<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, 1999.
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)
Washington 91-1661606
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Pike Street, Seattle, Washington 98101
---------------------------------------- ----------
(Address of principal executive offices) (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 6, 1999, the aggregate market value of the 51,331,027 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
1,724,244 shares held by all directors and executive officers of the Registrant
as a group, was $1,020,204,000. This figure is based on the closing sale price
of $19.875 per share of the Registrant's Common Stock on December 6, 1999, as
reported in The Wall Street Journal on December 7, 1999.
Number of shares of Common Stock outstanding as of December 6, 1999: 53,055,271
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, 1999, are incorporated into Part II, Items 5-8 of this
Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form
10-K.
<PAGE> 2
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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 107 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,
---------------------------------------------------------------------------------------
1997 1998
--------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans(1) $4,091,571 $ 357,496 8.74% $4,166,420 $ 364,801 8.76%
Mortgage-backed securities 1,003,077 74,667 7.44 907,265 70,099 7.73
Investment securities 305,183 20,140 6.60 279,442 18,238 6.53
FHLB stock 84,888 6,704 7.90 96,405 7,466 7.74
---------- ---------- ---- ---------- ---------- ----
Total interest-earning assets 5,484,719 459,007 8.37 5,449,532 460,604 8.45
Other assets 161,324 193,397
---------- ----------
Total assets $5,646,043 $5,642,929
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Checking accounts $ 83,991 2,006 2.39 $ 91,800 2,153 2.35
Passbook and statement accounts 183,048 6,371 3.48 173,189 6,048 3.49
Insured money market accounts 374,581 15,391 4.11 418,205 16,890 4.04
Certificate accounts (time deposits) 2,117,792 115,857 5.47 2,274,557 126,757 5.57
Repurchase agreements with customers 60,671 3,059 5.04 79,652 4,252 5.34
FHLB advances 1,315,353 73,393 5.58 1,210,362 67,816 5.60
Securities sold under agreements
to repurchase 569,203 30,944 5.44 400,202 22,521 5.63
Federal funds purchased 187,082 10,426 5.57 102,407 5,796 5.66
---------- ---------- ---- ---------- ---------- ----
Total interest-bearing liabilities 4,891,721 257,447 5.26 4,750,374 252,233 5.31
Other liabilities 106,513 139,686
---------- ----------
Total liabilities 4,998,234 4,890,060
Stockholders' equity 647,809 752,869
---------- ----------
Total liabilities and
stockholders' equity $5,646,043 $5,642,929
========== ---------- ---- ========== ---------- ----
Net interest income/Interest rate spread $ 201,560 3.11% $ 208,371 3.14%
========== ==== ========== ====
Net interest margin(2) 3.67% 3.82%
==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
1999
-------------------------------------------------
Average Average
Balance Interest Rate
<S> <C> <C> <C>
ASSETS
Loans(1) $4,191,658 $ 353,930 8.44%
Mortgage-backed securities 1,132,638 82,331 7.27
Investment securities 174,848 11,502 6.58
FHLB stock 104,013 7,814 7.51
---------- ---------- ----
Total interest-earning assets 5,603,157 455,577 8.13
Other assets 189,085
---------
Total assets $5,792,242
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Checking accounts 98,850 2,266 2.29
Passbook and statement accounts 166,428 5,225 3.14
Insured money market accounts 504,609 20,057 3.97
Certificate accounts (time deposits) 2,434,148 127,464 5.24
Repurchase agreements with customers 98,155 4,930 5.02
FHLB advances 1,076,263 59,275 5.51
Securities sold under agreements
to repurchase 396,098 19,995 5.05
Federal funds purchased 105,992 5,278 4.98
---------- ---------- ----
Total interest-bearing liabilities 4,880,543 244,490 5.01
Other liabilities 150,126
----------
Total liabilities 5,030,669
Stockholders' equity 761,573
----------
Total liabilities and
stockholders' equity $5,792,242
========== ---------- ----
Net interest income/Interest rate spread $ 211,087 3.12%
========== ====
Net interest margin(2) 3.77%
====
</TABLE>
- ----------
(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 $5.7 billion at September 30, 1999, representing
approximately 93% 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 $1.353 billion (net of discounts and premiums) at September 30,
1999, 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>
1995 1996 1997
------------------------- ------------------------- ------------------------
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 $2,635,669 60.1% $3,241,789 66.6% $3,719,185 68.9%
Land development 167,028 3.8 172,146 3.5 158,706 2.9
Construction(1) 443,723 10.1 548,302 11.2 542,394 10.0
Insured or guaranteed:
FHA 20,479 .4 18,123 .4 26,641 .5
VA 16,434 .4 18,169 .4 17,797 .3
Mortgage-backed
securities(residential)(2) 1,095,861 25.0 865,887 17.8 931,456 17.3
Savings account loans 2,344 .1 3,576 .1 3,954 .1
Consumer 2,463 .1 1,488 -- 1,089 --
---------- ----- ---------- ----- ---------- -----
Total(3) $4,384,001 100.0% $4,869,480 100.0% $5,401,222 100.0%
========== ===== ========== ===== ========== =====
Loans by type of security
Residential:
Single-family(4) $3,168,844 72.2% $3,879,092 79.7% $4,222,566 78.2%
Other dwelling units 54,407 1.2 74,108 1.5 122,038 2.2
Income property 60,082 1.4 45,329 .9 120,119 2.2
Mortgage-backed
securities(residential)(2) 1,095,861 25.0 865,887 17.8 931,456 17.3
Savings account loans 2,344 .1 3,576 .1 3,954 .1
Consumer 2,463 .1 1,488 -- 1,089 --
---------- ----- ---------- ----- ---------- -----
Total(3) $4,384,001 100.0% $4,869,480 100.0% $5,401,222 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1999
------------------------ ---------------------------
Amount Percent Amount Percent
---------- -------- ------------ -------
<S> <C> <C> <C> <C>
Loans by type of loan
Real estate:
Conventional:
Permanent $3,689,755 68.3% $3,908,177 64.1%
Land development 160,879 3.0 170,479 2.8
Construction(1) 562,689 10.4 620,459 10.2
Insured or guaranteed:
FHA 19,330 .3 14,616 .2
VA 15,829 .3 13,217 .2
Mortgage-backed
securities(residential)(2) 949,892 17.6 1,366,278 22.5
Savings account loans 3,094 .1 2,731 --
Consumer 673 -- 395 --
---------- ----- ---------- -----
Total(3) $5,402,141 100.0% $6,096,352 100.0%
========== ===== ========== =====
Loans by type of security
Residential:
Single-family(4) $4,258,722 78.7% $4,455,275 73.0%
Other dwelling units 105,022 2.0 206,347 3.4
Income property 84,738 1.6 65,326 1.1
Mortgage-backed
securities(residential)(2) 949,892 17.6 1,366,278 22.5
Savings account loans 3,094 .1 2,731 --
Consumer 673 -- 395 --
---------- ----- ---------- -----
Total(3) $5,402,141 100.0% $6,096,352 100.0%
========== ===== ========== =====
</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,
$15.9 million, $17.8 million, $17.6 million, and $10.4 million at September 30,
1995, 1996, 1997, 1998, and 1999, 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 $4.11 billion,
$4.60 billion, $5.10 billion, $5.10 billion, and $5.7 billion, at September 30,
1995, 1996, 1997, 1998, and 1999, 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, 1999. 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>
Maturity Distribution
----------------------------------------------------
Balance Outstanding at Less than 1 to 5 After 5
September 30, 1999 1 year years years
---------------------- ---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
One- to four-family real estate loans $3,664,337 $ 13,422 $ 33,158 $3,617,757
GNMA, FHLMC, FNMA and other
mortgage-backed securities 1,366,278 1,099 16,510 1,348,669
Construction and land development
loans 790,938 555,161 23,349 212,428
Income property and other residential 271,673 21,125 34,245 216,303
Savings account loans 2,731 2,670 32 29
Consumer loans 395 160 161 74
---------- -------- ---------- ----------
$6,096,352 $593,637 $ 107,455 $5,395,260
========== ======== ========== ==========
</TABLE>
- ------------------------------------
<TABLE>
<S> <C>
Loans maturing after one year:
Fixed-interest rates $4,836,285
Floating or adjustable interest rates 666,430
----------
Total $5,502,715
==========
</TABLE>
<PAGE> 8
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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 $791
million or 13% of the Association's gross loan portfolio (including
mortgage-backed securities) at September 30, 1999. 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, 1999, $5.2 billion or
85% 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, 1999, loans under this program amounted to
$46.1 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, 1999, amounted to $6.5 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, 1999, the Association was servicing approximately
$48.2 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,
---------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Loans originated(1):
Construction $ 341,001 $ 428,317 $ 407,135 $ 467,884 $ 425,190
Land 97,990 92,496 77,270 105,901 121,853
Loans on existing property 758,455 972,601 556,063 723,337 1,058,403
Loans refinanced 27,468 62,854 48,240 157,110 164,166
----------- ----------- ----------- ----------- -----------
Total loans originated 1,224,914 1,556,268 1,088,708 1,454,232 1,769,612
----------- ----------- ----------- ----------- -----------
Loans and mortgage-backed
securities purchased:
From acquisitions of
associations 27,759 -- 627,816 -- --
Other 216,843 60,888 11,310 321,006 767,101
----------- ----------- ----------- ----------- -----------
244,602 60,888 639,126 321,006 767,101
----------- ----------- ----------- ----------- -----------
Loans and mortgage-backed
securities sold (34,156) (134,275) (119,851) (55,560) (22,726)
----------- ----------- ----------- ----------- -----------
Loan and mortgage-backed
securities principal
repayments (683,383) (1,016,049) (1,127,923) (1,734,310) (1,834,818)
----------- ----------- ----------- ----------- -----------
Net change in loans in
process, discounts, fees, etc (37,679) 7,908 68,224 (3,702) (67,096)
----------- ----------- ----------- ----------- -----------
Net loan activity increase(decrease)
$ 714,298 $ 474,740 $ 548,284 $ (18,334) $ 612,073
=========== =========== =========== =========== ===========
</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.
<PAGE> 13
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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,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Restructured loans (1) $10,103 $24,046 $ 8,613 $ 4,005 $12,983
Nonaccrual loans:
Single-family residential 2,879 5,913 9,571 8,751 7,949
Construction and land 9,515 7,779 4,629 9,932 5,434
Commercial real estate 76 482 586 255 92
Consumer -- 4 3 3 3
------- ------- ------- ------- -------
Total nonaccrual loans (2) 12,470 14,178 14,789 18,941 13,478
Total REO (3) 19,735 20,417 19,339 6,805 6,926
------- ------- ------- ------- -------
Total nonperforming assets $42,308 $58,641 $42,741 $29,751 $33,387
======= ======= ======= ======= =======
Total nonperforming assets as
a percent of total assets .92% 1.15% .75% .53% .54%
======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Performing in accordance with restructured terms.
(2) The Association recognized interest income on nonaccrual loans of
approximately $1,099,000 in 1999. Had these loans performed according to their
original contract terms, the Association would have recognized interest income
of approximately $1,548,000 in 1999.
In addition to the nonaccrual loans reflected in the above table, at
September 30, 1999, the Association had $13.8 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 .77%
at September 30, 1999. 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,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $11,720 $11,651 $15,182 $24,623 $23,854
Charge-offs:
Real estate:
Permanent 450 146 131 546 733
Construction 164 179 592 344 1,326
Land 163 90 413 1,215 817
Income property 6,536 405 4,796 199 255
Other 17 -- -- -- --
------- ------- ------- ------- -------
7,330 820 5,932 2,304 3,131
------- ------- ------- ------- -------
Recoveries:
Real estate:
Permanent 10 10 14 53 52
Construction 50 -- 8 15 36
Land 21 -- -- 10 202
Income property 654 513 3,340 717 203
Other -- -- -- -- --
------- ------- ------- ------- -------
735 523 3,362 795 493
------- ------- ------- ------- -------
Net charge-offs 6,595 297 2,570 1,509 2,638
Acquisitions 281 -- 11,198 -- --
Provisions for loan losses 6,245 3,828 813 740 684
------- ------- ------- ------- -------
Ending balance $11,651 $15,182 $24,623 $23,854 $21,900
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding .25% .01% .06% .04% .06%
======= ======= ======= ======= =======
</TABLE>
- ----------
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Permanent single-family $ 3,031 $ 5,239 $ 5,755 $ 5,515 $ 5,385
Construction 5 2,945 3,053 3,059 3,064
Land 405 2,525 1,763 1,912 2,307
Income property 950 1,843 7,081 6,257 7,650
Other -- -- -- -- --
Unallocated 7,260 2,630 6,971 7,111 3,494
------- ------- ------- ------- -------
$11,651 $15,182 $24,623 $23,854 $21,900
======= ======= ======= ======= =======
</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 $13.0 million of
the allowance for loan loss at year-end 1999, compared with an allocation of
$11.2 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 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,
-----------------------------------------------------------------------------------------
1997 1998 1999
------------------------- ------------------------ ------------------------
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 $258,279 $266,279 $198,540 $210,540 $115,278 $120,278
State and political subdivisions 23,471 25,403 23,473 25,439 21,475 22,719
-------- -------- -------- -------- -------- --------
$281,750 $291,682 $222,013 $235,979 $136,753 $142,997
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
<PAGE> 16
16
The investment portfolio at September 30, 1999 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 $ 90,869 7.98%
Due after one year through five years 22,781 6.88
Due after ten years 23,103 7.93
---------
$ 136,753
=========
</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 1997, 1998, and
1999 amounted to approximately $375,000, $464,000, and $403,000, 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, 1999,
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,
--------------------------------------------------------------------------------
1997 1998 1999
---------------------- ------------------------ ------------------------
Amount Rate Amount Rate Amount Rate
----------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Checking accounts $ 88,811 3.00% $ 93,942 2.60% $ 101,950 2.60%
Regular savings (passbook)
accounts 177,843 3.50 168,921 3.50 160,518 3.00
Money market deposit accounts 399,056 4.04 443,395 4.14 549,420 4.02
---------- ---------- ----------
665,710 706,258 811,888
---------- ---------- ----------
Fixed-rate certificates:
3.00% - 4.99% 13,946 20,875 1,043,119
5.00% - 6.99% 2,063,144 2,173,728 1,215,122
7.00% - 8.99% 1,544 1,428 487
9.00% and above 7 7 7
Jumbo certificates ($100,000 or more):
3.00% - 4.99% 3,293 5,793 40,264
5.00% - 6.99% 150,958 160,490 180,104
7.00% - 8.99% 6,769 2,596 866
---------- ---------- ----------
2,239,661 2,364,917 2,479,969
---------- ---------- ----------
$2,905,371 $3,071,175 $3,291,857
========== ========== ==========
</TABLE>
The following table sets forth, by various interest rate categories,
the amounts of certificates of deposit of the Association at September 30, 1999,
which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1999, 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% $ 4 $ 79 $ 79 $ 109 $ -- $ -- $ --
4.00 to 4.99% 390,845 355,627 255,250 69,949 5,361 6,080 --
5.00 to 5.99% 243,640 69,305 802,788 148,939 37,449 83,241 166
6.00 to 6.99% 6,627 692 1,656 206 212 305 --
7.00 to 7.99% 1,003 255 -- 84 -- 5 --
8.00 to 8.99% -- -- -- 6 -- -- --
9.00% and above -- -- -- 7 -- -- --
-------- -------- ---------- -------- ------- ------- ------
Total $642,119 $425,958 $1,059,773 $219,300 $43,022 $89,631 $ 166
======== ======== ========== ======== ======= ======= ======
</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, 1999, the Association had $221.2 million of
certificates of deposit in amounts of $100,000 or more outstanding, maturing as
follows: $89.5 million within 3 months; $45.2 million over 3 months through 6
months; $86.0 million over 6 months through 12 months; and $.5 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,
----------------------------------------------
1997 1998 1999
---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C>
Assumed from acquisitions $ 379,975 $ -- $ --
Deposits 3,045,581 3,233,094 3,281,349
Withdrawals 3,070,429 3,211,022 3,217,991
---------- ---------- ----------
Net increase (decrease) in deposits
before interest credited 355,127 22,072 63,358
Interest credited 142,684 156,099 159,942
---------- ---------- ----------
Net increase in customer accounts $ 497,811 $ 178,171 $ 223,300
========== ========== ==========
</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 -The Association- 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 $303.3 million of
securities sold under such agreements at September 30, 1999.
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
$87.6 million of such agreements outstanding at September 30, 1999.
<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,
------------------------------------------------
1997 1998 1999
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal funds and securities sold
to dealers under agreements to repurchase:
Average balance outstanding $ 756,290 $ 502,609 $ 502,090
Maximum amount outstanding
at any month-end during the period $1,088,904 $ 694,990 $ 731,580
Weighted-average interest rate
during the period(1) 5.47% 5.63% 5.03%
FHLB advances:
Average balance outstanding $1,315,353 $1,210,362 $1,076,263
Maximum amount outstanding at any
month-end during the period $1,703,000 $1,523,500 $1,454,000
Weighted-average interest rate
during the period(1) 5.58% 5.60% 5.51%
Securities sold to customers
under agreements to repurchase:
Average balance outstanding $ 60,671 $ 79,652 $ 98,155
Maximum amount outstanding at any
month-end during the period $ 72,660 $ 85,027 $ 105,871
Weighted-average interest rate
during the period(1) 5.04% 5.34% 5.02%
Total average borrowings $2,132,314 $1,792,623 $1,676,508
Weighted-average interest rate
on total average borrowings(1) 5.53% 5.60% 5.34%
</TABLE>
- ----------
(1) Interest expense divided by average daily 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,
----------------------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Return on assets(1) 1.86% 2.00% 1.99%
Return on equity(2) 16.50 15.68 15.47
Average equity to average assets 11.47 13.34 13.15
Dividend payout ratio(3) 40.72 42.45 43.90
</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.
<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,
------------------------------------------------------------------------------------------
1997 vs. 1996 1998 vs. 1997
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 $57,591 $ (445) $(5,022) $52,124 $ 6,541 $ 818 $ (54) $ 7,305
Mortgaged-backed securities 2,793 (2,223) (29) 541 (7,128) 2,909 (349) (4,568)
Investments(1) 163 1,937 31 2,131 (979) (156) (5) (1,140)
------- ------- ------- ------- -------- ------- ----- --------
All interest-earning assets 60,547 (731) (5,020) 54,796 (1,566) 3,571 (408) 1,597
------- ------- ------- ------- -------- ------- ----- --------
Interest expense:
Customer accounts 17,907 (4,461) (666) 12,780 10,996 2,256 164 13,416
FHLB advances and other
borrowings 19,471 (2,942) (607) 15,922 (19,870) 1,450 (210) (18,630)
------- ------- ------- ------- -------- ------- ----- --------
All interest-bearing liabilities 37,378 (7,403) (1,273) 28,702 (8,874) 3,706 (46) (5,214)
------- ------- ------- ------- -------- ------- ----- --------
Change in net interest income $23,169 $ 6,672 $(3,747) $26,094 $ 7,308 $ (135) $(362) $ 6,811
======= ======= ======= ======= ======== ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1999 vs. 1998
Increase (Decrease) Due to
---------------------------------------------
Volume Rate Rate/Vol Total
------ ---- -------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loan portfolio $ 2,211 $(13,332) $ 250 $(10,871)
Mortgaged-backed securities 17,421 (4,173) (1,016) 12,232
Investments(1) (6,634) 338 (92) (6,388)
-------- -------- ------- --------
All interest-earning assets 12,998 (17,167) (858) (5,027)
-------- -------- ------- --------
Interest expense:
Customer accounts 13,610 (9,112) (656) 3,842
FHLB advances and other
borrowings (7,552) (4,282) 249 (11,585)
-------- -------- ------- --------
All interest-bearing liabilities 6,058 (13,394) (407) (7,743)
-------- -------- ------- --------
Change in net interest income $ 6,940 $ (3,773) $ (451) $ 2,716
======== ======== ======= ========
</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 tables set forth, at September 30, 1999 and 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 - 300 basis points, measured in 100 basis point increments.)
<TABLE>
<CAPTION>
September 30, 1999
Change in Estimated Estimated Increase
Interest Rates NPV Amount (Decrease) in NPV Amount Percent
- ---------------------------------------------------------------------------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C>
+300 151,323 (569,263) -79%
+200 331,470 (389,116) -54%
+100 518,822 (201,764) -28%
0 720,586 -- 0%
-100 843,086 122,500 17%
-200 864,703 144,117 20%
-300 821,468 100,882 14%
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
Change in Estimated Estimated Increase
Interest Rates NPV Amount (Decrease) in NPV Amount Percent
- ---------------------------------------------------------------------------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C>
+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%
</TABLE>
<PAGE> 23
23
During the early part of fiscal 1999, higher rate mortgages were paidoff or
refinanced and replaced with lower coupon loans. This reduced the prepayment
expectations in the portfolio and resulted in a higher NPV sensitivity. In the
later part of fiscal 1999, interest rates began to move higher. This
resulted in a lower NPV and increased the NPV sensitivity even more.
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> 24
24
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, 1999, the Association was authorized under the current
regulations to have a maximum investment of $123.3 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
$10.5 million.
At September 30, 1999, 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 85
buildable acres, with an investment of $7.0 million, remained unsold as of
September 30, 1999. 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.
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 sold this property
during the current fiscal year.
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.
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 -The Association--Regulatory Capital Requirements."
<PAGE> 25
25
EMPLOYEES
As of September 30, 1999, the Company had approximately 700 employees,
including the full-time equivalent of 57 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, 1999.
<TABLE>
<CAPTION>
Names and Positions
or Offices Age Business Experience during the Last Five Years
------------------- --- ----------------------------------------------
<S> <C> <C>
Guy C. Pinkerton 65 Chairman since November 1994; Chief Executive
Director and Chief Executive Officer since October 1992; Director since
Officer October 1991; Former President of Washington
Federal
Charles R. Richmond 60 Executive Vice President and Secretary; Director
Director, Executive Vice since February 1995
President, and Secretary
Ronald L. Saper 49 Executive Vice President and Chief Financial
Executive Vice President and Officer
Chief Financial Officer
William A. Cassels 58 Executive Vice President
Executive Vice President
Lawrence D. Cierpiszewski 56 Executive Vice President since October 1996;
Executive Vice President previously served as Senior Vice President
Roy M. Whitehead 47 President and Director of Washington Federal
Director and President since April 1999 and Executive Vice President
from September 1998 to April 1999; 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
</TABLE>
<PAGE> 26
26
<TABLE>
<S> <C> <C>
Edwin C. Hedlund
Executive Vice President 43 Executive Vice President since July 1999;
previously a founder, President and Director of
Phoenix Savings Bank from April 1997 until July
1999; Vice President of Washington Federal from
November 1996 until April 1997; Vice President
and Secretary with Metropolitan Savings from
November 1994 until it was acquired by
Washington Federal in November 1996; Assistant
Regional Director with the Office of Thrift
Supervision from 1989 until 1994.
Keith D. Taylor 43 Senior Vice President and Treasurer
Senior Vice President and
Treasurer
</TABLE>
<PAGE> 27
27
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.
Certain federal banking laws have been recently amended. See "Regulation-The
Company-Financial Modernization."
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.
FINANCIAL MODERNIZATION. Under the Gramm-Leach-Bliley Act enacted into
law on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a financial holding company under Section 4(k) of
the Bank Holding Company Act. Existing savings and loan holding companies and
those formed pursuant to an application filed with the Office of Thrift
Supervision before May 4, 1999, may engage in any activity including
non-financial or commercial activities provided such companies control only one
savings and loan association that meets the Qualified Thrift Lender test.
Corporate reorganizations are permitted, but the transfer of grandfathered
unitary thrift holding company status through acquisition is not permitted.
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
<PAGE> 28
28
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 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
<PAGE> 29
29
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.
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.
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 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
<PAGE> 30
30
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, 1999, 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 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, 1999, the Association exceeded the
requirements of a well capitalized institution.
<PAGE> 31
31
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, 1999, the Association 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.
<PAGE> 32
32
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.
In January 1999, the OTS amended its capital distribution regulation to
bring such regulations into greater conformity with the other bank regulatory
agencies. Under the regulation, certain savings institutions would not be
required to file with the OTS. Specifically, savings institutions that would be
well capitalized following a capital distribution would not be subject to any
requirement for notice or application unless the total amount of all capital
distributions, including any proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings institution's net
income for that year to date plus the savings institution's retained net income
for the preceding two years. Because the Association is a subsidiary of the
Company, the regulation, however, would require the Association to provide
notice to the OTS of its intent to make a capital distribution, unless an
application is otherwise required. The Association does not believe that the
regulation will adversely affect its ability to make capital distributions.
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, 1999, the Association's advances from the FHLB amounted to $1.5
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, 1999, the Association had $108.8
million in FHLB stock, which was in compliance with this requirement.
<PAGE> 33
33
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> 34
34
TAXATION
FEDERAL TAXATION. For federal and state income tax purposes, the
Company reports its income and expenses on the accrual basis method of
accounting and files its federal and state income tax returns on a September 30
fiscal year basis. The Company files consolidated federal and state income tax
returns with its wholly-owned subsidiaries.
The Small Business Job Protection Act of 1996 (the Act) required
qualified thrift institutions, such as the Company, 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 1999. Accordingly, the Company will be required to pay
approximately $21,770,000 in additional federal income taxes, all of which has
been previously provided for, beginning in fiscal 1999 and continuing through
fiscal 2004.
A deferred tax liability has not been required to be recognized for the
tax bad debt base year reserves of the Company. 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,
1999, the amount of those reserves was approximately $4,835,000. The amount of
the unrecognized deferred tax liability at September 30, 1999, was approximately
$1,861,000.
Washington Federal's tax returns have been examined through the year
ended September 30, 1990.
<PAGE> 35
35
STATE TAXATION. The state of Washington does not have an income tax. A
business and occupation tax based on a percentage of gross receipts is assessed
against businesses; however, interest received on loans secured by mortgages or
deeds of trust on residential properties is not subject to this tax.
The state of Idaho has a corporate income tax with a statutory rate of
8% of apportionable income.
The state of Oregon has a corporate excise tax with a statutory rate of
6.6% of apportionable income.
The state of Utah has a corporate franchise tax with a statutory rate
of 5% of apportionable income.
The state of Arizona has a corporate income tax with a statutory rate
of 9.0% of apportionable income.
<PAGE> 36
36
ITEM 2. PROPERTIES
The Association owns the building in which its home and executive
offices are located, in Seattle, Washington. The following table sets forth
certain information concerning the Association's offices:
<TABLE>
<CAPTION>
Building
Number of --------------------- Net Book Value at
Location Offices Owned Leased(1) September 30, 1999(2)
- -------- --------- ----- -------- ---------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Washington 39 23 16 $18,130
Idaho 19 16 3 6,187
Oregon 24 17 7 7,237
Utah 11 6 5 7,403
Arizona 14 7 7 6,201
-- -- -- -------
Total 107 69 38 $45,158
=== == == =======
</TABLE>
- ----------
(1) The leases have varying terms expiring from 1999 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 $50.1 million at September 30, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Association is involved in legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by management to
be immaterial to the financial condition of the Association.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 37
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from page
27 of the Company's Annual Report to Stockholders for Fiscal 1999 (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
12 to 15 of the proxy statement dated December 17, 1999.
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 9 of the proxy statement dated December 17, 1999.
<PAGE> 38
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference to page 17
of the proxy statement dated December 17, 1999.
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, 1999
and 1998
Consolidated Statements of Operations for each of the years in the
three-year period ended September 30, 1999
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended September 30, 1999
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended September 30, 1999
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> 39
39
(1) Incorporated by reference from the Registrant's Registration
Statement on Form 8-B filed with the SEC on January 26, 1995.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) All schedules are omitted as the required information is not
applicable or the information is presented in the Consolidated Financial
Statements or related notes.
<PAGE> 40
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WASHINGTON FEDERAL, INC.
December 20, 1999 By: /s/ Guy C. Pinkerton
- ----------------- ------------------------------
Date Guy C. Pinkerton, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Kermit O. Hanson December 20, 1999
- ----------------------------------- ---------------------------
Kermit O. Hanson, Director Date
/s/ W. Alden Harris December 20, 1999
- ----------------------------------- ---------------------------
W. Alden Harris, Director Date
/s/ Anna C. Johnson December 20, 1999
- ----------------------------------- ---------------------------
Anna C. Johnson, Director Date
/s/ John F. Clearman December 20, 1999
- ----------------------------------- ---------------------------
John F. Clearman, Director Date
/s/ H. Dennis Halvorson December 20, 1999
- ----------------------------------- ---------------------------
H. Dennis Halvorson, Director Date
<PAGE> 41
41
/s/ Guy C. Pinkerton December 20, 1999
- --------------------------------------- ---------------------------
Guy C. Pinkerton, Director, Chairman Date
and Chief Executive Officer
/s/ Richard C. Reed December 20, 1999
- --------------------------------------- ---------------------------
Richard C. Reed, Director Date
/s/ Charles R. Richmond December 20, 1999
- --------------------------------------- ---------------------------
Charles R. Richmond, Director, Date
Executive Vice President and Secretary
/s/ Roy M. Whitehead December 20, 1999
- --------------------------------------- ---------------------------
Roy M. Whitehead, Director and Date
President
/s/ Ronald L. Saper December 20, 1999
- --------------------------------------- ---------------------------
Ronald L. Saper, CPA, Executive Date
Vice President and Chief Financial
Officer (principal financial officer)
/s/ Joseph R. Runte December 20, 1999
- --------------------------------------- ---------------------------
Joseph R. Runte, Vice President Date
and Controller
(principal accounting officer)
<PAGE> 1
EXHIBIT 13
WASHINGTON FEDERAL, INC.
ANNUAL REPORT 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
</TABLE>
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 107 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, which did 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.
In 1999, the Association opened three new offices, one in Portland, Oregon,
one in Phoenix, Arizona, and one in Riverton, Utah. The Association closed one
branch in Tucson, consolidating the deposits into another Tucson office and
closed one branch in Salt Lake City, Utah, consolidating the deposits into its
downtown Salt Lake City office.
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, 1999 1998 % Change
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Assets ........................................................................ $6,163,503 $5,637,011 + 9%
Investment securities ......................................................... 141,753 234,013 - 39
Loans receivable .............................................................. 4,378,728 4,143,525 + 6
Mortgage-backed securities .................................................... 1,352,916 976,046 + 39
Customer accounts ............................................................. 3,379,502 3,156,202 + 7
Federal Home Loan Bank advances and other borrowings .......................... 1,908,257 1,578,319 + 21
Stockholders' equity .......................................................... 750,023 767,172 - 2
Net income .................................................................... 114,286 111,836 + 2
Diluted earnings per share .................................................... 2.05 1.92 + 7
Dividends per share ........................................................... .90 .82 + 10
Stockholders' equity per share ................................................ 13.83 13.56 + 2
Shares outstanding ............................................................ 54,232 51,446 + 5
Return on average stockholders' equity ........................................ 15.47% 15.68% - 1
Return on average assets ...................................................... 1.99% 2.00% --
</TABLE>
- --------------------------------------------------------------------------------
TOTAL ASSETS
Dollars in Millions
(At September 30)
<TABLE>
<S> <C>
1979 755
1984 908
1989 2,438
1994 3,830
1999 6,164
</TABLE>
STOCKHOLDERS' EQUITY
Dollars in Millions
(At September 30)
<TABLE>
<S> <C>
1979 62
1984 104
1989 277
1994 547
1999 750
</TABLE>
NET INCOME PER SHARE
(Before SAIF special assessment in 1996)
<TABLE>
<S> <C>
1995 $1.34
1996 $1.59
1997 $1.83
1998 $1.92
1999 $2.05
</TABLE>
CASH DIVIDENDS PER SHARE
<TABLE>
<S> <C>
1995 $0.62
1996 $0.68
1997 $0.74
1998 $0.82
1999 $0.90
</TABLE>
RETURN ON AVERAGE EQUITY
(Before SAIF special assessment in 1996)
Annualized %
<TABLE>
<S> <C>
1995 13.99
1996 15.37
1997 16.50
1998 15.68
1999 15.47
</TABLE>
PRIMARY INTEREST SPREAD
End of Quarter %
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998 Fiscal 1999
<S> <C> <C> <C>
Dec 31 2.88 2.80 2.69
Mar 31 2.88 2.79 2.76
Jun 30 2.82 2.80 2.78
Sep 30 2.83 2.73 2.72
</TABLE>
Fiscal Years: [ ] 1997 [ ] 1998 [ ] 1999
1
<PAGE> 4
TO OUR STOCKHOLDERS
We are pleased to report another record year for your Company. Since becoming
a public company, this is the fifteenth time in the past sixteen years that we
have reported year-over-year earnings per share gains.
For the year, earnings were $114,286,000, or $2.05 per share, compared to the
$111,836,000 or $1.92 per share for the prior year, a 7% per share increase.
This was accomplished even though we have been operating in a fairly difficult
interest rate environment for the past three years. As a result of this
environment, our net interest spread has been steadily decreasing from 2.95% at
September 30, 1996 to 2.72% at September 30, 1999.
The year produced a return on average assets of 1.99%, and on stockholders'
equity of 15.47%. Washington Federal's stockholders' equity at September 30,
1999 was $750 million, or 12.17% of total assets, compared to $767 million, or
13.61% of total assets, at the beginning of the year. This decrease in
stockholders' equity for the year resulted principally from our repurchase of
2.54 million shares of Washington Federal stock at a cost of $55 million and the
payment of cash dividends of $49 million. Washington Federal's earnings and
capital ratios continue near the top in the nation for all financial
institutions.
Our operating expense ratio for the year was 0.80% and our efficiency ratio
(total operating expense divided by net interest income plus other income) was
18.03%. Both of these figures continue to be very positive and are less than
one-half the industry average.
We continue to specialize in land and construction lending for single family
homes. In addition, we provide financing to buyers of these homes and are very
active in making loans on existing homes. We also provide financing for
multi-family projects, mostly under $2.5 million each. For the year ended
September 30, 1999, we originated 10,467 real estate loans totaling $1.77
billion, up from the prior year's number of 9,812 loans, totaling $1.45 billion.
Our fiscal year 1999 total represents a production record for the Company. The
land and single family construction loans are shorter-term in nature, with
interest rates that adjust quarterly. Virtually all of our longer-term loans
contain a "due on sale" clause which gives us the right to renegotiate the rate
and terms should the underlying security be sold. A breakdown of our loan
portfolio can be found in the Notes to Consolidated Financial Statements
included in this report.
Our non-performing loans and real estate acquired through foreclosure are
quite low compared to others, and represented only 0.35% of total assets at the
end of the fiscal year. Our loan loss reserves totaled $21.9 million, which we
consider adequate based on our historical loan loss experience.
Customer deposit accounts increased to $3.4 billion at September 30, 1999, a
7% increase from the beginning of the year. During the year we consolidated two
branches into other nearby offices; one in Salt Lake City, Utah and one in
Tucson, Arizona, and opened three new branches; one in Riverton, Utah, one in
Phoenix, Arizona, and one in Portland, Oregon. We now have 107 offices with 39
in Washington, 19 in Idaho, 24 in Oregon, 11 in Utah and 14 in Arizona. We've
committed to five additional sites in Arizona, and are looking for additional
sites in Portland, Oregon as we continue our expansion in these markets. We are
also looking to expand to the Las Vegas, Nevada market.
During the year, we distributed $49 million in cash dividends, or $0.90 per
share, and declared a 10% stock dividend to shareholders of record on February
12, 1999. This was the fifteenth stock dividend distributed in the last
seventeen years. We also increased the cash dividend twice during the fiscal
year. We have increased the cash dividend 37 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 $0.60 in 1982.
We have completed the updating of our in-house computer systems and programs
to handle the Year 2000 issue. These programs and the outside systems with which
we interface have been thoroughly tested. We continue to enhance our contingency
plans 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. Our specialized product
lines and simplicity of operation have made this an easier and less expensive
task than for most financial institutions.
2
<PAGE> 5
During the year, our Board of Directors elected Roy Whitehead to the position
of president and director of the Company. Also during the year, Ed Hedlund
joined our executive management committee. Prior to joining us, Ed was our
supervisory agent with the Office of Thrift Supervision and then president of a
local thrift. His familiarity with Washington Federal and his thrift experience
make him a valuable addition as we continue to build a management team that will
carry forward the outstanding performance of the Company.
[Photo Not Shown]
CLOCKWISE FROM LEFT: RONALD L. SAPER, EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER, EDWIN C. HEDLUND, EXECUTIVE VICE PRESIDENT, WILLIAM A.
CASSELS, EXECUTIVE VICE PRESIDENT, LAWRENCE D. CIERPISZEWSKI, EXECUTIVE VICE
PRESIDENT, CHARLES R. RICHMOND, EXECUTIVE VICE PRESIDENT AND SECRETARY, ROY M.
WHITEHEAD, PRESIDENT, GUY C. PINKERTON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER.
In closing, I want to thank each member of the executive management
committee, our directors and our employees for their excellent efforts which
have made this year so successful. I also want to thank our stockholders and
customers for their continued support. I hope to see you at our annual meeting
to be held on Monday, January 24, 2000, at 2:00 p.m. at the Sheraton Hotel in
Seattle.
Sincerely,
/s/ Guy C. Pinkerton
- --------------------
Guy C. Pinkerton
Chairman 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 current 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, some of 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. 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. Based on
this assessment, the Company implemented a plan to renovate and implement its
computer applications by December 31, 1998. As of December 31, 1998, 100% of the
renovation and implementation of mission critical systems was completed. The
mission critical applications, which were all written internally, have been
renovated and tested by the Company's information systems department.
A full scale Year 2000 integration test, where computer clocks were advanced to
simulate year-end 1999 processing, January 2000 processing, and leap year
processing, occurred in March 1999. The test, which was accomplished over a
weekend, involved representatives of each principal business unit of the
Company. All facets of our mission critical systems were exercised and the
results of all testing matched the predetermined output.
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 representation 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 as to their functionality.
Every month, the Company reports to its Board of Directors the progress made in
addressing the Year 2000 issue, including timelines and percentage of
completion. Management met its target of December 31, 1998, to have its systems
renovated and implemented. Validation testing of all mission critical systems
was successfully completed in March 1999. Management recently reported the
results of an Office of Thrift Supervision examination of the Company's Year
2000 preparedness and compliance issues to the Board of Directors, who found the
report to be satisfactory.
Through September 30, 1999, the Company has not incurred any material
incremental costs to become Year 2000 compliant. The Company's mission critical
systems have been renovated and tested by the current 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 plans. The Company continues enhancing its existing
contingency plans to service customers in case events beyond its control impact
computer systems. 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.
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
than the short-term characteristics of its liabilities of customer accounts and
borrowed money. At September 30, 1999, the Company had approximately
$2,931,178,000 more liabilities subject to repricing in the next year than
assets subject to repricing, which amounted to a negative maturity gap of 48% of
total assets. The Company's interest rate risk approach has never resulted in
the recording of a monthly operating loss.
4
<PAGE> 7
The Company experienced only minor fluctuations in interest rate spreads in
fiscal 1999. Spreads widened during the middle of the year and narrowed at the
end of the year as the Federal Reserve raised short-term interest rates in the
last fiscal quarter. The year closed with a 2.72% interest rate spread, down
slightly from 2.73% at the beginning of the year. During this phase of the
interest rate cycle, the Company chose to leverage the balance sheet and
increase its asset size. As a result, Federal Home Loan Bank (FHLB) advances and
other borrowed money increased to an equivalent of 31.0% of total assets at
September 30, 1999, compared to 28.0% of total assets at September 30, 1998.
ASSET QUALITY
The Company maintains an allowance to absorb losses inherent in the loan
portfolio. The allowance is based on ongoing, quarterly assessments of the
probable and estimable losses inherent in the loan portfolio. In analyzing the
existing loan portfolio, the Company applies specific loss percentage factors to
the different loan types. The loss percentages are based on current economic
conditions, historical loss experience and the changes in the size and
composition of the loan portfolio.
Income property loans, builder construction loans and certain other loans are
reviewed on an individual basis to assess the ability of the borrowers to
continue to service all of their principal and interest obligations. If the
loans show signs of weakness, they will be downgraded, and if warranted, placed
on nonaccrual status. The Company has an Asset Quality Review Committee that
reports the results of their internal reviews to the Board of Directors on a
monthly basis.
Non-performing assets declined to $21.3 million or .35% of total assets at
September 30, 1999 compared to $24.8 million or .44% of total assets at
September 30, 1998. These ratios are low compared to others and reflect the
excellent economic conditions within the Company's marketplace.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at September 30, 1999, was $750,023,000 or 12.2% of
total assets. This is a decrease of $17,149,000 from September 30, 1998, when
net worth was $767,172,000 or 13.6% of total assets. The ratio of net worth to
total assets remains at a high level despite the continuance of a stock
repurchase plan during fiscal 1999 and the distribution of 43% of earnings in
the form of cash dividends.
The $17,149,000 decrease in the Company's net worth includes $49,209,000 of cash
dividends paid, $30,000,000 of depreciation in the valuation reserve for
available-for-sale securities, and stock repurchases of $54,938,000. Net worth
was increased by the $114,286,000 generated from net income and $2,812,000 of
proceeds received from the exercise of common stock options and purchases by the
Employee Stock Ownership Plan. During fiscal 1999, 2,539,000 shares of common
stock were repurchased at an average price of $21.64 under the March 1996, the
September 1998, and the April 1999 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 $223,300,000, or 7%, 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 $166,790,000 at
September 30, 1999, an $89,438,000 net decrease from a year ago. The decrease
included $85,500,000 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,
1999, total liquidity was 18.85%.
CHANGES IN FINANCIAL POSITION
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES. The Company purchased
$765,963,000 of mortgage-backed securities, all of which have been categorized
as available-for-sale.
The Company had $22,726,000 of gross sales of securities resulting in net gains
of $2,747,000. All sales were mortgage-backed securities which were categorized
as available-for-sale. As of September 30, 1999, the Company had unrealized
gains on its available-for-sale portfolio of $3,000,000, net of tax, which are
recorded as part of stockholders' equity.
LOANS RECEIVABLE. Loans receivable increased 6% during fiscal 1999 to
$4,378,728,000 at September 30, 1999, from $4,143,525,000 a year earlier. The
loans receivable balance increased due to a record level of loan origination's
from $1,454,232,000 to $1,769,612,000, an increase of 22% from the prior year.
REAL ESTATE HELD FOR SALE. The balance at September 30, 1999, was $16,679,000, a
3% increase from $16,193,000 one year ago.
FHLB STOCK. The Company had a balance of $108,844,000 at September 30, 1999,
compared with $101,050,000 one year ago.
COSTS IN EXCESS OF NET ASSETS ACQUIRED. As of September 30, 1999, costs in
excess of net assets acquired totaled $47,583,000. 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, 1999, there was no impairment of costs in excess of net
assets acquired. The Company will provide for any diminution in value of these
assets should an impairment be identified.
CUSTOMER ACCOUNTS. Customer accounts at September, 30, 1999, were $3,379,502,000
compared with $3,156,202,000 at September 30, 1998, a 7% increase. See Liquidity
and Capital Resources above.
FHLB ADVANCES AND OTHER BORROWINGS. Total borrowings increased 21% to
$1,908,257,000. 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 1999 net income increased 7% over fiscal 1998. See Note T, Selected
Quarterly Financial Data (Unaudited) which highlights the quarter-by-quarter
results for the years ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
1997 1998 1998 1998 1998 1999 1999 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate on loans and
mortgage-backed securities .. 8.15% 8.10% 8.07% 7.98% 7.79% 7.67% 7.65% 7.66%
Interest rate on
investment securities* ...... 7.70 7.64 7.73 7.76 7.90 8.15 8.04 8.03
------------------------------------------------------------------------------------------
Combined ................. 8.12 8.07 8.05 7.96 7.80 7.69 7.67 7.68
Interest rate on
customer accounts ........... 5.16 5.14 5.11 5.09 4.99 4.80 4.70 4.71
Interest rate on
borrowings .................. 5.57 5.53 5.53 5.50 5.37 5.20 5.30 5.40
------------------------------------------------------------------------------------------
Combined ................. 5.32 5.28 5.25 5.23 5.11 4.93 4.89 4.96
------------------------------------------------------------------------------------------
Interest rate spread ........... 2.80% 2.79% 2.80% 2.73% 2.69% 2.76% 2.78% 2.72%
==========================================================================================
</TABLE>
*Includes municipal bonds at tax-equivalent rates.
The interest rate spread declined during fiscal 1999 from 2.73% at September 30,
1998, to 2.72% at September 30, 1999.
COMPARISON OF FISCAL 1999 RESULTS WITH FISCAL 1998
Net interest income increased $2,716,000 (1%) in fiscal 1999 over fiscal 1998
due largely to an increase in the balance sheet.
Interest on loans and mortgage-backed securities increased $1,360,000 (1%) in
fiscal 1999 from 1998. The increase is a result of the increase in the volumes
as the Company originated $1,769,612,000 in loans compared to $1,454,232,000 in
the prior fiscal year. Average interest rates on loans and mortgage-backed
securities declined to 7.66% from 7.98% one year ago.
Interest and dividends on investment securities decreased $6,387,000 (25%) in
fiscal 1999 from fiscal 1998. The weighted average yield improved to 8.03% at
September 30, 1999 compared with 7.76% at September 30, 1998. The combined
investment securities and FHLB stock portfolio decreased to $250,597,000 at
September 30, 1999, versus $335,063,000 one year ago.
Interest on customer accounts increased 2% to $159,942,000 for fiscal 1999 from
$156,099,000 for fiscal 1998. The increase relates to the increase in customer
accounts to $3,379,502,000 from $3,156,202,000 the prior year. The average cost
of customer accounts decreased to 4.71% at year end compared to 5.09% one year
ago.
Interest on FHLB advances and other borrowings decreased $11,586,000 (12%) in
fiscal 1999 over fiscal 1998. This decrease was partially due to a reduction in
the average borrowings from $1,712,971,000 to $1,578,352,000. The average rates
paid decreased to 5.40% at September 30, 1999 versus 5.50% at September 30,
1998.
The provision for loan losses during fiscal 1999 was $684,000 compared with
$740,000 in fiscal 1998 and $813,000 in fiscal 1997, reflecting a trend of
declining non-performing assets. Non-performing assets declined to $21.3 million
or .35% of total assets at September 30, 1999, compared with $24.8 million or
.44% of total assets and $42.7 million or .75% of total assets at September 30,
1998 and 1997, respectively. Although the provision declined, we continued to
maintain our allowance for loan losses at current levels which, at $21.9 million
or 1.03% of non-performing assets are within an acceptable range of estimated
losses and low compared with others in the industry. Our provision is reflective
of the excellent economic conditions within the Company's marketplace during
fiscal 1999.
Other income increased $1,633,000 (15%) in fiscal 1999 over fiscal 1998. Net
gains on the sale of available-for-sale securities totaled $2,747,000 in fiscal
1999 compared to $5,560,000 in fiscal 1998. Other income included several
non-recurring transactions, the largest of which provided the Company $2.2
million of pre-tax income during the year.
Other expense increased $985,000 (2%) in fiscal 1999 over fiscal 1998. The
increase is primarily due to increased compensation expense resulting from
branch network expansion and general inflationary increases. The branch network
increased to 107 offices at September 30, 1999, versus 106 offices at September
30, 1998. Other expense for fiscal 1999 equaled .80% of average assets compared
with .81% in fiscal 1998, while the number of staff, including part-time
employees on a full-time equivalent basis, amounted to 700 and 677 at September
30, 1999 and 1998, respectively.
Income taxes increased $846,000 (1%) in fiscal 1999. The effective tax rate was
35.5% for fiscal 1999 compared with 35.6% for fiscal 1998.
6
<PAGE> 9
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 mortgage-backed securities increased $2,738,000 (1%) in
fiscal 1998 from 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% the previous year.
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 at September 30, 1997.
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% the year
before.
Interest on FHLB advances and other borrowings decreased $18,629,000 (16%) in
fiscal 1998 from fiscal 1997. This decrease was primarily 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. Although the provision declined, the Company
continued to maintain its allowance for loan losses at current levels, which at
$23.9 million or .96% of non-performing assets which is within an acceptable
range of estimated losses and low when compared with others in the industry. The
provision was reflective of the excellent economic conditions within the
Company's marketplace during fiscal 1998.
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 was 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, was 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.
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 and will continue to be amortized utilizing the
straight-line method over 15 years.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the 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, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
ASSETS
<S> <C> <C>
Cash $ 25,037 $ 22,215
Available-for-sale securities, amortized cost $1,161,917 and $710,188 1,169,917 764,188
Held-to-maturity securities, fair value $327,002 and $464,799 324,752 445,871
Loans receivable 4,378,728 4,143,525
Interest receivable 36,521 35,175
Premises and equipment, net 50,110 48,882
Real estate held for sale 16,679 16,193
FHLB stock 108,844 101,050
Costs in excess of net assets acquired 47,583 53,639
Other assets 5,332 6,273
--------------------------
$6,163,503 $5,637,011
===========================
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Customer accounts
Savings and demand accounts $ 3,291,857 $3,071,175
Repurchase agreements with customers 87,645 85,027
--------------------------
3,379,502 3,156,202
FHLB advances 1,454,000 1,356,500
Other borrowings, primarily securities sold under agreements to repurchase 454,257 221,819
Advance payments by borrowers for taxes and insurance 26,107 25,332
Federal and state income taxes, including net deferred liabilities of $54,012 and $66,724 52,504 63,969
Accrued expenses and other liabilities 47,110 46,017
--------------------------
5,413,480 4,869,839
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, 100,000,000 shares authorized; 62,191,540 and 56,423,961
shares issued; 54,232,061 and 51,446,129 shares outstanding 62,192 56,424
Paid-in capital 785,031 714,700
Accumulated other comprehensive income, net of tax 5,000 35,000
Treasury stock, at cost; 7,959,479 and 4,977,832 shares (146,186) (92,221)
Retained earnings 43,986 53,269
--------------------------
750,023 767,172
--------------------------
$6,163,503 $5,637,011
==========================
</TABLE>
8 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans ............................................... $ 353,930 $ 364,801 $ 357,496
Mortgage-backed securities .......................... 82,331 70,100 74,667
Investment securities ............................... 19,316 25,703 26,844
-----------------------------------------------
455,577 460,604 459,007
INTEREST EXPENSE
Customer accounts ................................... 159,942 156,099 142,684
FHLB advances and other borrowings .................. 84,548 96,134 114,763
-----------------------------------------------
244,490 252,233 257,447
-----------------------------------------------
NET INTEREST INCOME ................................. 211,087 208,371 201,560
Provision for loan losses ........................... 684 740 813
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . 210,403 207,631 200,747
OTHER INCOME
Gain on sale of mortgage-backed securities .......... 2,747 5,560 938
Other ............................................... 9,918 5,472 4,139
-----------------------------------------------
12,665 11,032 5,077
OTHER EXPENSE
Compensation and fringe benefits .................... 26,485 24,852 24,051
Amortization of intangibles ......................... 6,056 6,039 5,593
Occupancy expense ................................... 4,001 4,151 4,282
SAIF deposit insurance premiums ..................... 1,826 1,790 2,392
Other ............................................... 7,733 8,284 8,081
-----------------------------------------------
46,101 45,116 44,399
Gain on real estate acquired through foreclosure, net 114 238 1,913
-----------------------------------------------
INCOME BEFORE INCOME TAXES .......................... 177,081 173,785 163,338
Income taxes
Current .......................................... 75,507 48,883 50,620
Deferred ......................................... (12,712) 13,066 7,668
-----------------------------------------------
62,795 61,949 58,288
-----------------------------------------------
NET INCOME .......................................... $ 114,286 $ 111,836 $ 105,050
===============================================
PER SHARE DATA
Basic earnings per share ............................ $ 2.06 $ 1.94 $ 1.85
Diluted earnings per share .......................... $ 2.05 $ 1.92 $ 1.83
Cash dividends ...................................... $ .90 $ .82 $ .74
Weighted average number of shares outstanding,
including dilutive stock options ................. 55,806,778 58,155,078 57,470,329
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
<PAGE> 12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 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)
Comprehensive income:
Net income 105,050 105,050
Other comprehensive income,
net of tax
Unrealized gains on securities 17,605 17,605
Reclassification adjustment (605) (605)
-------
Total comprehensive income 122,050
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
---------------------------------------------------------------------
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)
Comprehensive income:
Net income 111,836 111,836
Other comprehensive income,
net of tax
Unrealized gains on securities 9,586 9,586
Reclassification adjustment (4,586) (4,586)
-------
Total comprehensive income 116,836
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)
---------------------------------------------------------------------
Balance at September 30, 1998 56,424 714,700 53,269 35,000 (92,221) 767,172
---------------------------------------------------------------------
Eleven-for-ten stock split
distributed February 26, 1999 5,643 68,617 (74,360) (100)
Comprehensive income:
Net income 114,286 114,286
Other comprehensive income,
net of tax
Unrealized losses on securities (28,228) (28,228)
Reclassification adjustment (1,772) (1,772)
-------
Total comprehensive income 84,286
Dividends (49,209) (49,209)
Proceeds from exercise of
common stock options 125 1,427 1,552
Proceeds from Employee
Stock Ownership Plan 287 973 1,260
Treasury stock (54,938) (54,938)
---------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $62,192 $785,031 $ 43,986 $ 5,000 $(146,186) $750,023
=====================================================================
</TABLE>
10 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income ..................................................................... $ 114,286 $ 111,836 $ 105,050
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of fees, discounts, and premiums, net .......................... (25,646) (28,426) (14,674)
Amortization of costs in excess of net assets acquired ...................... 6,056 6,038 5,593
Depreciation ................................................................ 2,263 2,287 2,132
Gain on investment securities and real estate held for sale ................. (2,861) (5,798) (2,627)
Decrease (increase) in accrued interest receivable .......................... (1,346) 1,208 2,431
Increase in income taxes payable ............................................ 142 8,710 10,204
FHLB stock dividends ........................................................ (7,794) (7,466) (6,683)
Decrease (increase) in other assets ......................................... 5,334 (4,265) 8,350
Increase in accrued expenses and other liabilities .......................... 993 4,844 238
---------------------------------------------
Net cash provided by operating activities ...................................... 91,427 88,968 110,014
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and contracts originated
Loans on existing property .................................................. (1,058,403) (723,337) (556,063)
Construction loans .......................................................... (425,190) (467,884) (407,135)
Land loans .................................................................. (121,853) (105,901) (77,270)
Loans refinanced ............................................................ (164,166) (157,110) (48,240)
---------------------------------------------
(1,769,612) (1,454,232) (1,088,708)
Savings account loans originated ............................................... (4,420) (4,984) (7,818)
Loan principal repayments ...................................................... 1,497,888 1,483,446 1,010,333
Increase (decrease) in undisbursed loans in process ............................ 48,862 35,934 (26,000)
Loans purchased ................................................................ (1,138) (1,797) (1,310)
Available-for-sale securities purchased ........................................ (765,963) (319,209) (54,187)
Principal payments and maturities of available-for-sale securities ............. 297,809 191,360 106,918
Available-for-sale securities sold ............................................. 22,726 55,560 119,851
Principal payments and maturities of held-to maturity securities ............... 122,621 120,024 67,885
Proceeds from sales of real estate held for sale ............................... 13,435 24,454 12,313
Premises and equipment purchased, net .......................................... (3,491) (3,617) (4,115)
FHLB stock purchased ........................................................... -- -- (9,057)
Cash received for acquisitions ................................................. -- -- 3,590
---------------------------------------------
Net cash provided (used) by investing activities ............................... (541,283) 126,939 129,695
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts .............................................. 223,300 178,171 117,836
Net increase (decrease) in short-term borrowings ............................... 329,938 (773,725) (665,363)
Proceeds from long-term borrowings ............................................. -- 600,000 350,000
Repayments of long-term borrowings ............................................. -- (152,500) --
Proceeds from exercise of common stock options ................................. 1,552 1,762 350
Dividends ...................................................................... (49,209) (46,848) (42,691)
Proceeds from Employee Stock Ownership Plan .................................... 1,260 967 469
Treasury stock sold (purchased) ................................................ (54,938) (23,955) 1,370
Increase (decrease) in advance payments by borrowers for taxes and insurance ... 775 (1,008) 2,129
---------------------------------------------
Net cash provided (used) by financing activities ............................... 452,678 (217,136) (235,900)
---------------------------------------------
INCREASE (DECREASE) IN CASH .................................................... 2,822 (1,229) 3,809
CASH AT BEGINNING OF YEAR ...................................................... 22,215 23,444 19,635
---------------------------------------------
CASH AT END OF YEAR ............................................................ $ 25,037 $ 22,215 $ 23,444
=============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NONCASH INVESTING ACTIVITIES
Real estate acquired through foreclosure .................................... $ 13,807 $ 10,220 $ 5,547
CASH PAID DURING THE YEAR FOR
Interest .................................................................... $ 245,987 $ 248,357 $ 256,822
Income taxes ................................................................ 60,412 53,368 49,492
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 107 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 those securities to maturity. There are very
limited circumstances under which securities in the held-to-maturity category
can be sold without jeopardizing the cost basis of accounting for the remainder
of the securities in this category. Recognition is provided for unrealized
losses in the 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 through
comprehensive income 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 income.
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.
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance is based on ongoing, quarterly assessments of
the probable and estimable losses inherent in the loan portfolio. The Company's
methodology for assessing the appropriateness of the allowance consists of
several key elements which include the formula allowance, specific allowance and
the unallocated allowance.
The formula portion of the general loan loss allowance is established by
applying a loss percentage factor to the different loan types. 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 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.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a loan that management
believes indicate the probability that a loss has been incurred.
The unallocated allowance is comprised of two components. The first component
recognizes the estimation risk associated with the formula and specific
allowances. The second component is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. The conditions evaluated in connection with the
unallocated allowance may include loan volumes and concentrations, seasoning of
the loan portfolio, specific industry conditions, recent loss experience within
certain parts of the portfolio and the duration of the current business cycle.
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. From time to time, the
Association reviews the status of costs in excess of net assets acquired to
determine that no impairment of the assets 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 affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATIONS. Certain reclassifications have been made to the financial
statements for years prior to September 30, 1999, to conform to the
classifications used in 1999.
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, and 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 periods ended September 30, 1999, 1998 and 1997, the combined
amortization of these discounts was $4,081,000, $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 $1.85, respectively.
13
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(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 ............................... $ 90,869 $ 1,073 $ -- $ 91,942 7.98%
1 to 5 years ................................... 15,130 690 -- 15,820 6.98
Over 10 years .................................. 9,279 3,237 -- 12,516 10.41
----------------------------------------------------------------------------
115,278 5,000 -- 120,278 8.05
----------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
Tax-exempt municipal bonds due
1 to 5 years ................................... 7,651 436 -- 8,087 6.67
Over 10 years .................................. 13,824 814 (6) 14,632 6.26
----------------------------------------------------------------------------
21,475 1,250 (6) 22,719 6.41
----------------------------------------------------------------------------
$136,753 $ 6,250 $ (6) $142,997 7.79%
===========================================================================
</TABLE>
<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>
There were no sales of investment securities during 1999 or 1998. Investment
securities with a book value of $85.7 million and a fair value of $90.7 million
at September 30, 1999, were pledged to secure public deposits.
NOTE D
MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
September 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(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 ................... $ 9,361 $ 28 $ (112) $ 9,277 6.66%
FNMA pass-through certificates ................... 11,290 808 -- 12,098 8.48
FHLMC pass-through certificates .................. 980,626 8,526 (20,084) 969,068 6.96
FHLMC ............................................ 18,030 1,350 (121) 19,259 6.79
FNMA ............................................. 11,046 815 (137) 11,724 6.60
Private issues ................................... 16,286 1,245 (228) 17,303 6.52
Forward commitments .............................. -- 10,910 -- 10,910 --
---------------------------------------------------------------------------
1,046,639 23,682 (20,682) 1,049,639 6.96
---------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
GNMA pass-through certificates ................... 116 9 -- 125 9.65
FNMA pass-through certificates ................... 7,931 242 (23) 8,150 8.15
FHLMC pass-through certificates .................. 295,230 3,937 (3,159) 296,008 7.25
---------------------------------------------------------------------------
303,277 4,188 (3,182) 304,283 7.27
---------------------------------------------------------------------------
$1,349,916 $ 27,870 $ (23,864) $1,353,922 7.03%
==========================================================================
</TABLE>
14
<PAGE> 17
<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>
Proceeds from sales of mortgage-backed securities in the available-for-sale
portfolio during 1999, 1998, and 1997 were $22.7 million, $55.6 million, and
$119.8 million, respectively. The Company realized gains of $2.7 million, $5.6
million, and $1.1 million during 1999, 1998, and 1997, respectively. The Company
had no losses on sales in 1999 and 1998 and $158,000 in losses during 1997,
respectively.
Available-for-sale mortgage-backed securities with a book value of $333.4
million and a fair value of $328.0 million at September 30, 1999, 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 $8.4 million were pledged as
collateral on September 30, 1999, 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, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Market Market
Cost Value Cost Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to purchase ........................ $147,395 $158,305 $116,358 133,006
======================================================================
</TABLE>
All forward contracts at September 30, 1999, were scheduled to be executed
before September 30, 2000.
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, 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Conventional real estate
Permanent single-family residential ......... $3,664,338 $3,535,154
Income property ............................. 271,673 189,760
Land ........................................ 170,479 160,879
Construction ................................ 620,459 562,689
Other .......................................... 3,125 3,767
--------------------------
4,730,074 4,452,249
--------------------------
Less
Allowance for possible losses ............... 21,900 23,854
Discount on loans ........................... 5,929 9,072
Loans in process ............................ 295,646 246,784
Deferred loan origination fees .............. 27,871 29,014
--------------------------
351,346 308,724
--------------------------
$4,378,728 $4,143,525
==========================
</TABLE>
The Association originates adjustable and fixed interest rate loans, which at
September 30, 1999, consisted of the following:
<TABLE>
<CAPTION>
Fixed Rate
- ------------------------------------------------
(In thousands)
Term to Maturity Book Value
- ------------------------------------------------
<S> <C>
Less than 1 year ............. $ 86,948
1 to 3 years ................. 64,745
3 to 5 years ................. 59,711
5 to 10 years ................ 288,166
10 to 20 years ............... 489,461
Over 20 years ................ 3,095,736
----------
$4,084,767
==========
</TABLE>
<TABLE>
<CAPTION>
Adjustable Rate
- ------------------------------------------------
(In thousands)
Term to Rate Adjustment Book Value
- ------------------------------------------------
<S> <C>
Less than 1 year ............. $582,163
1 to 3 years ................. 63,144
3 to 5 years ................. --
5 to 10 years ................ --
10 to 20 years ............... --
Over 20 years ................ --
--------
$645,307
========
</TABLE>
At September 30, 1999 and 1998, approximately $58,436,000 and $58,247,000 of
fixed rate loan origination commitments were outstanding, respectively. Loans
serviced for others at September 30, 1999 and 1998, were approximately
$48,198,000 and $73,606,000, respectively.
Permanent single-family residential loans receivable included adjustable rate
loans of $65,708,000 and $96,507,000 at September 30, 1999 and 1998,
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, 1999 Washington Idaho Oregon Utah Arizona Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Conventional real estate
Permanent single-family
residential .................. $1,802,588 $485,693 $662,654 $508,364 $184,291 $ 20,748 $3,664,338
Income property ................ 116,213 21,431 49,472 27,054 45,093 12,410 271,673
Land ........................... 101,327 18,563 9,683 19,670 21,236 -- 170,479
Construction ................... 314,043 67,163 97,881 78,602 62,682 88 620,459
Other ............................. 1 227 15 29 -- 2,853 3,125
-------------------------------------------------------------------------------------------
$2,334,172 $593,077 $819,705 $633,719 $313,302 $ 36,099 $4,730,074
============================================================================================
</TABLE>
At September 30, 1999, the Company's recorded investment in impaired loans was
$8.6 million, of which $6.6 million had allocated reserves of $2.6 million. 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. The
average balance of impaired loans during 1999 and 1998 was $16.3 million and
$9.5 million, and interest income from impaired loans was $332,000 and $390,000,
respectively.
16
<PAGE> 19
NOTE F
ALLOWANCE FOR LOSSES ON LOANS
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year ....................... $23,854 $24,623 $15,182
Loss allowances from acquired institutions ......... -- -- 11,198
Provision for loan losses .......................... 684 740 813
Charge-offs ........................................ (3,131) (2,304) (5,932)
Recoveries ......................................... 493 795 3,362
-----------------------------------------
Balance at end of year ............................. $21,900 $23,854 $24,623
=========================================
</TABLE>
NOTE G
INTEREST RECEIVABLE
<TABLE>
<CAPTION>
September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Loans receivable .................................................. $26,995 $27,188
Allowance for uncollected interest on loans receivable ............ (1,364) (1,748)
Mortgage-backed securities ........................................ 8,240 5,825
Investment securities ............................................. 2,650 3,910
------------------------
$36,521 $35,175
========================
</TABLE>
NOTE H
PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
(In thousands)
Estimated
Useful Life
------------
<S> <C> <C> <C>
Land ............................................. -- $11,251 $10,635
Buildings ........................................ 25 - 40 48,137 46,312
Leasehold improvements ........................... 7 - 15 4,583 4,771
Furniture, fixtures and equipment ................ 4 - 10 12,895 12,379
------------------------
76,866 74,097
Less accumulated depreciation and amortization ... (26,756) (25,215)
------------------------
$50,110 $48,882
========================
</TABLE>
The Company has noncancelable operating leases for branch offices. Rental
expense, including amounts paid under month-to-month cancelable leases, amounted
to $1,438,000, $1,420,000 and $1,455,000 in 1999, 1998, and 1997, 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, 1999 1998
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Acquired for development ......................................... $ 9,753 $ 9,388
Acquired in settlement of loans .................................. 6,926 6,805
-------------------------
$16,679 $16,193
========================
</TABLE>
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J
CUSTOMER ACCOUNTS
<TABLE>
<CAPTION>
September 30, 1999 1998
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Checking accounts, 2.60% and under ............................. $ 101,950 $ 93,942
Passbook and statement accounts, 3.00% ......................... 160,518 168,921
Insured money market accounts, 2.47% to 4.02% .................. 549,420 443,395
Certificate accounts ...........................................
Less than 4.00% ............................................. 271 234
4.00% to 4.99% .............................................. 1,083,112 26,434
5.00% to 5.99% .............................................. 1,385,528 2,128,693
6.00% to 6.99% .............................................. 9,698 205,524
7.00% and over .............................................. 1,360 4,032
---------------------------
Total certificates ............................................. 2,479,969 2,364,917
---------------------------
Repurchase agreements with customers ........................... 87,645 85,027
---------------------------
$3,379,502 $3,156,202
===========================
</TABLE>
Certificate maturities were as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Less than 1 year ............................................... $2,127,850 $2,093,394
1 to 2 years ................................................... 219,300 148,109
2 to 3 years ................................................... 43,022 24,499
Over 3 years ................................................... 89,797 98,915
---------------------------
$2,479,969 $2,364,917
===========================
</TABLE>
Interest expense on customer accounts consisted of the following:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Checking accounts .................................. $ 2,266 $ 2,153 $ 2,006
Passbook and statement accounts .................... 5,225 6,048 6,371
Insured money market accounts ...................... 20,057 16,889 15,391
Certificate accounts ............................... 127,867 127,221 116,232
-----------------------------------------------
155,415 152,311 140,000
Repurchase agreements with customers ............... 4,930 4,252 3,059
-----------------------------------------------
160,345 156,563 143,059
Less early withdrawal penalties .................... (403) (464) (375)
-----------------------------------------------
$ 159,942 $ 156,099 $ 142,684
===============================================
Weighted average interest rate at end of year ...... 4.71% 5.09% 5.18%
Weighted daily average interest rate during the year 4.84% 5.14% 5.06%
</TABLE>
NOTE K
FHLB ADVANCES
Maturity dates of FHLB advances were as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
FHLB advances due
Less than 1 year ................................................ $ 654,000 $ 556,500
2 to 3 years .................................................... 200,000 --
3 to 4 years .................................................... -- 200,000
More than 5 years ............................................... 600,000 600,000
---------------------------
$1,454,000 $1,356,500
===========================
</TABLE>
18
<PAGE> 21
Financial data pertaining to the weighted average cost and the amount of FHLB
advances were as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year ...... 5.42% 5.50% 5.51%
Weighted daily average interest rate during the year 5.51% 5.60% 5.58%
Daily average of FHLB advances ..................... $1,076,263 $1,210,362 $1,315,353
Maximum amount of FHLB advances at any month end ... 1,454,000 1,523,500 1,703,000
Interest expense during the year ................... 59,275 67,816 73,393
</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, 1999 1998
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Securities sold under agreements to repurchase
Due within 30 days ............................................. $303,257 $221,819
Other borrowings
Credit facility, weighted average rate of 5.63% ................ 1,000 --
Federal funds purchased, weighted average rate of 5.64%,
due on demand .................................................. 150,000 --
-------------------------
$454,257 $221,819
=========================
</TABLE>
The Company has a $40,000,000 credit facility with another financial institution
which expires February 28, 2000. The credit facility bears interest at the
London Interbank Offering Rate (LIBOR) plus 25 basis points.
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, 1999, 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, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year ........ 5.30% 5.57% 5.81%
Weighted daily average interest rate during the year . 5.05% 5.63% 5.44%
Daily average of securities sold under agreements
to repurchase ..................................... $396,098 $400,202 $569,203
Maximum securities sold under agreements to repurchase
at any month end .................................. 620,580 608,990 822,904
Interest expense during the year ..................... 19,994 22,521 30,944
</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 FASB (Financial Accounting Standards
Board) issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." In general, SFAS No. 127 deferred 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, 1999 and
1998, include deferred taxes of $54,012,000 and $66,724,000, 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 effects were as
follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets
Real estate valuation reserves $ 972 $ 3,826
Discounts 46 66
-------------------------
Total deferred tax assets 1,018 3,892
-------------------------
Deferred tax liabilities
Federal Home Loan Bank stock dividends 21,499 17,115
Loan loss reserves 11,159 16,632
Valuation adjustment on available-for-sale securities 3,000 19,000
Depreciation 2,813 3,395
Loan origination costs 9,467 4,131
State income taxes 2,500 4,113
Other, net 4,592 6,230
-------------------------
Total deferred tax liabilities 55,030 70,616
-------------------------
Net deferred tax liability $54,012 $66,724
=========================
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 35% 35% 35%
Dividend received deduction (2) (2) (1)
Tax-exempt interest (1) -- --
State income tax 3 2 2
Other, net 1 1 --
------------------------------------------
Effective income tax rate 36% 36% 36%
==========================================
</TABLE>
The Small Business Job Protection Act of 1996 (the Act) required qualified
thrift institutions, such as the Company, 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 1999. Accordingly, the Company will be required to pay
approximately $21,770,000 in additional federal income taxes, all of which has
been previously provided for, beginning in fiscal 1999, and continuing through
fiscal 2004.
A deferred tax liability has not been required to be recognized for the tax bad
debt base year reserves of the Company. The base year reserves are the balance
of reserves as of September 30, 1988, reduced proportionately for reductions in
the Company's loan portfolio since that date. At September 30, 1999 the amount
of those reserves was approximately $4,835,000. The amount of the unrecognized
deferred tax liability at September 30, 1999, was approximately $1,861,000.
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. This feature allows the
employee to direct a portion of their vested account balance toward the purchase
of Company stock. Contributions to the Plan amounted to $1,745,000, $1,493,000,
and $1,654,000 for the years ended September 30, 1999, 1998, and 1997,
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 5,351,518, 1,688,074, and 2,781,790 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, 1996 $13.01 1,758,824
Granted in 1997 17.51 145,739 $3.15
Exercised in 1997 10.77 (175,944)
Forfeited in 1997 13.50 (156,459)
-------------------------
Outstanding, September 30, 1997 13.62 1,572,160
Granted in 1998 24.06 469,703 3.53
Exercised in 1998 11.97 (176,456)
Forfeited in 1998 14.45 (167,519)
-------------------------
Outstanding, September 30, 1998 16.59 1,697,888
Granted in 1999 21.86 55,970 3.75
Exercised in 1999 12.38 (143,039)
Forfeited in 1999 17.77 (63,903)
-------------------------
Outstanding, September 30, 1999 $17.12 1,546,916
=========================
</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 1999
and 1998, 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, 1999
- -------------------------------------------------------------------------------------------------------------------
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 Option Shares Option Shares Option Shares
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.74 - 10.07 3,437 1.1 years $ 8.86 3,437 $ 8.86
11.87 - 14.68 565,021 4.3 12.45 307,800 12.59
15.20 - 17.37 470,684 5.8 15.62 104,492 15.51
20.66 - 24.38 507,774 8.3 23.77 605 24.38
------------------------------------------------------------------------------------
1,546,916 6.1 years $17.12 416,334 $13.31
====================================================================================
</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 $210,000 and $749,000 for 1999 and 1998, respectively, and net income
per share would have remained the same for 1999 and would have been reduced by
$.01 for 1998.
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: annual dividend yield of 4.00% for
1999 and 3.25% for 1998; expected volatility of 18.00% for 1999 and 13.00% for
1998; risk-free interest rate of 5.75% for 1999 and 5.50% for 1998; and expected
life of five years for both years.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P
STOCKHOLDERS' EQUITY
In the second quarter of both fiscal 1999 and 1998, the Company declared an
eleven-for-ten stock split 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
discretionary 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 capital components, risk-weightings, and other factors.
As of September 30, 1999 and 1998, 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
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
Total capital to risk-weighted assets..... $698,484 21.77% $256,641 8.00% $320,802 10.00%
Tier I capital to risk-weighted assets.... 690,074 21.51% NA NA 192,481 6.00%
Core capital to adjusted tangible assets.. 690,074 11.31% NA NA 305,008 5.00%
Core capital to total assets.............. 690,074 11.31% 183,005 3.00% NA NA
Tangible capital to tangible assets....... 690,074 11.31% 91,502 1.50% NA NA
September 30, 1998
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
</TABLE>
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation
(FDIC) routinely examine the Company's financial statements as part of their
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 1999.
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.
Information used to calculate EPS was as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................................... $114,286,000 $111,836,000 $105,050,000
Weighted average shares
Basic weighted average number of
common shares outstanding .......................... 55,345,712 57,540,414 56,881,179
Dilutive effect of outstanding common stock
equivalents......................................... 461,066 614,664 589,150
--------------------------------------------
Diluted weighted average number of
common shares outstanding .......................... 55,806,778 58,155,078 57,470,329
============================================
Net income per share
Basic ................................................. $ 2.06 $ 1.94 $ 1.85
Diluted ............................................... 2.05 1.92 1.83
</TABLE>
The Company adopted SFAS No. 128 effective October 1, 1997. All prior period EPS
data have been restated for the adoption of this statement and the effect of
stock dividends.
22
<PAGE> 25
NOTE Q
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate those
values. 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.
<TABLE>
<CAPTION>
September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------
(In thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash .............................. $ 25,037 $ 25,037 $ 22,215 $ 22,215
Available-for-sale securities ..... 1,169,917 1,169,917 764,188 764,188
Held-to-maturity securities ....... 324,752 327,002 445,871 464,799
Loans receivable .................. 4,378,728 4,305,600 4,143,525 4,487,761
FHLB stock ........................ 108,844 108,844 101,050 101,050
Financial liabilities
Customer accounts ................. 3,379,502 3,358,665 3,156,500 3,167,470
FHLB advances ..................... 1,454,000 1,402,892 1,356,202 1,412,565
Other borrowings .................. 454,257 454,257 221,819 221,819
</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.
NOTE R
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. This statement does not affect the results
of operations or financial condition of the Company. The Company adopted SFAS
No. 130 on October 1, 1998.
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. The Company, after
reviewing SFAS No. 131, has determined that its current business and operations
consist of a single business segment. This statement does not affect the results
of operations or financial condition of the Company. The Company adopted SFAS
No. 131 on October 1, 1998.
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.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. As issued, SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. In July 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
In general, SFAS No. 137 delays for one year the effective date of SFAS No. 133.
The impact on the financial statements of adopting SFAS No. 133 has not been
determined.
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 and 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, 1999 1998
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash $ 1,279 $ 1,786
Investment in subsidiary 750,298 767,307
Dividend receivable 12,000 10,000
------------------------
Total assets $763,577 $779,093
========================
LIABILITIES
Borrowed money $ 1,000 $ --
Dividend payable 12,475 11,833
Other liabilities 79 88
------------------------
Total liabilities 13,554 11,921
------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value: 100,000,000 shares authorized;
62,191,540 and 56,423,961 shares issued;
54,232,061 and 51,446,129 shares outstanding 62,192 56,424
Paid-in capital 785,031 714,700
Accumulated other comprehensive income, net of tax 5,000 35,000
Treasury stock, at cost; 7,959,479 and 4,977,832 shares (146,186) (92,221)
Retained earnings 43,986 53,269
------------------------
Total stockholders' equity 750,023 767,172
------------------------
Total liabilities and stockholders' equity $763,577 $779,093
========================
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
INCOME
Dividends from subsidiary $101,500 $ 67,000
EXPENSE
Borrowings 47 129
Other 273 235
------------------------
Total expense 320 364
------------------------
Net income before equity in undistributed net income of subsidiaries 101,180 66,636
Equity in undistributed net income of subsidiaries 12,992 45,070
------------------------
Income before income taxes 114,172 111,706
Income tax benefit 114 130
------------------------
Net income $114,286 $111,836
========================
</TABLE>
24
<PAGE> 27
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $114,286 $111,836
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed net income of subsidiaries (12,992) (45,070)
Decrease (increase) in other assets (2,099) 1,485
Increase in other liabilities 633 992
-------------------------
Net cash provided by operating activities 99,828 69,243
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings 1,000 (1,000)
Issuance of common stock through stock option plan 1,552 1,762
Proceeds from Employee Stock Ownership Plan 1,260 967
Treasury stock purchased (54,938) (23,955)
Dividends (49,209) (46,848)
-------------------------
Net cash used by financing activities (100,335) (69,074)
-------------------------
Increase (decrease) in cash (507) 169
Cash at beginning of year 1,786 1,617
-------------------------
Cash at end of year $ 1,279 $ 1,786
=========================
</TABLE>
NOTE T
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited interim results of operations by
quarter:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
Year ended September 30, 1999 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $114,393 $113,261 $112,277 $115,646
Interest expense 61,840 60,434 59,386 62,830
-----------------------------------------------------------
Net interest income 52,553 52,827 52,891 52,816
Provision for loan losses 179 204 301 --
Other operating income 3,427 3,485 3,029 2,724
Other operating expense 11,422 12,015 11,498 11,052
-----------------------------------------------------------
Income before income taxes 44,379 44,093 44,121 44,488
Income taxes 16,061 15,566 15,373 15,795
-----------------------------------------------------------
Net income $ 28,318 $ 28,527 $ 28,748 $ 28,693
===========================================================
Basic earnings per share $ .50 $ .51 $ .52 $ .53
===========================================================
Diluted earnings per share $ .50 $ .51 $ .52 $ .52
===========================================================
Return of average assets 2.02% 2.00% 2.01% 1.93%
===========================================================
</TABLE>
<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 $ .47 $ .49 $ .49 $ .49
==========================================================
Diluted earnings per share $ .46 $ .48 $ .49 $ .49
==========================================================
Return on average assets 1.91% 1.99% 2.05% 2.04%
==========================================================
</TABLE>
25
<PAGE> 28
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income ................ $455,577 $460,604 $459,007 $404,211 $343,766
Interest expense ............... 244,490 252,233 257,447 228,745 188,253
------------------------------------------------------------------------
Net interest income ............ 211,087 208,371 201,560 175,466 155,513
Provision for loan losses ...... 684 740 813 3,828 6,245
Other income ................... 12,665 11,032 5,077 5,917 9,704
Other expense .................. 45,987 44,878 42,486 53,105 35,883
------------------------------------------------------------------------
Income before income taxes .. 177,081 173,785 163,338 124,450 123,089
Income taxes ................... 62,795 61,949 58,288 44,555 44,746
------------------------------------------------------------------------
Net income .................. $114,286 $111,836 $105,050 $ 79,895 $ 78,343
========================================================================
Per share data
Basic earnings per share .... $ 2.06 $ 1.94 $ 1.85 $ 1.43 $ 1.35
Diluted earnings per share .. $ 2.05 $ 1.92 $ 1.83 $ 1.41 $ 1.34
Cash dividends .............. $ .90 $ .82 $ .74 $ .68 $ .62
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets .......................... $6,163,503 $5,637,011 $5,719,589 $5,114,978 $4,577,402
Loans and mortgage-backed securities .. 5,731,644 5,119,571 5,137,905 4,589,621 4,114,881
Investment securities ................. 141,753 234,013 289,750 299,006 256,661
Customer accounts ..................... 3,379,502 3,156,202 2,978,031 2,480,220 2,445,335
FHLB advances ......................... 1,454,000 1,356,500 1,601,000 1,162,000 527,000
Other borrowings ...................... 454,257 221,819 303,544 797,549 957,087
Stockholders' equity .................. 750,023 767,172 717,745 577,702 575,929
Number of
Customer accounts .................. 189,419 184,832 180,957 160,968 161,295
Mortgage loans ..................... 40,104 40,615 41,820 39,570 35,641
Offices ............................ 107 106 104 93 87
</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 (the Company) as of
September 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 19, 1999
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 24, 2000, at 2 p.m. at the
Sheraton Hotel, 1400 Sixth 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,
1999, there were approximately 2,959
stockholders of record.
<TABLE>
<CAPTION>
STOCK PRICES
---------------------
QUARTER ENDED HIGH LOW DIVIDENDS
------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997 27 1/2 24 5/16 20
MARCH 31, 1998 26 5/8 23 15/16 20
JUNE 30, 1998 27 3/8 24 5/16 21
SEPTEMBER 30, 1998 25 9/16 20 1/4 21
DECEMBER 31, 1998 24 31/64 20 11/16 22
MARCH 31, 1999 25 7/64 21 22
JUNE 30, 1999 23 5/8 20 5/8 23
SEPTEMBER 30, 1999 25 9/16 22 1/16 23
ALL PRICES SHOWN HAVE BEEN
ADJUSTED FOR STOCK SPLITS.
MARKET MAKERS:
D.A. Davidson & Co., Inc.
Fox-Pitt, Kelton Inc.
Herzog, Heine, Geduld, Inc.
Instinet Corporation
Jefferies & Company, Inc.
Knight Securities L.P.
Lehman Brothers, Inc.
Mayer & Schweitzer, Inc.
Merrill Lynch, Pierce,
Fenner & Smith Inc.
Bank of America Securities
Ragen MacKenzie, Inc.
Salomon Smith Barney, Inc.
Sherwood Securities Corp.
Spear, Leeds & Kellogg
</TABLE>
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 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
ROY M. WHITEHEAD
President
DIRECTOR EMERITUS
HAROLD C. KEAN
E.W. MERSEREAU, JR.
EXECUTIVE MANAGEMENT COMMITTEE
WILLIAM A. CASSELS
Executive Vice President
LAWRENCE D. CIERPISZEWSKI
Executive Vice President
EDWIN C. HEDLUND
Executive Vice President
GUY C. PINKERTON
Chairman 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
President
DEPARTMENT OFFICERS
ACCOUNTING
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
CORPORATE REAL ESTATE AND TAXES
KEITH D. TAYLOR
Senior Vice President and Treasurer
DATA PROCESSING
JIM BLACK
RIC HEATON
JOHN F. GALUS
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
PATRICIA BAINTER
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
JOHN WUNDERLICH
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
RUSSELL PETERSON
SUBSIDIARIES
FIRST INSURANCE AGENCY, INC.
317 S. 2nd 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
DIVISION/REGION OFFICES
SOUTHERN WASHINGTON
29 OFFICE LOCATIONS
REGION MANAGERS
JAMES E. CADY
Vice President
10015 NE 183rd
Bothell, WA 98011
DALE B. CULVER
Vice President
2206 So. 320th
Federal Way, WA 98003
E. CRAIG WILSON
Vice President
5809 196th SW
Lynnwood, WA 98036
NORTHERN WASHINGTON
10 OFFICE LOCATIONS
DIVISION MANAGER
DOUGLAS A. ROWELL
Senior Vice President
317 S. 2nd Street
Mount Vernon, WA 98273
WESTERN IDAHO
15 OFFICE LOCATIONS
DIVISION MANAGER
ROBERT P. LINK
Senior Vice President
1001 W. Idaho St.
Boise, ID 83701
EASTERN IDAHO
4 OFFICE LOCATIONS
REGION MANAGER
LARRY WADSWORTH
Vice President
500 North Capital
Idaho Falls, ID 83402
SOUTHERN OREGON
15 OFFICE LOCATIONS
DIVISION MANAGER
NATE LOWE
Senior Vice President
300 Ellsworth St. SW
Albany, OR 97321
NORTHERN OREGON
9 OFFICE LOCATIONS
REGION MANAGER
THOMAS A. FRANKLIN
Vice President
4770 SW 76th Ave
Portland, OR 97225
UTAH
11 OFFICE LOCATIONS
DIVISION MANAGER
RICHARD FISHER
Senior Vice President
505 East 200 South
Salt Lake City, UT 84102
PHOENIX, ARIZONA
7 OFFICE LOCATIONS
DIVISION MANAGER
RON SHERIDAN
Senior Vice President
2196 E. Camelback Road, Suite 100
Phoenix, AZ 85016
TUCSON, ARIZONA
7 OFFICE LOCATIONS
DIVISION MANAGER
PATTY MCCARTHY-HOWARD
Senior Vice President
5151 E. Broadway Blvd., Suite 105
Tucson, AZ 85711
28
<PAGE> 31
[WASHINGTON FEDERAL SAVINGS LOGO]
425 Pike Street, Seattle, WA 98101
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
================================================================================
We consent to the incorporation by reference in Registration Statement
No. 33-89082 and No. 33-97900 of Washington Federal, Inc. on Form S-8
of our report dated October 19, 1999, incorporated by reference in this Annual
Report on Form 10-K of Washington Federal, Inc. for the year ended
September 30, 1999.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Seattle, Washington
December 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,037
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,169,917
<INVESTMENTS-CARRYING> 324,752
<INVESTMENTS-MARKET> 327,002
<LOANS> 4,378,728
<ALLOWANCE> 21,900
<TOTAL-ASSETS> 6,163,503
<DEPOSITS> 3,379,502
<SHORT-TERM> 1,108,257
<LIABILITIES-OTHER> 125,721
<LONG-TERM> 800,000
0
0
<COMMON> 62,192
<OTHER-SE> 687,831
<TOTAL-LIABILITIES-AND-EQUITY> 6,163,503
<INTEREST-LOAN> 353,930
<INTEREST-INVEST> 101,647
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 455,577
<INTEREST-DEPOSIT> 159,942
<INTEREST-EXPENSE> 244,490
<INTEREST-INCOME-NET> 211,087
<LOAN-LOSSES> 684
<SECURITIES-GAINS> 2,747
<EXPENSE-OTHER> 45,987
<INCOME-PRETAX> 177,081
<INCOME-PRE-EXTRAORDINARY> 114,286
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,286
<EPS-BASIC> 2.06
<EPS-DILUTED> 2.05
<YIELD-ACTUAL> 7.68
<LOANS-NON> 13,478
<LOANS-PAST> 0
<LOANS-TROUBLED> 12,983
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 23,854
<CHARGE-OFFS> 3,131
<RECOVERIES> 493
<ALLOWANCE-CLOSE> 21,900
<ALLOWANCE-DOMESTIC> 18,406
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,494
</TABLE>
