Washington Federal, Inc. — Form 10-Q Summary
Business context and reporting period
Washington Federal is a bank holding company operating through Washington Federal, National Association. Its business primarily comprises deposits and lending across residential, construction, commercial real estate, commercial and industrial, and consumer loans. This fiscal 2018 second-quarter report covers the three and six months ended March 31, 2018; the fiscal year ends September 30. Amounts below are U.S. dollars.
Financial performance and position
- Quarterly earnings: Net income was $49.3 million, versus $42.1 million a year earlier; diluted EPS was $0.57, versus $0.47. For the six months, net income was $100.9 million, versus $83.3 million, and diluted EPS was $1.17, versus $0.93.
- Interest income and margin: Second-quarter net interest income rose to $117.3 million from $107.7 million. Net interest margin was 3.25%, versus 3.15%. Six-month net interest income was $233.0 million, up from $210.9 million; margin was 3.26%, versus 3.08%.
- Expenses and taxes: Second-quarter non-interest expense increased 14.5% to $65.8 million. Six-month expense rose 14.2% to $127.7 million. The six-month effective tax rate was 19.51%, compared with 32.75% a year earlier; 2018 included a $3.7 million discrete tax benefit from deferred-tax remeasurement and other tax benefits.
- Balance sheet: Total assets were $15.63 billion at March 31, up $379.6 million from September 30, 2017. Net loans increased 3.1% to $11.22 billion; deposits grew 2.8% to $11.14 billion. FHLB advances were $2.33 billion, up from $2.23 billion.
- Cash flow and liquidity: For the six months, operating cash flow was $120.2 million, investing cash outflow was $442.5 million, and financing cash inflow was $266.1 million. Cash and cash equivalents fell $56.3 million to $256.8 million. The Bank also reported access to an FHLB credit line, subject to collateral eligibility, and Federal Reserve primary credit.
- Capital: Stockholders’ equity was $1.99 billion, or 12.72% of assets, versus $2.01 billion, or 13.15%, at September 30. The Bank’s common equity Tier 1, total risk-based capital, and Tier 1 leverage ratios were 15.62%, 16.87%, and 10.82%, respectively.
- Credit quality: Non-performing assets were $69.7 million, or 0.45% of assets, versus $70.2 million, or 0.46%, at September 30. Non-accrual loans increased to $53.8 million from $49.6 million; delinquent loans remained 0.40% of loans. The allowance for loan losses was $127.6 million; allowance plus unfunded-commitment reserve was $134.3 million, or 1.07% of gross loans.
Material changes versus comparable periods
- Higher average earning assets and improved asset yields lifted quarterly net interest income; higher deposit rates partly offset the benefit.
- Deposit fee income increased, which management attributed largely to the Green Checking product. Technology and other costs rose amid platform and Bank Secrecy Act (BSA) initiatives; compensation costs also increased.
- Six-month other income was lower year over year, principally because of an $8.6 million FDIC loss-share valuation adjustment. The six-month loan-loss provision was a $0.95 million release, compared with a $1.6 million release in the prior-year period.
- The company repurchased 1.67 million shares in the quarter for approximately $58.0 million at an average $34.66 per share. It paid a $0.17 quarterly dividend and declared another $0.17 dividend for May 2018.
Outlook, risks, and unusual items
- Management estimated a fiscal 2018 annual effective tax rate of approximately 22%–23%, including discrete tax benefits. The filing provides no specific earnings or revenue guidance.
- The OCC issued a BSA Consent Order on February 28, 2018. The Bank expects significant compliance expenses and does not expect to pursue acquisitions or branch expansion until its BSA program improves. Further regulatory action, fines, restrictions, and reputational harm remain risks.
- The company reached a preliminary agreement to terminate remaining FDIC loss-share agreements early; final settlement was expected in fiscal Q3 2018. The FDIC will no longer share in future recoveries, gains, losses, or expenses on covered assets.
- Interest-rate exposure is material: a modeled immediate parallel 200-basis-point increase was estimated to raise next-year net interest income by only 0.1%, while reducing net portfolio value by $530.8 million, or 21.9%. These are model estimates, not forecasts. The filing also reports $48.8 million of pretax unrealized losses on held-to-maturity securities.
- Management expects the new expected-credit-loss standard (CECL) to increase the allowance upon adoption, but the amount is still under evaluation. Cybersecurity, economic and real-estate conditions, borrower credit, interest rates, and regulatory changes are identified risks.
- An immaterial prior-acquisition balance-sheet classification correction increased goodwill and finite-lived intangibles by $12.2 million in total and reduced other assets by the same amount. The company adopted a tax-accounting update that shifted $1.8 million from retained earnings to accumulated other comprehensive income.
Important facts for investors to verify
- Progress, costs, and regulatory status of the BSA Consent Order, including whether it affects business growth plans.
- Final terms and timing of the FDIC loss-share termination and the resulting exposure to future losses on previously covered assets.
- Loan growth and mix, non-accrual trends, recoveries, and whether the allowance remains adequate as the portfolio expands.
- Interest-rate sensitivity, deposit pricing and funding costs, and unrealized securities losses under changing rate conditions.
- Execution of share repurchases and dividends alongside capital needs, and the final fiscal 2018 tax rate and discrete tax effects.