Washington Federal, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. The company is a bank holding company operating through Washington Federal Bank, focused on deposits, commercial and consumer lending, and related banking services. Figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Net interest income | $121.7; up 1.5% year over year | $360.9; up 2.3% |
| Net income | $53.9; up 4.8% | $157.9; up 3.6% |
| Diluted earnings per share | $0.67, versus $0.61 | $1.95, versus $1.78 |
| Net interest margin | 3.18%, versus 3.29% | 3.18%, versus 3.27% |
| Dividends per common share | $0.20, versus $0.17 | $0.58, versus $0.49 |
- Balance sheet at June 30: Total assets were $16.47 billion, up $602.8 million from September 30, 2018. Net loans were $11.97 billion, up $497.5 million; customer deposits were $11.80 billion, up $413.0 million.
- Funding and liquidity: Cash and cash equivalents were $289.8 million. FHLB advances were $2.505 billion, up $175 million since September 30. The bank also has access to an FHLB credit line, subject to collateral eligibility, and the Federal Reserve’s primary credit program.
- Cash flows, nine months: Operating activities provided $168.7 million, investing activities used $562.3 million, and financing activities provided $414.8 million. Cash increased $21.2 million to $289.8 million.
- Capital: Stockholders’ equity was $2.013 billion, or 12.22% of assets; tangible capital to tangible assets was 10.54%. Bank regulatory ratios exceeded the disclosed minimum well-capitalized levels.
- Credit quality: Non-performing assets were $51.1 million, or 0.31% of assets, versus $70.1 million, or 0.44%, at September 30, 2018. Non-accrual loans declined to $41.0 million from $55.7 million; delinquencies were 0.35% of loans versus 0.42%.
Material changes versus comparable periods
- Net interest income rose, but net interest margin narrowed as higher asset yields were more than offset by faster increases in deposit and other funding costs. For the quarter, the yield on earning assets increased to 4.50% from 4.26%, while the cost of interest-bearing liabilities rose to 1.40% from 1.04%.
- Loans grew 3.5% from September 30. Management said the portfolio strategy emphasizes construction, multifamily, commercial real estate, and commercial and industrial lending, which generally have adjustable rates or shorter duration. Commercial loan originations represented 73% of originations during the nine months.
- Other expense rose $3.9 million for the quarter and $15.8 million year to date. Management attributed increases principally to compensation and benefits, staffing, occupancy, technology, and Bank Secrecy Act (BSA) program enhancements.
- Year-to-date other income increased $14.0 million, including a $6.4 million gain associated with the sale and valuation adjustments of fixed assets in the December 2018 quarter. The comparison period included $8.6 million of FDIC loss-share valuation expense.
- The company repurchased 1.06 million shares during the quarter at an average $32.45 per share. It paid $46.7 million in dividends and spent $103.9 million on treasury-stock purchases during the nine months.
Outlook, risks, and notable items
- The filing provides no specific earnings or growth guidance. Management describes an aim to grow market share and earnings through investment in people, process, and technology.
- Management estimated that an immediate parallel 200-basis-point rate increase would reduce next-year net interest income by 1.7%. A separate scenario of gradual short-rate increases over two years estimated NII declines of 1.1% in year one and 5.1% in year two, assuming a constant balance sheet and no management intervention. These are model estimates, not forecasts.
- In the same immediate +200-basis-point scenario, estimated net portfolio value would decline 17.3%, or $410.3 million; the NPV-to-assets ratio would fall to 12.6% from 14.2%. Management said its rate-risk measures improved from September 2018.
- Key stated risks include economic and real-estate deterioration, borrower credit quality and collateral values, interest-rate changes, access to financing, regulatory and competitive factors, and execution of BSA remediation. The filing identifies potential for higher-than-anticipated BSA enhancement costs or regulatory action beyond the contemplated Consent Order.
- The allowance for loan losses was $134.0 million; together with the $6.25 million reserve for unfunded commitments, management considered total reserves of $140.3 million, or 1.05% of gross loans, sufficient. Adoption of the expected-credit-loss standard (CECL) was still under evaluation; management said the allowance may increase, but had not quantified the impact.
- A one-time tax benefit from resolving a previously unrecognized tax position reduced the nine-month effective tax rate to 20.03%. The company declared a subsequent quarterly dividend of $0.21 per share, payable August 23, 2019.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. Ordinary-course legal proceedings were not considered material to the consolidated financial statements.
Important facts for investors to verify
- Whether loan growth and the shift toward commercial and construction lending change concentration, underwriting, or reserve risk.
- Whether deposit-cost increases continue to outpace asset-yield gains and further pressure net interest margin.
- Actual loss-reserve impact and transition assumptions when CECL is adopted.
- Progress, costs, and any regulatory developments related to the BSA program and Consent Order.
- How rate sensitivity, including the disclosed NII and NPV scenarios, evolves with balance-sheet growth, deposit repricing, and prepayments.
- Sustainability of earnings excluding the one-time tax benefit and the fixed-asset-related gain, alongside ongoing expense growth and share repurchases.