Business context and reporting period
Washington Federal, Inc. (WaFd Bank) is a Seattle-based bank holding company providing lending, deposit, insurance and related services through 232 branches across eight states. This Form 10-Q covers the fiscal second quarter and six months ended March 31, 2021; balance-sheet comparisons are with September 30, 2020. Financial amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Financial performance and position
- Quarter ended March 31: Net interest income was $124.0 million, up from $117.6 million a year earlier. Net income was $44.9 million versus $36.4 million; net income available to common shareholders was $42.1 million, or $0.56 per diluted share, compared with $36.4 million, or $0.47.
- Six months ended March 31: Net interest income was $244.5 million versus $237.3 million. Net income was $83.8 million versus $104.2 million; net income available to common shareholders was $81.1 million, or $1.07 per diluted share, versus $104.2 million, or $1.34.
- Margins: Net interest margin was 2.75% for both the quarter and six-month period, down from 3.10% and 3.13%, respectively, in the comparable prior-year periods. For the quarter, the yield on earning assets fell to 3.30% from 4.22%, while the cost of interest-bearing liabilities fell to 0.65% from 1.35%.
- Assets and lending: Total assets were $19.53 billion, up $739.5 million from fiscal year-end. Net loans were $13.04 billion, up $243.1 million; gross loans rose 5.5%. Commercial loans increased 15.0% and grew to 61.5% of gross loans, while consumer loans declined 6.8%. The portfolio included $711.4 million of PPP loans.
- Credit quality: The allowance for loan losses was $172.7 million; including the $26.5 million reserve for unfunded commitments, total allowance for credit losses was $199.2 million, or 1.30% of gross loans. Nonperforming assets were $48.9 million, or 0.25% of assets, versus $37.7 million, or 0.20%, at September 30. Nonaccrual loans were $40.0 million and delinquencies were 0.29% of loans, compared with 0.24% at fiscal year-end.
- Liquidity and funding: Cash and cash equivalents were $2.32 billion, up $615.5 million. Deposits increased 7.5% to $14.82 billion, with transaction accounts up 14.5% and time deposits down 9.6%. FHLB advances declined to $2.15 billion from $2.70 billion. Shareholders’ equity was $2.33 billion, or 11.94% of assets; tangible capital to tangible assets was 10.53%.
- Capital: At March 31, the Bank’s common equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 12.58%, 12.58%, 13.83% and 9.04%, respectively. The filing reports the Bank exceeded the listed well-capitalized thresholds.
- Cash flow, six months: Operating activities provided $204.8 million; investing activities used $236.2 million; financing activities provided $646.9 million. Cash increased $615.5 million to $2.32 billion.
Material changes versus comparable periods
- Quarterly net income improved year over year, despite lower net interest margin; lower deposit and borrowing costs and growth in average earning assets supported net interest income.
- Six-month net income declined year over year. The prior-year period included a $30.7 million net gain from fixed-asset sales, while 2021 also had lower other income overall.
- Credit-loss provision was zero for the March 2021 quarter versus $8.2 million in the prior-year quarter; six-month provision was $3.0 million versus $4.45 million.
- Quarterly other income included a $14.1 million gain from partial termination of a borrowing hedge, largely offset by a $13.8 million loss on early repayment of fixed-rate FHLB debt.
- The company issued Series A preferred stock in February, receiving $293.3 million net. It repurchased 2.82 million common shares during the quarter at an average $31.53 per share, including shares tendered in a modified Dutch auction. Common dividends were $0.23 per share; a further $0.23 dividend was declared for payment in May.
Outlook, management commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said deposit growth had created excess liquidity and reduced the need for FHLB borrowing. Its strategy included growing transaction deposits and, in the low-rate environment, emphasizing shorter-duration or adjustable-rate lending.
- Management’s interest-rate model estimated that an immediate parallel 200-basis-point rate increase would raise next-year net interest income 9.9%, compared with 3.4% at September 30, 2020. A separate gradual-rate scenario estimated increases of 1.4% in year one and 4.9% in year two. These are model estimates based on stated assumptions, not forecasts; the company did not provide a modeled falling-rate estimate.
- COVID-19 effects remain uncertain. At March 31, 45 mortgage loans totaling $14 million and 10 commercial loans totaling $89 million remained in payment deferral. The company reported $549.3 million of loans classified as substandard despite being less than 90 days delinquent; if treated as nonperforming, its ratio of nonperforming assets plus performing restructured loans to assets would have been 3.45%.
- Forward-looking risks include economic deterioration, borrower and collateral weakness, pandemic effects, interest-rate and LIBOR-transition risks, regulation, and the availability and cost of funding. The filing also identifies ongoing BSA-program and HMDA-compliance remediation risks, including possible additional costs or regulatory action. Management considered ordinary-course legal proceedings immaterial to the financial statements.
Important facts for investors to verify
- Whether the increase in nonaccrual loans, criticized/substandard exposures and delinquencies persists, and how deferral loans perform after scheduled payments resume.
- Whether loan growth and changing commercial/consumer mix affect credit losses, funding needs and interest-rate sensitivity.
- How sustained low rates, cash balances and low-yield PPP lending affect net interest margin and earnings; compare realized results with management’s model scenarios.
- The effect of the preferred issuance, share repurchases and dividends on common earnings per share, capital and future distributions.
- Progress and any developments in BSA and HMDA remediation or related regulatory matters.