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Washington Federal Inc.’s (WAFD - Analyst Report) fiscal first quarter 2013 earnings (ended Dec 31) of 33 cents per share beat the Zacks Consensus Estimate by a penny. This was also an improvement from the year-ago earnings of 31 cents.

Constantly declining credit costs primarily drove the results. However, higher operating expenses and lower top line were the headwinds. Improvement in asset quality and enhanced capital ratios were the other highlights of the quarter.

Washington Federal’s net income in the fiscal first quarter surged 5.6% to $35.3 million from $33.4 million in the prior-year quarter.

Quarter in Detail

Washington Federal’s total revenue in the reported quarter was $136.3 million, declining 15.1% from $160.6 million in the prior-year quarter. However, total revenue beat the Zacks Consensus Estimate of $99.0 million by 37.6%.

Net interest income (before provision for loan losses) fell nearly 8.0% year over year to $95.4 million. Net interest margin came in at 3.22%, down 6 basis points (bps) from the prior-year quarter.

Operating expenses surged 11.5% from the year-ago quarter to $38.3 million. 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 the reported quarter, credit quality continued to improve with Washington Federal reporting provision for loan losses of $3.6 million as of Dec 31, 2012, which dipped 67.9% on a year-over-year basis. Likewise, net loan charge-offs came in at $10.0 million, declining 28.6% from the year-ago period.

As of Dec 31, 2012, total loan delinquencies were 2.89% of total loans as against 3.13% as of Dec 31, 2011. Similarly, nonperforming assets totaled $264.0 million or 2.02% of total assets as of Dec 31 2012, falling 23.0% from Dec 31, 2011.

Profitability Metrics

Washington Federal’s profitability metrics continued to display enhancement. As of Dec 31, 2012, return on average common equity (ROE) was 7.41% compared with 7.02% in the prior-year quarter. Return on assets (ROA) was 1.11% as compared with 0.98% in the year-ago period.

Share Repurchase

Washington Federal repurchased nearly 2.7 million shares at an average price of $16.60 per share in the reported quarter. The company has an authorization to buyback up to an additional 3.5 million shares.

Other developments

During the quarter, Washington Federal successfully completed the acquisition of South Valley Bank and Trust. Upon closure, the transaction added $514 million in loans, $743 million in deposits and 24 branches to Washington Federal’s branch network. The deal was announced in Apr 2012.

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 Rank #3 (Hold). Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

Among Washington Federal's peers, Sterling Financial Corporation , which holds a Zacks Rank #2 (Buy), is expected to report its fourth quarter 2012 results on Jan 24.

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