Washington Federal, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013. Income and cash-flow results are compared with the quarter ended December 31, 2012; balance-sheet figures are generally compared with September 30, 2013. Amounts are in U.S. dollars.
Business context and financial performance
Washington Federal is a bank holding company operating through Washington Federal, National Association. During the quarter, it acquired 51 Bank of America branches in New Mexico, Washington, Oregon, and Idaho. The acquisitions materially increased deposits, cash, and the branch network.
| Metric | Quarter / December 31, 2013 | Comparable period / date |
|---|---|---|
| Interest income | $131.3 million | $131.3 million, prior-year quarter |
| Net interest income | $98.3 million | $95.4 million, prior-year quarter |
| Provision (recovery) for loan losses | $(4.6) million recovery | $3.6 million provision, prior-year quarter |
| Net income | $40.2 million; diluted EPS $0.39 | $35.3 million; diluted EPS $0.33 |
| Other expense | $44.1 million | $38.3 million, prior-year quarter |
| Net cash from operating activities | $51.5 million | $60.6 million, prior-year quarter |
| Total assets | $14.40 billion | $13.08 billion, September 30, 2013 |
| Loans receivable, net | $7.65 billion | $7.53 billion, September 30, 2013 |
| Customer accounts | $10.40 billion | $9.09 billion, September 30, 2013 |
| FHLB advances | $1.93 billion | $1.93 billion, September 30, 2013 |
| Stockholders’ equity | $1.95 billion; 13.56% of assets | $1.94 billion; 14.81% of assets, September 30, 2013 |
Material changes and operating trends
- Net income rose about 14% year over year, supported by lower credit costs. The loan-loss recovery reflected a favorable settlement of a lawsuit involving previously purchased loans, as well as improving credit quality and economic conditions.
- Net interest income increased about 3%. Lower customer deposit costs helped, while interest income on loans and covered loans declined year over year. The reported interest-rate spread was 2.58% at December 31, down from 2.73% at September 30; the filing does not provide a clear quarterly net interest margin value in the supplied text.
- Other expense increased 15.2% year over year. The company cited higher staffing and occupancy costs, including an increase in branches from 190 to 235 year over year.
- Non-performing assets were $197.9 million, or 1.37% of assets, versus $213.6 million, or 1.63%, at September 30, and $264.2 million, or 2.02%, a year earlier. Non-accrual loans were $114.7 million, down from $131.3 million at September 30 and $163.1 million a year earlier.
- The allowance for loan losses was $118.2 million, or 1.46% of gross loans. Net recoveries were $6.0 million, compared with net charge-offs of $9.9 million in the prior-year quarter.
- Available-for-sale securities increased 20% from September 30 to $2.84 billion. Cash and cash equivalents rose to $967.3 million, largely reflecting acquisition proceeds and liquidity awaiting investment. Investing cash flow was $758.6 million, including $1.28 billion of cash received in the branch transactions; financing cash flow was $(46.3) million.
Liquidity, capital, outlook, and risks
- The Bank’s reported capital ratios were 25.06% total risk-based, 23.80% Tier 1 risk-based, and 12.01% Tier 1 leverage—above the stated “well capitalized” thresholds. The company reported substantial FHLB borrowing capacity and $967.3 million of cash and cash equivalents.
- Management is reducing interest-rate risk through growth in shorter-term business loans and transaction deposits and increased variable-rate investments. The acquired deposits were 83% transaction accounts. The investment portfolio was 43% variable-rate and 57% fixed-rate.
- Interest-rate exposure increased: the one-year repricing gap was negative $2.873 billion, or 19.95% of assets, versus a negative 12.9% gap at September 30. Under an immediate parallel 200-basis-point rate increase, the model estimated next-year net interest income would decline 5.8%; a gradual 200-basis-point increase over 12 months was estimated to reduce first-year net interest income by 2.1%. An immediate 200-basis-point increase was also estimated to reduce net portfolio value by $520 million. These are model estimates with stated assumptions, not forecasts of actual results.
- Held-to-maturity securities included approximately $111 million of unrealized losses at December 31. Management noted that rising rates may expose these securities to unrealized losses.
- No formal earnings guidance is provided. Management expected an effective tax rate of 35.75% going forward. A January 2014 agreement to acquire 23 branches in Arizona and Nevada, including approximately $610 million of deposits, was expected to close in the second calendar quarter, subject to regulatory approval and customary conditions.
- Purchase accounting for the 51 completed branches remained incomplete, including valuation of the core deposit intangible and acquired assets; completion was expected by March 31, 2014. The filing identifies risks including economic conditions, regulation, interest rates, deposit flows, funding costs, loan demand and credit quality, competition, and changes in accounting or tax rules.
Important facts for investors to verify
- How much of the earnings increase and loan-loss recovery is attributable to the lawsuit settlement, and whether improved credit trends persist.
- Final purchase-accounting values and the ongoing costs, deposit retention, and profitability of the acquired branches.
- Subsequent credit quality, allowance adequacy, non-performing assets, and performance of restructured loans; management noted that $94.3 million of loans under 90 days delinquent were classified as substandard.
- Interest-rate sensitivity, particularly the negative repricing gap, estimated net-interest-income and net-portfolio-value impacts, and unrealized losses on held-to-maturity securities.
- Closing and integration of the proposed Arizona and Nevada branch acquisition, and how excess cash is deployed.