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spk00: Good day, everyone. Welcome to Western Alliance Bank Corporation's second quarter 2021 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebankcorporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern Time, July 16th through August 16th, 2021 at 11 p.m. Eastern Time by dialing 1-800-585-8367 using conference ID 3676158. I would now like to turn the call over to Miles Pondelic. Director of Investor Relations and Corporate Development. Please go ahead.
spk10: Thank you, and welcome to Western Alliance Bank's second quarter 2021 conference call. Our speakers today are Ken Beccione, 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 risk, uncertainties, and assumptions, Except as required by law, the company does not undertake any obligation to update any forward-looking statements.
spk08: 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 8K filed yesterday, which are available on the company's website.
spk10: Now for opening remarks, I'd like to turn the call over to Ken Gacchione. Thanks, Miles, and good afternoon, everyone. And as Miles said, welcome to the Western Alliance's second quarter earnings call. This quarter's results continue to 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 our 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 and 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, consisting with our excellent asset quality results. Strong balance sheet growth continued with loans rising $2 billion, excluding triple P 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 stand 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% of our average interest-earning assets, yielding approximately 3.21% as an alternative to cash or mortgage-backed securities. Optimizing our interest-earning asset mix helped NIM expand from 3.37% to 3.51% in the second quarter. Fee income was a record $136 million, representing 27% of total revenue, as it 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 wind share as gain-on-sale margins fluctuate to maintain earnings. I think it's worth reemphasizing that But, excuse me, I think it's worth reemphasizing that what most attracted us to AmeriHomes' business model was their low-cost and flexible mortgage production and servicing ecosystem that leverages their complementary correspondent and consumer direct channels to feed and enhance value to our Western Alliance's commercial businesses while minimizing risk. Business-to-business correspondents mortgage lenders have several business levers and the flexibility to sustain earnings throughout the rate or throughout rate 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 of $57.1 billion in unpaid balances. Well, UPB, sorry. Expanded the number of correspondent sellers by 57 to 819 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 AmeriHomes' business model, we continue to stand by our full year guide until $1.41. Asset quality continued to improve this quarter as the economic recovery extended in breadth. Total classified assets declined $43 million in Q2, the 49 basis points of total assets, which was lower than Q1 20s 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 a 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 and 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.
spk09: Thank you. 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, an increase of over 50% from the prior quarter. Net interest income rose $53 million during the quarter to $370.5 million, an increase of 24% year-over-year, primarily a 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, but was far exceeded by gain on sale of mortgage loans. Pre-AmeriHome wall contributed 18% non-interest income in the first, supported by $7 million of income from equity investments. Non-interest expense, including 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 costs 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 added $4.5 billion in loans held for sale, yielding 3.2%, as opposed to cash yielding 10 basis points. Investment yields improved basis points following ongoing...
spk03: towards residential loans and non-commercial real estate loan returns.
spk09: 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 due to the issuance of $600 million of subordinated debt and the assumption of AmeriHome borrowings. The spot rate for total deposits, which includes non-interest bearing, was 11 basis points.
spk03: We expect funding costs have generally stabilized at these levels.
spk09: 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 NIVET 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 and increase in incentive compensation costs. As mentioned on our first quarter call, we expected the efficiency ratio to rise to the mid-40s as a result of 75 million, or 37% from the prior quarter, and 35.4% from the same period last year. This resulted in pre-provisioned 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 a 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, primarily due to $600 million subordinated debt issuance as well as the assumption of the AmeriHome borrowings. Finally, tangible book value per share decreased 16 cents over the prior quarter to 32.86, but increased 18% year-over-year, again driven by the AmeriHome acquisition of intangible assets that were largely offset by Q2 earnings and the issuance of common stock from our ATM of 700,000 shares for $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 for $1.3 billion in the quarter or $2 billion, excluding triple P payoffs of approximately $700 million. Majority in Galton and AmeriHome transactions. This was supplemented by growth in capital call lines of $162 million and construction and land loans of $89 million. On base core deposit growth, the profits grew 3.5 billion or 9.2% in the second quarter, driven by increases in non-interest-bearing DBA of $2.6 billion, which now comprise 48% of our deposit base, and savings and money market deposits of $534 million. Market share gains in mortgage warehouse continue to be significant drivers of deposit growth during the quarter, along with strong performance from regional commercial clients, robust fundraising activity and 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, to 49 basis points in 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 mention 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 to $264 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 ACLs of funded loans just line nine basis points to 88 or 91 basis points when excluding BBB loans. For comparison purposes, the 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 and assets, we continue to generate significant capital to fund organic growth and maintain regulatory capital ratios. Our tangible common equity to total assets of 7.1% and common equity tier one ratio of narrow home 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 $0.255 per share, our tangible book value per share declined $0.16 for the quarter to $0.3286 compared to an increase of 18% over the past 12 months. I'll now hand the call back to Ken for closing comments.
spk10: 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 turbocharged our net interest income. Year-to-date, non-PPP loans have grown $3.6 billion, and deposits have grown $10 billion with the amount of loan growth, providing us an opportunity to deploy liquidity and growth and grow net interest income. AmeriHomes passed Q2 guidance in its tracking to full-year projections. Asset quality non-accrual loans tracking downward with nearly no net charge-offs to the quarter.
spk03: Return on tangible... Common equity was 28.1% for the quarter.
spk10: 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 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 link 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.
spk03: continue to rise throughout the year.
spk10: Asset quality will remain steady, although with 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 a growth-based capital strategy to support above-trend balance sheet growth. And finally, I would be remiss Dale, Tim Bruckner, who's sitting to my left here, our chief credit officer, and I are happy to.
spk00: And as a reminder, to ask a question, you will need to press star one on your telephone. To redraw your question, press the pound key. Please stand by while we compile the Q&A roster. For our first question, we have Brooke VanVleet from UBS. Brooke, your line is open.
spk02: Oh, thank you. Ken, does that $1.5 billion loan guide include AmeriHome, or is that kind of standalone?
spk10: That's net loan growth for the company.
spk09: We don't really expect loan growth from AmeriHome. I mean, AmeriHome has their health for sale piece. That can fluctuate some. So, I mean, we're talking about health for investment loans, core loan growth. That's $30 billion. That's what the $1.5 billion is attributable to.
spk02: Okay, got it. And shifting to AmeriHome, I think the biggest question is just overall origination volume and gain on sale. Is this... Yeah, 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?
spk10: So I'll take half the question. 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've seen. But, Brock, you gave me an opportunity here to answer the question in a larger and I'd like to frame it the way we think about it here for everyone on the call. So I'm 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 the questions.
spk03: We believe that you should consider, evaluate, or compare
spk10: 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 this is the acquisition rationale that we have for making this purchase so of course there they help 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's relates back to net interest income, lower interest expense. We are going to be able to mine, we think, our HOA book for consumer direct mortgage opportunities. We've purchased EDO 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 arm 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 of the interconnectivity 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 gives you a larger perspective on how we think about AmeriHome and how we think it's going to help enhance our earnings going forward.
spk09: Yeah, Brock, I know we had a conversation, you know, during the quarter about, you know, seeing the volatility in this sector and what that might mean for us. And we view AmeriHome as really a low-cost producer. And that's an enviable place to be because that puts them in a position such that, you know, 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, about 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 it up in volume. And so the gain on sale number was, you know, 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, you know, in the servicing revenue side. So we're confident that that gain can continue. And, again, just to 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 class to fill up our liquidity that we have.
spk02: Great. Great color. Thank you. I'll jump back in the queue. Thanks.
spk00: For the next question, we have Casey here from Defri's. Casey, your line's open.
spk11: Yeah, thanks. Good morning, everyone. On the AmeriHome side, specifically the mortgage servicing drag that you mentioned, can you just 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.
spk09: Yeah, yeah, so I'm not going to really rephrase that as an impairment that took place. I mean, so, you know, these models are trying to predict, you know, human behavior. There's a lot of things that would be human behavior that aren't necessarily picked up in these models. And I think in particular what you had in the first quarter, second quarter coming in, is you had very substantial volatility in the 10-year. So everyone thought, oh, gosh, you know, we missed the bottom of the rate. And so that actually, you know, basically it's just like last call. It's like, you know what, it's 2 a.m., you've got to get in here, otherwise you're going to miss out on the lowest rates, you know, in a generation. But then what happened? Wow, we thought the 10-year would get up to 190, and now we're back to, you know, one in the 130 range. And so are we getting now 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.
spk03: You can't just say, oh, in terms of, you know, the gain on sale number is better probably because
spk09: because the servicing revenue was impaired. Servicing revenue being impaired means there's a lot of re-buy business going on. There's a lot more activity generating in the system. And so the gas opportunity is a bit higher. So it's not kind of a one-for-one deal. But, yeah, in a steady state, we'd look for about a plus 10 in that. I mean, it's in the revenue. It's a contra revenue for a reason because it's not supposed to be a contra.
spk11: Okay, gotcha. So, I mean, You're standing by the buck 41, and so that implies basically this AmeriHome contribution is running around 50 cents in the back half of 21, correct? Correct. Okay. All right. And then just on your comment, Dale, that the capital will build from here, 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, does that just assume that loans and deposits grow a billion and a half? Or, you know, you just use the ATM to...
spk09: Perhaps a little bit of both, but I think the balance sheet growth number is going to be higher than $1.5 billion and not even need to touch the ATM. Because as you saw this last quarter, 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 preponderant. And that is a 50% 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 be the same. So earnings this year were... $230 million. You know, based on that, that would support $2.3 billion. If it was all 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, you know, we will cap as needed. But, you know, right now, we don't think that's going to be significant.
spk11: Okay, great. And just last one for me. The borrowings that you assumed from AmeriHome, if I'm reading the margin tables right, it appears there's 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.
spk09: 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 as much as we'd like it to. Understood. Thank you. Thanks.
spk00: For the next question, we have Brad Millsaps from Piper Sandler. Brad, your line's open.
spk06: Hey, guys. Good morning. 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 as you saw this quarter. But just kind of curious how to think about that 90% loan deposit ratio number. And maybe as that pertains to, you know, the help for sale loans, those 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 billion to a billion five loan growth guide?
spk03: Yeah, so, I mean, a few things going on there.
spk09: So, yeah, I mean, here we wanted to get to, you know, kind of 90-ish or whatever, and we actually faded back a little bit because the deposit growth was so robust. You know, 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 loan growth is going to exceed deposit growth, and that will pull that up. When I talk about loans to deposit ratio, I do not include the health for sale. Those loans is only a few weeks.
spk03: And so it has a much more liquidity relative to those other categories away from loans.
spk09: So I do think that, I mean, I like the health 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 to do that where we're going to have loan growth and AmeriHome is going to be the primary test of deposit growth.
spk03: Right now, deposit growth can just iterate. It looks, you know, continues to look strong.
spk09: 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 on our balance sheet for higher yielding origination activities. They have these are things like vacation homes. They'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 warehouse clients among the 800 clients that AmeriHome has. that they buy from. And with that, we can put in our own direct conduits to feed our high-yielding, because they're not puttable to the GSEs, resi mortgages.
spk06: Okay, great. Thanks.
spk03: And then just switching gears a little bit, maybe for the expense side of the equation.
spk06: What type of expense flexibility should we think about as the mortgage business sort of ebbs and flows over the next several quarters?
spk09: Well, we see, I mean, there can be some flexibility within this. We think that the The AmeriHome, you know, pivoted really well in the volatility that took place in the second quarter in terms of, you know, finding ways to, you know, 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 as you mentioned on the previous call, you know, 50 cents, you know, 50 cents in Q3, 50 cents in Q4 plus 40, that puts us at $1.41. And that's the same run rate that we have for getting to the number that we had for 2022. So I think there's multiple channels to manage through that process with all the levers that Ken enumerated. And so I'm not too concerned about that. We're looking at kind of the total. I think we are going to stay in the mid-40s, and I think that's pretty reasonable.
spk06: Okay, great. Just final follow-up for me. Can you comment on the change in bond yields, link order? You guys had some nice improvement there. I'm just kind of curious, you know, are you, you know, kind of, you know, things you might be buying, just saw some nice improvement there, and just curious if you could provide any color.
spk09: Yeah, maybe a couple 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 certainly the average in our book. And in the first quarter, again, you know, volatility, same issue. It comes out as a little bit of a different animal. But we had increased volatility. amortization of premium on MBS bonds that we had purchased that slowed down in the second quarter. And so we had less of a debit to hold against that. And so that helped us pick up.
spk06: Great. Thank you, guys.
spk00: For our next question, we have Brandon Kane from Tourist Securities. Brandon, your line is open.
spk07: Thank you. All right, so loan growth was once, I mean, deposit growth was once again strong this quarter. Could I get a breakdown of the verticals on a dollar basis of where deposit growth came from?
spk10: Did you say deposit?
spk07: Yes, deposit growth.
spk10: Well, you know, warehouse lending grew about $1.7 billion. Our new deposit verticals grew a little over $300 million. HOA business increased. where the first quarter is very seasonally strong, still had a good quarter this quarter and 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 is Oh, I'm sorry. It came across a little fuzzy. So that's how the $3.5 billion. But basically, when you look at all the sectors, it was pretty much broad-based throughout all our silos and all our regions.
spk05: Okay.
spk10: Thank you.
spk07: And for mortgage warehouse, obviously, continued to grow deposits there, but it looks like loan growth is softening there. What is the outlook for warehouse balances for the remainder of the year?
spk10: So, yeah, 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 note financing should offset some of the weakness there. in warehouse funding overall or warehouse funding proper. But we think going forward, as we begin to roll out our cross-sale activity, which will be towards the end of the year, to be quite honest, we think we'll be able to. Okay.
spk07: And just lastly, the reserve came down again in the face of loan growth. Do you think we've hit a bottom? Do you see continued bleed down, even though we're still getting growth in those lower-cost, credit-cost business lines?
spk09: Yeah, I don't know if I could call a bottom. I mean, I appreciate that we're going to hit a bottom on the reserve in dollars certainly sooner than we're going to hit the bottom on the ratio. You know, I mean, negligible charge-offs, you know, this past quarter, throughout this recession, admittedly a very odd recession in terms of credit quality behavior primarily driven by federal intervention. But that would point you that our reserve could still be very substantial. We had seven basis points of losses. The average remaining life on our loan book is 2.4 years. You know, if you said, well, I can needle 2.4 years or for a duration there, but you could see how even on a dollar basis it could continue to ebb. Most significantly is that even compared to our balance sheet pre, you know, pre-feasal is we've been growing, you know, have had historically low, or if not zero, you know, anticipated losses in low LTV residential loans, capital, I personally don't think that the outlook for the economy is going to improve in the near term as dramatically as the forecast did, whether it was Moody's, whether it was Blue Chip in the second quarter. I don't know if we're at the bottom or not, but I do think that certainly the preponderance of the reserve releases are behind us.
spk07: Okay. Thanks for all the answers.
spk09: Thanks.
spk00: Next we have Chris McGrathy from KBW. Chris, your line is open.
spk09: Great. Thanks for the question. Talking about the mortgage business a little bit differently, Dale, the proportion that you're holding on your balance sheet, you know, around 17% buying a bond at these levels.
spk08: I'm interested in kind of where you see that peaking or where your comfort range is from that proportional piece of the loan book.
spk09: 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, you know, compared to most. You know, we've You know, C&I loans are a big piece of what we've got. Even some of the securities we've been purchasing, you know, have a variable rate element to them. And then our funding structure, you know, 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 beta of what you'd see. So we start from a position that we can tolerate, you know, higher levels of residential. We've been below the peer group for a long time, which I'm going to hang at 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 improving yield. These are low-risk credit trades. And with the deposit growth, We can kind of do this. 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, yeah, we're going to be moving up to 30%. Okay. That's a good color. In terms of the liquidity, you guys think we're 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? Yeah, 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, those clear out in two to three weeks. And so that is a near cash element that we can use. So I'm comfortable with kind of, you know, with where we are. I think that number could, you know, could drop down a bit more to, you know, 1% to 2% with liquidity behind it from loans that have already been, you know, pledged for delivery to the GSEs.
spk03: Okay.
spk09: Chris, I might also... I might also mention, you know, 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 with the Federal Reserve that is unused. We've got multi-billion dollar credit lines, credit funds lines with other institutions. They're not necessarily committed, but we think that they're certainly there that are also unused. So we've got well over $10 billion that we could draw upon as needed. Great. And then if I could just sneak in a housekeeping. I think when you announced the mayoral home, 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'm wondering if that's a run rate. Thanks. So on the tax rate, you know, I think I'm expecting that number to ebb up a little bit from where we are at the 19, I think.
spk03: I think it's, you know, I could see it climbing closer to 20.
spk09: The card income, you know, there has been kind of a difference in activity. Ours is really a P card, but I think business levels are getting better. Great. Thank you very much. Thanks.
spk00: For the next question, we have Timur Breziler from Wells Fargo. Timur, your line is open.
spk04: Hi. Good morning. Maybe just circling back on the expense side, I think you had said that the In Our Own Deal added 1,000 employees to the organization. I know you mentioned that the efficiency ratio is likely to be maintained in the mid-40s or at least in the near term. I'm just wondering, as 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 enero home?
spk10: 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 into the risk management side of the business. So when we think about our numbers, when we think about the guidance leading this year at a $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.
spk04: Okay, that's helpful. And then just one last one on AmeriHome origination. You said the win rate now is 12% to 13% up from 7%. I think historically or previously you had mentioned that that number could go as high as 20%, and it doesn't really sound like the 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 corollary to that, if you can just talk about where the revenue yields that were put on the book today are and where those can go once you start bringing down some of the non-community papers.
spk09: Yes. So the primary goal of increasing or broadening what they're buying is to give the bank another channel of growth in residential with, again, low LTV, better yielding assets. So AmeriHome, for the most part now, has generated a product that We like the business, but we like it going to the GSEs because the yields aren't necessarily high enough for what we think the best kind of risk-adjusted returns would be. 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. You know, what we can do kind of going forward.
spk10: I mean, this is what we get paid for. There's a lot of interconnectivity between AmeriHome and on the banking side. If we have strong loan demand on the banking side, we will not hold on to as much on the residential mortgage side, and AmeriHome will have a higher gain on If there's any soft demand or more excess liquidity than what we anticipated, we'll 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.
spk04: Okay, and then so as you start bringing on more non-QM paper, I guess how fast should we expect to see the win rate start to elevate? Are you going to stay at the 12%, 13% level for now and the mix-up is just going to change, or do you foresee the non-QM channel being additive to what's currently being produced?
spk10: I'm hesitant to give you a forecast going forward of what the win rate is because you've got to add a few other factors in there. What's the margin? What's happening overall with the 10-year? What I'll say is, and what we learned when we were 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 we've got room there to move that around.
spk03: Okay. Thank you for taking my question. Thank you.
spk00: For the next question, we have John Armstrong from RCBC Capital Markets. John, your line is open.
spk01: Hey, thank you. Good morning, everyone. Good morning. Hey, Ken, one of your quotes in the release is you began to unlock value from AmeriHome. I'm just curious, what's next? Is it the things you referenced like mining the warehouse and HOA? 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?
spk10: Yeah, thanks, John. It's really everything I mentioned as a little bit of a prelude on the earnings call here. So, you know, 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. Done. As we're selling MSRs, let's see if we can give loan commitments to the buyers, which we've done this quarter.
spk03: Let's see if we can hold on to deposits. which we've done this quarter, but it's not a one-and-done thing, of course.
spk10: 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 warehouse lending cross-sell will happen towards the end of the year. We've got the Merihome folks working on the a jumbo mortgage program. We have them working on the non-QM program. And those are just some of the things I referenced. So we've 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 just gives us greater value in terms of valuation on the banking side. And that's how we've always thought about the deal, John.
spk01: Okay. Any of this stuff new? Have you found more synergies or things that you think could be larger than you originally anticipated?
spk10: Yeah. You know, actually, the first place where we saw one of the bigger opportunities where we said, oh, my God, we weren't thinking about this, was on the EBO side. That's the early buyout of loans from Ginnie Mae 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
spk03: probably all in around LIBOR 200.
spk10: Well, we took 10 basis point money and we put it against a large purchase of VBO loans, and now we're able to carry that VBO loans in a positive carry until we're ready to sell the loans down the road. So I think that one really surprised us at how quickly that opportunity appeared. And, frankly, it wasn't really discussed much during the due diligence period. We were doing more of the normal blocking and tackling conversations during due diligence.
spk01: 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 that profitability, or do we expect this to eventually be very much integrated in the consumer piece of the business?
spk10: Yeah, good question. For this year, we're going to continue to kind of give you the guidance of the $1.41 because it's a new business line. But we don't break out any of the other business lines. As I said, this is only 17% of our total net income. So as we start giving you the guidance, 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. We're talking to you a little bit more about the dollar 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.
spk09: The more it gets integrated, the more murky and difficult it is to try to distill it all. If we're cross-selling into their warehouse clients now and then we're getting direct sales to our mortgage portfolio holdings, What does the Maryland 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 P's in each side of the play.
spk10: Yeah, you know, it's interesting because you hit on a hot spot here for us as we were thinking about this not too long ago. If we take more, I think it's kind of good that we're keeping it on our balance sheet. We're getting that net interest in. period of time. Others could say, well, gee, I would have liked that gain to happen immediately because I want that immediate recognition. So we try to balance this stuff, and that's why we think it's much better to look at the overall total EPS number than it is just to look at a segment of the EPS.
spk01: Yeah, that's good. I was going to ask that, but I thought it was too deep for this call, but just in terms of the allocations.
spk03: But just one more for you, Doc, as a mortgage expert, and this is
spk01: 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 we model that line?
spk09: Well, so AmeriHome has been a large producer in this space. I think that their activity level can continue at what they've been running. That's their core business. We think that's certainly an opportunity. We think they can expand that, as we 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, AmeriHomes numbers, they have $15 million of net interest income in the quarter from mostly holding their health for sale loans. You know, of the other $38 million was core Western Alliance 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. But, you know, again, these cross-sells I think are really where the key is in terms of driving higher EPS.
spk01: Okay, okay. Thanks for everything. I think Suns in seven, you have to win it at home, and it has to be a little dramatic, so that's my call.
spk10: Well, we have like 3,000 Suns championship T-shirts on order, so we're already heavily vested into that. If not, we'll be selling them very cheaply to anyone who wants them. All right, thanks.
spk00: For the next question, we have Gary Tenner from D.A. Davidson. Gary, your line's open. Thanks.
spk08: Good morning. To get away from mortgage for a second, just want to kind of ask about the credit link notes for a moment. Obviously, as part of that transaction, you freed up a good amount of risk-based capital and some extra 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 AMHs whereas clients are increasing the warehouse business, or would you think of it more holistically as just creating additional capacity for wherever those higher risk weighted assets come from?
spk09: Yeah, I think it's more holistic in terms of what that is. I mean, again, 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, you know, does strengthen the credit quality of the bank and provides more insulation to it. We have somebody who's now in a first loss position, not us, if there's any losses, you know, within that portfolio. So, you know, we do get a relief on the, like you mentioned, the risk-weighted assets. You know, I think it's warranted because somebody else away from us An investor has first loss for anything that happens there. So in that sense, we're a stronger credit profile. But what we look at is, gosh, you know, now our RWA is lower. We can continue to grow. You know, 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.
spk08: Thank you. And then just a Ask about the $9 run rate that you've talked about, you know, the last couple of quarters exiting this year. Can 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, you know, 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, you know, as any additional details.
spk09: Well, again, it includes a normalized provision. It does not include releases or underfunding, nor does it include the reverse of another provision. another kind of global challenge like we had in 2020. But 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 don't perceive substantial credit losses coming at any time in the future. but it would cover charge-offs. So it would cover charge-offs and it would cover growth in a relatively low-risk growth profile as we're putting on the books in 2021 and as I think we're going to be looking at in 2022. Yeah, I would echo that.
spk10: I mean, I look backwards and look what our last year's charge-offs were and maybe use that as, you know, a guide as what 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. All right. Thanks, guys.
spk05: Thank you.
spk00: For the next question, we have David Chiaverini from Redbush Security. David, your line's open.
spk05: Hi, thanks. I had a follow-up on 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?
spk09: There is some seasonality. I'm going to say fourth quarter and maybe primarily driven by California. California property taxes are due And so, as you know, 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 skewed heavily for the overall, I think they're into 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, you know, relative counties there coming in. So yeah, there's, there's a piece with that.
spk05: Thanks for that. And then shifting to the resi mortgage portfolio that you're keeping, just wanted to clarify that what you are keeping historically and continues to be Jimbo and non QM.
spk09: Yeah, it does. I mean, what, so, so again, the trade that we're making is, is we're willing to give up liquidity for yield and strong asset qualities. We're not going to compromise on AQ, but 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 saleable to the GSEs, it's going to trade at a lower price, a higher yield. Something that is jumbo is going to trade at a lower price, higher yield. So we have, these are 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, you know, it trades at a lower price. And we're like, well, gosh, we can handle that. We want to put it on our balance sheet kind of going forward. Just let me note that just because it's not liquid to the GSEs 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.
spk00: We don't have any further questions.
spk10: Okay. I just wanted to thank you all for attending the phone call, and we look forward to speaking to you in a couple months from now. Thanks again, everyone.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.
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