Washington Federal, Inc. (WaFd Bank) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. The company is a regional bank operating 224 branches across eight states, with lending, deposit, insurance and related banking businesses. Financial figures below are in U.S. dollars; “Q3” refers to the three months ended June 30.
Financial performance and position
| Metric | Q3 2021 | Nine months 2021 | Comparable 2020 period |
|---|---|---|---|
| Net interest income | $128.6 million | $373.2 million | $117.4 million; $354.7 million |
| Net income | $47.4 million | $131.2 million | $34.9 million; $139.1 million |
| Net income available to common shareholders | $43.8 million | $124.9 million | $34.9 million; $139.1 million |
| Diluted EPS | $0.61 | $1.68 | $0.46; $1.80 |
| Net interest margin | 2.82% | 2.77% | 2.82%; 3.02% |
| Provision (release) for credit losses | $(2.0) million | $1.0 million | $10.8 million; $15.3 million |
At June 30, 2021, total assets were $19.65 billion, net loans $13.47 billion, customer deposits $15.24 billion, cash and cash equivalents $2.25 billion, and FHLB advances $1.95 billion. Shareholders’ equity was $2.23 billion, or 11.33% of assets; tangible capital to tangible assets was 9.92%. The Bank’s regulatory capital ratios exceeded the stated well-capitalized thresholds.
For the nine months, operating cash flow was $249.7 million, investing cash flow was $(420.3) million, and financing cash flow was $719.6 million. Cash and cash equivalents increased $549.0 million to $2.25 billion.
Changes versus comparable periods
- Q3 net income rose from $34.9 million to $47.4 million, while nine-month net income declined from $139.1 million to $131.2 million. Q3 net interest income increased $11.2 million year over year; nine-month net interest income increased $18.5 million.
- Nine-month NIM fell to 2.77% from 3.02%, reflecting lower asset yields and the timing of the prior-year Federal Reserve rate cuts. Q3 NIM was unchanged at 2.82% year over year.
- Q3’s $2.0 million credit-loss release, primarily attributed to improved forecast macroeconomic variables, contrasted with a $10.8 million provision in Q3 2020. For nine months, the provision was $1.0 million versus $15.3 million.
- Nine-month other income decreased $34.3 million year over year, largely because the prior-year period included a $30.7 million gain on fixed-asset sales. 2021 included a $14.1 million gain on termination of a borrowing hedge and a $13.8 million prepayment penalty on long-term debt.
- Deposits increased $1.46 billion, or 10.6%, from September 30, 2020. Transaction accounts grew 19.3%, while time deposits fell 11.0%; FHLB advances declined $750 million. Net loans increased $675.7 million, with commercial loans rising to 61.2% of gross loans from 56.3%.
- Equity included $293.3 million of net proceeds from the February 2021 Series A preferred-stock offering. The company repurchased $208.1 million of common stock in the nine months, including 3.62 million shares during Q3 at an average $32.69 per share.
Outlook, management commentary and risks
- The filing provides no quantified earnings or revenue guidance. Management described strong deposit growth as creating excess liquidity and said its focus on transaction accounts is intended to reduce sensitivity to rising rates.
- Management’s model estimated that an immediate parallel 200-basis-point rate increase would raise next-year net interest income 9.2%. Under that scenario, estimated net portfolio value would decrease $105.7 million, or 3.5%. These estimates assume a constant balance sheet and depend on modeling assumptions; actual outcomes may differ.
- Credit quality indicators were mixed: delinquencies were 0.20% of loans, down from 0.24% at September 2020, while nonperforming assets rose to $45.7 million, or 0.23% of assets, from $37.7 million, or 0.20%. Non-accrual loans were $34.0 million. Management reported $444.6 million of loans that were less than 90 days delinquent but classified as substandard; if treated as nonperforming, the ratio of nonperforming assets plus performing restructured loans to assets would have been 2.84%.
- The allowance for credit losses, including the reserve for unfunded commitments, was $198.3 million, or 1.26% of gross loans. Unfunded loan commitments totaled $3.52 billion. COVID-19 impacts remain uncertain; 43 mortgage loans totaling $6 million and three commercial loans totaling $39 million remained in payment deferral at quarter-end.
- Principal risks include economic and property-value deterioration, borrower creditworthiness, interest-rate and market risks, and regulatory matters. The filing identifies risks related to Bank Secrecy Act and Home Mortgage Disclosure Act remediation, including the possibility of additional enforcement, penalties or higher compliance costs. Management said ordinary-course legal proceedings were not expected to materially affect the financial statements.
Investor verification priorities
- Track whether nonperforming assets, substandard loans and remaining COVID-related deferrals lead to higher credit losses or reserve needs; review the large unfunded commitment balance.
- Assess the sustainability and cost of deposit growth, deployment of elevated cash, and the effect of loan and securities yields on NIM and earnings.
- Review interest-rate exposure and hedge activity, including the sensitivity assumptions, AOCI effects and the $14.1 million hedge-termination gain.
- Confirm progress and potential costs or consequences of BSA and HMDA remediation and related regulatory matters.
- Evaluate capital after preferred dividends and substantial share repurchases, and verify the effect of the preferred stock on earnings available to common shareholders.