Detailed Narrative
Loan Growth and Portfolio Shift
WaFd reported a significant increase in its active loan portfolio, growing 10% on a linked-quarter basis, following 12% growth in the prior quarter. Total loan originations in the active portfolio reached $1.5 billion, with C&I lending being the largest contributor at 49% ($741 million) of total originations. The company is strategically shifting its focus to serving the banking needs of businesses, aiming for continued active loan portfolio growth of 8% to 12% going forward⏳.
Deposit Trends and Funding Challenges
Total deposits decreased by $192 million during the quarter, primarily due to expected tax-related and public fund municipal deposit dynamics. Noninterest-bearing deposits increased by $69 million (2.7%), but time deposits decreased by $191 million (2.3%). The company faces macro trends of decreasing noninterest-bearing deposits in the overall market (down from 30% to 22% since 2021) and deposit growth concentrated in the largest 25 banks, while other banks experience contraction. The strategic goal is to increase noninterest-bearing deposits to 20% of total deposits by 2030 from the current 12.6%.
Credit Quality Overview
Credit quality metrics remained moderate, though criticized loans increased by $139 million to 4.9% of net loans. Nonperforming assets slightly increased to $136 million (0.49% of total assets), largely due to an increase in nonaccrual loans in the C&I segment. A specific large C&I relationship, with outstanding balances of $54 million, continues to impact NPAs and delinquencies, though it is expected to be resolved by sale prior to quarter-end September 30, 2026. The net provision for credit losses was $11 million, driven by active loan portfolio growth and concerns over adversely classified loans.
Capital Management and Regulatory Impact
WaFd maintains a strong capital profile with an estimated CET1 ratio of 11.4% and a total risk-based capital ratio of 14.4%. Management estimates that the reproposed Basel III endgame capital framework, if finalized, could reduce risk-weighted assets by approximately 1.5%, representing an estimated $300 million of total risk-based capital relief. The company prioritizes organic growth, followed by M&A, and then share repurchases for capital deployment, having paused repurchases this quarter due to stock price appreciation.
Efficiency and Operating Expenses
The company's efficiency ratio improved significantly to 53.7% for the quarter, down from 55.7% in the prior quarter and 56% in the same quarter last year. Total noninterest expense remained stable at $110 million. Management's objective is to maintain the efficiency ratio in the 50% to 55% range, balancing necessary investments in products and teams with delivering reasonable shareholder returns.
M&A and Shareholder Value
WaFd is opportunistic regarding M&A, noting recent market activity like a $10 billion asset West Coast bank selling at almost 2x tangible book value. However, the company emphasizes discipline, aiming to protect shareholders from dilution and preferring not to do a deal if it means overpaying relative to its own currency. The focus remains on improving its own cost of funds and profitability to enhance its multiple and M&A attractiveness, while delivering an 11% return on tangible common equity.