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| WFSL > SEC Filings for WFSL > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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. A more detailed description of these and other factors that could materially affect our actual results is included in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, Stockholders should not place undue reliance on the Company's forward-looking statements, which are made as of the date of this Quarterly Report. 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 June 30, 2009, the Company had a negative one-year maturity gap of approximately 36% of total assets, which represents an increase from the 34% negative one-year gap as of September 30, 2008. The increase was due to the growth and repricing of deposit accounts into shorter term maturities, which was offset by the refinancing of $300,000,000 of borrowings that were scheduled to mature within one year and now have been refinanced to mature in 2014 at a rate of 3.03%.
The interest rate spread increased to 3.27% at June 30, 2009 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 2008, market rates for short-term deposits have fallen. As a result, deposits are repricing to lower rates, which contributes to an increasing spread. Somewhat offsetting the benefit of lower deposit costs is the decreasing yield on loans as a result of the repricing of variable rate loans and the impact of refinancing of fixed-rate mortgages into historically low long-term interest rates.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
As of June 30, 2009, the weighted average rates on earning assets decreased by 27 basis points since September 30, 2008, while the weighted average rates on customer accounts and borrowings decreased by 69 basis points over the same period. As of June 30, 2009, the Company had grown total assets by $212,477,000, or 1.8%, from $11,830,141,000 at September 30, 2008, by deploying funds obtained through lower cost short-term deposits and borrowings. For the quarter ended June 30, 2009, compared to September 30, 2008, loans decreased $390,280,000, or 4.1%, and investment securities increased $436,959,000, or 27.3%. Cash and cash equivalents of $166,031,000 and stockholders' equity of $1,394,081,000 provides management with flexibility in managing interest rate risk going forward.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at June 30, 2009 was $1,394,081,000, or 11.58% of total assets. This was an increase of $61,407,000 from September 30, 2008 when net worth was $1,332,674,000, or 11.27% of total assets. The increase in the Company's net worth included $31,079,000 from net income and a $39,588,000 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 $13,848,000 of cash dividend payments. During the quarter ended December 31, 2008, the Company reduced its quarterly cash dividend on common stock from $.21 to $.05 to conserve capital.
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.
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)
June 30, 2009
Total capital to risk-weighted
assets 1,123,312 16.49 % 545,127 8.00 % 681,408 10.00 %
Tier I capital to risk-weighted
assets 1,076,697 15.80 % N/A N/A 408,845 6.00 %
Core capital to adjusted tangible
assets 1,076,697 9.21 % N/A N/A 584,577 5.00 %
Core capital to total assets 1,076,697 9.21 % 350,746 3.00 % N/A N/A
Tangible capital to tangible
assets 1,076,697 9.21 % 175,373 1.50 % N/A N/A
September 30, 2008
Total capital to risk-weighted
assets $ 1,128,345 16.59 % $ 544,064 8.00 % $ 680,080 10.00 %
Tier I capital to risk-weighted
assets 1,077,788 15.85 % N/A N/A 408,048 6.00 %
Core capital to adjusted tangible
assets 1,077,788 9.32 % N/A N/A 578,579 5.00 %
Core capital to total assets 1,077,788 9.32 % 347,147 3.00 % N/A N/A
Tangible capital to tangible
assets 1,077,788 9.32 % 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 $451,806,000, or 30.6%, during the nine months ended June 30, 2009, which included the purchase of $753,902,000 of available-for-sale investment securities. During the same period $16,000,000 of available-for-sale securities were sold, resulting in a gain of $959,000. There were no purchases or sales of held-to-maturity securities in the same period. As of June 30, 2009, the Company had net unrealized gains on available-for-sale securities of $42,060,000, 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 U.S. government participation in the mortgage-backed securities market.
Loans receivable: During the nine months ended June 30, 2009, the balance of loans receivable decreased 4.1% to $9,111,340,000 compared to $9,501,620,000 at September 30, 2008. This decrease is consistent with management's strategy to reduce the Company's exposure to land and construction loans and a result of increased loan prepayments stemming from record low interest rates available on 30-year fixed-rate mortgage as noted in earnings release. If the current low rates on 30 year fixed-rate mortgages persists, management will consider continuing to shrink 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 12/31/08 AS OF 3/31/09 AS OF 6/30/09
AMOUNT % AMOUNT % AMOUNT %
Single-family residential $ 7,032,028 70.3 % $ 6,937,789 70.8 % $ 6,763,040 71.2 %
Construction - speculative 385,074 3.8 358,042 3.7 311,995 3.3
Construction - custom 298,381 3.0 260,104 2.7 240,885 2.5
Land - acquisition & development 706,151 7.1 678,278 6.9 613,499 6.5
Land - consumer lot loans 206,276 2.1 201,407 2.1 198,127 2.1
Multi-family 695,164 6.9 686,906 7.0 695,795 7.3
Commercial real estate 303,321 3.0 307,502 3.1 306,994 3.2
Commercial & industrial 137,057 1.4 128,212 1.3 123,978 1.3
HELOC 94,581 0.9 107,657 1.1 118,001 1.2
Consumer 151,858 1.5 139,366 1.4 128,764 1.4
10,009,891 100 % 9,805,263 100 % 9,501,078 100 %
Less:
ALL 104,835 143,124 161,695
Loans in Process 232,839 195,407 193,119
Deferred Net Origination Fees 36,783 35,133 34,924
374,457 373,664 389,738
$ 9,635,434 $ 9,431,599 $ 9,111,340
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Non-performing assets: Non-performing assets increased significantly during the quarter ended June 30, 2009 to $605,882,000 from $164,191,000 at September 30, 2008, a 269% increase. A disproportionate share of our non-performing assets come from the land acquisition and development 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 5.03% at June 30, 2009 compared to 1.39% at September 30, 2008. This level of non-performing assets is unprecedented in the Company's 27 year history as a public company. While our non-performing assets have increased significantly over the last nine 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 real estate owned (REO) held by the Company at the dates indicated.
June 30, September 30,
2009 2008
(In thousands)
Restructured loans (1) $ 68,385 $ 6,210
Nonaccrual loans:
Single-family residential 118,851 38,017
Construction - speculative 71,701 33,003
Construction - custom 1,336 1,315
Land - acquisition & development 265,901 51,562
Land - consumer lot loans - -
Multi-family 3,504 748
Commercial real estate 5,271 1,929
Commercial & industrial 24,731 -
HELOC 75 -
Consumer 924 535
Total nonaccrual loans (2) 492,294 127,109
Total REO (3) 86,651 37,082
Total REHI (3) 26,937 -
Total non-performing assets $ 605,882 $ 164,191
Total non-performing assets and restructured loans $ 674,267 $ 170,401
Total non-performing assets and restructured loans as
a percentage of total assets 5.60 % 1.44 %
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(1) Performing in accordance with restructured terms.
(2) The Company recognized interest income on nonaccrual loans of approximately $4,011,000 in the nine months ended June 30, 2009. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $19,166,000 for the nine months ended June 30, 2009.
In addition to the nonaccrual loans reflected in the above table, at June 30, 2009, the Company had $287,661,000 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 7.99% at June 30, 2009.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
(3) Total REO and REHI (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.
June 30, 2009 September 30, 2008
Loans to Loans to
Amount Total Loans 1 Amount Total Loans 1
(In thousands)
Single-family residential $ 18,835 71.2 % $ 17,055 69.5 %
Construction - speculative 17,145 3.3 10,069 4.4
Construction - custom 731 2.5 1,328 3.2
Land - acquisition & development 98,723 6.5 28,679 7.3
Land - consumer lot loans 2,969 2.1 2,279 2.1
Multi-family 4,148 7.3 4,514 6.9
Commercial real estate 3,638 3.2 4,536 2.8
Commercial & industrial 2,724 1.3 3,807 1.5
HELOC 2,271 1.2 1,338 0.8
Consumer 10,511 1.4 11,453 1.5
$ 161,695 100.0 % $ 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.
Customer accounts: Customer accounts increased $501,441,000, or 7.0%, to $7,670,980,000 at June 30, 2009 compared with $7,169,539,000 at September 30, 2008. The increase in customer deposits reflects the opportunity created in the marketplace by the failure and/or merger of several large institutions throughout our footprint. The following table shows the composition of our customer accounts as of the dates shown:
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Deposits by Type
(In thousands)
June 30, 2009 September 30, 2008
Wtd. Avg. Wtd. Avg.
Amount % Rate Amount % Rate
Checking (noninterest) $ 116,836 1.5 % 0.00 % $ 119,460 1.7 % 0.00 %
NOW (interest) 401,599 5.2 0.50 % 397,512 5.5 1.48 %
Savings (passbook/stmt) 196,500 2.6 0.50 % 188,546 2.6 1.22 %
Money Market 1,205,051 15.7 0.92 % 1,231,542 17.2 2.48 %
CD's 5,750,994 75.0 2.60 % 5,232,479 73.0 3.72 %
Total $ 7,670,980 100.0 % 2.14 % $ 7,169,539 100.0 % 3.25 %
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FHLB advances and other borrowings: Total borrowings decreased $288,209,000, or 9.1%, to $2,887,699,000 at June 30, 2009, compared with $3,175,908,000 at September 30, 2008. Total short-term borrowings (due within 30 days) at June 30, 2009, were $0 compared with $377,000,000 at September 30, 2008. See Interest Rate Risk on page 17.
RESULTS OF OPERATIONS
Throughout this document we will refer to net income, which is defined as net income available to common shareholders after the payment of preferred dividends.
Net Income: The quarter ended June 30, 2009, produced net income of $2,500,000 compared to $33,169,000 for the same quarter one year ago. For the nine months ended June 30, 2009, net income totaled $31,079,000, which was a decrease of $70,590,000 from the same period last year. The decrease for the quarter and nine month periods resulted primarily from the significant increase in the provision for loan losses and other credit costs and FDIC insurance premiums, offset somewhat by growth in net interest income.
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 Comparison of Nine Months Ended
6/30/09 and 6/30/08 6/30/09 and 6/30/08
Volume Rate Total Volume Rate Total
(In thousands) (In thousands)
Interest income:
Loan portfolio $ (235 ) $ (13,653 ) $ (13,888 ) $ 31,994 $ (38,220 ) $ (6,226 )
Mortgaged-backed securities 5,876 (364 ) 5,512 15,620 (235 ) 15,385
Investments (1) 816 (3,120 ) (2,304 ) (1,297 ) (7,279 ) (8,576 )
All interest-earning assets 6,457 (17,137 ) (10,680 ) 46,317 (45,734 ) 583
Interest expense:
Customer accounts 4,111 (26,244 ) (22,133 ) 21,853 (70,998 ) (49,145 )
FHLB advances and other borrowings 701 (2,837 ) (2,136 ) 6,773 (15,262 ) (8,489 )
All interest-bearing liabilities 4,812 (29,081 ) (24,269 ) 28,626 (86,260 ) (57,634 )
Change in net interest income $ 1,645 $ 11,944 $ 13,589 $ 17,691 $ 40,526 $ 58,217
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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 $52,200,000 provision for loan losses during the quarter ended June 30, 2009, while a $13,216,000 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $605,882,000, or 5.03%, of total assets at June 30, 2009, compared to $85,107,000, or .72%, of total assets one year ago. The Company had net charge-offs of $33,629,000 for the quarter ended June 30, 2009 compared with $6,162,000 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 acquisition and development and speculative construction portfolios; and finally, the material increase in net charge-offs for the quarter. Management believes that higher non-performing assets and charge-offs may continue going forward until the housing market begins to recover. Similarly, management expects the provision to remain at elevated levels until non-performing assets and charge-offs improve.
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 Nine Months
Ended June 30, Ended June 30,
2009 2008 2009 2008
(In thousands)
Beginning balance $ 143,124 $ 47,005 $ 85,058 $ 28,520
. . .
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