Washington Federal’s (WFSL) first fiscal quarter (ended Dec 31, 2009) earnings of 7 cents per share were a nickel short of the Zacks Consensus Estimate. This also compares unfavorably with the earnings of 23 cents in the year-ago quarter.
The results continued to be impacted by higher credit costs. Provision for loan losses and loss on real estate acquired through foreclosures has substantially increased during the reported quarter. However, as a result of weakness in the industry, Washington Federal took the opportunity to expand riding on its financial strength at an attractive cost. The acquisition of failed Horizon Bank on Jan 8, 2010 is expected to add materially to Washington Federal’s earnings in the upcoming quarters. Also, there will be limited risk to shareholders as Washington Federal has a loss sharing agreement with the FDIC.
Net income available to common shareholders for the reported quarter came in at $7.9 million, compared to $20.2 million in the prior year quarter.
In response to the deteriorating credit conditions of Washington Federal’s loan portfolio and continued declines in its real estate values, it recorded a massive provision for loan losses of $69.8 million in the reported quarter, compared to $35.0 million in the prior-year quarter. Allowance for loan losses was $191 million as of Dec 31, 2009.
Washington Federal’s net interest income (before provision for loan losses) for the quarter increased 8.6% year-over-year to $97.8 million. The increase in net interest income was primarily supported by a 23.3% decrease in interest expense to $67.9 million. As of Dec 31, 2009, the interest rate spread decreased to 3.08% from 3.17% as of Sep 30 2009.
Total other income for the quarter increased to $24.2 million from $4.2 million in the prior-year quarter. Total other expense for the quarter increased 9.7% year-over-year to $27.0 million.
As a result of a significant decline in real estate values throughout the western United States, efficiency ratio came in among the lowest in the industry at 26.6% during the quarter.
Washington Federal’s credit quality improved slightly during the quarter. Non-performing assets as a percentage of total assets decreased 6 basis points sequentially to 4.37% at Dec 31, 2009. There has been a meaningful decrease in non-performing loans over the last 6 months due to payoffs, write-downs and the migration of problem real estate loans to real estate owned (REO). Overall delinquencies declined to 4.74% in the current quarter from 4.86% at Sep 30, 2009.
Profitability metrics for the quarter worsened both sequentially and on a year-over-year basis. Return on equity was 1.80%, compared to 2.57% in the prior quarter and 5.97% in the prior-year quarter. Return on assets was 0.25% compared to 0.31% in the prior quarter and 0.66% in the prior-year quarter. The deterioration of both these ratios resulted from significant declines in real estate values throughout the western United States.
Though Washington Federal’s margin expansion and increased market share through acquisitions will be a great support going forward, we are concerned about the company’s significant exposure to real estate markets and suspect that it will continue to experience higher credit costs.
Read the full analyst report on “WFSL”
Zacks Investment Research
