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Western Alliance Bancorp (NYSE:WAL)

Q3 2007 Earnings Call

October 19, 2007 12:30 pm ET

Executives

Robert Sarver - Chairman, President and Chief ExecutiveOfficer

Dale Gibbons - Chief Financial Officer

Hal Erskine - President

Analysts

Christopher Nolan - Oppenheimer

Brad Milsaps - Sandler O'Neill

Manuel Ramirez - KBW

Hugh Miller - Sidoti & Co

Brent Christ - Fox-Pitt Kelton

Alan Duncan - Wachovia Securities

Joe Morford - RBC Capital Markets

Brian Freckmann - Crown Capital

Operator

Good day, everyone. And welcome to the Earnings Call forWestern Alliance Bancorporation for the third quarter 2007. Our speakers todayare Robert Sarver, Chairman and President, Chief Executive Officer; and DaleGibbons, Chief Financial Officer, and Hal Erskine, President of PartnersFirst.

Today's call is being recorded and will be available forreplay after 5 PM Eastern Time today until 11 PM October 26 by dialing areacode 888-203-1112, using the pass code 4231550.

The discussion during this call may contain forward-lookingstatements that relate to expectations, beliefs, projections, future plans andstrategies, anticipated events or trends and similar expressions concerningmatters that are not historical facts.

The forward-looking statements contained herein reflect ourcurrent views about future events and financial performances that are subjectto risk and uncertainties, assumptions and changes in circumstances that maycause our actual results to differ significantly from historical results andthose expressed in the forward-looking statements.

Some factors that could actual results to differ materiallyfrom historical or expected results include factors listed in the InitialPublic Offering Registration Statement as filed with the Securities andExchange Commission. Except as required by law, the Company does not undertakeany obligations to update any forward-looking statements.

And now for opening remarks, I would like to turn the callover to your host, Mr. Robert Sarver. Please go ahead, sir.

Robert Sarver

Thank you. Thank you for joining us this morning. I wouldlike to start off going over our strategic direction right now and some of ourinitiatives and really where the focus -- current focus of your management teamis. After that, I want to talk a little about asset quality, which is somethingI know is at the top of the list with all bank investors, and also happens tobe a topic that I spend a great deal of my time and my personal attention in.

Then, I'm going to turn over to Dale Gibbons, ChiefFinancial Officer of Western Alliance to give you some highlights of thefinancial results for our recently completed quarter. And then I thought itwould be helpful to have Hal Erskine, who is the President of our new venture,PartnersFirst, to talk about where we are and kicking off our affinity creditcard business.

Strategically in terms of our focus right now, and reallykind of what is at the top of our list. Number one, I would say would becontinue to grow our core deposit loan business. We want to continue to recruitgood relationship bankers to the Company. However, we are slowing down thenumber of new offices we've opened. We opened three new offices in the thirdquarter, two in Las Vegas, one in San Diego.

As you know, we’ve grown over the last five or so years fromfive offices to 38 today. At this point, we feel we have very good coverage inmarkets like Las Vegas, San Diego, Phoenix, Tucson and Reno. So there is reallynot a business in one of those markets that can’t interact with us because weare too far away. Going forward, the number of new office openings we plan onfor the next 12 months probably, looks more like one a quarter versus two orthree a quarter that we’ve had previously.

We are also continuing to look internally in how we canimprove our operating efficiencies within our organization. One thing about atougher economy, it focuses you to look more internally. I think yourweaknesses elevate, and you really get a better chance to see how you as acompany can become a better organization. We’ve started that. We’ll have abouta 5% FTE reduction excluding the PartnersFirst operation. Matter of fact, thislast quarter, we reduced our FTEs by 13, including staffing up for the openingof these three new offices.

The money management business is something we’ve done reallywell at. We’ve been able to attract and retain a lot of key people from ouracquisition from Miller/Russell. We bought China investments this quarter. Ourassets under management have grown, pushing $2 billion, the business we thinkwe’re good at that we can run profitably and do well. So we’re going tocontinue to put capital and emphasis on organically trying to expand thatbusiness, as well as looking for acquisition opportunities in that business.

PartnersFirst, a new venture I'm very excited about. I wouldsay, since we started working on this in the last three or four months, resultsto date are kind of at the high end of what we anticipated. We do want tobecome the premier credit card program for small to mid-size affinity groups.

We added a great director, Ken Vecchione, former ChiefFinancial Officer for an MBNA and newly appointed CFO of Apollo Group. He's gota lot of experience. The quality of people we’ve been able to hire in thatbusiness is strong. And the receptiveness from the marketplace in terms ofcustomers out there willing to talk to us about doing business has been reallygood. And Hal, will update you on some more information there a little later inthe call.

Getting to something that’s kind of exciting to me is Ithink at this point, we’re beginning to look at what I’d call vultureopportunities in our market with the disruption. That could include the form ofpurchasing pools of assets at deep discounts. It may even include institutionalpurchases and potentially may include us partnering up with other investmentfunds and investment vehicles to help manage those acquisitions.

Myself personally, as well as the banks that I have run,have had a good track record of being able to acquire real estate assets atdistressed prices and turn them around into very profitable investments. Wealso will continue to buyback stock in our Company at we deem to be opportuneprices and surely trade it at 10% deposit premium today would be a price wewould think would be opportunistic for us to acquire shares.

From a credit quality standpoint, let me just kind of giveyou a summary of our portfolio. 21% of our portfolio is what you would refer toas C&I, straight commercial and industrial loans, no real estate ascollateral. 42% of our loans are secured with commercial real estate mortgages.They are term loans. About half of that portfolio is owner occupied and theother half is investor property. 10% of our portfolio is single-familymortgages.

And I make a comment on that. Our single-family portfolio, alot of people are very interested in kind of what’s your exposure to sub primein the mortgage business. We've got about $0.5 billion of mortgage-backedsecurities. They are all rated AAA. We bought no sub prime issues.

We do have one $10 million exposure on an Alt-A paper, butwe bought the super senior tranche of that and in order for us to absorb anylosses there, there would have to be over a 14% loss rate in that pool.

Our mortgage portfolio, which is a little over $400 million,we have said before very strong average loan to value 66% at origination,average FICO 704, no sub prime. In terms of where we are currently in terms ofpayment history, we have one REO house we took back for $150,000. We think wecan sell for about 175. We don't anticipate any loss there.

We have one loan in the portfolio over 90 days delinquentfor $450,000 that just appraised for 485. We will probably end up taking thatback and having to sell it and then, we have zero loans 30 to 89 daysdelinquent. So the performance of our mortgage portfolio and ourmortgage-backed securities portfolio is very strong. I feel pretty good there.

In terms of construction, 9% of our portfolio is in commercialreal estate construction. About one-third of that is owner occupied; abouttwo-thirds of that is to investors. 4% of our portfolio is in residentialconstruction. That's a number that has come down. And 9% of our loans aresecured with land, undeveloped lots. About two-thirds of that is residentialand one-third is commercial. 1% of our loans are multifamily term loans and 4%are consumer loans.

I do believe that because we forecasted 18 months ago thisdownturn in the economy, especially in real estate, that we have been able totake certain actions to limit our exposure and our losses in our portfolio. Istill believe firmly that we will continue to outperform our peer groups interms of losses we take in our loan portfolio and in terms of delinquency andnon-accrual numbers.

We have been fairly granular in terms of our approach tolending specifically in real estate. Even though we have a legal lending limitof about $75 million, the largest relationship we have in the bank is $26million. We only have five credit relationships of $20 million and up. We haveanother 14 relationships between $15 million and $19 million.

Looking at our non-accrual loans, you can see some of thechanges in the press release in there. We did make significant progress inresolving -- we resolved about $4 million of credits that were over 90 dayspast due through payoff or being brought current in restructuring withadditional collateral.

Non-accrual loans, as we've said before, I mean, there justwas no way that that number was going to stay nil. And that has bounced up tocurrently about $16 million. That really consists of only six credits. Most ofthem are house related, either some homes that are finished or some lots. Theyare all secured with a first deed of trust.

We currently in our loan loss reserve allocation have about$1.3 million reserve for those credits. They are in the process of collection.Some of them may take a little longer than others.

There's three big ones. One is a $2 million deal in Reno thatis secured with some residential lots. The appraisal just came in. They areactually kind of higher end lots on a golf course. New appraisal just came inat $3 million.

We have another deal for $5 million in Tucson that wassecured with some lots where we have some cost overruns and the builder and thecontractor got into a little pissing match and it looks like they have cometogether now, are going to get this project finished. It is about 90% complete.We do have a takeout in place with a homebuilding company that has reuppedtheir agreement to buy. And the other is about $6.5 million on a residentialproject that is under construction in Las Vegas. That is going to be a littlebit of a more protractive workout.

But I guess my point is that we have had this step-up insome non-accrual loans. I don't think it is an alarming rate. The numbers arestill well below our peers. And what is going to go back to whether howsuccessful we are is the fact that did we underwrite deals in the rightlocations and do we have enough collateral.

Anything to do with residential right now, whether it islots or houses, is going to take longer to develop, longer to absorb. The keyis do you have enough equity and do you have the right sponsors in the rightlocations so when the market comes back, your properties are going to be soldand you are going to do that without taking losses to the bank.

We have significantly reduced our delinquency in loandelinquencies and are on top of that. I am looking at a chart, I guess, thatshows every loan in the Company that is 30 days or more past due, 90 days ormore, non-accrual, REO, the whole thing. The total is $12 million in Las Vegas,$2.2 million in Reno, none in Northern California, $0.5 million in Torrey PinesBank in Southern California, and $6 million in Alliance.

So I am really -- while I would like to not have any NPAs,given where the market is, I feel pretty pleased that we only have $21 millionof loans that are over 30 days past due. We are on top of that, and I think ourunderwriting is going to pay off in the long run.

Let's see -- I am sure we will get some more questions inthe Q&A regarding real estate in specific. I know that is on the top ofeverybody's list. But right now, I'm going to turn it over to Dale. And Dalecan give you some summary and highlights of our financial performance for thequarter. Dale?

Dale Gibbons

As you saw in the press release, net income for the fourthquarter was $11.9 million at $0.35 per share. It included $0.03 benefit frombasically securities valuation. You may recall during the second quarter, wehad an $0.08 charge related to the significant run-up in market rates during 2Qthat reversed in the third quarter.

The benefit was less though, however, because as most peopleare aware, there was a pretty substantial expansion in spread relationshipsacross the credit curve coming off some treasuries.

We also had a $0.01 gain on a security situation that wasjust an opportunistic deal that took place during the third quarter. Coming theother way, we had a $0.02 charge for PartnersFirst, a $0.02 charge for Alta.Alta does continue to make progress. It's still however pulling downconsolidated earnings.

And then most significantly, we had a provision expense of$3.9 million, which was $3.3 million over our 600,000 in net charge-offs. Thatclipped EPS by $0.07, the excess over charge-offs. Half of that increase was aresult of strong loan growth that we had during the quarter, and the other halfwas to cover credit deterioration as Robert alluded to.

In terms of the share count, we were down slightly to $31.7million. We repurchased 560,000 shares. However, that was largely offset by the310,000 shares that were issued for the Shine Investment Financial Servicesacquisition in the Denver area.

Revenue was up 20% over last year at $52.7 million, largelydue to the First Independent acquisition, which closed at the end of the firstquarter. It was up 6% on a link quarter annualized basis however. Our marginwas down 14 basis points to 438 from a 452 in the second quarter. This declinewas not caused by assets repricing faster than liabilities.

In terms of kind of a stand-alone basis on our interest raterisk profile, we see ourselves as modestly liability sensitive. However, we didhave a deterioration in terms of our liability mix with continued declines indemand deposits, primarily driven by title companies, and that was offset byincreases in money market accounts. Obviously, that is a more expensive fundingstructure.

In addition to that, in all of our, earning asset growthboth on our loan book and securities was funded with wholesale sources,although that is at a positive spread and produces net interest income for usand a higher EPS, it is at a substantially lower margin than our averagepresently. And that’s what drove that down. In fact, net interest income was up2% from the second quarter. In addition, we also had some interest reversalswith some of the loans becoming non-performing. A year ago, the margin was 442,essentially flat.

Non-interest income was up 27% to $5.9 million from a yearago, and down slightly from the second quarter. We had $400,000 of revenuerecognized for the two months that we had Shine during the third quarter.

However, we did not have any loan sales income, whichexplains the decrease that we have. We were getting traction there through thesecond quarter, and that kind of abruptly halted in the third quarter. And thatwas the drop in the other income category.

Non-interest expense, up 38% to $34.6 million over lastyear. It’s up $1.1 million from the second quarter '07 if you exclude thenon-recurring merger related expenses we had in the second quarter. That $1.1million is almost entirely explainable from PartnersFirst, about 80% of it. Wealso had about $250,000 of expenses from Shine. And as Robert mentioned, we hadopened three new offices during the quarter.

The third quarter efficiency ratio was 65.1% compared to64.2% in the second quarter. However, if you just exclude PartnersFirst, itdeclined slightly to 63.6%. Obviously, that’s not where we need to be. But webelieve we are making progress and we're going to continue to do so with thereduction that we had in FTE a little bit during the third quarter, as well asslowing down the expansion of our retail distribution system.

Non-performing loans came in at 46 basis points at $16.4million of total loans. Notably, however, we believe loans past due 30 days andstill on accrual declined from $33 million to $5 million, with most of thereduction coming from a migration to NPL. The reserve level was at 1.13% at9/30, up from 1.09% at 6/30.

To the degree that 30 to 89 day past due loans are reallynascent non-performers, we think that the pipeline has been reduced from theincreases that we had in 30 to 89 day past dues for the past five quarters. Thetax rate; again, declined a little bit to 31.5%, nothing really nonrecurring inthis category.

We have been managing this down through acquisitions ofloans and securities that are tax advantaged; however, some of those are tiedto LIBOR. And as LIBOR, we expect to come down in certainly the fourth quarterfrom the third, where it was quite volatile.

We do expect to see the benefit there decrease, and probablyhave about an increase in our tax rate about 1% from the 31.5%. Organic loangrowth was 2% un-annualized on a link quarter basis. We have done some gooddeals in all loan categories.

The largest piece that we, largest loan that we did was inthe construction category, it is in Utah. It is at 39% loan to value, and theguarantors are exceptionally strong. We feel good about this developmentopportunity.

In terms of the deposit side, really deposits were flatduring the quarter; again, if you net out the title deposit decline we had of$35 million, we also had another increase, $9 million in our customerrepurchase agreement. However, we think the title situation and depositsgenerally are going to be challenged for the foreseeable future.

In terms of where the affiliates are, organic loan growthwas $57 million at Bank of Nevada, which is where the Utah loan was booked, $6million in Reno, $38 million in Arizona and $46 million in San Diego, $11million in Oakland. As I said, they continue to show increased performance.

Deposit growth or the lack thereof was distributed, it wasflat at Bank of Nevada, small decrease at First Independent, minus $34 millionat Alliance Bank. Alliance Bank took the brunt of the title company depositdecline that we had during the quarter.

At this point, I would like to turn it over to Hal to talkabout PartnersFirst.

Hal Erskine

Thank you, Dale. And I want to say how proud I am of myWestern Alliance teammates and the credit quality and steering this shipthrough a difficult market. And I'm very proud of our performance. And it hasenabled us to do what we're doing, which is three things. Since July 2 when westarted -- one, get ready to issue cards, which we will be doing on October 29;second, prospecting signing affinity groups and then, of course, bringing ongood people.

I will start with the operation. We initiated our totalsystems agreement on July 2. And in four months, basically a little bit lessthan four months with two people to Hawkins (ph), Kevin Skirde, Tina Yorkers(ph) went down to Columbus, Georgia and it's like My Cousin Vinny all overagain. But they did a phenomenal job.

And the fact that we will issue cards next week to selectWestern Alliance people for final testing and certification. It is a recordtime and with a great partner from Total Systems, normally takes six to ninemonths with a dozen or more people on the issuer side, we did with two peopleliving down there in the last three months.

We had our compliance review by Western Alliance. They tookfour of their senior most auditors and compliance people through three days ofvery rigorous testing in Columbus again in Total Systems and passed with flyingcolors. So I'm very proud of that.

We have established vendor relationships and contract withLoyalty Rewards Plastic Agency Data Management and a variety of other vendors.We will issue two affinity programs, starting in November 1, NationalAssociation of Sports Medicine, which I will bring up in a minute. And we have,after the peak season through Thanksgiving holiday will be implementing ournext six to nine programs, which we will talk about. FDR, Visa, MasterCard,freeze them during the holidays for level of card usage.

We will launch four to six new programs, as I mentioned,including a student loan pay down program for our college/university partnersin December.

That is the operation. We are very proud of our credit andunderwriting. The key for our affinity marketing will be of course ourpre-approval, make sure we sign the right groups with the right demographics.And throughout the decision-making process of who we give our loan to, both inthe automated TSYS structure as well as the judgmental. And every applicationwill be reviewed by a PartnersFirst person.

Second category, affinity groups, we have developed -- JimDuncan and our team have developed what I consider the finest prospect databasein the affinity credit card market in the last two months. We have over 10,000affinity prospects by credit quality and a database that we are talking with andsending out mailers to every month.

And from that, over 100 prospects or presently, it isactually 111 are what we would call a hot prospect phase. And in the next 6 to12 months, we will be renewing their contract and have expressed significantinterest in talking to that. From there, we have 20 in final stages ofnegotiations, where we are in serious discussions with them about finalizingthe program. And we signed 10 new partners relationships since the launch.

We have shortened the sale cycle in addition to theoperations cycle. We feel in the affinity market one of the issues is how longit takes to sign a group from contact to close. We usually in the four to sixmonths range. We’ve now, as you can tell, shortened at least for the groups wesigned to less than three months. And so, our goal is to be 120 days fromcontacting a group to have the marketing completed.

Finally, and I will end on this, we’ve attracted, as Robertmentioned some fine people to our organization. We started with seven, who youmet in the launch in July. We are up to 12 now. We will have 30 by the end ofthe year. I added up this morning we have over 200 years of credit cardexperience from the 10 people we have presently onboard.

And a good example of that is how quickly with TSYS, theHawk and Kevin have made things happen in getting our organization up to speedto issue cards 1 of November. We also have 20 outside brokers working to bringus business. And their skill set is well over 200 years of experience inselling and business development broker -- developing affinity marketing.

So that’s a quick update on PartnersFirst. We're very proud.A couple of highlights of the partnerships that we have signed since July, youheard about U.S. Squash, which of course has great demographics. And that’ssomething we will always focus on as our first criteria of who we sign.

The National Association of Sports Medicine, which is aprogram for team physicians and team physical therapists that there is 80,000nationwide. Golf Magazine $1.6 million subscribers and if you know anyone whoplays golf, they are using a very good demographic. And we’re excited about anew program for a VIP with The Palms, a casino in Las Vegas.

So with that, I will turn it back over to Robert.

Robert Sarver

Yes. Thanks, Hal. We really are excited about what you aredoing at PartnersFirst. And we feel over the long term, this is a piece ofbusiness that can add significant value to the Company. And we are all workinghard to get off to a good start here and I think so far so good.

With that, why don't we go to questions and just open it upright now?

Question-and-Answer-Session

Operator

(Operator Instructions) And we will take our first questionwith Christopher Nolan with Oppenheimer. Please go ahead.

Christopher Nolan - Oppenheimer

Good afternoon. Hello. Hal, does the turbulence in thecredit market affect your planning for securitizations? Have you guys startedconsidering alternative plans if you cannot access securitization markets?

Hal Erskine

Well, the first criteria will be credit worthiness, and thatis something that is very important. We have six phases, the pre-approval ofthe group we sign who we market to in that group's list. We will do a lot of modelingto not necessarily market every single person on the list.

Third, who applies, we will have both an automated andjudgmental review of all aspects of their credit quality. And then we willreview everybody at least once and probably more times in terms of who we givea card to in the credit line. So that will be the first criteria that'simportant to securitization.

And then yes, of course, the securitization market, I wouldnot want to be trying to securitize the sub-prime credit card business rightnow. But that first criteria is credit worthiness. And then second, the goodpart about having Western Alliance as our partner is -- and I will let Dalespeak to this as well. There is no balance sheet issue relative to our growthfor at least as far as in almost two years' worth of our growth. So from thatpoint of view, I think we are not desperate to have a securitization. But wefeel the first thing we will have to do is put on good credit and I don't thinkthese credit prices will last forever either.

Dale Gibbons

Yes, we believe we can take about $1 billion of credit cardreceivables, which would get us to maybe a sweet spot in terms of the size toaffect the securitization without having a kind of significant haircut forbeing a quasi odd lot.

And so, we will be able to do that, and then maybe run $500million to $1 billion on our balance sheet, prospectively, as we build asecuritization reputation.

Christopher Nolan - Oppenheimer

So that just basically uses your existing capital generationrun rate, right?

Dale Gibbons

Correct.

Christopher Nolan - Oppenheimer

Okay. And should we expect, given these hot prospects thenthe comments that PartnersFirst is performing better than expectations in thestartup phase and that the expenses related to it in 2008 will be greater than$0.02 a share -- $0.02 a quarter I mean?

Dale Gibbons

Yes. Actually, we expect that to kick up to $0.04 thisquarter. And it could be a little bit bumpy as we go into 2008. But my -- kindof our best estimate would be that that $0.04 charge would continue quarterlythroughout next year.

That said, I mean the purpose for this is because we aremoving beyond the phase of just building infrastructure PartnersFirst. Theseexpenses are to market to the members of our newly found partners.

Christopher Nolan - Oppenheimer

Great. And finally, Robert, could you give a little subcomment in terms of some of the raw land valuations and other observations interms of the real estate market, both residential and commercial, in the Vegasmarket, please?

Robert Sarver

Yes, sure. The valuations for commercial have held up prettygood. I would say if there’s one area that’s starting to soften a little bit,it would be on the office side, the land for office development. Office isgetting a little bit overbuilt.

The residential side is really kind of two components, andthat’s why my comments a year ago, year and a half ago, you can't justunderwrite real estate as a financial asset. You've got to know what realestate you are underwriting, the location, things like that.

The lots that are closer in that have infrastructure have amuch better valuation. The stuff that’s far out and more speculative, boy, Iwouldn’t even want to guess what some of those valuations are. Because really,in order to find out what residential land is worth now, you can't really lookat comps.

What I've got our people doing is kind of going old school,which is what are the houses currently selling for in that market. Say a houseis selling for $200,000. A builder can only pay $50,000 for a finished lot. So,if you've got finished lots, those lots could be worth $40,000, say, whichgives a little discount and time value for absorption of lots to the builder.

But if you've got unfinished lots and you don't have sewerand you don't have utilities to the property, and it's just raw land sittingout there, if that lot were to cost, say, $50,000 to develop, then today yourland is worth nothing.

And so, it really goes back to understanding your market andunderstanding which projects you have and which borrowers have the capacity tohold on.

Christopher Nolan - Oppenheimer

Great. Thanks for the color.

Operator

And we’ll take our next question from Brad Milsaps fromSandler O'Neill. Please go ahead.

Brad Milsaps - Sandler O'Neill

Hey, good afternoon.

Robert Sarver

Hey Brad.

Brad Milsaps - Sandler O'Neill

Hey Dale, just quickly on the net interest margin, I was alittle surprised to see it come in as much as it did. I know you kind of walkedthrough some of the interest reversals, et cetera.

But just curious when I was there in late September, youguys had talked about really aggressively lowering your deposit rates in anticipationof the fed cut. And just curious as to the direction of the margin goingforward and just any additional color you can offer there.

Dale Gibbons

I appreciate that, Brad. And in terms of kind of there-pricing that we have done on interest-bearing liabilities, deposits. It hasbeen more aggressive than the contraction we saw in income as a result of theprime reduction.

But as we indicated, we did have about $250,000 of interestreversals. We also -- our wholesale borrowing has increased prettysignificantly as our loan to deposit ratio continued to increase and depositswere flat.

I don't see any recovery on the deposit growth in thenear-term at all. If anything, I think it’s probably continue to be understress.

Title Company deposits, two years ago, two and half yearsago were 20% of our total. Today, they are at just over 5%. But with what wesee in the market, I think that could still drop further.

And so, to the degree that our funding mix is not going toimprove, I don't believe, over the near-term, but we still continue to want tohave some asset growth, although probably a little bit slower than what weexperienced during the third quarter.

So with that, I would think that there’s going to becontinued margin pressure as a result of mix issues, not to the substantialdecline of 14 basis points that occurred in the third quarter, but at a moremodest rate. But yet, I expect it to continue to contract in the single digitrange in 4Q.

Brad Milsaps - Sandler O'Neill

Okay. One more question along the lines of loan growth. I'mjust kind of curious, I guess last quarter, you guys talked about thecompetition and the profitability of doing commercial loans, et cetera, notbeing as attractive. And obviously this quarter, you had some very, very strongloan growth.

Just kind of curious as what changed in the last 90 days,kind of where a lot of the demand came from. And were you seeing betterpricing, -- just better opportunities? Just curious as to direction there, whatyou saw over the last 90 days?

Robert Sarver

Well, I think there's a couple things there. Number one,we’ve hired a lot of new people over the last 12 months and opened up a lot ofnew offices. So, just because of the sheer numbers of new people we have calling,we are going to get growth.

Number two, a down market is also a good opportunity for usto pick out top quality borrowers that ordinarily, we really were not able toget from some of the bigger banks. So, we are still in business. A matter offact, we are aggressively in business going after the A quality projects.

And finally, because the sales of houses and things hasslowed down, you have less churn in your construction portfolio, so you haveless payoffs. So, I think its kind of a factor of all those three.

Brad Milsaps - Sandler O'Neill

Sure, fair enough. Robert, would you say that your pipelineis right now at a level kind of where it was in the third quarter? Have youcome off a little bit or how would you clarify?

Robert Sarver

Our pipeline is actually better, but it would be morecommercial focused.

Brad Milsaps - Sandler O'Neill

Okay.

Robert Sarver

You know versus residential real estate and things likethat.

Brad Milsaps - Sandler O'Neill

Okay. I’ll step back and listen.

Operator

And we’ll take our next question from Manuel Ramirez fromKBW. Please go ahead.

Manuel Ramirez - KBW

Hi, good morning. Dale, could you talk about what kind ofsecurities you are adding in the quarter? And is this a reflection of youranticipation that the Fed is going to ease further?

And then secondly, Robert, I hope you could elaborate onyour comment about being a "vulture" investor potentially here withthings kind of hitting an air pocket in the economy and the real estate marketin particular.

If I look at your capital position, it is decent. But thereare other companies out there that have more excess capital than you do. Andyou obviously have to support the credit card business. So, I'm curious how youwould finance that.

Robert Sarver

Yeah. I mean smart people figure out how to make money intimes like this. And part of it is being in a position, so that you can takeadvantage of those opportunities. I think as a company, we have a reputation ofbeing able to make money in tough economies and to acquire distressedportfolios and turn them into profits.

We have that track record. We are beginning to look atopportunities out there that could present themselves. One way we could do thatwould be partnering up with another investor where we are using the bulk oftheir equity and their cash, and then maybe we’re getting a promote off theprofits that are generated.

But, we will look clearly at how we can profit from what isgoing on in this market, because it will be oversold. And just as the marketsoverreacted on the plus side while back, they are going to overreact on thedownside too.

Manuel Ramirez - KBW

And can you give me an example of the kind of stuff you arelooking at now?

Robert Sarver

I mean not specifically with names, but there areinstitutions out there and banks out there that have portfolios of commercialreal estate loans and residential real estate loans that are getting to pricelevels that are attracted and to be purchased.

And back in Arizona, when the market was bad, we went outand purchased loans from different S&Ls and different finance companies andthen kind of worked our way out of those and was able to achieve returns thatwere over IRRs that’s over 20%.

Manuel Ramirez - KBW

And do you suspect that the regulators are at the point inthe cycle where they would be concerned with that kind of strategy, or thatthey would be thankful that you would help them bail out other institutions thatdo have problem loans? Where do you think their heads are at?

Robert Sarver

I think if our, if our and it is the same thing I focus,same situation that happened in 1991 in Arizona. If our camel ratings andregulatory relationships and regulatory ratings are such that we are strong,which we are and if the regulators feel we have the expertise, then I think itis something we can do.

Manuel Ramirez - KBW

Okay. And then on the securities portfolio, Dale?

Dale Gibbons

Sure Many. We have been purchasing some collateralized debtobligations. These are primarily trust-preferred pools of other financialinstitutions. Those spreads have expanded. We are over the longer-term, wecertainly remain sanguine on the banking industry.

And some of these pricing metrics or whatever, I am not surereflect that. You can see the same thing in financial adjustment rate preferredstock. These are DRD beneficial, and those have really sold off prettydramatically.

And, I mean we can buy A-rated paper of what I wouldconsider a blue-chip name in Arps that would yield something on a taxableequivalent basis something pushing 9%.

Mortgage-backed securities, there has been expansion inthose categories as well with the and we have been pretty tight here in termsof what we have been looking at with just basically super senior tranches.Although, I really can't understand how we could ever have losses in thedouble-digit range on prime paper.

And then also some municipal loans, we have gotten intoColorado as well, we have purchased -- we have acquired some municipalsecurities or municipal loaning relationships out of that market as well tomitigate our tax liability in that new state.

Manuel Ramirez - KBW

Okay. And if I look at the averages versus the peered and itlooked like it haven’t pretty evenly over the quarter.

Dale Gibbons

I think that is fair.

Manuel Ramirez - KBW

Okay. Thank you.

Operator

And we’ll take our next question from Hugh Miller, Sidoti& Co. Please go ahead.

Hugh Miller - Sidoti & Co

Hi, good afternoon. I was wondering if I could follow up alittle bit on the softness that you were talking about in the office spacemarket in Las Vegas, and seeing if you were seeing anything else other than someof the residential real estate-related firms that were causing that softness,and wanted to get your thoughts on whether or not you feel that it willprobably spill over into other areas outside of just office space?

Robert Sarver

I think office is the first one that we're seeing somedeterioration in right now. And it is kind of similar to residential in that itis really more of a function of some overbuilding and over speculating, maybe afew too many office condos being built for sale and office buildings.

Retail is still doing pretty good. Although, some of theretail on the outskirts, that is depending upon a lot of the new residentialdevelopments to be built will be a little soft. Industrial is very strong. ButI would say office is a little bit of a weakness right now.

Hugh Miller - Sidoti & Co

Okay. And can you maybe add some color then on just whatyou're seeing then for the construction market for the commercial side withinLas Vegas?

Robert Sarver

Say that again?

Hugh Miller - Sidoti & Co

Just wondering if you could add some color on the commercialconstruction market that you're seeing in Vegas. Obviously, you said there is alittle overbuilding with the office space, but what you're seeing in general onthe commercial side in the Vegas market.

Robert Sarver

In terms of construction?

Hugh Miller - Sidoti & Co

Yes.

Robert Sarver

Yeah. I think that is starting to slow a little bit.Obviously, the one thing that’s not slowing are the casinos. We have about 100cranes in Las Vegas building these projects. I counted last week, I counted 23of them on one project, City Center.

Thing I would say about the markets we're in, we’re in sometough markets. And we knew they were getting tough and things are never as goodas for as long as people think and they are never as bad.

But long-term and even mid-term, Phoenix has got 80,000 newjobs being created again this year. Las Vegas expecting 100,000 new jobs overthe next four years just to meet the demand of the 40,000 new hotel rooms.

So, I see these markets coming back. I probably see Vegascoming back first and I see Arizona coming back next and Southern Californialast.

Hugh Miller - Sidoti & Co

Okay, and just last question is I guess, if you are seeingVegas coming back first, over what time period would you anticipate that theywill benefit from the job growth from all of the strip construction?

Robert Sarver

I would say within the next 12 months.

Hugh Miller - Sidoti & Co

Thanks so much.

Operator

We’ll take our next question from Brent Christ with Fox-PittKelton. Please go ahead.

Brent Christ - Fox-Pitt Kelton

Good morning. Just a follow-up to the question on capital.You guys mentioned a number of initiatives that either you have in place orcontemplating whether it is PartnersFirst, maybe expanding the asset managementbusiness a little bit, continuing to buy back stock or even getting into someof these vulture-type deals.

Could you just talk a little bit about how you’reprioritizing those, given your current capital levels and where you might see afloor in terms of absolute capital ratios?

Robert Sarver

Well, I can let Dale talk about our absolute capital ratios.But for me, PartnersFirst is definitely at the top of the list. This is abusiness, we think has tremendous upside for us down the road. And so we aregoing to make sure we capitalize it properly and devote the resources we can tomake it successful.

I would say second would be kind of evaluating the returnsthat we think we can get by buying our own stock back versus whatever vultureopportunities we have. Of course, those opportunities can take place with ourexisting balance sheet and really don't require significant capital.

And then in terms of the actual numbers and where thatshakes out, Dale, you can give him some color on.

Dale Gibbons

Sure. Certainly, what we look at primarily is going to belike tangible common equity. We’re only at 10.3% on total capital, but thereare some things that we can do to, one, reduce our risk-weighted assets, and wewill be looking at that this quarter.

And then there is also obviously an opportunity to issuesome trust preferred to address that issue. Our tangible common equity took abit of a clip during the third quarter related to other comprehensive incomechanges from the expansion of spreads in the securities markets.

Some of that has already tightened in a little bit. And inaddition, I am not sure that should necessarily be included in that number. Soif you adjust for that, we are above the 5.7 kind of reported level, but Iwould say I don't think we want to really escape below 5.5 in these marketconditions.

Brent Christ - Fox-Pitt Kelton

And obviously, with the securities portfolio continuing toincrease, are you guys considering doing that going forward? And would that eatinto some of the capital that maybe you would allocate elsewhere?

Robert Sarver

The first priority is to be able to accommodate the businessopportunity with PartnersFirst and so, the answer would be no. There are somethings we can do. In addition, I think the securities growth will slow andthere is also some things we can do in terms of 20% risk-weighted assets versus100 and things like that.

So, to some degree, the securities portfolio is going to bean accordion to provide opportunity for the credit card initiative inparticular, but as well as other loan situations and there are opportunitiesthat arise in our markets.

Brent Christ - Fox-Pitt Kelton

Okay, and then just on a separate topic, at the beginning,you guys mentioned some pending reductions in the headcount. Could you justtalk a little bit about the nature of those and over what time horizon?

Robert Sarver

Well, what we expect to do is we are continuing to kind ofmanage our FTE. We are looking at positions as they become available and asthey open up and seeing if there's a better way to restructure that, so that wecan operate more efficiently.

So it is not going to be a ratcheting downward, but it is anarea that we are very, very conscientious of. With the slowdown that we have inour distribution system, and what we would expect would be continued growthafter we get through these stagnant part on the liabilities side in particular.

We do have new offices out there. More than 40% of ouroffices are less than two years old. We think they are in good markets. We aregoing to be opening a branch this quarter in Mesa, Arizona.

So, what we are looking for is that our balance sheet growthwould exceed the growth of our FTE, and we would drive efficiency in part bythat method as well.

Brent Christ - Fox-Pitt Kelton

Okay guys, Thanks.

Operator

And we’ll take our next question from Alan Duncan (ph) withWachovia Securities. Please go ahead.

Alan Duncan - Wachovia Securities

Thank you. What kind of exposure does the bank have to theLas Vegas residential high-rise market? How do you guys see that marketdeveloping over the next several years?

Robert Sarver

We have none.

Alan Duncan - Wachovia Securities

Good.

Robert Sarver

So that was kind of one of the things we made aconscientious effort to stay away from. In addition to not only that, but we hada policy in place that any just residential permanent condo mortgages that weredone in high-rise condos or apartment conversion condos had to be approved byme personally in the bank, regardless of dollar amount. And I approved threeover the last five years. So that was one we did not jump into.

Alan Duncan - Wachovia Securities

Thank you.

Operator

And we’ll take our next question from Joe Morford from RBCCapital Markets. Please go ahead.

Joe Morford - RBC Capital Markets

Thanks good morning. Really just about everything has beenasked, so I guess a couple of quick follow-ups. One, Robert, you mentioned,still some interest in further expanding on the asset management side.

Just kind of talk about opportunities you are seeing now inpricing and the current market and things like that?

Robert Sarver

We have had good experience there. We bought Miller/Russellfour years ago. We have doubled the size of the company. We bought it for about$6.5 million. We think today it's probably worth about $18 million to $20million. We bought this other firm in Colorado. There is a network of thesetypes of firms.

And many of them are kind of, from time-to-time, look tosee, well, maybe I should exit our programs a little different than some of theothers that are out there, like a Compass or Boston Private or Wells Fargo orwhatever. I think it is pretty attractive. So we are going to continue to lookfor some of those firms in our region.

Actually, I was meeting with one yesterday to talk a littlebit about it. So, local firms, managing $2, $300 million to $5, $600 million inassets that kind of want to team up with us.

Joe Morford - RBC Capital Markets

Okay. And then there has just been a lot of talk aboutPhoenix, Vegas, those places. Just what are your current thoughts about the SanDiego market and where that is in this whole cycle?

Robert Sarver

San Diego is not doing too bad. Our stuff is clean as awhistle there. But we have stuck more to infill and coastal things. Farther youget away from the water, the more things have really got out of control. And ifyou look at numbers at San Bernardino, Riverside, Temecula, you get out therein the desert and it's really bad there. And part of it is because the price ofhousing has been really high.

And so people have to use a higher percentage of theirincome to make mortgage payments, and I think people stretch more in some ofthose areas to buy houses. And the people that stretch more tended to findthemselves in more of the type of loan products that now they are getting intotrouble with. But in terms of where we are in San Diego, I think things arestill doing pretty good.

Joe Morford - RBC Capital Markets

Okay. Appreciate the update.

Operator

(Operator Instructions) And we’ll take our next questionfrom Christopher Nolan with Oppenheimer. Please go ahead.

Christopher Nolan - Oppenheimer

Robert a follow-up on the vulture investing perspective. Isit fair to interpret that as your view that we are within sight of possibly theoversold -- the market being oversold in certain residential areas and soforth? Everything I hear or see and so forth just echoes we don't even see thebottom remotely yet.

Robert Sarver

Well, that is kind of the trick. Because, if you really wantto make good money, you've got to see the bottom before everybody else. When itbecomes evident that it is at the bottom and it is getting better, then it istoo late to make really big returns because everyone else sees the same thing.

So my track record in my real estate company and with thebanks has been to get in early and then get out early. So yes, I do thinkthings are getting worse before they are getting better. But you will probablysee us get in and make some of those investments before everyone thinks thebottom has hit.

Christopher Nolan - Oppenheimer

Good. Thank you very much.

Operator

We'll take our next from Brian Freckmann from Crown Capital.Please go ahead.

Brian Freckmann - Crown Capital

Hi, guy, how are you? Quick question for you. I think I musthave just missed it in the dialogue. The mark-to-market gains, what were thoseagain?

Dale Gibbons

During this -- effective at the beginning of this year, weelected to adopt FAS 159, and we have mark-to-market accounting now onfixed-rate mortgage-backed securities. That is the biggest piece of kind ofwhat is in there. And so during the second quarter, rates rose rapidly, and weactually had a mark-to-market loss on those securities.

During the third quarter, rates dropped dramatically, evenmore than they actually rose in the second quarter. But we did not recover allof the loss as a result of expansion of spread relationships amongmortgage-backed securities relative to treasury.

And hence that brought up one of the opportunities I talkedabout earlier in terms of being able to buy MBS at greater spreads and we thinkgreater overall returns than what you have been able to previously.

Brian Freckmann - Crown Capital

Okay. And just I'll take this off-line. How big is thatportfolio just going forward if we can try to model it out?

Dale Gibbons

MBS portfolio -- $252 million is what we moved in there, andit has been pretty close to that since. In terms of how we look at that goingforward, I think our growth rate is going to slow, as I mentioned, going intothe fourth quarter in terms of our investment. That said, those types ofsecurities are 20% risk-weighted assets; they are AAA. And so it does providean opportunity relative to the risk-based capital position at least.

Brian Freckmann - Crown Capital

Thanks guys.

Operator

And there are no further questions at this time. I wouldlike to turn it back over to management for any additional or closing remarks.

Robert Sarver

Well, I appreciate you guys listening in. These are tryingtimes. There're tough times. But there're also exciting times, and there'sopportunities. I think this is when the quality of your management and the qualityof your people really stands out.

And I think we are not only going to do well in terms ofweathering the storm in the markets we are, but hopefully we will come backwhen things turn around as a much stronger organization.

And also, the diversity into the PartnersFirst operationsand some of the other things we are doing will really pay-off for us. So we areexcited about what is going on, and I think we have had a realistic outlook onthings for the last year and half and not a lot of big surprises in terms ofwhat is going on here.

We are moving forward, and just kind of charge on and seehow we can take a tough situation and turn it into some opportunities and comeout in good shape. Thank you.

Operator

Once again, ladies and gentlemen, this will conclude today'sconference. We thank you for your participation. You may now disconnect.

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Source: Western Alliance Bancorp Q3 2007 Earnings Call Transcript

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