10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-34654
WASHINGTON FEDERAL, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1661606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
425 Pike Street Seattle, Washington 98101
(Address of principal executive offices and zip code)
(206) 624-7930
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of class:
at February 3, 2016
Common stock, $1.00 par value
91,563,241


Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
 
 
 
 
  
The Consolidated Financial Statements of Washington Federal, Inc. and Subsidiaries filed as a part of the report are as follows:
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)





 
December 31, 2015
 
September 30, 2015
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
305,959

 
$
284,049

Available-for-sale securities, at fair value
2,304,788

 
2,380,563

Held-to-maturity securities, at amortized cost
1,598,370

 
1,643,216

Loans receivable, net
9,402,730

 
9,170,634

Interest receivable
38,259

 
40,429

Premises and equipment, net
288,796

 
276,247

Real estate owned
42,098

 
61,098

FHLB and FRB stock
111,107

 
107,198

Bank owned life insurance
103,281

 
102,496

Intangible assets, including goodwill of $291,503
298,719

 
299,358

Federal and state income tax assets, net
716

 
14,513

Other assets
190,076

 
188,523

 
$
14,684,899

 
$
14,568,324

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
5,924,084

 
$
5,820,878

Time deposit accounts
4,727,035

 
4,810,825

 
10,651,119

 
10,631,703

FHLB advances
1,928,000

 
1,830,000

Advance payments by borrowers for taxes and insurance
21,747

 
50,224

Accrued expenses and other liabilities
113,793

 
100,718

 
12,714,659

 
12,612,645

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized;
134,100,924 and 133,695,803 shares issued; 92,918,434 and 92,936,395 shares outstanding
134,101

 
133,696

Paid-in capital
1,649,529

 
1,643,712

Accumulated other comprehensive income (loss), net of taxes
(4,432
)
 
353

Treasury stock, at cost; 41,182,490 and 40,759,408 shares
(661,774
)
 
(651,836
)
Retained earnings
852,816

 
829,754

 
1,970,240

 
1,955,679

 
$
14,684,899

 
$
14,568,324




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3


Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Quarter Ended December 31,
 
2015
 
2014
 
(In thousands, except per share data)
INTEREST INCOME
 
 
 
Loans
$
112,863

 
$
108,293

Mortgage-backed securities
16,987

 
19,175

Investment securities and cash equivalents
5,274

 
5,273

 
135,124

 
132,741

INTEREST EXPENSE
 
 
 
Customer accounts
12,717

 
13,445

FHLB advances and other borrowings
15,538

 
17,113

 
28,255

 
30,558

Net interest income
106,869

 
102,183

Provision for (reversal of) allowance for loan losses

 
(5,500
)
Net interest income after reversal of provision for loan losses
106,869

 
107,683

 
 
 
 
OTHER INCOME
 
 
 
Loan fee income
1,517

 
2,065

Deposit fee income
5,917

 
5,977

Other income (expense)
3,201

 
(2,662
)
 
10,635

 
5,380

 
 
 
 
OTHER EXPENSE
 
 
 
Compensation and benefits
29,699

 
29,160

Occupancy
8,592

 
8,135

FDIC insurance premiums
2,589

 
674

Product delivery
5,523

 
5,627

Information technology
8,710

 
4,030

Other expense
9,396

 
5,974

 
64,509

 
53,600

Gain on real estate acquired through foreclosure, net
1,420

 
315

Income before income taxes
54,415

 
59,778

Income tax provision
19,317

 
21,371

NET INCOME
$
35,098

 
$
38,407

 

 


PER SHARE DATA
 
 
 
Basic earnings
$
0.38

 
$
0.39

Diluted earnings
0.38

 
0.39

Dividends paid on common stock per share
0.13

 
0.15

Basic weighted average number of shares outstanding
92,986,358

 
98,147,939

Diluted weighted average number of shares outstanding
93,577,837

 
98,524,839


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4


Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
Quarter Ended December 31,
 
2015
 
2014
 
(In thousands)
Net income
$
35,098

 
$
38,407

 
 
 
 
Other comprehensive income (loss) net of tax:
 
 
 
Net unrealized gain (loss) on available-for-sale securities
(10,360
)
 
8,560

Related tax benefit (expense)
3,807

 
(3,146
)
 
(6,553
)
 
5,414

 
 
 
 
Net unrealized gain (loss) on long-term borrowing hedge
2,795

 
(4,249
)
Related tax benefit (expense)
(1,027
)
 
1,562

 
1,768

 
(2,687
)
 
 
 
 
Other comprehensive income (loss) net of tax
(4,785
)
 
2,727

Comprehensive income
$
30,313

 
$
41,134





SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5


Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED) 
(in thousands)
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Total
Balance at October 1, 2015
$
133,696

$
1,643,712

$
829,754

$
353

$
(651,836
)
$
1,955,679

Net income




35,098





35,098

Other comprehensive income (loss)



(4,785
)

(4,785
)
Dividends on common stock




(12,036
)




(12,036
)
Compensation expense related to common stock options


300







300

Proceeds from exercise of common stock options
227

4,815







5,042

Restricted stock expense
178

702







880

Treasury stock acquired








(9,938
)
(9,938
)
Balance at December 31, 2015
$
134,101

$
1,649,529

$
852,816

$
(4,432
)
$
(661,774
)
$
1,970,240

 
 
 
 
 
 
 
(in thousands)
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Total
Balance at October 1, 2014
$
133,323

$
1,638,211

$
706,149

$
20,708

$
(525,108
)
$
1,973,283

Net income




38,407





38,407

Other comprehensive income (loss)



2,727


2,727

Dividends on common stock




(10,159
)




(10,159
)
Compensation expense related to common stock options


300







300

Proceeds from exercise of common stock options
18

248







266

Restricted stock expense
250

591







841

Treasury stock acquired








(24,326
)
(24,326
)
Balance at December 31, 2014
$
133,591

$
1,639,350

$
734,397

$
23,435

$
(549,434
)
$
1,981,339




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6


Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Quarter Ended December 31,
 
2015
 
2014
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
35,098

 
$
38,407

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
2,934

 
5,299

Cash received from (paid to) FDIC under loss share
1,975

 
(431
)
Stock option compensation expense
300

 
300

Reversal of provision for loan losses

 
(5,500
)
Gain on investment securities and real estate held for sale
(2,310
)
 
(9,606
)
Decrease in accrued interest receivable
2,170

 
11,280

Decrease in federal and state income tax receivable
16,577

 
19,208

Increase in cash surrender value of bank owned life insurance
(785
)
 
(216
)
Increase in other assets
(3,754
)
 
(14,552
)
Increase (decrease) in accrued expenses and other liabilities
15,870

 
(25,890
)
Net cash provided by operating activities
68,075

 
18,299

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Origination of loans and principal repayments, net
(179,768
)
 
(36,993
)
Loans purchased
(51,646
)
 
(46,831
)
FHLB & FRB stock purchased
(6,809
)
 

FHLB & FRB stock redemption
2,901

 
3,969

Available-for-sale securities purchased
(50,741
)
 
(41,225
)
Principal payments and maturities of available-for-sale securities
114,764

 
202,760

Principal payments and maturities of held-to-maturity securities
43,569

 
31,178

Proceeds from sales of real estate owned
26,664

 
17,909

Purchase of bank owned life insurance

 
(100,000
)
Premises and equipment purchased and REO improvements
(17,183
)
 
(2,019
)
Net cash provided by (used in) investing activities
(118,249
)
 
28,748

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in customer accounts
19,492

 
(137,999
)
Proceeds from borrowings
204,000

 

Repayments of borrowings
(106,000
)
 
(100,000
)
Proceeds from exercise of common stock options and related tax benefit
5,042

 
266

Dividends paid on common stock
(12,036
)
 
(14,359
)
Treasury stock purchased
(9,938
)
 
(24,326
)
Decrease in advance payments by borrowers for taxes and insurance
(28,476
)
 
(9,703
)
Net cash provided by (used in) financing activities
72,084

 
(286,121
)
Increase (decrease) in cash and cash equivalents
21,910

 
(239,074
)
Cash and cash equivalents at beginning of period
284,049

 
781,843

Cash and cash equivalents at end of period
$
305,959

 
$
542,769

(CONTINUED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7


Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Quarter Ended December 31,
 
2015
 
2014
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Real estate acquired through foreclosure
$
5,308

 
$
8,852

Covered real estate acquired through foreclosure

 
51

Cash paid during the period for
 
 
 
Interest
29,195

 
34,653

Income taxes
8

 
23




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8


Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A – Summary of Significant Accounting Policies
Nature of Operations - Washington Federal, Inc. is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a federally-insured national bank subsidiary. The Bank is principally engaged in the business of attracting deposits from the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential mortgage and construction loans, home equity loans, lines of credit, commercial and industrial loans, multi-family and other forms of real estate loans. As used throughout this document, the terms "Washington Federal" or the "Company" refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.
Basis of Presentation - The consolidated unaudited interim financial statements included in this report have been prepared by Washington Federal. All intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 2015 Consolidated Statement of Financial Condition was derived from audited financial statements.
The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2015 Annual Report on Form 10-K (“2015 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2015 Form10-K. There have not been any material changes in our significant accounting policies compared to those contained in our 2015 Form 10-K disclosure for the year ended September 30, 2015.
Off-Balance-Sheet Credit Exposures – The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance of $923,891,000 and $816,014,000 at December 31, 2015 and September 30, 2015, respectively. The Company estimates losses on off-balance-sheet credit exposures by allocating a loss percentage derived from historical loss factors for each asset class.

NOTE B – New Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The new guidance clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. ASU 2014-04 is effective for annual and interim reporting periods within those annual periods, beginning after December 15, 2014. The Company's adoption of this guidance did not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. These amendments are effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. ASU 2015-03 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, which delayed the effective date of ASU 2014-09 by one year and permits companies to voluntarily adopt the new standard as of the original effective date. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

9

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



On April 15, 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in Cloud Computing Arrangement. The ASU was issued to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers in determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. The guidance in this ASU are effective for interim and annual periods beginning after December 15, 2015 and can be adopted either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

On September 25, 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. the amendments in ASU 2015-16 require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in ASU 2015-16 are effective for years beginning after December 15, 2015. Early adoption is permitted for reporting periods for which financial statements have not been issued. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

NOTE C – Dividends and Share Repurchases
On January 20, 2016, the Company announced its 132nd consecutive quarterly cash dividend on common stock of $0.14 per share. The current dividend will be paid on February 12, 2016, to common shareholders of record on February 1, 2016. Dividends per share were $0.13 and $0.15 for the quarters ended December 31, 2015 and 2014, respectively. For the three months ended December 31, 2015, the Company repurchased 423,082 shares at an average price of $23.49. For the three months ended December 31, 2014, the Company repurchased 1,116,147 shares at an average price of $21.79. There are 3,778,148 remaining shares that can be repurchased under the current Board approved program.

10

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



NOTE D – Loans Receivable

The following table is a summary of loans receivable (including LIP, net of charge offs.)
 
December 31, 2015
 
September 30, 2015
 
(In thousands)
 
(In thousands)
Non-Acquired loans
 
 
 
 
 
   Single-family residential
$
5,629,715

55.7
%
 
$
5,651,845

57.5
%
   Construction
660,238

6.5

 
200,509

2.0

   Construction - custom
404,849

4.0

 
396,307

4.0

   Land - acquisition & development
97,025

1.0

 
94,208

1.0

   Land - consumer lot loans
102,376

1.0

 
103,989

1.1

   Multi-family
997,696

9.9

 
1,125,722

11.5

   Commercial real estate
839,157

8.3

 
986,270

10.0

   Commercial & industrial
751,073

7.4

 
612,836

6.2

   HELOC
127,919

1.3

 
127,646

1.3

   Consumer
181,142

1.8

 
194,655

2.0

Total non-acquired loans
9,791,190

96.9
%
 
9,493,987

96.6
%
Acquired loans
164,380

1.6

 
166,293

1.7

Credit impaired acquired loans
116,030

1.1

 
87,081

0.9

Covered loans
38,584

0.4

 
75,909

0.8

Total gross loans
10,110,184

100.0
%
 
9,823,270

100.0
%
   Less:
 
 
 
 
 
      Allowance for probable losses
107,901

 
 
106,829

 
      Loans in process
535,850

 
 
476,796

 
      Discount on acquired loans
25,040

 
 
30,095

 
      Deferred net origination fees
38,663

 
 
38,916

 
Total loan contra accounts
707,454

 
 
652,636

 
Net Loans
$
9,402,730

 
 
$
9,170,634

 
 
 
 
 
 
 



11

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following table sets forth information regarding non-accrual loans.
 
 
December 31, 2015
 
September 30, 2015
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
43,856

 
77.3
%
 
$
59,074

 
87.1
%
Construction

 

 
754

 
1.1
%
Construction - custom
2,518

 
4.4

 
732

 
1.1
%
Land - acquisition & development
509

 
0.9

 

 
%
Land - consumer lot loans
939

 
1.7

 
1,273

 
1.9
%
Multi-family
1,538

 
2.7

 
2,558

 
3.8
%
Commercial real estate
6,681

 
11.8

 
2,176

 
3.2
%
Commercial & industrial
115

 
0.2

 

 
%
HELOC
473

 
0.8

 
563

 
0.8
%
Consumer
119

 
0.2

 
680

 
1.0
%
Total non-accrual loans
$
56,748

 
100
%
 
$
67,810

 
100
%

The Company recognized interest income on nonaccrual loans of approximately $1,257,000 in the three months ended December 31, 2015. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $687,000 for the three months ended December 31, 2015. The recognized interest income includes more than three months of interest for some of the loans that were brought current.
The following tables provide details regarding delinquent loans.
 
December 31, 2015
Amount of Loans
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
 
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
 
 
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
$
5,644,009

 
$
5,576,774

 
$
17,285

 
$
9,939

 
$
40,010

 
$
67,234

 
1.19
%
Construction
325,485

 
324,619

 
560

 
306

 

 
866

 
0.27

Construction - Custom
221,327

 
218,773

 
28

 
9

 
2,518

 
2,554

 
1.15

Land - Acquisition & Development
85,830

 
84,805

 
387

 

 
638

 
1,025

 
1.19

Land - Consumer Lot Loans
102,887

 
100,224

 
828

 
897

 
938

 
2,663

 
2.59

Multi-Family
966,921

 
965,110

 
1,196

 

 
615

 
1,811

 
0.19

Commercial Real Estate
929,495

 
920,582

 
841

 
1,933

 
6,139

 
8,913

 
0.96

Commercial & Industrial
756,831

 
754,611

 
2,219

 
1

 

 
2,220

 
0.29

HELOC
125,479

 
124,883

 
19

 
19

 
558

 
595

 
0.47

Consumer
181,431

 
179,977

 
882

 
352

 
221

 
1,454

 
0.80

 
9,339,695

 
9,250,358

 
24,245

 
13,456

 
51,637

 
89,335

 
0.96

Acquired loans
140,995

 
140,137

 
193

 
16

 
649

 
858

 
0.61

Credit impaired acquired loans
55,060

 
52,806

 
854

 

 
1,400

 
2,254

 
4.09

Covered loans
38,584

 
37,062

 
501

 
295

 
726

 
1,522

 
3.94

Total Loans
$
9,574,334

 
$
9,480,363

 
$
25,793

 
$
13,767

 
$
54,412

 
$
93,969

 
0.98
%
Delinquency %
 
 
99.02%
 
0.27%
 
0.14%
 
0.57%
 
0.98%
 
 



12

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


September 30, 2015
Amount of Loans
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
 
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
 
 
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
$
5,655,928

 
$
5,590,673

 
$
17,305

 
$
7,757

 
$
40,193

 
$
65,255

 
1.15
%
Construction
130,121

 
130,121

 

 

 

 

 

Construction - Custom
205,692

 
204,168

 
791

 
270

 
463

 
1,524

 
0.74

Land - Acquisition & Development
75,661

 
74,737

 
406

 

 
518

 
924

 
1.22

Land - Consumer Lot Loans
104,494

 
102,045

 
689

 
399

 
1,361

 
2,449

 
2.34

Multi-Family
1,068,038

 
1,065,667

 
259

 
454

 
1,658

 
2,371

 
0.22

Commercial Real Estate
893,072

 
892,180

 
131

 

 
761

 
892

 
0.10

Commercial & Industrial
617,545

 
616,602

 
93

 
27

 
823

 
943

 
0.15

HELOC
127,648

 
127,196

 
174

 
27

 
251

 
452

 
0.35

Consumer
194,977

 
194,259

 
493

 
170

 
55

 
718

 
0.37

 
9,073,176

 
8,997,648

 
20,341

 
9,104

 
46,083

 
75,528

 
0.83

Acquired loans
57,682

 
56,559

 
356

 

 
767

 
1,123

 
1.95

Credit impaired acquired loans
139,726

 
138,940

 
243

 
4

 
539

 
786

 
0.56

Covered loans
75,890

 
70,729

 
272

 
90

 
4,799

 
5,161

 
6.80

Total Loans
$
9,346,474

 
$
9,263,876

 
$
21,212

 
$
9,198

 
$
52,188

 
$
82,598

 
0.88
%
Delinquency %
 
 
99.12%
 
0.23%
 
0.10%
 
0.56%
 
0.88%
 
 

The percentage of total delinquent loans increased from 0.88% as of September 30, 2015 to 0.98% as of December 31, 2015.

The following table provides information related to loans that were restructured in at TDR during the periods presented:

 
Quarter Ended December 31,
 
2015
 
2014
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Recorded
 
Recorded
 
Contracts
 
Investment
 
Investment
 
Contracts
 
Investment
 
Investment
 
 
 
(In thousands)
 
 
 
(In thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
   Single-family residential
3

 
$
729

 
$
729

 
35

 
$
9,600

 
$
9,600

   Construction

 

 

 
2

 
718

 
718

   Land - consumer lot loans

 

 

 
2

 
532

 
532

   Commercial real estate
5

 
965

 
965

 

 

 

   Consumer

 

 

 
1

 
85

 
85

 
8

 
$
1,694

 
$
1,694

 
40

 
$
10,935

 
$
10,935


The following table provides information on payment defaults occurring during the periods presented where the loan had been modified in a TDR within 12 months of the payment default.

13

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
Quarter Ended December 31,
 
2015
 
2014
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
5

 
$
668

 
8

 
$
1,431

   Land - consumer lot loans
1

 
148

 
3

 
389

 
6

 
$
816

 
11

 
$
1,820


Most loans restructured in troubled debt restructurings ("TDRs") are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. As of December 31, 2015, 96.6% of the Bank's $282,723,000 in TDRs were classified as performing. Each request is individually evaluated for merit and likelihood of success. The concession for these loans is typically a payment reduction through a rate reduction of between 100 to 200 basis points for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. As of December 31, 2015, single-family residential loans comprised 86.1% of TDRs.

The Company reserves for restructured loans within its allowance for loan loss methodology by taking into account the following performance indicators: 1) time since modification, 2) current payment status and 3) geographic area.

The following table shows the changes in accretable yield for acquired impaired loans and acquired non-impaired loans (including covered loans).
    
 
Quarter Ended December 31, 2015
 
Fiscal Year Ended September 30, 2015
 
Acquired Impaired
 
Acquired Non-impaired
 
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
 
(In thousands)
Beginning balance
$
72,705

 
$
111,300

 
$
7,204

 
$
187,080

 
$
97,125

 
$
135,826

 
$
14,513

 
$
275,862

Additions

 

 

 

 

 

 

 

Net reclassification from nonaccretable

 

 

 

 
6,307

 

 
346

 

Accretion
(5,526
)
 
5,526

 
(857
)
 
857

 
(30,727
)
 
30,727

 
(7,655
)
 
7,655

Transfers to REO

 

 

 

 

 
(2,975
)
 

 
(150
)
Payments received, net

 
(7,680
)
 

 
(3,790
)
 

 
(52,278
)
 

 
(96,287
)
Ending Balance
$
67,179

 
$
109,146

 
$
6,347

 
$
184,147

 
$
72,705

 
$
111,300

 
$
7,204

 
$
187,080


The excess of cash flows expected to be collected over the initial fair value of acquired impaired loans is referred to as the accretable yield and this amount is accreted into interest income over the estimated life of the acquired loans using the effective interest method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes in the respective indices for acquired loans with variable interest rates.

Additionally, as of December 31, 2015 the Company has $1,700,000 remaining in loans it acquired during fiscal 2013 as part of the South Valley Bank acquisition for which it was probable at acquisition that all contractually required payments would not be collected. The timing and amount of future cash flows cannot not be reasonably estimated; therefore, these loan are accounted for on a cash basis.


14

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


At December 31, 2015 and September 30, 2015, none of the acquired impaired or non-impaired loans were classified as non-performing assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Covered loans were $38,584,000 at December 31, 2015 compared to $75,909,000 as of September 30, 2015, the decrease being attributable to FDIC loss share coverage on commercial loans from the former Home Valley Bank that expired after September 30, 2015. The FDIC loss share coverage for single family residential loans will continue for another five years. The remaining portfolio of covered loans is expected to continue to decline over time, absent another FDIC assisted transaction.

The following table shows activity for the FDIC indemnification asset:
 
 
Three Months Ended December 31, 2015
 
Fiscal Year Ended September 30, 2015
 
(In thousands)
Balance at beginning of period
$
16,275

 
$
36,860

Additions

 
(1,795
)
Payments received
(1,974
)
 
(720
)
Amortization
(287
)
 
(18,588
)
Accretion
62

 
518

Balance at end of period
$
14,076

 
$
16,275



15

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE E – Allowance for Losses on Loans
The following tables summarize the activity in the allowance for loan losses. 
Three Months Ended December 31, 2015
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
47,347

 
$
(1,139
)
 
$
2,466

 
$
(918
)
 
$
47,756

Construction
6,680

 

 
155

 
179

 
7,014

Construction - custom
990

 
(60
)
 

 
132

 
1,062

Land - acquisition & development
5,781

 

 
35

 
962

 
6,778

Land - consumer lot loans
2,946

 
(408
)
 

 
463

 
3,001

Multi-family
5,304

 

 

 
(257
)
 
5,047

Commercial real estate
8,960

 
(23
)
 
123

 
1,284

 
10,344

Commercial & industrial
24,980

 
(248
)
 
1

 
(637
)
 
24,096

HELOC
902

 
(1
)
 
21

 
(102
)
 
820

Consumer
2,939

 
(242
)
 
392

 
(1,106
)
 
1,983

 
$
106,829

 
$
(2,121
)
 
$
3,193

 
$

 
$
107,901

Fiscal Year Ended September 30, 2015
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
62,763

 
$
(5,524
)
 
$
13,403

 
$
(23,295
)
 
$
47,347

Construction
6,742

 
(388
)
 
$
120

 
206

 
6,680

Construction - custom
1,695

 

 

 
(705
)
 
990

Land - acquisition & development
5,592

 
(38
)
 
207

 
20

 
5,781

Land - consumer lot loans
3,077

 
(459
)
 
221

 
107

 
2,946

Multi-family
4,248

 

 
220

 
836

 
5,304

Commercial real estate
7,548

 
(1,711
)
 
735

 
2,388

 
8,960

Commercial & industrial
16,527

 
(3,354
)
 
1,374

 
10,433

 
24,980

HELOC
928

 
(66
)
 
2

 
38

 
902

Consumer
3,227

 
(3,060
)
 
3,688

 
(916
)
 
2,939

Covered loans
2,244

 

 

 
(2,244
)
 

 
$
114,591

 
$
(14,600
)
 
$
19,970

 
$
(13,132
)
 
$
106,829


There was no provision for loan losses recorded for the three months ended December 31, 2015, which compares to a reversal of provision of $5,500,000 for the three months ended December 31, 2014. The lack of provision for the quarter ended December 31, 2015 was a result of continued improvement in credit quality of the loan portfolio offset by net growth in the loan portfolio. The related improvement in the credit quality of the loan portfolio relates to the factors below.
The Company had recoveries, net of charge-offs, of $1,072,000 for the quarter ended December 31, 2015, compared with $842,000 of net recoveries for the same quarter one year ago. Non-performing assets amounted to $98,846,000, or 0.67%, of total assets at December 31, 2015, compared to $164,317,000, or 1.13% of total assets at December 31, 2014. Non-accrual loans decreased from $98,353,000 at December 31, 2014, to $56,748,000 at December 31, 2015, a 42.3% decrease. The percentage of delinquent loans decreased from 1.47% at December 31, 2014, to 0.98% at December 31, 2015.

The reserve for unfunded commitments was $3,085,000 as of December 31, 2015, which is unchanged since September 30, 2015.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $110,986,000, or 1.10% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio.

16

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Acquired loans, including covered loans, are not usually classified as non-performing because at acquisition, the carrying value of these loans is recorded at fair value. As of December 31, 2015, $25,223,000 in acquired loans were subject to the general allowance as the discount related to these balances was no longer sufficient to absorb all of the expected losses.
The following tables show loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves.
 
December 31, 2015
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
Allowance Allocation
 
Recorded Investment of Loans (1)
 
Ratio
 
Allowance Allocation
 
Recorded Investment of Loans (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
47,625

 
$
5,614,580

 
0.8
%
 
$
130

 
$
14,206

 
0.9
%
Construction
7,014

 
121,689

 
5.8

 

 

 

Construction - custom
1,062

 
218,749

 
0.5

 

 
2,578

 

Land - acquisition & development
6,778

 
77,223

 
8.8

 

 
6,649

 

Land - consumer lot loans
3,001

 
91,664

 
3.3

 

 
10,658

 

Multi-family
5,048

 
1,085,243

 
0.5

 

 
3,500

 

Commercial real estate
10,344

 
939,248

 
1.1

 

 
9,811

 

Commercial & industrial
24,096

 
776,240

 
3.1

 

 
27

 

HELOC
820

 
126,596

 
0.6

 

 
1,310

 

Consumer
1,983

 
180,814

 
1.1

 

 
328

 

 
$
107,771

 
$
9,232,046

 
1.2
%
 
$
130

 
$
49,067

 
0.3
%
(1)
Excludes acquired loans with discounts sufficient to absorb potential losses and covered loans
September 30, 2015
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
Allowance Allocation
 
Recorded Investment of Loans (1)
 
Ratio
 
Allowance Allocation
 
Recorded Investment of Loans (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
47,073

 
$
5,595,752

 
0.8
%
 
$
275

 
$
51,718

 
0.5
%
Construction
6,680

 
124,679

 
5.4

 

 
5,441

 

Construction - custom
990

 
205,692

 
0.5

 

 

 

Land - acquisition & development
5,781

 
72,602

 
8.0

 

 
2,198

 

Land - consumer lot loans
2,946

 
93,103

 
3.2

 

 
10,824

 

Multi-family
5,304

 
1,062,194

 
0.5

 

 
5,348

 

Commercial real estate
8,960

 
844,691

 
1.1

 

 
8,826

 

Commercial & industrial
24,980

 
643,577

 
3.9

 

 

 

HELOC
902

 
126,594

 
0.7

 

 
1,072

 

Consumer
2,938

 
194,569

 
1.5

 

 
86

 

 
$
106,554

 
$
8,963,453

 
1.2
%
 
$
275

 
$
85,513

 
0.3
%
(1) Excludes acquired loans with discounts sufficient to absorb potential losses and covered loans
As of December 31, 2015, $107,771,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $130,000 was specific reserves on loans deemed to be individually impaired. As of September 30,

17

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


2015, $106,554,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $275,000 was specific reserves on loans deemed to be individually impaired.

The Company has an asset quality review function that analyzes its loan portfolios and reports the results of the review to the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as follows:

Pass – the credit does not meet one of the definitions below.

Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and Management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.

Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible. Partial charge-off versus full charge-off may be taken if the collateral offers some identifiable protection.


18

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on loans based on risk rating categories as defined above.
December 31, 2015
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,551,785

 
$

 
$
77,930

 
$

 
$

 
$
5,629,715

  Construction
655,964

 
4,274

 

 

 

 
660,238

  Construction - custom
402,000

 

 
2,849

 

 

 
404,849

  Land - acquisition & development
87,772

 
5,627

 
3,626

 

 

 
97,025

  Land - consumer lot loans
100,125

 

 
2,251

 

 

 
102,376

  Multi-family
997,696

 

 

 

 

 
997,696

  Commercial real estate
813,974

 
8,111

 
17,073

 

 

 
839,157

  Commercial & industrial
713,240

 
3,058

 
34,775

 

 

 
751,073

  HELOC
127,198

 

 
721

 

 

 
127,919

  Consumer
180,892

 

 
250

 

 

 
181,142

 
9,630,645

 
21,070

 
139,475

 

 

 
9,791,190

 
 
 
 
 
 
 
 
 
 
 
 
Non-impaired acquired loans
152,761

 

 
11,619

 

 

 
164,380

Credit-impaired acquired loans
79,555

 
199

 
36,276

 

 

 
116,030

Covered loans
37,555

 

 
1,029

 

 

 
38,584

Total gross loans
$
9,900,516

 
$
21,269

 
$
188,399

 
$

 
$

 
$
10,110,184

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
97.9
%
 
0.2
%
 
1.9
%
 
%
 
%
 
 


19

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


September 30, 2015
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 Single-family residential
$
5,558,700

 
$

 
$
93,145

 
$

 
$

 
$
5,651,845

 Construction
197,935

 

 
2,574

 

 

 
200,509

 Construction - custom
396,307

 

 

 

 

 
396,307

 Land - acquisition & development
89,656

 

 
4,552

 

 

 
94,208

 Land - consumer lot loans
103,569

 

 
420

 

 

 
103,989

 Multi-family
1,118,673

 
865

 
6,184

 

 

 
1,125,722

 Commercial real estate
971,510

 
4,360

 
10,400

 

 

 
986,270

 Commercial & industrial
575,034

 
1,496

 
36,306

 

 

 
612,836

 HELOC
127,398

 

 
248

 

 

 
127,646

 Consumer
194,451

 

 
204

 

 

 
194,655

 
9,333,233

 
6,721

 
154,033

 

 

 
9,493,987

 
 
 
 
 
 
 
 
 
 
 
 
Non-impaired acquired loans
149,891

 

 
16,402

 

 

 
166,293

Credit-impaired acquired loans
61,019

 

 
26,062

 

 

 
87,081

Covered loans
61,776

 

 
14,133

 

 

 
75,909

Total gross loans
$
9,605,919

 
$
6,721

 
$
210,630

 
$

 
$

 
$
9,823,270

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
97.8
%
 
0.1
%
 
2.1
%
 
%
 
%
 
 

The following tables provide information on loans (excluding acquired and covered loans) based on borrower payment activity.
December 31, 2015
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,585,859

 
99.2
%
 
$
43,856

 
0.8
%
Construction
660,238

 
100.0

 

 

Construction - custom
402,331

 
99.4

 
2,518

 
0.6

Land - acquisition & development
96,516

 
99.5

 
509

 
0.5

Land - consumer lot loans
101,437

 
99.1

 
939

 
0.9

Multi-family
996,158

 
99.8

 
1,538

 
0.2

Commercial real estate
832,476

 
99.2

 
6,681

 
0.8

Commercial & industrial
750,958

 
100.0

 
115

 

HELOC
127,446

 
99.6

 
473

 
0.4

Consumer
181,023

 
99.9

 
119

 
0.1

 
$
9,734,442

 
99.4
%
 
$
56,748

 
0.6
%


20

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


September 30, 2015
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,592,771

 
99.0
%
 
$
59,074

 
1.0
%
Construction
199,755

 
99.6

 
754

 
0.4

Construction - custom
395,575

 
99.8

 
732

 
0.2

Land - acquisition & development
94,208

 
100.0

 

 

Land - consumer lot loans
102,716

 
98.8

 
1,273

 
1.2

Multi-family
1,123,165

 
99.8

 
2,558

 
0.2

Commercial real estate
984,093

 
99.8

 
2,176

 
0.2

Commercial & industrial
612,836

 
100.0

 

 

HELOC
127,083

 
99.6

 
563

 
0.4

Consumer
193,975

 
99.7

 
680

 
0.3

 
$
9,426,177

 
99.3
%
 
$
67,810

 
0.7
%

21

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on impaired loan balances and the related allowances by loan types. 
 
 
 
 
 
 
 
 
December 31, 2015
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average Recorded Investment
 
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
 
Single-family residential
$
14,791

 
$
16,304

 
$

 
$
12,837

 
Construction

 

 

 

 
Construction - custom
1,182

 
1,182

 

 
868

 
Land - acquisition & development
542

 
8,630

 

 
1,327

 
Land - consumer lot loans
510

 
527

 

 
427

 
Multi-family
761

 
4,754

 

 
1,117

 
Commercial real estate
7,331

 
8,671

 

 
4,686

 
Commercial & industrial
953

 
6,687

 

 
948

 
HELOC
262

 
631

 

 
245

 
Consumer
479

 
479

 

 
385

 
 
26,811

 
47,865

 

 
22,840

 
With an allowance recorded:
 
 
 
 
 
 
 
 
Single-family residential
246,210

 
249,530

 
6,339

 
246,922

 
Construction

 

 

 

 
Construction - custom

 

 

 

 
Land - acquisition & development
2,101

 
3,303

 

 
2,294

 
Land - consumer lot loans
11,080

 
11,345

 

 
11,120

 
Multi-family
2,430

 
2,435

 

 
2,437

 
Commercial real estate
23,802

 
27,168

 

 
24,042

 
Commercial & industrial

 

 

 

 
HELOC
1,393

 
1,393

 

 
1,393

 
Consumer
97

 
286

 

 
98

 
 
287,113

 
295,460

 
6,339

(1)
288,306

 
Total:
 
 
 
 
 
 
 
 
Single-family residential
261,001

 
265,834

 
6,339

 
259,759

 
Construction

 

 

 

 
Construction - custom
1,182

 
1,182

 

 
868

 
Land - acquisition & development
2,643

 
11,933

 

 
3,621

 
Land - consumer lot loans
11,590

 
11,872

 

 
11,547

 
Multi-family
3,191

 
7,189

 

 
3,554

 
Commercial real estate
31,133

 
35,839

 

 
28,728

 
Commercial & industrial
953

 
6,687

 

 
948

 
HELOC
1,655

 
2,024

 

 
1,638

 
Consumer
576

 
765

 

 
483

 
 
$
313,924

 
$
343,325

 
$
6,339

(1)
$
311,146

 

(1)
Includes $130,000 of specific reserves and $6,209,000 included in the general reserves.


22

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



September 30, 2015
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
17,250

 
$
19,644

 
$

 
$
14,069

Construction
453

 
2,151

 

 
471

Construction - custom
554

 
554

 

 
182

Land - acquisition & development
2,570

 
9,426

 

 
926

Land - consumer lot loans
727

 
814

 

 
544

Multi-family
3,770

 
7,054

 

 
1,545

Commercial real estate
9,427

 
15,620

 

 
8,130

Commercial & industrial
2,955

 
13,066

 

 
2,681

HELOC
683

 
1,532

 

 
536

Consumer
477

 
703

 

 
390

 
38,866

 
70,564

 

 
29,474

With an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
259,461

 
263,268

 
6,678

 
260,028

Construction
4,988

 
5,778

 

 
5,432

Land - acquisition & development
2,486

 
3,426

 

 
3,478

Land - consumer lot loans
11,289

 
11,554

 

 
11,324

Multi-family
3,823

 
3,823

 

 
3,732

Commercial real estate
19,124

 
21,078

 

 
18,886

HELOC
1,443

 
1,443

 

 
1,359

Consumer
99

 
289

 

 
102

 
302,713

 
310,659

 
6,678

(1)
304,341

Total:
 
 
 
 
 
 
 
Single-family residential
276,711

 
282,912

 
6,678

 
274,097

Construction
5,441

 
7,929

 

 
5,903

Construction - custom
554

 
554

 

 
182

Land - acquisition & development
5,056

 
12,852

 

 
4,404

Land - consumer lot loans
12,016

 
12,368

 

 
11,868

Multi-family
7,593

 
10,877

 

 
5,277

Commercial real estate
28,551

 
36,698

 

 
27,016

Commercial & industrial
2,955

 
13,066

 

 
2,681

HELOC
2,126

 
2,975

 

 
1,895

Consumer
576

 
992

 

 
492

 
$
341,579

 
$
381,223

 
$
6,678

(1)
$
333,815


(1)
Includes $275,000 of specific reserves and $6,403,000 included in the general reserves.


23

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE F – Fair Value Measurements
ASC 825 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
We have established and documented the Company's process for determining the fair values of the Company's assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis:
Measured on a Recurring Basis
Securities
Securities available for sale are recorded at fair value on a recurring basis. Most securities at fair value are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Securities that are traded on active exchanges are considered a Level 1 input method.
The bank offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the bank enters into the opposite trade with a counter party to offset its interest rate risk. The bank has also entered into a commercial loan hedge as well as long term borrowing hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.
 

24

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables present the balance of assets and liabilities measured at fair value on a recurring basis.
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
$
101,558

 

 

 
$
101,558

Obligations of U.S. government

 
425,814

 

 
425,814

Obligations of states and political subdivisions

 
27,232

 

 
27,232

Corporate debt securities

 
505,406

 

 
505,406

Mortgage-backed securities
 
 
 
 
 
 

Agency pass-through certificates

 
1,149,087

 

 
1,149,087

       Other Commercial MBS

 
95,691

 

 
95,691

Total available-for-sale securities
101,558

 
2,203,230

 

 
2,304,788

Interest rate contracts

 
9,656

 

 
9,656

Total financial assets
$
101,558

 
$
2,212,886

 
$

 
$
2,314,444

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
9,656

 
$

 
$
9,656

Commercial loan hedge

 
565

 

 
565

Long term borrowing hedge

 
11,759

 

 
11,759

Total financial liabilities
$

 
$
21,980

 
$

 
$
21,980

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended December 31, 2015.

25

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
$
101,952

 

 

 
$
101,952

Obligations of U.S. government

 
482,464

 

 
482,464

Obligations of states and political subdivisions

 
27,123

 

 
27,123

Corporate debt securities

 
505,800

 

 
505,800

Mortgage-backed securities
 
 
 
 
 
 

Agency pass-through certificates

 
1,160,518

 

 
1,160,518

       Other Commercial MBS

 
102,706

 

 
102,706

Total available-for-sale securities
101,952

 
2,278,611

 

 
2,380,563

Interest rate contracts

 
11,879

 

 
11,879

Total financial assets
$
101,952

 
$
2,290,490

 
$

 
$
2,392,442

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
11,879

 
$

 
$
11,879

Commercial loan hedge

 
966

 

 
966

Long term borrowing hedge

 
14,555

 

 
14,555

Total financial liabilities
$

 
$
27,400

 
$

 
$
27,400

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the fiscal year ended September 30, 2015.


26

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Measured on a Nonrecurring Basis
Impaired Loans & Real Estate Owned
Real estate owned consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the current appraisal or estimated value of the collateral, but only up to the fair value of the real estate owned as of the initial transfer date less selling costs.
When management determines that the fair value of the collateral or the real estate held for sale requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the impaired loan or real estate held for sale as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2015 included loans for which a specific reserve allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as covered REO and real estate held for sale for which fair value of the properties was less than the cost basis.
The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at December 31, 2015 and December 31, 2014, and the total losses (gains) resulting from those fair value adjustments for the three months ended December 31, 2015 and December 31, 2014. The estimated fair value measurements are shown gross of estimated selling costs.
 
 
Three Months Ended December 31, 2015
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
Impaired loans (1)
$

 
$

 
$
8,524

 
$
8,524

 
$
(1,681
)
Real estate owned (2)

 

 
7,145

 
7,145

 
(1,755
)
Balance at end of period
$

 
$

 
$
15,669

 
$
15,669

 
$
(3,436
)

(1) The gains (losses) represent remeasurements of collateral-dependent loans.
(2) The gains (losses) represent aggregate writedowns and charge-offs on real estate held for sale.

 
Three Months Ended December 31, 2014
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
Impaired loans (1)
$

 
$

 
$
146

 
$
146

 
$
(64
)
Real estate owned (2)

 

 
37,942

 
37,942

 
8,237

Balance at end of period
$

 
$

 
$
38,088

 
$
38,088

 
$
8,173


(1)
The gains (losses) represent remeasurements of collateral-dependent loans.
(2)
The gains (losses) represent aggregate writedowns and charge-offs on real estate held for sale.
Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.
The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for loan loss process.

27

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Applicable loans that were included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary.
The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following methods are used to value impaired loans:
The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.
The present value of the expected future cash flows of the collateral is used for measurement of non collateral-dependent loans to test for impairment. The Company calculates the amount and timing of the future cash flows, the effective interest rate to be used to discount the cash flows and the basis for determination of the cash flows, including consideration of current economic and environmental factors, as well as other information relating to current or previous conditions.
Real estate owned ("REO") - When a loan is reclassified from loan status to real estate held for sale due to the Company taking possession of the collateral, a Special Credits officer, along with the Special Credits manager, obtains a valuation, which may include appraisals or third-party price options, which is used to establish the fair value of the underlying collateral. The determined fair value, less selling costs, becomes the carrying value of the REO asset.
The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the fair value as necessary. After foreclosure, the valuations are updated periodically and current market conditions may require the assets to be written down further or up to the cost basis established on the date of transfer. The carrying balance of REO assets are also written down or up once a bona fide offer is contractually accepted, through execution of a Purchase and Sale Agreement, where the accepted price is lower than the cost established on the transfer date.
Fair Values of Financial Instruments
U. S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below. 

28

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
 
 
 
December 31, 2015
 
September 30, 2015
 
 
Level in Fair Value Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
305,959

 
$
305,959

 
$
284,049

 
$
284,049

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Equity securities
 
1
 
101,558

 
101,558

 
101,952

 
101,952

Obligations of U.S. government
 
2
 
425,814

 
425,814

 
482,464

 
482,464

Obligations of states and political subdivisions
 
2
 
27,232

 
27,232

 
27,123

 
27,123

Corporate debt securities
 
2
 
505,406

 
505,406

 
505,800

 
505,800

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,149,087

 
1,149,087

 
1,160,518

 
1,160,518

Other commercial MBS
 
2
 
95,691

 
95,691

 
102,706

 
102,706

Total available-for-sale securities
 
 
 
2,304,788

 
2,304,788

 
2,380,563

 
2,380,563

Held-to-maturity securities
 
2
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,598,370

 
1,571,288

 
1,643,216

 
1,637,420

Total held-to-maturity securities
 
 
 
1,598,370

 
1,571,288

 
1,643,216

 
1,637,420

 
 
 
 
 
 
 
 
 
 
 
Loans receivable
 
3
 
9,402,730

 
9,901,403

 
9,170,634

 
9,667,750

FDIC indemnification asset
 
3
 
14,076

 
13,271

 
16,275

 
15,522

FHLB and FRB stock
 
2
 
111,107

 
111,107

 
107,198

 
107,198

        Other assets - interest rate contracts
 
2
 
9,656

 
9,656

 
11,879

 
11,879

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Customer accounts
 
2
 
10,651,119

 
9,920,280

 
10,631,703

 
10,004,290

FHLB advances
 
2
 
1,928,000

 
2,012,603

 
1,830,000

 
1,938,384

        Other liabilities - interest rate contracts
 
2
 
9,656

 
9,656

 
11,879

 
11,879

Other liabilities - commercial loan hedge
 
2
 
565

 
565

 
966

 
966

        Other liabilities - long term borrowing hedge
 
2
 
11,759

 
11,759

 
14,555

 
14,555

The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value. 
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 input method.
Loans receivable and covered loans – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.
FDIC indemnification asset – The fair value of the indemnification asset is estimated by discounting the expected future cash flows using the current rates.
FHLB and FRB stock – The fair value is based upon the par value of the stock which equates to its carrying value.

29

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.
FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest Rate Contracts – The bank offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the bank enters into the opposite trade with a counterparty to offset its interest rate risk. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.
Commercial Loan Hedge – The fair value of the interest rate swap is estimated by a third party pricing service using a discounted cash flow technique.
Long Term Borrowing Hedges – The fair value of the forward starting interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.
The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities.
 
December 31, 2015
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
 
Losses
 
 
(In thousands)
Available-for-sale securities

 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
$
99,907

 
$
1,600

 
$
(593
)
 
$
100,914

 
1.89
%
5 to 10 years
76,604

 

 
(1,852
)
 
74,752

 
1.35

Over 10 years
254,886

 
100

 
(4,838
)
 
250,148

 
1.34

Equity Securities
 
 
 
 
 
 
 
 
 
Within 1 year
500

 
11

 

 
511

 
1.80

1 to 5 years
99,922

 
1,124

 

 
101,046

 
1.90

5 to 10 years

 

 

 

 

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
24,872

 
103

 

 
24,975

 
0.57

1 to 5 years
341,470

 
839

 
(108
)
 
342,201

 
1.20

5 to 10 years
89,952

 
558

 
(3,030
)
 
87,480

 
1.80

Over 10 years
50,000

 
750

 

 
50,750

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
2,292

 
3

 

 
2,295

 
1.23

5 to 10 years
1,311

 
18

 

 
1,329

 
2.05

Over 10 years
20,377

 
3,230

 

 
23,607

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,141,558

 
11,636

 
(4,105
)
 
1,149,089

 
2.56

Other Commercial MBS
96,383

 
18

 
(710
)
 
95,691

 
1.58

 
2,300,034

 
19,990

 
(15,236
)
 
2,304,788

 
2.07

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,598,370

 
5,638

 
(32,719
)
 
1,571,289

 
3.19

 
$
3,898,404

 
$
25,628

 
$
(47,955
)
 
$
3,876,077

 
2.53
%

30

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
 
September 30, 2015
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
Losses
 
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
$
105,065

 
$
1,923

 
$
(274
)
 
$
106,714

 
1.74
%
5 to 10 years
119,071

 
35

 
(1,247
)
 
117,859

 
1.54

Over 10 years
262,832

 

 
(4,941
)
 
257,891

 
1.23

Equity Securities
 
 
 
 
 
 
 
 
 
Within 1 year
500

 
17

 

 
517

 
1.80

1 to 5 years
99,922

 
1,513

 

 
101,435

 
1.90

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
24,787

 
191

 

 
24,978

 
0.53

1 to 5 years
311,435

 
1,190

 
(58
)
 
312,567

 
0.88

5 to 10 years
100,000

 
876

 
(3,524
)
 
97,352

 
1.47

Over 10 years
69,950

 
953

 

 
70,903

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
2,285

 
8

 

 
2,293

 
1.23

5 to 10 years
1,303

 
7

 

 
1,310

 
2.05

Over 10 years
20,382

 
3,138

 

 
23,520

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,144,787

 
18,222

 
(2,491
)
 
1,160,518

 
2.48

Other Commercial MBS
103,131

 
85

 
(510
)
 
102,706

 
1.51

 
2,365,450

 
28,158

 
(13,045
)
 
2,380,563

 
1.97

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,643,216

 
10,516

 
(16,312
)
 
1,637,420

 
3.19

 
$
4,008,666

 
$
38,674

 
$
(29,357
)
 
$
4,017,983

 
2.46
%
There were no available-for-sale securities sold during the quarter ended December 31, 2015 or the quarter ended December 31, 2014. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 10 years.
The following tables show the unrealized gross losses and fair value of securities as of December 31, 2015 and September 30, 2015, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other than temporarily impaired.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
December 31, 2015
Less than 12 months
 
12 months or more
 
Total
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
(In thousands)
 
 
Corporate bonds due
$
(108
)
 
$
32,986

 
$
(3,030
)
 
$
46,970

 
$
(3,138
)
 
$
79,956

U.S. government and agency securities due
(5,062
)
 
243,329

 
(2,221
)
 
109,611

 
(7,283
)
 
352,940

Agency pass-through certificates
(3,181
)
 
636,155

 
(34,354
)
 
1,266,121

 
(37,535
)
 
1,902,276

 
$
(8,351
)
 
$
912,470

 
$
(39,605
)
 
$
1,422,702

 
$
(47,956
)
 
$
2,335,172


September 30, 2015
Less than 12 months
 
12 months or more
 
Total
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
(In thousands)
 
 
Corporate bonds due
$
(183
)
 
$
72,862

 
$
(3,399
)
 
$
46,601

 
$
(3,582
)
 
$
119,463

U.S. government and agency securities due
(5,010
)
 
336,243

 
(1,452
)
 
57,344

 
(6,462
)
 
393,587

Agency pass-through certificates
(1,036
)
 
169,541

 
(18,277
)
 
1,193,463

 
(19,313
)
 
1,363,004

 
$
(6,229
)
 
$
578,646

 
$
(23,128
)
 
$
1,297,408

 
$
(29,357
)
 
$
1,876,054



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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE G – Derivatives and Hedging Activities

The Bank periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Bank retains a variable rate loan. Under these agreements, the Bank enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Bank enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The Bank had $474,900,000 and $439,416,000 notional in interest rate swaps to hedge this exposure as of December 31, 2015 and September 30, 2015, respectively. The interest rate swaps are derivatives under ASC 815, Derivatives and Hedging, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the three months ended December 31, 2015 as the changes in value for the asset and liability side of the swaps offset each other.

The Bank has also entered into forward-starting interest rate swaps to convert future short-term borrowings to fixed rate payments. The primary purpose of this hedge is to mitigate the risk of rising interest rates, specifically LIBOR rates, which are a benchmark for the short term borrowings. The hedging program qualifies as a cash flow hedge under FASB ASC 815, which provides for matching of the recognition of gains and losses of the interest rate swaps and the hedged items. The hedged item is the LIBOR portion of the series of future short-term fixed rate borrowings over the term of the interest rate swap. Prior to the starting date, the change in the fair value of the interest rate swap is recorded in other comprehensive income. The Bank had $400,000,000 notional in forward starting interest rate swaps to hedge future borrowing rates as of December 31, 2015 and September 30, 2015. The impact on accumulated other comprehensive income as of December 31, 2015 was an after-tax gain of $1,768,000.

The Bank has also entered into an interest rate swap to hedge the interest rate risk of an individual fixed rate commercial loan and this relationship qualifies as a fair value hedge under FASB ASC 815, which provides for matching of the recognition of gains and losses of the interest rate swap and the hedged item. The Bank had $54,155,000 and $54,815,000 notional in interest rate swap to hedge this loan as of December 31, 2015 and September 30, 2015, respectively

The following table presents the fair value and balance sheet classification of derivatives at December 31, 2015 and September 30, 2015:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
December 31, 2015
 
September 30, 2015
 
December 31, 2015
 
September 30, 2015
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Location
 
Fair Value
 
 
(In thousands)
Interest rate contracts
 
Other assets
 
$
9,656

 
Other assets
 
$
11,879

 
Other liabilities
 
$
9,656

 
Other liabilities
 
$
11,879

Commercial loan hedge
 
Other assets
 

 
Other assets
 

 
Other liabilities
 
565

 
Other liabilities
 
966

Long term borrowing hedge
 
Other assets
 

 
Other assets
 

 
Other liabilities
 
11,759

 
Other liabilities
 
14,555

 
 
 
 
$
9,656

 
 
 
$
11,879

 
 
 
$
21,980

 
 
 
$
27,400



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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended (the "Exchange Act"), based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s 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, including without limitation the potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations being promulgated thereunder; 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 Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees. The Company 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.
GENERAL
Washington Federal, Inc. is a Washington corporation headquartered in Seattle, Washington and is a bank holding company under the Bank Holding Company Act of 1956. The Company conducts its operations primarily through the Bank, a federally-insured national bank subsidiary, Washington Federal, National Association.
The Company's fiscal year end is September 30th. All references to 2015 represent balances as of September 30, 2015 or activity for the fiscal year then ended.
INTEREST RATE RISK
Based on Management's assessment of the current interest rate environment, the Bank has taken steps to reduce its interest rate risk profile compared to its historical norms, including growing shorter-term business loans and transaction deposit accounts, as well as extending the maturity on borrowings. The mix of transaction accounts is 56% of total deposits as of December 31, 2015 while the composition of the investment securities portfolio is 40% variable and 60% fixed rate. The Company has $1,598,370,000 of 30-year fixed rate mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. With rising interest rates, these securities may be subject to unrealized losses. As of December 31, 2015, the net unrealized loss on these securities was $27,081,000. The Company has $2,304,788,000 of available-for-sale securities that are carried at fair value. As of December 31, 2015, the net unrealized gain on these securities was $4,754,000. The Bank has executed forward starting interest rate swaps to hedge interest rates on future borrowings. The net unrealized loss on these interest rate swaps as of December 31, 2015 was $11,759,000. All of the above are pre-tax net unrealized gains or losses.

The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) of the Company.
Net Interest Income Sensitivity. The potential impact of rising interest rates on net interest income in the future under various rate change scenarios is estimated using a model that is based on account level detail for loans and deposits. In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would decrease by (0.5)% in the next year. This compares to an estimated decrease of (2.2)% as of the September 30, 2015 analysis. This analysis assumes zero balance sheet growth and a constant percentage composition of assets and liabilities for consistency. It also assumes that loan and deposit prices respond in full to the increase in market rates. Actual results would differ from the assumptions used in this model, as Management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates. It is noted that a flattening yield curve due to a greater increase in short term rates as compared to long term rates would likely result in a more significant decrease in net interest income. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long term rates over two years would result in a net interest income decrease of 2.26% in the first year and 0.51% in the second year assuming a constant balance sheet and no management intervention.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations




NPV Sensitivity. The NPV is an estimate of the market value of shareholders' equity. It is derived by calculating the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of the NPV to changes in interest rates provides a longer term view of interest rate risk as it incorporates all future expected cash flows. In the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $588,979,000 or 20.95% and the NPV to total assets ratio to decline to 16.14% from a base of 18.91%. As of September 30, 2015, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $535,948,000 or 19.65% and the NPV to total assets ratio to decline to 15.91% from a base of 18.39%. The increased NPV sensitivity and higher base NPV ratio is due to higher interest rates and lower prices as of December 31, 2015.

Repricing Gap Analysis. At December 31, 2015, the Company had approximately $1,766,553,000 more in liabilities subject to maturity or repricing in the next year than assets, which resulted in a negative one-year maturity gap of (12.0)% of total assets. This was an decrease from the (13.40)% negative gap as of September 30, 2015. A negative repricing gap implies that funding costs will change more rapidly than interest income on earning assets with movements in interest rates. A negative repricing gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. This interest rate gap analysis provides management with a high-level indication of interest rate risk, but it is considered less reliable than more detailed modeling.
Interest Rate Spread. The interest rate spread is measured as the difference between the rate on total loans and investments and the rate on costing liabilities at the end of each period. The interest rate spread decreased to 2.72% at December 31, 2015 from 2.73% at September 30, 2015. The spread decrease of 1 basis point is due to lower rates on interest earning assets. As of December 31, 2015, the weighted average rate on loans and mortgage backed securities decreased by 4 basis points compared to September 30, 2015, while the weighted average rate on earning assets declined by 1 basis point to 3.62%.
Net Interest Margin. The net interest margin is measured using the interest income and expense over the average assets and liabilities for the period. The net interest margin increased to 3.18% for the quarter ended December 31, 2015 from 3.01% for the quarter ended December 31, 2014. The yield on earning assets increased 10 basis points to 3.99% and the cost of interest bearing liabilities declined 8 basis points to 0.90%. The higher yield on earning assets is the result of changes in the asset mix as cash and investment securities have decreased while loans has increased. The decrease in interest costs was a combination of changes in the deposit mix from time deposits to core transaction accounts as well as lower costs on FHLB advances as the Company prepaid a $100,000,000 FHLB advance during the quarter ended December 31, 2014.
The following table sets forth the information explaining the changes in the net interest margin for the periods indicated compared to the same periods one year ago.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



 
Quarter Ended December 31, 2015
 
Quarter Ended December 31, 2014
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
 
(In thousands)
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans and covered loans
$
9,258,041

 
$
112,864

 
4.84
%
 
$
8,367,285

 
$
108,293

 
5.13
%
Mortgaged-backed securities
2,880,242

 
16,986

 
2.34

 
3,191,365

 
19,175

 
2.38

Cash & Investments
1,198,471

 
4,258

 
1.41

 
1,876,824

 
4,872

 
1.14

FHLB & FRB stock
107,793

 
1,016

 
3.74

 
158,194

 
401

 
1.01

 
 
 
 
 
 
 
 
 
 
 
 
 Total interest-earning assets
13,444,547

 
135,124

 
3.99
%
 
13,593,668

 
132,741

 
3.89
%
Other assets
1,109,202

 
 
 
 
 
1,062,770

 
 
 
 
Total assets
$
14,553,749

 
 
 
 
 
$
14,656,438

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,619,654

 
$
12,718

 
0.48
%
 
$
10,680,974

 
$
13,446

 
0.50
%
FHLB advances
1,844,772

 
15,537

 
3.34

 
1,920,217

 
17,112

 
3.65

 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
12,464,426

 
28,255

 
0.90
%
 
12,601,191

 
30,558

 
0.98
%
Other liabilities
124,370

 
 
 
 
 
95,026

 
 
 
 
               Total liabilities
12,588,796

 
 
 
 
 
12,696,217

 
 
 
 
Stockholder's equity
1,964,953

 
 
 
 
 
1,960,221

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
14,553,749

 
 
 
 
 
$
14,656,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
106,869

 
 
 
 
 
$
102,183

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.18
%
 
 
 
 
 
3.01
%
As of December 31, 2015, total assets had increased by $116,575,000 to $14,684,899,000 from $14,568,324,000 at September 30, 2015. For the quarter ended December 31, 2015, compared to the quarter ended September 30, 2015, loans receivable increased $232,096,000 or 2.53% partially offset by the decrease of $120,621,000 or 3.00% in investment securities.
Cash and cash equivalents of $305,959,000 and stockholders’ equity of $1,970,240,000 as of December 31, 2015 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, repayments and sales of investments and borrowings and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments.
The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") equal to 49.0% of total assets, providing a substantial source of additional liquidity if needed.
The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term loan agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB,

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB. The Bank is also eligible to borrow under the Federal Reserve Bank's primary credit program.
The Company's cash and cash equivalents amounted to $305,959,000 at December 31, 2015, a decrease from $284,049,000 at September 30, 2015. These amounts include the Bank's operating cash.
The Company’s net worth at December 31, 2015 was $1,970,240,000, or 13.42% of total assets. This was a increase of $14,561,000 from September 30, 2015 when net worth was $1,955,679,000 which was 13.42% of total assets. The Company’s net worth was impacted in the three months ended December 31, 2015 by net income of $35,098,000, the payment of $12,036,000 in cash dividends, treasury stock purchases of $9,938,000, as well as an other comprehensive loss of $4,785,000. The ratio of tangible capital to tangible assets at December 31, 2015 was 11.62%. The Company has paid out 63% of its fiscal 2016 year-to-date earnings to shareholders in the form of cash dividends and share repurchases, compared with 111% for fiscal year 2015. Management believes the strong net worth position will allow the Company to manage its interest rate risk and provide the capital support needed for controlled growth in a regulated environment.
The Company (on a consolidated basis) and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements.
Federal banking agencies establish regulatory capital rules which require minimum capital ratios and establish criteria for calculating regulatory capital. Minimum capital ratios for four measures are used for assessing capital adequacy. The standards are indicated in the table below. The common equity tier 1 capital ratio recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The rules set forth a “capital conservation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus these buffers, restrictions can be placed on the bank by its regulators. These restrictions include reducing dividend payments, share-backs, and staff bonus payments. The purpose of these buffers is to require banks to build up capital outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where losses are incurred, the minimum capital ratios can still be met. The capital rules that became effective in January 2015 include a phase-in period for certain minimum ratios and the capital buffers, before the full minimum ratios take effect in 2019. Management continues to monitor the financial position of the Company and its capital ratios as the rules phase in.
There are also standards for Adequate and Well Capitalized criteria that are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank and Holding Company must maintain minimum common equity risk-based, tier 1 risk-based, total risk-based and tier 1 leverage ratios as set forth in the following table.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



 
Actual
 
Minimum Capital
Adequacy Guidelines
 
Minimum Well-Capitalized Guidelines
 
Capital
 
Ratio
 
Capital
 
Ratio
 
Capital
 
Ratio
 
(In thousands)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier I risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
$
1,678,544

 
18.52
%
 
$
644,872

 
4.50
%
 
NA

 
NA

      The Bank
1,676,263

 
18.48
%
 
645,078

 
4.50
%
 
931,779

 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,678,544

 
18.52
%
 
543,821

 
6.00
%
 
NA

 
NA

      The Bank
1,676,263

 
18.48
%
 
544,370

 
6.00
%
 
725,827

 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,790,041

 
19.75
%
 
725,095

 
8.00
%
 
NA

 
NA

      The Bank
1,787,760

 
19.70
%
 
725,827

 
8.00
%
 
907,284

 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,678,544

 
11.71
%
 
573,219

 
4.00
%
 
NA

 
NA

      The Bank
1,676,263

 
11.69
%
 
573,402

 
4.00
%
 
716,753

 
5.00
%
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,658,985

 
18.81
%
 
637,788

 
4.50
%
 
NA

 
NA

      The Bank
1,652,569

 
18.73
%
 
637,810

 
4.50
%
 
921,281

 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,658,985

 
18.81
%
 
529,051

 
6.00
%
 
NA

 
NA

      The Bank
1,652,569

 
18.73
%
 
529,360

 
6.00
%
 
705,814

 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,769,587

 
20.07
%
 
705,402

 
8.00
%
 
NA

 
NA

      The Bank
1,763,171

 
19.98
%
 
705,814

 
8.00
%
 
882,267

 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,658,985

 
11.71
%
 
566,923

 
4.00
%
 
NA

 
N/A

      The Bank
1,652,569

 
11.66
%
 
566,942

 
4.00
%
 
708,678

 
5.00
%

CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents: Cash and cash equivalents increased $21,910,000, or 7.71%, to $305,959,000 at December 31, 2015.

Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $75,775,000, or 3.2%, during the three months ended December 31, 2015, due to prepayments, calls and maturities which were partially offset by the purchase of $50,741,000 of available-for-sale securities. During the same period, the balance of held-to-maturity securities declined by $44,846,000 due to paydowns and maturities. There were no held to maturity securities purchased or sold during the quarter. As of December 31, 2015, the Company had a net unrealized gain on available-for-sale securities of $4,754,000, which is included on a net of tax basis in accumulated other comprehensive income.

Loans receivable: Loans receivable, net of related contra accounts, increased to $9,402,730,000 at December 31, 2015 compared to $9,170,634,000 at September 30, 2015. This increase resulted primarily from originations of $963,319,000 and loan purchases of $51,646,000, partially offset by loan repayments of $726,292,000. Commercial loan originations accounted for 75% of total originations and consumer loan originations were 25%. The increase in the loan portfolio is consistent with management's strategy during low rate environments to produce more multifamily, commercial real estate, and commercial and industrial loans which generally have adjustable interest rates or a shorter duration.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table shows the loan portfolio by category and the change.

 
December 31, 2015
 
September 30, 2015
 
Change
 
(In thousands)
 
(In thousands)
 
$
%
Non-Acquired loans
 
 
 
 
 
 
 
 
   Single-family residential
$
5,629,715

55.7
%
 
$
5,651,845

57.5
%
 
$
(22,131
)
(0.4
)%
   Construction
660,238

6.5

 
200,509

2.0

 
459,729

229.3

   Construction - custom
404,849

4.0

 
396,307

4.0

 
8,542

2.2

   Land - acquisition & development
97,025

1.0

 
94,208

1.0

 
2,817

3.0

   Land - consumer lot loans
102,376

1.0

 
103,989

1.1

 
(1,613
)
(1.6
)
   Multi-family
997,696

9.9

 
1,125,722

11.5

 
(128,027
)
(11.4
)
   Commercial real estate
839,157

8.3

 
986,270

10.0

 
(147,112
)
(14.9
)
   Commercial & industrial
751,073

7.4

 
612,836

6.2

 
138,237

22.6

   HELOC
127,919

1.3

 
127,646

1.3

 
273

0.2

   Consumer
181,142

1.8

 
194,655

2.0

 
(13,513
)
(6.9
)
Total non-acquired loans
9,791,190

96.9
%
 
9,493,987

96.6
%
 
297,203

3.1
 %
Acquired loans
164,380

1.6

 
166,293

1.7

 
(1,913
)
(1.2
)
Credit impaired acquired loans
116,030

1.1

 
87,081

0.9

 
28,949

33.2

Covered loans
38,584

0.4

 
75,909

0.8

 
(37,325
)
(49.2
)
Total gross loans
10,110,184

100
%
 
9,823,270

100
%
 
286,914

2.9
 %
   Less:
 
 
 
 
 
 
 
 
      Allowance for probable losses
107,901

 
 
106,829

 
 
1,072

1.0
 %
      Loans in process
535,850

 
 
476,796

 
 
59,054

12.4

      Discount on acquired loans
25,040

 
 
30,095

 
 
(5,055
)
(16.8
)
      Deferred net origination fees
38,663

 
 
38,916

 
 
(253
)
(0.6
)
Total loan contra accounts
707,454

 
 
652,636

 
 
54,818

8.4

Net Loans
$
9,402,730

 
 
$
9,170,634

 
 
$
232,096

2.5
 %
 
Non-performing assets (excludes discounted acquired assets): Non-performing assets decreased 23.1% during the quarter ended December 31, 2015 to $98,846,000 from $128,577,000 at September 30, 2015. The decrease is primarily due to the decrease in REO discussed below. Non-performing assets as a percentage of total assets decreased to 0.67% at December 31, 2015 compared to 0.88% at September 30, 2015.




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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table sets forth information regarding restructured and non-accrual loans and REO.
 
December 31,
2015
 
September 30,
2015
 
(In thousands)
Restructured loans:
 
 
 
 
 
 
 
Single-family residential
$
243,292

 
86.1
%
 
$
259,460

 
85.8
%
Construction

 

 
4,989

 
1.6

Land - acquisition & development
1,976

 
0.7

 
2,486

 
0.8

Land - consumer lot loans
10,173

 
3.6

 
11,289

 
3.7

Multi - family
1,530

 
0.5

 
3,823

 
1.3

Commercial real estate
24,258

 
8.6

 
19,124

 
6.3

HELOC
1,397

 
0.5

 
1,443

 
0.5

Consumer
97

 

 
99

 

Total restructured loans (1)
$
282,723

 
100
%
 
$
302,713

 
100
%
 
 
 
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
43,856

 
77.3
%
 
$
59,074

 
87.1
%
Construction

 

 
754

 
1.1

Construction - custom
2,518

 
4.4

 
732

 
1.1

Land - acquisition & development
509

 
0.9

 

 

Land - consumer lot loans
939

 
1.7

 
1,273

 
1.9

Multi-family
1,538

 
2.7

 
2,558

 
3.8

Commercial real estate
6,681

 
11.8

 
2,176

 
3.2

Commercial & industrial
115

 
0.2

 

 

HELOC
473

 
0.8

 
563

 
0.8

Consumer
119

 
0.2

 
680

 
1.0

Total non-accrual loans (2)
56,748

 
100
%
 
67,810

 
100
%
Real estate owned
42,098

 
 
 
60,767

 
 
Total non-performing assets
$
98,846

 
 
 
$
128,577

 
 
Total non-performing assets and performing restructured loans as a percentage of total assets
2.60
%
 
 
 
2.96
%
 
 
 
 
 
 
 
 
 
 
(1)    Restructured loans were as follows:
 
 
 
 
 
 
 
Performing
$
273,211

 
96.6
%
 
$
291,416

 
96.3
%
Non-performing (included in non-accrual loans above)
9,512

 
3.4

 
11,297

 
3.7

 
$
282,723

 
100
%
 
$
302,713

 
100
%

(2)
For the three months ended December 31, 2015, the Company recognized $1,257,000 in interest income on cash payments received from borrower on nonaccrual loans. The Company would have recognized interest income of $687,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than three months of interest for some of the loans that were brought current. In addition to the nonaccrual loans reflected in the above table, the Company had $102,335,000 of loans that were less than 90 days delinquent at December 31, 2015 but which it had classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs and performing restructured loans as a percent of total assets would have increased to 1.37% at December 31, 2015.
Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.

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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



 
Most restructured loans are accruing and performing loans where the borrower has proactively approached the Bank about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 86.1% of restructured loans as of December 31, 2015. The concession for these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform it will be placed in non-accrual status when it is 90 days delinquent.
A loan that defaults and is subsequently modified would impact the Company’s delinquency trend, which is part of the qualitative risk factors component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the historical loss factors component of the Company's general reserve calculation.
Allocation of the allowance for loan losses: The following table shows the allocation of the Company’s allowance for loan losses.
 
 
December 31, 2015
 
September 30, 2015
 
Amount
 
Loans to
Total Loans (1)
 
Coverage
Ratio (2)
 
Amount
 
Loans to
Total Loans (1)
 
Coverage
Ratio (2)
 
(In thousands)
 
(In thousands)
Single-family residential
$
47,755

 
60.6
%
 
0.9
%
 
$
47,348

 
62.5
%
 
0.8
%
Construction
7,014

 
1.3

 
5.8

 
6,680

 
1.4

 
5.1

Construction - custom
1,062

 
2.4

 
0.5

 
990

 
2.3

 
50.0

Land - acquisition & development
6,778

 
0.9

 
8.1

 
5,781

 
0.8

 
7.7

Land - consumer lot loans
3,001

 
1.1

 
2.9

 
2,946

 
1.1

 
2.8

Multi-family
5,048

 
11.7

 
0.5

 
5,304

 
11.8

 
0.5

Commercial real estate
10,344

 
10.2

 
1.1

 
8,960

 
9.4

 
1.0

Commercial & industrial
24,096

 
8.4

 
3.1

 
24,980

 
7.1

 
3.9

HELOC
820

 
1.4

 
0.6

 
902

 
1.4

 
0.7

Consumer
1,983

 
2.0

 
1.1

 
2,938

 
2.2

 
1.5

 
$
107,901

 
100
%
 
 
 
$
106,829

 
100
%
 
 

(1)
Represents the total amount of the loan category as a % of total gross loans, excluding non-acquired and non-covered loans outstanding not subject to the allowance for loan loss.
(2)
Represents the allocated allowance of the loan category as a % of total gross loans, excluding non-acquired and non-covered loans outstanding not subject to the allowance for loan loss, for the same loan category.

Real Estate Owned: Real estate owned decreased during the three months ended December 31, 2015 by $19,000,000 to $42,098,000. The decrease is primarily due to sales of REO properties during the quarter.



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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table shows the composition of the Bank’s customer accounts by deposit type.
  
December 31, 2015
 
September 30, 2015
 
Deposit Account Balance
 
As a % of Total Deposits
 
Wtd. Avg.
Rate
 
Deposit Account Balance
 
As a % of Total Deposits
 
Wtd. Avg.
Rate
 
(In thousands)

 
 
 
 
 
(In thousands)

 
 
 
 
Non-interest checking
$
1,016,514

 
9.5
%
 
%
 
$
976,250

 
9.2
%
 
%
Interest checking
1,636,584

 
15.4

 
0.06

 
1,579,516

 
14.9

 
0.06

Savings (passbook/stmt)
782,646

 
7.3

 
0.10

 
700,794

 
6.6

 
0.10

Money Market
2,488,340

 
23.4

 
0.14

 
2,564,318

 
24.1

 
0.13

CD’s
4,727,035

 
44.4

 
0.97

 
4,810,825

 
45.2

 
0.95

Total
$
10,651,119

 
100
%
 
0.48
%
 
$
10,631,703

 
100
%
 
0.48
%

Customer accounts: Customer accounts increased $19,416,000, or 0.2%, to $10,651,119,000 at December 31, 2015 compared with $10,631,703,000 at September 30, 2015.
FHLB advances and other borrowings: Total borrowings were $1,928,000,000 as of December 31, 2015, and increase of $98,000,000 since September 30, 2015. The increase represents short term FHLB advances held as of December 31, 2015.

RESULTS OF OPERATIONS
Net Income: The quarter ended December 31, 2015 produced net income of $35,098,000 compared to $38,407,000 for the same quarter one year ago, as described more fully below.
Net Interest Income: For the quarter ended December 31, 2015, net interest income was $4,686,000 higher than the same quarter of the prior year. Average earning assets were slightly lower by $149,121,000 period over period. However, the average yield on interest earning assets increased by 10 basis points and the cost of funds decreased by 8 basis points. The net result was a net interest margin of 3.18% in the quarter ended December 31, 2015 compared to 3.01% in quarter ended December 31, 2014, which drove higher net interest income.
The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis: 
 
Comparison of Quarters Ended
12/31/15 and 12/31/14
 
Volume
 
Rate
 
Total
 
(In thousands)
Interest income:
 
 
 
 
 
Loans receivable
$
10,748

 
$
(6,178
)
 
$
4,570

Mortgaged-backed securities
(1,867
)
 
(322
)
 
(2,189
)
Investments (1)
(2,487
)
 
1,945

 
(542
)
All interest-earning assets
6,394

 
(4,555
)
 
1,839

Interest expense:
 
 
 
 
 
Customer accounts
(92
)
 
(636
)
 
(728
)
FHLB advances and other borrowings
(869
)
 
(1,250
)
 
(2,119
)
All interest-bearing liabilities
(961
)
 
(1,886
)
 
(2,847
)
Change in net interest income
$
7,355

 
$
(2,669
)
 
$
4,686


42

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



___________________ 
(1)
Includes interest on cash equivalents and dividends on FHLB & FRB stock
Provision (Reversal) for Loan Losses: There was no provision for loan losses recorded for the three months ended December 31, 2015, which compares to a reversal of provision of $5,500,000 for the three months ended December 31, 2014. The lack of provision for the quarter ended December 31, 2015 was a result of continued improvement in credit quality of the loan portfolio offset by net growth in the loan portfolio. The related improvement in the credit quality of the loan portfolio relates to the following factors.
The Company had recoveries, net of charge-offs, of $1,072,000 for the quarter ended December 31, 2015, compared with $842,000 of net recoveries for the same quarter one year ago. Non-performing assets amounted to $98,846,000, or 0.67%, of total assets at December 31, 2015, compared to $164,317,000, or 1.13% of total assets at December 31, 2014. Non-accrual loans decreased from $98,353,000 at December 31, 2014, to $56,748,000 at December 31, 2015, a 42.3% decrease. The percentage of delinquent loans decreased from 1.47% at December 31, 2014, to 0.98% at December 31, 2015.
Unfunded commitments are likely to increase as commercial loans become a greater portion of the loan mix. The reserve for unfunded commitments was $3,085,000 as of December 31, 2015, which is unchanged since September 30, 2015. Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $110,986,000, or 1.10% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio. See Note E for further discussion and analysis of the allowance for loan losses for the quarter ended December 31, 2015.

Other Income: For the three months ended December 31, 2015, total other income was $10,635,000 as compared to $5,380,000 three months ended December 31, 2014. The increase was primarily due to other income including the following unusual items in the quarter ended December 31, 2014. One, there was a prepayment charge of $2,600,000 on a $100,000,000 FHLB advance that was accruing interest at 4% and scheduled to mature in September 2015. The prepayment charge was offset by a reduction in interest expense over the remaining nine months of the FHLB advance. Two, Management recorded a $2,000,000 FDIC indemnification asset write-down related to the commercial loans acquired from Horizon Bank in 2010. The portion of that agreement related to commercial loans expired after March 31, 2015. Deposit fee income was $5,917,000 for the three months ended December 31, 2015 compared to $5,977,000 three months ended December 31, 2014.

Other Expense: The quarter ended December 31, 2015 results include total other expense of $64,509,000 compared to $53,600,000 for the same quarter one year ago, a 20.4% increase. This increase was driven primarily by $6,600,000 of expenses related to the Company's conversion of its core system that occurred during the quarter ended December 31, 2015. Additionally, the quarter ended December 31, 2014 benefited from an adjustment of $1,900,000 to FDIC insurance premiums. Compensation and benefits expense increased $539,000. The number of staff, including part-time employees on a full-time equivalent basis, was 1,825 and 1,862 at December 31, 2015 and 2014, respectively. Total other expense for the quarters ended December 31, 2015 and 2014 equaled 1.77% and 1.46%, respectively, of average assets.

Gain (Loss) on Real Estate Acquired Through Foreclosure: Gains recognized on real estate acquired through foreclosure was a net gain of $1,420,000 for the three months ended December 31, 2015, compared to $315,000 for the same period one year ago.

Taxes: Income taxes decreased to $19,317,000 for the quarter ended December 31, 2015, as compared to $21,371,000 for the same period one year ago. The effective tax rate for three months ended December 31, 2015 was 35.50% while for the period ended December 31, 2014 it was 35.75%. The Company expects a lower effective tax rate going forward due to the effects of the addition of bank owned life insurance and increased investment in low income housing tax credit partnerships.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk
Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since September 30, 2015. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2015 Form 10-K.

Item 4.        Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is

43

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 4.        Controls and Procedures

accumulated and communicated to the Company's management, including the Company’s President and Chief Executive Officer along with the Company’s Executive Vice President and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s President and Chief Executive Officer along with the Company’s Executive Vice President and Interim Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Company’s President and Chief Executive Officer along with the Company’s Executive Vice President and Interim Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting. During the period to which this report relates, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.

44



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
 
PART II – Other Information
Item 1. Legal Proceedings
From time to time the Company and its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company’s financial position or results of operations.

Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the 2015 Form 10-K for the year ended September 30, 2015. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended December 31, 2015. 
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of  Publicly
Announced Plan (1)
 
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan at the
End of the Period
October 1, 2015 to October 31, 2015
110,658

 
$
22.29

 
110,658

 
4,090,572

November 1, 2015 to November 30, 2015
12,150

 
25.17

 
12,150

 
4,078,422

December 1, 2015 to December 31, 2015
300,274

 
23.86

 
300,274

 
3,778,148

Total
423,082

  
$
23.49

  
423,082

 
3,778,148

 ___________________
(1)
The Company's only stock repurchase program was publicly announced by its Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 46,956,264 shares have been authorized for repurchase. This includes the authorization of an additional 5,000,000 shares that may be repurchased under Washington Federal's share repurchase program that was announced in May 2015.

Item 3.        Defaults Upon Senior Securities
Not applicable

Item 4.        Mine Safety Disclosures
Not applicable

Item 5.        Other Information
Not applicable


45

Table of Contents

Item 6.        Exhibits
(a)
 
Exhibits
 
 
 
31.1
 
Section 302 Certification by the Chief Executive Officer
 
 
 
31.2
 
Section 302 Certification by the Interim Chief Financial Officer
 
 
 
32
 
Section 906 Certification by the Chief Executive Officer and the Interim Chief Financial Officer
 
 
 
101
 
Financial Statements from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2015 formatted in XBRL

46

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
February 5, 2016
/S/    ROY M. WHITEHEAD        
 
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer
 
 
February 5, 2016
/S/    BRENT J. BEARDALL       
 
BRENT J. BEARDALL
Executive Vice President and Interim Chief Financial Officer

47