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

Attached files

file filename
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 thousands)
 
 
 
(In thousands)
Single-family residential
$
37,536

 
$
5,585,912

 
0.7
%
 
$
260

 
$
19,629

 
1.3
%
Construction
19,838

 
498,450

 
4.0

 
—

 
—

 
—

Construction - custom
1,080

 
229,298

 
0.5

 
—

 
330

 
—

Land - acquisition & development
6,022

 
90,850

 
6.6

 
2

 
850

 
0.2

Land - consumer lot loans
2,535

 
92,828

 
2.7

 
—

 
558

 
—

Multi-family
6,911

 
1,091,974

 
0.6

 
13

 
1,505

 
0.9

Commercial real estate
8,497

 
957,380

 
0.9

 
91

 
11,157

 
0.8

Commercial & industrial
28,008

 
966,930

 
2.9

 
—

 
—

 
—

HELOC
813

 
133,203

 
0.6

 
—

 
239

 
—

Consumer
1,888

 
137,315

 
1.4

 
—

 
3

 
—

 
$
113,128

 
$
9,784,140

 
1.2
%
 
$
366

 
$
34,271

 
1.1
%
(1) Excludes $214 million in acquired impaired loans and covered loans with discounts sufficient to cover incurred losses.
As of June 30, 2017, $122,090,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $139,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2016, $113,128,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $366,000 was specific reserves on loans deemed to be individually impaired.

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

18
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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.


19
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, 2017
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Loan type
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,642,507

 
$
—

 
$
45,343

 
$
—

 
$
—

 
$
5,687,850

  Construction
1,427,443

 
5,876

 
3,555

 
—

 
—

 
1,436,874

  Construction - custom
560,724

 
—

 
536

 
—

 
—

 
561,260

  Land - acquisition & development
117,004

 
207

 
2,313

 
—

 
—

 
119,524

  Land - consumer lot loans
100,436

 
—

 
1,190

 
—

 
—

 
101,626

  Multi-family
1,248,315

 
3,191

 
11,681

 
—

 
—

 
1,263,187

  Commercial real estate
1,305,769

 
4,303

 
35,934

 
—

 
—

 
1,346,006

  Commercial & industrial
1,083,039

 
20,450

 
13,371

 
—

 
—

 
1,116,860

  HELOC
148,063

 
—

 
521

 
—

 
—

 
148,584

  Consumer
95,748

 
—

 
27

 
—

 
—

 
95,775

Total gross loans
$
11,729,048

 
$
34,027

 
$
114,471

 
$
—

 
$
—

 
$
11,877,546

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
98.7
%
 
0.3
%
 
1.0
%
 
—
%
 
—
%
 
 

September 30, 2016
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Loan type
 
 
 
 
 
 
 
 
 
 
 
 Single-family residential
$
5,607,521

 
$
—

 
$
51,309

 
$
—

 
$
—

 
$
5,658,830

 Construction
1,098,549

 
8,595

 
3,267

 
—

 
—

 
1,110,411

 Construction - custom
473,069

 
—

 
—

 
—

 
—

 
473,069

 Land - acquisition & development
111,225

 
—

 
7,272

 
—

 
—

 
118,497

 Land - consumer lot loans
103,528

 
—

 
1,039

 
—

 
—

 
104,567

 Multi-family
1,117,437

 
3,237

 
3,616

 
—

 
—

 
1,124,290

 Commercial real estate
1,033,880

 
13,446

 
46,313

 
—

 
—

 
1,093,639

 Commercial & industrial
930,776

 
7,207

 
40,606

 
—

 
—

 
978,589

 HELOC
149,195

 
—

 
521

 
—

 
—

 
149,716

 Consumer
138,917

 
—

 
83

 
—

 
—

 
139,000

Total gross loans
$
10,764,097

 
$
32,485

 
$
154,026

 
$
—

 
$
—

 
$
10,950,608

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
98.3
%
 
0.3
%
 
1.4
%
 
—
%
 
—
%
 
 

The balance of loans internally graded as 'substandard' above includes $23,299,000 as of June 30, 2017 and $35,910,000 as of September 30, 2016 of acquired loans and covered loans.

The following tables provide information on gross loans based on borrower payment activity.

20
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


June 30, 2017
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,655,238

 
99.4
%
 
$
32,613

 
0.6
%
Construction
1,436,873

 
100.0

 
—

 
—

Construction - custom
560,724

 
99.9

 
536

 
0.1

Land - acquisition & development
119,453

 
99.9

 
71

 
0.1

Land - consumer lot loans
100,560

 
99.0

 
1,066

 
1.0

Multi-family
1,262,505

 
99.9

 
682

 
0.1

Commercial real estate
1,333,023

 
99.0

 
12,983

 
1.0

Commercial & industrial
1,108,606

 
99.3

 
8,254

 
0.7

HELOC
148,403

 
99.9

 
181

 
0.1

Consumer
95,753

 
99.9

 
22

 
0.1

 
$
11,821,138

 
99.5
%
 
$
56,408

 
0.5
%

September 30, 2016
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,625,682

 
99.4
%
 
$
33,148

 
0.6
%
Construction
1,110,411

 
100.0

 
—

 
—

Construction - custom
473,069

 
100.0

 
—

 
—

Land - acquisition & development
118,439

 
99.9

 
58

 
0.1

Land - consumer lot loans
104,057

 
99.5

 
510

 
0.5

Multi-family
1,123,583

 
99.9

 
776

 
0.1

Commercial real estate
1,086,470

 
99.3

 
7,100

 
0.7

Commercial & industrial
978,006

 
99.9

 
583

 
0.1

HELOC
149,477

 
99.8

 
239

 
0.2

Consumer
139,000

 
100.0

 
—

 
—

 
$
10,908,194

 
99.6
%
 
$
42,414

 
0.4
%

21
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, 2017
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average Recorded Investment
 
(In thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
24,487

 
$
26,942

 
$
—

 
$
17,683

Construction - custom
711

 
715

 
—

 
436

Land - acquisition & development
123

 
8,234

 
—

 
123

Land - consumer lot loans
212

 
332

 
—

 
214

Multi-family
682

 
3,954

 
—

 
915

Commercial real estate
11,371

 
19,725

 
—

 
10,417

Commercial & industrial
8,529

 
14,659

 
—

 
8,440

HELOC
251

 
1,363

 
—

 
277

Consumer
19

 
1,499

 
—

 
34

 
46,385

 
77,423

 
—

 
38,539

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
196,489

 
200,820

 
4,761

 
196,739

Land - acquisition & development
190

 
190

 
2

 
237

Land - consumer lot loans
8,837

 
9,542

 
—

 
9,061

Multi-family
497

 
497

 
4

 
505

Commercial real estate
15,907

 
17,505

 
133

 
16,002

Commercial & industrial
127

 
127

 
—

 
127

HELOC
1,409

 
1,484

 
—

 
1,411

Consumer
102

 
289

 
—

 
105

 
223,558

 
230,454

 
4,900

(1)
224,187

Total impaired loans:
 
 
 
 
 
 
 
Single-family residential
220,976

 
227,762

 
4,761

 
214,422

Construction - custom
711

 
715

 
—

 
436

Land - acquisition & development
313

 
8,424

 
2

 
360

Land - consumer lot loans
9,049

 
9,874

 
—

 
9,275

Multi-family
1,179

 
4,451

 
4

 
1,420

Commercial real estate
27,278

 
37,230

 
133

 
26,419

Commercial & industrial
8,656

 
14,786

 
—

 
8,567

HELOC
1,660

 
2,847

 
—

 
1,688

Consumer
121

 
1,788

 
—

 
139

 
$
269,943

 
$
307,877

 
$
4,900

(1)
$
262,726


(1)
Includes $139,000 of specific reserves and $4,761,000 included in the general reserves.



22
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


September 30, 2016
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
9,627

 
$
11,366

 
$
—

 
$
6,511

Land - acquisition & development
138

 
9,001

 
—

 
614

Land - consumer lot loans
499

 
609

 
—

 
317

Multi-family
394

 
3,972

 
—

 
638

Commercial real estate
11,741

 
21,301

 
—

 
6,260

Commercial & industrial
1,030

 
3,082

 
—

 
863

HELOC
209

 
315

 
—

 
165

Consumer
74

 
550

 
—

 
111

 
23,712

 
50,196

 
—

 
15,479

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
228,186

 
232,595

 
3,809

 
216,632

Land - acquisition & development
1,154

 
2,094

 
1

 
1,766

Land - consumer lot loans
9,630

 
10,678

 
1

 
9,548

Multi-family
1,505

 
1,505

 
13

 
1,522

Commercial real estate
19,434

 
22,848

 
91

 
19,311

HELOC
1,506

 
1,521

 
—

 
1,413

Consumer
116

 
306

 
—

 
100

 
261,531

 
271,547

 
3,915

(1)
250,292

Total impaired loans:
 
 
 
 
 
 
 
Single-family residential
237,813

 
243,961

 
3,809

 
223,143

Land - acquisition & development
1,292

 
11,095

 
1

 
2,380

Land - consumer lot loans
10,129

 
11,287

 
1

 
9,865

Multi-family
1,899

 
5,477

 
13

 
2,160

Commercial real estate
31,175

 
44,149

 
91

 
25,571

Commercial & industrial
1,030

 
3,082

 
—

 
863

HELOC
1,715

 
1,836

 
—

 
1,578

Consumer
190

 
856

 
—

 
211

 
$
285,243

 
$
321,743

 
$
3,915

(1)
$
265,771


(1)
Includes $366,000 of specific reserves and $3,549,000 included in the general reserves.


23
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE F – Fair Value Measurements
ASC 820 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 820 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.
 

24
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, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
$
522

 
$
—

 
$
—

 
$
522

U.S. government and agency securities
—

 
222,245

 
—

 
222,245

Municipal bonds
—

 
26,736

 
—

 
26,736

Corporate debt securities
—

 
211,209

 
—

 
211,209

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates
—

 
801,393

 
—

 
801,393

Commercial MBS
—

 
8,309

 
—

 
8,309

Total available-for-sale securities
522

 
1,269,892

 
—

 
1,270,414

Interest rate contracts
—

 
1,342

 
—

 
1,342

Total financial assets
$
522

 
$
1,271,234

 
$
—

 
$
1,271,756

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
1,342

 
$
—

 
$
1,342

Commercial loan hedges
—

 
154

 
—

 
154

Borrowings hedges
—

 
2,536

 
—

 
2,536

Total financial liabilities
$
—

 
$
4,032

 
$
—

 
$
4,032

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the nine months ended June 30, 2017.

25
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
$
101,824

 
$
—

 
$
—

 
$
101,824

U.S. government and agency securities
—

 
259,351

 
—

 
259,351

Municipal bonds
—

 
27,670

 
—

 
27,670

Corporate debt securities
—

 
461,138

 
—

 
461,138

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates
—

 
993,041

 
—

 
993,041

Commercial MBS
—

 
79,870

 
—

 
79,870

Total available-for-sale securities
101,824

 
1,821,070

 
—

 
1,922,894

Interest rate contracts
—

 
20,895

 
—

 
20,895

Total financial assets
$
101,824

 
$
1,841,965

 
$
—

 
$
1,943,789

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
20,895

 
$
—

 
$
20,895

Commercial loan hedges
—

 
3,312

 
—

 
3,312

Borrowings hedges
—

 
31,347

 
—

 
31,347

Total financial liabilities
$
—

 
$
55,554

 
$
—

 
$
55,554

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the fiscal year ended September 30, 2016.


26
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 discounted cash flows, 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, 2017 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, 2017 and June 30, 2016, and the total gains (losses) resulting from those fair value adjustments for the three and nine months ended June 30, 2017 and June 30, 2016. The estimated fair value measurements are shown gross of estimated selling costs.
 
 
June 30, 2017
 
Three Months Ended June 30, 2017
 
Nine Months Ended June 30, 2017
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
 
 
Impaired loans (1)
$
—

 
$
—

 
$
7,807

 
$
7,807

 
$
(305
)
 
$
(1,666
)
Real estate owned (2)
—

 
—

 
9,777

 
9,777

 
(467
)
 
(1,087
)
Balance at end of period
$
—

 
$
—

 
$
17,584

 
$
17,584

 
$
(772
)
 
$
(2,753
)

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

 
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.
Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.
The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for loan loss process.
Applicable loans 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

27
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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.
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 opinions, 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
ASC 825 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. 

28
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
 
 
 
June 30, 2017
 
September 30, 2016
 
 
Level in Fair Value Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
359,252

 
$
359,252

 
$
450,368

 
$
450,368

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Equity securities
 
1
 
522

 
522

 
101,824

 
101,824

U.S. government and agency securities
 
2
 
222,245

 
222,245

 
259,351

 
259,351

Municipal bonds
 
2
 
26,736

 
26,736

 
27,670

 
27,670

Corporate debt securities
 
2
 
211,209

 
211,209

 
461,138

 
461,138

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
801,393

 
801,393

 
993,041

 
993,041

Commercial MBS
 
2
 
8,309

 
8,309

 
79,870

 
79,870

Total available-for-sale securities
 
 
 
1,270,414

 
1,270,414

 
1,922,894

 
1,922,894

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,651,528

 
1,630,745

 
1,417,599

 
1,441,556

Total held-to-maturity securities
 
 
 
1,651,528

 
1,630,745

 
1,417,599

 
1,441,556

 
 
 
 
 
 
 
 
 
 
 
Loans receivable
 
3
 
10,654,425

 
11,046,152

 
9,910,920

 
10,414,794

FDIC indemnification asset
 
3
 
8,745

 
9,160

 
12,769

 
12,095

FHLB and FRB stock
 
2
 
124,990

 
124,990

 
117,205

 
117,205

        Other assets - interest rate contracts
 
2
 
1,342

 
1,342

 
20,895

 
20,895

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Customer accounts
 
2
 
10,634,278

 
10,208,813

 
10,600,852

 
10,184,321

FHLB advances
 
2
 
2,275,000

 
2,319,974

 
2,080,000

 
2,184,671

        Other liabilities - interest rate contracts
 
2
 
1,342

 
1,342

 
20,895

 
20,895

Other liabilities - commercial loan hedges
 
2
 
154

 
154

 
3,312

 
3,312

        Other liabilities - borrowings hedges
 
2
 
2,536

 
2,536

 
31,347

 
31,347

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 – 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.

29
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 hedges – The fair value of the interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.
Borrowings 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, 2017
 
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
$
9,300

 
$
352

 
$
—

 
$
9,652

 
10.38
%
1 to 5 years
9,933

 
3

 
—

 
9,936

 
1.46

5 to 10 years
55,202

 
—

 
(944
)
 
54,258

 
1.95

Over 10 years
149,205

 
107

 
(913
)
 
148,399

 
1.89

Equity securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
500

 
22

 
—

 
522

 
1.80

Corporate debt securities due
 
 
 
 
 
 
 
 
 
Within 1 year
28,094

 
18

 
(1
)
 
28,111

 
2.07

1 to 5 years
63,587

 
1,621

 
—

 
65,208

 
2.85

5 to 10 years
119,959

 
—

 
(2,069
)
 
117,890

 
2.56

Municipal bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
2,337

 
14

 
—

 
2,351

 
1.23

5 to 10 years
1,359

 
60

 
—

 
1,419

 
2.05

Over 10 years
20,348

 
2,618

 
—

 
22,966

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
795,786

 
8,553

 
(2,946
)
 
801,393

 
2.87

Commercial MBS
8,350

 
—

 
(41
)
 
8,309

 
3.23

 
1,263,960

 
13,368

 
(6,914
)
 
1,270,414

 
2.77

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,651,528

 
5,088

 
(25,871
)
 
1,630,745

 
3.17

 
$
2,915,488

 
$
18,456

 
$
(32,785
)
 
$
2,901,159

 
2.97
%
 

30
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
September 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
$
21,284

 
$
—

 
$
(59
)
 
$
21,225

 
0.81
%
1 to 5 years
12,477

 
1,027

 
(11
)
 
13,493

 
7.94

5 to 10 years
48,134

 
—

 
(1,589
)
 
46,545

 
1.14

Over 10 years
182,051

 
27

 
(3,990
)
 
178,088

 
1.33

Equity Securities
 
 
 
 
 
 
 
 
 
1 to 5 years
100,422

 
1,402

 
—

 
101,824

 
1.90

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
278,094

 
325

 
(53
)
 
278,366

 
1.33

1 to 5 years
63,481

 
928

 
(113
)
 
64,296

 
2.47

5 to 10 years
69,955

 
—

 
(2,417
)
 
67,538

 
1.96

Over 10 years
50,000

 
938

 
—

 
50,938

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
2,315

 
2

 
—

 
2,317

 
1.23

5 to 10 years
1,335

 
38

 
—

 
1,373

 
2.05

Over 10 years
20,363

 
3,617

 
—

 
23,980

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
978,955

 
17,118

 
(3,032
)
 
993,041

 
2.58

Commercial MBS
80,318

 
—

 
(448
)
 
79,870

 
1.91

 
1,909,184

 
25,422

 
(11,712
)
 
1,922,894

 
2.22

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,417,599

 
24,171

 
(214
)
 
1,441,556

 
3.18

 
$
3,326,783

 
$
49,593

 
$
(11,926
)
 
$
3,364,450

 
2.62
%

For available-for-sale investment securities, there were sales totaling $350,890,000 during the nine months ended June 30, 2017 and no sales during the nine months ended June 30, 2016. There were no purchases of available-for-sale investment securities during the nine months ended June 30, 2017 and purchases of $50,742,000 during the nine months ended June 30, 2016. For held-to-maturity investment securities, there were purchases totaling $415,729,000 during the nine months ended June 30, 2017 and no purchases during the nine months ended June 30, 2016. There were no sales of held-to-maturity investment securities during either period. 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, 2017 and September 30, 2016, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value since purchase 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.

31
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
June 30, 2017
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 debt securities
$
(257
)
 
$
54,743

 
$
(1,812
)
 
$
68,147

 
$
(2,069
)
 
122,890

U.S. government and agency securities
(452
)
 
24,750

 
(1,406
)
 
147,589

 
(1,858
)
 
172,339

Agency pass-through certificates
(22,365
)
 
1,314,631

 
(6,493
)
 
337,469

 
(28,858
)
 
1,652,100

 
$
(23,074
)
 
$
1,394,124

 
$
(9,711
)
 
$
553,205

 
$
(32,785
)
 
$
1,947,329


September 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 debt securities
$
—

 
$
—

 
$
(2,582
)
 
$
100,467

 
$
(2,582
)
 
$
100,467

U.S. government and agency securities
(11
)
 
3,167

 
(5,638
)
 
220,613

 
(5,649
)
 
223,780

Agency pass-through certificates
(1,278
)
 
301,030

 
(2,417
)
 
232,407

 
(3,695
)
 
533,437

 
$
(1,289
)
 
$
304,197

 
$
(10,637
)
 
$
553,487

 
$
(11,926
)
 
$
857,684



32
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 $984,549,000 and $840,935,000 notional in interest rate swaps to hedge this exposure as of June 30, 2017 and September 30, 2016, 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, 2017 and 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 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 notional in interest rate swaps to hedge existing and anticipated future borrowings as of June 30, 2017 and September 30, 2016.

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 $52,936,000 and $54,155,000 as of June 30, 2017 and September 30, 2016, respectively.

The following table presents the fair value and balance sheet classification of derivatives at June 30, 2017 and September 30, 2016:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
June 30, 2017
 
September 30, 2016
 
June 30, 2017
 
September 30, 2016
 
 
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
 
$
1,342

 
Other assets
 
$
20,895

 
Other liabilities
 
$
1,342

 
Other liabilities
 
$
20,895

Commercial loan hedges
 
Other assets
 
—

 
Other assets
 
—

 
Other liabilities
 
154

 
Other liabilities
 
3,312

Borrowings hedges
 
Other assets
 
—

 
Other assets
 
—

 
Other liabilities
 
2,536

 
Other liabilities
 
31,347

 
 
 
 
$
1,342

 
 
 
$
20,895

 
 
 
$
4,032

 
 
 
$
55,554



33
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 & BUSINESS DESCRIPTION
Washington Federal, Inc. (“Company” or “Washington Federal”) is a bank holding company headquartered in Seattle, Washington that conducts its operations through Washington Federal, National Association (“Bank”), a federally chartered national bank subsidiary. Washington Federal and its subsidiaries are engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate.

The Company's fiscal year end is September 30th. All references to 2016 represent balances as of September 30, 2016 or activity for the fiscal year then ended.

On April 11, 2017 the Company announced that it had entered into a definitive merger agreement with Anchor Bancorp ("Anchor"). The merger agreement calls for the merger of Anchor with and into the Company, followed by the merger of Anchor’s wholly-owned subsidiary, Anchor Bank, into the Company’s wholly-owned subsidiary, Washington Federal, National Association. The merger is an all-stock transaction, with the aggregate merger consideration consisting of shares of Washington Federal common stock having a value of approximately $63.9 million. The merger is expected to close in the fourth calendar quarter of 2017, pending the receipt of requisite regulatory approvals, the approval of Anchor’s shareholders and the satisfaction of other customary closing conditions.

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 loans and transaction deposit accounts, as well as extending the maturity on borrowings. The mix of transaction and savings accounts is 58% of total deposits as of June 30, 2017 while the composition of the investment securities portfolio is 29% variable and 71% 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 $1,651,528,000 of fixed rate mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of June 30, 2017, the net unrealized loss on these securities was $20,783,000. The Company has $1,270,414,000 of available-for-sale securities that are carried at fair value. As of June 30, 2017, the net unrealized gain on these securities was $6,454,000. 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, 2017 was $2,536,000. 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

34
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 2.0% in the next year. This compares to an estimated increase of 3.2% as of the September 30, 2016 analysis. It is noted that a flattening yield curve would likely result in a decrease in net interest income. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long term rates over two years would result in a net interest income increase of 0.3% in the first year and increase of 1.0% 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, 2017, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $432,574,000 or 17.4% and the NPV to total assets ratio to decline to 14.5% from a base of 16.4%. As of September 30, 2016, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $479,090,000 or 18.6% and the NPV to total assets ratio to decline to 14.8% from a base of 16.9%. The increased NPV sensitivity and higher base NPV ratio is due primarily to higher interest rates and lower prices as of June 30, 2017.

Repricing Gap Analysis. At June 30, 2017, the Company had approximately $2,375,191,000 more in liabilities subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (15.8)% of total assets. This was an increase from the (10.1)% gap as of September 30, 2016. 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 increased to 2.85% at June 30, 2017 from 2.65% at September 30, 2016. The spread increase of 20 basis points is primarily due to the rise in the Fed funds rate, which resulted in an increased rate being earned on cash. As of June 30, 2017, the weighted average rate on earning assets increased by 19 basis points to 3.77% compared to September 30, 2016, while the weighted average cost of funds decreased by 1 basis point to 0.92%. The interest rate spread increased to 2.85% at June 30, 2017 from 2.67% at June 30, 2016.
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 3.13% for the quarter ended June 30, 2017 from 3.07% for the quarter ended June 30, 2016. The yield on earning assets increased 3 basis points to 3.98% and the cost of interest bearing liabilities decreased 3 basis point to 0.91%. The higher yield on earning assets is the result of the shift in mix from investment securities into a higher proportion of loans receivable which carry higher yields on average. The decrease 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.

35
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, 2017
 
Three Months Ended June 30, 2016
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
 
(In thousands)
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
10,579,593

 
$
117,457

 
4.45
%
 
$
9,561,921

 
$
113,728

 
4.77
%
Mortgaged-backed securities
2,551,598

 
15,992

 
2.51

 
2,698,354

 
15,297

 
2.27

Cash & Investments
627,197

 
3,373

 
2.16

 
1,187,023

 
4,012

 
1.36

FHLB & FRB stock
124,968

 
894

 
2.87

 
117,022

 
698

 
2.39

 
 
 
 
 
 
 
 
 
 
 
 
 Total interest-earning assets
13,883,356

 
137,716

 
3.98
%
 
13,564,320

 
133,735

 
3.95
%
Other assets
1,142,899

 
 
 
 
 
1,219,363

 
 
 
 
Total assets
$
15,026,255

 
 
 
 
 
$
14,783,683

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,567,710

 
$
12,764

 
0.48
%
 
$
10,569,479

 
$
13,274

 
0.50
%
FHLB advances
2,274,451

 
16,337

 
2.88

 
2,075,604

 
16,221

 
3.13

 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
12,842,161

 
29,101

 
0.91
%
 
12,645,083

 
29,495

 
0.94
%
Other liabilities
155,460

 
 
 
 
 
163,788

 
 
 
 
               Total liabilities
12,997,621

 
 
 
 
 
12,808,871

 
 
 
 
Stockholders' equity
2,028,634

 
 
 
 
 
1,974,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
15,026,255

 
 
 
 
 
$
14,783,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
108,615

 
 
 
 
 
$
104,240

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.13
%
 
 
 
 
 
3.07
%
As of June 30, 2017, total assets had increased by $195,935,000 to $15,083,998,000 from $14,888,063,000 at September 30, 2016. During the nine months ended June 30, 2017, cash and cash equivalents decreased by $91,116,000, loans receivable increased $743,505,000 and investment securities declined by $418,551,000.
Cash and cash equivalents of $359,252,000 and stockholders’ equity of $2,021,186,000 as of June 30, 2017 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 48% 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,

36
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 totaled $359,252,000 at June 30, 2017, a decrease from $450,368,000 at September 30, 2016. These amounts include the Bank's operating cash.
The Company’s net worth at June 30, 2017 was $2,021,186,000, or 13.40% of total assets. This was a increase of $45,455,000 from September 30, 2016 when net worth was $1,975,731,000, or 13.27% of total assets. The Company’s net worth was impacted in the nine months ended June 30, 2017 by net income of $127,428,000, the payment of $61,341,000 in cash dividends, treasury stock purchases of $46,470,000, as well as an other comprehensive income of $13,634,000. The ratio of tangible capital to tangible assets at June 30, 2017 was 11.67%. Management believes the Company's strong net worth position allows it to manage balance sheet 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.

37
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
 
Ratio
 
Ratio
 
(In thousands)
June 30, 2017
 
 
 
 
 
 
 
Common Equity Tier I risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
$
1,722,082

 
17.31
%
 
4.50
%
 
NA

      The Bank
1,691,102

 
17.00
%
 
4.50
%
 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,722,082

 
17.31
%
 
6.00
%
 
NA

      The Bank
1,691,102

 
17.00
%
 
6.00
%
 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,846,519

 
18.56
%
 
8.00
%
 
NA

      The Bank
1,815,545

 
18.25
%
 
8.00
%
 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
      The Company
1,722,082

 
11.69
%
 
4.00
%
 
NA

      The Bank
1,691,102

 
11.48
%
 
4.00
%
 
5.00
%
 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
Common Equity Tier 1 risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,690,380

 
17.54
%
 
4.50
%
 
NA

      The Bank
1,668,828

 
17.32
%
 
4.50
%
 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,690,380

 
17.54
%
 
6.00
%
 
NA

      The Bank
1,668,828

 
17.32
%
 
6.00
%
 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,807,740

 
18.76
%
 
8.00
%
 
NA

      The Bank
1,786,188

 
18.54
%
 
8.00
%
 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
      The Company
1,690,380

 
11.60
%
 
4.00
%
 
NA

      The Bank
1,668,828

 
11.45
%
 
4.00
%
 
5.00
%

CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents: Cash and cash equivalents are $359,252,000 at June 30, 2017, a decrease of $91,116,000, or 20.2%, since September 30, 2016.

Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $652,480,000, or 33.9%, during the nine months ended June 30, 2017, due to sales of $350,890,000 as well as repayments, calls and maturities. During the same period, the balance of held-to-maturity securities increased by $233,929,000 due to purchases of $415,729,000 partially offset by paydowns and maturities. As of June 30, 2017, the Company had an unrealized gain on available-for-sale securities of $6,454,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

Loans receivable: Loans receivable, net of related contra accounts, increased to $10,654,425,000 at June 30, 2017 compared to $9,910,920,000 at September 30, 2016. This increase resulted primarily from originations of $3,216,125,000, partially offset by loan repayments of $2,400,232,000. Commercial loan originations accounted for 68% of total originations and consumer loan originations were 32% during the period. The increase in the loan portfolio is consistent with management's strategy during low

38
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

47.9
%
 
$
5,658,830

51.7
%
 
$
29,020

0.5
 %
   Construction
1,436,874

12.1

 
1,110,411

10.1

 
326,463

29.4

   Construction - custom
561,260

4.7

 
473,069

4.3

 
88,191

18.6

   Land - acquisition & development
119,524

1.0

 
118,497

1.1

 
1,027

0.9

   Land - consumer lot loans
101,626

0.9

 
104,567

1.0

 
(2,941
)
(2.8
)
   Multi-family
1,263,187

10.6

 
1,124,290

10.3

 
138,897

12.4

   Commercial real estate
1,346,006

11.3

 
1,093,639

10.0

 
252,367

23.1

   Commercial & industrial
1,116,860

9.4

 
978,589

8.9

 
138,271

14.1

   HELOC
148,584

1.3

 
149,716

1.4

 
(1,132
)
(0.8
)
   Consumer
95,775

0.8

 
139,000

1.3

 
(43,225
)
(31.1
)
Total gross loans
11,877,546

100
%
 
10,950,608

100
%
 
926,938

8.5
 %
   Less:
 
 
 
 
 
 
 
 
      Allowance for loan losses
122,229

 
 
113,494

 
 
8,735

7.7
 %
      Loans in process
1,054,513

 
 
879,484

 
 
175,029

19.9

      Net deferred fees, costs and discounts
46,379

 
 
46,710

 
 
(331
)
(0.7
)
Total loan contra accounts
1,223,121

 
 
1,039,688

 
 
183,433

17.6

Net Loans
$
10,654,425

 
 
$
9,910,920

 
 
$
743,505

7.5
 %
 
Non-performing assets: Non-performing assets increased $4,079,000 during the nine months ended June 30, 2017 to $75,520,000 from $71,441,000 at September 30, 2016. The increase is primarily due to the $13,994,000 rise in non-accrual loans partially offset by the $9,915,000 decline in REO. Non-performing assets as a percentage of total assets increased to 0.50% at June 30, 2017 compared to 0.48% at September 30, 2016.




39
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,
2017
 
September 30,
2016
 
(In thousands)
Restructured loans:
 
 
 
 
 
 
 
Single-family residential
$
196,575

 
88.0
%
 
$
228,185

 
87.3
%
Land - acquisition & development
190

 
0.1

 
1,154

 
0.4

Land - consumer lot loans
8,878

 
4.0

 
9,631

 
3.7

Multi - family
497

 
0.2

 
1,505

 
0.6

Commercial real estate
15,907

 
7.1

 
19,434

 
7.4

HELOC
1,409

 
0.6

 
1,506

 
0.6

Consumer
102

 
—

 
116

 
—

Total restructured loans (1)
$
223,558

 
100
%
 
$
261,531

 
100
%
 
 
 
 
 
 
 
 
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 (2)
56,408

 
100
%
 
42,414

 
100
%
Real estate owned
19,112

 
 
 
29,027

 
 
Total non-performing assets
$
75,520

 
 
 
$
71,441

 
 
Total non-performing assets and performing restructured loans as a percentage of total assets
1.93
%
 
 
 
2.17
%
 
 
 
 
 
 
 
 
 
 
(1)    Restructured loans were as follows:
 
 
 
 
 
 
 
Performing
$
215,178

 
96.3
%
 
$
251,583

 
96.2
%
Non-performing (included in non-accrual loans above)
8,380

 
3.7

 
9,948

 
3.8

 
$
223,558

 
100
%
 
$
261,531

 
100
%

(2)
For the nine months ended June 30, 2017, the Company recognized $4,721,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $1,727,000 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 $52,900,000 of loans that were less than 90 days delinquent at June 30, 2017 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 2.28% at June 30, 2017.
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.
 
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 88.0% of restructured loans as of June 30, 2017. The concession for these loans is

40
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

typically a payment reduction through a rate reduction of 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.
Allowance for loan losses: The following table shows the Company’s allowance for loan losses by loan category.
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 impaired loans and covered loans with discounts sufficient to cover incurred losses.


41
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 thousands)
 
 
 
(In thousands)
Single-family residential
$
37,536

 
$
5,585,912

 
0.7
%
 
$
260

 
$
19,629

 
1.3
%
Construction
19,838

 
498,450

 
4.0

 
—

 
—

 
—

Construction - custom
1,080

 
229,298

 
0.5

 
—

 
330

 
—

Land - acquisition & development
6,022

 
90,850

 
6.6

 
2

 
850

 
0.2

Land - consumer lot loans
2,535

 
92,828

 
2.7

 
—

 
558

 
—

Multi-family
6,911

 
1,091,974

 
0.6

 
13

 
1,505

 
0.9

Commercial real estate
8,497

 
957,380

 
0.9

 
91

 
11,157

 
0.8

Commercial & industrial
28,008

 
966,930

 
2.9

 
—

 
—

 
—

HELOC
813

 
133,203

 
0.6

 
—

 
239

 
—

Consumer
1,888

 
137,315

 
1.4

 
—

 
3

 
—

 
$
113,128

 
$
9,784,140

 
1.2
%
 
$
366

 
$
34,271

 
1.1
%
(1)
Excludes acquired impaired loans and covered loans with discounts sufficient to cover incurred losses.

Reserve for losses on unfunded commitments: Unfunded commitments tend to vary depending on our loan mix and the proportion share of commercial loans. 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, 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, 2017.

Real estate owned: Real estate owned decreased during the nine months ended June 30, 2017 by $9,915,000 to $19,112,000. The decrease is primarily due to sales of REO properties during the period.



42
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Customer accounts: Customer accounts increased $33,426,000, or 0.3%, to $10,634,278,000 at June 30, 2017 compared with $10,600,852,000 at September 30, 2016.

The following table shows the composition of the Bank’s customer accounts by deposit type.
  
June 30, 2017
 
September 30, 2016
 
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
$
1,195,152

 
11.2
%
 
—
%
 
$
1,091,738

 
10.3
%
 
—
%
Interest checking
1,703,994

 
16.0

 
0.19

 
1,629,983

 
15.4

 
0.10

Savings (passbook/statement)
871,257

 
8.2

 
0.11

 
820,980

 
7.7

 
0.10

Money market
2,433,547

 
22.9

 
0.16

 
2,462,891

 
23.2

 
0.15

Time deposits
4,430,328

 
41.7

 
1.01

 
4,595,260

 
43.3

 
1.02

Total
$
10,634,278

 
100
%
 
0.50
%
 
$
10,600,852

 
100
%
 
0.50
%

FHLB advances and other borrowings: Total borrowings increased to $2,275,000,000 as of June 30, 2017 from $2,080,000,000 as of September 30, 2016. The weighted average rate for FHLB borrowings was 2.88% as of June 30, 2017 and 3.15% at September 30, 2016.

RESULTS OF OPERATIONS
Net Income: The Company recorded net income of $44,112,000 for the quarter ended June 30, 2017 compared to $43,004,000 for the prior year quarter. Net income was $127,428,000 for the nine months ended June 30, 2017 compared to $119,825,000 for the same period one year ago.
Net Interest Income: For the quarter ended June 30, 2017, net interest income was $108,615,000 which is $4,375,000 higher than the same quarter of the prior year. Net interest margin was 3.13% for the quarter ended June 30, 2017 compared to 3.07% for the quarter ended June 30, 2016. The increase in net interest income was primarily due to average earning assets increasing by $319,036,000. The increase in net interest margin was primarily due to the shift in asset mix from cash and investment securities to higher yielding loans receivable. For the nine months ended June 30, 2017, net interest income was $319,494,000 which is $2,060,000 higher than the same period of the prior year, primarily due to growth in average earning assets and the increase in interest income on loans receivable more than offsetting the decline in interest income on mortgage-backed securities. Net interest margin was 3.10% for the nine months ended June 30, 2017 compared to 3.14% for the nine months ended June 30, 2016. The decrease in net interest margin for the nine months ended was primarily due to the relatively low interest rate environment that has led to new loan originations having lower yields than the loans that repaid.
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: 

43
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
06/30/17 and 06/30/16
 
Comparison of Nine Months Ended
06/30/17 and 06/30/16
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(In thousands)
 
(In thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
11,648

 
$
(7,919
)
 
$
3,729

 
$
28,787

 
$
(20,263
)
 
$
8,524

Mortgaged-backed securities
(864
)
 
1,559

 
695

 
(3,902
)
 
(221
)
 
(4,123
)
Investments (1)
(2,482
)
 
2,039

 
(443
)
 
(5,297
)
 
3,652

 
(1,645
)
All interest-earning assets
8,302

 
(4,321
)
 
3,981

 
19,588

 
(16,832
)
 
2,756

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
(2
)
 
(508
)
 
(510
)
 
10

 
(899
)
 
(889
)
FHLB advances and other borrowings
1,477

 
(1,361
)
 
116

 
4,359

 
(2,774
)
 
1,585

All interest-bearing liabilities
1,475

 
(1,869
)
 
(394
)
 
4,369

 
(3,673
)
 
696

Change in net interest income
$
6,827

 
$
(2,452
)
 
$
4,375

 
$
15,219

 
$
(13,159
)
 
$
2,060

___________________ 
(1)
Includes interest on cash equivalents and dividends on FHLB & FRB stock
Provision (Release) for Loan Losses: The Company recorded no provision for loan losses of during the three months ended June 30, 2017, compared to a $1,650,000 release of allowance for loan losses recording during the three months ended June 30, 2016. Recoveries, net of charge-offs, totaled $1,252,000 for the three months ended June 30, 2017, compared to net recoveries of $2,897,000 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 $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.

Other Income: The three months ended June 30, 2017 results include total other income of $13,922,000 compared to $10,486,000 for the same period one year ago. The nine months ended June 30, 2017 results include total other income of $35,954,000 compared to $31,850,000 for the same period one year ago. The increase during the three months ended and nine months ended June 30, 2017 is primarily due to gains recognized on bank owned life insurance. The nine months ended June 30, 2017 also includes a $968,000 gain on sale of investment securities. Deposit fee income was $15,803,000 for the nine months ended June 30, 2017 compared to $16,564,000 for the nine months ended June 30, 2016.

Other Expense: The three months ended June 30, 2017 results include total other expense of $57,062,000 compared to $56,305,000 for the same period one year ago. The nine months ended June 30, 2017 results include total other expense of $168,870,000 compared to $180,040,000 for the same period one year ago, a $11,170,000 or 6.2% decrease. The decrease for the nine months ended June 30, 2017 is primarily due to approximately $6,600,000 of additional expenses recognized during the nine months ended June 30, 2016 that related to the Company's November 2015 conversion of its core systems. Additionally, product delivery costs declined by $3,543,000 from the prior year and this was mostly attributable to benefits from the new systems and related process efficiencies. The number of staff, including part-time employees on a full-time equivalent basis, was 1,815 and 1,817 at June 30, 2017 and 2016, respectively. Total other expense for the nine months ended ended June 30, 2017 and 2016 equaled 1.51% and 1.64%, respectively, of average assets.

Gain (Loss) on Real Estate Owned: Results for the three months ended June 30, 2017 include a net loss on real estate owned of $124,000, compared to a gain of $5,087,000 for the same period one year ago. Gains recognized on real estate owned was a net gain of $1,069,000 for the nine months ended June 30, 2017, compared to $10,401,000 for the same period one year ago. The decreases during these periods were primarily due to fewer REO sales.

Income Tax Expense: Income tax expense totaled $21,239,000 for the three months ended June 30, 2017, as compared to $22,154,000 for the same period one year ago. Income tax expense totaled $61,819,000 for the nine months ended June 30, 2017, as compared to $62,970,000 for the same period one year ago. The effective tax rate for the nine months ended June 30, 2017 was 32.67% while for the period ended June 30, 2016 it was 34.45%. The decline in the effective tax rate from the prior period

44
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

is primarily due to increased investments in bank owned life insurance, low income housing tax credit partnerships and tax exempt 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, 2016. 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 2016 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.

45


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 2016 Form 10-K for the year ended September 30, 2016. 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, 2017. 
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 (2)
April 1, 2017 to April 30, 2017
6,437

 
$
32.22

 
6,437

 
4,150,644

May 1, 2017 to May 31, 2017
568,270

 
31.93

 
568,270

 
3,582,374

June 1, 2017 to June 30, 2017
236,327

 
32.65

 
236,327

 
3,346,047

Total
811,034

  
$
32.14

  
811,034

 
3,346,047

 ___________________
(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 51,956,264 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 approved in September 2016.
(2)
Does not reflect TARP warrants that were repurchased during the three months ended June 30, 2017 that Management also counts against the maximum number of shares that may be repurchased under the Plan. Net of such repurchased warrants, there are 3,245,187 shares remaining under the Plan for repurchase.

Item 3.        Defaults Upon Senior Securities
Not applicable

Item 4.        Mine Safety Disclosures
Not applicable

Item 5.        Other Information
Not applicable


46

Item 6.        Exhibits
(a)
 
Exhibits
 
 
 
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 Form 10-Q for the three months ended June 30, 2017 formatted in XBRL

47

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 27, 2017
/S/    BRENT J. BEARDALL        
 
BRENT J. BEARDALL
President & Chief Executive Officer
 
 
July 27, 2017
/S/    VINCENT L. BEATTY       
 
VINCENT L. BEATTY
Senior Vice President and Chief Financial Officer
 
 
July 27, 2017
/S/    CORY D. STEWART      
 
CORY D. STEWART
Senior Vice President and Principal Accounting Officer

48

Stock widget

Investing forum

WASHINGTON FEDERAL INC Reports

Also read