Good day, everyone.

Good day, everyone. Welcome.

Good day, everyone. Welcome to Western Alliance Bancorporation's second quarter 2026 earnings call.

You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development.

Please go ahead, Miles.

Good day, everyone. Welcome to Western Alliance Bancorporation's second quarter 2026 earnings call.

You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. 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. For opening remarks, I'd like to turn the call over to Ken Vecchione.

Thanks, Miles. Good afternoon, everyone.

I'll make some brief comments about our second quarter 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 Lynne will join us for a Q&A.

I am very pleased with Western Alliance's strong second quarter performance and our early execution against the objectives outlined at Investor Day. Results were highlighted by broad-based C&I-driven loan growth, strong net interest income, PP&R expansion, stable net interest margin, and continued balance sheet strength.

Credit trends remain constructive with criticized assets and net charge-offs both declining from prior quarter. Ongoing resolution activity gives us confidence that non-accrual loan balances will improve meaningfully during the second half of 2026.

Just as important, we have already begun executing several key strategic initiatives we discussed in May, including deposit optimization efforts designed to enhance profitability and a more robust share repurchase program supported by our strengthening capital position. As we approach the $100 billion asset milestone later this year, Western Alliance is entering its next phase from a position of strength, combining industry-leading growth, improving profitability, and increased capital returns to drive long-term shareholder value.

Turning to our financial results. Quarterly held-for-investment loan growth of $1.8 billion was led by C&I growth across our commercial platforms.

As discussed at Investor Day, we began executing our deposit optimization strategy during the quarter, reducing higher-cost deposits by well over $1 billion towards quarter end. While this contributed to lower period-end deposits, it positions us to improve funding costs and enhance profitability going forward.

Early indications so far in the third quarter are that interest expense and deposit costs will continue to decline. Strong average earning asset growth of $2.7 billion drove net interest income up $31 million, or 16%, on a linked-quarter annualized basis compared to 14% year-over-year growth.

This performance was achieved while maintaining a stable net interest margin. Quarterly non-interest income of $199 million was consistent with adjusted Q1 fee income, which excludes securities gains of $50.5 million.

Mortgage banking improved from prior quarter, though higher rates and tighter spreads are creating headwinds. Overall, we generated strong operating leverage as total revenue growth outpaced total expense growth by a three-to-one margin, excluding last year's quarter securities gains.

In total, PP&R increased 25% year-over-year to $412 million. Asset quality remains stable.

Reductions in criticized assets, combined with quarterly net charge-offs declining to 37 basis points, reinforce our expectations for non-accrual loans to decline in the second half of the year. The increase in non-accruals during the quarter was driven by the credit disclosed in the first quarter 10-Q, which remains current on all contractual payments.

As a follow-up to Investor Day commentary, we successfully resolved two of the six non-accrual loans discussed with the remaining four on track for resolution in the second half of 2026. Before handing the call over to Vishal, I'd like to briefly preview our revised 2026 management outlook.

Since the disruptions in 2023, Western Alliance has delivered one of the strongest regional bank growth stories, highlighted by predictable loan growth, ample liquidity, robust capital levels, and scaling PP&R. As a result, we remain confident in the strategic objectives and medium-term financial targets outlined at Investor Day.

A more balanced growth profile will create additional capacity for capital returns to shareholders. Western Alliance shares trade at a meaningful discount to our estimate of intrinsic value and the earnings power of the franchise.

Greater share repurchase activity around the current price represents an attractive investment in one of our highest-returning assets, our own equity. Our competitive advantage going forward will be to pair industry-leading growth with disciplined capital allocation.

Vishal will now walk you through our results in more detail before I review the outlook.

Thanks, Ken. Turning to the income statement on slide four, net interest income of $797 million increased 4% from the prior quarter, primarily from average earning asset growth of $2.7 billion, which included $1.1 billion of average HFI loan growth.

NII also increased 14% year-over-year. Lower funding costs driven by declines in interest-bearing deposit costs offset the slight margin impact from remixing loans into C&I from CRE.

Net interest margin remained relatively flat as the deposit remixing strategy offset nominally lower average earning asset yields. These factors supported another quarter of NII growth.

Non-interest income of $199 million was essentially unchanged from Q1 when excluding $50.5 million of elevated securities gains realized last quarter. Year-over-year growth of approximately $51 million or 34% reflected building momentum in service charges and fees through greater commercial banking, treasury management, and FX offerings.

Mortgage banking revenue was higher from the prior quarter and year-over-year, despite the headwinds created by higher mortgage rates. Loan production and lock commitment volume were both up double-digit percentages from the prior quarter and year-over-year.

The gain on sale margin did compress 8 basis points from Q1 to 29 basis points from lower secondary gains, which reflected softer investor demand due to higher rates. Servicing revenue rebounded to $31 million, mostly from slower prepayment speeds in a higher rate environment.

To hedge volatility in the mortgage market, we sold covered call options on mortgage bonds, which produced gains of $6 million and are embedded in fair value gain adjustments. We expect to regularly execute these types of trades and in fact, have already realized $3 million of income in July.

Non-interest expense increased less than $9 million from the prior quarter to $583 million. Deposit costs rose $16 million due to a full quarter impact of significant back-weighted mortgage warehouse deposit growth in Q1.

Pre-provision net revenue of $412 million was 25% higher compared to Q2 2025, highlighting the continued growth in the earnings power of the franchise. Provision expense of $80 million was mostly a function of loan growth and net charge-off replenishment.

Earnings per share of $2.36 was 6% above our adjusted EPS of $2.22 in Q1 or 14% higher year-over-year. Turning to the balance sheet on slide five, securities and cash declined $2.4 billion, primarily driven by a $2.6 billion reduction in cash as we deployed more liquidity into increased loan growth.

Securities and cash as a percentage of assets moved closer to the mid-20% area, while our HFI loan-to-deposit ratio increased to 74% and closer to our medium-term target of 77%-80%. Total quarterly HFI loan growth was $1.8 billion and generated mostly from C&I growth, an area which continues to drive overall loan growth momentum.

C&I growth was spread across our commercial banking businesses. As Ken discussed earlier, total deposits declined by $849 million during the quarter, reflecting the intentional reduction of approximately $1.2 billion of higher cost deposits as part of our ongoing deposit optimization efforts.

Total assets remained just below $99 billion, though total equity expanded $227 million, mostly from retained earnings growth. Tangible book value per share rose $2.10 from the end of Q1 to $63.24 or 13% over the prior year from retained earnings growth and modest relief in our AOCI position.

Looking closer at our loan growth trends on slide six, C&I growth continues to fuel our overall HFI loan growth. Over 80% of quarterly HFI growth occurred in C&I categories.

From a business line perspective, commercial banking grew $950 million, primarily from our specialty commercial banking verticals and Hotel Franchise Finance within CRE. Our multi-year diversification efforts have led to C&I accounting for nearly 49% of the HFI portfolio.

While CRE ex-construction has declined about two points over the past year to 19.5% of the book. Looking at slide seven, deposits totaled $81.9 billion in Q2, an increase of $10.8 billion year-over-year.

The $849 million decline in deposits from the prior quarter reflected our deposit optimization strategy, resulting in a reduction of over $1 billion in higher cost balances towards the end of the quarter, with another $1 billion of additional reductions made during the first few weeks of Q3. Growth in commercial banking and Specialty Escrow channels, particularly Business Escrow Services as well as HOA, helped balance the overall decline.

Demonstrating our early success in improving funding costs, June's end-of-month total cost of deposits was approximately one to two basis points below Q2's total average cost of 178. Turning to our net interest drivers on slide eight, the securities yield expanded five basis points to 464, reflecting continued reinvestment at higher yields.

HFI loan yields decreased three basis points to 582 as a function of ongoing remixing efforts into more C&I loans compared to CRE. On the liability side, interest-bearing deposit costs compressed one basis point to 274 from Q1.

Overall liability funding costs declined three basis points from the prior quarter to 196, which was helped by higher average balances in non-interest-bearing deposits. The cost of funding earning assets also declined as average earning assets grew 3% from the prior quarter to $91.7 billion.

Looking at slide nine, net interest income grew $31 million quarterly, or 16% annualized, to $797 million, primarily from C&I-driven average HFI loan growth and higher average securities, which powered strong average earning asset growth. Net interest margin was relatively stable, compressing one basis point from Q1 to 353 as the interest cost of earning assets declined two basis points while the earning asset yield declined three basis points.

Turning to slide 10, the adjusted efficiency ratio of 49% increased 140 basis points from the prior quarter. When excluding the security gains of Q1, however, this ratio would have declined by about 150 basis points.

On a year-over-year basis, the adjusted efficiency ratio dropped by almost three points. As mentioned earlier, non-interest expense increased approximately $9 million in Q2 from higher deposit costs related to higher average mortgage warehouse deposit balances.

Excluding deposit costs, non-interest expense decreased $7 million from the prior quarter. Excluding the Q1 securities gains, operating leverage resumed in the second quarter, with revenue growing three times more than non-interest expense on a quarterly basis.

We believe these trends position us well to continue improving operating leverage over time through a combination of disciplined expense management, deposit optimization efforts, and continued business momentum. On slide 11, you see we remain asset sensitive on a net interest income basis.

Among total earning assets, 67% are variable, while variable liabilities represent 87% of total earning assets. Non-maturity deposit rates, including ECRs, are estimated to have a beta of 59% over the next 12 months.

When factoring in the potential impact on earnings from mortgage banking revenue and also deposit fees, our modeling now indicates we are rate neutral on an earnings at risk basis. Earnings are expected to rise 0.8% in both an up 100 and a down 100 basis point ramp scenario.

Turning to slide 12, we see core asset quality remains stable. Special mention loans decreased $87 million to $316 million, and as a percentage of funded HFI loans dropped 16 basis points to 52 basis points.

Classified accruing loans edged down $15 million to $440 million, or 72 basis points from 77 last quarter. Non-accrual loans increased $70 million, but nearly all of this change was related to the migration of the loan mentioned previously that is now current.

As detailed in the appendix, Western Alliance continues to compare favorably to our $50 billion to $300 billion asset peers in special mention, classified, and criticized loan categories. On slide 13, you see our allowance and coverage ratios.

Provision expense was $80 million and replenished net charge-offs, as well as supporting incremental loan growth, primarily in C&I. Our allowance for loan losses moved higher to $487 million, or 80 basis points of funded HFI loans, and our allowance for credit losses also increased two basis points to 89.

Excluding loans covered by credit-linked notes, the total loan ACL to funded loans ratio is 101. Regarding non-accrual loan coverage, the loan previously discussed was the primary driver of ACL coverage dipping below 100%.

We expect this to be temporary, given stable core asset quality trends and expected near-term non-accrual resolutions. Looking at capital on slide 14, our tangible common equity to tangible assets ratio lifted approximately 20 basis points from year-end to 7%, from solid retained earnings growth, as well as a slight decrease in tangible assets and an incremental improvement in our AOCI position.

Our CET1 ratio was maintained at our targeted level of 11%. Turning to slide 15, tangible book value per share increased 13% year-over-year and has grown at a 17% CAGR since the end of 2015.

The gap between historical tangible book value accumulation and peers stands at more than four times. Western Alliance has been a consistent leader in creating shareholder value over the medium and long term.

On slide 16, we have provided 10 metrics that highlight how we stacked against our peers on earnings growth, profitability, and other critical factors that drive financial results and create durable franchise value. We view these metrics as important in compounding tangible book value and ultimately generating a long-term superior total shareholder return.

For the last 10 years, our EPS growth and TBVPS accumulation have ranked in the top quartile relative to peers. We are also the leader in organic 10-year loan deposit and revenue growth, as well as adjusted efficiency.

We continue to make strides towards achieving top quartile returns on average assets and average tangible common equity, as well as our medium-term targets of 1.2%-1.3% and 16%-17%, respectively. I'll now hand the call back to Ken.

Thanks, Vishal. As we outlined at our Investor Day, Western Alliance has spent the last several years purposefully strengthening the foundation of the franchise.

We have materially improved our capital liquidity and deposit profile, creating a more resilient balance sheet while preserving the flexibility to pursue attractive growth opportunities. At the same time, our diversified business model and specialized platforms have continued to generate strong earnings momentum as we progress towards our profitability targets of 16%-17% return on average tangible common equity.

Having achieved our targeted 11% CET1 ratio, we now have greater flexibility in how we deploy capital to maximize shareholder value. Importantly, our revised outlook continues to reflect growth among the strongest in our peer group while enhancing profitability, compounding tangible book value, and returning additional capital to shareholders.

With that as a backdrop, our updated 2026 outlook is as follows. In order to prioritize share repurchases, we are revising our loan growth outlook to $5 billion.

Deposit optimization efforts prioritizing profitability have reduced higher cost deposits by approximately $2 billion, including $1 billion since quarter end. As a result, we are lowering our deposit growth outlook to $6 billion, reflecting lower funding needs and our continued efforts to remix the deposit base in order to improve our funding costs.

Our revised loan growth outlook will allow us to notably increase share buybacks with $150 million planned for the back half of 2026 and still maintain capital levels. We're revising our net interest income growth forecast to 12%-14%, compared to our prior forecast of 11%-14%.

Our new outlook incorporates a 25-basis-point hike in September. We did not have rate changes assumed in our prior guidance.

We expect NIM to remain stable going forward as double-digit average earning asset growth generates higher net interest income. Total non-interest income is now projected to grow between 13% and 17%, compared to 20%-25% growth previously.

We continue to see strength in commercial banking fees. However, the current geopolitical environment and the backup in the 10-year Treasury note and mortgage rates will hold Q3 and Q4's mortgage banking revenue in line to Q2 level.

Looking at non-interest expense, our deposit cost range of $650 million-$700 million is unchanged. Deposit optimization efforts should lower average balances for ECR-related deposits and offset the impact of an expected rate hike.

Operating expenses are still expected to land between $1.6 billion and $1.65 billion. With respect to asset quality, we reaffirm our core net charge-off guidance of 25 to 35 basis points, with non-performing loans falling in the back half of the year.

Lastly, I should say our full year 2026 effective tax rate outlook is 19%. With that, Vishal, Dale, Tim, Lynne, and I are here to take your questions.

We will now begin the question and answer session. Please limit yourselves to one question and one follow-up.

If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again.

We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.

Please stand by while we compile the Q&A roster. Your first question comes from the line of David Smith with Truist Securities.

David, please go ahead.

Hey, good morning.

Good morning, David.

Could you speak a little bit more about the decision to pivot a little bit away from as strong balance sheet growth more towards buybacks? Was this about the opportunity set that you saw for good loan deposit originations being a little bit reduced, or does this just reflect the fact that you think your stock is undervalued and you haven't been getting rewarded for your leading growth output?

What do you need to see to return to putting that same priority on growth, or do you think there's anything you can see to go back there?

A couple of questions there. Let me start with the pivot.

The revised guidance, as we said, reduced $1 billion in loan growth outlook. That reflected a deliberate capital allocation decision.

We see an opportunity to enhance shareholder value by modestly reducing our loan growth and reallocating excess capital towards share repurchases. Redirecting the $1 billion of incremental growth capacity into an expanded repurchase program allows the company to capitalize on what we view as a meaningful discount between current share price and intrinsic value.

I want to say, even with the $1 billion loan origination reduction, Western Alliance, within the $50 billion-$300 billion asset peer group, would still post the highest organic year-over-year percentage loan growth, excluding any bank that did an acquisition. We still outdistance peers, and we're also able to return capital to shareholders.

We did say on Investor Day, and we did preview that we would do $300 million of repurchase activity. I think you asked and answered the question simultaneously, which is the share price doesn't reflect our intrinsic value, the growth of the company, the historical growth of the company, and we're not getting rewarded for the excess growth.

We can still be the top-performing loan growth bank inside of the peer group. Though we're just better, we don't need to be better by a very wide margin because that wide margin, we were not getting compensated for.

All right. In fact, some people would say you grow so quickly that you must be taking on more risk.

We explained during Investor Day how we have this S-curve philosophy and how we kind of grow our businesses. We don't see it as taking on more risk.

We think this is a better positioning for The Street, and it moves us from maximizing balance sheet growth to maximizing value or value optimization of returning capital.

Would you kind of be open to leaning into the buyback on a continued basis if the share price isn't materially up at the end of the year?

Yeah, we will do that. It'll be a constant review between loan growth, the adjusted risk returns that we see, keeping our capital at 11%, and then taking the excess capital that we have and repurchasing our shares.

I'll also tell you, and we'll wait for the Basel III rules to be finalized. On the first reading of them, all right?

We mentioned, I think on the last call, we had 81 basis points of incremental CET1 that would be offered to us or delivered to us. We would use some of that as we move into 2027 as well to buy back our stock if we don't think it reflects the appropriate price or appropriate value of our company.

All right. Thank you.

Your next question comes from the line of Anthony Elian from JP Morgan. Anthony, please go ahead.

Thank you. On ECR deposit costs, you have a hike now in the outlook, three Qs, seasonally a stronger quarter for ECR deposits.

The guide for ECR deposit cost expense was unchanged. Vishal, is the ability to keep that range unchanged entirely due to the benefits you expect from the optimization you did in June and so far in July?

Can you size up the magnitude of any more outflows you expect?

I'll lead off, and Vishal can pick up where I may have left off a fact or two. Let's talk about what we expect and what we've done.

We took off about $1.2 billion of higher price, or transitioned, I should say $1.2 billion of higher price deposits to other banks. That's at the end of Q2.

In Q3, we already transitioned $1 billion, and we expect to transition another $750 million by the end of Q3. I should say we plan to do this all while continuing to grow total deposits in Q3 up or near $1 billion.

Q3 is going to see $1.75 billion transition off the balance sheet. Yet, we're still going to grow.

It's our intent to grow $1 billion or about just about $1 billion for Q3. That's the volume side.

We also plan to take down Q4, I'll say by several hundred million dollars. All in for the year, we're expecting to target $3 billion.

We'll wait, we'll pause, we'll look at what we plan to do in 2027. We'll make our next set of assumptions to move forward based upon our 2027 plan.

As it relates to your specific question on deposit costs, we do expect deposit costs to decline in Q3 and in Q4 from the deposit remixing optimization strategy. In Q4, you're going to see the impact of the 25 basis points times the beta of the outstanding ECR balances that we have that will offset some of that impact in Q4.

All in, what we've given guidance is our total deposits from last guidance to this guidance remain flat, but we're able to absorb the 25 basis points of increase to the ECR deposit levels.

I completely agree with that. That's exactly what's going on here, Tony.

In the fourth quarter with the 125 basis point rate hike, obviously that's back weighted towards the end of the year. The impact will be a little bit more muted for the full year.

That's how we're able to offset it. The deposit cost would have gone up a little bit because of the rate hike.

Due to the $3 billion optimization program, that's bringing the number back down. I would also just add that the majority of the $3 billion we're targeting does hit that sort of ECR deposit balance

Everyone talks about deposit costs as if it's asymmetrical. I just want to make sure you know that when deposit costs go down, there's also a decline in net interest income because we're not putting those deposits out into investments.

All right? The net impact to the balance sheet is much smaller than calculating just what the deposit cost reduction is within operating expense.

Thank you. My follow-up.

Are there other parts of the balance sheet or the company you'd be looking to optimize to improve profitability? Whether this involves taking a closer look at certain parts of the loan portfolio, contemplating asset sales, or adjusting headcount.

Could you end up with a smaller balance sheet once the optimization strategy is complete? Thank you.

I think the balance sheet will continue to grow just naturally, given the opportunities that we have in front of us. Just to remind folks, at the end of Q1, we only grew $400 million.

We said that we had a very strong pipeline moving into Q2. In fact, we did accomplish that by generating $1.8 billion of loan growth.

We still see a very good loan origination pipeline. All right?

What we did with taking down the loans by $1 billion for the full year, that was the beginning of the optimization. We will continue to look at that going forward.

My sense is that the balance sheet will continue to rise over time. As it relates to optimizing the P&L or looking at our operating expenses.

This quarter, we ran 3:1. We have a very good efficiency ratio.

We continue to look at that all the time. I think what we don't get credit for is the fact that we have absorbed a great deal of the expense to prepare to go over or cross over into LFI status, a $100 billion threshold.

We absorbed that, our efficiency ratio has remained steady to actually drop during that same time. I would say that's a pretty nifty trick, being able to absorb that increase in LFI preparation costs, as well as bring down our efficiency ratio.

Your next question comes from the line of Jared Shaw with Barclays. Jared, please go ahead.

Hi, thanks. Maybe I guess sticking with the deposit theme.

When you look at the growth that you are bringing on as you roll out that $3 billion but still see that good growth coming in. Is that mostly in interest-bearing products then?

If so, what are you bringing that on at? If it's in ECR deposits, is that just better pricing on those?

Yeah. I'm going to return to one of the things that we said during Investor Day, which is we've got a number of deposit channels.

HOA, Business Escrow Services, Corporate Trust, Juris Banking, our Digital Asset Group. All have basically lower cost of funds than more of our traditional business lines.

It is our expectation to grow those business lines or those deposit channels at a faster pace than our traditional channels. By that, I also mean our warehouse lending/MSR group, which usually brings in somewhat of the higher priced deposits.

Yeah, I think that's exactly what we're trying to do here. We've got all these different deposit initiatives.

The cost is very attractive to them. When you think about each one, the cost is a little bit different there, but that's really the plan going forward, is a remixing.

As those lower cost deposits come in, we're going to reduce the higher cost deposits net-net. As Ken mentioned, we're going to grow deposits in the third quarter, but we do think the cost is going to continue to improve from here.

I'll give you just sort of where we are from a spot perspective, so you can kind of see the early efforts here. It's not just the ECR deposits, it's across the bank.

We're trying to see where there's potential reductions. Our cost of total deposits in the second quarter declined three basis points from 181 to 178.

As we're coming out of June, we see that trending down one to two basis points. When you look at cost of interest-bearing deposits, was down about one basis point in the second quarter at 274 from 275.

We're also exiting June with that being down about one to two basis points. I think the direction and the trajectory looks encouraging from here.

This is Dale. I might also add that during our Investor Day, we talked about our new deposit businesses and what growth they have.

Well, in the past year, they have grown two and a half times as fast as the rest of the balance sheet. They've also had a decline in their funding costs at a steeper rate than what the rest of the balance sheet has been.

I think that's going to continue into third and fourth quarter, given the declines that we're going to continue to see in kind of mortgage warehouse deposits that Ken outlined. Again, the mix is going to be changing to lower cost, more diversified, and faster-growing sources than we've had in the past.

Okay. All right.

Thanks. Maybe shifting over to the fee income side.

I guess it feels like that guide seems pretty conservative, even with the flat mortgage just sort of given where we've already seen in the first half. I guess where do you see pressure apart from mortgage on core fees there to sort of bring that guide down lower?

The guide was really lowered from several vantage points. First, the mortgage.

That goes without saying, the macro environment, economic environment, geopolitical environment just has some natural headwinds there. We will be pleased if we continue to see mortgage income in Q3 and Q4 consistent with Q2.

We hope to do better, but that is our baseline approach. In the first half of the year, what we saw was, maybe I will turn this part over to Dale again because it is his business.

Juris Banking has a component in there called DST. That is our payment network to handle large claims, and we make fee income as we handle those large claims.

We had a couple of them that were in the first half of the year that accelerated income, which we thought would be in the back half to the front half of the year. Dale, do you want to pick that up?

You may recall, I think we discussed Cambridge Analytica before, we had significant volume in terms of payments in the fourth quarter running into the first quarter. Thought it would be a little bit earlier.

I would tell you our queue in this particular channel is very strong. What we have difficulty doing is pinning down exactly when those revenues are going to come in because they are subject to motions, the federal court system, and a number of other variables that we do not control.

That said, we do see this picking up. We do not see it picking up immediately.

Maybe by fourth quarter and certainly into 2027, we have some big cases that we think are going to be coming to fruition for distribution.

Your next question comes from the line of Ebrahim Poonawala from Bank of America. Ebrahim, please go ahead.

Hey, good morning.

Good morning.

I guess maybe, Ken, this whole notion of you're not getting rewarded for performance, slowing down loan growth to sort of lean into buybacks. One, given your view of the stock and the value, should you be doing more in buybacks if given just how compelling it is relative to the performance and the return profile of the bank?

Second, if we sort of assume that this recalibration of growth continues, does this also have an impact in terms of headcount and the amount of bankers you have? Are there other changes that may get instituted at the bank if you are resetting the bank to a little bit of a slower trajectory of growth?

Just talk to us about how we should think about that beyond the next two to three months into next year around the growth versus buybacks and operationally what that means.

Okay. Thank you for the question.

Let's take the first one on capital allocation. One of the factors that we have set up in our model is maintaining a 11% CET1 ratio.

Many of our competitors will run between 10.2 and 10.5. All right?

We're very aware of that. For us, keeping the CET1 ratio at 11% allows us to have the right credit rating that affords us the ability for Dale's businesses that he just mentioned, the BES, the Corporate Trust, Digital Assets.

I'm sure I'm missing a couple off the top of my head. Those five to six businesses to grow at an outsized pace.

We're trying to optimize the balance sheet also through lower deposit costs. We need to keep that 11% CET1 ratio there to maintain our investment grade rating or actually improve it as we go forward to help bring in the lower cost of deposits.

That is a factor that we keep in mind when looking to buy back shares. Now, if the stock is undervalued and continues to be undervalued, do I want to buy back more shares?

The answer is, you bet. We're going to look for or look towards two things.

One, if we see a continued spread compression at a point where we don't like the risk-adjusted returns, we may slow down loan growth again and still be ahead of all our peers, by the way, and buy back more shares. And/or let's see what happens as we get to the end of the third quarter when we believe the Basel III rules will be published.

At a minimum, we hope that the 81 basis points that I already referenced will be available for us to use to buy back more shares and/or increase our CET1 ratio and/or also support greater growth if we have it, if it's an opportunity for us based upon our loan origination channel. We kind of look at all three of those.

All right? It's dynamic.

We do think that being in a place where you can actually grow faster than peers and also buy back shares positions the bank to be in a good place in terms of continuing to deliver value both in the short term and in the long term for shareholders. You asked a short question.

I decided to give you a long answer on the first item. On the second one, on operating efficiency.

We are always focused on operating efficiency, and what we do there, to be honest, is we'll trade off a little. Since we have operating efficiencies generally so much lower than the other banks, and again, we absorbed $25 million a year for the last couple of years in terms of being LFI ready and compliant.

All right? That we will use some of those funds to continue to look at opportunities to either bring on new business development officers in channels that we think provide us with a good risk-adjusted return or continue to build new deposit channels that we're always looking at as well, or even new loan channels or businesses.

We continue to do that. Plus, we're putting money into a bunch of AI initiatives inside of the company, and that's going to cost some money.

We have nothing to report on what the return on that is yet. Right now we're seeing just benefits around the edges.

We're trying to mobilize that inside of the company to make that a more significant event or production going forward. Or return, not production.

I should say the word return going forward.

Got it. I guess maybe just tied to that, back to in terms of getting the stock to reflect the performance, part of it is credit quality.

The other is, I think Vishal mentioned cost of interest-bearing deposits 274, probably among the highest in the group. Dale mentioned some of the initiatives.

Is there a way where that deposit cost relative to where the Fed funds is can meaningfully decline? I would argue that that's probably part of the reason why your stock trades where it is in terms of the valuation multiples, given the initiatives you have underway.

Assuming the Fed doesn't do anything over the next year, could we see a discernible, meaningful decline in what it takes to sort of in terms of cost of funding for the bank?

Yeah, sure. I think, Ebrahim, you've hit one of the points there, that's something we're clearly focused on.

That's the whole point of the deposit optimization program. As Ken has mentioned before, these are longstanding client relationships that go back a long time and where this is definitely going to involve some finesse in terms of how we're working through this.

It's hard to tell you right now sort of what the end state is. What I would tell you is we're very focused on this.

We're working to bring the cost down. We've gone across the bank.

We're looking at some of the most expensive deposits that we have across the different business lines. We're trying to see where we could reprice it down with our six different deposit initiatives where we're having a lot of success there.

A lot of the cost, like I'll tell you in Business Escrow Services, the cost is well less than 1%. Really, we are having traction getting these lower cost deposits in, it naturally will take some time for us to do this.

I wouldn't expect anyone to think this is going to change overnight. Over the medium term, we think we will be able to move the needle here.

I just want to add something else to that. Deposit cost, interest expense, they're just one or two of the inputs to the output, which is PP&R growth.

Our PP&R growth is rather robust. This quarter was 1.68% of average assets.

Look at that PP&R growth and look what we're doing with it. Right?

This quarter, we also put an additional $14 million into the loan loss reserve. That's worth about $0.10 to us because we continue to move forward more with C&I loans and de-emphasize, say, the residential loans.

The PP&R is what we really focus on. Net interest margin should rise in the future with the activities that we're talking about.

Adjusted net interest margin, that's where we move the deposits out of operating expense into revenue. That should increase over time.

The benefit here, well, that will be to the benefit of a higher PP&R, which will give us all the flexibility that we want going forward to our long-term goals of getting to a return on average tangible common equity of 16%-17%, which by the way, we were at 15.4% for this quarter.

Ebrahim, the only other thing I would add is also we're having a lot of traction on the treasury management side. As we're targeting more C&I loans and focused on our commercial clients, you actually see a noticeable uptick so far in our treasury management fees.

We think that direction is going to continue going forward.

Your next question comes from the line of Janet Lee with TD Cowen. Janet, please go ahead.

Hello. Are you able to—

Hey, Janet

Give a little bit more details around or quantify how much of the non-performing loan decline we should expect in the second half of 2026 given the progress you're making on the resolution? Based on your updated guide, which was maintained for your NCO for 2026, should we still forecast net charge-off in the second half to be in that mid-20s to get into the midpoint?

Okay. We've got several things going on for the back half of the year.

We said there were six credits that we needed to resolve to bring the NPLs down. Two of which have been resolved by the end of the quarter.

A third should be resolved in the next one week to 10 days. We've got everything signed up, ready to go.

We just got to close. That's three.

The fourth one is being targeted and looks like right now it's on track for the end of Q3, with the last two to happen in Q4. All right?

That's the path, that's the track. We're still on the same track as we disclosed on Investor Day.

Could one of those credits move out of Q3 into Q4? Yeah, you bet.

The trend will be down between now and the end of the year. All right?

That's what we're focused on. We also think that the charge-off level, or the dollars, have peaked.

The charge-off rate has peaked in Q1 and Q2. You could see they both remain flat.

Actually, charge-off rate was down a couple basis points. We see that with a gently sloping mark coming down in Q3 and Q4.

I'll look to Lynn. Did I take everything away from you, Lynn?

Lynne Herndon is our Chief Credit Officer sitting in here today. You want to add anything to that?

No. Exactly what you said.

High confidence in those six asset resolutions and continued focus on the rest to bring that non-accrual number down.

Okay. Janet?

I'll also just say, it's worth you to look at the appendix here of this deck, and just look at how we compare on special mention loans, criticized and classified loans relative to the peer group. We're not just a little better.

We are significantly better. Yes, our NPLs are a little bit higher than we'd like, and we're working on them bringing them down.

Overall, the asset quality is rather firm here.

Yeah. Janet, it's Vishal here.

I just want to hit the second point of your question about the charge-offs and what to think about for the back half of the year. We're still reaffirming for the full year we'll be between the 25 to 35 bps.

I understand your point about what would you put at the back half to get there. I would say right now it seems like we're tracking a little bit above the midpoint of that 25 to 35 when you think about charge-offs for the back half of the year as you're doing your modeling.

Got it. Thank you for all the color.

Just making sure that I understood the comments earlier around your fee income guidance.

Your fee income guide of 13%-17% year-over-year in 2026 does not contemplate any uptick or outsized uptick in service charges in the fourth or later in 2026. You have a good line of sight into that popping up again in early 2027.

Am I interpreting it correctly?

Somewhat. For the back half of the year, the service fee charges coming out of the Juris Banking group should be less in the back half of the year than the first half of the year.

The service fee charges, treasury management services that come out of the rest of the bank regional banking and our commercial business lines that Tim Bruckner runs sitting across from me, those should tick up somewhat. It will not tick up to the extent that you have those big settlements that you had in Q1 and Q2 from Juris.

The total fee income will be down compared to Q1 and Q2. The other things that are important to note, what was in Q1 and Q2?

We started this new program, and we're excited by it, which is this we're hedging the mortgage business, I'll say at the corporate level, by selling options against MBS bonds. We made $6.2 million in Q2.

We already locked in $3 million in Q3, and we hope to kind of do that going forward as somewhat of a hedge against the AmeriHome business. That's new that you'll see going forward.

The other thing in Q2 that you had that is hard to predict when it happens in Q3 and Q4 is in our tech and innovation business. It's common, or it's not uncommon I should say, to get an exit fee or a warrant position attached to the credit that we're giving to some of these tech and innovation companies.

When those companies have an exit event, and we have warrants attached to that, then we obviously receive the value. Okay?

Sometimes we receive it right away if it's an exit event that has a bonus fee attached to it. Sometimes we have to wait a couple of months if it's attached to an exit where we have to hold onto the stock if something went public.

That was in Q2. Hard to predict when those things happen in Q3 and Q4.

For us, we have very low expectations of that, just as a general rule. When the good news comes in, we do the happy dance when it comes in.

That's how we kind of project it out for Q3 and Q4. I would not project anything into 2027 for DST.

I'm excited about the pipeline, and I've learned one thing working with Dale. The pipeline always looks great, somehow lawyers get in the way of it.

Motions get in the way of it. Judges may have different rulings or change their minds, everything just keeps moving back versus when I expected.

I've tempered my enthusiasm short term, long term, that pipeline continues to grow.

Your next question comes from the line of Casey Haire from Autonomous. Casey, please go ahead.

Great. Thanks.

Good morning, guys. One more on credit.

Just wanted to ask about the ACL ratio. I know you guys at 89 basis points, I think you guys have talked about it going to the low 90s.

Any updated thoughts of potentially pushing that even further? Where does that ultimately settle?

I know there's a remix in the C&I which is driving that, but just any updated thoughts as to where that ratio lives going forward?

Hey, Casey, it's Vishal. Thanks for the question.

I think you're spot on. I think the reserve is going to continue to move up incrementally from here.

That's driven by we're reducing the growth on the mortgage side and moving more into the C&I side. As you could see this quarter, we have the $1.5 billion of the $1.8 billion came from C&I.

When we look at the loan pipeline, that's where we're seeing a lot of the growth. I think what you're going to see is a comparable increase that we had in the second quarter, which is the 2 basis points.

I think you could see a comparable increase in both the third and the fourth quarter. I think that ACL will move up from here, given the mix of the loan portfolio going forward.

Casey, an interesting data point that we monitor. The peer group banks probably brought down their allowance for loan loss reserve, or ACL, down about 3 or so basis points on average as a group.

We've come up 2 basis points. As the other banks continue to bring that down, we're continuing to rise upward.

Over time, the difference or the gap between where we stand and where they stand will be different. It will be smaller.

The other thing I just want to bring to your attention, and we've said this many times. We really look at our ACL to be over 1%.

You cannot ignore the fact that we have CLNs on our residential portfolio. Right?

CLNs is an insurance policy whereby we've already received all the money in, it's sitting on our balance sheet, and we can use that money if there are losses against the residential book. That's protecting our business.

We really kind of see our position closer to 1%. Notwithstanding that, it will rise very naturally, as Vishal said, as we remix the loan composition.

Okay, great. Just, Ken, question for you on the strategy pivot.

It sounds like it's got some duration, and I think everyone understands the rationale, and I think shareholders like the move. What about the clients?

I've heard you talk about loan growth is not something that you just switch on and off. It takes a while for pipelines to build.

Western Alliance has a long history of standing by clients when other banks kind of walk away. I guess, how do you make this strategy pivot and not risk long-term franchise value with the client base?

How quickly can you get back to running to the speed that we're accustomed to with Western Alliance?

Yeah. I think that question can also be put to the deposit side as well as the loan side.

I'll start off, and I'll turn it over to Tim Bruckner. First, on the deposit side, I keep using the word finesse.

All right? We're helping our clients transition their deposits to other banks who are willing to pay the price that we're paying or even a higher price to get those deposits.

We've got to give them ample notice. Right?

We're not looking to push anything out of the bank. We're looking to transition with them.

All right? Keep the relationship as robust as it is because there are other aspects to it.

There's the loan origination aspect. There is operating accounts that come with it as well.

Of course, treasury management services. On the other side, on the loan side, maybe this is the lead-in for Bruckner.

We have just so many different loan verticals that we can move on and off of. Tim, you want to take it from there?

Yeah. I'm glad this question was asked.

We have an incredibly broad bank. We've taken every opportunity to tell anyone we can about the different S-curve engines that we have, the different businesses that we have.

Generally speaking, as we have slightly slower growth, we're allocating from non-relationship lending, in some cases, into full relationship banking. You can see it in our numbers.

You can see where the investor commercial real estate has come down, and the C&I numbers have gone up. At the same time, for the past three years, we've put incredible product improvements into our treasury management complement.

We're now seeing the benefits of that. There is no difficulty in relationship continuity.

In fact, we're moving to relationship, and we're de-emphasizing some of the lending that we were doing that didn't have that depth of relationship and cross-sell.

Your next question comes from the line of Bernard von Gizycki. Bernard, go ahead.

Hey, guys. Thanks for taking the question.

Just on the lower loan growth guide, in addition to optimizing the balance sheet, I just know on the MDI loans, I know you show your exposure ex mortgage warehouse, which is a safer asset class. Does your slower growth incorporate wanting to reduce the MDI exposure, just given in totality it's an outlier?

Some of that will be a natural outcome of that. For example, we will not look to push as hard on capital call and subscription lines where we see those spreads compressing at a very fast pace.

Yeah, you could see that. The other thing on the MDI also is a reflection of what we're doing in warehouse lending and MSR lending, which is a reflection of the mortgage market.

The mortgage market has pulled back somewhat, and therefore, the amount of credit that our warehouse lending clients need has dropped back as well.

The only thing I want to reemphasize something Ken said before, which is even though we have a pivot here, right? The loan growth we had projected about 10% growth now coming to 8.5% for the year, and deposits were about 10.5%, now about 8%.

I just want to reemphasize, these growth rates are top quartile growth rates. Not only top quartile, but when we looked, and I appreciate estimates are moving around, it really put us at the number 1 or number 2 when you look at all banks between $50 billion-$300 billion from a growth perspective this year.

I think it's a very unique thing we're able to do here, which is still have top quartile growth and high risk-adjusted returns, but at the same time see the opportunity in our share price being undervalued and go out there and do a significant share repurchase. I think the combination of the two, I think is a very attractive opportunity moving forward.

Just to follow up just on the loan growth for the second half of the year. Just given the pipelines you're seeing now, the revisions you just made.

Ken, I think you cautioned if you see continued spread compression and don't like the risk-adjusted returns, you could slow the loan growth again. Would that imply that the loan growth, at least expected at this point in 3Q, is likely going to be probably a bit higher than the 4Q?

Just any comments you can provide on that?

We grew on HFI loans $400 million in Q1, $1.8 billion in Q2, so that's $2.2 billion. We said $5 billion.

You're looking at $1.2 billion-$1.3 billion in each of the next two quarters. Our pipelines indicate that that's what we're going to achieve.

Your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary, please go ahead.

Thanks. Just had one follow-up question.

Hopefully, I didn't miss it earlier. In terms of that credit that was disclosed in the 10-Q, I think at the Investor Day, you all said that there was an updated appraisal in progress.

I don't know if you could share anything with us on that at this point.

What I'll share on the credit, first of all, we haven't got the appraisal in. Let me just start with that, okay?

What we share on the credit is the borrower has brought the credit current. That's good as of the end of June, they brought it current.

They have indicated that they're going to make the next one or two payments going forward because they have a tenant, potential tenant, I should say, that is looking at taking a sizable piece, renting a sizable piece of the building. We think at this moment, based on all the facts that we know, that we have that property fairly valued on our balance sheet.

I don't want to say I'm optimistic about how this thing's going to be resolved, but I am pleased that the borrower brought the credit current as of the end of June and has indicated that they're going to make the next couple of payments, the next couple of monthly payments as they work, and we help them bring in a potential tenant to this building.

Great, I appreciate the color.

You're welcome.

Your next question comes from the line of Timur Braziler with UBS. Timur, please go ahead.

Hi, good morning. In looking to maybe scope the magnitude of the deposit optimization.

I get the $3 billion this year, but on a base of, call it $30 billion in just ECR-related deposits, it still seems kind of small. I guess, what's the end game here and the ability to further reduce those deposits?

Will that be driven by some of Dale's initiatives? Does the $100 billion getting lifted in all kind of influence that trajectory?

I'm thinking in terms of 2027 and beyond balance sheet growth, the levels this year, is this kind of a good jumping-off point for what we should think about 2027 growth?

You've got a couple of things there. First, getting ready to cross over $100 billion has not influenced any of this.

There is a byproduct of it, which is you've got to be on average be over $100 billion to be considered into Category IV. The fact that maybe we've slowed down growth by a quarter or so puts us into that next category next year.

The filing of a number of reports actually gets extended for months after that, actually quarters after that. It just gives us more time to be prepared.

That's sort of just a regulatory thing. Nothing that we're doing is purposely designed to bring down the growth so that we could stay under $100 billion.

At this point, I'll come back and say, we're really finessing what we do here. We're looking at taking down overall deposits in ECR land by about $3 billion by the end of the year.

All right? That's pretty considerable.

All right? Also looking to improve total deposits in Q3 by $1 billion, and roughly staying flat in Q4, which is, as you know, our seasonal drop-off with warehouse lending clients.

At this point, $3 billion looks pretty good. We'll give you a little more guidance as we get closer to 2027 on what we plan to do.

A lot of that's going to be predicated upon opportunities we have on the loan side where we want to place our loan-to-deposit ratio, which we continue to bring up. It's now 74 and change, where it used to be 71 and change.

We can bring that up a little bit. I'm not going to commit to what the 2027 levels are going to be at until we do a little bit more planning.

You have to appreciate, we're in early stages of doing this in terms of remixing. We mentioned it on May 12th.

We said we have to give plenty of time for our clients to reposition their deposits. We want to work with them because we have so many other relationships with them.

Okay, got it. Then just one last one on credit.

You had said two of the six loans that were previously discussed were already resolved. I think one of them was that $99 million life science loan.

What was the other loan that's already been resolved?

Yeah. Actually, the six loans that we mentioned at Investor Day did not include the life science loan that Ken was referencing a little bit earlier.

We are clearly working to expedite the resolution of that one as quickly as possible. The six that were mentioned there specifically don't include that.

Again, two of them have already closed and are off the books, and we're working really quickly on the one to two that we do expect to close in this quarter.

Okay. Was it that life science loan that was brought current?

Is that the loan that was referred to?

No.

No.

The life science loan was brought current. It is still an NPL.

Yeah.

We have not forecasted, and at this point, are not forecasting that to roll out of NPLs. We are still telling you that total NPLs will decline in the back half of the year.

That's right.

Your next question comes from the line of Chris McGratty with KBW. Chris, please go ahead.

Great. I thought you forgot about me, Ken.

Tangible common equity, how important is the TCE ratio in this discussion with CET1?

I think the TCE is at a reasonable level right now at the 7%. I think when you think about it, we tend to manage more to the CET1 ratio, appreciating we look at all the different capital metrics.

As you've heard us say, 11% CET1 is the target. The reason we're okay at the 7% level, TCE to TA, we believe it's solid.

I would point you to, Chris, obviously, if you look at the assets, 27% of our assets are sitting in cash and securities, and a quarter of our loan book is sitting in resi mortgages, low LTV, high cycle. We feel good with the TCE where it is.

I think depending on where rates go, AOCI, and how we kind of continue to optimize from here, you could see it go up. We feel good about the 7%.

The deposit optimization program has a benefit of bringing up the TCE to TA. We should see an upward bent on that ratio as we move forward into the back half of the year.

Okay, great. Thanks a lot.

You got it.

This concludes the question and answer session. I will now turn the call back to Ken Vecchione for closing remarks.

Ken, please go ahead.

Thank you all for your time today. I hope we thoroughly answered all your questions about the second quarter, and we look forward to having another call with you soon to talk about our Q3 results.

Enjoy the rest of the day, everyone.

Goodbye.

This concludes today's call. Thank you all for attending.

You may now disconnect.