Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Second Quarter 2012. [Operator Instructions] Our speakers today are Robert Sarver, Chairman and CEO; Ken Vecchione, President and COO; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorp.com. The call will be recorded and made available for replay after 2 p.m. Eastern Time, July 20, through September 4, 2012, by dialing 1 (877) 344-7529, pass code 10016260. 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 statement. Some factors that could cause actual results to differ materially from historical or expected results include factors listed in the initial public offering registration statement as filed 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.

Thank you. Thanks for joining us this morning. We're pleased to announce our second quarter results for 2012. I'm going to call on Ken and Dale to walk you through those results, and then we'll have a question-and-answer, which I'll be available to answer any questions you have and I'll follow up with some concluding remarks.

Let me add my welcome as well. After the close of business yesterday, we released our second quarter earnings for the quarter. WAL earned $14 million or $0.15 per share. Net income increased nearly 24% compared to the first quarter and increased 126% compared to prior year. EPS of $0.15 grew 25% versus prior quarter and increased 3x versus the prior year. Growth in earnings was supported by strong loan growth, up $239 million and deposit growth up $102 million. Year-to-date, loan growth has risen by 8% or $385 million and deposit growth has grown $343 million or 6%. While net interest margin declined 7 basis points from the first quarter to 4.46%, WAL did post its 11th consecutive quarter of increasing net interest income. Net interest income was $70.8 million, rose $749,000 from Q1. Expenses remained relatively flat from prior quarter. And pretax, precredit income grew to $32.1 million, or 5%, on an annualized basis. This was our 12th consecutive quarter of increasing pretax precredit income. This quarter, we experienced rather mild REO valuation declines and loss on sales. REO losses were less than $1 million. This quarter, we had some properties that saw their values increase. Asset quality continues to dampen our performance. The provision expense of $13.3 million has not declined for 3 quarters. Bank of Nevada's asset quality still remains problematic. We continue to work through our fair share of classified loans. We charged off $13.9 million this quarter, which is consistent with the last 4 quarters' performance. Our charge-off rate did decline to 111 basis points of average total loans, down from 118 from the first quarter and 126 basis points from the second quarter of 2011. This quarter's loan growth included $22 million of net purchased loan growth. Year-to-date, loan growth is $385 million…

Thanks, Ken. To recap, for the second quarter, our net interest income was $70.8 million, which was 11.9% above that of 2Q of '11. As Ken also mentioned, interest income was higher and interest expense was lower on both a linked quarter, as well as a year-over-year basis. Noninterest income was essentially flat in the first quarter, down from 1 year ago, however, as it included a nonrecurring gain on bank owned life insurance. Total revenue was a record $76.6 million, up over 9% from $70.1 million in the second quarter of last year. Operating expense increased to 4.8% to $44.5 million in the second quarter from the same quarter 1 year ago and was up slightly from the first quarter as modestly lower compensation costs were offset by elevated legal, professional and data processing expenses. With revenue growth nearly double the growth rate in operating expense, pretax preprovision income was up 16% to $32.1 million, which was a new high. The credit loss provision was $13.3 million compared to net charge-offs of $13.9 million, resulting in an ending allowance to total loans of 1.89%. As Ken mentioned, loss and repossessed assets fell to just under $1 million, which was the smallest charge we've experienced in over 2 years. A gain in our trust preferred valuation, coupled with securities gains, resulted in pretax income of $19.4 million and net of taxes and discontinued operations, $14 million, $0.15 a share, 3x where we were in the second quarter of 2011. As we've projected on our last call, our interest margin declined 7 basis points to 4.46% lower as loan yields were -- lower loan yields were partially offset by lower funding costs. Our efficiency ratio improved modestly to 56.4% while a pre-prereturn on assets continues to hover in the 180s. Our…

[Operator Instructions] And the first question comes from Joe Morford of RBC Capital Markets.

I've got a few questions on credit. I guess first for the OREO appraisal spends, can you talk about what the gross write-downs were in the quarter? And just in general, should we -- are we at a point where we should start to see less volatility in this line item? And then related to this, when should we start to see some of the other credit-related workout costs start to come down like the legal fees and the repossessed, other repossessed asset expense?

Yes, the actual appraisals we got on the REO was about a breakeven, but we had a write-up, a little over $1 million that we couldn't take because while the property was written down quite a bit from when we made the loan, the -- you can only write the property back up to the level that it was taken in when it came in as REO. So at this point, I think going forward, the REO number should not be material. I think the valuations are flat to maybe even improving a little bit in terms of where we have everything marked. In terms of the credit costs, yes, we still -- we're still running probably about $1.5 million a quarter in collection costs. That excludes even people and salaries, just external collection costs and REO costs. And the number, when you -- when we look at and try to forecast the number of REO properties that are kind of coming in versus what's selling, I think you're going to see that number start to gradually decline over the next 3 or 4 quarters of those costs. So we should be picking up a little benefit there.

I guess lastly, just follow-up to -- despite the steady improvement in credit, the charge-off level itself is still relatively elevated, up over 1% of average loans. When do you think we'll start to see that fall back to more normalized levels?

I think we have -- well, first of all, I'll say, we're not really getting new problem credits. It's just that some of the problem credits we have are still working their way through the system and some of them are turning out where we have some losses to recognize. But I think we're going to see a step-down in terms of loan losses, and that step-down's either going to be next quarter or the fourth quarter.

And our next question is from Casey Haire of Jefferies.

Just a couple of follow-ups on credit. Can you give us a little bit of color on the Nevada credits that pushed the classifieds higher? And then also the $92 million that's still on the watch list, just your outlook there and how much of that is from Nevada?

Yes, the one thing I'll say about the loans that moved, the bulk of those loans are current. And we just finished with a pretty tough exam process and we had a handful of loans that moved from watch to sub that I think the collection outcome is going to be pretty good. And as I said, the -- for the most part, the payments are current. So I wouldn't read too much into that.

Okay. And the $92 million on the watch list, how much of that is Nevada? And how comfortable are you with that kind of...

About half of that is Nevada.

Yes, $55 million.

Okay. And then just switching to, I guess, to capital, loan pipeline sounds pretty good. You guys are growing risk-weighted assets at a decent clip here. But the capital generation is not as fast, Tier 1 coming down a little bit. How comfortable are you -- how low can you run that ratio? And would you slow down loan growth to prevent an offensive-minded capital raise?

We don't plan on an offensive-minded capital raise, unless it's in conjunction with a screaming deal. So I -- hopefully, that answers your question. And on the credit stuff, I keep a pretty good handle on that. I was just in Vegas yesterday at the special assets meeting, and credit doesn't have me real concerned right now. Whether the cost in charge-offs start coming down significantly in a quarter or 2 quarters or 3 quarters, it's coming. So I guess that from that standpoint, I'm just not -- that's not a hot button for me right now.

Yes, 75% of our provision expense was incurred to cover the legacy book and 25% kind of going forward. And what we're seeing is, again, as we've talked about it in the past, loans originated during what we call kind of the bubble year. It is where those losses are still coming from. And our asset quality performance, since that time, since that kind of the mid-2000s, has been, I think, been very strong. And so as we continue to see that fall off, it was a little bit higher this quarter, as you saw in the migration, in terms of kind of the classified assets. But again, all but $2 million of that was in Nevada, that number is getting smaller. We feel pretty good that kind of going forward, that our provision costs can fall off as our NPAs decline, and consequently, our internal capital generation can support our growing balance sheet.

Okay, great. And then just last one for me on the margin, the NIM down 7 bps. How much more flexibility do you guys have on the deposit side, with loan yields coming down pretty -- at a pretty decent clip here?

Well, we saw a little bit of improvement this last quarter, and frankly, and I think there's a little bit more room, but that is a declining benefit that we're going to be able to see. I mean, our cost of funding earning assets was 43 basis points. I think we can continue to see that ebb. But that is a little bit of pressure, but again, how we think we're mitigating that is really on the net interest income line as opposed to necessarily the margin as we think our margin is going to continue to slope downward here, but not more rapidly than kind of what we've seen.

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

Dale, maybe just back to the -- I think sort of the loan yield data you mentioned. I want to make sure I heard you correctly that new loan generation coming on the books at roughly 60 basis points lower than where the current load yield would be for the second quarter, is that correct?

Lower than where the loans are paying off. Yes, so -- yes, so the replacement loans are 60 basis points lower. Now the reason why the margin fell faster than that is because we had net loan growth as well. So -- but our margin wouldn't be -- wouldn't have declined as quickly if our loan balances were stable, but we're putting on loans at 60 basis points lower than the loans being paid off, and that's pulled it down.

Okay, okay. But that wouldn't imply necessarily high 4%. Is that -- I mean it sounds like you're going up market and getting...

No, no, no. No, absolutely. Actually, they're over 5%.

Okay, okay. So new loans would be coming on the books at over 5%?

Yes, they are. They're over 5%. And the other thing to point out as well is, and we've talked about this a little bit on our first quarter call, but during the first quarter, and in fact, kind of late into the first quarter compared to the second, we put on a fair amount of qualifying SBLF loans to get our dividend rate down to 1%, which happens effective July 1. And so that reflected kind of an increase in the decline in the yield of loan portfolio, which, as we talked about, dropped 18 basis points during 2Q.

Do you think you guys -- this is for Robert or Dale, do you think you're able to get -- maintain that above 5% because it's just a lack of competition, particularly in some of your markets? Or you just hear things about sub-4% fancying out there, even lower, so just kind of curious kind of what you guys are seeing.

Well, it's partly a mix thing. I mean...

We don't do much sub-4%. I mean, what you got is, there are certain types of loans that are a little more like commodity. That's like a fully stabilized commercial real estate, an owner-occupied building. We're not competing as much in the commodity-based pricing. And the stuff we have, even on the owner-occupied side, is a little more relationship-driven with other credit products, so we don't really see ourselves having to drop to the rates of some of the larger banks in order to keep and grow new customers, commercial customers.

Okay. Yes, I was just curious because you guys go upmarket, and you talked about doing a higher-quality credit, typically that demands a lower rate. So that's a good color. And then secondly, just on the provision, I know you talked about last quarter some of the provision was driven by an exam of the Nevada bank. There were several credits that went on nonaccrual that maybe shouldn't have been, but the regulators felt that that's where they needed to be. And then you mentioned this quarter something else about an -- maybe it was another bank, but just kind of curious kind of what -- maybe between the 2 quarters what the differences in the provision would've been, kind of with the exam and then whatever occurred this quarter that drove it higher or kept it in line...

Well, I mean, I don't -- it's kind of hard to tell. I mean -- listen, at the end of the day, some of these credit calls as to whether you got to watch credit or subcredit are a little bit close calls. And some of the stuff that went on nonaccrual, all I can say is there's some fairly positive events with a few of the larger ones that within the next 6 months, they'll be back on accrual.

And our next question comes from Brett Rabatin of Sterne Agee.

I was just hoping to get some additional color maybe on the C&I loan growth you had this quarter, obviously, pretty strong. Was it industry-related to anything in particular, was it pretty broad-based? Can you give me some flavor around the C&I loan growth?

No, it was pretty broad-based. The number of customers we have is continuing to grow and I would say broad-based in terms of type of customer, but more so -- the origin of the credits are primarily in the Phoenix and San Diego marketplace.

Any shared national credit-type properties or -- any type of share credits?

Yes, we said we had about $22 million of net purchase loan growth, and some of those are shared national credits, yes.

Okay. And then I didn't see the PowerPoint on the website. I didn't know if you had the TDR number handy there.

It should have been on there. It's $115 million.

The next question is from Terry McEvoy of Oppenheimer.

Question, the new capital rules, does that change your strategy at all in terms of growing loans? I mean, you're already running off residential mortgage, which will help risk-weighted assets, but you're also adding construction loans, and that's been something you've talked about in recent quarters. How do you feel about continuing to grow in light of what that would do to risk-weighted assets and pro forma capital?

Brian, could you hit me with that -- could you hit me with that, again, Terry?

Sure, yes. As you look at the new capital rules, there is a higher risk weighting for residential mortgage and construction and development. How does that change your strategy in terms of growing construction loans, which we've seen in recent quarters? Would you see yourself being less enthusiastic about adding those loans because of the capital implications?

Well, no, I wouldn't. I mean we're really focused on in terms of what we can do for risk-adjusted return. And I still think that really controlling ratio, although the risk-based capital, put it aside a little bit, is going to be a tangible common equity ratio as in the leverage ratio that are used by the regulators, as well as by the Street. So we're looking to make good loans to provide a good reasonable return. I know they stepped up the risk-based capital weightings a bit for those types of loans, but I don't expect that to really kind of affect our underwriting.

At least in the short term, because I think what we'll see is and what we're seeing now is, we can make some construction loans on really good projects with a lot of equity and well-priced, and so it makes sense. But a year from now or 2 years from now, it may be that the bigger banks jump back in that market and drive that pricing down so that when you compare the pricing and some more relaxed structure along with these increased capital, it may not be as attractive to us at that point. But today, it is.

Understood. And then just the other question, any update on new hires throughout the quarter and pipeline of new lending teams?

Yes, looked at that actually just yesterday. From a year-over-year basis, we've hired 24 net new additions in terms of business development officers, and from first quarter of '12 to second quarter of '12, we hired 4. So you see like about a 45-person increase of the total FTE of the company. 24 of that -- and that's a year-over-year basis, 24 of that came from business development officers. Another 12-ish, maybe 15 people were people that also support the business development officers. So our overall growth in FTE has been really concentrated on the front end of the business in terms of bringing in new business.

And the next question is from Brian Klock of Keefe, Bruyette, & Woods.

Maybe just a -- maybe a follow-up on Terry's question about the new business development officers. I think you guys just recently hired a C&I lender in Phoenix from a large bank. I mean, is that pipeline -- has that business development officer been able to bring in any new loan growth yet or is that something that's -- something of a pipeline that you can still capitalize going forward?

Yes, I'm not certain who you're referring to, and even if you -- even if I knew, I wasn't going to -- wouldn't directly address it. But I'll say that we have brought in actually 2 people from another, I'll say, larger bank than us, and they have already put forth through credit committee, I will say, 3 credits ranging probably from $16 million to $50 million and we have approved them and we're in the process of hopefully closing them as we go forward. So yes, they did come over with a book of business and we've parceled through some of that and we've taken what we think are the better credits.

And it seems like when we came out to visit you guys in May, I mean the Phoenix economy is booming and you guys still continue to get, I guess, more than your share of market share growth there. So it seems like even if you get away from the construction industry, which is rebounding in the housing market, there's still a lot of opportunity, it seems like, in Arizona.

Yes, definitely.

Okay. And maybe just a real quick question, I guess Basel III, and you guys did give a Tier 1 common pro forma in the slide deck that would, I guess, incorporate the NPR. This is actually today, it's 7.5% Tier 1 common, but as you bring down the NPAs and internally generate capital going forward, obviously, that ratio should move up, I guess, as we go forward.

Yes, absolutely. I mean, we're looking at our internal capital generation to -- frankly, to accelerate, and it's been on that path for the past several quarters. We think that we can continue to support our balance sheet growth with internal capital generation.

Okay. Then it seems like right now, pretty stable credit and improving, and as you get -- like you said, as you get those NPAs worked down, not only is it going to help on the provisioning, which helps the internal capital generation, but also should help on the risk-weighted asset under that NPR. Is that fair?

Yes.

And next, we have a follow-up question from Casey Haire of Jefferies.

I just wanted to touch base on the pretax preprovision to average assets ratio has kind of stalled out here at 1:8 over the last couple of quarters. Can you just give us some updated thoughts as to how you're thinking about that going forward?

Well, as we talked about -- at the beginning of the first quarter, we had some -- we had a little bit of a higher expense load and you see that again in Q2 primarily in kind of legal and professional. We're not expecting those levels of expenses to continue at this rate. Hence, my guidance that we think our expenses are going to be comparatively flat through the end of this year. Meanwhile, we should be looking at additional revenue growth. We're expecting our balance sheet to continue. Continued loan growth, we're going to -- we think we're going to see that. And in addition to that, the day -- the calendar works for us now, too. I mean, the back half of the year is actually a few days longer than the first half of the year and almost all of our income is day-based and so we're looking for more income coming in from that as well. So we think that our net interest income is going to continue to climb. Our expenses are going to be comparatively flat and our pre-preincome will continue to rise. And I think you'd see some kind of a modest ratio of improvement as well. We have a goal there to get to that above 2%, and then we'd like to kind of step it up a bit higher than that also. But I don't think we're stalled out at 1 80 [ph].

Okay, great. And then just one follow-up. The tax rate came in a little late. How should we think about that going forward?

Yes, that's -- probably around 30%. We have stepped up our holdings of tax-exempt investments, and incidentally, we're really focused on revenue so we don't get caught up in a lot of the general obligation issues that are appearing from time to time. So -- but at the same time, that number is probably going to rise our incremental tax rates from where we are.

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

Sure. Yes, thanks. So in summary, again, organic growth continues to be kind of our main priority. I will say, though, we're looking at some select acquisition opportunities now that are getting a little more attractive. And so I think you may see something there from us in the next couple of quarters. In addition, a lot of our growth has been driven, I think, from our brand. Our local brand identity is getting pretty strong. Ken talked about consistency of earnings. We've also had consistency for a number of quarters in these economies of providing reasonable credit to customers and relationship banking and good service and so is our brand is looking pretty good. Our loan to deposit pipelines are both over $0.5 billion throughout the company. And our challenge is now to begin to pick up some of those operating efficiencies, whether it's with continued elevated insurance costs, FDIC insurance costs. We have some opportunity there in Nevada or credit collection costs, REO costs, there is another $5 million to $10 million of expenses there that we need to wring out that aren't producing any income and we need to do that over the next 3 to 4 quarters. But overall, we're still pretty optimistic. I will say the national economy looks like it's slowing. Locally, we're seeing a pickup in housing and a pickup in tourism. But overall, the national economy is -- looks like it's slowing a little bit, so we're trying to remain fairly cautious on the loan side in terms of credit structure and make sure that we're not sacrificing there. So with that, I think the question's pretty much answered all the key areas for the quarter for us. I'd say it was a good quarter for us. It wasn't a great quarter, but it was a good quarter and it's continued progress. Thank you.

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