UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2005
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                to

 

Commission file number   0­25454

 

WASHINGTON FEDERAL, INC.

(Exact name of registrant as specified in its charter)

 

Washington		91-1661606
(State or other jurisdiction of		(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  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ý No  o

 

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.

 

 

 

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, 2005 and September 30, 2004
	Consolidated Statements of Operations for the quarter and six months ended March 31, 2005 and 2004
	Consolidated Statements of Cash Flows for the six months ended March 31, 2005 and 2004
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
	Signatures

 

2

 

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

		March 31, 2005			September 30, 2004
		(In thousands, except share data)
ASSETS
Cash and cash equivalents		$	527,278		$	508,361
Repurchase agreements		—			200,000
Available-for-sale securities, including encumbered securities of $353,378 and $64,587, at fair value		1,153,204			899,525
Held-to-maturity securities, including encumbered securities of $77,035 and $54,811, at amortized cost		144,219			156,373
Securitized assets subject to repurchase, net		88,346			110,607
Loans receivable, net		5,429,741			4,982,836
Interest receivable		31,647			29,832
Premises and equipment, net		61,900			63,049
Real estate held for sale		6,444			8,630
FHLB stock		81,453			137,274
Intangible assets, net		58,315			58,939
Other assets		5,912			13,779
		$	7,588,459		$	7,169,205
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Savings and demand accounts		$	4,687,448		$	4,569,245
Repurchase agreements with customers		35,141			41,113
		4,722,589			4,610,358
FHLB advances		1,200,000			1,200,000
Other borrowings		400,000			100,000
Advance payments by borrowers for taxes and insurance		20,907			25,226
Federal and state income taxes		46,132			62,081
Accrued expenses and other liabilities		49,320			51,352
		6,438,948			6,049,017
Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized; 103,939,918 and 103,821,846 shares issued; 86,707,298 and 86,547,557 shares outstanding		103,940			94,383
Paid-in capital		1,237,599			1,161,627
Accumulated other comprehensive income (loss), net of taxes		(162		)	17,107
Treasury stock, at cost; 17,232,620 and 17,274,289 shares		(206,170		)	(206,666		)
Retained earnings		14,304			53,737
		1,149,511			1,120,188
		$	7,588,459		$	7,169,205

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3

 

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Quarter Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
		(In thousands, except per share data)
INTEREST INCOME
Loans and securitized assets subject to repurchase		$	90,321		$	82,388		$	177,206		$	164,783
Mortgage-backed securities		23,568			12,379			36,402			24,113
Investment securities and cash equivalents		8,291			7,915			16,115			16,468
		122,180			102,682			229,723			205,364
INTEREST EXPENSE
Customer accounts		26,622			21,234			50,514			42,871
FHLB advances and other borrowings		18,941			22,172			37,195			44,591
		45,563			43,406			87,709			87,462
Net interest income		76,617			59,276			142,014			117,902
Provision for loan losses		—			—			—			—
Net interest income after provision for loan losses		76,617			59,276			142,014			117,902
OTHER INCOME
Gain (loss) on securities, net		(3,476		)	(659		)	(3,412		)	(122		)
Other		3,747			2,981			6,262			5,549
		271			2,322			2,850			5,427
OTHER EXPENSE
Compensation and fringe benefits		8,733			7,789			17,067			15,349
Occupancy		3,124			1,869			4,960			3,673
Other		2,107			1,824			3,916			3,620
		13,964			11,482			25,943			22,642
Gain on real estate acquired through foreclosure, net		581			127			799			252
Income before income taxes		63,505			50,243			119,720			100,939
Income taxes		22,544			17,723			42,501			35,596
NET INCOME		$	40,961		$	32,520		$	77,219		$	65,343
PER SHARE DATA
Basic earnings		$	0.47		$	0.38		$	0.89		$	0.76
Diluted earnings		.47			.37			.88			.75
Cash dividends		.19			.18			.38			.36
Weighted average number of shares outstanding, including dilutive stock options		87,464,540			87,231,366			87,452,362			87,132,216

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4

 

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended
		March 2005			March 2004
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	77,219		$	65,343
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of fees, discounts, and premiums, net		(10,204		)	(4,343		)
Amortization of intangible assets		624			723
Depreciation		2,545			1,260
Loss (Gain) on investment securities and real estate held for sale, net		2,613			(129		)
Increase in accrued interest receivable		(1,815		)	(588		)
Decrease in income taxes payable		(9,094		)	(8,129		)
FHLB stock dividends		(387		)	(3,263		)
Decrease (increase) in other assets		3,525			(458		)
Decrease in accrued expenses and other liabilities		(2,032		)	(890		)
Net cash provided by operating activities		62,994			49,526
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Single-family residential loans		(535,275		)	(464,670		)
Construction loans		(333,525		)	(242,648		)
Land loans		(148,058		)	(120,402		)
Multi-family loans		(58,519		)	(85,104		)
		(1,075,377		)	(912,824		)
Savings account loans originated		(574		)	(531		)
Loan principal repayments		782,581			795,207
Increase in undisbursed loans in process		233			24,686
Loans purchased		(131,058		)	(1,356		)
FHLB stock redemption		56,208			—
Available-for-sale securities purchased		(464,719		)	(493,992		)
Repurchase agreement maturity		200,000			—
Principal payments and maturities of available-for-sale securities		118,371			123,010
Available-for-sale securities sold		78,544			228,171
Held-to-maturity securities purchased		—			(56,900		)
Principal payments and maturities of held-to-maturity securities		12,303			34,995
Proceeds from sales of real estate held for sale		3,661			6,536
Premises and equipment purchased, net		(1,396		)	(1,606		)
Net cash used by investing activities		(421,223		)	(254,604		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts		112,231			(16,852		)
Net increase in borrowings		300,000			—
Proceeds from exercise of common stock options		1,378			2,180
Dividends paid		(33,091		)	(31,547		)
Proceeds from Employee Stock Ownership Plan		947			747
Decrease in advance payments by borrowers for taxes and insurance		(4,319		)	(3,767		)
Net cash provided (used) by financing activities		377,146			(49,239		)
Increase (decrease) in cash and cash equivalents		18,917			(254,317		)
Cash and cash equivalents at beginning of period		508,361			1,437,208
Cash and cash equivalents at end of period		$	527,278		$	1,182,891
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure		$	676		$	3,397
Cash paid during the period for
Interest		86,821			88,569
Income taxes		49,593			43,780

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5

 

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER AND SIX MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

 

NOTE A – Correction of Error

 

As disclosed by press release on April 20, 2005 (“Press Release”), in response to a comment letter from the Securities and Exchange Commission (“SEC”), Washington Federal, Inc. (“Company”) began a review of its accounting for derivatives.  As of May 6, 2005, this review has been completed and the Company determined that its accounting for derivative instruments, which consist solely of cash flow hedges using forward contracts to purchase and sell mortgage-backed securities, has 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 has been recorded in the quarter ended March 31, 2005 and increased net income for the quarter 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 corretion 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 the year.

 

The Company previously presented in the Press Release for the quarter ended March 31, 2005, net income of $36.3 million.  As a result of the elimination of hedge accounting, net income for the quarter ended March 31, 2005 was reduced by $3.3 million net of tax.  Specifically, on a pre tax basis interest income on mortgage backed securities was decreased by $1.1 million and gain (loss) on securities was reduced by $4.0 million.

 

The net impact to after tax earnings relative to the amounts disclosed in the Press Release is to increase net income by $4.6 million for the quarter ended March 31, 2005.

 

Effect of the error on net income reported in prior years and in the Press Release is as follows:

 

		Fiscal Years Ended September 30,												Six Mo.Ended			Cumulative
Amounts in Millions		2001			2002			2003			2004			3/31/2005			Impact
Net Income as previously disclosed		$	117.5		$	148.4		$	145.0		$	131.9		$	72.6		$	615.4
After Tax Effect of Eliminating Hedge Accounting		$	13.9		$	(1.5	)	$	(0.7	)	$	(2.3	)	$	(4.8	)	$	4.6
Net Income after elimination of Hedge Accounting		$	131.4		$	146.9		$	144.3		$	129.6		$	67.8		$	620.0
% Change		11.83		%	-1.01		%	-0.48		%	-1.74		%	-6.61		%	0.75		%

 

NOTE B - 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

 

6

 

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 8.  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 dependent 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.

 

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.

 

7

 

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 March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
		(In thousands, except per share data)
Net income, as reported		$	40,961		$	32,520		$	77,219		$	65,343
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(429		)	(448		)	(858		)	(895		)
Pro forma net income		$	40,532		$	32,072		$	76,361		$	64,448
Earnings per share:
Basic – as reported		$	0.47		$	0.38		$	0.89		$	0.76
Basic – pro forma		0.47			0.37			0.88			0.75
Diluted – as reported		0.47			0.37			0.88			0.75
Diluted – pro forma		0.46			0.37			0.87			0.74

 

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

 

NOTE C - Dividends

 

Dividends per share increased to 19 cents for the quarter ended March 31, 2005 compared with 18 cents for the same period one year ago.  On April 15, 2005 the Company paid its 89th 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.

 

NOTE D - Comprehensive Income

 

The Company’s comprehensive income includes all items which comprise net income plus the unrealized gains (losses) on available-for-sale securities.  Total comprehensive income for the quarters ended March 31, 2005 and 2004 totaled $28,469,000 and $36,445,000, respectively.  Total comprehensive income for the six

 

8

 

months ended March 31, 2005 and March 31, 2004 totaled $59,950,000 and $65,364,000, 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 E – 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, 2005 and 2004:

 

		Quarter Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
		(In thousands)
Balance at beginning of period		$	25,008		$	25,631		$	25,140		$	25,806
Provision for loan losses		—			—			—			—
Charge-offs.		(14		)	(181		)	(146		)	(387		)
Recoveries		—			12			—			43
Balance at end of period		$	24,994		$	25,462		$	24,994		$	25,462

 

9

 

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 both March 31, 2005 and March 31, 2004, the Company had a negative one-year maturity gap of approximately 17% of total assets as the asset mix of the current quarter was similar to that from one year ago.

 

The interest rate spread decreased to 2.83% at March 31, 2005 from 3.00% at September 30, 2004, due to increasing deposit costs partially offset by growth in long-term assets and borrowings.  The weighted average rate on customer accounts increased by 41 basis points to 2.37% as of March 31, 2005.  As of March 31, 2005, the Company had grown total assets by $419,254,000 from $7,169,205,000 at September 30, 2004.  Short-term investments (original maturities less than one year) decreased $181,083,000 during the six months ended March 31, 2005.  Loans and mortgage-backed securities increased $671,185,000 to $6,405,843,000 during the six month period ended March 31, 2005.  Long-term borrowings increased $300,000,000 during the six months ended March 31, 2005, as the Company chose to lock in long-term funding at a weighted-average rate of 3.79%.  Total short-term assets of $527,278,000, which represent 7% 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, 2005 was $1,149,511,000, or 15.15% of total assets.  This was an increase of $29,323,000 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 $77,219,000 from net income.  Net worth was reduced by $33,091,000 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.

 

CHANGES IN FINANCIAL CONDITION

 

Available-for-sale and held-to-maturity securities:  Available-for-sale securities increased $253,679,000, or 28.2%, during the six months ended March 31, 2005.  For the six months ended March 31, 2005 the Company purchased $464,719,000 of available-for-sale investment securities in addition to selling $78,544,000 of available-for-sale securities at a net gain of $698,000.  In addition, the Company recorded an

 

10

 

other than temporary impairment charge of $4,111,000 during the second fiscal quarter on Fannie Mae and Freddie Mac preferred stock that were part of the available-for-sale portfolio.  There were no purchases of held-to-maturity securities during the six months ended March 31, 2005.  As of March 31, 2005, the Company had net unrealized losses on available-for-sale securities of $162,000, 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, 2005, the combined total of loans receivable and securitized assets subject to repurchase increased 8.3% to $5,518,087,000 compared to $5,093,443,000 at September 30, 2004.  This growth was consistent with Management’s strategy to increase net loans during this period of increasing home mortgage rates.  Permanent single-family residential loans as a percentage of total loans decreased to 70.6% at March 31, 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 21.6% at March 31, 2005 compared to 20.4% at September 30, 2004.

 

Non-performing assets:  Non-performing assets decreased 39.2% during the six months ended March 31, 2005 to $9,082,000 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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		March 31, 2005			September 30, 2004
		(In Thousands)
Restructured loans (1)		$	766		$	803
Nonaccrual loans:
Single-family residential		6,165			7,589
Construction		311			2,965
Land		600			252
Multi-family		416			322
Total nonaccrual loans (2)		7,492			11,128
Total REO (3)		1,590			3,817
Total non-performing assets		$	9,082		$	14,945
Total non-performing assets and restructured loans		$	9,848		$	15,748
Total non-performing assets and restructured loans as a percentage of total assets		0.13		%	0.22		%

 

(1)                                  Performing in accordance with restructured terms.

 

(2)                                  The Company recognized interest income on nonaccrual loans of approximately $287,000 in the quarter ended March 31, 2005.  Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $555,000 for the quarter ended March 31, 2005.

 

In addition to the nonaccrual loans reflected in the above table, at March 31, 2005, the Company had $4,029,000 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 .18% at March 31, 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.

 

12

 

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, 2005					September 30, 2004
		Amount			Loans to Total Loans (1)		Amount			Loans to Total Loans (1)
		(In thousands)
Real estate:
Single-family residential		$	9,597		70.6	%	$	8,517		71.2	%
Multi-family		5,660			7.8		6,084			8.4
Land		3,685			6.1		3,470			5.3
Construction		6,052			15.5		7,069			15.1
		$	24,994		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 $112,231,000, or 2.4%, to $4,722,589,000 at March 31, 2005 compared with $4,610,358,000 at September 30, 2004.

 

FHLB advances and other borrowings:  Total borrowings increased $300,000,000, or 23.1%, to $1,600,000,000 at March 31, 2005 compared with $1,300,000,000 at September 30, 2004.  The $300,000,000 of 5 year original maturity reverse repurchase agreements had a weighted-average rate of 3.79%.

 

RESULTS OF OPERATIONS

 

Net Income:  The quarter ended March 31, 2005 produced net income of $40,961,000 compared to  $32,520,000 for the same quarter one year ago, an 26.0% increase.  Net income for the six months ended March 31, 2005 was $77,219,000 compared to $65,343,000 for the six months ended March 31, 2004, an 18.2% increase.  Net income 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 A.

 

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

 

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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:

 

		Comparison of Quarters Ended 3/31/05 and 3/31/04									Comparison of Six Months Ended 3/31/05 and 3/31/04
In thousands		Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loan portfolio		$	9,165		$	(1,232	)	$	7,933		$	15,378		$	(2,955	)	$	12,423
Mortgaged-backed securities(2)		3,152			8,037			11,189			5,629			6,660			12,289
Investments(1)		(3,318		)	3,694			376			(6,502		)	6,149			(353		)
All interest-earning assets		8,999			10,499			19,498			14,505			9,854			24,359
Interest expense:
Customer accounts		341			5,047			5,388			378			7,265			7,643
FHLB advances and other borrowings		(1,964		)	(1,267		)	(3,231		)	(5,222		)	(2,174		)	(7,396		)
All interest-bearing liabilities		(1,623		)	3,780			2,157			(4,844		)	5,091			247
Change in net interest income		$	10,622		$	6,719		$	17,341		$	19,349		$	4,763		$	24,112

 

(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 A

 

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Provision for Loan Losses:  The Company recorded no provision for loan losses during either of the quarters or six month periods ended March 31, 2005 and 2004.  Nonperforming assets amounted to $9,082,000 or .12% of total assets at March 31, 2005 compared to $25,216,000 or .33% of total assets one year ago.  Delinquencies on permanent loans decreased from $23,100,000 at March 31, 2004 to $15,100,000 at March 31, 2005.  Net charge-offs of $14,000 for the quarter ended March 31, 2005 remained low and were less than the $169,000 of net charge-offs for the quarter ended March 31, 2004.  During the quarter ended March 31, 2005, the combined total of loans receivable and securitized assets subject to repurchase increased 8.3% to $5,518,087,000 compared to $5,093,443,000 at September 30, 2004.  It should be noted that uncertain economic conditions, including unemployment that is higher than the national average, combined with increasing loan demand continue in the Company’s primary markets.

 

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

 

		Quarter Ended March 31,						Six Months Ended March 31,
		2005			2004			2005				2004
		(In thousands)
Beginning balance		$	25,008		$	25,631		$		25,140		$	25,806
Charge-offs:
Real Estate:
Single-family residential		14			105			132				198
Multi-family		—			—			14				—
Land		—			1			—				43
Construction		—			75			—				146
		14			181			146				387
Recoveries:
Real Estate:
Single-family residential		—			12			—				12
Multi-family		—			—			—				—
Land		—			—			—				31
Construction		—			—			—				—
		—			12			—				43
Net charge-offs		14			169			146				344
Acquired through acquisition		—			—			—				—
Provision for loan losses		—			—			—				—
Ending balance		$	24,994		$	25,462		$	24,994			$		25,462
Ratio of net charge-offs to average loans outstanding		0.00		%	0.00		%	0.00			%	0.01			%

 

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