Business context and reporting period
Washington Federal, Inc. is a bank holding company operating through Washington Federal, National Association, with residential, construction, commercial real estate and commercial lending and deposit businesses. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended June 30, 2017; balance-sheet comparisons are to September 30, 2016. Amounts below are in U.S. dollars.
Financial performance and condition
- Profitability: Third-quarter net income was $44.1 million, up from $43.0 million a year earlier; diluted EPS was $0.49 versus $0.47. Nine-month net income was $127.4 million versus $119.8 million; diluted EPS was $1.42 versus $1.30.
- Net interest: Quarterly net interest income rose to $108.6 million from $104.2 million, and net interest margin increased to 3.13% from 3.07%. Nine-month net interest income was $319.5 million versus $317.4 million; margin was 3.10% versus 3.14%.
- Other income and expenses: Nine-month other income was $36.0 million versus $31.9 million, while other expense declined 6.2% to $168.9 million. The nine-month effective tax rate was 32.67%, compared with 34.45%.
- Assets and loans: Total assets were $15.08 billion, up $195.9 million from September 30, 2016. Net loans increased 7.5% to $10.65 billion; gross loans grew 8.5% to $11.88 billion. Growth was concentrated in construction, commercial real estate, multifamily and commercial and industrial lending.
- Deposits, borrowings and liquidity: Customer accounts were $10.63 billion, up 0.3%; FHLB advances were $2.28 billion, up from $2.08 billion. Cash and cash equivalents declined to $359.3 million from $450.4 million. The company cited an FHLB credit line equal to 48% of total assets as an additional liquidity source.
- Cash flow: For the nine months, operating activities provided $122.4 million, investing activities used $332.2 million, and financing activities provided $118.7 million. Cash declined by $91.1 million to $359.3 million.
- Capital and shareholder returns: Stockholders’ equity was $2.02 billion, or 13.40% of assets; tangible capital to tangible assets was 11.67%. The Bank’s capital ratios exceeded the reported well-capitalized thresholds. The company paid $61.3 million in dividends and repurchased $46.5 million of stock during the nine months; the quarterly dividend was $0.15 per share.
Material changes versus comparable periods
- Loan growth and a shift from cash and securities toward higher-yielding loans supported quarterly net interest income and margin. Nine-month margin, however, declined year over year, which management attributed primarily to lower yields on new originations than on loans repaid.
- Available-for-sale securities declined $652.5 million from September 2016, while held-to-maturity securities increased $233.9 million. The portfolio included $1.65 billion of held-to-maturity mortgage-backed securities and $1.27 billion of available-for-sale securities.
- Nonperforming assets rose to $75.5 million, or 0.50% of assets, from $71.4 million, or 0.48%. Nonaccrual loans increased to $56.4 million from $42.4 million, including commercial real estate loans of $13.0 million versus $7.1 million and commercial and industrial loans of $8.3 million versus $0.6 million. Total delinquent loans improved to 0.50% from 0.68% of loans.
- Other expense fell year over year for the nine-month period, partly because the prior-year period included about $6.6 million of core-system conversion costs and because product delivery expenses declined with system and process efficiencies. Gains on real estate owned were also lower than in the prior-year period.
Outlook, risks and unusual items
- No earnings or growth guidance is provided. Management reported that it had reduced interest-rate risk relative to historical norms by growing shorter-term loans and transaction deposits and extending borrowing maturities.
- In a modeled immediate parallel 200-basis-point rate increase, net interest income was estimated to rise 2.0% over the next year, while net portfolio value was estimated to fall $432.6 million, or 17.4%. Management cautioned that a flattening yield curve could reduce net interest income; model results rely on assumptions and a constant balance sheet.
- The company entered an all-stock merger agreement with Anchor Bancorp, announced April 11, 2017, with consideration valued at approximately $63.9 million. Closing was expected in the fourth calendar quarter of 2017, subject to regulatory and shareholder approvals and customary conditions.
- Management stated that the $122.2 million loan-loss allowance plus the $6.6 million reserve for unfunded commitments, totaling $128.8 million or 1.08% of gross loans, was sufficient for estimated inherent losses. Nonaccrual loans and commercial credit exposure remain important asset-quality items to monitor.
- Other notable items include $5.0 million of bank-owned life insurance gains for the nine months and a $968,000 gain on securities sales. The nine-month loan-loss provision was a $1.6 million release. The filing identifies general economic, regulatory, interest-rate, deposit-flow, funding-cost, credit-quality and competitive risks; it reports no material legal proceedings and no material change in risk factors from the 2016 Form 10-K.
Important facts for investors to verify
- Track whether the increase in nonaccrual commercial real estate and commercial and industrial loans leads to further losses, provisions or charge-offs.
- Review loan-growth quality and concentrations, particularly construction, commercial real estate and commercial and industrial lending, alongside the reserve for unfunded commitments.
- Confirm Anchor Bancorp merger approvals, closing timing, final consideration and integration effects.
- Monitor net interest margin, deposit costs, FHLB borrowing levels and actual performance against the filing’s interest-rate sensitivity assumptions.
- Assess the sustainability of earnings contributions from bank-owned life insurance gains, securities transactions, lower expenses and loan-loss recoveries.