Last year, Washington Mutual (NYSE:WM) picked up credit card company Providian for a measly 4.2% premium. It certainly looked like a good deal at the time, considering that, for example, Bank of America (NYSE:BAC) agreed to pay a whopping 31% premium for MBNA. Even the portfolio managers at Putnam, which owned 7.5% of Providian, thought Washington Mutual was virtually stealing the company.

At first, it seemed that the deal was indeed a smart move for Washington Mutual, which reported its fourth-quarter results this week. For the period, the company posted net income of $865 million, or $0.85 per share, up from $668 million, or $0.76 per share. But that wasn't good enough for Wall Street analysts, who were expecting earnings per share of $0.90.

It turns out that the growth from buying Providian wasn't enough to compensate for the compression of margins from its deposit and loan business. A big part of the problem here is the flattening of the yield curve -- a situation in which short-term rates are roughly the same as long-term rates.

This is what the flattened curve means to Washington Mutual: The company borrows money at short-term rates from depositors and lends the money on a long-term basis, for mortgages, businesses, cars, and so on. The difference -- the net interest margin -- is profit for the bank. And the profit gets squeezed when the curve flattens.

Interestingly enough, though, Washington Mutual was actually able to increase its net interest margin from 2.61 in the third quarter to 2.77 in the fourth quarter, though it did decline on a year-over-year basis. Higher rates on credit card balances were a big help in preventing the margin from coming in any lower.

But concerns certainly remain. Higher interest rates may encourage more deposits, but at the same time, there may be less demand -- especially as the American consumer becomes burdened by more and more debt. True, Washington Mutual has engaged in sophisticated hedging strategies to try to deal with this problem, but it appears to be not enough to result in stronger margins overall.

Another big problem is that the mortgage business is slowing down. Washington Mutual's mortgage revenues were $264 million in the fourth quarter, compared with $384 million in the same period a year ago.

Perhaps the real estate business is only experiencing a short-term softening. And, perhaps, the yield curve will improve. But these are big "ifs" -- at least in the short run. So if it wants to keep growing, Washington Mutual will probably need to seek more acquisitions, and doing so means taking on more risks. But with the merger-and-acquisition market heating up, don't count on Washington Mutual to get any more bargains like Providian.

Bank of America is a Motley Fool Income Investor recommendation. For more of the market's best dividend-paying stocks, take Income Investor for a free, no-risk test drive. Your portfolio will thank you.

Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.