Western Alliance Bancorporation

Now for the opening remarks, I would like to turn the call over to Robert Sarver. Please go ahead.

Thank you, and welcome to our third quarter conference call. Third quarter for Western Alliance was another consistent quarter which included some of the same trends we've seen over the last 8 quarters, and that is consistent growth in loans and deposits and customers, improving revenue and stable and controlled expense levels.

We did pick up a little this quarter in terms of reducing our credit costs, which is a good sign as collateral values in the markets stabilize, and as you saw in the release yesterday, we closed on the acquisition of Western Liberty. So all in all, a good quarter for us, a consistent quarter, and I think setting the stage for a good 2013.

I'm going to turn it over to Ken and Dale to walk you through the details and specifics, and then as usual, we'll be available after the call, along with those 2, to answer any questions you have about our performance of the company.

Thanks, Robert, and good morning, everyone, and also thank you all for joining us again for this quarterly call. After the market closed yesterday, Western Alliance announced solid earnings combined with productive operating results.

Net income was up 10.7% from the second quarter of 2012 and net income was up nearly 19% compared to the third quarter of 2011. Net income for the quarter included several items relating to the exit of our Wealth Management business, inclusive of goodwill and intangible impairment of $3.4 million, offset by $800,000 of gain on sale of minority interest in Miller/Russell.

Negating the cost of exiting the Wealth Management were gains on sale of investment securities, which totaled $1 million, and unrealized fair value gains on trust preferred securities which totaled $500,000.

We produced EPS of $0.18 for the quarter, inclusive of the items I just mentioned, which compares favorably to the $0.15 per share from the prior quarter and is more than triple the $0.04 EPS reported for the third quarter of 2011. Without the impairment charges, minority interest sales, securities gains and unrealized fair value gains on trust preferred securities, Western Alliance posted EPS of $0.20 for the quarter.

I want to quickly highlight upfront several contributing factors to our performance. First, we had positive gains in net loans and deposits.

Loans have increased 3.3% from the previous quarter and have risen nearly 18% from Q3 of 2011. Deposits demonstrate similar performance with quarter-to-quarter growth of 2.7% and over 9% from the prior year.

Second, our net interest income improved for the 12th consecutive quarter. On a linked-quarter basis, revenue grew $1.1 million or 1.5%.

And third, expenses declined modestly for the quarter. As you can see from the earnings release, provision expense declined 33% and net charge-offs of $9 million declined 35% from the second quarter.

Also, Western Alliance recorded a very modest $126,000 net loss on sales and valuation of repossessed assets.

Once again, asset quality, defined as problem loans and repossessed assets, remains stubbornly stuck at $415 million and has not meaningfully improved since the beginning of the year. Our asset quality concerns still center around Nevada.

We are pleased with the asset quality of Western Alliance Bank and Torrey Pines Bank. However, Bank of Nevada and, specifically the Las Vegas economy, must exhibit sustained improvement to see corresponding improvement in Nevada's asset quality.

The last highlight to mention is the capital position of the company. The 9.7% Tier 1 leverage ratio of the company has remained consistent since the beginning of the year as we have grown our assets $559 million to $7.4 billion.

Finally, on Wednesday, we closed the Western Liberty Bancorp acquisition. Western Liberty will add $184 million of assets, $101 million in loans, $112 million in deposits.

The $71 million in equity from Western Liberty Bancorp are expected to improve -- is expected to improve our Tier 1 leverage ratio at Bank of Nevada and the holding company. We also expect our tangible book value to increase while EPS in 2013 and '14 will be neutral to slightly accretive.

At the time of the merger announcement, the consideration paid to Western Liberty shareholders was $55 million, 50% to be paid in cash, 50% to be paid in stock. Since the announcement, our stock has increased 16%, thus increasing the purchase price to $59.4 million.

The bargain purchase option, which was estimated to be $16 million in the Registration Statement, will be adjusted to account for the rise in WAL stock and the reassessment of the credit marks.

Growth in loans this quarter rose by $168 million. This growth tracks to the growth in Q1 and Q2 of $146 million and $239 million, respectively.

All in, year-to-date, net loans have increased $806 million or 18% from September 2011. As you can see from the companion slide, our net growth was generated in levels 2 through 4 for our sustained levels or -- 2 through 4 credits, as the 5 graded credits decreased.

The net result of de-risking our balance sheet while continuing to grow has been to lift the total proportion of the portfolio graded 1 through 3 to 27.3% of total loans. Later, Dale will discuss the credit performance of these loans.

One further note, SBLF loans were $209 million, which is greater than the baseline of $151 million. Deposit growth has kept pace with loan growth, rising $161 million, thus placing our loan-to-deposit ratio at 86.5%.

Today, noninterest DDAs represent 31% of our deposit base. Deposits have grown $504 million from year-end 2011, while decreasing the cost of -- while we were decreasing the cost of deposits from 52 basis points to 38 basis points.

To further place our year-to-date growth in context, deposit share in Arizona and San Diego grew significantly greater than the fundamental market growth, while Nevada's market share growth grew consistent with the underlying market. We now hold the seventh market share position in Arizona.

We hold the eighth market share position in San Diego. And in Nevada, we occupy the fifth position.

This quarter, all our banks demonstrated an improved financial performance. Western Alliance Bank earned $8.8 million or 147 basis points ROA.

As net interest revenue increased, expenses rose modestly and pretax pre-provision income increased to $14.1 million. Fundamentally, the Arizona economy continues its improvement.

Arizona's unemployment rate is now 8.3%. A year ago, the unemployment rate was 9.5%, and over the last year, 37,500 people found employment.

Construction showed the greatest percentage gain during this time.

Torrey Pines Bank improved net income by 25% as compared to the prior quarter as rising revenues, flat expenses and lower provision increased net income to $6.4 million and 130 basis points ROA. The California unemployment rate is 10.6%, which is still too high but continues to improve from year-end 2011.

The San Diego market is performing better than the state as tourism, health care and military contractors continue to support the area. San Diego's unemployment rate fell to 9% in August, down from 9.3%.

Home sales and permits continue to improve. Generally speaking, Torrey Pines operates in counties that were not as affected from the business downturn as compared to the counties of Fresno, Sacramento or the Inland Empire.

Increasing net interest income, combined with lower expenses and declining provision, pushed Bank of Nevada's net income to $5.9 million, providing an ROA of 79 basis points. Tourism and visitor volume have -- are the underpinning of the economic recovery.

However, growth in visitor volume, pass inter [ph traffic and gaming revenues have reached a plateau recently. Moderate loan demand does exist, but we continue to be cautious regarding bankable credits.

At this time, I'll turn the presentation over to Dale.

Thanks, Ken. This was our sixth consecutive quarter of both higher interest income and lower interest expense resulting in record net interest income of $71.9 million, which was up over 11% from the same period last year.

Operating noninterest income declined to $5.4 million from $5.9 million, primarily related to lower fee revenue. Total operating revenue was $77.3 million, up 9% from the $70 million in the third quarter of '11.

Operating expense increased 3.5% to just under $44 million during the quarter from the same quarter a year ago, and was down slightly from the second quarter of 2012. With revenue growth more than double the growth rate and operating expense, pre-pre income was up 17.7% to $33.4 million.

Credit loss provision was $8.9 million compared to the net charge-offs of $9 million resulting in an allowance to total loans of 1.83%. As Ken mentioned, our net loss on repossessed assets was a modest $100,000.

During the quarter, we sold our 25% interest in Miller/Russell, our -- an asset manager, for an $800,000 gain and are in discussions to dispose of our 80% interest in Shine Investment Advisory Services, which drove our decision to impair the asset by $3.4 million, totaling the net $2.6 million charge you see here.

In 2012, the company made investments in affordable housing development resulting in a $700,000 charge during the third quarter. Although this charge will be recurring, we put it below pre-pre since the benefits of the program are recognized in the tax line, saving us $1 million in income taxes during the current quarter.

Finally, we had $1.4 million net gain from security sales, revaluation of our trust preferred obligations and merger charges from the Western Liberty acquisition. Pretax income was $22.5 million, and net of taxes and discontinued ops earnings were $15.5 million.

The Interest rate on preferred stocks fell to 1% during the quarter as we qualify for the lowest tier from the Small Business Lending Fund resulting in an EPS of $0.18.

From the $0.15 EPS in the second quarter to the $0.18 in the third, we had $0.01 improvement due to higher net interest income, $0.03 benefit from a lower provision and $0.01 from lower preferred dividends. This takes us to $0.20.

Subtracting up $0.05 for goodwill impairment and our potential disposition of Shine and adding $0.02 for securities valuation and $0.01 for gain on Miller/Russell, takes us to a reported $0.18 for the third quarter.

Consistent with our projection on the last conference call, our net interest margin declined 5 basis points to 4.41% for the third quarter. Our efficiency ratio improved to 54.9% as our revenue growth continues to outpace the rate of our expense increase, and pre-pre income has recently plateaued in the 180s.

Again, we want to drive this above 2%, but the pinch on the margin had been a headwind in improving this ratio. A return on assets was 85 basis points in the third quarter.

Reviewing the drivers of the interest margin, the cash position was flat, however, short-term investments increased by $80 million as the company initiated a strategy to mitigate the effect on the interest margin from arising interest rates due to the spread compression that would otherwise occur because the company has $1.5 billion of loans that are earning income at rate floors. The investment portfolio yield increased 2 basis points to 3.17% due to a change in mix of the portfolio, including more tax exempt securities.

Average loan yields fell 8 basis points to 5.42% as new loan yields -- are yielding 60 basis points lower than the yield on payoffs. Interest-bearing deposits cost fell 2 basis points while average DDA balances increased $69 million, mitigating the margin contraction.

This graph decomposes the change in the interest margin from the second quarter to the third quarter. In the past, we've discussed that one factor that has reduced the decline in our loan yield relative to others in the industry is our use of interest rate floors.

For essentially an insurance premium of about $500,000 annually, we have cut in 1/2 the risk of margin compression as rates rise by selling short fixed rate securities. However, this strategy increased the size of the balance sheet and our earning assets at essentially a 0 rate, which resulted in a 5 basis-point reduction in the margin.

The decline in loan yields cut the margin another 6 basis points. These charges were partially offset by a decrease in funding costs, primarily deposits, and an increase in tax equivalent yield adjustments from municipal finance.

Aggregate problem loans rose slightly to $415 million at September 30 and are down 14% from $482 million a year ago. Within problem assets, nonperforming loans rose $18 million, essentially migrating from performing classified loans and TDRs.

2/3 of this migration was from Nevada. Of the $123 million in non-accruing loans, more than 1/2 remain current with regard to contractual, principal and interest payments.

This slide shows charge-offs by year of loan origination without regard to when the charge-off was actually taken. The pie on the left shows cumulative charge-offs for the 13-year period from 2000 through September of 2012, showing that over 99% of the $370 million in cumulative losses during that period were from loans originated from 2004 to 2008.

The pie on the right shows that of our $5.3 billion in loans outstanding at September 30, 2012, 63% were originated in 2009 or later. The table at the bottom shows cumulative charge-offs for all loans made in each year and the remaining balance of such loans as of September 30, 2012.

Not to imply that additional losses will not be taken on these credits, but it appears we may be moving from the worst of times to hopefully the best as the $3.4 billion pool of loans that originated since 2009 have only had $3.4 million of losses cumulatively for the 4-year period.

Reviewing charge-offs for the past 5 quarters, they stepped down $5 million in Q3 from $14 million for the prior 3 periods, really driven by lower charge-offs at Bank of Nevada, which still comprised 85% of the $9 million total. Increasing our provision to cover our loan growth explains $3 million of the $8.9 million in provision expense during the third quarter and improved credit loss experience over time should continue to reduce our allowance requirement and provisions.

Other real estate was flat at $77 million during the quarter, with $11 million in additions, largely offset by $9 million in sales. For the first time since the financial crisis, sales proceeds exceeded book value as we have seen a shift from often receiving lowball offers for real estate holdings to bids above our book balance on occasion.

At September 30, repossessed land is held at 17% of original appraisal and improved property is held at 40%.

As a result of the recent price stability we have seen in appraisals, we are migrating away from our semiannual assessment process to an annual appraisal update. This is not to say that price volatility won't return as the comps used for each appraisal can vary significantly in value.

Using this modified schedule, we expect to reappraise just over 1/2 of our portfolio in the fourth quarter.

Our capital remains strong with Tier 1 at $703 million and total of $785 million. Using the proposed Basel III rules to take effect next year, our capital actually rises due to unrecognized gains in securities that are part of capital under Basel III.

Risk-based assets increased in Basel III due to higher weightings for certain mortgage loans, nonperforming loans, as well as unused credit lines. However, in all cases, our capital remains well in excess of the well-capitalized thresholds.

As our ROA has increased, internal capital generation has fully supported our growing balance sheet.

Our business development pipelines remain strong and we expect our projected loan growth of $100 million per quarter to continue. Regarding deposits, at year end, the Federal Transaction Account Guarantee program expires, which has provided unlimited insurance for non-interest-bearing demand and it will now revert to a $250,000 ceiling.

Although we have a number of strategies to mitigate the insurance and uncertainty of -- for our clients, we expect this change may hamper our deposit growth track into year end.

As I mentioned it during the third quarter, our interest margins slipped 5 basis points due to our loan floor hedging strategy. This program was put in place in mid-August and the average balance sheet will increase another $70 million in the fourth quarter from this program, crimping the margin another 4 basis points.

In addition, since loan yields will continue to fall faster than funding costs, our margin will contract to the lower 430s in the current quarter. As we've said in the past, however, we expect to earn through this margin compression and continue to report higher net interest income than in 3Q.

The anticipated sale of our asset management interest will reduce revenue but $600,000, expense by $400,000 and pre-pre income by $200,000 quarterly. We expect our efficiency ratio to remain about flat in the fourth quarter with revenue growth continuing to climb, and a modest uptick in expenses, excluding merger charges.

Progress in reducing our problem assets has slowed which may continue, but we do not see migration accelerating. Provision in OREO losses fell, which we believe is consistent with our trend of gradual improvement in credit quality.

We viewed the Western Liberty transaction as primarily a capital play. Our tangible book value per share was up strongly during the third quarter, rising from $6.01 to $6.35.

Completion of the merger adds another $0.25 to tangible book, and as an end market transaction, we expect cost increases after the conversion to be low while providing the employees of the bank the opportunity for other positions at Western Alliance. We were also considering other actions to take during the fourth quarter which may reduce the gain we'll recognize from the merger to improve our operating results in the future.

Amy, at this time, we'd like to open it up for questions.

I guess, can you go back and maybe help explain a little more about what went on with the pickup in nonperforming assets this quarter? It sounded like it was more related to TDRs and just does that affect how you think about the provision at all going forward?

And particularly balancing that with your comments about -- positive comments about the performance of the recent vintage credits.

Yes, sure. We're not having new loans fall into problem buckets, but we've seen migration from the watch category to substandard and some substandard to nonaccrual.

I will say that a large chunk of our nonaccrual loans that have moved are current in interest and current in payments. But some of the kind of new interpretations of the rules in terms of the accrual, nonaccrual, and the restructured credits have had some changes in some of the buckets.

They don't have a big implication on the reserve so much because at the end of the day, you have to look to the collateral value on a lot of these. And as the collateral values have stabilized, actually even gotten a little better, it makes it easier for us to work out some of these credits and doesn't hit the income statement as much.

I'd say at this point, we probably are going to be increasing our intensity on the work outside a little more now that the collateral values have stabilized and should have a little more success at actually unwinding these credits and working them out over the next 6 to 12 months. I think we'll do a little better at that.

Okay, that's helpful. The other question was just, kind of big picture, how should we think about expense levels going forward given the workout -- credit-related workout costs are trending lower, but you're continuing to invest in the franchise and things like that?

Should overall cost be fairly flat or very modest growth?

Yes, I would say flat to up a little bit. We still have a fair amount of, call it, bad economy costs built in our operating expenses.

And what we'll be doing is, as those start trending down, like some of the legal costs and the FDIC assessments and things like that, that'll give us an opportunity to reinvest that in, call it, muscle in the organization to help generate business and generate revenue. We are putting some additional resources, you'll see into technology and some other things.

So I would say expenses will grow, but at a pretty muted level and we still think we can maintain good operating leverage.

Hey, Dale, just if you could maybe repeat a couple of your comments on the margin. I certainly appreciate all the guidance, but just kind of wanted to understand the moving pieces.

You mentioned the hedging program and then also I think you said about $1.5 billion of loan to floors, which is, I think, fairly consistent with where it has been. Are those still hanging out around or just under 6%?

Just -- if you could comment on those a little bit more, on your success in holding that and kind of how all that pertains to the margin as you look out into 2013?

I mean, our floors will come down, I mean, some are in the 4s and maybe 5s. But -- so -- in -- through 2013 -- right now we're going to see a little bit of maybe an accelerated step-down in the margin really related to the size of the balance sheet.

You may see on the balance sheet that in the liabilities section we're showing securities sold short, and that is basically an earning asset, but it doesn't earn anything. And so that's what really the margin crimp is.

We end up losing about $500,000 in net interest income, but the biggest piece is because we bloated our earning assets a little bit. Since that took place in the middle of August, you're going to see the rest of that in the average balance which is, of course, where the margin is from, picking up in the fourth quarter.

So that, coupled with continued drop of our loan yields, and I think it's been consistent now, they were accelerated a little bit but we dropped 8 basis points this past quarter. With that, you're going to see the margin come down to, I said kind of the lower 430s, 433, 435, I'm not sure, but somewhere in there I'd expect is where we're going to we end up.

After that, I think that the margin compression can be fairly consistent with what it's been, which -- maybe it's about 5 basis points a quarter. Again, we do see our strong loan pipeline and that's not as long, obviously through 2013, but we think we've got some momentum in that process and we believe we're going to be able to earn through that and getting to Robert's point, continue to grow revenue faster than the expense line and improve our operating leverage.

Okay, great. And then you also gave some color on the income statement impact of the divestiture of Miller/Russell and then Shine.

Is -- all those numbers, are they in the third quarter and you'll -- and that'll hit on a full run rate basis in the fourth? And does that include both of those items that you talked about?

Yes, that's correct. Moving from the third to fourth, you will see a full quarter drop of $600,000 in revenue and $400,000 in expense and $200,000 in pre-pre income from the disposition of both of those entities.

Sure, sure. And then just one more housekeeping item.

Within the loan portfolio data, there was like there was a big change between CRE owner-occupied and nonowner-occupied. Was there a re-class there or was that just a shift in what you're seeing in the market?

There was no reclassification. Yes, that's just in terms of where the originations have been going.

I would say that in the -- one of the things we're doing as well is we're doing some municipal finance and that's showing up in that C&I category also and augmenting that growth.

Just another question on the margin. Does the guidance bake in any flexibility lower on the funding side of things, be it either on CD repricing benefits or an opportunity on the borrowing side?

It's almost like an asymptote. We're getting down to 0.

So it's increasingly a lower slope of improvement in funding costs. So we think there's a little bit of room there, but it's been declining and that's probably going to continue to decline quarter-over-quarter in terms of the increase benefit we're getting.

Okay. And the hedging program, if I understand it correctly, so you think the NIM compression can slow down after next quarter because the hedge program will not continue?

Is that correct?

The hedge program will continue, but it'll be basically reflected at a lower rate. So we're going to get down to the lower 430s this quarter.

And then that hedging program will remain intact. Otherwise, the margin would go back up another 9 basis points, so it's not going to go back up because of that.

But we don't expect to step into a larger hedging program going into the first quarter. So the change should arrest from that reason.

It'll still continue to slip because of, basically, lower loan yields.

Got you. Okay.

And then just on the -- following up on the CRE, that growth kind of slowed down a little bit. Is that should seasonal weakness or are we -- is that just secular slowdown?

This is Ken. A couple things happened this quarter.

We've had a couple of borrowers that took their -- went to the public markets to refinance and we've had a couple of borrowers that we made loans to not longer than maybe 3 months ago, that had opportunities for their properties to flip at profits. So I think we got caught in a couple of those items this quarter that slowed down or took down our -- some of our CRE growth.

Got you. And just one more, on -- with Western Liberty done, just wondering about your guys' appetite for further M&A outside of Nevada.

Yes, we do. I mean, we think, as our stock continues to get better and our earnings continue to grow that we are increasingly given a little better position to evaluate and look at deals.

We are still very focused on organic growth, but I think we are going to see more opportunities on the M&A side just because so many of the smaller banks are just finding themselves a little frustrated in the overall regulatory environment, as well as with the interest rate environment. It's very difficult on them, and many of them can't access the market.

So -- we're seeing more and more opportunities, and I think more will present themselves for us in a financially accretive way as our company continues to do better. But we're going to be disciplined.

But yes, we're looking them on the road, actually next week, spending 2 days looking at some things. So we'll be active.

So just a couple of quick things. I guess, Robert, you're talking about the increase in NPLs during the quarter.

So does it sound like that was anything related to the OCC guidance that talked about collateral values, TDRs, et cetera? Was that something that was changed here?

No. Not really.

No.

But thinking about provision levels and where you guys are going, it seems like your classifieds keep dropping significantly. So we should probably focus more on your classified formations, which are down meaningfully, versus the NPL lumpiness?

I think that's a good point, Brian. I mean, in part, sort of a sediment or distillation process that's taking place.

So we have had a lower migration to classified, but some of those classifieds migrated to NPL, obviously, the worst category, and then some of those end up in ORE. And then finally, we get them out the door.

So part of this is almost a distillation like that. But again, in terms of nonperforming asset information or classified as information, that has continued to slip, to go down.

Okay. And then just thinking, I guess, Dale, thinking about the ORE and you're changing to the annual so you're going to have a big chunk that you're going to look at and reassess, reappraise here in the fourth quarter.

But looks like your trends have been significantly improved when you look at the marks that you're taking on those OREs when you reappraise them. And so I guess is that a fair point to think about even though, there's a bigger level of ORE that will be reappraised in the fourth quarter?

It looks like the severity of the significance...

I mean, the severities have really come in. We're seeing that fairly pervasively across all our markets, including Nevada.

So we've gone through this process of migrating to, what I would call, an annual appraisal. We are still going to watch.

We've got CoStar that we look at other kind of market indicators. And if things kind of change, we may change our process again.

I would say the industry standard is to reassess property annually, not semiannually, as we have been doing. But we wanted to stay ahead of the curve in terms of the valuation because some of those were moving fairly quickly in our markets.

Okay. And just one last question.

Thinking about Western Liberty, you guys closed that yesterday. Actually, that's got to be a positive sign from a perspective of regulatory MOU that you've got at the Bank of Nevada.

I don't know if you guys can make any comments about that, but is your regulatory exam safe and sound? That's exams that something that's upcoming or close to being at a [indiscernible].

No, we can't comment on any of that other than I can say that we did have a regulatory exam there within the last 2 quarters.

But you can look at it, Brian, as capital's improving, earnings are improving there, their classified assets ratios are coming down, so I might say, "Well the bank is getting better."

I think you can look at the calendar, too. We announce that transaction, we signed it on August 17th and we closed it exactly 2 months later.

That's fairly quick.

Is it still just a waiting game in Nevada or are there some strategic actions that can be put in place to improve the performance at Bank of Nevada? If I look at the ROA, it's about 1/2 of the other 2 banks.

So clearly, there's some leverage from an improvement in that franchise.

Yes, I'd say a little bit of both. I mean, obviously, a big part of our business, even though it's not directly related to gaming, but a lot of businesses in that economy are indirectly related to gaming.

And of course, the whole economy gets impacted by it. So in some ways, it is a waiting game.

I mean my group [ph] was good for a long time, it got bad for quite a while and now starting to get a little better. But the thing that we like about the franchise is the core earnings power is still pretty strong of the bank because the margin is good and the overhead ratio is good.

So the biggest thing dragging it down is the credit costs. And I think we're now in a point where the market's improved a little bit that we can become a little more aggressive at working through some of these problem credits and, on our own, begin to maybe have a little better impact on bringing down some of the credit costs.

But to a certain degree, we have to wait for the economy to improve a little bit, too, in terms of really getting us to a normalized level of earnings there.

And just one more question, there were a fair amount of glitches earlier in the month with Demo, [ph] MNI [ph] and the integration. And I know you publicly said in the past you've benefited from market disruptions in Arizona and I'm wondering if that's a gift that keeps on giving, so to speak, and you continue to see opportunities to expand?

Well, it does. I mean we're in a nice position right now in Arizona.

We are -- as you heard, we have the seventh largest market share in the state. Every other of the banks in the top 10 are over $50 billion banks.

And so we've carved out a nice marketing niche for us as kind of the only non-big bank alternative for a business with any size in the state. And so we're basically trying to leverage that as much as we can and we've got pretty good success with it.

Had just one question on origination rates. You, in the past, have talked about your success given some non-commoditized-type product.

Was curious to hear if that was something that was still holding up pretty well in terms of commercial real estate C&I? Or if just the market pressures are starting to have somewhat of an impact on your originations?

The market pressures are having an impact, there's no doubt about it, especially more on the commodity-driven deals. So if you're going out to the market to finance a fully stabilized leased apartment complex, we're not competing for that.

If you're going out to the market to finance a fully leased, 100% stabilized anchored retail center, we're not competing for that. We're in the value add business.

We want our customers to pay us for our relationship, the level of service, what we're doing, and so we can't compete in everything, but with the relationships we have and with the opportunity, as the previous caller talked about a lot of the kind of disconnect in the market, we've repriced $2.5 billion of assets in the last 18 months and still been able to keep our margin fairly healthy. And I think that's -- one of the things, probably I'm the most proud of is our bankers negotiate hard and our customers recognize that the service we offer is a value to them and it's not only about the price, like, say it was maybe 5 years ago.

The only thing I'd add too, which is very important for I think our borrowers, is that they get to talk to decision-makers from the very beginning versus having some of the larger banks have to ship their loan docs or loan presentations back to San Francisco or Charlotte to get approvals or comments. They can walk into the office here and talk from anyone to Robert to anyone of the 4 us that sit on the credit committee for the larger loans and get answers.

And in the banks, the CEOs are out there with their credit committees that can make decisions as well. So some of what we do is speed, not speed as in terms of making reckless loans, but having speed to getting to an answer, whether it'd be a yes or a no answer, I think really helps the borrower.

Maybe another way to ask the question would be just to ask, are you guys still being able to get 5% or thereabouts on new loan originations?

Well, some of them. Yes -- no, our loan origination yields, I mentioned this, are running about 60 basis points below what our current portfolio looks like.

And so that's going to continue to kind of hold down that margin. But again, part of that is because of quality.

As Ken was discussing, we've been originating more and more investment-grade credits that are rated in the top 1, 2 and 3 grades of our 9-level grading system. And so we've -- our asset quality's been moving.

That's been putting pressure on the margin, as well as obviously what's going on with the FOMC and market conditions.

Robert, I had a kind of a big picture question here. Two years ago, we were talking about generating better pre-pre ROA, getting credit quality come down -- or improve, rather.

And here we are, those things are largely accomplished. As we look at kind of next year, 2 years, what are some of the goals of the company?

Well, I think one of the shifts that we go into, especially in this new regulatory environment, is how we most efficiently deploy our capital. And so when we look at growth, we now start to look more at the profitability of the growth and how we're deploying the capital best to create value for the shareholders.

So we're looking to get more sophisticated in how we analyze the profitability of relationships and making sure we're using our capital as smart as possible, and that will also take into account the M&A front. So I would say the biggest shift for us is looking at the sophistication in the usage and deployment of capital in terms of how we operate internally, as well as looking in acquisition opportunities which now are available to us and for a couple years they really weren't.

I'd say that's the biggest shift.

Okay. We talked about efficiency.

Does the company feel any pressure to slow the growth in deposits as a way of perhaps lowering the balance of securities on the portfolio?

No.

Okay. You still see deposit growth as a funder of your loan growth going forward?

Yes.

Yes. I think there got to be more balance in that.

I mean one of the things that regulators I think have changed from where we were, kind of pre-crisis, is an institution like Chorus [ph] isn't going to be allowed to exist anymore in terms of basically a real estate investment fund -- a real estate investment trust funded with broker deposit. So maintaining our strong core deposit profile, we think that really adds franchise value.

And we incent our staff to -- for continued production in that area.

Okay. And then Dale, what was the -- what's a good number for the forward amortization of the affordable housing investment?

That's -- it's 700. It's going to pick up a little bit in the fourth quarter, but -- and then maybe I'll give you some guidance next year.

But I expect that number is going to be climbing through 2013.

Okay. And is there kind of an offset in tax benefit?

Yes. And the tax benefit is fairly consistent at about 50% better than the deduction.

Of course, the deduction, it only reduces net income by 2/3 of the amount roughly because, of course, it's tax-deductible. And then you get tax credits on top of that.

So the tax benefit is going to be about, I'm going to say, 40%, 50% higher than the amount of the charge you were. You saw that this quarter where we had a $700,000 charge and a $1 million benefit.

And you're going to see that kind of profile. But it is going to be climbing into the next year.

The after-tax return on these investments that we're getting is actually 7% on these deals, so we think it's pretty profitable and friendly for the shareholder, even though it kind of impairs the optics a little bit in terms of what you're seeing on this contra to non-contra income.

Question for you on Las Vegas. We've actually been hearing that there's some land development activity starting again out there, and obviously, you're seeing collateral values kind of bottom out.

Arizona was a surprising and fast turnaround as investors got in there and started taking the amount of product on market down. Is there some potential for an analogous situation in Las Vegas?

But if not, why not? And sort of how do you see the turnaround in the Las Vegas land market shaping up?

I think, as I compare Vegas to Phoenix, I think the turnaround will be slower. Phoenix was much more diversified and a very strong program between the government sectors and the private sectors recruiting business.

And actually, I was just at the dinner for the main comp entity that does that call the Greater Phoenix Economic Council, and our bank president at Arizona, Jim Lundy, is the new incoming chairman. So I think the recovery in Vegas is going to be slower.

It will be tied much more directly to one industry, and that's the gaming and tourism industry. However, there are some pretty sophisticated folks that have big investments in that market that think while it will be slower, it's possible, 2 or 3 years from now, it could -- when it does come back, it come back -- could come back very, very strong.

Okay. Thanks for the questions, and thank you all for listening, and we'll be back with you for the fourth quarter report in January, and appreciate your interest in the company.

Have a good day.