Q1 2022 Western Alliance Bancorp Earnings Call
Okay.
Good day, everyone welcome to the Western Alliance Bank Corporation first quarter 2022 earnings call. You May also view the presentation today via webcast through the company's website at Www Dot Western Alliance Bank Corporation Dotcoms.
I'd now like to turn the call over to miles ponder like director of Investor Relations and corporate development. Please go ahead.
Thank you and welcome to the Western Alliance Banks first quarter 2022 conference call. Your speakers today are Ken Vecchione, President and CEO and Dale Gibbons, Chief Financial Officer before I hand, the call over to Ken. Please note that today's presentation contains forward looking statements, which are subject to risks uncertainties and assumptions.
Except as required by law the company does not undertake any obligation to update any forward looking statements for a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements. Please refer to the company's SEC filings, including the form 8-K filed yesterday, which are available on the company's website now for opening remarks.
I'd like to turn the call over to Ken Vecchione.
Good morning, everyone. Besides Dale sitting alongside of me, Tim Bruckner, Our Chief Credit Officer is also here today as well. So we had solid performance this quarter as the company Paas to $60 billion asset milestone and were excited by the business opportunities before us for the first quarter Wal generated total.
Net revenues of 55, five $555 million net income was $240 million and EPS of $2.22.
We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 164% and 23, 9%, respectively, which will continue to support capital accumulation and strong capital levels in the quarters to come balance sheet expansion continues.
With quarterly loan growth of $2 billion, or 21, 2% annualized and deposits rose by $4 5 billion or 38, 7% annualized as we continue to effectively attract and deploy liquidity.
Excluding triple P runoff loans grew $2 2 billion in the first quarter with residential loans, increasing 2 billion healthy commercial loan demand continued this quarter with the seasonal run off of our warehouse lending loans by $640 million caused by mortgage supply constraints.
Associated with lower inventories industrywide Western line diverse loan drivers continue to propel growth in the regional banking divisions up $533 million Tech and innovation up $131 million and hotel franchise finance up a $158 million the flex.
Abilities on National commercial Bank franchise provides material opportunities to grow both sides of the balance sheet and in the event of an economic slowdown allows for alternative growth avenues by product and geographic mix. Unlike many of our competitors.
Asset quality continues to remain stable as total nonperforming assets modestly increased $19 million to 17 basis points of total assets and net charge offs were only $200000 as the economic environment continues to evolve we believe that our deliberate strategy to responsibly grow the NAV.
<unk> business lines, where we possess specialized sector and underwriting expertise and a low to no loss loan categories, which now comprise 53% of total loans will allow us to maintain a superior credit risk profile to the overall commercial commercial banking sector.
Regarding a marrow home mortgage banking revenue.
<unk> increased $2 $5 million quarterly to $78 million as gain on sale margin compression and lower production volumes were offset by a rise in loan servicing revenue as discussed at the time of acquisition the natural macro hedge between servicing income rising MSR valuation and decline.
Gain on sale margins was on display this quarter. Additionally, a M. H continues to unlock value as an emerging commercial bank leveraging our ability to efficiently deploy liquidity into low credit risk held for investment assets with attractive yields a mere home continues to demonstrate the unique opportunities to unlock value.
<unk> as a bank on mortgage business, such as $4 9 billion and low cost custodial deposits $2 5 billion in Epo loan purchases $370 million in warehouse referral loans already generated to date and residential loans purchased through their correspondent loan business. These off.
<unk> drive additional value from our marrow home that cannot be matched by other stand alone mortgage companies Dale will now take you through the financial performance.
For the quarter Western Alliance generated net income of $240 million EPS of $2 22 and <unk>.
Provision net revenue of 307.
Total net revenue of $555 million has increased 65% year over year, but declined $5 million during the quarter, primarily due to certain noninterest income items.
Net interest income modestly declined $1 million during the quarter to 449 is strong held for investment loan growth of $2 billion was impacted by two fewer business days in the quarter and interest expense on our credit linked notes issued in late December .
Overall noninterest income increased $4 million to 106 from the prior quarter, driven primarily by $6 6 million Mark to market losses on equity securities and a smaller benefit from credit guarantees of $4 9 million from the prior quarter, which was partially offset by a gain on sale of municipal investment securities.
As Ken noted mortgage based mortgage banking related income increased two and a half million dollars quarterly is lower production volume.
The decline in net gain on loans originated and sold was offset by a rise in loan servicing revenue as rising interest rates and falling prepayment speeds benefit MSR valuations net of hedges and servicing income.
Gain on sale revenue fell by half to $37 million, while servicing revenue jumped to $41 million.
Mortgage prepayment speeds fell as new mortgage rates rose in the last three four years, making refinancing on economic and thereby extending the lives of our servicing assets. This is the natural hedge of the mortgage business and why we manage the business for total mortgage revenue. If we had rapidly increased the value of our servicing rights we manufactured in the.
Quarter, we would have booked a higher gain on sale and lower servicing income in lockstep.
Finally, noninterest expense increased $10 $8 million in the quarter, resulting in an efficiency ratio of 44, 1%.
Q1 expenses have historically run modestly higher and we expect this is the high watermark for this ratio and declining in 2022.
Turning to our net interest drivers investment yields increased 26 basis points from the prior quarter to $2 77.
As rates rose as prepayments fell in residential mortgage backed securities reducing purchase price premium amortization.
Near quarter end through the security sales and reinvesting we moved over $1 billion of securities to 100% repricing beta with the sort of give up in yield that will increase sensitivity in the current quarter.
On a linked quarter basis loan yields declined five basis points, driven by a greater proportion of residential loans and lower prepayment and triple Tvs yield.
Yields on loans held for sale benefited from rising mortgage rates and increased 10 basis points to $3 one 4%.
And of course, the spot rate for <unk> S loans was 373.
Total cost of funds increased by two basis points from the prior quarter and 27, primarily due to the credit linked note transaction entered into in December .
Demonstrating the strength of our deposit franchise to raise low cost sticky sources of funding interest bearing deposit costs remained fairly flat at 21 basis points, while the balances grew to $3 billion during the quarter.
Net interest income of $450 million is 42% higher year over year, but declined slightly from the prior quarter overall average, earning assets increased $1 2 billion or eight 5% annualized.
Net interest margin was relatively stable at 332% down one basis point from the prior quarter as our strong deposit growth led to a greater proportion of earning assets being held in cash.
Lower loan yields due to residential loan growth.
Excess cash provides us with optionality to deploy into higher yielding loans in future periods.
After the recent 25 basis point move by the fed our asset sensitivity has increased from last quarter driven by increased liquidity as deposit growth exceeded loan growth by $2 5 billion in variable rate loans moves above their floors.
In a rate shock scenario, plus 100 basis points over for the next 12 months on a static balance sheet net interest income is expected to rise six 8% using the same scenario on a gross balance sheet. We expect net interest income to grow over 25% over the base case over the base.
Right.
Under a 200 basis point rate shock scenario on a static balance sheet net interest income is expected to rise.
<unk>, 4% and a multiple of this impact when balance sheet growth expectations are also incorporated.
Given our first quarter net interest income run rate of $450 million or $1 8 billion per year, we should see at least a 40% increase in net interest income in the shop, plus 200 scenario for $720 million annually, which the market projects, we'll see on an accelerated rate increase trajectory later.
This year.
An important driver of this projected increase in net interest income is due to moving off of our rate floors.
The rate for schedule shows that 84% of our loans will be at their floor with a 100 basis point increase in rates, which should happen by the second epilepsy meeting to be held in mid June .
And they become completely irrelevant in the third quarter.
I would note that these four served as well as sustaining net interest income for two years during the pandemic.
Our efficiency ratio increased to 44% from 41, 8% in Q4 as certain seasonal expenses outpace net revenue growth.
Noninterest expense rose $11 million from last quarter due to lower loan origination cost deferrals and higher seasonal expenses in Q1.
Again at 44%, we believe the efficiency ratio will decrease through successive quarters. This year.
Pre provision net revenue was $307 million for the quarter to 52% increase from the same period last year. This resulted in a <unk> way of two 1%. Despite a 13 basis points compared to last quarter, primarily driven by balance sheet growth outpacing PNR.
This continued strong performance, leading capital generation provides us with significant flexibility to fund ongoing balance sheet growth managed capital actions and meet credit demand.
Balance sheet momentum continued during the quarter as loans held for investment increased $2 billion or five 2% to 41 billion and deposit growth of $4 5 billion brought balances $252 billion at quarter end.
Mortgage servicing rights balances grew $250 million in the quarter to 950 is no MSR sales were completed during Q1 as we expect this asset will continue to benefit from a rising rate environment.
Goodwill and intangibles increased $63 million, primarily due to our acquisition of digital disbursements in January .
Tangible book value per share decreased 71.
One 9% over the prior quarter to $37 13, primarily due to fair value losses on available for sale Securities recorded in all other comprehensive income.
Book value increased 12, 4% over the prior year.
We continue to generate consistent organic loan growth from our national commercial business strategy and are seeing balanced demand between regional banking divisions and national business lines loans held for investment grew $2 billion in the quarter with continued strong growth in residential real estate.
Wherever drivers of loan growth this quarter in particular net C&I growth was negatively impacted by $228 million in Triple T loan pay offs and a $640 million decline in mortgage warehouse balances were lower housing inventory are in higher rates held back to typical seasonal upturn in purchase volume.
Given current pipeline strength, especially in node finance and MSR lending businesses, where the team is onboarding, New American clients, we still expect mortgage warehouse balances in aggregate to be flat year over year for 2022.
Mortgage warehouses already rebounded to $270 million quarter to date.
C&I loan growth benefitted from healthy contributions of our regional banking divisions with $209 million and other national business lines with $223 million, especially in tech and innovation restaurant franchise finance.
CRE.
CRE investor in construction and land also contributed $320 million and $250 million of net loan growth respectively. Our national commercial franchise provides optionality to deploy liquidity by business mix and geography.
Turning to deposits, we continue to see broad based core deposit growth across our diversified channels that will generate stable low cost funding in different rate environments.
Deposits grew $4 5 billion or 38, 7% annualized in the first quarter driven by increases in noninterest bearing DDA of $2 2 billion interest bearing DDA of $1 3 billion in savings and money market of $1. Three these were partially offset by a decrease in the most expensive category Cds 238 million.
Noninterest bearing DDA is comprised 45% of our total deposit mix.
Our specialty deposit franchises continue to provide ample opportunities to generate attractive funding to support loan growth with deposits from HOA HOA up by $632 million settlement services increased $308 million in tech and innovation up by 158.
Settlement services had successfully incorporated digital disbursements into the franchise and has already begun benefiting from synergies through expanded relationships and new affiliations with claims administrators and law firms.
Our asset quality continues to remain stable in total classified assets in special mention loans as a percentage of total loans are lower than they were in 2019.
As the economic environment continues to evolve we believe our deliberate strategy to responsibly grow national business lines, where we possess specialized sector and underwriting expertise and a low to no loss categories, which now comprised 53% of total loans will allow us to maintain superior credit risk profile to the overall commercial banking set.
<unk>.
Special mention loans remained relatively stable on a proportion of total funded loans at 85 basis points total classified assets rose $64 million in Q1 to $365 million or 60 basis points of total assets due to the temporary impact of the <unk> variant.
Accordingly quarterly net losses were negligible for the first quarter, our total loan ACL increased $11 million from the prior quarter to $301 million as the provision exceeded losses in all total loan ACL to funded loans declined one basis point to 73 at quarter end adjusting for the five four.
And loans that are covered by credit linked notes were ample first quarter first loss coverage is assumed by a third party. The ACL coverage ratio rises to 84 basis points.
Given our industry, leading return on equity and assets, we continue to generate significant capital to fund organic growth and maintain a well capitalized regulatory cap regulatory ratios, our tangible common equity to total assets of six 7% was bolstered by net income and $1 3 million shares issued at four one.
$8 million.
And proceeds under the ATM, but also affected this quarter by negative fair value marks on available for sale debt securities.
Our CET one ratio was essentially flat at 9%.
Inclusive of our tangible of our quarterly cash dividend of $35 per share our tangible book value per share declined 71 to <unk> $37, primarily reflecting the adverse hff's market quarter in.
While rates have continued to rise in April the rate of increase we witnessed in the term structure in the first quarter of the yield curve Simpson side later this year, given our robust capital generation.
We still expect a 2022 will again be a year of tangible book value growth.
I'll hand, the call back to Ken to conclude with closing comments.
Excuse me I was very pleased with Q1 results and the management team's ability to adapt to the changing interest rate and economic environments loan growth was strong.
<unk> grew more than double that amount credit remains solid and clean expenses are balanced for both for both near term efficiency and long term investments and net interest income sensitivity increased as variable rate loans are projected to rise above their floors or marrow homes first quarter.
Our results remain consistent with our overall pro forma guidance that we gave at the time of acquisition, which was $2 <unk> and we are tracking above this the composition of that performance is more skewed towards net interest income, which is consistent with our expectations, but more pronounced with rising rates.
Deposit growth and loan growth from Merrell home have both exceeded our expectations and taken on greater significance. In this rapidly rising rate environment going forward, we expect mortgage banking revenues to be in line with Q1 levels and any disruption to this may be made up with balance sheet.
<unk> for the remainder of the year, we continue to support our full year $9 80 EPS floor.
Loan and deposit growth expectations remain at $2 billion per quarter with a bias to the upside our loan and deposit pipelines bolstered by client confidence gives us reassurance that our balance sheet. We will continue to grow in a safe sound and thoughtful manner, we've modeled fixed rate hikes in 2000.
22, starting with 50 basis points in May and then 25 basis points in June July September and December immediately. This is conservative net interest margin is expected to grow throughout the year lifting net interest income sequentially as loan growth provides incremental revenue support.
Net interest income sensitivity has climbed substantially from the prior quarter and is our expectation based upon the projected forward yield curve that nearly all of our variable rate loans with floors will be in the money next quarter further giving support to <unk> progressively increasing throughout the year as our efficiency ratio.
Clients the bank asset quality remains solid and we've not seen emerging deep delinquencies or defaults within any segment our base economic model is for a slowdown, but not a recession and then lastly capital we believe our internal capital generation can support up to 4 billion of loan growth without returning.
The equity markets at this time del Tim and I would be happy to take your questions.
Thank you we will now open up the lines quick question to ask a question. Thank you press. The Star then the number one on your telephone keypad to withdraw your question simply past apparel key.
One moment. Please for your first question.
And your first question comes from the line up ever Hain Formula.
From Bank of America. Your line is open.
Hey, good morning.
I guess it would be.
Ken Dan just going back to your earnings outlook.
$9.80 unchanged from last.
Quarter, just talk to us at all and how.
And the trajectory of NII as you mentioned right I think the market facing and maybe a few basis points hike in May June .
You should have meaningfully more sensitivity on the asset side coming up for the back half of the year.
Just wondering.
Dale if the forward curve plays out as expected what does that mean in terms of.
NII growth and what's the offset in terms of why your EPS outlook didn't change and move higher is it just because you are assuming lower mortgage earnings. So would appreciate if you could address one.
Yes, So I think as Ken mentioned, he gave the rate scenario.
That base.
Basically reconciles to the 980.
But we show on slide seven is a more accelerated.
Right path, which is perhaps more in line with.
With what.
Expectations are from the epilepsy actions so between both of those we can get to $9 80 based upon a more gentle right path forward than maybe what we will see.
Yes.
I'm pretty optimistic about what youre going to see in the next three quarters.
In terms of net interest income growth and I think it's going to be some of the largest quarter over quarter increases.
This company.
Posted organically.
History.
And.
And so yeah, you could say that the 980 again I'll keep telling you. The 980 as before is what we said last quarter.
<unk>.
We feel very comfortable with the 980 and we will go will go from there and we're going to update we will update in the middle of the middle of the year, our EPS guidance.
And a follow up data.
Just talk to us around one.
My sense is you expect deposit growth so the level of deposit growth and what you're assuming in terms of deposit betas.
As we go through the <unk>.
And just mix shift moving from an IV to anticipating.
Yes so.
So our deposit betas ran in the Forty's on money market accounts last time, we think we're going to be in that same area. This time around interest bearing checking is about 10 points lower than that again, we think that that's probably going to be somewhat similar I can make arguments for why it could be exports.
Celebrated but then with liquidity why it could actually be a little bit lower than that.
Regarding earnings Ecr's, those were a bit worried the 20% range last time, we think those are likely to be accelerated.
In terms of what we're looking at but but even from there even going into the <unk>.
Thank you.
Again, you can see that with a lot of our loan book, 57% variable.
That is going to have a joining yields relative to a more muted expansion of cost structure. Let me just add a couple of points there to Dell one we kind of feel our geographic and product and national business segments provide growth through diversified channels and that's again, what gives us a great deal of comfort to say.
Deposit growth 2 billion floor and as you can see what we just did this quarter.
We feel very comfortable with the 2 billion. We also feel very comfortable that a member home continues to attract and bring in deposit growth, which we always expected and youre seeing that as well as it relates to maybe deposit pricing pressure near term that's been relatively muted for us and only a handful of clients had been looking to re.
Calibrate their pricing and I think Dale might have said this on the last call, but we're going to hold back repricing deposits until many of our clients have gone past their floors and we're trying to put the link those two together so just a little more color on the deposits for you.
Got it.
Thanks for taking my questions.
Your next question comes from the line of Casey Haire from Jefferies. Your line is open.
Yeah. Thanks, good morning, everyone.
Dale had a question on the efficiency ratio Youre.
Talking about it being the high watermark here in this quarter with the gain on sale flat.
What does that mean I mean, because the MSR rebel if we strip that out that would obviously launch it higher so.
In the high 40, so what does it what are the steps to get that efficiency ratio back to that low 40%. Besides a stable gain on sale.
If you could just give some color there that'd be helpful.
So I mean, it's going to be much more muted growth relative to the revenue line. So.
As we indicated we have a lot of kind of first quarter charges. This has always been the case COVID-19 .
Stepping up but you know in terms of.
Incentives rewards just general compensation to all of those reviews are effective in February .
We're fast 91 cost where we're at.
Also lower deferrals were lower in Q1, we don't have much of a deferral when loan growth comes from residential we expect a broadening out in terms of gross loan growth activity in Q2, and beyond and that will result in more deferrals of those costs kind of going forward. So so I mean seasonally I think you can see this is.
Well, it's a little it's a little more.
<unk> for 2021, because in the second quarter is when we acquired Amira home and aware of home had an efficiency ratio in the.
At 50, so pulling that and pulled us up a little bit I think it's notable that we brought them in and our efficiency ratio on a combined basis is where it was before we acquired them are home on a standalone.
Casey the simple calculus is that we expect net interest income growth total revenue growth to grow at a much faster multiple than expense growth.
And so while we manage our efficiency towards the low 40% range. We are also <unk>.
<unk> of all the investments that we need to make in this company and we are doing that in order to become a $100 billion company unimpeded. So we continue to invest in risk management and technology, we have people new hires the education and the training of the recently hired we continue to be.
<unk> and improved settlement services and business escrow services and these two business present, great opportunities for us to increase franchise value and it also carries with it a low cost funding. So we've got that going on plus several new initiatives in the loan and deposit areas, which we hope.
Help us towards 2023, and then we have also look selectively at regional expansion and new business development hires. So that's all embedded into that efficiency ratio and the fact that the revenues are growing and so.
So I'll say, a geometric pace versus the expenses are growing more as medically allows us to lower the expense efficiency ratio for the year, while simultaneously, making all the investments we need for the out years. So we're in a good position doing that.
Okay very good and just following up on the loan growth broadening out.
In a more traditional C&I.
You guys have talked about a 30% cap on on Reggie.
If the commercial side comes in a little lighter woods.
Is that 30% cap on resi is still.
There's still a hard cap or would you could you potentially take that higher.
Let me describe it.
That is more of a.
Benchmark guidepost or whatever someplace to kind of reflect and what that reflection is going to consider is where do we see our capital position, where do we see our interest rate risk profile, what opportunities are going to be in front of us in terms of other credit opportunities. So so I could see us going through 30% so long as all.
Those other criteria are met and I think thats. The case this time, but I think it's notable so in the first quarter. Yes, we did put on $2 billion of residential and those were basically 30 year fixed rate mortgages, but that was matched fight to a little over $2 billion of noninterest bearing DDA on top of that we had another $2 5 billion $1 billion of <unk>.
Growth in <unk>.
Deposit types with beta is in the <unk> and the <unk> that is now either sitting in 100% increase.
Betas on what we did in our securities book or in cash again poised to take advantage of a higher rate environment, which we think is imminent.
Okay very good so just last one for me.
The Paas at launch I think you guys talked about that last quarter being starting up this.
And early <unk>, just wondering if you know some updated thoughts there and if you could.
Any visibility on what kind of deposit balances that might generate.
Yes.
Beta testing, we brought in a few clients and we're working on it and what we do with all our national business lines as we put it through beta testing and were slow to roll out, but once we feel comfortable.
We then put our foot down on the accelerator and so we're not there yet and so any of our deposit growth projections do not have anything coming from this initiative and as we get more comfortable the initiative will provide more details.
As we go forward throughout the year.
Great. Thank you.
Your next question comes from the line up.
Candidly from UBS Your line is open.
Hey, good morning, everybody thanks for questioning.
Let's see.
I missed it what was the MSR fair value Mark.
Yeah. So so we have the MSR or servicing revenue was $41 million.
In the first quarter, it's been lower in the fourth quarter than in other periods and I think if you look at our balance of $950 million and what would be an expected return just on servicing alone that would have been about $16 million.
So we're saying 16 million was kind of normalized we didn't what we didn't do is we were maybe a little slower to increase the value of the servicing rights. We we're creating as we bought aggregated and presented loans to the <unk>. We did this because we thought it was actually gonna be inked.
Leasing in value in the fourth quarter, and we didn't see that and I think we've talked about this before Brock, but initially what happened was even though rates were rising and you would typically see an extension of CPR lives. It was a little bit like I'll call. It last call, where everyone said I've got to get it I get my refi done in time, well know that market is dramatically.
Changed refi business as you know I think albeit over and as a result, we've seen this significant extension. So so if we had done that earlier, what we would've had in the first quarter earnings instead of showing $41 million of servicing revenue and $37 million of gain on sale that.
Number of the gain on sale number would have been higher and the servicing revenue would have been down and I put that are our core earning rate was 25 was $16 million.
Okay.
A lot to unpack there so.
If I look at so one question is do you intend to build above the 950 <unk> level.
Are you a seller going forward.
So I might note that we actually contracted to sell $209 million of servicing rights in.
In the second week of April .
And that would hold us basically flattish to the 950 level, we do think that within certainly these lower coupons that are.
They're not going to get any better than they are and so liquidating them can make sense. So.
I don't expect our MSR number to change considerably from where we were.
Just to add that the sale of the MSR. So we just did also came in at a higher valuation and what we mark the MSR at at the end of the quarter.
Okay.
I guess, we're all struggling with what that line.
What mortgage revs could look like.
Assuming for example.
Positive Mark in Q2, just because of where rates have risen.
And.
Maybe it's stable servicing number could.
Could you could you speak to that I know you gave guidance that you expect mortgage revs to be relatively flat, but just kind of.
Boil that down a bit.
Let me speak to a little bit and also take you back to our thought process at the Actavis acquisition.
So again, we think the revenue total mortgage servicing revenues, that's how we look at it.
Our banking revenues I should say are going to remain relatively flat, which is at or near Q1 levels. As we go forward during the course of the year.
If if those say if those revenue should fall somewhat short we believe we'll be able to make that up in net interest income and the deposit growth. We are seeing and the MSR loan growth. We expect during the course of the year coming from Merrill and the reason wanted to bring this up and bring.
You're back to the acquisition is I think it's really important to remember.
Why we did the Amira home acquisition, we didn't see it as a mortgage company that we bought for three multiple on a forward basis, we wouldn't support a merrill home.
<unk> three forward multiple but did not interest to us but what.
When we sat with their management team and we saw the number of revenue streams that could be created inside of the bank that could get a much higher multiple we really concluded that we're buying a emerging bank at a three multiple.
That got us very excited and as you can see now as mortgage revenues in the industry all falling short on the production side, because the volume of north parcel compression on the margin side. We're one of the few mortgage companies that can actually are segments that can actually generate.
Setting revenues coming from deposits and coming from loan growth and also being able to generate loans to go into our book on the held for investment to soak up this.
Extra liquidity, we have so just wanted to bring you back to why we did the deal and what do we have a number of levers here and therefore, we don't get hung up solely on the mortgage banking income.
Brock I mean, I look at where we're going to see in terms of the rapid expansion of net interest income based upon the rate environment and the liquidity.
That Ken mentioned and I do think that.
With a stable revenue from mortgage direct mortgage operations gain on sale and servicing revenue combined.
That number is going to continue to be dwarfed by what we're going to see on our lenders just income pretty a combined bank, including what we get from the enhanced deposit growth that we've had from Meera homebuyers.
Okay got you.
I think more disclosure here would be would be super helpful. So you get the credit that I think you should have said this for this business.
Step off the soapbox.
Thanks.
Your next question comes from the line of Brad Millsaps from Piper Sandler Your line is open.
Hey, good morning.
Hey, Brad.
They all wanted to follow up on the ECA.
ECR deposits I think.
Last quarter, they were around $11 billion.
Did that number remained relatively stable and will those will the cost of those deposits.
Continue to manifest themselves on non interest expense as opposed to.
Interest expense just curious if that's kind of where are you going to keep keep those going forward.
Assume that's not part of your.
Kind of a new interest rate sensitivity guidance in those tables or does that is that included in there as well.
Yes, yes to all three questions. So.
It is about the same number approximately half of our DDA is subject to these cash <unk>.
That number we think is going to be essentially kind of fairly stable going forward and know that the cost of that is not is not shown in our net interest income pickup in phases. As you indicated doesn't show up there we will continue to show up in deposit costs and noninterest expense.
And so.
And you said those deposit betas are typically run in the <unk>.
The last time, they ran in the Twenty's, but we're projecting theyre going to be in the third at this time.
Okay, Great and then just as my follow up.
It feels like the loans held for sale at least on average held in better maybe than you initially thought.
It sounds also like the spot rate is up fairly significantly can you kind of speak to that.
Line item and kind of what you guys kind of foresee coming there as you kind of think about managing liquidity et cetera.
Yes, I think I think that balance is going to be fairly flat kind of going forward.
You indicated it is very sensitive to those things roll every three or four weeks that rate was $3 73 at the end of Q1.
Up from what the average was just an anticipation of rates rising you saw LIBOR and other rates climbing along the way so so yeah.
What we are what we see right now as we saw our cash increase a little bit. We do think we're going to get a broader base and more significant loan quarter or this quarter and as we.
We will see I believe effective deployment of that.
Got it.
There's one more on the cash you've kind of said previously you might wait to deploy some of that into the bond portfolio.
Yes.
In fact deposits do run ahead of learns and until rates, maybe stabilize or move higher is that is that still your thinking or.
Just kind of curious how you change your mind on the cash management, yes. So I mean, you you did see that our bond portfolio climbed in the first quarter that was mostly towards the end of the quarter.
It's actually grown further this quarter already but those.
Purchases have all been in.
Basically double a securities, 100% free pricing beta off a sofa and and so.
So we think that as youre going to see the duration of the Securities book.
Fall down a little bit here as well in Q2.
The gain on sale that we took last quarter.
Well time, and we've taken that extra look we took the gain and then we took we took the liquidity and reinvested it for higher returns. So we like that trade that we did.
Great. Thank you guys I'll hop back in queue.
Thank you.
Your next question comes from the line of Brandon <unk> from curious Securities. Your line is open.
Thank you.
I just wanted to get a little more clarification on activity analysis or NII.
Curious.
What the growth balance sheet assumption for that was it.
Kind of assuming the $2 billion in loans and deposit growth just wanted to clarify that.
Well, our internal growth assumptions are stronger than the.
The floor that we've indicated we were saying basically you're kind of at least $2 billion on loans and deposits each.
And we think we've got kind of the pipeline.
Lines and the product array to be able to do that I don't I don't have a number to tell you, but but they are greater than that I think it's notable that Ken mentioned that we expect to be able to do this without having to touch the capital markets.
Growing up to $4 billion per quarter.
Okay.
And then all that being said with the current interest rate environment and the forward curve.
Is it possible to get a sub 40 efficiency ratio, but in this year and especially next year.
Yes, I wouldn't talk to that.
We are not something we want if we have the efficiency ratio dropping and dropping will work to an efficiency ratio to me. It's just the exhaust fumes from the business and how we allocate our capital and liquidity and quite frankly, we probably allocate I put more money into the expense line for other investment projects that we.
We have on the board, but have yet to begun to fund and so I think instead of getting below 40%, we would take a longer time horizon, which has served us very well in this company and look to continue to work on the growth projections for 2023, and 2024 and that's how we would use the.
Money.
Okay.
And then lastly.
Could you give us an update on the non QM transition.
With the Merrill home and if you could quantify potentially any benefits for that this year and maybe next year.
So merrell home continues to generate non QM and jumbo loans.
For us.
Today's rates are in the $4 75 area, maybe a little more a little higher than that.
Probably the last time, we talk but I think were saying they were doing about 200 million a month are probably up to now little over $300 million a month.
And we expect that to continue to decline throughout the year.
Okay. Thank you very much.
Okay.
And your next question comes from the line of Gary Taylor from D. A Davidson your line is open.
Thanks, Good morning.
Sorry to beat a dead horse on the mortgage question, but.
As we look out to the second quarter and assuming the first quarter.
MSR valuation adjustment was kind of maybe overstated, maybe it was a bit of a catch up as Dale you may have alluded to from the fourth quarter.
Remember, it's not moving up quite as much. So if the if the valuation adjustment is lower this quarter could you just help me understand or maybe position what the offset would be on the mortgage banking line, so kind of keep that number flat sequentially.
Is that kind of volume driven or what are the other moving parts that are going on.
Yes, I appreciate that it would be rate driven on gain on sale. So so what happened is is so we have independent third party two of them that we go to and they value our mortgage book.
Servicing rights book and they were both.
They were both indicated that we were low on our valuation and we also get broker quotes in there and so we've raised that valuation and that resulted in late in the quarter, a larger servicing revenue than would've otherwise been the case now going into the second quarter. We take these now higher basis points.
The value for <unk>, and we put them into basically the MSR manufacturing model and so now when we do a deal and then we sell it to Fannie or Freddie we're recognizing a larger gain on sale at the time and posting a larger mortgage servicing right and so now if we sell those MSR.
<unk> going forward.
Recognized as smaller gains so that number is going to be lower and in lockstep gain on sale revenue will be higher as Ken indicated we did a sale already hasnt closed yet closer to next month.
About 20%, 22% of our mortgage servicing rights book at valuations above what we had mark them too. So we've taken that again and said you know what they are still low on valuation now that is into the machine that produces the value for MSR valuations and gain on sale and so that is.
Still higher again, so youre going to see that youre going to see that gain on sale.
Not to beat a dead horse on this side.
If theres any disruption to our forecast about.
Mortgage banking revenues it'll be offset by the growth in net interest income the marrow home brings experience certainly the deposits and loans they bring in this environment and a higher rate environment.
Will mute or offset any of the disruption in.
In the mortgage revenue lines.
Cars at all.
Right and I think we've got that from a holistic perspective, but obviously more difficult on our side to kind of pull out those parts.
If I can just ask one more question on the loans held for sale I thought I had recalled from last quarter that the.
We're the last quarters' average was.
About where you wanted it so in terms of.
I understand now that were in the quarter was this quarter is about right. So I'm just curious.
If that was a change in your thought process because I assume you could have extended the dwell times, a little bit to keep that I retire. If you wanted to but just want to make sure I'm thinking about it correctly I'm sorry, yes. So I was just so we have this.
We thought you know a pretty a pretty cool little trip, whereby we could hold these loans longer and basically earn the coupon rate on the loan for what is effectively only a four week investments. So instead of getting at the time 2000 <unk>.
15 basis points help with cash at the Federal reserve were getting something north of 3%.
I would just say that.
That maybe somebody caught onto us and.
And the pricing dynamics for that trade have changed and so we're using it less.
Okay, So where the balances are now as kind of a sweet spot.
Yeah.
Going forward Okay.
Okay.
Yeah.
Okay.
And your next question comes from the line of Steven Alexopoulos from Jpmorgan. Your line is open.
Okay.
Hello, Steven.
Steven Your line is open.
Yeah.
Our next question comes from the line of John Armstrong.
I received your line is open.
Yes, thanks, good morning, guys.
Hey, John .
Just a.
Couple of questions here because this is a crazy question can you talk a little bit about regional banking and what's going on there in terms of loan growth.
You know a little bit harder for us to do that and the reason why as you know.
Lot of our competition for new clients, we go up against the large.
Regionals and large money center banks, and we like doing that and more times than not.
Can win that with a higher price and and greater service.
But a lot of small regionals, we don't we don't see they're not they're not really competing against us as much we're not competing against them.
Average loan sizes for us have risen and as we moved upscale to be with a stronger more liquid clear.
Clients.
We've just kind of left some of the regional banking in the das the only place we really see them as a little bit in our Metro C&I book will run into them, but that's not a huge growing book of business for us.
Okay.
It feels healthy feels like you can picture there.
Okay.
Dale a question for you is this is kind of the opposite of the question I asked last quarter, but.
When you guys talk about the 980, EPS 980, plus EPS guide.
Last quarter I asked you about what it means for the first quarter.
But if you reverse that.
Jeff some exit rate.
275 or higher for the year.
I guess the question is are your blessing that kind of an exit rate for the year, which makes us more comfortable for 2023 yeah.
Yeah, Yeah, we I think like you said I think that your area is where you're going to end up to do that and and with the rate sensitivity.
The rate rises that that were I think right in front of us.
To get there.
Correct.
And under that scenario.
<unk> done it it sounds like Youre, saying.
Fee revenues are probably under 10% of total.
Yeah, I mean, I think thats, where where that would end up is also.
Okay. Okay, and then just one other question.
Ken you've alluded to this but it sounds like.
Despite maybe a hostile rate environment for mortgage.
You are saying.
The accretion numbers the earnings numbers that you've laid out.
You did <unk> home about a year ago.
Maybe the geography is different but they are still valid.
What youre trying to say, yes, that's exactly.
<unk>.
Okay. Okay. Thanks, guys I appreciate it.
Thank you.
Your next question comes from the line of Tomorrow <unk> from Wells Fargo. Your line is open.
Yeah.
Hi, good morning.
Looking at the cost structure for Amira home base.
Based on kind of total.
<unk> added revenues to the bank or is there a component of variable comp.
Gain on sale.
So.
Some you.
You faded out there a little bit, but I think I got to just are we adding cost structure to our marrow home for producing the banking related traditional banking related noninterest income answer would be no. That's being handled a merrill home is providing the leads and help.
When the business and then we have the infrastructure on the traditional commercial bank side to absorb that business and.
And if we add if we have to add people would be added on that side of the of the house, where the expertise is.
Okay, and then how about on the gain on sale business is there a variable component to that to that business and gain on sale revenues coming down should we expect to have likewise reduction then from selling their home costs.
Okay again to somebody who is a little cloudy in what you're asking but I think I got it yes. There is a variable component of expenses there are Merrill home has.
Decreased its people count from the time that we bought them also decreased their people count expectation from the time that we bought them and they run a pretty.
Ah.
Pretty low cost shop, so they're very quick to size up appropriately for the volume and the margins that they generate we're very confident that they move pretty quickly there, but 60% of their costs are variable based upon kind of the volume counts.
Okay, Great and then just lastly.
In regards to the ATM that was exercise again this quarter can you just remind us if theres anything left.
On that program.
Yeah.
It has.
About one 5 million shares and capacity.
In itself.
As we indicated we think we can kind of grow without it I mean in the first quarter, we did take on some goodwill.
And so coupling that with the recent otherwise wouldn't have needed to do it than either we also grew our mortgage servicing rights, which are a little bit of a capital hog, but we think made sense based upon valuation, but going forward, we don't see either of those kinds of things it's back to the kind of the basics of the balance sheet and that balance sheet can handle more than $2 billion worth of loan growth per quarter.
<unk> without touching any external capital sources.
Okay. Yeah, and then you went on the next point so the MSR I think if I remember correctly that the cap is kind of 25% of CET one before it becomes more punitive to from a capital standpoint is that does that.
The right way of thinking about it in that.
Quarterly it would be a great that'd be a red line for US that's about 1 billion won.
Yes.
Ziv Msr's.
Yes.
Okay, great. Thanks for the questions.
You bet.
Your next question comes from the line of Chris <unk> from Keybanc. Your line is open.
Good morning or afternoon, Chris.
Good afternoon. This is <unk>.
O'connell filling in for Chris Mcgratty.
Got you.
On the longer term loan trajectory.
How do you think about the sustainability of loan growth.
Given that I know the near term growth outlook is fairly clear but.
Residential mortgage now close to 30% of the portfolio. How you think about sustaining your growth rates kind of in the 12 to 24 month timeline into 2023 and beyond.
Yes, so I'll say, we do a loan pipeline meeting every week here.
And the loan pipeline is busy active.
Active.
Clients have not exhibited a reluctance to slow their growth plans, although they are mindful of the economic backdrop I am out with clients quite often.
And they are still optimistic about their business, but as I said mindful of the economic backdrop.
The beautiful thing that we have set up with a mirror home is we can always bring in residential loans to offset our liquidity, we are targeting residential growth to be about 50% of our total loan growth and back to your question about loan growth.
I think between the geographic and business segment mix that we have established in this company.
We feel very comfortable with the growth guide that we gave and that growth guide continuing.
Into 2023.
Very active pipeline. These days. So we're very we're very comfortable where the future is taking us yeah, I mean, our dependence on residential growth, which picked up during the pandemic I think youre going to see that Wayne here as these other channels become more robust and frankly capital call was it was a big player.
C capital call as maybe being an area of more accelerated growth in the near term along with the other technology right.
Great. That's all I had appreciate the color. Thanks for taking my question.
Okay.
And we have a follow up question from Brock Vandervliet from UBS. Your line is open.
Thanks, just to follow up on that comment.
Dale in terms of the growth.
Capital call and other tech just maybe stepping back.
Seems like.
And the innovation economy.
Got a bit of a karate chop lately, what what makes you so confident about those segments.
Brock I am going to take this and this is Ken.
First a lot of our capital call line and subscription line business is really not to the.
Innovation economy, it's more to the traditional.
Brand name.
P firms and hedge approach.
P. Basically P firms that you would know and they are very active they are raising lots of funds.
With one about that three or four months ago, and basically said to me, we can't get enough credit.
Down at the lenders.
The finance.
The fund Finance conference down in Miami, a couple of weeks ago and again there too.
Just a huge demand for subscription lines in capital call lines. So we're feeling optimistic about that.
That channel for us.
Okay and.
Another segment warehouse.
<unk> seen some really rough numbers across the sector here with little recovery expected you mentioned that even quarter to date. There has been a pick up is that sign.
The marketing effort through a mirror home gaining traction.
Yeah. So first when we came into the year and we gave a $2 billion alone.
Guidance per quarter, we said, we expected the <unk>.
Warehouse lending group to remain flat for the full year and we still expect it to be flat for the full year.
We're hopeful that it rises but we.
We are doing a lot of cross selling we've got a lot of loans now.
Underwriting from Merrill homes client base, and and Thats on the warehouse lending side and also on the MSR financing side as well.
Got it okay. Thanks for the second round of questions.
Right.
Thank you ladies and gentlemen, we have reached the end of our Q&A session I would now like to hand, the conference back to Ken Vecchione for closing remarks.
Just wanted to say thank you all for joining us today, and we look forward to speaking to you in about three months about Q2's results be well.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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Okay.
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