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EX-31.1 - EXHIBIT 31.1 - WASHINGTON FEDERAL INCwafd10-qex3116302016.htm
EX-32 - EXHIBIT 32 - WASHINGTON FEDERAL INCwafd10-qex326302016.htm
EX-31.2 - EXHIBIT 31.2 - WASHINGTON FEDERAL INCwafd10-qex3126302016.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 June 30, 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 July 26, 2016
Common stock, $1.00 par value
90,489,424



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)





 
June 30, 2016
 
September 30, 2015
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
530,055

 
$
284,049

Available-for-sale securities, at fair value
1,969,869

 
2,380,563

Held-to-maturity securities, at amortized cost
1,492,480

 
1,643,216

Loans receivable, net
9,628,576

 
9,170,634

Interest receivable
36,888

 
40,429

Premises and equipment, net
295,348

 
276,247

Real estate owned
31,682

 
61,098

FHLB and FRB stock
117,205

 
107,198

Bank owned life insurance
206,377

 
102,496

Intangible assets, including goodwill of $291,503
297,537

 
299,358

Federal and state income tax assets, net
16,189

 
14,513

Other assets
199,394

 
188,523

 
$
14,821,600

 
$
14,568,324

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
5,920,242

 
$
5,820,878

Time deposit accounts
4,658,674

 
4,810,825

 
10,578,916

 
10,631,703

FHLB advances
2,080,000

 
1,830,000

Advance payments by borrowers for taxes and insurance
33,209

 
50,224

Accrued expenses and other liabilities
167,290

 
100,718

 
12,859,415

 
12,612,645

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized; 134,145,522 and 133,695,803 shares issued; 90,226,193 and 92,936,395 shares outstanding
134,145

 
133,696

Paid-in capital
1,653,465

 
1,643,712

Accumulated other comprehensive (loss) income, net of taxes
(15,705
)
 
353

Treasury stock, at cost; 43,919,329 and 40,759,408 shares
(721,884
)
 
(651,836
)
Retained earnings
912,164

 
829,754

 
1,962,185

 
1,955,679

 
$
14,821,600

 
$
14,568,324




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3


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

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except share data)
 
(In thousands, except share data)
INTEREST INCOME
 
 
 
 
 
 
 
Loans receivable
$
113,728

 
$
107,250

 
$
339,802

 
$
324,817

Mortgage-backed securities
15,297

 
16,995

 
49,130

 
54,313

Investment securities and cash equivalents
4,710

 
5,055

 
14,990

 
16,084

 
133,735

 
129,300

 
403,922

 
395,214

INTEREST EXPENSE
 
 
 
 
 
 
 
Customer accounts
13,274

 
12,485

 
39,062

 
38,504

FHLB advances and other borrowings
16,221

 
16,250

 
47,426

 
50,082

 
29,495

 
28,735

 
86,488

 
88,586

Net interest income
104,240

 
100,565

 
317,434

 
306,628

Provision (release) for loan losses
(1,650
)
 
(1,932
)
 
(3,150
)
 
(11,381
)
Net interest income after provision (release) for loan losses
105,890

 
102,497

 
320,584

 
318,009

 
 
 
 
 
 
 
 
OTHER INCOME
 
 
 
 
 
 
 
Gain on sale of investment securities

 
9,639

 

 
9,639

Prepayment penalty on long-term debt

 
(7,941
)
 

 
(10,554
)
Loan fee income
1,101

 
1,915

 
3,784

 
6,028

Deposit fee income
5,297

 
5,156

 
16,564

 
16,538

Other income
4,088

 
3,042

 
11,502

 
6,380

 
10,486

 
11,811

 
31,850

 
28,031

 
 
 
 
 
 
 
 
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
27,333

 
29,824

 
86,217

 
89,453

Occupancy
8,515

 
8,492

 
26,075

 
24,866

FDIC insurance premiums
2,869

 
2,377

 
8,243

 
5,431

Product delivery
3,822

 
6,175

 
13,639

 
17,222

Information technology
7,669

 
3,783

 
23,832

 
11,695

Other expense
6,097

 
6,068

 
22,034

 
18,975

 
56,305

 
56,719

 
180,040

 
167,642

Gain on real estate owned, net
5,087

 
3,188

 
10,401

 
4,976

Income before income taxes
65,158

 
60,777

 
182,795

 
183,374

Income tax expense
22,154

 
21,727

 
62,970

 
65,556

NET INCOME
$
43,004

 
$
39,050

 
$
119,825

 
$
117,818

 

 


 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share
$
0.47

 
$
0.41

 
$
1.30

 
$
1.22

Diluted earnings per share
0.47

 
0.41

 
1.30

 
1.22

Dividends paid on common stock per share
0.14

 
0.13

 
0.41

 
0.41

Basic weighted average number of shares outstanding
90,928,847

 
94,466,524

 
91,901,632

 
96,335,777

Diluted weighted average number of shares outstanding
91,468,662

 
94,904,262

 
92,393,644

 
96,726,085


SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4



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

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
(In thousands)
Net income
$
43,004

 
$
39,050

 
$
119,825

 
$
117,818

 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale investment securities
(965
)
 
(35,001
)
 
(4,409
)
 
(21,378
)
Reclassification adjustment of net gain (loss) from sale
 
 
 
 
 
 
 
     of available-for-sale securities included in net income

 
9,639

 

 
9,639

Related tax benefit (expense)
355

 
9,320

 
1,620

 
4,314

 
(610
)
 
(16,042
)
 
(2,789
)
 
(7,425
)
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on long-term borrowing hedge
(10,290
)
 
5,587

 
(20,978
)
 
(3,646
)
Related tax benefit (expense)
3,782

 
(2,053
)
 
7,709

 
1,340

 
(6,508
)
 
3,534

 
(13,269
)
 
(2,306
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax
(7,118
)
 
(12,508
)
 
(16,058
)
 
(9,731
)
Comprehensive income
$
35,886

 
$
26,542

 
$
103,767

 
$
108,087





SEE NOTES TO INTERIM 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




119,825





119,825

Other comprehensive income (loss)



(16,058
)

(16,058
)
Dividends on common stock




(37,415
)




(37,415
)
Compensation expense related to common stock options


900







900

Proceeds from exercise of common stock options
300

6,020







6,320

Restricted stock expense
149

2,833







2,982

Treasury stock acquired








(70,048
)
(70,048
)
Balance at June 30, 2016
$
134,145

$
1,653,465

$
912,164

$
(15,705
)
$
(721,884
)
$
1,962,185

 
 
 
 
 
 
 
(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




117,818





117,818

Other comprehensive income (loss)



(9,731
)

(9,731
)
Dividends on common stock




(24,597
)




(24,597
)
Compensation expense related to common stock options


900







900

Proceeds from exercise of common stock options
106

1,570







1,676

Restricted stock expense
259

2,562







2,821

Treasury stock acquired








(103,049
)
(103,049
)
Balance at June 30, 2015
$
133,688

$
1,643,243

$
799,370

$
10,977

$
(628,157
)
$
1,959,121




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Nine Months Ended June 30,
 
2016
 
2015
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
119,825

 
$
117,818

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, accretion and restricted stock expense
25,577

 
19,075

Cash received from (paid to) FDIC under loss share
1,826

 
(714
)
Stock option compensation expense
900

 
900

Provision (release) for loan losses
(3,150
)
 
(11,381
)
Loss (gain) on sale of investment securities and real estate owned
(14,536
)
 
(25,817
)
Prepayment penalty from repayment of borrowings

 
10,554

Decrease (increase) in accrued interest receivable
3,541

 
12,487

Decrease (increase) in FDIC loss share receivable

 
1,795

Decrease (increase) in federal and state income tax receivable
7,654

 
10,883

Decrease (increase) in cash surrender value of bank owned life insurance
(3,881
)
 
(1,720
)
Decrease (increase) in other assets
(13,895
)
 
(37,376
)
Increase (decrease) in accrued expenses and other liabilities
45,594

 
(23,738
)
Net cash provided by (used in) operating activities
169,455

 
72,766

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Origination of loans and principal repayments, net
(407,641
)
 
(204,527
)
Loans purchased
(51,646
)
 
(183,406
)
FHLB & FRB stock purchased
(36,347
)
 

FHLB & FRB stock redemption
26,340

 
55,649

Available-for-sale securities purchased
(50,742
)
 
(329,490
)
Principal payments and maturities of available-for-sale securities
452,948

 
502,561

Proceeds on available-for-sale securities sold

 
244,749

Held-to-maturity securities purchased

 
(249,382
)
Principal payments and maturities of held-to-maturity securities
146,211

 
207,954

Proceeds from sales of real estate owned
53,573

 
63,077

Purchase of bank owned life insurance
(100,000
)
 
(100,000
)
Premises and equipment purchased and REO improvements
(35,276
)
 
(24,582
)
Net cash provided by (used in) investing activities
(2,580
)
 
(17,397
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in customer accounts
(52,711
)
 
(138,390
)
Proceeds from borrowings
918,000

 

Repayments of borrowings
(668,000
)
 
(210,554
)
Proceeds from exercise of common stock options and related tax benefit
6,320

 
1,676

Dividends paid on common stock
(37,415
)
 
(38,997
)
Treasury stock purchased
(70,048
)
 
(103,049
)
Increase (decrease) in advance payments by borrowers for taxes and insurance
(17,015
)
 
1,652

Net cash provided by (used in) financing activities
79,131

 
(487,662
)
Increase (decrease) in cash and cash equivalents
246,006

 
(432,293
)
Cash and cash equivalents at beginning of period
284,049

 
781,843

Cash and cash equivalents at end of period
$
530,055

 
$
349,550

(CONTINUED)

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Nine Months Ended June 30,
 
2016
 
2015
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Real estate acquired through foreclosure
$
13,147

 
$
25,832

Cash paid during the period for
 
 
 
Interest
86,007

 
88,511

Income taxes
47,289

 
48,096




SEE NOTES TO INTERIM 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 Form 10-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 $1,125,481,000 and $816,014,000 at June 30, 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendments in this ASU were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to- maturity debt securities, trade and other receivables, net investments in leases and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the current framework of recognizing probable incurred losses and instead requires an entity to use its current estimate of all expected credit losses over the contractual life. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, an allowance for expected credit losses is recorded as an adjustment to the cost basis of the asset. Subsequent changes in estimated cash flows would be recorded as an adjustment to the allowance and through the statement of income.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security's cost basis.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For most debt securities, the transition approach requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period the guidance is effective. For other-than-temporarily impaired

9

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


debt securities and PCD assets, the guidance will be applied prospectively. The Company is currently evaluating the provisions of this ASU to determine the impact the new standard will have on the Company's consolidated financial statements.

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. The Company is currently evaluating the provisions of this ASU to determine the 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, which will 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 is 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.

10

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



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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 May 13, 2016, the Company paid a dividend on common stock of $0.14 per share. This dividend was the 133rd consecutive quarterly cash dividend paid on common stock. Dividends per share were $0.14 and $0.13 for the quarters ended June 30, 2016 and 2015, respectively. On July 25, 2016, the Company declared a dividend on common stock of $0.14 per share, which represents its 134th consecutive quarterly cash dividend. The dividend will be paid on August 19, 2016 to common shareholders of record on August 5, 2016.

For the three months ended June 30, 2016, the Company repurchased 1,097,397 shares at an average price of $23.33. For the three months ended June 30, 2015, the Company repurchased 1,171,662 shares at an average price of $21.93. As of June 30, 2016, there are 1,041,309 remaining shares authorized to be repurchased under the current Board approved program.

NOTE D – Loans Receivable

The following table is a summary of loans receivable.
 
June 30, 2016
 
September 30, 2015
 
(In thousands)
 
(In thousands)
Non-Acquired loans
 
 
 
 
 
   Single-family residential
$
5,593,018

52.9
%
 
$
5,651,845

57.6
%
   Construction
1,016,305

9.6

 
200,509

2.0

   Construction - custom
409,116

3.9

 
396,307

4.0

   Land - acquisition & development
101,849

1.0

 
94,208

1.0

   Land - consumer lot loans
101,731

1.0

 
103,989

1.1

   Multi-family
1,094,736

10.3

 
1,125,722

11.6

   Commercial real estate
886,957

8.4

 
986,270

10.0

   Commercial & industrial
810,442

7.7

 
612,836

6.2

   HELOC
134,735

1.3

 
127,646

1.3

   Consumer
154,261

1.4

 
194,655

2.0

Total non-acquired loans
10,303,150

97.5
%
 
9,493,987

96.8
%
Acquired loans
140,369

1.3

 
166,293

1.6

Credit impaired acquired loans
96,491

0.9

 
87,081

0.9

Covered loans
32,191

0.3

 
75,909

0.7

Total gross loans
10,572,201

100.0
%
 
9,823,270

100.0
%
   Less:
 
 
 
 
 
      Allowance for loan losses
111,016

 
 
106,829

 
      Loans in process
780,721

 
 
476,796

 
      Discount on acquired loans
14,775

 
 
30,095

 
      Deferred net origination fees
37,113

 
 
38,916

 
Total loan contra accounts
943,625

 
 
652,636

 
Net Loans
$
9,628,576

 
 
$
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.
 
 
June 30, 2016
 
September 30, 2015
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
36,707

 
77.5
%
 
$
59,074

 
87.1
%
Construction

 

 
754

 
1.1

Construction - custom
506

 
1.1

 
732

 
1.1

Land - acquisition & development
427

 
0.9

 

 

Land - consumer lot loans
1,105

 
2.3

 
1,273

 
1.9

Multi-family
1,238

 
2.6

 
2,558

 
3.8

Commercial real estate
6,297

 
13.3

 
2,176

 
3.2

Commercial & industrial
521

 
1.1

 

 

HELOC
548

 
1.2

 
563

 
0.8

Consumer

 

 
680

 
1.0

Total non-accrual loans
$
47,349

 
100
%
 
$
67,810

 
100
%

The Company recognized interest income on nonaccrual loans of approximately $4,100,000 in the nine months ended June 30, 2016. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $1,865,000 for the nine months ended June 30, 2016. Interest income actually recognized during the nine months ended June 30, 2016 is higher because of loans that were brought current or paid off.
The following tables provide details regarding delinquent loans.
 
June 30, 2016
Loans Receivable
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of Loans In Process
 
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
 
 
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
$
5,596,644

 
$
5,542,000

 
$
14,268

 
$
6,679

 
$
33,697

 
$
54,644

 
0.98
%
Construction
442,810

 
442,810

 

 

 

 

 

Construction - Custom
213,465

 
212,690

 
110

 
159

 
506

 
775

 
0.36

Land - Acquisition & Development
86,243

 
85,775

 

 

 
468

 
468

 
0.54

Land - Consumer Lot Loans
102,248

 
100,304

 
738

 
101

 
1,105

 
1,944

 
1.90

Multi-Family
1,095,174

 
1,094,284

 
956

 

 

 
956

 
0.09

Commercial Real Estate
886,552

 
884,644

 
217

 
1,443

 
123

 
1,783

 
0.20

Commercial & Industrial
811,502

 
811,486

 

 
75

 

 
75

 
0.01

HELOC
134,151

 
133,236

 
297

 
70

 
548

 
915

 
0.68

Consumer
153,640

 
152,874

 
385

 
274

 
107

 
766

 
0.50

 
9,522,429

 
9,460,103

 
16,971

 
8,801

 
36,554

 
62,326

 
0.65

Acquired loans
140,369

 
137,107

 
265

 
529

 
2,468

 
3,262

 
2.32

Credit impaired acquired loans
96,491

 
91,168

 

 

 
5,323

 
5,323

 
5.52

Covered loans
32,191

 
31,465

 
417

 
2

 
307

 
726

 
2.26

Total Loans
$
9,791,480

 
$
9,719,843

 
$
17,653

 
$
9,332

 
$
44,652

 
$
71,637

 
0.73
%
Delinquency %
 
 
99.27%
 
0.18%
 
0.10%
 
0.46%
 
0.73%
 
 



12

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


September 30, 2015
Loans Receivable
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of Loans In Process
 
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 decreased from 0.88% as of September 30, 2015 to 0.73% as of June 30, 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 June 30,
 
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

 
$
1,492

 
$
1,492

 
8

 
$
1,611

 
$
1,611

   Land - consumer lot loans

 

 

 
2

 
203

 
203

   Commercial real estate
2

 
1,558

 
1,558

 

 

 

 
9

 
$
3,050

 
$
3,050

 
10

 
$
1,814

 
$
1,814

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30,
 
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
17

 
$
3,322

 
$
3,322

 
57

 
$
13,875

 
$
13,875

   Construction

 

 

 
2

 
718

 
718

   Construction - custom

 

 

 
2

 
532

 
532

   Land - consumer lot loans

 

 

 
6

 
923

 
923

   Commercial real estate
7

 
2,523

 
2,523

 
3

 
3,175

 
3,175

   Consumer

 

 

 
1

 
85

 
85

 
24

 
$
5,845

 
$
5,845

 
71

 
$
19,308

 
$
19,308


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 June 30,
 
2016
 
2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
3

 
$
1,570

 
9

 
$
1,594

   Construction
1

 
279

 

 

   Land - consumer lot loans
2

 
204

 
2

 
301

   Commercial real estate
1

 
174

 

 

 
7

 
$
2,227

 
11

 
$
1,895

 
 
 
 
 
 
 
 
 
Nine Months Ended June 30,
 
2016
 
2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
14

 
$
3,108

 
19

 
$
3,329

   Construction
1

 
279

 

 

   Land - consumer lot loans
4

 
498

 
7

 
991

   Commercial real estate
2

 
326

 

 

 
21

 
$
4,211

 
26

 
$
4,320


Most loans restructured in TDRs are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. As of June 30, 2016, 96.0% of the Company's $258,135,000 in TDRs were classified as performing. Each request for modification is individually evaluated for merit and likelihood of success. The concession granted in a loan modification 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 June 30, 2016, single-family residential loans comprised 86.7% 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)


    
 
Nine Months Ended June 30, 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 non-accretable
4,867

 

 

 

 
6,307

 

 
346

 

Accretion
(17,119
)
 
17,119

 
(2,210
)
 
2,210

 
(30,727
)
 
30,727

 
(7,655
)
 
7,655

Transfers to REO

 
(175
)
 

 

 

 
(2,975
)
 

 
(150
)
Payments received, net

 
(31,823
)
 

 
(31,439
)
 

 
(52,278
)
 

 
(96,287
)
Ending Balance
$
60,453

 
$
96,421

 
$
4,994

 
$
157,851

 
$
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.

Covered loans were $32,191,000 at June 30, 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:
 
 
Nine Months Ended June 30, 2016
 
Year Ended September 30, 2015
 
(In thousands)
Balance at beginning of period
$
16,275

 
$
36,860

Additions/Adjustments

 
(1,795
)
Payments received
(1,827
)
 
(720
)
Amortization
(1,385
)
 
(18,588
)
Accretion
187

 
518

Balance at end of period
$
13,250

 
$
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 June 30, 2016
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
41,828

 
$
(634
)
 
$
162

 
$
(675
)
 
$
40,681

Construction
15,726

 

 
207

 
1,729

 
17,662

Construction - custom
1,022

 

 
60

 
(54
)
 
1,028

Land - acquisition & development
7,252

 
(31
)
 
2,741

 
(3,240
)
 
6,722

Land - consumer lot loans
2,466

 
(26
)
 
5

 
59

 
2,504

Multi-family
6,784

 

 

 
137

 
6,921

Commercial real estate
7,783

 

 
454

 
(94
)
 
8,143

Commercial & industrial
23,824

 
(150
)
 
6

 
716

 
24,396

HELOC
828

 
(27
)
 

 
55

 
856

Consumer
2,406

 
(307
)
 
437

 
(433
)
 
2,103

 
$
109,919

 
$
(1,175
)
 
$
4,072

 
$
(1,800
)
 
$
111,016

Three Months Ended June 30, 2015
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
54,762

 
$
(1,698
)
 
$
3,878

 
$
(4,938
)
 
$
52,004

Construction
5,445

 

 

 
488

 
5,933

Construction - custom
968

 

 

 
17

 
985

Land - acquisition & development
7,405

 

 
1

 
(1,634
)
 
5,772

Land - consumer lot loans
3,035

 
(276
)
 
187

 
53

 
2,999

Multi-family
4,673

 

 

 
362

 
5,035

Commercial real estate
6,734

 
(1,592
)
 
230

 
1,896

 
7,268

Commercial & industrial
21,146

 
(2,106
)
 
896

 
1,726

 
21,662

HELOC
850

 
(26
)
 
1

 
39

 
864

Consumer
3,305

 
(853
)
 
1,045

 
(408
)
 
3,089

 
$
108,323

 
$
(6,551
)
 
$
6,238

 
$
(2,399
)
 
$
105,611


17

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


Nine Months Ended June 30, 2016
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
47,347

 
$
(2,800
)
 
$
2,739

 
$
(6,605
)
 
$
40,681

Construction
6,680

 

 
357

 
10,625

 
17,662

Construction - custom
990

 
(60
)
 
60

 
38

 
1,028

Land - acquisition & development
5,781

 
(31
)
 
6,148

 
(5,176
)
 
6,722

Land - consumer lot loans
2,946

 
(701
)
 
5

 
254

 
2,504

Multi-family
5,304

 

 

 
1,617

 
6,921

Commercial real estate
8,960

 
(32
)
 
1,569

 
(2,354
)
 
8,143

Commercial & industrial
24,980

 
(729
)
 
597

 
(452
)
 
24,396

HELOC
902

 
(54
)
 
21

 
(13
)
 
856

Consumer
2,939

 
(827
)
 
1,226

 
(1,235
)
 
2,103

 
$
106,829

 
$
(5,234
)
 
$
12,722

 
$
(3,301
)
 
$
111,016

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

 
$
(4,801
)
 
$
10,553

 
$
(16,511
)
 
$
52,004

Construction
6,742

 
(388
)
 
75

 
(496
)
 
5,933

Construction - custom
1,695

 

 

 
(710
)
 
985

Land - acquisition & development
5,592

 
(38
)
 
206

 
12

 
5,772

Land - consumer lot loans
3,077

 
(363
)
 
221

 
64

 
2,999

Multi-family
4,248

 

 
220

 
567

 
5,035

Commercial real estate
7,548

 
(1,619
)
 
711

 
628

 
7,268

Commercial & industrial
16,527

 
(2,461
)
 
948

 
6,648

 
21,662

HELOC
928

 
(26
)
 
1

 
(39
)
 
864

Consumer
3,227

 
(1,981
)
 
2,394

 
(551
)
 
3,089

Covered loans
2,244

 
 
 
 
 
(2,244
)
 

 
$
114,591

 
$
(11,677
)
 
$
15,329

 
$
(12,632
)
 
$
105,611


The Company recorded a release of allowance for loan losses of $1,650,000 for the three months ended June 30, 2016, which compares to a release of allowance of $1,932,000 for the three months ended June 30, 2015. The release of allowance for loan losses for the quarter ended June 30, 2016 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 $2,897,000 for the quarter ended June 30, 2016, compared with net charge-offs of $313,000 for the same quarter one year ago. Non-performing assets were $79,031,000, or 0.53%, of total assets at June 30, 2016, compared to $93,329,000, or 0.64%, and $128,577,000, or 0.88%, of total assets at March 31, 2016 and September 30, 2015, respectively. Non-accrual loans were $47,349,000 at June 30, 2016, compared to $54,559,000 and $67,810,000 at March 31, 2016 and September 30, 2015, respectively. Delinquencies, as a percent of total loans, were 0.73% at June 30, 2016, compared to 0.90% and 0.88% at March 31, 2016 and September 30, 2015, respectively

The reserve for unfunded commitments was $3,235,000 as of June 30, 2016, which is an increase from $3,085,000 at September 30, 2015.


18

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


Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $114,251,000, or 1.08% of gross loans, is sufficient to absorb estimated inherent losses.
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 June 30, 2016, $21,158,000 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.
 
June 30, 2016
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
$
39,986

 
$
5,547,373

 
0.7
%
 
$
693

 
$
24,451

 
2.8
%
Construction
17,662

 
442,437

 
4.0

 

 

 

Construction - custom
1,027

 
211,215

 
0.5

 

 
1,125

 

Land - acquisition & development
6,710

 
87,099

 
7.7

 
13

 
1,454

 
0.9

Land - consumer lot loans
2,504

 
90,983

 
2.8

 

 
1,238

 

Multi-family
6,911

 
1,091,709

 
0.6

 
11

 
1,513

 
0.7

Commercial real estate
7,963

 
848,187

 
0.9

 
180

 
21,313

 
0.8

Commercial & industrial
24,397

 
832,429

 
2.9

 

 

 

HELOC
856

 
132,869

 
0.6

 

 
468

 

Consumer
2,103

 
154,107

 
1.4

 

 

 

 
$
110,119

 
$
9,438,408

 
1.2
%
 
$
897

 
$
51,562

 
1.7
%
(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 June 30, 2016, $110,119,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $897,000 was specific reserves on loans deemed to be individually impaired. As of September 30,

19

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 collection or 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.


20

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.
June 30, 2016
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,533,837

 
$

 
$
59,181

 
$

 
$

 
$
5,593,018

  Construction
1,012,203

 

 
4,102

 

 

 
1,016,305

  Construction - custom
408,538

 

 
578

 

 

 
409,116

  Land - acquisition & development
94,830

 

 
7,019

 

 

 
101,849

  Land - consumer lot loans
100,173

 

 
1,558

 

 

 
101,731

  Multi-family
1,087,363

 
3,252

 
4,121

 

 

 
1,094,736

  Commercial real estate
861,771

 
11,345

 
13,841

 

 

 
886,957

  Commercial & industrial
755,361

 
6,532

 
48,549

 

 

 
810,442

  HELOC
133,939

 

 
796

 

 

 
134,735

  Consumer
154,148

 

 
113

 

 

 
154,261

 
10,142,163

 
21,129

 
139,858

 

 

 
10,303,150

 
 
 
 
 
 
 
 
 
 
 
 
Non-impaired acquired loans
132,710

 
47

 
7,612

 

 

 
140,369

Credit-impaired acquired loans
65,106

 

 
31,381

 

 
4

 
96,491

Covered loans
31,849

 

 
342

 

 

 
32,191

Total gross loans
$
10,371,828

 
$
21,176

 
$
179,193

 
$

 
$
4

 
$
10,572,201

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
98.1
%
 
0.2
%
 
1.7
%
 
%
 
%
 
 


21

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


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

 
$

 
$
93,145

 
$

 
$

 
$
5,651,845

 Construction
197,935

 

 
2,574

 

 

 
200,509

 Construction - custom
396,307

 

 

 

 

 
396,307

 Land - acquisition & development
89,656

 

 
4,552

 

 

 
94,208

 Land - consumer lot loans
103,569

 

 
420

 

 

 
103,989

 Multi-family
1,118,673

 
865

 
6,184

 

 

 
1,125,722

 Commercial real estate
971,510

 
4,360

 
10,400

 

 

 
986,270

 Commercial & industrial
575,034

 
1,496

 
36,306

 

 

 
612,836

 HELOC
127,398

 

 
248

 

 

 
127,646

 Consumer
194,451

 

 
204

 

 

 
194,655

 
9,333,233

 
6,721

 
154,033

 

 

 
9,493,987

 
 
 
 
 
 
 
 
 
 
 
 
Non-impaired acquired loans
149,891

 

 
16,402

 

 

 
166,293

Credit-impaired acquired loans
61,019

 

 
26,062

 

 

 
87,081

Covered loans
61,776

 

 
14,133

 

 

 
75,909

Total gross loans
$
9,605,919

 
$
6,721

 
$
210,630

 
$

 
$

 
$
9,823,270

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

The following tables provide information on loans (excluding acquired and covered loans) based on borrower payment activity.
June 30, 2016
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,556,312

 
99.3
%
 
$
36,707

 
0.7
%
Construction
1,016,305

 
100.0

 

 

Construction - custom
408,610

 
99.9

 
506

 
0.1

Land - acquisition & development
101,422

 
99.6

 
427

 
0.4

Land - consumer lot loans
100,626

 
98.9

 
1,105

 
1.1

Multi-family
1,093,495

 
99.9

 
1,238

 
0.1

Commercial real estate
880,661

 
99.3

 
6,297

 
0.7

Commercial & industrial
809,921

 
99.9

 
521

 
0.1

HELOC
134,188

 
99.6

 
548

 
0.4

Consumer
154,261

 
100.0

 

 

 
$
10,255,801

 
99.5
%
 
$
47,349

 
0.5
%


22

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


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

 
99.0
%
 
$
59,074

 
1.0
%
Construction
199,755

 
99.6

 
754

 
0.4

Construction - custom
395,575

 
99.8

 
732

 
0.2

Land - acquisition & development
94,208

 
100.0

 

 

Land - consumer lot loans
102,716

 
98.8

 
1,273

 
1.2

Multi-family
1,123,165

 
99.8

 
2,558

 
0.2

Commercial real estate
984,093

 
99.8

 
2,176

 
0.2

Commercial & industrial
612,836

 
100.0

 

 

HELOC
127,083

 
99.6

 
563

 
0.4

Consumer
193,975

 
99.7

 
680

 
0.3

 
$
9,426,177

 
99.3
%
 
$
67,810

 
0.7
%

23

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


The following tables provide information on impaired loan balances and the related allowances by loan types. 
 
 
 
 
 
 
 
 
June 30, 2016
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average Recorded Investment
 
(In thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
9,602

 
$
11,287

 
$

 
$
8,491

Construction - custom
578

 
578

 

 
289

Land - acquisition & development
164

 
8,393

 

 
164

Land - consumer lot loans
650

 
747

 

 
599

Multi-family
428

 
4,177

 

 
736

Commercial real estate
5,673

 
6,588

 

 
5,697

Commercial & industrial
906

 
7,627

 

 
544

HELOC
368

 
483

 

 
354

Consumer
33

 
483

 

 
17

 
18,402

 
40,363

 

 
16,891

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
223,533

 
227,633

 
4,202

 
224,274

Land - acquisition & development
1,454

 
2,656

 
8

 
1,543

Land - consumer lot loans
9,672

 
10,734

 
5

 
9,748

Multi-family
1,513

 
1,513

 
11

 
1,518

Commercial real estate
20,490

 
24,316

 
180

 
19,816

HELOC
1,379

 
1,394

 

 
1,388

Consumer
95

 
285

 

 
95

 
258,136

 
268,531

 
4,406

(1)
258,382

Total impaired loans:
 
 
 
 
 
 
 
Single-family residential
233,135

 
238,920

 
4,202

 
232,765

Construction - custom
578

 
578

 

 
289

Land - acquisition & development
1,618

 
11,049

 
8

 
1,707

Land - consumer lot loans
10,322

 
11,481

 
5

 
10,347

Multi-family
1,941

 
5,690

 
11

 
2,254

Commercial real estate
26,163

 
30,904

 
180

 
25,513

Commercial & industrial
906

 
7,627

 

 
544

HELOC
1,747

 
1,877

 

 
1,742

Consumer
128

 
768

 

 
112

 
$
276,538

 
$
308,894

 
$
4,406

(1)
$
275,273


(1)
Includes $897,000 of specific reserves and $3,509,000 included in the general reserves.



24

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


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

 
$
19,644

 
$

 
$
14,069

Construction
453

 
2,151

 

 
471

Construction - custom
554

 
554

 

 
182

Land - acquisition & development
2,570

 
9,426

 

 
926

Land - consumer lot loans
727

 
814

 

 
544

Multi-family
3,770

 
7,054

 

 
1,545

Commercial real estate
9,427

 
15,620

 

 
8,130

Commercial & industrial
2,955

 
13,066

 

 
2,681

HELOC
683

 
1,532

 

 
536

Consumer
477

 
703

 

 
390

 
38,866

 
70,564

 

 
29,474

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
259,461

 
263,268

 
6,678

 
260,028

Construction
4,988

 
5,778

 

 
5,432

Land - acquisition & development
2,486

 
3,426

 

 
3,478

Land - consumer lot loans
11,289

 
11,554

 

 
11,324

Multi-family
3,823

 
3,823

 

 
3,732

Commercial real estate
19,124

 
21,078

 

 
18,886

HELOC
1,443

 
1,443

 

 
1,359

Consumer
99

 
289

 

 
102

 
302,713

 
310,659

 
6,678

(1)
304,341

Total impaired loans:
 
 
 
 
 
 
 
Single-family residential
276,711

 
282,912

 
6,678

 
274,097

Construction
5,441

 
7,929

 

 
5,903

Construction - custom
554

 
554

 

 
182

Land - acquisition & development
5,056

 
12,852

 

 
4,404

Land - consumer lot loans
12,016

 
12,368

 

 
11,868

Multi-family
7,593

 
10,877

 

 
5,277

Commercial real estate
28,551

 
36,698

 

 
27,016

Commercial & industrial
2,955

 
13,066

 

 
2,681

HELOC
2,126

 
2,975

 

 
1,895

Consumer
576

 
992

 

 
492

 
$
341,579

 
$
381,223

 
$
6,678

(1)
$
333,815


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


25

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


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

26

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


The following tables present the balance of assets and liabilities measured at fair value on a recurring basis.
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
$
101,885

 
$

 
$

 
$
101,885

Obligations of U.S. government

 
249,053

 

 
249,053

Obligations of states and political subdivisions

 
27,488

 

 
27,488

Corporate debt securities

 
460,399

 

 
460,399

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates

 
1,046,506

 

 
1,046,506

       Commercial MBS

 
84,538

 

 
84,538

Total available-for-sale securities
101,885

 
1,867,984

 

 
1,969,869

Interest rate contracts

 
22,085

 

 
22,085

Total financial assets
$
101,885

 
$
1,890,069

 
$

 
$
1,991,954

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
22,085

 
$

 
$
22,085

Commercial loan hedge

 
3,394

 

 
3,394

Long term borrowing hedge

 
35,533

 

 
35,533

Total financial liabilities
$

 
$
61,012

 
$

 
$
61,012

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the nine months ended June 30, 2016.

27

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


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

 
$

 
$

 
$
101,952

Obligations of U.S. government

 
482,464

 

 
482,464

Obligations of states and political subdivisions

 
27,123

 

 
27,123

Corporate debt securities

 
505,800

 

 
505,800

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates

 
1,160,518

 

 
1,160,518

       Commercial MBS

 
102,706

 

 
102,706

Total available-for-sale securities
101,952

 
2,278,611

 

 
2,380,563

Interest rate contracts

 
11,879

 

 
11,879

Total financial assets
$
101,952

 
$
2,290,490

 
$

 
$
2,392,442

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
11,879

 
$

 
$
11,879

Commercial loan hedge

 
966

 

 
966

Long term borrowing hedge

 
14,555

 

 
14,555

Total financial liabilities
$

 
$
27,400

 
$

 
$
27,400

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


28

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


Measured on a Nonrecurring Basis
Impaired Loans & Real Estate Owned
Real estate owned ("REO") consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the current appraisal or estimated value of the collateral, but only up to the fair value of the real estate owned as of the initial transfer date less selling costs.

When management determines that the fair value of the collateral or the real estate owned requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the impaired loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at June 30, 2016 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 real estate owned where the fair value of the property was less than the cost basis.

The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at June 30, 2016 and June 30, 2015, and the total gains (losses) resulting from those fair value adjustments for the nine months ended June 30, 2016 and June 30, 2015. The estimated fair value measurements are shown gross of estimated selling costs.
 
 
June 30, 2016
 
Three Months Ended June 30, 2016
 
Nine Months Ended June 30, 2016
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
 
 
Impaired loans (1)
$

 
$

 
$
15,724

 
$
15,724

 
$
(692
)
 
$
(3,762
)
Real estate owned (2)

 

 
19,853

 
19,853

 
(614
)
 
(2,944
)
Balance at end of period
$

 
$

 
$
35,577

 
$
35,577

 
$
(1,306
)
 
$
(6,706
)

(1) The gains (losses) represent remeasurements of collateral-dependent loans.
(2) The gains (losses) represent aggregate writedowns and charge-offs on REO.

 
June 30, 2015
 
Three Months Ended June 30, 2015
 
Nine Months Ended June 30, 2015
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
 
 
Impaired loans (1)
$

 
$

 
$
6,735

 
$
6,735

 
$
(3,621
)
 
$
(4,201
)
Real estate owned (2)

 

 
73,781

 
73,781

 
(2,366
)
 
8,403

Balance at end of period
$

 
$

 
$
80,516

 
$
80,516

 
$
(5,987
)
 
$
4,202


(1)
The gains (losses) represent remeasurements of collateral-dependent loans.
(2)
The gains (losses) represent aggregate writedowns and charge-offs on REO.
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.

29

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


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

30

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


 
 
 
 
June 30, 2016
 
September 30, 2015
 
 
Level in Fair Value Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
530,055

 
$
530,055

 
$
284,049

 
$
284,049

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Equity securities
 
1
 
101,885

 
101,885

 
101,952

 
101,952

Obligations of U.S. government
 
2
 
249,053

 
249,053

 
482,464

 
482,464

Obligations of states and political subdivisions
 
2
 
27,488

 
27,488

 
27,123

 
27,123

Corporate debt securities
 
2
 
460,399

 
460,399

 
505,800

 
505,800

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,046,506

 
1,046,506

 
1,160,518

 
1,160,518

Commercial MBS
 
2
 
84,538

 
84,538

 
102,706

 
102,706

Total available-for-sale securities
 
 
 
1,969,869

 
1,969,869

 
2,380,563

 
2,380,563

Held-to-maturity securities
 
2
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,492,480

 
1,512,666

 
1,643,216

 
1,637,420

Total held-to-maturity securities
 
 
 
1,492,480

 
1,512,666

 
1,643,216

 
1,637,420

 
 
 
 
 
 
 
 
 
 
 
Loans receivable
 
3
 
9,628,576

 
10,206,509

 
9,170,634

 
9,667,750

FDIC indemnification asset
 
3
 
13,250

 
12,633

 
16,275

 
15,522

FHLB and FRB stock
 
2
 
117,205

 
117,205

 
107,198

 
107,198

        Other assets - interest rate contracts
 
2
 
22,085

 
22,085

 
11,879

 
11,879

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Customer accounts
 
2
 
10,578,916

 
10,182,610

 
10,631,703

 
10,004,290

FHLB advances
 
2
 
2,080,000

 
2,211,686

 
1,830,000

 
1,938,384

        Other liabilities - interest rate contracts
 
2
 
22,085

 
22,085

 
11,879

 
11,879

Other liabilities - commercial loan hedge
 
2
 
3,394

 
3,394

 
966

 
966

        Other liabilities - long term borrowing hedge
 
2
 
35,533

 
35,533

 
14,555

 
14,555

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

31

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


Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.
FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest Rate Contracts – The bank offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the bank enters into the opposite trade with a counterparty to offset its interest rate risk. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.
Commercial Loan Hedge – The fair value of the interest rate swap is estimated by a third party pricing service using a discounted cash flow technique.
Long Term Borrowing Hedges – The fair value of the interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.
The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities.
 
June 30, 2016
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
 
Losses
 
 
(In thousands)
Available-for-sale securities

 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
Within 1 year
$
25,980

 
$

 
$
(65
)
 
$
25,915

 
0.73
%
1 to 5 years
$
13,268

 
$
1,273

 
$
(23
)
 
$
14,518

 
7.49
%
5 to 10 years
49,174

 

 
(1,526
)
 
47,648

 
1.06

Over 10 years
165,032

 

 
(4,060
)
 
160,972

 
1.14

Equity Securities
 
 
 
 
 
 
 
 
 
Within 1 year
500

 
22

 

 
522

 
1.80

1 to 5 years
99,922

 
1,441

 

 
101,363

 
1.90

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
250,000

 
263

 

 
250,263

 
1.07

1 to 5 years
71,540

 
148

 
(106
)
 
71,582

 
1.97

5 to 10 years
89,954

 
518

 
(2,793
)
 
87,679

 
2.02

Over 10 years
50,000

 
875

 

 
50,875

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
2,307

 
18

 

 
2,325

 
1.23

5 to 10 years
1,327

 
65

 

 
1,392

 
2.05

Over 10 years
20,367

 
3,404

 

 
23,771

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,033,736

 
16,277

 
(3,507
)
 
1,046,506

 
2.58

Commercial MBS
86,057

 

 
(1,519
)
 
84,538

 
1.79

 
1,959,164

 
24,304

 
(13,599
)
 
1,969,869

 
2.17

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,492,480

 
20,764

 
(578
)
 
1,512,666

 
3.18

 
$
3,451,644

 
$
45,068

 
$
(14,177
)
 
$
3,482,535

 
2.60
%

32

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


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

 
$
1,923

 
$
(274
)
 
$
106,714

 
1.74
%
5 to 10 years
119,071

 
35

 
(1,247
)
 
117,859

 
1.54

Over 10 years
262,832

 

 
(4,941
)
 
257,891

 
1.23

Equity Securities
 
 
 
 
 
 
 
 
 
Within 1 year
500

 
17

 

 
517

 
1.80

1 to 5 years
99,922

 
1,513

 

 
101,435

 
1.90

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
24,787

 
191

 

 
24,978

 
0.53

1 to 5 years
311,435

 
1,190

 
(58
)
 
312,567

 
0.88

5 to 10 years
100,000

 
876

 
(3,524
)
 
97,352

 
1.47

Over 10 years
69,950

 
953

 

 
70,903

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
2,285

 
8

 

 
2,293

 
1.23

5 to 10 years
1,303

 
7

 

 
1,310

 
2.05

Over 10 years
20,382

 
3,138

 

 
23,520

 
6.45

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

 
18,222

 
(2,491
)
 
1,160,518

 
2.48

Commercial MBS
103,131

 
85

 
(510
)
 
102,706

 
1.51

 
2,365,450

 
28,158

 
(13,045
)
 
2,380,563

 
1.97

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

 
10,516

 
(16,312
)
 
1,637,420

 
3.19

 
$
4,008,666

 
$
38,674

 
$
(29,357
)
 
$
4,017,983

 
2.46
%
There were no available-for-sale securities sold during the three or nine months ended June 30, 2016. During the three and nine months ended June 30, 2015, there were $235,110,000 of available-for-sale securities sold for a gain of $9,639,000. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 10 years.
The following tables show the unrealized gross losses and fair value of securities as of June 30, 2016 and September 30, 2015, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other than temporarily impaired.

33

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


 
June 30, 2016
Less than 12 months
 
12 months or more
 
Total
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
(In thousands)
 
 
Corporate bonds due
$
(512
)
 
$
19,442

 
$
(2,387
)
 
$
57,613

 
$
(2,899
)
 
$
77,055

U.S. government and agency securities due
(3,199
)
 
122,397

 
(2,475
)
 
116,082

 
(5,674
)
 
238,479

Agency pass-through certificates
(1,911
)
 
371,804

 
(3,693
)
 
385,416

 
(5,604
)
 
757,220

 
$
(5,622
)
 
$
513,643

 
$
(8,555
)
 
$
559,111

 
$
(14,177
)
 
$
1,072,754


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

 
$
(3,399
)
 
$
46,601

 
$
(3,582
)
 
$
119,463

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

 
(1,452
)
 
57,344

 
(6,462
)
 
393,587

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

 
(18,277
)
 
1,193,463

 
(19,313
)
 
1,363,004

 
$
(6,229
)
 
$
578,646

 
$
(23,128
)
 
$
1,297,408

 
$
(29,357
)
 
$
1,876,054



34

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


NOTE G – Derivatives and Hedging Activities

The Bank periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Bank retains a variable rate loan. Under these agreements, the Bank enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Bank enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The Bank had $557,930,000 and $439,416,000 notional in interest rate swaps to hedge this exposure as of June 30, 2016 and September 30, 2015, respectively. The interest rate swaps are derivatives under FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the nine months ended June 30, 2016 as the changes in value for the asset and liability side of the swaps offset each other.

The Bank has also entered into interest rate swaps, some of which are forward-starting, to convert certain existing and future short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of rising interest rates, specifically LIBOR rates, which are a benchmark for the short term borrowings. The hedging program qualifies as a cash flow hedge under ASC 815, which provides for offsetting 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 existing or future short-term fixed rate borrowings over the term of the interest rate swap. The change in the fair value of the interest rate swaps is recorded in other comprehensive income. The Bank had $700,000,000 and $400,000,000 notional in interest rate swaps to hedge existing and anticipated future borrowings as of June 30, 2016 and September 30, 2015, respectively. The unrealized loss, gross of the related tax benefit, on these interest rate swaps as of June 30, 2016 was $35,533,000.

The Bank has also entered into an interest rate swap to hedge the interest rate risk of an individual fixed rate commercial loan and this relationship qualifies as a fair value hedge under ASC 815, which provides for offsetting of the recognition of gains and losses of the interest rate swap and the hedged item. The Bank hedges this loan using an interest rate swap with a notional amount of $54,155,000 and $54,815,000 as of June 30, 2016 and September 30, 2015, respectively

The following table presents the fair value and balance sheet classification of derivatives at June 30, 2016 and September 30, 2015:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
June 30, 2016
 
September 30, 2015
 
June 30, 2016
 
September 30, 2015
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Location
 
Fair Value
 
 
(In thousands)
Interest rate contracts
 
Other assets
 
$
22,085

 
Other assets
 
$
11,879

 
Other liabilities
 
$
22,085

 
Other liabilities
 
$
11,879

Commercial loan hedge
 
Other assets
 

 
Other assets
 

 
Other liabilities
 
3,394

 
Other liabilities
 
966

Long term borrowing hedge
 
Other assets
 

 
Other assets
 

 
Other liabilities
 
35,533

 
Other liabilities
 
14,555

 
 
 
 
$
22,085

 
 
 
$
11,879

 
 
 
$
61,012

 
 
 
$
27,400



35

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

FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended (the "Exchange Act"), based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes, including without limitation the potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations being promulgated thereunder; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
GENERAL
Washington Federal, Inc. is a Washington corporation headquartered in Seattle, Washington and is a bank holding company under the Bank Holding Company Act of 1956. The Company conducts its operations primarily through the Bank, a federally-insured national bank subsidiary, Washington Federal, National Association.
The Company's fiscal year end is September 30th. All references to 2015 represent balances as of September 30, 2015 or activity for the fiscal year then ended.
INTEREST RATE RISK
Based on Management's assessment of the current interest rate environment, the Bank has taken steps to reduce its interest rate risk profile compared to its historical norms, including growing shorter-term business loans and transaction deposit accounts, as well as extending the maturity on borrowings. The mix of transaction and savings accounts is 56% of total deposits as of June 30, 2016 while the composition of the investment securities portfolio is 40% variable and 60% fixed rate. When interest rates rise, the fair value of the investment securities with fixed rates will decrease and vice versa when interest rates decline. The Company has $1,492,480,000 of 30-year fixed rate mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of June 30, 2016, the net unrealized gain on these securities was $20,186,000. The Company has $1,969,869,000 of available-for-sale securities that are carried at fair value. As of June 30, 2016, the net unrealized gain on these securities was $10,705,000. The Bank has executed interest rate swaps to hedge interest rates on existing and future borrowings. The unrealized loss on these interest rate swaps as of June 30, 2016 was $35,533,000. All of the above are pre-tax net unrealized gains or losses.

The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) of the Company.
Net Interest Income Sensitivity. We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. The analysis assumes a constant balance sheet. Actual results would differ from the assumptions used in this model, as Management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates

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 increase by 3.9% in the next year. This compares to an estimated decrease of 2.2% as of the September 30, 2015 analysis. It is noted that a flattening yield curve 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

36

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

rates over two years would result in a net interest income increase of 2.2% in the first year and increase of 4.2% in the second year assuming a constant balance sheet and no management intervention.

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. As of June 30, 2016, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $387,491,000 or 15.1% and the NPV to total assets ratio to decline to 15.4% from a base of 17.0%. As of September 30, 2015, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $535,948,000 or 19.7% and the NPV to total assets ratio to decline to 15.9%% from a base of 18.4%. The decreased NPV sensitivity and lower base NPV ratio is due to lower interest rates and higher prices as of June 30, 2016.

Repricing Gap Analysis. At June 30, 2016, the Company had approximately $1,447,214,000 more in liabilities subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (9.8)% of total assets. This was an decrease from the (13.4)% gap as of September 30, 2015. A negative repricing gap implies that funding costs will change more rapidly than interest income on earning assets with movements in interest rates. A negative repricing gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. This interest rate gap analysis provides management with a high-level indication of interest rate risk, but it is considered less reliable than more detailed modeling.
Interest Rate Spread. The interest rate spread is measured as the difference between the rate on total loans and investments and the rate on costing liabilities at the end of each period. The interest rate spread decreased to 2.67% at June 30, 2016 from 2.73% at September 30, 2015. The spread decrease of 6 basis points is primarily due to payoffs of existing loans with new loan originations being at lower rates as the yield curve has continued to flatten and an increase in the proportion of funding provided by FHLB advances at rates higher than the average cost of customer deposits. As of June 30, 2016, the weighted average rate on loans, mortgage backed securities and investments decreased by 2 basis points to 3.61% compared to September 30, 2015, while the weighted average cost of funds increased by 4 basis point to 0.94%.
Net Interest Margin. The net interest margin is measured using the interest income and expense over the average assets and liabilities for the period. The net interest margin increased to 3.07% for the quarter ended June 30, 2016 from 3.02% for the quarter ended June 30, 2015. The yield on earning assets increased 6 basis points to 3.95% and the cost of interest bearing liabilities increased 1 basis point to 0.94%. The higher yield on earning assets is the result of changes in the asset mix as cash and investment securities have decreased while loans receivable have increased. The increase in interest costs was due to changes in the mix of customer deposits and FHLB advances.
The following table sets forth the information explaining the changes in the net interest margin for the periods indicated compared to the same periods one year ago.

37

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

 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2015
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
 
(In thousands)
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
9,561,921

 
$
113,728

 
4.77
%
 
$
8,628,345

 
$
107,250

 
4.99
%
Mortgaged-backed securities
2,698,354

 
15,297

 
2.27

 
3,024,821

 
16,995

 
2.25

Cash & Investments
1,187,023

 
4,012

 
1.36

 
1,543,556

 
4,625

 
1.20

FHLB & FRB stock
117,022

 
698

 
2.39

 
134,692

 
430

 
1.28

 
 
 
 
 
 
 
 
 
 
 
 
 Total interest-earning assets
13,564,320

 
133,735

 
3.95
%
 
13,331,414

 
129,300

 
3.89
%
Other assets
1,219,363

 
 
 
 
 
1,124,750

 
 
 
 
Total assets
$
14,783,683

 
 
 
 
 
$
14,456,164

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,569,479

 
$
13,274

 
0.50
%
 
$
10,635,364

 
$
12,485

 
0.47
%
FHLB advances
2,075,604

 
16,221

 
3.13

 
1,820,110

 
16,250

 
3.58

 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
12,645,083

 
29,495

 
0.94
%
 
12,455,474

 
28,735

 
0.93
%
Other liabilities
163,788

 
 
 
 
 
46,980

 
 
 
 
               Total liabilities
12,808,871

 
 
 
 
 
12,502,454

 
 
 
 
Stockholder's equity
1,974,812

 
 
 
 
 
1,953,710

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
14,783,683

 
 
 
 
 
$
14,456,164

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
104,240

 
 
 
 
 
$
100,565

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.07
%
 
 
 
 
 
3.02
%
As of June 30, 2016, total assets had increased by $253,276,000 to $14,821,600,000 from $14,568,324,000 at September 30, 2015. During the nine months ended June 30, 2016, cash and cash equivalents increased by $246,006,000, loans receivable increased $457,942,000 and investment securities declined by $561,430,000.
Cash and cash equivalents of $530,055,000 and stockholders’ equity of $1,962,185,000 as of June 30, 2016 provides management with flexibility in managing interest rate risk going forward.

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

38

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

and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB. The Bank is also eligible to borrow under the Federal Reserve Bank's primary credit program.
The Company's cash and cash equivalents total $530,055,000 at June 30, 2016, an increase from $284,049,000 at September 30, 2015. These amounts include the Bank's operating cash.
The Company’s net worth at June 30, 2016 was $1,962,185,000, or 13.24% of total assets. This was a increase of $6,506,000 from September 30, 2015 when net worth was $1,955,679,000, or 13.42% of total assets. The Company’s net worth was impacted in the nine months ended June 30, 2016 by net income of $119,825,000, the payment of $37,415,000 in cash dividends, treasury stock purchases of $70,048,000, as well as an other comprehensive loss of $16,058,000. The ratio of tangible capital to tangible assets at June 30, 2016 was 11.46%. The Company has paid out 90% of its fiscal 2016 year-to-date earnings to shareholders in the form of cash dividends and share repurchases, compared with 111% for fiscal year 2015. Management believes the strong net worth position will allow the Company to manage its interest rate risk and provide the capital support needed for controlled growth in a regulated environment.
The Company (on a consolidated basis) and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements.
Federal banking agencies establish regulatory capital rules which require minimum capital ratios and establish criteria for calculating regulatory capital. Minimum capital ratios for four measures are used for assessing capital adequacy. The standards are indicated in the table below. The common equity tier 1 capital ratio recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The rules set forth a “capital conservation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus these buffers, restrictions can be placed on the bank by its regulators. These restrictions include reducing dividend payments, share buy-backs, and staff bonus payments. The purpose of these buffers is to require banks to build up capital outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where losses are incurred, the minimum capital ratios can still be met. The capital rules that became effective in January 2015 include a phase-in period for certain minimum ratios and the capital buffers, before the full minimum ratios take effect in 2019. Management continues to monitor the financial position of the Company and its capital ratios as the rules phase in.
There are also standards for Adequate and Well Capitalized criteria that are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank and the Company must maintain minimum common equity risk-based, tier 1 risk-based, total risk-based and tier 1 leverage ratios as set forth in the following table.

39

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

 
Actual
 
Minimum Capital
Adequacy Guidelines
 
Minimum Well-Capitalized Guidelines
 
Capital
 
Ratio
 
Capital
 
Ratio
 
Capital
 
Ratio
 
(In thousands)
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier I risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
$
1,681,062

 
17.96
%
 
$
421,244

 
4.50
%
 
NA

 
NA

      The Bank
1,675,178

 
17.90
%
 
421,139

 
4.50
%
 
608,312

 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,681,062

 
17.96
%
 
561,659

 
6.00
%
 
NA

 
NA

      The Bank
1,675,178

 
17.90
%
 
561,519

 
6.00
%
 
748,692

 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,795,972

 
19.19
%
 
748,878

 
8.00
%
 
NA

 
NA

      The Bank
1,790,088

 
19.13
%
 
748,692

 
8.00
%
 
935,865

 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
 
 
 
 
      The Company
1,681,062

 
11.61
%
 
579,120

 
4.00
%
 
NA

 
NA

      The Bank
1,675,178

 
11.57
%
 
579,108

 
4.00
%
 
723,885

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

 
18.81
%
 
396,788

 
4.50
%
 
NA

 
NA

      The Bank
1,652,569

 
18.73
%
 
397,020

 
4.50
%
 
921,281

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

 
18.81
%
 
529,051

 
6.00
%
 
NA

 
NA

      The Bank
1,652,569

 
18.73
%
 
529,360

 
6.00
%
 
705,814

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

 
20.07
%
 
705,402

 
8.00
%
 
NA

 
NA

      The Bank
1,763,171

 
19.98
%
 
705,814

 
8.00
%
 
882,267

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

 
11.71
%
 
566,923

 
4.00
%
 
NA

 
N/A

      The Bank
1,652,569

 
11.66
%
 
566,942

 
4.00
%
 
708,678

 
5.00
%

CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents: Cash and cash equivalents are $530,055,000 at June 30, 2016, an increase of $246,006,000, or 86.61%, since September 30, 2015.

Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $410,694,000, or 17.3%, during the nine months ended ended June 30, 2016, due to prepayments, calls and maturities which were partially offset by the purchase of $50,742,000 of available-for-sale securities. During the same period, the balance of held-to-maturity securities declined by $150,736,000 due to paydowns and maturities. There were no held to maturity securities purchased or sold during the nine months ended June 30, 2016. As of June 30, 2016, the Company had a net unrealized gain on available-for-sale securities of $10,705,000, which is included on a net of tax basis in accumulated other comprehensive income.

Loans receivable: Loans receivable, net of related contra accounts, increased to $9,628,576,000 at June 30, 2016 compared to $9,170,634,000 at September 30, 2015. This increase resulted primarily from originations of $2,758,103,000 and loan purchases

40

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

of $51,646,000, partially offset by loan repayments of $2,083,589,000. Commercial loan originations accounted for 71% of total originations and consumer loan originations were 29% during the period. The increase in the loan portfolio is consistent with management's strategy during low rate environments to produce more multifamily, commercial real estate, and commercial and industrial loans which generally have adjustable interest rates or a shorter duration.
The following table shows the loan portfolio by category and the change.

 
June 30, 2016
 
September 30, 2015
 
Change
 
(In thousands)
 
(In thousands)
 
$
%
Non-Acquired loans
 
 
 
 
 
 
 
 
   Single-family residential
$
5,593,018

52.9
%
 
$
5,651,845

57.6
%
 
$
(58,827
)
(1.0
)%
   Construction
1,016,305

9.6

 
200,509

2.0

 
815,796

406.9

   Construction - custom
409,116

3.9

 
396,307

4.0

 
12,809

3.2

   Land - acquisition & development
101,849

1.0

 
94,208

1.0

 
7,641

8.1

   Land - consumer lot loans
101,731

1.0

 
103,989

1.1

 
(2,258
)
(2.2
)
   Multi-family
1,094,736

10.3

 
1,125,722

11.6

 
(30,986
)
(2.8
)
   Commercial real estate
886,957

8.4

 
986,270

10.0

 
(99,313
)
(10.1
)
   Commercial & industrial
810,442

7.7

 
612,836

6.2

 
197,606

32.2

   HELOC
134,735

1.3

 
127,646

1.3

 
7,089

5.6

   Consumer
154,261

1.4

 
194,655

2.0

 
(40,394
)
(20.8
)
Total non-acquired loans
10,303,150

97.5
%
 
9,493,987

96.8
%
 
809,163

8.5
 %
Acquired loans
140,369

1.3

 
166,293

1.6

 
(25,924
)
(15.6
)
Credit impaired acquired loans
96,491

0.9

 
87,081

0.9

 
9,410

10.8

Covered loans
32,191

0.3

 
75,909

0.7

 
(43,718
)
(57.6
)
Total gross loans
10,572,201

100
%
 
9,823,270

100
%
 
748,931

7.6
 %
   Less:
 
 
 
 
 
 
 
 
      Allowance for probable losses
111,016

 
 
106,829

 
 
4,187

3.9
 %
      Loans in process
780,721

 
 
476,796

 
 
303,925

63.7

      Discount on acquired loans
14,775

 
 
30,095

 
 
(15,320
)
(50.9
)
      Deferred net origination fees
37,113

 
 
38,916

 
 
(1,803
)
(4.6
)
Total loan contra accounts
943,625

 
 
652,636

 
 
290,989

44.6

Net Loans
$
9,628,576

 
 
$
9,170,634

 
 
$
457,942

5.0
 %
 
Non-performing assets (excludes discounted acquired assets): Non-performing assets decreased 38.5% during the nine months ended June 30, 2016 to $79,031,000 from $128,577,000 at September 30, 2015. The decrease is primarily due to the $29,416,000 decline in REO as the Company continues to sell those assets as well as a $20,461,000 decline in non-accrual loans. Non-performing assets as a percentage of total assets decreased to 0.53% at June 30, 2016 compared to 0.88% at September 30, 2015.




41

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

The following table sets forth information regarding restructured loans and non-performing assets.
 
June 30,
2016
 
September 30,
2015
 
(In thousands)
Restructured loans:
 
 
 
 
 
 
 
Single-family residential
$
223,531

 
86.7
%
 
$
259,460

 
85.8
%
Construction

 

 
4,989

 
1.6

Land - acquisition & development
1,454

 
0.6

 
2,486

 
0.8

Land - consumer lot loans
9,672

 
3.7

 
11,289

 
3.7

Multi - family
1,514

 
0.6

 
3,823

 
1.3

Commercial real estate
20,490

 
7.9

 
19,124

 
6.3

HELOC
1,379

 
0.5

 
1,443

 
0.5

Consumer
95

 

 
99

 

Total restructured loans (1)
$
258,135

 
100
%
 
$
302,713

 
100
%
 
 
 
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
36,707

 
77.5
%
 
$
59,074

 
87.1
%
Construction

 

 
754

 
1.1

Construction - custom
506

 
1.1

 
732

 
1.1

Land - acquisition & development
427

 
0.9

 

 

Land - consumer lot loans
1,105

 
2.3

 
1,273

 
1.9

Multi-family
1,238

 
2.6

 
2,558

 
3.8

Commercial real estate
6,297

 
13.3

 
2,176

 
3.2

Commercial & industrial
521

 
1.1

 

 

HELOC
548

 
1.2

 
563

 
0.8

Consumer

 

 
680

 
1.0

Total non-accrual loans (2)
47,349

 
100
%
 
67,810

 
100
%
Real estate owned
31,682

 
 
 
60,767

 
 
Total non-performing assets
$
79,031

 
 
 
$
128,577

 
 
Total non-performing assets and performing restructured loans as a percentage of total assets
2.20
%
 
 
 
2.96
%
 
 
 
 
 
 
 
 
 
 
(1)    Restructured loans were as follows:
 
 
 
 
 
 
 
Performing
$
247,695

 
96.0
%
 
$
291,416

 
96.3
%
Non-performing (included in non-accrual loans above)
10,440

 
4.0

 
11,297

 
3.7

 
$
258,135

 
100
%
 
$
302,713

 
100
%

(2)
For the three months ended June 30, 2016, the Company recognized $1,165,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $557,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than nine months of interest for some of the loans that were brought current. In addition to the non-accrual loans reflected in the above table, the Company had $133,154,000 of loans that were less than 90 days delinquent at June 30, 2016 but which it had classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs and performing restructured loans as a percent of total assets would have increased to 1.43% at June 30, 2016.
Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.
 

42

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

Most restructured loans are accruing and performing loans where the borrower has proactively approached the Bank about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 86.7% of restructured loans as of June 30, 2016. The concession for these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twenty four months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are generally required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform it will be placed in non-accrual status when it is 90 days delinquent.
A loan that defaults and is subsequently modified would impact the Company’s delinquency trend, which is part of the qualitative risk factors component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the historical loss factors component of the Company's general reserve calculation.
Allocation of the allowance for loan losses: The following table shows the allocation of the Company’s allowance for loan losses within the specific loan categories.
 
 
June 30, 2016
 
September 30, 2015
 
Amount
 
Loans to
Total Loans (1)
 
Coverage
Ratio (2)
 
Amount
 
Loans to
Total Loans (1)
 
Coverage
Ratio (2)
 
(In thousands)
 
(In thousands)
Single-family residential
$
40,681

 
58.7
%
 
0.7
%
 
$
47,347

 
62.5
%
 
0.8
%
Construction
17,662

 
4.7

 
4.0

 
6,680

 
1.4

 
5.1

Construction - custom
1,028

 
2.2

 
0.5

 
990

 
2.3

 
50.0

Land - acquisition & development
6,722

 
0.9

 
7.6

 
5,781

 
0.8

 
7.7

Land - consumer lot loans
2,504

 
1.0

 
2.7

 
2,946

 
1.1

 
2.8

Multi-family
6,921

 
11.5

 
0.6

 
5,304

 
11.8

 
0.5

Commercial real estate
8,143

 
9.2

 
0.9

 
8,960

 
9.4

 
1.0

Commercial & industrial
24,396

 
8.8

 
2.9

 
24,980

 
7.1

 
3.9

HELOC
856

 
1.4

 
0.6

 
902

 
1.4

 
0.7

Consumer
2,103

 
1.6

 
1.4

 
2,939

 
2.2

 
1.5

 
$
111,016

 
100
%
 
 
 
$
106,829

 
100
%
 
 

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

Real Estate Owned: Real estate owned decreased during the nine months ended June 30, 2016 by $29,416,000 to $31,682,000. The decrease is primarily due to sales of REO properties during the period.



43

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

The following table shows the composition of the Bank’s customer accounts by deposit type.
  
June 30, 2016
 
September 30, 2015
 
Deposit Account Balance
 
As a % of Total Deposits
 
Wtd. Avg.
Rate
 
Deposit Account Balance
 
As a % of Total Deposits
 
Wtd. Avg.
Rate
 
(In thousands)

 
 
 
 
 
(In thousands)

 
 
 
 
Non-interest checking
$
1,041,258

 
9.9
%
 
%
 
$
976,250

 
9.2
%
 
%
Interest checking
1,604,741

 
15.2

 
0.10

 
1,579,516

 
14.9

 
0.06

Savings (passbook/statement)
787,441

 
7.4

 
0.10

 
700,794

 
6.6

 
0.10

Money market
2,486,802

 
23.5

 
0.14

 
2,564,318

 
24.1

 
0.13

Time deposits
4,658,674

 
44.0

 
1.02

 
4,810,825

 
45.2

 
0.95

Total
$
10,578,916

 
100
%
 
0.51
%
 
$
10,631,703

 
100
%
 
0.48
%

Customer accounts: Customer accounts decreased $52,787,000, or 0.5%, to $10,578,916,000 at June 30, 2016 compared with $10,631,703,000 at September 30, 2015.
FHLB advances and other borrowings: Total borrowings were $2,080,000,000 as of June 30, 2016, an increase of $250,000,000 since September 30, 2015. The increase represents the net of $300,000,000 of new long term advances partially offset by repayment of $50,000,000 of short term FHLB advances during the nine months ended June 30, 2016.

RESULTS OF OPERATIONS
Net Income: The quarter ended June 30, 2016 produced net income of $43,004,000 compared to $39,050,000 for the same quarter one year ago. The nine months ended June 30, 2016 produced net income of $119,825,000 compared to $117,818,000 for the same period one year ago.
Net Interest Income: For the quarter ended June 30, 2016, net interest income was $104,240,000 which is $3,675,000 higher than the same quarter of the prior year. The increase was primarily due to higher average balances on loans receivable. The average yield on interest earning assets increased by 6 basis points as the asset mix shifted from cash and investment securities to more loans receivable. The average cost of funds increased by 1 basis point as more FHLB advances were added which shifted the overall mix of funding. The net result was a net interest margin of 3.07% in the quarter ended June 30, 2016 compared to 3.02% in quarter ended June 30, 2015. The nine months ended June 30, 2016 produced net interest income of $317,434,000 compared to $306,628,000 for the same period one year ago.
The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis: 

44

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

 
Comparison of Three Months Ended
6/30/16 and 6/30/15
 
Comparison of Nine Months Ended
6/30/16 and 6/30/15
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(In thousands)
 
(In thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
11,145

 
$
(4,667
)
 
$
6,478

 
$
34,898

 
$
(19,913
)
 
$
14,985

Mortgaged-backed securities
(1,848
)
 
150

 
(1,698
)
 
(5,183
)
 

 
(5,183
)
Investments (1)
(1,333
)
 
988

 
(345
)
 
(6,111
)
 
5,017

 
(1,094
)
All interest-earning assets
7,964

 
(3,529
)
 
4,435

 
23,604

 
(14,896
)
 
8,708

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
(71
)
 
860

 
789

 
(265
)
 
823

 
558

FHLB advances and other borrowings
1,905

 
(1,934
)
 
(29
)
 
2,286

 
(4,942
)
 
(2,656
)
All interest-bearing liabilities
1,834

 
(1,074
)
 
760

 
2,021

 
(4,119
)
 
(2,098
)
Change in net interest income
$
6,130

 
$
(2,455
)
 
$
3,675

 
$
21,583

 
$
(10,777
)
 
$
10,806

___________________ 
(1)
Includes interest on cash equivalents and dividends on FHLB & FRB stock
Provision (Release) for Loan Losses: The Company recorded a release of allowance for loan losses of $1,650,000 during the three months ended June 30, 2016, which compares to a release of $1,932,000 for the three months ended June 30, 2015. For the nine months ended June 30, 2016, a release of allowance for loan losses of $3,150,000 was recorded versus a release of $11,381,000 for the nine months ended June 30, 2015. The release recorded for the three and nine months ended June 30, 2016 was a result of continued improvement in credit quality of the loan portfolio offset by net growth in the loan portfolio. The related improvement in the credit quality of the loan portfolio relates to the following factors.
The Company had recoveries, net of charge-offs, of $2,897,000 for the quarter ended June 30, 2016, compared with $313,000 of net charge-offs for the same quarter one year ago. For the nine months ended June 30, 2016, net recoveries totaled $7,488,000 versus net recoveries of $3,652,000 for the nine months ended June 30, 2015. Non-performing assets amounted to $79,031,000, or 0.53% of total assets, at June 30, 2016, as compared to $128,577,000, or 0.88% of total assets, at September 30, 2015. Non-accrual loans decreased from $67,810,000 at September 30, 2015, to $47,349,000 at June 30, 2016, a 30.2% decrease.
Unfunded commitments tend to vary depending on our loan mix and the proportion share of commercial loans. The reserve for unfunded commitments was $3,235,000 as of June 30, 2016, which is an increase from $3,085,000 at September 30, 2015. Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $114,251,000, or 1.08% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio. See Note E for further discussion and analysis of the allowance for loan losses as of and for the period ended June 30, 2016.

Other Income: The quarter ended June 30, 2016 results include total other income of $10,486,000 compared to $11,811,000 for the same quarter one year ago. The decrease is primarily because the quarter ended June 30, 2015 included a $9,639,000 gain on sales of investment securities and a $7,941,000 expense related to prepayment of a Federal Home Loan Bank advance while the current quarter had no such amounts. For the nine months ended June 30, 2016, total other income was $31,850,000 as compared to $28,031,000 for the nine months ended June 30, 2015. The increase for the nine months ended was primarily due to the nine months ended June 30, 2015 including a prepayment charge of $10,554,000 on early repayment of certain FHLB advances, a $2,000,000 FDIC indemnification asset write-down related to the commercial loans acquired from Horizon Bank in 2010 and a $9,639,000 gain on sales of investment securities. The nine months ended June 30, 2016 didn't include any such amounts. Deposit fee income was $5,297,000 for the three months ended June 30, 2016 compared to $5,156,000 for the three months ended June 30, 2015.

Other Expense: The quarter ended June 30, 2016 results include total other expense of $56,305,000 compared to $56,719,000 for the same quarter one year ago, a 0.7% increase. The decrease is primarily due to lower compensation and benefits expense as well as product delivery costs, which were mostly offset by higher information technology costs related to the Company's new systems implemented in November 2015. Information technology expense increased to $7,669,000 for the quarter ended June 30, 2016 compared to $3,783,000 for the same quarter a year ago. Management believes that the new technology and systems better position the Company to support future growth and expansion. Compensation and benefits expense decreased to $27,333,000 for

45

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

the quarter ended June 30, 2016 compared to $29,824,000 for the same quarter a year ago. The number of staff, including part-time employees on a full-time equivalent basis, was 1,817 and 1,839 at June 30, 2016 and 2015, respectively. Total other expense for the quarters ended June 30, 2016 and 2015 equaled 1.52% and 1.57%, respectively, of average assets.

For the nine months ended June 30, 2016, total other expense was $180,040,000 as compared to $167,642,000 for the nine months ended June 30, 2015. The increase year over year for the nine months ended was driven primarily by a $12,137,000 increase in information technology expenses which related mostly to the Company's conversion of its core system that occurred in November 2015. Additionally, the nine months ended June 30, 2015 benefited from an adjustment of $1,900,000 to FDIC insurance premiums.

Gain (Loss) on Real Estate Owned: Gains recognized on real estate owned was a net gain of $5,087,000 for the three months ended June 30, 2016, compared to $3,188,000 for the same period one year ago. For the nine months ended June 30, 2016, gains on real estate owned was $10,401,000 as compared to $4,976,000 for the nine months ended June 30, 2015.

Income Tax Expense: Income tax expense increased to $22,154,000 for the quarter ended June 30, 2016, as compared to $21,727,000 for the same period one year ago. The effective tax rate for three months ended June 30, 2016 was 34.00% while for the period ended June 30, 2015 it was 35.75%. The Company expects the lower effective tax rate to continue going forward due to the effects of the addition of bank owned life insurance and increased investment in low income housing tax credit partnerships as well as tax free loans.

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

Item 4.        Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.

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

46



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

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

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended June 30, 2016. 
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of  Publicly
Announced Plan (1)
 
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan at the
End of the Period
April 1, 2016 to April 30, 2016
209,409

 
$
21.94

 
209,409

 
1,929,297

May 1, 2016 to May 31, 2016
286,400

 
23.93

 
286,400

 
1,642,897

Jun 1, 2016 to June 30, 2016
601,588

 
23.53

 
601,588

 
1,041,309

Total
1,097,397

  
$
23.33

  
1,097,397

 
1,041,309

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

Item 3.        Defaults Upon Senior Securities
Not applicable

Item 4.        Mine Safety Disclosures
Not applicable

Item 5.        Other Information
Not applicable


47


Item 6.        Exhibits
(a)
 
Exhibits
 
 
 
3.1
 
Restated Articles of Incorporation of the Company, incorporated by reference from the Registrant's Form 10-Q filed on May 3, 2016
 
 
 
3.2
 
Amended and Restated Bylaws of the Company, incorporated by reference from the Registrant’s Form 8-K filed on January 22, 2016
 
 
 
31.1
 
Section 302 Certification by the Chief Executive Officer
 
 
 
31.2
 
Section 302 Certification by the Chief Financial Officer
 
 
 
32
 
Section 906 Certification by the Chief Executive Officer and Chief Financial Officer
 
 
 
101
 
Financial Statements from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 formatted in XBRL

48


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
July 28, 2016
/S/    ROY M. WHITEHEAD        
 
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer
 
 
July 28, 2016
/S/    VINCENT L. BEATTY       
 
VINCENT L. BEATTY
Senior Vice President and Chief Financial Officer
 
 
July 28, 2016
/S/    CORY D. STEWART      
 
CORY D. STEWART
Senior Vice President and Principal Accounting Officer

49