1
[WASHINGTON FEDERAL SAVINGS LOGO]
WASHINGTON FEDERAL, INC.
425 Pike Street, Seattle, WA 98101
Bowne of Seattle - Phone (206) 223-0725 - FAX (206) 623-3613
BPX/ V25539 - Control 3 - Proof 1 - 12/16/97 - RUSH
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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 104 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 its 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 Company. 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 Company acquired the deposits
of First Western Savings, doing business in Oregon as Metropolitan Savings, in
Eugene and Portland, Oregon.
In 1992, the Company changed the name of its Oregon division branches
from Freedom Federal Savings to Washington Federal Savings and shortened its
corporate name to Washington Federal Savings.
In 1993, the Company purchased First Federal Savings Bank of Salt Lake
City, Utah adding ten new branches in that state. Then, during 1994, the Company
expanded to Arizona and began operating five branch offices in Tucson.
In 1995, the Company purchased West Coast Mutual Savings Bank with the
one branch office in Centralia, Washington. The Company sold the Burley, Idaho
branch office and opened three new offices in Washington, two more in Tucson and
one each in Utah and in Oregon.
In 1996, the Company 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 Company opened four new offices, one each in Portland,
Oregon, and Tucson, Arizona and two in Phoenix, Arizona. The Company also closed
a branch office in Idaho Falls, consolidating the deposits into the main Idaho
Falls office.
The Company has a wholly-owned subsidiary, First Insurance Agency,
Inc., which provides general insurance to the public.
The Company obtains 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
into 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.
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FINANCIAL HIGHLIGHTS
September 30, 1997 1996 % Change
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(In thousands, except per share data)
Assets ......................................................................... $5,719,589 $5,114,978 + 12%
Investment securities .......................................................... 289,749 299,006 - 3
Loans receivable ............................................................... 4,190,776 3,723,016 + 13
Mortgage-backed securities ..................................................... 947,129 866,605 + 9
Customer accounts .............................................................. 2,978,031 2,480,220 + 20
Federal Home Loan Bank advances and other borrowings ........................... 1,904,544 1,959,549 - 3
Stockholders' equity ........................................................... 717,745 577,702 + 24
Net income ..................................................................... 105,050 79,895 + 31
Net income per share ........................................................... 2.21 1.71 + 29
Dividends per share ............................................................ .90 .82 + 10
Stockholders' equity per share ................................................. 15.11 13.12 + 15
Shares outstanding ............................................................. 47,509 40,695 + 17
Return on average stockholders' equity ......................................... 16.50% 13.73% + 20
Return on average assets ....................................................... 1.86% 1.63% + 14
Return on average stockholders' equity, excluding Savings
Association Insurance Fund ("SAIF") special assessment in 1996 .............. 16.50% 15.37% + 7
Return on average assets, excluding SAIF special assessment in 1996 ............ 1.86% 1.82% + 2
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TOTAL ASSETS
Dollars in Millions
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(At September 30)
1977 421
1982 665
1987 1,860
1992 2,792
1997 5,720
STOCKHOLDERS' EQUITY
Dollars in Millions
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(At September 30)
1977 32
1982 46
1987 196
1992 424
1997 718
NET INCOME PER SHARE
(Before SAIF special assessment in 1996)
$
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2.25
1993 1.87
1994 1.92
1995 1.63
1996 1.92
1997 2.21
CASH DIVIDENDS PER SHARE
$
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1.00
1993 0.62
1994 0.68
1995 0.75
1996 0.82
1997 0.9
RETURN ON AVERAGE EQUITY
(Before SAIF special assessment in 1996)
Annualized %
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21.0
1993 20.39
1994 18.19
1995 13.99
1996 15.37
1997 16.5
PRIMARY INTEREST SPREAD
End of Quarter %
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Fiscal 1995 Fiscal 1996 Fiscal 1997
Dec 31 3.1 2.55 2.88
Mar 31 2.79 2.78 2.88
Jun 30 2.6 2.9 2.82
Sep 30 2.57 2.95 2.83
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TO OUR STOCKHOLDERS
Our fiscal year ended September 30, 1997 was another record year as we
surpassed $100 million in earnings for the first time in our history. Since
becoming a public company, this was the thirteenth time in the past fourteen
years that we have reported year-over-year earnings per share gains. We are
quite proud of this achievement.
For the year, earnings were $105,050,000 or $2.21 per share compared to
the $89,436,000 or $1.92 per share for the prior year, a 15% per share increase.
Prior year amounts exclude the one-time after-tax charge of $9,541,000, or $.21
per share, to recapitalize the Savings Association Insurance Fund.
This year produced a return on average assets of 1.86% and on average
stockholders' equity of 16.50%. As of September 30, 1997, Washington Federal's
net worth increased to $718 million or 12.5% of total assets compared to $578
million or 11.3% of total assets at the beginning of the fiscal year. Customer
funds increased 20% during the year to $2.98 billion and total assets increased
12% to $5.72 billion. Washington Federal's earnings and capital ratios continue
near the top in the nation for all types of financial institutions.
This record performance was achieved in spite of a decrease in our net
interest spread to 2.83% from 2.95% at the beginning of the fiscal year. The
decrease was primarily a result of the Federal Reserve increase in short-term
rates of 1/4% in March of 1997.
Our expense ratio for the year was .79% of average assets and our
efficiency ratio (total operating expense divided by net interest income plus
other income) averaged 18.9%. Both of these figures are less than one-half the
industry average.
During the latter part of our fiscal year, we took advantage of gains
realized on the sale of some of our securities and real estate owned in order to
reduce borrowings and increase our capital ratio to prepare Washington Federal
for expansion opportunities out ahead.
This year, we closed $1.089 billion in residential loans, down from our
fiscal 1996 record production of $1.556 billion. This was partially by design as
we placed more emphasis on our branch lending program and slowed our wholesale
mortgage brokerage operation. We continue to place emphasis on developing our
branch lending capabilities. In this regard, we would appreciate referrals of
friends or acquaintances you may have that need real estate mortgage financing
in our five-state service areas. We also negotiated some favorable sales of
non-performing commercial properties acquired in our mergers and have reduced
non-performing assets to a low .54% of total assets.
Our merger with Metropolitan Bancorp closed on November 29, 1996 and
their operation was successfully integrated into the Washington Federal system.
In connection with this transition, we sold $110 million of the $200 million
derivative portfolio we acquired. This merger added eight more offices to our
Puget Sound branch system. We also opened offices in Portland, Oregon; Tucson,
Arizona; two locations in Phoenix, Arizona and closed one of our offices in
Idaho Falls, Idaho. We now have 104 offices with 39 in Washington, 19 in Idaho,
23 in Oregon, 11 in Utah and 12 in Arizona.
During the year we distributed $42.7 million in cash dividends, or $.90
per share, and declared a 10% stock dividend to stockholders of record on
February 7, 1997. This was the thirteenth stock dividend we have distributed in
the last fifteen years. We also increased the cash dividend twice during the
fiscal year. We have increased the cash dividend twenty-nine times since
becoming a stock company in 1982.
During the year, we made an extensive effort to identify year 2000
issues which impact our in-house computer system and outside systems with which
we interface. As a result of our review and the corrections performed to date,
we are confident in our ability to evaluate and correct all of our systems and
programs prior to the end of 1998. Management is reporting monthly to the Board
of Directors regarding progress made in this area.
In November 1996, we added two directors to our board bringing the
total to nine. Both John F. Clearman and H. Dennis Halvorson have many years of
financial institution experience and bring added expertise to your company.
We have also added Patrick F. Patrick, former President and Chief
Executive Officer of Metropolitan Bancorp, to our Executive Management team,
which includes Charles R. Richmond, Ronald L. Saper, William A. Cassels and
Lawrence D. Cierpiszewski. I thank each of them for their leadership in
achieving the record results of your Company during this last fiscal year.
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You may have noticed that our annual report this year is simpler than
in years past. We feel this new format better reflects Washington Federal's
conservative philosophy and our desire to maximize profitability for our
shareholders. Please let us know what you think about this new format. We
welcome your comments.
I also want to thank our employees and directors for their extra
efforts that have made this year so successful, and our customers and
stockholders for their continued support. I hope to see you at our annual
meeting on Wednesday January 28, 1998, at 2:00 p.m. at the Westin Hotel in
Seattle, Washington.
Sincerely,
/S/ GUY C. PINKERTON
Guy C. Pinkerton
Chairman, President and
Chief Executive Officer
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL On February 3, 1995, Washington Federal, Inc. (the
"Company") completed its reorganization into a
savings and loan holding company structure (the
"reorganization"). The Company's predecessor,
Washington Federal Savings (the "Association") became
a wholly-owned subsidiary of the Company as a result
of the reorganization.
INTEREST The Company accepts a high level of interest rate
RATE RISK 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. At September 30, 1997,
the Company had approximately $2,860,000,000 more
liabilities subject to repricing in the next year
than assets subject to repricing which amounted to a
negative maturity gap of 50% of total assets. The
Company's interest rate risk approach has never
resulted in the recording of a monthly operating
loss.
Fiscal 1997 began with a trend of expanding interest
rate spreads. The first quarter closed with a 2.88%
interest rate spread, down from 2.95% at the
beginning of the year. The decline was, in large
part, due to the combination with Metropolitan
Bancorp which was completed during the quarter.
Interest rate spreads for the next three quarters
were relatively flat. 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
33.3% of total assets at September 30, 1997, compared
to 38.3% of total assets at September 30, 1996.
LIQUIDITY The Company's net worth at September 30, 1997 was
AND CAPITAL $717,745,000 or 12.5% of total assets. This is an
RESOURCES increase of $140,043,000 from September 30, 1996 when
net worth was $577,702,000 or 11.3% of total assets.
The ratio of net worth to total assets remains at a
high level despite a 12% increase in assets during
fiscal 1997 and the distribution of $42,691,000 in
cash dividends.
The $140,043,000 increase in the Company's net worth
includes $105,050,000 generated from net income,
$58,495,000 of common stock issued with the
Metropolitan Bancorp merger, $17,000,000 of
appreciation in the valuation reserve for
available-for-sale securities and $2,189,000 of
proceeds received with the exercise of common stock
options and purchases by the Employee Stock Ownership
Plan. Net worth was reduced by the $42,691,000 of
cash dividends paid. During fiscal 1997, no shares of
common stock were repurchased under the March 1996
authorized stock repurchase program.
The Association's percentage of net worth to total
assets is among the highest in the nation and is
approximately three times the minimum required under
Office of Thrift Supervision ("OTS") regulations (see
Note P). Management believes this strong net worth
position will help protect earnings against interest
rate risk and will enable it to compete more
effectively for controlled growth through
acquisitions and customer deposit increases.
Excluding the $379,975,000 of customer accounts
acquired with the Metropolitan Bancorp merger,
customer accounts increased $117,836,000, or 5%, from
a year ago, largely due to our branch expansion in
Arizona and Washington and several successful new
account marketing campaigns. Also, during fiscal
1997, the Company reduced the amount of high-cost
brokered deposits which had been acquired in the
Metropolitan Bancorp merger by approximately
$28,679,000.
The Company's cash and investment securities amounted
to $313,194,000, a $5,447,000 decrease from a year
ago. The $44,187,000 of investment securities
purchased during the year were U.S. government agency
securities which replaced the $57,213,000 of
investment securities that matured during the year.
The minimum liquidity levels of the Association are
governed by the regulations of the OTS. Liquidity is
defined as the ratio of average cash and eligible
unpledged investment securities to the sum of average
withdrawable savings plus short-term (one year)
borrowings. Currently the Association is required to
maintain total liquidity at five percent (reduced to
four percent on November 24, 1997). At September 30,
1997, total liquidity was 5.06% compared to 5.82% at
September 30, 1996.
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CHANGES IN Available-for-sale and held-to-maturity securities.
FINANCIAL The Company acquired $280,507,000 of collateralized
POSITION mortgage obligations with its acquisition of
Metropolitan Bancorp, all of which have been
categorized as available-for-sale. Additionally, the
Company purchased $44,187,000 of U.S. government
agency and $10,000,000 of mortgage-backed securities,
respectively, during the year, all of which were
categorized as available-for-sale.
The Company had $119,851,000 of gross sales of
securities resulting in $1,096,000 of gains and
$158,000 of losses. All sales were mortgage-backed
securities which were categorized as
available-for-sale. All but $10,000,000 of the
securities sold were collateralized mortgage
obligations acquired in the Metropolitan Bancorp
merger which did not fit within the investment policy
of the Company. As of September 30, 1997, the Company
had unrealized gains on its available-for-sale
portfolio of $30,000,000, net of tax, which are
recorded as part of stockholders' equity.
Loans receivable. Loans receivable grew 13% to
$4,190,776,000 at September 30, 1997 from
$3,723,016,000 a year earlier. The loans receivable
balance, after excluding $347,309,000 acquired in the
Metropolitan Bancorp merger, increased $120,451,000
despite a significant decline in loan originations to
$1,088,708,000, a decrease of 30% from the prior
year. The decline in loan originations was partially
by design as the Company placed more emphasis on the
branch lending program and slowed production within
the wholesale mortgage brokerage operation.
Real estate held for sale. The balance at September
30, 1997 was $30,189,000, a 10% decrease from the
$33,491,000 of one year ago.
FHLB stock. The Company purchased $9,057,000 of FHLB
stock during the fiscal year, exclusive of
$13,314,000 acquired in the Metropolitan Bancorp
merger, while the dividend yield ranged between
7 1/4% and 8%. The Company had a balance of
$93,584,000 at September 30, 1997 compared with
$64,530,000 one year ago.
Costs in excess of net assets acquired. Costs in
excess of net assets acquired of $36,909,000 were
recorded with the Metropolitan Bancorp merger. As of
September 30, 1997, costs in excess of net assets
acquired totalled $58,774,000. 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, 1997,
there was no impairment of costs in excess of net
assets acquired. The Company will provide for any
diminuation in value of these assets should an
impairment be identified.
Customer accounts. Customer accounts at September,
30, 1997 were $2,978,031,000 compared with
$2,480,220,000 at September 30, 1996, a 20% increase.
See Liquidity and Capital Resources above.
FHLB advances and other borrowings. Total borrowings
decreased 3% to $1,904,544,000. See Interest Rate
Risk above.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF GENERAL
OPERATIONS Fiscal 1997 net income increased 31% over fiscal
1996. See Note S - Selected Quarterly Financial Data
(Unaudited) highlighting the quarter-by-quarter
results for the years ended September 30, 1997 and
1996.
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
1995 1996 1996 1996 1996 1997 1997 1997
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Interest rate on loans and
mortgage-backed securities ... 8.22% 8.15% 8.14% 8.16% 8.13% 8.15% 8.18% 8.17%
Interest rate on
investment securities* ....... 7.55 7.34 7.62 7.47 7.56 7.34 7.53 7.72
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Combined .................. 8.17 8.10 8.10 8.11 8.09 8.09 8.13 8.14
Interest rate on
customer accounts ............ 5.52 5.19 4.98 4.93 5.01 5.04 5.16 5.18
Interest rate on
borrowings ................... 5.77 5.50 5.49 5.45 5.45 5.44 5.53 5.51
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Combined .................. 5.62 5.32 5.20 5.16 5.21 5.21 5.31 5.031
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Interest rate spread ............ 2.55% 2.78% 2.90% 2.95% 2.88% 2.88% 2.82% 2.83%
=============================================================
*Includes municipal bonds at tax-equivalent rates.
The interest rate spread declined during fiscal 1997
from 2.95% at September 30, 1996 to 2.83% at
September 30, 1997.
COMPARISON OF FISCAL 1997 RESULTS WITH FISCAL 1996
Net interest income increased $26,094,000 (15%) in
fiscal 1997 over fiscal 1996. This resulted from the
Company's balance sheet expansion as a result of the
Metropolitan Bancorp merger and despite the
relatively stable interest rate spread the last three
quarters of fiscal 1997.
Interest on loans and mortgaged-backed securities
increased $52,665,000 (14%) in fiscal 1997 from 1996.
The increase is associated with the merger described
earlier resulting in total outstanding loan 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 ago.
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 ago.
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 the 4.93%
rate of one year ago.
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 decreased $3,015,000
(79%) in fiscal 1997 from fiscal 1996. All of the
provision for loan losses were for general reserves
which were established to provide for the inherent
risks associated with the expanded loan portfolio.
Other income decreased $840,000 (14%) in fiscal 1997
over fiscal 1996. Net gains on the sale of
available-for-sale securities totalled $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 is
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.
Total employees, 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.
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COMPARISON OF FISCAL 1996 RESULTS WITH FISCAL 1995
Net interest income increased $19,953,000 (13%) in
fiscal 1996 over fiscal 1995. This resulted from the
Company's balance sheet expansion and the improved
interest rate spread the last three quarters of
fiscal 1996.
Interest on loans and mortgaged-backed securities
increased $57,287,000 (18%) in fiscal 1996 from
fiscal 1995. Total outstanding loans and
mortgage-backed securities increased to
$4,589,621,000 at September 30, 1996 from
$4,114,881,000 at the beginning of fiscal 1996.
Average interest rates on loans and mortgage-backed
securities decreased to 8.16% at September 30, 1996
from 8.26% one year before.
Interest and dividends on investment securities
increased $3,158,000 (15%) in fiscal 1996 from fiscal
1995. The weighted average yield declined to 7.47% at
September 30, 1996 compared with 7.69% at September
30, 1995. The combined investment securities and FHLB
stock portfolio increased to $363,536,000 at
September 30, 1996 versus $301,795,000 one year
before.
Interest on customer accounts increased 13% to
$129,904,000 for fiscal 1996 from $115,348,000 for
fiscal 1995. The average cost of customer accounts
decreased to 4.93% at year end compared with the
5.51% rate the preceding year.
Interest on FHLB advances and other borrowings
increased $25,936,000 (36%) in fiscal 1996 over
fiscal 1995. Average rates paid declined at September
30, 1996 to 5.45% from 5.87% at September 30, 1995.
The provision for loan losses increased $3,828,000
(39%) in fiscal 1996 from fiscal 1995. All of the
provision for loan losses were for general reserves
which were established to provide for the inherent
risks associated with the expanded loan portfolio.
Other income decreased $3,787,000 (39%) in fiscal
1996 over fiscal 1995. Net gains on the sale of
available-for-sale securities totalled $1,444,000 in
fiscal 1996 compared to $4,518,000 in fiscal 1995.
Other expense increased $17,082,000 (47%) in fiscal
1996 over fiscal 1995. Of the increase, $15,026,000
related to the special SAIF assessment, a
nonrecurring charge. The remainder of the increase
was due to general inflationary increases plus the
incremental costs associated with branch network
expansion. The branch network expanded to 93 offices
at September 30, 1996 versus 87 offices at September
30, 1995. Other expense for fiscal 1996 equaled .78%
of average assets compared with .86% in fiscal 1995.
Total employees, including part-time employees on a
full-time equivalent basis, increased to 602 from
563.
Income taxes decreased $191,000 in fiscal 1997. The
effective tax rate was 36% for both fiscal 1996 and
fiscal 1995.
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), $699,938,000
of assets, $379,975,000 of deposits and $58,495,000
of stockholders' equity. The merger was accounted for
by the purchase method and $36,909,000 of costs in
excess of net assets acquired will be amortized
utilizing the straight-line method over 15 years.
IMPACT OF The Consolidated Financial Statements and related
INFLATION Notes presented elsewhere herein have been prepared
AND in accordance with generally accepted accounting
CHANGING principles, which require the measurement of
PRICES financial position and operating results in terms of
historical dollars without considering changes in the
relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all
of the assets and virtually all of the liabilities of
the Company are monetary in nature. As a result,
interest rates have a more significant impact on the
Company's performance than the general level of
inflation. Over short periods of time, interest rates
may not necessarily move in the same direction or in
the same magnitude as inflation.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
ASSETS
Cash .................................................................................... $ 23,444 $ 19,635
Available-for-sale securities, amortized cost $626,132 and $512,696 ..................... 672,132 533,615
Held-to-maturity securities, fair value $578,124 and $629,649 ........................... 564,747 631,996
Loans receivable ........................................................................ 4,190,776 3,723,016
Interest receivable ..................................................................... 36,383 34,628
Premises and equipment, net ............................................................. 47,552 41,885
Real estate held for sale ............................................................... 30,189 33,491
FHLB stock .............................................................................. 93,584 64,530
Costs in excess of net assets acquired .................................................. 58,774 27,457
Other assets ............................................................................ 2,008 4,725
---------------------------
$ 5,719,589 $ 5,114,978
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Customer accounts
Savings and demand accounts .......................................................... $ 2,905,371 $ 2,423,885
Repurchase agreements with customers ................................................. 72,660 56,335
---------------------------
2,978,031 2,480,220
FHLB advances ........................................................................... 1,601,000 1,162,000
Other borrowings, primarily securities sold under agreements to repurchase .............. 303,544 797,549
Advance payments by borrowers for taxes and insurance ................................... 26,340 23,516
Federal and state income taxes, including net deferred liabilities of $53,659 and $37,910 52,259 38,040
Accrued expenses and other liabilities .................................................. 40,670 35,951
---------------------------
5,001,844 4,537,276
Stockholders' equity
Common stock, $1.00 par value, 100,000,000 shares authorized; 51,137,889 and 44,011,776
shares issued; 47,508,759 and 40,695,450 shares outstanding .......................... 51,138 44,012
Paid-in capital ......................................................................... 573,241 405,563
Valuation adjustment for available-for-sale securities, net of tax ...................... 30,000 13,000
Treasury stock, at cost; 3,629,130 and 3,316,326 shares ................................. (68,266) (68,499)
Retained earnings ....................................................................... 131,632 183,626
---------------------------
717,745 577,702
---------------------------
$ 5,719,589 $ 5,114,978
---------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, 1997 1996 1995
----------- ----------- -----------
(In thousands, except per share data)
INTEREST INCOME
Loans ................................................. $ 357,496 $ 305,372 $ 238,086
Mortgage-backed securities ............................ 74,667 74,126 84,125
Investment securities ................................. 26,844 24,713 21,555
-----------------------------------------
459,007 404,211 343,766
INTEREST EXPENSE
Customer accounts ..................................... 142,684 129,904 115,348
FHLB advances and other borrowings .................... 114,763 98,841 72,905
-----------------------------------------
257,447 228,745 188,253
-----------------------------------------
Net interest income ................................... 201,560 175,466 155,513
Provision for loan losses ............................. 813 3,828 6,245
-----------------------------------------
Net interest income after provision for loan losses ... 200,747 171,638 149,268
OTHER INCOME
Gain on sale of securities ............................ 938 1,444 4,518
Other ................................................. 4,139 4,473 5,186
-----------------------------------------
5,077 5,917 9,704
OTHER EXPENSE
Compensation and fringe benefits ...................... 24,051 20,231 18,627
Amortization of intangibles ........................... 5,593 3,545 3,536
SAIF special assessment ............................... -- 15,026 --
SAIF deposit insurance premiums ....................... 2,392 5,530 5,013
Occupancy expense ..................................... 4,282 3,417 2,959
Other ................................................. 8,081 5,414 5,946
-----------------------------------------
44,399 53,163 36,081
Gain on real estate acquired through foreclosure, net.. 1,913 58 198
-----------------------------------------
Income before income taxes ............................ 163,338 124,450 123,089
Income taxes
Current ............................................ 50,620 38,222 39,373
Deferred ........................................... 7,668 6,333 5,373
-----------------------------------------
58,288 44,555 44,746
-----------------------------------------
NET INCOME ............................................ $ 105,050 $ 79,895 $ 78,343
=========================================
PER SHARE DATA
Net income ............................................ $ 2.21 $ 1.71 $ 1.63
Cash dividends ........................................ $ .90 $ .82 $ .74
Weighted average number of shares outstanding,
including dilutive stock options ................... 47,496,140 46,683,758 48,136,702
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, 1994 .......... $ 39,852 $ 320,310 $ 186,611 $ -- $ -- $ 546,773
Cumulative effect of change in
accounting method for available-
for-sale securities, net of tax... 1,551 1,551
Net income .......................... 78,343 78,343
Dividends ........................... (35,476) (35,476)
Proceeds from exercise of
common stock options ............. 91 610 701
Treasury stock ...................... (22,412) (22,412)
Valuation adjustment for
available-for-sale securities .... 6,449 6,449
-----------------------------------------------------------------------------------
Balance at September 30, 1995 ....... 39,943 320,920 229,478 8,000 (22,412) 575,929
-----------------------------------------------------------------------------------
Eleven-for-ten stock split
distributed March 1, 1996 ........ 3,997 83,937 (87,934)
Net income .......................... 79,895 79,895
Dividends ........................... (37,813) (37,813)
Proceeds from exercise of
common stock options ............. 72 706 778
Treasury stock ...................... (46,087) (46,087)
Valuation adjustment for
available-for-sale securities .... 5,000 5,000
-----------------------------------------------------------------------------------
Balance at September 30, 1996 ....... 44,012 405,563 183,626 13,000 (68,499) 577,702
-----------------------------------------------------------------------------------
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
===================================================================================
10 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 105,050 $ 79,895 $ 78,343
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of fees, discounts and premiums, net ........................... (14,674) (19,481) (17,936)
SAIF special assessment ..................................................... -- 15,026 --
Amortization of costs in excess of net assets acquired ...................... 5,593 3,545 3,536
Depreciation ................................................................ 2,132 1,912 1,814
Gain on investment securities and real estate held for sale ................. (2,627) (1,502) (4,876)
Decrease (increase) in accrued interest receivable .......................... 2,431 (3,187) (4,884)
Increase in income taxes payable ............................................ 10,204 2,325 1,767
FHLB stock dividends ........................................................ (6,683) (3,896) (3,455)
Decrease (increase) in other assets ......................................... 8,350 (1,669) 36
Increase (decrease) in accrued expenses and other liabilities ............... 238 4,638 (3,378)
---------------------------------------
Net cash provided by operating activities ...................................... 110,014 77,606 50,967
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and contracts originated
Loans on existing property .................................................. (556,063) (972,601) (758,455)
Construction loans .......................................................... (407,135) (428,317) (341,001)
Land loans .................................................................. (77,270) (92,496) (97,990)
Loans refinanced ............................................................ (48,240) (62,854) (27,468)
---------------------------------------
(1,088,708) (1,556,268) (1,224,914)
Savings account loans originated ............................................... (7,818) (7,065) (4,754)
Loan principal repayments ...................................................... 1,010,333 863,577 608,449
Increase (decrease) in undisbursed loans in process ............................ (26,000) 24,628 47,040
Loans purchased ................................................................ (1,310) (888) (5,132)
Purchases of available-for-sale securities ..................................... (54,187) (241,230) (135,651)
Principal payments and maturities of available-for-sale securities ............. 106,918 129,888 51,089
Sales of available-for-sale securities ......................................... 119,851 165,719 65,984
Purchases of held-to-maturity securities ....................................... -- -- (213,720)
Principal payments and maturities of held-to-maturity securities ............... 67,885 129,768 89,880
Proceeds from sales of real estate held for sale ............................... 12,313 2,580 1,241
Premises and equipment purchased, net .......................................... (4,115) (3,867) (2,927)
FHLB stock (purchased) sold .................................................... (9,057) (15,500) 35,000
Cash received (paid) for acquisitions .......................................... 3,590 -- (4,016)
---------------------------------------
Net cash (used) provided by investing activities ............................... 129,695 (508,658) (692,431)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts .............................................. 117,836 34,885 140,963
Net increase (decrease) in short-term borrowings ............................... (665,363) 845,462 399,383
Proceeds from long-term borrowings ............................................. 350,000 -- 150,000
Repayments of long-term borrowings ............................................. -- (370,000) --
Proceeds from exercise of common stock options ................................. 350 778 701
Dividends ...................................................................... (42,691) (37,813) (35,476)
Proceeds from employee stock ownership plan .................................... 469 -- --
Treasury stock (purchased) sold ................................................ 1,370 (46,087) (22,412)
Increase in advance payments by borrowers for taxes and insurance .............. 2,129 294 1,001
---------------------------------------
Net cash (used) provided by financing activities ............................... (235,900) 427,519 634,160
---------------------------------------
Increase (decrease) in cash .................................................... 3,809 (3,533) (7,304)
Cash at beginning of year ...................................................... 19,635 23,168 30,472
---------------------------------------
Cash at end of year ............................................................ $ 23,444 $ 19,635 $ 23,168
=======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash investing activities
Real estate acquired through foreclosure .................................... $ 5,547 $ 3,884 $ 8,894
Implementation of new accounting standard-reclass to available-
for-sale portfolio ....................................................... -- 215,489 324,904
Cash paid during the year for
Interest .................................................................... $ 256,822 $ 228,756 $ 185,686
Income taxes ................................................................ 49,492 43,794 43,315
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
14
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 and 1995
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 104 full-service branch offices located in Washington,
Oregon, Idaho, Utah and Arizona.
Investment and mortgage-backed securities. The Company accounts for
investment and mortgage-backed securities in two categories:
held-to-maturity and available-for-sale.
Held-To-Maturity Securities - Securities classified as
held-to-maturity are accounted for at amortized cost, but the
Company must have both the positive intent and the ability to hold
those securities to maturity. There are very limited circumstances
under which securities in the held-to-maturity category can be sold
without jeopardizing the cost basis of accounting for the remainder
of the securities in this category. Recognition is provided for
unrealized losses in the debt 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 has also obtained through acquisition certain interest
rate swap agreements that are designated against adjustable rate
mortgage-backed securities. These interest rate swap agreements are
carried at historical cost with the related interest differential
paid or received as an adjustment to interest income.
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, 1997 to
conform to the classifications used in 1997.
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 had 10 offices located in the Seattle area, (two
of which were subsequently merged into existing offices of the
Company), $699,938,000 of assets, $379,975,000 of deposits and
$58,495,000 of stockholders' equity. The merger was accounted for by
the purchase method and the $36,909,000 of costs in excess of net
assets acquired will 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. Assets with a fair value of $699,938,000,
including costs in excess of net assets acquired, were acquired in
conjunction with the transaction with $641,443,000 of liabilities
assumed.
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 be amortized utilizing the interest method over
the estimated lives of the assets. During the period ended September
30, 1997, the combined amortization of these discounts was
$2,473,000.
Had the merger with Metropolitan Bancorp occurred at the beginning
of the Company's 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
proforma amounts of $475,800,000, $106,192,000 and $2.23,
respectively.
13
16
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C INVESTMENT SECURITIES
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%
=======================================================
September 30, 1996
--------------------------------------------------------------------------------------------------
(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 ..................... $ 68,717 $ 130 $ (18) $ 68,829 7.96%
1 to 5 years ......................... 177,705 2,035 (867) 178,873 6.74
5 to 10 years ........................ 15,215 332 -- 15,547 6.98
Over 10 years ........................ 9,278 3,011 -- 12,289 10.41
-------------------------------------------------------
270,915 5,508 (885) 275,538 7.19
-------------------------------------------------------
HELD-TO-MATURITY SECURITIES
Tax-exempt municipal bonds due
1 to 5 years ......................... 2,000 145 -- 2,145 7.80
5 to 10 years ........................ 7,652 756 -- 8,408 6.67
Over 10 years ........................ 13,816 600 (2) 14,414 6.26
-------------------------------------------------------
23,468 1,501 (2) 24,967 6.52
-------------------------------------------------------
$ 294,383 $ 7,009 $ (887) $ 300,505 7.13%
=======================================================
There were no sales of investment securities during 1997. Proceeds
from sales of investment securities in the available-for-sale
portfolio during 1996 and 1995 were $29.6 million and $31.8 million,
respectively. The Company realized no gains during 1997 and 1996 and
realized gains of $912,000 in 1995. The Company had losses on sales
of $401,000 and $39,000, respectively, during 1996 and 1995.
Investment securities with a book value of $3.3 million and a fair
value of $4.4 million at September 30, 1997 were pledged to secure
public deposits.
NOTE D MORTGAGE-BACKED SECURITIES
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%
=====================================================
14
17
MORTGAGE-BACKED SECURITIES (CONTINUED)
September 30, 1996
------------------------------------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized --------------------- Fair
Cost Gains Losses Value Yield
--------- --------- --------- --------- ----
AVAILABLE-FOR-SALE SECURITIES
FNMA pass-through certificates $ 29,879 $ 1,892 $ -- $ 31,771 8.71%
FHLMC pass-through certificates 211,902 6,095 (1,979) 216,018 7.80
Forward commitments ........... -- 10,288 -- 10,288
------------------------------------------------------
241,781 18,275 (1,979) 258,077 7.91%
------------------------------------------------------
HELD-TO-MATURITY SECURITIES
GNMA pass-through certificates 475 39 (3) 511 9.47
FNMA pass-through certificates 19,070 789 (269) 19,590 8.51
FHLMC pass-through certificates 587,612 5,632 (10,147) 583,097 7.43
Private issues ................ 1,371 113 -- 1,484 8.67
------------------------------------------------------
608,528 6,573 (10,419) 604,682 7.47
------------------------------------------------------
$ 850,309 $ 24,848 $ (12,398) $ 862,759 7.60%
======================================================
Proceeds from sales of mortgage-backed securities in the
available-for-sale portfolio during 1997, 1996 and 1995 were $119.8
million, $77.5 million and $34.2 million, respectively. The Company
realized gains of $1.1 million, $3.4 million and $3.6 million during
1997, 1996 and 1995, respectively. The Company had losses on sales
of $158,000 and $1.5 million during 1997 and 1996, respectively.
There were no losses on sales recorded during 1995.
Available-for-sale mortgage-backed securities with a book value of
$83.6 million and a fair value of $89.1 million at September 30,
1997 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 $232,582,000 were pledged as collateral on
September 30, 1997 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, 1997 1996
-------------------------------------------------------------------------
(In thousands)
Market Market
Cost Value Cost Value
--------------------------------------
Commitments to purchase ......... $226,271 $248,575 $239,956 $250,244
Commitments to sell ............. 29,202 29,944 -- --
--------------------------------------
$197,069 $218,631 $239,956 $250,244
======================================
All forward purchase and sales commitments at September 30, 1997
were scheduled to be executed before September 30, 1998.
The Company acquired the following interest rate swaps in the merger
with Metropolitan Bancorp. The book value of pledged collateral at
September 30, 1997 was $2.7 million. No interest rate swap
agreements were purchased, terminated or expired during the year
ended September 30, 1997. Scheduled maturities of interest rate swap
agreements were as follows:
Notional Long-term Short term(1) Fair
September 30, 1997 Amount receipt rate payment rate Value
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Designated against adjustable rate mortgage-backed securities:
Due less than 3 years ....................... $60,000 5.07 5.59 $ (595)
(1) The rate of each agreement is tied to the 1 year constant maturity U.S.
Treasury index. Each swap reprices on an annual basis.
Financial data pertaining to the net cost, weighted average net effective cost
and the level of interest swap agreements follows:
Year ended September 30, 1997
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Weighted average net cost at end of year ............................................. -0.52%
Weighted average net cost during the year ............................................ -0.38%
Monthly average notional amount of interest rate swap agreements ..................... $60,000
Maximum notional amount of interest rate swap agreement at any month end ............. 60,000
Net cost included with adjustable rate mortgage-backed securities during the year..... 226
15
18
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E LOANS RECEIVABLE
September 30, 1997 1996
--------------------------------------------------------------
(In thousands)
Conventional real estate
Permanent single-family residential $3,521,466 $3,158,644
Income property ................... 242,157 119,437
Land .............................. 158,706 172,146
Construction ...................... 542,394 548,302
Other ................................ 5,043 5,064
----------------------
4,469,766 4,003,593
----------------------
Less
Allowance for possible losses ..... 24,623 15,182
Discount on loans ................. 14,185 7,796
Loans in process .................. 210,849 227,393
Deferred loan origination fees .... 29,333 30,206
----------------------
278,990 280,577
----------------------
$4,190,776 $3,723,016
======================
The Company originates adjustable and fixed interest rate loans, which at
September 30, 1997, consisted of the following:
Fixed Rate
-----------------------------------------------------------
(In thousands)
Term to Maturity Book Value
-----------------------------------------------------------
Less than 1 year ............................. $ 116,474
1 to 3 years ................................. 98,734
3 to 5 years ................................. 118,126
5 to 10 years ................................ 49,424
10 to 20 years ............................... 488,019
Over 20 years ................................ 2,752,471
----------
$3,623,248
==========
Adjustable Rate
--------------------------------------------------------
(In thousands)
Term to Rate Adjustment Book Value
--------------------------------------------------------
Less than 1 year ............................. $671,004
1 to 3 years ................................. 175,514
3 to 5 years ................................. --
5 to 10 years ................................ --
10 to 20 years ............................... --
Over 20 years ................................ --
--------
$846,518
========
At September 30, 1997 and 1996, approximately $40,643,000 and
$69,051,000 of fixed rate loan origination commitments were
outstanding. Loans serviced for others at September 30, 1997 and
1996 were approximately $119,897,000 and $112,638,000, respectively.
Permanent loans represented approximately 84% of all loans
outstanding. Approximately 93% of the permanent loans are fixed rate
with an average maturity of approximately 21 years.
Permanent single family residential loans receivable included
adjustable rate loans of $177,374,000 and $66,987,000 at September
30, 1997 and 1996, 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, 1997 Washington Idaho Oregon Utah Arizona Other Total
------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Conventional real estate
Permanent single-family
residential ........ $1,877,719 $ 432,423 $ 601,715 $ 504,527 $ 76,193 $ 28,889 $3,521,466
Income property ....... 130,886 27,383 27,195 18,048 3,133 35,512 242,157
Land .................. 96,364 14,348 11,489 17,195 18,278 1,032 158,706
Construction .......... 273,527 57,730 118,069 59,485 31,824 1,759 542,394
Other .................... 3,965 561 25 123 -- 369 5,043
----------------------------------------------------------------------------------
$2,382,461 $ 532,445 $ 758,493 $ 599,378 $ 129,428 $ 67,561 $4,469,766
==================================================================================
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. At September 30, 1996 the Company's recorded
investment in impaired loans was $7.2 million of which $2.0 million
had allocated reserves of $995,000. The average balance of impaired
loans during 1997 and 1996 was $13.7 million and $6.0 million and
interest income from impaired loans was $368,000 and $93,000,
respectively.
16
19
NOTE F ALLOWANCE FOR LOSSES ON LOANS
Year ended September 30, 1997 1996 1995
--------------------------------------------------------------------------
(In thousands)
Balance at beginning of year ............. $15,182 $11,651 $11,720
Loss allowances from acquired institutions 11,198 -- 281
Provision for loan losses ................ 813 3,828 6,245
Charge-offs .............................. (5,932) (820) (7,330)
Recoveries ............................... 3,362 523 735
-----------------------------
Balance at end of year ................... $24,623 $15,182 $11,651
=============================
NOTE G INTEREST RECEIVABLE
September 30, 1997 1996
---------------------------------------------------------------------------
(In thousands)
Loans receivable ..................................... $28,741 $25,687
Allowance for uncollected interest on loans receivable (1,708) (1,797)
Mortgage-backed securities ........................... 4,844 5,804
Investment securities ................................ 4,506 4,934
------------------
$36,383 $34,628
===================
NOTE H PREMISES AND EQUIPMENT
September 30, 1997 1996
------------------------------------------------------------------------------
(In thousands)
Estimated
Useful Life
-----------
Land ......................................... -- $ 10,767 $ 8,979
Buildings .................................... 25 - 40 43,586 40,671
Leasehold improvements ....................... 7 - 15 4,653 3,927
Furniture, fixtures and equipment ............ 4 - 10 12,181 11,204
-------------------
71,187 64,781
Less accumulated depreciation and amortization (23,635) (22,896)
-------------------
$ 47,552 $ 41,885
===================
The Company has noncancelable operating leases for branch offices.
Rental expense, including amounts paid under month-to-month
cancelable leases, amounted to $1,455,000, $1,094,000 and $953,000
in 1997, 1996 and 1995. 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, 1997 1996
-----------------------------------------------------------------------------
(In thousands)
Acquired for development .................................. $10,850 $13,074
Acquired in settlement of loans ........................... 5,328 4,624
Acquired from purchased institutions in settlement of loans 14,011 15,793
----------------
$30,189 $33,491
================
17
20
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J CUSTOMER ACCOUNTS
September 30, 1997 1996
-----------------------------------------------------------------------
(In thousands)
Checking accounts, 3.00% and under .......... $ 88,811 $ 75,781
Passbook and statement accounts, 3.50% ...... 177,843 175,307
Insured money market accounts, 2.90% to 4.04% 399,056 342,013
Certificate accounts
Less than 4.00% .......................... 230 808
4.00% to 4.99% ........................... 17,009 140,825
5.00% to 5.99% ........................... 1,974,727 1,579,802
6.00% to 6.99% ........................... 239,375 108,226
7.00% and over ........................... 8,320 1,123
-----------------------
Total certificates .......................... 2,239,661 1,830,784
-----------------------
Repurchase agreements with customers ........ 72,660 56,335
-----------------------
$2,978,031 $2,480,220
=======================
Certificate maturities were as follows:
September 30, 1997 1996
-----------------------------------------------------------------------
(In thousands)
Less than 1 year ............................ $1,778,943 $1,603,957
1 to 2 years ................................ 395,607 172,577
2 to 3 years ................................ 18,660 27,575
Over 3 years ................................ 46,451 26,675
-----------------------
$2,239,661 $1,830,784
=======================
Interest expense on customer accounts consisted of the following:
Year ended September 30, 1997 1996 1995
--------------------------------------------------------------------------------------------
(In thousands)
Checking accounts .................................. $ 2,006 $ 1,734 $ 1,735
Passbook and statement accounts .................... 6,371 6,267 7,036
Insured money market accounts ...................... 15,391 13,137 10,549
Certificate accounts ............................... 116,232 105,634 93,542
-------------------------------------
140,000 126,772 112,862
Repurchase agreements with customers ............... 3,059 3,481 2,924
-------------------------------------
143,059 130,253 115,786
Less early withdrawal penalties .................... (375) (349) (438)
-------------------------------------
$ 142,684 $ 129,904 $ 115,348
=====================================
Weighted average interest rate at end of year ...... 5.18% 4.93% 5.51%
Weighted daily average interest rate during the year 5.06% 5.24% 5.00%
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,
1997 and 1996 of 5.51% and 5.48%, respectively. Maturity dates of
advances were as follows:
September 30, 1997 1996
-----------------------------------------------------------------------
(In thousands)
FHLB advances due
Less than 1 year ......................... $1,248,500 $1,112,000
1 to 2 years ............................. 152,500 50,000
4 to 5 years ............................. 200,000 --
-----------------------
$1,601,000 $1,162,000
=======================
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 percent of the
total assets of the Association, subject to collateralization
requirements.
NOTE L OTHER BORROWINGS
September 30, 1997 1996
----------------------------------------------------------------------------------------
(In thousands)
Securities sold under agreements to repurchase
Due within 30 days ............................................ $287,544 $427,496
After 30 but within 90 days ................................... -- 159,053
-------------------
287,544 586,549
-------------------
Other borrowings
Credit facility, weighted average rate of 5.84% and 5.72%, due
October 4, 1997 ............................................... 1,000 11,000
Federal funds purchased, weighted average rate of 6.38% and 6.00%,
due on demand ................................................. 15,000 200,000
-------------------
$303,544 $797,549
===================
The Company has a $40,000,000 credit facility with another financial
institution which expires February 28, 1998. The credit facility
bears interest at the London Interbank Offering Rate ("LIBOR") plus
25 basis points. There was $1,000,000 outstanding on this credit
facility at September 30, 1997.
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, 1997, 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, 1997 1996 1995
------------------------------------------------------------------------------------------------
(In thousands)
Weighted average interest rate at end of year ........ 5.81% 5.47% 5.83%
Weighted daily average interest rate during the year . 5.44% 5.76% 5.92%
Daily average of securities sold under agreements
to repurchase ..................................... $ 569,203 $ 831,676 $ 862,623
Maximum securities sold under agreements to repurchase
at any month end .................................. 822,904 971,173 1,009,334
Interest expense during the year ..................... 30,944 47,905 51,028
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), 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 occuring after December 31, 1996.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125"
(SFAS No. 127"). In general, SFAS No. 127 defers for one year the
effective date of SFAS No. 125. The Company will implement SFAS No.
125, as amended by SFAS No. 127, as required. The adoption is not
anticipated to 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,
1997 and 1996 include deferred taxes of $53,659,000 and $37,910,000,
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 at September 30, 1997
follow:
September 30, 1997 1996
----------------------------------------------------------------------------
(In thousands)
Deferred tax assets
Real estate valuation reserves ...................... $ 3,867 $ 3,941
Discounts ........................................... 109 178
-----------------
Total deferred tax assets ........................... 3,976 4,119
-----------------
Deferred tax liabilities
Federal Home Loan Bank stock dividends .............. 14,610 10,545
Loan loss reserves .................................. 15,714 13,993
Valuation adjustment on available-for-sale securities 16,000 7,919
Depreciation ........................................ 3,339 3,255
Loan origination costs .............................. 4,102 4,460
Accrued interest - pre-1985 loans ................... 394 397
Deferred costs from farming operations .............. 849 866
Prepaid expenses .................................... 57 417
Other, net .......................................... 2,570 177
-----------------
Total deferred tax liabilities ...................... 57,635 42,029
-----------------
Net deferred tax liability ............................. $53,659 $37,910
=================
A reconciliation of the statutory federal income tax rate to the
effective income tax rate follows:
Year ended September 30, 1997 1996 1995
--------------------------------------------------------------------
Statutory income tax rate ................... 35% 35% 35%
Tax-exempt interest ......................... -- (1) (1)
State income tax ............................ 2 3 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. The Association used the
percentage of taxable income method in tax years 1996 and 1995.
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 exceeds the
September 30, 1988 balance. Such recaptured amounts are to be taken
into ordinary income ratably over a six-year period beginning in
1997. Accordingly, the Company will have to pay approximately
$2,664,000 in additional federal income taxes, all of which has been
previously provided for, each year of the six-year period due to the
Act.
The Act also repeals the reserve method of accounting for tax bad
debt deductions and requires thrifts to calculate the tax bad debt
deduction based on actual current loan losses.
A deferred tax liability has not been 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, 1997, the amount of those reserves
was approximately $4,017,000. The amount of the unrecognized
deferred tax liability at September 30, 1997 was approximately
$1,406,000.
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 10% of their base salaries on a tax-deferred basis through the
401(k) provisions of the Plan with a combined maximum of 12%. 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 $1,654,000, $1,497,000, and
$1,351,000, for the years ended September 30, 1997, 1996 and 1995,
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 4,020,675; 1,268,276 and 2,090,000
unissued shares of common stock to be reserved pursuant to the 1982
Employee Stock Compensation Program (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 between six and ten years after the
date of grant.
Weighted Average
Fair Value of Option
Average Price(1) Number(1) Shares Granted
- -------------------------------------------------------------------------------------------------------------
Outstanding, October 1, 1994 .. $ 15.23 1,430,624
Granted in 1995 ............... 13.63 154,638
Exercised in 1995 ............. 7.71 (168,049)
Forfeited in 1995 ............. 16.55 (119,540)
------------------------------------------------------
Outstanding, September 30, 1995 14.34 1,297,673
Granted in 1996 ............... 18.41 369,261 $ 3.25
Exercised in 1996 ............. 9.43 (132,617)
Forfeited in 1996 ............. 15.92 (80,743)
------------------------------------------------------
Outstanding, September 30, 1996 15.74 1,453,574
Granted in 1997 ............... 21.19 120,445 3.81
Exercised in 1997 ............. 13.04 (145,408)
Forfeited in 1997 ............. 16.33 (129,305)
------------------------------------------------------
Outstanding September 30, 1997 $ 16.48 1,299,306
======================================================
(1) Average price and number of stock options granted, exercised and
forfeited have been adjusted for 10 percent stock dividends in the
second quarter of both 1997 and 1996, which had the effect of an
eleven-for-ten stock split.
Financial data pertaining to outstanding stock options were as
follows:
September 30, 1997
--------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------
$ 6.42 - 8.35 33,616 1.2 years $ 7.55 33,616 $ 7.55
10.58 - 15.82 605,865 6.4 14.58 149,597 14.83
16.50 - 21.02 654,825 7.3 18.62 56,052 17.64
25.00 5,000 9.7 25.00 -- --
------------------------------------------------------------------------------------------
1,299,306 6.7 years $16.47 239,265 $14.47
==========================================================================================
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-based Compensation" ("SFAS No. 123"). 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 Opinion Number 25 ("APB No. 25"), but they will now
be required to disclose the pro forma amounts of net income and
earnings per share that would have been reported had the company
elected to follow the fair value recognition provisions of SFAS No.
123. Effective October 1, 1996, the Company 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 $220,000 and $558,000 for 1997 and
1996, respectively, and net income per share would have remained the
same for 1997 and been reduced $.01 for 1996.
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 1997 and 1996: annual dividend yield of 3.25%;
expected volatility of 16.43%; risk-free interest rate of 6.00%; 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 1997 and 1996, the Company
declared eleven-for-ten stock splits in the form of a 10 percent
stock dividend in addition to the regular quarterly cash dividends
on its shares of common stock.
The Association is subject to various regulatory capital
requirements administered by the Office of Thrift Supervision
("OTS"). Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary action by
regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Association must meeting 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, 1997 and 1996, 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 table.
There are no conditions or events since that notification that
management believes have changed the institution's categorization.
To be categorized as
For capital well capitalized under
Actual adequacy purposes prompt corrective
------------------- ------------------- action provisions
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------
September 30, 1997 (Dollars in thousands)
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
September 30, 1996
Total capital to risk-weighted assets .. $508,744 19.22% $211,770 8.00% $264,713 10.00%
Tier I capital to risk-weighted assets . 511,836 19.34% NA NA 158,828 6.00%
Core capital to adjusted tangible assets 511,836 10.16% NA NA 251,772 5.00%
Core capital to total assets ........... 511,836 10.16% 151,063 3.00% NA NA
Tangible capital to tangible assets .... 511,836 10.16% 75,531 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 1997.
SFAS No. 128, "Earnings per Share" ("SFAS No. 128") was issued in
February, 1997. SFAS No. 128 simplifies the standards found in
Accounting Principles Board Opinion No. 15 ("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.
SFAS No. 128 is effective after December 15, 1997. Upon adoption of
SFAS No. 128, all prior-period EPS data will be restated. The
Company will adopt SFAS No. 128 effective September 30, 1998.
Adoption is anticipated not to have a material impact on the
Company's financial statements.
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, 1997 1996
---------------------------------------------------------------------------------------------
(In thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------
Financial assets
Cash ........................ $ 23,444 $ 23,444 $ 19,635 $ 19,635
Available-for-sale securities 672,132 672,132 533,615 533,615
Held-to-maturity securities . 564,747 578,124 631,996 629,649
Loans receivable ............ 4,190,776 4,401,679 3,723,016 3,673,693
FHLB stock .................. 93,584 93,584 64,530 64,530
Financial liabilities
Customer accounts ........... 2,978,031 2,986,062 2,480,220 2,484,492
FHLB advances ............... 1,601,000 1,594,196 1,162,000 1,159,468
Other borrowings ............ 303,544 303,544 797,549 797,394
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.
23
26
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE R 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.
STATEMENT OF FINANCIAL CONDITION
September 30, 1997 1996
---------------------------------------------------------------------------------------------
(In thousands)
ASSETS
Cash ............................................................. $ 1,617 $ 1,401
Investment in subsidiaries ....................................... 716,332 586,326
Dividend receivable .............................................. 11,000 9,000
Other assets ..................................................... 725 1,342
-----------------------
Total assets .................................................. $ 729,674 $ 598,069
=======================
LIABILITIES
Borrowed money ................................................... $ 1,000 $ 11,000
Dividend payable ................................................. 10,927 9,360
Other liabilities ................................................ 2 7
-----------------------
Total liabilities ............................................. 11,929 20,367
-----------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value: 100,000,000 shares authorized -
51,137,889 and 44,011,776 shares issued;
47,508,759 and 40,695,450 shares outstanding .................. 51,138 44,012
Paid-in capital .................................................. 573,241 405,563
Valuation adjustment for available-for-sale securities, net of tax 30,000 13,000
Treasury stock, at cost - 3,629,130 and 3,316,326 shares ......... (68,266) (68,499)
Retained earnings ................................................ 131,632 183,626
-----------------------
Total stockholders' equity .................................... 717,745 577,702
-----------------------
Total liabilities and stockholders' equity .................... $ 729,674 $ 598,069
=======================
STATEMENT OF OPERATIONS
Year ended September 30, 1997 1996
-----------------------------------------------------------------------------------------------
(In thousands)
INCOME
Dividends from subsidiary .......................................... $ 52,000 $ 77,000
EXPENSE
Borrowings ......................................................... 240 559
Other .............................................................. 270 3
--------------------
Total expense ...................................................... 510 562
--------------------
Net income before equity in undistributed net income of subsidiaries 51,490 76,438
Equity in undistributed net income of subsidiaries .................... 53,375 3,252
--------------------
Income before income taxes ............................................ 104,865 79,690
Income tax benefit .................................................... 185 205
--------------------
Net Income ............................................................ $105,050 $ 79,895
====================
24
27
STATEMENT OF CASH FLOWS
Year ended September 30, 1997 1996
--------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................... $ 105,050 $ 79,895
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed net income of subsidiaries (53,375) (3,252)
Increase in other assets ......................... (952) (1,342)
Increase (decrease) in other liabilities ......... (5) 422
-----------------------
Net cash provided by operating activities ........ 50,718 75,723
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings ........ (10,000) 6,000
Issuance of common stock through stock option plan .. 350 778
Treasury stock (purchased) issued ................... 1,839 (46,087)
Dividends ........................................... (42,691) (37,813)
-----------------------
Net cash used by financing activities ............ (50,502) (77,122)
-----------------------
Increase (decrease) in cash ...................... 216 (1,399)
Cash at beginning of year ........................ 1,401 2,800
-----------------------
Cash at end of year .............................. $ 1,617 $ 1,401
=======================
NOTE S SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited interim results of
operations by quarter:
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
===============================================
Net income per share ............... $ .53 $ .55 $ .56 $ .57
===============================================
Return on average assets ........... 1.76% 1.82% 1.89% 1.93%
===============================================
First Second Third Fourth
Year ended September 30, 1996 Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Interest income .................... $ 96,840 $100,084 $102,992 $104,295
Interest expense ................... 57,504 56,931 56,939 57,371
-----------------------------------------------
Net interest income ................ 39,336 43,153 46,053 46,924
Provision for loan losses .......... 483 301 1,276 1,768
Other operating income ............. 1,737 1,252 1,828 1,100
Other operating expense ............ 8,780 9,595 9,589 25,141
-----------------------------------------------
Income before income taxes ......... 31,810 34,509 37,016 21,115
Income taxes ....................... 11,556 12,700 13,546 6,753
-----------------------------------------------
Net income ......................... $ 20,254 $ 21,809 $ 23,470 $ 14,362
===============================================
Net income per share ............... $ .43 $ .46 $ .50 $ .32
===============================================
Return on average assets ........... 1.73% 1.79% 1.87% 1.13%
===============================================
25
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- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
Year ended September 30, 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Interest income ....................... $ 459,007 $ 404,211 $ 343,766 $ 287,577 $ 275,345
Interest expense ...................... 257,447 228,745 188,253 121,114 116,677
-------------------------------------------------------------
Net interest income ................... 201,560 175,466 155,513 166,463 158,668
Provision for loan losses ............. 813 3,828 6,245 401 2,731
Other income .......................... 5,077 5,917 9,704 8,359 12,852
Other expense ......................... 42,486 53,105 35,883 32,034 29,656
-------------------------------------------------------------
Income before income taxes
and extraordinary loss ........... 163,338 124,450 123,089 142,387 139,133
Income taxes .......................... 58,288 44,555 44,746 49,600 45,843
Extraordinary loss, net of tax benefit -- -- -- -- (2,122)
-------------------------------------------------------------
Net income ......................... $ 105,050 $ 79,895 $ 78,343 $ 92,787 $ 91,168
=============================================================
Per share data
Net income before extraordinary loss $ 2.21 $ 1.71 $ 1.63 $ 1.91 $ 1.92
Extraordinary loss, net of
income tax benefit ............... -- -- -- -- (.04)
-------------------------------------------------------------
Net income ......................... $ 2.21 $ 1.71 $ 1.63 $ 1.91 $ 1.88
-------------------------------------------------------------
Cash dividends ..................... $ .90 $ .82 $ .74 $ .68 $ .62
=============================================================
September 30, 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------------
(In thousands)
Total assets ....................... $5,719,589 $5,114,978 $4,577,402 $3,830,053 $3,159,267
Loans and mortgage-backed securities 5,137,905 4,589,621 4,114,881 3,400,583 2,775,941
Investment securities .............. 289,750 299,006 256,661 195,165 168,847
Customer accounts .................. 2,978,031 2,480,220 2,445,335 2,281,751 2,216,381
FHLB advances ...................... 1,601,000 1,162,000 527,000 310,100 336,000
Other borrowings ................... 303,544 797,549 957,087 624,604 60,000
Stockholders' equity ............... 717,745 577,702 575,929 546,773 486,183
Number of
Customer accounts ............... 180,957 160,968 161,295 153,000 148,204
Mortgage loans .................. 41,820 39,570 35,641 32,057 32,552
Offices ......................... 104 93 87 82 74
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, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 20, 1997
- --------------------------------------------------------------------------------
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
Annual Meeting The annual meeting of stockholders will be
held on January 28, 1998, 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
Assistant Vice President
Washington Federal, Inc.
425 Pike Street
Seattle, Washington 98101
Stock Information Washington Federal, Inc. is traded on the
NASD National Market. The common stock symbol is WFSL. At
September 30, 1997, there were approximately 3,094
shareholders of record.
Stock Prices
-----------------------
Quarter Ended High Low Dividends
----------------------------------------------------------------------
December 31, 1995 21 5/8 18 3/8 20
March 31, 1996 21 3/8 18 3/4 20
June 30, 1996 20 1/8 18 3/8 21
September 30, 1996 21 1/2 17 1/2 21
December 31, 1996 25 3/8 20 7/8 22
March 31, 1997 28 1/8 22 3/4 22
June 30, 1997 28 1/4 22 3/8 23
September 30, 1997 30 1/4 25 3/16 23
All prices shown have been
adjusted for stock splits
Market Makers:
Dain, Bosworth, Inc.
Dean Witter Reynolds Inc.
Fox-Pitt, Kelton Inc.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
Lehman Brothers, Inc.
Mayer & Schweitzer, Inc.
Merrill Lynch, Pierce,
Fenner & Smith Inc.
Nationsbanc Montgomery Securities
Piper Jaffray Companies, Inc.
Ragen MacKenzie, Inc.
Sherwood Securities Corp.
Smith Barney, Inc.
Troster Singer Corp.
27
30
- --------------------------------------------------------------------------------
DIRECTORS, OFFICERS AND OFFICES
CORPORATE EXECUTIVE HUMAN RESOURCES
HEADQUARTERS MANAGEMENT COMMITTEE ARLINE FONDA
425 Pike Street Vice President
Seattle, WA 98101 WILLIAM A. CASSELS
(206) 624-7930 Executive Vice President KAREN CARLSON
BOARD OF LAWRENCE D. BOBBY FASSIO
DIRECTORS CIERPISZEWSKI
GUY C. PINKERTON Executive Vice President INTERNAL AUDIT
Chairman, President and BARBARA A.
Chief Executive Officer PATRICK F. PATRICK MURPHY
Executive Vice President
E.W. MERSEREAU, JR. LOAN OPERATIONS
Vice Chairman GUY C. PINKERTON MICHAEL BUSH
Chairman, President and Vice President
JOHN F. CLEARMAN Chief Executive Officer
Retired, Former LEANN BURKE
President and Chief CHARLES R.
Executive Officer, RICHMOND LOAN SERVICING
NC Machinery Co. Executive Vice President TERRY O.
and Secretary PERMENTER
H. DENNIS HALVORSON Vice President
Retired, Former Chief RONALD L. SAPER
Executive Officer, Executive Vice President VIVIAN L. YORITA
United Bank and Chief Financial Vice President and
Officer Assistant Manager
KERMIT O. HANSON
Dean Emeritus DEPARTMENT MIKE CULALA
University of Washington OFFICERS
Graduate School of LOIS L.
Business Administration ACCOUNTING KRISTJANSSON
KEITH D. TAYLOR
W. ALDEN HARRIS C.P.A. MARY TOMLINSON
Former Executive Senior Vice President
Vice President and Treasurer LEGAL, REGULATORY
and Compliance
ANNA C. JOHNSON JOESEPH R. RUNTE JOSEPH M. VINCENT
Senior Partner Vice President and Vice President
Scan East West Travel Controller
MANUALS/TRAINING
RICHARD C. REED MARTINE ANDREWS LINDA NICHOLL
Management Consultant Assistant Manager
Altman Weil Pensa MARKETING AND
KAREN MEFFORD INVESTOR RELATIONS
CHARLES R. RICHMOND CATHY COOPER
Executive Vice President APPRAISAL Assistant Vice President
and Secretary EILEEN E. HIRAMI
Vice President MULTI-FAMILY LOANS
DIRECTOR TOBIAS W.
EMERITUS JAMES N. IBABAO WASHINGTON
HAROLD C. KEAN Vice President
CONSTRUCTION AND
LAND LOANS PERMANENT LOAN
LORELEI G. STOVES PRODUCTION
Senior Vice President JANE A. NOGLE
Senior Vice President
DEPOSIT OPERATIONS
BEN A. WHITMARSH COLLEEN WELLS
Vice President Assistant Vice President
and Divisional Loan
CAROLYN J. LOBDELL Brokerage Manager
Assistant Vice President
and Assistant Manager CHRISTA TULLY
Assistant Divisional
MARTY DAVIES Loan Brokerage Manager
FACILITIES QUALITY CONTROL
KELLY PERNELA NANCY C. ELLWEIN
Manager Vice President
SAVINGS SOUTHERN CENTRAL
ADMINISTRATION WASHINGTON OREGON
CYNTHIA L. ARNOLD
Vice President 29 Office Locations 16 Office Locations
REGION MANAGERS Division Manager
SPECIAL CREDITS JAMES E. CADY NATE LOWE
JACK B. JACOBSON Vice President Senior Vice President
Vice President DALE B. CULVER
Vice President PORTLAND,
GEORGE W. CORLEY E. CRAIG WILSON OREGON
Vice President Vice President
7 Office Locations
SUBSIDIARIES NORTHERN Region Manager
WASHINGTON WILLIAM V. READ
FIRST INSURANCE Vice President
AGENCY, INC. 10 Office Locations
406 South Second Street Division Manager UTAH
Mount Vernon, WA 98273 DOUGLAS A. ROWELL
1-800-562-2555 Senior Vice President 11 Office Locations
(360) 336-9630 Division Manager
MICHAEL L. MINOR WESTERN RICHARD FISHER
President IDAHO Vice President
WASHINGTON 15 Office Locations PHOENIX,
Services, Inc. Division Manager ARIZONA
425 Pike Street ROBERT P. LINK
Seattle, WA 98101 Senior Vice President 4 Office Locations
(206) 624-7930 Division Manager
EASTERN RON SHERIDAN
IDAHO Vice President
4 Office Locations TUCSON,
Region Manager ARIZONA
LARRY WADSWORTH
Vice President 8 Office Locations
Division Manager
PATTY MCCARTHY-HOWARD
Senior Vice President
28