Business context and reporting period
Washington Federal, Inc. is a bank holding company operating through Washington Federal, National Association. Its business is primarily gathering deposits and making real-estate-secured and other loans. The 10-K covers the fiscal year ended September 30, 2013; references to fiscal 2013 are not calendar-year or quarterly results. The supplied filing text incorporates the full financial statements and management discussion by reference to the company’s Annual Report, but does not reproduce them.
Key financial metrics
| Metric | FY 2013 / September 30, 2013 | Comparison |
|---|---|---|
| Interest income on average interest-earning assets | $516.3 million | $590.3 million in FY 2012 |
| Net interest income | $380.1 million | $397.0 million in FY 2012 |
| Net interest margin | 3.17% | 3.18% in FY 2012 |
| Average total assets | $12.95 billion | $13.38 billion in FY 2012 |
| Net loans | $7.53 billion | $7.45 billion in FY 2012 |
| Deposits | $9.09 billion | $8.58 billion in FY 2012 |
| FHLB advances | $1.9 billion outstanding | Average balance was $1.95 billion in FY 2012 |
| Credit quality | Nonperforming assets: $213.6 million, or 1.63% of assets; net charge-offs: $17.8 million; loan-loss provision: $1.35 million | Nonperforming assets were $272.9 million, or 2.19%; net charge-offs were $69.7 million; provision was $45.7 million in FY 2012 |
Net interest income declined about 4% year over year, while the margin was nearly unchanged. The filing text does not provide a clear value for FY 2013 net income, earnings per share, total revenue, or operating cash flow; those statements are incorporated by reference. The company reported return on assets of 1.17% and return on equity of 7.88%, versus 1.03% and 7.23%, respectively, in FY 2012. The Bank exceeded the regulatory requirements to be considered well-capitalized, but the supplied text does not give its specific capital ratios.
Material changes versus the prior comparable period
- Deposits rose by $513.7 million, including acquired deposits; average checking balances increased and transaction accounts grew to 39% of deposits from 34%.
- Net loans increased modestly, and loan originations rose to $2.0 billion from $1.4 billion. The company also purchased $538.5 million of non-covered loans.
- Credit indicators improved: nonperforming assets, net charge-offs, and the loan-loss provision all declined substantially.
- Average interest-earning assets and net interest income fell; management attributed the NII decline primarily to lower asset yields.
- The company repurchased 6.3 million shares during FY 2013 at a weighted-average price of $17.46; 9.9 million shares remained authorized for repurchase at year-end.
Outlook, management commentary, risks and unusual items
- Management said it expected loan-loss provisions to remain historically elevated until nonperforming assets and charge-offs improve substantially and national and regional economic conditions normalize.
- The company’s negative one-year repricing gap was $1.68 billion, or 12.86% of assets. Its sensitivity analysis estimated that a 200-basis-point rate increase would reduce one-year net income by $6.2 million, assuming no balance-sheet growth or mix changes; this is a risk model, not a forecast.
- Management described stronger mortgage-rate conditions in the last quarter and increased mortgage origination activity. It also noted that changing loan and deposit mix improved modeled interest-rate sensitivity.
- Effective July 17, 2013, the Bank converted to a national bank charter and the holding company became a bank holding company. The South Valley acquisition added loans, deposits, and 24 Oregon branches. The company also acquired about $1.5 billion in deposits and 51 branches from Bank of America; the New Mexico branches converted after year-end, with remaining conversions anticipated in December 2013.
- On October 9, 2013, the CFPB imposed a $34,000 civil penalty and required enhanced Home Mortgage Disclosure Act reporting compliance. The Bank said it had adopted the required program and believed it had complied with the order’s material terms.
- Key risks include regional economic and real-estate weakness, concentration in real-estate lending, interest-rate movements, deposit retention and funding costs, regulatory changes, and execution of a three-year core-system migration and branch integrations. Management stated it did not hedge interest-rate exposure with derivatives.
- New capital rules generally begin applying in 2015, with the conservation buffer phased in later. Management believed current capital levels were sufficient for compliance. No specific earnings or growth guidance was provided in the supplied text.
Most important facts for investors to verify
- Review the incorporated Annual Report for FY 2013 net income, EPS, full revenue and expense detail, cash flows, year-end balance sheet, and actual regulatory capital ratios.
- Assess whether declining nonperforming assets and charge-offs are sustainable, and whether the allowance remains adequate given the real-estate-heavy loan portfolio.
- Verify the terms, conversion status, integration costs, and deposit retention associated with the Bank of America branches and South Valley acquisition.
- Monitor sensitivity to rising rates, deposit repricing and maturities, and reliance on FHLB advances.
- Track implementation of the CFPB order, the core-system migration, and readiness for the new capital requirements.