Washington Federal, Inc. (WaFd Bank) — Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023 (fiscal Q3; fiscal year ends September 30). Unaudited consolidated results. WaFd Bank provides consumer, business, and real-estate lending and banking services through 199 branches in eight states.
Financial performance and condition
| Metric | Quarter ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Net interest income | $168.7 million; up 11.2% year over year | $526.5 million; up 25.1% |
| Net interest margin | 3.27%, versus 3.22% | 3.49%, versus 3.00% |
| Net income | $61.8 million, versus $63.3 million | $207.2 million, versus $162.9 million |
| Net income available to common shareholders | $58.1 million; diluted EPS $0.89 | $196.2 million; diluted EPS $3.00 |
| Provision for credit losses | $9.0 million, versus $1.5 million | $15.0 million, versus $1.5 million |
| Noninterest income / expense | $13.8 million / $94.7 million | $37.9 million / $283.9 million |
- Balance sheet at June 30: Total assets were $22.55 billion; net loans $17.38 billion; deposits $16.12 billion; borrowings $3.75 billion; shareholders’ equity $2.39 billion.
- Growth and funding: Net loans rose 7.9% from September 30, 2022, while deposits increased 0.6%. Borrowings rose from $2.13 billion to $3.75 billion, including $3.0 billion of FHLB advances and $750 million from the Federal Reserve’s Bank Term Funding Program. Cash and equivalents increased to $1.14 billion.
- Cash flow, nine months: Operating activities provided $131.1 million; investing activities used $1.29 billion; financing activities provided $1.61 billion. Cash increased $455.7 million.
- Capital and liquidity: Company CET1 and total risk-based capital ratios were 10.25% and 13.23%; Bank ratios were 11.41% and 12.62%. Management said liquidity remained strong. It reported 75% of deposits as FDIC-insured or collateralized.
Material changes and notable items
- Quarterly net income declined 2.4% year over year even as net interest income increased, reflecting higher credit-loss provision and operating costs, and lower other income. Nine-month net income increased 27.2%.
- Funding costs rose materially: quarterly average cost of interest-bearing liabilities increased to 2.51% from 0.42% a year earlier. Deposit account balances shifted toward higher-cost time deposits, which grew 45.7% from September 2022; transaction deposits fell 11.3%.
- Credit quality weakened from fiscal year-end: nonaccrual loans increased to $55.3 million from $34.5 million; nonperforming assets rose to $67.0 million from $44.6 million; and delinquencies increased to 0.31% of loans from 0.17%. Net charge-offs were $10.4 million for the quarter, versus net recoveries of $0.6 million a year earlier.
- The allowance for credit losses, including unfunded commitments, was $204.6 million, or 1.03% of gross loans. Management stated it considered the allowance sufficient. One commercial and industrial loan was a principal factor in quarterly charge-offs and provision.
- At June 30, available-for-sale securities had a reported net unrealized loss of $104.4 million and held-to-maturity securities a $49.9 million loss. Management attributed securities valuation declines primarily to interest rates and said it did not intend, and did not expect to be required, to sell the securities before recovery.
- Shareholders’ equity was 10.62% of assets, down from 10.95% at September 2022. Tangible capital to tangible assets was 9.37%.
Outlook, risks, and contingencies
- The filing gives no formal earnings or financial guidance. Management described continued uncertainty in the economic outlook and cited recession concerns and recent banking-sector volatility.
- Interest-rate exposure remains significant. Management’s model estimated that an immediate parallel 200-basis-point rate increase would raise next-year net interest income 3.0%, but reduce net portfolio value 24.2% ($643.1 million); assumptions include a constant balance sheet and results may differ.
- The pending all-stock acquisition of Luther Burbank Corporation, announced at an approximate $654 million value based on the November 2022 share price, remained subject to regulatory approval and customary closing conditions. Shareholders of both companies had approved the transaction. The filing cites approval, integration, cost, dilution, and execution risks, among others.
- Other disclosed risks include deposit competition and confidence in regional banks, higher funding costs and FDIC premiums, real-estate and borrower stress, cybersecurity and operational risks, regulatory compliance, and the ability to maintain dividends and capital.
- Legal proceedings in the ordinary course were not expected by management to have a material financial-statement impact. The company repurchased 1.12 million shares in the quarter at an average $25.62 per share and paid a $0.25 common dividend.
Important facts for investors to verify
- Whether deposit pricing and mix stabilize, and how reliance on FHLB and BTFP borrowings changes.
- Whether loan delinquencies, nonaccrual balances, charge-offs, and criticized commercial exposures continue to rise; note $241.2 million of loans were classified substandard despite being less than 90 days delinquent.
- How unrealized securities losses, deposit outflows, and interest-rate movements affect liquidity, capital, and net interest income; review the assumptions behind management’s sensitivity models.
- The status and terms of the Luther Burbank merger, regulatory conditions, expected integration costs, and potential dilution.
- Whether continued dividends and share repurchases remain consistent with regulatory capital, liquidity needs, and the pending merger.