WAFD INC - Quarter Report: 2007 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2007

or

For the transition period from              to             

Commission file number 0­25454

WASHINGTON FEDERAL, INC.

(Exact name of registrant as specified in its charter)

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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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:

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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):

NOTE C – Dividends

On April 20, 2007 the Company paid its 97^th 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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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:

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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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PART I – Financial Information

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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PART I – Financial Information

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.

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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PART I – Financial Information

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.

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.

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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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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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PART I – Financial Information

Rate / Volume Analysis:

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PART I – Financial Information

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.

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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PART I – Financial Information

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.

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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PART I – Financial Information

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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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART II – Other Information

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.

Not applicable

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.

Not applicable

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART II – Other Information

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: