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 June 30, 2005
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 Exchange 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 JULY 25, 2005
Common stock, $1.00 par value 86,793,983
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I
Item 1. Financial Statements (Unaudited)
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 June 30, 2005 and September 30, 2004 ................................ Page 3
Consolidated Statements of Operations for the quarter
and nine months ended June 30, 2005 and 2004 .............................. Page 4
Consolidated Statements of Cash Flows for the
nine months ended June 30, 2005 and 2004 .................................. 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 16
Item 4. Controls and Procedures ......................................................... Page 17
PART II
Item 1. Legal Proceedings ............................................................ Page 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .................. Page 18
Item 3. Defaults Upon Senior Securities .............................................. Page 18
Item 4. Submission of Matters to a Vote of Security Holders .......................... Page 18
Item 5. Other Information ............................................................ Page 18
Item 6. Exhibits ..................................................................... Page 19
Signatures ................................................................... Page 20
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 2005 September 30, 2004
-------------- ------------------
(In thousands, except share data)
ASSETS
Cash and cash equivalents ......................................... $ 499,700 $ 508,361
Repurchase agreements ............................................. - 200,000
Available-for-sale securities, including encumbered
securities of $568,610 and $64,587, at fair value .............. 1,188,487 899,525
Held-to-maturity securities, including encumbered
securities of $73,355 and $54,811, at amortized cost........... 138,464 156,373
Securitized assets subject to repurchase, net...................... 79,210 110,607
Loans receivable, net ............................................. 5,697,437 4,982,836
Interest receivable ............................................... 33,330 29,832
Premises and equipment, net ....................................... 62,324 63,049
Real estate held for sale ......................................... 5,545 8,630
FHLB stock ........................................................ 129,453 137,274
Intangible assets, net ............................................ 58,022 58,939
Other assets ...................................................... 38,484 13,779
----------- -----------
$ 7,930,456 $ 7,169,205
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Customer accounts
Savings and demand accounts ................................... $ 4,777,216 $ 4,569,245
Repurchase agreements with customers .......................... 31,469 41,113
----------- -----------
4,808,685 4,610,358
FHLB advances ..................................................... 1,200,000 1,200,000
Other borrowings................................................... 600,000 100,000
Advance payments by borrowers for taxes and insurance ............. 16,085 25,226
Federal and state income taxes .................................... 41,718 62,081
Accrued expenses and other liabilities ............................ 89,790 51,352
----------- -----------
6,756,278 6,049,017
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, 300,000,000 shares authorized;
104,009,983 and 103,821,846 shares issued; 86,777,363
and 86,547,557 shares outstanding ............................ 104,010 94,383
Paid-in capital ................................................... 1,238,456 1,161,627
Accumulated other comprehensive income, net of taxes .............. 6,503 17,107
Treasury stock, at cost; 17,232,620 and 17,274,289 shares ......... (206,170) (206,666)
Retained earnings ................................................. 31,379 53,737
----------- -----------
1,174,178 1,120,188
----------- -----------
$ 7,930,456 $ 7,169,205
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended June 30, Nine Months Ended June 30,
------------------------- --------------------------
2005 2004 2005 2004
-------- -------- --------- ---------
(In thousands, except per share data)
INTEREST INCOME
Loans and securitized assets subject to repurchase ....... $ 94,206 $ 82,651 $271,413 $247,434
Mortgage-backed securities ................................. 12,244 11,659 48,646 35,773
Investment securities and cash equivalents.................. 7,552 8,900 23,667 25,367
-------- -------- -------- --------
114,002 103,210 343,726 308,574
INTEREST EXPENSE
Customer accounts .......................................... 30,593 21,101 81,107 63,971
FHLB advances and other borrowings ......................... 20,655 19,939 57,850 64,531
-------- -------- -------- --------
51,248 41,040 138,957 128,502
-------- -------- -------- --------
NET INTEREST INCOME ........................................ 62,754 62,170 204,769 180,072
Provision (reversal of reserve) for loan losses ............ (134) (231) (134) (231)
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ........ 62,888 62,401 204,903 180,303
OTHER INCOME
Loss on securities, net .................................... (121) (596) (3,534) (719)
Other ...................................................... 2,687 3,021 8,948 8,570
-------- -------- -------- --------
2,566 2,425 5,414 7,851
OTHER EXPENSE
Compensation and fringe benefits ........................... 8,694 7,797 25,761 22,966
Occupancy .................................................. 1,912 1,815 6,872 5,489
Other ...................................................... 3,573 2,964 10,114 10,379
Deferred loan origination costs ............................ (1,409) (1,549) (4,035) (5,165)
-------- -------- -------- --------
12,770 11,027 38,712 33,669
Gain on real estate acquired through foreclosure, net ...... 464 303 1,263 556
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ................................. 53,148 54,102 172,868 155,041
Income taxes ............................................... 18,867 19,070 61,368 54,666
-------- -------- -------- --------
NET INCOME ................................................. $ 34,281 $ 35,032 $111,500 $100,375
======== ======== ======== ========
PER SHARE DATA
Basic earnings ............................................. $ 0.40 $ 0.41 $ 1.29 $ 1.16
Diluted earnings ........................................... .39 .40 1.27 1.15
Cash dividends ............................................. .20 .19 .58 .55
Weighted average number of shares outstanding,
including dilutive stock options ......................... 87,464,631 87,000,061 87,455,443 87,094,161
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
----------------------------
June 2005 June 2004
---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................................. $ 111,500 $ 100,375
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization of fees, discounts, and premiums, net ................... (7,524) (5,967)
Amortization of intangible assets .................................... 917 1,066
Depreciation ......................................................... 3,205 1,905
Provision (reversal of reserve) for loan losses ...................... (134) (231)
Loss (gain) on investment securities and real estate held for sale,net 2,271 163
Increase in accrued interest receivable .............................. (3,498) (1,735)
Decrease in income taxes payable ..................................... (14,629) (9,206)
FHLB stock dividends ................................................. (1,221) (4,706)
Decrease (increase) in other assets .................................. (29,047) 6,867
Increase (decrease) in accrued expenses and other liabilities ........ 38,438 (12,808)
--------- ---------
Net cash provided by operating activities .............................. 100,278 75,723
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Single-family residential loans ...................................... (855,400) (806,213)
Construction loans ................................................... (519,325) (405,941)
Land loans ........................................................... (269,549) (182,970)
Multi-family loans ................................................... (98,988) (120,890)
--------- ---------
(1,743,262) (1,516,014)
Savings account loans originated ....................................... (906) (1,253)
Loan principal repayments .............................................. 1,258,942 1,296,641
Increase in undisbursed loans in process ............................... 57,615 79,421
Loans purchased ........................................................ (256,162) (1,800)
FHLB stock repurchase .................................................. (47,166) -
FHLB stock redemption .................................................. 56,208 2,299
Available-for-sale securities purchased................................. (585,731) (598,990)
Repurchase agreement maturity (purchase) ............................... 200,000 (200,000)
Principal payments and maturities of available-for-sale securities ..... 160,535 204,590
Available-for-sale securities sold...................................... 127,544 253,171
Held-to-maturity securities purchased .................................. - (56,900)
Principal payments and maturities of held-to-maturity securities ....... 18,137 47,194
Proceeds from sales of real estate held for sale ....................... 5,715 12,582
Premises and equipment purchased, net .................................. (2,480) (2,597)
--------- ---------
Net cash used by investing activities .................................. (751,011) (481,656)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts ........................... 198,327 (5,099)
Net increase (decrease) in borrowings .................................. 500,000 (250,000)
Proceeds from exercise of common stock options ......................... 2,305 2,590
Dividends paid ......................................................... (50,366) (47,929)
Proceeds from Employee Stock Ownership Plan ............................ 947 747
Treasury stock purchased, net .......................................... - (1,939)
Decrease in advance payments by borrowers for taxes and insurance ...... (9,141) (8,686)
--------- ---------
Net cash provided (used) by financing activities ....................... 642,072 (310,316)
DECREASE IN CASH AND CASH EQUIVALENTS................................... (8,661) (716,249)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 508,361 1,437,208
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 499,700 $ 720,959
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NON-CASH INVESTING ACTIVITIES
Real estate acquired through foreclosure ............................. $ 1,367 $ 4,918
CASH PAID DURING THE PERIOD FOR
Interest ............................................................. 135,956 130,642
Income taxes ......................................................... 76,543 65,018
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
NOTE A - Basis of Presentation
The consolidated interim financial statements included in this report have
been prepared by the 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, 2004 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 2004 Annual Report on Form 10-K
("2004 Form 10-K") as filed with the SEC. Interim results are not
necessarily indicative of results for a full year.
On December 16, 2004, the Financial Accounting Standards Board issued
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. Rather, the new standard 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 has not yet quantified the effects of the adoption of SFAS 123R,
but it is expected that the new standard may result in significant stock-
based compensation expense. The pro forma effects on net income and earnings
per share if the Company had applied the fair value recognition provisions
of original SFAS 123 to stock compensation awards (rather than applying the
intrinsic value measurement provisions of Opinion 25) are disclosed in the
table on page 7. Although such pro forma effects of applying original SFAS
123 may be indicative of the effects of adopting SFAS 123R, the provisions
of these two statements differ in some important respects. The actual
effects of adopting SFAS 123R will be dependant on numerous factors
including, but not limited to, the valuation model chosen by the Company to
estimate the value of stock-based awards; the assumed award forfeiture rate;
the accounting policies adopted concerning the method of recognizing the fair
value of awards over the requisite service period; and the transition
method (as described below) chosen for adopting SFAS 123R.
SFAS 123R will be effective for the Company's fiscal year beginning October
1, 2005, and requires the use of 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 for pro forma disclosures under the original SFAS 123.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
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 2004 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.
The following table illustrates the effect on net income and earnings per
share as if the Company had applied the fair value recognition provisions of
the original SFAS 123:
Quarter Ended June 30, Nine Months Ended June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands, except per share data)
<s> <c> <c> <c> <c>
Net income, as reported ............ $ 34,281 $ 35,032 $ 111,500 $ 100,375
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects ........................... (429) (448) (1,287) (1,343)
--------- ---------- --------- ----------
Pro forma net income................ $ 33,852 $ 34,584 $ 110,213 $ 99,032
========= ========== ========= ==========
Earnings per share:
Basic - as reported $ 0.40 $ 0.41 $ 1.29 $ 1.16
Basic - pro forma 0.39 0.40 1.27 1.15
Diluted - as reported 0.39 0.40 1.27 1.15
Diluted - pro forma 0.39 0.40 1.26 1.14
Certain reclassifications have been made to the financial statements to conform
prior periods to current classifications.
NOTE B - Dividends
Dividends per share increased to 20 cents for the quarter ended June 30, 2005
compared with 19 cents for the same period one year ago. On July 15, 2005
the Company paid its 90th consecutive quarterly cash dividend.
On January 19, 2005, 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 4, 2005, which was distributed on February 18, 2005.
All previously reported share and per share amounts have been adjusted
accordingly.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
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, 2005 and 2004
totaled $40,946,000 and $22,304,000, respectively. Total comprehensive
income for the nine months ended June 30, 2005 and 2004 totaled $100,896,000
and $87,668,000, 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 available-for-sale securities during
the applicable periods.
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 nine
months ended June 30, 2005 and 2004:
Quarter Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands) (in thousands)
<s> <c> <c> <c> <c>
Balance at beginning of period...... $ 24,994 $ 25,462 $ 25,140 $ 25,806
Provision (reversal of reserve)
for loan losses................... (134) (231) (134) (231)
Charge-offs......................... - (84) (146) (471)
Recoveries.......................... 8 47 8 90
--------- ---------- --------- ----------
Balance at end of period............ $ 24,868 $ 25,194 $ 24,868 $ 25,194
========= ========== ========= ==========
NOTE E - Correction of Error
As disclosed by press release on April 20, 2005 ("Press Release"), Washington
Federal, Inc. ("Company") began a review of its accounting for derivatives. As
of May 6, 2005, this review was completed and the Company determined that its
accounting for derivative instruments, which consisted of cash flow hedges
using forward contracts to purchase and sell mortgage-backed securities, had
been incorrect. The Company's cash flow hedge documentation lacked the
specificity required by Statement of Financial Accounting Standards No. 133
("SFAS 133") and Emerging Issues Task Force Topic D-102.
The cumulative effect as of January 1, 2005 of the correction of the error
would have increased retained earnings as of that date by $7.9 million, net of
tax. Such correction was recorded in the quarter ended March 31, 2005 and
increased net income for nine months ended June 30, 2005 by the same amount.
The effect of the error was not material to any prior quarter in 2005 or 2004
nor for any prior year, and does not have a material effect on the trend in
earnings during those periods. The correction of the error is not expected
to have a material impact on net income for the year ending September 30, 2005
or to the trend of earnings for that year.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2005, the Company had a negative one-year maturity gap of
approximately 24% of total assets, compared to a 21% negative one-year
maturity gap as of June 30, 2004. The increase in interest rate
risk is the result of the Company investing a portion of its short-term
assets into longer term assets over the course of the last twelve-month
period.
The interest rate spread decreased to 2.55% at June 30, 2005 from
3.00% at September 30, 2004 due to increasing deposit costs. The weighted
average rate on customer accounts increased by 74 basis points to 2.70% as
of June 30, 2005. This increase was due to increasing short-term market
rates resulting from the Federal Reserve increasing its targeted Fed
Funds rate from 1.25% as of June 30, 2004 to 3.25% at June 30, 2005. As
of June 30, 2005, the Company had grown total assets by $761,251,000 from
$7,169,205,000 at September 30, 2004. Short-term investments (original
maturities less than one year) decreased $208,661,000 during the nine
months ended June 30, 2005. Loans and mortgage-backed securities increased
$1,005,358,000, or 17.5%, to $6,740,016,000 during the nine month period
ended June 30, 2005 as the Company grew long-term assets to offset
increasing deposit costs. Long-term borrowings increased $500,000,000
during the nine months ended June 30, 2005, as the Company chose to lock
in additional long-term funding at a weighted-average rate of 3.87%.
Total short-term assets of $499,700,000, which represent 6.3% of total
assets, provide management with flexibility in managing interest rate risk.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at June 30, 2005 was $1,174,178,000, or 14.81% of
total assets. This was an increase of $53,990,000 from September 30, 2004
when net worth was $1,120,188,000, or 15.62% of total assets. The
increase in the Company's net worth included $111,500,000 from net income.
Net worth was reduced by $50,366,000 of cash dividend payments.
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.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale
securities increased $288,962,000, or 32.1%, during the nine months ended
June 30, 2005. For the nine months ended June 30, 2005 the Company
purchased $585,731,000 of available-for-sale investment securities and
sold $127,544,000 of available-for-sale securities at a net gain of
$576,000. In addition, the Company recorded an other than temporary
impairment charge of $4,110,000 during the second fiscal quarter on
Fannie Mae and Freddie Mac preferred stock that are part of the
available-for-sale portfolio. There were no purchases of held-to-
maturity securities during the nine months ended June 30, 2005. As of June 30,
2005, the Company had net unrealized gains on available-for-sale securities
of $6,503,000, net of tax, which were recorded as part of stockholders'
equity.
Loans receivable and securitized assets subject to repurchase: During the
nine months ended June 30, 2005, the combined total of loans receivable and
securitized assets subject to repurchase increased 13.4% to $5,776,647,000
compared to $5,093,443,000 at September 30, 2004. 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 decreased to 70.2% at June 30, 2005 compared to
71.2% at September 30, 2004. The aggregate of construction and land loans
(gross of loans in process) as a percentage of total loans increased to 22.1%
at June 30, 2005 compared to 20.4% at September 30, 2004.
FHLB stock: During the current quarter the Company purchased $48,000,000 of
FLHB stock to bring its total investment to $129,453,000 at June 30, 2005.
Non-performing assets: Non-performing assets decreased 46.6% during the nine
months ended June 30, 2005 to $7,975,000 from $14,945,000 at September 30,
2004 due to a strong housing market in the western United States and
increased sales of real estate held for sale.
The following table sets forth information regarding restructured and
nonaccrual loans and REO held by the Company at the dates indicated.
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11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, September 30,
2005 2004
---------- ----------
(In thousands)
<s> <c> <c>
Restructed loans (1) ............... $ 572 $ 803
Nonaccrual loans:
Single-family residential ....... 6,013 7,589
Construction .................... 496 2,965
Land ............................ 404 252
Multi-family .................... 419 322
---------- ----------
Total nonaccrual loans (2) ... 7,332 11,128
Total REO (3) ...................... 643 3,817
---------- ----------
Total non-performing assets ........ $ 7,975 $ 14,945
========== ==========
Total non-performing assets and
restructured loans ................ $ 8,547 $ 15,748
========== ==========
Total non-performing assets and
restructured loans as a percentage
of total assets ................... 0.11% 0.22%
========== ==========
(1) Performing in accordance with restructured terms.
(2) The Company recognized interest income on nonaccrual loans
of approximately $185,000 in the quarter ended June 30,
2005. Had these loans performed according to their
original contract terms, the Company would have
recognized interest income of approximately $448,000
for the quarter ended June 30, 2005.
In addition to the nonaccrual loans reflected in the above
table, at June 30, 2005, the Company had $4,328,000 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 been .16% at
June 30, 2005.
(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.
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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.
June 30, 2005 September 30, 2004
------------------------ ------------------------
Loans to Loans to
Amount Total Loans 1 Amount Total Loans 1
---------- ----------- ---------- -----------
(In thousands)
<s> <c> <c> <c> <c>
Real estate:
Single-family
residential ............. $ 9,354 70.2% $ 8,517 71.2%
Multi-family .............. 5,446 7.6 6,084 8.4
Land ...................... 3,984 6.7 3,470 5.3
Construction .............. 6,084 15.5 7,069 15.1
---------- ---------- ---------- ----------
$ 24,868 100.0% $ 25,140 100.0%
========== ========== ========== ==========
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.
Customer accounts: Customer accounts increased $198,327,000, or 4.3%,
to $4,808,685,000 at June 30, 2005 compared with $4,610,358,000 at
September 30, 2004.
FHLB advances and other borrowings: Total borrowings increased $500,000,000,
or 38.5%, to $1,800,000,000 at June 30, 2005, compared with $1,300,000,000
at September 30, 2004. The $500,000,000 of reverse repurchase agreements
either mature or are callable five years after inception and have a
weighted-average rate of 3.87%.
RESULTS OF OPERATIONS
Net Income: The quarter ended June 30, 2005 produced net income of
$34,281,000 compared to $35,032,000 for the same quarter one year ago,
a 2.1% decrease. This was primarily due to higher operating expenses
incurred in the current quarter versus the same period one year ago.
Net income for the nine months ended June 30, 2005 was $111,500,000
compared to $100,375,000 for the nine months ended June 30, 2004, an
11.1% increase. Net income for the nine months increased primarily as
a result of increased balances of loans and mortgage-backed securities,
reduced borrowing costs and the $4.6 million (after tax) increase in net
income which resulted from the Company's correction of its hedge
accounting as described in Note E.
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13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 changes 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 Nine Months Ended
6/30/05 and 6/30/04 6/30/05 and 6/30/04
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- --------
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest Income:
Loan Portfolio ................. $11,927 $ (372) $ 11,555 $ 27,645 $ (3,666) $ 23,979
Mortgaged-backed securities (2) 4,698 (4,113) 585 11,195 1,678 12,873
Investments (1) ................ (3,221) 1,873 (1,348) (10,088) 8,388 (1,700)
------ ------ ------ ------ ------ ------
All interest-earning assets .... 13,404 (2,612) 10,792 28,752 6,400 35,152
------ ------ ------ ------ ------ ------
Interest Expense:
Customer Accounts .............. 654 8,838 9,492 1,028 16,108 17,136
FHLB advances and other
borrowings ..................... 2,176 (1,460) 716 (3,072) (3,609) (6,681)
------ ------ ------ ------ ------ ------
All interest-bearing liabilities . 2,830 7,378 10,208 (2,044) 12,499 10,455
------ ------ ------ ------ ------ ------
Change in net interest income .... $10,574 $ (9,990) $ 584 $30,796 $ (6,099) $ 24,697
====== ====== ====== ====== ====== ======
(1) Includes interest on cash equivalents and dividends on stock of the FHLB
of Seattle
(2) Includes the correction of an error related to hedge accounting as
described in Note E of the June 30, 2005 Form 10-Q
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15
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 had a $134,000 reversal of reserve
for the quarter and nine months ended June 30, 2005, compared to a $231,000
reversal of reserve for the same periods last year. The reversal of reserve
in the current quarter was recorded due to a reduction in the Company's
nonperforming loan balances combined with improving economic conditions in
key markets served by the Company. Nonperforming assets amounted
to $7,975,000 or .10% of total assets at June 30, 2005 compared to
$14,441,000 or .20% of total assets one year ago. Delinquencies on permanent
loans decreased from $16,000,000 at June 30, 2004 to $14,600,000 at June 30,
2005. Net recoveries of $8,000 for the quarter ended June 30, 2005 compared
with $37,000 of net charge-offs for the quarter ended June 30, 2004. The
combined total of loans receivable and securitized assets subject to
repurchase increased 13.4% to $5,776,647,000 at June 30, 2005 compared to
$5,093,443,000 at September 30, 2004, which partially offset the positive
credit trends discussed above.
The following table analyzes the Company's allowance for loan losses
at the dates indicated.
Quarter Nine Months
ended June 30, ended June 30,
------------------------- --------------------------
2005 2004 2005 2004
-------- -------- --------- ---------
(in thousands)
Beginning balance $ 24,994 $ 25,462 $ 25,140 $ 25,806
Charge-offs:
Real Estate:
Single-family residential .. - 84 132 282
Multi-family ............... - - 14 -
Land ....................... - - - 43
Construction ............... - - - 146
-------- -------- -------- --------
- 84 146 471
Recoveries:
Real Estate:
Single-family residential .. 8 - 8 12
Multi-family ............... - - - -
Land ....................... - 47 - 78
Construction ............... - - - -
-------- -------- -------- --------
8 47 8 90
Net charge-offs (recoveries) ...... (8) 37 138 381
Acquired through acquisition ...... - - - -
Provision (reversal of reserve)
for loan losses .................. (134) (231) (134) (231)
-------- -------- -------- --------
Ending balance .................... $ 24,868 $ 25,194 $ 24,868 $ 25,194
======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding ......... 0.00% 0.00% 0.00% 0.01%
======== ======== ======== ========
-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
Other Income: The quarter ended June 30, 2005 produced total other income
of $2,566,000 compared to $2,425,000 for the same quarter one year ago, a
5.8% increase. Total other income for the nine months ended June 30, 2005
was $5,414,000 compared to $7,851,000 for the nine months ended June 30, 2004,
a 31.0% decrease. 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. Total other income for the quarter and nine months ended
June 30, 2004 included a net loss of $596,000 and $719,000, respectively, on
the sale of securities.
Other Expense: The quarter ended June 30, 2005 produced total other expense
of $12,770,000 compared to $11,027,000 for the same quarter one year ago, a
15.8% increase. Total other expense for the nine months ended June 30, 2005
was $38,712,000 compared to $33,669,000 for the nine months ended June 30, 2004,
a 15.0% increase. There were four primary reasons for the increases; first, a
bonus compensation accrual of $1,939,000 was recorded in the nine month period
ended June 30, 2005 due to increased earnings per share. There was no bonus
accrual for the nine month period ended June 30, 2004. Second, during the
nine months ended June 30, 2005 the Company recorded a non-recurring expense
of $1,225,000 related to the amortization of leasehold improvements that brings
the Company into conformity with a recent clarification of the accounting
standard for leases. The Company now amortizes leasehold improvements over
the shorter of the original lease term excluding option periods, or the
expected useful life of the improvements. Third, the Company recorded $517,500
of other expenses resulting from the consolidation of a low income housing
investment. Finally, an increase in staff, including part-time employees on a
full-time equivalent basis, to 766 at June 30, 2005 from 757 at June 30, 2004
contributed to the increase in other expense. Total other expense for the
quarter and nine months ended June 30, 2005 equaled .66% and .68%, respectively,
of average assets, compared to .60% for both of the same periods one year ago.
Taxes: Income taxes decreased $203,000 or 1.1% for the quarter ended June 30,
2005 compared to the same period one year ago due to a lower taxable
income base. However, for the nine months ended June 30, 2005, income taxes
increased $6,702,000 or 12.3% when compared to the same period one year ago
due to a higher taxable income base. In addition, the effective tax rate
increased to 35.50% for the quarter and nine months ended June 30, 2005 from
35.25% for the same periods one year ago.
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,
2004. 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 2004 Form 10-K.
-16-
17
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.
-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. 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, 2005.
Maximum
Total Number Number of Shares
of Shares That May Yet
Purchased as Part Be Purchased
Total Number Average of Publicly Under the Plan
of Shares Price Paid Announced at the End of
Purchased Per Share Plan (1) the Period
---------- ----------- ---------- -----------
<s> <c> <c> <c> <c>
Period:
April 1, 2005 to April 30, 2005 .... - $ - - 3,310,014
May 1, 2005 to May 31, 2005 ........ - - - 3,310,014
June 1, 2005 to June 30, 2005 ...... - - - 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 purchase.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
-18-
19
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Part II - Other Information
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
-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
July 26, 2005 --------------------------------------
ROY M. WHITEHEAD
Vice Chairman, President and Chief
Executive Officer
/s/ Brent J. Beardall
July 26, 2005 --------------------------------------
BRENT J. BEARDALL
Senior Vice President and Chief
Financial Officer
-20-