance attrition tended to be from larger and higher cost accounts. The interest bearing deposits increased 78 basis points for the quarter to 2.75% compared to the ending spot rate of 2.82%. $6 billion decline in deposits during the quarter was roughly evenly split between money market accounts and demand deposits.
Overall, net interest income decreased $30 million or 4.7% over the prior quarter, nearly half due to two fewer days in the quarter and the remainder due to balance sheet repositioning actions in light of the deposit loss.
Held for sale loans contributed $31 million, which will decline as we liquidate these assets. Net interest margin compression compressed 19 basis points to 3.79% due to increased borrowings, short-term excess cash on the balance sheet we had to ensure liquidity, and an incremental drag of 11 basis points.
Going forward, we estimate that our balance sheet is fairly interest rate neutral with rate shock sensitivities either up or down, only changing net interest income by less than 1%. Our adjusted efficiency ratio increased to 43% from 39% in the quarter and was flat year-over-year.
Higher deposit cost of $5 million related to higher earnings credit rates and normal Q1 seasonality were the primary drivers of the increase from the fourth quarter. Pre-provision net revenue was $352 million during the quarter, a 15% increase in the same period last year, and a decrease of $25 million or 7% from the prior quarter. This resulted in PPNR return on assets of 2% for the quarter, a decrease of 15 basis points from Q4.
The aggregate of adversely graded credits increased $35 million this quarter. We see nothing significant in this modest migration to indicate in our widespread deterioration is looming.
Total non-performing assets increased $22 million, 17 basis points of total assets. Really net loan charge offs were $6 million or five basis points of average loans compared to net loan charge-off $1.8 million or one basis points in the fourth quarter.
Our total loan ACL decreased $7 million from the prior quarter to $350 million as loans were marked down in the ACL release if these credits were transferred to held for sale.
Loan ACL to funded loans increased to 75 basis points compared to 69 in Q4 as some of the loans transferred had low loss rate assumptions, leaving capital call and subscription lines and mortgage warehouse credits. Additionally, the reserve associated with commercial real estate was increased as the economic outlook softened.
Tangible common equity to total assets of 6.5% and common equity Tier 1 ratio of 9.4% were both bolstered by net income. Like the increase we expect for CET1 in the second quarter, tangible common equity ratio should rise in tandem. Inclusive [ph] of our quarterly cash dividend payment of $0.36 per share, our tangible book value per share increased $1.31 in the quarter to $41.56..
Tangible book value per share continued its long ascent as the earnings power of the company surpassed charges associated with the bank's balance of repositioning. TBV also benefited from a reduced AOCI impact after crimping book value last year as bonds prices fell when rates rose.
I will return the call back to Ken.
Okay. Thanks Dale. Our guidance for the rest of 2023 continues to be driven by the strategies and priorities laid out in our Q3 and Q4 2022 earnings calls and informed by the recent banking disruptions.
In order to best serve our sophisticated commercial clients, we will continue to aim to be more aligned with the country's largest banks by rebuilding our capital levels, enhancing insured deposits and liquidity, lowering our loan to deposit ratio, and deepening our client relationships. We want to be seen as equal to these bank -- these peer banks from our depositors' perspective.
Eliminating these differences allows us to compete more on service, performance, and what I call, management intimacy, where C Suite relationships can drive deeper banking relationships.
Organic earnings balance sheet repositioning, we'll continue to grow capital as we reposition the company for slower growth ahead of a potential economic slowdown. So, let me tell you what this means going forward.
Regarding capital, we discussed our imminent lift in CET1 to 9. 7% and that we expect to exceed 10% by the end of Q2 through planned loan HFS sales and organic capital growth.
Over the medium term, we will target an 11% CET1 ratio, which will be driven by our continued strong return on average tangible common equity and capital generation.
As we complete our planned HFS loan sales, we will payoff short-term borrowings and return to more traditional bank funding. Deposits are expected to grow at approximately $2 billion a quarter and exceed more muted loan growth. This will lower our loan to deposit ratio over time towards a mid-80% target.
Net interest margin is expected to slightly compress in 2023 to 3.65% to 3.75% given the anticipated flat rate environment, slower loan growth and increasing price competition for deposits. As our liquidity grows, we will look to accelerate HQI growth in our securities book to further enhance liquidity flexibility.
Our efficiency ratio, excluding the impact of deposit costs, should increase slightly to the mid to high 40s given our smaller loan book, partially offset by the inherent operating leverage of our business.
Asset quality remains well-positioned and steady as she goes. And then on future economic environment, net charge offs could begin to normalize and we expect net charge offs to range between the first quarter's five basis points maybe up to 15 basis.
Overall, we expect PPNR for the full year of 2023 to be down 5% to 10% from 2022 levels due to small interest earning assets and higher borrowing costs. However, as we execute our balance sheet repositioning efforts and continue to reestablish our core deposit growth trajectory, we see Western Alliance as even a better institution and better well-positioned for the future.
At this time, Dale, Tim, and I are happy to take your questions.
Thank you. [Operator Instructions]
First question today comes from the line of Steven Alexopoulos with JPMorgan. Steven, please go ahead.
Hi, everyone. I wanted to start with the big picture question first. So, just following-up on the balance sheet repositioning in the quarter, a fair portion of your growth over the past few years has come from these non-core segments, right, which you're now exiting. With you shrinking the company down to focus more on core relationships, one, when do you get there, right? When is the bank primarily done in terms of shrinking down to get to these more fuller relationships?
And then even more important, what does Western Alliance look like after that? Do you focus on ROE, profitability? Are you still a growth bank? What is West Alliance 2.0?
Okay. A couple of things there. Let me unpack them all. One, the EFR loans that we have exited in some syndication lines that we exited. Again, those were all non-core and they reflected our excess liquidity that we had in the company and let's go back to the days of 2020 when we had $6 billion to $7 billion of cash sitting at the Fed earning 10 basis points, it was a good alternative to increase net interest income and there was excellent asset quality and that's what we did there.
We're not as we continue to reemerge from this. First things first, I want to say, our focus near-term is on moving that deposit ratio down and also moving the capital levels up and we're going to do that with a heavy focus and concentration on deposit growth and again a more muted growth in loans about $500 plus million.
As we emerge from Q4 and position ourselves for 2024, we should be just about ready as we enter into 2024 to hit our CET1 ratios and hit our liquidity into the multi deposit ratios.
Now, we've got plenty of opportunity here to grow. I think you'll see us go to some of our core strengths that have always been with us, that have always helped us grow in the past.
C&I loans out of warehouse lending is still active. Now, Florida is going to be economically driven as well. Note financing is going to be there. We've been strong in CRE, especially in lot banking. We've always had good performance out of our hotel book.
Again, I want to say very clearly it's all dependent upon where the economy is at the end of 2023 moving into 2024. But in the big picture, we will go back to some of the things that we've done well. But also during the course of the remainder of this year, we have a number of different business lines that we are working on to developing. Some of those are on the deposit side and some of them are on the loan side. And as we've done every year, year and a half, we've rolled out new business lines and opportunities to make sure we propel growth.
But I will say, Steve, in the past, we've been -- if you go back and look from 2022 backwards to 2014, you've seen we've grown loans and deposits on average both about 23% to 26% per year, right? We never got paid to that. And I think what we're going to do is we're going to be a little more cautious on that loan growth, but again accelerating on the deposit side.
So, one, we never have to experience a disruption with some information that was put in the marketplace, which I think was inappropriate, but we can get to that point in another time. But I think we're going to be a very steady grower. I think we should be able to grow above peer trend like we've always had. I just don't think we're going to grow at the very top end of peer trend, I don't think that's necessary for us.
I might add that we're really taking a surgical strike here on these types of things. So, capital call, for example, I mean we got into that as Ken said when we had a lot of liquidity. Those are thinly priced fields and we did syndications where we received no deposits. We're not exiting that space entirely, we're still going to do bilateral deals where it's a complete relationship. And that's a way that we can kind of continue to be here, but really step away from the stuff really the marginal cost and marginal benefit from that is fairly muted.
Got it. That's helpful. Thank you. And maybe just one follow-up. So, if I look at the deposit decline in the quarter, the $3.3 billion you're calling out through March, the Tech & Innovation segment. We heard from many of the regional banks at this point that they were beneficiaries of the flight out of Silicon Valley Bank.
What did you hear from your customers through this period, which drove them to take deposits out of your bank. I would have thought you could have been a beneficiary also, but they just watching your stock price and panicking. What was it? And did they close accounts or they just bring balances down to the insured level? Thanks.
Okay. One, they didn't close accounts, they moved deposits out. So, let's kind of break down the deposit outflow. $3 billion of the deposit outflow, 50% came out of our Tech Innovation and Life Science area. And Bridge Bank, which is our technology and innovation arm of the company, was always set up as a challenger to SVB.
So, during the panic of Monday morning the 13th, I think people looked and said, what most looks like SVB. Well, here is Western Alliance. Now, what was interesting, only 14% of our deposits and about 11% of our total loans was in the tech and innovation sector, right? But still, there was a lot of pressure put on our stock price.
And what you saw was a modern-day bank run, right? You saw heavy social media and commentary and social media, which got shareholders nervous, which drove the stock price down, we can talk about this a little later, too, which then forced some of the larger corporates that we had to through treasury management systems to move their mouse, click -- point click and send the funds out, then we received a phone call that said, I'm sorry, I'm moving my money, but I see the stock price going down and better to be safe sorry.
68% of our dollars that went out, went out to larger banks, the money center banks. And everyone all said the same thing. When the crisis is over, we're going to come back. And we'll wait and see if that happens. And we'll wait and see if they come back dollar-for-dollar. I doubt it, but they should come back because we haven't lost touch with these folks, all right?
On the second part of your question as it relates to Tech and Innovation, we were still fighting the fight, pulled on to deposits during the -- on the 13th and the 14th of March. Now, that has begun to change a little bit and we are more optimistic that deposit growth will begin to happen in our Tech and Innovation, and that kind of informs us to say why we feel comfortable with growing $2 billion per quarter.
Okay. I appreciate it. Go ahead Dale.
In terms of kind of the stock situation -- so really, I think the question starts with how did we get caught up in this? And we think the original tie is because of Bridge and the relationship that we have is the prime competitor to Silicon Valley Bank. But for us, it was only 16% of our total versus for Silicon Valley Bank, it's basically their entire business.
So, -- but -- so what happened is that issue when they run started on SVB, I think they looked around who else is in the space, but that perception quickly metastasize into a short narrative.
And if you look at our options activity, we a lot of days, we wouldn't trade options at all. But on that Friday, March 10th, we traded about 1,000 times our normal volume. And the most common issue was somebody bought $30 put. Mind you, this is what our stock is trading at $50. So, they're $20 got the money, and they expired next week, the March 17th week. somebody that had an agenda, and then on Monday morning, before the market opens at 5:00 A.M. New York Times, there was a premarket session selling. And nobody treats premarket us, so it's pretty easy to move the stock price around and push it down, down, down. And so we've opened a $12 on Monday morning.
Well, that's what the print was. And so when depositors saw they say, oh my gosh, you're down 75% over the weekend, hence that triggered an $8 billion withdrawal on that Monday. Now, we traded down into the $7s and then on nearly quadruple and closed at $26 per share. That's not typical bank trading in terms of what goes on.
But I think the stock price recovery calmed down depositors and so we had a sharp drop about 85% in terms of withdrawals on Tuesday and then -- since it been basically flat. And after that entire week, we've been on this kind of uptrend again.
Got it. I appreciate all the color.
The next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
Thank you. I guess maybe forward-looking, thinking about just your deposit growth outlook, given sort of the new perspective, talk to us around where you expect deposit growth to come from in terms of business segments? And what's -- and how are you thinking about just the incremental of the deposit cost that's coming into the bank? Yes, if we can start there?
Okay, I'll put this up. I'll take the first half and I'll get Dale the second half. In terms of deposit growth, we see deposit growth coming from our HOA segment, which was unaffected and one of the lessons learned here, by the way, when you take our technology, use APIs to connect to the management company's technology and then they connect to the HOAs back office or technology, those accounts and dollars can't move. That's a nine-month to a year conversion.
And so one of the things that has informed us and what we're looking at is where else can we find channels to do just that and be very deeply rooted into the back offices of our clients. But HOA is one place where we expect growth.
Our new business lines, I'll take you back to 2018 and early 2019, building settlement services, building escrow services, while we just launched corporate trust. All those should contribute during the course of the year. And then we also have the natural build warehouse lending group and the regions have very strong brand recognition, actually stronger than I would have thought.
And so during the outflow, we only saw a 3% to 5% in that range for the regional bank brands, Torrey Pines, Bank of Nevada, Alliance Bank of Arizona, First Independent Bank, and Bridge Bank on the non-tech side. And so we're going to make also a deeper commitment and a concerted effort to bring in more of that metro banking there because that, for us, is like our consumer deposits, okay?
We're not a consumer shop, but those deposits were very sticky. And to combine your question with Steve's question from before, one of the things that we've learned, this is really interesting, if someone called us up and said during the crisis on Monday and Tuesday. And really, it was just Monday and Tuesday, mostly Monday, to be honest with you, right, and said, what's going on? If we had that conversation, that was a conversation that nine out of 10 times, we can hold on to the client.
But if you are a larger corporate and you move your money really quick, it is hard to rationalize a person out of a position that they did not rationalize themselves into. So, if we move -- if you made a decision out of fear, it's hard to get to that person.
Well, our metro banking clients and depositors. That's a conversation that they know, Dale given who called on them every couple of weeks. They trusted that, all right? And that's a way to grow.
Additionally, I think one of the things we also learned is more information in terms of times of trouble really is very helpful. The 8-K that we put out were certainly important for the market, but really, it was done so that our business development officers could talk very specifically to our clients and give them very specific data. But more specific to data, the more concrete and finite, the better they felt.
If you said, gee, we've been here for 40 years, and we believe in customer service and all that, great. But they needed to see things like what is your loan -- I'm sorry, what is your insured to uninsured? How much coverage do you have? When you have that data put into the marketplace and then the BDOs could then taken and talk to clients, that was very helpful. So, I went a little further than just your question there. I'll let Dale take on the cost side here on this
Yes. Yes. Regarding the costs, as we talked last year, we were not playing the beta game. We were trying to say that we're doing better than others perhaps because our beta is lower in terms of how fast we're raising our funding cost. We were there where the market was where the price was all along, and we know what that is. And so today, that's kind of where we are.
Well, I don't think many banks can really pull in much in deposits as something meaningly different than effective at funds. And so that's what we've dialed in, in terms of what we can do, but we do have these -- a variety of initiatives as well as our current array of deposit gathering divisions, whereby we can continue to execute on that, and I think that's demonstrated by what we've done for the past three weeks.
And maybe, Dale, I guess, a different way, when you look at the NIM outlook, 3.65%, 3.75%, how do you think about if the Fed is done with the rate hike sale next quarter and rates remain flat from there, where do you expect the margin to exit 2023?
Yes, I mean, it's really kind of where that is -- where that guide is. As I mentioned, the volatility we have around our margin net interest income in different rate environments is almost nil, less than 1%, whether up or down, shock or ramp. So, that's intact. I mean in terms of what we go from this 3.79% to this guide of just a little bit lower than that, I think it's important to revert that 3.79% has a couple of things in it that are depressing that number.
One is it has a very large cash position that we had for three weeks of March, basically, whereby we took down large dollars from the FHLB or the FRB and we had it in cash. I mean our balance sheet was close to $90 billion on some of those days, and we ended the quarter at $71 billion. That was at an upside down spread. That caused our margin by 11 basis points.
In addition, we talk about the HFS loans that are coming out of here that have a spread of 2.3%. You take that out of our margin at 4.79%, our margin rises about 20 basis points. So, the 4.79% is already depressed. And so going -- holding that level or declining slightly, I think that maybe helps with the modeling.
Understood. I'll leave here. Thank you.
Our next question comes from Casey Haire with Jefferies. Please go ahead.
Yes, thanks. Good morning guys. I wanted to touch on the borrowing paydown. By my math, you guys -- if you guys continue to grow loans, deposits at $500 million, $2 billion, respectively, you get to that mid-80s by the end -- by summer 2024. Can we expect the borrowing to be the use of the excess liquidity as you get there ratably and to what level?
Yes, I mean I think your bottoms are going to come down, obviously, to a level. I don't have a dollar figure for you, Casey. But yes, we'll take them down. I mean, we operated last year with the borrowing position in kind of the mid-single-digits, could be lower than that.
But we still expect to be using the FHLB and also are a good accordion basically for day-to-day liquidity is as people withdraw, deposits come in and things like this. And so that's a pretty stable source to do something like that. What we don't want to do is we don't want to rely on the FHLB for just standard operating liquidity.
I think your numbers are about right. We could maybe get to that loan to deposit ratio a little bit sooner. That will be informed by our deposit activity, right? So, if we do a better job, it will come down quicker. But I think your numbers -- your direction is about right.
Okay, great. And on the efficiency ratio guide, I got that. I just -- obviously, there's a lot going on in the near-term or in the last month. Just wondering if you could give an expense run rate for the second quarter just as a starting point?
I'd rather say -- yes, I think what I'd rather say is -- the guide is in the mid to high 40s. And the expense run rate for us or the efficiency ratio, I've said this on many calls, is really the exhaust fumes that comes out from the business. So, we know where we want to get to in terms of EPS. And you can kind of then back into certain things we won't sacrifice. We're not going to sacrifice the build that we've been doing in risk management programs and technology and technology itself and by the way [ph], it was because we put so much money into our technology, our payment systems, all work really well. We had no fail. So, we're very pleased with that.
And also the reason why we're able to have some confidence around going -- the go-forward in the deposit growth is from new businesses that we have cultivated since 2018 and 2019, specifically on the deposit side. So, those things are going to continue.
If we don't put money into the company to grow, then you're not going to have sustainable deposits and sustainable loan growth. So, I didn't give you a very specific answer to Q2, but I'm just telling you, mid to high 40s is what we're going to do inside of the overall outlook that I presented.
Got you. And just last one for me. If I take the spot rates that you guys provided in the slide deck and then give you credit for all of the HFS sales and layer in that high 40s efficiency ratio, I get about 1.4% ROA and an 18% tangible ROE. Does that sound about right?
1.4% ROA, you said for the -- for the year, you mean, more or less?
Yes. Well, yes, like a run rate of 3.31% with all the spot rates that you guys give and then giving credit to the balance sheet restructuring, the $6 billion fully offloaded.
Yes. So, maybe you're a little bit off and I think it's because you're jumping to the efficiency ratio instantly. And you said, high, I don't know what a high means.
Yes. Exactly.
I mean -- yes. So, remember, we're still going to have a lot of these -- the $3 billion is already contracted, that's coming in this quarter in terms of dispositions, some more will probably as well. But that's going to linger a little bit. And so that would -- is a revenue source that really doesn't have an expense tie with it. So, you may be a little bit -- you may be jumping up too quickly.
Okay, understood. Thank you.
The next question comes from Brad Milsaps with Piper Sandler. Please go ahead Brad.
Hey thanks for taking my questions. Dale, I just wanted to -- hey Ken. Just wanted to follow up on the spot rate discussion. I was encouraged to see those lower on the deposit rates at the end of the quarter. Do you think that's sort of a onetime phenomenon? And do you -- would you expect those to sort of accelerate again?
I think you mentioned you thought your deposit growth would mostly come from higher-cost sources, but just wanted to get a sense of sort of squaring those spot rates versus kind of what's going on in the environment with your deposit growth goals?
Well, so I mean -- yes, I mean, I do think that we have two sources of deposit growth here. One of them is at a more marginal cost, and that's going to be kind of new money, I believe. And the other is recovery of funds from clients that pull funds out in kind of the last three weeks of March.
And I think that we're going to have success on both of those categories in terms of where the lower cost money when where it came from, it really was predominantly in the tech space. We've talked to these enterprises. And a lot of them say, they're going to come back. They just want to see a little bit of calmness and stability kind of reenter the space. And so I think we're on track to that. So, I think that's a portion of what you're going to see.
Okay. And do you have a sense for maybe ECR deposit growth? I mean those were basically flat linked-quarter. Is that -- what percentage would that be of kind of how you're thinking about growth throughout the year?
Yes, I think ECR deposit growth is going to climb as well. A lot of that comes from different elements of our HOA division as well as our mortgage warehouse operation and escrow funds related to principal and interest in title and taxes and insurance, those heavy CRs with them. And I think we're optimistic about how that can go this year, too.
Okay. And then just a follow-up on the loan spot out rates that you disclosed on slide 14. You gave the average of 6.28%. But I assume that includes the loans that you moved to held for sale at the end of the quarter. With the spot of 6.45%, is that -- I assume that would exclude those loans held for sale, so it would be up fairly materially over the average. If I were able to back out those loans that you move. Is that the right way to think about it?
It is the right way to think about it. Yes. And we've kind of -- I'll say, reverse engineer in on page 18, where we took the spot yields for the entire quarter and what that was in that spread and hence coming up with $31 million is the revenue piece associated with the HFS disposition.
Got it. And then finally for me, the bucket that you term is 2C, I guess, the $3 billion of non-contracted plan sales, is there anything that, in your mind, that would hold that up or maybe why that is -- I mean, I know you guys have been extremely busy, why that isn't under contract yet? And then just appetite for further unwinding of any additional credit link notes that you might have out there?
So, I think it's want to say that we've got 50% of that already cemented and we're just waiting to close towards the end of April. The other $3 billion were in active conversations with. And so we don't see any reason why we're not going to get it done by the end of Q2. I mean, could something drag into -- a little bit into Q3, maybe. But right now, we're encouraged with the conversations we're having with the parties across the table from us.
Okay, great. And anything else on CLN unwinding and think you're kind of done in that regard?
Well, there will be some more CLNs that unwind as we -- as part of the $3 billion that we're looking to sell. And that's all factored into our net CET1 side that we have. Of course, you lose capital efficiency when you unwind them, but you're getting rid of the assets on the other side, net-net, these transactions are all capital accretive to us.
Yes, the capital call and subscription in CLN, which is the one we're talking about is already contracted. It's being unwind daily. They're taking loans out of that every day. And so it's just whittling down. I think it's going to be over by the end of this month and so that will be gone. In terms of the other CLNs we have, we have -- we still have three that are all residential. We don't have plans to unwind or dismantle those.
Okay, great. Thank you guys.
Our next question comes from Timur Braziler with Wells Fargo. Please go ahead Timur.
Hi good morning. Looking at the HQLA build in the quarter, can you tell us where we are in that process, maybe provide like HQLA to total assets? And as you continue to build that out, is that additive to the current securities balances or is there going to be some additional repositioning that kind of keeps the securities book flat while HQLA grows?
Yes. So, I mean we're going to be taking that up. I don't have a limit for you. I mean, there's demand associated with HQLA as you surpass $100 billion. So, we're going to be on a trajectory to kind of have that rise. But -- and so over time, I think it could displace something else in the AFS book or whatever that we have presently.
But I wouldn't look for that to be -- that's not going to be some substantial kind of step variable that you've got to leg into. It's going to be something that we're -- as we're -- as our loan to deposit ratio descends, we're going to be climbing that ratio. But we're not going to -- it's not going to jump in any substantial way that's going to kind of, I don't know, disturb margin or things like this.
Yes, I would say that's going to be informed by our insured to uninsured level, that's number one. And again, back to lessons learned, if we -- if some large corporates bring back their money, then we need to sign a higher level of volatility to those dollars and then hold some of those dollars in HQLA. So, that also will be part of the composition mix fabric of the new deposits coming in that we're going to have to determine.
Okay. And then construction loans continue to grow at a nice clip. Curious if you can provide what the current unfunded balances are in that book and what the funding schedule looks like there for the rest of the year?
Sure. Tim Bruckner here. Hi.
Hey Tim.
Okay. The funding schedule for the rest of the year rolls out at about $400 million a quarter. So, within our funded loan balances and forward projections, that's accounted in the volume. That represents the trajectory of the unfunded for this year.
Okay, great. And then one last one for me, maybe going back to Steve's question. On the bigger picture front here, where do you ultimately see Western Alliance falling into the broader technology innovation sector once that recovers, assuming there's going to be quite a lot of dislocation from Silicon Valley clients. And do you ultimately see Western Alliance playing a larger role in that sector?
I think it's going to be a sector that's going to be positioned against the other growth areas that we have. So, not going to be -- it's not going to overwhelm the deposit composition or the loan composition, that's something we've seen. So, we're not going to be the new tech bank. But I do feel very strongly that the others that are picking up the tech people out of SVB, and there have been a number of banks.
I think people are going to migrate to us and stay with us because one, consistent performance is very important here, not only a consistency of the people that you deal with, the consistency of the credit granting process and the credit review. And we've seen over our time here, banks that have jumped into tech and innovation, and they think it's C&I lending.
Tim Bruckner can pick up on this in a second, if you like. But it is not. And we've seen people jump in and say, hey, I'm here to provide you credit. And all of a sudden, they see, wait a minute, you're lending against possible negative cash flows or clearly negative cash flows, you're lending against VC's commitments to put in money over time, it's a different C&I loan. Tim, do you want to pick up on that?
Yes. Thanks Ken. It is. And as our plan and strategy discussed today indicates, we recognize and adapt to a changing environment. In the tech space, we've got a change in competitive landscape with respect to the lenders involved. And we've got a changing landscape with respect to the VC. So, we've got that in evaluation.
We think that we are well suited in this space that we have a deep understanding of the space, but we're moving forward fully advised by what we've seen and are seeing and the changes that have presented themselves. So, I don't expect that this will hold a significantly larger position on our balance sheet as we move forward.
Okay. Thank you for that color.
Our next question comes from Ben Gerlinger with Hovde Group. Please go ahead Ben.
Hey, good afternoon. I was curious if you guys -- I mean, just kind of philosophically speaking, Western Alliance has always been entrepreneurial in both the left and the right side of the balance sheet. And it seems like on the left side, you guys are retrenching -- you're sticking with your core clients, partially given the volatility and then also just economically speaking, I'm sure you're tapping the brakes a little bit.
But as we shift beyond a recession or go through one and get through the other side, has the DNA changed on how Western Alliance operates? Could we see you guys reenter the market that you've left, just kind of thinking longer term growth and where that could come from?
Yes. Well, first, let me say, culturally, we pride ourselves on being entrepreneurial. Many people think it's in on the business development side, whether we bring in deposits or loan growth. And I would say, yes, you're correct, if you think about that.
I think where we excel in our entrepreneurial behavior is to -- in times of crisis and in times of working out transactions with clients. So, you want to see our entrepreneurial behavior. Go back and look at COVID and look at our hotel book, which probably back then was $3 billion. We had projections of anywhere from us losing $100 million to $1 billion in that book, right?
We moved quickly. We put a program in place that I think maybe only one other bank use, which was in order to get a deferral, you had to put money up. So, every month of deferral you wanted, you actually had to put up a month of cash.
And while that did not seem to sit immediately well with our sponsors. Once they understood that what we were trying to do and get them to commit to their projects, so we could then commit to any new deals that they wanted to do. Then we had almost 100% uptake in that program. What's the benefit of that program? Everyone was projecting large losses, not on late payment. Let me be clear, not one late payment.
So, what you saw here, okay, we did have a rush for liquidity to run out of this bank on Monday. I will tell you by Tuesday, late afternoon, we already had the basis of the plan that we're talking to you about here today in terms of moving the sell down of non-core assets.
We also believe moving quickly -- and by the way, this was very connected to what we told everyone in Q3 and Q4 coming out of kind of -- moving out of our EFR loans, capital call and subscription lines and also getting out of some corporate finance credits, which we thought may have some potential credit weakness down the road.
But we moved so quickly that, that allowed us to lock up deals for the low marks that you see that we noted here in the early part of our slide deck. That's the entrepreneurial behavior that we have here.
And so yes, you could say we're retrenching. Right now, we're using all that entrepreneurial behavior to build capital to make sure we have a good deposit franchise, a better deposit franchise. You saw that, by the way, from moving our insured deposit level from 45% to 73% inside of five weeks. We move. When we put our minds to do something, it gets done very quickly.
And so yes, so one of the other former questions from one of the other analysts. Yes, Q1 -- I'm sorry, Q2, Q3, you're going to see sort of this flattish type of balance sheet. But as we begin to emerge out of Q4, assuming that we're on track with all the capital and all the liquidity that we want to do. And that's perhaps job one, I just want to make sure everyone understands that. Our DNA will be in full view again as we build into 2024.
The only thing I'll say is we don't need to grow as fast, right? Again, we weren't rewarded for growing as fast. And the other thing I'll say, it's all going to be informed again by where the economy stands and what's happening in the economic environment and macro factors, okay?
Yes, that's great color. I appreciate it. The confidence is the best capital in this environment. The only other question I had is kind of just where your share price is today. Seeing wall under tangible book is like seeing a snowman in Phoenix. I'm just kind of curious, your appetite of share repurchases. I know you're trying to build capital, so that would fly in the face of it, but just anything on that end?
Yes, that's not in the conversation at the moment. We'll not be in the conversation until we cross over 11%. And then the decision then will be -- it will be dependent upon the economy and other economic events will reassess capital management alternatives at that time. But that's not something that's is it even contemplated here or even discussed.
Got you. Appreciate the color. Thanks guys.
Thank you.
The next question comes Brandon King with Truist. Please go ahead Brandon.
Hey. So, I wanted to touch on credit, and I appreciate the guidance, and I wanted to get a better sense of how you think this credit normalization process will play out for Western Alliance, particularly for this year?
Sure. Hi it's Tim Bruckner. First, I'd say that as we look at our portfolio right now, it's performing and doing exactly what we wanted to do in this economy. We're at our foundation, a relationship bank. And at our foundation, we're a direct lender and we don't enter into transactions where we're complicated with mezzanine and sub debt and so forth.
So, we've got direct, frank, straightforward and ongoing dialogue with each of our customers in that sense. So, when we talk about how we're doing, how we relate, that's informed by this active dialogue.
So, as you can expect right now in segments like office, we're out in front of the customer with dialogue in the present environment discussing. So, I expect that you see stability with any economic downturn. I expect that there is also a chance for some migration to criticized or special mention, we don't see significant migration to us based on the direct relationship and the active dialogue that we're having. That holds true across all segments that we lend in.
Okay. And my follow-up that was as far as the uptick in classified assets, is that kind of the general story there as well?
Yes. Exactly.
Okay. All right. And just one more follow-up with the PPNR guidance. Within that, what is the outlook for AmeriHome going forward for the rest of the year?
So, actually, quietly, AmeriHome is having a good several weeks here. And what I would tell you is that overall, production margins have improved to more historic normalized levels. It has happened towards the end of Q1 and it continues into the current quarter.
And I would kind of say that the mortgage income that we earned in Q1 probably is about right as we move forward. And what's helped us here is the retreat of large money center bank. I don't know why we just don't say Wells, but to retreat of Wells of the correspondent lending market, combined with industry capacity rationalization has paved the path towards higher margins and higher win rates.
And so we knew the market would have to right-size itself. It's taken a little bit longer than we'd like. But it has -- it seems like it's getting there now. And so that's the color around AmeriHome at the moment.
Got you. So, first quarter is a good base to grow for the rest of the year?
Yes, more or less.
Okay. Thanks for taking my questions.
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead Gary.
Thanks, good morning. I wanted to ask another question just with regard to kind of the use of net inflows of deposits over the next few quarters. I think the question was already asked in terms of the securities portfolio, but you finished the quarter at $3.5 billion of cash and equivalents, that's about 5% of your total balance sheet. It's about double where you've been historically in most quarters at least. Is that sort of a level that you'd kind of target over time? Or do you think that it trends back towards that, call it, 2.5%, 3% level over time?
I think that can hold over time. We're holding a bit more cash than we usually do presently. I think that -- I think that can probably trend lower.
But the overall liquidity position -- and again, as Ken indicated, I mean, as -- assuming we get continued deposit recovery here, our coverage of uninsured remains robust. And I think that it will inform what that liquidity profile has to look like in terms of what funds return and what volatility might be associated with them.
Okay. Thanks. And then in terms of the ECR or the deposit costs in the quarter, since ECR deposits were essentially flat in the quarter, I would have assumed that, that expense item would have moved up a little bit more, given kind of the full quarter fourth quarter hikes and the mix we had in the first quarter. So, I was just wondering if there were any changes structurally to the ECR rates or anything along those lines?
It's interesting and maybe somewhat counterintuitive. But what's transpired is that a lot of the funds we lost, they were larger. And so consequently, they were higher. And so we lost ECR deposits that were among the highest that we made. And so the actual rate of increase went down because the mean spread relative to, say, under Fed funds.
Okay. So, potentially, as you talk about maybe recovering some of those ECR deposits that have flowed out, that number could have a little bit of volatility to it separate from the rate environment for some period of time?
It is possible.
Okay. Thank you.
The next question comes from Chris McGratty with KBW. Chris, please go ahead.
Great, thanks. Just following up on that one. Obviously, there's a correlation between your NIBs and the ETRs. Just given the change in the deposit mix over the last year, I guess, how do you see that 35% non-interest-bearing mix progressing?
This elevated rate environment, I think it's fairly difficult to get, say, a new DDA that has no ECR in non-interest-bearing. So, I think that -- I mean, at the same time, the dollars that are still there have been through a little bit of volatility and they're still here. So, my impression is that as we grow, we'll grow outside of that and so that will continue to whittle down proportionately.
But I don't really see dollar exit from that category. And we possibly could get some recovery, as I mentioned, most of the dollars that went out were in the tech space. And a number of those clients have said we'll be back when the storm settles a little bit.
Just so I make sure that helpful. Just to make sure I understand. So the 16.5% of NIV have, what you're saying is the dollars shouldn't be declined nearly the same rate as what they have, but the mix will have a bias because of growth other were. Is that the right interpretation?
Well, the mix will have a -- the proportion of mix will have a bias downward, but the dollars will be fairly steady. That's what I say.
Yes, that's exactly. Okay, got it. And then maybe if I could, you talk about the mid-80s and the 11% as kind of a medium tier target. You give your efficiency for this year. As you kind of exit the year, I think somebody asked the guy is a little bit different. The kind of the efficiency ratio of the company when we're all done with the adjustments, how do we think about it relative to that mid- to upper 40s if you're thinking out one to two years?
That's a harder projection to make. I would state that -- and as Ken was indicating, AmeriHome seems to be getting real lengths at the moment. We'll have to see how that plays out. But if the rate environment -- I personally think we're going to be in a declining rate inflated environment in 2024 going into the general election. And I think that's probably bullish for mortgages.
And with that, that could be a greater proportion of our revenue than what it's been for the past few quarters. And their efficiency ratio is in the low 50s. So that would be something that would keep it up, although the revenue piece would be meaningful.
Okay, that’s helpful. Thank you.
Our next question comes from Andrew Terrell with Stephens. Please go ahead Andrew.
Question on the CET1 pickup from the dispositions. So the $3 billion of contracted sales in the second quarter gets you a 50 bps or so CET1 pickup or 33 bps net of the CLM. I guess if there's $3 billion of loans remaining beyond that, that aren't contracted for sale just yet, but no further CLN repositioning. I guess, should we think about the CET1 pickup from that last $3 billion pool is closer to kind of a 50 basis point lift on the CET1?
Well, -- good question. So what we have here is we believe we're going to be exceed 10%. So, -- is all of that $3 billion going to be disposed off in the second quarter? I can't tell you that. We've got $3 billion contract that will go. So, is there some tail there associated with it. But when it's all gone, there's more pickup there than just to give you over 10%.
Okay, got it. And then apologies if you disclosed this, but how much should the MSR sale impact servicing revenues this quarter? And any expectation for go-forward MSR sales?
Yes. So, MSRs -- the MSR was sold, I think, on the last day of the quarter. So it didn't really impact any of our servicing income for Q1. It was a significant size, $360 million. And we did that in the face of a large money center bank that's disposing of the MSRs, and we did it right on top of par, right on top of our mark. So, we're very pleased that we're able to get a sizable deal off.
That gives us a lot of optionality to when we want to come back to the market if we want to come back to the market and the size of the deals. We may do smaller deals if we think the pricing could be better. There's no rush to go ahead and do them. And so -- and again, I would also say if the mortgage market to Dale's viewpoint of the world, if the mortgage market begins to pick up at a faster pace, then maybe I have to retreat from some of my statements and we have to do some sales. But right now, we don't see that we're going to have to do any sales, and we get all the optionality going one way as to when we want to launch a deal.
Yes. We manufacture MSRs. And so you could look at the ending balance, if you'd start with bidding balance, take out $360 million, obviously, that ending balance is higher than that. So, it's going to be a fairly stable balance on average, but it's going to move up and down as they manufacture them every day and then as we dispose with them periodically. I will say we're getting a lot of reverse inquiries, and people want to own them and so we're a manufacturer.
Okay, very good. Thanks for taking the questions.
The next question comes from Brody Preston with UBS. Please go ahead Brody.
Hey everyone. Thanks for the time. So, I have a few questions. I just wanted to ask maybe on the asset sensitivity just given that the balance sheet sensitivity is down when I layer in the mortgage and then the deposit costs that flow through NIE. Dale, is it fair to say that the earnings stream is liability sensitive in the current rate environment?
We really think it's pretty close to zero here. And you do have a pickup potentially on the deposit costs like you're alluding to. But again, we're showing that it's a little bit asset sensitive presently. But like I said, less than 1%. So, we put it all together and with or without deposit cost is margin or non-interest expense, it's pretty neutral.
Got it. And within the PPNR guidance, could you share what your interest rate outlook is for Fed funds?
Yes, we've got one increase coming up in -- at this next meeting, 25, and then we have two later in the year, I think it's November and December. Two cuts, yes.
We may not believe that, but that's what we have in our model.
That basically tracks the futures were running off of.
Okay, great. And then on the deposit rates, I think the interest-bearing deposit rate was 2.82% spot versus the 2.75% at quarter end. The average was up I think it was like 75 to 80 basis points quarter-over-quarter. So, just trying to help think about the step-up in deposit costs going forward? Do you think that the spot rate is indicative of where you would expect the 2Q deposit rate -- interest-bearing deposit costs to come in? Or do you think it will kind of be another 70 to 80 basis point increase?
No. No, no. I mean your spot rate is as of March 31st. So, what's going to change it from there. We have one rate increase in early May, 20 to 25 and then what's the proportion that's going to follow through. So, it could be up a little bit more than that, but we wouldn't expect it to be much more.
We're not seeing kind of interest account volatility. We saw some of that earlier, but a lot of these are indexed at various levels to Fed funds. So, I think it's going to be more -- I mean, the big increase you had from Q4 to Q1 was you had significant raises, they were still doing 75 back then in Q4 that didn't layer in that kind of that for the full year on an average basis.
So, going from 1.79% to 2.75% was really because the 1.79% rate was held back from the average rate -- from the average rate and how quickly they were still moving Fed funds back in the late 2022.
Got it. And just on the intra-quarter deposit swings. I think it was the March 9th update you gave where you were $8 billion for the quarter. Could you tell us what were the categories that drove that upswing? Which ones kind of flowed out? And how much of that you could expect to maybe get back? And if that's encompassed within your guidance for deposit growth going forward?
Sure. So yes, we were up $8 billion -- just under $8 billion as you mentioned. We would typically have seen some of those funds to go down a little bit. We were targeting that we're actually going to be up $4 billion for the quarter instead of $7.8 billion because we thought we'd lose a little bit in mortgage warehouse deposits in particular that would flow out. We also had some other dollars on things that we're going to be pulling out. Well, that happened. And in fact, we had some of those dollars a little bit more than we expected.
And then we've mentioned settlement services, which is another division. I mean they were off to a very strong Q1 in particular. And -- but those accounts have just come in. I mean, so we opened accounts that had been here for single-digit weeks and then with all the volatility that took place, and I think it kind of a little bit when they saw our share price on Monday the 13th and so they took it out.
Now, for those, we do have commitments for many of them that they were kind of surprised by this, and they think they're coming back. So, we're pretty optimistic about what going to reverse there. It was a little bit like LIFO, last in first out, I mean, so a brand-new account wasn't as sticky as something that had been here with more tenure.
They hadn't experienced our service levels and our performance. It was easy for them to move. But those folks that have been with us that understood service levels and performance and how important it is, those funds didn't move. And we've been on the road last week meeting with just a number of settlement service clients and future clients. And there is a big pipeline that's building out there. So, we hope to gain our fair share of that -- of those settlements.
Got it. And if I could sneak one last one, a little bit ticky-tack in, just on the mortgage servicing rights that you sold. Could you maybe ring-fence what the unpaid principal balance was? I mean if I just look at the valuation, it looks like it was like maybe $22-ish billion. I guess maybe if I could back into it, but just help us ring fence that. And then I just wanted to clarify that there was no gain on that that flowed through the servicing income line item this quarter?
No, there was no gain on that, that went through. There -- yes, I don't have that number in front of me, but I think your math is about right, basis points per dollar.
Okay, great. Thank you for all the time this afternoon for taking my questions guys. Appreciate it.
The next question comes from Tim Coffey with Janney. Please go ahead Tim.
Great. Thanks. Morning gentlemen.
Just before you begin, --
I'm sorry what was that?
I was going to just -- it was about $20 billion of unpaid balances that were on the last question, okay? Sorry.
No, no, no. Thanks. I was -- that's actually something I needed. So, just given the source of stress in the deposits in March, have you considered strengthening or limiting the concentration limits to deposits from the VC industry are companies funded by VCs?
Well, I mean our first tie with these deposits is what we have when we have a credit relationship with them. And so -- and there was several things that went on there in terms of tweets that people are familiar with that I think accelerated it.
What we've taken note of is kind of volatility around some of this stuff and we'll reflect that in how we consider what we need in HQLA and liquidity kind of going forward. But we're committed to the tech space. And we think that there is value to be created for us and for them in that space, but maybe the duration risk is shorter than others might have thought.
Lessons learned there, about a third to 40% of our total deposits were operating accounts tied to loan commitments where we had to be the primary banking relationship. Those deposits didn't flow out. That's number one.
Number two, the other thing I like what we did, and this is -- goes back to the original Bridge team when they started the company to be a challenger brand to SVB was to focus on the portfolio companies and not the venture capital funds. So, those dollars are less likely to flow in and out on the operating accounts than they are with the venture capital funds. So, that was something that was started that we continued that was, I think, a good decision.
I think for us, going forward, we now need to tie more of the deposit commitment to the loan documents such that if they do move money, the penalty pricing is severe. Today, it's a nuisance, but we're going to tie and may get more severe in order to keep those deposits with us.
And by the way, if you want a relationship and you want the experience that we bring, you're going to need to bring deposits to the table. And that's what we say, by the way, to all clients that we sit across the table from them and we say, we're happy to make your business very, very successful, that's what we want to do. You've got to do the same for us. So, if we're giving you credit, we need that deposit relationship and we need those sticky deposits.
Great. Okay, thanks. That's helpful. And then in terms of the deposit outlook of the $2 billion per quarter, how much of that is predicated on the deposits that flowed out of the bank in the last month or so coming back?
It's a mix, to be honest with you. I don't know that I can give you a very specific number how much is returning versus how much is new. I will tell you that this whole disruption gave us an opportunity to spend more time with our clients, if there's any silver lining, that's good.
To certain clients during the heart of the disruption, we were talking to them every day if they wanted to. But it also gave them much more access to the senior management teams and it allows us now to call on them. So, I can't give you a number, but we feel more comfortable with the overall $2 billion coming back for quarter -- $2 billion growth per quarter.
Okay. Okay. And since you're getting back to just old-fashioned relationship-based banking here, is there a minimum interest spread that you're looking at or targeting?
So, the answer is yes, by different loan categories, okay? And as Dale said, we're basically pricing at the margin today. So, effective Fed funds gets offset by SOFR plus. And that spread is what drives us. And overall, the spread is very close to what you see is our net interest margin spread.
So, different if you're doing a construction loan versus a C&I loan versus a hotel loan versus warehouse lending. But the blend of that, those spreads are pretty much seen in our net interest margin rate.
Okay, great. Those were my questions. Appreciate the time. Thank you.
Our next question comes from David Smith with Autonomous Research. Please go ahead David.
Thank you. We're getting late. Just a few quick ones on capital. Do you have plans for additional credit linked note issuance from here given the way that you've reevaluated the existing CLN base? Is it something you've ruled out or just--?
It's something we don't need going forward at this point. And it's expensive, very expensive. So, when we're done -- so we don't need that incremental cost.
Okay. Can you talk about what changed that led to that reevaluation because I know it was something that the bank had done a decent amount of in recent quarters?
Well, I mean, one of the benefits of them was that you got a reduction in risk-weighted assets and held capital. We're moving away from that to a higher capital level so that whatever the next storm is, with that and with our insured deposit levels, in the top decile relative to the 50 largest banks, we're not going to be in a situation that for a short game. And so I don't think the CLNs were productive in avoiding that scenario.
Okay. And with the new 11% target, is that something that you view as a long-term target for Western Alliance? Or do you think you able to come back down towards, say, 10% after everything settles down at some point?
I think, as I said, we want to be competitive with our -- with the money center banks. Now no one's ever going to confuse JPMorgan and Western Alliance as one in the same company, or at least not in the next quarter. Let me just say that. So, here a pause for after.
But I think one of the things we learned when we're out on the road talking to non-sophisticated banking people, they understand their business, they're very smart, but they don't spend a lot of time. For us to come in to say our capital, like there are a number of studies that were done that we used that put into the model, CET1 less HCM box, less AFS marks, right?
And when we went in and we showed people and talked to people and said that we were one of the best in terms of this adjusted CET1. They didn't have to understand what adjusted meant, they didn't have to understand CET1. But when they heard our percentage and compare it to a lot of the other large money center banks, and we were higher than that, boom, they understood that.
As I said to folks, if my mom was alive, went to us, he was over 90. I made it as simple as I could if she was alive to tell her. Money center bank A was at 6%, we're at 8%, we're better. Money center bank C had insured deposit level this were higher. When people just got that very basic math, the meetings went very, very well and it was well understood, and they were able to check the box and say let's move on.
Got it. Thank you.
Our final question today comes from Jon Arfstrom with RBC. Please go ahead Jon.
Hey thanks. This can be quick. The provision, it looks like it was driven by a charge off and it feels like you're comfortable with credit and growth is slowing intentionally. But anything that prevents that provision from coming way back down next quarter?
Well, yes. I mean, it was driven by a charge off. We had -- we disclosed in there, we had a debt obligation of actually Signature Bank and so we have written that off.
Okay. Just in terms of the provision--
[Indiscernible] comments about credit quality, they are all.
Yes, so you don't feel like you need to be building reserves from here, I guess, is my--
We don’t know.
Okay.
Not any way other than the consistent that would be--
Yes. Okay, that's helpful. And then back to the return question, when you guys flesh out your model, are you a mid-teen return on tangible company? Is that the goal? Are you a high-teen return on tangible company? How do you think about that in your mind?
In terms of return on average tangible common equity, I think--
Return on tangible.
Yes, I think we're going to be low 20s or greater as we move forward through the end of the year and into 2024. Remember, too, that with a smaller balance sheet and small -- and less spread income, the fee income plays a more dominant role and that's coming from AmeriHome. And right now, we're seeing -- we got fingers crossed when we say this, we're seeing the trends move in our favor, and I think that's going to give us a little extra push in the return on average tangible common equity ratio.
Okay, good. That's a good message with your valuation. And then I guess last question probably would have been a good first question. But you -- do you feel like you're dealing with any abnormal stresses right now at your company? Or is this kind of over in terms of managing the stressful situations from mid-March?
All right. So, I want to be careful that I'm not like George Bush that things are signed on the aircraft carrier that says mission accomplished. I will say -- the water is a calmer, okay? So, I think what's important is -- we return to a lot more calm as it relates to depositors starting a Wednesday, that would 50. Cash inflows and outflows are about the same. And as you saw, starting on the 20th or thereabouts, we started to grow, and we've grown in.
So, there's a calm with these depositors. For us, there is still a heightened level of sensitivity to make sure that everything we just said on this call gets executed upon, right? And that, to me, is incredibly important. One, of course, we like to be known as a company that's transparent, but also when we tell you we're going to do something, we do it. We also like to be known as trying to be a little bit more innovative to looking at problems and solving them and then solving them right away.
So, if you're asking me about anxiety and what keeps me up at night, is making sure that we work hard to execute on everything that we've said here. If you're asking me for what the other one or two events that could be out there that maybe could impact the industry a little bit, I think First Republic hasn't been solved yet, but I think we've now shown that we are completely different and separated from that company. There was a point where whatever happened to them affected us. But I think we've now separated ourselves from there.
And the other thing that we're just waiting for is you saw that Fitch gave us -- kept this investment grade but lower a notch or two. We still have one of the rating agency that is probably going to do something or other since they've had us on watch. And we're waiting for that. But we saw no outflow with any impact to Fitch, zero, no incoming calls, zero. And we just want that one last item to be passed and then it's all about execution or it's still right now, execution on the plan that we presented here and also working on growth.
So, what I think you saw here during the course of this crisis is management's dexterity. I've said that to our Board several times. We can balance a few things, keep a few in the air and do them well. I'd like to think we did okay through this whole crisis here and that's what's front and center in our minds these days, Jon. I appreciate the big question at the end.
Yes, okay. Thanks for everything.
Thank you.
That's all the questions we have. I'll turn the call back to Ken Vecchione for closing remarks.
Yes. Listen, this is probably our longest call ever. Not surprising. I would hope we answered all your questions. And we look forward to the next earnings call. We'll talk some more. Thank you all for your time today.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.