Washington Federal, Inc. — Form 10-Q Summary
Business context and reporting period
Washington Federal, Inc. is a bank holding company operating through Washington Federal, National Association. Its business includes residential, construction, multifamily, commercial real estate and commercial and industrial lending, funded primarily by customer deposits and borrowings. This unaudited report covers the quarter and nine months ended June 30, 2018; the company’s fiscal year ends September 30.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Interest income | $155.1 million | $449.9 million |
| Net interest income | $119.9 million | $352.9 million |
| Net interest margin | 3.29% | 3.27% |
| Provision for loan losses | $1.0 million | $0.05 million |
| Net income | $51.4 million | $152.3 million |
| Diluted earnings per share | $0.61 | $1.78 |
At June 30, 2018, total assets were $15.77 billion; net loans were $11.33 billion; customer accounts were $11.29 billion; FHLB advances were $2.37 billion; and stockholders’ equity was $1.99 billion. Cash and cash equivalents were $345.9 million. For the nine-month period, operating cash flow was $140.3 million, investing cash outflow was $504.4 million, financing cash inflow was $397.0 million, and cash increased by $32.8 million.
Net worth was 12.60% of total assets, and tangible capital to tangible assets was 10.83%. The Bank’s regulatory capital ratios were 14.74% common equity Tier 1, 14.74% Tier 1 risk-based, 15.94% total risk-based and 10.75% Tier 1 leverage, exceeding the stated well-capitalized benchmarks.
Changes versus comparable periods
- Quarterly net income rose to $51.4 million from $44.1 million; nine-month net income increased to $152.3 million from $127.4 million. Diluted EPS was $0.61 versus $0.49 for the quarter and $1.78 versus $1.42 for nine months.
- Quarterly net interest income increased $11.2 million year over year; nine-month net interest income increased $33.4 million. Quarterly NIM improved to 3.29% from 3.13%; nine-month NIM rose to 3.27% from 3.10%.
- Net loans grew $443.3 million, or 4.1%, from September 30, 2017. Gross loans grew 4.4%, with construction loans increasing 18.0%. Deposits increased $452.5 million, or 4.2%; FHLB advances increased $145 million.
- Non-accrual loans increased to $60.6 million from $49.6 million, although delinquent loans remained 0.40% of loans. Non-performing assets were $71.9 million, or 0.46% of assets, broadly unchanged as a percentage from September 2017.
- Other expenses rose 17.4% for the quarter and 15.3% for nine months, including higher BSA-compliance and technology spending. Equity declined $19.4 million from September 2017, reflecting dividends and $136.9 million of treasury-stock purchases, partly offset by earnings.
Outlook, commentary, risks and unusual items
- Management estimated fiscal 2018’s annual effective tax rate at approximately 21%, including discrete tax benefits. Nine-month tax expense included a $5.4 million benefit from remeasuring deferred taxes following the federal corporate tax-rate reduction.
- The company incurred $4.9 million of BSA-program enhancement expense in the quarter and expected a further $10 million of non-recurring costs over the next four quarters; after the program stabilizes, quarterly BSA costs were expected to be about $2 million. The OCC issued a Consent Order on February 28, 2018. The Bank said it did not expect to pursue acquisitions or branch expansion until its BSA program improves. Noncompliance could lead to further restrictions, penalties or costs.
- The Bank terminated its remaining FDIC loss-share agreements in May 2018, paying $39.9 million to settle the clawback liability. The filing states that future gains, losses, recoveries and expenses on the previously covered assets will be borne entirely by the Bank. Nine-month other income included an $8.55 million FDIC-related valuation charge.
- Management’s interest-rate model estimated that an immediate parallel 200-basis-point rate increase would reduce next-year net interest income by 1.2%. The same scenario was estimated to reduce net portfolio value by 19.3%, or $413.5 million. Results depend on modeling assumptions and management actions.
- At June 30, the company reported net unrealized losses of $60.4 million on held-to-maturity securities and $8.7 million on available-for-sale securities, primarily attributed to interest-rate changes. Management stated it did not intend, and did not consider it more likely than not it would be required, to sell the securities before recovery of amortized cost.
- The allowance for loan losses plus the reserve for unfunded commitments totaled $135.4 million, or 1.06% of gross loans; management considered this sufficient. The filing also identifies economic, real-estate, borrower-credit, interest-rate, regulatory, cybersecurity and technology risks. Loans in process and unused lines of credit totaled $2.16 billion.
Important facts for investors to verify
- Whether non-accrual loan growth, including commercial and industrial exposures, continues and affects credit costs or reserve adequacy.
- Progress, remaining costs and regulatory status of the BSA Consent Order, including whether it constrains growth or triggers additional action.
- Deposit pricing, borrowing costs and realized margin performance as interest rates change, compared with the filing’s sensitivity estimates.
- Whether the FDIC loss-share termination and $39.9 million settlement leave any material remaining obligations or credit exposure.
- How much earnings benefited from the tax-rate change and discrete tax items, and whether the estimated approximately 21% fiscal-year tax rate is achieved.
- Whether continued share repurchases and dividends remain consistent with capital needs, liquidity and the company’s growth plans.