Washington Federal, Inc. — Form 10-Q Summary
Business context and reporting period
Washington Federal, Inc. is a savings and loan holding company. This unaudited filing covers its fiscal first quarter ended December 31, 2012; operating results are compared with the quarter ended December 31, 2011, and balance-sheet figures generally with September 30, 2012.
Results include South Valley Bank and Trust from November 1, 2012, following its October 31 acquisition. The transaction added 24 Oregon branches, $735 million of deposits, $383 million of net loans and $107 million of covered loans. Closing consideration was approximately $44 million. Purchase accounting remained provisional at quarter-end.
Financial results and position
| Metric | December 2012 quarter / quarter-end | Comparison |
|---|---|---|
| Interest income | $131.3 million | $155.9 million in December 2011 quarter |
| Net interest income | $95.4 million | $103.7 million |
| Provision for loan losses | $3.6 million | $11.2 million |
| Net income | $35.3 million; diluted EPS $0.33 | $33.4 million; diluted EPS $0.31 |
| Other expense | $38.3 million | $34.4 million |
| Cash dividends per share | $0.08 | $0.08 |
- Net interest income declined 8.0% year over year, as lower interest income exceeded the reduction in interest expense. The reported interest-rate spread was 2.83% at December 31, versus 2.80% at September 30; the filing excerpt does not provide a clear net interest margin value.
- Total assets were $13.11 billion, up $633.9 million from September 30. Net loans were $7.61 billion; covered loans were $380.6 million. Investment securities totaled $3.41 billion, including $2.00 billion available-for-sale and $1.41 billion held-to-maturity.
- Customer accounts were $9.23 billion, including $3.57 billion in transaction deposits and $5.66 billion in time deposits. FHLB advances were unchanged at $1.88 billion.
- Stockholders’ equity was $1.91 billion, or 14.61% of assets, compared with 15.23% at September 30. Regulatory capital ratios remained well above the stated “well capitalized” thresholds: total risk-based capital 26.25%, Tier 1 risk-based capital 24.99%, and core capital to adjusted tangible assets 12.49%.
- Operating cash flow was $60.6 million; investing activities provided $11.2 million, and financing activities used $185.8 million. Cash and cash equivalents ended at $637.3 million, down $114.1 million during the quarter.
Material changes and asset quality
- Net income increased 5.6% year over year, supported by lower loan-loss provisioning and a smaller net loss on foreclosed real estate ($3.3 million versus $10.6 million). Higher operating expense—up 11.5%—partly offset these benefits; management attributed much of the increase to acquired operations and staffing.
- Nonperforming assets declined to $264.2 million, or 2.02% of assets, from $272.9 million (2.19%) at September 30 and $343.7 million (2.52%) a year earlier. Nonaccrual loans were $163.1 million; net charge-offs were $9.9 million.
- The allowance for loan losses was $126.8 million, or 1.58% of gross loans, down from $133.1 million at September 30. Management stated it considered the allowance sufficient. Delinquencies and elevated charge-offs in single-family residential loans remained areas of concern, while exposure to land acquisition and development and speculative construction continued to decline.
- Commercial real estate and commercial-and-industrial balances increased substantially from September 30, in part because of South Valley. Single-family residential loans remained the largest portfolio category. Acquired loans are carried at acquisition-date fair value and are not classified as nonperforming under the company’s stated accounting approach.
Outlook, risks, and unusual items
- No earnings or revenue guidance was provided. Management said it may continue shrinking the loan portfolio if low rates on 30-year fixed-rate mortgages persist, and cited growth in business lending and transaction deposits as part of its interest-rate-risk management strategy. It expected an effective tax rate of 36% going forward.
- The one-year repricing gap was negative 12.3% of assets, versus negative 10.1% at September 30. The company estimated that an immediate parallel 200-basis-point rate increase would reduce one-year net interest income by 1.7%; a gradual 200-basis-point increase over 12 months would reduce it by 0.76%. An immediate 200-basis-point increase was estimated to reduce net portfolio value by $315 million. These are model estimates based on stated assumptions, not forecasts.
- Management identified economic conditions, interest rates, deposit flows, competition, portfolio quality, regulation and compliance with an OCC memorandum of understanding as risks that could affect results. The filing describes the MOU as an ongoing compliance factor.
- South Valley purchase valuations were incomplete and provisional at quarter-end, including acquired-loan classification and fair-value assessments; final purchase accounting could change recorded amounts. Certain earn-out asset collections could reduce the purchase price by up to $14 million.
- The company repurchased 2.70 million shares for $44.7 million during the quarter. Management reported effective disclosure controls and no material change in internal control over financial reporting. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Final South Valley purchase accounting, acquired-loan classifications, earn-out collections, and the resulting goodwill and other asset values.
- Whether nonperforming assets, residential delinquencies, charge-offs, and the allowance remain consistent with management’s assessment of credit risk.
- Deposit retention and funding costs, loan and securities growth, and the effect of the negative repricing gap if interest rates change.
- Progress in satisfying the OCC memorandum of understanding and any related regulatory developments.
- How continued share repurchases and dividends affect capital, liquidity, and per-share results.