Washington Federal, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018. Washington Federal is a bank holding company operating through Washington Federal, National Association; it focuses on deposit-taking and commercial and consumer lending. Financial results below are compared with the quarter ended December 31, 2017 unless otherwise noted. Balance-sheet comparisons are with September 30, 2018.
Financial performance and position
| Metric | Quarter / period-end result | Comparison or context |
|---|---|---|
| Interest income | $162.6 million | Up from $145.8 million |
| Net interest income | $119.2 million | Up $3.4 million |
| Net interest margin | 3.21% | Down from 3.26% |
| Net income; diluted EPS | $52.9 million; $0.65 | Net income was $51.7 million and diluted EPS $0.59 |
| Other income; other expense | $19.0 million; $71.7 million | Prior-year quarter: $6.8 million; $61.9 million |
| Cash from operations | $60.3 million | Prior-year quarter: $58.1 million |
| Cash from investing; financing | $(330.8) million; $285.3 million | Quarter-end cash and cash equivalents were $283.4 million, up $14.7 million from September 30 |
| Total assets; stockholders’ equity | $16.19 billion; $1.98 billion | Assets rose $322.4 million; equity fell $13.8 million from September 30 |
| Loans; customer deposits | Net loans $11.70 billion; deposits $11.56 billion | Net loans increased $223.2 million and deposits $174.5 million from September 30 |
| Borrowings | FHLB advances $2.54 billion | Up from $2.33 billion at September 30; period-end weighted-average rate was 2.75% |
| Capital and liquidity | Equity was 12.25% of assets; tangible capital to tangible assets was 10.53% | Bank CET1 14.38%, total risk-based capital 15.56%, and leverage 10.58%; each exceeded the stated well-capitalized threshold |
Material changes and credit quality
- Net interest income increased as average earning assets and their yields rose, while the margin narrowed: the yield on earning assets increased to 4.35% from 4.08%, but the cost of interest-bearing liabilities rose to 1.24% from 0.91%.
- Gross loans grew 1.3% from September 30. Commercial real estate and commercial and industrial balances increased 5.1% and 6.4%, respectively; construction balances declined. Management said loan growth reflected a strategy emphasizing multifamily, commercial real estate, and commercial and industrial lending, generally with adjustable rates or shorter duration.
- Nonperforming assets fell to $62.7 million, or 0.39% of assets, from $70.1 million, or 0.44%. Nonaccrual loans were $51.5 million; delinquent loans remained 0.42% of loans. No loans more than 90 days delinquent were still accruing.
- The loan-loss allowance was $131.2 million. The company recorded a $0.5 million provision release, versus no provision in the prior-year quarter. The allowance plus the reserve for unfunded commitments totaled $137.4 million, or 1.06% of gross loans; management considered it adequate. Unfunded loan commitments and unused lines totaled $2.12 billion.
- Other comprehensive loss was $5.4 million, principally reflecting a $10.5 million pretax loss on cash-flow hedges, partly offset by securities-related gains. Stockholders’ equity also reflected $48.9 million of share repurchases and $14.6 million of dividends.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings, revenue, or loan-growth guidance. Management describes balance-sheet and interest-rate management actions but cautions that interim results are not necessarily indicative of full-year results.
- Management estimated that an immediate parallel 200-basis-point rate increase would reduce next-year net interest income by 2.6%. The modeled net portfolio value decline under that scenario was 22.5%, with the NPV-to-assets ratio falling from 12.7% to 10.6%. These are model estimates, not forecasts.
- Other income increased to $19.0 million from $6.8 million. Management attributed the change primarily to a reported $6.4 million net gain from fixed-asset sale and valuation adjustments and the prior-year $8.6 million FDIC loss-share valuation expense.
- Other expense rose 15.7%. The quarter included $3.6 million of nonrecurring Bank Secrecy Act (BSA) program enhancement expense; management estimated a further $2.0 million over the next two quarters. The filing identifies potential additional BSA remediation costs or regulatory action as risks. It also cites economic, real-estate, borrower-credit, interest-rate, regulatory, funding, and execution risks.
- The effective tax rate was 21.35%, compared with 14.79% in the prior-year quarter, which included discrete tax-reform and stock-compensation benefits. The company declared a $0.20-per-share dividend in January 2019 and authorized an additional 10 million shares for repurchase.
- The company early adopted certain accounting standards without material financial-statement impact. It expects the future expected-credit-loss standard to increase the allowance, but the amount remained under evaluation. Ordinary-course legal proceedings were not considered material.
Most important facts for investors to verify
- Whether loan growth and deposit pricing sustain net interest income as funding costs rise and the margin remains under pressure.
- Credit trends in commercial real estate, commercial and industrial, and construction lending, and the adequacy of reserves as the portfolio grows.
- The eventual cost and regulatory status of BSA program remediation, including the projected additional $2.0 million expense.
- Interest-rate sensitivity and the effects of unrealized securities losses, hedges, and changing deposit behavior on earnings and capital.
- The pace and funding of share repurchases and dividends relative to capital levels and liquidity needs.