WAFD, INC. 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 subsequentSecurities 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: •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; •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; •the effects of and changes in monetary and fiscal policies of theBoard of Governors of theFederal Reserve System and theU.S. Government ; •fluctuations in interest rate risk and changes in market interest rates, including risk related to LIBOR reform; •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; •legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential limitations in the manner in which the Company conducts its business and undertake new investments and activities; •the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms; •changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees; •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; •the success of the Company at managing the risks involved in the foregoing and managing its business; and •the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control. 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 DESCRIPTIONWashington Federal Bank , National Association, a federally-insured national bank dbaWaFd Bank (the "Bank" or "WaFd Bank "), was founded onApril 24, 1917 in Ballard,Washington and is 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.Washington Federal, Inc. , aWashington corporation (the "Company"), was formed as the Bank's holding company 34
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES in November, 1994. As used throughout this document, the terms "Washington Federal" or the "Company" refer to the Company and its consolidated subsidiaries, and the term "Bank" refers to the operating subsidiary,Washington Federal Bank , National Association. The Company is headquartered inSeattle, Washington . The Company's fiscal year end isSeptember 30th . All references to 2019 represent balances as ofSeptember 30, 2019 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 61% of total deposits as ofDecember 31, 2019 while the composition of the investment securities portfolio is 25% variable and 75% 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$1,360,694,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As ofDecember 31, 2019 , the net unrealized gain on these securities was$19,726,000 . The Company has$1,495,586,000 of available-for-sale securities that are carried at fair value. As ofDecember 31, 2019 , the net unrealized gain on these securities was$25,523,000 . The Company has executed interest rate swaps to hedge interest rate risk on certain FHLB borrowings. The unrealized loss on these interest rate swaps as ofDecember 31, 2019 was$4,762,000 . 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 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. As ofDecember 31, 2019 , 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 increase by 0.7% in the next year. This compares to an estimated increase of 1.4% as of theSeptember 30, 2019 analysis. The change is primarily due to fluctuating interest rates and the impact to expected prepayment speeds as well as shifts in the mix of fixed versus adjustable rate assets and updated 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 0.1% in the first year and decrease of 3.6% 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 ofDecember 31, 2019 , in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by$369,764,000 or 14.5% and the NPV to total assets ratio to decline to 13.9% from a base of 15.2%. As ofSeptember 30, 2019 , the NPV in the event of a 200 basis point increase in rates was estimated to decline by$257,638,000 or 10.5% and the NPV to total assets ratio to decline to 13.9% from a base of 14.6%. The change in NPV sensitivity is due primarily to fluctuating interest rates that have impacted asset prices as well as sensitivity to expected prepayment speeds on fixed rate loans and mortgage-backed securities as ofDecember 31, 2019 . 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 2.76% atDecember 31, 2019 from 2.80% atSeptember 30, 2019 . The spread compression of 4 basis points is primarily due to the decrease in short-term interest rates, which resulted in a lower rate on interest earning assets partially offset by a lower rate on interest-bearing liabilities. As ofDecember 31, 2019 , the weighted average rate earned on interest-earning assets decreased by 10 basis points to 4.00% compared toSeptember 30, 2019 , while the weighted average rate being paid on interest-bearing liabilities decreased by 6 basis 35
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES points to 1.24%. The interest rate spread decreased to 2.76% atDecember 31, 2019 from 2.86% atDecember 31, 2018 due to the same factors described above. 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 3.15% for the quarter endedDecember 31, 2019 from 3.21% for the quarter endedDecember 31, 2018 . The yield on interest-earning assets decreased 5 basis points to 4.30% and the cost of interest-bearing liabilities increased 3 basis points to 1.27% over that same period. The lower yield on interest-earning assets is the result of the decrease in short-term interest rates, which resulted in a lower rate being earned on cash and adjustable rate loans and investment securities. The higher rate in interest-bearing liabilities was primarily due to the increase in rates on interest-bearing deposits partially offset by lower rates paid on FHLB advances. The following tables set forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago.
Three Months Ended December
Three Months Ended December 31, 2019 31, 2018
Average Balance Interest Average Rate Average Balance Interest Average Rate
($ in thousands) ($ in thousands)
Assets
Loans receivable $ 11,942,498 $ 142,146 4.72 % $ 11,542,621 $ 137,065 4.71 %
Mortgaged-backed securities 2,360,374 15,612 2.62 2,592,535 19,192 2.94
Cash & Investments 776,633 5,425 2.77 579,580 4,752 3.25
FHLB & FRB stock 124,568 1,641 5.23 132,305 1,613 4.84
Total interest-earning assets 15,204,073 164,824 4.30 % 14,847,041 162,622 4.35 %
Other assets 1,189,996 1,167,575
Total assets $ 16,394,069 $ 16,014,616
Liabilities and Equity
Customer accounts $ 11,888,167 $ 31,481 1.05 % $ 11,436,685 $ 26,579 0.92 %
FHLB advances 2,264,457 13,658 2.39 2,457,880 16,891 2.73
Total interest-bearing liabilities 14,152,624 45,139 1.27 % 13,894,565 43,470 1.24 %
Other liabilities 202,675 129,396
Total liabilities 14,355,299 14,023,961
Shareholders' equity 2,038,770 1,990,655
Total liabilities and equity $ 16,394,069 $ 16,014,616
Net interest income $ 119,685 $ 119,152
Net interest margin (NIM) 3.15 % 3.21 %
As of December 31, 2019 , total assets had decreased by $51,749,000 to
$16,423,161,000 from $16,474,910,000 at September 30, 2019 . During the three
months ended December 31, 2019 , cash and cash equivalents increased by
$64,647,000 , loans receivable decreased $25,714,000 , and investment securities
decreased by $72,942,000 .
Cash and cash equivalents of $483,805,000 and shareholders' equity of
$2,050,909,000 as of December 31, 2019 provide management with flexibility in
managing interest rate risk going forward.
LIQUIDITY AND CAPITAL RESOURCES
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. Additionally, the Company earns fee income for loan, deposit,
insurance and other services.
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.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES 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 theFederal Reserve Bank's primary credit program. The Company's cash and cash equivalents totaled$483,805,000 atDecember 31, 2019 , an increase from$419,158,000 atSeptember 30, 2019 . These amounts include the Bank's operating cash. The Company's shareholders' equity atDecember 31, 2019 was$2,050,909,000 , or 12.49% of total assets. This is an increase of$17,914,000 fromSeptember 30, 2019 when net worth was$2,032,995,000 , or 12.34% of total assets. The Company's shareholders' equity was impacted in the three months endedDecember 31, 2019 by net income of$65,703,000 , the payment of$16,433,000 in cash dividends, treasury stock purchases of$33,479,000 , as well as other comprehensive income of$694,000 . The ratio of tangible capital to tangible assets atDecember 31, 2019 was 10.80%. 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. 37
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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.
Minimum Capital
Actual Adequacy Guidelines Minimum Well-Capitalized Guidelines
($ in thousands) Capital Ratio Ratio Ratio
December 31, 2019
Common Equity Tier I risk-based
capital ratio:
The Company $ 1,726,579 14.17 % 4.50 % NA
The Bank 1,679,075 13.88 % 4.50 % 6.50 %
Tier I risk-based capital
ratio:
The Company 1,726,579 14.17 % 6.00 % NA
The Bank 1,679,075 13.88 % 6.00 % 8.00 %Total risk-based capital ratio:
The Company 1,866,593 15.32 % 8.00 % NA The Bank 1,819,089 15.04 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 1,726,579 10.72 % 4.00 % NA The Bank 1,679,075 10.42 % 4.00 % 5.00 % September 30, 2019 Common Equity Tier 1 risk-based capital ratio: The Company$ 1,710,147 14.30 % 4.50 % NA The Bank 1,666,426 13.93 % 4.50 % 6.50 % Tier I risk-based capital ratio: The Company 1,710,147 14.30 % 6.00 % NA The Bank 1,666,426 13.93 % 6.00 % 8.00 %
Total risk-based capital ratio:
The Company 1,848,581 15.45 % 8.00 % NA The Bank 1,804,860 15.09 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 1,710,147 10.51 % 4.00 % NA The Bank 1,666,426 10.24 % 4.00 % 5.00 % CHANGES IN FINANCIAL CONDITION Cash and cash equivalents - Cash and cash equivalents are$483,805,000 atDecember 31, 2019 , an increase of$64,647,000 , or 15.4%, sinceSeptember 30, 2019 . Available-for-sale and held-to-maturity investment securities - Available-for-sale securities increased$9,844,000 , or 0.7%, during the three months endedDecember 31, 2019 , mostly due to purchases of$82,028,000 , partially offset by principal repayments and maturities of$69,085,000 and a decrease to net unrealized gain of$2,149,000 . During the same period, the balance of held-to-maturity securities decreased by$82,786,000 primarily due to principal pay-downs and maturities of$81,329,000 . As ofDecember 31, 2019 , the Company had a net unrealized gain on available-for-sale securities of$25,523,000 , which is included on a net of tax basis in accumulated other comprehensive income (loss). 38
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Loans receivable - Loans receivable, net of related contra accounts, decreased
by $25,714,000 to $11,904,861,000 at December 31, 2019 , compared to
$11,930,575,000 at September 30, 2019 . The decrease resulted primarily from loan
principal repayments of $1,301,419,000 and an increase in loans in process of
$110,941,000 , partially offset by originations of $1,371,315,000 . Commercial
loan originations accounted for 76% of total originations and consumer loan
originations were 24% during the period. The mix of loan originations is
consistent with management's strategy during low rate environments to produce
more construction, multifamily, commercial real estate, and commercial and
industrial loans that generally have adjustable interest rates or a shorter
duration.
The following table shows the loan portfolio by category and the change.
December 31, 2019 September 30, 2019 Change
($ in thousands) ($ in thousands) $ %Gross loans by category
Single-family residential$ 5,702,071 42.5 %$ 5,835,194 43.8 %$ (133,123) (2.3) % Construction 2,174,313 16.2 2,038,052 15.3 136,261 6.7 Construction - custom 538,234 4.0 540,741 4.1 (2,507) (0.5) Land - acquisition & development 203,043 1.5 204,107 1.5 (1,064) (0.5) Land - consumer lot loans 97,097 0.7 99,694 0.7 (2,597) (2.6) Multi-family 1,436,715 10.7 1,422,674 10.7 14,041 1.0 Commercial real estate 1,643,099 12.3 1,631,170 12.3 11,929 0.7 Commercial & industrial 1,352,738 10.1 1,268,695 9.5 84,043 6.6 HELOC 141,274 1.1 142,178 1.1 (904) (0.6) Consumer 115,829 0.9 129,883 1.0 (14,054) (10.8) Total gross loans 13,404,413 100 % 13,312,388 100 % 92,025 0.7 % Less: Allowance for loan losses 132,513 131,534 979 0.7 % Loans in process 1,312,282 1,201,341 110,941 9.2 Net deferred fees, costs and discounts 54,757 48,938 5,819 11.9 Total loan contra accounts 1,499,552 1,381,813 117,739 8.5 Net Loans$ 11,904,861 $ 11,930,575 $ (25,714) (0.2) % Non-performing assets - Non-performing assets decreased$4,084,000 during the three months endedDecember 31, 2019 to$39,742,000 from$43,826,000 atSeptember 30, 2019 . The change is due to a$3,642,000 decrease in non-accrual loans and$442,000 decline in real estate owned ("REO"). Non-performing assets as a percentage of total assets was 0.24% atDecember 31, 2019 compared to 0.27% atSeptember 30, 2019 . 39
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
The following table sets forth information regarding restructured loans and
non-performing assets.
December 31, September 30,
2019 2019
($ in thousands)
Restructured loans:
Single-family residential $ 102,164 92.2 % $ 111,886 92.0 %
Land - acquisition & development 86 0.1 90 0.1
Land - consumer lot loans 3,556 3.2 3,714 3.1
Multi - family 380 0.3 385 0.3
Commercial real estate 3,238 2.9 4,168 3.4
Commercial & industrial 411 0.4 425 0.3
HELOC 942 0.8 949 0.8
Consumer 58 0.1 60 -
Total restructured loans (1) $ 110,835 100 % $ 121,677 100 %
Non-accrual loans:
Single-family residential $ 23,014 76.5 % $ 25,271 74.9 %
Land - acquisition & development 86 0.3 169 0.5
Land - consumer lot loans 334 1.1 246 0.7
Commercial real estate 5,557 18.5 5,835 17.3
Commercial & industrial 467 1.6 1,292 3.8
HELOC 630 2.1 907 2.7
Consumer 1 - 11 -
Total non-accrual loans 30,089 100 % 33,731 100 %
Real estate owned 6,339 6,781
Other property owned 3,314 3,314
Total non-performing assets $ 39,742 $ 43,826
Total non-performing assets and performing
restructured loans as a percentage of total
assets 0.89 % 0.97 %
Total Assets
(1) Restructured loans were as follows:
Performing $ 106,380 96.0 % $ 116,659 95.9 %
Non-performing (included in non-accrual loans
above) 4,455 4.0 5,018 4.1
$ 110,835 100 % $ 121,677 100 %
For the three months ended December 31, 2019 , the Company recognized $497,000 in
interest income on cash payments received from borrowers on non-accrual loans.
The Company would have recognized interest income of $353,000 for the same
period had these loans performed according to their original contract terms.
Recognized interest income for the three months ended December 31, 2019 was
higher than what otherwise would have been recognized 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 $64,511,000 of loans that were less than 90
days delinquent at December 31, 2019 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 1.28% at December 31, 2019 .
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.
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 92.2% of restructured loans
as of December 31, 2019 . The concession for these loans
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES 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 tables show the Company's allowance for loan losses by loan category.December 31, 2019 Loans Collectively Evaluated for Impairment
Loans Individually Evaluated for Impairment
Recorded Investment of
Allowance Allocation Loans Ratio Allowance Allocation Recorded Investment of Loans Ratio
($ in thousands) ($ in thousands)
Single-family residential $ 30,700
$ 5,686,482 0.5 % $ - $ 19,993 - %
Construction 32,292 1,189,457 2.7 - - -
Construction - custom 1,399 259,944 0.5 - - -
Land - acquisition & development 8,731 153,856 5.7 15 86 17.4
Land - consumer lot loans 2,090 93,272 2.2 - 295 -
Multi-family 7,403 1,436,313 0.5 1 380 0.3
Commercial real estate 12,861 1,632,612 0.8 174 10,487 1.7
Commercial & industrial 33,470 1,352,116 2.5 70 641 10.9
HELOC 1,104 139,963 0.8 - 483 -
Consumer 2,203 115,749 1.9 - 2 -
$ 132,253 $ 12,059,764 1.1 % $ 260 $ 32,367 0.8 %
September 30, 2019 Loans Collectively Evaluated for Impairment Loans Individually Evaluated for Impairment
Recorded Investment of
Allowance Allocation Loans Ratio Allowance Allocation Recorded Investment of Loans Ratio
($ in thousands) ($ in thousands)
Single-family residential $ 30,988
$ 5,822,200 0.5 % $ - $ 17,978 - %
Construction 32,304 1,164,889 2.8 - - -
Construction - custom 1,369 255,505 0.5 - - -
Land - acquisition & development 9,135 160,964 5.7 20 230 8.7
Land - consumer lot loans 2,143 95,574 2.2 - 375 -
Multi-family 7,387 1,422,266 0.5 4 385 1.0
Commercial real estate 12,847 1,618,406 0.8 323 12,765 2.5
Commercial & industrial 31,358 1,266,913 2.5 92 1,805 5.1
HELOC 1,103 140,378 0.8 - 837 -
Consumer 2,461 129,527 1.9 - 50 -
$ 131,095 $ 12,076,622 1.1 % $ 439 $ 34,425 1.3 %
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES 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$2,639,733,000 and$2,379,089,000 atDecember 31, 2019 andSeptember 30, 2019 , respectively. The Company reserves for estimated losses on these off-balance-sheet credit exposures using historical loss factors for each type of credit. The reserve for unfunded commitments was$7,500,000 as ofDecember 31, 2019 , which is an increase from$6,900,000 atSeptember 30, 2019 . Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling$140,013,000 , or 1.04% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. See Note E and Note I for further details of the allowance for loan losses and reserve for unfunded commitments as of and for the period endedDecember 31, 2019 . Real estate owned - REO decreased during the three months endedDecember 31, 2019 by$442,000 to$6,339,000 , primarily due to sales of REO properties during the period.
Intangible assets - Intangible assets increased to
Customer accounts - Customer accounts decreased
The following table shows the composition of the Bank's customer accounts by
deposit type.
December 31, 2019 September 30, 2019
Weighted Weighted
Deposit Account As a % of Total Average Deposit Account As a % of Total Average
Balance Deposits Rate Balance Deposits Rate
($ in thousands)
Non-interest checking $ 1,593,392 13.4 % - % $ 1,621,343 13.5 % - %
Interest checking 2,125,878 17.8 0.57 1,984,576 16.6 0.61
Savings 748,505 6.3 0.12 753,574 6.3 0.13
Money market 2,847,346 23.8 0.84 2,724,308 22.7 0.82
Time deposits 4,617,017 38.7 1.82 4,906,963 40.9 1.91
Total $ 11,932,138 100 % 1.02 % $ 11,990,764 100 % 1.08 %
FHLB advances and other borrowings - Total borrowings totaled $2,250,000,000 as
of December 31, 2019 , unchanged from $2,250,000,000 as of September 30, 2019 .
The weighted average rate for FHLB borrowings was 2.46% as of December 31, 2019
and 2.49% at September 30, 2019 . The decrease was due to lower rates on new FHLB
advances.
Shareholders' equity - The Company's total shareholders' equity at December 31,
2019 was $2,050,909,000 , or 12.49% of total assets. This was an increase of
$17,914,000 from the September 30, 2019 total of $2,032,995,000 , or 12.34% of
total assets. The Company's equity was impacted in the three months ended
December 31, 2019 by net income of $65,703,000 , the payment of $16,433,000 in
cash dividends, treasury stock purchases of $33,479,000 , as well as other
comprehensive income of $694,000 .
RESULTS OF OPERATIONS
Net Income - The Company recorded net income of $65,703,000 for the three months
ended December 31, 2019 compared to $52,942,000 for the prior year quarter.
Net Interest Income - For the three months ended December 31, 2019 , net interest
income was $119,685,000 , which is $533,000 higher than the same quarter of the
prior year. Net interest margin was 3.15% for the quarter ended December 31,
2019 compared to 3.21% for the quarter ended December 31, 2018 . The increase in
net interest income was primarily due to the average balance of earning assets
increasing by $357,032,000 , partially offset by a $258,059,000 increase in
average balance on interest-bearing liabilities. The compression in net interest
margin to 3.15% for the quarter ended December 31, 2019 from
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
3.21% for the quarter ended December 31, 2018 was due to the yield on earning
assets decreasing by 5 basis points to 4.30% and the cost of interest bearing
liabilities increasing 3 basis points to 1.27% over that same period. The lower
yield on earning assets is the result of the decrease in short-term interest
rates, which resulted in a lower rate being earned on cash and adjustable rate
loans and investment securities. The higher rate in interest-bearing liabilities
was primarily due to the increase in rates on interest-bearing deposits
partially offset by lower rates paid on FHLB advances
The following table sets forth certain information explaining changes in
interest income and interest expense for the period indicated compared to the
same period one year ago. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to
(1) changes in volume (changes in volume multiplied by old rate) and (2) changes
in rate (changes in rate multiplied by old volume). The change in interest
income and interest expense attributable to changes in both volume and rate has
been allocated proportionately to the change due to volume and the change due to
rate.
Rate / Volume Analysis:
Comparison of Three Months Ended
12/31/19 and 12/31/18
($ in thousands) Volume Rate Total
Interest income:
Loans receivable $ 4,787 $ 294 $ 5,081
Mortgaged-backed securities (1,616) (1,964) (3,580)
Investments (1) 1,547 (846) 701
All interest-earning assets 4,718 (2,516) 2,202
Interest expense:
Customer accounts 1,070 3,832 4,902
FHLB advances and other borrowings (1,251) (1,982) (3,233)
All interest-bearing liabilities (181) 1,850 1,669 Change in net interest income$ 4,899 $ (4,366) $ 533 ___________________ (1)Includes interest on cash equivalents and dividends on FHLB & FRB stock. Provision (Release) for Loan Losses - The Company recorded a$1,000,000 release of loan loss allowance for the three months endedDecember 31, 2019 , compared with a$500,000 release for the three months endedDecember 31, 2018 . Reserving for new loan originations has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled$2,579,000 for the three months endedDecember 31, 2019 , compared to net recoveries of$1,408,000 during the three months endedDecember 31, 2018 . Other Income - The three months endedDecember 31, 2019 results include total other income of$46,376,000 compared to$19,009,000 for the same period one year ago, a$27,367,000 increase. The increase is primarily due to the three months endedDecember 31, 2019 including a gain of$32,600,000 on sales of fixed assets, while the three months endedDecember 31, 2018 included a net gain of$6,400,000 recognized on the sale and valuation adjustments of fixed assets. Other Expense - Other expenses have increased as a result of ongoing investments in people, process and technology with the objective of growing market share and ultimately earnings. The three months endedDecember 31, 2019 results include total other expense of$82,636,000 compared to$71,672,000 for the same period one year ago, a$10,964,000 increase. The increase is primarily due to information technology being higher by$8,067,000 which was largely from a$5,931,000 impairment charge on systems hardware and software. In addition, compensation and benefits costs increased by$2,748,000 primarily due to an increase in headcount. The number of staff, including part-time employees on a full-time equivalent basis, increased by 4.8% to 2,001 atDecember 31, 2019 from 1,910 atDecember 31, 2018 . Total other expense for the three months endedDecember 31, 2019 andDecember 31, 2018 equaled 2.02% and 1.79%, respectively, of average assets.
Gain (Loss) on Real Estate Owned - Results for the three months ended
Income Tax Expense - Income tax expense totaled$17,836,000 for the three months endedDecember 31, 2019 , compared to$14,367,000 for the same period one year ago. The effective tax rate for the three months endedDecember 31, 2019 was 21.35% compared to 21.34% for the three months endedDecember 31, 2018 . The effective tax rate for the three months endedDecember 31, 2019 differs from the statutory rate mainly due to state taxes and tax-exempt income. 43
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
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