WaFd, Inc. (WAFD) Earnings Call Transcript

Thank you for standing by. Welcome to the WaFd, Inc. Fourth Quarter and Fiscal Year 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we'll open up for questions. [Operator Instructions]. Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Brad Goode, Chief Marketing Officer and Investor Relations Manager. Please go ahead.

Victor, thank you. Good morning, everybody. Happy Friday. Let's dive into our 2026 fourth quarter and full year earnings report. You can find the earnings press release along with our detailed fact sheet and investor scorecard on our website at wafedbank.com. During today's call, we'll 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 materials. Joining us this morning are President and CEO, Brent Beardall, Chief Financial Officer, Kelly Holz; and Chief Credit Officer, Ryan Mauer. I'd now like to hand the call over to Mr. Beardall.

Good morning, and thank you for joining us. It has certainly been an eventful quarter and year for WaFd. During this call, we will focus primarily on the WaFd stand-alone results -- and at the end of the call, I will provide my comments on the merger with EverBank that we announced on September 7 of this year. We closed out our fiscal year 2026 on a high note with earnings per share up 22% and over the prior year. Adjusting for nonoperating items, specifically the $6.2 million of merger expenses in the quarter, EPS would have been up by 5% on a linked quarter basis and up by 10% on the same quarter 1 year ago. And what is likely to be our final fiscal year before we merge with EverBank. We are proud to deliver our second best year ever in terms of after-tax net income of $241 million. This morning, we will cover 4 areas: First, Kelly Holt, our CFO; and -- we'll provide you with a detailed review of the balance sheet and income statement for the quarter and year-end. Next, Ryan Mawer, our Chief Credit Officer, will provide comments on the current status of our loan portfolio and credit quality trends including a detailed discussion of the large charge-offs incurred this quarter. Then I will provide my thoughts on the quarter, the short-term outlook on earnings and our long-term prospects, partnering with EverBank. Finally, we will answer any questions you have. Kelly, please walk us through the quarter and fiscal year-end results we published yesterday.

Thank you, Brent. As announced, WaFd Inc. reported net income available to common shareholders of $56.3 million or $0.76 per diluted share for the quarter ended September 30, 2026. This compares to net income to common shareholders of $0.72 per share for the fourth quarter of fiscal 2025 and $0.84 per share for the June 2026 quarter. The decrease in earnings per share for the quarter was a result of a modest increase in net interest income, increased noninterest income from the loan sale activity offset by an increased provision for loan losses and merger-related expenses. For the full year ended September 30, 2026, WaFd reported net income available to common shareholders of $241.2 million or $3.21 per diluted share. This compares to net income to common shareholders of $2.63 per diluted share for fiscal year 2025. For the balance sheet, Loans receivable decreased $977 million during the quarter as a result of the loan sale related activity. The company sold $543 million of single-family residential loans during the quarter and has entered into an agreement to sell $429 million of multifamily loans in the first quarter of fiscal 2027. These multifamily loans have been reclassified as held for sale, at September 30, 2026. We expect to realize a net gain of approximately $7 million when this sale is finalized. Outside of the loan sale, active loan types, commercial real estate, multifamily construction, land A&D, C&I and consumer combined, increased by $237 million for the quarter, while our inactive loan types decreased by $267 million. Loan originations and advances for the quarter outpaced repayments and payoffs for our active loan types with originations of $1.4 billion and repayments and payoffs of $1 billion. For the inactive loan types, advances were $24 million and repayments and payoffs were $249 million. The weighted average rate of origination was 6.87% for the quarter and the weighted average rate on repayments and payoffs was 6.35%. 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 decreased $113 million during the quarter, a result of our shifting strategy, replacing the single-family runoff in the loan portfolio from mortgage-backed securities to funding our higher-yielding loan origination pipeline. Total deposits increased by $389 million during the quarter, with noninterest-bearing deposits increasing $39 million or 1.5%, interest-bearing deposits increasing $91 million or 0.9% and time deposits increasing $259 million or 3.2%. Core deposits ended the quarter at 81.8% compared to the June quarter at 80.6% of total deposits. and up from September 2025 at 77.9%. Noninterest-bearing deposits ended the quarter at 12.6% of total deposits. The loan-to-deposit ratio decreased for the quarter ended September 2026 to 89.3%, primarily as a result of the loan sale activity. WaFd's capital profile remains strong. We expect our capital ratios to be in line with the prior quarter ratios, which was 11.4% for CET1 and 14.4% for the total risk-based capital ratio. Liquidity is strong with $4.2 billion of on-balance sheet liquidity, a robust core funding base and significant off-balance sheet borrowing capacity. For the income statement, net interest income increased $1 million from the prior quarter, the effect of a 4 basis point improvement on the interest earned on assets, offset by a 7-point increase in the cost of interest paid on liabilities. As a result, the net interest margin held steady at 2.81%, no change from the June 30, 2026 quarter. On a linked quarter comparison, the margin was benefited from a 2 basis point improvement with loan rates, a 3 basis point improvement with investment yields, a 1 basis point decrease with borrowing rates and then impacted by a 6 basis point increase in the cost of deposits and 3 basis points for day count, the 92-day quarter compared to 91 days in June. 50% our loans and 75% of our securities are on a 33-60 basis. For the spot rate as of the September quarter end, the yield on interest-earning assets was 5.21%, while the cost of interest-bearing liabilities was 2.87%, the margin ended at 2.81%, the same as the margin for the September quarter. Absent any changes in interest rates, we expect our margin to expand modestly over the next quarter or 2 with the reduction in earning assets due to the loan sales in addition to our earning assets repricing more quickly than our liabilities in the short term in a rising rate environment. As of September 30, the balance of deferred income on the interest rate mark for the Luther Burbank portfolio was $137 million. During the September quarter, we recognized approximately $17 million of the discount through noninterest income with the sale of the single-family loan portfolio pool. Total noninterest income was $38.1 million for the September 2026 quarter compared to $24.2 million for the prior quarter, this increase was primarily driven by a $16.4 million gain on the sale of single-family loans during the quarter. This gain was partially offset by the quarter-over-quarter reduction in noninterest income attributable to the $3 million gain on the sale of bank real estate we recognized in the third quarter. Total noninterest expense was $121.5 million compared to $110.3 million for the June quarter. This was the result of continued investments in our people and technologies combined with $6.2 million in merger-related costs occurred in the fourth quarter. The company's efficiency ratio for the September quarter was 55.12% compared to 53.7% in the prior quarter. Income tax expense totaled $17.1 million for the September 2026 quarter compared to $18.2 million for the June quarter. The effective tax rate for the September quarter was 22.17% and compared to 21.6% for the quarter ended June 30, 2026. The increase in the effective tax rate from the prior quarter was the result of merger-related expenses incurred, which are not deductible for tax and create a discrete tax expense. The effective tax rate for the fiscal year 2026 was 21.88%. 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 $1.4 billion for the September quarter. This loan production was centered in commercial and industrial of 44% and commercial real estate of 20% and construction of 23%. We were able to achieve this level of loan production, utilizing a consistent approach to underwriting and managing to a moderate risk profile. Total loan production in our active portfolio for fiscal year 2026 was $5.5 billion compared to $3.5 billion for the fiscal year 2025, a 56.6% increase year-over-year. I would like to acknowledge the significant efforts of our WaFd colleagues in generating that level of growth in a challenging and highly competitive environment. Adversely classified loans during the quarter decreased to 2.56% of net loans compared to 2.59% as of the June quarter 2026 and 3.16% as of September 2025. Total criticized loans decreased by $99 million to 4.7% of net loans compared to 4.9% as of the June quarter and 4.4% as of September 2025. The decrease in criticized loans is the result of an improvement of a large C&I relationship as well as the resolution of a significant $54 million C&I problem relationship during the quarter. This problem relationship was noted in our previous call with anticipation that the business would be sold prior to fiscal year-end. Ultimately, this relationship resulted in a large impairment well outside of our historical loss results. The loans in question were provided to a large private equity-owned manufacturer. And at the time of the issuance in 2021, the underwriting credit metrics for the borrower in terms of revenue, earnings and cash flow all represented strong and stable growth. Further, pro forma leverage, a measure of funded debt to EBITDA was very modest, well over 1:1. However, operating results saw a material decline in 2023 and 2024 due to unfavorable operating conditions in the challenging economic environment. This decline, coupled with the inability of ownership to contribute or raise additional capital caused a negative spiral and working capital in 2025 and 2026, which in turn further impacted operating results. In the end, the company was unable to recover from this spiral and had to be sold to new ownership, resulting in a large impairment to the bank. It should be noted that this loss was significant for the bank and is well outside of our normalized loss history. Inclusive of this loss, the loss rate for fiscal year ending 9/30, 2026, was 22 basis points. Adjusting for or excluding this loss at 9/30/2026, would have resulted in a loss rate of 4 basis points. This compares with loss rates from prior 2 years ending 9/30/2025 and 9/30/2024 of 6 basis points and 1 basis point, respectively. Going forward, we anticipate the loss rates to return to the norm historically. Nonperforming assets decreased to $86 million or 0.32% of total assets from $136 million or 0.49% at June 30, 2026. The -- this change is centered in the resolution of the $54 million problem loan relationship noted previously. Delinquent loans decreased 2.5% of total loans at September 30, 2026, compared to 0.75% at June 30, 2026, and 0.6% at September 30, 2025. The net provision for credit losses in the quarter was $20 million compared to a provision of $11 million in the prior quarter. The provision for loan losses in the fourth fiscal quarter of 2026 was the result of growth in the active loan portfolio and increased charge-offs during the quarter. $39.2 million of net charge-offs were taken during the quarter, inclusive of the problem loan mentioned previously. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.04% of gross loans at September 30, 2026 and 2025. For the commercial loan portion of the portfolio, the allowance represents 1.37% of net loans compared to 1.3% as of September 2025. Overall, we saw quarter-over-quarter improvements in adversely classified loans, criticized loans, nonperforming assets and delinquencies in the quarter. While these metrics remain elevated when compared to historic norms, they remain at moderate levels overall and continue to be impacted by 2 primary drivers: First, the economic uncertainty driven by continued inflationary pressures energy supply shocks driven by the war in the Middle East and tariffs will continue to impact the borrower's top line revenue results as well as operating costs. Second, the elevated interest rate environment has impacted the borrowers' cost of debt. Looking forward, these factors will remain headwinds for credit quality in the industry. With that, I will turn the call over to Brent for his comments.

As you have just heard, the fundamentals of our business are doing very well. We produced almost 8% growth in our active loan segments, which is impressive to me, considering the overall economy is growing at just 2.5%. Having resolved the large C&I credit, credit quality measures are strong. Our loan and deposit pipelines are robust with $3 billion of loans, a 5% increase from the June quarter and $240 million of deposits in our pipeline, a 6% decline from the June quarter. Our Net Promoter Score remains in the top quartile of all banks at a $55. Given the recent increase in short-term rates, we would expect our margin to expand over the next couple of quarters as assets will reprice more quickly than liabilities. We are likely to receive a significant bump in our risk-based capital ratios when the new Basel rules get approved. With all of that for context, the question I received most often now is why did WaFd decide to partner with EverBank. I answered that question with a philosophical retort. How much is enough? WaFd has had a remarkable run in the last 44 years as a public company with total shareholder return of approximately 36,000%. When the stock was at $36 a share, which is where we were trading immediately prior to the announcement, but just as we can look back with a great deal of pride, we need to guard ourselves and not let that turn into hubris going forward. There are plenty of examples of companies that fail to adapt or made the wrong changes, both inside of banking, think of WaMu or First Republic and outside of banking, for example, Sears, blockbuster or Palm, those did not adjust to the market. The reality from my perspective is that banking world has fundamentally changed over the last decade. Let me give 3 examples. First, today, we operate in a hypercompetitive market for deposits, where the playing field is imbalanced towards the largest banks. Evidence for this is in the Federal Reserve's HA data, which I've mentioned earlier, which shows that year-to-date, the largest 25 banks in the United States of America have grown deposits organically by 6.8%. The rest of us and that's roughly 4,300 banks for those of you that are counting, have been unable to grow net deposits. That is a problem, and I don't see it changing, unfortunately. Additionally, noninterest-bearing deposits, which have historically been the lifeblood of banks from a profitability standpoint have declined in totality and I believe will continue to decline as it is easier and easier to move funds to higher-yielding alternatives. Second, technology and scale matters. Primarily because scale allows you to invest more money in technology. This is great for our customers, it certainly favors larger banks that can spread the cost over a larger base. Third, more and more traditional banking is done outside of the banking system. If you look, the vast majority of banks C&I growth over the last decade has been in loans to these so-called nondepository financial institutions in DFIs. I am convinced that this trend will continue. Based on that perspective, how can WaFd not just compete but compete and win going forward. I think the partnership with EverBank makes us stronger in addressing each of these 3 areas noted above. First, we are changing our business model, so that we are not solely reliant on noninterest-bearing deposit growth to hit our return goals. Our pro forma bank, as shown in the investor presentation published on September 7, shows that with a 3% margin which would be in the lowest quartile of the peer group, we can achieve just shy of a 15% return on tangible common equity. To me, this is a game changer. We can pay a fair rate for deposits and still deliver the needed returns to our shareholders, and we can do this through improved margins on our assets and operating in the top quartile of all banks from an efficiency standpoint. That is a long-term differentiator that I want to be a part of. Second, coming together with Everbank will make us approximately 3x the size from an asset perspective that we are today and will enable us to use that scale to invest more in technology for both our clients and our teams. We already have a very strong digital offering, but I am convinced we will make further improvements. Third, EverBank has built a very strong team to serve the MBFI market and do it in a way that we believe is well controlled from both an underwriting perspective and from an ongoing controls and monitoring. What today is our competition will become clients for us going forward. With this partnership, we will be able to address these fundamental risks in turn what was a weakness into a strength. Let me share 1 further why and how it relates to what WaFd has done historically. If you go way back to 1982, before we went public, WaFd made the bold decision to restructure its balance sheet and sell a large portion of its single-family loans that were underwater from a rate perspective. crazy to think that 8.75% mortgages at that time were underwater, but that was the case in 1982. They did this to position the bank for profitable growth going forward. At the time, we realized a loss that amounted to $44 million on those loan sales. To put that in perspective for a fed today, million was the equivalent of 4 years' earnings back in. Looking at the last 4 years today for WaFd that would equate to $1.1 billion. It was a bold move but it paid off. WaFd in 1982 turned below market yielding assets in the market yielding assets and the results were phenomenal. For the next decade, as WaFd significantly outperformed its peers, including ROAs up to 3%. While I am not forecasting that kind of ROA in our future, through this merger, we will be able to fair value the WaFd balance sheet, including the $6.6 billion of single-family residential loans that are today earning only 4.25%. And mark those loans to market rates. What was a weakness will become a strength. And importantly, we were able to do it with the following metrics: 9.8% pro forma CET1 at close only 8% dilution to WaFd existing shareholders and 29% EPS accretion to WaFd's shareholders once the cost saves are fully realized. I believe this is a unique opportunity to make WaFd stronger and EverBank stronger. But most importantly, from my perspective, is we will do this without losing what makes WaFd great. Our bankers and the ethos we have created over the last 19 years, believing we can make a difference 1 customer at a time. So where do we stand on the merger? Earlier this month, we filed our regulatory applications and we expect to file our proxy within the next 2 weeks. Our previously announced expected closing time frame of the first calendar quarter 2027 remains on track. All of this is, of course, pending receipt of the requisite approvals from both shareholders and regulators. You have likely heard me say before that our research shows that roughly 2/3 of bank M&A is destructive to capital of the acquiring firm. Since we announced our deal, our stock is down 18.9%, while the NASDAQ Regional Bank Index is down 8.3%, roughly a 10% delta. You cannot argue with the market. We look forward to the opportunity to execute on our plan and demonstrate that we are part of the 1/3 of bank deals that are accretive to shareholder value. Finally, I want to acknowledge all of the incredible bankers that call a Fed Bank Home that make these results for the fiscal year 2026 possible. Our most valuable asset is our team. And we have bankers that care and want to serve our clients. Thank you to our bankers. With that, we'll move to Q&A.

[Operator Instructions] And our first question will come from the line of Jeff Rulis from D.A. Davidson.

I appreciate the strategic kind of overview there, Brent, helpful. Maybe I could hop into the loan sales, what timing of that in the quarter when those were completed or the multifamily moved to held for sale and then the average yield on those buckets of the sale.

Sorry, Kelli, do you want to handle that?

Certainly. So we closed on the single-family sale towards the end of September, so right at the end of the quarter, and we signed our purchase and sale agreement on the multifamily sale actually on the last day of the quarter. 2026. The single-family is reflective of a rate in the 4.25% 4.30%, 4.40% range on average in the single multifamily bucket that is held for sale is in about 4.8% today.

And do we expect the multifamily sale to close in December. Is that correct?

Correct.

Perfect. And then I guess, is there any -- was that -- those buckets of loans, was there anything particular about you could get premium pricing or good execution on those? Is there a selection process of maybe why those? And the follow-up question is any more coming that you see within those portfolios?

Yes. And I'll take that. right? Obviously, these came from the Luther Burbank portfolio, the portfolios that were marked previously with purchase accounting. So that gave us the opportunity for the gain. And certainly, we're just looking at the market overall and what our opportunities are. And we don't have immediate plans, but we'll continue to think about what the future is with EverBank and nothing further to announce now, but we'll continue to be opportunistic as the way I would describe it.

Okay. And then maybe just a question on the kind of a preliminary thought on earning asset levels at year-end relative to the 9/30 balance. Is that -- is the expectation -- I guess any color on that, just given the moving pieces, do you expect it to be largely flat, up down? Any any look into the earning asset level at year-end?

Yes. So the only thing we know is that sales of the single-family that are held for sale. But besides that, I'd expect relatively flat to modest growth with loan growth.

Okay. Maybe just squeeze in one more for Ryan, that the remaining call it, $76 million on nonaccrual. Any more sort of sizable credits or relationships there as that number comes down? Just trying to peg if there's anything kind of lumpy in there. There's a significant 1 or 2 credits or relationships remaining.

Yes. Thank you, Jeff. There are still some larger credits. We have one larger real estate loan that we do actually anticipate will be sold -- we have a property that is in the process of being sold anticipating the full payoff. So we do still have some larger credits that are adversely classified, but nothing that, from my perspective, would represent anything as a significant loss like what we incurred with the other relationship that we discussed.

Sure. Ryan, I think with the balance of that, maybe that large real estate.

SP-16 Yes, that 1 is a $40 million balance.

$40 million a little over half of the remaining bonds. Okay. I will step back. Thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Matthew Clark from Piper Sandler.

Just want to touch on the earning assets a little further there. loans are going to be down roughly $1 billion with the multifamily loan sale later this year. I guess do you anticipate any offset to the weaker NII that's going to unfold from that? Is there something you plan to do on the expense side? Or I just want to make sure we're thinking about it correctly.

Yes. So we haven't made definitive plans, nothing to announce. Clearly, we've got levers to pull from an investment side. One of the nice things about higher rates is the investments now yield higher than these loans that we got with us. So we could replace those loans with investments. But as I think we called out -- we're expecting our margin to go up, and we -- we'll work to defend the NII.

Okay. And then -- just on the expense run rate this quarter, $117 million ex the merger charges, thoughts on that run rate going forward?

Yes. I would say typically, this quarter is a little bit hotter with kind of year-end cleanup items. So you take out those merger-related expenses. And I think we'll probably be there to a little bit flat on the next quarter.

Okay. And then just on CD repricing, can you remind us, I think it's in your -- actually, I think it's in your fact sheet, so I apologize. But maybe the roll-on rate of new CDs, kind of the blended average where you anticipate those CDs to migrate to?

Yes. I'll let Kelli talk about where our new pricing is at right now. But what I would say is we kind of saw the market front run the latest Fed increase, where you saw rates start to go up. So we've kind of been getting squeezed in the last couple of quarters. And now with the actual rates going up, that helps us on the asset side. So my expectation is that it will kind of fade out in terms of the increasing on the deposit costs. Just because it kind of front loaded a little bit. Tell you want to share what our current special rates are?

We're currently in our CD special rates were running 4.1% for a 13-month CD. So we're seeing most of our CD renewals and CD dollars coming through just the specialist at this point.

Okay. And then what's the data you're assuming on interest-bearing deposits, assuming we get 1 or 2 more rate hikes?

I think about 50%.