Western Alliance Bancorporation (WAL) Q2 2026 Earnings Report, Transcript and Summary

Good day, everyone. Welcome. Good day, everyone. Welcome to Western Alliance Bank Corporation's second quarter 26 Earnings Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebankcorporation.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 Bank Corporation's Second Quarter 26 Earnings Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. Our speakers today are Kenneth A. Vecchione, chairman, president, and chief executive officer and Vishal Idnani, Chief Financial Officer Before I hand the call over to Kenneth, please note that today's press 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 8-Ks filed yesterday which are available on the company's website. Now for opening remarks, I would like to turn the call over to Kenneth A. Vecchione.

Thanks, Miles. Good afternoon, everyone. I will 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, Timothy and Lynn will join us for Q&A. I am very pleased with Western Alliance 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, PPNR expansion, stable net interest margin, and continued balance sheet strength. Credit trends remain constructive, with criticized assets and net charge offs both declining from the prior quarter. Ongoing resolution activity gives us confidence that loan balances will improve meaningfully during the second half of 26. 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 noninterest 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 3-to-1 margin. Excluding last quarter's securities gains. In total, PPNR 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 nonaccrual loans to decline in the second half of the year. The increase in nonaccruals 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 2 of the 6 nonaccrual loans discussed with the remaining 4 on track for resolution. In the second half of 26. Before handing the call over to Vishal, I would like to briefly preview our revised 2026 management outlook. Since the disruptions in 2023, Western Alliance has delivered 1 of the strongest regional bank growth stories highlighted by predictable loan growth, ample liquidity, robust capital levels, and scaling PPNR. As a result, we remain confident in 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 1 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, Kenneth. Turning to the income statement on slide 4, 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. Noninterest 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 prepayments paid in a higher rate environment. To hedge volatility in the mortgage market, we sold covered calls 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 have, in fact, already realized $3 million of income in July. Noninterest 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 and $22 in Q1 or 14% higher year over year. Turning to the balance sheet on slide 5. 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 to 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 remain 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 6. C&I growth continues to fuel our overall HFI loan growth. Over 80% of quarterly HFI growth occurred in C&I From a business line perspective, commercial banking grew $950 million primarily from our specialty commercial banking verticals and hotel franchise finance within CRE. Our multiyear diversification efforts have led to C&I accounting for nearly 49% of the HFI portfolio, while CRE ex construction has declined about 2 points over the past year to 19 and a half percent of the book. Looking at slide 7, 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 1 to 2 basis points below Q2's total average cost of $1.78. Turning to our net interest drivers on slide 8, the securities yield expanded 5 basis points to $4.64. Reflecting continued reinvestment at higher yields. HFI loan yields decreased 3 basis points to 8.2% as a function of ongoing remixing efforts into more C&I loans compared to CRE. On the liability side, interest bearing deposit costs compressed 1 basis point to 2.74% from Q1. Overall liability funding costs declined 3 basis points from the prior quarter to 1.96%, which was helped by higher average balances in noninterest 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 9, 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 1 basis point from Q1 to March as the interest cost of earning assets declined 2 basis points, while the earning asset yield declined 3 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 3 points. As mentioned earlier, noninterest expense increased approximately $9 million in Q2 from higher deposit costs related to higher average mortgage warehouse deposit balance. Excluding deposit costs, noninterest expense decreased $7 million from the prior quarter. Excluding the Q1 securities gains, operating leverage resumed in the second quarter with revenue growing 3x more than noninterest 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. Nonmaturity 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 mentioned loans decreased $87 million to $316 million and as a percentage of funded HFI loans dropped 16 basis points to 52 bps. Classified accruing loans edged down $15 million to $440 million or 72 basis points from 77 last quarter. Nonaccrual 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 2 basis points to 89. Excluding loans covered by credit linked notes, the total loan ACL to funded loans ratio is 1.01. Regarding nonaccrual 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 nonaccrual resolution. 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 CET 1 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 7% CAGR since the end of 2020. The gap between historical tangible book value accumulation in peers stands at more than 4x. 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. 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 TDVPS 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 to 1 point 3 percent and 16% to 17%, respectively. I will now hand the call back to Kenneth.

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 to 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 order to improve our funding costs. Our revised loan growth outlook will allow us to notably increase share buybacks with a $150 million planned for the back half of 2026 and still maintain capital levels. We are revising our net interest income growth forecast to 12% to 14% compared to our prior forecast of 11% to 14%. Percent. 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 noninterest income is now projected to grow between 13% to 17% compared to 20% to 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 q 4's mortgage banking revenue in line to Q2 level. Looking at noninterest expense, our deposit cost range of $650 million to $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 and $1.65 billion. With respect to asset quality, we reaffirm our core net charge off guidance of 25 to 35 basis points with nonperforming loans falling in the back half of the year. Lastly, on a full year-- oh, lastly, I should say, our full year 2026 effective tax rate outlook is 19%. With that, Vishal, Dale, Timothy, Lynn, and I are here to take your question.

We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 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 and A roster. First question comes from the line of David Charles 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 it just reflect the fact that you think your stock is undervalued and you have not been getting rewarded for your leading growth output. And then what do you need to see to return the putting the same priority on growth, or do you think there is anything you can see to go back there?

Okay. Couple of questions there. Let me start with the pivot. So the revised guidance as we said, reduced $1 billion in loan growth outlook. And that reflected a deliberate capital allocation decision. So we see an opportunity to enhance shareholder value by modestly reducing our loan growth and reallocating excess capital towards share repurchases. Now 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 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 to $300 billion asset peer group would still post the highest organic year over year percentage loan growth. Excluding any bank that did an acquisition. So we still outdistance peers, and we are also able to return capital to shareholders. Now we did say on Investor Day that we and we did preview that we would do $300 million of repurchase activity. But I think you asked and answered the question simultaneously. Which is the share price does not reflect our intrinsic value, the growth of the company, the historical growth of the company, and we are not getting rewarded for the excess growth. So we could still be the top performing loan growth bank inside of the peer group. So that we are just better. We do not need to be better by a very wide margin because that wide margin we were not getting compensated for. Alright? And in fact, some people would say, you grow so quickly that you must have more you must be taking on more risk. And we explained during investor day how we have this s curve philosophy and how we kinda grow our businesses. We do not see it as taking on more risk, but 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 capital out returning capital.

Would you kind of you know, be open to leaning into the buyback on a continued basis if the share price is not materially up the end of the year?

Yeah. We will do that. So we are gonna have a it will 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 will also tell you when we wait for the Basel III rules, to be finalized. But on the first reading of them, alright, we mentioned, I think on the last call, we had 81 basis points of incremental CET 1 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 do not think it reflects the appropriate price. Or appropriate value of our company. Alright. Thank you.

Your next question comes from the line of Anthony Albert Elian from JPMorgan. Anthony, please go ahead.

Thank you. On ECR deposit costs, you have a hike now in the outlook 3Q is seasonally a stronger quarter for ECR deposits. But the guide for ECR deposit cost expense was unchanged. Can 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 and you size up the magnitude of any more outflows you expect?

Yeah. So I will lead off, and Vishal can pick up where I may have left off a factor too. So let's talk about what we expect and what we have done. 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 is at the end of Q2. In Q3, we are 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. Okay? So Q3 is going to see $1.75 billion transition off the balance sheet, but yet still going to grow. it is our intent to grow $1 billion or about just about $1 billion for Q3. So that is the volume side. And then we also plan to take down Q4, I will say, by several hundred million dollars And all in for the year, you know, we are expecting to target $3 billion, and then we will wait. We will pause. We will look at what we plan to do in 2027. And we will 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 some and in Q4, from the deposit remixing optimization strategy. But in Q4, you are gonna 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. So all in, what we have given guidance is our total deposits here from the last guidance to this guidance remain flat, but we are able to absorb the 25 basis points of increase to the ECR deposit levels.

Yeah. I completely agree with that. that is exactly what is going on here, Tony. So in the fourth quarter, with the 25 bp rate hike, obviously, that is back weighted towards the end of the year. So the impact will be a little bit more muted for the full year. But that is how we are able to offset it. So the deposit cost would have gone up a little bit because of the rate hike, but due to the $3 billion optimization program that is bringing the number back down. I would also just add that the majority of the $3 billion we are targeting does hit that sort of ECR deposit balance.

And, you know, everyone talks about deposit costs. As if it is asymmetrical. I just wanna make sure you know that. Deposit costs go down, there is also a decline in net interest income because we are not putting those deposits out into invest Alright? So the net impact to the balance sheet is much smaller than calculating just what the deposit cost reduction is within operating expense.

Thank you. And then my follow-up, are there other parts of the balance sheet or the company you would 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. And could you end up with a smaller balance sheet once the optimization strategy is complete? Thank you.

Yeah. 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 And we said, that we had a very, very strong pipeline moving into Q2. And in fact, we did accomplish that by generating $1.8 billion of loan growth. We still see a very good loan origination pipeline. Alright? And what we did with taking down the loans by a billion dollars for the full year, that was the beginning of the optimization. We will continue to look at that going forward. But my sense is that the balance sheet will continue to rise over time. As it relates to optimizing the p and l or looking at our operating expenses, You know, this quarter, we ran 3-to-1. We have a very good efficiency ratio. We continue to look at that all the time. I think what we do not 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, the $100 billion threshold. We absorbed that, and our efficiency ratio has remained steady to actually drop. During that same time. I would say that is 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 David Shaw with Barclays. Jared, please go ahead.

Hi. Thanks. I guess, sticking with the deposit theme, when you look at growth that you are bringing on as you roll out that $3 billion but still see that good growth coming in, is it mostly is that mostly an interest bearing products then? And if so, what do you what do you bring that on at? Or if it is in ECR deposits, is that just better pricing on those?

Yeah. So I am gonna return to 1 of the things that we said during investor day. Which is we have got a number of deposit channels HOA, business escrow services, corporate trust, jurors banking, our digital asset group. Which all have basically lower cost of funds than more of our traditional business lines. And it is our expectation to grow those business lines or those deposit channels at a faster pace than our traditional channels. And by that, I also mean warehouse lending slash MSR. Group usually brings in somewhat of the higher price deposits.

Yeah. I think that is exactly what we are trying do here. We have got all these different deposit initiatives. The cost is very attractive to them. You know, when you think about each 1, the cost is a little bit different there, but that is really the plan going forward as they remix it. As those lower cost deposits come in, we are gonna reduce the higher cost deposits net, as Kenneth mentioned. We are gonna grow deposits in the third quarter, but we do think the cost is gonna continue to improve from here. I will give you, you know, just sort of where we are from a spot perspective so you can kind of see the early efforts here. it is not just the ECR deposits. it is across the bank. We are trying to see where there is potential reduction. So our cost of total deposits in the second quarter declined 3 basis points from $1.81 to $1.78. As we are coming out of June, we see that trending down 1 to 2 basis points. When you look at cost of interest bearing deposits, it was down about 1 basis point in the second quarter at 2.74% from 2.75% We are also exiting June with that being down about 1 to 2 basis points. So 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 2.5x as fast as the rest of the balance sheet. And they have also had a decline in their funding cost at a steeper rate than what the rest of the balance sheet has been. I think that is gonna continue into third and fourth quarter given the declines that we are going to continue to see in kind of mortgage warehouse deposits that Kenneth outlined And, again, so the mix is gonna be changing to lower-cost, more diversified, and faster growing sources than we have had in the past.

Okay. Alright. Thanks. Maybe shifting over to the fee income side. You know, I guess it feels like that guide seems pretty conservative just given even with the flat mortgage, just sort of given where we have 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.

Well, the guide was really lowered from several vantage points. First, the mortgage and that goes without saying the macro or environment, economic environment, geopolitical environment, is just has some natural headwinds there. And so 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 and then maybe I will I will turn this part over to Dale again because it is his business. But 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?

Yeah. You may recall we discussed Cambridge Analytica before, but we had the significant volume in terms of payments in the fourth quarter running into the first quarter. Thought it would be a little bit earlier. And 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 gonna come in because they are subject to motions. The-- you know, the federal court system, and a number of other variables that we do not control. But that said, we do see this picking up-- do not see it picking up immediately. But by 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. So I guess maybe can Good morning. This whole notion of not getting rewarded for performance slowing down loan growth to sort of lean into buybacks. 1, given your view of the stock and the value, should you be doing more in buybacks if, given just how compelling it is relative the performance and the return profile of the bank. And 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? Like, 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 2 to 3 months into next year around the growth versus buybacks and operationally what that means.

Okay. Thank you for the question. So let's take the first 1 on capital allocation. 1 of the factors that we have set up in our model is maintaining a 11% CET 1 ratio. Now many of our competitors will run between 10.2 and 10.5. Alright? And we are very aware of that. But for us, keeping the CET 1 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 am sure I am missing a couple off top of my head. But those 5 to 6 businesses, to grow at an outsized pace. So we are trying to optimize the balance sheet also through lower deposit cost. We need to keep that 11% CET 1 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. So 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. And I am gonna look for or look towards 2 things. 1, if we see continued spread compression at a point where we do not 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. And at a minimum, we hope that the 81 basis points that I already referenced will be available for us to use to bring to buy back more shares and or increase our CET 1 ratio and or also support greater growth if we have it if it is an opportunity for us for based upon our loan origination channel. So we kind of look at all 3 of those. Alright? And it is dynamic. And 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 delivering continue continuing to deliver value both in the short term and in the long term for shareholders. So, asked short question, I decided to give you a long answer on the first item. On the second 1 on operating efficiency, we are always focused on operating efficiency. And what we do there, to be honest, is we will trade off a little so since we have our operating efficiencies generally so much lower than the other banks, And, again, we absorb $25 million a year for the last couple of years. In terms of being LFI ready and compliant. 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 are always looking at as well. Even new loan channels or businesses. And so we continue to do that. Plus, we are putting money into our a bunch of AI initiatives inside of the and that is gonna cost some money. And you know, we have nothing to report on what the return on that is yet. Right now, we are seeing just benefits around the edges. But we are 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. And I guess maybe just tied to that, So back to in terms of getting the stock to reflect the performance, Part of it is credit quality. The other is think, Vishal mentioned cost of interest bearing deposits, $2.74, probably among the highest in the group. Is there a way so Dale mentioned some of the initiatives Is there a way where that deposit cost relative to where the Fed funds is can meaningfully decline would argue that is only part of the reason why your stock trades where it in terms of the valuation multiples given the initiative you have under way. So assuming the Fed does not do anything over the next year, could we see a mean 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, that is you hit 1 of the points there, and that is something we are clearly focused on. that is the whole point of the deposit optimization program. Know, as Kenneth has mentioned before, there is definitely these are long standing client relationships that go back a long time, and where this is definitely gonna involve some finesse in terms of how we are working through this. So it is hard to tell you right now sort of what the end state is What I would tell you is we are very focused on this. We are working to bring the cost down. We have gone across the bank. We are looking at some of the most expensive deposits that we have across the different business lines. We are trying to see where we could reprice it down with our 6 different deposit initiatives where we are having a lot of success there and a lot of the cost. Like, I will tell you, like, business escrow services, the cost is well less than 1%. Really, we are having traction getting these lower cost deposits in, but it naturally will take some time for us to do this. I would not expect anyone to this is gonna change overnight. But over the medium term, we think we will be able to move the needle here.

I just wanna add something else to that. Deposit cost, interest expense, they are just 1 or 2 of the inputs. To the output, which is PPNR growth. And our PPNR growth is rather robust. This quarter was 1.68% of average assets. And look at that PPNR growth and look what doing with it. Alright? This quarter, we also put an additional $14 million into the loan loss reserve. that is worth about 10 cents to us because we continue to move forward more with C&I loans. And the and deemphasize say, the residential loans. And so the PPNR is what we really focus on Net interest margin, should rise in the future with the activities that we are talking about. Adjusted net interest margin, that is where we move the deposits out of operating expense. Into revenue. That should increase over time. But the benefit here that will be to the benefit of a higher PPNR. 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 to 17%. Which, by the way, we were at 15.4% for this quarter.

Ebrahim, the only other thing I would add is also we are having a lot of traction on the treasury management side. As we are targeting, you know, more C&I loans and focused on our commercial clients. You actually see, like, a noticeable uptick so far in our treasury management fees, and we think that direction is gonna continue going forward.

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

Hello. Are you able to I got it. Could you give a little are you able to give a little bit more details around or quantify how much of the nonperforming loan decline we should expect in the second half of 26, given the progress you are making on the resolution and based on your updated guide, I mean, which was maintained for your NCO for 2026, But should we still forecast net charge off in the second half to be in that mid 20s to get into the midpoint. Okay.

So we have got several things going on. For the back half of the year. We said there were 6 credits that we needed to resolve to bring the NPLs down. 2 of which have been resolved by the end of the quarter. A third should be resolved in the next 1 to 10 days. We have got everything signed up, ready to go. We just gotta close. We have that is 3. The fourth 1 is being targeted and looks like right now it is on track. For the end of Q3. With the last 2 to happen in Q4. Alright? So that is the path. that is the track. We are still on the same track as we just disclosed on investor day. Could 1 of those credits move out of Q3 into Q4? Yeah. You bet. But the trend will be down between now and the end of the year. Alright? that is what we are focused on. And we also think that the charge off level or the dollars have peaked The charge off rate has peaked. Q1 and Q2. You could see they both remain flat. Actually, charge off rate was down a couple of basis points. And we see that with a gently sloping mark coming down In Q3 and Q4. I will turn to Lynn. Did I take everything away from you, Lynn? Or-- Lynne Herndon is our chief credit officer sitting in here today. You wanna add anything to that? No. No. Exactly what you said. High confidence in those 6 assets. Resolutions and continued focus on the rest. Bring that to bring that non accrual number down. Yeah. And I will also just say, I mean, it is it is 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 are not just a little better. We are significantly better. Yes. Our NPLs are a little bit higher than we would like. And we are working on them, bringing them down. But overall, the asset quality is rather firm here.

Yeah. Jared, it is Vishal here. I just wanna hit the second point of yours about the charge-off and what to think about for the back half of the year. So we are still reaffirming for the full year. We will be between the 25 to 35 bps And 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 are 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 are doing your modeling.

Got it. Thank you for all the color. And just making sure that I understood the comments earlier around your fee income guidance So your fee income guide of 13% to 17% year over year in 2026 does not contemplate any uptick, or outsized uptick in service charges in the fourth or later in 2026, and 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 Timothy R. Bruckner runs, sitting across from me, those should tick up somewhat. But it will not tick up to the extent that you have those big settlements that you had in Q1 and Q2 from Juris. So though the fee income total fee income will be down compared to Q1 and Q2. The other things are that are important to note. What was in Q1 and Q2? Well, we started this new program and we are excited by it. Which is this-- we are hedging the mortgage business, I will 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 of a hedge against the Amerihome business. So that is new that you will see going forward. The other thing in Q2 that you had that it is hard to predict when it happens in Q3 and Q4, is in our tech and innovation business, it is common or it is not uncommon, I should say, to get an exit fee or a warrant position attached to the credit that we are giving to some of these tech and innovation and when those companies have an exit event, and we have warrants attached to that, then the value we obviously receive the value. Okay? Sometimes we receive it right away. If it is an exit event, that has a bonus fee attached to it. Sometimes we have to wait a couple of months. If it is attached to exit, where we have to hold on to the stock, if something went public, But that was in Q2. Hard to predict when those things happen in Q3 and Q4. And so for us, we have very low expectations of that. Just as a general rule. And when the good news comes in, you know, we do the happy dance. When it comes in. So that is how we kind of project it out For Q3 and Q4. I would not project anything into 2027 for DST. You know, I am excited about the pipeline, and I have learned 1 thing working with Dale. The pipeline always looks great. But somehow lawyers get in the way of it. Motions get in the way of it, Judges may have different rulings or change their minds. And then everything just keeps moving back. Versus when I expected. So I have tempered my enthusiasm short term, or 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. 1 more on credit. Just wanted to about the ACL ratio. I know you guys are at 89 basis points, I think you guys have talked about it going to the low 90s. Any updated thoughts on potentially pushing that even further? Where does that ultimately settle? I know there is a remix in the CNI, which is driving that. But just any updated thoughts as to where that ratio lives going forward?

Hey, Casey. it is Vishal. Thanks for the question. I think you are spot on. I think the reserve is going to continue to move up incrementally from here. that is driven by we are reducing sort of 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. And when we look at the loan pipeline, that is where we are seeing a lot of the growth. I think what you are gonna see is a comparable increase that we had in the second quarter, which is the 2 bps. 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 sort of the mix of the loan portfolio going forward.

And, Casey, an interesting data point that we monitor The peer group banks probably brought down their loan allowance for loan loss reserve or ACL down about 3 or so basis points on average as a group. We have come up 2 basis points. So we have closed that gap by 5 basis points. And so as the other banks continue to bring that down, we are we are continuing to rise upward. And over time, the difference or the gap between where we stand and where they stand will be different. Other will be smaller. Other thing I just wanna bring to your attention, and we have 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? And the CLNs is an insurance policy whereby we have already received all the money in, it is sitting on our balance sheet, and we can use that money if there are losses against the residential book. So that is protecting our business. And so, you know, 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. And then just, Kenneth, question for you on the strategy pivot. It sounds like it is got some duration and you know, I think everyone understands the rationale. And I think shareholders like to move. But the what about what about the clients? You know, I have heard you talk about loan growth is not something that you know, you just switch on and off. It takes a while for pipelines to build. You know? And WAL has a long history of standing by clients when other banks kind of walk away. So I guess, how do you make this strategy pivot and not risk kind of long-term franchise value with the client base? Like, how quickly can you get back to running at the speed that we are accustomed to with Western lines?

Yeah. I think that question can be also be put to the deposit side as well as the loan side. I will start off, and I will turn it over to Timothy R. Bruckner. First, on the deposit side, I keep using the word finesse. Alright? And we are helping our clients transition their deposits to other banks. Who are willing to pay the price that we are paying or even a higher price to get those deposits. So we have gotta give them ample notice Right? We are not looking to push anything out of the bank. We are looking to transition with them. Alright? And keep the relationship as robust as it is, because there are other aspects to it. there is the loan origination aspect, There is operating accounts that come with it as well. And, of course, treasury management services. On the other side, on the loan side, you know, we have and maybe this is for Bruckner.

We have just so many different loan verticals that we can move on and off of. Timothy, you wanna take it from there? Yeah. I am glad this question was asked. We have an incredibly broad bank. We have 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 are allocating from nonrelationship lending in some cases into full relationship banking. So when we and 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 3 years, we put incredible product improvements into our treasury management complement. And we are now seeing the benefits of that. So there is no difficulty in relationship continuity. In fact, we are moving to relationship and we are deemphasizing some of the lending that we were doing that did not 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, just know on the NDFI loans, I know you show your exposure ex mortgage warehouse which is a safer asset class. But does your slower growth incorporate wanting to reduce the NDFI exposure, just given in totality, it is an outlier?

So some of that will be a natural outcome of that. So 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. So, yeah, you could see that. The other thing on the NDFI also is a reflection of what we are doing in warehouse lending and MSR lending. Which is a reflection of the mortgage market. So the mortgage market has pulled back somewhat, and therefore, the amount of credit that our warehouse funding clients need has dropped back as well.

The only thing I wanna reemphasize something Kenneth said before which is even though we have a pivot here, Right? So the loan growth, you know, we projected about 10% growth now coming to 8.5 percent for the year, and deposits were about 10 and a half, now about 8%. I just wanna reemphasize these growth rates are top core 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 to 300 billion from a growth perspective this year. So I think it is a very unique thing we are 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. So I think the combination of the 2, I think, is a very attractive opportunity moving forward.

And just to follow-up, just on the loan growth for the second half of the year. Just given the pipelines you are seeing now, the revisions you just made, Kenneth, I think you cautioned if you see continued spread compression and do not 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 a bit higher than in 4Q? Just any, comments you can provide on that?

So we grew on HFI loans $400 million in Q1, $1.8 billion in Q2, so that is 2.2. We said $5 billion. So, you know, you are looking at $1.2 billion to $1.3 billion in each of the next 2 quarters. Our pipelines indicate that is what we are going to achieve.

Your next question comes from the line of Gary Tenner with D.A. Davidson. Gary, please go ahead.

Thanks. Just had 1 follow-up question Hopefully, I did not miss it earlier. In terms of that credit that was disclosed in the 10 Q, I think at the Investor Day, y'all said that there was an updated appraisal progress. I do not know if you could share anything with us on that at this point.

So what I will share on the credit first of all, we have not gotten the appraisal link, so we just start with that. Okay? But what I will share on the credit is the borrower has brought the credit current. So that is good as of the end of June. They brought it current. They have indicated that they are gonna make the next 1 or 2 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. And so we think at this moment, based on all the facts that we know, that we have that property fairly valued on our on our balance sheet. And I do not wanna say I am optimistic about how this thing is going to be resolved, but I am pleased that the tenant that the borrower brought the credit current as of the end of June. and has indicated that they are gonna 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 are 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 and in just ECR-related deposits, it still seems kind of small. I guess, what is the end game here and the ability to further reduce deposits? Will that be driven by some of sales initiatives, Does the $100 billion getting lifted? And all kind of influence that trajectory? And then I am 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 say we should think about 2027 growth?

You have 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 have got a bit on average, the over a $100 billion to be considered into category 4, and the fact that we have maybe slowed down growth by a quarter or so, puts us into that next category next year. But the filing of a number of reports actually gets extended for months after that, actually, quarters after that. So it just gives us more time to be prepared that is sort of just a regulatory thing. But nothing that we are doing is designed purposely designed to bring down the growth so that we could stay under $100 billion. At this point, and I will come back and say, we are really finessing what we do here. And so you know, we are looking at taking down overall deposits in these in ECR land by about $3 billion by the end of the year. Alright? that is pretty considerable Alright? And, 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. And so at this point, $3 billion looks pretty good. Give you a little more guidance. As we get closer to 2027 on what we plan to do. A lot of that is gonna 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 is now 74 and change. Where it used to be 71 and change. We can bring that up a little bit. So I am not gonna commit to what the 2027 levels are gonna be at until we do a little bit more planning. We are you have to appreciate. We are in early stages of doing this. In terms of remixing. We mentioned it in on May 12. 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. And then just 1 last 1 on credit. You had said 2 of the 6 loans that were previously discussed, were already resolved. I think 1 of them was that $99 million life science loan. What was the other loan that is already been resolved?

Yeah. So, actually, the 6 loans that we mentioned in 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 1 as quickly as possible. But, the 6 that were mentioned there specifically do not include that. Again, 2 of them have already closed and are off the books. And we are working really, quickly on the 1 to 2 that we do expect to close in this quarter.

Okay. So was it that life science loan that was that was brought current? Is that the loan that was referred to?

No. The Life Science loan was brought current.

it is still an NPL. Yeah. And we have not forecasted, and at this point, are not forecasting that to roll out of NPLs. Yet we are still telling you that total NPLs will decline in the back half of the year. that is right.

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

Great. I thought you forgot about me, Kenneth. 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 have heard us say, 11% CET 1 is the target. The reason, you know, we are okay at the 7% level, TC to TA, we believe it is solid, I would, you know, point you to, Christopher, obviously, you know, 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, like, resi mortgages, low LTV, high FICO. So we feel good with the TCE where it is. I think depending on where rates go, AOCI, and how we kinda continue to optimize from here, you could see it go up. we feel good about the 7%.

Yeah. And the deposit optimization program, has a benefit of bringing up the TCE to TA. And so that will 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.

This concludes the question and answer session. I will now turn the call back to Kenneth A. Vecchione for closing remarks. Kenneth, please go ahead.

Thank you all for your time today. I hope we thoroughly answered all your questions about 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 this concludes today's call. Thank you all for attending. You may now disconnect.

Look forward, to having another call with you soon to talk about our Q3 results. Enjoy the rest of the day. Everyone.