Washington Federal, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. Washington Federal is a bank holding company operating through its federally insured national bank subsidiary; its principal business is taking deposits and making residential, construction, commercial real estate, and other loans. Financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Interest income | $133.7 million | $403.9 million |
| Net interest income | $104.2 million | $317.4 million |
| Provision for loan losses | Release of $1.7 million | Release of $3.2 million |
| Net income | $43.0 million | $119.8 million |
| Diluted earnings per share | $0.47 | $1.30 |
| Net interest margin | 3.07% | Not stated as a nine-month figure |
| Operating cash flow | Not reported separately | $169.5 million provided |
- At June 30, total assets were $14.82 billion, net loans $9.63 billion, customer deposits $10.58 billion, FHLB advances $2.08 billion, and stockholders’ equity $1.96 billion.
- Cash and cash equivalents were $530.1 million. The company reported a $2.6 million net use of cash in investing activities and $79.1 million provided by financing activities for the nine-month period; cash increased by $246.0 million overall.
- Nonperforming assets were $79.0 million, or 0.53% of assets; nonaccrual loans were $47.3 million. The allowance for loan losses was $111.0 million, and the reserve for unfunded commitments was $3.2 million. Management stated the combined $114.3 million reserve, 1.08% of gross loans, was sufficient for estimated inherent losses.
- Company capital ratios were 17.96% common equity tier 1, 17.96% tier 1 risk-based, 19.19% total risk-based, and 11.61% tier 1 leverage. The Bank’s ratios exceeded the filing’s stated well-capitalized thresholds.
Material changes versus comparable periods
- Quarterly net income rose from $39.1 million to $43.0 million; nine-month net income increased from $117.8 million to $119.8 million. Quarterly diluted EPS rose from $0.41 to $0.47; nine-month diluted EPS increased from $1.22 to $1.30.
- Net interest income increased 3.7% for the quarter and 3.5% for nine months versus the prior-year periods. Quarterly net interest margin rose to 3.07% from 3.02%, primarily as the earning-asset mix shifted toward loans.
- Net loans increased 5.0% from September 30, 2015. Gross loans rose 7.6%, including substantial growth in construction and commercial and industrial lending; single-family residential and commercial real estate balances declined. Investment securities fell by $561.4 million, while cash increased by $246.0 million.
- Credit quality improved: nonperforming assets declined from $128.6 million, or 0.88% of assets, at September 30, 2015; nonaccrual loans declined from $67.8 million. Delinquent loans fell from 0.88% to 0.73% of loans.
- Quarterly other expense was broadly flat, but nine-month expense increased to $180.0 million from $167.6 million, largely due to $12.1 million higher information-technology costs associated mainly with the core-system conversion implemented in November 2015.
Outlook, management commentary, risks and unusual items
- The filing provides no formal earnings or growth guidance. Management said the new technology systems are intended to support future growth and expansion, and described loan growth toward shorter-duration or adjustable-rate commercial lending as part of its strategy in a low-rate environment.
- Management’s rate model estimated that an immediate, parallel 200-basis-point rate increase would raise net interest income 3.9% over the next year, but reduce net portfolio value by $387.5 million, or 15.1%. A flattening yield curve could materially weaken net interest income. These are model estimates based on assumptions, not forecasts.
- The one-year repricing gap was negative 9.8% of assets, indicating liabilities reprice sooner than assets; management noted this could pressure margins when rates rise. The company also reported a $35.5 million pretax unrealized loss on swaps hedging existing and anticipated borrowings.
- Quarterly loan-loss releases reflected improving credit measures, partly offset by loan growth. Management cautioned that actual losses may differ from estimates. Of $258.1 million in troubled debt restructurings, 96.0% were classified as performing; most modifications involved temporary payment relief, not principal forgiveness.
- Quarterly results compare with a prior-year quarter that included a $9.6 million securities-sale gain and a $7.9 million FHLB debt-prepayment expense. Neither item occurred in the current quarter. Gains on real estate owned were $5.1 million for the quarter and $10.4 million year to date.
- Liquidity sources include deposits, loan and investment repayments, borrowings, and retained earnings. The Bank reported an FHLB credit line equal to 49.0% of assets. Deposits declined 0.5% from September 2015 while FHLB advances rose $250 million.
- Risks identified include economic conditions, interest rates, deposit flows and funding costs, loan demand and credit quality, competition, regulatory and legislative changes, and accounting changes. Management reported effective disclosure controls and no material change in internal control over financial reporting. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Whether rapid loan growth, particularly in construction and commercial and industrial portfolios, changes future credit losses or reserve needs.
- Whether credit-quality improvement continues, including trends in nonaccrual loans, real estate owned, delinquencies, and restructured loans.
- How deposit costs, FHLB borrowing levels, and interest-rate movements affect net interest margin and the company’s modeled rate sensitivity.
- Whether elevated technology spending moderates after the core-system conversion and how it affects operating efficiency.
- Capital and shareholder-return capacity in light of dividends and share repurchases: the company repurchased 1.10 million shares in the quarter, and 1.04 million shares remained authorized at June 30. It reported distributing 90% of fiscal-year-to-date earnings through dividends and repurchases.
- The effects and implementation timing of new accounting standards, particularly the expected-credit-loss standard; the company was evaluating its impact.