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Washington Federal Inc.’s (WFSL) fiscal second quarter (ended March 31, 2011) earnings came in at 23 cents per share, 2 pennies shy of the Zacks Consensus Estimate. However, results were substantially better than the year-ago quarter’s adjusted loss of 11 cents.
The year-ago quarter’s number excluded a gain of $85.6 million related to the acquisition of the failed Horizon Bank, and a recovery of $39.0 million related to the settlement of a contingent federal tax liability. Considering these non-recurring items, Washington Federal reported net income of 73 cents per share in the year-ago quarter.
Results for the reported quarter primarily benefited from increased interest income, lower expenses and a substantial drop in provision for loan losses. However, loan demand remained weak and profitability metrics deteriorated.
Quarter in Detail
Washington Federal’s total revenue for the reported quarter was $114.1 million, down 39.4% from $188.1 million in the prior-year quarter. However, this compares favorably with the Zacks Consensus Estimate of $108.0 million.
Net interest income (before provision for loan losses) for the quarter increased 4.7% year over year to $101.6 million. Net interest margin (NIM) decreased 8 basis points (bps) sequentially but increased 17 bps year over year to 3.26%. The sequential decrease was primarily due to the negative impact of net loan and investment runoff and re-pricing, which more than offset the benefit from lower deposit costs.
Operating expenses for the quarter were down 16.6% year over year at $33.3 million. The rise was mainly a result of lower compensation and benefits.
Washington Federal’s efficiency ratio stood at 31.5%, which is among the lowest in the industry.
Credit quality continued to show improvement during the quarter at Washington Federal with lower delinquencies, charge-offs and non-performing assets. In response to the improving credit conditions of its loan portfolio, the company recorded a provision for loan losses of $30.8 million in the quarter, down 51.5% from $63.4 million in the prior-year quarter.
Though allowance increased 9 bps sequentially to 1.34% of loans, nonperforming assets as a percentage of total assets fell 32 bps sequentially to 2.98% as of March 31, 2011.
Profitability metrics deteriorated on a year-over-year basis. Return on equity (ROE) was 5.59% compared with 18.24% in the prior-year quarter. Return on assets (ROA) was 0.77% compared with 2.44% a year ago.
On March 28, the board of directors of Washington Federal declared a quarterly dividend of 6 cents per share. The dividend will be paid on April 22,to shareholders of record as of April 8.
Share Repurchase Update
During the quarter, Washington Federal bought back 350,000 shares of its common stock at a weighted average price of $17.27.
We remain concerned about the company’s considerable exposure to real estate markets where values remain soft. Also, unemployment remained high throughout the eight state territory of the company. Though interest income expansion and improving credit quality are expected to hold up the financials, soft loan demand will resist revenue growth.
Washington Federal currently retains a Zacks #3 Rank, which translates into a short-term Hold recommendation.Furthermore, we maintain a long-term Neutral recommendation on the stock. Washington Federal’s competitor ––First Financial Holdings Inc. (FFCH - Snapshot Report), however, retains a Zacks #2 Rank (a short-term Buy rating).
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