Western Alliance Reports Q3 2026 Results and Raises Net Interest Income Outlook

Western Alliance (NYSE: WAL ) reported third-quarter financial results on Tuesday. The transcript from the company's third-quarter earnings call has been provided below. This transcript is brought to you APIs. For real-time access to our entire catalog, please visit for a consultation.

View the webcast at Summary Western Alliance Bank reported significant improvements in asset quality, with nonaccrual loans declining by 14% and net charge-offs decreasing to $46 million. The company made substantial strides in reducing deposit costs by transitioning $3 billion of higher-cost deposits, which supported a 10 basis point increase in adjusted net interest margin. Western Alliance repurchased $92 million of shares, representing approximately 1% of shares outstanding, and remains on track to hit its share repurchase target for the second half of 2026.

PPNR grew 6% year-over-year, while EPS increased by 7.5% to $2.45, driven by growth in net interest income and noninterest income. Net interest income increased 5.4% from the prior quarter, benefiting from loan growth despite a reduction in average earning assets due to deposit optimization. The company revised its 2026 outlook, expecting deposit optimization to total at least $5 billion by year-end, and adjusted its net interest income growth expectation to 11%-12%. Western Alliance continued to experience robust loan growth, notably in C&I and select CRE businesses, while maintaining strong credit trends and reserve coverage.

Management expressed confidence in continued asset quality improvement and reiterated strategic focus on sustainable, risk-adjusted growth. Full Transcript OPERATOR Please go ahead. Thank you. Welcome to Western Alliance Bank's third quarter 2026 conference call.

Our speakers today are Ken Vecchione, Chairman, President and Chief Executive Officer, and Vishal Idnani, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risks, uncertainties and assumptions. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the Company's SEC filings, including the Form 8-K filed yesterday, which are available on the Company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione. Ken Vecchione (Chairman, President and Chief Executive Officer) Good afternoon everyone. I'll make some brief comments about our third quarter 2026 performance before handing the call over to Vishal to discuss our financial results and drivers in more detail.

After reviewing our revised 2026 outlook, Dale, Tim and Lynn will join us for Q&A. As usual, Western Alliance entered the quarter with three strategic objectives front and center: improve asset quality, lower deposit costs and accelerate share repurchases. We exited the quarter having made significant strides against each of these goals, which I'm pleased to update you on today. Asset quality improved meaningfully in the third quarter.

Nonaccrual loans declined 14% or $77 million from the prior quarter to $485 million, exceeding the expectations outlined in our guidance update. Last month we successfully resolved two additional credits from the six identified at May's Investor Day, and the remaining two are on a glide path towards resolution before year end. Net charge-offs also improved, declining $9 million from the prior quarter to $46 million. Net charge-offs decreased 7 basis points to 30 basis points, combined with a 4 basis point increase in the allowance to funded HFI loans to 93 basis points.

The reduction in nonaccruals drove ACL coverage of nonaccrual loans sharply higher, increasing 22 percentage points to 118%. Our second strategic objective was the intentional transition of higher-cost deposits off the balance sheet to lower our overall funding costs and improve balance sheet profitability. Here too, we made substantial progress during the quarter. We transitioned $3 billion of higher-cost ECR-related deposits while keeping total deposits essentially flat compared with the prior quarter.

This was a herculean achievement supported by a strong quarter of commercial banking deposit growth of $1.8 billion. These actions reduced deposit costs by $14 million from Q2 and supported a 10 basis point quarterly expansion in adjusted net interest margin. Importantly, this decline in deposit costs represents a positive departure from prior third quarters when funding costs have typically peaked. We remain well positioned for additional deposit cost reductions in Q4 as we realize the full-quarter benefit of these lower balances.

We exceeded our original deposit optimization goal by $1.5 billion with $4.5 billion of deposits remixed over the prior two quarters, one quarter earlier than expected. With another $500 million expected to transition in Q4, this initiative is nearly complete. Finally, our more balanced growth profile has enhanced our flexibility to prioritize share repurchases while maintaining robust capital levels. In Q3, we repurchased $92 million of shares against our $150 million target for the second half of 2026, representing approximately 1.15 million shares or roughly 1% of shares outstanding.

We have continued to repurchase shares at attractive valuations into Q4 and remain on track to achieve our second half repurchase objectives. Taken together, these accomplishments support sustainable, risk-adjusted PPNR growth and increasing profitability, keeping us on track to achieve the medium-term goals outlined at Investor Day. I'll hand the call over to Vishal to review our Q3 financial results. Vishal Idnani (Chief Financial Officer) Thanks, Ken.

Western Alliance delivered another quarter of strong and steady financial performance with continued earnings growth, improving credit trends, and strong reserve coverage alongside increased capital return. PPNR grew 6% year over year to 419 million while EPS increased 7.5% to $2.45. Net interest income grew 8% or 57 million, driven by continued HFI loan growth, while noninterest income increased 10% or 19 million, reflecting continued momentum in commercial banking fee income, partially offset by rate-driven headwinds in mortgage banking.

Net revenue increased 76 million over the past year compared with approximately 51 million of growth in noninterest expense and supported continued growth in pre-provision net revenue. Credit trends also improved. Provision expense remained essentially flat year over year while nonaccrual loans declined to 79 basis points of funded HFI loans, and reserve coverage increased to 118%. This helped drive net income of 277 million, up 6% from a year ago.

And while our strategic actions have moderated balance sheet growth over the past two quarters, profitability has continued to improve. ROTCE increased 20 basis points from Q2 to 15.5%. Overall, we're encouraged by our financial trajectory. The actions we've taken over the past two quarters, many of which we outlined at Investor Day in May, are strengthening the durability of our earnings and positioning us well as we move forward.

Turning to the income statement on slide 5, net interest income of 808 million increased 5.4% from the prior quarter on a linked-quarter annualized basis, benefiting from 1.5 billion of growth in average HFI loans. This more than offset lower average earning assets as our deposit optimization actions reduced excess liquidity and continued to improve balance sheet profitability. Noninterest income increased 8 million quarter over quarter, or 4%, to 207 million. Commercial banking fee momentum continued to build, increasing 6 million sequentially and 26 million year over year.

That growth, along with higher securities gains, more than offset lower mortgage banking revenue. Mortgage banking revenue of 80 million declined only 5 million from the prior quarter despite a challenging rate environment. Mortgage production decreased 4% and rate lock volume decreased 14% year over year, while gain-on-sale margins remained stable at 27 basis points. Our use of private-label securitizations helps support secondary market revenue, partially offsetting rate-driven pressure on origination volumes and margins.

Noninterest expense increased 12 million from Q2 to 595 million. As Ken mentioned, we were pleased with the $14 million decrease in deposit costs, reflecting the 4.5 billion of deposit optimization completed to date, with another 500 million expected to transition in Q4. This quarterly decline marks a welcome shift from prior third quarters when we have typically experienced an increase in deposit costs as balances rebuild during the first half of the year. We expect a further reduction in deposit costs in the fourth quarter.

Taken together, the quarter reflects continued progress in shifting the balance sheet toward higher returning assets, building our commercial banking fee businesses, and reducing the structural cost of our deposit base. Turning to the balance sheet on slide 6, securities and cash declined approximately 1 billion from Q2 to 25.6 billion, reflecting deployment into loans and the impact of our deposit optimization strategy. Securities and cash represented 26% of assets, while our HFI loan-to-deposit ratio increased approximately 1 percentage point to 75%, moving closer to our medium-term target of 77% to 80%.

HFI loans grew 600 million during the quarter, with more than half of the growth coming from C&I and a solid contribution from select CRE businesses. Total deposits declined by only 119 million despite more than 3 billion of deposit optimization during the quarter. Commercial banking deposits helped offset those actions, growing 1.8 billion in Q3 and increasing to 34% of total deposits. Another benefit of our optimization efforts was a 10% quarterly decline in period-end borrowings to 5.6 billion, which further supported quarterly improvements in both the adjusted and reported NIMs.

Overall, total assets decreased 629 million from Q2 to 98.1 billion, while total equity decreased 188 million, primarily reflecting the change in AOCI from higher interest rates and our share repurchases. Tangible book value per share decreased $1.02 sequentially to 62.22, yet remained up more than 6% year over year. Looking at loan growth on slide 7, HFI loans grew 600 million in Q3 with continued strength across our commercial businesses. C&I loans grew nearly 350 million in the quarter and have driven approximately 90% of our 4.9 billion of HFI loan growth over the past year.

We also saw solid growth in select CRE businesses. Commercial loan growth was partially offset by an approximately 350 million decline in mortgage warehouse and MSR balances as softer mortgage demand reduced line utilization. We remain focused on moving our HFI loan-to-deposit ratio toward our 77% to 80% medium-term target and continue to expect commercial loan growth to lead us toward that goal. Turning to deposits on slide 8, commercial banking deposits grew 1.8 billion in the quarter, increasing to 34% of our deposit base from 31% last quarter.

This strong commercial banking growth offset most of the purposeful reduction in higher-cost deposits, resulting in total deposits of 81.8 billion and essentially flat from Q2. Our remixing efforts were concentrated in noninterest-bearing deposits with associated ECRs. As a result, noninterest-bearing deposits with no ECRs now represent 39% of total noninterest-bearing deposits compared to 33% at the end of Q1 before we began our optimization efforts.

Turning to our net interest drivers on slide 9, securities yields decreased 2 basis points from Q2 to 4.62%, reflecting a modest portfolio mix shift, while HFI loan yields increased 2 basis points to 5.84% due to higher commercial loan yields. The FOMC rate hike occurred just two weeks before quarter end, so the benefit was not fully reflected in Q3 earning asset yields. The cost of interest-bearing deposits increased 2 basis points to 2.76%, reflecting the active remix of our deposit base away from ECR-related deposits and into interest-bearing commercial deposits. Interest-bearing deposits increased approximately 2 billion during the quarter as part of that remix.

Overall liability funding costs increased 6 basis points to 2.02% as borrowing and debt costs increased, partially reflecting the full-quarter impact of a subordinated debt rate reset late in Q2. Looking at slide 10, net interest income grew 11 million from Q2, or 5% annualized, to 808 million, primarily reflecting higher average HFI loan balances. Net interest margin expanded 4 basis points to 3.57% as average earning asset yields increased 10 basis points, partially offset by a 6 basis point increase in funding costs.

Average earning assets declined 785 million from Q2, primarily reflecting a 1.7 billion reduction in average cash as our deposit optimization efforts reduced excess liquidity, while average HFI loans increased 1.5 billion. Turning to slide 11, the adjusted efficiency ratio increased 110 basis points from Q2 to 50%. As mentioned earlier, noninterest expense increased approximately 12 million in Q3 as higher salaries and employee benefits more than offset a $14 million reduction in deposit costs. That reduction reflected lower average ECR-related deposit balances of 30.1 billion, down from 31.6 billion in Q2.

Higher salaries and employee benefits reflected an extra day in the quarter and targeted investments to support future growth and efficiency. These investments included additional hiring to support our lower-cost specialized deposit channels and new AI initiatives, as well as converting technology consultants to full-time employees, which we expect will reduce contractor expense going forward. On a sequential basis, net revenue and noninterest expense each grew approximately 2%, resulting in an essentially flat reported efficiency ratio of 58%. On slide 12, we remain slightly asset sensitive on a net interest income basis.

Of total earning assets, 66% are variable with 52% repricing to SOFR, while variable liabilities represent 86% of total earning assets. Nonmaturity deposit rates, including ECRs, are estimated to have a 65% beta over the next 12 months when we incorporate the rate sensitivity of ECR-related deposit costs and mortgage banking revenue. That asset sensitivity largely moderates, and our modeling indicates a neutral position on an earnings-at-risk basis. Turning to slide 13, I'll echo Ken's comments and highlight the continued improvement in our key asset quality metrics.

Classified assets declined 37 million to less than 1.1 billion, largely reflecting two additional nonaccrual resolutions previously identified, with two more expected to resolve this quarter. Nonaccrual loans declined 77 million, or 14%, from Q2 to 485 million, reducing the ratio to funded HFI loans by 13 basis points to 79 basis points. Classified accruing loans were essentially flat at 441 million, or 72 basis points of funded loans, while OREO increased 39 million to 165 million. Special mention loans increased 81 million as we continue to actively migrate loans to special mention in order to facilitate early identification, elevation, and resolution.

As shown in the appendix, Western Alliance continues to compare favorably with our 50 billion to 350 billion asset peers across special mention, classified, and criticized loan categories both currently and historically. The improvement in nonaccrual loans, together with stable classified accruing balances, kept overall criticized loans relatively flat at 1.3 billion. On slide 14, provision expense was 80 million, replenishing net charge-offs of 46 million and supporting incremental loan growth. The resulting allowance for loan losses increased 3 basis points to 0.83% of funded HFI loans, while our total loan ACL ratio increased 4 basis points to 93 bps.

Excluding loans covered by credit-linked notes, the total loan ACL to funded loans ratio increased 6 basis points to 1.07% compared with 1.01% last quarter. Based on our C&I loan growth trends, we expect the allowance to continue to build in the fourth quarter. Continued execution on nonaccrual resolutions, together with the increase in reserves, drove total loan ACL coverage of nonaccrual loans to 118%, up from 96% in Q2.

Looking at capital on slide 15, our tangible common equity to tangible assets ratio decreased 10 basis points from Q2 to 6.9%, primarily reflecting the change in AOCI from higher interest rates and accelerated share repurchases, partially offset by earnings growth and the reduction in our balance sheet from the deposit optimization. I'd also note that the vast majority of our securities are classified as available for sale. Our CET1 ratio decreased 10 basis points from Q2 to 10.9%, reflecting loan growth and share repurchases while remaining above well-capitalized levels.

During Q3, we repurchased 92.1 million, or approximately 1.15 million shares, at an average price of 79.78. This brought cumulative repurchases since the program's inception to 212.5 million, or about 2.7 million shares through September 30th. Turning to slide 16, tangible book value per share increased 6% year over year and has grown at a 16% CAGR since the end of 2015. Over that period, our tangible book value growth has been approximately four times the peer median.

As a reminder, the peer comparison is presented on a one-quarter lag, with Western Alliance reflecting Q3 results and peers reflecting Q2. As Q3 results are incorporated across the peer group, we expect the comparison to better reflect the impact of the higher rate environment across the industry. I'll now hand the call back to Kim.