On Thursday, Washington Federal Inc.’s (WFSL) fiscal first quarter (ended December 31, 2010) earnings came in at 22 cents per share in line with the Zacks Consensus Estimate and compares favorably with the year-ago quarter’s earnings of 7 cents.
Net income available to common shareholders for the reported quarter came in at $24.5 million, compared with $7.9 million in the prior-year quarter.
Results benefited from a growth in net interest income and decline in provision for loan losses. However, high operating expenses were a headwind.
Quarter in Detail
Washington Federal’s total revenue reported during the quarter was $109.2 million, down 10.5% from $122.0 million in the prior-year quarter, mainly due to a fall in Other Income. Total revenue, however, beat the Zacks Consensus Estimate of $106.0 million.
Washington Federal’s net interest income (before provision for loan losses) for the quarter increased 7.1% year over year to $104.7 million. Net interest margin (NIM) rose 20 basis points (bps) to 3.34% during the quarter. The improvement in NIM was primarily attributable to reduced interest expense on borrowings and decreasing interest expense on deposits.
Operating expenses for the quarter were up $7.3 million or 21.3% year over year to $34.3 million. The rise was mainly a result of higher compensation and benefits expenses and FDIC insurance premiums.
Washington Federal’s efficiency ratio is among the lowest in the industry and stood at 31.4%.
Credit Quality
Washington Federal’s credit quality continued to show improvement during the quarter. In response to the improving credit conditions of its loan portfolio, the company recorded a provision for loan losses of $26 million for the quarter, significantly down from $69.8 million in the prior year quarter.
Though allowance for loan losses increased to $101 million as of December 31, 2010 from $75 million in the year-ago quarter, nonperforming assets as a percentage of total assets fell 107 bps from the year-ago period to 3.30% as of December 31, 2010.
Profitability Metrics
Profitability metrics improved on a year-over-year basis. Return on equity (ROE) was 5.30% compared with 1.80% in the prior year. Return on assets (ROA) was 0.73% compared with 0.25% in the prior year.
Stock Update
During the quarter, Washington Federal restarted its share repurchase program. The company repurchased 300,000 shares at an average price of $15.09. The remaining shares under the current board authorization are 2,581,714.
Our Take
Though net income expansion and decreased non-performing assets will be a great support going forward, but we remain concerned about Washington Federal’s significant exposure to real estate markets and apprehend credit quality deterioration. We believe that the ongoing soft market conditions will continue to force the company to aggressively write down problem assets.
Washington Federal currently retains a Zacks #3 Rank, which indicates a short-term ‘Hold’ rating. However, considering the fundamentals, we maintain our long-term ‘Underperform’ recommendation on the shares.
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