WaFd, Inc. (NASDAQ: WAFD) is a diversified regional bank that has weathered various economic cycles and emerging challenges over its storied 107-year history. Headquartered in Seattle, Washington, the company operates a network of 210 bank branches across nine western states, offering a comprehensive suite of lending, depository, insurance, and other banking services to consumers, small-to-mid-sized businesses, and commercial real estate owners and developers.
Business Overview A Century of Prudent Growth and Adaptation
WaFd, Inc. traces its roots back to 1917 when it was founded as Washington Federal Savings and Loan Association in Ballard, Washington. Originally providing lending and depository services to consumers, the bank expanded its focus over the years to also serve mid-sized to large businesses and owners/developers of commercial real estate. In 1994, the company restructured as a holding company, Washington Federal, Inc., to provide greater operational flexibility.
The company’s growth strategy has involved both organic expansion and strategic acquisitions. In September 2023, the company underwent a significant rebranding, changing its name from Washington Federal, Inc. to WaFd, Inc. to better reflect its focus on serving a wider customer base. Simultaneously, the bank subsidiary changed its name to Washington Federal Bank dba WaFd Bank.
WaFd has faced and overcome various challenges throughout its history. In the early 2000s, the bank had to address compliance issues related to its Home Mortgage Disclosure Act (HMDA) reporting. This required significant remediation efforts, but the bank successfully resolved the issues and moved forward, demonstrating its ability to adapt and improve its operations.
Despite these challenges, WaFd has remained committed to its core mission of providing quality banking services to its customers. The company’s growth strategy, combining organic expansion with strategic mergers and acquisitions, has allowed it to emerge as a strong regional bank serving communities across the western United States.
In 2023, the company completed a significant transformation with the acquisition of California-based Luther Burbank Corporation. This all-stock transaction, valued at $465.5 million, expanded WaFd’s footprint to 210 branches across nine states, including its initial entry into the lucrative California market. The merger integrated $7.7 billion in assets and $5.6 billion in deposits, further bolstering WaFd’s scale and geographic diversification. While the integration of the two previously separate companies required substantial efforts, it has allowed WaFd to enhance its product and service offerings.
Despite the challenges posed by the COVID-19 pandemic, WaFd has demonstrated resilience and adaptability. The company’s robust risk management practices, diversified loan portfolio, and prudent capital allocation have enabled it to navigate volatile market conditions while continuing to serve its customers and communities.
Financial Snapshot Solid Fundamentals and Disciplined Growth
As of the latest reported quarter (Q3 2024), WaFd maintained a strong financial position. The company’s total assets stood at $28.06 billion, reflecting a 25.1% increase from the prior year, largely attributable to the Luther Burbank acquisition. Loans receivable, net of related contra accounts, grew by 19.4% to $20.87 billion, driven by both commercial and consumer loan originations.
Customer deposits experienced a significant 31.8% surge to $21.18 billion, underscoring the company’s ability to attract and retain a diversified funding base. WaFd’s net interest margin, a key measure of profitability, was 2.72% for the nine-month period ended June 30, 2024, compared to 3.49% in the prior year period, reflecting the impact of rising interest rates on the company’s funding costs.
Despite the headwinds, WaFd’s net income for the nine months ended June 30, 2024, was $138.9 million, or $1.78 per diluted share, compared to $207.2 million, or $3.00 per diluted share, in the same period of the prior year. The decrease was primarily attributable to acquisition-related expenses, higher deposit costs, and an increase in the provision for credit losses.
WaFd’s capital position remains robust, with a common equity tier 1 capital ratio of 12.79% and a total risk-based capital ratio of 13.92% as of June 30, 2024, well above regulatory requirements. The company’s tangible book value per share stood at $34.89, providing a solid base for future growth and shareholder value creation.
For the most recent quarter (Q3 2024), WaFd reported revenue of $188,607,000 and net income of $61,140,000. The company’s operating cash flow (OCF) for the quarter was $96,621,000, while free cash flow (FCF) stood at $89,422,000. These figures demonstrate the company’s ability to generate substantial cash flows from its operations, even amidst challenging market conditions.
Liquidity Maintaining a Strong Position
WaFd has maintained a strong liquidity position, which has been crucial in navigating the challenges faced by the banking industry. The company’s diverse funding sources, including customer deposits, borrowings, and available credit facilities, provide a stable foundation for its operations. As of June 30, 2024, WaFd reported $21.18 billion in customer deposits, representing a significant portion of its funding base.
The company’s liquidity management strategy includes maintaining a portfolio of high-quality, liquid assets that can be readily converted to cash if needed. This approach, combined with prudent asset-liability management, has enabled WaFd to meet its financial obligations and support its lending activities even during periods of market stress. As of the most recent quarter, WaFd reported a cash position of $2.49 million, further bolstering its liquidity profile.
Navigating Challenges and Capitalizing on Opportunities
WaFd’s disciplined approach to risk management has been a key differentiator, particularly in the face of the commercial real estate (CRE) concerns that have plagued some of its regional banking peers. The company’s CRE exposure, which represented 27.7% of its total loan portfolio as of June 30, 2024, has been closely monitored and proactively managed. In a strategic move, WaFd sold $2.8 billion in multifamily CRE loans during the third quarter of 2024, further strengthening its balance sheet and liquidity position.
The integration of Luther Burbank’s operations has presented both challenges and opportunities for WaFd. The company has made significant investments in system conversions, employee retention, and customer experience to ensure a smooth transition and realize the anticipated synergies from the merger. These efforts have resulted in one-time acquisition-related expenses, but management remains confident in the long-term strategic and financial benefits of the transaction.
Looking ahead, WaFd is well-positioned to capitalize on its expanded geographic footprint and diversified product offerings. The company’s entry into the California market, with its robust economic dynamics and growing population, presents a promising avenue for future growth. WaFd also plans to leverage its enhanced scale and capabilities to deepen relationships with existing customers and attract new ones, while maintaining its disciplined approach to credit risk and capital allocation.
Product Segments and Portfolio Composition
WaFd’s business activities are primarily categorized into two major product segments: Commercial Loans and Consumer Loans. The commercial loan portfolio, accounting for 58.9% of the total loan portfolio as of June 30, 2024, includes multi-family real estate loans (20.5% of total loans), commercial real estate loans (16.8%), commercial and industrial loans (10.7%), construction loans (10.0%), and land acquisition and development loans (0.9%). This segment has shown steady growth, with a 9.4% increase during the nine months ended June 30, 2024, driven primarily by increases in multi-family, commercial real estate, and construction loans.
The consumer loan portfolio, representing 41.1% of the total loan portfolio, includes single-family residential mortgages (37.2% of total loans), custom construction loans (1.9%), consumer lot loans (0.5%), home equity lines of credit (1.1%), and other consumer loans (0.4%). This segment experienced significant growth of 22.2% during the nine months ended June 30, 2024, with single-family residential mortgages and construction-custom loans being the primary contributors.
The company’s loan portfolio focus on commercial and consumer real estate-related lending aligns with its strategy of emphasizing commercial and residential mortgage lending to generate interest income. The total gross loans increased by 14.3% to $22.47 billion as of June 30, 2024, compared to $19.65 billion as of September 30, 2023, largely due to the addition of loans acquired through the Luther Burbank Corporation merger.
WaFd maintains a strong focus on credit quality, with an allowance for credit losses on loans totaling $203.82 million as of June 30, 2024, or 1.00% of gross loans. The company’s non-performing assets, including non-accrual loans and real estate owned, increased to $68.79 million, or 0.24% of total assets, as of June 30, 2024, primarily due to the addition of non-accrual loans acquired in the Luther Burbank merger.
In addition to its lending activities, WaFd generates non-interest income from various sources, including deposit-related fees, debit and credit card interchange fees, and insurance agency commissions through its WAFD Insurance Group subsidiary. During the nine months ended June 30, 2024, non-interest income totaled $44.81 million, representing approximately 8.4% of the company’s total revenue.
Conclusion A Steadfast Regional Banking Franchise
WaFd, Inc. has weathered various economic cycles and emerging challenges throughout its 107-year history, demonstrating the resilience and adaptability that have become hallmarks of the company. Its prudent risk management practices, diversified business model, and strategic acquisitions have positioned WaFd as a steadfast regional banking franchise capable of navigating a shifting landscape and delivering long-term value for its shareholders.
As the company continues to integrate the Luther Burbank acquisition and capitalize on its expanded geographic reach, investors will closely monitor WaFd’s ability to maintain its strong financial performance, disciplined growth strategy, and commitment to serving the evolving needs of its customers and communities. With its robust product offerings, strong liquidity position, and focus on commercial and consumer real estate lending, WaFd is well-positioned to continue its growth trajectory and navigate the challenges of the evolving banking landscape.
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