Washington Federal, Inc. (WAFD) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2017. Washington Federal is a bank holding company focused on residential and commercial lending and deposit-taking. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Three months ended Mar. 31, 2017 | Prior-year quarter | Six months ended Mar. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $107.7 | $106.3 | $210.9 | $213.2 |
| Net interest margin | 3.15% | 3.16% | 3.08% | 3.17% |
| Net income | $42.1 | $41.7 | $83.3 | $76.8 |
| Diluted EPS | $0.47 | $0.45 | $0.93 | $0.83 |
| Other income | $10.1 | $10.7 | $22.0 | $21.4 |
| Other expense | $57.5 | $59.2 | $111.8 | $123.7 |
- At March 31, total assets were $15.0 billion, net loans $10.46 billion, deposits $10.63 billion, FHLB advances $2.15 billion, and stockholders’ equity $2.01 billion. Since September 30, 2016, net loans increased 5.6%; deposits rose 0.3%; and borrowings increased $70 million.
- For the six months, operating cash flow was $84.0 million; investing cash outflow was $305.5 million and financing cash inflow was $37.5 million. Cash and cash equivalents declined $184.0 million to $266.4 million.
- Net worth was 13.47% of assets; tangible capital to tangible assets was 11.72%. Bank regulatory capital ratios exceeded the stated well-capitalized thresholds, including a 16.95% common equity tier 1 ratio and 11.46% tier 1 leverage ratio.
- The company paid $0.40 per share in dividends in the quarter, including a $0.25 special dividend and $0.15 regular dividend.
Changes versus comparable periods
- Quarterly net income rose modestly year over year; six-month net income increased 8.5%. Quarterly net interest income improved, but six-month net interest income and margin declined, primarily reflecting lower mortgage-backed securities income and lower yields on new loan originations.
- Six-month other expense fell $11.9 million, or 9.6%, partly because the prior-year comparison included about $6.6 million of core-system conversion costs; product-delivery expense also decreased.
- Gross loans grew $689.9 million, led by construction, commercial real estate, multifamily, and commercial and industrial lending. Management said loan growth reflected a strategy to increase adjustable-rate or shorter-duration lending.
- Available-for-sale securities declined $534.1 million, while held-to-maturity securities rose $280.1 million, reflecting securities sales, maturities, and purchases. The company recorded a $968,000 six-month gain on investment-security sales.
Outlook, risks, and unusual items
- Merger: On April 11, 2017, the company announced an all-stock agreement to acquire Anchor Bancorp for consideration valued at approximately $63.9 million. Closing was expected in the third calendar quarter of 2017, subject to regulatory and shareholder approvals and other conditions.
- Interest-rate exposure: A modeled immediate parallel 200-basis-point rate increase was estimated to raise next-year net interest income 1.3%, but reduce net portfolio value 20.8%. The one-year repricing gap was negative 14.7% of assets; a flattening yield curve could reduce net interest income. These are model estimates based on stated assumptions, not forecasts.
- Credit quality: Nonperforming assets increased to $79.7 million, or 0.53% of assets, from $71.4 million, or 0.48%, at September 30. Non-accrual loans rose to $57.2 million from $42.4 million; delinquent loans as a share of total loans improved to 0.65% from 0.68%. The allowance for loan losses was $121.9 million; including the unfunded-commitment reserve, total reserves were $127.0 million, or 1.09% of gross loans. Management considered reserves sufficient.
- Liquidity and funding: The bank reported an FHLB credit line equal to 48% of assets and eligibility for Federal Reserve primary credit. Cash declined substantially during the half-year while lending and securities activity used cash.
- Management cited general economic conditions, interest rates, deposit flows, funding costs, loan demand and quality, competition, regulatory changes, and tax and accounting changes as risks. The filing gives no quantitative earnings or balance-sheet guidance. Management stated that interim results are not necessarily indicative of full-year results.
- Legal proceedings in the ordinary course were not considered material. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress, approvals, terms, and expected closing timing for the Anchor Bancorp merger.
- Whether loan growth and portfolio mix changes support earnings without weakening credit quality, particularly given higher non-accrual loans and nonperforming assets.
- Actual deposit and borrowing costs, net interest margin trends, and sensitivity to rate changes versus the filing’s model scenarios.
- Cash and liquidity trends, reserve adequacy, and performance of commercial, construction, and other growing loan categories.
- Dividend and repurchase activity, including the effect of the special dividend and remaining share-repurchase authorization.