Wash. Federal Profits By Buying Failed Bank

Washington Federal's first-quarter net income rose sevenfold from last year as it recorded a $55 million gain from the acquisition of failed Horizon Bank of Bellingham, Wash.
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SEATTLE (

TheStreet

) -- Illustrating just how lucrative government-assisted bank acquisitions can be,

Washington Federal

(WFSL)

reported first-quarter net income of $82.1 million, a sevenfold increase from a year earlier.

Earnings of 73 cents a share -- greatly exceeding the 10-cent consensus estimate among analysts polled by Thomson Reuters -- were padded by an after-tax gain of $55 million from the acquisition of

Horizon Bank

of Bellingham, Wash., which was the first bank failure of the year on Jan. 8, and a $39 million gain on the resolution of a tax liability.

Washington Federal wasn't charged a premium by the Federal Deposit Insurance Corp. when it acquired Horizon Bank's $1.1 billion in deposits, along with total assets of $1.3 billion, including 18 branches. The FDIC also agreed to share in losses on $1 billion of the acquired assets.

While a small number of other banks benefiting from government-assisted acquisitions of failed institutions have granted the FDIC "equity appreciation instruments," allowing the agency to benefit from a rise in the share price of an acquiring bank holding company, no such mechanism factored into the Horizon acquisition. Then again, Washington Federal's shares were down 1% since the Horizon acquisition, through Thursday's market close.

A recent example of a deal of this type was

New York Community Bancorp's

(NYB)

acquisition of most of the failed

AmTrust

in early December, which led to a remarkable run-up in New York Community's share price, a fourth-quarter "bargain purchase gain" of $140 million for the acquirer and a payment of $23 million to the FDIC.

As part of its loss-sharing agreement with the FDIC, Washington Federal will have to pay the agency after10 years if cumulative losses on the acquired loans are less than $536 million. The thrift's management currently expects its losses will total less than that threshold, and a $21 million liability has been established for the eventual payment. The liability will be adjusted as loss estimates change.

Nonperforming assets -- including problem loans and repossessed real estate - made up 3.9% of total assets, improving from 4.37% the previous quarter. Loan losses continued to increase, with net charge-offs of $59 million, up from $46 million the previous quarter and $16 million in the first quarter of 2009.

Washington Federal reported that its "spread," or the difference between the average yield on earning assets and the thrift's average cost of funds, was 3.05% for the first quarter, declining from 3.11% a year earlier. The company also said it was maintaining higher-than-usual liquidity, "out of concern that the risk of higher interest rates is increasing."

The company had $13.8 billion in total assets as of March 31, and its capital levels remained quite strong, with a tier 1 leverage ratio of 11.17% and a total risk-based capital ratio of 22.03%, greatly exceeding the 5% and 10% required for most banks and thrifts to be considered

well-capitalized

.

CEO Roy Whitehead said that while loan demand was still weak, Washington Federal's deposit inflows "continued to be robust." He also said that the company's "highest priority" was continuing to aggressively work through its nonperforming loans.

--

Written by Philip van Doorn in Jupiter Fla.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.