Washington Federal Inc.’s (WAFD) shares fell nearly 2.3% following the release of its fiscal first-quarter 2015 results (ended Dec 31) on Jan 14, before the market opened. Earnings of 39 cents per share came in line with the Zacks Consensus Estimate as well as with the prior-year quarter figure.
Despite in-line results, shares of Washington Federal fell reflecting concerns over continuously rising expenses and deteriorating profitability. These have kept investors skeptical about the company’s future.
The quarter witnessed higher revenues on the back of a rise in net interest income. However, lower other income and escalating operating expenses were the dampeners. Among other highlights, asset quality improved, while deterioration was witnessed in profitability ratios.
Washington Federal’s net income decreased 4.5% year over year to $38.4 million.
Performance in Detail
Total revenue came in at $107.6 million, up 3.4% year over year. However, it was 6.4% lower than the Zacks Consensus Estimate of $115.0 million.
Net interest income increased 3.9% from the prior-year quarter to $102.2 million. The rise was mainly driven by increased assets, arising from acquisitions of deposits in 2014.
Net interest margin witnessed a decline of 11 basis points (bps) from the prior-year quarter to 3.01%. Lower yields on loans led to the decline.
However, other income fell 7% year over year to $5.4 million. It includes a $2.6 million prepayment charge related to Federal Home Loan Bank advance of $100 million; which is to be written off over the remaining nine months of fiscal 2015, by a reduction in interest expense.
Operating expenses increased 21.5% from the year-ago quarter to $53.6 million. The rise was primarily due to an increase in all items of expenses on account of branch acquisitions from Bank of America Corporation (BAC) during fiscal 2014. One exception was FDIC premiums, which fell significantly in the reported quarter.
Credit Quality
Credit quality continued to improve during the quarter. Washington Federal’s provision for loan losses constituted a reversal of $5.5 million against a reversal of $4.6 million in the year-ago quarter.
Moreover, non-performing loans were down 14.3% year over year to $98 million as of Dec 31, 2014. Further, total loan delinquencies decreased from 1.81% as of Dec 31, 2013 to 1.47% in the reported quarter.
However, there was a major decline in net loan recoveries, which stood at $1.0 million, against $6.0 million reported in the prior-year quarter.
Profitability Ratios
Washington Federal’s profitability ratios deteriorated in the quarter. As of Dec 31, 2014, return on average common equity (“ROE”) was 7.84%, down from 8.26% in the prior-year quarter. Return on average assets (“ROA”) was 1.05%, down from 1.19% in the year-ago quarter.
Share Repurchase
Washington Federal bought back 1.1 million shares for an average price of $21.79 per share in the reported quarter. The company has authorization to repurchase an additional 4.0 million shares.
Our Viewpoint
Washington Federal has exhibited a steady performance till now. Low sensitivity of the transaction deposit account portfolio has limited the company’s exposure to the prevalent low interest rate environment. Further, the company continues to benefit from deposit re-pricing efforts owing to lower deposit rates.
However, the expected interest rate rise in mid-2015 can likely hurt such efforts. Nevertheless, the company is well positioned to continue its growth through strategic acquisitions, given its strong capital and liquidity position.
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. Moreover, mounting expenses pose a challenge to the bank’s performance as well.
Currently, Washington Federal carries a Zacks Rank #3 (Hold).
Among other financial savings and loan institutions, Banner Corporation (BANR) and Citizens Financial Group, Inc. (CFG) are slated to report on Jan 21 and Jan 26, respectively.
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