Washington Federal, Inc. — Form 10-Q Summary
Business context and period. Washington Federal, Inc. is a savings and loan holding company whose primary operating subsidiary is Washington Federal. This unaudited report covers the fiscal quarter and nine months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise noted. Dollar figures below are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended June 30, 2012 | Nine months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Net interest income | $96.5 | $304.9 | $106.1 quarter; $312.4 nine months |
| Provision for loan losses | $10.4 | $39.6 | $21.0 quarter; $77.8 nine months |
| Net income | $35.2 | $102.7 | $30.1 quarter; $80.5 nine months |
| Diluted earnings per share | $0.33 | $0.96 | $0.27 quarter; $0.72 nine months |
| Cash dividends per share | $0.08 | $0.24 | $0.06 quarter; $0.18 nine months |
- Quarterly net interest income fell about 9%, while net income increased about 17%. For the nine-month period, net interest income declined about 2% and net income rose about 28%. Lower loan-loss provisions and improved results on foreclosed real estate supported earnings despite lower interest income.
- Quarterly other income was $3.6 million versus $4.3 million; other expense was $36.0 million versus $34.2 million. Nine-month other income was $13.3 million versus $21.2 million, including an $8.1 million securities-sale gain in 2011 and none in 2012.
- Net gain on real estate acquired through foreclosure was $1.1 million for the quarter, compared with an $8.2 million loss a year earlier. The nine-month result remained a loss of $11.0 million, versus a $28.4 million loss in 2011.
- At June 30, total assets were $13.47 billion, compared with $13.44 billion at September 30, 2011. Net loans were $7.62 billion, down 4.0% from September 2011; available-for-sale securities were $3.63 billion, up 11.4%.
- Cash and cash equivalents were $963.8 million. Customer accounts totaled $8.68 billion, up slightly from September 2011. FHLB advances and other borrowings totaled $2.76 billion, including $800 million of other borrowings.
- Stockholders’ equity was $1.93 billion, or 14.36% of assets, versus $1.91 billion, or 14.18%, at September 2011. The bank reported a 26.43% total risk-based capital ratio and an 11.87% core-capital-to-adjusted-tangible-assets ratio; both exceeded the stated well-capitalized thresholds.
- For the nine months, operating cash flow was $201.3 million, investing cash flow was $158.4 million, and financing cash flow was a use of $212.0 million. Cash increased $147.8 million from the beginning of the period.
Material changes, outlook and risks
- Credit quality improved, but remains a concern. Nonperforming assets were $278.5 million, or 2.07% of assets, at June 30, versus $370.3 million, or 2.76%, at September 30, 2011; management also cited a 2.96% ratio one year earlier. Nonaccrual loans were $171.0 million, down from $210.5 million at September 2011. Loans 30 days or more delinquent were 2.69%, versus 3.43% at September 2011. The allowance for loan losses was $138.0 million.
- Management attributed lower provisions to improved nonperforming assets, delinquencies and reduced exposure to land acquisition and development and speculative construction. It expects nonperforming assets to remain elevated until residential real estate markets stabilize and values recover. Management stated that the allowance was sufficient for estimated inherent losses.
- Restructured loans totaled $432.8 million; 92.3% were performing. Single-family residential loans made up 83.2% of restructurings. Separately, $156.3 million of loans less than 90 days delinquent were classified as substandard; including them would raise the reported ratio of nonperforming assets plus performing restructured loans from 5.03% to 6.19% of assets.
- Management said it was reducing exposure to land and construction loans and was not aggressively competing for 30-year fixed-rate mortgages at current rates. If low mortgage rates persist, it may continue shrinking the loan portfolio. Securities purchases were used in part to offset income lost from loan and mortgage-backed-security repayments.
- Interest-rate risk remains material: liabilities repricing within one year exceeded similarly repricing assets by about $1.18 billion, an 8.8% negative gap. The company estimated that an immediate parallel 200-basis-point rate increase would reduce one-year net interest income by 1.35% and net portfolio value by $451 million. The reported interest-rate spread was 2.88%, down from 3.13% at September 2011.
- The Bank remained subject to an Office of the Comptroller of the Currency-monitored memorandum of understanding originally entered into with the OTS. Failure to comply could lead to added regulatory scrutiny, business constraints or formal enforcement action. Management also identified uncertainty over the costs and effects of Dodd-Frank and other regulation.
- Washington Federal agreed to acquire South Valley Bancorp. The announced consideration included 0.2962 Washington Federal shares per South Valley share plus contingent cash payments tied to specified assets and possible business sales. South Valley shareholders approved the merger; closing was expected in the third calendar quarter of 2012, subject to regulatory approvals and customary conditions. The Western National Bank FDIC-assisted acquisition had been completed in December 2011.
- No specific earnings forecast was provided. Management expected an effective tax rate of 36% going forward. The company disclosed no legal proceedings considered material to its financial position or results.
Important facts for investors to verify
- Whether the improving delinquency and nonperforming-asset trends continue, and whether the $138.0 million loan-loss allowance remains adequate amid weak real estate markets.
- How the substandard and restructured loan balances evolve, including the $156.3 million of substandard loans that were less than 90 days delinquent.
- Whether net interest income and the interest-rate spread stabilize as the loan portfolio contracts and securities holdings rise, and how actual results compare with management’s rate-sensitivity estimates.
- Completion, final terms and integration effects of the South Valley merger, including contingent payments and regulatory approvals.
- Compliance status under the OCC-monitored MOU and any resulting operating or regulatory constraints.