Business context and reporting period
Washington Federal, Inc. filed this Form 10-K for the fiscal year ended September 30, 2011 (not a standalone fourth-quarter report). The company operates a federally insured savings bank, primarily gathering deposits and making real-estate-secured loans. It had 160 branches across eight states. The supplied filing text incorporates the full financial statements from the accompanying Annual Report, but does not include all of those statements.
Key financial metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net interest income | $416.9 million | $394.5 million |
| Net interest margin | 3.35% | 3.17% |
| Return on assets | 0.83% | 0.89% |
| Return on equity | 5.99% | 6.55% |
| Net loans, excluding covered loans | $7.94 billion | $8.42 billion |
| Deposits | $8.67 billion | $8.85 billion |
| Allowance for loan losses | $157.2 million | $163.1 million |
| Provision for loan losses | $92.4 million | $179.9 million |
| Net charge-offs | $98.3 million | $183.7 million |
| Non-performing assets | $370.3 million; 2.76% of assets | $434.5 million; 3.22% of assets |
The company’s average interest-earning assets were $12.45 billion, and average interest-bearing liabilities were $11.49 billion. At year-end, it reported $2.0 billion of FHLB advances, $800 million of securities sold under repurchase agreements, and $32.2 million of customer repurchase agreements. The investment portfolio had a fair value of $3.31 billion. Washington Federal reported that the Bank exceeded the requirements for a “well-capitalized” institution; exact capital ratios are not stated in the supplied text.
Net income, earnings per share, total revenue, cash-flow amounts, and full period-end balance-sheet totals are not clearly provided in the supplied filing text. Net interest income is reported above as a key banking earnings measure, not as total revenue.
Material changes versus the prior comparable period
- Net interest income rose $22.5 million, or about 5.7%, and net interest margin increased 0.18 percentage points.
- Net loans declined about $487.8 million, or 5.8%; the filing reports negative net loan activity. Gross loans excluding covered loans fell from $8.78 billion to $8.30 billion.
- Deposits declined about $186.6 million, or 2.1%.
- Credit measures improved year over year: provision expense fell by $87.6 million, net charge-offs fell by $85.4 million, and non-performing assets declined by $64.2 million.
- Despite lower non-performing assets, total restructured loans increased from $272.9 million to $377.5 million. Performing restructured loans were $320.0 million at year-end.
- Average FHLB advances declined to $1.88 billion from $2.07 billion; the company had no short-term borrowings at September 30, 2011.
Outlook, commentary, risks and unusual items
- Management said loan-loss provisions were expected to remain elevated until non-performing assets and charge-offs improve substantially. The filing does not provide quantified earnings or revenue guidance.
- The Bank remained subject to a July 2010 memorandum of understanding with the OTS, now monitored by the OCC. Management said required measures were near completion; only the OCC can determine compliance. The agreement calls for risk-management and control improvements and does not require additional capital or change dividend policy.
- Interest-rate exposure is material: the one-year repricing gap was negative $2.2 billion, or 16.5% of assets, versus negative $2.5 billion, or 18.5%, a year earlier. The company’s model estimated a $6.0 million reduction in one-year net income from a 100-basis-point rate increase, assuming no balance-sheet growth or mix change; this is a sensitivity, not a forecast.
- Key risks include ongoing weakness in real estate and regional economies, borrower credit deterioration, collateral-value declines, interest-rate movements, funding availability, higher regulatory and deposit-insurance costs, and regulatory compliance. The company also cited longer foreclosure timelines and competition from government-supported mortgage lenders.
- Horizon Bank assets acquired in 2010 remained subject to FDIC loss-sharing agreements. The FDIC generally covers 80% of covered losses up to $536 million and 95% above that threshold, subject to differing terms by loan category. Covered loans net of discounts and allowance were $382.2 million at year-end.
- Legal proceedings in the ordinary course were described as immaterial to the financial statements. The filing states that the company was in compliance with its interest-rate risk policy guidelines.
Important facts for investors to verify
- Consult the incorporated Annual Report financial statements for net income, EPS, total revenue, cash flows, full balance-sheet amounts, and detailed liquidity and capital ratios.
- Review credit trends, including restructured and criticized loans, collateral valuations, allowance adequacy, charge-offs, and the performance of FDIC-covered assets.
- Confirm the OCC’s current status and any remaining requirements under the memorandum of understanding.
- Assess sensitivity to deposit repricing, certificate maturities, FHLB funding, and interest-rate changes; the filing’s sensitivity analysis assumes a static balance sheet.
- Monitor regional real-estate conditions, foreclosure timelines, FDIC assessment costs, and implementation of Dodd-Frank requirements.