<PAGE> 1
- -------------------------------------------------------------------------------
FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996.
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)
United States 91-1661606
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
425 Pike Street, Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 624-7930
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 9, 1996, the aggregate market value of the 41,908,919 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,221,058 shares held by all directors and executive officers of the Registrant
as a group, was $1,105,348,000. This figure is based on the closing sale price
of $26.375 per share of the Registrant's Common Stock on December 9, 1996, as
reported in The Wall Street Journal on December 10, 1996.
Number of shares of Common Stock outstanding as of December 9, 1996: 43,129,977
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended September 30, 1996 are incorporated into Part II, Items 5-8 of this
Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1996 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form
10-K.
<PAGE> 2
2
PART I.
ITEM 1. BUSINESS
GENERAL
Washington Federal, Inc. (the "Company"), formed in November 1994,
is a Washington corporation headquartered in Seattle, Washington. The company is
a non-diversified unitary savings and loan holding company within the meaning of
the Home Owners' Loan Act ("HOLA") which conducts its operations through a
federally insured savings and loan association subsidiary, Washington Federal
Savings and Loan Association ("Washington Federal" or the "Association"). As
such, the Company is registered as a holding company with the Office of Thrift
Supervision ("OTS") and is subject to OTS regulation, examination, supervision
and reporting requirements.
The Association, doing business as Washington Federal Savings, is a
federally-chartered savings and loan association that began operations in
Washington as a state-chartered mutual association in 1917. In 1935, the
Association converted to a federal charter and became a member of the Federal
Home Loan Bank ("FHLB") System. On November 17, 1982, Washington Federal
converted from a federal mutual to a federal capital stock association.
The business of Washington Federal consists primarily of attracting
savings deposits from the general public and investing these funds in loans
secured by first mortgage liens on single-family dwellings, and to a
significantly lesser extent, on commercial property and multi-family dwellings.
It also originates other types of loans for its portfolio and invests in certain
United States Government and agency obligations and other investments permitted
by applicable laws and regulations. Washington Federal has 93 offices located in
Washington, Oregon, Idaho, Arizona and Utah, all of which are full service
branches. Through subsidiaries, the Association is engaged in real estate
development and insurance brokerage activities.
The principal sources of funds for the Association's activities are
retained earnings, loan repayments (including prepayments), net savings inflows,
sales of loans, loan participations and other assets, and deposits and
borrowings. Washington Federal's principal sources of revenue are interest on
loans, interest and dividends on investments and gains on sale of investments
and real estate. Its principal expenses are interest paid on savings, general
and administrative expenses, interest on borrowings and income taxes.
The Company's growth has been generated both internally and as a
result of eleven mergers and three assumptions of deposits. The most recent
acquisition was completed in November 1996, when the Company purchased
Metropolitan Bancorp, Seattle, Washington ("Metropolitan"). Metropolitan
financial data is not included in this report as the transaction occurred
subsequent to the fiscal year end. For additional information in this regard,
see Note B to the Consolidated Financial Statements included in Item 14 hereof.
The Association is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority and primary federal
regulator, and by the Federal Deposit
<PAGE> 3
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Insurance Corporation ("FDIC"), which insures its deposits up to applicable
limits. Such regulation and supervision establishes a comprehensive framework of
activities in which an association may engage and is intended primarily for the
protection of the Savings Association Insurance Fund ("SAIF") administered by
the FDIC and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities. Any change in such regulation, whether by the OTS, the
FDIC or the U.S. Congress, could have a significant impact on the Association
and its operations. See "Regulation."
<PAGE> 4
4
<TABLE>
<CAPTION>
Year Ended September 30,
***** ---------------------------------------------------------------------------
1994 1995
------------------------------------------ -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------ ----------- --------- ----------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) $2,300,231 $208,030 9.04% $ 2,635,724 $238,086 9.03%
Mortgage-backed securities 747,286 60,741 8.13 1,109,687 84,125 7.58
Investment securities 171,870 12,299 7.16 245,760 18,101 7.37
FHLB stock 73,222 6,507 8.89 54,701 3,454 6.31
---------- -------- ----- ----------- -------- ----
Total interest-earning assets 3,292,609 287,577 8.73 4,045,872 343,766 8.50
Other assets 144,691 143,157
---------- -----------
Total assets $3,437,300 $ 4,189,029
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Checking accounts $ 75,463 1,849 2.45 $ 72,323 1,735 2.40
Passbook and statement accounts 266,369 8,160 3.06 210,286 7,036 3.35
Insured money market accounts 248,769 7,902 3.18 244,132 10,549 4.32
Certificate accounts (time deposits) 1,576,614 69,345 4.40 1,720,238 93,104 5.41
Repurchase agreements with customers 67,347 2,502 3.72 54,617 2,924 5.35
FHLB advances 336,967 18,528 5.50 317,590 18,714 5.89
Securities sold under
agreements to repurchase 242,554 11,883 4.90 863,379 51,028 5.91
Federal funds purchased 16,692 945 5.66 46,160 3,163 6.85
---------- -------- ----- ---------- ------- ----
Total interest-bearing liabilities 2,830,775 121,114 4.28 3,528,725 188,253 5.33
Other liabilities 89,175 98,657
---------- ----------
Total liabilities 2,919,950 3,627,382
Stockholders' equity 517,350 561,647
---------- ----------
Total liabilities
and stockholders' equity $3,437,300 $4,189,029
========== -------- ----- ========== --------
Net interest income/Interest rate spread $166,463 4.45% $155,513 3.17%
======== ===== ======== ====
Net interest margin (2) 5.06% 3.84%
===== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1996
----------------------------------------------
Average Average
Balance Interest Rate
--------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
ASSETS
Loans (1) $3,442,290 $305,372 8.87%
Mortgage-backed securities 966,658 74,126 7.67
Investment securities 336,722 20,817 6.18
FHLB stock 50,795 3,896 7.67
---------- -------- ----
Total interest-earning assets 4,796,465 404,211 8.43
Other assets 114,126
----------
Total assets $4,910,591
=---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Checking accounts 72,376 1,734 2.40
Passbook and statement accounts 178,616 6,267 3.51
Insured money market accounts 313,746 13,137 4.19
Certificate accounts (time deposits) 1,847,561 105,285 5.70
Repurchase agreements with customers 66,048 3,481 5.27
FHLB advances 862,966 48,183 5.58
Securities sold under
agreements to repurchase 816,857 47,905 5.86
Federal funds purchased 50,810 2,753 5.42
---------- -------- ----
Total interest-bearing liabilities 4,208,980 228,745 5.44
Other liabilities 123,135
----------
Total liabilities 4,332,115
Stockholders' equity 578,476
----------
Total liabilities
and stockholders' equity $4,910,591
========== -------- ----
Net interest income/Interest rate spread $175,466 2.99%
======== ====
Net interest margin (2) 3.66%
====
</TABLE>
- ------------------------------------------------
(1) The average balance of loans includes non-accruing loans, interest on which
is recognized on a cash basis.
(2) Net interest income divided by average interest-earning assets.
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5
LENDING ACTIVITIES
GENERAL. The Company's net portfolio of loans and mortgage-backed
securities totaled $4.6 billion at September 30, 1996, representing
approximately 90% of its total assets. In recent years the Company has
concentrated its lending activities on the origination of conventional loans,
which are loans that are neither insured nor guaranteed by agencies of the
United States Government. The Company's investment in mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") and certain privately insured mortgage-backed
securities amounted to $867 million (net of discounts and premiums) at September
30, 1996 and is deemed to be part of the Company's loan portfolio.
Washington Federal has historically concentrated its lending
activity on the origination of long-term, fixed-rate single-family first
mortgage loans, single-family construction loans and land development loans.
Although mortgage loans may be written with adjustable interest rates, the
Association does not emphasize adjustable-rate loans.
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6
The following table sets forth the composition of the Company's
gross loan and mortgage-backed securities portfolio, by loan type and security
type, as of the dates indicated.
<TABLE>
<CAPTION>
1992 1993 1994
------------------------ --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
--------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans by type of loan Real estate:
Conventional:
Permanent $1,602,080 62.2% $1,881,376 63.0% $2,089,769 57.7%
Land development 104,347 4.1 126,640 4.2 132,487 3.7
Construction(1) 239,985 9.3 312,097 10.4 359,812 9.9
Insured or guaranteed:
FHA 31,075 1.2 26,731 .9 22,279 .6
VA 18,337 .7 18,971 .6 18,511 .5
Mortgage-backed
securities(residential) 569,334 22.1 615,375 20.6 995,107 27.4
Savings account loans 2,051 .1 2,782 .1 2,790 .1
Consumer 7,289 .3 6,071 .2 3,796 .1
---------- ----- ---------- ----- ---------- -----
Total(2) $2,574,498 100.0% $2,990,043 100.0% $3,624,551 100.0%
========== ===== ========== ===== ========== =====
Loans by type of security Residential:
Single-family(3) $1,843,878 71.6% $2,223,171 74.3% $2,499,458 69.0%
Other dwelling units 36,166 1.4 49,597 1.7 46,260 1.3
Income property 115,780 4.5 93,047 3.1 77,140 2.1
Mortgage-backed
securities(residential) 569,334 22.1 615,375 20.6 995,107 27.4
Savings account loans 2,051 .1 2,782 .1 2,790 .1
Consumer 7,289 .3 6,071 .2 3,796 .1
---------- ----- ---------- ----- ---------- -----
Total(2) $2,574,498 100.0% $2,990,043 100.0% $3,624,551 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
1995 1996
--------------------------- --------------------------
Amount Percent Amount Percent
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Loans by type of loan Real estate:
Conventional:
Permanent $2,635,669 60.1% $3,241,789 66.6%
Land development 167,028 3.8 172,146 3.5
Construction(1) 443,723 10.1 548,302 11.2
Insured or guaranteed:
FHA 20,479 .4 18,123 .4
VA 16,434 .4 18,169 .4
Mortgage-backed
securities(residential) 1,095,861 25.0 865,887 17.8
Savings account loans 2,344 .1 3,576 .1
Consumer 2,463 .1 1,488 --
---------- ----- ---------- -----
Total(2) $4,384,001 100.0% $4,869,480 100.0%
========== ===== ========== =====
Loans by type of security
Residential:
Single-family(3) $3,168,844 72.2% $3,879,092 79.7%
Other dwelling units 54,407 1.2 74,108 1.5
Income property 60,082 1.4 45,329 .9
Mortgage-backed
securities(residential) 1,095,861 25.0 865,887 17.8
Savings account loans 2,344 .1 3,576 .1
Consumer 2,463 .1 1,488 --
---------- ----- ---------- -----
Total(2) $4,384,001 100.0% $4,869,480 100.0%
========== ===== ========== =====
</TABLE>
- ---------------
(1) Includes construction loans that have been modified to monthly payment
loans, due in full in approximately one year, in the amount of $19.2 million,
$16.4 million, $6.1 million, $6.1 million and $15.9 million at September 30,
1992, 1993, 1994, 1995 and 1996, respectively.
(2) After netting undisbursed proceeds on loans in process, deferred fees,
discounts on loans and allowances for possible losses against the applicable
loan amounts, the Association's net loan portfolio at September 30, 1992, 1993,
1994, 1995 and 1996 amounted to $2.40 billion, $2.78 billion, $3.40 billion,
$4.11 billion and $4.6 billion, respectively.
(3) Includes condominium units (which are deemed to be single-family residences
regardless of the number of units in the structure in which they are located),
as well as land and construction loans for single family residences.
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7
The following table summarizes the scheduled contractual gross loan
maturities for the Association's total loan and mortgage-backed securities
portfolios due for the periods indicated as of September 30, 1996. Amounts are
presented prior to deduction of discounts, premiums, loans in process, deferred
loan origination fees and allowance for loan losses. Adjustable and variable
rate loans are shown in the period in which loan principal payments are
contractually due.
<TABLE>
<CAPTION>
Maturity Distribution
--------------------------------------------
Balance outstanding at Less than 1 to 5 After 5
September 30, 1996 1 year years years
---------------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
One- to four-family real estate loans $3,158,644 $ 87,281 $ 53,476 $3,017,887
GNMA, FHLMC, FNMA and other
mortgage-backed securities 865,887 10,457 50,760 804,670
Construction and land development
loans 720,448 522,860 16,917 180,671
Income property loans 119,437 15,965 21,232 82,240
Savings account loans 3,596 3,596 -- --
Consumer loans 1,468 542 231 695
---------- ---------- ---------- ----------
$4,869,480 $ 640,701 $ 142,616 $4,086,163
========== ========== ========== ==========
</TABLE>
- ------------------------------------
Loans maturing after one year:
Fixed interest rates $3,926,517
Floating or adjustable interest rates 285,760
----------
Total $4,212,277
==========
<PAGE> 8
8
The original contractual loan payment period for residential loans
originated by the Association normally ranges from 15 to 30 years. Experience
during recent years has indicated that, because of prepayments in connection
with refinancing and sales of property, residential loans remain outstanding an
average of less than ten years.
LENDING PROGRAMS AND POLICIES. The Association specializes in
residential real estate lending and has no present plans to expand its
operations into consumer or commercial business loans. The Association offers
"balloon" payment loans, which are amortized on a 20 or 30 year basis but which
have a maturity date for the principal balance of a much shorter period. The
Association also provides land acquisition and development loans ("land
development loans") and construction loans for single-family residences. The
interest rate on these loans generally adjusts every 90 days in accordance with
a designated index. Land development and construction loans amounted to $720
million or 15% of the Association's gross loan portfolio (including
mortgage-backed securities) at September 30, 1996. The Association offers a
multi-family (five or more dwelling units) lending program with strict
underwriting guidelines, including a $1 million limit on any one loan.
All of the associations acquired by Washington Federal offered a
variety of lending products, including commercial real estate and non-real
estate secured loans, consumer secured loans and non-secured lines of credit.
All commercial, consumer and line of credit lending has been discontinued and
lending has been redirected toward the traditional Association lending practices
of single-family residential loans. The loans acquired, other than single-family
residential real estate loans, are being serviced and payoffs are being
encouraged.
As a result of activity over the past three decades, the Association
believes that it is a leading construction lender for single-family residences
in the Seattle metropolitan area. Because of this history, the Association has
developed a staff with in-depth land development and construction experience and
working relationships with a group of builders which have been selected based on
their operating histories and financial stability.
Construction lending is generally considered to involve a higher
level of risk than single-family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on real estate developers and managers. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans also is such that they are generally more difficult to evaluate and
monitor.
The Association continues to originate medium and long-term,
permanent fixed-rate loans, but in most instances (see below) only under terms,
conditions and documentation which permit sale in the secondary market.
Moreover, since 1973 it has been the Association's general policy to include in
the documentation evidencing its conventional mortgage loans the so-called "due
on sale clause," which facilitates adjustment of interest rates on such loans
when the property securing the loan is sold or transferred. At September 30,
1996, $4.2 billion or 86%
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9
of the Association's loan portfolio was represented by medium and long-term,
fixed-rate loans secured by single-family residences (including mortgage-backed
securities).
The Association offers a 99% loan-to-value ratio conventional loan
program for first time home buyers. The high-ratio conventional lending program
presents greater risk to the Association. To mitigate the risk, the program has
stringent underwriting and property requirements that include home
ownership/money management counseling and property condition inspections. A loss
reserve of 2% of the loan amount is established for each loan granted. The
Association is authorized by its Board to originate $100 million of loans under
this program. As of September 30, 1996, loans under this program amounted to
$70.8 million.
All of the Association's mortgage lending is subject to its written,
nondiscriminatory underwriting standards, loan origination procedures and
lending policies prescribed by the Association's Board of Directors. Property
valuations are required on all real estate loans and are prepared by independent
appraisers approved by the Association's Board of Directors and the appraisals
are reviewed by the Association's appraisal staff. Detailed loan applications
are obtained to determine the borrower's ability to repay, and the more
significant items on these applications are verified through the use of credit
reports, financial statements and written confirmations. Depending on the size
of the loan involved, a varying number of senior officers of the Association
must approve the application before the loan can be granted.
Federal regulations limit the amount of a real estate loan made by a
federally-chartered savings institution to a specified percentage of the value
of the property securing the loan, as determined by an appraisal at the time the
loan is originated (referred to as the "loan-to-value ratio"). The regulation
provides that at the time of origination a real estate loan may not exceed 100%
of the appraised value of the security property. Maximum loan-to-value ratios
for each type of real estate loan made by an institution are now established by
the institution's board of directors. In addition, the board of directors must
approve each real estate loan (other than a home loan) with a loan-to-value
ratio in excess of 80%.
A general reserve is established for all loans with loan-to-value
ratios exceeding 80% that are not insured by private mortgage insurance by
placing 1% of the new loan principal balance into such reserve when the loan is
closed. This total reserve balance at September 30, 1996 amounted to $4.4
million.
The Association's residential construction loans and land
acquisition and development loans are of a short-term nature and are generally
made for 80% or less of the appraised value of the property upon completion for
residential construction loans and 75% or less for land acquisition and
development loans. Funds are disbursed periodically at various stages of
completion as authorized by the Association's personnel.
It is the Association's policy to obtain title insurance insuring
that the Association has a valid first lien on the mortgaged real estate.
Borrowers must also obtain hazard insurance prior to closing and, when required
by the Department of Housing and Urban Development, flood insurance. Borrowers
may be required to advance funds on a monthly basis together with each payment
of principal and interest to a mortgage escrow account from which the
Association
<PAGE> 10
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makes disbursements for items such as real estate taxes, hazard insurance
premiums and private mortgage insurance premiums as they fall due.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Association has general
authority to lend anywhere in the United States. The Association's primary
lending area, however, is western Washington, western Oregon, southern Idaho,
southern Arizona and northern Utah.
Loan originations come from a number of sources. Residential loan
originations result from referrals from real estate brokers, walk-in customers,
purchasers of property in connection with builder projects financed by the
Association, purchasers of property referred through mortgage brokers and from
refinancing for existing customers. Construction loan originations are obtained
primarily by direct solicitation of builders and continued business from
builders who have previously borrowed from the Association.
At September 30, 1996, the Association was servicing approximately
$112.6 million of loans for others. Sales are made on a yield basis with the
difference between the yield to the purchaser and the amount paid by the
borrower constituting servicing income to the Association. The sale of loans and
loan participations is subject to federal regulations, which, among other
things, until recently required that sales be made on a non-recourse basis.
The Association also purchases mortgage-backed securities when
lending rates and mortgage volume for new loan originations in its market area
do not fulfill its needs. Mortgage-backed securities accounted for most of the
Association's loan purchases in recent years. Mortgage-backed securities are
more liquid than individual mortgage loans and may be used to collateralize
borrowings of the Association.
<PAGE> 11
11
The table below shows total loan origination, purchase, sale and
repayment activities of the Association on a consolidated basis for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Thousands)
Loans originated(1):
Construction $ 272,976 $ 291,777 $ 370,845 $ 341,001 $ 428,317
Land 43,549 66,546 74,508 97,990 92,496
Loans on existing property 272,549 464,195 540,561 758,455 972,601
Loans refinanced 71,648 97,387 76,518 27,468 62,854
----------- ----------- ----------- ----------- ----------
Total loans originated 660,722 919,905 1,062,432 1,224,914 1,556,268
----------- ----------- ----------- ----------- ----------
Loans and mortgage backed
securities purchased:
From acquisitions of
associations -- 316,095 -- 27,759 --
Other 139,390 261,056 620,026 216,843 60,888
----------- ----------- ----------- ----------
139,390 577,151 620,026 244,602 60,888
----------- ----------- ----------- ----------- ----------
Loans and mortgage-backed
securities sold -- (27,239) (18,702) (34,156) (134,275)
----------- ----------- ----------- ----------- ----------
Loan and mortgage-backed
securities principal
repayments (847,061) (1,074,562) (1,057,659) (683,383) (1,016,049)
----------- ----------- ----------- ----------- ----------
Net change in loans in
process, discounts, fees, etc 13,129 (20,855) 18,545 (37,679)
----------- ----------- ----------- ----------
7,908
Net loan activity increase
(decrease) $ (33,820) $ 374,400 $ 624,642 $ 714,298 $ 474,740
=========== =========== =========== =========== ===========
</TABLE>
(1) Includes undisbursed loans in process and does not include savings account
loans, which were not material during the periods indicated.
INTEREST RATES, LOAN FEES AND SERVICE CHARGES. Interest rates
charged by the Association on mortgage loans are primarily determined by the
level of competitive loan rates offered in its lending areas and in the
secondary market. Mortgage loan rates reflect factors such as interest rates
generally, the supply of money available to the savings and loan industry and
the demand for such loans. These factors are in turn affected by general
economic conditions, the regulatory programs and policies of federal and state
agencies, changes in tax laws and governmental budgetary programs.
<PAGE> 12
12
The Association receives loan origination fees for originating loans
and servicing fees for servicing loans sold by it to others. The Association
also receives commitment fees for making commitments to originate construction,
commercial and multi-family residential loans, as well as various fees and
charges related to existing loans, which include prepayment charges, late
charges and assumption fees.
In making one- to-four family home mortgage loans, the Association
does not normally charge a commitment fee. As part of the loan application, the
borrower pays the Association for its out-of-pocket costs in reviewing the
application, such as the appraisal fee, whether or not the borrower closes the
loan. The interest rate charged is normally the prevailing rate at the time the
loan application is approved. In the case of larger construction loans, the
Association normally charges a 1% commitment fee, which may be included in the
loan origination charge when the loan is made. Commitment fees and other terms
of commercial and multi-family residential loans are individually negotiated.
NON-PERFORMING ASSETS. When a borrower fails to make a required
payment on a loan, the Association attempts to cause the deficiency to be cured
by contacting the borrower. Contacts are made after a payment is 30 days past
due. In most cases, deficiencies are cured promptly. If the delinquency is not
cured within 90 days, the Association causes the trustee on the deed of trust to
institute appropriate action to foreclose the property. If foreclosed, the
property will be sold at a public sale and may be purchased by the Association.
There are circumstances under which the Association may choose to foreclose a
deed of trust as mortgagee and when this procedure is followed certain
redemption rights are involved.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Association does not accrue interest on loans past due 90 days or more. See
Note A to the Consolidated Financial Statements included in Item 14 hereof.
Real estate acquired by foreclosure or deed-in-lieu thereof ("REO")
is classified as real estate held for sale until it is sold. When property is
acquired, it is recorded at the lower of carrying or fair value at the date of
acquisition and any writedown resulting therefrom is charged to the allowance
for loan losses. Interest accrual ceases on the date of acquisition and all
costs incurred in maintaining the property from that date forward are expensed.
Costs incurred for the improvement or development of such property are
capitalized. See Note A to the Consolidated Financial Statements included in
Item 14 hereof.
<PAGE> 13
13
The following table sets forth information regarding restructured
and non-accrual loans and REO held by the Association at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Restructured loans (1) $ 7,667 $ 7,658 $11,254 $10,103 $24,046
Non-accrual loans:
Single-family residential 3,201 4,498 4,215 2,879 5,913
Construction and land 11,621 13,407 5,484 9,515 7,779
Commercial real estate 610 1,718 1,223 76 482
Consumer 25 93 105 -- 4
------- ------- ------- ------- -------
Total non-accrual loans (2) 15,457 19,716 11,027 12,470 14,178
Total REO (3) 4,182 1,936 2,316 19,735 20,417
------- ------- ------- ------- -------
Total non-performing assets $27,306 $29,310 $24,597 $42,308 $58,641
======= ======= ======= ======= =======
Total non-performing assets as
a percent of total assets .98% .93% .64% .92% 1.15%
======= ======= ======= ======= =======
</TABLE>
- ------------------------------------------------
(1) Performing in accordance with restructured terms.
(2) The Association recognized interest income on non-accrual loans of
approximately $576,000 in 1996. Had these loans performed according to their
original contract terms, the Association would have recognized interest income
of approximately $1,322,000 in 1996.
In addition to the non-accrual loans reflected in the above table,
at September 30, 1996, the Association had $3.3 million of loans which were less
than 90 days or more delinquent but which it had classified as substandard for
one or more reasons. If these loans were deemed non-performing, the
Association's ratio of total non-performing assets as a percent of total assets
would have been 1.21% at September 30, 1996. For discussion of the Company's
policy for placing loans on nonaccrual status, see Note A to the Consolidated
Financial Statements included in Item 14 hereof.
(3) Total REO includes real estate held for sale acquired in settlement of loans
or acquired from purchased institutions in settlement of loans. See Note I to
the Consolidated Financial Statements included in Item 14 hereof.
During 1995, three Northern California commercial properties
totalling $11.7 million were reclassified to REO. The assets, which were part of
insolvent thrift acquisitions in the 1980s, will be marketed individually by the
Company as property values are enhanced and the California economy improves.
<PAGE> 14
14
The following table analyzes the Company's allowance for loan losses
for the years indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Beginning Balance $18,278 $16,896 $14,674 $11,720 $11,651
Charge-offs:
Real estate:
Permanent 69 43 8 450 146
Construction 146 1,071 977 164 179
Land 260 29 184 163 90
Income property 1,090 6,860 2,604 6,536 405
Other 95 3 4 17 --
------- ------- ------- ------- -------
1,660 8,006 3,777 7,330 820
------- ------- ------- ------- -------
Recoveries:
Real estate:
Permanent -- 47 127 10 10
Construction -- 168 50 50 --
Land -- 356 26 21 --
Income property 64 269 219 654 513
Other 35 134 -- -- --
------- ------- ------- ------- -------
99 974 422 735 523
------- ------- ------- ------- -------
Net Charge-offs 1,561 7,032 3,355 6,595 297
Acquisitions -- 2,079 -- 281 --
Provisions for loan 179 2,731 401 6,245 3,828
------- ------- ------- ------- -------
losses
Ending balance $16,896 $14,674 $11,720 $11,651 $15,182
======= ======= ======= ======= =======
Ratio of net charge-
offs to .08% .35% .15% .25% .01%
average loans ======== ======= ======= ======= =======
outstanding
</TABLE>
- ------------------------------------------------
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Real estate:
Permanent single-family $ 1,169 $ 1,323 $ 1,537 $ 3,031 $ 5,239
Construction -- 230 120 5 2,945
Land -- 30 255 405 2,525
Income Property 4,852 4,575 2,750 950 1,843
Other 50 71 2 -- --
Unallocated 10,825 8,445 7,056 7,260 2,630
------- ------- ------- ------- -------
$16,896 $14,674 $11,720 $11,651 $15,182
======= ======= ======= ======= =======
</TABLE>
As part of the process of determining the adequacy of the allowance
for loan losses, management reviews the loan portfolio for specific weaknesses.
A portion of the allowance is then allocated to reflect the loss exposure.
Residential real estate loans are not individually analyzed for impairment and
loss exposure because of the significant number of loans, their relatively small
balances and historically low level of losses. Residential construction,
commercial real estate and commercial business loans were evaluated individually
for impairment, which resulted in an allocation of $7.3 million of the allowance
for loan loss at year-end 1996, compared with an allocation of $1.4 million a
year earlier.
<PAGE> 15
15
Unallocated reserves are established for loss exposure that may
exist in the remainder of the loan portfolio but has yet to be identified. In
determining the adequacy of unallocated reserves, management considers changes
in the size and composition of the loan portfolio, actual historical loan loss
experience, and current and anticipated economic conditions.
REAL ESTATE HELD FOR SALE. As one of the Association's activities, a
subsidiary is engaged in the development and sale of real estate. Also, REO
which was acquired in the acquisitions of insolvent associations has been
recorded as real estate held for sale. These acquired assets were not covered by
yield maintenance agreements pursuant to agreements entered into with the FSLIC
in connection with these acquisitions. However, in determining their offering
price, the Association recorded yield maintenance discounts based on estimated
holding periods and a market rate of return. Such yield maintenance is amortized
to income over the estimated holding period utilizing the interest method. For
additional information, see Notes B and I to the Consolidated Financial
Statements included in Item 14 hereof.
The business of real estate development involves substantial risks,
and the results of such activities depend upon a number of factors, including
seasonality, the type, location and size of each project, the stage of project
development, general economic conditions and the level of mortgage interest
rates. Consequently, there may be substantial inter-period variations in the
operating results of the Association's real estate development activities.
Moreover, because investing in real estate and real estate development
activities are not permissible activities for national banks, the amount of the
investment in, and loans to, any subsidiary engaged in such activities is
deductible from a savings association's regulatory capital. See "Regulation -
The Association--Regulatory Capital Requirements."
INVESTMENT ACTIVITIES
As a federally-chartered savings institution, Washington Federal is
required to maintain certain liquidity ratios and does so by investing in
securities that qualify as liquid assets under federal regulations. These
include, among other things, certain certificates of deposit, bankers'
acceptances, loans to financial institutions whose deposits are
federally-insured, federal funds and United States Government and agency
obligations.
The following table sets forth the composition of the Company's
investment portfolio on the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------
1994 1995 1996
----------- ------------------------- ------------------------------
Amortized Amortized Fair Amortized Fair
Cost Cost Value Cost Value
----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(In Thousands)
U.S. Government and agency
obligations $ 127,974 $ 204,528 $ 211,816 $ 270,915 $ 275,538
State and political subdivisions 67,191 44,845 46,197 23,468 24,967
--------- --------- --------- --------- ----------
$ 195,165 $ 249,373 $ 258,013 $ 294,383 $ 300,505
========= ========= ========= ========= ==========
</TABLE>
- ------------------------------------------------
<PAGE> 16
16
The investment portfolio at September 30, 1996 categorized by
maturity is as follows:
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
--------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Due in less than one year $ 68,717 7.96%
Due after one year through five years 179,705 6.74
Due after five years through ten years 22,867 6.88
Due after ten years 23,094 7.93
----------
$ 294,383
==========
</TABLE>
SOURCES OF FUNDS
GENERAL. Savings deposits are an important source of the
Association's funds for use in lending and for other general business purposes.
In addition to savings deposits, Washington Federal derives funds from loan
repayments, advances from the FHLB and other borrowings and, to a lesser extent,
from loan sales. Loan repayments are a relatively stable source of funds while
savings inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in normal sources of funds such as savings inflows
at less than projected levels. They may also be used on a longer-term basis to
support expanded activities.
SAVINGS. In recent years, the Association has chosen to rely on term
certificate accounts and other deposit alternatives which have no fixed term and
pay interest rates that are more responsive to market interest rates than
passbook accounts. This greater variety of deposits has allowed the Association
to be more competitive in obtaining funds to more effectively manage its
liabilities.
Certificates with a maturity of one year or less have penalties for
premature withdrawal equal to 90 days of interest. When the maturity is greater
than one year, the penalty is 180 days of interest. For jumbo certificates the
penalty depends on the original term. If the original term is 90 days or less
the penalty is the greater of 30 days interest or all interest earned. If the
original term is 90 days or more the penalty is the greater of 90 days interest
or all interest earned. Early withdrawal penalties during fiscal 1994, 1995 and
1996 amounted to approximately $280,000, $438,000 and $349,000, respectively.
The Association offers a single "performance" checking account. This
account pays interest on balances over $1,000 and is charged a service fee if
balances drop below $1,000.
The Association's deposits are obtained primarily from residents of
Washington, Oregon, Idaho, Arizona and Utah and the Association does not
advertise for deposits outside of these states. At September 30, 1996,
management believed that less than 2% of the Association's deposits were held by
nonresidents of Washington, Oregon, Idaho, Arizona and Utah.
<PAGE> 17
17
The following table sets forth certain information relating to the
Association's savings deposits at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------
1994 1995 1996
-------------------- ------------------------- -------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Checking accounts $ 75,557 3.00% $ 70,011 3.00% $ 75,781 3.00%
Regular savings (passbook)
accounts 245,545 3.00 187,812 3.50 175,307 3.50
Money market deposit accounts 239,044 3.75 271,582 4.91 342,013 4.04
---------- ---------- ----------
560,146 529,405 593,101
---------- ---------- ----------
Fixed-rate certificates:
3.00% - 4.99% 1,290,583 150,754 137,463
5.00% - 6.99% 314,606 1,599,413 1,642,332
7.00% - 8.99% 22,188 14,322 1,075
9.00% and above 6,848 1,611 49
Jumbo certificates ($100,000 or more):
3.00% - 4.99% 26,534 5,091 4,169
5.00% - 6.99% 1,738 70,027 45,696
7.00% - 8.99% 98 476 --
---------- ---------- -----------
1,662,595 1,841,694 1,830,784
---------- ---------- ----------
$2,222,741 $2,371,099 $2,423,885
========== ========== ==========
</TABLE>
The following table sets forth by various interest rate categories
the amounts of certificates of deposit of the Association at September 30, 1996
which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1996 Maturing in
-----------------------------------------------------------------------------------------------------
1 to 3 4 to 6 7 to 12 13 to 24 25 to 36 37 to 60 After
Months Months Months Months Months Months 60 Months
------ ------ ------ ------ ------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 149 $ 177 $ 201 $ -- $ 55 $ 226 $ --
4.00 to 4.99% 75,061 62,341 2,155 772 496 -- --
5.00 to 5.99% 629,177 271,475 470,455 160,490 26,062 22,122 21
6.00 to 6.99% 55,850 11,891 24,216 11,123 918 4,229 4
7.00 to 7.99% 520 89 54 145 23 68 --
8.00 to 8.99% -- 31 73 47 16 5 --
9.00% and above 5 37 -- -- 5 -- --
-------- --------- -------- --------- ------- ------- -----
Total $760,762 $346,041 $497,154 $172,577 $27,575 $26,650 $ 25
======== ======== ======== ======== ======= ======= ======
</TABLE>
Historically, the majority of certificate holders roll over their
balances into new certificates of the same term at the Association's then
current rate. To ensure a continuity of this trend, the Association expects to
continue to offer market rates of interest. The Association's ability to retain
deposits maturing in negotiated-rate certificate accounts is more difficult to
project. The Association is confident, however, that by competitively pricing
these certificates, balance levels deemed appropriate by management can be
achieved on a continuing basis.
At September 30, 1996, the Association had $49.9 million of
certificates of deposit in amounts of $100,000 or more outstanding, maturing as
follows: $24.2 million within 3 months; $14.2 million over 3 months through 6
months; $11.3 million over 6 months through 12 months; and $.2 million
thereafter.
<PAGE> 18
18
The following table sets forth the customer account activities of
the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1994 1995 1996
------------ ------------ --------------
(In Thousands)
<S> <C> <C> <C>
Assumed from acquisitions $ 62,359 $ 27,374 $ --
Branch sale -- ( 4,743) --
Deposits 2,017,393 2,590,714 2,363,515
Withdrawals 2,104,140 2,565,109 2,458,534
--------- --------- ---------
Net increase (decrease) in deposits
before interest credited (24,388) 48,236 (95,019)
Interest credited 89,758 115,348 129,904
---------- ---------- ----------
Net increase in customer accounts $ 65,370 $ 163,584 $ 34,885
========== ========== ==========
</TABLE>
- ------------------
BORROWINGS. The Association obtains advances from the FHLB upon the
security of the capital stock of the FHLB it owns and certain of its home
mortgages, provided certain standards related to credit worthiness have been
met. See "Regulation - Federal Home Loan Bank System." Such advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities, and the FHLB prescribes acceptable uses
to which the advances pursuant to each program may be put as well as limitations
on the size of such advances. Depending on the program, such limitations are
based either on a fixed percentage of assets or the Association's credit
worthiness. The FHLB is required to review its credit limitations and standards
at least annually. FHLB advances have from time to time been available to meet
seasonal and other withdrawals of savings accounts and to expand lending.
The Association also uses reverse repurchase agreements as a form of
borrowing. Under reverse repurchase agreements, the Association sells an
investment security to a dealer for a period of time and agrees to buy back that
security at the end of the period and pay the dealer a stated interest rate for
the use of the dealer's funds. The amount of securities sold under such
agreements depends on many factors, including the terms available for such
transactions, the perceived ability to apply the proceeds to investments
yielding a higher return, the demand for the securities and management's
perception of trends in interest rates. The Association had $586.6 million of
securities sold under such agreements at September 30, 1996.
The Association also offers two forms of repurchase agreements to
its customers. One form has an interest rate that floats like a money market
deposit account and is offered at a $1,000 minimum for an 84-day term. The other
form has a fixed rate and is offered in a minimum denomination of $100,000. Both
are fully collateralized by securities. These obligations are not insured by
SAIF and are classified as borrowings for regulatory purposes. The Association
had $56.3 million of such agreements outstanding at September 30, 1996.
<PAGE> 19
19
The following table presents certain information regarding
borrowings of Washington Federal at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
----------------------------------------------
1994 1995 1996
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal funds and securities sold to dealers
under agreements to repurchase:
Average balance outstanding $ 259,246 $ 909,539 $ 867,667
Maximum amount outstanding at any
month-end during the period $ 624,604 $1,094,334 $ 936,224
Weighted average interest rate
during the period(1) 4.95% 5.96% 5.84%
FHLB advances:
Average balance outstanding $ 336,967 $ 317,590 $ 862,966
Maximum amount outstanding at any
month-end during the period $ 427,700 $ 527,000 $1,162,000
Weighted average interest rate
during the period(1) 5.50% 5.89% 5.58%
Securities sold to customers
under agreements to repurchase:
Average balance outstanding $ 67,347 $ 54,617 $ 66,048
Maximum amount outstanding at any
month-end during the period $ 74,294 $ 74,236 $ 79,406
Weighted average interest rate
during the period(1) 3.72% 5.35% 5.27%
Total average borrowings $ 663,560 $1,281,746 $1,796,681
Weighted-average interest rate
on total average borrowings(1) 5.10% 5.92% 5.70%
</TABLE>
- ----------------------------
(1) Month-end balances times month-end average rates divided by the sum of the
month-end balances.
<PAGE> 20
20
OTHER RATIOS
The following table sets forth certain ratios relating to the
Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Return on assets(1)(4) 2.70% 1.87% 1.82%
Return on equity(2)(4) 18.19 13.99 15.37
Average equity to 15.05 13.41 11.78
average assets
Dividend payout ratio(3) 35.34 45.69 42.65
</TABLE>
- ------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per
share.
(4) Amounts exclude the effects of a one-time assessment of
institutions with SAIF-insured deposits to recapitalize the
SAIF.
<PAGE> 21
21
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Association for the periods
indicated. 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), (2) changes in rate (changes
in rate multiplied by average volume), and (3) changes in rate-volume (change in
rate multiplied by change in average volume). The change in interest income and
interest expense attributable to change in both volume and rate has been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1994 vs. 1993 1995 vs. 1994
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------------- -------------------------------------------
Volume Rate Rate/Vol Total Volume Rate Rate/Vol Total
------ ---- -------- ----- ------ ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest income:
Loan portfolio $ 28,649 $(11,008) $ (1,490) $16,151 $30,891 $ (6,696) $ 5,861 $ 30,056
Mortgaged-backed securities 22,401 (12,480) (5,017) 4,904 27,470 753 (4,839) 23,384
Investments(1) (10,619) 1,946 (150) (8,823) 4,787 (2,086) 48 2,749
-------- -------- -------- ------- ------- ------- -------- -------
All interest-earning assets 40,431 (21,542) (6,657) 12,232 63,148 (8,029) 1,070 56,189
------- -------- ------- -------- ------- ------- -------- -------
Interest expense:
Customer accounts 7,320 (6,819) ( 710) ( 209) 2,703 22,123 764 25,590
FHLB advances and other 9,129 (3,332) (1,151) 4,646 33,598 4,181 3,770 41,549
------- -------- ------- -------- -------- ------- -------- -------
borrowings
All interest-bearing liabilities 16,449 (10,151) (1,861) 4,437 36,301 26,304 4,534 67,139
------- -------- ------- -------- ------- ------- -------- -------
Change in net interest income $ 23,982 $(11,391) $ (4,796) $ 7,795 $26,847 $(34,333) $(3,464) $(10,950)
======= ======= ======= ======== ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1996 vs. 1995
Increase (Decrease) Due to
-----------------------------------------------
(In Thousands)
Volume Rate Rate/Vol Total
------ ---- -------- -----
<S> <C> <C> <C> <C>
Interest income:
Loan portfolio $ 72,833 $ (4,217) $ (1,330) $ 67,286
Mortgaged-backed securities (10,842) 999 (156) (9,999)
Investments(1) 6,242 (2,374) (710) 3,158
------ -------- -------- -------
All interest-earning assets 68,233 (5,592) (2,196) 60,445
------ -------- -------- -------
Interest expense:
Customer accounts 8,855 5,294 407 14,556
FHLB advances and other 29,908 (2,822) (1,150) 25,936
------- -------- -------- -------
borrowings
All interest-bearing liabilities 38,763 2,472 (743) 40,492
------- ------- ------- -------
Change in net interest income $ 29,470 (8,064) $ (1,453) $ 19,953
======= ======== ======== =======
</TABLE>
- ---------------------
(1) Includes interest on overnight investments and dividends on stock of the
FHLB of Seattle.
<PAGE> 22
22
GAP ANALYSIS
The following table is intended as an illustration of the projected
maturity or repricing of the Company's interest-earning assets and
interest-bearing liabilities at September 30, 1996. The amounts of assets and
liabilities shown which mature or reprice within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except (i) adjustable rate mortgage-backed securities and loans are
included in the period in which they are first scheduled to adjust and not in
the period in which they mature, (ii) constant prepayment rates (CPR) ranging
from 0% to 6%, based on contractual interest rates, seasoning, and asset type,
were utilized for fixed rate loans and mortgage-backed and related securities,
(iii) variable rate certificates of deposit which reprice monthly are included
in the three month or less category, (iv) all of the Company's money market and
negotiable order of withdrawal ("NOW") accounts are deemed to reprice or mature
within the three month or less category and (v) all of the Company's passbook
accounts are deemed to reprice or mature in the over five year category.
Management believes that these assumptions approximate actual experience and
considers them reasonable. The interest rate sensitivity of the Company's assets
and liabilities in the table could vary substantially, however, if different
assumptions are used or if actual experience differs from the assumptions used:
<TABLE>
<CAPTION>
Four to Over one Over three
Within three twelve through through five
months months three years years
------------ ------ ----------- ------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Interest bearing earning assets:
Investment securities(1) $ -- $ 20,056 $ 94,887 $ 84,817
Mortgage-backed securities(2)
Adjustable rate 39,702 33,509 -- --
Fixed rate -- -- 5 404
Adjustable rate mortgage loans 365,139 68,943 8,235 --
Fixed rate mortgage loans and other loans 140,213 416,750 764,702 767,563
----------- ----------- ----------- -----------
Total $ 545,054 $ 539,258 $ 867,829 $ 852,784
=========== =========== =========== ===========
Interest-bearing liabilities:
Deposits(3) $ 960,278 $ 1,112,986 $ 197,848 $ 26,600
Borrowings 1,736,898 172,205 50,427 19
----------- ----------- ----------- -----------
Total $ 2,697,176 $ 1,285,191 $ 248,275 $ 26,619
=========== =========== =========== ===========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities $(2,152,122) $ (745,933) $ 619,554 $ 826,165
Cummulative excess (deficiency) of interest bearing
earning assets over interest-bearing liabilities $(2,152,122) $(2,898,055) $(2,278,501) $(1,452,336)
Ratio of cummulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities to total
assets
(42.07%) (56.66%) (44.55%) (28.39%)
</TABLE>
<TABLE>
<CAPTION>
Over five
years Totals
----- ------
<S> <C> <C>
Interest-earning assets: $ 94,623 $ 294,383
Investment securities(1)
Mortgage-backed securities(2) -- 73,211
Adjustable rate 792,267 792,676
Fixed rate -- 442,317
Adjustable rate mortgage loans 1,477,444 3,566,672
Fixed rate mortgage loans and other loans ---------- ----------
$2,364,334 $5,169,259
Total ========== ==========
Interest-bearing liabilities: $ 182,508 $2,480,220
Deposits(3) -- 1,959,549
Borrowings ---------- ----------
$ 182,508 $4,439,769
Total ========== ==========
Excess (deficiency) of interest-earning assets over $2,181,826 $ 729,490
interst-bearing liabilities
Cummulative excess (deficiency) of interest-earning $ 729,490
assets over interest-bearing liabilities
Ratio of cummulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities 14.26%
to total assets
</TABLE>
(1) Consists of held-to-maturity and available-for-sale securities.
Available-for-sale securities have not been adjusted for unrealized net
gains totalling $4.6 million at September 30, 1996.
(2) Consists of mortgage-backed securities available-for-sale and
held-to-maturity, which have not been adjusted for net discounts totalling
$15.6 million or unrealized net gains of $16.3 million at September 30,
1996.
(3) Does not include accrued interest payable, which amounted to $2.8 million at
September 30, 1996.
<PAGE> 23
23
SUBSIDIARIES
The Company is a non-diversified unitary savings and loan holding company
who conducts its primary business through its only subsidiary, the Association.
The Association has several wholly-owned subsidiaries which are discussed
further below.
Washington Federal is permitted by current federal regulations to invest an
amount up to 2% of its assets in stock, paid-in surplus and unsecured loans in
service corporations. The Association may invest an additional 1% of its assets
when the additional funds are utilized for community or inner-city purposes. In
addition, federally-chartered savings institutions which are in compliance with
regulatory capital requirements and other conditions also may make conforming
loans to service corporations in which the lender owns or holds more than 10% of
the capital stock in an aggregate amount of up to 50% of the loans-to-one
borrower limitations contained in federal regulations. Savings institutions
meeting these requirements also may make, subject to the loans-to-one borrower
limitations, an unlimited amount of conforming loans to service corporations in
which the lender does not own or hold more than 10% of the capital stock of
certain other corporations meeting specified requirements.
At September 30, 1996, the Association was authorized under the current
regulations to have a maximum investment of $101.9 million in its service
corporations, exclusive of the additional 1% of assets investments permitted for
community or inner-city purposes but inclusive of the ability to make conforming
loans to its subsidiaries. On that date, the Association's investment in and
unsecured loans to its four wholly-owned service corporations amounted to $28.2
million and the Association had $5.4 million in conforming loans outstanding to
its subsidiaries.
At September 30, 1996, Washington Services, Inc. ("WSI"), a wholly-owned
subsidiary of the Association, is presently developing a 301-acre light
industrial center in the technology corridor of South Snohomish County,
Washington, of which 123 buildable acres, with an investment of $13.2 million,
remain unsold as of September 30, 1996. Based upon the sales history of this
development, the Association believes the net realizable value from the sale of
the remaining properties exceeds the subsidiary's basis in these properties.
First Insurance Agency, Inc., a wholly-owned subsidiary of the Association,
is an insurance brokerage company which offers a full line of individual and
business insurance products. The agency provides insurance to the Association at
competitive rates.
First Federal Financial Services, Inc., a wholly-owned subsidiary of the
Association, is incorporated under the laws of Idaho. The subsidiary is engaged
in real estate development activities.
Freedom Vineyards, Inc., a wholly-owned subsidiary of WSI, is incorporated
under the laws of California for the purpose of operating an agricultural
property located in that state. The Association intends to sell this property,
which is classified as real estate held for sale.
<PAGE> 24
24
As a result of the acquisition of Metropolitan Bancorp the Company also
acquired a 19% interest in the outstanding common stock of Phoenix Mortgage &
Investment, Inc., a mortgage-banking company headquartered in Lynnwood,
Washington which emphasizes the origination of single-family residential loans
through seven loan origination offices located in northwest Washington.
A savings association is required to deduct the amount of the investment in,
and extensions of credit to, a subsidiary engaged in any activities not
permissible for national banks. Because the acquisition and development of real
estate is not a permissible activity for national banks, the investments in and
loans to the subsidiary of the Association which is engaged in such activities
are subject to exclusion from the capital calculation. See "Regulation -
Association--Regulatory Capital Requirements."
<PAGE> 25
25
EMPLOYEES
As of September 30, 1996, the Company had approximately 602 employees,
including the full-time equivalent of 55 part-time employees and its service
corporation employees. None of these employees are represented by a collective
bargaining agent, and the Company has enjoyed harmonious relations with its
personnel.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning individuals
who are deemed to be executive officers of Washington Federal as of November 30,
1996.
<TABLE>
<CAPTION>
Names and Positions
or Offices Age Business Experience during the last five years
---------- --- ----------------------------------------------
<S> <C> <C>
Guy C. Pinkerton 62 Chairman since November 1994;
Director, President and Chief Executive Officer since
Chief Executive Officer October 1992; Director since
October 1991; President since
July 1988
Charles R. Richmond 57 Executive Vice President and
Director, Executive Secretary; Director since
Vice President and Secretary February 1995
Ronald L. Saper 46 Executive Vice President and
Executive Vice President and Chief Financial Officer since
Chief Financial Officer October 1991; previously served
as Senior Vice President and
Controller of Far West Federal
Bank and as Senior Vice President
and Chief Financial Officer of
National Bancshares Corporation
of Texas
William A. Cassels 55 Executive Vice President
Executive Vice President
Lawrence D. Cierpiszewski 53 Executive Vice President since
Executive Vice President October 1996; previously served
as Senior Vice President;
previously was Executive Vice
Patrick F. Patrick 54 Executive Vice President with
Executive Vice President completion of merger with
Metropolitan Bancorp.; previously
served as President, Chief
Executive Officer and Director of
Metropolitan Bancorp.
Keith D. Taylor 40 Senior Vice President and
Senior Vice President Treasurer since August 1992;
and Treasurer Senior Vice President and
Controller since December 1990;
previously was Vice President and
Controller
</TABLE>
<PAGE> 26
26
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Association. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company is registered as a savings and loan holding company
under the HOLA and is subject to OTS regulation, examination, supervision and
reporting requirements.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the savings institution subsidiary of such a
holding company fails to meet a qualified thrift lender ("QTL") test, then such
unitary holding company also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, shall
register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Association--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Association, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Association or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, upon prior notice to, and no objection by the OTS, other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval
<PAGE> 27
27
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
FEDERAL SECURITIES LAWS. The Company's Common Stock is registered with the
Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934 ("Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the Exchange Act.
THE ASSOCIATION
GENERAL. The Association is a federally-chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Association is subject to
broad federal regulation and oversight by the OTS and the FDIC extending to all
aspects of its operations. The Association is a member of the FHLB of Seattle
and is subject to certain limited regulation by the Federal Reserve Board. The
Association is a member of the SAIF and its deposits are insured by the SAIF
fund administered by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Association.
FEDERAL SAVINGS ASSOCIATION REGULATION. The OTS has extensive authority over
the operations of savings associations. As part of this authority, savings
associations are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC. Such regulation and
supervision is primarily intended for the protection of depositors.
The investment and lending authority of the Association is prescribed by
federal laws and regulations, and it is prohibited from engaging in any
activities not permitted by such laws and regulations. These laws and
regulations generally are applicable to all federally-chartered savings
associations and many also apply to state-chartered savings associations.
INSURANCE OF ACCOUNTS. The deposits of the Association are insured up to
$100,000 per insured member (as defined by law and regulation) by the SAIF and
are backed by the full faith and credit of the United States Government. As
insurer, the FDIC is authorized to conduct
<PAGE> 28
28
examinations of, and to require reporting by, FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious threat to the FDIC. The
FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action.
The Federal Deposit Insurance Act ("FDIA"), as amended on December 19, 1991,
required the FDIC to promulgate regulations which establish a risk-based
assessment system, and gave the FDIC the authority to promulgate regulations
governing the transition from the fixed-rate assessment system to the risk-based
assessment system. Under FDIC regulations, institutions are assigned to one of
three capital groups - "well capitalized," "adequately capitalized" and
"undercapitalized" - which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed under "Prompt Corrective Action" below. These three groups are then
divided into subgroups which are based on supervisory evaluations by the
institution's primary federal regulator, resulting in nine assessment
classifications. Effective January 1, 1997 assessment rates for SAIF-insured
institutions will range from 0% of insured deposits for well-capitalized
institutions with minor supervisory concerns to .27% of insured deposits for
undercapitalized institutions with substantial supervisory concerns. In
addition, an additional assessment of 6.4 basis points will be added to the
regular SAIF-assessment until December 31, 1999 in order to cover Financing
Corporation debt service payments.
Both the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit
insurance fund that covers the deposits of state and national banks and certain
state savings banks, are required by law to attain and thereafter maintain a
reserve ratio of 1.25% of insured deposits. The BIF has achieved the required
reserve ratio, and as a result, the FDIC reduced the average deposit insurance
premium paid by BIF-insured banks to a level substatially below the average
premium paid by savings institutions. Banking legislation was enacted September
30, 1996 to eliminate the premium differential between SAIF-insured institutions
and BIF-insured institutions. The legislation provided that all insured
depository institutions with SAIF-assessable deposits as of March 31, 1995 pay
a special one-time assessment to recapitalize the SAIF. Pursuant to this
legislation, the FDIC promulgated a rule that established the special assessment
necessary to recapitalize the SAIF at 65.7 basis points of SAIF-assessable
deposits held by affected institutions as of March 31, 1995. Based upon its
level of SAIF deposits as of March 31, 1995, the Association paid a special
assessment of $15.0 million. The assessment was accrued in the quarter ended
September 30, 1996.
Another component of the SAIF recapitalization plan provides for the merger
to the SAIF and the BIF on January 1, 1999, if no insured depository institution
is a savings association on that date. If legislation is enacted which requires
the Association to convert to a bank charter, the Company would become a bank
holding company subject to the more restrictive activity limits imposed on bank
holding companies unless special grandfather provisions are included in such
legislation. The Company does not believe that its activities would be
materially affected in the event that it was required to become a bank holding
company.
<PAGE> 29
29
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations are
required to maintain minimum levels of regulatory capital. Pursuant to federal
law, the OTS has established capital standards applicable to all savings
associations. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations create three capital requirements: a tangible
capital requirement, a leverage or core capital requirement and a risk-based
capital requirement. All savings associations must have tangible capital of at
least 1.5% of adjusted total assets (as defined in the regulations). For
purposes of this requirement, tangible capital is core capital less all
intangibles other than certain purchased mortgage servicing rights (of which the
Association has none). Core capital includes common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus and minority
interests in consolidated subsidiaries, less intangibles (unless included under
certain limited conditions, but in no event exceeding 25% of core capital), plus
purchased mortgage servicing rights in an amount not to exceed 50% of core
capital.
The current leverage or core capital requirement is core capital, as defined
above, of at least 3% of adjusted total assets.
The risk-based capital standard adopted by the OTS currently requires
savings associations to maintain a minimum ratio of total capital to
risk-weighted assets of 8%. Total capital consists of core capital, defined
above, and supplementary capital. Supplementary capital consists of certain
capital instruments that do not qualify as core capital, and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only in
an amount equal to the amount of core capital. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk-weighing categories range from 0% for low-risk assets such
as U.S. Treasury securities and GNMA securities to 100% for various types of
loans and other assets deemed to be of higher risk. Single family mortgage loans
having loan-to-value ratios not exceeding 80% and meeting certain additional
criteria, as well as certain multi-family residential property loans, qualify
for a 50% risk-weight treatment. The book value of each asset is multiplied by
the risk-weighting applicable to the asset category, and the sum of the products
of this calculation equals total risk-weighted assets.
OTS regulations impose special capitalization standards for savings
associations that own service corporations and other subsidiaries. In addition,
certain exclusions from capital and assets are required when calculating total
capital in addition to the adjustments for calculating core capital. These
adjustments do not materially affect the regulatory capital of the Association.
For information regarding the Association's compliance with each of its
three capital requirements at September 30, 1996, see Note P to the Consolidated
Financial Statements.
<PAGE> 30
30
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk is subject
to a deduction of its interest rate risk component from total capital for
purposes of calculating its risk-based capital. As a result, such an institution
is required to maintain additional capital in order to comply with the
risk-based capital requirement. The final rule was originally to be effective as
of January 1, 1994; however, its effectiveness has been delayed several times.
In August 1995, the OTS issued Thrift Bulletin No. 67, which allows eligible
institutions to request adjustment to their interest rate risk component as
calculated by the OTS, or to request to use their own models to calculate their
interest rate component. The OTS also indicated that it will continue to delay
the effectiveness of its interest rate risk rule requiring institutions with
above normal interest rate risk exposure to adjust their regulatory capital
requirement until new procedures are implemented and evaluated.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions.
PROMPT CORRECTIVE ACTION. Under federal law, each federal banking agency has
implemented a system of prompt corrective action for institutions which it
regulates. Under OTS regulations, an institution shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any order or final capital directive to meet
and maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law authorizes the OTS to reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of September 30, 1996, the Association exceeded
the requirements of a well capitalized institution.
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The
<PAGE> 31
31
liquidity requirement may vary from time to time (between 4% and 10%) depending
upon economic conditions and savings flows of all savings associations. At the
present time, the required liquid asset ratio is 5%.
Liquid assets for purposes of this ratio include specified short-term assets
(e.g., cash, certain time deposits, certain banker's acceptances and short-term
United States Government obligations), and long-term assets (e.g., United States
Government obligations of more than one and less than five years and state
agency obligations with a minimum term of 18 months). The regulations governing
liquidity requirements include as liquid assets debt securities hedged with
forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Association of Primary Dealers in United States
Government securities or banks whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial futures position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of such securities. Certain
mortgage-related securities with less than one year to maturity may be
designated as liquid assets. Short-term liquid assets currently must constitute
at least 1% of an association's average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed upon
associations for violations of liquidity requirements.
QUALIFIED THRIFT LENDER TEST. A savings association that does not meet a QTL
test set forth in the HOLA and implementing regulations must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the association shall be restricted
to those of a national bank; (iii) the association shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
association shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the association
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Under recent legislation and applicable regulations, any savings institution
is a QTL if (i) it qualifies as a domestic building and loan association under
Section 7701(a)(19) of the Internal Revenue Code (which generally requires that
at least 60% of the institution's assets constitute housing-related and other
qualifying assets) or (ii) at least 65% of the institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a monthly
average basis in at least nine out of every 12 months. At September 30, 1996,
the Association was in compliance with the QTL test.
TRANSACTIONS WITH AFFILIATES. Under federal law, all transactions between
and among a savings association and its affiliates, which include holding
companies, are subject to Sections 23A and 23B of the Federal Reserve Act.
Generally, these requirements limit these transactions to a percentage of the
association's capital and require all of them to be on terms at least as
favorable to the association as transactions with non-affiliates. In addition, a
savings association may not lend to any affiliate engaged in non-banking
activities not permissible for a bank holding
<PAGE> 32
32
company or acquire shares of any affiliate not a subsidiary. The OTS is
authorized to impose additional restrictions on transactions with affiliates if
necessary to protect the safety and soundness of a savings association. The OTS
regulations also set forth various reporting requirements relating to
transactions with affiliates.
Extensions of credit by a savings association to executive officers,
directors and principal shareholders are subject to Section 22(h) of the Federal
Reserve Act, which, among other things, generally prohibits loans to any such
individual where the aggregate amount exceeds an amount equal to 15% of an
institution's unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral.
Section 22(h) permits loans to directors, executive officers and principal
stockholders made pursuant to a benefit or compensation program that is widely
available to employees of a subject savings association provided that no
preference is given to any officer, director, or principal shareholder or
related interest thereto over any other employee. In addition, the aggregate
amount of extensions of credit by a savings institution to all insiders cannot
exceed the institution's unimpaired capital and surplus. Furthermore, Section
22(g) places additional restrictions on loans to executive officers.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations on
capital distributions by savings associations, including cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Associations and distributions that do not qualify for the safe
harbor are required to obtain prior OTS approval before making any capital
distributions.
As of September 30, 1996, the Association is a Tier 1 institution which can
make capital distributions during any calendar year equivalent to 100% of net
income for the calendar year-to-date plus 50% of its "surplus capital ratio" at
the beginning of the calendar year. The "surplus capital ratio" is defined to
mean the percentage by which the association's ratio of total capital to assets
exceeds the ratio of its fully phased-in capital requirement to assets, and
"fully phased-in capital requirement" is defined to mean an association's
capital requirement under the statutory and regulatory standards applicable on
December 31, 1994, as modified to reflect any applicable individual minimum
capital requirement imposed upon the association. The OTS has approved the
Association's capital distribution plan through the calendar year 1997.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, savings
institutions would be permitted to only make capital distributions that would
not result in their capital being reduced below the level required to remain
"adequately capitalized" as defined in the OTS prompt corrective action
regulations. The Association would continue to be required to provide notice to
the OTS of its intent to make a capital distribution. Management does not
believe that the proposal will adversely affect the Association's ability to
make capital distributions if it is adopted substantially as proposed.
<PAGE> 33
33
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. At September
30, 1996, the Association's advances from the FHLB amounted to $1.2 billion.
As a member, the Association is required to purchase and maintain stock in
the FHLB of Seattle in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1996, the Association had $64.5
million in FHLB stock, which was in compliance with this requirement.
Recent changes in federal law now require the FHLBs to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. At
September 30, 1996, the Association was in compliance with its reserve
requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest- bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the Association's earning assets. Savings
institutions also have authority to borrow from the Federal Reserve Board's
"discount window," but Federal Reserve Board regulations require them to exhaust
all FHLB sources before borrowing in this manner.
<PAGE> 34
34
TAXATION
FEDERAL TAXATION
For federal and state income tax purposes, the Company reports its income
and expenses on the accrual basis method of accounting and files its federal and
state income tax returns on a September 30 fiscal year basis. The Company files
consolidated federal and state income tax returns with its wholly-owned
subsidiaries.
Washington Federal is subject to those rules of federal income taxation
generally applicable to corporations. Historically, savings institutions which
met certain definitional tests primarily relating to their assets and the nature
of their businesses were permitted to establish a reserve for bad debts and to
make annual additions thereto, which additions were subject to specified formula
limits, deducted in arriving at the institution's income. The maximum bad debt
deduction allowable under the percentage of taxable income method ("Percentage
Method') was 8% and, as a result, the effective federal income tax rate for the
Association, absent other factors, was approximately 32.2%.
Legislation adopted in August 1996 (i) repealed the provision of the Code
which authorizes use of the Percentage Method by qualifying savings institutions
to determine deductions for bad debts, effective for taxable years beginning
after 1995, and (ii) required that a savings institution recapture for tax
purposes (i.e. take into income) over a six-year period its applicable excess
reserves, which for a thrift institution such as the Association generally is
the excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1, 1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1, 1988, which
recapture would be suspended for any tax year that begins after December 31,
1995 and before January 1, 1998 (thus a maximum of two years) in which a savings
institution originates an amount of residential loans which is not less than the
average of the principal amount of such loans made by a savings institution
during its six most recent taxable years beginning before January 1, 1996. These
provisions did not have a material adverse effect on the Company's financial
condition or operations.
Washington Federal's tax returns have been examined through the year ended
September 30, 1990.
<PAGE> 35
35
STATE TAXATION
The State of Washington does not have an income tax. A business and
occupation tax based on a percentage of gross receipts is assessed against
businesses; however, interest received on loans secured by mortgages or deeds of
trust on residential properties is not subject to this tax.
The State of Idaho has a corporate income tax with a statutory rate of 8% of
apportionable income.
The State of Oregon has a corporate excise tax with a statutory rate of 6.6%
of apportionable income.
The State of Utah has a corporate franchise tax with a statutory rate of 5%
of apportionable income.
The State of Arizona has a corporate income tax with a statutory rate of
9.3% of apportionable income.
<PAGE> 36
36
ITEM 2. PROPERTIES
The Association owns the building in which its home and executive offices
are located, in Seattle, Washington. The following table sets forth certain
information concerning the Association's offices:
<TABLE>
<CAPTION>
Building
Number of -------------------------- Net Book Value at
Location Offices Owned Leased(1) September 30, 1996 (2)
- -------- ----------- ----- ------ ------------------
(In Thousands)
<S> <C> <C> <C> <C>
Washington 32 18 14 $15,409
Idaho 20 16 4 5,952
Oregon 21 12 9 5,779
Utah 11 6 5 8,160
Arizona 9 5 4 2,495
-- -- -- -------
Total 93 57 36 $37,795
== == == =======
</TABLE>
- ---------------
(1) The leases have varying terms expiring from 1996 through 2070, including
renewal options.
(2) Amount represents land and improvements with respect to properties owned by
the Association and represents the book value of leasehold improvements, where
applicable.
Washington Federal evaluates on a continuing basis the suitability and
adequacy of its offices, both branches and administrative centers, and has an
active program of opening, relocating, remodeling, or closing them as necessary
to maintain efficient and attractive premises.
Washington Federal's net investment in premises, equipment and leaseholds
was $41.9 million at September 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
The Association is involved in legal proceedings occurring in the ordinary
course of business which in the aggregate are believed by management to be
immaterial to the financial condition of the Association.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 37
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required herein is incorporated by reference from page 27 of
the Company's Annual Report to Stockholders for Fiscal 1996 ("Annual Report"),
which is included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from page 26 of
the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required herein is incorporated by reference on pages 4
through 7 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein are
incorporated by reference from pages 8 through 25 and page 27 of the Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is included under Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference to pages 11 to
14 of the proxy statement dated December 20, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required herein is incorporated by reference to pages 2 to 3
and 5 to 8 of the proxy statement dated December 20, 1996.
<PAGE> 38
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference to page 16 of
the proxy statement dated December 20, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) The following financial statements are incorporated herein by
reference from pages 8 through 25 and page 27 of the Annual Report.
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1995
Consolidated Statements of Operations for each of the years in the three
year period ended September 30, 1996
Consolidated Statements of Stockholders' Equity for each of the years in the
three year period ended September 30, 1996
Consolidated Statements of Cash Flows for each of the years in the three
year period ended September 30, 1996
Notes to Consolidated Financial Statements
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report.
No. Exhibit Page
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Specimen Common Stock Certificate (1)
10.1 1982 Employee Stock Compensation Program* (1)
10.2 1987 Stock Option and Stock Appreciation (1)
Rights Plan*
10.3 1994 Stock Option and Stock Appreciation (1)
Rights Plan*
13 Annual Report to Stockholders
21 Subsidiaries of the Company - Reference is --
made to Item 1, "Business - Subsidiaries" for
the required information
23 Consent of Independent Public Accountants
- -------
* Management contract or compensation plan.
<PAGE> 39
39
(1) Incorporated by reference from the Registrant's Registration Statement
on Form 8-B filed with the SEC on January 26, 1995.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
(d) All schedules are omitted as the required information is not applicable
or the information is presented in the Consolidated Financial Statements or
related notes.
<PAGE> 40
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WASHINGTON FEDERAL, INC.
December 23, 1996 By: /s/ Guy C. Pinkerton
- ----------------- ---------------------
Date Guy C. Pinkerton,Chairman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Kermit O. Hanson December 23, 1996
- -------------------------- -----------------
Kermit O. Hanson, Director Date
/s/ W. Alden Harris December 23, 1996
- -------------------------- -----------------
W. Alden Harris, Director Date
/s/ Anna C. Johnson December 23, 1996
- -------------------------- -----------------
Anna C. Johnson, Director Date
/s/ John F. Clearman December 23, 1996
- -------------------------- -----------------
John F. Clearman, Director Date
/s/ H. Dennis Halvorson December 23, 1996
- -------------------------- -----------------
H. Dennis Halvorson, Director Date
<PAGE> 41
41
/s/ E. W. Mersereau, Jr. December 23, 1996
- ------------------------------ -----------------
E. W. Mersereau, Jr., Director Date
and Vice Chairman of the Board
/s/ Guy C. Pinkerton December 23, 1996
- ------------------------------ -----------------
Guy C. Pinkerton, Director, Chairman, Date
President and Chief Executive Officer
/s/ Richard C. Reed December 23, 1996
- ------------------------------ -----------------
Richard C. Reed, Director Date
/s/ Charles R. Richmond December 23, 1996
- ------------------------------ -----------------
Charles R. Richmond, Director, Date
Executive Vice President and Secretary
/s/ Ronald L. Saper December 23, 1996
- ------------------------------ -----------------
Ronald L. Saper, CPA, Executive Date
Vice President and Chief Financial
Officer (principal financial officer)
/s/ Keith D. Taylor December 23, 1996
- ------------------------------ -----------------
Keith D. Taylor, CPA, Senior Vice President Date
and Treasurer
(principal accounting officer)
<PAGE> 1
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
September 30, 1996 1995 % Change
(In thousands, except per share data)
<S> <C> <C> <C>
Assets $5,114,978 $4,577,402 +12%
Investment securities 299,006 256,661 +17
Loans receivable 3,723,016 3,034,027 +23
Mortgage-backed securities 866,605 1,080,854 -20
Customer accounts 2,480,220 2,445,335 +1
Federal Home Loan Bank (FHLB) advances and other borrowings 1,959,549 1,484,087 +32
Stockholders' equity 577,702 575,929
Net income 79,895 78,343 +2
Net income per share 1.88 1.79 +5
Dividends per share .90 .82 +10
Stockholders' equity per share 14.20 13.47 +5
Shares outstanding 40,695 38,874 +5
Return on average stockholders' equity 13.73% 13.99% -2
Return on average assets 1.63% 1.87% -13
Return on average stockholders' equity, excluding
SAIF special assessment 15.37% 13.99% +10
Return on average assets, excluding SAIF special assessment 1.82% 1.87% -3
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On February 3, 1995, Washington Federal, Inc. (the "Company") completed its
reorganization into a savings and loan holding company structure (the
"reorganization"). The Company's predecessor, Washington Federal Savings (the
"Association") became a wholly-owned subsidiary of the Company as a result of
the reorganization.
INTEREST RATE RISK
The Association assumes a high level of interest rate risk as a result of its
policy to originate 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 September 30, 1996, the Association had
$2,887,141,000 more liabilities subject to repricing in the next year than
assets subject to repricing. This amounted to a negative maturity gap of 56.4%
of total assets.
Fiscal 1996 began with the continued trend of contracting interest rate spreads
as the December, 1995 first quarter closed with a 2.55% interest rate spread. It
was the tenth consecutive quarterly decline in interest rate spreads. To counter
the contraction of the interest rate spread, the Association continued its
strategy of utilizing its borrowing capacity, associated with its strong capital
position, and expanded the balance sheet during that phase of the interest rate
cycle by placing more emphasis on residential loan production. FHLB advances and
other borrowed money increased to an equivalent of 38.3% of total assets at
September 30, 1996, compared to 32.4% of total assets at September 30, 1995.
As fiscal 1996 progressed, the differential between short-term interest rates
and long-term interest rates began to widen, resulting in an expanding interest
rate spread during the final three quarters of the year and culminating with the
2.95% interest rate spread at September 30, 1996. As the interest rate spread
began to expand, the Association began a phase of controlled growth by choosing
not to purchase any mortgage-backed securities during fiscal 1996 and by
de-emphasizing wholesale loan production.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at September 30, 1996 was $577,702,000 or 11.3% of total
assets. This is an increase of $1,773,000 from September 30, 1995 when net worth
was $575,929,000 or 12.6% of total assets. The ratio of net worth to total
assets remains at a high level despite a 12% increase in assets during fiscal
1996, the distribution of $37.8 million in cash dividends, and the utilization
of $46.1 million of cash to repurchase Company stock.
In March, 1996 the Board of Directors of the Company authorized the repurchase
of 2,000,000 shares of the Company's outstanding common stock. The repurchase
program supplements the program previously authorized in February, 1995, which
allowed the repurchase of up to 5%, or 2,087,858 shares of outstanding common
stock. Through September 30, 1996, 3,316,326 of the shares authorized have been
repurchased, including 2,140,442 at an average price of $21.54 per share during
fiscal 1996. The Company has negotiated a $40,000,000 revolving credit facility
to fund the repurchase of outstanding common stock (see Note L).
The Association's percentage of net worth to total assets is among the highest
in the nation and is approximately three times the minimum required under Office
of Thrift Supervision ("OTS") regulations (see Note P). Management believes this
strong net worth position will help protect earnings against interest rate risk
and will enable it to compete more effectively for controlled growth through
acquisitions and customer deposit increases.
Customer accounts increased $34,885,000 from a year ago despite a de-emphasis of
attracting governmental deposits which declined $56,209,000. After excluding
governmental deposits, customer accounts grew $91,094,000, largely due to our
branch expansion in Arizona and Washington. The one percent increase in customer
accounts is modest and can be attributed to the disintermediation of funds to
the stock and bond markets.
The Association's cash and investment securities amounted to $318,641,000, a
$38,812,000 increase from a year ago. The Association purchased $48.8 million of
tax-preferred investment securities, which replaced the $21.1 million of
tax-free municipal securities that matured during the year. The remaining $10.1
million net increase of cash and investment securities were U.S. government
agency securities that supplemented the liquidity requirements of the
Association.
The minimum liquidity levels of the Association are governed by the regulations
of the OTS. Liquidity is defined as the ratio of average cash and eligible
unpledged investment securities to the sum of average withdrawable savings plus
short-term (one year) borrowings. Currently the Association is required to
maintain short-term liquidity at one percent and total liquidity at five
percent. At September 30, 1996, total liquidity was 5.82% compared to 5.68% at
September 30, 1995.
<PAGE> 3
CHANGES IN FINANCIAL POSITION
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES. On October 1, 1994, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Other than at the adoption of SFAS No. 115, no transfers
between the held-to-maturity and available-for-sale categories were to be made
without causing the entire portfolio to be reclassified as available-for-sale.
However, in November 1995, the Financial Accounting Standards Board issued a
question and answer bulletin which allowed companies subject to SFAS No. 115 to
make a one-time transfer between held-to-maturity and available-for-sale
categories. The Company evaluated its securities portfolio before January 1,
1996, and categorized an additional $215,489,000 as available-for-sale.
The Company purchased $181,230,000 of U.S. government and agency securities
during the year, all of which were categorized as available-for-sale.
The Company had $165,719,000 of gross sales of securities resulting in $3.4
million of gains and $1.9 million of losses. Of the sales $136,116,000 were
mortgage-backed securities resulting in $3.4 million of gains and $1.5 million
of losses, and $29,603,000 were U.S. government and agency securities resulting
in losses of $401,000. All of the securities sold were categorized as
available-for-sale. As of September 30, 1996, the Company had unrealized gains
on its available-for-sale portfolio of $13 million, net of tax, which are
recorded as part of stockholders' equity.
LOANS RECEIVABLE. Loans receivable grew 23% during fiscal 1996 to $3,723,016,000
at September 30, 1996 from $3,034,027,000 a year earlier. The increased balance
results from record loan originations of $1,556,268,000, an increase of 27% from
the prior year.
REAL ESTATE HELD FOR SALE. The balance at September 30, 1996 was $33,491,000, a
4% increase, over the $32,129,000 of one year ago.
FHLB STOCK. The Association purchased $15,500,000 of FHLB stock during the
fiscal year and the dividend yield improved to 8% at September 30, 1996 compared
with 7% at September 30, 1995. The Association had a balance of $64,530,000 at
September 30, 1996 compared with $45,134,000 one year ago.
COSTS IN EXCESS OF NET ASSETS ACQUIRED. The Company periodically monitors these
assets for potential impairment in accordance with SFAS No. 121 "Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". As of September
30, 1996, there was no impairment of the costs in excess of net assets acquired.
If necessary, the Company will provide for any diminution in value of these
assets should an impairment be identified.
CUSTOMER ACCOUNTS. Customer accounts at September 30, 1996 were $2,480,220,000
compared with $2,445,335,000 at September 30, 1995. See Liquidity and Capital
Resources above.
FHLB ADVANCES AND OTHER BORROWINGS. Total borrowings increased to
$1,959,549,000. See Interest Rate Risk above.
RESULTS OF OPERATIONS
GENERAL
Fiscal 1996 net income before the Savings Association Insurance Fund ("SAIF")
special assessment increased 18% over fiscal 1995. See Note S - Selected
Quarterly Financial Data (Unaudited) for highlights of the quarter by quarter
results for the years ended September 30, 1996 and 1995.
The net interest income improved each quarter of 1996 as interest rate spreads
improved the last three quarters of the fiscal year as indicated in the table
below.
<TABLE>
<CAPTION>
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
1994 1995 1995 1995 1995 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate on loans and mortgage-backed securities 8.19% 8.25% 8.30% 8.26% 8.22% 8.15% 8.14% 8.16%
Interest rate on investment securities* 8.06 8.01 7.91 7.69 7.55 7.34 7.62 7.47
Combined 8.18 8.23 8.27 8.22 8.17 8.10 8.10 8.11
Interest rate on customer accounts 4.55 5.12 5.46 5.51 5.52 5.19 4.98 4.93
Interest rate on borrowings 6.09 6.06 6.03 5.87 5.77 5.50 5.49 5.45
Combined 5.08 5.44 5.67 5.65 5.62 5.32 5.20 5.16
Interest rate spread 3.10% 2.79% 2.60% 2.57% 2.55% 2.78% 2.90% 2.95%
</TABLE>
*Includes municipal bonds at tax-equivalent rates.
The interest rate spread improved during fiscal 1996 from 2.57% at September 30,
1995 to 2.95% at September 30, 1996.
<PAGE> 4
COMPARISON OF FISCAL 1996 RESULTS WITH FISCAL 1995
Net interest income increased $19,953,000 (13%) in fiscal 1996 over fiscal 1995.
This resulted from the Company's balance sheet expansion and the improved
interest rate spread the last three quarters of fiscal 1996.
Interest on loans and mortgage-backed securities increased $57,287,000 (18%) in
fiscal 1996 from 1995. The increase is associated with the leveraging described
earlier resulting in total outstanding loans and mortgage-backed securities
increasing to $4,589,621,000 at September 30, 1996 from $4,114,881,000 at the
beginning of fiscal 1996. Average interest rates on loans and mortgage-backed
securities decreased to 8.16% from 8.26% one year ago.
Interest and dividends on investment securities increased $3,158,000 (15%) in
fiscal 1996 from fiscal 1995. The weighted average yield declined to 7.47% at
September 30, 1996 compared with 7.69% at September 30, 1995. The combined
investment securities and FHLB stock portfolio increased to $363,536,000 at
September 30, 1996 versus $301,795,000 one year ago.
Interest on customer accounts increased 13% to $129,904,000 for fiscal 1996 from
the $115,348,000 for fiscal 1995. The average cost of customer accounts
decreased to 4.93% at year end, compared to the 5.51% rate of one year ago.
Interest on FHLB advances and other borrowings increased $25,936,000 (36%) in
fiscal 1996 over fiscal 1995. The leveraging described earlier was the
predominant reason for the increase, while average rates paid declined at
September 30, 1996 to 5.45% versus 5.87% at September 30, 1995.
The provision for loan losses increased $3,828,000 (39%) in fiscal 1996 from
fiscal 1995. All of the provision for loan losses were for general reserves
which were established to provide for the inherent risks associated with the
expanded loan portfolio.
Other income decreased $3,787,000 (39%) in fiscal 1996 over fiscal 1995. Gains
on the sale of available-for-sale securities totalled $1,444,000 in fiscal 1996
compared to $4,518,000 in fiscal 1995.
Other expense increased $17,082,000 (47%) in fiscal 1996 over fiscal 1995. Of
the increase, $15,026,000 relates to the SAIF special assessment and is a
non-recurring charge. The remainder of the increase is due to general
inflationary increases plus the incremental costs associated with the branch
network expansion. The branch network expanded to 93 offices at September 30,
1996 versus 87 offices at September 30, 1995. Other expense for fiscal 1996
equalled .78% of average assets compared to .86% in fiscal 1995, while the
number of staff, including part-time employees on an equivalent full-time basis,
were 602 and 563, for the same periods, respectively.
Income taxes decreased $191,000 in fiscal 1996. The effective tax rate was 36%
for both fiscal 1996 and fiscal 1995.
COMPARISON OF FISCAL 1995 RESULTS WITH FISCAL 1994
Net interest income decreased $10,950,000 (7%) in fiscal 1995 over fiscal 1994.
This resulted from the continued contraction of the interest spread which has
declined for nine consecutive quarters.
Interest on loans and mortgage-backed securities increased $53,440,000 (20%) in
fiscal 1995 from 1994. The increase is associated with the leveraging described
earlier resulting in total outstanding loans and mortgage-backed securities
increasing to $4,114,881,000 at September 30, 1995 from $3,400,583,000 at the
beginning of fiscal 1995. Average interest rates on loans and mortgage-backed
securities increased to 8.26% from 7.99% one year ago.
Interest and dividends on investment securities increased $2,749,000 (15%) in
fiscal 1995 from fiscal 1994. The weighted average yield declined to 7.69% at
September 30, 1995 compared with 8.00% at September 30, 1994. The combined
investment securities and FHLB stock portfolio increased to $301,795,000 at
September 30, 1995 versus $271,844,000 one year ago.
Interest on customer accounts increased 29% to $115,348,000 for fiscal 1995 from
the $89,758,000 for fiscal 1994. The average cost of customer accounts increased
to 5.51% at year end compared to the 4.22% rate of one year ago. Interest on
FHLB advances and other borrowings increased $41,549,000 (133%) in fiscal 1995
over fiscal 1994.
The leveraging described earlier was a big factor, however rates played a big
part as the average rates paid at September 30, 1995 were 5.87% versus 5.17% at
September 30, 1994.
The provision for loan losses increased $5,844,000 (1,457%) in fiscal 1995 from
fiscal 1994. Most of the increase, $4.6 million, was associated with two
commercial real estate loans.
Other income increased $1,345,000 (16%) in fiscal 1995 over fiscal 1994. Gains
on the sale of available-for-sale securities totalled $4,518,000 in fiscal 1995
compared to $2,321,000 in fiscal 1994.
Other expense increased $2,709,000 (8%) in fiscal 1995 over fiscal 1994 due to
general inflationary increases plus the incremental costs associated with the
branch network expansion. Other expense for fiscal 1995 equalled .86% of average
assets
<PAGE> 5
compared to .97% in fiscal 1994, while the number of staff, including part-time
employees on an equivalent full-time basis, were 563 and 537, for the same
periods, respectively.
Income taxes decreased $4,854,000 (10%) in fiscal 1995 due to a lower taxable
income base. The effective tax rate was 36% for fiscal 1995 versus 35% for 1994.
MERGER WITH METROPOLITAN BANCORP
On July 12, 1996 the Company announced the merger with Metropolitan Bancorp,
Seattle, Washington. The transaction closed subsequent to the Company's fiscal
year after receiving the necessary regulatory and stockholder approvals. Company
stock was issued to Metropolitan stockholders in exchange for their shares. For
further details of the transaction, see Note B.
RECENTLY ENACTED LEGISLATION IMPACTING FINANCIAL INSTITUTIONS
On August 20, 1996 the Small Business Job Protection Act ("Job Act") was signed
into law. The Job Act eliminated the special reserve rules contained in Section
593 of the Internal Revenue Code including the "percentage of taxable income"
method of computing deductions for bad debts which the Company currently
utilizes. As a result the Company must adopt the specific chargeoff method.
Furthermore, the Job Act requires post-1987 reserve accumulations to be
recaptured, however the Company has determined that no reserves are subject to
recapture. See Note M for further details.
On September 30, 1996 the Omnibus Appropriation's Bill ("Omnibus Act") was
signed into law. The Omnibus Act included provisions to recapitalize the SAIF of
Federal Deposit Insurance Corporation ("FDIC"). The recapitalization requires
SAIF members, including the Company, to pay a one-time special assessment of
65.7 basis points which equals $15,026,000 pre-tax, after which the Company's
annual premium to the FDIC will decline from 23 basis points to 6.4 basis
points, or an annual savings of $4 million. See Note J for further discussion.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the Association are monetary in nature. As a result,
interest rates have a more significant impact on the Association's performance
than the general level of inflation. Over short periods of time, interest rates
may not necessarily move in the same direction or in the same magnitude as
inflation.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 1995
(In thousands)
<S> <C> <C>
ASSETS
Cash $19,635 $23,168
Available-for-sale securities 533,615 361,625
Held-to-maturity securities, fair value of $629,649 and $992,500 631,996 975,890
Loans receivable 3,723,016 3,034,027
Interest receivable 34,628 31,441
Premises and equipment, net 41,885 39,930
Real estate held for sale 33,491 32,129
FHLB stock 64,530 45,134
Costs in excess of net assets acquired 27,457 31,002
Other assets 4,725 3,056
$5,114,978 $4,577,402
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Customer accounts
Savings and demand accounts $2,423,885 $2,371,099
Repurchase agreements with customers 56,335 74,236
2,480,220 2,445,335
FHLB advances 1,162,000 527,000
Other borrowings, primarily securities sold under agreements to repurchase 797,549 957,087
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
Advance payments by borrowers for taxes and insurance 23,516 23,222
Federal and state income taxes, including net deferred of $37,910 and $31,577 38,040 32,542
Accrued expenses and other liabilities 35,951 16,287
4,537,276 4,001,473
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, 100,000,000 shares authorized; 44,011,776 and
39,943,213 shares issued; 40,695,450 and 38,874,228 shares outstanding 44,012 39,943
Paid-in capital 405,563 320,920
Valuation adjustment for available-for-sale securities, net of tax 13,000 8,000
Treasury stock, at cost; 3,316,326 and 1,068,985 shares (68,499) (22,412)
Retained earnings 183,626 229,478
577,702 575,929
$5,114,978 $4,577,402
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, 1996 1995 1994
<S> <C> <C> <C>
(In thousands, except per share data)
INTEREST INCOME
Loans $305,372 $238,086 $208,030
Mortgage-backed securities 74,126 84,125 60,741
Investment securities 24,713 21,555 18,806
404,211 343,766 287,577
INTEREST EXPENSE
Customer accounts 129,904 115,348 89,758
FHLB advances and other borrowings 98,841 72,905 31,356
228,745 188,253 121,114
NET INTEREST INCOME 175,466 155,513 166,463
Provision for loan losses 3,828 6,245 401
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 171,638 149,268 166,062
OTHER INCOME
Gain on sale of securities 1,444 4,518 2,321
Other 4,473 5,186 6,038
5,917 9,704 8,359
OTHER EXPENSE
Compensation and fringe benefits 20,231 18,627 17,715
SAIF special assessment 15,026 -- --
Regulatory assessments 5,530 5,013 4,843
Occupancy expense 3,417 2,959 2,696
Other 8,959 9,482 8,118
53,163 36,081 33,372
Gain on real estate owned, net 58 198 1,338
INCOME BEFORE INCOME TAXES 124,450 123,089 142,387
Income taxes
Current 38,222 39,373 44,667
Deferred 6,333 5,373 4,933
44,555 44,746 49,600
NET INCOME $79,895 $78,343 $92,787
PER SHARE DATA
Net income $1.88 $1.79 $2.11
Cash dividends $.90 $.82 $.75
Weighted average number of shares outstanding
including dilutive stock options 41,709,022 43,760,638 44,084,622
</TABLE>
<PAGE> 7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Valuation
Adjustment for
Common Paid-in Retained Available-for- Treasury
Stock Capital Earnings Sale Securities Stock Total
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance at October 1, 1993 $36,162 $234,836 $215,185 $ -- $ -- $486,183
Eleven-for-ten stock split
distributed February 18, 1994 3,619 85,048 (88,667)
Net income 92,787 92,787
Dividends (32,694) (32,694)
Proceeds from exercise of
common stock options 71 426 497
Balance at September 30, 1994 39,852 320,310 186,611 546,773
Cumulative effect of change in
accounting method for available-
for-sale securities, net of tax 1,551 1,551
Net income 78,343 78,343
Dividends (35,476) (35,476)
Proceeds from exercise of
common stock options 91 610 701
Treasury stock (22,412) (22,412)
Valuation adjustment for
available-for-sale securities 6,449 6,449
Balance at September 30, 1995 39,943 320,920 229,478 8,000 (22,412) 575,929
Eleven-for-ten stock split
distributed March 1, 1996 3,997 83,937 (87,934)
Net income 79,895 79,895
Dividends (37,813) (37,813)
Proceeds from exercise of
common stock options 72 706 778
Treasury stock (46,087) (46,087)
Valuation adjustment for
available-for-sale securities 5,000 5,000
Balance at September 30, 1996 $44,012 $405,563 $183,626 $13,000 $(68,499) $577,702
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, 1996 1995 1994
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $79,895 $78,343 $92,787
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of fees, discounts and premiums, net (19,481) (17,936) (26,977)
SAIF special assessment 15,026 -- --
Amortization of costs in excess of net assets acquired 3,545 3,536 3,515
Depreciation 1,912 1,814 1,638
Gain on investment securities and real estate held for sale (1,502) (4,876) (3,659)
Increase in accrued interest receivable (3,187) (4,884) (3,601)
Increase in income taxes payable 2,325 1,767 5,444
FHLB stock dividends (3,896) (3,455) (6,508)
Decrease (increase) in other assets (1,669) 36 213
Increase (decrease) in accrued expenses and other liabilities 4,638 (3,378) 730
Net cash provided by operating activities 77,606 50,967 63,582
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and contracts originated
Loans on existing property (972,601) (758,455) (540,561)
Construction loans (428,317) (341,001) (370,845)
Land loans (92,496) (97,990) (74,508)
Loans refinanced (62,854) (27,468) (76,518)
(1,556,268) (1,224,914) (1,062,432)
Savings account loans originated (7,065) (4,754) (6,859)
Loan principal repayments 863,577 608,449 825,446
Increase in undisbursed loans in process 24,628 47,040 14,845
Loans purchased (888) (5,132) (354)
Purchase of available-for-sale securities (241,230) (135,651) --
Principal payments and maturities of available-for-sale securities 129,888 51,089 --
Sales of available-for-sale securities 165,719 65,984 --
Purchases of held-to-maturity securities -- (213,720) (722,268)
Principal payments and maturities of held-to maturity securities 129,768 89,880 308,238
Sales of held-to-maturity securities -- -- 19,370
Proceeds from sale of real estate held for sale 2,580 1,241 5,971
Premises and equipment purchased, net (3,867) (2,927) (2,939)
FHLB stock (purchased) sold (15,500) 35,000 --
Cash received (paid) for acquisitions -- (4,016) 62,024
Net cash used by investing activities (508,658) (692,431) (558,958)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts 34,885 140,963 3,011
Net increase in short-term borrowings 845,462 399,383 578,704
Proceeds from long-term borrowings -- 150,000 --
Repayments of long-term borrowings (370,000) -- (40,000)
Proceeds from exercise of common stock options 778 701 497
Dividends (37,813) (35,476) (32,694)
Treasury stock purchased (46,087) (22,412) --
Increase (decrease) in advance payments
by borrowers for taxes and insurance 294 1,001 (228)
Net cash provided by financing activities 427,519 634,160 509,290
INCREASE (DECREASE) IN CASH (3,533) (7,304) 13,914
CASH AT BEGINNING OF YEAR 23,168 30,472 16,558
CASH AT END OF YEAR $19,635 $23,168 $30,472
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NON-CASH INVESTING ACTIVITIES
Real estate acquired through foreclosure $3,884 $8,894 $2,462
Transfer from held-to-maturity securities to available-for-sale securities 215,489 324,904 --
CASH PAID DURING THE YEAR FOR
Interest $228,756 $185,686 $120,114
Income taxes 43,794 43,315 44,156
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1996, 1995 and 1994
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Washington Federal, Inc., (the "Company") and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated. On February 3, 1995, the Company's predecessor, Washington Federal
Savings (the "Association") reorganized into a holding company structure and the
Association became a wholly-owned subsidiary of the Company.
<PAGE> 9
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Effective October 1, 1994, the
Company adopted, as required, Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". This statement requires debt and equity securities to be segregated
into the following three categories: trading, held-to-maturity and
available-for-sale.
Trading Securities - Trading securities are purchased and held principally for
the purpose of reselling them within a short period of time. Their unrealized
gains and losses are included in earnings. It is the Company's current policy
not to purchase securities for the purpose of trading.
Held-To-Maturity Securities - Securities classified as held-to-maturity are
accounted for at amortized cost, but the Company must have both the positive
intent and the ability to hold those securities to maturity. There are very
limited circumstances under which securities in the held-to-maturity category
can be sold without jeopardizing the cost basis of accounting for the remainder
of the securities in this category. Recognition is provided for unrealized
losses in the debt portfolio if any market valuation differences are deemed to
be other than temporary.
Available-For-Sale Securities - Securities not classified as either trading or
held-to-maturity are considered to be available-for-sale. Gains and losses
realized on the sale of these securities are based on the specific
identification method. Unrealized gains and losses for available-for-sale
securities are excluded from earnings and reported as a net amount in a separate
component of stockholders' equity until realized.
Forward contracts to purchase mortgage-backed securities are designated as
available-for-sale. Emerging Issues Task Force ("EITF") discussion 96-11 dated
May 23, 1996 requires that changes in the fair value of forward contracts
designated as available-for-sale be recognized as part of the SFAS No. 115
component of stockholders' equity as they occur unless a decline in the fair
value of the underlying securities is other than temporary. Securities purchased
under forward contracts designated as available-for-sale would be recorded at
their fair values at the settlement date. The Company has adopted the provisions
of EITF 96-11 on a prospective basis for all forward contracts entered into
after May 23, 1996.
LOANS RECEIVABLE. Loans more than 90 days past due are placed on nonaccrual
status and an allowance for accrued interest is established. Any interest
ultimately collected is credited to income in the period of recovery.
An allowance for losses on specific loans is provided to record loans receivable
at their estimated fair value when losses are probable and estimable. Such
provisions are based on management's estimate of fair value of the collateral
considering current and anticipated future market conditions. General loan loss
allowances are established to provide for inherent risks in the portfolio. The
allowances are provided based on management's continuing evaluation of the
pertinent factors underlying the quality of the loan portfolio, including
changes in the size and composition of the loan portfolio, actual loan loss
experience and current and anticipated economic conditions. The recovery of the
carrying value of loans is susceptible to future market conditions beyond the
Association's control which may result in losses or recoveries differing from
those provided.
In May, 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114). SFAS No. 114 requires that loans that will
not be repaid in accordance with their contractual terms be measured using a
discounted cash flow methodology or the fair value of the collateral for certain
loans. Smaller balance loans are excluded from the scope of the statement with
limited exceptions. The Company adopted SFAS No. 114, effective October 1, 1995
which did not have a material effect on the Association's financial condition or
results of operations.
PREMISES AND EQUIPMENT. Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
respective assets.
Expenditures are capitalized for betterments and major renewals, and charges for
ordinary maintenance and repairs are expensed to operations as incurred.
REAL ESTATE HELD FOR SALE. Properties acquired in settlement of loans, purchased
in acquisitions or acquired for development are recorded at the lower of cost or
fair value.
Real estate properties which have been purchased in acquisitions (see Note B)
have yield maintenance reserves which are amortized to income over the estimated
holding period utilizing the interest method.
COSTS IN EXCESS OF NET ASSETS ACQUIRED. Costs in excess of fair value of net
assets acquired in business combinations are amortized to expense over a period
not to exceed 15 years using the straight-line method. Under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the
$25,479,000 of goodwill and $1,978,000 of core deposit intangible are reductions
from stockholders' equity in computing the Association's tangible capital. With
each quarterly
<PAGE> 10
Statement of Financial Condition, the Company reviews the status of costs in
excess of net assets acquired on a discounted cash flow basis to determine that
no impairment of this asset has occurred.
DEFERRED FEES AND DISCOUNTS ON LOANS. Loan discounts and loan fees are deferred
and are recognized over the life of the loans using the interest method based on
actual loan payments.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATIONS. Certain reclassifications have been made to the financial
statements for years prior to September 30, 1996 to conform to the
classifications used in 1996.
NOTE B ACQUISITIONS
On July 12, 1996, Washington Federal, Inc. signed an agreement to merge with
Metropolitan Bancorp, of Seattle, Washington. At September 30, 1996 Metropolitan
had 10 offices, all located in the Seattle area, $752 million of assets, $396
million of deposits and $51 million of stockholders' equity. Under the terms of
the agreement each Metropolitan share of common stock will be converted into
approximately .74 shares of the Company's common stock. The total value of the
transaction is approximately $58 million. The merger was completed during the
first quarter of fiscal 1997 and was accounted for by the purchase method.
Approximately $40 million of costs in excess of net assets acquired will be
amortized utilizing the straight-line method over 15 years. Because the merger
occurred after September 30, 1996, the financial statements presented herein for
the Company do not include the financial information of Metropolitan Bancorp.
On July 1, 1995, the Association completed the purchase of assets and assumption
of liabilities of West Coast Mutual Savings Bank ("West Coast"), Centralia,
Washington. The transaction included the sole branch office and $27 million of
deposits of West Coast. The acquisition was accounted for by the purchase
method.
On May 14, 1994, the Association completed the acquisition of deposits in two
branch offices, formerly of Great American Federal Savings Association, from the
Resolution Trust Corporation. The two offices, located in Tucson, Arizona, had
deposits of $62 million.
From the Association's various acquisitions, additional discounts of $26,614,000
were recorded to yield a market rate of interest on loans, and additional yield
maintenance reserves of $15,041,000 were recorded to yield a market rate of
return on real estate held for sale. Both the loan purchase discounts and the
real estate yield maintenance reserves are amortized utilizing the interest
method over the estimated lives of the assets. During the periods ended
September 30, 1996, 1995, and 1994 the combined amortization of loan purchase
discounts and yield maintenance reserves on real estate was $2,170,000,
$2,744,000 and $3,134,000, respectively.
<TABLE>
<CAPTION>
NOTE C INVESTMENT SECURITIES
September 30, 1996
(In thousands)
Amortized Gross Unrealized Fair
Cost Gain Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. government and agency securities due
Less than 1 year $68,717 $130 $(18) $68,829
1 to 5 years 177,705 2,035 (867) 178,873
5 to 10 years 15,215 332 15,547
Over 10 years 9,278 3,011 12,289
270,915 5,508 (885) 275,538
HELD-TO-MATURITY SECURITIES
Tax-exempt municipal bonds due
Less than 1 year -- -- --
1 to 5 years 2,000 145 2,145
5 to 10 years 7,652 756 8,408
Over 10 years 13,816 600 (2) 14,414
</TABLE>
<PAGE> 11
<TABLE>
<S> <C> <C> <C> <C>
23,468 1,501 (2) 24,967
$294,383 $7,009 $(887) $300,505
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
(In thousands)
Amortized Gross Unrealized Fair
Cost Gain Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. government and agency securities due
Less than 1 year $18,280 $79 $(60) $18,299
1 to 5 years 161,727 3,633 (375) 164,985
5 to 10 years 15,243 654 -- 15,897
Over 10 years 9,278 3,357 -- 12,635
204,528 7,723 (435) 211,816
HELD-TO-MATURITY SECURITIES
Tax-exempt municipal bonds due
Less than 1 year 21,379 761 -- 22,140
1 to 5 years 2,000 195 -- 2,195
5 to 10 years 7,652 273 -- 7,925
Over 10 years 13,814 235 (112) 13,937
44,845 1,464 (112) 46,197
$249,373 $9,187 $(547) $258,013
</TABLE>
Proceeds from sales of investment securities in the available-for-sale portfolio
during 1996 were $29.6 million. The Company realized no gains and $401,000 in
losses on these sales during 1996.
Proceeds from sales of investment securities in the available-for-sale portfolio
during 1995 were $31.8 million. The Company realized $912,000 in gains and
$39,000 in losses on these sales during 1995.
Proceeds from sales of investment securities during 1994 were $.7 million. The
Company realized $34,000 in gains and no losses on these sales during 1994.
Investment securities with a book value of $3.3 million and a fair value of $4.2
million at September 30, 1996 were pledged to secure public deposits.
<TABLE>
<CAPTION>
NOTE D MORTGAGE-BACKED SECURITIES
September 30, 1996
(In thousands)
Amortized Gross Unrealized Fair
Cost Gain Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
FNMA pass-through certificates $29,879 $1,892 $ -- $31,771
FHLMC pass-through certificates 211,902 6,095 (1,979) 216,018
Forward Commitments -- 10,288 -- 10,288
241,781 18,275 (1,979) 258,077
HELD-TO-MATURITY SECURITIES
GNMA pass-through certificates 475 39 (3) 511
FNMA pass-through certificates 19,070 789 (269) 19,590
FHLMC pass-through certificates 587,612 5,632 (10,147) 583,097
Collateralized mortgage obligations 1,371 113 -- 1,484
608,528 6,573 (10,419) 604,682
$850,309 $24,848 $(12,398) $862,759
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
(In thousands)
Amortized Gross Unrealized Fair
Cost Gain Losses Value
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
GNMA pass-through certificates $6,123 $596 $ -- $6,719
FNMA pass-through certificates 34,768 2,732 -- 37,500
FHLMC pass-through certificates 103,460 4,021 (1,891) 105,590
144,351 7,349 (1,891) 149,809
HELD-TO-MATURITY SECURITIES
GNMA pass-through certificates 1,857 246 (2) 2,101
FNMA pass-through certificates 25,250 1,504 (49) 26,705
FHLMC pass-through certificates 892,548 21,665 (7,978) 906,235
Collateralized mortgage obligations 11,390 50 (178) 11,262
931,045 23,465 (8,207) 946,303
$1,075,396 $30,814 $(10,098) $1,096,112
</TABLE>
Proceeds from sales of mortgage-backed securities in the available-for-sale
portfolio during 1996 were $77.5 million. The Company realized $3.4 million in
gains and $1.5 million in losses on these sales during 1996.
Proceeds from sales of mortgage-backed securities in the available-for-sale
portfolio during 1995 were $34.2 million. The Company realized $3.6 million in
gains and no losses on these sales during 1995.
Proceeds from sales of mortgage-backed securities during 1994 were $34.2
million. The Company realized $2.3 million in gains and no losses on these sales
during 1994.
Available-for-sale mortgage-backed securities with a book value of $119.6
million and a fair value of $123.9 million at September 30, 1996 were pledged to
secure public deposits, securities sold under agreements to repurchase and other
borrowings.
Substantially all mortgage-backed securities have contractual due dates which
exceed ten years. Mortgage-backed securities categorized as held-to-maturity
with a fair market value of approximately $504,410,000 were pledged as
collateral on September 30, 1996 for securities sold under agreements to
repurchase (see Note L), or secured repurchase agreements with customers (see
Note J).
The Company enters into forward contracts to purchase mortgage-backed securities
as part of its interest rate risk management program. At September 30, 1996 and
1995, the Company had commitments outstanding to purchase mortgage-backed
securities in the amount of $260,000,000 and $200,000,000, respectively. The
related mortgage-backed securities will be designated as available-for-sale
securities upon exercise of the commitments.
In November of 1995, the Financial Accounting Standards Board ("FASB") issued
additional implementation guidance regarding the FASB's previously issued FAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The
additional guidance provided an opportunity to reassess the appropriateness of
the classification of securities, and reclassify securities in accordance with
the provisions of FAS No. 115. Any reclassification under these guidelines was
required to be made by December 31, 1995, and accordingly, the Company
reclassified $215,489,000 of mortgage-backed securities from held-to-maturity to
the available-for-sale classification prior to that date.
<TABLE>
<CAPTION>
NOTE E LOANS RECEIVABLE
September 30, 1996 1995
(In thousands)
<S> <C> <C>
Conventional real estate
Permanent single-family residential $3,158,644 $2,558,093
Income property 119,437 114,489
Land 172,146 167,028
Construction 548,302 443,723
Other 5,064 4,807
4,003,593 3,288,140
Less
Allowance for possible losses 15,182 11,651
Discount on loans 7,796 10,389
Loans in process 227,393 202,766
Deferred loan origination fees 30,206 29,307
280,577 254,113
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C>
$3,723,016 $3,034,027
</TABLE>
The Association originates both adjustable and fixed interest rate loans. At
September 30, 1996, these loans consisted of the following:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
(In thousands) (In thousands)
Term to Maturity Book Value Term to Rate Adjustment Book Value
<S> <C> <C> <C>
Less than 1 year $99,694 Less than 1 year $579,977
1 to 3 years 39,301 1 to 3 years 17,114
3 to 5 years 47,159 3 to 5 years --
5 to 10 years 157,307 5 to 10 years --
10 to 20 years 525,968 10 to 20 years --
Over 20 years 2,537,073 Over 20 years --
$3,406,502 $597,091
</TABLE>
At September 30, 1996 and 1995, approximately $69,051,000 and $81,910,000 of
fixed rate loan origination commitments were outstanding. Loans serviced for
others at September 30, 1996, 1995 and 1994 were approximately $112,638,000,
$146,360,000, and $190,034,000, respectively.
Permanent loans represented approximately 82% of all loans outstanding.
Approximately 98% of the permanent loans are fixed rate with an average maturity
of approximately 24 years.
Permanent single family residential loans receivable included adjustable rate
loans of $66,987,000 and $94,315,000 at September 30, 1996 and 1995,
respectively. These loans have interest rate adjustment limitations and are
generally indexed to the 1-year Treasury Bill rate or the monthly weighted
average cost of funds for Eleventh District savings institutions as published by
the FHLB.
Loans by geographic concentration were as follows:
<TABLE>
<CAPTION>
Other
September 30, 1996 Washington Idaho Oregon Utah Arizona States Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Conventional real estate
Permanent single-family
residential $1,730,370 $397,332 $506,761 $468,294 $45,770 $10,117 $3,158,644
Income property 30,782 32,894 22,515 20,794 2,478 9,974 119,437
Land 104,958 13,829 15,062 15,391 21,144 1,762 172,146
Construction 270,374 60,660 105,781 80,266 27,942 3,279 548,302
Other 20 761 83 187 103 3,910 5,064
$2,136,504 $505,476 $650,202 $584,932 $97,437 $29,042 $4,003,593
</TABLE>
At September 30, 1996, the Company's recorded investment in impaired loans was
$7.2 million which had allocated reserves of $995,000. Loans of $5.2 million did
not require reserves. The average balance of impaired loans during the year was
$6.0 million and interest income (cash received) from impaired loans was
$93,000.
<TABLE>
<CAPTION>
NOTE F ALLOWANCE FOR LOSSES ON LOANS
Year ended September 30, 1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $11,651 $11,720 $14,674
Allowance for losses on loans acquired -- 281 --
Provision for loan losses 3,828 6,245 401
Charge-offs (820) (7,330) (3,777)
Recoveries 523 735 422
Balance at end of year $15,182 $11,651 $11,720
</TABLE>
<TABLE>
<CAPTION>
NOTE G INTEREST RECEIVABLE
September 30,
1996 1995
<S> <C> <C>
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
Investment securities $4,934 $4,113
Loans receivable 25,687 21,106
Allowance for uncollected interest on loans receivable (1,797) (1,470)
Mortgage-backed securities 5,804 7,692
$34,628 $31,441
</TABLE>
<TABLE>
<CAPTION>
NOTE H PREMISES AND EQUIPMENT
September 30, 1996 1995
(In thousands)
Estimated
Useful Life
<S> <C> <C> <C>
Land -- $8,979 $8,390
Buildings 25 - 40 40,671 38,222
Leasehold improvements 7 - 15 3,927 3,996
Furniture, fixtures and equipment 4 - 10 11,204 11,148
64,781 61,756
Less accumulated depreciation and amortization (22,896) (21,826)
$41,885 $39,930
</TABLE>
<TABLE>
<CAPTION>
NOTE I REAL ESTATE HELD FOR SALE
September 30, 1996 1995
(In thousands)
<S> <C> <C>
Acquired for development $13,074 $12,394
Acquired in settlement of loans 4,624 3,567
Acquired from purchased institutions in settlement of loans 15,793 16,168
$33,491 $32,129
</TABLE>
<TABLE>
<CAPTION>
NOTE J CUSTOMER ACCOUNTS
September 30, 1996 1995
(In thousands)
<S> <C> <C>
Checking accounts, 0.00% to 3.00% $75,781 $70,011
Passbook and statement accounts, 3.50% 175,307 187,812
Insured money market accounts, 2.90% to 4.04% 342,013 271,582
Certificate accounts
0.00% to 3.99% 808 1,998
4.00% to 4.99% 140,825 153,847
5.00% to 5.99% 1,579,802 697,324
6.00% to 6.99% 108,226 972,116
7.00% and over 1,123 16,409
Total certificates 1,830,784 1,841,694
Repurchase agreements with customers 56,335 74,236
$2,480,220 $2,445,335
</TABLE>
At September 30, 1996 and 1995 certificate maturities were as follows:
<TABLE>
<CAPTION>
September 30, 1996 1995
(In thousands)
<S> <C> <C>
Less than 1 year $1,603,957 $1,622,986
1 to 2 years 172,577 144,289
2 to 3 years 27,575 49,383
Over 3 years 26,675 25,036
$1,830,784 $1,841,694
</TABLE>
<PAGE> 15
Interest expense on customer accounts consisted of the following:
<TABLE>
<CAPTION>
Year ended September 30, 1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Checking accounts $1,734 $1,735 $1,849
Passbook and statement accounts 6,267 7,036 8,160
Insured money market accounts 13,137 10,549 7,902
Certificate accounts 105,634 93,542 69,626
126,772 112,862 87,537
Repurchase agreements with customers 3,481 2,924 2,502
130,253 115,786 90,039
Less early withdrawal penalties (349) (438) (281)
$129,904 $115,348 $89,758
Weighted average interest rate at end of year 4.93% 5.51% 4.22%
Weighted daily average interest rate during the year 5.24% 5.00% 4.02%
</TABLE>
During fiscal 1996, the Deposit Insurance Fund Act of 1996 was enacted calling
for a special assessment to capitalize the Savings Association Insurance Fund
("SAIF"). The special assessment rate is 65.7 basis points of March 31, 1995
SAIF-insured deposits. Accordingly, the Association, which is a SAIF member,
recorded a one-time pre-tax charge of $15,026,000 and an offsetting tax benefit
of $5,485,000 during the fourth quarter of fiscal 1996. The special assessment
will be paid during the first quarter of fiscal 1997. The Association's annual
SAIF premium rates are anticipated to be reduced beginning January 1, 1997 from
the current level of 23 basis points to 6.4 basis points.
NOTE K FHLB ADVANCES
FHLB advances had weighted average interest rates at September 30, 1996 and 1995
of 5.48% and 5.88%, respectively. Maturity dates of advances were as follows:
<TABLE>
<CAPTION>
September 30, 1996 1995
(In thousands)
<S> <C> <C>
FHLB advances due
Less than 1 year $1,112,000 $167,000
1 to 2 years 50,000 310,000
2 to 3 years -- 50,000
$1,162,000 $527,000
</TABLE>
FHLB advances are collateralized as provided for in the Advance, Pledge and
Security Agreements with the FHLB, by all FHLB stock owned by the Association,
deposits with the FHLB and certain mortgages or deeds of trust securing such
properties as provided in the agreements with the FHLB. As a member of the FHLB
of Seattle, the Association currently has a credit line of 35 percent of the
total assets of the Association, subject to collateralization requirements.
<TABLE>
<CAPTION>
NOTE L OTHER BORROWINGS
September 30, 1996 1995
(In thousands)
<S> <C> <C>
Securities sold under agreements to repurchase
Due within 30 days $427,496 $872,087
After 30 but within 90 days 159,053 --
After one year -- 60,000
586,549 932,087
Other borrowings
Credit facility, weighted average rate of 5.72% and 6.20%,
due October 4, 1996 11,000 5,000
Federal funds purchased, weighted average rate of 6.00% and
6.75%, due on demand 200,000 20,000
$797,549 $957,087
</TABLE>
<PAGE> 16
The Company has a $40,000,000 credit facility with another financial institution
which expires February 28, 1997. The credit facility bears interest at the
London Interbank Offering Rate (LIBOR) plus 25 basis points. There was
$11,000,000 outstanding on this credit facility at September 30, 1996.
The Association enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the Consolidated Statements of Financial Condition.
During the two years ended September 30, 1996, all of the Association's
transactions were fixed-coupon reverse repurchase agreements. The dollar amount
of securities underlying the agreements remain in the asset accounts. The
securities pledged are registered in the Association's name and principal and
interest payments are received by the Association; however, the securities are
held by the designated trustee of the broker. Upon maturity of the agreements
the identical securities pledged as collateral will be returned to the
Association.
Financial data pertaining to the weighted average cost and the amount of
securities sold under agreements to repurchase were as follows:
<TABLE>
<CAPTION>
September 30, 1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.47% 5.83% 5.00%
Weighted daily average interest rate during the year 5.76% 5.92% 4.92%
Daily average of securities sold under agreements
to repurchase $831,676 $ 862,623 $241,690
Maximum securities sold under agreements to
repurchase at any month end 971,173 1,009,334 604,604
Interest expense during the year 47,905 51,028 11,883
</TABLE>
NOTE M INCOME TAXES
The Consolidated Statements of Financial Condition at September 30, 1996 and
1995 include deferred taxes of $37,910,000 and $31,577,000 that have been
provided for the temporary differences between the tax basis and the financial
statement carrying amounts of assets and liabilities. The major sources of these
temporary differences and their deferred tax effect at September 30, 1996
follow:
<TABLE>
<CAPTION>
September 30, 1996 1995
(In thousands)
<S> <C> <C>
Deferred tax assets
Real estate valuation reserves $ 3,941 $ 4,064
Discounts 178 261
Total deferred tax assets 4,119 4,325
Deferred tax liabilities
Federal Home Loan Bank stock dividends (10,545) (9,400)
Loan loss reserves (13,993) (11,490)
Valuation adjustment on available-for-sale securities (7,919) (4,746)
Depreciation (3,255) (3,266)
Loan origination costs (4,460) (3,259)
Accrued interest - pre-1985 loans (397) (517)
Deferred costs from farming operations (866) (916)
Prepaid expenses (417) (393)
Other, net (177) (1,915)
Total deferred tax liabilities (42,029) (35,902)
Net deferred tax liability $(37,910) $(31,577)
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
Year ended September 30, 1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Statutory income tax rate 35% 35% 35%
Tax-exempt interest (1) (1) (1)
State income tax 3 3 3
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C>
Other, net (1) (1) (2)
Effective income tax rate 36% 36% 35%
</TABLE>
The Association meets certain definition tests and other conditions prescribed
by the Internal Revenue Code which allows, with limitations, a bad debt
deduction. This deduction can be computed as a percentage-of-taxable-income
before such deduction or based upon actual loss experience. During the three
fiscal years ended September 30, 1996, the Association employed the percentage
of taxable income method.
The Business Job Protection Act ("Act"), enacted during 1996, eliminated the
special reserve rules contained in Section 593 of the Internal Revenue Code,
including the percentage-of-taxable-income method of computing reserve
additions. The Act further authorized the retention of the pre-1988 reserve
accumulations.
There are no post-1987 reserve accumulations, as the total pre-tax loan loss
reserves at September 30, 1996 approximate $54,672,000 which is less then the
pre-1988 reserve accumulations of $83,716,000 before taxes. Therefore, there
will be no post-1987 reserve recapture. Pre-1988 reserves will be recaptured in
full if a savings institution redeems stock or pays dividends in excess of
earnings and profits.
The Company has been examined by the Internal Revenue Service through the year
ended September 30, 1990. There were no material changes made to the
Association's taxable income as originally reported.
NOTE N PROFIT SHARING RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains a Profit Sharing Retirement Plan and Employee Stock
Ownership Plan ("Plan") for the benefit of its employees. Contributions are made
to the Plan semi-annually as approved by the Board of Directors. Such amounts
are not in excess of amounts permitted by the Employee Retirement Income
Security Act.
Employees may contribute up to 7% of their base salaries to the Plan plus an
additional 10% of their base salaries on a tax-deferred basis through the 401(k)
provisions of the Plan. Under provisions of the Plan, employees are eligible to
participate on the date of hire and become vested in the Company's contributions
following seven years of service. Contributions to the Plan amounted to
$1,497,000, $1,351,000, and $1,227,000, for the years ended September 30, 1996,
1995 and 1994, respectively.
Effective October 16, 1995 an Employee Stock Ownership Plan ("ESOP") component
was added to the Plan. The ESOP component allows employees to acquire a direct
ownership interest in Company common stock by transferring a percentage of their
vested accounts to the ESOP feature of the Plan.
NOTE O STOCK OPTION PLANS
The Company has three employee stock option plans which provide a combination of
stock options, stock appreciation rights and stock grants. Stockholders
authorized 4,020,675; 1,268,276 and 2,090,000 unissued shares of common stock to
be reserved pursuant to the 1982 Employee Stock Compensation Program ("1982
Plan"), the 1987 Stock Option and Stock Appreciation Rights Plan ("1987 Plan")
and the 1994 Stock Option and Stock Appreciation Rights Plan ("1994 Plan"),
respectively. The 1987 Plan and 1994 Plan are substantially similar to the 1982
Plan, but incorporate changes in the Internal Revenue Code affecting incentive
stock options and do not provide for the grant of performance share awards.
Options granted prior to June 1985 under the 1982 plan are exercisable at the
rate of 25% each year commencing two years after the date of grant, or in full
four years after the date of grant, and expire after five years. Options granted
after June 1985 under either plan are exercisable at varying percentages
commencing as early as three years after the date of grant, with expiration
dates between six and ten years after the date of grant. The per share option
price is equal to the fair market value of the Company's common stock on the
date of the grant.
<TABLE>
<CAPTION>
Stock Options(1)
Average Price Number
<S> <C> <C>
Outstanding, October 1, 1993 $12.73 867,250
Granted in 1994 21.01 599,330
Exercised in 1994 6.92 (99,180)
Forfeited in 1994 18.62 (66,833)
Outstanding, September 30, 1994 16.75 1,300,567
Granted in 1995 14.99 140,580
Exercised in 1995 8.48 (152,772)
Forfeited in 1995 18.20 (108,672)
</TABLE>
<PAGE> 18
<TABLE>
<S> <C> <C>
Outstanding, September 30, 1995 15.77 1,179,703
Granted in 1996 20.25 335,692
Exercised in 1996 10.37 (120,561)
Forfeited in 1996 17.51 (73,403)
Outstanding September 30, 1996 $17.31 1,321,431
</TABLE>
(1) Average price and number of stock options granted, exercised and forfeited
have been adjusted for 10 percent stock dividends in the second quarter of both
1996 and 1994, which had the effect of a eleven-for-ten stock split.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation". The statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS No.
123 does not rescind or interpret the existing accounting rules for employee
stock-based arrangements. Companies may continue following those rules to
recognize and measure compensation as outlined in Accounting Principles Board
Opinion Number 25 ("APB No. 25"), but they will now be required to disclose the
pro forma amounts of net income and earnings per share that would have been
reported had the company elected to follow the fair value recognition provisions
of SFAS No. 123. Effective October 1, 1996, the Company will adopt the
disclosure requirements of SFAS No. 123, but has determined that it will
continue to measure its employee stock-based compensation arrangements under the
provisions of APB No. 25. The adoption of the disclosure requirements of SFAS
No. 123 will have no material impact on the results of operations or financial
condition of the Company.
NOTE P STOCKHOLDERS' EQUITY
In the second quarter of both fiscal 1996 and 1994, the Company declared
eleven-for-ten stock splits in the form of a 10 percent stock dividend in
addition to the regular quarterly cash dividends on its shares of common stock.
The Association, which periodically pays a cash dividend to the Company, is
subject to legal and regulatory restrictions on its ability to pay dividends. To
maintain minimum regulatory capital under OTS regulations, the Association must
have (i) tangible capital equal to 1.5 percent of adjusted total assets, (ii)
core capital equal to 3 percent of adjusted total assets, and (iii) total
capital equal to 8 percent of risk-weighted assets. At September 30, 1996, the
Association had the following capital ratios:
<TABLE>
<CAPTION>
Actual Required Excess
Amount Percentage Amount Percentage Amount
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital $511,836 10.2% $ 75,531 1.5% $436,305
Core (leverage) capital $511,836 10.2% $151,063 3.0% $360,773
Risk-based capital $508,744 19.2% $211,770 8.0% $296,974
</TABLE>
The FDIC has established categories of institutions with respect to capital.
Depending on the Association's category classification, the FDIC may restrict
certain activities of the Association, including acceptance of brokered deposits
or offering interest rates on deposits that are significantly higher than
prevailing interest rates. In order to be categorized as a well-capitalized
institution, the FDIC requires financial institutions it regulates to maintain a
leverage ratio, defined as Tier 1 capital divided by total regulatory assets of
at least 5.0%; Tier 1 risk-based capital of at least 6.0% of risk-weighted
assets; and total risk-based capital of at least 10.0% of risk-weighted assets.
At September 30, 1996, the Association exceeded the well-capitalized
requirements.
At periodic intervals, the OTS and the FDIC routinely examine the Company's
financial statements as part of their legally prescribed oversight of the
savings and loan industry. Based on their examinations, these regulators can
direct that the Company's financial statements be adjusted in accordance with
their findings. The extent to which forthcoming regulatory examinations may
result in adjustments to the financial statements cannot be determined. The OTS
concluded an examination of the Company in July 1995.
NOTE Q FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate that
value. SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its 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, such amounts have not been
<PAGE> 19
comprehensively revalued for purposes of these financial statements since that
date and, therefore, estimates of fair value subsequent to that date may differ
significantly from the amounts presented below.
<TABLE>
<CAPTION>
September 30, 1996 1995
(In thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets
Cash $19,635 $19,635 $23,168 $23,168
Available-for-sale securities 533,615 533,615 361,625 361,625
Held-to-maturity securities 631,996 629,649 975,890 992,500
Loans receivable 3,723,016 3,673,693 3,034,027 3,072,706
FHLB stock 64,530 64,530 45,134 45,134
Financial liabilities
Customer accounts 2,480,219 2,484,492 2,445,335 2,449,361
FHLB advances 1,162,000 1,159,468 527,000 479,097
Other borrowings 797,549 797,394 957,087 957,011
Off balance sheet information
Forward contracts to purchase
mortgage-backed securities -- -- -- 11,675
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments:
CASH - The carrying amount of these items is a reasonable estimate of their fair
value.
INVESTMENT SECURITIES - The fair value is based on quoted market prices or
dealer estimates.
LOANS RECEIVABLE - For certain homogeneous categories of loans, such as fixed
and variable 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 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.
MORTGAGE-BACKED SECURITIES - Estimated fair value for mortgage-backed securities
issued by quasi-governmental agencies is based on quoted market prices. The fair
value of all other mortgage-backed securities is based on dealer estimates.
FHLB STOCK - The fair value is based upon the redemption 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 Association for debt with similar remaining
maturities.
FORWARD CONTRACTS TO PURCHASE MORTGAGE-BACKED SECURITIES - The fair value is
based on quoted market prices.
NOTE R FINANCIAL INFORMATION - WASHINGTON FEDERAL, INC.
Washington Federal, Inc. was formed February 3, 1995. The following Washington
Federal, Inc. (parent company only) financial information should be read in
conjunction with the other notes to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
September 30, 1996 1995
(In thousands)
<S> <C> <C>
ASSETS
Cash $ 1,401 $ 2,800
Investment in subsidiaries 586,326 578,074
Dividend receivable 9,000 9,000
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C>
Other assets 1,342 --
Total assets $598,069 $589,874
LIABILITIES
Borrowed money $11,000 $5,000
Dividend payable 9,360 8,942
Other liabilities 7 3
Total liabilities 20,367 13,945
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value: 100,000,000 shares authorized -
44,011,776 and 39,943,213 shares issued;
40,695,450 and 38,874,228 shares outstanding 44,012 39,943
Paid-in capital 405,563 320,920
Valuation adjustment for available-for-sale securities, net of tax 13,000 8,000
Treasury stock, at cost - 3,316,326 and 1,068,985 shares (68,499) (22,412)
Retained earnings 183,626 229,478
Total stockholders' equity 577,702 575,929
Total liabilities and stockholders' equity $598,069 $589,874
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED Period of February 3, 1995
SEPTEMBER 30, 1996 (inception) to September 30, 1995
(In thousands)
<S> <C> <C>
INCOME
Dividends from subsidiary $77,000 $47,000
Interest income -- 1
Total income 77,000 47,001
EXPENSE
Borrowings 559 365
Other 3 1
Total expense 562 366
Net income before equity in undistributed
net income of subsidiaries 76,438 46,635
Equity in undistributed net income of subsidiaries 3,252 4,449
Income before income taxes 79,690 51,084
Income tax benefit 205 133
Net Income $79,895 $51,217
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
YEAR ENDED Period of February 3, 1995
SEPTEMBER 30, 1996 (inception) to September 30, 1995
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $79,895 $51,217
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of subsidiaries (3,252) (4,449)
Increase in other assets (1,342) (9,000)
Increase in other liabilities 422 8,945
Net cash provided by operating activities 75,723 46,713
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term borrowings 6,000 5,000
Issuance of common stock through stock option plan 778 340
Treasury stock purchased (46,087) (22,412)
Dividends (37,813) (26,841)
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C>
Net cash used by financing activities (77,122) (43,913)
Increase in cash (1,399) 2,800
Cash at beginning of year 2,800 --
Cash at end of year $1,401 $2,800
</TABLE>
NOTE S SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited interim results of operations by
quarter for the years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended September 30, 1996 Quarter Quarter Quarter Quarter
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $96,840 $100,084 $102,992 $104,295
Interest expense 57,504 56,931 56,939 57,371
Net interest income 39,336 43,153 46,053 46,924
Provisions for loan losses 483 301 1,276 1,768
Other operating income 1,737 1,252 1,828 1,100
Other operating expense 8,780 9,595 9,589 25,141
Income before income taxes 31,810 34,509 37,016 21,115
Income taxes 11,556 12,700 13,546 6,753
Net income $20,254 $21,809 $23,470 $14,362
Net income per share $.47 $.51 $.55 $.35
Return of average assets 1.73% 1.79% 1.87% 1.13%
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended September 30, 1995 Quarter Quarter Quarter Quarter
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $80,218 $83,425 $87,654 $92,469
Interest expense 39,275 44,195 50,214 54,569
Net interest income 40,943 39,230 37,440 37,900
Provisions for loan losses 321 373 612 4,939
Other operating income 1,113 1,055 1,658 5,878
Other operating expense 8,989 9,147 9,104 8,643
Income before income taxes 32,746 30,765 29,382 30,196
Income taxes 12,052 11,193 10,768 10,733
Net income $20,694 $19,572 $18,614 $19,463
Net income per share $.47 $.44 $.43 $.45
Return of average assets 2.10% 1.92% 1.75% 1.74%
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Year ended September 30, 1996 1995 1994 1993 1992
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $404,211 $343,766 $287,577 $275,345 $271,693
Interest expense 228,745 188,253 121,114 116,677 133,537
Net interest income 175,466 155,513 166,463 158,668 138,156
Provision for loan losses 3,828 6,245 401 2,731 179
Other income 5,917 9,704 8,359 12,852 4,963
Other expense 53,105 35,883 32,034 29,656 26,589
Income before income taxes
and extraordinary loss 124,450 123,089 142,387 139,133 116,351
Income taxes 44,555 44,746 49,600 45,843 34,415
Extraordinary loss, net of tax benefit -- -- -- (2,122) --
Net income $79,895 $78,343 $92,787 $91,168 $81,936
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
Per share data
<S> <C> <C> <C> <C> <C>
Net income before extraordinary loss $1.88 $1.79 $2.11 $2.11 $1.86
Extraordinary loss, net of
income tax benefit -- -- -- (.05) --
Net income $1.88 $1.79 $2.11 $2.06 $1.86
Cash dividends $.90 $.82 $.75 $.68 $.62
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 1995 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $5,114,978 $4,577,402 $3,830,053 $3,159,267 $2,791,693
Loans and mortgage-backed securities 4,589,621 4,114,881 3,400,583 2,775,941 2,401,541
Investment securities 299,006 256,661 195,165 168,847 220,903
Customer accounts 2,480,220 2,445,335 2,281,751 2,216,381 1,853,541
FHLB advances 1,162,000 527,000 310,100 336,000 393,500
Other borrowings 797,549 957,087 624,604 60,000 60,000
Stockholders' equity 577,702 575,929 546,773 486,183 424,116
Number of
Customer accounts 160,968 161,295 153,000 148,204 125,030
Mortgage loans 39,570 35,641 32,057 32,552 28,859
Offices 93 87 82 74 63
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Washington Federal, Inc.
Seattle, Washington
We have audited the accompanying consolidated statements of financial
condition of Washington Federal, Inc. and subsidiaries as of September 30, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 30,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note A to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on October 1, 1994.
DELOITTE & TOUCHE LLP
Seattle, Washington
October 25, 1996
GENERAL CORPORATE AND STOCKHOLDERS' INFORMATION
CORPORATE HEADQUARTERS
425 Pike Street
Seattle, Washington 98101
(206) 624-7930
INDEPENDENT ACCOUNTANTS
<PAGE> 23
Deloitte & Touche, LLP
Seattle, Washington
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick LLP
Washington, D.C.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Stockholder inquiries regarding transfer requirements, cash or stock dividends,
lost certificates, consolidating records, correcting a name or changing an
address should be directed to the transfer agent:
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations Department
50 California Street-10th Floor
San Francisco, CA 94111
Telephone: 1-800-356-2017
ANNUAL MEETING
The annual meeting of stockholders will be held on January 23, 1997, at 2 p.m.
at the Seattle Sheraton Hotel, 1400 Sixth Avenue, Seattle, Washington.
FORM 10-K
This report is available to stockholders of
record upon written request to
Cathy Cooper
Assistant Vice President
Washington Federal, Inc.
425 Pike Street
Seattle, Washington 98101
STOCK INFORMATION
Washington Federal, Inc. is traded on the NASD National Market. The common stock
symbol is WFSL. At September 30, 1996, there were approximately 2,934
shareholders of record.
<TABLE>
<CAPTION>
STOCK PRICES
QUARTER ENDED HIGH LOW DIVIDENDS
<S> <C> <C> <C>
DECEMBER 31, 1994 18 5/8 15 20
MARCH 31, 1995 18 3/4 15 5/8 20
JUNE 30, 1995 22 1/8 17 3/4 21
SEPTEMBER 30, 1995 21 7/8 19 1/8 21
DECEMBER 31, 1995 23 3/4 20 1/8 22
MARCH 31, 1996 23 1/2 20 5/8 22
JUNE 30, 1996 22 1/8 20 1/4 23
SEPTEMBER 30, 1996 23 5/8 19 1/4 23
ALL PRICES SHOWN HAVE BEEN
ADJUSTED FOR STOCK SPLITS
</TABLE>
MARKET MAKERS:
Dain, Bosworth Incorporated
Dean Witter Reynolds Inc.
Fox-Pitt, Kelton Incorporated
Herzog, Heine, Geduld, Inc.
Jeffries & Company, Inc.
Keefe, Bruyette & Woods, Inc.
Lehman Brothers, Inc.
Mayer & Schweitzer, Inc.
<PAGE> 24
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Montgomery Securities Inc.
Piper Jaffray Companies, Inc.
Prudential Securities Inc.
Ragen Mackenzie, Incorporated
M.A. Schapiro & Co., Inc.
Sherwood Securities Corp.
Smith Barney Inc.
Weeden and Co., Inc.
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in registration Statements No.
33-89082 and No. 33-97900 on Forms S-8 of Washington Federal, Inc. of our report
dated October 25, 1996, incorporated by reference in this Annual Report on Form
10-K of Washington Federal, Inc. for the year ended September 30, 1996.
DELOITTE & TOUCHE LLP
Seattle, Washington
December 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION ON SEPTEMBER 30, 1996; CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 19,635
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 533,615
<INVESTMENTS-CARRYING> 631,996
<INVESTMENTS-MARKET> 629,649
<LOANS> 3,723,016
<ALLOWANCE> 15,182
<TOTAL-ASSETS> 5,114,978
<DEPOSITS> 2,480,220
<SHORT-TERM> 1,909,549
<LIABILITIES-OTHER> 97,507
<LONG-TERM> 50,000
0
0
<COMMON> 381,076
<OTHER-SE> 196,626
<TOTAL-LIABILITIES-AND-EQUITY> 5,114,978
<INTEREST-LOAN> 305,372
<INTEREST-INVEST> 98,839
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 404,211
<INTEREST-DEPOSIT> 129,904
<INTEREST-EXPENSE> 98,841
<INTEREST-INCOME-NET> 175,466
<LOAN-LOSSES> 3,828
<SECURITIES-GAINS> 1,444
<EXPENSE-OTHER> 53,163
<INCOME-PRETAX> 124,450
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,895
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 3.72
<LOANS-NON> 14,178
<LOANS-PAST> 0
<LOANS-TROUBLED> 24,046
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,651
<CHARGE-OFFS> 820
<RECOVERIES> 523
<ALLOWANCE-CLOSE> 15,182
<ALLOWANCE-DOMESTIC> 12,552
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,630
</TABLE>
