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 involves attracting deposits and making commercial and consumer loans. This unaudited report covers the fiscal quarter and six months ended March 31, 2019; the comparable periods ended March 31, 2018. Balance-sheet comparisons are against September 30, 2018.
Key financial metrics
| Metric | Quarter ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Net interest income | $120.1 million | $239.2 million |
| Net income | $51.1 million | $104.0 million |
| Diluted earnings per share | $0.63 | $1.28 |
| Net interest margin | 3.15% | 3.18% |
| Provision for loan losses | $0.75 million | $0.25 million |
| Net cash provided by operating activities | Not presented for the quarter; six-month amount was $108.9 million |
- Quarterly interest income was $167.6 million and interest expense was $47.5 million. Other income was $12.8 million and other expense was $68.0 million.
- At March 31, total assets were $16.44 billion, net loans were $11.89 billion, and customer accounts (deposits) were $11.72 billion. Total stockholders’ equity was $2.00 billion, or 12.20% of assets.
- Cash and cash equivalents were $279.6 million. Six-month cash flows were $108.9 million from operating activities, negative $582.0 million from investing activities, and positive $483.9 million from financing activities.
- FHLB advances were $2.61 billion, up from $2.33 billion at September 30, 2018. The weighted-average borrowing rate was 2.77%. The Bank also had an FHLB credit line of up to 45% of total assets, subject to collateral eligibility.
- Regulatory capital ratios at March 31 included a Bank common equity Tier 1 ratio of 14.07%, total risk-based capital ratio of 15.25%, and Tier 1 leverage ratio of 10.33%.
Material changes versus comparable periods
- Quarterly net income rose 3.7% from $49.3 million; six-month net income rose 3.1% from $100.9 million. Quarterly diluted EPS increased from $0.57 to $0.63.
- Quarterly net interest income increased $2.8 million year over year, but net interest margin declined from 3.25% to 3.15%. For the six-month period, net interest income increased $6.2 million while margin declined from 3.26% to 3.18%. Higher asset yields and loan growth were partly offset by higher deposit and borrowing costs.
- Total assets increased $569.5 million, or 3.6%, from September 30, 2018. Net loans grew $417.8 million, or 3.6%; gross loans grew 3.0%. Growth included commercial real estate and commercial and industrial lending. Management said it was emphasizing construction, multifamily, commercial real estate, and commercial and industrial loans, which generally have adjustable rates or shorter duration.
- Deposits increased $335.2 million, or 2.9%. The average cost of deposits shown in the deposit table increased from 0.87% to 1.09%.
- Nonperforming assets fell to $59.6 million, or 0.36% of assets, from $70.1 million, or 0.44%. Nonaccrual loans declined to $48.9 million from $55.7 million; delinquent loans were 0.40% of loans, versus 0.42% at September 30.
- Six-month other income rose to $31.8 million from $19.4 million. Management attributed the increase principally to a $6.4 million gain from sale and valuation adjustments of fixed assets in the December 2018 quarter and the absence of $8.55 million of FDIC loss-share valuation expense recorded in the prior-year December quarter.
- Six-month other expense increased to $139.6 million from $127.7 million, reflecting higher compensation, technology spending, and other costs, including Bank Secrecy Act program enhancements. Six-month effective tax rate was 21.35%, compared with 19.51% a year earlier.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management describes continued controlled balance-sheet growth and investment in people, processes, and technology.
- Interest-rate sensitivity is significant: the company estimated that an immediate parallel 200-basis-point rate increase would reduce next-year net interest income by 3.0%. The modeled net portfolio value would decline 22.6%, to an NPV-to-assets ratio of 11.7%, under the same shock. These are model estimates based on stated assumptions, not forecasts.
- Management identified risks including economic and real-estate downturns, borrower credit quality and collateral values, interest-rate changes, access to financing, regulatory and competitive developments, and execution of acquisitions. It also highlighted risks from Bank Secrecy Act remediation, including higher-than-expected costs or enforcement actions beyond those contemplated by the Consent Order.
- The company expects the allowance for credit losses to increase when it adopts the expected-credit-loss standard (ASU 2016-13); the amount remained under evaluation. The company planned to adopt the new lease standard on October 1, 2019 and expected to recognize right-of-use assets and lease liabilities, but did not quantify them.
- Credit-loss allowance was $133.1 million; together with the $6.25 million reserve for unfunded commitments, management considered total reserves of $139.3 million, or 1.05% of gross loans, adequate. Unused lines and loans in process totaled $2.27 billion.
- The company repurchased 698,705 shares during the quarter at an average $29.65 per share. It paid a $0.20 quarterly dividend and declared another $0.20 dividend after quarter-end. It reported no legal proceedings considered material to the consolidated financial statements.
Important facts for investors to verify
- Whether margin pressure continues as deposit and borrowing costs rise, and how loan and deposit mix affects net interest income.
- Actual credit performance in growing commercial and construction portfolios, including substandard and delinquent credits, and whether reserves remain sufficient.
- Progress, cost, and any regulatory developments related to the Bank Secrecy Act program and Consent Order.
- The final expected-credit-loss allowance impact and lease-standard balance-sheet impact when quantified.
- Interest-rate model assumptions and changes in the disclosed NII and NPV sensitivity measures.
- Whether share repurchases and dividends remain consistent with capital, liquidity, and growth needs.