Its numbers are still a bit wanting, but Washington Federal Inc. is distinguishing itself from the pack of recession-hit also-rans in the beleaguered Pacific Northwest.
In its most recent quarter, the $12.6 billion-asset Seattle company nearly doubled its loan losses from the same period a year earlier, it said Tuesday. But analysts, looking ahead, note that the company is primed for a major growth spurt, with credit problems leveling off and a sizable war chest of capital at its fingertips. Washington Federal raised $333 million in capital in the latter part of 2009, a move observers considered likely to put it in a position to buy other banks.
"Even though the earnings were lighter than what we had expected, their problems peaked two quarters ago, and they are moving on," said Jeffrey A. Rulis, an analyst at D.A. Davidson & Co. The firm was an adviser during the capital-raising effort last year. "Given their capital base, Washington Federal is in a position to do what they want now," he said.
The company deployed some of that capital this month by acquiring the $1.3 billion-asset Horizon Bank in Bellingham, Wash., from the Federal Deposit Insurance Corp.
Washington Federal did not return a phone call seeking comment on Tuesday. Yet Rulis said that, with as many as 30 banks in Washington state potentially headed toward failure, the company stands to pick up $5 billion to $6 billion of assets from other institutions. He added that Washington Federal could possibly go after a bank as large as $12 billion of assets, which would double its size.
Analysts viewed the Horizon deal favorably because it allowed the Seattle company to expand in the northwest part of the state.
"To the average bank, Horizon likely was not super-attractive, given that it was heavily funded by CDs and [with] its exposure to construction loans," Rulis said. "But Washington Federal has a much larger portfolio to take on those loans. It should be pretty turnkey for them, and this really beefs up their presence from Seattle to the Canadian border."
Sara Hasan, an analyst at McAdams Wright Ragen, predicted that the company would cap its asset growth at $2.5 billion, which would keep its tangible common equity ratio above 10%, based on Dec. 31 data. Its tangible common equity ratio at the end of the quarter was 11.53%.
However, she said, should the company remain profitable, that ratio would grow, giving the company more capacity for growth.
Washington Federal could also benefit from the accounting gain available to institutions that acquire failed banks, Rulis said. Companies are able to book the difference between the discounted value of the failed bank's assets and the maximum loss exposure to the buyer.
In the case of Washington Federal's purchase of the failed Horizon, Rulis said he is expecting a gain of $30 million to $40 million, which should show up in this quarter's results.
The company on Tuesday reported net income of $7.9 million for its first quarter, ended Dec. 31, a decline of 61% from a year earlier. The drop in profit was driven primarily by a $69.5 million provision for loan losses, slightly less than double the provision taken a year earlier. The massive increase in credit costs was partially offset by a $20 million gain Washington Federal posted on securities sold during the quarter.
Though the company's earnings for the quarter generally disappointed analysts, some said the results comprised important evidence pointing toward improvement. For example, Hasan and Rulis both noted that the quarterly report said nonperforming assets and chargeoffs had stopped rising and that Washington Federal had increased its reserve.
"A net decrease in nonperforming assets, even if they have done so through charging off assets, is a positive signal," Rulis said. "We aren't seeing a major wave of new credit problems."
As of Dec. 31, the company's nonperforming assets totaled $553 million, or 4.37% of total assets, up 81% from a year earlier. Chargeoffs totaled $46 million, up threefold from a year earlier.
Hasan also pointed to the company's shrinking construction portfolio, which contains the bulk of its problem assets. This portfolio was less than 10% of assets at Dec. 31, down from a peak above 15%.
"Considering that the portfolio of yucky assets continues to shrink, I would say the company is doing a pretty good job at showing improvement," Hasan said.
McAdams Wright Ragen also advised on Washington Federal's capital-raising operation.