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EX-32 - EXHIBIT 32 - WASHINGTON FEDERAL INCwafd10-qex326302018.htm
EX-31.2 - EXHIBIT 31.2 - WASHINGTON FEDERAL INCwafd10-qex3126302018.htm
EX-31.1 - EXHIBIT 31.1 - WASHINGTON FEDERAL INCwafd10-qex3116302018.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, 2018
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 ("Exchange Act") 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, a smaller reporting company or an emerging growth 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 24, 2018
Common stock, $1.00 par value
83,537,545



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, 2018
 
September 30, 2017
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
345,919

 
$
313,070

Available-for-sale securities, at fair value
1,255,401

 
1,266,209

Held-to-maturity securities, at amortized cost
1,670,450

 
1,646,856

Loans receivable, net of allowance for loan losses of $128,666 and $123,073
11,325,971

 
10,882,622

Interest receivable
43,670

 
41,643

Premises and equipment, net
269,674

 
263,694

Real estate owned
11,275

 
20,658

FHLB and FRB stock
128,790

 
122,990

Bank owned life insurance
214,752

 
211,330

Intangible assets, including goodwill of $301,368 and $293,153
311,796

 
298,682

Federal and state income tax assets, net
4,293

 

Other assets
184,330

 
185,826

 
$
15,766,321

 
$
15,253,580

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
6,572,766

 
$
6,361,158

Time deposit accounts
4,714,707

 
4,473,850

 
11,287,473

 
10,835,008

FHLB advances
2,370,000

 
2,225,000

Advance payments by borrowers for taxes and insurance
32,632

 
56,631

Accrued expenses and other liabilities
89,953

 
131,253

 
13,780,058

 
13,247,892

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized; 135,343,437 and 134,957,511 shares issued; 83,534,098 and 87,193,362 shares outstanding
135,344

 
134,958

Additional paid-in capital
1,665,421

 
1,660,885

Accumulated other comprehensive income (loss), net of taxes
8,137

 
5,015

Treasury stock, at cost; 51,809,339 and 47,764,149 shares
(975,001
)
 
(838,060
)
Retained earnings
1,152,362

 
1,042,890

 
1,986,263

 
2,005,688

 
$
15,766,321

 
$
15,253,580




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,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share data)
 
(In thousands, except share data)
INTEREST INCOME
 
 
 
 
 
 
 
Loans receivable
$
131,541

 
$
117,457

 
$
382,581

 
$
348,326

Mortgage-backed securities
18,022

 
15,992

 
52,588

 
45,007

Investment securities and cash equivalents
5,509

 
4,267

 
14,762

 
13,345

 
155,072

 
137,716

 
449,931

 
406,678

INTEREST EXPENSE
 
 
 
 
 
 
 
Customer accounts
18,887

 
12,764

 
49,939

 
38,173

FHLB advances
16,333

 
16,337

 
47,104

 
49,011

 
35,220

 
29,101

 
97,043

 
87,184

Net interest income
119,852

 
108,615

 
352,888

 
319,494

Provision (release) for loan losses
1,000

 

 
50

 
(1,600
)
Net interest income after provision (release) for loan losses
118,852

 
108,615

 
352,838

 
321,094

 
 
 
 
 
 
 
 
OTHER INCOME
 
 
 
 
 
 
 
Gain on sale of investment securities

 

 

 
968

FDIC loss share valuation adjustments

 

 
(8,550
)
 

Loan fee income
1,094

 
889

 
2,909

 
3,310

Deposit fee income
6,411

 
5,714

 
19,500

 
15,803

Other income
4,946

 
7,319

 
17,974

 
15,873

 
12,451

 
13,922

 
31,833

 
35,954

 
 
 
 
 
 
 
 
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
31,223

 
28,947

 
92,467

 
84,774

Occupancy
9,095

 
8,829

 
26,779

 
26,370

FDIC insurance premiums
2,950

 
2,842

 
8,622

 
8,591

Product delivery
4,356

 
3,246

 
11,977

 
10,096

Information technology
10,118

 
6,617

 
26,828

 
19,754

Other expense
9,235

 
6,581

 
28,032

 
19,285

 
66,977

 
57,062

 
194,705

 
168,870

Gain (loss) on real estate owned, net
168

 
(124
)
 
(64
)
 
1,069

Income before income taxes
64,494

 
65,351

 
189,902

 
189,247

Income tax expense
13,100

 
21,239

 
37,567

 
61,819

NET INCOME
$
51,394

 
$
44,112

 
$
152,335

 
$
127,428

 

 


 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share
$
0.61

 
$
0.49

 
$
1.78

 
$
1.43

Diluted earnings per share
0.61

 
0.49

 
1.78

 
1.42

Dividends paid on common stock per share
0.17

 
0.15

 
0.49

 
0.69

Basic weighted average number of shares outstanding
84,168,992

 
89,199,823

 
85,589,588

 
89,297,471

Diluted weighted average number of shares outstanding
84,252,659

 
89,497,264

 
85,698,888

 
89,653,955


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,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
 
(In thousands)
Net income
$
51,394

 
$
44,112

 
$
152,335

 
$
127,428

 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale investment securities
(4,851
)
 
3,171

 
(18,282
)
 
(8,224
)
Reclassification adjustment of net gain (loss) from sale of available-for-sale securities included in net income

 

 

 
968

Related tax benefit (expense)
1,104

 
(1,165
)
 
5,506

 
2,667

 
(3,747
)
 
2,006

 
(12,776
)
 
(4,589
)
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on cash flow hedges of borrowings
3,865

 
(2,856
)
 
20,887

 
28,810

Related tax benefit (expense)
(879
)
 
1,049

 
(4,989
)
 
(10,587
)
 
2,986

 
(1,807
)
 
15,898

 
18,223

 
 
 
 
 
 
 
 
Other comprehensive income (loss) net of tax
(761
)
 
199

 
3,122

 
13,634

Comprehensive income
$
50,633

 
$
44,311

 
$
155,457

 
$
141,062





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, 2017
$
134,958

$
1,660,885

$
1,042,890

$
5,015

$
(838,060
)
$
2,005,688

Adjustment pursuant to adoption of ASU 2018-02


(1,772
)
1,772



Net income


152,335



152,335

Other comprehensive income (loss)



1,350


1,350

Dividends on common stock


(41,091
)


(41,091
)
Proceeds from exercise of common stock options
60

1,228




1,288

Restricted stock expense
215

3,419




3,634

Exercise of stock warrants
111

(111
)
 
 
 

Treasury stock acquired




(136,941
)
(136,941
)
Balance at June 30, 2018
$
135,344

$
1,665,421

$
1,152,362

$
8,137

$
(975,001
)
$
1,986,263

 
 
 
 
 
 
 
(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




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Nine Months Ended June 30,
 
2018
 
2017
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
152,335

 
$
127,428

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion expense, net
38,980

 
29,602

Cash received from (paid to) FDIC under loss share agreements, net
1,595

 
813

Stock based compensation expense
3,634

 
5,126

Provision (release) for loan losses
50

 
(1,600
)
Loss (gain) on sale of investment securities

 
(968
)
Decrease (increase) in accrued interest receivable
(2,027
)
 
(1,257
)
Decrease (increase) in federal and state income tax receivable
(4,293
)
 
16,047

Decrease (increase) in cash surrender value of bank owned life insurance
(4,490
)
 
(4,907
)
Gain on bank owned life insurance
(2,416
)
 
(4,983
)
Net realized (gain) loss on sales of premises, equipment, and real estate owned
(1,333
)
 
(1,691
)
Decrease (increase) in other assets
(878
)
 
6,618

Increase (decrease) in accrued expenses and other liabilities
(40,862
)
 
(47,859
)
Net cash provided by (used in) operating activities
140,295

 
122,369

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Origination of loans and principal repayments, net
(308,167
)
 
(668,413
)
Loans purchased
(143,605
)
 
(72,856
)
FHLB & FRB stock purchased
(408,800
)
 
(93,009
)
FHLB & FRB stock redeemed
403,000

 
85,224

Available-for-sale securities purchased
(166,696
)
 

Principal payments and maturities of available-for-sale securities
156,240

 
290,243

Proceeds from sales of available-for-sale securities

 
350,890

Held-to-maturity securities purchased
(170,836
)
 
(415,729
)
Principal payments and maturities of held-to-maturity securities
143,837

 
176,333

Proceeds from sales of real estate owned
11,960

 
13,780

Proceeds from settlement of bank owned life insurance
3,484

 
6,913

Cash paid for acquisitions
(2,211
)
 

Proceeds from sales of premises and equipment
1

 
3,956

Premises and equipment purchased and REO improvements
(22,604
)
 
(9,541
)
Net cash provided by (used in) investing activities
(504,397
)
 
(332,209
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in customer accounts
452,694

 
33,654

Proceeds from borrowings
10,220,000

 
2,325,000

Repayments of borrowings
(10,075,000
)
 
(2,130,000
)
Proceeds from exercise of common stock options and related tax benefit
1,288

 
7,078

Dividends paid on common stock
(41,091
)
 
(61,341
)
Treasury stock purchased
(136,941
)
 
(46,470
)
Increase (decrease) in borrower advances related to taxes and insurance, net
(23,999
)
 
(9,197
)
Net cash provided by (used in) financing activities
396,951

 
118,724

Increase (decrease) in cash and cash equivalents
32,849

 
(91,116
)
Cash and cash equivalents at beginning of period
313,070

 
450,368

Cash and cash equivalents at end of period
$
345,919

 
$
359,252

(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,
 
2018
 
2017
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Real estate acquired through foreclosure
$
1,517

 
$
2,323

Non-cash financing activities
 
 
 
Stock issued upon exercise of warrants
3,836

 
7,546

Cash paid during the period for
 
 
 
Interest
95,394

 
82,919

Income taxes
34,160

 
33,228




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. (the "Company") is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through its national bank subsidiary, Washington Federal, National Association (the "Bank"). The Bank is principally engaged in the business of attracting deposits from businesses and 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 Company has prepared the consolidated unaudited interim financial statements included in this report. 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. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2017 Annual Report on Form 10-K (“2017 Annual Financial Statements”). Interim results are not necessarily indicative of results for a full year.

During the nine months ended June 30, 2018, an immaterial correction was recorded related to acquisitions of insurance agency businesses in prior years. The balance sheet classification correction resulted in an increase in goodwill of $7,135,000 and finite-lived intangible assets of $5,106,000 and a corresponding decrease in other assets of $12,241,000.

Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2017 Annual Financial Statements. There have not been any material changes in the Company's significant accounting policies compared to those contained in its 2017 Annual Financial Statements for the year ended September 30, 2017.

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 $2,161,343,000 and $1,992,905,000 at June 30, 2018 and September 30, 2017, 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 August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In March 2017, the FASB issued 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

9

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


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 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 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. While the Company is currently in the process of evaluating the impact of the amended guidance on its consolidated financial statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Company’s loan and lease portfolio at the time of adoption.

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 in the process of accumulating the lease data necessary to apply the amended guidance. The Company is continuing to evaluate the impact of the amended guidance on its consolidated financial statements, but the effects of recognizing most operating leases is not expected to be material. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.

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 25, 2018, the Company paid a regular dividend on common stock of $0.17 per share, which represented the 141st consecutive quarterly cash dividend. Dividends per share were $0.17 and $0.15 for the quarters ended June 30, 2018 and 2017, respectively. On July 23, 2018, the Company declared a regular dividend on common stock of $0.18 per share, which represents its 142nd consecutive quarterly cash dividend. This dividend will be paid on August 24, 2018 to common shareholders of record on August 10, 2018.

For the three months ended June 30, 2018, the Company repurchased 1,224,384 shares at an average price of $32.64. During the three months ended June 30, 2018, 2,329 shares of common stock were issued to investors holding warrants previously issued as part of the 2008 Troubled Asset Relief Program ("TARP"). As of June 30, 2018, 107,617 of these warrants remain outstanding. Net of warrant cash repurchase activity, there are 2,855,765 remaining shares authorized to be repurchased under the current Board approved share repurchase program.

NOTE D – Loans Receivable


11

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


The following table is a summary of loans receivable.
 
June 30, 2018
 
September 30, 2017
 
(In thousands)
 
(In thousands)
Gross loans by category
 
 
 
 
 
   Single-family residential
$
5,745,598

45.1
%
 
$
5,711,004

46.8
%
   Construction
1,885,034

14.8

 
1,597,996

13.1

   Construction - custom
612,688

4.8

 
602,631

4.9

   Land - acquisition & development
150,936

1.2

 
124,308

1.0

   Land - consumer lot loans
103,118

0.8

 
104,405

0.9

   Multi-family
1,346,534

10.6

 
1,303,148

10.7

   Commercial real estate
1,435,418

11.3

 
1,434,610

11.8

   Commercial & industrial
1,133,075

8.9

 
1,093,360

9.0

   HELOC
136,766

1.1

 
144,850

1.2

   Consumer
188,125

1.5

 
85,075

0.7

Total gross loans
12,737,292

100
%
 
12,201,387

100
%
   Less:
 
 
 
 
 
      Allowance for loan losses
128,666

 
 
123,073

 
      Loans in process
1,230,132

 
 
1,149,934

 
      Net deferred fees, costs and discounts
52,523

 
 
45,758

 
Total loan contra accounts
1,411,321

 
 
1,318,765

 
Net loans
$
11,325,971

 
 
$
10,882,622

 

The following table sets forth information regarding non-accrual loans.
 
 
June 30, 2018
 
September 30, 2017
 
(In thousands, except ratio data)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
26,119

 
43.1
%
 
$
27,930

 
56.3
%
Construction
1,841

 
3.0

 

 

Construction - custom

 

 
91

 
0.2

Land - acquisition & development
1,757

 
2.9

 
296

 
0.6

Land - consumer lot loans
642

 
1.1

 
605

 
1.2

Multi-family

 

 
139

 
0.3

Commercial real estate
9,684

 
16.0

 
11,815

 
23.8

Commercial & industrial
19,876

 
32.8

 
8,082

 
16.3

HELOC
637

 
1.1

 
531

 
1.1

Consumer
28

 

 
91

 
0.2

Total non-accrual loans
$
60,584

 
100
%
 
$
49,580

 
100
%
% of total net loans
0.53
%
 
 
 
0.46
%
 
 

The Company recognized interest income on non-accrual loans of approximately $3,926,000 in the nine months ended June 30, 2018. Had these loans been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $1,741,000 for the nine months ended June 30, 2018. Recognized interest income for the nine months ended June 30, 2018 was higher than what otherwise would have been collected in the period due to the collection of past due amounts. Interest cash flows collected on non-accrual loans vary from period to period as those loans are brought current or are paid off.

12

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



The following tables provide details regarding delinquent loans.
 
June 30, 2018
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, except ratio data)
 
 
Single-family residential
$
5,744,620

 
$
5,714,962

 
$
7,201

 
$
4,521

 
$
17,936

 
$
29,658

 
0.52
%
Construction
1,012,239

 
1,009,782

 

 
616

 
1,841

 
2,457

 
0.24

Construction - custom
285,858

 
285,687

 
171

 

 

 
171

 
0.06

Land - acquisition & development
121,508

 
119,593

 

 
270

 
1,645

 
1,915

 
1.58

Land - consumer lot loans
103,040

 
102,303

 
128

 
301

 
308

 
737

 
0.72

Multi-family
1,346,512

 
1,346,512

 

 

 

 

 

Commercial real estate
1,435,417

 
1,433,030

 
684

 

 
1,703

 
2,387

 
0.17

Commercial & industrial
1,133,075

 
1,126,480

 

 

 
6,595

 
6,595

 
0.58

HELOC
136,766

 
135,406

 
863

 
146

 
351

 
1,360

 
0.99

Consumer
188,125

 
187,773

 
125

 
127

 
100

 
352

 
0.19

Total Loans
$
11,507,160

 
$
11,461,528

 
$
9,172

 
$
5,981

 
$
30,479

 
$
45,632

 
0.40
%
Delinquency %
 
 
99.60%
 
0.08%
 
0.05%
 
0.26%
 
0.40%
 
 


September 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, except ratio data)
 
 
Single-family residential
$
5,709,690

 
$
5,671,933

 
$
10,925

 
$
4,810

 
$
22,022

 
$
37,757

 
0.66
%
Construction
793,959

 
793,959

 

 

 

 

 

Construction - custom
277,599

 
277,508

 

 

 
91

 
91

 
0.03

Land - acquisition & development
104,856

 
104,526

 

 

 
330

 
330

 
0.31

Land - consumer lot loans
104,335

 
103,389

 
112

 
680

 
154

 
946

 
0.91

Multi-family
1,303,119

 
1,302,720

 
5

 
255

 
139

 
399

 
0.03

Commercial real estate
1,434,610

 
1,432,052

 
507

 

 
2,051

 
2,558

 
0.18

Commercial & industrial
1,093,360

 
1,092,735

 

 
51

 
574

 
625

 
0.06

HELOC
144,850

 
143,974

 
221

 
342

 
313

 
876

 
0.60

Consumer
85,075

 
84,644

 
245

 
107

 
79

 
431

 
0.51

Total Loans
$
11,051,453

 
$
11,007,440

 
$
12,015

 
$
6,245

 
$
25,753

 
$
44,013

 
0.40
%
Delinquency %
 
 
99.60%
 
0.11%
 
0.06%
 
0.23%
 
0.40%
 
 

The percentage of total delinquent loans was 0.40% as of June 30, 2018 and 0.40% as of September 30, 2017. 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 table provides information related to loans restructured in a troubled debt restructuring ("TDR") during the periods presented:

 
Three Months Ended June 30,
 
2018
 
2017
 
 
 
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
5

 
$
714

 
$
714

 
11

 
$
1,836

 
$
1,836

   HELOC
1

 
75

 
75

 

 

 

 
6

 
$
789

 
$
789

 
11

 
$
1,836

 
$
1,836



 
Nine Months Ended June 30,
 
2018
 
2017
 
 
 
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
25

 
$
4,909

 
$
4,909

 
31

 
$
5,682

 
$
5,682

   Land - consumer lot loans

 

 

 
1

 
204

 
204

   Commercial & Industrial
3

 
7,256

 
7,256

 

 

 

   HELOC
1

 
75

 
75

 
1

 
228

 
228

 
29

 
$
12,240

 
$
12,240

 
33

 
$
6,114

 
$
6,114


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

 
Three Months Ended June 30,
 
2018
 
2017
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
($ in thousands)
 
($ in thousands)
Trouble Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential

 
$

 
3

 
$
401

 

 
$

 
3

 
$
401




14

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


 
Nine Months Ended June 30,
 
2018
 
2017
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
($ in thousands)
 
($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
2

 
$
206

 
16

 
$
3,586

   Commercial real estate

 

 
2

 
267

 
2

 
$
206

 
18

 
$
3,853


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, 2018, 96.7% of the Company's $171,603,000 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, 2018, single-family residential loans comprised 89.4% of TDRs.

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

In May 2018, the Bank entered into an agreement with the FDIC to early terminate its remaining FDIC loss share agreements, which relate to the Horizon Bank and Home Valley Bank acquisitions. The Bank paid $39,906,000 to settle the FDIC clawback liability and this amount is consistent with the liability on the balance sheet as of March 31, 2018 so no additional gain or loss was recorded in the three months ended June 30, 2018. Under the termination agreement, all rights and obligations of the Bank and the FDIC have been resolved and completed. As such, future recoveries, gains, losses and expenses related to the previously covered assets will now be recognized entirely by the Bank and the FDIC will no longer share in such gains or losses.



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, 2018
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
34,144

 
$
(299
)
 
$
283

 
$
273

 
$
34,401

Construction
27,389

 

 

 
2,744

 
30,133

Construction - custom
2,081

 

 

 
(67
)
 
2,014

Land - acquisition & development
7,622

 
(12
)
 
2,699

 
(2,609
)
 
7,700

Land - consumer lot loans
2,853

 
(1
)
 
35

 
20

 
2,907

Multi-family
7,982

 

 

 
109

 
8,091

Commercial real estate
11,588

 

 
91

 
(100
)
 
11,579

Commercial & industrial
29,330

 
(3,317
)
 
433

 
1,069

 
27,515

HELOC
802

 

 

 
9

 
811

Consumer
3,785

 
(45
)
 
223

 
(448
)
 
3,515

 
$
127,576

 
$
(3,674
)
 
$
3,764

 
$
1,000

 
$
128,666

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



16

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


Nine Months Ended June 30, 2018
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
36,892

 
$
(1,049
)
 
$
615

 
$
(2,057
)
 
$
34,401

Construction
24,556

 

 

 
5,577

 
30,133

Construction - custom
1,944

 
(50
)
 

 
120

 
2,014

Land - acquisition & development
6,829

 
(12
)
 
7,278

 
(6,395
)
 
7,700

Land - consumer lot loans
2,649

 
(67
)
 
35

 
290

 
2,907

Multi-family
7,862

 

 

 
229

 
8,091

Commercial real estate
11,818

 
(36
)
 
92

 
(295
)
 
11,579

Commercial & industrial
28,524

 
(3,433
)
 
603

 
1,821

 
27,515

HELOC
855

 
(1
)
 

 
(43
)
 
811

Consumer
1,144

 
(217
)
 
785

 
1,803

 
3,515

 
$
123,073

 
$
(4,865
)
 
$
9,408

 
$
1,050

 
$
128,666


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


The Company recorded a provision for loan losses of $1,000,000 for the three months ended June 30, 2018, compared to no provision for loan losses for the three months ended June 30, 2017. A provision for loan losses of $50,000 and a release of allowance for loan losses of $1,600,000 was recorded during the nine months ended June 30, 2018 and June 30, 2017, respectively. Reserving for new loan originations as the loan portfolio grows has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $90,000 for the three months ended June 30, 2018, compared to net recoveries of $1,252,000 during the three months ended June 30, 2017. Recoveries, net of charge-offs, totaled $4,543,000 for the nine months ended June 30, 2018, compared to net recoveries of $11,764,000 during the nine months ended June 30, 2017.

Non-performing assets were $71,859,000, or 0.46%, of total assets at June 30, 2018, compared to $70,238,000, or 0.46%, of total assets at September 30, 2017. Non-accrual loans were $60,584,000 at June 30, 2018, compared to $49,580,000 at September 30, 2017. Delinquencies, as a percent of total loans, were 0.40% at June 30, 2018, compared to 0.40% at September 30, 2017.

The reserve for unfunded commitments was $6,750,000 as of June 30, 2018, which is a decrease from $7,750,000 at September 30, 2017.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $135,416,000, or 1.06% of gross loans as of June 30, 2018, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments.


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, 2018
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
Allowance Allocation
 
Recorded Investment of Loans
 
Ratio
 
Allowance Allocation
 
Recorded Investment of Loans
 
Ratio
 
(In thousands, except ratio data)
 
(In thousands, except ratio data)
Single-family residential
$
34,401

 
$
5,726,737

 
0.6
%
 
$

 
$
24,139

 
%
Construction
30,133

 
1,007,676

 
3.0

 

 
4,563

 

Construction - custom
2,014

 
285,858

 
0.7

 

 

 

Land - acquisition & development
7,700

 
118,323

 
6.5

 

 
3,184

 

Land - consumer lot loans
2,907

 
97,310

 
3.0

 

 
833

 

Multi-family
8,086

 
1,343,468

 
0.6

 
5

 
3,045

 
0.2

Commercial real estate
11,502

 
1,388,029

 
0.8

 
77

 
31,805

 
0.2

Commercial & industrial
27,515

 
1,087,664

 
2.5

 

 
45,400

 

HELOC
811

 
134,522

 
0.6

 

 
562

 

Consumer
3,515

 
188,004

 
1.9

 

 
26

 

 
$
128,584

 
$
11,377,591

 
1.1
%
 
$
82

 
$
113,557

 
0.1
%

September 30, 2017
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
Allowance Allocation
 
Recorded Investment of Loans
 
Ratio
 
Allowance Allocation
 
Recorded Investment of Loans
 
Ratio
 
(In thousands, except ratio data)
 
(In thousands, except ratio data)
Single-family residential
$
36,892

 
$
5,713,576

 
0.7
%
 
$

 
$
5,552

 
%
Construction
24,556

 
793,958

 
3.1

 

 

 

Construction - custom
1,944

 
277,495