Western Alliance Bancorp
NYSE:WAL
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Western Alliance Bancorp
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Good day, everyone. Welcome to Western Alliance Bancorporation's Third Quarter 2021 Earnings Call. You may also view the presentation today via webcast through the company's Web site at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern Time, October 22 through November 22, 2021, at 11 p.m. Eastern Time by dialing 1(800) 585-8367 using conference ID 5392611.
I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.
Thank you. And welcome to Western Alliance Bank's Third Quarter 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, 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 Web site.
Now for opening remarks, I'd like to turn the call over to Ken Vecchione.
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 WAL 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 billion asset milestone. Validating our strategy during the quarter, we raised $300 million in inaugural preferred offering, achieving the lowest ever preferred dividend rate for a US bank under $100 billion in assets at 4.25%.
In the third quarter, exceptional balance sheet expansion continued with our highest ever quarterly loan growth of $4.8 billion or 63% on a linked quarter annualized basis and deposits rose by $3.4 billion or 32% annualized as we continue to effectively deploy liquidity. Loan demand continued to broaden across our business lines, with C&I loans increasing by $2.2 billion, inclusive of $240 million of PPP runoff, along with $2.3 billion of growth in our residential portfolio. Notably, capital call lines drove $1.9 billion of growth within C&I as deal activity continues to be strong and utilization rates rose. Additionally, resort lending and hotel franchise finance contributed approximately $114 million to loan growth as well as $148 million increase in CRE investors.
For the third quarter, WAL generated record total net revenues of $548.5 million, a 57% annualized rise, in PPNR to $317.1 million 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 $12.3 million, an increase of $26.8 million from the $14.5 million provision release in the second quarter. We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.83% and 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 as thoughtfully managed to maximize value for the entire bank through loan, deposit and net interest income growth. A $5.2 billion increase in average earning assets drove net interest income growth of $39.9 million or 10.8% for the quarter or 43% annualized to $410.4 million of excess liquidity deployment into loans and loans held-for-sale contributed significantly to earnings.
Fee income increased $2.1 million to $138.1 million and now represents over 25% of total net revenue. Asset quality continues to remain stable as total nonperforming assets declined to $10 million to 17 basis points of total assets and net charge-offs were $3 million 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 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 professionals. Both teams join us from larger commercial banks where they improved their business plans and built robust multibillion-dollar books of business. The Texas CRE team has $10 million in outstandings and an additional $110 million approved to be funded and a $400 million pipeline. Likewise, the restaurant franchise finance team has $90 million in outstandings and $54 million approved to be funded and a pipeline of $300 million.
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 $548.5 million, up 8.3% quarter-over-quarter or 33% annualized. Net interest income grew $39.9 million during the quarter to $410.4 million, an increase of 44% year-over-year, primarily a result of our significant balance sheet growth and deployment of liquidity into higher-yielding assets. PPNR rose 57% on an annualized linked quarter basis to $317.1 million excluding acquisition and restructuring expenses. Noninterest income increased $2.1 million to $138 million from the prior quarter as mortgage banking-related income rose $12 million for the quarter and totaled $123.2 million.
Servicing revenue increased $23 million in the quarter as refinance activity slowed, despite a smaller servicing portfolio of $47.2 billion 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 forma acquisition expectations, contributing $0.58 during the quarter, which is inclusive of $0.20 in net interest income from AmeriHome using our balance sheet, an opportunity most stand-alone correspondent lenders don't have. Finally, adjusted net income for the quarter was $238.8 million or $2.30 in adjusted EPS, which is inclusive of a credit loss provision of $12.3 million, but excludes pretax merger and restructuring charges of $2.4 million. Turning to net interest drivers.
During the quarter, deployment of our excess liquidity into higher-yielding assets drove both loan growth and net interest income growth. Loans held-for-sale increased $2.1 billion 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 of low to no lost 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 basis points. Consistent with our previous comments, we believe that in the current rate environment, funding costs have stabilized. Net interest income grew $39.9 million during the quarter to $410 million or 44% year-over-year as balance sheet growth and optimization and earning asset mix generated robust spread income. Average earning assets increased $5.2 billion 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 for sale, which we view as a higher-yielding cash-like alternative.
Despite our successful liquidity deployment in Q3, we sell a meaningful dry powder of $1 billion 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, and we have 47% noninterest-bearing deposit funding. Our efficiency ratio improved to 41.5% from 44.5% during the quarter, while we continue to make investments to support risk management and sustained growth. The inherent operating efficiency of deploying excess liquidity has helped push our efficiency ratio to the lower 40s.
Pre-provision net revenue increased $39.7 million or 14% from the prior quarter and 75% from the same period last year. This resulted in a PPNR ROA of 2.45% 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 other capital management actions as well as meet credit demand. Balance sheet momentum continued during the quarter as loans increased $4.8 billion or 15.9% to $34.8 billion. Strong deposit growth of $3.4 billion brought balances to $45.3 billion at quarter end, and all total assets have grown 58% year-over-year to $52.8 billion. Total deposits increased $313 million over the prior quarter to $2.1 billion, primarily due to overnight borrowings of $400 million, partially offset by the redemption of $75 million in subordinated debt.
As Ken described, we experienced record quarterly loan growth this quarter with growth evenly split between residential and C&I loans. In all, loans grew $4.8 billion during the quarter and were up $5 billion ex PPP runoff and 34% year-over-year. Residential real estate and C&I loans grew $2.3 billion and $2.2 billion, respectively. Turning to deposits. We continue to see broad-based core deposit growth across our business channels. Deposits grew $3.4 billion or 8% in the third quarter, with the strongest growth in savings and money market accounts of $1.6 billion. Noninterest-bearing DDA accounts contributed $950 million and represents 47% of total deposits. Strong performance from commercial clients, robust fundraising activity and tech and innovation and seasonal inflows in HOA banking relationships were all significant drivers of deposit growth during the quarter. We are confident in the stickiness of deposits that we've generated in recent quarters, particularly as our newer initiatives are finally taking root.
Our asset quality remains strong and stable. Special mention loans continued to decline to $364 million or 105 basis points of funded loans. Total classified assets rose $26 million in the third quarter, $265 million or 50 basis points in total assets, but are down more than 40% from a year ago on a ratio basis. Total nonperforming assets declined $10 million to 17 basis points in total assets. Quarterly credit losses continue to be nominal. In the third quarter, net charge-offs were $3 million or 4 basis points of average loans annualized compared to $100,000 in the second quarter. Our loan allowance for credit losses increased $15 million from the prior quarter to $275 million due to robust loan growth. In all, total loan ACL to funded loans is 80 basis points or 82 basis points when excluding PPP loans. As mentioned in prior quarters, the strategic focus of the bank is to source a significant portion of loan growth from low to mid last segments to achieve a risk-diversified portfolio with the third quarter loan growth, our low to no loss segments now comprise over half of total loans.
Given our industry-leading return on equity and assets, we generate sufficient capital to fund about 25% to 35% annual loan growth depending on the mix and this is after dividend service. Our tangible common equity to total asset ratio of 6.9% and common equity Tier 1 of 8.7%, were weighed down this group quarter by robust asset growth in excess of these levels. As you have seen throughout the year, we took several capital actions to enhance our capital staff and support ongoing growth. During Q3, we issued $300 million of preferred equity, which was slightly offset in total capital as we redeemed $75 million of subordinated debt. We are also redeeming $175 million of 6.25% subordinated debt this quarter, which we anticipate to be completed in November. We will recognize a $6 million pretax nonrecurring charge associated with this redemption as we accelerate amortization of origination costs on net debt. 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 of $34.67 or 19% growth in the past year. Our tangible book value per share growth is industry-leading and has grown 2.5x out of the peers over the past five years or at a compound annual rate of over 19%. I'll now hand the call back to Ken to conclude.
Thanks, Dale. The third quarter really was an exceptional quarter from an earnings and loan growth perspective as our distinctive national business strategy model continues to hit on all cylinders. Impressively, end-of-period loan balances were $3.3 billion greater than the average balance, which provides a strong jump-off point for the fourth quarter. Net interest income in addition to the $1 billion in excess liquidity that we are gradually deploying in the coming quarters. We're very excited about the diverse set of growth opportunities in front of us as we enter the fourth quarter. Looking forward, for full year 2022, you can expect loan held for investments to continue robust growth with a quarterly minimum of $1.5 billion to $2 billion, an increase from the prior guidance of $1 billion to $1.5 billion 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 flexibility to both execute on near-term opportunities while investing for the long-term growth.
At this time, Dale, Tim and I are happy to take your questions.
[Operator Instructions] Our first question comes from the line of Ebrahim Poonawala 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, one, is this efficiency ratio sustainable, especially given your asset size going over $50 billion 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 two?
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 a company, I think it may be a little bit unique rather compared to our industry peers is not only are we working on 2022's growth. But 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 it 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 2022's EPS guidance that we had given when we did the acquisition, which has now folded into our overall guidance as we talk about the company.
Ebrahim, we appreciate your comment on alluding to the $50 billion as being a hurdle that sometimes is accompanied with higher levels of risk management expenses. But as Ken indicated, we've been leading this ahead for years now. And so we have already put in place much of that infrastructure that we need and expect -- basically, on risk management, you probably get diseconomies of scale as you grow. But we're prepared for that, and that's embedded in our guidance on efficiency.
Just because I think the other side of low efficiency is concerns around underinvestment. So I think that's helpful. And then just separately on the loan growth, Ken, I think you mentioned a minimum of $1.5 billion to $2 billion. Can you give us an upside scenario of what could lead that loan growth to being much stronger? Obviously, you are a much larger bank today. I would imagine there are much more -- 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 drive that?
Let me just add to the last comment -- the first comment you made that we are very cognizant of underinvesting. 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 $1.5 billion to $2 billion. If you kind of look backwards, you can see that our old guidance of $1 billion to $1.5 billion, we easily pass that or succeeded that. But right now, as I look forward, we have strong demand for subscription and capital call lines. There is demand in lot banking, hotel and residential construction.
We believe there will be some new AmeriHome products that will 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 CRE 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 preleased. 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 like to add that for a couple of quarters now, we've talked about having to rightsize the loan-to-deposit ratio. Obviously, if we're growing $1.5 billion to $2 billion on each side of the balance sheet at the same time, we're not going to move that number. 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 Jefferies.
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 had talked about getting resi loans to about 30% of the loan book. Is that still kind of your limit? And then once you get there, is $1.5 billion to $2 billion a quarter still sustainable and is that -- especially with all these new businesses that you're looking to add on at the end of '22?
Thanks, Casey, for your question, and thanks for the very eloquent way you called me a sandbagger. I appreciate that. First, if I wasn't clear, the $1.5 billion to $2 billion is our minimum loan growth numbers. We actually said that we think we're going to post mid 25% 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-25% range. And to the 30% number, we can get there as quickly as we want. We would prefer to see it more coming in 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 dictated 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.
Yes, 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 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 side.
Dale, a question for you on the mortgage servicing lines within fees and expenses. A positive swing to the tune of about $30 million. 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, we look at it more on a total revenue from AmeriHome rather than looking at those 2 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 a 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 singing what the gain is on terms of the disposition. So one feeds the other and they run off of each other in a fairly short window on our balance sheet and income statement unlike some others.
And just lastly, on the capital management front. Ken, 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 -- and a 25% plus ROE that you'll just rebuild organically to get above 9%, or 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 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 the fourth quarter. Our goal is to be just above 9% on a CET1 ratio. I think once we get there and if our 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.
Dale, 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 versus the old were coming on?
Yes, new loan yields are pretty much on top of slightly lower than what we're running off. The reason why we had a 20 bps decline and I think I alluded to this, but I'll give it a little more color, is because of the mix change. We put on north of $2 billion of residential. Those yields are about 3. We put on just short of $2 billion worth of basically capital call lines. Those yields are pushing 2.5 to 3. So if you add both of those in, that probably explains the 20 basis point kind of slip 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 yield in the fourth quarter from the third, yes, I believe we will. 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. As we did this quarter, as well, we expect to just kind of plow through that in terms of net interest income performance.
And as you guys have reshaped the loan portfolio and will continue to reshaping with more resi. How do I think about sort of asset betas, if the Fed were to, in fact, start raising rates at some point in the future? I know you have the loan floor number in the Q. 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 time around since you do have more fixed-rate product on the books?
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 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 much on the asset yield improvement nor are we going to see much in terms of funding costs. Two reasons on the funding cost. One is, we've got a very heavy proportion of DDA today. And two 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 betas 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.
And final question for me. You mentioned your decision to hold more the mortgage loans on the books this quarter. Obviously, that helped the average held for sale balance. Is your intent to continue to do that? Obviously, market conditions will drive that. But -- or if you just kind of scratch the surface on kind of where you think that number can go in terms of adding new products at AMH, et cetera? Just wanted to get a sense of that average balance going forward of loans held for sale.
I think the average balance is going to rise. It's going to rise as you see deposit growth continue. We had a $7.3 billion average balance for Q3 for the held for sale versus an ending loan balance of $6.8 million. We see this as an attractive way to generate incremental net interest income. These loans earned 3.35%, 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 account that has a three week turn to it or three week maturity that is government protected. I mean, this is great. We love it. And this is one of the reasons both Dale and I alluded to in our comments that these are the benefits that we get with AMH that stand-alone 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 on to WAL's balance sheet. And as I said, at the end of the day, better than investing in 10 basis points as I said. That's what was told to us at PS 169, if there was anyone from New York on the line.
Your next question comes from the line of Brock Vandervliet with UBS.
I understand the comments about looking at AmeriHome in terms of total revenue basis in terms of the contribution, but for the mortgage geeks in the room, if you can just kind of talk about the math on the gain on sale, how that may fluctuate? 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 in the marketplace?
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 in our big pro forma, 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 assume that we were going to lower their cost of funds. We assume that we could go out and cross-sell against their 840 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 to compress without jeopardizing our pro formas.
We've already started a couple of these and we talked about this, I think, last time as well. 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 GOS revenue as well as nonqualified 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 higher, 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 can kind of rely on us for liquidity.
And just to clarify that, Dale, if you had sold straight away, would that have resulted in a higher gain on sale that by holding you're just choosing to recognize in NII or some other place?
No, I don't think it would result in a higher GOS if we had sold immediately. What it would have resulted in is less interest income. So we said they had $0.58 contribution. Well, $0.20 of that is basically them using our balance sheet and liquidity to use this held for sale line and hold 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 the revenue sources, then 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 and 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 spend time talking about a business that has a 6 multiple handle to it when I'd much rather talk about tech and innovation, and the 29 multiple that that they get on tech and 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 question comes from the line of Brandon King with Truist Securities.
I appreciated the details and commentary on the recent hire that you made in the production volume so far. But I 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 compensation or whatnot, but just wanted to get more color on that?
And I do think the ability to hire is one of the longest poles 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 closures, those types of folks offered hiring bonuses that seem to have worked and bring people in. So that's good. So I think 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 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.
And then touching on credit. So the reserve on a percentage basis has declined in the quarter, but there was a provision obviously because of the higher balance sheet growth. And now that you're growing in a 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 the CECL environment currently expected credit locks as well. Gosh, I mean, one of the things that was powerful in our ratio declining so quickly is the expectations 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 collateral value collapse. No one was ever going to go to the office again. And so those estimates by the Blue Chip and Moody's and others, we're fairly dramatic in terms of a swing. That didn't happen. And now that has basically been abated. And so here we are with low expectations of collateral 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 but at a 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 if 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 four years. So if I say I need 4 basis points a year, and we've got to cover four years average life, well, 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.
And we have a little bit of a rate volume thing going on here. The volume being dollars, we anticipate continuing to add to the provision. But the rate side, you'll see it decline a little bit. So that's what we're balancing here.
Our next question comes from the line of Timur Braziler with Wells Fargo.
Most of my questions have been asked and answered. Just maybe just two more. The build-out or I guess the hire in the franchise finance business. I think that lending category has been relatively 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 the new hire in place?
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 one. Number two, the large bank that they came from is stepping away from this sector, mostly because we took the team. And so the loan sitting on their balance sheet are ripe for the taking. And that's why these guys have only been on maybe, as I said, six weeks, eight weeks most, they got $90 million outstandings, 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 resort financing business, which has $1 billion 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.
And then another one of your national verticals. There's been some shake-up in the HOA business with a competitor entering that space, 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 is there any different with the shakeout?
Well, first, let me say that our HOA deposit business is killing it. So in 2020, they had an all-time record in terms of deposit gathering and brought in $683 million. Year-to-date, they have brought in $1.1 billion. So they've doubled their production of 2020 in only nine 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 have there. We have a couple of hundred million dollars. 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 two or three 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.
Your next question comes from the line of Chris McGratty with KBW.
The $1.9 billion that you referenced with regard to capital call, can you contextualize that a little bit? How big is that outstanding right now? And then can you also just review the overall mix of the legacy bridge book?
So there are about over $3 billion, $3.1 billion in both subscription 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 two 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, tech and 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 the tech and innovation deposit gathering. They're up over $800 million. So again, that helps us fuel other opportunities we have other places on the balance sheet to grow loans.
Was there something in this quarter because $1.9 billion to get to $3.1 billion, I mean, that's is quite remarkable in one quarter. Is there anything specific to this quarter that -- I know that the growth has been tremendous for the industry, but basically a doubling?
First, let me say it surprised us as well as they grew that quickly. We had granted or approved a number of subscription lines dating back bigger ones in size Q4 of 2020 and also the first quarter and second quarter of this year. And they just started to get pulled down. Utilization runs around 50% or thereabouts, our clients are pulling it down, and we're happy that they are.
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 out maybe a couple of years in a higher rate environment, how would you see this strategy at all, maybe not -- the balances be affected?
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 -- it's an 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 three weeks. I mean, these are very short kind of roles. 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 and 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.
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&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 -- consumer versus commercial lines need to be balanced.
Dale, there's been a lot of questions on the earning asset mix, and you used the term optimizing the earning asset mix. Of all the things that you've talked about, if you had to point to one or two that we can expect to see in the next quarter or two, 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. 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 your other factors. But if we've got strong loan growth, I think we've got opportunities to kind of continue and maybe trade away. I mean, capital call lines, we love them. We think they're bullet-proof in terms of structure, but they're obviously not the highest yielding thing we have, and they also consume a little bit more in terms of risk-weighted assets at 100%.
On the noninterest 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 as net interest income, but it will show up somewhere in the P&L, and it may bounce around a little bit but don't necessarily expect fees to keep pace with NII. Is that fair?
Yes, I think that's fair.
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 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 billion of loan growth? And I think it's too low. Anything that's unsustainable in the $2.30?
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 was nothing there that's unusual that I would remove that would 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 $3.3 billion, make some assumptions on how we deploy cash and take your Q3 to Q4 earnings or move them in that direction.
I mean if you look at the third quarter, I mean, we have a spectacular operating leverage on a linked-quarter basis. I think the expenses were up 6% to the amount of revenue. That trend is not obviously sustainable. But consistent with our guide that we could 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.
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 levels. So for instance, over the summer months, when you're originating, say, $20 billion, if we go into the winter months and you're originating $10 billion and you're holding these loans for three weeks, I imagine that those held on the balance sheet would be lower through the winter. But can you talk about that a little bit?
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 saw our daily balance sheet and you can kind of infer this from what you've seen before, we tend to run up on loans towards the end of the month and towards the end of a quarter. So there's a little bit of a trough in the middle. And you see this on our loan book, which has for the quarter north of a $3 billion lower average than the ending. And so now we're in this period of flat lining where our loan growth so far has gone up a little, but not a lot in the fourth quarter. That's pretty typical and then kicks in as we go later in the year. So what we've done is we run up the held for sale book early on in the quarter. That gets you to a higher average. And then when the loan book spikes at quarter end, we drive the held for sale balance down.
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 on the high 30s in 2018.
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 billion. Can you give us a sense of how big you expect this team in 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 hire 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 at their client base. So a lot of optimism around it. But I would say, I think you should use the same $1 billion 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 Vecchione 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.
This concludes today's conference call. Thank you for participating. You may now disconnect.