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, and including the Risk Factors included in the Company's 2021 Form 10-K for the year endedSeptember 30, 2021 , 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 home sale volumes and financial stress on borrowers (consumers and businesses) as a result of the uncertain economic environment; •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; •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 theBoard of Governors of theFederal Reserve System and theU.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 and risk of negative rates; •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 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; •changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees; •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; •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; and •the effects and unanticipated expenses related to the proposed charter conversion of the Bank from a federal to a state charter. 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. 34
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GENERAL & BUSINESS DESCRIPTION
Washington 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 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 theWashington Federal, Inc. and its consolidated subsidiaries, and the term "Bank" refers to the operating subsidiary,Washington Federal Bank, National Association . The Company is headquartered inSeattle, Washington . OnJanuary 3, 2022 , the Bank announced that it had applied to theWashington State Department of Financial Institutions to convert from a national association to a non-Federal Reserve memberWashington state -chartered bank. If the application is approved and the conversion is completed, then theWashington State Department of Financial Institutions will be the Bank's regulator and theFederal Deposit Insurance Corporation (the "FDIC") will be the Bank's primary federal regulator. TheFederal Reserve will continue to regulate the Bank's holding company. The Bank has notified theFDIC and theFederal Reserve System of the proposed charter conversion. The Bank also filed a notice of the charter conversion with its current primary federal regulator, theOffice of the Comptroller of the Currency . If the charter conversion application is approved, the Bank will cancel its holdings of stock of theFederal Reserve Bank of San Francisco and terminate its membership in theFederal Reserve System .
The Company's fiscal year end 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 theSecurities and Exchange Commission ("SEC") onNovember 19, 2021 .
ASSET QUALITY & ALLOWANCE 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 theSecurities and Exchange Commission ("SEC") onNovember 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 ofDecember 31, 2021 while the composition of the investment securities portfolio is 56% variable and 44% 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$326,387,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As ofDecember 31, 2021 , the net unrealized gain on these securities was$9,508,000 . The Company has$1,946,139,000 of available-for-sale securities that are carried at fair value. As ofDecember 31, 2021 , the net unrealized gain on these securities was$31,470,000 . 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 ofDecember 31, 2021 was$48,888,000 . 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-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 35
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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, 2021 , 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 8.4% in the next year. This compares to an estimated increase of 9.7% as of theSeptember 30, 2021 analysis. 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. 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 0.7% in the first year and increase of 4.1% in the second year assuming a constant balance sheet and no management intervention. We have not provided an estimate of any impact on net interest income of a decrease in interest rates atDecember 31, 2021 as many of our interest rate sensitive assets and liabilities are tied to interest rates that are already at or near their historical minimum levels (i.e., Prime and LIBOR) and, therefore, are not expected to materially decrease further assuming U.S. market interest rates continue to remain above zero percent. Sustained negative interest rates for an economy with the size and complexity ofthe United States would likely lead to broad macroeconomic impacts that are difficult to foresee. While there is a possibility that U.S market interest rates could fall below zero percent, this has not occurred inthe United States . 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, 2021 , in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by$471,566,000 or 14.3% and the NPV to total assets ratio to decline to 14.9% from a base of 16.4%. As ofSeptember 30, 2021 , the NPV in the event of a 200 basis point increase in rates was estimated to decrease by$207,000,000 or 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 ofDecember 31, 2021 . 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 2.48% atDecember 31, 2021 and 2.45% atSeptember 30, 2021 . As ofDecember 31, 2021 , the weighted average period-end rate on interest-earning assets increased by 3 basis points to 2.83% compared toSeptember 30, 2021 , while the weighted average period-end rate on interest-bearing liabilities was unchanged and remained at 0.35%. The period-end interest rate spread increased to 2.48% atDecember 31, 2021 from 2.34% atDecember 31, 2020 as the weighted average period-end rate on interest-earning assets decreased by 9 basis points while the weighted average period-end rate on interest-bearing liabilities declined by 23 basis points. Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin was 2.87% for the quarter endedDecember 31, 2021 compared to 2.75% for the quarter endedDecember 31, 2020 . The yield on interest-earning assets decreased 12 basis points to 3.22% and the cost of interest-bearing liabilities decreased 31 basis points to 0.45% over that same period. Repayments on higher rate loans, the origination of lower yielding loans, and the purchase of mortgage loan pools with an effective yield less than the average of the loan portfolio drove the decline in yield on interest-earning assets. The benefit from amortization of net loan origination fees on PPP loans also declined to$3,319,000 during the quarter endedDecember 31, 2021 compared to$4,886,000 in the prior year quarter. The lower rate in interest-bearing liabilities was primarily due to lower rates paid on interest-bearing deposits as well as a lower rate on FHLB advances. The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago. 36
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Three Months Ended December 31, 2021 Three Months Ended December 31, 2020
Average Balance Interest Average Rate Average Balance Interest Average Rate
($ in thousands) ($ in thousands)
Assets
Loans receivable $ 14,297,907 $ 138,509 3.84 % $ 12,824,870 $ 133,671 4.14 %
Mortgage-backed securities 925,028 4,792 2.06 1,582,286 7,230 1.81
Cash & Investments 3,207,877 5,783 0.72 3,004,224 5,265 0.70
FHLB & FRB stock 102,863 1,356 5.23 140,730 1,656 4.67
Total interest-earning assets 18,533,675 150,440 3.22 % 17,552,110 147,822 3.34 %
Other assets 1,272,163 1,307,937
Total assets $ 19,805,838 $ 18,860,047
Liabilities and Equity
Interest-bearing customer accounts $ 12,530,492 $ 8,461 0.27 % $ 11,619,857 $ 14,110 0.48 %
FHLB advances 1,720,000 7,843 1.81 2,668,478 13,198 1.96
Other borrowings - - - - - -
Total interest-bearing liabilities 14,250,492 16,304 0.45 % 14,288,335 27,308 0.76 %
Noninterest-bearing customer accounts 3,188,223 2,258,685
Other liabilities 223,421 275,834
Total liabilities 17,662,136 16,822,854
Shareholders' equity 2,143,702 2,037,193
Total liabilities and equity $ 19,805,838 $ 18,860,047
Net interest income/interest rate spread $ 134,136 2.77 % $ 120,514 2.65 %
Net interest margin (NIM) 2.87 % 2.75 %
As of December 31, 2021 , total assets had increased by $322,597,000 to
$19,973,171,000 from $19,650,574,000 at September 30, 2021 . During the three
months ended December 31, 2021 , loans receivable increased $758,632,000 while
cash and cash equivalents decreased by $210,162,000 and investment securities
decreased by $231,758,000 . Growth in loans receivable were also substantially
funded by the $359,934,000 increase in customer deposits.
Cash and cash equivalents of $1,880,647,000 and shareholders' equity of
$2,149,126,000 as of December 31, 2021 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.
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 $25.00 per 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 .
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES The Company has actively worked with its borrowers to modify consumer mortgage and commercial loans to provide payment deferrals as a result of the COVID-19 pandemic. The terms of the payment deferrals are generally 90 days for consumer mortgage loans and up to 180 days for commercial loans, and borrowers may be eligible for multiple deferrals. Pursuant to the CARES Act, these loan modifications are not accounted for as TDRs. As ofDecember 31, 2021 , 16 mortgage loans totaling$3,526,000 and 1 commercial loan totaling$475,000 that had been modified remain in deferral. These loans are not considered past due until after the deferral period is over and scheduled payments have resumed. The Bank has a credit line with theFederal Home Loan Bank of Des Moines ("FHLB") of 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 theFederal Reserve Bank's primary credit program. Strong growth in customer deposit accounts has provided the primary source for funding increases in the loan portfolio. Customer accounts increased$359,934,000 , or 2.3%, to$15,902,046,000 atDecember 31, 2021 compared with$15,542,112,000 atSeptember 30, 2021 . Total FHLB borrowings totaled$1,720,000,000 as ofDecember 31, 2021 and was unchanged fromSeptember 30, 2021 . The Company's cash and cash equivalents totaled$1,880,647,000 atDecember 31, 2021 , an decrease from$2,090,809,000 atSeptember 30, 2021 . These amounts include the Bank's operating cash. The Company's shareholders' equity atDecember 31, 2021 was$2,149,126,000 , or 10.76% of total assets. This is an increase of$23,062,000 fromSeptember 30, 2021 when net worth was$2,126,064,000 , or 10.82% of total assets. The Company's shareholders' equity was impacted in the three months endedDecember 31, 2021 by net income of$50,281,000 , the payment of$14,899,000 in common stock dividends, payment of$3,656,000 in preferred stock dividends, treasury stock purchases of$2,973,000 , as well as the other comprehensive loss of$7,909,000 . The ratio of tangible capital to tangible assets atDecember 31, 2021 was 9.35%. 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 adverse 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. 38
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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, 2021
Common Equity Tier I risk-based
capital ratio:
The Company $ 1,477,844 9.98 % 4.50 % NA
The Bank 1,746,080 11.79 % 4.50 % 6.50 %
Tier I risk-based capital ratio:
The Company 1,777,844 12.00 % 6.00 % NA
The Bank 1,746,080 11.79 % 6.00 % 8.00 %
Total risk-based capital ratio:
The Company 1,963,161 13.26 % 8.00 % NA
The Bank 1,931,396 13.04 % 8.00 % 10.00 %
Tier 1 Leverage ratio:
The Company 1,777,844 9.14 % 4.00 % NA
The Bank 1,746,080 8.98 % 4.00 % 5.00 %
September 30, 2021
Common Equity Tier 1 risk-based
capital ratio:
The Company $ 1,446,613 9.50 % 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 FINANCIAL CONDITION
Cash and cash equivalents - Cash and cash equivalents were $1,880,647,000 at
December 31, 2021 , a decrease of $210,162,000 , or 10.1%, since September 30,
2021 . The change is primarily due to funding of new loan originations, partially
offset by growth in customer transaction deposit accounts.
Available-for-sale and held-to-maturity investment securities -
Available-for-sale securities decreased $192,120,000 , or 9.0%, during the three
months ended December 31, 2021 , mostly due to principal repayments and
maturities of $170,847,000 . During the same period, the balance of
held-to-maturity securities decreased by $39,638,000 primarily due to principal
pay-downs and maturities of $38,679,000 . As of December 31, 2021 , the Company
had a net unrealized gain on available-for-sale securities of $31,470,000 , which
is included on a net of tax basis in accumulated other comprehensive income
(loss).
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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
December 31, 2021 or September 30, 2021 as 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 December 31, 2021 or September 30, 2021 , therefore,
no allowance was recorded.
Loans receivable - Loans receivable, net of related contra accounts, increased
by $758,632,000 to $14,592,202,000 at December 31, 2021 , compared to
$13,833,570,000 at September 30, 2021 . The increase was primarily the net result
of originations of $2,134,338,000 , purchases of single-family residential
mortgages of $413,326,000 , partially offset by loan principal repayments of
$1,833,099,000 as well as a $24,956,000 decrease in loans in process. Commercial
loan originations accounted for 79% of total originations and consumer loan
originations were 21% during the period. The mix of loan originations is
consistent with management's strategy during low rate environments to produce
more construction, multifamily, commercial real estate, and commercial and
industrial loans that generally have adjustable interest rates or a shorter
duration.
The following table shows the loan portfolio by category and the change.
December 31, 2021 September 30, 2021 Change
($ in thousands) ($ in thousands) $ %
Commercial loans
Multi-family $ 2,298,155 13.5 %
2,681,453 15.8 2,443,845 15.0 237,608 9.7
Commercial & industrial (1) 2,373,012 13.9 2,314,654 14.2 58,358 2.5
Construction 2,967,644 17.4 2,888,214 17.7 79,430 2.8
Land - acquisition & development 225,423 1.3 222,457 1.4 2,966 1.3
Total commercial loans 10,545,687 61.9 10,160,647 62.3 385,040 3.8
Consumer loans
Single-family residential 5,295,837 31.1 4,951,627 30.4 344,210 7.0
Construction - custom 787,862 4.6 783,221 4.8 4,641 0.6
Land - consumer lot loans 151,297 0.9 149,956 0.9 1,341 0.9
HELOC 166,601 1.0 165,989 1.0 612 0.4
Consumer 77,681 0.5 87,892 0.5 (10,211) (11.6)
Total consumer loans 6,479,278 38.1 6,138,685 37.7 340,593 5.5
Total gross loans 17,024,965 100 % 16,299,332 100 % 725,633 4.5
Less:
Allowance for credit losses on
loans 171,411 171,300 111 0.1
Loans in process 2,207,880 2,232,836 (24,956) (1.1)
Net deferred fees, costs and
discounts 53,472 61,626 (8,154) (13.2)
Total loan contra accounts 2,432,763 2,465,762 (32,999) (1.3)
Net loans $ 14,592,202 $ 13,833,570 $ 758,632 5.5 %
(1) Includes
Non-performing assets - Non-performing assets increased$11,165,000 during the three months endedDecember 31, 2021 to$54,790,000 from$43,625,000 atSeptember 30, 2021 . The change is primarily due to a$13,210,000 increase in non-accrual loans. Non-performing assets as a percentage of total assets was 0.27% atDecember 31, 2021 compared to 0.22% atSeptember 30, 2021 . 40
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The following table sets forth information regarding troubled debt restructured loans and non-performing assets.
December 31, September 30,
2021 2021
($ in thousands)
Troubled debt restructured loans:
Multi - family $ 201 0.3 % $ 223 0.3 %
Commercial real estate 2,248 3.7 2,275 3.5
Commercial & industrial 38 0.1 40 0.1
Construction - - - -
Land - acquisition & development - - - -
Single-family residential 55,625 92.2 60,011 92.0
Construction - custom - - - -
Land - consumer lot loans 1,933 3.2 2,292 3.5
HELOC 242 0.4 246 0.4
Consumer 39 0.1 41 0.1
Total restructured loans (1) $ 60,326 100 % $ 65,128 100 %
Non-accrual loans:
Multi - family $ - - % $ 475 1.5 %
Commercial real estate 7,565 16.8 8,038 25.3
Commercial & industrial 15,349 34.1 365 1.1
Construction 611 1.4 505 1.7
Land - acquisition & development 2,340 5.2 2,340 7.4
Single-family residential 17,751 39.5 19,320 60.9
Construction - custom 465 1.0 - -
Land - consumer lot loans 544 1.2 359 1.1
HELOC 276 0.6 287 0.9
Consumer 58 0.1 60 0.2
Total non-accrual loans 44,959 100 % 31,749 100 %
Real estate owned 5,737 8,204
Other property owned 4,094 3,672
Total non-performing assets $ 54,790 $ 43,625
Total non-performing assets and performing
restructured loans as a percentage of total
assets 0.57 % 0.55 %
Total Assets
(1) Restructured loans were as follows:
Performing $ 58,782 97.4 % $ 63,655 97.7 %
Non-performing (included in non-accrual loans
above) 1,544 2.6 1,473 2.3
$ 60,326 100 % $ 65,128 100 %
For the three months ended December 31, 2021 , the Company recognized $1,250,000
in interest income on cash payments received from borrowers on non-accrual
loans. The Company would have recognized interest income of $328,000 for the
same period had these loans performed according to their original contract
terms. Recognized interest income for the three months ended December 31, 2021
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 $248,068,000 of loans that were
less than 90 days delinquent at December 31, 2021 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 1.81% at December 31, 2021 .
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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 ofDecember 31, 2021 . The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twenty-four months. Interest-only payments may also be approved during the modification period. For commercial loans, six consecutive payments on newly restructured loan terms are generally required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform, it will be placed in non-accrual status when it is 90 days delinquent. A loan that defaults and is subsequently modified would impact the Company's delinquency trend, which is part of the qualitative risk factors component of the 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.
December 31, 2021 September 30, 2021 Change
Allowance for credit losses: ($ in thousands) ($ in thousands) $ %
Commercial loans
Multi-family $ 15,993 9.3 % 16,949 9.9 % $ (956) (5.6) %
Commercial real estate 25,722 15.0 23,437 13.7 2,285 9.7
Commercial & industrial 47,231 27.6 45,957 26.8 1,274 2.8
Construction 24,766 14.4 25,585 14.9 (819) (3.2)
Land - acquisition & development 14,125 8.2 13,447 7.8 678 5.0
Total commercial loans 127,837 74.6 125,375 73.2 2,462 2.0
Consumer loans
Single-family residential 30,106 17.6 30,978 18.1 (872) (2.8)
Construction - custom 3,719 2.2 4,907 2.9 (1,188) (24.2)
Land - consumer lot loans 4,984 2.9 4,939 2.9 45 0.9
HELOC 2,365 1.4 2,390 1.4 (25) (1.0)
Consumer 2,400 1.4 2,711 1.6 (311) (11.5)
Total consumer loans 43,574 25.4 45,925 26.8 (2,351) (5.1)
Total allowance for loan losses 171,411 100.0 % 171,300 100.0 % 111 0.1
Reserve for unfunded commitments 30,000 27,500 2,500 9.1
Total allowance for credit losses $ 201,411 $ 198,800 $ 2,611 1.3 %
No allowance was recorded as of December 31, 2021 or as of September 30, 2021
for the $198,947,000 and $305,162,000 of 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 $201,411,000 , or 1.18% 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 December 31, 2021 and September 30, 2021 .
Real estate owned ("REO") - REO decreased during the three months ended
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Intangible assets - Intangible assets decreased to
Customer accounts - Customer accounts increased$359,934,000 , or 2.3%, to$15,902,046,000 atDecember 31, 2021 compared with$15,542,112,000 atSeptember 30, 2021 . Transaction accounts increased by$442,037,000 or 3.7% during that period, while time deposits decreased$82,103,000 or 2.4%. The shift in deposit mix has been a result of a deliberate deposit pricing and customer growth strategy. The focus on transaction accounts is intended to lessen sensitivity to rising interest rates and manage interest expense. The following table shows the composition of the Bank's customer accounts by deposit type. December 31, 2021 September 30, 2021 Weighted Weighted Deposit Account As a % of Total Average Deposit Account As a % of Total Average Balance Deposits Rate Balance Deposits Rate ($ in thousands) Non-interest checking$ 3,279,841 20.6 % - %$ 3,122,397 20.1 % - % Interest checking 3,688,823 23.3 0.21 3,566,322 22.9 0.20 Savings 1,043,002 6.6 0.11 1,039,336 6.7 0.11 Money market 4,538,396 28.5 0.20 4,379,970 28.2 0.19 Time deposits 3,351,984 21.1 0.53 3,434,087 22.1 0.54 Total$ 15,902,046 100 % 0.22 %$ 15,542,112 100 % 0.23 % FHLB advances and other borrowings - Total borrowings were$1,720,000,000 as ofDecember 31, 2021 and unchanged from$1,720,000,000 as ofSeptember 30, 2021 . Strong growth in deposits has provided for substantial funding of growth in loans receivable, therefore, additional FHLB borrowings have not been necessary. The weighted average rate for FHLB borrowings was 1.49% as ofDecember 31, 2021 and 1.51% atSeptember 30, 2021 . Shareholders' equity - The Company's shareholders' equity atDecember 31, 2021 was$2,149,126,000 , or 10.76% of total assets. This is an increase of$23,062,000 fromSeptember 30, 2021 when net worth was$2,126,064,000 , or 10.82% of total assets. The Company's shareholders' equity was impacted in the three months endedDecember 31, 2021 by net income of$50,281,000 , the payment of$14,899,000 in common stock dividends, payment of$3,656,000 in preferred stock dividends, treasury stock purchases of$2,973,000 , as well as the other comprehensive loss of$7,909,000 .
RESULTS OF OPERATIONS
Net Income - The Company recorded net income of$50,281,000 for the three months endedDecember 31, 2021 compared to$38,951,000 for the prior year quarter. The changes are due to the factors described below. Net Interest Income - For the three months endedDecember 31, 2021 , net interest income was$134,136,000 , which is$13,622,000 higher than the same quarter of the prior year. Net interest margin was 2.87% for the quarter endedDecember 31, 2021 compared to 2.75% for the quarter endedDecember 31, 2020 . The increase in net interest income is mostly due to average interest-earning assets increasing by$981,565,000 or 5.59% from the prior year while average interest-bearing liabilities decreased$37,843,000 or 0.26%. The average rate earned on interest-earning assets declined by 12 basis points to 3.22% while the average rate paid on interest-bearing liabilities declined by 31 basis points to 0.45%. During the three months endedDecember 31, 2021 and 2020, net interest income included$3,319,000 and$4,886,000 , respectively, of net loan origination fee amortization on PPP loans. The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. 43
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Rate / Volume Analysis:
Comparison of Three Months Ended
12/31/21 and 12/31/20
($ in thousands) Volume Rate Total
Interest income:
Loans receivable $ 14,765 $ (9,927) $ 4,838
Mortgage-backed securities (3,314) 876 (2,438)
Investments (1) 371 (153) 218
All interest-earning assets 11,822 (9,204) 2,618
Interest expense:
Customer accounts 997 (6,646) (5,649)
FHLB advances and other borrowings (4,407) (948) (5,355)
All interest-bearing liabilities (3,410) (7,594) (11,004) Change in net interest income$ 15,232 $ (1,610) $ 13,622 ___________________ (1)Includes interest on cash equivalents and dividends on FHLB & FRB stock. Provision (Release) for Credit Losses - The Company recorded a$500,000 provision for credit losses for the three months endedDecember 31, 2021 , compared with a provision for credit losses of$3,000,000 for the three months endedDecember 31, 2020 . The provision in the three months endedDecember 31, 2021 was primarily due to growth in loans receivable and unfunded commitments largely offset by improvements in management's assessment of the credit quality of certain loan portfolios. The provision for the three months endedDecember 31, 2020 was primarily due to reserving for growth in loans receivable and changes in composition of the loan portfolio. Recoveries, net of charge-offs, totaled$2,111,000 for the three months endedDecember 31, 2021 , compared to net recoveries of$1,734,000 during the three months endedDecember 31, 2020 . No allowance was recorded as ofDecember 31, 2021 or as ofSeptember 30, 2021 for the$198,947,000 and$305,162,000 of 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 three months endedDecember 31, 2021 results include total other income of$18,681,000 compared to$13,870,000 for the same period one year ago, a$4,811,000 increase. The increase in other income was primarily due to a gain of$5,135,000 that was recorded for certain equity investments in theDecember 31, 2021 . Other Expense - Total other expense was$89,613,000 for the three months endedDecember 31, 2021 , an increase of$8,203,000 from$81,410,000 for the prior year quarter. Compensation and benefits costs increased by$4,702,000 , or 11.0%, 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. The three months endedDecember 31, 2021 also included a tax related accrual of$2,400,000 . Total other expense for the three months endedDecember 31, 2021 andDecember 31, 2020 equaled 1.81% and 1.73%, respectively, of average assets. Gain (Loss) on Real Estate Owned - Results for the three months endedDecember 31, 2021 include a net gain on real estate owned of$562,000 , compared to a net loss of$449,000 for the prior year quarter. The gain during the three months endedDecember 31, 2021 was due to REO sales, partially offset by the write-down of certain properties. Income Tax Expense - Income tax expense totaled$12,985,000 for the three months endedDecember 31, 2021 , compared to$10,574,000 for the prior year quarter. The effective tax rate was 20.52% and 21.35% for the three months endedDecember 31, 2021 andDecember 31, 2020 , 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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