Western Alliance Bancorp
NYSE:WAL
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Western Alliance Bancorp
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Good day, everyone, and welcome to Western Alliance Bancorporation's Second Quarter 2021 Earnings Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for the replay after 3:00 p.m. Eastern Time, July 16th through August 16, 2021 at 11:00 p.m. Eastern Time by dialing 1800-585-8367 using conference ID 3676158.
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 second quarter 2021 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer.
Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risks, uncertainties and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.
For 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
Thanks Miles, and good afternoon everyone and as Miles said, welcome to Western Alliance's second quarter earnings call.
This quarter's results continue demonstrate the unique benefits of Western Alliance's national commercial business strategy to position Western Alliance as one of the country's premier growth commercial banks that can consistently generate leading balance sheet and earnings growth with superior asset quality across economic cycles.
This quarter, the bank produced record net revenues, PPNR and EPS, while expanding on net interest margin, generating the highest return on tangible common equity in the bank's history and returning asset quality to pre-pandemic levels.
For the second quarter, Western Alliance earned total net revenues of $506.5 million, net income before merger and restructuring charges of $236.5 million and adjusted EPS of $2.29, an increase of 20.5% from the prior quarter.
These results benefited from a $14.5 million reversal of credit loss provision consistent with our excellent asset quality results. Strong balance sheet growth continued with loans rising $2 billion, excluding PPP loans or 29% on a linked-quarter annualized basis and deposits by $3.5 billion or 37%. Our deposit and loan pipelines are very active and total assets now stands at $49.1 billion.
Net interest income totaled $370.5 billion, up $53.2 million or 16.8% for the quarter as robust balance sheet growth rising NIM and excess liquidity deployment significantly moved the earnings needle. Strong loan growth led to a 5.5% or $1.5 billion increase in average loan balances quarter-over-quarter. Additionally, after closing the AmeriHome acquisition on April 7th, we added $4.5 billion in held for sale mortgages, primarily GST qualified or 12.4% of our average interest earning assets, using approximately 3.21% as an alternative to cash or mortgage-backed securities.
Optimizing our interest earning asset mix helped NIM expand of 3.37% to 3.51% in the second quarter. Fee income was a record $136 million, representing 27% of total revenue as we began to integrate and optimize AmeriHome's mortgage-banking related activities throughout the rest of Western Alliance. Mortgage-banking related income was $111.2 million in the second quarter, demonstrating our ability to adjust win share as gain on sale margins fluctuate to maintain earnings.
I think it's worth reemphasizing that what - excuse me, I think it's worth reemphasizing that what most attracted us to AmeriHome's business model was their low cost and flexible mortgage production and servicing ecosystem that leverages our complementary correspondent and consumer direct channels to feed and enhance value to our Western Alliance's commercial businesses, while minimizing risk.
Business to business correspondent mortgage lenders have several business levers and the flexibility to sustained earnings throughout the REIT or throughout REIT and economic cycles. Despite the evolving mortgage sector fundamentals, AmeriHome continues to meet our expectations and contributed $0.39 to EPS in Q2. We have optimized AmeriHome's balance sheet to Western Alliance capital levels with a servicing portfolio $57.1 billion in unpaid balances, well, yeah UPD - sorry, extended a number of correspondent sellers by 57 days 119 and taken advantage of market dislocations to drive value.
In the second quarter, since April 7th when the transaction closed, AmeriHome generated $20.7 billion in loan production or 25% above levels for the full quarter period a year ago and only down 3.6% from Q1, with 47% from traditional home purchases. Gain on sale margin was 64 basis points for the quarter in line with 2019 63 basis points. Given the flexibility of AmeriHome's business model, we continue to stand by our full year guidance of $1.41.
Asset quality continued to improve this quarter as the economic recovery extended in breadth. Total classified assets declined $43 million in Q2 to 49 basis points of total assets which is lower than Q1 '20 levels on both a relative and absolute dollar amount, just as the pandemic impact was beginning to be felt.
For the quarter, net loan charge-offs were zero. Finally, Western Alliance is one of the most profitable banks in the industry with return on average assets and a record return on average tangible common equity of 1.86%, 28.1% respectively, which will continue to support capital accumulation, strong capital levels. Tangible book value per share modestly declined to $32.86 from $33.02 as goodwill on intangibles doubled to $611 million in Q2, mainly from recognizing the AMH platform value.
At this time, Dale will take you through the financial performance.
Okay. Thank you, Ken.
For the quarter, Western Alliance generated adjusted net income of $236 million or $229 adjusted earnings per share of 22.9% and 3.5% from the prior quarter. This is inclusive of a reversal credit provisions that Ken mentioned of $14.5 million, excludes pre-merger, pre-tax merger and restructuring expenses of $15.7 million related to AmeriHome. Additionally pre-provision net revenue of $277 million rose 37% quarter-over-quarter, excluding those same charges.
After the AmeriHome acquisition, total net revenue grew $169.5 million during the quarter to $506.5 million, an increase of over 50% from the prior quarter. Net interest income rose $53 million during the quarter to $317.5 million, an increase of 24% year-over-year, primarily result of our significant balance sheet growth and deployment of liquidity into higher yielding assets.
Average earning assets increased $4.1 billion, while lower yielding cash proportion held at the Fed fell to 4.4% from 15%. Non-interest income increased $116.3 million to $136 million from the prior quarter and now represents 27% of total revenue due to mortgage-banking related income of $111 million from AmeriHome.
Within this category, net loan servicing revenue was a negative $20.8 million as high refinance activity drove accelerated amortization of servicing rights, which was far exceeded by gain on sale of mortgage loans.
AmeriHome wall contributed 18% non-interest income or $24.8 million in the second quarter compared to $19.7 million in the first supported by $7 million of income from equity investments. Non-interest expense, excluding merger and restructuring charges increased $94.5 million, mainly due to the acquisition of AmeriHome, which increased compensation costs as we added approximately 1,000 new members to the wall team as well as new cost related to loan servicing and origination expenses.
Turning now to our net interest drivers, you can begin to see the benefit of AmeriHome to our strategy to expedite and optimize the deployment of excess liquidity into higher yielding assets as we had a $4.5 billion loans held for sale, yielding 3.2% as opposed to cash yielding 10 basis points.
Investment yields improved 10 basis points from the prior quarter of 2.47, while on a linked-quarter basis, loan yields excluding HFS declined 11 basis points following ongoing shift - mix shift towards residential loans and a slight reduction in non-commercial real estate loan insurance.
Interest bearing deposit costs were flat from the prior quarter at 22 basis points. The total cost of funds increased 8 basis points to 27 based on duly issuance of $600 million of subordinated debt in the assumption of AmeriHome borrowings. The spot rate for total deposits, which includes non-interest bearing was 11 basis points. We expect funding costs have generally stabilized at these levels.
As a result, net interest income grew $53.2 million to $370.5 million during the quarter or 24% year-over-year as average earning assets increased $4.1 billion. Cash as a portion of average interest earning assets fell to 4.4% from 15% in the quarter, which drove significant expansion by 14 basis points to 351. Additionally, excluding the impact of PPP loans, the margin would have increased 22 basis points.
Our efficiency ratio rose to 44.5% from 39% in the first quarter, mainly driven by the addition of AmeriHome employees an increase in incentive compensation costs. As mentioned on our first quarter call, we expect the efficiency ratio to rise to the mid-40s as a result of the acquisition.
Pre-provision net revenue increased $75 million or 37% from the prior quarter and 35.4% from the same period last year. This resulted in pre-provision net revenue return on assets of $231 for the quarter, an increase of 28 basis points compared to $203 in the first quarter. This continued strong performance and leading capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands.
Balance sheet momentum continued during the quarter as loans held for investment increased $1.3 billion or 4.6% to $30 billion and deposit growth of $3.5 billion brought balances to $41.9 billion at quarter end. In all, total assets have grown 54% year-over-year as we approach the $50 billion asset level. Borrowings increased $1.2 billion over the prior quarter to $1.8 billion, primarily due to $600 million subordinated debt issuance as well as the assumption of the AmeriHome borrowings.
Finally, tangible book value per share decreased $0.16 over the prior quarter to $32.86, but increased 18% year-over-year, again driven by the AmeriHome acquisition with - of intangible assets that were largely offset by Q2 earnings and the issuance of common stock through our ATM, of 700,000 shares or $70 million.
Despite heightened competition and pricing pressure, we continue to generate consistent strong organic loan growth from our flexible national commercial business strategy. Loans held for investments were $1.3 billion in the quarter or $2 billion, excluding PPP payoffs of approximately $700 million.
Majority of growth this quarter was driven by an increase in residential real estate loans of $2 billion, which now comprise 17% of total loans as we look to deploy excess liquidity and integrate it new flow arrangements in the recent Galton and the AmeriHome transactions. This was supplemented by growth in capital call lines of $162 million in construction and land loans of $89 million.
Turning to deposits, we continue to see broad-based core deposit growth across business channels. Deposits grew $3.5 billion or 9.2% in the second quarter, driven by increases in non-interest bearing DDA of $2.6 billion, which now comprise 48% of our deposit base in savings and money market deposits of $534 million.
Market share gains in mortgage warehouse continued to be significant drivers of deposit growth during the quarter along with strong performance in regional commercial clients, robust fund, the raising activity in tech innovation and seasonal inflows from the HOA banking relationships.
Our asset quality continued to significantly improve this quarter, total classified assets fell $43 million in the second quarter $238 million, 49 basis points of total assets, while our total classified assets ratio declined 16 basis points to 49 basis points due to continued improvement in COVID impacted clients.
Finally, special mentioned loans declined $69 million during the quarter to 1.35% of funded loans. Similarly, quarterly net credit losses were negligible at $100,000 for the quarter or zero basis points of average loans compared to a $1.4 million net loss in the first quarter. Our loan allowance for credit losses fell $16 million from the prior quarter between $64 million due to continued improvement in credit trends and macroeconomic forecasts and loan growth in portfolio segments with low expected loss rates.
In all, total loan ACL to funded loans just by 9 basis points to 88 or 91 basis points, when excluding PPP loans. For comparison purposes, loan allowance for credit losses to funded loans was 84 basis points at year end 2019 before CECL was adopted.
Finally, given our industry-leading return on equity in assets, we continue to generate significant capital fund organic growth and maintain regulatory capital ratios. Our tangible common equity to total assets of 7.1% and common equity to 1 ratio of 9.2% were weighted down this quarter by AmeriHome acquisition and strong asset growth.
However, we issued 700,000 shares under our ATM shelf during this quarter and completed a $242 million credit linked note transaction that reduced risk weighted assets as we continue to look for ways to optimize our capital levels to support ongoing growth.
Additionally, we completed $844 million in mortgage servicing rights dispositions and have already completed our expected Q3 mortgage servicing sales, capital levels should build from here. Inclusive of our quarterly cash dividend payment of $0.25 per share. Our tangible book value per share declined $0.16 for the quarter to $32.86 compared to an increase of 18% over the past 12 months.
I'll now hand the call back to Ken for closing comments.
Thanks Dale.
At the midpoint of the year, I thought I would take this opportunity to reflect back upon our performance. We deployed excess liquidity and turbo charged on net interest income. Year-to-date, non-PPP loans have grown $3.6 billion and deposits have grown $10 billion or 2.75 times the amount of loan growth, providing us an opportunity to deploy liquidity and growth and grow net interest income.
AmeriHome surpassed Q2 guidance and it's tracking to full year projections. Asset quality improved with substandard, special mention and non-accrual loans tracking downward with nearly no net charge-offs for the quarter. Return on tangible common equity was 28.1% for the quarter.
PPNR a key metric for the company earnings power was 37.1% - grew 37.1% and we executed several capital raising transactions, that Dale just mentioned. So for the second half of the year, I think you can expect loan and deposits to continue to grow between $1 billion and $1.5 billion per quarter.
Net interest income to grow quarter-to-quarter with incremental liquidity deployed into loans and investments to overcome the interest drag of the new sub debt and credit linked note issuances.
NIM will continue to see some pressure as competition interest rates and loan mix nudge loan yields downward. PPNR will follow net interest income and fee income growth and will continue to rise throughout the year. Asset quality will remain steady although the net charge-offs tracking to prior year's performance or prior quarter's performance.
We continue to believe we will exit the year at a $9 EPS run rate level. And lastly, we will deploy growth based capital strategy to support above trend balance sheet growth. And finally, I would be remiss in the outlook section of the presentation, if I didn't predict the [indiscernible].
At this time, Dale, Tim Bruckner, who is sitting to my left here, our Chief Credit Officer and I are happy to take your questions.
[Operator Instructions] For our first question we have Brock Vandervliet from UBS. And Brock, your line is open.
Ken, does that $1.5 billion loan guide include AmeriHome or is that like a standalone?
That's net loan growth for the company.
So we don't really expect loan growth from AmeriHome. I mean, AmeriHome, it has their held for sale piece that can fluctuate from. So I mean we're talking about held for investment loans, core loan growth as the $30 billion, that's what $1 billion drive is attributable to.
Okay, got it. And shifting to AmeriHome, I think the biggest question is just overall origination volume and gain on sale, is this and obviously the parts of the sector are under pretty heavy pressure. How do you look at things, you know, the remainder of the year for volumes and gain on sale margin?
So I'll take half the question and I'll give the other half to Dale. First, we don't see any change to the guidance that we gave, which is $1.41, of course, we made $0.39 for this quarter. You know, we do think there is some pressure in the marketplace on volumes and on margins as you see. But Brock you gave me an opportunity here to answer the question in a larger and - way and I'd like to frame it the way we think about it here for everyone on the call. So I am going to take advantage of your question with a one minute answer here.
First AMH contributed only 17% of our operating EPS. So it's not the majority of our earnings of our company, although today, I assume it's going to be the majority of the questions, okay. We believe that you shouldn't consider a value or compare AMH to other standalone mortgage companies and for the following reasons.
One, AMH has many tributaries that feed into the bank net interest income and this is the acquisition rationale that we have for making this purchase. So of course, they are held for investment mortgages which absorbed excess liquidity and help us generate constant loan growth, that's one.
Number two, MSR loans - we'll be able to generate MSR loans that will accompany MSR sales. In addition, we expect custodial deposits not bundled along with MSR sales that will help us fund in the future investments and loans, again helping our net interest income grow. We've paid down the AMH outstanding credit lines with our excess liquidity, and once again, that relates back to net interest income lower interest expense.
We are going to be able to mine we think our HLA book for consumer direct mortgage opportunities. We've purchased EBO loans that's early buyout loans that produce a positive carry for us when we buy them but also produce a future gain on sale, that's more equivalent to our consumer direct business, i.e., a much larger gain on sale when we execute against this.
And then also AmeriHome has 800 warehouse lending clients and we haven't even begun yet to scratch the surface of cross selling into those warehouse lending clients, which in turn once again back to net interest income will generate greater net interest income for us. So because of these, the connectivity with the bank, we kind of see AmeriHome as a provider of not only loan growth, but really a provider of incremental net interest income for us.
And the acquisition of AmeriHome was designed to unlock and capture many of the revenue streams that are generally hidden inside of a mortgage company, and I hope that kind of huge you a larger perspective on how we think about AmeriHome and how we think it's going to help enhance our earnings going forward.
Yes, Brock I know we had a conversation, you know, during the quarter about, you know, doing - seeing the volatility in this sector and what that might mean for us, and we view AmeriHome is really a low-cost producer and that's an enviable place to be because that puts them in a position such that when there is a musical chairs game going on, and I think there is in this space at this time, they have the ability, capacity to expand their win rate and their buy rate, so they were doing 7% in 2020, you know, that number is, you know took back 12% to 13% today, it could go higher still.
And so you saw this pivot, it's like okay, well if the margins are under duress, then we can make up - make it up in volume and so the gain on sale number was higher than we thought it would be obviously in part mitigated by this acceleration of amortization that we had and the charge we ended up taking in the servicing revenue side, so we're confident that game can continue and again just echo Ken's comment, I mean the real power to AmeriHome is not just what they can do on their own, but how much better they make the bank perform because of this go to fast to fill up our liquidity that we have.
For the next question, we have Casey Haire from Jefferies. Casey, your line is open.
I'll just wanted to follow up on the AmeriHome side, specifically that the mortgage servicing drag that you mentioned, if we just think about, it give us a way to think about how that line should run going forward and what the MSR impairment was in the quarter? Apologies if I missed that.
Yes. So I mean I'm not going to really rephrase that as an impairment that Ken's said. I mean so, you know, these models are trying to predict, you know, human behavior where lot of things go with the human behavior that aren't necessarily picked out in these models. And I think in particular what you had in the first quarter or second quarter coming in, if you had to converse substantial volatility in the tenure.
So everyone thought, oh gosh, you know, we missed the bottom of the rates. And so that actually, based on the models, it shouldn't see a slowdown in prepayment behavior because rates are higher. But no, that's not what happened, here the acceleration of prepayment behavior, and to me, my closest analogy is it's like last call, it's like, you know what it's 2:00 a.m., you got to get in here otherwise you're going to miss out on the lowest rates, you know what in generation.
But then what happened, while, we thought that, you know the tenure get up to 190 and now we're back to, you know, ones in the 130 range. And so we're getting now with even an echo wave of that, so these prepayment speeds, you know, have come in higher than we thought, that resulted in, you know accelerated amortization, I'm not going to necessarily call these impairments, but getting to your point, a more normalized level, we would be looking for about a $10 million quarterly positive in that servicing line.
You can't just say, oh gosh, it's under by 30 million on a run rate basis though because of kind of common adjust made in terms of, you know, the gain on sale number is better, probably because the servicing revenue was impaired, servicing revenue being impaired, means there's a lot of refi business going on, there's a lot more activity generating in the system. And so the cost opportunity, gain on sale opportunity is a bit higher.
So it's not kind of a one for one deal, but yeah on, you know a steady state, we'd look for about a plus 10 in that, I mean it's, you know, it's in the revenue, it's a contra-revenue for a reason because it's not supposed to be a contra.
Okay, got you. So I - you stand by the $1.41 and so that implies basically, you know this AmeriHome contribution is running around $0.50 in the back half. If I'm correct?
Correct.
Okay, all right. And then just on your comment here of the capital will build from here, you know, does that - what does that assume like if you guys continue to beat your loan growth guide, will you just, you know continue to use the at the market offering or, you know how should we think about - is that capital build line, is that - does that just assume that loans and deposits grow $1.5 billion or you just use the ATM to true-up
Perhaps a little bit of both. But I think the balance sheet growth number is going to be higher, it could be higher than $1.5 billion and not even need to touch the ATM, because as you saw this last quarter, where overwhelmingly our loan growth was in residential. I don't think it's going to be that high proportionately to the other categories going forward, but it will be preponderance and that is a 50%, you know, asset class assignment.
And so based on that, you could grow if it was just that you could grow $3 billion to get to $1.5 billion of risk-weighted asset increases, which would, you know be the same. So the earnings this year were $230 million based on that that would support $2.3 billion, give us 50%, you know you can do the math on that.
So I think we've got more capacity with just capital generation that we have going on irrespective of ATM, which we could - we will tap as needed, but right now, we don't think that's going to be significant.
And just last one from me, the borrowings that you assume from AmeriHome, if I'm reading the margin tables right at, it appears there is about $595 million left at period end; is that correct?
Correct.
And so that's a lever that you also have to pull to help. I mean I'm assuming you're going to continue to pay that down to zero?
Yes, it is. Some of those, a good chunk of those borrowings have high rates and are not callable for an extended period of time. So don't look for that to drop off to zero, it might just be likely to.
For the next question, we have Brad Milsaps from Piper Sandler. Brad your line is open.
Dale, just wanted to follow up sort of around the loan growth guidance commentary. Last quarter, you mentioned getting to a 90% loan deposit ratio, maybe by the end of this year, early next, I don't know if that contemplated another $3.5 billion of deposit growth that you saw this quarter, but just kind of curious how to think about that 90% loan deposit ratio number and maybe as that pertains, you know, that held for sale loans, they came in a bit higher than I was looking for, and then, you know is there incremental AmeriHome production that you plan to retain above and beyond the $1 billion to $1.5 billion loan growth got?
Yes. So I mean it's a few things going on there. So yes I mean here are - here we wanted to get kind of 90-ish or whatever and we actually paid it back a little bit because the deposit growth was a robust. I don't have a timeline of exactly kind of when we're going to get there. I do believe that we've got, you know quarters in front of us, where our loan growth is going to exceed deposit growth, now to pull that out, when I talk about loan to deposit ratio, I do not include the held for sale, those I think held for sale is a much better comparison the cash and adjusting portfolio there is a average life of those loans is only a few weeks, and so it has a much more liquidity relative to those other categories away from loans.
So I do think that there, I mean, I like to held for sale portfolio because basically you get the note rate on those loans predominantly and yet they flip every three weeks, and so it's a very sensitive asset at the same time.
But we will have to have a situation, if we do that, where we're going to have loan growth, you know and AmeriHome is going to be the primary, you know to this you know a kind of you know well path of deposit growth. Right now, deposit growth can just iterated looks - continues to look strong, so I'm not exactly sure when that's going to be.
But we do have several things going on; one is we are - we have feeds from AmeriHome today that go along on our balance sheet for higher yielding origination activity as they have, these are things like vacation homes. We're going to be coming out this quarter with a jumbo product that they had years ago reintroducing that, that can come up on our balance sheet too because it's a higher yield, low LTV, great credit quality as well as non-qualified mortgages.
So we're getting these from the Galton relationships, we're getting these from our own warehouse clients. And as Ken said, we're going to start mining, you know warehouse clients among the 800 clients that AmeriHome have that they buy from. And with that, we can put in our own direct conduit to feed our apathy for high quality low LTV high yielding since they're not reportable to the GSEs resi mortgages.
Okay, great, thanks. And then just switching gears a little bit maybe the expense side of the equation, what type of expense flexibility should we think about as the mortgage business, you know sort of ebbs and flows over the next several quarters?
Well, we - I mean, there can be some flexibility within this. We think that the AmeriHome pivoted really well in the volatility that took place in the second quarter in terms of, you know, finding ways to increase gain on sale even though we had increased amortization. We're looking for that to continue, we're looking for the kind of the total contribution, and obviously mentioned on the previous call $0.50 in Q3, $0.50 in Q4 plus $0.40 that was a $1.41.
And that's the same run rate that we have for getting to the number that we have for 2022. So I think there is multiple channels to manage through that process with the - all levers that Ken enumerated. And so I'm not too concerned about that we're looking at, you know kind of the total. I think we are going to stay in the mid-40s and I think that's pretty reasonable.
Just final follow-up for me, can you comment on the change in bond yields linked quarter, you guys had some nice improvement there. Just kind of curious, you know, are you kind of things you might be buying, we saw some nice improvement there and just hoping you could provide any color?
Yes. Maybe a couple of things. One of them, we do have in our bond portfolio, low income housing bonds. We think that's a growing sector likely to continue those yields are higher than sort of the average in our books and in the first quarter again volatility same issue comes out it's a little bit of a different animal, but we had increased amortization of premium on MBS bonds that we have purchased that slowed down in the second quarter, and so we had a less of a debit to hold against that, so that helped the bond yields pickup.
For our next question, we have Brandon King from Truist Securities. Brandon, your line is open.
So loan growth was more - I mean deposit growth was once again strong this quarter. Could I get a break down of the verticals on a dollar basis, where deposit growth came from?
Did you say deposit?
Yes, deposit growth.
Well, warehouse lending grew about $1.7 billion. Our new deposit verticals grew overall to $300 million, HLA business where the first quarter is very seasonally strong, still had a good quarter. This quarter it grew $210 million, and technology which is a wash in liquidity was up $936 million.
So I would take a little exception that we didn't have a great quarter, I mean $3.5 billion - I'm sorry, I came across the - take that back, sorry, came across little fussy. So that's how the $3.5 billion. But basically, when you look at all the sectors, it was pretty much broad based through all our silos and all our regions.
Okay. Thank you. And for mortgage warehouse, obviously you continue to grow deposits there, but it looks like the loan growth was softening there, what is the outlook for warehouse balance sheets for the remainder of the year?
So, yes I agree with you, it was a little bit softer this quarter. When we think about warehouse lending, we have a couple of other business lines to get wrapped in there. Our MSR lending and our notes financing should offset some of the weakness in warehouse lending overall or warehouse lending probably to gain or hold the market share going forward.
Okay. And just lastly, the reserve came down again. Do you think we could hit bottom on an absolute dollar basis of the reserve? Do you see continue to be down, even though you're still getting growth in those lower-cost credit costs business loans?
Yes, I don't really want to call it a bottom. I mean, I appreciate that we're going to hit bottom. And the reserve in dollars certainly few days and we're going to hit the bottom on the ratio. I mean negligible charge-offs this past quarter throughout this recession and admittedly - the credit quality behavior primarily driven by the federal intervention.
But I would point you that our reserve could still be very substantial. We had 7 basis points of losses, the average remaining life on our loan book is 2.4 years. If you said well, again 2.4 years for a duration and 7 basis points, that's a 20 basis point reserve if that were the math.
Obviously, we're not getting anywhere near to there, but you could see how even on a dollar basis, it could continue to have - most significantly is that even compared to our balance sheet pre CECL is that we've been growing in these categories that have had low if not zero anticipated losses in low LTV residential loans, capital growth finance and as that proportion has grown larger and larger that also tends to push the numbers lower.
I personally don't think that the outlook for the economy is going to improve in the near-term, it's dramatically is the forecast is whether it was Moody's or whether it was Blue Chip in the second quarter. So I don't know, if we're at the bottom or not, but I do think that certainly its preponderance of the reserve releases that are behind us.
Next we have Chris McGratty from KBW. Chris, your line is open.
Thanks for the question. Maybe talking about the mortgage business little bit differently Dale. The proportionate your holding on your balance sheet around 17%, and I think we all agree that's a great trade relative to buying a bond at these levels. I'm interested in kind of where you see that peaking or where your comfort range is from that proportional piece of loan book?
Well, so I mean I think I first want to address this from our interest rate risk profile. So we have a very naturally asset sensitive balance sheet compared to most. We - C&I loans are a big piece of what we've given some of the securities we've been purchasing have a variable rate element to them.
And then our funding is structured 48% DDA, very low in terms of CDs and the administered rate categories like money market are client relationships and I think they're going to have lower than kind of mean data what you'd see. So we start from a position that we can tolerate higher levels of residential.
We've been below the peer group for a long time, which I'm going to hang in about 30% now at 17% it has moved up significantly obviously. And I think we're going to go to that 30% number and kind of see where we are, I think we see a lot of opportunity in front of us in terms of moving yield, these are low-risk credit trades and with the deposit growth, we can kind of do this - and but I do think it's not going to be as sharply climbing as it certainly did this last quarter, we are seeing increased breadth in terms of credit demand we believe, and so I think we're going to see a little more balanced growth prospectively. But yes, we're going to be moving up to 30%.
Okay, that's good color. In terms of the liquidity, you guys I think were one of the more aggressive in deploying it. With cash around 4% to 5%, I mean what's the reasonable level that you need to run proportional to the balance sheet?
Yes. So - as of right now we have $3.4 billion in cash. So we've got money to deploy today. I don't think that number needs to be very large. And in part I look to the held for sale portfolio to drive that that portfolio from AmeriHome, the large preponderance in there as well has - those clear out in two to three weeks. And so that is a near-cash element that we can use, so I'm comfortable, it's kind of with where we are I think that number can drop down a bit more to 1% to 2% with liquidity behind it from loans that have already been in place for delivery to the GSEs.
Okay.
Chris, I might also mention, we have an $8 billion credit line with the Federal Home Loan Bank that is unused. We've got a multi-billion dollar credit line in the Federal Reserve that is unused. We've got multi-billion dollar credit lines - credit fund clients with other institutions. They're not necessarily committed, but we think that there is certainly there that are also unused, so we've got well over $10 billion that we could draw on as needed.
Great. And then if I could just sneak in a housekeeping, I think when you announced AmeriHome, you talked about the tax rate maybe going up 100 basis points. So I'm looking for a little guidance on there and then the card income was strong this quarter, I mentioned, let's say, if that's a run rate? Thanks.
So on the tax rate, I think I'm expecting that number to have up a little bit from where we are at the '19, I think it's - I can see it climbing closer to '20. The card income there has been kind of a difference in activity, ours is really a CCAR, I don't know that I would expect that to extrapolate from there, but I think business levels are getting better.
For the next question, we have Timur Braziler from Wells Fargo. Timur, your lines open.
Maybe just circling back on the expense side, I think you had said that the AmeriHome deal added 1,000 employees to the organization. I know you mentioned that the efficiency ratio is likely to be maintained in the mid-40 for at least the near-term, I'm just wondering has that business is fully integrated and run kind of the Western Alliance way, is there an opportunity to optimize that business at some point or are the two different enough where you can't really touch the expense side of the AmeriHome?
I think for the company overall, you need to think about the efficiency ratio being just about where it is 44.5%, 45% and that's where we're going to probably run the company. That will allow us to continue to invest in new products and services, look to bring on new business teams, maybe look to develop organically new business silos.
And also as we continue to grow at the pace that we're growing, so we're a $50 billion asset-based company today. We need to also ensure that we put the right investment into the technology and onto the risk management side of the business.
So when we think about our numbers, when we think about the guidance leaving this year as the $9 EPS run rate, we don't have it moving off of 45%, that allows us to grow EPS earnings. The way we think we need to grow and also invest at the same time.
And then just one last one on AmeriHome origination and you've got the win rate now at 12% to 13% up from 7%. I think historically or previously you had mentioned that number can go as high as 20% and it doesn't really sound like be non-QM component is really ramping up yet.
So as that ramps up, is that going to go through the production and increase kind of the gain on sale volume, is more of that going to be portfolioed in the near-term and then kind of co-related to that, if you can just talk about where the resi yields that were put on the book today are and where those can go once you start bringing down some of the non-QM paper?
Yes. So I mean the primary goal of increasing or broadening what they're buying is to give the bank had another channel of growth in residential with again low LTV, better yielding assets. So AmeriHome for the most part now has generated product that we like the business but we like it going through the GSEs, because the yields aren't necessarily high enough for what we think the best kind of risk adjusted returns would be.
And so, but as they add that in, we'll be able to pick up even more from AmeriHome to kind of put on our balance sheet. I think that number is going to be around 3%, what we can do kind of going forward.
I mean, it's what we get paid for, there's a lot of interconnectivity between the AmeriHome and on the banking side. If we have strong loan demand on the banking side, we will not hold onto as much on the residential mortgage side and AmeriHome will have a higher gain on sale, if there is any soft demand or and more excess liquidity than what we anticipated will take loans from AmeriHome and we'll keep them on our balance sheet and the gain on sale will be less for AmeriHome but you'll see a higher flowing net interest income for the bank. And so that's what we balance out every day here.
And then - so as you start bringing out more non-QM paper. I guess how should we expect to see the win rate to elevate, I mean they're going to stay at the 12%, 13% level for now and the mix shift is that's going to change or do you see the non-QM channel being additive to what's going to be doing produced?
So I'm hesitant to give you a forecast going forward what the win rate is because you got to - you've got to add a few other factors in there, what's the margin, what's happening with - overall with the tenure, but what I'll say is and what we learned when we are doing the due diligence for AmeriHome is that they have the ability to expand the win rate in order to keep the gain on sale income high enough to achieve what we want to achieve in terms of our EPS guidance.
And so that's going to be balanced between margin and between the win rate. And as we've said they were at 12%, they've been as high as about 17%. So we've got room there to move that around.
For the next question, we have Jon Arfstrom from RBC Capital Markets. Jon, your line is open.
One of your quotes in the releases you began to unlock value from AmeriHome, I'm just curious what's next? Is it the things you referenced like mining the warehouse in HLA or is there something else that's more near term and right in front of us when you say you're just beginning to unlock value?
Yes. Thanks Jon. It's really everything I mentioned as a little bit of a prelude at least on the earnings call here. So we've got a list of things that we're just going down and executing upon. Certainly, the easiest one was let's unlock the value by paying down their outstanding credit lines, Jon.
As we're showing MSRs, let's see, if we can give loan commitments to the buyers, which we've done this quarter. Let's see, if we can hold on to deposits which we've done this quarter, but it's not a one done thing of course we're going to continue to work on that as we go forward.
A little further down is the cross sell into the warehouse lending line that's going to take a little bit longer. As you can expect, we were focused on Legal Day 1 and Legal Day 90, but the but the warehouse lending cross sell will happen towards the end of the year. We've got the AmeriHome folks working on the jumbo mortgage program.
We have them working on the non-QM programs. So - and those are just some of the things I can - I referenced. So we got a lot of things going on here. What we're trying to do is find the value that we can unlock in AmeriHome which translates over into our net interest income which is gives us greater value and in terms of valuation on the banking side and that's how we've always thought about the deal, Jon.
Okay. Any of the stuff new that you found more synergies or think that you think could be larger than you originally anticipated?
Yes, actually the first place where we saw one of the bigger opportunities where we said, Oh my God, we weren't thinking about this, it was on the EBO side, that's the early buyout of loans from Ginnie Mae. You're able to buy on that par and then turn around and sell them at very close to consumer direct margin spreads, which is in that 500 basis point range.
The reason why AmeriHome was active but not overly active was that they had a negative carry to that because their cost of funds was probably all in around the LIBOR 200, while we took 10 basis point money and we put it against a large purchase of EBO loans and now we're able to carry that the EBO loans in a positive carry until we're ready to sell the loans down the road.
So I think that one really surprised us and how quickly that opportunity appeared. And frankly, it wasn't really discussed much during the due diligence period where we are doing more of the normal blocking and tackling conversations during due diligence.
Okay. Two more questions here. I understand why you're breaking out the profitability now, but is this something you plan to do or you want to do in the future is breaking out the profitability or do we expect this to eventually be very much in the greater than the consumer piece of the business?
Yes, good question. For this year, we're going to continue to kind of give you the guidance of the $1.41 because it's the new business line, but we don't break out into the other business lines. As I said, this 17% of our total net income.
So as we start giving you the guide, as you can see we're doing it now, we're giving you the guidance that we're exiting the year at $9. That's the number we're focused on for the whole company exiting at $9. This year, we're talking to a little bit more about $1.41 because we want to make sure the comfort level is there that you know that we're executing upon that acquisition, upon that trade, if you will. But longer term, we're just going to talk about our total EPS.
I mean on the mortgage integrated, the more murky and difficult it is to try to distill it on. I mean, what - if we're cross selling into their warehouse clients now and then we're getting direct sales to our mortgage portfolio holdings, what is AmeriHome get allocated for that, we're not into that game. We're more interested in moving the whole ball rather than trying to see who gets how many piece of it each side of the play.
You know this thing because you hit on a hotspot here for us as we were thinking about this not too long ago, if we take more mortgages from AmeriHome and we keep it on the balance sheet, of course, we've got our balance sheet, we're getting that net interest income and it's going to stay out there for an extended period of time. All I could say, well, yes, I would have liked that going to happen immediate recognition. So we try to balance this stuff and that's why overall, total EPS number of the EPS.
Yes that's good. I was going to ask that, but in this call but just in terms of the allocations. But just one more for you, Dale. Not everyone that hold your stock is a mortgage expert and this is probably annoying and a simple question, but how would you think about the main inputs into that gain on loan origination and sale line that $132 million just big picture, what should we be thinking about when you model that line?
Well. So, yes I mean AmeriHome is - there has been a large producer in this space. I can cut, you know there activity level can continue at what they've been running, that's their core business, that's - we think that's certainly an opportunity, we think they can expand that as we've talked about in terms of some of these other business lines. We think there's maybe a cross sell into our HOA business and things like this. But again that's going to get kind of overwhelmed by the benefit we get.
So I mean AmeriHome's numbers there $50 million of net interest income in the quarter for most people held for sale loans - the other $38 million was core Western Alliance on net interest income and that was in part because of liquidity deployment. So I'm looking for AmeriHome to continue to deliver as they have and but you know, again these cross-sells I think again are what GE is in terms of driving higher EPS.
Thanks for everything. I think sums in 7 you have to weather it home, then it has to be a little dramatic, so that's my call.
Well, we have like 3,000 sums championship T-shirts on order. So we're already heavily vested into that. If not we'll be selling them at very cheaply filling to anyone.
For the next question, we have Gary Tenner from D.A. Davidson. Gary, your line is open.
Just mortgage for a second, just wanted to ask about the credit linked notes for a moment that obviously as further transaction you're free to get amount of risk based capital and sector capacity for lending. I just wonder if you would draw a direct line to that capacity as it relates to the cross-sell opportunities into AMH's warehouse clients are increasing the warehouse business or would you think of it more holistically is just creating additional capacity for whatever those higher risk weighted assets number?
Yes, I think it's more of holistic in terms of what that is, I mean we're focused on generating strong risk adjusted returns. The warehouse space is one that not just us, but I think the industry's experience from a credit perspective has been very strong. The credit link note does strengthen the - does strengthen the credit quality of the bank and provides more insulation to it. We have somebody who's now on a first loss position not us if there's any losses within that portfolio.
So we do get a relief on the unlike you mentioned the risk weighted assets. I think it's warranted because somebody else away from us an investor has first loss or anything that happens there. So in that sense we're - we're a stronger credit profile. But if - what we look at is gosh now RWA is lower we can continue to grow. It's from a shareholder perspective it's much cheaper to do the credit link note than it is to issue shares on the ATM that's obviously a substitute alternative to get there. And it reinforces the value of that business line because we can have a direct method to support the capital needs from there that is significantly less expensive than the returns that we get from our clients.
And then just to ask about the $9 run rate that you've talked about the last couple of quarters exiting this year, could you give us a sense of what that contemplates from a provision line item because obviously in a given quarter that could have some volatility to it, so just any thoughts on what that contemplates or if you wanted to kind of equate that $9 run rate to a PPNR per share kind of run rate as additional detail?
Well, again includes a normalized provision, it does not include releases or underfunding or nor does it include the reverse of another kind of global challenge like we had in 2020. So what does that look like in terms of basis points, I don't have a number for you, but I think if you look at the composition of our loan growth and where it comes from, what would it take to support that kind of going forward, we have substantial credit losses coming any time in the future, but it cover charge-offs. So it cover charge-offs and we cover good growth in relatively low-risk growth profile as we're putting on the books in 2021, and I think we're going to be looking at in 2022.
Yes, I would I would answer that. I mean I look backwards and look what our last year's charge-offs were and maybe use that as a guide, and what is the provision would be. But to be very clear, we don't anticipate large releases to generate that $9 EPS run rate that's not included in our logic.
For the next question we have David Chiaverini from Wedbush Security. David your line is open.
I had a follow-up on deposits you mentioned about how the follow up deposits. You mentioned about how the mortgage warehouse deposits were up very strongly at $1.7 billion. I was curious is there any seasonality in the mortgage warehouse deposits that could be a headwind as we look out to the third quarter and fourth quarter?
There is some seasonality. It’s - I’m going to say fourth quarter and maybe primarily driven by California, California taxes, property taxes are due. And so as you know the - those warehouse deposits are overwhelmingly funds held from escrow funds from servicers which people escrow their insurance payments and they escrow their tax payments.
But as you get one particular state that is skews heavily for their overall. I think there are due in November. I'm not a California resident. So you're going to see a dip whereby the servicer is writing a check drawn on us to the state or to the relevant counties they are coming in. So yeah, there is a piece with that.
And then shifting to the resi mortgage portfolio that you're keeping. Just want to clarify that what you are keeping historically and continues to be Jumbo and non-QM?
Yes, it does. I mean so again, the trade that we’re making is we're willing to give up liquidity for yield and strong asset quality. So, we're going to compromise in a queue. But if we can get - if we can give up some liquidity to get a better return we'll do that. So what I mean by that is say you have a non-qualified mortgage something that isn’t salable to the GSCs. It’s going to trade at a lower price a higher yield. Something that is jumbo is going to trade a lower price higher yield.
So we have - these are about 65% loan trade at lower price, higher yield. So we have these are at about 65% loan-to-value loans. The debt-to-income is in the mid-30s. The FICO scores are 760, so we think it's pretty good quality stuff. But because it's not saleable, it trades - it trades at a lower price, and that - and we're like, oh gosh, we can handle that.
We want to put it on our balance sheet on kind of going forward. Just maybe note that - just because it's not liquid to the GSE, it doesn't mean it's not liquid to us. So for example, all of these loans we can pledge on our federal home loan bank line, and they give us advances on them. And it wouldn't be difficult at all even if you wanted to - to securitize these loans and sell them to private investors.
We don't have any further questions.
Okay. Just wanted to thank you all for attending the phone call and we look forward to speaking to you in a couple of months from now. Thanks again, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.