Washington Federal, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016; comparative results are for the periods ended March 31, 2015. Washington Federal is a bank holding company focused on residential mortgage and construction lending, commercial real estate, multifamily, commercial and industrial, and other loans. Financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Net interest income | $106.3 million, versus $103.9 million | $213.2 million, versus $206.1 million |
| Net interest margin | 3.16%, versus 3.10% | Not stated clearly for the six-month period |
| Net income | $41.7 million, versus $40.4 million | $76.8 million, versus $78.8 million |
| Diluted EPS | $0.45, versus $0.42 | $0.83, versus $0.81 |
| Dividends per share | $0.14, versus $0.13 | $0.27, versus $0.28 |
At March 31, 2016, total assets were $14.67 billion, net loans were $9.55 billion, customer deposits were $10.54 billion, FHLB advances were $1.98 billion, and stockholders’ equity was $1.96 billion. Cash and cash equivalents were $276.1 million. Loans grew 4.1% from September 30, 2015, while deposits declined 0.8% and borrowings increased $150 million.
For the six months, operating cash flow was $135.5 million, investing cash outflow was $115.1 million, and financing cash outflow was $28.4 million; cash declined $8.0 million to $276.1 million. The company reported net worth of 13.38% of assets and tangible capital to tangible assets of 11.58%. Bank regulatory capital ratios exceeded the disclosed well-capitalized thresholds.
Material changes and credit quality
- Net interest income increased year over year, supported by higher average earning assets and a slightly higher earning-asset yield; the quarter’s margin rose six basis points.
- Six-month net income declined despite higher net interest income, primarily alongside increased operating expenses and a smaller loan-loss reserve release. Six-month other expense rose to $123.7 million from $110.9 million.
- Loans shifted toward commercial lending: construction loans rose substantially and commercial and industrial loans increased 31.4% from September 30, while commercial real estate and multifamily balances declined. Management said the mix shift reflected a strategy to grow adjustable-rate or shorter-duration lending.
- Nonperforming assets fell to $93.3 million, or 0.64% of assets, from $128.6 million, or 0.88%, at September 30. Nonaccrual loans declined to $54.6 million from $67.8 million. Delinquent loans were 0.90% of loans, versus 0.88% at September 30; none were over 90 days delinquent and still accruing.
- The allowance for loan losses was $109.9 million; including the $3.1 million reserve for unfunded commitments, reserves totaled $113.0 million, or 1.10% of gross loans. Management considered this adequate. The company recorded a $1.5 million allowance release in the six-month period, versus a $9.4 million release a year earlier.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management expected the lower effective tax rate to continue, citing bank-owned life insurance, low-income housing tax-credit investments, and tax-free loans.
- Interest-rate exposure remains material. Under the company’s model, an immediate parallel 200-basis-point rate increase would raise next-year net interest income by an estimated 1.4%, compared with a 2.2% decrease in the September 2015 analysis. The same scenario was estimated to reduce net portfolio value by $494.0 million, or 18.73%. These are model estimates, not forecasts; management cautioned that a flattening yield curve could pressure income.
- The one-year repricing gap was negative 12.7% of assets, meaning liabilities reprice or mature faster than assets and funding costs may rise more rapidly if rates increase. Management described steps to reduce rate risk, including growing shorter-term business loans and transaction deposits and extending borrowing maturities.
- Information-technology expense increased as a result of systems implemented in November 2015. Management attributed $6.6 million of six-month expense to the core-system conversion and said the systems should support future growth.
- Six-month other income was higher than the prior year, partly because the prior-year period included a $2.6 million FHLB prepayment charge and a $2.0 million FDIC indemnification-asset write-down. The current period also included $5.3 million of net gains on real estate owned for six months.
- Share repurchases totaled 1.64 million shares at an average $21.05 during the quarter; 2.14 million shares remained authorized. The company reported paying dividends and repurchasing shares equal to 90% of fiscal-year-to-date earnings.
- Loans in process and unused lines of credit, the reported material off-balance-sheet credit exposures, totaled $929.0 million. Management identified general economic conditions, interest rates, deposit flows, funding costs, loan demand, credit quality, regulation, competition, and technology as risks. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Whether commercial and construction loan growth is sustainable and whether concentration or underwriting risks change as the portfolio mix shifts.
- Whether improving nonperforming-asset trends continue, and whether the allowance remains adequate relative to portfolio growth, delinquencies, and the $929.0 million of off-balance-sheet exposures.
- How deposit costs, borrowing costs, and net interest margin respond to rate changes, particularly given the negative repricing gap and disclosed NPV sensitivity.
- Whether technology-conversion costs subside as management expects, and whether the new systems deliver the anticipated operating benefits.
- Capital and shareholder distributions: confirm the effect of dividends and repurchases on capital ratios as regulatory buffers phase in.
- Management’s interest-rate, liquidity, and capital assumptions are estimates; actual results may differ. The filing states that interim results are not necessarily indicative of full-year results.