Earnings Call Transcript
Western Alliance Bancorporation (WAL)
Earnings Call Transcript - WAL Q1 2021
Operator, Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the First Quarter 2021. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via webcast through the company’s website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern Time, April 16th through May 16, 2021 at 11 p.m. Eastern Time by dialing in 1-800-585-8367, using conference ID number 9757965.
Ken Vecchione, President and CEO
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. The continued growth in Western Alliance’s national commercial business strategy drove financial results and balance sheet growth through record quarterly highs to kick off 2021. Mirroring the company’s strong fourth quarter performance and underlying fundamental trends, WAL earned our net income of $192.5 million and earnings per share of $1.90 for the quarter, up $108 million year-over-year and nearly flat to Q4. Net revenue expanded 4.5 times the rate of expenses as improvement in asset quality and economic conditions drove a $32.4 million release in the loan loss reserve this quarter. Our focus continues to be on PPNR growth, which rose approximately 31% year-over-year to $202 million, while marginally lower than last quarter due to two fewer days. Regarding the acquisition of AmeriHome, I am pleased that the closing took place approximately three weeks ahead of schedule. While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergies with the pay down of external credit lines.
Dale Gibbons, CFO
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 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, the preponderance of which will be incurred in Q2 as integration continues. Net interest income grew $2.5 million during the quarter to $317.3 million, an increase of 18% year-over-year, primarily as a result of our significant balance sheet growth. However, while average earning assets grew $5.7 billion, the relative proportion held in cash and lower yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy excess liquidity into AmeriHome-generated assets and higher yielding commercial loans. Quarter-over-quarter, our loan-to-deposit ratio fell to 75% from 85% in Q4, as we proactively look to grow low-cost deposits as dry powder for future loan growth. Non-interest income fell $4.1 million to $19.7 million from the prior quarter, mainly driven by smaller fair value gain adjustments in our securities measured at fair value, but partially offset by $7.3 million in warrant income. Non-interest expense increased $2.8 million, mainly due to higher deposit costs as lower rates were offset by higher average balances. Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $202 million, up over 30% from a year ago. Turning now to net interest drivers, as our strong core deposit growth continued throughout the quarter, we look to 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 classes with generally lower yields than the remainder of the portfolio and low credit risk. This was partially offset by modestly higher PPP fees, strong loan growth, and liquidity deployment towards the end of the quarter.
Ken Vecchione, President and CEO
Thanks, Dale. Western Alliance is one of only a handful of growth banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer leading ROA and return on average tangible common equity, with steady asset quality and lower net charge-offs. Going forward based on our current pipelines, we expect loan and deposit growth of $1 billion to $1.5 billion per quarter, which will drive higher net interest income and PPNR growth. We expect NIM pressure to subside through the deployment of liquidity into attractive asset classes. One of the characteristics of AmeriHome that we found very attractive is that it provides a natural solution to our excess liquidity. AmeriHome will be expanding its product array to include higher yielding non-QM and jumbo loans that fit our established credit box. Placing and holding these loans on our balance sheet enhances our existing residential mortgage purchase program, and it’s 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. Overall, the efficiency ratio will rise to accommodate our employees. Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecasts incorporating risk for tail economic events, which is consistent going forward and 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 sub-standard. We believe the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that imply material losses are on the horizon. To conclude, Western Alliance is well-positioned for balance sheet growth with steady asset quality, and 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.
Operator, Operator
Thank you. You have our first question from the line of Brock Vandervliet from UBS. Your line is now open.
Brock Vandervliet, 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 absorb this excess liquidity in the near term?
Dale Gibbons, CFO
We are currently working on this. They had slightly over $3 billion in borrowings, and we are gradually phasing those out. I anticipate this will be completed by the second quarter. Additionally, AmeriHome will allow us to swiftly deploy mortgages that we want on our balance sheet. We would prefer lower LTV but higher yielding options, which leads us to consider non-QM solutions that they will also be introducing. As we gain the capability to do this, I believe in the upcoming quarters that will become evident. The substantial deposit growth we experienced last quarter was not coincidental; we intentionally increased our deposits because we now have near-term access to a virtually limitless supply of high-quality asset deployment. I expect to see the results of this in 2021.
Brock Vandervliet, Analyst
Okay. I think the situation with AmeriHome's gain on sale has become a bit more challenging since the announcement of the deal. Can you provide any insights on their gain on sale for Q1 and how it compares to the previous quarter or the same period last year?
Dale Gibbons, CFO
We are unable to discuss their Q1 performance due to it being part of a public enterprise that has not yet been announced. However, we did mention that AmeriHome has the capability to adapt. We anticipated that margins would decrease, and that is currently happening. They also have the ability to increase their win rate, which was around 7%, and they have been working on that as well. Therefore, they are making the necessary adjustments, and we stand by the $1.41 that we indicated. We expect AmeriHome to provide benefits in 2021, with an estimated $0.30 to $0.35 of that amount seen in the second quarter as we gradually implement it, which includes aspects like paying down their loans. That summarizes our current situation.
Ken Vecchione, President and CEO
Hey, Brock. It’s Ken. I just want to add a few things. If you recall back to our earnings call or our conference call in early February when we announced AmeriHome, we said that there are other opportunities to earn more than the accretion numbers that we provided. We held those back because of some uncertainty that we saw coming potentially with rising rates, and we are using all of those as we intended to in order to maintain our earnings estimates for AmeriHome.
Brock Vandervliet, Analyst
Got it. Okay. Appreciate the color.
Operator, Operator
Thank you. You have our next question from the line of Casey Haire from Jefferies. Please go ahead.
Casey Haire, Analyst
Great. Thanks. Good morning, guys.
Ken Vecchione, President and CEO
Good morning.
Casey Haire, Analyst
I wanted to discuss the deposit growth. You really exceeded expectations this quarter, even with the updated guidance. It seems like the conditions are still favorable for this trend to continue. Do you think the deposit growth projections might be conservative given the current environment and what you are observing?
Dale Gibbons, CFO
So, you think it’s conservative because we told you $800 million, and we came in at $6.5 billion?
Casey Haire, Analyst
Yeah.
Dale Gibbons, CFO
Maybe. Look, we bumped it up to $1 billion to $1.5 billion. We have been performing at this level or better for the last six quarters to eight quarters. We have some real visibility into the pipeline based on either oral commitments or things we are just finishing up the paperwork on now. So, yeah, there is a possibility to exceed both the deposit guide as well as the loan guide.
Casey Haire, Analyst
Okay. And on, sorry, on the cash balance at 15% on average in the quarter, and I realize that you guys did get to work in the back half of the quarter with securities and loans. But even with the paydown on the AmeriHome debt, you are still probably at around 7% of cash for this. What is your target level? How comfortable are you driving that to what level?
Dale Gibbons, CFO
Yeah. So, I mean the $1 billion to $1.5 billion is what we consider to be kind of a core number, but as we deploy that and pull that number down, that number can fall substantially. And frankly, the securities book is at least a third or 40% higher than it needs to be too. Now that’s better than cash, but not as good as some of these other loan-based alternatives. So, I do expect that we are going to have a couple of quarters where we are going to right-size our loan-to-deposit ratio. It wasn’t that long ago that we were in the 90s. Now we are down at 75. Well, doing that means that loan growth will be well in excess of a $1.5 billion as we increase that loan-to-deposit ratio. That’s going to get underway in the not too distant future.
Casey Haire, Analyst
Okay. Great. And just some follow-ups on the NIM side of things, Ken, the new money loan yields that you are seeing in mortgage as well as new money yields on securities purchases?
Dale Gibbons, CFO
Yeah. So, the securities purchases, the yields that we got was at 2.20%, and new loan yields that we are putting on are running about 20 basis points to 25 basis points lower than what the average is. I think we are experiencing pricing pressure. I think that the velocity that the industry and the economy has come out of this pandemic has resulted in kind of reduced expectations for credit losses industry wide, and that’s being reflected in price. But again, what we have got the ability to do is to drive volume and to shift our focus in terms of where the best kind of risk adjusted returns will be.
Casey Haire, Analyst
Okay, just to clarify, Dale, your existing loan yield in the quarter was around 4.6%. I would think residential mortgages were lower than that, right?
Dale Gibbons, CFO
Yeah. No. Resi mortgages that we are putting on our books are around 3%.
Casey Haire, Analyst
Got you. Okay. Thank you.
Dale Gibbons, CFO
Yeah.
Operator, Operator
Thank you. Your next question is from the line of Brad Milsaps from Piper Sandler. Your line is now open.
Brad Milsaps, Analyst
Hey. Good afternoon, guys.
Ken Vecchione, President and CEO
Hi, Brad.
Brad Milsaps, Analyst
I wanted to ask some questions about AmeriHome. I'm curious how much the recent changes and increase in loan guidance are related to your decision to retain more production from AmeriHome. If that's the case, will it affect what AmeriHome contributes on its own in the future, or is everything interconnected?
Ken Vecchione, President and CEO
Our core number is not heavily reliant on AmeriHome. We have been sourcing mortgages from various origins, which has been the case in both the first quarter and last year. What AmeriHome provides us is a more profitable method of doing this compared to other parties, allowing us to keep it in-house. Additionally, we are fully equipped to take advantage of this opportunity. From AmeriHome, we also expect to optimize our loan to deposit ratio in a way that positively impacts our net interest income.
Brad Milsaps, Analyst
Yeah. I guess maybe ask differently, Dale, are the two sort of exclusive of one another? You are increasing loan guidance, but then you still think AmeriHome can contribute what it was going to when you initially announced this back in February?
Dale Gibbons, CFO
We have increased our loan guidance regardless of AmeriHome. Last year, without AmeriHome and during the pandemic, we never went below $1 billion, so this is partly an acknowledgment of that. We can achieve this without AmeriHome, but having them gives us more confidence to secure a better price point for the residential real estate we acquire. They are set to expand their product line, which will provide us with even greater volume. AmeriHome does not influence the $1 billion to $1.5 billion range, and that’s essentially the point we want to convey.
Brad Milsaps, Analyst
Yeah.
Dale Gibbons, CFO
Yeah.
Brad Milsaps, Analyst
Got it. That’s helpful. I know when you announce a deal your intention was to sell some of the MSR. Would this align with what you were thinking, and how does that impact their run rate in terms of gain on loan sale margin going forward?
Ken Vecchione, President and CEO
Yeah. This is Ken. We actually sold the MSRs for more money than we had anticipated. So we feel good about that in terms of the transaction by getting this large amount of our books allows us to do smaller MSR transactions going forward, which we think we should get better pricing on.
Brad Milsaps, Analyst
Okay. Great. Thank you, guys.
Operator, Operator
Thank you. Your next question is from the line of Chris McGratty from KBW. Please go ahead.
Chris McGratty, Analyst
Great. Thanks. Good afternoon. Dale, I wonder if you can break out the $6.5 billion of deposit growth by your verticals specifically tech and innovation and HOA and kind of mortgage?
Dale Gibbons, CFO
Yeah. So the HOA group was up about…
Ken Vecchione, President and CEO
Got update.
Dale Gibbons, CFO
The regions collectively accounted for approximately $1.9 billion. Warehouse lending contributed around $2.1 billion. Tech and innovation generated about $760 million. Our HOA business reached just under $700 million, which is nearly as much as it earned throughout the entire previous year. These are the primary factors driving deposit growth, Chris. I should just add that there are a couple of things we are excited about. We never disclose the names of our deposit businesses, but our first deposit business grew by $500 million in Q1, and the second deposit business, which we've always said was trailing behind the first, grew by $50 million. So we are getting excited about what these businesses can do for us.
Chris McGratty, Analyst
Okay. Great. And then…
Dale Gibbons, CFO
I should just add that there are a couple of things we are excited about. We never disclose the names of our deposit businesses, but our first deposit business grew by $500 million in Q1, and the second deposit business, which we always said was behind the first, grew by $50 million. So we are getting excited about what these businesses can do for us.
Chris McGratty, Analyst
Okay. Great. And then…
Dale Gibbons, CFO
So the warehouse lending this quarter and we include three items in there, we include warehouse lending, MSR lending and our note finance, which is a separate business, but we have it on the warehouse lending. That collectively grew $560 million for this quarter. And we came in with an understanding this year that we keep warehouse lending basically flat to exactly balance of 2020. But we keep telling you we keep winning share there and it manifests itself here in Q1 as you can see.
Chris McGratty, Analyst
Okay. Thank you very much.
Operator, Operator
Thank you. The next question is from Gary Tenner from D.A. Davidson. Please go ahead.
Gary Tenner, 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 for the quarter?
Dale Gibbons, CFO
We have about $1.5 billion in loans remaining.
Gary Tenner, Analyst
Okay.
Dale Gibbons, CFO
Including two of course.
Gary Tenner, Analyst
Right. Got you. Okay. In terms of, as you kind of thinking forward and knowing that obviously adding more resi mortgages will change this. But if you kind of just run through from a loan sensitivity perspective, what amount of your loans are variable rate today and kind of status within the money floors as we start thinking a little further out to prospective rate hikes?
Dale Gibbons, CFO
Today, the floors are active in most of our portfolio, leading us to act as if we are 80% fixed. We have an interesting asymmetric profile where if interest rates decrease, we experience very little reduction in net interest income due to the rate floors. Conversely, if rates increase, our loan yields become more sensitive because we will be moving off the floors. This creates an asymmetric advantage for us based on our current position. Currently, about 80% of our book is behaving as if it's fixed rate.
Gary Tenner, Analyst
Okay. And just in terms of if there is one rate hike, two rate hikes until there’s an actual upward benefit in those variable rate on yield?
Dale Gibbons, CFO
It's quite remarkable. Some changes will happen immediately, while others may require an increase of about 100 basis points. However, I would suggest that on average, we will likely need to see around two rate increases before we start noticing significant improvements in loan yields.
Ken Vecchione, President and CEO
Okay. As you know these loans are variable. We are putting them at the floor so they are looking like they are fixed rate loans today.
Gary Tenner, Analyst
You mentioned the mortgage warehouse and the ongoing success in winning business, noting that warehouse deposit balances increased significantly. Can you elaborate on how mortgage warehouse-related deposits are sensitive to overall mortgage volume?
Ken Vecchione, President and CEO
We have been actively lending for about 10 to 12 years, and it has evolved into a key strategic asset for us. Our deposit growth has exceeded expectations, primarily due to the quality of our service and our focus on larger, more sophisticated clients. These clients are increasingly comfortable consolidating their deposits with us, resulting in a significant gap where we hold more deposits than we have in outstanding loan balances. We are successfully increasing our market share in both loans and deposits. Some of our competitors are not meeting service level expectations, which presents us with an opportunity. As I mentioned in our last earnings call, we have many potential clients looking for opportunities to work with us, and our challenge is to efficiently onboard both deposit and loan business.
Dale Gibbons, CFO
I think it’s important to note to remember that deposit balances aren’t really the business. So it’s not operating accounts from the source. So let’s say the refi business contracts dramatically. That can affect the actual balances of the enterprise, but that is a very small piece of the deposit balances we have. But both that balances we have that drive that number is the escrow relationships and that’s based upon the mortgage servicing that some of these enterprises own. So you can see volatility in the origination side. But the MSR drives the deposit balances and that’s tends to be much more stable as people maintain mortgages on their houses.
Gary Tenner, Analyst
Great. Thank you.
Operator, Operator
Thank you. The next question is from Timur Braziler from Wells Fargo. Your line is now open.
Timur Braziler, Analyst
Hi. Good morning. Maybe just following up…
Ken Vecchione, President and CEO
Hi.
Timur Braziler, Analyst
… on that last mortgage warehouse discussion. I guess how sensitive is that business to steepening yield curve and if broader industry trend start to slow down? With the circling runway is that kind of irrespective of what’s happening industry-wide as you onboard new clients or if there is a broader slowdown we should expect to see volumes and growth rates low as well as are they less in volume?
Ken Vecchione, President and CEO
Good question. When we entered 2021, we did not anticipate a significant increase in warehouse lending balances. However, after a strong first quarter, we expect this trend to continue into the second, third, and fourth quarters. We are experiencing two key developments: a natural increase in market share with our current clients and the potential to tap into the AmeriHome client base. They have around 720 clients, of which we have about 100 that overlap, and we plan to reach their clients effectively. For example, we could approach an AmeriHome client and offer a line of credit, hypothetically $25 million, which would also allow us to buy loans as they accumulate. This two-for-one opportunity creates a compelling case for AmeriHome clients. Although we have not completely incorporated this into our projections yet, it gives us confidence that we can continue to expand our warehouse lending business on the loan side.
Timur Braziler, Analyst
Okay. That’s helpful. So as we start thinking about your new loan growth guidance, it shouldn’t just be what you have been putting on existing plus the rest of the increase guide coming directly from resi, we can actually see mortgage warehouse continue to ramp higher and be a larger component of that growth haven’t as well?
Ken Vecchione, President and CEO
Well, I am just going to clarify what you said, these $1 billion to $1.5 billion is basically business as we do it today, all right. So you will see our resi loan purchases continue and you will see more house lending grow as if we would never had the AmeriHome acquisition. The AmeriHome acquisition as we ramp that up will provide either comfort to achieve that $1 billion to $1.5 billion or if we do it really well it will help us succeed that number.
Timur Braziler, Analyst
Okay. That’s helpful. Thank you. On the residential side, I think, in quarters past you guys have talked about the concentration of 20%. Do you have a concentration limit in mind and I guess as we are building out what residential loan growth could look like, how big of the overall loan portfolio can we envision that becoming?
Dale Gibbons, CFO
Well, I think we can easily punch through 20. I mean the average bank our size is 30. First Republic is just under 60. So I mean what we like about the space is, I mean, it’s very good quality performance. Now we have got kind of an unlimited channel into that, some other kind of cross-sell opportunities, some of which we have talked about that we can pick up. So we are definitely going through 20 and toward the immediate that we spend at.
Ken Vecchione, President and CEO
We have a very strong portfolio, with a 59% FICO score, a debt-to-income ratio of approximately 34% to 36%, and a loan-to-value ratio below 70%. We could provide a list of applicants who have become 90-day delinquent, but such cases are typically rare, and we have not experienced any losses in our portfolio. This significantly contributes to the overall quality of our loan composition.
Timur Braziler, Analyst
Okay. Thank you. And then just last one for me back on the deposit side, I am wondering how much of the growth, if any, is coming from the extension of the tax deadline and what that could look like for balances as customers go to pay tax bills in the next month, if you will?
Dale Gibbons, CFO
Yeah. That’s more of a consumer phenomenon, I would say, and our liquidity has been coming in strong all through ‘20. Remember in 2020 we did $9.1 billion of liquidity, which far, far exceeded our best, best year ever and this quarter we did $6.5 billion, which just in one quarter.
Timur Braziler, Analyst
Okay. Thank you.
Operator, Operator
Thank you. The next question is from David Chiaverini from Wedbush Securities. Please go ahead.
David Chiaverini, 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?
Ken Vecchione, President and CEO
Yes. It will absolutely slow. What we did is, we have been sitting on a lot of growth from the fourth quarter, also the first quarter, and so we wanted to deploy some of that. Again, the balancing act we are trying to do is, look, we can get 10 basis points if we keep it at the Fed, that’s pretty meaningless. We can get 3% if we can put it out into low LTV home loans or we can go into the securities book, and as I said, we have got 2.20%. So, it’s a little bit of a compromise there because it is going to take us some time late within this year, but sometime to deploy the liquidity that we have and also the new deposit growth that we expected and continue to generate. So, but over time, yeah, I think our securities book can actually bleed down, but I wouldn’t expect to see that anytime soon. But no I think the growth in the book in the security side is largely behind us. We are using our current liquidity to pay off all of the AmeriHome debt and then also to begin to purchase non-QM mortgages through that channel.
David Chiaverini, 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 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, CFO
We are concentrating on enhancing the company's earning power and converting that into earnings per share. Margin isn't significantly relevant to this goal. We believe that having low-cost, stable core deposits allows us to invest in profitable assets. Ideally, I would want to achieve a 5% return without any risk, but we're not seeing those kinds of opportunities at scale currently. Therefore, we are focusing on residential lending, even though the return is about 2 percentage points lower. If I incorporate mortgage loans at a 3% rate while our margin stands at 3.37%, it may slightly decrease that margin. However, if I adjust investments that currently yield 10 basis points and allocate them at 3%, that could actually improve the margin, despite the narrower spread. The combination of these strategies might result in a slight reduction in margin, which I believe could be beneficial, as it indicates that we are continuing to adjust the foundational aspects of our balance sheet for deployment into earning assets.
Ken Vecchione, President and CEO
So I want to add one other thing to what Dale said. Our focus on net interest income rather than NIM started in early 2018. So this is not a new phenomenon for us. We have talked about this since the early part of 2018 that this was the direction that we were going to take which is prioritize net interest income growth over NIM. Simply said, net interest income is going to drive EPS. One of the things I am very proud of this quarter was two less days. We made more in net interest income than we made in Q4. So our strategy is being executed upon and Dale said, our goal is to keep that net interest income looking robust for the next several quarters as we continue to deploy the excess liquidity and continue to upgrade our guidance as to what we are going to bring in.
David Chiaverini, Analyst
That all makes sense. Regarding a final housekeeping item, I believe you mentioned merger charges you are expecting to be about $15 million, primarily in the second quarter. Is your current expectation that the total will now be lower than the $35 million that was discussed at the announcement of AmeriHome?
Dale Gibbons, CFO
Yes. Yeah. As Ken was alluding to that earlier in terms of pricing that we got on the disposition of the MSR book. I mean the preponderance of those fees that we are going to be incurring are basically de-conversion costs from our outsourced mortgage servicer to the purchaser, that transaction is to close within the next few weeks.
David Chiaverini, Analyst
Got it. Thanks very much.
Operator, Operator
Thank you. The next is Michael Young from Truist. Your line is now open.
Michael Young, Analyst
Thanks. Good morning.
Ken Vecchione, President and CEO
Good morning.
Michael Young, 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 are more muted and loan growth coming from commercial going forward or kind of stay more stable?
Ken Vecchione, President and CEO
What I meant is that the balance is expected to remain relatively flat. With our growth, you might see the ratio decrease. However, we believe the balance will remain consistent. This is largely influenced by CECL, driven by the economic outlook, which can significantly impact the figures. It's important for our shareholders, investors, and analysts to note that 42% of our portfolio consists of loans or asset categories where we have never incurred any losses, and this factor also contributes to the CECL calculation.
Michael Young, Analyst
Okay. Great. And maybe just as a follow-up, just thinking about the pace of growth relative to capital, capital levels gotten a little skinny even with the issuance this quarter. I know PPP kind of has an impact on the TCE ratio. But just we think about you guys are willing to grow if growth is there and you will raise capital as needed or would you tamper some of the mortgage growth areas that maybe more of a flex area on the balance sheet to stay within kind of capital ratios?
Ken Vecchione, President and CEO
No. If we need capital to grow, I think you can expect us to do the right thing and raise capital.
Michael Young, Analyst
Okay. And if I can sneak in one last one just with AmeriHome kind of on the books, I guess, now, Ken, just trying to think about sort of the buy versus build equation going forward? You guys always have some deposit loan growth verticals in the pipeline that you are building? But has this changed your view on that equation or what you would like to do on a go-forward basis?
Ken Vecchione, President and CEO
No. Not at all. I mean, the AmeriHome team has a couple of things that they would like to look at in terms of new opportunities and I mentioned them non-QM channel, jumbo channel are just two of them that jump right out. But that’s separate. That team can work on that as the commercial side of Western Alliance can work on other business opportunities and we are continuing to work on those opportunities now. And we are probably one of the few banks that is sitting here working on 2022’s growth levels. That’s how far out we are in what we think in terms of our pipeline and our visibility.
Tim Coffey, 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, CFO
I believe this trend will continue, and as I mentioned, it's a central component. I think 40% is a reasonable number. When we adjust our excess liquidity, it will likely be much higher than that because a significant portion will be directed toward mortgage acquisitions, where we anticipate well over $1.5 billion.
Tim Coffey, Analyst
Okay. Regarding the efficiency ratio, do you think 45% will be a new benchmark for you as you move through the year, especially considering the growth from this past quarter and the addition of AmeriHome?
Dale Gibbons, CFO
It's going to be around 45% or 46%. But in the mid-40s, that's where it's fairly stable, definitely under 50%.
Tim Coffey, Analyst
Okay. Great. Those are my questions. Thank you very much.
Ken Vecchione, President and CEO
Thank you.
Operator, Operator
Thank you. The next question is from Jon Arfstrom from RBC Capital Markets. Your line is now open.
Jon Arfstrom, Analyst
Thanks. Good morning, everyone.
Ken Vecchione, President and CEO
Good morning, Jon.
Jon Arfstrom, Analyst
Hey, Dale, question for you, can you go back and review the loan-to-deposit comments you made earlier and where you think you might sit at the end of the second quarter and maybe end of the year, can you help us with that a bit?
Dale Gibbons, CFO
We are currently working on our plans and by the end of the second quarter, I anticipate that we will be close to our current position or slightly improved, with growth between $1 billion and $1.5 billion. We aim to launch new products for AmeriHome towards the end of the second quarter or into the third quarter, which should lead to significant volume, allowing us to act swiftly. I would prefer to reach a loan-to-deposit ratio of around 90% by the end of the year. If we look at our current situation and adjust accordingly, we expect considerable growth from our current figure of $331 million. We have achieved $3.5 billion in loan growth with a 3.5% spread, which has generated almost $10 million a month in increased pre-provision net revenue just from utilizing our liquidity. Adding in AmeriHome, we anticipate reaching an EPS run rate of $9 as we conclude 2021.
Jon Arfstrom, Analyst
I was going to ask later…
Ken Vecchione, President and CEO
I want to emphasize what Dale mentioned earlier, Jon. While everyone is focused on liquidity and the loan-to-deposit ratio, we are concentrating on net interest margin in relation to net interest income. What Dale pointed out is central to our business strategy. The $3.5 billion we just released and the $10 million we are generating in pretax income, amounting to $30 million a quarter, is very significant. We are confident that, along with the AmeriHome acquisition, we can achieve that $9 EPS run rate by the end of the year.
Jon Arfstrom, Analyst
I was going to ask if you think the numbers should go up, but you already answered that. I do want to ask one more question, and it won't be about deposits. Could you discuss lending outside of your national businesses, including some pipeline trends and what you are seeing in construction, just to get a sense of your overall thoughts on the economy?
Ken Vecchione, President and CEO
We are observing similar trends in both our operational areas and beyond. On the residential construction front, demand is currently very high. The construction of homes typically takes five to seven months, but delays are occurring due to labor shortages, resulting in higher costs. However, once the homes are completed, they sell quickly. One of our challenges is finding ways to maintain those valuable loans for a longer duration. The market for single-family homes is particularly vibrant. Built-to-rent developments, which are mainly within our operational areas, are also thriving, especially in Arizona, particularly around Phoenix and the West Valley, where we're actively engaging in several projects. I’d like to pass this over to our Chief Credit Officer, Tim Bruckner, who has been here listening quietly. Tim, would you like to share your thoughts?
Tim Bruckner, Chief Credit Officer
Well, sure. In the residential and commercial sectors, there were definitely some projects that were put on hold last year due to the uncertainties of the pandemic, which led to delays. However, we are now seeing those projects move forward, and as we look ahead to 2021, we don’t anticipate any significant changes in loan demand. There is stability across the major groups within our real estate portfolio, and we are not detecting any alarming trends in rent payments. Instead, we see factors that provide us with reassurance. We are also maintaining a very close and regular dialogue with our borrowers, which keeps us informed. Overall, the outlook for all segments of real estate remains very positive for us.
Ken Vecchione, President and CEO
Yeah.
Tim Bruckner, Chief Credit Officer
...and not just residential.
Ken Vecchione, President and CEO
I will say that we are very active in the net migration in various states, which is seeing increased activity. However, this is not limited to the construction of single-family homes. On the industrial side, we have initiated or financed several spec projects for industrial warehouses, and before they are even completed, they are already leased. They are no longer speculative; they are all pre-leased. This illustrates how strong the commercial real estate market is for us.
Tim Bruckner, Chief Credit Officer
Yeah. For just the data point on that, that portfolio is stabilizing and has stabilized faster now than at any time in the past four years in our portfolio. So it is moving very quickly.
Ken Vecchione, President and CEO
Jon, we don’t have time to give you a short answer. We hope the long one.
Jon Arfstrom, Analyst
No. That’s fine. You mentioned that you expect some changes in special mention and classified, but it seems like you are not worried about having to cut it at all?
Ken Vecchione, President and CEO
The short answer is yes. We have assessed the situation and do not foresee any challenges on the horizon. We feel confident about the current state of our asset quality.
Jon Arfstrom, Analyst
Okay. All right. Thank you.
Operator, Operator
Thank you. There are no further questions at this time. I will turn the call over back to Mr. Ken Vecchione.
Ken Vecchione, President and CEO
Thank you. Listen, thanks to everyone for dialing in and listening to our story. We are feeling very good about it. We were very proud of the results and we look forward to talking to 90 days from now about the second quarter. Thanks again and everyone enjoy the weekend.
Operator, Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect. Have a great day.