Washington Federal 10-K 2006
Documents found in this filing:
Securities and Exchange Commission
Washington, D.C. 20549
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006.
For the transition period from to
Commission File Number: 0-25454
Washington Federal, Inc.
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (206) 624-7930
Securities registered pursuant to Section 12(b) of the Act:
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
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 21, 2006, the aggregate market value of the 86,218,437 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 1,152,543 shares held by all directors and executive officers of the Registrant as a group, was $2,024,408,901. This figure is based on the closing sale price of $23.48 per share of the Registrants Common Stock on November 21, 2006, as reported in The Wall Street Journal on November 22, 2006.
Number of shares of Common Stock outstanding as of November 21, 2006: 87,370,980
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, 2006, 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 25, 2007 are incorporated into Part III, Items 10-14 of this Form 10-K.
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 expects. 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.
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 2006, 2005 and 2004 represent balances as of September 30, 2006, September 30, 2005 and September 30, 2004, or activity for the fiscal years then ended, respectively.
The business of Washington Federal consists primarily of attracting savings deposits from the general public and investing these funds in loans secured by first lien mortgages 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 123 full service branches located in Washington, Oregon, Idaho, Arizona, Utah, Nevada and Texas. During 2006, Washington Federal opened one new office in Medford, Oregon. Through its subsidiaries, the Company is engaged in real estate investment and insurance brokerage activities.
The principal sources of funds for the Companys activities are retained earnings, loan repayments (including prepayments), net deposit inflows, repayments and sales of investments 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. On October 10, 2006, Washington Federal and First Federal Banc of the Southwest, Inc. (First Federal) entered into an Agreement and Plan of Reorganization (the Merger Agreement) pursuant to which First Federal will merge with and into the Company (the Merger). First Federal is the holding company for First Federal Bank, a federal savings bank headquartered in Roswell, New Mexico. Following the Merger, First Federal Bank will merge with and into Washington Federal Savings. Under the terms of the Merger Agreement, shareholders of First Federal will receive $24.14 in cash for each share of First Federal common stock they own. The aggregate consideration to be paid in connection with the Merger is $99.0 million for the shares of common stock and vested employee stock options outstanding immediately prior to the effective time of the Merger. The Merger is expected to close in the first calendar quarter of 2007, pending the receipt of all requisite regulatory approvals and the approval of First Federals shareholders.
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 Deposit Insurance Fund (DIF) 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:
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, 2006, the Company had a negative one-year gap of 33.7%, as compared to a negative one-year gap of 25.8% at September 30, 2005.
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), advances from the Federal Home Loan Bank of Seattle and other borrowings to fund its operations. Management has historically been able to replace maturing deposits if desired; however the Company may not 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. Such borrowings, if sought, may not be available to the Company or, if available, may not 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 Federals ability to pay dividends. Washington Federal is a separate legal entity from its 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 OTS, 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 U.S. government sponsored entities, such as Fannie Mae and Freddie Mac, 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:
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 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 prior credit history, financial statements, tax returns and cash flow projections; valuation of collateral; 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, other 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.
Average Statements of Financial Condition
General. The Companys net portfolio of loans totaled $7.1 billion at September 30, 2006, representing approximately 78% 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.
The following table sets forth the composition of the Companys gross loan portfolio, by loan type, as of September 30 for the years indicated.
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, 2006. Amounts are presented prior to deduction of discounts, premiums, loans in process, deferred net loan origination fees and allowance for loan losses. Adjustable-rate loans are shown in the period in which loan principal payments are contractually due.
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. 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 $1.8 billion, or 23% of the Companys gross loan portfolio at September 30, 2006. The Company offers a multi-family (five or more dwelling units) lending program with underwriting guidelines, including a $5.0 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.
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. 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. 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, 2006, $5.4 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 or written confirmations. Depending on the size of the loan involved, a varying number of 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, 2006, was $507 million, with allocated reserves of $1.0 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 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 $350,000. Permanent land loans amounted to $149 million or 1.9% of the gross loan portfolio, as of September 30, 2006.
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 and Purchase 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 origination, purchase and repayment activities of the Company for the years indicated.
Interest Rates, Loan Fees and Service Charges. Interest rates charged by the Company on mortgage loans are primarily determined by the 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.
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.
The following table sets forth information regarding restructured and nonaccrual loans and REO held by the Company at the dates indicated.
In addition to the nonaccrual loans reflected in the above table, at September 30, 2006, the Company had $0.1 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 .09% at September 30, 2006. 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.
The following table analyzes the Companys allowance for loan losses at the dates indicated.
The following table sets forth the allocation of the Companys allowance for loan losses at the dates indicated.
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 Regulation - Washington Federal Savings - Regulatory Capital Requirements below.
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 and mortgage-backed securities.
The following table sets forth the composition of the Companys investment portfolio at the dates indicated.
The investment portfolio at September 30, 2006 was categorized by maturity as follows:
Sources of Funds
General. Deposits are an important source of the Companys funds for use in lending and other general business purposes. In addition to deposits, Washington Federal derives funds from loan repayments, advances from the FHLB and other borrowings and, to a lesser extent, from investment repayments and sales. Loan repayments are a relatively stable source of funds, while deposit 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 deposit inflows at less than projected levels. They may also be used on a longer-term basis to support expanded activities.
Deposits. 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. Early withdrawal penalties during 2004, 2005 and 2006 amounted to approximately $405,000, $570,000 and $991,000, respectively.
The Company offers two checking account products; the accounts pay interest on monthly average balances over $1,000 and $10,000 respectively.
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, 2006, approximately 1.0% of the Companys deposits were held by nonresidents of Washington, Oregon, Idaho, Arizona, Utah, Nevada and Texas.
The following table sets forth certain information relating to the Companys savings deposits at the dates indicated.
The following table sets forth, by various interest rate categories, the amount of certificates of deposit of the Company at September 30, 2006, which mature during the periods indicated.
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 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.
At September 30, 2006, the Company had $1.2 billion of certificates of deposit in amounts of $100,000 or more outstanding, maturing as follows: $339 million within 3 months; $228 million over 3 months through 6 months; $472 million over 6 months through 12 months; and $177 million thereafter.
The following table sets forth the customer account and customer repurchase activities of the Company for the years indicated.
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 Regulation - Washington 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 had $1.5 billion of FHLB advances outstanding at September 30, 2006.
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 $700 million of securities sold under such agreements at September 30, 2006. See Note I to the financial statements for additional information.
The Company may need to borrow funds for short periods of time to meet day-to-day financing needs. In these instances, funds are borrowed from other financial institutions for periods generally ranging from 1 to 7 days at the then current borrowing rate. At September 30, 2006, the Company had $170 million of such short-term borrowings.
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 FDIC and are classified as borrowings for regulatory purposes. The Company had $26.0 million of such agreements outstanding at September 30, 2006.
The following table presents certain information regarding borrowings of Washington Federal for the years indicated.
The following table sets forth certain ratios related to the Company for the periods indicated.
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.
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.
At September 30, 2006, the Company had approximately $3.1 billion more liabilities subject to repricing in the next year than assets, which amounted to a negative maturity gap of 34% of total assets. As of September 30, 2005, the amount of excess liabilities subject to repricing within one year was approximately $2.1 billion or 26% of total assets. The increase of approximately $930 million of liabilities in excess of assets repricing within one year was due to the investment of cash and cash equivalents into long term assets and deposit growth. By having an excess of liabilities repricing within one year over assets, the Company is subject to decreasing net interest income should interest rates rise. However, if the size and/or mix of the balance sheet changes, rising rates may not cause a decrease in net interest income.
One 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).
September 30, 2006
September 30, 2005
At September 30, 2006, 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 leverage its balance sheet by increasing short-term borrowings and investing 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, 2006, the estimated prepayment rate for both a 30 year fixed-rate mortgage and a 30 year fixed-rate mortgage-backed security with rates from 6% to 7% was 13% in the base case, and 8% in the +200 basis point shift.
The following table sets forth Company guidelines for interest rate risk measured by NPV after shifts in interest rates:
As of September 30, 2006 and 2005 the Companys estimated NPV exceeded the above guidelines.
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 Savings 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. Washington Federal Savings 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, 2006, Washington Federal Savings was authorized under the current regulations to have a maximum investment of $181.4 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, 2006, Washington Federal Savings investment in, and unsecured loans to, its wholly owned service corporations amounted to $3.6 million.
Washington Services, Inc., a wholly owned subsidiary of Washington Federal Savings, is continuing its investment in 8 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.
As of September 30, 2006, the Company had approximately 765 employees, including the full-time equivalent of 23 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.
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.
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 under the Patriot Act which apply 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.
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. The Sarbanes-Oxley Act of 2002 (SOA) imposed significant new responsibilities on publicly held companies such as Washington Federal, particularly in the area of corporate governance. Washington Federal, like other public companies, has reviewed and reinforced its internal controls and financial reporting procedures in response to the various requirements of SOA and implementing regulations issued by the SEC and the Nasdaq Stock Market. Washington Federal has observed and will continue to observe full compliance with these new legal requirements.
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 DIF and its deposits are insured by the DIF 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 DIF 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 DIF-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 1.24 basis points was added to the DIF assessment to cover financing corporation debt service payments for 2006.
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.
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, 2006, 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, 2006, Washington Federal Savings exceeded the requirements of a well capitalized institution.
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, 2006, 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.
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, 2006, the Companys advances from the FHLB amounted to $1.5 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, 2006, 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.
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 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.
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 corporate 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.
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:
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 $62.2 million at September 30, 2006.
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, 2006.
The information required herein, with the exception of the table below, is incorporated by reference from page 35 of the Companys Annual Report to Stockholders for 2006 (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, 2006.
The information required herein is incorporated by reference from page 9 of the Annual Report.
The information required herein is incorporated by reference on pages 4 through 8 of the Annual Report.
The information required herein is incorporated by reference to Interest Rate Risk commencing on page 19 of this Form 10-K.
The financial statements and supplementary data required herein are incorporated by reference from pages 10 through 34 of the Annual Report.
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-15. 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.
The annual Managements 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 pages 33 and 34 of the Annual Report.
The information required herein is incorporated by reference to pages 4 through 13 of the Proxy Statement dated December 15, 2006 for the Companys annual meeting of stockholders to be held on January 25, 2007 (Proxy Statement).
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 report on Form 8-K.
The information required herein is incorporated by reference to pages 14 through 18 of the Proxy Statement.
The information required herein is incorporated by reference to pages 2 through 8 of the Proxy Statement.
The information required in this item 12 regarding equity compensation plans is incorporated by reference to Note L on pages 26 through 28 of the Annual Report.
The information required herein is incorporated by reference to page 20 of the Proxy Statement.
The information required herein is incorporated by reference to page 21 of the Proxy Statement.
(a)(1) The following financial statements are incorporated herein by reference from pages 10 through 34 of the Annual Report.
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of September 30, 2006 and 2005
Consolidated Statements of Operations for each of the years in the three-year period ended September 30, 2006
Consolidated Statements of Stockholders Equity for each of the years in the three-year period ended September 30, 2006
Consolidated Statements of Cash Flows for each of the years in the three-year period ended September 30, 2006
(a)(2) There are no financial statement schedules filed herewith.
(a)(3) The following exhibits are filed as part of this report:
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.
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.