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Edited Transcript of WAL earnings conference call or presentation 21-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Western Alliance Bancorp Earnings Call

Phoenix Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Western Alliance Bancorp earnings conference call or presentation Friday, April 21, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dale M. Gibbons

Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank

* Robert Gary Sarver

Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank

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Conference Call Participants

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* Bradley Jason Milsaps

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

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Christopher McGratty

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

* Jon G. Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Matthew John Keating

Barclays PLC, Research Division - Director and Senior Analyst

* Riley Manuhoa Stormont

D.A. Davidson & Co., Research Division - Research Associate

* Timur Felixovich Braziler

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the first quarter 2017. Our speakers today are Robert Sarver, Chairman and CEO; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2:00 Eastern time, April 21, 2017, through Sunday, May 21, 2017, at 9:00 a.m. Eastern time by dialing 1 (877) 344-7529, pass code 10103883.

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 future 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 statements. 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 like to turn the call over to Robert Sarver. Please go ahead, sir.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [2]

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Thank you. Welcome, everybody, to our first quarter earnings call. I want to talk a little bit on some high level views I have for the quarter and a little bit strategically. To start with, we had a really good quarter. We're off to a good start. The growth in our balance sheet, our loan pipelines, our deposit pipelines are good. Our margin's doing well. Asset quality is good and we're off to, I think, a very good start in meeting our numbers that we talked to you about 90 days ago for the year. Big picture wise, you saw we hired Jim Haught as our Chief Operating Officer. We will be expanding our executive leadership a little bit. And you also see in our expense run rate some increases. And I want to talk about kind of all those together.

First of all, our business model has gotten more complex over the last 5 years for three reasons: one, the company's been growing at a pretty good clip, roughly 15% to 25% a year; secondly, we are expanded in a significant way geographically and by product line. We have a number of National Business Lines that we're in, and this expansion is proving very profitable for us, but also adds risk to the company because it expands our oversight and what we have to do to manage risk in all those different business lines. And then thirdly, we're somewhere in the later innings of the economic cycle. I'm not sure if we're in the fifth inning, or the eighth inning or the ninth inning. But we want to make sure we're prepared to be on top of our risk, especially on the credit side so that we are, number one, in a better position than the last recession to manage the downside; and number two, that we can be more proactive in taking advantage of other people's issues earlier on in the cycle.

So having said all that, it made sense for us to put some investment in some people and some infrastructure within the company to better address the complexity of the company as well as our future opportunities. We just finished integrating the acquisition of GE, the hotel portfolio. We did the system conversion there. We did our major systems conversion. All that's gone well and starting to settle down. And now, we're beginning to look for additional acquisitive opportunities that may present themselves, which it looks like there's going to be a number of them this year to take a look at.

As I look at my time and Dale's time, we've probably been a little -- spread a little bit thin. I've had 15 direct reports. I've been spending, if I look at my desk, it's 80% on things that don't generate revenue, 20% on things that do generate revenue. And so in order to move this company forward over the next 3 to 5 years in a manner in which our shareholders have become accustomed, it's important for me to free up my desk and my time to be out looking to grow revenue and meaningfully impact the growth and revenue opportunities of this company, and also be able to be vigilant on credit quality, which is something I'm pretty hands on. And the same with Dale. You guys have known Dale a long time. He's very talented and skilled and he's gotten himself buried down in a little too much of the day to day. So we thought it's important to bring in somebody. And it's not just Jim, it's some other people we brought in who have bigger bank experience in a lot of areas that will help us manage risk and our operations, technology, all those kind of things and keep pace. But at the end of the day, it becomes more of a reallocation of time for myself and Dale to get out and figure out how we're going to take that $70 million a quarter in earnings and how does that become $140 million 5 years from now. What do we need to do to do that, and both Dale and I are pretty good at those things. And we've hired other people in here who are really good at a lot of the other things we need to do to manage that risk and underwrite that growth. That's kind of high level.

Second thing I'll talk about is our loan and deposit pipelines are good. You can see we had a good first quarter of growth. We're off to a good second quarter. The business development efforts and our business development officers are saying they're busier than they've been since they can remember, so that's a good thing. Obviously, rates have gone up a little bit, gives a little wind at our -- back of our sails, pushing us forward, which helps the margin. We're well positioned for that and that's been good.

Asset quality, I feel pretty comfortable about our charge-offs are very minimal, as you see. And we did have a little migration on the substandard and the special mention buckets. I'll talk about kind of 3 credits that are big pieces of that. The largest is a $30 million substandard credit. It's a SNC credit, but the company -- we're the -- one of the company's main depository institutions and have been for quite a while. We're in a good position in terms of collateral on the credit stack and the company was sold not too long ago. This loan matures in November and we expect full pay off in November from the parent company or the -- from our -- either our borrower or the parent company. So we think that will go away either in the third or fourth quarter, depending on the timing of that.

We got a couple other deals, 2 other construction loans that total $25 million that we're watching. Don't anticipate any eventual credit issues with, but the rains in California along with some of the cost overruns with the price of construction going up in Northern California, we're watching these a little closer. The borrowers will put up all the additional money themselves to finish the project. Projects are back on schedule, but did get delayed a little bit. But we have no concern. One's at a 37% loan to value, one's at a 60% loan to value. They'll get built and finished and then get off the list. One, I think, will get off in the second quarter and one will get off either in the second or the third. So I think those numbers, barring any new surprises, those numbers will probably taper down a little bit next quarter. But we look at these closely, I look at every single one of these credits closely and I'm not concerned about it.

In terms of some financial highlights. As you see, we recorded record earnings for the first quarter again, $73.4 million, $0.70 a share. That's up 17% from the $0.60 we recorded a year ago for the first quarter. Our margin climbed 6 basis points from the fourth quarter to 4.63%, reflecting increase asset yields from the FOMC actions in December. Our operating efficiency was 44.4% in the first quarter, a little bit higher than 42.4% on a linked quarter basis but improved from 45.6%. I talked about that. I think that increased level of operating expenses is here to stay for us. I don't anticipate it jumping up or stair climbing up or anything, but we have invested in some infrastructure in a number of areas that's going to take that base run rate or expenses up to about where it is this quarter.

I mentioned our strong balance sheet, growth of loans and deposits. Our nonperforming assets were essentially flat from the fourth quarter. Net loan losses continue to be at pretty low levels. We've got about 1/3 of our REO portfolio in escrow to close this month, so that will bump that down a little bit. And despite our strong balance sheet growth, we continue to have our capital levels remain high. Our tangible common equity is 9.4% of tangible assets, and our tangible book value per share rose 18% year-over-year to $15.86.

Net interest income rose $4 million for the quarter to $179.3 million. It's up 23% from a year ago. That's partially offset by a 16% increase in expenses. Operating noninterest income slipped to $9.9 million as warrant revenue decreased. That's kind of cyclical. Operating revenue rose $5.5 million to $88.3 million on a linked quarter basis, in part from seasonal factors at the start of every new year as well as some increased infrastructure spending that I addressed to support our current planned growth. Operating pre-provision net revenue increased $2.2 million for the quarter to $100.9 million. That was up 23% from the same period a year ago. And consistent with our strong loan growth, we have a little more in the provision, $4.3 million compared to $2.5 million in the first quarter a year ago. We had some modest gains in OREO disposition security sales. Overall pretax income, $97.8 million. Seasonal factors drove the tax rate to 25%, which is lower than the fourth quarter but essentially the same as it was a year ago. Diluted shares were stable from year-end, just under $105 million, and that resulted in $0.70 per share.

I'll turn it over to Dale now.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [3]

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Thanks, Robert. As interest rates rose during the quarter, prepayment activity on a mortgage-related bond slowed. Since the majority of our mortgage-backed securities portfolio was purchased at a premium, the rate of amortization of this premium declines when prepayments fall. This benefit, coupled with increased tax exempt investments during the quarter, drove a 27 basis point increase in our securities yield to 3.08% in Q1. Loan yields rose 6% -- 6 basis points during the quarter as just over half of our portfolio was variable rate and half of the variable rate loans are tied to prime. Prime has had a more pronounced move than LIBOR since late last year. Funding costs were up 2 basis points.

Consistent with our asset sensitive rate risk profile, the interest margin also rose 6 basis points during the quarter to 4.63%. Net of interest accretion from rate and credit discounts from acquisitions, the margin was up 8 basis points to 4.48%. The graph on the right shows that we expect fairly stable appreciation from purchase accounting marks throughout 2017. Actual accretion has historically been higher than what is shown here due to loan prepayment activity, which accelerates discount recognition.

Linked quarter expense growth in excess of the increase in revenues took our efficiency ratio up 2% to 44.2%. Although it has still improved from the first quarter of last year at 45.6%. While about half of the $2 million increase in compensation cost from the fourth quarter was seasonal, the remaining personnel cost as well as the increase in professional expense have been incurred to maintain our compliance risk management and credit infrastructure to support our continued growth, as Robert discussed.

The consistency of our performance shows up on our PPNR ROA of 2.3% and our 1.69% return on assets. Our performance on both of these measures has consistently been in the top decile compared to peer banks.

As deposit growth well in excess of loan growth during the quarter, our securities and cash position climbed $450 million from year-end. Core deposit growth drove total assets to $18 billion during the quarter, while borrowings remain low at about 2% of total funding.

Loan growth of $454 million during the quarter was led by $200 million in C&I and $125 million in construction. Residential loans rose $50 million as we've made selective purchases of residential mortgages since we think the trough of interest rates is behind us and hold loan yields are higher than those of mortgage-backed securities. Led by Arizona, loans were up in each of our geographic regions and National Business Lines during the quarter, except technology, which was flat and mortgage warehouse that declined.

Growth in non-interest-bearing deposits comprised 60% of the $806 million increase we had in total deposits during the quarter. Consistently strong growth in this category has taken the proportion of deposits in non-interest DDA from 35% a year ago to nearly 40% today. On top of this, each of our other deposit categories of interest-bearing DDA, money market and CDs grew about $100 million to start the year. Among the regions, Arizona led deposit growth of $411 million followed by Nevada with $165 million, while Northern California declined.

From the National Business Lines, HOA services rose $222 million during the quarter as it is seasonally their strongest. And technology and innovation deposits grew just over $100 million.

Total adversely graded assets rose $43 million to $387 million with increases in special mention and classified, while nonperforming assets and repossessed real estate fell modestly. On a ratio basis, adversely graded assets and NPAs have been essentially flat for the past year. These figures are net of $26 million of purchase accounting discounts to unpaid principal balance on the notes.

Half of our growth credit losses of $2.7 million during quarter were offset by $1.4 million of recoveries of prior charge-offs, resulting in net losses of $1.3 million or only 4 basis points of the loan book. The loan loss reserve rose to $128 million at quarter end and is enough to cover over 10 years of gross loan losses at our current run rate, which is well above the 4-year duration of our loan portfolio. In addition to the $128 million reserve, our acquired loan portfolio is held at a $45 million credit discount to the unpaid principal balance of our borrowers. As a number of these loans may pay as agreed, we expect at least a portion of this discount may also be used to cover credit charges. When this discount is combined with the reserve, it results in total coverage of 1.26% of loans.

Our strong capital growth matched our balance sheet expansion, resulting in capital ratios being flat or up slightly for the quarter as well as over the past year. While our return on tangible common equity has remained above 17%, tangible book value per share rose 20% in the last year and 4.5% on a linked quarter basis unannualized.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [4]

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Okay. The outlook is sunny, warm with clear skies. Any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Casey Haire of Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [2]

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So I want to focus on the expenses. Rob, I hear you that you guys have been a thin crew, a small crew relative to your size, but a lot of the expense build was in that legal professional and director line. So I mean what exactly is -- is this -- is that -- are these permanent people? Are they temporary consultants? What exactly -- who are -- what is that expense? And what is it for?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [3]

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Okay. Some of it is consultants that are being replaced by permanent people. So the cost of -- some of that cost will go down a little bit. But we got our second DFAST filing coming up. We're expanding our risk modeling, second line of defense. And as I said, we've added little bit more on the senior management side. We are adding a little bit more structure and overhead around our M&A strategy and M&A team. And let's see, that's about it. Some of the outsourcing is internal audit, which is only about 2/3 staff over the next year that will kind of substitute for that. I think that's the bulk of it.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [4]

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Okay. And as -- I mean is -- are we fully -- is the full team on the court now or -- I mean is there more coming?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [5]

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Well, the -- what I'll say is the full cost is on the court. There may be some shifting between people and outsourcing, but the full cost is on the court.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [6]

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Okay. Okay. And how does this relate to operating leverage dynamics going forward? I mean we're all conditioned to -- you guys have always shot for revenues going -- growing 2x expenses. What does that math look like going forward?

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [7]

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Well, we think our expenses are going to be fairly flat into the second quarter. And with the step up in cost, we think we're really rightsized in terms of what we need to be going forward. So there will be, after the second quarter, kind of a standard inflation cost increase on the expense side, which we think is going to be significantly less than what the revenue growth is going to be given where we are in terms of the first quarter on our loan and deposit growth and, as Robert indicated, with clear skies, we're -- we see things to be fairly consistent prospectively. So I think we're back to where we are in terms of noninterest -- interest income growth being significantly better than expense growth, which should drive that efficiency ratio down. We're starting from a little bit higher point in the first quarter of '17, but yet, I think we're going to still see a trend decline throughout 2017.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [8]

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We did the same thing about 5 years ago where we kind of went through a bolstering of our management team and some of our infrastructure to get ready to take us over $10 billion and we're kind of doing the same thing now as we're approaching $20 billion.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [9]

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Okay. Okay. I mean, Rob, you mentioned some of the expenses towards the M&A strategy. Is this, I guess, sort of the price that has to be paid to pursue potentially larger M&A targets?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [10]

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I think it's -- I think part of it is the price that needs to be paid given our -- where we operate today in terms of the complexity of our business model and in terms of where we are in the cycle. And then part of it is the price to pay to be in a position to work on some deals and integrate those deals appropriately. We're now at the point where when you think of the size of deals we'll be looking at where we're going forward, we need certain people dedicated to some of that stuff.

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Operator [11]

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Our next question comes from Timur Braziler of Wells Fargo.

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

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Maybe just tying up the expense question with one more. Is any of this at all regulatory driven or kind of done in conjunction with regulatory expectations if you are going to be doing additional M&A going forward?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [13]

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I think the regulatory expectations for our company and our own expectations are pretty much about the same. So I guess you could say yes. I mean they're both.

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

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Okay, great. And then just kind of framing the opportunity for M&A, that was great color in the prepared remarks, but just looking forward, some of the opportunity that you potentially see in 2017, does it look more like the GE transaction from last year where you're acquiring a business line? Or do you see yourselves going after a larger whole bank M&A? And if so, kind of what type of geographies would you be scoping out? Would it be something that's relatively in-footprint? Or would you be willing to expand that footprint?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [15]

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Well, I'd say all. The answer would be all of the above. So look at 3 buckets. One would be a kind of a niche lending opportunity like GE that's focused again on the commercial piece. We don't see ourselves jumping into a big retail opportunity, but commercially focused asset generator. That's one opportunity. Second opportunity would be a deal within our footprint, our main footprint, and that would most likely be California when you look at availability of opportunities. In Arizona and Nevada, there's not much, so that would be California. And for various reasons, those opportunities look a little better as one company's just done something, a couple of companies maybe aren't going to do something. So that could be good timing this year. And then the third would be looking at other whole bank opportunities and markets outside of Arizona, California, and Nevada. We're now doing business in 30 states. We have offices of one sort or another in D.C., Boston, Raleigh, Atlanta, Dallas and a number of our National Business Lines. So we're beginning to look at other opportunities. But having said all that, we're mostly an organic grower, so don't look for us to go be doing a whole bunch of deals. And we're select financially. If you go back and look at the deals we've done over the last 10 years, we made pretty good money on them. So we're pretty disciplined when it comes to doing a deal, both in terms of the economics and the culture, which leads to not just the economics the first couple of years but the economics over a 5- to 10-year period.

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Timur Felixovich Braziler, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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Okay, that's great color. And I guess if I can, just one more. Kind of looking at organic growth engine. Loan growth in the first quarter was very strong, and I understand that fourth quarter had a little bit of elevated payoff activity. But looking forward and kind of looking at your pipelines and kind of excluding some of the external focus that might be placed on M&A, is this a level that's relatively sustainable kind of looking at your existing pipelines? Or was there maybe a [ onetime event or two? ]

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [17]

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Yes. I mean I think we're at the same place we were the quarter ago when we had the call and we said, look for us to grow, I think, I don't know, maybe we used the term low teens in terms of organic growth, or 12% or something like that. But if you figure like an average of $400 million and it may be a little more, a little less quarter-to-quarter. But over the year, that's probably about what we see right now.

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Operator [18]

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And the next question will come from Brad Milsaps of Sandler O'Neill.

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

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You kind of just addressed my question, but it looked like a lot of the loan growth was back end-loaded. Dale or Robert, anything in there that wouldn't stick around in the second quarter? The period end was just a lot higher than the average. So just curious if something like that . . .

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [20]

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No, not really. I mean we -- a little bit of our business on the mortgage warehouse business becomes a little back end-loaded as there's more real estate closings at the end of the quarter. But that's a little -- the small piece of it. But in general, it just looked at -- it just happened to be that a lot of the deals were closing towards the end of the quarter for whatever reason. So majority of that's -- our business is a little bit cyclical with the quarter, but like -- if I look at our daily report today, I think we're down $50 million from where we ended the quarter. So it's pretty good.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [21]

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Yes. So I mean we track basically, as a microcosm of what was going on in HA data, which, as you know, was pretty sluggish at the beginning and then ticked up, not as strongly as we did, toward the quarter end. That's typical for us. I call it a telephone wire effect in terms of we always kind of peak at quarter end and then it kind of comes off. But no, it was a late start and you noticed that the ending balance of our loans was $500 million higher than the average balance for the quarter. So that augurs well for a continued net interest income improvement, at least into 2Q.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [22]

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Yes.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [23]

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Yes, absolutely. And just to follow up on some of the components. It looks like construction has crept up to about 12% of the loan book or just under. Dale or Robert, I know you talked in the past sort of not letting one category get above 10%. Don't want to split hairs here too much, but you are above that now. Will that slow down some? Or how do you feel about that book? I know you kind of called out the 2 credits in California, but just kind of any color on how you're approaching the growth in that book will be helpful.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [24]

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Yes, I don't think we ever said we were going to let construction go above 10.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [25]

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No, that was the hotel portfolio we said will be pretty stable and we want to keep it at 10%, no more than 10%. In terms of the total A&D and construction book, we've got to limit it, about 85% of capital, and we're significantly below that at this point. But yes, the -- what's been good for us in that market has been just residential construction loans and we've been underwriting those at pretty good levels, doing A&D deals at 35% to 50% of cost and just bread and butter housing. So that portfolio is doing well, and that's where most of that growth is.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [26]

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I think you are going to see the growth rate taper off from where it's been of late. But no, I think there's still some room there.

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Operator [27]

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And next, we have a question from Jon Arfstrom of RBC Capital Markets.

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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [28]

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A question on the margin. The 4.48% core margin, I know, Dale, you addressed some of the puts and takes there. But is that about what you expected? Or any surprises there in terms of how things behaved?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [29]

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You know Dale is always low on the margin. If he ever tells you the margin is up 20 basis points, run for the hills. He's been low on his margin prediction for 4 -- about, let's see, 16 quarters running, so.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [30]

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I'll try to be a little more accurate this time. So as you know, in our 10-K, we show our interest rate risk profile. And given that, you would dial in about a 6 basis point increase in the margin for every 25 basis points that the FOMC acts. We did a little better than that this quarter, which I would attribute to that our betas on our deposit rates were still quite low. I mean we had a 2 basis point increase in funding cost. We haven't raised our posted rates, but certain selected accounts, we have increased those. So our beta is probably in the high single-digits when we model about a 40% beta on a weighted basis for those deals. So I think if we see continued increases from the FOMC, we're likely to see those betas continue to creep up. But that's really what drove kind of the outsized improvement in the margin relative to the 25 basis points, on average, we were up during the quarter from -- on prime rate.

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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Okay. Seen anything unique from the March hike? Or is it just behaving the same way, in terms of deposit pricing?

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [32]

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From the what? I'm sorry.

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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [33]

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From the March increase.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [34]

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No, it's been consistent. I mean -- so I think it is of note that -- so we have a little more than half of our portfolio is variable rate. And then you cut it in half again and say it's prime tied or LIBOR tied. Well, prime has been more sensitive than LIBOR. LIBOR is only up about 25 basis points in the past 5 months and, of course, prime is up 50. So that will temper that to some degree. But no, we're seeing everything kind of repriced as expected from what was done in mid-March.

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Operator [35]

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And our next question comes from Gary Tenner of D. A. Davidson.

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Riley Manuhoa Stormont, D.A. Davidson & Co., Research Division - Research Associate [36]

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This is actually Riley Stormont on for Gary. I just wanted to get sort of a -- some commentary on the Southern California market in particular. I know you highlighted that one as potential for some M&A activity in the future. But I know specifically San Diego and L.A. were some markets you talked about hoping for some more opportunity last quarter. So any color on sort of organic progress there and competition you're seeing would be great.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [37]

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Yes, I'd say the competition in those markets is a little stiffer than Nevada and Arizona given the more abundance of banks that compete for business. But obviously, the markets are very dense. There's a lot of business there. Southern California, do you have other number, Dale, on loan growth and deposit growth for Southern California, how that broke out for the quarter?

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [38]

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Yes. So loans in Southern California were up $40 million for the quarter and deposits were up $14 million.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [39]

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Yes.

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Operator [40]

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And our next question comes from Chris McGratty of KBW.

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

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I'm interested if there's any -- was there any notable shifts in the legacy Bridge portfolio in the classified movement in the quarter? I know you talked about the construction loans. Was there any migration in that portfolio? We're seeing some of your peers have some movement.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [42]

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No. I mean that portfolio has more ins and outs than the rest of the book. Things move quicker in the innovation sector. They become problematic quicker and they get fixed quicker. Everything moves quicker. So I'd say the level of activity in and out is heavier than the rest of the bank, and we've seen that the last year and a half. This has been a relatively tough year last year or so for -- in the technology sector as pricing and valuations of companies have adjusted down. There's still a lot of powder on the sidelines, but the amount of investment that's come in, say, last quarter compared to a year ago, was down a fair amount and valuations have been resetting. So what I like about our team at Bridge is in one of the tougher environments, they've been able to manage that portfolio really well. I mean we've had $400,000 of loan losses since we bought Bridge Bank in that book. And so don't -- I mean yes, it has been a tough market for technology over the last 1.5 years as valuations have reset. And there are loans that come in and out of the substandard and there has been a little bit more pressure than usual because there's not a lot of wind at the back. But don't confuse our -- don't confuse Bridge Bank with some of these others that have been [shitting the nest].

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

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Totally. Got it. Any kind of comment on retail commercial real estate? Obviously, a lot of stress, given what's happened with online and brick-and-mortar. Anything that you could speak to in terms of a portfolio review that may have been conducted?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [44]

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Yes. We -- first of all, we have never been a retail lender. I mean going back a long time, I don't like long-term retail credit risk. Never have. So most of our loans that are retail related would be construction or short-term kind of mini perm stuff, but I don't like long-term retail credit risk. Have it -- I like it way less now. We don't have a real big retail book. We started a review about 4 months ago of every credit that has retail credit risk over $5 million in the company. We're about 80%, 90% of the way through that and it looks pretty strong. So I feel we're in pretty good shape with what we have. We're not doing much at all going forward, except on select basis and focusing more on the type of retail where the market's trending, which is more entertainment related, restaurant related, that kind of stuff versus some of the traditional retail. But yes, you're right on line with our thinking, 3, 4, 5 months ago when we started the review, the review looks good.

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

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Great. Maybe on M&A, have -- we've obviously seen a bump in bank stock valuations when you pull back a little bit. I'm interested in your comments if there's been any kind of bid ask spread narrowing between sellers? What they might be expecting, given the bump and then the correction? And then whether the competitive pricing might be different in the West versus kind of nationally?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [46]

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Yes, it is different in the West. That's the tough part. I mean I was telling our team, we were looking at deals, I mean, it's like buying a house. The same house is more expensive in California than it is everywhere else. Everyone wants 20x earnings per bank. I will say buyers are probably a little more aggressive in terms of with their currency, and sellers are a little more aggressive. I mean the good news on the M&A front is most -- a lot of bankers and a lot of banks are looking to sell right now. They're just not too infatuated with the business for a number of reasons. So there's a fair amount of opportunities, but I would say pricing is still pretty challenged. And one of the issues I struggle with, and maybe you can give me some insight, I mean, yes, we traded this big multiple book value, but we don't get a lot of respect on a PE basis. And I don't quite understand that. You got any color for me on that?

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

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Good question. I mean I think that's where the opportunity is with your currency to kind of grow in the PE multiple a bit, but I would agree with you. Certainly, the numbers work with your multiple and it's just finding something that supports the growth rate of the pro forma company, is my opinion.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [48]

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Yes. Dale, you want to add something to that?

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [49]

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Well, I was just going to say that just from a buyer's perspective, the price itself in dollars isn't really what drives it. It's how many shares are going to be issued and what is the income stream adjusted for efficiency gain is going to look like after that? And so one thing about the rising tide of valuations is while it hasn't changed, it really hasn't changed the calculus for a buyer, it has for a seller because a seller is interested in translating the currency they're going to get into U.S. currency. And so -- and that's -- I think the bid ask has narrowed, but every deal is obviously unique and has challenges in its own separate ways.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [50]

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Yes, good point.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [51]

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Great. Dale, in terms of the tax rate for the rest of the year, how would you -- given the little bit of noise in the first quarter, how would you guide us on the effective for the balance of the year?

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [52]

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Yes, we should be in kind of the higher 20%.

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Operator [53]

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And next, we have a question from Brett Rabatin of Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [54]

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I wanted to talk about the commercial real estate and owner-occupied portfolio. Was just curious if you could give us some color on the linked quarter improvement and yield there. And if you're seeing better opportunities with people might be doing less in that book and if you're seeing opportunities there. And then secondly, just with the pullback in rates here the past month, how has that affected what you guys are looking at from a loan spread perspective?

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [55]

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Yes, that will affect maybe a little bit. I mean that stuff's just either floating or tied to 5-year LIBOR swap rates. And so we've been able to reprice some of that. And the other thing is a lot of the banks are -- some of the banks, due to some of the regulatory constraints, are kind of maxed out on real estate loans. And so we're seeing a little less competition in that area and able to get a little more pricing juice there. And also, this last bump up in the prime rate in rates kick in a little more than the previous ones because we have some floors on some of those loans. So it took a rate or 2 maybe to get a rate to get us up to the floor and then the last one kind of kicks in a little bit. But we're a really good real estate lender. Our customers really appreciate the fact that we really know the business well. And we're fortunate that we get paid for it.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [56]

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Our origination rates on those types of loans have increased about 30 basis points over the past couple of quarters and really are reflecting what's happened in terms of the swap curve, which is what these are priced off of because they're almost all fixed rate. But late, that's actually come down a little bit. But overall, things -- those yields are improving and they've been the highest they've been in the past couple of years.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [57]

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Okay. And then the other thing I was curious about was you mentioned not sure what inning we're in, 5, seventh, ninth inning of this expansion, and it seems like there's slightly less optimism around some of the potential changes that we're hoping for with tax rates or regulation, what have you. What are your -- are your clients kind of in a wait-and-see mode on the economy? How do you sort of frame the outlook from your clients' perspective?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [58]

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I think in general, the clients are a little more optimistic than they were a year ago. But the idea of managing cost per companies is kind of -- it's still here, it's here to stay. I mean I think people are just more vigilant on spending. So I would say the general spending of businesses in terms of new technology, new infrastructure, growth, it hasn't kicked in yet, really. Our average uses of lines of credit is still below the precrisis numbers significantly.

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Operator [59]

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The next question will come from Matthew Keating of Barclays.

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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [60]

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My question really pertains to the growth in the National Business Lines -- the loan growth, rather, in the National Business Lines this quarter. It looks like the biggest chunk of that came from the other National Business Lines segment, which, I believe, includes the mortgage warehouse, which you said was down. So I'm just wondering, how much was the mortgage warehouse balances down in the quarter? And then what offset that in that segment?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [61]

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Yes. I think mortgage warehouse was down about $50 million or...

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [62]

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$68 million.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [63]

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Okay, $68 million to be exact. And that's really tied into, as you guys know, I mean, less refinance activity. So that business was down. But we're picking up some new customers, so I think this quarter, that business may not be down. I think we may be offsetting that overall demand for that credit with some new customers. Our corporate finance business was up a little bit. And let's see, what else is in that book in other? Yes, our muni nonprofit. We booked a couple of nice deals. We got a big nonprofit -- a big school, a big nonprofit school in the Bay Area and a couple of other deals along those lines.

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Dale M. Gibbons, Western Alliance Bancorporation - CFO, EVP, CFO of Western Alliance Bank, EVP of Western Alliance Bank and Director of Western Alliance Bank [64]

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Resort finance was fairly flat.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [65]

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Yes, resort finance business was flat. Our timeshare financing receivable business is pretty flat. The securitization markets are pretty robust there, so it was pretty flat. We got a little bit of growth in our homeowner association lending book, where we lend money to associations who do capital improvements but pretty...

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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [66]

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Maybe back to the warehouse, though. Is that around a $800 million book? So it seems like the decline there is a bit better than some peers. Anything special? Are you guys more purchase-focused there? Any reason why that...

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [67]

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Yes, our customer -- our target customer is more purchase-focused and we're actually growing in terms of number of customers. I mean that's -- the business has been growing.

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Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [68]

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Okay. And then secondly, the second topic would be on -- it's nice to see the slight to strong deposit growth in the quarter. Deposit cost didn't move up that much. We have heard a few banks, as earnings season progressed, lament that commercial deposits tend to reprice quicker. Maybe just comment on your expectations there as we see additional Fed rate hikes, how you think that will hold up?

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [69]

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I think our deposit pricing will hold up better than most in the country because, number one: our customers that deposit with us, borrow with us, so they're pretty locked in. And number two, as we've said before, most of our deposits comes from either, one: the innovation and technology piece, which is heavy DDA; or number two, they come through our business customers in Arizona and Nevada and San Diego. And those markets have far fewer bank competitors in the top 3 largest banks in each of those markets, which are either Chase, Wells, BofA. They are very stingy in ranging deposit prices. And so we don't have the kind of deposit pressure in our main markets than the rest of the country has.

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Operator [70]

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And this concludes our question-and-answer session. I would like to turn the conference back over to Robert Sarver for any closing remarks.

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Robert Gary Sarver, Western Alliance Bancorporation - Chairman, CEO, Chairman of Western Alliance Bank and CEO of Western Alliance Bank [71]

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Yes, nothing else to add. Appreciate everyone dialing in. And overall, we're off to a pretty good start and we'll give you another update in 90 days. Thank you.

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Operator [72]

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