Good day, everyone. Welcome to Western Alliance Bank Corporation's Third Quarter 2021 Earnings Call. 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 pm Eastern on October 22 through November 22, 2021 at 11 pm Eastern Time by dialing 1-eight hundred-five by 8367 using conference ID 5,392,611.
I would now like to turn the call over to Myles Ponderlix, Director of Investor Relations and Corporate Development. Please go ahead.
Thank you, and welcome to Western Alliance Bank's Q3 2021 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer and Dale Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward looking statements, which are subject to risks, filings, including the Form 8 ks filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Baccioni. Good morning and good afternoon to everyone.
Also joining us here today is Tim Bruckner, our Chief Credit Officer. This quarter's results continue to demonstrate the unique benefits of Western Alliance's national commercial business strategy to position WALL as one of the country's premier growth commercial banks that consistently generates leading balance sheet and earnings growth with superior asset quality across economic cycles. As a company, we are proud of our thoughtful, safe, sustainable growth And are excited to have passed the $50,000,000,000 asset milestone. Validating our strategy during the quarter, we raised $300,000,000 in inaugural 3rd offering, achieving the lowest ever preferred dividend rate for a U. S.
Bank under $100,000,000,000 in assets at 4.25%. In the Q3, exceptional balance sheet expansion continued with our highest ever quarterly loan growth of 4,800,000,000 Or 63% on a linked quarter annualized basis. And deposits rose by $3,400,000,000 or 32% annualized As we continue to effectively deploy liquidity, loan demand continue to broaden across our business lines with C and I loans increasing by $2,200,000,000 inclusive of $240,000,000 of Triple T runoff along with $2,300,000,000 of growth in our residential portfolio. Notably, capital call lines drove $1,900,000,000 of growth within C and I as deal activity continues to be strong and utilization rates grows. Additionally, resort lending and hotel franchise finance contributed approximately $114,000,000 for loan growth as well as $148,000,000 increase in CRE For the Q3, Wall generated record total net revenues of $548,500,000
A 57%
annualized rise in PP and R to $317,100,000 and adjusted EPS of 2.30 Adjusted EPS quarter to quarter rose by $0.01 as the company recorded a provision for credit losses totaling $12,300,000 an increase of $26,800,000 from the $14,500,000 provision released in the 2nd quarter. We remain one of the Profitable banks in the industry with return on average assets and return on average tangible common equity of 1.83% 26 6%, respectively, which will continue to support capital accumulation and strong capital levels in the quarters to come. I would like to reiterate that AmeriHome is now integrated into the strategic fabric of Western Alliance And it's thoughtfully managed to maximize value for the entire bank through loan, deposits and net interest income growth. A $5,200,000,000 increase in average earning assets drove net interest income growth of $39,900,000 We're 10.8% for the quarter or 43% annualized to $410,400,000 as excess liquidity deployment into loans and loans held for sale contributed significantly to earnings. Fee income increased $2,100,000 to $138,100,000 and now represents over 25% of total net revenue.
Asset quality continues to remain stable as total non performing assets declined to $10,000,000 to 17 basis points of total assets and net charge offs were $3,000,000 or 4 basis points. Finally, what excites me most is the diverse set of growth opportunities In front of us, we will continue to do what we do best and support our clients in attractive markets nationally where they do business. I believe we have exited the pandemic as an employer of choice for leading specialized commercial lenders, which positions us well or extremely well to To attract and retain uniquely qualified talent to thoughtfully sustain growth with superior risk adjusted returns. For example, during the quarter, We hired 2 seasoned teams. We added 11 people based in Texas to our single family home construction CRE National Business Line and brought on the leading national restaurant franchise finance team with the hire of 6 loan and credit Both teams join us from larger commercial banks where they proved their business plans and built robust Multi $1,000,000,000 books of business.
The Texas CRE team has $10,000,000 in outstandings and an additional $110,000,000 approved to be funded a $400,000,000 pipeline. Likewise, the restaurant franchise finance team has $90,000,000 in outstandings And $54,000,000 approved to be funded and a pipeline of $300,000,000 Dale will now take you through the details of our quarterly financial performance.
Thank you, Ken. For the quarter, Western Alliance generated record net revenue of 548,500,000 Up 8.3% quarter over quarter or 33% annualized. Net interest income grew $39,900,000 during the quarter to $410,400,000 an increase of 44% year over year, primarily a result of our significant balance sheet growth and deployment of liquidity into higher yielding assets. PP and R rose 57% on an annualized linked quarter basis to $317,100,000 excluding acquisition and Restructuring expenses. Non interest income increased $2,100,000 to $138,000,000 from the prior quarter as mortgage banking related income rose 12,000,000 for the quarter and totaled $123,200,000 Servicing revenue increased $23,000,000 in the quarter as refinance activity slowed despite a smaller servicing portfolio of $47,200,000,000 in unpaid principal balance.
Gain on sale margin was 51 basis points for the quarter as we extended the time from funding to sale, which positively impacted net interest income. With these evolving mortgage sector fundamentals, AmeriHome continues to meet our pro form a acquisition expectations, contributing $0.58 during the quarter, which is inclusive of $0.20 in net interest income from Maricom using our balance sheet, an opportunity most standalone correspondent lenders don't have. Finally, adjusted net income for the quarter was $238,800,000 or $2.30 in adjusted EPS, which is inclusive of a credit loss provision of $12,300,000 but excludes pre tax merger and restructuring charges of 2,400,000 Turning to net interest drivers. During the quarter, deployment of our excess liquidity into higher yielding assets Growth both loan growth and net interest income growth. Loans held for sale increased $2,100,000,000 and are yielding 3.35%.
On a linked quarter basis, yields on loans held for investment declined 20 basis points to 4.28, which is fully explained by the continued strong growth in load to no loss asset categories, namely residential loans and capital call lines. Interest bearing deposits remained relatively stable from the prior quarter at 21 basis points as were total cost of funds at 28 Consistent with our previous comments, we believe that in the current rate environment, funding costs have stabilized. Net interest income grew $39,900,000 during the quarter to $410,000,000 or 44% year over year as balance sheet growth and optimization of earning asset mix Generated robust spread income. Average earning assets increased $5,200,000,000 or 12% during the quarter to 48.4 Additionally, we successfully deployed liquidity into loans and have held the investment portfolio relatively flat in favor of loans held which we view as a higher yielding cash life alternative. Despite our successful liquidity deployment in Q3, We sell a meaningful dry powder of $1,000,000,000 in cash and the opportunity to further fund loans through continued deposit growth.
As a result of loan growth In lower yielding categories, NIM declined 8 basis points to 3.43%. We expect continued strong net interest income growth as we're Well positioned to take advantage of a rising rate environment as 71% of our commercial loan portfolio is variable rate percent from 44.5% during the quarter, while we continue to make investments to support risk management and sustained growth. The inherent operating efficiency of Excess liquidity has helped push our efficiency ratio to the lower 40s. Pre provision net revenue increased $39,700,000 or 14% from the prior quarter and 75% from the same period last year. This resulted in the PP and R ROA of 2.45 percent for the quarter, an increase of 14 basis points compared to 2.31 from the last quarter.
This continued strong performance and leading capital generation provides us significant flexibility to fund ongoing balance sheet growth, support infrastructure and capital undercapital management actions as well as meet credit demand. Balance sheet momentum continued during the quarter as loans increased $4,800,000,000 or 15.9 percent to $34,800,000,000 Strong deposit growth of $3,400,000,000 brought balances to $45,300,000,000 at quarter end. In all, total assets have grown 58% year over year to $52,800,000,000 Total deposits increased $313,000,000 over the prior quarter to $2,100,000,000 primarily due to overnight borrowings of $400,000,000 partially offset by the redemption of $75,000,000 in subordinated As Ken described, we experienced record quarterly loan growth this quarter with growth evenly split between residential and C and I loans. In all, loans grew $4,800,000 during the quarter and were up $5,000,000,000 ex PPP run off and over 34% year over year. Revenues for real estate and C and I loans grew $2,300,000,000 $2,200,000,000 respectively.
Turning to deposits, we continue to see broad based core deposit growth across our business channels. Deposits grew $3,400,000,000 or 8% in the 3rd quarter, With the strongest growth in savings and money market accounts of $1,600,000,000 Non interest bearing DDA accounts contributed $950,000,000 And seasonal inflows and HOA banking relationships were all significant drivers of deposit growth during the quarter. We are confident in the stickiness of deposits Our asset quality remains strong and stable. Special mentor loans continue to decline to $364,000,000 or 105 basis points Funded loans, total classified assets rose $26,000,000 in the Q3, dollars 265,000,000 or 50 basis points in total assets, but are down more than 40% from a year ago on a ratio basis. Total non performing assets declined $10,000,000 to 17 basis points Quarterly credit losses continue to be nominal.
In the 3rd quarter, net charge offs were $3,000,000 or 4 basis points Average loans annualized compared to $100,000 in the 2nd quarter. Our loan allowance for credit losses increased $15,000,000 from the prior quarter to $275,000,000 due to robust loan growth. In all, total loan ACI to funded loans is 80 basis points or 82 basis points when excluding Triple fee loans. As mentioned in prior quarters, the strategic focus of the bank is to source a significant portion of loan growth from low to no loss segments to achieve a diversified risk a risk diversified portfolio. With the 3rd quarter loan growth, Our loan to no loss segment now drives over half of total loans.
Given our industry leading return on equity and assets, we generate sufficient capital to fund about 25 35% annual loan growth depending on the mix and this is after dividend service. Our tangible common equity to total asset As you have seen throughout the year, we took several capital actions to enhance our capital set and support ongoing growth. During Q3, we issued $300,000,000 of preferred equity, which was slightly offset in total capital as we redeemed $75,000,000 of subordinated debt. We are also redeeming $175,000,000 of 6.25 percent subordinated debt this quarter, which we anticipate to be completed in November. We will recognize a $6,000,000 pre tax non recurring charge associated with this redemption as we accelerate amortization of origination costs on Inclusive of our quarterly cash dividend payment, which we increased to 0.35 Our tangible book value per share rose $1.81 in the quarter and $34.67 or 19% growth in the past year.
Our tangible book value per share growth is industry leading and has grown 2.5 times as it appears over the past 5 years We report a compound annual rate of over 19%. I'll now hand the call back to Ken to conclude. Thanks, Dale.
The Q3 really was an exceptional quarter from an earnings and loan growth perspective as our distinctive national business Our strategy model continues to hit on all cylinders. Impressively, end of period loan balances were $3,300,000,000 greater than the average balance, Which provides a strong jump off point for the 4th quarter. Net interest income in addition to the $1,000,000,000 in excess as we enter the Q4. Looking forward for full year 2022, you can expect loan held for investments Continue robust growth with a quarterly minimum of $1,500,000,000 to $2,000,000,000 an increase from the prior guidance of $1,000,000,000 to $1,500,000,000 Or a low to mid-20s percent growth rate for the year with flexible origination mix designed to maximize net interest income. Today, approximately half of our growth was generated from low to no loss residential mortgages.
Deposits are expected to grow in line with loans as we work to deploy excess liquidity and normalize the loan to deposit ratio, which today stands at 77%. We expect to maintain our efficiency ratio in the lower 40s As we continue to invest in risk management and technology and work to bring new business lines, products and services to market, total revenue And PPNR growth will track balance sheet growth as we benefit from operational leverage. Regarding capital, We are targeting a CET1 ratio of 9%, which our robust quarter end loan growth impacted. We have several mechanisms to address our capital levels. Most importantly, we generate significant capital through earnings growth and have historically demonstrated our success in accessing the capital markets.
In conclusion, we continue to see strong pipelines and have the operating
Thank you. Our first question comes from the line of Ebrahim Sonwala with Bank of America.
I guess, just first, Ken, you talked about next year and the low 40s efficiency ratio. I think the one thing that investors wrestle with is the sustainability of your ROA, ROE. Give us a sense of like, 1, is this efficiency ratio sustainable, especially given your asset size going over $50,000,000,000 today? And is there anything on the mortgage side that we should worry about that could impact the profitability of the bank over the next year or
Okay. Thanks, Efraim. First, we think the efficiency ratio in the lower 40s is sustainable for the next couple of years. We think our strong net interest income will overpower any expense growth that we have. What we're doing as Company, I think it may be a little bit unique rather compared to our industry peers is not only are we working on 20 22's growth, So right now, we're working on 2023's growth.
And we need to keep the efficiency ratio in the lower 40s So we can bring in new teams, as I just discussed, launch new products and services to propel us going forward. Regarding AMH and if there's anything that worries us or can impact The growth, AMH has a number of levers combined being inside of a commercial bank, as you heard Dale talk about With net interest income growth and so we are still confident about the 20 22's EPS guidance that we had given when we did the acquisition, which is now folded into our overall guidance as we talk about Ebrahim,
I appreciate your comment on alluding to the $50,000,000,000 as being a hurdle that sometimes is accompanied with levels of risk management expenses. But as Ken indicated, we've been leading this ahead for years now. And so we have already input in place Much of that infrastructure that we need and expect that basically on risk management, you probably get diseconomies of scales as you grow, but we're prepared for that and that's embedded And our guidance on efficiency.
That's helpful, Dale. Thanks. Just because I think the other side of low efficiency is Concerns around under investments, I think that's helpful. And then just separately on the loan growth, Ken, I think you mentioned minimum of 1.5% to 2%. Can you give us an upside scenario of what could lead that loan growth to being much stronger?
Obviously, you're a much larger bank today. I would imagine there are Many more opportunities than you had even 12 months ago. So give us a sense of whether you see more upside or downside risk to that loan growth outlook And what would like to add? Thank you.
Okay. Thank you, Oferm. Let me just add to the last comment, the first comment you made that we are very Cognizant of under investing. So we're not looking to drive that efficiency ratio below 40%. We could if we wanted to.
But investing for the long term and having long term growth aspirations as we do, it's important that we keep investing, Which leads us right into your question about my confidence level. So I feel very strong about growing between $1,500,000,000 to $2,000,000,000 If you kind of look backwards, you can see that our old guidance of $1,000,000,000 to $1,500,000,000 we easily passed That or succeeded that. But right now, as I look forward, we have strong demand for subscription and capital call lines. There's demand in lot banking, Hotel and residential construction. We believe there'll be some new AmeriHome products that we'll bring online, Jumbo loans, non QM loans that will be able to feed our balance sheet as well.
We see a great deal of Activity in the CRA income producing space, especially with distribution centers. We've done a few spec Centers and before the shell is even lifted, those spec centers have been already pre leased. So we see strong demand there. And there are several new businesses that we hope to bring online, probably towards the back end of 2022, which will give us confidence as we go through the year in 2022, looking forward to 2023 in terms of our growth Momentum. So yes, I guess the short answer is I'm feeling good.
I would also add, like to add that for a couple of quarters now, we've talked about having to right size the loan to deposit ratio. Obviously, if we're growing $1,500,000,000 to $2,000,000,000 on each side of the balance sheet at the same time, we're not going to move that number. We did we made some progress this last quarter where we took it to the higher 70s from the low 70s, but we used to be at 95. So I expect as we go through this period, and this may largely happen in the residential space, But we would have some outsized quarters where loan growth is going to continue either way at that low loan to deposit deployment rate.
And I just want to add one comment to my statement, which is I want to make sure everyone on the line knows that we're not chasing loan growth, Right. So 51% of our portfolio today is either in low loss or no loss credit Segments. So we've been growing and growing in less riskier assets as we've been posting these numbers.
Your next question comes from the line of Casey Haire with
Another
loan growth question for you. So This loan growth guide does feel pretty conservative, especially with all the runway you have on the resi mortgage side. This time next year, you guys I think you guys have talked about getting resi loans to about 30% of the loan book. Is that still You know kind of your limit and then once you get there, is a $1,500,000,000 to $2,000,000,000 a quarter still sustainable and is that And especially with all these new businesses that you're looking to add on at the end of 'twenty
Thanks for the very eloquent way you called me a sandbagger. I appreciate that. First, if I wasn't clear, the $1,500,000,000 to $2,000,000,000 is our minimum loan growth numbers. We actually said that we think we're going to post mid-twenty 5 Percent growth year over year. And that would raise that number a little bit higher.
It may come in a little uneven, But we think we'll get to the mid-twenty 5 percent range. And to the 30% number, we can get there as quickly as we want. We would prefer to see more coming on the commercial side, but we have a very balanced and restrained Viewpoint at this moment on the mortgage side, but we can turn that on. Note that I said that AMH is turning on just turned on their Non QM and jumbo loan product. And that's going to take a little time to ramp up as we get AMH's clients Comfortable with the program, understanding our credit box and our process.
But that thing should hit full stride somewhere in the middle of next year And that will allow us to step on the accelerator if we want and put on more loan growth. Really loan growth will be Somewhat by deposit growth, as Dale said. We've got plenty of deposit liquidity sitting on our balance sheet with a 76% loan to deposit ratio. And also our guide is that we expect deposits to grow along
with loans. I don't think there's a stop sign at a 31% Concentration level of residential. I mean, I think that's where we would approach the median of the peers and We reflect always in terms of what our proportion should be. But I could see that number being higher. As you know, there are some other institutions that are higher than that that Seem to be well regarded by the Street.
And as we get there, I think we're going to have kind of other opportunities and As well as to manage our interest rate risk profile, where some institutions have maybe gotten into trouble with too high of a residential concentration is they don't have a funding mix That matches that. But with nearly half of our funding in DDA, it gives us more tolerance for an interest rate risk environment to have something with a longer dated, longer maturity on the asset
Dale, question for you on the mortgage servicing lines within fees and expenses. A positive swing to the tune of about 30,000,000 Looking forward, is there a way that you can kind of give us a better feel for this as we get used to this business because or should we just Kind of should expect this volatility to continue?
Well, honestly for us, I really look at it more on a total revenue From AmeriHome rather than looking at those two lines separately, there is a little bit of an interchange between them. If you have A more robust view in terms of what valuations of mortgage servicing rights are. You're going to have Mortgage servicing right, Mark, that could be maybe potentially higher and that gives you more gain on sale. But ultimately, and we're regularly selling these down, We have a ready price point to confirm the veracity and the accuracy of that number and by signaling what the gain is on terms of the disposition. So 1 feeds the other and they run off of each other in a fairly short window on our balance sheet and income statement, unless of others.
Okay, Very good. And just lastly on the capital management front, Ken, I'm sorry I missed your comments at the end there. But You guys are below your kind of 9% level. You did not use the ATM. Is the thinking that On a more moderate pace of growth that you'll and a 25% plus ROE that you'll just rebuild organically to get above 9% Are you looking to take actions?
Well, there are a couple of things there. I think this is a high class problem to have that our growth is coming in. So yes, we will So go to the market for growth capital. We could do that either through the ATM or we have some other CRT trades that we're working on and hopefully we'll line them up before the end of Q4. Our goal is to be just above 9% on a CET1 ratio.
I think once we get there and if Growth is sort of programmed the way we just described it. We won't need to go back many more times to hit the market. But if it comes in at an accelerated pace, as I said, high quality problem to have, we're happy to issue growth Capital to support these earnings.
Our next question comes from the line of Brad Milsaps with Piper Sandler.
Hey, good morning guys.
Hey, Brad. Hey, I was curious if
you could comment on just kind of where new loan yields are coming on Kind of relative to the book yield, I don't think you included spot yields in the slide deck this quarter. So, I was just kind of curious Where kind of where the new loans were versus the yield were coming on?
Yes. New loan yields are pretty much on top of Lower than what we're running off. The reason why we had a 20 bps decline and I think
I alluded to this, so
I'll give a little more color, It's because of the mix change. We put on north of $2,000,000,000 of residential. Those yields are 3, we put on just short of $2,000,000,000 worth of basically capital call lines. Those yields are pushing 3, 2.5 to 3. So if you add the bulk of those in, that totally explains the 20 basis point kind of clip there.
Now that said, I mean, I think residential is going to be a continued part of our growth trajectory. And so will we have an additional kind of A slippage in total loan yields in the 4th quarter from the 3rd, yes, I believe we will. And but it's not really the Spot rates as much as the mix of the loan portfolio that's going to drive that a little bit lower. But again, we're prepared for that and as we did this quarter as well, we expect to just kind of plow through that in terms of interest income performance.
Great. That's helpful. And as
you guys have reshaped the loan portfolio and
we'll continue to reshape with more resi. How do I think about sort of asset betas if the Fed were to in Start raising rates at some point in the future. I know you have the loan floor number in the queue, but just kind of curious how you guys are Sort of levered to still the short end, obviously a lot of DDA, but just kind of curious the impact this time around versus last
So I don't know how many we're going to get, but I'll say for the first couple of rate increases, you're not going to see much change. We do have a number of loans at floors And so those won't change. Some of them, the floor and the variable rate are the same number. That's a pretty common situation for recent For recent origination activity, so those could see an immediate increase, but that's the smaller proportion in terms of the loan book. So within a range of 2 to 3 kind of rate revisions, I don't think we're going to see On the asset yield improvement, nor are we going to see much in terms of funding costs.
Two reasons on the funding costs. One is we've got a very heavy proportion of DBA today. And 2 is I just see a lot of liquidity in the system and I see banks kind of struggling to deploy that. I don't think you're going to get Beta is at least out of the gate for the industry as high as they've been in other rate rising environments because there's just No incentive to increase your funding costs when your opportunities for deployment remain limited.
Great. And final question for me. You mentioned your decision to Or more the mortgage loans on the books this quarter, obviously that helps the average held for sale balance. Is it your intent to continue to do that? Obviously, market conditions will drive that, but or have you just kind of scratched the surface on Kind of where you think that number can go in terms of adding new products at AMH, etcetera.
Just wanted to get a sense of that average balance going forward Everyone is held for sale.
So, this is Ken. I think the average balance is going to rise. It's going to rise as you see deposit growth continue. We had a $7,300,000,000 average balance for Q3 for the held for sale versus an ending loan balance of 6.8. We see this as an attractive way to generate incremental net interest income.
These loans Earned 3.35 percent that was up 24 basis points from the prior quarter. And Think of these mortgages or think of this, the held for sale as a big money market That has a 3 week turn to it or 3 week maturity that is government protected. So we I mean, this is great. We love it. And this is one of the reasons and as we both Dale and I alluded to in our comments That these are the benefits that we get with AMH that standalone mortgage providers would not get.
And that's why we're very Excited about doing the acquisition because of all the deposit and loan growth net interest income opportunities that AMH offered to us. So this is just an example of leveraging AMH's loan production onto Wall's balance sheet. And at the end of the day, better than investing in 10 basis points at the Fed. That's what we thought Talk to us at PS 169.
Very good. In Queens, if
there was anyone from New York on the line. Thanks for the color guys. Great quarter. Appreciate it. Thank you.
Your next question comes from the line of Brock Sandra Belet with UBS.
I understand the If you could just kind of talk about the math on the gain on sale, how that You alluded to holding the loans longer, possibly depressing the gain on sale. Also just talk about general gain on sale pressure or not that you're seeing
Yes. So there is a gain on sale pressure on the margin. If you go back to our comments when we acquired AmeriHome, we always kind of planned For more of a 2018 gain on sale margin scenario, we hoped we'd be wrong, but it's moving towards that direction. So what we have in terms of the opportunities in front of us is to increase our win share, our win rate, which was about 8.9% This quarter, so that's one way to maintain the gain on sale dollar amount. Again, the other thing is we're not A slave to the gain on sale income.
So we can participate or not at our choice somewhat By how much money we're bringing in on these mortgages and other opportunities that AMH is generating for us. So on our big pro form a, when we looked at it, we assume that we're going to get income from the new deposit growth, income for Held for sale, income for held for investment mortgages we put on our balance sheet. We assumed that we were going to lower Their cost of funds, we assumed that we could go out and cross sell against their 8.40 client base and sell Warehouse Lending Financing or MSR Financing. So all that was sort of embedded in the big picture In terms of when we did the transaction, so we have a number of levers to pull if the margin continues
We've already started a couple of these. So And we talked about this, I think, last time as well. But so before we acquired AmeriHome, they were just in the government products, So GSE or direct obligations of the federal government. And they have now already rolled out their jumbo product. That's a new sandbox for them that is also going to give them some Goss revenue as well as non qualified mortgages as well.
So we're expanding their playing field of what they're doing. We're expanding the penetration that they're getting in this group for a 9% number, as Ken mentioned, to something Moving up from there. And then we have a number of other elements like held for sale loans to again Address the performance and to soften any volatility in the mortgage market because they didn't kind of rely on us for liquidity.
And just to clarify that, Dale, if you had sold straightaway, would that have resulted in a higher And on sales that by holding you're just choosing to recognize an NII or some other place?
No, I don't think
it would result in a higher GAAP If we had sold immediately, what it would have resulted in is less interest income. So I mentioned we said they had $0.58 Contribution, well, dollars 0.20 of that is basically them using our balance sheet and liquidity to use this held for sales line It holds. If you strip that away and a number of banks that are solely in this space that aren't owned by a banking company Don't really have net interest income. That's really not a meaningful component of their revenue sources. Their EPS is $0.38
Right, which represents about 16% of our overall earnings. And just for the mortgage geeks out there, as you said, I just want to emphasize that while AMH is a notable piece of our income stream, there are other regional Our national business lines that produce equal to or greater on the same number. So for tech and innovation, tech and innovation produces more Than AmeriHome. But we tend to spend time talking about a business that has a fixed multiple handle When I'd much rather talk about 2nd Innovation and the 29 multiple that we have that they get on 2nd Innovation income. So I'm using this as a platform Brock to once again tell everyone, we are moving away from giving any AMH numbers going forward As it relates to EPS, it's just embedded into our numbers as we move forward.
And we're just going to talk about the whole company at the top of the house.
Your next
Good morning.
I appreciated the details and commentary on the recent hire that you made and the production volume so far. But Wanted to know if you could provide any more insight into your hiring strategy and your plans going forward, especially in this environment, a lot of Other banks say that it's tough to find talent these days and competing on conversation and whatnot. But just wanted to give more color
on that.
Yes, great question. And I do think the ability to hire is one of the longest Polls in the tent to our strategic plan objectives. So We are finding it a little more difficult to hire. Just yesterday on our town hall, I announced a number of changes, Which we think are very positive relative to both compensation, benefits and flex Work schedules, we think that's going to help us bring in the people that we need. We have in certain cases For the administrators, loan closers, those types of folks offered Hiring bonuses that seem to have worked and bring people in.
So that's good. So I think that we're Feeling a little bit of the pinch as some of the other companies are. As it relates to opportunities to bring new teams in though, We have more people contacting us about coming over to Western Alliance. I think our Size of the bank now helps, our profile helps, of course the numbers that we posted help And it's also a very good way when we sit down across the table from a team or several people that we'd like to bring in and we say, the stock did double this year. And the equity portion of what they get also is very attractive.
So we're trying to
work all the angles here in
terms of bringing in people. Okay, great. And then touching on credit.
So the reserve on a percentage basis In the quarter, but there was provision obviously because of the higher balance sheet growth. And now that you're going in lower loss Loan categories, where do you see that loan loss reserve ratio shaking out at?
It's really hard to say because we're in this seasonal environment, currently expected credit losses. Well, Gosh, I mean, one of the things that was powerful in our ratio declining so quickly is the for collateral value reductions, particularly in commercial properties, abated dramatically. And so right out of the gate in the pandemic, everyone thought there was going to be kind of a flatter value collapse. No one was ever going to go to the office again. And so those estimates by Blue Chip and Moody's and others were fairly dramatic in terms of the sloom.
That didn't happen. And now that has basically been abated. And so here we are with low expectations of Lateral value decline and so the number looks pretty good. Could something result in a change in that environment that would kind of reset That view, I think it could. And that could put us in a higher expectation of potential risk.
That said, in today's current environment where things are going, it's a little bit like, I don't know, an asymptote in terms of kind of coming down. We're approaching a limit. I don't know exactly where that is, but I would expect that over the coming quarters, you'll see maybe a bleed off Of basis points in terms of coverage, but provisioning, and if that is slowing rate And how much lower it goes, I don't know. I mean, you could come up with a lot lower number. I mean, if you say that you look at our most recent Performance on charge offs, we're at 4 basis points this quarter annualized.
That's about where we are for the past year as well. And we have a duration of our loan book of 4 years. So if I say I need 4 basis points a year and I've got to cover 4 years average life, I only need 16, I'll call it 20 basis points, and we've got 80. So in that sense, it looks like there's a lot of room to run down further. But I certainly wouldn't count on that.
Yes. We have a little bit of a rate volume thing going on here. The volume being dollars, we will continue we anticipate continuing to add to the provision, but The rate size you will see is decline a little bit. So that's what we're balancing here.
Thanks.
Your next question comes from the line of Tamer Braziler with Wells Fargo.
Most of my questions have been asked and answered. Just maybe just 2 more. The Although, I guess the hiring franchise finance business, I think that lending category has That looks like we flat since it was acquired a couple of years ago. I guess what's the outlook for that business going forward? Is it just a bigger balance sheet that is Giving you comfort in growing that and I guess how big would you like to see that business get with any higher interest?
Yes. Thank you for the question. Well, first, let me say that the team that we brought over Has as its roots GE credit granting experience. And they have the same roots that we have in our hotel Franchise Finance Group as well. So that's one of the things that attracted us to the team.
That's 1. Number 2, the Large bank that they came from is stepping away from this sector, mostly because we took the team. And so the Loans sitting on their balance sheet are right for the taking. And that's why these guys have only been on maybe, as I said, 6 weeks, 8 weeks most, they got $90,000,000 outstanding. They've got a very strong pipeline And they've already been approved for other loans that just need to be taken down by the borrowers.
So We're off to a good start and it's very encouraging. I would say longer term, there's no reason why this business will not look like Our resource financing business, which has $1,000,000,000 of loans, it's just a question of the timing of how we get there. And again, everything we do is safe, sound and thoughtful credit granting. So as long as we see loans that fit our credit box, We think the future for this group is very bright.
Okay. And then on another one of your National verticals, there's been some shake up in the HOA business with the competitive entering that space. So, I guess, In a larger scale, what are you seeing from a competitive standpoint there? And is there any reason to think that the growth trajectory on deposits and
Yes. Good question there as well. Well, first, let me say That our HOA deposit business is killing it. So in 2020, they had an all time record in They have brought in $1,100,000,000 So they've doubled Their production of 2020 in only 9 months. And so we're very optimistic about the continued growth In this area, both on the deposit side and it gets dwarfed by our balance sheet, but we're happy with the loan growth that we We have a couple of $100,000,000 loans are smaller in average size, outstanding credit quality and we'll continue to grow that as we grow the deposits.
But deposits are this HOA business is a technology driven business and many people don't realize that. And with the upheaval in the market, I could think of 2 or 3 banks that are coming together or have purchased an HOA business. We welcome competition. We're not frightened of it. And our performance to date indicates that We'll be able to stand up and continue to grow this segment.
Thank you
for the color. Thank
you. Your next question comes from the line of Chris McGratty with KWP.
The $1,900,000,000 that you referenced With regard to capital, Collyn, can you contextualize that a little bit? How big is that outstanding right now? And then could you also just review the overall mix of the legacy
So there are about over $3,000,000,000 $3,100,000,000 in both Description and capital call lines. We see that as a very opportunistic area for us to continue to grow. Private Equity, Venture Capital Funds that are our clients, they're growing their funds. And as they grow their funds, they need more capital to help enhance their IRRs. And we're dealing with the brand names that you would know that are publicly traded or very, very well known.
And we really Stepped into this business, we were basically silent on this business 2 years ago. And so we've kind of stepped into it And we like the growth prospects there. In terms of, I'll say, tech and innovation overall, Year to date, Tekken Innovation overall has seen loan growth stay rather flat. And that's because with all the liquidity In the VC ecosystem, a lot of our loans are getting paid down. But as I said on our town hall meeting yesterday about the Tech and Innovation Group, When they get lemons, they make lemonade and the lemonade that they're making is really on the tech and innovation side In terms of growing deposits, so they're having just an outstanding year in tech We have other places on the balance sheet to grow loans.
Was there something thanks for that color. Was there something in this quarter because the 1,000,000,000 And to get to 31, I mean that's I mean that's quite remarkable in 1 quarter. Is there anything specific to this quarter that I know that the growth has been tremendous For the industry, but basically a doubling.
Yes. First, let me say, it surprised us as well that they grew that quickly. We had been doing we had granted a number of approved a number of subscription lines, kind of stating dating back Bigger ones in size Q4 of 2020 and also the Q1 and Q2 of this year. And they just started to get pulled down. Utilization runs around 50% or thereabouts.
And our clients are pulling it down and we're happy that they are.
Great. If I could just sneak one more in. Dale, the held for sale conversation about that growing kind of over the near term. If we took a little bit of a longer view and looked Maybe a couple of years in a higher rate environment. How would you see this strategy at all, maybe not the balances be effective?
I think it's going to
top out. I'm not exactly sure at what level Or when that is, but as we continue to see economic recovery, we see broadening of demand across Other sectors, a number of which have higher yield. We think that this is accordion. I mean, it's really to us, It's almost like a parking in the securities book except it's rate sensitive and you can get the money out in 3 weeks. I mean these are very short So it's an alternative to that.
It certainly yields better. And so we've got excess liquidity with the enormous deposit growth we've had this year. We're parking it there as an alternative, but we can pull that down quickly. I think that over time we will. I mean, as we move Our loan to deposit ratio back up to 90 or wherever it might be, I think this, some of that give up is going to be from here.
I might also say that some of that give up is going to come from the securities book. We ran up our securities book hard in 2020 early 2021 because We didn't have this alternative. We have, I would say, underutilized deployment in there where we bought RMBS. And we can buy RMBS that yield a lot less or we can buy government guaranteed puts to the GSEs Basically the same kind of credit risk and make another 100 basis points.
Okay. So the securities book is flat to down from here?
Yes.
Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.
One question, I think a lot of the P and L stuff has been beat up pretty well. But one question I had is the commercial segment And the consumer segment had roughly equal growth and it looks like your earnings are roughly equal. Do you think about the business that way? Do you want a balanced Business model or do you expect one segment to outgrow the other over time?
So we meet on a weekly basis With our senior operating committee and every week we talk about what's happening in every market and what's happening with all the products. And it's at that meeting and also at our senior loan committee meetings where we allocate capital and liquidity as appropriate. So that's what drives us is where is the best risk adjusted returns and that's what we push on. We don't really come out and say Capital call sorry, consumer versus commercial lines need to be balanced.
Okay, good. Dale, there's been a lot of questions on the earning asset mix and you use the term optimizing the earning If you of all the things that you've talked about, if you had to point to 1 or 2 that we can expect to see in the next quarter or 2, what would they be?
Well, I think you're probably going to see kind of a continuation of what we've got so far. I would hope That we're going to continue to see broadening out of our loan development and production alternatives. And, but at the same time, we've got so much room and so much liquidity to kind of finally deploy, I might say. So that could mitigate what we'd be doing on say loans held for sale as we just discussed or other factors. But We've got strong loan growth.
I think we've got opportunities to kind of continue to and maybe trade away. I mean, Capital call lines, we love them. They're just we think they're bulletproof in terms of structure, but they're obviously not the yielding thing we have and they also consumed a little bit more in terms of risk weighted assets at 100%.
Okay, good. On the non interest income line, just to kind of put that to bed, I think the message you're sending is don't expect it to grow at the same pace It's managed just income, but it will show up somewhere in the P and L and it may bounce around a little bit, but don't We expect fees to keep pace with NII. Is that fair?
Yes, I think that's fair.
Okay. And then just one question for you Ken on EPS. I actually had to look up Asymptote to remind me what that meant. And so I'm going to ask you a simple question on the $2.30 EPS that you put up for the quarter. Anything in there that you think is unsustainable, even if I put What's the number $2,000,000,000 of loan growth and I think it's too low.
Anything that's unsustainable in the $230,000,000
Well, first, That was Dale showing off, but he's studying for the SAT exam and we wish him all the best. On the $2.30 really there's nothing there that's unusual that I would remove that with lower EPS. I think that's a fairly good base to use. And then I see where you're going. Take your take the incremental jump off on the ending loan balance to the average loan balance of 3
If you look at the Q3, I mean, we have a spectacular operating leverage on a linked quarter basis. I think expenses were up 6 The amount of revenue, that trend is not obviously sustainable, but consistent with our guide that we should be in the lower 40s. So from here, I don't think that there's anything that you really have to pull back from.
Our next question comes from the line of David Chiaverini with Wedbush.
Hi, thanks. I have a follow-up on the size of the held for sale portfolio. You mentioned about It rising with deposits. But when I look at the period end balance versus the average, it's lower. And I would Assume that, and I may be stating the obvious here, but it would be a function of mortgage origination level.
So for instance, over the summer months, when you're originating, say, dollars 20,000,000,000 if we go into the winter months and you're originating $10,000,000,000 And you're holding these loans for 3 weeks. I imagine that those held on the balance sheet would be lower through the winter. But can you
Actually, it's more kind of liquidity balancing for us. I appreciate your comment. And it is based on kind of originations, but these are sold in short forwards to the GSEs for delivery. And we just extended that a little bit. What we do though is we extend those a little bit more so that they come due in the middle of the month Rather than at the end, if you had the kind of if you saw our daily balance sheet, and you can kind of infer this from what What you've seen before, we tend to run up on loans toward the end of a month and toward the end of a quarter.
So there's
a little bit of trough in
the middle. And you see this on the loan book, which had For the quarter, north of a $3,000,000,000 lower average than the ending. And so now we're in this period of flatlining where Our loan growth so far has gone up a little, but not a lot in the 4th quarter. That's pretty typical and then kicks in as we go later in the year. So what we've done As we run up the held for sale book early on in the quarter, it gets you to a higher average.
And then when the loan book spikes at quarter end, We drive the held for sale balance down.
Got it. Very helpful. And then you mentioned about The gain on sale margin, you're expecting it to approach the 2018 level. Can you remind us what that margin was in 2018?
It was in the high 30s in 2018.
Great. And then shifting to that new team in Texas, the single family home construction CRE national business line. You sized the restaurant franchise finance and that could get to $1,000,000,000 Can you give us a sense of how big you expect This team and this portfolio to grow?
I'm having a little trouble giving you that number, Because there are several factors that come into play, housing permits, the churn And all that, but we wouldn't have gone into this area and hired this team Unless we thought that over time, we could get to about the same level as the food Franchise group. I just don't know how quickly they're going to get there, but they've got a very strong pipeline. We're very active In terms of helping them and flying down there and working with them and their client base. So a lot of optimism around it. Well, I would say, I think you should use the same $1,000,000,000 number for the food franchise.
And this concludes the question and answer portion of our call. I will now turn the call back over to Mr. Ken Pechione for closing remarks.
Yes. Just thank you all for joining us today. We think we had a killer quarter, And we look forward to talking to you in a couple of months from now about our Q4 results. Thank you all. Have a good weekend.