WaFd, Inc.

standing by welcome to law fed inc second quarter 2026 results conference call at this time all participants are on a listen-only mode after the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star 1-1 on your telephone we will then hear an automated message advising your hand is raised to withdraw your question please press star 1-1 again please be advised today's conference is being recorded i would like to end the conference over your speaker today brad good chief marketing officer and rest relations manager please go ahead

Thank you, Kevin. Good morning, everybody. Happy Friday. Let's dive into our 2026 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 wafedbank.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 WAPA 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 pruning material. With us this morning, our President and CEO, Brent Beardall, Chief Financial Officer, Kelly Holtz, and our Chief Credit Officer, Ryan Maurer. 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, Kelly Holtz, our CFO, will provide you with a detailed review of our balance sheet and our income statement for the second quarter. Next, Ryan Maurer, our Chief Credit Officer, will provide comments on the current status of our loan portfolio and credit quality trends. Third, I will provide Finally, we will be happy to answer any questions you have at that point. Kelly, please walk us through the quarterly results.

Kelly, your line is muted.

Thank you, Brent. As announced, WSED, Inc. reported net income available to common shareholders of $61.9 million or 82 cents per diluted share for the quarter ended March 31st, 2026. This compares to net income to common shareholders of 65 cents per share for the second quarter of fiscal 2025 and 79 cents per share for the December 2025 quarter. The 3% 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 1.05 times tangible book value. Our share repurchase plan 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, CNI, 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 types, 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 is part of our overall investment strategy, currently replacing the single-family mortgage loans balance round. Total deposits decreased by $292 million during the quarter, with non-interest-bearing deposits decreasing $115 million, or 4.3%, 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 disbursements. 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%. Non-interest-bearing deposits ended the quarter at 12.2% of total deposits. The loan-to-deposit ratio ended the quarter at 94.5%. 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%. 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 five 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, a walkthrough from the December to the March margin. A five-basis point net improvement with deposit rates repricing more favorably than loan rates. A seven-basis point improvement recognizing non-accrual interest during the quarter. a six basis point improvement for day count, February being 28 days. We have 50% of our loans and 75% of our securities on a 30-360 accrual basis. Offsetting the increases was a five basis point decrease related to our securities growth. The mortgage-backed securities purchases at a net spread of approximately 1%. Although pressure on the margin, it does add $1.5 million in net interest income per quarter. As for 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 activities. 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 Lucifer Bank 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 non-interest income decreased $400,000 compared to the prior quarter to $19.8 million. Contributing to non-interest income is $6.7 million in commission revenue from our WAFED 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 non-interest expense increased 4.1 million, or 3.9%, from the prior quarter as a result of increased compensation and technology expenses, reflecting annual merit increases, employment 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 Wasatch 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 Kelly 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. Non-performing 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 non-accrual 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 zero 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 WAFED'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 non-performing 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 non-accrual 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 non-performing 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 of 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 one 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.

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 in active 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 loan, Gross active loans outstanding increased by 20% on a length quarter basis. I am pleased to report that the biggest contributor to that growth came from the CNI lending cycle, from the percentage standpoint. Bottom line results for the quarter improved nicely, with 4% length quarter EPS growth and 26% year-over-year. Even better if you compare the first six months of the year versus the prior year, we improved earnings per share by 35%. With all of the discussion and understandable worry about loans to non-depository financial institutions, so-called NDFI loans, I'm very happy to report that NDFI loans at WAPED are only around a year, at $35 million for 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 MDFI lending in the industry over the last few years is that it represented the bulk of CNI loan growth. The crowd rushed to get out of CRE assets for fear of potential losses, and many of went into what I think were riskier MDFI 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 it's 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 non-interest-bearing deposits, the total deposits from 11% last year up to 20% by 2030. Today, we set it 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 achieve the 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 bill 23rd. During that time, we have become a preferred SBA lender. 99% of our branch managers, formerly specializing in mortgage lending, have now passed our small business certification process. And we are formed into three business lines. First, our business bank, handling commercial credit needs up to $10 million and all small, medium-sized businesses and consumer deposits. This includes our 208 branches. Our corporate bank 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% for this last quarter, with our return on tangible common equity of 10.8%. If we can get our margin up just a little bit higher to 3%, which is our short-term goal over the next two years, everything else being equal, our ROTCE would be 12.5%. The key, from my perspective, is growth in direct CNI loans. and low-cost deposits, supported by growth in CRE loans while running an efficient bank. I am pleased to see our efficiency ratio remain near the top end of our target range at 55.7%. We believe that we have the 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 at $1.5 billion for raised donations. It is also very encouraging to see new deposit pipeline increase by 66% on a length 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 raised donations we've had. The lending pipeline is actually down 12.7%. Our deposit pipeline, however, increased from $264 million as of December 31st to $439 million as of March 31st. So a 66% increase. It is fun to see the traction our teams are gaining. Let me speak on the coffee competition. As you are all well aware, competition for low-cost deposits is robust and growing. Between the two big and failed 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 it looks to be getting even more challenging with the upcoming entrance of Elon Musk into the space with his new product, X-Money. Early indications are they are going to be very aggressive in looking to take market shares. advertising a 6% rate on FDIC insured deposits and 3% cashback on debit card purchases. Both of these are clearly loss leaders. What gives me pause is the fact that the sponsor is the richest person on earth and can fund losses to take market shares for an extended 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, tease, 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 lost wealth management on August 31st of last year with the hiring of an experienced team of professionals from a wire house firm here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first two years. Early indications remain very positive. AUM amounted to just under $450 million as of March 31st, and it is nice to fill a hole we have to cover. We see wealth as an essential element growing non-interest income and commercial deposits as many prospects full banking relationships. Two significant developments regarding technology. As many of you know, we have established a subsidiary, Ice Street 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 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 our 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 WAPA and WIFI system. The developments in AI technology are 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 two times. 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, seven 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 capitals. With our stock price trading near tangible book value for some of the last quarter, as Kelly 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 meeting. company. We continue to believe that with our robust capital levels, when our share prices press, share repurchases are the best use of capital. Considering our 10.8% return on annual common equity this last quarter. Last month, the Federal Reserve announced potential changes to capital calculations that could have a material positive impact for WAPED if approved. The proposal would adjust risk weighting for different loan categories. Specifically, single-family residential loans with loan-to-value below 60% would go from a 50% risk weighting to a 25% risk weighting. At the quarter end, the weighted average loan-to-value of our $7.50 single-family loan portfolio is less than 40%. What does all this mean? Our initial estimate is, if approved, it would increase WAPED's regulatory capital levels by approximately $400 million. This would give WAPED board and management more options going forward, with a strong preference to fund additional loan growth, followed by returning capital to shareholders, and lastly, looking at strategic M&A. For years, WAPED has been telling all that were missing how little risk there is in these low loans-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 rulemaking, but we will be paying close attention. By comparison, WAPEDs should benefit more than pure banks by this proposed rule because of large concentration of single-family loans we have. For the past year, we have routinely heard from investors that they understand our plans and agree with why we are making the changes all on 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 Lafayette 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. With that, Kevin, we'll open it up to questions and answers.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered and you want to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jeff Rulis of VA Davidson. Your line is open.

Thanks. Good morning. Kelly, I wanted to ask about the margin. You mentioned seven basis points on non-accrual 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 a positive impact to margin?

So that's the linked quarter swing. So, bringing one of our large non-performing credits current and bringing back the interest income onto a COIL and recognizing that is where you get seven basis points. So, there was about $2.2 million that was recognized this quarter that is from prior quarter activities.

I see. So, I guess the go-forward kind of flat expectation is sort of absent non-accrual impact, the core. I wanted to check back in. You mentioned the path towards 3% in a couple 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. Yeah, Jeff, so I'll hop 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 who knows where rates are going? Who knows who the care of the pet would be at this point? We think just organically as we reprice these mortgage loans and loans come due, we have that accretion to come into income and then we get to pay it relates on more commercial loans. Then you compound that and drive lower cost of profit. There's even more upside with profits. That's how we think we can take that. And Brent, you did allude to the fact of, you know, the securities growth is actually a net headwind, but a benefit to NII. But that's all sort of baked into the gradual increase is assumption of The positives you mentioned, but maybe additional, maybe securities investment kind of headwind the 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 reverse sliver purchases to this point. We'll probably take a foot off the gas on that as well. There won't be additional headwinds from that. Great. Thank you. And then my other question was just on the growth, or I should say net growth, I think, you know, encouraging to see some low single-digit pace so far. If we were to kind of extend that out, and, you know, 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 keep a low single-digit net growth pace as possible in future quarters? No, I would say we're very bullish on being able to continue this 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 is going to lead to all of our growth. So, we overcame what, the $275 million of repayment for the inactive portfolio. That's huge when you think that's possible. So, you know, I think in the past, we've set a deal kind of to 12% growth on the active portfolio, I think the higher that that range appears very reasonable for us.

Great. Thank you. One moment for our next question. Our next question comes from Matthew Clark with Piper Sandler. Your line is open.

Hey. Good morning, everyone. First one for me, just on the loan growth, you know, solid increase in CNI. I just want to get a sense for how much of that growth may have come from SNICs or club deals and where that portfolio sits today.

Yeah, I don't think any of that growth came from SNICs or club deals at this point. We have a couple in the pipeline, but, you know, these are direct originations for this one. And I'd tell you that the overall portfolio part of I can get that number and get back to Matt.

Okay, thank you. And then on the fee income run rate, stripping out the noise looked like a good result from insurance commissions. I know you've got some, you know, wealth is a growth area, and SBA gain on sale is as well, but how should we think about that 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, wealth, you know, We're still working to get profitable. So, right now, wealth is not a net item to us, which we understand is part of business plan. And the SBA game, right now, we're looking for every earning asset we can. So, we're not finding self-profit in the SBA portion. So, this is just good, organic, the income and insurance side. So, the $20 million, I think, is 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?

Yeah. So, the CDs have gotten more expensive, but it's a lot of... There are a lot of increases are coming in this one. So, we're seeing actual... So we have about $4.2 billion to be requesting at 3,068. And I think right now we're 340 to 360, right? So don't expect.

You said 360?

No, 340 to 360.

Okay.

Thank you. One moment for our next question. Our next question comes from Kelly with KBW. Your line is open.

Hi. Good morning. Thanks for the question. I think it was a great quarter for loan growth in the active portfolio. It was really nice to see the commercial growth. expectations to get to 3% over time clearly requires some, you know, bringing on some low-cost funding. And I think you gave some color about the deposit pipeline. But I was wondering, you know, 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. Thanks.

Great question, Kelly. Thank you for acknowledging that we believe this was just a fantastic work for us from a low-growth standpoint. The first net growth that we've had in over five quarters, I think, so thank you for acknowledging that. And, no, every one of these commercial relationships come with four operating accounts. So, we get the accounts. The question is, you know, how much do they have in deposits? And so, typically, you don't get very much from deposit balances, but you get the accounts. So, we're seeing the number of accounts continue to increase, but the balances come with time. And that's just the nature of what we're trying to do in Stanley Group.

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

Yeah, we'll follow up with that. It's broad-based because you've got the smaller deals coming in from the branches, and the branches are on average deals. There's probably 200,000 each on the CNI side, and we've got some larger, you know, true commercial deals that are in the, you know, 20 to 40-gallon range, but we'll follow up with that number for you.

Great. Thank 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've had, and there's also some seasonality. I know you don't give guidance, but wondering within that if that's a good number to build off of or any sort of puts or takes or, you know, special seasonality considerations impacting Q2. Thank you.

Yeah, no, good question. No, this is the quarter where we see the annual merit increases kick in and, of course, the increased impact. This is a good run rate for now, but if we continue to produce at these volumes, I would expect competition to increase. It's a similar barrier that competition increases, but we want to do that. That means 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 the introduction.

Got it. Thank you so much.

Thanks, Gary. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. And I'm not showing any further requests at this time. I'd like to turn the call back over to Brad for any further remarks.

Deal, 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.

See you later. Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.