1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 (I.R.S. Employer
incorporation or organization) Identification No.)
425 Pike Street Seattle, Washington 98101
-----------------------------------------------------
(Address of principal executive offices and zip code)
(206) 624-7930
----------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). 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 AUGUST 1, 2003
Common stock, $1.00 par value 69,710,202
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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 June 30, 2003 and September 30, 2002 ............................... Page 3
Consolidated Statements of Operations for the quarter
and nine months ended June 30, 2003 and 2002 .............................. Page 4
Consolidated Statements of Cash Flows for the
nine months ended June 30, 2003 and 2002 .................................. Page 5
Notes to Consolidated Financial Statements ................................ Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................................... Page 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................... Page 14
Item 4. Controls and Procedures ......................................................... Page 14
PART II
Item 1. Legal Proceedings ............................................................ Page 15
Item 2. Changes in Securities and Use of Proceeds..................................... Page 15
Item 3. Defaults Upon Senior Securities .............................................. Page 15
Item 4. Submission of Matters to a Vote of Security Holders .......................... Page 15
Item 5. Other Information ............................................................ Page 15
Item 6. Exhibits and Reports on Form 8-K ............................................. Page 15
Signatures ................................................................... Page 17
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 2003 September 30, 2002
-------------- ------------------
(In thousands, except per share data)
ASSETS
Cash and cash equivalents ......................................... $ 1,387,791 $ 975,153
Available-for-sale securities, including encumbered
securities of $117,477.......................................... 754,071 918,776
Held-to-maturity securities, including encumbered
securities of $2,125 ......................................... 184,627 168,925
Securitized assets subject to repurchase, net...................... 305,042 755,961
Loans receivable, net ............................................. 4,332,818 4,292,003
Interest receivable ............................................... 29,103 39,503
Premises and equipment, net ....................................... 59,306 55,119
Real estate held for sale ......................................... 15,337 17,587
FHLB stock ........................................................ 138,602 132,320
Costs in excess of net assets acquired ............................ 35,703 35,703
Other assets ...................................................... 370 1,391
----------- -----------
$ 7,242,770 $ 7,392,441
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Customer accounts
Savings and demand accounts ................................... $ 4,285,458 $ 4,452,250
Repurchase agreements with customers .......................... 69,225 69,672
----------- -----------
4,354,683 4,521,922
FHLB advances ..................................................... 1,650,000 1,650,000
Other borrowings................................................... 100,000 100,000
Advance payments by borrowers for taxes and insurance ............. 12,564 22,704
Federal and state income taxes .................................... 74,050 84,235
Accrued expenses and other liabilities ............................ 47,514 52,862
----------- -----------
6,238,811 6,431,723
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, 100,000,000 shares authorized;
84,060,964 and 83,833,244 shares issued; and 69,648,417
and 69,894,902 shares outstanding ............................ 84,059 76,212
Paid-in capital ................................................... 1,051,489 968,858
Accumulated other comprehensive income, net of taxes .............. 39,000 56,000
Treasury stock, at cost; 14,412,547 and 13,938,342 shares ......... (207,799) (198,279)
Retained earnings ................................................. 37,210 57,927
----------- -----------
1,003,959 960,718
----------- -----------
$ 7,242,770 $ 7,392,441
=========== ===========
CONSOLIDATED FINANCIAL HIGHLIGHTS
Stockholders' equity per share .................................... $ 14.42 $ 13.75
Stockholders' equity to total assets .............................. 13.86% 13.00%
Weighted average rates at period end:
Loans and mortgage-backed securities* ........................... 6.68% 7.26%
Investment securities** ......................................... 2.00 2.82
Combined on loans, mortgage-backed securities
and investment securities ....................................... 5.49 6.53
Customer accounts ............................................... 2.19 2.94
Borrowings ...................................................... 5.03 5.03
Combined cost of customer accounts and borrowings ............... 3.00 3.52
Interest rate spread ............................................ 2.49 3.01
* Includes securitized assets subject to repurchase
** Includes municipal bonds at tax-equivalent yields and cash equivalents
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended June 30, Nine Months Ended June 30,
------------------------- --------------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(In thousands, except per share data)
INTEREST INCOME
Loans and securitized assets subject to repurchase ........ $ 86,650 $100,274 $272,972 $309,405
Mortgage-backed securities ................................. 15,355 18,355 49,760 57,621
Investment securities and cash equivalents.................. 8,580 5,506 25,362 16,093
-------- -------- -------- --------
110,585 124,135 348,094 383,119
INTEREST EXPENSE
Customer accounts .......................................... 24,731 35,408 83,640 117,931
FHLB advances and other borrowings ......................... 22,186 20,466 66,544 61,575
-------- -------- -------- --------
46,917 55,874 150,184 179,506
-------- -------- -------- --------
NET INTEREST INCOME ........................................ 63,668 68,261 197,910 203,613
Provision for loan losses .................................. 100 1,500 1,500 5,500
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ........ 63,568 66,761 196,410 198,113
OTHER INCOME
Gains on sale of securities, net ........................... 489 - 489 765
Gains on sale of real estate ............................... - - 3,382 -
OTHER ...................................................... 2,831 1,719 7,246 5,485
-------- -------- -------- --------
3,320 1,719 11,117 6,250
OTHER EXPENSE
Compensation and fringe benefits ........................... 7,327 8,938 23,299 26,192
Occupancy .................................................. 1,316 1,197 3,920 3,490
Other ...................................................... 2,391 3,010 8,452 9,491
-------- -------- -------- --------
11,034 13,145 35,671 39,173
Gain (loss) on real estate acquired through
foreclosure, net ...................................... 162 83 (278) 108
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ................................. 56,016 55,418 171,578 165,298
Income taxes ............................................... 19,605 19,535 60,345 58,271
-------- -------- -------- --------
NET INCOME ................................................. $ 36,411 $ 35,883 $111,233 $107,027
======== ======== ======== ========
PER SHARE DATA
Basic earnings ............................................. $ .52 $ .51 $ 1.60 $ 1.53
Diluted earnings ........................................... .52 .51 1.59 1.52
Cash dividends ............................................. .22 .21 .64 .61
Weighted average number of shares outstanding,
including dilutive stock options ......................... 70,147,652 70,671,762 70,106,643 70,535,870
Return on average assets ................................... 2.02% 2.04% 2.04% 2.04%
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30,
----------------------------
2003 2002
--------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................................. $ 111,233 $ 107,027
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of fees, discounts, and premiums, net ................... (11,643) (4,096)
Depreciation ......................................................... 2,605 2,827
Provision for loan losses ............................................ 1,500 5,500
Gain on investment securities and real estate held for sale, net ..... (211) (873)
Decrease in accrued interest receivable .............................. 10,400 7,670
Decrease in income taxes payable ..................................... (2,185) (13,053)
FHLB stock dividends ................................................. (6,282) (5,988)
Decrease in other assets ............................................. 1,021 172
Increase (decrease) in accrued expenses and other liabilities ........ (5,348) 859
--------- ---------
Net cash provided by operating activities .............................. 101,090 100,045
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Loans on existing property ........................................... (727,847) (648,302)
Construction loans ................................................... (361,255) (264,657)
Land loans ........................................................... (117,547) (68,908)
Loans refinanced ..................................................... (92,642) (70,567)
--------- ---------
(1,299,291) (1,052,434)
Savings account loans originated ....................................... (1,284) (4,725)
Loan principal repayments .............................................. 1,931,022 1,364,813
Increase (decrease) in undisbursed loans in process .................... 31,834 (11,395)
Loans purchased ........................................................ (264,327) (58,647)
Available-for-sale securities purchased................................. (269,995) (180,683)
Principal payments and maturities of available-for-sale securities ..... 372,863 311,971
Available-for-sale securities sold...................................... 50,000 10,000
Held-to-maturity securities purchased .................................. (100,000) -
Principal payments and maturities of held-to-maturity securities ....... 84,909 66,875
Proceeds from sales of real estate held for sale ....................... 10,979 16,539
Premises and equipment purchased, net .................................. (6,792) (3,899)
--------- ---------
Net cash provided by investing activities .............................. 539,918 458,415
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts ........................... (167,239) 172,197
Net decrease in borrowings ............................................. - (117,500)
Proceeds from exercise of common stock options ......................... 2,640 2,978
Proceeds from employee stock ownership plan ............................ 772 294
Dividends paid ......................................................... (44,369) (42,417)
Treasury stock purchased ............................................... (10,034) (6,453)
Decrease in advance payments by borrowers for taxes and insurance ...... (10,140) (10,401)
--------- ---------
Net cash used by financing activities .................................. (228,370) (1,302)
INCREASE IN CASH AND CASH EQUIVALENTS................................... 412,638 557,158
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 975,153 30,331
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $1,387,791 $ 587,489
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NONCASH INVESTING ACTIVITIES
Real estate acquired through foreclosure ............................. $ 9,007 $ 16,654
CASH PAID DURING THE PERIOD FOR
Interest ............................................................. 151,189 184,025
Income taxes ......................................................... 63,160 71,767
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
NOTE A - Basis of Presentation
The consolidated interim financial statements included in this report have
been prepared by Washington Federal, Inc. ("Company") without audit. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect amounts reported in the financial
statements. Actual results could differ from these estimates. 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, 2002 Consolidated Statement of Financial
Condition was derived from audited financial statements.
The information included in this Form 10-Q should be read in conjunction
with Washington Federal, Inc.'s 2002 Annual Report on Form 10-K to the
Securities and Exchange Commission. Interim results are not necessarily
indicative of results for a full year.
NOTE B - Acquisitions
On May 20, 2003 the Company announced the signing of a definitive merger
agreement. The agreement calls for United Savings, a Washington-chartered
savings and loan association, to be acquired by the Company's wholly owned
subsidiary, Washington Federal Savings and Loan Association.
Under the terms of the merger agreement, shareholders of United Savings
will receive aggregate consideration of $65.0 million for the shares of
common stock outstanding immediately prior to the effective time of
the merger. United Savings shareholders may elect to be paid in either
common stock or cash, subject to certain procedures designed to ensure that
not more than 50%, nor less than 45%, of the consideration will be in the
form of common stock. The merger is expected to close in the third
calender quarter of 2003, pending the receipt of all requisite regulatory
approvals and the approval of United Savings' shareholders. Upon closing the
transaction, current United Savings President & CEO Derek L. Chinn will
be appointed to the Boards of Directors of the Company and its subsidiary,
Washington Federal Savings.
United Savings, headquartered in Seattle, Washington, had total assets of
$321 million, total deposits of $271 million and total stockholders' equity
of $43 million as of June 30, 2003.
NOTE C - Dividends
Dividends per share increased to 22 cents for the quarter ended June 30, 2003
compared with 21 cents for the same period one year ago. On July 18, 2003
the Company paid its 82nd consecutive quarterly cash dividend.
On January 21, 2003, the Board of Directors of the Company declared an
eleven-for-ten stock split in the form of a 10% stock dividend to stockholders
of record on February 7, 2003, which was distributed on February 21, 2003.
All previously reported share and per share amounts have been adjusted
accordingly.
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NOTE D - Comprehensive Income
The Company's comprehensive income includes all items which comprise net
income plus the unrealized holding gains (losses) on available-for-sale
securities and forward commitments to purchase or sell mortgage-backed
securities. Total comprehensive income for the quarters ended June 30,
2003 and June 30, 2002 totaled $30,411,000 and $48,883,000, respectively.
Total comprehensive income for the nine months ended June 30, 2003 and June
30, 2002 totaled $94,233,000 and $106,448,000, respectively. The difference
between the Company's net income and total comprehensive income equals the
change in the net unrealized gain or loss, net of tax, on securities
available-for-sale and forward commitments to purchase or sell mortgage-backed
securities during the applicable periods.
Note E - Allowance for Losses on Loans and Securitized Assets Subject
to Repurchase
The following table summarizes the activity in the allowance for loan losses
(including securitized assets subject to repurchase) for the three and nine
months ended June 30, 2003 and 2002:
Quarter Ended June 30, Nine Months Ended June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands)
Balance at beginning of period...... $ 24,615 $ 22,474 $ 23,912 $ 19,683
Provision for loan losses........... 100 1,500 1,500 5,500
Charge-offs......................... (219) (1,249) (916) (2,825)
Recoveries.......................... 20 155 20 522
--------- ---------- --------- ----------
Balance at end of period............ $ 24,516 $ 22,880 $ 24,516 $ 22,880
========= ========== ========= ==========
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Note F - New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS No. 148
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company accounts for stock
options using the intrinsic value method as prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". The
following table summarizes 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:
Quarter Ended June 30, Nine Months Ended June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands, except per share data)
Net income, as reported ............ $ 36,411 $ 35,883 $ 111,233 $ 107,027
Deduct: Total stock option employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects .......................... (277) (287) (832) (862)
--------- ---------- --------- ----------
Pro forma net income ............... $ 36,134 $ 35,596 $ 110,401 $ 106,165
========= ========== ========= ==========
Earnings per share
Basic - as reported .......... $ 0.52 $ 0.51 $ 1.60 $ 1.53
Basic - pro forma ............ 0.52 0.51 1.59 1.52
Diluted - as reported ........ 0.52 0.51 1.59 1.52
Diluted - pro forma .......... 0.52 0.50 1.57 1.51
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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. ("Company") is a savings and loan holding company.
The Company's primary operating subsidiary is Washington Federal Savings.
INTEREST RATE RISK
The Company assumes a high level of interest rate risk as a result of
its policy to originate fixed-rate single family home loans, which are
longer-term in nature than the short-term characteristics of its
liabilities of customer accounts and borrowed money. At June 30, 2003,
the Company had a negative one-year maturity gap of approximately 15%
of total assets, compared to a 33% negative one-year maturity gap as of
June 30, 2002. The decrease in interest rate risk is the result of the
Company building its short-term assets.
The interest rate spread decreased to 2.49% at June 30, 2003 from
3.01% at September 30, 2002. The decrease was primarily due to the continued
build up of cash and cash equivalents (totaling $1.4 billion) invested at
overnight rates (1.00%). During this phase of the interest rate cycle
(historically low rates for 30 year fixed-rate loans) the Company chose to
position its balance sheet for increasing rates in the future by building cash
and reducing the amount of loans and mortgage-backed investments. As of
June 30, 2003, the Company had accumulated $1,387,791,000 in cash and cash
equivalents, an increase of $412,638,000 from September 30,2002. This
liquidity, which represents 19% of total assets, provides management with
flexibility in managing interest rate risk going forward.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net worth at June 30, 2003 was $1,003,959,000, or 13.86% of
total assets. This was an increase of $43,241,000 from September 30, 2002
when net worth was $960,718,000, or 13.00% of total assets. The
increase in the Company's net worth included $111,233,000 from net
income. Net worth was reduced by $44,369,000 of cash dividends paid and
a $17,000,000 decrease in accumulated other comprehensive income. During
the nine months ended June 30, 2003, 510,070 shares were repurchased under
the Company's ongoing common stock repurchase program at an average
price of $19.67, which left a total of 2.81 million shares currently
authorized by the Board of Directors as available for repurchase.
The Company's percentage of net worth to total assets is among the
highest in the nation and is over three times the minimum required under
Office of Thrift Supervision 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, de novo expansion and increased customer deposits.
The Company's cash and investment securities amounted to $1,693,291,000,
a $600,721,000 increase from September 30, 2002. This increase is the
result of higher than normal repayment levels on loans and mortgage-
backed securities during the first nine months of fiscal 2003, stemming
from record low mortgage rates.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management has elected to keep these funds invested short term to take
advantage of expected rising interest rates in the future (see Interest
Rate Risk above).
CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale
securities decreased $164,705,000 or 17.9% during the nine months ended
June 30, 2003, due to unusually high prepayments, resulting from
reduced interest rates on mortgage loans and the underlying collateral
for mortgage-backed securities. The Company purchased $269,995,000 and
$100,000,000 of available-for-sale and held-to-maturity investment
securities, respectively, during the nine months ended June 30, 2003.
As of June 30, 2003, the Company had unrealized gains on available-for-sale
securities of $39,000,000, net of tax, which were recorded as part of
stockholders' equity.
Loans receivable and securitized assets subject to repurchase: During the
nine months ended June 30, 2003, the combined total of loans receivable and
securitized assets subject to repurchase decreased 8.1% to $4,637,860,000
compared to $5,047,964,000 at September 30,2002. The decrease resulted
primarily from Management's unwillingness to aggressively compete during this
period of increased refinancing activity caused by historically low home
mortgage rates. Permanent single family residential loans as a percentage
of total loans decreased to 73.7% at June 30, 2003 compared to 77.6% at
Septemeber 30, 2002. The aggregate of construction and land loans as a
percentage of total loans increased to 16.8% at June 30, 2003 compared to
14.1% at September 30, 2002.
Non-performing assets: Non-performing assets decreased 1.0% during the nine
months ended June 30, 2003 to $33,522,000 from $33,876,000 at September 30,
2002.
Costs in excess of net assets acquired: Costs in excess of fair value of net
assets acquired in business combinations are reviewed at least annually to
determine that no impairment of the assets has occured; there was no
impairment at June 30, 2003. The Company will continue to evaluate these
assets and, if appropriate, provide for any diminution in value.
Customer accounts: Customer accounts decreased $167,239,000, or 3.7%, to
$4,354,683,000 at June 30, 2003 compared with $4,521,922,000 at September
30, 2002, as a result of the low interest rate environment for deposits.
FHLB advances and other borrowings: Total borrowings remained unchanged at
$1,750,000,000 during the nine months ended June 30, 2003.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Income: The quarter ended June 30, 2003 produced net income of
$36,411,000 compared to $35,883,000 for the same quarter one year ago,
a 1.5% increase. Net income for the nine months ended June 30, 2003
was $111,233,000 compared to $107,027,000 for the nine months ended
June 30, 2002, a 3.9% increase. Net income for the three and
nine months ended June 30, 2003 increased primarily as a result of
reduced operating expenses and increased other income, which offset
the decrease in net interest income.
Net Interest Income: The largest component of the Company's
earnings is net interest income, which is the difference between
the interest and dividends earned on loans and other investments
and the interest paid on customer deposits and borrowings. Net
interest income is impacted primarily by two factors; first, the
volume of earning assets and liabilities and second, the rate
earned on those assets or the rate paid on those liabilities.
The following table sets forth certain information explaining
changes in interest income and interest expense for the periods
indicated compared to the same period one year ago. 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 volume). The change
in interest income and interest expense attributable to change
in both volume and rate has been allocated proportionately to
the change due to volume and the change due to rate.
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12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Rate / Volume Analysis:
Quarter Ended Nine Months Ended
June 30,2003 June 30, 2003
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- --------
(in thousands)
Interest Income:
Loan Portfolio $(8,905) $(4,719) $ (13,624) $(26,745) $(9,688) $ (36,433)
Mortgage-backed securities (7,322) 4,322 (3,000) (17,904) 10,043 (7,861)
Investment securities
and cash equivalents (1) 5,406 (2,332) 3,074 18,901 (9,632) 9,269
------- ------- ------- ------- ------- --------
All interest-earning assets (10,821) (2,729) (13,550) (25,748) (9,277) (35,025)
Interest Expense:
Customer Accounts (670) (10,007) (10,677) 532 (34,823) (34,291)
FHLB advances and other
borrowings 2,530 (810) 1,720 7,280 (2,311) 4,969
------- ------- ------- ------- ------- -------
All interest-bearing libilities 1,860 (10,817) (8,957) 7,812 (37,134) (29,322)
Change in net interest income $(12,681) $ 8,088 $ (4,593) $(33,560) $27,857 $(5,703)
======= ======== ======== ======= ======= =======
(1) Includes dividends on FHLB stock
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest income for the nine month period and quarter ended June 30, 2003
benefited from additional accretion of discounts on mortgage-back securities
and deferred loan fees of approximately $18,000,000 and $7,000,000,
respectively, caused from the record prepayment activity experienced during
the periods. If prepayments return to historic levels, this additional
accretion will subside.
The Company provided $100,000 for loan losses during the quarter,
compared to $1,500,000 for the same quarter last year. For the nine
months ended June 30, 2003, the total provision was $1,500,000,
compared to $5,500,000 for the same period one year ago. This decrease
was due to the continued decline in the amount of the loan portfolio,
combined with strong asset quality indicators. Non-performing assets
amounted to $33,522,000 or .46% of total assets at June 30, 2003 compared
to $37,141,000 or .52% of total assets one year ago. Delinquencies on
permanent loans have decreased from $28,000,000 at June 30, 2002 to
$23,700,000 at June 30, 2003. These factors, with others, resulted
in a decrease in net charge-offs for the quarter ended June 30, 2003
by $895,000 over the comparable period in fiscal 2002. However, weak
economic conditions, including high unemployment, continue in the
Company's primary markets.
Other Income: The quarter ended June 30, 2003 produced total other income
of $3,320,000 compared to $1,719,000 for the same quarter one year ago, a
93.1% increase. Total other income for the nine months ended June 30, 2003
was $11,117,000 compared to $6,250,000 for the nine months ended June 30, 2002,
a 77.9% increase. Total other income for the quarter and nine months ended
June 30, 2003 increased primarily as a result of fee income related to the
refinancing of mortgage loans and the $3,382,000 gain on sale of real estate.
There was a $489,000 gain on the sale of an available-for-sale security in
the quarter ended June 30, 2003.
Other Expense: The quarter ended June 30, 2003 produced total other expense
of $11,034,000 compared to $13,145,000 for the same quarter one year ago, a
16.1% decrease. Total other expense for the nine months ended June 30, 2003
was $35,671,000 compared to $39,173,000 for the nine months ended June 30, 2002,
an 8.9% decrease. Total other expense for the quarter and nine months ended
June 30, 2003 equaled .61% and .66%, respectively, of average assets, compared
to .75% for the same periods one year ago. The number of staff, including
part-time employees on a full-time equivalent basis, was 718 at June 30, 2003
and 741 at June 30, 2002.
Taxes: Income taxes increased $70,000 or 0.4% and $2,074,000 or 3.6% for the
quarter and nine month periods ended June 30, 2003, respectively, when compared
to the same periods one year ago, due to a higher taxable income base. The
effective tax rate was 35.00% and 35.25% for the quarters ended June 30, 2003
and June 30, 2002, respectively. The decrease in the effective tax rate in the
current quarter was the result of a tax-free exchange of property.
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14
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes that there has been no material changes in the Company's
quantitative and qualitative information about market risk since September 30,
2002. For a complete discussion of the Company's quantitative and qualitative
market risk, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended September 30, 2002.
Item 4. 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
Company's management, including the Company's President and Chief Executive
Officer along with the Company's Vice President Finance and principal
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Securities
Exchange Act of 1934 ("Exchange Act") Rule 13a-14. Based upon that
evaluation, the Company's President and Chief Executive Officer along with
the Company's Vice President Finance and principal financial officer
concluded that the Company's 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 Company's periodic Securities and Exchange Commission ("SEC")
filings. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect these
controls subsequent to the date the Company carried out its evaluation.
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 SEC's 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 Company's
management, including its President and Chief Executive Officer and Vice
President Finance and principal financial officer, as appropriate, to allow
timely decisions and regarding required disclosure.
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15
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 and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Section 302 certification by the Chief Executive Officer
31.2 Section 302 certification by the principal financial and
accounting officer
32 Section 906 Certification by the Chief Executive Officer
and the principal financial and accounting officer
(b) Report on Form 8-K
1. Report filed April 17, 2003. Item included: Item 9.
Regulation FD Disclosure. The report stated that the
Company announced by press release its earnings for the
quarter ended March 31, 2003.
2. Report filed May 1, 2003. Item included: Item 9.
Regulation FD Disclosure. The report stated that the
Company announced by press release an investor
presentation on May 7, 2003.
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16
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Part II - Other Information
3. Report filed May 20, 2003. Item included: Item 5. Other
Events. The report stated that the Company announced by
press release the signing of a merger agreement with
United Savings and Loan Bank.
4. Report filed June 24, 2003. Item inclued: Item 9.
Regulation FD Disclosure. The report stated that the
Company announced by press release a cash dividend of 22
cents payable on July 18, 2003 to common stockholders of
record on July 7, 2003.
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17
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
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.
/s/ Roy M. Whitehead
August 13, 2003 --------------------------------------
ROY M. WHITEHEAD
Vice Chairman, President and Chief
Executive Officer
/s/ Brent J. Beardall
August 13, 2003 --------------------------------------
BRENT J. BEARDALL
Vice President Finance and
Controller (principal financial and
accounting officer)
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