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EX-32 - EXHIBIT 32 - WASHINGTON FEDERAL INCwafd10-qex3212312015.htm
EX-31.1 - EXHIBIT 31.1 - WASHINGTON FEDERAL INCwafd10-qex31112312015.htm
EX-31.2 - EXHIBIT 31.2 - WASHINGTON FEDERAL INCwafd10-qex31212312015.htm

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



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


2

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





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

 
$
284,049

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

 
2,380,563

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

 
1,643,216

Loans receivable, net
9,402,730

 
9,170,634

Interest receivable
38,259

 
40,429

Premises and equipment, net
288,796

 
276,247

Real estate owned
42,098

 
61,098

FHLB and FRB stock
111,107

 
107,198

Bank owned life insurance
103,281

 
102,496

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

 
299,358

Federal and state income tax assets, net
716

 
14,513

Other assets
190,076

 
188,523

 
$
14,684,899

 
$
14,568,324

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

 
$
5,820,878

Time deposit accounts
4,727,035

 
4,810,825

 
10,651,119

 
10,631,703

FHLB advances
1,928,000

 
1,830,000

Advance payments by borrowers for taxes and insurance
21,747

 
50,224

Accrued expenses and other liabilities
113,793

 
100,718

 
12,714,659

 
12,612,645

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

 
133,696

Paid-in capital
1,649,529

 
1,643,712

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

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

 
829,754

 
1,970,240

 
1,955,679

 
$
14,684,899

 
$
14,568,324




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3


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

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

 
$
108,293

Mortgage-backed securities
16,987

 
19,175

Investment securities and cash equivalents
5,274

 
5,273

 
135,124

 
132,741

INTEREST EXPENSE
 
 
 
Customer accounts
12,717

 
13,445

FHLB advances and other borrowings
15,538

 
17,113

 
28,255

 
30,558

Net interest income
106,869

 
102,183

Provision for (reversal of) allowance for loan losses

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

 
107,683

 
 
 
 
OTHER INCOME
 
 
 
Loan fee income
1,517

 
2,065

Deposit fee income
5,917

 
5,977

Other income (expense)
3,201

 
(2,662
)
 
10,635

 
5,380

 
 
 
 
OTHER EXPENSE
 
 
 
Compensation and benefits
29,699

 
29,160

Occupancy
8,592

 
8,135

FDIC insurance premiums
2,589

 
674

Product delivery
5,523

 
5,627

Information technology
8,710

 
4,030

Other expense
9,396

 
5,974

 
64,509

 
53,600

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

 
315

Income before income taxes
54,415

 
59,778

Income tax provision
19,317

 
21,371

NET INCOME
$
35,098

 
$
38,407

 

 


PER SHARE DATA
 
 
 
Basic earnings
$
0.38

 
$
0.39

Diluted earnings
0.38

 
0.39

Dividends paid on common stock per share
0.13

 
0.15

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

 
98,147,939

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

 
98,524,839


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4



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

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

 
$
38,407

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

Related tax benefit (expense)
3,807

 
(3,146
)
 
(6,553
)
 
5,414

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

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

 
1,768

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

Comprehensive income
$
30,313

 
$
41,134





SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5



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

$
1,643,712

$
829,754

$
353

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

Net income




35,098





35,098

Other comprehensive income (loss)



(4,785
)

(4,785
)
Dividends on common stock




(12,036
)




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


300







300

Proceeds from exercise of common stock options
227

4,815







5,042

Restricted stock expense
178

702







880

Treasury stock acquired








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

$
1,649,529

$
852,816

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

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

$
1,638,211

$
706,149

$
20,708

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

Net income




38,407





38,407

Other comprehensive income (loss)



2,727


2,727

Dividends on common stock




(10,159
)




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


300







300

Proceeds from exercise of common stock options
18

248







266

Restricted stock expense
250

591







841

Treasury stock acquired








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

$
1,639,350

$
734,397

$
23,435

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




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6



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

 
$
38,407

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

 
5,299

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

 
(431
)
Stock option compensation expense
300

 
300

Reversal of provision for loan losses

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

 
11,280

Decrease in federal and state income tax receivable
16,577

 
19,208

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

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

 
18,299

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

FHLB & FRB stock redemption
2,901

 
3,969

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

 
202,760

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

 
31,178

Proceeds from sales of real estate owned
26,664

 
17,909

Purchase of bank owned life insurance

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

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

 
(137,999
)
Proceeds from borrowings
204,000

 

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

 
266

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

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

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

 
781,843

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

 
$
542,769

(CONTINUED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7



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

 
$
8,852

Covered real estate acquired through foreclosure

 
51

Cash paid during the period for
 
 
 
Interest
29,195

 
34,653

Income taxes
8

 
23




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8



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

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

NOTE B – New Accounting Pronouncements

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

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

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

9

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



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

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

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

10

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



NOTE D – Loans Receivable

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

55.7
%
 
$
5,651,845

57.5
%
   Construction
660,238

6.5

 
200,509

2.0

   Construction - custom
404,849

4.0

 
396,307

4.0

   Land - acquisition & development
97,025

1.0

 
94,208

1.0

   Land - consumer lot loans
102,376

1.0

 
103,989

1.1

   Multi-family
997,696

9.9

 
1,125,722

11.5

   Commercial real estate
839,157

8.3

 
986,270

10.0

   Commercial & industrial
751,073

7.4

 
612,836

6.2

   HELOC
127,919

1.3

 
127,646

1.3

   Consumer
181,142

1.8

 
194,655

2.0

Total non-acquired loans
9,791,190

96.9
%
 
9,493,987

96.6
%
Acquired loans
164,380

1.6

 
166,293

1.7

Credit impaired acquired loans
116,030

1.1

 
87,081

0.9

Covered loans
38,584

0.4

 
75,909

0.8

Total gross loans
10,110,184

100.0
%
 
9,823,270

100.0
%
   Less:
 
 
 
 
 
      Allowance for probable losses
107,901

 
 
106,829

 
      Loans in process
535,850

 
 
476,796

 
      Discount on acquired loans
25,040

 
 
30,095

 
      Deferred net origination fees
38,663

 
 
38,916

 
Total loan contra accounts
707,454

 
 
652,636

 
Net Loans
$
9,402,730

 
 
$
9,170,634

 
 
 
 
 
 
 



11

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


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

 
77.3
%
 
$
59,074

 
87.1
%
Construction

 

 
754

 
1.1
%
Construction - custom
2,518

 
4.4

 
732

 
1.1
%
Land - acquisition & development
509

 
0.9

 

 
%
Land - consumer lot loans
939

 
1.7

 
1,273

 
1.9
%
Multi-family
1,538

 
2.7

 
2,558

 
3.8
%
Commercial real estate
6,681

 
11.8

 
2,176

 
3.2
%
Commercial & industrial
115

 
0.2

 

 
%
HELOC
473

 
0.8

 
563

 
0.8
%
Consumer
119

 
0.2

 
680

 
1.0
%
Total non-accrual loans
$
56,748

 
100
%
 
$
67,810

 
100
%

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

 
$
5,576,774

 
$
17,285

 
$
9,939

 
$
40,010

 
$
67,234

 
1.19
%
Construction
325,485

 
324,619

 
560

 
306

 

 
866

 
0.27

Construction - Custom
221,327

 
218,773

 
28

 
9

 
2,518

 
2,554

 
1.15

Land - Acquisition & Development
85,830

 
84,805

 
387

 

 
638

 
1,025

 
1.19

Land - Consumer Lot Loans
102,887

 
100,224

 
828

 
897

 
938

 
2,663

 
2.59

Multi-Family
966,921

 
965,110

 
1,196

 

 
615

 
1,811

 
0.19

Commercial Real Estate
929,495

 
920,582

 
841

 
1,933

 
6,139

 
8,913

 
0.96

Commercial & Industrial
756,831

 
754,611

 
2,219

 
1

 

 
2,220

 
0.29

HELOC
125,479

 
124,883

 
19

 
19

 
558

 
595

 
0.47

Consumer
181,431

 
179,977

 
882

 
352

 
221

 
1,454

 
0.80

 
9,339,695

 
9,250,358

 
24,245

 
13,456

 
51,637

 
89,335

 
0.96

Acquired loans
140,995

 
140,137

 
193

 
16

 
649

 
858

 
0.61

Credit impaired acquired loans
55,060

 
52,806

 
854

 

 
1,400

 
2,254

 
4.09

Covered loans
38,584

 
37,062

 
501

 
295

 
726

 
1,522

 
3.94

Total Loans
$
9,574,334

 
$
9,480,363

 
$
25,793

 
$
13,767

 
$
54,412

 
$
93,969

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



12

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


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

 
$
5,590,673

 
$
17,305

 
$
7,757

 
$
40,193

 
$
65,255

 
1.15
%
Construction
130,121

 
130,121

 

 

 

 

 

Construction - Custom
205,692

 
204,168

 
791

 
270

 
463

 
1,524

 
0.74

Land - Acquisition & Development
75,661

 
74,737

 
406

 

 
518

 
924

 
1.22

Land - Consumer Lot Loans
104,494

 
102,045

 
689

 
399

 
1,361

 
2,449

 
2.34

Multi-Family
1,068,038

 
1,065,667

 
259

 
454

 
1,658

 
2,371

 
0.22

Commercial Real Estate
893,072

 
892,180

 
131

 

 
761

 
892

 
0.10

Commercial & Industrial
617,545

 
616,602

 
93

 
27

 
823

 
943

 
0.15

HELOC
127,648

 
127,196

 
174

 
27

 
251

 
452

 
0.35

Consumer
194,977

 
194,259

 
493

 
170

 
55

 
718

 
0.37

 
9,073,176

 
8,997,648

 
20,341

 
9,104

 
46,083

 
75,528

 
0.83

Acquired loans
57,682

 
56,559

 
356

 

 
767

 
1,123

 
1.95

Credit impaired acquired loans
139,726

 
138,940

 
243

 
4

 
539

 
786

 
0.56

Covered loans
75,890

 
70,729

 
272

 
90

 
4,799

 
5,161

 
6.80

Total Loans
$
9,346,474

 
$
9,263,876

 
$
21,212

 
$
9,198

 
$
52,188

 
$
82,598

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

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

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

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

 
$
729

 
$
729

 
35

 
$
9,600

 
$
9,600

   Construction

 

 

 
2

 
718

 
718

   Land - consumer lot loans

 

 

 
2

 
532

 
532

   Commercial real estate
5

 
965

 
965

 

 

 

   Consumer

 

 

 
1

 
85

 
85

 
8

 
$
1,694

 
$
1,694

 
40

 
$
10,935

 
$
10,935


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

13

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


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

 
$
668

 
8

 
$
1,431

   Land - consumer lot loans
1

 
148

 
3

 
389

 
6

 
$
816

 
11

 
$
1,820


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

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

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

 
$
111,300

 
$
7,204

 
$
187,080

 
$
97,125

 
$
135,826

 
$
14,513

 
$
275,862

Additions

 

 

 

 

 

 

 

Net reclassification from nonaccretable

 

 

 

 
6,307

 

 
346

 

Accretion
(5,526
)
 
5,526

 
(857
)
 
857

 
(30,727
)
 
30,727

 
(7,655
)
 
7,655

Transfers to REO

 

 

 

 

 
(2,975
)
 

 
(150
)
Payments received, net

 
(7,680
)
 

 
(3,790
)
 

 
(52,278
)
 

 
(96,287
)
Ending Balance
$
67,179

 
$
109,146

 
$
6,347

 
$
184,147

 
$
72,705

 
$
111,300

 
$
7,204

 
$
187,080


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

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


14

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


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

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

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

 
$
36,860

Additions

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

 
518

Balance at end of period
$
14,076

 
$
16,275



15

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


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

 
$
(1,139
)
 
$
2,466

 
$
(918
)
 
$
47,756

Construction
6,680

 

 
155

 
179

 
7,014

Construction - custom
990

 
(60
)
 

 
132

 
1,062

Land - acquisition & development
5,781

 

 
35

 
962

 
6,778

Land - consumer lot loans
2,946

 
(408
)
 

 
463

 
3,001

Multi-family
5,304

 

 

 
(257
)
 
5,047

Commercial real estate
8,960

 
(23
)
 
123

 
1,284

 
10,344

Commercial & industrial
24,980

 
(248
)
 
1

 
(637
)
 
24,096

HELOC
902

 
(1
)
 
21

 
(102
)
 
820

Consumer
2,939

 
(242
)
 
392

 
(1,106
)
 
1,983

 
$
106,829

 
$
(2,121
)
 
$
3,193

 
$

 
$
107,901

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

 
$
(5,524
)
 
$
13,403

 
$
(23,295
)
 
$
47,347

Construction
6,742

 
(388
)
 
$
120

 
206

 
6,680

Construction - custom
1,695

 

 

 
(705
)
 
990

Land - acquisition & development
5,592

 
(38
)
 
207

 
20

 
5,781

Land - consumer lot loans
3,077

 
(459
)
 
221

 
107

 
2,946

Multi-family
4,248

 

 
220

 
836

 
5,304

Commercial real estate
7,548

 
(1,711
)
 
735

 
2,388

 
8,960

Commercial & industrial
16,527

 
(3,354
)
 
1,374

 
10,433

 
24,980

HELOC
928

 
(66
)
 
2

 
38

 
902

Consumer
3,227

 
(3,060
)
 
3,688

 
(916
)
 
2,939

Covered loans
2,244

 

 

 
(2,244
)
 

 
$
114,591

 
$
(14,600
)
 
$
19,970

 
$
(13,132
)
 
$
106,829


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

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

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

16

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



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

 
$
5,614,580

 
0.8
%
 
$
130

 
$
14,206

 
0.9
%
Construction
7,014

 
121,689

 
5.8

 

 

 

Construction - custom
1,062

 
218,749

 
0.5

 

 
2,578

 

Land - acquisition & development
6,778

 
77,223

 
8.8

 

 
6,649

 

Land - consumer lot loans
3,001

 
91,664

 
3.3

 

 
10,658

 

Multi-family
5,048

 
1,085,243

 
0.5

 

 
3,500

 

Commercial real estate
10,344

 
939,248

 
1.1

 

 
9,811

 

Commercial & industrial
24,096

 
776,240

 
3.1

 

 
27

 

HELOC
820

 
126,596

 
0.6

 

 
1,310

 

Consumer
1,983

 
180,814

 
1.1

 

 
328

 

 
$
107,771

 
$
9,232,046

 
1.2
%
 
$
130

 
$
49,067

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

 
$
5,595,752

 
0.8
%
 
$
275

 
$
51,718

 
0.5
%
Construction
6,680

 
124,679

 
5.4

 

 
5,441

 

Construction - custom
990

 
205,692

 
0.5

 

 

 

Land - acquisition & development
5,781

 
72,602

 
8.0

 

 
2,198

 

Land - consumer lot loans
2,946

 
93,103

 
3.2

 

 
10,824

 

Multi-family
5,304

 
1,062,194

 
0.5

 

 
5,348

 

Commercial real estate
8,960

 
844,691

 
1.1

 

 
8,826

 

Commercial & industrial
24,980

 
643,577

 
3.9

 

 

 

HELOC
902

 
126,594

 
0.7

 

 
1,072

 

Consumer
2,938

 
194,569

 
1.5

 

 
86

 

 
$
106,554

 
$
8,963,453

 
1.2
%
 
$
275

 
$
85,513

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

17

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


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

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

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

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

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

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

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


18

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


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

 
$

 
$
77,930

 
$

 
$

 
$
5,629,715

  Construction
655,964

 
4,274

 

 

 

 
660,238

  Construction - custom
402,000

 

 
2,849

 

 

 
404,849

  Land - acquisition & development
87,772

 
5,627

 
3,626

 

 

 
97,025

  Land - consumer lot loans
100,125

 

 
2,251

 

 

 
102,376

  Multi-family
997,696

 

 

 

 

 
997,696

  Commercial real estate
813,974

 
8,111

 
17,073

 

 

 
839,157

  Commercial & industrial
713,240

 
3,058

 
34,775

 

 

 
751,073

  HELOC
127,198

 

 
721

 

 

 
127,919

  Consumer
180,892

 

 
250

 

 

 
181,142

 
9,630,645

 
21,070

 
139,475

 

 

 
9,791,190

 
 
 
 
 
 
 
 
 
 
 
 
Non-impaired acquired loans
152,761

 

 
11,619

 

 

 
164,380

Credit-impaired acquired loans
79,555

 
199

 
36,276

 

 

 
116,030

Covered loans
37,555

 

 
1,029

 

 

 
38,584

Total gross loans
$
9,900,516

 
$
21,269

 
$
188,399

 
$

 
$

 
$
10,110,184