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EXHIBIT 13
WASHINGTON FEDERAL, INC.
ANNUAL REPORT 2003
425 Pike Street, Seattle, WA 98101
TABLE OF CONTENTS
Financial Highlights 3
To Our Stockholders 4
Management's Discussion 6
Selected Financial Data 12
Financial Statements 13
Notes to Financial Statements 18
Report of Independent
Registered Public
Accounting Firm 38
General Information 39
Directors, Officers and Offices 40
A SHORT HISTORY
Washington Federal, Inc. (Company) is a savings and loan holding company
headquartered in Seattle, Washington. Its principal subsidiary is Washington
Federal Savings (Association), which operates 119 offices in eight 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, became a member of the Federal Home Loan Bank (FHLB) system and
obtained federal insurance. In 1958, Ballard Federal Savings and Loan
Association merged with Washington Federal Savings and Loan Association of
Bothell, and the latter name was retained for wider geographical acceptance. In
1971, Seattle Federal Savings and Loan Association, with three offices, merged
into the Association, and at the end of 1978, was joined by the 10 offices of
First Federal Savings and Loan Association of Mount Vernon.
On November 9, 1982, the Association converted from a federal mutual to a
federal stock association. In 1987 and 1988, acquisitions of United First
Federal, Provident Federal Savings and Loan, and Northwest Federal Savings and
Loan, all headquartered in Boise, Idaho, added 28 Idaho offices to the
Association. In 1988, the acquisition of Freedom Federal Savings and Loan
Association in Corvallis, Oregon, added 13 Oregon offices, followed in 1990 by
the eight Oregon offices of Family Federal Savings.
1
In 1991, the Association added three branches with the acquisition of First
Federal Savings and Loan Association of Idaho Falls, Idaho, and acquired the
deposits of First Western Savings Association of Las Vegas, Nevada, in Portland
and Eugene, Oregon, where they were doing business as Metropolitan Savings
Association. In 1993, 10 branches were added with the acquisition of First
Federal Savings Bank of Salt Lake City, Utah. In 1994, the Association expanded
into Arizona.
In 1995, the stockholders approved a reorganization whereby Washington Federal
Savings became a wholly owned subsidiary of a newly formed holding company,
Washington Federal, Inc. That same year, the Association purchased West Coast
Mutual Savings Bank with its one branch in Centralia, Washington, and opened six
additional branches. In 1996, the Association acquired Metropolitan Bancorp of
Seattle, adding eight offices in Washington in addition to opening four branches
in existing markets. Between 1997 and 1999, Washington Federal Savings continued
to develop its branch network, opening a total of seven branches and
consolidating three offices into existing locations.
In 2000, the Association expanded into Las Vegas, opening its first branch in
Nevada along with two branches in Arizona. In 2001, the Association opened two
additional branches in Arizona and its first branch in Texas with an office in
the Park Cities area of Dallas. In 2002, Washington Federal Savings opened five
full-service branches in existing markets and entered Colorado with a loan
production office. In 2003, the Association purchased United Savings and Loan
Bank with its four branches in the Seattle metropolitan area, added one new
branch in Puyallup, Washington and consolidated one branch in Nampa, Idaho.
The Association obtains its funds primarily through savings deposits from the
general public, from repayments of loans, borrowings and retained earnings.
These funds are used largely to make first lien loans to borrowers for the
purchase of new and existing homes, the acquisition and development of land for
residential lots, the construction of homes, the financing of small multi-family
housing units, and for investment in obligations of the U.S. government, its
agencies and municipalities. The Association also has a wholly owned subsidiary,
First Insurance Agency, Inc., which provides general insurance to the public.
2
FINANCIAL HIGHLIGHTS
September 30, 2003 (1) 2002 (1) % Change
(In thousands, except per share data)
Assets $7,535,975 $7,392,441 +2%
Cash and cash equivalents 1,437,208 975,153 +47
Investment securities 310,218 117,417 +164
Loans receivable and securitized
assets subject to repurchase, net 4,817,508 5,047,964 -5
Mortgage-backed securities 625,758 942,259 -34
Customer accounts 4,577,598 4,521,922 +1
FHLB advances
and other borrowings 1,750,000 1,750,000 --
Stockholders' equity 1,055,596 960,718 +10
Net income 144,999 148,384 -2
Diluted earnings per share 2.06 2.10 -2
Dividends per share 0.86 0.82 +5
Stockholders' equity per share 14.83 13.75 +8
Shares outstanding 71,173 69,895 --
Return on average stockholders' equity 14.61% 16.35% --
Return on average assets 1.98 2.09 --
Efficiency ratio 16.87 17.51 --
(1) - As restated see Note A.
3
TO OUR STOCKHOLDERS
Dear Stockholder:
It is a privilege to report that your company achieved outstanding financial
results again last year. Net income of $145.0 million represented a slight
decrease of 2.3% from fiscal 2002. Earnings per share amounted to $2.06, a 1.9%
decrease over last year. Return on assets reached 1.98% for the year, while
return on equity amounted to a respectable 14.61%. Continued strong earnings
also enabled the board of directors to increase your cash dividend for the 38th
time since 1982 to an annualized $.88 per share.
During the year, your company's balance sheet also strengthened. Assets grew to
$7.536 billion and capital exceeded $1 billion at fiscal year-end for the first
time. The quality of the company's assets remained high. Recent industry reports
credit Washington Federal with the lowest ratio of past due loans among the
largest mortgage servicing companies in the nation, while non-performing assets
declined by 19% to $27.434 million, and net charge-offs fell to $1.2 million,
the lowest in three years. Due to management's decision to invest cautiously
given historically low interest rates, liquid assets continued to increase. At
year-end, over $1.5 billion of the company's assets were invested very
short-term, representing a potentially significant increase in future revenues.
With three times the minimum capital required by our regulators, strong
earnings, unprecedented liquidity and excellent asset quality, we continue to
believe that we are indeed "One of America's Strongest Financial Institutions".
Having said all that, it's equally important to note that the past two years of
peak financial performance occurred in an ideal climate for our business. It
would seem imprudent to expect such conditions to persist indefinitely. For
example, abnormally high prepayments of mortgage loans and mortgage backed
securities during each of the past two years caused a temporary surge in
interest income. This occurred because deferred revenues, primarily loan fees
collected at origination and securities discounts that normally amortize over a
longer period of time, were accelerated into current accounting periods. The
company has also benefited from a very steep yield curve, meaning a historically
wide spread between short and long-term interest rates, which we know from hard
experience won't last forever. In 2003, we also reached a cyclical top in the
demand for mortgage loans. With the passing of the refinance boom, we are
already experiencing a slowdown in the mortgage market and we expect intensified
price competition until the hangover of excess capacity in the industry melts
away.
The good news is that, in choosing not to maximize current earnings, the
flexibility to take advantage of changing market conditions was preserved.
During the past year we focused on building liquidity and increasing net worth
as a percentage of assets. This approach had a cost to current earnings, but
offered the benefit of less interest rate risk and the potential for higher
earnings in the future than we might otherwise have achieved. With interest
rates higher at present, it appears that we will have the opportunity to invest
at better rates than we could have during recent quarters. Therefore, we believe
that your company is well positioned to continue its long tradition of
outperforming the industry.
On August 31st, the acquisition of United Savings and Loan Bank was finalized.
This was our first acquisition since 1996, and added $344 million in assets and
$268 million in deposits. United was established in 1960 to provide financial
services to immigrants to Seattle from Asian countries, primarily China, who at
that time had difficulty accessing the banking system. It is a privilege to
welcome the employees and customers of this unique company to Washington
Federal. With the addition of four United branches in Seattle, one new office in
Puyallup, Washington, and the consolidation of one office in Nampa, Idaho, the
branch count at year-end totaled 119.
During the year, we also completed a management transition that has been
underway for many years. Linda Brower, who joined us in January to head Human
Resources, was recently promoted to Executive Vice President. Brent Beardall, in
his third year with Washington Federal, was promoted to Senior Vice President
and Chief Financial Officer. Linda and Brent join Ed Hedlund, Jack Jacobson and
myself on the Executive Management Committee. My hope is that this outstanding
group of executives will work with the board and me to lead and manage the
company for the next ten to fifteen years.
Recently, we also added two new members to the Board of Directors. Derek Chinn,
former President & CEO of United Savings and Loan Bank joined the board in
September. Tom Kenney, VP Finance and the principal financial officer of Haggen,
Inc., a Bellingham, Washington based grocery store chain, joined the board in
October. Prior to joining Haggen, Inc. in 1996, Mr. Kenney spent 20 years in the
financial services industry. Both new directors will serve on the board's Audit
Committee and possess the financial literacy necessary to represent shareholder
interests in that important capacity. I thank them both for their willingness to
serve during a time when so much is expected of directors.
4
Alas, some good people are moving on, too. At the Annual Meeting in January,
2004 Kermit Hanson, Dean Emeritus of the Graduate School of Business at the
University of Washington and a director since 1966, will retire from the Board.
I hope that you will take a moment at the meeting to thank him for his 38 years
of outstanding service to the company. I also wish to recognize Ron Saper,
former Executive Vice President, who retired this year after serving 11 years as
your company's Chief Financial Officer. The legacy of Ron's financial discipline
will benefit stockholders for years to come.
In August, Standard & Poor's, in a promotion of sorts, removed Washington
Federal from their Small Cap 600 Index and added our stock to their Mid Cap 400
Index. This was nice recognition of the growth in the market value of your
company, and exposes our stock to a whole new universe of investors. It's
interesting to note that, although we still think of ourselves as a small
company, our current market capitalization of nearly $2 billion places us in the
top 10% of all NASDAQ companies, and in the top 30% of all NYSE companies. Based
on net income last year, our rankings are even higher: top 2% of NASDAQ
companies and top 20% of NYSE companies.
In closing, I wish to thank our customers, employees, stockholders and directors
for their continuing support. Let me also remind you to send your friends,
neighbors and relatives to Washington Federal for their home loans and savings
needs. I hope to see you at the Annual Stockholders' Meeting scheduled at 2:00
pm, on Wednesday, January 21, 2004 at the Sheraton Hotel in downtown Seattle,
Washington.
Sincerely,
Roy M. Whitehead
Vice Chairman, President and Chief Executive Officer
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT
Subsequent to the issuance of the Company's September 30, 2003 consolidated
financial statements and the filing of its 2003 Annual Report on Form 10-K with
the Securities and Exchange Commission, management of the Company determined
that the accounting for certain components of net unrealized gains on derivative
instruments were incorrectly recorded. The Company's correction of its
accounting for certain derivatives effected the 12 quarter period beginning with
the three months ended December 31, 2000, through the September 30, 2003
quarter. See Note A to the Company's Consolidated Financial Statements for a
description of the impact of this restatement. The Company's MD&A has been
revised to reflect the effects of this restatement.
GENERAL
Washington Federal, Inc. (Company) is a savings and loan holding company. The
Company's primary operating subsidiary is Washington Federal Savings
(Association).
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the use of estimates
and assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses in the Company's consolidated financial statements.
Accordingly, estimated amounts may fluctuate from one reporting period to
another due to changes in assumptions underlying estimated values.
The Company has determined that the only accounting policy deemed critical to an
understanding of the consolidated financial statements of Washington Federal,
Inc. relates to the methodology for determining the valuation of the allowance
for loan losses, as described below.
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance is based on ongoing, quarterly assessments of
the probable and estimable losses inherent in the loan portfolio. The Company's
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
and the unallocated allowance.
The formula portion of the general loan loss allowance is established by
applying a loss percentage factor to the different loan types. The allowances
are provided based on Management's continuing evaluation of the pertinent
factors underlying the quality of the loan portfolio, including changes in the
size and composition of the loan portfolio, actual loan loss experience, current
economic conditions, geographic concentrations, seasoning of the loan portfolio,
specific industry conditions, and the duration of the current business cycle.
The recovery of the carrying value of loans is susceptible to future market
conditions beyond the Company's control, which may result in losses or
recoveries differing from those provided.
Specific allowances are established in cases where Management has identified
significant conditions or circumstances related to a loan that Management
believes indicate the probability that a loss has been incurred. The unallocated
allowance allows for the estimation risk associated with the formula and
specific allowances.
INTEREST RATE RISK
The Company accepts a high level of interest rate volatility as a result of its
policy to originate fixed-rate single family home loans that are longer-term
than the short-term characteristics of its liabilities of customer accounts and
borrowed money. The following table shows the estimated repricing periods for
earning assets and paying liabilities.
6
Repricing Period
-----------------------------------------------------------------
Within One After 1 year
Year before 4 Years Thereafter Total
----------- -------------- ---------- -----------
(In thousands)
As of 9/30/03
Earning Assets * $ 3,192,103 $ 1,957,962 $2,184,478 $ 7,334,543
Paying Liabilities (4,424,515) (918,429) (984,654) (6,327,598)
----------- ----------- ----------
Excess (Liabilities) Assets $(1,232,412) $ 1,039,533 $1,199,824
Excess as % of Total Assets -16.35%
Policy limit for one year excess -60.00%
* Asset repricing period includes estimated prepayments based on historical
activity.
At September 30, 2003, the Company had approximately $1,232,000,000 more
liabilities subject to repricing in the next year than assets, which amounted to
a negative maturity gap of 16% of total assets, compared to a negative maturity
gap of 26% in the prior year. By having an excess of liabilities repricing
within one year over assets, the Company is subject to decreasing net interest
income should interest rates rise. However, if the size and or mix of the
balance sheet changes, rising rates may not cause a decrease net interest
income. The Company's interest rate risk approach has never resulted in the
recording of a monthly operating loss.
The Company's net interest spread decreased from 3.01% at September 30, 2002 to
2.47% at September 30, 2003. Net interest spread represents the difference
between the contractual rates of earning assets less the contractual rates of
paying liabilities as of a specific date. The spread decreased primarily from
record low interest rates on mortgages, as well as a continued shift in the
asset mix toward shorter-term assets. As of September 30, 2003, 19.1% of the
Company's assets were in short-term investments.
During this phase of the interest rate cycle the Company chose to build cash,
reduce the amount of loans and mortgage-backed investments and maintain customer
deposits with little or no growth. As of September 30, 2003, the Company had
accumulated $1,437 million in cash and cash equivalents, which can be invested
long-term in the future to generate additional revenues. This cash position was
generated principally through the net runoff of loans and mortgage-backed
investments of $441 million and $94 million of cash provided by the acquisition
of United Savings and Loan Bank (United).
ASSET QUALITY
The Company maintains an allowance to absorb losses inherent in the loan
portfolio. The allowance is based on ongoing, quarterly assessments of the
probable and estimable losses inherent in the loan portfolio. In analyzing the
existing loan portfolio, the Company applies specific loss percentage factors to
the different loan types. The loss percentages are based on Management's
continuing evaluation of the pertinent factors underlying the quality of the
loan portfolio, including changes in the size and composition of the loan
portfolio, actual loan loss experience and current economic conditions.
Multi-family loans, builder construction loans and certain other loans are
reviewed on an individual basis to assess the ability of the borrowers to
continue to service all of their principal and interest obligations. If the
loans show signs of weakness, they are downgraded and, if warranted, placed on
non-accrual status. The Company has an Asset Quality Review Committee that
reports the results of its internal reviews to the Board of Directors on a
quarterly basis.
Non-performing assets were $27,434,000, or .36% of total assets at September 30,
2003 compared to $33,876,000, or .46% of total assets at September 30, 2002.
Total delinquencies over 30 days were $34,736,000, or .46% of total assets at
September 30, 2003 compared to $37,419,000, or .51% of total assets at September
30, 2002. The aforementioned asset quality indicators, when compared to others
in the industry, demonstrate the continued excellent quality of the loan
portfolio.
7
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at September 30, 2003 was $1,055,596,000, or 14.0% of
total assets. This is an increase of $94,878,000 from September 30, 2002 when
net worth was $960,718,000, or 13.0% of total assets. The Company's net worth
increased due in part to net income of $144,999,000, proceeds received from the
exercise of common stock options of $4,726,000, purchases by the Employee Stock
Ownership Plan of $1,522,000 and acquisition-related stock issuances of
$33,282,000. Net worth was reduced by $60,004,000 as a result of cash dividends
paid, a decrease in unrealized gains on derivatives and securities of
$20,157,000 and $10,034,000 of stock repurchases. The ratio of net worth to
total assets remains at a high level despite the distribution of 41.4% of
earnings in the form of cash dividends.
Washington Federal's percentage of net worth to total assets is among the
highest in the nation and is over three times the minimum required under Office
of Thrift Supervision (OTS) regulations (see Note O). Management believes this
strong net worth position will help protect the Company against interest rate
risk and will enable it to compete more effectively.
Customer accounts increased $55,676,000, or 1.2% from one year ago, largely due
to the acquisition of $269,924,000 of deposits in connection with the United
merger, offset by net runoff of existing deposits of $214,248,000. Management's
strategy during this phase of the interest rate cycle has been to keep deposit
growth to a minimum until excess cash is deployed into higher yielding
investments.
The Company's cash and cash equivalents amounted to $1,437,208,000 at September
30, 2003, a significant increase from $975,153,000 one year ago. This continued
shift in the balance sheet from long-term assets to short-term assets resulted
from the decision to position the balance sheet to protect against the
possibility of rising interest rates in the future. See "Interest Rate Risk"
above.
CHANGES IN FINANCIAL POSITION
Available-for-sale and held-to-maturity securities. The Company purchased
$559,995,000 of securities during fiscal 2003, $459,895,000 of which have been
categorized as available-for-sale and $100,100,000 of which have been classified
as held-to-maturity.
The Company had $80,000,000 in sales of available-for-sale securities, resulting
in a net realized gain of $1,040,000. As of September 30, 2003, the Company had
net unrealized gains in its available-for-sale portfolio of $18,090,000, net of
tax, which are recorded as part of stockholders' equity.
Loans receivable and securitized assets subject to repurchase. Loans receivable
and securitized assets subject to repurchase decreased 4.6% to $4,817,508,000 at
September 30, 2003 from $5,047,964,000 one year earlier. The decrease resulted
from Management's decision not to aggressively compete based on price during
periods of increased refinancing activity caused by record low home mortgage
rates. The allowance for losses on loans and securitized assets subject to
repurchase increased $1,894,000 during the year as a result of the United
acquisition, which added $1,597,000 in allowance, and provision in excess of net
charge-offs of $297,000. The growth in the total allowance resulted primarily
from the acquisition of United and changes in both the geographic mix and loan
mix of the portfolio. The percentage of loans outside of Washington, Idaho,
Oregon, Utah and Arizona increased to 10.5% at September 30, 2003 from 1.6% one
year earlier as a result of the purchase of $418,000,000 of whole loans on
residences primarily in California. Construction and land loans increased to
16.5% of the portfolio at September 30, 2003 from 14.1% at September 30, 2002.
The amount of reserves allocated to impaired loans increased to $1,000,000 at
September 30, 2003 from no allocation in the prior year based on the estimated
value of the underlying collateral of the impaired loans.
Real estate held for sale. The balance at September 30, 2003 was $16,204,000, a
decrease from $17,587,000 reported one year ago.
FHLB stock. FHLB stock amounted to $143,851,000 at September 30, 2003 compared
with $132,320,000 one year ago. The Company received $8,155,000 in stock
dividends during the year and $3,376,000 in stock that was acquired from United.
Intangible assets. On August 31, 2003, the Company acquired United. The
acquisition produced goodwill of $19,263,000, a core deposit intangible of
$4,921,000 and a non-compete agreement intangible of $575,000. As a result,
goodwill increased to $54,966,000 at September 30, 2003 compared to $35,703,000
one year ago. Additionally, the unamortized balance of the core deposit
intangible and the non-compete agreement intangible were $4,805,000 and
$565,000, respectively, at September 30, 2003.
8
Other assets. Other assets increased $5,045,000 to $34,461,000 at September 30,
2003 from a commitment the Company made to invest a total of $10,000,000 into a
partnership to provide low-income housing. As of September 30, 2003, only
$100,000 had been invested. Current accounting rules require that the total
amount of the unfunded investment commitment, $9,900,000, be reported as both an
other liability and an other asset. This increase was offset by a decrease in
fair value of unsettled investments receivable of $5,637,000.
Customer accounts. Customer accounts at September 30, 2003 totaled
$4,577,598,000 compared with $4,521,922,000 at September 30, 2002, a 1.2%
increase. See "Liquidity and Capital Resources" above.
FHLB advances and other borrowings. Total borrowings of $1,750,000,000 at
September 30, 2003 remained unchanged from one year ago. See "Interest Rate
Risk" above.
RESULTS OF OPERATIONS
GENERAL
Fiscal 2003 net income decreased 2% from fiscal 2002. See Note S, "Selected
Quarterly Financial Data (Unaudited)," which highlights the quarter-by-quarter
results for the years ended September 30, 2003 and 2002.
PERIOD END SPREAD - AS OF THE DATE SHOWN
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
2001 2002 2002 2002 2002 2003 2003 2003
Interest rate on loans and
mortgage - backed securities* 7.49% 7.41% 7.35% 7.26% 7.10% 6.94% 6.68% 6.40%
Interest rate on
investment securities** ........ 5.50 3.19 3.09 2.82 2.29 2.28 2.00 1.98
Combined 7.37 6.96 6.89 6.53 6.06 5.84 5.49 5.28
Interest rate on
customer accounts 3.78 3.25 3.16 2.94 2.65 2.42 2.19 1.96
Interest rate on
borrowings 5.24 5.24 5.24 5.03 5.03 5.03 5.03 5.03
Combined ................. 4.16 3.76 3.69 3.52 3.32 3.16 3.00 2.81
Interest rate spread ........... 3.21% 3.20% 3.20% 3.01% 2.74% 2.68% 2.49% 2.47%
* Includes securitized assets subject to repurchase
** Includes municipal bonds at tax-equivalent rates and cash equivalents
The interest rate spread decreased during fiscal 2003 from 3.01% at September
30, 2002 to 2.47% at September 30, 2003. See "Interest Rate Risk" above.
COMPARISON OF FISCAL 2003 RESULTS WITH FISCAL 2002
Interest income on loans, securitized assets subject to repurchase and
mortgage-backed securities decreased $73,935,000 (15.1%) in fiscal 2003 from
2002 as interest rates declined to 6.40% from 7.26% one year ago. The Company
originated $1,867,112,000 in loans, which was more than offset by loan
repayments and payoffs of $2,604,297,000 in fiscal 2003.
Interest and dividend income on investment securities and cash equivalents
increased $11,428,000 (50.7%) in fiscal 2003 from fiscal 2002. Rates declined to
1.98% at September 30, 2003 compared with 2.82% at September 30, 2002. The
9
combined investment securities, cash equivalents and FHLB stock portfolio
increased 56.4% to $1,839,847,000 at September 30, 2003 versus $1,176,737,000
one year ago.
Interest expense on customer accounts decreased 30.4% to $105,919,000 for fiscal
2003 from $152,288,000 for fiscal 2002. The decrease related to a small increase
in customer accounts to $4,577,598,000 from $4,521,922,000 the prior year,
coupled with a significant decrease in the cost of customer accounts to 1.96% at
year end compared to 2.94% one year ago.
Interest expense on FHLB advances and other borrowings increased to $88,965,000
in fiscal 2003 from $82,653,000 in fiscal 2002 primarily due to an increase in
average borrowings to $1,750,648,000 as of September 30, 2003 from
$1,568,220,000 one year ago. The average cost of borrowings as of September 30,
2003 remained constant at 5.03% from one year ago.
The provision for loan losses was $1,500,000 for fiscal 2003 compared to
$7,000,000 in fiscal 2002. This decrease reflects the continued decline in the
amount of the loan portfolio combined with strong asset quality indicators.
Non-performing assets remained low at $27,434,000, or .36% of total assets at
September 30, 2003 compared with $33,876,000, or .46% of total assets at
September 30, 2002. Management believes the allowance for loan losses, totaling
$25,806,000, or 94% of non-performing assets, is adequate to absorb estimated
losses inherent in the portfolio.
Total other income increased $6,720,000 (66.9%) in fiscal 2003 from fiscal 2002.
This increase is primarily the result of fee income related to prepayments and
the refinancing of mortgage loans and a $3,382,000 gain on the sale of real
estate. Net gains on the sale of securities totaled $1,040,000 in fiscal 2003
compared to $765,000 in fiscal 2002.
Total other expense decreased $5,069,000 (10.0%) in fiscal 2003 over fiscal
2002. Compensation expense decreased $3,213,000 in fiscal 2003, primarily
attributable to a larger bonus being paid to all employees in fiscal 2002 versus
fiscal 2003. Routine operating expenses, including data processing, decreased
$2,044,000 in fiscal 2003 due to reduced depreciation expense of $422,000 and
general cost containment measures. Personnel, including part-time employees
considered on a full-time equivalent basis, increased to 754 at September 30,
2003 compared to 726 at September 30, 2002. The branch network increased to 119
offices at September 30, 2003 versus 115 offices one year ago. The United
acquisition added 36 full-time equivalent employees and four branches. Other
expense for fiscal 2003 equaled .61% of average assets compared with .70% in
fiscal 2002.
Income tax expense decreased $2,088,000 (2.6%) in fiscal 2003. The effective tax
rate was 35.19% for fiscal 2003 versus 35.26% for fiscal 2002.
COMPARISON OF FISCAL 2002 RESULTS WITH FISCAL 2001
Interest income on loans, securitized assets subject to repurchase and
mortgage-backed securities decreased $32,896,000 (6.3%) in fiscal 2002 from 2001
as average interest rates declined to 7.26% from 7.61% one year ago. The Company
originated $1,430,834,000 in loans, which was more than offset by loan
repayments and payoffs of $1,823,281,000 in fiscal 2002.
Interest and dividend income on investment securities and cash equivalents
increased $4,634,000 (25.9%) in fiscal 2002 from fiscal 2001. The
weighted-average yield declined to 2.82% at September 30, 2002 compared with
7.79% at September 30, 2001, due to the significant increase in lower yielding
cash balances. The combined investment securities, cash equivalents and FHLB
stock portfolio increased 336% to $1,176,737,000 at September 30, 2002 versus
$270,085,000 one year ago.
Interest expense on customer accounts decreased 21.8% to $152,288,000 for fiscal
2002 from $194,710,000 for fiscal 2001. The decrease related to an increase in
customer accounts to $4,521,922,000 from $4,316,692,000 the prior year coupled
with a significant decrease in the average cost of customer accounts to 2.94% at
year end compared to 4.31% one year ago.
Interest expense on FHLB advances and other borrowings decreased to $82,653,000
in fiscal 2002 from $125,410,000 in fiscal 2001 primarily due to a decline in
average borrowings to $1,568,220,000 as of September 30, 2002 from
$2,264,001,000 one year ago. This decrease in average volume was coupled with a
decrease in average rates to 5.03% as of September 30, 2002 from 5.09% at
September 30, 2001.
10
The provision for loan losses was $7,000,000 for fiscal 2002 compared to
$1,850,000 in fiscal 2001. This increase reflects the continued decline in
economic conditions in the markets the Company serves, including high
unemployment levels and a slowdown in the home construction market in the
Pacific Northwest. However, non-performing assets remained low at $33,876,000,
or .46% of total assets at September 30, 2002 compared with $33,758,000, or .48%
of total assets at September 30, 2001. Management believes the allowance for
loan losses, totaling $23,912,000, or 71% of non-performing assets, is adequate
to absorb estimated losses inherent in the portfolio.
Total other income decreased $1,567,000 (13.5%) in fiscal 2002 from fiscal 2001.
Net gains on the sale of securities totaled $765,000 in fiscal 2002 compared to
$3,235,000 in fiscal 2001. The decline was partially offset by a one-time gain
of $515,000 on the disposition of a branch in fiscal 2002.
Total other expense increased $2,131,000 (4.4%) in fiscal 2002 over fiscal 2001.
Compensation expense increased $5,776,000 in fiscal 2002, primarily attributable
to a bonus paid to all employees based on improved operating results; however,
this was offset by the elimination of goodwill amortization expense of
$5,875,000 over fiscal 2001. Routine operating expenses, including data
processing, increased $1,868,000 in fiscal 2002 largely due to the installation
of a new teller system. Personnel, including part-time employees considered on a
full-time equivalent basis, increased to 726 at September 30, 2002 compared to
714 at September 30, 2001. The branch network increased to 115 offices at
September 30, 2002 versus 111 offices one year ago. Other expense for fiscal
2002 equaled .70% of average assets compared with .68% in fiscal 2001.
Income tax expense increased $16,866,000 (26.4%) in fiscal 2002. The effective
tax rate was 35.26% for fiscal 2002 and and 35.25% for fiscal 2001.
11
SELECTED FINANCIAL DATA
Year ended September 30, 2003 (1) 2002 (1) 2001 (1) 2000 1999
(In thousands, except per share data)
Interest income $449,295 $511,802 $540,064 $495,949 $453,620
Interest expense 194,884 234,941 320,120 299,511 244,490
Net interest income 254,411 276,861 219,944 196,438 209,130
Provision for loan losses 1,500 7,000 1,850 -- 684
Other income 16,571 10,163 12,013 11,309 12,779
Other expense 45,759 50,828 48,697 44,568 44,144
Income before income taxes 223,723 229,196 181,410 163,179 177,081
Income taxes 78,724 80,812 63,946 57,500 62,795
Net income $144,999 $148,384 $117,464 $105,679 $114,286
Per share data
Basic earnings $ 2.08 $ 2.12 $ 1.68 $ 1.51 $ 1.55
Diluted earnings 2.06 2.10 1.67 1.50 1.54
Cash dividends 0.86 0.82 0.77 0.74 0.68
September 30, 2003 2002 2001 2000 1999
(In thousands)
Total assets $7,535,975 $7,392,441 $7,026,743 $6,719,841 $6,163,503
Loans and mortgage-backed securities* 5,443,266 5,990,223 6,537,010 6,277,340 5,731,644
Investment securities** 1,696,169 1,044,417 145,724 142,992 141,753
Customer accounts 4,577,598 4,521,922 4,316,692 3,465,270 3,379,502
FHLB advances 1,650,000 1,650,000 1,637,500 1,209,000 1,454,000
Other borrowings 100,000 100,000 30,000 1,154,509 454,257
Stockholders' equity 1,055,596 960,718 874,009 759,165 750,023
Number of
Customer accounts 217,785 213,404 211,570 191,343 189,419
Mortgage loans 33,975 38,096 42,032 41,741 40,104
Offices 119 115 111 108 107
* Includes securitized assets subject to repurchase
** Includes cash equivalents
(1) As restated see Note A
12
Washington Federal, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2003 2002
- ------------- ----------- -----------
(In thousands)
AS RESTATED - SEE NOTE A
ASSETS
Cash and cash equivalents, including repurchase agreements of $1,350,000 and $925,000 $ 1,437,208 $ 975,153
Available-for-sale securities, including encumbered securities of $76,921 and $114,583, at fair value 781,798 890,751
Held-to-maturity securities, including encumbered securities of $75,690 and $0, at amortized cost 154,178 168,925
Securitized assets subject to repurchase, net 210,782 755,961
Loans receivable, net 4,606,726 4,292,003
Interest receivable 29,489 39,503
Premises and equipment, net 60,942 55,119
Real estate held for sale 16,204 17,587
FHLB stock 143,851 132,320
Intangible assets 60,336 35,703
Other assets 34,461 29,416
----------- -----------
$ 7,535,975 $ 7,392,441
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Customer accounts
Savings and demand accounts $ 4,520,051 $ 4,452,250
Repurchase agreements with customers 57,547 69,672
----------- -----------
4,577,598 4,521,922
FHLB advances 1,650,000 1,650,000
Other borrowings, primarily securities sold under agreements to repurchase 100,000 100,000
Advance payments by borrowers for taxes and insurance 23,281 22,704
Federal and state income taxes, including net deferred liabilities of $70,485 and $80,185 70,011 84,235
Accrued expenses and other liabilities 59,489 52,862
----------- -----------
6,480,379 6,431,723
Stockholders' equity
Common stock, $1.00 par value, 100,000,000 shares authorized, 85,553,789 and 83,833,244
shares issued; 71,173,487 and 69,894,902 shares outstanding 85,554 76,212
Paid-in capital 1,085,650 968,858
Accumulated other comprehensive income, net of tax 26,890 47,720
Treasury stock, at cost; 14,380,302 and 13,938,342 shares (207,337) (198,279)
Retained earnings 64,839 66,207
----------- -----------
1,055,596 960,718
----------- -----------
$ 7,535,975 $ 7,392,441
----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
Washington Federal, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, 2003 2002 2001
- ------------------------ ------------ ------------ ------------
(In thousands, except per share data)
AS RESTATED - SEE NOTE A
INTEREST INCOME
Loans and securitized assets subject to repurchase $ 353,286 $ 406,262 $ 426,240
Mortgage-backed securities 62,021 82,980 95,898
Investment securities 33,988 22,560 17,926
------------ ------------ ------------
449,295 511,802 540,064
INTEREST EXPENSE
Customer accounts 105,919 152,288 194,710
FHLB advances and other borrowings 88,965 82,653 125,410
------------ ------------ ------------
194,884 234,941 320,120
------------ ------------ ------------
Net interest income 254,411 276,861 219,944
Provision for loan losses 1,500 7,000 1,850
------------ ------------ ------------
Net interest income after provision for loan losses 252,911 269,861 218,094
OTHER INCOME
Gain on sale of securities, net 1,040 765 3,235
Gain on sale of real estate 3,382 -- --
Other 12,343 9,280 8,377
------------ ------------ ------------
16,765 10,045 11,612
OTHER EXPENSE
Compensation and fringe benefits 30,846 34,059 28,283
Amortization of intangibles 126 -- 5,875
Occupancy expense 6,798 6,735 6,373
Other 7,989 10,034 8,166
------------ ------------ ------------
45,759 50,828 48,697
Gain (loss) on real estate acquired through foreclosure, net (194) 118 401
------------ ------------ ------------
Income before income taxes 223,723 229,196 181,410
Income taxes
Current 80,106 81,835 60,737
Deferred (1,382) (1,023) 3,209
------------ ------------ ------------
78,724 80,812 63,946
------------ ------------ ------------
NET INCOME $ 144,999 $ 148,384 $ 117,464
------------ ------------ ------------
PER SHARE DATA
Basic earnings $ 2.08 $ 2.12 $ 1.68
Diluted earnings 2.06 2.10 1.67
Cash dividends 0.86 0.82 0.77
Weighted average number of shares outstanding,
including dilutive stock options 70,232,695 70,523,160 70,461,517
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
Washington Federal, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
------- ---------- --------- --------- --------- ----------
(In thousands) - As Restated - See Note A
Balance at October 1, 2000 $62,296 $ 785,745 $ 98,142 $ 3,000 $(190,018) $ 759,165
Eleven-for-ten stock split
distributed February 23, 2001 6,247 101,767 (108,072) (58)
Comprehensive income:
Net income 117,464 117,464
Other comprehensive income,
net of tax of $24,035:
Unrealized gains on securities 46,245 46,245
Reclassification adjustment for losses on
securities sold (2,095) (2,095)
----------
Total comprehensive income 161,614
Dividends (54,044) (54,044)
Proceeds from exercise of
common stock options 459 5,663 6,122
Proceeds from Employee
Stock Ownership Plan 346 806 1,152
Restricted stock 4 112 (58) 58
------- ---------- --------- --------- --------- ----------
Balance at September 30, 2001 69,006 893,633 53,432 47,150 (189,212) 874,009
------- ---------- --------- --------- --------- ----------
Eleven-for-ten stock split
distributed February 22, 2002 6,905 70,824 (77,792) (63)
Comprehensive income:
Net income 148,384 148,384
Other comprehensive income,
net of tax of $310:
Unrealized gains on securities 1,065 1,065
Reclassification adjustment for losses on
securities sold (495) (495)
----------
Total comprehensive income 148,954
Dividends (57,383) (57,383)
Proceeds from exercise of
common stock options 282 3,462 3,744
Proceeds from Employee
Stock Ownership Plan 461 1,157 1,618
Restricted stock 19 478 (434) 63
Treasury stock purchases (10,224) (10,224)
------- ---------- --------- --------- --------- ----------
Balance at September 30, 2002 76,212 968,858 66,207 47,720 (198,279) 960,718
------- ---------- --------- --------- --------- ----------
Eleven-for-ten stock split
distributed February 21, 2003 7,622 79,612 (87,369) (135)
Comprehensive income:
Net income 144,999 144,999
Other comprehensive income,
net of tax of $11,340:
Changes in unrealized losses on securities (20,157) (20,157)
Reclassification adjustment for losses on
securities sold (673) (673)
----------
Total comprehensive income 124,169
Dividends (60,004) (60,004)
Proceeds from exercise of
common stock options 357 4,369 4,726
Tax benefit related to exercise
of stock options 1,218 1,218
Proceeds from Employee
Stock Ownership Plan 546 976 1,522
Restricted stock 14 332 (212) 134
Acquisition-related stock issuance 1,349 31,933 33,282
Treasury stock purchases (10,034) (10,034)
------- ---------- --------- --------- --------- ----------
Balance at September 30, 2003 $85,554 $1,085,650 $ 64,839 $ 26,890 $(207,337) $1,055,596
------- ---------- --------- --------- --------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
Washington Federal, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, 2003 2002 2001
------------ ------------ ------------
(In thousands)
AS RESTATED - SEE NOTE A
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 144,999 $ 148,384 $ 117,464
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of fees, discounts and premiums, net (12,206) (14,719) 1,434
Amortization of intangible assets 126 -- 5,875
Depreciation 3,099 3,521 2,996
Provision for loan losses 1,500 7,000 1,850
Gain on investment securities and real estate held for sale, net (4,228) (883) (3,636)
Decrease (increase) in accrued interest receivable 9,126 8,777 (7,580)
Increase (decrease) in income taxes payable (5,308) (11,883) 15,106
FHLB stock dividends (8,155) (7,959) (8,047)
Decrease (increase) in other assets (11,202) 3,810 (1,714)
Increase in accrued expenses and other liabilities 3,226 1,634 1,436
------------ ------------ ------------
Net cash provided by operating activities 120,977 137,682 125,184
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and contracts originated
Loans on existing property (1,078,374) (892,595) (1,157,278)
Construction loans (487,692) (363,420) (369,808)
Land loans (163,533) (87,212) (130,161)
Loans refinanced (137,513) (87,607) (86,969)
------------ ------------ ------------
(1,867,112) (1,430,834) (1,744,216)
Savings account loans originated (1,866) (5,765) (3,342)
Loan principal repayments 2,604,297 1,823,281 1,318,784
Increase (decrease) in undisbursed loans in process 71,804 (13,323) (29,503)
Loans purchased (417,669) (60,874) (2,842)
Available-for-sale securities purchased (459,895) (180,683) (89,882)
Principal payments and maturities of available-for-sale securities 487,438 344,986 216,992
Available-for-sale securities sold 80,000 10,000 50,282
Held-to-maturity securities purchased (100,100) -- --
Principal payments and maturities of held-to-maturity securities 115,812 80,154 45,325
Cash provided by acquisition 94,314 -- --
Proceeds from sales of real estate held for sale 16,342 19,603 19,268
Premises and equipment purchased, net (4,730) (4,398) (6,751)
------------ ------------ ------------
Net cash provided (used) by investing activities 618,635 582,147 (225,885)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts (214,248) 205,230 851,422
Net decrease in short-term borrowings -- (117,500) (1,646,009)
Proceeds from long-term borrowings -- 200,000 950,000
Proceeds from exercise of common stock options 5,944 3,744 6,122
Dividends paid (60,004) (57,383) (54,044)
Proceeds from Employee Stock Ownership Plan 1,522 1,618 1,152
Treasury stock purchased, net (10,034) (10,224) --
Increase (decrease) in advance payments by borrowers for taxes and insurance (737) (492) (5,897)
------------ ------------ ------------
Net cash provided (used) by financing activities (277,557) 224,993 102,746
------------ ------------ ------------
Increase in cash and cash equivalents 462,055 944,822 2,045
Cash and cash equivalents at beginning of year 975,153 30,331 28,286
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,437,208 $ 975,153 $ 30,331
------------ ------------ ------------
16
Year ended September 30, 2003 2002 2001
------------ ------------ ------------
(In thousands)
AS RESTATED - SEE NOTE A
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure $ 11,771 $ 20,294 $ 18,229
Non-cash operating activities
Assets securitized, subject to repurchase, net -- -- 1,388,197
Cash paid during the year for
Interest 195,360 237,480 322,933
Income taxes 83,878 90,743 45,746
The following summarizes the non-cash activities relating to the acquisition
Fair value of assets and intangibles acquired, including goodwill $ (343,626) $ -- $ --
Fair value of liabilities assumed 276,872 -- --
Fair value of stock issued 33,282 -- --
------------ ------------ ------------
Cash paid out in acquisition (33,472) -- --
Plus cash acquired 127,786 -- --
------------ ------------ ------------
Net cash provided by the acquisition $ 94,314 $ -- $ --
------------ ------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
NOTE A
RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 2003 consolidated
financial statements and the filing of its 2003 Annual Report on Form 10-K with
the Securities and Exchange Commission, management of the Company determined
that the accounting for certain components of net unrealized gains on derivative
instruments were incorrectly recorded. The Company's correction of its
accounting for certain derivatives effected the 12 quarter period beginning with
the three months ended December 31, 2000, through the September 30, 2003
quarter. The error resulted in the understatement of net income in fiscal 2001
by $3.8 million, in fiscal 2002 by $4.4 million and an overstatement of net
income in fiscal 2003 of $.5 million. The cumulative impact of the restatement
is an increase in net income of approximately $7.7 million or 1.92% in the
aggregate, when compared with the aggregate of previously reported net income
for the fiscal years 2001 through 2003.
In fiscal 2001, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The adoption of this standard changed the way the Company accounted for
its forward commitments to purchase and sell mortgage-backed securities (see
Note B and Note T for a description of the Company's forward commitments). As of
the beginning of fiscal 2001, under FAS 133 the Company was required to assess
and measure the effectiveness of the hedge and record any ineffectiveness in
earnings. Upon review of its hedging program in fiscal 2004, the Company
determined that it had improperly included the difference between the spot price
and the forward price of the contracts when computing the hedge effectiveness.
This restatement represents an adjustment to exclude the change from the spot
price compared to the forward price from the hedge effectiveness calculation and
reflect the excluded component in earnings.
18
The FAS 133 adjustment affects the following periods as shown:
Year Ended September 30,
--------------------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands, except per share data)
Interest Income on MBS
As previously reported $ 62,911 $ 76,138 $ 89,952
As restated 62,021 82,980 95,898
Gain on Sale of Investments
As previously reported 992 765 3,235
As restated 1,040 765 3,235
Income tax expense
As previously reported 79,021 78,400 61,850
As restated 78,724 80,812 63,946
Net Income
As previously reported 145,544 143,954 113,614
As restated 144,999 148,384 117,464
Basic Earnings Per Share
As previously reported 2.09 2.06 1.63
As restated 2.08 2.12 1.68
Diluted Earnings Per Share
As previously reported 2.07 2.04 1.61
As restated 2.06 2.10 1.67
Available for sale securities
As previously reported 804,186 918,776 1,079,896
As restated 781,798 890,751 1,046,597
Other Assets
As previously reported 12,073 1,391 1,015
As restated 34,461 29,416 34,314
Other Comprehensive Income
As previously reported 34,624 56,000 51,000
As restated 26,890 47,720 47,150
Retained Earnings
As previously reported 57,105 57,927 49,582
As restated 64,839 66,207 53,432
In addition, this restatement includes a reclassification the Company has made
to the consolidated statements of financial condition to reclassify the fair
value of the forward contracts (derivatives) from available for sale securities
to other assets.
NOTE B
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of Washington Federal, Inc. (Company) and its wholly owned
subsidiaries: Washington Federal Savings (Association), Washington Services,
Inc., First Insurance Agency, Inc. and Statewide Mortgage Services, Inc.
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 Company is principally engaged in the business of attracting
19
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 multi-family real estate loans. The Company conducts its activities
from a network of 119 offices located in Washington, Oregon, Idaho, Utah,
Arizona, Nevada, Texas and Colorado.
Cash and cash equivalents. Cash and cash equivalents include cash on hand,
amounts due from banks, overnight investments and repurchase agreements with an
initial maturity of three months or less.
Investments and mortgage-backed securities. The Company accounts for investments
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 for unrealized losses is
provided if 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 the accumulated other comprehensive income
component of stockholders' equity.
Management evaluates debt and equity securities for other than temporary
impairment on a quarterly basis based on the securities' current credit quality,
interest rates, term to maturity and management's intent and ability to hold the
securities until the principal is recovered. Any other than temporary declines
in fair value are recognized in the income statement as loss from securities.
Premiums and discounts on investments are deferred and recognized over the life
of the asset using the effective interest method.
Forward contracts to purchase mortgage-backed securities are recorded at fair
value on the balance sheet as a part of other assets. These contracts are
designated by the Company as cash flow hedges of the price risk of the
anticipated purchase of securities. On the date the Company enters into a
derivative contract, the derivative instrument is designated as a hedge of the
variability in expected future cash flows associated with a probable future
transaction. The Company uses a series of short-term commitments that are
modified (rolled) to match the term of the anticipated transaction. Under cash
flow hedge accounting, if specific criteria are met, the effective portion the
derivative instrument is recognized as a component of stockholders' equity
through comprehensive income until the related forecasted transaction affects
earnings, either through the recognition of interest income or through the sale
of the security. To the extent that forward contracts to purchase securities are
not designated as cash flow hedges or fail to meet hedging criteria, including
purchasing the mortgage-backed securities within a specific time frame, the fair
value of the contracts will be included in earnings.
The Company may enter into certain forward contracts to sell mortgage-backed
securities to hedge the price risk in certain mortgage-backed securities
accounted for as available-for-sale securities. To the extent forward sales
contracts meet specific hedging criteria, the effective portion of the change in
market value associated with the contract is recorded through comprehensive
income. To the extent that forward sales contracts are not designated as cash
flow hedges or fail to meet hedging criteria, the fair value of the contracts
will be recorded in earnings. The Company records forward purchases and forward
sales contracts net, where it has the legal right of offset, in other assets.
The Company is hedging the spot price at inception of the hedge. Changes to the
contractual price of the forward contract over the length of time the contract
is rolled forward are excluded from the effectiveness test and included in
earnings. There is no ineffectiveness associated with the changes in the spot
price from inception to delivery of the contract because the underlying security
of the derivative instrument is the same as that of the forecasted transaction.
Securitized assets subject to repurchase. In March 2001, the Company transferred
some of its permanent single-family residential loans into a Real Estate
Mortgage Investment Conduit (REMIC). The REMIC then issued securities backed by
such loans, all of which were retained by the Company. The terms of the transfer
of the loans to the REMIC contain a call provision whereby the Company can
repurchase the loans when the outstanding balance of the pool declines to 15% or
less of the original amount; therefore, the transfer did not qualify as a sale
under generally accepted accounting principles. Accordingly, the retained
interests continue to be accounted for in a manner similar to loans and are
included in the accompanying balance sheet as securitized assets subject to
repurchase.
20
Loans receivable. Loans receivable more than 90 days past due are placed on
non-accrual status and an allowance for accrued interest is established. Any
interest ultimately collected is credited to income in the period of recovery.
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance is based on ongoing, quarterly assessments of
the probable and estimable losses inherent in the loan portfolio. The Company's
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
and the unallocated allowance.
The formula portion of the general loan loss allowance is established by
applying a loss percentage factor to the different loan types. The allowances
are provided based on Management's continuing evaluation of the pertinent
factors underlying the quality of the loan portfolio, including changes in the
size and composition of the loan portfolio, actual loan loss experience, current
economic conditions, geographic concentrations, seasoning of the loan portfolio,
specific industry conditions, and the duration of the current business cycle.
The recovery of the carrying value of loans is susceptible to future market
conditions beyond the Company's control, which may result in losses or
recoveries differing from those provided.
Specific allowances are established in cases where Management has identified
significant conditions or circumstances related to a loan that Management
believes indicate the probability that a loss has been incurred. The unallocated
allowance allows for the estimation risk associated with the formula and
specific allowances.
Impaired loans consist of loans receivable that will not be repaid in accordance
with their contractual terms and are measured using the fair value of the
collateral. Smaller balance loans are excluded from this analysis.
Premises and equipment. Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the respective assets. Expenditures are
capitalized for betterments and major renewals. 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.
Intangible assets. Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net assets acquired. The core deposit
intangible and non-compete agreement intangible are acquired assets that lack
physical substance but can be distinguished from goodwill. Goodwill is no longer
amortized, but rather is evaluated for impairment on an annual basis. Other
intangible assets are amortized over their estimated useful lives and are
subject to impairment testing when events or circumstances change. If
circumstances indicate that the carrying value of the assets may not be
recoverable, an impairment charge could be recorded. No impairment of intangible
assets has ever been identified. The Company amortizes the core deposit
intangible on an accelerated basis over its estimated life of seven years; the
non-compete agreement intangible is amortized on a straight-line basis over its
life of five years.
Deferred fees and discounts on loans. Loan discounts and loan fees are deferred
and recognized over the life of the loans using the effective interest method
based on actual loan payments.
Accounting for stock-based compensation. In October 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". SFAS No.
123 requires expanded disclosures of stock-based compensation arrangements with
employees and encourages application of the fair value recognition provisions in
the statement. Companies may continue following rules to recognize and measure
compensation as outlined in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", but are now 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. The Company adopted the disclosure requirements of SFAS No.
123, but continues to measure its stock-based employee compensation arrangements
under the provisions of APB Opinion No. 25 and related Interpretations. In
December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which provides guidance on the
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB Opinion No. 25 to the fair value method
described in SFAS No. 123, if a company elects to do so. The Company has elected
to continue to follow the intrinsic value method in accounting for stock options
as provided in APB Opinion No. 25.
21
The Company has three stock-option employee compensation plans, which are
described more fully in Note N. The fair value of options granted under the
Company's stock option plans is estimated on the date of grant using the
Black-Scholes option-pricing model which utilizes the weighted-average
assumptions in the following table:
Year ended September 30, 2003 2002 2001
- ------------------------ ------- ------- -------
Annual dividend yield 4.19% 4.00% 4.00%
Expected volatility 28% 27% 34%
Risk-free interest rate 2.63% 3.52% 3.80%
Expected life 5 years 5 years 5 years
No stock-option employee compensation cost is reflected in net income, as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant, and the number of shares of each
grant is fixed at the grant date. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123:
Year ended September 30, 2003 2002 2001
- ------------------------ ----------- ----------- -----------
(In thousands, except per share data)
Net income, as reported $ 144,999 $ 148,384 $ 117,464
Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effects (1,111) (1,149) (738)
----------- ----------- -----------
Pro forma net income $ 143,888 $ 147,235 $ 116,726
Earnings per share:
Basic - as reported $ 2.08 $ 2.12 $ 1.68
Basic - pro forma 2.07 2.11 1.67
Diluted - as reported 2.06 2.10 1.67
Diluted - pro forma 2.05 2.09 1.66
Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires Management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates
reported in the financial statements include the allowance for loan losses,
intangible assets, deferred taxes and contingent liabilities. Actual results
could differ from these estimates.
In the second quarters of fiscal 2003, 2002 and 2001, the Company declared an
eleven-for-ten stock split in the form of a 10% stock dividend. All share and
per share amounts have been adjusted to reflect these stock dividends.
Business segments. The Company has determined that its current business and
operations consist of one business segment.
Accounting changes. In April 2003, the FASB issued and the Company adopted SFAS
No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities". This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The adoption of
SFAS No. 149 did not have a material impact on the Company's financial
statements.
In November 2002, the FASB issued and the Company adopted Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This interpretation
expands the disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees and requires the guarantor to
recognize a liability for the fair value of an obligation assumed under a
guarantee. The adoption of FIN 45 did not have a material impact on the
Company's financial statements.
In January 2003, the FASB issued and the Company adopted Interpretation No. 46
("FIN 46"), "Consolidation of Variable Interest Entities". This interpretation
provides new accounting guidance on how to identify a variable interest entity
("VIE") and determine when the assets, liabilities, non-controlling interest and
results of operation of a VIE need to be included in a corporation's
consolidated financial statements. The adoption of FIN 46 did not have a
material impact on the Company's financial statements.
Reclassifications. Certain reclassifications have been made to the financial
statements for years prior to September 30, 2003 to conform to current year
classifications.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C
INVESTMENT SECURITIES
September 30, 2003
-------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized ---------------------- Fair
Cost Gains Losses Value Yield
Available-for-sale securities
Mutual Fund Investments $ 170,000 $ - $ (960) $ 169,040 2.37%
U.S. government and agency securities due
Within 1 year 96,461 442 (27) 96,876 7.08
1 to 5 years
5 to 10 years 10,509 - (9) 10,500 5.36
Over 10 years 13,941 5,732 - 19,673 9.29
Mortgage-Backed Securities
Agency pass-through certificates 462,948 22,922 (161) 485,709 6.14
--------- --------- --------- ----------- -------
753,859 29,096 (1,157) 781,798
Held-to-maturity securities
Tax-exempt municipal bonds due
5 to 10 years 3,989 371 - 4,360 8.92
Over 10 years 10,140 1,216 - 11,356 8.67
U.S. government and agency securities due
1 to 5 years - - - -
Mortgage-Backed Securities
Agency pass-through certificates 140,049 4,506 (1,185) 143,370 6.27%
--------- --------- --------- -----------
154,178 6,093 (1,185) 159,086
--------- --------- --------- -----------
$ 908,037 $ 35,189 $ (2,342) $ 940,884
========= ========= ========= ===========
23
September 30, 2002
------------------------------------------------------------------------
(In thousands)
Gross Unrealized
Amortized -------------------------- Fair
Cost Gains Losses Value Yield
Available-for-sale securities
U.S. government and agency securities due
Within 1 year $ 64,500 $ 245 $ - $ 64,745 7.80%
1 to 5 years 15,045 1,314 - 16,359 6.98
5 to 10 years 4,745 128 (38) 4,835 7.04
Over 10 years 9,280 5,350 - 14,630 10.41
Mortgage-Backed Securities
Agency pass-through certificates 743,188 47,080 (86) 790,182 6.73
----------- ----------- ----------- ------------- -------
836,758 54,117 (124) 890,751
Held-to-maturity securities
Tax-exempt municipal bonds due
5 to 10 years 3,993 521 - 4,514 8.92
Over 10 years 12,855 1,205 (9) 14,051 8.95
U.S. government and agency securities due
1 to 5 years - - - -
Mortgage-Backed Securities
Agency pass-through certificates 152,077 8,948 - 161,025 7.04%
----------- ----------- ----------- -------------
168,925 10,674 (9) 179,590
----------- ----------- ----------- -------------
$ 1,005,683 $ 64,791 $ (133) $ 1,070,341
=========== =========== =========== =============
$80.0 million in available-for-sale securities were sold in fiscal 2003,
resulting in a net gain of $1,040,000. A $10.0 million available-for-sale
security was sold in fiscal 2002, resulting in a gain of $765,000. $50.3 million
of available-for-sale securities were sold in 2001, resulting in a gain of $3.2
million.
Substantially all mortgage-backed securities have contractual due dates that
exceed 10 years.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D
LOANS RECEIVABLE AND SECURITIZED ASSETS SUBJECT TO REPURCHASE
September 30, 2003 2002
- -------------------------------------- ---------- ----------
(In thousands)
Conventional real estate
Permanent single-family residential $3,851,720 $4,145,122
Multi-family 479,129 441,648
Land 217,214 179,936
Construction 639,058 574,866
---------- ----------
5,187,121 5,341,572
---------- ----------
Less
Allowance for probable losses 25,806 23,912
Loans in process 307,537 235,733
Deferred loan origination fees 36,270 33,963
---------- ----------
369,613 293,608
---------- ----------
$4,817,508 $5,047,964
---------- ----------
The Company originates adjustable and fixed interest rate loans, which at
September 30, 2003 consisted of the following:
Fixed-Rate Adjustable-Rate
(In thousands) (In thousands)
Term to Maturity Book Value Term to Rate Adjustment Book Value
Within 1 year $ 19,615 Less than 1 year $ 606,672
1 to 3 years 60,009 1 to 3 years 97,430
3 to 5 years 73,552 3 to 5 years 122,196
5 to 10 years 359,443 5 to 10 years 25,559
10 to 20 years 445,831 10 to 20 years ---
Over 20 years 3,376,814 Over 20 years ---
----------- ----------
$ 4,335,264 $ 851,857
----------- ----------
At September 30, 2003 and 2002, approximately $52,287,000 and $36,637,000 of
fixed-rate loan origination commitments were outstanding, respectively. Loans
serviced for others at September 30, 2003 and 2002 were approximately
$35,415,000 and $16,996,000, respectively.
Permanent single-family residential loans receivable included adjustable-rate
loans of $101,719,000 and $11,448,000 at September 30, 2003 and 2002,
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, 2003 Washington Idaho Oregon Utah Arizona Other Total
- -------------------------- ----------- --------- --------- --------- --------- --------- -----------
(In thousands)
Conventional real estate
Permanent single-family
residential $ 1,492,999 $ 464,792 $ 624,827 $ 401,448 $ 360,462 $ 507,192 $ 3,851,720
Multi-family 129,374 33,071 161,633 33,639 99,334 22,078 479,129
Land 114,951 42,694 16,482 20,903 20,181 2,003 217,214
Construction 281,987 89,604 101,895 81,073 70,264 14,235 639,058
----------- --------- --------- --------- --------- --------- -----------
$ 2,019,311 $ 630,161 $ 904,837 $ 537,063 $ 550,241 $ 545,508 $ 5,187,121
----------- --------- --------- --------- --------- --------- -----------
At September 30, 2003, the Company's recorded investment in impaired loans was
$9.6 million with allocated reserves of $1.0 million. At September 30, 2002 the
Company's recorded investment in impaired loans was $10.5 million with no
related allocated reserves. The average balance of impaired loans during 2003,
2002 and 2001 was $13.3 million, $12.7 million and $13.1 million and interest
income from impaired loans was $851,000, $922,000 and $949,000, respectively.
NOTE E
ALLOWANCE FOR LOSSES ON LOANS AND SECURITIZED ASSETS SUBJECT TO REPURCHASE
Year ended September 30, 2003 2002 2001
- ---------------------------- -------- -------- --------
(In thousands)
Balance at beginning of year $ 23,912 $ 19,683 $ 20,831
Provision for loan losses 1,500 7,000 1,850
Charge-offs (1,310) (3,401) (3,845)
Recoveries 107 630 847
Acquired reserves 1,597 --- ---
-------- -------- --------
Balance at end of year $ 25,806 $ 23,912 $ 19,683
-------- -------- --------
25
NOTE F
INTEREST RECEIVABLE
September 30, 2003 2002
- ------------------------------------------------------------- -------- --------
(In thousands)
Loans receivable and securitized assets subject to repurchase $ 24,929 $ 33,067
Allowance for uncollected interest on loans receivable (807) (956)
Mortgage-backed securities 3,043 5,158
Investment securities 2,324 2,234
-------- --------
$ 29,489 $ 39,503
-------- --------
NOTE G
PREMISES AND EQUIPMENT
September 30, 2003 2002
- --------------------------------- -------- -------- --------
(In thousands)
Estimated
Useful Life
-----------
Land -- $ 18,982 $ 13,643
Buildings 25 - 40 55,509 52,975
Leasehold improvements 7 - 15 5,409 5,302
Furniture, fixtures and equipment 2 - 10 15,446 15,052
-------- --------
95,346 86,972
Less accumulated depreciation (34,404) (31,853)
-------- --------
$ 60,942 $ 55,119
-------- --------
The Company has non-cancelable operating leases for branch offices. Future
minimum net rental commitments for all non-cancelable leases, including
maintenance and associated costs, are immaterial. Rental expense, including
amounts paid under month-to-month cancelable leases, amounted to $1,862,000,
$1,895,000 and $1,606,000 in 2003, 2002 and 2001.
NOTE H
REAL ESTATE HELD FOR SALE
September 30, 2003 2002
---- ----
(In thousands)
Acquired for development $ 4,708 $ 7,072
Acquired in settlement of loans 11,496 10,515
-------- --------
$ 16,204 $ 17,587
-------- --------
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I
CUSTOMER ACCOUNTS
September 30, 2003 2002
- --------------------------------------------------- ---------- ----------
(In thousands)
Checking accounts, .75% and under $ 190,352 $ 191,542
Passbook and statement accounts, .75% 234,023 157,759
Insured money market accounts, .50% to 1.00% 1,037,641 972,993
Certificate accounts
Less than 3.00% 2,401,924 1,619,867
3.00% to 3.99% 257,646 935,687
4.00% to 4.99% 258,875 373,230
5.00% to 5.99% 120,960 189,712
6.00% to 6.99% 18,139 11,460
7.00% and over 491 ---
---------- ----------
Total certificates 3,058,035 3,129,956
---------- ----------
Repurchase agreements with customers, .75% to 1.55% 57,547 69,672
---------- ----------
$4,577,598 $4,521,922
---------- ----------
Certificate maturities were as follows:
September 30, 2003 2002
- ------------- ---------- ----------
(In thousands)
Within 1 year $2,313,645 $2,590,373
1 to 2 years 236,988 156,413
3 to 4 years 183,379 62,260
Over 4 years 324,023 320,910
---------- ----------
$3,058,035 $3,129,956
---------- ----------
Customer accounts over $100,000 totaled $1,133,000,000 as of September 30, 2003
and $1,040,000,000 as of September 30, 2002.
Interest expense on customer accounts consisted of the following:
Year ended September 30, 2003 2002 2001
- --------------------------------------------- --------- --------- ---------
(In thousands)
Checking accounts $ 1,655 $ 2,310 $ 2,426
Passbook and statement accounts 2,114 3,201 4,066
Insured money market accounts 14,947 22,231 24,514
Certificate accounts 85,931 122,705 160,018
--------- --------- ---------
104,647 150,447 191,024
Repurchase agreements with customers 1,651 2,259 4,138
--------- --------- ---------
106,298 152,706 195,162
Less early withdrawal penalties (379) (418) (452)
--------- --------- ---------
$ 105,919 $ 152,288 $ 194,710
--------- --------- ---------
Weighted-average interest rate at end of year 1.94% 2.96% 4.31%
Weighted daily average interest rate
during the year 2.38 3.41 5.28
27
NOTE J
FHLB ADVANCES
Maturity dates of FHLB advances were as follows:
September 30, 2003 2002
- ----------------- ---------- ----------
(In thousands)
FHLB advances due
Within 1 year $ 250,000 $ ---
1 to 3 years 300,000 450,000
4 to 5 years 400,000 100,000
More than 5 years 700,000 1,100,000
---------- ----------
$1,650,000 $1,650,000
---------- ----------
Included in the table above are $1,300,000,000 of FHLB advances that are
callable by the FHLB. If these callable advances were called at the earliest
call dates, the maturities of all FHLB advances would be as follows:
September 30, 2003 2002
- ----------------- ---------- ----------
(In thousands)
FHLB advances due
Within 1 year $ 850,000 $ 600,000
1 to 3 years 700,000 650,000
4 to 5 years 100,000 400,000
More than 5 years --- ---
---------- ----------
$1,650,000 $1,650,000
---------- ----------
Financial data pertaining to the weighted-average cost and the amount of FHLB
advances were as follows:
September 30, 2003 2002 2001
- ---------------------------------------------------- ----------- ----------- -----------
(In thousands)
Weighted-average interest rate at end of year 5.13% 5.13% 5.12%
Weighted daily average interest rate during the year 5.19 5.28 5.44
Daily average of FHLB advances $ 1,650,023 $ 1,558,384 $ 1,336,025
Maximum amount of FHLB advances at any month end 1,654,000 1,654,000 2,107,000
Interest expense during the year 85,564 82,357 72,654
FHLB advances are collateralized as provided for in the Advances, Pledge and
Security Agreement by all FHLB stock owned by the Association, deposits with the
FHLB and certain mortgages or deeds of trust securing such properties as
provided in the agreements with the FHLB. As a member of the FHLB of Seattle,
the Association currently has a credit line of 35% of the total assets of the
Association, subject to collateralization requirements.
NOTE K
OTHER BORROWINGS
September 30, 2003 2002
- ----------------------------------------------- --------- ----------
(In thousands)
Securities sold under agreements to repurchase
Callable once in 2007, matures in 2012 $ 100,000 $ 100,000
--------- ----------
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, 2003 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, 2003 2002 2001
- ------------------------------------------------------ ---------- ---------- ----------
(In thousands)
Weighted-average interest rate at end of year 3.44% 3.36% ---%
Weighted daily average interest rate during the year 3.39 3.36 5.75
Daily average of securities sold under agreements
to repurchase $ 100,000 $ 4,110 $ 785,563
28
NOTE K
OTHER BORROWINGS (CONT.)
September 30, 2003 2002 2001
- ------------------------------------------------------ ---------- ---------- ----------
(In thousands)
Maximum securities sold under agreements to repurchase
at any month end $ 100,000 $ 100,000 $1,074,509
Interest expense during the year 3,388 140 45,149
NOTE L
INCOME TAXES
The consolidated statements of financial condition at September 30, 2003 and
2002 include deferred tax liabilities of $70,485,000 and $80,185,000,
respectively, that have been provided for the temporary differences between the
tax basis and the financial statement carrying amounts of assets and
liabilities. The major sources of these temporary differences and their deferred
tax effects were as follows:
September 30, 2003 2002
- --------------------------------------------------------------- --------- ---------
(In thousands)
Deferred tax assets
Real estate valuation reserves $ --- $ 440
Deferred compensation 198 230
Loan loss reserves 3,437 ---
--------- ---------
Total deferred tax assets 3,635 670
--------- ---------
Deferred tax liabilities
FHLB stock dividends 31,919 30,538
Core deposit intangible 1,748 ---
Discounts 413 (8)
Loan loss reserves --- 742
Valuation adjustment 18,850 30,000
Depreciation 3,528 2,085
Loan origination costs 13,640 9,214
Securitized asset subject to repurchase valuation adjustment 673 2,653
Other, net 3,349 5,631
--------- ---------
Total deferred tax liabilities 74,120 80,855
--------- ---------
Net deferred tax liability $ 70,485 $ 80,185
--------- ---------
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
Year ended September 30, 2003 2002 2001
- --------------------------- ---- ---- ----
Statutory income tax rate 35% 35% 35%
Dividend received deduction (1) (1) (1)
Other (1) --- ---
State income tax 2 1 1
---- --- ---
Effective income tax rate 35% 35% 35%
---- --- ---
The Small Business Job Protection Act of 1996 (the Act) required qualified
thrift institutions, such as the Association, to recapture the portion of their
tax bad debt reserves that exceeded the September 30, 1988 balance. Such
recaptured amounts are to be taken into taxable income ratably over a six-year
period beginning in 1999. Accordingly, the Association is required to pay
approximately $25,406,000 in additional federal income taxes, all of which has
been previously provided, through fiscal 2004.
A deferred tax liability has not been required to be recognized for the tax bad
debt base year reserves of the Association. The base year reserves are the
balance of reserves as of September 30, 1988 reduced proportionately for
reductions in the Association's loan portfolio since that date. At September 30,
2003 the amount of those reserves was approximately $8,139,000. The amount of
unrecognized deferred tax liability at September 30, 2003 was approximately
$2,985,000.
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, as a result of this examination.
NOTE M
PROFIT SHARING RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains a Profit Sharing Retirement Plan and Employee Stock
Ownership Plan (Plan) for the benefit of its employees. Company 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 of 1974. Employees may contribute up to 7% of their base salaries to the
Plan or a portion of their base salaries on a tax-deferred basis through the
401(k) provisions of the Plan with a combined maximum of the lesser of 100% of
base salary or $40,000. Under provisions of the Plan, employees are eligible to
participate on the date of hire and become fully vested in the Company's
contributions following seven years of service. In August 1995 the Company
received a favorable determination from the Internal Revenue Service to include
an Employee Stock Ownership feature as part of the Plan. This feature allows
employees to direct a portion of their vested account balance toward the
purchase of Company stock. Company contributions to the Plan amounted to
$2,001,000, $2,039,000 and $1,781,000 for the years ended September 30, 2003,
2002 and 2001, respectively.
29
NOTE N
STOCK OPTION PLANS
The Company has three employee stock option plans which provide a combination of
stock options and stock grants. Stockholders authorized 2,246,826 shares,
3,702,563 shares and 3,388,000 shares of common stock, as adjusted for stock
splits and stock dividends, to be reserved pursuant to the 1987 Stock Option and
Stock Appreciation Rights Plan (the 1987 Plan), the 1994 Stock Option and Stock
Appreciation Rights Plan (the 1994 Plan) and the 2001 Long-Term Incentive Plan
(the 2001 Plan), respectively. The three plans are substantially similar. Of the
9,337,389 total shares authorized by stockholders under the three plans,
4,773,062 shares remain available for issuance. All equity compensation plans
have been approved by stockholders. Options granted under each plan vest at
varying percentages commencing as early as one year after the date of grant with
expiration dates 10 years after the date of grant.
Weighted-Average
Fair Value of Option
Average Price(1) Number(1) Shares Granted
---------------- --------- ---------------------
Outstanding, October 1, 2000 $ 13.34 2,663,546
Granted in 2001 15.34 101,217 $ 4.05
Exercised in 2001 10.56 (578,673)
Forfeited in 2001 13.85 (138,349)
---------- ---------
Outstanding, September 30, 2001 14.18 2,047,741
Granted in 2002 18.31 842,655 3.42
Exercised in 2002 11.78 (317,935)
Forfeited in 2002 16.02 (165,210)
---------- ---------
Outstanding, September 30, 2002 15.82 2,407,251
Granted in 2003 20.33 82,170 3.54
Exercised in 2003 13.10 (391,176)
Forfeited in 2003 16.63 (158,944)
---------- ---------
Outstanding, September 30, 2003 $ 16.49 1,939,301
---------- ---------
(1)Average price and number of stock options granted, exercised and forfeited
have been adjusted for the 10% stock dividends.
Financial data pertaining to outstanding stock options were as follows:
September 30, 2003
Weighted-
Weighted- Weighted- Average
Average Average Number of Exercisable Price
Ranges of Number of Remaining Exercise Price of Exercisable of Exercisable
Exercise Prices Option Shares Contractual Life Option Shares Option Shares Option Shares
- --------------- ------------- ---------------- ----------------- ------------- -----------------
$ 8.91 - 14.18 711,901 5.5 years $ 13.71 236,225 $ 12.82
15.03 - 16.62 156,642 5.7 15.66 36,232 15.87
18.31 - 21.52 1,070,758 7.1 18.46 177,971 18.32
--------- --------- --------- ---------- ---------
1,939,301 6.4 years $ 16.49 450,428 $ 15.24
--------- --------- ---------- ---------
30
NOTE O
STOCKHOLDERS' EQUITY
In the second quarter of fiscal 2003, 2002 and 2001, the Company declared an
eleven-for-ten stock split in the form of a 10% stock dividend in addition to
the regular quarterly cash dividends on its shares of common stock.
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary action by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about capital components, risk-weightings and other factors.
As of September 30, 2003 and 2002, the OTS categorized the Association as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Association must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following table. There are no conditions or events since that notification that
Management believes have changed the Association's categorization.
Categorized as
Well Capitalized Under
Capital Prompt Corrective
Actual Adequacy Guidelines Action Provisions
-------------------- -------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio
-------- --------- -------- --------- --------- ----------
September 30, 2003 (In thousands)
Total capital to
risk-weighted assets $974,775 24.56% $317,465 8.00% $396,831 10.00%
Tier I capital to risk-weighted assets 956,470 24.10 NA NA 238,099 6.00
Core capital to adjusted tangible assets 956,470 12.91 NA NA 370,373 5.00
Core capital to total assets 956,470 12.91 222,224 3.00 NA NA
Tangible capital to tangible assets 956,470 12.91 111,112 1.50 NA NA
September 30, 2002
Total capital to risk-weighted assets $875,847 22.62% $309,807 8.00% $387,259 10.00%
Tier I capital to risk-weighted assets 860,179 22.21 NA NA 232,355 6.00
Core capital to adjusted tangible assets 860,179 11.85 NA NA 363,095 5.00
Core capital to total assets 860,179 11.85 217,857 3.00 NA NA
Tangible capital to tangible assets 860,179 11.85 108,928 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
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 August 2003.
The Company has an ongoing stock repurchase program. During fiscal 2003, the
Company repurchased 510,070 shares at a weighted-average price of $19.67. In
fiscal 2002, the Company repurchased 535,150 shares at a weighted-average price
of $19.11. As of September 30, 2003, management had authorization from the Board
of Directors to repurchase up to 2.8 million additional shares.
31
Information used to calculate earnings per share follows:
Year ended September 30, 2003 2002 2001
- ------------------------ ----------- ----------- -------------
(In thousands, except per share data)
Net income $ 144,999 $ 148,384 $ 117,464
Weighted-average shares
Basic weighted-average number of
common shares outstanding 69,661,074 69,855,216 69,714,999
Dilutive effect of outstanding common stock equivalents 571,621 667,944 746,518
----------- ----------- -----------
Diluted weighted-average number of
common shares outstanding 70,232,695 70,523,160 70,461,517
----------- ----------- -----------
Net income per share
Basic $ 2.08 $ 2.12 $ 1.68
Diluted 2.06 2.10 1.67
NOTE P
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate those
values. SFAS No. 107 excludes certain financial instruments and all
non-financial 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.
September 30, 2003 2002
- ------------------------------------------ ------------------------ ------------------------
(In thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial assets
Cash and cash equivalents $1,437,208 $1,437,208 $ 975,153 $ 975,153
Available-for-sale securities 781,798 781,798 890,751 890,751
Held-to-maturity securities 154,178 159,086 168,925 179,590
Loans receivable and securitized assets 4,817,508 4,899,274 5,047,964 5,743,480
FHLB stock 143,851 143,851 132,320 132,320
Forward Contracts - Derivatives 22,388 22,388 28,025 28,025
Financial liabilities
Customer accounts 4,577,598 4,590,160 4,521,922 4,538,726
FHLB advances and other borrowings 1,750,000 1,925,532 1,750,000 1,897,468
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents - 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 and securitized assets subject to repurchase - For certain
homogeneous categories of loans, such as fixed- and variable-rate 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.
Available for sale securities, held to maturity securities and derivatives -
Estimated fair value for securities issued by quasi-governmental agencies is
based on quoted market prices. The fair value of all other securities and
derivatives 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.
32
FHLB advances and other borrowings - The fair value of FHLB advances and other
borrowings is estimated by discounting the estimated future cash flows using
rates currently available to the Association for debt with similar remaining
maturities.
NOTE Q
ACQUISITION AND INTANGIBLE ASSETS
On August 31, 2003, the Company acquired United Savings and Loan Bank. The
acquisition was accounted for as a purchase transaction with the total cash
consideration funded through internal sources. The purchase price was
$65,604,000, of which $32,322,000 was paid in cash and $33,282,000 was paid in
stock. In addition, the Company paid $1,150,000 in three non-compete and
severance agreements, of which $575,000 was allocated to both goodwill and the
non-compete agreement intangible. The purchase price has been allocated to the
underlying assets and liabilities based on estimated fair values at the date of
acquisition. Results of operations are included from the date of acquisition.
The Company acquired assets with an estimated fair value of $343,626,000 and
assumed liabilities with an estimated fair value of $276,872,000. The
acquisition produced goodwill of $19,263,000, a core deposit intangible of
$4,921,000 and a non-compete agreement intangible of $575,000.
The balance of the Company's intangible assets was as follows:
Core Deposit Non-Compete
Goodwill Intangible Agreement Total
-------- ------------ ----------- --------
(In thousands)
Balance at September 30, 2001 $ 35,703 $ --- $ --- $ 35,703
Accumulated amortization --- --- --- ---
-------- -------- -------- --------
Balance at September 30, 2002 35,703 --- --- 35,703
United acquisition 19,263 4,921 575 24,759
Accumulated amortization --- (116) (10) (126)
-------- -------- -------- --------
Balance at September 30, 2003 $ 54,966 $ 4,805 $ 565 $ 60,336
-------- -------- -------- --------
The table below presents the estimated intangible asset amortization expense for
the next five years:
Year ended September 30, Amortization expense
- ------------------------ --------------------
(In thousands)
2004 $ 1,396
2005 1,198
2006 1,000
2007 801
2008 593
33
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.
Statements of Financial Condition
September 30, 2003 2002
- -------------------------------------- ---------- ----------
(In thousands)
Assets
Cash $ 4,527 $ 2,268
Investment in subsidiary 1,053,451 959,250
Dividend receivable 12,000 14,000
----------- -----------
Total assets $ 1,069,978 $ 975,518
=========== ===========
Liabilities
Dividend payable and other liabilities $ 14,382 $ 14,800
----------- -----------
Stockholders' equity
Common stock, $1.00 par value: 100,000,000 shares authorized;
85,553,789 and 83,833,244 shares issued;
71,173,487 and 69,894,902 shares outstanding $ 85,554 $ 76,212
Paid-in capital 1,085,650 968,858
Accumulated other comprehensive income, net of tax 26,890 47,720
Treasury stock, at cost; 14,380,302 and 13,938,342 shares (207,337) (198,279)
Retained earnings 64,839 66,207
----------- -----------
Total stockholders' equity 1,055,596 960,718
----------- -----------
Total liabilities and stockholders' equity $ 1,069,978 $ 975,518
=========== ===========
Statements of Operations
Year ended September 30, 2003 2002 2001
- ---------------------------------------------------------- -------- -------- --------
(In thousands)
Income
Dividends from subsidiary $ 63,500 $ 64,000 $ 45,000
Expense
Miscellaneous 389 380 354
-------- -------- --------
Net income before equity in undistributed net income of
subsidiary 63,111 63,620 44,646
Equity in undistributed net income of subsidiary 81,751 84,630 72,693
-------- -------- --------
Income before income taxes 144,862 148,250 117,339
Income tax benefit 137 134 125
-------- -------- --------
Net income $144,999 $148,384 $117,464
======== ======== ========
Statements of Cash Flows
Year ended September 30, 2003 2002 2001
- --------------------------------------------------- ---------- ---------- ----------
(In thousands)
Cash Flows From Operating Activities
Net income $ 144,999 $ 148,384 $ 117,464
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed net income of subsidiary (81,751) (84,630) (72,693)
Decrease (increase) in dividend receivable 2,000 (1,875) 1,875
Increase (decrease) in dividend payable (417) 920 758
---------- ---------- ----------
Net cash provided by operating activities 64,831 62,799 47,404
Cash Flows From Financing Activities
Issuance of common stock through stock option plan 5,944 3,744 6,224
Proceeds from Employee Stock Ownership Plan 1,522 1,618 1,108
Treasury stock purchased (10,034) (10,224) ---
Dividends (60,004) (57,383) (54,102)
---------- ---------- ----------
Net cash used by financing activities (62,572) (62,245) (46,770)
---------- ---------- ----------
Increase in cash 2,259 554 634
Cash at beginning of year 2,268 1,714 1,080
---------- ---------- ----------
Cash at end of year $ 4,527 $ 2,268 $ 1,714
---------- ---------- ----------
34
NOTE S
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited interim results of operations by
quarter, as adjusted for the restatement as described in Note A:
AS RESTATED - SEE NOTE A
First Second Third Fourth
Year ended September 30, 2003 Quarter Quarter Quarter Quarter
- ----------------------------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
Interest income $ 121,476 $ 113,587 $ 109,972 $ 104,260
Interest expense 53,703 49,565 46,917 44,699
---------- ---------- ---------- ----------
Net interest income 67,773 64,022 63,055 59,561
Provision for loan losses 1,250 150 100 ---
Other operating income 2,267 5,888 3,671 4,745
Other operating expense 12,054 12,265 10,796 10,644
---------- ---------- ---------- ----------
Income before income taxes 56,736 57,495 55,830 53,662
Income taxes 20,001 20,269 19,539 18,915
---------- ---------- ---------- ----------
Net income $ 36,735 $ 37,226 $ 36,291 $ 34,747
---------- ---------- ---------- ----------
Basic earnings per share $ .53 $ .54 $ .52 $ .50
---------- ---------- ---------- ----------
Diluted earnings per share $ .52 $ .53 $ .52 $ .49
---------- ---------- ---------- ----------
Cash dividends per share $ .21 $ .21 $ .22 $ .22
---------- ---------- ---------- ----------
Return of average assets 1.99% 2.03% 2.00% 1.90%
========== ========== ========== ==========
First Second Third Fourth
Year ended September 30, 2002 Quarter Quarter Quarter Quarter
- ----------------------------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
Interest income $ 133,036 $ 128,196 $ 125,254 $ 125,316
Interest expense 65,357 58,274 55,874 55,436
---------- ---------- ---------- ----------
Net interest income 67,679 69,922 69,380 69,880
Provision for loan losses 2,000 2,000 1,500 1,500
Other operating income 3,445 2,165 2,299 2,253
Other operating expense 12,761 13,149 13,051 11,867
---------- ---------- ---------- ----------
Income before income taxes 56,363 56,938 57,128 58,767
Income taxes 19,870 20,072 20,138 20,732
---------- ---------- ---------- ----------
Net income $ 36,493 $ 36,866 $ 36,990 $ 38,035
---------- ---------- ---------- ----------
Basic earnings per share $ .52 $ .53 $ .53 $ .54
---------- ---------- ---------- ----------
Diluted earnings per share $ .52 $ .52 $ .52 $ .54
---------- ---------- ---------- ----------
Cash dividends per share $ .20 $ .20 $ .21 $ .21
---------- ---------- ---------- ----------
Return of average assets 2.09% 2.09% 2.09% 2.11%
---------- ---------- ---------- ----------
35
AS PREVIOUSLY REPORTED
First Second Third Fourth
Year ended September 30, 2003 Quarter Quarter Quarter Quarter
- ------------------------------ ---------- ---------- ---------- ----------
(In thousands, except per share data)
Interest income $ 122,068 $ 114,326 $ 109,961 $ 103,830
Interest expense 53,703 49,565 46,917 44,699
---------- ---------- ---------- ----------
Net interest income 68,365 64,761 63,044 59,131
Provision for loan losses 1,250 150 100 ---
Other operating income 1,866 5,491 3,482 3,984
Other operating expense 11,653 11,868 10,410 10,128
---------- ---------- ---------- ----------
Income before income taxes 57,328 58,234 56,016 52,987
Income taxes 20,210 20,530 19,605 18,676
---------- ---------- ---------- ----------
Net income $ 37,118 $ 37,704 $ 36,411 $ 34,311
---------- ---------- ---------- ----------
Basic earnings per share $ .54 $ .54 $ .52 $ .49
---------- ---------- ---------- ----------
Diluted earnings per share $ .52 $ .54 $ .52 $ .49
---------- ---------- ---------- ----------
Cash dividends per share $ .21 $ .21 $ .22 $ .22
---------- ---------- ---------- ----------
Return of average assets 2.03% 2.08% 2.02% 1.89%
========== ========== ========== ==========
First Second Third Fourth
Year ended September 30, 2002 Quarter Quarter Quarter Quarter
- ------------------------------ ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Interest income $ 131,325 $ 126,485 $ 123,543 $ 123,607
Interest expense 65,357 58,274 55,875 55,435
---------- ---------- ---------- ----------
Net interest income 65,968 68,211 67,668 68,172
Provision for loan losses 2,000 2,000 1,500 1,500
Other operating income 3,002 1,553 1,803 1,848
Other operating expense 12,318 12,536 12,553 11,464
---------- ---------- ---------- ----------
Income before income taxes 54,652 55,228 55,418 57,056
Income taxes 19,267 19,469 19,535 20,129
---------- ---------- ---------- ----------
Net income $ 35,385 $ 35,759 $ 35,883 $ 36,927
---------- ---------- ---------- ----------
Basic earnings per share $ .51 $ .51 $ .51 $ .53
---------- ---------- ---------- ----------
Diluted earnings per share $ .50 $ .51 $ .51 $ .52
---------- ---------- ---------- ----------
Cash dividends per share $ .20 $ .20 $ .21 $ .21
---------- ---------- ---------- ----------
Return of average assets 2.04% 2.05% 2.04% 2.07%
---------- ---------- ---------- ----------
36
NOTE T
DERIVATIVE INSTRUMENTS
The Company accepts a high level of interest rate risk as a result of its policy
to originate fixed-rate single family home loans that are longer-term than the
short-term characteristics of its liabilities of customer accounts and borrowed
money. The Company enters into forward contracts to purchase and sell
mortgage-backed securities as part of its interest rate risk management program.
These forward contracts are derivative instruments as defined by SFAS No. 133,
as amended. The forward contracts allow the Company to hedge the risk of varying
mortgage-backed securities prices in the future as the result of changes in
interest rates. The estimated amount of net unrealized gains that may be
recorded through earnings in the next twelve months is $1.8 million (after tax),
assuming a 20% prepayment of principal of the underlying security. The net after
tax impact to the income statement of excluding the changes in the contractual
price of the forward commitments over time from the effectiveness test was
$2,321,000, $8,702,000, $3,993,000 for fiscal years 2003, 2002, and 2001
respectively. These amounts were recorded through the income statement as a part
of interest income on mortgage backed securities. The Company has determined
anticipated purchase dates for each forward commitment to purchase ranging from
October 2003 through November 2004. The Company has determined anticipated sale
dates for each forward commitment to sell ranging from December 2003 through
September 2004. The net fair value of these contracts is included as a part of
other assets. The related mortgage-backed securities are designated as
available-for-sale securities upon exercise of the commitments to purchase.
The notional amounts, fair value and unrealized gains (losses) on the forward
contracts were as follows:
September 30, 2003 2002
- ----------------------- ------------------------------------ -----------------------------------
(In thousands)
Notional Fair Unrealized Notional Fair Unrealized
Amount Value Gain (Loss) Amount Value Gain (loss)
-------- -------- ------------- -------- --------- -----------
Commitments to purchase $320,000 $ 28,909 $ 18,281 $270,000 $ 36,212 $ 23,783
Commitments to sell 160,000 (6,521) (4,456) 220,000 (8,187) (5,372)
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Washington Federal, Inc.
Seattle, Washington
We have audited the accompanying consolidated statements of financial condition
of Washington Federal, Inc. and subsidiaries (the "Company") as of September 30,
2003 and 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2003. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Washington Federal, Inc. and
subsidiaries as of September 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note A, the accompanying consolidated financial statements as of
September 30, 2003 and 2002, and for each of the three years in the period ended
September 30, 2003, have been restated.
/s/ Deloitte & Touche, LLP
- ----------------------------
DELOITTE & TOUCHE LLP
Seattle, Washington
November 6, 2003
(November 5, 2004, as to the effects of the restatement described in Note A)
38
GENERAL CORPORATE AND
STOCKHOLDERS' INFORMATION
Corporate 425 Pike Street
Headquarters Seattle, Washington 98101
(206) 624-7930
Independent Deloitte & Touche LLP
Auditors Seattle, Washington
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:
Mellon Investor Services L.L.C.
P.O. Box 3315
South Hackensack, NJ 07606, or
85 Challenger Road
Ridgefield Park, NJ 07660
Telephone: 1-800-522-6645
www.melloninvestor.com
Annual Meeting The annual meeting of stockholders will be
held on January 21, 2004, at 2 p.m. at the
Sheraton Hotel, 1400 Sixth Avenue,
Seattle, Washington
Form 10-K/A This report and all SEC filings are available on the
Company's web site at: www.washingtonfederal.com
Stock Information Washington Federal, Inc. is traded on the NASDAQ Stock
Market. The common stock symbol is WFSL. At September 30,
2003, there were approximately 2,584 stockholders of record.
Stock Prices
Quarter Ended High Low Dividends
-----------------------------------------------
December 31, 2001 $21.41 $18.18 $0.20
March 31, 2002 23.76 21.39 0.20
June 30, 2002 24.92 21.85 0.21
September 30, 2002 23.87 19.32 0.21
December 31, 2002 23.03 18.77 0.21
March 31, 2003 23.51 20.91 0.21
June 30, 2003 23.92 21.06 0.22
September 30, 2003 26.41 23.19 0.22
All prices shown have been
adjusted for stock splits.
Largest Market Makers:
McAdams Wright Ragen, Inc.
Cincinnati Stock Exchange
Goldman, Sachs & Co.
Archipelago Exchange
Knight Equity Markets, L.P.
Archipelago, L.L.C.
Merrill Lynch, Pierce, Fenner & Smith, Inc.
Citigroup Global Markets, Inc.
Schwab Capital Markets
Alternate Display Facility
Morgan Stanley & Co., Inc.
Prudential Equity Group, Inc.
Deutsche Banc Alex Brown
Investment Technology Group
Instinet Corporation
39
DIRECTORS, OFFICERS AND OFFICES
CORPORATE HEADQUARTERS
425 Pike Street
Seattle, WA 98101
(206) 624-7930
BOARD OF DIRECTORS
GUY C. PINKERTON
Chairman
ROY M. WHITEHEAD
Vice Chairman, President and Chief Executive Officer
DEREK L. CHINN
Former President and Chief Executive Officer,
United Savings and Loan Bank
JOHN F. CLEARMAN
Former Chief Financial Officer,
Milliman USA, Inc.
H. DENNIS HALVORSON
Former Chief Executive Officer, United Bank
KERMIT O. HANSON
Dean Emeritus
University of Washington
Graduate School of
Business Administration
W. ALDEN HARRIS
Former Executive
Vice President
ANNA C. JOHNSON
Senior Partner
Scan East West Travel
THOMAS F. KENNEY
Vice President Finance
Haggen, Inc.
CHARLES R. RICHMOND
Former Executive
Vice President
DIRECTORS EMERITI
E.W. MERSEREAU, JR.
RICHARD C. REED
40
EXECUTIVE MANAGEMENT COMMITTEE
BRENT J. BEARDALL
Senior Vice President
and Chief Financial Officer
LINDA S. BROWER
Executive Vice President
EDWIN C. HEDLUND
Executive Vice President and Secretary
JACK B. JACOBSON
Executive Vice President
and Chief Lending Officer
ROY M. WHITEHEAD
Vice Chairman, President and
Chief Executive Officer
DEPARTMENT MANAGERS
Appraisal
HEATHER ST. CLAIR
Branch Loan Underwriting
MICHAEL BUSH
Vice President
Credit Administration-Construction and Land
JAMES E. CADY
Senior Vice President
DALE SULLIVAN
Vice President
Corporate Real Estate and Taxes
KEITH D. TAYLOR
Senior Vice President
and Treasurer
Data Processing
TERRY O. PERMENTER
Senior Vice President
Deposit Operations
BEN A. WHITMARSH
Senior Vice President
Internal Audit
BARBARA A. MURPHY
Vice President
Legal/Special Credits
PAUL TYLER
Vice President and Counsel
Loan Operations
LEANN BURKE
Officer
41
Loan Servicing
LARRY PLUMB
Senior Vice President
Manuals/Training
LINDA NICHOLL
Assistant Vice President
Marketing and Investor Relations
CATHY COOPER
Vice President
Multi-Family Loans
J. TIMOTHY GRANT
Senior Vice President
Permanent Loan Production
JOHN WUNDERLICH
Vice President
Permanent Loan Underwriting and
Wholesale Lending
COLLEEN WELLS
Vice President
SUBSIDIARIES
First Insurance Agency, Inc.
317 S. 2nd Street
Mount Vernon, WA 98273
1-800-562-2555
(360) 336-9630
DUANE HENSON
Washington Services, Inc.
6125 South Morgan Road
Freeland, WA 98249
SOUTH SOUND
WASHINGTON
16 Office Locations
Division Manager
RONDA TOMLINSON
Vice President
9919 Bridgeport Way S.W.
Lakewood, WA 98499
MIDSOUND
WASHINGTON
14 Office Locations
Division Manager
E. CRAIG WILSON
Vice President
5809 196th S.W.
Lynnwood, WA 98036
CENTRAL SEATTLE
4 Office Locations
Regional Manager
42
ROBERT ZIRK
Vice President
601 S. Jackson
Seattle, WA 98104
NORTHERN WASHINGTON
10 Office Locations
Division Manager
DOUGLAS A. ROWELL
Senior Vice President
317 S. 2nd Street
Mount Vernon, WA 98273
WESTERN IDAHO
12 Office Locations
Division Manager
ROBERT P. LINK
Senior Vice President
1001 W. Idaho St.
Boise, ID 83701
EASTERN IDAHO
4 Office Locations
Division Manager
LARRY WADSWORTH
Senior Vice President
500 North Capital
Idaho Falls, ID 83402
SOUTHERN OREGON
15 Office Locations
Division Manager
PEGGY HOBIN
Senior Vice President
300 Ellsworth St. SW
Albany, OR 97321
NORTHERN OREGON
10 Office Locations
Interim Division Manager
DALE SULLIVAN
Vice President
14990 S.W. Bangy Road
Lake Oswego, OR 97035
UTAH
10 Office Locations
Division Manager
RICHARD FISHER
Senior Vice President
505 East 200 South
Salt Lake City, UT 84102
PHOENIX ARIZONA
12 Office Locations
Division Manager
Wendy yates
Vice President
2196 E. Camelback Road, Suite 100
Phoenix, AZ 85016
43
TUCSON ARIZONA
8 Office Locations
Division Manager
GEORGIA VELARDE
Vice President
5151 E. Broadway Blvd., Suite 105
Tucson, AZ 85711
NEVADA
2 Office Locations
Division Manager
PAMELA K. CALLAHAN
Vice President
9340 Sun City Blvd. #103
Las Vegas, NV 89134
TEXAS
1 Office Location
Division Manager
VAUGHN PEARSON
Senior Vice President
7001 Preston Road, Suite 110
Dallas, TX 75205
COLORADO
1 Loan Production Office
SCOTT BRKOVICH
Officer
384 Inverness Drive South, Suite 105
Englewood, CO 80112
44