1 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, 2004 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 0-25454 WASHINGTON FEDERAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Washington 91-1661606 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ___ 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 1, 2004 Common stock, $1.00 par value 78,455,500 -1- 2 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I Item 1. Financial Statements The 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, 2004 and September 30, 2003 ............................... Page 3 Consolidated Statements of Operations for the quarter and six months ended March 31, 2004 and 2003 .............................. Page 4 Consolidated Statements of Cash Flows for the six months ended March 31, 2004 and 2003 .................................. Page 5 Notes to Consolidated Financial Statements ................................ Page 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. Page 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................... Page 17 Item 4. Controls and Procedures ......................................................... Page 17 PART II Item 1. Legal Proceedings ............................................................ Page 18 Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities ................................................................... Page 18 Item 3. Defaults Upon Senior Securities .............................................. Page 18 Item 4. Submission of Matters to a Vote of Secuirty Holders .......................... Page 18 Item 5. Other Information ............................................................ Page 18 Item 6. Exhibits and Reports on Form 8-K ............................................. Page 18 Signatures ................................................................... Page 20 -2- 3 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) March 31, 2004 September 30, 2003 -------------- ------------------ (In thousands, except per share data) ASSETS Cash and cash equivalents ......................................... $ 1,182,891 $ 1,437,208 Available-for-sale securities, including encumbered securities of $56,466 and $76,921, at fair value................ 940,840 781,798 Held-to-maturity securities, including encumbered securities of $64,742 and $75,690, at amortized cost........... 176,317 154,178 Securitized assets subject to repurchase, net...................... 150,654 210,782 Loans receivable, net ............................................. 4,758,358 4,606,726 Interest receivable ............................................... 30,077 29,489 Premises and equipment, net ....................................... 61,288 60,942 Real estate held for sale ......................................... 13,317 16,204 FHLB stock ........................................................ 147,114 143,851 Intangible assets ................................................. 59,613 60,336 Other assets ...................................................... 22,623 34,461 ----------- ----------- $ 7,543,092 $ 7,535,975 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Customer accounts Savings and demand accounts ................................... $ 4,509,026 $ 4,520,051 Repurchase agreements with customers .......................... 51,720 57,547 ----------- ----------- 4,560,746 4,577,598 FHLB advances ..................................................... 1,650,000 1,650,000 Other borrowings................................................... 100,000 100,000 Advance payments by borrowers for taxes and insurance ............. 19,514 23,281 Federal and state income taxes .................................... 61,893 70,011 Accrued expenses and other liabilities ............................ 58,599 59,489 ----------- ----------- 6,450,752 6,480,379 STOCKHOLDERS' EQUITY Common stock, $1.00 par value, 100,000,000 shares authorized; 94,286,097 and 94,109,168 shares issued; and 78,498,545 and 78,290,836 shares outstanding ............................ 94,286 85,554 Paid-in capital ................................................... 1,158,647 1,085,650 Accumulated other comprehensive income, net of taxes .............. 34,646 34,624 Treasury stock, at cost; 15,787,552 and 15,818,332 shares ......... (206,935) (207,337) Retained earnings ................................................. 11,696 57,105 ----------- ----------- 1,092,340 1,055,596 ----------- ----------- $ 7,543,092 $ 7,535,975 =========== =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -3- 4 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Quarter Ended March 31, Six Months Ended March 31, ------------------------- -------------------------- 2004 2003 2004 2003 -------- -------- --------- --------- (In thousands, except per share data) 	 INTEREST INCOME Loans and securitized assets subject to repurchase ....... $ 82,388 $ 89,648 $164,783 $185,205 Mortgage-backed securities ................................. 12,379 16,190 24,113 34,405 Investment securities and cash equivalents.................. 7,915 8,488 16,468 16,783 -------- -------- -------- -------- 102,682 114,326 205,364 236,393 INTEREST EXPENSE Customer accounts .......................................... 21,234 27,615 42,871 58,910 FHLB advances and other borrowings ......................... 22,172 21,950 44,591 44,358 -------- -------- -------- -------- 43,406 49,565 87,462 103,268 -------- -------- -------- -------- NET INTEREST INCOME ........................................ 59,276 64,761 117,902 133,125 Provision for loan losses .................................. - 150 - 1,400 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ........ 59,276 64,611 117,902 131,725 OTHER INCOME Gain (loss) on sale of securities, net ..................... (659) - (122) - Gains on sale of real estate ............................... - 3,382 - 3,382 OTHER ...................................................... 2,602 2,222 4,788 4,415 -------- -------- -------- -------- 1,943 5,604 4,666 7,797 OTHER EXPENSE Compensation and fringe benefits ........................... 7,789 7,742 15,349 15,972 Occupancy .................................................. 1,490 1,294 2,913 2,603 Other ...................................................... 1,824 2,832 3,620 4,945 -------- -------- -------- -------- 11,103 11,868 21,882 23,520 Gain (loss) on real estate acquired through foreclosure, net ...................................... 127 (113) 252 (440) -------- -------- -------- -------- INCOME BEFORE INCOME TAXES ................................. 50,243 58,234 100,938 115,562 Income taxes ............................................... 17,723 20,530 35,596 40,740 -------- -------- -------- -------- NET INCOME ................................................. $ 32,520 $ 37,704 $ 65,342 $ 74,822 ======== ======== ======== ======== PER SHARE DATA Basic earnings ............................................. $ 0.41 $ 0.49 $ 0.83 $ 0.98 Diluted earnings ........................................... .41 .49 .82 .97 Cash dividends ............................................. .20 .19 .40 .38 Weighted average number of shares outstanding, including dilutive stock options ......................... 79,301,242 77,100,346 79,211,105 77,096,488 Return on average assets ................................... 1.73% 2.06% 1.73% 2.03% SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -4- 5 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended ---------------------------- March 2004 March 2003 ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income ............................................................. $ 64,342 $ 74,822 Adjustments to reconcile net income to net cash provided by operating activities Amortization of fees, discounts and premiums, net .................... (4,342) (7,635) Amortization of intangible assets .................................... 723 - Depreciation ......................................................... 1,260 1,890 Provision for loan losses ............................................ - 1,400 Loss (gain) on investment securities and real estate held for sale,net (129) 441 Decrease (increase) in accrued interest receivable ................... (588) 6,377 Decrease in income taxes payable ..................................... (8,129) (7,931) FHLB stock dividends ................................................. (3,263) (4,491) Decrease (increase) in other assets .................................. (458) 636 Decrease in accrued expenses and other liabilities ................... (890) (1,370) --------- --------- Net cash provided by operating activities .............................. 49,526 64,139 CASH FLOWS FROM INVESTING ACTIVITIES Loans and contracts originated Loans on existing property ........................................... (506,907) (466,625) Construction loans ................................................... (242,648) (236,558) Land loans ........................................................... (120,402) (76,765) Loans refinanced ..................................................... (42,867) (59,383) --------- --------- (912,824) (839,331) Savings account loans originated ....................................... (531) (889) Loan principal repayments .............................................. 795,207 1,298,144 Increase in undisbursed loans in process ............................... 24,686 18,470 Loans purchased ........................................................ (1,356) (130,188) Available-for-sale securities purchased................................. (493,992) (229,995) Principal payments and maturities of available-for-sale securities ..... 123,010 286,347 Available-for-sale securities sold...................................... 228,171 - Held-to-maturity securities purchased .................................. (56,900) (50,000) Principal payments and maturities of held-to-maturity securities ....... 34,995 52,440 Proceeds from sales of real estate held for sale ....................... 6,536 6,748 Premises and equipment purchased, net .................................. (1,606) (5,439) --------- --------- Net cash provided (used) by investing activities ....................... (254,604) 406,307 CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in customer accounts ...................................... (16,852) (89,574) Proceeds from exercise of common stock options ......................... 2,180 1,767 Dividends paid ......................................................... (31,547) (29,076) Proceeds from Employee Stock Ownership Plan ............................ 747 772 Treasury stock purchased, net .......................................... - (10,034) Decrease in advance payments by borrowers for taxes and insurance ...... (3,767) (4,149) --------- --------- Net cash used by financing activities .................................. (49,239) (130,294) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ (254,317) 340,152 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 1,437,208 975,153 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $1,182,891 $1,315,305 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION NON-CASH INVESTING ACTIVITIES Real estate acquired through foreclosure ............................. $ 3,397 $ 5,399 CASH PAID DURING THE PERIOD FOR Interest ............................................................. 88,569 104,586 Income taxes ......................................................... 43,780 49,235 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -5- 6 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTER AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003 (Unaudited) NOTE A - Basis of Presentation The consolidated interim financial statements included in this report have been prepared by Washington Federal, Inc. ("Company") without audit. 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, 2003 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 Washington Federal, Inc.'s 2003 Annual Report on Form 10-K ("2003 Form 10-K") to the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year. The Company accounts for stock-based compensation plans based on the "intrinsic value method" provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized on options granted. Compensation expense for restricted stock awards is based on the market price of the stock on the date of grant and is recognized ratably over the vesting period of the award. 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 N in the 2003 Form 10-K where the Company's three stock-options employee compensation plans, as well as the weighted-average assumptions utilized in the Black-Scholes model, are more fully described. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting For Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure," requires disclosures of net income and earnings per share for companies not adopting its fair value accouting method for stock-based employee compensation. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123: -6- 7 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTER AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003 (Unaudited) Quarter Ended March 31, Six Months Ended March 31, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (in thousands except per share data) <s> <c> <c> <c> <c> Net income, as reported ............ $ 32,520 $ 37,704 $ 65,342 $ 74,822 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ........................... (448) (278) (895) (555) --------- ---------- --------- ---------- Balance at end of period............ $ 32,072 $ 37,426 $ 64,447 $ 74,267 ========= ========== ========= ========== Earnings per share: Basic - as reported $ 0.41 $ 0.49 $ 0.83 $ 0.98 Basic - pro forma 0.41 0.49 0.82 0.97 Diluted - as reported 0.41 0.49 0.82 0.97 Diluted - pro forma 0.40 0.49 0.81 0.96 Certain reclassifications have been made to the financial statements to conform prior periods to current classifcations. NOTE B - Dividends Dividends per share increased to 20 cents for the quarter ended March 31, 2004 compared with 19 cents for the same period one year ago. On April 16, 2004 the Company paid its 85th consecutive quarterly cash dividend. On January 21, 2004, the Board of Directors of the Company declared an eleven-for-ten stock split in the form of a 10% stock dividend to stockholders of record on February 6, 2004, which was distributed on February 20, 2004. All previously reported share and per share amounts have been adjusted accordingly. 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 and forward commitments to purchase or sell mortgage-backed securities. Total comprehensive income for the quarters ended March 31, 2004 and March 31, 2003 totaled $36,445,000 and $30,704,000, respectively. Total comprehensive income for the six months ended March 31, 2004 and March 31, 2003 totaled $65,364,000 and $63,822,000, respectively. The difference between the Company's net income and total comprehensive income equals the change in the net unrealized gain or loss, net of tax, on securities available-for-sale and forward commitments to purchase or sell mortgage-backed securities during the applicable periods. -7- 8 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTER AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003 (Unaudited) Note D - Allowance for Losses on Loans and Securitized Assets Subject to Repurchase The following table summarizes the activity in the allowance for loan losses (including securitized assets subject to repurchase) for the quarter and six months ended March 31, 2004 and 2003: Quarter Six Months Ended March 31, Ended March 31, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (in thousands) (in thousands) <s> <c> <c> <c> <c> Balance at beginning of period...... $ 25,631 $ 24,550 $ 25,806 $ 23,912 Provision for loan losses........... - 150 - 1,400 Charge-offs......................... (181) (85) (387) (697) Recoveries.......................... 12 - 43 - --------- ---------- --------- ---------- Balance at end of period............ $ 25,462 $ 24,615 $ 25,462 $ 24,615 ========= ========== ========= ========== -8- 9 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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, 2004, the Company had a negative one-year maturity gap of approximately 17% of total assets, compared to a 16% negative one-year maturity gap as of March 31, 2003. The slight increase in interest rate risk is the result of the Company investing a portion of its short-term assets into longer term assets. The interest rate spread decreased to 2.55% at March 31, 2004 from 2.47% at September 30, 2003 primarily due to an increased yield on investments coupled with a decrease in deposit rates. During this phase of the interest rate cycle (historically low rates for 30 year fixed-rate loans) the Company has continued to position its balance sheet for changing rates in the future by maintaining a high level of cash and building stockhoders' equity. As of March 31, 2004, the Company had accumulated $1,182,891,000 in cash and cash equivalents, a decrease of $254,317,000 from September 30,2003. This decrease in cash and cash equivalents resulted from investment purchases and loan growth. This liquidity, which represents 16% of total assets, provides management with flexibility in managing interest rate risk going forward. LIQUIDITY AND CAPITAL RESOURCES The Company's net worth at March 31, 2004 was $1,092,340,000, or 14.48% of total assets. This was an increase of $36,744,000 from September 30, 2003 when net worth was $1,055,596,000, or 14.01% of total assets. The increase in the Company's net worth included $65,342,000 from net income. Net worth was reduced by $31,547,000 of cash dividend payments. The Company's percentage of net worth to total assets is among the highest in the nation 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. -9- 10 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION Available-for-sale and held-to-maturity securities: Available-for-sale securities increased $159,042,000 or 20.3% during the six months ended March 31, 2004. The Company purchased $493,992,000 and $56,900,000 of available-for-sale and held-to-maturity investment securities, respectively, during the six months ended March 31, 2004. In addition, during the six months ended March 31, 2004, the Company sold $228,171,000 of available-for-sale securities at a net loss of $122,000. As of March 31, 2004, the Company had unrealized gains on available-for-sale securities of $28,111,000, net of tax, which were recorded as part of stockholders' equity. Loans receivable and securitized assets subject to repurchase: During the six months ended March 31, 2004, the combined total of loans receivable and securitized assets subject to repurchase increased 1.9% to $4,909,012,000 compared to $4,817,508,000 at September 30,2003. The slight increase was consistent with Management's strategy to minimize loan growth during this period of historically low home mortgage rates. Permanent single-family residential loans as a percentage of total loans decreased 72.6% at March 31, 2004 compared to 73.2% at September 30, 2003. The aggregate of construction and land loans (gross of loans in progress) as a percentage of total loans increased to 18.1% at March 31, 2004 compared to 17.6% at September 30, 2003. Non-performing assets: Loans are placed on nonaccrual status when, in the judgement of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Company does not accrue interest on loans 90 days past due or more. Real estate acquired by foreclosure or deed-in-lieu thereof ("REO") is classified as real estate held for sale until it is sold. When property is acquired, it is recorded at the lower of carrying or fair value at the date of acquisition, and any writedown resulting therefrom is charged to the allowance for loan losses. Interest accrual ceases on the date of acquisition and costs incurred in maintaining the property from that date forward are expensed as incurred. Costs incurred for the improvement or developement of such property are capitalized. Non-performing assets decreased 8.1% during the six months ended March 31, 2004 to $25,216,000 from $27,434,000 at September 30, 2003. The following table sets forth information regarding restructured and nonaccrual loans and REO held by the Company at the dates indicated. -10- 11 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, September 30, 2004 2003 ---------- ---------- (Dollars in thousands) <s> <c> <c> Restructed loans (1) ............... $ 1,465 $ 2,551 Nonaccrual loans: Single-family residential ....... 16,210 12,711 Construction and land ........... 439 3,227 Commercial real estate .......... - - Consumer ........................ - - ---------- ---------- Total nonaccrual loans (2) ... 16,649 15,938 Total REO (3) ...................... 8,567 11,496 ---------- ---------- Total non-performing assets ........ $ 25,216 $ 27,434 ========== ========== Total non-performing assets and restructured loans ................ $ 26,681 $ 29,985 ========== ========== Total non-performing assets and restructured loans as a percentage of total assets ................... 0.35% 0.40% ========== ========== (1) Performing in accordance with restructured terms. (2) The Company recognized interest income on nonaccrual loans of approximately $242,000 in the quarter ended March 31, 2004. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $916,000 for the quarter ended March 31, 2004. In addition to the nonaccrual loans reflected in the above table, at March 31, 2004, the Company had $1.2 million 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 been .37% at March 31, 2004. (3) Total REO (included in real estate held for sale on the Balance Sheet) includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. -11- 12 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. March 31, 2004 September 30, 2003 ------------------------ ------------------------ Loans to Loans to Amount Total Loans (1) Amount Total Loans (1) ---------- ----------- ---------- ----------- (in thousands) <s> <c> <c> <c> <c> Real estate: Permanent ................. $ 9,267 80.5% $ 9,940 74.3% Multi-family .............. 6,356 7.5 5,795 9.2 Land ...................... 2,975 0.8 2,929 4.2 Construction .............. 6,864 11.2 7,142 12.3 ---------- ---------- ---------- ---------- $ 25,462 100.0% $ 25,806 100.0% ========== ========== ========== ========== (1) The percentage is based on gross loans (including securitized assets subject to repurchase) before allowance for loan losses, loans in process and deferred loan origination costs. Intangible assets: Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assest acquired. The core deposit intangible and non-compete agreement intangible are acquired assets that lack physical substance but can be distinguished from goodwill. Goodwill is no longer amortized, but rather is evaluated for impairment on an annual basis. Other intangible assets are amortized over their estimated useful lives and are subject to impairment testing when events or circumstances change. If circumstances indicate that the carrying value of the assets may not be recoverable, an impairment charge could be recorded. There was no impairment at March 31, 2004. The Company will continue to evaluate these assets and, if appropriate, provide for any diminution in value. Customer accounts: Customer accounts decreased $16,852,000, or 0.37%, to $4,560,746,000 at March 31, 2004 compared with $4,577,598,000 at September 30, 2003. FHLB advances and other borrowings: Total borrowings remained unchanged at $1,750,000,000 during the six months ended March 31, 2004. -12- 13 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, 2004 produced net income of $32,520,000 compared $37,704,000 for the same quarter one year ago, a 13.7% decrease. Net income for the six months ended March 31, 2004 was $65,342,000 compared to $74,822,000 for the six months ended March 31, 2003, a 12.7% decrease. Net income decreased primarily as a result of margin compression caused by lower yielding loans combined with slower loan prepayments (which reduces the amount of net deferred loan fees accreted into 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 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 change in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. -13- 14 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 Comparison of Six Months Ended 3/31/04 and 3/31/03 3/31/04 and 3/31/03 Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- -------- (In thousands) <s> <c> <c> <c> <c> <c> <c> Interest Income: Loan Portfolio ................. $ 2,343 $(9,603) $ (7,260) $ 321 $(20,743) $ (20,422) Mortgaged-backed securities .... (998) (2,813) (3,811) (5,547) (4,745) (10,292) Investments (1) ................ 560 (1,133) (573) 2,817 (3,132) (315) ------ ------ ------ ------ ------ ------ All interest-earning assets .... 1,905 (13,549) (11,644) (2,409) (28,620) (31,029) ------ ------ ------ ------ ------ ------ Interest Expense: Customer Accounts .............. 680 (7,061) (6,381) 970 (17,009) (16,039) FHLB advances and other borrowings ..................... - 222 222 28 205 233 ------ ------ ------ ------ ------ ------ All interest-bearing libilities .. 680 (6,839) (6,159) 998 (16,804) (15,806) ------ ------ ------ ------ ------ ------ Change in net interest income .... $ 1,225 $ (6,710) $ (5,485) $(3,407) $(11,816) $ (15,223) ====== ====== ====== ====== ====== ====== (1) Includes interest on cash equivalents and dividends on stock of the FHLB of Seattle. -14- 15 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Accretion of loan fees and discounts on securities for the quarter ended March 31, 2004 totaled $7,890,000, a $1,739,000 decrease from the same quarter one year ago. Accretion of loan fees and discounts on securities for the six months ended March 31, 2004 totaled $16,579,000, a $6,241,000 decrease from the same period one year ago. Decreased accretion of loan fees and discounts on securities occurred due to a slow down of prepayments on loans and mortgage-backed securities. Provision for Loan Losses: The Company provided no provision for loan losses during the quarter, compared to $150,000 for the same quarter last year. For the six months ended March 31, 2004, the Company provided no provision for loan losses, compared to $1,400,000 for the same period one year ago. This decrease was primarily due to strong asset quality indicators. Nonperforming assets amounted to $25,216,000 or .33% of total assets at March 31, 2004 compared to $28,080,000 or .38% of total assets one year ago. Delinquencies on permanent loans have decreased from $24,400,000 at March 31, 2003 to $23,100,000 at March 31, 2004. Net charge-offs of $169,000 for the quarter ended March 31, 2004 remained low and were consistent with the $85,000 of net charge-offs for the quarter ended March 31, 2003. However, weak economic conditions, including unemployment that is higher than the national average, continue in the Company's primary markets. The following table analyzes the Company's allowance for loan losses at the dates indicated. -15- 16 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Quarter Six Months ended March 31, ended March 31, ------------------------- -------------------------- 2004 2003 2004 2003 -------- -------- --------- --------- (in thousands) 	 Beginning balance: $ 25,631 $ 24,550 $ 25,806 $ 23,912 Charge-offs: Real Estate: Permanent .................. 105 40 198 152 Multi-family ............... - - - - Land ....................... 1 30 43 30 Construction ............... 75 15 146 515 -------- -------- -------- -------- 181 85 387 697 Recoveries: Real Estate: Permanent ................. 12 - 12 - Multi-family .............. - - - - Land ...................... - - 31 - Construction .............. - - - - -------- -------- -------- -------- 12 - 43 - Net charge-offs ................... 169 85 344 697 Acquired through acquisition ...... - - - - Provision for loan losses ......... - 150 - 1,400 -------- -------- -------- -------- Ending balance .................... $ 25,462 $ 24,615 $ 25,462 $ 24,615 ======== ======== ======== ======== Ratio of net charge-offs to average loans outstanding ......... 0.00% 0.00% 0.01% 0.01% ======== ======== ======== ======== Other Income: The quarter ended March 31, 2004 produced total other income of $1,943,000 compared to $5,604,000 for the same quarter one year ago, a 65.3% decrease. Total other income for the six months ended March 31, 2004 was $4,666,000 compared to $7,797,000 for the six months ended March 31, 2003, a 40.2% decrease. Total other income for the quarter and six months ended March 31, 2003 included a $3,382,000 gain on sale of real estate. Total other income for the quarter and six months ended March 31, 2004 included a net loss of $659,000 and $122,000, respectively, on the sale of securities. Included in these net amounts was a $775,000 loss resulting from the discontinuance of a cash flow hedge, recorded at the point the forecasted transaction was deemed probable of not occurring. Other Expense: The quarter ended March 31, 2004 produced total other expense of $11,103,000 compared to $11,868,000 for the same quarter one year ago, a 6.4% decrease. Total other expense for the six months ended March 31, 2004 was $21,882,000 compared to $23,520,000 for the six months ended March 31, 2003, a 7.0% decrease. Total other expense for the quarter and six months ended March 31, 2004 equaled .59% and .58%, respectively, of average assets, compared to .65% and .64%, respectively, for the same periods one year ago. The number of staff, including part-time employees on a full-time equivalent basis, was 754 at March 31, 2004 compared to 724 at March 31, 2003, however, compensation expense remained relatively flat due to the decline in bonus compensation. -16- 17 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Taxes: Income taxes decreased $2,807,000 or 13.7% and $5,144,000 or 12.6% for the quarter and six month periods ended March 31, 2004, respectively, when compared to the same periods one year ago, due to a lower taxable income base. The effective tax rate was 35.25% for all periods presented. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management believes that there has been no material changes in the Company's quantitative and qualitative information about market risk since September 30, 2003. For a complete discussion of the Company's quantitative and qualitative market risk, see "Marnagement's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2003 Form 10-K. 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. -17- 18 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The Company's only stock repurchase program was publicly announced by the Board of Directors on Febuary 3, 1995 and has no expiration date. Under this ongoing program, a total of 19,960,240 shares have been authorized for repurchase. There were no purchases during any of the three months in the quarter ended March 31, 2004. As of March 31, 2004, 3,094,103 shares may still be purchased under the program. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Washington Federal, Inc. was held on January 21, 2004. Three nominees for reelection as Directors, Derek L. Chinn, W. Alden Harris and Guy C. Pinkerton, were reelected for three- year terms. One nominee for election as Director, Thomas F. Kenney, was elected to a one-year term. The votes cast for Derek L. Chinn were 53,817,086 shares. The votes cast for W. Alden Harris were 53,566,098 shares. The votes cast for Guy C. Pinkerton were 64,280,559 shares. The votes cast for Thomas F. Kenney were 64,108,382 shares. The stockholders ratified the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year 2004 with 69,297,883 shares cast for the proposal. Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (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- 19 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Part II - Other Information (b) Report on Form 8-K 1. Report filed January 16, 2004. Item included: Item 9. Regulation FD Disclosure. The report stated that at the Company's annual meeting of stockholders on January 21, 2004, the Board of Directors announced a 10% stock dividend. 2. Report filed January 23, 2004. Items included: Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition. The report stated that the Company announced by press release its earnings for the quarter ended December 31, 2003 and included a copy of the Company's fact sheet which presents certain detailed financial information about the Company as an exhibit to the report. -19- 20 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. /s/ Roy M. Whitehead May 11, 2004 -------------------------------------- ROY M. WHITEHEAD Vice Chairman, President and Chief Executive Officer /s/ Brent J. Beardall May 11, 2004 -------------------------------------- BRENT J. BEARDALL Senior Vice President and Chief Financial Officer -20-