Brent Beardall
Analyst · D.A. Davidson. Your line is open
As you have just heard, the fundamentals of our business are doing very well. We produced almost 8% growth in our active loan segments, which is impressive to me considering the overall economy is growing at just 2.5%. Having resolved the large C&I credit quality measures are strong. Our loan and deposit pipelines are robust with $3 billion of loans, a 5% increase from the June quarter, and $240 million of deposits in our pipeline, a 6% decline from the June quarter. Our net promoter score remains in the top quartile of all banks at a 55. Given the recent increase in short-term rates, we would expect our margin to expand over the next couple of quarters as assets will reprice more quickly than liabilities. We are likely to receive a significant bump in our risk-based capital ratios when the new Basel rules get approved. With all of that for context, the question I receive most often now is why did WaFd decide to partner with EverBank? I answer that question with a philosophical retort. How much is enough? WaFd has had a remarkable run in the last 44 years as a public company, with total shareholder return of approximately 36,000% when the stock was at $36 a share, which is where we were trading immediately prior to the announcement. But just as we can look back with a great deal of pride, we need to guard ourselves and not let that turn into hubris going forward. There are plenty of examples of companies that failed to adapt or made the wrong changes, both inside of banking, think WaMu or First Republic, and outside of banking, for example, Sears, Blockbuster, or Palm. Those did not adjust to the market. The reality from my perspective is the banking world has fundamentally changed over the last decade. Let me give three examples. First, today we operate in a hyper-competitive market for deposits where the playing field is imbalanced towards the largest banks. Evidence for this is in the Federal Reserve's H.8 data, which I've mentioned earlier, which shows that year-to-date, the largest 25 banks in the U.S. have grown deposits organically by 6.8%. The rest of us, and that's roughly 4,300 banks for those of you that are counting, have been unable to grow net deposits. That is a problem, and I don't see it changing, unfortunately. Additionally, non-interest-bearing deposits, which have historically been the lifeblood of banks from a profitability standpoint, have declined in totality, and I believe will continue to decline as it is easier and easier to move funds to higher-yielding alternatives. Second, technology and scale matters. Primarily because scale allows you to invest more money in technology. This is great for our customers, but certainly favors larger banks that can spread the cost over a larger base. Third, more and more traditional banking is done outside of the banking system. If you look, the vast majority of bank C&I growth over the last decade has been in loans to these so-called non-depository financial institutions, NDFIs. I am convinced that this trend will continue. Based on that perspective, how can WaFd not just compete, but compete and win going forward? I think the partnership with EverBank makes us stronger in addressing each of these three areas noted above. First, we are changing our business model so that we are not solely reliant on non-interest-bearing deposit growth to hit our return goals. Our pro forma bank, as shown in the investor presentation published on September 7th, shows that with a 3% margin, which would be in the lowest quartile of the peer group, we can achieve just shy of a 15% return on tangible common equity. To me, this is a game changer. We can pay a fair rate for deposits and still deliver the needed returns to our shareholders, and we can do this through improved margins on our assets and operating in the top quartile of all banks from an efficiency standpoint. That is a long-term differentiator that I want to be a part of. Second, coming together with EverBank will make us approximately three times the size from an asset perspective that we are today and will enable us to use that scale to invest more in technology for both our clients and our teams. We already have a very strong digital offering, but I am convinced we will make further improvements. Third, EverBank has built a very strong team to serve the NDFI market and do it in a way that we believe is well controlled from both an underwriting perspective and from an ongoing controls and monitoring. What today is our competition will become clients for us going forward. With this partnership, we will be able to address these fundamental risks and turn what was a weakness into a strength. Let me share one further why and how it relates to what WaFd has done historically. If you go way back to 1982, before we went public, WaFd made the bold decision to restructure its balance sheet and sell a large portion of its single-family loans that were underwater from a rate perspective. Crazy to think that 8.75% mortgages at that time were underwater, but that was the case in 1982. They did this to position the bank for profitable growth going forward. At the time, we realized a loss that amounted to $44 million on those loan sales. To put that in perspective for WaFd today, $44 million was the equivalent of four years' earnings back then. Looking at the last four years today for WaFd, that would equate to $1.1 billion. It was a bold move, but it paid off. WaFd in 1982 turned below-market-yielding assets into market-yielding assets, and the results were phenomenal. For the next decade, as WaFd significantly outperformed its peers, including ROAs up to 3%. While I am not forecasting that kind of ROA in our future, through this merger, we will be able to fair value the WaFd balance sheet, including the $6.6 billion of single-family residential loans that are today earning only 4.25%, and mark those loans to market rates. What was a weakness will become a strength. Importantly, we were able to do it with the following metrics. 9.8% pro forma CET1 at close, only 8% dilution to WaFd existing shareholders, and 29% EPS accretion to WaFd shareholders once the cost saves are fully realized. I believe this is a unique opportunity to make WaFd stronger and EverBank stronger. Most importantly, from my perspective, is we will do this without losing what makes WaFd great, our bankers and the ethos we have created over the last 109 years, believing we can make a difference one customer at a time. So where do we stand on the merger? Earlier this month, we filed our regulatory applications, and we expect to file our proxy within the next two weeks. Our previously announced expected closing timeframe of the first calendar quarter 2027 remains on track. All of this is, of course, pending receipt of the requisite approvals from both shareholders and regulators. You have likely heard me say before that our research shows that roughly two-thirds of bank M&A is destructive to capital of the acquiring firm. Since we announced our deal, our stock is down 18.9%, while the Nasdaq Regional Bank Index is down 8.3%, roughly a 10% delta. You cannot argue with the market. We look forward to the opportunity to execute on our plan and demonstrate that we are part of the one-third of bank deals that are accretive to shareholder value. Finally, I want to acknowledge all of the incredible bankers that call WaFd Bank home that make these results for the fiscal year 2026 possible. Our most valuable asset is our team. We have bankers that care and want to serve our clients. Thank you to our bankers. With that, we will move to Q&A.
