Washington Federal Inc.’s (WAFD) second-quarter fiscal 2014 earnings (ended Mar 31) of 38 cents per share was in line with the Zacks Consensus Estimate. Moreover, the reported figure was up 11.8% from 34 cents in the prior-year quarter.
Higher revenues, a benefit from provision and improving credit quality were positives for the quarter. However, a rise in operating expenses dragged the results. Further, profitability ratios remained strong during the quarter.
Washington Federal’s net income increased 7.4% year over year to $38.7 million.
Performance in Detail
Total revenue for the reported quarter came in at $139.1 million, up 4.9% year over year. Further, it significantly outpaced the Zacks Consensus Estimate of $110.0 million.
Net interest income increased 8.2% from the prior-year quarter to $100.6 million. The rise was mainly driven by lower interest expense on customer accounts. Likewise, other income grew 10.9% year over year to $6.7 million. However, net interest margin decreased 7 basis points (bps) from the prior-year quarter to 3.03% due to lower yields on cash and investment balances.
Operating expenses increased 26.5% from the year-ago quarter to $52.1 million. The rise was primarily due to increase in compensation and benefits expenses as well other expenses.
Washington Federal’s profitability ratios remained strong as of Mar 31, 2014. Return on average common equity (:ROE) was 7.85%, up from 7.49% in the prior-year quarter. Return on assets (:ROA) was 1.07%, compared with 1.10% in the year-ago period.
Credit quality continued to improve in the quarter as Washington Federal reported provision for loan losses as a benefit of $4.3 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 $4.0 million in the year-ago quarter.
Further, allowance for loan losses was 1.40% of total gross loans, down 6 bps from 1.46% as of Sep 30, 2013.
Washington Federal bought back 0.6 million shares for approximately $12.8 million in the said quarter. Moreover, the company has authorization to repurchase 8.0 million shares.
During the said quarter, Washington Federal announced a deal to acquire 23 additional branches from Bank of America Corporation (BAC) for approximately $8 million. The to-be-acquired branches are located in Arizona and Nevada and will add deposits of $610 million and loans of $4 million to the company’s balance sheet. The deal is still subject to regulatory approval and will expectedly close by Jun 2014.
Earlier in Dec 2013, Washington Federal had completed the acquisition of 51 branches from BofA for $39 million. These branches were located in Eastern Washington, Idaho, Oregon and New Mexico.
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 a challenge to the bank’s performance as well.
Currently, Washington Federal carries a Zacks Rank #3 (Hold).
Among other companies in the same industry, First Niagara Financial Group Inc. (FNFG) and Hudson City Bancorp, Inc. (HCBK) are scheduled to report first-quarter 2014 results on Apr 24 and Apr 29, respectively.