Prepared remarks
Good day, and thank you for standing by. Welcome to WaFd, Inc.'s Fiscal First Quarter 2026 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Goode, Chief Marketing and Investor Relations Manager.
Thank you, Josh. Good morning, everybody. Happy New Year. Let's dive into our 2026 first quarter earnings report. You can find our earnings press release, along with our detailed fact sheet and investor scorecard on our website at wafdbank.com. During today's call, we'll make some 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 recently filed 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. With us this morning are President and CEO, Brent Beardall; Chief Financial Officer, Kelli Holz; and Chief Credit Officer, Ryan Mauer. I'd now like to hand the call over to Mr. Beardall.
Thank you, Mr. Goode, and good morning, everyone, and happy new year. This morning, we will cover four areas for you. First, Kelli will provide you with a detailed review of our balance sheet and income statement for the quarter ended December 31, including the impact on our margin from the increase in nonaccrual loans, which everyone has undoubtedly noticed; second, Ryan Mauer will provide comments on the current status of our loan portfolio and credit quality trends; third, I will provide my insights on our future prospects, capital management, and macro developments that impact WaFd; finally, we'll be happy to answer any questions you have. Before turning it over to Kelli, I want to point out that based on your historical inquiries about repricing on our assets and liabilities, we have added a new table to our fact sheet on Page 6. This table details our largest categories of assets and liabilities, what percentage of each is fixed versus variable, then the cumulative amount of repricing and quarterly increments over the next two years. Please note that this table takes into account both the variable rate instruments and fixed rate instruments that mature in the stated timeframes. It also considers the effect of various hedging strategies. Kelli, I'll turn it over to you to walk through the quarter-end results.
Thank you, Brent. As announced, WaFd, Inc. reported net income available to common shareholders of $60.5 million or $0.79 per diluted share for the quarter ended December 31, 2025. This compares to net income to common shareholders of $0.54 per share for the first quarter of fiscal 2025 and $0.72 per share for the September '25 quarter. The $0.07 increase in earnings per share for the quarter was a result of improvements in both income and expense, a modest increase in net interest income, and increased noninterest income, as well as an overall decrease in total noninterest expense. For the balance sheet, loans receivable decreased $240 million during the quarter, primarily due to a decrease in our inactive loan types, SFR, custom construction, and consumer lot loans, which combined decreased by $256 million. Loan originations and advances for the quarter outpaced repayments and payoffs in our active loan types, with originations at $1.1 billion and repayments and payoffs at $1 billion.
Active loan types include multifamily, commercial real estate, C&I, construction, land A&D, and consumer loans. For the inactive loan types, advances were $25 million and repayments and maturities were $321 million. Please see the table in our fact sheet that provides a breakdown between our active and inactive loan types. Total investments and mortgage-backed securities increased $728 million during the quarter, funded primarily by the increase in borrowings of $671 million. Investment purchases were primarily discount-priced agency mortgage-backed securities with an effective yield of 4.93%. This increase in mortgage-backed securities is part of our overall investment strategy currently replacing the single-family mortgage loan balance runoff. Total deposits decreased by $21 million during the quarter, with noninterest-bearing deposits increasing $125 million or 4.9%. Interest-bearing deposits increased $434 million or 4.5%, while time deposits decreased $580 million or 6.4%.
Core deposits ended the quarter at 79.7% of total deposits, up slightly from the September quarter at 77.9%. Noninterest-bearing deposits ended the quarter at 12.6% of total deposits. The loan-to-deposit ratio ended the quarter at 92.7%. We have made significant progress in this area. As you may recall, our loan-to-deposit ratio just two years ago at December 2023 was north of 110%. WaFd's liquidity and capital profile remain strong with a robust core funding base, a low reliance on wholesale borrowings, and significant off-balance sheet borrowing capacity. In addition, all of our capital ratios are in excess of regulatory well-capitalized levels. For the income statement, net interest income increased $1.2 million from the prior quarter with the effect of the reduction in interest paid on liabilities outpacing the reduction in interest earned on assets by 2 basis points. The net interest margin was 2.7% in the December quarter compared to 2.71% for the September quarter.
For the spot rate as of December 2025 period-end, the yield on interest-earning assets was 5.05%, while the cost of interest-bearing liabilities was 2.76% with a resulting margin of 2.77%. Comparing the spot rate at September 30, which was 2.82%, to our December quarter margin realized at 2.7%, 9 basis points of the difference relates to nonaccrual interest, one-time reversals when loans go nonaccrual, and also interest income not being recognized going forward from the nonaccrual date. The three remaining basis points relate to our purchase of mortgage-backed securities during the quarter, as I mentioned, with a net yield of 4.93%. While these purchases put pressure on the margin, they generate annual net interest income of approximately 1.03% of the average balance purchased. For the December quarter, this amounted to $1.2 million in net interest income. Looking forward, I would expect more pressure on the margin from additional mortgage-backed securities purchases in addition to increased net interest income.
Total noninterest income increased $1.9 million compared to the prior quarter to $20.3 million. Contributing to the noninterest income is a $3.2 million gain on the sale of a branch property offset by losses of $408,000 taken on certain equity method investments in the quarter compared to gains on those investments of $815,000 in the prior quarter. Total noninterest expense decreased $1.3 million or 1.2% from the prior quarter as a result of reduced compensation and technology expenses, offset by increases in other expenses. Decreased expenses combined with increased income resulted in a decrease in our efficiency ratio for the current quarter to 55.3% compared to 56.8% in the prior quarter. During the quarter, 1.95 million shares of common stock were repurchased at a weighted average price of $29.75. The impact on earnings per share for these repurchases was $0.02 for the quarter. Our share repurchase plan currently has a remaining authorization of 6.3 million shares, which, depending on share price, provides a compelling investment alternative.
Thank you, Kelli, and good morning, everyone. As highlighted in our earnings release, we experienced a strong quarter in new loan production across various product lines. Total production in our active portfolio reached $1.1 billion for the December quarter. This production was primarily focused on commercial and industrial loans at 46%, commercial real estate at 23%, and construction at 25%. Importantly, we achieved this level of loan production with a steady underwriting approach that kept our risk profile moderate. Adversely classified loans declined by $51 million during the quarter and now account for 2.94% of net loans, down from 3.16% in the September quarter and 1.97% in December 2024. Total criticized loans rose by $30 million to 4.6% of net loans compared to 4.39% in the September quarter and 2.54% in December 2024. It's worth noting that this increase in criticized loans is not limited to any specific business category and reflects the wider economic conditions, where high interest rates and economic uncertainty have impacted both commercial and consumer borrowers.
Additionally, an asset being criticized does not indicate that there is an exposure to loss; rather, it signifies that the borrower is experiencing some financial stress that needs attention. Nonperforming assets rose to $203 million or 0.75% of total assets, up from $143 million or 0.54% on September 30, 2025. This change is chiefly attributed to nonaccrual loans, which increased by $62.7 million or 49% since September 30, 2025, though this was somewhat offset by a $2.3 million decrease in real estate owned. Delinquent loans increased to 1.07% of total loans as of December 31, 2025, compared to 0.6% at September 30, 2025, and 0.3% at December 31, 2024. While these credit metrics are elevated compared to recent periods, they remain modest in relation to WaFd's loan loss reserve and capital position, and indicative of our proactive portfolio management culture. It's important to highlight that the increases in delinquencies and nonperforming assets were mainly influenced by two commercial accounts that are over 90 days past due, with outstanding balances totaling $58 million.
Although they were appropriately placed on nonaccrual per our policy, no charge-off was recorded during the revaluation, and we are actively working with both borrowers to resolve the issues. If we adjusted nonperforming assets and delinquencies for these accounts, NPAs would be 0.67% of total assets compared to 0.64% at September 2025, and delinquencies would be 0.78% of total loans compared to 0.6% at September 2025. The net provision for credit losses for the quarter was $3.5 million, resulting from decreased loan balances combined with credit metrics showing increasing trends and negative migration of criticized and nonperforming loans, along with $3.7 million in net charge-offs taken during the quarter. Net loan charge-offs for the quarter represented just 7 basis points of total loans annualized at December 2025, driven by a relationship in the commercial and industrial energy sector due to low oil prices and reduced working capital.
For context, net charge-offs over the last decade have averaged a recovery of 2 basis points per year, while over the last three years, they've averaged 10 basis points per year. The allowance for credit losses, including reserves for unfunded commitments, provides a coverage of 1.05% of gross loans as of December 31, 2025, compared to 1% in December 2024. For the commercial loan portfolio, the allowance stands at 1.33% of net loans compared to 1.26% in December 2024. While credit metrics at the end of the December quarter are elevated compared to prior quarters, they remain at healthy overall levels and are influenced by two main factors: first, the high interest rate environment has affected loan demand and borrowers' cost structures; second, the economic uncertainty caused by tariffs continues to impact borrowers' revenue as well as material costs. Looking ahead, these factors will continue to pose challenges for credit quality. Although uncertainties related to tariffs are still significant, the interest rate environment seems to be improving in the near term. Now, I will turn the call over to Brent for his comments.
Excellent. Thank you, Ryan. I think we've started off the year well with a 10% linked quarter EPS growth and a 40% year-over-year growth, and importantly, 18% growth in transaction deposits on a linked quarter basis. Our strategic plan Build 2030 is designed to fully shift our focus to where we can add the most value to our clients and our shareholders, serving the banking needs of businesses. This shift takes time, disciplined effort and comes with specific goals. The most important goal is increasing our noninterest-bearing deposits to total deposits from 11% last year, up to 20% by 2030, and we are currently sitting at 12.6% today. 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 have achieved their lower cost of funds is to focus on serving small businesses, which is exactly what we're doing. Here's what we've accomplished so far.
It's hard to believe that it was just January last year that we reorganized our frontline bankers into three segments to kick off Build 2030. During that time, we've become a preferred SBA lender, and 98% of our branch managers who formerly specialized in mortgage lending have now passed our small business credit certification process. Our three different lines of business are: first, our business bank, handling commercial credit needs up to $10 million and all small business and consumer deposits. This includes our 208 branches through our nine Western states; our corporate bank, handling all large commercial credits and treasury needs; then our commercial real estate bank, recognizing our historical strength and expertise in commercial real estate, we have dedicated a 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 is 2.7% for the quarter with a return on tangible common equity of 10.6%. If we can get our margin up to 3%, which is our short-term goal within the next two years, everything else being equal, return on tangible common equity would be 12.9%. The key from my perspective is growth in C&I loans and deposits, supported by growth in CRE loans while running an efficient bank. I'm very pleased to see our efficiency ratio down to the top end of our target range at 55% this quarter. We believe that we have the products and teams in place to grow our active loan portfolios by 8% to 12% over the next one to two years. Last quarter, our active loan portfolio was essentially flat, but we believe we have now turned the corner and will start growing. Looking forward, our lending pipelines continue to expand while deposits remain challenging. Our lending pipeline is up $697 million or 28% over the last quarter.
To detail it, our total lending pipeline as of the September 30, 2025, quarter was $2.5 billion. And today, our total lending pipeline is at $3.2 billion while deposits remain fairly flat. Looking at the number of accounts. In the last year, noninterest-bearing accounts are up by 5,800 accounts, a 2.5% increase, which is modest, but importantly, it reverses a trend of declining numbers we had seen over the last several years. C&I loans after opening up business lending to our branch teams, in the last year, we have increased the number of C&I loans we have on our books by 97%. With each of these new business relationships, we are planting the seeds for additional growth going forward. As we announced last quarter, we launched WaFd Wealth Management on August 31 with the hiring of experienced professionals from a wirehouse firm here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first two years and then go from there.
Early indications are very positive. Assets under management amounted to just over $400 million as of December 31, and it is nice to fill a hole that we have had in our product offering. We see wealth as an essential element in growing our noninterest income going forward. Turning to capital. With our stock price trading below tangible book value for some of last quarter, you have seen that we were aggressive in repurchasing our shares. We repurchased 2 million shares at a price of $29.75 or 99% of tangible book value. Over the last seven quarters, our company has repurchased 5.8 million shares at a weighted price of $29.45. This represents 7% of the shares outstanding on March 31, 2024. We continue to believe that with our robust capital levels, when our share price is depressed, share repurchase is the best use of capital. Based on current trading, I think our stock today is trading at about 1.1 times tangible book value.
As you know, we've appealed our FDIC Needs to Improve CRA rating to the highest levels of the FDIC, a committee called the SARC, the Supervisory Appeals Review Committee. We made our case in early December, recognizing it is a long shot, but we felt compelled to do so because our belief is the FDIC examiners were comparing apples to oranges, by comparing WaFd with lenders that sell their loans, and all of this on a segment of our loan portfolio that we have now exited. We expect to hear the final conclusion within the next week, but we are anticipating moving forward with the Needs to Improve rating.
Questions and answers
I would now like to turn the call over to questions.
First one was around the margin outlook at least in the near term. What's your plan for that $800 million of borrowings that comes due or reprices within the next three months?
Yes. Simple, we will replace that with current borrowers not looking to shrink at this point. So we'll replace it, and if the Fed continues to cut rates, that rate will come down.
Okay. And then the interest income reversal, I just want to double-check the dollar amount. I know you gave the basis points on a spot basis, but I just wanted to just verify the dollar amount of interest income reversal this quarter.
Kelli, do you want to give that?
Certainly, for the quarter, nonaccrual interest amounted to just over $5 million.
Okay. Yes, in the ballpark. Okay. And then the two new C&I nonaccruals, can you just give us some color on the types of businesses those relate to and the plan for resolution?
Yes. Again, we want to be careful and not call out any specific borrower. Ryan can talk to you about the types of businesses. But as we laid out, we're working with the clients and are optimistic at this point that we'll have resolution. Ryan, do you want to discuss a little bit further?
Yes, I would say that one business is in manufacturing and is affected by market conditions, tariffs, and labor costs. The other is related to commercial real estate.
Okay. And then last one for me, just on expense growth this year, kind of where you stand on the build-out of the SBA platform and whether or not you plan to hire more C&I lenders? I'm just trying to get a sense for how we should think about overall operating expense growth this year.
Yes, we will implement our annual merit increases starting this March quarter. While we will remain optimistic about exploring team opportunities, we do not have significant plans to expand large teams. We believe we currently have the necessary teams and tools in place. We will also continue to make strategic investments in technology. Excluding the merit increases, I believe we are operating at a solid run rate. As production increases, bonus compensation will also rise, but overall, I think we are in a good position right now.
Our next question comes from Jeff Rulis with D.A. Davidson.
Kelli, I wanted to follow up on what you said. You mentioned expecting further margin pressure while anticipating growth in net interest income dollars. Is that projection for the first calendar quarter?
Correct. With the current strategy to replace single-family runoff with mortgage-backed securities.
I understand that there are different time frames involved, but Brent mentioned the short-term goal of reaching a 3% margin. If you could provide some insight into how this relates to the balance of calendar '26, is this a potential short-term challenge before we see improvement? Any details on the expected trajectory?
Yes. So again, I want to be very careful not to provide guidance going forward. But clearly, this quarter was impacted by the increase in nonaccruals. Likewise, this was impacted negatively a quarter from now or two quarters from now, it can go the other way, it would be meaningful for us, not only the catch-up of the previous accrued interest that wasn't counted, but then the ongoing accrual to be very positive for us as well as the continued shift in terms of our balance sheet towards lower-cost deposits. So that's where we see the optimism to get to a 3% margin over the short term.
Okay. Regarding the loan portfolio, is the inactive runoff for this quarter approximately $200 million to $250 million in terms of shrinkage, which is expected to be offset by, Brent, you mentioned, aiming for 8% to 10% growth?
Yes, yes, very much so. I would just say the inactive could spike up for us if we have a reduction in long-term rates, right? So there's no refi boom going on what so ever. And if we get to a point that we have long-term mortgage rates go down, you could see that after spike up significantly. And we also have a meaningful amount of discount remaining on the Luther book that was accretive to income if and when that happens.
Okay. And then just the last one, Brent. Regarding the buyback, your sub tangible book certainly aligns with share values, possibly around 10% or more above last quarter's average buyback price. How sensitive are you to price changes? Additionally, what levels would you feel comfortable reducing to if you continue to be active in buybacks?
I don't think you'll see us meaningfully shift our capital ratios at this point, right? We're not looking to meaningfully cut into those. Obviously, we're producing a large amount of income, and absent growth, the repurchase of shares is our best alternative. I would just say, as you've seen us in the past, the closer we are to tangible book value, the more aggressive we'd be. I still believe that at 1.1 times tangible, it's the best investment we can make today.
Our next question comes from Andrew Terrell with Stephens.
If I could just start by clarifying the margin. I understand the mechanics and the potential pressure from investments. However, regarding the near-term expectations, I would assume the margin reset will be higher in the first calendar quarter since you're lapping the 9 basis point headwind from the interest reversal this past quarter. So, is the margin expected to decline from the reported amount or from the spot rate you provided, which I believe was 2.77% as of December 31?
I think we're referring to the spot rate, not the reported amount.
Got it. Okay. And if I just think about the mix of the balance sheet, securities roughly around that 18% of assets today. Is there a target mix of the balance sheet? Or specifically, is there a level where you wouldn't want to build the bond book anymore?
Yes. Compared to our peers, our bond book is still relatively small. We view our single-family mortgages as part of our bond book, even though they aren't securitized. I'm not planning to invest an additional $8 billion into bonds as we move forward, but there is definitely potential for growth in the bond portfolio. While we haven't made any announcements, I think having a target of 25% to 30% in the longer term is reasonable. In the short term, you'll see us gradually increase that, depending on the investment opportunities available in the market.
Yes. Understood. Okay. And just last one for me. I mean the transactional deposit growth was really strong this quarter, both NIB deposits and interest checking as well. I was hoping you could maybe just give a little more color on what you saw that kind of drove that throughout the quarter? Is it just reflective of early momentum from the changes you've made earlier in 2025? Anything unusual in the pace of deposit growth this quarter? Just wanted to maybe unpack the core deposit growth this quarter.
Yes. I would attribute it to two things: the momentum that we're getting in terms of our business shift or mix shift towards more C&I and treasury management. But also, we need to acknowledge that it's the cyclicality, the seasonality towards calendar year-end, those deposits tend to build up a little bit and the credit cards come due, and those come due. And typically, in the first calendar quarter, you see that shift out. So we will see with the results of this quarter. But to your point, a significant runoff in terms of CDs, and that was really offset by increasing our transaction counts that we're very pleased. So time will tell, but we're optimistic.
Our next question comes from Kelly Motta with KBW.
I did want to ask a follow-up maybe, Kelli, on the MBS purchases. Is my understanding last quarter, that the inactive runoff would be in part to fuel those purchases. It looks like you did a bit more and took out some borrowings, which again drove NII growth, but at the expense of some margin. As you look ahead, is that still a fair way to think about the growth in the securities portfolio? And how should we be thinking about that use of borrowings and potentially using those with that trade ahead?
Certainly, we did accelerate some of the mortgage-backed securities purchases in excess of, as you mentioned, of the runoff in the single-family intentionally this quarter to get a head start on it. But absent any meaningful loan growth we would use potentially borrowings and deposit growth to continue to grow the balance sheet for investments if they make sense for us.
Got it. That's helpful. I wanted to clarify your expectations for growth in the active portfolio. You mentioned 8% to 12% over two years, while I think we're seeing that amount in 2026. Is that the correct way to interpret it? Is there a possibility of a slower ramp-up to that 8% to 12% as the pipeline develops? I'm trying to understand if 8% to 12% over fiscal year 2026 is still a realistic target.
In fiscal year 2026, we're anticipating growth in the range of 6% to 10%, and we expect to see higher growth in fiscal year 2027 as we fully ramp up our operations. The positive indicators from our pipeline suggest that the upcoming quarter should be strong for us in terms of loan production. Now we need to demonstrate that potential.
Got it. That's helpful. And you noted your CRA, you Needs to Improve, your fight, you've taken it to the highest level with the expectation that these are very difficult to overturn. Is there anything that getting that lifted would unlock in terms of your ability to look ahead, it seems like you're working on SBA trying to get these active portfolios going. But just wondering if there's kind of any additional opportunity that could be unlocked when you think through that CRA Needs to Improve?
Yes. Really, the most of it is around branching and how easy or difficult it is to do branching activities. And with over 200 branches, you might imagine we have branches all the time that we need to move as leases expire and so forth. And right now, there are all kinds of hurdles we have to jump through if we can get those moved at all. But it's also with regards to mergers and acquisitions, and we're not actively looking to do deals at all. We need to show that the Luther Burbank was worthwhile, but we like having the options, and having a Needs to Improve doesn't preclude you from doing a merger and acquisition, it just makes it much more difficult. So if we got out of that, that would be welcome news from our perspective.
Got it. That's helpful. And then just maybe one more high-level question for me on that 3% margin trajectory. In your expectation or wish to move towards that over the intermediate term. Are you baking in any additional rate assumptions? Said another way, you've added some borrowings and have some higher cost funding that needs to work down, would rates be some sort of an element to needed to get you there? And maybe if you could just kind of help us out with how you guys are thinking about the kind of recipe in order to get to that 3%.
Yes. We're really kind of looking at the combination of the forward curve versus what our gut told us, and we're kind of baking in one to two cuts this year into that assumption.
Thank you. I would now like to turn the call back over to Brad Goode for any closing remarks.
Josh, thanks so much. Hey, thanks, everybody, for joining this morning's call, our second call with you all. Please contact me if you have any further questions. And we hope you have a great day and a great weekend, and go Seahawks.
Thank you, everyone. Go Seahawks. See you.
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.