The combination of these variables generated record net income of $135.8 million and earnings per share of $1.36, each up more than 45% versus the prior quarter and exceeding our pre-pandemic performance in 2019.
Total loans grew $985 million for the quarter to $26 billion and deposits increased $1.3 billion to $29 billion, reducing our loan to deposit ratio to 90.2%.
Our loan growth continues to be concentrated in low-loss asset classes such as warehousing lending, which accounted for over 100% of the loan growth and 56% of the deposit growth and $267 million in capital call lines where the risk-reward equation is heavily skewed in our favor.
In the quarter, high average interest earning assets of $1.9 billion were offset by lower rates, substantial liquidity build and a one-time adjustment to PPP loan fee recognition to reflect modification and extension of the CARES Act forgiveness timeframe, which pushed our net interest margin downward to 3.71%, as net interest income declined $13.7 million from the second quarter to $285 million, but improved $18.3 million from a year ago period.
Excluding the impact of PPP loans, net interest income would have only fallen by $4 million, which was largely the impact of interest expense on our new subordinated debt issued in middle of the second quarter.
We believe approximately 21 basis points of this compression is transitory in nature and NIM is expected to rise as excess liquidities put to work through balance sheet growth, deposit seasonality and warehouse lending, driving balances lower and PPP loan forgiveness assumptions normalize.
Provision for credit losses was $14.7 million in the third quarter considerably less than the $92 million in the second quarter, which was primarily attributable to stable to modest improvements in macroeconomic forecast assumptions, loan growth in low-risk asset classes and limited net charge-offs of $8.2 million or 13 basis points of average assets.
Dale, will go into more detail on the specific drivers of our provision but our total loan ACL to funded loans ratio now stands at 1.37% or $355 million and 1.46%, excluding PPP loans, which are guaranteed by the CARES Act.
As of Q3, $1.3 billion of loans are on deferral or 5% of the total portfolio, which represents a 55% decline from Q2.
We expect $1.1 billion of loan deferrals will expire next quarter, which will continue to drive down our outstanding modifications.
Our quarterly efficiency ratio improved to 39.7% compared to 43.2% from the year ago period, becoming more efficient during the economic uncertainty provides the incremental flexibility to maintain PPNR.
Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $29.03, or 4.3% over the previous quarter and 13.4% year-over-year.
Supported by our robust PPNR generation, capital rose $121.6 million with a CET1 ratio of 10%, supporting 15.6% annualized loan growth.
Over the last three months Western Alliance generated record net income of $135.8 million or $1.36 per share, which was up 46% on a linked-quarter basis.
As Ken mentioned, net income benefited reduction in provision expense for credit losses to $14.7 million, primarily driven by stability and the economic outlook during the quarter in a release of specific reserves associated with the fully resolved credit.
Net interest income grew 1$8.3 million year-over-year to $284.7 million but declined $13.7 million during the quarter, primarily result of changes in prepayment assumptions on PPP loans that impacted fee accretion recognition.
As a result, using the effective interest method, we reversed out $6.4 million of the fees recognized in Q2 and overall PPP fee recognition has been extended.
The $43 million, we are to receive will be simply be booked to income more slowly than our original expectations.
Net interest income was impacted in Q3, as a result of this timing change by $10.6 million.
Non-interest income fell $700,000 to $20.6 million from the prior quarter.
We benefited from a recovery of an additional $5 million mark-to-market loss on preferred stocks that we recognized in the first quarter.
Over the last two quarters, we recovered 80% of that $11 million original loss.
Finally, non-interest expense increased $9.3 million, as the deferral of loan origination cost fell, as PPP loan originations dropped, as well as an increase in incentive accruals as our third quarter pandemic -- as our third quarter performance exceeded our original third quarter budget, which was established before the pandemic.
Strong ongoing balance sheet momentum coupled with diligent expense management drove pre-provision net revenue to $181.3 million, up 13.5% year-over-year and consistent with our overall growth trend from the first quarter, as the second quarter benefited from one-time PPP recognition of BOLI restructuring in FAS 91 loan cost deferrals.
Investment yields decreased 23 basis points from the prior quarter to 2.79% and fell 29 basis points from the prior year due to the lower rate environment.
Loan yields decreased 35 basis points following declines across most loan types, mainly driven by changing loan mix and in the reduction of PPP loan fees, resulted in lower PPP loan yield during the quarter.
Costs of interest bearing deposits was reduced by 9 basis points in Q3 to 31 basis points with an end of quarter spot rate of 0.27% [Phonetic], as we continue to lower posted deposit rates and push out higher cost exception price funds.
The spot rate for total deposits, which includes non-interest bearing deposits was 15 basis points.
When all of the company's funding sources are considered, total funding costs declined by 2 basis points with an end of quarter spot rate of 0.25%.
Additionally, in October, we called $75 million of subordinated debt that has diminishing capital treatment with the current rate of 3.4%.
Despite the transition to a substantially lower rate environment during 2020, net interest income increased 6.9% year-over-year to $284.7 million.
As mentioned earlier, during Q3, our extraordinary build and liquidity and adjustments to PPP loan fee recognition compressed our net interest margin of 3.71%, as net interest income declined $13.7 million.
PPP loans reduced our NIM during the quarter by 13 basis points.
This changes to prepayment assumptions, reduced SBA fees recognized resulting in PPP loan yield of 1.76%.
Excluding this timing difference, net interest income declined only $4 million quarter-over-quarter, primarily due to interest expense on the new subordinated debt that we issued last May, resulting in a net interest margin of 3.84%.
Referring to the bar chart on the lower left section of the page, of the $43 million in total PPP loan fees net origination costs that we received, only $3.3 million was recognized in the third quarter.
The recognized reversal of PPP was $6.1 million in Q3 and expect fee recognition to be approximately $6.9 million in the fourth quarter and taper off as prepayments and forgiveness are realized.
Additionally, average excess liquidity relative to loans increased $1.3 million in the quarter, the majority of which are held at the Federal Reserve Bank earning minimal returns, which impacted NIM by approximately 21 basis points in aggregate.
Regarding efficiency, on a linked-quarter basis, our efficiency ratio increased to 39.7%, as we continue to invest in our business to support future growth opportunities.
Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 40.7%, which as we indicated last quarter should be moving closer to our historical levels in the low-40s.
Return on assets increased 44 basis points from the prior quarter to 1.66%, while provisions fell.
PPNR ROA decreased 47 basis points to 2.22%, as attractive decline in margin from the prior quarter.
Our strong balance sheet momentum continued during the quarter as loans increased $985 million to $26 billion and deposit growth of $1.3 billion brought our deposit balance to $22.8 billion at quarter-end.
Inclusive of PPP, both loans and deposits grew approximately 29% year-over-year with our focus on loan loss segments and DDA.
The loan to deposit ratio decreased to 90.2% from 90.9% in Q2, as our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs.
Our cash position remains elevated at $1.4 billion at quarter-end compared to $2.1 billion quarterly average, as deposit growth continues to outpace loan originations.
Finally, tangible book value per share increased to $1.19 over the prior quarter to $29.03, an increase of $3.43, or 13.4% over the past 12 months.
The vast majority of the $985 million in loan growth was driven by increases in C&I loans of $892 million, supplemented by construction loan increases of $103 million.
Residential and consumer loans now comprise 9.3% of our portfolio, while construction loan concentration remains flat at 8.8% of total loans.
Within the C&I growth for the quarter and highlighting our focus on low-risk assets that Ken mentioned, capital call lines grew $267 million, mortgage warehouse loans grew over $1 billion and corporate finance loans decreased $141 million this quarter.
Notably, year-over-year deposit growth of $6.4 million is higher than the annual deposit growth in any previous calendar year.
Deposits grew $1.3 billion or 4.7% in the third quarter, driven by increases in non-interest bearing DDA of $777 million, which now comprise over 45% of our deposit base plus growth in savings in money market accounts of $752 million.
By quarter-end, deferrals had declined by $1.6 billion or 55%, reducing total loan deferrals from 11.5% in Q2 to 5%.
Excluding the hotel franchise finance segment in which we executed a unique sector specific to hurdle strategy, the bank wide deferral rate is approximately 1.6%.
We have received minimal additional request for further deferrals and 98% of clients with expired deferrals are now current in payments.
We expect $1.1 billion of loan deferrals will expire in the current quarter, which will substantially drive down outstanding modifications.
Consistent with this trend, as of yesterday deferrals are down $420 million in October, bringing the current total to $880 million.
Regarding asset quality, our non-performing assets and OREO to loan ratio remained flat at 47 basis points to total assets, while total classified assets increased to $28 million or 4 basis points to 98 basis points to total assets.
Classified accruing loans rose by $21 million, explainable by a few loans 90 days past due as of September 30.
Special Mention loans increased $81 million during the quarter to 1.83% of funded loans, which is a result of our credit mitigation strategy to early identify, elevate and apply heightened monitoring to loans and segments impacted by the current COVID environment.
Over 60% of the increase in Special Mention loans are from previously identified segments uniquely impacted by the pandemic, such as the hotel portfolio and a component of our corporate finance division credits determined to have some level of repayment dependency on travel, leisure or entertainment.
As we have discussed in the past, Special Mention loans are not predictive of future migration to classified or loss, since over the past five years, less than 1% has moved through charge-offs.
Our total allowance for credit losses rose a modest $7 million from the prior quarter due to improvement in macroeconomic forecasts and loan growth in portfolio segments with lower expected loss rates.
Additionally, we covered $8.2 million of net charge-offs.
The ending allowance related to loan losses was $355 million.
In all, total loan allowance for credit losses to funded loans declined a modest 2 basis points to 1.37% or 1.46%, when excluding PPP loans.
When we exclude these segments, the ACL to funded loans on the remainder of the portfolio is 2%.
Provision expense decreased to $14.7 million for Q3, driven by loan growth in lower loss segments and improved macroeconomic factors, while fully covering charge-offs.
Net credit losses of $8.2 million or 13 basis points of average loans were recognized during the quarter compared to $5.5 million in Q2.
We continue to generate significant capital and maintain strong regulatory capital ratios with tangible common equity to total assets of 8.9% and a Common Equity Tier 1 ratio of 10, a decrease of 20 basis points during the quarter due to our strong loan growth.
Excluding PPP loans, TCE to tangible assets is 9.3%, a modest decline of 10 basis points from the first quarter.
Inclusive of our quarterly cash dividend payments of $0.25 per share, our tangible book value per share rose $1.19 in the quarter to $29.03, up 13.4% in the past year.
We continue to grow our tangible book value per share rapidly as it has increased three times that of the peers over the last 5.5 years.
I would now like to briefly update you on our credit risk mitigation efforts and the current status of a few exposures to industries generally considered to be the most impacted by COVID- 19 pandemic.
In our $500 million gaming book focused on all strip, middle market gaming-linked companies, total deferrals were reduced from 37% of the portfolio to only 4% and as of today, it's zero, as our clients are now open for business and are performing at or above their reopening plans.
The $1.3 billion investor dependent portion of our Technology and Innovation segment has continued to benefit from significant sponsor support for technology firms best positioned to succeed in this COVID environment and an active fund raising environment as well.
Since March 2020, 65 of our clients have raised over $1.7 billion in capital, resulting in 87% of borrowers with greater than six months remaining liquidity, up from 77% in Q1.
Our CRE retail book of $674 million focus on local personal services based retail centers with no destination mall exposure, continues to modestly exceed national trends that shows rent collections rising from 50% in May to 80% in August.
Similarly, the portfolio's deferrals have fallen from $176 million to $31 million.
Lastly, our $2.1 billion Hotel Franchise Finance business focused on select service hotels with greater financial flexibility and LTVs at origination of approximately 60% continues to trend toward stabilization.
Occupancy rates are tracking national averages, currently around 50%, which have tripled from April lows.
At approximately 55% occupancy, select service hotels are estimated to cover amortizing debt service, so a typical hotel is operating at break even.
Furthermore, we have seen deferrals declined from 83% of the portfolio to 44% of the portfolio and currently, we do not anticipate granting any additional deferrals in the hotel portfolio.
Our pipelines are strong and we expect loan growth to return to previously anticipated levels of $600 million to $800 million for the next several quarters in low risk asset classes.
The acquisition is a low risk, low cost entry point to build a meaningful residential mortgage business line at an accelerated timeframe with over 100 additional mortgage originator relationships.
As Dale mentioned, our current spot rates indicate that the net interest margin pressure experienced this quarter will subside and net interest margin will trend upwards toward 3.9% in Q4.

Summary:
The combination of these variables generated record net income of $135.8 million and earnings per share of $1.36, each up more than 45% versus the prior quarter and exceeding our pre-pandemic performance in 2019.
Over the last three months Western Alliance generated record net income of $135.8 million or $1.36 per share, which was up 46% on a linked-quarter basis.