WAFD Inc. (Washington Federal, Inc.) — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2021, not a standalone calendar fourth quarter. WaFd Bank is a regional bank operating 219 branches across eight western states, focused on deposits and residential, commercial real estate, construction and business lending.
Financial performance and position
| Metric | FY2021 / September 30, 2021 | Comparable prior period |
|---|---|---|
| Interest income | $591.6 million | $621.3 million in FY2020 |
| Net interest income | $505.1 million | $469.5 million in FY2020 |
| Net income | $183.6 million | $173.4 million in FY2020 |
| Net income available to common shareholders; diluted EPS | $173.6 million; $2.39 | $173.4 million; $2.26 |
| Net interest margin; efficiency ratio | 2.80%; 58.8% | 2.93%; 56.7% in FY2020 |
| Net loans; total assets | $13.83 billion; $19.65 billion | $12.79 billion; $18.79 billion |
| Customer deposits; FHLB advances | $15.54 billion; $1.72 billion | $13.78 billion; $2.70 billion |
| Cash and cash equivalents | $2.09 billion | $1.70 billion |
| Shareholders’ equity | $2.13 billion, or 10.82% of assets | $2.01 billion, or 10.72% of assets |
- Cash flow: Operating cash flow was $314.5 million; investing cash flow was negative $579.7 million; financing cash flow was positive $653.1 million. Cash increased $387.8 million to $2.09 billion.
- Credit: FY2021 provision for credit losses was $0.5 million, versus $21.8 million in FY2020. The allowance for loan losses was $171.3 million and the reserve for unfunded commitments was $27.5 million, totaling $198.8 million. Net recoveries were $6.3 million.
- Asset quality: Nonperforming assets were $43.6 million, or 0.22% of assets, versus $37.7 million, or 0.20%, a year earlier. Restructured loans declined to $65.1 million; 97.7% were performing.
- Capital and returns: The Bank was classified as well capitalized. Its common equity Tier 1, total risk-based capital and leverage ratios were 11.28%, 12.53% and 8.92%, respectively. The company paid $0.91 per common share in dividends and repurchased 10.8 million shares for $348.7 million.
Material changes versus FY2020
- Net income increased 5.9%, and net interest income rose 7.6%, supported by balance-sheet growth and sharply lower deposit and borrowing costs. Interest income fell as asset yields declined; net interest margin contracted 13 basis points to 2.80%.
- Loans grew 8.1% net, while gross commercial loans increased 24.5% and rose to 62.4% of gross loans from 56.4%. Single-family residential loans declined 6.7%.
- Deposits rose 12.8%, including 23.5% growth in transaction accounts; time deposits fell 13.6%. Strong deposit inflows enabled a $980 million reduction in FHLB advances.
- Other income declined 30.4%, largely reflecting a $30.7 million gain on property sales and valuation adjustments in FY2020. FY2021 included a $14.1 million gain from partial termination of a borrowing hedge and a $13.8 million loss on early repayment of FHLB debt.
- Operating expenses increased 5.4%, driven chiefly by higher compensation and benefits. The efficiency ratio worsened by 2.1 percentage points.
Outlook, risks and unusual items
- The filing provides no specific earnings, loan-growth or margin guidance. Management described a focus on organic loan growth and on positioning the balance sheet for changing interest rates; actual results remain subject to economic and market conditions.
- Management’s rate model estimated that an immediate parallel 200-basis-point increase would raise next-year net interest income 9.7%, assuming a constant balance sheet. In the same scenario, estimated net portfolio value would fall 6.8%. These are model sensitivities, not forecasts.
- The Bank remains subject to the OCC’s 2018 BSA consent order. It agreed to a $2.5 million civil money penalty in September 2021; the order remained in effect at filing and restricts acquisitions and branch expansion. The Bank also remains subject to CFPB HMDA consent orders, including a 2020 order with a $200,000 penalty and a 10-year compliance period.
- A class action alleging improper overdraft fees on re-presented items was pending; management disputed the claims. Management said ordinary-course legal proceedings were not expected to have a material financial-statement impact.
- Principal risks include real-estate and regional economic concentration, borrower credit quality and allowance-estimation uncertainty, COVID-19 effects, interest-rate and LIBOR-transition risk, cybersecurity and third-party technology exposure, regulatory compliance, and deposit competition. Management noted continued uncertainty around pandemic effects and supply-chain and labor constraints.
- The 2021 financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting. The auditor identified the allowance for credit losses as a critical audit matter because it involves significant judgment and forecasts.
Important facts for investors to verify
- Current status and any conditions for release of the OCC BSA consent order, and progress on HMDA compliance obligations.
- Loan growth and composition, particularly commercial real estate, construction and commercial-and-industrial exposures; monitor criticized loans, delinquencies and nonperforming assets.
- Adequacy and sensitivity of the $198.8 million total credit-loss allowance to economic forecasts and collateral values.
- Deposit mix, uninsured deposits (reported at $7.20 billion), liquidity, and the maturity and repricing profile of FHLB advances.
- Whether margin and earnings trends support the reported rate-sensitivity estimates, and how share repurchases and dividends affect capital.