Western Alliance Bancorporation 2026 Q3 Earnings Call

To Miles Pondelik, Head of Investor Relations and Corporate Development. 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.

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. Non-accrual 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 seven basis points to 30 basis points. Combined with a four basis point increase in the allowance to funded HFI loans to 93 basis points, the reduction in non-accruals drove ACL coverage of non-accrual 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 shares of $92 million 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 will hand the call over to Vishal to review our Q3 financial results.

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 returns. 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 non-interest 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 non-interest expense, and supported continued growth in pre-provision net revenue. Credit trends also improved. Provision expense remained essentially flat year-over-year, while non-accrual 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.

While our strategic actions have moderated balance sheet growth over the past two quarters, profitability has continued to improve. ROATCE increased 20 basis points from Q2 to 15.5%. Overall, we are encouraged by our financial trajectory. The actions we have 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. Non-interest 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 helped support secondary market revenue, partially offsetting rate-driven pressure on origination volumes and margins. Non-interest expense decreased $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 one percentage point to 75%, moving closer to our medium-term target of 77%-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 and 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 seven, 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%-80% medium-term target and continue to expect commercial loan growth to lead us toward that goal. Turning to deposits on slide eight, 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, essentially flat from Q2. Our remixing efforts were concentrated in non-interest-bearing deposits with associated ECRs. As a result, non-interest-bearing deposits with no ECRs now represent 39% of total non-interest-bearing deposits, compared to 33% at the end of Q1 before we began our optimization efforts. Turning to our net interest drivers on slide nine, securities yields decreased two basis points from Q2 to 4.62%, reflecting a modest portfolio mix shift. HFI loan yields increased two 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.