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WAFD > SEC Filings for WAFD > Form 10-Q on 7-Feb-2014All Recent SEC Filings

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Form 10-Q for WASHINGTON FEDERAL INC


7-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 being 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. 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. (the "Company") formed in 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a federally-insured national bank subsidiary, Washington Federal, National Association (the "Bank"). As used throughout this document, the terms "Washington Federal" or the "Company" refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.
On July 17, 2013, the Bank converted from a federal savings association to a national bank charter with the Office of the Comptroller of the Currency and is now a national bank. At the same time, the Company which had previously been a savings and loan holding company, became a bank holding company under the Bank Holding Company Act.
The Company's fiscal year end is September 30th. All references to 2013 and 2012 represent balances as of September 30, 2013 and September 30, 2012, respectively, or activity for the fiscal years then ended.
The results discussed below were impacted by the acquisition on close of business October 31, 2013 of eleven branches from Bank of America, National Association; these branches are located in New Mexico. Effective as of the close of business on December 6, 2013, Washington Federal completed the acquisition of another forty branches from Bank of America, National Association; these branches are located in Washington, Oregon, and Idaho. The combined acquisitions provided recorded book values of $1.3 billion in deposit accounts, $9 million of loans, and $16 million in branch properties. Washington Federal paid a 2.60% premium on the total deposits. The cash received by Washington Federal in the transactions was $1.3 billion.
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the first eleven branches for the period from November 1, 2013 to December 31, 2013 and for the additional forty branches from December 7, 2013 to December 31, 2013.
INTEREST RATE RISK
Historically, the Company accepted a higher level of interest rate risk 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 shorter-term business loans, transaction deposit accounts and extending the maturity on borrowings, to reduce its interest rate risk profile compared to its historical norms. The recent branch acquisitions have accelerated these efforts. The acquired $1.3 billion in deposits are 83% transaction accounts. The Company has also been purchasing more variable rate investments. The composition of the investment portfolio is now 43% variable and 57% fixed rate. In addition, $1.6 billion of its purchased 30-year fixed rate mortgage-backed securities have been designated as held-to-maturity. With rising interest rates, these securities may be subject to unrealized losses. As of December 31, 2013, the unrealized losses on these securities were $110 million.

The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value ("NPV") the Company.


Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Maturity Gap Analysis. At December 31, 2013, the Company had approximately $2.873 billion more in liabilities subject to repricing in the next year than assets, which amounted to a negative one-year maturity gap of 19.95% of total assets. This was an increase from the 12.9% negative gap as of September 30, 2013. The increase is partly due to the recently acquired deposits as transaction accounts are subject to repricing at any time. This is combined with some shortening of maturities by existing clients. Additionally, the estimated maturities of mortgage securities has extended as prepayments have slowed. A negative maturity gap implies that funding costs will change more rapidly than interest income on earning assets with movement in interest rates. A negative maturity gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. Gap analysis provides management with a high-level indication of interest rate risk, but is considered less reliable than more detailed modeling.

Net Interest Income Sensitivity. The potential impact of rising interest rates on net interest income in the future is estimated using a model that is based on account level detail for loans and deposits. In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income will decrease by 5.8% in the next year. This compares to an estimated decrease of 1.6% in the prior quarter's analysis. The increased sensitivity is due to some maturity extension in the investment portfolio. In the event of a gradual increase from current rates by 200 basis points over a twelve-month period, the model forecasts a decrease in net interest income of 2.1% in the first year. This analysis assumes zero balance sheet growth and a 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.

NPV Sensitivity. The NPV estimates the market of value of shareholder's equity based upon forecasted interest rate scenarios. It is derived by calculating 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 $520 million and the NPV to total assets ratio to decline to 15.48%. As of September 30, 2013, the estimated decrease in NPV in the event of a 200 basis point increase in rates was estimated to decline by $314 million and the NPV to total assets ratio to decline to 17.42%. The increased NPV sensitivity is due to higher interest rates and lower prices as of December 31, 2013. The base NPV ratio is also lower compared to the prior quarter due to the impact of the branch acquisitions.
Interest Rate Spread. The interest rate spread decreased to 2.58% at December 31, 2013 from 2.73% at September 30, 2013. The spread decreased due to a decline in the average rate on loans and investment securities. As of December 31, 2013, the weighted average rate on customer deposit accounts and borrowings decreased by 12 basis points compared to September 30, 2013, while the weighted average rates on earning assets decreased by 27 basis points over the same period.
As of December 31, 2013, the Company had increased total assets by $1,321,514,000 from $13,082,859,000 at September 30, 2013 due to the recent branch acquisitions that brought $1,314,477,000 in deposits. For the quarter ended December 31, 2013, compared to September 30, 2013, loans (both non-covered and covered) increased $80,274,000, or 1%. Investment securities increased $453,826,000, or 11.3%. Cash and cash equivalents of $967,348,000 and stockholders' equity of $1,952,984,000 as of December 31, 2013 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at December 31, 2013 was $1,952,984,000, or 13.56% of total assets. This was an increase of $23,140,000 from September 30, 2013 when net worth was $1,937,635,000, or 14.81% of total assets. The Company's net worth was impacted in the three months ended December 31, 2013 by net income of $40,236,000, the payment of $10,179,000 in cash dividends, treasury stock purchases that totaled $18,945,000, as well as a decrease in other comprehensive income of $6,183,000.
Management believes this strong net worth position will help the Company manage its inherent risks and resultant profitability 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.


Table of Contents
                   WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2.    Management's Discussion and Analysis of Financial Condition and
Results of Operations



                                                                                                  Categorized as
                                                                                              Well Capitalized Under
                                                                     Capital                     Prompt Corrective
                                        Actual                 Adequacy Guidelines               Action Provisions
                                  Capital       Ratio          Capital          Ratio           Capital           Ratio
                                                                     (In thousands)
December 31, 2013
Total capital (to risk-weighted
assets)
The Company                       $1,737,481    25.62 %             $542,535     8.00 %            NA                NA
The Bank                         1,700,455      25.06 %       542,845            8.00 %               $678,557    10.00 %
Tier I capital (to
risk-weighted assets)
The Company                      1,652,186      24.36 %       271,268            4.00 %            NA                NA
The Bank                         1,615,112      23.80 %       271,423            4.00 %       407,134              6.00 %
Tier I Capital (to average
assets)
The Company                      1,652,186      12.29 %       537,721            4.00 %            NA                NA
The Bank                         1,615,112      12.01 %       537,831            4.00 %       272,289              5.00 %

September 30, 2013
Total capital (to risk-weighted
assets)
The Company                      1,749,383      26.49 %       528,243            8.00 %            NA                NA
The Bank                         1,693,227      25.64 %       528,380            8.00 %       660,475             10.00 %
Tier I capital (to
risk-weighted assets)
The Company                      1,666,091      25.23 %       264,121            4.00 %            NA                NA
The Bank                         1,609,914      24.38 %       264,190            4.00 %       396,285              6.00 %
Tier I Capital (to average
assets)
The Company                      1,666,091      13.03 %       511,334            4.00 %            NA               N/A
The Bank                         1,609,914      12.59 %       511,358            4.00 %       639,197              5.00 %

The Company's cash and cash equivalents amounted to $967,348,000 at December 31, 2013, an increase from $203,563,000 at September 30, 2013. The Company is in the process of investing the liquid assets that were acquired in the recent branch acquisitions. Previously, it was holding higher than normal amounts of liquidity due to concern about potentially rising interest rates in the future. Additionally, see "Interest Rate Risk" above and the "Statement of Cash Flows" included in the financial statements.
CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale securities increased $477,566,000, or 20%, during the three months ended December 31, 2013, which included the purchase of $565,080,000 of available-for-sale securities. There were no available-for-sale securities sold during the three months ended December 31, 2013. During the same period, there were no held-to-maturity securities purchased and no sales. As of December 31, 2013, the Company had net unrealized gains on available-for-sale securities of $195,000, net of tax, which were recorded as part of stockholders' equity. The Company increased its available-for-sale portfolio with investments made with the proceeds from the recent branch acquisitions.
Loans receivable: During the three months ended December 31, 2013, the balance of loans receivable increased to $7,651,558,000 compared to $7,528,030,000 at September 30, 2013. This increase includes net loan activity (originations less principal payments and maturities) for non covered loans of $127,367,000 and the acquisition of $8,278,000 in loans as described in Note B. Additionally, during the three month period, $9,956,000 of loans were transferred to REO. Covered loans: As of December 31, 2013, covered loans decreased 14.6%, or $43,254,000 to $252,693,000, compared to September 30, 2013 due primarily to $50,220,000 of principal payments and maturities.


Table of Contents
                   WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2.    Management's Discussion and Analysis of Financial Condition and
Results of Operations



The following table shows the loan portfolio by category for the last three
quarters.
Loan Portfolio by
Category *                  December 31, 2013             September 30, 2013               June 30, 2013
Non-Acquired loans                                          (In thousands)
Single-family
residential            $  5,421,896         66.8 %   $    5,359,149         67.1 %   $ 5,253,604         67.6 %
Construction -
speculative                 135,868          1.7            130,778          1.6         116,363          1.5
Construction - custom       333,954          4.1            302,722          3.8         237,952          3.1
Land - acquisition &
development                  72,075          0.9             77,775          1.1          85,248          1.1
Land - consumer lot
loans                       119,206          1.5            121,671          1.5         128,745          1.7
Multi-family                842,343         10.4            831,684         10.4         741,870          9.5
Commercial real estate      433,361          5.3            414,961          5.1         398,130          5.1
Commercial &
industrial                  274,432          3.4            243,199          3.0         239,469          3.1
HELOC                       111,577          1.4            112,186          1.4         111,418          1.4
Consumer                     44,142          0.5             47,141          0.6          51,515          0.7
Total non-acquired
loans                     7,788,854           96          7,641,266         95.6       7,364,314         94.8
Acquired loans
Single-family
residential                  13,856          0.2             14,468          0.2          15,354          0.2
Construction -
speculative                       -            -                  -            -               -            -
Construction - custom             -            -                  -            -               -            -
Land - acquisition &
development                   1,206            -              1,489            -           3,720            -
Land - consumer lot
loans                         3,261            -              3,313            -           3,615          0.1
Multi-family                  3,773          0.1              3,914          0.1           7,383          0.1
Commercial real estate      117,038          1.4            133,423          1.7         162,724          2.1
Commercial &
industrial                   72,594          0.9             75,326          0.9          88,768          1.1
HELOC                         9,538          0.1             10,179          0.1          11,466          0.1
Consumer                      7,754          0.1              8,267          0.1           9,035          0.1
Total acquired loans        229,020          2.8            250,379          3.1         302,065          3.8
Credit-impaired
acquired loans
Single-family
residential                     331            -                333            -             335            -
Construction -
speculative                       -            -                  -            -               -            -
Construction - custom             -            -                  -            -               -            -
Land - acquisition &
development                   2,225            -              2,396            -           2,484            -
Land - consumer lot
loans                             -            -                  -            -               -            -
Multi-family                      -            -                  -            -               -            -
Commercial real estate       71,841          1.0             76,909          1.1          78,519          1.1
Commercial &
industrial                    7,140          0.1              7,925          0.1           8,606          0.1
HELOC                        10,834          0.1             11,266          0.1          12,015          0.2
Consumer                         64            -                 71            -              79            -
Total credit-impaired
acquired loans               92,435          1.2             98,900          1.3         102,038          1.4
Total loans
  Single-family
residential               5,436,083         67.0          5,373,950         67.3       5,269,293         67.8
  Construction -
speculative                 135,868          1.7            130,778          1.6         116,363          1.5
  Construction -
custom                      333,954          4.1            302,722          3.8         237,952          3.1
  Land - acquisition &
development                  75,506          0.9             81,660          1.1          91,452          1.1
  Land - consumer lot
loans                       122,467          1.5            124,984          1.5         132,360          1.8


Table of Contents
                   WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2.    Management's Discussion and Analysis of Financial Condition and
Results of Operations



  Multi-family                    846,116    10.5         835,598    10.5         749,253    9.6
  Commercial real estate          622,240     7.7         625,293     7.9         639,373    8.3
  Commercial & industrial         354,166     4.4         326,450       4         336,843    4.3
  HELOC                           131,949     1.6         133,631     1.6         134,899    1.7
  Consumer                         51,960     0.6          55,479     0.7          60,629    0.8
Total loans                     8,110,309     100 %     7,990,545     100 %     7,768,417    100 %
Less:
Allowance for probable losses     118,158                 116,741                 118,104
Loans in process                  273,263                 275,577                 189,677
Discount on acquired loans         31,485                  34,143                  37,568
Deferred net origination fees      35,845                  36,054                  32,562
                                  458,751                 462,515                 377,911
                              $ 7,651,558             $ 7,528,030             $ 7,390,506


 ____________________


* Excludes covered loans Non-performing assets: Non-performing assets, which excludes discounted acquired assets, decreased during the quarter ended December 31, 2013 to $197,910,000 from $213,617,000 at September 30, 2013, a 7.4% decrease. The continued elevated level of NPAs is a result of the significant decline in housing values in the western United States and the national recession which began in 2007. Non-performing assets as a percentage of total assets was 1.37% at December 31, 2013 compared to 1.63% at September 30, 2013. This level of NPAs remains significantly higher than the 0.96% average in the Company's 28+ year history as a public company. The following table sets forth information regarding restructured and non-accrual loans and REO held by the Company at the dates indicated.


Table of Contents
                   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,
                                           2013                             2013
                                                      (In thousands)
Restructured loans:
Single-family residential     $    355,449            85.7 %   $    356,576            85.7 %
Construction - speculative           9,705             2.3           10,733             2.6
Construction - custom                1,196             0.3            1,196             0.3
Land - acquisition &
development                          6,037             1.5            7,211             1.7
Land - consumer lot loans           13,411             3.2           12,706             3.1
Multi - family                       8,701             2.1            7,557             1.8
Commercial real estate              18,749             4.5           18,539             4.5
Commercial & industrial                 44               -               56               -
HELOC                                1,198             0.3            1,088             0.3
Consumer                                71               -               33               -
Total restructured loans (1)       414,561             100 %        415,695             100 %

Non-accrual loans:
Single-family residential           89,075            77.6 %        100,460            76.5 %
Construction - speculative           3,053             2.7            4,560             3.5
Construction - custom                    -               -                -               -
Land - acquisition &
development                          2,813             2.5            2,903             2.2
Land - consumer lot loans            3,548             3.1            3,337             2.5
Multi-family                         2,494             2.2            6,573             5.0
Commercial real estate              11,613            10.1           11,736             8.9
Commercial & industrial                655             0.6              477             0.4
HELOC                                  471             0.4              263             0.2
Consumer                               995             0.9              990             0.8
Total non-accrual loans (2)        114,717             100 %        131,299             100 %
Total REO (3)                       71,537                           72,925
Total REHI (3)                      11,656                            9,392
Total non-performing assets   $    197,910                     $    213,616
Total non-performing assets
and performing restructured
loans as a percentage of
total assets                          4.09 %                           4.52 %
(1)  Restructured loans were
as follows:
Performing                    $    390,841            94.3 %   $    391,415            94.2 %
Non-accrual *                       23,720             5.7           24,281             5.8
                              $    414,561             100 %   $    415,696             100 %

* Included in "Total non-accrual loans" above

(2) The Company recognized interest income on nonaccrual loans of approximately $1,507,000 in the three months ended December 31, 2013. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $1,512,000 for the three months ended December 31, 2013. The recognized interest income may include more than three months of interest for some of the loans that were brought current. In addition to the nonaccrual loans reflected in the above table, at December 31, 2013 the Company had $94,334,000 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 4.43% at December 31, 2013.


Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(3) Total REO and REHI includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. Excludes covered REO.

. . .

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