UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended December 31, 2005
or
For the transition period from to
Commission file number 0-25454
WASHINGTON FEDERAL, INC.
(Exact name of registrant as specified in its charter)
(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 February 1, 2006
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Financial Statements (Unaudited)
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
ASSETS
Cash and cash equivalents
Available-for-sale securities, including encumbered securities of $538,268 and $571,462, at fair value
Held-to-maturity securities, including encumbered securities of $94,975 and $68,759, at amortized cost
Loans receivable, net
Interest receivable
Premises and equipment, net
Real estate held for sale
FHLB stock
Intangible assets, net
Other assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Customer accounts
Savings and demand accounts
Repurchase agreements with customers
FHLB advances
Other borrowings
Advance payments by borrowers for taxes and insurance
Federal and state income taxes
Accrued expenses and other liabilities
Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized;104,225,461 and 104,140,966 shares issued;87,017,789 and 86,933,294 shares outstanding
Paid-in capital
Accumulated other comprehensive loss, net of taxes
Treasury stock, at cost; 17,207,672 shares
Retained earnings
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENTS OF OPERATIONS
INTEREST INCOME
Loans
Mortgage-backed securities
Investment securities and cash equivalents
INTEREST EXPENSE
FHLB advances and other borrowings
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
OTHER INCOME
Gain on sale of securities, net
Other
OTHER EXPENSE
Compensation and fringe benefits
Occupancy
Gain on real estate acquired through foreclosure, net
Income before income taxes
Income taxes
NET INCOME
PER SHARE DATA
Basic earnings
Diluted earnings
Cash dividends
Weighted average number of shares outstanding, including dilutive stock options
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CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Amortization (accretion) of fees, discounts, and premiums, net
Amortization of intangible assets
Depreciation
Stock option compensation expense
Gain on investment securities and real estate held for sale, net
Increase in accrued interest receivable
Increase in income taxes payable
Decrease (increase) in other assets
Increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Single-family residential loans
Construction loans
Land loans
Multi-family loans
Savings account loans originated
Loan principal repayments
Increase in undisbursed loans in process
Loans purchased
FHLB stock redemption
Available-for-sale securities purchased
Principal payments and maturities of available-for-sale securities
Available-for-sale securities sold
Principal payments and maturities of held-to-maturity securities
Proceeds from sales of real estate held for sale
Premises and equipment purchased, net
Net cash used by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts
Net increase in borrowings
Proceeds from exercise of common stock options
Dividends paid
Decrease in advance payments by borrowers for taxes and insurance
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure
Cash paid during the period for
Interest
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2005 AND 2004
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, 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
Dividends per share increased to 20 cents for the quarter ended December 31, 2005 compared with 19 cents for the same period one year ago. On January 13, 2006 the Company paid its 92nd consecutive quarterly cash dividend.
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 December 31, 2005 and 2004 totaled $27,350,000 and $31,482,000, respectively. The difference between the Company’s net income and total comprehensive income equals the change in the net unrealized gain or loss on available-for-sale securities of $13,916,000, net of tax of $5,120,000, for the period ending December 31, 2005.
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NOTE D – Allowance for Losses on Loans
The following table summarizes the activity in the allowance for loan losses for the quarters ended December 31, 2005 and 2004:
Balance at beginning of period
Charge-offs
Recoveries
Balance at end of period
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).
In addition, SFAS 123R 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 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 during the quarter ended December 31, 2005 was approximately $388,000.
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PART I – Financial Information
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 December 31, 2005, the Company had a negative one-year maturity gap of approximately 33% 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 a portion of its short-term assets into longer-term assets over the course of the last quarter.
The interest rate spread decreased to 2.53% at December 31, 2005 from 2.54% at September 30, 2005. The spread decreased primarily because rates on customer accounts increased by 22 basis points since September 30, 2005, however this was partially offset by an increase in earning assets of 13 basis points over the same period. As of December 31, 2005, the Company had grown total assets by $70,851,000 from $8,234,450,000 at September 30, 2005. Short-term assets (original maturities less than one year) decreased $209,206,000 during the quarter ended December 31, 2005. Loans and mortgage-backed securities increased $284,079,000, or 4.0%, to $7,368,353,000 during the quarter ended December 31, 2005 as the Company grew long-term assets to offset the impact of increasing deposit costs. Long-term borrowings increased $15,000,000 during the quarter ended December 31, 2005. Total short-term assets of $428,585,000, which represent 5.2% of total assets, provides management with flexibility in managing interest rate risk.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s net worth at December 31, 2005 was $1,198,639,000, or 14.43% of total assets. This was an increase of $11,331,000 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 $36,146,000 from net income. Net worth was reduced by $17,488,000 of cash dividend payments and an $8,796,000 increase in accumulated other comprehensive loss.
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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CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale securities increased $28,992,000, or 2.7%, during the quarter ended December 31, 2005. For the quarter ended December 31, 2005 the Company purchased $90,059,000 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 December 31, 2005, the Company had net unrealized losses on available-for-sale securities of $9,500,000, net of tax, which were recorded as part of stockholders’ equity.
Loans receivable: During the quarter ended December 31, 2005, the balance of loans receivable increased 4.3% to $6,264,599,000 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 70.7% at December 31, 2005 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 decreased to 21.9% at December 31, 2005 compared to 22.1% at September 30, 2005.
Non-performing assets: Non-performing assets increased 5.9% during the quarter ended December 31, 2005 to $7,779,000 from $7,344,000 at September 30, 2005. Non-performing assets as a percentage of total assets were .09% at both December 31, 2005 and September 30, 2005.
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The following table sets forth information regarding restructured and nonaccrual loans and REO held by the Company at the dates indicated.
Restructured loans (1)
Nonaccrual loans:
Single-family residential
Construction
Land
Multi-family
Total nonaccrual loans (2)
Total REO (3)
Total non-performing assets
Total non-performing assets and restructured loans
Total non-performing assets and restructured loans as a percentage of total assets
In addition to the nonaccrual loans reflected in the above table, at December 31, 2005, the Company had $65,000 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 .10% at December 31, 2005.
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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.
Real estate:
Customer accounts: Customer accounts increased $55,822,000, or 1.1%, to $5,087,327,000 at December 31, 2005 compared with $5,031,505,000 at September 30, 2005.
FHLB advances and other borrowings: Total borrowings increased $15,000,000, or 0.8%, to $1,900,000,000 at December 31, 2005 compared with $1,885,000,000 at September 30, 2005.
RESULTS OF OPERATIONS
Net Income: The quarter ended December 31, 2005 produced net income of $36,146,000 compared to $36,258,000 for the same quarter one year ago, a 0.3% decrease.
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.
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Rate / Volume Analysis:
Interest income:
Loan portfolio
Mortgaged-backed securities
Investments(1)
All interest-earning assets
Interest expense:
All interest-bearing liabilities
Change in net interest income
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Provision for Loan Losses: The Company recorded no provision for loan losses during either of the quarters ended December 31, 2005 and 2004. Nonperforming assets amounted to $7,779,000 or .09% of total assets at December 31, 2005 compared to $12,896,000 or .17% of total assets one year ago. Delinquencies on permanent loans decreased from $16,500,000 at December 31, 2004 to $14,700,000 at December 31, 2005. Net charge-offs of $20,000 for the quarter ended December 31, 2005 compared with $132,000 of net charge-offs for the quarter ended December 31, 2004. The balance of loans receivable increased 4.3% to $6,264,599,000 at December 31, 2005 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.
Beginning balance
Charge-offs:
Real Estate:
Recoveries:
Net charge-offs (recoveries)
Provision (reversal of reserve) for loan losses
Ending balance
Ratio of net charge-offs to average loans outstanding
Other Income: The quarter ended December 31, 2005 produced total other income of $3,391,000 compared to $2,578,000 for the same quarter one year ago, a 31.5% increase. The quarter to quarter difference in total
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other income resulted primarily from a $496,000 gain on the sale of real estate held for investment during the quarter ended December 31, 2005.
Other Expense: The quarter ended December 31, 2005 produced total other expense of $12,669,000 compared to $11,978,000 for the same quarter one year ago, a 5.8% increase, resulting primarily from a general increase in routine operating expenses during the current quarter. Total other expense for the quarter equaled .61% of average assets, compared to .65% for the same period one year ago. The number of staff, including part-time employees on a full-time equivalent basis, was 751 at December 31, 2005 and 749 at December 31, 2004.
Taxes: Income taxes decreased $1,180,000 or 5.9% for the quarter ended December 31, 2005 compared to the same period one year ago primarily due to the settlement of 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 ended December 31, 2005 decreased to 34.20% from 35.50% for the same period one year ago. The Company expects a 35.50% effective tax rate going forward.
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.
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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.
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PART II – Other Information
From time to time the Company or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company’s financial position or results of operations.
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 December 31, 2005.
Period
October 1, 2005 to October 31, 2005
November 1, 2005 to November 30, 2005
December 1, 2005 to December 31, 2005
Total
Not applicable
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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
ROY M. WHITEHEAD
Vice Chairman, President and
Chief Executive Officer
/s/ Brent J. Beardall
BRENT J. BEARDALL
Senior Vice President and
Chief Financial Officer
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