Q3 2021 Western Alliance Bancorp Earnings Call
Good day everyone. Welcome to Western Alliance Bank corporations. Third quarter 2021 earnings call. You may also view the presentation today via webcast through the company's website. At www.weiu.net Corporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern time, October 22nd through November 22nd 2021 at 11.
P.m. Eastern time, dialing 1-800-568-7423 nine two, six, one one. I would now like to turn the call over to Miles. Pondelik, pondelik, director of investor relations and corporate development, please go ahead.
Ed, thank you, welcome, Western Alliance Banks. Third quarter 2021 conference. Call our speakers today are Ken vecchione, president and chief executive officer and Dale, Gibbons, Chief Financial Officer beforehand, the call over to Ken. Please note that today's presentation contains forward-looking statements, which are subject to risk, 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.
Early for many forward-looking statements. Please. Refer to the company's SEC filings including the form 8-k filed yesterday, which are available on the company's website. Now, for opening remarks. I'd like to turn the call over to Ken vecchione. Good morning and good afternoon to everyone. Also joining us here. Today is Tim Bruckner our chief credit officer. This court has results. Continue to demonstrate. The unique benefits of Western Alliance has National Commercial business strategy to position wall as one of the
The country's Premier growth commercial, banks, that consistently generate.
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 dollar asset Milestone validating our strategy during the quarter. We raise 300 million dollars in an inaugural preferred offering achieving the lowest ever preferred dividend rate for a u.s. Bank under a hundred billion in assets at 4.25%.
And the third quarter, exceptional balance sheet expansion continued with our highest ever quarterly long growth of 4.8 billion or 63 percent on a link quarter, annualized basis.
And deposits Rose by 3.4 billion or 32 percent annualized. As we continue to effectively deploy liquidity loan demand, continue to broaden across our business lines with cni loans, increasing by 2.2 billion, inclusive of 240 million of triple P run off along with 2.3 billion dollars of growth. In our residential portfolio. Notably Capital call lines drove, 1.9 billion of growth within C. And I as deal.
If he continues to be strong and utilization rates Rose, additionally Resort, lending and hotel franchise. Finance contributed, approximately a hundred and fourteen million dollars. To Long group grunt long growth as well as a hundred Forty-Eight million increase in cre investor. For the third quarter wall generated record, total net revenues of five hundred forty. Eight point five million dollars. A 57 percent annualized rise in ppnr to 317 Point 1 million.
In and adjusted EPS of two dollars and thirty cents. Adjusted EPS, quarter-to-quarter Rose by one penny as the company recorded a provision for credit losses, totaling 12 point, three million dollars, an increase of twenty, six point eight million from the 14.5 million provision released in the second quarter. We remain one of the most profitable banks of the industry with return on average assets and return. On average tangible, common Equity of 1.83 percent and twenty six points.
Percent 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 is thoughtfully managed to maximize value for the entire Bank. Through loan deposit and net interest income growth, a 5.2 billion dollar increase in average earning assets. Drove net interest income growth.
Of thirty, nine point nine million dollars or 10.8 percent for the quarter or 43 percent annualized to four hundred and ten point four million dollars as excess liquidity deployment into loans and Loans held for sale contributed significantly to earnings fee income, increased 2.1 million to a hundred thirty-eight Point, 1 million dollars and now represents over 25% of total. Net revenue asset quality continues to remain stable as total non-performing.
Decline to 10 million dollars to 17 basis points of total assets and net charge.
We're 3 million dollars or four 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 and 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 for extremely well to attract and retain uniquely qualified talent.
To thoughtfully sustained growth with Superior risk-adjusted returns, for example. During the quarter. We hired two season teams. We had 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 higher of six loan and credit professionals. Both teams. Join us from larger commercial Banks where they prove their business plans and
Robust, multi-billion dollar books of business. The Texas cre team has 10 million in outstandings and an additional hundred. Ten million approved to be funded and a 400 million-dollar pipeline. Likewise, the restaurant franchise Finance team, has 90 millions in outstandings and fifty four million dollars approved to be funded and a pipeline of 300 million dollars. They will now take you through the details of our quarterly Financial.
Performance again for the quarter Western Alliance. Generated record net, revenue of five, hundred forty, eight and a half million up. 8.3% quarter-over-quarter for 33 percent annualized, net interest income grew, thirty nine point nine million during the quarter. To four hundred ten point four. And increase of 44 percent year over year, primarily results of our significant balance sheet growth and deployment of liquidity into higher, yielding assets, ppnr Rose to 57 percent on an annualized.
Quarter basis to 317 Point 1 million, excluding acquisition and restructuring expenses.
Non-interest income increase, 2.1 million 238 million from the prior quarter. As Mortgage Banking related income, Rose 12 million for the quarter and totals a hundred and twenty three point, two million servicing Revenue increased 23 million in the quarter is refinance activity slowed despite a smaller servicing portfolio, the forty seven point two billion in unpaid principal balance. Gain on sale margin was 51 basis points for the quarter as we extended the time from funding to sail which positively
Acted net interest income with these evolving mortgage sector fundamentals. Amerihome continues to meet our pro forma acquisition expectations, contributing 58 cents, during the quarter, which is inclusive of twenty cents, and net interest income from amerihome using our balance sheet, an opportunity. Most Standalone correspondent lenders, don't have finally adjusted. Net income for the quarter was two hundred thirty eight point, eight million or two dollars and thirty cents in adjusted EPS, which
Is inclusive of a credit loss. Provision of twelve point three million, but excludes pre-tax, merger restructuring, charges of 2.4 million.
Turning.
Interest drivers during the quarter deployment of our excess liquidity into higher, yielding assets, growth loan, growth and that interest income growth loans held for sale. Increased 2.1 billion, in are yielding three point three five percent on a link quarter basis. Yield Bond. Loans held for investment declined. 20 basis points to 4.28, which is fully explained by the continued strong growth and low to no loss. Asset categories, namely residential loans and capital call lines.
Interfering deposits remained. Relatively stable from the prior quarter at 21 basis points, as we're total cost of funds at 28 basis points, consistent with our previous comments. We believe that in the current rate, environment funding cost has stabilized.
Net interest income group of thirty. Nine point nine million during the quarter of 410, or 44 percent year over year as balance sheet growth in optimization of earning asset, mix generated, robust spread income, average earning assets, increase 5.2 billion or 12 percent during the quarter to 48.4. Additionally. We successfully deployed the quiddity into loans and have healthy Investment Portfolio, relatively flat in favor of loans held for sale, which we view as a higher yielding cash light alternative.
Despite our successful liquidity deployment in, Q3. We sell of meaningful, dry powder of 1 billion dollars in cash and the opportunity to further fund loans through continued deposit growth.
As a result of loan growth in lower yield and categories. And in Decline 8 basis points to 3.4 3%, 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 percent, non-interest bearing deposit Thunder.
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.
Provision net revenue, increased thirty nine point seven million or 14 percent from the prior quarter and 75 percent from the same period last year. This resulted in a ppnr Roa, two point, five, five, two point four, five percent for the quarter and increase of 14 basis points compared to 231 from the last quarter. This continued strong performance and leading Capital generation provides a significant flexibility to fund ongoing balance sheet growth, support infrastructure. And
Capital other Capital Management actions as well as meet credit demands.
Balance sheet momentum continued during the quarter as loans. Increased 4.8 billion or 15.9 percent to thirty four point eight billion, strong deposit growth that 3.4 billion brought balances to forty five point three billion, a quarter and in all total assets have grown 58 percent year over year, 250 2.8 billion, total deposits increase. 313 million over the prior quarter to two point, 1 billion, primarily due to overnight borrowing. So 400 million.
Redemption of a hundred of 75 million in subordinated, debt.
If you can describe, we experienced record quarterly loan growth. This quarter with growth evenly split between residential and cni Loans, in all loans group, 4.5, 4.8 billion during the quarter. And we're up to five billion dollars extra pulpy. Run up run off and 34 percent year-over-year, residential real estate and cni 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 eight percent in the third quarter with the strongest growth in savings and money, market accounts of 1.6 billion. Non-interest bearing DDA account has contributed 950 million and represents, 47 percent of total deposits. Strong performance from commercial clients, robust fundraising activity and Tech and innovation in seasonal in.
Lows, in HOA banking relationships were all significant drivers and deposit growth during the quarter. We are confident in the stickiness of deposits that we generated in recent quarters particularly, as our newest newer, initiatives are finally taking room. Perhaps the quality remains strong and stable special mention loans continue to decline to three hundred sixty four million or a hundred five basis points of funded loans. Total classified assets, Rose 26 million in the third quarter 216.
Five million or 50 basis points in total assets, but are down more than 40 percent from a year ago on a racial basis. Total non-performing assets to client, 10 million to 17 basis points in total assets.
Quarterly credit losses continue to be nominal in the third quarter. Net charge officer 3, million, or for basis points, above average low, the unannualized compared to a hundred thousand. In the second quarter, our loan allowance for credit losses, increase 15 million from the prior quarter to 275 million due to robust loan growth and all total loan ACL for funded loans is 80 basis points or 82, basis points when excluding triple P 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 last segments to achieve a diversified risk. A risk Diversified portfolio with the third quarter low growth are low to no last segments. Now, comprise over half of total loan.
Giving her industry-leading return on equity and assets. We generate sufficient Capital to fund about 25 to 35 percent annual loan growth, depending on the mix. And this is after dividend service are tangible common Equity to total asset ratio of 6.9%, and common Equity, Tier 1 of 8.7%. For way down this group, quarter by robust asset growth in excess of these levels.
As you've 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 is redeemed. 75 million is subordinated debt. We are also redeeming, a hundred seventy five million dollars of 6.25% subordinated debt this quarter, which we anticipate to be completed in November will recognize a six million dollar pre-tax.
During charges associated.
With this Redemption, as we accelerate emeralds ation of origination costs on that debt.
Inclusive are our quarterly cash dividend payment, which we increased to 35. Cents are tangible book, value per share. Rose a dollar eighty one in the corner, 3467 or 19% growth in the past year are tangible book value per share, growth is industry-leading and grown two-and-a-half times out of the peers, over the past five years, and we record a compound annual rate of over 19%. Hello. Hanna call back again to conclude. Thanks Dale.
The third quarter really wasn't 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, or 3.3 billion greater than the average balance, which provides a strong jump off point for for the fourth quarter, that interest income. In addition to the 1 billion in excess liquidity, that we are gradually deploying in the coming quarters. We're very excited.
Read 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 one and a half, two billion dollars and increase from the prior guidance of one to one and a half billion, or a low to mid 20s percent growth rate for the year with flexible. Origination mixed designed to maximize
Is 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.
Is to Market total revenue and ppnr growth will track down. She growth as we benefit from operational. Leverage regarding Capital. We are targeting a CET, one ratio of 9% which our robust quarter and 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 Capitol Mall.
Office 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.
Thank you to ask a question. You will need to press star one on your telephone to withdraw, your question. Press the pound key. Our first question comes from the line of your ham and Wala with Bank of America.
Good morning. Good morning. I guess just first. Can you talk about next year and the low 40s? Efficiency ratio? I think, the one thing that investors wrestle with is just a sustainability of your Oar. OE. 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 market side that we should worry about that could impact.
The profitability of the bank or the next year or two? Okay. Thanks Ephram first, we think the efficiency ratio in the lower 40s is sustainable for the next couple of years. We think are 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 a we working on 2022 s growth but right now we're working on
Grow, 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 am H. 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 2022. EPS guidance that we had given when we did the acquisition, which is now folded into our overall guidance. As we talk about the company.
Abraham, I appreciate your comment on, on, on alluding to the 50 billion. Is being a hurdle that sometimes is, is a company that with higher levels of risk management expenses, but it's can indicated. We've been leading a this ahead for four years now. And so we have already in put in place much of that infrastructure that we need and expect that, you know, basically on risk manager, you probably get diseconomies this scales as you grow, but, but we're prepared for that and that's embedded in our guidance, on efficiency.
That's hopefully, they learn things just because I think the other side of low efficiency is concerns around under investment. I think that's helpful. And then just a separately on the loan growth that can I think you mentioned minimum of one and a half to two painters and 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 much more many more opportunities than you had even 12 months ago. So give us a sense of whether you see, more upside to downside risk to that loan growth Outlook and What would life
Thank you. Okay. Thank you. Welcome. Let me just add the last comment that 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.
How about growing between one and a half to two billion?
If you kind of Look Backwards, you can see that our original, our old guidance of one to one and a half billion. We easily passed that or succeeded that but right now, you know, 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 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 as well, we see a great deal of activity in the CRA income-producing space specially with distribution centers, you know, we've done a few spec centers and before the shells, even lifted, those spec centers have been already, pre least. 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
His confidence as we go through the year in 2022, looking forward to 2023 in terms of our growth momentum. So, yeah, I guess, you know, the short answer is I'm feeling good. I would, I would also add like to add that after a couple of quarters. Now, we've talked about having to right-size the loan to deposit ratio. Obviously, if we're growing, you know, one and a half to two billion dollars on each side of the balance sheet. At the same time. We're not going to move that number.
We did we'd made some progress this last quarter where we took it to the higher 70s from the low 70s, but, you know, we used to be at 95. So I expect, you know, as we, you know, go through this period and and just made largely happen in the residential space But we would have some outside quarters. Where loan growth is going to continue either way, at that low loan to deposit deployment rate as and just want to add one comment to my statement, which is I want to make sure everyone on the line and knows that we're not.
They seem longer of all, right. So 51 percent 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 as we've been posting these numbers.
Go to thanks for taking my questions. You guys.
Your next question comes from the line of Casey hair with Jeffries. Thanks. Good morning guys. Hey case. So, you know pretty conservative especially with with all the runway you have on the resi mortgage side, you know this time next year you guys, you know, I think you guys have talked about getting Reggie loans to about 30 percent of the loan book. Is that still, you know, kind of your limit and
And once you get there is is a, you know, a billion and a half to two billion, a quarter seal sustainable. And is that you know, especially with all these new businesses that you're looking to add on at the end of 20 to thank you 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 billion and a half to two billion is our minimum loan growth numbers. We actually said that. We think we're going to post
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 more coming on the commercial side, but we have a very balanced and restrained Viewpoint at this moment on the 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 caught. Get am H is 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 put on more long growth really long.
Local be dictated somewhat by deposit growth. As Dale says, we've got plenty of deposit liquidity, sitting on our balance sheet with a 76 percent loan to deposit ratio. And also our guide is that we expect deposits to grow along, grow along with loans. Yeah. I don't think there's a stop sign in a 31 percent concentration, level of residential. I mean, I think we, that's where we would approach the median of the peers. And, and we would, we reflect always
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. There seemed to be well regarded by the street and you know, and as we get there, I think we're going to have, you know, you know, kind of other opportunities and as well as to manage our interest rate risk profile, where some institutions have made the got 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 a longer maturity on the asset side.
Okay, very good. Dale question for you on the on the mortgage servicing Lines within fees and expenses, you know, 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 expect, should expect this this volatility to continue. Well, honestly for us, I will look at it.
We're on a total revenue from amerihome, rather than looking at those two lines separately. There is a little bit of an interchange between them. You know, if you have, you know, a more robust view in terms of what, you know, valuations of mortgage servicing rights are, you're going to have a, a mortgage servicing, right? Mark, that is, that could be maybe potentially higher and that gives you more gain on sale. But ultimately, when, and where regularly, you know, selling these down, we have our ready price point to confirm.
the, you know, the at
The accuracy of that number and by singing, with the gain is on terms of the disposition. So so, you know, 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. Okay, very good. And just lastly on the Capital Management fund Kim can, I'm sorry, I missed your comments at the end there. But you know, you guys are below your kind of nine percent level you did not use. The ATM is the
Is the thinking that on a more moderate pace of growth that you land a 25% plus r OE that you'll just rebuild organically to get above 9% or or you looking to take actions. Well, there are a couple things there. I think this is a high-class problem to have that our growth is coming in. So yeah, 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 were working on.
We will line them up before the end of the fourth quarter. Our goal is to be just above 9% on a CT, 1 ratio. I think, once we get there and if our growth is sort of programmed, the way we just described it. We won't be able. We won't need to go back many more times to hit the market, but if it comes in an accelerated Pace, as I said, high quality problem to have, we're happy to to issue growth Capital to support.
Art, these earnings.
Yep. Thanks guys. Alright. You're welcome.
Mmm, next question comes from the line of Brad Millsaps with Piper Sandler.
Hey, good morning, guys. Hey, bro, if you comment on just kind of where we're new loan yields are coming on, kind of relative to the to the, to the book. You know, I don't think you included spot yields in the slide deck, this quarter. So it was just kind of curious where, you know, kind of where the new loans versus the old we're coming on. Yeah. Heels are pretty much on top of slightly lower than the than what we're running off. Your reason why we had a 20-bit decline and I
Eluded this, dog? A little more color is because of the Mix Change, you know, we, you know, we put on north of two billion dollars of residential. Those yields are about three, we put on just short of two billion dollars worth of you know, basically Capital call lines. Those yields are, you know, pushing three, two and a half to three years. If you had the both of those in that probably explains the 20 basis points kind of 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
You know will we have an additional kind of a slippage and total loan yield in the fourth quarter from the third? Yeah, I believe we will and and but it's not really the spot rates as much as the mix of the of the the loan portfolio that's going to drive that a little bit lower. But again, we're prepared for that and you know as we did this quarter as well, we expect to know to just you know, kind of you know plow through that in terms of net interest income performance.
Right.
Helpful, and as you guys have reshaped, the loan portfolio and will continue to reshape it with more resi. How do I think about, you know, sort of asset betas, you know, if you know, if the FED were to? In fact, you know, start raising rates, you know, 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, you know, sort of levered to, you know, still the short end. Obviously a lot of DDA, but just kind of curious the impact, you know, this time around versus lat.
That time around. Since you do have more fixed rate product on the books.
Yeah, yeah, so the I don't know how many were going to get, but I'll say for the first couple of rate increases. You're not going to see much change where 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 but but that's the smaller proportion of, you know, in terms of the loan book so Within
Thin within a range of you know, two to three, you know kind of rate straight 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 cost, reasons on the funding cost. One is we've got a very heavy proportion of DDA today and to is I just see a lot of liquidity in the system and 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.
Environments because there's just no incentive to increase your funding costs when your opportunities for deployment remain Limited.
Great in final question for me, you mentioned, you know, decision to hold more, you know, the mortgage loans on the books. This core obviously that helps that 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 scratched the surface on kind of where you think, you know, that number can go, in terms of, you know, adding new products that amh, Etc, just wanted to get a sense of that. Average balance is going forward. I'm going to hell for sale. So I this is
I think the average balance is going to rise. It's going to rise as you see deposit growth continued. We had a 7.3 billion dollar 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 three point, three five percent. That was up, 24 basis points from the prior quarter.
And think of these mortgages or think of the think of this. The hell for sale as a as a big money market account that has a three-week turn to it or three weeks maturity that that is government protected. So we need, this is great. We love it. And these this is one of the reasons and as we both down 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. Am H is Loan. Production on two walls. Are bouncing.
And at the end of day better than investing in 10 basis points at the fed. That's what we thought. That's what was taught to us at PS. 169.
Harrogate.
Thanks for calling guys. Great quarter. Appreciate it. Thank you.
Of rock vandervliet with you.
If you can just kind of talk about the math on the on the gain on sale, how that may fluctuate. You alluded to holding the loans longer possibly depressing the gain on sale also.
So just talk about, you know, General gain on sale pressure or not that you're seeing in the in the marketplace. Yeah, 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 wind, share our win rate, which was about 98.9 percent 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
Honey, we're bringing in on these mortgages and other opportunities that amh is a generating for us. So in our big pro forma, when we looked at it, you know, 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 were we assumed that we could go out and cross-sell against their
And 40 client base and sell, we're hopeful ending financing or MSR financing. So all that was sort of embedded in the 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 it jeopardizing, our Pro formas and you've already started a couple of these. So and we talked about this I think last time as well, but
Before we acquired amerihome.
We were just in the government, you know, the government products. I was so GSE or direct obligations of the federal government and they have now already rolled out there. They're jumbo product. That's a new Sandbox for them. That is also going to give them some gossip Revenue as well as non qualified mortgages as well. So so we're expanding the the they're playing field with what they're doing. Were expanding the penetration that they're getting in this group or a 9%.
Numbers can mention to something higher, you know, moving up from there. And then we have a number of other elements like held for sale loans to again address, you know, the performance and to anticipate any volatility in the mortgage Market because they can kind of rely on us for liquidity.
And it's just to clarify that daily. If, if you would sold straight away with that, have resulted in a higher, you know, a higher gain on sale that by holding. You're just choosing to recognize and in nii or some other place and I don't think it would result in a higher gossip. We had sold immediately. What it would have resulted in is less is less interesting come. So I mentioned they, you know, we said they have 58 cents, contribution. Well, 20 cents of that is
Is basically them using our balance sheet and liquidity to use this helper sales, you know, lying and a hole and hold if you strip that away and a number of banks that are solely in this space that aren't owned by, you know, a Banking Company don't really have net interest income. That's really, not a meaningful component of their revenue sources. They're in their EPS is 38 cents, right? Which represents about 16% of all overall earnings and and just
For the mortgage peeks out there, as you said, I just want to emphasize that while amh is a notable piece of our income stream. The 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 send those to spend time talking about a business that has a six multiple handle.
To it when I much rather talk about tech and Innovation and the 29 multiple that we have 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 and we're just going to talk about the whole company at the top of the house.
Got it. Okay. Appreciate the color. Thank you.
Your next question comes from the line of Brandon King through security. Hey, good morning.
Morning, I appreciate it. The details and commentary on the recent hire that you made and their production volume so far, but wanted to know if you could buy any more insight into your hiring strategy and your plan is going forward, especially in this environment. A lot of other Banks say that it's tough to find Talent these days and they're competing on a conversation that we're not but just wanted to give me a call on that.
Yeah, great question. And
Do you 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. Closers those types of folks offered hiring bonuses, that seemed to have worked and bring people in, so, that's good. So, you know, we, I think we're feeling a little bit of the pin ches 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, you know, the stock did double this year and the fhlb
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 with declined in the quarter, but there was a provision obviously because of the higher balance sheet growth. And now it's a growing in lower loss loan categories. Where do you see that loan loss? Reserve ratio shaking out at
You know, it's really hard to say because you know, we're in this the Cecil environment currently expected credit losses. Well, you know, 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 it was going to be kind of a collateral value.
Laps ever. No one was ever going to go to the office again, you know, so and so those those estimates by the Blue Chip and Moody's and others. We're fairly fairly dramatic in terms of a swoon that didn't happen. And now that, you know, has basically been abated. And so, here we are with, you know, you know low expectations of collateral value to clients. And so the number looks pretty good, you know, since something result in a change in that environment.
That would, that would kind of reset that.
You know, that view, I think it could and and that could put us, you know, in a higher expectation of potential risk, you know, that said, you know, in the today's current environment where things are going, you know, it's a little bit. Like, I don't know, an asymptote, in terms of kind of coming down, you know, 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 that
Visioning without at a slowing rate and you know how much lower rate 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, you know, most recent, you know, performance on charge-offs, you know, we're at for 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 for basis points a year, and I've got a cover for years average life. Well, I only need 16. I'll call it.
20 basis points we've got 80. So, in that sense, it looks like there's, you know, a lot of room to run down further, but I certainly wouldn't wouldn't count on that. Yeah. We have a little bit of a great volume thing going on here, the volume being dollars, you know, we will continue, we anticipate continuing to add to the provision, but the rate side you'll see is decline a little bit. So that's what we're balancing here. Okay. Thanks called answer.
Thanks. Our next question comes from the line of the tumor braziler with Wells Fargo. Okay, good morning. Most of my questions. I've been asking answer just maybe just two more the build-out or the higher in the franchise Finance business. I think that's about London category has been relatively flat a couple of years ago. I guess what's the outlook for?
It's going forward. That is giving you comfort and growing that and yeah, 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.
As well. So that's one of the things that attracted us to the team. That's one number to The Lodge bank that they came from, is stepping away from this sector mostly, because we took the teams. And so the loan, sitting on their balance, sheet are ripe for the taking. And that's why, you know, these guys have only been on maybe, as I said six weeks, eight weeks, most they got 90 million outstanding.
Standings, you know, 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 bars. 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 a billion dollars of loans. It's just a question of the timing of how we get there. And again,
Everything we do is, you know, 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 or the competitor entering that space. We got some in a larger scale. What are you seeing from a competitive standpoint there? And is there any reason to think that the growth trajectory deposits? And yeah, well first, let me say that our HOA.
A business is killing it. So in 2020, they had an all-time record in terms of deposit Gathering and brought in 683 million dollars a year to date.
They have brought in 1.1 billion dollars. So they've doubled their their production of 2020 and only nine months. And so we're very optimistic about the continued growth in this, in this area, both on the deposit side and it gets drafted by our balance sheet, but we're happy with the loan growth that we have there. We have a couple hundred million dollars loans or smaller, an average-sized.
In credit quality and will continue to grow that as we grow the deposits. But, you know, 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, you know, 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 will be able to stand up and continue to grow this segment.
Thank you for calling snakes water.
Thank you.
Your next question comes from the line of Christmas mcgratty with kwb.
Good morning, the billion nine that you reference with regard to Capital call any can you that contextualize that a little bit? How big is that? I was standing right now. And then you also just review the overall mix of the the Legacy Bridge book likes.
So the there are about over three 3.1 billion dollars 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 when as they grow their funds, they need more Capital to help enhance.
They're irrs.
And we're dealing with the brand names that you would know that, you know, are publicly traded or very very well known and you know, we really stepped into this business. We were we were basically silent on this business two years ago. And so we've kind of stepped into it and we like the the growth prospects there in terms of, I'll say Tech and Innovation overall, year-to-date Tech and Innovation overall has seen loan.
Broke the stay rather flat and that's because with all the liquidity in the VC Echo System, a lot of our loans are getting paid down. But as I said to on our town hall meeting yesterday about the tech and Innovation group, you know, 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 and Tech and Innovation deposit Gathering. They're all up over 800 million dollars. So, again that helps us fuel other opportunities. We have other places on the balance sheet to grow loans. Was there something. Thanks, but I call it, was there something in this quarter because I billion nine on to get 231. I mean that's any ice is quite remarkable and 1/4. Is there anything specific to this quarter that?
I know the gross been tremendous for the industry, but you know, basically a doubling. Yeah, 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. The number of subscription lines. Come stating dating back, bigger ones, in size Q4 2020, and also the first quarter and second quarter of this year. And they just
As it gets pulled down, you know, utilization runs, you know, around 50% of thereabouts and our clients are pulling it down and we're happy that they they are.
Great, if I could just sneak one more in the deal, 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 balance is be affected II, think it's going to I think it's going to top out. Not exactly sure, you know what level or when that is, but but as we
Continue to see, you know, economic recovery. We see broadening of demand across other sectors number which, you know, have higher yield. We think that, that this is 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 deposits.
Our growth. We've had this year, we're parking at, there's an alternative but we can pull that down quickly. I think that over time we well, I mean, as we move our loan to deposit, ratio back up to, you know, 90 or wherever it might be. You know, I think this some of that give up is going to be from here. I might also say that someone would that give up is going to come from the Securities book, you know, 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, you know, rmbs, and you know, we can buy.
Can buy rmbs that yields a lot less or we can buy government-guaranteed, puts to the you know to the gses basically the same kind of credit risk and make another hundred basis points.
Okay, so the Securities book is flat to down from here. Yeah. Thanks, though. Thanks.
Your next question comes from the line of John arfstrom with RBC Capital markets.
Thanks. Good morning.
Morning morning, one question. I think a lot of the pnl 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 to balance 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. Okay, good deal has been a lot of questions on the learning asset Max and you use the term optimizing, the earning asset mix. If you 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, I think you're part of what we've got so far, you know, I would hope that, you know, that we're going to, we're going to continue to see broadening out of our
Of our loan development and production Alternatives. And but at the same time, you know, we've got so much room and so much liquidity to, you know, to kind of finally play on my say-so so that could mitigate what we'd be doing on sale own self or Sailors. We just discussed or your other factors, but what if we've got, you know, strong loan growth, I think, you know, I think we've got, you know, we've got opportunities to, you know, to kind of continue to, and
I betrayed a way I mean, you know Capital called lines. We love them. You know, they're they're just we think they're bulletproof 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 a hundred percent. Okay. Good. I'm 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 as net interest income.
But it'll show up somewhere in the P and L and A.
Bounced around a little bit, but don't necessarily expect fees to keep Pace with nii. Is that fair? Yeah, I think that's fair. Okay. Okay, and then just one question for you Ken on EPS. I actually had to look up asymptotes to remind what remind me what that meant. And and so I'm going to ask you a simple question on the 230 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
long growth and I think it's too low, anything. That's unsustainable in the 2:30.
Well first that was Dale showing off that he's studying for the SAT you examined and we wish him all the best on the two dollars and thirty cents, 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 pick 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 Q. Three to Q4 earnings or move them in that direction. I mean, if you look at the third, you look at the third quarter. I mean, we have a spectacular operating leverage on the link quarter basis. I think expenses were up six percent of the amount of Revenue that trend is not obviously sustainable. But but consistent with our guide that we can be in the lower 40s.
40s. So from here, I you know, I don't think that there's anything that, you know, you really have to pull back from. Okay. Thank you.
Our next question comes from the line of David T of the for any with wedbush.
Hey, thanks. I have a follow-up on the size of the held for sale portfolio. You mentioned about you know it Rising with deposits. But I when I look at the period and balance versus the average, it slower and 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 your originating say 20 billion, if we go into the winter months and
Regenerating 10 billion and you're holding these loans for three weeks. I imagine that those, you know, held on the balance sheet would be would be lower through the winter. But can you talk about that a little bit? Yeah, you know, actually it's more kind of liquidity balancing for us. I appreciate your comment and it is based on kind of origination but these are sold, you know, you know in short forwards to the gses for delivery and we just extend 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 you know, from what you see in 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 our loan book which has you know, for the quarter of north of the three billion dollar lower average than the ending. And so now we're in this period of
That 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 help for sale book. Early on in the quarter. They get you to a higher average and then when the loan book, you know, spikes at quarter and we drive the hell for sale balance down.
Got a very helpful in then you mention 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. I was on the high 30s in 2018.
Great. And then shifting to that new team in in Texas, the single-family home construction, Sierra National business line, you sized the restaurant franchise finance and that could get to a billion dollars. Can you give us a sense of how big you expect this team in this portfolio to grow?
You know.
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
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, their client base. So a lot of optimism around it, but I would say, I think you should use the same billion dollar number for the food franchise.
Got it. Thanks very much.
And this case the question and answer portion of our call. I will now turn the call back over to mr. Ken vecchione for closing remarks. Yeah, 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 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.