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WAFD > SEC Filings for WAFD > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for WASHINGTON FEDERAL INC

Form 10-Q for WASHINGTON FEDERAL INC


9-May-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 as amended (the "Exchange Act"), 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. was formed in 1994 as a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through the Bank, a federally-insured national bank subsidiary.
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, the Bank 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 $1.3 billion in deposit accounts, $8 million of loans, and $17 million in branch properties. Washington Federal paid a 2.60% premium on the total deposits and received $1.3 billion in cash from the transactions.
The operating results of the Company include the operating results produced by the first eleven branches for the period from November 1, 2013 to March 31, 2014 and for the additional forty branches from December 7, 2013 to March 31, 2014.
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 45% variable and 55% 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 March 31, 2014, the unrealized losses on these securities were $84 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") of 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 March 31, 2014, the Company had approximately $2.0 billion more in liabilities subject to repricing in the next year than assets, which amounted to a negative one-year maturity gap of 13.9% 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. Additionally, the estimated maturities of mortgage securities and loans 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 2.1% in the next year. This compares to an estimated decrease of 1.6% as of the September 30, 2013 analysis. The increased sensitivity is due to some maturity extension in the investment portfolio. 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 $539 million and the NPV to total assets ratio to decline to 15.23%. As of September 30, 2013, the estimated decrease in NPV in this event was $314 million and the NPV to total assets ratio was estimated to decline to 17.42%. The increased NPV sensitivity and lower base NPV ratio as of March 31, 2014 is due to the impact of the branch acquisitions, including the characteristics of the acquired deposits and the deployment of cash into securities.
Interest Rate Spread. The interest rate spread decreased to 2.67% at March 31, 2014 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 March 31, 2014, the weighted average rate on customer deposit accounts and borrowings decreased by 15 basis points compared to September 30, 2013, while the weighted average rates on earning assets decreased by 22 basis points over the same period. As of March 31, 2014, the Company had increased total assets by $1,281,740,000 from $13,082,859,000 at September 30, 2013 due to the recent branch acquisitions that brought $1,314,478,000 in deposits. For the quarter ended March 31, 2014, compared to September 30, 2013, loans (both non-covered and covered) increased $142,737,000, or 1.8%. Investment securities increased $706,264,000, or 17.6%. Cash and cash equivalents of $608,236,000 and stockholders' equity of $1,980,683,000 as of March 31, 2014 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at March 31, 2014 was $1,980,683,000, or 13.79% of total assets. This was an increase of $43,048,000 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 six months ended March 31, 2014 by net income of $78,893,000, the payment of $20,372,000 in cash dividends, treasury stock purchases that totaled $31,776,000, as well as a increase in other comprehensive income of $4,112,000.
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)
March 31, 2014
Total capital (to risk-weighted
assets)
The Company                     $ 1,755,764      25.48 %   $     551,298           8.00 %            NA                NA
The Bank                          1,740,488      25.25 %         551,420           8.00 %               $689,275    10.00 %
Tier I capital (to
risk-weighted assets)
The Company                       1,668,794      24.22 %         275,649           4.00 %            NA                NA
The Bank                          1,653,499      23.99 %         275,710           4.00 %       413,565              6.00 %
Tier I Capital (to average
assets)
The Company                       1,668,794      11.85 %         563,323           4.00 %            NA                NA
The Bank                          1,653,499      11.74 %         563,463           4.00 %       704,329              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 $608,236,000 at March 31, 2014, 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 $749,627,000, or 31.7%, during the six months ended March 31, 2014, which included the purchase of $930,476,000 of available-for-sale securities. There were no available-for-sale securities sold during the six months ended March 31, 2014. During the same period, there were no held-to-maturity securities purchased and no sales. As of March 31, 2014, the Company had net unrealized gains on available-for-sale securities of $10,490,000, 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 six months ended March 31, 2014, the balance of loans receivable increased to $7,737,109,000 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 $208,020,000 and the acquisition of $8,278,000 in loans as described in Note B. Additionally, during the six month period, $20,898,000 of loans were transferred to REO. Covered loans: As of March 31, 2014, covered loans decreased 22.4%, or $66,342,000 to $229,605,000, compared to September 30, 2013 due primarily to $80,725,000 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 *                   March 31, 2014              December 31, 2013             September 30, 2013
Total Loans
  Single-family
residential              5,462,093         66.6        5,436,083         67.0          5,373,950         67.3
  Construction -
speculative                135,001          1.7          135,868          1.7            130,778          1.6
  Construction -
custom                     354,279          4.3          333,954          4.1            302,722          3.8
  Land - acquisition &
development                 77,049          0.9           75,506          0.9             81,660          1.1
  Land - consumer lot
loans                      116,864          1.5          122,467          1.5            124,984          1.5
  Multi-family             869,635         10.6          846,116         10.5            835,598         10.5
  Commercial real
estate                     634,457          7.8          622,240          7.7            625,293          7.9
  Commercial &
industrial                 351,705          4.4          354,166          4.4            326,450            4
  HELOC                    131,852          1.6          131,949          1.6            133,631          1.6
  Consumer                  48,239          0.6           51,960          0.6             55,479          0.7
Total Loans              8,181,174          100 %      8,110,309          100 %        7,990,545          100 %
Less:
Allowance for probable
losses                     114,931                       118,158                         116,741
Loans in process           264,946                       273,263                         275,577
Discount on acquired
loans                       29,286                        31,485                          34,143
Deferred net
origination fees            34,902                        35,845                          36,054
                           444,065                       458,751                         462,515
                       $ 7,737,109                  $  7,651,558                  $    7,528,030


 ____________________


* Excludes covered loans Non-performing assets (excludes discounted acquired assets): NPAs decreased during the quarter ended March 31, 2014 to $174,789,000 from $213,616,000 at September 30, 2013, an 18.2% decrease, due to improving credit conditions and credit quality. Non-performing assets as a percentage of total assets was 1.22% at March 31, 2014 compared to 1.63% at September 30, 2013. This level of NPAs is significantly higher than the Company's history prior to 2007 of 0.50%. The Company's 30-year average is 0.96%.


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 sets forth information regarding restructured and
non-accrual loans and REO held by the Company at the dates indicated.
                                        March 31,                      September 30,
                                           2014                             2013
                                                      (In thousands)
Restructured loans:
Single-family residential     $    348,918            86.1 %   $    356,577            85.7 %
Construction - speculative           9,416             2.3           10,733             2.6
Construction - custom                1,196             0.3            1,196             0.3
Land - acquisition &
development                          5,164             1.3            7,211             1.7
Land - consumer lot loans           13,270             3.3           12,706             3.1
Multi - family                       7,727             1.9            7,557             1.8
Commercial real estate              18,107             4.5           18,539             4.5
Commercial & industrial                 31               -               56               -
HELOC                                1,198             0.3            1,088             0.3
Consumer                               197               -               33               -
Total restructured loans (1)       405,224             100 %        415,696             100 %

Non-accrual loans:
Single-family residential           81,740            81.6 %        100,460            76.5 %
Construction - speculative           2,132             2.1            4,560             3.5
Construction - custom                  265             0.3                -               -
Land - acquisition &
development                          2,113             2.1            2,903             2.2
Land - consumer lot loans            3,007             3.0            3,337             2.5
Multi-family                         2,199             2.2            6,573             5.0
Commercial real estate               7,101             7.1           11,736             8.9
Commercial & industrial                579             0.6              477             0.4
HELOC                                  441             0.4              263             0.2
Consumer                               621             0.6              990             0.8
Total non-accrual loans (2)        100,198             100 %        131,299             100 %
Total REO (3)                       60,995                           72,925
Total REHI (3)                      13,596                            9,392
Total non-performing assets   $    174,789                     $    213,616
Total non-performing assets
and performing restructured
loans as a percentage of
total assets                          3.88 %                           4.52 %

(1)  Restructured loans were
as follows:
Performing                    $    381,849            94.2 %   $    391,415            94.2 %
Non-accrual (included in
Total non-accrual loans)            23,375             5.8           24,281             5.8
                              $    405,224             100 %   $    415,696             100 %

(2) The Company recognized interest income on nonaccrual loans of approximately $3,057,000 in the six months ended March 31, 2014. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $2,819,000 for the six months ended March 31, 2014. The recognized interest income may include more than six months of interest for some of the loans that were brought current.


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

In addition to the nonaccrual loans reflected in the above table, at March 31, 2014 the Company had $87,415,000 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 4.48% at March 31, 2014.

(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.

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 86.1% of restructured loans as of March 31, 2014. 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 the Company's 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.

                                      March 31, 2014                                      September 30, 2013
                                            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        $         63,348             69.1 %          1.2 %     $         64,184             69.9 %          1.2 %
Construction -
speculative                   6,773              1.7            5.0                  8,407              1.7            6.4
Construction -
custom                        1,599              4.5            0.5                    882              4.0            0.3
Land -
acquisition &
development                   6,027              0.9            8.1                  9,165              1.0           11.8
Land - consumer
lot loans                     2,974              1.4            2.6                  3,552              1.6            2.9
Multi-family                  4,187             11.0            0.5                  3,816             10.9            0.5
Commercial real
estate                        5,924              5.8            1.3                  5,595              5.4            1.3
Commercial &
industrial                   20,403              3.7            7.1                 16,614              3.4            6.5
HELOC                           975              1.4            0.9                  1,002              1.5            0.9
Consumer                      2,721              0.5            6.6                  3,524              0.6            7.5
                   $        114,931              100 %          1.5 %     $        116,741              100 %          1.5 %

(1) Represents the total amount of the loan category as a % of total gross non-acquired and non-covered loans outstanding.

(2) Represents the allocated allowance of the loan category as a % of total gross non-acquired and non-covered loans outstanding for the same loan category.


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



Customer accounts: Customer accounts increased $1,254,620,000, or 13.80%, to
$10,344,891,000 at March 31, 2014 compared with $9,090,271,000 at September 30,
2013.
The following table shows the composition of the Company's customer accounts by
. . .
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