WAFD Inc. (Washington Federal) — Q1 FY2016 Form 10-Q
Business context and period: Bank holding company operating through Washington Federal, National Association, focused on deposits and residential, construction, commercial real estate, multifamily, and commercial and industrial lending. This unaudited quarter ended December 31, 2015; comparisons are with the quarter ended December 31, 2014 unless otherwise noted. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2016 | Comparison / context |
|---|---|---|
| Net interest income | $106.9 million | Up 4.6% from $102.2 million |
| Net interest margin | 3.18% | Up from 3.01%; earning-asset yield rose 10 bps and cost of interest-bearing liabilities fell 8 bps |
| Net income / diluted EPS | $35.1 million / $0.38 | Down from $38.4 million / $0.39 |
| Other income | $10.6 million | Up from $5.4 million, partly because the prior-year quarter included unusual charges |
| Other expense | $64.5 million | Up 20.4% from $53.6 million |
| Cash flow | $68.1 million from operating activities; cash and equivalents ended at $306.0 million | Cash increased $21.9 million from September 30, 2015 |
| Loans and deposits | Net loans $9.40 billion; customer accounts $10.65 billion | Since September 30, net loans rose 2.5%; deposits rose 0.2% |
| Borrowings | FHLB advances $1.93 billion | Up $98 million from September 30, primarily short-term advances |
| Equity and capital | Stockholders’ equity $1.97 billion; tangible capital to tangible assets 11.62% | Bank total risk-based capital ratio 19.70%; well-capitalized threshold 10.00% |
Material changes and asset quality
- Net income fell despite higher net interest income. The prior-year quarter included a $5.5 million reversal of loan-loss provision; no provision or reversal was recorded in the current quarter. Current-quarter expense also included $6.6 million related to a core-system conversion. The prior-year quarter included a $2.6 million FHLB prepayment charge and a $2.0 million FDIC indemnification-asset write-down.
- Net loans increased $232.1 million sequentially. Growth included a large increase in construction loans and commercial and industrial lending; multifamily and commercial real estate balances declined. Management said loan growth reflects a strategy to expand shorter-duration or adjustable-rate business lending.
- Credit indicators improved year over year: nonperforming assets were $98.8 million, or 0.67% of assets, versus $164.3 million, or 1.13%, a year earlier. Nonaccrual loans fell 42.3% year over year to $56.7 million. Sequentially, however, total loan delinquencies edged up to 0.98% from 0.88%.
- The allowance for loan losses was $107.9 million; including the $3.1 million reserve for unfunded commitments, reserves totaled $111.0 million, or 1.10% of gross loans. Management considered this level sufficient. Performing restructured loans totaled $273.2 million; 96.6% of all restructured loans were classified as performing.
- Real estate owned declined to $42.1 million from $60.8 million, primarily due to property sales. Covered loans fell to $38.6 million after commercial-loan FDIC loss-share coverage expired.
Liquidity, outlook, risks, and other notable items
- Management cited cash, retained earnings, deposits, loan repayments, investment maturities, and borrowings as funding sources. The Bank’s FHLB credit line is stated as equal to 49% of total assets; the filing does not state the unused amount available. The Bank is also eligible to borrow under the Federal Reserve’s primary credit program.
- Interest-rate exposure remains significant. A modeled immediate parallel 200-basis-point rate increase would reduce next-year net interest income by 0.5%; a separate NPV model estimated a 20.95% decline in net portfolio value. Management cautioned that a flattening yield curve could worsen net interest income sensitivity.
- Management expects a lower effective tax rate going forward, citing bank-owned life insurance and low-income housing tax-credit investments. No specific earnings or revenue guidance was provided; interim results are not necessarily indicative of full-year results.
- The company reported a $4.8 million net-of-tax other comprehensive loss, mainly reflecting unrealized losses on available-for-sale securities, partly offset by hedge-related gains. Management said it did not intend to sell securities in unrealized loss positions and did not consider it more likely than not that it would be required to sell before recovery.
- The company repurchased 423,082 shares during the quarter at an average $23.49 per share. A $0.14-per-share dividend was announced after quarter-end, payable February 12, 2016. Management reported disclosure controls were effective and no material change in internal control over financial reporting. Ordinary-course legal proceedings were not considered material.
- Key risks cited include economic conditions, interest rates, deposit flows and funding costs, loan demand and credit quality, competition, regulation, tax policy, and changes in accounting standards.
Important facts for investors to verify
- Whether core-system conversion costs are substantially nonrecurring and how expenses trend after the conversion.
- Whether loan growth, particularly in construction and commercial and industrial lending, sustains returns without weakening underwriting or credit quality.
- Whether the sequential uptick in delinquency persists, and how nonaccrual loans, restructured loans, REO, and reserve adequacy evolve.
- How actual net interest income and net interest margin respond to rate changes versus the company’s modeled sensitivities, including any yield-curve flattening.
- The availability and cost of funding, including deposit mix, short-term FHLB advances, and the actual unused capacity under the FHLB credit line.
- The realized impact of the announced lower tax-rate expectation, share repurchases, and dividend policy on earnings and capital.