Washington Federal Inc.’s (NASD:WAFD) fiscal first-quarter 2014 earnings (ended Dec 31) came in at 39 cents per share, surpassing the Zacks Consensus Estimate of 37 cents. The reported figure also compared favorably with 33 cents earned in the year-ago quarter.
Notably, our proven model had predicted that Washington Federal would beat earnings as it had the right combination of two key ingredients: Earnings ESP of +2.70% and Zacks Rank #3 (Hold).
Better-than-expected results were driven by top-line growth, partly offset by higher operating expenses. Moreover, improvements in asset quality and profitability ratios were tailwinds.
Washington Federal’s net income increased 14.0% year over year to $40.2 million.
Performance in Detail
Washington Federal’s total revenue for the reported quarter came in at $137.0 million, up 0.6% year over year. Further, it outpaced the Zacks Consensus Estimate of $106.0 million.
Net interest income rose 3.0% from the prior-year quarter to $98.3 million. The rise was mainly driven by lower interest expense on customer accounts. Likewise, other income increased 16.8% year over year to $5.9 million. However, net interest margin decreased 10 basis points (bps) from the prior-year quarter to 3.12% due to lower yields on loans.
Operating expenses increased 15.2% from the year-ago quarter to $44.1 million. The rise was primarily due to increase in compensation and benefits expenses.
Washington Federal’s profitability metrics depicted an improvement as of Dec 31, 2013. Return on average common equity (:ROE) was 8.26%, up from 7.41% in the prior-year quarter. Moreover, return on assets (:ROA) was 1.19%, compared with 1.10% in the year-ago period.
Credit quality continued to improve in the quarter with Washington Federal reporting provision for loan losses as a benefit of $4.6 million, against a provision of $3.6 million in the prior-year quarter. Likewise, net loan recoveries came in at $0.6 million compared with net loan charge-offs of $10.0 million in the year-ago quarter.
As of Dec 31, 2013, total loan delinquencies were 1.81% of total loans, down 108 bps from 2.89% as of Dec 31, 2012.
Washington Federal bought back 0.9 million shares for approximately $18.9 million in the said quarter. Moreover, the company has authorization to repurchase 9.0 million shares.
During the said quarter, Washington Federal completed the deal to acquire 51 branches from Bank of America Corporation (NYSE:BAC) for $17.3 million. The acquired branches are located in Eastern Washington, Idaho, Oregon and New Mexico and added $1.3 billion of deposits and $8.3 million of loans to the company’s balance sheet.
Management anticipates expenses related to the new branches to be a drag on earnings over the next two quarters as it completes branch consolidations. Further, the company expects operating expenses to increase going forward due to branch acquisition.
Presently, Washington Federal continues to benefit from comparatively low interest rates. However, the expected rise in interest rates will likely hurt the company’s deposit re-pricing efforts. Nevertheless, extensive capital deployment activities, along with the acquisitions, will boost shareholders’ confidence in the stock.
Though Washington Federal is optimistic about the recovering economy, we remain concerned about the company’s sizeable exposure to real estate markets, where pricing remains soft. Further, mounting expenses is also a challenge to the bank’s performance.
Among other companies in the same industry, People's United Financial Inc. (NASD:PBCT) and Flagstar Bancorp Inc. (NYSE:FBC) are scheduled to report fourth quarter and full-year 2013 earnings on Jan 16 and Jan 22, respectively.