WaFd, Inc. (NASDAQ:WAFD), the parent company of Washington Federal Bank, reported solid quarterly results for the period ended June 30, 2024, reflecting the successful integration of its acquisition of Luther Burbank Corporation. The company's annual net income stood at $257,426,000, with annual revenue reaching $742,611,000. Additionally, the company generated annual operating cash flow of $213,957,000 and annual free cash flow of $198,894,000.

In the latest quarter, the company reported net income of $64,560,000, a significant increase of 306% from the $15,888,000 reported in the previous quarter. This translated to earnings per diluted share of $0.75, up from $0.17 in the prior quarter. The company's return on average assets was 0.87%, while return on average common equity was 9.20% for the quarter.

The strong quarterly performance was driven by the successful integration of the Luther Burbank acquisition, which closed on February 29, 2024. The addition of Luther Burbank's assets and operations has significantly expanded WaFd's footprint, particularly in the state of California, where the company now has a presence through 10 former Luther Burbank branches.

Business Overview

WaFd, Inc. is the parent company of Washington Federal Bank, a federally-insured, state-chartered commercial bank that has been in operation since 1917. The bank provides a range of lending, depository, insurance, and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate.

Prior to the Luther Burbank acquisition, WaFd operated a network of 210 bank branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico, and Texas. The addition of the 10 California branches from Luther Burbank has expanded the company's geographic reach and customer base.

The company's loan portfolio is diversified across commercial and consumer segments. As of June 30, 2024, the commercial loan portfolio accounted for 67% of total loans, while the consumer loan portfolio made up the remaining 33%. The commercial loan portfolio includes multi-family, commercial real estate, commercial & industrial, construction, and land acquisition & development loans. The consumer loan portfolio consists primarily of single-family residential mortgages, home equity lines of credit, and other consumer loans.

Financial Condition and Liquidity

WaFd's balance sheet remains strong, with total assets of $28.6 billion as of June 30, 2024, up from $22.5 billion at the end of the prior fiscal year. This increase was largely driven by the addition of $7.7 billion in assets from the Luther Burbank acquisition.

The company's loan portfolio, net of the allowance for credit losses, stood at $20.9 billion as of June 30, 2024, up 19.4% from $17.5 billion at the end of the prior fiscal year. This growth was primarily attributable to the integration of Luther Burbank's loan portfolio.

To enhance its liquidity position, the company sold $2.8 billion in acquired multi-family loans during the quarter and has identified an additional $0.5 billion in single-family mortgage loans to be sold. The proceeds from these sales have been used to pay down $1.6 billion in borrowings, with the remaining funds invested in the Federal Reserve's overnight account earning 5.40%.

Customer deposits totaled $21.2 billion as of June 30, 2024, an increase of 31.8% from the prior fiscal year-end, driven by the addition of Luther Burbank's deposit base. The deposit mix shifted, with time deposits now accounting for 43.7% of total deposits, up from 33.0% at the end of the prior fiscal year, as a result of the Luther Burbank integration.

Borrowings, including senior debt and junior subordinated debentures, stood at $4.1 billion as of June 30, 2024, up from $3.7 billion at the end of the prior fiscal year. The company utilized the proceeds from the multi-family loan sale to pay off $1.6 billion in maturing borrowings during the quarter.

Asset Quality and Credit Trends

WaFd's asset quality remains strong, with non-performing assets at $68.8 million, or 0.24% of total assets, as of June 30, 2024, compared to $57.9 million, or 0.26%, at the end of the prior fiscal year. The increase in non-performing assets was primarily due to the addition of $13.5 million in non-accrual loans from the Luther Burbank acquisition.

The allowance for credit losses, including the reserve for unfunded commitments, totaled $225.3 million as of June 30, 2024, representing 1.00% of gross loans, compared to $201.7 million, or 1.03% of gross loans, at the end of the prior fiscal year. The increase in the allowance reflects the $16.0 million provision recorded on the non-credit deteriorated Luther Burbank loans and the $7.4 million estimated lifetime credit losses for the credit deteriorated loans.

Net charge-offs for the quarter were $1.0 million, compared to $10.0 million in the prior year same quarter, indicating continued strong credit quality.

Quarterly Performance

For the third fiscal quarter of 2024, WaFd reported net interest income of $177.0 million, an increase of 5.0% from the $168.7 million reported in the same quarter of the prior year. This increase was driven by overall asset growth, despite a decline in net interest margin to 2.56% from 3.27% in the prior year quarter.

The decrease in net interest margin was primarily due to a larger increase in the rate paid on interest-bearing liabilities compared to the rate earned on interest-earning assets. Average interest-bearing liabilities grew by 43.3%, while average interest-earning assets grew by 34.8%. The rate on interest-bearing liabilities increased by 112 basis points, outpacing the 37 basis point increase in the average rate on interest-earning assets.

Non-interest income for the quarter was $17.3 million, up from $13.8 million in the prior year quarter, largely due to recording unrealized gains on certain equity method investments.

Non-interest expense increased by 16.2% to $110.1 million, primarily due to a $6.7 million increase in compensation expense, a $1.8 million increase in information technology costs, and a $2.3 million increase in FDIC insurance premiums. The company also incurred $2.3 million in acquisition-related expenses during the quarter.

The provision for credit losses was $1.5 million in the third fiscal quarter of 2024, compared to $9.0 million in the same quarter of the prior year. The current quarter provision was driven by increased borrower sensitivity to high interest rates and inflationary pressures in the commercial and industrial portfolio, partially offset by a reduction in the loan portfolio due to the reclassification of a portion of the single-family loans as held for sale.

Outlook

WaFd's management remains optimistic about the company's prospects following the successful integration of the Luther Burbank acquisition. The company expects to continue benefiting from the expanded geographic footprint and customer base, as well as the increased scale and efficiency of the combined operations.

The company has provided the following guidance for the remainder of fiscal 2024: - Net interest margin is expected to improve from the current level of 2.56% as the company deploys the liquidity from the loan sales into higher-yielding assets. - Credit quality is anticipated to remain strong, with non-performing assets expected to remain below 0.30% of total assets. - The company plans to continue its disciplined approach to loan growth, focusing on commercial lending opportunities that align with its risk appetite. - The integration of Luther Burbank's operations is progressing well, and the company expects to realize the anticipated cost savings and revenue synergies from the acquisition.

Risks and Challenges

While WaFd's performance has been strong, the company faces several risks and challenges that investors should consider: - Continued economic uncertainty and the potential for a recession could impact the company's loan portfolio and asset quality. - Rising interest rates and inflationary pressures may squeeze net interest margins and put pressure on borrowers. - The integration of Luther Burbank's operations could face unexpected challenges or delays, which could impact the realization of anticipated synergies. - Increased competition in the banking industry, particularly in the California market, could impact the company's ability to grow its customer base and maintain market share. - Regulatory changes or increased compliance requirements could increase the company's operating costs and administrative burden.

Conclusion

WaFd, Inc. has delivered solid quarterly results, highlighting the successful integration of the Luther Burbank acquisition. The company's expanded geographic footprint, diversified loan portfolio, and strong liquidity position provide a solid foundation for future growth. While the company faces some risks and challenges, its experienced management team and disciplined approach to operations position it well to navigate the current economic environment and continue delivering value to shareholders.