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," the Risk Factors included in the Company's 2020 Form 10-K for the year endedSeptember 30, 2020 , 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 natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as the COVID-19 pandemic), 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 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 , 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 success of the Company at managing the risks involved in the remediation efforts associated with its Bank Secrecy Act ("BSA") 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 remediation efforts associated with its Home Mortgage Disclosure Act ("HMDA") compliance and reporting, risks the costs of enhancements to the Bank's HMDA program are greater than anticipated; and risks governmental authorities undertake enforcement actions or legal proceedings with respect to the Bank's HMDA program beyond those contemplated by the Consent Orders that have been entered into with theConsumer Financial Protection Bureau (the "CFPB"); •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. 35
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES 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 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 is
CRITICAL ACCOUNTING POLICIES
The Company has determined that the only accounting policy critical to an
understanding of the consolidated financial statements of Washington Federal
relates to the methodology for determining the amount of the allowance for
credit losses ("ACL"). The Company maintains an allowance based on the expected
credit losses over the contractual life of the loan portfolio as well as
unfunded loan commitments. The allowance is based on ongoing, quarterly
assessments by management.
The ACL consists of the allowance for loan losses and the reserve for unfunded
commitments. In June 2016 , the FASB issued ASU 2016-13, Financial Instruments -
Credit Losses ("ASC 326"). The ASC, as amended is intended to provide financial
statement users with more decision-useful information about the expected credit
losses on financial instruments that are not accounted for at fair value through
net income.
The Company early adopted ASC 326 during fiscal 2020 and based on the
application of the modified retrospective method it became effective on October
1, 2019 for all financial assets measured at amortized cost (primarily loans
receivable and held-to-maturity debt securities) and off-balance-sheet credit
exposures. The Company recorded a decrease to retained earnings of $21,945,000
as of October 1, 2019 for the cumulative effect of adopting ASC 326.
As a result of our adoption of ASC 326, our methodology for estimating the ACL
changed significantly from September 30, 2019 . The standard replaced the
"incurred loss" approach with an "expected loss" approach known as current
expected credit loss ("CECL"). The CECL methodology requires an estimate of the
credit losses expected over the life of an exposure (or pool of exposures) and
it removes the incurred loss methodology's threshold that delayed the
recognition of a credit loss until it was "probable" a loss event was deemed to
be "incurred."
The estimate of expected credit losses under the CECL methodology is based on
relevant information about past events, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported amounts.
Historical loss experience is generally the starting point for estimating
expected credit losses. We then consider whether the historical loss experience
should be adjusted for asset-specific risk characteristics or current conditions
at the reporting date that did not exist over the period from which historical
experience was based. Finally, we consider forecasts about future economic
conditions or changes in collateral values that are reasonable and supportable.
Management's determination of the amount of the ACL is a critical accounting
estimate as it requires significant reliance on the credit risk we ascribe to
individual borrowers, the use of estimates and significant judgment as to the
amount and timing of expected future cash flows on criticized loans, significant
reliance on historical loss rates on homogenous portfolios, consideration of our
quantitative and qualitative evaluation of past events, current conditions, and
reasonable and supportable forecasts that affect the collectability of the
reported amounts.
Going forward, the impact of utilizing the CECL methodology to calculate the ACL
will be significantly influenced by the composition, characteristics and quality
of our loan portfolio, as well as the prevailing economic conditions and
forecasts utilized. Material changes to these and other relevant factors may
result in greater volatility to the allowance for credit losses, and therefore,
greater volatility in our reported earnings. See Notes A, D and E to the
Consolidated Financial Statements and the
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"Asset Quality and Allowance for Credit Losses" section below for more information on loans receivable and the allowance for credit losses.
ASSET QUALITY & ALLOWANCE FOR CREDIT LOSSES
The Company maintains an ACL for the expected credit losses over the contractual
life of the loan portfolio as well as unfunded loan commitments. The amount of
ACL is based on ongoing, quarterly assessments by management.
The ACL consists of the allowance for loan losses and the reserve for unfunded
commitments. The estimate of expected credit losses under the CECL methodology
is based on relevant information about past events, current conditions, and
reasonable and supportable forecasts that affect the collectability of the
reported amounts. Historical loss experience is generally the starting point for
estimating expected credit losses. We then consider whether the historical loss
experience should be adjusted for asset-specific risk characteristics or current
conditions at the reporting date that did not exist over the period that
historical experience was based for each loan type. Finally, we consider
forecasts about future economic conditions or changes in collateral values that
are reasonable and supportable.
Portfolio segment is defined as the level at which an entity develops and
documents a systematic methodology to determine its ACL. The Company has
designated two loan portfolio segments, commercial loans and consumer loans.
These loan portfolio segments are further disaggregated into classes, which
represent loans of similar type, risk characteristics, and methods for
monitoring and assessing credit risk. The commercial loan portfolio segment is
disaggregated into five classes: multi-family, commercial real estate,
commercial and industrial, construction, and land acquisition and development.
The risk of loss for the commercial loan portfolio segment is generally most
indicated by the credit risk rating assigned to each borrower. Commercial loan
risk ratings are determined by experienced senior credit officers based on
specific facts and circumstances and are subject to periodic review by an
independent internal team of credit specialists. The consumer loan portfolio
segment is disaggregated into five classes: single-family-residential mortgage,
custom construction, consumer lot loans, home equity lines of credit, and other
consumer. The risk of loss for the consumer loan portfolio segment is generally
most indicated by delinquency status and general economic factors. Each
commercial and consumer loan portfolio class may also be further segmented based
on risk characteristics.
For most of our loan portfolio classes, the historical loss experience is
determined using a cohort methodology. This method pools loans into groups
("cohorts") sharing similar risk characteristics and tracks each cohort's net
charge-offs over the lives of the loans to calculate a historical loss rate. The
historical loss rates for each cohort are then averaged to calculate an overall
historical loss rate which is applied to the current loan balance to arrive at
the quantitative baseline portion of the allowance for credit losses for the
respective loan portfolio class. For certain loan portfolio classes, the Company
determined there was not sufficient historical loss information to calculate a
meaningful historical loss rate using the cohort methodology. For any such loan
portfolio class, the weighted-average remaining maturity ("WARM") methodology is
being utilized until sufficient historical loss data is obtained. The WARM
method multiplies an average annual loss rate by the expected remaining life of
the loan pool to arrive at the quantitative baseline portion of the allowance
for credit losses for the respective loan portfolio class.
The Company also considers qualitative adjustments to the historical loss rate
for each loan portfolio class. The qualitative adjustments for each loan class
consider the conditions over the period from which historical loss experience
was based and are split into two components: 1) asset or class specific risk
characteristics or current conditions at the reporting date related to portfolio
credit quality, remaining payments, volume and nature, credit culture and
management, business environment or other management factors and 2) reasonable
and supportable forecast of future economic conditions and collateral values.
The Company performs a quarterly asset quality review which includes a review of
forecasted gross charge-offs and recoveries, nonperforming assets, criticized
loans, risk rating migration, delinquencies, etc. The asset quality review is
performed by management and the results are used to consider a qualitative
overlay to the quantitative baseline. The second qualitative adjustment noted
above, economic conditions and collateral values, encompasses a one-year
reasonable and supportable forecast period. The overlay adjustment for the
reasonable and supportable forecast assumes an immediate reversion after the
one-year forecast period to historical loss rates for the remaining life of the
respective loan pool.
When management deems it to be appropriate, the Company establishes a specific
reserve for individually evaluated loans that do not share similar risk
characteristics with the loans included in each respective loan pool. These
individually evaluated loans are removed from their respective pools and
typically represent collateral dependent loans but may also include other
non-performing loans or troubled debt restructurings ("TDRs"). In addition, the
Company individually evaluates "reasonably expected" TDRs, which are identified
by the Company as a loan expected to be classified as a TDR within the next six
months. Management judgment is utilized to make this determination.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class. 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 73% of total deposits as ofDecember 31, 2020 while the composition of the investment securities portfolio is 36% variable and 64% 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$586,870,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As ofDecember 31, 2020 , the net unrealized gain on these securities was$19,305,000 . The Company has$2,482,944,000 of available-for-sale securities that are carried at fair value. As ofDecember 31, 2020 , the net unrealized gain on these securities was$51,070,000 . 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, 2020 was$2,743,000 . 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 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, 2020 , 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 6.4% in the next year. This compares to an estimated increase of 3.4% as of theSeptember 30, 2020 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 increase of 1.5% in the first year and increase of 4.7% 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, 2020 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, could not 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, 2020 , in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to increase by$206,536,000 or 7.4% and the NPV to total assets ratio to increase to 16.2% from a base of 14.4%. As ofSeptember 30, 2020 , the NPV in the event of a 200 basis point increase in rates was estimated to increase by$141,000,000 or 5.3% and the NPV to total assets ratio to increase to 15.6% from a base of 14.1%. The change in NPV sensitivity is due primarily to changes in interest rates that has impacted asset prices as well as sensitivity to expected prepayment speeds on fixed rate loans and mortgage-backed securities as ofDecember 31, 2020 . 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 was 2.34% atDecember 31, 2020 and was also 2.34% atSeptember 30, 2020 . As ofDecember 31, 2020 , the weighted average rate on interest-earning assets decreased by 11 38
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
basis points to 2.92% compared to September 30, 2020 , while the weighted average
rate on interest-bearing liabilities decreased by 11 basis points to 0.58%. The
interest rate spread decreased to 2.34% at December 31, 2020 from 2.76% at
December 31, 2019 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 2.75% for the quarter ended December 31, 2020 from 3.15% for the quarter
ended December 31, 2019 . The yield on interest-earning assets decreased 97 basis
points to 3.34% and the cost of interest-bearing liabilities decreased 67 basis
points to 0.76% over that same period. The compression in the net interest
margin since the prior year same quarter is primarily due to the rapid drop in
short-term rates by the Federal Reserve Bank in response to the COVID-19
pandemic which resulted in the changes in average rates noted above.
Additionally, the balance of low yielding cash was relatively high at
$1,830,722,000 as of December 31, 2020 and the Company had $646,887,000 in PPP
loans as of that date that have a relatively low yield and were originated since
the prior year same quarter. The lower rate in interest-bearing liabilities was
primarily due to lower rates paid on interest-bearing deposits as well as FHLB
advances.
The following table sets forth the information explaining the changes in the net
interest margin for the period indicated compared to the same period one year
ago.
Three Months Ended December 31, 2020 Three Months Ended December 31, 2019
Average Balance Interest Average Rate Average Balance Interest Average Rate
($ in thousands) ($ in thousands)
Assets
Loans receivable $ 12,824,870 $ 133,671 4.14 % $ 11,924,778 $ 142,146 4.73 %
Mortgage-backed securities 1,582,286 7,230 1.81 2,360,374 15,612 2.62
Cash & Investments 3,004,224 5,265 0.70 776,633 5,425 2.77
FHLB & FRB stock 140,730 1,656 4.67 124,568 1,641 5.23
Total interest-earning assets 17,552,110 147,822 3.34 % 15,186,353 164,824 4.31 %
Other assets 1,307,937 1,189,996
Total assets $ 18,860,047 $ 16,376,349
Liabilities and Equity
Interest-bearing customer accounts $ 11,619,857 $ 14,110 0.48 % $ 10,247,113 $ 31,481 1.22 %
FHLB advances 2,668,478 13,198 1.96 2,264,457 13,658 2.39
Total interest-bearing liabilities 14,288,335 27,308 0.76 % 12,511,570 45,139 1.43 %
Noninterest-bearing customer accounts 2,258,685 1,641,054
Other liabilities 275,834 206,876
Total liabilities 16,822,854 14,359,500
Shareholders' equity 2,037,193 2,016,849
Total liabilities and equity $ 18,860,047 $ 16,376,349
Net interest income $ 120,514 $ 119,685
Net interest margin (NIM) 2.75 % 3.15 %
As of December 31, 2020 , total assets had increased by $269,567,000 to
$19,063,622,000 from $18,794,055,000 at September 30, 2020 . During the three
months ended December 31, 2020 , cash and cash equivalents increased by
$127,745,000 and loans receivable increased $88,693,000 .
Cash and cash equivalents of $1,830,722,000 and shareholders' equity of
$2,061,767,000 as of December 31, 2020 provide management with flexibility in
managing interest rate risk going forward.
LIQUIDITY AND CAPITAL RESOURCES
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, repayments and sales of investments and borrowings and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments. Additionally, the Company earns fee income for loan, deposit, insurance and other services. The Company participated in theSmall Business Administration's Paycheck Protection Program ("PPP"). This program came about through the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") passed byCongress to help small businesses keep their employees employed through the COVID-19 shelter in place orders. In 2020, the Company assisted over 6,500 businesses with more than$780,000,000 in PPP loans. The Company is actively working 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, 2020 , 183 mortgage loans totaling$46,000,000 and 10 commercial loans totaling$32,000,000 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") 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. The Company's cash and cash equivalents totaled$1,830,722,000 atDecember 31, 2020 , an increase from$1,702,977,000 atSeptember 30, 2020 . These amounts include the Bank's operating cash. The Company's shareholders' equity atDecember 31, 2020 was$2,061,767,000 , or 10.82% of total assets. This is an increase of$47,634,000 fromSeptember 30, 2020 when net worth was$2,014,133,000 , or 10.72% of total assets. The Company's shareholders' equity was impacted in the three months endedDecember 31, 2020 by net income of$38,951,000 , the payment of$16,577,000 in cash dividends, treasury stock purchases of$701,000 , as well as other comprehensive income of$24,482,000 . The ratio of tangible capital to tangible assets atDecember 31, 2020 was 9.34%. 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. 40
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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, 2020
Common Equity Tier I risk-based
capital ratio:
The Company $ 1,711,296 12.65 % 4.50 % NA
The Bank 1,665,018 12.31 % 4.50 % 6.50 %
Tier I risk-based capital ratio:
The Company 1,711,296 12.65 % 6.00 % NA
The Bank 1,665,018 12.31 % 6.00 % 8.00 %
Total risk-based capital ratio:
The Company 1,880,718 13.90 % 8.00 % NA
The Bank 1,834,435 13.56 % 8.00 % 10.00 %
Tier 1 Leverage ratio:
The Company 1,711,296 9.25 % 4.00 % NA
The Bank 1,665,018 9.00 % 4.00 % 5.00 %
September 30, 2020
Common Equity Tier 1 risk-based
capital ratio:
The Company $ 1,687,676 12.93 % 4.50 % NA
The Bank 1,625,478 12.46 % 4.50 % 6.50 %
Tier I risk-based capital ratio:
The Company 1,687,676 12.93 % 6.00 % NA
The Bank 1,625,478 12.46 % 6.00 % 8.00 %
Total risk-based capital ratio:
The Company 1,851,136 14.19 % 8.00 % NA
The Bank 1,788,904 13.71 % 8.00 % 10.00 %
Tier 1 Leverage ratio:
The Company 1,687,676 9.28 % 4.00 % NA
The Bank 1,625,478 8.94 % 4.00 % 5.00 %
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents - Cash and cash equivalents are $1,830,722,000 at
December 31, 2020 , an increase of $127,745,000 , or 7.5%, since September 30,
2020 . The change is primarily due to the large increase in deposits.
Available-for-sale and held-to-maturity investment securities -
Available-for-sale securities increased $233,452,000 , or 10.4%, during the three
months ended December 31, 2020 , mostly due to purchases of $379,760,000 , offset
by principal repayments and maturities of $157,246,000 . During the same period,
the balance of held-to-maturity securities decreased by $118,968,000 primarily
due to principal pay-downs and maturities of $116,223,000 . As of December 31,
2020 , the Company had a net unrealized gain on available-for-sale securities of
$51,070,000 , which is included on a net of tax basis in accumulated other
comprehensive income (loss).
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Substantially all 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, 2020 or September 30, 2020 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, 2020 or September 30, 2020 , therefore,
no allowance was recorded.
Loans receivable - Loans receivable, net of related contra accounts, increased
by $88,693,000 to $12,881,010,000 at December 31, 2020 , compared to
$12,792,317,000 at September 30, 2020 . The increase was primarily the net result
of originations of $1,915,025,000 and loan principal repayments of
$1,600,257,000 as well as a $223,900,000 increase in loans in process.
Commercial loan originations accounted for 75% of total originations and
consumer loan originations were 25% during the period. The mix of loan
originations is consistent with management's strategy during low rate
environments to produce more construction, multifamily, commercial real estate,
and commercial and industrial loans that generally have adjustable interest
rates or a shorter duration.
The following table shows the loan portfolio by category and the change.
December 31, 2020 September 30, 2020 Change
($ in thousands) ($ in thousands) $ %
Commercial loans
Multi-family $ 1,610,796 10.9 %
1,954,154 13.2 1,895,086 13.1 59,068 3.1
Commercial & industrial (1) 2,256,627 15.3 2,132,160 14.7 124,467 5.8
Construction 2,687,708 18.2 2,403,276 16.6 284,432 11.8
Land - acquisition & development 193,239 1.3 193,745 1.3 (506) (0.3)
Total commercial loans 8,702,524 58.9 8,163,029 56.3 539,495 6.6
Consumer loans
Single-family residential 5,063,053 34.2 5,304,689 36.7 (241,636) (4.6)
Construction - custom 659,364 4.5 674,879 4.7 (15,515) (2.3)
Land - consumer lot loans 110,841 0.7 102,263 0.7 8,578 8.4
HELOC 139,752 0.9 139,703 1.0 49 -
Consumer 111,292 0.8 83,159 0.6 28,133 33.8
Total consumer loans 6,084,302 41.1 6,304,693 43.7 (220,391) (3.5)
Total gross loans 14,786,826 100 % 14,467,722 100 % 319,104 2.2
Less:
Allowance for credit losses on
loans 170,189 166,955 3,234 1.9
Loans in process 1,679,972 1,456,072 223,900 15.4
Net deferred fees, costs and
discounts 55,655 52,378 3,277 6.3
Total loan contra accounts 1,905,816 1,675,405 230,411 13.8
Net loans $ 12,881,010 $ 12,792,317 $ 88,693 0.7 %
(1) Includes
Non-performing assets - Non-performing assets increased$28,847,000 during the three months endedDecember 31, 2020 to$66,542,000 from$37,695,000 atSeptember 30, 2020 . The change is due to a$29,350,000 increase in non-accrual loans and$503,000 decline in real estate owned ("REO"). Non-performing assets as a percentage of total assets was 0.35% atDecember 31, 2020 compared to 0.20% atSeptember 30, 2020 . 42
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The following table sets forth information regarding troubled debt restructured loans and non-performing assets.
December 31, September 30,
2020 2020
($ in thousands)
Troubled debt restructured loans:
Multi - family $ 288 0.3 % $ 304 0.3 %
Commercial real estate 2,476 2.9 1,462 1.6
Commercial & industrial 48 0.1 51 0.1
Construction - - - -
Land - acquisition & development - - - -
Single-family residential 80,155 92.9 85,607 93.6
Construction - custom - - - -
Land - consumer lot loans 2,714 3.1 3,106 3.4
HELOC 584 0.7 826 0.9
Consumer 49 - 52 0.1
Total restructured loans (1) $ 86,314 100 % $ 91,408 100 %
Non-accrual loans:
Multi - family $ - - % $ - - %
Commercial real estate 31,397 53.8 3,771 13.0
Commercial & industrial 594 1.0 329 1.1
Construction 1,237 2.1 1,669 5.8
Land - acquisition & development - - - -
Single-family residential 24,349 41.7 22,431 77.2
Construction - custom - - - -
Land - consumer lot loans 443 0.8 243 0.8
HELOC 334 0.6 553 1.9
Consumer 52 0.1 60 0.2
Total non-accrual loans 58,406 100 % 29,056 100 %
Real estate owned 4,463 4,966
Other property owned 3,673 3,673
Total non-performing assets $ 66,542 $ 37,695
Total non-performing assets and performing
restructured loans as a percentage of total
assets 0.79 % 0.67 %
Total Assets
(1) Restructured loans were as follows:
Performing $ 84,482 97.9 % $ 89,072 97.4 %
Non-performing (included in non-accrual loans
above) 1,832 2.1 2,336 2.6
$ 86,314 100 % $ 91,408 100 %
For the three months ended December 31, 2020 , the Company recognized $3,489,000
in interest income on cash payments received from borrowers on non-accrual
loans. The Company would have recognized interest income of $402,000 for the
same period had these loans performed according to their original contract
terms. Recognized interest income for the three months ended December 31, 2020
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 $535,586,000 of loans that were
less than 90 days delinquent at December 31, 2020 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 3.60% at December 31, 2020 .
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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 92.9% of restructured loans as ofDecember 31, 2020 . 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, 2020 September 30, 2020 Change
Allowance for credit losses: ($ in thousands) ($ in thousands) $ %
Commercial loans
Multi-family $ 14,363 8.4 % $ 13,853 8.3 % $ 510 3.7 %
Commercial real estate 23,496 13.8 22,516 13.5 980 4.4
Commercial & industrial 44,317 26.0 38,665 23.2 5,652 14.6
Construction 26,365 15.5 24,156 14.5 2,209 9.1
Land - acquisition & development 10,666 6.3 10,733 6.4 (67) (0.6)
Total commercial loans 119,207 70.0 109,923 65.8 9,284 8.4
Consumer loans
Single-family residential 38,613 22.7 45,186 27.1 (6,573) (14.5)
Construction - custom 3,594 2.1 3,555 2.1 39 1.1
Land - consumer lot loans 2,958 1.7 2,729 1.6 229 8.4
HELOC 2,362 1.4 2,571 1.5 (209) (8.1)
Consumer 3,455 2.0 2,991 1.8 464 15.5
Total consumer loans 50,982 30.0 57,032 34.2 (6,050) (10.6)
Total allowance for loan losses 170,189 100.0 % 166,955 100.0 % 3,234 1.9
Reserve for unfunded commitments 26,500 25,000 1,500 2.2
Total allowance for credit losses $ 196,689 $ 191,955 $ 4,734 2.5 %
No allowance was recorded as of December 31, 2020 for the $646,887,000 of SBA
Payroll Protection Program loans, which are included in commercial & industrial,
due to the government guarantee. Management believes the allowance for credit
losses of $196,689,000 , or 1.33% 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,
2020 .
Real estate owned - REO decreased during the three months ended December 31,
2020 by $503,000 to $4,463,000 , primarily due to sales of REO properties during
the period.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Intangible assets - Intangible assets decreased to
Customer accounts - Customer accounts increased
The following table shows the composition of the Bank's customer accounts by
deposit type.
December 31, 2020 September 30, 2020
Weighted Weighted
Deposit Account As a % of Total Average Deposit Account As a % of Total Average
Balance Deposits Rate Balance Deposits Rate
($ in thousands)
Non-interest checking $ 2,336,294 16.5 % - % $ 2,164,071 15.7 % - %
Interest checking 3,175,494 22.4 0.20 3,029,576 22.0 0.24
Savings 914,655 6.5 0.11 872,087 6.3 0.11
Money market 3,955,016 27.9 0.22 3,740,698 27.1 0.30
Time deposits 3,785,082 26.7 0.90 3,973,192 28.8 1.17
Total $ 14,166,541 100 % 0.36 % $ 13,779,624 100 % 0.48 %
FHLB advances and other borrowings - Total borrowings totaled $2,600,000,000 as
of December 31, 2020 , a decrease from $2,700,000,000 as of September 30, 2020 .
The decrease was due to the termination of a hedged FHLB borrowing that had an
effective interest rate of 1.39%. The weighted average rate for FHLB borrowings
was 1.82% as of December 31, 2020 and 1.79% at September 30, 2020 .
Shareholders' equity - The Company's total shareholders' equity at December 31,
2020 was $2,061,767,000 , or 10.82% of total assets. This was an increase of
$47,634,000 from the September 30, 2020 total of $2,014,133,000 , or 10.72% of
total assets. The Company's equity was impacted in the three months ended
December 31, 2020 by net income of $38,951,000 , the payment of $16,577,000 in
cash dividends, treasury stock purchases of $701,000 , as well as other
comprehensive income of $24,482,000 .
RESULTS OF OPERATIONS
Net Income - The Company recorded net income of$38,951,000 for the three months endedDecember 31, 2020 compared to$67,866,000 for the prior year quarter. The decrease is due to the factors described below. Net Interest Income - For the three months endedDecember 31, 2020 , net interest income was$120,514,000 , which is$829,000 higher than the same quarter of the prior year. Net interest margin was 2.75% for the quarter endedDecember 31, 2020 compared to 3.15% for the quarter endedDecember 31, 2019 . Average interest-earning assets increased$2,365,757,000 or 15.58% from the prior year while average interest-bearing liabilities increased$1,776,765,000 or 14.20%. The average rate earned on interest-earning assets declined by 97 basis points to 3.34% while the average rate paid on interest-bearing liabilities declined by 67 basis points to 0.76%. The compression in the net interest margin since the prior year same quarter is primarily due to the rapid drop in short-term rates by theFederal Reserve Bank in response to the COVID-19 pandemic which led to changes in the rates on earning assets and bearing liabilities noted above. Additionally, the balance of cash was relatively high at$1,830,722,000 as ofDecember 31, 2020 and the loan portfolio atDecember 31, 2020 contained$634,850,000 in PPP loans, which carry a 1% note rate. The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. 45
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Rate / Volume Analysis:
Comparison of Three Months Ended
12/31/20 and 12/31/19
($ in thousands) Volume Rate Total
Interest income:
Loans receivable $ 10,063 $ (18,538) $ (8,475)
Mortgage-backed securities (4,319) (4,063) (8,382)
Investments (1) 7,661 (7,806) (145)
All interest-earning assets 13,405 (30,407) (17,002)
Interest expense:
Customer accounts 3,719 (21,090) (17,371)
FHLB advances and other borrowings 2,194 (2,654) (460)
All interest-bearing liabilities 5,913 (23,744) (17,831)
Change in net interest income $ 7,492 $
(6,663)
___________________
(1)Includes interest on cash equivalents and dividends on FHLB & FRB stock. Provision (Release) for Credit Losses - The Company recorded a$3,000,000 provision for credit losses for the three months endedDecember 31, 2020 , compared with a release of allowance for credit losses of$3,750,000 for the three months endedDecember 31, 2019 . The credit loss provision for the three months endedDecember 31, 2020 is primarily due to reserving for new loan originations and changes in composition of the loan portfolio. Recoveries, net of charge-offs, totaled$1,734,000 for the three months endedDecember 31, 2020 , compared to net recoveries of$2,579,000 during the three months endedDecember 31, 2019 . No allowance was recorded as ofDecember 31, 2020 for the$646,887,000 of PPP loans, which are included in the commercial & industrial loan category, due to the government guarantee. Other Income - The three months endedDecember 31, 2020 results include total other income of$13,870,000 compared to$46,376,000 for the same period one year ago, a$32,506,000 decrease. The decrease was primarily due to a net gain of$30,700,000 from the sale of fixed assets, including a branch property inBellevue, Washington during the first quarter of fiscal 2020. Other Expense - Total other expense was$81,410,000 for the three months endedDecember 31, 2020 , a decrease of$1,226,000 from$82,636,000 for the same period one year ago. Compensation and benefits costs increased by$6,092,000 , or 16.6%, over the prior year quarter due to a 4.8% rise in headcount, annual merit increases as well as higher bonus compensation that reflects increased loan production activity since the prior year. Information technology costs decreased by$5,276,000 , primarily due to the prior year quarter including a$5,900,000 impairment charge on systems hardware and software. Total other expense for the three months endedDecember 31, 2020 andDecember 31, 2019 equaled 1.73% and 2.02%, respectively, of average assets.
Gain (Loss) on Real Estate Owned - Results for the three months ended
Income Tax Expense - Income tax expense totaled$10,574,000 for the three months endedDecember 31, 2020 , compared to$18,423,000 for the prior year quarter. The effective tax rate for both the three months endedDecember 31, 2020 and the three months endedDecember 31, 2019 was 21.35%. The effective tax rate for the three months endedDecember 31, 2020 differs from the statutory rate mainly due to state taxes, tax-exempt income and tax-credit investments.
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