Earnings Call Transcript - WAFD Q2 2026

Brad Goode, Chief Marketing Officer and Investor Relations Manager

Thank you, Kevin. Good morning, everybody. Happy Friday. Let's dive into our second quarter earnings report. You can find our earnings press release, along with our detailed fact sheet and investor scorecard on our website, that's wafdbank.com. During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. Information on risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and the Form 10-K for the fiscal year ended September 30, 2025. Forward-looking statements are effective only as of the date they are made and WaFd assumes no obligation to update information concerning its expectations. We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings material. With us this morning are President and CEO, Brent Beardall, Chief Financial Officer, Kelli Holz, and our Chief Credit Officer, Ryan Mauer. I'd now like to hand the call over to Mr. Beardall. Good morning.

Brent Beardall, President and CEO

Thank you, Brad. Let me start by saying I thought we had an outstanding second quarter, and we are excited to elaborate on the results. This morning, we will cover four areas. First, Kelli Holz, our CFO, will provide you with a detailed review of our balance sheet and our income statement for the quarter. Next, Ryan Mauer, our Chief Credit Officer, will provide comments on the current status of our loan portfolio and credit quality trends. Third, I will provide my insights on the quarter’s potential for growth, capital management strategies, and regulatory developments. Finally, we will be happy to answer any questions you have at that point. Kelli, please walk us through the quarterly results.

Kelli Holz, Chief Financial Officer

Thank you, Brent. As announced, WaFd Inc. reported net income available to common shareholders of $61.9 million or $0.82 per diluted share for the quarter ended March 31, 2026. This compares to net income to common shareholders of $0.65 per share for the second quarter of fiscal 2025 and $0.79 per share for the December 2025 quarter. The $0.03 increase in earnings per share for the quarter was a result of a modest increase in net interest income, controlled expenses as well as 2.7 million shares repurchased during the quarter at a weighted average price of $31.85 per share or 1.05x tangible book value. Our share repurchase spend currently has a remaining authorization of 8 million shares, which depending on share price, provides a compelling investment alternative. For the balance sheet, loans receivable increased $119 million during the quarter, primarily due to an increase in our active loan types: Commercial Real Estate, Multifamily, Construction, Land A&D, C&I and Consumer, which combined increased by $359 million. Loan originations and advances for the quarter outpaced repayments and payoffs in our active loan types with originations of $1.5 billion and repayments and payoffs of $900 million. For the inactive loan type, advances were $21 million with repayments and maturities at $276 million. The weighted average rate on originations was 6.22% for the quarter, and the weighted average rate on repayments and payoffs was 6.12%. Please see the tables in our fact sheet that provide a breakdown between our active and inactive loan types. Total investments and mortgage-backed securities increased $191 million during the quarter, funded by borrowings, which increased $626 million. Investment purchases were primarily discount-priced agency mortgage-backed securities with an effective yield of 4.8%. The increase in mortgage-backed securities as part of our overall investment strategy currently replaces the single-family mortgage loans balance runoff. Total deposits decreased by $292 million during the quarter, with noninterest-bearing deposits decreasing $115 million or 4.3% and interest-bearing deposits remaining stable, decreasing just $4 million, while time deposits decreased $174 million or 2%. Deposit outflows in the first calendar quarter reflect predictable seasonal patterns, including annual distributions, tax payments, and bonus disbursement. Core deposits ended the quarter at 80.4% compared to the December quarter at 79.7% and up from the September quarter at 77.9%. Noninterest-bearing deposits ended the quarter at 12.2% of total deposits. The loan-to-deposit ratio ended the quarter at 94.5%. WaFd's capital profile remained strong. We estimate our CET1 ratio at quarter end to be 11.4% and our total risk-based capital ratio to be 14.4%. Liquidity is strong with $4.2 billion of on-balance sheet liquidity, a robust core funding base, low reliance on wholesale borrowings and significant off-balance sheet borrowing capacity. For the income statement, net interest income increased $6.5 million from the prior quarter. The effect of the reduction in interest paid on liabilities outpacing the reduction in interest earned on assets by 5 basis points. The net interest margin was 2.81% in the March quarter compared to 2.7% for the quarter ended December 31, 2025. For the spot rate as of the March quarter-end, the yield on interest-earning assets is 5.06%, the cost of interest-bearing liabilities is 2.78%, and the margin is at 2.81%. Comparing the linked quarter, I'll walk through from the December to the March margin, a 5 basis point net improvement with deposit rates repricing more favorably than loan rates, a 7 basis point improvement recognizing nonaccrual interest during the quarter, and a 6 basis point improvement for day count, February being 28 days. We have 50% of our loans and 75% of our securities on an accrual basis. Offsetting the increases was a 5 basis point decrease related to our securities growth, the mortgage-backed securities purchases at a net spread of approximately 1%, although it puts pressure on the margin, it does add $1.5 million in net interest income per quarter. Absent any changes in interest rates, we expect our margin to be flat in the near term, acknowledging the day count for the March quarter and the funding of loan growth and deposit activity. One piece of good news that will materialize going forward for us is the accretion of $167 million of deferred income related to the interest rate mark on the Luther Burbank loan portfolio. Currently, this is being accreted into income at a rate of $6 million per quarter. We expect this to accelerate as these loans begin to adjust or repay. Total noninterest income decreased $400,000 compared to the prior quarter to $19.8 million, contributing to noninterest income is $6.7 million in commission revenue from our WaFd Insurance subsidiary compared to $4.4 million in the prior quarter, offset by losses of $1.1 million taken on certain equity method investments in the quarter compared to losses of $408,000 realized in the prior quarter. As a reminder, the December 2025 quarter also included a $3.2 million gain from the sale of a branch property. Total noninterest expense increased $4.1 million or 3.9% from the prior quarter as a result of increased compensation and technology expenses reflecting annual merit increases, implemented taxes, and continued investment in technology. The company's efficiency ratio for the quarter was 55.7% compared to 55.3% in the prior quarter.

Ryan Mauer, Chief Credit Officer

Thank you, Kelli, and good morning, everyone. As reflected in our earnings release, we had a solid quarter of new loan production along multiple product lines. As Kelli indicated, total production in our active portfolio was $1.5 billion for the March quarter. This loan production was centered in Commercial and Industrial at 37%, Commercial Real Estate at 15%, and Construction at 35%. Importantly, we were able to achieve this level of loan production while maintaining a consistent approach to underwriting that preserved a moderate risk profile. Adversely classified loans decreased by $65 million in the quarter and now represent 2.6% of net loans compared to 2.9% as of the December quarter, and 2.5% as of March 2025. Total criticized loans decreased by $65 million to 4.2% of net loans compared to 4.6% as of the December quarter and 3.3% as of March 2025. It should be noted that the criticized loans are not concentrated in any particular business line or industry and are reflective of the economic environment where elevated interest rates and economic uncertainty impacted both commercial and consumer borrowers. In addition, an asset being criticized does not imply that loss exposure exists; rather, it represents that the borrower is experiencing some level of financial stress that needs to be addressed. Nonperforming assets decreased to $132 million or 0.48% of total assets from $203 million or 0.75% at December 31, 2025. The change is due to nonaccrual loans decreasing by $67.5 million or 35% since December 31, 2025. REO decreased slightly to $8.1 million and other property owned decreased to 0 with USDA receivable proceeds received. Delinquent loans decreased to 0.78% of total loans at March 31, 2026, compared to 1.07% at December 31, 2025, and 0.27% at March 31, 2025. While still elevated in comparison to recent periods, these credit metrics are trending positively, remain modest in light of WaFd's loan loss reserve and capital position, and are indicative of our culture of early and proactive portfolio management. It is important to note here that delinquencies and nonperforming assets are impacted by a large commercial relationship that is over 90 days past due. Outstanding balances for this relationship amount to $51 million. Although appropriately placed on nonaccrual per policy, there was no charge-off taken upon revaluation at this point, and we are actively collaborating with the borrower to resolve the issues. If nonperforming assets and delinquencies were adjusted for this relationship, NPAs would be 0.3% of total assets compared with 0.6% at September of 2025, and delinquencies would be 0.52% of total loans compared to 0.6% at September 30, 2025. The net provision for credit losses in the quarter was $4 million; the provision is primarily the net result of increased commercial loan originations. Net loan charge-offs for the quarter represented a nominal 1 basis point annualized of gross loans at March 31, 2026. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.05% of gross loans at March 31, 2026, compared to 1.01% in March of 2025. For the commercial portion of the portfolio, the allowance represents 1.33% of net loans compared to 1.24% as of March of 2025. Credit metrics at March quarter end, while still elevated from prior quarters, are trending positively, remain at healthy levels overall, and continue to be impacted by two primary drivers. First, the elevated interest rate environment has affected borrowers' expense structures. Second, the economic uncertainty originally driven by tariffs, with further expected impact from war in the Middle East and energy supply shocks, will continue to affect borrowers' top-line revenue results as well as operating costs. Looking forward, these factors remain headwinds for credit quality. With that, I will turn the call over to Brent for his comments.

Brent Beardall, President and CEO

Excellent. Thank you, Ryan. No question, the headline for this quarter is loan growth in my opinion. After over a year of seeing our loan portfolio contract, this quarter, we saw growth in the overall net loan portfolio, including inactive segments. More impressive, we saw a 12% increase on a linked quarter basis in the active portfolio. And if you included the yet-to-be-funded loans, gross active loans outstanding increased by 20% on a linked quarter basis. I am pleased to report that the biggest contributor to that growth came from the C&I lending segment from a percentage standpoint. Bottom line results for the quarter improved nicely with 4% linked quarter EPS growth and 26% year-over-year, even better if you compare the first 6 months of the year versus the prior year, we improved earnings per share by 35%. With all of the discussion, an understandable worry about loans to non-depository financial institutions, so-called NBFI loans. I'm very happy to report that NDFI loans at WaFd are only a rounding error at $35 million or 17 basis points of our loan portfolio. We have historically been very skeptical of lending money to others that are going to turn around and lend it out to consumers and businesses, typically at credit standards that are looser than our own. One of the great ironies we see with the surge in NDFI loans in the industry over the last few years is that it represented the bulk of the C&I loan book. The crowd rushed to get out of CRE assets for fear of potential losses, and many went into what I think were riskier NDFI loans, all for the sake of diversification. We have long believed that concentrations can be a double-edged sword. It all depends on what concentration is in. That is why we remain bullish on well-underwritten commercial real estate loans that typically have a diversified cash flow, real underlying collateral, significant upfront equity, and strong sponsor support. Our strategic plan, Build 2030, is designed to fully shift our focus to where we can add the most value for our clients and shareholders, serving the banking needs of businesses. This shift takes time, discipline, and effort and comes with specific goals. The most important goal is increasing our noninterest-bearing deposits from 11% last year up to 20% by 2030. Today, we sit at 12.2%. It is an ambitious goal, but it is what we need to do as it will also drive increased loan demand and branch utilization. The way our peers achieved their lower cost of funds is to focus on serving small businesses, which is exactly what we are doing. Here's what we've accomplished so far. It was just last January that we recognized or reorganized our frontline bankers into three teams. We kick off Build 2030. During that time, we have become a preferred SBA lender, 99% of our branch managers, formerly specializing in mortgage lending have now passed our Small Business Certification process. We have formed into three business lines: first, our business bank serves all commercial credit needs up to $10 million and all small to medium-sized business needs along with consumer deposits. This includes our 208 branches. Our corporate bank handles all of our large commercial credits and treasury clients along with their treasury management leads. Lastly, our Commercial Real Estate Bank recognizes our historical strength and expertise in CRE. We have a dedicated team to serve the credit and treasury needs of real estate developers and investors. We acknowledge that we have work to do to improve our profitability. As you've heard, our margin was 2.81% from this last quarter with our return on tangible common equity of 10.8%. If we can get our margin up to a little bit higher to 3%, which is our short-term goal over the next 2 years, everything else being equal, ROE or ROTCE would be 12.5%. The key from my perspective is growth in direct C&I loans and low-cost deposits, supported by growth in CRE loans while running an efficient bank. I'm pleased to see our efficiency ratio remain near the top end of our target range at 55.7%. We believe that we have products and teams in place to grow our active loan portfolios by 8% to 12% going forward. Looking forward, our lending pipeline continues to be quite strong, building on the very strong second quarter we had of $1.5 billion of originations. It is also very encouraging to see our new deposit pipeline increased by 66% on a linked-quarter basis. To give you some specific numbers, our lending pipeline actually decreased from $3.6 billion as of December to $3.2 billion, but that's because of the robust originations we've had. The lending pipeline has actually grown down 12.7%. Our deposit pipeline, however, increased from $264 million as of December 31 to $439 million as of March 31. So a 66% increase. It is fun to see the traction we're gaining. Let me speak on deposit competition. As you are all well aware, competition for low-cost deposits is robust and growing. Between the two big banks that have the advantage of the implied guarantee of the federal government on all deposits to other regional banks to credit unions and fintechs, there is no shortage of competition, and that looks to be getting even more challenging with the upcoming entry of Elon Musk into the space with this new product, X Money. Early indications are they are going to be very aggressive in looking to take market share, advertising a 6% rate on FDIC-insured deposits and 3% cash back on debit card purchases. Both of these are fairly loss leaders. What gives me concern is the fact that the sponsor is the richest person on earth and can afford losses to take market share for an undefined period of time if he chooses to do so. The good news is we are a relationship bank. We are not priced at the high end of the market today, and I think most consumers will see through the loss leader tactics and be skeptical about what the long-term value proposition will be. All of that said, I think X Money could be to traditional banking what Tesla has been to the auto industry, and it certainly has our full attention. We launched a wealth management service on August 31 of last year with the hiring of an experienced team of professionals from a firm here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first 2 years. Early indications remain very positive. AUM amounted to just under $450 million as of March 31, and it is nice to fill a gap we have had. We see wealth management as an essential element of growing noninterest income and commercial deposits as many prospects want to find one bank for their full banking relationships. Two significant developments regarding technology: As many of you know, we have established a subsidiary dedicated to building software for the benefit of our customers. We are the only bank of our size in the country that I know of, that has built its own consumer online and mobile applications. Coming up in this third quarter, we are excited to launch the next generation of our mobile app, which will reduce the time it takes from the launch of the app until a client can see their balances by more than half. Speed matters to our clients, and this will be a huge upgrade. This will also enable us to launch additional differentiated features like consumer positive pay and real-time peer-to-peer payments within the WaFd ecosystem. The developments in AI technology were perhaps the biggest news in the market over the last year. We are actively using AI to assist our software developers, which is increasing the pace of development by over 2x. Additionally, this next quarter, we will be launching our AI Call Center Agent that I am really excited about. Our goal is that customers will be able to get the answers to their questions immediately, 24 hours a day, 7 days a week, which will provide bandwidth for our bankers to deepen relationships. Let me be clear; customers will always be able to access a live banker if that is their preference. Our perspective is that technology is a tool for clients and bankers to make us better bankers. It is not a replacement for bankers. We sincerely believe that everyone deserves a banker. Turning next to capital. With our stock price remaining near tangible book value for most of the last quarter, as Kelli mentioned, we were aggressive in repurchasing shares. We repurchased 2.7 million shares at a price of $31.85 or just 105% of tangible book value. This represents 3.6% of the shares outstanding on December 31, 2025. That's still staggering to me that in one quarter, we were able to buy back 3.6% of the company. We continue to believe that with our robust capital levels, when our share price is compressed, share repurchases are the best use of capital. Considering our 10.8% return on tangible common equity this last quarter. Last month, the Federal Reserve announced potential changes to capital calculations that could have a material positive impact for WaFd if approved. The proposal would adjust risk weightings for different loan categories. Specifically, single-family residential loans with the loan-to-value below 60% would go from a 50% risk weighting to a 25% risk weighting. As of quarter end, the weighted average loan-to-value of our single-family loan portfolio is less than 40%. What does all this mean? Our initial estimate is, if approved, it would increase WaFd's regulatory capital levels by approximately $400 million. This would give WaFd and management more options going forward, with a solid preference to fund additional loan growth, followed by returning capital to shareholders, and lastly, looking at strategic M&A. For years, WaFd has been telling everyone that we were missing a little risk in these low loan-to-value single-family loans. It is gratifying to see regulators acknowledging that with this new rule. At this stage, it is just a proposed rule in the making, but we will be paying close attention. By comparison, WaFd should benefit more than peer banks from this proposed rule because of the large concentration of single-family loans we have. For the past year, we have repeatedly heard from investors that they understand our plan and agree with why we are making the changes to execute our strategic plan. The only pushback has been they wanted to see execution on the plan. We hope this quarter and future results begin to answer that question. Finally, I want to acknowledge all of the incredible bankers that call WaFd home, making these results possible. Our most valuable asset is our team. We have bankers that care and want to serve our clients. What we are doing is challenging, but we are making significant progress to become a business-oriented bank. With that, Kevin, we'll open it up to questions.

Operator, Operator

Our first question comes from Jeff Rulis with D.A. Davidson.

Jeff Rulis, Analyst

Kelli, I wanted to ask about the margin. You mentioned 7 basis points on nonaccrual improvement. Is that the linked quarter swing? I think last quarter you had some headwinds associated with it? Or was that just this quarter alone, a positive impact to margin?

Kelli Holz, Chief Financial Officer

So that's the linked quarter swing. So bringing one of our large nonperforming credits current and bringing back the interest income onto accrual and recognizing that is where you get to 7 basis points. So there was about $2.2 million that was recognized this quarter that is really from prior quarter activities.

Jeff Rulis, Analyst

I understand. So, the expectation of a flat outlook, excluding the nonaccrual impact, seems to be the core flat aspect. I wanted to revisit the projection towards 3% in a few years. As you analyze the gains, where do you anticipate those coming from? Is it primarily on the funding side? I'm just trying to clarify how you aim to reach that 3% figure within the same timeframe.

Brent Beardall, President and CEO

Yes, Jeff. So I'll opt in on that one. I think when we say kind of 3% over the short term, that's absent of changes with interest rates, right? Because who knows where rates are going. We know who the decision-makers are in the Fed at this point. We think just organically, as we reprice the mortgage loans and performance comes due. We have that accretion to come into income and then we get a pickup yield as the loans reprice to current market rates on more commercial loans. Then you compound that and drive lower cost deposit growth, there's even more upside with deposits. That's how we think.

Jeff Rulis, Analyst

And Brent, you did allude to the fact of securities growth is actually a net headwind, but a benefit to NII. But that's all sort of baked into the gradual increases, assumption of the positives you mentioned, but maybe additional maybe securities investment kind of headwind margin? Is that all kind of baked into the expectation?

Brent Beardall, President and CEO

That is kind of baked in. And you've seen we've been pretty aggressive with the security purchases to this point. We'll probably take our foot off the gas on that as well going forward. So there won't be additional headwind from that.

Jeff Rulis, Analyst

Great. And then my other question was just on the growth or I should say net growth I think, encouraging to see some low single-digit pace so far. If we were to kind of extend that out, and we'll stop short of guidance, but thinking about how you're feeling about the inactive runoff versus active growth. Was this an outlier? Or do you think kind of trying to keep a low single-digit net growth pace is possible in future quarters?

Brent Beardall, President and CEO

No, I would say we're very bullish on being able to continue the pace. It feels like we're getting traction, and I think you can see that with our pipeline. And so to have the 12% net growth on the active portfolio and you look at all our growth. So we've overcome what was $275 million of repayments of the inactive portfolio. That's huge considering producing that growth. I think we've said it kind of 8% to 12% growth on the active portfolio. I think the higher than that range appears very reasonable for us.

Operator, Operator

Our next question comes from Matthew Clark with Piper Sandler.

Matthew Clark, Analyst

First one for me, just on the loan growth. Solid increase in C&I. I just want to get a sense for how much of that growth may have come from club deals and where that portfolio sits today?

Brent Beardall, President and CEO

Yes. I believe none of the growth has resulted from club deals so far. We have a few in the works, but there haven’t been any direct originations for this. Kelli, you have the overall portfolio of our club yields, and the last update I received indicated we were around $500 million in total bookings.

Kelli Holz, Chief Financial Officer

I can get that number and get back to that.

Matthew Clark, Analyst

Okay. And then on the fee income run rate straight out the noise, it looked like a good result from insurance commissions. I know you've got some wealth as a growth area and SBA gain on sale as well. But how should we think about that $20 million run rate that you put up this quarter going forward? Should we cut that down a little bit? Or do you think that's sustainable?

Brent Beardall, President and CEO

No. I think that's sustainable. And you mentioned exactly where we want to go, but let me be clear, right now, while we're still working to get profitable. So right now, wealth management is not a net revenue item to us, as we understand it's part of the business plan and the SBA gain. Right now, we're looking for every earning asset we can. So we're not finding significant contributions from the SBA portion. So this is just good organic fee income and the insurance side. So about $20 million, we think it's very sustainable.

Matthew Clark, Analyst

Okay. And then just on the CD repricing, the CDs that are coming due this quarter, what's the renewal rate we should assume on that slug?

Brent Beardall, President and CEO

Yes. So the CDs have gotten more expensive lately because of the market dynamics. We don't know if the rate decreases are coming in the near term or not. So we're seeing actually some of the wholesale corporate deposits pricing closely to those treasuries. So we have a balance of $4.2 billion of CDs repricing at 3.68%. And I think right now, we're looking at rates from 3.40% to 3.60%.

Operator, Operator

Our next question comes from Kelly Motta with KBW.

Kelly Motta, Analyst

I didn't catch the last few slides, but it was a great quarter for loan growth in the active portfolio. It's really nice to see the commercial growth. Aligning your margin expectations to reach 3% over time clearly requires some low-cost funding. You mentioned something about the deposit pipeline, but I was curious, part of the strategy to shift towards commercial is to enhance funding strength. Understanding that some of these relationships take time for deposits to be established, could you estimate how much of this new commercial funding will come with a core deposit relationship over time? That would be helpful.

Brent Beardall, President and CEO

Great question. And Kelly, thank you for acknowledging. We believe this was just a fantastic quarter for us from a loan growth standpoint. The first net growth that we've had in over 5 quarters. So thank you for acknowledging that. And every one of these commercial relationships typically includes operating accounts. So when you get the accounts, the question is how much do they have in deposits. And so typically, we don't see very much new deposit balances, but you do get the accounts. So we're seeing a number of accounts continue to increase, and the balances improve, and that's just the nature of what we're trying to do.

Kelly Motta, Analyst

Got it. That's helpful. And then I understand that these aren't club deals. I'm wondering if you could provide just given how strong the growth was at the average size of the new relationships coming on?

Brent Beardall, President and CEO

Yes. We'll follow up with that. It's broad-based because you've got those smaller deals coming in from the branches and the branches are on average between the deals, there are probably $200,000 each on the C&I side, then we've got some larger true commercial deals that are in the $20 million to $40 million range. But we'll follow up with that number for you.

Kelly Motta, Analyst

Last question for me, and then I'll step back. Expenses were up quarter-over-quarter, pretty understandable given the strength of growth and the revenue growth that you had, and there's some seasonality. I know you don't give guidance, but wondering within that, that's a good number to build off of, or any sort of puts or takes or special seasonality considerations impacting in Q2?

Brent Beardall, President and CEO

Yes. No. Good question, though. This is the quarter where we see the annual merit increases kick in and, of course, the increase in taxes for the first calendar quarter. So this is a good run rate for now. But if we continue to produce at these lines, I would expect compensation to increase from some of our variable compensation increases, but we want to do that, and we're driving value for our shareholders. I think it's a good solid run rate. It could go up slightly from here. We continue to outperform, if you will, in terms of loan production.

Operator, Operator

I'm not showing any further questions at this time. I'd like to turn the call back over to Brad for any further remarks.

Brad Goode, Chief Marketing Officer and Investor Relations Manager

Kevin, thank you so much. Thanks, everybody, for joining the morning's call. Please contact me if you have any questions. Have a great rest of the day and a great weekend. Appreciate you being here. Thanks.

Operator, Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.