Business Overview and History
WaFd, Inc. (NASDAQ: WAFD) is a Seattle-based bank holding company that has been serving communities in the Western United States for over a century. Formerly known as Washington Federal, Inc., the company rebranded to WaFd, Inc. in 2023, reflecting its ongoing evolution and commitment to providing exceptional banking services to its customers.
Founded in 1917 in Ballard, Washington, WaFd Bank, the company's primary operating subsidiary, has grown to become a prominent regional bank with a network of 210 branches across nine states, including Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico, Texas, and California. The bank's roots can be traced back to its humble beginnings as a small savings and loan association, catering primarily to the financial needs of local residents and businesses.
WaFd Bank was originally established as a federally-insured Washington state chartered commercial bank, focusing on providing lending, depository, and banking services to consumers and small to mid-sized businesses in the local Seattle area. Over the decades, the bank expanded its footprint across the western United States, allowing it to diversify its customer base and loan portfolio beyond its initial Seattle-area roots. In 1994, Washington Federal, Inc. was formed as the bank holding company.
In 2023, the company faced a significant challenge when it was required to remediate issues with its Home Mortgage Disclosure Act (HMDA) compliance and reporting. This led to enforcement actions and legal proceedings that the company had to navigate. Despite this setback, WaFd Bank was able to resolve the HMDA issues and continue serving its customers.
Throughout its history, WaFd has remained focused on its core community banking model, providing personal and commercial banking services to customers in its western U.S. markets. The company has weathered various economic cycles and regulatory changes, demonstrating resiliency and an ability to adapt to evolving industry dynamics.
Financial Performance and Ratios
As of June 30, 2024, WaFd reported total assets of $28.58 billion, a significant increase from the $22.47 billion reported at the end of the previous fiscal year. This growth was primarily attributed to the Luther Burbank acquisition, which added $7.7 billion in assets to the company's balance sheet.
The company's net income for the nine months ended June 30, 2024, was $138.90 million, compared to $207.22 million for the same period in the prior year. The decline in net income was partly due to acquisition-related expenses of $26 million associated with the Luther Burbank transaction.
WaFd's net interest margin, a key measure of profitability, stood at 2.72% for the nine-month period ended June 30, 2024, down from 3.49% in the prior-year period. This decrease was primarily driven by rising deposit costs, as the company faced a higher interest rate environment.
The company's loan portfolio grew by 19.4% during the same nine-month period, reaching $20.87 billion as of June 30, 2024. This growth was fueled by both organic loan originations and the addition of Luther Burbank's loan book. WaFd's deposit base also experienced a significant increase of 31.8% to $21.18 billion, reflecting the bank's strong customer relationships and ability to attract a diverse funding mix.
Financials
WaFd's capital ratios remained strong, with a Common Equity Tier 1 ratio of 12.79% and a Total Risk-Based Capital ratio of 13.92% as of June 30, 2024, well above the regulatory requirements for a "well-capitalized" institution. The company's tangible common equity ratio stood at 8.91%, providing a solid foundation for future growth and stability.
For the fiscal year 2023, WaFd reported revenue of $742.61 million and net income of $257.43 million. Operating cash flow (OCF) for the year was $213.96 million, while free cash flow (FCF) stood at $198.89 million.
In the most recent quarter (Q3 2024), the company's financial performance showed significant growth, largely due to the integration of Luther Burbank Corporation's operations following the merger that closed on March 1, 2024. Revenue for the quarter reached $389.82 million, representing a year-over-year growth of 43.23%. Net income for Q3 2024 was $61.14 million, while OCF and FCF were $63.15 million and $58.29 million, respectively. The increase in OCF and FCF was driven by higher earnings, partially offset by merger-related expenses.
Liquidity
WaFd's conservative risk management approach has been a key factor in its long-term success. The company's disciplined underwriting standards and proactive credit monitoring have enabled it to maintain a relatively low level of non-performing assets, which stood at 0.24% of total assets as of June 30, 2024.
As of June 30, 2024, WaFd had a Debt/Equity ratio of 1.11, indicating a balanced approach to leverage. The company's liquidity position remained strong, with $2.49 billion in cash and cash equivalents. WaFd also maintains a credit line with the Federal Home Loan Bank of Des Moines (FHLB-DM) of up to 45% of total assets, providing a substantial source of additional liquidity. Additionally, the company has a credit line with the Federal Home Loan Bank of San Francisco (FHLB-SF) to support borrowings from that institution.
The company's current ratio and quick ratio both stood at 0.22 as of June 30, 2024, reflecting the nature of the banking industry where short-term liabilities (primarily deposits) typically exceed short-term assets.
Business Segments
WaFd operates two main business segments: commercial banking and consumer banking.
The commercial banking segment is the primary driver of WaFd's business, providing lending, depository, insurance, and other banking services to mid-sized to large businesses, as well as owners and developers of commercial real estate. As of June 30, 2024, commercial loans made up 58.9% of WaFd's total gross loan portfolio, totaling $13.24 billion, up 9.4% from September 30, 2023. The allowance for credit losses on commercial loans was $153.19 million, comprising 75.2% of the total allowance. Commercial loan originations accounted for 73% of total loan originations during the nine months ended June 30, 2024.
The consumer banking segment provides lending, depository, and other banking services to individual consumers. As of June 30, 2024, consumer loans made up 41.1% of WaFd's total gross loan portfolio, totaling $9.23 billion, up 22.2% from September 30, 2023. The allowance for credit losses on consumer loans was $50.63 million, comprising 24.8% of the total allowance. Consumer loan originations accounted for 27% of total loan originations during the nine months ended June 30, 2024.
Risk Management and Outlook
However, the company is not immune to the challenges facing the banking industry, such as the risks associated with rising interest rates, increased competition, and potential economic downturns. WaFd's entry into the California market through the Luther Burbank acquisition also presents new competitive dynamics and operational risks that the company will need to navigate effectively.
Looking ahead, WaFd remains cautiously optimistic about its future prospects. The company's management has indicated that it will continue to focus on organic growth, strategic acquisitions, and prudent risk management to drive long-term value for its shareholders. The successful integration of Luther Burbank and the ongoing optimization of the combined operations will be critical in the coming years.
Conclusion
WaFd, Inc. has established itself as a resilient and well-respected community bank in the Western United States, with a rich history of serving its local markets. The company's conservative approach to lending, diversified revenue streams, and strong capital position have enabled it to navigate challenging economic environments and position itself for continued growth.
As WaFd embarks on a new chapter with the integration of Luther Burbank, the company will need to carefully manage the execution risks and capitalize on the synergies created by the merger. Investors will be closely watching the company's ability to maintain its competitive edge, manage interest rate risks, and deliver consistent financial performance in the years to come.
Overall, WaFd's long-standing commitment to its communities, prudent risk management, and adaptable business model make it a compelling investment opportunity for those seeking exposure to a well-established regional banking franchise in the Western United States.