WaFd's Annual Earnings Per Share Increased 10% For 2023 Even After Net Interest Margin Contraction and Outsized Provision For Credit Losses

SEATTLE, October 17, 2023--(BUSINESS WIRE)--WaFd, Inc. (Nasdaq: WAFD) (the "Company"), parent company of WaFd Bank (the "Bank"), today announced record annual earnings of $257,426,000 for the fiscal year ended September 30, 2023, an increase of $21,096,000 from earnings of $236,330,000 for the year ended September 30, 2022. After the effect of dividends on preferred stock, net income available for common shareholders was $3.72 per share for the fiscal year ended September 30, 2023, a $0.33 or 9.7% increase from $3.39 for the prior fiscal year. Return on common shareholders' equity for the fiscal year ended September 30, 2023, was 11.69% compared to 11.70% for the year ended September 30, 2022. Return on assets for the year ended September 30, 2023, was 1.18% compared to 1.17% for the prior year.

President and CEO Brent Beardall commented, "This past year was a roller-coaster for the banking industry. At WaFd, despite the ups and downs in the industry, the year culminated in record net income and earnings per share for the Company. We are grateful to our bankers for their efforts and to our clients for the trust that led to these results.

I am most pleased that for the year our total deposits increased, and the percentage of uninsured deposits decreased to 26%. In a year that saw the second and third largest bank failures in the history of the United States and net outflows of deposits in the banking industry, we view the fact that we were able to achieve net deposit growth as a meaningful accomplishment. One of the commonalities of the failed banks in 2023 was a high percentage of uninsured deposits (70 to 95%), so having only 26% of uninsured deposits at WaFd is a nice contrast.

Over the past two years, the Federal Reserve has increased its short-term interest rates from 0.25% to 5.50%. The impact of increasing interest rates was substantial. This increase occurred at the fastest pace and to the highest absolute level in forty years. For example, the rate on a 30-year fixed rate mortgage is now 8%. Two years ago, that rate would have been 3%. The rate for a short-term construction loan today is around 8.5%. Two years ago, a comparable rate would have been only 2.5%. Higher borrowing costs means our clients have less cash available for discretionary expenditures. Essentially, the challenging interest rate environment is exposing weaknesses. The Bank experienced its first material net charge-off in a decade this past year when we charged off approximately $40 million, primarily due to one commercial loan currently in bankruptcy. We believe the conditions surrounding this credit were idiosyncratic. As we do with all material losses, we will study the circumstances to understand the causation and learn from it going forward.

For the Bank, the higher rates translated into higher interest expense on both deposits and borrowings. Interest expense for the year increased $281 million or 391%. Even with interest expense increasing almost four-fold, it was more than offset by a $377 million increase in interest income, resulting in growth in net interest income by $96 million or 16%. Our margin for the year increased from 3.16% to 3.40%. However, our quarterly margin has decreased every quarter of this fiscal year from 3.69% in December to 3.13% in September. Importantly, the margin for the month of September 2023 was 3.10%, just 3 basis points below the quarterly margin signaling margin compression is slowing. This could be an indication we are approaching the trough for this rate cycle if the Fed is done raising rates.

One of the biggest challenges for our bankers this year has been the intentional slowing of loan production to match the significant reduction in loan repayments. Our clients are astute, not many borrowers want to pre-pay loans that are materially below current rates. As a result, loan repayments decreased from $6.2 billion to $4.4 billion. Our bankers have shifted their efforts to selling the distinctive functionality of our deposit products and supporting our clients in these shifting economic times.

The market is keenly aware of margin compression and additional credit stressors facing lenders and that is why banks, including WaFd, are trading at a significant discount to the broader market. We remain focused on what we can control, like tangible book value per share. For the year 2023, we grew tangible book value per share by 10% to $28.05.

We continue to make strategic investments in both our technology and our teams and we are pleased to see that our clients are noticing. Our Net Promoter Score, a measure of how likely clients are to recommend a company, increased to an all-time high of 57. The average for the industry is approximately 30 (the higher the score the better). Our belief is that the upheaval in the regional banking space is providing a rare opportunity for WaFd Bank to earn more market share in the Western United States. Our value proposition remains consistent: We strive to combine a strong balance sheet, deep relationships and intuitive technology that simplifies banking."

Total assets were $22.5 billion as of September 30, 2023, an increase of 8.2% from $20.8 billion at September 30, 2022, primarily due to the $1.4 billion, or 8.5%, increase in net loans. In addition, cash increased by $297 million.

The Bank's held-to-maturity ("HTM") investments were $424 million as of September 30, 2023, with a net unrealized loss of $55 million. Although not permitted by U.S. Generally Accepted Accounting Principles ("GAAP"), including these unrealized losses in accumulated other comprehensive income would result in a ratio of shareholder's equity to total assets of 10.55% compared to 10.80%, as reported.

Customer deposits totaled $16.1 billion as of September 30, 2023, an increase of 0.3% since September 30, 2022. Transaction accounts decreased by $1.9 billion or 15.2% during the fiscal year 2023, while time deposits increased $2.0 billion or 58.9%. As of September 30, 2023, 67.0% of the Company's deposits were in transaction accounts. Core deposits, defined as all transaction accounts and time deposits less than $250,000, totaled 88.1% of deposits at September 30, 2023. Deposits that are uninsured or not collateralized were 25.7% as of September 30, 2023, a decrease from 30.3% as of September 30, 2022. The focus historically has been on growing transaction accounts to lessen sensitivity to rising interest rates and manage interest expense. However, the current rate environment has resulted in increased demand for higher yielding deposits. The loan-to-deposit ratio was 108.8% at September 30, 2023 compared to 100.5% at September 30, 2022.

Borrowings totaled $3.7 billion as of September 30, 2023, an increase of $1.5 billion or 71.8% since September 30, 2022. The weighted average effective interest rate as of September 30, 2023, was 3.98% versus 2.02% at September 30, 2022. As of September 30, 2023, $2.8 billion of the $3.7 billion in outstanding borrowings have effective maturities less than one year.

Loan originations totaled $4.7 billion for fiscal year 2023 compared to $8.7 billion in fiscal year 2022. Offsetting the loan origination volume in each of these years were loan repayments of $4.4 billion and $6.2 billion, respectively. In addition to the slowing repayments, which are directly correlated with the rapid rise in interest rates, the Bank has intentionally slowed new loan production to temper loan growth. Even so, net loans outstanding grew for the quarter due to the funding of construction loans previously originated. Commercial loans represented 74% of all loan originations during fiscal 2023 with consumer loans accounting for the remaining 26%. Commercial loans are preferable as they generally have floating interest rates and shorter durations. The weighted average interest rate on the loan portfolio was 5.22% as of September 30, 2023, an increase from 4.25% at September 30, 2022, due primarily to higher rates on adjustable rate loans as well as higher rates on newly originated loans.

Credit quality continues to be monitored closely in light of the shifting economic and monetary environment. As of September 30, 2023, non-performing assets increased to $58 million, or 0.3% of total assets, compared to 0.2% as of September 30, 2022. Since September 30, 2022, real estate owned decreased by $2.5 million and non-accrual loans increased by $15.9 million. Delinquent loans were 0.4% of total loans at September 30, 2023 compared to 0.2% at September 30, 2022. The allowance for credit losses (including the reserve for unfunded commitments) totaled $202 million as of September 30, 2023, and was 1.03% of gross loans as compared to $205 million or 1.06% of gross loans as of September 30, 2022. Net charge-offs were $45.1 million for fiscal year 2023 compared to net recoveries of $3.5 million in fiscal 2022.

The Company recorded a provision for credit losses of $41.5 million in fiscal 2023, compared to provision of $3.0 million in fiscal 2022. In fiscal 2023, the provision primarily supported net growth in the loan portfolio, as well as one charge-off, offset by reduced unfunded commitment balances combined with the uncertain economic outlook amid concerns around a possible recession and recent macro-economic events.

The Company paid a quarterly dividend on the 4.875% Series A preferred stock on July 17, 2023. On September 8, 2023, the Company paid a cash dividend of $0.25 per share to common stockholders of record on August 25, 2023, which was the Company’s 162^nd consecutive quarterly cash dividend. Tangible common shareholders’ equity per share increased by $2.56 or 10.04% during fiscal 2023 to $28.05. The ratio of tangible shareholders' equity to tangible assets increased to 9.55% as of September 30, 2023.

Net interest income was $690.2 million for fiscal 2023, an increase of $96 million or 16.1% from the prior year. The increase in net interest income from the prior year was primarily due to the $2.0 billion increase in average loans outstanding during the year despite a decrease in the interest rate spread of 9 basis points. The decrease in the spread was the result of an increase of 168 basis points in the average rate on interest-bearing liabilities outpacing the 159 basis point increase in the average rate earned on interest-earning assets.

Total other income was $52.2 million for fiscal year 2023, a decrease from $66.4 million in the prior year. The decrease in other income is primarily due to $4.7 million in unrealized losses recorded for certain equity investments in fiscal 2023 versus $9.3 million in unrealized gains recorded in fiscal 2022.

Total other expense was $376.0 million for fiscal 2023, an increase of $17.5 million or 4.9% from the prior year. FDIC premiums increased $10.5 million compared to the same period last year. Compensation and benefits costs increased $2.6 million or 1.35% year-over-year primarily due to annual merit increases and investments in strategic initiatives combined with a reduction in capitalization of compensation as loan originations have decreased. These initiatives also drove an increase of $2.2 million in information technology expenses. Merger related expenses of $3.0 million were also included in total other expense. The Company’s efficiency ratio was 50.65% for fiscal 2023 as compared to 54.25% for the prior year as income growth outpaced expense growth.

For the year ended September 30, 2023, the Company recorded federal and state income tax expense of $67.7 million, which equates to a 20.81% effective tax rate. This compares to an effective tax rate of 21.23% for fiscal year 2022. The Company's effective tax rate for fiscal 2023 differs from the statutory federal tax rate mainly due to state taxes, tax-exempt income, tax-credit investments and miscellaneous non-deductible expenses.

As announced last November, the Company has entered into an agreement to purchase Luther Burbank Corporation, an $8 billion dollar financial institution headquartered in the State of California. In May, shareholders of each entity approved the transaction, and the merger application has been submitted to the regulatory authorities for approval. On October 13, 2023, the Washington State Department of Financial Institutions granted approval of the proposed merger, subject to approval by the FDIC and the Federal Reserve Bank. In order to move forward with the transaction, approval must be received from all three regulatory agencies, including both the FDIC and the Federal Reserve. While the market has been turbulent, management remains confident in both the strategic and economic merits of this merger.

WaFd Bank is headquartered in Seattle, Washington and has 198 branches in eight western states. To find out more, please visit our website www.wafdbank.com. The Company uses its website to distribute financial and other material information.

Non-GAAP Financial Measures

The adjusted ratio of shareholders' equity to total assets on September 30, 2023, discussed above, is calculated by deducting the $55 million in tax-effected unrealized losses on HTM investments from total GAAP equity of $2.4 billion, then dividing the adjusted equity by total assets of $22.5 billion to arrive at 10.55%. The unadjusted ratio as of September 30, 2023, was 10.80%.

Important Cautionary Statements

The foregoing information should be read in conjunction with the financial statements, notes and other information contained in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

This press release contains statements about the Company’s future that are not statements of historical or current fact. These statements are "forward looking statements" for purposes of applicable securities laws, and are based on current information and/or management's good faith belief as to future events. Words such as "anticipate," "believe," "continue," "expect," "goal," "intend," "should," "strategy," "will," or similar expressions signify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance. By their nature, forward-looking statements involve inherent risk and uncertainties, including the following risks and uncertainties, and those risks and uncertainties more fully discussed under "Risk Factors" in the Company’s September 30, 2022 10-K, and Quarterly Reports on Form 10-Q which could cause actual performance to differ materially from that anticipated by any forward-looking statements. In particular, any forward-looking statements are subject to risks and uncertainties related to (i) current and future economic conditions, including the effects of declines in the real estate market, high unemployment rates, inflationary pressures, a potential recession, and slowdowns in economic growth; (ii) fluctuations in interest rate risk and market interest rates, including the effect on our net interest income and net interest margin, (iii) financial stress on borrowers (consumers and businesses) as a result of higher interest rates or an uncertain economic environment; (iv) changes in deposit flows or loan demands; (v) the effect of COVID-19 and other infectious illness outbreaks that may arise in the future and the resulting governmental and societal responses; (vi) global economic trends, including developments related to Ukraine and Russia, and related negative financial impacts on our borrowers; (vii) risks related to the proposed merger with Luther Burbank Corporation; (viii) our ability to identify and address cyber-security risks, including security breaches, "denial of service attacks," "hacking" and identity theft; and (ix) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services. The Company undertakes no obligation to update or revise any forward-looking statement.

WAFD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
	September 30, 2023				September 30, 2022
	(In thousands, except share and ratio data)
ASSETS
Cash and cash equivalents	$	980,649			$	683,965
Available-for-sale securities, at fair value		1,995,097				2,051,037
Held-to-maturity securities, at amortized cost		423,586				463,299
Loans receivable, net of allowance for loan losses of $177,207 and $172,808		17,476,550				16,113,564
Interest receivable		87,003				63,872
Premises and equipment, net		237,011				243,062
Real estate owned		4,149				6,667
FHLB and FRB stock		126,820				95,073
Bank owned life insurance		242,919				237,931
Intangible assets, including goodwill of $304,750 and $303,457		310,619				309,009
Federal and state income tax assets, net		8,479				—
Other assets		581,793				504,652
	$	22,474,675			$	20,772,131
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Transaction deposits	$	10,765,313			$	12,691,527
Time deposits		5,305,016				3,338,043
Total customer deposits		16,070,329				16,029,570
Borrowings		3,650,000				2,125,000
Advance payments by borrowers for taxes and insurance		52,550				50,051
Federal and state income tax liabilities, net		—				3,306
Accrued expenses and other liabilities		275,370				289,944
		20,048,249				18,497,871
Stockholders’ equity
Preferred stock, $1.00 par value, 5,000,000 shares authorized; 300,000 and 300,000 shares issued; 300,000 and 300,000 shares outstanding		300,000				300,000
Common stock, $1.00 par value, 300,000,000 shares authorized; 136,466,579 and 136,270,886 shares issued; 64,736,916 and 65,330,126 shares outstanding		136,467				136,271
Additional paid-in capital		1,687,634				1,686,975
Accumulated other comprehensive (loss) income, net of taxes		46,921				52,481
Treasury stock, at cost; 71,729,663 and 70,940,760 shares		(1,612,345	)			(1,590,207	)
Retained earnings		1,867,749				1,688,740
		2,426,426				2,274,260
	$	22,474,675			$	20,772,131
CONSOLIDATED FINANCIAL HIGHLIGHTS
Common shareholders' equity per share	$	32.85			$	30.22
Tangible common shareholders' equity per share		28.05				25.49
Shareholders' equity to total assets		10.80	%			10.95	%
Tangible shareholders' equity (TSE) to tangible assets		9.55				9.60
TSE + allowance for credit losses to tangible assets		10.35				10.45
Weighted average rates at period end
Loans and mortgage-backed securities		5.08	%			4.13	%
Combined loans, all interest-earning assets		5.07				4.04
Customer accounts		2.12				0.51
Borrowings		3.98				2.02
Combined cost of customer accounts and borrowings		2.46				0.68
Net interest spread		2.61				3.36

WAFD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
	As of
SUMMARY FINANCIAL DATA	September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
	(In thousands, except share and ratio data)
Cash	$	980,649			$	1,139,643			$	1,118,544			$	645,862			$	683,965
Loans receivable, net		17,476,550				17,384,188				17,271,906				16,993,588				16,113,564
Allowance for credit losses ("ACL")		201,707				204,569				205,920				208,297				205,308
Available-for-sale securities, at fair value		1,995,097				2,036,233				2,006,286				2,059,837				2,051,037
Held-to-maturity securities, at amortized cost		423,586				434,172				445,222				453,443				463,299
Total assets		22,474,675				22,552,588				22,325,211				21,653,811				20,772,131
Transaction deposits		10,765,313				11,256,575				11,880,343				12,547,832				12,691,527
Time deposits		5,305,016				4,863,849				3,980,605				3,412,203				3,338,043
FHLB advances		3,650,000				3,750,000				3,800,000				3,075,000				2,125,000
Total shareholders' equity		2,426,426				2,394,066				2,375,117				2,324,381				2,274,260
FINANCIAL HIGHLIGHTS
Common shareholders' equity per share		32.85				32.36				31.54				30.96				30.22
Tangible common shareholders' equity per share		28.05				27.58				26.85				26.24				25.49
Shareholders' equity to total assets		10.80	%			10.62	%			10.64	%			10.73	%			10.95	%
Tangible shareholders' equity to tangible assets		9.55	%			9.37	%			9.39	%			9.44	%			9.60	%
Tangible shareholders' equity + ACL to tangible assets		10.35	%			10.17	%			10.19	%			10.27	%			10.45	%
Common shares outstanding		64,736,916				64,721,190				65,793,099				65,387,745				65,330,126
Preferred shares outstanding		300,000				300,000				300,000				300,000				300,000
Loans to customer deposits		108.75	%			107.84	%			108.90	%			106.48	%			100.52	%
CREDIT QUALITY
ACL to gross loans		1.03	%			1.03	%			1.02	%			1.03	%			1.06	%
ACL to non-accrual loans		400.04	%			370.09	%			595.04	%			713.83	%			594.51	%
Non-accrual loans to net loans		0.29	%			0.32	%			0.20	%			0.17	%			0.21	%
Non-accrual loans		50,422				55,276				34,606				29,180				34,534
Non-performing assets to total assets		0.26	%			0.30	%			0.21	%			0.18	%			0.21	%
Non-performing assets		57,924				67,000				46,785				38,650				44,554

WAFD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
	Three Months Ended September 30,								Twelve Months Ended September 30,
		2023				2022				2023				2022
	(In thousands, except share and ratio data)								(In thousands, except share and ratio data)
INTEREST INCOME
Loans receivable	$	240,998			$	174,710			$	900,068			$	601,592
Mortgage-backed securities		11,695				8,263				43,184				26,332
Investment securities and cash equivalents		29,017				14,960				99,703				38,435
		281,710				197,933				1,042,955				666,359
INTEREST EXPENSE
Customer accounts		83,402				17,071				237,233				43,041
FHLB advances and other borrowings		34,611				7,243				115,488				28,729
		118,013				24,314				352,721				71,770
Net interest income		163,697				173,619				690,234				594,589
Provision (release) for credit losses		26,500				1,500				41,500				3,000
Net interest income after provision (release)		137,197				172,119				648,734				591,589
OTHER INCOME
Gain (loss) on sale of investment securities		33				18				33				99
Gain (loss) on termination of hedging derivatives		33				—				(867	)			—
Loan fee income		731				1,154				3,885				7,168
Deposit fee income		6,849				6,604				26,050				25,942
Other income	...	6,688				6,706				23,100				33,163
		14,334				14,482				52,201				66,372
OTHER EXPENSE
Compensation and benefits		45,564				51,304				196,534				193,917
Occupancy		10,115				10,568				41,579				42,499
FDIC insurance premiums		7,000				2,231				20,025				9,531
Product delivery		5,819				5,104				20,973				19,536
Information technology		12,672				12,228				49,447				47,202
Other expense		11,007				11,707				47,477				45,890
		92,177				93,142				376,035				358,575
Gain (loss) on real estate owned, net		(235	)			(488	)			176				651
Income before income taxes		59,119				92,971				325,076				300,037
Income tax provision		8,911				19,576				67,650				63,707
Net Income		50,208				73,395				257,426				236,330
Dividends on preferred stock		3,656				3,656				14,625				14,625
Net Income available to common shareholders	$	46,552			$	69,739			$	242,801			$	221,705
PER SHARE DATA
Basic earnings	$	0.72			$	1.07			$	3.72			$	3.40
Diluted earnings		0.72				1.07				3.72				3.39
Cash dividends per share		0.25				0.24				0.99				0.95
Basic weighted average shares outstanding		64,729,006				65,326,706				65,192,510				65,287,650
Diluted weighted average shares outstanding		64,736,864				65,423,817				65,255,283				65,404,110
PERFORMANCE RATIOS
Return on average assets		0.90	%			1.44	%			1.18	%			1.17	%
Return on average common equity		8.73				14.22				11.69				11.70
Net interest margin		3.13				3.64				3.40				3.16
Efficiency ratio		51.78				49.52				50.65				54.25

WAFD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
	Three Months Ended
	September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
	(In thousands, except share and ratio data)
INTEREST INCOME
Loans receivable	$	240,998			$	232,167			$	222,957			$	203,946			$	174,710
Mortgage-backed securities		11,695				10,454				10,422				10,613				8,263
Investment securities and cash equivalents		29,017				29,859				21,967				18,860				14,960
		281,710				272,480				255,346				233,419				197,933
INTEREST EXPENSE
Customer accounts		83,402				70,062				52,123				31,646				17,071
FHLB advances and other borrowings		34,611				33,718				28,185				18,974				7,243
		118,013				103,780				80,308				50,620				24,314
Net interest income		163,697				168,700				175,038				182,799				173,619
Provision (release) for credit losses		26,500				9,000				3,500				2,500				1,500
Net interest income after provision (release)		137,197				159,700				171,538				180,299				172,119
OTHER INCOME
Gain (loss) on sale of investment securities		33				—				—				—				18
Gain (loss) on termination of hedging derivatives		33				(926	)			26				—				—
Loan fee income		731				1,000				652				1,502				1,154
Deposit fee income		6,849				6,660				6,188				6,353				6,604
Other income		6,688				7,037				3,206				6,169				6,706
		14,334				13,771				10,072				14,024				14,482
OTHER EXPENSE
Compensation and benefits		45,564				50,456				51,444				49,070				51,304
Occupancy		10,115				10,444				10,918				10,102				10,568
FDIC insurance premiums		7,000				5,350				4,000				3,675				2,231
Product delivery		5,819				5,217				5,316				4,621				5,104
Information technology		12,672				11,661				12,785				12,329				12,228
Other expense		11,007				11,571				12,418				12,481				11,707
		92,177				94,699				96,881				92,278				93,142
Gain (loss) on real estate owned, net		(235	)			722				(199	)			(112	)			(488	)
Income before income taxes		59,119				79,494				84,530				101,933				92,971
Income tax provision		8,911				17,719				18,596				22,424				19,576
Net income		50,208				61,775				65,934				79,509				73,395
Dividends on preferred stock		3,656				3,656				3,656				3,656				3,656
Net income available to common shareholders	$	46,552			$	58,119			$	62,278			$	75,853			$	69,739
PER SHARE DATA
Basic earnings per common share	$	0.72			$	0.89			$	0.95			$	1.16			$	1.07
Diluted earnings per common share		0.72				0.89				0.95				1.16				1.07
Cash dividends per common share		0.25				0.25				0.25				0.24				0.24
Basic weighted average shares outstanding		64,729,006				65,194,880				65,511,131				65,341,974				65,326,706
Diluted weighted average shares outstanding		64,736,864				65,212,846				65,551,185				65,430,690				65,423,817
PERFORMANCE RATIOS
Return on average assets		0.90	%			1.12	%			1.21	%			1.50	%			1.44	%
Return on average common equity		8.73				11.09				12.01				15.15				14.22
Net interest margin		3.13				3.27				3.51				3.69				3.64
Efficiency ratio		51.78				51.90				52.34				46.78				49.52

View source version on businesswire.com: https://www.businesswire.com/news/home/20231017440764/en/

Contacts

WaFd, Inc.
425 Pike Street, Seattle, WA 98101
Brad Goode, SVP, Chief Marketing Officer
206-626-8178
brad.goode@wafd.com