WASHINGTON FEDERAL INC - FORM 10-K - EX-13 - EXHIBIT 13 - December 3, 2015

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2015 ANNUAL REPORT


Table of Contents


1

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2015 ANNUAL REPORT




A SHORT HISTORY

Washington Federal, Inc. ("Company" or "Washington Federal") is a bank holding company headquartered in Seattle, Washington that conducts its operations through a federally-insured national bank subsidiary. Its subsidiary is Washington Federal, National Association ("Bank"), which operates 247 offices in eight western states.

The Company had its origin on April 24, 1917, as Ballard Savings and Loan Association. In 1935, the state-chartered Company converted to a federal charter, became a member of the Federal Home Loan Bank system and obtained federal deposit insurance. In 1958, Ballard Federal Savings and Loan Association merged with Washington Federal Savings and Loan Association of Bothell, and the name was shortened to Washington Federal Savings and Loan Association. On November 9, 1982, Washington Federal converted from a federal mutual to a federal stock association, and began trading on the NASDAQ. The Company has recorded a profit every year since, and is often leading the industry in important measures of financial performance such as efficiency and capital strength. Today, the stock trades at 67 times its original 1982 offering price, has paid 131 consecutive quarterly cash dividends, and delivered 10,247% total shareholder to those who first invested 33 years ago.

Along the way, we have expanded to serve clients in eight western states, primarily by way of some 19 acquisitions. Today we offer banking services for both consumers and businesses alike. While much has changed about Washington Federal over the years, one constant has been our commitment to doing business with integrity and treating employees, clients and investors fairly. Our tagline, “invested here,” is intended to reflect our people-first values and express the Company’s dedication to helping our neighborhoods and communities thrive.



FINANCIAL HIGHLIGHTS
September 30,
2015
2014
% Change
 
(In thousands, except per share data)
Assets
$
14,568,324

$
14,756,041

(1.3%)
Cash and cash equivalents
284,049

781,843

(63.7)
Investment securities
1,117,339

1,366,018

(18.2)
Loans receivable, net
9,170,634

8,324,798

+10.2
Mortgage-backed securities
2,906,440

3,231,689

(10.1)
Customer accounts
10,631,703

10,716,928

(0.8)
FHLB advances and other borrowings
1,830,000

1,930,000

(5.2)
Stockholders’ equity
1,955,679

1,973,283

(0.9)
Net income
160,316

157,364

+1.9
Diluted earnings per share
1.67

1.55

+7.7
Dividends per share
0.54

0.41

+31.7
Stockholders’ equity per share
21.04

20.05

+4.9
Shares outstanding
92,936

98,405

(5.6)
Return on average stockholders’ equity
8.21
%
7.99
%
+2.8
Return on average assets
1.10

1.10

—
Efficiency ratio (1)
49.54

46.76

+5.9

(1)
Calculated as total operating costs divided by net interest income, plus other income (excluding investment gains)
NM – not meaningful



2

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2015 ANNUAL REPORT

TO OUR STOCKHOLDERS

Fellow Stockholder,
It is my privilege to report that in 2015 your Company completed its ninety-eighth year in business with record results. Net income for the year totaled $160,316,000, a slight increase over prior year earnings of $157,364,000. Earnings per share also improved, to $1.67 from $1.55, a 7.7% increase from the prior year. It was a good year in virtually all aspects of the Company’s operation.
Perhaps the most encouraging sign for future earnings prospects came in the form of record loan originations, which topped $3 billion for the first time. It was a breakout year for the commercial bank, as our business bankers and commercial real estate lenders produced 62% of all originations. These loans are beneficial to us in preparing for higher rates, because the interest charged on commercial loans is generally floating, and because they mature much earlier than our longstanding bread-and-butter product, the 30 year, fixed rate portfolio mortgage loan. While consumer banking continues to generate most of the Company’s revenues, it’s very gratifying to see the investment in commercial banking begin to pay off. We expect their success to continue into the new fiscal year.
In anticipation of higher interest rates, we have also been focused for several years on changing the mix of our deposits in favor of checking, money market and savings accounts. We believe such transaction accounts will provide more control over interest expense in a rising interest rate environment than will certificates of deposit, traditionally our primary funding source. Although still an important source of overall funding, since 2008 we have steadily reduced the reliance on certificates from 73% to 45% of total deposits. The result, in our opinion, will be a less expensive and more stable funding base over time.
Another major theme again this year was improving asset quality, as the ratio of non-performing assets to total assets decreased to 0.88%, compared to 1.00% at the prior year-end. Delinquent loans also declined from 1.44% to 0.84% of total loans at year-end. Both are important measures of the health of our loan portfolio and stand at the lowest levels since 2008 and the beginning of the Great Recession. Our credit administrators believe that there is room for further improvement.
Washington Federal has long had a reputation for consistency and reliability. We strive to be the bank that stockholders, clients, and employees can all rely upon through the most difficult of economic times. Living up to that responsibility takes a strong capital position and ours is among the best in the industry. Using regulatory standards to adjust for risk, at June 30, 2015, Washington Federal had the strongest capital position (#1) among the largest 100 publicly traded banks in the United States. A strong capital position matters little when times are good, yet when the economy slows, it allows a bank like ours to protect the shareholder’s investment, take advantage of bargain opportunities, work more patiently with borrowing clients fallen on temporarily hard times, and maintain the jobs and personal cash flow of our all-important colleagues.
Turning to the income statement, revenue growth has been a challenge for all banks in the current low interest rate environment. As older loans and investments repay, the funds received must necessarily be re-invested in today’s lower yielding assets. Still, we are pleased to report that we were able to hold interest income to a small decrease over the prior year, due to the record increase in loan originations mentioned above. One benefit of low rates, though, has been a steady decline in the cost of deposits, which fell by $7 million during the year and enabled net interest income, the difference between interest income and interest expense, to increase by $8 million. Not a lot, yet in today’s interest rate climate, happily taken.
Another strategic objective is to increase fee income and we are very pleased to report that deposit fee income increased by 57% during the year. WAFD Insurance also contributed with an increase in commissions earned of 79% over the prior year. We believe that both sources of fee income will increase again in the coming year.
In analyzing net income last year and forecasting future profits, it’s important to note that two potentially non-recurring items played a material role in boosting income this year. First, the stronger economy allowed Management to realize $9,304,000 in gains on sale of real estate acquired in foreclosure during the recession, compared to a loss of $2,743,000 last year. Second, as mentioned above, we experienced a significant improvement in loan quality and recoveries of loans previously charged-off during the year, which allowed Management to reverse $11,162,000 in prior charges to the allowance for loan losses. Combined, these two items generated $20,466,000 in pre-tax income that may not be duplicated in the year to come.
Operating expenses climbed by almost $21 million during the year due to a number of factors. Much of the increase is due to having a full year of expenses related to branch acquisitions in 2014. Last year I wrote about Project Catalyst, a four year project that is our first core technology upgrade in more than a generation. It will be completed in 2016 and contributed to the increase in overhead during the year. Likewise, the growth of the commercial bank has required a large investment and contributed to higher expenses, along with hiring and training to fill succession needs, a tightening labor market and the deployment of a new

3

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2015 ANNUAL REPORT

generation of ATM’s to most of our 247 branches. Once Project Catalyst is completed and stable, we expect that certain efficiencies will be achieved. Washington Federal has long been a low-cost provider of banking services and it is our goal to be among the top 10% of the industry in cost effectiveness as measured by the ratio of non-interest expense to net revenue.
Because we used cash and the proceeds of maturing investments to fund loan growth during the year, the balance sheet did not experience growth overall, so additional capital was not needed. Absent the need to retain earnings to support asset growth, shareholders were rewarded with an 8% increase in the cash dividend, along with a ramped-up stock repurchase program. In all, 5.8 million shares, representing approximately 6% of the shares outstanding at the beginning of fiscal 2015 were repurchased during the year. Approximately 4.2 million shares remain in the current repurchase authorization from the Board and Management will use that authorization as opportunities arise.
The Company also lived up to its “Invested Here” tagline last year, largely due to the amazing commitment to volunteerism by our colleagues. They contributed over 12,000 hours of their personal time to local community organizations, including 700 hours spent helping low income individuals and families with free tax preparation. Lending to promote economic development, to revitalize neighborhoods, and to provide services for low-and moderate income families increased to $153 million last year, including $117 million committed to affordable housing. An additional $20 million in Low Income Housing Tax Credits helped construct 331 new units of affordable housing in neighborhoods served by the Company. Employees, retirees and directors contributed over $500,000 to local United Way campaigns and the Washington Federal Foundation provided direct financial support to 249 different not-for-profit organizations during the year. Finally, knowing that there is often the need for space where community organizations can meet, we have dedicated excess space to that purpose in a number of cities and towns. In Klamath Falls, Oregon for example, we remodeled a building previously used for bank operations and the resulting Washington Federal Conference Center hosted 183 meetings and events for community based organizations during the year, all at no cost to those using the facility.
As we look ahead, the consumer segment will continue to be the largest and most important part of our business, and we will focus our branch colleague’s efforts as always on residential real estate lending. Home equity lines of credit, custom construction loans and 30 year, fixed rate mortgages that we hold in portfolio generate high quality assets for the Company that stick to our ribs longer than most commercial loans. Should we get the benefit of higher long term interest rates during the year, expect our mortgage originations to increase. Consumers also represent our largest and most stable source of core deposits and we expect our branches to increase the number of households served during the year to come.
You will see us continue to invest more heavily in our commercial banking capabilities. It’s an effective way to grow the overall business and comes without the burden of consumer regulation that is expensive and difficult to comply with, along with less competition from the government and tax-privileged competitors such as credit unions. We are very pleased with the amount and the quality of growth being generated by our commercial bankers at present. They brought on several marquee clients during the year, while attracting other top-quality and seasoned bankers to our commercial lending teams. As good as the year was for them, the best days for our commercial bankers clearly lie ahead.
Technology will play a starring role in our future plans. Consumers and businesses alike clearly prefer the convenience of handling routine transactions and information requests through digital channels and this is an area where we will invest actively and prudently. The public expects the bank to be open and available wherever and whenever they need us. Meanwhile, branches are still needed and expected, but are becoming something akin to a “Help Desk” that customers use for problem resolution and non-routine transactions. Like most banks, Washington Federal is experimenting with different forms of branches, such as the very smart looking and dual branded location in Ashland Oregon. Look for smaller and more highly automated branches in the future as we move more and more of our client interface activities to reliable digital channels as demanded by the public today.
All in, it was another very good year for Washington Federal, particularly in light of the tremendous effort and expense necessary to prepare the Company for the move to a new generation of technology in 2016. Return on assets improved to 1.10%, return on equity amounted to 8.21%, even with our strong equity position, and total shareholder return was 14.29% from September 30, 2014 to September 30, 2015. I am not gifted enough as a writer to pay adequate tribute to the extraordinary effort of our 1,850 colleagues who made all of this happen. Perhaps it’s enough simply to say that their collective work was truly extraordinary this year.
On behalf of them and in closing, allow me to say thank you for entrusting a portion of your wealth to our enterprise and for believing as we do that there’s still a place in the world for a good, solid regional bank. As always, you can help further by referring your friends, neighbors and business associates to Washington Federal for all their banking needs.


4

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2015 ANNUAL REPORT

I hope to see you at the 2016 Annual Meeting of Shareholders to be held on January 20th at 2:00 PM at the Benaroya Hall in downtown Seattle.

Sincerely,
Roy M. Whitehead
Chairman, President and Chief Executive Officer






5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We make statements in this Annual Report on Form 10-K that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions as well as future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under Item 1A. “Risk Factors,” and in any of the Company's other subsequent Securities and Exchange Commission filings, which could cause our future results to differ materially from the plans, objectives, goals, estimates, intentions, and expectations expressed in forward-looking statements:

•
a deterioration in economic conditions, including declines in the real estate market and home sale volumes and financial stress on borrowers as a result of the uncertain economic environment;
•
economic downturn, including high unemployment rates and declines in housing prices and property values;
•
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
•
fluctuations in interest rate risk and changes in market interest rates;
•
the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
•
the Company's ability to successfully complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such activities;
•
the Company's ability to manage its expenses to remain at levels that are appropriate for its business activities and their level of complexity;
•
legislative and regulatory limitations, including those arising under the Dodd-Frank Wall Street Reform Act and potential limitations in the manner in which we conduct our business and undertake new investments and activities;
•
the ability of the Company to obtain external financing, including client deposits and wholesale borrowing sources, to fund its operations or obtain this financing on favorable terms;
•
changes in other economic, competitive, governmental, regulatory, and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
•
the ability of the Company to successfully implement new core operating systems;
•
the ability of the Company to identify and mitigate information security risks;
•
the success of the Company at managing the risks involved in the foregoing and managing its business; and
•
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.

All forward-looking statements speak only as of the date on which such statements are made, and Washington Federal undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.

6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
Washington Federal, Inc. is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a national bank subsidiary, Washington Federal, National Association. 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 real estate loans, multi-family real estate loans and commercial 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.
The Company's fiscal year end is September 30th. All references to 2015, 2014 and 2013 represent balances as of September 30, 2015, September 30, 2014 and September 30, 2013, or activity for the fiscal years then ended.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses in the Company's consolidated financial statements. Accordingly, estimated amounts may fluctuate from one reporting period to another due to changes in assumptions underlying estimated values.
The Company has determined that the only accounting policy critical to an understanding of the consolidated financial statements of Washington Federal relates to the methodology for determining the valuation of the allowance for loan losses. The Company maintains an allowance to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio.
The general loan loss allowance is established by applying a loss percentage factor to the different loan types. For example, residential real estate loans are not individually analyzed for impairment and loss exposure because of the significant number of loans, their relatively small balances and their historically low level of losses. See the "Asset Quality and Allowance for Loan Losses" section below for additional information about establishing the loss factors. Specific allowances may be established for loans that are individually evaluated.

INTEREST RATE RISK
The primary source of income for the Company is net interest income, which is the difference between the income generated by interest-earning assets and the expense incurred for interest-bearing liabilities. The level of net interest income is a function of the average balances of our interest-bearing assets and liabilities and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-bearing assets and liabilities. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest-earning assets, the result could be a reduction in net interest income, and with it, a reduction in our earnings.
Based on Management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term business loans and transaction deposit accounts, investing in variable rate securities and extending the maturity on borrowings, to reduce its interest rate risk profile compared to its historical levels. Historically, the Company had accepted a higher level of interest rate risk as a result of its significant holdings of fixed-rate single-family home loans that are longer-term than the short-term characteristics of its primary liabilities of customer certificate of deposit accounts.
The acquisition of $1.9 billion in deposits from Bank of America, N.A. during 2014 provided a significant increase in transaction deposit accounts. Transaction account balances increased to 55% of total customer deposits as of September 30, 2015 compared to 51% as of the prior year end. Transaction account balances have historically been less sensitive to changes in interest rates. Other factors during 2015 that reduced interest rate risk include: 1) commercial and industrial loans have grown by $234 million million or 61.6% to $613 million during 2015, and 2) the adjustable rate portion of the overall loan portfolio has grown from 28% to 35%. Management has also been purchasing variable rate investments in recent years to mitigate the risk of rising interest rates. The composition of the investment portfolio is now 41% variable and 59% fixed rate. Management has executed $400 million in notional value of forward starting interest rate swaps to lock-in long term borrowing rates.



7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company manages its interest rate risk through the interest rate cycles by originating more fixed-rate loans when yields are higher and adding loans and investments with shorter term characteristics, such as construction and commercial loans, when rates are lower. During low rate environments, the Company endeavors to grow longer duration transaction deposit accounts which are not usually as sensitive to rising rates as term deposits. This balance sheet strategy, in conjunction with a strong capital position and low operating costs has allowed the Company to manage interest rate risk within guidelines established by the Board of Directors through various interest rate cycles experienced in the Company's 98 year history. Although a significant increase in market interest rates or a flattening of the yield curve could adversely affect net interest income, this interest rate risk approach has never resulted in a monthly operating loss. The Company's objective is to grow the amount of net interest income through rate cycles, acknowledging that there will be some periods of time when that will not be feasible.
The chart below shows the volatility of our period end net interest spread (dashed line measured against the right axis) compared to the relatively consistent growth in net interest income (solid line measured against the left axis). As noted above, this relative consistency is accomplished by actively managing the size and composition of the balance sheet through different rate cycles.
Management 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.
Repricing Gap Analysis. At September 30, 2015, the Company had approximately $1.9 billion more in liabilities than assets subject to repricing in the next year, which amounted to a negative maturity gap of 13.4% of total assets. This is an increase from the 11.0% negative gap as of the prior year end, attributable to the decrease in cash balances and the growth in loans. Having this excess of liabilities, relative to assets, that will be repricing within the next year, the Company is subject to decreasing net interest income should interest rates rise. However, if Management were to take steps to change the size and/or mix of the balance sheet, rising rates may not cause a decrease in net interest income. Cash and cash equivalents of $284,049,000 and stockholders' equity of $1,955,679,000 provide management with additional flexibility in managing interest rate risk going forward.
The following table shows the estimated repricing periods for earning assets and paying liabilities:

8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
Repricing Period
 
 
As of September 30, 2015
Within One
Year
 
After 1 year -
before 6 Years
 
Thereafter
 
Total
 
(In thousands)
 
 
Earning Assets (1)
$
4,857,276

 
$
4,730,256

 
$
3,925,481

 
$
13,513,013

Paying Liabilities
(6,804,769
)
 
(3,619,159
)
 
(2,043,780
)
 
(12,467,708
)
Excess (Liabilities) Assets
$
(1,947,493
)
 
$
1,111,097

 
$
1,881,701

 
 
Excess as % of Total Assets
(13.40
)%
 
 
 
 
 
 
Policy limit for one year excess
(20.00
)%
 
 
 
 
 
 
(1) Asset repricing period includes estimated prepayments based on historical activity

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 2.20% in the next year. This compares to an estimated decrease of 1.50% as of the September 30, 2014 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 will 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 3.25% in the first year and 6.50% in the second year assuming a constant balance sheet and no management actions.

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 $535,948,000 or 19.7% and the NPV to total assets ratio to decline to 15.91% from a base of 18.39%. As of September 30, 2014, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $598,000,000 or 21.7% and the NPV to total assets ratio to decline to 15.68% from a base of 18.53%. The decreased NPV sensitivity and higher base NPV ratio is due to lower interest rates and higher prices as of September 30, 2015.
Interest Rate Spread. The interest rate spread increased to 2.73% at September 30, 2015 from 2.66% at September 30, 2014. Net interest spread represents the difference between the contractual rates of earning assets and the contractual rates of paying liabilities as of a specific date. The spread increased primarily due to lower rates on borrowings and customer accounts. Rates on customer accounts decreased by 3 basis points from the prior year and rates on borrowings decreased by 17 basis points.


SEP 2015
 
JUN 2015
 
MAR 2015
 
DEC 2014
 
SEP 2014
 
JUN 2014
 
MAR 2014
 
DEC 2013
Interest rate on loans and mortgage-backed securities
3.94
%
 
3.96
%
 
4.10
%
 
4.14
%
 
4.17
%
 
4.18
%
 
4.22
%
 
4.26
%
Interest rate on investment securities
1.19

 
1.12

 
0.94

 
1.02

 
0.96

 
1.00

 
1.08

 
0.84

Combined earning assets
3.63

 
3.61

 
3.63

 
3.68

 
3.63

 
3.63

 
3.70

 
3.65

Interest rate on customer accounts
0.48

 
0.48

 
0.48

 
0.50

 
0.51

 
0.53

 
0.56

 
0.61

Interest rate on borrowings
3.35

 
3.43

 
3.49

 
3.49

 
3.52

 
3.52

 
3.52

 
3.52

Combined cost of funds
0.90

 
0.90

 
0.92

 
0.94

 
0.97

 
0.98

 
1.03

 
1.07

Interest rate spread
2.73
%
 
2.71
%
 
2.71
%
 
2.74
%
 
2.66
%
 
2.65
%
 
2.67
%
 
2.58
%


9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net Interest Margin. The net interest margin is measured using net interest income divided by average assets for the period. The net interest margin increased to 3.08% for the year ended September 30, 2015 from 3.05% for the year ended September 30, 2014. The yield on earning assets decreased 6 basis points to 3.95% and the cost of interest bearing liabilities declined 10 basis points to 0.94%.

For the year ended September 30, 2015, average earning assets increased by $136,449,000, or 1.03%, from $13,308,050,000 during 2014 to $13,444,499,000 for the current year. During 2015, average loans receivable increased $600,869,000 or 7.51%, while the combined average balances of mortgage backed securities, investments and cash and cash equivalents decreased by $464,420,000 or 8.75%. Management views organic loan growth as the highest and best use of capital, thus the shift in earning assets away from cash and investments and into loans is seen as a positive development. The lower yield on earning assets is the result of lower rates on loans and investments due to the continued low interest rate environment and the increase in loan production.

During 2015, average customer deposit accounts increased $331,577,000 or 3.21%, while the average balance of borrowings decreased by $106,301,000 or 5.44%. The decrease in interest costs was a combination of continued downward repricing of time deposits, lower average balance of borrowings partially offset by the increase in customer accounts.

The following table sets forth information explaining the changes in the net interest margin for 2015 compared to the prior year.
 
Year Ended September 30, 2015
 
Year Ended September 30, 2014
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
 
(In thousands)
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans and covered loans
$
8,598,435

 
$
437,002

 
5.08
%
 
$
7,997,566

 
$
430,850

 
5.39
%
Mortgaged-backed securities
3,073,180

 
71,392

 
2.32

 
3,275,846

 
80,260

 
2.45

Cash & Investments
1,634,441

 
20,363

 
1.25

 
1,866,560

 
20,964

 
1.12

FHLB & FRB stock
138,443

 
1,796

 
1.30

 
168,078

 
1,623

 
0.97

 
 
 
 
 
 
 
 
 
 
 
 
 Total interest-earning assets
13,444,499

 
530,553

 
3.95
%
 
13,308,050

 
533,697

 
4.01
%
Other assets
1,102,827

 
 
 
 
 
969,653

 
 
 
 
Total assets
$
14,547,326

 
 
 
 
 
$
14,277,703

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,656,687

 
$
51,054

 
0.48
%
 
$
10,325,110

 
$
58,524

 
0.57
%
FHLB advances
1,848,904

 
66,018

 
3.57

 
1,955,205

 
69,553

 
3.56

 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
12,505,591

 
117,072

 
0.94
%
 
12,280,315

 
128,077

 
1.05
%
Other liabilities
89,140

 
 
 
 
 
27,437

 
 
 
 
               Total liabilities
12,594,731

 
 
 
 
 
12,307,752

 
 
 
 
Stockholders' equity
1,952,595

 
 
 
 
 
1,969,951

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
14,547,326

 
 
 
 
 
$
14,277,703

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
413,481

 
 
 
 
 
$
405,620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.08
%
 
 
 
 
 
3.05
%


Cash and cash equivalents of $284,049,000 and stockholders’ equity of $1,955,679,000 as of September 30, 2015 provides management with flexibility in managing interest rate risk going forward.

10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ASSET QUALITY & ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance to absorb losses inherent in the loan portfolio. The amount of the allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. The Company's methodology for determining the appropriateness of the allowance is primarily based on a general allowance methodology. Other elements include specific allowances and a reserve for unfunded commitments.
The loan loss allowance is primarily established by applying a loss percentage factor to the different loan types. Management believes loan types are the most relevant factor in the allowance calculation for groups of homogeneous loans as the risk characteristics within these groups are similar. The loss percentage factor is made up of two parts - the historical loss factor (“HLF”) and the qualitative loss factor (“QLF”).
The HLF takes into account historical charge-offs by loan type. For the fiscal year 2015, the Company is using the 10 year average of historical loss rates for each loan category multiplied by 2 to reflect a two year loss emergence period. This is the likely period of time during which a residential or commercial loan borrower experiencing financial difficulties might be utilizing their cash reserves prior to becoming delinquent on their loan, plus the period of time that it takes the bank to work out the loans. The Company uses a 10 year average to encompass a typical credit cycle.
The QLF is based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, delinquency trends, current economic conditions, collateral values, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, and the duration of the current business cycle. These factors are considered by loan type. Single family residential loan sub-types are considered by loan to value, non owner or owner occupied, and modified loans. Credit quality has been improving in most loan categories during the year, but at different paces. In addition, loan growth in some portfolios has been a consideration.
As of September 30, 2015, the general allowance was $106,829,000 and it was comprised of $81,721,000 due to HLF and $25,108,000 due to qualitative factors. As of September 30, 2015, the Company had $275,000 allocated to specific allowances for individually evaluated loans. The reserve for unfunded commitments was $3,085,000 as of September 30, 2015. The Company reversed $11,162,000 of loan loss provision in 2015 due in large part to net recoveries of previously charged off loans of $5,370,000 . This was comprised of $19,970,000 in recoveries and $14,600,000 in charge offs.
The recovery of the carrying value of loans is susceptible to future market conditions beyond the Company's control, which may result in losses or recoveries differing from those estimated.
Restructured loans. Restructured single-family residential loans are reserved for under the Company's loan loss reserve methodology. Most troubled debt restructured ("TDR") loans are accruing and performing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. As of September 30, 2015 single-family residential loans comprised 85.8% of restructured loans. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period.
Outstanding TDRs decreased to $302,713,000 as of September 30, 2015 from $374,743,000 as of the prior year end. During 2015, there were additions of $18,930,000 and reductions of $90,960,000 due to prepayments and transfers to Real Estate Owned ("REO").
The subsequent default rate on restructured single- family mortgage loans has been 15.6% over the last two years. Concessions for construction (1.6%), land A&D (0.8%) and multi-family loans (1.3%) are typically an extension of maturity combined with a rate reduction of normally 100 bps. Before granting approval to modify a loan in a TDR, a borrower’s ability to repay is considered by evaluating: current income levels and debt to income ratio, borrower’s credit score, payment history of the loan, and updated evaluation of the secondary repayment source. The subsequent default rate on restructured commercial loans has been 10.2% over the last two years.
If a loan is on non-accrual status before becoming a TDR it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on accrual status before it becomes a TDR, and it is concluded that a full repayment is highly probable, it will remain on accrual status following restructuring. If the

11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

homogeneous restructured loan does not perform, it is placed in non-accrual status when it is 90 days delinquent. For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. After the required six consecutive payments are made, a management assessment may conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual. A loan that defaults and is subsequently modified would impact the Company's delinquency trend, which is part of the QLF component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the HLF component of our general reserve calculation.
Non-performing assets. Non-performing assets were $128,577,000, or 0.88%, of total assets at September 30, 2015 compared to $147,311,000, or 1.00%, of total assets at September 30, 2014. The current level of non-performing assets is lower than the 0.97% average over the Company's 30+ year history as a public company.
The following table details non-performing assets by type comparing 2015 and 2014:
 
 
September 30,
 
 
 
 
Non-Performing Assets
 
2015
 
2014
 
$ Change
 
% Change
 
 
(In thousands)
 
 
Non-accrual loans:
 
 
 
 
 
 
 
 
Single-family residential
 
$
59,074

 
$
74,067

 
$
(14,993
)
 
(20.2
)%
Construction – speculative
 
754

 
1,477

 
(723
)
 
(49.0
)
Construction – custom
 
732

 
—

 
732

 
—

Land – acquisition & development (A&D)
 
—

 
811

 
(811
)
 
(100.0
)
Land – consumer lot loans
 
1,273

 
2,637

 
(1,364
)
 
(51.7
)
Multi-Family
 
2,558

 
1,742

 
816

 
46.8

Commercial real estate
 
2,176

 
5,106

 
(2,930
)
 
(57.4
)
Commercial & industrial
 
—

 
7

 
(7
)
 
(100.0
)
HELOC
 
563

 
795

 
(232
)
 
(29.2
)
Consumer
 
680

 
789

 
(109
)
 
(13.8
)
Total non-accrual loans
 
67,810

 
87,431

 
(19,621
)
 
(22.4
)
Total Real Estate Owned (REO)
 
60,767

 
59,880

 
887

 
1.5

Total non-performing assets
 
$
128,577

 
$
147,311

 
$
(18,734
)
 
(12.7
)%

 
 
 
 
 
 
 
 
In response to the improving overall credit quality of our loan portfolio, the total allowance for loan loss decreased by $7,762,000, or 6.8% from $114,591,000 as of September 30, 2014 to $106,829,000 at September 30, 2015. $106,554,000 of the allowance is calculated under the formulas contained in our general allowance methodology and the remaining $275,000 is made up of specific reserves on loans that were deemed to be impaired at September 30, 2015. The primary reasons for the decrease in total allowance are the improving asset quality metrics combined with improving macroeconomic factors, such as improving employment and higher real estate values offset by growth in total loans outstanding.
The ratio of the allowance for loan losses and reserves for unfunded commitments to total gross loans decreased to 1.13% as of September 30, 2015 from 1.33% as of September 30, 2014 due to the combination of improving credit quality and loan growth.
The ratio of the allowance for loan losses to non performing loans increased to 157.5% as of September 30, 2015 from 128.5% as of September 30, 2014. This is primarily due to the reduction in non-performing loans.


12


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, borrowings and retained earnings, if applicable. Washington Federal's principal sources of revenue are interest on loans and interest and dividends on investments.
The Company's net worth at September 30, 2015 was $1,955,679,000 or 13.42% of total assets. This is a decrease of $17,604,000 from September 30, 2014 when net worth was $1,973,283,000 or 13.37% of total assets. The Company's net worth was impacted in the year by net income of $160,316,000, the payment and accrual of $36,711,000 in cash dividends, treasury stock purchases that totaled $126,728,000, as well as a decrease in accumulated other comprehensive income (loss) of $20,355,000. The Company paid out 22.9% of its 2015 earnings in cash dividends to common shareholders, compared with 26.7% last year. The decrease reflects a timing difference in the payment schedule of dividends. If the dividend amount remains the same at $0.13 per quarter, the estimated cash dividends for 2016 will be $48,360,000. For the year ended September 30, 2015, $163,439,000, or 101.9%, of net income was returned to shareholders in the form of cash dividends or share repurchases. Management believes this strong net worth position will help the Company manage its interest rate risk and provide the capital support needed for controlled growth in a regulated environment.
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. On June 1, 2015, the FHLB of Seattle merged into the FHLB of Des Moines
to create a larger, financially stronger, member-owned cooperative. The resulting institution is headquartered in Des Moines with a smaller presence maintained in Seattle for members of the former FHLB of Seattle. This merger will benefit the Bank due to the return of $55,708,000 of excess FHLB stock that occurred in 2015 and expected higher dividends to be received on the stock investment in the FHLB of Des Moines.

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, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB.
The Company's cash and cash equivalents amounted to $284,049,000 at September 30, 2015, a 63.7% decrease from the cash and cash equivalents balance of $781,843,000 as of the prior year end. The decrease in cash and cash equivalents is the result of the significant loan growth experienced in 2015 as detailed below. Additionally, see “Interest Rate Risk” above and the “Statement of Cash Flows” included in the financial statements.


13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities. Available-for-sale securities decreased $668,879,000, or 21.9% during the year ended September 30, 2015 to $2,380,563,000 as repayments were deployed into loans. This net decrease included principal repayments of $721,951,000, sales of $246,826,000 and the purchase of $315,114,000 of available-for-sale investment securities. As of September 30, 2015, the Company had net unrealized gains on available-for-sale securities of $15,113,000 which is recorded net of tax as part of stockholders' equity. During the year the Company sold $246,826,000 of available for sale securities and had realized gains of $9,641,000.
Held-to-maturity securities increased $94,951,000 or 6.1% during the year ended September 30, 2015 to $1,643,216,000 due to purchases of $259,489,000, partially offset by repayments of $159,947,000, with the remaining decrease due to amortization of the net purchase premium. With potentially rising interest rates, these securities may be subject to unrealized losses. As of September 30, 2015, the net unrealized losses on held-to-maturity securities was $5,796,000, which management attributes to the change of interest rates since acquisition.
Loans receivable. Loans receivable, including covered loans net of related contra accounts, increased $845,836,000, or 10.2%, to $9,170,634,000 at September 30, 2015, from $8,324,798,000 one year earlier. This increase resulted primarily from record high originations of $3,103,515,000, which represented a 42.9% increase over the prior year. There were also loan purchases of $279,936,000. The net 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 are more often adjustable rate or have a shorter final maturity. Commercial loan originations accounted for 62% of total originations and consumer originations were 38%. The significant increase in loan origination resulted from a strategic emphasis on commercial lending, coupled with growing economies in all major markets. Loan repayments for the year totaled $2,457,268,000, a $629,953,000 or 34.5% increase over 2014. The increase in repayments is due to the ongoing historically low interest rate environment and the growth in commercial loans that typically have a shorter duration. During the year, there were transfers to from loans to REO of $76,185,000.
The following table presents the gross loan balances by category and the year over year change.
 
September 30, 2015
 
September 30, 2014
 
Change
 
(In thousands)
 
(In thousands)
 
$
%
Non-Acquired loans
 
 
 
 
 
 
 
 
   Single-family residential
$
5,651,845

57.6
%
 
$
5,560,203

62.6
%
 
$
91,642

1.6%
   Construction - speculative
200,509

2.0

 
140,060

1.6

 
60,449

43.2
   Construction - custom
396,307

4.0

 
385,824

4.3

 
10,483

2.7
   Land - acquisition & development
94,208

1.0

 
77,832

0.9

 
16,376

21.0
   Land - consumer lot loans
103,989

1.1

 
108,623

1.2

 
(4,634
)
(4.3)
   Multi-family
1,125,722

11.6

 
917,286

10.3

 
208,436

22.7
   Commercial real estate
986,270

10.0

 
591,336

6.7

 
394,934

66.8
   Commercial & industrial
612,836

6.2

 
379,226

4.3

 
233,610

61.6
   HELOC
127,646

1.3

 
116,042

1.3

 
11,604

10.0
   Consumer
194,655

2.0

 
132,590

1.5

 
62,065

46.8
Total non-acquired loans
9,493,987

96.8
%
 
8,409,022

94.7
%
 
1,084,965

12.9%
Acquired loans
166,293

1.6

 
184,188

2.0

 
(17,895
)
(9.7)
Credit impaired acquired loans
87,081

0.9

 
76,507

0.8

 
10,574

13.8
Covered loans
75,909

0.7

 
213,203

2.5

 
(137,294
)
(64.4)
Total gross loans
9,823,270

100
%
 
8,882,920

100
%
 
940,350

10.6%
   Less:
 
 
 
 
 
 
 
 
      Allowance for probable losses
106,829

 
 
114,591

 
 
(7,762
)
(6.8)
      Loans in process
476,796

 
 
346,172

 
 
130,624

37.7
      Discount on acquired loans
30,095

 
 
59,874

 
 
(29,779
)
(49.7)
      Deferred net origination fees
38,916

 
 
37,485

 
 
1,431

3.8
Total loan contra accounts
652,636

 
 
558,122

 
 
94,514

16.9
Net Loans
$
9,170,634

 
 
$
8,324,798

 
 
845,836

10.2%

14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following table shows the change in the geographic distribution by state of the gross loan portfolio from 2014 to 2015:

2015
2014
Change
Washington
49.7
%
45.8
%
3.9
 %
Oregon
15.6

16.1

(0.5
)%
Utah
10.7

4.5

6.2
 %
Idaho
6.8

4.2

2.6
 %
New Mexico
4.8

7.8

(3.0
)%
Other (1)
4.3

6.7

(2.4
)%
Arizona
3.3

11.0

(7.7
)%
Texas
3.1

2.4

0.7
 %
Nevada
1.7

1.5

0.2
 %

100.0
%
100.0
%

(1) Includes loans in other states and purchased loan pools and other loans without state property information.
Covered loans are included as part of loans receivable as described above. As of September 30, 2015, FDIC covered loans net of related discounts decreased 58.7%, or $103,580,000, from the prior year end to $72,896,000. A reduction of $49,515,000 was due to the expiration of the FDIC loss share coverage for the acquired commercial loans from the former Horizon Bank that expired after March 31, 2015. The FDIC loss share coverage for single family residential loans from the former Horizon Bank will continue for another five years. There were also $72,928,000 of net principal payments, maturities and transfers to REO which were partially offset by an increase of $18,414,000 in accretable yield and reversal of $449,000 in loss reserve. There were $38,083,000 of covered commercial loans from the former Home Valley Bank as of September 30, 2015 that will lose their FDIC loss share coverage after September 30, 2015. The remaining portfolio of covered loans is expected to continue to decline over time, absent another FDIC assisted transaction. When FDIC loss share agreements expire, any remaining loans will be transferred to the non covered portfolio. The Company continues to accrue a liability for the termination of the loss share agreements for what is known as the clawback provision of the agreement with the FDIC. The Company estimates the amount of this liability based on actual loss experience and projected future losses and recoveries. Contractually, the amount that will have to be paid to the FDIC for a clawback liability, if any, will be determined in 2022, after full expiry of the loss share agreements.

Non-performing assets. NPAs (excludes discounted acquired assets) decreased to $128,577,000 as of September 30, 2015 from $147,311,000 at September 30, 2014, a 12.7% decrease. The decrease is due to improving credit conditions and credit quality. Non-performing assets as a percentage of total assets was 0.88% at September 30, 2015 compared to 1.00% at September 30, 2014. This level of NPAs is now below the 0.96% average in the Company's 30+ year history as a public company.

Restructured Loans. Total restructured loans declined to $302,713,000 as of September 30, 2015 from $374,743,000 as of September 30, 2014. As of September 30, 2015, 95.7% of the restructured loans were performing. The $13,126,000 of non-performing restructured loans are included in the NPAs total. Total non-performing assets and restructured loans as a percent of total assets has declined to 2.87% as of September 30, 2015 from 3.37% as of September 30, 2014.

Real estate owned. As of September 30, 2015, real estate owned consisted of 212 properties totaling $61,098,000. Real estate owned decreased by $22,864,000 or 37.4% from $83,962,000 as of September 30, 2014 as the Bank continued to liquidate foreclosed properties. During the year, the Bank sold 257 foreclosed properties for net proceeds of $76,296,000 and a net gain on sale of $12,632,000. Including the $3,328,000 in ongoing maintenance expense, and periodic valuation adjustments, the net gain on sale of REO for the year was $9,304,000. Land represents $17,735,000 or 29.1% of total non covered and covered real estate held for sale.

The total net loss on sale of real estate, measured against the original loan balance of $96,126,000, was $19,829,000 or 20.6% for properties sold in fiscal 2015.


15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest Receivable. Interest receivable decreased by $11,608,000 to $40,429,000 at September 30, 2015 as compared to September 30, 2014 largely as a result of the over-accrual of interest income of $8,872,000 that was corrected in the current year. Based upon an evaluation of all relevant factors, Management believes the correcting adjustment did not have a material impact on the Company’s current quarter, current year-to-date, or previously reported results. The remaining difference is primarily due to lower yields on earning assets.

Bank Owned Life Insurance. The Company purchased $100,000,000 in bank-owned life insurance, with an expected 2015 pre-tax equivalent yield of 5.14% during 2015 to assist in funding the growth of employee benefit costs.
Intangible assets. The Company's intangible assets are made up of $291,503,000 of goodwill and the unamortized balance of the core deposit intangible of $7,855,000 at September 30, 2015.

Customer deposits. Customer deposits at September 30, 2015, totaled $10,631,703,000 compared with $10,716,928,000 at September 30, 2014, an $85,225,000 or 0.8% decrease due primarily to a reduction in time deposits. Consistent with its interest rate risk management strategy, the Company was able to increase transaction accounts by $330,191,000 or 6.0%, while time deposits decreased by $415,416,000 or 7.9%. The weighted average rate paid on customer deposits during the year was 0.48%, a decrease of 9 basis points from the previous year, as a result of the low interest rate environment.
FHLB advances and other borrowings. Total FHLB advances were $1,830,000,000 at September 30, 2015. In December 2014, there was a prepayment of a FHLB advance of $100,000,000 with a maturity date in September 2015, resulting in a prepayment penalty of $2,613,000. In June 2015, there was a prepayment of a FHLB advance of $100,000,000 with a maturity date in September 2017, resulting in a prepayment penalty of $7,941,000. In July 2015, a new $100,000,000 FHLB advance was executed at an interest rate of 1.95% for a term of five years. The result of these activities was a decrease in the cost of borrowings from 3.52% to 3.35%.
Contractual obligations. The following table presents, as of September 30, 2015, the Company's significant fixed and determinable contractual obligations, within the categories described below, by contractual maturity or payment amount.
Contractual Obligations
 
Total
 
Less than
1 Year
 
1 to 5
Years
 
Over 5
Years
 
 
(In thousands)
Customer accounts
 
$
10,631,703

 
$
8,683,192

 
$
1,948,511

 
$
—

Debt obligations (1)
 
1,830,000

 
250,000

 
1,180,000

 
400,000

Operating lease obligations
 
26,340

 
5,272

 
12,127

 
8,941

 
 
$
12,488,043

 
$
8,938,464

 
$
3,140,638

 
$
408,941

(1) Represents final maturities of debt obligations.
These obligations, except for the operating leases, are included in the Consolidated Statements of Financial Condition. The payment amounts of the operating lease obligations represent those amounts contractually due.


16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
For highlights of the quarter-by-quarter results for the years ended September 30, 2015 and 2014, see Note P, “Selected Quarterly Financial Data (Unaudited)”.
COMPARISON OF 2015 RESULTS WITH 2014
Net income increased $2,952,000, or 1.88%, to $160,316,000 for the year ended September 30, 2015 as compared to $157,364,000 for the year ended September 30, 2014. Net interest income was higher in 2015 by $7,861,000 primarily due to loan growth and reduced cost of funds. Increases in operating expenses were attributable to a full year of operations of the 74 branches that were acquired in fiscal 2014 and the related increase in customer transactions. Other income increased by $9,764,000 or 31.85% driven by increased volume of fee generating services related to the acquired branches and transaction deposit accounts. Net income for the twelve months ended September 30, 2015 continued to benefit from improving credit quality. The reversal of the provision for loan losses amounted to $11,162,000 for the year ended September 30, 2015 as compared to $15,401,000 for the year ago period.

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for 2015. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
 
Year Ended
September 30, 2015
($ in thousands)
Volume
Rate
Total
Interest income:
 
 
 
  Loans and covered assets
$
30,507

$
(24,355
)
$
6,152

  Mortgaged-backed securities
(4,941
)
(3,927
)
(8,868
)
  Investments (1)
(2,594
)
2,166

(428
)
 
 
 
 
     All interest-earning assets
22,972

(26,116
)
(3,144
)
 
 
 
 
Interest expense:
 
 
 
  Customer accounts
1,879

(9,349
)
(7,470
)
  FHLB advances and other borrowings
(3,358
)
(177
)
(3,535
)
 
 
 
 
All interest-bearing liabilities
(1,479
)
(9,526
)
(11,005
)
 
 
 
 
Change in net interest income
$
24,451

$
(16,590
)
$
7,861

 
 
 
 
(1) Includes interest on cash equivalents and dividends on FHLB & FRB stock
 
Non-performing assets (NPA's) decreased by $18,734,000 from 2014 to $128,577,000 as of September 30, 2015. There were $13,126,000 of restructured loans in this total that were not performing. The Company had net recoveries of $5,370,000 for the twelve months ended September 30, 2015 compared with $14,365,000 of net recoveries for the same period one year ago.
The negative provision for loan losses is in response to the continued positive trends in credit quality as described in the Asset Quality Section above. The magnitude of the reversal of provision decreased by $4,239,000 or 27.52% as the growth of the loan portfolio necessitated a corresponding allocation of the allowance for loan losses. Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $109,914,000, or 1.13% of gross loans as of September 30, 2015, is sufficient to absorb estimated losses inherent in the portfolio.


17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Total other income increased $9,764,000, or 31.85%, to $40,423,000 in 2015 from 2014. The increase in fee income resulted from an increased number of transaction accounts and higher fees from client derivatives. Net gains on sale of investments was $9,641,000 in fiscal year 2015 and there were no gains in the fiscal year 2014. During 2015, there were prepayment penalties on long-term debt of $10,554,000.
Compensation expense increased $10,209,000, or 9.30%, to $119,939,000 in 2015 primarily due to the addition of the employees from the branches that were acquired during 2014 and growth in our commercial banking units. The number of staff, including part-time employees on a full-time equivalent basis, was 1,838 and 1,909 at September 30, 2015 and 2014, respectively. The decline in full-time equivalent employees occurred as the Company continues to consolidate under-performing branches and streamline back-office operations.
Occupancy expense increased to $33,956,000, or 11.51%, for the twelve months ended September 30, 2015 from $30,452,000 for the fiscal year ended September 30, 2014 as a result of the increased number of branch facilities from acquisitions and ongoing improvements, including the company wide deployment of new ATMs. The branch network consisted of 247 offices at September 30, 2015 and 251 offices at September 30, 2014.
Information technology expense was $15,976,000 in 2015 compared to $14,303,000 in 2014. This 11.70% increase was mostly due to the increase in the usage of our electronic delivery channels including online banking, bill payment, mobile banking and remote deposit capture.
Product delivery expense, including printing, postage, delivery, branch security, and ATM and debit card expenses, were $22,325,000 in 2015 compared to $14,973,000 in 2014. The ATM and debit card expenses were higher this year due to higher client adoption rates, changing client usage patterns, and the prior year's branch acquisitions.
FDIC insurance expense decreased by 28.10% to $7,916,000 for 2015 from $11,009,000 in 2014. The FDIC insurance rate is based on risk factors as established by the FDIC which have been improving for the Company, and this has resulted in an overall lower insurance expense.
Other miscellaneous expenses increased 5.08% to $24,739,000 for the twelve months ended September 30, 2015 from $23,542,000 for the comparable period one year ago.
Total operating expense for 2015 and 2014 equaled 1.55% and 1.43% of average assets, respectively. Despite the increase in operating expenses as a percent of average assets, the Company continues to operate as one of the most efficient banks in the country. The Company's efficiency ratio which is calculated as total operating expense divided by net operating income was 49.54% for the year ended September 30, 2015.
The gain (loss) on real estate acquired through foreclosure increased 439.19% to $9,304,000 in 2015 compared to a loss of $2,743,000 in 2014, due to the increased volume of dispositions of real estate acquired through foreclosure as the Bank continues to liquidate foreclosed properties. The net gain on real estate acquired through foreclosure, includes gains and losses on sale, ongoing maintenance expense and net valuation adjustments.
Income tax expense increased to $89,203,000 in 2015 from $87,564,000 for the fiscal year ended September 30, 2014. The effective tax rate was 35.75% for 2015 and 35.75% for 2014. The Company expects an effective tax rate of 35.50% going forward.

COMPARISON OF 2014 RESULTS WITH 2013
Net income increased $5,859,000, or 3.87%, to $157,364,000 for the year ended September 30, 2014 as compared to $151,505,000 for the year ended September 30, 2013. Net interest income was higher in 2014 by $25,488,000 primarily due to the investment of funds provided by the acquisition of 74 branches during the fiscal year. Increases in compensation, occupancy, information technology and product delivery expenses were also attributable to this increase in branches and the related customer transactions. Other income also benefited from the increase in customer transaction accounts. Net income for the twelve months ended September 30, 2014 also benefited from lower credit costs. The reversal of the provision for loan losses amounted to $15,401,000 for the year ended September 30, 2014 as compared to $1,350,000 in provision expense for the year ago period.

18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The table below sets forth certain information regarding changes in interest income and interest expense of the Company for 2014. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
 
Year Ended
September 30, 2014
($ in thousands)
Volume
Rate
Total
Interest income:
 
 
 
  Loans and covered assets
$
10,399

$
(34,464
)
$
(24,065
)
  Mortgaged-backed securities
15,032

16,708

31,740

  Investments (1)
4,291

5,440

9,731

 
 
 
 
     All interest-earning assets
29,722

(12,316
)
17,406

 
 
 
 
Interest expense:
 
 
 
  Customer accounts
8,670

(18,049
)
(9,379
)
  FHLB advances and other borrowings
2,340

(1,043
)
1,297

 
 
 
 
All interest-bearing liabilities
11,010

(19,092
)
(8,082
)
 
 
 
 
Change in net interest income
$
18,712

$
6,776

$
25,488

 
 
 
 
(1) Includes interest on cash equivalents and dividends on FHLB & FRB stock
 
Non-performing assets (NPA's) decreased by $66,305,000 from 2013 to $147,311,000 as of September 30, 2014. There were $24,090,000 of restructured loans in this total that were not performing. The Company had net recoveries of $14,365,000 for the twelve months ended September 30, 2014 compared with $17,756,000 of net charge-offs for the same period one year ago.
The decrease in the provision for loan losses is in response to three primary factors: first, the amount of NPA's improved materially year-over-year; second, non-accrual loans as a percentage of total loans decreased from 1.64% at September 30, 2013, to 1.01% at September 30, 2014; third, the percentage of loans 30 days or more delinquent decreased from 1.97% at September 30, 2013, to 1.44% at September 30, 2014. Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $115,257,000, or 1.33% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio.

Total other income increased $8,726,000, or 39.78%, to $30,659,000 in 2014 from 2013. The increase in fee income resulted from an increased number of transaction accounts.
Compensation expense increased $18,915,000, or 20.83%, to $109,730,000 in 2014 primarily due to the addition of the employees from the branches that were acquired during 2014 and growing our commercial banking units. The number of staff, including part-time employees on a full-time equivalent basis, was 1,909 and 1,457 at September 30, 2014 and 2013, respectively.
Occupancy expense increased to $30,452,000, or 29.05%, for the twelve months ended September 30, 2014 from $23,597,000 for the fiscal year ended September 30, 2013 as a result of increased branch facilities from acquisitions. The branch network consisted of 251 offices at September 30, 2014 and 182 offices at September 30, 2013.
Information technology expense was $14,303,000 in 2014 compared to $10,999,000 in 2013. This 30.04% increase was mostly due to the increase in branches. It also includes expense related to the planning for the upgrade in our core systems in 2015. The license and implementation costs associated with the systems upgrade are were capitalized.

19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Product delivery expense, including printing, postage, delivery, branch security, and ATM and debit card expenses, were $14,973,000 in 2014 compared to $4,414,000 in 2013. The ATM and debit card expenses were higher this year due to higher client adoption rates, changing client usage patterns, and the branch acquisitions. There is a much greater proportion of transaction accounts in the acquired branches.
FDIC insurance expense decreased by 9.87% to $11,009,000 for 2014 from $12,214,000 in 2013. The FDIC insurance rate is based on risk factors as established by the FDIC which have been improving for the Company, and this has resulted in an overall lower insurance expense.
Other miscellaneous expenses increased 6.04% to $23,542,000 for the twelve months ended September 30, 2014 from $22,201,000 for the comparable period one year ago.
Total operating expense for 2014 and 2013 equaled 1.43% and 1.27% of average assets, respectively. Despite the increase in operating expenses as a percent of average assets, the Company continues to operate as one of the most efficient banks in the country.
The loss on real estate acquired through foreclosure increased 47.55% to $2,743,000 in 2014 from $1,859,000 in 2013, due to the increased volume of dispositions of real estate acquired through foreclosure as the Bank continues to liquidate foreclosed properties. The net loss on real estate acquired through foreclosure, includes gains and losses on sale, ongoing maintenance expense and periodic write-downs from lower property valuations.
Income tax expense increased to $87,564,000 in 2014 from $83,111,000 for the fiscal year ended September 30, 2013. The effective tax rate was 35.75% for 2014 and 35.42% for 2013.



20


SELECTED FINANCIAL DATA
Year ended September 30,
2015
2014
2013
2012
2011
 
(In thousands, except per share data)
Interest income
$
530,553

$
533,697

$
516,291

$
590,271

$
644,635

Interest expense
117,072

128,077

136,159

193,249

227,696

Net interest income
413,481

405,620

380,132

397,022

416,939

Provision (reversal) for loan losses
(11,162
)
(15,401
)
1,350

44,955

93,104

Other income
49,727

27,916

20,074

6,698

(14,117
)
Other expense
224,851

204,009

164,240

142,854

136,059

Income before income taxes
249,519

244,928

234,616

215,911

173,659

Income taxes
89,203

87,564

83,111

77,728

62,518

Net income
$
160,316

$
157,364

$
151,505

$
138,183

$
111,141

Per share data
 
 
 
 
 
Basic earnings
$
1.68

$
1.56

$
1.45

$
1.29

$
1.00

Diluted earnings
1.67

1.55

1.45

1.29

1.00

Cash dividends
0.54

0.41

0.36

0.32

0.24

 
 
 
 
 
 
September 30,
2015
2014
2013
2012
2011
Total assets
$
14,568,324

$
14,756,041

$
13,082,859

$
12,472,944

$
13,440,749

Loans and mortgage-backed securities
12,004,178

11,380,011

10,433,872

9,812,666

10,992,053

Investment securities
1,117,339

1,366,018

1,109,772

612,524

246,004

Cash and cash equivalents
284,049

781,843

203,563

751,430

816,002

Customer accounts
10,631,703

10,716,928

9,090,271

8,576,618

8,665,903

FHLB advances
1,830,000

1,930,000

1,930,000

1,880,000

1,962,066

Other borrowings
—

—

—

—

800,000

Stockholders’ equity
1,955,679

1,973,283

1,937,635

1,899,752

1,906,533

Number of
 
 
 
 
 
Customer accounts
517,871

548,872

332,177

308,282

309,532

Loans
41,036

35,550

35,934

37,522

39,986

Offices
247

251

182

166

160




21



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
2015
 
2014
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
284,049

 
$
781,843

Available-for-sale securities
2,380,563

 
3,049,442

Held-to-maturity securities
1,643,216

 
1,548,265

Loans receivable, net
9,170,634

 
8,324,798

Interest receivable
40,429

 
52,037

Premises and equipment, net
276,247

 
257,543

Real estate owned
61,098

 
83,962

FHLB & FRB stock
107,198

 
158,839

Bank owned life insurance
102,496

 
—

Intangible assets, including goodwill of $291,503
299,358

 
302,909

Federal and state income taxes, net
14,513

 
16,515

Other assets
188,523

 
179,888

 
$
14,568,324

 
$
14,756,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
5,820,878

 
$
5,490,687

Time deposit accounts
4,810,825

 
5,226,241

 
10,631,703

 
10,716,928

FHLB advances
1,830,000

 
1,930,000

Advance payments by borrowers for taxes and insurance
50,224

 
29,004

Accrued expenses and other liabilities
100,718

 
106,826

 
12,612,645

 
12,782,758

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized;
133,695,803 and 133,322,909 shares issued; 92,936,395 and 98,404,705 shares outstanding
133,696

 
133,323

Paid-in capital
1,643,712

 
1,638,211

Accumulated other comprehensive income, net of taxes
353

 
20,708

Treasury stock, at cost; 40,759,408 and 34,918,204 shares
(651,836
)
 
(525,108
)
Retained earnings
829,754

 
706,149

 
1,955,679

 
1,973,283

 
$
14,568,324

 
$
14,756,041

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


22


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
2015
2014
2013
 
(In thousands, except per share data)
INTEREST INCOME
 
 
 
Loans
$
437,002

$
430,850

$
454,915

Mortgage-backed securities
71,392

80,260

48,520

Investment securities and cash equivalents
22,159

22,587

12,856

 
530,553

533,697

516,291

INTEREST EXPENSE
 
 
 
Customer accounts
51,054

58,524

67,903

FHLB advances and other borrowings
66,018

69,553

68,256

 
117,072

128,077

136,159

Net interest income
413,481

405,620

380,132

Provision (reversal) for loan losses
(11,162
)
(15,401
)
1,350

Net interest income after provision for loan losses
424,643

421,021

378,782

 
 
 
 
OTHER INCOME
 
 
 
Gain on sale of investments
9,641

—

—

Prepayment penalty on long-term debt
(10,554
)
—

—

Loan fee income
8,788

7,706

8,585

Deposit fee income
22,459

14,306

5,015

Other income
10,089

8,647

8,333


40,423

30,659

21,933

OTHER EXPENSE
 
 
 
Compensation and benefits
119,939

109,730

90,815

Occupancy
33,956

30,452

23,597

FDIC insurance premiums
7,916

11,009

12,214

Product delivery
22,325

14,973

4,414

Information technology
15,976

14,303

10,999

Other expense
24,739

23,542

22,201

 
224,851

204,009

164,240

Gain (loss) on real estate acquired through foreclosure, net
9,304

(2,743
)
(1,859
)
Income before income taxes
249,519

244,928

234,616

Income taxes
 
 
 
   Current
86,477

75,784

71,969

   Deferred
2,726

11,780

11,142

 
89,203

87,564

83,111

NET INCOME
$
160,316

$
157,364

$
151,505

 
 
 
 
PER SHARE DATA
 
 
 
Basic earnings
$
1.68

$
1.56

$
1.45

Diluted earnings
1.67

1.55

1.45

Basic weighted average number of shares outstanding
95,644,639

101,154,030

104,684,812

Diluted weighted average number of shares outstanding, including dilutive stock options
96,053,959

101,590,351

104,837,470

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
2015
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
Net income
$
160,316

 
$
157,364

 
$
151,505

Other comprehensive income (loss) net of tax:
 
 
 
 
 
   Net unrealized gains (losses) on available-for-sale securities
(27,536
)
 
22,924

 
(10,953
)
   Reclassification adjustment of net gains from sale
of available-for-sale securities included in net income
9,641

 
—

 
—

   Related tax benefit (expense)
6,577

 
(8,425
)
 
4,025

 
(11,318
)
 
14,499

 
(6,928
)
 
 
 
 
 
 
    Net unrealized gain (loss) on long-term borrowing hedge
(14,287
)
 
(268
)
 
—

    Related tax benefit (expense)
5,250

 
99

 
—

 
(9,037
)
 
(169
)
 
—

 
 
 
 
 
 
Other comprehensive income (loss)
(20,355
)
 
14,330

 
(6,928
)
Comprehensive income
$
139,961

 
$
171,694

 
$
144,577



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


24


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (loss)
Treasury
Stock
Total
 
(In thousands)
Balance at September 30, 2012
$
129,950

$
1,586,295

$
480,780

$
13,306

$
(310,579
)
$
1,899,752

 
 
 
 
 
 
 
Net income
 
 
151,505

 
 
151,505

Other comprehensive income adjustment
 
 
 
(6,928
)
 
(6,928
)
Dividends on common stock
 
 
(37,835
)
 
 
(37,835
)
Compensation expense related to common stock options
 
473

 
 
 
473

Proceeds from exercise of common stock options
208

4,052

 
 
 
4,260

Proceeds from issuance of common stock
1,997

31,496

 
 
 
33,493

Tax benefit related to exercise of stock options
 
1

 
 
 
1

Restricted stock
418

2,734

 
 
 
3,152

Treasury stock
 
 
 
 
(110,238
)
(110,238
)
Balance at September 30, 2013
$
132,573

$
1,625,051

$
594,450

$
6,378

$
(420,817
)
$
1,937,635

 
 
 
 
 
 
 
Net income
 
 
157,364

 
 
157,364

Other comprehensive income adjustment
 
 
 
14,330

 
14,330

Dividends on common stock
 
 
(45,665
)
 
 
(45,665
)
Compensation expense related to common stock options
 
324

 
 
 
324

Proceeds from exercise of common stock options
501

9,641

 
 
 
10,142

Proceeds from issuance of common stock
—

—

 
 
 
—

Tax benefit related to exercise of stock options
 
—

 
 
 
—

Restricted stock
249

3,195

 
 
 
3,444

Treasury stock
 
 
 
 
(104,291
)
(104,291
)
Balance at September 30, 2014
$
133,323

$
1,638,211

$
706,149

$
20,708

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

 
 
 
 
 
 
 
Net income
 
 
160,316

 
 
160,316

Other comprehensive income (loss) adjustment
 
 
 
(20,355
)
 
(20,355
)
Dividends on common stock
 
 
(36,711
)
 
 
(36,711
)
Compensation expense related to common stock options
 
231

 
 
 
231

Proceeds from exercise of common stock options
129

1,941

 
 
 
2,070

Restricted stock
244

3,329

 
 
 
3,573

Treasury stock
 
 
 
 
(126,728
)
(126,728
)
Balance at September 30, 2015
$
133,696

$
1,643,712

$
829,754

$
353

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



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

25


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
2015
 
2014
 
2013
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
160,316

 
$
157,364

 
$
151,505

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
    Depreciation and amortization expense
21,217

 
17,347

 
15,774

    Cash received from FDIC under loss share
720

 
2,502

 
13,421

    Stock option compensation expense
232

 
324

 
473

    Provision for (reversal of) loan losses
(11,162
)
 
(15,401
)
 
1,350

    (Gain) loss on investment securities and real estate held for sale, net
(28,528
)
 
(2,510
)
 
(8,011
)
    Loss on extinguishment of debt
10,554

 
—

 
—

    Decrease (increase) in accrued interest receivable
11,608

 
(2,819
)
 
(330
)
    Decrease (increase) in FDIC loss share receivable
1,795

 
(1,795
)
 
(1,482
)
    Increase in cash surrender value of bank owned life insurance
(2,496
)
 
—

 
—

    Decrease (increase) in income taxes receivable
13,829

 
18,890

 
(17,462
)
    (Increase) decrease in other assets
(29,220
)
 
(17,799
)
 
36,350

    (Decrease) increase in accrued expenses and other liabilities
(5,994
)
 
17,612

 
(10,166
)
    Net cash provided by operating activities
142,871

 
173,715

 
181,422

 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Net (loan originations) principal collections
(554,350
)
 
(261,401
)
 
343,771

Loans purchased
(279,936
)
 
(218,544
)
 
—

FHLB & FRB stock purchase
(4,067
)
 
—

 
(23,981
)
FHLB & FRB stock redeemed
55,708

 
14,017

 
5,894

Available-for-sale securities purchased
(315,114
)
 
(1,280,477
)
 
(889,595
)
Principal payments and maturities of available-for-sale securities
721,951

 
609,395

 
275,726

Available-for-sale securities sold
246,826

 
—

 
43,198

Held-to-maturity securities purchased
(259,489
)
 
—

 
(787,449
)
Principal payments and maturities of held-to-maturity securities
159,947

 
103,617

 
331,022

Net cash received from acquisition
—

 
1,776,660

 
202,308

Proceeds from sales of real estate held for sale and investment
56,380

 
73,895

 
115,615

Proceeds from sales of covered REO
18,515

 
15,654

 
20,843

Purchase of bank owned life insurance
(100,000
)
 
 
 
 
Premises and equipment purchased and REO improvements
(36,860
)
 
(51,794
)
 
(29,246
)
Net cash provided (used) by investing activities
(290,489
)
 
781,022

 
(391,894
)
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Net (decrease) in customer accounts
(85,073
)
 
(226,914
)
 
(223,515
)
Proceeds from long-term borrowings
100,000

 
—

 
50,000

Repayments of long-term borrowings
(210,554
)
 
—

 
(22,470
)
Proceeds from exercise of common stock options and related tax benefit
2,070

 
10,252

 
4,261

Dividends paid on common stock
(51,111
)
 
(42,065
)
 
(37,835
)
Treasury stock purchased, net
(126,728
)
 
(104,291
)
 
(110,238
)
Increase (decrease) in advance payments by borrowers for taxes and insurance
21,220

 
(13,439
)
 
2,402

Net cash (used) by financing activities
(350,176
)
 
(376,457
)
 
(337,395
)
Increase (decrease) in cash and cash equivalents
(497,794
)
 
578,280

 
(547,867
)
Cash and cash equivalents at beginning of period
781,843

 
203,563

 
751,430

Cash and cash equivalents at end of period
$
284,049

 
$
781,843

 
$
203,563

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

26


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Year ended September 30,
2015
 
2014
 
2013
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
 
Non-cash investing activities
 
 
 
 
 
Non-covered real estate acquired through foreclosure
$
30,024

 
$
37,721

 
$
91,352

Covered real estate acquired through foreclosure
1,892

 
8,748

 
11,196

Cash paid during the period for
 
 
 
 
 
Interest
116,226

 
128,733

 
140,409

Income taxes
65,720

 
64,372

 
80,417

The following summarizes the non-cash activities related to acquisitions
 
 
 
 
 
Fair value of assets and intangibles acquired, including goodwill
—

 
80,242

 
607,193

Fair value of liabilities assumed
—

 
(1,856,902
)
 
(776,009
)
Net fair value of acquired assets (liabilities)
$
—

 
$
(1,776,660
)
 
$
(168,816
)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

27

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013


NOTE A    Summary of Significant Accounting Policies
Washington Federal, Inc. is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a national bank subsidiary, Washington Federal, National Association. 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 real estate loans, multi-family real estate loans and commercial 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.
Nature of Operations. The Company is a bank holding company that conducts its operations through a 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 real estate loans, multi-family real estate loans and commercial loans. The Bank conducts its activities through a network of 247 offices located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico, and Texas.
Basis of Presentation. The consolidated 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.
The Company's fiscal year end is September 30th. All references to 2015, 2014 and 2013 represent balances as of September 30, 2015, September 30, 2014 and September 30, 2013, or activity for the fiscal years then ended. References to net income in this document refer to net income available to common shareholders.
Certain reclassification adjustments were made in 2015 to present the financial statements in a manner that is more meaningful to the users. Loans receivable and covered loans were consolidated into one line item on the Statement of Financial Condition. Real estate held for sale, real estate held for investment and covered real estate held for sale were consolidated into one line item on the Statement of Financial Condition. FDIC indemnification assets and other assets were consolidated into one line item on the Statement of Financial Condition. Reclassification of Other Expenses into Product Delivery and Information Technology line items have been made to the financial statements for years prior to September 30, 2014 to conform to current year classifications.

Acquisitions. Certain Branches of Bank of America, National Association. During the 2014 fiscal year, the Bank acquired 74 branches from Bank of America, National Association. This included: effective as of the close of business on October 31, 2013, 11 branches located in New Mexico; effective as of the close of business on December 6, 2013, 40 branches located in Washington, Oregon, and Idaho; and effective as of the close of business on May 2, 2014, 23 branches located in Arizona and Nevada. The combined acquisitions provided $1.9 billion in deposit accounts, $13 million of loans, and $25 million in branch properties. The Bank paid a 1.99% premium on the total deposits and received $1.8 billion in cash from the transactions. The acquisition method of accounting was used to account for the acquisitions. The purchased assets and assumed liabilities are recorded at their respective acquisition date estimated fair values. The Bank recorded $11 million in core deposit intangible and $31 million in goodwill related to these transactions. The operating results of the Company include the operating results produced by the first 11 branches beginning November 1, 2013, for the additional 40 branches beginning December 7, 2013, and for the most recent 23 branches from May 3, 2014 forward.

South Valley Bancorp, Inc. Effective November 1, 2012, the Bank acquired South Valley Bancorp, Inc. and South Valley's wholly owned subsidiary, South Valley Bank & Trust ("SVBT"), was merged into the Bank. The acquisition provided $361 million of net loans, $108 million of net covered loans, $736 million of deposit accounts, including $533 million in transaction deposit accounts and 24 branch locations in Central and Southern Oregon. Total consideration paid at closing was $44 million, including $34 million of the Company's stock and $10 million of cash resulting from the collection of certain earn-out assets. The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period November 1, 2012 forward.

Cash and cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, overnight investments and repurchase agreements with an initial maturity of three months or less.

28

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

Investments and mortgage-backed securities. The Company accounts for investments and mortgage-backed securities in two categories: held-to-maturity and available-for-sale. Premiums and discounts on investments are deferred and recognized into income over the life of the asset using the effective interest method.
Held-to-maturity securities are accounted for at amortized cost, but the Company must have both the positive intent and the ability to hold those securities to maturity. There are very limited circumstances under which securities in the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the securities in this category.
Available-for-sale securities are accounted for at fair value. Gains and losses realized on the sale of these securities are accounted for based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported net of the related tax effect in the accumulated other comprehensive income component of stockholders' equity.
Realized gains and losses on securities sold as well as other than temporary impairment charges, if any, are shown on the Consolidated Statements of Operations under the Other Income heading. Management evaluates debt and equity securities for other than temporary impairment on a quarterly basis based on the securities' current credit quality, market interest rates, term to maturity and management's intent and ability to hold the securities until the net book value is recovered.
Loans receivable. Loans that are performing in accordance with their contractual terms are carried at their amortized cost and expected interest is accrued. The Bank also receives fees for originating loans in addition to various fees and charges related to existing loans, which may include prepayment charges, late charges and assumption fees.
When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower. Contact is made after a payment is 30 days past its grace period. In most cases, deficiencies are cured promptly. If the delinquency is not cured within 90 days, the Bank may institute appropriate action to foreclose on the property. If foreclosed, the property is sold at a public sale and may be purchased by the Bank.
Restructured loans. The Bank will consider modifying the interest rates and terms of a loan if it determines that a modification is a better alternative to foreclosure. Most troubled debt restructured ("TDR") 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. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness is generally not an available option for restructured loans. Before granting approval to modify a loan in a TDR, the borrower’s ability to repay is evaluated, including: current income levels and debt to income ratio, borrower’s credit score, payment history of the loan, and updated evaluation of the secondary repayment source. The Bank also modifies some loans that are not classified as TDRs as the modification is due to a restructuring where the effective interest rate on the debt is reduced to reflect a decrease in market interest rates.
Non accrual loans. Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days or more past due. If payment is made on a loan so that the loan becomes less than 90 days past due, and the Bank expects full collection of principal and interest, the loan is returned to full accrual status. Any interest ultimately collected is credited to income in the period of recovery. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected be able to meet contractual obligations.
If a consumer loan is on non-accrual status before becoming a TDR it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on accrual status before it becomes a TDR, and management concludes that full repayment is probable based on internal evaluation, it will remain on accrual status following restructuring. If the restructured consumer loan does not perform, it is placed on non-accrual status when it is 90 days delinquent. 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 management will conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual.

29

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

Impaired loans. Impaired loans consist of loans receivable that are not expected to have their principal and interest repaid in accordance with their contractual terms. This includes TDRs that are on non-accrual status. Collateral dependent impaired loans are measured using the fair value of the collateral less selling costs. Non-collateral dependent loans are measured at the present value of expected future cash flows.
Deferred fees and discounts on loans. Loan discounts and loan fees are deferred and recognized over the life of the loans using the effective interest method.
Allowance for Loan Losses. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. The Bank's general methodology for assessing the appropriateness of the allowance is to apply a loss percentage factor to the different loan types. The loss percentage factor is made up of two parts - the historical loss factor (“HLF”) and the qualitative loss factor (“QLF”). The HLF takes into account historical charge-offs by loan type. The Bank uses an average of historical loss rates for each loan category multiplied by a loss emergence period. This is the likely period of time during which a residential or commercial loan borrower experiencing financial difficulties might deplete their cash prior to becoming delinquent on their loan, plus the period of time that it takes the bank to work out the loans. The QLF are based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, collateral values, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, and the duration of the current business cycle. These factors are considered by loan type.
Specific allowances are established for loans which are individually evaluated, in cases where management has identified significant conditions or circumstances related to a loan that management believes indicate the probability that a loss has been incurred. The Bank has also established a reserve for unfunded commitments.
The recovery of the carrying value of loans is susceptible to future market conditions beyond the Bank's control, which may result in losses or recoveries differing from those estimated.
Acquired credit impaired loans. Acquired credit impaired loans are accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 310-30 when there is evidence of credit deterioration since origination and for which it is probable, at acquisition, that the Company would be unable to collect all contractually required payments. Interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, are recognized on all acquired loans.
Covered assets. Covered loans consist of single family loans acquired from Horizon Bank in 2010 and certain loans acquired from SVBT in fiscal 2013 that were originally recorded at their estimated fair value at the time acquired. Loans that were classified as non-performing loans by Horizon Bank and SVBT are no longer classified as non-performing because, at acquisition, the carrying value of these loans was adjusted to reflect fair value and are covered under the FDIC loss sharing agreements. Management believes that the book value reflects an amount that will ultimately be collected. Covered real estate held for sale represents the foreclosed properties that were originally Horizon Bank loans or certain SVBT loans. Covered real estate held for sale is carried at the estimated fair value of the repossessed real estate. The covered loans and covered real estate held for sale are collectively referred to as “covered assets." When FDIC loss share agreements expire, any remaining loans will be transferred to the non covered portfolio.
FDIC indemnification asset. FDIC indemnification asset of $16,275,000 as of September 30, 2015 is the receivable recorded due to the guarantee provided by the FDIC on the covered assets. This asset declines due to collections from the FDIC on claims or the eventual expiration of the FDIC loss share agreements. The FDIC indemnification asset is included within other assets on the statement of financial condition.
Client Derivatives. Interest rate swap agreements are provided to certain clients who desire to convert their obligations from variable to fixed interest rates. Under these agreements, the Bank enters into a variable-rate loan agreement with a customer in addition to a swap agreement, and then enters into a corresponding swap agreement with a third party in order to offset its exposure on the customer swap agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under FASB ASC 815, Derivatives and Hedging, the instruments are marked to market in earnings. The change in fair value of the offsetting swaps are included in interest income and interest expense and there is no impact on net income. There is fee income earned on the swaps that is included in miscellaneous loan income.

30

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

Long Term Borrowing Hedges. The Bank has entered into forward-starting interest rate swaps to convert a series of future short-term borrowings to fixed rate payments. These interest rate swaps qualify as cash flow hedging instruments under ASC 815 which provides for matching of the recognition of gains and losses of the interest rate swaps and the hedged items. Prior to the starting date, the change in the fair value of the interest rate swap is recorded in Other Comprehensive Income.
Commercial Loan Hedge. The Bank has entered into an interest rate swap to hedge a long term fixed rate commercial loan. This interest rate swap qualifies as a fair value hedge under ASC 815 which provides for matching of the recognition of the gains and losses of the interest rate swap and the hedged item.
Premises and equipment. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Expenditures are capitalized for betterments and major renewals. Charges for ordinary maintenance and repairs are expensed to operations as incurred.
Real estate owned. Properties acquired in settlement of loans are recorded at fair value less selling costs. Subsequent accounting is recorded at lower of cost or fair value. These gains (losses) are shown on the real estate acquired through foreclosure line item.
Intangible assets. Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. The core deposit intangibles are acquired assets that lack physical substance but can be distinguished from goodwill. Goodwill is evaluated for impairment on an annual basis. Other intangible assets are amortized over their estimated lives and are subject to impairment testing when events or circumstances change. If circumstances indicate that the carrying value of the assets may not be recoverable, an impairment charge could be recorded. No impairment of intangible assets has ever been identified. The Bank amortizes the core deposit intangibles over their estimated lives using an accelerated method.
The balance of the Company's intangible assets was as follows:
 
Goodwill
 
Core Deposit Intangible
 
Total
 
(In thousands)
Balance at September 30, 2013
$
260,277

 
$
4,041

 
$
264,318

Additions
31,226

 
11,040

 
42,266

Amortization
—

 
(3,675
)
 
(3,675
)
Balance at September 30, 2014
291,503

 
11,406

 
302,909

Additions
—

 
—

 
—

Amortization
—

 
(3,551
)
 
(3,551
)
Balance at September 30, 2015
$
291,503

 
$
7,855

 
$
299,358

The table below presents the estimated core deposit intangible asset amortization expense for the next five years:
Year End
 
Expense
 
 
(In thousands)
2016
 
$
2,314

2017
 
1,607

2018
 
1,208

2019
 
1,254

2020
 
1,254


Income taxes. Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, a deferred tax asset or liability is determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes includes current and deferred income tax expense based on net income adjusted for temporary

31

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

and permanent differences such as depreciation, interest on state and municipal securities, and affordable housing tax credits. Income tax related interest and penalties, if applicable, and amortization of affordable housing tax credit investments are recorded within income tax expense.
Accounting for stock-based compensation. We recognize in the statement of operations the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees' requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. Stock options and restricted stock awards generally vest ratably over three to ten years and are recognized as expense over that same period of time. The exercise price of each option equals the market price of the Company's common stock on the date of the grant, and the maximum term is ten years.

The fair value of each grant is estimated as of the grant date using the Black-Scholes option-pricing model or a Monte Carlo simulation pricing model. Expected volatility is based on the historical volatility of the price of the Company's common stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted is determined based on historical experience with similar options, giving consideration to the contractual terms and vesting schedules, and represents the period of time that options granted are expected to be outstanding. The expected dividend yield is based on dividend trends and the market value of the Company's common stock at the time of grant. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant corresponding to the
estimated expected term of the options granted. Stock options that were not dilutive but were outstanding as of September 30, 2015, 2014 and 2013 were 94,054, 90,846 and 435,825, respectively. See Note L for additional information.

Restricted stock unit grants and certain restricted stock awards are subject to performance-based and market-based vesting as well as other approved vesting conditions and cliff vest based on those conditions. Compensation expense is recognized over the service period to the extent restricted stock units are expected to vest.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates reported in the financial statements include the allowance for loan losses, intangible assets, deferred taxes and contingent liabilities. Actual results could differ from these estimates.

New accounting pronouncements.

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) -
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. Adoption of the new guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. This new guidance permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Those not electing the proportional amortization method would account for the investment using the equity method or cost method. This new guidance is effective on a retrospective basis beginning after December 15, 2014 with early adoption permitted. The Company adopted this ASU prospectively as of December 31, 2013 as the retrospective adjustments were not material. This adoption did not have a material impact on the Company's consolidated financial statements.




32

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures. Under this new accounting guidance, repurchase-to-maturity transactions will be accounted for as secured borrowings rather than sales of an asset, and transfers of financial assets with contemporaneous repurchase financings will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts. The new guidance also prescribes additional disclosures particularly on the nature of collateral pledged in repurchase financings accounted for as secured borrowings. The new guidance is effective for the first interim or annual period beginning after December 31, 2014. This guidance did not have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): 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. Early adoption is permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In August 2015, the FASB issued ASU 2015-14, to defer the effective date of ASU 2014-09 , Revenue from Contracts with Customers (Topic 606). This new accounting guidance clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2018. The Company does not expect the new guidance to have a material impact on its consolidated financial statements.

In August 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting Measurement -Period Adjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments eliminate the requirement to retrospectively account for those adjustments. These amendments are effective for interim and annual periods beginning after December 15, 2015. The amendments should be applied prospectively. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
Business segments. As the Company manages its business and operations on a consolidated basis, management has determined that there is one reportable business segment.
Subsequent events. The Company has evaluated subsequent events for adjustment to or disclosure in the Company’s consolidated financial statements through the date of this report, and the Company has not identified any recordable or disclosable events, not otherwise reported in these consolidated financial statements or the notes thereto, except for the following:
The Company paid its 131st consecutive quarterly cash dividend totaling $12,035,000 on November 20, 2015 to common stockholders of record on November 6, 2015.






33

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013


NOTE B    INVESTMENT SECURITIES
 
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
%
5 to 10 years
—

 
—

 
—

 
—

 
—
%
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
%
 
1,643,216

 
10,516

 
(16,312
)
 
1,637,420

 
3.19
%
 
$
4,008,666

 
$
38,674

 
$
(29,357
)
 
$
4,017,983

 
2.46
%
 
 
 
 
 
 
 

 
 

34

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

September 30,
2014
 
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
$
171,154

 
$
2,585

 
$
(748
)
 
$
172,991

 
1.26
%
5 to 10 years
203,317

 
300

 
(102
)
 
203,515

 
1.45
%
Over 10 years
354,828

 
1,028

 
(419
)
 
355,437

 
1.25
%
Equity Securities
 
 
 
 
 
 
 
 
 
Within 1 year
 
 
 
 
 
 
 
 
 
1 to 5 years
100,500

 
887

 
—

 
101,387

 
1.90
%
  5 to 10 years
—

 
 
 
—

 
—

 
—
%
Corporate bonds due

 

 

 

 

Within 1 year
15,000

 
75

 
—

 
15,075

 
1.00
%
1 to 5 years
302,540

 
2,372

 
—

 
304,912

 
0.71
%
5 to 10 years
138,201

 
1,789

 
(970
)
 
139,020

 
1.43
%
Over 10 years
50,000

 
—

 
—

 
50,000

 
3.00
%
Municipal bonds due

 

 

 

 

1 to 5 years
—

 
—

 
—

 
—

 
—
%
5 to 10 years
—

 
—

 
—

 
—

 
—
%
  Over 10 years
20,402

 
3,279

 
—

 
23,681

 
6.45
%
Mortgage-backed securities

 

 

 

 

Agency pass-through certificates
1,561,639

 
24,893

 
(2,024
)
 
1,584,508

 
2.57
%
Other commercial MBS
98,851

 
65

 
—

 
98,916

 
1.49
%
 
3,016,432

 
37,273

 
(4,263
)
 
3,049,442

 
1.99
%
Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities

 

 

 

 

Agency pass-through certificates
1,548,265

 
4,855

 
(53,902
)
 
1,499,218

 
3.13
%
 
1,548,265

 
4,855

 
(53,902
)
 
1,499,218

 
3.13
%
 
$
4,564,697

 
$
42,128

 
$
(58,165
)
 
$
4,548,660

 
2.38
%

 
There were $246,826,000 of available-for-sale securities that were sold in 2015, resulting in a gain of $9,641,000. Substantially all mortgage-backed securities have contractual due dates that exceed twenty-five years.

The following table shows the gross unrealized losses and fair value of securities at September 30, 2015 and September 30, 2014, by length of time that individual securities in each category have been in a continuous loss position. The Bank had $1,297,408,000 securities in a continuous loss position for 12 or more months at September 30, 2015, and $1,642,718,000 securities in a continuous loss position for 12 or more months at September 30, 2014, which consisted of corporate bonds, U.S. government and agency securities, and mortgage-backed securities. Management believes that the declines in fair value of these investments are not an other than temporary impairment as these losses are due to a change in interest rates rather than any credit deterioration. The impairment is also deemed to be temporary because: 1) the Bank does not intend to sell the security, and 2) it is not more likely than not that it will be required to sell the security before recovery of the entire amortized cost basis of the security.
 

35

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

As of 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
$
(183
)
$
72,862

$
(3,399
)
$
46,601

$
(3,582
)
$
119,463

U.S. agency securities
(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



As of September 30,
2014
  
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
$
(125
)
$
24,875

$
(845
)
$
24,155

$
(970
)
$
49,030

U.S. agency securities
(472
)
316,578

(797
)
109,354

(1,269
)
425,932

Agency pass-through certificates
(215
)
19,212

(55,711
)
1,509,209

(55,926
)
1,528,421

 
$
(812
)
$
360,665

$
(57,353
)
$
1,642,718

$
(58,165
)
$
2,003,383





36

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013


NOTE C    Loans Receivable (including Covered Loans) 

 
September 30, 2015
 
September 30, 2014
 
(In thousands)
 
(In thousands)
Non-Acquired loans
 
 
 
 
 
   Single-family residential
$
5,651,845

57.6
%
 
$
5,560,203

62.6
%
   Construction - speculative
200,509

2.0

 
140,060

1.6

   Construction - custom
396,307

4.0

 
385,824

4.3

   Land - acquisition & development
94,208

1.0

 
77,832

0.9

   Land - consumer lot loans
103,989

1.1

 
108,623

1.2

   Multi-family
1,125,722

11.6

 
917,286

10.3

   Commercial real estate
986,270

10.0

 
591,336

6.7

   Commercial & industrial
612,836

6.2

 
379,226

4.3

   HELOC
127,646

1.3

 
116,042

1.3

   Consumer
194,655

2.0

 
132,590

1.5

Total non-acquired loans
9,493,987

96.8
%
 
8,409,022

94.7
%
Acquired loans
166,293

1.6

 
184,188

2.0

Credit impaired acquired loans
87,081

0.9

 
76,507

0.8

Covered loans
75,909

0.7

 
213,203

2.5

Total gross loans
9,823,270

100.0
%
 
8,882,920

100.0
%
   Less:
 
 
 
 
 
      Allowance for probable losses
106,829

 
 
114,591

 
      Loans in process
476,796

 
 
346,172

 
      Discount on acquired loans
30,095

 
 
59,874

 
      Deferred net origination fees
38,916

 
 
37,485

 
Total loan contra accounts
652,636

 
 
558,122

 
Net Loans
$
9,170,634

 
 
$
8,324,798

 
 
 
 
 
 
 







37

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The Company originates fixed and adjustable interest rate loans, which at September 30, 2015 consisted of the following:
Fixed-Rate
 
Adjustable-Rate
Term To Maturity
Book Value
 
Term To Rate Adjustment
Book Value
 
(In thousands)
 
 
(In thousands)
Within 1 year
$
343,801

 
Less than 1 year
$
1,778,466

1 to 3 years
160,832

 
1 to 3 years
799,633

3 to 5 years
97,837

 
3 to 5 years
733,061

5 to 10 years
155,708

 
5 to 10 years
92,796

10 to 20 years
938,938

 
10 to 20 years
—

Over 20 years
4,722,198

 
Over 20 years
—

 
$
6,419,314

 
 
$
3,403,956


Gross loans by geographic concentration were as follows:
 
September 30, 2015
Single -
family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction - custom
Construction - speculative
Commercial
real estate
Commercial
and industrial
Consumer
HELOC
Total
 
(In thousands)
Washington
$
2,905,256

$
388,151

$
54,467

$
62,916

$
232,244

$
84,462

$
638,974

$
350,485

$
74,649

$
89,011

$
4,880,615

Oregon
734,368

328,103

8,493

18,212

37,781

34,952

223,625

130,743

3,327

14,539

1,534,143

Arizona
154,858

411

—

—

—

—

5,594

42,437

117,982

—

321,282

Other
312,471

34,502

4,235

8,098

17,107

13,634

7,566

11,183

165

6,204

415,165

Utah
579,743

233,240

4,573

9,227

39,443

8,542

116,157

40,754

297

18,619

1,050,595

Idaho
492,297

55,562

2,187

3,566

33,292

6,856

37,109

33,869

24

7,544

672,306

New Mexico
193,387

72,729

12,348

2,714

20,744

15,666

132,974

10,880

935

12,697

475,074

Texas
189,355

15,446

11,979

261

8,882

36,396

21,755

19,114

33

—

303,221

Nevada
139,047

1,293

—

1,819

6,816

—

2,797

18,115

69

913

170,869

 
$
5,700,782

$
1,129,437

$
98,282

$
106,813

$
396,309

$
200,508

$
1,186,551

$
657,580

$
197,481

$
149,527

$
9,823,270


Percentage by geographic area
September 30, 2015
Single -
family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction - custom
Construction - speculative
Commercial
real estate
Commercial
and industrial
Consumer
HELOC
Total
 
As % of total gross loans
Washington
29.4
%
4.0
%
0.6
%
0.6
%
2.4
%
0.9
%
6.5
%
3.6
%
0.8
%
0.9
%
49.7
%
Oregon
7.5

3.3

0.1

0.2

0.4

0.4

2.3

1.3

—

0.1

15.6

Arizona
1.6

—

—

—

—

—

0.1

0.4

1.2

—

3.3

Other
3.2

0.4

—

0.1

0.2

0.1

0.1

0.1

—

0.1

4.3

Utah
5.9

2.4

—

0.1

0.4

0.1

1.2

0.4

—

0.2

10.7

Idaho
5.0

0.6

—

—

0.3

0.1

0.4

0.3

—

0.1

6.8

New Mexico
2.0

0.7

0.1

—

0.2

0.2

1.4

0.1

—

0.1

4.8

Texas
1.9

0.2

0.1

—

0.1

0.4

0.2

0.2

—

—

3.1

Nevada
1.4

—

—

—

0.1

—

—

0.2

—

—

1.7

 
57.9
%
11.6
%
0.9
%
1.0
%
4.1
%
2.2
%
12.2
%
6.6
%
2.0
%
1.5
%
100.0
%


38

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

Percentage by geographic area as a % of each loan type
 
September 30, 2015
Single -
family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction - custom
Construction - speculative
Commercial
real estate
Commercial
and industrial
Consumer
HELOC
As % of total gross loans
Washington
51.0
%
34.3
%
55.4
%
59.0
%
58.7
%
42.1
%
54.0
%
53.1
%
37.8
%
59.6
%
Oregon
12.9

29.1

8.6

17.1

9.5

17.4

18.8

19.9

1.7

9.7

Arizona
2.7

—

—

—

—

—

0.5

6.5

59.7

—

Other
5.5

3.1

4.3

7.6

4.3

6.8

0.6

1.7

0.1

4.1

Utah
10.2

20.7

4.7

8.6

10.0

4.3

9.8

6.2

0.2

12.5

Idaho
8.6

4.9

2.2

3.3

8.4

3.4

3.1

5.2

—

5.0

New Mexico
3.4

6.4

12.6

2.5

5.2

7.8

11.2

1.7

0.5

8.5

Texas
3.3

1.4

12.2

0.2

2.2

18.2

1.8

2.9

—

—

Nevada
2.4

0.1

—

1.7

1.7

—

0.2

2.8

—

0.6

 
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%

The Company has granted loans to officers and directors of the Company and related interests. These loans are made on the same terms,
including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans including undisbursed commitments was $55,965,000 and $60,278,000 at September 30, 2015 and 2014, respectively. During 2015, new loans on related party loans totaled $8,750,000 and repayments on related party loans totaled $13,063,000.

The following table provides additional information on impaired loans, loan commitments and loans serviced for others:
 
September 30, 2015
 
September 30, 2014
 
(In thousands)
Recorded investment in impaired loans
$
341,579

 
$
435,185

Troubled Debt Restructuring included in impaired loans
302,713

 
374,743

Impaired loans with allocated reserves
2,323

 
196

Reserves on impaired loans
275

 
60

Average balance of impaired loans
333,815

 
403,138

Interest income from impaired loans
14,855

 
21,674

Outstanding fixed-rate origination commitments
230,869

 
198,504

Loans serviced for others
72,083

 
86,745



39

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The following table sets forth information regarding non-accrual loans held by the Company:
 
September 30, 2015
 
September 30, 2014
 
(In thousands)
 
 
 
(In thousands)
 
 
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
59,074

 
87.1
%
 
$
74,067

 
84.8
%
Construction - speculative
754

 
1.1

 
1,477

 
1.7

Construction - custom
732

 
1.1

 
—

 
—

Land - acquisition & development
—

 
—

 
811

 
0.9

Land - consumer lot loans
1,273

 
1.9

 
2,637

 
3.0

Multi-family
2,558

 
3.8

 
1,742

 
2.0

Commercial real estate
2,176

 
3.2

 
5,106

 
5.8

Commercial & industrial


 
—

 
7

 
—

HELOC
563

 
0.8

 
795

 
0.9

Consumer
680

 
1.0

 
789

 
0.9

Total non-accrual loans
$
67,810

 
100
%
 
$
87,431

 
100
%
The following tables provide an analysis of the age of loans in past due status:
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 - Speculative
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 improved from 1.44% as of September 30, 2014 to 0.88% as of September 30, 2015.

Most loans restructured in troubled debt restructurings ("TDRs") 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. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 bps 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 September 30, 2015, the outstanding balance of TDR's was $302,713,000 as compared to $374,743,000 as of September 30, 2014. Single-family residential loans comprised 86% of restructured loans which is the same as at the prior

40

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

year end. The Bank 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 tables provides information related troubled debt restructured:
 
September 30, 2015
 
September 30, 2014
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Recorded
 
Recorded
Troubled Debt Restructurings:
Contracts
 
Investment
 
Investment
 
Contracts
 
Investment
 
Investment
 
 
 
(In thousands)
 
 
 
(In thousands)
   Single-Family Residential
62

 
$
13,378

 
$
13,378

 
241

 
$
52,900

 
$
52,900

   Construction - Speculative
2

 
701

 
701

 
—

 
—

 
—

   Construction - Custom
—

 
—

 
—

 
—

 
—

 
—

   Land - Acquisition & Development
—

 
—

 
—

 
3

 
631

 
631

   Land - Consumer Lot Loans
9

 
1,546

 
1,546

 
13

 
2,315

 
2,315

   Multi-Family
3

 
—

 
—

 
2

 
1,196

 
1,196

   Commercial Real Estate
1

 
3,175

 
3,175

 
3

 
2,177

 
2,177

   Commercial & Industrial
1

 
—

 
—

 
—

 
—

 
—

   HELOC
—

 
50

 
50

 
2

 
549

 
549

   Consumer
—

 
80

 
80

 
3

 
35

 
35

 
78

 
$
18,930

 
$
18,930

 
267

 
$
59,803

 
$
59,803




 
September 30, 2015
 
September 30, 2014
 
Number of
 
Recorded
 
Number of
 
Recorded
Troubled Debt Restructurings That Subsequently Defaulted:
Contracts
 
Investment
 
Contracts
 
Investment
 
 
 
(In thousands)
 
 
 
(In thousands)
   Single-Family Residential
18

 
$
2,917

 
38

 
$
7,427

   Construction - Speculative
—

 
—

 
—

 
—

   Construction - Custom
—

 
—

 
—

 
—

   Land - Acquisition & Development
—

 
—

 
—

 
—

   Land - Consumer Lot Loans
2

 
301

 
8

 
969

   Multi-Family
—

 
—

 
—

 
—

   Commercial Real Estate
—

 
—

 
—

 
—

   Commercial & Industrial
—

 
—

 
—

 
—

   HELOC
—

 
—

 
—

 
—

   Consumer
—

 
—

 
—

 
—

 
20

 
$
3,218

 
46

 
$
8,396



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 yield 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 indices for acquired loans with variable interest rates.


41

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013




The following table shows the changes in accretable yield for acquired impaired loans and acquired non-impaired loans including covered loans for the years ended September 30, 2015 and 2014:

 
September 30, 2015
 
September 30, 2014
 
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
$
97,125

 
$
135,826

 
$
14,513

 
$
275,862

 
$
115,513

 
$
207,809

 
$
22,240

 
$
403,229

Additions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net reclassification from nonaccretable
6,307

 
—

 
346

 
—

 
17,486

 
(2,069
)
 
—

 
—

Accretion
(30,727
)
 
30,727

 
(7,655
)
 
7,655

 
(35,874
)
 
35,874

 
(7,727
)
 
7,727

Transfers to REO
—

 
(2,975
)
 
—

 
(150
)
 
—

 
(10,131
)
 
—

 
(4,710
)
Payments received, net
—

 
(52,278
)
 
—

 
(96,287
)
 
—

 
(95,657
)
 
—

 
(130,384
)
Ending Balance
$
72,705

 
$
111,300

 
$
7,204

 
$
187,080

 
$
97,125

 
$
135,826

 
$
14,513

 
$
275,862



Additionally, there were $9.9 million in fair value of loans 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 be reasonably estimated; therefore, these loan are accounted for on a cash basis.
At September 30, 2015 and September 30, 2014, 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.
The FDIC loss share coverage for the acquired commercial loans from the former Horizon Bank expired after March 31, 2015. These loans were transferred to non-covered loans receivable. The FDIC loss share coverage for the acquired commercial loans from the former Home Valley Bank expired as of September 30, 2015 with final reporting as of October 31, 2015. Recoveries to the extent that claims were made will continue to be shared for three years. The FDIC loss share coverage for single family residential loans will continue to another five years.
The outstanding principal balance of covered loans was $75,909,000 and $213,203,000 as of September 30, 2015 and September 30, 2014, respectively. The discount balance related to the covered loans was $2,738,000 and $34,483,000 as of September 30, 2015 and September 30, 2014, respectively.

The following table shows the year to date activity for the FDIC indemnification asset:
 
 
September 30,
2015
 
September 30, 2014
 
(In thousands)
Balance at beginning of period
$
36,860

 
$
64,615

Additions
(1,795
)
 
1,795

Payments received
(720
)
 
(2,502
)
Amortization
(18,588
)
 
(27,850
)
Accretion
518

 
802

Balance at end of period
$
16,275

 
$
36,860



42

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE D    Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the twelve months ended September 30, 2015 and 2014: 
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 - speculative
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

September 30, 2014
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance

(In thousands)
Single-family residential
$
64,184

 
$
(8,529
)
 
$
17,684

 
$
(10,576
)
 
$
62,763

Construction - speculative
8,407

 
(949
)
 
97

 
(813
)
 
6,742

Construction - custom
882

 
—

 
—

 
813

 
1,695

Land - acquisition & development
9,165

 
(541
)
 
3,071

 
(6,103
)
 
5,592

Land - consumer lot loans
3,552

 
(658
)
 
22

 
161

 
3,077

Multi-family
3,816

 
—

 
—

 
432

 
4,248

Commercial real estate
5,595

 
(105
)
 
33

 
2,025

 
7,548

Commercial & industrial
16,614

 
(826
)
 
5,043

 
(4,304
)
 
16,527

HELOC
1,002

 
(48
)
 
—

 
(26
)
 
928

Consumer
3,524

 
(3,443
)
 
3,513

 
(367
)
 
3,227

Covered loans
—

 
—

 
—

 
2,244

 
2,244

 
$
116,741

 
$
(15,099
)
 
$
29,463

 
$
(16,514
)
 
$
114,591


The Company recorded a reversal of $11,162,000 of provision for loan losses during the fiscal year ended September 30, 2015, while a $15,401,000 reversal of provision was recorded for the year ended September 30, 2014. The credit quality of the portfolio has been improving significantly and economic conditions are more stable.

Non-performing assets (“NPAs”) amounted to $128,577,000, or 0.88%, of total assets at September 30, 2015, compared to $147,311,000, or 1.00%, of total assets one year ago. Acquired loans, including covered loans are not classified as non-performing loans because, at acquisition, the carrying value of these loans was adjusted to reflect fair value. For the year ended September 30, 2015, $30,778,000 in acquired loans were subject to the general allowance as the discount related to these balances was not sufficient to absorb potential losses.




43

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

There is no allowance for covered loans as of September 30, 2015 compared to an allowance of $2,244,000 as of September 30, 2014. The allowance for credit losses related to the covered loans as of September 30, 2014 resulted from decreased expectations of future cash flows due to increased credit losses for certain acquired loan pools. The allowance allocation was reversed during the current fiscal year due to improvements in the expected future cash flows of certain acquired loan pools.

Non-accrual loans decreased from $87,431,000 at September 30, 2014, to $67,810,000 at September 30, 2015.

The Company had net recoveries of $5,370,000 for the twelve months ended September 30, 2015, compared with $14,365,000 of net recoveries for the same period one year ago. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet its contractual obligations.

At September 30, 2015, $106,554,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $275,000 was made up of specific reserves on loans that were deemed to be impaired. For the year ending September 30, 2014, $112,287,000 of the allowance was calculated under the formulas contained in our general allowance methodology, $60,000 was made up of specific reserves on loans that were deemed to be impaired and the remaining $2,244,000 was related to covered loans.
The following tables show a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of September 30, 2015 and 2014:
September 30, 2015
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
General  Reserve
Allocation
 
Gross Loans Subject  to
General Reserve (1)
 
Ratio
 
Specific  Reserve
Allocation
 
Gross Loans Subject  to
Specific Reserve (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
47,073

 
$
5,595,752

 
0.8
%
 
$
275

 
$
51,718

 
0.5
%
Construction - speculative
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

44

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

September 30, 2014
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
General  Reserve
Allocation
 
Gross Loans Subject  to
General Reserve (1)
 
Ratio
 
Specific  Reserve
Allocation
 
Gross Loans Subject  to
Specific Reserve (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
62,067

 
$
5,487,331

 
1.1
%
 
$
—

 
$
72,869

 
—
%
Construction - speculative
6,682

 
130,901

 
5.5

 
60

 
9,159

 
0.7

Construction - custom
1,695

 
385,464

 
0.5

 
—

 
360

 
—

Land - acquisition & development
5,592

 
73,999

 
7.6

 
—

 
3,833

 
—

Land - consumer lot loans
3,077

 
95,684

 
3.2

 
—

 
12,939

 
—

Multi-family
4,248

 
911,162

 
0.5

 
—

 
6,124

 
—

Commercial real estate
7,548

 
563,534

 
1.4

 
—

 
27,802

 
—

Commercial & industrial
17,223

 
421,816

 
4.6

 
—

 
—

 
—

HELOC
928

 
114,393

 
0.9

 
—

 
1,650

 
—

Consumer
3,227

 
132,590

 
2.4

 
—

 
—

 
—

 
$
112,287

 
$
8,316,874

 
1.4
%
 
$
60

 
$
134,736

 
—
%
 ___________________
(1)
Excludes acquired loans with discounts sufficient to absorb potential losses and covered loans

45

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The Company has an asset quality review function that analyzes the loan portfolio 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 defined 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.

46

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The following tables provide information on loans based on credit quality indicators (defined above) as of September 30, 2015 and 2014:
 
September 30, 2015
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,558,700

 
$
—

 
$
93,145

 
$
—

 
$
—

 
$
5,651,845

  Construction - speculative
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

Total Non-acquired loans
9,333,233

 
6,721

 
154,033

 
—

 
—

 
9,493,987

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
%
 
—
%
 
—
%
 
 

47

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

September 30, 2014
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,426,895

 
$
2,793

 
$
130,515

 
$
—

 
$
—

 
$
5,560,203

  Construction - speculative
134,950

 
—

 
5,110

 
—

 
—

 
140,060

  Construction - custom
385,824

 
—

 
—

 
—

 
—

 
385,824

  Land - acquisition & development
71,692

 
—

 
6,140

 
—

 
—

 
77,832

  Land - consumer lot loans
108,013

 
—

 
610

 
—

 
—

 
108,623

  Multi-family
912,728

 
—

 
4,558

 
—

 
—

 
917,286

  Commercial real estate
557,914

 
1,971

 
31,451

 
—

 
—

 
591,336

  Commercial & industrial
359,221

 
14,740

 
5,265

 
—

 
—

 
379,226

  HELOC
115,794

 
—

 
248

 
—

 
—

 
116,042

  Consumer
132,349

 
—

 
241

 
—

 
—

 
132,590

Total Non-acquired loans
8,205,380

 
19,504

 
184,138

 
—

 
—

 
8,409,022

Acquired loans
156,954

 
16,213

 
10,963

 
58

 
—

 
184,188

Credit impaired acquired loans
61,332

 
2,143

 
13,032

 
—

 
—

 
76,507

Covered loans
$
135,134

 
$
815

 
$
76,729

 
$
525

 
—

 
213,203

Total gross loans
$
8,558,800

 
$
38,675


$
284,862


$
583


$
—


$
8,882,920

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
96.4
%
 
0.4
%
 
3.2
%
 
—
%
 
—
%
 
 

48

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The following tables provide information on non-acquired loans based on payment activity as of September 30, 2015 and 2014:
 
September 30, 2015
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
 
 
 
(In thousands)
 
 
Single-family residential
$
5,592,771

 
99.0
%
 
$
59,074

 
1.0
%
Construction - speculative
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
%

September 30, 2014
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
 
 
 
(In thousands)
 
 
Single-family residential
$
5,486,136

 
98.7
%
 
$
74,067

 
1.3
%
Construction - speculative
138,583

 
98.9

 
1,477

 
1.1

Construction - custom
385,824

 
100.0

 
—

 
—

Land - acquisition & development
77,021

 
99.0

 
811

 
1.0

Land - consumer lot loans
105,986

 
97.6

 
2,637

 
2.4

Multi-family
915,544

 
99.8

 
1,742

 
0.2

Commercial real estate
586,230

 
99.1

 
5,106

 
0.9

Commercial & industrial
379,219

 
100.0

 
7

 
—

HELOC
115,247

 
99.3

 
795

 
0.7

Consumer
131,801

 
99.4

 
789

 
0.6

 
$
8,321,591

 
99.0
%
 
$
87,431

 
1.0
%


49

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The following tables provide information on impaired loans based on loan types as of September 30, 2015 and 2014:
 
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 - speculative
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 - speculative
4,988

 
5,778

 
—

 
5,432

Construction - custom
—

 
—

 
—

 
—

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

Commercial & industrial
—

 
—

 
—

 
—

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 - speculative
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.


50

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

September 30, 2014
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
24,044

 
$
26,628

 
$
—

 
$
16,843

Construction - speculative
1,603

 
2,173

 
—

 
1,804

Construction - custom
—

 
—

 
—

 
—

Land - acquisition & development
837

 
2,325

 
—

 
1,038

Land - consumer lot loans
974

 
1,072

 
—

 
713

Multi-family
1,111

 
1,111

 
—

 
327

Commercial real estate
13,234

 
20,085

 
—

 
11,720

Commercial & industrial
3,195

 
17,166

 
—

 
3,900

HELOC
1,019

 
1,730

 
—

 
612

Consumer
663

 
833

 
—

 
517

 
46,680

 
73,123

 
—

 
37,474

With an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
322,320

 
327,869

 
10,527

 
316,348

Construction - speculative
7,556

 
7,986

 
60

 
7,532

Construction - custom
—

 
—

 
—

 
—

Land - acquisition & development
4,696

 
5,636

 
—

 
4,114

Land - consumer lot loans
13,002

 
13,385

 
—

 
12,858

Multi-family
5,243

 
5,463

 
—

 
4,957

Commercial real estate
34,159

 
35,028

 
—

 
18,572

Commercial & industrial
—

 
—

 
—

 
—

HELOC
1,486

 
1,486

 
—

 
1,204

Consumer
43

 
214

 
—

 
79

 
388,505

 
397,067

 
10,587

(1)
365,664

Total:
 
 
 
 
 
 
 
Single-family residential
346,364

 
354,497

 
10,527

 
333,191

Construction - speculative
9,159

 
10,159

 
60

 
9,336

Construction - custom
—

 
—

 
—

 
—

Land - acquisition & development
5,533

 
7,961

 
—

 
5,152

Land - consumer lot loans
13,976

 
14,457

 
—

 
13,571

Multi-family
6,354

 
6,574

 
—

 
5,284

Commercial real estate
47,393

 
55,113

 
—

 
30,292

Commercial & industrial
3,195

 
17,166

 
—

 
3,900

HELOC
2,505

 
3,216

 
—

 
1,816

Consumer
706

 
1,047

 
—

 
596

 
$
435,185

 
$
470,190

 
$
10,587

(1)
$
403,138


____________________ 
(1)
Includes $60,000 of specific reserves and $10,527,000 included in the general reserves.


51

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013


NOTE E    INTEREST RECEIVABLE
 
September 30,
2015
2014
 
(In thousands)
Loans receivable
$
30,930

$
40,986

Mortgage-backed securities
6,695

7,427

Investment securities
2,804

3,624

 
$
40,429

$
52,037


Interest receivable decreased by $11,608,000 at September 30, 2015 as compared to September 30, 2014 largely as a result of the over-accrual of interest income of $8,872,000 that was corrected in the current year. Management believes this error and its correction had no material impact to any prior reporting period. The remaining difference is primarily due to lower yields on earning assets.
 




NOTE F    PREMISES AND EQUIPMENT
 
September 30,
  

2015
2014
 
Estimated
Useful Life
(In thousands)
Land
—

$
113,347

$
113,353

Buildings
25 - 40

147,757

143,627

Leasehold improvements
7 - 15

10,193

8,547

Furniture, software and equipment
2 - 10

89,919

65,154

 
 
361,216

330,681

Less accumulated depreciation and amortization
 
(84,969
)
(73,138
)
 
 
$
276,247

$
257,543

 

The Bank has non-cancelable operating leases for branch offices. Future minimum net rental commitments for all non-cancelable leases, including maintenance and associated costs, were as follows: $5,272,281,000 for 2016, $3,992,307,000 for 2017, $3,279,576,000 for 2018, $2,608,795,000 for 2019, $2,245,791,000 for 2020 and $8,941,391,000 thereafter.

Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $6,600,000, $6,600,000 and $4,680,000 in 2015, 2014 and 2013, respectively.



52

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE G    CUSTOMER ACCOUNTS
 
September 30,
2015
2014
 
(In thousands)
Checking accounts, .15% and under
$
2,555,766

$
2,331,170

Passbook and statement accounts, .10% and under
700,794

622,546

Insured money market accounts, .01% to .15%
2,564,318

2,536,971

Certificate accounts


Less than 2.00%
4,303,475

4,524,158

2.00% to 2.99%
501,409

602,683

3.00% to 3.99%
5,156

98,610

4.00% to 4.99%
150

146

5.00% to 5.99%
635

644

Total certificates
4,810,825

5,226,241

 
$
10,631,703

$
10,716,928

Certificate maturities are as follows:
 
 
September 30,
2015
2014
 
(In thousands)
Within 1 year
$
2,862,313

$
3,147,172

1 to 2 years
1,068,792

999,090

2 to 3 years
321,118

659,867

Over 3 years
558,602

420,112

 
$
4,810,825

$
5,226,241

 
Customer accounts over $250,000 totaled $2,096,690,000 as of September 30, 2015 and $1,887,216,000 as of September 30, 2014.


Interest expense on customer accounts consisted of the following: 
Year ended September 30,
2015
2014
2013
 
(In thousands)
Checking accounts
$
1,036

$
1,259

$
936

Passbook and statement accounts
660

607

566

Insured money market accounts
3,631

4,574

4,280

Certificate accounts
46,273

52,636

62,669

 
51,600

59,076

68,451

Less early withdrawal penalties
(546
)
(552
)
(548
)
 
$
51,054

$
58,524

$
67,903

 
 
 
 
Weighted average interest rate at end of year
0.48
%
0.51
%
0.69
%
Weighted daily average interest rate during the year
0.48
%
0.57
%
0.75
%

53

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE H    FHLB ADVANCES AND OTHER BORROWINGS
 
Maturity dates of FHLB advances were as follows:
 
September 30,
2015
2014
 
(In thousands)
FHLB advances
 
 
Within 1 year
$
250,000

$
100,000

1 to 3 years
750,000

700,000

4 to 5 years
430,000

730,000

More than 5 years
400,000

400,000

 
$
1,830,000

$
1,930,000

 
There were no advances included in the above table which are callable by the FHLB.
 
 
Financial data pertaining to the weighted-average cost and the amount of FHLB advances were as follows:
 
September 30,
2015
2014
2013
 
(In thousands)
Weighted average interest rate at end of year
3.35
%
3.52
%
3.52
%
Weighted daily average interest rate during the year
3.57
%
3.56
%
3.57
%
Daily average of FHLB advances
$
1,848,904

$
1,955,205

$
1,905,479

Maximum amount of FHLB advances at any month end
$
1,930,000

$
2,205,000

$
1,930,000

Interest expense during the year (excludes interest rate swap expense)
$
64,331

$
68,307

$
68,075

 

On June 1, 2015, the FHLB of Seattle merged into the FHLB of Des Moines to create a larger, financially stronger, member-owned cooperative. The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") equal to 49.0% of total assets. The FHLB of Des Moines has assumed the Bank's advances with the FHLB of Seattle as of the merger date.

The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and a fixed-rate term loan agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB.

As of September 30, 2015, 2014 and 2013, respectively, there were no reverse repurchase agreements or other borrowings. The Bank has historically entered into sales of reverse repurchase agreements which are an additional source of liquidity. Fixed-coupon reverse repurchase agreements have been treated as financings, and the obligations to repurchase securities sold have been reflected as a liability in the consolidated statements of financial condition in prior years.
 
 



54

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013


NOTE I        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 their obligations from variable to fixed interest rates. Under these agreements, the Bank enters into a variable-rate loan agreement with a customer in addition to a swap agreement, and then enters into a corresponding swap agreement with a third party in order to offset its exposure on the customer swap agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under FASB ASC 815, Derivatives and Hedging, the instruments are marked to market in earnings.
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 interest rate risk. More specifically, to mitigate the interest rate risk of rising LIBOR rates which are a benchmark for the short term borrowings. These interest rate swaps qualify as cash flow hedging instruments 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 will be recorded in Other Comprehensive Income. The Bank has also entered into an interest rate swap to hedge a commercial loan. This interest rate swap qualifies as a fair value hedging instrument 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 hedged item is the commercial loan.
The notional amount of open interest rate swap agreements at September 30, 2015 was $894,231,000. This included $439,416,000 in interest rate swaps in the customer derivatives program. There was no net impact on income due to changes in fair value for the 12 months ended September 30, 2015 for these interest rate swaps as the changes in value for the asset swap and the liability swap offset each other. The fee income related to these swaps was $1,939,598 for 2015 and $920,705 for 2014. This amount is included in miscellaneous loan fees. Additionally, the Bank had $400,000,000 in forward starting interest rate swaps to hedge future borrowing rates. Their impact on other comprehensive income as of September 30, 2015 was a loss of $9,205,790. The Bank also had $54,815,000 in an interest rate swap related to a commercial loan hedge. The bank has pledged a security with $59,000,000 in par value as collateral with its counterparty to these derivative transactions.
The following table presents the fair value and balance sheet classification of derivatives at September 30, 2015 and September 30, 2014:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
September 30, 2015
 
September 30, 2014
 
 
September 30, 2015
 
September 30, 2014
 
(In thousands)
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Client derivatives
 
Other assets
 
$
11,879

 
Other assets
 
$
2,611

 
Other liabilities
 
$
11,879

 
Other liabilities
 
$
2,611

Commercial loan hedge
 
Other assets
 
—

 
Other assets
 
—

 
Other liabilities
 
966

 
Other liabilities
 
—

Long term borrowing hedge
 
Other assets
 
—

 
Other assets
 
—

 
Other liabilities
 
14,555

 
Other liabilities
 
268

 
 
 
 
$
11,879

 
 
 
$
2,611

 
 
 
$
27,400

 
 
 
$
2,879

 

Derivatives at fair value are priced using model pricing based on their relationship to other benchmark quoted prices as provided by an independent third party and under the provisions of FASB ASC 820, Fair Value Measurement, are considered a Level 2 input method.


55

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE J INCOME TAXES
The Consolidated Statements of Financial Condition at September 30, 2015 and 2014 includes net deferred tax assets (liabilities) of $11,549,000 and $2,448,000, respectively, that have been provided for the temporary differences between the tax basis and the financial statement carrying amounts of liabilities and assets. The major sources of these temporary differences and their deferred tax effects were as follows:
September 30,
2015
2014
 
(In thousands)
Deferred tax assets
 
 
Loan loss reserves
$
43,749

$
48,505

REO reserves
11,213

13,680

Asset purchase tax basis difference (net)
5,973

8,812

Delinquent accrued interest
3,069

4,767

FDIC loss share guarantee receivable
7,803

1,800

Other, net
3,891

4,749

Total deferred tax assets
75,698

82,313

Deferred tax liabilities
 
 
Federal Home Loan Bank stock dividends
24,135

32,810

Valuation adjustment on available-for-sale securities
205

12,032

Loan origination costs
13,875

13,002

Depreciation
25,934

22,021

Total deferred tax liabilities
64,149

79,865

Net deferred tax asset
11,549

2,448

Current tax asset
2,964

14,067

Net tax asset
$
14,513

$
16,515

A reconciliation of the statutory federal income tax rate to the effective income tax rate follows:

Year ended September 30,
2015
2014
2013
Statutory income tax rate
35
 %
35
 %
35
 %
State income tax
2

2

2

Other differences
(1
)
(1
)
(2
)
Effective income tax rate
36
 %
36
 %
35
 %








56

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

Income taxes (benefit) are summarized as follows:
 
2015
2014
2013
 
(In thousands)
Federal:
 
 
 
Current
$
79,841

$
70,797

$
66,756

Deferred
3,244

10,591

10,355

 
83,085

81,388

77,111

State:
 
 
 
  Current
$
6,636

$
4,987

$
5,213

  Deferred
(518
)
1,189

787

 
6,118

6,176

6,000

Total
 
 
 
  Current
86,477

75,784

71,969

  Deferred
2,726

11,780

11,142

 
$
89,203

$
87,564

$
83,111


Based on current information the Company does not expect that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on the results of operations or the financial position of the Company. As of 2015 and 2014, the Company's liability for uncertain tax positions was $100,000 and $100,000, respectively. Included in the balance of unrecognized tax benefits at 2015, are $100,000 of tax benefits that, if recognized, would affect the effective tax rate. The Company records interest and penalties related to uncertain tax positions in income tax expense. As of 2015 and 2014, there were approximately $10,000 and $12,000, respectively, of accrued interest and no accrued penalties.
The Company's federal income tax returns are open for the tax years 2013 through 2015. The Company has been examined by the Internal Revenue Service through the year ended September 30, 2012.
State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to two years after formal notification to the states. The Company's unrecognized tax benefits are related to state tax returns open from 2012 through 2015.

57

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE K    401(k) AND EMPLOYEE STOCK OWNERSHIP PLAN

The Company maintains a 401(k) and Employee Stock Ownership Plan (the "Plan") for the benefit of its employees. Company contributions are made semi-annually as approved by the Board of Directors. Such amounts are not in excess of amounts permitted by the Employee Retirement Income Security Act of 1974.

Plan participants may make voluntary after-tax contributions of their considered earnings as defined by the Plan. In addition, participants may make pre-tax contributions up to the statutory limits through the 401(k) provisions of the Plan. The annual addition from contributions to an individual participant's account in this Plan cannot exceed the lesser of 100% of base salary or $53,000. Under provisions of the Plan, employees are eligible to participate on the date of hire and become fully vested in the Company's contributions following six years of service.

Effective January 1, 2014, the Company added a guaranteed safe harbor matching contribution component to the plan equal to 100% of the first 4% of compensation that employee's contribute to their account. In addition to the new match being guaranteed, all safe harbor matching contributions are immediately vested. The new match is not subject to the 6 year vesting schedule of the current profit sharing contribution. This provides plan participants more investment flexibility. The Company anticipates that all eligible employees, regardless of personal plan participation, will continue to receive an annual discretionary profit sharing contribution from the Company, now capped at 7% of eligible compensation with this change.

Company contributions to the Plan amounted to $8,700,000, $7,314,000 and $5,870,000 for the years ended 2015, 2014, and 2013, respectively.


58

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE L    STOCK AWARD PLANS

The Company has one equity-based compensation plan which was approved by stockholders and provides for a combination of stock options and stock grants. Stockholders authorized 5,000,000 shares of common stock to be reserved pursuant to the 2011 Incentive Plan. Under the Plan, 4,201,230 shares remain available for issuance.

During 2015, 2014 and 2013, there were no stock options granted; however, stock grants were issued in each of those years. When applicable, stock options are granted with an exercise price equal to the market price of the Company's stock at the date of grant; those option awards generally vest based on 5 years of continuous service and have 10-year contractual terms. The Company's policy is to issue new shares upon option exercises. The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Expected volatility is based on the historical volatility of the Company's stock. The risk-free interest rate is based on the U.S. Treasury yield curve that is in effect at the time of grant with a remaining term equal to the options' expected life. The expected term represents the period of time that options granted are expected to be outstanding.

Stock Option Awards:

There were no stock options granted during 2015, 2014, and 2013.

A summary of stock option activity under the Plan as of 2015 and changes during the year are as follows:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at September 30, 2014
1,249,009

$
21.11

4
$1,859
Granted
—

—

 
 
Exercised
(128,394
)
16.12

 
 
Forfeited
(93,241
)
22.18

 
 
Outstanding at September 30, 2015
1,027,374

$
21.64

3
$
1,867

Exercisable at September 30, 2015
958,087

$
21.99

2
$
1,459


Miscellaneous information related to stock options is presented below:
 
2015
2014
2013
 
(In thousands, except fair value of options granted)
Compensation cost for stock options
$
232

$
324

$
473

Weighted avg. grant date FV
2.96

2.95

3.24

Total intrinsic value of options exercised
831

1,136

781

Grant date FV of options exercised
368

1,962

791

Cash received from option exercises
2,069

10,142

4,261

Tax benefit realized for option exercises
—

159

53



59

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

A summary of the Company's non-vested stock options is as follows:


2015

2014

2013
Non-vested Stock Options
Options Outstanding
Weighted
Average
Grant Date
Fair Value

Options Outstanding
Weighted
Average
Grant Date
Fair Value

Options Outstanding
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of period
145,795

$
3.87


287,750

$
3.44


614,272

$
3.20

Granted
—

—


—

—


—

—

Vested
(61,018
)
3.88


(119,520
)
2.88


(283,407
)
2.95

Forfeited
(15,490
)
3.90


(22,435
)
3.63


(43,115
)
3.25

Outstanding at end of period
69,287

$
3.85


145,795

$
3.87


287,750

$
3.44


As of September 30, 2015, unrecognized compensation cost for stock options net of forfeitures totaled $95,182, which is expected to be recognized over a weighted average remaining period of 0.5 years.


Restricted Stock Grant Awards:
The Company also grants shares of restricted stock pursuant to its 2011 Incentive Plan. These shares of restricted stock vest over a period of one to seven years. The Company had a total of 521,302 shares of restricted stock outstanding as of September 30, 2015, with a fair market value at the date of grant of $7.8 million. At the prior year end, the Company had a total of 515,845 restricted shares issued with a fair market value at the date of grant of $7.3 million.

The following table summarizes information about nonvested restricted share activity for the years ended September 30:

2015

2014

2013
Non-vested Restricted Stock
Outstanding
Weighted
Average
Fair Value

Outstanding
Weighted
Average
Fair Value

Outstanding
Weighted
Average
Fair Value
Outstanding at beginning of period
515,845

$
14.10


480,904

$
11.52


371,096

$
11.88

Granted
301,750

14.26


300,500

$
15.43


270,750

11.67

Vested
(223,043
)
13.24


(202,014
)
11.68


(134,792
)
11.87

Forfeited
(73,250
)
10.72


(63,545
)
8.50


(26,150
)
16.45

Outstanding at end of period
521,302

$
15.03


515,845

$
14.10


480,904

$
11.52


Compensation expense related to restricted stock was $3,271,564, $3,085,081 and $2,815,049 for the years ended 2015, 2014 and 2013, respectively.

60

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE M    STOCKHOLDERS' EQUITY

The Company and the Bank are subject to various regulatory capital requirements. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Common Equity Tier 1, Tier 1 and Total capital to risk weighted assets (as defined in the regulations) and Tier 1 capital to average assets (as defined in the regulations). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The Company and the Bank are also subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval.

As of September 30, 2015 and 2014, the Company and the Bank met all capital adequacy requirements to which they are subject, and the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Common Equity Tier 1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios as set forth in the following table. The Bank's actual capital amounts and ratios as of these dates are also presented. There are no conditions or events since that management believes have changed the Bank's categorization.

 
Actual
Capital Adequacy
Guidelines
Categorized as Well Capitalized Under Prompt Corrective Action Provisions
  
Capital
Ratio
Capital
Ratio
Capital
Ratio
As of September 30, 2015
(In thousands)
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 1 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
NA

The Bank
1,652,569

11.66

566,942

4.00

708,678

5.00

 
 
 
 
 
 
 
As of September 30, 2014
 
 
 
 
 
 
Tier 1 risk-based capital ratio:
 
 
 
 
 
 
The Company
$
1,648,199

22.71
%
$290,335
4.00
%
NA

NA

The Bank
1,658,704

22.85

290,386

4.00

$
435,579

6.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
The Company
1,739,658

23.97

580,671

8.00

NA
NA

The Bank
1,750,179

24.11

580,772

8.00

725,965

10.00

Tier 1 leverage ratio:
 
 
 
 
 
 
The Company
1,648,199

11.39

578,804

4.00

NA
NA

The Bank
1,658,704

11.46

578,816

4.00

723,520

5.00




61

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

At periodic intervals, the Federal Reserve, the OCC and the FDIC routinely examine the Company's and the Bank's financial statements as part of their oversight. Based on their examinations, these regulators can direct that the Company's or Bank's financial statements be adjusted in accordance with their findings. The extent to which forthcoming regulatory examinations may result in adjustments to the financial statements cannot be determined; however, no adjustments were proposed as a result of the most recent examination which concluded in July, 2015.

The federal banking agencies released new regulatory capital rules which became effective on January 1, 2015. These new rules raised the minimum capital ratios and established new criteria for regulatory capital. Minimum capital ratios for four measures are now established for capital adequacy purposes as indicated in the table above. The Common Equity Tier 1 capital ratio is new; it recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The new rules also set forth a "capital conversation 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 new capital rules detail a phase-in period for the new minimum ratios and the capital buffers before the full minimum ratios take effect in 2019. The Company has calculated its capital ratios using the new rules since March 31, 2015. This did not have a material impact on its consolidated financial statements. There are also new standards for Adequate and Well Capitalized criteria that are used for "Prompt Corrective Action" purposes. To remain categorized as well capitalized, the Bank must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios as set forth in the above table. These rules are further described in the 10-K report under "Washington Federal, National Association (Bank) - Regulatory Capital Requirements". Both the Company and the Bank have more than enough capital to readily meet these new guidelines.

The Company paid its 131st consecutive quarterly cash dividend on November 20, 2015 to common stockholders of record on November 6, 2015. The Company and the Bank are subject to restrictions on paying dividends that are further described in the 10-K report under "The Company - Restrictions on Company Dividends" and "Washington Federal, National Association (Bank) - Restrictions on Dividends".

The Company has an ongoing stock repurchase program. 5,841,204 shares were repurchased during 2015 at a weighted average price of $21.70. In 2014, 4,830,400 shares were repurchased during the year at a weighted average price of $21.59. As of September 30, 2015, Management had authorization from the Board of Directors to repurchase up to 4,201,230 additional shares.

In connection with the 2008 Troubled Asset Relief Program ("TARP") the Company issued 1,707,456 warrants to purchase common stock at an exercise price of $17.57. As of September 30, 2015, 1,700,856 warrants remained outstanding with an expiration date of November 14, 2018. The warrants have been included in the calculation of diluted shares outstanding using the treasury stock method.
The following table sets forth information regarding earnings per share calculations:
Year ended September 30,
2015
 
2014
 
2013
Weighted average shares outstanding
95,644,639

 
101,154,030

 
104,684,812

Weighted average dilutive warrants
340,016

 
352,171

 
100,211

Weighted average dilutive options
69,304

 
84,150

 
52,447

Weighted average diluted shares
96,053,959

 
101,590,351

 
104,837,470

 
 
 
 
 
 
Net income (In thousands)
$
160,316

 
$
157,364

 
$
151,505

Basic EPS
$
1.68

 
$
1.56

 
$
1.45

Diluted EPS
1.67

 
1.55

 
1.45



62

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE N    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, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, estimates of fair value subsequent to that date may differ significantly from the amounts presented below. 
 
 
2015
 
2014
  
Level
Carrying
Amount
Estimated
Fair Value
 
Carrying
Amount
Estimated
Fair Value
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
Cash and cash equivalents
1
$
284,049

$
284,049

 
$
781,843

$
781,843

Available-for-sale securities:
 


 
 
 
Equity securities
1
101,952

101,952

 
101,387

101,387

Obligations of U.S. government
2
482,464

482,464

 
731,943

731,943

Obligations of states and political subdivisions
2
27,123

27,123

 
23,681

23,681

Corporate debt securities
2
505,800

505,800

 
509,007

509,007

Mortgage-backed securities
 


 
 
 
Agency pass-through certificates
2
1,160,518

1,160,518

 
1,584,508

1,584,508

Other commercial MBS
2
102,706

102,706

 
98,916

98,916

Total available-for-sale securities
 
2,380,563

2,380,563

 
3,049,442

3,049,442

Held-to-maturity securities:
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
Agency pass-through certificates
2
1,643,216

1,637,420

 
1,548,265

1,499,218

Total held-to-maturity securities
 
1,643,216

1,637,420

 
1,548,265

1,499,218

 
 
 
 
 
 
 
Loans receivable
3
9,170,634

9,667,750

 
8,324,798

8,844,532

FDIC indemnification asset
3
16,275

15,522

 
36,860

35,976

FHLB and FRB stock
2
107,198

107,198

 
158,839

158,839

Other assets - interest rate contracts
2
11,879

11,879

 
2,611

2,611

 
 
 
 
 
 
 
Financial liabilities
 


 
 
 
Customer accounts
2
10,631,703

10,004,290

 
10,716,928

9,946,586

FHLB advances and other borrowings
2
1,830,000

1,938,384

 
1,930,000

2,054,437

Other liabilities - interest rate contracts
2
11,879

11,879

 
2,611

2,611

Other liabilities - commercial loan hedge
2
966

966

 
—

—

Other liabilities - long term borrowing hedge
2
14,555

14,555

 
268

268


For a description of the level in fair value hierarchy under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification please see note Q.

The following methods and assumptions were used to estimate the fair value of financial instruments:


63

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

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 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 except for equity securities where the quoted price for an identical instrument is used which are considered a Level 1 input method.

Loans receivable – 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 redemption value of the stock which equates to its carrying value.

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 and other borrowings – 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.

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.

Commercial Loan Hedges – The fair value of the interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.



64

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE O    FINANCIAL INFORMATION – WASHINGTON FEDERAL, INC.

The following Washington Federal, Inc. (parent company only) financial information should be read in conjunction with the other notes to the Consolidated Financial Statements.
 
Condensed Statements of Financial Condition
 
 
 
September 30,
2015
 
2014
 
(In thousands)
Assets
 
 
 
Cash
$
7,628

 
$
3,895

Investment in subsidiary
1,949,262

 
1,983,788

Total assets
$
1,956,890

 
$
1,987,683

 
 
 
 
Liabilities
 
 
 
Dividend payable and other liabilities
$
1,211

 
$
14,400

Total liabilities
1,211

 
14,400

 
 
 
 
Stockholders’ equity
 
 
 
Total stockholders’ equity
1,955,679

 
1,973,283

Total liabilities and stockholders’ equity
$
1,956,890

 
$
1,987,683



Condensed Statements of Operations
 
 
 
Year ended September 30,
2015
2014
2013
 
(In thousands)
Income
 
 
 
Dividends from subsidiary
$
175,000

$
70,000

$
143,799

Total Income
175,000

70,000

143,799

Expense
 
 
 
Miscellaneous
439

485

530

Total expense
439

485

530

 
 
 
 
Net income before equity in undistributed net income of subsidiary
174,561

69,515

143,269

Equity in undistributed net income of subsidiary
(14,402
)
87,675

8,045

Income before income taxes
160,159

157,190

151,314

Income tax benefit
157

174

191

Net income
$
160,316

$
157,364

$
151,505



65

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

Condensed Statements of Cash Flows
 
 
 
Year ended September 30,
2015
2014
2013
 
(In thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
160,316

$
157,364

$
151,505

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Equity in undistributed net income of subsidiaries
32,375

(87,943
)
(4,893
)
Decrease (increase) in other assets
—

1

1

Increase in other liabilities
(13,189
)
4,152

1,698

Net cash provided by operating activities
179,502

73,574

148,311

 
 
 
 
Cash Flows From Financing Activities
 
 
 
Proceeds from exercise of common stock options and related tax benefit
2,070

10,252

4,261

Treasury stock purchased
(126,728
)
(104,291
)
(110,238
)
Dividends paid on common stock
(51,111
)
(42,065
)
(37,835
)
Net cash used in financing activities
(175,769
)
(136,104
)
(143,812
)
 
 
 
 
Increase (decrease) in cash
3,733

(62,530
)
4,499

Cash at beginning of year
3,895

66,425

61,926

Cash at end of year
$
7,628

$
3,895

$
66,425

 


66

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013


NOTE P    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the unaudited interim results of operations by quarter for the years ended September 30, 2015 and 2014:
 
Year Ended September 30, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
 
(In thousands, except per share data)
Interest income
$
133,284

$
132,630

$
129,300

$
135,339

Interest expense
31,101

28,750

28,735

28,486

Net interest income
102,183

103,880

100,565

106,853

Provision (reversal) for loan losses
(5,500
)
(3,949
)
(1,932
)
219

Other operating income (REO expense)
5,695

12,314

14,999

16,719

Other operating expense
53,600

57,324

56,719

57,208

Income before income taxes
59,778

62,819

60,777

66,145

Income taxes
21,371

22,458

21,727

23,647

Net income
$
38,407

$
40,361

$
39,050

$
42,498

 
 
 
 
 
Basic earnings per share
$
0.39

$
0.42

$
0.41

$
0.46

Diluted earnings per share
0.39

0.42

0.41

0.45

Cash dividends paid per share
0.15

0.13

0.13

0.13

Return of average assets
1.05
%
1.11
%
1.08
%
1.17
%
 

Year Ended September 30, 2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
 
(In thousands, except per share data)
Interest income
$
131,258

$
132,351

$
135,011

$
135,077

Interest expense
32,946

31,715

31,732

31,684

Net interest income
98,312

100,636

103,279

103,393

Provision (reversal) for loan losses
(4,600
)
(4,336
)
(3,000
)
(3,465
)
Other operating income (REO expense)
3,837

7,255

6,016

10,808

Other operating expense
44,120

52,059

53,293

54,537

Income before income taxes
62,629

60,168

59,002

63,129

Income taxes
22,393

21,511

21,092

22,568

Net income
$
40,236

$
38,657

$
37,910

$
40,561

 
 
 
 
 
Basic earnings per share
$
0.39

$
0.38

$
0.38

$
0.41

Diluted earnings per share
0.39

0.38

0.37

0.41

Cash dividends paid per share
0.10

0.10

0.10

0.11

Return of average assets
1.19
%
1.07
%
1.04
%
1.10
%




67

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

NOTE Q    Fair Value Measurements
U.S. GAAP 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. U.S. GAAP 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 our 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 available for sale and interest rate contracts 
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 FASB ASC 820, Fair Value Measurement, are considered a Level 2 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 long term borrowing hedges through forward starting 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.

68

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

The following table presents the balance of assets measured at fair value on a recurring basis at September 30, 2015 and September 30, 2014:
 
Fair Value at September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
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

Obligations of foreign governments
—

 
—

 
—

 
—

Corporate debt securities
—

 
505,800

 
—

 
505,800

Agency pass through mortgage-backed securities
—

 
1,160,518

 
—

 
1,160,518

Other commercial MBS
—

 
102,706

 
—

 
102,706

Other debt securities
—

 
—

 
—

 
—

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 year ended September 30, 2015.


69

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

 
Fair Value at September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Equity securities
$
101,387

 
$
—

 
$
—

 
$
101,387

Obligations of U.S. government
—

 
731,943

 
—

 
731,943

Obligations of states and political subdivisions
—

 
23,681

 
—

 
23,681

Obligations of foreign governments
—

 
—

 
—

 
—

Corporate debt securities
—

 
509,007

 
—

 
509,007

Agency pass through mortgage-backed securities
—

 
1,584,508

 
—

 
1,584,508

Other commercial MBS
—

 
98,916

 
—

 
98,916

Other debt securities
—

 
—

 
—

 
—

Total Available-for-sale securities
101,387

 
2,948,055

 
—

 
3,049,442

  Interest rate contracts
—

 
2,611

 
—

 
2,611

Total Financial Assets
$
101,387

 
$
2,950,666

 
$
—

 
$
3,052,053

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
  Interest rate contracts
$
—

 
$
2,611

 
$
—

 
$
2,611

  Commercial loan hedge
—

 
—

 
—

 
—

  Long term borrowing hedge
—

 
268

 
—

 
268

Total Financial Liabilities
$
—

 
$
2,879

 
$
—

 
$
2,879

There were no transfers between, into and/or out of Level 1, 2 or 3 during the year ended September 30, 2014.
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, fair value adjustments are recorded to reflect increases or decreases of principal balances 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 a non-current appraisal 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 September 30, 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 table presents the aggregated balance of assets that were measured at estimated fair value on a nonrecurring basis for the year ended September 30, 2015 and September 30, 2014, and the total losses (gains) resulting from those fair value adjustments for the quarter and year ended September 30, 2015 and September 30, 2014. These estimated fair values are shown gross of estimated selling costs: 

70

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

 
As of September 30, 2015
 
Quarter
Ended
September 30, 2015
 
Year Ended September 30, 2015
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total (Gains) Losses
 
(In thousands)
 
 
Impaired loans (1)
$
—

 
$
—

 
$
6,735

 
$
6,735

 
$
40

 
$
4,241

Covered REO (2)
—


—


2,203

 
2,203

 
(7
)
 
161

Real estate held for sale (2)
—

 
—

 
79,245

 
79,245

 
661

 
(7,910
)
Balance at end of period
$
—

 
$
—

 
$
88,183

 
$
88,183

 
$
694

 
$
(3,508
)
 ___________________
(1)
The losses represent remeasurements of collateral-dependent loans.
(2)
The (gains) losses represent aggregate writedowns and charge-offs on real estate held for sale.
 
As of September 30, 2014
 
Quarter
Ended
September 30, 2014
 
Year Ended September 30, 2014
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total (Gains) Losses
 
(In thousands)
 
 
Impaired loans (1)
$
—

 
$
—

 
10,156

 
$
10,156

 
—

 
(1,311
)
Covered REO (2)
—

 
—

 
10,520

 
10,520

 
113

 
616

Real estate held for sale (2)
—

 
—

 
51,624

 
51,624

 
1,878

 
18,660

Balance at end of period
$
—

 
$
—

 
$
72,300

 
$
72,300

 
$
1,991

 
$
17,965

 ___________________
(1)
The (gains) losses represent remeasurements of collateral-dependent loans.
(2)
The losses represent aggregate writedowns and charge-offs on real estate held for sale.
The following describes the process used to value Level 3 assets measured on a nonrecurring basis:
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.
Applicable loans are evaluated for impairment on a quarterly basis. Loans 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.

71

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2015, 2014 AND 2013

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.

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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Washington Federal, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2015. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 version of its Internal Control-Integrated Framework. Based on its assessment, the Company's management believes that as of September 30, 2015, the Company's internal control over financial reporting was effective based on those criteria.
The Company's independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, have issued an audit report on the Company's internal control over financial reporting and their report follows.

December 2, 2015
Roy M. Whitehead
Chairman, President and
Chief Executive Officer


Brent J. Beardall
Executive Vice President and
Interim Chief Financial Officer


73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Washington Federal, Inc.
Seattle, Washington

We have audited the accompanying consolidated statements of financial condition of Washington Federal, Inc. and subsidiaries (the “Company”) as of September 30, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Washington Federal, Inc. and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2015, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 2, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.



Seattle, Washington
December 2, 2015

74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROLS
To the Board of Directors and Stockholders of
Washington Federal, Inc.
Seattle, Washington

We have audited the internal control over financial reporting of Washington Federal, Inc. and subsidiaries (the “Company”) as of September 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assertion and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Office of the Comptroller of the Currency Instructions for Call Reports for Balance Sheet on schedule RC, Income Statement on schedule RI, and Changes in Bank Equity Capital on schedule RI-A. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report’s on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management's statement referring to compliance with laws and regulations.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2015, of the Company and our report dated December 2, 2015, expressed an unqualified opinion on those consolidated financial statements.



Seattle, Washington
December 2, 2015

75

Performance Graphs

The following graphs compare the cumulative total return to Washington Federal stockholders (stock price appreciation plus reinvested dividends) to the cumulative total return of the Nasdaq Stock Market Index (U.S. Companies) and the Nasdaq Financial Stocks Index for the five year period ended September 30, 2015 and since Washington Federal first became a publicly traded company on November 9, 1982, respectively. The graphs assume that $100 was invested on September 30, 2008 and November 9, 1982, respectively, in Washington Federal Common Stock, the Nasdaq Stock Market Index and the Nasdaq Financial Stocks Index, and that all dividends were reinvested. Management of Washington Federal cautions that the stock price performance shown in the graphs below should not be considered indicative of potential future stock price performance.



76


77


GENERAL CORPORATE AND
STOCKHOLDERS' INFORMATION

Corporate
425 Pike Street
Headquarters
Seattle, Washington 98101
(206) 624-7930

Independent
Deloitte & Touche LLP
Auditors
Seattle, Washington

Transfer Agent,
Stockholder inquiries regarding transfer
Registrar and
requirements, cash or stock dividends, lost
Dividend
certificates, consolidating records, correcting
Disbursing
a name or changing an address should be
Agent
directed to the transfer agent:
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
Telephone: 1-888-888-0315
www.amstock.com

Annual Meeting
The annual meeting of stockholders will be
held on January 20, 2016, at 2 p.m., Pacific Time at
Benaroya Hall, 200 University Street,
Seattle, Washington 98101

Form 10-K
To find out more about the Company, please visit our website. The Company uses its website to distribute financial and other material information about the Company. This report and all SEC filings of the Company are available through the Company's website:
www.washingtonfederal.com

Stock
Information
Washington Federal, Inc. is traded on the NASDAQ Global Select Market. The common stock symbol is WAFD. At September 30, 2015, there were approximately 1,690 stockholders of record.

 
Stock Prices
 
Quarter Ended
High
Low
Dividends
December 31, 2013
$
23.93

$
22.96

$
0.10

March 31, 2014
24.12

22.13

0.10

June 30, 2014
22.89

20.83

0.10

September 30, 2014
22.51

20.36

0.11

December 31, 2014
22.49

19.67

0.15

March 31, 2015
22.14

19.86

0.13

June 30, 2015
24.16

21.46

0.13

September 30, 2015
23.93

21.39

0.13


Our Board of Directors' dividend policy is to review our financial performance, capital adequacy, regulatory compliance and cash resources on a quarterly basis, and, if such review is favorable, to declare and pay a cash dividend to shareholders.



78

DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
 
EXECUTIVE MANAGEMENT COMMITTEE
 
 
 
 
 
ROY M. WHITEHEAD
Chairman, President and
Chief Executive Officer
 
ROY M. WHITEHEAD
Chairman, President and
Chief Executive Officer
 
DAVID K. GRANT
Managing Partner of Catalyst Storage Partners. Former Chief Executive Officer of Shurgard Storage Centers, Inc.
 
BRENT J. BEARDALL
Executive Vice President
and Chief Banking Officer
 
ANNA C. JOHNSON
Senior Partner
Scan East West Travel
 
LINDA S. BROWER
Executive Vice President
Administration
 
THOMAS J. KELLEY
Retired Partner, Arthur Andersen LLP
 
JACK B. JACOBSON
Executive Vice President
Commercial Real Estate
 
BARBARA L. SMITH, PhD.
Owner, B. Smith Consulting Group
 
THOMAS E. KASANDERS
Executive Vice President
Business Banking
 
MARK N. TABBUTT
Chairman of Saltchuk Resources

 
MARK A. SCHOONOVER
Executive Vice President
Chief Credit Officer

 
RANDALL H. TALBOT
Managing Director of Talbot Financial, LLC. Former President, Chief Executive Officer and Director of Symetra Financial Corporation, Inc.
 
 
 
 
 
 
 
DIRECTOR EMERITUS
 
 
 
W. ALDEN HARRIS
 
 
 


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