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Washington Federal Beats on Earnings

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Washington Federal Inc.’s (WAFD - Free Report) fiscal second-quarter 2013 earnings (ended Mar 31) of 34 cents per share was ahead of the Zacks Consensus Estimate by a penny. This also compares favorably with the year-ago earnings of 32 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 second quarter surged 5.6% to $36.0 million from $34.1 million in the prior-year quarter.

Quarter in Detail

Washington Federal’s total revenue in the reported quarter was $132.6 million, declining 17.0% from $159.6 million in the prior-year quarter. However, total revenue surpassed the Zacks Consensus Estimate of $100.0 million.

Net interest income (NII) fell 11.1% year over year to $93.0 million. Similarly, net interest margin (NIM) declined 19 basis points from the prior-year quarter to 3.10%. The drop in both NII and NIM was mainly due to lower volume and yields on loans outstanding as well as lower yields on investments.

Operating expenses surged 11.8% from the year-ago quarter to $41.2 million. The rise was primarily a result of higher compensation and benefits expenses and occupancy costs, partially mitigated by lower Federal Deposit Insurance Corporation (FDIC) premiums as well as decline in other costs.

Credit Quality

During the reported quarter, credit quality continued to improve with Washington Federal reporting nil provision for loan losses compared with $18.0 million in the prior-year quarter. Likewise, net loan charge-offs came in at $4 million, plunging 86.3% from the year-ago period.

As of Mar 31, 2013, total loan delinquencies were 2.34% of total loans as against 2.57% as of Sep 30, 2012. Similarly, nonperforming assets totaled $246 million or 1.88% of total assets as of Mar 31, 2013, falling 9.8% from Sep 30, 2012 level.

Profitability Metrics

Washington Federal’s profitability metrics continued to display enhancement. As of Mar 31, 2013, return on average common equity (ROE) was 7.49% compared with 7.12% in the prior-year quarter. Return on assets (ROA) was 1.10% as compared with 1.00% in the year-ago period.

Share Repurchase Update

Washington Federal repurchased nearly 0.5 million shares at an average price of $16.99 per share in the reported quarter. As of Mar 31, 2013, the company has an authorization to buyback up to an additional 2.9 million shares.

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 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 #2 (Buy).

Among other companies in the same industry, Flagstar Bancorp Inc. (FBC - Free Report) and First Defiance Financial Corp. (FDEF - Free Report) are expected to report on Apr 22 and Sterling Financial Corporation is expected to report on Apr 24.

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