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July 24, 2009
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Washington Federal, Inc.’s (WFSL) third fiscal quarter adjusted results of $0.07 per diluted share surpassed our estimate by three pennies and consensus by four pennies. However, the results continued to be impacted by higher credit costs. Credit quality and profitability metrics significantly deteriorated during the quarter.
Net income available to common shareholders for the quarter came in at $2.5 million or $0.03 per diluted share, compared to $33.2 million or $0.38 per diluted share in the prior year quarter. Net income available to common shareholders for the reported quarter excludes preferred dividends of $3.5 million.
The quarterly results included a pre-tax loss of $4.8 million on real estate acquired through foreclosure. Also, during the quarter, there was a charge of $2.0 million related to Washington Federal’s repurchase of $200 million of preferred stock held by the Treasury under the TARP. Excluding these one-time items, we arrive at adjusted operating earnings of $0.07 per diluted share.
In response to the deteriorating credit conditions of Washington Federal’s loan portfolio and the increasing non-performing assets, the company recorded a massive provision for loan losses of $52.2 million in the reported quarter, compared to $13.2 million in the prior-year quarter.
Net interest income (before provision for loan losses) for the quarter increased 16.8% year-over-year to $94.3 million. The increase in net interest income was primarily supported by a 24.3% decrease in interest expense to $75.5 million and a 24.6% increase in income from mortgage-backed securities to $27.9 million. The quarter experienced increased net interest spread due to lower deposit rates. As of June 30, 2009, spread increased to 3.27% from 2.69% in the year-ago period.
Total other income for the quarter came in at $5.3 million, down 29.3% from $7.6 million in the prior-year quarter. Total other expense for the quarter increased 30.8% year-over-year to $30.9 million. The year-over-year increase in total other expense was primarily the result of increased compensation and FDIC insurance costs.
The rise in FDIC insurance costs increased the efficiency ratio to 31.06% during the quarter from 27.81% in the prior-year quarter. However, the efficiency ratio remains among the lowest in the peer group [Astoria Financial (AF), Dime Community Bancshares (DCOM), New York Community Bancorp (NYB), and TrustCo Bank Corp (TRST)].
Credit quality deteriorated drastically during the quarter. Non-performing assets as a percentage of total assets increased 102 basis points sequentially to 5.03% at June 30, 2009. The deterioration was attributable to the weakening credit conditions in the company’s loan portfolio.
In response to the deteriorating credit conditions, Washington Federal has increased its allowance for loan losses during the quarter. As of June 30, 2009, the allowance for loan losses increased to $162 million from $143 million as of March 31, 2009.
Profitability metrics for the quarter worsened both on a sequential as well as a year-over-year basis. Return on equity was 0.71%, compared to 2.40% in the prior quarter and 9.61% in the prior-year quarter. Return on assets was 0.08% as compared to 0.27% in the prior quarter and 1.13% in the prior-year quarter. The deterioration of both these ratios was a result of significant declines in real estate values throughout the western United States.
Though credit quality drastically worsened during the quarter, declining deposit rates helped improve funding concerns to a great extent and the capital position remained strong. As such, we maintain our Hold recommendation on the WFSL shares.
Read the full analyst report on "WFSL"
Read the full analyst report on "AF"
Read the full analyst report on "DCOM"
Read the full analyst report on "NYB"
Read the full analyst report on "TRST"
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