Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 0­25454

 


WASHINGTON FEDERAL, INC.

(Exact name of registrant as specified in its charter)

 


 

Washington   91-1661606

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

425 Pike Street Seattle, Washington 98101

(Address of principal executive offices and zip code)

(206) 624-7930

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Title of class:   at May 2, 2007
Common stock, $1.00 par value   87,332,946

 



Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

 

PART I          
Item 1.    Financial Statements (Unaudited)   
  

The Condensed Consolidated Financial Statements of Washington Federal, Inc. and Subsidiaries filed as a part of the report are as follows:

  
  

Consolidated Statements of Financial Condition as of March 31, 2007 and September 30, 2006

   Page 3
  

Consolidated Statements of Operations for the quarter and six months ended March 31, 2007 and 2006

   Page 4
  

Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006

   Page 5
  

Notes to Consolidated Financial Statements

   Page 7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    Page 10
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    Page 17
Item 4.    Controls and Procedures    Page 18
PART II      
Item 1.    Legal Proceedings    Page 19
Item 1A.    Risk Factors    Page 19
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    Page 19
Item 3.    Defaults Upon Senior Securities    Page 19
Item 4.    Submission of Matters to a Vote of Security Holders    Page 20
Item 5.    Other Information    Page 20
Item 6.    Exhibits    Page 20
   Signatures    Page 21

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

     March 31, 2007     September 30, 2006  
     (In thousands, except share data)  

ASSETS

    

Cash and cash equivalents

   $ 209,500     $ 45,722  

Available-for-sale securities, including encumbered securities of $ 763,756 and $637,855, at fair value

     1,365,900       1,451,038  

Held-to-maturity securities, including encumbered securities of $ 121,528 and $129,893, at amortized cost

     147,921       184,928  

Loans receivable, net

     7,773,994       7,078,443  

Interest receivable

     44,462       42,304  

Premises and equipment, net

     75,208       62,159  

Real estate held for sale

     5,198       3,903  

FHLB stock

     133,981       129,453  

Intangible assets, net

     108,392       56,259  

Other assets

     13,239       14,811  
                
   $ 9,877,795     $ 9,069,020  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities

    

Customer accounts

    

Savings and demand accounts

   $ 5,956,366     $ 5,285,708  

Repurchase agreements with customers

     22,739       26,018  
                
     5,979,105       5,311,726  

FHLB advances

     1,670,060       1,500,000  

Other borrowings

     800,167       870,000  

Advance payments by borrowers for taxes and insurance

     23,499       29,505  

Federal and state income taxes

     46,467       39,667  

Accrued expenses and other liabilities

     63,667       55,402  
                
     8,582,965       7,806,300  

Stockholders’ equity

    

Common stock, $1.00 par value, 300,000,000 shares authorized;

    

104,661,324 and 104,467,245 shares issued;

    

87,326,643 and 87,338,824 shares outstanding

     104,661       104,467  

Paid-in capital

     1,248,691       1,246,025  

Accumulated other comprehensive loss, net of taxes

     (2,433 )     (5,975 )

Treasury stock, at cost; 17,334,681 and 17,128,421 shares

     (210,260 )     (204,930 )

Retained earnings

     154,171       123,133  
                
     1,294,830       1,262,720  
                
   $ 9,877,795     $ 9,069,020  
                

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarter Ended March 31,    Six Months Ended March 31,
     2007     2006    2007    2006
     (In thousands, except per share data)

INTEREST INCOME

          

Loans

   $ 129,297     $ 106,274    $ 252,472    $ 208,679

Mortgage-backed securities

     18,464       15,725      37,539      30,093

Investment securities and cash equivalents

     4,241       6,660      7,467      14,449
                            
     152,002       128,659      297,478      253,221

INTEREST EXPENSE

          

Customer accounts

     59,037       41,459      114,986      80,308

FHLB advances and other borrowings

     27,772       21,724      54,910      43,374
                            
     86,809       63,183      169,896      123,682
                            

Net interest income

     65,193       65,476      127,582      129,539

Provision for loan losses

     150       85      200      85
                            

Net interest income after provision for loan losses

     65,043       65,391      127,382      129,454

OTHER INCOME

          

Gain on securities, net

     11       —        11      —  

Other

     3,280       3,404      6,414      6,796
                            
     3,291       3,404      6,425      6,796

OTHER EXPENSE

          

Compensation and fringe benefits

     10,879       9,040      20,414      17,275

Occupancy

     2,194       2,017      4,153      3,930

Other

     2,984       2,458      5,441      4,981
                            
     16,057       13,515      30,008      26,186

Gain (loss) on real estate acquired through foreclosure, net

     (79 )     5      157      144
                            

Income before income taxes

     52,198       55,285      103,956      110,208

Income taxes

     18,715       18,945      37,089      37,722
                            

NET INCOME

   $ 33,483     $ 36,340    $ 66,867    $ 72,486
                            

PER SHARE DATA

          

Basic earnings

   $ 0.38     $ 0.42    $ 0.77    $ 0.83

Diluted earnings

     .38       .42      .76      .83

Cash dividends

     .205       .200      .410      .400

Weighted average number of shares outstanding, including dilutive stock options

     87,571,131       87,363,894      87,608,059      87,378,631

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended  
     March 31, 2007     March 31, 2006  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 66,867     $ 72,486  

Adjustments to reconcile net income to net cash provided by operating activities

    

Amortization (accretion) of fees, discounts, premiums and intangible assets, net

     (483 )     2,509  

Depreciation

     1,490       1,345  

Stock option compensation expense

     527       808  

Provision for loan losses

     200       85  

Gain on investment securities and real estate held for sale, net

     (168 )     (145 )

Increase in accrued interest receivable

     (171 )     (2,927 )

Increase in income taxes payable

     4,153       729  

Decrease (increase) in other assets

     2,069       (5,523 )

Increase (decrease) in accrued expenses and other liabilities

     1,486       (6,283 )
                

Net cash provided by operating activities

     75,970       63,084  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Loans originated

    

Single-family residential loans

     (498,026 )     (519,328 )

Construction loans

     (282,961 )     (369,680 )

Land loans

     (226,943 )     (199,220 )

Multi-family loans

     (43,435 )     (70,757 )

Commercial real estate loans

     (4,767 )     —    

Other loans

     (6,353 )     —    
                
     (1,062,485 )     (1,158,985 )

Savings account loans originated

     (2,100 )     (648 )

Loan principal repayments

     817,842       869,970  

Increase (decrease) in undisbursed loans in process

     (45,793 )     20,507  

Loans purchased

     (23 )     (266,129 )

Available-for-sale securities purchased

     (77,854 )     (188,504 )

Principal payments and maturities of available-for-sale securities

     169,221       82,919  

Available-for-sale securities sold

     44,041       —    

Principal payments and maturities of held-to-maturity securities

     37,143       15,651  

Net cash paid out for acquistion

     (35,221 )     —    

Proceeds from sales of real estate held for sale

     936       1,589  

Premises and equipment purchased, net

     (1,079 )     (1,556 )
                

Net cash used by investing activities

     (155,372 )     (625,186 )

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in customer accounts

     287,874       128,877  

Net increase in borrowings

     1,254       215,000  

Proceeds from exercise of common stock options

     1,714       2,412  

Dividends paid

     (35,829 )     (34,882 )

Proceeds from Employee Stock Ownership Plan

     990       1,344  

Treasury stock purchased, net

     (5,850 )     —    

Decrease in advance payments by borrowers for taxes and insurance

     (6,973 )     (5,123 )
                

Net cash provided by financing activities

     243,180       307,628  

Increase (decrease) in cash and cash equivalents

     163,778       (254,474 )

Cash and cash equivalents at beginning of period

     45,722       637,791  
                

Cash and cash equivalents at end of period

   $ 209,500     $ 383,317  
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Non-cash investing activities

    

Real estate acquired through foreclosure

   $ 1,982     $ 201  

Cash paid during the period for

    

Interest

     168,607       123,955  

Income taxes

     33,125       37,705  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The following summarizes the non-cash activities relating to the acquisition

 

     Six Months Ended
     March 31,
2007
    March 31,
2006
     (In thousands)

Fair value of assets and intangibles acquired, including goodwill

   $ (576,750 )   $ —  

Fair value of liabilities assumed

     480,033       —  
              

Cash paid out for acquisition

     (96,717 )     —  

Plus cash acquired

     61,496       —  
              

Net cash paid out for acquisition

   $ (35,221 )   $ —  
              

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006

(UNAUDITED)

 

NOTE A – Basis of Presentation

The consolidated unaudited interim financial statements included in this report have been prepared by Washington Federal, Inc. (“Company”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 2006 Consolidated Statement of Financial Condition was derived from audited financial statements.

The information included in this Form 10-Q should be read in conjunction with Company’s 2006 Annual Report on Form 10-K (“2006 Form 10-K”) as filed with the SEC. Interim results are not necessarily indicative of results for a full year.

NOTE B – Acquisition

On February 13, 2007, the Company acquired 100% of the outstanding shares of First Federal Banc of the Southwest, Inc. (“First Federal”). The merger agreement provided for the merger of First Federal with and into the Company, followed by the merger of First Federal Bank, a federal savings bank and wholly owned subsidiary of First Federal, into the Company’s wholly owned subsidiary, Washington Federal Savings and Loan Association. As a result of the acquisition, Washington Federal added 180 employees and 13 branches; 11 in New Mexico and 2 in El Paso, Texas. The acquisition was accounted for as a purchase transaction with the total cash consideration funded through internal sources. The all-cash purchase price was $96,717,000. The purchase price has been allocated to the underlying assets and liabilities based on estimated fair values at the date of acquisition. Results of operations are included from the date of acquisition. The Company acquired assets with an estimated fair value of $576,750,000 and assumed liabilities with an estimated fair value of $480,033,000. The acquisition produced goodwill of $47,880,036 and a core deposit intangible of $4,882,000.

The balance of the Company’s intangible assets was as follows:

 

     Goodwill    Core Deposit
Intangible
    Non-Compete
Agreements
    Total  
     (In thousands)  

Balance at September 30, 2005

   $ 54,484    $ 2,440     $ 335     $ 57,259  

Accumulated amortization

     —        (885 )     (115 )     (1,000 )
                               

Balance at September 30, 2006

     54,484      1,555       220       56,259  

First Federal acquisition

     47,880      4,882       —         52,762  

Accumulated amortization

     —        (572 )     (57 )     (629 )
                               

Balance at March 31, 2007

   $ 102,364    $ 5,865     $ 163     $ 108,392  
                               

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006

(UNAUDITED)

 

The table below presents the estimated intangible asset amortization expense for the next four years (at which time all current intangible assets will be fully amortized):

 

Year ended September 30,

   Amortization expense
     (In thousands)

2007

   $ 1,190

2008

     2,220

2009

     1,916

2010

     702

NOTE C – Dividends

On April 20, 2007 the Company paid its 97th consecutive quarterly cash dividend. Dividends per share amounted to 20.5 cents for the quarter ended March 31, 2007 compared with 20 cents for the same period one year ago.

NOTE D – Comprehensive Income

The Company’s comprehensive income includes all items which comprise net income plus the unrealized gains (losses) on available-for-sale securities. Total comprehensive income for the quarters ended March 31, 2007 and 2006 totaled $36,746,000 and $30,972,000, respectively. Total comprehensive income for the six months ended March 31, 2007 and 2006 totaled $70,409,000 and $58,322,000, respectively. The difference between the Company’s net income and total comprehensive income for the six months ended March 31, 2007 equals the change in the net unrealized gain or loss on available-for-sale securities of $5,601,000. Net of tax of $2,059,000, the change was $3,542,000.

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006

(UNAUDITED)

 

NOTE E – Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the quarter and six months ended March 31, 2007 and 2006:

 

    

Quarter

Ended March 31,

   

Six Months

Ended March 31,

 
     2007     2006     2007     2006  
     (In thousands)  

Balance at beginning of period

   $ 25,021     $ 24,736     $ 24,993     $ 24,756  

Provision for (reversal of) loan losses

     150       85       200       85  

Charge-offs

     (297 )     (11 )     (319 )     (31 )

Recoveries

     —         —         —         —    

Acquired reserves

     3,123       —         3,123       —    
                                

Balance at end of period

   $ 27,997     $ 24,810     $ 27,997     $ 24,810  
                                

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

GENERAL

Washington Federal, Inc. (“Company”) is a savings and loan holding company. The Company’s primary operating subsidiary is Washington Federal Savings.

INTEREST RATE RISK

The Company assumes a high level of interest rate risk as a result of its policy to originate and hold for investment fixed-rate single-family home loans, which are longer-term in nature than the short-term characteristics of its liabilities of customer accounts and borrowed money. At March 31, 2007, the Company had a negative one-year maturity gap of approximately 33% of total assets, compared to a 34% negative one-year maturity gap as of September 30, 2006.

The interest rate spread decreased to 2.13% at March 31, 2007 from 2.18% at September 30, 2006. The spread decreased primarily because weighted average rates on customer accounts increased by 19 basis points since September 30, 2006, however this was partially offset by an increase in the weighted average rates on earning assets of 6 basis points over the same period. As of March 31, 2007, the Company had grown total assets by $808,775,000, or 8.9%, from $9,069,020,000 at September 30, 2006, which included $576,750,000 of assets acquired through the merger with First Federal (see Note B). Cash and cash equivalents increased $163,778,000, or 358%, during the six months ended March 31, 2007. Loans and mortgage-backed securities increased $610,389,000, or 7.2%, to $9,068,148,000 during the six months ended March 31, 2007 as the Company grew long-term assets to mitigate the impact of increasing deposit costs. Included in the

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

aforementioned $610,389,000 increase in loans and mortgage-backed securities was $403,000,000 of loans acquired from First Federal. The remaining $207,389,000 of loan growth was funded primarily through organic deposit growth of $287,874,000. Cash and cash equivalents of $209,500,000 and stockholders’ equity of $1,294,830,000 provides management with flexibility in managing interest rate risk.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net worth at March 31, 2007 was $1,294,830,000, or 13.11% of total assets. This was an increase of $32,110,000 from September 30, 2006 when net worth was $1,262,720,000, or 13.92% of total assets. The increase in the Company’s net worth included $66,867,000 from net income and a $3,542,000 decrease in accumulated other comprehensive loss as a result of an increase in market value of the Company’s available-for-sale investments. Net worth was reduced by $35,829,000 of cash dividend payments and $5,850,000 used to repurchase stock.

The Company’s percentage of net worth to total assets is among the highest in the industry and is over three times the minimum required under Office of Thrift Supervision regulations. Management believes this strong net worth position will help the Company manage its interest rate risk and enable it to compete more effectively for controlled growth through acquisitions, de novo expansion and increased customer deposits.

CHANGES IN FINANCIAL CONDITION

Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $85,138,000, or 5.9%, during the six months ended March 31, 2007. For the six months ended March 31, 2007 the Company purchased $123,111,000 of available-for-sale investment securities, which included $45,257,000 of securities acquired from First Federal. During the same period $44,041,000 of available-for-sale securities that were acquired in the purchase of First Federal were sold resulting in an $11,000 gain. There were no purchases or sales of held-to-maturity securities during the current period. As of March 31, 2007, the Company had net unrealized losses on available-for-sale securities of $2,433,000, net of tax, which were recorded as part of stockholders’ equity.

Loans receivable: During the six months ended March 31, 2007, the balance of loans receivable increased 9.8% to $7,773,994,000 compared to $7,078,443,000 at September 30, 2006. Included in this growth was $403,000,000 of loans acquired from First Federal (see Note B). Those loans, in conjunction with the $292,551,000 of organic growth, was consistent with Management’s strategy to grow the loan portfolio to mitigate rising deposit costs. Permanent single-family residential loans as a percentage of total loans decreased to 69.3% at March 31, 2007 compared to 70.3% at September 30, 2006. The aggregate of construction and land loans (gross of loans in process) as a percentage of total loans decreased to 22.6% at March 31, 2007 compared to 22.8% at September 30, 2006. Included in the period end gross loans balance was $138,906,000 of commercial real estate loans and other loans (non-real estate commercial loans and consumer loans) acquired through the merger with First Federal, which represented 1.7% of the total loan balance.

 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Non-performing assets: Non-performing assets increased 20.2% during the six months ended March 31, 2007 to $9,204,000 from $7,660,000 at September 30, 2006. Despite the percentage increase of 20.2% for the period, non-performing assets as a percentage of total assets was .09% at March 31, 2007 compared to .08% at September 30, 2006. During the last ten years the Company’s average ratio of non-performing assets to total assets was .35%.

The following table sets forth information regarding restructured and nonaccrual loans and REO held by the Company at the dates indicated.

 

    

March 31,

2007

   

September 30,

2006

 
    
     (In thousands)  

Restructured loans (1)

   $ 263     $ —    

Nonaccrual loans:

    

Single-family residential

     6,029       5,700  

Construction

     517       1,002  

Land

     438       126  

Multi-family

     152       353  

Commercial real estate

     269       —    

Other

     41       —    
                

Total nonaccrual loans (2)

     7,446       7,181  

Total REO (3)

     1,758       479  
                

Total non-performing assets

   $ 9,204     $ 7,660  
                

Total non-performing assets and restructured loans

   $ 9,467     $ 7,660  
                

Total non-performing assets and restructured loans as a percentage of total assets

     0.10 %     0.08 %
                

(1) Performing in accordance with restructured terms.
(2) The Company recognized interest income on nonaccrual loans of approximately $343,000 in the quarter ended March 31, 2007. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $468,000 for the quarter ended March 31, 2007.

In addition to the nonaccrual loans reflected in the above table, at March 31, 2007, the Company had $5,792,000 of loans that were less than 90 days delinquent but which it had classified as substandard

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

for one or more reasons. If these loans were deemed nonperforming, the Company’s ratio of total nonperforming assets and restructured loans as a percent of total assets would have increased to .15% at March 31, 2007.

(3) Total REO (included in real estate held for sale on the Statement of Financial Condition) includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans.

Allocation of the allowance for loan losses: The following table shows the allocation of the Company’s allowance for loan losses at the dates indicated.

 

     March 31, 2007     September 30, 2006  
     Amount    Loans to
Total Loans 1
    Amount    Loans to
Total Loans 1
 
     (In thousands)  

Real estate:

          

Single-family residential

   $ 9,925    69.3 %   $ 8,397    70.3 %

Multi-family

     5,113    6.5       5,061    6.9  

Land

     4,836    9.3       4,829    8.0  

Construction

     5,792    13.3       6,706    14.8  

Commercial real estate

     1,891    1.2       —      —    

Other

     440    0.4       —      —    
                          
   $ 27,997    100.0 %   $ 24,993    100.0 %
                          

1

The percentage is based on gross loans before allowance for loan losses, loans in process and deffered loan origination costs.

Customer accounts: Customer accounts increased $667,379,000, or 12.6%, to $5,979,105,000 at March 31, 2007 compared with $5,311,726,000 at September 30, 2006. The increase included $379,505,000 of deposits acquired through the merger with First Federal (see Note B) and organic growth of $287,874,000.

FHLB advances and other borrowings: Total borrowings increased $100,227,000, or 4.2%, to $2,470,227,000 at March 31, 2007 compared with $2,370,000,000 at September 30, 2006. The increase included $98,973,000 of total borrowings acquired through the merger with First Federal (see Note B). See Interest Rate Risk on page 10.

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS

Net Income: The quarter ended March 31, 2007 produced net income of $33,483,000 compared to $36,340,000 for the same quarter one year ago, a 7.9% decrease. Net income for the six months ended March 31, 2007 was $66,867,000 compared to $72,486,000 for the six months ended March 31, 2006, a 7.8% decrease. The decrease for the quarter ended March 31, 2007 resulted primarily from a 42.4% increase in interest expense on customer accounts, which was partially offset by an 18.1% increase in total interest income. The decrease for the six months ended March 31, 2007 resulted primarily from a 43.2% increase in interest expense on customer accounts, which was partially offset by a 17.5% increase in total interest income.

Net Interest Income: The largest component of the Company’s earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Net interest income is impacted primarily by two factors; first, the volume of earning assets and liabilities and second, the rate earned on those assets or the rate paid on those liabilities.

The following table sets forth certain information explaining changes in interest income and interest expense for the periods indicated compared to the same periods one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Rate / Volume Analysis:

 

     Comparison of Quarters Ended
3/31/07 and 3/31/06
   

Comparison of Six Months Ended

3/31/07 and 3/31/06

 
     Volume     Rate     Total     Volume     Rate     Total  
     (In thousands)  

Interest income:

            

Loan portfolio

   $ 19,932     $ 3,091     $ 23,023     $ 37,082     $ 6,711     $ 43,793  

Mortgaged-backed securities

     2,231       508       2,739       6,156       1,290       7,446  

Investments(1)

     (2,878 )     459       (2,419 )     (7,642 )     660       (6,982 )
                                                

All interest-earning assets

     19,285       4,058       23,343       35,596       8,661       44,257  
                                                

Interest expense:

            

Customer accounts

     4,749       12,829       17,578       7,387       27,291       34,678  

FHLB advances and other borrowings

     5,657       391       6,048       8,847       2,689       11,536  
                                                

All interest-bearing liabilities

     10,406       13,220       23,626       16,234       29,980       46,214  
                                                

Change in net interest income

   $ 8,879     $ (9,162 )   $ (283 )   $ 19,362     $ (21,319 )   $ (1,957 )
                                                

(1) Includes interest on cash equivalents

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Provision for Loan Losses: The Company recorded a $150,000 provision for loan losses during the quarter ended March 31, 2007, while an $85,000 provision was recorded for the same quarter one year ago. Nonperforming assets amounted to $9,204,000 or .09% of total assets at March 31, 2007 compared to $6,957,000 or .08% of total assets one year ago. Total delinquencies over 30 days were $16,116,000, or .16% of total assets at March 31, 2007 compared to $12,984,000, or .15% of total assets at March 31, 2006. The Company had net charge-offs of $297,000 for the quarter ended March 31, 2007 compared with $11,000 of net charge-offs for the quarter ended March 31, 2006.

The following table analyzes the Company’s allowance for loan losses at the dates indicated.

 

    

Quarter Ended

March 31,

   

Six Months

Ended March 31,

 
     2007     2006     2007     2006  
     (In thousands)  

Beginning balance

   $ 25,021     $ 24,736     $ 24,993     $ 24,756  

Charge-offs:

        

Real Estate:

        

Single-family residential

     —         11       —         31  

Multi-family

     34       —         34       —    

Land

     23       —         23       —    

Construction

     240       —         262       —    

Commercial real estate

     —         —         —         —    

Other

     —         —         —         —    
                                
     297       11       319       31  

Recoveries:

        

Real Estate:

        

Single-family residential

     —         —         —         —    

Multi-family

     —         —         —         —    

Land

     —         —         —         —    

Construction

     —         —         —         —    

Commercial real estate

     —         —         —         —    

Other

     —         —         —         —    
                                
     —         —         —         —    

Net charge-offs (recoveries)

     297       11       319       31  

Provision (reversal of reserve) for loan losses

     150       85       200       85  

Acquired reserves

     3,123       —         3,123       —    
                                

Ending balance

   $ 27,997     $ 24,810     $ 27,997     $ 24,810  
                                

Ratio of net charge-offs to average loans outstanding

     0.00 %     0.00 %     0.00 %     0.00 %
                                

Other Income: The quarter ended March 31, 2007 produced total other income of $3,291,000 compared to $3,404,000 for the same quarter one year ago, a 3.3% decrease. Total other income for the six months ended March 31, 2007 was $6,425,000 compared to $6,796,000 for the six months ended March 31, 2006, a 5.5%

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

decrease. Total other income for the quarter and six months ended March 31, 2007 included a $121,000 and $695,000 gain on the sale of real estate held for investment, respectively, while total other income for the quarter and six months ended March 31, 2006 included a $577,000 and $1,073,000 gain on the sale of real estate held for investment, respectively.

Other Expense: The quarter ended March 31, 2007 produced total other expense of $16,057,000 compared to $13,515,000 for the same quarter one year ago, an 18.8% increase. Total other expense for the six months ended March 31, 2007 was $30,008,000 compared to $26,186,000 for the six months ended March 31, 2006, a 14.6% increase. The increase in total other expense over the same comparable periods one year ago was primarily the result of compensation costs related to the additional 180 employees brought on through the acquisition with First Federal, as well as higher organic payroll expenses. Additionally, general occupancy expenses increased due to the 13 branches acquired from First Federal. Total other expense for the quarter and six months ended March 31, 2007 equaled .67% and .64%, respectively, of average assets, compared to .64% and .63%, respectively, for the same periods one year ago. The number of staff, including part-time employees on a full-time equivalent basis, was 911 at March 31, 2007 and 751 at March 31, 2006; the increase primarily due to the acquisition of First Federal (see Note B).

Taxes: Income taxes decreased $230,000, or 1.2%, and $633,000, or 1.7%, for the quarter and six months ended March 31, 2007 when compared to the same periods one year ago. While the taxable income base for the quarter and six months ended March 31, 2007 was $3,087,000, or 5.6%, and $6,252,000, or 5.7%, respectively, lower than the comparable periods one year ago, the Company settled a claim with the Internal Revenue Service during the six months ended March 31, 2006 over the deductibility of supervisory goodwill that resulted in a reduction of income tax expense for that period. As a result, the effective tax rate for the quarter and six months ended March 31, 2007 increased to 35.85% and 35.68%, respectively, from 34.20% for the same periods one year ago. The Company expects a 35.85% effective tax rate going forward for the remainder of the fiscal year.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since September 30, 2006. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2006 Form 10-K.

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

 

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15. Based upon that evaluation, the Company’s President and Chief Executive Officer, along with the Company’s Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART II – Other Information

 

Item 1. Legal Proceedings

From time to time the Company or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company’s financial position or results of operations.

 

Item 1A. Risk Factors

Not applicable

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended March 31, 2007.

 

Period

  

Total Number of

Shares Purchased

  

Average Price

Paid Per Share

  

Total Number of

Shares Purchased

as Part of Publicly

Announced Plan (1)

  

Maximum

Number of Shares

That May Yet Be

Purchased Under

the Plan at the

End of the Period

January 1, 2007 to

           

January 31, 2007

   —      $ —      —      3,310,014

February 1, 2007 to

           

February 28, 2007

   50,500      22.85    50,500    3,259,514

March 1, 2007 to

           

March 31, 2007

   199,500      23.54    199,500    3,060,014
                     

Total

   250,000    $ 23.40    250,000    3,060,014
                     

(1)

The Company’s only stock repurchase program was publicly announced by the Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 21,956,264 shares have been authorized for repurchase.

 

Item 3. Defaults Upon Senior Securities

Not applicable

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART II – Other Information

 

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of Washington Federal, Inc. was held on January 25, 2007. The two items voted upon by shareholders included the election of three directors, each for a three-year term, and the ratification of the appointment of Deloitte & Touche LLP as the independent registered public accountants for fiscal year 2007. The results of the voting were as follows:

 

     Votes Cast   

Votes

Withheld

  

Total

Votes Cast

     For    Against      

Election of Directors

           

Derek L. Chinn - 3-year term

   81,598,504    —      361,053    81,959,557

Thomas J. Kelley - 3-year term

   81,651,919    —      307,638    81,959,557

Barbara L. Smith - 3-year term

   81,615,459    —      344,098    81,959,557

Ratify appointment of Deloitte & Touche LLP 81,579,187

   139,333    241,037    81,959,557   

 

Item 5. Other Information

Not applicable

 

Item 6. Exhibits

 

(a) Exhibits

 

31.1

  Section 302 Certification by the Chief Executive Officer

31.2

  Section 302 Certification by the Chief Financial Officer

32

  Section 906 Certification by the Chief Executive Officer and the Chief Financial Officer

 

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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

May 4, 2007  

/s/ Roy M. Whitehead

  ROY M. WHITEHEAD
  Chairman, President and Chief Executive Officer
May 4, 2007  
 

/s/ Brent J. Beardall

  BRENT J. BEARDALL
  Senior Vice President and Chief Financial Officer

 

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