Washington Federal Inc. (WAFD) came out with yet another impressive quarter with its fiscal third-quarter 2014 earnings (ended Jun 30) of 37 cents per share beating the Zacks Consensus Estimate by a penny. It also compared favorably with the prior-year quarter figure of 36 cents. This marked the company’s tenth consecutive quarter of earnings beat.
Results were aided by higher revenues, a benefit from provision and improving credit quality. However, a fall in net interest margin (NIM) and increased operating expenses were on the downside.
Washington Federal’s net income increased 1.5% year over year to $37.9 million.
Quarter in Detail
Total revenue for the reported quarter came in at $143.1 million, up 7.4% year over year. Further, it significantly outpaced the Zacks Consensus Estimate of $111.0 million.
Net interest income increased 9.0% from the prior-year quarter to $103.3 million. The rise was mainly driven by higher investment income and lower interest expense on customer accounts. Also, other income grew significantly 59.6% year over year to $8.1 million. However, NIM decreased 10 basis points (bps) from the prior-year quarter to 3.05% due to lower yields on cash and investment balances.
Operating expenses increased 28.1% from the year-ago quarter to $53.3 million. The rise was primarily due to increase in compensation and benefits expenses owing to increased employees and costs pertaining to increased number of branch locations
Washington Federal’s profitability ratios deteriorated during the quarter. As of Jun 30, 2014, return on average common equity (:ROE) was 7.64%, down from 7.73% in the prior-year quarter while, return on average assets (:ROA) was 1.04%, compared with 1.15% in the year-ago period.
As of Jun 30, 2014, net loans receivable increased to almost $8.0 billon from $7.5 billion as of Sep 30, 2013, while customer accounts stood at $10.8 billion, up from $9.1 billion as of Sep 30, 2013.
Credit quality continued to improve in the quarter as Washington Federal reported provision for loan losses as a reversal of $3.0 million, against no provision in the prior-year quarter. Likewise, net loan recoveries came in at $2.0 million compared with net loan charge-offs of $5.0 million in the year-ago quarter.
Further, allowance for loan losses was 1.35% of total gross loans, down from 1.46% as of Sep 30, 2013.
Washington Federal bought back 1.5 million shares for approximately $32.46 million in the said quarter. Moreover, the company has authorization to repurchase an additional 7.0 million shares.
We remain encouraged as Washington Federal continued to exhibit a decent performance. Further, the prolonged low interest rate environment should not significantly affect its top line as its transaction deposit account portfolio is less sensitive to 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 strategic 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 a challenge to the bank’s performance as well.
Currently, Washington Federal carries a Zacks Rank #4 (Sell).
Among other companies in the savings and loan institution space, First Niagara Financial Group Inc. (FNFG), Hudson City Bancorp, Inc. (HCBK) and Capitol Federal Financial, Inc. (CFFN) are scheduled to report quarterly results on Jul 25, Jul 23 and Jul 28, respectively.