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WAFD > SEC Filings for WAFD > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for WASHINGTON FEDERAL INC

Form 10-Q for WASHINGTON FEDERAL INC


11-Aug-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 is 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. Effective as of the close of business on May 2, 2014, the Bank completed the acquisition of an additional twenty-three branches from Bank of America, National Association; these branches are located in Arizona and Nevada. The combined acquisitions provided $1.9 billion in deposit accounts, $13 million of loans, and $28 million in branch properties. Washington Federal paid a 1.99% premium on the total deposits and received $1.8 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 June 30, 2014, the additional forty branches from December 7, 2013 to June 30, 2014 and the twenty-three branches from May 3, 2014 to June 30, 2014.
INTEREST RATE RISK
Based on Management's assessment of the current interest rate environment, the Bank has taken steps to reduce its interest rate risk profile compared to its historical norms, including growing shorter-term business loans, transaction deposit accounts and extending the maturity on borrowings. The recent branch acquisitions have accelerated these efforts. The mix of transaction accounts is now approximately 50% of total deposits. The Bank 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 June 30, 2014, the unrealized net losses on these securities were $50 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 June 30, 2014, the Company had approximately $1.6 billion more in liabilities subject to repricing in the next year than assets, which resulted in a negative one-year maturity gap of 10.6% of total assets. There were $1.7 billion more in liabilities subject to repricing as of September 30, 2013, resulting in a 12.9% negative gap. The percentage decrease in the negative gap is primarily due to an increase in total assets. 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 movements in interest rates. Typically, a negative maturity gap 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 it is considered less reliable than more detailed modeling.

Net Interest Income Sensitivity. The potential impact of rising interest rates on future net interest income 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 0.5% in the next year. This compares to an estimated decrease of 1.6% as of the September 30, 2013 analysis. This analysis assumes zero balance sheet growth and a constant percentage composition of assets and liabilities for consistency. 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 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 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 $493 million and the NPV to total assets ratio to decline to 16.32% from a base of 18.51%. 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% from a base of 18.74%. The increased NPV sensitivity and lower base NPV ratio as of June 30, 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 2.65% at June 30, 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 June 30, 2014, the weighted average rate on customer deposit accounts and borrowings decreased by 21 basis points compared to September 30, 2013, while the weighted average rates on earning assets decreased by 29 basis points over the same period. Net Interest Margin. The net interest margin decreased to 3.05% for the quarter ended June 30, 2014 from 3.15% for the quarter ended June 30, 2013. The yield on earning assets declined 28 basis points to 3.99% and the cost of interest bearing liabilities declined 21 basis points to 1.02%. The greater decline in the yield on earning assets was due to lower loan yields on new originations compared to prepaying and maturing loans. In addition, there is a greater portion of floating rate loans and securities than in the prior year. As of June 30, 2014, the Company had increased total assets by $1,707,096,000 from $13,082,859,000 at September 30, 2013 due to the branch acquisitions during the fiscal year that brought $1,853,798,000 in deposits. For the quarter ended June 30, 2014, compared to September 30, 2013, loans (both non-covered and covered) increased $349,184,000, or 4.5%. Investment securities increased $671,260,000, or 16.7%. Cash and cash equivalents of $861,304,000 and stockholders' equity of $1,990,635,000 as of June 30, 2014 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at June 30, 2014 was $1,990,635,000, or 13.46% of total assets. This was an increase of $53,000,000 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 nine months ended June 30, 2014 by net income of $116,803,000, the payment of $31,393,000 in cash dividends, treasury stock purchases of $64,231,000, as well as an increase in other comprehensive income of $18,043,000.
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)
June 30, 2014
Total capital (to risk-weighted
assets)
The Company                     $ 1,751,035      24.52 %   $     571,202           8.00 %            NA                NA
The Bank                          1,743,057      24.41 %         571,334           8.00 %               $714,168    10.00 %
Tier I capital (to
risk-weighted assets)
The Company                       1,660,786      23.26 %         285,601           4.00 %            NA                NA
The Bank                          1,652,787      23.14 %         285,667           4.00 %       428,501              6.00 %
Tier I Capital (to average
assets)
The Company                       1,660,786      11.64 %         570,874           4.00 %            NA                NA
The Bank                          1,652,787      11.58 %         570,970           4.00 %       713,712              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 $861,304,000 at June 30, 2014, an increase from $203,563,000 at September 30, 2013. The Company continues to hold higher than normal amounts of liquidity due to concern about potentially rising interest rates. It is anticipated that the funds will be invested opportunistically over time as risk adjusted investment opportunities to enhance yields improve. 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 $742,073,000, or 31.4%, during the nine months ended June 30, 2014, which included the purchase of $1,080,476,000 of available-for-sale securities. Most of these investments made with the proceeds from the recent branch acquisitions. There were no available-for-sale securities sold during the nine months ended June 30, 2014. During the same period, there were no held-to-maturity securities purchased or sold. As of June 30, 2014, the Company had net unrealized gains on available-for-sale securities of $24,421,000, net of tax, which were recorded as part of stockholders' equity. Loans receivable: During the nine months ended June 30, 2014, the balance of loans receivable increased to $7,965,954,000 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 $451,916,000, which includes the acquisition of $12,881,000 in loans as described in Note B. During the nine month period, $32,818,000 of non covered loans were transferred to REO. Covered loans: As of June 30, 2014, FDIC covered loans decreased 30.0%, or $88,740,000 to $207,207,000, compared to September 30, 2013 due primarily to $104,951,000 of net principal payments and maturities. The FDIC loss share coverage for the majority of these loans will expire during fiscal year 2015. If all FDIC loss share coverage had expired as of June 30, 2014, the NPA ratio would increase from 1.10% to 1.16% and the delinquency rate would rise from 1.41% to 1.57%.


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 *                   June 30, 2014                March 31, 2014              December 31, 2013
Total Loans
  Single-family
residential              5,479,111         64.9       5,462,093         66.7        5,436,083         67.0
  Construction -
speculative                126,926          1.5         135,001          1.7          135,868          1.7
  Construction -
custom                     372,789          4.4         354,279          4.3          333,954          4.1
  Land - acquisition &
development                 91,058          1.1          77,049          0.9           75,506          0.9
  Land - consumer lot
loans                      114,573          1.4         116,864          1.4          122,467          1.5
  Multi-family             896,799         10.6         869,635         10.6          846,116         10.5
  Commercial real
estate                     693,421          8.2         634,457          7.8          622,240          7.7
  Commercial &
industrial                 398,181          4.7         351,705          4.4          354,166          4.4
  HELOC                    136,304          1.6         131,852          1.6          131,949          1.6
  Consumer                 138,547          1.6          48,239          0.6           51,960          0.6
Total Loans              8,447,709        100.0       8,181,174          100 %      8,110,309          100 %
Less:
Allowance for probable
losses                     114,150                      114,931                       118,158
Loans in process           303,084                      264,946                       273,263
Discount on acquired
loans                       28,480                       29,286                        31,485
Deferred net
origination fees            36,041                       34,902                        35,845
                           481,755                      444,065                       458,751
                       $ 7,965,954                  $ 7,737,109                  $  7,651,558


 ____________________


* Excludes covered loans Non-performing assets (excludes discounted acquired assets): NPAs decreased during the quarter ended June 30, 2014 to $162,357,000 from $213,616,000 at September 30, 2013, a 24.0% decrease, due to improving credit conditions and credit quality. Non-performing assets as a percentage of total assets was 1.10% at June 30, 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 of NPAs is 0.97%.


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.
                                         June 30,                      September 30,
                                           2014                             2013
                                                      (In thousands)
Restructured loans:
Single-family residential     $    333,814            86.1 %   $    356,577            85.7 %
Construction - speculative           8,554             2.2           10,733             2.6
Construction - custom                1,196             0.3            1,196             0.3
Land - acquisition &
development                          5,092             1.3            7,211             1.7
Land - consumer lot loans           12,922             3.3           12,706             3.1
Multi - family                       5,266             1.4            7,557             1.8
Commercial real estate              19,292             5.0           18,539             4.5
Commercial & industrial                 23               -               56               -
HELOC                                1,198             0.3            1,088             0.3
Consumer                               236             0.1               33               -
Total restructured loans (1)  $    387,593             100 %   $    415,696             100 %

Non-accrual loans:
Single-family residential     $     78,317            83.2 %   $    100,460            76.5 %
Construction - speculative           1,966             2.1            4,560             3.5
Construction - custom                  143             0.2                -               -
Land - acquisition &
development                          2,295             2.4            2,903             2.2
Land - consumer lot loans            1,879             2.0            3,337             2.5
Multi-family                         2,103             2.2            6,573             5.0
Commercial real estate               5,442             5.8           11,736             8.9
Commercial & industrial                516             0.5              477             0.4
HELOC                                  970             1.0              263             0.2
Consumer                               595             0.6              990             0.8
Total non-accrual loans (2)         94,226             100 %        131,299             100 %
Total REO (3)                       57,352                           72,925
Total REHI (3)                      10,780                            9,392
Total non-performing assets   $    162,358                     $    213,616
Total non-performing assets
and performing restructured
loans as a percentage of
total assets                          3.54 %                           4.62 %

(1)  Restructured loans were
as follows:
Performing                    $    361,918            93.4 %   $    391,415            94.2 %
Non-performing (included in
non-accrual loans above)            25,675             6.6           24,281             5.8
                              $    387,593             100 %   $    415,696             100 %

(2) The Company recognized interest income on nonaccrual loans of approximately $4,460,000 in the nine months ended June 30, 2014. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $3,988,000 for the nine months ended June 30, 2014. The recognized interest income may include more than nine 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 June 30, 2014 the Company had $49,806,000 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 3.88% at June 30, 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 June 30, 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.

                                      June 30, 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        $         62,360             66.6 %          1.1 %     $         64,184             69.9 %          1.2 %
Construction -
speculative                   6,387              1.5            5.0                  8,407              1.7            6.4
Construction -
custom                        1,678              4.5            0.5                    882              4.0            0.3
Land -
acquisition &
development                   6,955              1.1            7.9                  9,165              1.0           11.8
Land - consumer
lot loans                     2,862              1.4            2.6                  3,552              1.6            2.9
Multi-family                  4,141             10.9            0.5                  3,816             10.9            0.5
Commercial real
estate                        6,689              6.4            1.3                  5,595              5.4            1.3
Commercial &
industrial                   18,696              4.6            5.0                 16,614              3.4            6.5
HELOC                         1,015              1.4            0.9                  1,002              1.5            0.9
Consumer                      3,367              1.6            2.5                  3,524              0.6            7.5
                   $        114,150              100 %          1.4 %     $        116,741              100 %          1.5 %

(1) Represents the total amount of the loan category as a % of total gross loans, excluding non-acquired and non-covered loans outstanding not subject to the allowance for loan loss.

(2) Represents the allocated allowance of the loan category as a % of total gross loans, excluding non-acquired and non-covered loans outstanding not subject to the allowance for loan loss, for the same loan category.

. . .

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