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| WFSL > SEC Filings for WFSL > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain "forward-looking statements," as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company's intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company's loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
GENERAL
Washington Federal, Inc. ("Company") is a savings and loan holding company. The Company's primary operating subsidiary is Washington Federal Savings.
INTEREST RATE RISK
The Company assumes a high level of interest rate risk as a result of its policy to originate and hold for investment fixed-rate single-family home loans, which are longer-term in nature than the short-term characteristics of its liabilities of customer accounts and borrowed money. At December 31, 2008, the Company had a negative one-year maturity gap of approximately 37% of total assets, an increase from the 34% negative one-year gap as of September 30, 2008. This increase was primarily due to two factors: first, $300,000,000 of borrowings are now within one year of maturity; as of September 30, 2008, these same borrowings had maturities of over one year, and second, there was an increase in short-term borrowings as the Company took advantage of reduced short-term borrowing rates.
The interest rate spread increased to 2.91% at December 31, 2008 from 2.85% at September 30, 2008. The spread increased primarily because of a general decrease in rates on customer deposits. Since the Federal Reserve began decreasing short-term rates in September 2007, market rates for short-term deposits have fallen. As a result, deposits are repricing to lower rates, which contributes to an increasing spread.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
As of December 31, 2008, the weighted average rates on earning assets decreased by 15 basis points since September 30, 2008, while the weighted average rates on customer accounts and borrowings decreased by 21 basis points over the same period. As of December 31, 2008, the Company had grown total assets by $725,458,000, or 6.1%, from $11,796,425,000 at September 30, 2008, by deploying funds obtained through lower cost short-term deposits and borrowings, as well as the $200,000,000 of CPP funds (see Note B above). For the quarter ended December 31, 2008, cash and cash equivalents increased $70,445,000, or 85.3%, loans increased $133,814,000, or 1.41%, and investment securities increased $501,861,000, or 31.4%. Cash and cash equivalents of $153,045,000 and stockholders' equity of $1,581,707,000 provides management with flexibility in managing interest rate risk.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at December 31, 2008 was $1,581,707,000, or 12.63% of total assets. This was an increase of $249,033,000 from September 30, 2008 when net worth was $1,332,674,000, or 11.30% of total assets. The increase in the Company's net worth included $200,000,000 from the issuance of preferred stock and a related warrant to purchase common stock to the U.S. Treasury (see Note B for further discussion). The increase also included $20,169,000 from net income and a $32,804,000 increase in accumulated other comprehensive income as a result of a net increase in market value of the Company's available-for-sale investments. The vast majority of the Company's available for sale investments are fixed rate. As a result of market interest rates decreasing, the value of fixed rate investments generally increased. Net worth was reduced by $4,553,000 of cash dividend payments.
Management believes this strong net worth position will help the Company manage its interest rate risk and enable it to compete more effectively for controlled growth through acquisitions, de novo expansion and increased customer deposits. To be categorized as well capitalized, Washington Federal Savings must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. During the quarter the Company reduced its quarterly cash dividend on common stock from $.21 to $.05 to conserve capital due to deterioration in the housing market and general economic conditions.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Well Capitalized Under
Capital Prompt Corrective
Actual Adequacy Guidelines Action Provisions
Capital Ratio Capital Ratio Capital Ratio
(In thousands)
December 31, 2008
Total capital to risk-weighted assets 1,389,865 19.70 % 564,549 8.00 % 705,686 10.00 %
Tier I capital to risk-weighted assets 1,336,668 18.94 % N/A N/A 423,412 6.00 %
Core capital to adjusted tangible assets 1,336,668 10.92 % N/A N/A 611,980 5.00 %
Core capital to total assets 1,336,668 10.92 % 367,188 3.00 % N/A N/A
Tangible capital to tangible assets 1,336,668 10.92 % 183,594 1.50 % N/A N/A
September 30, 2008
Total capital to risk-weighted assets $ 1,168,709 17.18 % $ 544,064 8.00 % $ 680,080 10.00 %
Tier I capital to risk-weighted assets 1,118,152 16.44 % N/A N/A 408,048 6.00 %
Core capital to adjusted tangible assets 1,118,152 9.66 % N/A N/A 578,579 5.00 %
Core capital to total assets 1,118,152 9.66 % 347,147 3.00 % N/A N/A
Tangible capital to tangible assets 1,118,152 9.66 % 173,574 1.50 % N/A N/A
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CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale securities increased $504,663,000, or 34.2%, during the quarter ended December 31, 2008, which included the purchase of $489,454,000 of available-for-sale investment securities. During the same period there were no sales of available-for-sale securities, nor were there any purchases or sales of held-to-maturity securities. As of December 31, 2008, the Company had net unrealized gains on available-for-sale securities of $35,276,000, net of tax, which were recorded as part of stockholders' equity. The Company increased its investment portfolio to protect against a potential refinancing surge resulting from historically low mortgage rates, which were influenced by US government participation in the mortgage-backed securities market.
Loans receivable: During the quarter ended December 31, 2008, the balance of loans receivable increased 1.4% to $9,635,434,000 compared to $9,501,620,000 at September 30, 2008. This growth is consistent with management's strategy to grow the loan portfolio to mitigate the decreasing weighted average rates on earning assets. If the current low rates on 30 year fixed-rate mortgages persists, management will consider shrinking its loan portfolio. The following table shows the loan portfolio by category for the last three quarters.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Loan Portfolio by Category
(In thousands)
AS OF 6/30/08 AS OF 9/30/08 AS OF 12/31/08
AMOUNT % AMOUNT % AMOUNT %
Single-family residential $ 6,709,942 68.2 % $ 6,868,956 69.5 % $ 7,032,028 70.3 %
Construction - speculative 548,376 5.6 439,616 4.4 385,074 3.8
Construction - custom 307,461 3.1 317,894 3.2 298,381 3.0
Land - acquisition & development 737,931 7.5 724,421 7.3 706,151 7.1
Land - consumer lot loans 214,674 2.2 210,816 2.1 206,276 2.1
Multi-family 692,963 7.0 683,508 6.9 695,164 6.9
Commercial real estate 264,599 2.7 282,138 2.8 303,321 3.0
Commercial & industrial 160,422 1.6 151,844 1.5 137,057 1.4
HELOC 68,638 0.7 80,407 0.8 94,581 0.9
Consumer 142,786 1.4 153,072 1.5 151,858 1.5
9,847,792 100 % 9,912,672 100 % 10,009,891 100 %
Less:
ALL 54,059 85,058 104,835
Loans in Process 330,556 288,579 232,839
Deferred Net Origination Fees 37,303 37,415 36,783
421,918 411,052 374,457
$ 9,425,874 $ 9,501,620 $ 9,635,434
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Non-performing assets: Non-performing assets increased significantly during the quarter ended December 31, 2008 to $305,006,000 from $164,191,000 at September 30, 2008, an 85.8% increase. A disproportionate share of our non-performing assets come from the land A&D and speculative construction portfolios. These assets have seen the largest declines in value in our loan portfolio. The overall increase in our non-performing assets is attributable to the weakening economy and housing market throughout our eight state branch network. Non-performing assets as a percentage of total assets was 2.44% at December 31, 2008 compared to 1.39% at September 30, 2008. During the last ten and twenty years the Company's average ratio of non-performing assets to total assets was .40% and .49%, respectfully. While our non-performing assets have increased significantly over the last 3 months based on current conditions in the real estate marketplace, the Company anticipates non-performing assets will continue to increase in the future until the residential real estate market stabilizes and values recover.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The following table sets forth information regarding restructured and nonaccrual
loans and REO held by the Company at the dates indicated.
December 31, September 30,
2008 2008
(In thousands)
Restructured loans (1) $ 11,667 $ 6,210
Nonaccrual loans:
Single-family residential 54,597 38,017
Construction - speculative 29,035 33,003
Construction - custom 1,405 1,315
Land - acquisition & development 150,674 51,562
Land - consumer lot loans - -
Multi-family 5,964 748
Commercial real estate 397 1,929
Commercial & industrial 215 -
HELOC - -
Consumer 892 535
Total nonaccrual loans (2) 243,179 127,109
Total REO (3) 61,887 37,082
Total non-performing assets $ 305,066 $ 164,191
Total non-performing assets and restructured loans $ 316,733 $ 170,401
Total non-performing assets and restructured loans
as a percentage of total assets 2.53 % 1.44 %
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(1) Performing in accordance with restructured terms.
(2) The Company recognized interest income on nonaccrual loans of approximately $2,983,000 in the quarter ended December 31, 2008. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $9,650,000 for the quarter ended December 31, 2008.
In addition to the nonaccrual loans reflected in the above table, at December 31, 2008, the Company had $173,666,000 of loans that were less than 90 days delinquent but which it had classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total non-performing assets and restructured loans as a percent of total assets would have increased to 3.92% at December 31, 2008.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
(3) Total REO (included in real estate held for sale on the Statement of Financial Condition) includes real estate held for sale acquired in settlement of loans.
Allocation of the allowance for loan losses: The following table shows the allocation of the Company's allowance for loan losses at the dates indicated.
December 31, 2008 September 30, 2008
Loans to Loans to
Amount Total Loans 1 Amount Total Loans 1
(In thousands)
Single-family residential $ 19,345 70.3 % $ 17,055 69.5 %
Construction - speculative 12,104 3.8 10,069 4.4
Construction - custom 852 3.0 1,328 3.2
Land - acquisition & development 47,404 7.1 28,679 7.3
Land - consumer lot loans 2,345 2.1 2,279 2.1
Multi-family 3,394 6.9 4,514 6.9
Commercial real estate 2,585 3.0 4,536 2.8
Commercial & industrial 2,830 1.4 3,807 1.5
HELOC 1,713 0.9 1,338 0.8
Consumer 12,263 1.5 11,453 1.5
$ 104,835 100.0 % $ 85,058 100.0 %
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1 The percentage is based on gross loans before allowance for loan losses, loans in process and deferred loan origination costs.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Customer accounts: Customer accounts increased $115,204,000, or 1.6%, to $7,284,743,000 at December 31, 2008 compared with $7,169,539,000 at September 30, 2008. The following table shows the composition of our customer accounts as of the dates shown:
Deposits by Type
(In thousands)
December 31, 2008 September 30, 2008
Wtd. Avg. Wtd. Avg.
Amount % Rate Amount % Rate
Checking (noninterest) $ 119,868 1.6 % 0.00 %$ 119,460 1.7 % 0.00 %
NOW (interest) 401,710 5.5 0.96 % 397,512 5.5 1.48 %
Savings (passbook/stmt) 190,086 2.6 0.75 % 188,546 2.6 1.22 %
Money Market 1,202,728 16.5 1.82 % 1,231,542 17.2 2.48 %
CD's 5,370,351 73.8 3.55 % 5,232,479 73.0 3.72 %
Total $ 7,284,743 100.0 % 2.99 %$ 7,169,539 100.0 % 3.25 %
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FHLB advances and other borrowings: Total borrowings increased $367,718,000, or 11.6%, to $3,543,626,000 at December 31, 2008 compared with $3,175,908,000 at September 30, 2008. Total short-term borrowings (due within 30 days) at December 31, 2008 were $650,000,000 compared with $377,000,000 at September 30, 2008. See Interest Rate Risk on page 10.
RESULTS OF OPERATIONS
Net Income: The quarter ended December 31, 2008, produced net income of $20,169,000 compared to $33,048,000 for the same quarter one year ago, a 39.0% decrease. The decrease for the quarter resulted primarily from the significant increase in the provision for loan losses.
Net Interest Income: The largest component of the Company's earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Net interest income is impacted primarily by two factors; first, the volume of earning assets and liabilities and second, the rate earned on those assets or the rate paid on those liabilities.
The following table sets forth certain information explaining changes in
interest income and interest expense for the periods indicated compared to the
same periods one year ago. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to
(1) changes in volume (changes in volume multiplied by old rate) and (2) changes
in rate (changes in rate multiplied by old volume). The change in interest
income and interest expense attributable to changes in both volume and rate has
been allocated proportionately to the change due to volume and the change due to
rate.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Rate / Volume Analysis:
Comparison of Quarters Ended
12/31/08 and 12/31/07
Volume Rate Total
(In thousands)
Interest income:
Loan portfolio $ 21,354 $ (9,540 ) $ 11,814
Mortgaged-backed securities 3,466 (116 ) 3,350
Investments(1) (1,177 ) (2,040 ) (3,217 )
All interest-earning assets 23,643 (11,696 ) 11,947
Interest expense:
Customer accounts 10,906 (20,968 ) (10,062 )
FHLB advances and other borrowings 4,865 (7,575 ) (2,710 )
All interest-bearing liabilities 15,771 (28,543 ) (12,772 )
Change in net interest income $ 7,872 $ 16,847 $ 24,719
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(1) Includes interest on cash equivalents and dividends on FHLB stock
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provision for Loan Losses: The Company recorded a $35,000,000 provision for loan losses during the quarter ended December 31, 2008, while a $1,000,000 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $305,066,000 or 2.44% of total assets at December 31, 2008 compared to $39,741,000 or .38% of total assets one year ago. The Company had net charge-offs of $15,223,000 for the quarter ended December 31, 2008 compared with $150,000 of net charge-offs for the same quarter one year ago. This significant increase in the provision for loan losses is in response to three primary factors: first, the overall deterioration in the housing market in general in the Company's eight western state territory, second, the significant increase in the combined balance of non-performing assets in our land A&D and speculative construction portfolios, and finally, the material increase in net charge-offs for the quarter. Management expects the provision to remain at elevated levels until non-performing assets and charge-offs improve.
The Company's believes that higher non-performing assets and charge-offs may continue going forward until the housing market and general economic conditions begin to recover.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The following table analyzes the Company's allowance for loan losses at the
dates indicated.
Quarter
Ended December 31,
2008 2007
(In thousands)
Beginning balance $ 85,058 $ 28,520
Charge-offs:
Single-family residential 3,079 7
Construction - speculative 4,503 75
Construction - custom - -
Land - acquisition & development 3,557 54
Land - consumer lot loans 720 -
Multi-family - -
Commercial real estate - -
Commercial & industrial 2,171 14
HELOC - -
Consumer 1,357 -
15,387 150
Recoveries:
Single-family residential 2 -
Construction - speculative - -
Construction - custom - -
Land - acquisition & development 16 -
Land - consumer lot loans - -
Multi-family - -
Commercial real estate - -
Commercial & industrial 43 -
HELOC - -
Consumer 103 -
164 -
. . .
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