WaFd Bank(WAFD) - 2021 Q2 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements (Unaudited) This section presents Washington Federal, Inc.'s unaudited consolidated financial statements for periods ended March 31, 2021, including financial condition, operations, comprehensive income, shareholders' equity, cash flows, and detailed notes Consolidated Statements of Financial Condition Total assets increased to $19.53 billion as of March 31, 2021, from $18.79 billion, while total liabilities grew to $17.20 billion from $16.78 billion, and shareholders' equity rose to $2.33 billion from $2.01 billion Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Total Assets | $19,533,581 | $18,794,055 | | Cash and cash equivalents | $2,318,447 | $1,702,977 | | Loans receivable, net | $13,035,423 | $12,792,317 | | Total Liabilities | $17,200,628 | $16,779,922 | | Customer accounts | $14,819,421 | $13,779,624 | | FHLB advances | $2,150,000 | $2,700,000 | | Total Shareholders' Equity | $2,332,953 | $2,014,133 | Consolidated Statements of Operations Net income available to common shareholders increased to $42.1 million for the three months ended March 31, 2021, but decreased to $81.1 million for the six-month period, primarily due to lower other income Key Performance Indicators (Three Months Ended March 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Interest Income | $124,034 | $117,612 | | Provision for Credit Losses | $0 | $8,200 | | Net Income | $44,871 | $36,377 | | Net Income available to common shareholders | $42,149 | $36,377 | | Diluted EPS | $0.56 | $0.47 | Key Performance Indicators (Six Months Ended March 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Interest Income | $244,548 | $237,297 | | Provision for Credit Losses | $3,000 | $4,450 | | Net Income | $83,822 | $104,243 | | Net Income available to common shareholders | $81,100 | $104,243 | | Diluted EPS | $1.07 | $1.34 | Consolidated Statements of Comprehensive Income Comprehensive income significantly increased to $84.6 million for the three months and $148.0 million for the six months ended March 31, 2021, primarily due to net unrealized gains on borrowings cash flow hedges Comprehensive Income (in thousands) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended March 31 | | | | Net Income | $44,871 | $36,377 | | Other Comprehensive Income (Loss) | $39,741 | $(9,525) | | Comprehensive Income | $84,612 | $26,852 | | Six Months Ended March 31 | | | | Net Income | $83,822 | $104,243 | | Other Comprehensive Income (Loss) | $64,223 | $(8,831) | | Comprehensive Income | $148,045 | $95,412 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased from $2.01 billion to $2.33 billion by March 31, 2021, driven by a $300 million preferred stock issuance, net income, and other comprehensive income, partially offset by dividends and treasury stock acquisitions - The company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock, resulting in net proceeds of $293.3 million[21] - For the six months ended March 31, 2021, the company acquired $89.8 million in treasury stock and paid $33.9 million in common stock dividends[21] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $615.5 million for the six months ended March 31, 2021, with $204.8 million from operations, $236.2 million used in investing, and $646.9 million provided by financing activities Cash Flow Summary (Six Months Ended March 31, in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $204,755 | $50,957 | | Net cash from (used in) investing activities | $(236,201) | $303,301 | | Net cash from financing activities | $646,916 | $722,158 | | Increase in cash and cash equivalents | $615,470 | $1,076,416 | Notes to Interim Consolidated Financial Statements These notes detail significant accounting policies, including CECL adoption, and provide breakdowns of loan portfolio composition, allowance for credit losses, fair value measurements, and derivative activities - The company early adopted ASU 2016-13 (CECL) effective October 1, 2019, which resulted in a $21.9 million decrease to retained earnings[37] - On February 8, 2021, the company issued 300,000 shares of 4.875% Series A Preferred Stock, raising net proceeds of $293.3 million[39] Loan Portfolio Composition (in thousands) | Loan Class | March 31, 2021 | Sept 30, 2020 | | :--- | :--- | :--- | | Total commercial loans | $9,387,560 | $8,163,029 | | Total consumer loans | $5,878,028 | $6,304,693 | | Total gross loans | $15,265,588 | $14,467,722 | - As of March 31, 2021, non-accrual loans totaled $39.96 million, or 0.30% of total loans, up from $29.06 million, or 0.22%, at September 30, 2020[73] - The allowance for loan losses increased to $172.7 million at March 31, 2021, from $167.0 million at September 30, 2020, with no provision for credit losses recorded for the three months ended March 31, 2021[88][90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, covering asset quality, CECL, interest rate risk, liquidity, capital resources, and the impact of the low-interest-rate environment and COVID-19 Asset Quality & Allowance for Credit Losses The company details its CECL methodology for ACL calculation, noting non-performing assets increased to $48.9 million (0.25% of total assets), and the total ACL stood at $199.2 million (1.30% of gross loans) - The company's ACL methodology under CECL uses a cohort method for most loan classes to determine historical loss rates, supplemented by qualitative adjustments for current conditions and a one-year economic forecast[188][189][190] Non-Performing Assets (in thousands) | Category | March 31, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Total non-accrual loans | $39,955 | $29,056 | | Real estate owned | $5,316 | $4,966 | | Other property owned | $3,672 | $3,673 | | Total non-performing assets | $48,943 | $37,695 | | % of Total Assets | 0.25% | 0.20% | - The total allowance for credit losses (including reserve for unfunded commitments) was $199.2 million as of March 31, 2021, an increase from $192.0 million at September 30, 2020[238] Interest Rate Risk The company manages interest rate risk, with a 200 basis point rate increase estimated to boost net interest income by 9.9%, while net interest margin compressed to 2.75% due to lower rates and low-yielding assets - An immediate 200 basis point increase in interest rates is estimated to increase net interest income by 9.9% in the next year, a higher sensitivity compared to the 3.4% estimate at September 30, 2020[197] - The same 200 basis point rate increase is estimated to decrease the Net Portfolio Value (NPV) by $37 million, or 1.1%[198] Net Interest Margin Analysis | Period | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Average Rate on Earning Assets | 3.30% | 4.22% | | Average Rate on Bearing Liabilities | 0.65% | 1.35% | | Net Interest Margin (NIM) | 2.75% | 3.10% | Liquidity and Capital Resources The company maintains strong liquidity and capital, bolstered by a $300 million preferred stock issuance, with shareholders' equity at $2.33 billion and all regulatory capital ratios exceeding 'well capitalized' minimums - The company issued $300 million of 4.875% Series A Preferred Stock, enhancing its capital base[209] - Customer deposits grew by $1.04 billion (7.5%) since September 30, 2020, providing strong liquidity and allowing for a reduction in FHLB borrowings[215] Regulatory Capital Ratios (The Company) | Ratio | March 31, 2021 | Minimum Adequacy | | :--- | :--- | :--- | | Common Equity Tier I | 12.09% | 4.50% | | Tier I risk-based capital | 14.29% | 6.00% | | Total risk-based capital | 15.55% | 8.00% | | Tier 1 Leverage | 10.27% | 4.00% | Changes in Financial Condition Total assets grew by $739.5 million to $19.5 billion, driven by increased cash and net loans, with commercial loan growth offsetting a decrease in consumer loans, and customer accounts rising by $1.04 billion - Net loans receivable increased by $243.1 million since September 30, 2020, with commercial loan originations accounting for 78% of total originations during the period[226] - Customer accounts grew by $1.04 billion (7.5%), driven by a $1.42 billion (14.5%) increase in transaction accounts, while time deposits decreased by $382.4 million (9.6%)[242] - FHLB borrowings decreased by $550 million to $2.15 billion as strong deposit growth provided excess liquidity[244] Results of Operations Net income for Q2 2021 increased to $44.9 million due to higher net interest income and no credit loss provision, despite other income decreasing due to a hedge gain offset by a debt repayment loss, and slightly higher other expenses - Net interest income for Q2 2021 was $124.0 million, a $6.4 million increase YoY, driven by 19% growth in average interest-earning assets[247][250] - The company recorded no provision for credit losses in Q2 2021, compared to an $8.2 million provision in Q2 2020, recorded at the onset of the pandemic[253] - Other income for Q2 2021 included a $14.1 million gain on a hedging derivative termination, largely offset by a $13.8 million prepayment penalty on long-term debt[254][12] - Other expense increased by $2.3 million YoY to $81.7 million, mainly due to a $5.0 million (13.0%) increase in compensation and benefits[255] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in the company's quantitative and qualitative market risk disclosures since September 30, 2020, with further details available in the 2020 Form 10-K - Management confirms no material changes to the company's market risk profile since September 30, 2020[259] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[260] - There were no material changes in the company's internal control over financial reporting during the quarter[261] Part II - Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, none of which are expected to materially impact its consolidated financial statements - The company is involved in legal proceedings from time to time, but management does not expect them to have a material effect on the financial statements[173][263] Item 1A. Risk Factors The company refers to its 2020 Annual Report on Form 10-K for a comprehensive discussion of risk factors that could materially affect its business and financial condition - There are no new risk factors presented; the company directs investors to its 2020 Form 10-K for a detailed discussion of risks[264] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2021, the company repurchased 2,824,588 common shares at an average price of $31.53, with 11,769,687 shares remaining authorized for repurchase Share Repurchases (Quarter Ended March 31, 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 2021 | 2,083 | $25.74 | | Feb 2021 | 830 | $29.97 | | Mar 2021 | 2,821,675 | $31.54 | | Total | 2,824,588 | $31.53 | - The Board of Directors authorized an additional 10,000,000 shares for repurchase on January 26, 2021[266] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and iXBRL-formatted financial statements