10-Q 1 june2003q.txt JUNE 30 2003 FORM 10Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number 0-25454 WASHINGTON FEDERAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Washington 91-1661606 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
425 Pike Street Seattle, Washington 98101 ----------------------------------------------------- (Address of principal executive offices and zip code) (206) 624-7930 ---------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ___ APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. TITLE OF CLASS: AT AUGUST 1, 2003 Common stock, $1.00 par value 69,710,202 -1- 2 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I Item 1. Financial Statements The Consolidated Financial Statements of Washington Federal,Inc. and Subsidiaries filed as a part of the report are as follows: Consolidated Statements of Financial Condition as of June 30, 2003 and September 30, 2002 ............................... Page 3 Consolidated Statements of Operations for the quarter and nine months ended June 30, 2003 and 2002 .............................. Page 4 Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and 2002 .................................. Page 5 Notes to Consolidated Financial Statements ................................ Page 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... Page 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................... Page 14 Item 4. Controls and Procedures ......................................................... Page 14 PART II Item 1. Legal Proceedings ............................................................ Page 15 Item 2. Changes in Securities and Use of Proceeds..................................... Page 15 Item 3. Defaults Upon Senior Securities .............................................. Page 15 Item 4. Submission of Matters to a Vote of Security Holders .......................... Page 15 Item 5. Other Information ............................................................ Page 15 Item 6. Exhibits and Reports on Form 8-K ............................................. Page 15 Signatures ................................................................... Page 17
-2- 3 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
June 30, 2003 September 30, 2002 -------------- ------------------ (In thousands, except per share data) ASSETS Cash and cash equivalents ......................................... $ 1,387,791 $ 975,153 Available-for-sale securities, including encumbered securities of $117,477.......................................... 754,071 918,776 Held-to-maturity securities, including encumbered securities of $2,125 ......................................... 184,627 168,925 Securitized assets subject to repurchase, net...................... 305,042 755,961 Loans receivable, net ............................................. 4,332,818 4,292,003 Interest receivable ............................................... 29,103 39,503 Premises and equipment, net ....................................... 59,306 55,119 Real estate held for sale ......................................... 15,337 17,587 FHLB stock ........................................................ 138,602 132,320 Costs in excess of net assets acquired ............................ 35,703 35,703 Other assets ...................................................... 370 1,391 ----------- ----------- $ 7,242,770 $ 7,392,441 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Customer accounts Savings and demand accounts ................................... $ 4,285,458 $ 4,452,250 Repurchase agreements with customers .......................... 69,225 69,672 ----------- ----------- 4,354,683 4,521,922 FHLB advances ..................................................... 1,650,000 1,650,000 Other borrowings................................................... 100,000 100,000 Advance payments by borrowers for taxes and insurance ............. 12,564 22,704 Federal and state income taxes .................................... 74,050 84,235 Accrued expenses and other liabilities ............................ 47,514 52,862 ----------- ----------- 6,238,811 6,431,723 STOCKHOLDERS' EQUITY Common stock, $1.00 par value, 100,000,000 shares authorized; 84,060,964 and 83,833,244 shares issued; and 69,648,417 and 69,894,902 shares outstanding ............................ 84,059 76,212 Paid-in capital ................................................... 1,051,489 968,858 Accumulated other comprehensive income, net of taxes .............. 39,000 56,000 Treasury stock, at cost; 14,412,547 and 13,938,342 shares ......... (207,799) (198,279) Retained earnings ................................................. 37,210 57,927 ----------- ----------- 1,003,959 960,718 ----------- ----------- $ 7,242,770 $ 7,392,441 =========== =========== CONSOLIDATED FINANCIAL HIGHLIGHTS Stockholders' equity per share .................................... $ 14.42 $ 13.75 Stockholders' equity to total assets .............................. 13.86% 13.00% Weighted average rates at period end: Loans and mortgage-backed securities* ........................... 6.68% 7.26% Investment securities** ......................................... 2.00 2.82 Combined on loans, mortgage-backed securities and investment securities ....................................... 5.49 6.53 Customer accounts ............................................... 2.19 2.94 Borrowings ...................................................... 5.03 5.03 Combined cost of customer accounts and borrowings ............... 3.00 3.52 Interest rate spread ............................................ 2.49 3.01
* Includes securitized assets subject to repurchase ** Includes municipal bonds at tax-equivalent yields and cash equivalents SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -3- 4 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended June 30, Nine Months Ended June 30, ------------------------- -------------------------- 2003 2002 2003 2002 -------- -------- --------- --------- (In thousands, except per share data) INTEREST INCOME Loans and securitized assets subject to repurchase ........ $ 86,650 $100,274 $272,972 $309,405 Mortgage-backed securities ................................. 15,355 18,355 49,760 57,621 Investment securities and cash equivalents.................. 8,580 5,506 25,362 16,093 -------- -------- -------- -------- 110,585 124,135 348,094 383,119 INTEREST EXPENSE Customer accounts .......................................... 24,731 35,408 83,640 117,931 FHLB advances and other borrowings ......................... 22,186 20,466 66,544 61,575 -------- -------- -------- -------- 46,917 55,874 150,184 179,506 -------- -------- -------- -------- NET INTEREST INCOME ........................................ 63,668 68,261 197,910 203,613 Provision for loan losses .................................. 100 1,500 1,500 5,500 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ........ 63,568 66,761 196,410 198,113 OTHER INCOME Gains on sale of securities, net ........................... 489 - 489 765 Gains on sale of real estate ............................... - - 3,382 - OTHER ...................................................... 2,831 1,719 7,246 5,485 -------- -------- -------- -------- 3,320 1,719 11,117 6,250 OTHER EXPENSE Compensation and fringe benefits ........................... 7,327 8,938 23,299 26,192 Occupancy .................................................. 1,316 1,197 3,920 3,490 Other ...................................................... 2,391 3,010 8,452 9,491 -------- -------- -------- -------- 11,034 13,145 35,671 39,173 Gain (loss) on real estate acquired through foreclosure, net ...................................... 162 83 (278) 108 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES ................................. 56,016 55,418 171,578 165,298 Income taxes ............................................... 19,605 19,535 60,345 58,271 -------- -------- -------- -------- NET INCOME ................................................. $ 36,411 $ 35,883 $111,233 $107,027 ======== ======== ======== ======== PER SHARE DATA Basic earnings ............................................. $ .52 $ .51 $ 1.60 $ 1.53 Diluted earnings ........................................... .52 .51 1.59 1.52 Cash dividends ............................................. .22 .21 .64 .61 Weighted average number of shares outstanding, including dilutive stock options ......................... 70,147,652 70,671,762 70,106,643 70,535,870 Return on average assets ................................... 2.02% 2.04% 2.04% 2.04%
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -4- 5 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, ---------------------------- 2003 2002 --------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income ............................................................. $ 111,233 $ 107,027 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of fees, discounts, and premiums, net ................... (11,643) (4,096) Depreciation ......................................................... 2,605 2,827 Provision for loan losses ............................................ 1,500 5,500 Gain on investment securities and real estate held for sale, net ..... (211) (873) Decrease in accrued interest receivable .............................. 10,400 7,670 Decrease in income taxes payable ..................................... (2,185) (13,053) FHLB stock dividends ................................................. (6,282) (5,988) Decrease in other assets ............................................. 1,021 172 Increase (decrease) in accrued expenses and other liabilities ........ (5,348) 859 --------- --------- Net cash provided by operating activities .............................. 101,090 100,045 CASH FLOWS FROM INVESTING ACTIVITIES Loans originated Loans on existing property ........................................... (727,847) (648,302) Construction loans ................................................... (361,255) (264,657) Land loans ........................................................... (117,547) (68,908) Loans refinanced ..................................................... (92,642) (70,567) --------- --------- (1,299,291) (1,052,434) Savings account loans originated ....................................... (1,284) (4,725) Loan principal repayments .............................................. 1,931,022 1,364,813 Increase (decrease) in undisbursed loans in process .................... 31,834 (11,395) Loans purchased ........................................................ (264,327) (58,647) Available-for-sale securities purchased................................. (269,995) (180,683) Principal payments and maturities of available-for-sale securities ..... 372,863 311,971 Available-for-sale securities sold...................................... 50,000 10,000 Held-to-maturity securities purchased .................................. (100,000) - Principal payments and maturities of held-to-maturity securities ....... 84,909 66,875 Proceeds from sales of real estate held for sale ....................... 10,979 16,539 Premises and equipment purchased, net .................................. (6,792) (3,899) --------- --------- Net cash provided by investing activities .............................. 539,918 458,415 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in customer accounts ........................... (167,239) 172,197 Net decrease in borrowings ............................................. - (117,500) Proceeds from exercise of common stock options ......................... 2,640 2,978 Proceeds from employee stock ownership plan ............................ 772 294 Dividends paid ......................................................... (44,369) (42,417) Treasury stock purchased ............................................... (10,034) (6,453) Decrease in advance payments by borrowers for taxes and insurance ...... (10,140) (10,401) --------- --------- Net cash used by financing activities .................................. (228,370) (1,302) INCREASE IN CASH AND CASH EQUIVALENTS................................... 412,638 557,158 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 975,153 30,331 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $1,387,791 $ 587,489 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION NONCASH INVESTING ACTIVITIES Real estate acquired through foreclosure ............................. $ 9,007 $ 16,654 CASH PAID DURING THE PERIOD FOR Interest ............................................................. 151,189 184,025 Income taxes ......................................................... 63,160 71,767
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -5- 6 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTER AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002 (Unaudited) NOTE A - Basis of Presentation The consolidated interim financial statements included in this report have been prepared by Washington Federal, Inc. ("Company") without audit. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 2002 Consolidated Statement of Financial Condition was derived from audited financial statements. The information included in this Form 10-Q should be read in conjunction with Washington Federal, Inc.'s 2002 Annual Report on Form 10-K to the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year. NOTE B - Acquisitions On May 20, 2003 the Company announced the signing of a definitive merger agreement. The agreement calls for United Savings, a Washington-chartered savings and loan association, to be acquired by the Company's wholly owned subsidiary, Washington Federal Savings and Loan Association. Under the terms of the merger agreement, shareholders of United Savings will receive aggregate consideration of $65.0 million for the shares of common stock outstanding immediately prior to the effective time of the merger. United Savings shareholders may elect to be paid in either common stock or cash, subject to certain procedures designed to ensure that not more than 50%, nor less than 45%, of the consideration will be in the form of common stock. The merger is expected to close in the third calender quarter of 2003, pending the receipt of all requisite regulatory approvals and the approval of United Savings' shareholders. Upon closing the transaction, current United Savings President & CEO Derek L. Chinn will be appointed to the Boards of Directors of the Company and its subsidiary, Washington Federal Savings. United Savings, headquartered in Seattle, Washington, had total assets of $321 million, total deposits of $271 million and total stockholders' equity of $43 million as of June 30, 2003. NOTE C - Dividends Dividends per share increased to 22 cents for the quarter ended June 30, 2003 compared with 21 cents for the same period one year ago. On July 18, 2003 the Company paid its 82nd consecutive quarterly cash dividend. On January 21, 2003, the Board of Directors of the Company declared an eleven-for-ten stock split in the form of a 10% stock dividend to stockholders of record on February 7, 2003, which was distributed on February 21, 2003. All previously reported share and per share amounts have been adjusted accordingly. -6- 7 NOTE D - Comprehensive Income The Company's comprehensive income includes all items which comprise net income plus the unrealized holding gains (losses) on available-for-sale securities and forward commitments to purchase or sell mortgage-backed securities. Total comprehensive income for the quarters ended June 30, 2003 and June 30, 2002 totaled $30,411,000 and $48,883,000, respectively. Total comprehensive income for the nine months ended June 30, 2003 and June 30, 2002 totaled $94,233,000 and $106,448,000, respectively. The difference between the Company's net income and total comprehensive income equals the change in the net unrealized gain or loss, net of tax, on securities available-for-sale and forward commitments to purchase or sell mortgage-backed securities during the applicable periods. Note E - Allowance for Losses on Loans and Securitized Assets Subject to Repurchase The following table summarizes the activity in the allowance for loan losses (including securitized assets subject to repurchase) for the three and nine months ended June 30, 2003 and 2002:
Quarter Ended June 30, Nine Months Ended June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands) Balance at beginning of period...... $ 24,615 $ 22,474 $ 23,912 $ 19,683 Provision for loan losses........... 100 1,500 1,500 5,500 Charge-offs......................... (219) (1,249) (916) (2,825) Recoveries.......................... 20 155 20 522 --------- ---------- --------- ---------- Balance at end of period............ $ 24,516 $ 22,880 $ 24,516 $ 22,880 ========= ========== ========= ==========
-7- 8 Note F - New Accounting Pronouncements In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock options using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The following table summarizes 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:
Quarter Ended June 30, Nine Months Ended June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands, except per share data) Net income, as reported ............ $ 36,411 $ 35,883 $ 111,233 $ 107,027 Deduct: Total stock option employee compensation expense determined under fair value based method for all awards, net of related tax effects .......................... (277) (287) (832) (862) --------- ---------- --------- ---------- Pro forma net income ............... $ 36,134 $ 35,596 $ 110,401 $ 106,165 ========= ========== ========= ========== Earnings per share Basic - as reported .......... $ 0.52 $ 0.51 $ 1.60 $ 1.53 Basic - pro forma ............ 0.52 0.51 1.59 1.52 Diluted - as reported ........ 0.52 0.51 1.59 1.52 Diluted - pro forma .......... 0.52 0.50 1.57 1.51
-8- 9 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Washington Federal, Inc. ("Company") is a savings and loan holding company. The Company's primary operating subsidiary is Washington Federal Savings. INTEREST RATE RISK The Company assumes a high level of interest rate risk as a result of its policy to originate fixed-rate single family home loans, which are longer-term in nature than the short-term characteristics of its liabilities of customer accounts and borrowed money. At June 30, 2003, the Company had a negative one-year maturity gap of approximately 15% of total assets, compared to a 33% negative one-year maturity gap as of June 30, 2002. The decrease in interest rate risk is the result of the Company building its short-term assets. The interest rate spread decreased to 2.49% at June 30, 2003 from 3.01% at September 30, 2002. The decrease was primarily due to the continued build up of cash and cash equivalents (totaling $1.4 billion) invested at overnight rates (1.00%). During this phase of the interest rate cycle (historically low rates for 30 year fixed-rate loans) the Company chose to position its balance sheet for increasing rates in the future by building cash and reducing the amount of loans and mortgage-backed investments. As of June 30, 2003, the Company had accumulated $1,387,791,000 in cash and cash equivalents, an increase of $412,638,000 from September 30,2002. This liquidity, which represents 19% of total assets, provides management with flexibility in managing interest rate risk going forward. LIQUIDITY AND CAPITAL RESOURCES The Company's net worth at June 30, 2003 was $1,003,959,000, or 13.86% of total assets. This was an increase of $43,241,000 from September 30, 2002 when net worth was $960,718,000, or 13.00% of total assets. The increase in the Company's net worth included $111,233,000 from net income. Net worth was reduced by $44,369,000 of cash dividends paid and a $17,000,000 decrease in accumulated other comprehensive income. During the nine months ended June 30, 2003, 510,070 shares were repurchased under the Company's ongoing common stock repurchase program at an average price of $19.67, which left a total of 2.81 million shares currently authorized by the Board of Directors as available for repurchase. The Company's percentage of net worth to total assets is among the highest in the nation and is over three times the minimum required under Office of Thrift Supervision regulations. Management believes this strong net worth position will help protect earnings against interest rate risk and enable it to compete more effectively for controlled growth through acquisitions, de novo expansion and increased customer deposits. The Company's cash and investment securities amounted to $1,693,291,000, a $600,721,000 increase from September 30, 2002. This increase is the result of higher than normal repayment levels on loans and mortgage- backed securities during the first nine months of fiscal 2003, stemming from record low mortgage rates. -9- 10 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management has elected to keep these funds invested short term to take advantage of expected rising interest rates in the future (see Interest Rate Risk above). CHANGES IN FINANCIAL CONDITION Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $164,705,000 or 17.9% during the nine months ended June 30, 2003, due to unusually high prepayments, resulting from reduced interest rates on mortgage loans and the underlying collateral for mortgage-backed securities. The Company purchased $269,995,000 and $100,000,000 of available-for-sale and held-to-maturity investment securities, respectively, during the nine months ended June 30, 2003. As of June 30, 2003, the Company had unrealized gains on available-for-sale securities of $39,000,000, net of tax, which were recorded as part of stockholders' equity. Loans receivable and securitized assets subject to repurchase: During the nine months ended June 30, 2003, the combined total of loans receivable and securitized assets subject to repurchase decreased 8.1% to $4,637,860,000 compared to $5,047,964,000 at September 30,2002. The decrease resulted primarily from Management's unwillingness to aggressively compete during this period of increased refinancing activity caused by historically low home mortgage rates. Permanent single family residential loans as a percentage of total loans decreased to 73.7% at June 30, 2003 compared to 77.6% at Septemeber 30, 2002. The aggregate of construction and land loans as a percentage of total loans increased to 16.8% at June 30, 2003 compared to 14.1% at September 30, 2002. Non-performing assets: Non-performing assets decreased 1.0% during the nine months ended June 30, 2003 to $33,522,000 from $33,876,000 at September 30, 2002. Costs in excess of net assets acquired: Costs in excess of fair value of net assets acquired in business combinations are reviewed at least annually to determine that no impairment of the assets has occured; there was no impairment at June 30, 2003. The Company will continue to evaluate these assets and, if appropriate, provide for any diminution in value. Customer accounts: Customer accounts decreased $167,239,000, or 3.7%, to $4,354,683,000 at June 30, 2003 compared with $4,521,922,000 at September 30, 2002, as a result of the low interest rate environment for deposits. FHLB advances and other borrowings: Total borrowings remained unchanged at $1,750,000,000 during the nine months ended June 30, 2003. -10- 11 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Income: The quarter ended June 30, 2003 produced net income of $36,411,000 compared to $35,883,000 for the same quarter one year ago, a 1.5% increase. Net income for the nine months ended June 30, 2003 was $111,233,000 compared to $107,027,000 for the nine months ended June 30, 2002, a 3.9% increase. Net income for the three and nine months ended June 30, 2003 increased primarily as a result of reduced operating expenses and increased other income, which offset the decrease in net interest income. Net Interest Income: The largest component of the Company's earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Net interest income is impacted primarily by two factors; first, the volume of earning assets and liabilities and second, the rate earned on those assets or the rate paid on those liabilities. The following table sets forth certain information explaining changes in interest income and interest expense for the periods indicated compared to the same period one year ago. 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) and (2) changes in rate (changes in rate multiplied by old 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. -11- 12 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Rate / Volume Analysis:
Quarter Ended Nine Months Ended June 30,2003 June 30, 2003 Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- -------- (in thousands) Interest Income: Loan Portfolio $(8,905) $(4,719) $ (13,624) $(26,745) $(9,688) $ (36,433) Mortgage-backed securities (7,322) 4,322 (3,000) (17,904) 10,043 (7,861) Investment securities and cash equivalents (1) 5,406 (2,332) 3,074 18,901 (9,632) 9,269 ------- ------- ------- ------- ------- -------- All interest-earning assets (10,821) (2,729) (13,550) (25,748) (9,277) (35,025) Interest Expense: Customer Accounts (670) (10,007) (10,677) 532 (34,823) (34,291) FHLB advances and other borrowings 2,530 (810) 1,720 7,280 (2,311) 4,969 ------- ------- ------- ------- ------- ------- All interest-bearing libilities 1,860 (10,817) (8,957) 7,812 (37,134) (29,322) Change in net interest income $(12,681) $ 8,088 $ (4,593) $(33,560) $27,857 $(5,703) ======= ======== ======== ======= ======= =======
(1) Includes dividends on FHLB stock -12- 13 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest income for the nine month period and quarter ended June 30, 2003 benefited from additional accretion of discounts on mortgage-back securities and deferred loan fees of approximately $18,000,000 and $7,000,000, respectively, caused from the record prepayment activity experienced during the periods. If prepayments return to historic levels, this additional accretion will subside. The Company provided $100,000 for loan losses during the quarter, compared to $1,500,000 for the same quarter last year. For the nine months ended June 30, 2003, the total provision was $1,500,000, compared to $5,500,000 for the same period one year ago. This decrease was due to the continued decline in the amount of the loan portfolio, combined with strong asset quality indicators. Non-performing assets amounted to $33,522,000 or .46% of total assets at June 30, 2003 compared to $37,141,000 or .52% of total assets one year ago. Delinquencies on permanent loans have decreased from $28,000,000 at June 30, 2002 to $23,700,000 at June 30, 2003. These factors, with others, resulted in a decrease in net charge-offs for the quarter ended June 30, 2003 by $895,000 over the comparable period in fiscal 2002. However, weak economic conditions, including high unemployment, continue in the Company's primary markets. Other Income: The quarter ended June 30, 2003 produced total other income of $3,320,000 compared to $1,719,000 for the same quarter one year ago, a 93.1% increase. Total other income for the nine months ended June 30, 2003 was $11,117,000 compared to $6,250,000 for the nine months ended June 30, 2002, a 77.9% increase. Total other income for the quarter and nine months ended June 30, 2003 increased primarily as a result of fee income related to the refinancing of mortgage loans and the $3,382,000 gain on sale of real estate. There was a $489,000 gain on the sale of an available-for-sale security in the quarter ended June 30, 2003. Other Expense: The quarter ended June 30, 2003 produced total other expense of $11,034,000 compared to $13,145,000 for the same quarter one year ago, a 16.1% decrease. Total other expense for the nine months ended June 30, 2003 was $35,671,000 compared to $39,173,000 for the nine months ended June 30, 2002, an 8.9% decrease. Total other expense for the quarter and nine months ended June 30, 2003 equaled .61% and .66%, respectively, of average assets, compared to .75% for the same periods one year ago. The number of staff, including part-time employees on a full-time equivalent basis, was 718 at June 30, 2003 and 741 at June 30, 2002. Taxes: Income taxes increased $70,000 or 0.4% and $2,074,000 or 3.6% for the quarter and nine month periods ended June 30, 2003, respectively, when compared to the same periods one year ago, due to a higher taxable income base. The effective tax rate was 35.00% and 35.25% for the quarters ended June 30, 2003 and June 30, 2002, respectively. The decrease in the effective tax rate in the current quarter was the result of a tax-free exchange of property. -13- 14 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk Management believes that there has been no material changes in the Company's quantitative and qualitative information about market risk since September 30, 2002. For a complete discussion of the Company's quantitative and qualitative market risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended September 30, 2002. Item 4. Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Vice President Finance and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-14. Based upon that evaluation, the Company's President and Chief Executive Officer along with the Company's Vice President Finance and principal financial officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission ("SEC") filings. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect these controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company's management, including its President and Chief Executive Officer and Vice President Finance and principal financial officer, as appropriate, to allow timely decisions and regarding required disclosure. -14- 15 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Part II - Other Information Item 1. Legal Proceedings From time to time the Company or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company's financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Section 302 certification by the Chief Executive Officer 31.2 Section 302 certification by the principal financial and accounting officer 32 Section 906 Certification by the Chief Executive Officer and the principal financial and accounting officer (b) Report on Form 8-K 1. Report filed April 17, 2003. Item included: Item 9. Regulation FD Disclosure. The report stated that the Company announced by press release its earnings for the quarter ended March 31, 2003. 2. Report filed May 1, 2003. Item included: Item 9. Regulation FD Disclosure. The report stated that the Company announced by press release an investor presentation on May 7, 2003. -15- 16 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES Part II - Other Information 3. Report filed May 20, 2003. Item included: Item 5. Other Events. The report stated that the Company announced by press release the signing of a merger agreement with United Savings and Loan Bank. 4. Report filed June 24, 2003. Item inclued: Item 9. Regulation FD Disclosure. The report stated that the Company announced by press release a cash dividend of 22 cents payable on July 18, 2003 to common stockholders of record on July 7, 2003. -16- 17 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements 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. /s/ Roy M. Whitehead August 13, 2003 -------------------------------------- ROY M. WHITEHEAD Vice Chairman, President and Chief Executive Officer /s/ Brent J. Beardall August 13, 2003 -------------------------------------- BRENT J. BEARDALL Vice President Finance and Controller (principal financial and accounting officer) -17-