Western Alliance Bancorp (WAL) Q1 2021 Earnings Call Transcript

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Western Alliance Bancorp (WAL 0.39%)
Q1 2021 Earnings Call
Apr 16, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorp for 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 the webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 3:00 PM Eastern Time, April 16 through May 16, 2021 at 11:00 PM Eastern Time, by dialing in 1-800-585-8367, using conference ID number 9757965.

The discussion during this call may 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 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.

Kenneth A. Vecchione -- President and Chief Executive Officer

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 line 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. Barring the company's strong fourth quarter performance and underlying fundamental trends, WAL earned 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 expense as improvement in asset quality and economic conditions drove a $32.4 million relief in 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 paydown 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 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 of businesses.

Turning to the first quarter balance sheet trends, outstating 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 activity throughout our traditional banking and regional footprint.

Our deposit growth was broad-based across our franchise, which pushed down our loan-to-deposit ratio of 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition. The continued excess liquidity from our improving deposit franchise is at the expense of short-term NIM compression, but it's a trade-off we are willing to accept for long-term value creation.

This impressive loan growth drove net interest income of $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 from 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 to $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 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'll let Dale take you through the financial performance.

Dale Gibbons -- Vice Chairman and Chief Financial Officer

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 [Phonetic] -- in [Phonetic] 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 the 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 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 lower credit risk. This was partially offset by modestly higher PPP fees, strong loan growth and liquidity deployment toward the end of the quarter.

Significantly, quarter-end balances for loans and investments were $3.3 billion higher than the average balances and yielded 3.5% more than our Fed account. Higher income from this already-deployed liquidity positions us well for Q2.

Interest-bearing deposit costs were reduced by 3 basis points in Q1 to 22 basis points, due to ongoing repricing 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 have generally stabilized at these levels.

Net interest income increased $2.5 million to $317.3 million during the quarter or 18% year-over-year as higher loan and investment balances offset net interest margin compression. NIM declined 47 basis points to 337 basis points as our purposeful strong deposit growth in advance of closing 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 32% from 22%. Given our higher end of quarter loan balances, healthy loan pipeline and ability to deploy this excess liquidity over the coming quarters into higher-yielding earning assets, we expect this margin drag to moderate while net interest income declines [Phonetic].

Additionally, a PPP loan yield of 4.9% benefited the NIM by 8 basis points, which was similar to the fourth quarter benefit. Cumulatively, over the remainder of 2021, we expect to recognize $15.4 million of BBB 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 and our ROA of 2.03% for the quarter, a decrease of 21 basis points compared to 2.24% for the year-ago period, partially impacted by a much larger asset base. This continued strong performance in 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 increased $1.7 billion or 6.1% to $28.7 billion and deposit growth of $6.5 billion brought 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 loan loss segments and DDA. In all, total assets have grown 49% year-over-year as we approach the $50 billion asset level, including AmeriHome.

Finally, tangible book value per share increased $2.12 over the prior quarter to $33.02, an increase of $6.29 or 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 in residential real estate loans of $675 million, supplemented by construction loans of $337 million and CRE non-owner-occupied loans of $27 million. Residential and consumer loans now comprise 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 and Round 2 3P [Phonetic] loans, originations were $560 million, which were nearly offset by $479 million from Round 1 of 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 ability to deploy funds into attractive assets in the near term, we purposefully looked 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 and the savings in money market of $2.9 billion. Market share gains in mortgage warehouse continued to be a significant driver of deposit growth during the quarter, along with robust activity in tech and innovation and seasonal inflows from HOA 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 up 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've discussed before, SM loans are a result of our credit [Indecipherable] 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 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 to $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 forecast loan growth in portfolio segments with low expected loss rates.

In all, total loan ACL to funded loans declined 20 basis points to 97 basis points or 1.03% when excluding PPP loans. For comparison purposes, the loan ACL to funded levels was 84 basis points at year-end 2019 before CECL adoption. We continue to generate capital and maintain strong regulatory ratios with tangible common equity to total assets of 7.9% weighed 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 $33.02, an increase of 23% in the past year.

I'll now hand the call back over to Ken.

Kenneth A. Vecchione -- President and Chief Executive Officer

Thanks, Dale.

Western Alliance is one of only a handful growth banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer-leading ROA and return on average tangible common equity with steady asset quality and low 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 AmeriHome that we found very attractive is that it provides a natural solution to WAL's excess liquidity. AmeriHome will be expanding its product ray 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 is 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 from these investments. Inclusive of AmeriHome, the efficiency ratio will rise to the mid-place [Phonetic].

Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecast 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 mention category, but we do not expect material migrations into substandard. 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 do not see any indicators that have implied material losses are on the horizon.

To conclude, Western Alliance is well positioned for balance sheet growth with steady asset quality. PPNR 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.

Questions and Answers:

Operator

[Operator Instructions]

We have our first question from the line of Brock Vandervliet from UBS. Your line is now open.

Brock Vandervliet -- UBS -- Analyst

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 -- Vice Chairman and Chief Financial Officer

Yes. So we're doing that now. They had about over -- a little over $3 billion worth of borrowings, and we're phasing those out kind of going forward. I think we're going to -- I think that's going to be done, say, by the sometime in the second quarter. What we're also going to be getting from AmeriHome is we're 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 prefer to have something that is low LTV but higher-yielding, which pushes you toward kind of a non-QM solution, which they're 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. 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're going to see that in 2021.

Brock Vandervliet -- UBS -- Analyst

Okay. And I think 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 -- Vice Chairman and Chief Financial Officer

We can't talk about their Q1 performance because they're part of a public enterprise that they haven't announced yet. 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, and to increasing that. And so they've been doing that as well. So they're pivoting appropriately. And we're standing by the $1.41 that we indicated, AmeriHome was going to benefit us in 2021. I think you're going to see $0.30 to $0.35 of that in the second quarter as we phase this in, including the -- just in part about, Brock, regarding being able to pay down their loans and stuff like that. So we're in that process. But that's where we are.

Kenneth A. Vecchione -- President and Chief Executive Officer

Hey Brock, it's Ken. I just want to add a few things. If you recall back to our earnings call in -- or our conference call in early February, when we announced the 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're using all those as we intended to in order to maintain our earnings estimates for AmeriHome.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay. Appreciate the color.

Operator

Thank you. We have our next question from the line of Casey Haire from Jefferies. Please go ahead.

Casey Haire -- Jefferies -- Analyst

Great. Thanks. Good morning, guys. 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're seeing?

Kenneth A. Vecchione -- President and Chief Executive Officer

So, you think it's conservative because we told you $800 million, and we came in at $6.5 billion?

Casey Haire -- Jefferies -- Analyst

Yes.

Kenneth A. Vecchione -- President and Chief Executive Officer

Amazing. [Phonetic] Look, we bumped it up to $1 billion to $1.5 billion. We've been performing at this level or better for the last six to eight quarters. We have some real visibility into the pipeline based on either oral commitments or things we're just finishing up the paperwork on now. So yes, there is a possibility to exceed both the deposit guide as well as the loan guide.

Casey Haire -- Jefferies -- Analyst

Okay. And on -- so 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're still probably at around 7% of cash for that. What is your target level? How comfortable are you driving that to what level?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. 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, and 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're going to have a couple of quarters where we're going to right-size our loan-to-deposit ratio. It wasn't that long ago that we were in the 90s. Now we're down at 75 [Phonetic]. Well, doing that means that loan growth will be well in excess of $1.5 billion as we increase that load-to-deposit ratio. That's going to get under way in the next -- in the not too distant future.

Casey Haire -- Jefferies -- Analyst

Okay. Great. And just some follow-ups on the NIM side of things. The new money loan yields that you're seeing in on mortgage as well as the new money yields on securities purchases?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. So the securities purchases, the yields that we got were -- was 2.20%. And new loan yields that we're putting on are running about 20 to 25 basis points lower than what the average is. I think we are experiencing pricing pressure. I think that the velocities that the industry and the economy has come out of this, pandemic has resulted in kind of reduced expectations for credit losses industrywide, and that's being reflected in price. But again, what we've 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 -- Jefferies -- Analyst

Okay. Just to clarify, Dale. So 25 -- I mean, your existing loan yield in the quarter was around 4.6%. I would think resi mortgage is lower than that, right, or...?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yeah, no. Resi mortgages that we are putting on our books are around 3%.

Casey Haire -- Jefferies -- Analyst

Got you. Okay. Thank you.

Operator

Thank you. Your next question is from the line of Brad Milsaps from Piper Sandler. Your line is now open.

Brad Milsaps -- Piper Sandler -- Analyst

Hey. Good afternoon, guys.

Kenneth A. Vecchione -- President and Chief Executive Officer

Hey Brad.

Brad Milsaps -- Piper Sandler -- Analyst

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 stand-alone basis going forward, or is it all kind of interconnected?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Well, so I mean, kind of our core number, I wouldn't say is AmeriHome dependent. I mean we've been buying mortgages from other sources that was -- happened 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're 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 -- Piper Sandler -- Analyst

Yes. I guess, maybe asked differently, Dale, is are the two sort of exclusive of one another? You're 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 -- Vice Chairman and Chief Financial Officer

Yes. We increased our loan guidance 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 $1 billion. So it's imparted acknowledgment of that. So we can do this without AmeriHome, but AmeriHome gives us I don't know, more confidence to be able to execute a better price point for the residential real estate we pick up. They're going to be expanding their product line, that's going to give us kind of even more volume. So we're -- AmeriHome doesn't affect the $1 billion to $1.5 billion, if that's kind of what you're getting at, Brad.

Brad Milsaps -- Piper Sandler -- Analyst

Yes. Got it. That's helpful. And then I know when you announced the deal, your intention was to sell some of the MSR. Did this come in line with about what you were thinking? Sort of how does that impact kind of their run rate in terms of gain on loan sale margin going forward?

Kenneth A. Vecchione -- President and Chief Executive Officer

Yes, 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 these -- getting this large amount of our books that allows us to do smaller MSR transactions going forward, which we think we should get better pricing on.

Brad Milsaps -- Piper Sandler -- Analyst

Okay, great. Thank you, guys.

Operator

Thank you. Your next question is from the line of Chris McGratty from KBW. Please go ahead.

Christopher McGratty -- KBW -- Analyst

Great. Thanks. Good afternoon. Dale, I'm wondering if you can parse out the $6.5 billion of deposit growth by your verticals, specifically tech and innovation, HOA and kind of mortgage?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. So the HOA group was up about... Okay. So the regions all in did about $1.9 billion, all right? Warehouse lending did about $2.1 billion. Tech and innovation did 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 last year. So those are the big drivers of HOA -- of deposit growth, Chris.

Christopher McGratty -- KBW -- Analyst

Okay. Great. And then...

Dale Gibbons -- Vice Chairman and Chief Financial Officer

I should just add -- I'm sorry, there's a couple of things in there, too, which we're excited about. We never give you the names of our new 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're getting excited about what these businesses can do for us.

Christopher McGratty -- KBW -- Analyst

Okay. That's great color. In terms of the C&I growth, can you -- maybe I missed it in your prepared remarks, did you -- I know last quarter, you said that your guidance wasn't inclusive of growth in the warehouse. But did you tell us what the warehouse balance changes were in the commercial book?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Are you asking -- I'm not certain of your question, ask it again.

Christopher McGratty -- KBW -- Analyst

Sure. The mortgage warehouse and how much of that in the lending side, how much of the growth this quarter was warehouse?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Okay. All right. The warehouse lending this quarter, and we include three items in there. We include warehouse lending, MSR lending and our Node 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 its ending balance of 2020. But we keep telling you, we keep winning share there. And it manifests itself here in Q1, as you can see.

Christopher McGratty -- KBW -- Analyst

Okay. Thank you very much.

Operator

Thank you. The next is Gary Tenner from DA Davidson. Please go ahead.

Gary Tenner -- DA Davidson -- Analyst

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 in the quarter?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

We have about $1.5 billion in loans remaining, with including two, of course.

Gary Tenner -- DA Davidson -- Analyst

Right. Got you. Okay. In terms of -- as you're kind of thinking forward and knowing that, obviously, adding more resi mortgage will change this. But can you kind of just run through from a loan sensitivity perspective, what amount of your loans are variable rate today and kind of status of into money floors as we start thinking a little further out to perspective rate hikes?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

So today, the floors are active in the preponderance of our portfolio. So we're behaving as if we're 80% fixed. We have, I think, an interesting asymmetrical profile, whereby if rates go lower, we see very little contraction of net interest income because the rest of the floors. But if we drive our loan yields become even more asset sensitive because they'll be lifting off of the floors kind of going forward. So it's asymmetrical benefit for us relative to where we are. So we -- yes, 80% of our book today is behaving as if it's fixed rate.

Gary Tenner -- DA Davidson -- Analyst

Okay. And just in terms of -- if there is -- is it one rate hike, two rate hikes, and so there's an actual upward benefit in those [Indecipherable]?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. I mean, it's staggered. Some are immediate. The others are 100 basis points away. But I would say, on average, you're going to need to see probably two rate increases before you're going to start seeing kind of notable improvement in terms of loan yields.

Kenneth A. Vecchione -- President and Chief Executive Officer

Okay. Even though these loans are variable, we're putting them on as a floor, so they're looking like they're fixed rate loans today.

Gary Tenner -- DA Davidson -- Analyst

Okay. Great. And then just last question. You talked about mortgage warehouse and continuing to win business there, taking share. And obviously, the warehouse deposit balances grew pretty significantly. Can you just talk about the kind of sensitivity of mortgage warehouse-related deposits relative to overall volume -- overall mortgage volume?

Kenneth A. Vecchione -- President and Chief Executive Officer

So warehouse lending, I think, started out 10, 12 years ago as an interesting idea, and we 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. We thought it's primarily of the service we deliver and the fact that we moved upscale, upmarket in dealing with some of the more sophisticated clients. They're feeling more comfortable consolidating more and more of their deposits with us, all right? And there's -- some of the large clients, there's a disproportion between -- we have much more in deposits than we have in their loan balances.

But we're 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've got -- I think I said this maybe in last earnings call, if you think of us as an airport, we've got planes circling overhead looking to 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 -- Vice Chairman and Chief Financial Officer

I think it's important to note -- to remember that the deposit balances aren't really the business. So it's not operating accounts from these. So let's say the refi business contracts dramatically. That can affect the actual balances of that enterprise, but that is a very small piece of the deposit balances we have. The 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 MSRs drive the deposit balances, and that tends to be much more stable, and because people maintain mortgages on their house.

Gary Tenner -- DA Davidson -- Analyst

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 -- Wells Fargo -- Analyst

Hi, good morning. Maybe just following up on that last mortgage warehouse discussion. I guess, how sensitive is that business to speaking to the yield curve and if broader industry trends start to slow down, with the circling runway, is that kind of irrespective of what's happening industrywide as you onboard new clients, or if there is a broader slowdown, we should expect to see volumes and growth rates slow as well as the [Indecipherable]?

Kenneth A. Vecchione -- President and Chief Executive Officer

Yes. So good question there. When we came into 2021 as a planning year for our overall growth, we did not have warehouse lending stepping up in terms of balances. But well, obviously, we had a good first quarter, and we're going to continue that trend going into quarters two, three and four. What we're seeing is two things. One, there's just a natural rise in terms of taking market share with the clientele that we have today. And then on top of that, we will get a benefit from penetrating the AmeriHome client list.

So they've got, as I said, 720 clients. We've got about 100 or so that overlap and we're 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're willing -- we give you a line of credit, just call it $25 million for argument's sake, and we'll also buy -- after you accumulate loans on that line, we'll 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 -- Wells Fargo -- Analyst

Okay. That's helpful. So as we start thinking about your new loan growth guidance, it shouldn't just be what you've been putting on existing plus the rest of the increased guide coming directly from resi. We can actually see mortgage warehouse continue to ramp higher and be a larger component of that growth items as well.

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Well, I just want to clarify what you said. The $1 billion to $1.5 billion is basically business as we do it today, all right? So you'll see our resi repurchases continue, and you'll see warehouse lending grow as if we never had the AmeriHome acquisition. The AmeriHome acquisition, as we ramp that up, will provide either comfort to achieving that $1 billion to $1.5 billion, or if we do it really well, it will help us exceed that number.

Timur Braziler -- Wells Fargo -- Analyst

Okay. That's helpful. 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 could we envision that becoming?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

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 this space is, I mean, very good quality, performance. Now we've got kind of an unlimited channel into that. There are some other kind of cross-sell opportunities, some of which we've talked about that we can pick up. So, we're definitely going through 20% and toward the immediate, at least for now.

Kenneth A. Vecchione -- President and Chief Executive Officer

That's a very strong book we have, right? 759 FICO. BTI of about between 334 and 336, below 70% LTV. We could probably give you a list of all the folks that have been -- gone 90-day delinquents. It's usually just an unusual event, and we've not had a loss in the book. So it's -- it really helps bring a lot of asset quality to -- good asset quality to our loan composition.

Timur Braziler -- Wells Fargo -- Analyst

Okay. Thank you. And then just last one for me. Back on the deposit side. I'm 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 rolls in the next month or two?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. That's more of a consumer phenomenon, I would say. And our liquidity has been coming in strong all through '20. Remember, 2020, we did $9.1 billion of liquidity, which far exceeded our best, best year ever. And this quarter, we did $6.5 billion, which -- just in one quarter.

Timur Braziler -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

Thank you. Your next question is from the line of David Chiaverini from Wedbush Securities. Please go ahead.

David Chiaverini -- Wedbush Securities -- Analyst

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?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes, it will absolutely slow. What we did is, is we've 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're 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 could put it out into low LTV whole loans or we can go into the securities book and as I said, we got 2.20%. So it's a little bit of a compromise there because it is going to take us sometime within this year. But sometimes, to deploy the liquidity that we have and also the new deposit growth that we expect to continue to generate.

But over time, yes, 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 and the security side is largely behind us. We're 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 -- Wedbush Securities -- Analyst

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 on 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 -- Vice Chairman and Chief Financial Officer

Yes. I mean, again, what we're focused on is we're 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. 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% to that on a -- without risk. We're not seeing those opportunities at scale at that price point. So what are we doing? Well, we're going to residential where we have unlimited, and that's 2 points less. But if I add mortgage loans, at 3% and our margin is at 3.37%, that's going to decrement that margin a little bit. But instead, if I think about it, I've got investments at 10 basis points, something that's already on the books, and I can put that out of 3%, that would help the margin even though that spread is actually lower because I'm taking it from 10 basis points to 300.

So the combination of those two things. Is it possible the margin comes down a little bit, yes, I think that would actually be likely a good thing because what it really means is that we're continuing to move the fundamental footings of the balance sheet that we can then deploy into earning assets.

Kenneth A. Vecchione -- President and Chief Executive Officer

I just want to add one other thing 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're 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'm very proud of this quarter, with two less days, we made more in net interest income that we made in Q4. So our strategy is being executed upon. And as 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 upgrade our guidance as to what we're going to bring in.

David Chiaverini -- Wedbush Securities -- Analyst

That all makes sense. And then a last housekeeping item. I think you mentioned merger charges, you're expecting $15 million, roughly $15 million, mostly in the second quarter. 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 -- Vice Chairman and Chief Financial Officer

Yes. Yes. Ken was alluding to that earlier in terms of the pricing that we got on the disposition of the MSR book. I mean, the preponderance of those fees that we're going to be incurring are basically deconversion costs from our outsourced mortgage servicer to the purchaser. That transaction should close within the next few weeks.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Operator

Thank you. The next is Michael Young from Truist. Your line is now open.

Michael Young -- Truist -- Analyst

Hey. Thanks. Good morning.

Kenneth A. Vecchione -- President and Chief Executive Officer

Good morning.

Michael Young -- Truist -- Analyst

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 your more muted and loan growth coming more from commercial going forward, so we're kind of stay more stable?

Kenneth A. Vecchione -- President and Chief Executive Officer

Yes. That was really -- it's a numerating denominated thing. What I was trying to say is the balance is going to stay relatively flat. With the way we're growing, you can see the ratio drop. But the balance, we think, will be relatively flat. A lot of that, as you know, with CECL is just driven by the economic outlook, which can really move the numbers. But what should not be lost upon our shareholders, investors, the analyst community, is that 42% of our portfolio is in loans or asset categories that we've never ever had a loss on -- or loss in, I should say. And that's where it also drives the CECL calculation.

Michael Young -- Truist -- Analyst

Okay. Great. And maybe just as a follow-up, just thinking about the pace of growth relative to capital, capital level has gotten a little skinny even with the issuance this quarter. I know PPP kind of has an impact on the TCE ratio. But just should we think about you guys are willing to grow if growth is there and you'll raise capital as needed, or would you temper some of the mortgage growth areas that may be more of a flex area on the balance sheet to stay within kind of capital ratios?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

No if we need capital to grow, I think you can look for us to do the right thing and raise capital.

Michael Young -- Truist -- Analyst

Okay. And if I can sneak in one last one, just for the 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're building. But has this changed your view on that equation or what you'd like to do on a go-forward basis?

Kenneth A. Vecchione -- President and Chief Executive Officer

No, not at all. I mean, the AmeriHome team has a couple of things that they like to look at in terms of new opportunities, and I mentioned them, non-QM channel, jumbo channel are just two of them going 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're continuing to work on those opportunities now. And we're 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 -- Truist -- Analyst

Okay. Thanks.

Operator

Thank you. Your next question is from Tim Coffey from Janney. Please go ahead.

Tim Coffey -- Janney -- Analyst

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 -- Vice Chairman and Chief Financial Officer

Yes. 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. When we stop 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 where we see something kind of well in excess of $1.5 billion.

Tim Coffey -- Janney -- Analyst

Okay. And on the efficiency ratio is kind of -- you think as we go -- given the growth we saw this quarter, as you go through the year, adding AmeriHome and such, do you think 45% is going to be kind of a new level for you?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. It's going to be 45%, 46-ish or something in there, mid-40s. I think that's kind of where it's fairly stable at that level, something under 50% for sure, we believe.

Tim Coffey -- Janney -- Analyst

Okay. And can you talk a little bit about what it is about Western Alliance that allows you to maintain kind of expense growth at a level well below asset growth?

Kenneth A. Vecchione -- President and Chief Executive Officer

Yes. So let me try to -- 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 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're just growing revenues, as I said upfront, four times faster than expenses. And that too will keep the efficiency ratio in line.

Tim Coffey -- Janney -- Analyst

Great. Those are my questions. Thank you very much.

Operator

Thank you. The next question is from Jon Arfstrom from RBC Capital Markets. Your line is now open.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning, everyone.

Kenneth A. Vecchione -- President and Chief Executive Officer

Good morning, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Dale, a 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 end of the second quarter and maybe end of the year? Can you help us with that a bit?

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Yes. So I mean, it's something we're trying to get under way now. I think that at the end of the second quarter, I expect we maybe we'll be close to where we are presently, maybe a little bit better with the $1 billion, $1.5 billion in growth in each. I think we're going to be able to get these kind of new products out with AmeriHome. Maybe by the end of the second quarter into third, and then they see billions of dollars, certainly in volume. And so we can move rapidly on that. I personally would like to be kind of at a 90% range back to loan-to-deposit ratio at the end of the year.

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 03/31, we had $3.5 billion -- $3.4 billion of loan growth at a 3.5% spread. That's already in the books as of 03/31. And that generates about nearly $10 million a month of increased PPNR just from deploying that out of 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 -- RBC Capital Markets -- Analyst

I was going to ask later [Speech Overlap].

Kenneth A. Vecchione -- President and Chief Executive Officer

I just want to punctuate what Dale said for a moment there, Jon. Everyone's talking about the liquidity and loan-to-deposit ratio. We're talking about net interest margin versus net interest income. What Dale just said is the crux of how we've structured the business, that the $3.5 billion that we just put out and the $10 million that we're making a month pre-tax, $30 million a quarter. That is very, very powerful and that's what leads us to 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 -- RBC Capital Markets -- Analyst

Okay. I was going to ask if you think numbers should go up, but you answered that for me. I do want to ask one more question and it won't be on deposits. But can you talk about lending outside of your national businesses, some of the pipeline trends and what you're seeing in construction, just as a kind of a gut check on what you're thinking on the overall economy?

Kenneth A. Vecchione -- President and Chief Executive Officer

Yes. So actually, what we're seeing inside of our footprint is exactly what we're seeing outside of our footprint. So on the construction side, residential, that's very hot for us at this moment. Homes take five to seven months to build, they're extending out a little bit longer than that because of some labor shortages and some of the cost is a little bit higher. But once they're built, well, they're sold rather quickly. So one of our struggles, of course, is how you keep those really good loans outstanding for a longer period of time. But the construction side, single-family residences are really hot. Built-to-rent opportunities, which for us are mostly in our footprint, more so than outside of our footprint. Arizona seems to be the build-to-rent capital, the outskirts of Phoenix in the West Valley seems to be very, very active, and we're doing a number of deals there.

I'm 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 R. Bruckner -- Chief Credit Officer

Well, sure. Residential and commercial both, I think there were definitely some things that sat on the shelf last year with the uncertainties of the pandemic. So projects delayed. So we're 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 food groups within our real estate portfolio. So we're not seeing trends in rent payment that are alarming. We're seeing things that give us comfort. And we're maintaining a very close and direct monthly or weekly dialogue even with our borrowers that gives us that information. So I think outlook is very, very positive for us across all the segments of real estate [Speech Overlap] residential.

Kenneth A. Vecchione -- President and Chief Executive Officer

And we're very active in the net migration in states, as you would expect, as they're 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've started or financed a number of spec projects for industrial warehomes -- warehouses. And before the shell is even completed, they're already leased up and no longer are they spec. They're all pre-leased. So that's -- that give you an example of how hot of the CRE market is for resi.

Tim R. Bruckner -- Chief Credit Officer

Just a data point on that, that portfolio is stabilizing and has stabilized faster now than at any time in the past for years, our portfolio. So it is moving very quickly, yes.

Kenneth A. Vecchione -- President and Chief Executive Officer

Jon, we do [Phonetic] have time to give you a short answer, and we [Indecipherable] long one.

Jon Arfstrom -- RBC Capital Markets -- Analyst

No, that's fine. And I guess just the one thing, you did flag this, and I want to make sure it's out there, but you did say you're expecting some movement in special mention and classified, but it doesn't sound like you're concerned about credit at all.

Kenneth A. Vecchione -- President and Chief Executive Officer

The answer -- the short answer is yes. We've 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 -- RBC Capital Markets -- Analyst

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.

Kenneth A. Vecchione -- President and Chief Executive Officer

Thank you. Listen, thanks, everyone, for dialing in and listening to our story. We're feeling very good about it. We're very proud of the results, and we look forward to talking to you 90 days from now about the second quarter. Thanks again, and everyone, enjoy the weekend.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Kenneth A. Vecchione -- President and Chief Executive Officer

Dale Gibbons -- Vice Chairman and Chief Financial Officer

Tim R. Bruckner -- Chief Credit Officer

Brock Vandervliet -- UBS -- Analyst

Casey Haire -- Jefferies -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Christopher McGratty -- KBW -- Analyst

Gary Tenner -- DA Davidson -- Analyst

Timur Braziler -- Wells Fargo -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

Michael Young -- Truist -- Analyst

Tim Coffey -- Janney -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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