Washington Federal Inc.
) fiscal third-quarter 2012 earnings (ended June 30) of 33 cents
per share, beat the Zacks Consensus Estimate by a penny. This was
also better than the year-ago quarter's earnings of 27 cents.
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Higher net unrealized gains along with constantly declining credit
costs were responsible for the improved results. However, higher
operating expenses coupled with a decline in net interest income
were the headwinds. Overall, continuous improvement in asset
quality and enhanced capital ratios were impressive.
Washington Federal's net income surged 16.7% to $35.2 million from
$30.1 million in the prior-year quarter.
Quarter in Detail
Washington Federal's total revenue was $100.1 million, down 9.3%
from $110.4 million in the prior-year quarter. The decline was
attributable to lower net interest income and reduced income from
other sources. Total revenue also lagged the Zacks Consensus
Estimate of $107.0 million.
Net interest income (before provision for loan losses) fell 9.0%
year over year to $96.5 million mainly due to lower asset yields.
Similarly, net interest margin for the reported quarter declined 39
basis points on a year-over-year basis to 3.05%.
Operating expenses surged 5.2% from the year-ago quarter to $36.0
million in the quarter under review. The rise was mainly a result
of higher compensation and benefits expenses, occupancy costs as
well as other costs, partially mitigated by lower Federal Deposit
Insurance Corporation (FDIC) premiums.
Efficiency ratio declined to 35.9% compared with 31.0% in the
year-ago quarter. Increase in efficiency ratio indicates
deterioration in profitability.
During the fiscal third quarter, credit quality continued to
improve with Washington Federal reporting lower balances of
provision for loan losses, nonperforming assets, net charge-offs
and loan delinquencies. The company recorded provision for loan
losses of $10.4 million as of June 30, 2012, which dipped nearly
51.0% from $21.0 million as of June 30, 2011. Net loan charge-offs
for the reported quarter came in at $16.0 million, declining 33.3%
from the year-ago quarter.
As of June 30, 2012, total loan delinquencies were 2.69% of total
loans as against 3.43% as of September 30, 2011. Similarly,
nonperforming assets totaled $278.0 million or 2.07% of total
assets at June-end, falling 24.8% from September 30, 2011.
Washington Federal's profitability metrics continued to display
enhancement. Return on equity (ROE) was 7.33% compared with 6.55%
in the prior-year quarter. Return on assets (ROA) was 1.04% as
compared with 0.90% in the year-ago period.
On April 4, Washington Federal announced a deal to acquire
Oregon-based South Valley Bancorp Inc. The deal is anticipated to
be closed by October. Upon acquisition, the combined company will
have 189 offices spread across eight western states. In addition,
the acquisition will lead to an enhanced branch network, higher
liquidity and increased lending capacity, which will boost the
profitability in the long-run.
On June 22, Washington Federal completed the divestiture of two of
its branches located in El Paso, Texas. The sale included $19
million of deposits but loans were not a part of the deal.
Presently, Washington Federal continues to enjoy the benefits of
lower interest rates, but the anticipated rise in interest rates
will likely hurt the company's deposit re-pricing effort going
forward. Moreover, extensive capital deployment activities along
with the recent acquisitions will continue to boost investors'
confidence in the stock. Further, nonperforming asset contraction
will significantly support the bottom line.
Though Washington Federal is optimistic about the uptrend in the
economy, we remain concerned about the company's sizeable exposure
to real estate markets, where pricing remains soft.
Two of Washington Federal's peers,
Astoria Financial Corporation
Sterling Financial Corporation
) are expected to report their second-quarter 2012 earnings results
on July 18 and July 26, respectively.
Currently, Washington Federal retains a Zacks #3 Rank, which
translates into a short-term Hold rating. Considering the
fundamentals, we also maintain a long-term 'Neutral' recommendation
on the stock.