SOURCE: Washington Federal

Washington Federal

October 18, 2012 08:00 ET

Washington Federal Reports Annual Net Income of $138 Million

SEATTLE, WA--(Marketwire - Oct 18, 2012) - Washington Federal, Inc. (NASDAQ: WAFD), parent company of Washington Federal, today announced earnings of $35,531,000 or $.33 per diluted share for the quarter ended September 30, 2012, compared to $30,666,000 or $.28 per diluted share for the same period one year ago, a $4.9 million or 18% increase per diluted share. Earnings for the fiscal year ended September 30, 2012 of $138,183,000 or $1.29 per diluted share, an increase of $18,895,000 or 29% per diluted share from the prior year. Higher earnings were driven primarily by lower credit costs due to improved market conditions. Total credit costs were $55 million for the year, a $78 million or 59% decrease from fiscal 2011. The Company's ratio of tangible common equity to tangible assets ended the quarter at 13.45% and its total risk-based capital ratio was 27.29%. Both of these ratios continue to be among the best of large regional financial institutions in the U.S.

Chairman, President & CEO Roy M. Whitehead commented, "Financial performance for the year exceeded our expectations. Much of the credit goes to improved real estate market conditions that enabled us to record gains on the sale of properties foreclosed on and written down in prior years. During the quarter, we also completed important steps to enhance future profitability. In fiscal 2013, the focus will largely be on growth in our commercial banking segments. Low interest rates and a slow economy will challenge earnings growth; however, our strong financial position will provide tremendous flexibility. Opportunities to improve shareholder value, including acquisitions and stock repurchases, will be aggressively pursued."

Non-performing assets amounted to $273 million or 2.19% of total assets as of September 30, 2012, a $97 million or 26% decrease from September 30, 2011. Non-performing assets peaked at $606 million at 5.03% of total assets on June 30, 2009 and have since decreased by $333 million or 55%. Non-performing loans decreased from $210 million at the Company's September 30, 2011 fiscal year-end, to $173 million as of September 30, 2012, an 18% decrease. Total loan delinquencies were 2.57% as of September 30, 2012, a decrease from the 3.43% at September 30, 2011. Delinquencies on single family mortgage loans, the largest component of the loan portfolio, decreased to 2.73% from 3.25% as of September 30, 2011. Delinquencies on single family mortgage loans decreased by 8 basis points on a linked quarter basis to 2.73% from 2.81% as of June 30, 2012. The Company's single family mortgage loan delinquency ratio of 2.73% remains significantly better than the national average of 10.1%i.

Net loan charge-offs decreased from $98 million in the year ended September 30, 2011 to $70 million in the current year, a $28 million or 29% decrease. Net loan charge offs peaked in fiscal 2010, at $184 million. Total net charge-offs for fiscal 2012 represent a 62% decrease from the fiscal 2010 high.

Real estate held for sale decreased by $60 million or 38% from September 30, 2011 as the Company continues to liquidate foreclosed properties. During the year, the Company sold 663 properties for net proceeds of $143 million and a net gain on sale of $16 million over the current book value. The total net loss on sale of real estate, measured against the original loan balance of $267 million, was $124 million or 46% of original balances for properties sold in fiscal 2012. As of September 30, 2012, real estate held for sale consisted of 449 properties totaling $99 million. Land represented $43 million or 43% of total real estate held for sale at September 30, 2012. Net loss on real estate acquired through foreclosure, which includes gains and losses on sale, ongoing maintenance expense and periodic write-downs from lower valuations, decreased by 75% to $10 million in 2012 from $40 million in the prior year.

Asset quality trends during the quarter and fiscal year ending September 30, 2012 were generally positive as noted above with non-performing loans, real estate owned, delinquencies and net charge-offs all decreasing. Additionally, the residential real estate market has shown marked improvement in property values. The table below shows the change in median home priceii in several of our key markets.

    Sep-12   Sep-11   % Change  
    ($ in thousands)      
Seattle   $ 378   $ 350   8.0 %
Portland     241     225   7.1 %
Boise     180     166   8.4 %
Salt Lake     212     199   6.5 %
Las Vegas     130     120   8.3 %
Phoenix     160     157   1.9 %
Albuquerque     165     164   0.6 %
Dallas     150     129   16.3 %

Consistent with these improving conditions, total loan loss reserve as a percentage of total gross loans has decreased. As of September 30, 2012, the allowance totaled 1.69% of loans, a decrease of 20 basis points from the 1.89% as of September 30, 2011. As of September 30, 2012, the general allowance for loan losses was $117 million or 1.56% of loans subject to the general allowance.

Total assets decreased by $968 million or 7% to $12.5 billion at September 30, 2012, from $13.4 billion at September 30, 2011. As previously disclosed, during the fourth quarter the Company took steps intended to reduce the Company's interest rate risk and improve its future earnings potential. During the quarter, the Company sold $2.3 billion of fixed rate mortgage-backed securities for a pre-tax gain of $95 million. In the same period, the Company pre-paid $876 million of long term debt at a pre-tax loss of $95 million. The weighted average rate on the retired debt was 3.94%. In related transactions, the Company also purchased a mix of short and longer term assets totaling $2.0 billion with an anticipated weighted average yield of 1.83%, and restructured an additional $830 million of long term debt to lengthen maturity and reduce the weighted average rate from 4.48% to 3.43%. These transactions are expected to reduce the volatility of net interest income and stabilize the margin going forward.

For the fiscal year ended September 30, 2012, loans decreased by $484 million or 6%, as the low interest rate environment caused loan repayments to accelerate. Total loan repayments for fiscal 2012 were $2.0 billion, a $142 million or 7.8% increase from the prior year. Loan originations in 2012 totaled $1.4 billion, an $83 million or 6% increase over 2011. Importantly, commercial loan originations increased $172 million or 41% as a result of improved economic conditions and the Company's continued phased rollout of its commercial business lines. Loans covered by an FDIC loss sharing agreement decreased by $94 million, investment securities decreased $329 million and cash and cash equivalents decreased by $65 million. Other assets increased by $78 million or 130% in 2012 as a result of the capitalization of prepayment fees associated with the balance sheet restructuring described above. As of September 30, 2012, the Company's investment portfolio had net unrealized gains of $47 million.

Customer deposits decreased $89 million or 1% during the year, however; the Company was able to grow transaction accounts by $284 million or 11%, while time deposits decreased by $374 million or 6%. The weighted average rate paid on customer deposits during the year was 0.99%, a decrease of 33 basis points from the previous year, as a result of the low interest rate environment.

Federal Home Loan Bank (FHLB) and other borrowings decreased by $882 million or 32% as a result of the balance sheet restructuring. The weighted average rate on FHLB borrowings as of September 30, 2012 was 3.59%, a decrease of 51 basis points from the prior year.

During the year, the Company had an average balance of $848 million in cash and cash equivalents invested overnight at a yield of approximately .25%. The Company is maintaining higher than normal amounts of liquidity due to concern about potentially rising interest rates in the future. The period end spread was 2.80% as of September 30, 2012, a decrease from 3.13% as of September 30, 2011.

Net interest income for the year was $397 million, a $20 million decrease from last year. Net interest margin was 3.18% for the year, compared to 3.35% for the prior year. The margin was pressured as lower asset yields offset decreasing interest expense.

Total credit costs, which include the provision for loan losses and net loss on real estate acquired, were the key driver for improved earnings this year. The table below shows the Company's total credit costs for the last twelve quarters and fiscal years ending September 30, 2010, 2011 and 2012.

Quarter Ended   Total Credit Costs   $ Change     % Change  
($ in thousands)  
Quarter Ending                
Dec-09   $ 82,470            
Mar-10     80,058   (2,412 )   -2.9 %
Jun-10     51,767   (28,291 )   -35.3 %
Sep-10     46,089   (5,678 )   -11.0 %
Dec-10     36,553   (9,536 )   -20.7 %
Mar-11     40,395   3,842     10.5 %
Jun-11     29,171   (11,224 )   -27.8 %
Sep-11     27,035   (2,136 )   -7.3 %
Dec-11     21,779   (5,256 )   -19.4 %
Mar-12     19,582   (2,197 )   -10.1 %
Jun-12     9,221   (10,361 )   -52.9 %
Sep-12     4,194   (5,027 )   -54.5 %
Fiscal Year Ending                  
2010   $ 260,384            
2011     133,154   (127,230 )   -48.9 %
2012     54,776   (78,378 )   -58.9 %

The Company's efficiency ratio of 34.5% for the year remains among the lowest in the industry. The year produced a return on assets of 1.03%, while return on equity amounted to 7.23%.

On October 19, 2012, Washington Federal will pay a cash dividend of $.08 per share to common stockholders of record on October 5, 2012. This will be the Company's 119th consecutive quarterly cash dividend. During the year ended September 30, 2012, Washington Federal repurchased 2,895,484 shares at a weighted average price of $14.48. The Company has an authorization to repurchase up to an additional 6,188,030 shares. For the year the Company returned 55% of earnings to stockholders in the form of cash dividends and share repurchases.

During the quarter, the Company's first Eastern Washington branch was opened in Yakima, Washington.

Status of Proposed South Valley Bank and Trust Acquisition
Washington Federal has received approval from its primary regulators to complete its acquisition of South Valley Bank and Trust, which is anticipated to close on October 31, 2012. The transaction is expected to be immediately accretive to earnings.

About Washington Federal
Washington Federal, with headquarters in Seattle, Washington, has 166 offices in eight western states. To find out more about the Company, please visit our website. The Company uses its website to distribute financial and other material information about the Company, which is routinely posted on and accessible at

Important Cautionary Statements
The foregoing information should be read in conjunction with the financial statements, notes and other information contained in the Company's 2011 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

This press release contains statements about the Company's future that are not statements of historical fact. These statements are "forward looking statements" for purposes of applicable securities laws, and are based on current information and/or management's good faith belief as to future events. The words "believe," "expect," "anticipate," "project," and similar expressions signify forward-looking statements. Forward-looking statements include projections and estimates of loan demand, revenue growth, credit costs, levels of problem assets, earnings, interest rates, regulatory actions or other financial or business items; statements of management's plans, strategies and objectives for future operations; the characterization of the future effects of the reposition transactions on the Company's balance sheet and earnings prospects; and statements regarding future economic, industry or market conditions or performance. Forward-looking statements of this type speak only as of the date of this press release. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved.

By their nature, forward-looking statements involve inherent risk and uncertainties, which change over time, and actual performance or results, could differ materially from those anticipated by any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed or referenced in the Company's periodic reports filed with the Securities and Exchange Commission ("SEC"), may cause actual results to differ materially from those contemplated by any forward-looking statements: including, but 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; the level of success of the Company's asset/liability management strategies; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company's loan and investment portfolios; adequacy of the reserve for loan losses; the level of success in disposing of foreclosed real estate and reducing nonperforming assets; 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 Washington Federal's ability to comply in a timely and satisfactory manner with the requirements of a memorandum of understanding entered into with the Office of the Comptroller of the Currency.

    September 30, 2012     September 30, 2011  
    (In thousands, except per share data)  
Cash and cash equivalents   $ 751,430     $ 816,002  
Available-for-sale securities     1,781,705       3,255,144  
Held-to-maturity securities     1,191,487       47,036  
Loans receivable, net     7,451,998       7,935,877  
Covered loans, net     288,376       382,183  
Interest receivable     46,857       52,332  
Premises and equipment, net     178,845       166,593  
Real estate held for sale     99,478       159,829  
Covered real estate held for sale     29,549       56,383  
FDIC indemnification asset     87,571       101,634  
FHLB stock     149,840       151,755  
Intangible assets, net     256,076       256,271  
Federal and state income taxes     22,513       -  
Other assets     137,219       59,710  
    $ 12,472,944     $ 13,440,749  
Customer accounts                
  Transaction deposit accounts   $ 2,946,453     $ 2,662,188  
  Time deposit accounts     5,630,165       6,003,715  
      8,576,618       8,665,903  
FHLB advances     1,880,000       1,962,066  
Other borrowings     -       800,000  
Advance payments by borrowers for taxes and insurance     40,041       39,548  
Federal and state income taxes     -       1,535  
Accrued expenses and other liabilities     76,533       65,164  
      10,573,192       11,534,216  
Stockholders' Equity                
Common stock, $1.00 par value, 300,000,000 shares authorized; 129,950,223 and 129,853,534 shares issued; 106,177,615 and 108,976,410 shares outstanding    


Paid-in capital     1,586,295       1,582,843  
Accumulated other comprehensive income, net of taxes     13,306       85,789  
Treasury stock, at cost; 23,772,608 and 20,877,124 shares     (310,579 )     (268,665 )
Retained earnings     480,780       376,712  
      1,899,752       1,906,533  
    $ 12,472,944     $ 13,440,749  
Common stockholders' equity per share   $ 17.89     $ 17.49  
Tangible common stockholders' equity per share     15.48       15.14  
Stockholders' equity to total assets     15.23 %     14.18 %
Tangible common stockholders' equity to tangible assets     13.45       12.52  
Weighted average rates at period end                
  Loans and mortgage-backed securities     4.72 %     5.43 %
  Combined loans, mortgage-backed securities and investment securities     4.18       4.97  
  Customer accounts     0.90       1.14  
  Borrowings     3.59       4.04  
  Combined cost of customer accounts and borrowings     1.38       1.84  
  Interest rate spread     2.80       3.13  
    Quarter Ended
September 30,
    Twelve Months Ended
September 30,
    2012     2011     2012     2011  
    (In thousands, except per share data)  
INTEREST INCOME                                
Loans & covered assets   $ 115,467     $ 127,943     $ 484,833     $ 522,230  
Mortgage-backed securities     16,062       27,822       96,142       108,207  
Investment securities and cash equivalents     2,850       3,210       9,296       14,198  
      134,379       158,975       590,271       644,635  
INTEREST EXPENSE                                
Customer accounts     20,071       26,070       86,939       115,835  
FHLB advances and other borrowings     22,138       28,387       106,310       111,861  
      42,209       54,457       193,249       227,696  
Net interest income     92,170       104,518       397,022       416,939  
Provision for loan losses     5,379       15,354       44,955       93,104  
Net interest income after provision for loan losses     86,791       89,164       352,067       323,835  
OTHER INCOME                                
Gain (loss) on sale of investments     95,234       -       95,234       8,147  
Prepayment penalty on long-term debt     (95,565 )     -       (95,565 )     -  
Other     3,585       4,719       16,848       17,786  
      3,254       4,719       16,517       25,933  
OTHER EXPENSE                                
Compensation and benefits     19,487       18,015       77,628       72,034  
Occupancy     4,217       3,700       16,194       14,480  
FDIC premiums     3,550       5,283       16,093       20,582  
Other     8,459       7,287       32,939       28,963  
      35,713       34,285       142,854       136,059  
Gain (loss) on real estate acquired through foreclosure, net     1,185       (11,681 )     (9,819 )     (40,050 )
Income before income taxes     55,517       47,917       215,911       173,659  
Income taxes provision (benefit)     19,986       17,251       77,728       62,518  
NET INCOME   $ 35,531     $ 30,666     $ 138,183     $ 111,141  
PER SHARE DATA                                
Basic earnings   $ .33     $ .28     $ 1.29     $ 1.00  
Diluted earnings     .33       .28       1.29       1.00  
Cash Dividends per share     .08       .06       .32       .24  
Basic weighted average number of shares outstanding     106,512,324       109,666,258       107,108,703       111,383,877  
Diluted weighted average number of shares outstanding, including dilutive stock options     106,556,946       109,748,550       107,149,240       111,460,106  
PERFORMANCE RATIOS                                
Return on average assets     1.10 %     .91 %     1.03 %     .83 %
Return on average common equity     7.43 %     6.55 %     7.23 %     5.99 %

1 OCC Mortgage Metrics Report, 2nd Quarter 2012, which is the most recent data available

2 Multiple Listing Services