WaFd Inc. (WAFD) — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; fiscal Q1 FY2023. Unaudited consolidated results. WaFd provides banking services through 200 branches across eight western states.
Key financial metrics
| Metric | Q1 FY2023 / Dec. 31, 2022 | Comparison |
|---|---|---|
| Net interest income | $182.8 million | Up 36.3% from $134.1 million a year earlier |
| Net interest margin | 3.69% | 2.87% in prior-year quarter |
| Net income | $79.5 million | Up 58.1% from $50.3 million |
| Net income available to common shareholders | $75.9 million | Up from $46.6 million |
| Diluted EPS | $1.16 | $0.71 in prior-year quarter |
| Total assets | $21.65 billion | Up $881.7 million from Sept. 30, 2022 |
| Net loans | $16.99 billion | Up $880.0 million, or 5.5%, from Sept. 30, 2022 |
| Customer deposits | $15.96 billion | Down $69.5 million, or 0.4%, from Sept. 30, 2022 |
| FHLB advances | $3.08 billion | Up $950 million from Sept. 30, 2022 |
| Cash and cash equivalents | $645.9 million | Down $38.1 million from Sept. 30, 2022 |
| Shareholders’ equity | $2.32 billion | 10.73% of assets, versus 10.95% at Sept. 30, 2022 |
Performance, cash flow and balance sheet
- Interest income rose to $233.4 million from $150.4 million year over year; interest expense increased to $50.6 million from $16.3 million. Management attributed higher net interest income primarily to rising rates and growth in average earning assets.
- Average yield on interest-earning assets increased to 4.71% from 3.22%; average cost of interest-bearing liabilities rose to 1.31% from 0.45%. Period-end interest rate spread was 3.17%.
- Other income was $14.0 million, down from $18.7 million, principally because the prior-year quarter included a $5.1 million gain on certain equity investments. Other expense increased to $92.3 million from $89.6 million.
- Operating cash flow was $66.1 million, versus $26.8 million a year earlier. Investing activities used $932.0 million, chiefly reflecting net loan growth; financing activities provided $827.8 million, including net borrowing proceeds. Cash decreased by $38.1 million during the quarter.
- Loan growth was primarily funded by increased FHLB advances while deposits were nearly flat. Transaction and savings accounts were 79% of deposits; average deposit cost at quarter-end was 0.94%.
- Common dividends were $0.24 per share. The company repurchased 44,845 shares for approximately $1.7 million during the quarter.
Credit quality and capital
- Provision for credit losses was $2.5 million, versus $0.5 million in the prior-year quarter. The reported loan allowance was $176.8 million; including the $31.5 million reserve for unfunded commitments, total allowance for credit losses was $208.3 million, or 1.03% of gross loans.
- Nonperforming assets were $38.7 million, or 0.18% of assets, down from $44.6 million and 0.21% at Sept. 30, 2022. Nonaccrual loans fell to $29.2 million; delinquencies were 0.16% of loans versus 0.17% at quarter-end September.
- Management said $252.8 million of loans delinquent less than 90 days were nevertheless classified as substandard; if treated as nonperforming, nonperforming assets plus performing restructured loans would equal 1.60% of assets, rather than the reported 0.43%.
- The company reported a 9.92% common equity Tier 1 ratio and a 9.41% Tier 1 leverage ratio; the Bank reported 10.70% and 8.61%, respectively. The Bank exceeded the stated well-capitalized thresholds.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided. Management describes loan growth and a focus on shorter-term and adjustable-rate lending as part of its approach to interest-rate risk management.
- Rate sensitivity is material: the company’s model estimated that an immediate parallel 200-basis-point increase would raise next-year net interest income by 0.4%, but reduce net portfolio value by 23.4%. A modeled gradual increase of 300 basis points in short rates and 100 basis points in long rates over two years would lower net interest income by 13.8% in year one and 12.2% in year two, assuming a constant balance sheet and no management intervention. These are model estimates, not forecasts.
- Available-for-sale securities had a $118.9 million net unrealized loss; held-to-maturity securities had a $51.4 million net unrealized loss at Dec. 31. Management attributed the declines principally to interest-rate changes and stated it did not intend, and was not more likely than not required, to sell the securities before recovery.
- On Nov. 13, 2022, WaFd announced a proposed all-stock acquisition of Luther Burbank Corporation valued at approximately $654 million based on WaFd’s share price at announcement. It remained subject to shareholder and regulatory approvals and other closing conditions. Risks include integration costs, execution, dilution, regulatory conditions and failure to close.
- Risks identified include economic slowdown, higher rates and inflation, borrower and real-estate credit exposure, deposit and funding costs, cybersecurity and operational risks, regulatory compliance, geographic concentration, and merger-related uncertainty. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- The overdraft-fee class action settlement for $495,000 plus administrative expenses received final court approval in November 2022; the case was dismissed with prejudice. Management said other ordinary-course legal matters were not expected to have a material financial-statement impact.
Important facts for investors to verify
- Deposit trends, deposit pricing and reliance on FHLB borrowing as loan growth continues.
- Net interest margin and actual performance relative to the filing’s interest-rate and net portfolio value sensitivity scenarios.
- Credit migration, especially substandard commercial loans, and changes in delinquencies, nonaccrual loans and allowance coverage.
- The scale and duration of unrealized securities losses, and any effects on liquidity, capital or ability to sell assets.
- Regulatory and shareholder approvals, final terms, dilution, integration costs and expected benefits of the Luther Burbank merger.
- Whether dividends and repurchases remain consistent with capital, liquidity and regulatory requirements.