WASHINGTON FEDERAL INC - FORM 10-Q - July 27, 2017

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EX-32 - EXHIBIT 32 - WASHINGTON FEDERAL INCwafd10-qex3206302017.htm
EX-31.2 - EXHIBIT 31.2 - WASHINGTON FEDERAL INCwafd10-qex31206302017.htm
EX-31.1 - EXHIBIT 31.1 - WASHINGTON FEDERAL INCwafd10-qex31106302017.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, 2017
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,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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:
July 26, 2017
Common stock, $1.00 par value
88,425,970


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, 2017
 
September 30, 2016
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
359,252

 
$
450,368

Available-for-sale securities, at fair value
1,270,414

 
1,922,894

Held-to-maturity securities, at amortized cost
1,651,528

 
1,417,599

Loans receivable, net of allowance for loan losses of $122,229 and $113,494
10,654,425

 
9,910,920

Interest receivable
38,926

 
37,669

Premises and equipment, net
269,511

 
281,951

Real estate owned
19,112

 
29,027

FHLB and FRB stock
124,990

 
117,205

Bank owned life insurance
211,100

 
208,123

Intangible assets, including goodwill of $291,503
295,695

 
296,989

Federal and state income tax assets, net
—

 
16,047

Other assets
189,045

 
199,271

 
$
15,083,998

 
$
14,888,063

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
6,203,950

 
$
6,005,592

Time deposit accounts
4,430,328

 
4,595,260

 
10,634,278

 
10,600,852

FHLB advances
2,275,000

 
2,080,000

Advance payments by borrowers for taxes and insurance
33,701

 
42,898

Accrued expenses and other liabilities
119,833

 
188,582

 
13,062,812

 
12,912,332

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized; 134,946,383 and 134,307,818 shares issued; 88,750,133 and 89,680,847 shares outstanding
134,947

 
134,308

Additional paid-in capital
1,659,953

 
1,648,388

Accumulated other comprehensive income (loss), net of taxes
2,478

 
(11,156
)
Treasury stock, at cost; 46,196,250 and 44,626,971 shares
(786,156
)
 
(739,686
)
Retained earnings
1,009,964

 
943,877

 
2,021,186

 
1,975,731

 
$
15,083,998

 
$
14,888,063




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,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except share data)
 
(In thousands, except share data)
INTEREST INCOME
 
 
 
 
 
 
 
Loans receivable
$
117,457

 
$
113,728

 
$
348,326

 
$
339,802

Mortgage-backed securities
15,992

 
15,297

 
45,007

 
49,130

Investment securities and cash equivalents
4,267

 
4,710

 
13,345

 
14,990

 
137,716

 
133,735

 
406,678

 
403,922

INTEREST EXPENSE
 
 
 
 
 
 
 
Customer accounts
12,764

 
13,274

 
38,173

 
39,062

FHLB advances
16,337

 
16,221

 
49,011

 
47,426

 
29,101

 
29,495

 
87,184

 
86,488

Net interest income
108,615

 
104,240

 
319,494

 
317,434

Provision (release) for loan losses
—

 
(1,650
)
 
(1,600
)
 
(3,150
)
Net interest income after provision (release) for loan losses
108,615

 
105,890

 
321,094

 
320,584

 
 
 
 
 
 
 
 
OTHER INCOME
 
 
 
 
 
 
 
Gain on sale of investment securities
—

 
—

 
968

 
—

Loan fee income
889

 
1,101

 
3,310

 
3,784

Deposit fee income
5,714

 
5,297

 
15,803

 
16,564

Other income
7,319

 
4,088

 
15,873

 
11,502

 
13,922

 
10,486

 
35,954

 
31,850

 
 
 
 
 
 
 
 
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
28,947

 
27,333

 
84,774

 
86,217

Occupancy
8,829

 
8,515

 
26,370

 
26,075

FDIC insurance premiums
2,842

 
2,869

 
8,591

 
8,243

Product delivery
3,246

 
3,822

 
10,096

 
13,639

Information technology
6,617

 
7,669

 
19,754

 
23,832

Other expense
6,581

 
6,097

 
19,285

 
22,034

 
57,062

 
56,305

 
168,870

 
180,040

Gain (loss) on real estate owned, net
(124
)
 
5,087

 
1,069

 
10,401

Income before income taxes
65,351

 
65,158

 
189,247

 
182,795

Income tax expense
21,239

 
22,154

 
61,819

 
62,970

NET INCOME
$
44,112

 
$
43,004

 
$
127,428

 
$
119,825

 

 


 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share
$
0.49

 
$
0.47

 
$
1.43

 
$
1.30

Diluted earnings per share
0.49

 
0.47

 
1.42

 
1.30

Dividends paid on common stock per share
0.15

 
0.14

 
0.69

 
0.41

Basic weighted average number of shares outstanding
89,199,823

 
90,928,847

 
89,297,471

 
91,901,632

Diluted weighted average number of shares outstanding
89,497,264

 
91,468,662

 
89,653,955

 
92,393,644


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,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
(In thousands)
Net income
$
44,112

 
$
43,004

 
$
127,428

 
$
119,825

 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale investment securities
3,171

 
(965
)
 
(8,224
)
 
(4,409
)
Reclassification adjustment of net gain (loss) from sale
 
 
 
 
 
 
 
     of available-for-sale securities included in net income
—

 
—

 
968

 
—

Related tax benefit (expense)
(1,165
)
 
355

 
2,667

 
1,620

 
2,006

 
(610
)
 
(4,589
)
 
(2,789
)
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on long-term borrowing hedge
(2,856
)
 
(10,290
)
 
28,810

 
(20,978
)
Related tax benefit (expense)
1,049

 
3,782

 
(10,587
)
 
7,709

 
(1,807
)
 
(6,508
)
 
18,223

 
(13,269
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax
199

 
(7,118
)
 
13,634

 
(16,058
)
Comprehensive income
$
44,311

 
$
35,886

 
$
141,062

 
$
103,767





SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED) 
(in thousands)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Total
Balance at October 1, 2016
$
134,308

$
1,648,388

$
943,877

$
(11,156
)
$
(739,686
)
$
1,975,731

Net income




127,428





127,428

Other comprehensive income (loss)



13,634


13,634

Dividends on common stock




(61,341
)




(61,341
)
Proceeds from exercise of common stock options
309

6,769







7,078

Restricted stock expense
105

5,021







5,126

Exercise of stock warrants
225

(225
)
 
 
 
—

Treasury stock acquired








(46,470
)
(46,470
)
Balance at June 30, 2017
$
134,947

$
1,659,953

$
1,009,964

$
2,478

$
(786,156
)
$
2,021,186

 
 
 
 
 
 
 
(in thousands)
Common Stock
Additional 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




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Nine Months Ended June 30,
 
2017
 
2016
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
127,428

 
$
119,825

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion, net
29,602

 
22,595

Cash received from (paid to) FDIC under loss share
813

 
1,826

Stock based compensation
5,126

 
3,882

Provision (release) for loan losses
(1,600
)
 
(3,150
)
Loss (gain) on sale of investment securities
(968
)
 
—

Decrease (increase) in accrued interest receivable
(1,257
)
 
3,541

Decrease (increase) in federal and state income tax receivable
16,047

 
7,654

Decrease (increase) in cash surrender value of bank owned life insurance
(4,907
)
 
(3,881
)
Gain on bank owned life insurance
(4,983
)
 
—

Net realized (gain) loss on sales of premises, equipment, and real estate owned
(1,691
)
 
(14,536
)
Decrease (increase) in other assets
6,618

 
(13,895
)
Increase (decrease) in accrued expenses and other liabilities
(47,859
)
 
45,594

Net cash provided by (used in) operating activities
122,369

 
169,455

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Origination of loans and principal repayments, net
(668,413
)
 
(407,641
)
Loans purchased
(72,856
)
 
(51,646
)
FHLB & FRB stock purchased
(93,009
)
 
(36,347
)
FHLB & FRB stock redemption
85,224

 
26,340

Available-for-sale securities purchased
—

 
(50,742
)
Principal payments and maturities of available-for-sale securities
290,243

 
452,948

Proceeds on available-for-sale securities sold
350,890

 
—

Held-to-maturity securities purchased
(415,729
)
 
—

Principal payments and maturities of held-to-maturity securities
176,333

 
146,211

Proceeds from sales of real estate owned
13,780

 
53,573

Proceeds from settlement of bank owned life insurance
6,913

 
—

Purchase of bank owned life insurance
—

 
(100,000
)
Proceeds from sales of premises and equipment
3,956

 
—

Premises and equipment purchased and REO improvements
(9,541
)
 
(35,276
)
Net cash provided by (used in) investing activities
(332,209
)
 
(2,580
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in customer accounts
33,654

 
(52,711
)
Proceeds from borrowings
2,325,000

 
918,000

Repayments of borrowings
(2,130,000
)
 
(668,000
)
Proceeds from exercise of common stock options
7,078

 
6,320

Dividends paid on common stock
(61,341
)
 
(37,415
)
Treasury stock purchased
(46,470
)
 
(70,048
)
Increase (decrease) in advance payments by borrowers for taxes and insurance
(9,197
)
 
(17,015
)
Net cash provided by (used in) financing activities
118,724

 
79,131

Increase (decrease) in cash and cash equivalents
(91,116
)
 
246,006

Cash and cash equivalents at beginning of period
450,368

 
284,049

Cash and cash equivalents at end of period
$
359,252

 
$
530,055

(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,
 
2017
 
2016
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Real estate acquired through foreclosure
$
2,323

 
$
13,147

Non-cash financing activities
 
 
 
Stock issued upon exercise of warrants
7,546

 
—

Cash paid during the period for
 
 
 
Interest
82,919

 
86,007

Income taxes
33,228

 
47,289




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 holding 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 real estate loans, 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 information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2016 Annual Report on Form 10-K (“2016 Annual Financial Statements”). 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 2016 Annual Financial Statements. There have not been any material changes in our significant accounting policies compared to those contained in our 2016 Annual Financial Statements for the year ended September 30, 2016.
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 $1,752,652,000 and $1,278,829,000 at June 30, 2017 and September 30, 2016, respectively. The Company estimates losses on off-balance-sheet credit exposures by allocating a loss percentage derived from historical loss factors for each asset class.

NOTE B – New Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The ASU clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The ASU is effective for public business entities for annual periods beginning after December 15, 2017 and

9
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


interim periods therein. Entities may use either a full or modified approach to adopt the ASU. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations Clarifying the Definition of a Business (Topic 805), for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The ASU must be applied prospectively and upon adoption the standard will impact how we assess acquisitions (or disposals) of assets or businesses. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash: a Consensus of the FASB Emerging Issues Task Force. This ASU requires a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period. This ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU address eight specific cash flow issues with the objective of reducing diversity in practice. The specific issues identified include: debt prepayments or extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This ASU is effective for fiscal years beginning after December 15, 2017 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 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.

10
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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 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 February 2016, the FASB issued ASU 2016-02, Leases. 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 this guidance 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 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 19, 2017, the Company paid a regular dividend on common stock of $0.15 per share, which represented the 137th consecutive quarterly cash dividend. Dividends per share were $0.15 and $0.14 for the quarters ended June 30, 2017 and 2016, respectively. On July 24, 2017, the Company declared a regular dividend on common stock of $0.15 per share, which represents its 138th consecutive quarterly cash dividend. This dividend will be paid on August 18, 2017 to common shareholders of record on August 4, 2017.

For the three months ended June 30, 2017, the Company repurchased 811,034 shares at an average price of $32.14. Additionally, 100,860 shares of common stock were issued during the three months ended June 30, 2017 to investors that exercised warrants previously issued as part of the 2008 Troubled Asset Relief Program ("TARP"). As of June 30, 2017, 335,496 such warrants remain outstanding. Net of warrant repurchase and exercise activity, there are 3,245,187 remaining shares authorized to be repurchased under the current Board approved share repurchase program.

NOTE D – Loans Receivable

The following table is a summary of loans receivable.

11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
June 30, 2017
 
September 30, 2016
 
(In thousands)
 
(In thousands)
Gross loans by category
 
 
 
 
 
   Single-family residential
$
5,687,850

47.9
%
 
$
5,658,830

51.7
%
   Construction
1,436,874

12.1

 
1,110,411

10.1

   Construction - custom
561,260

4.7

 
473,069

4.3

   Land - acquisition & development
119,524

1.0

 
118,497

1.1

   Land - consumer lot loans
101,626

0.9

 
104,567

1.0

   Multi-family
1,263,187

10.6

 
1,124,290

10.3

   Commercial real estate
1,346,006

11.3

 
1,093,639

10.0

   Commercial & industrial
1,116,860

9.4

 
978,589

8.9

   HELOC
148,584

1.3

 
149,716

1.4

   Consumer
95,775

0.8

 
139,000

1.3

Total gross loans
11,877,546

100
%
 
10,950,608

100
%
   Less:
 
 
 
 
 
      Allowance for loan losses
122,229

 
 
113,494

 
      Loans in process
1,054,513

 
 
879,484

 
      Net deferred fees, costs and discounts
46,379

 
 
46,710

 
Total loan contra accounts
1,223,121

 
 
1,039,688

 
Net loans
$
10,654,425

 
 
$
9,910,920

 

The following table sets forth information regarding non-accrual loans.
 
 
June 30, 2017
 
September 30, 2016
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
32,613

 
57.9
%
 
$
33,148

 
78.2
%
Construction - custom
536

 
1.0

 
—

 
—

Land - acquisition & development
71

 
0.1

 
58

 
0.1

Land - consumer lot loans
1,066

 
1.9

 
510

 
1.2

Multi-family
682

 
1.2

 
776

 
1.8

Commercial real estate
12,983

 
23.0

 
7,100

 
16.7

Commercial & industrial
8,254

 
14.6

 
583

 
1.4

HELOC
181

 
0.3

 
239

 
0.6

Consumer
22

 
—

 
—

 
—

Total non-accrual loans
$
56,408

 
100
%
 
$
42,414

 
100
%

The Company recognized interest income on non-accrual loans of approximately $4,721,000 in the nine months ended June 30, 2017. Had these loans been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $1,727,000 for the nine months ended June 30, 2017. Interest cash flows collected on non-accrual loans varies from period to period as those loans are brought current or are paid off.

For acquired loans included in the non-accrual loan table above, interest income is still recognized on such loans through accretion of the difference between the carrying amount of the loans and the expected cash flows.

12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide details regarding delinquent loans.
 
June 30, 2017
Loans Receivable
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of Loans In Process
 
Current
 
30
 
60
 
90
 
Total Delinquent
 
 
(In thousands)
 
 
Single-family residential
$
5,687,169

 
$
5,642,516

 
$
9,307

 
$
7,004

 
$
28,342

 
$
44,653

 
0.79
%
Construction
683,273

 
682,587

 
—

 
686

 
—

 
686

 
0.10

Construction - custom
269,612

 
269,076

 
—

 
—

 
536

 
536

 
0.20

Land - acquisition & development
111,057

 
110,934

 
—

 
—

 
123

 
123

 
0.11

Land - consumer lot loans
101,584

 
100,969

 
36

 
300

 
279

 
615

 
0.61

Multi-family
1,263,143

 
1,262,814

 
139

 
190

 
—

 
329

 
0.03

Commercial real estate
1,345,986

 
1,343,075

 
325

 
1,728

 
858

 
2,911

 
0.22

Commercial & industrial
1,116,854

 
1,114,182

 
1,599

 
500

 
574

 
2,673

 
0.24

HELOC
148,581

 
147,090

 
808

 
647

 
36

 
1,491

 
1.00

Consumer
95,774

 
95,390

 
267

 
95

 
22

 
384

 
0.40

Total Loans
$
10,823,033

 
$
10,768,633

 
$
12,481

 
$
11,150

 
$
30,770

 
$
54,401

 
0.50
%
Delinquency %
 
 
99.50%
 
0.12%
 
0.10%
 
0.28%
 
0.50%
 
 


September 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 Delinquent
 
 
(In thousands)
 
 
Single-family residential
$
5,658,122

 
$
5,601,457

 
$
20,916

 
$
5,271

 
$
30,478

 
$
56,665

 
1.00
%
Construction
498,450

 
498,450

 
—

 
—

 
—

 
—

 
—

Construction - custom
229,957

 
229,419

 
538

 
—

 
—

 
538

 
0.23

Land - acquisition & development
94,928

 
94,928

 
—

 
—

 
—

 
—

 
—

Land - consumer lot loans
104,534

 
102,472

 
816

 
687

 
559

 
2,062

 
1.97

Multi-family
1,124,290

 
1,122,307

 
1,190

 
399

 
394

 
1,983

 
0.18

Commercial real estate
1,093,549

 
1,088,680

 
69

 
325

 
4,475

 
4,869

 
0.45

Commercial & industrial
978,582

 
978,540

 
—

 
42

 
—

 
42

 
—

HELOC
149,713

 
148,513

 
763

 
164

 
273

 
1,200

 
0.80

Consumer
138,999

 
138,078

 
715

 
126

 
80

 
921

 
0.66

Total Loans
$
10,071,124

 
$
10,002,844

 
$
25,007

 
$
7,014

 
$
36,259

 
$
68,280

 
0.68
%
Delinquency %
 
 
99.32%
 
0.25%
 
0.07%
 
0.36%
 
0.68%
 
 

The percentage of total delinquent loans decreased from 0.68% as of September 30, 2016 to 0.50% as of June 30, 2017 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,
 
2017
 
2016
 
 
 
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
11

 
$
1,836

 
$
1,836

 
7

 
$
1,492

 
$
1,492

   Commercial real estate
—

 
—

 
—

 
2

 
1,558

 
1,558

 
11

 
$
1,836

 
$
1,836

 
9

 
$
3,050

 
$
3,050


 
Nine Months Ended June 30,
 
2017
 
2016
 
 
 
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
31

 
$
5,682

 
$
5,682

 
17

 
$
3,322

 
$
3,322

   Land - consumer lot loans
1

 
204

 
204

 
—

 
—

 
—

   Commercial real estate
—

 
—

 
—

 
7

 
2,523

 
2,523

   HELOC
1

 
228

 
228

 
—

 
—

 
—

 
33

 
$
6,114

 
$
6,114

 
24

 
$
5,845

 
$
5,845


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.
 
Three Months Ended June 30,
 
2017
 
2016
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
3

 
$
401

 
3

 
$
1,570

   Construction
—

 
—

 
1

 
279

   Land - consumer lot loans
—

 
—

 
2

 
204

   Commercial real estate
—

 
—

 
1

 
174

 
3

 
$
401

 
7

 
$
2,227



14
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
Nine Months Ended June 30,
 
2017
 
2016
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
16

 
$
3,586

 
14

 
$
3,108

   Construction
—

 
—

 
1

 
279

   Land - consumer lot loans
—

 
—

 
4

 
498

   Commercial real estate
2

 
267

 
2

 
326

 
18

 
$
3,853

 
21

 
$
4,211


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, 2017, 96.3% of the Company's $223,558,000 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, 2017, single-family residential loans comprised 88.0% 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 remaining outstanding balance of covered loans was $23,094,000 at June 30, 2017 compared to $28,974,000 as of September 30, 2016. The FDIC loss share coverage for single family residential loans related to the Horizon Bank and Home Valley Bank acquisitions will continue for another three years.

The following table shows activity for the FDIC indemnification asset:
 
 
Nine Months Ended June 30, 2017
 
Twelve Months Ended September 30, 2016
 
(In thousands)
Balance at beginning of period
$
12,769

 
$
16,275

Payments made (received)
(813
)
 
(1,730
)
Amortization
(2,979
)
 
(2,012
)
Accretion
183

 
236

Balance at end of period
$
9,160

 
$
12,769



15
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE E – Allowance for Losses on Loans
The following tables summarize the activity in the allowance for loan losses. 

Three Months Ended June 30, 2017
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
37,164

 
$
(267
)
 
$
81

 
$
1,133

 
$
38,111

Construction
25,061

 
—

 
—

 
(3,195
)
 
21,866

Construction - custom
1,176

 
—

 
—

 
714

 
1,890

Land - acquisition & development
6,669

 
—

 
863

 
(315
)
 
7,217

Land - consumer lot loans
2,513

 
—

 
118

 
(83
)
 
2,548

Multi-family
7,929

 
—

 
—

 
(17
)
 
7,912

Commercial real estate
10,772

 
—

 
164

 
411

 
11,347

Commercial & industrial
28,365

 
—

 
154

 
653

 
29,172

HELOC
826

 
—

 
1

 
50

 
877

Consumer
1,447

 
(144
)
 
282

 
(296
)
 
1,289

 
$
121,922

 
$
(411
)
 
$
1,663

 
$
(945
)
 
$
122,229

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



16
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Nine Months Ended June 30, 2017
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
37,796

 
$
(763
)
 
$
455

 
$
623

 
$
38,111

Construction
19,838

 
—

 
—

 
2,028

 
21,866

Construction - custom
1,080

 
(3
)
 
—

 
813

 
1,890

Land - acquisition & development
6,023

 
(63
)
 
9,092

 
(7,835
)
 
7,217

Land - consumer lot loans
2,535

 
(17
)
 
368

 
(338
)
 
2,548

Multi-family
6,925

 
—

 
—

 
987

 
7,912

Commercial real estate
8,588

 
(11
)
 
1,684

 
1,086

 
11,347

Commercial & industrial
28,008

 
(163
)
 
1,096

 
231

 
29,172

HELOC
813

 
(90
)
 
2

 
152

 
877

Consumer
1,888

 
(798
)
 
975

 
(776
)
 
1,289

 
$
113,494

 
$
(1,908
)
 
$
13,672

 
$
(3,029
)
 
$
122,229

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


The Company recorded no provision for loan losses during the three months ended June 30, 2017, compared to a $1,650,000 release of allowance for loan losses recorded during the three months ended June 30, 2016. A release of allowance for loan losses of $1,600,000 and $3,150,000 was recorded during the nine months ended June 30, 2017 and June 30, 2016, respectively. Recoveries, net of charge-offs, totaled $1,252,000 for the three months ended June 30, 2017, compared with $2,897,000 of net recoveries for the same period one year ago. Recoveries, net of charge-offs, totaled $11,764,000 for the nine months ended June 30, 2017, compared with $7,488,000 of net recoveries for the same period one year ago. Reserving for new loan originations as the loan portfolio grows has been largely offset by recoveries of previously charged-off loans.
Non-performing assets were $75,520,000, or 0.50%, of total assets at June 30, 2017, compared to $71,441,000, or 0.48%, of total assets at September 30, 2016. Non-accrual loans were $56,408,000 at June 30, 2017, compared to $42,414,000 at September 30, 2016. Delinquencies, as a percent of total loans, were 0.50% at June 30, 2017, compared to 0.68% at September 30, 2016.

The reserve for unfunded commitments was $6,550,000 as of June 30, 2017, which is an increase from $3,235,000 at September 30, 2016.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $128,779,000, or 1.08% of gross loans as of June 30, 2017, is sufficient to absorb estimated inherent losses.

17
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables show loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves.
 
June 30, 2017
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
$
38,111

 
$
5,691,480

 
0.7
%
 
$
—

 
$
5,728

 
—
%
Construction
21,866

 
683,273

 
3.2

 
—

 
—

 
—

Construction - custom
1,890

 
269,508

 
0.7

 
—

 
105

 
—

Land - acquisition & development
7,215

 
110,709

 
6.5

 
2

 
189

 
1.1

Land - consumer lot loans
2,548

 
92,657

 
2.7

 
—

 
177

 
—

Multi-family
7,908

 
1,262,646

 
0.6

 
4

 
497

 
0.8

Commercial real estate
11,214

 
1,302,211

 
0.9

 
133

 
17,162

 
0.8

Commercial & industrial
29,172

 
1,116,745

 
2.6

 
—

 
34

 
—

HELOC
877

 
145,675

 
0.6

 
—

 
215

 
—

Consumer
1,289

 
95,666

 
1.3

 
—

 
—

 
—

 
$
122,090

 
$
10,770,570

 
1.1
%
 
$
139

 
$
24,107

 
0.6
%
(1)
Excludes $28 million in acquired loans with discounts sufficient to cover incurred losses.
September 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 thousa