WaFd, Inc. Q3 FY2026 earnings call

- Financial and Growth Performance - After over a year of net loan portfolio contraction, WaFd has delivered net loan growth in two consecutive quarters. Linked quarter net growth in the active loan portfolio was 10% following 12% growth in Q2 FY2026; including unfunded loans, gross active loans grew 14% linked quarter. - EPS grew 2.4% linked quarter and 15% year-over-year; return on tangible common equity is 11%, and total shareholder return for Q3 was 23%. The bank notes its stock trades at a discount to regional bank peers, at 11.7x forward earnings and 1.25x tangible book value versus 12x earnings and 1.7x tangible book value for the S&P Regional Bank Index. - The efficiency ratio improved to 53.7%, within the firm's target range of 50%-55%, driven by controlled operating expenses and growing net interest income.

- Strategic Direction: Build 2030 - WaFd's long-term strategic plan focuses on shifting the bank's core focus to serving business banking clients to increase shareholder and client value. The primary strategic goal is growing non-interest-bearing deposits as a share of total deposits from 11% in 2025 to 20% by 2030, with the current share at 12.6%. - The firm prioritizes organic growth in direct C&I lending (especially small business lending), supported by CRE and large corporate lending, alongside improving operating efficiency to lower cost of funds.

- Capital and Shareholder Management - WaFd paused share repurchases this quarter after the stock price increased, having repurchased 4.7 million shares fiscal year-to-date at an average price of $30.99 (101% of tangible book value, which management calls a high-value investment). The firm will remain opportunistic with future repurchases and has sufficient capital for both repurchases and organic growth. - Management expects more industry M&A activity over the next two years driven by scale benefits and a difficult operating environment for smaller banks. WaFd will only pursue deals that do not overly dilute existing shareholders, will not overpay for acquisitions, and requires a tangible book value dilution earnback period of less than 3 years. The current low stock multiple makes large strategic acquisitions prohibitive at current market pricing, so the firm is focused on improving its own profitability and multiple first.

- Regulatory Updates - The revised Basel III endgame capital framework, once finalized, is estimated to reduce WaFd's risk-weighted assets by approximately 12.5%, delivering $300 million in total risk-based capital relief. WaFd expects to benefit more than peers from this change due to its large single-family loan concentration. Implementation could come as soon as the end of 2026 calendar year. - Management cites an unlevel competitive playing field: per Fed data, the 25 largest U.S. banks have seen 5.85% net deposit growth year-to-date, while all other banks have seen a 0.78% contraction, driven by the market perception of too-big-to-fail protection for large banks. Management notes this will lead to further industry consolidation if policy does not change.

WaFd Inc. reported net income available to common shareholders of $62.5 million, or $0.84 per diluted share, for Q3 FY2026 ending June 30, 2026. This compares to $0.73 per diluted share in Q3 FY2025 and $0.82 per diluted share in Q2 FY2026.

Loans: Total loans receivable increased $51 million in the quarter. Active loan segments (commercial real estate, multifamily, construction, land A&D, C&I, consumer) grew by a net $315 million, with $1.5 billion in total originations outpacing $1 billion in repayments/payoffs. C&I originations were $741 million, representing 49% of total active segment originations; construction originations were 27% of total active originations, and commercial real estate originations were 10% of total active originations. Inactive loan segments saw net repayment of $276 million, with $23 million in advances against $299 million in repayments/maturities. The weighted average rate on all Q3 originations was 6.31%, compared to 6.06% on repayments/payoffs.

Balance Sheet: Total investments and mortgage-backed securities decreased $50 million as the firm shifted strategy from funding single-family loan runoff via MBS to supporting higher-yielding active loan originations. WaFd sold $77 million in available-for-sale securities for a $110,000 net gain, reinvesting proceeds into higher-yielding assets that will add $1.3 million in annual yield. Total deposits decreased $192 million: non-interest-bearing deposits increased $69 million (+2.7%), interest-bearing deposits decreased $70 million (-<1%), and time deposits decreased $191 million (-2.3%). Core deposits accounted for 80.6% of total deposits at quarter end, and non-interest-bearing deposits were 12.6% of total deposits. The loan-to-deposit ratio ended at 95.6%. CET1 ratio was 11.4% and total risk-based capital ratio was 14.4%, unchanged from the prior quarter. On-balance sheet liquidity totaled $4.8 billion.

Income Statement: Net interest income increased $3.8 million quarter-over-quarter, and net interest margin held steady at 2.81%. Non-interest income increased $4.4 million quarter-over-quarter to $24.2 million, driven by a $3.2 million gain on branch property sale and a swing from $1.1 million in prior quarter losses to $48,000 in gains on equity method investments. Non-interest expense was stable at $110 million quarter-over-quarter. The efficiency ratio improved to 53.7% from 55.7% in the prior quarter. Income tax expense was $18.2 million, with an effective tax rate of 21.6%. The allowance for credit losses (including unfunded commitments) provided 1.08% coverage of gross loans, up from 1.03% a year prior; for the commercial loan portfolio, coverage was 1.41% of net loans, up from 1.26% year-over-year. Net charge-offs totaled $1.6 million in the quarter, equal to an annualized 3 basis points.

- Net loan growth: The active loan portfolio is expected to continue growing at an 8%-12% annualized pace going forward. Inactive portfolio attrition will offset most of this active growth, resulting in low single-digit net overall loan growth for the near term, which is a fair base assumption. - Net interest margin: Management expects the net interest margin to remain relatively stable over the next two quarters, with the stable outlook including current Luther Burbank portfolio accretion and recent securities repositioning tailwinds. Faster-than-expected repayments on the Luther Burbank portfolio or increases in short-term interest rates would create upside to the margin, as WaFd is asset sensitive in the short term. The prior target of a 3%+ margin is more challenging to achieve in the near term under the current market expectation of sustained higher rates; reaching 3% would most likely be driven by Fed rate hikes. - Effective tax rate: Management expects the full fiscal year 2026 effective tax rate to be approximately 21.8%. - Capital allocation priorities (for incremental capital from the Basel III endgame change): In order of priority, capital will be used for organic growth, strategic or financial M&A that meets the firm's discipline requirements, and opportunistic share repurchases if the first two priorities do not require capital. - Operating efficiency: Management expects to maintain the efficiency ratio within the target 50%-55% range going forward, building off the current expense level.

- Credit quality: Elevated criticized loans (up to 4.9% of net loans from 4.2% last quarter) reflect broad pressure on borrowers from elevated interest rates, economic uncertainty driven by inflation, Middle East geopolitical conflict, and energy supply shocks, which increase borrower operating costs and pressure top-line revenue. While overall credit metrics remain moderate and covered by existing reserves and capital, these factors will continue to be headwinds for credit quality going forward. There is a $54 million C&I relationship that is over 90 days past due, classified as non-accrual and downgraded to doubtful, with an expected business sale planned by Q4 FY2026 end; no charge-off has been taken to date. - Deposit competition and cost pressure: Aggregate deposit growth is concentrated in the largest 25 U.S. banks, with smaller banks seeing deposit outflows, driven by the market perception of too-big-to-fail for large institutions. Market-wide non-interest-bearing deposits have declined from 30% of all U.S. commercial bank deposits in 2021 to 22% as of 2026, due to intense competition for deposits and fintech that makes it easier for customers to move funds to higher-yielding alternatives. Deposit competition is currently ferocious, and marginal deposit costs are trending higher, putting pressure on net interest margins. - M&A constraints: The bank's discounted stock valuation relative to peers makes accretive strategic M&A prohibitive in the current market, as targets typically trade at 1.7x-2x tangible book value while WaFd trades at only 1.25x, leading to excessive shareholder dilution. - Interest rate risk: While WaFd manages its balance sheet to be neutral on long-term interest rate risk, unexpected sustained rate increases or elevated rates could put further pressure on borrower credit quality and deposit costs.

Q: What is the expectation for overall net loan growth, given the 8%-12% growth target for the active portfolio and continued inactive portfolio attrition? Is low single-digit net growth a fair near-term assumption? / A: Management confirms low single-digit overall net loan growth is a reasonable near-term assumption, comparing the legacy single-family inactive portfolio to a bond portfolio with steady runoff. WaFd could add mortgage-backed security purchases to boost net growth if the rate environment is favorable.

Q: What are the details on reserve coverage for the large non-performing C&I relationship expected to be resolved next quarter, and what drove the C&I reserve build this quarter? / A: No specific reserves are allocated to this relationship, but it contributed to the general reserve build in C&I this quarter alongside broader active loan portfolio growth. Management notes the firm is well reserved overall with $230 million in total allowance for loan losses, and the loan is expected to be resolved via business sale by the end of Q4 FY2026.

Q: What is the path back to a 3%+ net interest margin, and how is competitive pricing for new loans shaping up currently? / A: The prior 3% margin expectation was based on market forecasts for falling rates, which have not materialized. The path back to 3% in the current environment would be driven by Fed rate hikes, which would benefit WaFd as it is short-term asset sensitive. Current new C&I A-credit pricing is SOFR plus 175 to 225 basis points, and competitive spreads have actually stabilized or improved slightly in recent months.

Q: What are the parameters for potential M&A activity given management expects more industry deal flow? What types of deals interest WaFd? / A: WaFd only pursues deals that deliver a tangible book value dilution earnback of less than 3 years and avoid excessive shareholder dilution. Current valuation of the firm's stock (at 1.25x tangible book) makes strategic acquisitions (which require paying 1.7-2x tangible book for high-quality deposit franchises) prohibitively dilutive. The firm will stay focused on executing its organic Build 2030 strategy to improve its own multiple before pursuing large deals, but will remain opportunistic on smaller financial transactions that meet its criteria.

Q: How would WaFd use the incremental capital from the revised Basel III endgame framework if it is finalized? / A: Capital allocation priorities are ranked: 1) supporting accelerated organic growth, 2) pursuing strategic or financial M&A that meets the firm's discipline requirements, 3) opportunistic share repurchases if capital is not needed for the first two priorities.