WAFD 10-Q Quarter ended Dec. 31, 2009

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2009

or

For the transition period from to

Commission file number 0-25454

WASHINGTON FEDERAL, INC.

(Exact name of registrant as specified in its charter)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

(UNAUDITED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

(UNAUDITED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

(UNAUDITED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

NOTE A – Basis of Presentation

The consolidated unaudited interim financial statements included in this report have been prepared by Washington Federal, Inc. (“Company”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 2009 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 2009 Annual Report on Form 10-K (“2009 Form 10-K”) as filed with the SEC. Interim results are not necessarily indicative of results for a full year.

References to Net Income in this document refer to Net Income Available to Common Shareholders.

Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through January 27, 2010, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

NOTE B – Subsequent Event

Effective January 8, 2010, Washington Federal Savings & Loan Association, a federally-chartered savings and loan association (the “Bank”) and wholly-owned subsidiary of the Company, acquired certain assets and liabilities, including most of the loans and deposits, of Horizon Bank, headquartered in Bellingham, Washington (“Horizon”) from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Horizon (the “Acquisition”). As of September 30, 2009, Horizon reported total assets of $1.3 billion and total deposits of $1.2 billion. All branches of Horizon have reopened as offices of the Bank.

Horizon operated through eighteen full-service offices, four commercial loan centers and four real estate loan centers in Washington with approximately 225 employees. Total assets purchased by the Bank amounted to approximately $1.141 billion, including an estimated $971 million in loans and $32 million in foreclosed real estate, and total liabilities assumed were approximately $1.005 billion, including an estimated $874 million in deposits. Pursuant to the Agreement, the Bank received a discount of approximately $177 million on the assets and paid a 0% deposit premium. Following the acquisition, the Company received a cash payment from the FDIC for $41 million.

The loans and foreclosed real estate purchased are covered by two loss share agreements between the FDIC and the Bank (one for single family loans and the other for all other loans and foreclosed real estate), which affords the Bank significant loss protection. Under the loss share agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to $536 million and 95% of losses in excess of that amount. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years with respect to losses and eight years with respect to loss recoveries. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

The assets acquired and liabilities assumed will be subject to purchase accounting adjustments when recorded on the Bank’s financial statements.

NOTE C – Dividends

On January 15, 2010 the Company paid its 108 ^th consecutive quarterly cash dividend on common stock. Dividends per share were $.05 for the quarters ended December 31, 2009 and 2008.

NOTE D – Comprehensive Income

The Company’s comprehensive income (loss) includes all items which comprise net income plus the unrealized gains (losses) on available-for-sale securities. Total comprehensive (loss) income for the quarters ended December 31, 2009 and 2008 totaled $(8,134,000) and $52,973,000, respectively. The difference between the Company’s net income and total comprehensive loss for the quarter ended December 31, 2009 was $16,045,000, which equals the change in the net unrealized gain on available-for-sale securities of $25,368,000, less tax of $9,323,000. In addition, $3,124,000 of net unrealized loss on available-for-sale securities were included in comprehensive income for the quarter ended December 31, 2009, which included $12,921,000 of gain on sale of investments reclassified into earnings for the same period.

NOTE E – Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the periods ended December 31, 2009 and 2008:

In comparison to the process used for the period ending December 31, 2008, the Company enhanced its general reserve allowance calculation to be more reflective of the current economic environment. Changes included shortening the look-back period for determining historical loss factors (“HLF”) and modifying the methodology to give more weighting to risks by asset type rather than geographic exposure. In addition to utilizing the HLF to calculate the general reserve, the Company utilizes a qualitative risk factor (“QRF”), which is determined by loan type and allows management to augment reserve levels to reflect the current environment and portfolio performance trends.

By shortening the look-back period the Company has taken into account the current housing environment where home values have declined substantially from the housing peak of 2007. We monitor delinquency trends as well as regional economic conditions including employment and housing values when determining the QRF.

The Company recorded a $69,750,000 provision for loan losses during the quarter ended December 31, 2009, while a $35,000,000 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $553,285,000, or 4.37%, of total assets at December 31, 2009 compared to $305,066,000, or 2.44%, of total assets one year ago. The Company had net charge-offs of $46,037,000 for the quarter ended December 31, 2009 compared with 15,223,000 of net charge-offs for the same quarter one year ago. This

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

significant increase in the provision for loan losses is in response to three primary factors: first, the overall deterioration in the housing market in general in the Company’s eight western state territory, second, the significant increase in the combined balance of non-performing assets in the land A&D and speculative construction portfolios, and finally, the material increase in net charge-offs for the quarter. Management expects the provision to remain at elevated levels until non-performing assets and charge-offs improve. $75,152,000 of the allowance was calculated under the formulas contained in our methodology and the remaining $115,397,000 was made up of specific reserves on loans that were deemed to be impaired at December 31, 2009. For the period ending December 31, 2008, $58,802,000 of the allowance was calculated under the formulas contained in our methodology and the remaining $46,033,000 was made up of specific reserves on loans that were deemed to be impaired.

At December 31, 2009, the Company’s recorded investment in impaired loans was $588,829,000, of which $305,742,000 had specific reserves of $115,397,000. At September 30, 2009, the Company’s recorded investment in impaired loans was $531,817,000, of which $318,543,000 had specific reserves of $107,375,000.

NOTE F – Accounting Pronouncements Not Yet Adopted

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 860-10, Transfers and Servicing . This standard was issued to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and the transferor’s continuing involvement, if any, in transferred financial assets. ASC 860-10 is effective for interim and annual reporting periods that begin after November 15, 2009. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial position and results of operations.

In June 2009, the FASB issued ASC 810-10, Consolidation . This standard significantly changes the criteria for determining whether the consolidation of a variable interest entity is required. ASC 810-10 is effective for interim and annual reporting periods that begin after November 15, 2009. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial position and results of operations.

NOTE G – Fair Value Measurements

U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

The following is a description of the valuation methodologies used to measure and report fair value of financial assets and liabilities on a recurring or nonrecurring basis:

Measured on a Recurring Basis

Securities

Securities available for sale are recorded at fair value on a recurring basis. Fair value is determined with quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data (Level 2).

The following table presents the balance of assets measured at fair value on a recurring basis at December 31, 2009:

Measured on a Nonrecurring Basis

Impaired Loans

From time to time, and on a nonrecurring basis, fair value adjustments to collateral dependent loans are recorded to reflect write-downs of principal balances based on the current appraised or estimated value of the collateral.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

REO

Real estate owned consists principally of properties acquired through foreclosure.

The following table presents the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the quarter ended December 31, 2009, and the total losses resulting from those fair value adjustments for the quarter ended December 31, 2009. The Company’s general estimate of selling costs for assets shown in the following table is 8%; as a result, the following estimated fair values are shown gross of the estimated selling costs:

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2009.

Fair Values of Financial Instruments

U. S GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although Management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.

Available-for-sale securities and held-to-maturity securities – Estimated fair value for investment securities is based on quoted market prices.

Loans receivable – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other loan types is estimated by discounting the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.

FHLB stock – The fair value is based upon the par value of the stock which equates to its carrying value.

Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

FHLB advances and other borrowings – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.

Reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

$315,836,000 of available-for-sale securities were sold during the period ending December 31, 2009, resulting in a gain of $20,428,000. There were no sales of available-for-sale securities during the period ending December 31, 2008.

Substantially all mortgage-backed securities have contractual due dates that exceed 10 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

The following table shows the unrealized gross losses and fair value of securities at December 31, 2009, by length of time that individual securities in each category have been in a continuous loss position. The Company had only $262,000 in fair value of securities in a continuous loss position for 12 or more months at December 31, 2009, which consisted of mortgage-backed securities. This decline represents only a 1.5% decline of the book value of these investments. Management believes that the declines in fair value of these investments were due to changes in market interest rates and a temporary lack of liquidity in the mortgage market, not in estimated cash flows.