Washington Federal (WAFD) 10-Q 2006 Q3 Quarterly report

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 June 30, 2006

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 July 31, 2006
Common stock, $1.00 par value	87,258,408

-1-

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 June 30, 2006 and September 30, 2005	Page 3
	Consolidated Statements of Operations for the quarter and nine months ended June 30, 2006 and 2005	Page 4
	Consolidated Statements of Cash Flows for the nine months ended June 30, 2006 and 2005	Page 5
	Notes to Consolidated Financial Statements	Page 6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 15
Item 4.	Controls and Procedures	Page 16
PART II
Item 1.	Legal Proceedings	Page 17
Item 1A.	Risk Factors	Page 17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 17
Item 3.	Defaults Upon Senior Securities	Page 17
Item 4.	Submission of Matters to a Vote of Security Holders	Page 17
Item 5.	Other Information	Page 18
Item 6.	Exhibits	Page 18
	Signatures	Page 19

-2-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

	June 30, 2006			September 30, 2005
	(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	65,741		$	637,791
Available-for-sale securities, including encumbered securities of$625,138 and $571,462, at fair value		1,423,234			1,077,856
Held-to-maturity securities, including encumbered securities of$134,149 and $68,759, at amortized cost		190,283			212,479
Loans receivable, net		6,815,713			6,008,932
Interest receivable		39,396			34,048
Premises and equipment, net		64,074			63,287
Real estate held for sale		4,921			5,631
FHLB stock		129,453			129,453
Intangible assets, net		56,491			57,259
Other assets		13,829			7,714
	$	8,803,135		$	8,234,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Savings and demand accounts	$	5,255,882		$	5,002,172
Repurchase agreements with customers		28,077			29,333
		5,283,959			5,031,505
FHLB advances		1,500,000			1,230,000
Other borrowings		700,000			655,000
Advance payments by borrowers for taxes and insurance		17,637			27,533
Federal and state income taxes		28,655			44,617
Accrued expenses and other liabilities		53,659			58,487
		7,583,910			7,047,142
Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized; 104,404,861 and 104,140,966 shares issued; 87,255,600 and 86,933,294 shares outstanding		104,405			104,141
Paid-in capital		1,244,133			1,240,310
Accumulated other comprehensive loss, net of taxes		(29,877	)		(704	)
Treasury stock, at cost;17,149,261 and 17,207,672 shares		(205,178	)		(205,874	)
Retained earnings		105,742			49,435
		1,219,225			1,187,308
	$	8,803,135		$	8,234,450

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-3-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarter Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(In thousands, except per share data)
INTEREST INCOME
Loans	$	112,325		$	94,206		$	321,004		$	271,412
Mortgage-backed securities		17,312			12,244			47,405			48,646
Investment securities and cash equivalents		5,245			7,552			19,694			23,667
		134,882			114,002			388,103			343,725
INTEREST EXPENSE
Customer accounts		47,236			30,593			127,544			81,107
FHLB advances and other borrowings		24,040			20,655			67,415			57,850
		71,276			51,248			194,959			138,957
Net interest income		63,606			62,754			193,144			204,768
Provision for (reversal of ) loan losses		100			(134	)		185			(134	)
Net interest income after provision for loan losses		63,506			62,888			192,959			204,902
OTHER INCOME
Loss on securities, net		—			(121	)		—			(3,534	)
Other		4,002			2,687			10,798			8,948
		4,002			2,566			10,798			5,414
OTHER EXPENSE
Compensation and fringe benefits		9,841			8,694			27,115			25,761
Occupancy		2,030			1,912			5,959			6,872
Other		3,065			3,572			10,365			10,112
Deferred loan origination costs		(1,140	)		(1,409	)		(3,457	)		(4,035	)
		13,796			12,769			39,982			38,710
Gain on real estate acquired through foreclosure, net		39			464			184			1,263
Income before income taxes		53,751			53,149			163,959			172,869
Income taxes		18,414			18,868			56,136			61,369
NET INCOME	$	35,337		$	34,281		$	107,823		$	111,500
PER SHARE DATA
Basic earnings	$	0.41		$	0.40		$	1.24		$	1.29
Diluted earnings		.40			.39			1.23			1.28
Cash dividends		.205			.20			.605			.58
Weighted average number of shares outstanding, including dilutive stock options		87,502,860			87,464,631			87,428,766			87,455,443

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-4-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	June 30, 2006			June 30, 2005
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	107,823		$	111,500
Adjustments to reconcile net income to net cash provided by operating activities
Amortization (accretion) of fees, discounts, and premiums, net		3,480			(7,524	)
Amortization of intangible assets		768			917
Depreciation		2,080			3,205
Stock option compensation expense		1,245			—
Provision for (reversal of) loan losses		185			(134	)
Loss (gain) on investment securities and real estate held for sale, net		(184	)		2,271
Increase in accrued interest receivable		(5,348	)		(3,498	)
Increase (decrease) in income taxes payable		989			(14,629	)
FHLB stock dividends		—			(1,221	)
Increase in other assets		(6,115	)		(29,047	)
Increase (decrease) in accrued expenses and other liabilities		(4,828	)		38,438
Net cash provided by operating activities		100,095			100,278
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Single-family residential loans		(799,450	)		(855,400	)
Construction loans		(550,368	)		(519,325	)
Land loans		(333,321	)		(269,549	)
Multi-family loans		(106,222	)		(98,988	)
		(1,789,361	)		(1,743,262	)
Savings account loans originated		(1,639	)		(906	)
Loan principal repayments		1,302,514			1,258,942
Increase in undisbursed loans in process		27,819			57,615
Loans purchased		(348,856	)		(256,162	)
FHLB stock repurchase		—			(47,166	)
FHLB stock redemption		—			56,208
Available-for-sale securities purchased		(518,386	)		(585,731	)
Repurchase agreement maturity		—			200,000
Principal payments and maturities of available-for-sale securities		125,259			160,535
Available-for-sale securities sold		—			127,544
Principal payments and maturities of held-to-maturity securities		22,382			18,137
Proceeds from sales of real estate held for sale		1,602			5,715
Premises and equipment purchased, net		(2,867	)		(2,480	)
Net cash used by investing activities		(1,181,533	)		(751,011	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts		252,454			198,327
Net increase in borrowings		315,000			500,000
Proceeds from exercise of common stock options		3,306			2,305
Dividends paid		(52,820	)		(50,366	)
Proceeds from Employee Stock Ownership Plan		1,344			947
Decrease in advance payments by borrowers for taxes and insurance		(9,896	)		(9,141	)
Net cash provided by financing activities		509,388			642,072
Decrease in cash and cash equivalents		(572,050	)		(8,661	)
Cash and cash equivalents at beginning of period		637,791			508,361
Cash and cash equivalents at end of period	$	65,741		$	499,700
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure	$	708		$	1,367
Cash paid during the period for
Interest		194,564			135,956
Income taxes		55,859			76,543

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-5-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005

(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, 2005 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 2005 Annual Report on Form 10-K (“2005 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. Specifically, securitized assets subject to repurchase have been included with loans receivable.

NOTE B – Dividends

On July 14, 2006 the Company paid its 94^th consecutive quarterly cash dividend. Dividends per share amounted to 20.5 cents for the quarter ended June 30, 2006 compared with 20 cents for the same period one year ago.

NOTE C – 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 June 30, 2006 and 2005 totaled $20,328,000 and $40,946,000, respectively. Total comprehensive income for the nine months ended June 30, 2006 and 2005 totaled $78,650,000 and $100,896,000, respectively. The difference between the Company’s net income and total comprehensive income for the nine months ended June 30, 2006 equals the change in the net unrealized gain or loss on available-for-sale securities of $46,124,000. Net of tax of $16,951,000 , the change was $29,173,000.

-6-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005

(UNAUDITED)

NOTE D – Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the quarter and nine months ended June 30, 2006 and 2005:

	Quarter Ended June 30,					Nine Months Ended June 30,
	2006		2005			2006			2005
	(In thousands)					(In thousands)
Balance at beginning of period	$	24,810	$	24,994		$	24,756		$	25,140
Provision for (reversal of) loan losses		100		(134	)		185			(134	)
Charge-offs		—		—			(31	)		(146	)
Recoveries		—		8			—			8
Balance at end of period	$	24,910	$	24,868		$	24,910		$	24,868

NOTE E – New Accounting Pronouncements

On October 1, 2005 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees. SFAS 123R now requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date estimated fair value of the award. That estimated cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

The Company adopted SFAS 123R using the Modified Prospective Application Method. Under this method SFAS 123R is applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date estimated fair value of those awards as calculated under the pro forma disclosure provisions of SFAS 123.

The fair value of options granted under the Company’s stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model. See Note A and Note L in the 2005 Form 10-K where the Company’s three stock-option employee compensation plans, as well as the weighted-average assumptions utilized in the Black-Scholes model, are more fully described.

Total compensation cost for stock options recognized for the quarter and nine months ended June 30, 2006 was approximately $436,000 and $1,245,000, respectively.

-7-

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 June 30, 2006, the Company had a negative one-year maturity gap of approximately 34% of total assets, compared to a 26% negative one-year maturity gap as of September 30, 2005. The increase in interest rate risk is the result of the Company investing its short-term assets into longer-term assets over the course of the nine months, as well as a general shift in deposits to shorter-term maturities over the same period.

The interest rate spread decreased to 2.31% at June 30, 2006 from 2.54% at September 30, 2005. The spread decreased primarily because weighted average rates on customer accounts increased by 84 basis points since September 30, 2005, however this was partially offset by an increase in the weighted average rates on earning assets of 39 basis points over the same period. As of June 30, 2006, the Company had grown total assets by $568,685,000, or 6.9%, from $8,234,450,000 at September 30, 2005 to fund loan growth. Cash and cash equivalents decreased $572,050,000, or 90%, during the nine months ended June 30, 2006. Loans and mortgage-backed securities increased $1,075,811,000, or 15.2%, to $8,160,085,000 during the nine months

-8-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

ended June 30, 2006 as the Company grew long-term assets to partially offset the impact of increasing deposit costs. Long-term borrowings increased $315,000,000 during the nine months ended June 30, 2006 as the Company replaced $185,000,000 of borrowings held at September 30, 2005 with a weighted average rate of 5.09% with $500,000,000 of borrowings with a weighted average rate of 4.68%. Stockholders’ equity of $1,219,225,000 provides management with flexibility in managing interest rate risk.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net worth at June 30 2006 was $1,219,225,000, or 13.85% of total assets. This was an increase of $31,917,000 from September 30, 2005 when net worth was $1,187,308,000, or 14.42% of total assets. The increase in the Company’s net worth included $107,823,000 from net income. Net worth was reduced by $52,820,000 of cash dividend payments and a $29,173,000 increase in accumulated other comprehensive loss as a result of the decrease in market value of the Company’s available-for-sale investments.

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 protect earnings against 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 $345,378,000, or 32.0%, during the nine months ended June 30, 2006. For the nine months ended June 30, 2006 the Company purchased $518,386,000 of available-for-sale investment securities. During the same period there were no sales of available-for-sale securities nor were there any purchases or sales of held-to-maturity securities. As of June 30, 2006, the Company had net unrealized losses on available-for-sale securities of $29,877,000, net of tax, which were recorded as part of stockholders’ equity.

Loans receivable: During the nine months ended June 30, 2006, the balance of loans receivable increased 13.4% to $6,815,713,000 compared to $6,008,932,000 at September 30, 2005. This growth was consistent with Management’s strategy to grow the loan portfolio to offset rising deposit costs. Permanent single-family residential loans as a percentage of total loans increased to 70.5% at June 30, 2006 compared to 70.2% at September 30, 2005. The aggregate of construction and land loans (gross of loans in process) as a percentage of total loans increased to 22.5% at June 30, 2006 compared to 22.2% at September 30, 2005.

Non-performing assets: Non-performing assets decreased 15.0% during the nine months ended June 30, 2006 to $6,243,000 from $7,344,000 at September 30, 2005. Non-performing assets as a percentage of total assets was .07% at June 30, 2006 as compared to .09% at September 30, 2005.

-9-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

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

	June 30, 2006			September 30, 2005
	(In thousands)
Restructured loans (1)	$	295		$	573
Nonaccrual loans:
Single-family residential		4,727			5,765
Construction		550			—
Land		19			403
Multi-family		445			420
Total nonaccrual loans (2)		5,741			6,588
Total REO (3)		502			756
Total non-performing assets	$	6,243		$	7,344
Total non-performing assets and restructured loans	$	6,538		$	7,917
Total non-performing assets and restructured loans as a percentage of total assets		0.07	%		0.09	%

(1) Performing in accordance with restructured terms.

(2) The Company recognized interest income on nonaccrual loans of approximately $170,000 in the quarter ended June 30, 2006. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $366,000 for the quarter ended June 30, 2006.

In addition to the nonaccrual loans reflected in the above table, at June 30, 2006, the Company had $24,000 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 remained at .07% at June 30, 2006.

(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.

-10-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

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.

	June 30, 2006				September 30, 2005
	Amount		Loans to Total Loans 1		Amount		Loans to Total Loans 1
	(In thousands)
Real estate:
Single-family residential	$	8,571	70.5	%	$	8,643	70.2	%
Multi-family		5,158	7.0			5,776	7.6
Land		4,517	7.4			3,360	6.7
Construction		6,664	15.1			6,977	15.5
	$	24,910	100.0	%	$	24,756	100.0	%

¹ The percentage is based on gross loans before allowance for loan losses, loans in process and deferred loan origination costs.

Customer accounts: Customer accounts increased $252,454,000, or 5.0%, to $5,283,959,000 at June 30, 2006 compared with $5,031,505,000 at September 30, 2005.

FHLB advances and other borrowings: Total borrowings increased $315,000,000, or 16.7%, to $2,200,000,000 at June 30, 2006 compared with $1,885,000,000 at September 30, 2005. See Interest Rate Risk on page 8.

RESULTS OF OPERATIONS

Net Income: The quarter ended June 30, 2006 produced net income of $35,337,000 compared to $34,281,000 for the same quarter one year ago, a 3.1% increase. Net income for the nine months ended June 30, 2006 was $107,823,000 compared to $111,500,000 for the nine months ended June 30, 2005, a 3.3% decrease. Net income decreased primarily as a result of a $7.9 million (after tax) increase in net income recorded in the quarter ended March 31, 2005 which resulted from the Company’s correction of its hedge accounting. See Note A in the 2005 Form 10-K and Note A in the March 31, 2005 Form 10-Q for additional information related to the correction of the Company’s hedge accounting.

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

-11-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

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 period 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.

-12-

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 6/30/06 and 6/30/05									Comparison of Nine Months Ended 6/30/06 and 6/30/05
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)									(In thousands)
Interest income:
Loan portfolio	$	17,258		$	861		$	18,119		$	48,372		$	1,220		$	49,592
Mortgaged-backed securities		4,810			258			5,068			16,954			(18,195	)		(1,241	)
Investments(1)		(4,108	)		1,801			(2,307	)		(10,551	)		6,578			(3,973	)
All interest-earning assets		17,960			2,920			20,880			54,775			(10,397	)		44,378
Interest expense:
Customer accounts		3,604			13,039			16,643			8,776			37,661			46,437
FHLB advances and other borrowings		4,289			(904	)		3,385			12,868			(3,303	)		9,565
All interest-bearing liabilities		7,893			12,135			20,028			21,644			34,358			56,002
Change in net interest income	$	10,067		$	(9,215	)	$	852		$	33,131		$	(44,755	)	$	(11,624	)

(1) Includes interest on cash equivalents and dividends on stock of the FHLB of Seattle

-13-

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 $100,000 provision for loan losses during the quarter ended June 30, 2006, while the same quarter one year ago saw a $134,000 reversal of the provision for loan losses. Nonperforming assets amounted to $6,243,000 or .07% of total assets at June 30, 2006 compared to $7,975,000 or .10% of total assets one year ago. Delinquencies on permanent loans decreased from $14,600,000 at June 30, 2005 to $11,700,000 at June 30, 2006. The Company had no net charge-offs for the quarter ended June 30, 2006 compared with $8,000 of net recoveries for the quarter ended June 30, 2005. The balance of loans receivable increased 13.4% to $6,815,713,000 at June 30, 2006 compared to $6,008,932,000 at September 30, 2005, which offset the positive credit trends discussed above.

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

	Quarter Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(In thousands)						(In thousands)
Beginning balance	$	24,810		$	24,994		$	24,756		$	25,140
Charge-offs:
Real Estate:
Single-family residential		—			—			31			132
Multi-family		—			—			—			14
Land		—			—			—			—
Construction		—			—			—			—
											��
		—			—			31			146
Recoveries:
Real Estate:
Single-family residential		—			8			—			8
Multi-family		—			—			—			—
Land		—			—			—			—
Construction		—			—			—			—
		—			8			—			8
Net charge-offs (recoveries)		—			(8	)		31			138
Provision (reversal of reserve) for loan losses		100			(134	)		185			(134	)
Ending balance	$	24,910		$	24,868		$	24,910		$	24,868
Ratio of net charge-offs to average loans outstanding		0.00	%		0.00	%		0.00	%		0.00	%

Other Income: The quarter ended June 30, 2006 produced total other income of $4,002,000 compared to $2,566,000 for the same quarter one year ago, a 56.0% increase, due to a gain on the sale of real estate. Total other income for the nine months ended June 30, 2006 was $10,798,000 compared to $5,414,000 for the nine months ended June 30, 2005, a 99.4% increase. Total other income for the nine months ended June 30, 2006

-14-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

included a $2,285,000 gain on the sale of real estate. Total other income for the nine months ended June 30, 2005 included a $4,110,000 loss due to the recognition of an other than temporary impairment charge on Freddie Mac and Fannie Mae preferred stock held in the available-for-sale portfolio. This loss was partially offset by net gains from the sale of available-for-sale securities of $576,000 for the nine months ended June 30, 2005.

Other Expense: The quarter ended June 30, 2006 produced total other expense of $13,796,000 compared to $12,769,000 for the same quarter one year ago, an 8.0% increase. Total other expense for the nine months ended June 30, 2006 was $39,982,000 compared to $38,710,000 for the nine months ended June 30, 2005, a 3.3% increase. The increase in other expense for the quarter and nine months ended June 30, 2006 versus the same periods one year ago is due to two factors: 1) effective April 1, 2006 the Company adopted a new bonus plan for all employees that resulted in an increase in bonus compensation expense of $523,000 over the quarter ended June 30, 2005, and 2) effective October 1, 2005, the Company adopted SFAS 123R (see related discussion under Note E above). Total compensation cost for stock options recognized for the quarter and nine months ended June 30, 2006 was approximately $436,000 and $1,245,000, respectively. Total other expense for the quarter and nine months ended June 30, 2006 equaled .64% and .63%, respectively, of average assets, compared to .66% and .68%, respectively, for the same period one year ago. The number of staff, including part-time employees on a full-time equivalent basis, was 761 at June 30, 2006 and 766 at June 30, 2005.

Taxes: Income taxes decreased $454,000, or 2.4%, and $5,233,000, or 8.5%, for the quarter and nine months ended June 30, 2006 when compared to the same periods one year ago. During the nine months ended June 30, 2006, the Company settled a claim with the Internal Revenue Service over the deductibility of supervisory goodwill that resulted in a reduction of income tax expense. As a result, the effective tax rate for the quarter and nine months ended June 30, 2006 decreased to 34.20% from 35.50% for the same periods one year ago. The Company expects a 35.50% 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, 2005. 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 2005 Form 10-K.

-15-

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-14. 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.

-16-

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 June 30, 2006.

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
April 1, 2006 to April 30, 2006	—	$	—	—	3,310,014
May 1, 2006 to May 31, 2006	—		—	—	3,310,014
June 1, 2006 to June 30, 2006	—		—	—	3,310,014
Total	—	$	—	—	3,310,014

⁽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

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

Not applicable

-17-

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART II - Other Information

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

-18-

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.

July 31, 2006	/s/ Roy M. Whitehead
	ROY M. WHITEHEAD
	Vice Chairman, President and Chief Executive Officer

July 31, 2006	/s/ Brent J. Beardall
	BRENT J. BEARDALL
	Senior Vice President and Chief Financial Officer

-19-