Washington Federal, Inc. (WaFd Bank) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; filed May 4, 2023. Dollar amounts below are in millions unless otherwise noted. WaFd provides banking, lending, insurance and related services through 199 branches across eight states.
Financial performance and position
- Quarterly earnings: Net income was $65.9 million, up from $49.4 million a year earlier. Net income available to common shareholders was $62.3 million; diluted EPS was $0.95 versus $0.70.
- Six-month earnings: Net income was $145.4 million versus $99.6 million; diluted EPS was $2.11 versus $1.41.
- Net interest income and margin: Quarterly net interest income rose to $175.0 million from $135.1 million; net interest margin was 3.51% versus 2.90%. For six months, net interest income was $357.8 million versus $269.2 million and margin was 3.60% versus 2.89%. Higher asset yields outpaced higher funding costs in the comparisons.
- Other income and expenses: Quarterly other income declined to $10.1 million from $15.7 million, including a loss on certain equity investments and lower loan fees. Quarterly noninterest expense increased to $96.9 million from $88.4 million, including higher compensation, FDIC premiums and $1.2 million of merger-related costs.
- Loans and assets: Total assets were $22.33 billion at March 31, up from $20.77 billion at September 30, 2022. Net loans were $17.27 billion, up 7.2% over that period; commercial loans represented 63.1% of gross loans. The allowance for loan losses was $177.4 million.
- Credit quality: Nonperforming assets were $46.8 million, or 0.21% of assets, versus $44.6 million and 0.21% at September 30. Loan delinquencies were 0.16% of loans versus 0.17%. The total allowance for credit losses, including unfunded commitments, was $205.9 million, or 1.02% of gross loans.
- Cash, deposits and borrowings: Cash and cash equivalents were $1.12 billion, up from $684.0 million at September 30. Deposits were $15.86 billion, down 1.1%; transaction deposits declined while time deposits increased. Borrowings rose to $3.80 billion from $2.13 billion, primarily to support loan growth and liquidity.
- Cash flow: For the six months, operating cash flow was $110.9 million, investing cash outflow was $1.14 billion and financing cash inflow was $1.46 billion. Cash increased by $434.6 million.
- Capital and dividends: Shareholders’ equity was $2.38 billion, or 10.64% of assets; tangible capital to tangible assets was 9.39%. Company CET1 and total risk-based capital ratios were 10.21% and 13.20%; Bank ratios were 11.09% and 12.31%. The company paid a quarterly common dividend of $0.25 per share.
Material changes and management commentary
- Loan growth and rising interest rates supported higher net interest income. The average yield on interest-earning assets increased to 5.11% from 3.24% in the quarter-year comparison; the cost of interest-bearing liabilities rose to 2.03% from 0.44%.
- Management recorded a $3.5 million quarterly provision for credit losses, compared with a $0.5 million release a year earlier, citing loan growth, recession concerns and recent macroeconomic developments. Net charge-offs were $5.9 million, compared with net recoveries of $0.5 million.
- The filing reports that the banking industry faced volatility, deposit outflows and confidence concerns following high-profile bank failures. WaFd said it experienced minimal deposit outflow in the quarter, took steps to engage customers and maximize funding sources, and maintained a robust liquidity position.
- At March 31, available-for-sale securities had a $94.2 million net unrealized loss and held-to-maturity securities had a $44.1 million net unrealized loss, both pre-tax. Management attributed the declines principally to interest rates and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
Outlook, risks and contingencies
- No earnings guidance is provided in the supplied filing text. Interest-rate modeling estimates that an immediate parallel 200-basis-point increase would raise next-year net interest income by 3.3%, but reduce estimated net portfolio value by 25.2%; these are model estimates based on stated assumptions, not forecasts of actual results.
- Key risks include deposit competition and confidence, liquidity and funding costs, interest-rate and securities-value sensitivity, a potential economic downturn, real-estate and borrower credit quality, and operational, cybersecurity and regulatory risks.
- The pending all-stock acquisition of Luther Burbank Corporation, announced at an approximate $654 million transaction value based on the specified November 2022 share price, remained subject to shareholder, regulatory and other closing conditions. The filing identifies execution, integration, dilution, cost and deal-completion risks.
- Unfunded loan commitments and other material off-balance-sheet credit exposures totaled $4.53 billion; the related reserve was $28.5 million. Management stated that ordinary-course legal proceedings were not expected to have a material financial-statement effect.
Most important facts for investors to verify
- Whether deposit trends, deposit mix and borrowing dependence remain stable, and how funding costs affect margins.
- Loan growth, criticized and delinquent credit trends, net charge-offs, and whether the allowance remains adequate as economic conditions evolve.
- The timing, approvals, costs, dilution and expected benefits of the Luther Burbank merger.
- How unrealized securities losses, interest-rate exposure and liquidity evolve; assess model assumptions alongside reported capital and cash levels.
- Whether the $0.25 common dividend remains supported by earnings, capital and regulatory requirements.