FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............. to ...............
For Quarter Ended: December 31, 1996 Commission file number: 025454
WASHINGTON FEDERAL, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1661606
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Pike Street Seattle, Washington 98101
(Address of principal executive offices and Zip Code)
(206) 624-7930
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: at January 31, 1997
Common stock, $1.00 par value 43,138,069 shares
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I
Item 1. Financial Statements
The Consolidated Financial Statements of Washington Federal, Inc. and
Subsidiaries filed as a part of the report are as follows:
Consolidated Statements of Financial Condition
as of December 31, 1996 and September 30, 1996 Page 3
Consolidated Statements of Operations for the three
months ended December 31, 1996 and 1995 Page 4
Consolidated Statements of Cash Flows for the
three months ended December 31, 1996 and 1995 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 8
PART II
Item 1. Legal Proceedings Page 12
Item 2. Changes in Securities Page 12
Item 3. Defaults upon Senior Securities Page 12
Item 4. Submission of Matters to a Vote of Stockholders Page 12
Item 5. Other Information Page 12
Item 6. Exhibits and Reports on Form 8-K Page 12
Signatures Page 13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
Dec. 31, 1996 Sept. 30, 1996
(In thousands, except per share data)
ASSETS
Cash $ 33,494 $ 19,635
Available-for-sale securities 810,857 533,615
Held-to-maturity securities, fair value
of $620,224 and $629,649 615,911 631,996
Loans receivable 4,131,145 3,723,016
Interest receivable 38,538 34,628
Premises and equipment, net 47,236 41,885
Real estate held for sale 31,831 33,491
FHLB stock 88,469 64,530
Costs in excess of net assets acquired 69,089 27,457
Other assets 2,689 4,725
$5,869,259 $5,114,978
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Customer accounts
Savings and demand accounts $2,774,533 $2,423,885
Repurchase agreements with customers 53,251 56,335
2,827,784 2,480,220
FHLB advances 1,703,000 1,162,000
Other borrowings, primarily securities sold
under agreements to repurchase 568,497 797,549
Advance payments by borrowers for taxes
and insurance 11,206 23,516
Federal and state income taxes 56,165 38,040
Accrued expenses and other liabilities 38,648 35,951
5,205,300 4,537,276
Stockholders' equity
Common stock, $1.00 par value, 100,000,000
shares authorized; 46,501,972 and 44,011,776
shares issued; 43,136,496 and
40,695,450 shares outstanding 46,502 44,012
Paid-in capital 463,724 405,563
Valuation adjustment for available-for-sale
securities, net of taxes 26,000 13,000
Treasury stock, at cost; 3,365,476
and 3,316,326 shares (69,635) (68,499)
Retained earnings 197,368 183,626
663,959 577,702
$5,869,259 $5,114,978
CONSOLIDATED FINANCIAL HIGHLIGHTS
Stockholders' equity per share $ 15.39 $ 14.20
Stockholders' equity to total assets 11.31% 11.28%
Loans serviced for others $ 141,386 $ 112,638
Weighted average rates at period end
Loans and mortgage-backed securities 8.13% 8.16%
Investment securities* 7.56% 7.47%
Combined interest rate on loans,
mortgage-backed securities and
investment securities 8.09% 8.11%
Customer accounts 5.01% 4.93%
Borrowings 5.45% 5.45%
Combined cost of customer accounts
and borrowings 5.21% 5.16%
Interest rate spread 2.88% 2.95%
*Includes municipal bonds at tax equivalent yields
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended December 31,
1996 1995
(Dollars in thousands,
except per share data)
INTEREST INCOME
Loans $84,362 $71,272
Mortgage-backed securities 18,069 20,113
Investment securities 6,379 5,455
108,810 96,840
INTEREST EXPENSE
Customer accounts 32,422 34,334
FHLB advances and other borrowings 28,559 23,170
60,981 57,504
Net interest income 47,829 39,336
Provision for loan losses 229 483
Net interest income after provision for
loan losses 47,600 38,853
OTHER INCOME
Gain on sale of securities 501
Other 964 1,236
964 1,737
OTHER EXPENSE
Compensation and fringe benefits 5,878 4,788
Regulatory assessments 1,039 1,320
Occupancy expense 991 760
Other 2,963 1,926
10,871 8,794
Gain on real estate owned, net 23 14
Income before income taxes 37,716 31,810
Income taxes 13,615 11,556
NET INCOME $24,101 $20,254
PER SHARE DATA
Net income $ .58 $ .47
Cash dividends $ .24 $ .22
Weighted average number of shares outstanding,
including dilutive stock options 41,967,234 43,110,459
Return on average assets 1.76% 1.73%
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Quarter Ended December 31,
1996 1995
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 24,101 $ 20,254
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of fees, discounts and premiums, net (4,423) (4,775)
Amortization of costs in excess of net
assets acquired 1,124 886
Depreciation 505 458
Gains on investment securities and real
estate held for sale (19) (516)
Decrease (increase) in accrued interest receivable 276 (2,323)
Increase in income taxes payable 15,110 13,500
FHLB stock dividends (1,568) (824)
Decrease (increase) in other assets 8,511 (286)
Increase (decrease) in accrued expenses and
other liabilities (1,784) 8,891
Net cash provided by operating activities 41,833 35,265
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and contracts originated
Loans on existing property (139,312) (315,372)
Construction loans (88,051) (88,852)
Land loans (18,486) (28,782)
Loans refinanced (9,548) (19,167)
(255,397) (452,173)
Savings account loans originated (1,120) (1,713)
Loan principal repayments 229,202 195,878
Decrease in undisbursed loans in process (30,385) (1,723)
Loans purchased (205) (218)
Purchase of available-for-sale securities --- (27,444)
Principal payments and maturities of
available-for-sale securities 23,629 10,895
Sales of available-for-sale securities --- 4,266
Principal payments and maturities of
held-to-maturity securities 16,265 29,686
Proceeds from sale of real estate held for sale 2,881 368
Premises and equipment purchased, net (2,172) (1,189)
FHLB stock purchased (9,057)
Cash received from acquisitions 3,590
Net cash used by investing activities (22,769) (243,367)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts (32,411) 41,323
Net increase in short-term borrowings 51,590 245,191
Repayments of long-term borrowings --- (60,000)
Proceeds from exercise of common stock options 116 311
Dividends (10,359) (9,339)
Treasury stock purchases (1,136)
Decrease in advance payments by borrowers for
taxes and insurance (13,005) (10,431)
Net cash provided (used) by financing activities (5,205) 207,055
Increase (decrease) in cash 13,859 (1,047)
Cash at beginning of period 19,635 23,168
Cash at end of period $ 33,494 $ 22,121
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure $ 1,045 $ 189
Transfer from held-to-maturity securities to
available-for-sale portfolio 215,489
Cash paid during the period for
Interest 62,565 6,096
Income taxes 175 1,989
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FIANANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 1996
NOTE A - Basis of Presentation
The consolidated interim financial statements included in this report have
been prepared by Washington Federal, Inc. ("Company") without audit. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation are reflected in the interim
financial statements. The September 30, 1996 Consolidated Statement of
Financial Condition was derived from audited financial statements.
NOTE B - Cash Dividend Paid
Dividends per share increased to 24 cents for the quarter ended December 31,
1996 compared with 22 cents for the same period one year ago. On January 24,
1997 the Company paid its fifty-sixth consecutive quarterly cash dividend.
NOTE C - Accounting For Certain Investments in Debt and Equity Securities
In November 1995, the Financial Accounting Standards Board issued "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (the "Guide"). The Guide allowed the Company to
reassess the appropriateness of the classifications of all its securities held
at the time and no later than December 31, 1995 account for any resulting
reclassification at fair value. During the quarter ended December 31, 1995,
the Company reclassified as available-for-sale mortgage-backed securities with
an amortized cost of $215,489,000 and unrealized gains of $8,517,000, net of
tax, were recorded as a separate component of shareholders' equity. The
unrealized gains on available-for-sale securities at December 31, 1996 was
26,000,000, net of tax.
NOTE D - Stock Repurchase Program
On March 28, 1996, the Board of Directors of the Company authorized its second
stock repurchase program, which provides for the repurchase of an additional
2,000,000 shares of common stock, or approximately 5% of its outstanding
shares. The repurchase will be made in open market transactions from time to
time as deemed prudent by management. The repurchased shares will be held as
treasury stock and will be available for general corporate purposes. As of
December 31, 1996, 770,000 shares authorized for repurchase remain
outstanding.
During the quarter 49,150 shares were repurchased at an average price of
$23.13 per share. The Company has negotiated a $40,000,000 revolving credit
facility to fund the repurchase of outstanding common stock.
NOTE E - Stock Dividend
On January 23, 1997, the Board of Directors of the Company declared an
eleven-for-ten stock split in the form of a 10% stock dividend to stockholders
of record on February 7, 1997 to be distributed on February 21, 1997. All
previously reported per share amounts will be adjusted accordingly.
NOTE F - Merger
On November 30, 1996 the Company completed a merger with Metropolitan Bancorp
("Metropolitan"), of Seattle, Washington. Metropolitan had 10 offices, all
located in the Seattle area. Under the terms of the agreement each
Metropolitan share of common stock converted into .738 shares of the Company's
common stock. The total value of the transaction was $59.4 million. The
merger was accounted for by the purchase method. Approximately $42.8 million
of costs in excess of net assets acquired will be amortized utilizing the
straight-line method over 15 years.
PART I - Financial Information
Item 2. 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") formed the Company in November, 1994 to effect the
Reorganization. After stockholder approval of the Reorganization at its
annual meeting, the Association became a wholly-owned subsidiary of the
Company.
INTEREST RATE RISK
The Company assumes a high level of interest rate risk as a result of its
policy to originate fixed-rate single family home loans which are longer-term
iin nature than the short-term characteristics of its liabilities of customer
accounts and borrowed money. At December 31, 1996 the Company had
approximately $3,215,116,000 more liabilities subject to repricing in the next
year than assets subject to repricing. This amounted to a negative maturity
gap of approximately 54.8% of total assets.
The interest rate spread increased for three consecutive quarters before
declining slightly in the quarter ending December 31, 1996 as a result of the
Metropolitan merger. The interest rate spread declined to 2.88% at December
31, 1996 from 2.95% at September 30, 1996, but improved from 2.55% at December
31, 1995. With the improvement of the interest rate spreads, the Company will
control its asset growth and attempt to deleverage the balance sheet. FHLB
advances and other borrowed money increased to an equivalent of 38.7% of total
assets at December 31, 1996, compared to 38.3% of total assets at September
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at December 31, 1996 was $663,959,000 or 11.3% of
total assets. This is an increase of $86,257,000 from September 30, 1996 when
net worth was $577,702,000 or 11.3% of total assets. Of the increase $59.4
million is the additional stock issued in connection with the completed merger
with Metropolitan. The ratio of net worth to total assets remains at a high
level despite a 15% increase in assets during the quarter.
The Company's percentage of net worth to total assets is among the highest in
the nation and the Association's regulatory capital ratios are over three
times the minimum required under Office of Thrift Supervision ("OTS")
regulations. Management believes this strong net worth position will help
protect earnings against interest rate risk and enable it to compete more
effectively for controlled growth through acquisitions and customer deposits
increases.
The Company's cash and investment securities amounted to $319,905,000, a
$1,323,000 increase from a quarter ago.
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 short-term liquidity at one percent and total liquidity
at five percent. At December 31, 1996, total liquidity was 5.46% compared to
5.82% at September 30, 1996.
CHANGES IN FINANCIAL POSITION
Available-for-sale and held-to-maturity securities. On October 1, 1994, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). Generally after the adoption of SFAS No.
115, no transfers between the held-to-maturity and available-for-sale
categories are allowed, however an exception was granted for the December 31,
1995 quarter.
As of December 31, 1996, the Company had unrealized gains of $26 million, net
of tax, which are recorded as part of stockholders' equity. Mortgage-backed
securities of $280,507,000 were acquired by the Company in the merger with
Metropolitan, all of which were categorized as available-for-sale.
Loans receivable. Loans receivable grew 11% during the quarter to
$4,131,145,000 at December 31, 1996 from $3,723,016,000 at September 30,
1996. The increased balance results primarily from $347,309,000 of loans
acquired in the merger with Metropolitan.
On October 1, 1995, the Company adopted SFAS No. 114,"Accounting by Creditors
for Impairment of a Loan" (SFAS No. 114). SFAS No. 114 requires that loans
that will not be repaid in accordance with their contractual terms be measured
using a discounted cash flow methodology or the fair value of the collateral
for certain loans. Smaller balance loans are excluded from the scope of the
statement with limited exceptions.
At December 31, 1996, the Company's recorded investment in impaired loans was
$20.4 million which had allocated reserves of $7.4 million. The increase of
$13.2 million from September 31, 1996 was primarily due to the merger with
Metropolitan. Loans of $3.5 million did not require reserves. The average
balance of impaired loans during the quarter was $13.8 million and interest
income (cash received) from impaired loans was $96,000.
Costs in excess of net assets acquired. 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 December 31, 1996, there was no impairment of the costs in excess of net
assets acquired. The merger with Metropolitan resulted in $42,755,000 of
costs in excess of net assets acquired. The Company will continue to evaluate
these assets and, if appropriate, provide for any diminuition in value of
these assets as a result of any legislation.
Customer accounts. Customer accounts at December 31, 1996 were $2,827,784,000
compared with $2,480,220,000 at September 30, 1996. The merger with
Metropolitan resulted in the assumption of $379,975,000 of deposits.
FHLB advances and other borrowings. Total borrowings increased to
$2,271,497,000. The merger with Metropolitan accounted for $260,358,000 of the
increase. See Interest Rate Risk above.
RESULTS OF OPERATIONS
Net interest income increased $8,493,000 (22%) to $47,829,000 for the December
1996 quarter from $39,336,000 a year ago. The net interest spread was 2.88%
at December 31, 1996 compared to 2.95% at September 30, 1996 and 2.55% at
December 31, 1995.
Interest income on loans increased $13,090,000 (18%) to $84,362,000 for the
quarter ended December 1996 from $71,272,000 a year ago. The increase is
associated with the increase in total outstanding loans to $4,131,145,000 at
December 31, 1996 from $3,297,932,000 at the December 31, 1995. Average
interest rates on loans decreased to 8.29% from 8.39% a year ago.
Interest income on mortgage-backed securities declined $2,044,000 (10%) to
$18,069,000 for the quarter ended December 31, 1996 versus $20,113,000 the
same period one year ago. The weighted average yield of 7.54% at December 31,
1996 was lower from the 7.68% at December 31, 1995.
Interest on investments increased $924,000 (17%) in the quarter versus the
year ago quarter. The weighted average yield increased to 7.56% at December
31, 1996 compared with 7.55% at December 31, 1995. The combined investment
securities and FHLB stock portfolio increased to $374,941,000 at December 31,
1996 versus $329,170,000 one year ago.
Interest expense on customer accounts decreased $1,912,000 (6%) to
$32,422,000 for the quarter ended December 31, 1996 from $34,334,000 for the
same period one year ago. The average cost of customer accounts decreased to
5.01% at quarter end compared to 5.52% one year ago.
Interest on FHLB advances and other borrowings increased $5,389,000 (23%) to
$28,559,000 for the December 1996 quarter compared with $23,170,000 for the
same quarter a year ago. The average rates paid at December 31, 1996 declined
to 5.45% versus 5.77% at December 31, 1995.
Other income decreased $773,000 (44%) for the December 1996 quarter compared
with the December 1995 quarter. Gains on the sale of available-for-sale
securities totalled $501,000 in the December 1995 quarter while no securities
were sold in the December 1996 quarter.
Other expense increased $2,538,000 (29%) for the quarter ended December 1996
compared with the December 1995 quarter, after adjusting for the $461,000
increase in deferred loan origination costs associated with loan volumes.
The changes reflect general inflationary increases plus the incremental costs
associated with the expansion of the branch network from 87 offices at
December 31, 1995 to 102 offices at December 31, 1996 and the merger with
Metropolitan during the quarter. Other expense for the December 1996 quarter
equalled .79% of average assets compared to .75% for the same quarter a year
ago, while the number of staff, including part-time employees on a full-time
equivalent basis, were 660 and 582, for the same periods, respectively.
Income taxes increased $2,059,000 (18%) in the December 1996 quarter due to a
higher taxable income base. The effective tax rate was 36% for both the
December 1996 and the December 1995 quarter.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as inflation.
PART II - Other Information
Item 1.......................Legal Proceedings
From time to time the Company or its subsidiaries are engaged in
legal proceedings in the ordinary course of business, none of
which are considered to have a material impact on the Company's
financial position or results of operations.
Item 2.......................Changes in Securities
Not applicable
Item 3.......................Defaults upon Senior Securities
Not applicable
Item 4.......................Submission of Matters to a
Vote of Stockholders
Not applicable
Item 5.......................Other information
Not applicable
Item 6.......................Exhibits and Reports on Form 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
February 13, 1997 GUY C. PINKERTON
Chairman, President and
Chief Executive Officer
February 13, 1997 RONALD L. SAPER
Executive Vice President and
Chief Financial Officer
February 13, 1997 KEITH D. TAYLOR
Senior Vice President and
Treasurer