Washington Federal, Inc. (WaFd; WAFD) — Form 10-Q
Business context and period: Regional bank serving consumers, businesses, and real-estate borrowers through 209 branches across eight western and southwestern states. This fiscal third-quarter report covers the three and nine months ended June 30, 2022; balance-sheet comparisons are to September 30, 2021. Financial statements are unaudited. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Quarter ended June 30, 2022 | Comparable period |
|---|---|---|
| Net interest income | $151.7 | $128.6 in Q3 2021 |
| Other income | $17.6 | $13.2 in Q3 2021 |
| Net income | $63.3 | $47.4 in Q3 2021 |
| Net income available to common shareholders | $59.6 | $43.8 in Q3 2021 |
| Diluted EPS | $0.91 | $0.61 in Q3 2021 |
| Net interest margin | 3.22% | 2.82% in Q3 2021 |
- For the nine months, net interest income was $421.0 million versus $373.2 million; net income was $162.9 million versus $131.2 million; diluted EPS was $2.32 versus $1.68. Nine-month net interest margin was 3.00%, up from 2.77%.
- Quarterly income improvement reflected higher average earning assets and yields, including rising rates on adjustable-rate assets, and lower interest expense on borrowings. Other income included a $2.7 million unrealized gain on certain equity investments for the quarter and $9.0 million for the nine-month period.
- Quarterly other expense rose to $87.4 million from $83.6 million, chiefly due to compensation and benefits. Nine-month expense included a $1.7 million tax-related accrual.
Balance sheet, liquidity, and capital
- Total assets were $20.16 billion, up $508 million from September 30, 2021. Net loans rose 12.5% to $15.57 billion; gross loans increased 16.0% to $18.90 billion.
- Customer accounts increased 2.7% to $15.97 billion. Transaction and savings accounts represented 79% of deposits; time deposits declined 4.0%. FHLB advances were $1.70 billion, down from $1.72 billion.
- Cash and cash equivalents fell 70.9% to $607 million, primarily as loan growth absorbed cash. Nine-month cash flows were $171 million provided by operations, $1.98 billion used in investing, and $328 million provided by financing.
- Shareholders’ equity was $2.22 billion, or 11.01% of assets; tangible capital to tangible assets was 9.63%. The Bank’s common equity tier 1, total risk-based capital, and leverage ratios were 11.08%, 12.33%, and 8.86%, respectively; it remained well-capitalized under prompt-corrective-action standards.
- The allowance for credit losses, including unfunded commitments, was $203.5 million, or 1.08% of gross loans. Nonperforming assets were $50.4 million, or 0.25% of assets; non-accrual loans were $36.7 million. Delinquencies were 0.26% of loans, versus 0.19% at September 2021.
Material changes and notable items
- Loan growth was concentrated in commercial lending, up 17.0%, including construction loans up 34.9%. Consumer loans rose 14.3%. Commercial originations were 78% of originations during the nine months.
- The quarter recorded a $1.5 million credit-loss provision, versus a $2.0 million release in the prior-year quarter. Management attributed the current provision mainly to loan and unfunded-commitment growth, partly offset by better credit quality in certain portfolios.
- Available-for-sale securities had a $65.9 million net unrealized loss at June 30; held-to-maturity securities had a $30.1 million net unrealized loss. Management attributed declines to interest-rate movements and said it did not expect to sell the securities before recovery.
- The Bank completed conversion from a national to Washington state charter on February 4, 2022. The WDFI and FDIC became the Bank’s primary state and federal regulators; the Federal Reserve continues to regulate the holding company.
- In June, a third-party vendor notified WaFd of unauthorized access to certain customer personal and financial data. WaFd said its own systems were not breached; the vendor investigation into the extent of exposure remained ongoing, and affected customers were to be notified after the analysis.
Outlook, risks, and contingencies
- The filing provides no formal earnings or balance-sheet guidance. Management said it had grown shorter-term loans and transaction deposits to reduce interest-rate risk.
- Rate sensitivity modeling estimated that an immediate parallel 200-basis-point rate increase would raise next-year net interest income by 3.9%, but reduce estimated net portfolio value by $592 million, or 21.1%. These estimates assume a constant balance sheet and are model-dependent.
- Key stated risks include rapid interest-rate changes, inflation or recession, borrower stress and declining real-estate values, concentration in western U.S. markets and real-estate lending, cybersecurity and third-party service-provider exposure, and regulatory/compliance costs.
- The Bank remains subject to a CFPB HMDA consent order through 2030 following reporting deficiencies; the filing warns that further deficiencies could prompt additional action. A prior OCC BSA consent order was terminated in December 2021.
- The Bank settled an overdraft-fee class action in May 2022 for $495,000 plus claims-administration expenses; preliminary court approval was granted in June, with claims administration ongoing. Management said ordinary-course legal proceedings were not expected to materially affect the financial statements.
Important facts for investors to verify
- Whether deposit growth and deposit pricing can continue to fund rapid loan growth as rates rise, given cash fell to $607 million.
- Credit quality trends: nonperforming assets and delinquencies increased from September 2021, and the filing identifies $209.2 million of substandard loans under 90 days delinquent.
- The effect of rising rates on both earnings and economic value: modeled NII benefits coexist with a material modeled NPV decline; actual outcomes may differ from assumptions.
- Progress and customer impact from the third-party vendor data incident, including any resulting remediation costs or regulatory consequences.
- Potential securities valuation and capital effects: AFS and HTM portfolios carried significant unrealized losses, primarily attributed to rate changes.