Washington Federal, Inc. Stock

Good day, and thank you for standing by. Welcome to the WaFd Bank announcement conference call. [Operator Instructions]. 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, WaFd Bank's Chief Marketing Officer. Sir, please go ahead.

Thank you, Michelle. Good morning, everybody. Thanks for joining us for an update about WaFd Bank and the announcement about our strategic merger with EverBank. You can find our press release about the announcement, which we issued yesterday on our website at wafdbank.com. Additional supplemental information about the announcement can be found in our Form 8-K filing with the Securities and Exchange Commission, which is also available on our website.

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 is available from the announcement press release again that was issued yesterday and our Form 8-K. Forward statements are effective only as the date they are made, and WaFd assumes no obligation to update information concerning its expectations. We will also reference non-GAAP financial measures.

With us this morning are WaFd Bank's CEO and Vice Chairman, Brent Beardall; Chief Financial Officer, Kelli Holz; and Greg Seibly, Chief Executive Officer of EverBank; and Pat Rusnak, EverBank's Chief Financial Officer. I'd now like to hand the call over to Mr. Beardall.

Thank you, Brad, and thank you all for joining us today to talk about the strategic merger of WaFd Bank and EverBank. I'm very pleased to be joined today by my long-time friend and Pacific Northwest Banking colleague, Greg Seibly, EverBank's CEO. Greg and I met nearly 20 years ago when he was President and CEO at Sterling Bank in Spokane. Also joining us is Pat Rusnak, EverBank's CFO, who like Greg has a long history in Western Banking, including serving as the CFO of Sterling Bank in Spokane and PacWest Bank.

When Greg and I first started talking about the potential of this strategic combination several months ago, it became immediately clear to us, our 2 banks would be stronger together in every way. It is not that our banks are identical. We are different than one another. But I think you will see with what we present this morning, those differences are actually very complementary of one another. Our conviction about this has only grown more resolute as we move through this process and both banks completed rigorous due diligence. Greg, welcome back to Seattle.

Thanks so much, Brent. It's great to be back in the Pacific Northwest, having spent nearly a decade here from 2007 to 2016, and it's really great to be here with the WaFd Bank team.

We have a great story to tell, and I'm looking forward to getting into the details and talking about why EverBank and WaFd Bank truly are stronger together and poised to achieve great results for our investors, our clients, our employees and the communities we serve.

First, I want to say it is a privilege every day to work side by side with the WaFd team of bankers. This opportunity to partner with EverBank is an elegant fit. It allows us to carry forward the ethos of WaFd and deliver improved returns for our shareholders. Both banks bring exceptional credit quality and strong capital to the partnership. WaFd Bank and EverBank complement one another in several key strategic priorities you will hear about in the coming slides. I have no doubt that we will be stronger together. I'm honored to work with Greg and the teams at WaFd Bank and EverBank to challenge the status quo for the banking industry in the years to come.

I couldn't agree more, Brent. EverBank and WaFd Bank truly are stronger together. Since 2023, when EverBank was purchased by our private equity owners, and I became CEO, EverBank has been on a journey to transform into a high-performing institution. We're incredibly proud of what we've accomplished over the past 3 years.

Today, we're starting down in exciting new paths, the merger of EverBank and WaFd Bank. The combination of EverBank and WaFd Bank will open many new opportunities for nationwide growth and improved financial performance. By joining forces, we'll leverage our existing scalable consumer and commercial platforms to deliver high-value products and services to clients across the country. All of us at EverBank are looking forward to partnering with the WaFd Bank team to accomplish even greater things in the years ahead.

We have a lot of ground to cover today, so let's get started. Greg, Pat, Kelli and I will focus on the highlights included in our investor presentation, then we will be happy to answer your questions.

We'll start on Page 6. EverBank and WaFd Bank have complementary business models and the combination of the 2 banks will bring together and align consumer and commercial capabilities and strategies. The merger enhances both franchises accelerating the profitability ramp while providing lending and funding diversification.

Combined the franchise will be a $75 billion asset, multichannel bank with scale and reach, diverse lending products, a bank footprint in highly attractive markets and a very evolved digital bank that provides durable liquidity to support our lending businesses. The merger will also strengthen the bank's return profile, resulting in greater operational scale and increased efficiencies, expand their array of products and provide access to new markets for both organizations, as outlined in the key statistics portion of the slide shown on the right-hand side of the page.

Turning to Page 7. We believe the combination of EverBank and WaFd is highly accretive to WaFd earnings per share with robust earnings power and profitability that would not be possible for at least the next 5 years as a stand-alone company. The enhanced financial performance of the combined bank implies a 25% to 45% increase in value creation for our shareholders.

For 2027, we forecast fully synergized earnings per share accretion of approximately 29%, a 15-plus percent return on average tangible common equity and run rate earnings of $865 million to common shareholders for the combined franchise. This materially enhanced profitability drives a short tangible book value earn-back period of 2 years and excess capital generation for the combined bank. We project approximately 8.6% tangible book value per share dilution as a result of the transaction. We are forecasting the new EverBank will generate approximately 90 basis points of annual CET1 before returning capital to shareholders.

Turning to Page 8. We truly are stronger together. We're bringing complementary institutions to create a highly profitable and high-growth franchise with several key attributes. First, a multichannel relationship-driven strategy. Second, strategically located in attractive high-growth markets, servicing clients nationally and locally. Third, scale in funding to navigate a rapidly evolving banking environment. Fourth, strong EPS accretion, return profile and earnings power to support robust growth and capital return to our shareholders. Fifth, an efficient cost structure and a flexible funding model and sixth, experienced management teams with significant integration experience and deep local and national expertise. Now I'd like to turn things over to Pat Rusnak, who will cover the key highlights of the transaction.

Thanks very much, Greg. Looking at Page 9 of the presentation, the transaction we've announced is a reverse merger that will create a significantly more profitable and stronger bank. Under the terms of the agreement, WaFd Inc. will be the legal acquirer and will issue shares to EverBank Financial Corp. stockholders. WaFd Inc. will remain a publicly traded bank holding company and will be renamed EverBank Financial Corp. with its common stock listed on the NASDAQ under a new ticker EVBK. EverBank will be accounting acquirer with WaFd balance sheet subject to fair value accounting. After the transaction is complete, EverBank Financial Corp. will be regulated by the Federal Reserve and EverBank NA by the OCC.

The transaction consideration is 100% stock and WaFd will issue approximately 103.1 million shares, 107.7 million inclusive of options in connection with the transaction resulting in 177.1 million basic and 182.0 million diluted pro forma shares. The ownership split will be comprised of 59.2% EverBank and 40.8% WaFd shareholders. The new bank holding company will be based in Bellevue, Washington, and the bank will be headquartered in Jacksonville, Florida.

Greg will serve as the CEO of the new bank and Brent as President. The Board of Directors of the new company will include 7 legacy EverBank seats and 6 legacy WaFd Bank seats, including Brent and Greg. Robert Radway, EverBank's current Chairman of the Board will be Chairman of the new Board. We anticipate the transaction will close in the first quarter of 2027.

The transaction is subject to approval by WaFd shareholders. It is also subject to regulatory approval and customary closing conditions. EverBank stockholders will have customary registration rights and have agreed to face and lock up schedule 12 months post closing the details of which are shown in footnote 1.

Page 10. The combination of WaFd Bank and EverBank will bring a scaled presence in highly attractive markets and create scarcity value. WaFd Bank today has 212 branches in 9 Western states. EverBank has 42 financial centers in California, Florida and New York, in addition to its pioneering mature digital bank and scalable commercial lending channels. The combined bank is poised for significant growth in several of the country's fastest growing markets, particularly California, Florida and Texas. Simply put, this strategic partnership positions us well for future growth. We will be the fourth largest bank holding company headquartered in the Western United States. The combined bank will cover 8 of the 15 largest MSAs by population in the country.

Turning to Page 11. The combined bank will leverage strength in regional, national and digital channels. The regional level, the combined bank's core end market relationship banking franchise is built on WaFd's 110-year history and a deep presence in market spanning 9 Western states. Over the last several years, WaFd has experienced meaningful growth by targeting specific C&I verticals.

The EverBank team has accomplished the same. More importantly, both organizations have done it with very solid credit quality. At the national level, EverBank brings relationship-driven commercial lending focused on national industry verticals with attractive risk-adjusted returns. EverBank's pioneering mature nationwide digital bank, complements its strategic branch footprint that will provide durable funding and balance sheet resilience.

On the right-hand side of Page 11, we show how the combined bank will deliver strength in commercial loans and deposits. Together, we will have $58 billion in loans, 32% of them regional and 68% national. On the deposit side of the house, the combined bank will have $59 billion in deposits, 54% regional, 16% national and 30% digital. Our deposit base will be supported by an expanded network of 254 strategically located branches. We will deliver a concierge level of service that will generate continued client loyalty. Our belief is that everyone deserves a banker, and we will leverage EverBank's well-established digital bank, which has an average client tenure of over 5 years to provide an additional stable source of funding.

Turning to Page 12, you'll see a more granular breakdown of both the lending and deposit business. On the lending side, our $59 billion diversified national and regional lending business, has an average yield on loans of 5.6%, of which 74% is commercial. The runoff and redeployment of legacy residential mortgages represents a significant profitability lever for the company going forward. On the deposit side, our $59 billion deposit portfolio has a weighted average cost of 2.73%, of which 82% is FDIC insured.

Looking at Page 13. The merger with EverBank accelerates WaFd's goals that we outlined in our strategic plan, Build 2030 and helps us achieve things together that would take considerably longer as a stand-alone bank. First, it significantly advances WaFd's evolution as a commercial bank. We move immediately from 64% commercial loans to 74%. The merger accelerates our profitability journey moving from 10% return on average tangible common equity to over 15% and a nearly 50% improvement in profitability.

It expands a fed's digital capabilities and enhances funding flexibility, moving our non-time deposits from 61% to 72%. All in, this is a great opportunity for us to optimize our balance sheet, reprice legacy single-family loans and create meaningful cross-sell opportunities. As you can hear, I'm excited for our shareholders and I am pleased about what this means for our bankers and for our clients. The ethos of WaFd will not only continue, this will be a springboard in terms of what we can deliver.

Turning to Page 14. We're incredibly fortunate to have 2 outstanding senior management teams at EverBank and WaFd, and our combined bank will bring together highly experienced bankers. I will serve as the CEO of the combined company. For the past 18 years, I've served as either CEO or President at Sterling Financial, Umpqua Bank, the Federal Home Loan Bank of San Francisco, Union Bank and EverBank. Much of that experience was in the Western U.S.

Brent will serve as President of EverBank, bringing with him more than 25 years of experience at WaFd, the past 9 years of which has been the CEO of the company and 6 years at Deloitte early in his career. Our combined senior leadership team has deep knowledge and experience in the Western region and national markets, along with critical experience leading organizations through integrations and transitions.

In recent years, these executives have managed several large and complex acquisitions, including the sale of Union Bank to U.S. Bank, TIAA's divestiture of TIAA Bank and its acquisition by the bank's current private equity owners, Umpqua Bank's acquisition of Sterling Bank and a fed's acquisition of Luther Burbank Savings in March 2024.

As Pat noted earlier, Robert Radway, EverBank's Chairman, will serve as Chairman of the new Board, which will have representation of legacy EverBank investors and WaFd Board members. We're in the process of finalizing our future executive leadership team, but we've already identified individuals to lead our critically important credit risk and governance functions.

They include Pat Rusnak, who will be the CFO, and Seth Waller, the Chief Credit Officer; Mercy Anne Martin, who's the Chief Risk Officer; Mark Baum, General Counsel; and Kim Robinson is the Chief Operating Officer of the regional bank. We plan to announce other leadership appointments later this month.

Turning to Page 16. As I mentioned previously, for the past 3 years, EverBank has been on a journey of transformation and performance. Today, EverBank is an entirely different company, more profitable, larger, stronger, more efficient, more diversified, poised for future success and no longer in the mortgage origination business. As we built our new scalable commercial lending platforms, we've seen significant growth in loans and profitability as noted on the bottom left-hand side of this slide. Our digitally led efficient deposit gathering strategy has created a bank with approximately 500,000 deposit accounts. These accounts have an average tenure of over 5 years and an average account balance of $55,000.

Turning to Slide 17. EverBank has run a digital bank for more than 20 years and was a pioneer in the space. Today, our digital bank has approximately 370,000 accounts with nearly $17.7 billion in deposits and an average account balance of $48,000 and an average tenure of over 5 years. Our digital bank is a strategic lever for the combined company and is designed to deliver stable and durable funding. The online bank has the ability to scale quickly to fund loan growth and is highly efficient.

Turning to Page 18. Over the past 3 years, EverBank's management team successfully transitioned a thrift into an efficient commercial bank. Our investors, Stone Point Capital, Warburg Pincus, Reverence Capital Partners, Sixth Street and Bayview Asset Management plus TIAA, which retained a stake in both common and preferred stocks saw enormous potential in the franchise.

Many of us on the new senior leadership team, which has been almost completely rebuilt, have successfully directed turnarounds like this before at both publicly owned and PE-owned financial institutions. We recognized immediately the bank needed a strategic reset. On day 1, we converted from a thrift to a national bank charter, opening broad new pathways for growth and profitability as a commercial bank. We built our new delivery framework around key operating principles, maintaining high-quality regulatory relationships, building a diversified and sustainable funding base, deploying assets in a focused and profitable way and managing costs and expenses. The results of this disciplined strategy are shown on the right side of Page 18, lower cost for deposits, increased loan yields, a rightsized expense base, all of which contributed to enhanced profitability and improved ROA.

Turning to Page 19. We're proud of what we've accomplished, particularly the transformation of the bank that is driving meaningful improvement in financial performance and positive operating leverage. Page 19 highlights 6 key areas where transformation has delivered markedly improved results in efficiency ratios, net interest margin, ROA, loans, deposits and net income. The projected outlooks for each of these areas is included through 2028. I'll now turn it over to Pat.

Page 21 provides an overview of key deal modeling assumptions for which I'll provide some color on a few notable items. Total modeled pretax deal-related charges of $260 million of which about 65% is expected to be recognized at or during the first quarter following closing. On the expected credit mark, was informed by third-party credit review and other internal modeling, $313 million or 1.55% of total WaFd loans. This represents about 1.4x the forecasted WaFd allowance at closing.

In accordance with ASU 2025-08, there will not be any CECL double count. As mentioned, the WaFd balance sheet will be fair valued to closing. We expect the most significant rate marks will be for loans with an estimated pretax rate mark of approximately $600 million. As this is largely for single and multifamily loans, the accretion will occur over a fairly long period that approximates the 10-year straight-line method. The expected first year after-tax accretion is approximately $44 million.

Expected core deposit intangible assets is approximately $368 million or 2.8% which will be amortized on an accelerated basis over 10 years. The first year expected after-tax CDI amortization is approximately $48 million.

One other notable fair value mark will be applied against the WaFd perpetual preferred stock, reducing the value by $105 million without any deferred tax effect. This will be treated as a permanent valuation adjustment for which no amortization will be recorded. EverBank has a similar case with its preferred stock, which has a par value of $675 million but has carried at $551 million due to the accounting treatment undertaken in connection with the TIAA sale in 2023.

The discounted amount is what is included in Tier 1 regulatory capital. We expect meaningful cost synergies over our integration time line as shown on Page 22. We expect $135 million in annualized cost synergies with $54 million or about 40% realized in the first year following closing and the balance by the end of the second year. These savings will be derived from reduced compensation, technology, occupancy and general and administrative expenses.

We're in the process of developing a detailed integration plan and have defined key leadership roles and organizational structures to support post-close execution. The combined bank will have a strong financial profile as shown on Page 23 with an efficient, scalable operating model that should drive substantially better financial returns than either bank could realize independently for 2027 and 2028 and beyond.

Noteworthy pro forma 2028 target performance metrics include an ROA of 1.15% and ROTCE of 15% plus. The combination of the 2 banks will unlock EverBank significantly improved earnings in future years. Page 24 presents a walk of WaFd's 2027 EPS from the consensus of $3.37 to $4.34 per share, reflecting fully phased in synergies. The resulting expected EPS accretion is 29% with ROTCE improvement in excess of 40%.

While the deal modeling does not assume any revenue synergies, there are several notable opportunities noted as upside levers, including cross-sell wealth management and insurance agency services to the EverBank consumer and commercial clients. I'll now turn it over to Kelli to cover the next few slides.

Turning to Page 25, which addresses capital and liquidity of the pro forma company, I'd like to briefly touch upon a few points. For liquidity, we expect that cash and securities will comprise about 20% of total assets and the loan-to-deposit ratio will be in the mid-90s. For capital, we are expecting a CET1 ratio of approximately 10% at close. Given the current uncertainty and volatility with rates, we are taking steps to partially hedge the risk to regulatory capital at closing due to the impact of higher rates on WaFd's fair value marks. Actions will also be initiated between now and closing to shorten WaFd's duration of equity using derivatives and other available strategies.

The associated costs for these measures is reflected in the pro forma financials. The pro forma company is expected to generate substantially improved profitability and internal capital generation. In addition to continuance of a quarterly cash dividend with a payout in the range of 25% to 35%, extended organic growth initiatives and prudent share repurchases will be in the capital management toolkit. The proposed Basel III end game capital rules have been modeled for both banks and would result in risk-based regulatory capital ratios increasing by approximately 120 basis points.

Page 26, the combined bank will have robust risk management, coupled with solid credit quality. Both banks have a track record of solid credit performance. EverBank brings to the combined bank a disciplined credit approach and conservative underwriting philosophy with strong collateral. This has resulted in demonstrated low credit losses across the portfolio. WaFd Bank has consistently delivered strong credit quality characterized by low net charge-offs.

Lastly, I would like to provide a bit of color on the due diligence process undertaken by both sides. Page 27 indicates the 12 key areas of diligence focus, including financial, legal, risk, HR, compliance and information security. For 4 critical areas, commercial credit 1 to 4 family mortgage loans, technology and deposits. Both banks separately engaged to the same highly respected and experienced firms to conduct bidirectional due diligence.

As indicated on the right of the slide, A substantial portion of the commercial credit portfolios were reviewed, including virtually all criticized loans. The diligence work on deposits was focused on identifying strategies for preserving the favorable deposit pricing differential of WaFd's branch customer base. This informed our decision to operate the post-closing bank under 3 distinct brands, WaFd Bank for Washington, Oregon, Idaho, Nevada, Arizona, New Mexico, Utah and Texas, EverBank for Florida and California and the direct digital bank. With that, I will turn it back to Brent.

This chart on Page 29, is critical for investors to understand. On the y-axis, we have priced to tangible book value on the x-axis is return on average tangible common equity. You can see WaFd and the peer banks plotted on the chart. It is not surprising that the more profitable bank is, the higher the trading multiple in terms of price to tangible book value. If we can achieve the improved profitability that we have laid out this morning, which I think we can and will do, the market should reward us with a higher multiple, we have seen over the last several years how challenging it is to move up and to the right on this chart. We believe this partnership provides a unique opportunity and the implied upside for our shareholders is approximately 44%.

On Page 30 is another way to look at the potential upside for our stock. Instead of price to tangible book value, this chart illustrates the value creation at various PE multiples showing a 26% upside to WaFd shareholders if we can trade at the KRX median.

Page 31 summarizes well why we believe this partnership is compelling for our clients our bankers and our shareholders. From a financial standpoint, the 5 metrics on the right are notable: 29% fully synergized EPS accretion; a 500 basis point improvement in return on tangible capital; only 8.6% tangible book value dilution to WaFd shareholders; tangible book value earn back of 2 years; and the meaningful upside to our stock price. This $3.9 billion combination is the only bank M&A in recent history with over 25% EPS accretion and less than 10% tangible book value dilution.

I've learned a lot in life and undoubtedly have more to learn. But one thing I know, it matters not just what you do, but who you do it with. I am thrilled to announce this morning the partnership with Greg and the entire EverBank team, I trust Greg, integrity matters, and I am thrilled to lock arms and deliver together. Greg, with that, I will hand over the baton.

Thank you, Brent. As we open this new chapter together, I'm very excited to begin working with you, the WaFd Bank team and the EverBank colleagues to bring our vision to life. I'm very optimistic about what the future holds for our combined organization, the returns we will provide to our shareholders the ways we can support our clients and the opportunities that will open up for our colleagues. Our investor presentation includes an appendix of supplemental information starting on Page 32. Now I'd like to open the call and look forward to answering your questions.

[Operator Instructions]. Our first question is going to come from the line of Kelly Motta with KBW.

Congrats on the deal announcement. I think maybe to just kick it off from a high level, WaFd and EverBank are 2 very different banks, but I think maybe complement one another. So if you could provide any color as to what you saw in one another and how this transaction came about to the extent that you're able to share.

Yes, Kelly, I'll take that. It's Greg. And thanks for being on the call. We are different. As you mentioned, the 2 organizations have offsets to one another. WaFd, obviously, a 110-year proud history. And I've known Brent for a long time as he mentioned, when you think about their franchise in the 9 Western states in their depository, it's well established. They run it very well. It's been in place for a long time. Obviously, their thrift roots are an issue that we're very familiar with, having been in a similar situation when we walked into EverBank. And the issue of the 2030 plan was clearly one that they were embracing and in the process of putting together but it takes time, as we all know, to be able to get to that point.

On the EverBank side, our national direct lending capabilities that we built over the course of the last 4 or 5 years, have been terrific additions to the company's return profile. At the same time, what we recognized was we were pretty reliant on the direct bank historically, and have added branches in California to our Florida franchise to be able to help narrow that gap.

When we sat down and talked about how we complement one another, clearly, each one of us have strengths on opposite sides. But when you put them together, I would just call everybody's attention to the slides that are on 11 and 12, which creates almost perfect symmetry for the 2 organizations in terms of matching of their loans and their deposit portfolios, which is something that we spent a lot of time evaluating would the relative strengths and weaknesses as we got into due diligence, hold up and allow us to continue to move forward and be stronger together. And our very, very strong opinion was absolutely. And that's what led to us getting to where we are today.

Thank you, Greg. If I could follow up on that a little bit, Kelly. As you know, on the WaFd journey, we have been trying our darnedest to grow low-cost deposits. And that is a wonderful thing for banks as you get those low-cost deposits, but they are increasingly difficult again. The market for noninterest-bearing deposits has gone from 30% of total deposits in the United States to 20% just in the last 7 years. And so we are swimming upstream. And we were having a great deal of success in the lending side, but not as much success as any of us would have liked in terms of the deposit origination side.

So when this idea first came to us, I looked at it. And at first, I said I'm not sure this works, but the more I looked into it, we literally filled out parts of the business for each other that each had relative weaknesses in, and we are stronger together. And it's remarkable to me that neither one of our franchises has a huge low-cost deposit base. But even without that, which I believe is the future of banking, we're all going to have to pay a fair share for deposits. Consumers are going to demand it and we can get the return to our shareholders by focusing on these niche asset lines, delivering incredible asset quality, earning a little bit more on those assets and doing in a hyperefficient scale. And those -- that combination of those 2 delivers what we are trying to get to, which is a 15% return on equity. And once I saw it come together, my excitement just continue to build.

Great. That's really good color and super helpful. Maybe turning to the growth profile. I believe in the deck, you're looking for high single-digit growth in the active portfolio, and then about 25% is running off. I'm wondering, as we kind of think about the natural near-term growth rate of your company, how we should be thinking about that rate of runoff and maybe a net growth? And you alluded to the challenges with funding the channels that you're looking to fund that with?

Yes. Kelly, this is Pat Rusnak. We're -- both banks have a single-family residential loan portfolios that are going to be running off over the upcoming years. ever banks is about $6.5 billion, has a yield of about 4.5%. WaFd is a little over $7 billion. That will, of course, be marked to a market rate. So we will -- in the case of the WaFd loans evaluate possibly accelerating that through loan sales, either on a forward basis between now and closing or following closing.

That would allow us to more quickly reposition those loans into higher-yielding commercial loans that could either be done on the WaFd side through their offerings or through our different specialty lending verticals at -- on the EverBank side. So I think that there's significant opportunity and flexibility that are there on both sides as these legacy portfolios continue to run off.

Got it. That's really helpful. Maybe last question for me, and then I'll step back and let others ask theirs is just on how you're thinking about capital from here? I know you said CET1, you alluded to this balance sheet flexibility and you have a pretty big benefit still from Basel III. So how we should be thinking about capital priorities and management broadly?

Sure. This is Pat again. So as Brent mentioned in the prepared remarks and as indicated in the deck, there's going to be significant internal capital generation capacity not even counting the significant benefit of Basel III end game. So in terms of prioritization, first part is we're going to execute on the plan and achieve a 15% ROTCE. That's objective #1. But we will evaluate opportunities for organic growth, there's opportunities in certain markets where we could potentially expand. We will also have the cash dividend that we will assess.

And as Kelli noted, share repurchases. And having all of those things available. And I think the last one is probably the one that would give us the most flexibility and there to support the stock price and an efficient way to manage capital levels as we go through time. So I think all of those things are there, but if I were to kind of say things that I would put an emphasis on, it would probably be having the share repurchase capabilities once we get through our process of getting the performance achieved.

Our next question will come from the line of Adam Kroll with Piper Sandler.

I'm on for Matthew Clark. So maybe starting out on the funding profile. With EverBank's digital bank, I was curious if you could walk through how you might plan to mitigate any potential cannibalization of some of the lower-cost funding? And maybe longer term, is 30% of deposits kind of where you want the digital platform to be?

This is Greg. I'll take that. And then Kelli will add some additional color on the back end as she already commented on this. What we'll end up doing is we'll dual brand. And we'll have the WaFd brand that will be used in the legacy footprint, ex of California. California and Florida will be flagged as EverBank, and then the direct bank will be flagged as EverBank direct.

And the goal there is to in market and the physical footprint, our view will be to lighten the targeting versus our historical practices on a stand-alone basis of the use of the direct bank. We think that's important because as noted, we don't want to cannibalize the WaFd deposits, which are lower cost overall than the current EverBank deposits. And we will use the direct bank, principally as go-to-market in new markets, exploratory markets or markets where we may have a small presence, but we'd like to build heft.

And that would be perhaps in markets like Texas markets in certain markets in Arizona, other parts of the country where we see significant opportunities. 30% is higher than we would like over time. We'll look to invigorate go-to-market opportunities in the Western U.S. to try and drive that number down. But again, I think the issue will depend on growth clearly because the digital bank can be used very flexibly to accelerate into growth markets that have loan demand on them. And over time, we can blend those costs down as we continue to diversify our markets.

If I could add just one follow-up on that. For the WaFd legacy branches, we are not stopping our pursuit of small business. We believe that is the future for branches and our teams are just starting to gain momentum. So there is no stop whatsoever. We are full steam ahead in serving small businesses, and we believe that will, over time, be an engine for low-cost deposits for us. But the beauty of this transaction is we now have multiple channels, different levers to be able to pull.

Got it. I really appreciate the color there. And then maybe moving to the growth strategy from here. Just looking at the branch footprint, there's a lot of attractive markets that you're currently in is there any markets where you might maybe see a more pronounced opportunity to take share both organically or inorganically down the road and maybe the potential to reallocate some of the targeted cost saves for growth?

Yes, a very good question. We think we have a very enviable footprint together. I'd just call out Texas. We have very minimal market share in Texas. Obviously, very excited about what we can do in Florida in terms of bringing out our regional banking concept to Florida and California is a market for us as well. In addition, the Mountain West. But those are the 3 states. I would say there's opportunities for organic growth, specifically.

I want to piggyback on that for just a minute. I think many of us in traditional banking domains without a direct bank always thought if you build it, they will come. So you'd build branches, hope people would come, maybe they filled, maybe they didn't. What we've seen in terms of our explorations in the California market leading up to this if you use the direct bank on a geo coated basis, you're actually able to gather deposits in specific MSAs and then have a client base that you have established before you build your financial centers.

And so from that perspective, to Brent's point, you think about the 3 or 4 markets you mentioned, we will use the direct bank for those kinds of opportunities. We'll go there with disciplined programs and focus targeting before we then go in and build physical delivery on the back end of that.

Our next question will come from the line of Jeff Rulis with D.A. Davidson.

Greg and Pat, it's been a while since we've last spoke. Good to talk to you again. So I guess -- on the -- I guess, the long-term commitment to some of EverBank's call it, more sophisticated product in the ABL, equipment finance, energy, specialty finance. Any thoughts on a pivot towards sort of the -- we know -- understand that single-family residential for both is sort of on the decline or running off. Maybe ideal balance sheet mix of the loans. Is that still part of the strategy longer term? Is some of that niche lending areas?

Yes. Jeff, good to hear from you again. It's been a long time. So we have -- over the past 3 years at EverBank launched a number of new specialty lending verticals. They're shown in the bottom right of Slide 16 in the presentation. Some of these started immediately after we got the TIA transaction completed. Others have been launched as recently as the beginning of this year. So all of them are, I think, moving according to plan are things that we would expect to continue to grow with the combined bank.

Give you a couple of ones that are more recent ones. We just started a CRE bridge lending business based in New York City at the beginning of this year. They've got their first deal done in April. It's a terrific business and great opportunity with we're repositioning CRE loan opportunities exist today. We've been in the equipment finance business for many years.

EverBank had a vendor -- as a vendor focused business historically. We added a couple of years ago, a large ticket leasing capability. And even more recently, about a year ago, a specialty team focused on material handling equipment that was kind of a top-tier team out of Chicago. So I think that all of those areas are ones that we will have areas to continue to grow.

One area where we had some trouble getting traction was, I would say, more on the -- just the traditional community bank commercial loan space, relationship based. That was an area that we've had some and just haven't gotten as much traction. And that is something that Brent and the WaFd team brings tremendous capability on. And as Brent mentioned, offering that in Florida where we don't have great capability today is another synergy opportunity.

Yes. And Jeff, I would just add, I think Pat said very well. I think if you think about the C&I acceleration for the EverBank franchise overall, and then some specialty verticals like oil and gas and some of the specialty end market CRE lending that the WaFd teams go to market with our view is that, that just rounds out the current complement of the 12 business lines at EverBank as it expands to the team, we get focused.

And we do think that there are other opportunities for us to continue to widen the top of the funnel here. We've already talked about a number of additional verticals that we will consider over time that have the proper risk profiles, the proper return profiles in areas where we feel like a new market entrant whether we build teams or we do acquisitions, small targeted business line acquisitions, which we've done, for example, with premise when we built our Life lending business would be great opportunities for us to continue to expand the array of products and services. Just more arrows in the quiver for us to go to market with. We think that will be something that we'll be able to do much more quickly together than we've done in the past.

Appreciate the color there. And maybe on a related basis, looking at your -- the net interest margin target of just below 3%. I guess is that kind of the expectation of the terminal level of the franchise, I guess, once you exit in greater fashion, the single-family residential. Is there a potential for margin well above kind of maybe mid-3 or beyond? I just wanted to kind of get your sense for what that profitability looks like over time?

Yes, I would think in the call it the medium term seeing something in the mid-3s is probably not realistic, but as we're able to continue to execute on repositioning of the legacy loans, the faster we can do that. Again, we are picking up significantly higher spreads will certainly help. And as Greg mentioned, to the extent we can reduce the reliance on the direct digital bank for funding and drive more -- through lower cost deposit channels will also help. But I really don't in the kind of near to medium term, see a NIM that's going to be in the mid-3s.

Jeff, it's Brent. Good to speak to you, and we hope we gave you a pleasant surprise on your Labor Day holiday. Just one of the things I would point out, you'll recall in our build 2030 that we were hoping to get to a margin of 3.5% to 3.60%, I think it was and we needed to get to that margin to be able to hit the 15% return on tangible common equity.

How great is it that our combined franchise, we only need a 3% margin to hit the 15%, so it's wonderful from my perspective that we're able to realize that level of return for our shareholders. And then to the extent we can grow the margin from their grade, but we don't have to.

Our next question will come from the line of Andrew Terrell with Stephens.

Good morning, everybody. Wanted to ask just around the profitability targets, with the 15% plus ROTCE expectation. Just I'd love to get a sense on how you think about the kind of upside, downside scenarios relative to profitability. Like where do you see the most opportunity to outperform that over time? And what should we be thinking about as potential headwinds? It sounds like you're going to hedge out the kind of sensitivity of the balance sheet in the interim? Do rates really play a role in the profitability forecast? Or what do you think the upside and kind of downside cases are for?

Yes. This is Pat. So in terms of rates, I'd say the combined bank is relatively neutral to slightly asset sensitive on a net interest income basis. But as you noted, we have a relatively long duration and liability sensitivity for EV. So that's what we're looking to protect with some hedging strategies between signing and closing and thereafter. I think that we view the cost synergy target as conservative.

We are facing it in over a relatively kind of longer period of time than you might typically see because we want to make sure that this -- the technology integration is done in a flawless manner. And we've -- as noted in the deck, we engaged third-party resources with that for diligence and they're going to continue to assist with the actual integration. But it's our expectation that we set targets like that, that we can -- we would aim to outperform.

However, we didn't, let's say, if the cost saves came in at 75% of the target instead of 100%, it would reduce the EPS accretion by percentage points. So a pretty nominal effect on the ROTCE.

Are the other opportunities that are set forth on Slide 24 and the upside levers, we think there's real opportunity there for which nothing has been modeled In the case of the wealth opportunity to cross-sell. Greg mentioned that we launched a couple of years ago or purchased from Primis Bank, a Life lending business. That business had a portfolio of $350 million when we acquired it about 2 years ago.

It's over $1 billion today, and it is focused on high net worth individuals who are looking to do protection for estate planning, tremendous opportunity there. Today, we can only offer them a loan and limited savings products. So they would -- that would be a prime target for wealth management, not to mention that our -- as shown here, we have a relatively high balance affluent depositor base. So tremendous opportunity there, opportunity for the insurance services as well. We can upmarket, do larger loans and hold sizes in certain areas. And then as I mentioned earlier, our ability to accelerate some of this back book repricing through loan sales. And it's not a case here where we have a lag to get the money deployed.

We have, on our side, 12 verticals that are up and running and humming and the WaFd side has similar active higher spread lending businesses. So -- and I say that there's no downside, but I think that there's far more upside with levers that can be adjusted that would give us great comfort in knowing we will be able to hit that target.

I can add one additional item on that, Andrew, good to speak you. As you know, we're very pleased with the technology that we've built out for our consumer online and mobile banking that's proprietary for WaFd and looking at the EverBank deposit portfolio, there's a huge opportunity to win over the primary checking account for these depositors as well. So we think as we're able to roll out the technology that we think is pretty impressive. We're going to be able to win more deposits. And it's just -- we're doing everything we can to provide the products to win more wallet share, and I think that's the opportunity for us.

Awesome. I appreciate all the color. Just one last one for me on capital. I see the CET1 pro forma, you guys obviously are going to be generating a lot of organic capital. And pretty big beneficiaries from some of the recent proposals as well. But how should we think about on a pro forma kind of capital deployment basis, like what's a good operating target for CET1 as you think about kind of the combined balance sheet?

So this is Pat. We are targeting a rate about 10% at close, again, with the hedging protection to make sure that the higher rates don't result in that falling below our target levels. As we continue to mix out of residential loans into other loans. That's going to change the over -- the balance sheet risk over time. We've got $13 billion of residential loans. So it's going to take time for that to go down to 10%.

But as we do that, I think that's something that would likely justify slightly higher capital levels when we would look at peers. So over time, the CET won't be in a range of, say, 10% to 11%. And as noted, with the with the Basel III end game getting solidified. That's just another added benefit with perhaps up to 150 basis points of positive impact. One of the thing there to note on that is that will also change as the residential loans run off over time because it's going to be moving these residential loans, obviously, based on loan-to-value down into lower categories. That's fine. But as you -- those loans pay off or you sell them and you move them into 100% risk-weighted commercial loans at much higher spreads, it will require more capital.

And I would now like to hand the conference back over to Brent Beardall for closing remarks.

Thank you very much, ladies and gentlemen, for joining us this morning. As you can tell, we are incredibly excited about what this opportunity means for all of the constituents for us here at WaFd Bank and EverBank. We truly believe we are stronger together. We're excited to turn the chapter and execute on the plan that we've laid out this morning. Have a wonderful day.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good day, and welcome to WaFd, Inc.'s Third Quarter Fiscal 2026 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the call over to Brad Goode, Chief Marketing Officer and Investor Relations Manager. Please go ahead.

Thank you, Michelle. Good morning, everybody. Thanks for joining us. Let's dive into our 2026 third quarter earnings report. You can find our earnings press release along with the detailed fact sheet and on our website at wbank.com. During today's call, we'll make forward-looking statements, which are subject to risks and uncertainties that 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 they are made, and WileFed 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, Brent Beardall; Chief Financial Officer, Kelli Holz; and Chief Credit Officer, Ryan Mauer. I'd now like to hand the call over to Mr. Brent.

Thanks, Mr. Goode. Good morning, and thank you for joining us this morning. I am pleased to report on our third quarter results. I see that the market has started to reward our shareholders with a significant uptick in our stock price over the last few months.

This morning, we will cover 4 areas. First, Kelli Holz, our CFO, will provide you with a detailed review of our balance sheet and income statement and all of the fluctuations. Second, Ryan Mauer, our Chief Credit Officer, will provide comments on the current status of our loan portfolio and credit quality trends. Then I will provide my insight on the quarter, potential for growth, capital management strategies and regulatory developments. Finally, we will be happy to answer any questions you have. Kelli, please walk us through the third quarter results we published yesterday.

Thank you, Brent. As announced, Waet Inc. reported net income available to common shareholders of $62.5 million or $0.84 per diluted share for the quarter ended June 30, 2026. This compares to net income to common shareholders of $0.73 per share for the third quarter of fiscal 2025 and $0.82 per share for the March 2026 quarter. The $0.02 increase in earnings per share for the quarter was a result of a modest increase in net interest income and noninterest income as well as controlled expenses, offset by an increased loan loss provision.

For the balance sheet, loans receivable increased $51 million during the quarter, primarily due to an increase in our active loan types. which are commercial real estate, multifamily, construction and C&I and consumer, which combined increased by $315 million. Loan originations and advances in the quarter outpaced repayments and payoffs in our active loan types with originations of $1.5 billion and repayments and payoffs of $1 billion. For the inactive loan type, advances were $23 million with repayments and maturities of $299 million.

The weighted average rate on originations for the quarter, and the weighted average rate on repayments and payoffs was 6.06%. Please see the table on our fact sheet that provide a breakdown between active and inactive loan types. Total investments in mortgage-backed securities decreased $50 million during the quarter, a result of shifting our strategy of replacing single-family loan runoff from mortgage-backed securities to funding our higher-yielding loan origination pipeline.

Also during the quarter, we sold $77 million of securities from our available-for-sale portfolio at a net gain of $110,000. The gains realized on the close-to-roll legacy ARMs were offset partially by losses on low coupon CMOs. The proceeds were reinvested into current coupon ARMs and mortgage-backed securities at a similar mix with limited impact on portfolio duration and will result in a go-forward pickup in yield on the trade of 1.75% or $1.3 million annually.

Total deposits decreased by $192 million during the quarter with noninterest-bearing deposits increasing $69 million or 2.7%. Interest-bearing deposits decreased slightly by $70 million or just under 1% and time deposits decreased $191 million or 2.3%. Deposit outflows in the second calendar quarter are an expected result of tax-related and public fund municipal deposit dynamics. Core deposits ended the quarter at 80.6% compared to the March quarter at 80.4% of total deposits and up from December 2025 at 77.9%.

Noninterest-bearing deposits ended the quarter at 12.6% of total deposits. The loan-to-deposit ratio ended the quarter at 95.6% WasFed'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%, in line with the prior quarter ratios. In March 2026, federal banking regulators reproposed revisions to the Basel III end-game capital framework, which remains subject to finalization following the close of the industry commentary in June of 2026.

Based on management's review and analysis using our March 31, 2026 data, we estimate the revised framework finalized could reduce risk-weighted assets by approximately 1.5%, representing an estimated $300 million of total risk-based capital relief. We will continue to evaluate this opportunity as the rule is finalized. Our understanding is that implementation could be the end of this calendar year. should benefit more peer banks with this proposed capital rule change of our large concentration of single-family loans.

Liquidity is strong with $4.8 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 $3.8 million from the prior quarter, the effect of a basis point improvement in both the interest paid on liabilities and interest earned on assets. As a result, the net interest margin held steady at 2.81%, no change from the March 31 quarter.

On a linked quarter comparison, -- we realized a 4 basis improvement with deposit rates, 3 basis point improvement with loan rates, a 2 basis point decrease with borrowing rates and a 3 basis point decrease for the day count quarter-over-quarter, 91 days this quarter compared to 90 days in March. A reminder, about 50% of our loans and 75% of our securities are on a 360. For swap rate as of the June quarter end, the yield on interest-earning assets was 5.12%, while the cost of interest-bearing liabilities was 2.77% and the margin at 0.82%.

Absent any changes in interest rates, we expect our margin to be relatively flat for the next quarter, acknowledging day count as well as the funding of loan growth and deposit activity. As of June 30, the balance of the deferred income on the interest rate mark for the Luher portfolio was $160 million. Currently, this is being accreted into income at a rate of $6 million per quarter. We expect this to accelerate as the to repay.

For the adjustable rate hybrid loans portfolio, which represent 85% of the outstanding balance and 66% of the remaining discount, the reset is just under 11%. Total noninterest income increased $4.4 million compared to the prior quarter to $24.2 million. Contributing to noninterest income was $3.2 million gain on sale of a branch property, net gains of $48,000 for certain equity method investments in the quarter compared to losses of $1.1 million realized in the prior quarter for these investments.

Total noninterest expense was stable at $110 million compared to the March quarter. The company's efficiency ratio for the June quarter was 53.7% compared to 55.7% in the prior quarter. Income tax expense totaled $18.2 million for the June quarter compared to $18.3 million for the linked March quarter. The effective tax rate for the June quarter was 21.6% compared to 21.8% for the quarter ended March 31. During the quarter, we purchased $9.2 million of federal energy tax credits and have committed to a 4-year investment in similar tax credits, which reduces our tax expense and effective tax rate. We expect our effective tax rate to be approximately 21.8% for fiscal year 2026.

I will now turn the call over to Ryan to share his comments on WaFd's credit quality.

Thank you, Kelly, and good morning, everyone. As reflected in our earnings release, we had a solid quarter of new loan production along multiple business lines. As Kelly indicated, total production in our active portfolio was $1.5 billion for the June quarter. This loan production was centered in commercial and industrial of 49%, commercial real estate of 10% and construction of 27%. We were able to achieve this level of production utilizing a consistent approach to underwriting and managing to a moderate risk profile.

Adversely classified loans increased nominally during the quarter and now represents 2.59% of net loans compared to 2.6% as of the March 2026 quarter and 3.54% as of June 2025. Total criticized loans increased by $139 million to 4.9% of net loans compared to 4.2% as of the March quarter and 4.1% as of June 2025. The increase in criticized loans is not concentrated in any one business line in our industry and the economic environment where elevated interest rates and economic uncertainty impact both commercial and consumer borrowers.

In addition, 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. Nonperforming assets increased slightly to $136 million or 0.49% of total assets from $132 million or 0.48% at March 31, 2026. The change is the result of increased nonaccrual loans, largely in the C&I segment. Delinquent loans decreased to 0.75% of total loans at June 30, 2026, compared to 0.78% at March 31, 2026, and increased from 0.36% at June 30, 2025. While criticized assets are elevated in comparison to periods, the overall credit metrics remain modest Waed's loan loss reserve and capital position and are indicative of our culture of early and proactive portfolio management.

It is important to note here that delinquencies and nonperforming assets remain impacted by a large commercial and industrial relationship over 90 days past due. Outstanding balances for this relationship amounts to $54 million. This relationship remains on nonaccrual per policy. There has been no charge-off taken at this time, but the relationship has been downgraded to doubtful with anticipated sale of the business to occur prior to quarter ending September 30, 2026.

If nonperforming assets and delinquencies were adjusted for this relationship, NPAs would be 0.3% of total assets compared to 0.6% at September 30, 2025, and delinquencies would be 0.48% of total loans compared to 0.6% at September 2025. The net provision for credit losses in the quarter was $11 million. The provision was a result in growth in the active loan portfolio, specifically C&I and construction loans in addition to concerns related to possible losses on adversely classified loans. $1.6 million of net charge-offs were paid during the quarter.

Net loan charge-offs for the June 2026 quarter represented a nominal 3 basis points annualized. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.08% of gross loans at June 30, 2026, compared to 1.03% in June 2025. For the commercial loan portion of the portfolio, the allowance represents 1.41% of net loans compared to 1.26% as of June 2025. Overall, while still elevated from prior quarters, credit metrics at June quarter remain at moderate levels overall and continue to be impacted by 2 primary drivers.

First, the elevated interest rate environment has impacted borrowers expense structures. Second, the economic uncertainty driven by tariffs and inflation with further impact by war in the Middle East and energy supply shocks will continue to impact borrowers' top line revenue as well as increased operating costs. Looking forward, these factors remain headwinds for credit quality. With that, I will turn the call over to Brent for his comments.

Thank you, Ryan. For years, we have said that we try not to pay too much attention to the stock price, knowing we cannot control the market, but we instead focus on what we can control, our profitability and the resultant increase in book value per share. That being said, the stock price is the most visible indicator for employees and customers to look at and see how is the bank doing. We were pleased to see the stock provide a 23% total shareholder return for the quarter.

It is important to note that we still believe the stock is trading at a relative discount to peers. We are trading at 11.7x estimated forward earnings and 1.25x tangible book value. By comparison, the S&P Regional Bank Index is at 11 or 12x earnings and 1.7x tangible book value. Having not only survived but thrived in the banking business for 109 years now, we tend to focus on the long term. It is amazing to see the power of consistency and compounding. WaFed went public on November 9, 1982.

And since that time, the total shareholder return, if dividends were reinvested in the stock along the way, has been over 39,000%. To put it another way, a $10,000 investment in 1982 is now worth $3.9 million, not bad for a bank that simply works every day to be there for our clients, believing it is not mutually exclusive to add value for our clients and to deliver a reasonable return for our shareholders. Now looking at the fundamentals of this last quarter.

The headline news for this quarter is again loan growth. After over a year of seeing our loan portfolio contract, these past 2 quarters saw a growth in the overall loan portfolio. More impressive, in my opinion, we saw 10% net linked quarter growth in the active loan portfolio, which followed 12% growth in the March quarter. If you include yet to be funded loans, gross active loans outstanding increased by 14% on a linked-quarter basis. I am to report that the biggest contributor to that growth from a percentage standpoint is C&I lending.

This quarter, C&I originations were $741 million or 49% of total originations for the quarter. Bottom line results for the quarter, as Kelly mentioned, improved with EPS growth of 2.4% on a linked quarter basis and a very nice 15% year-over-year growth in EPS. We work hard to originate good, high-quality loans, but we recognize that C&I loans, commercial and industrial loans carries with them more credit risk than our traditional single-family residential lending. So we set aside more in our allowance for credit losses this quarter, taking our overall coverage ratio from 105 basis points to 108 basis points. Big picture, we are hearing from our clients that most projects still are not penciling given the current cost and projected cash flows. We applaud this kind of discipline, and we think it speaks to our client selection.

As you can see, we are growing our construction loans with loans in process increasing 12% on a linked-quarter basis, but it is still just a fraction, only 38% of the LIP we had just 4 years ago. Our strategic plan called Build 2030 is designed to fully shift our focus to where we can add the most value to our clients and shareholders, serving the banking needs of businesses. This shift takes time, discipline and effort and comes with specific goals. The most important goal is increasing our noninterest-bearing deposits to total deposits from 11% last year up to 20% by 2030, and we are sitting here today at 12.6%.

It is an ambitious goal, but it is what we need to do that will also drive increased loan demand and branch utilization. The way our peers have achieved their lower cost of funds is focused on serving small businesses, which is exactly what we are doing. As for deposits, we are swimming into a current. We have 2 macro trends that are moving against us. First, the amount of noninterest-bearing deposits in the market overall are decreasing.

For the FDIC, after peaking at just over 30% of all U.S. commercial banking deposits in 2021, as rates increased, the percentage of noninterest-bearing deposits in the market has decreased to 22%. So it decreased from 30% down to 22% in overall noninterest-bearing deposits. In my opinion, this is reflective of the intense competition and pervasive technology that makes it easier for customers to move their deposits to higher-yielding alternatives. Additionally, with the incredible run the U.S. equity market has had over the last few years, more and more customers are willing to take equity risk.

Second, aggregate deposits in the U.S. are growing for the largest 25 banks and are flat to down for all other banks. For the Federal Reserve's H8 data, which was just released, year-to-date, the 25 largest banks net deposit growth now stands at 5.5%, while all other bank deposits have posted a 0.78% contraction. This is the most concerning trend from my perspective and the level playing field in the United States as it comes to the perception of safety. Our regulatory complex has failed to rid our system of too big to fail. And in fact, it has only gotten worse over the last 20 years post the GFC. Now too big to fail is seen by some as a badge of honor for deposits that have large balances in excess of FDIC coverages.

This is a problem for all banks in my opinion, and I applaud the members of Congress that are attempting to address this law. If we want a broad and diverse banking system, some needs to change. If not, the consequences will be large-scale consolidation in the banking industry. None of that is an excuse. It is just our current reality. We can and will do hard things.

We believe pursuing a strategy of attracting low-cost deposits is the right thing for shareholders and our clients. The key from my perspective is growth in direct C&I loans, specifically from small businesses supported by growth in CRE loans and large corporate loans while running bank. I'm very pleased to see our efficiency ratio improved nicely this quarter to 53.7% from 55.6% last quarter and 56% in the same quarter last year.

This comes as a result of controlled investments in our operating expenses and growth in our net interest income. Our objective is to deliver the efficiency ratio in the 50% to 55% range. We believe that this allows us to continue to make the necessary investments in our products and our teams to deliver for our clients while striking the balance needed to deliver a reasonable return to our shareholders.

Looking forward, our lending pipeline continues to be robust, building on a very strong third quarter of $1.5 billion of originations. Looking at our pipeline, we're lending -- our business banking segment is up 9.3% from the prior quarter to $280 million. Our Commercial Real Estate segment is down 9.6% and down to $2.4 billion in limit pipeline, and our corporate banking is down 19% to $314 million, given the large fundings they had at the end of last quarter.

Overall, our lending pipeline is strong at $2.9 billion, which is down 9%. On the deposit side, our deposit pipeline is actually up 250% with a deposit pipeline of $103 million for the Business Banking segment. The Commercial Real Estate Banking segment has new deposits in the pipeline of $22.3 million and the quarter has $131 million in our deposit pipeline. Likewise, we see strong fees coming with fee income and our pipeline of new loans at 11.1%, up 29%.

We believe that we have the products and the teams in place to continue to grow our active loan portfolio by 8%, 12% going forward. Now looking at the margin. As Kelly mentioned, based on the current interest rate environment, we would expect our margin to be fairly stable for the next couple of quarters, but we have clearly seen a change in terms of market expectation for interest rates over the last couple of months.

Whether that is attributable to the high inflation, geopolitical risk or the new Fed share, there's not a clear. There is now a clear market bias toward higher rates and that is reflected in increased long-term rates we are seeing. What does that mean for moped margin going forward? As you know, we endeavor to run a neutral interest rate risk position in our balance sheet, but we are asset sensitive over the short run as our assets contractually reprice faster than our liabilities.

So all else being equal, I would expect increasing short-term interest rates to be a positive for the margin over the short term. Turning to capital with a nice uptick in our stock price over the last quarter, we paused our stock repurchases. This is a recognition of the significant amount of repurchases completed earlier in the year. For the fiscal year, we've repurchased 4.7 million shares at a price of $3.99 and or 101% of tangible book value with the stock trading today in the $38 to $39 range. This has proven to be an excellent investment.

We will continue to be opportunistic with our share repurchases and known we have plenty of capital for both share repurchases and organic growth.

Turning to M&A. Within the last week, we saw the purchase of a $10 billion asset, West Coast Bank and what I would describe as a full price for a high-quality franchise. It's sold at almost 2x tangible book value. I think there will be an increasing amount of M&A over the next 2 years, which is in recognition of the benefits of scale and also the difficult operating environment I described earlier.

We are always looking at opportunities. and we will be proactive and protective of our shareholders, not wanting to overly dilute existing shareholders just to do a deal. We would prefer not to do any deal rather than overpay relative to our own currency.

Big picture, I'm very pleased with the progress our team is making in growing loans and changing the mix of our deposits while becoming more efficient and delivering 11% return on tangible common equity. Not knowing about the future holds, I am pleased with how WaFd is positioned to capitalize on the opportunities going forward. We have had a strong track record and our job is to continue to deliver for all our commitments.

Finally, I want to acknowledge and thank all of the incredible bankers that call WaFd home and make these results possible. Our most valuable asset is our team. We have bankers that care and want to serve our clients. With that, we are happy to answer your questions.

[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson.

I appreciate the comments on the growth outlook. Just wanted to kind of narrowing on the maybe net growth expectations through fiscal '27. I guess if you think about the active portfolio in the 10% growth area range and then inactive continues at the pace of attrition. I guess on net is a low single-digit growth for the I guess, the near term? Is that a fair assumption?

Yes. Jeff, thanks for joining us. I think that's a fair assumption, but as I've talked about before, we kind of think about our single-family portfolio almost like on portfolio. So you almost have to take into account what's happened with the securities in that. So if you just look at themselves, all in net single digits would be reasonable. We can augment that with mortgage-backed purchases if you would use to reiterate is inclined to do that.

Got it. And then on the margin, you got the outlook of stable. I wondered, is the bank accretion included in that? And then also, does that incorporate maybe some of the tailwinds. I think Kelly walked through some of the securities routes. But I just want to see if that accretion in the securities, maybe the tailwinds there, if that's all inclusive in that stable margin outlook.

Yes. It is all oppositive in that stable margin outlook that is not imposed if we have a pickup in the repayments on the rent portfolio, right now, of the $160 million that we have sitting on the balance sheet, we're only taking in, I think, $6 million to $7 million per quarter. So those picked up, that would be the positive side on our margin.

And Brent, sounds like if rate hikes that's also an added positive should that play out?

I think that's correct. Our stable margin is not making a position on ways. Clearly market seems to be calling for rates we're not smart enough to be able to what is going to happen with interest rates.

Our next question comes from Matthew Clark from Piper Sandler.

I wanted to start on the large C&I nonperformer that's been on the books and expected to sell this coming quarter. Do you have any reserves set aside on that current relationship. Was any of the reserve build quarter assigned to that? And if not, you adding reserves to, I guess, within the it looked like the reserve went up about 15 bps there was any of that specific.

Good question, and I'll let Ryan kick off on that. Go ahead, Ryan.

Yes, Matt, good question on this. We do not have any specific reserves assigned to that relationship. Generally speaking, we do not apply specific reserves. What we do have in this is general reserves and the increase in our general reserve was in part because of this the loan itself. Obviously, it will be resolved by the end of the quarter through a sale. And yes so at this point, that's driving the increase in orders.

Yes. And also associated with that, we have moved the loan from standard to doubtful. So it's on our minds and yes, that was a portion of the reserve build and see no question about it. But overall, we believe we are reserved for us over $203 million of allowance for loan loss today.

Okay. Great. And then on the C&I production this quarter, the $741 million, can you give us the average size of that production and where your club and SNC outstanding stood at the end of June, I think there were $725 million at the end of March.

Yes. I don't know if we have that -- they were happy to follow up with you on that. But Kelly, if you have the average size of our production today, it's fairly good because of the for small business loans we're originating. But if we don't have what we call Kelly, do you have that today?

I don't have a specific number, but it hasn't changed materially since what we provided for the March quarter. I could follow up with the update for you.

Great. And partly on deposits, as to plan to think above the 2 average. Just wanted to get your thoughts on the marginal cost is is coming in and what your outlook is on the Fed remains on hold.

Clearly, there's an expectation in the marketplace in terms of Fed rates. And on the client section at JPMorgan is offering 3 months at 5%. So that's unusual that or the added marketplace that shows what that position is ferocious for deposits right now. And we're seeing that in terms of having to increase our rates to maintain positive. So the good news is as loans are paying off or higher rates and a offsets higher but on deposit rates is clearly here today.

Okay. And then last one for me. Is it fair to assume that we won't see any repurchase it with where the stock is trading? Or is there any interest to increase the price that you're willing to repurchase that.

Yes. We don't have any hard and fast emergence program opportunistic the results kind of speak for themselves. Whatever is done is a pretty meaningful move. We typically maintain there. But overall for the year, you've seen we've been very active in the repurchase program. So -- we remain -- we want to keep that option open to us, but in all likelihood nearly before in the past, we were at.

Our next question comes from Kelly Motta with KBW.

Maybe to kick it off here on loan season margin. It looks like loan yields were flattish with a great percentage of accretible yield. We the active portfolio. Can you just speak to where new loan pricing is coming in the competition and any pressure on rent, that would be helpful.

Yes. You can see that the overall loan originations of $1.5 billion, a 6.31%, and so we're very pleased with that. The compassion remains difficult. I want to say that competition has changed at all in terms of new lending spreads, but clearly a change over the last 10 years has been private credit private, credit coming after deals used to be ranked. So all kind of the A credits that we're looking at, you're looking at the spreads of SOFR plus to $175 million to $225 million depending on the deal. But I wouldn't say it's gotten any worse in fact, I'd say it's probably gotten better just over the last few months in terms of what we're seeing from a competitive standpoint.

Got it. That's helpful. And just like between that and maybe your excited pressure on deposit costs, absent kind of a change in in the landscape or rates just kind of shake things up, it seems like maybe that 3% margin you've spoken about in the past might be more challenging near term. Is that kind of the way to think about it? And I guess, what do you think are the elements that that gets to you making your way back to making that progress.

Yes. So we're not driving through in the past, so I think that was with the expectation that rates were going to continue to which the market expectation was and we're going to have continued relief on the deposit side. But that appears to have changed at least for now. And so what gets us back there in terms of a 3% plus margin as I mentioned, it actually do end up piling up, see the short-term benefit of that.

And then longer term, if that equates to a steeper slope in the yield curve, that's positive for us. So we were going to benefit from the lag in the pricing of deposits as we're coming down to have those deposit rates come down. That's no longer appears to be the case, but rates are going up. So if -- in fact, we do get the Fed starting move rates up, that's the best way for us to get to 3% right now.

Got it. That's helpful. And then since your prepared remarks, Gian, it sounds like you opened the doors here a bit for M&A. It's obviously been a couple of years since Letier. Can you remind us, any thoughts on -- could you opened the door, what would be interest to walk at and kind of parameters and what you're waiting for.

Yes. No, we always keep our figure on the use of what's happening in the market. And as I mentioned, our #1 goal is to be disciplined to protect our shareholders to not be overly dilutive. If we look at M&A relating to perspectives, 1 strategic and 1 just financial, and strategic what we would help us with our goals to try to get lower cost funding base and riding assets. And to do that in today's market in all likelihood, you're going to have to pay something in the 1.7x to 2x tangible book value range. And when we're sitting pain today, at 1x, 2.53x tangible book value, that makes it pretty difficult.

And that probably prohibited for us to do 1 of those transactions. And so that's why we're so focused on Bill 2030, improving our cost of funds ourselves and improving our margin and our profitability so we can get our multiple up there. So our currency is more attractive to be able to use in a deal. The other alternative is, of course, looking at just at financial. And that's what we have historically done, and that's not bad. And we look at those opportunities. but we also don't want to substract from what we're doing in the good progress and momentum we have today.

So we keep pricing Europe and always in those conversations, but I would say it's a challenging environment. And if it is out, we're going to just to execute on our game plan that we have today.

Thank you. Our next question comes from Andrew Terrell with Stephens.

This is Jackson Lauren on for Andrew.

Jackson, thank you for joining talking about an upgrade.

Just on the revised framework, obviously very beneficial to capital. I guess assuming you finalized, I was just wondering if you could lay out some use cases for that incremental capital whether that's a pickup in the buyback or maybe potentially accelerating the exit of some of the transactional loan runoff.

Yes. No, good question. And we've tried to lay that out in the prepared comments. It's really first highest in beds would be organic growth, what we're doing today. So we continue to do that and hopefully more of that. Number 2 would be to look at M&A. And our first priority of M&A would be strategic and it's not a strategic tenet financial transaction potentially. But if we can't find one that meets our metrics, the things I didn't share with Kellegshould have is what we look for is the tangible book value dilution earn back and we want to earn back in less than 3 years, which I think is pretty the expectation of the marketplace.

So M&A and absent further organic growth, then we would look forward to share repurchases. So those would be the 3 priorities for our use of capital going forward.

Got it. That's helpful. And then just last one for me on expenses. Pretty flat in the quarter. Wondering if there's anything to think about the remainder of the year? Is this a level to build off of?

No, I think it's pretty much a good level to build off of. We continue to make investments, as I talked about, but having that efficiency ratio in that 50% to 55% range. And were nice mix to see the tick down. And obviously, you can control that efficiency ratio by the numerator or the denominator, and our preference is to grow the numerator but growth of nominator more and which is exactly what we've been able to do.

Thank you. This concludes the question-and-answer session. I'd like to turn the call back over to Brad for closing remarks.

Thank you, Michelle. Hey, thanks, everybody, for joining us this morning's call. Happy Friday and a great weekend. Please contact me if you have any questions, and enjoy the rest of the day.

Thank you for your participation. You may now disconnect.

Welcome to a WaFd Inc.'s Second Quarter 2026 Results Conference Call. [Operator Instructions] 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 second quarter earnings report. You can find our earnings press release, along with our detailed fact sheet and investor scorecard on our website, that's wafdbank.com.

During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. Information on risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and the Form 10-K for the fiscal year ended September 30, 2025. Forward-looking statements are effective only as of the date they are made and WaFd assumes no obligation to update information concerning its expectations.

We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings material. With us this morning are President and CEO, Brent Beardall, Chief Financial Officer, Kelli Holz, and our Chief Credit Officer, Ryan Mauer. I'd now like to hand the call over to Mr. Beardall. Good morning.

Thank you, Brad. Let me start by saying I thought we had an outstanding second quarter, and we are excited to elaborate on the results. This morning, we will cover four areas. First, Kelli Holz, our CFO, will provide you with a detailed review of our balance sheet and our income statement for the quarter. Next, Ryan Mauer, our Chief Credit Officer, will provide comments on the current status of our loan portfolio and credit quality trends. Third, I will provide my insights on the quarter 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.

Thank you, Brent. As announced, WaFd Inc. reported net income available to common shareholders of $61.9 million or $0.82 per diluted share for the quarter ended March 31, 2026. This compares to net income to common shareholders of $0.65 per share for the second quarter of fiscal 2025 and $0.79 per share for the December 2025 quarter. The $0.03 increase in earnings per share for the quarter was a result of a modest increase in net interest income, controlled expenses as well as 2.7 million shares repurchased during the quarter at a weighted average price of $31.85 per share or 1.05x tangible book value.

Our share repurchase spend currently has a remaining authorization of 8 million shares, which depending on share price, provides a compelling investment alternative.

For the balance sheet, loans receivable increased $119 million during the quarter, primarily due to an increase in our active loan types Commercial Real Estate, Multifamily, Construction, land A&D, C&I and Consumer, which combined, increased by $359 million. Loan originations and advances for the quarter outpaced repayments and payoffs in our active loan types with originations of $1.5 billion and repayments and payoffs of $900 million. For the inactive loan type, advances were $21 million with repayments and maturities at $276 million. The weighted average rate on originations was 6.22% for the quarter, and the weighted average rate on repayments and payoffs was 6.12%. Please see the tables in our fact sheet that 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 as 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 noninterest-bearing deposits decreasing $115 million or 4.3% and 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 disbursement. Core deposits ended the quarter at 80.4% compared to the December quarter at 79.7% and up from the September quarter at 77.9%. Noninterest-bearing deposits ended the quarter at 12.2% of total deposits.

The loan-to-deposit ratio ended the quarter at 94.5%. WaFd's capital profile remained strong. We estimate our CET1 ratio at quarter end to be 11.4% and our total risk-based capital ratio to be 14.4%. Liquidity is strong with $4.2 billion of on-balance sheet liquidity, a robust core funding base, low reliance on wholesale borrowings and significant off-balance sheet borrowing capacity.

For the income statement, net interest income increased $6.5 million from the prior quarter. The effect of the reduction in interest paid on liabilities outpacing the reduction in interest earned on assets by 5 basis points. The net interest margin was 2.81% in the March quarter compared to 2.7% for the quarter ended December 31, 2025. For the spot rate as of the March quarter-end, the yield on interest-earning assets is 5.06%, the cost of interest-bearing liabilities, 2.78% and the margin at 2.81%.

Comparing the linked quarter, I'll walk through from the December to the March margin, a 5 basis point net improvement with deposit rates, repricing more favorably than loan rates, a 7 basis point improvement recognizing nonaccrual interest during the quarter, 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 [indiscernible] accrual basis. Offsetting the increases was a 5 basis point decrease related to our securities growth, the mortgage-backed securities purchases at a net spread of approximately 1%, although it puts pressure on the margin, it does add $1.5 million in net interest income per quarter.

Absent any changes in interest rates, we expect our margin to be flat in the near term, acknowledging the day count for the March quarter and the funding of loan growth and deposit activity. One piece of good news that will materialize going forward for us is the accretion of $167 million of deferred income related to the interest rate mark on the Luther Burbank loan portfolio. Currently, this is being accreted into income at a rate of $6 million per quarter. We expect this to accelerate as these loans begin to adjust or repay.

Total noninterest income decreased $400,000 compared to the prior quarter to $19.8 million, contributing to noninterest income is $6.7 million in commission revenue from our WaFd Insurance subsidiary compared to $4.4 million in the prior quarter, offset by losses of $1.1 million taken on certain equity method investments in the quarter compared to losses of $408,000 realized in the prior quarter. As a reminder, the December 2025 quarter also included a $3.2 million gain from the sale of a branch property.

Total noninterest expense increased $4.1 million or 3.9% from the prior quarter as a result of increased compensation and technology expensed reflecting annual merit increases, implement 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, Kelly, 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.

Nonperforming assets decreased to $132 million or 0.48% of total assets from $203 million or 0.75% at December 31, 2025. The change is due to nonaccrual loans decreasing by $67.5 million or 35% since December 31, 2025. REO decreased slightly to $8.1 million and other property owned decreased to 0 with USDA receivable proceeds received. Delinquent loans decreased to 0.78% of total loans at March 31, 2026, compared to 1.07% at December 31, 2025, and 0.27% at March 31, 2025. While still elevated in comparison to recent periods, these credit metrics are trending positively, remain modest in light of WaFd's loan loss reserve and capital position and are indicative of our culture of early and proactive portfolio management. It is important to note here that delinquencies and nonperforming assets are impacted by a large commercial relationship over 90 days past due. Outstanding balances for this relationship amounts to $51 million.

Although appropriately placed on nonaccrual per policy, there was no charge-off taken upon revaluation at this point, and we are actively collaborating with the borrower to resolve the issues. If nonperforming assets and delinquencies were adjusted for this relationship, NPAs would be 0.3% of total assets compared with 0.6% at September of 2025, and delinquencies would be 0.52% of total loans compared to 0.6% at September 30, 2025. The net provision for credit losses in the quarter was $4 million, the provision is primarily the net result of increased commercial loan originations. Net loan charge-offs for the quarter represented a nominal 1 basis point annualized of gross loans at March 31, 2026. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.05% of gross loans at March 31, 2026, compared to 1.01% in March of 2025.

For the commercial portion of the portfolio, the allowance represents 1.33% of net loans compared to 1.24% as of March of 2025. Credit metrics at March quarter end, while still elevated from prior quarters, are trending positively, remain at healthy levels overall and continue to be impacted by two primary drivers. First, the elevated interest rate environment has 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. And if you included the yet to be funded loans, gross active loans outstanding increased by 20% on a linked quarter basis.

I am pleased to report that the biggest contributor to that growth came from C&I lending segment from a percentage standpoint. Bottom line results for the quarter improved nicely with 4% linked quarter EPS growth and 26% year-over-year, even better if you compare the first 6 months of the year, versus the prior year, we improved earnings per share by 35%. With all of the discussion, an understandable worry about loans to non-depository financial institutions, so-called NBFI loans. I'm very happy to report that NDFI loans at WaFd are only a rounding air 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 [indiscernible] in the industry over the last few years is that it represented the bulk of C&I loan book. The crowd rushed to get out of CRE assets, or fear potential losses. And many went into what I think were riskier NDFI loans, all for the sake of diversification.

We have long believed that concentrations can be a double-edged sword. It all depends on what concentration is in. That is why we remain bullish on well-underwritten commercial real estate loans that typically have a diversified cash flow, real underlying collateral, significant upfront equity and strong sponsor support. Our strategic plan, Build 2030 is designed to fully shift our focus to where we can add the most value for our clients and shareholders, serving the banking needs of businesses. This shift takes time, discipline and effort and comes with specific goals. The most important goal is increasing our noninterest-bearing deposits the 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 achieved their lower cost of funds is to focus on serving small businesses, which is exactly what we are doing. Here's what we've accomplished so far. It was just last January that we recognized or we reorganized our frontline bankers in three teams. We kick off, Build 2030. During that time, we have become a preferred SBA lender, 99% of our branch managers, formerly specializing mortgage lending have now passed our Small Business Certification process. And we are formed into three business lines: first, our business bank and what commercial credit needs up to $10 million and all small, medium-sized business needs and consumer deposits. This includes our 208 branches. Our corporate [indiscernible] 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% from this last quarter with our return on tangible common equity of 10.8%. If we can get our margin up to a little bit higher to 3%, which is our short-term goal over the next 2 years, everything else being equal, ROE or ROTCE would be 12.5%. The key from my perspective is growth in direct C&I loans and low-cost deposits, supported by growth in CRE loans while running an efficient bank. I'm pleased to see our efficiency ratio remain near the top end of our target range at 55.7%. We believe that we have products and the teams in place to grow our active loan portfolios by 8% to 12% going forward.

Looking forward, our lending pipeline continues to be quite strong, building on the very strong second quarter we had of $1.5 billion of originations. It is also very encouraging to see new deposit pipeline increased by 66%, on a linked-quarter basis. To give you some specific numbers, our lending pipeline actually decreased from $3.6 billion as of December to $3.2 billion, but that's because of the robust originations we have. The lending pipeline has actually grown down 12.7%. Our deposit pipeline, however, increased from $264 million as of December 31 to $439 million as of March 31. So a 66% increase. It is fun to see the traction [indiscernible] 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 two big [indiscernible] banks that have the advantage of the implied guarantee of the federal government on all deposits, to other regional banks to credit unions and fintechs, there is no shortage of competition and that looks to be getting even more challenging with the upcoming entrants of Elon Musk into the space with this new product X Money. Early indications are they are going to be very aggressive in looking to take market share, advertising 6% rate on FDICEC insured deposits and 3% cash back on debit card purchases. Both of these are fairly loss leaders. What gives me [indiscernible] is the fact that the sponsor is the richest person on earth and confirm losses to take market share for an attending 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, [indiscernible] 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 [indiscernible] management on August 31 of last year with the hiring of an experienced team of professionals from a [indiscernible] firm here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first 2 years. Early indications remain very positive. AUM amounted to just under $450 million as of March 31, and it is nice to fill a hole we have had [indiscernible]. We see wealth as an essential element growing noninterest income and commercial deposits as many prospects want to find one bank for their full banking relationships.

Two significant developments regarding technology. As many of you have -- know we have established a subsidiary, [indiscernible] 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 were perhaps the biggest news in the market over the last year. We are actively using AI to assist our software developers which is increasing the pace of development by over 2x. Additionally, this next quarter, we will be launching our AI Call Center Agent that I am really excited about. Our goal is that customers will be able to get the answers to their questions immediately 24 hours a day, 7 days a week, which will provide bandwidth for our bankers to deepen relationships.

Let me be clear, customers will always be able to access a live banker, if that is their preference. Our perspective is 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 written 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 31, 2025. That's still a staggering to me that in 1 quarter, we were able to buy back 3.6% of the company. We continue to believe that with our robust capital levels, when our share price is compressed, share repurchases are the best use of capital. Considering our 10.8% return on tangible common equity this last quarter.

Last month, the Federal Reserve announced potential changes to capital calculations that could have a material positive impact for WaFd if approved. The proposal would adjust risk weightings for different loan categories. Specifically, single-family residential loans with the loan to value below 60% would go from a 50% risk weighting to a 25% risk weighting. As of quarter end, the weighted average loan-to-value of our 7.5 -- $30 single-family loan portfolio is less than 40%. What does all this mean? Our initial estimate is, if approved, it would increase WaFd regulatory capital levels by approximately $400 million. This would give WaFd, [indiscernible] and management more options going forward. With a solid preference to fund additional loan growth, followed by returning capital to shareholders, and lastly, looking at strategic M&A.

For years, WaFd has been telling all that we're missing a 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 rule in making, 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 repeatedly heard from investors that they understand our plan and agree with why we are making the changes [indiscernible] 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, to 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 to becoming a business [indiscernible]. With that, Kevin, we'll open it up to questions.

[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson.

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

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

I see. So the -- I guess, the go-forward kind of flat expectation is sort of absent nonaccrual impact the core flat -- I wanted to check back in -- you've mentioned the path towards 3% in a couple of years. And 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 in over the same time frame?

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

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

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

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

No, I would say we're very bullish on being able to continue the pace. It feels like we're getting traction, and I think you can see that with our pipeline. And so to have the 12% net growth on the active portfolio and you look at all our growth. So we've overcame what was $275 million of repayments of the inactive portfolio. That's huge [indiscernible] producing that [indiscernible].

I think in the, we've said it kind of 8% to 12% growth on the active portfolio. I think the higher than that range appears very reasonable for us.

Our next question comes from Matthew Clark with Piper Sandler.

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

Yes. I don't think any of the growth came from [indiscernible] club deals at this point. We have a couple in the pipeline, but no sort of direct originations for this -- and Kelli, you have the overall portfolio of our club yields and a last i checked, we were around $500 million total bookings.

I can get that number and get back to that.

Okay. And then on the fee income run rate straight out the noise, it looked like a good result from insurance commissions. I know you've got some wealth is a growth area and SBA gain on sale is as well. But how should we think about that a $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. And you mentioned exactly where we want to go, but let me be clear, right now, well we're still working to get profitable. So right now, wealth not a net [indiscernible] item to us, as we understand as part of the business plan and the SBA gain. Right now, we're looking for every earning asset we can. So we're not finding [indiscernible] SBA portion. So this is just good organic fee income and the insurance side. So about $20 million, we think it's very sustainable.

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

Yes. So the CDs have gotten more expensive lately because [indiscernible] the market's [indiscernible]. We don't know the rate decreases are coming in [indiscernible]. So we're seeing actually some of the wholesale corporate deposits pricing [indiscernible] those treasuries. So we have balance of $4.2 billion of CDs repricing at 3.68%. And I think right now, we're [indiscernible] to 3.60% rates.

You said 3.60%?

Yes, 3.40% to 3.60%.

Our next question comes from Kelly Motta with KBW.

I didn't [indiscernible] to slide that it was a great quarter for loan growth in the active portfolio. It's really nice to see the commercial growth. Squaring your margin expectations to get to 3% over time clearly requires some -- 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.

Wondering understanding that some of these relationships take time for deposits to come over. If you could size like how much of this new commercial funding is coming with a core deposit relationship over time? That would be helpful.

Great question. And Kelly, thank you for acknowledging. We believe this was just a fantastic quarter for us from a lower growth standpoint. The first net growth that we've had in over 5 quarters. So thank you for acknowledging that.

And every one of these commercial relationships [indiscernible] operating accounts. So when you get the accounts, the question is how much do they have in deposits. And so typically, we don't get very much new deposit balances, but you get the accounts. So we're seeing a number of accounts continue to be an increase, the balances [indiscernible], and that's just the nature of what we're trying to do.

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

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

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

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

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

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.

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

Good day, and thank you for standing by. Welcome to WaFd, Inc.'s Fiscal First Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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 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 4 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 you 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 2 years. Please note that this table takes into account both the variable rate instruments and fixed rate instruments that mature in the stated time frames. It also takes into account 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 increasing $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 2 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 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 3 remaining basis points relates 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 is 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 at $20.3 million, contributing to the noninterest income is $3.2 million gain on 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 expense. 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 rate purchases 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.

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 $1.1 billion for the December quarter. This loan production was centered in commercial and industrial of 46%, commercial real estate of 23% and construction of 25%. 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 $51 million in the quarter and now represent 2.94% of net loans compared to 3.16% as of the September quarter and 1.97% as of December 2024. Total criticized loans increased by $30 million to 4.6% of net loans compared to 4.93% -- excuse me, 4.39% as of the September quarter and 2.54% as of December of 2024. It should be noted that the increase in criticized loans is not concentrated in any one business category or line, and is 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.

Nonperforming assets increased to $203 million or 0.75% of total assets from $143 million or 0.54% at September 30, 2025. The change is due to nonaccrual loans increasing by $62.7 million or 49% since September 30, 2025. This was offset by a decrease in REO of $2.3 million during the same time frame. Delinquent loans increased to 1.07% of total loans at December 31, 2025, compared to 0.6% at September 30, 2025, and 0.3% at December 31, 2024.

While elevated in comparison to recent periods, these credit metrics 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 the increases in delinquencies and nonperforming assets were largely impacted by 2 commercial relationships over 90 days past due. Outstanding balances to these relationships amount to $58 million collectively. Although appropriately placed on nonaccrual per policy, there was no charge-off taken upon revaluation, and we are actively collaborating with both borrowers to resolve the issues.

If nonperforming assets and delinquencies were adjusted for these relationships, 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 of 2025.

The net provision for credit losses in the quarter was $3.5 million. The provision is the result of decreased loan balances, mixed credit metrics, including increasing trends and negative migration of criticized and nonperforming loans, and $3.7 million of net charge-offs taken during the quarter. Net loan charge-offs for the quarter represented a nominal 7 basis points of total loans annualized at December of 2025.

The charge-off was driven by a relationship in the C&I energy sector as a result of depressed oil prices, coupled with diminished working capital. For reference, over the last 10 years, net charge-offs have averaged a recovery of 2 basis points per year. And over the last 3 years, net charge-offs have averaged 10 basis points per year. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.05% of gross loans at December 31, 2025, compared to 1% in December of 2024. For the commercial loan portfolio, the allowance represents 1.33% of net loans compared to 1.26% as of December of 2024.

Credit metrics at December quarter end, while elevated from prior quarters, remain at healthy levels overall and have been impacted by 2 primary drivers: first, the elevated interest rate environment has impacted loan demand and borrowers' expense structures; second, the economic uncertainty driven by tariffs continues to impact borrowers' top line revenue results as well as material costs. Looking forward, these factors remain headwinds for credit quality. While the uncertainty related to tariffs remains elevated, the interest rate environment appears to be easing in the near term.

With that, 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 recognized or reorganized our frontline bankers into 3 segments -- 3 teams to kick off Build 2030. During that time, we've become a preferred SBA lender and 98% of our branch managers who formally specialized in mortgage lending have now passed our small business credit certification process.

Our 3 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 9 Western states; our corporate bank, 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 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 2 years. Everything else being equal, return on intangible 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 1 to 2 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 remained 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 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 2 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 7 quarters, your 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 1.1x 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 are anticipating moving forward with the Needs to Improve rating.

With that, it looks like we have 4 questions in the queue. So operator, I'll let you open it up to questions.

[Operator Instructions] And our first question comes from Matthew Clark with Piper Sandler.

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 3 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 2 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 to call out any specific borrower. Ryan can talk to you about the types of business. 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 just say, very generically, one is in manufacturing business being impacted by markets tariff situations, cost of labor, those sorts of things. The other business is a real estate-related entity -- 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. Obviously, we'll have our annual merit increases, which will go into effect this March quarter. So as you've seen in the past, and we will be optimistic -- or opportunistic as we look at teams out there, but no significant plans for increases of large teams coming over. We think we have the teams in place and the tools in place. And obviously, we'll continue to make investments strategically from a technology standpoint as well. But I think absent the merit increases, I think we're at a pretty good run rate. And then as we get production to increase, obviously, bonus compensation will increase from there. But I think we're at a pretty solid run rate right now.

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

Kelli, you mentioned -- just wanted to kind of circle back. I think you said the expectation is that you would expect further margin pressure, but yet growth in NII dollars, is that at least in calendar 1Q?

Correct. With the current strategy to replace single-family runoff with mortgage-backed securities.

And I guess kind of sinking that, and I know that's different time frames, but Brent sort of mentioned the short-term goal to get to a 3% margin. Just -- I guess if you could kind of meet the 2, I guess, the balance of calendar '26, is this sort of a near-term little headwind and then hope to kind of lift from there? Any color on the 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, as this was impacted negatively a quarter from now or 2 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, as you saw to lower cost deposits. So that's where we see the optimism to get to 3% margin over the short term.

Okay. And then the -- just on the loan portfolio, is the inactive runoff this quarter, is that a pretty fair number to use in terms of maybe $200 million, $250 million a quarter in terms of that shrinkage offset by, Brent, I think you said active -- hope to get to 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, whatsoever. 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. On that buyback, your sub tangible book, certainly pencils, I guess, with shares, maybe 10% plus above that average buyback price last quarter. How price sensitive are you? And then maybe balance that with capital? How -- what levels do you think you could be comfortable lowering to if you were -- if you remain pretty active on buyback?

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, 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 1.1x tangible, it's the best investment we can make today.

Our next question comes from Andrew Terrell with Stephens.

If I could just start and just clarify on the margin. I totally get the kind of mechanics and why there might be some pressure moving into investments. But when you're referencing the near-term kind of expectations, I would assume the margin reset is higher in calendar 1Q just based off of the -- you're lapping the 9 basis point headwind of interest reversal this past quarter. So I guess, is it -- is the margin expected to decline from the reported amount or from the spot rate that you gave, I think it was 2.77% at 12/31.

I think we're referring to the spot rate, not the reported amount.

Got it. Okay. And if I just think about 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. If you compare us to our peers, I think we're still relatively light in terms of our bond book compared to others. And as we've talked about, we kind of think of our single-family mortgages as a bond book. They're just not securitized. So I'm not looking to put $8 billion additionally into bonds as we get out of that, but there's certainly room for us to grow the bond portfolio. I don't think we've announced anything that -- I'd say over the longer term, 25% to 30% wouldn't be out of the question. But over the short term, you'll see us kind of ratchet that up over time, depending on the opportunities what the investments are available to us 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 2 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.

[Operator Instructions] 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. And then I did want to get a point of clarification, Brent, if I may, on your expectations for growth in the active portfolio. I think you said 8% to 12% over 2 years versus -- I think we're seeing that amount in 2026. Is that the right way to think about it? So maybe a slower run up to that 8% to 12% as that pipeline pulls through? Just trying to kind of square that of commentary whether 8% to 12% over fiscal year 2026 is still in the realm of possibility?

Yes. I'd say in fiscal year 2026, we're probably 6% to 10%, and then we're thinking in fiscal 2027 on the higher end of that range as we really turn things back on, open them up and the most optimistic sign on that is what we're seeing in the pipeline. So spring should -- this next quarter should be a good quarter for us from a loan production standpoint. Now we have to prove it.

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 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. 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 1 to 2 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.

Good day, and thank you for standing by. Welcome to the WaFd Fourth Quarter and Fiscal Year 2025 Results Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand this conference over to your speaker today, Brad Goode. Please go ahead.

Thank you, Kevin. Good morning, everybody. We are excited to have you all attending our first ever earnings conference call. We have listened to the feedback from many of you requesting that we hold a call like this, we've heard you, and so here we are. Let's dive into our 2025 fourth quarter and full year earnings report. You can find our earnings press release, along with our detailed fact sheet and investor scorecard on our website, I'm sure you all know where that is, wafdbank.com.

During today's call, we will 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-Q for the quarter ended June 30, 2025.

Forward-looking statements are effective only as of the date that 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; Chief Credit Officer, Ryan Mauer and Chief Experience Officer, Cathy Cooper. I'd now like to hand the call over to Mr. Beardall.

Thank you, Mr. Goode, and good morning, everyone. Today, we will cover 5 primary items with you. First, Kelli Holz, our CFO, will provide you with a detailed review of our balance sheet and income statement for the quarter and year ended 2025. Second, 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 you my insights in terms of our future prospects, capital management strategies and macro developments that impact WaFd. Fourth, Cathy Cooper, our Client Experience Officer, will discuss the progress we are making to improve banking for our clients. Finally, we will be happy to answer any questions you have at that point.

Kelli, please walk us through the quarter and year-end results.

Thank you, Brent. As announced, WaFd Inc. reported net income available to common shareholders of $56.9 million or $0.72 per diluted share for the quarter ended September 30. This compares to net income to common shareholders of $0.71 per share for the fourth quarter of fiscal 2024 and $0.73 per share for the third quarter of fiscal 2025. The $0.01 decrease in earnings per share for the quarter was primarily due to modest increases in noninterest expense, offset by modest increases in net interest income and noninterest income.

For the full year ended September 30, 2025, WaFd reported net income available to common shareholders of [ $211.4 million ] or $2.63 per diluted share. This compares to fiscal 2024 net income to common shareholders of $2.50 per share. For the balance sheet, loans receivable decreased $188 million during the quarter, primarily due to a decrease in our inactive loan types which are single-family mortgage custom construction, which combined decreased by $216 million.

Loan originations for the quarter outpaced repayments and payoffs in our active loan types for the first time this fiscal year with originations of $1.4 billion compared to $700 million in the June quarter and repayments and payoffs of $1.2 billion in both those quarters. Active loan types include multifamily, commercial real estate, C&I, construction, land A&D and consumer. As announced earlier this year, we have exited the single-family mortgage lending market, which also includes custom construction, consumer lot loans and HELOCs. Please see the updated table on our fact sheet to provide the breakdown between our active and inactive loan types.

Deposits increased by $51 million during the quarter, with noninterest-bearing deposits increasing $80 million or 3.2%, while time deposits decreased $286 million or 3%. For the fiscal year, total deposits increased by $64 million, a result of the efforts of our teams across the entire footprint. The former Luther Burbank deposits decreased by $1 billion over the fiscal year which was an intentional effort on our part to lower the cost of funds for these higher costs, mostly CDs deposits. Those decreased -- which decreased from 4.25% at September 2024 to 3.36% of total deposits today. Core deposits ended the quarter at 78% of total deposits similar to the June quarter and increased from 75% as of the prior year-end.

Noninterest-bearing deposits ended the quarter at 12% of total deposits. The net loan-to-deposit ratio ended the quarter at 93.7%. Total cash decreased $152 million in the September quarter, and total investments and mortgage-backed securities increased to $279 million. Cash balances were used to pay down borrowings, which decreased $174 million during the quarter. The increase in mortgage-backed securities as part of our overall investment strategy currently replacing the single-family mortgage loan balance runoff.

WaFd's liquidity and capital profile remains 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 $1.9 million from the prior quarter. The net effect of the reduction in interest paid on liabilities outpacing the reduction on interest earned on assets by 3 basis points. The net interest margin was 2.71% for the September quarter compared to 2.69% in June. As of the September period end, the yield on interest-earning assets was 5.23%, while the cost of interest-bearing liabilities was 2.91%, with the resulting margin at period end of 2.82%.

Total noninterest income increased slightly compared to the prior quarter to $18.4 million. Contributing to noninterest income is $4.6 million in revenue for the quarter from our insurance subsidiary, WaFd Insurance. For the fiscal year, WaFd Insurance revenue was $19.5 million, an increase of 12.5% over the prior year. Total noninterest expense increased $2.7 million or 2.6% from the prior quarter as a result of strategic investments in our talent and technologies. Increases in compensation and information technology spend resulted in a small increase to the company's efficiency ratio for the fourth fiscal quarter to 56.82% compared to 56.01% as of June.

Let me 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 on a quarter-over-quarter basis increased from $700 million to $1.4 billion. Increase in production were seen in the majority of our active loan portfolio types. On a quarter-over-quarter basis, commercial real estate production increased by 380% from $44 million to $211 million. Commercial & Industrial increased by 56% from $325 million to $507 million. Commercial construction increased by 142% from $206 million to $499 million, and land A&D increased by 132% from $19 million to $44 million. Importantly, we were able to achieve the increase in loan production with a consistent approach to underwriting that maintained a moderate risk profile.

Delinquent loans ended the quarter at 0.6% up 34 basis points when compared to the June quarter and 35 basis points when compared to September of 2024. Adversely classified loans decreased by $84 million in the quarter and now represent 3.1% of net loans compared to 3.5% as of the June quarter and 2% as of September '24. Total criticized loans increased $57 million to 4.4% of net loans compared to 4.1% as of the June quarter and 2.4% as of September of 2024. It should be noted that the increase in criticized loans is not concentrated in any one business line or industry. And similar to the rise in delinquencies is reflective of the economic environment where elevated interest rates and economic uncertainty impacted both commercial and consumer borrowers.

Nonperforming assets increased $46 million in the quarter and represent 0.54% of total assets, consisting of $129 million in nonperforming loans, $11.1 million in REO and $3 million in other repossessed assets. While elevated in comparison to recent period, these credit metrics 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 the increases in delinquencies and nonperforming assets were largely impacted by a single commercial real estate loan over 90 days past due. Although this loan was appropriately placed on nonaccrual per policy, there was no charge-off taken upon revaluation, and we are actively collaborating with the borrower and recent developments are indicating positive momentum. If nonperforming assets and delinquencies were adjusted for this one loan, NPAs would be 0.36% of total assets which represents no change from the June quarter end and delinquencies would be 0.38% of total loans, which is up from 0.26% from June quarter end.

The net provision for credit losses for the quarter was $3 million, including a $2 million provision for loan losses and a provision of $1 million related to unfunded loan commitments. The provision is a result of growth in commercial loan balances, including C&I and CRE. In addition to mixed credit metrics and negative trends in the migration of criticized nonperforming and delinquent loans.

Net loan charge-offs for the quarter totaled $1 million. For the year, net charge-offs totaled $11.8 million and represented a nominal 6 basis points of average net loans. For reference, over the last 10 years, net charge-offs have averaged a recovery of 2 basis points per year and over the last 3 years, net charge-offs have averaged 10 basis points per year. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.04% of gross loans at fiscal year-end compared to 1.01% in September of 2024. For the commercial loan portion of the portfolio, the allowance represents 1.3% of net loans compared to 1.26% as of September of 2024.

Credit metrics at fiscal year-end, while elevated from prior quarters, remain at healthy levels overall and have been impacted by 2 primary drivers: first, the elevated interest rate environment has impacted loan demand and borrowers expense structures; second, the economic uncertainty driven by tariffs continues to impact borrowers' top line revenue results as well as material costs. Looking forward, these factors remain headwinds for credit quality. While the uncertainty related to tariffs remains elevated, the interest rate environment appears to be easing in the near term.

With that, I will hand the microphone over to Brent for his comments.

Excellent. I wanted to let Kelli and Ryan start this call, so everyone can appreciate what I think is a very solid year that we've just completed. Change is hard, especially for an organization that has been around for 108 years. But I am incredibly proud of our team. All 2,000 of us have embraced what needed to be done, taking the next step in moving WaFd to be a true commercial bank. You are seeing part of the change with this earnings call. We recognize that change takes time, but believe that this is the best course of action for all of our constituents.

Let me discuss our evolution from a thrift to a commercial bank. Most of you on this call will remember our previous strategic plan, which we set out in 2018, it was called Vision 2025, and it focused on becoming a digital-first bank, growing our transaction deposits and building our reputation as the bank of choice for top-tier talent in the Western United States.

How did we do in executing that strategic plan? I would give us a 7 out of 10. Before the 500 basis point increase in interest rates, my score would have been 9 out of 10, but certainly, rising deposit costs and reduced loan demand negatively impacted us. There is no question in my mind, we are better off today for having aimed high with Vision 2025. I would now take our tech stack over any midsized bank peer as we now have a phenomenal digital offering with a combination of strong vendor relationships and control via in-house developed software.

We also learned that technology is a journey with no destination. There is no finish line to cross. As soon as you have implemented a new technology, you have to work on what comes next and iterate on what you just launched. The key is to be nimble, and we believe we have the technology and the teams to do exactly that. Leveraging technology for the benefit of our clients and colleagues is foundational to who we are today and for our future.

What is next? We took a hard look at where our stock was trading, even after the events of the last couple of days. We typically traded just above tangible book value. As you're aware, right now, we're below tangible book value. While most of our peers have been trading in the range of about 1.35x tangible book value.

Why is that? The market may be wrong over the short term, but generally speaking, the market proves right over the long term. Our stock trades at a relative discount because our profitability lags compared to our peers. By peers, I refer to the 62 publicly traded banks between $10 billion and $50 billion in assets.

And let me just give you some comparisons that most of you are aware of in terms of profitability. Our peers' return on assets, typically 1.22%, WaFd was 0.91%, we lag. In return -- in terms of return on tangible common equity, our peers are at 13%, WaFd is at 10%. In terms of the efficiency ratio, our peers were at 55%, WaFd at 57%. So we lag in terms of profitability. The biggest single driver for why our profitability is behind our peers is because of our margin. Our peers have a margin of 3.42%, and you can see WaFd has a margin this quarter of 2.71%. That is made up of course, in terms of yield on loans, our peers had a yield of 6% on their loans and WaFd was 5.38%, which is brought down by the significant balance of single-family mortgages that I'll address as well as the cost of deposits. Our peers cost of deposits is just above 2%, we are at 2.6%.

However, we remain stronger than our peers in terms of TCE ratio with our peers at 9.3% and WaFd at 9.8%, and our net charge-offs have remained very low relative to our peers. For this last quarter, our peers were at 16 basis points and WaFd at just 2 basis points of charge-offs.

There is no silver bullet. The reason for our relative underperformance lies in our thrift heritage. We historically focused on attracting higher cost time deposits to fund mortgage loans, effectively accepting a higher degree of interest rate risk. Our solution is summed up by our next business plan, which we call Build 2030, a plan designed to fully shift our focus to where we can add the most value to 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 in my mind, is increasing our noninterest-bearing deposits to total deposits, from 11% in January when we launched this plan up to 20% by the end of fiscal 2030. Today, we sit at 12%. It is an ambitious goal, but it is what we need to do and it will 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 are doing. Here's what we've accomplished so far. In January, we reorganized our frontline bankers into 3 teams to kick off Build 2030. Our business bank handling commercial credit needs up to $10 million and all small business in consumer deposits. This includes our 208 branches, our corporate bank, which handles all large commercial credits and clients with treasury needs. Lastly, our commercial real estate bank, recognizing our historical strength and expertise in commercial real estate, we have a dedicated team to serve the credit and treasury needs of real estate investors and operators.

We have also expanded our product offerings. We now originate SBA 504 loans and 7(a) loans. Over the last 6 months, WaFd has earned SBA delegated authority and has been approved as a preferred SBA lender. Being great at serving treasury management needs with all of its requisite tools and controls is our long-term solution for achieving low-cost deposits.

We all heard about the hype that what AI can do and we, too, are excited about the potential. But AI is also being used extensively by bad actors to commit fraud. Robust treasury management controls and automation are a must for all businesses. We are very pleased with our treasury management offering for both small and large businesses that allows our clients to mitigate risk and easily manage their banking. We are now 9 months since we announced Build 2030 and here are some of the results. Our gross loan pipelines have increased 24% in just the last quarter. Gross new money potential is up to $2.5 billion, up from just $2 billion a quarter ago. And we have a deposit pipeline of almost $250 million of net new deposits we anticipate.

With the branches focused on attracting small businesses, we are seeing more customer traffic, client growth and still have significant capacity to grow without adding staff levels. We are seeing growth in the number of accounts, which is exactly what we want. Specifically, noninterest-bearing accounts are up by 5,000 over the year, a 2.5% increase, which is modest, but important because it reverses the trend of declining numbers of noninterest-bearing deposits that we have seen over the last several years.

C&I loans. After opening up business lending to our branch teams in the last year, we have more than doubled the number of C&I loans we have on our books to 3,000. With each of these new business relationships, we are planting the seed for additional growth going forward. Having studied many thrifts that failed in their journey to become commercial banks, I believe the most important differentiator is being disciplined, especially around credit. We don't want to get in a hurry and take undue credit risk for the sake of faster growth, we will err on the side of quality for growth.

Looking at the composition of our balance sheet, let me highlight our plan for handling the SFR loans or single-family residential loans we have on our balance sheet currently $8.1 billion, earning only 4.2%, which is about 40% of our total loans. Given the rate environment, our plan is to replace runoff in this portfolio with agency mortgage-backed security. Currently, we picked up about 100 basis points with 0 credit risk. Last quarter, we had $226 million of single-family loans pay off.

On the deposit side, we have largely been treading water over the last 18 months. But that does not tell the whole story nor give credit to our team for what we have accomplished. As you recall, on March 1, 2024, we closed the Luther Burbank acquisition, knowing they had a high cost deposit base. Since that time, we have allowed their deposits to decline by $1.8 billion or 32%. But importantly, in doing so, we have decreased the weighted rate on the remaining deposits by 90 basis points. We are very pleased to point out that organic growth at WaFd deposit franchise over that time more than offsets the $1.8 billion of Luther runoff. Another way to look at it is WaFd would have grown its deposits by 8.5% over the last 18 months, absent the impact of the Luther deposit runoff.

That leads to an obvious question, are we pleased with the results of the Luther Burbank acquisition? The answer is yes. We got into California at the right price and now have a solid foundation to build the franchise in the state. I want to also mention that we still have $170 million in our rate mark related to the Luther Burbank loans that will accrete into income over the life of those loans. And with rates coming down, I would expect that to accelerate.

It's also important to note that this last quarter, we finally came to the end of our HMDA consent orders. Working with the CFPB, they have now closed out the 2 HMDA Consent Orders. So that is now closed and behind us, which is timely considering we are completely out of the mortgage business.

Changing topics. We are very pleased to announce that on August 29 of this year, we launched WaFd Wealth Management with the hiring of experienced professionals from a wirehouse here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first 2 years and then go from there. Early indications are very positive, and it is nice to fill a hole that we've had in our product offering. We see wealth as an essential element of growing our noninterest income going forward.

Two macro items I would address. Number one, bank M&A. We are all aware of the 2 large deals announced this last quarter, Fifth Third acquiring Comerica and PNC acquiring FirstBank. I think we will see a big pickup in M&A over the next 2 years as bank valuations improve and management teams look for scale in light of banking's unlevel playing field today. I thought it was very interesting to hear that the PNC CEO said about wanting to get to $1 trillion of size in order to stay relevant. There are only 200 banks in the United States greater than $3 billion in assets, crazy to think about only 200 banks greater than $3 billion in assets. I think by the end of this administration, it could be significantly less than that.

Will we be a buyer? Of course, we would love to be a buyer of the right franchise at the right price. But given our CRA needs to improve rating, which we continue to appeal and we hope to have resolution on that appeal this quarter, and our relatively low valuation, I don't see us participating at a significant level. That may not be a bad thing considering most M&A has been destructive to capital for the acquiring institution.

Number two, deposit insurance reform. I'm a Board member of the midsized bank coalition and we have been leading the charge on reforming deposit insurance coverage. I think it's evident to everyone since the 2023 runs on the banks, Silicon Valley and First Republic and other midsized banks, it is an unlevel playing field. And it appears we are gaining momentum with the latest proposed legislation, which would provide $10 million of insurance for noninterest-bearing transaction deposits on all banks except the G-SIBs and foreign banks.

The banking system is strong today, but the system is broken in my opinion, as too many deposits are concentrated in the too big to fail banks. For example, the largest bank in the U.S. grew by 18% in assets on an annualized basis in the second quarter, while the economy grew at only 2.5%. That bank now holds 14% of the deposits in the United States. There is something wrong with the perception that deposits are safe in the too big to fail banks but less so as the rest of them. Now is the time to begin addressing this issue if we want a broad, robust and diverse banking system, and I'm pleased to see the momentum gaining.

We are certainly living in interesting times. But I'm grateful to be part of the WaFd team and what we are building. Next, it is my pleasure to introduce Cathy Cooper, our Client Experience Officer, to talk about some of the progress in improving our clients' banking experience.

Thank you. Brent asked me to take a few moments to describe the ways that we're differentiating WaFd from the competition. First, our bankers are expected and empowered to be active members of their local communities, be it chamber, rotary or nonprofit boards, showing up consistently builds credibility at a grassroots level as evidenced by the improvement in our Net Promoter Score, from a low of 17, 8 years ago to a high of 58 this past year. We have also won Best Bank awards from both Newsweek and Forbes and are currently named Best Bank in 4 out of our 9 states.

Second, it's having control over our client-facing technology instead of being held hostage by vendors. Next week, we launch Release 2.8 of our digital banking platform, developed in-house by Pike Street Labs -- our Pike Street Labs team. The mobile app release adds direct deposit switching, debit card controls and consumer wire transfers. Our customers can send a wire, verified by the phone's device ID plus the client's voice print, all from a mobile phone for $10.

Pike Street Labs also built our own consumer deposit account portal that allows you to open a checking account online in as little as 10 minutes. We continue to optimize the flow to reduce customer friction while leveraging a robust enterprise solution for identification of clients and fraud risk scoring. We have to be able to block synthetic identities and fraudsters without creating undue hurdles for legitimate customers. Today, we auto-approve 44% of online deposit account applications and have opened over 4,700 consumer accounts online in the past year.

One of the most powerful tools under development is a client data platform that recognizes visitors to our website and to our online banking. Checks to see which badges they earned during prior visits, and adjusts or personalizes the experience. Maybe you clicked on the small business lending page the last time you visited so we gave you a small business loan badge. And if you logged in while you were on our website, we can now stitch that badge to your log-in identity. This allows us to follow up and target activities like e-mails and other outreach to improve service and enhance conversion.

And finally, we are focused on solving the pain of small business owners who according to studies spend as much as 18 hours a week managing their finances. Eighteen hours is too much. So we are creating banking that bridges the gap between commercial and consumer solutions. We use nCino for origination of all small business loans and deposit accounts. We offer Treasury Express, a small business digital banking solution, that connects to light versions of our treasury services. And we are one of the earliest adopters of CashFlow Central from Fiserv, designed to support payables and receivables for small businesses without having to rely on a separate third-party service.

With that, we'll close for Q&A.

[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson.

I appreciate hosting the call. And Brent, I again appreciate the strategic overview. That was great. I guess moving to the loan pipeline. You mentioned that's been building for 3 quarters and Kelli outlined kind of the undertone of the -- some of the originations in the active portfolio are starting to outpace that.

I guess more simply just looking at kind of your budgeting for fiscal '26 on net growth, what could you tell us on your expectations?

Yes. So thank you, Jeff, and good to be with you this morning. And you'll notice we're now kind of breaking the loan segment into 2 parts, the active and the inactive. We're breaking out the single-family loans in the inactive segment. And really, we think about that inactive as really an equivalent to a bond portfolio. So as the single-family goes away we can replace our bond mortgage-backed securities.

So we think about the active portfolio. We truly believe that we can see 8% to 12% growth in the next year in the active portfolio.

And pace of runoff in the inactive -- I understood that you're redeploying it into MBS, but your expectation for net runoff in the inactive?

The inactive will run off of about $200 million to $300 million a quarter is our expectation.

Great. And then on the margin, Kelli, you mentioned -- I forget -- that 282 number, was that a September average? Or just where -- the spot rate at the end of the quarter?

Go ahead, Kelli.

Certainly, Jeff, 282 is the as of the end of the quarter spot rate, so which we also like to see because it gives an indication absent any unexpected events or actions that's where we would have our starting point for the first quarter of fiscal '26.

Got it. And I guess just if you wouldn't mind sharing kind of an update on your rate sensitivity, a quarter cut in September and expectations for a couple more by the end of the year. And mindful of that spot rate indicating upward your expectations as we kind of manage the margin into the new year.

I think it's reasonable to say that you could see the margin expand a bit with future cuts. Just recognize that we have always said in the past and do think that we lag about a quarter for full effectiveness on rate cuts. So if we see one in October, we would benefit from that in the December quarter, but December cut might take us through March or June to fully recognize the benefit there. And that really is just the repricing on our liabilities.

Thank you, Jeff. And I think from my perspective, it's good news on the margin. As you point out, the spot rate on the margin as of the end of the quarter is 282. So that would bode well for the coming quarter, but it all depends on what happens with rates and as I think everybody on this call knows the short-term impact of rates has been negative for us just slightly in terms of margin. But then as the deposit pricing catches up with the asset repricing and it's a net benefit.

The most important thing for us in terms of rates is to have a positive flow to the yield curve and it appears that, that will be the case for the foreseeable future, which is very positive.

We'll go to the next question, operator.

Our next question comes from Matthew Clark with Piper Sandler.

Thanks for the question. I wanted to get a little more color on the core loan yields. I think they were down about 8 basis points this quarter based on our calculation. Just the drivers there? And then maybe remind us how much of your loan portfolio reprices with each rate cut overnight or within the month?

Yes. I'll let Kelli take that, but that's a function of both moving rates and also the increase in nonaccrual loans. It has an impact, but I will let Kelli talk about that a little bit more.

Correct. I mean the big driver quarter-over-quarter would be the increase in our nonaccrual loans, which was primarily as Ryan mentioned, one loan. I would say that had in round numbers, a 3 basis point impact on our margin. We've got about -- we're about 55%, 45%, 55% of our earning assets, 45% are fixed, and we have about 40 -- and that's about the same on the loan book, too, because that's the majority of our earning assets. You're going to see our yield on our loan book, Matt, vary depending on how much of our fair value mark recognized during the quarter on our Luther Burbank loans, and it was slightly lower this quarter than it was last quarter. And that's simply a function of repayments in that book.

Okay. And is that 55%, 45% -- does the variable piece include -- does that include ARMs? Or I'm assuming it's not all truly floating?

It includes our hybrid loans. Yes, correct. And it includes the impact of any swaps we have on the books as well. We've got -- just over 40% of our earning assets will reprice in the next 6 months.

Okay. Got it. And then on the step-up in production, pretty big increase. Anything chunky in there? Maybe just if there's -- maybe what was the largest kind of new commitment or new loan origination in that $1.4 billion that you put on? Just trying to get a sense of kind of if there was anything sizable that drove part of that increase? And what type of credit it might be?

Yes. I would -- I'll let Ryan talk a little bit about that. But it's really a function of how low our production had come and we're still coming up. I recall just a couple of years ago, we were doing $8 billion of production a year. And so we're typically keeping our largest loans at just under $50 million, but the requests are picking up and as projects get larger in size, they're picking up. And -- but if we go over that $50 million in terms of loan requests, we're trying to find a participant and mitigate our risk.

Ryan, I'll let you talk a little bit about the production and the largest loans you saw.

Yes. Thanks, Brent, and thanks, Matthew, as well for the question. I think, Brent, adequately or accurately described really what we're seeing here. We are maintaining our largest loans under $50 million. I think the biggest impact of this is we have seen a number of commercial real estate loans, particularly multifamily loans that with the movement -- with a downward movement in the rate. We have a number of clients where these projects are now penciling. So we've seen renewed interest for a lot of borrowers that have during the first part of the year, really been sitting on the sidelines waiting for some more stability.

But it's not -- we're seeing commercial real estate, we're seeing C&I opportunities. There's a number of C&I borrowers also that we're not moving forward with larger CapEx projects and things like that because of economic uncertainty. So as things are stabilizing, we're just seeing an increase really across the board, but nothing that is particularly lumpy within that group.

Okay. And then on the expense run rate, it looked pretty clean. Just any comments on the outlook and knowing there's some -- I think there's some seasonality in the March quarter?

Yes, correct. It's a pretty clean quarter. Some of the health insurance expenses were up, it just -- we're self-insured. So we had some larger claims come through. It will happen from time to time, nothing predictable about the seasonality there. But I think we're at a pretty good run rate from an expense standpoint, at least until we get to next year, and then we'll have the increases, the annual increases.

Okay. And then just big picture question because we're getting it from clients. But any thoughts on stablecoin? Anything you might be doing, any kind of partnerships and just your view on that potential threat?

Yes. We're paying a lot of attention to it, obviously, and it's moving quickly. We haven't announced any partnerships, but we're certainly looking into it. And I think there will be demand in the marketplace from it. I don't -- we don't get a lot of questions or demand from our clients today. So I don't feel like our deposit base is at risk, but I do believe it could be an opportunity if we do it right. So it's something we're looking at.

Our next question comes from Andrew Terrell with Stephens.

Thanks for hosting this call. I appreciate it. Just a couple of quick ones for me. Brent, on kind of a balance sheet size question, I guess, on the target for 20% noninterest-bearing deposits by 2030. I guess you can kind of get there 2 ways, right? You could shrink the time deposit composition or just on an absolute basis, close to double the NIB dollars. I'm curious, should we expect continued declines in the time deposit book. Which do you see being the more of the driving factor on that -- getting to that 20% noninterest-bearing mix?

I see the biggest driving factor is overall growth. We don't want to shrink our way to it at all. We want to bring on new clients and become more relevant in our communities we serve. So it's overall growth. And most of the time deposit runoff has come from the Luther franchise. And so we think we're at the tail end of that runoff. So I would hope to be able to break even, maybe even slight growth on time deposits, but the outsized growth in noninterest-bearing and checking accounts.

Yes. Got it. Okay. And then just on deposit costs, I mean the spot margin at the end of the period I guess kind of implies that there was some good progress on deposit moves post the Fed cut. And I heard your comments about generally lagging. And I just wanted to talk about maybe the client reaction to rate cuts so far and what you've seen or what you've heard from your clients push back wise or maybe lack thereof and just how you're approaching the most recent rate cut as well as any expected incremental rate cuts? How your approach compares to the most recent round of 100 basis points, whether you'd like to be more aggressive or less aggressive?

Yes. No, I think to answer your question directly, we'll be more aggressive in terms of our cuts and we can do that now that our loan-to-deposit ratio is down to low 90s. As you'll recall, we were up about 110% not too long ago. So we've gotten that loan-to-deposit ratio, will be more aggressive with rate cuts. And the -- it's been telegraphed enough by the Fed, the clients expect it to happen. So we're not giving very much pushback. So your observation is spot on. We were very aggressive with this latest rate cuts and we'll get the benefit of that this next quarter. But I think it's expected.

The real question for all of us is what the rates do in this last quarter of the year. And I think if you look at the futures, it's going for a couple more decreases. Personally, I would be surprised if that happened. I think there is more strength in the economy than maybe the futures are giving it credit for. And if you look at the Fed fuel mandate, unemployment remain some very, very strong and -- unemployment remains low and the employment market is strong and inflation is still well above their target. So I were a Fed Board member, I don't know how quickly I would want to move into decreasing rates for them. But obviously, I'm not and the market is telling us it's going to happen, but we will see.

Our next question comes from Kelly Motta with KBW.

Thanks for the question, and thanks for holding the call today. I really appreciate it.

You're welcome, Kelly. Good to speak to you, and I've never had so much love for holding the phone call. So this is wonderful.

Well, fair enough. I guess -- I guess speaking to -- over time, it sounds like you want to improve the profitability, you're looking over time to do so. And you mentioned you guys as far as Vision 2025, were trying to become digital first and have continued to invest in technologies. Can you just on a high level, provide kind of the what's left to be done in the types of things WaFd is interested in, in order to get that client growth and engagement that's going to get you to that profitability level over time?

Yes. So there's no one thing, right? I think we have offerings across the board. It's just constantly improving those offerings and getting them better. And I think Cathy spoke to a couple of the improvements that we're going to have rolling out a direct deposits switchover feature to make it really easy for people to switchover to direct deposit. We are looking at giving people credit for their paychecks a couple of days earlier, like some others do it. It's just doing tweaks here and there on what we offer, there's no single technology.

I'm really pleased with how our mobile offering is going and specifically with the wire transfers, that's a differentiator for us. But it's really almost impossible to differentiate with technology. If you find something good, others will copy it and vice versa. But we have to be great. We have to have people that just -- they love our technology. And in fact, recently, we just reached out to our clients and said, okay, what about our technology do you want us to improve? So we're giving away, I think, a big screen TV for the [ first one that ] gives us the best feedback.

But that's one of the phenomenal things about having Pike Street Labs is we can develop based on what our clients ask and get it done quickly with releases, and we're doing typically one or 2 releases per quarter. So there's nothing specific other than to continue improving everything we offer.

But the most important thing is how are we going to improve that profitability, we're going to focus on the business accounts, which has not been our historical focus. And we recognize that our peers that we're comparing ourselves against have been doing this for decades, and we're relatively new to that game. But as I mentioned in my comments, the most important thing from my perspective is that we're conservative with our underwriting, so we don't take undue risk, and we will get there.

Got it. That's really helpful. Maybe a last question from me for Kelli. You guys have hit on the fact that your EOP margin is higher than the average. I do believe looking at the EOP margin from the prior quarter. That was a few basis points higher than what ended up popping out at for your fiscal fourth quarter average. I'm just wondering if there's any like end of period liquidity or anything like that, that could be skewing the EOP margin higher that we should be taking into account? Or if that was just kind of the 3Q dynamics and fluctuations?

Yes, certainly. I think the end of period margin at June did come in higher than what we ended June with and that was primarily a result, as Brent mentioned, some reversal of interest for the large nonaccrual loans that went nonaccrual during the quarter. Absent that, we've seen our margin expand at the end of, I think, at June. So it really is function of nonaccrual [indiscernible].

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

Brad, before you give our parting comments, let me just say thank you to everyone for joining this morning. We appreciate it very much. And one point we did not cover was capital management. And obviously, with the stock trading today at $27.86, below tangible book value, we believe it's one of the best investments we can make. And I would say we would be likely to exercise our share repurchase program that the Board has given us. So it's -- it's not always a bad thing when the stock price goes down, it does provide opportunities. And I think as CNBC headline said this morning with regard to regional banks, buy the dip. And I truly believe that's the case with WaFd.

So thank you very much. And Brad, I'll have you take it from that.

Okay. Yes. Thanks, Brent, and really appreciate everybody joining the call this morning. Thank you. I hope you found it valuable for your time this morning. You can contact me if you've got any further questions. Have a great rest of the day and enjoy your weekend. Thanks.

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