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| WAFD > SEC Filings for WAFD > Form 10-Q on 5-Feb-2013 | All Recent SEC Filings |
5-Feb-2013
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, including without limitation the
potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection
Act and regulations to be promulgated thereunder; 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,
including without limitation the Bank's ability to comply in a timely and
satisfactory manner with the requirements of the memorandum of understanding
entered into with the Office of The Comptroller of the Currency. 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.
The results discussed below were impacted by the acquisition on close of
business October 31, 2012, of South Valley Bank and Trust, headquartered in
Klamath Falls, Oregon ("South Valley"). The acquisition provided $383 million of
net loans, $107 million of net covered loans, $735 million of deposit accounts,
including $533 million in transaction deposit accounts and 24 branch locations
in Central and Southern Oregon. Total consideration at closing of $44 million,
including $33 million of Washington Federal, Inc. stock and $10 million of cash
resulting from the collection of certain earn-out assets.
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period from November 1, 2012 to December 31, 2012.
INTEREST RATE RISK
Historically, the Company accepted a higher level of interest rate volatility as
a result of its significant holdings of fixed-rate single-family home loans that
are longer in term than the characteristics of its primary liabilities of
customer accounts and borrowings. Based on Management's assessment of the
current interest rate environment, the Company has taken steps, including
growing business loans, transaction deposit accounts and extending the maturity
on borrowings, to reduce its interest rate risk profile compared to its
historical norms.
At December 31, 2012, the Company had approximately $1.6 billion more
liabilities subject to repricing in the next year than assets, which amounted to
a negative one-year maturity gap of 12.3% of total assets. This was a Increase
from the 10.1% negative gap as of September 30, 2012.
The negative one-year maturity gap described above signifies that assets do not
respond as quickly to changes in interest rates as liabilities and net interest
income typically declines when interest rates rise and expands when interest
rates fall as compared to a portfolio of matched maturities of assets and
liabilities.
The potential impact of rising interest rates on net income for one year has
also been estimated using a model that is based on account level of detail for
loans and deposits. In the event of an immediate and parallel increase of 200
basis points in interest rates, we would expect net interest income to decrease
by 1.7%. In the event of a gradual increase from current rates by 200 basis
points over a twelve-month period, we would expect a decrease in net interest
income of .76%.
This analysis assumes zero balance sheet growth and constant percentage
composition of assets and liabilities. It also assumes that loan and deposit
prices respond in full to the increase in market rates. Actual results will
differ from the assumptions used in this model, as Management monitors and
adjusts loan and deposit pricing and the size and composition of the balance
sheet to respond to changing interest rates.
The net portfolio value ("NPV") is the difference between the present value of
expected cash flows from interest-earning assets and the present value of
expected cash flows from interest-paying liabilities and off-balance-sheet
contracts. The sensitivity of the NPV to changes in interest rates is another
measure of interest rate risk. This approach provides a longer term view of
interest rate risk as it incorporates all future expected cash flows. In the
event of an immediate and parallel increase of 200 basis points in interest
rates, the NPV is estimated to decline by $315 million and the NPV to total
assets ratio to decline to 16.14%. As of September 30, 2012 the estimated
decrease in NPV in the event of a 200 basis point increase in rates was
estimated to decline by $296 million and the NPV to total assets ratio to
decline to 15%.
The interest rate spread increased to 2.83% at December 31, 2012 from 2.80% at
September 30, 2012. The spread increased due to a decline in the average rate on
customer deposit accounts and borrowings. As of December 31, 2012, the weighted
average rate on customer deposit accounts and borrowings decreased by 12 basis
points compared to September 30, 2012, while the weighted average rates on
earning assets decreased by 9 basis points over the same period.
As of December 31, 2012, the Company had increased total assets by $633,898,000
from $12,472,944,000 at September 30, 2012. For the quarter ended December 31,
2012, compared to September 30, 2012, loans (both non-covered and covered)
increased $255,130,000, or 3.3%. To help offset the reduced income from loans,
investment securities increased $437,831,000, or 14.7%. Cash and cash
equivalents of $637,298,000 and stockholders' equity of $1,914,678,000 provides
management with flexibility in managing interest rate risk going forward.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at December 31, 2012 was $1,914,678,000, or 14.61% of
total assets. This was an increase of $14,926,000 from September 30, 2012 when
net worth was $1,899,752,000, or 15.23% of total assets. The Company's net worth
was impacted in the three months ended December 31, 2012 by net income of
$35,282,000, the payment of $17,250,000 in cash dividends, treasury stock
purchases that totaled $44,747,000, as well as a decrease in other comprehensive
income of $1,667,000.
Management believes this strong net worth position will help the Company manage
its interest rate risk and provide the capital support needed for controlled
growth in a regulated environment. To be categorized as well capitalized,
Washington Federal must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the following table.
Categorized as
Well Capitalized Under
Capital Prompt Corrective
Actual Adequacy Guidelines Action Provisions
Capital Ratio Capital Ratio Capital Ratio
(In thousands)
December 31, 2012
Total capital to risk-weighted
assets $ 1,684,606 26.25 % $ 513,443 8.00 % $ 641,804 10.00 %
Tier I capital to risk-weighted
assets 1,603,789 24.99 % N/A N/A 385,082 6.00 %
Core capital to adjusted
tangible assets 1,603,789 12.49 % N/A N/A 642,126 5.00 %
Core capital to total assets 1,603,789 12.49 % 385,276 3.00 % N/A N/A
Tangible capital to tangible
assets 1,603,789 12.49 % 192,638 1.50 % N/A N/A
September 30, 2012
Total capital to risk-weighted
assets 1,653,760 27.29 % 484,822 8.00 % 606,028 10.00 %
Tier I capital to risk-weighted
assets 1,577,280 26.03 % N/A N/A 363,617 6.00 %
Core capital to adjusted
tangible assets 1,577,280 12.92 % N/A N/A 610,556 5.00 %
Core capital to total assets 1,577,280 12.92 % 366,334 3.00 % N/A N/A
Tangible capital to tangible
assets 1,577,280 12.92 % 183,167 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 $222,072,000, or 12.5%, during the three months ended
December 31, 2012, which included the purchase of $261,966,000 of
available-for-sale securities. There were $43,899,000 of available-for-sale
securities sold during the three months ended December 31, 2012, resulting in no
gain or loss. During the same period, there were 264,781,000 of held-to-maturity
securities purchased and no sales of held-to-maturity securities. As of
December 31, 2012, the Company had net unrealized gains on available-for-sale
securities of $11,639,000, net of tax, which were recorded as part of
stockholders' equity. The Company increased its available-for-sale and
held-to-maturity investment portfolios to help offset some of the lost interest
income on maturing and prepaying loans and mortgage-backed securities.
Loans receivable: During the three months ended December 31, 2012, the balance
of loans receivable increased 2.2% to $7,614,910,000 compared to $7,451,998,000
at September 30, 2012. This increase is a result of the acquisition of $344
million in loans from South Valley offset by declining balances consistent with
management's strategy to reduce the Company's exposure to land and construction
loans and not aggressively compete for 30 year fixed-rate loans at rates below
4%, due to the duration risk associated with such low mortgage rates.
Additionally, during the quarter, $22,762,000 of loans were transferred to REO.
If the current low rates on 30 year fixed-rate mortgages persist, management
will consider continuing to shrink the Company's loan portfolio. The following
table shows the loan portfolio by category for the last three quarters.
Loan Portfolio by Category * December 31, 2012 September 30, 2012 June 30, 2012 Non-Acquired loans (In thousands) Single-family residential $ 5,573,590 69.4 % $ 5,778,922 73.5 % $ 5,904,805 74.0 % Construction - speculative 123,871 1.5 129,637 1.6 130,741 1.6 Construction - custom 228,140 2.9 211,690 2.7 210,488 2.6 Land - acquisition & development 109,458 1.4 124,677 1.6 135,392 1.7 Land - consumer lot loans 137,106 1.7 141,844 1.8 145,129 1.8 Multi-family 721,802 9.0 710,140 9.0 692,763 8.7 Commercial real estate 347,564 4.3 319,210 4.1 310,588 3.9 Commercial & industrial 171,644 2.1 162,823 2.1 148,577 1.9 HELOC 111,986 1.4 112,902 1.4 113,559 1.4 Consumer 59,131 0.7 63,374 0.8 68,202 0.9 Total non-acquired loans 7,584,292 94.4 7,755,219 98.6 7,860,244 98.5 Acquired loans (In thousands) Single-family residential 15,495 - - - - - Construction - speculative 90 - - - - - Construction - custom 994 - - - - - Land - acquisition & development 3,520 - - - - - Land - consumer lot loans 3,891 0.1 - - - - Multi-family 9,333 0.2 - - - - Commercial real estate 178,727 2.2 - - - - Commercial & industrial 106,931 1.3 - - - - HELOC 13,810 0.2 - - - - Consumer 10,759 0.1 - - - - Total acquired loans 343,550 4.1 - - - - Credit-impaired acquired loans Single-family residential 340 - 342 - 343 - Construction - speculative 1,755 - 1,889 - 1,889 - Land - acquisition & development 2,677 - 3,702 0.1 4,211 0.1 Multi-family - - 601 - 1,074 - |
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Commercial real estate 83,657 1.1 87,154 1.1 91,006 1.0
Commercial &
industrial 1,883 - 3,292 - 5,100 0.1
HELOC 12,849 0.2 14,040 0.2 15,037 0.2
Consumer 90 - 97 - 115 -
Total credit-impaired
acquired loans 103,251 1.4 111,117 1.4 118,775 1.5
Total loans
Single-family
residential 5,589,425 69.4 5,779,264 73.5 5,905,148 74.0
Construction -
speculative 125,716 1.5 131,526 1.6 132,630 1.6
Construction -
custom 229,134 2.9 211,690 2.7 210,488 2.6
Land - acquisition &
development 115,655 1.4 128,379 1.7 139,603 1.8
Land - consumer lot
loans 140,997 1.8 141,844 1.8 145,129 1.8
Multi-family 731,135 9.2 710,741 9.0 693,837 8.7
Commercial real
estate 609,948 7.6 406,364 5.2 401,594 4.9
Commercial &
industrial 280,458 3.4 166,115 2.1 153,677 2
HELOC 138,645 1.8 126,942 1.6 128,596 1.6
Consumer 69,980 0.8 63,471 0.8 68,317 0.9
Total loans 8,031,093 99.8 % 7,866,336 100 % 7,979,019 100 %
Less:
Allowance for probable
losses 126,827 133,147 137,951
Loans in process 204,566 213,286 155,051
Discount on acquired
loans 50,817 33,484 35,200
Deferred net
origination fees 33,973 34,421 34,612
416,183 414,338 362,814
$ 7,614,910 $ 7,451,998 $ 7,616,205
____________________
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
December 31, September 30,
2012 2012
(In thousands)
Restructured loans:
Single-family residential $ 356,546 84.0 % $ 361,640 83.4 %
Construction - speculative 14,244 3.4 15,907 3.7
Construction - custom 1,196 0.3 1,196 0.3
Land - acquisition &
development 13,009 3.1 14,985 3.5
Land - consumer lot loans 13,622 3.2 13,782 3.2
Multi - family 17,517 4.1 17,507 4.0
Commercial real estate 7,337 1.7 7,377 1.7
Commercial & industrial - - - -
HELOC 891 0.2 884 0.2
Consumer - - - -
Total restructured loans (1) 424,362 100 % 433,278 100 %
Non-accrual loans:
Single-family residential 108,570 66.6 % 131,193 75.7 %
Construction - speculative 9,471 5.8 10,634 6.1
Construction - custom 39 - 539 0.3
Land - acquisition &
development 14,318 8.8 13,477 7.8
Land - consumer lot loans 4,024 2.5 5,149 3.0
Multi-family 7,907 4.8 4,185 2.4
Commercial real estate 16,958 10.4 7,653 4.4
Commercial & industrial 987 0.6 16 -
HELOC 489 0.3 198 0.1
Consumer 353 0.2 383 0.2
Total non-accrual loans (2) 163,116 100 % 173,427 100 %
Total REO (3) 83,000 80,800
Total REHI (3) 18,103 18,678
Total non-performing assets $ 264,219 $ 272,905
Total non-performing assets
and performing restructured
loans as a percentage of
total assets 5.05 % 5.42 %
(1) Restructured loans were
as follows:
Performing $ 397,045 93.6 % $ 403,238 93.1 %
Non-accrual * 27,317 6.4 30,040 6.9
$ 424,362 100 % $ 433,278 100 %
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* Included in "Total non-accrual loans" above
(2) The Company recognized interest income on nonaccrual loans of approximately $790,000 in the three months ended December 31, 2012. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $2,250,000 for the three months ended December 31, 2012.
In addition to the nonaccrual loans reflected in the above table, at
December 31, 2012, the Company had $134,816,000 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
NPAs and performing restructured loans as a percent of total assets would have
increased to 6.07% at December 31, 2012.
(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 or acquired from purchased institutions in settlement of
loans. Excludes covered REO.
Restructured single-family residential loans are reserved for under the Company's general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.
Most restructured loans are accruing and performing loans where the borrower has
proactively approached the Company about modifications due to temporary
financial difficulties. Each request is individually evaluated for merit and
likelihood of success. Single-family residential loans comprised 84.0% of
restructured loans as of December 31, 2012. The concession for these loans is
typically a payment reduction through a rate reduction of from 100 to 200 bps
for a specific term, usually six to twelve months. Interest-only payments may
also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms
are required prior to returning the loan to accrual status. In some instances
after the required six consecutive payments are made, a management assessment
will conclude that collection of the entire principal balance is still in doubt.
In those instances, the loan will remain on non-accrual. Homogeneous loans may
or may not be on accrual status at the time of restructuring, but all are placed
on accrual status upon the restructuring of the loan. Homogeneous loans are
restructured only if the borrower can demonstrate the ability to meet the
restructured payment terms; otherwise, collection is pursued and the loan
remains on non-accrual status until liquidated. If the homogeneous restructured
loan does not perform it will be placed in non-accrual status when it is 90 days
delinquent.
A loan that defaults and is subsequently modified would impact the Company's
delinquency trend, which is part of the qualitative risk factors component of
the general reserve calculation. Any modified loan that re-defaults and is
charged-off would impact the historical loss factors component of our general
reserve calculation.
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, 2012 September 30, 2012
Loans to Coverage Loans to Coverage
Amount Total Loans (1) Ratio (2) Amount Total Loans (1) Ratio (2)
(In thousands) (In thousands)
Single-family
residential $ 77,508 73.5 % 1.4 % $ 81,815 74.5 % 1.4 %
Construction -
speculative 8,660 1.6 7.0 12,060 1.7 9.3
Construction -
custom 275 3.0 0.1 347 2.7 0.2
Land -
acquisition &
development 15,056 1.4 13.8 15,598 1.6 12.5
Land - consumer
lot loans 4,963 1.8 3.6 4,937 1.8 3.5
Multi-family 5,107 9.5 0.7 5,280 9.2 0.7
Commercial real
estate 2,651 4.6 0.8 1,956 4.1 0.6
. . .
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