Washington Federal, Inc. (WaFd Bank) — Fiscal Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2020; balance-sheet comparisons are to September 30, 2019. The bank operates 234 branches across eight western and southwestern states. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Fiscal Q3 2020 | Comparable / other |
|---|---|---|
| Net interest income | $117.4 | $121.7 in Q3 2019 |
| Net interest margin | 2.82% | 3.18% in Q3 2019 |
| Provision for credit losses | $10.8 | None in Q3 2019 |
| Net income | $34.9; diluted EPS $0.46 | $53.9; diluted EPS $0.67 in Q3 2019 |
| Other income / other expense | $13.3 / $75.3 | $14.0 / $70.9 in Q3 2019 |
- Nine-month results: Net interest income was $354.7 versus $360.9 million; net income was $139.1 versus $157.9 million; diluted EPS was $1.80 versus $1.95. Net interest margin was 3.02% versus 3.18%.
- Balance sheet at June 30: Total assets were $18.18 billion, up $1.70 billion from September 30. Net loans were $12.73 billion, up $803 million. Customer deposits were $13.11 billion, up $1.12 billion.
- Liquidity and borrowings: Cash and cash equivalents were $1.22 billion, up $799 million. FHLB advances were $2.80 billion, up $550 million. The company cited additional FHLB borrowing capacity, subject to eligible collateral.
- Capital: Shareholders’ equity was $1.99 billion, or 10.95% of assets, versus $2.03 billion, or 12.34%, at September 30. Tangible capital to tangible assets was 9.40%. The Bank’s regulatory capital ratios remained above the stated well-capitalized thresholds.
- Cash flows, nine months: Operating cash flow was $111.7 million; investing cash outflow was $778.3 million; financing cash inflow was $1.47 billion. Cash increased by $799.1 million.
Material changes and notable items
- Net interest margin contracted as lower rates reduced asset yields more than funding costs. Management also cited elevated cash balances and 1%-rate Paycheck Protection Program (PPP) loans as pressures on spread and margin.
- Gross loans grew 7.4% from September 30. Commercial loans rose 20.3%, including $759 million of PPP loans at quarter-end; consumer loans declined 5.1%.
- COVID-19-related expected credit losses led to a $10.8 million quarterly provision. The allowance for credit losses, including unfunded commitments, was $184.8 million at June 30. CECL adoption increased the allowance by $28.5 million before tax and reduced opening retained earnings by $21.9 million; this limits comparability with prior periods.
- Nonperforming assets were $44.6 million, or 0.25% of assets, versus $43.8 million, or 0.27%, at September 30. Loan delinquencies were 0.32% versus 0.29%. The filing reports 1,388 COVID-related loan payment deferrals totaling $762 million at June 30; deferred loans were not treated as past due during the deferral period.
- Nine-month other income included a $32.6 million gain on sales of fixed assets. Nine-month other expense included a $6.4 million impairment charge on systems hardware and software. Technology and compensation expenses increased, reflecting investments in systems, compliance, and staffing.
- Available-for-sale securities increased to $2.06 billion, while held-to-maturity securities declined to $827 million. The company reclassified $375 million of securities from held-to-maturity to available-for-sale under an accounting-guidance provision.
Outlook, risks, and contingencies
- The filing gives no quantified earnings or financial guidance. Management stresses that COVID-19’s duration and economic effects are uncertain and may affect borrowers, asset quality, liquidity, operations, and results.
- Key stated risks include stress in energy, hospitality, restaurant, and senior-living industries; real-estate and borrower deterioration; interest-rate and LIBOR-reform exposure; and operational and cybersecurity risks related to remote work.
- The company remains subject to a 2013 CFPB consent order concerning HMDA reporting. It disclosed possible further enforcement action and civil penalties following alleged reporting errors; it has submitted amended filings and enhanced procedures.
- Management said ordinary-course legal proceedings were not expected to have a material financial-statement effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- The company declared a regular $0.22-per-share dividend for payment in August 2020. No material forward-looking operating targets were provided.
Important facts for investors to verify
- Whether COVID-19 deferral borrowers resume payments and how credit quality, criticized loans, delinquencies, and required reserves evolve after deferrals end.
- How sensitive the $184.8 million credit-loss allowance is to economic forecasts and assumptions under CECL, particularly for commercial and industrial exposures.
- The earnings and spread effects of large cash balances, PPP loan runoff or forgiveness, deposit mix, and continued low interest rates.
- The sustainability of capital and liquidity after dividends, share repurchases, deposit movements, and FHLB borrowing; also review regulatory capital ratios and collateral availability.
- The status and potential consequences of the CFPB HMDA matter, and the costs and progress of compliance, technology, and cybersecurity initiatives.