WAFD INC - Quarter Report: 2020 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended December 31, 2020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 001-34654
WASHINGTON FEDERAL INC
(Exact name of registrant as specified in its charter)
Washington | 91-1661606 | |||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
425 Pike Street | Seattle | Washington | 98101 | |||||||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code (206) 624-7930
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $1.00 par value per share | WAFD | NASDAQ Stock Market | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had outstanding 75,891,386 shares of common stock as of January 26, 2021.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
| The Consolidated Financial Statements of Washington Federal, Inc. and Subsidiaries filed as a part of the report are as follows: | ||||||||||||||
2
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
| December 31, 2020 | September 30, 2020 | ||||||||||
| (In thousands, except share data) | |||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 1,830,722 | $ | 1,702,977 | |||||||
Available-for-sale securities, at fair value | 2,482,944 | 2,249,492 | |||||||||
Held-to-maturity securities, at amortized cost | 586,870 | 705,838 | |||||||||
Loans receivable, net of allowance for loan losses of $170,189 and $166,955 | 12,881,010 | 12,792,317 | |||||||||
| Interest receivable | 52,671 | 53,799 | |||||||||
| Premises and equipment, net | 256,242 | 252,805 | |||||||||
| Real estate owned | 4,463 | 4,966 | |||||||||
| FHLB and FRB stock | 137,991 | 141,990 | |||||||||
| Bank owned life insurance | 229,175 | 227,749 | |||||||||
Intangible assets, including goodwill of $302,707 and $302,707 | 309,425 | 309,906 | |||||||||
| Federal and state income tax assets, net | — | 5,708 | |||||||||
| Other assets | 292,109 | 346,508 | |||||||||
| $ | 19,063,622 | $ | 18,794,055 | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Liabilities | |||||||||||
| Customer accounts | |||||||||||
| Transaction deposit accounts | $ | 10,381,459 | $ | 9,806,432 | |||||||
| Time deposit accounts | 3,785,082 | 3,973,192 | |||||||||
| 14,166,541 | 13,779,624 | ||||||||||
| FHLB advances | 2,600,000 | 2,700,000 | |||||||||
| Advance payments by borrowers for taxes and insurance | 15,539 | 49,462 | |||||||||
| Federal and state income tax liabilities, net | 8,294 | — | |||||||||
| Accrued expenses and other liabilities | 211,481 | 250,836 | |||||||||
| 17,001,855 | 16,779,922 | ||||||||||
| Commitments and contingencies (see Note I) | |||||||||||
| Shareholders’ equity | |||||||||||
Common stock, $1.00 par value, $300,000,000 shares authorized; 135,937,934 and 135,727,237 shares issued; 75,867,105 and 75,689,364 shares outstanding | 135,938 | 135,727 | |||||||||
| Additional paid-in capital | 1,680,111 | 1,678,843 | |||||||||
| Accumulated other comprehensive income (loss), net of taxes | 41,435 | 16,953 | |||||||||
Treasury stock, at cost; 60,070,829 and 60,037,873 shares | (1,238,997) | (1,238,296) | |||||||||
| Retained earnings | 1,443,280 | 1,420,906 | |||||||||
| 2,061,767 | 2,014,133 | ||||||||||
| $ | 19,063,622 | $ | 18,794,055 | ||||||||
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands, except share data) | |||||||||||
| INTEREST INCOME | |||||||||||
| Loans receivable | $ | 133,671 | $ | 142,146 | |||||||
| Mortgage-backed securities | 7,230 | 15,612 | |||||||||
| Investment securities and cash equivalents | 6,921 | 7,066 | |||||||||
| 147,822 | 164,824 | ||||||||||
| INTEREST EXPENSE | |||||||||||
| Customer accounts | 14,110 | 31,481 | |||||||||
| FHLB advances | 13,198 | 13,658 | |||||||||
| 27,308 | 45,139 | ||||||||||
| Net interest income | 120,514 | 119,685 | |||||||||
| Provision (release) for credit losses | 3,000 | (3,750) | |||||||||
| Net interest income after provision (release) | 117,514 | 123,435 | |||||||||
| OTHER INCOME | |||||||||||
| Loan fee income | 2,392 | 1,804 | |||||||||
| 6,026 | 6,260 | ||||||||||
| Other income | 5,452 | 38,312 | |||||||||
| 13,870 | 46,376 | ||||||||||
| OTHER EXPENSE | |||||||||||
| Compensation and benefits | 42,723 | 36,631 | |||||||||
| Occupancy | 9,592 | 10,135 | |||||||||
| FDIC insurance premiums | 3,263 | 2,470 | |||||||||
| Product delivery | 4,937 | 4,267 | |||||||||
| Information technology | 11,831 | 17,107 | |||||||||
| Other expense | 9,064 | 12,026 | |||||||||
| 81,410 | 82,636 | ||||||||||
| Gain (loss) on real estate owned, net | (449) | (886) | |||||||||
| Income before income taxes | 49,525 | 86,289 | |||||||||
| Income tax expense | 10,574 | 18,423 | |||||||||
| NET INCOME | $ | 38,951 | $ | 67,866 | |||||||
| PER SHARE DATA | |||||||||||
| Basic earnings per share | $ | 0.51 | $ | 0.86 | |||||||
| Diluted earnings per share | 0.51 | 0.86 | |||||||||
| Dividends paid on common stock per share | 0.22 | 0.21 | |||||||||
| Basic weighted average number of shares outstanding | 75,792,995 | 78,480,264 | |||||||||
| Diluted weighted average number of shares outstanding | 75,798,460 | 78,535,299 | |||||||||
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| Net income | $ | 38,951 | $ | 67,866 | |||||||
| Other comprehensive income (loss) net of tax: | |||||||||||
Net unrealized gain (loss) during the period on available-for-sale investment securities, net of tax of $(2,686) and $425 | 8,991 | (1,724) | |||||||||
| 8,991 | (1,724) | ||||||||||
Net unrealized gain (loss) during the period on borrowings cash flow hedges, net of tax of $(4,627) and $(697) | 15,491 | 2,418 | |||||||||
| 15,491 | 2,418 | ||||||||||
| Other comprehensive income (loss) | 24,482 | 694 | |||||||||
| Comprehensive income | $ | 63,433 | $ | 68,560 | |||||||
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| (in thousands) | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||
| Balance at October 1, 2020 | $ | 135,727 | $ | 1,678,843 | $ | 1,420,906 | $ | 16,953 | $ | (1,238,296) | $ | 2,014,133 | ||||||||
| Net income | — | — | 38,951 | — | — | 38,951 | ||||||||||||||
| Other comprehensive income (loss) | — | — | — | 24,482 | — | 24,482 | ||||||||||||||
Dividends on common stock ($0.22 per share) | — | — | (16,577) | — | — | (16,577) | ||||||||||||||
| Proceeds from stock-based awards | 2 | 28 | — | — | — | 30 | ||||||||||||||
| Stock-based compensation expense | 209 | 1,240 | — | — | — | 1,449 | ||||||||||||||
| Treasury stock acquired | — | — | — | — | (701) | (701) | ||||||||||||||
| Balance at December 31, 2020 | $ | 135,938 | $ | 1,680,111 | $ | 1,443,280 | $ | 41,435 | $ | (1,238,997) | $ | 2,061,767 | ||||||||
| (in thousands) | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||
| Balance at October 1, 2019 | $ | 135,540 | $ | 1,672,417 | $ | 1,335,909 | $ | 15,292 | $ | (1,126,163) | $ | 2,032,995 | ||||||||
| — | — | (21,945) | — | — | (21,945) | |||||||||||||||
| Net income | — | — | 67,866 | — | — | 67,866 | ||||||||||||||
| Other comprehensive income (loss) | — | — | — | 694 | — | 694 | ||||||||||||||
Dividends on common stock ($0.21 per share) | — | — | (16,433) | — | — | (16,433) | ||||||||||||||
| Proceeds from stock-based awards | 3 | 47 | — | — | — | 50 | ||||||||||||||
| Stock-based compensation expense | 177 | 1,202 | — | — | — | 1,379 | ||||||||||||||
| Treasury stock acquired | — | — | — | — | (33,479) | (33,479) | ||||||||||||||
| Balance at December 31, 2019 | $ | 135,720 | $ | 1,673,666 | $ | 1,365,397 | $ | 15,986 | $ | (1,159,642) | $ | 2,031,127 | ||||||||
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 38,951 | $ | 67,866 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, amortization, accretion and other, net | 9,211 | 15,275 | |||||||||
| Stock-based compensation expense | 1,449 | 1,379 | |||||||||
| Provision (release) for credit losses | 3,000 | (3,750) | |||||||||
| Net realized (gain) loss on sales of premises, equipment, and real estate owned | 15 | (32,734) | |||||||||
| Impairment loss on premises and equipment | — | 5,931 | |||||||||
| Decrease (increase) in accrued interest receivable | 1,128 | 2,132 | |||||||||
| Decrease (increase) in federal and state income tax receivable | 5,708 | — | |||||||||
| Decrease (increase) in cash surrender value of bank owned life insurance | (1,426) | (1,457) | |||||||||
| Decrease (increase) in other assets | 71,923 | (3,793) | |||||||||
| Increase (decrease) in federal and state income tax liabilities | 981 | 14,654 | |||||||||
| Increase (decrease) in accrued expenses and other liabilities | (36,761) | 8,092 | |||||||||
| Net cash provided by (used in) operating activities | 94,179 | 73,595 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Origination of loans and principal repayments, net | (91,857) | 20,131 | |||||||||
| FHLB & FRB stock purchased | (108,001) | (77,200) | |||||||||
| FHLB & FRB stock redeemed | 112,000 | 77,200 | |||||||||
| Available-for-sale securities purchased | (379,760) | (82,028) | |||||||||
| Principal payments and maturities of available-for-sale securities | 157,246 | 69,085 | |||||||||
| Principal payments and maturities of held-to-maturity securities | 116,223 | 81,329 | |||||||||
| Proceeds from sales of real estate owned | 357 | 820 | |||||||||
| Net cash received (paid) in business combinations | — | (1,725) | |||||||||
| Proceeds from sales of premises and equipment | — | 53,790 | |||||||||
| Premises and equipment purchased and REO improvements | (8,388) | (4,931) | |||||||||
| Net cash provided by (used in) investing activities | (202,180) | 136,471 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Net increase (decrease) in customer accounts | 386,917 | (58,626) | |||||||||
| Proceeds from borrowings | 2,700,007 | 1,930,000 | |||||||||
| Repayments of borrowings | (2,800,007) | (1,930,000) | |||||||||
| Proceeds from stock-based awards | 30 | 50 | |||||||||
| Dividends paid on common stock | (16,577) | (16,433) | |||||||||
| Treasury stock purchased | (701) | (33,479) | |||||||||
| Increase (decrease) in advances payments by borrowers for taxes and insurance | (33,923) | (36,931) | |||||||||
| Net cash provided by (used in) financing activities | 235,746 | (145,419) | |||||||||
| Increase (decrease) in cash and cash equivalents | 127,745 | 64,647 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,702,977 | 419,158 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,830,722 | $ | 483,805 | |||||||
(CONTINUED)
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In thousands) | |||||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||||
| Non-cash investing activities | |||||||||||
| Real estate acquired through foreclosure | $ | (161) | $ | 272 | |||||||
| Non-cash financing activities | |||||||||||
| Stock issued upon exercise of warrants | — | — | |||||||||
| Cash paid (received) during the period for | |||||||||||
| Interest | 23,164 | 45,954 | |||||||||
| Income taxes | (19) | — | |||||||||
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8
Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – Summary of Significant Accounting Policies
Company and Nature of Operations - Washington Federal Bank, National Association, a federally-insured national bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 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., a Washington 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 in Seattle, Washington. The Bank conducts its activities through a network of 234 bank branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico and Texas.
Risks and Uncertainties - The worldwide spread of coronavirus (“COVID-19”) has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 and the related government actions impact the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.
Basis of Presentation - The Company has prepared the consolidated unaudited interim financial statements included in this report. All intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation are reflected in the interim financial statements.
The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on November 23, 2020 ("2020 Annual Financial Statements"). Interim results are not necessarily indicative of results for a full year.
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.
Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2020 Annual Financial Statements. There have not been any significant changes in the Company's significant accounting policies compared to those contained in its 2020 Annual Financial Statements for the year ended September 30, 2020.
Restricted Cash Balances - Based on the level of vault cash on hand, the Company was not required to maintain cash reserve balances with the Federal Reserve Bank as of December 31, 2020. As of December 31, 2020 and September 30, 2020, the Company pledged cash collateral related to derivative contracts of $54,800,000 and $97,600,000, respectively.
Equity Securities - The Company records equity securities within Other assets in its Consolidated Statements of Financial Condition. Investments in equity securities with readily determinable fair values (marketable) are measured at fair value, with changes in the fair value recognized as a component of Other income in the Consolidated Statements of Operations. Investments in equity investments that do not have readily determinable fair values (non-marketable) are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, also referred to as the measurement alternative. Any adjustments to the carrying value of these investments are recorded in Other income in the Consolidated Statements of Operations.
Allowance for Credit Losses (Loans Receivable) - Effective October 1, 2019, the Company has applied FASB ASU 2016-13, Financial Instruments - Credit Losses ("ASC 326"), so the allowance calculation is based on current expected credit loss methodology ("CECL"). Prior to October 1, 2019, the calculation was based on incurred loss methodology. See Note E "Allowance for Losses on Loans" for details. The Company maintains an allowance for credit losses (“ACL”) for the expected
9
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
credit losses of the loan portfolio as well as unfunded loan commitments. The amount of ACL is based on ongoing, quarterly assessments by management. The CECL methodology requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures) and replaces the incurred loss methodology’s threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred.
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.
10
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Allowance for Credit Losses (Held-to-Maturity Debt Securities) - For held-to-maturity (“HTM”) debt securities, the Company is required to utilize a CECL methodology to estimate expected credit losses. Substantially all of the Company’s HTM 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. See Note F "Fair Value Measurements" for more information about HTM debt securities.
Allowance for Credit Losses (Available-for-Sale Debt Securities) - The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL methodology applied for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Under the new guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. Changes in the allowance for credit losses are recorded as a provision (or release) for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note F "Fair Value Measurements" for more information about AFS debt securities.
Accrued Interest Receivable - Upon adoption of ASC 326, the Company made the following elections regarding accrued interest receivable:
•Presenting accrued interest receivable balances separately from their underlying instruments within the consolidated statements of financial condition.
•Excluding accrued interest receivable that is included in the amortized cost of financing receivables from related disclosure requirements.
•Continuing our policy to write off accrued interest receivable by reversing interest income in cases where the Company does not reasonably expect to receive payment.
•Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above.
Non-Accrual Loans - Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days or more past due. If payment is made on a loan so that the loan becomes less than 90 days past due, and the Bank expects full collection of principal and interest, the loan is returned to full accrual status. Any interest ultimately collected is credited to income in the period of recovery. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet contractual obligations.
If a consumer loan is on non-accrual status before becoming a TDR it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on accrual status before it becomes a TDR, and management concludes that full repayment is probable based on internal evaluation, it will remain on accrual status following restructuring. If the restructured consumer loan does not perform, it is placed on non-accrual status when it is 90 days delinquent. For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. In some instances, after the required six consecutive payments are made, management will conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual status.
11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Collateral-Dependent Loans - A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans and leases deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral consists of various types of real estate including residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.
Off-balance-sheet credit exposures - The only material off-balance-sheet credit exposures are unfunded loan commitments, which had a combined balance of $3,011,286,000 and $2,738,095,000 at December 31, 2020 and September 30, 2020, respectively. The reserve for unfunded commitments is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized through provision for credit losses in the consolidated statements of income. 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.
NOTE B – New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU provide temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The ASU primarily includes relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company is currently in the process of evaluating the amendments and determining the impact to its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including reasonably certain renewal periods. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted this ASU beginning October 1, 2020 and it did not have a material impact on its consolidated financial statements.
NOTE C – Dividends and Share Repurchases
On November 20, 2020, the Company paid a regular dividend on common stock of $0.22 per share, which represented the 151st consecutive quarterly cash dividend. Dividends per share were $0.22 and $0.21 for the quarters ended December 31, 2020 and 2019, respectively. On January 26, 2021, the Company declared a regular dividend on common stock of $0.23 per share, which represents its 152nd consecutive quarterly cash dividend. This dividend will be paid on February 19, 2021 to common shareholders of record on February 5, 2021.
For the three months ended December 31, 2020, the Company repurchased 32,956 shares at an average price of $21.29. As of December 31, 2020, there are 4,594,275 remaining shares authorized to be repurchased under the current Board approved share repurchase program. On January 26, 2021 the Board authorized an additional 10,000,000 shares for repurchase under the program.
12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D – Loans Receivable
For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies" above.
The Company's loans held for investment are divided into two portfolio segments, commercial loans and consumer loans, with each of those segments further split into loan classes for purposes of estimating the allowance for credit losses.
The following table is a summary of loans receivable by loan portfolio segment and class.
| December 31, 2020 | September 30, 2020 | ||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||
| Commercial loans | |||||||||||||||||
| Multi-family | $ | 1,610,796 | 10.9 | % | $ | 1,538,762 | 10.6 | % | |||||||||
| Commercial real estate | 1,954,154 | 13.2 | 1,895,086 | 13.1 | |||||||||||||
| Commercial & industrial (1) | 2,256,627 | 15.3 | 2,132,160 | 14.7 | |||||||||||||
| Construction | 2,687,708 | 18.2 | 2,403,276 | 16.6 | |||||||||||||
| Land - acquisition & development | 193,239 | 1.3 | 193,745 | 1.3 | |||||||||||||
| Total commercial loans | 8,702,524 | 58.9 | 8,163,029 | 56.3 | |||||||||||||
| Consumer loans | |||||||||||||||||
| Single-family residential | 5,063,053 | 34.2 | 5,304,689 | 36.7 | |||||||||||||
| Construction - custom | 659,364 | 4.5 | 674,879 | 4.7 | |||||||||||||
| Land - consumer lot loans | 110,841 | 0.7 | 102,263 | 0.7 | |||||||||||||
| HELOC | 139,752 | 0.9 | 139,703 | 1.0 | |||||||||||||
| Consumer | 111,292 | 0.8 | 83,159 | 0.6 | |||||||||||||
| Total consumer loans | 6,084,302 | 41.1 | 6,304,693 | 43.7 | |||||||||||||
| Total gross loans | 14,786,826 | 100 | % | 14,467,722 | 100 | % | |||||||||||
| Less: | |||||||||||||||||
| Allowance for credit losses on loans | 170,189 | 166,955 | |||||||||||||||
| Loans in process | 1,679,972 | 1,456,072 | |||||||||||||||
| Net deferred fees, costs and discounts | 55,655 | 52,378 | |||||||||||||||
| Total loan contra accounts | 1,905,816 | 1,675,405 | |||||||||||||||
| Net loans | $ | 12,881,010 | $ | 12,792,317 | |||||||||||||
(1) Includes $646,887,000 and $762,004,000 of SBA Payroll Protection Program loans as of December 31, 2020 and September 30, 2020, respectively.
The Company elected to exclude accrued interest receivable ("AIR") from the amortized cost basis of loans for disclosure purposes and from the calculations of estimated credit losses. As of December 31, 2020, and September 30, 2020, AIR for loans totaled $47,168,000 and $48,704,000, respectively, and is included in the “accrued interest receivable” line item on the Company’s consolidated statements of financial condition.
13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loans in the amount of $5,153,478,000 and $5,361,504,000 at December 31, 2020 and September 30, 2020, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.
The following table sets forth the amortized cost basis of non accrual loans and loans 90 days or more past due and accruing.
| December 31, 2020 | September 30, 2020 | ||||||||||||||||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||||||||||||||
| Non-accrual | Non-accrual with no ACL | 90 days or more past due and accruing | Non-accrual | Non-accrual with no ACL | 90 days or more past due and accruing | ||||||||||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||||||||
| Multi-family | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Commercial real estate | 31,397 | — | — | 3,771 | — | — | |||||||||||||||||||||||||||||
| Commercial & industrial | 594 | — | 280 | 329 | — | — | |||||||||||||||||||||||||||||
| Construction | 1,237 | — | — | 1,669 | — | — | |||||||||||||||||||||||||||||
| Land - acquisition & development | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total commercial loans | 33,228 | — | 280 | 5,769 | — | — | |||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||
| Single-family residential | 24,349 | 0 | 3,908 | 22,431 | — | 933 | |||||||||||||||||||||||||||||
| Construction - custom | — | 0 | — | — | — | — | |||||||||||||||||||||||||||||
| Land - consumer lot loans | 443 | 0 | 168 | 243 | — | — | |||||||||||||||||||||||||||||
| HELOC | 334 | 0 | — | 553 | — | — | |||||||||||||||||||||||||||||
| Consumer | 52 | 0 | 6 | 60 | — | 17 | |||||||||||||||||||||||||||||
| Total consumer loans | 25,178 | — | 4,082 | 23,287 | — | 950 | |||||||||||||||||||||||||||||
| Total non-accrual loans | $ | 58,406 | $ | — | $ | 4,362 | $ | 29,056 | $ | — | $ | 950 | |||||||||||||||||||||||
| % of total loans | 0.45 | % | 0.22 | % | |||||||||||||||||||||||||||||||
The Company recognized interest income on non-accrual loans of approximately $3,489,000 in the three months ended December 31, 2020. Had these loans been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $402,000 for the three months ended December 31, 2020. 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. Interest cash flows collected on non-accrual loans vary from period to period as those loans are brought current or are paid off.
14
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables provide details regarding loan delinquencies by loan portfolio and class.
| December 31, 2020 | Days Delinquent Based on $ Amount of Loans | % based on $ | |||||||||||||||||||||||||||||||||||||||
| Type of Loan | Loans Receivable (Amortized Cost) | Current | 30 | 60 | 90 | Total Delinquent | |||||||||||||||||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||||||||||||||||||||
| Commercial Loans | |||||||||||||||||||||||||||||||||||||||||
| Multi-family | $ | 1,609,800 | $ | 1,609,325 | $ | 475 | $ | — | $ | — | $ | 475 | 0.03 | % | |||||||||||||||||||||||||||
| Commercial real estate | 1,942,854 | 1,914,254 | 85 | 3,958 | 24,557 | 28,600 | 1.47 | ||||||||||||||||||||||||||||||||||
| Commercial & industrial | 2,243,465 | 2,242,422 | 216 | — | 827 | 1,043 | 0.05 | ||||||||||||||||||||||||||||||||||
| Construction | 1,393,107 | 1,389,404 | 2,550 | — | 1,153 | 3,703 | 0.27 | ||||||||||||||||||||||||||||||||||
| Land - acquisition & development | 152,621 | 152,369 | 252 | — | — | 252 | 0.17 | ||||||||||||||||||||||||||||||||||
| Total commercial loans | 7,341,847 | 7,307,774 | 3,578 | 3,958 | 26,537 | 34,073 | 0.46 | ||||||||||||||||||||||||||||||||||
| Consumer Loans | |||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 5,048,435 | 5,016,530 | 7,477 | 5,872 | 18,556 | 31,905 | 0.63 | ||||||||||||||||||||||||||||||||||
| Construction - custom | 299,351 | 299,351 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Land - consumer lot loans | 109,845 | 109,248 | 95 | 168 | 334 | 597 | 0.54 | ||||||||||||||||||||||||||||||||||
| HELOC | 140,272 | 138,933 | 916 | 116 | 307 | 1,339 | 0.95 | ||||||||||||||||||||||||||||||||||
| Consumer | 111,449 | 111,201 | 67 | 27 | 154 | 248 | 0.22 | ||||||||||||||||||||||||||||||||||
| Total consumer loans | 5,709,352 | 5,675,263 | 8,555 | 6,183 | 19,351 | 34,089 | 0.60 | ||||||||||||||||||||||||||||||||||
| Total Loans | $ | 13,051,199 | $ | 12,983,037 | $ | 12,133 | $ | 10,141 | $ | 45,888 | $ | 68,162 | 0.52 | % | |||||||||||||||||||||||||||
| Delinquency % | 99.48% | 0.09% | 0.08% | 0.35% | 0.52% | ||||||||||||||||||||||||||||||||||||
| September 30, 2020 | Days Delinquent Based on $ Amount of Loans | % based on $ | |||||||||||||||||||||||||||||||||||||||
| Type of Loan | Loans Receivable (Amortized Cost) | Current | 30 | 60 | 90 | Total Delinquent | |||||||||||||||||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||||||||||||||||||||
| Commercial Loans | |||||||||||||||||||||||||||||||||||||||||
| Multi-family | $ | 1,538,240 | $ | 1,538,240 | $ | — | $ | — | $ | — | $ | — | — | % | |||||||||||||||||||||||||||
| Commercial real estate | 1,884,688 | 1,884,210 | — | 195 | 283 | 478 | 0.03 | ||||||||||||||||||||||||||||||||||
| Commercial & industrial | 2,115,513 | 2,114,650 | — | 583 | 280 | 863 | 0.04 | ||||||||||||||||||||||||||||||||||
| Construction | 1,352,414 | 1,350,752 | — | — | 1,662 | 1,662 | 0.12 | ||||||||||||||||||||||||||||||||||
| Land - acquisition & development | 153,571 | 153,571 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total commercial loans | 7,044,426 | 7,041,423 | — | 778 | 2,225 | 3,003 | 0.04 | ||||||||||||||||||||||||||||||||||
| Consumer Loans | |||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 5,293,962 | 5,267,608 | 3,922 | 3,108 | 19,324 | 26,354 | 0.50 | ||||||||||||||||||||||||||||||||||
| Construction - custom | 295,953 | 295,953 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Land - consumer lot loans | 101,394 | 101,029 | 152 | — | 213 | 365 | 0.36 | ||||||||||||||||||||||||||||||||||
| HELOC | 140,222 | 139,491 | 275 | 76 | 380 | 731 | 0.52 | ||||||||||||||||||||||||||||||||||
| Consumer | 83,315 | 82,959 | 121 | 11 | 224 | 356 | 0.43 | ||||||||||||||||||||||||||||||||||
| Total consumer loans | 5,914,846 | 5,887,040 | 4,470 | 3,195 | 20,141 | 27,806 | 0.47 | ||||||||||||||||||||||||||||||||||
| Total Loans | $ | 12,959,272 | $ | 12,928,463 | $ | 4,470 | $ | 3,973 | $ | 22,366 | $ | 30,809 | 0.24 | % | |||||||||||||||||||||||||||
| Delinquency % | 99.76% | 0.03% | 0.03% | 0.17% | 0.24% | ||||||||||||||||||||||||||||||||||||
15
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company participated in the Small Business Administration’s Paycheck Protection Program ("PPP"). This program came about through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress 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 of December 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.
Most TDRs are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. Each request for modification is individually evaluated for merit and likelihood of success. The concession granted in a loan modification is typically a payment reduction through a rate reduction of between 100 to 200 basis points for a specific term, usually to twenty four months. Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. As of December 31, 2020, 97.9% of the Company's $86,314,000 in TDRs were classified as performing. As of December 31, 2020, single-family residential loans comprised 92.9% of TDRs. The Company's ACL methodology takes into account the following performance indicators for restructured loans: 1) time since modification, 2) current payment status and 3) geographic area.
We evaluate the credit quality of our loans based on regulatory risk ratings and also consider other factors. Based on this evaluation, the loans are assigned a grade and classified as follows:
•Pass – the credit does not meet one of the definitions below.
•Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.
•Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.
•Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
•Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible. Partial charge-off versus full charge-off may be taken if the collateral offers some identifiable protection.
The following tables present by primary credit quality indicator, loan class, and year of origination, the amortized cost basis of loans receivable as of December 31, 2020.
16
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| YTD 2021 | 2020 | 2019 | 2018 | 2017 | Prior to 2017 | Revolving Loans | Revolving to Term Loans | Total Loans | |||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||
| Multi-family | |||||||||||||||||||||||||||||
| Pass | $ | 120,709 | $ | 384,701 | $ | 114,454 | $ | 276,390 | $ | 232,338 | $ | 392,183 | $ | 8,195 | $ | — | $ | 1,528,970 | |||||||||||
| Special Mention | — | 2,418 | 2,816 | 4,054 | 5,092 | 4,464 | — | — | 18,844 | ||||||||||||||||||||
| Substandard | — | — | 7,544 | 3,974 | 3,769 | 46,699 | — | — | 61,986 | ||||||||||||||||||||
| Total | $ | 120,709 | $ | 387,119 | $ | 124,814 | $ | 284,418 | $ | 241,199 | $ | 443,346 | $ | 8,195 | $ | — | $ | 1,609,800 | |||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||
| Pass | $ | 158,763 | $ | 424,621 | $ | 219,629 | $ | 243,656 | $ | 233,589 | $ | 443,025 | $ | 2,217 | $ | — | $ | 1,725,500 | |||||||||||
| Special Mention | — | 197 | 9,496 | 414 | 1,725 | 26,103 | — | — | 37,935 | ||||||||||||||||||||
| Substandard | — | 9,067 | 29,699 | 22,688 | 47,315 | 70,650 | — | — | 179,419 | ||||||||||||||||||||
| Total | $ | 158,763 | $ | 433,885 | $ | 258,824 | $ | 266,758 | $ | 282,629 | $ | 539,778 | $ | 2,217 | $ | — | $ | 1,942,854 | |||||||||||
| Commercial & industrial | |||||||||||||||||||||||||||||
| Pass | $ | 157,872 | $ | 801,134 | $ | 60,562 | $ | 83,496 | $ | 75,301 | $ | 165,692 | $ | 616,063 | $ | 12,097 | $ | 1,972,217 | |||||||||||
| Special Mention | — | 8,931 | 6,937 | 1,163 | 4,286 | — | 5,111 | — | 26,428 | ||||||||||||||||||||
| Substandard | 12,751 | 45,891 | 7,296 | 6,310 | 104 | 49,331 | 123,137 | — | 244,820 | ||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Total | $ | 170,623 | $ | 855,956 | $ | 74,795 | $ | 90,969 | $ | 79,691 | $ | 215,023 | $ | 744,311 | $ | 12,097 | $ | 2,243,465 | |||||||||||
| Construction | |||||||||||||||||||||||||||||
| Pass | $ | 119,251 | $ | 407,194 | $ | 446,042 | $ | 190,227 | $ | 42,695 | $ | 16 | $ | 77,463 | $ | — | $ | 1,282,888 | |||||||||||
| Special Mention | — | — | — | 32,992 | — | — | — | — | 32,992 | ||||||||||||||||||||
| Substandard | — | 3,256 | 36,940 | — | 37,031 | — | — | — | 77,227 | ||||||||||||||||||||
| Total | $ | 119,251 | $ | 410,450 | $ | 482,982 | $ | 223,219 | $ | 79,726 | $ | 16 | $ | 77,463 | $ | — | $ | 1,393,107 | |||||||||||
| Land - acquisition & development | |||||||||||||||||||||||||||||
| Pass | $ | 10,965 | $ | 43,159 | $ | 34,967 | $ | 19,309 | $ | 17,706 | $ | 4,513 | $ | 5,307 | $ | — | $ | 135,926 | |||||||||||
| Special Mention | — | — | — | — | — | 15,573 | — | — | 15,573 | ||||||||||||||||||||
| Substandard | — | — | 1,122 | — | — | — | — | — | 1,122 | ||||||||||||||||||||
| Total | $ | 10,965 | $ | 43,159 | $ | 36,089 | $ | 19,309 | $ | 17,706 | $ | 20,086 | $ | 5,307 | $ | — | $ | 152,621 | |||||||||||
| Total commercial loans | |||||||||||||||||||||||||||||
| Pass | $ | 567,560 | $ | 2,060,809 | $ | 875,654 | $ | 813,078 | $ | 601,629 | $ | 1,005,429 | $ | 709,245 | $ | 12,097 | $ | 6,645,501 | |||||||||||
| Special Mention | — | 11,546 | 19,249 | 38,623 | 11,103 | 46,140 | 5,111 | — | 131,772 | ||||||||||||||||||||
| Substandard | 12,751 | 58,214 | 82,601 | 32,972 | 88,219 | 166,680 | 123,137 | — | 564,574 | ||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Total | $ | 580,311 | $ | 2,130,569 | $ | 977,504 | $ | 884,673 | $ | 700,951 | $ | 1,218,249 | $ | 837,493 | $ | 12,097 | $ | 7,341,847 | |||||||||||
17
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| YTD 2021 | 2020 | 2019 | 2018 | 2017 | Prior to 2017 | Revolving Loans | Revolving to Term Loans | Total Loans | |||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||
| Single-family residential | |||||||||||||||||||||||||||||
| Current | $ | 250,276 | $ | 824,978 | $ | 578,704 | $ | 525,644 | $ | 607,513 | $ | 2,229,415 | $ | — | $ | — | $ | 5,016,530 | |||||||||||
| 30 days past due | — | — | 356 | 60 | 1,523 | 5,538 | — | — | 7,477 | ||||||||||||||||||||
| 60 days past due | — | 473 | — | — | 357 | 5,042 | — | — | 5,872 | ||||||||||||||||||||
| 90+ days past due | — | — | 680 | — | 439 | 17,437 | — | — | 18,556 | ||||||||||||||||||||
| Total | $ | 250,276 | $ | 825,451 | $ | 579,740 | $ | 525,704 | $ | 609,832 | $ | 2,257,432 | $ | — | $ | — | $ | 5,048,435 | |||||||||||
| Construction - custom | |||||||||||||||||||||||||||||
| Current | $ | 11,469 | $ | 250,459 | $ | 35,802 | $ | 1,621 | $ | — | $ | — | $ | — | $ | — | $ | 299,351 | |||||||||||
| Total | $ | 11,469 | $ | 250,459 | $ | 35,802 | $ | 1,621 | $ | — | $ | — | $ | — | $ | — | $ | 299,351 | |||||||||||
| Land - consumer lot loans | |||||||||||||||||||||||||||||
| Current | $ | 20,268 | $ | 38,986 | $ | 16,288 | $ | 5,991 | $ | 6,994 | $ | 20,721 | $ | — | $ | — | $ | 109,248 | |||||||||||
| 30 days past due | — | — | 72 | — | — | 23 | — | — | 95 | ||||||||||||||||||||
| 60 days past due | — | — | — | — | — | 168 | — | — | 168 | ||||||||||||||||||||
| 90+ days past due | — | — | — | 152 | 122 | 60 | — | — | 334 | ||||||||||||||||||||
| Total | $ | 20,268 | $ | 38,986 | $ | 16,360 | $ | 6,143 | $ | 7,116 | $ | 20,972 | $ | — | $ | — | $ | 109,845 | |||||||||||
| HELOC | |||||||||||||||||||||||||||||
| Current | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,750 | $ | 131,482 | $ | 701 | $ | 138,933 | |||||||||||
| 30 days past due | — | — | — | — | — | 167 | 749 | — | 916 | ||||||||||||||||||||
| 60 days past due | — | — | — | — | — | 5 | 111 | — | 116 | ||||||||||||||||||||
| 90+ days past due | — | — | — | — | — | 30 | 277 | — | 307 | ||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,952 | $ | 132,619 | $ | 701 | $ | 140,272 | |||||||||||
| Consumer | |||||||||||||||||||||||||||||
| Current | $ | 11,231 | $ | 8,421 | $ | 1,237 | $ | 51,616 | $ | 180 | $ | 16,175 | $ | 22,341 | $ | — | $ | 111,201 | |||||||||||
| 30 days past due | — | — | 9 | — | 47 | 11 | — | — | 67 | ||||||||||||||||||||
| 60 days past due | — | — | 6 | — | 14 | 7 | — | — | 27 | ||||||||||||||||||||
| 90+ days past due | — | — | 36 | — | 112 | 6 | — | — | 154 | ||||||||||||||||||||
| Total | $ | 11,231 | $ | 8,421 | $ | 1,288 | $ | 51,616 | $ | 353 | $ | 16,199 | $ | 22,341 | $ | — | $ | 111,449 | |||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||
| Current | $ | 293,244 | $ | 1,122,844 | $ | 632,031 | $ | 584,872 | $ | 614,687 | $ | 2,273,061 | $ | 153,823 | $ | 701 | $ | 5,675,263 | |||||||||||
| 30 days past due | — | — | 437 | 60 | 1,570 | 5,739 | 749 | — | 8,555 | ||||||||||||||||||||
| 60 days past due | — | 473 | 6 | — | 371 | 5,222 | 111 | — | 6,183 | ||||||||||||||||||||
| 90+ days past due | — | — | 716 | 152 | 673 | 17,533 | 277 | — | 19,351 | ||||||||||||||||||||
| Total | $ | 293,244 | $ | 1,123,317 | $ | 633,190 | $ | 585,084 | $ | 617,301 | $ | 2,301,555 | $ | 154,960 | $ | 701 | $ | 5,709,352 | |||||||||||
18
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E – Allowance for Losses on Loans
For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies."
The following tables summarize the activity in the allowance for loan losses by loan portfolio segment and class.
| Three Months Ended December 31, 2020 | Beginning Allowance | Charge-offs | Recoveries | Provision & Transfers | Ending Allowance | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||
| Multi-family | $ | 13,853 | $ | — | $ | — | $ | 510 | $ | 14,363 | |||||||||||||||||||
| Commercial real estate | 22,516 | — | 789 | 191 | 23,496 | ||||||||||||||||||||||||
| Commercial & industrial | 38,665 | (2) | 50 | 5,604 | 44,317 | ||||||||||||||||||||||||
| Construction | 24,156 | — | — | 2,209 | 26,365 | ||||||||||||||||||||||||
| Land - acquisition & development | 10,733 | — | 35 | (102) | 10,666 | ||||||||||||||||||||||||
| Total commercial loans | 109,923 | (2) | 874 | 8,412 | 119,207 | ||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||
| Single-family residential | 45,186 | — | 779 | (7,352) | 38,613 | ||||||||||||||||||||||||
| Construction - custom | 3,555 | — | — | 39 | 3,594 | ||||||||||||||||||||||||
| Land - consumer lot loans | 2,729 | — | 7 | 222 | 2,958 | ||||||||||||||||||||||||
| HELOC | 2,571 | — | — | (209) | 2,362 | ||||||||||||||||||||||||
| Consumer | 2,991 | (150) | 226 | 388 | 3,455 | ||||||||||||||||||||||||
| Total consumer loans | 57,032 | (150) | 1,012 | (6,912) | 50,982 | ||||||||||||||||||||||||
| Total loans | $ | 166,955 | $ | (152) | $ | 1,886 | $ | 1,500 | $ | 170,189 | |||||||||||||||||||
| Three Months Ended December 31, 2019 | Beginning Allowance | Charge-offs | Recoveries | Provision & Transfers | Ending Allowance | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||
| Multi-family | $ | 10,404 | $ | — | $ | 498 | $ | (396) | $ | 10,506 | |||||||||||||||||||
| Commercial real estate | 13,024 | (98) | 368 | (227) | 13,067 | ||||||||||||||||||||||||
| Commercial & industrial | 32,235 | (50) | 144 | 1,347 | 33,676 | ||||||||||||||||||||||||
| Construction | 22,768 | — | 54 | (903) | 21,919 | ||||||||||||||||||||||||
| Land - acquisition & development | 10,904 | (11) | 1,460 | (1,940) | 10,413 | ||||||||||||||||||||||||
| Total commercial loans | 89,335 | (159) | 2,524 | (2,119) | 89,581 | ||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||
| Single-family residential | 47,771 | (15) | 261 | (1,661) | 46,356 | ||||||||||||||||||||||||
| Construction - custom | 2,880 | — | — | 50 | 2,930 | ||||||||||||||||||||||||
| Land - consumer lot loans | 2,635 | (70) | 10 | (8) | 2,567 | ||||||||||||||||||||||||
| HELOC | 2,048 | — | 93 | (107) | 2,034 | ||||||||||||||||||||||||
| Consumer | 4,615 | (374) | 309 | (505) | 4,045 | ||||||||||||||||||||||||
| Total consumer loans | 59,949 | (459) | 673 | (2,231) | 57,932 | ||||||||||||||||||||||||
| Total loans | $ | 149,284 | $ | (618) | $ | 3,197 | $ | (4,350) | $ | 147,513 | |||||||||||||||||||
19
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded a $3,000,000 provision for credit losses for the three months ended December 31, 2020, compared with a release of allowance for credit losses of $3,750,000 for the three months ended December 31, 2019. The credit loss provision for the three months ended December 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 ended December 31, 2020, compared to net recoveries of $2,579,000 during the three months ended December 31, 2019. No allowance was recorded as of December 31, 2020 or as of September 30, 2020 for the $646,887,000 and $762,004,000 of gross PPP loans in the portfolio on each date, respectively, which are included in the commercial & industrial loan category, due to the government guarantee.
Non-performing assets were $66,542,000, or 0.35% of total assets, at December 31, 2020, compared to $37,695,000, or 0.20% of total assets, at September 30, 2020. Non-accrual loans were $58,406,000 at December 31, 2020, compared to $29,056,000 at September 30, 2020. Delinquencies, as a percent of total loans, were 0.52% at December 31, 2020, compared to 0.24% at September 30, 2020.
The Company has an asset quality review function that analyzes its loan portfolio and reports the results of the review to its Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as described in Note D "Loans Receivable."
The following tables provide the amortized cost of loans receivable based on risk rating categories as previously defined.
| December 31, 2020 | Internally Assigned Grade | ||||||||||||||||||||||||||||||||||
| Pass | Special mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||||||||||||||
| Loan type | |||||||||||||||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||||||||
| Multi-family | $ | 1,528,970 | $ | 18,844 | $ | 61,986 | $ | — | $ | — | $ | 1,609,800 | |||||||||||||||||||||||
| Commercial real estate | 1,725,500 | 37,935 | 179,419 | — | — | 1,942,854 | |||||||||||||||||||||||||||||
| Commercial & industrial | 1,972,217 | 26,428 | 244,820 | — | — | 2,243,465 | |||||||||||||||||||||||||||||
| Construction | 1,282,888 | 32,992 | 77,227 | — | — | 1,393,107 | |||||||||||||||||||||||||||||
| Land - acquisition & development | 135,926 | 15,573 | 1,122 | — | — | 152,621 | |||||||||||||||||||||||||||||
| Total commercial loans | 6,645,501 | 131,772 | 564,574 | — | — | 7,341,847 | |||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||
| Single-family residential | 5,018,759 | 191 | 29,485 | — | — | 5,048,435 | |||||||||||||||||||||||||||||
| Construction - custom | 299,351 | — | — | — | — | 299,351 | |||||||||||||||||||||||||||||
| Land - consumer lot loans | 109,234 | — | 611 | — | — | 109,845 | |||||||||||||||||||||||||||||
| HELOC | 139,215 | — | 1,057 | — | — | 140,272 | |||||||||||||||||||||||||||||
| Consumer | 111,442 | — | 7 | — | — | 111,449 | |||||||||||||||||||||||||||||
| Total consumer loans | 5,678,001 | 191 | 31,160 | — | — | 5,709,352 | |||||||||||||||||||||||||||||
| Total | $ | 12,323,502 | $ | 131,963 | $ | 595,734 | $ | — | $ | — | $ | 13,051,199 | |||||||||||||||||||||||
| Total grade as a % of total loans | 94.42 | % | 1.01 | % | 4.56 | % | — | % | — | % | |||||||||||||||||||||||||
20
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| September 30, 2020 | Internally Assigned Grade | ||||||||||||||||||||||||||||||||||
| Pass | Special mention | Substandard | Doubtful | Loss | Total Gross Loans | ||||||||||||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||||||||||||||
| Loan type | |||||||||||||||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||||||||
| Multi-family | $ | 1,506,692 | $ | 13,721 | $ | 17,827 | $ | — | $ | — | $ | 1,538,240 | |||||||||||||||||||||||
| Commercial real estate | 1,681,230 | 92,184 | 111,274 | — | — | 1,884,688 | |||||||||||||||||||||||||||||
| Commercial & industrial | 1,898,709 | 64,695 | 152,109 | — | — | 2,115,513 | |||||||||||||||||||||||||||||
| Construction | 1,187,786 | 61,178 | 103,450 | — | — | 1,352,414 | |||||||||||||||||||||||||||||
| Land - acquisition & development | 137,998 | 15,573 | — | — | — | 153,571 | |||||||||||||||||||||||||||||
| Total commercial loans | 6,412,415 | 247,351 | 384,660 | — | — | 7,044,426 | |||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||
| Single-family residential | 5,270,666 | 192 | 23,104 | — | — | 5,293,962 | |||||||||||||||||||||||||||||
| Construction - custom | 295,953 | — | — | — | — | 295,953 | |||||||||||||||||||||||||||||
| Land - consumer lot loans | 101,151 | — | 243 | — | — | 101,394 | |||||||||||||||||||||||||||||
| HELOC | 139,646 | — | 576 | — | — | 140,222 | |||||||||||||||||||||||||||||
| Consumer | 83,304 | — | 11 | — | — | 83,315 | |||||||||||||||||||||||||||||
| Total consumer loans | 5,890,720 | 192 | 23,934 | — | — | 5,914,846 | |||||||||||||||||||||||||||||
| Total loans | $ | 12,303,135 | $ | 247,543 | $ | 408,594 | $ | — | $ | — | $ | 12,959,272 | |||||||||||||||||||||||
| Total grade as a % of total gross loans | 94.94 | % | 1.91 | % | 3.15 | % | — | % | — | % | |||||||||||||||||||||||||
21
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables provide information on amortized cost of loans receivable based on borrower payment activity.
| December 31, 2020 | Performing Loans | Non-Performing Loans | |||||||||||||||||||||
| Amount | % of Total Loans | Amount | % of Total Loans | ||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||
| Multi-family | $ | 1,609,800 | 100.0 | % | $ | — | — | % | |||||||||||||||
| Commercial real estate | 1,911,457 | 98.4 | 31,397 | 1.6 | |||||||||||||||||||
| Commercial & industrial | 2,242,871 | 100.0 | 594 | — | |||||||||||||||||||
| Construction | 1,391,870 | 99.9 | 1,237 | 0.1 | |||||||||||||||||||
| Land - acquisition & development | 152,621 | 100.0 | — | — | |||||||||||||||||||
| Total commercial loans | 7,308,619 | 99.5 | 33,228 | 0.5 | |||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||
| Single-family residential | 5,024,086 | 99.5 | 24,349 | 0.5 | |||||||||||||||||||
| Construction - custom | 299,351 | 100.0 | — | — | |||||||||||||||||||
| Land - consumer lot loans | 109,402 | 99.6 | 443 | 0.4 | |||||||||||||||||||
| HELOC | 139,938 | 99.8 | 334 | 0.2 | |||||||||||||||||||
| Consumer | 111,397 | 100.0 | 52 | 0.0 | |||||||||||||||||||
| Total consumer loans | 5,684,174 | 99.6 | 25,178 | 0.4 | |||||||||||||||||||
| Total loans | $ | 12,992,793 | 99.6 | % | $ | 58,406 | 0.4 | % | |||||||||||||||
| September 30, 2020 | Performing Loans | Non-Performing Loans | |||||||||||||||||||||
| Amount | % of Total Loans | Amount | % of Total Loans | ||||||||||||||||||||
| (In thousands, except ratio data) | |||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||
| Multi-family | $ | 1,538,240 | 100.0 | % | $ | — | — | % | |||||||||||||||
| Commercial real estate | 1,880,917 | 99.8 | 3,771 | 0.2 | |||||||||||||||||||
| Commercial & industrial | 2,115,184 | 100.0 | 329 | — | |||||||||||||||||||
| Construction | 1,350,745 | 99.9 | 1,669 | 0.1 | |||||||||||||||||||
| Land - acquisition & development | 153,571 | 100.0 | — | — | |||||||||||||||||||
| Total commercial loans | 7,038,657 | 99.9 | 5,769 | 0.1 | |||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||
| Single-family residential | 5,271,531 | 99.6 | 22,431 | 0.4 | |||||||||||||||||||
| Construction - custom | 295,953 | 100.0 | — | — | |||||||||||||||||||
| Land - consumer lot loans | 101,151 | 99.8 | 243 | 0.2 | |||||||||||||||||||
| HELOC | 139,669 | 99.6 | 553 | 0.4 | |||||||||||||||||||
| Consumer | 83,255 | 99.9 | 60 | 0.1 | |||||||||||||||||||
| Total consumer loans | 5,891,559 | 99.6 | 23,287 | 0.4 | |||||||||||||||||||
| Total loans | $ | 12,930,216 | 99.8 | % | $ | 29,056 | 0.2 | % | |||||||||||||||
22
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F – Fair Value Measurements
FASB ASC 820, Fair Value Measurement ("ASC 820") defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company has established and documented the process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis.
Measured on a Recurring Basis
Available-for-Sale Securities and Derivative Contracts
Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges are measured using the closing price in an active market and are considered a Level 1 input method.
The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges, mortgage pool hedges and borrowings hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.
23
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present the balance and level in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis.
| December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | — | $ | 78,281 | $ | — | $ | 78,281 | |||||||||||||||
| Asset-backed securities | — | 1,210,356 | — | 1,210,356 | |||||||||||||||||||
| Municipal bonds | — | 38,703 | — | 38,703 | |||||||||||||||||||
| Corporate debt securities | — | 287,393 | — | 287,393 | |||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||
| Agency pass-through certificates | — | 868,211 | — | 868,211 | |||||||||||||||||||
| Total available-for-sale securities | — | 2,482,944 | — | 2,482,944 | |||||||||||||||||||
| Client swap program hedges | — | 35,825 | — | 35,825 | |||||||||||||||||||
| Borrowings cash flow hedges | — | 2,743 | — | 2,743 | |||||||||||||||||||
| Total financial assets | $ | — | $ | 2,521,512 | $ | — | $ | 2,521,512 | |||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||
| Client swap program hedges | $ | — | $ | 35,825 | $ | — | $ | 35,825 | |||||||||||||||
| Commercial loan fair value hedges | — | 7,508 | — | 7,508 | |||||||||||||||||||
| Mortgage loan fair value hedges | — | 12,459 | — | 12,459 | |||||||||||||||||||
| Total financial liabilities | $ | — | $ | 55,792 | $ | — | $ | 55,792 | |||||||||||||||
24
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| September 30, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | — | $ | 18,824 | $ | — | $ | 18,824 | |||||||||||||||
| Asset-backed securities | — | 936,917 | 936,917 | ||||||||||||||||||||
| Municipal bonds | — | 38,315 | — | 38,315 | |||||||||||||||||||
| Corporate debt securities | — | 287,184 | — | 287,184 | |||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||
| Agency pass-through certificates | — | 968,252 | — | 968,252 | |||||||||||||||||||
| Total available-for-sale securities | — | 2,249,492 | — | 2,249,492 | |||||||||||||||||||
| Client swap program hedges | — | 48,201 | — | 48,201 | |||||||||||||||||||
| Total financial assets | $ | — | $ | 2,297,693 | $ | — | $ | 2,297,693 | |||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||
| Client swap program hedges | $ | — | $ | 48,201 | $ | — | $ | 48,201 | |||||||||||||||
| Commercial loan fair value hedges | — | 8,492 | — | 8,492 | |||||||||||||||||||
| Mortgage loan fair value hedges | 16,061 | 16,061 | |||||||||||||||||||||
| Borrowings cash flow hedges | — | 17,375 | — | 17,375 | |||||||||||||||||||
| Total financial liabilities | $ | — | $ | 90,129 | $ | — | $ | 90,129 | |||||||||||||||
25
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as collateral dependent loans and real estate owned ("REO"). REO consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral or REO property.
When management determines that the fair value of the collateral or the REO requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the collateral dependent loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2020 included loans for which an allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as real estate owned where the fair value of the property was less than the cost basis.
The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at December 31, 2020 and December 31, 2019, and the total gains (losses) resulting from those fair value adjustments during the respective periods. The estimated fair value measurements are shown gross of estimated selling costs.
| December 31, 2020 | Three Months Ended December 31, 2020 | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Total Gains (Losses) | |||||||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||||||||
| Loans (1) | $ | — | $ | — | $ | — | $ | — | $ | (44) | |||||||||||||||||||
| Real estate owned (2) | — | — | 447 | 447 | (47) | ||||||||||||||||||||||||
| Balance at end of period | $ | — | $ | — | $ | 447 | $ | 447 | $ | (91) | |||||||||||||||||||
(1)The gains (losses) represent re-measurements of collateral-dependent loans.
(2)The gains (losses) represent aggregate write-downs and charge-offs on real estate owned.
| December 31, 2019 | Three Months Ended December 31, 2019 | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Total Gains (Losses) | |||||||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||||||||
| Loans (1) | $ | — | $ | — | $ | 70 | $ | 70 | $ | (299) | |||||||||||||||||||
| Real estate owned (2) | — | — | 976 | 976 | (2) | ||||||||||||||||||||||||
| Balance at end of period | $ | — | $ | — | $ | 1,046 | $ | 1,046 | $ | (301) | |||||||||||||||||||
(1)The gains (losses) represent re-measurements of collateral-dependent loans.
(2)The gains (losses) represent aggregate write-downs and charge-offs on real estate owned.
At December 31, 2020, there were $528,000 in foreclosed residential real estate properties held as REO. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $2,214,000.
Fair Values of Financial Instruments
FASB ASC 825, Financial Instruments ("ASC 825") requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.
26
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| December 31, 2020 | September 30, 2020 | |||||||||||||||||||||||||||||||
| Level in Fair Value Hierarchy | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Financial assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 1 | $ | 1,830,722 | $ | 1,830,722 | $ | 1,702,977 | $ | 1,702,977 | |||||||||||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||||||||||||||
| U.S. government and agency securities | 2 | 78,281 | 78,281 | 18,824 | 18,824 | |||||||||||||||||||||||||||
| Asset-backed securities | 2 | 1,210,356 | 1,210,356 | 936,917 | 936,917 | |||||||||||||||||||||||||||
| Municipal bonds | 2 | 38,703 | 38,703 | 38,315 | 38,315 | |||||||||||||||||||||||||||
| Corporate debt securities | 2 | 287,393 | 287,393 | 287,184 | 287,184 | |||||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||||||||
| Agency pass-through certificates | 2 | 868,211 | 868,211 | 968,252 | 968,252 | |||||||||||||||||||||||||||
| Total available-for-sale securities | 2,482,944 | 2,482,944 | 2,249,492 | 2,249,492 | ||||||||||||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||||||||
| Agency pass-through certificates | 2 | 581,313 | 600,622 | 698,934 | 720,516 | |||||||||||||||||||||||||||
| Commercial MBS | 2 | 5,557 | 5,553 | 6,904 | 6,852 | |||||||||||||||||||||||||||
| Total held-to-maturity securities | 586,870 | 606,175 | 705,838 | 727,368 | ||||||||||||||||||||||||||||
| Loans receivable | 3 | 12,881,010 | 13,433,950 | 12,792,317 | 13,392,089 | |||||||||||||||||||||||||||
| FHLB and FRB stock | 2 | 137,991 | 137,991 | 141,990 | 141,990 | |||||||||||||||||||||||||||
| Other assets - client swap program hedges | 2 | 35,825 | 35,825 | 48,201 | 48,201 | |||||||||||||||||||||||||||
| Other assets - borrowings cash flow hedges | 2 | 2,743 | 2,743 | — | — | |||||||||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||||||||||||||
| Time deposits | 2 | 3,785,082 | 3,761,325 | 3,973,192 | 3,963,203 | |||||||||||||||||||||||||||
| FHLB advances | 2 | 2,600,000 | 2,620,269 | 2,700,000 | 2,722,509 | |||||||||||||||||||||||||||
| Other liabilities - client swap program hedges | 2 | 35,825 | 35,825 | 48,201 | 48,201 | |||||||||||||||||||||||||||
| Other liabilities - mortgage loan fair value hedges | 2 | 12,459 | 12,459 | 16,061 | 16,061 | |||||||||||||||||||||||||||
| Other liabilities - commercial loan fair value hedges | 2 | 7,508 | 7,508 | 8,492 | 8,492 | |||||||||||||||||||||||||||
| Other liabilities - borrowings cash flow hedges | 2 | — | — | 17,375 | 17,375 | |||||||||||||||||||||||||||
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities that are exchange traded are considered a Level 1 input method.
Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base price, with further loan level pricing adjustments made based on individual loan characteristics such as FICO score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using a discount rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as an annual loss rate based on historical losses to arrive at an estimated exit price
27
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
FHLB and FRB stock – The fair value is based upon the par value of the stock that equates to its carrying value.
Time deposits – The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits with similar remaining maturities.
FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest rate swaps – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counterparty to offset its interest rate risk. The Company also uses interest rate swaps for various fair value hedges and cash flow hedges. The fair value of these interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.
The following tables provide details about the amortized cost and fair value of available-for-sale and held-to-maturity securities.
| December 31, 2020 | |||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | Yield | ||||||||||||||||||||||||||
| Gains | Losses | ||||||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Available-for-sale securities | |||||||||||||||||||||||||||||
| U.S. government and agency securities due | |||||||||||||||||||||||||||||
| 1 to 5 years | $ | 58,807 | $ | 588 | $ | — | $ | 59,395 | 0.53 | % | |||||||||||||||||||
| 5 to 10 years | 18,443 | 443 | — | 18,886 | 2.05 | ||||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||||||||
| 5 to 10 years | 107,355 | 206 | (1,360) | 106,201 | 0.68 | ||||||||||||||||||||||||
| Over 10 years | 1,097,828 | 7064 | (737) | 1104155 | 1.09 | ||||||||||||||||||||||||
| Corporate debt securities due | |||||||||||||||||||||||||||||
| Within 1 year | 52,756 | 236 | (86) | 52,906 | 1.22 | ||||||||||||||||||||||||
| 1 to 5 years | 152,226 | 6,557 | (87) | 158,696 | 1.87 | ||||||||||||||||||||||||
| 5 to 10 years | 73,340 | 2,451 | — | 75,791 | 1.16 | ||||||||||||||||||||||||
| Municipal bonds due | |||||||||||||||||||||||||||||
| 1 to 5 years | 1,469 | 33 | — | 1,502 | — | ||||||||||||||||||||||||
| Over 10 years | 35,836 | 1,365 | — | 37,201 | 5.40 | ||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||
| Agency pass-through certificates | 833,814 | 35,980 | (1,583) | 868,211 | 2.72 | ||||||||||||||||||||||||
| 2,431,874 | 54,923 | (3,853) | 2,482,944 | 1.73 | |||||||||||||||||||||||||
| Held-to-maturity securities | |||||||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||
| Agency pass-through certificates | 581,313 | 19,309 | — | 600,622 | 3.16 | ||||||||||||||||||||||||
| Commercial MBS | 5,557 | — | (4) | 5,553 | 1.02 | ||||||||||||||||||||||||
| 586,870 | 19,309 | (4) | 606,175 | 3.14 | |||||||||||||||||||||||||
| $ | 3,018,744 | $ | 74,232 | $ | (3,857) | $ | 3,089,119 | 2.00 | % | ||||||||||||||||||||
28
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| September 30, 2020 | |||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | Yield | ||||||||||||||||||||||||||
| Gains | Losses | ||||||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Available-for-sale securities | |||||||||||||||||||||||||||||
| U.S. government and agency securities due | |||||||||||||||||||||||||||||
| 5 to 10 years | $ | 18,448 | $ | 376 | $ | — | $ | 18,824 | 2.05 | % | |||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||||||||
| 5 to 10 years | 38,289 | — | (1,600) | 36,689 | 0.83 | ||||||||||||||||||||||||
| Over 10 years | 906,489 | 647 | (6,908) | 900,228 | 1.14 | ||||||||||||||||||||||||
| Corporate debt securities due | |||||||||||||||||||||||||||||
| Within 1 year | 54,209 | 337 | (51) | 54,495 | 1.22 | ||||||||||||||||||||||||
| 1 to 5 years | 128,289 | 3,366 | (428) | 131,227 | 1.78 | ||||||||||||||||||||||||
| 5 to 10 years | 97,157 | 4,305 | — | 101,462 | 1.50 | ||||||||||||||||||||||||
| Municipal bonds due | |||||||||||||||||||||||||||||
| 1 to 5 years | 1,461 | 36 | — | 1,497 | — | ||||||||||||||||||||||||
| Over 10 years | 36,044 | 774 | — | 36,818 | 5.40 | ||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||
| Agency pass-through certificates | 929,713 | 39,166 | (627) | 968,252 | 2.82 | ||||||||||||||||||||||||
| 2,210,099 | 49,007 | (9,614) | 2,249,492 | 1.97 | |||||||||||||||||||||||||
| Held-to-maturity securities | |||||||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||
| Agency pass-through certificates | 698,934 | 21,582 | — | 720,516 | 3.16 | ||||||||||||||||||||||||
| Commercial MBS | 6,904 | — | (52) | 6,852 | 1.02 | ||||||||||||||||||||||||
| 705,838 | 21,582 | (52) | 727,368 | 3.14 | |||||||||||||||||||||||||
| $ | 2,915,937 | $ | 70,589 | $ | (9,666) | $ | 2,976,860 | 2.25 | % | ||||||||||||||||||||
During fiscal 2020, as permitted in conjunction with the adoption of ASU 2019-04, the Company reclassified $374,680,000 of prepayable debt securities from held-to-maturity to available-for-sale. For available-for-sale investment securities, there were purchases of $379,760,000 during the three months ended December 31, 2020 and purchases of $82,028,000 during the three months ended December 31, 2019. There were no sales of available-for-sale investment securities during either period. For held-to-maturity investment securities, there were no purchases during the three months ended December 31, 2020 and no purchases during the three months ended December 31, 2019. There were no sales of held-to-maturity investment securities during either period. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 10 years.
The Company elected to exclude AIR from the amortized cost basis of debt securities disclosed throughout this footnote. For AFS securities, AIR totaled $3,997,000 and $3,285,000 as of December 31, 2020 and September 30, 2020, respectively. For HTM debt securities, AIR totaled $1,506,000 and $1,811,000 as of December 31, 2020 and September 30, 2020, respectively. AIR is included in the “accrued interest receivable” line item on the Company’s consolidated statements of financial condition.
The following tables show the gross unrealized losses and fair value of securities as of December 31, 2020 and September 30, 2020, by length of time that individual securities in each category have been in a continuous loss position. There were 33 and 51 securities with an unrealized loss as of December 31, 2020 and September 30, 2020, respectively. The decline in fair value since purchase is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired.
29
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| December 31, 2020 | Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||
| Unrealized Gross Losses | Fair Value | Unrealized Gross Losses | Fair Value | Unrealized Gross Losses | Fair Value | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Available-for-sale securities | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | $ | (173) | $ | 45,811 | $ | — | $ | — | $ | (173) | $ | 45,811 | |||||||||||||||||||||||
| Asset-backed securities | (398) | 219,539 | (1,699) | 141,478 | (2,097) | 361,017 | |||||||||||||||||||||||||||||
| Mortgage-backed securities | (1,174) | 52,559 | (409) | 53,606 | (1,583) | 106,165 | |||||||||||||||||||||||||||||
| (1,745) | 317,909 | (2,108) | 195,084 | (3,853) | 512,993 | ||||||||||||||||||||||||||||||
| Held-to-maturity securities | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | (4) | 5,553 | — | — | (4) | 5,553 | |||||||||||||||||||||||||||||
| $ | (1,749) | $ | 323,462 | $ | (2,108) | $ | 195,084 | $ | (3,857) | $ | 518,546 | ||||||||||||||||||||||||
| September 30, 2020 | Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||
| Unrealized Gross Losses | Fair Value | Unrealized Gross Losses | Fair Value | Unrealized Gross Losses | Fair Value | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Available-for-sale securities | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | $ | (74) | $ | 45,875 | $ | (405) | $ | 24,596 | $ | (479) | $ | 70,471 | |||||||||||||||||||||||
| Asset-backed securities | (5,481) | 587,746 | (3,027) | 204,369 | (8,508) | 792,115 | |||||||||||||||||||||||||||||
| Mortgage-backed securities | (278) | 41,897 | (349) | 56,196 | (627) | 98,093 | |||||||||||||||||||||||||||||
| (5,833) | 675,518 | (3,781) | 285,161 | (9,614) | 960,679 | ||||||||||||||||||||||||||||||
| Held-to-maturity securities | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | (52) | 6,853 | — | — | (52) | 6,853 | |||||||||||||||||||||||||||||
| $ | (5,885) | $ | 682,371 | $ | (3,781) | $ | 285,161 | $ | (9,666) | $ | 967,532 | ||||||||||||||||||||||||
Substantially all of the Company’s held-to-maturity 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. Therefore, the Company did not record an allowance for credit losses for these securities as of December 31, 2020 or September 30, 2020.
The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position have any credit loss impairment as of December 31, 2020 or September 30, 2020. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Available-for-sale debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Corporate debt securities and municipal bonds are considered to have an issuer of high credit quality (rated AA or higher) and the decline in fair value is due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
30
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G – Derivatives and Hedging Activities
The following tables present the fair value, notional amount and balance sheet classification of derivative assets and liabilities at December 31, 2020 and September 30, 2020.
| December 31, 2020 | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| Interest rate contract purpose | Balance Sheet Location | Notional | Fair Value | Balance Sheet Location | Notional | Fair Value | |||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Client swap program hedges | Other assets | $ | 637,633 | $ | 35,825 | Other liabilities | $ | 637,633 | $ | 35,825 | |||||||||||||
| Commercial loan fair value hedges | Other assets | — | — | Other liabilities | 90,918 | 7,508 | |||||||||||||||||
| Mortgage loan fair value hedges | Other assets | — | — | Other liabilities | 500,000 | 12,459 | |||||||||||||||||
| Borrowings cash flow hedges | Other assets | 1,500,000 | 2,743 | Other liabilities | — | — | |||||||||||||||||
| $ | 2,137,633 | $ | 38,568 | $ | 1,228,551 | $ | 55,792 | ||||||||||||||||
| September 30, 2020 | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| Interest rate contract purpose | Balance Sheet Location | Notional | Fair Value | Balance Sheet Location | Notional | Fair Value | |||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Client swap program hedges | Other assets | $ | 656,074 | $ | 48,201 | Other liabilities | $ | 656,074 | $ | 48,201 | |||||||||||||
| Commercial loan fair value hedges | Other assets | — | — | Other liabilities | 93,316 | 8,492 | |||||||||||||||||
| Mortgage loan fair value hedges | Other assets | — | — | Other liabilities | 500,000 | 16,061 | |||||||||||||||||
| Borrowings cash flow hedges | Other assets | — | — | Other liabilities | 1,600,000 | 17,375 | |||||||||||||||||
| $ | 656,074 | $ | 48,201 | $ | 2,849,390 | $ | 90,129 | ||||||||||||||||
The Company enters into interest rate swaps to hedge interest rate risk. These arrangements include hedges of individual fixed rate commercial loans and also hedges of a specified portion of pools of prepayable fixed rate mortgage loans under the "last of layer" method. These relationships qualify as fair value hedges under FASB ASC 815, Derivatives and Hedging ("ASC 815"), which provides for offsetting of the recognition of gains and losses of the respective interest rate swap and the hedged items. Gains and losses on interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.
Upon electing to apply ASC 815 fair value hedge accounting, the carrying value of the hedged item is adjusted to reflect the cumulative impact of changes in fair value attributable to the hedged risk. The hedge basis adjustment remains with the hedged item until the hedged item is de-recognized from the balance sheet. The following tables present the impact of fair value hedge accounting on the carrying value of the hedged items at December 31, 2020 and September 30, 2020.
| (In thousands) | December 31, 2020 | |||||||
| Balance sheet line item in which hedged item is recorded | Carrying value of hedged items | Cumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items | ||||||
| Loans receivable (1) (2) | $ | 2,242,120 | $ | 20,208 | ||||
| $ | 2,242,120 | $ | 20,208 | |||||
(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At December 31, 2020, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $2,143,675,000, the cumulative basis adjustment associated with the hedging relationships was $12,515,000, and the amount of the designated hedged items was $500,000,000.
31
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At December 31, 2020, the amortized cost basis of the hedged commercial loans was $98,445,000 and the cumulative basis adjustment associated with the hedging relationships was $7,693,000.
| (In thousands) | September 30, 2020 | |||||||
| Balance sheet line item in which hedged item is recorded | Carrying value of hedged items | Cumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items | ||||||
| Loans receivable (1) (2) | $ | 2,562,765 | $ | 24,664 | ||||
| $ | 2,562,765 | $ | 24,664 | |||||
(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At September 30, 2020, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $2,461,008,000, the cumulative basis adjustment associated with the hedging relationships was $16,049,000, and the amount of the designated hedged items was $500,000,000.
(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At September 30, 2020, the amortized cost basis of the hedged commercial loans was $101,757,000 and the cumulative basis adjustment associated with the hedging relationships was $8,615,000.
The Company has entered into interest rate swaps to convert certain short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of changes in future cash flows resulting from increasing interest rates. For qualifying cash flow hedges under ASC 815, gains and losses on the interest rate swaps are recorded in accumulated other comprehensive income ("AOCI") and then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line item as the hedged cash flows. During the three months ended December 31, 2020, a cash flow hedge with a notional amount of $100,000,000 and an effective interest rate of 1.39% was terminated and the FHLB advance was repaid. As of December 31, 2020, the maturities for hedges of adjustable rate borrowings ranged from less than one year to nine years, with the weighted average being 6.8 years.
The following tables present the gain (loss) recognized in AOCI on derivative instruments related to cash flow hedges on borrowings for the periods presented.
| (In thousands) | Three Months Ended December 31, | |||||||
| Amount of gain/(loss) recognized in AOCI | 2020 | 2019 | ||||||
| Interest rate contracts: | ||||||||
| Pay fixed/receive floating swaps on borrowings cash flow hedges | $ | 20,118 | $ | 3,115 | ||||
| Total pre-tax gain/(loss) recognized in AOCI | $ | 20,118 | $ | 3,115 | ||||
The following tables present the gain (loss) on derivative instruments in fair value and cash flow accounting hedging relationships under ASC 815 for the periods presented.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended December 31, 2020 | Three Months Ended December 31, 2019 | |||||||||||||
| Interest income on loans receivable | Interest expense on FHLB advances | Interest income on loans receivable | Interest expense on FHLB advances | |||||||||||
| (In thousands) | (In thousands) | |||||||||||||
| Interest income/(expense), including the effects of fair value and cash flow hedges | $ | 133,671 | $ | (13,198) | $ | 142,146 | $ | (13,658) | ||||||
| Gain/(loss) on fair value hedging relationships: | ||||||||||||||
| Interest rate contracts | ||||||||||||||
| Amounts related to interest settlements on derivatives | $ | (1,541) | $ | (7) | ||||||||||
| Recognized on derivatives | 4,587 | 4,692 | ||||||||||||
| Recognized on hedged items | (4,456) | (4,593) | ||||||||||||
| Net income/(expense) recognized on fair value hedges | $ | (1,410) | $ | 92 | ||||||||||
| Gain/(loss) on cash flow hedging relationships: | ||||||||||||||
| Interest rate contracts | ||||||||||||||
| Amounts related to interest settlements on derivatives | $ | 3,597 | $ | (214) | ||||||||||
| Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense | — | — | ||||||||||||
| Net income/(expense) recognized on cash flow hedges | $ | 3,597 | $ | (214) | ||||||||||
The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The interest rate swaps are derivatives under ASC 815, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the three months ended December 31, 2020 and 2019 as the changes in fair value of the receive fixed swap and pay fixed swap offset each other.
The following tables present the impact of derivative instruments (client swap program) that are not designated in accounting hedges under ASC 815 for the periods presented.
| (In thousands) | Three Months Ended December 31, | ||||||||||
| Derivative instruments | Classification of gain/(loss) recognized in income on derivative instrument | 2020 | 2019 | ||||||||
| Interest rate contracts: | |||||||||||
| Pay fixed/receive floating swap | Other noninterest income | $ | 12,376 | $ | 5,408 | ||||||
| Receive fixed/pay floating swap | Other noninterest income | (12,376) | (5,408) | ||||||||
| $ | — | $ | — | ||||||||
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H – Revenue from Contracts with Customers
Since net interest income on financial assets and liabilities is outside the scope of ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"), a significant majority of our revenues are not subject to that guidance.
Revenue streams that are within the scope of ASC 606 are presented within non-interest income and are, in general, recognized as revenue at the same time the Company's obligation to the customer is satisfied. Most of the Company's customer contracts that are within the scope of the new guidance are cancelable by either party without penalty and are short-term in nature. These sources of revenue include depositor and other consumer and business banking fees, commission income, as well as debit and credit card interchange fees. In scope revenue streams represented approximately 5.4% of our total revenues for the three months ended December 31, 2020, compared to 4.4% for the three months ended December 31, 2019. As this standard is immaterial to our consolidated financial statements, the Company has omitted certain disclosures in ASC 606, including the disaggregation of revenue table. Sources of non-interest income within the scope of the guidance include the following:
Deposit related and other service charges (recognized in Deposit fee income) - The Company's deposit accounts are governed by standardized contracts customary in the industry. Revenues are earned at a point in time or over time (monthly) from account maintenance fees and charges for specific transactions such as wire transfers, stop payment orders, overdrafts, debit card replacements, check orders and cashier’s checks. The Company’s performance obligation related to each of these fees is generally satisfied, and the related revenue recognized, at the time the service is provided (point in time or monthly). The Company is principal in each of these contracts.
Debit and Credit Card Interchange Fees (recognized in Deposit fee income) - The Company receives interchange fees from the debit card or credit card payment network based on transactions involving debit or credit cards issued by the Company, generally measured as a percentage of the underlying transaction. Interchange fees from debit and credit card transactions are recognized as the transaction processing services are provided by the network. The Company acts as an agent in the card payment network arrangement so the interchange fees are recorded net of any expenses paid to the principal (the card payment network in this case).
Insurance Agency Commissions (recognized in Other income) - WAFD Insurance Group, Inc. is a wholly-owned subsidiary of Washington Federal Bank, N.A. that operates as an insurance agency, selling and marketing property and casualty insurance policies for a small number of high-quality insurance carriers. WAFD Insurance Group, Inc. earns revenue in the form of commissions paid by the insurance carriers for policies that have been sold. In addition to the origination commission, WAFD Insurance Group, Inc. may also receive contingent incentive fees based on the volume of business generated for the insurance carrier and based on policy renewal rates.
NOTE I – Commitments and Contingencies
Lease Commitments - The Company’s lease commitments consist primarily of real estate property for branches and office space under various non-cancellable operating leases that expire between 2021 and 2070. The majority of the leases contain renewal options and provisions for increases in rental rates based on a predetermined schedule or an agreed upon index.
Financial Instruments with Off-Balance Sheet Risk - The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance of $3,011,286,000 and $2,738,095,000 at December 31, 2020 and September 30, 2020, respectively. The reserve was $26,500,000 as of December 31, 2020, which is an increase from $25,000,000 at September 30, 2020. See Note A "Summary of Significant Accounting Policies" for details regarding the reserve methodology.
Legal Proceedings - The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended September 30, 2020, 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, 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 the Board of Governors of the Federal Reserve System and 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 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 the Consumer 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.
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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 DESCRIPTION
Washington Federal Bank, National Association, a federally-insured national bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 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., a Washington 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 in Seattle, Washington.
The Company's fiscal year end is September 30th. All references to 2020 represent balances as of September 30, 2020 or activity for the fiscal year then ended.
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
36
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
“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 of December 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 of December 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 of December 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 of December 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 of December 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 the September 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 at December 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 of the 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 in the 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 of December 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 of September 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 of December 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% at December 31, 2020 and was also 2.34% at September 30, 2020. As of December 31, 2020, the weighted average rate on interest-earning assets decreased by 11
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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 the Small Business Administration’s Paycheck Protection Program ("PPP"). This program came about through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress 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 of December 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 the Federal Home Loan Bank of Des Moines ("FHLB") up to 45% of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity if needed.
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's primary credit program.
The Company's cash and cash equivalents totaled $1,830,722,000 at December 31, 2020, an increase from $1,702,977,000 at September 30, 2020. These amounts include the Bank's operating cash.
The Company’s shareholders' equity at December 31, 2020 was $2,061,767,000, or 10.82% of total assets. This is an increase of $47,634,000 from September 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 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. The ratio of tangible capital to tangible assets at December 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.
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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.
| Actual | Minimum Capital 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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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
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 | % | $ | 1,538,762 | 10.6 | % | $ | 72,034 | 4.7 | % | ||||||||||||||
| Commercial real estate | 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 $762,004,000 of PPP loans as of September 30, 2020 and $646,887,000 as of December 31, 2020.
Non-performing assets - Non-performing assets increased $28,847,000 during the three months ended December 31, 2020 to $66,542,000 from $37,695,000 at September 30, 2020. The change is due to a $29,350,000 increase in non-accrual loans and $503,000 decline in real estate owned ("REO"). Non-performing assets as a percentage of total assets was 0.35% at December 31, 2020 compared to 0.20% at September 30, 2020.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
The following table sets forth information regarding troubled debt restructured loans and non-performing assets.
| December 31, 2020 | September 30, 2020 | ||||||||||||||||||||||
| ($ 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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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
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 of December 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 $309,425,000 as of December 31, 2020 from $309,906,000 as of September 30, 2020. The decrease was due to normal amortization of finite-lived intangible assets.
Customer accounts - Customer accounts increased $386,917,000, or 2.8%, to $14,166,541,000 at December 31, 2020 compared with $13,779,624,000 at September 30, 2020.
The following table shows the composition of the Bank’s customer accounts by deposit type.
| December 31, 2020 | September 30, 2020 | ||||||||||||||||||||||||||||||||||
| Deposit Account Balance | As a % of Total Deposits | Weighted Average Rate | Deposit Account Balance | As a % of Total Deposits | Weighted Average Rate | ||||||||||||||||||||||||||||||
| ($ 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 ended December 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 ended December 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 ended December 31, 2020 compared to 3.15% for the quarter ended December 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 the Federal 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 of December 31, 2020 and the loan portfolio at December 31, 2020 contained $634,850,000 in PPP loans, which carry a 1% note rate.
The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Rate / Volume Analysis:
| Comparison of Three Months Ended 12/31/20 and 12/31/19 | |||||||||||||||||
| ($ 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) | $ | 829 | |||||||||||
___________________
(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 ended December 31, 2020, compared with a release of allowance for credit losses of $3,750,000 for the three months ended December 31, 2019. The credit loss provision for the three months ended December 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 ended December 31, 2020, compared to net recoveries of $2,579,000 during the three months ended December 31, 2019. No allowance was recorded as of December 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 ended December 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 in Bellevue, Washington during the first quarter of fiscal 2020.
Other Expense - Total other expense was $81,410,000 for the three months ended December 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 ended December 31, 2020 and December 31, 2019 equaled 1.73% and 2.02%, respectively, of average assets.
Gain (Loss) on Real Estate Owned - Results for the three months ended December 31, 2020 include a net loss on real estate owned of $449,000, compared to a net loss of $886,000 for the prior year quarter.
Income Tax Expense - Income tax expense totaled $10,574,000 for the three months ended December 31, 2020, compared to $18,423,000 for the prior year quarter. The effective tax rate for both the three months ended December 31, 2020 and the three months ended December 31, 2019 was 21.35%. The effective tax rate for the three months ended December 31, 2020 differs from the statutory rate mainly due to state taxes, tax-exempt income and tax-credit investments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since September 30, 2020. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Form 10-K.
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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting. During the period to which this report relates, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART II – Other Information
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company’s consolidated financial statements.
Item 1A. Risk Factors
In addition to the other information set forth below and in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the Company's Form 10-K for the year ended September 30, 2020. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended December 31, 2020.
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan (1) | Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period | |||||||||||||||||||
| October 1, 2020 to October 31, 2020 | 32,956 | $ | 21.29 | 32,956 | 4,594,275 | ||||||||||||||||||
| November 1, 2020 to November 30, 2020 | — | — | — | 4,594,275 | |||||||||||||||||||
| December 1, 2020 to December 31, 2020 | — | — | — | 4,594,275 | |||||||||||||||||||
| Total | 32,956 | $ | 21.29 | 32,956 | 4,594,275 | ||||||||||||||||||
___________________
(1)The Company's stock repurchase program was publicly announced by its Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 66,956,264 shares were authorized for repurchase. This does not include the 10,000,000 additional shares authorized by the Board of Directors on January 26, 2021.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
| (a) | Exhibits | |||||||||||||
| 101 | Financial Statements from the Company’s Form 10-Q for the three months ended December 31, 2020 formatted in iXBRL | |||||||||||||
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| January 28, 2021 | /S/ BRENT J. BEARDALL | ||||
| BRENT J. BEARDALL President & Chief Executive Officer | |||||
| January 28, 2021 | /S/ VINCENT L. BEATTY | ||||
| VINCENT L. BEATTY Executive Vice President and Chief Financial Officer | |||||
| January 28, 2021 | /S/ CORY D. STEWART | ||||
| CORY D. STEWART Senior Vice President and Principal Accounting Officer | |||||
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