U.S. Markets closed

Edited Transcript of WAL earnings conference call or presentation 18-Oct-19 4:00pm GMT

Q3 2019 Western Alliance Bancorp Earnings Call

Phoenix Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Western Alliance Bancorp earnings conference call or presentation Friday, October 18, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dale M. Gibbons

Western Alliance Bancorporation - Vice Chairman & CFO

* Kenneth A. Vecchione

Western Alliance Bancorporation - CEO & Director

* Robert Gary Sarver

Western Alliance Bancorporation - Executive Chairman of the Board

================================================================================

Conference Call Participants

================================================================================

* Arren Saul Cyganovich

Citigroup Inc, Research Division - VP & Senior Analyst

* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David John Chiaverini

Wedbush Securities Inc., Research Division - Senior Analyst

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - MD

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Timur Felixovich Braziler

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Tyler Stafford

Stephens Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the third quarter of 2019. Our speakers today are Ken Vecchione, Chief Executive Officer; Dale Gibbons, Chief Financial Officer; and Robert Sarver, Executive Chairman. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com.

The call will be recorded and made available for replay after 2 p.m. Eastern Time, October 18, 2019 through November 18, 2019 at 9 a.m. Eastern Time by dialing 1 (877) 344-7529, passcode 10134684.

The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about the current events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.

Now for the opening remarks, I would now like to turn the call over to Ken Vecchione. Please go ahead.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, operator. Good afternoon, and welcome to Western Alliance's third quarter earnings call. Joining me on the call today are Dale and Robert. I will provide an overview of the quarterly results and Dale will walk you through the bank's financial performance in greater detail. And then afterwards, we'll open up the line and Robert, Dale and I will take your questions.

During the third quarter, we continued advancing our key strategic objectives, which include leveraging our branch light business model to drive disciplined and thoughtful loan and deposit growth, carefully managing our balance sheet with regards to asset sensitivity, pursuing accretive capital allocation policies and derisking our loan composition, all while being unique in our ability to drive industry-leading growth and efficiency across changing market environments.

Western Alliance produced another record quarter with robust loan and deposit growth, which generated continued increases in net interest income and earnings per share. Our combination of regional banking and national business line lending drove loan growth of 19% on a linked quarter annualized basis as we saw wide ranging broad participation across our businesses. We achieved annualized net interest income growth of 18% with total revenue growth of 22-plus percent as we produced positive operating leverage, all while derisking our balance sheet and improving asset sensitivity. This was achieved against a headwind of a challenging yield curve. As discussed on our prior earnings call, we expect ongoing loan origination volume to offset net interest margin compression and produce continued increases in net interest income.

So let me go through a few of the key highlights. Net income during the quarter rose 3.6% to a record $127.4 million or 14.6% year-over-year. Our earnings per share grew 4.2% to $1.24 per share and 18.1% from the prior year. Balance sheet growth continues to be exceptional and exceeded our guidance of $600 million per quarter for both loans and deposits. Total loans were $20.2 billion, an increase of $903 million or 18.8% on a linked quarter annualized basis and have risen by $2.4 billion over the last 3 quarters. On a year-over-year basis, loans rose by 20.4% with $1 billion of growth coming from the residential program.

As part of our strategic derisking plan, we view residential loans as a thoughtful, responsible alternative to managing our loan growth while deepening our warehouse lender relationships. Residential loans now comprise 9.3% of our portfolio.

During the quarter, we also reduced our construction and land and development loans by $55 million, lowering their proportion in our overall portfolio to 10.7% compared to the 12.6% in quarter 1. This puts us within striking distance of our 10% target for year-end 2020 with opportunities to balance future reductions.

We had another stellar quarter in deposit growth, which really highlights the continued strength of our diversified funding channels and overall deposit franchise. This quarter, total deposits grew over $1 billion or 18.7% on a linked quarter annualized basis to $22.4 billion, which is the third consecutive quarter of more than $1 billion in organic deposit growth. This growth was attributable to an increase in savings and money market accounts of $1.2 billion primarily driven by our tech and innovation business due to a healthy capital fundraising environment. Noninterest-bearing demand deposits rose another $78 million to $8.8 billion and over $1.3 billion of our year-to-date deposit growth has been in DDAs. DDA as a percentage of total deposit declined slightly to 39% from 40% in Q2. Overall, the loan-to-deposit ratio remain consistent at 89.8% compared to the prior quarter.

Continued balance sheet growth drove healthy net interest income expansion of $11.7 million in Q3 or 18.4% annualized while confronting yield curve headwinds which resulted in an 18 basis point reduction in NIM to 4.41%. NIM compression was driven by recent pressure on the yield curve, increased deposit liquidity and continued derisking of our loan portfolio partially offset by proactive steps taken to reduce our deposit rates, all of which Dale will speak to in greater detail later in the call.

Total operating revenues grew $15.2 million for the quarter compared to an expense increase of $7.7 million, producing a 2x revenue to expense growth ratio and an efficiency ratio of 42.4%. We remain one of the most profitable banks in our industry and produce return on assets of 1.94% and return on tangible common equity of 19.4%. We believe our ability to simultaneously drive industry-leading growth and efficiency is the key differentiator.

Our financial results were accompanied by continued stable asset quality as the markets we operate in are experiencing some of the strongest economic growth in the country. Nonperforming assets were $66 million, down $4 million from the prior quarter and remain at near historical low levels. During the quarter, we had net recoveries of $600,000 and loan growth in low loss categories such as residential, which resulted in a provision expense of $4 million.

Turning to capital management. On display this quarter was our ability to thoughtfully manage capital allocation between loan growth and share repurchases. Last quarter, we paid our initial quarterly dividend of $0.25 per share. We also continue to opportunistically repurchase shares. During the quarter, we purchased 1 million shares at $43.63, bringing total program repurchases to 3.6 million shares at an average price of $41.59. Overall, the share count has been reduced by 3.4% through repurchases since the initiation of the stock buyback program in Q4 of 2018. We anticipate using the remaining $99 million available under the current plan as opportunities present themselves.

Given all these actions, tangible common equity ratio absorbed the significant balance sheet growth and share repurchases and was 10.1% at quarter end, down only 10 basis points from prior quarter but up 10 basis points from the prior year period. Tangible book value per share grew 3.9% or $0.95 from the prior quarter to $25.60 and now has grown by 225% over the past 5 years as we continue to scale our business.

Additionally, our asset sensitivity profile has improved as variable rate loan floors are increasing, deposit costs are quickly being adjusted and our loan portfolio continues to shift into longer fixed rate residential loans. We expect asset sensitivity will continue to improve with additional rate cuts as more loan floors are triggered.

Finally, lastly, I'd like to thank the 1,800 people at Western Alliance that did a fantastic job to produce these financial results this quarter. And now Dale will take you through the financial performance.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [3]

--------------------------------------------------------------------------------

Our managed balance sheet growth resulted in record earnings despite headwinds from a flattening yield curve preceding the anticipated Fed rate cuts. Net interest income rose $11.7 million or 18.4% annualized from the second quarter to $266.4 million driven by a $1.8 billion increase in average earning assets which outweighed reduced loan yields. From the corresponding period last year, net interest income was up 13.8%.

The provision for credit losses was $4 million for the quarter, a decrease of $3 million from the second quarter due to net loan recoveries during the period and the mix shift to high quality residential loans.

Noninterest income increased $5.2 million for the quarter to $19.4 million as equity investment income from our tech and innovation segment and gain on sales of investment securities increased $2.9 million and $3.2 million, respectively.

Noninterest expense was up $11.7 million as compensation costs and deposit costs increased by $5.2 million and $3.9 million partially offset by a $2.9 million decrease in professional fees.

Compensation costs were affected by increased accruals for annual performance incentive plan. Deposit costs were elevated by $2.5 million due to a single client who maintained higher-than-anticipated balances throughout the quarter but whose ending balances were 0. We do not expect a repeat of this activity in Q4.

We also experienced a $3.4 million loss on sales in OREO property which was essentially offset by the securities gains.

Share repurchases to date reduced the diluted share count to 102.5 million shares, resulting in diluted EPS of $1.24. As Ken mentioned, of the $250 million authorization, we've repurchased a total of $151 million with $99 million remaining.

Turning now to our deposit drivers. Net interest income rose $11.7 million during the quarter to a record $266.4 million. Investment securities yield decreased 26 basis points from the prior quarter to 3.08% due to a flattening yield curve and lower reinvestment rates. Lower long-term rates increased mortgage prepayment speeds and the resulting accelerated amortization of premium was responsible for lowering the overall quarterly portfolio yield by 16 basis points.

On a linked-quarter basis, loan yields decreased 19 basis points due to reduction in interest rates and spreads. Further impacting the decline in yields was our intentional mix shift toward residential loans and the decline in LIBOR, which preceded cuts in the Fed funds rate and prime.

Interest-bearing deposit cost decreased by 5 basis points in Q3 to 1.3% as a result of proactive steps taken to reduce our deposit rate immediately after the Fed rate cut.

During the quarter, we lowered our rates on approximately $6.2 billion of exception priced deposits with a weighted average reduction of 23 basis points. Additionally, after the Fed announcements, we reduced our stated rates on $5.2 billion of interest-bearing nonmaturity deposit by an average of 29 basis points. This decreased funding cost by 6 basis points when all of the company's funding sources are considered, including noninterest-bearing deposits and borrowings. However, due to our decision to time rate reduction coincident with Fed rate announcements, the full effect of these actions are not reflected in the third quarter results. We expect that the effective cost to our liability funding was down to 80 basis points at the end of Q3 compared to the 87 basis point average.

The strategic shift in our loan mix away from construction and the reduction in market rates weighed on the margin but was more than offset with improved revenue from our consistent balance sheet expansion, driving a net interest income increase of $11.7 million for the quarter. Given no change in the economic outlook, this will be the theme for our ongoing performance that we can continue to earn through NIM compression.

The net interest margin decreased 18 basis points to 4.41% during the quarter as our earning asset yield fell 24 basis points partially offset by 6 basis points of funding cost decrease. The largest component of the margin decline was from the sharp change in the relationship between LIBOR and Fed funds during the quarter as the outlook shifted from a rising to declining rates. With nearly half of the bank’s loans tied to LIBOR, loan yields began declining in the second quarter. However, deposit costs could not be reduced until after the FOMC cut the target Fed funds rate at the end of July. Compression between these 2 rate indexes reduced the margin by a 9 of the 18 basis point total decline.

The increase in our on balance sheet liquidity drove another 7 basis points of the margin contraction as our strong balance sheet deposit growth resulted in $550 million increase in average cash balances during the quarter. Finally, 2 basis points of the reduction was due to derisking our portfolio from the ongoing shift into residential loans and lower construction loans.

Looking ahead, margin volatility in the fourth quarter should be much lower as the basis risk issue from the change in direction of rates is behind us, and excess liquidity deployment should continue even with additional cuts to the federal funds target is expected.

With regard to our asset sensitivity, our rate risk profile has declined notably as our mix shift, primarily to fixed-rate residential loans, has reduced our net interest income variability due to the changes in the rate environment. Meanwhile, $2 billion of our variable rate loans are now behaving as fixed since the rate floors are now active after the first 2 rate cuts we've already had. This has reduced our interest rate risk in a 100 basis point parallel stock lower to 4.8% at September 30 from 6.6% at June 30. As we stated last quarter, we believe a ramp down is a much more probable rate reduction scenario, which would further reduce our rate risk profile by another 60%. We believe a 1.8% reduction in net interest income in this situation is something we can quite reasonably manage through with continued balance sheet growth, earning through margin compression like we did in the second and third quarters of this year.

Of our $14 billion of variable rate loans, $9.3 billion or 66% have floors with $2 billion in the money. With each additional 25 basis point rate cut, another $1 billion of loans with floors will be triggered which will reduce the sensitivity in a shock scenario by another 50 basis points, further mitigating our recent margin compression.

Turning now to operating efficiency. In Q3, we produced another strong quarter of operating leverage while continuing to invest in new products and business initiatives to drive ongoing growth. On a linked-quarter basis, our efficiency ratio increased 40 basis points to 42.4%. As I mentioned earlier, a significant portion of the deposit cost and ORE expense are onetime in nature and not likely to be repeated in the fourth quarter. On a taxable equivalent basis, operating revenue increased $15.4 million to $288.9 million in the third quarter of 2019 compared to an operating expense increase of $7.7 million to $122.6 million, generating operating leverage of 2x.

As a core component of our strategy and irrespective of the rate environment, we continue -- we will continue disciplined expense management and credit underwriting to maintain industry-leading operating leverage and profitability.

Our pre-provision net revenue return on assets was 2.44% and our ROA was 1.94%. These metrics continue to be in a top decile compared to peers.

Our balance sheet momentum continued during the quarter as loans increased $903 million to $20.2 billion and deposit growth of $1 billion brought our deposit balance to $22.4 billion at quarter end. Our loan-to-deposit ratio remained essentially flat at just under 90%. Our ample liquidity position continues to provide us with balance sheet flexibility to pursue attractive, risk-adjusted lending opportunities.

Tangible book value per share increased $0.95 over the prior quarter and $4.90 or 23.7% over the prior year. Our industry-leading financial performance is a direct result of the powerful combination of commercial banking relationships within our regional footprint and our National Business Lines.

Total loans were $20.2 billion, an increase of $903 million driven by increases in nonowner-occupied commercial real estate of $346 million, residential loans of $282 million and C&I loans of $275 million. Residential loans now comprise 9.3% of our loan portfolio while construction loans have decreased by another $55 million and make up 10.7% of total loans versus 11.5% at the end of the second quarter.

Regarding deposit growth and further demonstrating the strength of our franchise, deposits grew $1 billion in the third quarter driven by an increase in savings and money market accounts of $1.2 billion. This growth was partially offset by a net decline in mainly higher-cost CDs of $221 million. This is the third consecutive quarter of more than $1 billion in organic deposit growth.

Over the past year, deposits grew across all categories with the largest increase in savings and money market of $2 billion and noninterest-bearing DDA of $741 million. Year-to-date deposit growth has been $3.3 billion, of which nearly 40% has been in DDA. Over the past year, loan growth of $3.4 billion was fully funded by deposit growth of $3.5 billion. We believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform's long-term success.

Overall, asset quality continues to remain stable. Total adversely graded assets increased $40 million during the quarter to $439 million as special mention credits increased $36 million to 88 basis points of total assets. From the prior year, total adversely graded assets have increased just $81 million or 2 basis points to 1.72% of total assets versus a $3.4 billion rise in loans.

Nonperforming assets comprised of loans on nonaccrual and repossessed real estate increased marginally to $66 million or 25 basis points of total assets and continue to hold steady as a proportion of the balance sheet.

Regarding the increase in special mention credits, looking back over a 5-year period, loans that have migrated to special mention have less than a 1% risk of loss as it is an early potential stress indicator that has little correlation to loans becoming nonperforming. Overall, we see nothing in our portfolio that raises concerns or indicates a change in credit outlook as we expect asset quality ratios to remain at historically low levels relative to the overall size of the balance sheet.

Gross credit losses of $2.1 million during the quarter were more than offset by $2.7 million in recoveries, resulting in net recovery of $600,000 or 1 basis point of total loans annualized. The credit loss provision of $4 million decreased from the prior quarter due to this net recovery position and the change in the loan origination mix. Provisioning related to our loan growth increased the allowance for loan and lease losses to $165 million, up $15 million from a year ago, resulting in a reserve of 85 basis points of nonacquired loans at September 30. For acquired loans, credit discounts totaled $7.5 million at quarter end, which was 95 basis points of the remaining $788 million of purchased loans primarily from the Bridge Bank and Hotel Franchise Finance transactions.

Finally, we continue to generate significant capital and maintain strong regulatory capital ratios with tangible common equity to total assets of 10.1% and a CET ratio of 10.3%. Despite the payment of our first quarterly dividend of $0.25 per share and the buyback of 1 million shares, our tangible book value per share rose $0.95 in the quarter and is up 23% in the past year. Notably, our production rate of tangible book value has been more than 3x that of the peer group over the past 5 years. Given capital requirements that banks operate under, we believe that consistent capital creation is fundamental to value creation.

I'll turn it back to Ken.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [4]

--------------------------------------------------------------------------------

Thanks, Dale. On display this quarter was the advantages of our diversified business model that provide us the flexibility to actively adapt our business and capital allocation strategy and response to the changing external environment without sacrificing credit quality. The combination of our regional banking and National Business Lines lending provided powerful growth to net interest income, loans and deposits. Our business model generates positive operating leverage, growth in high quality loans, industry-leading ROA, ROE and meaningful tangible book value per share growth.

Within our market today, we have observed little change in business activity as our loan and deposit pipelines remained strong. We expect loan and deposit growth on average to continue at the same level as our prior guidance of $600 million in loan growth per quarter fully funded by core deposit growth. Despite a challenging interest rate environment, we expect net interest income to continue to rise as volume increases from residential purchases, higher earning assets, and our growing loan pipeline will overcome potential net interest margin compression and the repositioning of our asset sensitivity and projected rate actions.

So to summarize, we continue to generate robust loan growth while reducing risk, had exceptional deposit growth of over $1 billion for the third consecutive quarter, grew net interest income 18% annualized, continue to maintain stable asset quality at historical low levels, grew year-over-year net income by nearly 15% and EPS by 18%, positioned the company to carry forward its momentum through the fourth quarter and into next year, and we reduced asset sensitivity and further insulated ourselves in a down rate environment.

So operator, at this time, if you would open the line, and Robert, Dale and I will be happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question today comes from Michael Young with SunTrust.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [2]

--------------------------------------------------------------------------------

We ended the last call with a unsolicited comment on M&A, so maybe we'll start this call with a solicited comment on M&A. Where do you feel the appetite is for acquisitions at this point or should we take the activity on the share buyback as just seeing better value in buying your own stock at this point?

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [3]

--------------------------------------------------------------------------------

Yes. It's Robert. I would say probably more of the latter. I mean we're continually evaluating the best use of our capital on a daily basis, looking at a lot of deals. But as of now, we've chosen to invest in our own brand and our organic growth and to repurchase our own shares. So I would say probably more of the latter.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [4]

--------------------------------------------------------------------------------

Okay. And then just on the 1- to 4-family purchase strategy, I'm curious if you could just talk about -- it sounds like you have a pretty strong appetite to continue that as a derisking measure. But has anything changed relative to the drop in 10-year rates and the yields you're able to get on that paper? And does CECL impact capital allocation to that or anything like that, any changes in strategy there?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [5]

--------------------------------------------------------------------------------

No change in strategy. We still think it's a very effective method which to extend the duration of our assets and do so with something that should perform quite well should an economic downturn present itself at some time in the future. So rates are lower than what we were getting initially going into the program, but we're still getting into the lower 4s in terms of yield. These are really good quality underwriting at 67%, 68% loan to value, 760 FICO, mid-30s on debt to income. And we're able to do this because we're buying things that maybe don't quite fit in the box from our mortgage warehouse originators that would be qualified. So some of these are loans that have an IO period in the beginning. Some of these are loans that are not necessarily primary residences but by well-heeled borrowers. So we're continuing to execute on that and we think it's really helping in terms of our interest rate risk management.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [6]

--------------------------------------------------------------------------------

And there's one other thing to add to that, which is, it puts us closer to our warehouse lender. So we now have another product to offer them in addition to warehouse lines, MSR lines, note financing, getting in deeper with the deposits and now picking up some of their volume on a forward flow basis gives us an opportunity to remain close to them.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question today comes from Timur Braziler with Wells Fargo Securities.

--------------------------------------------------------------------------------

Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [8]

--------------------------------------------------------------------------------

First one for me, Dale. You had mentioned a couple times that there was a large deposit on the books for the quarter that has now exited. Just wondering what's the size of that deposit?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [9]

--------------------------------------------------------------------------------

That was a little over $500 million average balance for the quarter. We still have a relationship with the client but that -- but those deposit dollars were 0 at quarter end.

--------------------------------------------------------------------------------

Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [10]

--------------------------------------------------------------------------------

Okay. And then maybe sticking with deposits. Certainly, quite encouraging to see the drop in funding cost this quarter. And I know from prior conversations, you guys had been proactive in addressing the deposit rates kind of right after the Fed has cut. I know the full impact of what's been done already will be reflected in the fourth quarter results. But going forward, that proactive approach, does that reduce ability to lower deposit costs further on additional rate cuts or are you expecting to see similar magnitudes for each incremental rate that we see?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [11]

--------------------------------------------------------------------------------

Well, I don't know how low rates are going to go. I mean if we got to the 0 band, I mean eventually, you're going to get some compression in terms of ability to cut. But this is where the floors become so effective because as rates get lower, a greater proportion of our loan portfolio becomes effectively fixed rate. So it's an asymmetric kind of a return in that if and when rates ever go up again, we should actually have increased sensitivity on the other side. So yes, I mean, if rates continue to drop substantially, another number of cuts from here, you are going to see some compression but the floors will be stronger.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [12]

--------------------------------------------------------------------------------

Hey, we moved pretty quickly immediately after the 2 rate cuts and what we noticed is many of our competitors did not. So I think as they catch up to us next quarter on the next cut, then there'll be less opportunities for our clients to go elsewhere and that they'll see the same action among many more banks.

--------------------------------------------------------------------------------

Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [13]

--------------------------------------------------------------------------------

Okay. That's good color. And then just if I could, one more. Looking longer term in this rate drop environment, are you guys still thinking that 1.5:1 kind of revenue to expense level is still achievable in 2020 or is that really dependent on how many additional rate cuts are going to be?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [14]

--------------------------------------------------------------------------------

Look, going forward, we expect to continue industry-leading and peer group operating leverage as part of our strategic growth management programs. We have a core discipline of expense management within the company. I do not expect that to change. And we'll balance that against the delivery on platform expenses and services and also new product expenses that we may spend. So we'll do what's right for the company as we go forward.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

The next question today comes from Brad Milsaps with Sandler O'Neill.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [16]

--------------------------------------------------------------------------------

Maybe kind of a three-part question around credit. You guys have excellent asset quality numbers. But just kind of curious kind of bigger picture kind of what you're seeing in the credit environment in terms of pricing, underwriting. And then just any additional color on what drove the increase in the adversely graded credits. Understood that's coming off a low base, but just kind of any color there. And then, Dale, just any color around CECL might also be helpful.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [17]

--------------------------------------------------------------------------------

Okay. So I'll take parts A and B and will give Dale part C. So general quality -- general statement, asset quality remains stable. Our portfolio looks fine. We see no economic stress from the economy. As I always say, we see more self-inflicted wounds, whether it'd be partner disputes or companies expanding too quickly or ill-timed or poorly executed acquisitions or poor cost controls. Those drive some of the stresses in the companies that we're dealing with. As a general statement though, I'll say that we believe we're at the top end of the expansion. So therefore, we're lending as if the expansion is coming to an end even though this is not our opinion. So we're trying to grow safely, thoughtfully, in a very conservative, managed way.

As it relates to some of the activity this quarter, I think what's important to know is our credit process and philosophy. So our credit process is based on early identification and resolution. So we like to identify early, elevate early, and that creates more resolution options and it also creates them sooner for us. It also garners early executive level attention so many people are on any loans that either fall into the special mention category or fall into substandard. And so in reality, we cycle loans in, we cycle them out -- I'm really talking about special mention here -- that do drive a little bit more special mention in terms of dollars. But to reiterate what Dale said, only 1% of all special mention loans are charged off as we look at that over the last 5 years. So I'd end by saying, there really is no trend in our special mention composition. It's all back to self-inflicted wounds or companies that are beginning to show some weakness that we want to make sure we attend to right away.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [18]

--------------------------------------------------------------------------------

Regarding CECL, Brad. As you know, this is something that's going to be done on the first of next year and depending upon economic conditions at that time. But we expect a charge of about 20 basis points of our capital position at adoption based upon the current situation and that would cover both the reserve build as well as reflecting what we need to do for unfunded commitments.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [19]

--------------------------------------------------------------------------------

That's helpful, Dale. And I know it's early, but would you expect kind of provisioning to sort of track to keep the reserve at that resultant level?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [20]

--------------------------------------------------------------------------------

Yes, it could be. So if that's a 20%, 30% increase in the reserve provisioning given the same economic outlook would probably have a comparable rate of increase.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The next question today comes from Casey Haire with Jefferies.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [22]

--------------------------------------------------------------------------------

So a question on the loan, deposit growth guidance. It just feels a little bit conservative given the performance year-to-date, especially on the deposit side which is averaging about $1 billion a quarter. And Ken, to your point, it sounds like business activity is still pretty good, so just trying to get a feel for why the conservatism in the guidance?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [23]

--------------------------------------------------------------------------------

So we say the average is $600 million certainly on the deposit side. Q4, seasonally a slow quarter for us in deposits, all right? So I keep that in mind. And sometimes, whether it'd be on the loans or deposits, it's hard to control when deals get completed. So for example, in Q1, our loan growth was only $400 million. So these things have an ebb and flow to it. And so what we like people to think is, on average, it should be $600 million. Some quarters, it will be far more. And occasionally, it will be less.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [24]

--------------------------------------------------------------------------------

Okay. Fair enough. And then just on the liquidity side, what is the -- how optimistic are you that you can work down the excess liquidity? And is there -- just given the deposit momentum, is there any thought to getting a little bit more aggressive with the securities book, especially with -- I mean the deposit initiatives that you have on the come could potentially build this. Your deposit momentum could accelerate. So I'm just trying to get a sense, liquidity drag could be here to stay for a decent while if these trends continue.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [25]

--------------------------------------------------------------------------------

Yes. I mean it could continue the liquidity drag. I don't expect it to increase from where we are. As you know, kind of how we got here for the third quarter is we had a substantial run-up in deposits going into the end of the second quarter. And that was elevated throughout the third quarter and then came down a bit as of the last day. So I would expect -- and we did purchase some securities. I'm sure you saw that, too. Our portfolio was up a bit in Q3. Given the seasonal outlook that Ken just mentioned in terms of the fourth quarter, I think we're going to burn off some of that liquidity drag and we'll look at this on an ongoing basis. Rather than loading up in securities and buying residential mortgage-backed which is mostly what people purchase, I'd rather deploy it into our residential purchase program. It's certainly a better return for us. And so we'll see how that plays out. But I think liquidity drag is likely to ebb a little bit, at least.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [26]

--------------------------------------------------------------------------------

Got you. And just last one for me. The Hotel Franchise Finance, that has been growing the last year or so. Is it -- I thought the plan was just sort of to maintain that or just wondering what's behind the increased appetite to grow that portfolio.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [27]

--------------------------------------------------------------------------------

Well, we like that product and we're growing it in what we think is a prudent way. So with low loan to value, loan to cost numbers, with sponsors that are well capitalized and only working with operators as well that have maybe a dozen or more hotels with top brands in top MSA areas and primary, secondary locations in those top MSAs. So when we have some opportunities and we have deals that meet that entire criteria, we put our money into the hotel group.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [28]

--------------------------------------------------------------------------------

We don't expect it to increase proportionately to the loan portfolio from here though. I mean we had an increase in the third quarter. Some of that's going to be sold down, have some other things going on. So I think this is a proportionately kind of a high-water mark.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

The next question today comes from Arren Cyganovich with Citi.

--------------------------------------------------------------------------------

Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [30]

--------------------------------------------------------------------------------

I think the thing that stands out for me is you have the strong organic growth, and we agree in terms of our model that you can outgrow the NIM. The skeptic in me though is a little bit worried about the level of growth in potential credit quality associated with that. Now you have a good history in the past several years of delivering on credit. Can you give any kind of examples of maybe some of that conservatism that you're taking in terms of this growth so that we give folks a little bit more comfort in terms of that credit outlook?

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [31]

--------------------------------------------------------------------------------

Yes. Let me start with that. I think our business model is a little bit unique in that we have a lot of different products in a lot of different markets that we lend money to. And because we have so many different channels and types of businesses we're lending to, we can look for better risk-adjusted returns as opposed to the typical bank our size that maybe does commercial lending, commercial real estate and consumer. So we're in so many different niches that we're able to reallocate capital on a current basis to niches that provide us protection in a down economy. And that's what we've been doing for probably the last 3 or 4 years. So if you look at where the growth is coming from and then you look even further within that growth at the underwriting standards, I think you'd be pretty comfortable. We have a number of things we're not doing as much of that we used to do. And so we're just really able to kind of change where we allocate the funds. And we use that to kind of mitigate our risk and as I said, look for the best risk-adjusted returns.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [32]

--------------------------------------------------------------------------------

Just add a few things to that, to what Robert said. This quarter saw over $100 million increase in capital call lines. And to Robert's point, very, very low to no losses in that business product. Resort finance went up. Again, we've never had a loss there. And the team that's running that has never had a loss in over 30 years. Residential portfolio that Dale mentioned, very strong asset quality as well. So that's the some numbers maybe or examples behind the model that Robert mentioned.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [33]

--------------------------------------------------------------------------------

Yes. Like as an example, some of the things we don't do as much of today because we think that the market hasn't priced the risk properly or maybe the risk levels aren't there would be restaurant franchise finance, some of the corporate syndicated credits, the corporate finance group. These are areas we've cut back on because we think the market is maybe a little too aggressive on.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [34]

--------------------------------------------------------------------------------

I'd throw solar lending in there, too.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [35]

--------------------------------------------------------------------------------

Yes. Good point.

--------------------------------------------------------------------------------

Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [36]

--------------------------------------------------------------------------------

That's helpful. I appreciate that. The second question I had was just on kind of the recent weakness in some of the valuations of technology unicorns, et cetera. Are you seeing anything from your Northern California or your Technology & Innovation businesses that would be impacted by these lower valuations?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [37]

--------------------------------------------------------------------------------

So what we're seeing is, first, they're having a very, very strong capital raising activities. And a lot of our deposit growth this quarter came from there. We're seeing loans churn at a little bit faster rate. Generally, the average maturity of our loans is 3.5 years for our entire portfolio, but it's much, much less than that in the tech and innovation. We're seeing some aggressiveness on pricing and structure from newly established competitors, but we're not following that because we think there's enough activity for us to pick and choose what it is that we like. And also, in that, in tech and innovation, we're putting a little bit more capital allocation to our capital call line strategy.

--------------------------------------------------------------------------------

Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [38]

--------------------------------------------------------------------------------

Okay. But nothing from a valuation standpoint that would cause any kind of negative impact to your balance sheet?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [39]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

The next question today comes from Chris McGratty of KBW.

--------------------------------------------------------------------------------

Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [41]

--------------------------------------------------------------------------------

Maybe, Dale, for you. I think in your prepared remarks you said given the strategies with the floors and the deposit pricing that the pressure on NIM might be a little bit less severe kind of going forward. Maybe you could make some additional comments in terms of severity, especially with the comments on liquidity coming down a little bit for Q4.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [42]

--------------------------------------------------------------------------------

Sure. So these floors, we've 2 of them, after the 2 rate cuts, we got $2 billion in the money. The next one will put another $1 billion in the money. The one after that goes to about $1.2 billion and then $1.4 billion. So we're gradually becoming kind of one-dimensionally kind of fixed rate on our loan portfolio should rates kind of continue to fall. And then meanwhile, we continue to have expectations that we're going to be able to respond quickly based upon Fed action. We've got another ALCO meeting set for October 30 right after they meet. If they move, we're going to move. And I think that helped us in the third quarter. And now that the shift and kind of the basis is behind us where LIBOR is no longer anticipating Fed rate increases, I think that, that is -- will mitigate the risk that we have in terms of kind of further rate cuts from here.

--------------------------------------------------------------------------------

Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [43]

--------------------------------------------------------------------------------

Okay. And with the focus on NII, I mean, if we get a cut in October, we should still, given that balance sheet momentum, you still see commensurate growth of NII that we saw maybe this quarter? Is that reasonable?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [44]

--------------------------------------------------------------------------------

Well, I think the net NII growth will be slower in the fourth quarter. So in the third quarter, that was the inflection point for the margin change at 18 basis points. I think the fourth quarter is going to be the inflection point for the change in terms of net interest income. So I'm looking for -- while the margin drop should be substantially less, I'm looking for a lower growth in terms of net interest income. We're going to get the effect of potentially as many as 4 rate cuts that are going to have an influence on fourth quarter net interest income: the one in July; the one in September; the one in October, which we believe is going to happen; and maybe it's a little bit iffy if we get the fourth one in December versus only 2 rate cuts affected the third quarter number.

--------------------------------------------------------------------------------

Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [45]

--------------------------------------------------------------------------------

Okay. But even under that scenario, it sequentially will be higher is what you're saying?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [46]

--------------------------------------------------------------------------------

Yes. We believe we'll be able to exceed where we were in Q3.

--------------------------------------------------------------------------------

Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [47]

--------------------------------------------------------------------------------

Great. And maybe just one more. The expense line, the deposit cost, you talked about this quarter being kind of just one-off. But if we look over the last couple of years, obviously, that number has grown considerably as rates have risen. How do we think about that expense line into 2020 with rate cuts? Is that -- is there a correlation that, that number should come down or is it kind of steady in that $7 million to $8 million a quarter?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [48]

--------------------------------------------------------------------------------

Yes, I think in the fourth quarter, I think we're going to look a lot more like we did in the second quarter than the third. If we get additional rate cuts, that will release pressure on that number and it should otherwise ebb lower, except that to the degree we're continuing to move our deposit liabilities that will be a countervailing effect. So I'm not sure exactly how this necessarily is going to sort out, but I would look for the third quarter number as being essentially a blip that will largely reverse.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

The next question today comes from Tyler Stafford with Stephens.

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [50]

--------------------------------------------------------------------------------

Nice quarter. I want to start on, I guess, first on expenses. The salaries increased due to the estimated corporate bonus payout that you mentioned in the deck. I know for 2018 you achieved 138% incentive payout. So I was just hoping you could give us, Dale, some detail about how much you've accrued so far in 2019 and what incentive reduction tailwinds you might see just given a tougher interest rate backdrop if you do just achieve that, I guess, 100% baseline going forward.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [51]

--------------------------------------------------------------------------------

Yes. So we're north of $40 million here in terms of estimated accrual for bonuses in 2019. And that number -- I mean, that number could be variable depending on kind of what we're going to be doing in terms of performance against the budget when approved in the beginning of 2020. So I mean the big driver for us in terms of the change from where we were -- estimated where we were at 6/30 versus now is really in demand deposits. We've got a goal in there. You can see it in the proxy in terms of what that number was for core demand. And we now believe that we're going to achieve that. And we were somewhat uncertain about that earlier and that kind of moved the needle for us. So I can't speak to what the specific goals are going to be like for 2020, but we have the expectation as we've stated that we're going to continue to be able to earn through kind of where we are in terms of margin compression and I think something that was set up that would enable that to be a variable item should we fall short.

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [52]

--------------------------------------------------------------------------------

Okay. Yes. No doubt the fundamental results you guys have put up this year warrant that higher incentive comp. I totally get that. Can you tell us where that $40 million is, I guess, relative just to a baseline number for 2019?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [53]

--------------------------------------------------------------------------------

So the baseline number would be about $30 million, about $10 million higher.

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [54]

--------------------------------------------------------------------------------

Okay. Perfect. And then just last for me just on the mortgage warehouse, could you tell us what those average balances were for the third quarter?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [55]

--------------------------------------------------------------------------------

The average balance for the...

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [56]

--------------------------------------------------------------------------------

For the mortgage warehouse balances.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [57]

--------------------------------------------------------------------------------

I don't have that number in front of me. I'm going to have to -- we'd have to get with you afterward, Tyler.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

The next question today comes from Matthew Clark of Piper Jaffray.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [59]

--------------------------------------------------------------------------------

Do you happen to have the spot rate on interest-bearing deposits at the end of September?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [60]

--------------------------------------------------------------------------------

Well, so I said 80 basis points which was a blended number including DDA. So if you back that back out, you're going to be basically divided by about 0.6 or something like that so 1.3.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [61]

--------------------------------------------------------------------------------

Okay. And then just on the buyback, I guess any sense for any change in appetite going forward when you'd like to slow that down to some degree or vice versa?

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [62]

--------------------------------------------------------------------------------

Well, we said we've got about $100 million left in the authorization. And I think looking at levels of under 2x book and under 10x current earnings to us seem fairly attractive. So I'm not going to tell you exactly what we'll buy and how much but the program is going to continue.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [63]

--------------------------------------------------------------------------------

Okay. And then, Dale, I think last quarter you talked to, for every Fed rate cut, 5 basis point impact to NIM. If you add back the liquidity, down 7, I know the timing of the Fed cut was -- the 2 cuts were -- it wasn't at the start of the quarter either. But with these floors coming into play, I mean, how do you think about that guide after you've had 2 cuts kind of in the rearview mirror here going forward?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [64]

--------------------------------------------------------------------------------

Yes. I think the 2 cuts and the 5 bps per cut was basically borne out of what I'm labeling the basis risk that happened in the third quarter. I don't think that includes liquidity obviously. I think we're basically on track with that. And as such, we're looking for a margin compression substantially less in the fourth quarter relative to the third. It was brought up earlier that we do have kind of a countervailing element. That is, if you get a lot lower rates from here, we're going to run into compression on the liability side repricing, which I think offsets what we're doing on the loans and then the floors related to that. So I would say the relevant range is that's still a fairly decent kind of metric, 5 bps per quarter for up to 2 or 3 additional cuts.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

The next question today comes from Jon Arfstrom with RBC Capital Markets.

--------------------------------------------------------------------------------

Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - MD [66]

--------------------------------------------------------------------------------

Ken, can you give us an update on the deposit initiative progress? I think we ask you that every quarter and it seems to get a little better, but give us the latest.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [67]

--------------------------------------------------------------------------------

Yes. There's stuff moving along. The deposit initiative, number one, is active. It brought in balances last quarter. It held those balances this quarter. And we continue to move in a slow but steady pace, ensuring that we have the right customer service and technology to satisfy our customers. Product initiatives, number two, just went live this quarter. We just had our first sales meeting the other day planning out how we're going to grow that. So really not much to add there, although they have gotten some balances in which surprised us all.

--------------------------------------------------------------------------------

Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - MD [68]

--------------------------------------------------------------------------------

Okay. Good. And then a question on the floors. You made a comment about getting ahead of the competition. I'm just curious, are these floors that were already in place or you went out and asked for them or are you doing it on renewal? Help us understand that process.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [69]

--------------------------------------------------------------------------------

Floors have been an integral part of our credit underwriting process for years through this whole way. So it's only lately been a topic of discussion in a broader sense.

--------------------------------------------------------------------------------

Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - MD [70]

--------------------------------------------------------------------------------

Yes. Okay. Difficult conversations at all with clients if you're saying that your peers aren't doing this at all?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [71]

--------------------------------------------------------------------------------

Maybe. But that's offset by the reliability and convenience that we give them and we're able to get them.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [72]

--------------------------------------------------------------------------------

I think maybe more banks use floors than you think, Jon.

--------------------------------------------------------------------------------

Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - MD [73]

--------------------------------------------------------------------------------

Yes, okay. Yes, it's a brand new topic for us. And obviously, Ken, you made a comment that you're acting as if you're coming to the end of the expansion even though it's not your opinion. And the floor conversation leads me to believe we're acting as if -- you're acting as if rates are going much, much lower even though you may not believe that. Is that a fair statement?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [74]

--------------------------------------------------------------------------------

That's right. But it doesn't hurt to have these floors.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

The next question today comes from Brock Vandervliet with UBS.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [76]

--------------------------------------------------------------------------------

I figure you're not going to use the floor here to talk about 2020 guidance or you already would have done so. But just directionally as you think about margins and NII, assuming 2 or 3 more cuts, I would expect at some point your -- the asset yields reset more quickly and then you get a catch-up on the funding side causing a longer term lift as we kind of peer around the corner in NIM. Is that a fair analysis in terms of your balance sheet?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [77]

--------------------------------------------------------------------------------

Well, I think directionally that's right. I mean we're focused on the net interest income. So as we head into next year, as we said a few times, we expect to overcome any NIM compression. We also expect asset quality to remain flat and for us to manage our expenses appropriately.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [78]

--------------------------------------------------------------------------------

I think it should play out that way, Brock. I mean we're dialing in 3 more rate cuts. I think we have some skepticism whether it will be that many, particularly if maybe Brexit gets done and a little more better results and confidence coming out of Europe, which I think has been a factor in terms of what's affected the rate environment here. But I think you paint a scenario that has some reasonable probability of playing out.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [79]

--------------------------------------------------------------------------------

Okay. And as a follow-up, year-to-date, roughly how much of the deposit growth is coming from tech and innovation?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [80]

--------------------------------------------------------------------------------

Give me a second on that and I'll give you an answer.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [81]

--------------------------------------------------------------------------------

And I guess is there any aspect of those deposits that you would flag in terms of being more volatile and perhaps tying back to what looks like a very conservative guide on deposit growth?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [82]

--------------------------------------------------------------------------------

So I'll answer your first question. Our technology group generated over $700 million for this year. You would then look at life science added a little bit but -- and equity -- resources added a little bit, but most of that comes out of the technology sector. I'm sorry, what was the second question?

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [83]

--------------------------------------------------------------------------------

Second question is just, is there a inherent volatility to those deposit flows that you would call out that perhaps ties back to your seemingly pretty conservative guide on deposit growth overall?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [84]

--------------------------------------------------------------------------------

Yes. I think that's a good observation. You can see that happen. They raise money for a reason. You can see some of our companies being taken out and purchased, which then you'll see flow through our fee income line through equity and warrant income. And therefore, our loans may soften a little bit. And then that's incoming. And then outgoing would be our customers using their cash to buy other companies. And hopefully, we tie into loans that they need for that, but they'll use their equity and cash before they pull down on our loans.

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [85]

--------------------------------------------------------------------------------

The deposit growth we've had in that sector has exceeded that of the bank overall. It's also very low cost, very attractive to us. But yes, it is a bit lumpier and it does have greater volatility. And in some respects, a little more difficulty in terms of forecasting than some of the other elements of our funding sources.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [86]

--------------------------------------------------------------------------------

But historically, if you look at Bridge Bank over the last, in excess of 15 years, including multiple cycles of money coming in and money going out, they've grown their deposits every year.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

The next question today comes from David Chiaverini of Wedbush Securities.

--------------------------------------------------------------------------------

David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [88]

--------------------------------------------------------------------------------

A couple of questions, first on the mortgage warehouse business. How much of the deposit growth was related to mortgage warehouse in the quarter?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [89]

--------------------------------------------------------------------------------

So kind of the -- mortgage warehouse probably grew this quarter a little bit less than it normally does. So under 10% -- sorry, they grew about, sorry, about $40 million of the $1 billion in deposits.

--------------------------------------------------------------------------------

David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [90]

--------------------------------------------------------------------------------

Okay. That's good in respect of seasonality heading into the fourth quarter. And then do you -- similarly, on mortgage warehouse, do you happen to have the period end balance of loans outstanding? You mentioned you didn't have the average balance, but did you happen to have the period end?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [91]

--------------------------------------------------------------------------------

Yes. It is just under $1.8 billion.

--------------------------------------------------------------------------------

David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [92]

--------------------------------------------------------------------------------

Great. And then shifting back to the floor conversation. So the typical average life you mentioned for the overall portfolio is 3.5 years. Is that the same for the loans that have floors that the average life is 3.5 years?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [93]

--------------------------------------------------------------------------------

I mean the floor loans tend to be -- probably tend to be a little bit shorter. I mean the commercial real estate tends to be a little more fixed rate. And so it's going to be on the shorter side of that, 2.5 to 3 years, I would say.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [94]

--------------------------------------------------------------------------------

But it's an exception to not have a floor in a floating rate loan.

--------------------------------------------------------------------------------

David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [95]

--------------------------------------------------------------------------------

And each time these loans are renewed, I imagine if the interest rate environment is coming down that the floors would come down as well when a new floor is put in upon origination, is that correct?

--------------------------------------------------------------------------------

Dale M. Gibbons, Western Alliance Bancorporation - Vice Chairman & CFO [96]

--------------------------------------------------------------------------------

I mean, for the most part, floors are either at or moderately below 25 to 50 basis points below the current rate using the metric of what they index to, off of prime or LIBOR. Lately, that's not the case. We've put on a number of loans in the third quarter and into the fourth quarter whereby the fixed-rate portion of the loan is active, i.e., that rate is higher than what the index plus the spread would be on a floating rate basis.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [97]

--------------------------------------------------------------------------------

The floor is hit before we did the loan.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [98]

--------------------------------------------------------------------------------

Yes. That's a simple way of saying it.

--------------------------------------------------------------------------------

David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [99]

--------------------------------------------------------------------------------

Got it. Okay. That's helpful. And then final one for me going back to credit. With the increase in special mention loans, $36 million. And I know how you said there's less than 1% risk of a loss on those loans. But curious as to either what industry or loan category kind of made up the increase this quarter.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [100]

--------------------------------------------------------------------------------

Yes. There's nothing in terms of a concentration. It's spread out through our entire book and I'll just leave it there. I think that's the simplest answer.

--------------------------------------------------------------------------------

Operator [101]

--------------------------------------------------------------------------------

The next question today comes from Gary Tenner of D.A. Davidson.

--------------------------------------------------------------------------------

Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [102]

--------------------------------------------------------------------------------

I just wanted to ask another kind of question regarding credit. You made the comment that even though you don't necessarily think the expansion is coming to an end, you're lending as though it is. Can you square that with the 18% year-to-date growth rate? I mean we've got a lot of banks that are loan growth is being pulled back as soon as you're coming back on growth. Are they just being that much more conservative or what's -- how do you square that?

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [103]

--------------------------------------------------------------------------------

I'd add a couple of things to that or the way I'd square it is one, we have residential loans that are a big forward flow and purchase activity, and that was over $300 million this quarter against $900 million of total loan growth. So that helps us. And also I come back to the lines of business we're in. So capital call had $100 million of growth. A lot of banks are not in that. Resort financing had about $35 million to $40 million. A lot of banks are not in that. So Robert said earlier in the conversation here, it's because of how we're able to allocate our capital among a variety of different products. A lot of those products are not being carried by competitors. Remember the characteristics of our National Business Line, very few competitors, we get pricing stability, occasionally pricing power, very, very good asset quality and high operating leverage.

--------------------------------------------------------------------------------

Robert Gary Sarver, Western Alliance Bancorporation - Executive Chairman of the Board [104]

--------------------------------------------------------------------------------

Yes. Fewer competitors allow the banks that are in the field to have better underwriting, stronger credit. If you're just out making generic business loans, C&I loans, you're competing with every community bank, midsized bank and large bank, you're going to have more stress on rates and pricing and on credit structure. If you're doing a lot of the niches we're in, you're going to be able to get much better credit structure behind the deals you're doing.

--------------------------------------------------------------------------------

Operator [105]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Vecchione for any closing remarks.

--------------------------------------------------------------------------------

Kenneth A. Vecchione, Western Alliance Bancorporation - CEO & Director [106]

--------------------------------------------------------------------------------

We thank you all for participating and we look forward to talking to you for our fourth quarter call. Thanks again, everyone.

--------------------------------------------------------------------------------

Operator [107]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.