WAFD INC quarterly report, Q2 FY2014

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Business context and reporting period

Washington Federal, Inc. (WAFD) is a bank holding company operating through Washington Federal, National Association. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2014; the balance-sheet comparison is with September 30, 2013. The company completed acquisitions of 51 Bank of America branches in late 2013, adding about $1.3 billion in deposits. Fiscal Q2 results include the acquired branches’ operations from their respective closing dates.

Financial and operating performance

  • Quarterly earnings: Net income was $38.7 million, or $0.38 per diluted share, versus $36.0 million, or $0.34, in the prior-year quarter. Six-month net income was $78.9 million versus $71.3 million.
  • Interest income and margin: Quarterly net interest income was $100.6 million, up from $93.0 million; six-month net interest income was $198.9 million versus $188.5 million. Quarterly interest income was $132.4 million, while interest expense was $31.7 million. The reported interest-rate spread was 2.67%, down from 2.73% at September 30, 2013; the filing does not provide a clear net interest margin value in the supplied text.
  • Credit costs and asset quality: The quarter included a $4.3 million reversal of loan-loss provision, compared with no provision in the prior-year quarter. The six-month reversal was $8.9 million, versus a $3.6 million provision. Nonperforming assets were $174.8 million, or 1.22% of assets, compared with $213.6 million, or 1.63%, at September 30, 2013. Non-accrual loans were $100.2 million; net recoveries for the quarter were $1.5 million. The allowance was $114.9 million, or 1.40% of gross loans.
  • Expenses and other items: Quarterly other expense increased 26.5% to $52.1 million, including higher compensation, occupancy, technology, and other costs. Foreclosed-real-estate activity produced a $0.6 million quarterly gain, versus a $4.0 million loss a year earlier. The quarterly effective tax rate was 35.75%; management expected that rate to continue.
  • Balance sheet and funding: Total assets were $14.36 billion, up from $13.08 billion at September 30. Net loans were $7.74 billion; available-for-sale securities were $3.11 billion and held-to-maturity securities $1.61 billion. Customer accounts totaled $10.34 billion, including $4.87 billion in transaction accounts and $5.47 billion in time deposits. FHLB advances remained $1.93 billion.
  • Liquidity, capital, and cash flow: Cash and equivalents were $608.2 million, versus $203.6 million at September 30. For the six months, operating cash flow was $76.6 million, investing cash flow was $455.2 million, and financing cash flow was not clearly stated as a single net figure in the supplied text. Stockholders’ equity was $1.98 billion, or 13.79% of assets. The Bank’s total risk-based capital ratio was 25.25% and Tier 1 leverage ratio 11.74%; it exceeded the stated well-capitalized thresholds.

Material changes versus comparable periods

  • Quarterly and six-month net income rose year over year, aided by higher net interest income, lower credit costs, and reduced foreclosed-property losses. Quarterly net interest income benefited from higher mortgage-backed securities income and lower customer-deposit rates.
  • Other expense rose 26.5% year over year for the quarter. Staff increased to 1,846 from 1,439, and branches to 231 from 188, reflecting expansion and acquired operations.
  • Since September 30, deposits increased $1.25 billion, mainly from the branch acquisitions; available-for-sale securities increased $749.6 million and loans receivable increased $209.1 million. Total assets increased $1.28 billion.
  • Nonperforming assets and non-accrual loans declined, while the allowance for loan losses decreased from $116.7 million at September 30 to $114.9 million.

Outlook, risks, contingencies, and unusual items

  • Interest-rate exposure: Management reported a negative one-year repricing gap of 13.9% of assets, versus 12.9% at September 30. A modeled immediate 200-basis-point rate increase was estimated to reduce next-year net interest income by 2.1% and reduce net portfolio value by $539 million, with NPV-to-assets falling to 15.23%. The company also reported $84 million of unrealized losses on its $1.6 billion held-to-maturity 30-year fixed-rate mortgage-backed securities portfolio. These estimates depend on assumptions and are not forecasts.
  • Credit and liquidity risks: Management cited improving credit quality and more favorable economic conditions, but noted NPAs remain above the company’s pre-2007 historical level. Loans in process and unused lines of credit totaled $545 million, excluding covered loans. The company had an FHLB credit line equal to 50% of total assets.
  • Acquisitions and subsequent event: On May 2, 2014, the Bank completed a separate acquisition of 23 Arizona and Nevada branches. Deposits acquired were $539 million, below the $610 million forecast; the deposit premium was adjusted to 0.50%, and $2.7 million was paid. This occurred after quarter-end.
  • Other: The company paid a quarterly dividend of $0.10 per share, up from $0.09 a year earlier, and repurchased 593,300 shares 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. No specific earnings or revenue guidance was provided.

Important facts for investors to verify

  1. Whether credit improvement and the loan-loss reserve reversal are sustainable; monitor nonperforming assets, delinquencies, charge-offs, and reserve coverage.
  2. How the branch acquisitions affect deposit costs, expense growth, loan growth, and the deployment of acquired liquidity, including the May 2014 Arizona and Nevada transaction.
  3. The sensitivity of earnings and economic value to rising rates, including the negative repricing gap and unrealized losses on held-to-maturity securities.
  4. Whether the 35.75% expected effective tax rate and the higher operating-cost base persist.
  5. Reconcile cash-flow and deposit movements with the acquisition-related balance-sheet changes; confirm current liquidity, capital ratios, and remaining share-repurchase authorization.