Oct 21 (Reuters) - Western Alliance Bancorp reported a rise in third-quarter profit on Tuesday, as a rise in interest income and higher lending fees helped offset an increase in rainy day funds, sending its shares up 2.8% in extended trading.

Western's stock was hammered last week after the bank said that it had initiated a lawsuit against borrower Cantor Group for failing to provide collateral on loans in the first position.

"Related to the Cantor Group V loan, although the most recent appraisals indicate sufficient collateral coverage, our reserve methodology for a $98 million non-accrual loan resulted in a reserve of $30 million," CEO Kenneth Vecchione said in a statement.

The bank also said its nonaccrual loans increased by $95 million to $522 million during the quarter, primarily driven by the migration of the Cantor Group V loan.

The bank's provision for credit losses doubled to $80 million, reflecting net charge-offs of $31.1 million and about $30 million in reserves for the Cantor Group V loan, it said.

The banking sector was rattled last week following a string of events, including Western's disclosure, Zions Bancorp booking a $50 million loss in the third quarter on two commercial and industrial loans from its California unit and Jefferies' exposure to bankrupt auto parts maker First Brands.

PROFITS STEADY

However, Western's stock has gained about 8% in the last three sessions after analysts downplayed these incidents as one-offs and pointed to sector strength following a spate of strong results.

Net interest income - the difference between what banks earn on loans and pay on deposits - rose to $750.4 million from $696.9 million in the year-ago quarter.

Net income attributable to the bank's common shareholders came in at $250.2 million, or $2.28 per share, in the three months ended September 30, compared with $196.6 million, or $1.80 per share, a year earlier.

"Relative to a low bar, we think both better-than-expected credit results and the sizable deposit growth/pre-provision net revenue beat will lead to outperformance in trading tomorrow," Stephens analyst wrote in a note.

Zions also reported a higher third-quarter profit on Monday, boosted by increased interest income and broader loan growth amid easing economic uncertainty.

Western Alliance stock performance against Zions