WAFD Inc. (Washington Federal, Inc.) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2015. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions. Comparisons are with the corresponding 2014 period or September 30, 2014, as applicable.
Business context and financial performance
Washington Federal is a bank holding company operating through its federally insured national bank. Its lending is concentrated in residential real estate, with additional multifamily, commercial real estate, construction, commercial and industrial, and consumer lending. Fiscal 2014 branch acquisitions expanded its network; no acquisitions were completed in the six months ended March 31, 2015.
- Quarter: Net interest income was $103.9, up 3.2% year over year. Net income was $40.4, up 4.4%; diluted earnings were $0.42 per share versus $0.38. Net interest margin increased to 3.10% from 3.03%.
- Six months: Net interest income was $206.1, up 3.6%. Net income was $78.8, essentially unchanged from $78.9; diluted earnings were $0.81 per share versus $0.77.
- Revenue and expenses: Quarterly other income was $10.8, compared with $6.7; other expense increased 10.1% to $57.3. For the six months, other income was $16.2 versus $12.5 and other expense was $110.9 versus $96.2. The filing attributes higher costs in part to staffing, occupancy, product delivery and marketing associated with the expanded branch network.
- Interest-rate economics: Quarterly earning-asset yield was 4.01%, down 3 basis points year over year; the cost of interest-bearing liabilities fell 12 basis points to 0.93%. Management cited lower funding costs and a shift toward higher-yielding loans as support for margin.
Financial position, liquidity and credit
- Assets and loans: Total assets were $14,611 at March 31, down $145 from September 30. Net loans receivable were $8,421, up $273; total gross loans were $9,015. Loans grew through originations and $146.8 of loan purchases. Securities totaled $4,237, down from $4,598 at September 30.
- Deposits and borrowings: Customer accounts were $10,693, down $24; FHLB advances were $1,830, down $100 after repayment of an advance. Deposits were 46.6% certificates of deposit and 53.4% transaction, savings and money-market accounts.
- Cash flow and liquidity: Cash and cash equivalents were $675, down $107 over the six months. Operating cash flow was $59.0, investing cash flow was $73.1, and financing cash outflow was $238.9. Management said it continued to hold higher-than-normal liquidity in view of potentially rising rates; the bank also had access to an FHLB credit line.
- Capital: Stockholders’ equity was $1,968, or 13.47% of assets. The Bank’s reported capital ratios exceeded the disclosed “well capitalized” thresholds, including a 21.23% total risk-based capital ratio and an 11.52% Tier 1 leverage ratio.
- Credit quality: Nonperforming assets were $143.2, or 0.98% of assets, versus $147.3, or 1.00%, at September 30. Nonaccrual loans fell 13.2% to $75.9. The allowance for loan losses was $108.3; the company recorded a $3.9 quarterly reversal of provision and $3.1 of net recoveries. Management attributed the reversal to improving portfolio credit quality and more favorable economic conditions.
- Shareholder returns: The company repurchased 3.9 million shares during the six months for $77.4, averaging $21.44 per share, and paid $0.28 per share in dividends. On May 4, it announced a $0.13 dividend and authorization for an additional 5 million share repurchases.
Material changes, outlook and risks
- Management reported improving credit metrics, but identified interest-rate exposure: a parallel 200-basis-point increase was modeled to reduce next-year net interest income by 1.1% and reduce net portfolio value by $515 million, or 18.3%. The filing notes that a steeper increase in short-term rates could have a greater adverse effect.
- FDIC loss-share coverage on $83.1 of former Horizon Bank covered assets ended after March 31, 2015; coverage on $53.2 of former Home Valley Bank assets was scheduled to expire September 30, 2015. Management estimated that, if all coverage had expired at March 31, the NPA ratio would have been 1.22% rather than 0.98%.
- The quarter included a $3.9 reversal of loan-loss provision. Six-month results also reflected unusual items recorded in the prior quarter: an $8.9 correction to interest income and accrued interest, an $8.2 upward REO valuation correction, a $2.6 prepayment charge on a repaid FHLB advance, and a $2.0 FDIC indemnification asset write-down. Management said the prior-period corrections were not material to any reporting period.
- The company purchased $100 million of bank-owned life insurance to help fund employee benefit costs; management cited a pro forma pre-tax-equivalent yield of 5.14%. The $2.6 advance prepayment charge was expected to be offset by lower interest expense over the remaining nine months of the fiscal year.
- No earnings or growth guidance was provided. Management expected an effective tax rate of 35.75% going forward. Forward-looking results remain subject to economic and regulatory conditions, interest rates, deposit flows, funding costs, loan demand, competition and portfolio credit quality.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Whether loan growth and margin improvement persist, and how the portfolio performs as interest rates and funding costs change.
- Credit trends behind the provision reversal, including nonaccrual loans, criticized assets, restructured loans and allowance adequacy.
- The effect of expiring FDIC loss-share coverage on reported asset quality and potential loss exposure.
- The recurring earnings impact of the unusual corrections and charges, and whether branch-related expense growth moderates.
- Capital and liquidity after dividends and ongoing repurchases, including the use and terms of the newly authorized repurchase capacity.