WaFd Inc. (Washington Federal) — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021. The company is a Seattle-based bank holding company operating WaFd Bank through 219 branches in eight states. Comparisons below are with the three months ended December 31, 2020 for earnings and cash flow, and September 30, 2021 for balance-sheet changes. Amounts are in U.S. dollars.
Financial performance
- Revenue and earnings: Net interest income was $134.1 million, up $13.6 million year over year; other income was $18.7 million, up $4.8 million. Net income increased to $50.3 million from $39.0 million. After $3.7 million of preferred dividends, net income available to common shareholders was $46.6 million.
- Per-share results: Diluted EPS was $0.71 versus $0.51; basic EPS was $0.72 versus $0.51. Weighted-average basic shares fell to 65.2 million from 75.8 million. Common dividends paid were $0.23 per share versus $0.22.
- Margins: Net interest margin increased to 2.87% from 2.75%. The average yield on interest-earning assets declined to 3.22% from 3.34%, while the average cost of interest-bearing liabilities declined to 0.45% from 0.76%.
- Credit costs and expenses: Provision for credit losses was $0.5 million versus $3.0 million. Other expense rose to $89.6 million from $81.4 million, including higher compensation and a $2.4 million tax-related accrual. Effective tax rate was 20.52% versus 21.35%.
- Cash flow: Operating activities provided $26.8 million versus $94.2 million. Investing activities used $546.8 million, primarily reflecting net loan growth and $413.3 million of purchased loans; financing activities provided $309.8 million, including $359.9 million of deposit growth. Cash and cash equivalents fell $210.2 million to $1.88 billion.
Balance sheet, funding and capital
- Total assets rose $322.6 million to $19.97 billion. Net loans increased $758.6 million (5.5%) to $14.59 billion; gross loans grew 4.5%, led by commercial real estate and single-family residential lending.
- Customer deposits increased $359.9 million (2.3%) to $15.90 billion. Transaction accounts represented 79% of deposits; time deposits declined $82.1 million. FHLB advances were unchanged at $1.72 billion.
- Shareholders’ equity was $2.15 billion, or 10.76% of assets, versus $2.13 billion, or 10.82%, at September 30. Tangible capital to tangible assets was 9.35%. Bank regulatory capital ratios exceeded stated well-capitalized thresholds, including a 11.79% common equity tier 1 ratio and a 13.04% total risk-based capital ratio.
- Available-for-sale securities were $1.95 billion and held-to-maturity securities were $326.4 million. The quarter included a $7.9 million other comprehensive loss, primarily from unrealized changes in securities and hedges.
Material changes, outlook and risks
- Net interest income growth reflected higher average earning assets and lower funding costs; asset yields declined, partly offset by a larger decline in liability costs. PPP loan-fee amortization also decreased to $3.3 million from $4.9 million.
- Other income included a $5.1 million gain on certain equity investments. Net gain on real estate owned was $0.6 million, compared with a $0.4 million loss in the prior-year quarter.
- Credit indicators weakened from September: nonperforming assets increased to $54.8 million, or 0.27% of assets, from $43.6 million, or 0.22%; nonaccrual loans rose to $45.0 million from $31.7 million; and delinquencies increased to 0.31% of loans from 0.19%. The allowance for credit losses, including unfunded commitments, was $201.4 million, or 1.18% of gross loans. Management said the allowance was sufficient for estimated losses.
- Interest-rate modeling estimated that an immediate parallel 200-basis-point rate increase would raise next-year net interest income by 8.4%, down from the prior quarter’s 9.7% estimate. The same shock was estimated to reduce net portfolio value by $471.6 million, or 14.3%, compared with a $207.0 million, or 6.8%, decline in the prior-quarter analysis. These are model estimates based on stated assumptions, not forecasts.
- No formal earnings guidance was provided. Management described deposit growth as a funding source for loan expansion and its focus on transaction accounts and shorter-term or adjustable-rate lending as part of interest-rate risk management.
- The Bank applied to convert from a national to a Washington state-chartered bank; approval and completion were not assured. The OCC terminated the Bank’s February 2018 BSA consent order on December 17, 2021, but the Bank remains subject to anti-money-laundering requirements. The filing also identifies HMDA compliance remediation, economic and borrower-credit conditions, property values, interest rates, regulation, and the proposed charter conversion as risks.
- COVID-related payment deferrals remaining at quarter-end covered 16 mortgage loans totaling $3.5 million and one commercial loan totaling $0.5 million. Legal proceedings in the ordinary course were not expected by management to have a material financial-statement impact.
Most important facts for investors to verify
- Whether loan growth and deposit mix remain sustainable, and how deposit pricing affects funding costs and margins.
- Whether rising nonaccrual loans and delinquencies—particularly in commercial and industrial lending—lead to higher provisions or charge-offs.
- The assumptions behind the allowance, rate-sensitivity and NPV models, including the effect of changing rates and prepayment behavior.
- The nature and recurrence of the $5.1 million equity-investment gain and the $2.4 million tax-related accrual.
- The status and potential costs of the state-charter conversion and HMDA remediation, and continued compliance with BSA requirements.
- Capital and liquidity levels, including the large unfunded commitment balance of $4.27 billion and reliance on pledged loans for FHLB borrowing capacity.