Business context and reporting period
Washington Federal, Inc. is a savings and loan holding company whose primary operating subsidiary is Washington Federal. This unaudited Form 10-Q covers the fiscal quarter and six months ended March 31, 2013; balance-sheet comparisons are primarily with September 30, 2012.
Results include South Valley Bank and Trust, acquired effective October 31, 2012, with 24 Oregon branches. The acquisition added $735 million of deposits, including $533 million of transaction deposits. Purchase-accounting valuations remained provisional at March 31, 2013.
Financial and operating highlights
Amounts below are in millions, except per-share data and ratios.
| Metric | Quarter ended Mar. 31, 2013 | Comparable period |
|---|---|---|
| Interest income | $126.5 | $154.6 in 2012 |
| Net interest income | $93.0 | $104.6 in 2012 |
| Provision for loan losses | $0 | $18.0 in 2012 |
| Net income | $36.0 | $34.1 in 2012 |
| Diluted earnings per share | $0.34 | $0.32 in 2012 |
| Cash dividend per share | $0.09 | $0.08 in 2012 |
- For the six months, net income was $71.3 million versus $67.5 million; net interest income was $188.5 million versus $208.3 million.
- Net interest spread was 2.72%, down from 2.80% at September 30, 2012. The filing attributes pressure primarily to lower yields on loans and securities.
- Quarterly other income was $6.0 million, including a one-time $1.0 million transaction fee. Other expense rose 11.8% year over year to $41.2 million, partly reflecting South Valley-related staffing and operating costs. A favorable tax-dispute settlement lowered the quarterly effective tax rate to 33.25%; management expected 36.00% going forward.
- Total assets were $13.12 billion at March 31, 2013, versus $12.47 billion at September 30, 2012. Net loans were $7.44 billion, little changed; investment securities increased by $519.5 million to approximately $3.49 billion.
- Customer accounts were $9.15 billion, up $575.6 million from September 30, with transaction accounts increasing. FHLB advances were $1.93 billion, up $50 million. Cash and cash equivalents were $782.1 million.
- Six-month operating cash flow was $112.9 million; investing activities provided $147.8 million and financing activities used $230.0 million. Cash increased $30.6 million to $782.1 million.
- Stockholders’ equity was $1.93 billion, or 14.75% of assets. The bank’s total risk-based capital ratio was 26.69%, above the 10.00% well-capitalized threshold; its Tier 1 risk-based ratio was 25.43% versus a 6.00% threshold.
Material changes and credit quality
- South Valley materially expanded the deposit base and added acquired loans and covered assets. Acquired loans were recorded at estimated fair value; purchase accounting was incomplete and subject to adjustment.
- Non-performing assets were $246.1 million, or 1.88% of assets, at March 31, down from $272.9 million, or 2.19%, at September 30. Management noted this remained above the company’s 28-plus-year historical average of 0.95%.
- Non-accrual loans fell to $149.0 million from $173.4 million at September 30. Quarter net charge-offs were $3.9 million versus $28.7 million a year earlier. The allowance for loan losses was $122.9 million, or 1.57% of gross loans.
- Management cited improved problem-asset and delinquency measures, and reduced exposure to land acquisition and development and speculative construction, as reasons for lower provisions. However, $118.3 million of loans less than 90 days delinquent were classified as substandard; including them as non-performing would raise the ratio of non-performing assets plus performing restructured loans to 5.79% of assets.
- Total restructured loans were $416.8 million; 94.8% were performing. Single-family residential loans represented 86.4% of restructured loans. Some restructured loans subsequently defaulted, including 41 contracts totaling $8.9 million during the quarter.
Outlook, risks and contingencies
- No specific earnings or growth guidance was provided. Management said it would consider continuing to shrink the loan portfolio if low rates on 30-year fixed-rate mortgages persisted, while increasing shorter-term business lending and transaction deposits and extending borrowing maturities.
- Interest-rate risk remains material. The one-year repricing gap was negative $1.077 billion, or 8.21% of assets, improved from a negative 10.1% at September 30. Modeling estimated net interest income would rise 2.01% under an immediate parallel 200-basis-point rate increase, but estimated net portfolio value would fall $186 million and its ratio to assets decline to 16.83%. These are scenario estimates based on stated assumptions, not forecasts.
- Management identified economic conditions, interest rates, deposit flows, loan demand and credit quality, regulatory changes, and competition as risks. It also cited the bank’s ability to comply with an Office of the Comptroller of the Currency memorandum of understanding as a risk factor.
- Management believed the loan-loss allowance was sufficient. Covered loans are subject to FDIC loss-sharing arrangements; acquired and covered loan valuations and related indemnification estimates involve judgment. Ordinary-course legal proceedings were not considered material.
Important facts for investors to verify
- Whether South Valley purchase-accounting valuations are finalized and whether any resulting adjustments affect goodwill, loan values, or earnings.
- Trends in non-performing assets, substandard and delinquent loans, TDR defaults, charge-offs, and allowance adequacy—especially in single-family, commercial real estate, and acquired portfolios.
- Whether lower loan and securities yields continue to pressure net interest income and spread, and how actual results compare with management’s interest-rate sensitivity assumptions.
- Deposit retention and funding costs, FHLB borrowing levels, liquidity availability, and capital ratios as the balance sheet evolves.
- Progress in meeting OCC memorandum-of-understanding requirements and any related regulatory developments.