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"A lot has changed since we announced the acquisition of LBC in November 2022. Importantly, we have identified a portion of the LBC multifamily loan portfolio (up to $3.2 billion) that would be attractive to potential buyers and have initiated a program to sell these loans. We have engaged a third party to facilitate this process. There has been a lot of interest in these loans, we are working through the bidding process and expect to execute on the sale in the next few months. We are mindful of the benefits of selling these loans, the resulting liquidity and the options going forward, whether to pay down debt, originate new loans or a combination of both. Ultimately, the amount of loans sold is dependent on price and certainty for execution.

"An acquisition of the size of LBC is meaningful for WaFd; their assets were 34% of standalone WaFd assets. Why did we do it? Why take the risk? We believe this acquisition will accrue to the benefit of our clients, our communities, our shareholders and our employees. Now that it is substantially complete, we believe common shareholders will experience earnings per share accretion of 8% in fiscal 2025 and 16% in fiscal 2026. These estimates factor in the redeployment of the funds received in the potential loan sale into higher yielding assets. Projections that lead to those returns are contained in the Non-GAAP Financial Measures section below.

"We are grateful to be one of the strongest regional banks in the now nine western states in which we operate. Our value proposition is straightforward, we provide relationship banking to our clients through a platform that is large enough to be meaningful but small enough to be nimble and responsive to our clients. We are more optimistic today about our future prospects than any time in my 24 years at WaFd.

"There have been significant changes in interest rates and market values of assets since the merger announcement and the table below calls out what we were expecting in November of 2022 compared to what we are expecting today."

As a result of the merger on February 29, 2024, the Company's balances as of March 31, 2024 reflect the newly combined entity and the activity for the quarter then ended include one month of LBC-related activity. Given this, the Company's financial results are not directly comparable to prior reported periods. Total assets were $30.1 billion as of March 31, 2024, compared to $22.5 billion at September 30, 2023, primarily due to the addition of $7.7 billion of LBC assets at fair value on February 29, 2024.

Net loans held for investment increased by $3.3 billion, or 19.0%, from September 30, 2023 to March 31, 2024 reflecting the addition of LBC loans with a fair value of $3.2 billion. The fair value of total loans obtained in the merger was $6.2 billion. The Company has identified approximately $3.2 billion of the acquired multifamily loans to sell and has classified these as Loans Held for Sale at fair value.

Cash and cash equivalents as of March 31, 2024 increased by $525.1 million, or 53.5%, since September 30, 2023. Investment securities increased by $477.3 million during the quarter due to the addition of $529.2 million in securities obtained in the merger.

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. Transaction accounts increased by $1.6 billion or 14.6% during that period, while time deposits increased $3.7 billion or 69.7% as 66% of the LBC deposit portfolio was time deposits. As a result of this mix, the percentage of the Company’s transaction accounts at March 31, 2024 decreased to 57.8% compared to 67.0% at September 30, 2023. Core deposits, defined as all transaction accounts and time deposits less than $250,000, totaled 82.1% of deposits at March 31, 2024. Deposits that are uninsured or not collateralized were 25.5% as of March 31, 2024, a slight decrease from 25.7% as of September 30, 2023.

Borrowings totaled $5.3 billion as of March 31, 2024, up from $3.7 billion at September 30, 2023 with $1.4 billion attributable to the merger. The Company also assumed additional debt in connection with the merger in the form of approximately $50 million in floating rate junior subordinated debentures, due June 2036 and June 2037, and $94 million in 6.5% senior unsecured term notes maturing September 30, 2024. The effective weighted average interest rate of the combined borrowings and debt was 4.48% as of March 31, 2024, compared to 3.98% at September 30, 2023 as a result of adding the LBC borrowings.

The Company had loan originations of $0.8 billion for the second fiscal quarter of 2024, compared to $1.0 billion of originations in the same quarter one year ago. Offsetting loan originations in each of these quarters were loan repayments of $1.0 billion and $1.1 billion, respectively. The Bank has intentionally slowed new loan production to temper net loan growth. Commercial loans represented 77% of all loan originations during the second fiscal quarter of 2024 and consumer loans accounted for the remaining 23%. Commercial loans are viewed by the Bank as preferable; they generally have floating interest rates and shorter durations. The weighted average interest rate on the loan portfolio was 5.02% as of March 31, 2024, a decrease from 5.22% as of September 30, 2023, due primarily to adding the lower yielding LBC portfolio.

Credit quality continues to be monitored closely in light of the shifting economic and monetary environment. As of March 31, 2024, non-performing assets were $68 million, or 0.2% of total assets, from $58 million, or 0.3%, at September 30, 2023. The percentage of delinquent loans was 0.4% of total loans for both March 31, 2024 and September 30, 2023 as a result of the increased loan balance. The following table shows the effect the merger had on the change in non-performing assets and delinquencies.

The allowance for credit losses including the reserve for unfunded commitments ("ACL") totaled $225 million as of March 31, 2024, and was 1.00% of gross loans outstanding, as compared to $202 million, or 1.04% of gross loans outstanding, as of September 30, 2023. The increase in the ACL reflects the $16.0 million provision recorded on LBC loans held for investment that are not credit deteriorated and the $7.4 million estimated lifetime credit losses for those that are considered purchased credit deteriorated ("PCD"). Net charge-offs were $146,000 for the second fiscal quarter of 2024, compared to net charge-offs of $6 million for the prior year same quarter.

The Company paid quarterly dividends on Series A preferred stock on January 15, 2024 and April 15, 2024. On March 8, 2024, the Company paid a regular cash dividend on common stock of $0.26 per share, which represented the 164^th consecutive quarterly cash dividend. During the quarter, the Company repurchased 7,837 shares of common stock at a weighted average price of $30.38 per share and has authorization to repurchase 1,853,453 additional shares. Tangible common shareholders' equity per share decreased by $1.41, or 5.0%, to $26.64 since September 30, 2023. Over the past 12 months, tangible book value decreased per share by $0.21 or 0.8%. The ratio of total tangible shareholders' equity to tangible assets decreased to 8.31% as of March 31, 2024. See the reconciliation for these non-GAAP measures starting on page 13.

Net interest income was $159 million for the second fiscal quarter of 2024, a decrease of $16.4 million or 9.4% from the same quarter in the prior year. The decrease in net interest income was primarily due to the 129 basis point increase in the average rate paid on interest-bearing liabilities outpacing the 38 basis point increase in the average rate earned on interest-earning assets. Net interest income also increased by $6.4 million compared to the quarter ended December 31, 2023 due to a larger increase in the average interest earning assets than the increase in interest bearing liabilities as a result of the merger. Net interest margin was 2.73% in the second fiscal quarter of 2024 compared to 2.91% for the quarter ended December 31, 2023 and 3.51% for the prior year quarter.

Total other income was $13.4 million for the second fiscal quarter of 2024 compared to $10.1 million in the prior year same quarter. The increase is primarily due to recording $1.8 million less unrealized losses for certain equity method investments in the current quarter compared to the quarter ended March 31, 2023. Small increases in insurance agency commissions recognized by the WAFD Insurance Group and increased fees earned as a result of the merger account for the remaining change.

Total other expense was $133.7 million in the second fiscal quarter of 2024, an increase of $36.8 million, or 38.0%, from the prior year's quarter. Compensation expense increased as a result of $19 million in merger-related retention, severance and change-in-control expenses combined with a larger post-merger workforce. FDIC premiums increased $3.9 million compared to the same period last year and included a $1.8 million expense for an FDIC special assessment. Total other expense also increased by $10.9 million compared to the same quarter in the prior year. This is largely due to $5.9 million in merger related expenses in the quarter as well as $5 million in non-operating expenses including a $2 million charitable donation and $3 million in accruals related to legal and compliance related items.

The Company recorded a provision for credit losses of $16.0 million in the second fiscal quarter of 2024, compared to a provision for credit losses of $3.5 million in the same quarter of fiscal 2023. The provision for loan losses in the quarter ended March 31, 2024 represents the preliminary lifetime loss estimate for the non-PCD loans obtained in the merger.

The Company’s efficiency ratio in the second fiscal quarter of 2024 was 58.5% (as adjusted, see Non-GAAP Financial Measures below), compared to 58.0% in the prior quarter and 52.3% for the same period one year ago.

Income tax expense totaled $5.1 million for the second fiscal quarter of 2024, as compared to $18.6 million for the prior year same quarter. The effective tax rate for the quarter ended March 31, 2024 was 24.21% compared to 20.81% for the year ended September 30, 2023. Although the Company’s effective tax rate may vary from the statutory rate mainly due to state taxes, tax-exempt income and tax-credit investments, much of the change in the current quarter resulted specifically from the merger and consideration of California State and Local taxes.

WaFd Bank is headquartered in Seattle, Washington, and has 210 branches in nine western states. To find out more about WaFd Bank, please visit our website www.wafdbank.com. The Company uses its website to distribute financial and other material information about the Company.

Non-GAAP Financial Measures and Management Projections

The Company has presented certain non-GAAP measures within this document to remove the effect of certain income and expenses to provide investors with information useful in understanding our financial performance. The Company considers these items to be non-operating in nature as they are items that Management does not consider indicative of the Company's on-going financial performance. We believe that the tables presented reflect our on-going performance in the periods presented and, accordingly, are useful to consider in addition to our GAAP financial results. These measures should not be considered a substitution for GAAP basis disclosures.

Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way they are calculated herein. Because of this, our non-GAAP financial measures may not be comparable to similar measures used by others. We caution investors not to place undue reliance on such measures. See the following unaudited tables for reconciliations of our non-GAAP measures to the most directly comparable GAAP financial measures.

The Company has presented certain forward-looking statements above. The following unaudited table describes how the Company arrived at estimates for the accretive effect of LBC on the combined entity in fiscal 2025.

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 "expects," "anticipates," "believes," "estimates," "intends," "forecasts," "may," "potential," "projects," and other similar expressions or future or conditional verbs such as "will," "should," "would," and "could" are intended to help identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements include, without limitation, statements related to the potential sale of approximately $3.2 billion of commercial real estate loans categorized as Held for Sale, and statements relating to the benefits to the Company and our shareholders of the LBC merger, including its anticipated effect on earnings per share. Although the Company believes any such statements are based on reasonable assumptions, forward-looking statements should not be read as a guarantee of future performance, and you are cautioned not to place undue reliance on any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement.

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, 2023 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, forward-looking statements relating to the potential sale of approximately $3.2 billion of commercial real estate loans categorized as Held for Sale are subject to risks and uncertainties that affect our ability to sell the loans, the anticipated timing of the sale, and the final purchase price for the assets, including, without limitation continued fluctuations in interest rates, deteriorating economic conditions or declines in the real estate market, and regulatory limitations. Other forward-looking statements relating to our financial condition or operations are subject to risks and uncertainties related to (i) fluctuations in interest rate risk and market interest rates, including the effect on our net interest income and net interest margin; (ii) current and future economic conditions, including the effects of declines in the real estate market, high unemployment rates, inflationary pressures, a potential recession, the monetary policies of the Federal Reserve, and slowdowns in economic growth; (iii) risks related to the integration of the operations of Luther Burbank Corporation; (iv) financial stress on borrowers (consumers and businesses) as a result of higher interest rates or an uncertain economic environment; (v) changes in deposit flows or loan demands; (vi) the impact of bank failures or adverse developments at other banks and related negative press about regional banks and the banking industry in general; (vii) the effects of natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as the COVID-19 pandemic) and the resulting governmental and societal responses; (viii) global economic trends, including developments related to Ukraine and Russia, and the evolving conflict in Israel and Gaza, and related negative financial impacts on our borrowers; (ix) litigation risks resulting in significant expenses, losses and reputational damage; (x) 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.

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Contacts

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