<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, 1998.
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 7, 1998, the aggregate market value of the 49,419,574 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,529,060 shares held by all directors and executive officers of the Registrant
as a group, was $1,250,933,000. This figure is based on the closing sale price
of $25.3125 per share of the Registrant's Common Stock on December 7, 1998, as
reported in The Wall Street Journal on December 8, 1998.
Number of shares of Common Stock outstanding as of December 7, 1998: 50,948,634
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, 1998, are incorporated into Part II, Items 5-8 of this
Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1998 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form
10-K.
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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, including
loans for the construction of such 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 106 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). 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 Insurance Corporation (FDIC), which
insures its deposits up to applicable limits. Such
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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."
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4
AVERAGE STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------
1996 1997
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- ------ ---------- ---------- -------
(Dollars in Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $3,442,290 $ 305,372 8.87% $4,091,571 $ 357,496 8.74%
Mortgage-backed securities 966,658 74,126 7.67 1,003,077 74,667 7.44
Investment securities 336,722 20,817 6.18 305,183 20,140 6.60
FHLB stock 50,795 3,896 7.67 84,888 6,704 7.90
---------- ---------- ------ ---------- ---------- ------
Total interest-earning assets 4,796,465 404,211 8.43 5,484,719 459,007 8.37
Other assets 114,126 161,324
---------- ----------
Total assets $4,910,591 $5,646,043
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Checking accounts $ 72,376 1,734 2.40 $ 83,991 2,006 2.39
Passbook and statement accounts 178,616 6,267 3.51 183,048 6,371 3.48
Insured money market accounts 313,746 13,137 4.19 374,581 15,391 4.11
Certificate accounts (time deposits) 1,847,561 105,285 5.70 2,117,792 115,857 5.47
Repurchase agreements with customers 66,048 3,481 5.27 60,671 3,059 5.04
FHLB advances 862,966 48,183 5.58 1,315,353 73,393 5.58
Securities sold under
agreements to repurchase 816,857 47,905 5.86 569,203 30,944 5.44
Federal funds purchased 50,810 2,753 5.42 187,082 10,426 5.57
---------- ---------- ------ ---------- ---------- ------
Total interest-bearing liabilities 4,208,980 228,745 5.44 4,891,721 257,447 5.26
Other liabilities 123,135 106,513
---------- ----------
Total liabilities 4,332,115 4,998,234
Stockholders' equity 578,476 647,809
---------- ----------
Total liabilities
and stockholders' equity $4,910,591 $5,646,043
========== ---------- ------ ========== ---------- ------
Net interest income/Interest rate spread $ 175,466 2.99% $ 201,560 3.11%
========== ====== ========== ======
Net interest margin (2) 3.66% 3.67%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1998
-------------------------------------
Average Average
Balance Interest Rate
---------- ---------- ------
(Dollars in Thousands)
ASSETS
<S> <C> <C> <C>
Loans (1) $4,166,420 $ 364,801 8.76%
Mortgage-backed securities 907,265 70,099 7.73
Investment securities 279,442 18,238 6.53
FHLB stock 96,405 7,466 7.74
---------- ---------- ------
Total interest-earning assets 5,449,532 460,604 8.45
Other assets 193,397
----------
Total assets $5,642,929
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Checking accounts 91,800 2,153 2.35
Passbook and statement accounts 173,189 6,048 3.49
Insured money market accounts 418,205 16,890 4.04
Certificate accounts (time deposits) 2,274,557 126,757 5.57
Repurchase agreements with customers 79,652 4,252 5.34
FHLB advances 1,210,362 67,816 5.60
Securities sold under
agreements to repurchase 400,202 22,521 5.63
Federal funds purchased 102,407 5,796 5.66
---------- ---------- ------
Total interest-bearing liabilities 4,750,374 252,233 5.31
Other liabilities 139,686
----------
Total liabilities 4,890,060
Stockholders' equity 752,869
----------
Total liabilities
and stockholders' equity $5,642,929
========== ---------- ------
Net interest income/Interest rate spread $ 208,371 3.14%
========== ======
Net interest margin (2) 3.82%
======
</TABLE>
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(1) The average balance of loans includes nonaccruing loans, interest on which
is recognized on a cash basis.
(2) Net interest income divided by average interest-earning assets.
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LENDING ACTIVITIES
GENERAL. The Company's net portfolio of loans and mortgage-backed
securities totaled $5.1 billion at September 30, 1998, representing
approximately 91% 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 $976 million (net of discounts and premiums) at September 30, 1998,
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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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 September 30 for the years indicated.
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans by type of loan Real estate:
Conventional:
Permanent $2,089,769 57.7% $2,635,669 60.1% $3,241,789 66.6%
Land development 132,487 3.7 167,028 3.8 172,146 3.5
Construction(1) 359,812 9.9 443,723 10.1 548,302 11.2
Insured or guaranteed:
FHA 22,279 .6 20,479 .4 18,123 .4
VA 18,511 .5 16,434 .4 18,169 .4
Mortgage-backed
securities(residential)(2) 995,107 27.4 1,095,861 25.0 865,887 17.8
Savings account loans 2,790 .1 2,344 .1 3,576 .1
Consumer 3,796 .1 2,463 .1 1,488 --
---------- ------- ---------- ------- ---------- -------
Total(3) $3,624,551 100.0% $4,384,001 100.0% $4,869,480 100.0%
========== ======= ========== ======= ========== =======
Loans by type of security Residential:
Single-family(4) $2,499,458 69.0% $3,168,844 72.2% $3,879,092 79.7%
Other dwelling units 46,260 1.3 54,407 1.2 74,108 1.5
Income property 77,140 2.1 60,082 1.4 45,329 .9
Mortgage-backed
securities(residential)(2) 995,107 27.4 1,095,861 25.0 865,887 17.8
Savings account loans 2,790 .1 2,344 .1 3,576 .1
Consumer 3,796 .1 2,463 .1 1,488 --
---------- ------- ---------- ------- ---------- -------
Total(3) $3,624,551 100.0% $4,384,001 100.0% $4,869,480 100.0%
========== ======= ========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans by type of loan Real estate:
Conventional:
Permanent $3,719,185 68.9% $3,689,755 68.3%
Land development 158,706 2.9 160,879 3.0
Construction(1) 542,394 10.0 562,689 10.4
Insured or guaranteed:
FHA 26,641 .5 19,330 .3
VA 17,797 .3 15,829 .3
Mortgage-backed
securities(residential)(2) 931,456 17.3 949,892 17.6
Savings account loans 3,954 .1 3,094 .1
Consumer 1,089 -- 673 --
---------- ------- ---------- -------
Total(3) $5,401,222 100.0% $5,402,141 100.0%
========== ======= ========== =======
Loans by type of security Residential:
Single-family(4) $4,222,566 78.2% $4,258,722 78.7%
Other dwelling units 122,038 2.2 105,022 2.0
Income property 120,119 2.2 84,738 1.6
Mortgage-backed
securities(residential)(2) 931,456 17.3 949,892 17.6
Savings account loans 3,954 .1 3,094 .1
Consumer 1,089 -- 673 --
---------- ------- ---------- -------
Total(3) $5,401,222 100.0% $5,402,141 100.0%
========== ======= ========== =======
</TABLE>
(1) Includes construction loans that have been modified to monthly payment
loans, due in full in approximately one year, in the amount of $6.1 million,
$6.1 million, $15.9 million, $17.8 million, and $17.6 million at September 30,
1994, 1995, 1996, 1997, and 1998, respectively.
(2) For additional information, see Note C to the Consolidated Financial
Statements.
(3) 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 amounted to $3.40 billion,
$4.11 billion, $4.60 billion, $5.10 billion, and $5.1 billion, at September 30,
1994, 1995, 1996, 1997, and 1998, respectively.
(4) 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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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, 1998. Amounts are
presented prior to deduction of discounts, premiums, loans in process, deferred
loan origination fees and allowance for loan losses. Adjustable rate loans are
shown in the period in which loan principal payments are contractually due.
<TABLE>
<CAPTION>
Balance Maturity Distribution
Outstanding at ----------------------------------------------
September 30, Less than 1 to 5 After 5
1998 1 year years years
---------- ---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
One- to four-family real estate loans $3,535,154 $ 29,492 $ 57,569 $3,448,093
GNMA, FHLMC, FNMA and other
mortgage-backed securities 949,892 -- 2,933 946,959
Construction and land development
loans 723,568 556,078 19,076 148,414
Income property and other residential 189,760 32,241 46,381 111,138
Savings account loans 3,094 2,949 24 121
Consumer loans 673 337 201 135
---------- ---------- ---------- ----------
$5,402,141 $ 621,097 $ 126,184 $4,654,860
========== ========== ========== ==========
- -------------------
Loans maturing after one year:
Fixed-interest rates $4,164,352
Floating or adjustable interest rates 616,692
----------
Total $4,781,044
==========
</TABLE>
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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 $724
million or 13% of the Association's gross loan portfolio (including
mortgage-backed securities) at September 30, 1998. 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.
Many 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 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 only under terms, conditions,
and documentation which permit sale in the secondary market(see below).
Moreover, since 1973 it has been the Association's general policy to include in
the documentation evidencing its conventional mortgage loans the 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, 1998, $4.5
billion or 83% of the
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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
general loss reserve is established, which considers the greater risk inherent
with these loans, as well as, their relative loan loss experience. The
Association is authorized by its Board to originate $100 million of loans under
this program. As of September 30, 1998, loans under this program amounted to
$60.8 million.
All of the Association's mortgage lending is subject to 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%.
When establishing general reserves for loans with loan-to-value
ratios exceeding 80% that are not insured by private mortgage insurance,
Washington Federal considers the additional risk inherent with these products,
as well as, their relative loan loss experience, and provides reserves we deem
appropriate. This total reserve balance at September 30, 1998, amounted to $5.9
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 ensuring
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,
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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 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, 1998, the Association was servicing
approximately $73.6 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, 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.
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The table below shows total loan origination, purchase, sale, and
repayment activities of the Association on a consolidated basis for the years
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Loans originated(1):
Construction $ 370,845 $ 341,001 $ 428,317 $ 407,135 $ 467,884
Land 74,508 97,990 92,496 77,270 105,901
Loans on existing property 540,561 758,455 972,601 556,063 723,337
Loans refinanced 76,518 27,468 62,854 48,240 157,110
----------- ----------- ----------- ----------- -----------
Total loans originated 1,062,432 1,224,914 1,556,268 1,088,708 1,454,232
----------- ----------- ----------- ----------- -----------
Loans and mortgage-backed securities purchased:
From acquisitions of
associations-- 27,759 -- 627,816 --
Other 620,026 216,843 60,888 11,310 321,006
----------- ----------- ----------- ----------- -----------
620,026 244,602 60,888 639,126 321,006
----------- ----------- ----------- ----------- -----------
Loans and mortgage-backed
securities sold (18,702) (34,156) (134,275) (119,851) (55,560)
----------- ----------- ----------- ----------- -----------
Loan and mortgage-backed
securities principal
repayments (1,057,659) (683,383) (1,016,049) (1,127,923) (1,734,310)
----------- ----------- ----------- ----------- -----------
Net change in loans in
process, discounts, fees, etc 18,545 (37,679) 7,908 68,224 (3,702)
----------- ----------- ----------- ----------- -----------
Net loan activity increase(decrease)
$ 624,642 $ 714,298 $ 474,740 $ 548,284 $ (18,334)
=========== =========== =========== =========== ===========
</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 general interest
rates , 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
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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 nonaccrual 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 nonaccrual
status, previously accrued but unpaid interest is deducted from interest income.
The Association does not accrue interest on loans 90 days past due 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.
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13
The following table sets forth information regarding restructured
and nonaccrual loans, and REO held by the Association at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Restructured loans (1) $11,254 $10,103 $24,046 $ 8,613 $ 4,005
Nonaccrual loans:
Single-family residential 4,215 2,879 5,913 9,571 8,751
Construction and land 5,484 9,515 7,779 4,629 9,932
Commercial real estate 1,223 76 482 586 255
Consumer 105 -- 4 3 3
------- ------- ------- ------- -------
Total nonaccrual loans (2) 11,027 12,470 14,178 14,789 18,941
Total REO (3) 2,316 19,735 20,417 19,339 6,805
------- ------- ------- ------- -------
Total nonperforming assets $24,597 $42,308 $58,641 $42,741 $29,751
======= ======= ======= ======= =======
Total nonperforming assets as
a percent of total assets .64% .92% 1.15% .75% .53%
======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Performing in accordance with restructured terms.
(2) The Association recognized interest income on nonaccrual loans of
approximately $467,000 in 1998. Had these loans performed according to their
original contract terms, the Association would have recognized interest income
of approximately $854,000 in 1998.
In addition to the nonaccrual loans reflected in the above table,
at September 30, 1998, the Association had $6.7 million of loans which were less
than 90 days 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 nonperforming assets as a percent of total assets would have been .65%
at September 30, 1998. For a 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.
<PAGE> 14
14
The following table analyzes the Company's allowance for loan
losses at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $14,674 $11,720 $11,651 $15,182 $24,623
Charge-offs:
Real estate:
Permanent 8 450 146 131 546
Construction 977 164 179 592 344
Land 184 163 90 413 1,215
Income property 2,604 6,536 405 4,796 199
Other 4 17 -- -- --
------- ------- ------- ------- -------
3,777 7,330 820 5,932 2,304
------- ------- ------- ------- -------
Recoveries:
Real estate:
Permanent 127 10 10 14 53
Construction 50 50 -- 8 15
Land 26 21 -- -- 10
Income property 219 654 513 3,340 717
Other -- -- -- -- --
------- ------- ------- ------- -------
422 735 523 3,362 795
------- ------- ------- ------- -------
Net charge-offs 3,355 6,595 297 2,570 1,509
Acquisitions -- 281 -- 11,198 --
Provisions for loan losses 401 6,245 3,828 813 740
------- ------- ------- ------- -------
Ending balance $11,720 $11,651 $15,182 $24,623 $23,854
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding .15% .25% .01% .06% .04%
======= ======= ======= ======= =======
</TABLE>
- ----------
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Permanent single-family $ 1,537 $ 3,031 $ 5,239 $ 5,755 $ 5,515
Construction 120 5 2,945 3,053 3,059
Land 255 405 2,525 1,763 1,912
Income property 2,750 950 1,843 7,081 6,257
Other 2 -- -- -- --
Unallocated 7,056 7,260 2,630 6,971 7,111
------- ------- ------- ------- -------
$11,720 $11,651 $15,182 $24,623 $23,854
======= ======= ======= ======= =======
</TABLE>
As part of the process for 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 their 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
$11.2 million of the allowance for loan loss at year-end 1998, compared with an
allocation of $11.9 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.
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 at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations $270,915 $275,538 $258,279 $266,279 $198,540 $210,540
State and political subdivisions 23,468 24,967 23,471 25,403 23,473 25,439
-------- -------- -------- -------- -------- --------
$294,383 $300,505 $281,750 $291,682 $222,013 $235,979
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
<PAGE> 16
16
The investment portfolio at September 30, 1998 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 $ 116,175 7.44%
Due after one year through five years 67,579 6.94
Due after five years through ten years 15,158 6.98
Due after ten years 23,101 7.93
-----------
$ 222,013
===========
</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 1996, 1997, and 1998 amounted to approximately $349,000, $375,000, and
$464,000, respectively.
The Association offers a single performance checking account.
This account pays interest on balances over $1,000 and charges 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, 1998,
management believed that less than 3% 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,
----------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
Amount Rate Amount Rate Amount Rate
---------- ------ ---------- ------ ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Checking accounts $ 75,781 3.00% $ 88,811 3.00% $ 93,942 2.60%
Regular savings (passbook)
accounts 175,307 3.50 177,843 3.50 168,921 3.50
Money market deposit accounts 342,013 4.04 399,056 4.04 443,395 4.14
---------- ---------- ----------
593,101 665,710 706,258
---------- ---------- ----------
Fixed-rate certificates:
3.00% - 4.99% 137,463 13,946 20,875
5.00% - 6.99% 1,642,332 2,063,144 2,173,728
7.00% - 8.99% 1,075 1,544 1,428
9.00% and above 49 7 7
Jumbo certificates ($100,000 or more):
3.00% - 4.99% 4,169 3,293 5,793
5.00% - 6.99% 45,696 150,958 160,490
7.00% - 8.99% -- 6,769 2,596
---------- ---------- ----------
1,830,784 2,239,661 2,364,917
---------- ---------- ----------
$2,423,885 $2,905,371 $3,071,175
========== ========== ==========
</TABLE>
The following table sets forth, by various interest rate
categories, the amounts of certificates of deposit of the Association at
September 30, 1998, which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1998, 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% $ -- $ -- $ 53 $ 67 $ 114 $ -- $ --
4.00 to 4.99% 24,467 1,849 115 3 -- -- --
5.00 to 5.99% 389,042 751,805 728,134 137,206 24,097 98,281 128
6.00 to 6.99% 2,612 143,764 48,796 9,652 198 502 --
7.00 to 7.99% 1,597 214 928 1,179 78 5 --
8.00 to 8.99% -- -- 18 -- 6 -- --
9.00% and above -- -- -- 1 6 -- --
-------- -------- -------- -------- -------- -------- --------
Total $417,718 $897,632 $778,044 $148,108 $ 24,499 $ 98,788 $ 128
======== ======== ======== ======== ======== ======== ========
</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, 1998, the Association had $168.9 million of
certificates of deposit in amounts of $100,000 or more outstanding, maturing as
follows: $65.7 million within 3 months; $52.1 million over 3 months through 6
months; $47.2 million over 6 months through 12 months; and $3.9 million
thereafter.
<PAGE> 18
18
The following table sets forth the customer account activities of
the Association for the years indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1996 1997 1998
----------- ----------- -----------
(Dollars In
Thousands)
<S> <C> <C> <C>
Assumed from acquisitions $ -- $ 379,975 $ --
Deposits 2,363,515 3,045,581 3,233,094
Withdrawals 2,458,534 3,070,429 3,211,022
----------- ----------- -----------
Net increase (decrease) in deposits
before interest credited (95,019) 355,127 22,072
Interest credited 129,904 142,684 156,099
----------- ----------- -----------
Net increase in customer accounts $ 34,885 $ 497,811 $ 178,171
=========== =========== ===========
</TABLE>
- ----------
BORROWINGS. The Association obtains advances from the FHLB upon
the security of the FHLB capital stock 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 $221.8 million of
securities sold under such agreements at September 30, 1998.
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 $85.0 million of such agreements outstanding at September 30, 1998.
<PAGE> 19
19
The following table presents certain information regarding
borrowings of Washington Federal at the dates and for the years indicated.
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
------------------------------------------------
1996 1997 1998
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal funds and securities sold
to dealers under agreements to repurchase:
Average balance outstanding $ 867,667 $ 756,290 $ 502,609
Maximum amount outstanding
at any month-end during the period $ 936,224 $1,088,904 $ 694,990
Weighted-average interest rate
during the period(1) 5.84% 5.47% 5.63%
FHLB advances:
Average balance outstanding $ 862,966 $1,315,353 $1,210,362
Maximum amount outstanding at any
month-end during the period $1,162,000 $1,703,000 $1,523,500
Weighted-average interest rate
during the period(1) 5.58% 5.58% 5.60%
Securities sold to customers
under agreements to repurchase:
Average balance outstanding $ 66,048 $ 60,671 $ 79,652
Maximum amount outstanding at any
month-end during the period $ 79,406 $ 72,660 $ 85,027
Weighted-average interest rate
during the period(1) 5.27% 5.04% 5.34%
Total average borrowings $1,796,681 $2,132,314 $1,792,623
Weighted-average interest rate
on total average borrowings(1) 5.70% 5.53% 5.60%
</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,
---------------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Return on assets(1)(4) 1.82% 1.86% 2.00%
Return on equity(2)(4) 15.37 16.50 15.68
Average equity to average assets 11.78 11.47 13.34
Dividend payout ratio(3) 42.65 40.72 42.45
</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 years
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,
-------------------------------------------------------------------------------------------
1996 vs. 1995 1997 vs. 1996
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- -------------------------------------------
Volume Rate Rate/Vol Total Volume Rate Rate/Vol Total
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio $ 72,833 $ (4,217) $ (1,330) $ 67,286 $ 57,591 $ (445) $ (5,022) $ 52,124
Mortgaged-backed securities (10,842) 999 (156) (9,999) 2,793 (2,223) (29) 541
Investments(1) 6,242 (2,374) (710) 3,158 163 1,937 31 2,131
-------- -------- -------- -------- -------- -------- -------- --------
All interest-earning assets 68,233 (5,592) (2,196) 60,445 60,547 (731) (5,020) 54,796
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Customer accounts 8,855 5,294 407 14,556 17,907 (4,461) (666) 12,780
FHLB advances and other 29,908 (2,822) (1,150) 25,936 19,471 (2,942) (607) 15,922
-------- -------- -------- -------- -------- -------- -------- --------
borrowings
All interest-bearing liabilities 38,763 2,472 (743) 40,492 37,378 (7,403) (1,273) 28,702
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest income $ 29,470 $ (8,064) $ (1,453) $ 19,953 $ 23,169 $ 6,672 $ (3,747) $ 26,094
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1998 vs. 1997
Increase (Decrease) Due to
--------------------------------------------
Volume Rate Rate/Vol Total
-------- -------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loan portfolio $ 6,541 $ 818 $ (54) $ 7,305
Mortgaged-backed securities (7,128) 2,909 (349) (4,568)
Investments(1) (979) (156) (5) (1,140)
-------- -------- -------- --------
All interest-earning assets (1,566) 3,571 (408) 1,597
-------- -------- -------- --------
Interest expense:
Customer accounts 10,996 2,256 164 13,416
FHLB advances and other (19,870) 1,450 (210) (18,630)
-------- -------- -------- --------
borrowings
All interest-bearing liabilities (8,874) 3,706 (46) (5,214)
-------- -------- -------- --------
Change in net interest income $ 7,308 (135) $ (362) $ 6,811
======== ======== ======== ========
</TABLE>
- ----------
(1) Includes interest on overnight investments and dividends on stock of the
FHLB of Seattle.
<PAGE> 22
22
INTEREST RATE RISK
The Company accepts a high level of interest rate volatility 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. The strong capital position and low
operating costs have allowed the Company to manage interest rate risk, within
guidelines established by the Board of Directors of the Company, through all
interest rate cycles. A significant increase in market interest rates could
adversely affect net interest income of the Company. The Company's interest rate
risk approach has never resulted in the recording of a monthly operating loss.
One approach used to quantify interest rate risk is the net
portfolio value (NPV) analysis. This analysis calculates the difference between
the present value of interest-bearing liabilities and the present value of
expected cash flows from interest-earning assets and off-balance sheet
contracts. The following table sets forth, at September 30, 1998, an analysis of
the Company's interest rate risk as measured by the estimated changes in NPV
resulting from instantaneous and sustained parallel shifts in the yield curve (+
or - 400 basis points, measured in 100 basis point increments.)
<TABLE>
<CAPTION>
Estimated
Change in Estimated Increase (Decrease)
Interest Rates NPV Amount in NPV Amount Percent
- --------------------------------------------------------------------------------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C>
+400 $ 299,680 $ (738,479) -71%
+300 513,503 (524,656) -51%
+200 717,308 (320,851) -31%
+100 905,244 (132,915) -13%
% 0 1,038,159 -- 0%
-100 1,017,860 (20,299) -2%
-200 979,498 (58,661) -6%
-300 977,806 (60,353) -6%
-400 978,257 (59,902) -6%
</TABLE>
Certain assumptions were used in preparing the above table. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates, and the
market values of certain assets under the various interest rate scenarios. Even
if interest rates change in the designated amounts, there can be no assurance
that the Company's assets and liabilities would perform as set forth above.
<PAGE> 23
23
SUBSIDIARIES
The Company is a unitary savings and loan holding company which 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 inner-city or community development
purposes. In addition, federally-chartered savings institutions which are in
compliance with regulatory capital requirements and other conditions also may
make loans to service corporations in an aggregate amount of up to 50% of the
institution's capital as defined in federal regulations.
At September 30, 1998, the Association was authorized under the current
regulations to have a maximum investment of $111.6 million in its service
corporations, exclusive of the additional 1% of assets investments permitted for
inner-city or community development purposes but inclusive of the ability to
make loans to its subsidiaries. On that date, the Association's investment in,
and unsecured loans to, its five wholly-owned service corporations amounted to
$12.9 million.
At September 30, 1998, Washington Services, Inc. (WSI), a wholly-owned
subsidiary of the Association, was developing a 301-acre light industrial center
in the technology corridor of South Snohomish County, Washington, of which 83
buildable acres, with an investment of $6.7 million, remained unsold as of
September 30, 1998. 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 to customers of the Association.
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.
Statewide Mortgage Services, Inc., a wholly-owned subsidiary of the
Association, is incorporated under the laws of Washington for the purpose of
operating a commercial office building located in that state.
<PAGE> 24
24
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, 1998, the Company had approximately 677 employees,
including the full-time equivalent of 48 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,
1998.
<TABLE>
<CAPTION>
Names and Positions
or Offices Age Business Experience during the Last Five Years
- ------------------------------ ---------- ----------------------------------------------
<S> <C> <C>
Guy C. Pinkerton 64 Chairman since November 1994; Chief Executive
Director, President, and Chief Officer since October 1992; Director since
Executive Officer October 1991; President since July 1988
Charles R. Richmond 59 Executive Vice President and Secretary; Director
Director, Executive Vice since February 1995
President, and Secretary
Ronald L. Saper 48 Executive Vice President and Chief Financial
Executive Vice President and Officer
Chief Financial Officer
William A. Cassels 57 Executive Vice President
Executive Vice President
Lawrence D. Cierpiszewski 55 Executive Vice President since October 1996;
Executive Vice President previously served as Senior Vice President
Roy M. Whitehead 46 Executive Vice President since September 1998;
Executive Vice President previously served as Regional Vice President,
Wells Fargo Bank, N.A. from June 1997 until
September 1998 and President of Wells Fargo
Bank (Colorado) N.A. and First Interstate Bank
of Colorado from December 1993 until June 1998
Keith D. Taylor 42 Senior Vice President and Treasurer
Senior Vice President and
Treasurer
</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 a 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. No multiple savings and loan holding company,
or subsidiary thereof, which is not a savings institution shall commence or
continue a business activity for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, upon prior
notice to, and with 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) performing
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 of the
Director of the OTS, no director or officer of a savings and loan holding
company, or
<PAGE> 27
27
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.
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 (the 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 regulations 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 REGULATIONS. 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 by the SAIF (as defined by law and regulation), and
are backed by the full faith and credit of the United States Government. As
insurer, the FDIC is authorized to conduct 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.
Effective October 1, 1996, assessment rates for SAIF-insured institutions
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. See "Prompt Corrective
Action" below. In addition, an assessment of 6.4 basis points is added to the
regular SAIF-assessment until December 31, 1999, in order to cover financing
corporation debt service payments.
<PAGE> 28
28
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 substantially 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.
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 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
<PAGE> 29
29
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, 1998, see Note P to the Consolidated
Financial Statements.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under this 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 implementation 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 risk
component. The OTS also indicated that it will continue to delay the
implementation 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, a Tier 1
risk-based capital ratio of 6.0% or more, a Tier 1 leverage capital ratio of
5.0% or more, and is not subject to any written agreement, order or 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 1 risk-based capital ratio of 4.0% or more, a Tier 1 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
<PAGE> 30
30
has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based
capital ratio that is less than 4.0%, or a Tier 1 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 1 risk-based capital ratio that is less than 3.0%, or a Tier 1
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. (The FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized). As of September 30, 1998, the Association exceeded the
requirements of a well capitalized institution.
LIQUIDITY REQUIREMENTS. All savings associations are required, for each
calendar month, to maintain an average daily balance of liquid assets (including
cash, certain time deposits and savings accounts, bankers' acceptances, certain
government obligations, and certain other investments) which is not less than a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less during the preceding
calendar month. The liquidity requirement may be changed by the OTS to any
amount between 4% and 10% depending upon economic conditions and savings flows
of all savings associations. This amount is currently 4%.
OTS regulations also require that short-term liquid assets constitute at least
1% of an association's average daily balance of net withdrawable deposit
accounts and short term borrowings during the preceding calendar month. 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, 1998, the Association
<PAGE> 31
31
was in compliance with the QTL test of a domestic building and loan association
as defined in the Code.
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 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, 1998, 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. Fully
phased-in capital requirement is defined to mean an association's capital
requirement under the statutory
<PAGE> 32
32
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 1999.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under this 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.
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, 1998, the Association's advances from the FHLB amounted to $1.4 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, 1998, the Association had $101.0
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.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings associations
have a responsibility under the Community Reinvestment Act (CRA) and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the Fair Lending Laws)
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending Laws
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the U.S. Department of Justice.
<PAGE> 33
33
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.
For tax years beginning prior to January 1, 1996, a qualified thrift
institution was allowed a bad debt deduction based on a percentage of taxable
income or on actual experience. Accordingly, the Association used the percentage
of taxable income method in fiscal 1996.
The Small Business Job Protection Act of 1996 (the Act) requires
qualified thrift institutions, such as the Association, to recapture the portion
of their tax bad debt reserves that exceeded the September 30, 1988, balance.
Such recaptured amounts are to be taken into taxable income ratably over a
six-year period beginning in 1997. Accordingly, the Company will be required to
pay approximately $22,057,000 in additional federal income taxes beginning in
fiscal 1998, all of which has been previously provided for, and continuing
through fiscal 2003.
The Act also repeals the reserve method of accounting for tax bad debt
deductions and required thrifts to calculate the tax bad debt deduction based on
actual current loan losses.
A deferred tax liability has not been required to be recognized for the
tax bad debt base year reserves of the Association. The base year reserves are
the balance of reserves as of September 30, 1988, reduced proportionately for
reductions in the Association's loan portfolio since that date. At September 30,
1998, the amount of those reserves was approximately $5,370,000. The amount of
the unrecognized deferred tax liability at September 30, 1998, was approximately
$1,913,000.
Washington Federal's tax returns have been examined through the year ended
September 30, 1990.
<PAGE> 34
34
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
9.0% of apportionable income.
<PAGE> 35
35
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 Net Book Value at
Number of ------------------------------ September 30,
Location Offices Owned Leased(1) 1998 (2)
- -------- --------- ------- --------- -----------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Washington 39 22 17 $16,711
Idaho 19 16 3 6,292
Oregon 23 15 8 7,519
Utah 11 6 5 7,607
Arizona 14 7 7 5,138
------- ------- ------- -------
Total 106 66 40 $43,267
======= ======= ======= =======
</TABLE>
- ----------
(1) The leases have varying terms expiring from 1998 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 $48.9 million at September 30, 1998.
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> 36
36
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 1998 (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 7A. MARKET RISK DISCLOSURES
The information required herein is incorporated by reference to
Interest Rate Risk commencing on page 22 of this Form 10-K.
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 22, 1998.
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 22, 1998.
<PAGE> 37
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference to page 16 of
the proxy statement dated December 22, 1998.
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, 1998 and
1997
Consolidated Statements of Operations for each of the years in the
three-year period ended September 30, 1998
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended September 30, 1998
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended September 30, 1998
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:
<TABLE>
<CAPTION>
No. Exhibit Page
- --- ------- ----
<S> <C> <C>
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 Rights Plan* (1)
10.3 1994 Stock Option and Stock Appreciation Rights Plan* (1)
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
27 Financial Data Schedule
</TABLE>
- -------
* Management contract or compensation plan.
<PAGE> 38
38
(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> 39
39
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 21, 1998 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.
<TABLE>
<S> <C>
/s/ Kermit O. Hanson December 21, 1998
- ------------------------------------------ -----------------
Kermit O. Hanson, Director Date
/s/ W. Alden Harris December 21, 1998
- ------------------------------------------ -----------------
W. Alden Harris, Director Date
/s/ Anna C. Johnson December 21, 1998
- ------------------------------------------ -----------------
Anna C. Johnson, Director Date
/s/ John F. Clearman December 21, 1998
- ------------------------------------------ -----------------
John F. Clearman, Director Date
/s/ H. Dennis Halvorson December 21, 1998
- ------------------------------------------ -----------------
H. Dennis Halvorson, Director Date
</TABLE>
<PAGE> 40
40
<TABLE>
<S> <C>
/s/ Guy C. Pinkerton December 21, 1998
- ------------------------------------------ -----------------
Guy C. Pinkerton, Director, Chairman, Date
President and Chief Executive Officer
/s/ Richard C. Reed December 21, 1998
- ------------------------------------------ -----------------
Richard C. Reed, Director Date
/s/ Charles R. Richmond December 21, 1998
- ------------------------------------------ -----------------
Charles R. Richmond, Director, Date
Executive Vice President and Secretary
/s/ Ronald L. Saper December 21, 1998
- ------------------------------------------ -----------------
Ronald L. Saper, CPA, Executive Date
Vice President and Chief Financial
Officer (principal financial officer)
/s/ Keith D. Taylor December 21, 1998
- ------------------------------------------ -----------------
Keith D. Taylor, CPA, Senior Vice President Date
and Treasurer
(principal accounting officer)
</TABLE>
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Exhibit Index Page
- --- ------------- ----
<S> <C> <C>
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 Rights Plan* (1)
10.3 1994 Stock Option and Stock Appreciation Rights Plan* (1)
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
27 Financial Data Schedule
</TABLE>
- -------
* Management contract or compensation plan.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 8-B filed with the SEC on January 26, 1995.
<PAGE> 1
[WASHINGTON FEDERAL, INC. ANNUAL REPORT 1998 LOGO]
<PAGE> 2
TABLE OF CONTENTS
Financial Highlights 1
To Our Stockholders 2
Management's Discussion 4
Financial Statements 8
Notes to Financial Statements 12
Selected Financial Data 26
Accountant's Report 27
General Information 27
Directors, Officers, Offices 28
A SHORT HISTORY
Washington Federal, Inc. (the Company) is a savings and loan holding company
headquartered in Seattle, Washington. Its principal subsidiary is Washington
Federal Savings (the Association) which operates 106 branches in five Western
states.
The Association had its origin on April 24, 1917, as Ballard Savings and Loan
Association. In 1935, the state-chartered Association converted to a federal
charter and became a member of the Federal Home Loan Bank System with account
insurance provided through the FSLIC. In 1958, Ballard Federal Savings and Loan
Association merged with Washington Federal Savings and Loan Association of
Bothell, and the latter name was retained for wider geographic acceptance. In
1971, Seattle Federal Savings and Loan Association, then with three offices, was
merged into the Association and at the end of 1978, was joined by the ten
offices of First Federal Savings and Loan Association of Mount Vernon. On
November 17, 1982, the Association converted from a federal mutual to a federal
stock association.
In 1987 and 1988, acquisitions of United First Federal, Provident Federal
Savings and Loan and Northwest Federal Savings and Loan, all headquartered in
Boise, Idaho added 28 Idaho offices to the Association. In 1988, the acquisition
of Freedom Federal Savings and Loan added 13 Oregon offices, followed in 1990 by
the eight Oregon offices of Family Federal Savings. In 1991, the acquisition of
First Federal Savings and Loan of Idaho Falls, Idaho added three branches to the
system. That same year, the Association acquired the deposits of First Western
Savings, doing business in Eugene and Portland, Oregon as Metropolitan Savings.
In 1992, the Association shortened its corporate name to Washington Federal
Savings and changed the name of its Oregon division branches from Freedom
Federal Savings to Washington Federal Savings.
In 1993, the Association purchased First Federal Savings Bank of Salt Lake
City, Utah which added ten branches in that state. Then, during 1994, the
Association expanded to Arizona and began operating five branch offices in
Tucson.
In 1995, the Association purchased West Coast Mutual Savings Bank with its
one branch office in Centralia, Washington. The Association also sold its
Burley, Idaho branch office and opened three new offices in Washington, two more
in Tucson and one each in Utah and Oregon.
In 1996, the Association opened one new office in Oregon, one in Washington
and three in Phoenix. The Company also purchased Metropolitan Bancorp of
Seattle, Washington which added eight branches in the Puget Sound region to the
Association.
In 1997, the Association opened four new offices, one each in Portland,
Oregon, and Tucson, Arizona and two in Phoenix, Arizona. The Association also
closed one of its branches in Idaho Falls, consolidating the deposits into its
main Idaho Falls office.
In 1998, the Association opened two new offices in Phoenix, Arizona.
The Association also has a wholly owned subsidiary, First Insurance Agency,
Inc., which provides general insurance to the public.
The Association obtains its funds primarily through savings deposits from the
general public, from repayment of loans and from borrowings and retained
earnings. These funds are used largely to make first lien loans to borrowers for
the purchase of new and existing homes, the acquisition and development of land
for residential lots, the construction of homes, the financing of other real
estate and for investment in obligations of the U.S. government, its agencies
and municipalities.
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
September 30, 1998 1997 % Change
- ---------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Assets ............................................. $5,637,011 $5,719,589 - 1%
Investment securities .............................. 234,013 289,750 -19
Loans receivable ................................... 4,143,525 4,190,776 - 1
Mortgage-backed securities ......................... 976,046 947,129 + 3
Customer accounts .................................. 3,156,202 2,978,031 + 6
Federal Home Loan Bank advances and other borrowings 1,578,319 1,904,544 -17
Stockholders' equity ............................... 767,172 717,745 + 7
Net income ......................................... 111,836 105,050 + 6
Net income per share ............................... 2.12 2.01 + 5
Dividends per share ................................ .90 .82 +10
Stockholders' equity per share ..................... 14.91 13.73 + 9
Shares outstanding ................................. 51,446 47,509 + 8
Return on average stockholders' equity ............. 15.68% 16.50% - 5
Return on average assets ........................... 2.00% 1.86% + 8
</TABLE>
<TABLE>
<CAPTION>
TOTAL ASSETS
Dollars in Millions
- --------------------
(At September 30)
<S> <C>
1978 704
1983 786
1988 2,241
1993 3,159
1998 5,637
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
Dollars in Millions
- --------------------
(At September 30)
<S> <C>
1978 51
1983 88
1988 237
1993 486
1998 767
</TABLE>
<TABLE>
<CAPTION>
NET INCOME PER SHARE
(Before SAIF special assessment)
$
- --------------------
<S> <C>
1994 1.74
1995 1.48
1996 1.75
1997 2.01
1998 2.12
</TABLE>
<TABLE>
<CAPTION>
CASH DIVIDENDS PER SHARE
$
- --------------------
<S> <C>
1994 0.62
1995 0.68
1996 0.74
1997 0.82
1998 0.9
</TABLE>
<TABLE>
<CAPTION>
RETURN ON AVERAGE EQUITY
(Before SAIF special assessment in 1996)
Annualized %
- --------------------
<S> <C>
1994 18.19
1995 13.99
1996 15.37
1997 16.5
1998 15.68
</TABLE>
<TABLE>
<CAPTION>
PRIMARY INTEREST SPREAD
End of Quarter %
- --------------------
<S> <C> <C> <C>
Dec 31 2.55 2.88 2.8
Mar 31 2.78 2.88 2.79
Jun 30 2.9 2.82 2.8
Sep 30 2.95 2.83 2.73
Fiscal 1996 Fiscal 1997 Fiscal 1998
</TABLE>
1
<PAGE> 4
TO OUR STOCKHOLDERS
Your Company, once again, achieved record operating earnings for the fiscal
year ended September 30, 1998. This is the fourteenth time in the last fifteen
years that we have achieved year-over-year earnings per share gains.
For the year, earnings were $111,836,000 or $2.12 per share, compared to
$105,050,000 or $2.01 per share for the prior year, a 5% increase. This was
accomplished even though we operated in a relatively flat yield curve
environment throughout the year. As a result of this flat yield curve
environment, our net interest spread decreased to 2.73% at September 30, 1998,
from 2.83% at the beginning of the year.
The year produced a return on average assets of 2.00% and a return on equity
of 15.68%. As of September 30, 1998, Washington Federal's net worth increased to
$767 million or 13.6% of total assets from $718 million or 12.5% of total assets
at the end of the prior year. Washington Federal's earnings and capital ratios
remain near the top in the nation for all types of financial institutions.
Our expense ratio for the year was .81% of average assets, and our efficiency
ratio (total operating expense divided by net interest income plus other income)
was 17.9%. Both of these figures are very positive in that they are less than
one-half the industry average.
Excellent economic conditions and diligent efforts by our staff during the
year, helped us to reduce our non-performing assets to $24.8 million or .44% of
total assets. This represents the lowest level since 1987 when we began our
acquisition of some troubled thrifts which had high ratios of non-performing
assets. Since then, we have successfully disposed of more than $250 million of
these assets. Though our historical loan loss experience with single family
residential loans originated by Washington Federal continues to be very low, we
continue to maintain our current reserve levels which is within an acceptable
range of estimated losses, particularly in the area of construction, land,
income property and non-conforming residential loans which have a higher loan
loss experience.
Customer funds increased to $3.16 billion at September 30, 1998, a 6%
increase for the year. Most of this increase occurred during the last four
months of the fiscal year and has continued into the new fiscal year as
customers have become more concerned about the safety of alternative
investments. During the year, we opened two new offices in Phoenix, Arizona. We
now have 106 offices with 39 in Washington, 19 in Idaho, 23 in Oregon, 11 in
Utah and 14 in Arizona.
This year we originated $1.454 billion in loans, a 34% increase over the
$1.089 billion funded in fiscal 1997. We also purchased $319 million in
mortgage-backed securities. Unfortunately, this was offset with payoffs and
repayments of loans and mortgage-backed securities of $1.722 billion. We
continue to place emphasis on developing our branch lending capabilities.
During the year, we distributed $46.8 million in cash dividends, or $.90 per
share, and declared a 10% stock dividend to shareholders of record on February
12, 1998. This was the fourteenth stock dividend we have distributed in the last
sixteen years. We also increased the cash dividend twice during the fiscal year.
We have increased the cash dividend 35 times since becoming a stock company in
1982. Our annual cash dividend is higher than our initial offering price
(adjusted for stock dividends and stock splits) of $.66 in 1982.
We have completed 90% of the work necessary to update our in-house computer
systems and programs to handle the year 2000 issues. This leaves us with the
rest of 1998 and all of 1999 to thoroughly test those programs and outside
systems with which we interface. We are enhancing our existing contingency plan
to service our customers in case events beyond our control impact our computer
system. We are confident in our ability to continue to provide the quality
service that our customers have come to expect.
Toward the end of the fiscal year, we repurchased 1,105,100 of Company common
stock at an average price of $23.52. We have sufficient capital and Board
authorization to continue repurchasing our stock as the situation warrants.
At the end of the fiscal year, Roy Whitehead joined our Executive Management
team. He has 23 years of banking and thrift experience and will provide added
management depth in the years ahead. The other members of our Executive
Management team are Charles R. Richmond, William A. Cassels, Lawrence D.
Cierpiszewski and Ronald L. Saper. I thank each of them for their support and
leadership in achieving the record results for your Company this past fiscal
year.
2
<PAGE> 5
At our September Board meeting, E.W. Mersereau, Jr. was elected Director
Emeritus. Eg joined our Board in 1979 after we merged with First Federal Savings
and Loan Association of Mount Vernon, where he had been a director since 1947.
On behalf of the Board members and all of the employees, I extend our gratitude
for the excellent support, counsel and guidance he provided during his tenure
with Washington Federal. I also know that if our former Chairman, Elliot K.
Knutson, were still here, he would want to express his appreciation to Eg for
his contributions to the Company's success.
In closing, I wish to thank our employees and directors for their efforts
which have made this year so successful, and our customers and stockholders for
their continued support. I hope to see you at our annual meeting to be held on
Wednesday, January 27, 1999, at 2:00 p.m. at the Westin Hotel in Seattle.
[PHOTO]
Clockwise from left: Roy M. Whitehead, Executive Vice President; William A.
Cassels, Executive Vice President; Ronald L. Saper, Executive Vice President and
Chief Financial Officer; Lawrence D. Cierpiszewski, Executive Vice President;
Charles R. Richmond, Executive Vice President and Secretary; Guy C. Pinkerton,
Chairman, President and Chief Executive Officer.
Sincerely,
/s/ Guy C. Pinkerton
Guy C. Pinkerton
Chairman, President and
Chief Executive Officer
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL Washington Federal, Inc. (the Company) is a savings and loan holding
company. The Company's primary operating subsidiary is Washington
Federal Savings (the Association).
YEAR 2000 This discussion constitutes a "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998 and contains forward-looking statements that
have been prepared on the basis of the Company's best judgment and
currently available information. These forward-looking statements
are inherently subject to significant business, third-party and
regulatory uncertainties and contingencies, many of which are beyond
the control of the Company. In addition, these forward-looking
statements are based on the Company's current assessments and
renovation plans, which are based on certain representations of
third-party servicers and are subject to change. Accordingly, there
can be no assurance that the Company's results of operations will
not be adversely affected by difficulties or delays in the Company's
or third-party's Year 2000 readiness efforts. See below for a
discussion of factors that may cause such forward-looking statements
to differ from actual results.
Most existing computer programs use only two digits to identify the
year in a date field, making the assumption that the year's first
two digits will always be 19. These programs were developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results on or after January 1, 2000. For example, if an interest
calculation were made for the month of January 2000, but the system
assumed the year was 1900, the results could be materially
erroneous.
A few years ago, the Company began to assess the Year 2000 issue,
including upgrades to its software and hardware. Based on this
assessment, the Company implemented a plan to renovate and test its
computer applications by December 31, 1998. As of September 30,
1998, management estimated 90% of the renovation had been completed.
The Company's assessment segregated computer applications into three
categories: mission critical systems, secondary systems and embedded
systems. The mission critical systems were identified as those
systems necessary to deliver our products to our customer base. The
success of our Year 2000 renovation relies, in part, on the
representations of third-party servicers. The mission critical
applications, which were all written internally, are being renovated
and tested by the Company's information systems department.
The Company's secondary systems are primarily personal
computer-based software programs which provide financial data for
internal use. Examples of these secondary systems include payroll,
fixed assets and accounts payable. Most of these systems were
written by third-party servicers and the Company relies on their
written representations that their software is Year 2000 compliant.
The Company's embedded systems include items as diverse as the
computer chips in the heating, ventilation and air conditioning
system to office building elevators. The Company has identified
those systems and relies on written representations of the
third-party servicers.
Every two months, the Company reports to its Board of Directors the
progress made in addressing the Year 2000 issue, including time
lines and percentage of completion. Management is striving to meet
its target of December 31, 1998, to have its systems renovated and
implemented. Further validation testing will continue throughout
1999. Management recently reported the results of an Office of
Thrift Supervision examination of the Company's Year 2000 compliance
issues to the Board of Directors, which found the report to be
satisfactory.
Through September 30, 1998, the Company has not incurred any
material incremental costs to become Year 2000 compliant. The
Company's mission critical systems are being renovated and tested by
the already existing information systems staff. Less than $1 million
has been spent on the Year 2000 project to date. The Company
estimates the total amount of time and money expended to become Year
2000 compliant will have no material impact on the Company's results
of operations or financial condition.
Based on its current assessments and renovation plans, which are
based in part on certain representations of third-party servicers,
the Company does not expect that it will experience a significant
disruption of its operations as a result of the change to the new
millennium. Although the Company has no reason to conclude that a
failure will occur, the most reasonably likely worst-case Year 2000
scenario would entail a disruption or failure of the Company's power
supply or voice and data transmission suppliers, a computer system,
a third-party servicer, or a facility. If such a failure were to
occur, the Company would implement its contingency plan. While it is
impossible to quantify the impact of such a scenario, the most
reasonably likely worst-case scenario would entail a diminishment of
service levels, some customer inconvenience, and additional costs
from the contingency plan implementation, which are not currently
estimable. While the Company has contingency plans to address a
temporary disruption in these services, there can be no assurance
that any disruption or failure will be only temporary, that the
Company's contingency plans will function as anticipated, or that
the results of operations of the Company will not be adversely
affected in the event of a prolonged disruption or failure.
4
<PAGE> 7
INTEREST The Company accepts a high level of interest rate volatility as a
RATE RISK result of its policy to originate fixed-rate single family home
loans which are longer-term than the short-term characteristics of
its liabilities of customer accounts and borrowed money. At
September 30, 1998, the Company had approximately $2,350,542,000
more liabilities subject to repricing in the next year than assets
subject to repricing, which amounted to a negative maturity gap of
42% of total assets. The Company's interest rate risk approach has
never resulted in the recording of a monthly operating loss.
Fiscal 1998 began with a trend of steady interest rate spreads. The
year closed with a 2.73% interest rate spread, down from 2.83% at
the beginning of the year. The decline was, in large part, due to
the yield curve becoming flatter. During this phase of the interest
rate cycle the Company chose to control its asset growth, strengthen
its capital position and deleverage the balance sheet by reducing
its borrowed money. Federal Home Loan Bank (FHLB) advances and other
borrowed money declined to an equivalent of 28.0% of total assets at
September 30, 1998, compared to 33.3% of total assets at September
30, 1997.
LIQUIDITY The Company's net worth at September 30, 1998, was $767,172,000 or
AND 13.6% of total assets. This is an increase of $49,427,000 from
CAPITAL September 30, 1997, when net worth was $717,745,000 or 12.5% of
RESOURCES total assets. The ratio of net worth to total assets remains at a
high level despite re-implementation of a stock repurchase plan
during fiscal 1998 and the distribution of $46,848,000 in cash
dividends.
The $49,427,000 increase in the Company's net worth includes
$111,836,000 generated from net income, $5,000,000 of appreciation
in the valuation reserve for available-for-sale securities and
$5,434,000 of proceeds received with the exercise of common stock
options and purchases by the Employee Stock Ownership Plan. Net
worth was reduced by the $46,848,000 of cash dividends paid and
stock repurchases of $25,995,000. During fiscal 1998, 1,105,000
shares of common stock were repurchased at an average price of
$23.52 under the March 1996 and the September 1998 common stock
repurchase programs.
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 against interest rate risk and will
enable it to compete more effectively for controlled growth through
acquisitions and customer deposit increases.
Customer accounts increased $178,171,000, or 6%, from a year ago,
largely due to branch expansion in Arizona and several successful
new account marketing campaigns.
The Company's cash and investment securities amounted to
$256,228,000, a net decrease from a year ago. The decrease included
$60,520,000 of investment securities which matured during the year
and were not replaced since the Company's emphasis has been on
origination of higher yielding loans.
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 and
mortgage-backed securities to the sum of average withdrawable
savings plus short-term (one year) borrowings. Currently the
Association is required to maintain total liquidity at 4%. At
September 30, 1998, total liquidity was 25.08%.
CHANGES IN AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES. The Company
FINANCIAL purchased $319,209,000 of mortgage-backed securities all of which
POSITION have been categorized as available-for-sale.
The Company had $55,560,000 of gross sales of securities resulting
in net gains of $5,560,000. All sales were mortgage-backed
securities which were categorized as available-for-sale. As of
September 30, 1998, the Company had unrealized gains on its
available-for-sale portfolio of $35,000,000, net of tax, which are
recorded as part of stockholders' equity.
LOANS RECEIVABLE. Loans receivable declined 1% during fiscal 1998 to
$4,143,525,000 at September 30, 1998, from $4,190,776,000 a year
earlier. The loans receivable balance decreased even though loan
originations increased to $1,454,232,000, an increase of 34% from
the prior year. The decline in loan interest rates caused a
significant increase in prepayment activity during the year.
REAL ESTATE HELD FOR SALE. The balance at September 30, 1998, was
$16,193,000, a 46% decrease from the $30,189,000 of one year ago.
FHLB STOCK. The Company had a balance of $101,050,000 at September
30, 1998, compared with $93,584,000 one year ago.
COSTS IN EXCESS OF NET ASSETS ACQUIRED. As of September 30, 1998,
costs in excess of net assets acquired totaled $53,639,000. 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,
1998, there was no impairment of costs in excess of net assets
acquired. The Company will provide for any permanent decline in
value of these assets, should an impairment be identified.
CUSTOMER ACCOUNTS. Customer accounts at September 30, 1998, were
$3,156,202,000 compared with $2,978,031,000 at September 30, 1997, a
6% increase. See Liquidity and Capital Resources above.
FHLB ADVANCES AND OTHER BORROWINGS. Total borrowings decreased 17%
to $1,578,319,000. See Interest Rate Risk above.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
RESULTS OF OPERATIONS
GENERAL
Fiscal 1998 net income increased 6% over fiscal 1997. See Note T, Selected
Quarterly Financial Data (Unaudited) highlighting the quarter-by-quarter results
for the years ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
1996 1997 1997 1997 1997 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate on loans and
mortgage-backed securities 8.13% 8.15% 8.18% 8.17% 8.15% 8.10% 8.07% 7.98%
Interest rate on
investment securities* ... 7.56 7.34 7.53 7.72 7.70 7.64 7.73 7.76
------- ------- ------- ------- ------- ------- ------- -------
Combined .............. 8.09 8.09 8.13 8.14 8.12 8.07 8.05 7.96
Interest rate on
customer accounts ........ 5.01 5.04 5.16 5.18 5.16 5.14 5.11 5.09
Interest rate on
borrowings ............... 5.45 5.44 5.53 5.51 5.57 5.53 5.53 5.50
------- ------- ------- ------- ------- ------- ------- -------
Combined .............. 5.21 5.21 5.31 5.31 5.32 5.28 5.25 5.23
------- ------- ------- ------- ------- ------- ------- -------
Interest rate spread ........ 2.88% 2.88% 2.82% 2.83% 2.80% 2.79% 2.80% 2.73%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
*Includes municipal bonds at tax-equivalent rates.
The interest rate spread declined during fiscal 1998 from 2.83% at September 30,
1997, to 2.73% at September 30, 1998.
COMPARISON OF FISCAL 1998 RESULTS WITH FISCAL 1997
Net interest income increased $6,811,000 (3%) in fiscal 1998 over fiscal 1997
despite a drop in the interest rate spread and a reduction in the balance sheet.
This increase resulted largely from the increase in deferred fees and discount
amortization due to the high prepayments in the loan and mortgage-backed
securities portfolios.
Interest on loans and mortgaged-backed securities increased $2,738,000 (1%) in
fiscal 1998 from fiscal 1997. The increase is a result of the increase in
amortization of deferred fees on loans and discounts on mortgage-backed
securities. Deferred fee amortization increased 54% to $29,536,000 in fiscal
1998 from $19,134,000 in fiscal 1997. Average interest rates on loans and
mortgage-backed securities declined to 7.98% from 8.17% one year ago.
Interest and dividends on investment securities decreased $1,141,000 (4%) in
fiscal 1998 from fiscal 1997. The weighted average yield improved to 7.76% at
September 30, 1998, compared with 7.72% at September 30, 1997. The combined
investment securities and FHLB stock portfolio decreased to $335,063,000 at
September 30, 1998, versus $383,334,000 one year ago.
Interest on customer accounts increased 9% to $156,099,000 for fiscal 1998 from
$142,684,000 for fiscal 1997. The increase related to the increase in customer
accounts to $3,156,202,000 from $2,978,031,000 the prior year. The average cost
of customer accounts decreased to 5.09% at year end compared to 5.18% one year
ago.
Interest on FHLB advances and other borrowings decreased $18,629,000 (16%) in
fiscal 1998 over fiscal 1997. This decrease was due to a reduction in total
borrowings from $1,904,544,000 to $1,578,319,000. The average rates paid
decreased slightly to 5.50% at September 30, 1998, versus 5.51% at September 30,
1997.
The provision for loan losses during fiscal 1998 was $740,000 compared with
$813,000 in fiscal 1997 and $3,828,000 in fiscal 1996, reflecting a trend of
declining non-performing assets. Non-performing assets declined to $24.8 million
or .44% of total assets at September 30, 1998, compared with $42.7 million or
.75% of total assets and $58.6 million or 1.15% of total assets at September 30,
1997 and 1996, respectively. Though our provision declined, we have continued to
maintain our allowance for loan losses at current levels which at $23.9 million
or .96% of non-performing assets is within an acceptable range of estimated
losses and low when compared with others in the industry. Our provision is
reflective of the excellent economic conditions within the Company's marketplace
during fiscal 1998. However, we believe Asia's continued economic problems could
have a ripple effect on the Puget Sound marketplace. For example, Boeing, our
region's largest employer, recently announced a planned reduction of over 40,000
jobs. Maintaining the allowance for loan losses at current levels is appropriate
considering the more difficult economic period we may encounter going forward.
Other income increased $5,955,000 (117%) in fiscal 1998 over fiscal 1997. Net
gains on the sale of available-for-sale securities totaled $5,560,000 in fiscal
1998 compared to $938,000 in fiscal 1997.
Other expense increased $717,000 (2%) in fiscal 1998 over fiscal 1997. The
increase is due to branch network expansion and general inflationary increases.
The branch network increased to 106 offices at September 30, 1998, versus 104
offices at September 30, 1997. Other expense for fiscal 1998 equaled .81% of
average assets compared with .79% in fiscal 1997, while the number of staff,
including part-time employees on a full-time equivalent basis, were 677 and 656,
at September 30, 1998 and 1997, respectively.
Income taxes increased $3,661,000 (6%) in fiscal 1998. The effective tax rate
was 35.6% for fiscal 1998 compared with 35.7% for fiscal 1997.
6
<PAGE> 9
COMPARISON OF FISCAL 1997 RESULTS WITH FISCAL 1996
Net interest income increased $26,094,000 (15%) in fiscal 1997 over
fiscal 1996 largely due to balance sheet expansion which resulted
upon the Metropolitan Bancorp merger in November 1996. Interest rate
spreads remained relatively stable throughout most of fiscal 1997.
Interest on loans and mortgaged-backed securities increased
$52,665,000 (14%) in fiscal 1997 from fiscal 1996. The increase is
associated with the merger described earlier, resulting in total
outstanding loans and mortgage-backed securities increasing to
$5,137,905,000 at September 30, 1997, from $4,589,621,000 at the
beginning of fiscal 1997. Average interest rates on loans and
mortgage-backed securities were basically unchanged at 8.17% from
8.16% one year before.
Interest and dividends on investment securities increased $2,131,000
(9%) in fiscal 1997 from fiscal 1996. The weighted average yield
improved to 7.72% at September 30, 1997, compared with 7.47% at
September 30, 1996. The combined investment securities and FHLB
stock portfolio increased to $383,334,000 at September 30, 1997,
versus $363,536,000 one year before.
Interest on customer accounts increased 10% to $142,684,000 for
fiscal 1997 from $129,904,000 for fiscal 1996. The average cost of
customer accounts increased to 5.18% at year end compared to 4.93%
at September 30, 1996.
Interest on FHLB advances and other borrowings increased $15,922,000
(16%) in fiscal 1997 over fiscal 1996 despite a reduction in total
borrowings from $1,959,549,000 to $1,904,544,000. Average rates paid
increased to 5.51% at September 30, 1997, versus 5.45% at September
30, 1996.
The provision for loan losses during fiscal 1997 was $813,000
compared with $3,828,000 in fiscal 1996, which reflected the
improving economic conditions within Washington Federal's
marketplace during the period. Non-performing assets declined to
$42.7 million or .75% of total assets at September 30, 1997 compared
with $58.6 million or 1.15% of total assets at September 30, 1996.
With the improving economic conditions the Company deemed the
provision adequate to maintain the allowance for loan losses at
appropriate levels.
Other income decreased $840,000 (14%) in fiscal 1997 from fiscal
1996. Net gains on the sale of available-for-sale securities totaled
$938,000 in fiscal 1997 compared to $1,444,000 in fiscal 1996.
Other expense increased $6,262,000 (16%) in fiscal 1997 over fiscal
1996 after excluding the $15,026,000 related to the SAIF special
assessment, a nonrecurring charge realized in 1996. The increase was
due to overall expansion, including the Metropolitan Bancorp merger,
and general inflationary increases. The branch network expanded to
104 offices at September 30, 1997, versus 93 offices at September
30, 1996. Other expense for fiscal 1997 equaled .79% of average
assets compared with .78% in fiscal 1996, while the number of staff,
including part-time employees on a full-time equivalent basis, were
656 and 602, for the same periods, respectively.
Income taxes increased $13,733,000 (31%) in fiscal 1997. The
effective tax rate was 35.7% for fiscal 1997 compared with 35.8% for
fiscal 1996.
MERGER WITH METROPOLITAN BANCORP
On November 29, 1996, the Company completed its merger with
Metropolitan Bancorp of Seattle, Washington. At the time of the
merger, Metropolitan Bancorp was comprised of 10 offices located in
the Seattle area, two of which were subsequently merged into
existing offices of the Company. At the time of the merger,
Metropolitan Bancorp consisted of $699,938,000 in assets,
$379,975,000 in deposits and $58,495,000 in stockholders' equity.
The merger was accounted for by the purchase method and $36,909,000
of costs in excess of net assets acquired were recorded which will
continue to be amortized utilizing the straight-line method over 15
years.
IMPACT OF The Consolidated Financial Statements and related Notes presented
INFLATION herein have been prepared in accordance with generally accepted
AND accounting principles, which require the measurement of financial
CHANGING position and operating results in terms of historical dollars
PRICES 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 Company are monetary in
nature. As a result, interest rates have a more significant impact
on the Company'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.
7
<PAGE> 10
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, 1998 1997
---- ----
(In thousands, except per share data)
ASSETS
<S> <C> <C>
Cash .................................................................................... $ 22,215 $ 23,444
Available-for-sale securities, amortized cost $710,188 and $626,132 ..................... 764,188 672,132
Held-to-maturity securities, fair value $464,799 and $578,124 ........................... 445,871 564,747
Loans receivable ........................................................................ 4,143,525 4,190,776
Interest receivable ..................................................................... 35,175 36,383
Premises and equipment, net ............................................................. 48,882 47,552
Real estate held for sale ............................................................... 16,193 30,189
FHLB stock .............................................................................. 101,050 93,584
Costs in excess of net assets acquired, net ............................................. 53,639 58,774
Other assets ............................................................................ 6,273 2,008
----------- -----------
$ 5,637,011 $ 5,719,589
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Customer accounts
Savings and demand accounts .......................................................... $ 3,071,175 $ 2,905,371
Repurchase agreements with customers ................................................. 85,027 72,660
----------- -----------
3,156,202 2,978,031
FHLB advances ........................................................................... 1,356,500 1,601,000
Other borrowings, primarily securities sold under agreements to repurchase .............. 221,819 303,544
Advance payments by borrowers for taxes and insurance ................................... 25,332 26,340
Federal and state income taxes, including net deferred liabilities of $66,724 and $53,659 63,969 52,259
Accrued expenses and other liabilities .................................................. 46,017 40,670
----------- -----------
4,869,839 5,001,844
Stockholders' equity
Common stock, $1.00 par value, 100,000,000 shares authorized; 56,423,961 and 51,137,889
shares issued; 51,446,129 and 47,508,759 shares outstanding .......................... 56,424 51,138
Paid-in capital ......................................................................... 714,700 573,241
Valuation adjustment for available-for-sale securities, net of tax ...................... 35,000 30,000
Treasury stock, at cost; 4,977,832 and 3,629,130 shares ................................. (92,221) (68,266)
Retained earnings ....................................................................... 53,269 131,632
----------- -----------
767,172 717,745
----------- -----------
$ 5,637,011 $ 5,719,589
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
<PAGE> 11
Washington Federal, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans ............................................... $ 364,801 $ 357,496 $ 305,372
Mortgage-backed securities .......................... 70,100 74,667 74,126
Investment securities ............................... 25,703 26,844 24,713
----------- ----------- -----------
460,604 459,007 404,211
INTEREST EXPENSE
Customer accounts ................................... 156,099 142,684 129,904
FHLB advances and other borrowings .................. 96,134 114,763 98,841
----------- ----------- -----------
252,233 257,447 228,745
----------- ----------- -----------
Net interest income ................................. 208,371 201,560 175,466
Provision for loan losses ........................... 740 813 3,828
----------- ----------- -----------
Net interest income after provision for loan losses . 207,631 200,747 171,638
OTHER INCOME
Gain on sale of securities .......................... 5,560 938 1,444
Other ............................................... 5,472 4,139 4,473
----------- ----------- -----------
11,032 5,077 5,917
OTHER EXPENSE
Compensation and fringe benefits .................... 24,852 24,051 20,231
Amortization of intangibles ......................... 6,039 5,593 3,545
SAIF special assessment ............................. -- -- 15,026
SAIF deposit insurance premiums ..................... 1,790 2,392 5,530
Occupancy expense ................................... 4,151 4,282 3,417
Other ............................................... 8,284 8,081 5,414
----------- ----------- -----------
45,116 44,399 53,163
Gain on real estate acquired through foreclosure,
net .............................................. 238 1,913 58
----------- ----------- -----------
Income before income taxes .......................... 173,785 163,338 124,450
Income taxes
Current .......................................... 48,883 50,620 38,222
Deferred ......................................... 13,066 7,668 6,333
----------- ----------- -----------
61,949 58,288 44,555
----------- ----------- -----------
NET INCOME .......................................... $ 111,836 $ 105,050 $ 79,895
=========== =========== ===========
PER SHARE DATA
Basic earnings per share ............................ $ 2.14 $ 2.03 $ 1.57
Diluted earnings per share .......................... $ 2.12 $ 2.01 $ 1.55
Cash dividends ...................................... $ .90 $ .82 $ .74
Weighted average number of shares outstanding,
including dilutive stock options ................. 52,868,253 52,245,754 51,352,134
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
<PAGE> 12
Washington Federal, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Valuation
Adjustment for
Common Paid-in Retained Available-for- Treasury
Stock Capital Earnings Sale Securities Stock Total
----- ------- -------- --------------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 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
--------- --------- --------- --------- --------- ---------
Common stock issued with
Metropolitan Bancorp merger . 2,443 57,189 (1,137) 58,495
Eleven-for-ten stock split
distributed February 21, 1997 4,644 109,709 (114,353)
Net income ..................... 105,050 105,050
Dividends ...................... (42,691) (42,691)
Proceeds from exercise of
common stock options ........ 39 311 350
Proceeds from Employee
Stock Ownership Plan ........ 469 1,370 1,839
Valuation adjustment for
available-for-sale securities 17,000 17,000
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 .. 51,138 573,241 131,632 30,000 (68,266) 717,745
--------- --------- --------- --------- --------- ---------
Eleven-for-ten stock split
distributed February 26, 1998 5,118 138,195 (143,351) (38)
Net income ..................... 111,836 111,836
Dividends ...................... (46,848) (46,848)
Proceeds from exercise of
common stock options ........ 168 2,297 2,465
Proceeds from Employee
Stock Ownership Plan ........ 967 2,040 3,007
Treasury stock ................. (25,995) (25,995)
Valuation adjustment for
available-for-sale securities 5,000 5,000
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 .. $ 56,424 $ 714,700 $ 53,269 $ 35,000 $ (92,221) $ 767,172
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
10
<PAGE> 13
Washington Federal, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 111,836 $ 105,050 $ 79,895
Adjustments to reconcile net income to net cash provided by operating
activities
Amortization of fees, discounts and premiums, net ....................... (28,426) (14,674) (19,481)
SAIF special assessment ................................................. -- -- 15,026
Amortization of costs in excess of net assets acquired .................. 6,038 5,593 3,545
Depreciation ............................................................ 2,287 2,132 1,912
Gain on investment securities and real estate held for sale ............. (5,798) (2,627) (1,502)
Decrease (increase) in accrued interest receivable ...................... 1,208 2,431 (3,187)
Increase in income taxes payable ........................................ 8,710 10,204 2,325
FHLB stock dividends .................................................... (7,466) (6,683) (3,896)
Decrease (increase) in other assets ..................................... (4,265) 8,350 (1,669)
Increase in accrued expenses and other liabilities ...................... 4,844 238 4,638
----------- ----------- -----------
Net cash provided by operating activities .................................. 88,968 110,014 77,606
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and contracts originated
Loans on existing property .............................................. (723,337) (556,063) (972,601)
Construction loans ...................................................... (467,884) (407,135) (428,317)
Land loans .............................................................. (105,901) (77,270) (92,496)
Loans refinanced ........................................................ (157,110) (48,240) (62,854)
----------- ----------- -----------
(1,454,232) (1,088,708) (1,556,268)
Savings account loans originated ........................................... (4,984) (7,818) (7,065)
Loan principal repayments .................................................. 1,483,446 1,010,333 863,577
Increase (decrease) in undisbursed loans in process ........................ 35,934 (26,000) 24,628
Loans purchased ............................................................ (1,797) (1,310) (888)
Available-for-sale securities purchased .................................... (319,209) (54,187) (241,230)
Principal payments and maturities of available-for-sale securities ......... 191,360 106,918 129,888
Available-for-sale securities sold ......................................... 55,560 119,851 165,719
Principal payments and maturities of held-to-maturity securities ........... 120,024 67,885 129,768
Proceeds from sales of real estate held for sale ........................... 24,454 12,313 2,580
Premises and equipment purchased, net ...................................... (3,617) (4,115) (3,867)
FHLB stock purchased ....................................................... -- (9,057) (15,500)
Cash received for acquisitions ............................................. -- 3,590 --
----------- ----------- -----------
Net cash provided (used) by investing activities ........................... 126,939 129,695 (508,658)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts .......................................... 178,171 117,836 34,885
Net increase (decrease) in short-term borrowings ........................... (773,725) (665,363) 845,462
Proceeds from long-term borrowings ......................................... 600,000 350,000 --
Repayments of long-term borrowings ......................................... (152,500) -- (370,000)
Proceeds from exercise of common stock options ............................. 1,762 350 778
Dividends .................................................................. (46,848) (42,691) (37,813)
Proceeds from employee stock ownership plan ................................ 967 469 --
Treasury stock sold (purchased) ............................................ (23,955) 1,370 (46,087)
Increase (decrease) in advance payments by borrowers for taxes and insurance (1,008) 2,129 294
----------- ----------- -----------
Net cash provided (used) by financing activities ........................... (217,136) (235,900) 427,519
----------- ----------- -----------
Increase (decrease) in cash ................................................ (1,229) 3,809 (3,533)
Cash at beginning of year .................................................. 23,444 19,635 23,168
----------- ----------- -----------
Cash at end of year ........................................................ $ 22,215 $ 23,444 $ 19,635
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash investing activities
Real estate acquired through foreclosure ................................ $ 10,220 $ 5,547 $ 3,884
Implementation of new accounting standard reclassification to
available-for-sale portfolio ......................................... -- -- 215,489
Cash paid during the year for
Interest ................................................................ $ 248,357 $ 256,822 $ 228,756
Income taxes ............................................................ 53,368 49,492 43,794
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
<PAGE> 14
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 and 1996
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.
DESCRIPTION OF BUSINESS. Washington Federal, Inc. is a savings and loan
holding company. The Company's principal operating subsidiary is
Washington Federal Savings (the Association). The Company is
principally engaged in the business of attracting savings deposits from
the general public and investing these funds, together with borrowings
and other funds, in one-to-four family residential real estate loans,
and, in limited circumstances, income-producing property real estate
loans. The Company conducts its activities from a network of 106
full-service branch offices located in Washington, Oregon, Idaho, Utah
and Arizona.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. The Company accounts for
investment and mortgage-backed securities in two categories:
held-to-maturity and available-for-sale.
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 these 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
portfolio if any market valuation differences are deemed to be other
than temporary.
Available-For-Sale Securities - Securities not classified as
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. Changes in the fair value of forward contracts
designated as available-for-sale are recognized as a component of
stockholders' equity until realized unless a decline in the fair value
of the underlying securities is other than temporary. Securities
purchased under a forward contract are recorded at their fair values at
the settlement date.
HEDGING ACTIVITY. The Company from time to time may enter into certain
forward contracts to sell mortgage-backed securities to hedge the price
risk in certain forward purchase contracts accounted for as
available-for-sale securities. To the extent forward sales contracts
meet current hedging criteria, the market value change associated with
the contract is recorded through an equity adjustment consistent with
the forward sales contract. To the extent that forward sales contracts
fail to meet hedging criteria, the market value will be recorded
through the income statement.
The Company obtained through acquisition certain interest rate swap
agreements that are designated against adjustable rate mortgage-backed
securities. These interest rate swap agreements were carried at
historical cost with the related interest differential paid or received
as an adjustment to interest income. The interest rate swaps were
terminated during the 1998 fiscal year. The remaining discount on the
swap agreements will be amortized to income based on the original final
maturity, which is less than the remaining term of the related loans.
LOANS RECEIVABLE. Loans receivable 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 Company's control which may result in losses or
recoveries differing from those provided.
Loans receivable that will not be repaid in accordance with their
contractual terms are measured using a discounted cash flow methodology
or the fair value of the collateral for certain loans. Smaller balance
loans are excluded with limited exceptions.
12
<PAGE> 15
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.
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), goodwill and core deposit intangibles
are treated as reductions from stockholders' equity in computing the
Association's tangible capital. From time to time, the Association
reviews the status of costs in excess of net assets acquired to
determine that no impairment of this asset has occurred.
DEFERRED FEES AND DISCOUNTS ON LOANS. Loan discounts and loan fees are
deferred and 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 general accepted accounting principles requires management to make
estimates and assumptions that effect 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, 1998, to conform
to the classifications used in 1998.
NOTE B ACQUISITIONS
On November 29, 1996, Washington Federal, Inc. completed its merger
with Metropolitan Bancorp of Seattle, Washington. At the time of the
merger, Metropolitan Bancorp was comprised of 10 offices located in the
Seattle area, two of which were subsequently merged into existing
offices of the Company. At the time of the merger, Metropolitan Bancorp
consisted of $699,938,000 in assets, $379,975,000 in deposits and
$58,495,000 in stockholders' equity. The merger was accounted for by
the purchase method and the $36,909,000 of costs in excess of net
assets acquired were recorded, which will continue to be amortized
utilizing the straight-line method over 15 years. The Company issued
2,442,908 shares of its common stock with a fair value of $58,495,000
in exchange for all the common stock of Metropolitan Bancorp.
From the Metropolitan acquisition, additional discounts of $8,359,000
and $11,101,000 were recorded to yield a market rate of interest on
loans and mortgage-backed securities, respectively. These discounts
will continue to be amortized utilizing the interest method over the
estimated lives of the assets. During the period ended September 30,
1998, and 1997, the combined amortization of these discounts was
$6,439,000 and $2,473,000, respectively.
Had the merger with Metropolitan Bancorp occurred at the beginning of
the Company's 1997 fiscal year, total revenue, net income and net
income per share would have been enhanced for the additional two months
by $9,803,000, $1,142,000 and $.02, respectively, to combined pro forma
amounts of $475,800,000, $106,192,000 and $2.03, respectively.
13
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1998
- -------------------------------------------------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized ---------------------- Fair
Cost Gains Losses Value Yield
---------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. government and agency securities due
Less than 1 year ..................... $ 116,175 $ 3,204 $ -- $ 119,379 7.44%
1 to 5 years ......................... 57,928 1,227 -- 59,155 6.95
5 to 10 years ........................ 15,158 1,967 -- 17,125 6.98
Over 10 years ........................ 9,279 5,602 -- 14,881 10.41
--------- --------- --------- --------- -----
198,540 12,000 -- 210,540 7.40
--------- --------- --------- --------- -----
HELD-TO-MATURITY SECURITIES
Tax-exempt municipal bonds due
1 to 5 years ......................... 9,651 739 -- 10,390 6.90
Over 10 years ........................ 13,822 1,281 (54) 15,049 6.26
--------- --------- --------- --------- -----
23,473 2,020 (54) 25,439 6.52
--------- --------- --------- --------- -----
$ 222,013 $ 14,020 $ (54) $ 235,979 7.37%
========= ========= ========= ========= =====
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
- -------------------------------------------------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized ----------------------- Fair
Cost Gains Losses Value Yield
--------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. government and agency securities due
Less than 1 year ..................... $ 93,911 $ 1,801 $ -- $ 95,712 7.48%
1 to 5 years ......................... 139,903 2,151 (103) 141,951 6.80
5 to 10 years ........................ 15,187 767 -- 15,954 6.98
Over 10 years ........................ 9,278 3,384 -- 12,662 10.41
--------- --------- --------- --------- -----
258,279 8,103 (103) 266,279 7.19
--------- --------- --------- --------- -----
HELD-TO-MATURITY SECURITIES
Tax-exempt municipal bonds due
1 to 5 years ......................... 9,651 806 -- 10,457 6.90
Over 10 years ........................ 13,820 1,126 -- 14,946 6.26
--------- --------- --------- --------- -----
23,471 1,932 -- 25,403 6.52
--------- --------- --------- --------- -----
$ 281,750 $ 10,035 $ (103) $ 291,682 7.13%
========= ========= ========= ========= =====
</TABLE>
There were no sales of investment securities during 1998 or 1997.
Proceeds from sales of investment securities in the available-for-sale
portfolio during 1996 were $29.6 million. The Company had losses on
sales of $401,000 during 1996. Investment securities with a book value
of $85.7 million and a fair value of $96.7 million at September 30,
1998, were pledged to secure public deposits.
NOTE D MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
September 30, 1998
- ---------------------------------------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized ----------------------- Fair
Cost Gains Losses Value Yield
--------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
GNMA pass-through certificates $ 13,169 $ 38 $ (162) $ 13,045 6.84%
FNMA pass-through certificates 18,180 1,619 -- 19,799 8.49
FHLMC pass-through certificates 399,633 17,660 (49) 417,244 7.57
FHLMC ......................... 37,152 2,954 (80) 40,026 7.02
FNMA .......................... 20,260 1,707 (17) 21,950 6.85
Private issues ................ 23,254 1,740 (58) 24,936 6.46
Forward commitments ........... -- 16,648 -- 16,648
--------- --------- --------- --------- ----
511,648 42,366 (366) 553,648 7.46
--------- --------- --------- --------- ----
HELD-TO-MATURITY SECURITIES
GNMA pass-through certificates 228 3 -- 231 9.35
FNMA pass-through certificates 12,457 571 (20) 13,008 8.11
FHLMC pass-through certificates 409,713 16,562 (154) 426,121 7.32
--------- --------- --------- --------- ----
422,398 17,136 (174) 439,360 7.35
--------- --------- --------- --------- ----
$ 934,046 $ 59,502 $ (540) $ 993,008 7.41%
========= ========= ========= ========= ====
</TABLE>
14
<PAGE> 17
MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
September 30, 1997
- --------------------------------------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized ----------------------- Fair
Cost Gains Losses Value Yield
--------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
GNMA pass-through certificates.. $ 20,214 $ 53 $ (247) $ 20,020 6.93%
FNMA pass-through certificates.. 26,313 2,243 -- 28,556 8.51
FHLMC pass-through certificates. 189,464 9,016 (952) 197,528 7.67
FHLMC .......................... 67,577 5,164 (1,527) 71,214 6.92
FNMA ........................... 37,157 2,771 (1,199) 38,729 6.91
Private issues ................. 27,128 2,036 (920) 28,244 6.71
Forward commitments ............ -- 21,562 -- 21,562
--------- --------- --------- --------- -----
367,853 42,845 (4,845) 405,853 7.39
--------- --------- --------- --------- -----
HELD-TO-MATURITY SECURITIES
GNMA pass-through certificates.. 336 31 (1) 366 9.37
FNMA pass-through certificates.. 16,577 641 (20) 17,198 8.12
FHLMC pass-through certificates. 523,249 13,006 (2,266) 533,989 7.39
Private issues ................. 1,114 54 -- 1,168 8.00
--------- --------- --------- --------- -----
541,276 13,732 (2,287) 552,721 7.42
--------- --------- --------- --------- -----
$ 909,129 $ 56,577 $ (7,132) $ 958,574 7.41%
========= ========= ========= ========= =====
</TABLE>
Proceeds from sales of mortgage-backed securities in the
available-for-sale portfolio during 1998, 1997 and 1996 were $55.6
million, $119.8 million and $77.5 million, respectively. The Company
realized gains of $5.6 million, $1.1 million and $3.4 million during
1998, 1997 and 1996, respectively. The Company had no losses on sales
in 1998 and $158,000 and $1.5 million during 1997 and 1996,
respectively.
Available-for-sale mortgage-backed securities with a book value of
$85.2 million and a fair value of $92.7 million at September 30, 1998,
were pledged to secure public deposits, securities sold under
agreements to repurchase and other borrowings. Mortgage-backed
securities categorized as held-to-maturity with a fair market value of
approximately $238,165,000 were pledged as collateral on September 30,
1998, for securities sold under agreements to repurchase (see Note L),
or secured repurchase agreements with customers (see Note J).
Substantially all mortgage-backed securities have contractual due dates
which exceed ten years.
The Company enters into forward contracts to purchase mortgage-backed
securities as part of its interest rate risk management program. In
certain circumstances, the Company may hedge these contracts by
entering into forward commitments to sell mortgage-backed securities.
The related mortgage-backed securities will be designated as
available-for-sale securities upon exercise of the commitments.
Forward purchase and sales contracts were as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------- -------------------- --------------------
(In thousands)
Market Market
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commitments to purchase ........ $116,358 $133,006 $226,271 $248,575
Commitments to sell ............ -- -- 29,202 29,944
-------- -------- -------- --------
$116,358 $133,006 $197,069 $218,631
======== ======== ======== ========
</TABLE>
All forward contracts at September 30, 1998, were scheduled to be
executed before September 30, 1999.
The Company acquired interest rate swaps with a notional amount of
$60,000,000 in its merger with Metropolitan Bancorp in November 1996.
These interest rate swap agreements were terminated during the year
ended September 30, 1998. The remaining discount of $595,000 on the
swap agreements will be amortized to income based on the original final
maturity, which is less than the remaining term of the related loans.
15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E
LOANS RECEIVABLE
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Conventional real estate
Permanent single-family residential ....... $3,535,154 $3,521,466
Income property ........................... 189,760 242,157
Land ...................................... 160,879 158,706
Construction .............................. 562,689 542,394
Other ........................................ 3,767 5,043
---------- ----------
4,452,249 4,469,766
---------- ----------
Less
Allowance for possible losses ............. 23,854 24,623
Discount on loans ......................... 9,072 14,185
Loans in process .......................... 246,784 210,849
Deferred loan origination fees ............ 29,014 29,333
---------- ----------
308,724 278,990
---------- ----------
$4,143,525 $4,190,776
========== ==========
</TABLE>
The Association originates adjustable and fixed interest rate loans, which at
September 30, 1998, consisted of the following:
<TABLE>
<CAPTION>
Fixed Rate
- --------------------------------------------------------------------------------
(In thousands)
Term to Maturity Book Value
- --------------------------------------------------------------------------------
<S> <C>
Less than 1 year .................................................. $ 115,493
1 to 3 years ...................................................... 89,010
3 to 5 years ...................................................... 76,122
5 to 10 years ..................................................... 152,749
10 to 20 years .................................................... 474,050
Over 20 years ..................................................... 2,863,369
----------
$3,770,793
==========
</TABLE>
<TABLE>
<CAPTION>
Adjustable Rate
- --------------------------------------------------------------------------------
(In thousands)
Term to Rate Adjustment Book Value
- --------------------------------------------------------------------------------
<S> <C>
Less than 1 year .................................................. $586,114
1 to 3 years ...................................................... 95,342
3 to 5 years ...................................................... --
5 to 10 years ..................................................... --
10 to 20 years .................................................... --
Over 20 years ..................................................... --
--------
$681,456
========
</TABLE>
At September 30, 1998 and 1997, approximately $58,247,000 and $40,643,000 of
fixed rate loan origination commitments were outstanding, respectively. Loans
serviced for others at September 30, 1998 and 1997, were approximately
$73,606,000 and $119,897,000, respectively.
Permanent single-family residential loans receivable included adjustable rate
loans of $96,507,000 and $177,374,000 at September 30, 1998 and 1997,
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>
September 30, 1998 Washington Idaho Oregon Utah Arizona Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Conventional real estate
Permanent single-family
residential ......... $1,776,724 $ 457,537 $ 633,870 $ 509,677 $ 126,302 $ 31,044 $3,535,154
Income property ....... 104,205 23,368 26,625 18,604 3,003 13,955 189,760
Land .................. 107,048 14,358 8,939 15,407 14,139 988 160,879
Construction .......... 302,071 63,826 97,257 58,279 40,912 344 562,689
Other .................... 19 298 19 59 -- 3,372 3,767
---------- ---------- ---------- ---------- ---------- ---------- ----------
$2,290,067 $ 559,387 $ 766,710 $ 602,026 $ 184,356 $ 49,703 $4,452,249
========== ========== ========== ========== ========== ========== ==========
</TABLE>
At September 30, 1998, the Company's recorded investment in impaired loans was
$8.3 million, of which $5.6 million had allocated reserves of $2.0 million. At
September 30, 1997, the Company's recorded investment in impaired loans was
$10.0 million of which $6.3 million had allocated reserves of $2.2 million. The
average balance of impaired loans during 1998 and 1997 was $9.5 million and
$13.7 million, and interest income from impaired loans was $390,000 and
$368,000, respectively.
16
<PAGE> 19
NOTE F
ALLOWANCE FOR LOSSES ON LOANS
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year ............. $ 24,623 $ 15,182 $ 11,651
Loss allowances from acquired institutions -- 11,198 --
Provision for loan losses ................ 740 813 3,828
Charge-offs .............................. (2,304) (5,932) (820)
Recoveries ............................... 795 3,362 523
-------- -------- --------
Balance at end of year ................... $ 23,854 $ 24,623 $ 15,182
======== ======== ========
</TABLE>
NOTE G
INTEREST RECEIVABLE
<TABLE>
<CAPTION>
September 30, 1998 1997
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Loans receivable ..................................... $ 27,188 $ 28,741
Allowance for uncollected interest on loans receivable (1,748) (1,708)
Mortgage-backed securities ........................... 5,825 4,844
Investment securities ................................ 3,910 4,506
-------- --------
$ 35,175 $ 36,383
======== ========
</TABLE>
NOTE H
PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
(In thousands)
Estimated
Useful Life
-----------
<S> <C> <C> <C>
Land .............................................. -- $10,635 $10,767
Buildings ......................................... 25 - 40 46,312 43,586
Leasehold improvements ............................ 7 - 15 4,771 4,653
Furniture, fixtures and equipment ................. 4 - 10 12,379 12,181
------- -------
74,097 71,187
------- -------
Less accumulated depreciation and amortization .... (25,215) (23,635)
------- -------
$48,882 $47,552
======= =======
</TABLE>
The Company has noncancelable operating leases for branch offices. Rental
expense, including amounts paid under month-to-month cancelable leases, amounted
to $1,420,000, $1,455,000 and $1,094,000 in 1998, 1997 and 1996, respectively.
Future minimum net rental commitments for all noncancelable leases, including
maintenance and associated costs, are immaterial.
NOTE I
REAL ESTATE HELD FOR SALE
<TABLE>
<CAPTION>
September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Acquired for development .......................................... $ 9,388 $10,850
Acquired in settlement of loans ................................... 6,179 5,328
Acquired from purchased institutions in settlement of loans ....... 626 14,011
------- -------
$16,193 $30,189
======= =======
</TABLE>
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J
CUSTOMER ACCOUNTS
<TABLE>
<CAPTION>
September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Checking accounts, 2.60% and under ............................ $ 93,942 $ 88,811
Passbook and statement accounts, 3.50% ........................ 168,921 177,843
Insured money market accounts, 2.47% to 4.16% ................. 443,395 399,056
Certificate accounts
Less than 4.00% ............................................. 234 230
4.00% to 4.99% .............................................. 26,434 17,009
5.00% to 5.99% .............................................. 2,128,693 1,974,727
6.00% to 6.99% .............................................. 205,524 239,375
7.00% and over .............................................. 4,032 8,320
---------- ----------
Total certificates ............................................ 2,364,917 2,239,661
---------- ----------
Repurchase agreements with customers .......................... 85,027 72,660
---------- ----------
$3,156,202 $2,978,031
========== ==========
</TABLE>
Certificate maturities were as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Less than 1 year .................................................. $2,093,394 $1,778,943
1 to 2 years ...................................................... 148,109 395,607
2 to 3 years ...................................................... 24,499 18,660
Over 3 years ...................................................... 98,915 46,451
---------- ----------
$2,364,917 $2,239,661
========== ==========
</TABLE>
Interest expense on customer accounts consisted of the following:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Checking accounts .................................. $ 2,153 $ 2,006 $ 1,734
Passbook and statement accounts .................... 6,048 6,371 6,267
Insured money market accounts ...................... 16,889 15,391 13,137
Certificate accounts ............................... 127,221 116,232 105,634
--------- --------- ---------
152,311 140,000 126,772
Repurchase agreements with customers ............... 4,252 3,059 3,481
--------- --------- ---------
156,563 143,059 130,253
Less early withdrawal penalties .................... (464) (375) (349)
--------- --------- ---------
$ 156,099 $ 142,684 $ 129,904
========= ========= =========
Weighted average interest rate at end of year ...... 5.09% 5.18% 4.93%
Weighted daily average interest rate during the year 5.14% 5.06% 5.24%
</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 was 65.7 basis points of SAIF-insured
institutions' March 31, 1995 reported deposits. Accordingly, the Association
recorded a one-time pre-tax charge of $15,026,000, before an offsetting tax
benefit of $5,485,000 during the fourth quarter of fiscal 1996. The special
assessment was paid during the first quarter of fiscal 1997. The Association's
annual SAIF premium rates were reduced beginning January 1, 1997, from 23 basis
points to 6.5 basis points.
18
<PAGE> 21
NOTE K
FHLB ADVANCES
FHLB advances had weighted average interest rates at September 30, 1998 and
1997, of 5.50% and 5.51%, respectively. Maturity dates of advances were as
follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
FHLB advances due
Less than 1 year ............... $ 556,500 $1,248,500
1 to 2 years ................... -- 152,500
3 to 4 years ................... 200,000 --
4 to 5 years ................... -- 200,000
More than 5 years .............. 600,000 --
---------- ----------
$1,356,500 $1,601,000
========== ==========
</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% of the total
assets of the Association, subject to collateralization requirements.
NOTE L
OTHER BORROWINGS
<TABLE>
<CAPTION>
September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Securities sold under agreements to repurchase
Due within 30 days ................................................... $221,819 $287,544
Other borrowings
Credit facility, weighted average rate of 5.84% ...................... -- 1,000
Federal funds purchased, weighted average rate of 6.38%, due on demand -- 15,000
-------- --------
$221,819 $303,544
======== ========
</TABLE>
The Company has a $40,000,000 credit facility with another financial institution
which expires February 28, 1999. The credit facility bears interest at the
London Interbank Offering Rate (LIBOR) plus 25 basis points. There was no
balance outstanding on this credit facility at September 30, 1998.
The Company 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, 1998, all of the Company'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 Company's name and principal and interest payments are
received by the Company; 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 Company.
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, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year ........ 5.57% 5.81% 5.47%
Weighted daily average interest rate during the year . 5.63% 5.44% 5.76%
Daily average of securities sold under agreements
to repurchase ..................................... $400,202 $569,203 $831,676
Maximum securities sold under agreements to repurchase
at any month end .................................. 608,990 822,904 971,173
Interest expense during the year ..................... 22,521 30,944 47,905
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was issued in June 1996 and established, among other things, new criteria for
determining whether a transfer of financial assets in exchange for cash or other
consideration should be accounted for as a sale or as a pledge of collateral in
a secured borrowing. As issued, SFAS No. 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, the Financial Accounting Standards Board
(FASB) issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." In general, SFAS No. 127 defers for one
year the effective date of SFAS No. 125. The Company implemented SFAS No. 125,
as amended by SFAS No. 127, as required. The adoption did not have a material
impact on the results of operations or financial condition of the Company.
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M
INCOME TAXES
The consolidated statements of financial condition at September 30, 1998 and
1997, include deferred taxes of $66,724,000 and $53,659,000, respectively, 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 were as
follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets
Real estate valuation reserves ...................... $ 3,826 $ 3,867
Discounts ........................................... 66 109
------- -------
Total deferred tax assets ........................... 3,892 3,976
------- -------
Deferred tax liabilities
Federal Home Loan Bank stock dividends .............. 17,115 14,610
Loan loss reserves .................................. 16,632 15,714
Valuation adjustment on available-for-sale securities 19,000 16,000
Depreciation ........................................ 3,395 3,339
Loan origination costs .............................. 4,131 4,102
State income taxes .................................. 4,113 1,918
Other, net .......................................... 6,230 1,952
------- -------
Total deferred tax liabilities ...................... 70,616 57,635
------- -------
Net deferred tax liability ............................. $66,724 $53,659
======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 35% 35% 35%
Tax-exempt interest ..... -- -- (1)
State income tax ........ 2 2 3
Other, net .............. (1) (1) (1)
--- --- ---
Effective income tax rate 36% 36% 36%
=== === ===
</TABLE>
For tax years beginning prior to January 1, 1996, a qualified thrift institution
was allowed a bad debt deduction based on a percentage of taxable income or on
actual experience. Accordingly, the Association used the percentage of taxable
income method in fiscal 1996.
The Small Business Job Protection Act of 1996 (the Act) required qualified
thrift institutions, such as the Association, to recapture the portion of their
tax bad debt reserves that exceeded the September 30, 1988 balance. Such
recaptured amounts are to be taken into taxable income ratably over a six-year
period beginning in 1997. Accordingly, the Company will be required to pay
approximately $22,057,000 in additional federal income taxes beginning in fiscal
1998, all of which has been previously provided for, and continuing through
fiscal 2003.
The Act also repealed the reserve method of accounting for tax bad debt
deductions and required thrifts to calculate the tax bad debt deduction based on
actual current loan losses.
A deferred tax liability has not been required to be recognized for the tax bad
debt base year reserves of the Association. The base year reserves are the
balance of reserves as of September 30, 1988, reduced proportionately for
reductions in the Association's loan portfolio since that date. At September 30,
1998, the amount of those reserves was approximately $5,370,000. The amount of
the unrecognized deferred tax liability at September 30, 1998, was approximately
$1,913,000.
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 Company's
taxable income as originally reported.
NOTE N
PROFIT SHARING RETIREMENT AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains a Profit Sharing Retirement and Employee Stock Ownership
Plan (the Plan) for the benefit of its employees. Contributions are made
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 or 13% of
their base salaries on a tax-deferred basis through the 401(k) provisions of the
Plan with a combined maximum of 13%. 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. During August 1995, the Company
received a favorable determination from the Internal Revenue Service to include
an Employee Stock Ownership feature as part of the Plan. Contributions to the
Plan amounted to $1,493,000, $1,654,000, and $1,497,000, for the years ended
September 30, 1998, 1997 and 1996, respectively.
20
<PAGE> 23
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 4,422,742, 1,395,103 and 2,299,000 unissued shares of common stock to
be reserved pursuant to the 1982 Employee Stock Compensation Program (the 1982
Plan), the 1987 Stock Option and Stock Appreciation Rights Plan (the 1987 Plan)
and the 1994 Stock Option and Stock Appreciation Rights Plan (the 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 under each plan are exercisable at varying percentages
commencing as early as three years after the date of grant, with expiration
dates ten years after the date of grant.
<TABLE>
<CAPTION>
Weighted Average
Fair Value of Option
Average Price(1) Number(1) Shares Granted
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, October 1, 1995 $13.04 1,427,440
Granted in 1996 16.74 406,187 $2.95
Exercised in 1996 8.57 (145,879)
Forfeited in 1996 14.47 (88,817)
------ --------- -----
Outstanding, September 30, 1996 14.31 1,598,931
Granted in 1997 19.26 132,490 3.46
Exercised in 1997 11.85 (159,949)
Forfeited in 1997 14.85 (142,235)
------ --------- -----
Outstanding, September 30, 1997 14.98 1,429,237
Granted in 1998 26.82 387,003 3.88
Exercised in 1998 13.17 (160,415)
Forfeited in 1998 15.90 (152,290)
------ --------- -----
Outstanding September 30, 1998 $18.12 1,503,535
====== ========= =====
</TABLE>
(1) Average price and number of stock options granted, exercised and forfeited
have been adjusted for 10% stock dividends in the second quarter of both 1998
and 1997, which had the effect of an eleven-for-ten stock split.
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
September 30, 1998
- ----------------------------------------------------------------------------------------------------------------
Weighted
Weighted Weighted Average
Average Average Number of Exercisable Price
Ranges of Number of Remaining Exercise Price of Exercisable of Exercisable
Exercise Prices Option Shares Contractual Life Options Shares Option Shares Option Shares
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.59 - 9.62 16,144 1.1 years $ 8.19 14,028 $ 7.97
11.07 - 15.59 615,833 5.3 13.63 229,841 13.82
16.15 - 19.11 479,991 6.8 17.17 33,484 17.28
22.73 - 26.82 391,567 9.1 26.76 -- --
--------- --------- ------ ------- ------
1,503,535 6.7 years $18.12 277,353 $13.94
========= ========= ====== ======= ======
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation." SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages 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 (APB) Opinion 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 adopted 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. Had compensation
cost for the Company's compensation plans been determined consistent with SFAS
No. 123, the Company's net income attributable to common stock would have been
reduced by $749,000 and $220,000 for 1998 and 1997, respectively, and net income
per share would have been reduced by $.01 for 1998 and would have remained the
same for 1997.
The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1998 and 1997:
annual dividend yield of 3.25%; expected volatility of 13.00%; risk-free
interest rate of 5.50%; and expected life of five years.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P
STOCKHOLDERS' EQUITY
In the second quarter of both fiscal 1998 and 1997, the Company declared
eleven-for-ten stock splits in the form of a 10% stock dividend in addition to
the regular quarterly cash dividends on its shares of common stock.
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
action by regulators that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Association's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
As of September 30, 1998 and 1997, the OTS categorized the Association as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Association must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Association's categorization.
<TABLE>
<CAPTION>
To be categorized as
well capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998 (Dollars in thousands)
Total capital to risk-weighted assets .. $682,547 22.85% $238,985 8.00% $298,731 10.00%
Tier I capital to risk-weighted assets . 668,453 22.38% NA NA 179,239 6.00%
Core capital to adjusted tangible assets 668,453 12.12% NA NA 275,855 5.00%
Core capital to total assets ........... 668,453 12.12% 165,513 3.00% NA NA
Tangible capital to tangible assets .... 668,453 12.12% 82,756 1.50% NA NA
September 30, 1997
Total capital to risk-weighted assets .. $608,315 19.67% $247,376 8.00% $309,220 10.00%
Tier I capital to risk-weighted assets . 600,395 19.42% NA NA 185,532 6.00%
Core capital to adjusted tangible assets 600,395 10.74% NA NA 279,407 5.00%
Core capital to total assets ........... 600,395 10.74% 167,644 3.00% NA NA
Tangible capital to tangible assets .... 600,395 10.74% 83,822 1.50% NA NA
</TABLE>
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation
(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; however, no adjustments were proposed as a
result of the most recent OTS examination which concluded in February 1998.
SFAS No. 128, "Earnings per Share," was issued in February, 1997. SFAS No. 128
simplifies the standards found in APB No. 15 for computing earnings per share
(EPS), and makes them comparable to international standards.
Under SFAS No. 128, the Company is required to present both basic and diluted
EPS on the face of its statements of operations. Basic EPS, which replaces
primary EPS required by APB No. 15 for entities with complex capital structures,
excludes common stock equivalents and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS gives effect to all dilutive potential
common shares that were outstanding during the period.
The Company adopted SFAS No. 128 effective October 1, 1997. All prior period EPS
data have been restated.
NOTE Q
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," (SFAS No.
107) 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 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.
22
<PAGE> 25
<TABLE>
<CAPTION>
September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------
(In thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash $ 22,215 $ 22,215 $ 23,444 $ 23,444
Available-for-sale securities 764,188 764,188 672,132 672,132
Held-to-maturity securities 445,871 464,799 564,747 578,124
Loans receivable 4,143,525 4,487,761 4,190,776 4,401,679
FHLB stock 101,050 101,050 93,584 93,584
Financial liabilities
Customer accounts 3,156,500 3,167,470 2,978,031 2,986,062
FHLB advances 1,356,202 1,412,565 1,601,000 1,594,196
Other borrowings 221,819 221,819 303,544 303,544
Interest rate swaps -- -- -- (595)
</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.
INTEREST RATE SWAPS - The market value for interest rate swaps was
determined using the discounted cash flow method.
NOTE R PENDING ACCOUNTING CHANGES
SFAS No. 130, "Reporting Comprehensive Income," was issued in June
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Adoption of SFAS No. 130 is not anticipated to impact the Company's
financial results.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was issued in June 1997 and redefined how operating
segments are determined. SFAS No. 131 requires disclosure of certain
financial and descriptive information about a company's operating
segments. This statement is not anticipated to impact the Company's
financial results.
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits," was issued in February 1998 and standardizes
the annual disclosure requirements for pensions and other
postretirement benefits. This statement will not affect the results of
operations or financial position of the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement addresses the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS
No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. The impact on the financial statements
of adopting SFAS No. 133 has not been determined.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," was issued in October 1998. Prior to issuance of
SFAS No. 134, when a mortgage banking company securitized loans held
for sale but did not sell the security in the secondary market, the
security was classified as trading. SFAS No. 134 requires that the
security be classified in accordance with SFAS No. 115 as either
trading, available-for-sale or held-to-maturity according to the
Company's intent unless the Company has already committed to sell the
security before or during the securitization process. The statement is
effective for all fiscal years beginning after December 15, 1998. This
statement is not expected to have a material impact on the results of
operations or financial position of the Company.
NOTE S FINANCIAL INFORMATION - WASHINGTON FEDERAL, INC.
The following Washington Federal, Inc. (parent company only) financial
information should be read in conjunction with the other notes to the
Consolidated Financial Statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, 1998 1997
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Assets
Cash ............................................................. $ 1,786 $ 1,617
Investment in subsidiary ......................................... 767,307 716,332
Dividend receivable .............................................. 10,000 11,000
Other assets ..................................................... -- 725
--------- ---------
Total assets ................................................... $ 779,093 $ 729,674
========= =========
Liabilities
Borrowed money ................................................... $ -- $ 1,000
Dividend payable ................................................. 11,833 10,927
Other liabilities ................................................ 88 2
--------- ---------
Total liabilities .............................................. 11,921 11,929
--------- ---------
Stockholders' equity
Common stock, $1.00 par value: 100,000,000 shares authorized;
56,423,961 and 51,137,889 shares issued;
51,446,129 and 47,508,759 shares outstanding ................... 56,424 51,138
Paid-in capital .................................................. 714,700 573,241
Valuation adjustment for available-for-sale securities, net of tax 35,000
30,000
Treasury stock, at cost; 4,977,832 and 3,629,130 shares .......... (92,221)
(68,266)
Retained earnings ................................................ 53,269 131,632
--------- ---------
Total stockholders' equity ..................................... 767,172 717,745
--------- ---------
Total liabilities and stockholders' equity ..................... $ 779,093 $ 729,674
========= =========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Income
Dividends from subsidiary .......................................... $ 67,000 $ 52,000
Expense
Borrowings ......................................................... 129 240
Other .............................................................. 235 270
-------- --------
Total expense ...................................................... 364 510
-------- --------
Net income before equity in undistributed net income of subsidiaries 66,636 51,490
Equity in undistributed net income of subsidiaries ................... 45,070 53,375
-------- --------
Income before income taxes ........................................... 111,706 104,865
Income tax benefit ................................................... 130 185
-------- --------
Net income ........................................................... $111,836 $105,050
======== ========
</TABLE>
24
<PAGE> 27
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997
- --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 111,836 $ 105,050
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed net income of subsidiaries.. (45,070) (53,375)
Decrease (increase) in other assets ................ 1,485 (952)
Increase (decrease) in other liabilities ........... 992 (5)
--------- ---------
Net cash provided by operating activities .......... 69,243 50,718
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term borrowings .................... (1,000) (10,000)
Issuance of common stock through stock option plan ... 1,762 350
Proceeds from employee stock ownership plan .......... 967 469
Treasury stock (purchased) issued .................... (23,955) 1,370
Dividends ............................................ (46,848) (42,691)
--------- ---------
Net cash used by financing activities .............. (69,074) (50,502)
--------- ---------
Increase in cash ................................... 169 216
Cash at beginning of year .......................... 1,617 1,401
--------- ---------
Cash at end of year ................................ $ 1,786 $ 1,617
========= =========
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited interim results of
operations by quarter:
NOTE T
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
Year ended September 30, 1998 QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income ............ $116,232 $114,931 $114,924 $114,517
Interest expense ........... 65,276 62,940 61,878 62,139
-------- -------- -------- --------
Net interest income ........ 50,956 51,991 53,046 52,378
Provision for loan losses... 159 172 224 185
Other operating income ..... 1,893 2,974 3,039 3,126
Other operating expense .... 10,699 11,442 11,526 11,211
-------- -------- -------- --------
Income before income taxes.. 41,991 43,351 44,335 44,108
Income taxes ............... 14,907 15,389 15,883 15,770
-------- -------- -------- --------
Net income ................. $ 27,084 $ 27,962 $ 28,452 $ 28,338
======== ======== ======== ========
Basic earnings per share ... $ .52 $ .54 $ .54 $ .54
======== ======== ======== ========
Diluted earnings per share.. $ .51 $ .53 $ .54 $ .54
======== ======== ======== ========
Return on average assets ... 1.91% 1.99% 2.05% 2.04%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended September 30, 1997 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income ............ $108,810 $116,863 $116,281 $117,053
Interest expense ........... 60,981 64,993 65,400 66,073
-------- -------- -------- --------
Net interest income ........ 47,829 51,870 50,881 50,980
Provision for loan losses... 229 184 201 199
Other operating income ..... 964 814 1,426 1,873
Other operating expense .... 10,848 10,994 10,666 9,978
-------- -------- -------- --------
Income before income taxes.. 37,716 41,506 41,440 42,676
Income taxes ............... 13,615 15,100 14,425 15,148
-------- -------- -------- --------
Net income ................. $ 24,101 $ 26,406 $ 27,015 $ 27,528
Basic earnings per share ... $ .48 $ .50 $ .52 $ .53
======== ======== ======== ========
Diluted earnings per share.. $ .48 $ .50 $ .51 $ .52
======== ======== ======== ========
Return on average assets ... 1.76% 1.82% 1.89% 1.93%
======== ======== ======== ========
</TABLE>
25
<PAGE> 28
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income ............ $460,604 $459,007 $404,211 $343,766 $287,577
Interest expense ........... 252,233 257,447 228,745 188,253 121,114
-------- -------- -------- -------- --------
Net interest income ........ 208,371 201,560 175,466 155,513 166,463
Provision for loan losses .. 740 813 3,828 6,245 401
Other income ............... 11,032 5,077 5,917 9,704 8,359
Other expense .............. 44,878 42,486 53,105 35,883 32,034
-------- -------- -------- -------- --------
Income before income taxes 173,785 163,338 124,450 123,089 142,387
Income taxes ............... 61,949 58,288 44,555 44,746 49,600
-------- -------- -------- -------- --------
Net income ............... $111,836 $105,050 $ 79,895 $ 78,343 $ 92,787
======== ======== ======== ======== ========
Per share data
Basic earnings per share . $ 2.14 $ 2.03 $ 1.57 $ 1.49 $ 1.75
Diluted earnings per share $ 2.12 $ 2.01 $ 1.55 $ 1.48 $ 1.74
Cash dividends ........... $ .90 $ .82 $ .74 $ .68 $ .62
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets ....................... $5,637,011 $5,719,589 $5,114,978 $4,577,402 $3,830,053
Loans and mortgage-backed securities 5,119,571 5,137,905 4,589,621 4,114,881 3,400,583
Investment securities .............. 234,013 289,750 299,006 256,661 195,165
Customer accounts .................. 3,156,202 2,978,031 2,480,220 2,445,335 2,281,751
FHLB advances ...................... 1,356,500 1,601,000 1,162,000 527,000 310,100
Other borrowings ................... 221,819 303,544 797,549 957,087 624,604
Stockholders' equity ............... 767,172 717,745 577,702 575,929 546,773
Number of
Customer accounts ................ 184,832 180,957 160,968 161,295 153,000
Mortgage loans ................... 40,615 41,820 39,570 35,641 32,057
Offices .......................... 106 104 93 87 82
</TABLE>
26
<PAGE> 29
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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1998. 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 Washington Federal, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 19, 1998
GENERAL CORPORATE AND
STOCKHOLDERS' INFORMATION
CORPORATE 425 Pike Street
HEADQUARTERS Seattle, Washington 98101
(206) 624-7930
INDEPENDENT Deloitte & Touche, LLP
ACCOUNTANTS Seattle, Washington
SPECIAL COUNSEL Elias, Matz, Tiernan & Herrick LLP
Washington, D.C.
TRANSFER AGENT, Stockholder inquiries regarding transfer
REGISTRAR AND requirements, cash or stock dividends, lost
DIVIDEND certificates, consolidating records, correcting
DISBURSING a name or changing an address should be
AGENT directed to the transfer agent:
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations Department
85 Challenger Road
Ridgefield Park, NJ 07660
Telephone: 1-800-356-2017
www.chasemellon.com
ANNUAL MEETING The annual meeting of stockholders will be held on
January 27, 1999, at 2 p.m. at the Westin Hotel, 1900
Fifth Avenue, Seattle, Washington.
FORM 10-K This report is available to stockholders of record
upon written request to:
Cathy Cooper
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, 1998, there were approximately 3,065
shareholders of record.
<TABLE>
<CAPTION>
Stock Prices
------------
Quarter Ended High Low Dividends
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996 23 1/8 19 20
March 31, 1997 25 5/8 20 5/8 20
June 30, 1997 25 3/4 20 3/8 21
September 30, 1997 27 3/8 22 7/8 21
December 31, 1997 30 1/4 26 3/4 22
March 31, 1998 29 1/4 26 5/16 22
June 30, 1998 30 1/8 26 3/4 23
September 30, 1998 28 1/8 22 1/4 23
</TABLE>
All prices shown have been adjusted for stock splits.
MARKET MAKERS:
Fox-Pitt, Kelton Inc.
Herzog, Heine, Geduld, Inc.
Instinut Corporation
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
Lehman Brothers, Inc.
Mayer & Schweitzer, Inc.
Merrill Lynch, Pierce,
Fenner & Smith Inc.
Nationsbanc Montgomery Securities
Ragen MacKenzie, Inc.
Sherwood Securities Corp.
Salomon Smith Barney, Inc.
Troster Singer Corp.
27
<PAGE> 30
DIRECTORS, OFFICERS AND OFFICES
CORPORATE HEADQUARTERS
425 Pike Street
Seattle, WA 98101
(206) 624-7930
BOARD OF DIRECTORS
GUY C. PINKERTON
Chairman, President and Chief Executive Officer
JOHN F. CLEARMAN
Chief Financial Officer of Milliman & Robertson, Inc.
H. DENNIS HALVORSON
Retired, Former Chief Executive Officer, United Bank
KERMIT O. HANSON
Dean Emeritus University of Washington Graduate School of Business
Administration
W. ALDEN HARRIS
Former Executive Vice President
ANNA C. JOHNSON
Senior Partner Scan East West Travel
RICHARD C. REED
Management Consultant Altman Weil, Inc.
CHARLES R. RICHMOND
Executive Vice President and Secretary
DIRECTOR EMERITUS
HAROLD C. KEAN
E.W. MERSEREAU, JR.
EXECUTIVE MANAGEMENT COMMITTEE
WILLIAM A. CASSELS
Executive Vice President
LAWRENCE D. CIERPISZEWSKI
Executive Vice President
GUY C. PINKERTON
Chairman, President and Chief Executive Officer
CHARLES R. RICHMOND
Executive Vice President and Secretary
RONALD L. SAPER
Executive Vice President and Chief Financial Officer
ROY M. WHITEHEAD
Executive Vice President
DEPARTMENT OFFICERS
ACCOUNTING
KEITH D. TAYLOR C.P.A.
Senior Vice President and Treasurer
JOSEPH R. RUNTE
Vice President and Controller
MARTINE ANDREWS
Assistant Manager
KAREN MEFFORD
ADMINISTRATION
DEANNA RUSSELL
APPRAISAL
EILEEN E. HIRAMI
Vice President
JAMES N. IBABAO
CONSTRUCTION AND LAND LOANS
LORELEI G. STOVES
Senior Vice President
DATA PROCESSING
JIM BLACK
RIC HEATON
DEPOSIT OPERATIONS
BEN A. WHITMARSH
Vice President
CAROLYN J. LOBDELL
Assistant Vice President and Assistant Manager
MARTY DAVIES
FACILITIES
KELLY PERNELA
Assistant Vice President
HUMAN RESOURCES
ARLINE FONDA
Vice President
KAREN CARLSON
BOBBY FASSIO
INTERNAL AUDIT
BARBARA A. MURPHY
Vice President
LOAN OPERATIONS
MICHAEL BUSH
Vice President
LEANN BURKE
LOAN SERVICING
TERRY O. PERMENTER
Vice President
VIVIAN L. YORITA
Vice President and Assistant Manager
MIKE CULALA
LOIS L. KRISTJANSSON
MARY TOMLINSON
LEGAL, REGULATORY AND COMPLIANCE
PAUL TYLER
Vice President
MANUALS/TRAINING
LINDA NICHOLL
Assistant Vice President
MARKETING AND INVESTOR RELATIONS
CATHY COOPER
Vice President
MULTI-FAMILY LOANS
LANG HADLEY
Vice President
MARY BAUMEIER
PERMANENT LOAN PRODUCTION
JANE A. NOGLE
Senior Vice President
COLLEEN WELLS
Assistant Vice President and Divisional Loan Brokerage Manager
CHRISTA TULLY
Assistant Divisional Loan Brokerage Manager
QUALITY CONTROL
NANCY C. ELLWEIN
Vice President
SAVINGS ADMINISTRATION
CYNTHIA L. ARNOLD
Vice President
SPECIAL CREDITS
JACK B. JACOBSON
Vice President
GEORGE W. CORLEY
Vice President
SUBSIDIARIES
FIRST INSURANCE AGENCY, INC.
406 South Second Street
Mount Vernon, WA 98273
1-800-562-2555
(360) 336-9630
ANN BRITTAIN
Vice President
WASHINGTON SERVICES, INC.
6125 South Morgan Road
Freeland, WA 98249
SOUTHERN WASHINGTON
29 OFFICE LOCATIONS
REGION MANAGERS
JAMES E. CADY
Vice President
DALE B. CULVER
Vice President
E. CRAIG WILSON
Vice President
NORTHERN WASHINGTON
10 OFFICE LOCATIONS
DIVISION MANAGER
DOUGLAS A. ROWELL
Senior Vice President
WESTERN IDAHO
15 OFFICE LOCATIONS
DIVISION MANAGER
ROBERT P. LINK
Senior Vice President
EASTERN IDAHO
4 OFFICE LOCATIONS
REGION MANAGER
LARRY WADSWORTH
Vice President
SOUTHERN OREGON
16 OFFICE LOCATIONS
DIVISION MANAGER
NATE LOWE
Senior Vice President
NORTHERN OREGON
7 OFFICE LOCATIONS
REGION MANAGER
WILLIAM V. READ
Vice President
UTAH
11 OFFICE LOCATIONS
DIVISION MANAGER
RICHARD FISHER
Senior Vice President
PHOENIX, ARIZONA
6 OFFICE LOCATIONS
DIVISION MANAGER
RON SHERIDAN
Senior Vice President
TUCSON, ARIZONA
8 OFFICE LOCATIONS
DIVISION MANAGER
PATTY MCCARTHY-HOWARD
Senior Vice President
28
<PAGE> 31
[LOGO]
WASHINGTON FEDERAL SAVINGS
425 Pike Street, Seattle, WA 98101
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-89082 and No. 33-97900 of Washington Federal, Inc. on forms S-8 or our
report dated October 19, 1998, incorporated by reference in the Annual Report
on Form 10-K of Washington Federal, Inc. for the year ended September 30, 1998.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
December 24, 1998
Seattle, Washington
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,215
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 764,188
<INVESTMENTS-CARRYING> 445,871
<INVESTMENTS-MARKET> 464,799
<LOANS> 4,143,525
<ALLOWANCE> 23,854
<TOTAL-ASSETS> 5,637,011
<DEPOSITS> 3,156,202
<SHORT-TERM> 778,319
<LIABILITIES-OTHER> 135,318
<LONG-TERM> 800,000
0
0
<COMMON> 56,424
<OTHER-SE> 710,748
<TOTAL-LIABILITIES-AND-EQUITY> 5,637,011
<INTEREST-LOAN> 364,801
<INTEREST-INVEST> 95,803
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 460,604
<INTEREST-DEPOSIT> 156,099
<INTEREST-EXPENSE> 252,233
<INTEREST-INCOME-NET> 208,371
<LOAN-LOSSES> 740
<SECURITIES-GAINS> 5,560
<EXPENSE-OTHER> 44,878
<INCOME-PRETAX> 173,785
<INCOME-PRE-EXTRAORDINARY> 111,836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,836
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.12
<YIELD-ACTUAL> 7.96
<LOANS-NON> 18,347
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,580
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,623
<CHARGE-OFFS> 1,609
<RECOVERIES> 100
<ALLOWANCE-CLOSE> 23,854
<ALLOWANCE-DOMESTIC> 16,743
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,111
</TABLE>
