8-K: WaFd Inc. Reports Mixed Q2 Fiscal 2024 Results Following Luther Burbank Merger

WaFd Inc. announced a significant decrease in quarterly earnings due to merger-related costs, despite a successful and rapid integration of Luther Burbank Corporation.

Summary

• WaFd Inc. reported net earnings of $15.888 million for the quarter ended March 31, 2024, a 73% decrease compared to the previous quarter and a 76% decrease compared to the same quarter last year.
• Earnings per diluted share for common shareholders were $0.17, down from $0.85 in the previous quarter and $0.95 in the same quarter last year.
• The results include $51.1 million in merger-related costs and certain non-operating expenses.
• Adjusted for these expenses, return on common shareholders' equity was 8.7%, and return on assets was 0.9%.
• The merger with Luther Burbank Corporation (LBC) closed on February 29, 2024, with systems conversions and branch re-branding completed by March 4, 2024.
• The company has identified up to $3.2 billion of the LBC multifamily loan portfolio for potential sale and has initiated a program to sell these loans.
• Total assets increased to $30.1 billion as of March 31, 2024, up from $22.5 billion at September 30, 2023, primarily due to the addition of $7.7 billion of LBC assets.
• Customer deposits totaled $21.3 billion as of March 31, 2024, an increase of 32.8% since September 30, 2023, due to $5.6 billion in deposits obtained in the merger.
• Net interest income was $159 million for the quarter, a decrease of $16.4 million or 9.4% from the same quarter in the prior year.
• The company expects earnings per share accretion of 8% in fiscal 2025 and 16% in fiscal 2026 due to the merger.

Sentiment

Score: 5

Explanation: The document presents mixed results. While the merger was completed quickly and the company is optimistic about the future, the current financial performance is significantly down due to merger costs. The forward-looking statements are positive, but the current results are concerning.

Positives

• The merger with Luther Burbank Corporation was completed quickly and efficiently.
• The company has identified a significant portion of the acquired loan portfolio for potential sale, which could improve liquidity.
• The company expects significant earnings per share accretion in the coming years due to the merger.
• Deposit accounts from the acquired LBC business are down only 1.1% since the conversion.
• The company is one of the strongest regional banks in the nine western states in which it operates.

Negatives

• Net earnings decreased significantly due to merger-related costs and non-operating expenses.
• Earnings per share for common shareholders decreased substantially compared to previous periods.
• Net interest income decreased year-over-year.
• The company's efficiency ratio increased to 77.74% from 52.34% in the same quarter last year.
• Tangible common shareholders' equity per share decreased by $1.41, or 5.0%, to $26.64 since September 30, 2023.

Risks

• Fluctuations in interest rates and market interest rates could impact net interest income and net interest margin.
• Current and future economic conditions, including potential recession and real estate market declines, pose risks.
• Integration of Luther Burbank Corporation operations could present challenges.
• Financial stress on borrowers due to higher interest rates or economic uncertainty could affect loan performance.
• Changes in deposit flows or loan demands could impact the company's financial position.
• Bank failures or adverse developments at other banks could negatively impact the company.
• Global economic trends and conflicts could have negative financial impacts on borrowers.
• Cyber-security risks, including breaches and attacks, could affect operations.
• The sale of the $3.2 billion loan portfolio is subject to market conditions and may not be executed as planned.

Future Outlook

The company expects earnings per share accretion of 8% in fiscal 2025 and 16% in fiscal 2026 due to the merger, factoring in the redeployment of funds from the potential loan sale into higher-yielding assets. The company is also optimistic about its future prospects.

Management Comments

• President and CEO Brent Beardall stated that the acquisition of Luther Burbank will be seen as a transformational event for WaFd Bank.
• He noted that there is a lot of noise in the first quarter due to merger costs and provided disclosures showing earnings without these items.
• He expressed pride in the speed of the acquisition and conversion process.
• He highlighted the company's value proposition of providing relationship banking through a nimble platform.
• He stated that the company is more optimistic about its future prospects than any time in his 24 years at WaFd.

Industry Context

This announcement comes at a time of significant changes in interest rates and market values of assets, impacting the banking industry. The merger of WaFd and Luther Burbank is a strategic move to increase scale and market presence, which is a common trend in the regional banking sector. The company is also navigating the challenges of a changing economic environment and increased regulatory scrutiny.

Comparison to Industry Standards

• The decrease in net income and earnings per share is significant and likely worse than many of its peers in the regional banking sector, especially those that have not undergone a major merger.
• The adjusted return on equity of 8.7% is below the average for well-performing regional banks, which often target a return on equity of 10% or higher.
• The efficiency ratio of 77.74% is high compared to industry benchmarks, which typically aim for an efficiency ratio below 60%.
• The rapid integration of LBC is a positive differentiator, as many bank mergers face significant delays and integration challenges. Comparably, the merger of First Horizon and TD Bank was terminated due to regulatory uncertainty, highlighting the challenges in the sector.
• The planned sale of $3.2 billion in multifamily loans is a strategic move to manage risk and improve liquidity, similar to actions taken by other banks to optimize their balance sheets in response to changing market conditions. For example, some banks have been selling off commercial real estate loans to reduce exposure.

Stakeholder Impact

• Shareholders will experience a decrease in earnings per share in the short term, but the company anticipates significant accretion in the coming years.
• Employees have been impacted by the merger, with some experiencing retention, severance, and change-in-control expenses.
• Customers of the acquired LBC branches have been transitioned to WaFd systems and branding.
• The company's suppliers and creditors are likely to be impacted by the increased scale of the combined entity.

Next Steps

• The company will continue to work through the bidding process for the sale of the $3.2 billion multifamily loan portfolio.
• The company will focus on integrating the operations of Luther Burbank Corporation.
• The company will monitor credit quality closely in light of the shifting economic and monetary environment.
• The company will work to achieve the projected earnings per share accretion in fiscal 2025 and 2026.

Key Dates

Keywords

merger, acquisition, earnings, net income, interest rates, loan portfolio, deposits, financial results, banking, regional bank