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EX-31.1 - EXHIBIT 31.1 - WASHINGTON FEDERAL INCwafd10-qex3113312016.htm
EX-3.1 - EXHIBIT 3.1 - WASHINGTON FEDERAL INCwafd10-qex313312016.htm
EX-32 - EXHIBIT 32 - WASHINGTON FEDERAL INCwafd10-qex323312016.htm
EX-31.2 - EXHIBIT 31.2 - WASHINGTON FEDERAL INCwafd10-qex3123312016.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 March 31, 2016
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 May 2, 2016
Common stock, $1.00 par value
91,069,431



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)





 
March 31, 2016
 
September 30, 2015
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
276,084

 
$
284,049

Available-for-sale securities, at fair value
2,097,086

 
2,380,563

Held-to-maturity securities, at amortized cost
1,558,087

 
1,643,216

Loans receivable, net
9,545,322

 
9,170,634

Interest receivable
37,571

 
40,429

Premises and equipment, net
299,125

 
276,247

Real estate owned
38,770

 
61,098

FHLB and FRB stock
113,187

 
107,198

Bank owned life insurance
204,655

 
102,496

Intangible assets, including goodwill of $291,503
298,113

 
299,358

Federal and state income tax assets, net
11,544

 
14,513

Other assets
191,279

 
188,523

 
$
14,670,823

 
$
14,568,324

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
5,876,244

 
$
5,820,878

Time deposit accounts
4,667,140

 
4,810,825

 
10,543,384

 
10,631,703

FHLB advances
1,980,000

 
1,830,000

Advance payments by borrowers for taxes and insurance
23,863

 
50,224

Accrued expenses and other liabilities
161,116

 
100,718

 
12,708,363

 
12,612,645

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized; 134,092,173 and 133,695,803 shares issued; 91,270,241 and 92,936,395 shares outstanding
134,092

 
133,696

Paid-in capital
1,651,397

 
1,643,712

Accumulated other comprehensive (loss) income, net of taxes
(8,586
)
 
353

Treasury stock, at cost; 42,821,932 and 40,759,408 shares
(696,283
)
 
(651,836
)
Retained earnings
881,840

 
829,754

 
1,962,460

 
1,955,679

 
$
14,670,823

 
$
14,568,324




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3


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

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except share data)
 
(In thousands, except share data)
INTEREST INCOME
 
 
 
 
 
 
 
Loans
$
113,211

 
$
109,274

 
$
226,074

 
$
217,567

Mortgage-backed securities
16,846

 
18,143

 
33,833

 
37,318

Investment securities and cash equivalents
5,006

 
5,213

 
10,280

 
11,029

 
135,063

 
132,630

 
270,187

 
265,914

INTEREST EXPENSE
 
 
 
 
 
 
 
Customer accounts
13,071

 
12,574

 
25,788

 
26,018

FHLB advances and other borrowings
15,667

 
16,176

 
31,205

 
33,832

 
28,738

 
28,750

 
56,993

 
59,850

Net interest income
106,325

 
103,880

 
213,194

 
206,064

Provision for (release of) allowance for loan losses
(1,500
)
 
(3,949
)
 
(1,500
)
 
(9,449
)
Net interest income after provision for (release of) allowance for loan losses
107,825

 
107,829

 
214,694

 
215,513

 
 
 
 
 
 
 
 
OTHER INCOME
 
 
 
 
 
 
 
Loan fee income
1,166

 
2,048

 
2,683

 
4,112

Deposit fee income
5,350

 
5,405

 
11,267

 
11,383

Other income
4,213

 
3,388

 
7,414

 
726

 
10,729

 
10,841

 
21,364

 
16,221

 
 
 
 
 
 
 
 
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
29,184

 
30,469

 
58,883

 
59,629

Occupancy
8,969

 
8,239

 
17,561

 
16,374

FDIC insurance premiums
2,785

 
2,380

 
5,374

 
3,055

Product delivery
4,294

 
5,420

 
9,817

 
11,047

Information technology
7,453

 
3,882

 
16,163

 
7,912

Other expense
6,541

 
6,934

 
15,937

 
12,909

 
59,226

 
57,324

 
123,735

 
110,926

Gain on real estate owned, net
3,894

 
1,473

 
5,314

 
1,788

Income before income taxes
63,222

 
62,819

 
117,637

 
122,596

Income tax expense
21,499

 
22,458

 
40,816

 
43,828

NET INCOME
$
41,723

 
$
40,361

 
$
76,821

 
$
78,768

 

 


 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share
$
0.45

 
$
0.42

 
$
0.83

 
$
0.81

Diluted earnings per share
0.45

 
0.42

 
0.83

 
0.81

Dividends paid on common stock per share
0.14

 
0.13

 
0.27

 
0.28

Basic weighted average number of shares outstanding
91,777,771

 
96,373,366

 
92,385,367

 
97,270,403

Diluted weighted average number of shares outstanding
92,147,998

 
96,725,234

 
92,860,052

 
97,635,201


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4



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

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
(In thousands)
Net income
$
41,723

 
$
40,361

 
$
76,821

 
$
78,768

 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities
6,916

 
5,063

 
(3,445
)
 
13,623

Related tax benefit (expense)
(2,542
)
 
(1,860
)
 
1,266

 
(5,006
)
 
4,374

 
3,203

 
(2,179
)
 
8,617

 
 
 
 
 
 
 
 
Net unrealized gain (loss) on long-term borrowing hedge
(13,483
)
 
(4,985
)
 
(10,688
)
 
(9,233
)
Related tax benefit (expense)
4,955

 
1,832

 
3,928

 
3,393

 
(8,528
)
 
(3,153
)
 
(6,760
)
 
(5,840
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax
(4,154
)
 
50

 
(8,939
)
 
2,777

Comprehensive income
$
37,569

 
$
40,411

 
$
67,882

 
$
81,545





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




76,821





76,821

Other comprehensive income (loss)



(8,939
)

(8,939
)
Dividends on common stock




(24,735
)




(24,735
)
Compensation expense related to common stock options


600







600

Proceeds from exercise of common stock options
250

5,149







5,399

Restricted stock expense
146

1,936







2,082

Treasury stock acquired








(44,447
)
(44,447
)
Balance at March 31, 2016
$
134,092

$
1,651,397

$
881,840

$
(8,586
)
$
(696,283
)
$
1,962,460

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

$
1,638,211

$
706,149

$
20,708

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

Net income




78,768





78,768

Other comprehensive income (loss)



2,777


2,777

Dividends on common stock




(12,406
)




(12,406
)
Compensation expense related to common stock options


600







600

Proceeds from exercise of common stock options
35

457







492

Restricted stock expense
265

1,716







1,981

Treasury stock acquired








(77,355
)
(77,355
)
Balance at March 31, 2015
$
133,623

$
1,640,984

$
772,511

$
23,485

$
(602,463
)
$
1,968,140




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Six Months Ended March 31,
 
2016
 
2015
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
76,821

 
$
78,768

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, accretion and restricted stock expense
11,082

 
10,566

Cash received from (paid to) FDIC under loss share
2,153

 
(738
)
Stock option compensation expense
600

 
600

Release of provision for loan losses
(1,500
)
 
(9,449
)
Loss (gain) on investment securities and real estate owned
(6,629
)
 
(12,338
)
Decrease (increase) in accrued interest receivable
2,858

 
11,678

Decrease (increase) in federal and state income tax receivable
8,163

 
6,995

Decrease (increase) in cash surrender value of bank owned life insurance
(2,159
)
 
(961
)
Decrease (increase) in other assets
(5,551
)
 
(26,667
)
Increase (decrease) in accrued expenses and other liabilities
49,710

 
586

Net cash provided by operating activities
135,548

 
59,040

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Origination of loans and principal repayments, net
(321,573
)
 
(78,301
)
Loans purchased
(51,646
)
 
(146,832
)
FHLB & FRB stock purchased
(32,329
)
 

FHLB & FRB stock redemption
26,340

 
7,921

Available-for-sale securities purchased
(50,741
)
 
(163,126
)
Principal payments and maturities of available-for-sale securities
328,188

 
466,991

Principal payments and maturities of held-to-maturity securities
82,536

 
65,913

Proceeds from sales of real estate owned
38,347

 
37,404

Purchase of bank owned life insurance
(100,000
)
 
(100,000
)
Premises and equipment purchased and REO improvements
(34,248
)
 
(16,897
)
Net cash provided by (used in) investing activities
(115,126
)
 
73,073

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in customer accounts
(88,243
)
 
(24,227
)
Proceeds from borrowings
818,000

 

Repayments of borrowings
(668,000
)
 
(100,000
)
Proceeds from exercise of common stock options and related tax benefit
5,399

 
492

Dividends paid on common stock
(24,735
)
 
(26,806
)
Treasury stock purchased
(44,447
)
 
(77,355
)
Increase (decrease) in advance payments by borrowers for taxes and insurance
(26,361
)
 
(10,996
)
Net cash provided by (used in) financing activities
(28,387
)
 
(238,892
)
Increase (decrease) in cash and cash equivalents
(7,965
)
 
(106,779
)
Cash and cash equivalents at beginning of period
284,049

 
781,843

Cash and cash equivalents at end of period
$
276,084

 
$
675,064

(CONTINUED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Six Months Ended March 31,
 
2016
 
2015
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Real estate acquired through foreclosure
$
10,535

 
$
19,927

Cash paid during the period for
 
 
 
Interest
57,325

 
62,193

Income taxes
27,245

 
32,517




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 $929,028,000 and $816,014,000 at March 31, 2016 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 March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation- Improvements to Employee Share-Based Payment Accounting, which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the guidance, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company is currently evaluating the guidance to determine its adoption method and does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The guidance also simplifies the accounting for sale and leaseback transactions. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.

9

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


The Company is currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this ASU also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017 including interim periods within that reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 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.

In April 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.

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.

NOTE C – Dividends and Share Repurchases
On February 12, 2016, the Company paid its 132nd consecutive quarterly cash dividend on common stock of $0.14 per share. Dividends per share were $0.14 and $0.13 for the quarters ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016, the Company repurchased 1,639,442 shares at an average price of $21.05. For the three months ended March 31, 2015, the Company repurchased 2,500,018 shares at an average price of $21.21. As of March 31, 2016, there are 2,138,706 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 loans in process, net of charge offs.)
 
March 31, 2016
 
September 30, 2015
 
(In thousands)
 
(In thousands)
Non-Acquired loans
 
 
 
 
 
   Single-family residential
$
5,618,954

54.5
%
 
$
5,651,845

57.6
%
   Construction
785,846

7.6

 
200,509

2.0

   Construction - custom
398,797

3.9

 
396,307

4.0

   Land - acquisition & development
101,605

1.0

 
94,208

1.0

   Land - consumer lot loans
100,856

1.0

 
103,989

1.1

   Multi-family
1,073,222

10.4

 
1,125,722

11.6

   Commercial real estate
833,570

8.1

 
986,270

10.0

   Commercial & industrial
805,272

7.8

 
612,836

6.2

   HELOC
130,459

1.3

 
127,646

1.3

   Consumer
164,672

1.6

 
194,655

2.0

Total non-acquired loans
10,013,253

97.2
%
 
9,493,987

96.8
%
Acquired loans
152,572

1.5

 
166,293

1.6

Credit impaired acquired loans
106,637

1.0

 
87,081

0.9

Covered loans
34,211

0.3

 
75,909

0.7

Total gross loans
10,306,673

100.0
%
 
9,823,270

100.0
%
   Less:
 
 
 
 
 
      Allowance for loan losses
109,919

 
 
106,829

 
      Loans in process
591,667

 
 
476,796

 
      Discount on acquired loans
21,120

 
 
30,095

 
      Deferred net origination fees
38,645

 
 
38,916

 
Total loan contra accounts
761,351

 
 
652,636

 
Net Loans
$
9,545,322

 
 
$
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.
 
 
March 31, 2016
 
September 30, 2015
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
42,395

 
77.7
%
 
$
59,074

 
87.1
%
Construction

 

 
754

 
1.1

Construction - custom
67

 
0.1

 
732

 
1.1

Land - acquisition & development
477

 
0.9

 

 

Land - consumer lot loans
940

 
1.7

 
1,273

 
1.9

Multi-family
1,520

 
2.8

 
2,558

 
3.8

Commercial real estate
7,701

 
14.1

 
2,176

 
3.2

Commercial & industrial
596

 
1.1

 

 

HELOC
554

 
1.0

 
563

 
0.8

Consumer
309

 
0.6

 
680

 
1.0

Total non-accrual loans
$
54,559

 
100
%
 
$
67,810

 
100
%

The Company recognized interest income on nonaccrual loans of approximately $3,219,000 in the six months ended March 31, 2016. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $1,315,000 for the six months ended March 31, 2016. The recognized interest income includes more than six months of interest for some of the loans that were brought current.
The following tables provide details regarding delinquent loans.
 
March 31, 2016
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
$
5,624,134

 
$
5,558,731

 
$
18,000

 
$
7,785

 
$
39,618

 
$
65,403

 
1.16
%
Construction
396,322

 
396,181

 

 

 
141

 
141

 
0.04

Construction - Custom
212,067

 
209,153

 
1,047

 
1,800

 
67

 
2,914

 
1.37

Land - Acquisition & Development
92,467

 
90,541

 
1,445

 

 
481

 
1,926

 
2.08

Land - Consumer Lot Loans
101,372

 
99,379

 
563

 
490

 
940

 
1,993

 
1.97

Multi-Family
1,077,248

 
1,075,662

 
970

 

 
616

 
1,586

 
0.15

Commercial Real Estate
889,342

 
881,896

 
1,766

 
53

 
5,627

 
7,446

 
0.84

Commercial & Industrial
810,452

 
808,825

 
862

 

 
765

 
1,627

 
0.20

HELOC
130,446

 
129,456

 
378

 
63

 
549

 
990

 
0.76

Consumer
164,942

 
163,620

 
757

 
207

 
358

 
1,322

 
0.80

 
9,498,792

 
9,413,444

 
25,788

 
10,398

 
49,162

 
85,348

 
0.90

Acquired loans
131,079

 
130,030

 
376

 
2

 
671

 
1,049

 
0.80

Credit impaired acquired loans
50,924

 
50,604

 

 
44

 
276

 
320

 
0.63

Covered loans
34,211

 
33,575

 
38

 
2

 
596

 
636

 
1.86

Total Loans
$
9,715,006

 
$
9,627,653

 
$
26,202

 
$
10,446

 
$
50,705

 
$
87,353

 
0.90
%
Delinquency %
 
 
99.10%
 
0.27%
 
0.11%
 
0.52%
 
0.90%
 
 



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 0.90% as of March 31, 2016 and there are no loans greater than 90 days delinquent and still accruing interest as of either date.


13

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


The following tables provide information related to loans that were restructured in a troubled debt restructuring ("TDR") during the periods presented:

 
Three Months Ended March 31,
 
2016
 
2015
 
 
 
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
7

 
$
1,101

 
$
1,101

 
14

 
$
2,664

 
$
2,664

   Land - consumer lot loans

 

 

 
4

 
720

 
720

   Commercial real estate


 


 


 
3

 
3,175

 
3,175

 
7

 
$
1,101

 
$
1,101

 
21

 
$
6,559

 
$
6,559

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31,
 
2016
 
2015
 
 
 
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
10

 
$
1,830

 
$
1,830

 
49

 
$
12,264

 
$
12,264

   Construction

 

 

 
2

 
718

 
718

   Land - consumer lot loans

 

 

 
6

 
1,252

 
1,252

   Commercial real estate
5

 
965

 
965

 
3

 
3,175

 
3,175

   Consumer

 

 

 
1

 
85

 
85

 
15

 
$
2,795

 
$
2,795

 
61

 
$
17,494

 
$
17,494


The following tables provide 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.

14

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


 
Three Months Ended March 31,
 
2016
 
2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
6

 
$
871

 
2

 
$
304

   Land - consumer lot loans
1

 
146

 
2

 
301

   Commercial real estate
1

 
152

 

 

 
8

 
$
1,169

 
4

 
$
605

 
 
 
 
 
 
 
 
 
Six Months Ended March 31,
 
2016
 
2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
8

 
$
1,095

 
7

 
$
1,237

   Land - consumer lot loans
1

 
146

 
3

 
389

   Commercial real estate
1

 
152

 

 

 
10

 
$
1,393

 
10

 
$
1,626


Most loans restructured in TDR are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. As of March 31, 2016, 95.3% of the Company's $270,308,000 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 twenty four months. Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. As of March 31, 2016, single-family residential loans comprised 86.4% 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).

15

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


    
 
Six Months Ended March 31, 2016
 
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
(11,010
)
 
11,010

 
(1,485
)
 
1,485

 
(30,727
)
 
30,727

 
(7,655
)
 
7,655

Transfers to REO

 
(123
)
 

 

 

 
(2,975
)
 

 
(150
)
Payments received, net

 
(21,039
)
 

 
(17,419
)
 

 
(52,278
)
 

 
(96,287
)
Ending Balance
$
61,695

 
$
101,148

 
$
5,719

 
$
171,146

 
$
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. Acquired loans are included in non-performing assets and subject to the general loss reserving methodology if the purchase discount is no longer sufficient to cover expected losses.

Additionally, as of March 31, 2016 the Company has $1,455,000 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 loans are accounted for on a cash basis.

Covered loans were $34,211,000 at March 31, 2016 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:
 
 
Six Months Ended March 31, 2016
 
Year Ended September 30, 2015
 
(In thousands)
Balance at beginning of period
$
16,275

 
$
36,860

Additions/Adjustments

 
(1,795
)
Payments received
(2,153
)
 
(720
)
Amortization
(773
)
 
(18,588
)
Accretion
131

 
518

Balance at end of period
$
13,480

 
$
16,275



16

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 March 31, 2016
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
47,756

 
$
(1,026
)
 
$
111

 
$
(5,013
)
 
$
41,828

Construction
7,014

 

 
(5
)
 
8,717

 
15,726

Construction - custom
1,062

 

 

 
(40
)
 
1,022

Land - acquisition & development
6,778

 

 
3,371

 
(2,897
)
 
7,252

Land - consumer lot loans
3,001

 
(268
)
 

 
(267
)
 
2,466

Multi-family
5,047

 

 

 
1,737

 
6,784

Commercial real estate
10,344

 
(9
)
 
992

 
(3,544
)
 
7,783

Commercial & industrial
24,096

 
(331
)
 
590

 
(531
)
 
23,824

HELOC
820

 
(26
)
 

 
34

 
828

Consumer
1,983

 
(278
)
 
397

 
304

 
2,406

 
$
107,901

 
$
(1,938
)
 
$
5,456

 
$
(1,500
)
 
$
109,919

Three Months Ended March 31, 2015
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
55,495

 
$
(1,409
)
 
$
4,122

 
$
(3,446
)
 
$
54,762

Construction
5,451

 

 
75

 
(81
)
 
5,445

Construction - custom
965

 

 

 
3

 
968

Land - acquisition & development
6,671

 

 
204

 
530

 
7,405

Land - consumer lot loans
3,113

 
(52
)
 
34

 
(60
)
 
3,035

Multi-family
4,500

 

 

 
173

 
4,673

Commercial real estate
5,872

 

 
453

 
409

 
6,734

Commercial & industrial
23,328

 
(355
)
 
18

 
(1,845
)
 
21,146

HELOC
892

 

 

 
(42
)
 
850

Consumer
2,413

 
(701
)
 
734

 
859

 
3,305

 
$
108,700

 
$
(2,517
)
 
$
5,640

 
$
(3,500
)
 
$
108,323


17

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


Six Months Ended March 31, 2016
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
47,347

 
$
(2,165
)
 
$
2,577

 
$
(5,931
)
 
$
41,828

Construction
6,680

 

 
150

 
8,896

 
15,726

Construction - custom
990

 
(60
)
 

 
92

 
1,022

Land - acquisition & development
5,781

 

 
3,406

 
(1,935
)
 
7,252

Land - consumer lot loans
2,946

 
(676
)
 

 
196

 
2,466

Multi-family
5,304

 

 

 
1,480

 
6,784

Commercial real estate
8,960

 
(32
)
 
1,115

 
(2,260
)
 
7,783

Commercial & industrial
24,980

 
(579
)
 
591

 
(1,168
)
 
23,824

HELOC
902

 
(27
)
 
21

 
(68
)
 
828

Consumer
2,939

 
(520
)
 
789

 
(802
)
 
2,406

 
$
106,829

 
$
(4,059
)
 
$
8,649

 
$
(1,500
)
 
$
109,919

Six Months Ended March 31, 2015
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
62,763

 
$
(3,103
)
 
$
6,675

 
$
(11,573
)
 
$
54,762

Construction
6,742

 
(388
)
 
75

 
(984
)
 
5,445

Construction - custom
1,695

 

 

 
(727
)
 
968

Land - acquisition & development
5,592

 
(38
)
 
205

 
1,646

 
7,405

Land - consumer lot loans
3,077

 
(87