Washington Federal, Inc. — Q1 FY2018 Form 10-Q
Business context and reporting period
Washington Federal is a bank holding company operating through Washington Federal, National Association. Its business includes deposit-taking and lending, principally residential mortgages, construction, commercial real estate, commercial and industrial, and other loans. The quarter ended December 31, 2017; comparable income and cash flow figures are for the three months ended December 31, 2016. Balance-sheet comparisons are to September 30, 2017. Amounts below are in U.S. dollars.
Financial and operating highlights
| Metric | Q1 FY2018 / Dec. 31, 2017 | Comparable / prior date |
|---|---|---|
| Net interest income | $115.7 million | $103.2 million, up 12.2% year over year |
| Net interest margin | 3.26% | 3.02% |
| Net income | $51.7 million | $41.2 million, up 25.3% |
| Diluted EPS | $0.59 | $0.46 |
| Net cash from operating activities | $58.1 million | $41.9 million |
| Total assets | $15.58 billion | $15.25 billion at Sept. 30, 2017 |
| Net loans | $11.11 billion | $10.88 billion at Sept. 30, 2017 |
| Customer deposits | $11.00 billion | $10.84 billion at Sept. 30, 2017 |
| FHLB advances | $2.42 billion | $2.23 billion at Sept. 30, 2017 |
| Cash and cash equivalents | $309.7 million | $313.1 million at Sept. 30, 2017 |
Net interest income growth reflected higher average earning assets and a higher earning-asset yield; management also cited a shift from cash and securities toward higher-yielding loans. Other expense rose 14.0% to $61.9 million. The provision for loan losses was zero in both periods. Net cash used in investing activities was $333.7 million, while financing activities provided $272.2 million; cash declined $3.4 million during the quarter.
Material changes and credit quality
- Gross loans increased 2.1% from September 30. Construction loans grew $112.4 million and consumer loans $134.9 million; the latter increase included purchased consumer-loan pools. Management said it was pursuing more adjustable-rate or shorter-duration commercial and multifamily lending in the low-rate environment.
- Nonperforming assets fell to $63.4 million, or 0.41% of assets, from $70.2 million, or 0.46%. Nonaccrual loans declined to $45.5 million, but total loan delinquencies edged up to 0.43% from 0.40%. No loans over 90 days delinquent were still accruing.
- The allowance for loan losses was $127.2 million. Including the $6.8 million reserve for unfunded commitments, reserves totaled $133.9 million, or 1.08% of gross loans. Management considered this adequate.
- Stockholders’ equity was $2.01 billion, or 12.90% of assets; tangible capital to tangible assets was 11.12%. The Bank’s reported capital ratios exceeded the stated minimum well-capitalized thresholds.
Outlook, risks, contingencies, and unusual items
- Tax change: The December 2017 Tax Act reduced the federal corporate rate to 21% effective January 1, 2018. Revaluation of deferred tax balances generated a discrete tax benefit (reported as $3.7 million in the note; MD&A also cites $3.743 million). The quarter’s effective tax rate was 14.79%, versus 32.50% a year earlier. Management estimated a fiscal 2018 annual effective rate of approximately 22%–23%; the quarter’s tax result included additional stock-compensation tax benefits.
- FDIC loss-share agreements: Other income included an $8.55 million valuation charge related to remaining agreements, reflecting management’s estimate of amounts payable if terminated early. The company had proposed early termination to the FDIC; the outcome and final amount were not stated.
- Interest-rate exposure: A modeled immediate parallel 200-basis-point rise was estimated to increase next-year net interest income 1.3%, but reduce net portfolio value 20.4% ($528.6 million). The one-year repricing gap was negative 12.9% of assets. These are model estimates and depend on assumptions.
- Other risks: Management identified economic and real-estate conditions, borrower creditworthiness and collateral values, interest rates, regulatory changes, financing availability, and execution of acquisitions as risks. It also cited ongoing Bank Secrecy Act program remediation efforts and related costs. The company stated its disclosure controls were effective; ordinary-course legal proceedings were not considered material.
- The company declared a $0.17-per-share dividend payable in February 2018 and authorized an additional 5 million shares for repurchase on January 24, 2018. It repurchased 1.15 million shares during the quarter for $39.0 million.
- An immaterial correction for prior insurance-agency acquisitions increased goodwill by $7.1 million and finite-lived intangibles by $5.1 million, with a corresponding $12.2 million decrease in other assets. The company expected adoption of the expected-credit-loss standard to increase its loan-loss allowance, but the amount remained under evaluation.
Key facts for investors to verify
- Whether the FDIC agrees to early termination of the loss-share agreements and the ultimate settlement charge or liability.
- Whether loan growth, consumer-loan purchases, and the shift toward commercial lending affect future credit losses, delinquencies, and allowance adequacy.
- How the lower statutory tax rate and deferred-tax remeasurement affect reported and normalized earnings in subsequent quarters.
- Whether deposit costs, FHLB borrowing levels, and the negative repricing gap pressure margins if rates rise; compare actual performance with management’s modeled rate sensitivities.
- Progress, costs, and any regulatory consequences related to the Bank Secrecy Act remediation program.