Washington Federal, Inc. — Form 10-Q Summary
Business context and reporting period. Washington Federal, Inc. is a savings and loan holding company. This unaudited report covers the quarter and six months ended March 31, 2012, the second quarter of its fiscal year. Comparisons are with the corresponding 2011 periods unless stated otherwise.
Financial performance and condition
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net interest income | $104.6 million, versus $101.6 million | $208.3 million, versus $206.3 million |
| Provision for loan losses | $18.0 million, versus $30.8 million | $29.2 million, versus $56.8 million |
| Net income | $34.1 million, versus $25.8 million | $67.5 million, versus $50.4 million |
| Diluted earnings per share | $0.32, versus $0.23 | $0.63, versus $0.45 |
| Cash dividends per share | $0.08, versus $0.06 | $0.16, versus $0.12 |
Quarterly net income rose about 32%; management attributed improved earnings chiefly to lower credit costs, including reduced loan-loss provisions and lower real-estate foreclosure losses. Net interest income increased despite lower interest income, as deposit interest expense declined. Other income fell to $5.0 million from $12.5 million, mainly because the prior-year quarter included an $8.1 million investment-sale gain. Other expense rose 10.5% to $36.8 million, partly reflecting acquired operations. The reported interest spread was 3.01%, down from 3.13% at September 30, 2011; the filing does not provide a comparable quarter-over-quarter net interest margin value.
For the six months, operating cash flow was $129.6 million, investing cash flow was $25.2 million, and financing cash flow was negative $80.4 million. Cash and cash equivalents increased $74.3 million to $890.3 million.
At March 31, 2012, total assets were $13.56 billion and stockholders’ equity was $1.91 billion, or 14.07% of assets. Loans receivable, net, were $7.68 billion, down 3.3% from September 30, 2011; deposits were $8.80 billion, up 1.5%. FHLB advances and other borrowings totaled $2.76 billion, broadly unchanged. Available-for-sale securities increased 13.3% to $3.69 billion. Washington Federal reported capital ratios above the stated “well-capitalized” thresholds, including total risk-based capital of 25.59% and Tier 1 risk-based capital of 24.32%.
Material changes and asset quality
- Non-performing assets were $286.2 million, or 2.11% of assets, versus $370.3 million, or 2.76%, at September 30, 2011. Non-accrual loans declined to $166.2 million from $210.5 million at September 30, 2011, and from $221.7 million a year earlier.
- Net charge-offs were $28.7 million for the quarter, above the $18.0 million provision; the allowance for loan losses ended at $143.8 million. Delinquencies of 30 days or more were 2.95% of loans, down from 3.37% a year earlier.
- Management said real-estate values remained under pressure, expected NPAs to remain elevated until housing markets stabilize, and expected loan-loss provisions to remain elevated until housing values stabilize. Land acquisition/development and speculative construction exposure declined as a share of the loan portfolio.
- Total loans, including covered loans, fell 3.9% from September 30, 2011. Management cited its strategy to reduce exposure to land and construction lending and not aggressively compete for 30-year fixed-rate mortgages at prevailing rates; it may continue shrinking the loan portfolio if low mortgage rates persist.
Outlook, transactions, risks, and unusual items
- Western National Bank’s selected assets and liabilities were acquired from the FDIC on December 16, 2011. The transaction included a $53 million discount on net assets and no loss-sharing provision or deposit premium. Purchase accounting remained provisional, with final adjustments expected by fiscal year-end. The quarter also included expenses associated with the October 2011 Charter Bank acquisition.
- On April 4, 2012, the company announced a definitive agreement to acquire South Valley Bancorp. The deal includes stock consideration and contingent cash payments and was expected to close in the third calendar quarter of 2012, subject to regulatory and shareholder approvals and other conditions.
- Interest-rate exposure remains material: the one-year repricing gap was negative 14.5% of assets, improved from negative 16.5% at September 30, 2011. Management estimated an immediate parallel 200-basis-point rate rise would reduce one-year net interest income by 3.3%; a gradual 200-basis-point rise over 12 months was estimated to reduce it by 0.5%. An immediate shock was estimated to reduce net portfolio value by $485 million.
- The bank remained subject to an Office of Thrift Supervision memorandum of understanding monitored by the OCC. Noncompliance could lead to additional scrutiny, business restrictions, or formal enforcement action. The filing also cites uncertainty over regulatory changes, economic conditions, rates, deposit flows, credit quality, and real-estate values.
- Management expected an effective tax rate of 36%. The filing states that disclosure controls were effective and that ordinary-course legal proceedings were not expected to have a material impact.
Important facts for investors to verify
- Whether declining NPAs and delinquencies persist, and whether the $143.8 million allowance adequately reflects real-estate values, charge-offs, and restructured-loan performance.
- How loan shrinkage, securities reinvestment, deposit pricing, and interest-rate changes affect net interest income and the reported interest-rate sensitivity estimates.
- Final purchase-accounting adjustments for Western National Bank and integration costs from acquired operations.
- Regulatory and shareholder approvals, closing timing, and contingent consideration for the South Valley transaction.
- The status and terms of the OCC-monitored memorandum of understanding and any associated operating constraints.