WAFD Inc. (Washington Federal) — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020; fiscal year ends September 30. Washington Federal operates WaFd Bank, serving consumers, businesses and real-estate borrowers through 234 branches in eight states.
Financial performance and position
| Metric | Quarter / period-end result | Comparison |
|---|---|---|
| Net income | $39.0 million; diluted EPS $0.51 | Down from $67.9 million and $0.86 a year earlier |
| Net interest income | $120.5 million | Up $0.8 million year over year |
| Net interest margin | 2.75% | Down from 3.15% year over year |
| Provision for credit losses | $3.0 million expense | Compared with a $3.75 million release a year earlier |
| Noninterest income | $13.9 million | Down from $46.4 million, which included a $30.7 million fixed-asset sale gain in the prior-year quarter |
| Operating cash flow | $94.2 million | Compared with $73.6 million a year earlier |
| Cash and cash equivalents | $1.831 billion | Up $127.7 million from September 30, 2020 |
| Total assets | $19.064 billion | Up $269.6 million from September 30, 2020 |
| Net loans | $12.881 billion | Up $88.7 million from September 30, 2020 |
| Customer deposits | $14.167 billion | Up $386.9 million from September 30, 2020 |
| FHLB advances | $2.600 billion | Down $100 million from September 30, 2020 |
| Shareholders’ equity | $2.062 billion; 10.82% of assets | Up from $2.014 billion; 10.72% of assets at September 30 |
The quarter’s cash balance rose alongside deposits. Investing activities used $202.2 million, principally reflecting securities purchases; financing activities provided $235.7 million. The filing reports a 9.34% tangible capital-to-tangible-assets ratio. The Bank’s actual regulatory ratios exceeded the stated well-capitalized thresholds.
Changes and credit quality
- Net income fell year over year, mainly reflecting the absence of the prior-year $30.7 million property-sale gain. Lower net interest margin also weighed on earnings; lower funding costs partly offset reduced asset yields.
- Average interest-earning assets increased 15.6% year over year, while the average yield declined 97 basis points to 3.34%. The average cost of interest-bearing liabilities fell 67 basis points to 0.76%.
- Commercial loans grew 6.6% from September 30, led by construction, while consumer loans fell 3.5%. Total gross loans grew 2.2%.
- Nonperforming assets rose to $66.5 million, or 0.35% of assets, from $37.7 million, or 0.20%, at September 30. Nonaccrual loans increased to $58.4 million from $29.1 million; total loan delinquencies rose to 0.52% from 0.24%.
- The allowance for loan losses was $170.2 million and the reserve for unfunded commitments was $26.5 million. Management said the $196.7 million combined allowance, equal to 1.33% of gross loans, was sufficient for estimated losses. Substandard loans were $595.7 million, versus $408.6 million at September 30.
Outlook, risks and other notable items
- The filing provides no specific earnings or revenue guidance. Management’s interest-rate modeling estimated that an immediate parallel 200-basis-point rate increase would raise next-year net interest income by 6.4%; this is a model scenario, not guidance. The filing cautions that actual results may differ and does not provide a comparable estimate for falling rates.
- COVID-19 and its uncertain economic effects remain key risks. At quarter-end, 183 residential mortgage loans totaling $46 million and 10 commercial loans totaling $32 million remained in payment deferral. The company reported assisting more than 6,500 businesses with over $780 million in PPP loans during 2020.
- The Bank’s key risks include borrower repayment and real-estate collateral values, interest-rate and market risk, liquidity and funding, and regulatory and compliance matters. The filing specifically identifies ongoing BSA and HMDA remediation and related consent-order risks.
- The company paid a $0.22-per-share quarterly dividend and declared a $0.23 dividend for payment in February 2021. It repurchased 32,956 shares during the quarter; the Board authorized an additional 10 million shares for repurchase on January 26, 2021.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course legal proceedings were not expected to have a material financial-statement effect.
Important facts for investors to verify
- Reconcile the PPP loan balance: the filing gives $646.9 million in several notes and loan tables, but MD&A cites $634.9 million in one discussion and $646.9 million elsewhere.
- Track whether the increases in nonaccrual, delinquent and substandard loans persist, especially in commercial real estate and commercial and industrial lending, and how they affect provisions and the allowance.
- Monitor margin trends and the earnings impact of low-yielding cash, PPP loans, deposit pricing and changing rates; assess the assumptions behind the interest-rate sensitivity models.
- Follow payment-deferral performance, COVID-19-related borrower conditions, and the Bank’s BSA and HMDA remediation and regulatory status.
- Assess the effects of deposit growth, available liquidity, FHLB borrowing and the expanded share-repurchase authorization on capital and funding flexibility.