Western Alliance Bancorporation (NYSE:WAL) Q1 2021 Earnings Conference Call April 16, 2021 12:00 PM ET
Company Participants
Ken Vecchione - President and CEO
Dale Gibbons - Chief Financial Officer
Tim Bruckner - Chief Credit Officer
Conference Call Participants
Brock Vandervliet - UBS
Casey Haire - Jefferies
Brad Milsaps - Piper Sandler
Chris McGratty - KBW
Gary Tenner - D.A. Davidson
Timur Braziler - Wells Fargo
David Chiaverini - Wedbush Securities
Michael Young - Truist
Tim Coffey - Janney
Jon Arfstrom - RBC Capital Markets
Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the First Quarter 2021. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer.
You may also view the presentation today via webcast through the company’s website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern Time, April 16th through May 16, 2021 at 11 p.m. Eastern Time by dialing in 1-800-585-8367, using conference ID number 9757965.
The discussion during the -- this call maybe contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historically facts.
The forward-looking statements contained herein reflect our current views about future events and financial performance, and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statements.
Factors that could cause actual results to differ materially from historical or expected results are included in this presentation, the related earnings release and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.
Now for the opening remarks, I would now like to turn the call over to Mr. Ken Vecchione. Please go ahead.
Ken Vecchione
Good afternoon, and welcome to Western Alliance’s first quarter earnings call. Joining me on the call today are Dale Gibbons; and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer. I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment, and then Dale will walk you through the Bank’s financial performance. Afterwards, we will open the lines and we will take your questions.
The continued growth in Western Alliance’s national commercial business strategy drove financial results and balance sheet growth through record quarterly highs to kick off 2021. Mirroring the company’s strong fourth quarter performance and underlying fundamental trends, WAL earned our net income of $192.5 million and earnings per share of $1.90 for the quarter, up $108 million year-over-year and nearly flat to Q4.
Net revenue expanded 4.5 times the rate of expenses as improvement in asset quality and economic conditions drove a $32.4 million release in the loan loss reserve this quarter. Our focus continues to be on PPNR growth, which rose approximately 31% year-over-year to $202 million, while marginally lower than last quarter due to two fewer days.
Regarding the acquisition of AmeriHome, I am pleased that the closing took place approximately three weeks ahead of schedule. While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergies with the pay down of external credit lines.
Additionally, we signed agreements with the sale of approximately $750 million of mortgage servicing rights to strong counterparties that will allow Western Alliance to retain substantially all of the custodial deposits. We expect this to be completed in early May.
AmeriHome was an attractive strategic acquisition, expanding Western Alliance’s fee income and lowering the company’s reliance on spread income, while providing growth optionality to our commercial portfolio businesses.
Turning to the first quarter, balance sheet trends, outstanding quarterly loan and deposit growth of $1.7 billion and $6.5 billion, respectively, lifted total assets to $43.4 billion, up 49% from the prior year.
Our near-term focus on growing loans in low risk asset classes was on display as loan growth was primarily driven by warehouse funding, residential loan purchases, and increased activities through our -- throughout our traditional banking and regional footprint.
Our deposit growth was broad based across our franchise, which pushed down our loan-to-deposit ratio to 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition. The continued access to liquidity from our improving deposit franchise is at the expense of short term NIM compression, but it’s a tradeoff we are willing to accept for long-term value creation.
This impressive loan growth drove net interest income to $317.3 million or $2.5 million higher than last quarter and up 18% on a year-over-year basis. Quarterly net interest margin was 3.37%, down 47% from the fourth quarter, as we continued to deploy excess liquidity into loans and investment securities.
Non-interest income totaled $19.7 million for the quarter, aided by $7.3 million of warrant income for Bridge Bank. Asset quality remained stable this quarter as the economic recovery gained steam. For the quarter, net loan charge-offs were $1.4 million or 2 basis points on an annualized basis.
Credit losses may not appear in any meaningful way as prior and proposed stimulus packages continue to positively impact consumer spending habits and many businesses were provided the liquidity to weather the pandemic.
Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share of $33.02 or 23.5% year-over-year -- or 23.5% year-over-year growth. We remain one of the most profitable banks in the industry with a return on average assets and return on average tangible common equity of 1.93% and 24.2%, respectively. This strong momentum coupled with economic reopening positions Western Alliance well for an industry-leading 2021.
At this time, I will let Dale take you through the financial performance.
Dale Gibbons
Thanks, Ken. For the quarter, Western Alliance generated net income of $192.5 million or $1.90 per share, each down about 1% from the prior quarter. This is inclusive of a reversal of credit loss provisions of $32.4 million due to continued improvement in economic forecasts relative to year end 2020 and continued loan in -- loan segments with historically very low loss rates.
Additionally, merger expenses related to the AmeriHome acquisition of $400,000 were recognized. We expect total merger charges to be approximately $15 million, preponderance of which will be incurred in Q2 as integration continues.
Net interest income grew $2.5 million during the quarter to $317.3 million, an increase of 18% year-over-year, primarily as a result of our significant balance sheet growth. However, while average earning assets grew $5.7 billion, the relative proportion held in cash and lower yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy excess liquidity into AmeriHome-generated assets and higher yielding commercial loans. Quarter-over-quarter, our loan-to-deposit ratio fell to 75% from 85% in Q4, as we proactively look to grow low-cost deposits as dry powder for future loan growth.
Non-interest income fell $4.1 million to $19.7 million from the prior quarter, mainly driven by smaller fair value gain adjustments in our securities measured at fair value, but partially offset by $7.3 million in warrant income.
Non-interest expense increased $2.8 million, mainly due to higher deposit costs as lower rates were offset by higher average balances. Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $202 million, up over 30% from a year ago.
Turning now to net interest drivers, as our strong core deposit growth continued throughout the quarter, we look to deploy -- redeploy excess liquidity into the investment portfolio and loans. Total investments grew $2.4 billion for the quarter or 43% to $7.9 billion, compared to an average balance of $6.5 billion. Investment yields declined 24 basis points from the prior quarter to 2.37% due to lower reinvestment rates in the current environment.
Similarly on a linked-quarter basis, linked-loan yields declined 8 basis points following ongoing mix shift toward residential loans and asset class with generally lower yields than the remainder of the portfolio and low credit risk. This was partially offset by modestly higher PPP fees, strong loan growth, and liquidity deployment towards the end of the quarter.
Significantly quarter end balances for loans and investments were $3.3 billion higher than the average balances and yield 3.5% more than our Fed account. Higher income from this already deployed liquidity positions as well for Q2.
Interest bearing deposit costs were reduced by 3 basis points in Q1 to ‘22 due to ongoing re-pricing efforts and maturities of higher cost CDs. The spot rate for total deposits which includes non-interest-bearing was 11 basis points. We expect funding costs had generally stabilized at these levels.
Net interest income increased $2.5 million to $317.3 million during the quarter, 18% year-over-year as higher loan investment balances offset net interest margin compression. NIM declined 47 basis points to $337 million as our purposeful strong deposit growth in advance and posing the AmeriHome acquisition negatively impacted the margin by 43 basis points.
To put this in perspective, average securities and cash balances to interest earning assets increased meaningfully in Q1 with 32% from 22%. Given our higher end of quarter loan balances healthy loan pipeline and ability to deploy this access liquidity over the coming quarters into higher yielding earning assets, we expect this margin drag to moderate while net interest income climbs.
Additionally, a PPP loan yield of 4.9% benefited the NIM by 8 basis points which was similar to the fourth quarter benefits. Cumulatively over the remainder of 2021, we expect to recognize $14.4 million of PPP fees.
Our efficiency ratio rose 90 basis points to 39.1%, an increase from 38.2% in Q4. This higher efficiency ratio was driven by a modest decline in non-interest income and an increase in expenses, partially offset by increased net interest income.
Non-interest expense linked-quarter growth increased by 2.1% driven by higher deposit fees related to the 82% annualized rise in deposit balances. Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 41%. Inclusive of AmeriHome we expect the efficiency ratio to rise to the mid-40s this quarter.
Pre-provision net revenue declined $4.4 million or 2.1% from the prior quarter, but increased 31% from the same period last year. This results in PPNR ROA of 2.03% for the quarter and decrease of 21 basis points, compared to 2.24% a year ago period, partially impacted by a much larger asset base. This continued strong performance in capital generation provides a significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands.
Balance sheet momentum continued during the quarter as loans increased $1.7 billion or 6.1% to $28.7 billion and deposit growth of $6.5 billion from our balances to $38.4 billion at quarter end. Inclusive of the second round of PPP funding loans grew 24% year-over-year, while deposits grew approximately 55% year-over-year with our focus on low cost, low loan life segments and DDA and all total assets have grown 49% year-over-year as we approach the $50 billion asset level including the AmeriHome.
Finally, tangible book value per share increased to $2.12 over the prior quarter to $33.02, an increase of $6.29 and 23.5% over the prior year attributable to both net income and the common stock offering of 2.3 million shares completed during Q1 in anticipation of the AmeriHome acquisition.
Our strong loan growth continues to benefit from flexible national commercial business strategy. The majority of the $1.7 billion in growth was driven by an increase in C&I loans of $746 million.
Loan growth was also strong and residential real estate loans of $675 million supplemented by construction loans of $337 million in CRE non-owner occupied loans of $27 million. Residential and consumer loans now comprised 10.9% of our loan portfolio, an increase from 9.9% a year ago.
Within the C&I growth for the quarter and highlighting our focus on low risk assets mortgage warehouse loans grew $562 million in Round 2 PPP loans originations were $560 million, which were nearly offset by $479 million from Round 1 the payoffs.
We continue to believe our ability to grow core deposits from diversified funding channels is our key to firm’s long-term value creation, given the balance -- the ability to deploy funds into attractive assets in the near-term we purposefully look to expand balance sheet liquidity in Q1.
Deposits grew $6.5 billion or 20% in the first quarter driven by increases in non-interest bearing DDA of $4.1 billion, which now comprise 46% of our deposit base in savings and money market of $2.9 billion.
Market share gains and mortgage warehouse continue to be a significant drivers of deposit growth during the quarter along with robust activity in tech and innovation and seasonal inflows for majorly league banking relationships developed during 2020.
Our asset quality remains strong and borrowers are stable, liquid and supported by strong sponsors. Total classified assets increased $57 million in Q1 to $281 million due to migration of a few borrowers and COVID impacted industries such as travel, leisure and entertainment as reopening continues but at an uneven pace. We see the potential for these credits to be upgraded as travel and events increase in the coming quarters.
Our non-performing loans plus OREO ratio declined to 27 basis points to total assets and total classified assets rose 4 basis points to total assets to 0.65% compared to the ratio at the end of 2020.
Special mention loans increased $23 million during the quarter to 1.65% of funded loans. As we have discussed before, SM loans are a result of our credit mark litigation strategy to early identify, elevate and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credits migrate in and out. We do not see credit losses emerging especially from special mention volatility.
Regarding loan deferrals, as of quarter end, we had $68.5 million of deferrals, all of which are in low LTV residential loans. Quarterly net credit losses were modest at $1.4 million or 2 basis points of average loans, compared to $3.9 million in the fourth quarter.
Our loan ACL fell $36 million from the prior quarter to $280 million due to improvement in macroeconomic forecasts and loan growth and portfolio segments were below the expected loss rates. In all total loan ACL to funded loans declined 20 basis points to 1.03% when excluding PPP loans. For comparison purposes the loan ACL to funded loans was 84 basis points at year end 2019 before CECL adoption.
We continue to generate capital and maintain strong regulatory ratios. The tangible common equity to total assets of 7.9%, were down this quarter by strong asset growth and the common equity Tier 1 ratio of 10.3%, an increase of 40 basis points during the quarter, mainly driven by our common stock offering and growth in low risk assets. Inclusive of our quarterly cash dividend payment of $0.25 a share, our tangible book value per share rose $2.12 in the quarter to $33.2, an increase of 23% in the past year.
I will now hand the call back over to Ken.
Ken Vecchione
Thanks, Dale. Western Alliance is one of only a handful of growth Banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer leaning ROA and return on average tangible common equity, with steady asset quality and lower net charge offs.
Going forward based on our current pipelines, we expect loan and deposit growth of $1 billion to $1.5 billion per quarter, which will drive higher net interest income and PPNR growth. We expect NIM pressure to subside through the deployment of liquidity into attractive asset classes.
One of the characteristics of the AmeriHome that we found very attractive is that it provides a natural solution to world excess liquidity. AmeriHome will be expanding its product array to include higher yielding non-QM and jumbo loans that fit our established credit box.
Placing and holding these loans on our balance sheet enhances our existing residential mortgage purchase program, and it’s worthy -- and it’s a worthy credit solution for the swift deployment of excess liquidity.
To keep pace with balance sheet performance, our risk management programs and technology platforms are evolving and expenses will rise, but will be offset by the revenue generated from excess liquidity deployment. There will be no drag on PPNR or EPS of these investments. Inclusive, overall, the efficiency ratio will rise to the employees.
Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecasts incorporating risk for tail economic events, which is consistent going forward could imply a steady reserve balance. Depending on the timing and pace of the recovery, there could be some loan migration into the special mentioned category, but we do not expect material migrations into sub-standard.
We believe the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we don’t -- as we do not see any indicators that imply material losses are on the horizon.
To conclude, Western Alliance is well-positioned for balance sheet growth with steady asset quality, PPR should continue its upward trajectory from Q1 along with industry leading return on assets and equity.
At this time, Dale, Tim and I are happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] You have our first question from the line of Brock Vandervliet from UBS. Your line is now open.
Brock Vandervliet
Great. Thanks very much. Dale, if you could review with the closing of AmeriHome, what does the debt paydown picture look like and how is that going to shape your ability to kind of soak up this excess liquidity in the near term?
Dale Gibbons
Yeah. So, it’s a work we are doing that now. They had about -- over a little over $3 billion worth of borrowings, and we are phasing those out kind of going forward. I think we are going to -- I think that’s going to be done, say, by sometime in the second quarter.
What we are also going to be getting from AmeriHome is we are going to be able to have a kind of ready deployment into mortgages that we would want to put on our balance sheet, and we would prefer to have something that is low LTV, but higher yielding which pushes you toward kind of a non-QM solution, which they are going to be rolling that product out as well.
So, as our ability to do that happens, and I think over the next couple of quarters, that’s going to be the case. I mean it wasn’t random that we had this kind of massive deposit growth during the quarter, we let it go in terms of bringing in more deposits because now we have a near-term ready access to almost limitless source of good quality asset deployment, and I think you are going to see that in 2021.
Brock Vandervliet
Okay. And I think the -- on AmeriHome, the gain on sale picture has darkened somewhat since you announced the deal. Can you give us any sense of what their gain on sale was in Q1 and how that may have compared to the prior quarter or prior year?
Dale Gibbons
We can’t talk about their Q1 performance because they are part of a public enterprise that hasn’t been announced yet, but what we did mention was, AmeriHome has the ability to pivot. So we expected that margins were going to be coming down. That is taking place today. But they have also the ability to take what we call their win rate, which was about 7% and that is lying about 7% of the loans that they look at to increasing that and so they have been doing that as well.
So they are pivoting appropriately, and we are standing by there -- the $1.41 that we indicated. AmeriHome was going to benefit us in 2021. I think you are going to see $0.30 to $0.35 of that in the second quarter as we phase this in, including just in part about, Brock, regarding being able to pay down their loans and stuff like that, so we are in that process, right? Okay, that’s where we are.
Ken Vecchione
Hey, Brock. It’s Ken. I just want to add a few things. If you recall back to our earnings call or our conference call in early February when we announced AmeriHome, we said that there are other opportunities to earn more than the accretion numbers that we provided.
We held those back because of some uncertainty that we saw coming potentially with rising rates, and we are using all of those as we intended to in order to maintain our earnings estimates for AmeriHome.
Brock Vandervliet
Got it. Okay. Appreciate the color.
Operator
Thank you. You have our next question from the line of Casey Haire from Jefferies. Please go ahead.
Casey Haire
Great. Thanks. Good morning, guys.
Ken Vecchione
Good morning.
Casey Haire
I wanted to touch on the deposit growth. I mean, you guys, I mean, even with the updated -- with bumping up the guide, I mean this quarter you really massively outperformed that. Just wondering is there still -- it feels like the environment is still ripe to continue to do that. Is it possible that the deposit growth is conservative based on the current environment based on what you are seeing?
Dale Gibbons
So, you think it’s conservative because we told you $800 million, and we came in at $6.5 billion?
Casey Haire
Yeah.
Dale Gibbons
Maybe. Look, we bumped it up to $1 billion to $1.5 billion. We have been performing at this level or better for the last six quarters to eight quarters. We have some real visibility into the pipeline based on either oral commitments or things we are just finishing up the paperwork on now. So, yeah, there is a possibility to exceed both the deposit guide as well as the loan guide.
Casey Haire
Okay. And on, sorry, on the cash balance at 15% on average in the quarter, and I realize that you guys did get to work in the back half of the quarter with securities and loans. But even with the paydown on the AmeriHome debt, you are still probably at around 7% of cash for this. What is your target level? How comfortable are you driving that to what level?
Dale Gibbons
Yeah. So, I mean the $1 billion to $1.5 billion is what we consider to be kind of a core number, but as we deploy that and pull that number down, that number can fall substantially. And frankly, the securities book is at least a third or 40% higher than it needs to be too. Now that’s better than cash, but not as good as some of these other loan-based alternatives.
So, I do expect that we are going to have a couple of quarters where we are going to right-size our loan-to-deposit ratio. It wasn’t that long ago that we were in the 90s. Now we are down at 75. Well, doing that means that loan growth will be well in excess of a $1.5 billion as we increase that loan-to-deposit ratio. That’s going to get under way in the next -- in the not too distant future.
Casey Haire
Okay. Great. And just some follow-ups on the NIM side of things, Ken, the new money loan yields that you are seeing in mortgage as well as new money yields on securities purchases?
Dale Gibbons
Yeah. So, the securities purchases, the yields that we got was at 2.20%, and new loan yields that we are putting on are running about 20 basis points to 25 basis points lower than what the average is. I think we are experiencing pricing pressure.
I think that the velocity that the industry and the economy has come out of this pandemic has resulted in kind of reduced expectations for credit losses industry wide, and that’s being reflected in price. But again, what we have got the ability to do is to drive volume and to shift our focus in terms of where the best kind of risk adjusted returns will be.
Casey Haire
Okay. Just to clarify, Dale. 25 -- I mean your existing loan yield in the quarter was around 4.6%. I would think resi mortgages was as lower than that, right, or?
Dale Gibbons
Yeah. No. Resi mortgages that we are putting on our books are around 3%.
Casey Haire
Got you. Okay. Thank you.
Dale Gibbons
Yeah.
Operator
Thank you. Your next question is from the line of Brad Milsaps from Piper Sandler. Your line is now open.
Brad Milsaps
Hey. Good afternoon, guys.
Ken Vecchione
Hi, Brad.
Brad Milsaps
Just wanted to stick with some questions around AmeriHome, just kind of curious, how much the change and increase in loan guidance is related to you guys, retaining more production from AmeriHome. And what -- and if so does that have any impact on kind of what AmeriHome would contribute on a standalone basis going forward or is it all kind of interconnected?
Ken Vecchione
Well, so I mean our, kind of our core number, I wouldn’t say is AmeriHome dependent. I mean we have been buying mortgages from other sources that was -- it happens in the first quarter and last year.
What AmeriHome gives us is a more profitable way to do that rather than going to other parties. We can kind of keep it all in the family. And also kind of a ready full bore in terms of ability to do that. So what we are going to get from AmeriHome is also on top of that is to be able to -- again kind of right size our loan to deposit ratio in a way that’s certainly accretive to net interest income.
Brad Milsaps
Yeah. I guess maybe ask differently, Dale, is -- are the two sort of exclusive one another, you are increasing loan guidance, but then you still think AmeriHome can contribute what it was going to when you initially announced this back in February?
Dale Gibbons
Yeah. We will -- we increased our loan guidance and irrespective of AmeriHome that is that we -- all of last year, we certainly didn’t have AmeriHome and we were in a pandemic and never once were we under a $1 billion. So it’s a part acknowledgement of that. So we can do this without AmeriHome.
But AmeriHome gives us, I don’t more confidence to be able to execute a better price point for the residential real estate we pick up. They are going to be expanding their product line. That’s going to give us kind of even more volume. So we are -- AmeriHome doesn’t affect $1 billion to $1.5 billion. That’s kind of what you are getting it right.
Brad Milsaps
Yeah.
Dale Gibbons
Yeah.
Brad Milsaps
Yeah. Got it. Got it. That’s helpful. And then I know when you announce a deal you -- your intention was to sell some of the MSR. Would this comes in line with about what you were thinking and so how does that impact kind of their run rate in terms of gain on loan sale margin going forward?
Ken Vecchione
Yeah. This is Ken. We actually sold the MSRs for more money than we had anticipated. So we feel good about that in terms of the transaction by getting this large amount of our books allows us to do smaller MSR transactions going forward, which we think we should get better with better pricing on.
Brad Milsaps
Okay. Great. Thank you, guys.
Operator
Thank you. Your next question is from the line of Chris McGratty from KBW. Please go ahead.
Chris McGratty
Great. Thanks. Good afternoon. Dale, I wonder if you can pass out the $6.5 billion of deposit growth by your verticals specifically tech and innovation and HOA and kind of mortgage?
Dale Gibbons
Yeah. So the HOA group was up about…
Ken Vecchione
Got update.
Dale Gibbons
So the regions all in did about a $1.9 billion, all right. Warehouse lending did about $2.1 billion. Tech and innovation is about $760 million. Our HOA business just under $700 million. By the way HOA did as much in this quarter as it did almost all of last year. So those are the big drivers of HOA -- of deposit growth, Chris.
Chris McGratty
Okay. Great. And then…
Dale Gibbons
I should just add -- I am sorry, there’s a couple of things in there too which we are excited about. We never give you the names of due to deposit businesses, but our deposit business one grew $500 million in Q1 and deposit business two, which we always said was well behind deposit business number one grew $50 million. So we are getting excited about what these businesses can do for us.
Chris McGratty
Okay. It’s great color. In terms of the C&I growth, can you -- maybe I missed in your prepared remarks. Did you -- I know the last quarter you said that your guidance was inclusive of growth in the warehouse, but did you tell us what the warehouse balance changes were in the commercial book?
Dale Gibbons
Are you asking -- I am not certain of your question. Ask it again.
Chris McGratty
Sure. The mortgage warehouse and how much of that is in the lending side. How much of the growth this quarter was warehouse?
Dale Gibbons
Okay. All right. The warehouse lending this quarter and we include three items in there, we include warehouse lending, MSR lending and our note finance, which is a separate business, but we have it on the warehouse lending. That collectively grew $560 million for this quarter.
And we came in with an understanding this year that we keep warehouse lending basically flat to exactly balance of 2020. But we keep telling you we keep winning share there and it manifests itself here in Q1 as you can see.
Chris McGratty
Okay. Thank you very much.
Operator
Thank you. The next is Gary Tenner from D.A. Davidson. Please go ahead.
Gary Tenner
Thanks. Good morning. Just a couple of questions, one just kind of housekeeping on PPP, can you give us what the average loans outstanding were for the quarter?
Dale Gibbons
We have about $1.5 billion in loans remaining.
Gary Tenner
Okay.
Dale Gibbons
With including two of course.
Gary Tenner
Right. Got you. Okay. In terms of, as you kind of thinking forward and knowing that obviously adding more resi mortgages will change this. But if you kind of just run through from a loan sensitivity perspective, what amount of your loans are variable rate today and kind of status within the money floors as we start thinking a little further out to prospective rate hikes?
Dale Gibbons
So today the floors are active in the preponderance of our portfolio. So we are behaving as if we are 80% fixed. We have a I think an interesting asymmetrical profile whereby if rates go lower we see very little contraction of net interest income, because the rate of floors [ph], but if rates rise our loan yields become even asset sensitive because then we will be lifting off of the floors kind of going forward. So it’s an asymmetrical benefit for us relative to where we are. So we -- yeah, 80% of our book today is behaving as if its fixed rate.
Gary Tenner
Okay. And just in terms of if there is one rate hike, two rate hikes until there’s an actual upward benefit in those variable rate on yield?
Dale Gibbons
Yeah, I mean it’s staggering. Some are immediate. There are kind of -- others are 100 basis points away. So but I would say on average you are going to need to see probably two rate increases before you are going to start seeing kind of notable improvement in terms of loan yields.
Ken Vecchione
Okay. As you know these loans are variable. We are putting them at the floor so they are looking like they are fixed rate loans today.
Gary Tenner
Okay. Right. And then just last question, you talked about mortgage warehouse and continuing to win business. There you are taking share and obviously the warehouse deposit balances grew pretty significantly. Could you just talk about the kind of sensitivity of mortgage warehouse related deposits relative to overall volume -- overall mortgage volume?
Ken Vecchione
So, we are out lending I think started out 10, 12 years ago was an interesting idea and we will see if we can get another channel going to something today where it’s just a very important strategic weapon for us. It’s delivering more in deposits than we anticipated because primarily of the service we deliver and the fact that we moved upscale -- up market in dealing with some of the larger more sophisticated clients.
They are feeling more comfortable consolidating more and more of their deposits with us, all right, and there’s some of the large clients, there is a disproportion between we have much more in deposits then we have on their loan -- in their loan balances.
But we are continuing to gain share in both the loan side and the deposit side. I just would say that some of the competitors that we normally see are just not performing as well as they should in terms of service levels.
And we have got -- I think I said just maybe in the last earnings call. If you think of us as an airport we have got planes circling overhead looking for land and give us their business. And for us it’s a matter of how quickly we can onboard both the deposit and the loan business.
Dale Gibbons
I think it’s important to note to remember that deposit balances aren’t really the business. So it’s not operating accounts from the source. So let’s say the refi business contracts dramatically. That can affect the actual balances of the enterprise, but that is a very small piece of the deposit balances we have.
But both that balances we have that drive that number is the escrow relationships and that’s based upon the mortgage servicing that some of these enterprises own. So you can see volatility in the origination side. But the MSR drives the deposit balances and that’s tends to be much more stable as because people maintain mortgages on their houses.
Gary Tenner
Great. Thank you.
Operator
Thank you. Your next question is from the line of Timur Braziler from Wells Fargo. Your line is now open.
Timur Braziler
Hi. Good morning. Maybe just following up…
Ken Vecchione
Hi.
Timur Braziler
… on that last mortgage warehouse discussion. I guess how sensitive is that business to steepening yield curve and if broader industry trend start to slow down. With the circling runway is that kind of irrespective of what’s happening industry wide as you onboard new clients or if there is a broader slowdown we should expect to see volumes and growth rates low as well as are they less in volume?
Ken Vecchione
Yeah. So, good question there. When we came into 2021 in the planning year for our overall growth we did not have warehouse lending stepping up in terms of balances. But obviously we had a good first quarter and we are going to continue that trend going into quarters two, three or four.
What we are seeing is two things. One are, there’s just a natural rise in terms of taking market share with the cliental that we have today. And then on top of that, we will get a benefit from penetrating the AmeriHome client list. So they have got, as I said, 720 clients. We have got about 100 or so that overlap and we are going to be able to penetrate going into their clients.
So if you can picture that we go into one of the AmeriHome clients and say, look, we are willing -- we give you a line of credit just called $25 million for argument’s sake. And we will also buy -- after you accumulate loans on that line we will also take you out of that line.
That’s a very powerful argument to offer sort of a two for one opportunity to the AmeriHome clients. So we haven’t fully factored that into our numbers yet, but that gives us some confidence that we should be able to continue to grow our warehouse lending business on the loan side.
Timur Braziler
Okay. That’s helpful. So as we start thinking about your new loan growth guidance, it shouldn’t just be what you have been putting on existing plus the rest of the increase guide coming directly from resi, we can actually see mortgage warehouse continue to ramp higher and the larger component of that growth haven’t as well?
Ken Vecchione
Well, I am just going to clarify what you said, these $1 billion to $1.5 billion is basically business as we do it today, all right. So you will see our resi more purchases continue and you will see more house lending grow as if we would never had the AmeriHome acquisition. The AmeriHome acquisition as we ramp that up will provide either comfort to get -- achieving that $1 billion to $1.5 billion or if we do it really well it will help us succeed that number.
Timur Braziler
Okay. That’s helpful. Thank you. On the residential side, I think, in quarters past you guys have talked about the concentration of 20%. Do you have a concentration limit in mind and I guess as we are building out what residential loan growth could look like, how big of the overall loan portfolio can we envision that becoming?
Dale Gibbons
Well, I think we can easily punch through 20. I mean the average Bank our size is 30. First Republic is just under 60. So I mean what we like about the space is, I mean, it’s very good quality performance. Now we have got kind of an unlimited channel into that, some other kind of cross-sell opportunity, some of which we have talked about that we can pick up. So we are definitely going through 20 and toward the immediate that we spend at.
Ken Vecchione
That’s a very strong book we have, right, 59% FICO, DTI of about between 34% and 36%, below 70% LTV. We could probably give you a list of all the folks that have been are gone 90-day delinquent. It’s usually just an unusual event and we have not had a loss in the book. So it’s -- it really helps to bring a lot of asset quality to -- good asset quality to our loan composition.
Timur Braziler
Okay. Thank you. And then just last one for me back on the deposit side, I am wondering how much of the growth if any is coming from the extension of the tax deadline and what that could look like for balances as customers go to pay tax bills in the next month if you will?
Dale Gibbons
Yeah. That’s more of a consumer phenomenon, I would say, and our liquidities has been coming in strong book all through ‘20. Remember in 2020 we did $9.1 billion of liquidity, which far, far exceeded our best, best year ever and this quarter we did $6.5 billion, which just in one quarter.
Timur Braziler
Okay. Thank you.
Operator
Thank you. The next question is from the line of David Chiaverini from Wedbush Securities. Please go ahead.
David Chiaverini
Hi. Thanks. I wanted to ask about the pace of securities purchases you had a strong ramp up in the first quarter. Going forward should we expect that pace to slow somewhat as you pay down debt with the closing of AmeriHome?
Ken Vecchione
Yes. It will absolutely slow. What we did is, we have been sitting on a lot of growth from the fourth quarter, also the first quarter, and so we wanted to deploy some of that. Again, the balancing act we are trying to do is, look, we can get 10 basis points if we keep it at the Fed, that’s pretty meaningless. We can get 3% if we can put it out into low LTV home loans or we can go into the securities book, and as I said, we have got 2.20%.
So, it’s a little bit of a compromise there because it is going to take us sometime late within this year, but sometime to deploy the liquidity that we have and also the new deposit growth that we expected and continue to generate.
So, but over time, yeah, I think, our securities book can actually bleed down, but I wouldn’t expect to see that anytime soon. But no I think the growth in the book in the security side is largely behind us. We are using our current liquidity to pay off all of the AmeriHome debt and then also to begin to purchase non-QM mortgages through that channel.
David Chiaverini
Great. That’s helpful. And I also wanted to follow up on the NIM commentary. You mentioned about how the drag should moderate going forward and I see in the slide deck how the spot rate loans is about 13 basis points lower than the portfolio average in the quarter. In terms of magnitude of being down, well, I guess, the clarification is to expect continued margin compression, but just not clearly as much as the 47 basis points in the first quarter, is that the way to think about it?
Dale Gibbons
Yeah. I mean, again, we are focused on is we are focused on how do we increase the earning power of the company and translate that into EPS. Margin has very little to do with that, where so earning power, we think, hey, low cost, stable core deposits that we can deploy into profitable assets.
Now, gosh, I’d love to get 5% for that on a -- without risk. We are not seeing those opportunities at scale at that price point. So what are we doing? Well, we are going to residential where we have unlimited and that’s 2 points less. But if I add mortgage loans at 3% and our margins at 3.37% that’s going to decrement that margin a little bit.
But instead if I think about it I have got investments at 10 basis points, that stuff is already on the books and I can put that out at 3 that would help the margin even though that spread is actually lower because I am take it from 10 basis points to 300 basis points.
So the combination of those two things, if it’s possible the margin comes down a little bit? Yeah, I think that would actually be likely a good thing, because what it really means is that we are continuing to move the fundamental footings of the balance sheet that we can then deploy into earning assets.
Ken Vecchione
So I want to add one other thing to what Dale said. Our focus on net interest income rather than NIM started in early 2018. So this is not a new phenomenon for us. We have talked about this since the early part of 2018 that this was the direction that we are going to take which is prioritize net interest income growth over NIM. Simply said net interest income is going to drive EPS.
One of the things I am very proud of this quarter was two less days. We made more in net interest income than we made in Q4. So our strategy is being executed upon and Dale said, our goal is to keep that net interest income looking robust for the next several quarters as we continue to deploy the excess liquidity and continue to upgrade our guidance as to what we are going to bring in.
David Chiaverini
That all makes sense. And then a last housekeeping item, I think you mentioned merger charges you are expecting $15 million -- roughly $15 million mostly in the second quarter. Are you -- is your expectation now that it’s going to be in total lower than the $35 million that was discussed at the announcement of AmeriHome?
Dale Gibbons
Yes. Yeah. As Ken was alluding to that earlier in terms of pricing that we got on the disposition of the MSR book. I mean the preponderance of those fees that we are going to be incurring are basically de-conversion costs from our outsourced mortgage servicer to the purchaser, that transaction to close within the next few weeks.
David Chiaverini
Got it. Thanks very much.
Operator
Thank you. The next is Michael Young from Truist. Your line is now open.
Michael Young
Thanks. Good morning.
Ken Vecchione
Good Morning.
Michael Young
I wanted to follow up Ken on your comments about the reserve level maybe maintaining more of a flat level going forward. Is that sort of on a relative basis to loans outstanding? In other words, I guess, CECL impacts maybe are more muted and loan growth coming from commercial going forward or kind of stay more stable?
Ken Vecchione
Yeah. That was really -- it’s a numerator, non-denominator thing. What I was trying to say is, the balance is going to stay relatively flat. With the way we are growing you could see the ratio drop. But the balance we think will be relatively flat.
A lot of that as you know with CECL just driven by the economic outlook, which can -- which we can really move the numbers. But what should not be lost upon are our shareholders, investors, the analyst community is that 42% of our portfolio is in loans or asset categories that we have never ever had a loss on or loss in, I should say, and that’s where it also drives the CECL calculation.
Michael Young
Okay. Great. And maybe just as a follow-up, just thinking about the pace of growth relative to capital, capital levels gotten a little skinny even with the issuance this quarter. I know PPP kind of has an impact on the TCE ratio. But just we think about you guys are willing to grow if growth is there and you will raise capital as needed or would you tamper some of the mortgage growth areas that maybe more of a flex area on the balance sheet to stay within kind of capital ratios?
Ken Vecchione
No. If we need capital to grow, I think, you can look to -- look for us to do the right thing and raise capital.
Michael Young
Okay. And if I can sneak in one last one just with AmeriHome kind of on the books, I guess, now, Ken, just trying to think about sort of the buy versus build equation going forward? You guys always have some deposit loan growth verticals in the pipeline that you are building? But has this changed your view on that equation or what you would like to do on a go-forward basis?
Ken Vecchione
No. Not at all. I mean, the AmeriHome team has a couple of things that they would like to look at in terms of new opportunities and I mentioned them non-QM channel, jumbo channel are just two of them that jump right out.
But that’s separate. That team can work on that as the commercial side of Western Alliance can work on other business opportunities and we are continuing to work on those opportunities now. And we are probably one of the few banks that is sitting here working on 2022’s growth levels. That’s how far out we are in what we think in terms of our pipeline and our visibility.
Michael Young
Okay. Thanks.
Operator
Thank you. Your next question is from Tim Coffey from Janney. Please go ahead.
Tim Coffey
Great. Thank you, gentlemen. So, in the quarter residential mortgages were about 40% of your net loan growth. Would you expect it to be that level going forward?
Dale Gibbons
Yeah. Yeah. Yes. I think that’s going to continue and as I mentioned that’s kind of the core piece. I think 40% is not a bad number. It -- when we swap up our excess liquidity it’s going to skew much higher than that because a lot of that is going to be directly toward mortgage acquisitions is where we see something kind of well in excess of a $1.5 billion.
Tim Coffey
Okay. And on the efficiency ratio is kind of you think as we go -- given the growth of this past quarter as you go through the year adding AmeriHome and such, do you think 45% is going to kind of a new level for you?
Dale Gibbons
Yeah. It’s going to be 45%, 46%-ish or something in there. But mid -- yeah, mid-40%s, I think, that’s kind of where it’s fairly stable at that level, something under 50% for sure well.
Tim Coffey
Okay. And can talk a little bit about what it is about Western Alliance will allows you to maintain kind of expense growth at a level well below asset growth?
Ken Vecchione
Yeah. So let me try, I think a lot of that, when we talk about our national commercial business line strategy, we generally talk about it in terms of the growth that it brings in and that’s very helpful to keeping the efficiency ratio low.
But these businesses are for the most part have very, very high operating leverage and that’s one of the characteristics there. There are several characteristics of the national strategy. Generally very few competitors, pricing power or stability, great asset quality and then the fourth one we love is very high operating leverage.
And as the growth shifts over to that coming from those national business lines just the natural calculation of the efficiency ratio will keep us more moderate as compared to our peer group. The other thing is we are just growing revenues, as I said up front, four times faster than expenses and that too we will keep the efficiency ratio in line.
Tim Coffey
Okay. Great. Those are my questions. Thank you very much.
Ken Vecchione
Thank you.
Operator
Thank you. The next question is from Jon Arfstrom from RBC Capital Markets. Your line is now open.
Jon Arfstrom
Thanks. Good morning, everyone.
Ken Vecchione
Good morning, Jon.
Jon Arfstrom
Hey. Dale, question for you, can you go back and review the loan-to-deposit comments you made earlier and where you think you might sit at the end of the second quarter and maybe end of the year, can you help us with that a bit?
Dale Gibbons
Yeah. So, well -- so I mean it’s something we are trying to get underway now. I think that at the end of the second quarter, I expect we maybe will be close to where we are presently maybe a little bit better with a $1 billion, $1.5 in growth of each.
I think we are going to be able to get these kind of new products out for AmeriHome. Maybe by the end of the second quarter into the third quarter and then would they see billions of dollars certainly in volume and so we can move rapidly on that. I personally would like to be kind of it’s a 90% range back to loan-to-deposit ratio at the end of the year.
And so, I mean, if you take where we are, where we right size that, where we have very substantial growth from just where we are as of $331 million. We had 3.5% -- $3.4 billion of loan growth at a 3.5% spread. That’s already in the books as of $331 million.
That generates about nearly $10 million a month have increased PPNR just from deploying that out of our liquidity. Then you add in AmeriHome with this. We expect to be at an EPS run rate of $9 as we exit 2021.
Jon Arfstrom
I was going to ask later…
Ken Vecchione
Just want to -- I just want to punctuate when Dale said for a moment there, Jon. Everyone’s talking about the liquidity and loan-to-deposit ratio. We are talking about net interest margin versus net interest income.
What Dale just said is the crux of how we are structuring the business that the $3.5 billion that we just put out and the $10 million that we are making among pretax, $30 million a quarter. That is very, very powerful and that’s what we just have a certain degree of confidence along with the AmeriHome acquisition that we can exit the year at that $9 EPS run rate.
Jon Arfstrom
Okay. I was going to ask if you think numbers should go up but you answered that for me. I did -- I do want to ask one more question and it won’t be on deposits. But could you talk about lending outside of your national businesses, some of the pipeline trends and what you are seeing in construction just as a kind of a gut check on what you are thinking on the overall economy.
Ken Vecchione
Yeah. So what -- actually what we are seeing inside of our footprint is exactly what we are seeing outside of our footprint. So, on the construction side residential that’s very hot for us at this moment. Homes take five months to seven months to build. They are extending out a little bit longer than that because of some labor shortages and so the cost is a little bit higher. But once they are built boom they are sold rather quickly.
So one of our struggles of course is how do you keep those really good loans outstanding for a longer period of time. But the construction site, single-family residences are really hot. Built-to-rent opportunities which for us are mostly in our footprint more or so than outside of our footprint, Arizona seems to be built-to-rent capital on the outskirts of Phoenix and the West Valley seems to be a very, very active and we are doing a number of deals there. I am going to let our Chief Credit Officer who’s been sitting here patiently and hasn’t said a word, Tim Bruckner. Tim, do you want to comment on this?
Tim Bruckner
Well, sure. Residential and commercial book, I think, there were definitely some things that sat on the shelf last year with the uncertainties of the pandemic. So projects delayed. We are -- so we are seeing that move forward and so we -- as we look out across 2021, we don’t see any big shifts in loan demand.
We see stability across the major crew groups within our real estate portfolio. So we are not seeing trends in rent payments that are alarming. We are seeing things that give us comfort. And we are maintaining a very close and direct monthly or weekly dialogue even with our borrowers. It gives us that information. So I think outlook is very, very, positive for us across all the segments of real estate…
Ken Vecchione
Yeah.
Tim Bruckner
… and not just residential.
Ken Vecchione
I will say, and we are very active in the net migration in states as you would expect as they are seeing even more activity. But I should have said it does not only pertains to construction of single-family residences. But on the industrial side we have started or finance the number of specked projects for industrial warehomes -- warehouses and before the shelf is even completed they are already leased up. No longer are they spec. They are all pre-leased. So that’s give you an example of how hot the CRE market is for us.
Tim Bruckner
Yeah. For -- just the data point on that, that portfolio is stabilizing and has stabilized faster now than at any time in the past four years our portfolio. So it is moving very quickly.
Ken Vecchione
Jon, we don’t have time to give you a short answer. We hope the long one.
Jon Arfstrom
No. That’s fine.
Ken Vecchione
Fine.
Jon Arfstrom
And I guess the one thing I -- you did flag this and I want to make sure it’s out there. But you did say you are expecting some movement in special mention and classified, but it doesn’t sound like you are concerned about cut it at all?
Ken Vecchione
The answer -- the short answer is, yes. We have looked around. We don’t see anything on the horizon that’s going to give us a little bit of trouble and we feel good about where the asset quality is.
Jon Arfstrom
Okay. All right. Thank you.
Operator
Thank you. There are no further questions at this time. I will turn the call over back to Mr. Ken Vecchione.
Ken Vecchione
Thank you. Listen, thanks to everyone for dialing in and listening to our story. We are feeling very good about it. We were very proud of the results and we look forward to talking to 90 days from now about the second quarter. Thanks again and everyone enjoy the weekend.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect. Have a great day.
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