Washington Federal, Inc. (WAFD) — Form 10-Q Summary
Business context and period. Washington Federal is a savings and loan holding company whose primary operating subsidiary is Washington Federal. This unaudited filing covers the quarter ended December 31, 2011, the first quarter of fiscal 2012. Comparisons of quarterly results are against the quarter ended December 31, 2010; balance-sheet comparisons are generally against September 30, 2011.
Financial performance and condition
- Earnings: Net income was $33.4 million, up from $24.5 million; diluted EPS was $0.31 versus $0.22. The improvement principally reflected a lower loan-loss provision, partly offset by lower net interest income and foreclosure-related real estate losses.
- Interest income and margins: Interest income was $155.9 million, down from $165.6 million. Net interest income was $103.7 million versus $104.7 million. The reported interest rate spread was 3.11%, compared with 3.13% at September 30, 2011.
- Credit costs and asset quality: Provision for loan losses fell to $11.2 million from $26.0 million; net charge-offs were $13.8 million versus $29.8 million. Non-accrual loans were $185.8 million, down from $210.5 million at September 30, 2011. Non-performing assets were $343.7 million, or 2.52% of assets, versus $370.3 million, or 2.76%, at September 30, 2011; the filing also reports $442.7 million, or 3.30%, a year earlier. Management cautioned that real estate values remained under pressure and expected non-performing assets and provisions to remain elevated until housing values stabilize.
- Loans and deposits: Non-covered loans, net, were $7.81 billion, down 1.6% from September 30. Total deposits were $8.88 billion, up 2.4%; the average deposit rate declined to 1.03% from 1.14%. Single-family residential loans represented 74.1% of gross non-covered loans.
- Liquidity, cash flow and debt: Cash and cash equivalents were $909.9 million, versus $816.0 million at September 30. Operating cash flow was $102.3 million; investing activities used $10.2 million and financing activities provided $1.9 million. FHLB advances and other borrowings totaled $2.76 billion, essentially unchanged from September 30. The company cited access to an FHLB credit line equal to 50% of total assets.
- Capital and shareholder returns: Stockholders’ equity was $1.91 billion, or 14.00% of assets, compared with 14.18% at September 30. The bank’s reported total risk-based capital ratio was 24.96%, and Tier 1 risk-based capital ratio was 23.69%; both exceeded the stated “well capitalized” thresholds. The quarterly dividend was $0.08 per share, up from $0.06; the company repurchased 1.55 million shares for $20.3 million.
Material changes, outlook and risks
- Portfolio mix: Available-for-sale securities increased 9.0% to $3.55 billion during the quarter, as the company used securities in part to offset income lost from maturing and prepaying loans. Management said it was reducing exposure to land and construction lending and was not aggressively competing for 30-year fixed-rate mortgages; it may continue shrinking the loan portfolio if low mortgage rates persist.
- Acquisitions: The bank acquired six Charter Bank branches and approximately $254 million of deposits in October 2011. In December, it acquired certain assets and liabilities of Western National Bank in an FDIC-assisted transaction, including $143 million of loans and $136 million of deposits at book value. The WNB purchase included a $53 million asset discount, with no loss-sharing provision or deposit premium. Purchase accounting remained provisional; management did not anticipate a significant upfront gain or goodwill asset.
- Interest-rate exposure: The one-year repricing gap was negative 18.1% of assets, versus negative 16.5% at September 30. Management estimated that an immediate, parallel 200-basis-point rate increase would reduce one-year net interest income by 3.4%; a gradual 200-basis-point increase over 12 months was estimated to reduce it by 0.7%. An immediate increase was estimated to reduce net portfolio value by $599 million. These are model estimates based on assumptions, not forecasts.
- Credit and regulatory risks: Management identified continuing real estate weakness and elevated credit costs as risks. The filing also cites sensitivity to interest rates, deposit flows, funding costs, loan demand, competition, and regulatory changes. The bank remained subject to an Office of Thrift Supervision memorandum of understanding monitored by the OCC; noncompliance could lead to added scrutiny, business constraints or formal enforcement. The company said Dodd-Frank implementation could increase compliance and operating costs, but its ultimate impact was uncertain.
- Other disclosures: Management expected a 36% effective tax rate going forward. The company reported effective disclosure controls and no significant changes in internal controls. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Whether subsequent purchase-accounting adjustments for WNB materially changed acquired asset values, earnings or capital.
- Whether credit quality continues to improve, particularly non-performing assets, delinquencies, restructured loans and residential real estate values; the filing reports $208.1 million of additional substandard loans that were less than 90 days delinquent.
- Whether the allowance for loan losses remains adequate as conditions change; management’s estimate was $154.5 million at quarter-end.
- How actual net interest income and net portfolio value respond to changing rates compared with the filing’s model estimates and assumptions.
- Whether the MOU is modified, suspended or terminated by the OCC, and whether regulatory changes increase costs or constrain the bank.