ウエスタン・アライアンス（WAL）2026年第3四半期決算説明会：与信改善、業績見通しを改定

ウエスタン・アライアンス・バンクの2026年第3四半期決算説明会は、信用質の改善、預金コストの削減、および株主還元の拡大に焦点を当てました。同行はまた、拡大された預金最適化プログラムとより緩やかなバランスシート成長を反映し、通期見通しを修正しました。

主なポイント

• 純利益は前年同期比6%増の2億7,700万ドルとなり、1株当たり利益（EPS）は7.5%増の2.45ドルに上昇しました。貸倒引当金控除前純利益（PPNR）は6%増の4億1,900万ドルに増加しました。
• 不稼働貸出金は前四半期比で14%（7,700万ドル）減少の4億8,500万ドルとなりました。不稼働貸出金に対する総貸出金引当金（ACL）カバー率は、第2四半期の96%から118%に上昇しました。
• ウエスタン・アライアンスは第3四半期中に30億ドルの高コストなECR（預金クレジット）関連預金を移行させましたが、総預金残高は818億ドルと概ね安定しており、第2四半期からの減少はわずか1億1,900万ドルにとどまりました。
• 商用バンキング預金は18億ドル増加して総預金の34%に達しました。預金コストは1,400万ドル減少し、調整後純利ざや（NIM）の10ベーシスポイント拡大を支えました。
• 同行は当四半期中に約115万株に相当する9,210万ドルの自社株買いを実施しました。経営陣は2026年下半期の自社株買い目標1億5,000万ドルの達成に向けて順調に進展しています。
• 経営陣は通期の預金最適化目標を少なくとも50億ドルに引き上げましたが、予想預金成長率を35億ドル〜40億ドルに、純金利収入の成長率を11%〜12%にそれぞれ下方修正しました。

主要財務データ

業務および業績

預金最適化による構造的資金調達コストの削減

ウエスタン・アライアンスは過去2四半期で45億ドルの預金リミックスを完了し、当初目標を15億ドル上回り、計画より1四半期早く達成しました。第4四半期にはさらに5億ドルの移行が見込まれています。

第3四半期中に商用バンキング預金が18億ドル増加し、計画していた高コスト預金の流出の大部分を相殺しました。ECRを除いた無利息預金は、無利息預金全体の39%を占め、第1四半期末の33%から上昇しました。

期末借入金は前四半期比10%減の56億ドルとなりました。しかし、ECR関連残高から有利息の商用預金へのシフトに伴い、有利息預金コストは2ベーシスポイント上昇して2.76%となりました。

商用貸出が貸出金の増加を牽引

当四半期中、HFI貸出金は6億ドル増加しました。商工業（C&I）貸出残高は約3億5,000万ドル増加し、過去1年間における同行のHFI貸出金増加額（49億ドル）の約90%を占めました。

商業用不動産（CRE）事業の一部、地域バンキング、ホテル・フランチャイズ・ファイナンス、テクノロジー＆イノベーション、MSR融資、ノート・ファイナンスからも成長が見られました。これは、金利上昇に伴い住宅ローン取引が減少し、住宅ローン・ウェアハウスおよびMSR残高が約3億5,000万ドル減少したことで一部相殺されました。

HFI貸出金対預金比率は約1ポイント上昇して75%となり、経営陣の中期目標である77%〜80%に向けて進展しました。

手数料収入の増加が住宅ローン業務の圧力を相殺

商用バンキングの手数料収入は前四半期比で600万ドル、前年同期比で2,600万ドル増加しました。有価証券売却益の増加と相まって、住宅ローン関連収入の減少を補って余りある成果となりました。

住宅ローン関連収入は第2四半期から500万ドル減少して8,000万ドルとなりました。住宅ローン実行額は4%減少、金利ロック取扱高は前年同期比で14%減少しましたが、売却益マージンは27ベーシスポイントで安定を維持しました。経営陣は、プライベートブランドの証券化が融資実行額やマージンへの圧力を一部緩和したと述べています。

信用質は改善傾向が継続

要管理資産は3,700万ドル減少して11億ドル未満となりました。ウエスタン・アライアンスは、5月の投資家説明会で特定した6件の融資のうちさらに2件を解決し、残る2件も年内に解決する見込みです。

利息を計上している要管理貸出金は4億4,100万ドルと概ね横ばいでしたが、早期の特定と解決を図るべく融資項目を分類移行したため、要注意貸出金は8,100万ドル増加しました。所有不動産（OREO）は3,900万ドル増加の1億6,500万ドルとなりました。

経営陣は、現在ポートフォリオ内で特段懸念が高まっている集中分野は見られないと述べました。同行は原則として、承認前に市場金利より150ベーシスポイント高い金利条件で融資のストレステストを実施しています。

経営陣の見通し（ガイダンス）

予測では12月に25ベーシスポイントの利上げが行われることを前提としています。経営陣は、住宅ローン関連の預金が流出し、よりコストの高い借入金に置き換わるため、第4四半期の純利ざやが通常見られる季節的逆風により3〜4ベーシスポイント低下すると予想しています。金額ベースの純金利収入は前四半期比で横ばいから小幅増を見込んでおり、経営陣は約1%〜2%の成長可能性があることを示唆しています。

経営陣は第4四半期に不稼働貸出金がさらに減少すると予想しており、貸倒損失純額は第3四半期の水準を超えず、一段の改善の可能性もあると述べました。また、貸出ポートフォリオがC&Iにシフトするにつれて引当金比率は上昇し続け、2027年まで四半期ごとに約2ベーシスポイントの引当金増加を計画前提としています。

リスクおよび注視事項

• 高金利の継続が、住宅ローン需要、ウェアハウス・ラインの利用率、および住宅ローン関連収入に圧力をかけています。
• 第4四半期における季節的な預金流出により、追加の市場調達が必要となり、純利ざやが縮小する可能性があります。
• 9月の利上げを受け、経営陣は第4四半期に有利息預金コストが約10〜15ベーシスポイント上昇すると予想しています。
• 不稼働貸出金や要管理資産が改善した一方で、要注意貸出金および所有不動産（OREO）は当四半期中に増加しました。
• 貸出の金利競合は依然として激しい状態です。経営陣は、現在の環境下では融資単独でのアプローチは困難であるとし、預金や手数料を含めた総合的な取引収益性を強調しています。
• 今後の自社株買いは、バーゼルIIIの最終規制案、CET1比率を11%付近に維持するという同行の目標、および総資産に対する有形普通株主資本の比率を高めるという目標に一部依存します。

アナリスト質疑応答のハイライト

預金最適化後の資金調達： 経営陣は、HLA、コーポレート・トラスト、ビジネス・エスクロー・サービスなどの低コストな専門チャネルが、従来のチャネルよりも迅速に拡大すると見込んでいます。また、貸出増加がより緩やかになることで、必要とされる新規預金額も減少する見込みです。

正常化後の信用コスト： 経営陣は、特定された残りの不稼働債権が解決されれば、正常化後の貸倒損失純額は25〜35ベーシスポイントの範囲内にとどまることを再確認しました。

費用の推移： 第3四半期の支出には、預金チャネルの人員採用やAIイニシアチブへの投資が含まれています。また、同行はテクノロジーコンサルタントを正社員に置き換えており、これに伴うコスト削減効果は2027年年初に現れる見込みです。経営陣は、第3四半期のECRを除く費用を新たなコストベースと見なすべきではなく、第4四半期には減少すると予想しています。

預金ベータ： 経営陣は、今後1年間の総累積ベータを約65%と試算しています。見込まれるベータは、ECRを除く流動性預金で55%〜60%、ECR関連残高で70%〜75%となっています。

中期的な収益性： ウエスタン・アライアンスは、第3四半期の15.5%に対し、今後約2年から2年半にかけて16%〜17%の持続可能なROATCEを達成することを引き続き目標としています。

株主還元： 経営陣は、自社株買いと、約11%のCET1目標、格付け改善の可能性、および総有形資産に対する有形普通株主資本比率を同業他社の水準である7.6%〜7.8%に近づけるという長期目標とのバランスを取る意向です。

決算説明会文字起こし全文

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決算説明会の完全なトランスクリプト

経営陣による説明

Unknown Executive

Thank you. Welcome to Western Alliance Bank's Third Quarter 2026 Conference Call. 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.

Kenneth Vecchione

Good afternoon, everyone. I'll make some brief comments about our third 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, Dale, Tim and Lynne will join us for Q&A as usual. Western Alliance entered the quarter with 3 strategic objectives front and center, improve asset quality, lower deposit costs and accelerated share repurchases.

We exited the quarter having made significant strides against each of these goals, which I'm pleased to update you on today. Asset quality improved meaningfully in the third quarter. Nonaccrual loans declined 14% or $77 million from the prior quarter to $485 million exceeding the expectations outlined in our guidance update last month.

We successfully resolved 2 additional credits from the 6 identified at May's Investor Day and the remaining 2 are on a glide path towards resolution before year-end. Net charge-offs also improved, declining $9 million from the prior quarter to $46 million. Net charge-offs decreased 7 basis points to 30 basis points, combined with a 4 basis point increase in the allowance to funded HFI loans to 93 basis points the reduction in nonaccruals drove ACL coverage of nonaccrual loans sharply higher, increasing 22 percentage points to 118%.

Our second strategic objective was the intentional transition of higher-cost deposits off the balance sheet to lower our overall funding costs and improve balance sheet profitability. Here, too, we made substantial progress. During the quarter, we transitioned $3 billion of higher cost ECR-related deposits while keeping total deposits essentially flat compared with the prior quarter.

This was a Herculean achievement supported by a strong quarter of commercial banking deposit growth of $1.8 billion. These actions reduced deposit costs by $14 million from Q2 and supported a 10 basis point quarterly expansion in adjusted net interest margin. Importantly, this decline in deposit costs represents a positive departure from prior third quarters when funding costs have typically peaked.

We remain well positioned for additional deposit costs in Q4 with deposit cost reductions in Q4 as we realized the full quarter benefit of these lower balances. We exceeded our original deposit optimization goal by $1.5 billion, with $4.5 billion of deposits remixed over the prior 2 quarters, 1 quarter earlier than expected.

With another $500 million expected to transition in Q4, this initiative is nearly complete. Finally, our more balanced growth profile has enhanced our flexibility to prioritize share repurchases while maintaining robust capital levels. In Q3, we repurchased shares of $92 million against our $150 million target for the second half of 2026, representing approximately 1.15 million shares or roughly 1% of shares outstanding.

We have continued to repurchase shares at attractive valuations into Q4 and remain on track to achieve our second half repurchase objectives. Taken together, these accomplishments support sustainable risk-adjusted PPNR growth and increasing profitability, keeping us on track to achieve the medium-term goals outlined at Investor Day.

I'll hand the call over to Vishal to review our Q3 financial results.

Vishal Idnani

Thanks, Ken. Western Alliance delivered another quarter of strong and steady financial performance with continued earnings growth, improving credit trends and strong reserve coverage alongside increased capital returns. PPNR grew 6% year-over-year to $419 million, while EPS increased 7.5% to $2.45.

Net interest income grew 8% or $57 million, driven by continued HFI loan growth while noninterest income increased 10% or $19 million, reflecting continued momentum in commercial banking fee income, partially offset by rate-driven headwinds in mortgage banking.

Net revenue increased $76 million over the past year compared with approximately $51 million of growth in noninterest expense and supported continued growth in pre-provision net revenue.

Credit trends also improved. Provision expense remained essentially flat year-over-year, while nonaccrual loans declined to 79 basis points of funded HFI loans and reserve coverage increased to 118%.

This helped drive net income of $277 million, up 6% from a year ago. And while our strategic actions have moderated balance sheet growth over the past 2 quarters, profitability has continued to improve.

ROATCE increased 20 basis points from Q2 to 15.5%.

Overall, we are encouraged by our financial trajectory. The actions we've taken over the past 2 quarters, many of which we outlined at Investor Day in May are strengthening the durability of our earnings and positioning us well as we move forward.

Turning to the income statement on Slide 5. Net interest income of $808 million increased 5.4% from the prior quarter on a linked quarter annualized basis benefiting from $1.5 billion of growth in average HFI loans. This more than offset lower average earning assets as our deposit optimization actions reduced excess liquidity and continued to improve balance sheet profitability.

Noninterest income increased $8 million quarter-over-quarter or 4% to $207 million. Commercial banking fee momentum continued to build, increasing $6 million sequentially and $26 million year-over-year. That growth, along with higher securities gains more than offset lower mortgage banking revenue.

Mortgage banking revenue of $80 million declined only $5 million from the prior quarter despite a challenging rate environment. Mortgage production decreased 4% and rate lock volume decreased 14% year-over-year, while gain on sale margins remained stable at 27 basis points.

Our use of private label securitizations helped support secondary market revenue, partially offsetting rate-driven pressure on origination volumes and margins. Noninterest expense decreased $12 million from Q2 to $595 million. As Ken mentioned, we were pleased with the $14 million decrease in deposit costs reflecting the $4.5 billion of deposit optimization completed to date with another $500 million expected to transition in Q4.

This quarterly decline marks a welcome shift from prior third quarters when we have typically experienced an increase in deposit costs as balances rebuild during the first half of the year. We expect a further reduction in deposit costs in the fourth quarter.

Taken together, the quarter reflects continued progress in shifting the balance sheet toward higher returning assets building our commercial banking fee businesses and reducing the structural cost of our deposit base.

Turning to the balance sheet on Slide 6. Securities and cash declined approximately $1 billion from Q2 to $25.6 billion, reflecting deployment into loans and the impact of our deposit optimization strategy. Securities and cash represented 26% of assets, while our HFI loan-to-deposit ratio increased approximately 1 percentage point to 75%, moving closer to our medium-term target of 77% to 80%.

HFI loans grew $600 million during the quarter, with more than half of the growth coming from C&I and a solid contribution from select CRE businesses. Total deposits declined by only $119 million despite more than $3 billion of deposit optimization during the quarter.

Commercial banking deposits helped to offset those actions, growing $1.8 billion in Q3 and increasing to 34% of total deposits. Another benefit of our optimization efforts was a 10% quarterly decline in period-end borrowings to $5.6 billion, which further supported quarterly improvements in both the adjusted and reported NIM.

Overall, total assets decreased $629 million from Q2 to $98.1 billion, while total equity decreased $188 million, primarily reflecting the change in AOCI from higher interest rates and our share repurchases. Tangible book value per share decreased $1.02 sequentially to [ 62.22 ] yet remained up more than 6% year-over-year. Looking at loan growth on Slide 7.

HFI loans grew $600 million in Q3 with continued strength across our commercial businesses. C&I loans grew nearly $350 million in the quarter and have driven approximately 90% of our $4.9 billion of HFI loan growth over the past year. We also saw solid growth in select CRE businesses. Commercial loan growth was partially offset by an approximately $350 million decline in mortgage warehouse and MSR balances as softer mortgage demand reduced line utilization.

We remain focused on moving our HFI loan-to-deposit ratio toward our 77% to 80% medium-term target and continue to expect commercial loan growth to lead us towards that goal. Turning to deposits on Slide 8. Commercial Banking deposits grew $1.8 billion in the quarter, increasing to 34% of our deposit base from 31% last quarter.

This strong commercial banking growth offset most of the purposeful reduction in higher cost deposits, resulting in total deposits of $81.8 billion, essentially flat from Q2. Our remixing efforts were concentrated in noninterest-bearing deposits with associated ECRs.

As a result, noninterest-bearing deposits with no ECRs now represent 39% of total noninterest-bearing deposits compared to 33% at the end of Q1 before we began our optimization efforts. Turning to our net interest drivers on Slide 9. Securities yields decreased 2 basis points from Q2 to [ 462 ] reflecting a modest portfolio mix shift while HFI loan yields increased 2 basis points to 5.84% due to higher commercial loan yields.

The FOMC rate hike occurred just 2 weeks before quarter end, so the benefit was not fully reflected in Q3 earning asset yields. The cost of interest-bearing deposits increased 2 basis points to [ 276 ] reflecting the active remix of our deposit base away from ECR-related deposits and into interest-bearing commercial deposits.

Interest-bearing deposits increased approximately $2 billion during the quarter as part of that remix. Overall, liability funding cost increased 6 basis points to 202 as borrowing and debt costs increased, partially reflecting the full quarter impact of the subordinated debt rate reset late in Q2.

Looking at Slide 10. Net interest income grew $11 million from Q2 or 5% annualized to $808 million, primarily reflecting higher average HFI loan balances. Net interest margin expanded 4 basis points to 357 as average earning asset yields increased 10 basis points, partially offset by a 6 basis point increase in funding costs.

Average earning assets declined $785 million from Q2, primarily reflecting a $1.7 billion reduction in average cash as our deposit optimization efforts reduced excess liquidity while average HFI loans increased $1.5 billion.

Turning to Slide 11. The adjusted efficiency ratio increased 110 basis points from Q2 to 50%. As mentioned earlier, noninterest expense increased approximately $12 million in Q3 as higher salaries and employee benefits more than offset a $14 million reduction in deposit costs. That reduction reflected lower average ECR-related deposit balances of $30.1 billion, down from $31.6 billion in Q2.

Higher salaries and employee benefits reflected an extra day in the quarter and targeted investments to support future growth and efficiency. These investments included additional hiring to support our lower-cost specialized deposit channels and new AI initiatives as well as converting technology consultants to full-time employees, which we expect will reduce contractor expense going forward.

On a sequential basis, net revenue and noninterest expense each grew approximately 2%, resulting in an essentially flat reported efficiency ratio of 58%. On Slide 12, we remain slightly asset sensitive on a net interest income basis. Of total earning assets, 66% are variable with 52 -- 52% repricing to so far, while variable liabilities represent 86% of total earning assets.

Nonmaturity deposit rates, including ECRs are estimated to have a 65% beta over the next 12 months. When we incorporate the rate sensitivity of ECR-related deposit costs and mortgage banking revenue, that asset sensitivity largely moderates and our modeling indicates a neutral position on an earnings at risk basis.

Turning to Slide 13. I'll echo Ken's comments and highlight the continued improvement in our key asset quality metrics. Classified assets declined $37 million to less than $1.1 billion, largely reflecting 2 additional nonaccrual resolutions previously identified with 2 more expected to resolve this quarter.

Nonaccrual loans declined $77 million or 14% from Q2 to $485 million, reducing the ratio to funded HFI loans by 13 basis points to 79 basis points. Classified accruing loans were essentially flat at $441 million or 72 basis points of funded loans, while OREO increased $39 million to $165 million.

Special mention loans increased $81 million as we continued to actively migrate loans to special mention in order to facilitate early identification, elevation and resolution. As shown in the appendix, Western Alliance continues to compare favorably with our $50 billion to $350 billion asset peers across special mentioned classified and criticized loan categories, both currently and historically.

The improvement in nonaccrual loans, together with stable classified accruing balances kept overall criticized loans relatively flat at $1.3 billion. On Slide 14, provision expense was $80 million, replenishing net charge-offs of $46 million and supporting incremental loan growth. The resulting allowance for loan losses increased 3 basis points to 83 of funded HFI loans, while our total loan ACL ratio increased 4 basis points to 93 bps.

Excluding loans covered by credit linked notes, the total loan ACL to funded loans ratio increased 6 basis points to $1.07 compared with 101 last quarter. Based on our C&I loan growth trends, we expect the allowance to continue to build in the fourth quarter.

Continued execution on nonaccrual resolutions together with the increase in reserves drove total loan ACL coverage of nonaccrual loans to 118%, up from 96% in Q2. Looking at capital on Slide 15. Our tangible common equity to tangible assets ratio decreased 10 basis points from Q2 to 6.9%, primarily reflecting the change in AOCI from higher interest rates and accelerated share repurchases, partially offset by earnings growth and the reduction in our balance sheet from the deposit optimization.

I'd also note that the vast majority of our securities are classified as available for sale. Our CET1 ratio decreased 10 basis points from Q2 to 10.9%, reflecting loan growth and share repurchases while remaining above well-capitalized levels.

During Q3, we repurchased $92.1 million or approximately one -- spot 15 million shares at an average price of $79.78. This brought cumulative repurchases since the program's inception to $212.5 million or about 2.7 million shares through September 30.

Turning to Slide 16. Tangible book value per share increased 6% year-over-year and has grown at a 16% CAGR since the end of 2015. Over that period, our tangible book value growth has been approximately 4x the peer median.

As a reminder, the pure comparison is presented on a 1-quarter lag with Western Alliance reflecting Q3 results and peers reflect in Q2. As Q3 results are incorporated across the peer group, we expect the comparison to better reflect the impact of the higher rate environment across the industry. I'll now hand the call back to Ken.

Kenneth Vecchione

Okay. Thanks, Vishal. As I discussed in my opening remarks, Western Alliance made significant progress during the quarter against several of the priorities established at our Investor Day in May. The nonaccrual resolution and continued reserve build helped address a key credit overhang, while further strengthening reserve coverage.

Our deposit optimization efforts have positioned the balance sheet for improved profitability, benefits of which are already evident in our third quarter results. We also accelerated share repurchases, reflecting both the trajectory of our business and our confidence in the long-term value of the franchise.

Given our current valuation, we continue to view share repurchases as an attractive and disciplined use of capital. With that context, our updated 2026 outlook is as follows: Deposit optimization is now expected to total at least $5 billion by year-end compared to the $3 billion previously identified on our second quarter earnings call.

As a result, we are revising our deposit growth outlook lower by a comparable amount from $6 billion to a range of $3.5 billion to $4 billion. Strong momentum in commercial banking deposits, combined with encouraging growth from our newer deposit verticals and continues to support a lower cost and more durable funding base.

For the remainder of the year, the outperformance and deposit optimization naturally reduces the overall deposit growth outlook. I would also remind everyone that the fourth quarter typically experiences seasonal deposit outflows, which are incorporated into our forecast.

Loan growth is being revised lower by $1 billion, in conjunction with the transition of excess deposits off the balance sheet. In addition, warehouse lending activity is expected to be restrained by 2 factors: typically seasonal softness in Q4 and elevated interest rates, which continue to temper mortgage demand.

The higher marginal HFI loan-to-deposit growth should place us within our medium-term target range of 77% to 80% by year-end. Net interest income is now expected to grow between 11% and 12%.

The revised outlook reflects the purposeful actions taken within our deposit base and the corresponding impact on average earning assets, compared with our prior expectation of 12% to 14% growth. Our forecast incorporates a 25 basis point rate increase in December.

While we are pleased with the net interest margin expansion delivered in the third quarter, NIM typically experiences a 3 to 4 basis point headwind in the fourth quarter due to -- due to seasonal deposit outflows and the resulting increase in borrowings. Total noninterest income is now projected to grow between 18% and 21% compared to 13% to 17% growth previously.

This revision reflects strong Q3 performance and continued momentum in commercial banking fees. Mortgage banking revenue in Q4 is expected to be approximately $70 million, reflecting the seasonal slowdown in mortgage applications and the recent rise in mortgage rates.

Turning to noninterest expense. Our deposit optimization efforts reversed the typical third quarter increase in deposit force. We expect continued deposit cost reductions in Q4, supported by meaningfully lower ECR-related deposit balance of $26.7 billion at quarter end compared to $29.9 billion at the end of Q2.

Lower balances should move -- should more than offset the impact of the September rate hike. As a result, we are lowering the upper end of our deposit cost guidance range to $650 million to $675 million. Importantly, we continue to invest in lower cost deposit channels and AI initiatives, where we are beginning to realize benefits from earlier investments.

As a result, the operating expense range of $1.6 billion to $1.65 billion remains unchanged. Although based on Q3 results, we currently expect to finish towards the upper end of that range. With respect to asset quality, we are reaffirming our core net charge-off guidance of 25 to 35 basis points, consistent with our Q3 results.

We expect Q4 performance similar to Q3. We we also expect nonaccrual loans to continue to decline. And lastly, our 2026 effective tax rate outlook remains at 19%. Now Vishal, Dale, Tim, Lynne and I will be happy to take your questions.

Operator

[Operator Instructions]

Your first question comes from the line of David Feaster with Raymond James.

質疑応答

David Feaster

I wanted to follow up on the deposit optimization side. You talked about -- you got about $500 million optimization remaining I guess, after these deposit optimization efforts, how do you think about your ability to continue to fund accelerating loan growth with these lower cost deposits.

Given the hiring that you talked about, it sounds like you're prepping to be able to sustain the improved funding costs. So just kind of curious on that and then maybe how the impact on the mortgage deposits from the -- you talked about some of the higher rate impact on the mortgage market, how that could impact the mortgage deposit side too?

Kenneth Vecchione

Okay. So we have about 5 or 6 deposit channels that report underneath Dale. And we expect, going forward, that those deposit channels will grow at a higher percentage -- or a higher growth rate than our traditional other channels.

Those channels, for the most part, are at a much lower cost basis. And so we expect to fund our growth through the business lines of HLA, Corporate Trust, Business Escrow Services, that's Florida, just to reference that will help propel our growth going forward.

I'll also say that our deposit growth, whereas previous years, go back to 2025, we grew about $10 billion in deposits. We don't need to bring in that type of deposit growth because we're also moderating our loan growth somewhat.

So we think we're going to have the opportunity here to pick and choose a little bit on deposit optimization in terms of what deposit channels we want to accentuate and where we want to go out and get our deposits. So that's that question.

On the deposits related to the mortgage business. Clearly, if the mortgage industry begins to slow down, you would expect to see some of the mortgage deposits also slow down with the volume. And so we are anticipating that for 2027. Offsetting that, though, is we've taken some opportunities to launch this year for private label securitization transactions.

So those are 4 PLS trades. And why do I highlight them? Well, first, the MSR related to those PLS trades is about 1/3 of the cost of our normal endosomes. So we get to hold an MSR balance that's 2/3 less than we used to hold, but we get to keep all those deposits.

Heretofore, we have a cap of 25%. And as you know, if you cross over 25% on the risk-weighted asset is very punitive in terms of being 2.5x the value of the MSR. So we'll be able to grow MSRs and keep those deposits with us rather than selling MSRs and sometimes when we sell MSRs, the deposits move away from us.

I want to say the MSRs that are -- sorry, the deposits that are attached to MSRs come in at roughly 20 basis points. So the PLS transaction has several benefits. One, it provides us extra margin, which is going to be helpful for the mortgage income. It also provides us with a smaller MSR balance and also allows us to keep and retain balances that are -- deposit balances that are very low cost.

David Feaster

That's super helpful. And the other kind of the other key initiative, right, has been credit. That's been 1 of the other things that's kind of weighed on the stocking. You've made a lot of headway on the credit side. Nonaccruals are lowest they've been every year. You made improvement in the criticized CRE too.

As you look at credit today, and obviously, higher rates could impact that. As you stress the book with higher rates, is there anything that you're watching closely? Anything within C&I or the CRE buckets and just maybe how you think about credit in the -- potential for credit leverage as we look forward?

Kenneth Vecchione

Yes. So I think we did make great progress on asset quality. And taking a second to collectively pat ourselves on the back a little bit. We see continued asset quality progress heading into Q4 with NPLs, again, coming down from the Q3 levels as we complete the 2 credits that are still -- that still need to be resolved.

And again, as I said, we're on a glide path to resolving them and we have a very high confidence level that those will be resolved. And we also see charge-offs being no greater than the level they were in Q3, but more likely coming down from that as well. So that kind of gives you a little bit of a Q3 into Q4 viewpoint of asset quality.

As it relates to stressing the portfolio and looking at the portfolio, it is our nature that we always stress all credits before they're granted. And we put in different stress mechanisms. But generally, for the longest period of time, we stress all the credits up 150 basis points for the impact of rates.

So when we approve credits, we already are factoring in that rates will be 150 basis points higher than -- whatever then prevailing rate is. And if the deal works at that time with debt service coverage ratio and so forth, then we feel comfortable to approve it. Right now, we're not seeing any bubbles in the book all right? And we just -- we just do our reviews every quarter, and we always do it right before the earnings call.

So right now, there isn't any heightened concern in any 1 part of the book other than to say, as my Chief Credit Officer, sits and tells me, she always is nervous and is always cautious. But really, there's no big bubble that we see in the book at this time.

Operator

Matthew Clark with Piper Sandler.

Matthew Clark

Just on expenses, I think you mentioned during your prepared remarks that maybe the higher end of the range for the overall expense guide, that implies about I think $570 million for the fourth quarter. I know there's relief coming in deposit costs, but where else should we expect to see some relief in that run rate?

Kenneth Vecchione

I don't know the word I used the word relief. I would say that in Q3, operating expenses rose because of the investments that we are making structurally in the business.

I think that's pretty important. To the first question that we received about where do you think deposit growth is going to come from. This quarter, Q3, we added more people count to a number of our deposit channels to begin to staff up for the pipelines that we currently have.

So we're putting money into the deposit channel businesses. That's 1 place. Second place, we're putting money is AI initiatives, and we're beginning to see some early signs of positive returns on what we're doing and other initiatives will take a little longer to be realized.

And then the third thing we're doing in the expenses is beginning to transition out consultants and hiring our own folks. And that will take probably another quarter or so before we begin to see the benefit and that will probably -- that benefit will probably come at us in the early part of 2027.

Vishal Idnani

Yes. Matt, it's Vishal here. I agree with that. And I think what you're getting at is you do have the guidance range so you can back-solve into what we have for expenses. So obviously, you have the range for the deposit cost.

We did cut the top end of that down given the continued success we're having in the optimization. So we do think you'll see a further decline in deposit costs there. And then when you look at the noninterest expense, excluding the deposit cost, I do think you will see a reduction in the fourth quarter, given some of the things we did in the third quarter. So there will be a decline in some of those line items going into the fourth quarter, in line with the full year guidance we've given you.

Kenneth Vecchione

Yes. I just want to add 1 other thing that Vishal hit on an important point with Q4 deposit force. The fact that we've taken off $4.5 billion or transitioned out $4.5 billion, you can calculate what the implied deposit cost rate is. But the savings on that $4.5 billion is able to absorb the 25 basis point increase on the ECR-related deposits in Q4 and still have a decline in overall deposit costs.

So that is a very important benefit on deposit optimization that we're also able to bring down our overall total deposit costs going into Q4.

Matthew Clark

Great. And then just on fee income, I just want to clarify the implied guidance there. I know your guidance includes gains, securities gains. So I just want to level set the fourth quarter. Is that $140 million to $160 million the right range to think about for 4Q? I got the mortgage revenue, which is helpful. I just want to make sure we're on the same page.

Vishal Idnani

Yes. No, I appreciate that question. I think you've got it there, which is if you take the range we gave, which is up 18% to 21% and you back solve what the year-to-date fee income is, we are providing that number on an all-in basis. So that includes the securities gains in there. So what that would imply when you look at it is there would be a decrease from the third to the fourth quarter. It's hard to say exactly what that's going to be. Obviously, mortgage, we'll have to see where that lands up.

Our best estimate right now is down $70 million. I do think we're down to $70 million. And I think you will probably on the higher side of that range when you're thinking about fee income based on what we're seeing right now, but it will be dependent on mortgage.

Operator

Next question comes from Jared Shaw with Barclays Capital.

Jared David Shaw

Just looking at credit, great progress on the NPLs and the 2 remaining. As we look out sort of once those 2 are resolved, how should we think about normalized net charge-offs for the company. Is that still in that 25 to 35 basis points once we're done with being resolved in the fourth quarter? Hello?

Kenneth Vecchione

Jared, I said, yes, you're exactly correct. .

Jared David Shaw

Okay. Sorry. I cut out there for a minute. And then when we -- just going back to the expense side, looking at the non-ECR expense, going into fourth quarter. Is that what's going to be driving that? Is that just more of a normalization on the salary side? Or is that a new base that we should be building from? .

Vishal Idnani

No. I think there will be a normalization there. And so if you back out the deposit fees and you look at the rest of the noninterest expense ex deposit fees, given what we said here, you would see a decline there anywhere think about it, given we said the higher end of the range, by call it, 5% to 7%.

So there is going to be that decline that happens there in the fourth quarter, a little bit on what we were doing in terms of hiring that happened in the third, but there's a churn there as well. So I would not take the third quarter. That is not the new run rate to grow expenses off of.

The expenses ex deposit fees will be down in the fourth quarter. And I would back into it based on the full year guidance we've given you of that range and towards the top end of that range.

Operator

Next question comes from Ben Gerlinger with Citi.

Benjamin Gerlinger

Based on the 6 credits that are -- I'm just kind of 2 remaining. Could you kind of just talk through how they got resolved or they're no longer on that local list. Was it a sale? Or is there equity put in? I'm just kind of curious how they got resolved?

Kenneth Vecchione

So sure, you came in a little choppy, Ben. I'm just going to restate your question, you're asking how did the 2 credits get resolved in Q3. Is that the question? .

Benjamin Gerlinger

The remaining -- the previous 4, but in general, yes see how they kick how better?

Lynnee Herndon

Yes. The 4 that we've been mentioning and tracking were ultimately sale of assets off the books and moved outside of the bank.

Benjamin Gerlinger

Got it. Was there a seller financing? .

Lynnee Herndon

We did not provide that. .

Benjamin Gerlinger

Got it. Okay. And then just lastly, it seems like you're alluding to improved credit in the end of the year and into next year. Is there anything on the REO perspective that would be like on the table here that should also be expected as well as we're just looking at these are the last 2 remaining ones in the year-end? .

Kenneth Vecchione

So we're -- for the year-end, we're just looking at 2 more that will help reduce the NPLs. We -- we'll always be mindful and try to reduce REO. We use it. We use REO in a very strategic way. We take properties back. Generally, our whole REO book, I should say, has revenues greater than operating expenses, so it's a net contributor to earnings.

But really, the importance for us is to take the property back, put in the value add that's needed, and then increase the vacancy and -- I'm sorry, increase the occupancy, decreasing the vacancy and then move it off our books. And if you go back to say Q2 of 2025, you'll see our REO was as high as 218 in and then it came down by year-end to $137 million.

So we move things in and out of there, and we find it's better to take these properties back and make the changes that are necessary, increase value and then sell them back to the market. I also want to say, when we take the REO -- or we take the properties back to -- we do mark to market -- we do mark them to market. And so they all come in at current valuations.

And then if they're there any longer than a year, we also remark them again to make sure that the valuations are accurate. If not, then we take a charge for them. If they go up, we don't take any gain until we sell.

Operator

Next question comes from Timur Basler, UBS.

Timur Braziler

I wanted to talk quickly on the margin. I don't know if there was an outlook or just a reference point, but the comment that margin is typically down 3 to 4 basis points in the fourth quarter. Just how does that triangulate to this year where it seems like loan growth for the year has already been achieved.

You're asset sensitive on the balance sheet and the offset from ECR is somewhat mitigated given the fact that they're exiting here and you're getting the full kind of average effect in 4Q. So is the 4Q guide going to be more or less reference to that historical 3 to 4 basis point range? Or is there going to be more net asset sensitivity here in the near term as ECRs are less of a mitigating factor?

Kenneth Vecchione

Yes. The Q4 guide is more directed to what has happened in this company historically. And where we've seen the decrease in net interest margin is because of a higher booking of mortgage-related deposits leave the bank, and we have to backfill it with other borrowings.

And other borrowings obviously cost more than the deposit cost, and it weighs a little bit more on the margin. these deposits then come back in, in Q4 and then the margin then returns move upward.

But historically, we've seen 3 to 4 basis points for the last several years of impact to the margin because of the exit or temporary exit of the warehouse lending deposits.

Vishal Idnani

Yes. I would just say, while we typically have some compression in the fourth quarter exactly because of what Ken said, you've got the warehouse deposits coming out and you have to take out more borrowings dollars of NII will be flat to up in the fourth quarter.

When you're thinking about Q3 to Q4, I think you'll see the dollar NII up slightly anywhere from, call it, 1 to 2 percentage points, which you can kind of look at sort of what the full year guide is and back into it. But I think it will be up from a dollar perspective while there's going to be a little bit of compression on the NIM side.

Timur Braziler

Okay. And then maybe looking beyond kind of the near term, once the deposit optimization program is complete. What's the next step for Western Alliance? Are we going back to $8 billion on deposit growth, $6 billion in loan growth annually? Or is there going to be more of a consideration on funding of that loan growth. I'm just wondering, ECR-related deposits, what's the go-forward sort of the funding that's going to come from those balances?

Kenneth Vecchione

Yes. We'll give you more specific guidance when we do our Q4 earnings call in January. But I think the guidance you can take away from Investor Day is what we're still continuing to follow, which is we're going to have slower or more moderate, I'll say, loan growth to be in the top quartile of our peers rather than to be outside the top quartile.

And by doing that, we're also going to have less of a need for deposit growth. And that's how we're structuring the business going forward. And then the excess capital that we generate assuming that the share price is where it's at, we will continue to be buyers of our shares.

Operator

Next question comes from Chris McGratty with KBW.

Christopher McGratty

Great. The 16% to 17% ROTCE that you threw out it as medium term earlier this year, did about 15% in the quarter. I'm interested, I guess, in an update of timing given the shift in the balance sheet? That's the first question. .

Vishal Idnani

Yes. I would say when we were at Investor Day in May, we said we were going to target that 2.5- to 3-year -- so I think just bring that in from there. So it's still sort of 2, 2.5 years is where we think we're going to get here. And remember, the hope to that range was it is where we can sustainably get to an ROE between the 16% to 17%, and we landed at 15.5% in the third quarter.

So we don't think we're that far from the end of the range. And the way we're going to get there is all the different things we're talking about here. And 1 thing I'd highlight is we're making a very big push on the treasury management side trying to bring in more fee income, even trying to get more of those core operating accounts, lower cost deposits.

There's a lot of different initiatives that are going on at the bank to get there. But I would say, Chris, call it, 2, 2.5 years from now, hopefully, we'll get there on the sooner side given we're at 15.5% today.

Christopher McGratty

Great. And then on the buyback, I mean, just taking the $150 million that you put out earlier would imply some modest deceleration. I guess to keep at these levels or perhaps even increase, is it just Basel III final , obviously, the TCE ratio matters to some degree. But I guess I'm asking about sustainability of current buyback levels?

Kenneth Vecchione

Yes. There are a couple of things that we will consider as we go forward and come out of '26 into '27. First, we do want to see the final Basel III rules will help inform us what we are going to be in '27 regarding buybacks.

But we also want to target -- continue to target that 11% area for CET1. And the reason why we're focused on that is that we're looking to get a upgrade on our short-term and long-term ratings -- credit ratings.

And while that's important, go back to the first call about where deposit growth is going to come from. We believe a higher credit upgrade will give us more ability, give us a greater ability to attract more deposits in some of our emerging deposit channels.

And so that's what we're going to balance it out against the short and the long term. Of course, if the price looks as attractive as it is today, we're going to be buyers, but we're going to try to balance that against the 11%. And I don't want to give short drift to the TCE.

I mean that we do think is important. And for us, we are working over time to bring our TCE, which only went down 10 basis points. And just so I can tell you that had we not done the deposit optimization, we probably would have been down another 20 basis points. So the deposit optimization added bps to TCE, and so our goal is to kind of bring our TC to TA up towards our peer group, which is in that 7.6 to 7.8. And that's 1 of our goals as well. But we're going to look at all those things together, Chris.

Vishal Idnani

It's Vishal here. The only thing I'd add, obviously, is you can see where we bought back the $92 million at $79.78 in the stock right now is trading at $75 million. if you can imagine, we think this is a very attractive price to be buying back shares. .

Operator

Next question comes from David with Truist.

David Smith

Can you talk a little bit more about where the loan growth is coming from? I guess just coming from the $8.7 billion in the fourth quarter of last year, imply another $1 billion or so in the fourth quarter to get right to the $4 billion target. So just speak a little bit about the types of loans you're expecting that to come from, please?

Kenneth Vecchione

Yes. So the HFI portfolio grew 4% on a linked quarter annualized basis this quarter. And it was across regional banking, hotel franchise finance, tech and innovation, that growth, supported by MSR lending and note finance offset a mild decline in warehouse lending as mortgage production slowed in response to mortgage rates.

And I would perceive the same areas driving the volume going forward. But Tim Bruckner is our Chief Banking offer, Tim, do you want to add anything to that?

Timothy Bruckner

Yes. I just say I'm very pleased to see the growth in the specialty initiatives that we've identified and spoken about -- and that's paired with the corresponding growth in deposit and treasury management fee-related business.

It is a growth is a function of our strategy and now in action.

David Smith

And then on the NIM for the fourth quarter. I know you mentioned historically, you often see a 3 or 4 basis point seasonal headwind from more deposit out being back to borrowings. But since you're almost done with the deposit optimization, should seasonality be less today and going forward than it has been historically?

Kenneth Vecchione

I mean, we still have a fair amount of warehouse lending deposits, and those deposits will roll off temporarily and they do have to be replaced by other borrowings. So that trend is still going to continue.

Vishal Idnani

Yes. So this is the typical seasonal stuff we see with the T&I payments. It builds up over the first 3 quarters of the year. You have those outflows in the fourth quarter. Then obviously, you see that spike back up in the first quarter. I think that's very typical for us. I think you do have the right point, which is while we do have marginally less warehouse deposits, you might see a little bit less seasonality, but there is still the remainder of the book that's there.

Operator

Next question comes from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom

Where would you guys like the reserves to go over time? Do you expect to continue to build that ratio?

Kenneth Vecchione

Yes. The peer group reserves are about 1.18%. And our ACL is 93 basis points. Last quarter, I don't know what's going to happen fully this quarter. But last quarter, we went up 2 basis points and the rest of the peer group came down 3% in that narrowed group. .

So to be honest with you, Jon, we don't necessarily target an absolute number, but rather we target through our CECL process, the quality of our portfolio book, but we stress test it. We then make certain decisions like this quarter when we added overlays into the models for a higher interest rate environment, uncertainty with the macroeconomic environment and also some uncertainty with the geopolitical environment, and that kind of moved us up, all right?

In addition, as you've heard us say many times, we are moving away from being a little bit more CRE-centric to more C&I centric. And that combination of the portfolio composition change will kind of lead us upward. As we kind of look at where we're going for our strategic plan, we have just basically said Think of it as about 2 bps per quarter given where we see the composition of the loan growth moving throughout 2027.

Jon Arfstrom

Good. And then I guess maybe a financial psychology question for you, Ken. Do you like this strategy, you're comfortable with the strategy of the mid- to high single-digit loan growth and repurchases? Or do you feel like it's the more moderate loan growth approaches hold back your businesses at all?

Kenneth Vecchione

Boy, Jon, I'm going to have to sit down or lay down on my couch for that one, and cut you a check for a couple of hundred dollars if we want to talk about that...

Jon Arfstrom

It's just working so far, but I'm just curious. Is it holding you back? .

Kenneth Vecchione

It is. Well, it's my nature. -- to be more of an organic growing, right? And we've shown great results as a company growing that way through total shareholder return. We're -- we're reevaluating -- we don't have a broken company here. We are reevaluating how best to get valuation higher in this company, and we weren't getting rewarded for that excess growth above the peer group.

And so what we're doing is we're bringing in the excess growth, as you know, all right? We had a blip in Q1's asset quality. I think we're showing that, that was, in fact, a blip and you go back and look at 15 years of track record here, and we've averaged 10 basis points, go back over the last 5 years, and you see we've averaged 17 basis points of charge-offs, still lower than our peer group.

You can go back and look at our classified assets, our criticized and our special mention currently to our peer group. You can see that we're in the top quartile of all that. So we're bringing in loan growth. We're improving or reaffirming asset quality and we are rolling the growth of the balance sheet and not taking in deposits like we normally did, where we were making a smaller spread on the income because some of those deposits had some volatility to them in terms of how long we can lend the mouth for.

So therefore, we put them into HQLA. We're making a small spread. And hence, we're trying to get more out of our base and to grow our return on average tangible common equity and return on average assets. So that's the growth we're going to -- that's the plan, very clear about that on Investor Day, and we're still working towards that. And -- and so what that's going to mean and actually helpful somewhat is that Tim Bruckner sitting to my right, gets to be far more selective about what loans he wants and should, in fact, be able to bring in loans at higher spreads than just having to bring in all those deposit growth where you need to put it back out into lower loan growth. Tim?

Timothy Bruckner

Yes. Thanks, Ken. What's neat about this, the growth that you're seeing is exactly in the segments and sectors that we have indicated as being desirable. And it's bringing with exactly the deposit and fee business that we sought out. We are prescriptive in how we approach that growth, and we're seeing the results, those results are encouraging.

Operator

Next question comes from Casey Haire, Autonomous Research.

Casey Haire

Great. I wanted to touch on deposit beta. Most banks just point to the last cycle and say that's a pretty good reference point. Obviously, Western Alliance a lot going on here. You've optimized a lot of the ECR deposits. Dale's got some new initiatives in the worst, which sound like they're lower cost.

It all adds up to potentially a lower deposit beta. When I look at you guys last cycle, inclusive of ECR I've got the deposit beta at around 75%. I'm just wondering if you guys have given any thoughts to where that would settle out in the next Fed cycle.

Vishal Idnani

Yes. Sure thing, Casey. Obviously, these are estimates based on the best information we have right now. We are currently expecting our blended cumulative deposit beta to be about 65% and over the next year, and that includes both the nonmaturity deposits and the ECR-related deposits.

To your point, though, there is some nuance here between the types of deposits, so as we think about nonmaturity deposits, excluding ECR, we're expecting a beta anywhere from 55% to 60%. And when you think about the ECR specifically those deposits, you could see a beta of about 70% to 75%, given we do have those warehouse deposits, which come closer to a 90% to 100% beta. So hopefully, that gives you some color to get there.

Casey Haire

Yes. Okay. I'm sorry. So which 1 is the -- all-in beta? .

Vishal Idnani

60% -- 65%, is the all-in beta nonmaturity deposits plus ECRs. If you were to exclude the ECR 55% to 60% on the ECR specifically, call it 70% to 75%. So when you blend those 2 ranges, you'd get an overall beta of about 65%.

Casey Haire

And just 1 more on the NPL resolution front. So I heard you guys talking about you stress the portfolio for higher interest rates. But what is -- do you guys have a line of sight on how much further the NPL resolution go about 14% reduction in the third quarter. We've seen others with credit issues, talk to the rising rate environment slowing down the resolution. Just wondering if there's any way you could quantify what you'd expect in the coming year?

Kenneth Vecchione

Well, I'll give you the coming quarter and wait for the full year when we give you our full year guidance in January. But the coming quarter, we have a high degree of confidence that the NPLs will continue to drop from the $485 million level that we're at. .

As we've said, we've got 2 credits. One is figured say, it's just completed more or less. And the other 1 is scheduled for completion in the early part of December. And so that gives us the confidence that the NPLs will continue to improve from now through the end of the year.

Operator

Next question comes from Janet Lee with TD Cowen.

Sun Young Lee

Hello, could you talk to us about the lending side on the competition. I get that much of the benefit from the rate hike in the third quarter is not -- was not showing up on the loan yields in the third quarter.

I do see that the CRE loan yields were down a little bit. I wanted to see if there's any meaningful changes in the competition on the lending side?

Kenneth Vecchione

Sure. It's a competitive environment. And the acknowledgment of that is foundational in a plan that we've undertaken. -- we don't look at relationships purely on a loan yield basis. We look at that on a relationship basis. And we've done a really good job of maxing our relationship income, including deposits, including the fee business in the teens that we pursue and how we evaluate and pursue those segments. So we're pleased with what we're saying. If you approach this as a loan-only business today, it's a tough and competitive environment.

Sun Young Lee

If we were to get more rate hikes, how do you assess -- how much deposit optimization opportunity is still available or remaining. I understand that you've executed on the accelerated deposit optimization and $500 million more left in the fourth quarter, are we at a good place? Or is it something that you could revisit?

Kenneth Vecchione

Janet, right now, the $5 billion seems like the appropriate number. I said all along that this had to be finessed and in terms of how pleased we are, we were able to transition the $5 billion -- or soon to be $5 billion off the balance sheet.

We have not lost a single customer. We have lost any low tunities as well. And I think we're going to pause here and see how the rest of the year shakes out. We're -- not many banks could have the precision to take out $3 billion in a quarter and still keep deposits flat. I mean, I said it in my opening remarks, that's Herculean. I mean that is precision bombing okay, to be able to do that. This was no easy task and to also accelerate in the deposit transitioning faster than we expected.

So at this point, we're going to pause. $5 billion is significant, and we'll take a it look at it after we the end of the year if we need to do anything differently.

Operator

Next question comes from Bernard Von Gizycki, Deutsche Bank.

Bernard Von Gizycki

Just a question on fees. Just any updates on the expected settlements within Juris banking, leading to higher service fees. Is that not expected in 4Q still kind of like first half '27? Just any updates there? .

Dale Gibbons

I believe it's really going to be in. There's a couple of big cases out there, otable, but that's still in a process, even though settlement discussions, I think, are well along. So that's probably '27 alone.

Bernard Von Gizycki

Okay. And just 1 more follow-up on the fee income. Vishal, I think in 2Q, you highlighted trying to hedge the volatility in the mortgage market, you'd sell some covered call options. Did you have any income from that during the quarter? And if so, do you expect that to continue? .

Vishal Idnani

We did have a little bit of that in here. It's a couple of million bucks, nothing material in the quarter. And then I'd say going forward, opportunistically, we'll continue to look at that. .

Operator

Next question comes from Anthony Elian with JPMorgan.

Anthony Elian

Vishal, can you help us unpack the outlook for NII for flat to slightly up in 4Q. And following up on Casey's question on the beta, could you give us your expectations for deposit costs in 4Q relative to the 6 you had or interest-bearing in 3Q?

Vishal Idnani

Yes, sure. Thanks. So in terms of the NII, I'd say a couple of things. So one, -- we've -- as Ken mentioned, typically in the fourth quarter, we do see a little bit of a contraction in NIM. And if you go back the last 3 years, you can take a look at that. And again, it's due to the seasonality in the warehouse business. As those payments come out as we kind of refund some of that with borrowings, you've got some higher costs there.

So that's why you see a little bit of NIM compression in the fourth quarter. That could be anywhere from, as Ken said, historically, it's been 3 to 4 bps. That being said, obviously, the balance sheet is continuing to grow. We do have optimization. We have a remixing on the balance sheet. So when we think about the dollars of NII, I think we're going to be flat to slightly up Q3 to Q4 from a dollar perspective.

So hopefully, that helps on the first question. On the second question about the cost of interest-bearing deposits, they were up 2 bps quarter-over-quarter from [ $274 to $276 ]. Obviously, we had the rate hike in September and the middle of the month. So we are going to see -- and we expect to see cost of interest-bearing deposits up into the fourth quarter.

When we look at where that sits today, if I look at the month of September, it was up to about 281, up 5 bps from where we were for the quarter, but that doesn't fairly capture the full projected increase, obviously, given the time of the hike. So I would say just going forward, based on sort of the beta assumptions we put out there and what we're looking at in terms of 25 bps, I think you get back into a range there for cost of interest-bearing deposits to go up, call it, anywhere from 10 to 15 bps.

Operator

There are no further questions at this time. I will now turn the call back to Ken Vecchione for closing remarks.

Kenneth Vecchione

Yes. Thank you very much for your time today. We were very pleased with the quarter, very pleased against the progress we made against our strategic initiatives, and we look forward to talking to you again in early January. Thank you all. .

Operator

This concludes today's call. Thank you for attending. You may now disconnect.