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Washington Federal Beats, Revs Dip

WAFD STSA

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Washington Federal Inc.’s (WAFD - Analyst Report) fiscal fourth quarter 2012 earnings (ended September 30) of 33 cents per share, slightly beat the Zacks Consensus Estimate of 31 cents. This was also an improvement from the year-ago quarter’s earnings of 28 cents.

For fiscal 2012, Washington Federal’s earnings of $1.29 per share were marginally ahead of the Zacks Consensus Estimate of $1.27. Moreover, this compares favorably with the prior-year earnings of $1.00.

Constantly declining credit costs were largely responsible for the improved results. However, higher operating expenses coupled with a decline in top line were the headwinds. Overall, continuous improvement in asset quality and enhanced capital ratios were impressive.

Washington Federal’s net income in the fiscal fourth quarter surged 15.9% to $35.5 million from $30.7 million in the prior-year quarter.

Quarter in Detail

Washington Federal’s total revenue in the fiscal fourth quarter was $137.6 million, declining 15.9% from $163.7 million in the prior-year quarter. However, total revenue beat the Zacks Consensus Estimate of $101.0 million.

In fiscal 2012, total revenue was $606.8 million, down 12.1% from $690.6 million in fiscal 2011. Total revenue significantly surpassed the Zacks Consensus Estimate of $423.0 million.

Net interest income (before provision for loan losses) fell 11.8% year over year to $92.2 million mainly due to lower asset yields, partially offset by lower interest expenses.

Operating expenses surged 5.2% from the year-ago quarter to $35.7 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.

Credit Quality

During fiscal 2012, credit quality continued to improve with Washington Federal reporting provision for loan losses of $45.0 million as of September 30, 2012, which dipped 51.7% on a year-over-year basis. Likewise, net loan charge-offs for fiscal 2012 came in at $70.0 million, declining 29% from the year-ago period.

As of September 30, 2012, total loan delinquencies were 2.57% of total loans as against 3.43% as of September 30, 2011. Similarly, nonperforming assets totaled $273.0 million or 2.19% of total assets at September-end, falling 26% from September 30, 2011.

Profitability Metrics

Washington Federal’s profitability metrics continued to display enhancement. As of September 30, 2012, return on equity (ROE) was 7.23% compared with 5.99% in the prior-year. Return on assets (ROA) was 1.03% as compared with 0.83% in the year-ago period.

Share Repurchase

During fiscal 2012, Washington Federal repurchased nearly 3.0 million shares at an average price of $14.48 per share. The company has an authorization to buyback up to an additional 6.2 million shares.

Other developments

During the fiscal fourth quarter, Washington Federal received approval from the regulators to complete its acquisition of South Valley Bank and Trust. The deal is expected to close on October 31. Earlier in April, the company had announced a deal to acquire South Valley. Upon closure, the transaction is expected to be immediately accretive to earnings.

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

Our Viewpoint

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 efforts going forward. Moreover, extensive capital deployment activities along with the recent acquisitions will boost investors’ confidence in the stock.

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.

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.

Among Washington Federal's peers, Sterling Financial Corporation (STSA - Snapshot Report) is expected to report its third quarter 2012 earnings results on October 25.
 

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