Western Alliance Bancorporation (WAL) Earnings

Management highlights

- Core Financial Performance Highlights * Reported strong Q2 2026 results with broad-based C&I-driven loan growth, strong net interest income (NII), pre-provision net revenue (PPNR) expansion, and a stable net interest margin (NIM). PPNR increased 25% year-over-year to $412 million, and EPS reached $2.36, up 14% year-over-year. * NII hit $797 million, up 4% quarter-over-quarter and 14% year-over-year, driven by $2.7 billion of average earning asset growth including $1.1 billion of average HFI loan growth. NIM compressed just 1 basis point quarter-over-quarter to 353 bps, remaining broadly stable. * Total deposits declined $849 million quarter-over-quarter, which was an intentional outcome of the company's deposit optimization strategy, which removed ~$1.2 billion of higher-cost deposits in Q2, with an additional $1 billion of higher-cost deposit reductions completed in early Q3. Year-over-year total deposits still grew $10.8 billion to $81.9 billion. - Balance Sheet and Strategic Initiatives * Executing on previously announced strategic initiatives including deposit optimization to lower funding costs and expand profitability, and an expanded share repurchase program supported by the company's strengthening capital position. * The company's CET1 ratio is maintained at its targeted 11%, and tangible common equity to tangible assets increased 20 basis points from year-end 2025 to 7%. Tangible book value per share rose 13% year-over-year to $63.24. * Ongoing portfolio diversification: multi-year efforts have shifted the portfolio mix to higher growth C&I from CRE, improving overall risk-adjusted returns. - Asset Quality * Core asset quality remains stable and constructive: criticized assets, special mention loans, classified accruing loans, and net charge-offs all declined quarter-over-quarter. Net charge-offs came in at 37 bps in Q2. * The allowance for credit losses (ACL) increased 2 basis points to 89 bps of total funded loans, with an ACL ratio of 101% excluding loans covered by credit-linked notes. * Management expects non-accrual loan balances to improve meaningfully in H2 2026 via planned resolutions of six targeted problem credits.

Guidance

- Revised 2026 full-year loan growth guidance downward to $5 billion (from the prior forecast that implied higher growth), reflecting a deliberate capital allocation pivot toward share repurchases. Even after this revision, the company's 2026 loan growth will still be top quartile among $50B-$300B asset regional banks. - Revised 2026 full-year deposit growth guidance downward to $6 billion, aligned with reduced funding needs from slower loan growth and ongoing deposit optimization to remove higher-cost balances from the balance sheet. The company expects to reduce high-cost ECR-related deposits by $3 billion total by the end of Q3 2026. - Revised net interest income growth guidance upward to 12-14% from the prior 11-14% range. The new guidance incorporates an assumed 25 basis point Fed rate hike in September 2026, which was not included in prior guidance, and management expects NIM to remain stable going forward. - Revised 2026 non-interest income growth guidance downward to 13-17% from the prior 20-25% range, driven by expectations that mortgage banking revenue will hold at Q2 levels in H2 2026 due to high long-term rates and geopolitical uncertainty. Strength in commercial banking and treasury management fees will partially offset this stagnation. - Full-year 2026 guidance for total deposit costs (range of $650 million to $700 million) and operating expenses (range of $1.6 billion to $1.65 billion) is unchanged. Deposit optimization is expected to offset the cost impact of the projected September rate hike. - Reaffirmed full-year 2026 core net charge-off guidance of 25-35 bps, with non-performing loans expected to decline in H2 2026. The 2026 effective tax rate guidance is set at 19%. - The company plans $150 million in share repurchases for H2 2026, supported by its strong capital position.

Segment performance

Western Alliance reports total assets just below $99 billion, with total held-for-investment (HFI) loans reaching ~$61 billion as of Q2 2026. The C&I segment is the fastest growing and largest segment: C&I accounted for over 80% of quarterly HFI loan growth ($1.8 billion total HFI growth, ~$1.44 billion from C&I), and now represents 49% of the total HFI portfolio. Commercial banking (a C&I-focused vertical) grew $950 million in the quarter, driven by specialty commercial and hotel franchise finance. The CRE ex-construction segment represents 19.5% of the HFI portfolio, a 2 percentage point decline over the past year as the company diversifies away from CRE. Mortgage banking revenue improved quarter-over-quarter, though high rates and tight spreads create ongoing headwinds; mortgage servicing revenue rebounded to $31 million in Q2 driven by slower prepayments in a high rate environment. Non-interest income was $199 million in Q2, with commercial banking, treasury management and FX fees driving 34% year-over-year growth, accounting for the majority of non-interest revenue contribution.

Risks & headwinds

- High current long-term interest rates and wider credit spreads compress margins on new originations, reducing the attractiveness of some loan types relative to repurchasing the company's own undervalued equity. - High mortgage rates continue to create headwinds for mortgage banking revenue growth, limiting upside to non-interest income in H2 2026. - Geopolitical uncertainty and elevated long-term Treasury yields create unpredictability for market-sensitive revenue streams including mortgage banking and large legal settlement fee income in the Juris Banking segment. - Timing of large settlement fee income in the Juris Banking DST business is dependent on federal court proceedings, which are unpredictable and can delay revenue recognition. - The company's average deposit cost is currently higher than many peers, creating pressure on net interest margin that requires sustained progress on deposit optimization to address. - Uncertainty around the finalization of Basel III capital rules creates some ambiguity for future capital planning and potential share repurchase capacity in 2027. - While core asset quality is strong, elevated non-accrual loan balances remain above management's target level, requiring active resolution work.

Analyst Q&A

• Q: Why did management pivot from prioritizing maximum balance sheet growth to prioritizing share repurchases, and will this pivot be sustained if the share price remains depressed? /

  A: Management says the pivot is a deliberate capital allocation decision: Western Alliance will still deliver top peer group loan growth, but the share price does not reflect the company's intrinsic value or strong historical growth, so returning excess capital to shareholders is a more attractive use of capital than incremental uncompensated loan growth. Management will continue to regularly review the tradeoff between loan growth and buybacks, and will sustain increased buybacks if the share price remains depressed. Additional excess capital from future Basel III rule changes could also support more buybacks in 2027 if the share price remains undervalued.

• Q: How does the $3 billion deposit optimization program allow management to keep full-year deposit cost guidance unchanged despite the projected September rate hike, and will this create a meaningful, lasting reduction in deposit costs over the medium term? /

  A: The optimization program specifically targets the highest-cost ECR deposits, so removing $3 billion of these high-cost balances fully offsets the projected cost increase from the 25 basis point September rate hike. The company is also growing lower-cost deposit channels (including business escrow, HOA, and corporate trust) that have funding costs well below 100 bps at a faster rate than traditional higher-cost channels. While the adjustment will take time, management expects a discernible decline in overall deposit costs over the medium term, improving NIM and PPNR over time.

• Q: What is the expected timeline and magnitude of non-performing loan (NPL) reductions in H2 2026, and what can we expect for net charge-offs in the back half of the year? /

  A: Management expects six targeted problem credits to be resolved by the end of 2026: two were resolved by the end of Q2, a third is expected to close within 10 days, a fourth by the end of Q3, and the final two in Q4. Net charge-offs for the full year will remain in the 25-35 bps guidance range, with back half 2026 net charge-offs tracking slightly above the guidance midpoint. Management confirmed the overall trend for NPLs and charge-offs is downward in H2 2026, and core asset quality remains significantly better than peer group averages.

• Q: How does the strategic pivot to slower growth and more buybacks impact client relationships and the company's ability to pivot back to faster growth if needed? /

  A: Management emphasizes that the pivot is a marginal adjustment, not a sharp pullback, and the company is still growing at top peer group rates. On the deposit side, management is working collaboratively with clients to transition high-cost deposits, giving ample notice and preserving broader relationship banking ties. On the lending side, the company is reallocating capacity from non-relationship transactional lending to deeper full-relationship commercial banking and C&I lending, which improves long-term franchise value via cross-selling of fee-based treasury services. The broad diversified portfolio of vertical lending businesses allows easy adjustments to growth levels without disrupting core client relationships.