Analysts said Washington Federal Inc.’s deal to buy First Federal Banc of the Southwest Inc. is a good use of surplus capital that should give the Seattle thrift company’s net interest margin a lift.
The $8.8 billion-asset Washington Federal would expand into New Mexico with the $99 million cash deal, which would be its first acquisition in more than three years.
Roy M. Whitehead, Washington Federal’s chairman and chief executive, said Tuesday in a press release that his company expects the acquisition of the $562 million-asset First Federal to “be accretive to earnings in 2007 with additional earnings growth through the coming years.”
Washington Federal would gain 13 branches in New Mexico and two in Texas.
“This deal pushes them into a few new markets, adds a couple of branches in Texas, probably helps their margin a little bit, and, maybe most important of all, uses some of their excess capital,” James Bradshaw, an analyst at D.A. Davidson in Portland, Ore., said in an interview Wednesday.
He said New Mexico is a natural extension for Washington Federal. It has 43 branches and 38% of its loan portfolio in its home state but also has 20 branches in Arizona, three in Nevada, and three in Texas. Loans in Arizona make up about 10% of its portfolio and those in Texas and Nevada about 1% each.
Mr. Bradshaw said, “They sort of surrounded New Mexico to a degree, so getting into New Mexico, and maybe Colorado someday too, makes sense for these guys.”
The flattened and inverted yield curve has pressured Washington Federal’s net interest margin as funding costs have risen faster than yields on loans. Its net interest margin fell 32 basis points from a year earlier, to 3%, in its fiscal third quarter, which ended June 30.
Analysts said that buying First Federal, of Roswell, should help Washington Federal’s margin, though the seller’s loan portfolio, at $412 million, is small relative to the buyer’s, at $6.8 billion.
Paul Miller at Friedman, Billings, Ramsey & Co. Inc., wrote in a report issued Wednesday that First Federal’s loan portfolio “earns an impressive weighted-average yield of 7.1%.”
Mr. Bradshaw said the yield on First Federal’s portfolio is 100 basis points above the yield on new loans Washington Federal could issue. Washington Federal has “been unwilling to buy back stock at where the share price is sitting,” he said, “so I think this is a good deployment of excess capital for these guys.”
Washington Federal’s stock was trading at $22.60 Wednesday, about 9% below the all-time high it reached in mid-January. The First Federal deal is expected to close next quarter.
