Washington Federal, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. Washington Federal is a savings-and-loan holding company operating through Washington Federal Savings, with 160 branches in eight states. Figures below are in U.S. dollars; financial-statement detail is partly incorporated by reference to the annual report and is not included in the supplied filing text.
Key financial metrics
- Scale: Average total assets were $13.37 billion, up from $12.25 billion in FY2009. Average stockholders’ equity was $1.81 billion, versus $1.42 billion.
- Interest income and margin: Interest income on average interest-earning assets was $663.6 million, down from $691.8 million. Interest expense declined to $269.1 million from $318.6 million, lifting net interest income to $394.5 million from $373.1 million. Net interest margin was 3.17%, unchanged from FY2009; the interest-rate spread rose to 2.99% from 2.91%.
- Profitability: Return on average assets was 0.89%, versus 0.33%; return on average equity was 6.55%, versus 2.87%. The supplied filing text does not provide a clear net income or revenue total.
- Loans and credit: Net non-covered loans were $8.42 billion, down from $8.98 billion. Net covered loans acquired from Horizon Bank were $534.5 million. The allowance for loan losses was $163.1 million. Provision for loan losses was $179.9 million, compared with $193.0 million; net charge-offs increased to $183.7 million from $111.2 million.
- Asset quality: Non-performing assets were $434.5 million, or 3.22% of total assets, down from $557.1 million, or 4.43%. Including restructured loans, the total was $659.7 million, or 5.25% of assets. Management identified an additional $370.8 million of substandard loans less than 90 days delinquent.
- Deposits and borrowings: Customer accounts were $8.83 billion at year-end, up from $7.79 billion. Year-end borrowings included $1.9 billion of FHLB advances and $800 million of securities sold under repurchase agreements; customer repurchase agreements were $26.6 million. Average total borrowings were $2.93 billion.
- Investments and liquidity: Investment portfolio fair value was $2.57 billion, compared with $2.31 billion. The filing describes deposits, loan repayments, investment repayments and sales, and borrowings as funding sources; a clear cash-flow statement total is not provided in the supplied text.
- Capital: Average equity to average assets was 13.54%, up from 11.57%. Washington Federal Savings exceeded regulatory “well-capitalized” thresholds; specific year-end capital ratios are not included in the supplied text.
Material changes and notable events
- In January 2010, the Bank acquired certain Horizon Bank assets and liabilities from the FDIC, adding a net 10 branches. The transaction included FDIC loss-sharing protection: 80% of covered losses up to $536 million and 95% above that amount. The Bank recorded a $228 million FDIC indemnification receivable at acquisition.
- Non-covered gross loans declined to $8.78 billion from $9.39 billion. Single-family residential loans remained the largest category at 74.8% of gross loans; speculative construction loans fell to 1.9% from 2.8%, and land acquisition and development loans to 3.5% from 5.5%.
- Deposits increased, including deposits acquired with Horizon. The average cost of interest-bearing liabilities fell to 2.34% from 2.97%, helping raise net interest income despite lower interest income.
- Non-performing assets declined year over year, but net charge-offs rose materially. Restructured loans increased to $272.9 million; $225.2 million were performing under restructured terms.
Outlook, risks and contingencies
- The Bank entered an OTS memorandum of understanding on July 28, 2010. Required actions include enhanced enterprise risk management, construction lending and valuation controls, and programs covering consumer compliance, fair lending, IT, continuity and information security. Management said it was nearing completion; the OTS determines compliance. The MOU remains in effect until modified or terminated and may increase costs or constrain growth.
- Management expected loan-loss provision levels to remain elevated until non-performing assets and charge-offs improve substantially. The filing gives no numerical earnings or growth guidance.
- Interest-rate exposure is significant: liabilities repricing within one year exceeded assets by approximately $3.8 billion, or 28.2% of assets. Under the filing’s static model, a 100-basis-point rate increase would reduce one-year net income by an estimated $12.3 million; a 300-basis-point increase by $37.0 million. These are risk scenarios, not forecasts.
- Key risks include continued weakness in housing and regional economies, collateral-value declines, estimation uncertainty in loan-loss reserves, FDIC loss-share performance, deposit and wholesale funding costs, interest-rate movements, regulatory changes under Dodd-Frank, and operational and technology risks.
- The filing states that ordinary-course legal proceedings were not material to the financial statements. Dodd-Frank was expected to increase compliance costs; the ultimate impact was undetermined. The company also anticipated potentially higher FDIC assessments.
Investor verification priorities
- Review the incorporated annual report for full-year net income, total revenue, cash flows, and exact year-end balance-sheet and regulatory capital figures.
- Assess the composition, collateral coverage, delinquency trends and subsequent performance of non-performing, restructured and substandard loans, as well as the adequacy of reserves.
- Verify the Horizon covered-asset balances, FDIC reimbursement assumptions, loss-share claims and remaining coverage periods.
- Track OTS MOU compliance, related expenses, and any resulting regulatory restrictions or updates.
- Compare actual net interest income and deposit costs with the disclosed rate-risk scenarios and monitor upcoming certificate maturities and wholesale funding.