FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to __________________ For Quarter Ended December 31, 1997 Commission file number 0 25454 WASHINGTON FEDERAL, INC. (Exact name of registrant as specified in its charter) Washington 91-1661606 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 425 Pike Street, Seattle, Washington 98101 (Address of principal executive offices and Zip Code) (206) 624-7930 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X . No . (2) Yes X . No . APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of class: at February 10, 1998 Common stock, $1.00 par value 47,623,602 shares
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I Item 1. Financial Statements The Consolidated Financial Statements of Washington Federal, Inc. and Subsidiaries filed as a part of the report are as follows: Consolidated Statements of Financial Condition as of December 31, 1997 and September 30, 1997 Page 3 Consolidated Statements of Operations for the three months ended December 31, 1997 and Page 4 Consolidated Statements of Cash Flows for the three months ended December 31, 1997 and 1996 Page 5 Notes to Consolidated Financial Page 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Page 7 PART II Item 1. Legal Proceedings Page 10 Item 2. Changes in Securities Page 10 Item 3. Defaults upon Senior Securities Page 10 Item 4. Submission of Matters to a Vote of Stockholders Page 10 Item 5. Other Information Page 10 Item 6. Exhibits and Reports on Form 8-K Page 10 Signatures Page 11
<TABLE> WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) <CAPTION> December 31, 1997 September 30, 1997 (In thousands, except per share data) <S> <C> <C> ASSETS Cash $ 33,221 $ 23,444 Available-for-sale securities, including mortgage-backed securities of $393,912 662,342 672,132 Held-to-maturity securities, including mortgage-backed securities of $517,508 540,979 564,747 Loans receivable 4,206,395 4,190,776 Interest receivable 36,974 36,383 Premises and equipment, net 48,199 47,552 Real estate held for sale 30,338 30,189 FHLB stock 95,471 93,584 Costs in excess of net assets acquired 57,272 58,774 Other assets 2,117 2,008 $5,713,308 $5,719,589 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Customer accounts Savings and demand accounts $2,911,258 $2,905,371 Repurchase agreements with customers 70,982 72,660 2,982,240 2,978,031 FHLB advances 1,523,500 1,601,000 Other borrowings, primarily securities sold under agreements to repurchase 342,511 303,544 Advance payments by borrowers for taxes and insurance 11,256 26,340 Federal and state income taxes 73,934 52,259 Accrued expenses and other liabilities 43,105 40,670 4,976,546 5,001,844 Stockholders' equity Common stock, $1.00 par value, 100,000,000 shares authorized; 51,161,742 and 51,137,889 shares issued; 47,532,612 and 47,508,759 shares outstanding 51,162 51,138 Paid-in capital 573,563 573,241 Valuation adjustment for available-for-sale securities, net of taxes 33,000 30,000 Treasury stock, at cost; 3,629,130 and 3,629,130 shares (68,266) (68,266) Retained earnings 147,303 131,632 736,762 717,745 $5,713,308 $5,719,589 CONSOLIDATED FINANCIAL HIGHLIGHTS Stockholders' equity per share $ 15.50 $ 15.11 Stockholders' equity to total assets 12.90% 12.55% Loans serviced for others $ 110,317 $ 119,897 Weighted average rates at period end Loans and mortgage-backed securities 8.15% 8.17% Investment securities 7.70% 7.72% Combined rate on loans, mortgage-backed securities and investment securities 8.12% 8.14% Customer accounts 5.16% 5.18% Borrowings 5.57% 5.51% Combined cost of customer accounts and borrowings 5.32% 5.31% Interest rate spread 2.80% 2.83% *Includes municipal bonds at tax equivalent yields </TABLE>
<TABLE> WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <CAPTION> Quarter Ended December 31, 1997 1996 (Dollars in thousands, except per share data) <S> <C> <C> INTEREST INCOME Loans $ 92,141 $ 84,362 Mortgage-backed securities 17,339 18,069 Investment securities 6,752 6,379 116,232 108,810 INTEREST EXPENSE Customer accounts 39,200 32,422 FHLB advances and other borrowings 26,076 28,559 65,276 60,981 Net interest income 50,956 47,829 Provision for loan losses 159 229 Net interest income after provision for loan losses 50,797 47,600 OTHER INCOME Gain on sale of securities 745 Other 1,148 964 1,893 964 OTHER EXPENSE Compensation and fringe benefits 5,817 5,878 Regulatory assessments 446 1,039 Occupancy expense 1,050 991 Other 3,487 2,963 10,800 10,871 Gain on real estate owned, net 101 23 Income before income taxes 41,991 37,716 Income taxes 14,907 13,615 NET INCOME $ 27,084 $ 24,101 PER SHARE DATA Basic earnings per share $ .57 $ .53 Diluted earnings per share $ .56 $ .53 Cash dividends $ .24 $ .22 Weighted average number of shares outstanding, including dilutive stock options 48,156,417 46,163,957 Return on average assets 1.91% 1.76% </TABLE>
<TABLE> WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <CAPTION> Quarter Ended December 31, 1997 1996 (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 27,084 $ 24,101 Adjustments to reconcile net income to net cash provided by operating activities Amortization of fees, discounts and premiums, net (5,815) (4,423) Amortization of costs in excess of net assets acquired 1,502 1,124 Depreciation 585 505 Gains on investment securities and real estate held for sale (845) (19) Decrease (increase) in accrued interest receivable (591) 276 Increase in income taxes payable 18,675 15,110 FHLB stock dividends (1,887) (1,568) Decrease (increase) in other assets (109) 8,511 Increase (decrease) in accrued expenses and other liabilities 2,435 (1,784) Net cash provided by operating activities 41,034 41,833 CASH FLOWS FROM INVESTING ACTIVITIES Loans and contracts originated Loans on existing property (161,655) (139,312) Construction loans (107,131) (88,051) Land loans (24,306) (18,486) Loans refinanced (28,972) (9,548) (322,064) (255,397) Savings account loans originated (1,516) (1,120) Loan principal repayments 319,202 229,202 Decrease in undisbursed loans in process (9,272) (30,385) Loans purchased (434) (205) Purchase of available-for-sale securities (10,000) --- Principal payments and maturities of available-for-sale securities 16,584 23,629 Sales of available-for-sale securities 10,744 --- Principal payments and maturities of held-to-maturity securities 24,041 16,265 Proceeds from sale of real estate held for sale 3,165 2,881 Premises and equipment purchased, net (1,232) (2,172) FHLB stock purchased --- (9,057) Cash received from acquisitions --- 3,590 Net cash (used) provided by investing activities 29,218 (22,769) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in customer accounts 4,209 (32,411) Net increase(decrease) in short-term borrowings (38,533) 51,590 Proceeds from exercise of common stock options 346 116 Dividends (11,413) (10,359) Treasury stock purchases --- (1,136) Decrease in advance payments by borrowers for taxes and insurance (15,084) (13,005) Net cash used by financing activities (60,475) (5,205) Increase in cash 9,777 13,589 Cash at beginning of period 23,444 19,635 Cash at end of period $ 33,221 $ 33,494 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing activities Real estate acquired through foreclosure $ 3,213 $ 1,045 Cash paid during the period for Interest 68,311 62,565 Income taxes --- --- </TABLE>
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTER ENDED DECEMBER 31, 1997 NOTE A - Basis of Presentation The consolidated interim financial statements included in this report have been prepared by Washington Federal, Inc. ("Company") without audit. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 1997 Consolidated Statement of Financial Condition was derived from audited financial statements. NOTE B - Cash Dividend Paid Dividends per share increased to 24 cents for the quarter ended December 31, 1997 compared with 22 cents for the same period one year ago. On January 23, 1998 the Company paid its 60th consecutive quarterly cash dividend. NOTE C - Stock Dividend On January 28, 1998, the Board of Directors of the Company declared an eleven-for-ten stock split in the form of a 10% stock dividend to stockholders of record on February 12, 1998 to be distributed on February 26, 1998. All previously reported per share amounts will be adjusted accordingly. NOTE D - Year 2000 Washington Federal has initiated a program to prepare the Company's computer systems and applications for the year 2000. The Board of Directors has established the time frame for year 2000 compliance company-wide. The Data Processing Department has been working on this effort for several months. The Company is to have all products, services and supporting technical systems year 2000 compliant by the fourth quarter of 1998. The testing and conversion of system applications is not expected to result in a material cost to the Company. NOTE E - Earnings per Share SFAS No. 128, "Earnings per Share" (SFAS No. 128) was issued in February, 1997. Under SFAS No. 128, the Company is required to present both basic and diluted EPS on the face of its statement of operations. The following table provides a reconciliation of the numerators and denominators of the basic and diluted computations. Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS Income available to common stockholders $27,084,000 47,521,059 .57 Diluted EPS Income available to common stockholders plus assumed conversions $27,084,000 48,156,417 .56
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART I - Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Washington Federal, Inc. (the "Company") is a unitary savings and loan holding company. The Company's wholly-owned subsidiary, Washington Federal Savings (the "Association") is the Company's primary operating entity. INTEREST RATE RISK The Company assumes a high level of interest rate volatility as a result of its policy to originate fixed-rate single family home loans which are longer-term in nature than the short-term characteristics of its liabilities of customer accounts and borrowed money. At December 31, 1997 the Company had a negative one year maturity gap of approximately 50% of total assets. The interest rate spread declined to 2.80% at December 31, 1997 from 2.83% at September 30, 1997. Interest rate spreads for the three previous quarters were relatively flat. During this phase of the interest rate cycle the Company chose to control its asset growth, strengthen its capital position and deleverage the balance sheet by reducing its borrowed money. FHLB advances and other borrowed money decreased to an equivalent of 32.7% of total assets at December 31, 1997, compared to 33.3% of total assets at September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's net worth at December 31, 1997 was $736,762,000 or 12.9% of total assets. This is an increase of $19,017,000 from September 30, 1997 when net worth was $717,745,000 or 12.6% of total assets. The Company's percentage of net worth to total assets is among the highest in the nation and the Association's regulatory capital ratios are over three times the minimum required under Office of Thrift Supervision ("OTS") regulations. Management believes this strong net worth position will help protect earnings against interest rate risk and enable it to compete more effectively for controlled growth through acquisitions and customer deposits increases. The Company's cash and investment securities amounted to $325,122,000, a $11,928,000 increase from a quarter ago. The minimum liquidity levels of the Association are governed by the regulations of the OTS. Liquidity is defined as the ratio of average cash and eligible unpledged investment securities to the sum of average withdrawable savings plus short-term (one year) borrowings. Currently, the Association is required to maintain total liquidity at four percent. At December 31, 1997, total liquidity was 5.26% compared to 5.06% at September 30, 1997.
CHANGES IN FINANCIAL POSITION Available-for-sale and held-to-maturity securities. As of December 31, 1997, the Company had unrealized gains of $33,000,000, net of tax, which are recorded as part of stockholders' equity. Loans receivable. Loans receivable grew less than 1% during the quarter to $4,206,395,000 at December 31, 1997 from $4,190,776,000 at September 30, 1997. The Company measures loans that will not be repaid in accordance with their contractual terms using a discounted cash flow methodology or the fair value of the collateral for certain loans. Smaller balance loans are excluded with limited exceptions. At December 31, 1997, the Company's recorded investment in impaired loans was $6,157,000 which had allocated reserves of $2,192,000. Loans of $3,938,000 did not require reserves. The average balance of impaired loans during the quarter was $10,096,000 and interest income(cash received) from impaired loans was $98,000. Costs in excess of net assets acquired. The Company periodically monitors these assets for potential impairment of which there was none at December 31, 1997. The Company will continue to evaluate these assets and, if appropriate, provide for any diminuition in value of these assets as a result of any legislation. Customer accounts. Customer accounts at December 31, 1997 were $2,982,240,000 compared with $2,978,031,000 at September 30, 1997. FHLB advances and other borrowings. Total borrowings decreased to $1,866,011,000. See Interest Rate Risk above. RESULTS OF OPERATIONS Net interest income increased $3,127,000 (7%) to $50,956,000 for the December 1997 quarter from $47,829,000 a year ago. The net interest spread was 2.80% at December 31, 1997 compared to 2.83% at September 30, 1997 and 2.88% at December 31, 1996. Interest income on loans increased $7,779,000 (9%) to $92,141,000 for the quarter ended December 1997 from $84,362,000 a year ago. The increase is associated with the increase in total outstanding loans to $4,206,395,000 at December 31, 1997 from $4,131,145,000 at the December 31, 1996. Average interest rates on loans decreased to 8.27% from 8.29% a year ago. Interest income on mortgage-backed securities declined $730,000 (4%) to $17,339,000 for the quarter ended December 31, 1997 versus $18,069,000 the same period one year ago. The weighted average yield of 7.56% at December 31, 1997 was higher than the 7.54% at December 31, 1996.
Interest on investments increased $373,000 (6%) in the quarter versus the year ago quarter. The weighted average yield increased to 7.70% at December 31, 1997 compared with 7.56% at December 31, 1996. The combined investment securities and FHLB stock portfolio increased to $387,372,000 at December 31, 1997 versus $374,941,000 one year ago. Interest expense on customer accounts increased $6,778,000 (21%) to $39,200,000 for the quarter ended December 31, 1997 from $32,422,000 for the same period one year ago. The average cost of customer accounts increased to 5.16% at quarter end compared to 5.01% one year ago. Interest on FHLB advances and other borrowings decreased $2,483,000 (9%) to $26,076,000 for the December 1997 quarter compared with $28,559,000 for the same quarter a year ago. The average rates paid at December 31, 1997 increased to 5.57% versus 5.45% at December 31, 1996. Other income increased $929,000 (96%) for the December 1997 quarter compared with the December 1996 quarter. Gains on the sale of available-for-sale securities totalled $745,000 in the December 1997 quarter while no securities were sold in the December 1996 quarter. Other expense decreased $210,000 (2%) for the quarter ended December 1997 compared with the December 1996 quarter, after adjusting for the $139,000 decrease in deferred loan origination costs associated with lower loan volumes. Other expense for the December 1997 quarter equalled .76% of average assets compared to .79% for the same quarter a year ago, while the number of staff, including part-time employees on a full-time equivalent basis, were 660 for both periods. Income taxes increased $1,292,000 (9%) in the December 1997 quarter due to a higher taxable income base. The effective tax rate was 35.5% for December 1997 and 36.1% for the December 1996 quarter. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and related Notes presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES PART II - Other Information Item 1. Legal Proceedings From time to time the Company or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company's financial position or results of operations. Item 2. Changes in Securities Not applicable Item 3. Defaults upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Stockholders Not applicable Item 5. Other information Not applicable Item 6. Exhibits and Reports on Form 8-K Not applicable
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. February 13, 1998 /s/ GUY C. PINKERTON Chairman, President and Chief Executive Officer February 13, 1998 /s/ RONALD L. SAPER Executive Vice-President and Chief Financial Officer February 13, 1998 /s/ KEITH D. TAYLOR Senior Vice-President and Treasurer