WFSL Washington Federal, Inc. (MM)

Washington Federal Inc. (WFSL) reported the first-quarter earnings for fiscal 2012 (ended December 31, 2011) of 31 cents per share, beating the Zacks Consensus Estimate by 2 cents. The result was also substantially better than the year-ago quarter’s earnings of 22 cents. 

Washington Federal’s net income in the reported quarter stood at $33.4 million, up nearly 36% from $24.5 million in the prior-year quarter.

Though the results were impacted by higher non-interest expenses and decline in top line, a fall in the company’s credit costs along with improvement in asset quality and capital ratios were the positives.

Quarter in Detail

Washington Federal’s total revenue for the reported quarter was $108.4 million, slightly down from $109.2 million in the prior-year quarter. However, this compares favorably with the Zacks Consensus Estimate of $108.0 million.

Net interest income for the quarter (before provision for loan losses) inched down approximately 1% year over year to $103.7 million. Similarly, net interest margin (NIM) for the reported quarter also decreased 9 basis points (bps) year over year to 3.27%. The decline in NIM was attributable to lower yield on assets partially offset by the lower deposit costs.

Operating expenses for the quarter increased marginally from the year-ago quarter to $34.4 million. The rise was mainly a result of higher compensation and benefits expenses as well as occupancy costs.

Credit Quality

Credit quality continued to improve during the fiscal first quarter with Washington Federal reporting lower charge-offs, nonperforming assets and loan delinquencies. The company recorded provision for loan losses of $11.2 million for the quarter, down 56.9% from $26.0 million in the prior-year quarter.

Net loan charge-offs fell from $30 million in the quarter ended December 31, 2010 to $14 million in the reported quarter. Similarly, nonperforming assets totaled $344 million or 2.52% of total assets at quarter-end, down 22% from prior-year quarter.

Profitability Metrics

Profitability metrics improved on a year-over-year basis. Return on equity (ROE) was 7.02% compared with 5.30% in the prior-year quarter. Return on assets (ROA) was 0.98% as compared with 0.73% in the year-ago period.

Share Repurchase Update

On June 27, 2011, Washington Federal had announced the repurchase authorization of an additional 10 million shares, an extension of its previous authorization of about 22 million shares.  During the quarter ended December 31, 2011, Washington Federal repurchased 1.55 million shares at a weighted average price of $13.11. The company still has an authorization to repurchase up to an additional 7,533,514 shares.

Dividend Update

Washington Federal is scheduled to pay a quarterly dividend of 8 cents per share on January 13, 2012 to shareholders of record as of December 30, 2011. This represents a 33% jump from the quarterly dividend of 6 cents, which was paid in the previous four quarters.

Acquisitions in the Reported Quarter

On October 17, 2011, Washington Federal completed its acquisition and integration of six branches from Charter Bank in New Mexico along with $254 million of deposits, including $70 million of transaction accounts.

On December 16, 2011, Washington Federal announced its decision to acquire Phoenix, Arizona-based failed Western National Bank. The terms of the deal state that the company will acquire almost all the loans and deposits of Western National. As of September 30, 2011, this failed bank had nearly $162.9 million in total assets and $144.5 million in total deposits.

Additionally, all the three branches of Western National in Maricopa County, Arizona will operate under the name of Washington Federal. The acquisition will make it possible for the company to further expand its branch network in Arizona, where it already has 21 branches.

Our Viewpoint

Though Washington Federal is enjoying the benefits of lower interest rates, the expected upward trend of interest rates will ruin the company’s deposit re-pricing effort in the mid to long term. We are also concerned about the company’s considerable exposure to real estate markets where values remain soft.

However, interest income expansion and nonperforming asset contraction will significantly support the bottom line. Moreover, continued capital deployment activities are expected to keep investors’ confidence in the stock undamaged. Also, the company will benefit from the recent acquisitions.

Two of the peers of Washington Federal, Astoria Financial Corporation (AF) and Sterling Financial Corporation (STSA) are expected to report their fourth-quarter 2011 results on January 25.

Currently, Washington Federal retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

 
ASTORIA FINL CP (AF): Free Stock Analysis Report
 
STERLING FIN WA (STSA): Free Stock Analysis Report
 
WASH FEDL INC (WFSL): Free Stock Analysis Report
 
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