Washington Federal, Inc. — Form 10-Q Summary
Business context and reporting period. Washington Federal, Inc. is a savings and loan holding company. This filing covers the quarter and nine months ended June 30, 2011, the company’s fiscal third quarter. The operating subsidiary changed its name from Washington Federal Savings to Washington Federal on July 7, 2011. Figures are unaudited.
Key financial metrics
| Metric | Quarter ended June 30, 2011 | Nine months ended June 30, 2011 | Comparison |
|---|---|---|---|
| Net interest income | $106.1 million | $312.4 million | Up 6.9% and 6.2%, respectively, year over year |
| Provision for loan losses | $21.0 million | $77.8 million | Quarter broadly level; nine-month provision down from $153.9 million |
| Net income | $30.1 million; $0.27 diluted EPS | $80.5 million; $0.72 diluted EPS | Up from $12.7 million; down from $102.7 million, respectively |
| Net interest spread | 3.15% at June 30 | Not stated as a period average | Up from 3.09% at September 30, 2010 |
| Operating cash flow | Not separately stated | $221.7 million | Up from $152.5 million |
| Total assets | $13.32 billion | — | Down 1.2% from September 30, 2010 |
| Loans receivable, net | $8.02 billion | — | Down 4.7% from September 30, 2010; covered loans were $417.9 million |
| Cash and cash equivalents | $658.2 million | — | Down from $888.6 million at September 30, 2010 |
| Customer accounts and borrowings | $8.71 billion and $2.66 billion | — | Customer accounts down 1.6%; total borrowings nearly unchanged from September 30 |
| Stockholders’ equity | $1.86 billion; 13.96% of assets | — | Up from $1.84 billion; 13.65% of assets |
Performance, changes, and management commentary
- Quarterly net income increased substantially year over year, supported by higher net interest income and lower foreclosure-related losses. Nine-month net income declined despite lower credit costs: the 2010 comparison included a $54.8 million after-tax acquisition gain and a $38.9 million tax benefit from settling a contingent tax liability.
- For the quarter, interest income fell $5.8 million year over year, but interest expense fell $12.7 million, lifting net interest income. The reported interest spread benefited from lower deposit costs.
- Available-for-sale securities rose 26.0% to $3.13 billion from September 30, 2010, as the company invested deposits and sought to offset loan runoff. The nine-month period included $8.1 million of gains on securities sales, versus $20.4 million in the prior-year period.
- Management said it was reducing exposure to land and construction lending and avoiding 30-year fixed-rate mortgage originations below 4.50% because of duration risk. If low mortgage rates persist, it may continue to shrink the loan portfolio.
- Nonperforming assets were $394.7 million, or 2.96% of assets, down from $434.5 million and 3.22% at September 30, 2010. However, they remain above the company’s historical average, and management expects elevated levels until housing markets stabilize and values recover. Nonaccrual loans were $232.8 million; loans 30 or more days delinquent were 3.66%, while delinquencies in the large single-family portfolio increased year over year to 3.43%.
- The allowance for loan losses was $161.1 million. Management considers it sufficient but expects provisions to remain elevated until nonperforming assets and charge-offs improve measurably. Net charge-offs for the quarter were $23.5 million, down from $41.9 million a year earlier.
- Liquidity included $658.2 million in cash and a stated FHLB Seattle credit line equal to 50% of total assets. The nine-month cash decrease of $230.5 million reflected investing and financing outflows, including securities purchases, deposit runoff, dividends, and $36.6 million of treasury-stock purchases.
- Capital ratios exceeded the filing’s “well capitalized” thresholds: total risk-based capital was 24.26%, Tier 1 risk-based capital 23.03%, and core capital to adjusted tangible assets 11.82%. The company paid a quarterly dividend of $0.06 per share.
Outlook, risks, and contingencies
- Interest-rate exposure: The reported negative one-year repricing gap was about $2.7 billion, or 20% of assets, versus 16% at September 30, 2010. Under the company’s model, an immediate parallel 200-basis-point rate increase would reduce one-year net interest income by 7.4%; a gradual 200-basis-point increase over 12 months would reduce it by 2.4%. An immediate 200-basis-point increase was estimated to reduce net portfolio value by $829 million. These are model estimates dependent on assumptions, including no balance-sheet growth.
- Credit and property risk: Real estate values remained under pressure in primary markets. Performing restructured loans plus nonperforming assets equaled 5.19% of assets. An additional $235.5 million of loans, classified as substandard but less than 90 days delinquent, could raise that ratio to 6.96% if treated as nonperforming.
- Regulatory matters: The bank remained subject to a July 2010 Office of Thrift Supervision memorandum of understanding (MOU). The filing says it does not require additional capital or change dividend policy, but noncompliance could lead to restrictions or formal enforcement. Oversight was expected to transition to the OCC as the OTS was abolished.
- Regulatory and operating risks: The company cited uncertainty over implementation of the Dodd-Frank Act, potential compliance and deposit-insurance costs, and possible limits on business activities. Management did not anticipate a material effect from specified provisions at that time but could not predict the Act’s ultimate impact.
- The filing provides no specific earnings or balance-sheet guidance. Management stated an expected effective tax rate of 36.00% going forward. Legal proceedings in the ordinary course were not considered material.
Important facts for investors to verify
- Whether credit quality continues to improve, especially single-family delinquencies, real-estate-owned assets, restructured loans, and the sizable substandard loan pool.
- Whether the $161.1 million allowance remains adequate as property values, charge-offs, and nonperforming assets evolve.
- Actual sensitivity to rising rates compared with the company’s model estimates, including the effects of deposit pricing, prepayments, and balance-sheet actions.
- Whether deposit trends, cash balances, securities purchases, and access to FHLB funding continue to support liquidity.
- Compliance with the regulatory MOU and the effects of the regulatory transition and financial-reform implementation.
- The drivers of the nine-month earnings decline versus 2010, distinguishing recurring performance from the prior-year acquisition gain and tax benefit.