Washington Federal Beats in 2Q

Washington Federal Inc. (WAFD - Analyst Report) reported second-quarter earnings for fiscal 2012 (ended March 31, 2012) of 32 cents per share, marginally beating the Zacks Consensus Estimate of 30 cents. The result was also substantially better than the year-ago quarter’s earnings of 23 cents.

Net unrealized gains along with decline in credit costs and decent expansion of net interest margin (NIM) boosted the quarter’s results. On the other hand, higher operating expenses and decline in top line had an unfavorable influence on the results. Overall, sustained improvement in asset quality and enhanced capital ratios were impressive.

Washington Federal’s net income in the reported quarter jumped 32% to $34.1 million from $25.8 million in the prior-year quarter.

Quarter in Detail

Washington Federal’s total revenue for the reported quarter was $109.6 million, down 39% from $114.1 million in the prior-year quarter. The decline was attributable to absence of a non-recurring gain on sale of investments realized in the prior-year quarter. However, this compares favorably with the Zacks Consensus Estimate of $106.0 million.

Net interest income for the quarter (before provision for loan losses) climbed up 3% year over year to $104.6 million. NIM for the reported quarter grew 3 basis points year over year to 3.29%.

Operating expenses for the quarter climbed 10.5% from the year-ago quarter to $36.8 million. The rise was mainly a result of higher compensation and benefits expenses as well as occupancy costs, which were partially offset by lower Federal Deposit Insurance Corporation (FDIC) premiums.

Credit Quality

Improvement in credit quality persisted during the six months-period ended March 31, 2012 with Washington Federal reporting lower balances of provision for loan losses, nonperforming assets and loan delinquencies. The company recorded provision for loan losses of $29.2 million as of March 31, 2012, down nearly 49% from $56.8 million as of September 30, 2011.

Moreover, as of March 31, 2012, total loan delinquencies were 2.95% against 3.43% as of September 30, 2011. Similarly, nonperforming assets totaled $286 million or 2.11% of total assets at March-end, down 23% from September 30, 2011.

Profitability Metrics

Profitability metrics continued to display improvement on a year-over-year basis. Return on equity (ROE) was 7.12% compared with 5.59% in the prior-year quarter. Return on assets (ROA) was 1.00% as compared with 0.77% in the year-ago period.

Share Repurchase Update

During the fiscal second quarter 2012, Washington Federal repurchased 625,200 shares at a weighted average price of $16.00. The shares were repurchased under the extended 10 million share buyback program announced in June 2011.

Acquisitions in the Reported Quarter

During the reported quarter, Washington Federal completed the systems conversion and integration of Phoenix, Arizona-based failed Western National Bank. The acquisition, announced in December 2011, added 3 branches in Arizona and is further expected to assist the company in expanding its branch network in this region.

On April 4, 2012, Washington Federal announced a deal to acquire Oregon-based South Valley Bancorp Inc. The deal is anticipated to be closed by October end. The merger deal will result in the combined company having 190 offices in 8 western states. Moreover, following the completion of the deal, total assets and total deposits of the company will sum up to $14.4 billion and $9.6 billion, respectively, based on financial results as of December 31, 2011. Also, the acquisition will lead to a greater access to branch network, higher liquidity and increased lending capacity, which will boost the profitability in the long run.

Our Viewpoint

Though Washington Federal is optimistic regarding the uptrend in the economy, we remain concerned about the company’s considerable exposure to real estate markets where pricing remains soft. Currently, Washington Federal is enjoying the benefits of lower interest rates, but the anticipated rise in interest rates will likely ruin the company’s deposit re-pricing effort going forward.

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

Two of the peers of Washington Federal, Astoria Financial Corporation (AF - Snapshot Report) and Sterling Financial Corporation (STSA - Snapshot Report) are expected to report their first quarter 2012 results on April 18 and April 25, respectively.

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