WAFD INC - Quarter Report: 2008 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, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(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, 2007 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 2007 Annual Report on Form 10-K (“2007 Form 10-K”) as filed with the SEC. Interim results are not necessarily indicative of results for a full year.

Certain reclassifications have been made to the financial statements to conform prior periods to current classifications.

NOTE B – Acquisitions

On February 1, 2008, the Company acquired 100% of the outstanding shares of First Mutual Bancshares, Inc. (“First Mutual”). The merger agreement provided for the merger of First Mutual with and into the Company, followed by the merger of First Mutual Bank, a federal savings bank and wholly owned subsidiary of First Mutual, into the Company’s wholly owned subsidiary, Washington Federal Savings and Loan Association. As a result of the acquisition, Washington Federal added 169 employees and 12 branches primarily located on the rapidly growing eastside of Seattle. The acquisition was accounted for as a purchase transaction with the total cash consideration funded through internal sources. The all-cash purchase price was $180,985,000. 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 $1,147,312,000 and assumed liabilities with an estimated fair value of $966,327,000. The acquisition produced goodwill of $110,433,000 and a core deposit intangible of $2,523,000. Fair value calculations have been recorded based on estimates and are in process of being finalized.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

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

The table below presents the estimated intangible asset amortization expense for the next five years:

NOTE C - Dividends

On April 18, 2008 the Company paid its 101^st consecutive quarterly cash dividend. Dividends per share amounted to 21.0 cents for the quarter ended March 31, 2008 compared with 20.5 cents for the same period one year ago.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

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, 2008 and 2007 totaled $46,493,000 and $36,746,000, respectively. Total comprehensive income for the six months ended March 31, 2008 and 2007 totaled $87,806,000 and $70,409,000, respectively. The difference between the Company’s net income and total comprehensive income for the six months ended March 31, 2008 was $19,306,000, which equals the change in the net unrealized gain on available-for-sale securities of $30,523,000, less tax of $11,217,000.

NOTE E – Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the quarters and six months ended March 31, 2008 and 2007:

NOTE F – Available for Sale Investments

Securities not classified as held-to-maturity are considered to be available-for-sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in the accumulated other comprehensive income component of stockholders’ equity.

Management evaluates debt and equity securities for other than temporary impairment on a quarterly basis based on the securities’ current credit quality, interest rates, term to maturity and management’s intent and ability to hold the securities until the net book value is recovered. Any other than temporary declines in fair value are recognized in the statements of operations.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

As of March 31, 2008, the Company had an investment in agency preferred stock with a book value of $90,220,000 in its available for sale portfolio. In accordance with SFAS 115, these securities are carried at estimated fair value, which totaled $69,738,000 as of quarter end. The net unrealized loss is included in Other Comprehensive Gain (Loss) on the balance sheet. The Company has evaluated these securities for an other than temporary impairment (“OTTI”) and concluded that at this time, no such impairment exists. On an ongoing basis the Company will evaluate these securities to determine if and when such an OTTI occurs. At that point, any unrealized loss determined to be other than temporary would be recorded through the income statement.

NOTE G – New Accounting Pronouncement

Effective October 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” As a result of the implementation of FIN 48 the Company did not record any cumulative effect adjustment to retained earnings.

As of October 1, 2007 the Company’s liability for uncertain tax positions was $2.6 million. Included in the balance of unrecognized tax benefits at October 1, 2007, are $1.7 million of tax benefits that, if recognized, would affect the effective tax rate. The Company records interest and penalties related to uncertain tax positions in income tax expense. As of October 1, 2007 there was approximately $0.9 million of accrued interest and $0 of accrued penalties. There were no significant changes in components of the liability in the first and second quarters of the current fiscal year.

Based on current information the Company does not expect any changes in the amount of unrecognized tax benefits over the next twelve months to have a significant impact on the results of operations or the financial position of the Company.

The Company’s federal income tax returns for 2003 through 2007 are open tax years. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to two years after formal notification to the states. The Company has various state income tax returns in the process of examination, administrative appeals or litigation. The Company’s unrecognized tax benefits are related to state returns open from 1999 through 2007.

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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 both March 31, 2008 and September 30, 2007, the Company had a negative one-year maturity gap of approximately 31% of total assets, a decrease from the 33% negative one-year gap as of September 30, 2008. This decrease was the result of the acquisition of First Mutual Bank and the extension of borrowings during the quarter.

The interest rate spread increased to 2.30% at March 31, 2008 from 2.05% at September 30, 2007. The spread increased primarily due to two factors. First, falling short-term interest rates decreased the cost of customer deposits. Since the Federal Reserve began decreasing short-term rates in September 2007, market rates for short-term deposits have fallen. As a result, deposits are repricing to lower rates contributing to an increasing spread by reducing the rate paid on customer accounts. Second, the acquisition of First Mutual Bank (“FMB”) on February 1, 2008, which provided $1,042,959,000 of earning assets, at a weighted average rate of 7.23%. Additionally, the FMB acquisition brought $953,533,000 of paying liabilities, carrying a weighted average rate of 3.38%. As of the date of the FMB acquisition, FMB had a period end spread of 3.85%.

As of March 31, 2008, the weighted average rates on earning assets decreased by 15 basis points since September 30, 2007, while the weighted average rates on customer accounts and borrowings decreased by 40 basis points over the same period. As of Quarter end, the Company had grown total assets by $1,454,832,000, or 14.1%, from $10,285,417,000 at September 30, 2007. Cash and cash equivalents increased $4,018,000, or 6.5%, during the six months ended March 31, 2008. Loans increased $1,136,439,000, or 13.9%, to $9,324,717,000 during the six months ended March 31, 2008, as the Company grew long-term assets primarily through its acquisition of FMB. Cash and cash equivalents of $65,396,000 and stockholders’ equity of $1,376,064,000 provides management with flexibility in managing interest rate risk.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net worth at March 31, 2008 was $1,376,064,000, or 11.72% of total assets. This was an increase of $57,937,000 from September 30, 2007 when net worth was $1,318,127,000, or 12.82% of total assets. The increase in the Company’s net worth included $68,500,000 from net income and a $19,306,000 increase in accumulated other comprehensive income as a result of a net increase in market value of the Company’s available-for-sale investments. The vast majority of the Company’s available for sale investments are fixed rate. As a result of market interest rates decreasing, the value of fixed rate investments generally increased. Net worth was reduced by $36,821,000 of cash dividend payments.

The Company had the option to pay either all cash for the acquisition of FMB or it could have issued up to 50% of the consideration in common stock. Based on relatively low market interest rates, a lower stock price than when the transaction was negotiated and management’s evaluation of the current interest rate cycle, the Company elected to pay all cash for the FMB transaction.

The Company’s percentage of net worth to total assets is over two 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 increased $122,704,000, or 8.1%, during the six months ended March 31, 2008, which included the purchase of $251,854,000 of available-for-sale investment securities. During the same period there were sales of $72,030,000 of available-for-sale securities. There were not any purchases or sales of held-to-maturity securities. As of March 31, 2008, the Company had net unrealized gains on available-for-sale securities of $6,273,000, net of tax, which were recorded as part of stockholders’ equity.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

Loans receivable: During the quarter ended March 31, 2008, the balance of loans receivable increased 13.9% to $9,324,717,000 compared to $8,188,278,000 at September 30, 2007. This growth was due primarily to the FMB acquisition and is consistent with management’s strategy to grow the loan portfolio to mitigate the decreasing spread. The following table shows the gross loan portfolio by category for the last three quarters.

Gross Loan Portfolio by Category

The acquisition of FMB resulted in a slight diversification of the loan portfolio, decreasing single family residential from 70.5% of the portfolio to 66.8% as of March 31, 2008, and increasing other categories such as commercial real estate, commercial and industrial loans, consumer loans and multi-family loans.

Non-performing assets: Non-performing assets increased significantly during the six months ended March 31, 2008 to $68,479,000 from $15,931,000 at September 30, 2007, a 330% increase. This increase is attributable to the weakening housing market throughout our eight state branch network. Non-performing assets as a percentage of total assets was .58% at March 31, 2008 compared to .15% at September 30, 2007. During the last ten and twenty years the Company’s average ratio of non-performing assets to total assets was .33% and .47%, respectfully. While our non-performing assets have increased significantly over the last 6 months, based on current conditions in the real estate marketplace, the Company anticipates non-performing assets will continue to increase in the future.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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, 2008, the Company had $28,012,000 of loans that were less than 90 days delinquent but which it had classified as substandard 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 .83% at March 31, 2008.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

Customer accounts: Customer accounts increased $1,090,009,000, or 18.2%, to $7,086,794,000 at March 31, 2008 compared with $5,996,785,000 at September 30, 2007. $744,182,000 of the deposit growth came through the FMB acquisition, the remaining $345,827,000 was organic growth. The following table shows the composition of our customer accounts as of the dates shown:

Deposits by Type

FHLB advances and other borrowings: Total borrowings increased $287,670,000, or 10.1%, to $3,123,649,000 at March 31, 2008 compared with $2,835,979,000 at September 30, 2007. The increase in borrowings was due primarily to $180,985,000 in cash consideration paid for the FMB acquisition. Total short-term borrowings (due within 30 days) at March 31, 2008 were $120,000,000 compared with $275,000,000 at September 30, 2007. See Interest Rate Risk on page 10.

RESULTS OF OPERATIONS

Net Income: The quarter ended March 31, 2008 produced net income of $35,452,000 compared to $33,483,000 for the same quarter one year ago, a 5.9% increase. The increase for the quarter resulted primarily from the growth in the balance sheet in an effort to offset a declining net interest margin. See the Rate / Volume analysis below.

Net income for the six months ended March 31, 2008 was $68,500,000 compared to $66,867,000 for the same period one year ago, a 2.4% increase. The increase for the period resulted primarily from the growth in the balance sheet in an effort to offset a declining net interest margin. See the Rate / Volume analysis below.

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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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

Rate / Volume Analysis: