Washington Federal, Inc. (WaFd) — Q1 FY2017 Form 10-Q
Business and period: Bank holding company principally engaged in residential, construction, multifamily, commercial real estate and commercial-and-industrial lending, funded by customer deposits and borrowings. Unaudited quarter ended December 31, 2016; comparisons are with the quarter ended December 31, 2015 unless noted. Amounts below are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q1 FY2017 / Dec. 31, 2016 | Comparable / prior date |
|---|---|---|
| Net interest income | $103.2 | $106.9 |
| Net interest margin | 3.02% | 3.18% |
| Net income | $41.2 | $35.1 |
| Diluted EPS | $0.46 | $0.38 |
| Net interest spread | 2.73% | 2.72% at Dec. 31, 2015 |
| Cash and cash equivalents | $398.8 | $450.4 at Sept. 30, 2016 |
| Total assets | $14,873.7 | $14,888.1 at Sept. 30, 2016 |
| Net loans | $10,136.3 | $9,910.9 at Sept. 30, 2016 |
| Customer deposits | $10,647.6 | $10,600.9 at Sept. 30, 2016 |
| FHLB advances | $2,080.0 | Unchanged from Sept. 30, 2016 |
| Stockholders’ equity | $1,999.6; 13.44% of assets | $1,975.7; 13.27% at Sept. 30, 2016 |
Cash flow: Operating cash flow was $41.9, versus $68.1 a year earlier. Investing used $92.4, versus $118.2; financing used $0.9, compared with $72.1 provided in the prior-year quarter. Cash declined $51.5 during the quarter to $398.8.
Credit and capital: Allowance for loan losses was $118.5; including the $4.9 reserve for unfunded commitments, total reserves were $123.4, or 1.09% of gross loans. Nonaccrual loans were $60.7 and nonperforming assets were $83.4, or 0.56% of assets. Delinquencies rose to 0.74% of loans from 0.68% at September 30. The filing reports the Company’s common equity tier 1 ratio at 17.94% and the Bank’s at 17.50%.
Material changes and management commentary
- Net income increased 17.5%, although net interest income fell 3.5% and net interest margin declined 16 basis points. Management attributed margin pressure to lower earning-asset yields—particularly on new loans and mortgage-backed securities—and a 3-basis-point increase in the cost of interest-bearing liabilities.
- Other expense fell $10.2, or 15.8%, primarily because the prior-year quarter included approximately $6.6 of costs associated with the November 2015 core-systems conversion; product delivery costs also declined.
- Gross loans increased $378.0, or 3.5%, from September 30. Growth was concentrated in construction, multifamily and commercial real estate; management said it was pursuing shorter-duration or adjustable-rate lending in the low-rate environment.
- Available-for-sale securities declined $481.0, while held-to-maturity securities increased $334.4, reflecting $350.9 of AFS sales and $415.7 of HTM purchases. The company recorded a $968 gain on investment-security sales.
- Provision for loan losses was zero, as recoveries net of charge-offs of $5.3 offset reserve needs from loan growth. Nonaccrual loans increased $18.3 from September 30, including a rise in commercial-and-industrial nonaccrual loans.
Outlook, risks and notable items
- No earnings or revenue guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
- Interest-rate exposure is notable: modeled net interest income rises 1.7% under an immediate parallel 200-basis-point rate increase, but estimated net portfolio value falls 24.7%. A flattening yield curve could reduce net interest income; a negative one-year repricing gap of 15.3% of assets means funding costs may reprice faster than asset yields.
- Fixed-rate securities face valuation sensitivity. At December 31, held-to-maturity mortgage-backed securities had a $28.9 net unrealized loss; AFS securities had a $2.4 net unrealized loss. Management said it did not intend to sell impaired securities and did not expect to be required to sell them before recovery.
- Loans in process and unused credit lines totaled $1,448.9, up from $1,278.8 at September 30. The Bank cited an FHLB credit line equal to 48.7% of total assets as additional potential liquidity; actual availability is subject to borrowing terms and collateral requirements.
- Management identified economic conditions, interest rates, deposit flows, funding costs, loan demand and portfolio quality, competition, regulation and accounting changes among risks. It reported effective disclosure controls and no material change in internal control over financial reporting.
- After quarter-end, the company declared a regular $0.15-per-share dividend and a special $0.25-per-share dividend, payable February 10, 2017. It repurchased 757,768 shares during the quarter at an average $26.90 per share.
Important facts for investors to verify
- Whether the decline in net interest margin persists and how deposit and borrowing costs respond to rate changes.
- Drivers and subsequent trends in nonaccrual loans, delinquencies and reserves, especially commercial-and-industrial exposures.
- Actual deposit and loan growth, liquidity availability and funding mix compared with modeled or stated capacity.
- Interest-rate scenario assumptions behind the reported 24.7% NPV decline and their implications for economic value and earnings.
- Whether lower operating expenses are sustainable after the prior-year systems-conversion costs roll off.
- Capital, liquidity and share-repurchase capacity after the declared special dividend and further capital returns.