WaFd, Inc. — Q1 FY2024 Form 10-Q
Business and period: WaFd is a Seattle-based bank holding company whose bank provides lending, deposit, insurance and other banking services across eight western states. This unaudited quarter ended December 31, 2023; comparisons below are with the quarter ended December 31, 2022 unless noted. Amounts are in U.S. dollars.
Financial performance and condition
| Metric | Q1 FY2024 / Dec. 31, 2023 | Comparable / prior date |
|---|---|---|
| Interest income | $286.8 million | $233.4 million |
| Net interest income | $152.2 million | $182.8 million |
| Net interest margin | 2.91% | 3.69% |
| Net income | $58.5 million | $79.5 million |
| Net income available to common shareholders | $54.8 million | $75.9 million |
| Diluted earnings per share | $0.85 | $1.16 |
| Common dividend per share | $0.25 | $0.24 |
| Net cash from operating activities | $110.3 million | $66.1 million |
| Net cash from investing activities | $(71.0) million | $(932.0) million |
| Net cash from financing activities | $124.9 million | $827.8 million |
- Profitability and costs: Net income fell about 26% year over year. The company attributed the $30.6 million decline in net interest income mainly to rising deposit costs: average yields on earning assets rose 76 basis points to 5.47%, while the average cost of interest-bearing liabilities rose 185 basis points to 3.16%. Noninterest expense increased $4.3 million to $96.5 million, including higher FDIC premiums and product delivery costs. A $1.8 million gain on real estate owned (REO) sales compared with a $0.1 million loss a year earlier. The effective tax rate was 18.46%, versus 22.00%.
- Balance sheet and liquidity: Total assets were $22.64 billion, up $165.4 million from September 30, 2023. Cash and cash equivalents were $1.14 billion, up $164.1 million; management said the increase was funded by higher borrowings. Net loans were $17.58 billion. Customer accounts totaled $16.04 billion, down 0.2% from September; borrowings were $3.88 billion, up $225 million. Shareholders’ equity was $2.45 billion, or 10.83% of assets; tangible capital to tangible assets was 9.59%.
- Capital: At December 31, the Bank’s common equity tier 1, total risk-based capital and tier 1 leverage ratios were 12.10%, 13.31% and 9.12%, respectively. The filing says the Bank met applicable requirements and was categorized as well capitalized.
- Credit: The loan-loss allowance was $179.3 million; the reserve for unfunded commitments was $22.5 million, for total allowance for credit losses of $201.8 million, or 1.04% of gross loans. No credit-loss provision was recorded, compared with $2.5 million a year earlier. Nonperforming assets were $55.4 million, or 0.24% of assets; nonaccrual loans were $45.3 million. Loan delinquencies were 0.33%, down from 0.36% at September 30.
Material changes and notable items
- Interest expense increased $84.0 million year over year, more than offsetting the $53.4 million increase in interest income and compressing net interest income and margin.
- Gross loans decreased $295.5 million from September 30, but net loans increased $108.1 million, principally because loans in process declined $379.4 million. Commercial loans were 61.2% of gross loans.
- Available-for-sale securities had a net unrealized loss of $82.9 million at December 31; held-to-maturity securities had an unrealized loss of $44.1 million. Management attributed securities’ fair-value declines primarily to interest rates and reported no credit impairment. The filing also reports a $143.8 million unrealized gain on borrowing cash-flow hedges; these positions affect reported accumulated other comprehensive income and are not equivalent to cash proceeds.
- The company repurchased 697,893 common shares at an average $24.45 during the quarter; 1,861,290 shares remained authorized. It paid a $0.25 common dividend per share and the quarterly Series A preferred dividend.
- Cash-flow totals were affected by substantial borrowing turnover: proceeds from borrowings were $6.05 billion and repayments were $5.83 billion during the quarter.
Outlook, risks and contingencies
- Guidance: The filing does not provide specific earnings or financial guidance.
- Interest-rate exposure: Management’s model estimated that an immediate parallel 200-basis-point rate increase would reduce next-year net interest income by 1.0%; an immediate 100-basis-point decline would increase it by 3.47%. Under the 200-basis-point increase scenario, modeled net portfolio value would decline 27.37%. These are model estimates based on stated assumptions, not forecasts.
- Funding: The Bank used the Federal Reserve Bank Term Funding Program (BTFP) as a liquidity source. The Federal Reserve announced on January 24, 2024 that it would stop making new BTFP loans on March 11, 2024. The Bank also has FHLB borrowing capacity, subject to collateral eligibility and program terms.
- Merger: On January 30, 2024, WaFd announced receipt of regulatory approvals for its planned merger with Luther Burbank Corporation. Closing was expected by February 29, 2024, subject to remaining conditions; the transaction is expected to add California branches. Integration, closing and California-market entry risks remain.
- Other risks: Management identifies rate and inflation changes, borrower and real-estate credit conditions, deposit competition and confidence, cyber and operational risks, regulation and litigation, geographic concentration, and the pending merger among factors that could affect results. Management stated ordinary-course legal proceedings were not expected to have a material financial-statement effect. HMDA compliance remediation and possible related enforcement or proceedings are among disclosed risks.
Important facts for investors to verify
- Whether deposit pricing and borrowing costs continue to pressure net interest income and margin, and how deposit mix and balances evolve.
- How the balance sheet is funded as BTFP new lending ends, including borrowing levels, collateral availability and liquidity needs.
- Credit migration in commercial real estate and other commercial portfolios, including the filing’s disclosure that $264.0 million of loans less than 90 days delinquent were classified as substandard; treating these as nonperforming would raise the NPA-to-assets ratio to 1.41%, versus the reported 0.24%.
- Whether modeled interest-rate sensitivity and securities unrealized losses change as rates, prepayments and hedges move; the filing’s sensitivity results rely on assumptions and a constant balance sheet.
- Completion and integration of the Luther Burbank merger, and subsequent disclosures on acquired operations, costs and capital effects.
- Capital and distributions: regulatory capital levels, share repurchases, and the company’s ability to maintain common and preferred dividends under regulatory and funding constraints.