Western Alliance Bancorporation (WAL) Earnings Call Transcript & Summary

Good day, everyone. Welcome to Western Alliance Bank Corporation 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 Bank Corporation's Second Quarter 1026 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. Now 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 Lynn will join us for Q&A. I am very pleased with Wester Line'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, 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 prior quarter. Ongoing resolution activity gives us confidence that nonaccrual 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 indication 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 3:1 margin, excluding last year's quarter 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 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 PPNR. 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 call 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 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 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. 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 2020. And 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 and was 6% above our adjusted EPS of $2.22 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 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 6. 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 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 19.5% 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 and higher yields. HFI loan yields decreased 3 basis points to $5.82 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 points to 274 from Q1. Overall liability funding cost declined 3 basis points from the prior quarter to [ $196 ], 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 3.53% 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 balances. 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. 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 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 101. 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 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 [indiscernible] 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. 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 TBV EPS accumulation have ranked in the top quartile relative to peers. We are also the leader in organic tenure 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 1.3% and 16% to 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% 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 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 are revising our net interest income growth forecast to 12% to 14% compared to our prior forecast of 11% to 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 noninterest income is now projected to grow between 13% and 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 Q4'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 million 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 -- 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.

[Operator Instructions] Your first question comes from the line of David Smith with Truist Securities.

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? Is about the opportunity set that you saw for good loan deposit originations being a little bit reduced? Or does it just reflect the fact that you think your stock is undervalued and you haven't getting rewarded for pre-leading growth output? And then 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?

Okay. A 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 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 to $300 billion asset peer group, would still post the highest organic year-over-year percentage loan growth, excluding any one -- any bank that did an acquisition. So we still outdistance peers, and we're 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 hit -- 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. So we can still be the top performing loan growth bank inside of the peer group, but 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? And in fact, some people would say you grow so quickly that hmm, you must have more -- you must be taking on more risk. And we explained during the Investor Day how we have this S-curve philosophy and how we kind of grow our businesses. So we don't 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 returning capital.

So 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?

Yes, we will do that. So we're going to 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'll also tell you that we'll wait for the Basel III rules to be finalized, but 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 the appropriate value of our company.

Your next question comes from the line of Anthony Elian from JPMorgan.

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 ESR deposit cost expense was unchanged. Ken, 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 could you size up the magnitude of any more outflows you expect?

Yes. So I'll lead off and Vishal can pick up where I may have left off a fact or 2. So 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-priced 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, okay? So Q3 is going to see $1.75 billion transition off the balance sheet, but yet, we're still going to grow -- it's our intent to grow $1 billion or just about $1 billion for Q3. So that's the volume side. And then we also plan to take down Q4, I'll say, by several hundred million dollars. And all in for the year, we're expecting to target $3 billion, and then we'll wait, we'll pause, we'll look at what we plan to do in 2027, and 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 3 and some -- and in Q4 from the deposit remixing optimization strategy. But 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. So all in, what we've given guidance is our total deposits from the last guidance to this guidance, remained flat, but we're able to absorb the 25 basis points of increase to the ECR deposit levels.

Yes. I completely agree with that. That's exactly what's going on here, Tony. So in the fourth quarter, with the 125 bp rate hike, obviously, that's back weighted towards the end of the year. So the impact will be a little bit more muted for the full year, but that's how we're 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'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.

And everyone talks about deposit costs as it is 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, right? So the net impact to the balance sheet is much smaller than calculating just what the deposit cost reduction is within operating expense.

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?

Yes. 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, all right? And 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. But 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 crossover into LFI status, a $100 billion threshold. We absorbed that and our efficiency ratio has remained steady to actually drop during that same time. So 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.

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 mostly -- is that mostly an interest-bearing products then? And if so, what do you bring that on at, or if it's in ECR deposits, is that just better pricing on those?

Yes. So 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, insurance 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 our warehouse lending/MSR group, which usually brings in somewhat of the higher-priced deposits.

Yes, 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. And it's not just the ECR deposits, it's across the bank. We're trying to see where there is potential reductions. So our cost of total deposits in the second quarter declined 3 basis points from 1.81 to 1.78. As we're coming out of June, we see that trending down 1 to 2 basis points. And when you look at cost of interest-bearing deposits was down about 1 basis points in the second quarter, 2.74 from 2.75. We're 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've also had a decline in their funding costs at a steeper rate and 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. And again, so 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. Maybe shifting over to the fee income side. I guess it feels like that, that guide seems pretty conservative just given even with the flat mortgage just sort of given where we what we've already seen in the first half. Where -- 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 environment, economic environment, geopolitical environment is -- just has some natural headwinds there. And so we will be pleased if we continue to mortgage income in Q3 and Q4 consistent with Q2. We hope to do better, but that's our baseline approach. In the first half of the year, what we saw was, and then maybe I'll turn this part over to Dale again because it's his business. But [indiscernible] banking has a component in there called DST. That's 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?

Yes. You may recall, I think we discussed Cambridge Analytica before, but we had a significant volume in terms of payments in the fourth quarter running into the first quarter, I thought it'd be a little bit earlier. And I would tell you, our Q 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're subject to motion, the federal court system and a number of other variables that we don't control. But that said, we do see this picking up. We don't see it picking up immediately. But maybe by fourth quarter and certainly into 2027, we have some big cases that we think are going to be coming through for ratio of distribution.

Your next question comes from the line of Ebrahim Poonawala from Bank of America.

So 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? 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?

Yes. Okay. Thank you for the question. So 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. Now many of our competitors will run between 10.2% million and 10.5%. right? And we're very aware of that. But for us, keeping the CET1 ratio 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, but those 5 to 6 businesses to grow at an outsized pace. So 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. 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 we're going to look for -- or look towards 2 things. One, if we see 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. And 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 for for -- based upon our loan origination channel. So we kind of look at all 3 of those, right? And it's 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 -- continuing to deliver value both in the short term and in the long term for shareholders. So 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 our 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, 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. And so we continue to do that. Plus, we're putting money into our -- a bunch of AI initiatives inside of the company. And that's going to cost some money. And we have nothing to report on what the return on that is yet. Right now, we're seeing just benefits around the edges. But we're trying to mobilize that inside of the company to make that a more significant event or production going forward -- for 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, I think, Vishal mentioned cost of interest-bearing deposits [ 274 ], probably among the highest in the group. Is there a way -- so Dave mentioned some of the initiatives. Is there a way where that deposit costs relative to where the Fed funds is can meaningfully decline? I would argue that that's probably part of the reason why your stock rates varied in terms of the valuation multiples given the initiatives you have underway. So 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?

Yes. Sure. I think, Ebrahim, that's -- you've hit 1 of the points there, and that's something we're clearly focused on. That's the whole point of the deposit optimization program. As Ken has mentioned before, there's definitely -- and these are long-standing client relationships that go back a long time and where this is definitely going to involve some fines in terms of how we're working through this. So 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 are trying to see where we could reprice it down with our 6 different deposit initiatives, where we're having a lot of success there. And a lot of the cost I'll tell you, like business escrow services, the cost is well less than 1%. And really, we are having traction getting these lower cost deposits in, but it naturally will take some time for us to do this. I wouldn't expect anyone to think this is going to change overnight. But 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 costs, interest expense, they're 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 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 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're talking about. Adjusted net interest margin, that's where we moved the deposits out of operating expense into revenue that should increase over time. But the benefit here -- well, 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'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 like a noticeable uptick so far in our treasury management fees, and we think that direction is going to continue going forward.

Your next question comes from the line of Janet Lee with TD Cowen.

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 2026, given the progress you're making on the resolution? And based on your updated guide, I mean, 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. So we've 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 week to 10 days. We've got everything signed up, ready to go. We just got to close. We have -- that's 3. The fourth one is being targeted and looks like right now, it's on track for the end of Q3, with the last 2 to happen in Q4, all right? So 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? Yes, you bet. But the trend will be down between now and the end of the year, all right? And that's what we're focused on. And 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 of basis points. And we see that with a gently sloping coming down in Q3 and Q4. And I'll look to Lynne, and I take everything away from you, Lynne. Lynne Herndon is our Chief Credit Officer sitting in here today. You want to add anything to?

Yes. exactly what you said, high confidence in those 6 assets resolutions and continued focus on the rest to bring that nonaccrual number down.