Business context and reporting period
Washington Federal, Inc. is a bank holding company whose primary operating subsidiary was a savings and loan association during the quarter. This unaudited Form 10-Q covers the fiscal quarter and nine months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless otherwise noted. Results include South Valley Bank and Trust, acquired October 31, 2012. The bank and holding company converted to a national bank charter and bank holding company structure on July 17, 2013.
Financial performance and position
| Metric | Quarter ended June 30, 2013 | Nine months ended June 30, 2013 |
|---|---|---|
| Interest income | $128.2 million | $386.0 million |
| Net interest income | $94.7 million | $283.2 million |
| Provision for loan losses | $0 | $3.6 million |
| Net income | $37.3 million; diluted EPS $0.36 | $108.6 million; diluted EPS $1.03 |
| Cash dividends per share | $0.09 | $0.26 |
- Quarterly net income rose from $35.2 million; nine-month net income rose from $102.7 million. Lower credit costs supported earnings, partly offset by weaker net interest income.
- Net interest income declined from $96.5 million for the prior-year quarter and from $304.9 million for the prior-year nine-month period. The filing reports an interest rate spread of 2.65%, down from 2.80% at September 30, 2012; it does not provide a clear net interest margin value in the supplied text.
- Other expense was $41.6 million in the quarter, up from $36.0 million, primarily reflecting acquired South Valley personnel and related costs. The quarter’s effective tax rate was 36%.
- At June 30, total assets were $13.01 billion, deposits $9.06 billion, FHLB advances $1.93 billion, and stockholders’ equity $1.92 billion. Loans receivable, net, were $7.39 billion; cash and equivalents were $646.9 million.
- For the nine months, operating cash flow was $140.2 million, investing cash flow was $105.9 million, financing cash flow was negative $350.6 million, and cash declined $104.6 million.
- Reported capital ratios remained above the stated well-capitalized thresholds: total risk-based capital 26.59%, Tier 1 risk-based 25.33%, and core capital to adjusted tangible assets 12.70%.
Material changes versus comparable periods
- Quarterly interest income fell $17.2 million year over year, while interest expense fell $15.4 million; net interest income consequently declined $1.8 million. For nine months, net interest income declined $21.7 million.
- The loan-loss provision fell to zero for the quarter from $10.4 million; nine-month provision was $3.6 million versus $39.6 million. Net charge-offs for the quarter were $4.8 million, down from $16.2 million.
- Non-accrual loans were $148.7 million, down from $173.4 million at September 30, 2012. Non-performing assets were $233.4 million, or 1.79% of assets, versus $272.9 million, or 2.19%, at September 30, 2012. Management cautions the level remains above the company’s historical average.
- Customer accounts increased $486.9 million from September 30, 2012, with transaction accounts growing; time deposits were approximately flat. Net loans receivable decreased $61.5 million, while available-for-sale and held-to-maturity securities grew substantially.
- Equity increased $23.1 million from September 30, 2012, reflecting earnings partly offset by dividends, $87.0 million of treasury-stock purchases, and lower accumulated other comprehensive income.
Outlook, management commentary, risks and unusual items
- No earnings or financial guidance is provided. Management said it expected an effective tax rate of 36% going forward.
- Management described reducing interest-rate exposure by growing shorter-term business lending and transaction deposits, extending borrowing maturities, and purchasing more variable-rate investments. The investment portfolio was described as 50% variable-rate and 50% fixed-rate.
- Interest-rate sensitivity is material: the one-year repricing gap was negative $2.077 billion, or 15.96% of assets, compared with a negative 10.1% at September 30, 2012. Modeling estimated net interest income would decrease 2.59% in year one after an immediate parallel 200-basis-point rate increase, or 1.95% after a gradual increase over 12 months. An immediate 200-basis-point increase was estimated to reduce net portfolio value by $347 million.
- Approximately $1.6 billion of purchased 30-year fixed-rate mortgage-backed securities were classified as held-to-maturity; their unrealized losses were $70 million at June 30. The filing notes that rising rates may expose these securities to further unrealized losses.
- Loan-quality risks include delinquency, troubled debt restructurings, and regional real-estate exposure. Of $414.96 million in restructured loans, 5.6% were non-accrual. Management reported $120.7 million of loans less than 90 days delinquent but classified as substandard; including them as non-performing would raise non-performing assets plus performing restructurings to 5.73% of assets.
- South Valley acquisition accounting was finalized in the quarter, with adjustments to acquired real-estate, goodwill, and other assets. Up to $14 million of additional earn-out payments could be due; $5 million was accrued.
- After quarter-end, the company agreed to acquire 51 Bank of America branches, approximately $1.8 billion of deposits and $11 million of loans, for an estimated $45.6 million, subject to regulatory approval and closing conditions; closing was expected in fourth-quarter 2013.
- Management cited economic conditions, interest rates, deposit flows, loan demand, competition, regulation, and portfolio credit quality among factors that could cause actual results to differ from forward-looking statements. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Whether improving delinquency and non-performing asset trends continue, and whether the $118.1 million allowance remains adequate as loan mix and credit performance evolve.
- How interest-rate movements affect funding costs, net interest income, and the market value of the large fixed-rate securities portfolio.
- Whether deposit growth and liquidity remain sufficient as the company funds growth and integrates acquired branches; review the planned branch acquisition’s final terms and regulatory status.
- How South Valley integration, acquisition-related expense, and any earn-out payments affect future earnings and capital.
- Whether share repurchases, dividends, and future balance-sheet growth remain consistent with capital needs and the company’s stated risk management approach.