Washington Federal, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015. The company is a bank holding company operating through Washington Federal, National Association, focused primarily on residential, multifamily and commercial lending. Financial amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Key financial results
| Metric | Quarter ended June 30, 2015 | Comparable period / balance |
|---|---|---|
| Net income | $39.1 million; diluted EPS $0.41 | $37.9 million; diluted EPS $0.37 in Q3 2014 |
| Net interest income | $100.6 million | $103.3 million in Q3 2014 |
| Net interest margin | 3.02% | 3.05% in Q3 2014 |
| Other income | $11.8 million | $8.1 million in Q3 2014 |
| Other expense | $56.7 million | $53.3 million in Q3 2014 |
| Net income, nine months | $117.8 million; diluted EPS $1.22 | $116.8 million; diluted EPS $1.14 in 2014 |
- For the nine months, net interest income rose to $306.6 million from $302.2 million. Net income increased modestly despite higher operating expenses.
- Net interest margin contracted year over year in the quarter as the yield on earning assets fell 15 basis points; the cost of interest-bearing liabilities declined 12 basis points.
- Total assets were $14.37 billion at June 30, down from $14.76 billion at September 30, 2014. Net loans were $8.65 billion, up from $8.15 billion; total deposits were $10.58 billion, down from $10.72 billion.
- Cash and cash equivalents were $349.6 million, compared with $781.8 million at September 30, 2014. Nine-month operating cash flow was $72.8 million, versus $94.8 million a year earlier. Investing activities used $17.4 million and financing activities used $487.7 million.
- FHLB advances were $1.73 billion, down $200 million from September 30, 2014. Shareholders’ equity was $1.96 billion, or 13.63% of assets; tangible capital to tangible assets was 11.79%.
- Regulatory capital ratios remained well above stated well-capitalized thresholds: the company reported a 19.60% common equity Tier 1 ratio and a 20.86% total risk-based capital ratio.
Material changes and credit quality
- Loans grew, with notable increases in commercial real estate and multifamily lending; commercial real estate reached 10.6% of total gross loans, versus 8.7% at September 30, 2014. Single-family residential loans declined as a share of the portfolio.
- Nonperforming assets fell to $128.9 million, or 0.90% of assets, from $147.3 million, or 1.00%, at September 30, 2014. Nonaccrual loans declined to $65.3 million from $87.4 million.
- The allowance for loan losses was $105.6 million, down from $112.3 million. The company recorded a $1.9 million provision reversal in the quarter and an $11.4 million reversal for the nine months. Management attributed the reversals to improving portfolio credit indicators, while noting two isolated charge-offs during the quarter.
- Of $321.5 million in troubled debt restructurings, 95.9% were classified as performing. Management said most modifications were temporary payment relief, typically rate reductions of 100–200 basis points for six to twelve months.
- Covered loans declined to $77.3 million from $176.5 million. FDIC loss-share coverage on certain former Horizon Bank commercial loans expired in March 2015; coverage on $38.7 million of former Home Valley Bank commercial assets was scheduled to expire September 30, 2015.
Management commentary, outlook and risks
- The company sold available-for-sale securities and recorded a $9.6 million gain in the quarter. This was partly offset by a $7.9 million prepayment penalty on a $100 million FHLB advance repaid in June; an additional $2.6 million penalty related to a December 2014 repayment was recorded in the nine-month period.
- Management said it expects a lower effective tax rate going forward, citing bank-owned life insurance and increased investment in low-income housing tax-credit partnerships. No earnings or revenue guidance was provided.
- Interest-rate exposure is material. The one-year repricing gap was negative 13.2% of assets, versus negative 11.3% at September 30, 2014. A modeled immediate 200-basis-point rate increase was estimated to reduce next-year net interest income by 2.20%; a separate model estimated a 20.4% decline in net portfolio value. These are model-based estimates and depend on assumptions.
- Management reported $3.013 billion of remaining FHLB borrowing capacity and said the FHLB line equals 49% of total assets. The company also noted that rising rates could create unrealized losses on long-term fixed-rate mortgage-backed securities.
- Management disclosed correction of an $8.9 million over-accrual of interest income accumulated since fiscal 2011. It stated that the correction had no material impact on prior reporting periods. The filing reports no material legal proceedings and says disclosure controls were effective.
- Forward-looking results remain subject to economic and regulatory conditions, interest rates, deposit flows and funding costs, loan demand and credit quality, competition, and other factors discussed in the filing.
Important facts for investors to verify
- Reconcile securities-sale amounts: the filing reports $244.7 million of sale proceeds in the cash-flow statement, while MD&A cites $235.1 million of securities sold for the nine months; the quarter-specific sale amount is also reported as $238 million.
- Track whether deposit declines, cash usage and ongoing loan growth affect funding needs, liquidity and borrowing levels.
- Monitor commercial real estate and multifamily growth, delinquency trends, charge-offs, allowance adequacy and the performance of restructured loans.
- Assess the effect of expiring FDIC loss-share coverage and the related transition of formerly covered loans and assets.
- Compare actual outcomes with the filing’s interest-rate sensitivity scenarios and confirm the assumptions behind modeled margin and net portfolio value changes.
- Review the effect of share repurchases and dividends on capital: the company repurchased 4.8 million shares during the nine months and returned $142.0 million through dividends and repurchases.