Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Washington Federal, Inc. (the "Company" or "Washington Federal") makes statements in this Quarterly Report on Form 10-Q that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under Item 1A. “Risk Factors,” and in any of the Company's other subsequent Securities and Exchange Commission ("SEC") filings, which could cause the Company's future results to differ materially from the plans, objectives, goals, estimates, intentions and expectations expressed in forward-looking statements:
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•
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a deterioration in economic conditions, including declines in the real estate market and home sale volumes and financial stress on borrowers (consumers and businesses) as a result of the uncertain economic environment;
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•
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the effects of a severe economic downturn, including high unemployment rates and declines in housing prices and property values, in the Company's primary market areas;
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•
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the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
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•
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fluctuations in interest rate risk and changes in market interest rates;
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•
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the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
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•
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the Company's ability to successfully complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such activities;
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•
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legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential limitations
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in the manner in which the Company conducts its business and undertake new investments and activities;
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•
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the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms;
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•
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changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
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•
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the success of the Company at managing the risks involved in the remediation efforts associated with its Bank Secrecy Act program, costs of enhancements to the Bank’s BSA program are greater than anticipated; and governmental authorities undertake enforcement actions or legal proceedings with respect to the Bank’s BSA program beyond those contemplated by the Consent Order, and the potential impact of such matters on the success, timing and ability to pursue the Company’s growth or other business initiatives;
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•
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the success of the Company at managing the risks involved in the foregoing and managing its business; and
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•
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the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.
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All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.
GENERAL & BUSINESS DESCRIPTION
Washington Federal, Inc. is a bank holding company headquartered in Seattle, Washington that conducts its operations through Washington Federal, National Association (“Bank”), a federally chartered national bank subsidiary. Washington Federal, Inc. and
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
its consolidated subsidiaries are engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate.
The Company's fiscal year end is September 30
th
. All references to
2018
represent balances as of
September 30, 2018
or activity for the fiscal year then ended.
INTEREST RATE RISK
Based on management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term loans and transaction deposit accounts, to reduce its interest rate risk profile. The mix of transaction and savings accounts is
58%
of total deposits as of
December 31, 2018
while the composition of the investment securities portfolio is
24%
variable and
76%
fixed rate. When interest rates rise, the fair value of the investment securities with fixed rates will decrease and vice versa when interest rates decline. The Company has
$1,586,815,000
of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of
December 31, 2018
, the net unrealized loss on these securities was
$49,319,000
. The Company has $
1,451,340,000
of available-for-sale securities that are carried at fair value. As of
December 31, 2018
, the net unrealized loss on these securities was
$8,008,000
. The Company has executed interest rate swaps to hedge interest rate risk on certain FHLB borrowings. The unrealized gain on these interest rate swaps as of
December 31, 2018
was
$11,751,000
. All of the above are pre-tax net unrealized gains or losses.
The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) of the Company.
Net Interest Income Sensitivity
. The Company estimates the sensitivity of its net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in the Company's interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. The analysis assumes a constant balance sheet. Actual results would differ from the assumptions used in this model, as management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates.
In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would decrease by
2.6%
in the next year. This compares to an estimated decrease of
2.3%
as of the
September 30, 2018
analysis. The change is primarily due to higher interest rates, lower expected prepayment speeds and shifts in the mix of fixed versus adjustable rate assets, partially offset by a decrease in the estimated deposit betas used for transaction deposits in the Company's asset liability management model. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long term rates over two years would result in a net interest income decrease of
1.3%
in the first year and decrease of
6.5%
in the second year assuming a constant balance sheet and no management intervention.
NPV Sensitivity
. NPV is an estimate of the market value of shareholders' equity. NPV is calculated as the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of NPV to changes in interest rates provides a view of interest rate risk as it incorporates all future expected cash flows. As of
December 31, 2018
, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by
$456,791,000
or
22.5%
and the NPV to total assets ratio to decline to
10.6%
from a base of
12.7%
. As of
September 30, 2018
, the NPV in the event of a 200 basis point increase in rates was estimated to decline by
$452,713,000
or
20.5%
and the NPV to total assets ratio to decline to
12.1%
from a base of
14.2%
. The change in NPV sensitivity and lower base NPV ratio is due primarily to higher interest rates that have resulted in lower asset prices as well as greater asset price sensitivity due to lower expected prepayment speeds on fixed rate loans and mortgage-backed securities as of
December 31, 2018
.
Interest Rate Spread
. The interest rate spread is measured as the difference between the rate on total loans and investments and the rate on costing liabilities at the end of each period. The interest rate spread decreased to
2.86%
at
December 31, 2018
from
2.90%
at
September 30, 2018
. The spread decrease of
4
basis points is primarily due to the rise in short-term interest rates, which resulted in a higher rate being paid on interest-bearing deposits and short-term FHLB borrowings partially offset by a higher rate being earned on cash and adjustable rate loans and investment securities. As of
December 31, 2018
, the weighted average rate on earning assets increased by
10
basis points to
4.17%
compared to
September 30, 2018
, while the weighted average cost of funds increased by
14
basis points to
1.31%
. The interest rate spread decreased to
2.86%
at
December 31, 2018
from 2.92% at
December 31, 2017
due to the same factors described above.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Net Interest Margin
. Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin decreased to
3.21%
for the quarter ended
December 31, 2018
from
3.26%
for the quarter ended
December 31, 2017
. The yield on earning assets increased
27
basis points to
4.35%
and the cost of interest bearing liabilities increased
33
basis point to
1.24%
over that same period. The higher yield on earning assets is the result of the rise in short-term interest rates, which resulted in a higher rate being earned on cash and adjustable rate loans and investment securities, as well as the shift in mix from investment securities into a higher proportion of loans receivable that carry higher yields on average. The higher rate in interest bearing liabilities was primarily due to the increase in rates on interest-bearing deposit accounts and short-term FHLB advances partially offset by the maturity of certain long-term FHLB advances with higher rates.
The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago.
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Three Months Ended December 31, 2018
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Three Months Ended December 31, 2017
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Average Balance
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Interest
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Average Rate
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Average Balance
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Interest
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Average Rate
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($ in thousands)
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($ in thousands)
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Assets
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Loans receivable
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$
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11,542,621
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$
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137,065
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4.71
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%
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$
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10,984,886
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$
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124,511
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4.50
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%
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Mortgaged-backed securities
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2,592,535
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19,192
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2.94
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2,521,407
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16,899
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2.66
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Cash & Investments
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579,580
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4,752
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3.25
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559,370
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3,273
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2.32
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FHLB & FRB stock
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132,305
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1,613
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4.84
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126,229
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1,097
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3.45
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Total interest-earning assets
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14,847,041
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162,622
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4.35
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%
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14,191,892
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145,780
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4.08
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%
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Other assets
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1,167,575
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1,149,607
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Total assets
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$
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16,014,616
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$
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15,341,499
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Liabilities and Equity
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Customer accounts
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$
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11,436,685
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$
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26,579
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0.92
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%
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$
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10,850,742
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$
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14,638
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0.54
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%
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FHLB advances
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2,457,880
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16,891
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2.73
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2,305,978
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15,407
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2.65
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Total interest-bearing liabilities
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13,894,565
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43,470
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1.24
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%
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13,156,720
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30,045
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0.91
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%
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Other liabilities
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129,396
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168,382
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Total liabilities
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14,023,961
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13,325,102
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Stockholders' equity
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1,990,655
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2,016,397
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Total liabilities and equity
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$
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16,014,616
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$
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15,341,499
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Net interest income
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$
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119,152
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$
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115,735
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Net interest margin
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3.21
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%
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3.26
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%
|
As of
December 31, 2018
, total assets had increased by
$322,402,000
to
$16,188,126,000
from
$15,865,724,000
at
September 30, 2018
. During the
three months ended
December 31, 2018
, cash and cash equivalents increased by
$14,725,000
, loans receivable increased
$223,158,000
, and investment securities increased by
$97,778,000
.
Cash and cash equivalents of
$283,375,000
and stockholders’ equity of
$1,983,089,000
as of
December 31, 2018
provide management with flexibility in managing interest rate risk going forward.
LIQUIDITY AND CAPITAL RESOURCES
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, repayments and sales of investments and borrowings and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments.
The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") up to
45%
of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity if needed.
The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term loan agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB. The Bank is also eligible to borrow under the Federal Reserve Bank's primary credit program.
The Company's cash and cash equivalents totaled
$283,375,000
at
December 31, 2018
, an increase from
$268,650,000
at
September 30, 2018
. These amounts include the Bank's operating cash.
The Company’s net worth at
December 31, 2018
was
$1,983,089,000
, or
12.25%
of total assets. This is a decrease of
$13,819,000
from
September 30, 2018
when net worth was
$1,996,908,000
, or
12.59%
of total assets. The Company’s net worth was impacted in the
three months ended
December 31, 2018
by net income of
$52,942,000
, the payment of
$14,638,000
in cash dividends, treasury stock purchases of
$48,930,000
, as well as an other comprehensive loss of
$5,403,000
. The ratio of tangible capital to tangible assets at
December 31, 2018
was
10.53%
. Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment.
Washington Federal, Inc. and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.
Federal banking agencies establish regulatory capital rules that require minimum capital ratios and establish criteria for calculating regulatory capital. Minimum capital ratios for four measures are used for assessing capital adequacy. The standards are indicated in the table below. The common equity tier 1 capital ratio recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The rules set forth a “capital conservation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus these buffers, the bank's regulators may place restrictions on it. These restrictions include reducing dividend payments, share buy-backs, and staff bonus payments. The purpose of these buffers is to require banks to build up capital outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where losses are incurred, the minimum capital ratios can still be met. The capital rules that became effective in January 2015 include a phase-in period for certain minimum ratios and the capital buffers, before the full minimum ratios take effect in 2019. Management continues to monitor the financial position of the Company and its capital ratios as the rules phase in.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
There are also standards for Adequate and Well Capitalized criteria that are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank and the Company must maintain minimum common equity risk-based, tier 1 risk-based, total risk-based and tier 1 leverage ratios as set forth in the following table.
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Actual
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Minimum Capital
Adequacy Guidelines
|
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Minimum Well-Capitalized Guidelines
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($ in thousands)
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Capital
|
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Ratio
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Ratio
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Ratio
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December 31, 2018
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Common Equity Tier I risk-based capital ratio:
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The Company
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$
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1,670,577
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14.44
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%
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|
4.50
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%
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|
NA
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The Bank
|
1,663,692
|
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|
14.38
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%
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4.50
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%
|
|
6.50
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%
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|
Tier I risk-based capital ratio:
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The Company
|
1,670,577
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|
14.44
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%
|
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6.00
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%
|
|
NA
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The Bank
|
1,663,692
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14.38
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%
|
|
6.00
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%
|
|
8.00
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%
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Total risk-based capital ratio:
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The Company
|
1,807,992
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|
15.63
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%
|
|
8.00
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%
|
|
NA
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The Bank
|
1,801,107
|
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|
15.56
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%
|
|
8.00
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%
|
|
10.00
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%
|
|
Tier 1 Leverage ratio:
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The Company
|
1,670,577
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|
10.63
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%
|
|
4.00
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%
|
|
NA
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The Bank
|
1,663,692
|
|
|
10.58
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%
|
|
4.00
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%
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
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Common Equity Tier 1 risk-based capital ratio:
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The Company
|
$
|
1,678,475
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|
14.71
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%
|
|
4.50
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%
|
|
NA
|
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The Bank
|
1,661,628
|
|
|
14.55
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%
|
|
4.50
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%
|
|
6.50
|
%
|
|
Tier I risk-based capital ratio:
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|
|
|
|
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The Company
|
1,678,475
|
|
|
14.71
|
%
|
|
6.00
|
%
|
|
NA
|
|
|
The Bank
|
1,661,628
|
|
|
14.55
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%
|
|
6.00
|
%
|
|
8.00
|
%
|
|
Total risk-based capital ratio:
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|
|
|
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The Company
|
1,814,981
|
|
|
15.91
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%
|
|
8.00
|
%
|
|
NA
|
|
|
The Bank
|
1,798,135
|
|
|
15.75
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
|
Tier 1 Leverage ratio:
|
|
|
|
|
|
|
|
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The Company
|
1,678,475
|
|
|
10.85
|
%
|
|
4.00
|
%
|
|
NA
|
|
|
The Bank
|
1,661,628
|
|
|
10.74
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents
: Cash and cash equivalents are
$283,375,000
at
December 31, 2018
, an increase of
$14,725,000
, or
5.5%
, since
September 30, 2018
.
Available-for-sale and held-to-maturity investment securities
: Available-for-sale securities increased
$136,383,000
, or
10.4%
, during the
three months ended
December 31, 2018
, mostly due to purchases of
$172,076,000
and a decrease in the net unrealized loss of
$3,515,000
, partially offset by principal repayments and maturities of
$38,118,000
. During the same period, the balance of held-to-maturity securities decreased by
$38,605,000
primarily due to principal pay-downs and maturities of
$37,736,000
. As of
December 31, 2018
, the Company had a net unrealized loss on available-for-sale securities of
$8,008,000
, which is included on a net of tax basis in accumulated other comprehensive income (loss).
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Loans receivable
: Loans receivable, net of related contra accounts, increased by
$223,158,000
to
$11,700,239,000
at
December 31, 2018
, compared to
$11,477,081,000
at
September 30, 2018
. The increase resulted primarily from originations of
$1,044,766,000
partially offset by loan principal repayments of
$871,794,000
. Commercial loan originations accounted for
73%
of total originations and consumer loan originations were
27%
during the period. The increase in the loan portfolio is consistent with management's strategy during low rate environments to produce more multifamily, commercial real estate, and commercial and industrial loans that generally have adjustable interest rates or a shorter duration.
The following table shows the loan portfolio by category and the change.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
Change
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
$
|
%
|
|
Gross loans by category
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
$
|
5,844,963
|
|
44.9
|
%
|
|
$
|
5,798,966
|
|
45.1
|
%
|
|
$
|
45,997
|
|
0.8
|
%
|
|
Construction
|
1,841,674
|
|
14.1
|
|
|
1,890,668
|
|
14.7
|
|
|
(48,994
|
)
|
(2.6
|
)
|
|
Construction - custom
|
607,071
|
|
4.7
|
|
|
624,479
|
|
4.9
|
|
|
(17,408
|
)
|
(2.8
|
)
|
|
Land - acquisition & development
|
181,323
|
|
1.4
|
|
|
155,204
|
|
1.2
|
|
|
26,119
|
|
16.8
|
|
|
Land - consumer lot loans
|
100,563
|
|
0.8
|
|
|
102,036
|
|
0.8
|
|
|
(1,473
|
)
|
(1.4
|
)
|
|
Multi-family
|
1,405,172
|
|
10.8
|
|
|
1,385,125
|
|
10.8
|
|
|
20,047
|
|
1.4
|
|
|
Commercial real estate
|
1,526,887
|
|
11.7
|
|
|
1,452,168
|
|
11.3
|
|
|
74,719
|
|
5.1
|
|
|
Commercial & industrial
|
1,213,738
|
|
9.3
|
|
|
1,140,874
|
|
8.9
|
|
|
72,864
|
|
6.4
|
|
|
HELOC
|
136,856
|
|
1.1
|
|
|
130,852
|
|
1.0
|
|
|
6,004
|
|
4.6
|
|
|
Consumer
|
162,221
|
|
1.2
|
|
|
173,306
|
|
1.3
|
|
|
(11,085
|
)
|
(6.4
|
)
|
|
Total gross loans
|
13,020,468
|
|
100
|
%
|
|
12,853,678
|
|
100
|
%
|
|
166,790
|
|
1.3
|
%
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
131,165
|
|
|
|
129,257
|
|
|
|
1,908
|
|
1.5
|
%
|
|
Loans in process
|
1,138,308
|
|
|
|
1,195,506
|
|
|
|
(57,198
|
)
|
(4.8
|
)
|
|
Net deferred fees, costs and discounts
|
50,756
|
|
|
|
51,834
|
|
|
|
(1,078
|
)
|
(2.1
|
)
|
|
Total loan contra accounts
|
1,320,229
|
|
|
|
1,376,597
|
|
|
|
(56,368
|
)
|
(4.1
|
)
|
|
Net Loans
|
$
|
11,700,239
|
|
|
|
$
|
11,477,081
|
|
|
|
$
|
223,158
|
|
1.9
|
%
|
Non-performing assets
: Non-performing assets decreased
$7,363,000
during the
three months ended
December 31, 2018
to
$62,730,000
from
$70,093,000
at
September 30, 2018
. The change is due to a
$4,236,000
decrease in non-accrual loans and
$3,127,000
decline in real estate owned ("REO"). Non-performing assets as a percentage of total assets was
0.39%
at
December 31, 2018
compared to
0.44%
at
September 30, 2018
.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
The following table sets forth information regarding restructured loans and non-performing assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
September 30,
2018
|
|
|
($ in thousands)
|
|
Restructured loans:
|
|
|
|
|
|
|
|
|
Single-family residential
|
$
|
133,808
|
|
|
89.4
|
%
|
|
$
|
139,797
|
|
|
89.1
|
%
|
|
Land - acquisition & development
|
103
|
|
|
0.1
|
|
|
107
|
|
|
0.1
|
|
|
Land - consumer lot loans
|
4,601
|
|
|
3.1
|
|
|
4,916
|
|
|
3.1
|
|
|
Multi - family
|
435
|
|
|
0.3
|
|
|
448
|
|
|
0.3
|
|
|
Commercial real estate
|
5,552
|
|
|
3.7
|
|
|
6,254
|
|
|
4.0
|
|
|
Commercial & industrial
|
4,159
|
|
|
2.8
|
|
|
4,290
|
|
|
2.7
|
|
|
HELOC
|
968
|
|
|
0.6
|
|
|
976
|
|
|
0.6
|
|
|
Consumer
|
67
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
Total restructured loans (1)
|
$
|
149,693
|
|
|
100
|
%
|
|
$
|
156,858
|
|
|
100
|
%
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Single-family residential
|
$
|
24,748
|
|
|
48.1
|
%
|
|
$
|
27,643
|
|
|
49.6
|
%
|
|
Construction
|
1,380
|
|
|
2.7
|
|
|
2,427
|
|
|
4.4
|
|
|
Construction - custom
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Land - acquisition & development
|
438
|
|
|
0.9
|
|
|
920
|
|
|
1.7
|
|
|
Land - consumer lot loans
|
785
|
|
|
1.5
|
|
|
787
|
|
|
1.4
|
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate
|
9,478
|
|
|
18.4
|
|
|
8,971
|
|
|
16.1
|
|
|
Commercial & industrial
|
13,995
|
|
|
27.2
|
|
|
14,394
|
|
|
25.8
|
|
|
HELOC
|
599
|
|
|
1.2
|
|
|
523
|
|
|
0.9
|
|
|
Consumer
|
27
|
|
|
0.1
|
|
|
21
|
|
|
—
|
|
|
Total non-accrual loans
|
51,450
|
|
|
100
|
%
|
|
55,686
|
|
|
100
|
%
|
|
Real estate owned
|
8,171
|
|
|
|
|
11,298
|
|
|
|
|
Other property owned
|
3,109
|
|
|
|
|
3,109
|
|
|
|
|
Total non-performing assets
|
$
|
62,730
|
|
|
|
|
$
|
70,093
|
|
|
|
|
Total non-performing assets and performing restructured loans as a percentage of total assets
|
1.28
|
%
|
|
|
|
1.39
|
%
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
(1) Restructured loans were as follows:
|
|
|
|
|
|
|
|
|
Performing
|
$
|
143,768
|
|
|
96.0
|
%
|
|
$
|
150,667
|
|
|
96.1
|
%
|
|
Non-performing (included in non-accrual loans above)
|
5,925
|
|
|
4.0
|
|
|
6,191
|
|
|
3.9
|
|
|
|
$
|
149,693
|
|
|
100
|
%
|
|
$
|
156,858
|
|
|
100
|
%
|
For the
three months ended
December 31, 2018
, the Company recognized
$843,000
in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of
$587,000
for the same period had these loans performed according to their original contract terms. Recognized interest income for the
three months ended
December 31, 2018
was higher than what otherwise would have been collected in the period due to the collection of past due amounts. In addition to the non-accrual loans reflected in the above table, the Company had
$43,479,000
of loans that were less than 90 days delinquent at
December 31, 2018
but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs and performing restructured loans as a percent of total assets would have increased to
1.54%
at
December 31, 2018
.
Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Most restructured loans are accruing and performing loans where the borrower has proactively approached the Bank about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised
89.4%
of restructured loans as of
December 31, 2018
. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twenty-four months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are generally required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform, it will be placed in non-accrual status when it is 90 days delinquent.
A loan that defaults and is subsequently modified would impact the Company’s delinquency trend, which is part of the qualitative risk factors component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the historical loss factors component of the Company's general reserve calculation.
Allowance for loan losses
: The following table shows the Company’s allowance for loan losses by loan category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Loans Collectively Evaluated for Impairment
|
|
Loans Individually Evaluated for Impairment
|
|
|
Allowance Allocation
|
|
Recorded Investment of Loans
|
|
Ratio
|
|
Allowance Allocation
|
|
Recorded Investment of Loans
|
|
Ratio
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Single-family residential
|
$
|
31,484
|
|
|
$
|
5,833,667
|
|
|
0.5
|
%
|
|
$
|
—
|
|
|
$
|
16,259
|
|
|
—
|
%
|
|
Construction
|
31,463
|
|
|
1,045,849
|
|
|
3.0
|
|
|
—
|
|
|
1,380
|
|
|
—
|
|
|
Construction - custom
|
1,926
|
|
|
299,622
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Land - acquisition & development
|
9,147
|
|
|
145,197
|
|
|
6.3
|
|
|
9
|
|
|
438
|
|
|
2.1
|
|
|
Land - consumer lot loans
|
2,144
|
|
|
95,628
|
|
|
2.2
|
|
|
—
|
|
|
303
|
|
|
—
|
|
|
Multi-family
|
7,880
|
|
|
1,404,714
|
|
|
0.6
|
|
|
4
|
|
|
435
|
|
|
0.9
|
|
|
Commercial real estate
|
12,569
|
|
|
1,512,064
|
|
|
0.8
|
|
|
142
|
|
|
14,823
|
|
|
1.0
|
|
|
Commercial & industrial
|
29,934
|
|
|
1,199,565
|
|
|
2.5
|
|
|
345
|
|
|
14,206
|
|
|
2.4
|
|
|
HELOC
|
1,064
|
|
|
135,369
|
|
|
0.8
|
|
|
—
|
|
|
519
|
|
|
—
|
|
|
Consumer
|
3,054
|
|
|
161,958
|
|
|
1.9
|
|
|
—
|
|
|
162
|
|
|
—
|
|
|
|
$
|
130,665
|
|
|
$
|
11,833,633
|
|
|
1.1
|
%
|
|
$
|
500
|
|
|
$
|
48,525
|
|
|
1.0
|
%
|
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
Loans Collectively Evaluated for Impairment
|
|
Loans Individually Evaluated for Impairment
|
|
|
Allowance Allocation
|
|
Recorded Investment of Loans
|
|
Ratio
|
|
Allowance Allocation
|
|
Recorded Investment of Loans
|
|
Ratio
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Single-family residential
|
$
|
33,033
|
|
|
$
|
5,782,870
|
|
|
0.6
|
%
|
|
$
|
—
|
|
|
$
|
21,345
|
|
|
—
|
%
|
|
Construction
|
31,317
|
|
|
1,060,428
|
|
|
3.0
|
|
|
—
|
|
|
2,427
|
|
|
—
|
|
|
Construction - custom
|
1,842
|
|
|
289,192
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Land - acquisition & development
|
7,969
|
|
|
122,639
|
|
|
6.5
|
|
|
9
|
|
|
920
|
|
|
1.0
|
|
|
Land - consumer lot loans
|
2,164
|
|
|
96,583
|
|
|
2.2
|
|
|
—
|
|
|
507
|
|
|
—
|
|
|
Multi-family
|
8,325
|
|
|
1,384,655
|
|
|
0.6
|
|
|
4
|
|
|
448
|
|
|
1.0
|
|
|
Commercial real estate
|
11,702
|
|
|
1,432,791
|
|
|
0.8
|
|
|
150
|
|
|
19,378
|
|
|
0.8
|
|
|
Commercial & industrial
|
28,348
|
|
|
1,126,438
|
|
|
2.5
|
|
|
354
|
|
|
14,437
|
|
|
2.5
|
|
|
HELOC
|
781
|
|
|
128,715
|
|
|
0.6
|
|
|
—
|
|
|
1,162
|
|
|
—
|
|
|
Consumer
|
3,259
|
|
|
173,181
|
|
|
1.9
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
|
$
|
128,740
|
|
|
$
|
11,597,492
|
|
|
1.1
|
%
|
|
$
|
517
|
|
|
$
|
60,680
|
|
|
0.9
|
%
|
Reserve for losses on unfunded commitments
: Unfunded commitments tend to vary depending on the Company's loan mix and the proportionate share of commercial loans. The balance of unfunded commitments was
$2,116,196,000
and
$2,180,162,000
at
December 31, 2018
and
September 30, 2018
, respectively. The Company estimates losses on off-balance-sheet credit exposures by allocating a loss percentage derived from historical loss factors for each asset class. The reserve for unfunded commitments was
$6,250,000
as of
December 31, 2018
, which is a decrease from
$7,250,000
at
September 30, 2018
.
Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling
$137,415,000
, or
1.06%
of gross loans, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. See Note E for further discussion and analysis of the allowance for loan losses as of and for the period ended
December 31, 2018
.
Real estate owned
: REO decreased during the
three months ended
December 31, 2018
by
$3,127,000
to
$8,171,000
, primarily due to sales of REO properties during the period.
Intangible assets
: Intangible assets decreased to
$310,776,000
as of
December 31, 2018
from
$311,286,000
as of
September 30, 2018
. The decrease was due to amortization of finite-lived intangible assets.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Customer accounts
: Customer accounts increased
$174,546,000
, or
1.5%
, to
$11,561,692,000
at
December 31, 2018
compared with
$11,387,146,000
at
September 30, 2018
.
The following table shows the composition of the Bank’s customer accounts by deposit type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
|
Deposit Account Balance
|
|
As a % of Total Deposits
|
|
Wtd. Avg.
Rate
|
|
Deposit Account Balance
|
|
As a % of Total Deposits
|
|
Wtd. Avg.
Rate
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest checking
|
$
|
1,409,236
|
|
|
12.2
|
%
|
|
—
|
%
|
|
$
|
1,401,226
|
|
|
12.3
|
%
|
|
—
|
%
|
|
Interest checking
|
1,881,740
|
|
|
16.3
|
|
|
0.64
|
|
|
1,778,520
|
|
|
15.6
|
|
|
0.50
|
|
|
Savings (passbook/statement)
|
807,608
|
|
|
7.0
|
|
|
0.11
|
|
|
836,501
|
|
|
7.3
|
|
|
0.11
|
|
|
Money market
|
2,645,762
|
|
|
22.9
|
|
|
0.76
|
|
|
2,566,096
|
|
|
22.5
|
|
|
0.65
|
|
|
Time deposits
|
4,817,346
|
|
|
41.7
|
|
|
1.69
|
|
|
4,804,803
|
|
|
42.2
|
|
|
1.50
|
|
|
Total
|
$
|
11,561,692
|
|
|
100
|
%
|
|
0.99
|
%
|
|
$
|
11,387,146
|
|
|
100
|
%
|
|
0.87
|
%
|
FHLB advances and other borrowings
: Total borrowings increased to
$2,540,000,000
as of
December 31, 2018
from
$2,330,000,000
as of
September 30, 2018
. The weighted average rate for FHLB borrowings was
2.75%
as of
December 31, 2018
and
2.66%
at
September 30, 2018
. The increase was due to higher rates on short-term FHLB advances.
Stockholders' equity
: The Company’s total stockholders' equity at
December 31, 2018
was
$1,983,089,000
, or
12.25%
of total assets. This was a decrease of
$13,819,000
from the
September 30, 2018
total of
$1,996,908,000
, or
12.59%
of total assets. The Company’s equity was impacted in the
three months ended
December 31, 2018
by net income of
$52,942,000
, the payment of
$14,638,000
in cash dividends, treasury stock purchases of
$48,930,000
, as well as an other comprehensive loss of
$5,403,000
.
RESULTS OF OPERATIONS
Net Income
: The Company recorded net income of
$52,942,000
for the
three months ended
December 31, 2018
compared to
$51,670,000
for the prior year quarter.
Net Interest Income
: For the
three months ended
December 31, 2018
, net interest income was
$119,152,000
, which is
$3,417,000
higher than the same quarter of the prior year. Net interest margin was
3.21%
for the quarter ended
December 31, 2018
compared to
3.26%
for the quarter ended
December 31, 2017
. The increase in net interest income was primarily due to the average balance of earning assets increasing by
$655,149,000
and the yield on earning assets increasing to
4.35%
from
4.08%
, partially offset by a higher average rate paid on interest-bearing liabilities, which was
1.24%
for the
three months ended
December 31, 2018
compared to
0.91%
for the same quarter one year ago. The higher yield on earning assets is the result of the rise in short-term interest rates, which resulted in a higher rate being earned on cash and adjustable rate loans and investment securities, as well as the shift in mix from investment securities into a higher proportion of loans receivable that carry higher yields on average. The higher rate on interest-bearing liabilities was primarily due to the increase in rates on interest-bearing deposit accounts and short-term FHLB advances, partially offset by the maturity of certain long-term FHLB advances with higher rates.
The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Rate / Volume Analysis
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Three Months Ended
12/31/18 and 12/31/17
|
|
($ in thousands)
|
Volume
|
|
Rate
|
|
Total
|
|
Interest income:
|
|
|
|
|
|
|
Loans receivable
|
$
|
6,539
|
|
|
$
|
6,015
|
|
|
$
|
12,554
|
|
|
Mortgaged-backed securities
|
485
|
|
|
1,808
|
|
|
2,293
|
|
|
Investments (1)
|
173
|
|
|
1,822
|
|
|
1,995
|
|
|
All interest-earning assets
|
7,197
|
|
|
9,645
|
|
|
16,842
|
|
|
Interest expense:
|
|
|
|
|
|
|
Customer accounts
|
850
|
|
|
11,091
|
|
|
11,941
|
|
|
FHLB advances and other borrowings
|
1,018
|
|
|
466
|
|
|
1,484
|
|
|
All interest-bearing liabilities
|
1,868
|
|
|
11,557
|
|
|
13,425
|
|
|
Change in net interest income
|
$
|
5,329
|
|
|
$
|
(1,912
|
)
|
|
$
|
3,417
|
|
___________________
|
|
|
|
(1)
|
Includes interest on cash equivalents and dividends on FHLB & FRB stock.
|
Provision (Release) for Loan Losses
: The Company recorded a release of loan loss allowance of
$500,000
for the
three months ended
December 31, 2018
, compared with no provision for loan losses for the
three months ended
December 31, 2017
. Reserving for new loan originations as the loan portfolio grows has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled
$1,408,000
for the
three months ended
December 31, 2018
, compared to net recoveries of
$3,082,000
during the
three months ended
December 31, 2017
.
Other Income
: The
three months ended
December 31, 2018
results include total other income of
$19,009,000
compared to
$6,795,000
for the same period one year ago, a
$12,214,000
increase. The increase is primarily due to a net gain of $6,400,000 recognized this quarter from the sale and valuation adjustments of fixed assets as well as $8,550,000 of expense from FDIC loss share valuation adjustments in the
three months ended
December 31, 2017
.
Other Expense
: The
three months ended
December 31, 2018
results include total other expense of
$71,672,000
compared to
$61,941,000
for the same period one year ago, a
$9,731,000
or
15.7%
increase. The Company recognized $3,600,000 of non-recurring expense during the
three months ended
December 31, 2018
related to enhancements of its Bank Secrecy Act ("BSA") program and estimates that it will incur an additional $2,000,000 of non-recurring BSA related costs spread over the next two quarters. The Company has taken the opportunity allotted by the change in the tax law to make several strategic investments that have resulted in a higher level of operating expenses year over year. Those investments included a 5% salary increase for all employees earning less than $100,000; the establishment of a second technology team located in Boise, Idaho; the creation of an internal training team; and several new platform and system enhancements. Compensation and benefits costs increased
$4,264,000
primarily due to headcount increases, the aforementioned salary increases and cost of living adjustments since last year. The number of staff, including part-time employees on a full-time equivalent basis, was
1,910
and
1,829
at
December 31, 2018
and
2017
, respectively. Information technology costs increased by
$1,111,000
and other expenses increased by
$3,652,000
for the
three months ended
December 31, 2018
as both were elevated primarily due to the aforementioned Bank Secrecy Act program enhancements and other technology platform initiatives. Total other expense for the
three months ended
December 31, 2018
and
December 31, 2017
equaled
1.79%
and
1.62%
, respectively, of average assets.
Gain (Loss) on Real Estate Owned
: Results for the
three months ended
December 31, 2018
include a net gain on real estate owned of
$320,000
, compared to a gain of
$46,000
for the same period one year ago.
Income Tax Expense
: Income tax expense totaled
$14,367,000
for the
three months ended
December 31, 2018
, compared to
$8,965,000
for the same period one year ago. The effective tax rate for the
three months ended
December 31, 2018
was
21.35%
compared to
14.79%
for the
three months ended
December 31, 2017
and
20.76%
for the full fiscal year ended
September 30, 2018
. The effective tax rate for the
three months ended
December 31, 2017
was lower due to discrete tax benefits of $3,743,000 recognized related to the revaluation of deferred tax assets and liabilities stemming from tax reform as well as tax benefits of $2,205,000 related to items such as the excess deduction for stock-based compensation.