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Washington Federal Beats Earnings & Revs

Zacks Equity Research

Washington Federal Inc.’s (WAFD) fiscal fourth-quarter 2013 earnings (ended Sep 30) came in at 41 cents per share, beating the Zacks Consensus Estimate by a nickel. Also, this compared favorably with 33 cents earned in the year-ago quarter.

Better-than-expected results were driven by increase in net interest income and other income, partially offset by higher operating expenses. Moreover, consistent improvement in asset quality and strong profitability ratios were the tailwinds.

Washington Federal’s net income in the said quarter grew 20.8% year over year to $42.9 million.

Further, for fiscal 2013, net income was $151.5 million or $1.45 per share, up from $138.2 million or $1.29 per share. Earnings surpassed the Zacks Consensus Estimate of $1.38 per share.

Performance in Detail

Washington Federal’s total revenue for the reported quarter came in at $136.2 million, down 1.1% year over year. However, total revenue outpaced the Zacks Consensus Estimate of $100.0 million.

For fiscal 2013, total revenue was $538.2 million, decreasing 11.3% from the prior-year figure. Nevertheless, it significantly surpassed the Zacks Consensus Estimate of $395.0 million.

Net interest income rose 5.2% from the prior-year quarter to $97.0 million. The rise was mainly driven by higher interest rates and increase in both investment and loan balances. Also, net interest margin increased 14 basis points (bps) from the prior-year quarter to 3.21%. Likewise, other income increased 80.4% year over year to $5.9 million.

Operating expenses increased 20.9% from the year-ago quarter to $43.2 million. The rise was primarily due to increase in compensation and benefits expenses, occupancy costs and other costs, partially mitigated by lower Federal Deposit Insurance Corporation (:FDIC) premiums.

Washington Federal’s profitability metrics improved for the fiscal year ended Sep 30, 2013. Return on average common equity (:ROE) was 7.88%, up from 7.23% in the prior-year quarter. Also, return on assets (:ROA) was 1.17%, compared with 1.03% in the year-ago period.

Credit Quality

In the reported quarter, credit quality continued to improve with Washington Federal reporting provision for loan losses as a benefit of $2.3 million, compared with a provision of $5.4 million in the prior-year quarter. Likewise, net loan recoveries came in at $0.9 million compared with net loan charge-offs of $11.0 million in the year-ago quarter.

As of Sep 30, 2013, total loan delinquencies were 1.97% of total loans, down 60 bps from 2.57% as of Sep 30, 2012.

Capital Deployment Activities

In the reported quarter, Washington Federal hiked its quarterly cash dividend by 11% to 10 cents per share. The dividend will be paid on Oct 18, to stockholders of record as of Oct 4.

Further, during the fiscal year, Washington Federal repurchased 6.3 million shares at an average price of $17.46 per share. Moreover, the company authorized repurchase of an additional 9.8 million shares. During fiscal 2013, the company returned 98% of net income to shareholders in the form of cash dividends and share repurchases.

Moreover, during the said quarter, Washington Federal announced a deal to acquire 51 branches from Bank of America Corporation (BAC). The acquisition of the branches located in Eastern Washington, Idaho, Oregon and New Mexico will add $1.8 billion of deposits and $11 million of loans to the company’s balance sheet. The company anticipates the deal to close in two parts by Dec 31.

Our Viewpoint

Presently, Washington Federal continues to benefit from lower interest rates. However, the expected rise in interest rates will likely hurt the company’s deposit re-pricing efforts in the near term. Moreover, extensive capital deployment activities, along with the acquisitions, will boost shareholders’ confidence in the stock.

Though Washington Federal is optimistic about recovering economy, we remain concerned about the company’s sizeable exposure to real estate markets, where pricing remains soft.

Washington Federal currently carries a Zacks Rank #3 (Hold).

Among other companies in the same industry, Flagstar Bancorp Inc. (FBC) and First Defiance Financial Corp. (FDEF) are expected to report third-quarter 2013 earnings on Oct 22 and Oct 28, respectively.

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