Business context and reporting period
Washington Federal, Inc. (WaFd; Nasdaq: WAFD) filed this Form 10-K for the fiscal year ended September 30, 2022. It operates WaFd Bank, a regional commercial bank with 201 branches across eight western states, focused on real estate, commercial and consumer lending, deposits, and related services. The bank converted from a national to a Washington state charter effective February 4, 2022.
Financial performance and position
| Metric | FY2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net income | $236.3 million | Up 28.7% from $183.6 million |
| Net income available to common shareholders | $221.7 million; diluted EPS $3.39 | Prior-year diluted EPS was $2.39 |
| Net interest income / margin | $594.6 million / 3.16% | Up 17.7% / 0.36 percentage points |
| Interest spread at year-end | 3.36% | 2.45% a year earlier |
| Operating expenses / efficiency ratio | $358.6 million / 54.3% | Expenses up 7.9%; ratio improved from 58.8% |
| Net loans | $16.11 billion | Up 16.5%; commercial loans were 63.1% of gross loans |
| Deposits | $16.03 billion | Up 3.1% |
| Cash and cash equivalents | $684.0 million | Down from $2.09 billion |
| FHLB advances | $2.13 billion | Up from $1.72 billion; 2.02% weighted-average rate at year-end |
| Total shareholders’ equity | $2.27 billion; 10.95% of assets | Up from $2.13 billion; 10.82% of assets |
Cash provided by operating activities was $268.5 million; investing activities used $2.49 billion, principally reflecting loan growth and securities activity; financing activities provided $817.9 million. Cash declined by $1.41 billion during the year. The bank reported $3.56 billion of additional FHLB borrowing capacity based on pledged collateral. Its regulatory capital ratios exceeded applicable minimums, and it was categorized as well-capitalized.
Material changes versus the prior year
- Loans grew substantially, led by commercial real estate (+28.2%), construction (+31.0%), and multifamily (+15.5%). Commercial lending increased to 63.1% of gross loans from 62.3%.
- Net interest income rose with loan growth and higher asset yields; the annual net interest margin increased to 3.16% from 2.80%.
- Credit provision was $3.0 million versus $0.5 million. Net recoveries declined to $3.5 million from $6.3 million. Nonperforming assets were $44.6 million, or 0.21% of assets, versus $43.6 million, or 0.22%.
- Available-for-sale securities had a $111.7 million net unrealized loss recorded in equity; held-to-maturity securities had a $56.4 million unrealized loss, attributed to rising rates. The company reported no credit-loss allowance for these portfolios.
- Uninsured deposits (accounts over $250,000) totaled $7.40 billion, about 46% of customer deposits. Transaction accounts increased, while time deposits declined.
Outlook, risks, contingencies and unusual items
- The filing does not provide specific earnings or financial guidance. Management discusses inflation, rapid rate changes, recession risk, and potential pressure on borrowers, loan demand, collateral values, funding costs, and credit quality. It anticipated further Federal Reserve rate increases in 2023, while noting outcomes are uncertain.
- Interest-rate exposure shifted materially: the company estimated an immediate parallel 200-basis-point increase would raise next-year net interest income 1.9%, compared with 9.7% in the prior-year model. The same shock was estimated to reduce net portfolio value by $616.6 million, or 20.9%, versus a 6.8% reduction a year earlier. These are model scenarios, not forecasts.
- Real estate lending and western-state concentration expose the bank to property-market and regional downturns. The ACL was $172.8 million for loans, plus a $32.5 million reserve for unfunded commitments; management judged the total adequate, but estimates depend on forecasts and judgment.
- In June 2022, a third-party vendor disclosed unauthorized access to certain personal and financial data of some customers. WaFd suspended service, notified affected customers, and later resumed the relationship; the company said its own systems were not breached.
- The bank remains subject to two CFPB consent orders concerning HMDA reporting, including a 2020 order with a $200,000 penalty and a 10-year compliance plan. The prior OCC BSA consent order was terminated in December 2021. A separate overdraft-fee class action was settled for $495,000 plus administrative costs, subject to final approval and claims administration.
- After year-end, WaFd announced an all-stock agreement to acquire Luther Burbank Corporation for approximately $654 million based on the stated reference share price. Closing was anticipated as early as the second calendar quarter of 2023, subject to shareholder, regulatory, and other conditions.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. The allowance for loan losses was identified as a critical audit matter.
Important facts for investors to verify
- Progress and final terms, approvals, timing, and integration risks for the announced Luther Burbank acquisition.
- Commercial real estate, construction, and geographic concentration trends, including criticized loans, delinquencies, and subsequent credit-loss experience.
- Deposit retention and repricing, uninsured deposit levels, and the cost and availability of FHLB and other funding.
- Actual sensitivity of margins, earnings, and economic value to changing rates versus the filing’s static-balance-sheet scenarios.
- Changes in unrealized securities losses, liquidity needs, and the bank’s ability to avoid selling securities before recovery.
- Compliance with continuing HMDA orders, resolution of the overdraft settlement, and any costs or claims arising from the vendor data incident.