WASHINGTON FEDERAL INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Washington Federal, Inc.(the "Company" or "Washington Federal") makes statements in this Quarterly Report on Form 10-Q that constitute forward-looking statements. Many forward-looking statements can be identified using words such as "expects," "anticipates," "believes," "estimates," "intends," "forecasts," "projects," "potentially," and other similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could" are intended to help identify such forward-looking statements. These statements are not historical or current 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 Risk Factors discussed in Item 1A of this report, 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: •a deterioration in economic conditions or slowdowns in economic growth, including declines in home sale volumes and financial stress on borrowers (consumers and businesses) as a result of higher interest rates or an uncertain economic environment; •high unemployment rates, inflationary pressures and the impact of inflation on the Company's business and financial results; •the effects of natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as the COVID-19 pandemic), and the resulting governmental and societal responses, including on our asset credit quality and business operations, as well as its impact on general economic and financial market conditions; •risks associated with cybersecurity incidents and threat actors, including increased risks due to COVID-19 and the remote work environment; •risks related to the impacts of climate change; •the effects of a severe economic downturn, including high unemployment rates and declines in housing prices and property values, in our primary market areas; •the effects of and changes in monetary and fiscal policies of the Board of Governorsof the Federal Reserve Systemand the U.S. Government, including responses to the COVID-19 pandemic; •fluctuations in interest rate risk and changes in market interest rates, including risk related to LIBOR reform, risk of negative rates or an inverted yield curve and the effect on our net interest income and net interest margin; •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, the Washington Commercial Bank Act and potential limitations in the manner in which the Company conducts its business and undertakes new investments and activities; •the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms; •unanticipated effects and expenses related to the completed charter conversion of the Bank from a federal to a state charter; and •global economic trends, including developments related to Ukraineand Russia, and related negative financial impacts on our borrowers, the financial markets and the global economy; •the Company's ability to manage the risks and costs involved in the remediation efforts to the Bank's Home Mortgage Disclosure Act ("HMDA") compliance and reporting, and the impact of enforcement actions or legal proceedings with respect to the Bank's HMDA program; •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 foregoing and managing its business; and 38
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES
•the timing and the 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 AND COMMERCIAL DESCRIPTION
Washington Federal Bank, a federally-insured Washington statechartered commercial bank dba WaFd Bank(the "Bank" or " WaFd Bank"), was founded on April 24, 1917in Ballard, Washingtonand 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., a Washingtoncorporation was formed as the Bank's holding company in November, 1994. As used throughout this document, the terms "Washington Federal," the "Company" or "we" or "us" and "our" refer to the Washington Federal, Inc.and its consolidated subsidiaries, and the term "Bank" refers to the operating subsidiary, Washington Federal Bank. The Company is headquartered in Seattle, Washington. On January 3, 2022, the Bank announced that it had applied to the Washington State Department of Financial Institutions(the "WDFI") to convert from a national association to a non- Federal Reservemember Washington state-chartered bank. As described in the Current Report on Form 8-K filed with the SECon February 4, 2022, the Bank completed the conversion of its charter from a national bank charter, supervised by the Office of the Comptroller of the Currency, to a Washington statechartered commercial bank effective February 4, 2022. The Bank cancelled its holdings of stock in the Federal Reserve Bank of San Franciscoas part of the conversion and its legal name changed from " Washington Federal Bank, National Association" to " Washington Federal Bank." As a result of the conversion, the WDFI is the Bank's primary state regulator and the Federal Deposit Insurance Corporation(the "FDIC") is the Bank's primary federal regulator. The Federal Reservewill continue to regulate the Bank's holding company, Washington Federal, Inc.
The closing date of the Company’s financial year is
CRITICAL ACCOUNTING POLICIES See Note A to the Consolidated Financial Statements in "Item 1. Financial Statements" above. Also, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K filed with the
Securities and Exchange Commission("SEC") on November 19, 2021.
QUALITY OF ASSETS AND PROVISION FOR CREDIT LOSSES
See Note A, D and E to the Consolidated Financial Statements in "Item 1. Financial Statements" above. Also, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K filed with the
Securities and Exchange Commission("SEC") on November 19, 2021. 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 79% of total deposits as of June 30, 2022while the composition of the investment securities portfolio is 41% variable and 59% 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 $477,884,000of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of June 30, 2022, the net unrealized loss on these securities was $30,055,000. The Company has $2,150,732,000of available-for-sale securities that are carried at fair value. As of June 30, 2022, the net unrealized loss on these securities was $65,919,000. 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 June 30, 2022was $136,436,000. 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. 39
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES 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-earning 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 of June 30, 2022, 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 3.9% in the next year. This compares to an estimated increase of 9.7% as of the September 30, 2021analysis. The change is primarily due to a shift in the yield curve as well as shifts in the mix of fixed versus adjustable rate assets and liabilities and lower cash balances that immediately reprice to reflect the 200 basis point increase in interest rates. 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 increase of 0.9% in the first year and increase of 2.9% 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 June 30, 2022, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $592,366,000or 21.1% and the NPV to total assets ratio to decline to 12.1% from a base of 14.3%. As of September 30, 2021, the NPV in the event of a 200 basis point increase in rates was estimated to decrease by $207,000,000or 6.8% and the NPV to total assets ratio to decline to 15.2% from a base of 15.5%. The change in NPV sensitivity is due primarily to changes in interest rates and the related impact on asset prices and sensitivity to expected prepayment speeds on fixed rate loans and mortgage-backed securities, as well as changes in the mix of fixed versus adjustable rate assets and liabilities as of June 30, 2022. Interest Rates - The Company measures the difference between the rate on total interest-earning assets and the rate on interest-bearing liabilities at the end of each period. This period-end interest rate spread was 3.07% at June 30, 2022and 2.45% at September 30, 2021. As of June 30, 2022, the weighted average period-end rate on interest-earning assets increased by 70 basis points to 3.50% compared to 2.80% at September 30, 2021, while the weighted average period-end rate on interest-bearing liabilities increased by 8 basis point to 0.43% from 0.35%. The period-end interest rate spread increased to 3.07% at June 30, 2022from 2.31% at June 30, 2021. Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 3.22% for the quarter ended June 30, 2022compared to 2.82% for the quarter ended June 30, 2021. The yield on interest-earning assets increased 30 basis points to 3.55% and the cost of interest-bearing liabilities decreased 12 basis points to 0.42% over that same period. The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable rate assets and cash. Amortization of net loan origination fees on PPP loans declined to $936,000during the quarter ended June 30, 2022compared to $6,122,000in the prior year quarter. The lower rate in interest-bearing liabilities was primarily due to replacing high-yielding, long-term FHLB borrowings with new borrowings at lower rates. The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago. 40
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) ($ in thousands) Assets Loans receivable
$ 15,350,905 $ 149,1133.90 % $ 13,330,611 $ 134,1934.04 % Mortgage-backed securities 1,416,212 8,618 2.44 1,179,767 5,488 1.87 Cash & Investments 2,056,387 8,281 1.62 3,593,905 6,113 0.68 FHLB & FRB stock 78,305 1,136 5.82 113,770 1,654 5.83 Total interest-earning assets 18,901,809 167,148 3.55 % 18,218,053 147,448 3.25 % Other assets 1,383,146 1,278,879 Total assets $ 20,284,955 $ 19,496,932Liabilities and Equity Interest-bearing customer accounts $ 12,852,849 $ 9,2840.29 % $ 12,080,339 $ 8,9060.30 % FHLB advances 1,705,824 6,118 1.44 1,993,956 9,937 2.00 Other borrowings - - - - - - Total interest-bearing liabilities 14,558,673 15,402 0.42 % 14,074,295 18,843 0.54 % Noninterest-bearing customer accounts 3,278,346 2,890,917 Other liabilities 238,842 220,805 Total liabilities 18,075,861 17,186,017 Shareholders' equity 2,209,094 2,310,915 Total liabilities and equity $ 20,284,955 $ 19,496,932Net interest income/interest rate spread $ 151,7463.12 % $ 128,6052.71 % Net interest margin (NIM) 3.22 % 2.82 % 41
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Nine Months Ended June 30, 2022 Nine Months Ended June 30, 2021 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) ($ in thousands) Assets Loans receivable
$ 14,837,421 $ 426,8823.85 % $ 12,999,227 $ 400,6214.12 % Mortgage-backed securities 1,064,725 18,069 2.27 1,374,710 19,414 1.89 Cash & Investments 2,783,617 19,821 0.95 3,431,104 17,097 0.67 FHLB & FRB stock 90,107 3,654 5.42 128,371 4,892 5.10 Total interest-earning assets 18,775,870 468,426 3.34 % 17,933,412 442,024 3.30 % Other assets 1,313,366 1,279,851 Total assets $ 20,089,236 $ 19,213,263Liabilities and Equity Interest-bearing customer accounts $ 12,754,118 $ 25,9700.27 % $ 11,838,145 $ 33,7450.38 % FHLB advances 1,715,275 21,486 1.67 2,359,341 35,126 1.99 Other borrowings - - - 15 - 0.69 Total interest-bearing liabilities 14,469,393 47,456 0.44 % 14,197,501 68,871 0.65 % Noninterest-bearing customer accounts 3,221,504 2,575,191 Other liabilities 225,736 248,384 Total liabilities 17,916,633 17,021,076 Shareholders' equity 2,172,603 2,192,187 Total liabilities and equity $ 20,089,236 $ 19,213,263Net interest income/interest rate spread $ 420,9702.90 % $ 373,1532.65 % Net interest margin (NIM) 3.00 % 2.77 % As of June 30, 2022, total assets had increased by $508,257,000to $20,158,831,000from $19,650,574,000at September 30, 2021. During the nine months ended June 30, 2022, loans receivable increased $1,731,595,000while cash and cash equivalents decreased by $1,483,388,000and investment securities increased by $124,332,000. Growth in loans receivable was partially funded by continued growth in customer deposits as well as the decline in cash.
Cash and cash equivalents of
CASH AND CAPITAL RESOURCES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, sales and repayments 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. On
February 8, 2021, in connection with an underwritten public offering, the Company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock ("Series A Preferred Stock"). Net proceeds, after underwriting discounts and expenses, were $293,325,000. The public offering consisted of the issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series A Preferred Stock, at a public offering price of $25.00per depositary share. Holders of the depositary shares are entitled to all proportional rights and preferences of the Series A Preferred Stock (including dividend, voting, redemption and liquidation rights). The depositary shares are traded on the NASDAQ under the symbol "WAFDP." The Series A Preferred Stock is redeemable at the option of the Company, subject to all applicable regulatory approvals, on or after April 15, 2026. 42
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES
The Bank has a line of credit with the
(“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'sprimary credit program.
Strong growth in customer deposit accounts has been a substantial source of funding increases in the loan portfolio. Customer accounts increased
The Company's cash and cash equivalents totaled
$607,421,000at June 30, 2022, a decrease from $2,090,809,000at September 30, 2021. These amounts include the Bank's operating cash. The Company's shareholders' equity at June 30, 2022was $2,220,111,000, or 11.01% of total assets. This is an increase of $94,047,000from September 30, 2021when shareholders' equity was $2,126,064,000, or 10.82% of total assets. The Company's shareholders' equity was impacted in the nine months ended June 30, 2022by net income of $162,935,000, the payment of $46,015,000in common stock dividends, payment of $10,968,000in preferred stock dividends, treasury stock purchases of $3,212,000, as well as other comprehensive loss of $15,558,000. The ratio of tangible capital to tangible assets at June 30, 2022was 9.63%. 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 bank regulatory 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 adverse effect on the Company's financial statements. Federal Bankregulatory 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. 43
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 June 30, 2022 Common Equity Tier I risk-based capital ratio: The Company
$ 1,556,9479.81 % 4.50 % NA The Bank 1,760,344 11.08 % 4.50 % 6.50 % Tier I risk-based capital ratio: The Company 1,856,947 11.70 % 6.00 % NA The Bank 1,760,344 11.08 % 6.00 % 8.00 % Total risk-based capital ratio: The Company 2,055,468 12.95 % 8.00 % NA The Bank 1,958,937 12.33 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 1,856,947 9.35 % 4.00 % NA The Bank 1,760,344 8.86 % 4.00 % 5.00 % September 30, 2021 Common Equity Tier 1 risk-based capital ratio: The Company $ 1,446,6139.50 % 4.50 % NA The Bank 1,717,014 11.28 % 4.50 % 6.50 % Tier I risk-based capital ratio: The Company 1,746,613 11.47 % 6.00 % NA The Bank 1,717,014 11.28 % 6.00 % 8.00 % Total risk-based capital ratio: The Company 1,937,036 12.72 % 8.00 % NA The Bank 1,907,408 12.53 % 8.00 % 10.00 % Tier 1 Leverage ratio: The Company 1,746,613 9.07 % 4.00 % NA The Bank 1,717,014 8.92 % 4.00 % 5.00 %
CHANGES IN THE FINANCIAL SITUATION
Cash and cash equivalents – Cash and cash equivalents have been
Available-for-sale and held-to-maturity investment securities - Available-for-sale securities increased
$12,473,000, or 0.6%, during the nine months ended June 30, 2022, mostly due to purchases of $516,163,000, partially offset by principal repayments and maturities of $384,111,000and an unrealized loss of $87,859,000. During the same period, the balance of held-to-maturity securities increased by $111,859,000due primarily to purchases of $195,358,000, partially offset by principal pay-downs and maturities of $81,497,000. As of June 30, 2022, the Company had a net unrealized loss on available-for-sale securities of $65,919,000, which is included on a net of tax basis in accumulated other comprehensive income (loss). 44
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES The majority of the Company's held-to-maturity and available-for-sale debt securities are issued by U.S.government agencies or U.S.government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S.government and have a long history of zero credit loss. The Company did not record an allowance for credit losses for held-to-maturity securities as of June 30, 2022or September 30, 2021as the investment portfolio consists primarily of U.S.government agency mortgage-backed securities that management deems to have immaterial risk of loss. The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods. The Company does not believe that any of its available-for-sale debt securities had credit loss impairment as of June 30, 2022or September 30, 2021, therefore, no allowance was recorded. Loans receivable - Loans receivable, net of related contra accounts, increased by $1,731,595,000to $15,565,165,000at June 30, 2022, compared to $13,833,570,000at September 30, 2021. The increase was primarily the net result of originations of $7,104,309,000, purchases of single-family residential mortgages of $576,697,000, partially offset by loan principal repayments of $5,068,452,000as well as a $850,737,000increase in loans in process. Commercial loan originations accounted for 78% of total originations and consumer loan originations were 22% during the period. The mix of loan originations is consistent with management's strategy during low rate environments to produce more construction, multifamily, commercial real estate, and commercial and industrial loans that generally have adjustable interest rates or a shorter duration.
The following table presents the loan portfolio by category and the evolution.
June 30, 2022 September 30, 2021 Change ($ in thousands) ($ in thousands) $ % Commercial loans Multi-family
$ 2,494,59413.2 %
2,899,057 15.3 2,443,845 15.0 455,212 18.6 Commercial & industrial (1) 2,351,030 12.4 2,314,654 14.2 36,376 1.6 Construction 3,896,740 20.6 2,888,214 17.7 1,008,526 34.9 Land - acquisition & development 245,233 1.3 222,457 1.4 22,776 10.2 Total commercial loans 11,886,654 62.9 10,160,647 62.3 1,726,007 17.0 Consumer loans Single-family residential 5,652,897 29.9 4,951,627 30.4 701,270 14.2 Construction - custom 943,858 5.0 783,221 4.8 160,637 20.5 Land - consumer lot loans 158,485 0.8 149,956 0.9 8,529 5.7 HELOC 185,427 1.0 165,989 1.0 19,438 11.7 Consumer 73,044 0.4 87,892 0.5 (14,848) (16.9) Total consumer loans 7,013,711 37.1 6,138,685 37.7 875,026 14.3 Total gross loans 18,900,365 100 % 16,299,332 100 % 2,601,033 16.0 Less: Allowance for credit losses on loans 170,979 171,300 (321) (0.2) Loans in process 3,083,573 2,232,836 850,737 38.1 Net deferred fees, costs and discounts 80,648 61,626 19,022 30.9 Total loan contra accounts 3,335,200 2,465,762 869,438 35.3 Net loans
$ 15,565,165 $ 13,833,570 $ 1,731,59512.5 %
Non-performing assets - Non-performing assets increased
$6,805,000during the nine months ended June 30, 2022to $50,430,000from $43,625,000at September 30, 2021. The change is primarily due to a $4,930,000increase in non-accrual loans. Non-performing assets as a percentage of total assets was 0.25% at June 30, 2022compared to 0.22% at September 30, 2021. 45
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES
The following table presents information on restructured distressed debt loans and non-performing assets.
June 30, September 30, 2022 2021 ($ in thousands) Troubled debt restructured loans: Multi - family
$ 6,09910.4 % $ 2230.3 % Commercial real estate 2,194 3.7 2,275 3.5 Commercial & industrial 34 0.1 40 0.1 Single-family residential 48,730 82.7 60,011 92.0 Land - consumer lot loans 1,722 2.9 2,292 3.5 HELOC 84 0.1 246 0.4 Consumer 33 0.1 41 0.1 Total restructured loans (1) $ 58,896100 % $ 65,128100 % Non-accrual loans: Multi - family $ 5,94416.2 % $ 4751.5 % Commercial real estate 5,024 13.7 8,038 25.3 Commercial & industrial 4,288 11.7 365 1.1 Construction - - 505 1.7 Land - acquisition & development - - 2,340 7.4 Single-family residential 20,184 55.0 19,320 60.9 Construction - custom 900 2.5 - - Land - consumer lot loans 213 0.6 359 1.1 HELOC 91 0.2 287 0.9 Consumer 35 0.1 60 0.2 Total non-accrual loans 36,679 100 % 31,749 100 % Real estate owned 9,656 8,204 Other property owned 4,095 3,672 Total non-performing assets $ 50,430 $ 43,625Total non-performing assets and performing restructured loans as a percentage of total assets 0.54 % 0.55 % Total Assets (1) Restructured loans were as follows: Performing $ 57,49297.6 % $ 63,65597.7 % Non-performing (included in non-accrual loans above) 1,404 2.4 1,473 2.3 $ 58,896100 % $ 65,128100 % For the nine months ended June 30, 2022, the Company recognized $2,544,000in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $969,000for the same period had these loans performed according to their original contract terms. Recognized interest income for the nine months ended June 30, 2022was 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 $209,166,000of loans that were less than 90 days delinquent at June 30, 2022but 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 1.57% at June 30, 2022.
Restructured single-family residential loans are reserved under the Company’s general allowance methodology. If the balance of an individual loan is large, the Company may constitute a specific reserve, if necessary.
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. 46
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES Single-family residential loans comprised 82.7% of restructured loans as of June 30, 2022. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 basis points 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 allowance for credit losses 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 credit losses – The following table shows the composition of the Company’s allowance for credit losses.
June 30, 2022 September 30, 2021 Change Allowance for credit losses: ($ in thousands) ($ in thousands) $ % Commercial loans Multi-family $ 12,574 7.4 % 16,949 9.9 %
$ (4,375)(25.8) % Commercial real estate 25,300 14.8 23,437 13.7 1,863 7.9 Commercial & industrial 54,924 32.1 45,957 26.8 8,967 19.5 Construction 25,834 15.1 25,585 14.9 249 1.0 Land - acquisition & development 12,227 7.2 13,447 7.8 (1,220) (9.1) Total commercial loans 130,859 76.5 125,375 73.2 5,484 4.4 Consumer loans Single-family residential 26,217 15.3 30,978 18.1 (4,761) (15.4) Construction - custom 3,354 2.0 4,907 2.9 (1,553) (31.6) Land - consumer lot loans 5,220 3.1 4,939 2.9 281 5.7 HELOC 2,632 1.5 2,390 1.4 242 10.1 Consumer 2,697 1.6 2,711 1.6 (14) (0.5) Total consumer loans 40,120 23.5 45,925 26.8 (5,805) (12.6) Total allowance for loan losses 170,979 100.0 % 171,300 100.0 % (321) (0.2) Reserve for unfunded commitments 32,500 30,000 2,500 8.3 Total allowance for credit losses $ 203,479 $ 201,300 $ 2,1791.1 % No allowance was recorded as of June 30, 2022or as of September 30, 2021for the $54,185,000and $305,162,000of SBA Payroll Protection Program loans in the portfolio on each date, respectively, which are included in the commercial & industrial loan category, due to the government guarantee. Management believes the allowance for credit losses of $203,479,000, or 1.08% 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 ended June 30, 2022and September 30, 2021.
Real Estate Owned (“REO”) – REO has increased in the nine months ended
Intangible assets - Intangible assets decreased to
$309,254,000as of June 30, 2022from $310,019,000as of September 30, 2021. The decrease was due to normal amortization of finite-lived intangible assets. 47
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Customer accounts - Customer accounts increased
$423,508,000, or 2.7%, to $15,965,620,000at June 30, 2022compared with $15,542,112,000at September 30, 2021. Transaction accounts increased by $560,226,000or 4.6% during that period, while time deposits decreased $136,718,000or 4.0%. The shift in deposit mix has been a result of a deliberate deposit pricing and customer growth strategy. The focus on transaction accounts is intended to lessen sensitivity to rising interest rates and manage interest expense. The following table shows the composition of the Bank's customer accounts by deposit type. June 30, 2022 September 30, 2021 Weighted Weighted Deposit Account As a % of Total Average Deposit Account As a % of Total Average Balance Deposits Rate Balance Deposits Rate ($ in thousands) Non-interest checking $ 3,269,77320.5 % - % $ 3,122,39720.1 % - % Interest checking 3,472,402 21.7 0.51 3,566,322 22.9 0.20 Savings 1,069,801 6.7 0.12 1,039,336 6.7 0.11 Money market 4,856,275 30.4 0.31 4,379,970 28.2 0.19 Time deposits 3,297,369 20.7 0.53 3,434,087 22.1 0.54 Total $ 15,965,620100 % 0.32 % $ 15,542,112100 % 0.23 % FHLB advances and other borrowings - Total borrowings were $1,700,000,000as of June 30, 2022, a decrease from $1,720,000,000at September 30, 2021. Strong growth in deposits has provided for substantial funding of growth in loans receivable, therefore, the use of additional FHLB borrowings has been limited. The weighted average rate for FHLB borrowings was 1.43% as of June 30, 2022and 1.51% at September 30, 2021. The decline in the weighted average effective interest rate was the result of replacing high-yielding, long-term FHLB borrowings with new borrowings at lower rate. Shareholders' equity - The Company's shareholders' equity at June 30, 2022was $2,220,111,000, or 11.01% of total assets. This is an increase of $94,047,000from September 30, 2021when net worth was $2,126,064,000, or 10.82% of total assets. The Company's shareholders' equity was impacted in the nine months ended June 30, 2022by net income of $162,935,000, the payment of $46,015,000in common stock dividends, payment of $10,968,000in preferred stock dividends, treasury stock purchases of $3,212,000, as well as other comprehensive loss of $15,558,000. RESULTS OF OPERATIONS Net Income- The Company recorded net income of $63,295,000for the three months ended June 30, 2022compared to $47,422,000for the prior year quarter. The Company recorded net income of $162,935,000for the nine months ended June 30, 2022compared to $131,244,000for the prior year same period. The changes are due to the factors described below. Net Interest Income - For the three months ended June 30, 2022, net interest income was $151,746,000, which is $23,141,000higher than the same quarter of the prior year. Net interest margin was 3.22% for the quarter ended June 30, 2022compared to 2.82% for the quarter ended June 30, 2021. The increase in net interest income was primarily due to average interest-earning assets increasing by $683,756,000or 3.75% from the prior year while average interest-bearing liabilities increased $484,378,000or 3.44% as well as the impact of rising rates on adjustable rate assets. Average noninterest-bearing deposits grew by $387,429,000over the same period. The change in net interest income was also impacted by a 30 basis point increase in the average rate earned on interest-earning assets to 3.55% while the average rate paid on interest-bearing liabilities declined by 12 basis points to 0.42%. During the three months ended June 30, 2022and 2021, net interest income included $936,000and $6,122,000, respectively, of net loan origination fee amortization on PPP loans. For the nine months ended June 30, 2022, net interest income was $420,970,000, which is $47,817,000higher than the same period of the prior year. Net interest margin was 3.00% for the nine months ended June 30, 2022compared to 2.77% for the prior year same period. The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. 48
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Rate / Volume Analysis: Comparison of Three Months Ended Comparison of Nine Months Ended 6/30/22 and 6/30/21 6/30/22 and 6/30/21 ($ in thousands) Volume Rate Total Volume Rate Total Interest income: Loans receivable
$ 19,742 $ (4,822) $ 14,920 $ 53,933 $ (27,672) $ 26,261Mortgage-backed securities 1,243 1,887 3,130 (4,855) 3,510 (1,345) Investments (1) (4,330) 5,980 1,650 (4,774) 6,260 1,486 All interest-earning assets 16,655 3,045 19,700 44,304 (17,902) 26,402 Interest expense: Customer accounts 646 (268) 378 2,481 (10,256) (7,775) FHLB advances and other borrowings (1,300) (2,519) (3,819) (8,584) (5,057) (13,641) All interest-bearing liabilities (654) (2,787) (3,441) (6,103) (15,313) (21,416)
Change in net interest income
$ (2,589) $ 47,818___________________ ___________________ (1)Includes interest on cash equivalents and dividends on FHLB & FRB stock. The Bank's FRB stock was redeemed effective February 4, 2022in connection with its conversion to a Washington statechartered commercial bank. Provision (Release) for Credit Losses - The Company recorded a $1,500,000provision for credit losses for the three months ended June 30, 2022, compared to a $2,000,000release of allowance for credit losses for the three months ended June 30, 2021. The provision in the three months ended June 30, 2022was primarily due to growth in loans receivable and unfunded commitments partially offset by improvements in the credit quality of certain loan portfolios related to strong real estate markets and collateral conditions. The release for the three months ended June 30, 2021was primarily due to improvements in the credit quality of certain loan portfolios related to strong real estate markets and collateral conditions partially offset by growth in loans receivable. The Company recorded a $1,500,000provision for credit losses for the nine months ended June 30, 2022, compared with a $1,000,000provision for credit losses for the nine months ended June 30, 2021. Recoveries, net of charge-offs, totaled $595,000for the three months ended June 30, 2022, compared to net recoveries of $1,131,000during the three months ended June 30, 2021. Recoveries, net of charge-offs, totaled $3,179,000for the nine months ended June 30, 2022, compared to net recoveries of $5,329,000during the nine months ended June 30, 2021. No allowance was recorded as of June 30, 2022or as of September 30, 2021for the $54,185,000and $305,162,000of PPP loans in the portfolio on each date, respectively, which are included in the commercial & industrial loan category, due to the government guarantee. Other Income - The results for the three months ended June 30, 2022include total other income of $17,550,000compared to $13,211,000for the same period one year ago, a $4,339,000increase. The increase in other income was primarily due to an unrealized gain of $2,708,000that was recorded for certain equity investments in the quarter ended June 30, 2022. Other income was $51,890,000for the nine months ended June 30, 2022, compared with $41,558,000for the nine months ended June 30, 2021and the increase was mostly due to unrealized gains of $9,008,000that were recorded for certain equity investments in the nine months ended June 30, 2022. Other Expense - Total other expense was $87,403,000for the three months ended June 30, 2022, an increase of $3,763,000from $83,640,000for the prior year quarter. Compensation and benefits costs increased by $4,232,000, or 9.7%, over the prior year quarter due to annual merit increases, higher bonus compensation accruals related to strong deposit and loan growth and investments in top talent and contract staff to support strategic initiatives. Other expense was $265,433,000for the nine months ended June 30, 2022, compared with $246,796,000for the nine months ended June 30, 2021and the increase was primarily due to compensation and benefits increasing by $12,417,000for the same reasons noted above. The nine months ended June 30, 2022also included a tax related accrual of $1,700,000. Total other expense for the nine months ended June 30, 2022and June 30, 2021equaled 1.76% and 1.71%, respectively, of average assets. Gain (Loss) on Real Estate Owned - Results for the three months ended June 30, 2022include a net gain on real estate owned of $448,000, compared to a net loss of $151,000for the prior year quarter. Results for the nine months ended June 30, 2022include a net gain on real estate owned of $1,139,000, compared to a net loss of $566,000for the prior year same period. The gain (loss) for each respective period is due to REO sales valuation adjustments for certain properties. 49
WASHINGTON FEDERAL, INC.AND SUBSIDIARIES Income Tax Expense - Income tax expense totaled $17,546,000for the three months ended June 30, 2022, compared to $12,603,000for the prior year quarter. Income tax expense totaled $44,131,000for the nine months ended June 30, 2022, compared to $35,105,000for the prior year same period. The effective tax rate was 21.31% and 21.10% for the nine months ended June 30, 2022and June 30, 2021, respectively. The Company's effective tax rate varies from the statutory rate mainly due to state taxes, tax-exempt income and tax-credit investments.
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