WFSL Washington Federal, Inc. (MM)

Washington Federal Inc.’s (WFSL) fiscal third quarter (ended June 30, 2011) earnings came in at 27 cents per share, two cents ahead of the Zacks Consensus Estimate.

The result was substantially better than the year-ago quarter’s earnings of 11 cents.  

Earnings for the reported quarter benefited primarily from increased net interest income and an almost stable provision for loan losses. However, higher operating expenses were the downside. The company also witnessed weak loan demand during the reported quarter.

Quarter in Detail

Washington Federal’s total revenue for the reported quarter was $110.4 million, up 5.7% from $104.4 million in the prior-year quarter. This compares favorably with the Zacks Consensus Estimate of $105.0 million.

Net interest income for the quarter (before provision for loan losses) increased 6.9% year over year to $106.1 million. Net interest margin (NIM) increased 18 basis points (bps) sequentially and 30 bps year over year to 3.44%. The increase was primarily attributable to growth in investments and the re-pricing benefit from lower deposit rates.

Operating expenses for the quarter increased 3.9% year over year to $34.2 million. The rise was mainly a result of higher compensation and benefits.

Washington Federal’s efficiency ratio came in at 31.3%, which is among the lowest in the industry.

Credit Quality

Credit quality was mixed during the quarter with lower charge-offs and non-performing assets but higher loan delinquencies. The company recorded a provision for loan losses of $21.0 million in the quarter, almost flat with the prior-year quarter.

Though allowance increased 7 bps sequentially to 1.41% of loans, nonperforming assets as a percentage of total assets dipped 2 bps sequentially to 2.96% as of June 30, 2011.

Profitability Metrics

Profitability metrics improved on a year-over-year basis. Return on equity (ROE) was 6.55% compared with 2.77% in the prior-year quarter. Return on assets (ROA) was 0.90% compared with 0.37% a year ago.

Dividend Update

Washington Federal is scheduled to pay a quarterly dividend of 6 cents per share on July 22 to shareholders of record as of July 8.

Share Repurchase Update

On June 27, Washington Federal announced the repurchase authorization of an additional 10 million shares. This is an extension of its previous authorization of about 22 million shares, which was announced in 1995 with no expiration date. During the quarter, the company bought back about 1.7 million shares at a weighted average price of $15.72.

Acquisition of Charter Bank Deposits

On June 8, Washington Federal announced the signing of an agreement to acquire $253 million deposits and six branches of Albuquerque, New Mexico-based Charter Bank. With these new additions, the company’s total branch count will increase to 166.

Our Viewpoint

Though we remain concerned about the pressure on NIM and the company’s considerable exposure to real estate markets where values remain soft, interest income expansion and non-performing asset contraction will significantly support the bottom line.    

Washington Federal currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Its competitor –– Astoria Financial Corporation (AF) –– also retains a Zacks #3 Rank.

Washington Federal, Inc. (MM) (NASDAQ:WFSL)
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