WAFD

Good day, and thank you for standing by. Welcome to WaFd, Inc's second quarter 2026 results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Goode, Chief Marketing Officer and Investor Relations Manager. Please go ahead.

Thank you, Kevin. Good morning, everybody. Happy Friday. Let's dive into our 2026 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, our 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.

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 second 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, 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, your line is muted.

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 31st, 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 plan 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 types, 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 provides 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 is part of our overall investment strategy, currently replacing the single-family mortgage loans balance runoff. Total deposits decreased by $292 million during the quarter, with non-interest-bearing deposits decreasing $115 million or 4.3%, interest-bearing deposits remaining stable, decreasing just $4 million, and time deposits decreasing $174 million or 2%. Deposit outflows in the first calendar quarter reflect predictable seasonal patterns, including annual distributions, tax payments, and bonus disbursements.

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%. Non-interest-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 remains 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 to $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 31st, 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 2.78%, and the margin at 2.81%. Comparing the linked quarter, a walkthrough 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 non-accrual interest during the quarter. A 6 basis point improvement for day count, February being 28 days. We have 50% of our loans and 75% of our securities on a 30/360 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 non-interest income decreased $400,000 compared to the prior quarter to $19.8 million.

Contributing to non-interest 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 non-interest 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, employment 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. I will now turn the call over to Ryan to share his comments on WaFd's credit quality.

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 of 37%, commercial real estate of 15%, and construction of 35%. Importantly, we were able to achieve this level of loan production with a consistent approach to underwriting that maintained 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 one 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 is a representation that the borrower is experiencing some level of financial stress that needs to be addressed. Non-performing 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 non-accrual 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 zero 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 non-performing assets are impacted by a large commercial relationship over 90 days past due. Outstanding balances for this relationship amounts to $51 million. Although appropriately placed on non-accrual 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 non-performing 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 of 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 one 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 impacted borrowers' expense structures. Second, the economic uncertainty originally driven by tariffs, with further expected impact by war in the Middle East and energy supply shocks, will continue to impact 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.

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. 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 six months of the year versus the prior year, we improved earnings per share by 35%.

With all of the discussion and understandable worry about loans to non-depository financial institutions, so-called NDFI 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 lending in the industry over the last few years is that it represented the bulk of C&I loan growth. 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 non-interest-bearing deposits to total 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 achieve 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 reorganized our frontline bankers into three teams. We kicked 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 are formed into three business lines. First, our business bank. And with commercial credit needs up to $10 million and all small, medium-sized business needs and consumer deposits. This includes our 208 branches. Our corporate bank handles all of our large commercial credits and treasury clients and their treasury management leads. Lastly, our commercial real estate bank.

Recognizing 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 have heard, our margin was 2.81% for this last quarter, with our return on tangible common equity of 10.8%. If we can get our margin up just a little bit higher to 3%, which is our short-term goal over the next two years, everything else being equal, our 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 am pleased to see our efficiency ratio remain near the top end of our target range at 55.7%.

We believe that we have the products and the teams in place to grow our active loan portfolios by 8%-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 for originations. It is also very encouraging to see new deposit pipeline increase 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. That's because of the robust originations we had. The lending pipeline is actually down 12.7%. Our deposit pipeline, however, increased from $264 million as of December 31st to $439 million as of March 31st. A 66% increase. It is fun to see the traction our teams are gaining. Let me speak on deposit competition.

As you are all well aware, competition for low-cost deposits is robust and growing. Between the too-big-to-fail 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. It looks to be getting even more challenging with the upcoming entrance of Elon Musk into the space with his 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% cashback on debit card purchases. Both of these are clearly loss leaders. What gives me pause is the fact that the sponsor is the richest person on Earth and can fund losses to take market share for an extended period of time if he chooses to do so.

The good news, 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 tease 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 wealth management on August 31st of last year with the hiring of an experienced team of professionals from a wire house firm here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first two years. Early indications remain very positive. AUM amounted to just under $450 million as of March 31st, and it is nice to fill a hole we have had in our offering.

We see wealth as an essential element growing our non-interest 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, Pike Street Labs, that is dedicated to building software for the benefit of our customers. We are the only bank 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 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 are 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 two times. 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, seven 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 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 trading near tangible book value for some 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 31st, 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 suppressed, 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 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 $7.5 billion 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 board and management more options going forward, with a strong 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 all that would listen how little risk there is 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 rulemaking, but we will be paying close attention. By comparison, WaFd should benefit more than peer banks by this proposed rule because of large concentration of single-family loans we have. For the past year, we have routinely heard from investors that they understand our plan and agree with why we are making the changes called for in the 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 that make 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 becoming a business bank.

With that, Kevin, we'll open it up to questions and answers.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open.

Thanks. Good morning. Kelli, I wanted to ask about the margin. You mentioned seven basis points on non-accrual 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?

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

I see. I guess the go forward kind of flat expectation is sort of absent non-accrual impact, the core flat. I wanted to check back in. You've mentioned a path towards 3% in a couple years. I guess as you scratch out gains, where do you see that from? Is that on the funding side mostly? Just trying to kind of get to that 3% figure and over the same time frame.

Yeah. Jeff, so I'll hop in on that one. 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, who knows who the chair of the Fed will be at this point. We think just organically as we reprice these mortgage loans and loans come due, we have that accretion to come into income and then we get to pick up yield as these loans reprice to come into current market rates on more commercial loans. You compound that and drive lower cost of deposit growth. There's even more upside with the profits. That's how we think we can get there.

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

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

Great. Thank you. My other question was just on the growth, or I should say net growth. I think it's 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 trying to keep a low single-digit net growth pace is possible in future quarters?

No, I would say we're very bullish on being able to continue this pace. It feels like we're getting traction, and I think you can see that with our pipeline to have the 12% net growth on the active portfolio, then the overall growth. We overcame what, the $275 million of repayments of the inactive portfolio. That's huge win, and I do think that's possible. I think in the past we've said kind of 8%-12% growth on the active portfolio. I think the higher end at that range appears very reasonable for us.

Great. Thank you.

One moment for our next question. Our next question comes from Matthew Clark with Piper Sandler. Your line is open.

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

Yeah, I don't think any of that growth came from SNCs or club deals at this point. We have a couple in the pipeline, but these are direct originations at this point. Kelli, do you have the overall portfolio of our club deals? Last I checked, we were around $500 million total club deals.

I can get that number and get back to Matthew.

Okay. Thank you. On the fee income run rate, stripping out the noise, looked like a good result from insurance commissions. I know you've got some wealth is a growth area and SBA gain on sale is as well, but how should we think about that kind of $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?

No, I think that's sustainable. You mentioned exactly where we want to go, but let me be clear. Right now, wealth, we're still working to get profitable. Right now, wealth is not a net accretive item to us, which we understand is part of the business plan. The SBA gain, right now we're looking for every earning asset we can, so we're not planning on selling off any of the SBA portion. This is just good organic fee income and you mentioned the insurance side. About the $20 million, we think it's very sustainable going forward.

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

Yeah. The CDs have gotten more expensive lately because it appears the market's kind of pricing in this. They don't know if rate decreases are coming any time. We're seeing actually, some of the wholesale broker deposits pricing above U.S. Treasuries. We have about $4.2 billion of CDs repricing at 3.68%. I think right now we're 3.40%-3.60% rate. Don't expect much in comparison.

You said 3.60%?

Yep. 3.40%-3.60%.

[audio distortion]. Okay. Thank you.

Sure. Thanks, Matthew.

One moment for our next question. Our next question comes from Kelly Motta with KBW. Your line is open.

Hi. Good morning. Thanks for the question. I think however you slice it was a great quarter for loan growth in the active portfolio. It was really nice to see the commercial growth. Squaring your margin expectations to get to 3% over time clearly requires bringing on some low-cost funding. I think you gave some color about the deposit pipeline, but I was wondering. Clearly part of this plan to shift towards commercial is for the strength of funding. Understanding that some of these relationships take time for deposits to come over, if you could size how much of this new commercial funding is coming with A core deposit relationship over time. That would be helpful. Thanks.

Yeah. Great question, and Kelly, thank you for acknowledging it. We believe this was just a fantastic quarter for us from a loan growth standpoint. First net growth that we've had in over five quarters, I think. Thank you for acknowledging that. No, every one of these commercial relationships come with core operating accounts. We get the accounts. The question is, how much do they have in deposits? Typically, you don't get very much in deposit balances, but you get the accounts. We're seeing the number of accounts continue to increase, but the balances come with time. That's just the nature of what we're trying to do in Stanley and Fulton.

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

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

Great. Thank you. Last question from 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've had. There's also some seasonality. I know you don't give guidance, but wondering within that, if that's a good number to build off of or any sort of puts or takes or special seasonality considerations impacting Q2. Thank you.

Yeah. 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. This is a good run rate for now, but if we continue to produce at these volumes, I would expect compensation to increase. It's some of our variable compensation increases, but we want to do that. That means we're driving value for our shareholders. I think it's a good solid run rate, and it could go up slightly from here as we continue to prove, outperform, if you will, in terms of loan production and fees.

Got it. Thank you so much.

Thanks, Kelly.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. I'm not showing any further questions at this time. I turn the call back over to Brad for any further remarks.

Deal. 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.

Thank you, everyone.

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