FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005.
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-25454
Washington Federal, Inc.
(Exact name of registrant as specified in its charter)
Washington | 91-1661606 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
425 Pike Street, Seattle, Washington | 98101 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (206) 624-7930
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
|
NA | NA |
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of November 1, 2005, the aggregate market value of the 85,619,797 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 1,332,616 shares held by all directors and executive officers of the Registrant as a group, was $1,969,255,331. This figure is based on the closing sale price of $23.00 per share of the Registrants Common Stock on November 1, 2005, as reported in The Wall Street Journal on November 2, 2005.
Number of shares of Common Stock outstanding as of November 1, 2005: 86,952,413
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated:
(1) | Portions of the Registrants Annual Report to Stockholders for the fiscal year ended September 30, 2005, are incorporated into Part II, Items 5-8 of this Form 10-K. |
(2) | Portions of the Registrants definitive proxy statement for its Annual Meeting of Stockholders to be held on January 18, 2006 are incorporated into Part III, Items 10-14 of this Form 10-K. |
PART I
In addition to historical information, this Annual Report on Form 10-K includes certain forward-looking statements, as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding Washington Federals intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal; state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Companys loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting Washington Federals operations, markets, products services and fees. Washington Federal undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
Item 1. Business
General
Washington Federal, Inc. (Washington Federal or Company), formed in November 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a non-diversified unitary savings and loan holding company within the meaning of the Home Owners Loan Act (HOLA) that conducts its operations through a federally insured savings and loan association subsidiary, Washington Federal Savings. As such, the Company is registered as a holding company with the Office of Thrift Supervision (OTS) and is subject to OTS regulation, examination, supervision and reporting requirements.
The Company, doing business as Washington Federal Savings, is a federally-chartered savings and loan association that began operations in Washington as a state-chartered mutual company in 1917. In 1935, the Company converted to a federal charter and became a member of the Federal Home Loan Bank (FHLB) system. On November 9, 1982, Washington Federal Savings converted from a federal mutual to a federal capital stock company.
The Companys fiscal year end is September 30th. All references to 2005 represent balances as of September 30, 2005 or activity for the fiscal year then ended. All references to 2004 represent balances as of September 30, 2004 or activity for the fiscal year then ended.
The business of Washington Federal consists primarily of attracting savings deposits from the general public and investing these funds in loans secured by first mortgage liens on single-family dwellings, including loans for the construction of such dwellings, and loans on multi-family dwellings. It also originates other types of loans for its portfolio and invests in certain United States government and agency obligations and other investments permitted by applicable laws and regulations. Washington Federal has 122 full service branches located in Washington, Oregon, Idaho, Arizona, Utah, Nevada and Texas. During 2005, Washington Federal opened three new offices in Klamath Falls, Oregon, Richardson, Texas and Las Vegas, Nevada. Through its subsidiaries, the Company is engaged in real estate investment and insurance brokerage activities.
2
The principal sources of funds for the Companys activities are retained earnings, loan repayments (including prepayments), net savings inflows, sales of loans, sales of investments, loan participations, deposits and borrowings. Washington Federals principal sources of revenue are interest on loans, interest and dividends on investments and gains on sale of investments and real estate. Its principal expenses are interest paid on deposits, general and administrative expenses, interest on borrowings and income taxes.
The Companys growth has been generated both internally and as a result of 12 mergers and three assumptions of deposits. The most recent acquisition was completed in August 2003 when the Company purchased United Savings and Loan Bank.
The Company is subject to extensive regulation, supervision and examination by the OTS, as its chartering authority and primary federal regulator, and by the Federal Deposit Insurance Corporation (FDIC), which insures its deposits up to applicable limits. Such regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the deposits and the Savings Association Insurance Fund (SAIF) administered by the FDIC. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in such regulation, whether by the OTS, the FDIC or the U.S. Congress, could have a significant impact on the Company and its operations. See Regulation.
Certain Business Risks
Ownership of the Companys common stock involves risk. Investors should carefully consider, in addition to the other information set forth herein, the following risk factors.
The Companys business is subject to interest rate risk and variations in market interest rates may negatively affect its financial performance . Management is unable to predict fluctuations of market interest rates, which are affected by many factors, including:
| Inflation; |
| Recession; |
| A rise in unemployment; |
| Tightening money supply; and |
| Domestic and international disorder and instability in domestic and foreign financial markets. |
Changes in the interest rate environment may reduce or increase the Companys profits. The Company expects that it will continue to realize income from the differential or spread between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits and borrowings. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. Accordingly, changes in market interest rates could materially and adversely affect the Companys net interest spread, asset quality, levels of prepayments and cash flows as well as the market value of its securities portfolio and overall profitability.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive and by monitoring a banks interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time frame if it will mature or reprice within that period of time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets estimated to mature or reprice within a specific time frame and the amount of interest-bearing liabilities estimated to mature or reprice within that same period of time. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income. At September 30, 2005, the Company had a negative one-year gap of 25.8% of total assets, as compared to a negative one-year gap of 24.6% of total assets at September 30, 2004.
3
The Company relies, in part, on external financing to fund its operations and the unavailability of such funds in the future could adversely impact its growth and prospects. The Company relies on deposits (primarily certificates of deposit) and advances from the Federal Home Loan Bank of Seattle and other borrowings to fund its operations. Although management has historically been able to replace maturing deposits if desired, no assurance can be given that the Company would be able to replace such funds at any given point in time if its financial condition or market conditions were to change.
Although the Company considers such sources of funds adequate for its liquidity needs, it may seek additional debt in the future to achieve its long-term business objectives. There can be no assurance additional borrowings, if sought, would be available to the Company or, if available, would be on favorable terms. If additional financing sources are unavailable or are not available on reasonable terms, the Companys growth and future prospects could be adversely impacted.
Washington Federal Savings ability to pay dividends is subject to regulatory limitations which, to the extent the Company requires such dividends in the future, may affect Washington Federal Inc.s ability to pay dividends . Washington Federal, Inc. is a separate legal entity from its primary subsidiary, Washington Federal Savings, and does not have significant operations of its own. The availability of dividends from Washington Federal Savings is limited by various statutes and regulations. It is possible, depending upon the financial condition of Washington Federal Savings and other factors, that the Office of Thrift Supervision, Washington Federal Savings primary regulator, could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In the event Washington Federal Savings is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock. Consequently, the inability to receive dividends from Washington Federal Savings could adversely affect the Companys financial condition, results of operations and prospects.
The Companys allowance for loan losses may not be adequate to cover actual losses . Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance. The Companys allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect its operating results. The Companys allowance for loan losses is based on its historical loss experience as well as an evaluation of the risks associated with its loan portfolio, including but not limited to, the size and composition of the loan portfolio, current economic conditions and geographic concentrations within the portfolio. In the last two years, the Company has experienced negligible losses.
The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond the Companys control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Companys loans and allowance for loan losses. While the Company believes that its allowance for loan losses is adequate to cover current losses, the Company cannot provide assurances that it will not need to increase its allowance for loan losses or that regulators will not require an increase in the allowance. Either of these occurrences could materially and adversely affect the Companys earnings and profitability.
The Companys business is subject to various lending and other economic risks that could adversely impact its operating results and financial condition . Changes in economic conditions, particularly an economic slowdown in the Pacific Northwest, could hurt business. The Companys business is directly affected by political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies and inflation, all of which are beyond its control. Investments in Government Sponsored Entities may decline in value based on legislative or regulatory changes. A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on the Companys business:
| Loan delinquencies may increase; |
| Problem assets and foreclosures may increase; |
| Demand for its products and services may decline; and |
| Collateral for loans made by us, especially real estate, may decline in value, in turn reducing a customers borrowing power, and reducing the value of assets and collateral associated with its loans. |
| Investments in mortgage-backed securities may decline in value as a result of the diminution of the value of the underlying real estate collateral |
A downturn in the real estate market could hurt the Companys business . The Companys business activities and credit exposure are concentrated in real estate lending. A downturn in the real estate market could hurt the Companys
4
business because the vast majority of its loans are secured by real estate. If there is a significant decline in market values, the collateral for the Companys loans will provide less security. As a result, the Companys ability to recover the principal amount due on defaulted loans by selling the underlying real estate would be diminished, and it would be more likely to suffer losses on defaulted loans.
The Company may suffer losses in its loan portfolio despite its underwriting practices . The Company seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. These practices often include analysis of a borrowers credit history, financial statements, tax returns and cash flow projections; valuation of collateral based on reports of independent appraisers; and verification of liquid assets. Although the Company believes that its underwriting criteria are appropriate for the various kinds of loans it makes, it may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves in the allowance for loan losses.
The Company is subject to extensive regulation that could adversely affect its performance . The Companys operations are subject to extensive regulation by federal, state and local government authorities and are subject to various laws and judicial and administrative requirements and restrictions. The Companys business is highly regulated and the laws, rules and regulations applicable to it are subject to regular modification and change. There can be no assurance that there will be no laws, rules or regulations adopted in the future which could make compliance more difficult or expensive, or otherwise adversely affect the Companys business, financial condition or prospects.
The Company faces strong competition from other financial institutions, offering services similar to those offered by it, which could hurt business. Many competitors offer the types of loans and deposit services that the Company offers. These competitors include other savings associations, community banks, credit unions and other financial intermediaries. In particular, the Companys competitors include national banks and major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Increased competition within the Companys market area may result in reduced loan originations and deposits. Ultimately, the Company may not be able to compete as successfully against current and future competitors.
5
Average Statements of Financial Condition
Year Ended September 30,
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2003
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2004 |
2005 |
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Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average
Rate |
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(In thousands) | |||||||||||||||||||||||||||
Assets |
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Loans (1) |
$ | 4,740,877 | $ | 353,286 | 7.45 | % | $ | 4,912,166 | $ | 330,967 | 6.74 | % | $ | 5,531,687 | $ | 369,023 | 6.67 | % | |||||||||
Mortgage-backed securities |
664,702 | 62,021 | 9.33 | 632,095 | 48,554 | 7.68 | 867,348 | 61,459 | 7.09 | ||||||||||||||||||
Investment securities (2) |
1,492,547 | 25,833 | 1.73 | 1,475,807 | 28,338 | 1.92 | 971,553 | 31,032 | 3.19 | ||||||||||||||||||
FHLB stock |
135,643 | 8,155 | 6.01 | 142,986 | 5,913 | 4.13 | 102,616 | 387 | .38 | ||||||||||||||||||
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Total interest-earning assets |
7,033,769 | 449,295 | 6.39 | 7,163,054 | 413,772 | 5.78 | 7,473,204 | 461,901 | 6.18 | ||||||||||||||||||
Other assets |
300,628 | 258,543 | 223,881 | ||||||||||||||||||||||||
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Total assets |
$ | 7,334,397 | $ | 7,421,597 | $ | 7,697,085 | |||||||||||||||||||||
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Liabilities and Stockholders Equity |
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Checking accounts |
$ | 213,883 | 1,655 | .77 | % | $ | 198,071 | 1,199 | .61 | % | $ | 201,908 | 1,342 | .66 | % | ||||||||||||
Passbook and statement accounts |
166,137 | 2,114 | 1.27 | 227,805 | 1,703 | .75 | 209,340 | 1,985 | .95 | ||||||||||||||||||
Insured money market accounts |
1,045,571 | 14,947 | 1.43 | 970,580 | 8,185 | .84 | 919,551 | 15,154 | 1.65 | ||||||||||||||||||
Certificate accounts (time deposits) |
2,942,724 | 85,552 | 2.91 | 3,121,161 | 74,155 | 2.38 | 3,320,582 | 96,677 | 2.91 | ||||||||||||||||||
Repurchase agreements with customers |
73,322 | 1,651 | 2.25 | 48,515 | 858 | 1.77 | 35,131 | 668 | 1.90 | ||||||||||||||||||
FHLB advances |
1,650,023 | 85,566 | 5.19 | 1,539,594 | 80,258 | 5.21 | 1,206,267 | 62,049 | 5.14 | ||||||||||||||||||
Securities sold under agreements to repurchase |
100,000 | 3,387 | 3.39 | 100,000 | 3,395 | 3.40 | 458,082 | 17,381 | 3.79 | ||||||||||||||||||
Federal funds purchased |
625 | 12 | 1.92 | | | | 288 | 4 | 1.39 | ||||||||||||||||||
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Total interest-bearing liabilities |
6,192,285 | 194,884 | 3.15 | 6,205,726 | 169,753 | 2.74 | 6,351,149 | 195,260 | 3.07 | ||||||||||||||||||
Other liabilities |
149,478 | 128,131 | 191,070 | ||||||||||||||||||||||||
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Total liabilities |
6,341,763 | 6,333,857 | 6,542,219 | ||||||||||||||||||||||||
Stockholders equity |
992,634 | 1,087,740 | 1,154,866 | ||||||||||||||||||||||||
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Total liabilities and stockholders equity |
$ | 7,334,397 | $ | 7,421,597 | $ | 7,697,085 | |||||||||||||||||||||
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Net interest income/Interest rate spread |
$ | 254,411 | 3.24 | % | $ | 244,019 | 3.04 | % | $ | 266,641 | 3.11 | % | |||||||||||||||
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Net interest margin (3) |
3.62 | % | 3.41 | % | 3.57 | % | |||||||||||||||||||||
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(1) | The average balance of loans includes securitized assets subject to repurchase and nonaccruing loans, interest on which is recognized on a cash basis. It also includes net accretion of deferred loan fees and costs of $24.4 million $18.3 million and $21.0 million for years 2003, 2004 and 2005, respectively. |
(2) | Includes cash equivalents and repurchase agreements. |
(3) | Net interest income divided by average interest-earning assets. |
6
Lending Activities
General. The Companys net portfolio of loans (including securitized assets subject to repurchase) totaled $6.0 billion at September 30, 2005, representing approximately 73% of its total assets. The Company concentrates its lending activities on the origination of conventional mortgage loans, which are loans that are neither insured nor guaranteed by agencies of the United States government.
Washington Federal has historically concentrated its lending activity on the origination of long-term fixed-rate single-family first lien mortgage loans, single-family adjustable rate construction loans, adjustable rate land development loans and fixed rate multi-family loans.
7
The following table sets forth the composition of the Companys gross loan portfolio, by loan type, as of September 30 for the years indicated.
2001
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% |
2002
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% |
2003
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2004
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2005
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Amount
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%
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Amount
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%
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Amount
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%
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(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Loans secured by real estate: |
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Single-family residential |
$ | 4,502,558 | 79.1 | % | $ | 4,145,122 | 77.5 | % | $ | 3,851,720 | 74.3 | % | $ | 3,982,632 | 71.2 | % | $ | 4,630,411 | 70.2 | % | |||||||||||||||
Multi-family |
392,272 | 6.9 | % | 441,648 | 8.3 | % | 479,129 | 9.2 | % | 467,354 | 8.4 | % | 501,824 | 7.6 | % | ||||||||||||||||||||
Land (1) |
193,424 | 3.4 | % | 179,936 | 3.4 | % | 217,214 | 4.2 | % | 297,350 | 5.3 | % | 438,621 | 6.7 | % | ||||||||||||||||||||
Construction (2) |
602,129 | 10.6 | % | 574,866 | 10.8 | % | 639,058 | 12.3 | % | 845,260 | 15.1 | % | 1,021,419 | 15.5 | % | ||||||||||||||||||||
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GROSS LOANS |
$ | 5,690,383 | 100.0 | % | $ | 5,341,572 | 100.0 | % | $ | 5,187,121 | 100.0 | % | $ | 5,592,596 | 100.0 | % | $ | 6,592,275 | 100.0 | % | |||||||||||||||
Less LIP, Allowance and net def. costs & fees |
(302,278 | ) | (293,608 | ) | (369,613 | ) | (499,153 | ) | (583,343 | ) | |||||||||||||||||||||||||
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NET LOANS |
$ | 5,388,105 | $ | 5,047,964 | $ | 4,817,508 | $ | 5,093,443 | $ | 6,008,932 | |||||||||||||||||||||||||
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(1) | Represents loans to builders / intended occupants for the purpose of financing the acquisition and development of single-family residences. |
(2) | Represents loans to builders / intended occupants for the purpose of financing the construction of single-family or multi-family residences. |
8
The following table summarizes the scheduled contractual gross loan maturities for the Companys total loan portfolio due for the periods indicated as of September 30, 2005. Amounts are presented prior to deduction of discounts, premiums, loans in process, deferred loan origination fees and allowance for loan losses. Adjustable-rate loans are shown in the period in which loan principal payments are contractually due.
Contractual Maturities: |
Total
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Less than 1 Year |
1 to 5
Years |
After 5
Years |
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(In thousands) | ||||||||||||
Single-family residential |
$ | 4,630,411 | $ | 41,083 | $ | 171,400 | $ | 4,417,928 | ||||
Multi-family |
501,824 | 38,135 | 299,933 | 163,756 | ||||||||
Land |
438,621 | 316,588 | 4,977 | 117,056 | ||||||||
Construction |
1,021,419 | 630,358 | 11,593 | 379,468 | ||||||||
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$ | 6,592,275 | $ | 1,026,164 | $ | 487,903 | $ | 5,078,208 | |||||
Loans maturing after one year: |
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Adjustable rate |
$ | 362,734 | ||||||||||
Fixed rate |
5,203,377 | |||||||||||
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Total |
$ | 5,566,111 |
The original contractual loan payment period for residential loans originated by the Company normally ranges from 15 to 30 years. Experience during recent years has indicated that, because of prepayments in connection with refinancing and sales of property, residential loans remain outstanding an average of less than seven years.
Lending Programs and Policies. The Company specializes in residential real estate lending and has no present plans to expand its operations into consumer or commercial business loans. The Company offers balloon payment loans, which are amortized on a 20- or 30-year basis, but which have a maturity date for the principal balance of a much shorter period. The Company also provides land acquisition and development loans (land development loans) and construction loans for single-family and multi-family residences. The interest rate on these loans generally adjusts every 90 days in accordance with a designated index. Land development, permanent land and construction loans amounted to $1,460 million, or 22% of the Companys gross loan portfolio at September 30, 2005. The Company offers a multi-family (five or more dwelling units) lending program with underwriting guidelines, including a $3.5 million limit on any one loan.
Many of the institutions previously acquired by Washington Federal offered a variety of lending products, including commercial real estate and non-real estate secured loans, consumer secured loans and non-secured lines of credit. All commercial, consumer and line of credit lending has been discontinued and redirected toward the Companys traditional lending practices of single-family residential loans. The loans acquired, other than single-family residential real estate loans, are being serviced and payoffs are encouraged.
9
As a result of activity over the past three decades, the Company believes that it is a construction lender of choice by builders of single-family residences in its market areas. Because of this history, the Company has developed a staff with in-depth land development and construction experience and working relationships with a group of builders that have been selected based on their operating histories and financial stability.
Construction lending is generally considered to involve a higher level of risk than single-family residential lending due to the concentration of principal in a limited number of loans and borrowers, as well as the effects of general economic conditions on real estate developers and managers. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a propertys value at completion of the project and the estimated cost (including interest) of the project. These loans are generally more difficult to evaluate and monitor.
The Company continues to originate medium- and long-term permanent fixed-rate loans, but in most instances under terms, conditions and documentation that permit sale in the secondary market (see below). Moreover, since 1973, it has been the Companys general policy to include in the documentation evidencing its conventional mortgage loans a due-on-sale clause, which facilitates adjustment of interest rates on such loans when the property securing the loan is sold or transferred. At September 30, 2005, $4.6 billion, or 70% of the Companys gross loan portfolio, was represented by medium- and long-term fixed-rate loans secured by single-family residences.
All of the Companys mortgage lending is subject to written, nondiscriminatory underwriting standards, loan origination procedures and lending policies prescribed by the Companys Board of Directors. Property valuations are required on all real estate loans. Appraisals are prepared by independent appraisers approved by the Companys management, and reviewed by the Companys staff. Property evaluations are sometimes utilized on single-family real estate loans of $250,000 or less and are prepared by the Companys staff. Detailed loan applications are obtained to determine the borrowers ability to repay and the more significant items on these applications are verified through the use of credit reports, financial statements and written confirmations. Depending on the size of the loan involved, a varying number of senior officers of the Company must approve the application before the loan can be granted.
Federal guidelines limit the amount of a real estate loan made by a federally-chartered savings institution to a specified percentage of the value of the property securing the loan as determined by an evaluation at the time the loan is originated, referred to as the loan-to-value ratio. The guidelines provide that at the time of origination a real estate loan may not exceed 100% of the value of the security property. Maximum loan-to-value ratios for each type of real estate loan are established by the Companys Board of Directors.
When establishing general reserves for loans with loan-to-value ratios exceeding 80% that are not insured by private mortgage insurance, Washington Federal considers the additional risk inherent with these products, as well as their relative loan loss experience, and provides reserves when deemed appropriate. The total balance for loans with loan-to-value ratios exceeding 80% at September 30, 2005, was $486 million, with allocated reserves of $1.1 million.
The Companys residential construction loans and land acquisition and development loans are of a short-term nature and are generally made for 80% or less of the appraised value of the property upon completion for residential construction loans, and 75% or less for land acquisition and development loans. Funds are disbursed periodically at various stages of completion as authorized by the Companys personnel.
The Companys permanent land loans are generally made on improved land, with the intent of building a
10
primary or secondary residence. These loans are limited to 80% or less of the appraised value of the property, up to a maximum loan amount of $250,000. Permanent land loans amounted to $121 million or 1.8% of the gross loan portfolio, as of September 30, 2005.
It is the Companys policy to obtain title insurance ensuring that the Company has a valid first lien on the mortgaged real estate serving as collateral. Borrowers must also obtain hazard insurance prior to closing and, when required by regulation, flood insurance. Borrowers may be required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Company makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums when due.
Origination, Purchase and Sale of Loans. The Company has general authority to lend anywhere in the United States; however, the primary lending areas are within the states of Washington, Oregon, Idaho, Arizona, Utah, Nevada and Texas.
Loan originations come from a number of sources. Residential loan originations result from referrals from real estate brokers, walk-in customers, purchasers of property in connection with builder projects financed by the Company, mortgage brokers and refinancings for existing customers. Construction loan originations are obtained primarily by direct solicitation of builders and continued business from builders who have previously borrowed from the Company.
The Company also purchases loans and mortgage-backed securities when lending rates and mortgage volume for new loan originations in its market area do not fulfill its needs. The table below shows total loan (including securitized assets subject to repurchase) origination, purchase, sale and repayment activities of the Company for the years indicated.
11
2001
|
2002
|
2003
|
2004
|
2005
|
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans originated (1): |
||||||||||||||||||||
Construction |
$ | 369,808 | $ | 363,420 | $ | 487,692 | $ | 580,882 | $ | 716,569 | ||||||||||
Land |
130,161 | 87,212 | 163,533 | 244,048 | 358,863 | |||||||||||||||
Single-family residential |
1,104,869 | 851,279 | 1,059,450 | 1,108,216 | 1,209,555 | |||||||||||||||
Multi-family |
139,379 | 128,923 | 156,437 | 137,838 | 151,839 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total loans originated |
1,744,217 | 1,430,834 | 1,867,112 | 2,070,984 | 2,436,826 | |||||||||||||||
Loans purchased (2) |
2,842 | 60,874 | 594,030 | 31,911 | 331,456 | |||||||||||||||
Loan principal repayments |
(1,318,784 | ) | (1,823,281 | ) | (2,604,297 | ) | (1,693,142 | ) | (1,769,058 | ) | ||||||||||
Net change in loans in process, discounts, etc. |
10,595 | (8,568 | ) | (87,301 | ) | (133,818 | ) | (83,735 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net loan activity increase (decrease) |
$ | 438,870 | $ | (340,141 | ) | $ | (230,456 | ) | $ | 275,935 | $ | 915,489 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Begining balance |
$ | 4,949,235 | $ | 5,388,105 | $ | 5,047,964 | $ | 4,817,508 | $ | 5,093,443 | ||||||||||
Ending balance |
$ | 5,388,105 | $ | 5,047,964 | $ | 4,817,508 | $ | 5,093,443 | $ | 6,008,932 |
(1) | Includes undisbursed loans in process and does not include savings account loans, which were not material during the periods indicated. |
(2) | Includes loans acquired through acquisitions and whole loan purchases. |
Interest Rates, Loan Fees and Service Charges. Interest rates charged by the Company on mortgage loans are primarily determined by the level of competitive loan rates offered in its lending areas and in the secondary market. Mortgage loan rates reflect factors such as general interest rates, the supply of money available to the savings and loan industry and the demand for such loans. These factors are in turn affected by general economic conditions, the regulatory programs and policies of federal and state agencies, changes in tax laws and governmental budgetary programs.
The Company receives fees for originating loans in addition to various fees and charges related to existing loans, which may include prepayment charges, late charges and assumption fees.
In making one-to-four family home mortgage loans, the Company does not normally charge a commitment fee. As part of the loan application, the borrower pays the Company for out-of-pocket costs, such as the appraisal fee, in reviewing the application, whether or not the borrower closes the loan. The interest rate charged is normally the prevailing rate at the time the loan application is approved. In the case of construction loans, the Company normally charges an origination fee. Loan origination fees and other terms of multi-family residential loans are individually negotiated.
12
Nonperforming Assets. When a borrower fails to make a required payment on a loan, the Company attempts to cure the deficiency by contacting the borrower. Contact is made after a payment is 30 days past due. In most cases, deficiencies are cured promptly. If the delinquency is not cured within 90 days, the Company may cause the trustee on the deed of trust to institute appropriate action to foreclose on the property. If foreclosed, the property will be sold at a public sale and may be purchased by the Company. There are circumstances under which the Company may choose to foreclose a deed of trust as mortgagee, and when this procedure is followed, certain redemption rights are involved.
Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Company does not accrue interest on loans 90 days past due or more. See Note A to the Consolidated Financial Statements included in Item 8 hereof.
Real estate acquired by foreclosure or deed-in-lieu thereof (REO or Real Estate Owned) is classified as real estate held for sale until it is sold. When property is acquired, it is recorded at the lower of carrying or fair value at the date of acquisition, and any writedown resulting therefrom is charged to the allowance for loan losses. Interest accrual ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expensed as incurred. Costs incurred for the improvement or development of such property are capitalized. See Note A to the Consolidated Financial Statements included in Item 8 hereof.
13
The following table sets forth information regarding restructured and nonaccrual loans and REO held by the Company at the dates indicated.
2001
|
2002
|
2003
|
2004
|
2005
|
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Restructured loans (1) |
$ | 14,129 | $ | 2,472 | $ | 2,551 | $ | 803 | $ | 573 | ||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Single-family residential |
14,670 | 11,539 | 12,711 | 7,345 | 5,765 | |||||||||||||||
Construction |
8,756 | 4,521 | 1,788 | 2,965 | 0 | |||||||||||||||
Land |
1,214 | 7,301 | 1,439 | 252 | 403 | |||||||||||||||
Multifamily |
454 | | | 322 | 420 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total nonaccrual loans (2) |
25,094 | 23,361 | 15,938 | 10,884 | 6,588 | |||||||||||||||
Total REO (3) |
8,664 | 10,515 | 11,496 | 3,817 | 756 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total nonperforming assets |
$ | 33,758 | $ | 33,876 | $ | 27,434 | $ | 14,701 | $ | 7,344 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total nonperforming assets and restructured loans |
$ | 47,887 | $ | 36,348 | $ | 29,985 | $ | 15,504 | $ | 7,917 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total nonperforming assets and restructured loans as a percent of total assets |
0.68 | % | 0.49 | % | 0.40 | % | 0.22 | % | 0.09 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Performing in accordance with restructured terms. |
(2) | The Company recognized interest income on nonaccrual loans of approximately $240,000 in 2005. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $475,000 in 2005. |
In addition to the nonaccrual loans reflected in the above table, at September 30, 2005, the Company had $1.9 million of loans that were less than 90 days delinquent but which were classified as substandard for one or more reasons. If these loans were deemed nonperforming, the Companys ratio of total nonperforming assets and restructured loans as a percent of total assets would have been .11% at September 30, 2005. For a discussion of the Companys policy for placing loans on nonaccrual status, see Note A to the Consolidated Financial Statements included in Item 8 hereof.
(3) Total REO includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans.
14
The following table analyzes the Companys allowance for loan losses at the dates indicated.
September 30,
|
||||||||||||||||||||
2001
|
2002
|
2003
|
2004
|
2005
|
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Beginning balance |
$ | 20,831 | $ | 19,683 | $ | 23,912 | $ | 25,806 | $ | 25,140 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Single-family residential |
1,047 | 1,324 | 566 | 338 | 154 | |||||||||||||||
Construction |
2,251 | 1,938 | 683 | 146 | 90 | |||||||||||||||
Land |
547 | 139 | 61 | 44 | | |||||||||||||||
Multi-family |
| | | | 14 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
3,845 | 3,401 | 1,310 | 528 | 258 | ||||||||||||||||
Recoveries: |
||||||||||||||||||||
Single-family residential |
10 | 399 | 3 | 16 | 8 | |||||||||||||||
Construction |
828 | 176 | 104 | | | |||||||||||||||
Land |
9 | 55 | | 77 | | |||||||||||||||
Multi-family |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
847 | 630 | 107 | 93 | 8 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net charge-offs |
2,998 | 2,771 | 1,203 | 435 | 250 | |||||||||||||||
Acquired through acquisition |
| | 1,597 | | | |||||||||||||||
Provision (reversal of reserve) for loan losses |
1,850 | 7,000 | 1,500 | (231 | ) | (134 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Ending balance |
$ | 19,683 | $ | 23,912 | $ | 25,806 | $ | 25,140 | $ | 24,756 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Ratio of net charge-offs to average loans outstanding |
.02 | % | .06 | % | .05 | % | .01 | % | .01 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the allocation of the Companys allowance for loan losses at the dates indicated.
September 30,
|
||||||||||||||||||||||||||||||
2001
|
2002
|
2003
|
2004
|
2005
|
||||||||||||||||||||||||||
Amount
|
%(1)
|
Amount
|
%(1)
|
Amount
|
%(1)
|
Amount
|
%(1)
|
Amount
|
%(1)
|
|||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Allowance allocation: |
||||||||||||||||||||||||||||||
Single-family residential |
$ | 6,165 | 79.1 | % | $ | 7,823 | 77.5 | % | $ | 9,940 | 74.3 | % | $ | 8,517 | 71.2 | % | $ | 8,643 | 70.2 | % | ||||||||||
Multi-family |
7,941 | 6.9 | % | 9,327 | 8.3 | % | 7,142 | 9.2 | % | 6,084 | 8.4 | % | 5,776 | 7.6 | % | |||||||||||||||
Land |
2,134 | 3.4 | % | 3,137 | 3.4 | % | 2,929 | 4.2 | % | 3,470 | 5.3 | % | 3,360 | 6.7 | % | |||||||||||||||
Construction |
2,770 | 10.6 | % | 2,907 | 10.8 | % | 5,795 | 12.3 | % | 7,069 | 15.1 | % | 6,977 | 15.5 | % | |||||||||||||||
Unallocated |
673 | 718 | | | | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total allowance for loan losses |
$ | 19,683 | $ | 23,912 | $ | 25,806 | $ | 25,140 | $ | 24,756 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Represents the total amount of the loan category as a % of total loans outstanding. |
15
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 Companys methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowance. As part of the process for determining the adequacy of the allowance for loan losses, management reviews the loan portfolio for specific weaknesses.
The formula portion of the general loan loss allowance is established by applying a loss percentage factor to the different loan types. The allowance is based on managements 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 Companys control, which may result in losses or recoveries differing from those provided. A portion of the allowance is then allocated to reflect the estimated loss exposure. Residential real estate loans are not individually analyzed for impairment and loss exposure because of the significant number of loans, their relatively small balances and their historically low level of losses. In determining the adequacy of reserves, management considers the above mentioned factors.
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.
Real Estate Held for Sale. As one of the Companys activities, a subsidiary is engaged in the investment and sale of real estate.
The business of real estate development involves substantial risks, and the results of such activities depend upon a number of factors, including seasonality, the type, location and size of each project, the stage of project development, general economic conditions and the level of mortgage interest rates. Consequently, there may be substantial interperiod variations in the operating results of the Companys real estate development activities. Moreover, because investing in real estate and real estate development activities are not permissible activities for national banks, the amount of the investment in, and loans to, any subsidiary engaged in such activities is deducted in determining a savings associations regulatory capital. See RegulationWashington Federal SavingsRegulatory Capital Requirements below.
Investment Activities
As a federally-chartered savings institution, Washington Federal Savings is obligated to maintain adequate liquidity and does so by investing in securities. These investments may include, among other things, certain certificates of deposit, repurchase agreements, bankers acceptances, loans to financial institutions whose deposits are federally-insured, federal funds, United States government and agency obligations, GSE preferred stock and mortgage-backed securities.
As of September 30, 2005, the Company had $575 million invested in repurchase agreements, with various brokers, at a weighted-average rate of 3.77%. All repurchase agreements are
16
collateralized by United States agency mortgage-backed securities with a fair market value of at least 102% of the amount invested. All repurchase agreements outstanding on September 30, 2005 mature within 180 days.
The following table sets forth the composition of the Companys investment portfolio at the dates indicated.
2003
|
2004
|
2005
|
||||||||||||||||
Amortized
Cost |
Fair Value |
Amortized
Cost |
Fair Value |
Amortized
Cost |
Fair Value |
|||||||||||||
(In thousands) | ||||||||||||||||||
U.S. government and agency securities |
$ | 120,911 | $ | 127,049 | $ | 403,312 | $ | 404,522 | $ | 199,976 | $ | 204,411 | ||||||
State and political subdivisions |
14,129 | 15,716 | 10,161 | 11,522 | 10,158 | 11,103 | ||||||||||||
Agency mortgage-backed securities |
602,997 | 629,079 | 620,414 | 642,273 | 1,081,314 | 1,073,938 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$ | 738,037 | $ | 771,844 | $ | 1,033,887 | $ | 1,058,317 | $ | 1,291,448 | $ | 1,289,452 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
The investment portfolio at September 30, 2005 was categorized by maturity as follows:
Amortized Cost |
Wtd Avg Yield |
|||||
(In thousands) | ||||||
Due in less than one year |
$ | 72,290 | 7.52 | % | ||
Due after one year through five years |
41,994 | 3.43 | % | |||
Due after five years through 10 years |
2,800 | 7.08 | % | |||
Due after 10 years |
1,174,364 | 5.77 | % | |||
|
|
|
|
|||
$ | 1,291,448 | 5.80 | % |
Sources of Funds
General. Savings deposits are an important source of the Companys funds for use in lending and other general business purposes. In addition to savings deposits, Washington Federal derives funds from loan repayments, advances from the FHLB and other borrowings and, to a lesser extent, from loan sales. Loan repayments are a relatively stable source of funds, while savings inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in normal sources of funds, such as savings inflows at less than projected levels. They may also be used on a longer-term basis to support expanded activities.
17
Savings. The Company chooses to rely on term certificate accounts and other deposit alternatives that have no fixed term and pay interest rates that are more responsive to market interest rates than passbook accounts. This greater variety of deposits allows the Company to be more competitive in obtaining funds and to more effectively manage its liabilities.
Certificates with a maturity of one year or less have penalties for premature withdrawal equal to 90 days of interest. When the maturity is greater than one year but less than four years, the penalty is 180 days of interest. When the maturity is greater than 4 years, the penalty is 365 days interest. For jumbo certificates, the penalty depends on the original term. If the original term is 90 days or less, the penalty is the greater of 30 days interest or all interest earned. If the original term is 90 days or more, the penalty is the greater of 90 days interest or all interest earned. Early withdrawal penalties during 2003, 2004 and 2005 amounted to approximately $379,000, $405,000 and $570,000, respectively.
The Company offers two checking account products. Both accounts pay interest on monthly average balances over $1,000 and charge a service fee if monthly average balances drop below $1,000.
The Companys deposits are obtained primarily from residents of Washington, Oregon, Idaho, Arizona, Utah, Nevada and Texas. The Company does not advertise for deposits outside of these states. At September 30, 2005, approximately 1.2% of the Companys deposits were held by nonresidents of Washington, Oregon, Idaho, Arizona, Utah, Nevada and Texas.
18
The following table sets forth certain information relating to the Companys savings deposits at the dates indicated.
September 30,
|
||||||||||||||||||
2003
|
2004
|
2005
|
||||||||||||||||
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
(In thousands) | ||||||||||||||||||
Balance by interest rate: |
||||||||||||||||||
Checking accounts |
$ | 190,352 | .67 | % | $ | 196,155 | .69 | % | $ | 205,482 | 1.00 | % | ||||||
Passbook and statement accounts |
234,023 | .75 | 224,989 | .75 | 191,919 | 1.25 | ||||||||||||
Money market accounts |
1,037,641 | .92 | 929,952 | 1.07 | 871,945 | 2.40 | ||||||||||||
|
|
|
|
|
|
|||||||||||||
1,462,016 | 1,351,096 | 1,269,346 | ||||||||||||||||
Fixed-rate certificates: |
||||||||||||||||||
Under 1.00% |
13,831 | 11,199 | | |||||||||||||||
1.00% to 1.99% |
1,256,783 | 1,382,182 | 25,004 | |||||||||||||||
2.00% to 2.99% |
557,703 | 546,109 | 876,136 | |||||||||||||||
3.00% to 3.99% |
180,257 | 148,550 | 1,463,843 | |||||||||||||||
4.00% to 4.99% |
188,314 | 195,966 | 238,582 | |||||||||||||||
5.00% to 5.99% |
95,174 | 77,247 | 65,987 | |||||||||||||||
6.00% and above |
13,870 | 11,735 | 1,482 | |||||||||||||||
Jumbo fixed rate certificates ($100,000 or more): |
||||||||||||||||||
Under 1.00% |
3,725 | 2,324 | | |||||||||||||||
1.00% to 1.99% |
214,162 | 145,307 | 833 | |||||||||||||||
2.00% to 2.99% |
355,720 | 503,182 | 208,959 | |||||||||||||||
3.00% to 3.99% |
77,389 | 81,057 | 723,607 | |||||||||||||||
4.00% to 4.99% |
70,561 | 84,201 | 104,447 | |||||||||||||||
5.00% to 5.99% |
25,786 | 24,725 | 22,860 | |||||||||||||||
6.00% and above |
4,760 | 4,365 | 1,086 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||
3,058,035 | 3,218,149 | 3,732,826 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||
$ | 4,520,051 | $ | 4,569,245 | $ | 5,002,172 | |||||||||||||
|
|
|
|
|
|
The following table sets forth, by various interest rate categories, the amount of certificates of deposit of the Company at September 30, 2005, which mature during the periods indicated.
Maturing in
|
|||||||||||||||||||||
1 to 3 Months |
4 to 6 Months |
7 to 12 Months |
13 to 24 Months |
25 to 36 Months |
37 to 60 Months |
Total
|
|||||||||||||||
(In thousands) | |||||||||||||||||||||
Fixed-rate certificates: |
|||||||||||||||||||||
Under 1.00% |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
1.00 to 1.99% |
21,635 | 2,207 | 1,749 | 246 | | | 25,837 | ||||||||||||||
2.00 to 2.99% |
499,757 | 431,527 | 133,900 | 17,240 | 2,671 | | 1,085,095 | ||||||||||||||
3.00 to 3.99% |
159,156 | 514,929 | 1,157,329 | 236,689 | 88,914 | 30,433 | 2,187,450 | ||||||||||||||
4.00 to 4.99% |
228 | 356 | 33,559 | 203,753 | 2,064 | 103,069 | 343,029 | ||||||||||||||
5.00 to 5.99% |
1,409 | 3,098 | 56,809 | 27,331 | 200 | | 88,847 | ||||||||||||||
6.00 and above |
691 | 1,377 | | | | 500 | 2,568 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total |
$ | 682,876 | $ | 953,494 | $ | 1,383,346 | $ | 485,259 | $ | 93,849 | $ | 134,002 | $ | 3,732,826 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historically, a significant number of certificate holders roll over their balances into new certificates of the same term at the Companys then current rate. To ensure a continuity of this trend, the Company expects to continue to offer market rates of interest. Its ability to retain maturing deposits in certificate accounts is more difficult to project; however the Company is confident that by competitively pricing these certificates, levels deemed appropriate by management can be achieved on a continuing basis.
19
At September 30, 2005, the Company had $1.1 billion of certificates of deposit in amounts of $100,000 or more outstanding, maturing as follows: $190 million within 3 months; $261 million over 3 months through 6 months; $411 million over 6 months through 12 months; and $198 million thereafter.
The following table sets forth the customer account activities of the Company for the years indicated.
September 30,
|
|||||||||||
2003
|
2004
|
2005
|
|||||||||
(In thousands) | |||||||||||
Deposits |
$ | 2,224,075 | $ | 2,013,879 | $ | 2,622,572 | |||||
Withdrawals |
2,274,318 | 2,067,218 | 2,317,251 | ||||||||
|
|
|
|
|
|
|
|
||||
Net increase (decrease) in deposits before interest credited |
(50,243 | ) | (53,339 | ) | 305,321 | ||||||
Interest credited |
105,919 | 86,099 | 115,826 | ||||||||
|
|
|
|
|
|
|
|
||||
Net increase in customer accounts |
$ | 55,676 | $ | 32,760 | $ | 421,147 | |||||
|
|
|
|
|
|
|
|
Borrowings. The Company obtains advances from the FHLB upon the security of the FHLB capital stock it owns and certain of its home mortgages, provided certain standards related to credit worthiness have been met. See RegulationWashington Federal Savings - Federal Home Loan Bank System below. Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes acceptable uses to which the advances pursuant to each program may be put, as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of assets or the Companys creditworthiness. The FHLB is required to review its credit limitations and standards at least annually. FHLB advances have, from time to time, been available to meet seasonal and other withdrawals of savings accounts and to expand Washington Federals lending program.
The Company also uses reverse repurchase agreements as a form of borrowing. Under reverse repurchase agreements, the Company sells an investment security to a dealer for a period of time and agrees to buy back that security at the end of the period and pay the dealer a stated interest rate for the use of the dealers funds. The amount of securities sold under such agreements depends on many factors, including the terms available for such transactions, the perceived ability to apply the proceeds to investments yielding a higher return, the demand for the securities and managements perception of trends in interest rates. The Company had $600 million of securities sold under such agreements at September 30, 2005, see Note I of the financial statements for additional information.
The Company also offers two forms of repurchase agreements to its customers. One form has an interest rate that floats like a money market deposit account. The other form has a fixed rate and is offered in a minimum denomination of $100,000. Both forms are fully collateralized by securities. These obligations are not insured by SAIF and are classified as borrowings for regulatory purposes. The Company had $29.3 million of such agreements outstanding at September 30, 2005.
20
The following table presents certain information regarding borrowings of Washington Federal for the years indicated.
September 30,
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Average balance outstanding |
$ | 100,625 | $ | 100,000 | $ | 458,082 | ||||||
Maximum amount outstanding at any month-end during the period |
100,000 | 100,000 | 655,000 | |||||||||
Weighted-average interest rate during the period (1) |
3.39 | % | 3.40 | % | 3.79 | % | ||||||
FHLB advances: |
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Average balance outstanding |
$ | 1,650,023 | $ | 1,539,594 | $ | 1,206,267 | ||||||
Maximum amount outstanding at any month-end during the period |
1,650,000 | 1,650,323 | 1,230,000 | |||||||||
Weighted-average interest rate during the period (1) |
5.19 | % | 5.21 | % | 5.14 | % | ||||||
Securities sold to customers under agreements to repurchase: |
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Average balance outstanding |
$ | 73,322 | $ | 48,515 | $ | 35,131 | ||||||
Maximum amount outstanding at any month-end during the period |
76,477 | 46,205 | 40,811 | |||||||||
Weighted-average interest rate during the period (1) |
2.25 | 1.76 | 1.90 | |||||||||
Total average borrowings |
$ | 1,821,878 | $ | 1,688,109 | $ | 1,699,480 | ||||||
Weighted-average interest rate on total average borrowings (1) |
4.98 | % | 5.00 | % | 4.71 | % |
(1) | Interest expense divided by average daily balances. |
21
Other Ratios
The following table sets forth certain ratios related to the Company for the periods indicated.
September 30,
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Return on assets (1) |
1.98 | % | 1.78 | % | 1.90 | % | |||
Return on equity (2) |
14.61 | 12.12 | 12.63 | ||||||
Average equity to average assets |
13.53 | 14.66 | 15.00 | ||||||
Dividend payout ratio (3) |
41.55 | 49.40 | 46.99 |
(1) | Net income divided by average total assets. |
(2) | Net income divided by average equity. |
(3) | Dividends declared per share divided by net income per share. |
22
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
September 30,
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Interest income: |
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Loan portfolio |
$ | (35,734 | ) | $ | (17,242 | ) | $ | (52,976 | ) | $ | 12,378 | $ | (34,697 | ) | $ | (22,319 | ) | $ | 41,516 | $ | (3,460 | ) | $ | 38,056 | ||||||||||||
Mortgage-backed securities(1) |
(27,522 | ) | 6,563 | (20,959 | ) | (4,913 | ) | (8,554 | ) | (13,467 | ) | 16,878 | (3,973 | ) | 12,905 | |||||||||||||||||||||
Investments (2) |
23,488 | (12,060 | ) | 11,428 | (204 | ) | 467 | 263 | (13,614 | ) | 10,782 | (2,832 | ) | |||||||||||||||||||||||
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All interest-earning assets |
(39,768 | ) | (22,739 | ) | (62,507 | ) | 7,261 | (42,784 | ) | (35,523 | ) | 44,780 | 3,349 | 48,129 | ||||||||||||||||||||||
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Interest expense: |
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Customer accounts |
(769 | ) | (45,600 | ) | (46,369 | ) | 2,855 | (22,675 | ) | (19,820 | ) | 2,339 | 27,388 | 29,727 | ||||||||||||||||||||||
FHLB advances and other borrowings |
9,245 | (2,933 | ) | 6,312 | (5,491 | ) | 180 | (5,311 | ) | 1,261 | (5,481 | ) | (4,220 | ) | ||||||||||||||||||||||
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All interest-bearing liabilities |
8,476 | (48,533 | ) | (40,057 | ) | (2,636 | ) | (22,495 | ) | (25,131 | ) | 3,600 | 21,907 | 25,507 | ||||||||||||||||||||||
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Change in net interest income |
$ | (48,244 | ) | $ | 25,794 | $ | (22,450 | ) | $ | 9,897 | $ | (20,289 | ) | $ | (10,392 | ) | $ | 41,180 | $ | (18,558 | ) | $ | 22,622 | |||||||||||||
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(1) | 2005 interest income on mortgage-backed securities includes the correction of an error related to hedge accounting as described in Note A |
(2) | Includes interest on cash equivalents and dividends on stock of the FHLB of Seattle. |
23
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 in nature than the short-term characteristics of its liabilities of customer accounts and borrowed money. The strong capital position and low operating costs have allowed the Company to manage interest rate risk, within guidelines established by the Board of Directors, through all interest rate cycles. A significant increase in market interest rates could adversely affect net interest income of the Company. The Companys interest rate risk approach has never resulted in the recording of a monthly operating loss.
The following table shows the estimated repricing periods for earning assets and paying liabilities.
Repricing Period
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Within One
Year |
After 1 year -
before 4 Years |
Thereafter
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Total
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(In thousands) | ||||||||||||||||
As of 9/30/05 |
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Earning Assets * |
$ | 2,547,230 | $ | 2,224,709 | $ | 3,294,572 | $ | 8,066,511 | ||||||||
Paying Liabilities |
(4,673,467 | ) | (1,480,044 | ) | (762,994 | ) | (6,916,505 | ) | ||||||||
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Excess (Liabilities) Assets |
$ | (2,126,237 | ) | $ | 744,665 | $ | 2,531,578 | |||||||||
Excess as % of Total Assets |
-25.82 | % | ||||||||||||||
Policy limit for one year excess |
-60.00 | % |
* | Asset repricing period includes estimated prepayments based on historical activity |
At September 30, 2005, the Company had approximately $2,126,237,000 more liabilities subject to repricing in the next year than assets, which amounted to a negative maturity gap of 26% of total assets. As of September 30, 2004, the amount of excess liabilities subject to repricing within one year was $1,761,103,000 or 25% of total assets. The increase of $365,134,000 of liabilities in excess of assets repricing within one year was due to the overall deposit growth and a shift in deposit maturities towards shorter-term maturities. The negative one year maturity gap as a percentage of total assets increased only one percent due to the growth of total assets by 15% to $8,234,450,000. By having an excess of liabilities repricing within one year over assets, the Company is subject to decreasing net interest income should rates rise. However, if the size and/or mix of the balance sheet changes, rising rates may not cause a decrease in net interest income.
Another method used to quantify interest rate risk is the net portfolio value (NPV) analysis. This analysis calculates the difference between the present value of interest-bearing liabilities and the present value of expected cash flows from interest-earning assets and off-balance-sheet contracts. The following tables set forth an analysis of the Companys interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (measured in 100-basis-point increments).
24
September 30, 2005
Change in Interest Rates |
Estimated NPV Amount |
Estimated Increase (Decrease) in NPV Amount |
NPV as % of Assets |
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(Basis Points) | (In thousands) | (In thousands) | ||||||||
+300 | $ | 646,081 | $ | (696,594 | ) | 8.73 | % | |||
+200 | 888,102 | (454,573 | ) | 11.52 | ||||||
+100 | 1,134,150 | (208,525 | ) | 14.13 | ||||||
0 | 1,342,675 | | 16.12 | |||||||
-100 | 1,422,074 | 79,399 | 16.70 |
September 30, 2004
Change in Interest Rates |
Estimated NPV Amount |
Estimated Increase (Decrease) in NPV Amount |
NPV as % of Assets |
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(Basis Points) | (In thousands) | |||||||||
+300 | $ | 648,053 | $ | (632,647 | ) | 9.79 | % | |||
+200 | 871,437 | (409,263 | ) | 12.68 | ||||||
+100 | 1,098,013 | (182,687 | ) | 15.40 | ||||||
0 | 1,280,700 | | 17.40 | |||||||
-100 | 1,323,981 | 43,281 | ) | 17.71 |
At September 30, 2005, the Companys NPV sensitivity increased compared to the prior year. This increase was primarily the result of the shift in asset mix toward longer-term assets. If in the future the Company chooses to continue to reinvest its current short-term investments in longer-term assets (30-year mortgage loans or mortgage-backed securities), the Companys NPV sensitivity will increase.
Certain assumptions were used in preparing the above table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under the various interest rate scenarios. Even if interest rates change in the designated amounts, there can be no assurance that the Companys assets and liabilities would perform as set forth above.
The NPV analysis presented assumes zero balance sheet growth and constant percentage composition of assets and liabilities (actual results will differ from this assumption). Prepayment rates are derived from market prepayment rates observed on or about the measurement date. As of September 30, 2005, the prepayment rate for both a 30 year fixed rate mortgage and a 30-year fixed rate mortgage-backed security from 5% to 6% was 13% in the base case, and 7% in the +200 basis point shift.
25
The following table sets forth Company guidelines for interest rate risk measured by NPV after shifts in interest rates:
Rate Shock |
Minimum NPV Limit
|
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(Basis Points) | |||
+300 |
-0- | ||
+200 |
3.0 | % | |
+100 |
5.0 | % | |
-0- |
6.0 | % | |
-100 |
7.0 | % |
As of September 30, 2005 and 2004 the Companys estimated NPV exceed the above guidelines.
Subsidiaries
Washington Federal, Inc., is a unitary savings and loan holding company that conducts its primary business through its only subsidiary, Washington Federal Savings. Washington Federal Savings has three active wholly owned subsidiaries which are discussed further below.
Washington Federal is permitted by current federal regulations to invest an amount up to 2% of its assets in stock, paid-in surplus and unsecured loans in service corporations. The Company may invest an additional 1% of its assets when the additional funds are utilized for inner-city or community development purposes. In addition, federally-chartered savings institutions that are in compliance with regulatory capital requirements and other conditions also may make loans to service corporations in an aggregate amount of up to 50% of the institutions capital as defined in federal regulations.
At September 30, 2005, Washington Federal Savings was authorized under the current regulations to have a maximum investment of $164.7 million in its service corporations, exclusive of the additional 1% of investment assets permitted for inner-city or community development purposes but inclusive of the ability to make loans to its subsidiaries. On September 30, 2005, Washington Federal Savings investment in, and unsecured loans to, its wholly owned service corporations amounted to $5.1 million.
Washington Services, Inc., a wholly owned subsidiary of Washington Federal Savings, is continuing its investment in 29 developable acres zoned light industrial in the technology corridor of South Snohomish County, Washington. Based upon the sales history of this development, the Company believes the net realizable value from the sale of the remaining properties exceeds the subsidiarys basis in these properties.
First Insurance Agency, Inc., a wholly owned subsidiary of Washington Federal Savings, is an insurance brokerage company that offers a full line of individual and business insurance products to customers of the Company, as well as to others.
Statewide Mortgage Services, Inc., a wholly owned subsidiary of Washington Federal Savings, is incorporated under the laws of the state of Washington for the purpose of operating a commercial warehouse site located in the state.
A savings institution is required to deduct the amount of the investment in, and extensions of credit to, a subsidiary engaged in any activities not permissible for national banks. Because the acquisition and development of real estate is not a permissible activity for national banks, the investments in, and loans to, the subsidiary of the institution which is engaged in such activities are subject to exclusion from the capital calculation. See Regulation - Washington Federal Savings - Regulatory Capital Requirements below.
26
Employees
As of September 30, 2005, the Company had approximately 749 employees, including the full-time equivalent of 28 part-time employees and its service corporation employees. None of these employees are represented by a collective bargaining agreement, and the Company has enjoyed harmonious relations with its personnel.
Regulation
Set forth below is a brief description of certain laws and regulations that relate to the regulation of the Company and Washington Federal Savings. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Certain federal banking laws have been recently amended. See Regulation - The Company - Financial Modernization below.
The Company
General. The Company is registered as a savings and loan holding company under the HOLA and is subject to OTS regulation, examination, supervision and reporting requirements.
USA Patriot Act of 2001. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the Patriot Act) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued a number of implementing regulations which apply to various requirements of the Patriot Act to financial institutions such as Washington Federal Savings. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Financial Modernization. Under the Gramm-Leach-Bliley Act, enacted into law on November 12, 1999, no company may acquire control of a savings and loan holding company after May 4, 1999, unless the company is engaged only in activities traditionally permitted to a multiple savings and loan holding company or newly permitted to a financial holding company under Section 4(k) of the Bank Holding Company Act. Existing savings and loan holding companies, and those formed pursuant to an application filed with the OTS before May 4, 1999, may engage in any activity, including non-financial or commercial activities, provided such companies control only one savings and loan association that meets the Qualified Thrift Lender (QTL) test. Corporate reorganizations are permitted, but the transfer of grandfathered unitary thrift holding company status through acquisition is not permitted.
27
Activities Restrictions. There are generally no restrictions on the activities of a savings and loan holding company that holds only one subsidiary savings institution; however, if the savings institution subsidiary of such a holding company fails to meet a QTL test, then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company. See Washington Federal Savings - Qualified Thrift Lender Test below.
If the Company were to acquire control of another savings institution, other than through a merger or other business combination with Washington Federal Savings, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions, and where each subsidiary savings institution meets the QTL test, the activities of the Company and any of its subsidiaries (other than the Washington Federal Savings or other subsidiary savings institutions) would thereafter be subject to further restrictions. No multiple savings and loan holding company, or subsidiary thereof, that is not a savings institution shall commence or continue a business activity for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, upon prior notice to and with no objection by the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) performing activities authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company.
Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the OTS: (i) control of any other savings institution or savings and loan holding company, or substantially all the assets thereof, or (ii) more than 5% of the voting shares of a savings institution or holding company thereof that is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company, or person owning or controlling by proxy or otherwise more than 25% of such companys stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.
Federal Securities Laws. The Companys common stock is registered with the Securities and Exchange Commission (SEC) under Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SOA is the most far-reaching U.S. securities legislation enacted in some time. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Exchange Act. The SOA includes specific additional disclosure requirements and new corporate governance rules, among other things, applicable to public companies.
28
Washington Federal Savings
General. Washington Federal Savings is a federally-chartered savings association, the deposits of which are federally insured and backed by the full faith and credit of the United States government. Accordingly, Washington Federal Savings is subject to broad federal regulation and oversight by the OTS and the FDIC extending to all aspects of its operations. Washington Federal Savings is a member of the FHLB of Seattle and is subject to certain limited regulations by the Federal Reserve Board. Washington Federal Savings is a member of the SAIF and its deposits are insured by the SAIF fund administered by the FDIC. As a result, the FDIC has certain regulatory and examination authority over Washington Federal Savings.
Federal Savings Institution Regulations. The OTS has extensive authority over the operations of savings institutions. As part of this authority, savings institutions are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC. Such regulation and supervision is primarily intended for the protection of depositors.
The investment and lending authority of Washington Federal Savings is prescribed by federal laws and regulations, and it is prohibited from engaging in any activities not permitted by such laws and regulations. These laws and regulations generally are applicable to all federally-chartered savings institutions, and may also apply to state-chartered savings institutions.
Insurance of Accounts. The deposits of Washington Federal Savings are insured by the SAIF up to $100,000 per depositor (as defined by law and regulation) and are backed by the full faith and credit of the United States government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions after giving the OTS an opportunity to take such action.
Assessment rates for SAIF-insured institutions range from 0% of insured deposits for well capitalized institutions with minor supervisory concerns to .27% of insured deposits for undercapitalized institutions with substantial supervisory concerns. See Prompt Corrective Action below. In addition, an assessment of 1.34 basis points was added to the SAIF assessment to cover financing corporation debt service payments for 2005.
Regulatory Capital Requirements. Federally insured savings institutions are required to maintain minimum levels of regulatory capital. Pursuant to federal law, the OTS has established capital standards applicable to all savings institutions. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.
The capital regulations create three capital requirements: a tangible capital requirement, a leverage or core capital requirement and a risk-based capital requirement. All savings institutions must have tangible capital of at least 1.5% of adjusted total assets, as defined by regulation. For purposes of this requirement, tangible capital is core capital less all intangibles other than certain purchased mortgage servicing rights of which Washington Federal Savings has none.
Core capital includes common stockholders equity, non-cumulative perpetual preferred stock and related surplus and minority interests in consolidated subsidiaries, less intangibles (unless included under certain limited conditions, but in no event exceeding 25% of core capital), plus purchased mortgage servicing rights in an amount not to exceed 50% of core capital. The current leverage or core capital requirement is at least 3.0% of adjusted total assets.
29
The risk-based capital standard requires savings institutions to maintain a minimum ratio of total capital to risk-weighted assets of 8.0%. Total capital consists of core capital (defined above) and supplementary capital. Supplementary capital consists of certain capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only in an amount equal to the amount of core capital. In determining the required amount of risk-based capital, total assets, including certain off-balance-sheet items, are multiplied by a risk-weight factor based on the risks inherent in the type of assets held by an institution. The risk categories range from 0% for low-risk assets such as U.S. Treasury securities and GNMA securities to 100% for various types of loans and other assets deemed to be of higher risk. Single-family residential loans having loan-to-value ratios not exceeding 80% and meeting certain additional criteria, as well as certain multi-family residential loans, qualify for a 50% risk-weight treatment. The book value of each asset is multiplied by the risk factor applicable to the asset category, and the sum of the products of this calculation equals total risk-weighted assets.
OTS regulations impose special capitalization standards for savings institutions that own service corporations and other subsidiaries. In addition, certain exclusions from capital and assets are required when calculating total capital in addition to the adjustments for calculating core capital. These adjustments do not materially affect the regulatory capital of Washington Federal Savings.
For information regarding Washington Federal Savings compliance with each of these three capital requirements at September 30, 2005, see Note M to the Consolidated Financial Statements.
Any savings institution that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on an institutions operations and/or the appointment of a conservator or receiver. OTS capital regulations provide that such supervisory actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.
Prompt Corrective Action. Under federal law, each federal banking agency has implemented a system of prompt corrective action for institutions that it regulates. Under OTS regulations, an institution shall be deemed to be: (i) well capitalized if it has total risk-based capital of 10.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of well capitalized; (iii) undercapitalized if it has total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv) significantly undercapitalized if it has total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%; and (v) critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Federal law authorizes the OTS to reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category. (The FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of September 30, 2005, Washington Federal Savings exceeded the requirements of a well capitalized institution.
30
Qualified Thrift Lender Test. A savings institution that does not meet a QTL test set forth in the HOLA and implementing regulations must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity, not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations).
Under current legislation and applicable regulations, any savings institution is a QTL if: (i) it qualifies as a domestic building and loan association under Section 7701(a)(19) of the Internal Revenue Code (which generally requires that at least 60% of the institutions assets constitute housing-related and other qualifying assets) or (ii) at least 65% of the institutions portfolio assets (as defined) consist of certain housing and consumer-related assets on a monthly average basis in at least nine out of every 12 months. At September 30, 2005, Washington Federal Savings was in compliance with the QTL test set forth in the HOLA.
Transactions with Affiliates. Under federal law, all transactions between and among a savings institution and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder as interpreted by the OTS. Generally, these requirements limit these transactions to a percentage of the institutions capital and require all of them to be on terms at least as favorable to the institution as transactions with non-affiliates. In addition, a savings institution may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The OTS is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a savings institution. The OTS regulations also set forth various reporting requirements relating to transactions with affiliates.
Extensions of credit by a savings institution to executive officers, directors and principal shareholders are subject to Section 22(h) of the Federal Reserve Act, which, among other things, generally prohibits loans to any such individual where the aggregate amount exceeds an amount equal to 15% of an institutions unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral. Section 22(h) permits loans to directors, executive officers and principal stockholders made pursuant to a benefit or compensation program that is widely available to employees of a subject savings institution provided that no preference is given to any officer, director or principal stockholder, or related interest thereto, over any other employee. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institutions unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.
Restrictions on Capital Distributions. OTS regulations impose limitations on capital distributions by savings institutions including cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital accounts of a savings institution. Under OTS capital distribution regulations, certain savings institutions are required to file with the OTS. Specifically, since Washington Federal Savings is a subsidiary of the Company, the regulation requires Washington Federal Savings to provide notice to the OTS of its intent to make capital distributions, unless an application is otherwise required. Washington Federal Savings does not believe that the regulation will adversely affect its ability to make capital distributions.
31
Federal Home Loan Bank System. Washington Federal Savings is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. At September 30, 2005, the Companys advances from the FHLB amounted to $1.2 billion.
As a member, the institution is required to purchase and maintain stock in the FHLB of Seattle in an amount equal to 3.50% of FHLB advances outstanding and .75% of mortgage loans and pass-through securities. At September 30, 2005, the Company had $129.5 million in FHLB stock, which was in compliance with this requirement.
Federal law requires the FHLBs to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future.
Community Reinvestment Act and Fair Lending Laws. Savings institutions have a responsibility under the Community Reinvestment Act (CRA) and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the Fair Lending Laws) prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institutions failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. Failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the U.S. Department of Justice.
32
Taxation
Federal Taxation. For federal and state income tax purposes, the Company reports its income and expenses on the accrual basis method of accounting and files its federal and state income tax returns on a September 30 fiscal year basis. The Company files consolidated federal and state income tax returns with its wholly-owned subsidiaries.
The Small Business Job Protection Act of 1996 (the Act) requires qualified thrift institutions, such as the Company, 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 that began in 1999. Accordingly, the Company was required to pay approximately $25,406,000 in additional federal income taxes through fiscal 2004, all of which had previously been recognized.
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 Companys originally reported taxable income as a result of this examination.
33
State Taxation. The states of Washington and Nevada do not have an income tax. A business and occupation tax based on a percentage of gross receipts is assessed against businesses in Washington state; however, interest received on loans secured by mortgages or deeds of trust on residential properties is not subject to this tax.
The state of Idaho has a corporate income tax with a statutory rate of 7.6% of apportionable income.
The state of Oregon has a corporate excise tax with a statutory rate of 6.6% of apportionable income.
The state of Utah has a corporate franchise tax with a statutory rate of 5.0% of apportionable income.
The state of Arizona has a corporate income tax with a statutory rate of 7.0% of apportionable income.
The state of Texas has a franchise tax with a statutory rate of 4.5% of apportionable income.
Availability of Financial Data
All financial reports filed with the SEC, including insider transactions, are available through a link at the Companys website at www.washingtonfederal.com .
34
Item 2. Properties
The Company owns the building in which its home and executive offices are located in Seattle, Washington. The following table sets forth certain information concerning the Companys offices:
Location |
Number of Offices |
Building
|
Net Book Value at September 30, 2005 (2) |
||||||
Owned
|
Leased (1)
|
||||||||
(In thousands) | |||||||||
Washington |
43 | 29 | 14 | $ | 23,579 | ||||
Idaho |
16 | 16 | | 6,157 | |||||
Oregon |
27 | 17 | 10 | 9,075 | |||||
Utah |
10 | 6 | 4 | 7,380 | |||||
Arizona |
20 | 13 | 7 | 12,315 | |||||
Texas |
3 | 1 | 2 | 3,143 | |||||
Nevada |
3 | | 3 | 1,638 | |||||
|
|
|
|
|
|||||
Total |
122 | 82 | 40 | $ | 63,287 | ||||
|
|
|
|
|
(1) | The leases have varying terms expiring from 2005 through 2070, including renewal options. |
(2) | Amount represents land and improvements with respect to properties owned by the Company and represents the book value of leasehold improvements, where applicable. |
Washington Federal evaluates on a continuing basis the suitability and adequacy of its offices, both branches and administrative centers, and has opened, relocated, remodeled or closed them as necessary to maintain efficient and attractive premises.
Washington Federals net investment in premises, equipment and leaseholds was $63.3 million at September 30, 2005.
Item 3. | Legal Proceedings |
The Company is involved in legal proceedings occurring in the ordinary course of business that in the aggregate are believed by management to be immaterial to the financial statements of the Company. The effects of legal proceedings did not have a material impact on the statements of operations for any of the three years ended September 30, 2005.
Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
35
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The information required herein, with the exception of the table below, is incorporated by reference from page 34 of the Companys Annual Report to Stockholders for 2005 (Annual Report), which is included herein as Exhibit 13.
The following table provides information with respect to purchases made by or on behalf of the Company of the Companys common stock during the three months ended September 30, 2005.
Period |
Total Number of
Shares Purchased |
Average Price
Paid Per Share |
Total Number of
Shares Purchased as Part of Publicly Announced Plan (1) |
Maximum
Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period |
|||||
July 1, 2005 to July 31, 2005 |
| $ | | | | ||||
August 1, 2005 to August 31, 2005 |
| | | | |||||
September 1, 2005 to September 30, 2005 |
| | | | |||||
|
|
|
|
|
|||||
Total |
| $ | | | 3,310,014 |
(1) | The Companys only stock repurchase program was publicly announced by the Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 21,956,264 shares have been authorized for purchase. |
Item 6. | Selected Financial Data |
The information required herein is incorporated by reference from page 9 of the Annual Report.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The information required herein is incorporated by reference on pages 4 through 8 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference to Interest Rate Risk commencing on page 24 of this Form 10-K.
36
Item 8. | Financial Statements and Supplementary Data |
The financial statements and supplementary data required herein are incorporated by reference from pages 10 through 33 of the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys President and Chief Executive Officer along with the Companys Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (Exchange Act) Rule 13a-14. Based upon that evaluation, the Companys President and Chief Executive Officer, along with the Companys Senior Vice President and Chief Financial Officer, concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic SEC filings. There have been no significant changes in the Companys internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Companys management, including its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control over Financial Reporting and the Attestation report of the Companys Registered Public Accounting Firm required herein is incorporated by reference on page 33 of the Annual Report.
Item 9B. Other Information
On March 21, 2005, the Board of Directors of the Company appointed Thomas J. Kelley as a director of the Company. The size of the Companys Board of Directors was increased to 10 members in connection with this appointment. Mr. Kelley was appointed to the class of directors whose term expires in January 2006. Mr. Kelley will be a nominee for election as a director for a one-year term at the Companys annual meeting of stockholders scheduled to be held on January 18, 2006. There is no arrangement or understanding between Mr. Kelley and any other persons pursuant to which he was appointed as a director. Mr. Kelley currently serves on the Audit Committee of the Board of Directors.
37
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference to pages 3 through 13 of the proxy statement dated December 16, 2005.
The Company has adopted a code of ethics that applies to all senior financial officers, including its Chief Executive Officer and Chief Financial Officer. The code of ethics is publicly available on the Companys website at www.washingtonfederal.com . If the Company makes any substantive amendments to the code of ethics or grants any waiver from a provision of the code, it will disclose the nature of such amendment or waiver on its website or in a
Item 11. Executive Compensation
The information required herein is incorporated by reference to pages 11 through 13 of the proxy statement dated December 16, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required herein is incorporated by reference to pages 2 through 7 of the proxy statement dated December 16, 2005.
The information required in this item 12 regarding equity compensation plans is incorporated by reference to Note L on pages 27 through 28 of the Annual report.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference to page 16 of the proxy statement dated December 16, 2005.
Item 14. Principal Accounting Fees and Services
The information required herein is incorporated by reference to page 16 of the proxy statement dated December 16, 2005.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following financial statements are incorporated herein by reference from pages 10 through 33 of the Annual Report.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of September 30, 2005 and 2004
Consolidated Statements of Operations for each of the years in the three-year period ended
September 30, 2005 Consolidated Statements of Stockholders Equity for each of the years in the three-year period ended September 30, 2005
38
Consolidated Statements of Cash Flows for each of the years in the three-year period ended September 30, 2005
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report:
No.
|
Exhibit |
Page/
|
||
3.1 | Articles of Incorporation of the Company | (1) | ||
3.2 | Bylaws of the Company | (1) | ||
4 | Specimen Common Stock Certificate | (1) | ||
10.1 | 1987 Stock Option and Stock Appreciation Rights Plan* | (1) | ||
10.2 | 1994 Stock Option and Stock Appreciation Rights Plan* | (1) | ||
10.3 | 2001 Long-Term Incentive Plan* | (2) | ||
10.4 | Form of award agreement for restricted stock for 2001 Long Term Incentive Plan * | |||
10.5 | Form of award agreement for stock options for all plans* | |||
13 | Annual Report to Stockholders | |||
21 |
Subsidiaries of the Company - Reference is made to Item 1, Business - Subsidiaries for the required information |
|||
23 | Consent of Independent Registered Public Accounting Firm | |||
31.1 | Section 302 Certification by the Chief Executive Officer | |||
31.2 | Section 302 Certification by the Chief Financial Officer | |||
32 | Section 906 Certification pursuant to the Sarbanes-Oxley Act of 2002 |
* | Management contract or compensation plan |
(1) | Incorporated by reference from the Registrants Registration Statement on Form 8-B filed with the SEC on January 26, 1995. |
(2) | Incorporated by reference from the Registrants Registration Statement on Form S-8 filed with the SEC on January 23, 2003. |
(c) | See (a)(3) above for all exhibits filed herewith and the Exhibit Index. |
(d) | All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes. |
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WASHINGTON FEDERAL, INC. | ||||
November 4, 2005 | By: |
/s/ Roy M. Whitehead |
||
Roy M. Whitehead, Vice Chairman, | ||||
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ John F. Clearman |
November 4, 2005 | |
John F. Clearman, Director | ||
/s/ Derek L. Chinn |
November 4, 2005 | |
Derek L. Chinn, Director | ||
/s/ H. Dennis Halvorson |
November 4, 2005 | |
H. Dennis Halvorson, Director | ||
/s/ W. Alden Harris |
November 4, 2005 | |
W. Alden Harris, Director | ||
/s/ Anna C. Johnson |
November 4, 2005 | |
Anna C. Johnson, Director | ||
/s/ Thomas J. Kelley |
November 4, 2005 | |
Thomas J. Kelley, Director | ||
/s/ Thomas F. Kenney |
November 4, 2005 | |
Thomas F. Kenney, Director | ||
/s/ Guy C. Pinkerton |
November 4, 2005 | |
Guy C. Pinkerton, Director, Chairman | ||
/s/ Charles R. Richmond |
November 4, 2005 | |
Charles R. Richmond, Director | ||
/s/ Roy M. Whitehead |
November 4, 2005 | |
Roy M. Whitehead, Director, Vice Chairman, | ||
President and Chief Executive Officer | ||
/s/ Brent J. Beardall |
November 4, 2005 | |
Brent J. Beardall, CPA | ||
Senior Vice President and | ||
Chief Financial Officer |
40
Exhibit 10.4
RESTRICTED STOCK GRANT AGREEMENT
WASHINGTON FEDERAL, INC.
THIS AGREEMENT is made this (hereinafter referred to as the Date of Grant) by and between Washington Federal, Inc. (the Company) and , an employee of the Company (the Employee).
WHEREAS, the Employee is currently xxxxxxx officer title of the Company; and
WHEREAS, the Company desires to grant to the Employee xxxx shares of restricted common stock, as described herein.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the Company and the Employee agree as follows:
1. | Restricted Stock Grant . The Company hereby grants to Employee an award consisting of a total of x,xxx shares of common stock, $1.00 par value per share, of the Company (Common Stock), upon the terms and conditions set forth herein (Restricted Common Stock). |
2. | Restriction Period . The maximum restriction period applicable to the Restricted Common Stock granted hereunder is xxx (x) years, except as otherwise provided herein. On xx/xx/xx, provided that the Employee remains in the continuous employ of the Company, one-seventh (1/7 th ) of the shares of Restricted Common Stock shall be released from restriction, distributed to the Employee and be vested and unrestricted. On each (Month and day of grant) of the second (2 nd ), third (3 rd ), fourth (4 th ), fifth (5 th ), sixth (6 th ) and seventh (7 th ) years following xx/xx/xx (date of grant) , provided that the Employee remains in the continuous employ of the Company, an additional one-seventh (1/7 th ) of the shares of Restricted Common Stock shall be released from restriction, distributed to the Employee and be vested and unrestricted. If the employment of the Employee is terminated prior to the date any shares of Restricted Common Stock are vested for any reason (except as specifically provided in Sections 3 and 4 below), the Employee shall forfeit the right to any shares of Restricted Common Stock that have not theretofore been earned and vested. |
Shares received through payment of stock dividends or stock splits shall be vested and unrestricted and delivered to the Employee.
3. | Death and Disability . Notwithstanding Section 2 above, all shares of Restricted Common Stock shall be deemed to be vested and unrestricted and shall be distributed to the Employee or his heirs, as applicable, in the event that the employment of the Employee terminates due to death or Disability, as defined in the Companys 2001 Long-Term Incentive Plan (the 2001 Plan), as of the Employees last day of employment with the Company. |
4. | Change in Control . Notwithstanding Section 2 above, all shares of Restricted Common Stock shall be deemed to be vested and unrestricted and shall be distributed to the Employee in the event of a Change in Control of the Company, as defined in the 2001 Plan, as of the effective date of such change in control. |
5. | Delivery of Stock . Whenever shares of Restricted Common Stock are released from restriction, the Company shall, subject to the implementation of an arrangement between the Company and the Employee to effect all necessary tax withholding, issue a certificate to the Employee for such unrestricted shares. Such certificate shall, however, reflect any applicable restrictions under federal securities laws. The Company shall follow all requisite procedures to deliver such certificates to the Employee; provided, however, that such delivery may be postponed to enable the Company to comply with any applicable procedures, regulation or listing requirements of any governmental agency, stock exchange or regulatory agency. |
6. | Shareholder Rights . Employee shall have, with respect to the Restricted Common Stock, all of the voting rights of a shareholder of such Common Stock. Employee shall be paid, without restriction, all cash dividends paid on the Common Stock underlying the Restricted Common Stock. |
IN WITNESS WHEREOF , the Company has caused this Agreement to be executed by its duly authorized officers, and the Employee has hereunto set his hand, all as of the day first above written.
ATTEST: | WASHINGTON FEDERAL, INC. | |||
|
By: |
|
||
XXXXXXXXXX |
XXXXXXXXX |
|||
President and CEO |
Chairman |
|||
EMPLOYEE: | ||||
|
||||
xxxxxxxxxxx |
Exhibit 10.5
Notice of Grant of Stock Options and Option Agreement
Washington Federal Inc.
ID: 91-1661606
425 Pike St
Seattle, | WA 98101 |
Employee Name | Award Number: | Award number | ||
Employee Address | Plan: | Plan Identification | ||
ID: | ID number |
Effective XX/XX/XX, you have been granted a(n) incentive stock option to buy XXXXX shares of Washington Federal Inc. (the Company) common stock at a price of $XX.XX.
The total option price of the shares granted is $XX,XXX.XX.
Shares in each period will become fully vested on the date shown.
Shares |
Vest type |
Full Vest
|
Expiration
|
|||
XXX.XX |
On vest date |
XX/XX/XX | XX/XX/XX | |||
XXX.XX |
Annually |
XX/XX/XX | XX/XX/XX | |||
XXX.XX |
Annually |
XX/XX/XX | XX/XX/XX | |||
XXX.XX |
Annually |
XX/XX/XX | XX/XX/XX | |||
XXX.XX |
Annually |
XX/XX/XX | XX/XX/XX |
By your signature and the Companys signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Companys Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document.
Signatures: |
||
Washington Federal, Inc. | Date: XX/XX/XX | |
Employee | Date: XX/XX/XX |
Exhibit 13
TABLE OF CONTENTS
1 | ||
2 | ||
4 | ||
9 | ||
10 | ||
15 | ||
Managements Report on Internal Control over Financial Reporting |
33 | |
33 | ||
34 | ||
35 |
A SHORT HISTORY
Washington Federal, Inc. (Company or Washington Federal) is a savings and loan holding company headquartered in Seattle, Washington. Its principal subsidiary is Washington Federal Savings, which operates 122 offices in seven western states.
The Company had its origin on April 24, 1917 as Ballard Savings and Loan Association. In 1935, the state-chartered Company 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 Company, 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 Company converted from a federal mutual to a federal stock association. In 1987 and 1988, acquisitions of United First Federal, Provident Federal Savings and Loan, and Northwest Federal Savings and Loan, all headquartered in Boise, Idaho, added 28 Idaho offices to the Company. In 1988, the acquisition of Freedom Federal Savings and Loan Association in Corvallis, Oregon added 13 Oregon offices, followed in 1990 by the eight Oregon offices of Family Federal Savings.
In 1991, the Company 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 Company 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 Company purchased West Coast Mutual Savings Bank with its one branch in Centralia, Washington, and opened six additional branches. In 1996, the Company 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 Company expanded into Las Vegas, opening its first branch in Nevada along with two branches in Arizona. In 2001, the Company 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. In 2003, the Company 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. In 2004, the Company consolidated two branches in Mount Vernon, Washington into one and opened branches in Plano, Texas and West Bend, Oregon. In 2005, the Company opened locations in Klamath Falls, Oregon, Richardson, Texas and another in Las Vegas, Nevada.
The Company 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.
September 30, | 2005 | 2004 | % Change | ||||||||
(In thousands, except per share data) | |||||||||||
Assets |
$ | 8,234,450 | $ | 7,169,205 | +15 | % | |||||
Cash and cash equivalents |
637,791 | 508,361 | +25 | ||||||||
Investment securities |
214,993 | 414,683 | 48 | ||||||||
Loans receivable and securitized assets subject to repurchase, net |
6,008,932 | 5,093,443 | +18 | ||||||||
Mortgage-backed securities |
1,075,342 | 641,215 | +68 | ||||||||
Customer accounts |
5,031,505 | 4,610,358 | +9 | ||||||||
FHLB advances and other borrowings |
1,885,000 | 1,300,000 | +45 | ||||||||
Stockholders equity |
1,187,308 | 1,120,188 | +6 | ||||||||
Net income |
145,889 | 131,868 | +11 | ||||||||
Diluted earnings per share |
1.67 | 1.51 | +11 | ||||||||
Dividends per share |
0.78 | 0.75 | +4 | ||||||||
Stockholders equity per share |
13.66 | 12.94 | +6 | ||||||||
Shares outstanding |
86,933 | 86,548 | |||||||||
Return on average stockholders equity |
12.63 | % | 12.12 | % | |||||||
Return on average assets |
1.90 | 1.78 | |||||||||
Efficiency ratio |
19.16 | 18.57 |
1 |
Dear Stockholder:
The financial performance of a traditional thrift institution like Washington Federal depends primarily on the health of the housing market and the spread between short and long-term interest rates. During the fiscal year just completed, the residential real estate market continued to sizzle within our lending territory; likewise, for much of the year the interest rate spread on which we rely was somewhat higher than average. As a result, I am privileged to report that your Company enjoyed very strong financial performance during the past year. Net income amounted to $145,889,000, which was an 11% increase over the $131,868,000 recorded during the prior fiscal year. Earnings per share of $1.67 also represented an increase of 11% from $1.51 recorded in the previous year. Return on average assets of 1.90% was at or near the top of the range for industry peers of similar size, while return on equity improved to 12.63%, which we believe was respectable given your Companys conservative capital position and the historically low interest rate environment in which it was operating.
The past year also saw some interesting and important milestones achieved. For example, total assets grew by nearly 15% and at year-end exceeded $8 billion for the first time. Most of that growth came as a result of record loan originations of $2.44 billion, which enabled the loan portfolio to top $6 billion for the first time in your Companys history. Total deposit growth was also very encouraging during the year as customer accounts grew by 9% and totaled over $5 billion at year-end, also a new high mark.
Asset quality was superb. Non-performing assets (foreclosed real estate plus loans on which we are no longer receiving payments) amounted to only $7.3 million, or less than one-tenth of 1% of total assets at year-end. This is the lowest level of problem assets reported by your Company since going public in 1982. Net loan charge-offs recorded during the year were also astoundingly low at only $250,000. We are proud to report such positive results, although management believes that these numbers represent peak performance and do not necessarily reflect the actual credit risk embedded in the loan portfolio. As the housing market inevitably cools, we expect problem assets and charge-offs to increase and have taken the precaution of establishing appropriate reserves. Yet for now, we celebrate the relative absence of credit related difficulties.
Net interest income, which is the difference between interest income and interest expense, is the primary driver of earnings at Washington Federal and increased by $22.6 million over the prior year. This critical measure came under increasing pressure during the year due to a steady upward trend in deposit costs as the Federal Reserve tightened the supply of money and raised short-term rates from 1.5% to 3.75%. The resulting higher deposit costs were offset by an increase in floating rate construction loans, by redeploying cash into higher yielding, longer-term assets and by growth of the balance sheet using additional leverage. Your Companys ability to offset anticipated future increases in funding costs is extensive, yet ultimately limited and will depend on many factors including the speed and extent to which short-term rates increase and the degree to which long-term rates move commensurately. As always, this is the major risk managed by your Company, yet it is one which management has prepared for by building capital and maintaining excess liquidity, by extending the maturity of borrowed funds, by taking a conservative posture on credit risk and by managing to the lowest cost structure in the industry. Its also worth a reminder that we have been through this before, although no two rate cycles are alike.
Results this year were also dampened a bit by our investment exposure to U.S. government sponsored enterprises. Historically, investments in Fannie Mae, Freddie Mac and the Federal Home Loan Bank System were considered to be of the very highest quality due to their conservative operating models and the implied guarantee of the federal government. More recently though, as their business models became more complex, investments in these institutions have been shown to entail a higher degree of risk than was previously thought. Two years ago, our investment in the Federal Home Loan Bank of Seattle produced a tax-deferred dividend yield of 6.0%. Today, due to what appear to be temporary financial difficulties, they are currently unable to support a dividend. During the year, management also recognized a $4 million write down in the carrying values of investments in preferred stock issues of Fannie Mae and Freddie Mac. The reduction in the carrying values reflects the reduced market value of these securities as a result of their well-publicized accounting and financial difficulties. We have chosen to maintain these investments on our books because we believe them to be money-good assets at the end of the day; however, we continue to monitor them closely. Such investments, excluding mortgage-backed securities, represented approximately 4% of assets at fiscal year-end.
For the 40th time since going public in 1982, the Board of Directors of your Company declared a cash dividend increase during the year. The new annualized dividend rate of $.80 per share represents a payout ratio of 48% of last years earnings and a dividend yield of approximately 3.5% based on recent prices of your Companys stock. In February, stockholders were again delivered a 10% stock dividend. This was the 20th time since 1982 that your Company has declared additional stock distributions to owners in the form of a stock split or stock dividend. After cash dividends, retained earnings allowed your Company to increase its capital account by $67 million. The ratio of capital to total assets stood at 14.42 % at year-end, which is considerably higher than the industry average and gives management great flexibility to take advantage of opportunities that may present themselves in the future.
The filing of our annual report this year also brought with it the requirement for compliance with Section 404 of the Sarbanes-Oxley Act, which mandates the step-by-step documentation and testing of all key internal controls. The completion of this task came at great expense and much hard work by a group of key employees and I am pleased to report that your Company was not found to have any material weaknesses in its internal controls over financial reporting. On a related note, this year we
2
also welcomed a new member to the Board of Directors. Thomas J. Kelley is a Certified Public Accountant, currently instructing at Seattle University, who spent much of his career auditing financial institutions as a partner with the former Arthur Andersen firm. With his addition to the Audit Committee, we believe that all three of its members meet the definition of Audit Committee Financial Expert and that this represents a significant strengthening of the Boards ability to meet its financial oversight responsibilities.
Lately, we have received a number of questions from investors regarding your Companys exposure to the so-called exotic mortgages such as the Interest-Only and Option-ARM products that have become so popular of late. We have none. Our view is that the repayment characteristics and credit risks associated with these products are untested through the credit and interest rate cycles; therefore, management has elected to stay on the sidelines until these products are indeed proven to be profitable to lenders without toxic side effects for borrowers.
Looking ahead, the strength of our balance sheet and the earnings momentum from last year give reasons for optimism about your Companys future prospects, particularly in the long-term. On the other hand, the near-term risks of a break in the housing market and/or a spike in inflation that would necessitate more aggressive tightening by the Fed seem more likely than they did one year ago. Yet regardless of the various environmental possibilities, in the year to come we plan to stick with the simple, comfortable and familiar operating model that has served us so well over the years. We plan to open 2-4 new branches and gather sufficient new loans and deposits to adequately leverage the new capital we acquire through earnings. We will continue to operate as a high-touch, low-tech provider of residential real estate loans, and we will continue to provide a very safe place for thrift-minded people to keep their hard-earned savings. With a healthy underpinning of capital and a frugal management style, your Company should continue to prosper.
To our loyal customers goes a special note of appreciation. We thank you for entrusting us with your business and recognize that we have to earn your business every day. I would also like to thank the Executive Management Committee and all of our hard working employees for their dedicated efforts during the past year. Each year they somehow deliver just a little more and are the indispensable ingredient in the Washington Federal recipe for success. I would also like to thank the Board of Directors for their unwavering support and wise counsel to management and also for their commitment to protecting the interests of all stockholders.
Finally, I wish to thank our many stockholders for their continued support. For the benefit of your investment, please remember to send your friends and neighbors to Washington Federal for all their savings and home finance requirements. I hope to see you at the Annual Meeting of Stockholders to be held at 2:00 PM, on January 18, 2006 at Benaroya Hall in downtown Seattle, Washington.
Sincerely,
Roy M. Whitehead
Vice Chairman, President and Chief Executive Officer
(Standing - left to right) Edwin C. Hedlund, Executive Vice President and Secretary, Roy M. Whitehead, Vice Chairman, President and Chief Executive Officer, Linda S. Brower, Executive Vice President, (Seated - left to right) Jack B. Jacobson, Executive Vice President and Chief Lending Officer, Brent J. Beardall, Senior Vice President and Chief Financial Officer.
|
3
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL |
Washington Federal, Inc. (Company or Washington Federal) is a savings and loan holding company. The Companys primary operating subsidiary is Washington Federal Savings. |
The Companys fiscal year end is September 30 th . All references to 2005 represent balances as of September 30, 2005 or activity for the fiscal year then ended. All references to 2004 represent balances as of September 30, 2004 or activity for the fiscal year then ended.
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 Companys methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances.
The formula portion of the general loan loss allowance is established by applying a loss percentage factor to the different loan types. The allowance is provided based on Managements 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 Companys 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.
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. |
Repricing Period
|
||||||||||||||||
Within One Year |
After 1 year -
before 4 Years |
Thereafter | Total | |||||||||||||
(In thousands) | ||||||||||||||||
As of September 30, 2005 |
||||||||||||||||
Earning Assets * |
$ | 2,547,230 | $ | 2,224,709 | $ | 3,294,572 | $ | 8,066,511 | ||||||||
Paying Liabilities |
(4,673,467 | ) | (1,480,044 | ) | (762,994 | ) | (6,916,505 | ) | ||||||||
|
|
|
||||||||||||||
Excess (Liabilities) Assets |
$ | (2,126,237 | ) | $ | 744,665 | $ | 2,531,578 | |||||||||
|
|
|
||||||||||||||
Excess as % of Total Assets |
25.82 | % | ||||||||||||||
Policy limit for one year excess |
60.00 | % |
* | Asset repricing period includes estimated prepayments based on historical activity |
At September 30, 2005, the Company had approximately $2,126,237,000 more liabilities subject to repricing in the next year than assets, which amounted to a negative maturity gap of 26% of total assets. As of September 30, 2004, the amount of excess liabilities subject to repricing within one year was $1,761,103,000 or 25% of total assets. The increase of $365,134,000 of liabilities in excess of assets repricing within one year was due to deposit growth and a shift in deposit maturities towards shorter-term maturities. The negative one year maturity gap as a percentage of total assets increased only one percent due to the growth of total assets by 15% to $8,234,450,000. By having an excess of liabilities repricing within one year over assets, the Company is subject to decreasing net interest income should rates rise. However, if the size and/or mix of the balance sheet changes, rising rates may not cause a decrease in net interest income. The Companys interest rate risk approach has never resulted in the recording of a monthly operating loss.
The Companys net interest spread decreased from 3.00% at September 30, 2004 to 2.54% at September 30, 2005. 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 because rates on customer
4
accounts increased by 98 basis points over the prior year while rates on earning assets increased by only 29 basis points (see Period End Spread table on page 8). |
During 2005 the Company chose to grow earning assets by increasing the net amount of loans and investments (a net increase of $1,150,000,000 ). This growth was funded by a net increase in borrowings of $585,000,000. During the year the Company borrowed $700,000,000 in long-term funding with a weighted average contractual maturity of 7.8 years at a weighted average rate of 3.94%, combined with deposit growth of $421,000,000. As of September 30, 2005, the Company had $638,000,000 in cash and cash equivalents, which can be invested long-term in the future to generate additional revenues.
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 Managements 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 $7,344,000, or .09% of total assets at September 30, 2005 compared to $14,945,000, or .21% of total assets at September 30, 2004. Total delinquencies over 30 days were $16,723,000, or .20% of total assets at September 30, 2005 compared to $21,419,000, or .30% of total assets at September 30, 2004. The aforementioned asset quality indicators demonstrate the continued excellent quality of the loan portfolio.
The Companys net worth at September 30, 2005 was $1,187,308,000, or 14.4% of total assets. This is an increase of $67,120,000 from September 30, 2004 when net worth was $1,120,188,000, or 15.6% of total assets. The Companys net worth increased due in part to net income of $145,889,000, proceeds received from the exercise of common stock options of $4,006,000 and purchases by the Employee Stock Ownership Plan of $1,526,000. Net worth was reduced by $67,719,000 as a result of cash dividends paid and a decrease in accumulated other comprehensive income of $17,811,000. The Company paid out 46.4% of its 2005 earnings in the form of cash dividends, compared with 49.1% last year.
Washington Federals 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 M). 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 $421,147,000, or 9.1% from one year ago. Managements strategy during this phase of the interest rate cycle has been to remain competitive in its deposit pricing to attract the new deposit relationships necessary to help fund asset growth.
The Companys cash and cash equivalents amounted to $637,791,000 at September 30, 2005, a 10% decrease from the cash, cash equivalents and repurchase agreements balance of $708,361,000 one year ago. The decrease resulted primarily from using the funds to help grow net loans and investments over the prior year. See Interest Rate Risk on page 4 and the Statement of Cash Flows included in the financial statements.
The Company had $127,544,000 in sales of available-for-sale securities, resulting in a net realized loss of $3,534,000. Included in the 2005 net loss amount is a loss on impairment of Government Sponsored Entities (GSE) preferred stock of $4,100,000. As of September 30, 2005, the Company had net unrealized losses in its available-for-sale portfolio of $1,113,000.
Loans receivable and securitized assets subject to repurchase. Loans receivable and securitized assets subject to repurchase increased 18.0% to $6,008,932,000 at September 30, 2005 from $5,093,443,000 one year earlier. The increase resulted primarily from record loan production of $2,436,826,000 combined with whole loan purchases of $331,456,000. Loan repayments (including prepayments) during the year were $1,769,058,000, an increase of $75,916,000 or 4.5% from 2004. The allowance for losses on loans and securitized assets subject to repurchase
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5
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
decreased $384,000 during the year due to a $134,000 reversal of the reserve combined with net charge-offs of $250,000. In analyzing the allowance for loan losses, Management believes the 18.0% growth in the loan portfolio was principally offset by the Companys nonperforming loan balances decreasing during the year from $10,884,000 to $6,588,000 or 39%, combined with improving economic conditions throughout the Companys primary markets. The percentage of loans outside of Washington, Idaho, Oregon, Utah and Arizona increased to 12.1% of loans outstanding at September 30, 2005 from 7.3% one year earlier, resulting from the purchase of whole loans and increased loan production by the branches located in Nevada and Texas. Gross construction and land loans increased to 22.1% of the portfolio at September 30, 2005 from 20.4% at September 30, 2004. The amount of reserves allocated to impaired loans decreased to $300,000 at September 30, 2005 from an allocation of $700,000 in the prior year based on the estimated value of the underlying collateral of the impaired loans. |
Real estate held for sale . The balance of real estate held for sale at September 30, 2005 was $5,631,000, a decrease from $8,630,000 reported one year ago. The decrease was primarily due to strong demand for housing in the Companys primary markets.
FHLB stock. FHLB stock amounted to $129,453,000 at September 30, 2005 compared with $137,274,000 one year ago. The Company had a net redemption of $8,208,000 in FHLB stock during the year. No gain or loss was recognized on the redemption.
Intangible assets. The Companys intangible assets are made up of $54,484,000 of goodwill, as well as the unamortized balances of the core deposit intangible and the non-compete agreement intangible of $2,440,000 and $335,000, respectively, at September 30, 2005.
Other assets. Other assets decreased $6,065,000 to $7,714,000 at September 30, 2005 primarily due to the correction of an error related to hedge accounting for certain derivative instruments in the current year (see Note A).
Customer accounts. Customer accounts at September 30, 2005 totaled $5,031,505,000 compared with $4,610,358,000 at September 30, 2004, a 9.1% increase. See Liquidity and Capital Resources on page 5.
FHLB advances and other borrowings. Total borrowings increased $585,000,000, or 45.0%, to $1,855,000,000 at September 30, 2005 as the Company chose to fund asset growth with a mix of customer accounts and borrowed money. See Interest Rate Risk on page 4.
Contractual obligations. The following table presents, as of September 30, 2005, the Companys significant fixed and determinable contractual obligations, within the categories described below, by payment date or contractual maturity. These contractual obligations, except for the operating lease, are included in the Consolidated Statements of Financial Condition. The payment amounts represent those amounts contractually due.
Contractual Obligations | Total |
Less than
1 Year |
1 to 5
Years |
Over 5
Years |
|||||||||
(In thousands) | |||||||||||||
Debt obligations* |
$ | 1,885,000 | $ | 55,000 | $ | 630,000 | $ | 1,200,000 | |||||
Operating lease obligations |
6,500 | 1,928 | 4,050 | 522 | |||||||||
|
|
|
|||||||||||
$ | 1,891,500 | $ | 56,928 | $ | 634,050 | $ | 1,200,522 | ||||||
|
|
|
* | Represents final maturities of debt obligations. See a description in Notes H and I. |
RESULTS OF OPERATIONS |
GENERAL |
See Note P, Selected Quarterly Financial Data (Unaudited), which highlights the quarter-by-quarter results for the years ended September 30, 2005 and 2004.
COMPARISON OF 2005 RESULTS WITH 2004
In 2005 net income increased 11% from 2004.
Interest income on loans, securitized assets subject to repurchase and mortgage-backed securities increased $50,961,000 (13.4%) in 2005 from 2004 due to a 15.4% increase in the average outstanding balance of loans, securitized assets subject to repurchase and mortgage-backed securities, offset partially by a 12 basis point decrease in the weighted average yield from 6.85% in 2004 to 6.73% in 2005. Additionally, the correction of the error in hedge accounting recorded by the Company in 2005, as described in Note A, increased interest income on mortgage-backed securities by $11.1 million.
Interest and dividend income on investment securities and cash equivalents decreased $2,832,000 (8.3%) in 2005 from 2004. This decrease was due to a decrease in the average combined balance. The average combined balance of investment securities, cash equivalents and FHLB stock decreased 33.6% to $1,074,169,000 for the year ended September 30, 2005 versus $1,618,783,000 for the year ended September 30, 2004. Partially offsetting this decrease, the weighted average yield on investment securities, cash equivalents and FHLB stock increased from 2.12% in 2004 to 2.92% in 2005 primarily as a result of the Federal Reserve increasing short-term interest rates during the year.
6
Interest expense on customer accounts increased 34.5% to $115,826,000 for 2005 from $86,099,000 for 2004. The increase primarily related to a 58 basis point increase in the average cost of customer accounts to 2.47% during the year compared to 1.89% one year ago combined with the 9.1% increase in the balance of customer accounts over the prior year. Interest expense on FHLB advances and other borrowings decreased to $79,434,000 in 2005 from $83,654,000 in 2004 due to a decrease in the average cost of borrowings for the year ended September 30, 2005 to 4.77% from 5.10% for the same period one year ago. This decrease was accomplished by replacing higher cost borrowings with lower rate borrowings available during the year due to the relatively low level of long-term interest rates.
The Company recorded a $134,000 reversal of the provision for loan losses in 2005 compared to a $231,000 reversal of the provision in 2004. The current year reversal is due to a reduction in the Companys nonperforming loan balances as well as an improvement in the number of delinquent loans, which was offset by the 18.0% growth in loans receivable and securitized assets subject to repurchase over the prior year. Non-performing assets decreased to $7,344,000, or .09% of total assets at September 30, 2005 compared with $14,945,000, or .21% of total assets at September 30, 2004. Total delinquencies over 30 days were $16,723,000, or .20% of total assets at September 30, 2005 compared to $21,419,000, or .30% of total assets at September 30, 2004. Management believes the allowance for loan losses, totaling $24,756,000, is sufficient to absorb estimated losses inherent in the portfolio.
Total other income increased $1,266,000 (24.6%) in 2005 from 2004. The increase is primarily the result of recognizing $990,000 of income as a result of the favorable settlement of a loan obligation. In addition, there was a reduction in the amount of loss on the extinguishment of debt of $2,194,000 in 2005 versus $5,191,000 in the prior year. Net losses on the sale of securities totaled $3,534,000 in 2005 compared to net losses of $890,000 in 2004.
Compensation expense increased $2,786,000 or 8.9% in 2005 due to the combination of a $1,914,000 bonus expense resulting from increased earnings per share as well as annual cost of living and merit increases. There was no bonus expense in 2004. Personnel, including part-time employees considered on a full-time equivalent basis, decreased to 749 at September 30, 2005 compared to 754 one year ago.
Occupancy expense increased $975,000 or 12.5% during the year resulting from an expense of $1,225,000 related to the amortization of leasehold improvements that brings the Company into conformity with a recent clarification of the accounting standard for leases. The Company now amortizes leasehold improvements over the shorter of the original lease term, excluding option periods, or the expected useful life of the improvements. Partially offsetting this additional amortization expense was a reduction in the amount of maintenance expense. The branch network increased to 122 offices at September 30, 2005 versus 120 offices one year ago.
Other expenses increased $2,892,000 during the year due mainly to a $1,500,000 expense for a state business tax assessment as well as an increase in accounting and other professional fees of $615,000. Other expense for 2005 and 2004 equaled .68% and .62% of average assets, respectively.
Income tax expense increased $4,575,000 (6.4%) in 2005 due to a higher taxable income base. The effective tax rate was 34.38% for 2005 versus 35.27% for 2004. The effective income tax rate for 2005 decreased as a result of a $2,500,000 reversal of a contingent tax liability that was resolved in the fourth quarter.
COMPARISON OF 2004 RESULTS WITH 2003
Interest income on loans, securitized assets subject to repurchase and mortgage-backed securities decreased $35,786,000 (8.6%) in 2004 from 2003 as interest rates declined to 6.17% from 6.40% one year prior. The Company originated $2,070,984,000 in loans, which was offset by loan repayments and payoffs of $1,693,142,000 in 2004.
Interest and dividend income on investment securities and cash equivalents increased $263,000 (0.8%) in 2004 from 2003. Rates increased to 3.01% at September 30, 2004 compared with 1.98% at September 30, 2003, primarily as a result of the increase in short term interest rates during 2004. The combined investment securities, cash equivalents and FHLB stock portfolio decreased 34.1% to $1,211,957,000 at September 30, 2004 versus $1,839,847,000 one year prior.
Interest expense on customer accounts decreased 18.7% to $86,099,000 for 2004 from $105,919,000 for 2003. The decrease related to a small increase in customer accounts to $4,610,358,000 from $4,577,598,000 the prior year, coupled with a significant decrease in the average cost of customer accounts to 1.89% at year end compared to 2.38% one year ago. This decrease was primarily the result of higher rate CDs repricing throughout the year to lower market rates.
Interest expense on FHLB advances and other borrowings decreased to $83,654,000 in 2004 from $88,965,000 in 2003 primarily due to the repayment of $450,000,000 in FHLB advances during the year. The average cost of borrowings as of September 30, 2004 decreased to 4.96% from 5.03% from one year ago.
The Company recorded a $231,000 reversal of the provision for loan losses in 2004 compared to a $1,500,000 increase in the provision in 2003. This decrease reflects a reduction in the Companys nonperforming loan
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7
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
balances as well as an improvement in the number of delinquent loans. Non-performing assets decreased to $14,945,000, or .21% of total assets at September 30, 2004 compared with $27,434,000, or .36% of total assets at September 30, 2003. Management believed the allowance for loan losses, totaling $25,140,000, was sufficient to absorb estimated losses inherent in the portfolio. |
Total other income decreased $11,622,000 (69.3%) in 2004 from 2003. This decrease was primarily the result of a pre-tax charge of $5,191,000 related to the extinguishment of debt in 2004 compared to a $3,382,000 gain on the sale of real estate in 2003. Net losses on the sale of securities totaled $890,000 in 2004 compared to net gains of $1,040,000 in 2003.
Total other expense increased $505,000 (1.1%) in 2004 over 2003. Compensation expense remained relatively consistent by increasing only $565,000 in 2004. Personnel, including part-time employees considered on a full- time equivalent basis, remained the same at 754 at September 30, 2004 compared to one year ago. Routine operating expenses decreased $2,346,000 in 2004 due to an increase of deferred loan origination costs associated with record production (per SFAS No. 91) and general cost containment measures. The branch network increased to 120 offices at September 30, 2004 versus 119 offices one year ago. Other expense for both 2004 and 2003 equaled .62% of average assets.
Income tax expense decreased $2,836,000 (3.5%) in 2004. The effective tax rate was 35.27% for 2004 versus 35.19% for 2003.
PERIOD END SPREAD AS OF THE DATE SHOWN
Dec 31
2003 |
Mar 31
2004 |
Jun 30
2004 |
Sep 30
2004 |
Dec 31
2004 |
Mar 31
2005 |
Jun 30
2005 |
Sep 30
2005 |
|||||||||||||||||
Interest rate on loans and mortgage-backed securities* |
6.31 | % | 6.23 | % | 6.16 | % | 6.17 | % | 6.16 | % | 6.16 | % | 6.14 | % | 6.19 | % | ||||||||
Interest rate on investment securities** |
1.75 | 2.26 | 2.61 | 3.01 | 2.86 | 3.46 | 3.22 | 3.74 | ||||||||||||||||
|
|
|||||||||||||||||||||||
Combined |
5.21 | 5.30 | 5.44 | 5.62 | 5.63 | 5.80 | 5.78 | 5.91 | ||||||||||||||||
|
|
|||||||||||||||||||||||
Interest rate on customer accounts |
1.92 | 1.87 | 1.90 | 1.96 | 2.11 | 2.37 | 2.70 | 2.94 | ||||||||||||||||
Interest rate on borrowings |
5.03 | 5.03 | 5.03 | 4.96 | 4.74 | 4.74 | 4.66 | 4.51 | ||||||||||||||||
|
|
|||||||||||||||||||||||
Combined |
2.78 | 2.75 | 2.67 | 2.62 | 2.78 | 2.97 | 3.23 | 3.37 | ||||||||||||||||
|
|
|||||||||||||||||||||||
Interest rate spread |
2.43 | % | 2.55 | % | 2.77 | % | 3.00 | % | 2.85 | % | 2.83 | % | 2.55 | % | 2.54 | % | ||||||||
|
|
* | Includes securitized assets subject to repurchase |
** | Includes municipal bonds at tax-equivalent rates and cash equivalents |
The interest rate spread decreased during 2005 from 3.00% at September 30, 2004 to 2.54% at September 30, 2005. See Interest Rate Risk on pages 4 and 5.
8
Year ended September 30, | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||
(In thousands, except per share data) | |||||||||||||
Interest income |
$461,901 | $413,772 | $449,295 | $511,802 | $540,064 | ||||||||
Interest expense |
195,260 | 169,753 | 194,884 | 234,941 | 320,120 | ||||||||
|
|
||||||||||||
Net interest income |
266,641 | 244,019 | 254,411 | 276,861 | 219,944 | ||||||||
Provision for (reversal of) loan losses |
(134 | ) | (231 | ) | 1,500 | 7,000 | 1,850 | ||||||
Other income |
7,852 | 5,726 | 16,571 | 10,163 | 12,013 | ||||||||
Other expense |
52,319 | 46,264 | 45,759 | 50,828 | 48,697 | ||||||||
|
|
||||||||||||
Income before income taxes |
222,308 | 203,712 | 223,723 | 229,196 | 181,410 | ||||||||
Income taxes |
76,419 | 71,844 | 78,724 | 80,812 | 63,946 | ||||||||
|
|
||||||||||||
Net income |
$145,889 | $131,868 | $144,999 | $148,384 | $117,464 | ||||||||
|
|
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Per share data |
|||||||||||||
Basic earnings |
$1.68 | $1.53 | $1.72 | $1.75 | $1.39 | ||||||||
Diluted earnings |
1.67 | 1.51 | 1.71 | 1.74 | 1.38 | ||||||||
Cash dividends |
0.78 | 0.75 | 0.71 | 0.68 | 0.64 | ||||||||
September 30, | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||
(In thousands) | |||||||||||||
Total assets |
$8,234,450 | $7,169,205 | $7,535,975 | $7,392,441 | $7,026,743 | ||||||||
Loans and mortgage-backed securities* |
7,084,274 | 5,734,658 | 5,443,266 | 5,990,223 | 6,537,010 | ||||||||
Investment securities |
214,993 | 414,683 | 310,218 | 117,417 | 145,724 | ||||||||
Cash and cash equivalents |
637,791 | 708,361 | 1,437,208 | 975,153 | 30,331 | ||||||||
Customer accounts |
5,031,505 | 4,610,358 | 4,577,598 | 4,521,922 | 4,316,692 | ||||||||
FHLB advances |
1,230,000 | 1,200,000 | 1,650,000 | 1,650,000 | 1,637,500 | ||||||||
Other borrowings |
655,000 | 100,000 | 100,000 | 100,000 | 30,000 | ||||||||
Stockholders equity |
1,187,308 | 1,120,188 | 1,055,596 | 960,718 | 874,009 | ||||||||
Number of |
|||||||||||||
Customer accounts |
232,707 | 216,405 | 217,785 | 213,404 | 211,570 | ||||||||
Mortgage loans |
36,272 | 34,873 | 33,975 | 38,096 | 42,032 | ||||||||
Offices |
122 | 120 | 119 | 115 | 111 |
* | Includes securitized assets subject to repurchase |
9 |
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, | 2005 | 2004 | ||||||
(In thousands, except per
share data) |
||||||||
ASSETS | ||||||||
Cash and cash equivalents, including repurchase agreements of $575,000 and $460,000 |
$ | 637,791 | $ | 508,361 | ||||
Repurchase agreements |
| 200,000 | ||||||
Available-for-sale securities, including encumbered securities of $571,462 and $64,587 |
1,077,856 | 899,525 | ||||||
Held-to-maturity securities, including encumbered securities of $68,759 and $54,811 |
212,479 | 156,373 | ||||||
Securitized asset subject to repurchase, net |
71,257 | 110,607 | ||||||
Loans receivable, net |
5,937,675 | 4,982,836 | ||||||
Interest receivable |
34,048 | 29,832 | ||||||
Premises and equipment, net |
63,287 | 63,049 | ||||||
Real estate held for sale |
5,631 | 8,630 | ||||||
FHLB stock |
129,453 | 137,274 | ||||||
Intangible assets |
57,259 | 58,939 | ||||||
Other assets |
7,714 | 13,779 | ||||||
|
|
|
||||||
$ | 8,234,450 | $ | 7,169,205 | |||||
|
|
|
||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities |
||||||||
Customer accounts |
||||||||
Savings and demand accounts |
$ | 5,002,172 | $ | 4,569,245 | ||||
Repurchase agreements with customers |
29,333 | 41,113 | ||||||
|
|
|
||||||
5,031,505 | 4,610,358 | |||||||
FHLB advances |
1,230,000 | 1,200,000 | ||||||
Other borrowings |
655,000 | 100,000 | ||||||
Advance payments by borrowers for taxes and insurance |
27,533 | 25,226 | ||||||
Federal and state income taxes, including net deferred liabilities of $43,491 and $55,522 |
44,617 | 62,081 | ||||||
Accrued expenses and other liabilities |
58,487 | 51,352 | ||||||
|
|
|
||||||
7,047,142 | 6,049,017 | |||||||
Stockholders equity |
||||||||
Common stock, $1.00 par value, 300,000,000 shares authorized, 104,140,966 and 103,821,846 shares issued; 86,933,294 and 86,547,557 shares outstanding |
104,141 | 94,383 | ||||||
Paid-in capital |
1,240,310 | 1,161,627 | ||||||
Accumulated other comprehensive income (loss), net of tax |
(704 | ) | 17,107 | |||||
Treasury stock, at cost; 17,207,672 and 17,274,289 shares |
(205,874 | ) | (206,666 | ) | ||||
Retained earnings |
49,435 | 53,737 | ||||||
|
|
|
||||||
1,187,308 | 1,120,188 | |||||||
|
|
|
||||||
$ | 8,234,450 | $ | 7,169,205 | |||||
|
|
|
10 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, | 2005 | 2004 | 2003 | ||||||
(In thousands, except per share data) | |||||||||
INTEREST INCOME | |||||||||
Loans |
$369,023 | $330,967 | $353,286 | ||||||
Mortgage-backed securities |
61,459 | 48,554 | 62,021 | ||||||
Investment securities |
31,419 | 34,251 | 33,988 | ||||||
|
|
||||||||
461,901 | 413,772 | 449,295 | |||||||
INTEREST EXPENSE | |||||||||
Customer accounts |
115,826 | 86,099 | 105,919 | ||||||
FHLB advances and other borrowings |
79,434 | 83,654 | 88,965 | ||||||
|
|
||||||||
195,260 | 169,753 | 194,884 | |||||||
|
|
||||||||
Net interest income |
266,641 | 244,019 | 254,411 | ||||||
Provision for (reversal of) loan losses |
(134 | ) | (231 | ) | 1,500 | ||||
|
|
||||||||
Net interest income after provision for loan losses |
266,775 | 244,250 | 252,911 | ||||||
OTHER INCOME | |||||||||
Gain (loss) on sale of investments, net |
(3,534 | ) | (890 | ) | 1,040 | ||||
Gain on sale of real estate |
| | 3,382 | ||||||
Loss on extinguishment of debt |
(2,194 | ) | (5,191 | ) | | ||||
Other |
12,137 | 11,224 | 12,343 | ||||||
|
|
||||||||
6,409 | 5,143 | 16,765 | |||||||
OTHER EXPENSE | |||||||||
Compensation and fringe benefits |
34,197 | 31,411 | 30,846 | ||||||
Amortization of intangibles |
1,198 | 1,397 | 126 | ||||||
Occupancy expense |
8,788 | 7,813 | 6,798 | ||||||
Other |
13,700 | 10,808 | 11,043 | ||||||
Deferred loan origination costs |
(5,564 | ) | (5,165 | ) | (3,054 | ) | |||
|
|
||||||||
52,319 | 46,264 | 45,759 | |||||||
Gain (loss) on real estate acquired through foreclosure, net |
1,443 | 583 | (194 | ) | |||||
|
|
||||||||
Income before income taxes |
222,308 | 203,712 | 223,723 | ||||||
Income taxes |
|||||||||
Current |
78,024 | 77,270 | 80,106 | ||||||
Deferred |
(1,605 | ) | (5,426 | ) | (1,382 | ) | |||
|
|
||||||||
76,419 | 71,844 | 78,724 | |||||||
|
|
||||||||
NET INCOME |
$145,889 | $131,868 | $144,999 | ||||||
|
|
||||||||
PER SHARE DATA | |||||||||
Basic earnings |
$ 1.68 | $ 1.53 | $ 1.72 | ||||||
Diluted earnings |
1.67 | 1.51 | 1.71 | ||||||
Cash dividends |
0.78 | 0.75 | 0.71 | ||||||
Weighted average number of shares outstanding,
|
87,478,708 | 87,130,787 | 84,981,560 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
11 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common
Stock |
Paid-in
Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income (loss) |
Treasury
Stock |
Total | |||||||||||||||||
(In thousands) | ||||||||||||||||||||||
Balance at September 30, 2002 |
$ | 76,212 | $ | 968,858 | $ | 66,207 | $ | 47,720 | $ | (198,279 | ) | $ | 960,718 | |||||||||
Eleven-for-ten stock split
|
7,622 | 79,612 | (87,369 | ) | (135 | ) | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net income |
144,999 | 144,999 | ||||||||||||||||||||
Other comprehensive income,
|
||||||||||||||||||||||
Unrealized losses on securities |
(20,157 | ) | (20,157 | ) | ||||||||||||||||||
Reclassification adjustment |
(673 | ) | (673 | ) | ||||||||||||||||||
|
|
|
||||||||||||||||||||
Total comprehensive income |
124,169 | |||||||||||||||||||||
Dividends |
(60,004 | ) | (60,004 | ) | ||||||||||||||||||
Proceeds from exercise of
|
357 | 4,369 | 4,726 | |||||||||||||||||||
Tax benefit related to
|
1,218 | 1,218 | ||||||||||||||||||||
Restricted stock |
14 | 332 | (212 | ) | 134 | |||||||||||||||||
Proceeds from Employee
|
546 | 976 | 1,522 | |||||||||||||||||||
Acquisition-related stock issuance |
1,349 | 31,933 | 33,282 | |||||||||||||||||||
Treasury stock |
(10,034 | ) | (10,034 | ) | ||||||||||||||||||
|
|
|
||||||||||||||||||||
Balance at September 30, 2003 |
$ | 85,554 | $ | 1,085,650 | $ | 64,839 | $ | 26,890 | $ | (207,337 | ) | $ | 1,055,596 | |||||||||
|
|
|
||||||||||||||||||||
Eleven-for-ten stock split
|
8,558 | 70,066 | (78,624 | ) | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net income |
131,868 | 131,868 | ||||||||||||||||||||
Other comprehensive income,
|
||||||||||||||||||||||
Unrealized losses on securities |
(10,359 | ) | (10,359 | ) | ||||||||||||||||||
Reclassification adjustment |
576 | 576 | ||||||||||||||||||||
|
|
|
||||||||||||||||||||
Total comprehensive income |
122,085 | |||||||||||||||||||||
Dividends |
(64,696 | ) | (64,696 | ) | ||||||||||||||||||
Proceeds from exercise of
|
250 | 3,267 | 3,517 | |||||||||||||||||||
Tax benefit related to
|
748 | 748 | ||||||||||||||||||||
Restricted stock |
21 | 559 | (398 | ) | 182 | |||||||||||||||||
Proceeds from Employee
|
2,085 | 2,610 | 4,695 | |||||||||||||||||||
Treasury stock |
(1,939 | ) | (1,939 | ) | ||||||||||||||||||
|
|
|
||||||||||||||||||||
Balance at September 30, 2004 |
$ | 94,383 | $ | 1,161,627 | $ | 53,737 | $ | 17,107 | $ | (206,666 | ) | $ | 1,120,188 | |||||||||
|
|
|
||||||||||||||||||||
Eleven-for-ten stock split
|
9,446 | 73,988 | (83,434 | ) | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net income |
145,889 | 145,889 | ||||||||||||||||||||
Other comprehensive income,
|
||||||||||||||||||||||
Unrealized losses on securities |
(20,090 | ) | (20,090 | ) | ||||||||||||||||||
Reclassification adjustment |
2,279 | 2,279 | ||||||||||||||||||||
|
|
|
||||||||||||||||||||
Total comprehensive income |
128,078 | |||||||||||||||||||||
Dividends |
(67,719 | ) | (67,719 | ) | ||||||||||||||||||
Proceeds from exercise of
|
302 | 3,704 | 4,006 | |||||||||||||||||||
Tax benefit related to exercise
|
954 | 954 | ||||||||||||||||||||
Restricted stock |
10 | 257 | 8 | 275 | ||||||||||||||||||
Proceeds from Employee
|
734 | 792 | 1,526 | |||||||||||||||||||
Treasury stock |
||||||||||||||||||||||
|
|
|
||||||||||||||||||||
Balance at September 30, 2005 |
$ | 104,141 | $ | 1,240,310 | $ | 49,435 | $ | (704 | ) | $ | (205,874 | ) | $ | 1,187,308 | ||||||||
|
|
|
12 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, | 2005 | 2004 | 2003 | |||||||||
(In thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income |
$ | 145,889 | $ | 131,868 | $ | 144,999 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
Amortization of fees, discounts, and premiums, net |
(9,959 | ) | (12,792 | ) | (12,206 | ) | ||||||
Amortization of intangible assets |
1,198 | 1,397 | 126 | |||||||||
Depreciation |
3,847 | 2,624 | 3,099 | |||||||||
Provision for (reversal of) loan losses |
(134 | ) | (231 | ) | 1,500 | |||||||
Loss (gain) on investment securities and real estate held for sale, net |
2,091 | 306 | (4,228 | ) | ||||||||
Loss on extinguishment of debt |
2,194 | 5,191 | | |||||||||
Decrease (increase) in accrued interest receivable |
(4,216 | ) | (343 | ) | 9,126 | |||||||
Increase (decrease) in income taxes payable |
(6,307 | ) | 1,607 | (5,308 | ) | |||||||
FHLB stock dividends |
(387 | ) | (5,912 | ) | (8,155 | ) | ||||||
Decrease (increase) in other assets |
1,898 | 10,195 | (11,202 | ) | ||||||||
Increase (decrease) in accrued expenses and other liabilities |
7,134 | (8,137 | ) | 3,226 | ||||||||
|
|
|
||||||||||
Net cash provided by operating activities |
143,248 | 125,773 | 120,977 | |||||||||
|
|
|
||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Loans originated |
||||||||||||
Single-family residential loans |
(1,209,555 | ) | (1,108,216 | ) | (1,059,450 | ) | ||||||
Construction loans |
(716,569 | ) | (580,882 | ) | (487,692 | ) | ||||||
Land loans |
(358,863 | ) | (244,048 | ) | (163,533 | ) | ||||||
Multi-family loans |
(151,839 | ) | (137,838 | ) | (156,437 | ) | ||||||
|
|
|
||||||||||
(2,436,826 | ) | (2,070,984 | ) | (1,867,112 | ) | |||||||
Savings account loans originated |
(2,282 | ) | (1,779 | ) | (1,866 | ) | ||||||
Loan principal repayments |
1,769,058 | 1,693,142 | 2,604,297 | |||||||||
Increase in undisbursed loans in process |
84,162 | 127,591 | 71,804 | |||||||||
Loans purchased |
(331,456 | ) | (31,911 | ) | (417,669 | ) | ||||||
Repurchase agreements matured (purchased) |
200,000 | (200,000 | ) | | ||||||||
FHLB stock redeemed |
56,208 | 12,489 | | |||||||||
FHLB stock repurchased |
(48,000 | ) | | | ||||||||
Available-for-sale securities purchased |
(747,178 | ) | (666,990 | ) | (459,895 | ) | ||||||
Principal payments and maturities of available-for-sale securities |
424,476 | 250,431 | 487,438 | |||||||||
Available-for-sale securities sold |
127,544 | 303,171 | 80,000 | |||||||||
Held-to-maturity securities purchased |
(80,000 | ) | (56,900 | ) | (100,100 | ) | ||||||
Principal payments and maturities of held-to-maturity securities |
24,207 | 55,196 | 115,812 | |||||||||
Cash provided by acquisition |
| | 94,314 | |||||||||
Proceeds from sales of real estate held for sale |
6,281 | 14,816 | 16,342 | |||||||||
Premises and equipment purchased, net |
(4,085 | ) | (4,731 | ) | (4,730 | ) | ||||||
|
|
|
||||||||||
Net cash provided (used) by investing activities |
(957,891 | ) | (576,459 | ) | 618,635 | |||||||
|
|
|
||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Net increase (decrease) in customer accounts |
421,147 | 32,760 | (214,248 | ) | ||||||||
Net increase (decrease) in short-term borrowings |
52,806 | (255,191 | ) | | ||||||||
Net proceeds from (repayments of) long-term borrowings |
530,000 | (200,000 | ) | | ||||||||
Proceeds from exercise of common stock options |
4,006 | 4,265 | 5,944 | |||||||||
Dividends paid |
(67,719 | ) | (64,696 | ) | (60,004 | ) | ||||||
Proceeds from Employee Stock Ownership Plan |
1,526 | 4,695 | 1,522 | |||||||||
Treasury stock purchased, net |
| (1,939 | ) | (10,034 | ) | |||||||
Increase (decrease) in advance payments by borrowers for taxes and insurance |
2,307 | 1,945 | (737 | ) | ||||||||
|
|
|
||||||||||
Net cash provided (used) by financing activities |
944,073 | (478,161 | ) | (277,557 | ) | |||||||
|
|
|
||||||||||
Increase (decrease) in cash and cash equivalents |
129,430 | (928,847 | ) | 462,055 | ||||||||
Cash and cash equivalents at beginning of year |
508,361 | 1,437,208 | 975,153 | |||||||||
|
|
|
||||||||||
Cash and cash equivalents at end of year |
$ | 637,791 | $ | 508,361 | $ | 1,437,208 | ||||||
|
|
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
13 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30, | 2005 | 2004 | 2003 | |||||||
(In thousands) | ||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||
Noncash investing activities |
||||||||||
Real estate acquired through foreclosure |
$ | 1,839 | $ | 6,659 | $ | 11,771 | ||||
Cash paid during the year for |
||||||||||
Interest |
191,398 | 172,195 | 195,360 | |||||||
Income taxes |
81,553 | 75,004 | 83,878 | |||||||
The following summarizes the non-cash activities related to the United Savings and Loan 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 acquisition |
$ | | $ | | $ | 94,314 | ||||
|
|
|
14 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
NOTE A |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of consolidation. The consolidated financial statements include the accounts of Washington Federal, Inc. (Company or Washington Federal) and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated.
Description of business. Washington Federal, Inc. is a savings and loan holding company. The Companys principal operating subsidiary is Washington Federal Savings. The Company is principally engaged in the business of attracting savings deposits from the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential real estate loans and multi-family real estate loans. The Company conducts its activities through a network of 122 offices located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, and Texas.
The Companys fiscal year end is September 30 th . All references to 2005 represent balances as of September 30, 2005 or activity for the fiscal year then ended. All references to 2004 represent balances as of September 30, 2004 or activity for the fiscal year then ended.
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.
Repurchase Agreements. Repurchase agreements are fully collateralized investments with an initial maturity exceeding three months.
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.
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 managements intent and ability to hold the securities until the net book value is recovered. Any other than temporary declines in fair value are recognized in the statement of operations as loss on sale of investments.
Premiums and discounts on investments are deferred and recognized over the life of the asset using the effective interest method.
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 statement of financial condition as securitized assets subject to repurchase.
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 Companys methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances.
|
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Managements 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 Companys 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.
Impaired loans consist of loans receivable that are not expected to 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 or acquired for development are recorded at the lower of cost or fair value.
Derivatives. 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 (derivative contract) to purchase mortgage-backed securities as part of its interest rate risk management program. The forward contracts allow the Company to hedge the risk of varying mortgage-backed securities spot prices in the future as the result of changes in interest rates. The purchase contracts are generally for periods of 30 to 90 days.
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. Under cash flow hedge accounting, if specific criteria are met, the effective portion of 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. As of September 30, 2005 and 2004, the Company had outstanding forward purchase commitments of $20,000,000 and $315,000,000 with an estimated fair value of $0 and $10,259,000, respectively.
During 2005, the Company reviewed its accounting for derivatives and concluded that it had not met the criteria established by Statement of Financial Accounting Standards No. 133 as amended to account for such instruments as cash flow hedges. The cumulative effect of the correction of the error, as of January 1, 2005 was $7.9 million, net of tax. The amount was recorded as additional interest income on mortgage-backed securities and loss on sale of securities, in March 2005. The effect of the error was not material to any prior quarter in 2005 or 2004, nor was it material to any prior year.
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 evaluated for impairment on an annual basis. Other intangible assets are amortized over their estimated 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.
16
The table below presents the estimated intangible asset amortization expense for the next five years:
Year ended September 30, | Amortization expense | ||
(In thousands) | |||
2006 | $ | 1,000 | |
2007 | 801 | ||
2008 | 593 | ||
2009 | 289 | ||
2010 | 91 |
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. Deferred loan origination costs are deducted from other expenses.
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.
The Company has three stock-option employee compensation plans, which are described more fully in Note L. The fair value of options granted under the Companys 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, | 2004 | 2003 | ||||
Annual dividend yield |
3.42 | % | 4.19 | % | ||
Expected volatility |
27 | % | 28 | % | ||
Risk-free interest rate |
3.14 | % | 2.63 | % | ||
Expected life |
5 years | 5 years |
|
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No options were granted in 2005; as a result no assumptions for 2005 are presented in the table on page 17. 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, | 2005 | 2004 | 2003 | |||||||||
(In thousands, except per share data) | ||||||||||||
Net income, as reported |
$ | 145,889 | $ | 131,868 | $ | 144,999 | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(1,717 | ) | (1,824 | ) | (1,111 | ) | ||||||
|
|
|
||||||||||
Pro forma net income |
$ | 144,172 | $ | 130,044 | $ | 143,888 | ||||||
|
|
|
||||||||||
Earnings per share: |
||||||||||||
Basic as reported |
$ | 1.68 | $ | 1.53 | $ | 1.72 | ||||||
Basic pro forma |
1.66 | 1.51 | 1.71 | |||||||||
Diluted as reported |
1.67 | 1.51 | 1.71 | |||||||||
Diluted pro forma |
1.65 | 1.49 | 1.69 |
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 2005, 2004 and 2003, 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 December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R), a revision of SFAS No. 123. SFAS 123R will require the Company to, among other things, measure all employee stock-based compensation awards using a fair value method and record such expense in the Companys consolidated financial statements. The provisions of SFAS 123R, as amended by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, are effective no later than the beginning of the next fiscal year that begins after June 15, 2005; the Company will adopt the new requirements in its first quarter of fiscal 2006 using the modified prospective transition method. The adoption of SFAS 123R will increase the Companys future compensation expense for unvested awards outstanding as of September 30, 2005 by the following estimated amounts:
Year ended September 30, |
Estimated Additional
Compensation Expense |
||
(In thousands) | |||
2006 |
$ | 1,552 | |
2007 |
1,150 | ||
2008 |
1,101 | ||
2009 |
723 | ||
2010 |
685 |
Reclassifications. Certain reclassifications have been made to the financial statements for years prior to September 30, 2005 to conform to current year classifications.
18
NOTE B |
INVESTMENT SECURITIES |
September 30, | 2005 | |||||||||||||||
(In thousands) | ||||||||||||||||
Amortized
Cost |
Gross Unrealized
|
Fair
Value |
||||||||||||||
Gains | Losses | Yield | ||||||||||||||
Available-for-sale securities |
||||||||||||||||
U.S. government and agency securities due |
||||||||||||||||
Within 1 year |
$ | 72,290 | $ | 1,477 | $ | (288 | ) | 73,479 | 7.52 | % | ||||||
1 to 5 years |
15,094 | | (245 | ) | 14,849 | 4.29 | ||||||||||
5 to 10 years |
1,000 | | (20 | ) | 980 | 3.50 | ||||||||||
Over 10 years |
84,692 | 4,695 | (760 | ) | 88,627 | 8.00 | ||||||||||
Mortgage-backed Securities |
||||||||||||||||
Agency pass-through certificates |
905,893 | 3,436 | (9,408 | ) | 899,921 | 5.58 | ||||||||||
|
|
|
||||||||||||||
1,078,969 | 9,608 | (10,721 | ) | 1,077,856 | 5.88 | |||||||||||
|
|
|
||||||||||||||
Held-to-maturity securities |
||||||||||||||||
Tax-exempt municipal bonds due |
||||||||||||||||
5 to 10 years |
1,800 | 211 | | 2,011 | 9.06 | |||||||||||
Over 10 years |
8,358 | 734 | | 9,092 | 8.61 | |||||||||||
U.S. government and agency securities due |
||||||||||||||||
1 to 5 years |
26,900 | | (424 | ) | 26,476 | 2.95 | ||||||||||
Mortgage-backed Securities |
||||||||||||||||
Agency pass-through certificates |
175,421 | 1,408 | (2,812 | ) | 174,017 | 5.60 | ||||||||||
|
|
|
||||||||||||||
212,479 | 2,353 | (3,236 | ) | 211,596 | 5.41 | |||||||||||
|
|
|
||||||||||||||
$ | 1,291,448 | $ | 11,961 | $ | (13,957 | ) | $ | 1,289,452 | 5.80 | % | ||||||
|
|
|
September 30, | 2004 | |||||||||||||||
(In thousands) | ||||||||||||||||
Amortized
Cost |
Gross Unrealized
|
Fair
Value |
||||||||||||||
Gains | Losses | Yield | ||||||||||||||
Available-for-sale securities |
||||||||||||||||
U.S. government and agency securities due |
||||||||||||||||
Within 1 year |
$ | 328,503 | $ | 379 | $ | (4,546 | ) | 324,336 | 4.47 | % | ||||||
5 to 10 years |
36,537 | 970 | (610 | ) | 36,897 | 5.90 | ||||||||||
Over 10 years |
11,372 | 5,078 | (61 | ) | 16,389 | 9.79 | ||||||||||
Mortgage-backed Securities |
||||||||||||||||
Agency pass-through certificates |
501,102 | 21,222 | (421 | ) | 521,903 | 6.16 | ||||||||||
|
|
|
||||||||||||||
877,514 | 27,649 | (5,638 | ) | 899,525 | 5.56 | |||||||||||
|
|
|
||||||||||||||
Held-to-maturity securities |
||||||||||||||||
Tax-exempt municipal bonds due |
||||||||||||||||
5 to 10 years |
1,804 | 309 | | 2,113 | 9.06 | |||||||||||
Over 10 years |
8,357 | 1,052 | | 9,409 | 8.61 | |||||||||||
U.S. government and agency securities due |
||||||||||||||||
1 to 5 years |
26,900 | | | 26,900 | 2.95 | |||||||||||
Mortgage-backed Securities |
||||||||||||||||
Agency pass-through certificates |
119,312 | 2,705 | (1,647 | ) | 120,370 | 5.76 | ||||||||||
|
|
|
||||||||||||||
156,373 | 4,066 | (1,647 | ) | 158,792 | 5.47 | |||||||||||
|
|
|
||||||||||||||
$ | 1,033,887 | $ | 31,715 | $ | (7,285 | ) | $ | 1,058,317 | 5.55 | % | ||||||
|
|
|
|
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Yields shown in the tables on page 19 represent tax-equivalent yields for 2005 and 2004, calculated as 1.48 and 1.49 times the tax-free municipal yield, for the respective years.
$127.5 million in available-for-sale investment securities were sold in 2005, resulting in a net loss of $3,534,000. This net loss for 2005 consisted of $1,793,000 in realized gains and $5,327,000 in realized losses. In 2004, $303.2 million in available-for-sale investment securities and a $1.8 million held-to-maturity (HTM) security were sold, resulting in a net loss of $890,000. The net loss for 2004 consisted of $2,422,000 in realized gains and $3,312,000 in realized losses. The $1.8 million HTM security sale did not taint the remaining HTM securities in the Companys portfolio because over 87% of the related principal had been collected. $80.0 million in available-for-sale securities were sold in 2003, resulting in a net gain of $1,040,000.
Substantially all mortgage-backed securities have contractual due dates that exceed 10 years.
The following table shows the unrealized gross losses and fair value of securities at September 30, 2005, by length of time that individual securities in each category have been in a continuous loss position. The Company had investments in mortgage-backed securities, bonds and GSE preferred stock that were in a continuous loss position for 12 or more months at September 30, 2005. During the year the Company recorded a $4.1 million other than temporary impairment on GSE preferred stock, included in loss on sale of investments. Management believes that the declines in fair value of the mortgage-backed securities, bonds and GSE preferred stock were due to changes in market interest rates, not in estimated cash flows, and no other than temporary impairment was recorded at September 30, 2005 for these investments.
As of September 30, | 2005 | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||||
Gross Losses
|
Value
|
Gross Losses
|
Value
|
Gross Losses
|
Value
|
|||||||||||||||||||||
U.S. agency securities |
$ | (1,061 | ) | $ | 112,637 | $ | (676 | ) | $ | 31,318 | $ | (1,737 | ) | $ | 143,955 | |||||||||||
Agency pass-through certificates |
(8,320 | ) | 770,188 | (3,900 | ) | 158,898 | (12,220 | ) | 929,086 | |||||||||||||||||
|
|
|
||||||||||||||||||||||||
$ | (9,381 | ) | $ | 882,825 | $ | (4,576 | ) | $ | 190,216 | $ | (13,957 | ) | $ | 1,073,041 |
NOTE C |
LOANS RECEIVABLE AND SECURITIZED ASSETS SUBJECT TO REPURCHASE |
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
Conventional real estate |
|||||||
Single-family residential |
$ | 4,630,411 | $ | 3,982,632 | |||
Multi-family |
501,824 | 467,354 | |||||
Land |
438,621 | 297,350 | |||||
Construction |
1,021,419 | 845,260 | |||||
|
|
|
|||||
6,592,275 | 5,592,596 | ||||||
|
|
|
|||||
Less |
|||||||
Allowance for probable losses |
24,756 | 25,140 | |||||
Loans in process |
519,290 | 435,128 | |||||
Deferred net loan origination fees |
39,297 | 38,885 | |||||
|
|
|
|||||
583,343 | 499,153 | ||||||
|
|
|
|||||
$ | 6,008,932 | $ | 5,093,443 | ||||
|
|
|
20
The Company originates adjustable and fixed interest rate loans, which at September 30, 2005 consisted of the following:
Fixed-Rate | Adjustable-Rate | |||||||||
Term to Maturity | Book Value | Term to Rate Adjustment | Book Value | |||||||
(In thousands) | (In thousands) | |||||||||
Within 1 year |
$ | 49,259 | Less than 1 year | $ | 976,907 | |||||
1 to 3 years |
103,122 | 1 to 3 years | 246,653 | |||||||
3 to 5 years |
35,766 | 3 to 5 years | 102,301 | |||||||
5 to 10 years |
221,593 | 5 to 10 years | 5,317 | |||||||
10 to 20 years |
509,041 | 10 to 20 years | 8,462 | |||||||
Over 20 years |
4,333,854 | Over 20 years | | |||||||
|
|
|
|
|||||||
$ | 5,252,635 | $ | 1,339,640 | |||||||
|
|
|
|
At September 30, 2005 and 2004, approximately $47,537,000 and $36,214,000 of fixed-rate loan origination commitments were outstanding, respectively. Loans serviced for others at September 30, 2005 and 2004 were approximately $14,857,000 and $22,368,000, respectively.
Permanent single-family residential loans receivable included adjustable-rate loans of $82,968,000 and $66,431,000 at September 30, 2005 and 2004, 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, 2005 | Washington | Idaho | Oregon | Utah | Arizona | Other | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||||
Conventional real estate |
||||||||||||||||||||||
Single-family
|
$ | 1,804,054 | $ | 497,489 | $ | 765,195 | $ | 441,532 | $ | 448,529 | $ | 673,612 | $ | 4,630,411 | ||||||||
Multi-family |
99,428 | 37,473 | 216,596 | 32,468 | 88,393 | 27,466 | 501,824 | |||||||||||||||
Land |
221,002 | 47,357 | 46,906 | 33,621 | 58,103 | 31,632 | 438,621 | |||||||||||||||
Construction |
446,287 | 127,655 | 184,968 | 99,452 | 99,089 | 63,968 | 1,021,419 | |||||||||||||||
|
|
|
||||||||||||||||||||
$ | 2,570,771 | $ | 709,974 | $ | 1,213,665 | $ | 607,073 | $ | 694,114 | $ | 796,678 | $ | 6,592,275 | |||||||||
|
|
|
At September 30, 2005, the Companys recorded investment in impaired loans was $0.9 million with allocated reserves of $0.3 million. At September 30, 2004 the Companys recorded investment in impaired loans was $2.2 million with allocated reserves of $0.7 million. The average balance of impaired loans during 2005, 2004 and 2003 was $1.1 million, $4.6 million and $13.3 million and interest income from impaired loans was $71,000, $283,000 and $851,000, respectively.
NOTE D |
ALLOWANCE FOR LOSSES ON LOANS AND SECURITIZED ASSETS SUBJECT TO REPURCHASE |
Year ended September 30, | 2005 | 2004 | 2003 | |||||||||
(In thousands) | ||||||||||||
Balance at beginning of year |
$ | 25,140 | $ | 25,806 | $ | 23,912 | ||||||
Provision for (reversal of) loan losses |
(134 | ) | (231 | ) | 1,500 | |||||||
Charge-offs |
(258 | ) | (528 | ) | (1,310 | ) | ||||||
Recoveries |
8 | 93 | 107 | |||||||||
Acquired reserves |
| | 1,597 | |||||||||
|
|
|
||||||||||
Balance at end of year |
$ | 24,756 | $ | 25,140 | $ | 25,806 | ||||||
|
|
|
|
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E |
INTEREST RECEIVABLE |
September 30, | 2005 | 2004 | ||||||
(In thousands) | ||||||||
Loans receivable |
$ | 27,262 | $ | 24,094 | ||||
Allowance for uncollected interest on loans receivable |
(235 | ) | (464 | ) | ||||
Mortgage-backed securities |
4,989 | 3,159 | ||||||
Investment securities |
2,032 | 3,043 | ||||||
|
|
|
||||||
$ | 34,048 | $ | 29,832 | |||||
|
|
|
NOTE F |
PREMISES AND EQUIPMENT |
September 30, | 2005 | 2004 | ||||||||
(In thousands) | ||||||||||
Estimated | ||||||||||
Useful Life
|
||||||||||
Land |
| $ | 22,985 | $ | 22,808 | |||||
Buildings |
25 - 40 | 59,204 | 55,777 | |||||||
Leasehold improvements |
5 - 15 | 3,563 | 5,564 | |||||||
Furniture, fixtures and equipment |
2 - 10 | 14,324 | 14,484 | |||||||
|
|
|
||||||||
100,076 | 98,633 | |||||||||
Less accumulated depreciation and amortization |
(36,789 | ) | (35,584 | ) | ||||||
|
|
|
||||||||
$ | 63,287 | $ | 63,049 | |||||||
|
|
|
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 $2,033,000, $1,949,000 and $1,862,000 in 2005, 2004 and 2003, respectively.
22
NOTE G |
CUSTOMER ACCOUNTS |
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
Checking accounts, 1.00% and under |
$ | 205,482 | $ | 196,155 | |||
Passbook and statement accounts, 1.25% |
191,919 | 224,989 | |||||
Insured money market accounts, .50% to 3.25% |
871,945 | 929,952 | |||||
Certificate accounts |
|||||||
Less than 3.00% |
1,110,932 | 2,590,304 | |||||
3.00% to 3.99% |
2,187,450 | 229,606 | |||||
4.00% to 4.99% |
343,029 | 280,166 | |||||
5.00% to 5.99% |
88,847 | 101,973 | |||||
6.00% to 6.99% |
2,568 | 16,100 | |||||
|
|
|
|||||
Total certificates |
3,732,826 | 3,218,149 | |||||
|
|
|
|||||
Repurchase agreements with customers, .75% to 2.20% |
29,333 | 41,113 | |||||
|
|
|
|||||
$ | 5,031,505 | $ | 4,610,358 | ||||
|
|
|
|||||
Certificate maturities were as follows: |
|||||||
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
Within 1 year |
$ | 3,019,716 | $ | 2,355,240 | |||
1 to 2 years |
485,259 | 445,037 | |||||
3 to 4 years |
93,849 | 282,248 | |||||
Over 4 years |
134,002 | 135,624 | |||||
|
|
|
|||||
$ | 3,732,826 | $ | 3,218,149 | ||||
|
|
|
Customer accounts over $100,000 totaled $1,365,000,000 as of September 30, 2005 and $1,199,000,000 as of September 30, 2004.
Interest expense on customer accounts consisted of the following:
Year ended September 30, | 2005 | 2004 | 2003 | |||||||||
(In thousands) | ||||||||||||
Checking accounts |
$ | 1,342 | $ | 1,199 | $ | 1,655 | ||||||
Passbook and statement accounts |
1,985 | 1,703 | 2,114 | |||||||||
Insured money market accounts |
15,154 | 8,185 | 14,947 | |||||||||
Certificate accounts |
97,247 | 74,559 | 85,931 | |||||||||
|
|
|
||||||||||
115,728 | 85,646 | 104,647 | ||||||||||
Repurchase agreements with customers |
668 | 858 | 1,651 | |||||||||
|
|
|
||||||||||
116,396 | 86,504 | 106,298 | ||||||||||
Less early withdrawal penalties |
(570 | ) | (405 | ) | (379 | ) | ||||||
|
|
|
||||||||||
$ | 115,826 | $ | 86,099 | $ | 105,919 | |||||||
|
|
|
||||||||||
Weighted average interest rate at end of year |
2.99 | % | 2.00 | % | 1.94 | % | ||||||
Weighted daily average interest rate during the year |
2.47 | % | 1.89 | % | 2.38 | % |
|
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H |
FHLB ADVANCES |
Maturity dates of FHLB advances were as follows:
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
FHLB advances due |
|||||||
Within 1 year |
$ | | $ | | |||
1 to 3 years |
330,000 | 100,000 | |||||
4 to 5 years |
| 400,000 | |||||
More than 5 years |
900,000 | 700,000 | |||||
|
|
|
|||||
$ | 1,230,000 | $ | 1,200,000 | ||||
|
|
|
All of the 2005 advances and $1,100,000,000 of the 2004 advances included in the above table are callable by the FHLB. If these callable advances were to be called at the earliest call dates, the maturities of all FHLB advances would be as follows:
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
FHLB advances callable |
|||||||
Within 1 year |
$ | 530,000 | $ | 800,000 | |||
1 to 3 years |
100,000 | 400,000 | |||||
4 to 5 years |
| | |||||
More than 5 years |
600,000 | | |||||
|
|
|
|||||
$ | 1,230,000 | $ | 1,200,000 | ||||
|
|
|
Financial data pertaining to the weighted-average cost and the amount of FHLB advances were as follows:
September 30, | 2005 | 2004 | 2003 | |||||||||
(In thousands) | ||||||||||||
Weighted average interest rate at end of year |
4.88 | % | 5.09 | % | 5.13 | % | ||||||
Weighted daily average interest rate during the year |
5.18 | % | 5.21 | % | 5.19 | % | ||||||
Daily average of FHLB advances |
$ | 1,206,267 | $ | 1,539,594 | $ | 1,650,023 | ||||||
Maximum amount of FHLB advances at any month end |
1,230,000 | 1,651,000 | 1,654,000 | |||||||||
Interest expense during the year |
62,050 | 80,225 | 85,564 |
FHLB advances are collateralized as provided for in the Advances, Pledge and Security Agreement by all FHLB stock owned by the Company, 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 Company currently has a credit line of 35% of the total assets of the Company, subject to collateralization requirements.
24
NOTE I |
OTHER BORROWINGS |
Maturity dates of securities sold under agreements to repurchase (reverse repurchase agreements) were as follows:
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
Reverse repurchase agreements due |
|||||||
Within 1 year |
$ | | $ | | |||
1 to 3 years |
| | |||||
4 to 5 years |
300,000 | | |||||
More than 5 years |
300,000 | 100,000 | |||||
|
|
|
|||||
$ | 600,000 | $ | 100,000 | ||||
|
|
|
All of the reverse repurchase agreements included in the above table are callable by the counterparty. If these were to be called at the earliest call dates, the maturities of the reverse repurchase agreements would be as follows:
September 30, | 2005 | 2004 | |||||
(In thousands) | |||||||
Reverse repurchase agreements callable |
|||||||
Within 1 year |
$ | | $ | | |||
1 to 3 years |
100,000 | | |||||
4 to 5 years |
500,000 | 100,000 | |||||
More than 5 years |
| | |||||
|
|
|
|||||
$ | 600,000 | $ | 100,000 | ||||
|
|
|
Other borrowings on the Statement of Financial Condition included the $600,000,000 of reverse repurchase agreements presented in the table above as well as $55,000,000 of short-term borrowings due October 3, 2005 bearing an interest rate of 3.94%.
The Company enters into sales of 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 three years ended September 30, 2005 all of the Companys 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 Companys 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, | 2005 | 2004 | 2003 | |||||||||
(In thousands) | ||||||||||||
Weighted average interest rate at end of year |
3.80 | % | 3.44 | % | 3.44 | % | ||||||
Weighted daily average interest rate during the year |
3.79 | % | 3.40 | % | 3.39 | % | ||||||
Daily average of securities sold under agreements to repurchase |
$ | 458,082 | $ | 100,000 | $ | 100,000 | ||||||
Maximum securities sold under agreements to repurchase at any month end |
600,000 | 100,000 | 100,000 | |||||||||
Interest expense during the year |
17,384 | 3,397 | 3,388 |
|
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J |
INCOME TAXES |
The consolidated statements of financial condition at September 30, 2005 and 2004 include deferred tax liabilities of $43,491,000 and $55,522,000, 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, | 2005 | 2004 | |||||
(In thousands) | |||||||
Deferred tax assets |
|||||||
Valuation adjustment on available-for-sale securities |
$ | 409 | $ | | |||
Deferred compensation |
156 | 176 | |||||
Loan loss reserves |
9,145 | 9,176 | |||||
|
|
|
|||||
Total deferred tax assets |
9,710 | 9,352 | |||||
|
|
|
|||||
Deferred tax liabilities |
|||||||
Federal Home Loan Bank stock dividends |
31,256 | 32,838 | |||||
Core deposit intangible |
909 | 1,300 | |||||
Deferred gain on forward commitments |
3,633 | 4,360 | |||||
Valuation adjustment on available-for-sale securities |
| 9,313 | |||||
Depreciation |
6,211 | 6,139 | |||||
Loan origination costs |
10,808 | 9,926 | |||||
Securitized asset subject to repurchase valuation adjustment |
237 | 365 | |||||
Other, net |
147 | 633 | |||||
|
|
|
|||||
Total deferred tax liabilities |
53,201 | 64,874 | |||||
|
|
|
|||||
Net deferred tax liability |
$ | 43,491 | $ | 55,522 | |||
|
|
|
A reconciliation of the statutory federal income tax rate to the effective income tax rate follows:
Year ended September 30, | 2005 | 2004 | 2003 | ||||||
Statutory income tax rate |
35 | % | 35 | % | 35 | % | |||
Dividend received deduction |
(2 | ) | (1 | ) | (1 | ) | |||
Other timing difference |
(1 | ) | (1 | ) | (1 | ) | |||
State income tax |
3 | 2 | 2 | ||||||
|
|
||||||||
Effective income tax rate |
35 | % | 35 | % | 35 | % | |||
|
|
The Small Business Job Protection Act of 1996 (the Act) required qualified thrift institutions, such as the Company, 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 Company was required to pay approximately $25,406,000 in additional federal income taxes, all of which had been previously provided, through 2004.
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 Companys originally reported taxable income as a result of this examination.
NOTE K |
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.
Plan participants may make voluntary after-tax contributions of their considered earnings as defined by the Plan. In addition, participants may make pre-tax contributions up to the statutory limits
26
through the 401(k) provisions of the Plan. The annual addition from contributions to an individual participants account in this Plan cannot exceed the lesser of 100% of base salary or $41,000. Under provisions of the Plan, employees are eligible to participate on the date of hire and become fully vested in the Companys 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 $2,306,000, $2,101,000 and $2,001,000 for the years ended September 30, 2005, 2004 and 2003, respectively. |
NOTE L |
STOCK OPTION PLANS |
The Company has three employee stock option plans which provide a combination of stock options and stock grants. Stockholders authorized 2,718,660 shares, 4,480,101 shares and 4,099,480 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 11,298,241 total shares authorized by stockholders under the three plans, 4,099,480 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.
Average Price (1) | Number (1) |
Weighted Average
Fair Value of Option Shares Granted |
||||||
Outstanding, September 30, 2002 |
$ | 13.07 | 2,912,773 | |||||
Granted in 2003 |
16.80 | 99,426 | 2.93 | |||||
Exercised in 2003 |
10.83 | (473,323 | ) | |||||
Forfeited in 2003 |
13.74 | (192,322 | ) | |||||
|
|
|
||||||
Outstanding, September 30, 2003 |
13.63 | 2,346,554 | ||||||
Granted in 2004 |
21.23 | 1,255,771 | 4.15 | |||||
Exercised in 2004 |
12.16 | (265,629 | ) | |||||
Forfeited in 2004 |
16.18 | (254,249 | ) | |||||
|
|
|
||||||
Outstanding, September 30, 2004 |
16.65 | 3,082,447 | ||||||
Granted in 2005 |
| | | |||||
Exercised in 2005 |
13.09 | (310,453 | ) | |||||
Forfeited in 2005 |
18.18 | (205,026 | ) | |||||
|
|
|
||||||
Outstanding, September 30, 2005 |
$ | 16.95 | 2,566,968 | |||||
|
|
|
(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 was as follows:
September 30, 2005 | ||||||||||
Ranges of Exercise Prices |
Number of
Option Shares |
Weighted
Average Remaining Contractual Life |
Weighted
Average Exercise Price of Option Shares |
Number of
Exercisable Option Shares |
Weighted
Average Exercisable Price of Exercisable Option Shares |
|||||
$ 9.44 -13.02 |
560,067 | 3.9 years | $11.78 | 279,448 | $11.69 | |||||
13.55 -16.57 |
926,261 | 5.3 | 15.15 | 367,223 | 15.07 | |||||
16.69 -21.28 |
1,080,640 | 8.1 | 21.17 | 10,193 | 19.82 | |||||
|
||||||||||
2,566,968 | 6.2 years | $16.95 | 656,864 | $13.71 | ||||||
|
|
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also grants shares of restricted stock pursuant to its equity compensation plans. These shares of restricted stock vest over a period of five to seven years. The Company has issued a total of 80,000 shares of restricted stock, with a fair market value at the date of grant of $2.0 million. As of September 30, 2005, 49,778 shares remained restricted. The Company accounts for restricted stock grants by recording the fair value of the grant to compensation expense over the vesting period. At September 30, 2005, $1.3 million of unearned compensation was recorded as a reduction to retained earnings.
NOTE M |
STOCKHOLDERS EQUITY |
In the second quarter of fiscal 2005, 2004 and 2003, 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.
Washington Federal Savings 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 Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Washington Federal Savings must meet specific capital guidelines that involve quantitative measures of Washington Federal Savings assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Washington Federal Savings 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, 2005 and 2004, the OTS categorized Washington Federal Savings as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Washington Federal Savings 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 Washington Federal Savings categorization.
Actual |
Capital
Adequacy Guidelines |
Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||
Capital | Ratio | Capital | Ratio | Capital | Ratio | |||||||||||||
September 30, 2005 |
(Dollars in thousands) | |||||||||||||||||
Total capital to risk-weighted assets |
$ | 1,140,877 | 26.15 | % | $ | 348,992 | 8.00 | % | $ | 436,241 | 10.00 | % | ||||||
Tier I capital to risk-weighted assets |
1,123,485 | 25.75 | NA | NA | 261,744 | 6.00 | ||||||||||||
Core capital to adjusted tangible assets |
1,123,485 | 13.75 | NA | NA | 408,673 | 5.00 | ||||||||||||
Core capital to total assets |
1,123,485 | 13.75 | 245,204 | 3.00 | NA | NA | ||||||||||||
Tangible capital to tangible assets |
1,123,485 | 13.75 | 122,602 | 1.50 | NA | NA | ||||||||||||
September 30, 2004 |
||||||||||||||||||
Total capital to risk-weighted assets |
$ | 1,054,160 | 27.30 | % | $ | 308,886 | 8.00 | % | $ | 386,107 | 10.00 | % | ||||||
Tier I capital to risk-weighted assets |
1,036,851 | 26.85 | NA | NA | 231,664 | 6.00 | ||||||||||||
Core capital to adjusted tangible assets |
1,036,851 | 14.65 | NA | NA | 353,814 | 5.00 | ||||||||||||
Core capital to total assets |
1,036,851 | 14.65 | 212,289 | 3.00 | NA | NA | ||||||||||||
Tangible capital to tangible assets |
1,036,851 | 14.65 | 106,144 | 1.50 | NA | NA |
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation (FDIC) routinely examine the Companys financial statements as part of their oversight of the savings and loan industry. Based on their examinations, these regulators can direct that the Companys 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 2005.
28
The Company has an ongoing stock repurchase program. The Company did not repurchase any shares during 2005. In 2004, the Company repurchased 93,500 shares at a weighted-average price of $20.74. As of September 30, 2005, Management had authorization from the Board of Directors to repurchase up to 3.3 million additional shares. Information used to calculate earnings per share follows:
September 30, | 2005 | 2004 | 2003 | ||||||||
(In thousands, except per share data) | |||||||||||
Net income |
$ | 145,889 | $ | 131,868 | $ | 144,999 | |||||
Weighted average shares |
|||||||||||
Basic weighted average number of
|
86,711,608 | 86,302,945 | 84,289,899 | ||||||||
Dilutive effect of outstanding
|
767,100 | 827,842 | 691,661 | ||||||||
|
|
|
|||||||||
Diluted weighted average number of
|
87,478,708 | 87,130,787 | 84,981,560 | ||||||||
|
|
|
|||||||||
Net income per share |
|||||||||||
Basic |
$ | 1.68 | $ | 1.53 | $ | 1.72 | |||||
Diluted |
1.67 | 1.51 | 1.71 |
NOTE N |
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 statement of financial condition, 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, | 2005 | 2004 | ||||||||||
(In thousands) | ||||||||||||
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated
Fair Value |
|||||||||
Financial assets |
||||||||||||
Cash and cash equivalents |
$ | 637,791 | $ | 637,791 | $ | 508,361 | $ | 508,361 | ||||
Repurchase agreements |
| | 200,000 | 200,000 | ||||||||
Available-for-sale securities |
1,077,856 | 1,077,856 | 899,525 | 899,525 | ||||||||
Held-to-maturity securities |
212,479 | 211,596 | 156,373 | 158,792 | ||||||||
Loans receivable & securitized assets |
6,008,932 | 6,086,613 | 5,093,443 | 5,203,650 | ||||||||
FHLB stock |
129,453 | 129,453 | 137,274 | 137,274 | ||||||||
Financial liabilities |
||||||||||||
Customer accounts |
5,031,505 | 5,037,419 | 4,610,358 | 4,615,616 | ||||||||
FHLB advances and other borrowings |
1,885,000 | 1,871,474 | 1,300,000 | 1,357,405 |
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.
Repurchase agreements The carrying amount of these items is a reasonable estimate of their fair value.
|
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Net deferred loan fees is not included in the fair value calculation but is included in the carrying amount.
Available-for-sale securities and held-to-maturity securities Estimated fair value for investment securities is based on quoted market prices.
FHLB stock The fair value is based upon the redemption value of the stock which equates to its carrying value.
Customer accounts The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.
FHLB advances and other borrowings The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
NOTE O |
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, | 2005 | 2004 | ||||||
(In thousands) | ||||||||
Assets |
||||||||
Cash |
$ | 4,509 | $ | 4,895 | ||||
Investment in subsidiary |
1,185,099 | 1,117,827 | ||||||
Dividend receivable |
15,000 | 12,000 | ||||||
|
|
|
||||||
Total assets |
$ | 1,204,608 | $ | 1,134,722 | ||||
|
|
|
||||||
Liabilities |
||||||||
Borrowed money |
$ | | $ | | ||||
Dividend payable and other liabilities |
17,300 | 14,534 | ||||||
|
|
|
||||||
Total liabilities |
17,300 | 14,534 | ||||||
|
|
|
||||||
Stockholders equity |
||||||||
Common stock, $1.00 par value, 300,000,000 shares authorized, 104,140,966 and 103,821,846 shares issued; 86,933,294 and 86,547,557 shares outstanding |
$ | 104,141 | $ | 94,383 | ||||
Paid-in capital |
1,240,310 | 1,161,627 | ||||||
Accumulated other comprehensive income (loss), net of tax |
(704 | ) | 17,107 | |||||
Treasury stock, at cost; 17,207,672 and 17,274,289 shares |
(205,874 | ) | (206,666 | ) | ||||
Retained earnings |
49,435 | 53,737 | ||||||
|
|
|
||||||
Total stockholders equity |
1,187,308 | 1,120,188 | ||||||
|
|
|
||||||
Total liabilities and stockholders equity |
$ | 1,204,608 | $ | 1,134,722 | ||||
|
|
|
30
Statements of Operations |
||||||||||
Year ended September 30, | 2005 | 2004 | 2003 | |||||||
(In thousands) | ||||||||||
Income |
||||||||||
Dividends from subsidiary |
$ | 64,000 | $ | 58,000 | $ | 63,500 | ||||
|
|
|
||||||||
Expense |
||||||||||
Miscellaneous |
426 | 447 | 389 | |||||||
|
|
|
||||||||
Net income before equity in undistributed net income of subsidiary |
63,574 | 57,553 | 63,111 | |||||||
Equity in undistributed net income of subsidiary |
82,164 | 74,158 | 81,751 | |||||||
|
|
|
||||||||
Income before income taxes |
145,738 | 131,711 | 144,862 | |||||||
Income tax benefit |
151 | 157 | 137 | |||||||
|
|
|
||||||||
Net income |
$ | 145,889 | $ | 131,868 | $ | 144,999 | ||||
|
|
|
Statements of Cash Flows
Year ended September 30, | 2005 | 2004 | 2003 | |||||||||
(In thousands) | ||||||||||||
Cash Flows From Operating Activities |
||||||||||||
Net income |
$ | 145,889 | $ | 131,868 | $ | 144,999 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
Equity in undistributed net income of subsidiaries |
(82,164 | ) | (74,158 | ) | (81,751 | ) | ||||||
Decrease (increase) in dividend receivable |
(3,000 | ) | | 2,000 | ||||||||
Increase (decrease) in other liabilities |
1,076 | 333 | (417 | ) | ||||||||
|
|
|
||||||||||
Net cash provided by operating activities |
61,801 | 58,043 | 64,831 | |||||||||
Cash Flows From Financing Activities |
||||||||||||
Issuance of common stock through stock option plan |
4,006 | 4,265 | 5,944 | |||||||||
Proceeds from Employee Stock Ownership Plan |
1,526 | 4,695 | 1,522 | |||||||||
Treasury stock purchased |
| (1,939 | ) | (10,034 | ) | |||||||
Dividends |
(67,719 | ) | (64,696 | ) | (60,004 | ) | ||||||
|
|
|
||||||||||
Net cash used by financing activities |
(62,187 | ) | (57,675 | ) | (62,572 | ) | ||||||
Increase (decrease) in cash |
(386 | ) | 368 | 2,259 | ||||||||
Cash at beginning of year |
4,895 | 4,527 | 2,268 | |||||||||
|
|
|
||||||||||
Cash at end of year |
$ | 4,509 | $ | 4,895 | $ | 4,527 | ||||||
|
|
|
|
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P |
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following is a summary of the unaudited interim results of operations by quarter:
Year ended September 30, 2005 |
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Interest income |
$ | 107,543 | $ | 122,180 | $ | 114,002 | $ | 118,176 | ||||||||
Interest expense |
42,146 | 45,563 | 51,248 | 56,303 | ||||||||||||
|
|
|
||||||||||||||
Net interest income |
65,397 | 76,617 | 62,754 | 61,873 | ||||||||||||
Provision for (reversal of) loan losses |
| | (134 | ) | | |||||||||||
Other operating income |
2,796 | 851 | 3,030 | 1,175 | ||||||||||||
Other operating expense |
11,978 | 13,963 | 12,769 | 13,609 | ||||||||||||
|
|
|
||||||||||||||
Income before income taxes |
56,215 | 63,505 | 53,149 | 49,439 | ||||||||||||
Income taxes |
19,957 | 22,544 | 18,868 | 15,050 | ||||||||||||
|
|
|
||||||||||||||
Net income |
$ | 36,258 | $ | 40,961 | $ | 34,281 | $ | 34,389 | ||||||||
|
|
|
||||||||||||||
Basic earnings per share |
$ | .42 | $ | .47 | $ | .40 | $ | .40 | ||||||||
Diluted earnings per share |
.42 | .47 | .39 | .39 | ||||||||||||
Cash dividends per share |
.19 | .19 | .20 | .20 | ||||||||||||
Return on average assets |
1.96 | % | 2.16 | % | 1.76 | % | 1.71 | % | ||||||||
Year ended September 30, 2004 |
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Interest income |
$ | 102,682 | $ | 102,682 | $ | 103,210 | $ | 105,198 | ||||||||
Interest expense |
44,056 | 43,406 | 41,040 | 41,251 | ||||||||||||
|
|
|
||||||||||||||
Net interest income |
58,626 | 59,276 | 62,170 | 63,947 | ||||||||||||
Provision for (reversal of) loan losses |
| | (231 | ) | | |||||||||||
Other operating income |
3,230 | 2,449 | 2,728 | (2,681 | ) | |||||||||||
Other operating expense |
11,160 | 11,482 | 11,027 | 12,595 | ||||||||||||
|
|
|
||||||||||||||
Income before income taxes |
50,696 | 50,243 | 54,102 | 48,671 | ||||||||||||
Income taxes |
17,873 | 17,723 | 19,070 | 17,178 | ||||||||||||
|
|
|
||||||||||||||
Net income |
$ | 32,823 | $ | 32,520 | $ | 35,032 | $ | 31,493 | ||||||||
|
|
|
||||||||||||||
Basic earnings per share |
$ | .38 | $ | .38 | $ | .41 | $ | .36 | ||||||||
Diluted earnings per share |
.38 | .37 | .40 | .36 | ||||||||||||
Cash dividends per share |
.18 | .18 | .19 | .19 | ||||||||||||
Return on average assets |
1.74 | % | 1.73 | % | 1.91 | % | 1.73 | % |
32
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Washington Federal, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control system was designed to provide reasonable assurance to the Companys management and Board of Directors regarding the preparation and fair presentation of published financial statements.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of September 30, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that as of September 30, 2005, the Companys internal control over financial reporting was effective based on those criteria.
The Companys independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, have issued an audit report on our assessment of the Companys internal control over financial reporting and their report follows.
November 4, 2005
Roy M. Whitehead
Vice Chairman, President and
Chief Executive Officer
Brent J. Beardall
Senior Vice President and
Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
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, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended September 30, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of September 30, 2005, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report (not presented herein) dated November 4, 2005, expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
DELOITTE & TOUCHE LLP
Seattle, Washington
November 4, 2005
|
33
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 requirements, cash or stock
|
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
Telephone: 1-888-888-0315
www.amstock.com
Annual Meeting |
The annual meeting of stockholders will be held on January 18, 2006, at 2 p.m. at Benaroya Hall, 200 University Street, Seattle, Washington |
Form 10-K |
This report and all SEC filings are available through the Companys web site: www.washingtonfederal.com |
Stock Information |
Washington Federal, Inc. is traded on the NASDAQ Stock Market. The common stock symbol is WFSL. At September 30, 2005, there were approximately 2,523 stockholders of record. |
Largest Market Makers:
McAdams Wright Ragen, Inc.
National Stock Exchange
Archipelago Stock Exchange
NASDAQ/Brut Market Center
Keefe, Bruyette & Woods, Inc.
Goldman, Sachs & Co.
Knight Equity Markets, L.P.
Morgan Stanley & Co., Inc.
Citigroup Global Markets, Inc.
UBS Capital Markets L.P.
Lehman Brothers, Inc.
Merrill Lynch, Pierce, Fenner & Smith, Inc.
B-Trade Services, L.L.C.
National Financial Services
Prudential Equity Group, Inc.
34
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
W. ALDEN HARRIS
Former Executive
Vice President
ANNA C. JOHNSON
Senior Partner
Scan East West Travel
THOMAS J. KELLEY
Faculty member, Albers
School of Business, Seattle
University and retired
partner, Arthur Andersen LLP
THOMAS F. KENNEY
Vice President Finance
Haggen, Inc.
CHARLES R. RICHMOND
Former Executive
Vice President
DIRECTORS EMERITI
E.W. MERSEREAU, JR.
RICHARD C. REED
KERMIT O. HANSON
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
Accounting
CHAD J. LEONARD
Controller
ROBERT C. ZIRK
Internal Controls and Taxes
Appraisal
HEATHER J. ST. CLAIR
Retail Underwriter
MICHAEL R. BUSH
Senior Vice President
Credit Administration
JAMES E. CADY
Senior Vice President
DALE R. SULLIVAN
Senior Vice President
Corporate Real Estate
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
Senior Vice President
Legal/Special Credits
PAUL I. TYLER
Vice President and General Counsel
Loan Operations
LEANN H. BURKE
Assistant Vice President
Loan Servicing
VIVIAN L. YORITA
Vice President
Marketing and
Investor Relations
CATHY E. COOPER
Vice President
Multi-Family Lending
J. TIMOTHY GRANT
Senior Vice President
Permanent Loan Production
JOHN L. WUNDERLICH
Vice President
Wholesale Underwriter
COLLEEN E. WELLS
Vice President
SUBSIDIARIES
First Insurance Agency, Inc.
1501 Riverside Drive
Mount Vernon, WA 98273
1-800-562-2555
DUANE E. HENSON
DIVISIONS
SOUTH SOUND
WASHINGTON
18 Office Locations
Division Manager
RONDA F. TOMLINSON
Senior Vice President
9919 Bridgeport Way S.W.
Lakewood, WA 98499
MIDSOUND
WASHINGTON
16 Office Locations
Division Manager
E. CRAIG WILSON
Senior Vice President
5809 196th S.W.
Lynnwood, WA 98036
NORTHERN WASHINGTON
9 Office Locations
Division Manager
DOUGLAS A. ROWELL
Senior Vice President
1501 Riverside Drive
Mount Vernon, WA 98273
WESTERN IDAHO
10 Office Locations
Division Manager
ROBERT P. LINK
Senior Vice President
1001 W. Idaho St.
Boise, ID 83701
EASTERN IDAHO
6 Office Locations
Division Manager
LARRY L. WADSWORTH
Senior Vice President
500 North Capital
Idaho Falls, ID 83402
OREGON
27 Office Locations
Division Manager
PEGGY L. HOBIN
Senior Vice President
14990 SW Bangy Rd.
Lake Oswego, OR 97035
UTAH
10 Office Locations
Division Manager
MARLISE G. FISHER
Vice President
505 East 200 South
Salt Lake City, UT 84102
PHOENIX, ARIZONA
12 Office Locations
Division Manager
JOHN J. PIRTLE
Vice President
2196 E. Camelback Road, Suite 100
Phoenix, AZ 85016
TUCSON, ARIZONA
8 Office Locations
Division Manager
GEORGIA E. VELARDE
Vice President
5151 E. Broadway Blvd., Suite 105
Tucson, AZ 85711
NEVADA
3 Office Locations
Division Manager
PAMELA K. CALLAHAN
Vice President
9340 Sun City Blvd. #103
Las Vegas, NV 89134
TEXAS
3 Office Locations
Division Manager
VAUGHN C. PEARSON
Senior Vice President
5900 Chapel Hill Blvd.
Plano, TX 75093
A complete listing of our branch locations can be found at www.washingtonfederal.com
35
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 33-97900, 333-20191, 333-51143, 333-46588, and 333-119329 on Form S-8 of our reports relating to the financial statements of Washington Federal, Inc. dated November 4, 2005, incorporated by reference in the Annual Report on Form 10-K and managements report on the effectiveness of internal control over financial reporting dated November 4, 2005, appearing in the Annual Report on Form 10-K of Washington Federal, Inc. for the year ended September 30, 2005.
/s/ Deloitte & Touche, LLP
Seattle, Washington
November 4, 2005
EXHIBIT 31.1
CERTIFICATION
I, Roy M. Whitehead, certify that:
1. | I have reviewed this annual report on Form 10-K of Washington Federal, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the Audit Committee of the registrants Board of Directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: Nov 4, 2005 |
/s/ Roy M. Whitehead |
|
ROY M. WHITEHEAD | ||
Vice Chairman, President and | ||
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Brent J. Beardall, certify that:
1. | I have reviewed this annual report on Form 10-K of Washington Federal, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the Audit Committee of the registrants Board of Directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: Nov 4, 2005 |
/s/ Brent J. Beardall |
|
BRENT J. BEARDALL | ||
Senior Vice President and | ||
Chief Financial Officer |
EXHIBIT 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Washington Federal, Inc. (the Company) on Form 10-K for the period ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigneds best knowledge and belief:
(a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated this 4 th day of November 2005.
Washington Federal, Inc. |
(Company) |
/s/ Roy M. Whitehead |
ROY M. WHITEHEAD |
Vice Chairman, President and |
Chief Executive Officer |
/s/ Brent J. Beardall |
BRENT J. BEARDALL |
Senior Vice President and |
Chief Financial Officer |