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Washington Federal (WFSL)

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We are downgrading our recommendation on Washington Federal (WFSL) to Underperform from Neutral, based on the pressure on net interest margin (NIM) and its lag with respect to deposit re-pricing. The company's fiscal second-quarter 2011 earnings marginally missed the Zacks Consensus Estimate.

Increased interest income, lower expenses and a substantial drop in provision for loan losses were among the positives during the quarter. However, weak loan demand and lower profitability metrics were the downside. We remain concerned about the company's considerable exposure to real estate markets where values remain soft.

Our six-month target price of $14.00 per share equates to about 14.4x our earnings estimate for fiscal 2011. Combined with the $0.24 per share annual dividend, this price target implies an expected negative total return of 8.2% over that period.

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