Business Context and Reporting Period
Company: Washington Federal, Inc. (WAFD)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended December 31, 2009
Business Overview: A savings and loan holding company with primary operations through its subsidiary, Washington Federal Savings & Loan Association. The company operates in eight western states.
Key Financial Metrics
| Metric | Q4 2009 | Q4 2008 |
|---|---|---|
| Net Income (Available to Common) | $7.9 million | $20.2 million |
| Net Interest Income | $97.8 million | $90.0 million |
| Provision for Loan Losses | $69.8 million | $35.0 million |
| Net Charge-offs | $46.0 million | $15.2 million |
| Total Assets | $12.66 billion | $12.58 billion (Sep 30, 2009) |
| Loans Receivable, Net | $8.86 billion | $8.98 billion (Sep 30, 2009) |
| Cash and Cash Equivalents | $936.8 million | $498.4 million (Sep 30, 2009) |
| Stockholders' Equity | $1.73 billion | $1.75 billion (Sep 30, 2009) |
| Non-Performing Assets (NPA) | $553.3 million (4.37% of assets) | $305.1 million (2.44% of assets, Q4 2008) |
| Earnings Per Share (Diluted) | $0.07 | $0.23 |
Material Changes vs. Prior Period
- Profitability Decline: Net income dropped 61% year-over-year, primarily driven by a $34.8 million increase in the provision for loan losses and higher net charge-offs.
- Asset Quality Deterioration: Non-performing assets rose significantly to 4.37% of total assets, an unprecedented level in the company's 27-year public history. This is largely due to the land acquisition & development and speculative construction portfolios.
- Liquidity Increase: Cash and cash equivalents nearly doubled from the prior quarter ($498M to $937M) as the company reduced its loan portfolio by 1.4% and sold $316M of available-for-sale securities.
- Other Income: Total other income increased to $24.2 million from $4.2 million, largely due to a $20.4 million gain on the sale of investments.
- Expense Growth: Total other expenses increased 9.7% year-over-year, primarily due to higher FDIC insurance premiums.
Outlook, Risks, and Unusual Items
- Subsequent Event (Acquisition): Effective January 8, 2010, the company acquired assets and liabilities of Horizon Bank from the FDIC. The deal included approximately $971 million in loans and $32 million in foreclosed real estate, with $874 million in deposits assumed. The FDIC provided a $41 million cash payment and loss share agreements covering 80% of losses up to $536 million.
- Management Commentary: Management expects the provision for loan losses to remain at elevated levels until non-performing assets and charge-offs improve. The company is not aggressively competing for 30-year fixed-rate mortgages at current low rates and may continue to shrink its loan portfolio if rates remain low.
- Interest Rate Risk: The company maintains a negative one-year maturity gap of approximately 23% of total assets. The interest rate spread decreased to 3.08% due to declining loan yields from refinancing.
- Risks: Continued deterioration in the housing market, elevated non-performing assets in land and construction portfolios, and potential future increases in FDIC insurance costs.
Investor Verification Checklist
- Loss Share Agreement Terms: Verify the specific terms and duration of the FDIC loss share agreements regarding the Horizon Bank acquisition.
- Asset Quality Trends: Monitor the trajectory of non-performing assets, specifically in the land acquisition & development and speculative construction categories.
- Provision Adequacy: Assess whether the current allowance for loan losses ($190.5 million) is sufficient given the elevated charge-off rates and economic environment.
- Capital Ratios: Confirm that the company remains "well capitalized" under Prompt Corrective Action provisions following the Horizon acquisition.
- Loan Portfolio Strategy: Evaluate the impact of the strategy to reduce exposure to land/construction loans and avoid aggressive 30-year fixed-rate origination on future revenue growth.