ANNUAL REPORT 2003 WASHINGTON FEDERAL, INC.

Transcription

1 ANNUAL REPORT 2003 WASHINGTON FEDERAL, INC.

2 TABLE OF CONTENTS Financial Highlights 1 To Our Stockholders 2 Management s Discussion 4 Selected Financial Data 8 Financial Statements 9 Notes to Financial Statements 14 Independent Auditors Report 29 General Information 29 Directors, Officers and Offices 30 A SHORT HISTORY Washington Federal, Inc. (Company) is a savings and loan holding company headquartered in Seattle, Washington. Its principal subsidiary is Washington Federal Savings (Association), which operates 119 offices in eight western states. The Association had its origin on April 24, 1917 as Ballard Savings and Loan Association. In 1935, the statechartered Association converted to a federal charter, became a member of the Federal Home Loan Bank (FHLB) system and obtained federal insurance. In 1958, Ballard Federal Savings and Loan Association merged with Washington Federal Savings and Loan Association of Bothell, and the latter name was retained for wider geographical acceptance. In 1971, Seattle Federal Savings and Loan Association, with three offices, merged into the Association, and at the end of 1978, was joined by the 10 offices of First Federal Savings and Loan Association of Mount Vernon. On November 9, 1982, the Association converted from a federal mutual to a federal stock association. In 1987 and 1988, acquisitions of United First Federal, Provident Federal Savings and Loan, and Northwest Federal Savings and Loan, all headquartered in Boise, Idaho, added 28 Idaho offices to the Association. In 1988, the acquisition of Freedom Federal Savings and Loan Association in Corvallis, Oregon, added 13 Oregon offices, followed in 1990 by the eight Oregon offices of Family Federal Savings. In 1991, the Association added three branches with the acquisition of First Federal Savings and Loan Association of Idaho Falls, Idaho, and acquired the deposits of First Western Savings Association of Las Vegas, Nevada, in Portland and Eugene, Oregon, where they were doing business as Metropolitan Savings Association. In 1993, 10 branches were added with the acquisition of First Federal Savings Bank of Salt Lake City, Utah. In 1994, the Association expanded into Arizona. In 1995, the stockholders approved a reorganization whereby Washington Federal Savings became a wholly owned subsidiary of a newly formed holding company, Washington Federal, Inc. That same year, the Association purchased West Coast Mutual Savings Bank with its one branch in Centralia, Washington, and opened six additional branches. In 1996, the Association acquired Metropolitan Bancorp of Seattle, adding eight offices in Washington in addition to opening four branches in existing markets. Between 1997 and 1999, Washington Federal Savings continued to develop its branch network, opening a total of seven branches and consolidating three offices into existing locations. In 2000, the Association expanded into Las Vegas, opening its first branch in Nevada along with two branches in Arizona. In 2001, the Association opened two additional branches in Arizona and its first branch in Texas with an office in the Park Cities area of Dallas. In 2002, Washington Federal Savings opened five full-service branches in existing markets and entered Colorado with a loan production office. In 2003, the Association purchased United Savings and Loan Bank with its four branches in the Seattle metropolitan area, added one new branch in Puyallup, Washington and consolidated one branch in Nampa, Idaho. The Association obtains its funds primarily through savings deposits from the general public, from repayments of loans, borrowings and retained earnings. These funds are used largely to make first lien loans to borrowers for the purchase of new and existing homes, the acquisition and development of land for residential lots, the construction of homes, the financing of small multi-family housing units, and for investment in obligations of the U.S. government, its agencies and municipalities. The Association also has a wholly-owned subsidiary, First Insurance Agency, Inc., which provides general insurance to the public.

3 FINANCIAL HIGHLIGHTS September 30, % Change (In thousands, except per share data) Assets $7,535,975 $7,392,441 +2% Cash and cash equivalents ,437, , Investment securities , , Loans receivable and securitized assets subject to repurchase ,817,508 5,047,964 5 Mortgage-backed securities , , Customer accounts ,577,598 4,521, FHLB advances and other borrowings ,750,000 1,750,000 Stockholders equity ,055, , Net income , , Diluted earnings per share Dividends per share Stockholders equity per share Shares outstanding ,173 69,895 Return on average stockholders equity % 16.89% Return on average assets Efficiency ratio TOTAL ASSETS STOCKHOLDERS EQUITY NET INCOME PER DILUTED SHARE Dollars in Millions (At September 30) Dollars in Millions (At September 30) $ 5,637 7, , ,241 3, CASH DIVIDENDS PER SHARE $ 1.00 RETURN ON AVERAGE EQUITY Annualized % 21.0 INTEREST RATE SPREAD End of Quarter % Dec 31 Mar 31 Jun 30 Sep 30 Fiscal Years:

4 TO OUR STOCKHOLDERS Dear Stockholder: It is a privilege to report that your company achieved outstanding financial results again last year. While net income of $145,544,000 represented a modest 1.1% increase over fiscal 2002, it was nonetheless our best year ever. This is the 19th time in 21 years as a public entity that your company has reported an increase in operating results over the prior year. Earnings per share also improved to a record $2.07, a 1.5% increase over last year. Return on assets reached the gold standard for our industry of 2.00%, while return on equity amounted to a respectable 15.60%. Continued strong earnings also enabled the board of directors to increase your cash dividend for the 38th time since 1982 to an annualized $.88 per share. During the year, your company s balance sheet also strengthened. Assets grew to $7.536 billion and capital exceeded $1 billion at fiscal year-end for the first time. The quality of the company s assets remained high. Recent industry reports credit Washington Federal with the lowest ratio of past due loans among the largest mortgage servicing companies in the nation, while non-performing assets declined by 19% to $27 million, and net charge-offs fell to $1.2 million, the lowest in three years. Due to management s decision to invest cautiously given historically low interest rates, liquid assets continued to increase. At year-end, over $1.5 billion of the company s assets were invested very short-term, representing a potentially significant increase in future revenues. With three times the minimum capital required by our regulators, strong earnings, unprecedented liquidity and excellent asset quality, we continue to believe that we are indeed One of America s Strongest Financial Institutions. Having said all that, it s equally important to note that the past two years of peak financial performance occurred in a favorable climate for our business. It would seem imprudent to expect such conditions to persist indefinitely. For example, abnormally high prepayments of mortgage loans and mortgage backed securities during each of the past two years caused a temporary surge in interest income. This occurred because deferred revenues, primarily loan fees collected at origination and securities discounts that normally amortize over a longer period of time, were accelerated into current accounting periods. The company has also benefited from a very steep yield curve, meaning a historically wide spread between short and long-term interest rates, which we know from hard experience won t last forever. In 2003, we also reached a cyclical top in the demand for mortgage loans. With the passing of the refinance boom, we are already experiencing a slowdown in the mortgage market and we expect intensified price competition until the hangover of excess capacity in the industry melts away. The good news is that, in choosing not to maximize current earnings, the flexibility to take advantage of changing market conditions was preserved. During the past year we focused on building liquidity and increasing net worth as a percentage of assets. This approach had a cost to current earnings, but offered the benefit of less interest rate risk and the potential for higher earnings in the future than we might otherwise have achieved. With interest rates higher at present, it appears that we will have the opportunity to invest at better rates than we could have during recent quarters. Therefore, we believe that your company is well positioned to continue its long tradition of outperforming the industry. On August 31st, the acquisition of United Savings and Loan Bank was finalized. This was our first acquisition since 1996, and added $344 million in assets and $268 million in deposits. United was established in 1960 to provide financial services to immigrants to Seattle from Asian countries, primarily China, who at that time had difficulty accessing the banking system. It is a privilege to welcome the employees and customers of this unique company to Washington Federal. With the addition of four United branches in Seattle, one new office in Puyallup, Washington, and the consolidation of one office in Nampa, Idaho, the branch count at year-end totaled 119. During the year, we also completed a management transition that has been underway for many years. Linda Brower, who joined us in January to head Human Resources, was recently promoted to Executive Vice President. Brent Beardall, in his third year with Washington Federal, was promoted to Senior Vice President and Chief Financial Officer. Linda and Brent join Ed Hedlund, Jack Jacobson and myself on the Executive Management Committee. My hope is that this outstanding group of executives will work with the board and me to lead and manage the company for the next ten to fifteen years. Recently, we also added two new members to the Board of Directors. Derek Chinn, former President & CEO of United Savings and Loan Bank joined the board in September. Tom Kenney, VP Finance and the principal financial officer of Haggen, Inc., a Bellingham, Washington based grocery store chain, joined the board in October. Prior to joining Haggen, 2

5 Inc. in 1996, Mr. Kenney spent 20 years in the financial services industry. Both new directors will serve on the board s Audit Committee and possess the financial literacy necessary to represent shareholder interests in that important capacity. I thank them both for their willingness to serve during a time when so much is expected of directors. Alas, some good people are moving on, too. At the Annual Meeting in January, 2004 Kermit Hanson, Dean Emeritus of the Graduate School of Business at the University of Washington and a director since 1966, will retire from the Board. I hope that you will take a moment at the meeting to thank him for his 38 years of outstanding service to the company. I also wish (Standing - left to right) Edwin C. Hedlund, Executive Vice President and Secretary, Roy M. Whitehead, Vice Chairman, President and Chief Executive Officer, Linda S. Brower, Executive Vice President, (Seated - left to to recognize Ron Saper, former right) Jack B. Jacobson, Executive Vice President and Chief Lending Officer, Brent J. Beardall, Senior Vice Executive Vice President, who retired President and Chief Financial Officer. this year after serving 11 years as your company s Chief Financial Officer. The legacy of Ron s financial discipline will benefit stockholders for years to come. In August, Standard & Poor s, in a promotion of sorts, removed Washington Federal from their Small Cap 600 Index and added our stock to their Mid Cap 400 Index. This was nice recognition of the growth in the market value of your company, and exposes our stock to a whole new universe of investors. It s interesting to note that, although we still think of ourselves as a small company, our current market capitalization of nearly $2 billion places us in the top 10% of all NASDAQ companies, and in the top 30% of all NYSE companies. Based on net income last year, our rankings are even higher: top 2% of NASDAQ companies and top 20% of NYSE companies. In closing, I wish to thank our customers, employees, stockholders and directors for their continuing support. Let me also remind you to send your friends, neighbors and relatives to Washington Federal for their home loans and savings needs. I hope to see you at the Annual Stockholders Meeting scheduled at 2:00 pm, on Wednesday, January 21, 2004 at the Sheraton Hotel in downtown Seattle, Washington. Sincerely, Roy M. Whitehead Vice Chairman, President and Chief Executive Officer 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL CRITICAL ACCOUNTING POLICIES INTEREST RATE RISK ASSET QUALITY LIQUIDITY AND CAPITAL RESOURCES Washington Federal, Inc. (Company) is a savings and loan holding company. The Company s primary operating subsidiary is Washington Federal Savings (Association). Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses in the Company s consolidated financial statements. Accordingly, estimated amounts may fluctuate from one reporting period to another due to changes in assumptions underlying estimated values. The Company has determined that the only accounting policy deemed critical to an understanding of the consolidated financial statements of Washington Federal, Inc. relates to the methodology for determining the valuation of the allowance for loan losses, as more fully described under Loans receivable in Note A to the Consolidated Financial Statements. The Company accepts a high level of interest rate volatility as a result of its policy to originate fixed-rate single family home loans that are longer-term than the short-term characteristics of its liabilities of customer accounts and borrowed money. At September 30, 2003, the Company had approximately $1,200,000,000 more liabilities subject to repricing in the next year than assets subject to repricing, which amounted to a negative maturity gap of 16% of total assets, compared to a negative maturity gap of 26% in the prior year. The Company s interest rate risk approach has never resulted in the recording of a monthly operating loss. The Company s net interest spread decreased from 3.01% at September 30, 2002 to 2.47% at September 30, The spread decreased primarily from record low interest rates on mortgages, as well as a continued shift in the asset mix toward shorter-term assets. As of September 30, 2003, 19.1% of the Company s assets were in short-term investments. During this phase of the interest rate cycle the Company chose to build cash, reduce the amount of loans and mortgage-backed investments and maintain customer deposits with little or no growth. As of September 30, 2003, the Company had accumulated $1,437 million in cash and cash equivalents, which can be invested longterm in the future to generate additional revenues. This cash position was generated principally through the net runoff of loans and mortgage-backed investments of $441 million and $94 million of cash provided by the acquisition of United Savings and Loan Bank (United). The Company maintains an allowance to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. In analyzing the existing loan portfolio, the Company applies specific loss percentage factors to the different loan types. The loss percentages are based on Management s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience and current economic conditions. Multi-family loans, builder construction loans and certain other loans are reviewed on an individual basis to assess the ability of the borrowers to continue to service all of their principal and interest obligations. If the loans show signs of weakness, they are downgraded and, if warranted, placed on non-accrual status. The Company has an Asset Quality Review Committee that reports the results of its internal reviews to the Board of Directors on a quarterly basis. Non-performing assets were $27,434,000, or.36% of total assets at September 30, 2003 compared to $33,876,000, or.46% of total assets at September 30, Total delinquencies over 30 days were $34,736,000, or.46% of total assets at September 30, 2003 compared to $37,419,000, or.51% of total assets at September 30, The aforementioned asset quality indicators, when compared to others in the industry, demonstrate the continued excellent quality of the loan portfolio. The Company s net worth at September 30, 2003 was $1,055,596,000, or 14.0% of total assets. This is an increase of $94,878,000 from September 30, 2002 when net worth was $960,718,000, or 13.0% of total assets. The Company s net worth increased due in part to net income of $145,544,000, proceeds received from the exercise of common stock options of $4,726,000, purchases by the Employee Stock Ownership Plan of $1,522,000 and acquisition-related stock issuances of $33,282,000. Net worth was reduced by $60,004,000 as a result of cash dividends paid, a decrease in unrealized gains on available-for-sale securities of $21,376,000 and $10,034,000 of stock repurchases. The ratio of net worth to total assets remains at a high level despite the distribution of 41.2% of earnings in the form of cash dividends. Washington Federal s percentage of net worth to total assets is among the highest in the nation and is over three times the minimum required under Office of Thrift Supervision (OTS) regulations (see Note O). Management believes this strong net worth position will help protect the Company against interest rate risk and will enable it to compete more effectively. Customer accounts increased $55,676,000, or 1.2% from one year ago, largely due to the acquisition of $269,924,000 of deposits in connection with the United merger, offset by net runoff of existing deposits of $214,248,000. Management s strategy during this phase of the interest rate cycle has been to keep deposit growth to a minimum until excess cash is deployed into higher yielding investments. The Company s cash and cash equivalents amounted to $1,437,208,000 at September 30, 2003, a significant increase from $975,153,000 one year ago. This continued shift in the balance sheet from long-term assets to short-term assets resulted from the decision to position the balance sheet to protect against the possibility of rising interest rates in the future. See Interest Rate Risk above. 4

7 CHANGES IN FINANCIAL POSITION RESULTS OF OPERATIONS Available-for-sale and held-to-maturity securities. The Company purchased $559,995,000 of mortgage-backed and investment securities during fiscal 2003, $459,895,000 of which have been categorized as available-for-sale and $100,100,000 of which have been classified as held-to-maturity. The Company had $80,000,000 in sales of available-for-sale securities, resulting in a net realized gain of $992,000. As of September 30, 2003, the Company had unrealized gains in its available-for-sale portfolio of $34,624,000, net of tax, which are recorded as part of stockholders equity. Loans receivable and securitized assets subject to repurchase. Loans receivable and securitized assets subject to repurchase decreased 4.6% to $4,817,508,000 at September 30, 2003 from $5,047,964,000 one year earlier. The decrease resulted from Management s decision not to aggressively compete based on price during periods of increased refinancing activity caused by record low home mortgage rates. The allowance for losses on loans and securitized assets subject to repurchase increased $1,894,000 during the year as a result of the United acquisition, which added $1,597,000 in allowance, and provision in excess of net charge-offs of $297,000. The growth in the total allowance resulted primarily from the acquisition of United and changes in both the geographic mix and loan mix of the portfolio. The percentage of loans outside of Washington, Idaho, Oregon, Utah and Arizona increased to 10.5% at September 30, 2003 from 1.6% one year earlier as a result of the purchase of $418,000,000 of whole loans on residences primarily in California. Construction and land loans increased to 16.5% of the portfolio at September 30, 2003 from 14.1% at September 30, The amount of reserves allocated to impaired loans increased to $1,000,000 at September 30, 2003 from no allocation in the prior year based on the estimated value of the underlying collateral of the impaired loans. Real estate held for sale. The balance at September 30, 2003 was $16,204,000, a decrease from $17,587,000 reported one year ago. FHLB stock. FHLB stock amounted to $143,851,000 at September 30, 2003 compared with $132,320,000 one year ago. The Company received $8,155,000 in stock dividends during the year and $3,376,000 in stock that was acquired from United. Intangible assets. On August 31, 2003, the Company acquired United. The acquisition produced goodwill of $19,263,000, a core deposit intangible of $4,921,000 and a non-compete agreement intangible of $575,000. As a result, goodwill increased to $54,966,000 at September 30, 2003 compared to $35,703,000 one year ago. Additionally, the unamortized balance of the core deposit intangible and the non-compete agreement intangible were $4,805,000 and $565,000, respectively, at September 30, Other assets. Other assets increased $10,682,000 to $12,073,000 at September 30, 2003 from a commitment the Company made to invest a total of $10,000,000 into a partnership to provide low-income housing. As of September 30, 2003, only $100,000 had been invested. Current accounting rules require that the total amount of the unfunded investment commitment, $9,900,000, be reported as both an other liability and an other asset. Customer accounts. Customer accounts at September 30, 2003 totaled $4,577,598,000 compared with $4,521,922,000 at September 30, 2002, a 1.2% increase. See Liquidity and Capital Resources above. FHLB advances and other borrowings. Total borrowings of $1,750,000,000 at September 30, 2003 remained unchanged from one year ago. See Interest Rate Risk above. GENERAL Fiscal 2003 net income increased 1% from fiscal See Note S, Selected Quarterly Financial Data (Unaudited), which highlights the quarter-by-quarter results for the years ended September 30, 2003 and Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep Interest rate on loans and mortgage-backed securities* % 7.41% 7.35% 7.26% 7.10% 6.94% 6.68% 6.40% Interest rate on investment securities** Combined Interest rate on customer accounts Interest rate on borrowings Combined Interest rate spread % 3.20% 3.20% 3.01% 2.74% 2.68% 2.49% 2.47% * Includes securitized assets subject to repurchase **Includes municipal bonds at tax-equivalent rates and cash equivalents The interest rate spread decreased during fiscal 2003 from 3.01% at September 30, 2002 to 2.47% at September 30, See Interest Rate Risk above. COMPARISON OF FISCAL 2003 RESULTS WITH FISCAL 2002 Interest income on loans, securitized assets subject to repurchase and mortgage-backed securities decreased $66,203,000 (13.7%) in fiscal 2003 from 2002 as interest rates declined to 6.40% from 7.26% one year ago. The Company originated $1,867,112,000 in loans, which was more than offset by loan repayments and payoffs of 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) $2,604,297,000 in fiscal Interest income benefited from $44.5 million of net accretion of loan fees and discounts on mortgage-backed securities during fiscal 2003, an increase of $15.6 million from the prior year caused by record prepayments of mortgages and related securities. If prepayment speeds return to historical levels, this additional accretion will subside. Interest and dividend income on investment securities and cash equivalents increased $11,428,000 (50.7%) in fiscal 2003 from fiscal Rates declined to 1.98% at September 30, 2003 compared with 2.82% at September 30, The combined investment securities, cash equivalents and FHLB stock portfolio increased 56.4% to $1,839,847,000 at September 30, 2003 versus $1,176,737,000 one year ago. Interest expense on customer accounts decreased 30.4% to $105,919,000 for fiscal 2003 from $152,288,000 for fiscal The decrease related to a small increase in customer accounts to $4,577,598,000 from $4,521,922,000 the prior year, coupled with a significant decrease in the cost of customer accounts to 1.96% at year end compared to 2.94% one year ago. Interest expense on FHLB advances and other borrowings increased to $88,965,000 in fiscal 2003 from $82,653,000 in fiscal 2002 primarily due to an increase in average borrowings to $1,750,648,000 as of September 30, 2003 from $1,568,220,000 one year ago. The average cost of borrowings as of September 30, 2003 remained constant at 5.03% from one year ago. The provision for loan losses was $1,500,000 for fiscal 2003 compared to $7,000,000 in fiscal This decrease reflects the continued decline in the amount of the loan portfolio combined with strong asset quality indicators. Non-performing assets remained low at $27,434,000, or.36% of total assets at September 30, 2003 compared with $33,876,000, or.46% of total assets at September 30, Management believes the allowance for loan losses, totaling $25,806,000, or 94% of non-performing assets, is adequate to absorb estimated losses inherent in the portfolio. Total other income increased $6,929,000 (85.7%) in fiscal 2003 from fiscal This increase is primarily the result of fee income related to prepayments and the refinancing of mortgage loans and a $3,382,000 gain on the sale of real estate. Net gains on the sale of securities totaled $992,000 in fiscal 2003 compared to $765,000 in fiscal Total other expense decreased $4,812,000 (9.8%) in fiscal 2003 over fiscal Compensation expense decreased $3,213,000 in fiscal 2003, primarily attributable to a larger bonus being paid to all employees in fiscal 2002 versus fiscal Routine operating expenses, including data processing, decreased $2,044,000 in fiscal 2003 due to reduced depreciation expense of $422,000 and general cost containment measures. Personnel, including part-time employees considered on a full-time equivalent basis, increased to 754 at September 30, 2003 compared to 726 at September 30, The branch network increased to 119 offices at September 30, 2003 versus 115 offices one year ago. The United acquisition added 36 full-time equivalent employees and four branches. Other expense for fiscal 2003 equaled.61% of average assets compared with.70% in fiscal Income tax expense increased $621,000 (0.8%) in fiscal The effective tax rate was 35.19% for fiscal 2003 versus 35.25% for fiscal COMPARISON OF FISCAL 2002 RESULTS WITH FISCAL 2001 Interest income on loans, securitized assets subject to repurchase and mortgage-backed securities decreased $33,792,000 (6.5%) in fiscal 2002 from 2001 as average interest rates declined to 7.26% from 7.61% one year ago. The Company originated $1,430,834,000 in loans, which was more than offset by loan repayments and payoffs of $1,823,281,000 in fiscal Interest and dividend income on investment securities and cash equivalents increased $4,634,000 (25.9%) in fiscal 2002 from fiscal The weighted-average yield declined to 2.82% at September 30, 2002 compared with 7.79% at September 30, The combined investment securities, cash equivalents and FHLB stock portfolio increased 336% to $1,176,737,000 at September 30, 2002 versus $270,085,000 one year ago. Interest expense on customer accounts decreased 21.8% to $152,288,000 for fiscal 2002 from $194,710,000 for fiscal The decrease related to an increase in customer accounts to $4,521,922,000 from $4,316,692,000 the prior year coupled with a significant decrease in the average cost of customer accounts to 2.94% at year end compared to 4.31% one year ago. Interest expense on FHLB advances and other borrowings decreased to $82,653,000 in fiscal 2002 from $125,410,000 in fiscal 2001 primarily due to a decline in average borrowings to $1,568,220,000 as of September 30, 2002 from $2,264,001,000 one year ago. This decrease in average volume was coupled with a decrease in average rates to 5.03% as of September 30, 2002 from 5.09% at September 30, The provision for loan losses was $7,000,000 for fiscal 2002 compared to $1,850,000 in fiscal This increase reflects the continued decline in economic conditions in the markets the Company serves, including high unemployment levels and a slowdown in the home construction market in the Pacific Northwest. However, non-performing assets remained low at $33,876,000, or.46% of total assets at September 30, 2002 compared with $33,758,000, or.48% of total assets at September 30, Management believes the allowance for loan losses, totaling $23,912,000, or 71% of non-performing assets, is adequate to absorb estimated losses inherent in the portfolio. Total other income decreased $1,648,000 (16.9%) in fiscal 2002 from fiscal Net gains on the sale of securities totaled $765,000 in fiscal 2002 compared to $3,235,000 in fiscal The decline was partially offset by a one time gain of $515,000 on the disposition of a branch in fiscal Total other expense increased $2,050,000 (4.4%) in fiscal 2002 over fiscal Compensation expense increased $5,776,000 in fiscal 2002, primarily attributable to a bonus paid to all employees based on improved 6

9 operating results (adjusted by goodwill amortization); however, this was offset by the elimination of goodwill amortization expense of $5,875,000 over fiscal Routine operating expenses, including data processing, increased $1,868,000 in fiscal 2002 largely due to the installation of a new teller system. Personnel, including part-time employees considered on a full-time equivalent basis, increased to 726 at September 30, 2002 compared to 714 at September 30, The branch network increased to 115 offices at September 30, 2002 versus 111 offices one year ago. Other expense for fiscal 2002 equaled.70% of average assets compared with.68% in fiscal Income tax expense increased $16,550,000 (26.8%) in fiscal The effective tax rate was 35.25% for both fiscal 2002 and

10 SELECTED FINANCIAL DATA Year ended September 30, (In thousands, except per share data) Interest income $450,185 $504,960 $534,118 $495,949 $453,620 Interest expense , , , , ,490 Net interest income , , , , ,130 Provision for loan losses ,500 7,000 1, Other income ,823 8,206 10,137 11,309 12,779 Other expense ,059 48,871 46,821 44,568 44,144 Income before income taxes , , , , ,081 Income taxes ,021 78,400 61,850 57,500 62,795 Net income $145,544 $143,954 $113,614 $105,679 $114,286 Per share data Basic earnings $2.09 $2.06 $1.63 $1.51 $1.55 Diluted earnings Cash dividends September 30, Total assets $7,535,975 $7,392,441 $7,026,743 $6,719,841 $6,163,503 Loans and mortgage-backed securities*.. 5,465,654 6,018,248 6,570,309 6,277,340 5,731,644 Investment securities** ,696,169 1,044, , , ,753 Customer accounts ,577,598 4,521,922 4,316,692 3,465,270 3,379,502 FHLB advances ,650,000 1,650,000 1,637,500 1,209,000 1,454,000 Other borrowings , ,000 30,000 1,154, ,257 Stockholders equity ,055, , , , ,023 Number of Customer accounts , , , , ,419 Mortgage loans ,975 38,096 42,032 41,741 40,104 Offices * Includes securitized assets subject to repurchase **Includes cash equivalents 8

11 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, ASSETS Cash and cash equivalents, including repurchase agreements of $1,350,000 and $925, $1,437,208 $ 975,153 Available-for-sale securities, including encumbered securities of $76,921 and $114,583, at fair value , ,776 Held-to-maturity securities, including encumbered securities of $75,690 and $0, at amortized cost , ,925 Securitized assets subject to repurchase, net , ,961 Loans receivable, net ,606,726 4,292,003 Interest receivable ,489 39,503 Premises and equipment, net ,942 55,119 Real estate held for sale ,204 17,587 FHLB stock , ,320 Intangible assets ,336 35,703 Other assets ,073 1,391 LIABILITIES AND STOCKHOLDERS EQUITY $7,535,975 $7,392,441 Liabilities Customer accounts Savings and demand accounts $4,520,051 $4,452,250 Repurchase agreements with customers ,547 69,672 4,577,598 4,521,922 FHLB advances ,650,000 1,650,000 Other borrowings, primarily securities sold under agreements to repurchase , ,000 Advance payments by borrowers for taxes and insurance ,281 22,704 Federal and state income taxes, including net deferred liabilities of $70,485 and $80, ,011 84,235 Accrued expenses and other liabilities ,489 52,862 6,480,379 6,431,723 Stockholders equity Common stock, $1.00 par value, 100,000,000 shares authorized, 85,553,789 and 83,833,244 shares issued; 71,173,487 and 69,894,902 shares outstanding ,554 76,212 Paid-in capital ,085, ,858 Accumulated other comprehensive income, net of tax ,624 56,000 Treasury stock, at cost; 14,380,302 and 13,938,342 shares (207,337) (198,279) Retained earnings ,105 57,927 1,055, ,718 $7,535,975 $7,392,441 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9

12 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended September 30, (In thousands, except per share data) INTEREST INCOME Loans and securitized assets subject to repurchase $353,286 $406,262 $426,240 Mortgage-backed securities ,911 76,138 89,952 Investment securities ,988 22,560 17, , , ,118 INTEREST EXPENSE Customer accounts , , ,710 FHLB advances and other borrowings ,965 82, , , , ,120 Net interest income , , ,998 Provision for loan losses ,500 7,000 1,850 Net interest income after provision for loan losses , , ,148 OTHER INCOME Gain on sale of securities, net ,235 Gain on sale of real estate ,382 Other ,643 7,323 6,501 15,017 8,088 9,736 OTHER EXPENSE Compensation and fringe benefits ,846 34,059 28,283 Amortization of intangibles ,875 Occupancy expense ,098 4,778 4,497 Other ,989 10,034 8,166 44,059 48,871 46,821 Gain (loss) on real estate acquired through foreclosure, net (194) Income before income taxes , , ,464 Income taxes Current ,403 79,423 58,641 Deferred (1,382) (1,023) 3,209 79,021 78,400 61,850 NET INCOME $145,544 $143,954 $113,614 PER SHARE DATA Basic earnings $ 2.09 $ 2.06 $ 1.63 Diluted earnings Cash dividends Weighted average number of shares outstanding, including dilutive stock options ,232,695 70,523,160 70,461, SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Accumulated Other Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings Income Stock Total Balance at October 1, $ 62,296 $ 785,745 $ 98,142 $ 3,000 $ (190,018) $ 759,165 Eleven-for-ten stock split distributed February 23, , ,767 (108,105) (91) Comprehensive income: Net income , ,614 Other comprehensive income, net of tax of $26,131: Unrealized gains on securities ,095 50,095 Reclassification adjustment for gains on securities sold (2,095) (2,095) Total comprehensive income ,614 Dividends (54,011) (54,011) Proceeds from exercise of common stock options ,663 6,122 Proceeds from Employee Stock Ownership Plan ,152 Restricted stock (58) 58 Balance at September 30, , ,633 49,582 51,000 (189,212) 874,009 Eleven-for-ten stock split distributed February 22, ,905 70,824 (77,792) (63) Comprehensive income: Net income , ,954 Other comprehensive income, net of tax of $2,722: Unrealized gains on securities ,495 5,495 Reclassification adjustment for gains on securities sold (495) (495) Total comprehensive income ,954 Dividends (57,383) (57,383) Proceeds from exercise of common stock options ,462 3,744 Proceeds from Employee Stock Ownership Plan ,157 1,618 Restricted stock (434) 63 Treasury stock purchases (10,224) (10,224) Balance at September 30, $ 76,212 $ 968,858 $ 57,927 $ 56,000 $ (198,279) $ 960,718 Eleven-for-ten stock split distributed February 21, ,622 79,612 (87,368) (134) Comprehensive income: Net income , ,544 Other comprehensive income, net of tax of $11,637: Changes in unrealized gains on securities (20,733) (20,733) Reclassification adjustment for gains on securities sold (643) (643) Total comprehensive income ,168 Dividends (60,004) (60,004) Proceeds from exercise of common stock options ,369 4,726 Tax benefit related to exercise of stock options ,218 1,218 Proceeds from Employee Stock Ownership Plan ,522 Restricted stock (212) 134 Acquisition-related stock issuance ,349 31,933 33,282 Treasury stock purchases (10,034) (10,034) Balance at September 30, $85,554 $1,085,650 $ 57,105 $ 34,624 $(207,337) $1,055,596 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11

14 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 145,544 $ 143,954 $ 113,614 Adjustments to reconcile net income to net cash provided by operating activities Amortization of fees, discounts and premiums, net (13,850) (6,103) (143) Amortization of intangible assets ,874 Depreciation ,099 3,521 2,996 Provision for loan losses ,500 7,000 1,850 Gain on investment securities and real estate held for sale, net (4,180) (883) (3,636) Decrease (increase) in accrued interest receivable ,126 8,777 (7,580) Increase (decrease) in income taxes payable (5,308) (11,883) 15,106 FHLB stock dividends (8,155) (7,959) (8,047) Decrease (increase) in other assets (10,151) (376) 3,714 Increase in accrued expenses and other liabilities ,226 1,634 1,436 Net cash provided by operating activities , , ,184 CASH FLOWS FROM INVESTING ACTIVITIES Loans and contracts originated Loans on existing property (1,078,374) (892,595) (1,157,278) Construction loans (487,692) (363,420) (369,808) Land loans (163,533) (87,212) (130,161) Loans refinanced (137,513) (87,607) (86,969) (1,867,112) (1,430,834) (1,744,216) Savings account loans originated (1,866) (5,765) (3,342) Loan principal repayments ,604,297 1,823,281 1,318,784 Increase (decrease) in undisbursed loans in process ,804 (13,323) (29,503) Loans purchased (417,669) (60,874) (2,842) Available-for-sale securities purchased (459,895) (180,683) (89,882) Principal payments and maturities of available-for-sale securities , , ,992 Available-for-sale securities sold ,000 10,000 50,282 Held-to-maturity securities purchased (100,100) Principal payments and maturities of held-to-maturity securities ,812 80,154 45,325 Cash provided by acquisition ,314 Proceeds from sales of real estate held for sale ,342 19,603 19,268 Premises and equipment purchased, net (4,730) (4,398) (6,751) Net cash provided (used) by investing activities , ,147 (225,885) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in customer accounts (214,248) 205, ,422 Net decrease in short-term borrowings (117,500) (1,646,009) Proceeds from long-term borrowings , ,000 Proceeds from exercise of common stock options ,944 3,744 6,122 Dividends paid (60,004) (57,383) (54,044) Proceeds from Employee Stock Ownership Plan ,522 1,618 1,152 Treasury stock purchased, net (10,034) (10,224) Increase (decrease) in advance payments by borrowers for taxes and insurance.... (737) (492) (5,897) Net cash provided (used) by financing activities (277,557) 224, ,746 Increase in cash and cash equivalents , ,822 2,045 Cash and cash equivalents at beginning of year ,153 30,331 28,286 Cash and cash equivalents at end of year $ 1,437,208 $ 975,153 $ 30, SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15 WASHINGTON FEDERAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Year ended September 30, SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing activities Real estate acquired through foreclosure $ 11,771 $ 20,294 $ 18,229 Non-cash operating activities Assets securitized, subject to repurchase, net ,388,197 Cash paid during the year for Interest , , ,933 Income taxes ,878 90,743 45,746 The following summarizes the non-cash activities relating to the acquisition Fair value of assets and intangibles acquired, including goodwill $ (343,626) $ $ Fair value of liabilities assumed ,872 Fair value of stock issued ,282 Cash paid out in acquisition (33,472) Plus cash acquired ,786 Net cash provided by the acquisition $ 94,314 $ $ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation. The consolidated financial statements include the accounts of Washington Federal, Inc. (Company) and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Description of business. Washington Federal, Inc. is a savings and loan holding company. The Company s principal operating subsidiary is Washington Federal Savings (Association). The Company is principally engaged in the business of attracting savings deposits from the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential real estate loans and multi-family real estate loans. The Company conducts its activities from a network of 119 offices located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, Texas and Colorado. Cash and cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, overnight investments and repurchase agreements with an initial maturity of three months or less. Investments and mortgage-backed securities. The Company accounts for investments and mortgage-backed securities in two categories: held-to-maturity and available-for-sale. Held-to-maturity securities Securities classified as held-to-maturity are accounted for at amortized cost, but the Company must have both the positive intent and the ability to hold those securities to maturity. There are very limited circumstances under which securities in the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the securities in this category. Recognition for unrealized losses is provided if market valuation differences are deemed to be other than temporary. Available-for-sale securities Securities not classified as held-to-maturity are considered to be available-for-sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in the accumulated other comprehensive income component of stockholders equity. Management evaluates debt and equity securities for other than temporary impairment on a quarterly basis based on the securities current credit quality, interest rates, term to maturity and management s intent and ability to hold the securities until the principal is recovered. Any other than temporary declines in fair value are recognized in the income statement as loss from securities. Premiums and discounts on investments are deferred and recognized over the life of the asset using the interest method. Forward contracts to purchase mortgage-backed securities are recorded at fair value on the balance sheet as available-for-sale securities. These contracts are designated by the Company as cash flow hedges of the price risk of the anticipated purchase of securities. Under cash flow hedge accounting, if specific criteria are met, the unrealized gains or losses are recognized as a component of stockholders equity through comprehensive income until the related forecasted purchase of securities occurs, whereupon the remaining unrealized gains or losses are included in the basis of the purchased securities. To the extent that forward contracts to purchase securities fail to meet hedging criteria, including purchasing the mortgage-backed securities within a specific time frame, the fair value of the contracts will be included in earnings. The Company may enter into certain forward contracts to sell mortgage-backed securities to hedge the price risk in certain mortgage-backed securities accounted for as available-for-sale securities. To the extent forward sales contracts meet specific hedging criteria, the market value change associated with the contract is recorded through comprehensive income. To the extent that forward sales contracts fail to meet hedging criteria, the fair value of the contracts will be recorded in earnings. The Company records forward purchases and forward sales contracts net, where it has the legal right of offset, in available-for-sale securities. Securitized assets subject to repurchase. In March 2001, the Company transferred some of its permanent single-family residential loans into a Real Estate Mortgage Investment Conduit (REMIC). The REMIC then issued securities backed by such loans, all of which were retained by the Company. The terms of the transfer of the loans to the REMIC contain a call provision whereby the Company can repurchase the loans when the outstanding balance of the pool declines to 15% or less of the original amount; therefore, the transfer did not qualify as a sale under generally accepted accounting principles. Accordingly, the retained interests continue to be accounted for in a manner similar to loans and are included in the accompanying balance sheet as securitized assets subject to repurchase. Loans receivable. Loans receivable more than 90 days past due are placed on non-accrual status and an allowance for accrued interest is established. Any interest ultimately collected is credited to income in the period of recovery. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. The Company s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances and the unallocated allowance. The formula portion of the general loan loss allowance is established by applying a loss percentage factor to the different loan types. The allowances are provided based on Management s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions geographic concentrations, seasoning of the loan portfolio, specific industry conditions, and the duration of the current business cycle. The recovery of the 14