Washington Federal, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014; this is an annual report, not a standalone fourth-quarter report. Washington Federal is a bank holding company operating through Washington Federal, National Association, with 251 branches across eight states.
Financial performance and position
| Metric | FY2014 / September 30, 2014 | Comparison |
|---|---|---|
| Average total assets | $14.28 billion | $12.95 billion in FY2013 |
| Net interest income | $406.9 million | Up $26.6 million from $380.3 million |
| Net interest margin | 3.06% in the average-balance table; management discussion states 3.05% | 3.17% in FY2013 |
| Net loans | $8.15 billion | $7.53 billion; up $620.3 million |
| Deposits | $10.72 billion | $9.09 billion; increase included $1.85 billion of acquired deposits |
| FHLB advances | $1.9 billion outstanding | Average balance $1.96 billion, versus $1.91 billion in FY2013 |
| Credit quality | Nonperforming assets $147.3 million, or 1.00% of assets | $213.6 million, or 1.63%, in FY2013 |
| Allowance and credit costs | Allowance $112.3 million; $14.4 million net recoveries; $15.8 million provision reversal | FY2013 had $18.0 million net charge-offs and a $1.4 million provision |
| Returns and capital | ROA 1.10%; ROE 7.99%; average equity/assets 13.80% | FY2013: 1.17%, 7.88%, and 14.84%, respectively |
Investment securities had a fair value of $4.55 billion. The filing states that the Bank exceeded the regulatory requirements to be considered well-capitalized, but the supplied text does not provide its actual capital ratios. Cash-flow totals, net income, total revenue, and detailed liquidity measures are not clear in the supplied filing text; the financial statements are incorporated by reference from the accompanying Annual Report, which was not included in the source text.
Material changes versus FY2013
- Net interest income increased 7.0%, while margin declined as yields on earning assets fell more than funding costs.
- Loan balances grew 8.2%. Growth included higher commercial real estate, commercial and industrial, and multifamily balances; single-family loans remained the largest portfolio category.
- Deposits grew 17.9%, with the increase substantially boosted by acquired Bank of America branch deposits. The Bank acquired 74 branches in FY2014, adding approximately $1.9 billion in deposit accounts, and paid a 1.99% deposit premium.
- Credit indicators improved: nonperforming assets fell, and the allowance for loan losses declined from $116.7 million to $112.3 million. The company recorded net recoveries rather than net charge-offs.
- The Company repurchased 4.83 million shares at a weighted-average price of $21.59; 5.04 million shares remained authorized for repurchase at year-end.
Outlook, risks, and unusual items
- Management provided no specific earnings or growth guidance in the supplied text. It said credit conditions were improving but expected loan-loss provisions to remain historically elevated until problem assets, charge-offs, and economic conditions improved further.
- Interest-rate exposure remains material. The one-year repricing gap was negative $1.66 billion, or 11.00% of assets. The filing’s model estimated a $6.2 million decline in one-year net income under a 200-basis-point rate increase, assuming no balance-sheet growth or mix changes; management cautioned this is a sensitivity analysis, not a forecast.
- The loan portfolio is concentrated in real estate and the company operates in markets exposed to housing and regional economic conditions. Construction and income-producing property lending carry additional credit risks.
- The Bank was in year two of a three-year core technology system transition, creating execution, service-continuity, and integration risks. Cybersecurity and third-party technology risks were also identified.
- The CFPB had issued a consent order requiring a $34,000 penalty and an enhanced HMDA reporting compliance program. The Bank said it believed it had complied with the material terms; the program remained under CFPB review.
- New Basel III-related capital rules were scheduled to begin taking effect in 2015. Management believed current capital levels were sufficient for compliance. Regulatory limits may affect dividends and share repurchases.
- Management cited ordinary-course legal proceedings as immaterial. The IRS was examining tax years through September 30, 2012; management did not expect a material financial statement impact.
Important facts for investors to verify
- Consult the incorporated Annual Report for audited net income, earnings per share, full revenue and expense detail, cash flows, actual capital ratios, and complete liquidity disclosures.
- Reconcile the stated FY2014 net interest margin of 3.06% in the table with 3.05% in management’s discussion.
- Assess whether deposit growth and retention remain sustainable after the Bank of America branch acquisitions, and review related integration costs and customer retention.
- Review changes in loan mix, real-estate concentrations, credit quality, allowance adequacy, and subsequent recoveries or charge-offs.
- Track the core-system conversion, CFPB follow-up on HMDA compliance, and the effects of new capital rules on capital distributions.