Western Alliance (NYSE:WAL) held its first-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.
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Access the full call at https://events.q4inc.com/attendee/403697580
Summary
Western Alliance Bancorp reported strong core business performance in Q1 2026 with earnings per share of $2.22, despite dealing with two previously disclosed fraud-related credits.
The company fully charged off a $126.4 million loan to Leucadia Asset Management and charged off $26 million related to the Cantor Group 5 loan, while taking actions to offset these impacts with $50.5 million in security sales gains.
Q1 deposit growth was exceptional at $5.6 billion, ahead of the pace for the $8 billion target for 2026, enabling the company to optimize deposit costs and support net interest margin, which increased to 3.54%.
Total loans grew by $903 million, with a focus on lower risk-adjusted weightings to maintain a CET1 ratio of 11%.
Management highlighted strong capital generation with a 13% year-over-year increase in tangible book value per share and an adjusted return on average tangible common equity of 14.2%.
The company’s future outlook includes maintaining a CET1 ratio of 11%, projecting net interest income growth towards the upper end of an 11-14% range, and continuing to optimize deposit costs.
Western Alliance Bancorp plans to host its inaugural Investor Day on May 12th to provide insights into its growth strategy and operational performance.
Full Transcript
OPERATOR
Good day everyone. Welcome to Western Alliance Bank Corporation’s first quarter 2026 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 Pontlik, Director of Investor Relations and Corporate Development. Please go ahead.
Miles Pontlik (Director of Investor Relations and Corporate Development)
Thank you and welcome to Western Alliance Bank’s first quarter 2026 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, and Vishal Adnani, Chief Financial Officer. Before I hand the call over to Ken, please note that today’s presentation contains forward-looking statements which are subject to risks, uncertainties and assumptions. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company’s SEC filings, including the Form 8-K filed yesterday, which are available on the Company’s website. Now for opening remarks, I’d like to turn the call over to Ken Vecchione. Good afternoon everyone. I’ll make some brief comments about our first quarter 2026 performance before handing the call over to Vishal to discuss our financial results and drivers in more detail. After reviewing our revised 2026 outlook, Daryl and Tim will join us for Q and A. As usual, Western Alliance financial results in the first quarter reflect strong core business performance alongside decisive actions taken on two previously disclosed fraud related credits. Adjusting for these actions, we generated earnings per share of $2.22, which is consistent with where we are tracking on a reported basis prior to the charge off announced on March 6. Importantly, these matters are now largely behind us. By removing these lingering distractions, we can refocus attention on the trajectory of our underlying operating performance. I will briefly review these related charge offs and mitigating actions before discussing our core results. As previously announced, we fully charged off the remaining $126.4 million balance of the loan to a fund of Leucadia Asset Management (LAM). We initiated legal action at that time of the announcement and are actively pursuing recovery through those proceedings. Given the nature of this process, the outcome may take time to resolve and we will not provide further commentary while the matter is ongoing. As discussed, last month we executed security sales which generated $50.5 million of pre tax gains. These gains, together with identified expense savings and other revenue initiatives substantially offset the impact of this charge. We are also providing an update on the Cantor Group 5 loan. We believe the $29.6 million specific reserve established in Q3 has been validated by by current as is appraisal values across all the collateral properties as well as our updated lien positions. We believe recoveries on this loan will be realized in the future from multiple sources including springing guarantees from ultra high net worth guarantors and a mortgage fraud policy. Due to the complexity and potential duration of the resolution process, we charged off $26 million of this loan during the quarter quarter. Turning to Q1 results, deposit growth was exceptional at $5.6 billion on a quarterly basis, putting us ahead of pace to reaching our $8 billion deposit growth target for 2026. This outperformance positions us to accelerate deposit optimization programs which should further reduce funding costs and support net interest margin even absent interest rate cuts this year. In the first quarter, interest bearing deposit costs declined 21 basis points, contributing to a 3 basis point quarterly increase in net interest margin to 3.54%. Total loans grew $903 million this quarter split nearly evenly between the HFI and HFS portfolios. We grew HFI loans 3.2% on a linked quarter annualized basis and 8% compared to the prior year. We deliberately grew the HFS portfolio with lower risk adjusted weighting so we could repurchase shares and remain at our target CET1 ratio of 11%. This strategy afforded us the opportunity to delay loan growth into Q2 and reevaluate the credit macroeconomic and geopolitical environments. We have not backed away from our $6 billion target. Overall core asset quality remained steady as net charge offs for the quarter excluding fraud related credits were marginally higher than the upper end of guidance. We believe the portfolio is past peak stress, particularly within office CRE as we’ve seen classified loans increasingly migrate towards resolution instead of further deterioration. Classified assets to total assets declined 9 basis points from the prior quarter to 1.08%. We are positioning non performing loans to decline in the back half of the year with several credits to be resolved by Q3. We continue to manage our capital dynamically and in an evolving macro environment. During the quarter we repurchased 700,000 shares at a weighted average price in the low 70s, reflecting our conviction in the intrinsic value of the franchise. Strong capital generation drove an adjusted return on average assets and return on average tangible common equity of 1.07% and 14.2% respectively. This supported a stable CET1 ratio of 11% and ACL ratio of 87 basis points while compounding tangible book value per share. 13% year over year. Overall, we delivered strong balance sheet growth, net interest margin expansion and sustained core earnings momentum underpinned by healthy risk adjusted PP and R, while also opportunistically defending the stock through accelerated share repurchases. Western Alliance continues to benefit from a highly diversified franchise, differentiated marketing positioning and deep integrated relationships with our clients that enable us to perform across a wide range of economic scenarios at this time. Vishal will now walk you through our results in more detail.
Ken Vecchione
Thanks, Ken in the bottom right corner of slide 3 we highlight two earnings adjustments this quarter. The execution of a series of security sales generated aggregate pre tax gains of 50.5 million. These gains partially offset the impact of the LAM provision and together reduce net income by 62.1 million or $0.57 per share on a net basis. As a result, my comments on our adjusted performance exclude these items as we do not view them as reflective of the ongoing run rate outlook of the business. Turning to the income statement on slide four, net interest income of 766 million was in line with the fourth quarter and increased approximately 18% year over year. Lower funding costs driven by declines in interest bearing deposit costs helped offset pressure from lower loan yields while higher average earning assets also supported NII stability. Non interest income increased 18% quarter over quarter to approximately 253 million. Excluding securities gains realized in both Q1 and Q4, non interest income would have declined modestly by $5 million largely due to lower mortgage activity. Service charges and fees increased 15 million sequentially primarily reflecting strong performance in our juris banking business with the corresponding but smaller offset flowing through other non interest expense. Mortgage banking revenue was stable year over year but declined 18 million from the prior quarter. Importantly, fundamentals across the mortgage business continue to improve with gain on sale margin expanding 18 basis points year over year to 37 basis points and loan production volume increasing 18%. Q1 mortgage earnings were impacted by the sharp backup in interest rates highlighted by the 10 year treasury yield rising 33 basis points in March. Elevated rate volatility during the month also created modest headwinds for hedging performance and servicing income. Early April results indicate mortgage banking is reverting to levels seen in January and February before rates backed up. Non interest expense increased about 22 million from the prior quarter to 574 million. Excluding the FDIC special assessment rebate recognized last quarter, non interest expense only increased about 15 million. The increase reflects higher compensation expenses and related to annual merit increases and other typical Q1 costs. Deposit costs declined from a full quarter impact of two fed fund rate cuts in Q4. As mentioned earlier, the increase in other non interest expense was partly driven by higher jurisprus banking fee revenue and related expenses. Adjusted pre Provision net revenue was 394 million up 42% from the same quarter a year ago. Provision expense was 87 million excluding the Lam charge off cited earlier. Adjusted net income available to common stockholders was 241 million representing a meaningful increase from a year ago and generated adjusted EPS of $2.22 up 24% compared to reported EPS in the prior year period. Now turning to the balance sheet on Slide 5, cash and securities rose meaningfully toward quarter end driven by strong deposit growth. As we execute our deposit optimization strategy, we expect the relative size of cash and securities to total assets to return to more normalized levels seen in Q4. While our loan to deposit ratio returns to the mid-70s total loans increased 903 million from the prior quarter. Diversified and meaningful contributions from mortgage warehouse, Juris, HOA and regional banking drove 5.6 billion of quarterly deposit growth. We view this outsized growth as providing flexibility to further optimize deposit funding costs throughout the year. As deposit growth approaches our 2026 target of 8 billion, our balance sheet expanded in total by 6.1 billion from year end to just shy of 99 billion in assets. The slight decline in total equity resulted from more active share repurchases and and a rate driven change in our AOCI position. Mitigating the impact from continued organic earnings growth. We opportunistically repurchased 50 million in shares during the quarter bringing program to date repurchases to 1.6 million shares for 1:20.4 million at an average price of $76.55. Looking closer at loan growth trends on slide 6, Held for Investment (HFI) loan growth continues to be powered by CNI loan categories. Nearly 2/3 of quarterly Held for Investment (HFI) growth came from CNI with the remainder concentrated in residential loans. From a business line perspective, regional banking was the primary driver of quarterly growth led by Homebuilder Finance with solid contributions from innovation banking in market, commercial banking and hotel franchise finance. Now flipping to slide 7, robust deposit growth of 5.6 billion billion was the standout of our balance sheet. Growth in Q1. Strong growth in mortgage warehouse deposits and solid growth in specialty deposit channels like Jurist and HOA put us well ahead of plan for the year. Average deposits grew 1.8 billion or 3.8 billion less than period end deposit growth. Turning to our net interest drivers on Slide 8, interest bearing deposit costs declined 21 basis points from sustained cost reduction despite growth in average balances. Overall liability funding costs moved 12 basis points lower from Q4, mostly from lower deposit costs as well as reduced borrowing costs stemming from less reliance on short term FHLB borrowings. On the asset side, the securities yield rose 5 basis points from the prior quarter to 4 spot 59 due to a shorter day count. Despite the elevated level of security sales during the quarter, we were able to reinvest at slightly higher rates due to the recent backup in rates. The Held for Investment (HFI) loan yield compressed 16 basis points following a full quarter impact of rate cuts made in late October and December. Looking at slide 9, net interest income was stable versus Q4 at $766 million supported by $1.1 billion of average earning asset growth and lower funding costs. Earning asset growth was driven by CNI loan growth as well as higher held for sale balances. Net interest margin expanded three basis points sequentially to 354 reflecting meaningful reductions in funding costs. The interest cost of earning assets declined 12 basis points while the earning asset yield compressed only 8 basis points with rounding accounting for the net 3 basis point improvement in margin. Strong backloaded deposit momentum increased liquidity toward quarter end as evidenced by the significantly higher period and cash balance despite a slight decline in average balances during the quarter. Turning to Slide 10, the efficiency ratio of 56% and adjusted efficiency ratio of 48% both improved by approximately 8 percentage points year over year. We continue to realize strong operating leverage as year over year revenue growth outpaced non interest expense growth by approximately three times. As discussed earlier, non interest expense increased 22 million in Q1 or approximately 15 million when adjusting for the FDIC special assessment rebate recorded in Q4. The increase was primarily driven by seasonally elevated compensation costs as well as incremental expenses incurred to support higher JURIS banking fee revenue. Deposit costs declined 8 million due to lower rates, although higher balances driven by momentum in HOA and JURIS partially offset the benefit from the rate reductions on Slide 11, you will see we remain asset sensitive on a net interest income basis when factoring in the potential impact on earnings from mortgage banking revenue growth and also reduced deposit fees. Our modeling now indicates we are slightly liability sensitive on an earnings at risk base basis in a down 100 basis point ramp scenario. In this scenario, earnings are now expected to rise 1.7% mostly from improved forecasts in mortgage banking. On slide 12 we highlight several metrics demonstrating core asset quality remains stable excluding fraud related charge offs. Classified assets as a percentage of total assets continue to improve declining 36 basis points year over year and to 108. Criticized assets were largely stable sequentially increasing modestly by 60 million to approximately 1.47 billion, while special mentioned loans increased 78 million quarter over quarter. The change was not thematic and the balance remains $57 million below first quarter 2025 levels. Non performing loans in Oreo declined 7 basis points quarter over quarter as a percentage of total assets. Now let’s move to Slide 13 to review our allowance and coverage ratios. Provision expense was 87 million excluding the LAM charge off and replenished other net charge offs as well as supporting incremental loan growth primarily in CNI. Our allowance for loan losses remained constant at 461 million or 78 basis points of funded Held for Investment (HFI) loans. The total loan ACL to funded loans ratio also remained constant at 87 basis points. Over the medium term, we expect the allowance for loan losses to Trend into the low 80 basis point range, reflecting a higher proportion of CNI loan growth within the portfolio. Our total ACL still fully covers non performing loans, shifting higher to 105% coverage at the end of Q1 compared to 102% a quarter ago. Looking at capital on Slide 14, our tangible common equity to tangible assets ratio declined approximately 50 basis points from year end to 6.8% due to approximately 6 billion in asset growth, increased share repurchases of 50 million and a rate driven change in our AOCI position. We believe our active buybacks in Q1 were prudent uses of capital and given the modest difference between where our stock was trading in early March and our tangible book value per share. Nevertheless, our CET1 (Common Equity Tier 1) ratio remained at our targeted level of 11%. Turning to slide 15, tangible book value per share increased 13% year over year and has grown at an 18% CAGR since the end of 2015. The gap between historical tangible book value accumulation and peers stands at four times. Western alliance has been a consistent leader in creating shareholder value over the medium and long term. On slide 16 we …
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