WAFD INC annual report, FY2018

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Washington Federal, Inc. (WAFD) — FY2018 Form 10-K

Business and period: Washington Federal, Inc. is a bank holding company operating Washington Federal National Association, with 235 branches across eight western and southwestern states. Its principal activities are deposit-taking and commercial and consumer lending. This annual report covers the fiscal year ended September 30, 2018; it is not a standalone fourth-quarter report.

Financial performance and condition

  • Net interest income: $472.1 million, up $40.2 million (9.3%) from FY2017. Net interest margin rose to 3.27% from 3.13%; average earning-asset yield was 4.20% and the cost of interest-bearing liabilities was 1.00%.
  • Profitability: Return on assets was 1.31%, versus 1.16% in FY2017; return on equity was 10.16%, versus 8.64%. The supplied filing text does not provide a clear value for net income, revenue excluding net interest income, or net income margin.
  • Lending and credit: Net loans reached $11.48 billion, up 5.5% from $10.88 billion. Gross loans were $12.85 billion; construction and construction-custom loans together were about 19.6% of gross loans. The allowance for loan losses was $129.3 million, compared with $123.1 million. FY2018 included a $4.9 million release of provision and $11.1 million in net recoveries.
  • Asset quality: Non-performing assets were $70.1 million, or 0.44% of total assets. Non-performing assets plus performing restructured loans were $220.8 million, or 1.39% of assets, improving from 1.79% in FY2017. Non-accrual loans increased to $55.7 million from $49.6 million.
  • Funding and liquidity: Deposits at year-end totaled $11.39 billion, compared with $10.84 billion. FHLB advances were $2.33 billion; no short-term borrowings were outstanding. Cash and cash equivalents were $268.7 million. Average total assets were $15.62 billion, and year-end shareholders’ equity was $2.00 billion.
  • Cash flow and debt: The supplied text does not give a clear cash-flow statement total or a complete debt maturity profile. FHLB advances are the primary disclosed borrowing; average advances were $2.38 billion.
  • Capital returns: The dividend payout ratio declined to 27.47% from 42.94%. The company repurchased 823,167 shares in the fourth fiscal quarter at an average $33.17 per share.

Material changes and outlook

  • Net interest income benefited from asset growth and higher interest income; customer-account interest expense increased by $20.5 million, partly offset by lower borrowing expense.
  • The one-year repricing gap improved to negative 10.7% of assets from negative 15.7%. Management’s model estimated net interest income would decline 0.64%, 1.91%, and 3.71% under instantaneous rate increases of 100, 200, and 300 basis points, respectively, assuming a static balance sheet. These are risk estimates, not forecasts.
  • The OCC issued a Bank Secrecy Act (BSA) Consent Order in February 2018 requiring extensive remediation, including enhanced controls, independent review, monitoring systems, and regulatory reporting. The Bank expects significant related expenses and does not expect to pursue acquisitions or branch expansion until its BSA program has improved.
  • No quantified earnings or growth guidance is provided in the supplied text. Management described continued interest-rate, credit, regulatory, and economic uncertainty. It said the Bank was well-capitalized and compliant with its interest-rate-risk policy; specific capital ratios are not stated in the supplied text.
  • The company recently transitioned to a modernized core technology system, creating vendor-support and service-continuity risks. Management reported effective disclosure controls and internal control over financial reporting.

Key risks and contingencies

  • Further BSA deficiencies or failure to comply with the Consent Order could lead to additional expenses, penalties, enforcement, or restrictions that impair growth and business plans.
  • Real-estate concentration, including construction lending, exposes results to regional property values, borrower performance, and economic conditions. Interest-rate changes could pressure margins and earnings; deposit competition and funding costs are also material risks.
  • Cybersecurity, third-party systems, regulatory changes, and deposit-insurance assessments may increase costs or disrupt operations. The company reported no material legal-proceeding impact; ordinary-course proceedings were described as immaterial.
  • The expected-credit-loss accounting standard (CECL) was still under evaluation; the company had not stated its estimated impact.

Investor verification priorities

  1. Review the incorporated annual report and audited statements for net income, full revenue, cash flows, tax effects, and year-end asset and liability totals, which are not clearly presented in the supplied text.
  2. Track progress, costs, and regulatory status of the OCC BSA Consent Order, including whether it continues to limit expansion or acquisitions.
  3. Assess credit quality in construction and commercial lending, including delinquency trends, classified loans, allowance adequacy, and the effect of the $3.6 million in commercial and industrial charge-offs.
  4. Compare actual margin and earnings performance with the disclosed interest-rate sensitivity scenarios, and monitor deposit pricing, deposit retention, and FHLB reliance.
  5. Verify current regulatory capital ratios, dividend capacity, CECL implementation impact, and any subsequent material developments after September 30, 2018.