Business context and reporting period
Washington Federal, Inc. (WaFd Bank) is a regional bank serving consumers, businesses, and commercial real estate customers across eight western and southwestern states. This Form 10-Q covers the fiscal second quarter and first six months ended March 31, 2022; the fiscal year ends September 30. Income-statement comparisons are to the corresponding 2021 periods, while balance-sheet changes are generally compared with September 30, 2021.
Financial performance and position
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Net interest income | $135.1 million, up 8.9% year over year | $269.2 million, up 10.1% |
| Net interest margin | 2.90%, versus 2.75% | 2.89%, versus 2.75% |
| Net income | $49.4 million, versus $44.9 million | $99.6 million, versus $83.8 million |
| Net income available to common shareholders | $45.7 million; diluted EPS $0.70, versus $0.56 | $92.3 million; diluted EPS $1.41, versus $1.07 |
| Operating cash flow | Not reported for the quarter | $83.3 million, versus $204.8 million |
- Total assets were $20.56 billion at March 31, up $909.7 million from September 30, 2021. Net loans were $15.09 billion, up 9.1%; gross loans were $17.78 billion.
- Customer deposits rose 5.5% to $16.39 billion. Transaction and savings accounts represented 80% of deposits; time deposits declined 5.3% to $3.25 billion.
- Cash and cash equivalents were $1.95 billion, down $143.3 million from fiscal year-end. FHLB advances remained $1.72 billion.
- Shareholders’ equity was $2.19 billion, or 10.66% of assets; tangible capital to tangible assets was 9.29%. Bank regulatory capital ratios included 11.52% CET1, 12.77% total risk-based capital, and 8.80% Tier 1 leverage.
- The loan allowance was $171.4 million and the reserve for unfunded commitments was $30.0 million. Combined allowance for credit losses was $201.4 million, or 1.13% of gross loans.
Material changes versus comparable periods
- Quarterly net interest income increased $11.1 million year over year, principally reflecting growth in average earning assets and lower funding costs. The average yield on earning assets fell 6 basis points, while the cost of interest-bearing liabilities fell 21 basis points.
- Quarterly net income rose to $49.4 million. For the half year, net income increased to $99.6 million, supported by higher net interest income and other income.
- Other expense increased 8.2% in the quarter to $88.4 million, including higher compensation and benefits. Six-month other expense included a $1.7 million tax-related accrual.
- Available-for-sale securities fell $228.7 million from September 30, including a $46.7 million six-month unrealized loss (net of tax); held-to-maturity securities declined $64.8 million. At March 31, unrealized losses were $12.4 million on AFS securities and $6.9 million on HTM securities, before tax.
- Delinquencies rose to 0.30% of loans from 0.19% at September 30. Nonperforming assets increased to $47.2 million, or 0.23% of assets, from $43.6 million, or 0.22%.
- Net cash from operations declined to $83.3 million for six months, while investing used $1.03 billion, mainly reflecting loan growth. Financing provided $801.4 million, including deposit growth.
Outlook, commentary, risks and unusual items
- The filing gives no formal earnings or revenue guidance. Management said it was growing shorter-term loans and transaction deposits to reduce interest-rate risk. Transaction and savings accounts were 80% of deposits, and the securities portfolio was 53% variable-rate and 47% fixed-rate.
- Under an immediate parallel 200-basis-point rate increase, the model estimated next-year net interest income would rise 6.0%, compared with 9.7% in the September 2021 analysis. The same shock was estimated to reduce net portfolio value by $692.4 million, or 24.9%, versus a 6.8% decline in the prior analysis. These are model estimates based on assumptions, not forecasts.
- Management attributed the quarter’s $0.5 million credit-loss release mainly to improved credit quality and collateral conditions, largely offset by loan growth. It recorded no net provision or release for the six-month period.
- The Bank completed its conversion from a national to a Washington state-chartered bank on February 4, 2022. The state Department of Financial Institutions and FDIC became its primary bank regulators; the Federal Reserve continues to regulate the holding company.
- Risks cited include inflation, economic slowdown, borrower and collateral deterioration, interest-rate and market volatility, Russia-Ukraine-related disruption and cyberattacks, regulatory changes, and costs or consequences associated with charter conversion and HMDA compliance remediation. Management said pending legal matters were not expected to materially affect the financial statements.
- Other notable items: six-month other income included a $5.1 million gain on certain equity investments; the quarter included higher loan fees, largely from early repayments. The Bank’s securities unrealized losses were attributed to interest-rate changes; management reported no credit impairment.
Important facts for investors to verify
- Whether loan growth and deposit mix can be sustained without materially increasing funding costs or credit risk.
- How rising rates affect net interest income and economic value of equity, given the sharp increase in modeled NPV sensitivity.
- Whether delinquency, criticized-loan, and nonperforming-asset trends continue to worsen, and whether the allowance remains adequate.
- The recovery path for unrealized securities losses and the related effect on equity and liquidity if securities must be sold.
- Actual costs and regulatory outcomes from the charter conversion and HMDA compliance remediation.
- The drivers of the substantial year-over-year decline in operating cash flow and whether it persists.