-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LNMCCTld9gBE1tBUKB9QHl/l1G9ztP/vbfqmE1he892B0cpenuaPR6TpkbxZ0PJk 21S8ISCiqTxu5WPO+kDD+g== 0000891020-98-001811.txt : 19981230 0000891020-98-001811.hdr.sgml : 19981230 ACCESSION NUMBER: 0000891020-98-001811 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON FEDERAL INC CENTRAL INDEX KEY: 0000936528 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911661606 STATE OF INCORPORATION: WA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25454 FILM NUMBER: 98776633 BUSINESS ADDRESS: STREET 1: 425 PIKE STREET CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066247930 MAIL ADDRESS: STREET 1: 425 PIKE ST CITY: SEATTLE STATE: WA ZIP: 98101 10-K405 1 FORM 10-K 1 - -------------------------------------------------------------------------------- FORM 10-K Securities and Exchange Commission Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............. to .............. Commission File Number: 0-25454 Washington Federal, Inc. (Exact name of registrant as specified in its charter) United States 91-1661606 - ------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 425 Pike Street, Seattle, Washington 98101 - ---------------------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 624-7930 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered N/A N/A Securities registered pursuant to section 12(g) of the Act: Common Stock, $1.00 par value per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 7, 1998, the aggregate market value of the 49,419,574 shares of Common Stock of the Registrant issued and outstanding on such date, excluding 1,529,060 shares held by all directors and executive officers of the Registrant as a group, was $1,250,933,000. This figure is based on the closing sale price of $25.3125 per share of the Registrant's Common Stock on December 7, 1998, as reported in The Wall Street Journal on December 8, 1998. Number of shares of Common Stock outstanding as of December 7, 1998: 50,948,634 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated: (1) Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 1998, are incorporated into Part II, Items 5-8 of this Form 10-K. (2) Portions of the Registrant's definitive proxy statement for its 1998 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K. 2 2 PART I ITEM 1. BUSINESS GENERAL Washington Federal, Inc. (the Company), formed in November 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a non-diversified unitary savings and loan holding company within the meaning of the Home Owners' Loan Act (HOLA) which conducts its operations through a federally insured savings and loan association subsidiary, Washington Federal Savings and Loan Association (Washington Federal or the Association). As such, the Company is registered as a holding company with the Office of Thrift Supervision (OTS) and is subject to OTS regulation, examination, supervision and reporting requirements. The Association, doing business as Washington Federal Savings, is a federally-chartered savings and loan association that began operations in Washington as a state-chartered mutual association in 1917. In 1935, the Association converted to a federal charter and became a member of the Federal Home Loan Bank (FHLB) System. On November 17, 1982, Washington Federal converted from a federal mutual to a federal capital stock association. The business of Washington Federal consists primarily of attracting savings deposits from the general public and investing these funds in loans secured by first mortgage liens on single-family dwellings, including loans for the construction of such dwellings, and to a significantly lesser extent, on commercial property and multi-family dwellings. It also originates other types of loans for its portfolio and invests in certain United States Government and agency obligations and other investments permitted by applicable laws and regulations. Washington Federal has 106 offices located in Washington, Oregon, Idaho, Arizona, and Utah, all of which are full service branches. Through subsidiaries, the Association is engaged in real estate development and insurance brokerage activities. The principal sources of funds for the Association's activities are retained earnings, loan repayments (including prepayments), net savings inflows, sales of loans, loan participations and other assets, and deposits and borrowings. Washington Federal's principal sources of revenue are interest on loans, interest and dividends on investments, and gains on sale of investments and real estate. Its principal expenses are interest paid on savings, general and administrative expenses, interest on borrowings, and income taxes. The Company's growth has been generated both internally and as a result of eleven mergers and three assumptions of deposits. The most recent acquisition was completed in November 1996, when the Company purchased Metropolitan Bancorp, Seattle, Washington (Metropolitan). For additional information in this regard, see Note B to the Consolidated Financial Statements included in Item 14 hereof. The Association is subject to extensive regulation, supervision and examination by the OTS, as its chartering authority and primary federal regulator, and by the Federal Deposit Insurance Corporation (FDIC), which insures its deposits up to applicable limits. Such 3 3 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." 4 4 AVERAGE STATEMENTS OF FINANCIAL CONDITION
Year Ended September 30, ------------------------------------------------------------------------------- 1996 1997 ------------------------------------ ------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ---------- ---------- ------ ---------- ---------- ------- (Dollars in Thousands) ASSETS Loans (1) $3,442,290 $ 305,372 8.87% $4,091,571 $ 357,496 8.74% Mortgage-backed securities 966,658 74,126 7.67 1,003,077 74,667 7.44 Investment securities 336,722 20,817 6.18 305,183 20,140 6.60 FHLB stock 50,795 3,896 7.67 84,888 6,704 7.90 ---------- ---------- ------ ---------- ---------- ------ Total interest-earning assets 4,796,465 404,211 8.43 5,484,719 459,007 8.37 Other assets 114,126 161,324 ---------- ---------- Total assets $4,910,591 $5,646,043 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Checking accounts $ 72,376 1,734 2.40 $ 83,991 2,006 2.39 Passbook and statement accounts 178,616 6,267 3.51 183,048 6,371 3.48 Insured money market accounts 313,746 13,137 4.19 374,581 15,391 4.11 Certificate accounts (time deposits) 1,847,561 105,285 5.70 2,117,792 115,857 5.47 Repurchase agreements with customers 66,048 3,481 5.27 60,671 3,059 5.04 FHLB advances 862,966 48,183 5.58 1,315,353 73,393 5.58 Securities sold under agreements to repurchase 816,857 47,905 5.86 569,203 30,944 5.44 Federal funds purchased 50,810 2,753 5.42 187,082 10,426 5.57 ---------- ---------- ------ ---------- ---------- ------ Total interest-bearing liabilities 4,208,980 228,745 5.44 4,891,721 257,447 5.26 Other liabilities 123,135 106,513 ---------- ---------- Total liabilities 4,332,115 4,998,234 Stockholders' equity 578,476 647,809 ---------- ---------- Total liabilities and stockholders' equity $4,910,591 $5,646,043 ========== ---------- ------ ========== ---------- ------ Net interest income/Interest rate spread $ 175,466 2.99% $ 201,560 3.11% ========== ====== ========== ====== Net interest margin (2) 3.66% 3.67% ====== ======
Year Ended September 30, ------------------------------------- 1998 ------------------------------------- Average Average Balance Interest Rate ---------- ---------- ------ (Dollars in Thousands) ASSETS Loans (1) $4,166,420 $ 364,801 8.76% Mortgage-backed securities 907,265 70,099 7.73 Investment securities 279,442 18,238 6.53 FHLB stock 96,405 7,466 7.74 ---------- ---------- ------ Total interest-earning assets 5,449,532 460,604 8.45 Other assets 193,397 ---------- Total assets $5,642,929 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Checking accounts 91,800 2,153 2.35 Passbook and statement accounts 173,189 6,048 3.49 Insured money market accounts 418,205 16,890 4.04 Certificate accounts (time deposits) 2,274,557 126,757 5.57 Repurchase agreements with customers 79,652 4,252 5.34 FHLB advances 1,210,362 67,816 5.60 Securities sold under agreements to repurchase 400,202 22,521 5.63 Federal funds purchased 102,407 5,796 5.66 ---------- ---------- ------ Total interest-bearing liabilities 4,750,374 252,233 5.31 Other liabilities 139,686 ---------- Total liabilities 4,890,060 Stockholders' equity 752,869 ---------- Total liabilities and stockholders' equity $5,642,929 ========== ---------- ------ Net interest income/Interest rate spread $ 208,371 3.14% ========== ====== Net interest margin (2) 3.82% ======
- ---------- (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. 5 5 LENDING ACTIVITIES GENERAL. The Company's net portfolio of loans and mortgage-backed securities totaled $5.1 billion at September 30, 1998, representing approximately 91% of its total assets. In recent years, the Company has concentrated its lending activities on the origination of conventional loans, which are loans that are neither insured nor guaranteed by agencies of the United States Government. The Company's investment in mortgage-backed securities issued or guaranteed by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC) and certain privately insured mortgage-backed securities amounted to $976 million (net of discounts and premiums) at September 30, 1998, and is deemed to be part of the Company's loan portfolio. Washington Federal has historically concentrated its lending activity on the origination of long-term, fixed-rate single-family first mortgage loans, single-family construction loans, and land development loans. Although mortgage loans may be written with adjustable interest rates, the Association does not emphasize adjustable-rate loans. 6 6 The following table sets forth the composition of the Company's gross loan and mortgage-backed securities portfolio, by loan type and security type, as of September 30 for the years indicated.
1994 1995 1996 ---------------------- ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent ---------- ------- ---------- ------- ---------- ------- (Dollars in Thousands) Loans by type of loan Real estate: Conventional: Permanent $2,089,769 57.7% $2,635,669 60.1% $3,241,789 66.6% Land development 132,487 3.7 167,028 3.8 172,146 3.5 Construction(1) 359,812 9.9 443,723 10.1 548,302 11.2 Insured or guaranteed: FHA 22,279 .6 20,479 .4 18,123 .4 VA 18,511 .5 16,434 .4 18,169 .4 Mortgage-backed securities(residential)(2) 995,107 27.4 1,095,861 25.0 865,887 17.8 Savings account loans 2,790 .1 2,344 .1 3,576 .1 Consumer 3,796 .1 2,463 .1 1,488 -- ---------- ------- ---------- ------- ---------- ------- Total(3) $3,624,551 100.0% $4,384,001 100.0% $4,869,480 100.0% ========== ======= ========== ======= ========== ======= Loans by type of security Residential: Single-family(4) $2,499,458 69.0% $3,168,844 72.2% $3,879,092 79.7% Other dwelling units 46,260 1.3 54,407 1.2 74,108 1.5 Income property 77,140 2.1 60,082 1.4 45,329 .9 Mortgage-backed securities(residential)(2) 995,107 27.4 1,095,861 25.0 865,887 17.8 Savings account loans 2,790 .1 2,344 .1 3,576 .1 Consumer 3,796 .1 2,463 .1 1,488 -- ---------- ------- ---------- ------- ---------- ------- Total(3) $3,624,551 100.0% $4,384,001 100.0% $4,869,480 100.0% ========== ======= ========== ======= ========== =======
1997 1998 ---------------------- ---------------------- Amount Percent Amount Percent ---------- ------- ---------- ------- (Dollars in Thousands) Loans by type of loan Real estate: Conventional: Permanent $3,719,185 68.9% $3,689,755 68.3% Land development 158,706 2.9 160,879 3.0 Construction(1) 542,394 10.0 562,689 10.4 Insured or guaranteed: FHA 26,641 .5 19,330 .3 VA 17,797 .3 15,829 .3 Mortgage-backed securities(residential)(2) 931,456 17.3 949,892 17.6 Savings account loans 3,954 .1 3,094 .1 Consumer 1,089 -- 673 -- ---------- ------- ---------- ------- Total(3) $5,401,222 100.0% $5,402,141 100.0% ========== ======= ========== ======= Loans by type of security Residential: Single-family(4) $4,222,566 78.2% $4,258,722 78.7% Other dwelling units 122,038 2.2 105,022 2.0 Income property 120,119 2.2 84,738 1.6 Mortgage-backed securities(residential)(2) 931,456 17.3 949,892 17.6 Savings account loans 3,954 .1 3,094 .1 Consumer 1,089 -- 673 -- ---------- ------- ---------- ------- Total(3) $5,401,222 100.0% $5,402,141 100.0% ========== ======= ========== =======
(1) Includes construction loans that have been modified to monthly payment loans, due in full in approximately one year, in the amount of $6.1 million, $6.1 million, $15.9 million, $17.8 million, and $17.6 million at September 30, 1994, 1995, 1996, 1997, and 1998, respectively. (2) For additional information, see Note C to the Consolidated Financial Statements. (3) After netting undisbursed proceeds on loans in process, deferred fees, discounts on loans, and allowances for possible losses against the applicable loan amounts, the Association's net loan portfolio at amounted to $3.40 billion, $4.11 billion, $4.60 billion, $5.10 billion, and $5.1 billion, at September 30, 1994, 1995, 1996, 1997, and 1998, respectively. (4) Includes condominium units (which are deemed to be single-family residences regardless of the number of units in the structure in which they are located), as well as land and construction loans for single- family residences. 7 7 The following table summarizes the scheduled contractual gross loan maturities for the Association's total loan and mortgage-backed securities portfolios due for the periods indicated as of September 30, 1998. Amounts are presented prior to deduction of discounts, premiums, loans in process, deferred loan origination fees and allowance for loan losses. Adjustable rate loans are shown in the period in which loan principal payments are contractually due.
Balance Maturity Distribution Outstanding at ---------------------------------------------- September 30, Less than 1 to 5 After 5 1998 1 year years years ---------- ---------- ---------- ---------- (Dollars In Thousands) One- to four-family real estate loans $3,535,154 $ 29,492 $ 57,569 $3,448,093 GNMA, FHLMC, FNMA and other mortgage-backed securities 949,892 -- 2,933 946,959 Construction and land development loans 723,568 556,078 19,076 148,414 Income property and other residential 189,760 32,241 46,381 111,138 Savings account loans 3,094 2,949 24 121 Consumer loans 673 337 201 135 ---------- ---------- ---------- ---------- $5,402,141 $ 621,097 $ 126,184 $4,654,860 ========== ========== ========== ========== - ------------------- Loans maturing after one year: Fixed-interest rates $4,164,352 Floating or adjustable interest rates 616,692 ---------- Total $4,781,044 ==========
8 8 The original contractual loan payment period for residential loans originated by the Association normally ranges from 15 to 30 years. Experience during recent years has indicated that, because of prepayments in connection with refinancing and sales of property, residential loans remain outstanding an average of less than ten years. LENDING PROGRAMS AND POLICIES. The Association specializes in residential real estate lending and has no present plans to expand its operations into consumer or commercial business loans. The Association offers "balloon" payment loans, which are amortized on a 20 or 30 year basis but which have a maturity date for the principal balance of a much shorter period. The Association also provides land acquisition and development loans ("land development loans") and construction loans for single-family residences. The interest rate on these loans generally adjusts every 90 days in accordance with a designated index. Land development and construction loans amounted to $724 million or 13% of the Association's gross loan portfolio (including mortgage-backed securities) at September 30, 1998. The Association offers a multi-family (five or more dwelling units) lending program with strict underwriting guidelines, including a $1 million limit on any one loan. Many of the associations acquired by Washington Federal offered a variety of lending products, including commercial real estate and non real estate secured loans, consumer secured loans, and non-secured lines of credit. All commercial, consumer, and line of credit lending has been discontinued and lending has been redirected toward the traditional Association lending practices of single-family residential loans. The loans acquired, other than single-family residential real estate loans, are being serviced and payoffs are encouraged. As a result of activity over the past three decades, the Association believes that it is a leading construction lender for single-family residences in the Seattle metropolitan area. Because of this history, the Association has developed a staff with in-depth land development and construction experience, and working relationships with a group of builders which have been selected based on their operating histories and financial stability. Construction lending is generally considered to involve a higher level of risk than single-family residential lending due to the concentration of principal in a limited number of loans and borrowers, and the effects of general economic conditions on real estate developers and managers. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project, and the estimated cost (including interest) of the project. The nature of these loans also is such that they are generally more difficult to evaluate and monitor. The Association continues to originate medium and long-term, permanent fixed-rate loans, but in most instances only under terms, conditions, and documentation which permit sale in the secondary market(see below). Moreover, since 1973 it has been the Association's general policy to include in the documentation evidencing its conventional mortgage loans the due-on-sale clause, which facilitates adjustment of interest rates on such loans when the property securing the loan is sold or transferred. At September 30, 1998, $4.5 billion or 83% of the 9 9 Association's loan portfolio was represented by medium and long-term, fixed-rate loans secured by single-family residences (including mortgage-backed securities). The Association offers a 99% loan-to-value ratio conventional loan program for first time home buyers. The high-ratio conventional lending program presents greater risk to the Association. To mitigate the risk, the program has stringent underwriting and property requirements that include home ownership/money management counseling and property condition inspections. A general loss reserve is established, which considers the greater risk inherent with these loans, as well as, their relative loan loss experience. The Association is authorized by its Board to originate $100 million of loans under this program. As of September 30, 1998, loans under this program amounted to $60.8 million. All of the Association's mortgage lending is subject to written, nondiscriminatory underwriting standards, loan origination procedures, and lending policies prescribed by the Association's Board of Directors. Property valuations are required on all real estate loans and are prepared by independent appraisers approved by the Association's Board of Directors and the appraisals are reviewed by the Association's appraisal staff. Detailed loan applications are obtained to determine the borrower's ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements, and written confirmations. Depending on the size of the loan involved, a varying number of senior officers of the Association must approve the application before the loan can be granted. Federal regulations limit the amount of a real estate loan made by a federally-chartered savings institution to a specified percentage of the value of the property securing the loan, as determined by an appraisal at the time the loan is originated, referred to as the loan-to-value ratio. The regulation provides that at the time of origination, a real estate loan may not exceed 100% of the appraised value of the security property. Maximum loan-to-value ratios for each type of real estate loan made by an institution are now established by the institution's Board of Directors. In addition, the Board of Directors must approve each real estate loan (other than a home loan) with a loan-to-value ratio in excess of 80%. When establishing general reserves for loans with loan-to-value ratios exceeding 80% that are not insured by private mortgage insurance, Washington Federal considers the additional risk inherent with these products, as well as, their relative loan loss experience, and provides reserves we deem appropriate. This total reserve balance at September 30, 1998, amounted to $5.9 million. The Association's residential construction loans and land acquisition and development loans are of a short-term nature and are generally made for 80% or less of the appraised value of the property upon completion for residential construction loans, and 75% or less for land acquisition and development loans. Funds are disbursed periodically at various stages of completion as authorized by the Association's personnel. It is the Association's policy to obtain title insurance ensuring that the Association has a valid first lien on the mortgaged real estate. Borrowers must also obtain hazard insurance prior to closing and, when required by the Department of Housing and Urban Development, 10 10 flood insurance. Borrowers may be required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Association makes disbursements for items such as real estate taxes, hazard insurance premiums, and private mortgage insurance premiums as they fall due. ORIGINATION, PURCHASE AND SALE OF LOANS. The Association has general authority to lend anywhere in the United States. The Association's primary lending area, however, is western Washington, western Oregon, southern Idaho, southern Arizona, and northern Utah. Loan originations come from a number of sources. Residential loan originations result from referrals from real estate brokers, walk-in customers, purchasers of property in connection with builder projects financed by the Association, purchasers of property referred through mortgage brokers, and from refinancing for existing customers. Construction loan originations are obtained primarily by direct solicitation of builders and continued business from builders who have previously borrowed from the Association. At September 30, 1998, the Association was servicing approximately $73.6 million of loans for others. Sales are made on a yield basis with the difference between the yield to the purchaser and the amount paid by the borrower constituting servicing income to the Association. The sale of loans and loan participations is subject to federal regulations, which, until recently, required that sales be made on a non-recourse basis. The Association also purchases mortgage-backed securities when lending rates and mortgage volume for new loan originations in its market area do not fulfill its needs. Mortgage-backed securities accounted for most of the Association's loan purchases in recent years. Mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Association. 11 11 The table below shows total loan origination, purchase, sale, and repayment activities of the Association on a consolidated basis for the years indicated.
Year Ended September 30, ------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ----------- (Dollars In Thousands) Loans originated(1): Construction $ 370,845 $ 341,001 $ 428,317 $ 407,135 $ 467,884 Land 74,508 97,990 92,496 77,270 105,901 Loans on existing property 540,561 758,455 972,601 556,063 723,337 Loans refinanced 76,518 27,468 62,854 48,240 157,110 ----------- ----------- ----------- ----------- ----------- Total loans originated 1,062,432 1,224,914 1,556,268 1,088,708 1,454,232 ----------- ----------- ----------- ----------- ----------- Loans and mortgage-backed securities purchased: From acquisitions of associations-- 27,759 -- 627,816 -- Other 620,026 216,843 60,888 11,310 321,006 ----------- ----------- ----------- ----------- ----------- 620,026 244,602 60,888 639,126 321,006 ----------- ----------- ----------- ----------- ----------- Loans and mortgage-backed securities sold (18,702) (34,156) (134,275) (119,851) (55,560) ----------- ----------- ----------- ----------- ----------- Loan and mortgage-backed securities principal repayments (1,057,659) (683,383) (1,016,049) (1,127,923) (1,734,310) ----------- ----------- ----------- ----------- ----------- Net change in loans in process, discounts, fees, etc 18,545 (37,679) 7,908 68,224 (3,702) ----------- ----------- ----------- ----------- ----------- Net loan activity increase(decrease) $ 624,642 $ 714,298 $ 474,740 $ 548,284 $ (18,334) =========== =========== =========== =========== ===========
- ---------- (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. 12 12 The Association receives loan origination fees for originating loans and servicing fees for servicing loans sold by it to others. The Association also receives commitment fees for making commitments to originate construction, commercial and multi-family residential loans, as well as various fees and charges related to existing loans, which include prepayment charges, late charges, and assumption fees. In making one- to-four family home mortgage loans, the Association does not normally charge a commitment fee. As part of the loan application, the borrower pays the Association for its out-of-pocket costs in reviewing the application, such as the appraisal fee, whether or not the borrower closes the loan. The interest rate charged is normally the prevailing rate at the time the loan application is approved. In the case of larger construction loans, the Association normally charges a 1% commitment fee, which may be included in the loan origination charge when the loan is made. Commitment fees and other terms of commercial and multi-family residential loans are individually negotiated. NON-PERFORMING ASSETS. When a borrower fails to make a required payment on a loan, the Association attempts to cause the deficiency to be cured by contacting the borrower. Contacts are made after a payment is 30 days past due. In most cases, deficiencies are cured promptly. If the delinquency is not cured within 90 days, the Association causes the trustee on the deed of trust to institute appropriate action to foreclose the property. If foreclosed, the property will be sold at a public sale and may be purchased by the Association. There are circumstances under which the Association may choose to foreclose a deed of trust as mortgagee and when this procedure is followed, certain redemption rights are involved. Loans are placed on 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. 13 13 The following table sets forth information regarding restructured and nonaccrual loans, and REO held by the Association at the dates indicated.
September 30, --------------------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (Dollars in Thousands) Restructured loans (1) $11,254 $10,103 $24,046 $ 8,613 $ 4,005 Nonaccrual loans: Single-family residential 4,215 2,879 5,913 9,571 8,751 Construction and land 5,484 9,515 7,779 4,629 9,932 Commercial real estate 1,223 76 482 586 255 Consumer 105 -- 4 3 3 ------- ------- ------- ------- ------- Total nonaccrual loans (2) 11,027 12,470 14,178 14,789 18,941 Total REO (3) 2,316 19,735 20,417 19,339 6,805 ------- ------- ------- ------- ------- Total nonperforming assets $24,597 $42,308 $58,641 $42,741 $29,751 ======= ======= ======= ======= ======= Total nonperforming assets as a percent of total assets .64% .92% 1.15% .75% .53% ======= ======= ======= ======= =======
- ---------- (1) Performing in accordance with restructured terms. (2) The Association recognized interest income on nonaccrual loans of approximately $467,000 in 1998. Had these loans performed according to their original contract terms, the Association would have recognized interest income of approximately $854,000 in 1998. In addition to the nonaccrual loans reflected in the above table, at September 30, 1998, the Association had $6.7 million of loans which were less than 90 days delinquent but which it had classified as substandard for one or more reasons. If these loans were deemed non-performing, the Association's ratio of total nonperforming assets as a percent of total assets would have been .65% at September 30, 1998. For a discussion of the Company's policy for placing loans on nonaccrual status, see Note A to the Consolidated Financial Statements included in Item 14 hereof. (3) Total REO includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. See Note I to the Consolidated Financial Statements included in Item 14 hereof. 14 14 The following table analyzes the Company's allowance for loan losses at the dates indicated.
September 30, --------------------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (Dollars in Thousands) Beginning balance $14,674 $11,720 $11,651 $15,182 $24,623 Charge-offs: Real estate: Permanent 8 450 146 131 546 Construction 977 164 179 592 344 Land 184 163 90 413 1,215 Income property 2,604 6,536 405 4,796 199 Other 4 17 -- -- -- ------- ------- ------- ------- ------- 3,777 7,330 820 5,932 2,304 ------- ------- ------- ------- ------- Recoveries: Real estate: Permanent 127 10 10 14 53 Construction 50 50 -- 8 15 Land 26 21 -- -- 10 Income property 219 654 513 3,340 717 Other -- -- -- -- -- ------- ------- ------- ------- ------- 422 735 523 3,362 795 ------- ------- ------- ------- ------- Net charge-offs 3,355 6,595 297 2,570 1,509 Acquisitions -- 281 -- 11,198 -- Provisions for loan losses 401 6,245 3,828 813 740 ------- ------- ------- ------- ------- Ending balance $11,720 $11,651 $15,182 $24,623 $23,854 ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans outstanding .15% .25% .01% .06% .04% ======= ======= ======= ======= =======
- ---------- The following table sets forth the allocation of the Company's allowance for loan losses at the dates indicated.
September 30, ----------------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (Dollars In Thousands) Real estate: Permanent single-family $ 1,537 $ 3,031 $ 5,239 $ 5,755 $ 5,515 Construction 120 5 2,945 3,053 3,059 Land 255 405 2,525 1,763 1,912 Income property 2,750 950 1,843 7,081 6,257 Other 2 -- -- -- -- Unallocated 7,056 7,260 2,630 6,971 7,111 ------- ------- ------- ------- ------- $11,720 $11,651 $15,182 $24,623 $23,854 ======= ======= ======= ======= =======
As part of the process for determining the adequacy of the allowance for loan losses, management reviews the loan portfolio for specific weaknesses. A portion of the allowance is then allocated to reflect the loss exposure. Residential real estate loans are not individually analyzed for impairment and loss exposure because of the significant number of loans, their relatively small balances, and their historically low level of losses. Residential construction, commercial real estate, and commercial business loans were evaluated individually for impairment, which resulted in an allocation of $11.2 million of the allowance for loan loss at year-end 1998, compared with an allocation of $11.9 million a year earlier. 15 15 Unallocated reserves are established for loss exposure that may exist in the remainder of the loan portfolio but has yet to be identified. In determining the adequacy of unallocated reserves, management considers changes in the size and composition of the loan portfolio, actual historical loan loss experience, and current and anticipated economic conditions. REAL ESTATE HELD FOR SALE. As one of the Association's activities, a subsidiary is engaged in the development and sale of real estate. Also, REO which was acquired in the acquisitions of insolvent associations has been recorded as real estate held for sale. The business of real estate development involves substantial risks, and the results of such activities depend upon a number of factors, including: seasonality, the type, location and size of each project, the stage of project development, general economic conditions, and the level of mortgage interest rates. Consequently, there may be substantial inter-period variations in the operating results of the Association's real estate development activities. Moreover, because investing in real estate and real estate development activities are not permissible activities for national banks, the amount of the investment in, and loans to, any subsidiary engaged in such activities is deductible from a savings association's regulatory capital. See "Regulation - The Association--Regulatory Capital Requirements." INVESTMENT ACTIVITIES As a federally-chartered savings institution, Washington Federal is required to maintain certain liquidity ratios and does so by investing in securities that qualify as liquid assets under federal regulations. These include, among other things, certain certificates of deposit, bankers' acceptances, loans to financial institutions whose deposits are federally-insured, federal funds, and United States Government and agency obligations. The following table sets forth the composition of the Company's investment portfolio at the dates indicated.
September 30, ------------------------------------------------------------------------------ 1996 1997 1998 ---------------------- ----------------------- ---------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- -------- --------- -------- --------- -------- (Dollars In Thousands) U.S. Government and agency obligations $270,915 $275,538 $258,279 $266,279 $198,540 $210,540 State and political subdivisions 23,468 24,967 23,471 25,403 23,473 25,439 -------- -------- -------- -------- -------- -------- $294,383 $300,505 $281,750 $291,682 $222,013 $235,979 ======== ======== ======== ======== ======== ========
- ---------- 16 16 The investment portfolio at September 30, 1998 categorized by maturity is as follows:
Amortized Weighted Cost Average Yield ----------- ------------- (Dollars in Thousands) Due in less than one year $ 116,175 7.44% Due after one year through five years 67,579 6.94 Due after five years through ten years 15,158 6.98 Due after ten years 23,101 7.93 ----------- $ 222,013 ===========
SOURCES OF FUNDS GENERAL. Savings deposits are an important source of the Association's funds for use in lending and for other general business purposes. In addition to savings deposits, Washington Federal derives funds from loan repayments, advances from the FHLB and other borrowings and, to a lesser extent, from loan sales. Loan repayments are a relatively stable source of funds while savings inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in normal sources of funds such as savings inflows at less than projected levels. They may also be used on a longer-term basis to support expanded activities. SAVINGS. In recent years, the Association has chosen to rely on term certificate accounts and other deposit alternatives which have no fixed term and pay interest rates that are more responsive to market interest rates than passbook accounts. This greater variety of deposits has allowed the Association to be more competitive in obtaining funds to more effectively manage its liabilities. Certificates with a maturity of one year or less have penalties for premature withdrawal equal to 90 days of interest. When the maturity is greater than one year, the penalty is 180 days of interest. For jumbo certificates, the penalty depends on the original term. If the original term is 90 days or less, the penalty is the greater of 30 days interest or all interest earned. If the original term is 90 days or more, the penalty is the greater of 90 days interest or all interest earned. Early withdrawal penalties during fiscal 1996, 1997, and 1998 amounted to approximately $349,000, $375,000, and $464,000, respectively. The Association offers a single performance checking account. This account pays interest on balances over $1,000 and charges a service fee if balances drop below $1,000. The Association's deposits are obtained primarily from residents of Washington, Oregon, Idaho, Arizona, and Utah and the Association does not advertise for deposits outside of these states. At September 30, 1998, management believed that less than 3% of the Association's deposits were held by nonresidents of Washington, Oregon, Idaho, Arizona, and Utah. 17 17 The following table sets forth certain information relating to the Association's savings deposits at the dates indicated.
September 30, ---------------------------------------------------------------------- 1996 1997 1998 -------------------- -------------------- -------------------- Amount Rate Amount Rate Amount Rate ---------- ------ ---------- ------ ---------- ------ (Dollars in Thousands) Balance by interest rate: Checking accounts $ 75,781 3.00% $ 88,811 3.00% $ 93,942 2.60% Regular savings (passbook) accounts 175,307 3.50 177,843 3.50 168,921 3.50 Money market deposit accounts 342,013 4.04 399,056 4.04 443,395 4.14 ---------- ---------- ---------- 593,101 665,710 706,258 ---------- ---------- ---------- Fixed-rate certificates: 3.00% - 4.99% 137,463 13,946 20,875 5.00% - 6.99% 1,642,332 2,063,144 2,173,728 7.00% - 8.99% 1,075 1,544 1,428 9.00% and above 49 7 7 Jumbo certificates ($100,000 or more): 3.00% - 4.99% 4,169 3,293 5,793 5.00% - 6.99% 45,696 150,958 160,490 7.00% - 8.99% -- 6,769 2,596 ---------- ---------- ---------- 1,830,784 2,239,661 2,364,917 ---------- ---------- ---------- $2,423,885 $2,905,371 $3,071,175 ========== ========== ==========
The following table sets forth, by various interest rate categories, the amounts of certificates of deposit of the Association at September 30, 1998, which mature during the periods indicated.
Amounts at September 30, 1998, Maturing in --------------------------------------------------------------------------------------------- 1 to 3 4 to 6 7 to 12 13 to 24 25 to 36 37 to 60 After Months Months Months Months Months Months 60 Months -------- -------- -------- -------- -------- -------- --------- (Dollars in Thousands) 3.00 to 3.99% $ -- $ -- $ 53 $ 67 $ 114 $ -- $ -- 4.00 to 4.99% 24,467 1,849 115 3 -- -- -- 5.00 to 5.99% 389,042 751,805 728,134 137,206 24,097 98,281 128 6.00 to 6.99% 2,612 143,764 48,796 9,652 198 502 -- 7.00 to 7.99% 1,597 214 928 1,179 78 5 -- 8.00 to 8.99% -- -- 18 -- 6 -- -- 9.00% and above -- -- -- 1 6 -- -- -------- -------- -------- -------- -------- -------- -------- Total $417,718 $897,632 $778,044 $148,108 $ 24,499 $ 98,788 $ 128 ======== ======== ======== ======== ======== ======== ========
Historically, the majority of certificate holders roll over their balances into new certificates of the same term at the Association's then current rate. To ensure a continuity of this trend, the Association expects to continue to offer market rates of interest. The Association's ability to retain deposits maturing in negotiated-rate certificate accounts is more difficult to project. The Association is confident, however, that by competitively pricing these certificates, balance levels deemed appropriate by management can be achieved on a continuing basis. At September 30, 1998, the Association had $168.9 million of certificates of deposit in amounts of $100,000 or more outstanding, maturing as follows: $65.7 million within 3 months; $52.1 million over 3 months through 6 months; $47.2 million over 6 months through 12 months; and $3.9 million thereafter. 18 18 The following table sets forth the customer account activities of the Association for the years indicated.
Year Ended September 30, -------------------------------------------------- 1996 1997 1998 ----------- ----------- ----------- (Dollars In Thousands) Assumed from acquisitions $ -- $ 379,975 $ -- Deposits 2,363,515 3,045,581 3,233,094 Withdrawals 2,458,534 3,070,429 3,211,022 ----------- ----------- ----------- Net increase (decrease) in deposits before interest credited (95,019) 355,127 22,072 Interest credited 129,904 142,684 156,099 ----------- ----------- ----------- Net increase in customer accounts $ 34,885 $ 497,811 $ 178,171 =========== =========== ===========
- ---------- BORROWINGS. The Association obtains advances from the FHLB upon the security of the FHLB capital stock it owns and certain of its home mortgages, provided certain standards related to credit worthiness have been met. See "Regulation - Federal Home Loan Bank System." Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes acceptable uses to which the advances pursuant to each program may be put, as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of assets or the Association's credit worthiness. The FHLB is required to review its credit limitations and standards at least annually. FHLB advances have, from time to time, been available to meet seasonal and other withdrawals of savings accounts and to expand lending. The Association also uses reverse repurchase agreements as a form of borrowing. Under reverse repurchase agreements, the Association sells an investment security to a dealer for a period of time and agrees to buy back that security at the end of the period and pay the dealer a stated interest rate for the use of the dealer's funds. The amount of securities sold under such agreements depends on many factors, including the terms available for such transactions, the perceived ability to apply the proceeds to investments yielding a higher return, the demand for the securities, and management's perception of trends in interest rates. The Association had $221.8 million of securities sold under such agreements at September 30, 1998. The Association also offers two forms of repurchase agreements to its customers. One form has an interest rate that floats like a money market deposit account and is offered at a $1,000 minimum for an 84-day term. The other form has a fixed-rate and is offered in a minimum denomination of $100,000. Both are fully collateralized by securities. These obligations are not insured by SAIF and are classified as borrowings for regulatory purposes. The Association had $85.0 million of such agreements outstanding at September 30, 1998. 19 19 The following table presents certain information regarding borrowings of Washington Federal at the dates and for the years indicated.
At or for the Year Ended September 30, ------------------------------------------------ 1996 1997 1998 ---------- ---------- ---------- (Dollars in Thousands) Federal funds and securities sold to dealers under agreements to repurchase: Average balance outstanding $ 867,667 $ 756,290 $ 502,609 Maximum amount outstanding at any month-end during the period $ 936,224 $1,088,904 $ 694,990 Weighted-average interest rate during the period(1) 5.84% 5.47% 5.63% FHLB advances: Average balance outstanding $ 862,966 $1,315,353 $1,210,362 Maximum amount outstanding at any month-end during the period $1,162,000 $1,703,000 $1,523,500 Weighted-average interest rate during the period(1) 5.58% 5.58% 5.60% Securities sold to customers under agreements to repurchase: Average balance outstanding $ 66,048 $ 60,671 $ 79,652 Maximum amount outstanding at any month-end during the period $ 79,406 $ 72,660 $ 85,027 Weighted-average interest rate during the period(1) 5.27% 5.04% 5.34% Total average borrowings $1,796,681 $2,132,314 $1,792,623 Weighted-average interest rate on total average borrowings(1) 5.70% 5.53% 5.60%
- ---------- (1) Month-end balances times month-end average rates divided by the sum of the month-end balances. 20 20 OTHER RATIOS The following table sets forth certain ratios relating to the Company for the periods indicated.
Year Ended September 30, --------------------------------------- 1996 1997 1998 ------- ------- ------- Return on assets(1)(4) 1.82% 1.86% 2.00% Return on equity(2)(4) 15.37 16.50 15.68 Average equity to average assets 11.78 11.47 13.34 Dividend payout ratio(3) 42.65 40.72 42.45
(1) Net income divided by average total assets. (2) Net income divided by average equity. (3) Dividends declared per share divided by net income per share. (4) Amounts exclude the effects of a one-time assessment of institutions with SAIF-insured deposits to recapitalize the SAIF. 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.
Year Ended September 30, ------------------------------------------------------------------------------------------- 1996 vs. 1995 1997 vs. 1996 Increase (Decrease) Due to Increase (Decrease) Due to -------------------------------------------- ------------------------------------------- Volume Rate Rate/Vol Total Volume Rate Rate/Vol Total -------- -------- -------- -------- -------- -------- -------- -------- (Dollars In Thousands) Interest income: Loan portfolio $ 72,833 $ (4,217) $ (1,330) $ 67,286 $ 57,591 $ (445) $ (5,022) $ 52,124 Mortgaged-backed securities (10,842) 999 (156) (9,999) 2,793 (2,223) (29) 541 Investments(1) 6,242 (2,374) (710) 3,158 163 1,937 31 2,131 -------- -------- -------- -------- -------- -------- -------- -------- All interest-earning assets 68,233 (5,592) (2,196) 60,445 60,547 (731) (5,020) 54,796 -------- -------- -------- -------- -------- -------- -------- -------- Interest expense: Customer accounts 8,855 5,294 407 14,556 17,907 (4,461) (666) 12,780 FHLB advances and other 29,908 (2,822) (1,150) 25,936 19,471 (2,942) (607) 15,922 -------- -------- -------- -------- -------- -------- -------- -------- borrowings All interest-bearing liabilities 38,763 2,472 (743) 40,492 37,378 (7,403) (1,273) 28,702 -------- -------- -------- -------- -------- -------- -------- -------- Change in net interest income $ 29,470 $ (8,064) $ (1,453) $ 19,953 $ 23,169 $ 6,672 $ (3,747) $ 26,094 ======== ======== ======== ======== ======== ======== ======== ========
Year Ended September 30, -------------------------------------------- 1998 vs. 1997 Increase (Decrease) Due to -------------------------------------------- Volume Rate Rate/Vol Total -------- -------- -------- -------- (Dollars In Thousands) Interest income: Loan portfolio $ 6,541 $ 818 $ (54) $ 7,305 Mortgaged-backed securities (7,128) 2,909 (349) (4,568) Investments(1) (979) (156) (5) (1,140) -------- -------- -------- -------- All interest-earning assets (1,566) 3,571 (408) 1,597 -------- -------- -------- -------- Interest expense: Customer accounts 10,996 2,256 164 13,416 FHLB advances and other (19,870) 1,450 (210) (18,630) -------- -------- -------- -------- borrowings All interest-bearing liabilities (8,874) 3,706 (46) (5,214) -------- -------- -------- -------- Change in net interest income $ 7,308 (135) $ (362) $ 6,811 ======== ======== ======== ========
- ---------- (1) Includes interest on overnight investments and dividends on stock of the FHLB of Seattle. 22 22 INTEREST RATE RISK The Company accepts a high level of interest rate volatility as a result of its policy to originate fixed-rate single-family home loans which are longer-term in nature than the short-term characteristics of its liabilities of customer accounts and borrowed money. The strong capital position and low operating costs have allowed the Company to manage interest rate risk, within guidelines established by the Board of Directors of the Company, through all interest rate cycles. A significant increase in market interest rates could adversely affect net interest income of the Company. The Company's interest rate risk approach has never resulted in the recording of a monthly operating loss. One approach used to quantify interest rate risk is the net portfolio value (NPV) analysis. This analysis calculates the difference between the present value of interest-bearing liabilities and the present value of expected cash flows from interest-earning assets and off-balance sheet contracts. The following table sets forth, at September 30, 1998, an analysis of the Company's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point increments.)
Estimated Change in Estimated Increase (Decrease) Interest Rates NPV Amount in NPV Amount Percent - -------------------------------------------------------------------------------- (Basis Points) (Dollars in Thousands) +400 $ 299,680 $ (738,479) -71% +300 513,503 (524,656) -51% +200 717,308 (320,851) -31% +100 905,244 (132,915) -13% % 0 1,038,159 -- 0% -100 1,017,860 (20,299) -2% -200 979,498 (58,661) -6% -300 977,806 (60,353) -6% -400 978,257 (59,902) -6%
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. 23 23 SUBSIDIARIES The Company is a unitary savings and loan holding company which conducts its primary business through its only subsidiary, the Association. The Association has several wholly-owned subsidiaries which are discussed further below. Washington Federal is permitted by current federal regulations to invest an amount up to 2% of its assets in stock, paid-in surplus and unsecured loans in service corporations. The Association may invest an additional 1% of its assets when the additional funds are utilized for inner-city or community development purposes. In addition, federally-chartered savings institutions which are in compliance with regulatory capital requirements and other conditions also may make loans to service corporations in an aggregate amount of up to 50% of the institution's capital as defined in federal regulations. At September 30, 1998, the Association was authorized under the current regulations to have a maximum investment of $111.6 million in its service corporations, exclusive of the additional 1% of assets investments permitted for inner-city or community development purposes but inclusive of the ability to make loans to its subsidiaries. On that date, the Association's investment in, and unsecured loans to, its five wholly-owned service corporations amounted to $12.9 million. At September 30, 1998, Washington Services, Inc. (WSI), a wholly-owned subsidiary of the Association, was developing a 301-acre light industrial center in the technology corridor of South Snohomish County, Washington, of which 83 buildable acres, with an investment of $6.7 million, remained unsold as of September 30, 1998. Based upon the sales history of this development, the Association believes the net realizable value from the sale of the remaining properties exceeds the subsidiary's basis in these properties. First Insurance Agency, Inc., a wholly-owned subsidiary of the Association, is an insurance brokerage company which offers a full line of individual and business insurance products to customers of the Association. First Federal Financial Services, Inc., a wholly-owned subsidiary of the Association, is incorporated under the laws of Idaho. The subsidiary is engaged in real estate development activities. Freedom Vineyards, Inc., a wholly-owned subsidiary of WSI, is incorporated under the laws of California for the purpose of operating an agricultural property located in that state. The Association intends to sell this property, which is classified as real estate held for sale. Statewide Mortgage Services, Inc., a wholly-owned subsidiary of the Association, is incorporated under the laws of Washington for the purpose of operating a commercial office building located in that state. 24 24 A savings association is required to deduct the amount of the investment in, and extensions of credit to, a subsidiary engaged in any activities not permissible for national banks. Because the acquisition and development of real estate is not a permissible activity for national banks, the investments in, and loans to, the subsidiary of the Association which is engaged in such activities are subject to exclusion from the capital calculation. See "Regulation - Association--Regulatory Capital Requirements." 25 25 EMPLOYEES As of September 30, 1998, the Company had approximately 677 employees, including the full-time equivalent of 48 part-time employees and its service corporation employees. None of these employees are represented by a collective bargaining agent, and the Company has enjoyed harmonious relations with its personnel. EXECUTIVE OFFICERS The following table sets forth certain information concerning individuals who are deemed to be executive officers of Washington Federal as of November 30, 1998.
Names and Positions or Offices Age Business Experience during the Last Five Years - ------------------------------ ---------- ---------------------------------------------- Guy C. Pinkerton 64 Chairman since November 1994; Chief Executive Director, President, and Chief Officer since October 1992; Director since Executive Officer October 1991; President since July 1988 Charles R. Richmond 59 Executive Vice President and Secretary; Director Director, Executive Vice since February 1995 President, and Secretary Ronald L. Saper 48 Executive Vice President and Chief Financial Executive Vice President and Officer Chief Financial Officer William A. Cassels 57 Executive Vice President Executive Vice President Lawrence D. Cierpiszewski 55 Executive Vice President since October 1996; Executive Vice President previously served as Senior Vice President Roy M. Whitehead 46 Executive Vice President since September 1998; Executive Vice President previously served as Regional Vice President, Wells Fargo Bank, N.A. from June 1997 until September 1998 and President of Wells Fargo Bank (Colorado) N.A. and First Interstate Bank of Colorado from December 1993 until June 1998 Keith D. Taylor 42 Senior Vice President and Treasurer Senior Vice President and Treasurer
26 26 REGULATION Set forth below is a brief description of certain laws and regulations which relate to the regulation of the Company and the Association. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. THE COMPANY GENERAL. The Company is registered as a savings and loan holding company under the HOLA and is subject to OTS regulation, examination, supervision, and reporting requirements. ACTIVITIES RESTRICTIONS. There are generally no restrictions on the activities of a savings and loan holding company which holds only one subsidiary savings institution. However, if the savings institution subsidiary of such a holding company fails to meet a qualified thrift lender (QTL) test, then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company. See " The Association--Qualified Thrift Lender Test." If the Company were to acquire control of another savings institution, other than through a merger or other business combination with the Association, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions, and where each subsidiary savings institution meets the QTL test, the activities of the Company and any of its subsidiaries (other than the Association or other subsidiary savings institutions) would thereafter be subject to further restrictions. No multiple savings and loan holding company, or subsidiary thereof, which is not a savings institution shall commence or continue a business activity for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, upon prior notice to, and with no objection by the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) performing activities authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company. RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings and loan holding company, or substantially all the assets thereof; or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company, or 27 27 person owning or controlling by proxy or otherwise more than 25% of such company's stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. FEDERAL SECURITIES LAWS. The Company's Common Stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934 (the Exchange Act). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act. THE ASSOCIATION GENERAL. The Association is a federally-chartered savings association, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, the Association is subject to broad federal regulation and oversight by the OTS and the FDIC extending to all aspects of its operations. The Association is a member of the FHLB of Seattle and is subject to certain limited regulations by the Federal Reserve Board. The Association is a member of the SAIF and its deposits are insured by the SAIF fund administered by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Association. FEDERAL SAVINGS ASSOCIATION REGULATIONS. The OTS has extensive authority over the operations of savings associations. As part of this authority, savings associations are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC. Such regulation and supervision is primarily intended for the protection of depositors. The investment and lending authority of the Association is prescribed by federal laws and regulations, and it is prohibited from engaging in any activities not permitted by such laws and regulations. These laws and regulations generally are applicable to all federally-chartered savings associations and many also apply to state-chartered savings associations. INSURANCE OF ACCOUNTS. The deposits of the Association are insured up to $100,000 per insured member by the SAIF (as defined by law and regulation), and are backed by the full faith and credit of the United States Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action. Effective October 1, 1996, assessment rates for SAIF-insured institutions range from 0% of insured deposits for well-capitalized institutions with minor supervisory concerns, to .27% of insured deposits for undercapitalized institutions with substantial supervisory concerns. See "Prompt Corrective Action" below. In addition, an assessment of 6.4 basis points is added to the regular SAIF-assessment until December 31, 1999, in order to cover financing corporation debt service payments. 28 28 Both the SAIF and the Bank Insurance Fund (BIF), the federal deposit insurance fund that covers the deposits of state and national banks and certain state savings banks, are required by law to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved the required reserve ratio, and as a result, the FDIC reduced the average deposit insurance premium paid by BIF-insured banks to a level substantially below the average premium paid by savings institutions. Banking legislation was enacted September 30, 1996, to eliminate the premium differential between SAIF-insured institutions and BIF-insured institutions. The legislation provided that all insured depository institutions with SAIF-assessable deposits as of March 31, 1995, pay a special one-time assessment to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a rule that established the special assessment necessary to recapitalize the SAIF at 65.7 basis points of SAIF-assessable deposits held by affected institutions as of March 31, 1995. Based upon its level of SAIF deposits as of March 31, 1995, the Association paid a special assessment of $15.0 million. The assessment was accrued in the quarter ended September 30, 1996. REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations are required to maintain minimum levels of regulatory capital. Pursuant to federal law, the OTS has established capital standards applicable to all savings associations. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations create three capital requirements: a tangible capital requirement, a leverage or core capital requirement, and a risk-based capital requirement. All savings associations must have tangible capital of at least 1.5% of adjusted total assets, as defined in the regulations. For purposes of this requirement, tangible capital is core capital less all intangibles other than certain purchased mortgage servicing rights, of which the Association has none. Core capital includes common stockholders' equity, non-cumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, less intangibles (unless included under certain limited conditions, but in no event exceeding 25% of core capital), plus purchased mortgage servicing rights in an amount not to exceed 50% of core capital. The current leverage or core capital requirement is core capital, as defined above, of at least 3% of adjusted total assets. The risk-based capital standard requires savings associations to maintain a minimum ratio of total capital to risk-weighted assets of 8%. Total capital consists of core capital, defined above, and supplementary capital. Supplementary capital consists of certain capital instruments that do not qualify as core capital, and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only in an amount equal to the amount of core capital. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk-weight based on the risks inherent in the type of assets. The risk-weighing categories range from 0% for low-risk assets such as U.S. Treasury securities and GNMA securities, to 100% for various types of loans and other assets deemed to be of higher 29 29 risk. Single-family mortgage loans having loan-to-value ratios not exceeding 80% and meeting certain additional criteria, as well as certain multi-family residential property loans, qualify for a 50% risk-weight treatment. The book value of each asset is multiplied by the risk-weighting applicable to the asset category, and the sum of the products of this calculation equals total risk-weighted assets. OTS regulations impose special capitalization standards for savings associations that own service corporations and other subsidiaries. In addition, certain exclusions from capital and assets are required when calculating total capital in addition to the adjustments for calculating core capital. These adjustments do not materially affect the regulatory capital of the Association. For information regarding the Association's compliance with each of its three capital requirements at September 30, 1998, see Note P to the Consolidated Financial Statements. In August 1993, the OTS adopted a final rule incorporating an interest-rate risk component into the risk-based capital regulation. Under this rule, an institution with a greater than normal level of interest rate risk is subject to a deduction of its interest rate risk component from total capital for purposes of calculating its risk-based capital. As a result, such an institution is required to maintain additional capital in order to comply with the risk-based capital requirement. The final rule was originally to be effective as of January 1, 1994; however, its implementation has been delayed several times. In August 1995, the OTS issued Thrift Bulletin No. 67, which allows eligible institutions to request adjustment to their interest rate risk component as calculated by the OTS, or to request to use their own models to calculate their interest rate risk component. The OTS also indicated that it will continue to delay the implementation of its interest rate risk rule requiring institutions with above normal interest rate risk exposure to adjust their regulatory capital requirement until new procedures are implemented and evaluated. Any savings association that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on an association's operations, and the appointment of a conservator or receiver. The OTS' capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. PROMPT CORRECTIVE ACTION. Under federal law, each federal banking agency has implemented a system of prompt corrective action for institutions which it regulates. Under OTS regulations, an institution shall be deemed to be (i) well capitalized if it has total risk-based capital of 10.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a Tier 1 leverage capital ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances), and does not meet the definition of well capitalized, (iii) undercapitalized if it 30 30 has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a Tier 1 leverage capital ratio that is less than 4.0%, (3.0% under certain circumstances), (iv) significantly undercapitalized if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a Tier 1 leverage capital ratio that is less than 3.0%, and; (v) critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Federal law authorizes the OTS to reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category. (The FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of September 30, 1998, the Association exceeded the requirements of a well capitalized institution. LIQUIDITY REQUIREMENTS. All savings associations are required, for each calendar month, to maintain an average daily balance of liquid assets (including cash, certain time deposits and savings accounts, bankers' acceptances, certain government obligations, and certain other investments) which is not less than a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less during the preceding calendar month. The liquidity requirement may be changed by the OTS to any amount between 4% and 10% depending upon economic conditions and savings flows of all savings associations. This amount is currently 4%. OTS regulations also require that short-term liquid assets constitute at least 1% of an association's average daily balance of net withdrawable deposit accounts and short term borrowings during the preceding calendar month. Monetary penalties may be imposed upon associations for violations of liquidity requirements. QUALIFIED THRIFT LENDER TEST. A savings association that does not meet a QTL test set forth in the HOLA and implementing regulations must either convert to a bank charter or comply with the following restrictions on its operations: (i) the association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the association shall be restricted to those of a national bank; (iii) the association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the association ceases to be a QTL, it must cease any activity, and not retain any investment, not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Under recent legislation and applicable regulations, any savings institution is a QTL if: (i) it qualifies as a domestic building and loan association under Section 7701(a)(19) of the Internal Revenue Code (which generally requires that at least 60% of the institution's assets constitute housing-related and other qualifying assets) or, (ii) at least 65% of the institution's portfolio assets (as defined) consist of certain housing and consumer-related assets on a monthly average basis in at least nine out of every 12 months. At September 30, 1998, the Association 31 31 was in compliance with the QTL test of a domestic building and loan association as defined in the Code. TRANSACTIONS WITH AFFILIATES. Under federal law, all transactions between and among a savings association and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act. Generally, these requirements limit these transactions to a percentage of the association's capital and require all of them to be on terms at least as favorable to the association as transactions with non-affiliates. In addition, a savings association may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company, or acquire shares of any affiliate not a subsidiary. The OTS is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a savings association. The OTS regulations also set forth various reporting requirements relating to transactions with affiliates. Extensions of credit by a savings association to executive officers, directors, and principal shareholders are subject to Section 22(h) of the Federal Reserve Act, which, among other things, generally prohibits loans to any such individual where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral. Section 22(h) permits loans to directors, executive officers, and principal stockholders made pursuant to a benefit or compensation program that is widely available to employees of a subject savings association provided that no preference is given to any officer, director, or principal shareholder, or related interest thereto over any other employee. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution's unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations on capital distributions by savings associations, including cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt, and other transactions charged to the capital account of a savings association to make capital distributions. Generally, the regulation creates a safe harbor for specified levels of capital distributions from associations meeting at least their minimum capital requirements, so long as such associations notify the OTS and receive no objection to the distribution from the OTS. Associations and distributions that do not qualify for the safe harbor are required to obtain prior OTS approval before making any capital distributions. As of September 30, 1998, the Association is a Tier 1 institution which can make capital distributions during any calendar year equivalent to 100% of net income for the calendar year-to-date plus 50% of its surplus capital ratio at the beginning of the calendar year. The surplus capital ratio is defined to mean the percentage by which the association's ratio of total capital to assets exceeds the ratio of its fully phased-in capital requirement to assets. Fully phased-in capital requirement is defined to mean an association's capital requirement under the statutory 32 32 and regulatory standards applicable on December 31, 1994, as modified to reflect any applicable individual minimum capital requirement imposed upon the association. The OTS has approved the Association's capital distribution plan through the calendar year 1999. On December 5, 1994, the OTS published a notice of proposed rulemaking to amend its capital distribution regulation. Under this proposal, savings institutions would be permitted to only make capital distributions that would not result in their capital being reduced below the level required to remain adequately capitalized, as defined in the OTS prompt corrective action regulations. The Association would continue to be required to provide notice to the OTS of its intent to make a capital distribution. Management does not believe that the proposal will adversely affect the Association's ability to make capital distributions if it is adopted substantially as proposed. FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. At September 30, 1998, the Association's advances from the FHLB amounted to $1.4 billion. As a member, the Association is required to purchase and maintain stock in the FHLB of Seattle in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At September 30, 1998, the Association had $101.0 million in FHLB stock, which was in compliance with this requirement. Recent changes in federal law now require the FHLBs to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future. COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings associations have a responsibility under the Community Reinvestment Act (CRA) and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the Fair Lending Laws) prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the U.S. Department of Justice. 33 33 TAXATION FEDERAL TAXATION. For federal and state income tax purposes, the Company reports its income and expenses on the accrual basis method of accounting and files its federal and state income tax returns on a September 30 fiscal year basis. The Company files consolidated federal and state income tax returns with its wholly-owned subsidiaries. For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction based on a percentage of taxable income or on actual experience. Accordingly, the Association used the percentage of taxable income method in fiscal 1996. The Small Business Job Protection Act of 1996 (the Act) requires qualified thrift institutions, such as the Association, to recapture the portion of their tax bad debt reserves that exceeded the September 30, 1988, balance. Such recaptured amounts are to be taken into taxable income ratably over a six-year period beginning in 1997. Accordingly, the Company will be required to pay approximately $22,057,000 in additional federal income taxes beginning in fiscal 1998, all of which has been previously provided for, and continuing through fiscal 2003. The Act also repeals the reserve method of accounting for tax bad debt deductions and required thrifts to calculate the tax bad debt deduction based on actual current loan losses. A deferred tax liability has not been required to be recognized for the tax bad debt base year reserves of the Association. The base year reserves are the balance of reserves as of September 30, 1988, reduced proportionately for reductions in the Association's loan portfolio since that date. At September 30, 1998, the amount of those reserves was approximately $5,370,000. The amount of the unrecognized deferred tax liability at September 30, 1998, was approximately $1,913,000. Washington Federal's tax returns have been examined through the year ended September 30, 1990. 34 34 STATE TAXATION. The state of Washington does not have an income tax. A business and occupation tax based on a percentage of gross receipts is assessed against businesses; however, interest received on loans secured by mortgages or deeds of trust on residential properties is not subject to this tax. The state of Idaho has a corporate income tax with a statutory rate of 8% of apportionable income. The state of Oregon has a corporate excise tax with a statutory rate of 6.6% of apportionable income. The state of Utah has a corporate franchise tax with a statutory rate of 5% of apportionable income. The state of Arizona has a corporate income tax with a statutory rate of 9.0% of apportionable income. 35 35 ITEM 2. PROPERTIES The Association owns the building in which its home and executive offices are located, in Seattle, Washington. The following table sets forth certain information concerning the Association's offices:
Building Net Book Value at Number of ------------------------------ September 30, Location Offices Owned Leased(1) 1998 (2) - -------- --------- ------- --------- ----------------- (Dollars In Thousands) Washington 39 22 17 $16,711 Idaho 19 16 3 6,292 Oregon 23 15 8 7,519 Utah 11 6 5 7,607 Arizona 14 7 7 5,138 ------- ------- ------- ------- Total 106 66 40 $43,267 ======= ======= ======= =======
- ---------- (1) The leases have varying terms expiring from 1998 through 2070, including renewal options. (2) Amount represents land and improvements with respect to properties owned by the Association and represents the book value of leasehold improvements, where applicable. Washington Federal evaluates on a continuing basis the suitability and adequacy of its offices, both branches and administrative centers, and has an active program of opening, relocating, remodeling, or closing them as necessary to maintain efficient and attractive premises. Washington Federal's net investment in premises, equipment, and leaseholds was $48.9 million at September 30, 1998. ITEM 3. LEGAL PROCEEDINGS The Association is involved in legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition of the Association. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 36 36 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required herein is incorporated by reference from page 27 of the Company's Annual Report to Stockholders for Fiscal 1998 (Annual Report), which is included herein as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The information required herein is incorporated by reference from page 26 of the Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required herein is incorporated by reference on pages 4 through 7 of the Annual Report. ITEM 7A. MARKET RISK DISCLOSURES The information required herein is incorporated by reference to Interest Rate Risk commencing on page 22 of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required herein are incorporated by reference from pages 8 through 25 and page 27 of the Annual Report. ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required herein is included under Item 1 hereof. ITEM 11. EXECUTIVE COMPENSATION The information required herein is incorporated by reference to pages 11 to 14 of the proxy statement dated December 22, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required herein is incorporated by reference to pages 2 to 3 and 5 to 8 of the proxy statement dated December 22, 1998. 37 37 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required herein is incorporated by reference to page 16 of the proxy statement dated December 22, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following financial statements are incorporated herein by reference from pages 8 through 25 and page 27 of the Annual Report. Report of Independent Certified Public Accountants Consolidated Statements of Financial Condition as of September 30, 1998 and 1997 Consolidated Statements of Operations for each of the years in the three-year period ended September 30, 1998 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended September 30, 1998 Consolidated Statements of Cash Flows for each of the years in the three-year period ended September 30, 1998 Notes to Consolidated Financial Statements (a)(2) There are no financial statement schedules filed herewith. (a)(3) The following exhibits are filed as part of this report:
No. Exhibit Page - --- ------- ---- 3.1 Articles of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 4 Specimen Common Stock Certificate (1) 10.1 1982 Employee Stock Compensation Program* (1) 10.2 1987 Stock Option and Stock Appreciation 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
- ------- * Management contract or compensation plan. 38 38 (1) Incorporated by reference from the Registrant's Registration Statement on Form 8-B filed with the SEC on January 26, 1995. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes. 39 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASHINGTON FEDERAL, INC. December 21, 1998 By: /s/ Guy C. Pinkerton - ----------------- ------------------------------------- Date Guy C. Pinkerton, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Kermit O. Hanson December 21, 1998 - ------------------------------------------ ----------------- Kermit O. Hanson, Director Date /s/ W. Alden Harris December 21, 1998 - ------------------------------------------ ----------------- W. Alden Harris, Director Date /s/ Anna C. Johnson December 21, 1998 - ------------------------------------------ ----------------- Anna C. Johnson, Director Date /s/ John F. Clearman December 21, 1998 - ------------------------------------------ ----------------- John F. Clearman, Director Date /s/ H. Dennis Halvorson December 21, 1998 - ------------------------------------------ ----------------- H. Dennis Halvorson, Director Date
40 40 /s/ Guy C. Pinkerton December 21, 1998 - ------------------------------------------ ----------------- Guy C. Pinkerton, Director, Chairman, Date President and Chief Executive Officer /s/ Richard C. Reed December 21, 1998 - ------------------------------------------ ----------------- Richard C. Reed, Director Date /s/ Charles R. Richmond December 21, 1998 - ------------------------------------------ ----------------- Charles R. Richmond, Director, Date Executive Vice President and Secretary /s/ Ronald L. Saper December 21, 1998 - ------------------------------------------ ----------------- Ronald L. Saper, CPA, Executive Date Vice President and Chief Financial Officer (principal financial officer) /s/ Keith D. Taylor December 21, 1998 - ------------------------------------------ ----------------- Keith D. Taylor, CPA, Senior Vice President Date and Treasurer (principal accounting officer)
41 EXHIBIT INDEX
No. Exhibit Index Page - --- ------------- ---- 3.1 Articles of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 4 Specimen Common Stock Certificate (1) 10.1 1982 Employee Stock Compensation Program* (1) 10.2 1987 Stock Option and Stock Appreciation 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
- ------- * Management contract or compensation plan. (1) Incorporated by reference from the Registrant's Registration Statement on Form 8-B filed with the SEC on January 26, 1995. EX-13 2 ANNUAL REPORT TO STOCKHOLDERS 1 [WASHINGTON FEDERAL, INC. ANNUAL REPORT 1998 LOGO] 2 TABLE OF CONTENTS Financial Highlights 1 To Our Stockholders 2 Management's Discussion 4 Financial Statements 8 Notes to Financial Statements 12 Selected Financial Data 26 Accountant's Report 27 General Information 27 Directors, Officers, Offices 28 A SHORT HISTORY Washington Federal, Inc. (the Company) is a savings and loan holding company headquartered in Seattle, Washington. Its principal subsidiary is Washington Federal Savings (the Association) which operates 106 branches in five Western states. The Association had its origin on April 24, 1917, as Ballard Savings and Loan Association. In 1935, the state-chartered Association converted to a federal charter and became a member of the Federal Home Loan Bank System with account insurance provided through the FSLIC. In 1958, Ballard Federal Savings and Loan Association merged with Washington Federal Savings and Loan Association of Bothell, and the latter name was retained for wider geographic acceptance. In 1971, Seattle Federal Savings and Loan Association, then with three offices, was merged into the Association and at the end of 1978, was joined by the ten offices of First Federal Savings and Loan Association of Mount Vernon. On November 17, 1982, the Association converted from a federal mutual to a federal stock association. In 1987 and 1988, acquisitions of United First Federal, Provident Federal Savings and Loan and Northwest Federal Savings and Loan, all headquartered in Boise, Idaho added 28 Idaho offices to the Association. In 1988, the acquisition of Freedom Federal Savings and Loan added 13 Oregon offices, followed in 1990 by the eight Oregon offices of Family Federal Savings. In 1991, the acquisition of First Federal Savings and Loan of Idaho Falls, Idaho added three branches to the system. That same year, the Association acquired the deposits of First Western Savings, doing business in Eugene and Portland, Oregon as Metropolitan Savings. In 1992, the Association shortened its corporate name to Washington Federal Savings and changed the name of its Oregon division branches from Freedom Federal Savings to Washington Federal Savings. In 1993, the Association purchased First Federal Savings Bank of Salt Lake City, Utah which added ten branches in that state. Then, during 1994, the Association expanded to Arizona and began operating five branch offices in Tucson. In 1995, the Association purchased West Coast Mutual Savings Bank with its one branch office in Centralia, Washington. The Association also sold its Burley, Idaho branch office and opened three new offices in Washington, two more in Tucson and one each in Utah and Oregon. In 1996, the Association opened one new office in Oregon, one in Washington and three in Phoenix. The Company also purchased Metropolitan Bancorp of Seattle, Washington which added eight branches in the Puget Sound region to the Association. In 1997, the Association opened four new offices, one each in Portland, Oregon, and Tucson, Arizona and two in Phoenix, Arizona. The Association also closed one of its branches in Idaho Falls, consolidating the deposits into its main Idaho Falls office. In 1998, the Association opened two new offices in Phoenix, Arizona. The Association also has a wholly owned subsidiary, First Insurance Agency, Inc., which provides general insurance to the public. The Association obtains its funds primarily through savings deposits from the general public, from repayment of loans and from borrowings and retained earnings. These funds are used largely to make first lien loans to borrowers for the purchase of new and existing homes, the acquisition and development of land for residential lots, the construction of homes, the financing of other real estate and for investment in obligations of the U.S. government, its agencies and municipalities. 3 FINANCIAL HIGHLIGHTS
September 30, 1998 1997 % Change - --------------------------------------------------------------------------------------------------- (In thousands, except per share data) Assets ............................................. $5,637,011 $5,719,589 - 1% Investment securities .............................. 234,013 289,750 -19 Loans receivable ................................... 4,143,525 4,190,776 - 1 Mortgage-backed securities ......................... 976,046 947,129 + 3 Customer accounts .................................. 3,156,202 2,978,031 + 6 Federal Home Loan Bank advances and other borrowings 1,578,319 1,904,544 -17 Stockholders' equity ............................... 767,172 717,745 + 7 Net income ......................................... 111,836 105,050 + 6 Net income per share ............................... 2.12 2.01 + 5 Dividends per share ................................ .90 .82 +10 Stockholders' equity per share ..................... 14.91 13.73 + 9 Shares outstanding ................................. 51,446 47,509 + 8 Return on average stockholders' equity ............. 15.68% 16.50% - 5 Return on average assets ........................... 2.00% 1.86% + 8
TOTAL ASSETS Dollars in Millions - -------------------- (At September 30) 1978 704 1983 786 1988 2,241 1993 3,159 1998 5,637
STOCKHOLDERS' EQUITY Dollars in Millions - -------------------- (At September 30) 1978 51 1983 88 1988 237 1993 486 1998 767
NET INCOME PER SHARE (Before SAIF special assessment) $ - -------------------- 1994 1.74 1995 1.48 1996 1.75 1997 2.01 1998 2.12
CASH DIVIDENDS PER SHARE $ - -------------------- 1994 0.62 1995 0.68 1996 0.74 1997 0.82 1998 0.9
RETURN ON AVERAGE EQUITY (Before SAIF special assessment in 1996) Annualized % - -------------------- 1994 18.19 1995 13.99 1996 15.37 1997 16.5 1998 15.68
PRIMARY INTEREST SPREAD End of Quarter % - -------------------- Dec 31 2.55 2.88 2.8 Mar 31 2.78 2.88 2.79 Jun 30 2.9 2.82 2.8 Sep 30 2.95 2.83 2.73 Fiscal 1996 Fiscal 1997 Fiscal 1998
1 4 TO OUR STOCKHOLDERS Your Company, once again, achieved record operating earnings for the fiscal year ended September 30, 1998. This is the fourteenth time in the last fifteen years that we have achieved year-over-year earnings per share gains. For the year, earnings were $111,836,000 or $2.12 per share, compared to $105,050,000 or $2.01 per share for the prior year, a 5% increase. This was accomplished even though we operated in a relatively flat yield curve environment throughout the year. As a result of this flat yield curve environment, our net interest spread decreased to 2.73% at September 30, 1998, from 2.83% at the beginning of the year. The year produced a return on average assets of 2.00% and a return on equity of 15.68%. As of September 30, 1998, Washington Federal's net worth increased to $767 million or 13.6% of total assets from $718 million or 12.5% of total assets at the end of the prior year. Washington Federal's earnings and capital ratios remain near the top in the nation for all types of financial institutions. Our expense ratio for the year was .81% of average assets, and our efficiency ratio (total operating expense divided by net interest income plus other income) was 17.9%. Both of these figures are very positive in that they are less than one-half the industry average. Excellent economic conditions and diligent efforts by our staff during the year, helped us to reduce our non-performing assets to $24.8 million or .44% of total assets. This represents the lowest level since 1987 when we began our acquisition of some troubled thrifts which had high ratios of non-performing assets. Since then, we have successfully disposed of more than $250 million of these assets. Though our historical loan loss experience with single family residential loans originated by Washington Federal continues to be very low, we continue to maintain our current reserve levels which is within an acceptable range of estimated losses, particularly in the area of construction, land, income property and non-conforming residential loans which have a higher loan loss experience. Customer funds increased to $3.16 billion at September 30, 1998, a 6% increase for the year. Most of this increase occurred during the last four months of the fiscal year and has continued into the new fiscal year as customers have become more concerned about the safety of alternative investments. During the year, we opened two new offices in Phoenix, Arizona. We now have 106 offices with 39 in Washington, 19 in Idaho, 23 in Oregon, 11 in Utah and 14 in Arizona. This year we originated $1.454 billion in loans, a 34% increase over the $1.089 billion funded in fiscal 1997. We also purchased $319 million in mortgage-backed securities. Unfortunately, this was offset with payoffs and repayments of loans and mortgage-backed securities of $1.722 billion. We continue to place emphasis on developing our branch lending capabilities. During the year, we distributed $46.8 million in cash dividends, or $.90 per share, and declared a 10% stock dividend to shareholders of record on February 12, 1998. This was the fourteenth stock dividend we have distributed in the last sixteen years. We also increased the cash dividend twice during the fiscal year. We have increased the cash dividend 35 times since becoming a stock company in 1982. Our annual cash dividend is higher than our initial offering price (adjusted for stock dividends and stock splits) of $.66 in 1982. We have completed 90% of the work necessary to update our in-house computer systems and programs to handle the year 2000 issues. This leaves us with the rest of 1998 and all of 1999 to thoroughly test those programs and outside systems with which we interface. We are enhancing our existing contingency plan to service our customers in case events beyond our control impact our computer system. We are confident in our ability to continue to provide the quality service that our customers have come to expect. Toward the end of the fiscal year, we repurchased 1,105,100 of Company common stock at an average price of $23.52. We have sufficient capital and Board authorization to continue repurchasing our stock as the situation warrants. At the end of the fiscal year, Roy Whitehead joined our Executive Management team. He has 23 years of banking and thrift experience and will provide added management depth in the years ahead. The other members of our Executive Management team are Charles R. Richmond, William A. Cassels, Lawrence D. Cierpiszewski and Ronald L. Saper. I thank each of them for their support and leadership in achieving the record results for your Company this past fiscal year. 2 5 At our September Board meeting, E.W. Mersereau, Jr. was elected Director Emeritus. Eg joined our Board in 1979 after we merged with First Federal Savings and Loan Association of Mount Vernon, where he had been a director since 1947. On behalf of the Board members and all of the employees, I extend our gratitude for the excellent support, counsel and guidance he provided during his tenure with Washington Federal. I also know that if our former Chairman, Elliot K. Knutson, were still here, he would want to express his appreciation to Eg for his contributions to the Company's success. In closing, I wish to thank our employees and directors for their efforts which have made this year so successful, and our customers and stockholders for their continued support. I hope to see you at our annual meeting to be held on Wednesday, January 27, 1999, at 2:00 p.m. at the Westin Hotel in Seattle. [PHOTO] Clockwise from left: Roy M. Whitehead, Executive Vice President; William A. Cassels, Executive Vice President; Ronald L. Saper, Executive Vice President and Chief Financial Officer; Lawrence D. Cierpiszewski, Executive Vice President; Charles R. Richmond, Executive Vice President and Secretary; Guy C. Pinkerton, Chairman, President and Chief Executive Officer. Sincerely, /s/ Guy C. Pinkerton Guy C. Pinkerton Chairman, President and Chief Executive Officer 3 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Washington Federal, Inc. (the Company) is a savings and loan holding company. The Company's primary operating subsidiary is Washington Federal Savings (the Association). YEAR 2000 This discussion constitutes a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998 and contains forward-looking statements that have been prepared on the basis of the Company's best judgment and currently available information. These forward-looking statements are inherently subject to significant business, third-party and regulatory uncertainties and contingencies, many of which are beyond the control of the Company. In addition, these forward-looking statements are based on the Company's current assessments and renovation plans, which are based on certain representations of third-party servicers and are subject to change. Accordingly, there can be no assurance that the Company's results of operations will not be adversely affected by difficulties or delays in the Company's or third-party's Year 2000 readiness efforts. See below for a discussion of factors that may cause such forward-looking statements to differ from actual results. Most existing computer programs use only two digits to identify the year in a date field, making the assumption that the year's first two digits will always be 19. These programs were developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results on or after January 1, 2000. For example, if an interest calculation were made for the month of January 2000, but the system assumed the year was 1900, the results could be materially erroneous. A few years ago, the Company began to assess the Year 2000 issue, including upgrades to its software and hardware. Based on this assessment, the Company implemented a plan to renovate and test its computer applications by December 31, 1998. As of September 30, 1998, management estimated 90% of the renovation had been completed. The Company's assessment segregated computer applications into three categories: mission critical systems, secondary systems and embedded systems. The mission critical systems were identified as those systems necessary to deliver our products to our customer base. The success of our Year 2000 renovation relies, in part, on the representations of third-party servicers. The mission critical applications, which were all written internally, are being renovated and tested by the Company's information systems department. The Company's secondary systems are primarily personal computer-based software programs which provide financial data for internal use. Examples of these secondary systems include payroll, fixed assets and accounts payable. Most of these systems were written by third-party servicers and the Company relies on their written representations that their software is Year 2000 compliant. The Company's embedded systems include items as diverse as the computer chips in the heating, ventilation and air conditioning system to office building elevators. The Company has identified those systems and relies on written representations of the third-party servicers. Every two months, the Company reports to its Board of Directors the progress made in addressing the Year 2000 issue, including time lines and percentage of completion. Management is striving to meet its target of December 31, 1998, to have its systems renovated and implemented. Further validation testing will continue throughout 1999. Management recently reported the results of an Office of Thrift Supervision examination of the Company's Year 2000 compliance issues to the Board of Directors, which found the report to be satisfactory. Through September 30, 1998, the Company has not incurred any material incremental costs to become Year 2000 compliant. The Company's mission critical systems are being renovated and tested by the already existing information systems staff. Less than $1 million has been spent on the Year 2000 project to date. The Company estimates the total amount of time and money expended to become Year 2000 compliant will have no material impact on the Company's results of operations or financial condition. Based on its current assessments and renovation plans, which are based in part on certain representations of third-party servicers, the Company does not expect that it will experience a significant disruption of its operations as a result of the change to the new millennium. Although the Company has no reason to conclude that a failure will occur, the most reasonably likely worst-case Year 2000 scenario would entail a disruption or failure of the Company's power supply or voice and data transmission suppliers, a computer system, a third-party servicer, or a facility. If such a failure were to occur, the Company would implement its contingency plan. While it is impossible to quantify the impact of such a scenario, the most reasonably likely worst-case scenario would entail a diminishment of service levels, some customer inconvenience, and additional costs from the contingency plan implementation, which are not currently estimable. While the Company has contingency plans to address a temporary disruption in these services, there can be no assurance that any disruption or failure will be only temporary, that the Company's contingency plans will function as anticipated, or that the results of operations of the Company will not be adversely affected in the event of a prolonged disruption or failure. 4 7 INTEREST The Company accepts a high level of interest rate volatility as a RATE RISK result of its policy to originate fixed-rate single family home loans which are longer-term than the short-term characteristics of its liabilities of customer accounts and borrowed money. At September 30, 1998, the Company had approximately $2,350,542,000 more liabilities subject to repricing in the next year than assets subject to repricing, which amounted to a negative maturity gap of 42% of total assets. The Company's interest rate risk approach has never resulted in the recording of a monthly operating loss. Fiscal 1998 began with a trend of steady interest rate spreads. The year closed with a 2.73% interest rate spread, down from 2.83% at the beginning of the year. The decline was, in large part, due to the yield curve becoming flatter. During this phase of the interest rate cycle the Company chose to control its asset growth, strengthen its capital position and deleverage the balance sheet by reducing its borrowed money. Federal Home Loan Bank (FHLB) advances and other borrowed money declined to an equivalent of 28.0% of total assets at September 30, 1998, compared to 33.3% of total assets at September 30, 1997. LIQUIDITY The Company's net worth at September 30, 1998, was $767,172,000 or AND 13.6% of total assets. This is an increase of $49,427,000 from CAPITAL September 30, 1997, when net worth was $717,745,000 or 12.5% of RESOURCES total assets. The ratio of net worth to total assets remains at a high level despite re-implementation of a stock repurchase plan during fiscal 1998 and the distribution of $46,848,000 in cash dividends. The $49,427,000 increase in the Company's net worth includes $111,836,000 generated from net income, $5,000,000 of appreciation in the valuation reserve for available-for-sale securities and $5,434,000 of proceeds received with the exercise of common stock options and purchases by the Employee Stock Ownership Plan. Net worth was reduced by the $46,848,000 of cash dividends paid and stock repurchases of $25,995,000. During fiscal 1998, 1,105,000 shares of common stock were repurchased at an average price of $23.52 under the March 1996 and the September 1998 common stock repurchase programs. The Association's percentage of net worth to total assets is among the highest in the nation and is approximately three times the minimum required under Office of Thrift Supervision (OTS) regulations (see Note P). Management believes this strong net worth position will help protect against interest rate risk and will enable it to compete more effectively for controlled growth through acquisitions and customer deposit increases. Customer accounts increased $178,171,000, or 6%, from a year ago, largely due to branch expansion in Arizona and several successful new account marketing campaigns. The Company's cash and investment securities amounted to $256,228,000, a net decrease from a year ago. The decrease included $60,520,000 of investment securities which matured during the year and were not replaced since the Company's emphasis has been on origination of higher yielding loans. The minimum liquidity levels of the Association are governed by the regulations of the OTS. Liquidity is defined as the ratio of average cash and eligible unpledged investment securities and mortgage-backed securities to the sum of average withdrawable savings plus short-term (one year) borrowings. Currently the Association is required to maintain total liquidity at 4%. At September 30, 1998, total liquidity was 25.08%. CHANGES IN AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES. The Company FINANCIAL purchased $319,209,000 of mortgage-backed securities all of which POSITION have been categorized as available-for-sale. The Company had $55,560,000 of gross sales of securities resulting in net gains of $5,560,000. All sales were mortgage-backed securities which were categorized as available-for-sale. As of September 30, 1998, the Company had unrealized gains on its available-for-sale portfolio of $35,000,000, net of tax, which are recorded as part of stockholders' equity. LOANS RECEIVABLE. Loans receivable declined 1% during fiscal 1998 to $4,143,525,000 at September 30, 1998, from $4,190,776,000 a year earlier. The loans receivable balance decreased even though loan originations increased to $1,454,232,000, an increase of 34% from the prior year. The decline in loan interest rates caused a significant increase in prepayment activity during the year. REAL ESTATE HELD FOR SALE. The balance at September 30, 1998, was $16,193,000, a 46% decrease from the $30,189,000 of one year ago. FHLB STOCK. The Company had a balance of $101,050,000 at September 30, 1998, compared with $93,584,000 one year ago. COSTS IN EXCESS OF NET ASSETS ACQUIRED. As of September 30, 1998, costs in excess of net assets acquired totaled $53,639,000. The Company periodically monitors these assets for potential impairment in accordance with SFAS No. 121, "Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." As of September 30, 1998, there was no impairment of costs in excess of net assets acquired. The Company will provide for any permanent decline in value of these assets, should an impairment be identified. CUSTOMER ACCOUNTS. Customer accounts at September 30, 1998, were $3,156,202,000 compared with $2,978,031,000 at September 30, 1997, a 6% increase. See Liquidity and Capital Resources above. FHLB ADVANCES AND OTHER BORROWINGS. Total borrowings decreased 17% to $1,578,319,000. See Interest Rate Risk above. 5 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED) RESULTS OF OPERATIONS GENERAL Fiscal 1998 net income increased 6% over fiscal 1997. See Note T, Selected Quarterly Financial Data (Unaudited) highlighting the quarter-by-quarter results for the years ended September 30, 1998 and 1997.
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 1996 1997 1997 1997 1997 1998 1998 1998 ------- ------- ------- ------- ------- ------- ------- ------- Interest rate on loans and mortgage-backed securities 8.13% 8.15% 8.18% 8.17% 8.15% 8.10% 8.07% 7.98% Interest rate on investment securities* ... 7.56 7.34 7.53 7.72 7.70 7.64 7.73 7.76 ------- ------- ------- ------- ------- ------- ------- ------- Combined .............. 8.09 8.09 8.13 8.14 8.12 8.07 8.05 7.96 Interest rate on customer accounts ........ 5.01 5.04 5.16 5.18 5.16 5.14 5.11 5.09 Interest rate on borrowings ............... 5.45 5.44 5.53 5.51 5.57 5.53 5.53 5.50 ------- ------- ------- ------- ------- ------- ------- ------- Combined .............. 5.21 5.21 5.31 5.31 5.32 5.28 5.25 5.23 ------- ------- ------- ------- ------- ------- ------- ------- Interest rate spread ........ 2.88% 2.88% 2.82% 2.83% 2.80% 2.79% 2.80% 2.73% ======= ======= ======= ======= ======= ======= ======= =======
*Includes municipal bonds at tax-equivalent rates. The interest rate spread declined during fiscal 1998 from 2.83% at September 30, 1997, to 2.73% at September 30, 1998. COMPARISON OF FISCAL 1998 RESULTS WITH FISCAL 1997 Net interest income increased $6,811,000 (3%) in fiscal 1998 over fiscal 1997 despite a drop in the interest rate spread and a reduction in the balance sheet. This increase resulted largely from the increase in deferred fees and discount amortization due to the high prepayments in the loan and mortgage-backed securities portfolios. Interest on loans and mortgaged-backed securities increased $2,738,000 (1%) in fiscal 1998 from fiscal 1997. The increase is a result of the increase in amortization of deferred fees on loans and discounts on mortgage-backed securities. Deferred fee amortization increased 54% to $29,536,000 in fiscal 1998 from $19,134,000 in fiscal 1997. Average interest rates on loans and mortgage-backed securities declined to 7.98% from 8.17% one year ago. Interest and dividends on investment securities decreased $1,141,000 (4%) in fiscal 1998 from fiscal 1997. The weighted average yield improved to 7.76% at September 30, 1998, compared with 7.72% at September 30, 1997. The combined investment securities and FHLB stock portfolio decreased to $335,063,000 at September 30, 1998, versus $383,334,000 one year ago. Interest on customer accounts increased 9% to $156,099,000 for fiscal 1998 from $142,684,000 for fiscal 1997. The increase related to the increase in customer accounts to $3,156,202,000 from $2,978,031,000 the prior year. The average cost of customer accounts decreased to 5.09% at year end compared to 5.18% one year ago. Interest on FHLB advances and other borrowings decreased $18,629,000 (16%) in fiscal 1998 over fiscal 1997. This decrease was due to a reduction in total borrowings from $1,904,544,000 to $1,578,319,000. The average rates paid decreased slightly to 5.50% at September 30, 1998, versus 5.51% at September 30, 1997. The provision for loan losses during fiscal 1998 was $740,000 compared with $813,000 in fiscal 1997 and $3,828,000 in fiscal 1996, reflecting a trend of declining non-performing assets. Non-performing assets declined to $24.8 million or .44% of total assets at September 30, 1998, compared with $42.7 million or .75% of total assets and $58.6 million or 1.15% of total assets at September 30, 1997 and 1996, respectively. Though our provision declined, we have continued to maintain our allowance for loan losses at current levels which at $23.9 million or .96% of non-performing assets is within an acceptable range of estimated losses and low when compared with others in the industry. Our provision is reflective of the excellent economic conditions within the Company's marketplace during fiscal 1998. However, we believe Asia's continued economic problems could have a ripple effect on the Puget Sound marketplace. For example, Boeing, our region's largest employer, recently announced a planned reduction of over 40,000 jobs. Maintaining the allowance for loan losses at current levels is appropriate considering the more difficult economic period we may encounter going forward. Other income increased $5,955,000 (117%) in fiscal 1998 over fiscal 1997. Net gains on the sale of available-for-sale securities totaled $5,560,000 in fiscal 1998 compared to $938,000 in fiscal 1997. Other expense increased $717,000 (2%) in fiscal 1998 over fiscal 1997. The increase is due to branch network expansion and general inflationary increases. The branch network increased to 106 offices at September 30, 1998, versus 104 offices at September 30, 1997. Other expense for fiscal 1998 equaled .81% of average assets compared with .79% in fiscal 1997, while the number of staff, including part-time employees on a full-time equivalent basis, were 677 and 656, at September 30, 1998 and 1997, respectively. Income taxes increased $3,661,000 (6%) in fiscal 1998. The effective tax rate was 35.6% for fiscal 1998 compared with 35.7% for fiscal 1997. 6 9 COMPARISON OF FISCAL 1997 RESULTS WITH FISCAL 1996 Net interest income increased $26,094,000 (15%) in fiscal 1997 over fiscal 1996 largely due to balance sheet expansion which resulted upon the Metropolitan Bancorp merger in November 1996. Interest rate spreads remained relatively stable throughout most of fiscal 1997. Interest on loans and mortgaged-backed securities increased $52,665,000 (14%) in fiscal 1997 from fiscal 1996. The increase is associated with the merger described earlier, resulting in total outstanding loans and mortgage-backed securities increasing to $5,137,905,000 at September 30, 1997, from $4,589,621,000 at the beginning of fiscal 1997. Average interest rates on loans and mortgage-backed securities were basically unchanged at 8.17% from 8.16% one year before. Interest and dividends on investment securities increased $2,131,000 (9%) in fiscal 1997 from fiscal 1996. The weighted average yield improved to 7.72% at September 30, 1997, compared with 7.47% at September 30, 1996. The combined investment securities and FHLB stock portfolio increased to $383,334,000 at September 30, 1997, versus $363,536,000 one year before. Interest on customer accounts increased 10% to $142,684,000 for fiscal 1997 from $129,904,000 for fiscal 1996. The average cost of customer accounts increased to 5.18% at year end compared to 4.93% at September 30, 1996. Interest on FHLB advances and other borrowings increased $15,922,000 (16%) in fiscal 1997 over fiscal 1996 despite a reduction in total borrowings from $1,959,549,000 to $1,904,544,000. Average rates paid increased to 5.51% at September 30, 1997, versus 5.45% at September 30, 1996. The provision for loan losses during fiscal 1997 was $813,000 compared with $3,828,000 in fiscal 1996, which reflected the improving economic conditions within Washington Federal's marketplace during the period. Non-performing assets declined to $42.7 million or .75% of total assets at September 30, 1997 compared with $58.6 million or 1.15% of total assets at September 30, 1996. With the improving economic conditions the Company deemed the provision adequate to maintain the allowance for loan losses at appropriate levels. Other income decreased $840,000 (14%) in fiscal 1997 from fiscal 1996. Net gains on the sale of available-for-sale securities totaled $938,000 in fiscal 1997 compared to $1,444,000 in fiscal 1996. Other expense increased $6,262,000 (16%) in fiscal 1997 over fiscal 1996 after excluding the $15,026,000 related to the SAIF special assessment, a nonrecurring charge realized in 1996. The increase was due to overall expansion, including the Metropolitan Bancorp merger, and general inflationary increases. The branch network expanded to 104 offices at September 30, 1997, versus 93 offices at September 30, 1996. Other expense for fiscal 1997 equaled .79% of average assets compared with .78% in fiscal 1996, while the number of staff, including part-time employees on a full-time equivalent basis, were 656 and 602, for the same periods, respectively. Income taxes increased $13,733,000 (31%) in fiscal 1997. The effective tax rate was 35.7% for fiscal 1997 compared with 35.8% for fiscal 1996. MERGER WITH METROPOLITAN BANCORP On November 29, 1996, the Company completed its merger with Metropolitan Bancorp of Seattle, Washington. At the time of the merger, Metropolitan Bancorp was comprised of 10 offices located in the Seattle area, two of which were subsequently merged into existing offices of the Company. At the time of the merger, Metropolitan Bancorp consisted of $699,938,000 in assets, $379,975,000 in deposits and $58,495,000 in stockholders' equity. The merger was accounted for by the purchase method and $36,909,000 of costs in excess of net assets acquired were recorded which will continue to be amortized utilizing the straight-line method over 15 years. IMPACT OF The Consolidated Financial Statements and related Notes presented INFLATION herein have been prepared in accordance with generally accepted AND accounting principles, which require the measurement of financial CHANGING position and operating results in terms of historical dollars PRICES without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. 7 10 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 1997 ---- ---- (In thousands, except per share data) ASSETS Cash .................................................................................... $ 22,215 $ 23,444 Available-for-sale securities, amortized cost $710,188 and $626,132 ..................... 764,188 672,132 Held-to-maturity securities, fair value $464,799 and $578,124 ........................... 445,871 564,747 Loans receivable ........................................................................ 4,143,525 4,190,776 Interest receivable ..................................................................... 35,175 36,383 Premises and equipment, net ............................................................. 48,882 47,552 Real estate held for sale ............................................................... 16,193 30,189 FHLB stock .............................................................................. 101,050 93,584 Costs in excess of net assets acquired, net ............................................. 53,639 58,774 Other assets ............................................................................ 6,273 2,008 ----------- ----------- $ 5,637,011 $ 5,719,589 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Customer accounts Savings and demand accounts .......................................................... $ 3,071,175 $ 2,905,371 Repurchase agreements with customers ................................................. 85,027 72,660 ----------- ----------- 3,156,202 2,978,031 FHLB advances ........................................................................... 1,356,500 1,601,000 Other borrowings, primarily securities sold under agreements to repurchase .............. 221,819 303,544 Advance payments by borrowers for taxes and insurance ................................... 25,332 26,340 Federal and state income taxes, including net deferred liabilities of $66,724 and $53,659 63,969 52,259 Accrued expenses and other liabilities .................................................. 46,017 40,670 ----------- ----------- 4,869,839 5,001,844 Stockholders' equity Common stock, $1.00 par value, 100,000,000 shares authorized; 56,423,961 and 51,137,889 shares issued; 51,446,129 and 47,508,759 shares outstanding .......................... 56,424 51,138 Paid-in capital ......................................................................... 714,700 573,241 Valuation adjustment for available-for-sale securities, net of tax ...................... 35,000 30,000 Treasury stock, at cost; 4,977,832 and 3,629,130 shares ................................. (92,221) (68,266) Retained earnings ....................................................................... 53,269 131,632 ----------- ----------- 767,172 717,745 ----------- ----------- $ 5,637,011 $ 5,719,589 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 11 Washington Federal, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, 1998 1997 1996 ----------- ----------- ----------- (In thousands, except per share data) INTEREST INCOME Loans ............................................... $ 364,801 $ 357,496 $ 305,372 Mortgage-backed securities .......................... 70,100 74,667 74,126 Investment securities ............................... 25,703 26,844 24,713 ----------- ----------- ----------- 460,604 459,007 404,211 INTEREST EXPENSE Customer accounts ................................... 156,099 142,684 129,904 FHLB advances and other borrowings .................. 96,134 114,763 98,841 ----------- ----------- ----------- 252,233 257,447 228,745 ----------- ----------- ----------- Net interest income ................................. 208,371 201,560 175,466 Provision for loan losses ........................... 740 813 3,828 ----------- ----------- ----------- Net interest income after provision for loan losses . 207,631 200,747 171,638 OTHER INCOME Gain on sale of securities .......................... 5,560 938 1,444 Other ............................................... 5,472 4,139 4,473 ----------- ----------- ----------- 11,032 5,077 5,917 OTHER EXPENSE Compensation and fringe benefits .................... 24,852 24,051 20,231 Amortization of intangibles ......................... 6,039 5,593 3,545 SAIF special assessment ............................. -- -- 15,026 SAIF deposit insurance premiums ..................... 1,790 2,392 5,530 Occupancy expense ................................... 4,151 4,282 3,417 Other ............................................... 8,284 8,081 5,414 ----------- ----------- ----------- 45,116 44,399 53,163 Gain on real estate acquired through foreclosure, net .............................................. 238 1,913 58 ----------- ----------- ----------- Income before income taxes .......................... 173,785 163,338 124,450 Income taxes Current .......................................... 48,883 50,620 38,222 Deferred ......................................... 13,066 7,668 6,333 ----------- ----------- ----------- 61,949 58,288 44,555 ----------- ----------- ----------- NET INCOME .......................................... $ 111,836 $ 105,050 $ 79,895 =========== =========== =========== PER SHARE DATA Basic earnings per share ............................ $ 2.14 $ 2.03 $ 1.57 Diluted earnings per share .......................... $ 2.12 $ 2.01 $ 1.55 Cash dividends ...................................... $ .90 $ .82 $ .74 Weighted average number of shares outstanding, including dilutive stock options ................. 52,868,253 52,245,754 51,352,134
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 12 Washington Federal, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Valuation Adjustment for Common Paid-in Retained Available-for- Treasury Stock Capital Earnings Sale Securities Stock Total ----- ------- -------- --------------- ----- ----- (In thousands) Balance at October 1, 1995 ..... $ 39,943 $ 320,920 $ 229,478 $ 8,000 $ (22,412) $ 575,929 Eleven-for-ten stock split distributed March 1, 1996 ... 3,997 83,937 (87,934) Net income ..................... 79,895 79,895 Dividends ...................... (37,813) (37,813) Proceeds from exercise of common stock options ........ 72 706 778 Treasury stock ................. (46,087) (46,087) Valuation adjustment for available-for-sale securities 5,000 5,000 --------- --------- --------- --------- --------- --------- Balance at September 30, 1996 .. 44,012 405,563 183,626 13,000 (68,499) 577,702 --------- --------- --------- --------- --------- --------- Common stock issued with Metropolitan Bancorp merger . 2,443 57,189 (1,137) 58,495 Eleven-for-ten stock split distributed February 21, 1997 4,644 109,709 (114,353) Net income ..................... 105,050 105,050 Dividends ...................... (42,691) (42,691) Proceeds from exercise of common stock options ........ 39 311 350 Proceeds from Employee Stock Ownership Plan ........ 469 1,370 1,839 Valuation adjustment for available-for-sale securities 17,000 17,000 --------- --------- --------- --------- --------- --------- Balance at September 30, 1997 .. 51,138 573,241 131,632 30,000 (68,266) 717,745 --------- --------- --------- --------- --------- --------- Eleven-for-ten stock split distributed February 26, 1998 5,118 138,195 (143,351) (38) Net income ..................... 111,836 111,836 Dividends ...................... (46,848) (46,848) Proceeds from exercise of common stock options ........ 168 2,297 2,465 Proceeds from Employee Stock Ownership Plan ........ 967 2,040 3,007 Treasury stock ................. (25,995) (25,995) Valuation adjustment for available-for-sale securities 5,000 5,000 --------- --------- --------- --------- --------- --------- Balance at September 30, 1998 .. $ 56,424 $ 714,700 $ 53,269 $ 35,000 $ (92,221) $ 767,172 ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements 10 13 Washington Federal, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, 1998 1997 1996 ----------- ----------- ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................. $ 111,836 $ 105,050 $ 79,895 Adjustments to reconcile net income to net cash provided by operating activities Amortization of fees, discounts and premiums, net ....................... (28,426) (14,674) (19,481) SAIF special assessment ................................................. -- -- 15,026 Amortization of costs in excess of net assets acquired .................. 6,038 5,593 3,545 Depreciation ............................................................ 2,287 2,132 1,912 Gain on investment securities and real estate held for sale ............. (5,798) (2,627) (1,502) Decrease (increase) in accrued interest receivable ...................... 1,208 2,431 (3,187) Increase in income taxes payable ........................................ 8,710 10,204 2,325 FHLB stock dividends .................................................... (7,466) (6,683) (3,896) Decrease (increase) in other assets ..................................... (4,265) 8,350 (1,669) Increase in accrued expenses and other liabilities ...................... 4,844 238 4,638 ----------- ----------- ----------- Net cash provided by operating activities .................................. 88,968 110,014 77,606 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Loans and contracts originated Loans on existing property .............................................. (723,337) (556,063) (972,601) Construction loans ...................................................... (467,884) (407,135) (428,317) Land loans .............................................................. (105,901) (77,270) (92,496) Loans refinanced ........................................................ (157,110) (48,240) (62,854) ----------- ----------- ----------- (1,454,232) (1,088,708) (1,556,268) Savings account loans originated ........................................... (4,984) (7,818) (7,065) Loan principal repayments .................................................. 1,483,446 1,010,333 863,577 Increase (decrease) in undisbursed loans in process ........................ 35,934 (26,000) 24,628 Loans purchased ............................................................ (1,797) (1,310) (888) Available-for-sale securities purchased .................................... (319,209) (54,187) (241,230) Principal payments and maturities of available-for-sale securities ......... 191,360 106,918 129,888 Available-for-sale securities sold ......................................... 55,560 119,851 165,719 Principal payments and maturities of held-to-maturity securities ........... 120,024 67,885 129,768 Proceeds from sales of real estate held for sale ........................... 24,454 12,313 2,580 Premises and equipment purchased, net ...................................... (3,617) (4,115) (3,867) FHLB stock purchased ....................................................... -- (9,057) (15,500) Cash received for acquisitions ............................................. -- 3,590 -- ----------- ----------- ----------- Net cash provided (used) by investing activities ........................... 126,939 129,695 (508,658) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in customer accounts .......................................... 178,171 117,836 34,885 Net increase (decrease) in short-term borrowings ........................... (773,725) (665,363) 845,462 Proceeds from long-term borrowings ......................................... 600,000 350,000 -- Repayments of long-term borrowings ......................................... (152,500) -- (370,000) Proceeds from exercise of common stock options ............................. 1,762 350 778 Dividends .................................................................. (46,848) (42,691) (37,813) Proceeds from employee stock ownership plan ................................ 967 469 -- Treasury stock sold (purchased) ............................................ (23,955) 1,370 (46,087) Increase (decrease) in advance payments by borrowers for taxes and insurance (1,008) 2,129 294 ----------- ----------- ----------- Net cash provided (used) by financing activities ........................... (217,136) (235,900) 427,519 ----------- ----------- ----------- Increase (decrease) in cash ................................................ (1,229) 3,809 (3,533) Cash at beginning of year .................................................. 23,444 19,635 23,168 ----------- ----------- ----------- Cash at end of year ........................................................ $ 22,215 $ 23,444 $ 19,635 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Noncash investing activities Real estate acquired through foreclosure ................................ $ 10,220 $ 5,547 $ 3,884 Implementation of new accounting standard reclassification to available-for-sale portfolio ......................................... -- -- 215,489 Cash paid during the year for Interest ................................................................ $ 248,357 $ 256,822 $ 228,756 Income taxes ............................................................ 53,368 49,492 43,794
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 14 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1998, 1997 and 1996 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Washington Federal, Inc., (the Company) and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. DESCRIPTION OF BUSINESS. Washington Federal, Inc. is a savings and loan holding company. The Company's principal operating subsidiary is Washington Federal Savings (the Association). The Company is principally engaged in the business of attracting savings deposits from the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential real estate loans, and, in limited circumstances, income-producing property real estate loans. The Company conducts its activities from a network of 106 full-service branch offices located in Washington, Oregon, Idaho, Utah and Arizona. INVESTMENT AND MORTGAGE-BACKED SECURITIES. The Company accounts for investment and mortgage-backed securities in two categories: held-to-maturity and available-for-sale. Held-to-Maturity Securities - Securities classified as held-to-maturity are accounted for at amortized cost, but the Company must have both the positive intent and the ability to hold these securities to maturity. There are very limited circumstances under which securities in the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the securities in this category. Recognition is provided for unrealized losses in the portfolio if any market valuation differences are deemed to be other than temporary. Available-For-Sale Securities - Securities not classified as held-to-maturity are considered to be available-for-sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. Forward contracts to purchase mortgage-backed securities are designated as available-for-sale. Changes in the fair value of forward contracts designated as available-for-sale are recognized as a component of stockholders' equity until realized unless a decline in the fair value of the underlying securities is other than temporary. Securities purchased under a forward contract are recorded at their fair values at the settlement date. HEDGING ACTIVITY. The Company from time to time may enter into certain forward contracts to sell mortgage-backed securities to hedge the price risk in certain forward purchase contracts accounted for as available-for-sale securities. To the extent forward sales contracts meet current hedging criteria, the market value change associated with the contract is recorded through an equity adjustment consistent with the forward sales contract. To the extent that forward sales contracts fail to meet hedging criteria, the market value will be recorded through the income statement. The Company obtained through acquisition certain interest rate swap agreements that are designated against adjustable rate mortgage-backed securities. These interest rate swap agreements were carried at historical cost with the related interest differential paid or received as an adjustment to interest income. The interest rate swaps were terminated during the 1998 fiscal year. The remaining discount on the swap agreements will be amortized to income based on the original final maturity, which is less than the remaining term of the related loans. LOANS RECEIVABLE. Loans receivable more than 90 days past due are placed on nonaccrual status and an allowance for accrued interest is established. Any interest ultimately collected is credited to income in the period of recovery. An allowance for losses on specific loans is provided to record loans receivable at their estimated fair value when losses are probable and estimable. Such provisions are based on management's estimate of fair value of the collateral considering current and anticipated future market conditions. General loan loss allowances are established to provide for inherent risks in the portfolio. The allowances are provided based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience and current and anticipated economic conditions. The recovery of the carrying value of loans is susceptible to future market conditions beyond the Company's control which may result in losses or recoveries differing from those provided. Loans receivable that will not be repaid in accordance with their contractual terms are measured using a discounted cash flow methodology or the fair value of the collateral for certain loans. Smaller balance loans are excluded with limited exceptions. 12 15 PREMISES AND EQUIPMENT. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets. Expenditures are capitalized for betterments and major renewals, and charges for ordinary maintenance and repairs are expensed to operations as incurred. REAL ESTATE HELD FOR SALE. Properties acquired in settlement of loans, purchased in acquisitions or acquired for development are recorded at the lower of cost or fair value. COSTS IN EXCESS OF NET ASSETS ACQUIRED. Costs in excess of fair value of net assets acquired in business combinations are amortized to expense over a period not to exceed 15 years using the straight-line method. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), goodwill and core deposit intangibles are treated as reductions from stockholders' equity in computing the Association's tangible capital. From time to time, the Association reviews the status of costs in excess of net assets acquired to determine that no impairment of this asset has occurred. DEFERRED FEES AND DISCOUNTS ON LOANS. Loan discounts and loan fees are deferred and recognized over the life of the loans using the interest method based on actual loan payments. USE OF ESTIMATES. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. RECLASSIFICATIONS. Certain reclassifications have been made to the financial statements for years prior to September 30, 1998, to conform to the classifications used in 1998. NOTE B ACQUISITIONS On November 29, 1996, Washington Federal, Inc. completed its merger with Metropolitan Bancorp of Seattle, Washington. At the time of the merger, Metropolitan Bancorp was comprised of 10 offices located in the Seattle area, two of which were subsequently merged into existing offices of the Company. At the time of the merger, Metropolitan Bancorp consisted of $699,938,000 in assets, $379,975,000 in deposits and $58,495,000 in stockholders' equity. The merger was accounted for by the purchase method and the $36,909,000 of costs in excess of net assets acquired were recorded, which will continue to be amortized utilizing the straight-line method over 15 years. The Company issued 2,442,908 shares of its common stock with a fair value of $58,495,000 in exchange for all the common stock of Metropolitan Bancorp. From the Metropolitan acquisition, additional discounts of $8,359,000 and $11,101,000 were recorded to yield a market rate of interest on loans and mortgage-backed securities, respectively. These discounts will continue to be amortized utilizing the interest method over the estimated lives of the assets. During the period ended September 30, 1998, and 1997, the combined amortization of these discounts was $6,439,000 and $2,473,000, respectively. Had the merger with Metropolitan Bancorp occurred at the beginning of the Company's 1997 fiscal year, total revenue, net income and net income per share would have been enhanced for the additional two months by $9,803,000, $1,142,000 and $.02, respectively, to combined pro forma amounts of $475,800,000, $106,192,000 and $2.03, respectively. 13 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C INVESTMENT SECURITIES
September 30, 1998 - ------------------------------------------------------------------------------------------------------- (In thousands) Gross Unrealized Amortized ---------------------- Fair Cost Gains Losses Value Yield ---------- ----- ------ ----- ----- 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% ========= ========= ========= ========= =====
September 30, 1997 - ------------------------------------------------------------------------------------------------------- (In thousands) Gross Unrealized Amortized ----------------------- Fair Cost Gains Losses Value Yield --------- ----- ------ ----- ----- AVAILABLE-FOR-SALE SECURITIES U.S. government and agency securities due Less than 1 year ..................... $ 93,911 $ 1,801 $ -- $ 95,712 7.48% 1 to 5 years ......................... 139,903 2,151 (103) 141,951 6.80 5 to 10 years ........................ 15,187 767 -- 15,954 6.98 Over 10 years ........................ 9,278 3,384 -- 12,662 10.41 --------- --------- --------- --------- ----- 258,279 8,103 (103) 266,279 7.19 --------- --------- --------- --------- ----- HELD-TO-MATURITY SECURITIES Tax-exempt municipal bonds due 1 to 5 years ......................... 9,651 806 -- 10,457 6.90 Over 10 years ........................ 13,820 1,126 -- 14,946 6.26 --------- --------- --------- --------- ----- 23,471 1,932 -- 25,403 6.52 --------- --------- --------- --------- ----- $ 281,750 $ 10,035 $ (103) $ 291,682 7.13% ========= ========= ========= ========= =====
There were no sales of investment securities during 1998 or 1997. Proceeds from sales of investment securities in the available-for-sale portfolio during 1996 were $29.6 million. The Company had losses on sales of $401,000 during 1996. Investment securities with a book value of $85.7 million and a fair value of $96.7 million at September 30, 1998, were pledged to secure public deposits. NOTE D MORTGAGE-BACKED SECURITIES
September 30, 1998 - --------------------------------------------------------------------------------------------- (In thousands) Gross Unrealized Amortized ----------------------- Fair Cost Gains Losses Value Yield --------- ----- ------ ----- ----- 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% ========= ========= ========= ========= ====
14 17 MORTGAGE-BACKED SECURITIES (CONTINUED)
September 30, 1997 - -------------------------------------------------------------------------------------------- (In thousands) Gross Unrealized Amortized ----------------------- Fair Cost Gains Losses Value Yield --------- ----- ------ ----- ----- AVAILABLE-FOR-SALE SECURITIES GNMA pass-through certificates.. $ 20,214 $ 53 $ (247) $ 20,020 6.93% FNMA pass-through certificates.. 26,313 2,243 -- 28,556 8.51 FHLMC pass-through certificates. 189,464 9,016 (952) 197,528 7.67 FHLMC .......................... 67,577 5,164 (1,527) 71,214 6.92 FNMA ........................... 37,157 2,771 (1,199) 38,729 6.91 Private issues ................. 27,128 2,036 (920) 28,244 6.71 Forward commitments ............ -- 21,562 -- 21,562 --------- --------- --------- --------- ----- 367,853 42,845 (4,845) 405,853 7.39 --------- --------- --------- --------- ----- HELD-TO-MATURITY SECURITIES GNMA pass-through certificates.. 336 31 (1) 366 9.37 FNMA pass-through certificates.. 16,577 641 (20) 17,198 8.12 FHLMC pass-through certificates. 523,249 13,006 (2,266) 533,989 7.39 Private issues ................. 1,114 54 -- 1,168 8.00 --------- --------- --------- --------- ----- 541,276 13,732 (2,287) 552,721 7.42 --------- --------- --------- --------- ----- $ 909,129 $ 56,577 $ (7,132) $ 958,574 7.41% ========= ========= ========= ========= =====
Proceeds from sales of mortgage-backed securities in the available-for-sale portfolio during 1998, 1997 and 1996 were $55.6 million, $119.8 million and $77.5 million, respectively. The Company realized gains of $5.6 million, $1.1 million and $3.4 million during 1998, 1997 and 1996, respectively. The Company had no losses on sales in 1998 and $158,000 and $1.5 million during 1997 and 1996, respectively. Available-for-sale mortgage-backed securities with a book value of $85.2 million and a fair value of $92.7 million at September 30, 1998, were pledged to secure public deposits, securities sold under agreements to repurchase and other borrowings. Mortgage-backed securities categorized as held-to-maturity with a fair market value of approximately $238,165,000 were pledged as collateral on September 30, 1998, for securities sold under agreements to repurchase (see Note L), or secured repurchase agreements with customers (see Note J). Substantially all mortgage-backed securities have contractual due dates which exceed ten years. The Company enters into forward contracts to purchase mortgage-backed securities as part of its interest rate risk management program. In certain circumstances, the Company may hedge these contracts by entering into forward commitments to sell mortgage-backed securities. The related mortgage-backed securities will be designated as available-for-sale securities upon exercise of the commitments. Forward purchase and sales contracts were as follows:
September 30, 1998 1997 - ------------- -------------------- -------------------- (In thousands) Market Market Cost Value Cost Value -------- -------- -------- -------- Commitments to purchase ........ $116,358 $133,006 $226,271 $248,575 Commitments to sell ............ -- -- 29,202 29,944 -------- -------- -------- -------- $116,358 $133,006 $197,069 $218,631 ======== ======== ======== ========
All forward contracts at September 30, 1998, were scheduled to be executed before September 30, 1999. The Company acquired interest rate swaps with a notional amount of $60,000,000 in its merger with Metropolitan Bancorp in November 1996. These interest rate swap agreements were terminated during the year ended September 30, 1998. The remaining discount of $595,000 on the swap agreements will be amortized to income based on the original final maturity, which is less than the remaining term of the related loans. 15 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE E LOANS RECEIVABLE
September 30, 1998 1997 - -------------------------------------------------------------------------------- (In thousands) Conventional real estate Permanent single-family residential ....... $3,535,154 $3,521,466 Income property ........................... 189,760 242,157 Land ...................................... 160,879 158,706 Construction .............................. 562,689 542,394 Other ........................................ 3,767 5,043 ---------- ---------- 4,452,249 4,469,766 ---------- ---------- Less Allowance for possible losses ............. 23,854 24,623 Discount on loans ......................... 9,072 14,185 Loans in process .......................... 246,784 210,849 Deferred loan origination fees ............ 29,014 29,333 ---------- ---------- 308,724 278,990 ---------- ---------- $4,143,525 $4,190,776 ========== ==========
The Association originates adjustable and fixed interest rate loans, which at September 30, 1998, consisted of the following:
Fixed Rate - -------------------------------------------------------------------------------- (In thousands) Term to Maturity Book Value - -------------------------------------------------------------------------------- Less than 1 year .................................................. $ 115,493 1 to 3 years ...................................................... 89,010 3 to 5 years ...................................................... 76,122 5 to 10 years ..................................................... 152,749 10 to 20 years .................................................... 474,050 Over 20 years ..................................................... 2,863,369 ---------- $3,770,793 ==========
Adjustable Rate - -------------------------------------------------------------------------------- (In thousands) Term to Rate Adjustment Book Value - -------------------------------------------------------------------------------- Less than 1 year .................................................. $586,114 1 to 3 years ...................................................... 95,342 3 to 5 years ...................................................... -- 5 to 10 years ..................................................... -- 10 to 20 years .................................................... -- Over 20 years ..................................................... -- -------- $681,456 ========
At September 30, 1998 and 1997, approximately $58,247,000 and $40,643,000 of fixed rate loan origination commitments were outstanding, respectively. Loans serviced for others at September 30, 1998 and 1997, were approximately $73,606,000 and $119,897,000, respectively. Permanent single-family residential loans receivable included adjustable rate loans of $96,507,000 and $177,374,000 at September 30, 1998 and 1997, respectively. These loans have interest rate adjustment limitations and are generally indexed to the 1-year Treasury Bill rate or the monthly weighted average cost of funds for Eleventh District savings institutions as published by the FHLB. Loans by geographic concentration were as follows:
September 30, 1998 Washington Idaho Oregon Utah Arizona Other Total - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Conventional real estate Permanent single-family residential ......... $1,776,724 $ 457,537 $ 633,870 $ 509,677 $ 126,302 $ 31,044 $3,535,154 Income property ....... 104,205 23,368 26,625 18,604 3,003 13,955 189,760 Land .................. 107,048 14,358 8,939 15,407 14,139 988 160,879 Construction .......... 302,071 63,826 97,257 58,279 40,912 344 562,689 Other .................... 19 298 19 59 -- 3,372 3,767 ---------- ---------- ---------- ---------- ---------- ---------- ---------- $2,290,067 $ 559,387 $ 766,710 $ 602,026 $ 184,356 $ 49,703 $4,452,249 ========== ========== ========== ========== ========== ========== ==========
At September 30, 1998, the Company's recorded investment in impaired loans was $8.3 million, of which $5.6 million had allocated reserves of $2.0 million. At September 30, 1997, the Company's recorded investment in impaired loans was $10.0 million of which $6.3 million had allocated reserves of $2.2 million. The average balance of impaired loans during 1998 and 1997 was $9.5 million and $13.7 million, and interest income from impaired loans was $390,000 and $368,000, respectively. 16 19 NOTE F ALLOWANCE FOR LOSSES ON LOANS
Year ended September 30, 1998 1997 1996 - --------------------------------------------------------------------------------------------- (In thousands) Balance at beginning of year ............. $ 24,623 $ 15,182 $ 11,651 Loss allowances from acquired institutions -- 11,198 -- Provision for loan losses ................ 740 813 3,828 Charge-offs .............................. (2,304) (5,932) (820) Recoveries ............................... 795 3,362 523 -------- -------- -------- Balance at end of year ................... $ 23,854 $ 24,623 $ 15,182 ======== ======== ========
NOTE G INTEREST RECEIVABLE
September 30, 1998 1997 - --------------------------------------------------------------------------------------- (In thousands) Loans receivable ..................................... $ 27,188 $ 28,741 Allowance for uncollected interest on loans receivable (1,748) (1,708) Mortgage-backed securities ........................... 5,825 4,844 Investment securities ................................ 3,910 4,506 -------- -------- $ 35,175 $ 36,383 ======== ========
NOTE H PREMISES AND EQUIPMENT
September 30, 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) Estimated Useful Life ----------- Land .............................................. -- $10,635 $10,767 Buildings ......................................... 25 - 40 46,312 43,586 Leasehold improvements ............................ 7 - 15 4,771 4,653 Furniture, fixtures and equipment ................. 4 - 10 12,379 12,181 ------- ------- 74,097 71,187 ------- ------- Less accumulated depreciation and amortization .... (25,215) (23,635) ------- ------- $48,882 $47,552 ======= =======
The Company has noncancelable operating leases for branch offices. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $1,420,000, $1,455,000 and $1,094,000 in 1998, 1997 and 1996, respectively. Future minimum net rental commitments for all noncancelable leases, including maintenance and associated costs, are immaterial. NOTE I REAL ESTATE HELD FOR SALE
September 30, 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) Acquired for development .......................................... $ 9,388 $10,850 Acquired in settlement of loans ................................... 6,179 5,328 Acquired from purchased institutions in settlement of loans ....... 626 14,011 ------- ------- $16,193 $30,189 ======= =======
17 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE J CUSTOMER ACCOUNTS
September 30, 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) Checking accounts, 2.60% and under ............................ $ 93,942 $ 88,811 Passbook and statement accounts, 3.50% ........................ 168,921 177,843 Insured money market accounts, 2.47% to 4.16% ................. 443,395 399,056 Certificate accounts Less than 4.00% ............................................. 234 230 4.00% to 4.99% .............................................. 26,434 17,009 5.00% to 5.99% .............................................. 2,128,693 1,974,727 6.00% to 6.99% .............................................. 205,524 239,375 7.00% and over .............................................. 4,032 8,320 ---------- ---------- Total certificates ............................................ 2,364,917 2,239,661 ---------- ---------- Repurchase agreements with customers .......................... 85,027 72,660 ---------- ---------- $3,156,202 $2,978,031 ========== ==========
Certificate maturities were as follows:
September 30, 1998 1997 - ----------------------------------------------------------------------------------------------------- (In thousands) Less than 1 year .................................................. $2,093,394 $1,778,943 1 to 2 years ...................................................... 148,109 395,607 2 to 3 years ...................................................... 24,499 18,660 Over 3 years ...................................................... 98,915 46,451 ---------- ---------- $2,364,917 $2,239,661 ========== ==========
Interest expense on customer accounts consisted of the following:
Year ended September 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- (In thousands) Checking accounts .................................. $ 2,153 $ 2,006 $ 1,734 Passbook and statement accounts .................... 6,048 6,371 6,267 Insured money market accounts ...................... 16,889 15,391 13,137 Certificate accounts ............................... 127,221 116,232 105,634 --------- --------- --------- 152,311 140,000 126,772 Repurchase agreements with customers ............... 4,252 3,059 3,481 --------- --------- --------- 156,563 143,059 130,253 Less early withdrawal penalties .................... (464) (375) (349) --------- --------- --------- $ 156,099 $ 142,684 $ 129,904 ========= ========= ========= Weighted average interest rate at end of year ...... 5.09% 5.18% 4.93% Weighted daily average interest rate during the year 5.14% 5.06% 5.24%
During fiscal 1996, the Deposit Insurance Fund Act of 1996 was enacted, calling for a special assessment to capitalize the Savings Association Insurance Fund (SAIF). The special assessment rate was 65.7 basis points of SAIF-insured institutions' March 31, 1995 reported deposits. Accordingly, the Association recorded a one-time pre-tax charge of $15,026,000, before an offsetting tax benefit of $5,485,000 during the fourth quarter of fiscal 1996. The special assessment was paid during the first quarter of fiscal 1997. The Association's annual SAIF premium rates were reduced beginning January 1, 1997, from 23 basis points to 6.5 basis points. 18 21 NOTE K FHLB ADVANCES FHLB advances had weighted average interest rates at September 30, 1998 and 1997, of 5.50% and 5.51%, respectively. Maturity dates of advances were as follows:
September 30, 1998 1997 - -------------------------------------------------------------------------------- (In thousands) FHLB advances due Less than 1 year ............... $ 556,500 $1,248,500 1 to 2 years ................... -- 152,500 3 to 4 years ................... 200,000 -- 4 to 5 years ................... -- 200,000 More than 5 years .............. 600,000 -- ---------- ---------- $1,356,500 $1,601,000 ========== ==========
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
September 30, 1998 1997 - ---------------------------------------------------------------------------------------------------------- (In thousands) Securities sold under agreements to repurchase Due within 30 days ................................................... $221,819 $287,544 Other borrowings Credit facility, weighted average rate of 5.84% ...................... -- 1,000 Federal funds purchased, weighted average rate of 6.38%, due on demand -- 15,000 -------- -------- $221,819 $303,544 ======== ========
The Company has a $40,000,000 credit facility with another financial institution which expires February 28, 1999. The credit facility bears interest at the London Interbank Offering Rate (LIBOR) plus 25 basis points. There was no balance outstanding on this credit facility at September 30, 1998. The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. During the two years ended September 30, 1998, all of the Company's transactions were fixed-coupon reverse repurchase agreements. The dollar amount of securities underlying the agreements remain in the asset accounts. The securities pledged are registered in the Company's name and principal and interest payments are received by the Company; however, the securities are held by the designated trustee of the broker. Upon maturity of the agreements the identical securities pledged as collateral will be returned to the Company. Financial data pertaining to the weighted average cost and the amount of securities sold under agreements to repurchase were as follows:
September 30, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- (In thousands) Weighted average interest rate at end of year ........ 5.57% 5.81% 5.47% Weighted daily average interest rate during the year . 5.63% 5.44% 5.76% Daily average of securities sold under agreements to repurchase ..................................... $400,202 $569,203 $831,676 Maximum securities sold under agreements to repurchase at any month end .................................. 608,990 822,904 971,173 Interest expense during the year ..................... 22,521 30,944 47,905
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was issued in June 1996 and established, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. As issued, SFAS No. 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." In general, SFAS No. 127 defers for one year the effective date of SFAS No. 125. The Company implemented SFAS No. 125, as amended by SFAS No. 127, as required. The adoption did not have a material impact on the results of operations or financial condition of the Company. 19 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE M INCOME TAXES The consolidated statements of financial condition at September 30, 1998 and 1997, include deferred taxes of $66,724,000 and $53,659,000, respectively, that have been provided for the temporary differences between the tax basis and the financial statement carrying amounts of assets and liabilities. The major sources of these temporary differences and their deferred tax effect were as follows:
September 30, 1998 1997 - --------------------------------------------------------------------------------------- (In thousands) Deferred tax assets Real estate valuation reserves ...................... $ 3,826 $ 3,867 Discounts ........................................... 66 109 ------- ------- Total deferred tax assets ........................... 3,892 3,976 ------- ------- Deferred tax liabilities Federal Home Loan Bank stock dividends .............. 17,115 14,610 Loan loss reserves .................................. 16,632 15,714 Valuation adjustment on available-for-sale securities 19,000 16,000 Depreciation ........................................ 3,395 3,339 Loan origination costs .............................. 4,131 4,102 State income taxes .................................. 4,113 1,918 Other, net .......................................... 6,230 1,952 ------- ------- Total deferred tax liabilities ...................... 70,616 57,635 ------- ------- Net deferred tax liability ............................. $66,724 $53,659 ======= =======
A reconciliation of the statutory federal income tax rate to the effective income tax rate follows:
Year ended September 30, 1998 1997 1996 - --------------------------------------------------------------- Statutory income tax rate 35% 35% 35% Tax-exempt interest ..... -- -- (1) State income tax ........ 2 2 3 Other, net .............. (1) (1) (1) --- --- --- Effective income tax rate 36% 36% 36% === === ===
For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction based on a percentage of taxable income or on actual experience. Accordingly, the Association used the percentage of taxable income method in fiscal 1996. The Small Business Job Protection Act of 1996 (the Act) required qualified thrift institutions, such as the Association, to recapture the portion of their tax bad debt reserves that exceeded the September 30, 1988 balance. Such recaptured amounts are to be taken into taxable income ratably over a six-year period beginning in 1997. Accordingly, the Company will be required to pay approximately $22,057,000 in additional federal income taxes beginning in fiscal 1998, all of which has been previously provided for, and continuing through fiscal 2003. The Act also repealed the reserve method of accounting for tax bad debt deductions and required thrifts to calculate the tax bad debt deduction based on actual current loan losses. A deferred tax liability has not been required to be recognized for the tax bad debt base year reserves of the Association. The base year reserves are the balance of reserves as of September 30, 1988, reduced proportionately for reductions in the Association's loan portfolio since that date. At September 30, 1998, the amount of those reserves was approximately $5,370,000. The amount of the unrecognized deferred tax liability at September 30, 1998, was approximately $1,913,000. The Company has been examined by the Internal Revenue Service through the year ended September 30, 1990. There were no material changes made to the Company's taxable income as originally reported. NOTE N PROFIT SHARING RETIREMENT AND EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains a Profit Sharing Retirement and Employee Stock Ownership Plan (the Plan) for the benefit of its employees. Contributions are made semi-annually as approved by the Board of Directors. Such amounts are not in excess of amounts permitted by the Employee Retirement Income Security Act. Employees may contribute up to 7% of their base salaries to the Plan or 13% of their base salaries on a tax-deferred basis through the 401(k) provisions of the Plan with a combined maximum of 13%. Under provisions of the Plan, employees are eligible to participate on the date of hire and become vested in the Company's contributions following seven years of service. During August 1995, the Company received a favorable determination from the Internal Revenue Service to include an Employee Stock Ownership feature as part of the Plan. Contributions to the Plan amounted to $1,493,000, $1,654,000, and $1,497,000, for the years ended September 30, 1998, 1997 and 1996, respectively. 20 23 NOTE O STOCK OPTION PLANS The Company has three employee stock option plans which provide a combination of stock options, stock appreciation rights and stock grants. Stockholders authorized 4,422,742, 1,395,103 and 2,299,000 unissued shares of common stock to be reserved pursuant to the 1982 Employee Stock Compensation Program (the 1982 Plan), the 1987 Stock Option and Stock Appreciation Rights Plan (the 1987 Plan) and the 1994 Stock Option and Stock Appreciation Rights Plan (the 1994 Plan), respectively. The 1987 Plan and 1994 Plan are substantially similar to the 1982 Plan, but incorporate changes in the Internal Revenue Code affecting incentive stock options and do not provide for the grant of performance share awards. Options granted under each plan are exercisable at varying percentages commencing as early as three years after the date of grant, with expiration dates ten years after the date of grant.
Weighted Average Fair Value of Option Average Price(1) Number(1) Shares Granted - ------------------------------------------------------------------------------------------------------ Outstanding, October 1, 1995 $13.04 1,427,440 Granted in 1996 16.74 406,187 $2.95 Exercised in 1996 8.57 (145,879) Forfeited in 1996 14.47 (88,817) ------ --------- ----- Outstanding, September 30, 1996 14.31 1,598,931 Granted in 1997 19.26 132,490 3.46 Exercised in 1997 11.85 (159,949) Forfeited in 1997 14.85 (142,235) ------ --------- ----- Outstanding, September 30, 1997 14.98 1,429,237 Granted in 1998 26.82 387,003 3.88 Exercised in 1998 13.17 (160,415) Forfeited in 1998 15.90 (152,290) ------ --------- ----- Outstanding September 30, 1998 $18.12 1,503,535 ====== ========= =====
(1) Average price and number of stock options granted, exercised and forfeited have been adjusted for 10% stock dividends in the second quarter of both 1998 and 1997, which had the effect of an eleven-for-ten stock split. Financial data pertaining to outstanding stock options were as follows:
September 30, 1998 - ---------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Number of Exercisable Price Ranges of Number of Remaining Exercise Price of Exercisable of Exercisable Exercise Prices Option Shares Contractual Life Options Shares Option Shares Option Shares - ---------------------------------------------------------------------------------------------------------------- $ 7.59 - 9.62 16,144 1.1 years $ 8.19 14,028 $ 7.97 11.07 - 15.59 615,833 5.3 13.63 229,841 13.82 16.15 - 19.11 479,991 6.8 17.17 33,484 17.28 22.73 - 26.82 391,567 9.1 26.76 -- -- --------- --------- ------ ------- ------ 1,503,535 6.7 years $18.12 277,353 $13.94 ========= ========= ====== ======= ======
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based Compensation." SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages application of the fair value recognition provisions in the statement. SFAS No. 123 does not rescind or interpret the existing accounting rules for employee stock-based arrangements. Companies may continue following those rules to recognize and measure compensation as outlined in Accounting Principles Board (APB) Opinion No. 25, but they will now be required to disclose the pro forma amounts of net income and earnings per share that would have been reported had the company elected to follow the fair value recognition provisions of SFAS No. 123. Effective October 1, 1996, the Company adopted the disclosure requirements of SFAS No. 123, but has determined that it will continue to measure its employee stock-based compensation arrangements under the provisions of APB No. 25. Had compensation cost for the Company's compensation plans been determined consistent with SFAS No. 123, the Company's net income attributable to common stock would have been reduced by $749,000 and $220,000 for 1998 and 1997, respectively, and net income per share would have been reduced by $.01 for 1998 and would have remained the same for 1997. The fair value of options granted under the Company's stock option plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997: annual dividend yield of 3.25%; expected volatility of 13.00%; risk-free interest rate of 5.50%; and expected life of five years. 21 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE P STOCKHOLDERS' EQUITY In the second quarter of both fiscal 1998 and 1997, the Company declared eleven-for-ten stock splits in the form of a 10% stock dividend in addition to the regular quarterly cash dividends on its shares of common stock. The Association is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. As of September 30, 1998 and 1997, the OTS categorized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Association must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Association's categorization.
To be categorized as well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ---------------------- ----------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio September 30, 1998 (Dollars in thousands) Total capital to risk-weighted assets .. $682,547 22.85% $238,985 8.00% $298,731 10.00% Tier I capital to risk-weighted assets . 668,453 22.38% NA NA 179,239 6.00% Core capital to adjusted tangible assets 668,453 12.12% NA NA 275,855 5.00% Core capital to total assets ........... 668,453 12.12% 165,513 3.00% NA NA Tangible capital to tangible assets .... 668,453 12.12% 82,756 1.50% NA NA September 30, 1997 Total capital to risk-weighted assets .. $608,315 19.67% $247,376 8.00% $309,220 10.00% Tier I capital to risk-weighted assets . 600,395 19.42% NA NA 185,532 6.00% Core capital to adjusted tangible assets 600,395 10.74% NA NA 279,407 5.00% Core capital to total assets ........... 600,395 10.74% 167,644 3.00% NA NA Tangible capital to tangible assets .... 600,395 10.74% 83,822 1.50% NA NA
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation (FDIC) routinely examine the Company's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on their examinations, these regulators can direct that the Company's financial statements be adjusted in accordance with their findings. The extent to which forthcoming regulatory examinations may result in adjustments to the financial statements cannot be determined; however, no adjustments were proposed as a result of the most recent OTS examination which concluded in February 1998. SFAS No. 128, "Earnings per Share," was issued in February, 1997. SFAS No. 128 simplifies the standards found in APB No. 15 for computing earnings per share (EPS), and makes them comparable to international standards. Under SFAS No. 128, the Company is required to present both basic and diluted EPS on the face of its statements of operations. Basic EPS, which replaces primary EPS required by APB No. 15 for entities with complex capital structures, excludes common stock equivalents and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares that were outstanding during the period. The Company adopted SFAS No. 128 effective October 1, 1997. All prior period EPS data have been restated. NOTE Q FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," (SFAS No. 107) requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, estimates of fair value subsequent to that date may differ significantly from the amounts presented below. 22 25
September 30, 1998 1997 - ------------------------------------------------------------------------------------------------------- (In thousands) Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ----------------------------------------------------------------- Financial assets Cash $ 22,215 $ 22,215 $ 23,444 $ 23,444 Available-for-sale securities 764,188 764,188 672,132 672,132 Held-to-maturity securities 445,871 464,799 564,747 578,124 Loans receivable 4,143,525 4,487,761 4,190,776 4,401,679 FHLB stock 101,050 101,050 93,584 93,584 Financial liabilities Customer accounts 3,156,500 3,167,470 2,978,031 2,986,062 FHLB advances 1,356,202 1,412,565 1,601,000 1,594,196 Other borrowings 221,819 221,819 303,544 303,544 Interest rate swaps -- -- -- (595)
The following methods and assumptions were used to estimate the fair value of financial instruments: CASH - The carrying amount of these items is a reasonable estimate of their fair value. INVESTMENT SECURITIES - The fair value is based on quoted market prices or dealer estimates. LOANS RECEIVABLE - For certain homogeneous categories of loans, such as fixed and variable residential mortgages, fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. MORTGAGE-BACKED SECURITIES - Estimated fair value for mortgage-backed securities issued by quasi-governmental agencies is based on quoted market prices. The fair value of all other mortgage-backed securities is based on dealer estimates. FHLB STOCK - The fair value is based upon the redemption value of the stock which equates to its carrying value. CUSTOMER ACCOUNTS - The fair value of demand deposits, savings accounts and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities. FHLB ADVANCES AND OTHER BORROWINGS - The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Association for debt with similar remaining maturities. INTEREST RATE SWAPS - The market value for interest rate swaps was determined using the discounted cash flow method. NOTE R PENDING ACCOUNTING CHANGES SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Adoption of SFAS No. 130 is not anticipated to impact the Company's financial results. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued in June 1997 and redefined how operating segments are determined. SFAS No. 131 requires disclosure of certain financial and descriptive information about a company's operating segments. This statement is not anticipated to impact the Company's financial results. SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits," was issued in February 1998 and standardizes the annual disclosure requirements for pensions and other postretirement benefits. This statement will not affect the results of operations or financial position of the Company. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. This statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The impact on the financial statements of adopting SFAS No. 133 has not been determined. 23 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," was issued in October 1998. Prior to issuance of SFAS No. 134, when a mortgage banking company securitized loans held for sale but did not sell the security in the secondary market, the security was classified as trading. SFAS No. 134 requires that the security be classified in accordance with SFAS No. 115 as either trading, available-for-sale or held-to-maturity according to the Company's intent unless the Company has already committed to sell the security before or during the securitization process. The statement is effective for all fiscal years beginning after December 15, 1998. This statement is not expected to have a material impact on the results of operations or financial position of the Company. NOTE S FINANCIAL INFORMATION - WASHINGTON FEDERAL, INC. The following Washington Federal, Inc. (parent company only) financial information should be read in conjunction with the other notes to the Consolidated Financial Statements. STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 1997 - --------------------------------------------------------------------------------------------------- (In thousands) Assets Cash ............................................................. $ 1,786 $ 1,617 Investment in subsidiary ......................................... 767,307 716,332 Dividend receivable .............................................. 10,000 11,000 Other assets ..................................................... -- 725 --------- --------- Total assets ................................................... $ 779,093 $ 729,674 ========= ========= Liabilities Borrowed money ................................................... $ -- $ 1,000 Dividend payable ................................................. 11,833 10,927 Other liabilities ................................................ 88 2 --------- --------- Total liabilities .............................................. 11,921 11,929 --------- --------- Stockholders' equity Common stock, $1.00 par value: 100,000,000 shares authorized; 56,423,961 and 51,137,889 shares issued; 51,446,129 and 47,508,759 shares outstanding ................... 56,424 51,138 Paid-in capital .................................................. 714,700 573,241 Valuation adjustment for available-for-sale securities, net of tax 35,000 30,000 Treasury stock, at cost; 4,977,832 and 3,629,130 shares .......... (92,221) (68,266) Retained earnings ................................................ 53,269 131,632 --------- --------- Total stockholders' equity ..................................... 767,172 717,745 --------- --------- Total liabilities and stockholders' equity ..................... $ 779,093 $ 729,674 ========= =========
STATEMENTS OF OPERATIONS
Year ended September 30, 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) Income Dividends from subsidiary .......................................... $ 67,000 $ 52,000 Expense Borrowings ......................................................... 129 240 Other .............................................................. 235 270 -------- -------- Total expense ...................................................... 364 510 -------- -------- Net income before equity in undistributed net income of subsidiaries 66,636 51,490 Equity in undistributed net income of subsidiaries ................... 45,070 53,375 -------- -------- Income before income taxes ........................................... 111,706 104,865 Income tax benefit ................................................... 130 185 -------- -------- Net income ........................................................... $111,836 $105,050 ======== ========
24 27 STATEMENTS OF CASH FLOWS
Year ended September 30, 1998 1997 - -------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................... $ 111,836 $ 105,050 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed net income of subsidiaries.. (45,070) (53,375) Decrease (increase) in other assets ................ 1,485 (952) Increase (decrease) in other liabilities ........... 992 (5) --------- --------- Net cash provided by operating activities .......... 69,243 50,718 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term borrowings .................... (1,000) (10,000) Issuance of common stock through stock option plan ... 1,762 350 Proceeds from employee stock ownership plan .......... 967 469 Treasury stock (purchased) issued .................... (23,955) 1,370 Dividends ............................................ (46,848) (42,691) --------- --------- Net cash used by financing activities .............. (69,074) (50,502) --------- --------- Increase in cash ................................... 169 216 Cash at beginning of year .......................... 1,617 1,401 --------- --------- Cash at end of year ................................ $ 1,786 $ 1,617 ========= =========
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited interim results of operations by quarter: NOTE T
FIRST SECOND THIRD FOURTH Year ended September 30, 1998 QUARTER QUARTER QUARTER QUARTER - ----------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Interest income ............ $116,232 $114,931 $114,924 $114,517 Interest expense ........... 65,276 62,940 61,878 62,139 -------- -------- -------- -------- Net interest income ........ 50,956 51,991 53,046 52,378 Provision for loan losses... 159 172 224 185 Other operating income ..... 1,893 2,974 3,039 3,126 Other operating expense .... 10,699 11,442 11,526 11,211 -------- -------- -------- -------- Income before income taxes.. 41,991 43,351 44,335 44,108 Income taxes ............... 14,907 15,389 15,883 15,770 -------- -------- -------- -------- Net income ................. $ 27,084 $ 27,962 $ 28,452 $ 28,338 ======== ======== ======== ======== Basic earnings per share ... $ .52 $ .54 $ .54 $ .54 ======== ======== ======== ======== Diluted earnings per share.. $ .51 $ .53 $ .54 $ .54 ======== ======== ======== ======== Return on average assets ... 1.91% 1.99% 2.05% 2.04% ======== ======== ======== ========
First Second Third Fourth Year ended September 30, 1997 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Interest income ............ $108,810 $116,863 $116,281 $117,053 Interest expense ........... 60,981 64,993 65,400 66,073 -------- -------- -------- -------- Net interest income ........ 47,829 51,870 50,881 50,980 Provision for loan losses... 229 184 201 199 Other operating income ..... 964 814 1,426 1,873 Other operating expense .... 10,848 10,994 10,666 9,978 -------- -------- -------- -------- Income before income taxes.. 37,716 41,506 41,440 42,676 Income taxes ............... 13,615 15,100 14,425 15,148 -------- -------- -------- -------- Net income ................. $ 24,101 $ 26,406 $ 27,015 $ 27,528 Basic earnings per share ... $ .48 $ .50 $ .52 $ .53 ======== ======== ======== ======== Diluted earnings per share.. $ .48 $ .50 $ .51 $ .52 ======== ======== ======== ======== Return on average assets ... 1.76% 1.82% 1.89% 1.93% ======== ======== ======== ========
25 28 SELECTED FINANCIAL DATA
Year ended September 30, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Interest income ............ $460,604 $459,007 $404,211 $343,766 $287,577 Interest expense ........... 252,233 257,447 228,745 188,253 121,114 -------- -------- -------- -------- -------- Net interest income ........ 208,371 201,560 175,466 155,513 166,463 Provision for loan losses .. 740 813 3,828 6,245 401 Other income ............... 11,032 5,077 5,917 9,704 8,359 Other expense .............. 44,878 42,486 53,105 35,883 32,034 -------- -------- -------- -------- -------- Income before income taxes 173,785 163,338 124,450 123,089 142,387 Income taxes ............... 61,949 58,288 44,555 44,746 49,600 -------- -------- -------- -------- -------- Net income ............... $111,836 $105,050 $ 79,895 $ 78,343 $ 92,787 ======== ======== ======== ======== ======== Per share data Basic earnings per share . $ 2.14 $ 2.03 $ 1.57 $ 1.49 $ 1.75 Diluted earnings per share $ 2.12 $ 2.01 $ 1.55 $ 1.48 $ 1.74 Cash dividends ........... $ .90 $ .82 $ .74 $ .68 $ .62
September 30, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- (In thousands) Total assets ....................... $5,637,011 $5,719,589 $5,114,978 $4,577,402 $3,830,053 Loans and mortgage-backed securities 5,119,571 5,137,905 4,589,621 4,114,881 3,400,583 Investment securities .............. 234,013 289,750 299,006 256,661 195,165 Customer accounts .................. 3,156,202 2,978,031 2,480,220 2,445,335 2,281,751 FHLB advances ...................... 1,356,500 1,601,000 1,162,000 527,000 310,100 Other borrowings ................... 221,819 303,544 797,549 957,087 624,604 Stockholders' equity ............... 767,172 717,745 577,702 575,929 546,773 Number of Customer accounts ................ 184,832 180,957 160,968 161,295 153,000 Mortgage loans ................... 40,615 41,820 39,570 35,641 32,057 Offices .......................... 106 104 93 87 82
26 29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Washington Federal, Inc. Seattle, Washington We have audited the accompanying consolidated statements of financial condition of Washington Federal, Inc. and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Washington Federal, Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Seattle, Washington October 19, 1998 GENERAL CORPORATE AND STOCKHOLDERS' INFORMATION CORPORATE 425 Pike Street HEADQUARTERS Seattle, Washington 98101 (206) 624-7930 INDEPENDENT Deloitte & Touche, LLP ACCOUNTANTS Seattle, Washington SPECIAL COUNSEL Elias, Matz, Tiernan & Herrick LLP Washington, D.C. TRANSFER AGENT, Stockholder inquiries regarding transfer REGISTRAR AND requirements, cash or stock dividends, lost DIVIDEND certificates, consolidating records, correcting DISBURSING a name or changing an address should be AGENT directed to the transfer agent: ChaseMellon Shareholder Services, L.L.C. Shareholder Relations Department 85 Challenger Road Ridgefield Park, NJ 07660 Telephone: 1-800-356-2017 www.chasemellon.com ANNUAL MEETING The annual meeting of stockholders will be held on January 27, 1999, at 2 p.m. at the Westin Hotel, 1900 Fifth Avenue, Seattle, Washington. FORM 10-K This report is available to stockholders of record upon written request to: Cathy Cooper Vice President Washington Federal, Inc. 425 Pike Street Seattle, Washington 98101 STOCK INFORMATION Washington Federal, Inc. is traded on the NASD National Market. The common stock symbol is WFSL. At September 30, 1998, there were approximately 3,065 shareholders of record.
Stock Prices ------------ Quarter Ended High Low Dividends - ------------------------------------------------------------------------------------- December 31, 1996 23 1/8 19 20 March 31, 1997 25 5/8 20 5/8 20 June 30, 1997 25 3/4 20 3/8 21 September 30, 1997 27 3/8 22 7/8 21 December 31, 1997 30 1/4 26 3/4 22 March 31, 1998 29 1/4 26 5/16 22 June 30, 1998 30 1/8 26 3/4 23 September 30, 1998 28 1/8 22 1/4 23
All prices shown have been adjusted for stock splits. MARKET MAKERS: Fox-Pitt, Kelton Inc. Herzog, Heine, Geduld, Inc. Instinut Corporation Keefe, Bruyette & Woods, Inc. Knight Securities L.P. Lehman Brothers, Inc. Mayer & Schweitzer, Inc. Merrill Lynch, Pierce, Fenner & Smith Inc. Nationsbanc Montgomery Securities Ragen MacKenzie, Inc. Sherwood Securities Corp. Salomon Smith Barney, Inc. Troster Singer Corp. 27 30 DIRECTORS, OFFICERS AND OFFICES CORPORATE HEADQUARTERS 425 Pike Street Seattle, WA 98101 (206) 624-7930 BOARD OF DIRECTORS GUY C. PINKERTON Chairman, President and Chief Executive Officer JOHN F. CLEARMAN Chief Financial Officer of Milliman & Robertson, Inc. H. DENNIS HALVORSON Retired, Former Chief Executive Officer, United Bank KERMIT O. HANSON Dean Emeritus University of Washington Graduate School of Business Administration W. ALDEN HARRIS Former Executive Vice President ANNA C. JOHNSON Senior Partner Scan East West Travel RICHARD C. REED Management Consultant Altman Weil, Inc. CHARLES R. RICHMOND Executive Vice President and Secretary DIRECTOR EMERITUS HAROLD C. KEAN E.W. MERSEREAU, JR. EXECUTIVE MANAGEMENT COMMITTEE WILLIAM A. CASSELS Executive Vice President LAWRENCE D. CIERPISZEWSKI Executive Vice President GUY C. PINKERTON Chairman, President and Chief Executive Officer CHARLES R. RICHMOND Executive Vice President and Secretary RONALD L. SAPER Executive Vice President and Chief Financial Officer ROY M. WHITEHEAD Executive Vice President DEPARTMENT OFFICERS ACCOUNTING KEITH D. TAYLOR C.P.A. Senior Vice President and Treasurer JOSEPH R. RUNTE Vice President and Controller MARTINE ANDREWS Assistant Manager KAREN MEFFORD ADMINISTRATION DEANNA RUSSELL APPRAISAL EILEEN E. HIRAMI Vice President JAMES N. IBABAO CONSTRUCTION AND LAND LOANS LORELEI G. STOVES Senior Vice President DATA PROCESSING JIM BLACK RIC HEATON DEPOSIT OPERATIONS BEN A. WHITMARSH Vice President CAROLYN J. LOBDELL Assistant Vice President and Assistant Manager MARTY DAVIES FACILITIES KELLY PERNELA Assistant Vice President HUMAN RESOURCES ARLINE FONDA Vice President KAREN CARLSON BOBBY FASSIO INTERNAL AUDIT BARBARA A. MURPHY Vice President LOAN OPERATIONS MICHAEL BUSH Vice President LEANN BURKE LOAN SERVICING TERRY O. PERMENTER Vice President VIVIAN L. YORITA Vice President and Assistant Manager MIKE CULALA LOIS L. KRISTJANSSON MARY TOMLINSON LEGAL, REGULATORY AND COMPLIANCE PAUL TYLER Vice President MANUALS/TRAINING LINDA NICHOLL Assistant Vice President MARKETING AND INVESTOR RELATIONS CATHY COOPER Vice President MULTI-FAMILY LOANS LANG HADLEY Vice President MARY BAUMEIER PERMANENT LOAN PRODUCTION JANE A. NOGLE Senior Vice President COLLEEN WELLS Assistant Vice President and Divisional Loan Brokerage Manager CHRISTA TULLY Assistant Divisional Loan Brokerage Manager QUALITY CONTROL NANCY C. ELLWEIN Vice President SAVINGS ADMINISTRATION CYNTHIA L. ARNOLD Vice President SPECIAL CREDITS JACK B. JACOBSON Vice President GEORGE W. CORLEY Vice President SUBSIDIARIES FIRST INSURANCE AGENCY, INC. 406 South Second Street Mount Vernon, WA 98273 1-800-562-2555 (360) 336-9630 ANN BRITTAIN Vice President WASHINGTON SERVICES, INC. 6125 South Morgan Road Freeland, WA 98249 SOUTHERN WASHINGTON 29 OFFICE LOCATIONS REGION MANAGERS JAMES E. CADY Vice President DALE B. CULVER Vice President E. CRAIG WILSON Vice President NORTHERN WASHINGTON 10 OFFICE LOCATIONS DIVISION MANAGER DOUGLAS A. ROWELL Senior Vice President WESTERN IDAHO 15 OFFICE LOCATIONS DIVISION MANAGER ROBERT P. LINK Senior Vice President EASTERN IDAHO 4 OFFICE LOCATIONS REGION MANAGER LARRY WADSWORTH Vice President SOUTHERN OREGON 16 OFFICE LOCATIONS DIVISION MANAGER NATE LOWE Senior Vice President NORTHERN OREGON 7 OFFICE LOCATIONS REGION MANAGER WILLIAM V. READ Vice President UTAH 11 OFFICE LOCATIONS DIVISION MANAGER RICHARD FISHER Senior Vice President PHOENIX, ARIZONA 6 OFFICE LOCATIONS DIVISION MANAGER RON SHERIDAN Senior Vice President TUCSON, ARIZONA 8 OFFICE LOCATIONS DIVISION MANAGER PATTY MCCARTHY-HOWARD Senior Vice President 28 31 [LOGO] WASHINGTON FEDERAL SAVINGS 425 Pike Street, Seattle, WA 98101 EX-23 3 CONSENT OF INDEPENDENT PULBIC ACCOUNTANTS 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-89082 and No. 33-97900 of Washington Federal, Inc. on forms S-8 or our report dated October 19, 1998, incorporated by reference in the Annual Report on Form 10-K of Washington Federal, Inc. for the year ended September 30, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP December 24, 1998 Seattle, Washington EX-27 4 FINANCIAL DATA SCHEDULE
9 12-MOS SEP-30-1998 DEC-31-1998 22,215 0 0 0 764,188 445,871 464,799 4,143,525 23,854 5,637,011 3,156,202 778,319 135,318 800,000 0 0 56,424 710,748 5,637,011 364,801 95,803 0 460,604 156,099 252,233 208,371 740 5,560 44,878 173,785 111,836 0 0 111,836 2.14 2.12 7.96 18,347 0 4,580 0 24,623 1,609 100 23,854 16,743 0 7,111
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