WAFD Inc. (Washington Federal, Inc.) — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 31, 2020; fiscal year ends September 30. The bank serves consumers and businesses across eight western and southwestern states. All amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 / March 31, 2020 | Comparison |
|---|---|---|
| Net income | $38.0 million; diluted EPS $0.49 | Quarter net income was $51.1 million and EPS $0.63 in Q2 2019 |
| Six-month net income | $103.7 million; diluted EPS $1.33 | $104.0 million and $1.28 in prior-year period |
| Net interest income | $117.6 million for quarter; $237.3 million for six months | Down 2.0% and 0.8%, respectively, year over year |
| Net interest margin | 3.10% for quarter; 3.12% for six months | 3.15% and 3.18%, respectively, in comparable periods |
| Assets / net loans | $17.38 billion / $11.97 billion | Assets rose $900.7 million from Sept. 30, 2019; net loans rose $43.7 million |
| Deposits / FHLB advances | $12.09 billion / $3.05 billion | Deposits rose $97.7 million and advances rose $800 million from Sept. 30, 2019 |
| Cash and equivalents | $1.50 billion | Up $1.08 billion from Sept. 30, 2019 |
| Shareholders’ equity | $1.99 billion, or 11.43% of assets | Down from $2.03 billion, or 12.34%, at Sept. 30, 2019 |
Quarterly interest income was $159.6 million and interest expense $42.0 million. Six-month operating cash flow was $51.6 million, versus $108.9 million a year earlier. Investing activities provided $302.7 million, while financing activities provided $722.2 million. The cash build reflected, in part, $800 million more FHLB advances outstanding. The company repurchased 2.42 million shares in the quarter for $78.6 million and paid $33.4 million of dividends during the six-month period.
Material changes and notable items
- Q2 earnings declined as net interest income fell, credit-loss provision increased, and operating expenses rose. The $6.2 million quarterly provision compared with $0.75 million a year earlier; the six-month provision was $5.2 million versus $0.25 million.
- Other income included a $15.0 million gain on sales of available-for-sale securities, partly offset by a $13.8 million penalty for early repayment of a $200 million FHLB advance. For the six months, other income also reflected a $32.6 million gain on sales of fixed assets. Six-month expenses included a $5.9 million impairment charge on systems hardware and software.
- Net interest margin compression reflected lower yields on earning assets. For the quarter, earning-asset yield was 4.22% versus 4.45% a year earlier, while the cost of interest-bearing liabilities was 1.19% versus 1.36%.
- Gross loans increased 0.9% from September 30, 2019. Construction, commercial real estate, and commercial and industrial balances grew; single-family residential loans declined.
- The company reclassified $374.7 million of mortgage-backed securities from held-to-maturity to available-for-sale under adopted accounting guidance. This contributed to the change in reported securities balances.
- Shareholders’ equity declined principally due to share repurchases, dividends, and an $8.8 million six-month other comprehensive loss, partly offset by net income.
Liquidity, capital, credit and outlook
- Cash was $1.50 billion at March 31. Management cited access to FHLB borrowing capacity, subject to collateral eligibility, and Federal Reserve primary credit as additional liquidity sources. The company’s reported capital ratios remained above stated minimums: company common equity Tier 1 13.62%, total risk-based capital 14.82%, and Tier 1 leverage 10.42%.
- Credit metrics at March 31 included a $139.5 million loan-loss allowance, plus an $8.5 million reserve for unfunded commitments. Non-performing assets were $41.4 million, or 0.24% of assets, versus $43.8 million, or 0.27%, at September 30. Non-accrual loans were $32.6 million; delinquent loans were 0.33% of total loans versus 0.29% at September 30.
- Management attributed the increased provision primarily to expected COVID-19 effects on energy, hospitality, restaurant, and senior-living borrowers. It was offering payment deferrals; at March 31, 133 mortgage loans totaling $45 million and seven commercial loans totaling $11 million had been modified. By May 4, the company had assisted more than 5,000 businesses with over $700 million of Paycheck Protection Program loans.
- Management estimated that CECL adoption could require an allowance for loans and unfunded commitments of approximately $176 million, or 1.31% of gross loans, based on March 31 balances. Adoption was required by October 1, 2020; early adoption was under evaluation, and the final amount and retained-earnings impact could differ.
- No earnings or revenue guidance is provided. Interest-rate modeling estimated that an immediate, parallel 200-basis-point increase would raise next-year net interest income 1.9%; a gradual two-year rise of 300 basis points short-term and 100 basis points long-term was estimated to reduce first-year NII 0.3% and increase second-year NII 0.2%, assuming a constant balance sheet and no management action. These are model estimates, not forecasts.
- Key risks include COVID-19 duration and economic effects, borrower credit quality and collateral values, interest-rate and LIBOR-transition risk, liquidity and funding access, and regulatory matters. The filing notes a continuing CFPB consent order concerning HMDA reporting and possible further enforcement. Management said ordinary-course legal proceedings were not expected to have a material financial-statement effect.
Important facts for investors to verify
- How COVID-related payment deferrals, PPP exposure, and sector concentrations develop, and whether credit-loss provisions and delinquencies rise.
- The assumptions, timing, and final retained-earnings effect of CECL adoption; compare the estimated $176 million CECL allowance with the existing $148.0 million combined loan and unfunded-commitment reserves.
- Whether elevated cash and funding costs persist, including the level and pricing of FHLB advances and the bank’s available collateral-backed liquidity.
- Whether earnings can absorb margin pressure, higher operating costs, and unusual gains or charges; distinguish recurring performance from securities and fixed-asset sales and the debt prepayment penalty.
- Developments in CFPB HMDA compliance and any additional regulatory action, along with changes in capital ratios, repurchases, and dividends.