Document
Table of Contents

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 December 31, 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, 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:
January 24, 2018
Common stock, $1.00 par value
85,973,665


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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:
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)





 
December 31, 2017
 
September 30, 2017
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
309,713

 
$
313,070

Available-for-sale securities, at fair value
1,245,855

 
1,266,209

Held-to-maturity securities, at amortized cost
1,765,886

 
1,646,856

Loans receivable, net of allowance for loan losses of $127,155 and $123,073
11,107,042

 
10,882,622

Interest receivable
42,146

 
41,643

Premises and equipment, net
264,643

 
263,694

Real estate owned
17,928

 
20,658

FHLB and FRB stock
130,590

 
122,990

Bank owned life insurance
211,833

 
211,330

Intangible assets, including goodwill of $300,288 and $293,153
310,578

 
298,682

Other assets
177,799

 
185,826

 
$
15,584,013

 
$
15,253,580

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
6,482,612

 
$
6,361,158

Time deposit accounts
4,518,967

 
4,473,850

 
11,001,579

 
10,835,008

FHLB advances
2,415,000

 
2,225,000

Advance payments by borrowers for taxes and insurance
23,924

 
56,631

Accrued expenses and other liabilities
133,892

 
131,253

 
13,574,395

 
13,247,892

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized; 135,274,618 and 134,957,511 shares issued; 86,363,099 and 87,193,362 shares outstanding
135,275

 
134,958

Additional paid-in capital
1,661,866

 
1,660,885

Accumulated other comprehensive income (loss), net of taxes
8,004

 
5,015

Treasury stock, at cost; 48,911,519 and 47,764,149 shares
(877,044
)
 
(838,060
)
Retained earnings
1,081,517

 
1,042,890

 
2,009,618

 
2,005,688

 
$
15,584,013

 
$
15,253,580




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3


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

 
Three Months Ended December 31,
 
2017
 
2016
 
(In thousands, except share data)
INTEREST INCOME
 
 
 
Loans receivable
$
124,511

 
$
114,835

Mortgage-backed securities
16,899

 
12,789

Investment securities and cash equivalents
4,370

 
5,140

 
145,780

 
132,764

INTEREST EXPENSE
 
 
 
Customer accounts
14,638

 
13,017

FHLB advances
15,407

 
16,595

 
30,045

 
29,612

Net interest income
115,735

 
103,152

Provision (release) for loan losses

 

Net interest income after provision (release) for loan losses
115,735

 
103,152

 
 
 
 
OTHER INCOME
 
 
 
Gain on sale of investment securities

 
968

FDIC loss share valuation adjustments
(8,550
)
 

Loan fee income
1,035

 
1,334

Deposit fee income
6,686

 
5,185

Other income
7,624

 
4,409

 
6,795

 
11,896

 
 
 
 
OTHER EXPENSE
 
 
 
Compensation and benefits
29,619

 
26,994

Occupancy
8,671

 
8,450

FDIC insurance premiums
2,820

 
2,839

Product delivery
3,956

 
3,361

Information technology
7,929

 
6,451

Other expense
8,946

 
6,246

 
61,941

 
54,341

Gain (loss) on real estate owned, net
46

 
398

Income before income taxes
60,635

 
61,105

Income tax expense
8,965

 
19,859

NET INCOME
$
51,670

 
$
41,246

 

 


PER SHARE DATA
 
 
 
Basic earnings per share
$
0.59

 
$
0.46

Diluted earnings per share
0.59

 
0.46

Dividends paid on common stock per share
0.15

 
0.14

Basic weighted average number of shares outstanding
86,938,095

 
89,310,958

Diluted weighted average number of shares outstanding
87,082,499

 
89,731,024


SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents

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

 
Three Months Ended December 31,
 
2017
 
2016
 
(In thousands)
Net income
$
51,670

 
$
41,246

 
 
 
 
Other comprehensive income (loss) net of tax:
 
 
 
Net unrealized gain (loss) on available-for-sale investment securities
(1,964
)
 
(17,079
)
Reclassification adjustment of net gain (loss) from sale of available-for-sale securities included in net income

 
968

Related tax benefit (expense)
722

 
5,921

 
(1,242
)
 
(10,190
)
 
 
 
 
Net unrealized gain (loss) on cash flow hedges of borrowings
6,690

 
29,271

Related tax benefit (expense)
(2,459
)
 
(10,757
)
 
4,231

 
18,514

 
 
 
 
Other comprehensive income (loss) net of tax
2,989

 
8,324

Comprehensive income
$
54,659

 
$
49,570





SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents

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

Net income




51,670





51,670

Other comprehensive income (loss)



2,989


2,989

Dividends on common stock




(13,043
)




(13,043
)
Compensation expense related to common stock options











Proceeds from exercise of common stock options
14

272







286

Restricted stock expense
194

818







1,012

Exercise of stock warrants
109

(109
)
 
 
 

Treasury stock acquired








(38,984
)
(38,984
)
Balance at December 31, 2017
$
135,275

$
1,661,866

$
1,081,517

$
8,004

$
(877,044
)
$
2,009,618

 
 
 
 
 
 
 
(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




41,246





41,246

Other comprehensive income (loss)



8,324


8,324

Dividends on common stock




(12,422
)




(12,422
)
Proceeds from exercise of common stock options
190

4,172







4,362

Restricted stock expense
109

2,636







2,745

Exercise of stock warrants
50

(50
)







Treasury stock acquired








(20,385
)
(20,385
)
Balance at December 31, 2016
$
134,657

$
1,655,146

$
972,701

$
(2,832
)
$
(760,071
)
$
1,999,601




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Three Months Ended December 31,
 
2017
 
2016
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
51,670

 
$
41,246

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion expense, net
15,273

 
12,087

Stock based compensation expense
1,012

 
2,745

Loss (gain) on sale of investment securities

 
(968
)
Decrease (increase) in accrued interest receivable
(503
)
 
(449
)
Decrease (increase) in federal and state income tax receivable

 
16,047

Decrease (increase) in cash surrender value of bank owned life insurance
(1,571
)
 
(1,739
)
Gain on bank owned life insurance
(2,416
)
 
(649
)
Net realized (gain) loss on sales of premises, equipment, and real estate owned
(241
)
 
657

Decrease (increase) in other assets
(7,715
)
 
14,153

Increase (decrease) in accrued expenses and other liabilities
2,595

 
(41,265
)
Net cash provided by (used in) operating activities
58,104

 
41,865

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Origination of loans and principal repayments, net
(80,089
)
 
(226,080
)
Loans purchased
(143,605
)
 

FHLB & FRB stock purchased
(123,600
)
 
(9
)
FHLB & FRB stock redeemed
116,000

 
24

Available-for-sale securities purchased
(40,884
)
 

Principal payments and maturities of available-for-sale securities
58,261

 
112,469

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
50,653

 
78,778

Proceeds from sales of real estate owned
3,440

 
6,457

Proceeds from settlement of bank owned life insurance
3,484

 
1,231

Proceeds from sales of premises and equipment
1

 
1,722

Premises and equipment purchased and REO improvements
(6,485
)
 
(2,200
)
Net cash provided by (used in) investing activities
(333,660
)
 
(92,447
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in customer accounts
166,647

 
46,799

Proceeds from borrowings
3,090,000

 

Repayments of borrowings
(2,900,000
)
 

Proceeds from exercise of common stock options and related tax benefit
286

 
4,362

Dividends paid on common stock
(13,043
)
 
(12,422
)
Treasury stock purchased
(38,984
)
 
(20,385
)
Increase (decrease) in borrower advances related to taxes and insurance, net
(32,707
)
 
(19,302
)
Net cash provided by (used in) financing activities
272,199

 
(948
)
Increase (decrease) in cash and cash equivalents
(3,357
)
 
(51,530
)
Cash and cash equivalents at beginning of period
313,070

 
450,368

Cash and cash equivalents at end of period
$
309,713

 
$
398,838

(CONTINUED)

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended December 31,
 
2017
 
2016
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Real estate acquired through foreclosure
$
773

 
$
1,589

Non-cash financing activities
 
 
 
Stock issued upon exercise of warrants
3,761

 
1,523

Cash paid during the period for
 
 
 
Interest
29,986

 
28,737

Income taxes
5,225

 




SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8


Table of Contents

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 three months ended December 31, 2017, 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 our significant accounting policies compared to those contained in our 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 $2,088,669,000 and $1,992,905,000 at December 31, 2017 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 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

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


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 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

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


reporting date. The amendments require that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the current framework of recognizing probable incurred losses and instead requires an entity to use its current estimate of all expected credit losses over the contractual life. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

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

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

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

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



On November 20, 2017, the Company paid a regular dividend on common stock of $0.15 per share, which represented the 139th consecutive quarterly cash dividend. Dividends per share were $0.15 and $0.14 for the quarters ended December 31, 2017 and 2016, respectively. On January 24, 2018, the Company declared a regular dividend on common stock of $0.17 per share, which represents its 140th consecutive quarterly cash dividend. This dividend will be paid on February 23, 2018 to common shareholders of record on February 9, 2018.

For the three months ended December 31, 2017, the Company repurchased 1,147,370 shares at an average price of $33.98. Additionally, 108,704 shares of common stock were issued during the three months ended December 31, 2017 to investors that exercised warrants previously issued as part of the 2008 Troubled Asset Relief Program ("TARP"). As of December 31, 2017, 112,649 such warrants remain outstanding. Net of warrant cash repurchase activity, there are 753,585 remaining shares authorized to be repurchased under the current Board approved share repurchase program. On January 24, 2018, the Board approved an additional 5,000,000 shares available under the repurchase program.

NOTE D – Loans Receivable

The following table is a summary of loans receivable.
 
December 31, 2017
 
September 30, 2017
 
(In thousands)
 
(In thousands)
Gross loans by category
 
 
 
 
 
   Single-family residential
$
5,693,318

45.7
%
 
$
5,711,004

46.8
%
   Construction
1,710,418

13.7

 
1,597,996

13.1

   Construction - custom
583,580

4.7

 
602,631

4.9

   Land - acquisition & development
136,938

1.1

 
124,308

1.0

   Land - consumer lot loans
105,086

0.8

 
104,405

0.9

   Multi-family
1,312,695

10.5

 
1,303,148

10.7

   Commercial real estate
1,436,508

11.5

 
1,434,610

11.8

   Commercial & industrial
1,120,707

9.0

 
1,093,360

9.0

   HELOC
136,995

1.1

 
144,850

1.2

   Consumer
219,971

1.8

 
85,075

0.7

Total gross loans
12,456,216

100
%
 
12,201,387

100
%
   Less:
 
 
 
 
 
      Allowance for loan losses
127,155

 
 
123,073

 
      Loans in process
1,175,642

 
 
1,149,934

 
      Net deferred fees, costs and discounts
46,377

 
 
45,758

 
Total loan contra accounts
1,349,174

 
 
1,318,765

 
Net loans
$
11,107,042

 
 
$
10,882,622

 


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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following table sets forth information regarding non-accrual loans.
 
 
December 31, 2017
 
September 30, 2017
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
26,219

 
57.7
%
 
$
27,930

 
56.3
%
Construction
364

 
0.8

 

 

Construction - custom

 

 
91

 
0.2

Land - acquisition & development
1,326

 
2.9

 
296

 
0.6

Land - consumer lot loans
976

 
2.1

 
605

 
1.2

Multi-family
250

 
0.5

 
139

 
0.3

Commercial real estate
8,241

 
18.1

 
11,815

 
23.8

Commercial & industrial
7,596

 
16.7

 
8,082

 
16.3

HELOC
476

 
1.0

 
531

 
1.1

Consumer
72

 
0.2

 
91

 
0.2

Total non-accrual loans
$
45,520

 
100
%
 
$
49,580

 
100
%
% of total net loans
0.41
%
 
 
 
0.46
%
 
 

The Company recognized interest income on non-accrual loans of approximately $2,551,000 in the three months ended December 31, 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 $489,000 for the three months ended December 31, 2017. Interest cash flows collected on non-accrual loans varies from period to period as those loans are brought current or are paid off.

The following tables provide details regarding delinquent loans.
 
December 31, 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
$
5,692,045

 
$
5,655,873

 
$
9,801

 
$
6,073

 
$
20,298

 
$
36,172

 
0.64
%
Construction
852,164

 
847,793

 
1,500

 
2,507

 
364

 
4,371

 
0.51

Construction - custom
292,255

 
292,255

 

 

 

 

 

Land - acquisition & development
112,260

 
111,018

 

 

 
1,242

 
1,242

 
1.11

Land - consumer lot loans
104,996

 
104,246

 
107

 
153

 
490

 
750

 
0.71

Multi-family
1,312,673

 
1,312,423

 

 

 
250

 
250

 
0.02

Commercial real estate
1,436,508

 
1,436,064

 
129

 

 
315

 
444

 
0.03

Commercial & industrial
1,120,707

 
1,117,240

 
2,894

 

 
573

 
3,467

 
0.31

HELOC
136,995

 
136,004

 
439

 
147

 
405

 
991

 
0.72

Consumer
219,971

 
219,404

 
352

 
154

 
61

 
567

 
0.26

Total Loans
$
11,280,574

 
$
11,232,320

 
$
15,222

 
$
9,034

 
$
23,998

 
$
48,254

 
0.43
%
Delinquency %
 
 
99.57%
 
0.13%
 
0.08%
 
0.21%
 
0.43%
 
 



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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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)
 
 
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 increased from 0.40% as of September 30, 2017 to 0.43% as of December 31, 2017 and there are no loans greater than 90 days delinquent and still accruing interest as of either date.

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

 
Three Months Ended December 31,
 
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
8

 
$
2,012

 
$
2,012

 
12

 
$
2,134

 
$
2,134

   Land - consumer lot loans

 

 

 
1

 
204

 
204

   Commercial & Industrial
3

 
7,256

 
7,256

 

 

 

   HELOC

 

 

 
1

 
228

 
228

 
11

 
$
9,268

 
$
9,268

 
14

 
$
2,566

 
$
2,566




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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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 December 31,
 
2017
 
2016
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
TDRs That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-family residential
1

 
$
44

 
6

 
$
1,993

   Commercial real estate

 

 
2

 
267

 
1

 
$
44

 
8

 
$
2,260



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 December 31, 2017, 97.6% of the Company's $199,175,000 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 December 31, 2017, single-family residential loans comprised 85.7% of TDRs.

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

The Company's remaining outstanding balance of assets subject to FDIC loss share agreements was $58,699,000 (including $54,865,000 of loans receivable) at December 31, 2017 compared to $67,914,000 (including $61,810,114 of loans receivable) as of September 30, 2017. As of December 31, 2017, the associated FDIC indemnification asset was $0 compared to a balance of $8,967,000 as of September 30, 2017. The FDIC clawback liability was $39,906,000 as of December 31, 2017 and $37,143,000 as of September 30, 2017. The Company has made a proposal to the FDIC to early terminate its remaining FDIC loss share agreements, which relate to the Horizon Bank and Home Valley Bank acquisitions. During the three months ended December 31, 2017, the Company recorded an $8,550,000 charge resulting from valuation adjustments related to the FDIC indemnification asset and FDIC clawback liability. The valuation adjustments were based on management's estimate of the amount that would be due to the FDIC to early terminate the loss share agreements.



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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 December 31, 2017
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
36,892

 
$
(461
)
 
$
121

 
$
(624
)
 
$
35,928

Construction
24,556

 

 

 
658

 
25,214

Construction - custom
1,944

 
(50
)
 

 
158

 
2,052

Land - acquisition & development
6,829

 

 
3,372

 
(2,846
)
 
7,355

Land - consumer lot loans
2,649

 
(47
)
 

 
304

 
2,906

Multi-family
7,862

 

 

 
42

 
7,904

Commercial real estate
11,818

 

 

 
(193
)
 
11,625

Commercial & industrial
28,524

 
(116
)
 
55

 
805

 
29,268

HELOC
855

 

 

 
(47
)
 
808

Consumer
1,144

 
(78
)
 
286

 
2,743

 
4,095

 
$
123,073

 
$
(752
)
 
$
3,834

 
$
1,000

 
$
127,155

Three Months Ended December 31, 2016
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
37,796

 
$
(115
)
 
$
151

 
$
374

 
$
38,206

Construction
19,838

 

 

 
2,096

 
21,934

Construction - custom
1,080

 

 

 
30

 
1,110

Land - acquisition & development
6,023

 
(20
)
 
4,018

 
(3,356
)
 
6,665

Land - consumer lot loans
2,535

 
(17
)
 
70

 
(87
)
 
2,501

Multi-family
6,925

 

 

 
704

 
7,629

Commercial real estate
8,588

 
(11
)
 
356

 
1,235

 
10,168

Commercial & industrial
28,008

 
(58
)
 
725

 
(939
)
 
27,736

HELOC
813

 
(37
)
 
1

 
55

 
832

Consumer
1,888

 
(146
)
 
379

 
(446
)
 
1,675

 
$
113,494

 
$
(404
)
 
$
5,700

 
$
(334
)
 
$
118,456


The Company recorded no provision for loan losses during the three months ended December 31, 2017 or December 31, 2016. Reserving for new loan originations as the loan portfolio grows and the mix changes has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $3,082,000 for the three months ended December 31, 2017, compared with $5,296,000 of net recoveries for the same period one year ago.
Non-performing assets were $63,448,000, or 0.41%, of total assets at December 31, 2017, compared to $70,238,000, or 0.46%, of total assets at September 30, 2017. Non-accrual loans were $45,520,000 at December 31, 2017, compared to $49,580,000 at September 30, 2017. Delinquencies, as a percent of total loans, were 0.43% at December 31, 2017, compared to 0.40% at September 30, 2017.

The reserve for unfunded commitments was $6,750,000 as of December 31, 2017, 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 $133,905,000, or 1.08% of gross loans as of December 31, 2017, is sufficient to absorb estimated inherent losses.

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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.
 
December 31, 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)
 
 
 
(In thousands)
Single-family residential
$
35,928

 
$
5,676,565

 
0.6
%
 
$

 
$
24,083

 
%
Construction
25,214

 
851,800

 
3.0

 

 
364

 

Construction - custom
2,052

 
292,255

 
0.7

 

 

 

Land - acquisition & development
7,355

 
110,884

 
6.6

 

 
1,376

 

Land - consumer lot loans
2,906

 
97,291

 
3.0

 

 
416

 

Multi-family
7,899

 
1,311,943

 
0.6

 
5

 
730

 
0.7

Commercial real estate
11,519

 
1,389,749

 
0.8

 
106

 
27,535

 
0.4

Commercial & industrial
28,744

 
1,108,961

 
2.6

 
524

 
11,694

 
4.5

HELOC
808

 
134,320

 
0.6

 

 
620

 

Consumer
4,095

 
219,784

 
1.9

 

 
70

 

 
$
126,520

 
$
11,193,552

 
1.1
%
 
$
635

 
$
66,888

 
0.9
%

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)
 
 
 
(In thousands)
Single-family residential
$
36,893

 
$
5,713,576

 
0.7
%
 
$

 
$
5,552

 
%
Construction
24,556

 
793,958

 
3.1

 

 

 

Construction - custom
1,944

 
277,495

 
0.7

 

 
105

 

Land - acquisition & development
6,828

 
104,767

 
6.5

 
1

 
89

 
1.0

Land - consumer lot loans
2,649

 
96,337

 
2.8

 

 
171

 

Multi-family
7,857

 
1,302,625

 
0.6

 
5

 
493

 
1.0

Commercial real estate
11,697

 
1,391,668

 
0.8

 
120

 
21,765

 
0.6

Commercial & industrial
28,524

 
1,093,210

 
2.6

 

 
81

 

HELOC
855

 
141,689

 
0.6

 

 
215

 

Consumer
1,144

 
84,887

 
1.4

 

 
82

 

 
$
122,947

 
$
11,000,212

 
1.1
%
 
$
126

 
$
28,553

 
0.4
%

As of December 31, 2017, $126,520,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $635,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2017, $122,947,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $126,000 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

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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.


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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.
December 31, 2017
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Loan type
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,657,731

 
$

 
$
35,587

 
$

 
$

 
$
5,693,318

  Construction
1,707,044

 

 
3,374

 

 

 
1,710,418

  Construction - custom
583,580

 

 

 

 

 
583,580

  Land - acquisition & development
134,625

 

 
2,313

 

 

 
136,938

  Land - consumer lot loans
104,105

 

 
981

 

 

 
105,086

  Multi-family
1,304,991

 
3,159

 
4,545

 

 

 
1,312,695

  Commercial real estate
1,401,236

 
3,764

 
31,508

 

 

 
1,436,508

  Commercial & industrial
1,077,207

 
10,423

 
33,077

 

 

 
1,120,707

  HELOC
136,287

 

 
708

 

 

 
136,995

  Consumer
219,899

 

 
72

 

 

 
219,971

Total gross loans
$
12,326,705

 
$
17,346

 
$
112,165

 
$

 
$

 
$
12,456,216

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
99.0
%
 
0.1
%
 
0.9
%
 
%
 
%
 
 

September 30, 2017
Internally Assigned Grade
 
 
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Total Gross Loans
 
(In thousands)
Loan type
 
 
 
 
 
 
 
 
 
 
 
 Single-family residential
$
5,671,229

 
$

 
$
39,775

 
$

 
$

 
$
5,711,004

 Construction
1,594,926

 

 
3,070

 

 

 
1,597,996

 Construction - custom
602,540

 

 
91

 

 

 
602,631

 Land - acquisition & development
123,028

 
207

 
1,073

 

 

 
124,308

 Land - consumer lot loans
103,787

 

 
618

 

 

 
104,405

 Multi-family
1,295,261

 
5,795

 
2,092

 

 

 
1,303,148

 Commercial real estate
1,391,996

 
5,944

 
36,670

 

 

 
1,434,610

 Commercial & industrial
1,054,972

 
14,814

 
23,574

 

 

 
1,093,360

 HELOC
144,229

 

 
621

 

 

 
144,850

 Consumer
84,984

 

 
91

 

 

 
85,075

Total gross loans
$
12,066,952

 
$
26,760

 
$
107,675

 
$

 
$

 
$
12,201,387

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
98.9
%
 
0.2
%
 
0.9
%
 
%
 
%
 
 




19

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


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

December 31, 2017
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,667,099

 
99.5
%
 
$
26,219

 
0.5
%
Construction
1,710,054

 
100.0

 
364

 

Construction - custom
583,580

 
100.0

 

 

Land - acquisition & development
135,612

 
99.0

 
1,326

 
1.0

Land - consumer lot loans
104,110

 
99.1

 
976

 
0.9

Multi-family
1,312,445

 
100.0

 
250

 

Commercial real estate
1,428,267

 
99.4

 
8,241

 
0.6

Commercial & industrial
1,113,111

 
99.3

 
7,596

 
0.7

HELOC
136,519

 
99.7

 
476

 
0.3

Consumer
219,899

 
100.0

 
72

 

 
$
12,410,696

 
99.6
%
 
$
45,520

 
0.4
%
September 30, 2017
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,683,074

 
99.5
%
 
$
27,930

 
0.5
%
Construction
1,597,996

 
100.0

 

 

Construction - custom
602,540

 
99.9

 
91

 
0.1

Land - acquisition & development
124,012

 
99.8

 
296

 
0.2

Land - consumer lot loans
103,800

 
99.4

 
605

 
0.6

Multi-family
1,303,009

 
99.9

 
139

 
0.1

Commercial real estate
1,422,795

 
99.2

 
11,815

 
0.8

Commercial & industrial
1,085,278

 
99.3

 
8,082

 
0.7

HELOC
144,319

 
99.6

 
531

 
0.4

Consumer
84,984

 
99.9

 
91

 
0.1

 
$
12,151,807

 
99.6
%
 
$
49,580

 
0.4
%

20

Table of Contents
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. 
 
 
 
 
 
 
 
 
December 31, 2017
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average Recorded Investment
 
(In thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
20,405

 
$
21,860

 
$

 
$
20,864

Construction
969

 
969

 

 
485

Construction - custom

 

 

 
74

Land - acquisition & development
1,376

 
1,405

 

 
853

Land - consumer lot loans
300

 
375

 

 
254

Multi-family
250

 
254

 

 
195

Commercial real estate
16,372

 
21,720

 

 
14,631

Commercial & industrial
4,439

 
4,506

 

 
6,359

HELOC
620

 
747

 

 
555

Consumer
70

 
134

 

 
79

 
44,801

 
51,970

 

 
44,349

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
170,677

 
174,162

 
3,412

 
176,308

Land - acquisition & development

 

 

 
45

Land - consumer lot loans
7,405

 
7,776

 

 
7,677

Multi-family
480

 
480

 
5

 
487

Commercial real estate
11,910

 
12,755

 
106

 
13,495

Commercial & industrial
7,256

 
7,256

 
524

 
3,628

HELOC
1,356

 
1,435

 

 
1,542

Consumer
91

 
91

 

 
94

 
199,175

 
203,955

 
4,047

(1)
203,276

Total impaired loans:
 
 
 
 
 
 
 
Single-family residential
191,082

 
196,022

 
3,412

 
197,172

Construction
969

 
969

 

 
485

Construction - custom

 

 

 
74

Land - acquisition & development
1,376

 
1,405

 

 
898

Land - consumer lot loans
7,705

 
8,151

 

 
7,931

Multi-family
730

 
734

 
5

 
682

Commercial real estate
28,282

 
34,475

 
106

 
28,126

Commercial & industrial
11,695

 
11,762

 
524

 
9,987

HELOC
1,976

 
2,182

 

 
2,097

Consumer
161

 
225

 

 
173

 
$
243,976

 
$
255,925

 
$
4,047

(1)
$
247,625


(1)
Includes $635,000 of specific reserves and $3,412,000 included in the general reserves.



21

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


September 30, 2017
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
21,325

 
$
23,880

 
$

 
$
19,371

Construction - custom
148

 
165

 

 
231

Land - acquisition & development
330

 
8,208

 

 
176

Land - consumer lot loans
208

 
330

 

 
431

Multi-family
139

 
3,231

 

 
748

Commercial real estate
12,890

 
22,487

 

 
11,466

Commercial & industrial
8,279

 
14,321

 

 
7,425

HELOC
490

 
1,212

 

 
487

Consumer
88

 
1,433

 

 
57

 
43,897

 
75,267

 

 
40,392

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
181,941

 
186,167

 
4,030

 
204,723

Land - acquisition & development
90

 
90

 
1

 
576

Land - consumer lot loans
7,949

 
8,526

 

 
8,976

Multi-family
493

 
493

 
5

 
1,024

Commercial real estate
15,079

 
16,707

 
120

 
16,991

Commercial & industrial

 

 

 
297

HELOC
1,728

 
1,806

 

 
1,451

Consumer
97

 
284

 

 
100

 
207,377

 
214,073

 
4,156

(1)
234,138

Total impaired loans:
 
 
 
 
 
 
 
Single-family residential
203,266

 
210,047

 
4,030

 
224,094

Construction - custom
148

 
165

 

 
231

Land - acquisition & development
420

 
8,298

 
1

 
752

Land - consumer lot loans
8,157

 
8,856

 

 
9,407

Multi-family
632

 
3,724

 
5

 
1,772

Commercial real estate
27,969

 
39,194

 
120

 
28,457

Commercial & industrial
8,279

 
14,321

 

 
7,722

HELOC
2,218

 
3,018

 

 
1,938

Consumer
185

 
1,717

 

 
157

 
$
251,274

 
$
289,340

 
$
4,156

(1)
$
274,530


(1)
Includes $126,000 of specific reserves and $4,030,000 included in the general reserves.


22

Table of Contents
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
Available-for-Sale Securities and Derivative Contracts
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 Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges as well as borrowings 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.
 

23

Table of Contents
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.
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
$
503

 
$

 
$

 
$
503

U.S. government and agency securities

 
194,869

 

 
194,869

Municipal bonds

 
26,212

 

 
26,212

Corporate debt securities

 
184,416

 

 
184,416

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates

 
831,489

 

 
831,489

Commercial MBS

 
8,366

 

 
8,366

Total available-for-sale securities
503

 
1,245,352

 

 
1,245,855

Interest rate contracts

 
7,587

 

 
7,587

Borrowings hedges

 
4,997

 

 
4,997

Total financial assets
$
503

 
$
1,257,936

 
$

 
$
1,258,439

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
7,587

 
$

 
$
7,587

Commercial loan hedges

 
36

 

 
36

Total financial liabilities
$

 
$
7,623

 
$

 
$
7,623

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the three months ended December 31, 2017.

24

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


 
September 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

 
211,077

 

 
211,077

Municipal bonds

 
26,624

 

 
26,624

Corporate debt securities

 
185,298

 

 
185,298

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates

 
834,297

 

 
834,297

Commercial MBS

 
8,391

 

 
8,391

Total available-for-sale securities
522

 
1,265,687

 

 
1,266,209

Interest rate contracts

 
1,139

 

 
1,139

Total financial assets
$
522

 
$
1,266,826

 
$

 
$
1,267,348

 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
1,139

 
$

 
$
1,139

Commercial loan hedges

 
174

 

 
174

Borrowings hedges

 
1,693

 

 
1,693

Total financial liabilities
$

 
$
3,006

 
$

 
$
3,006

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the fiscal year ended September 30, 2017.


25

Table of Contents
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 December 31, 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 December 31, 2017 and December 31, 2016, and the total gains (losses) resulting from those fair value adjustments for the three months ended December 31, 2017 and December 31, 2016. The estimated fair value measurements are shown gross of estimated selling costs.
 
 
December 31, 2017
 
Three Months Ended December 31, 2017
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
Impaired loans (1)
$

 
$

 
$
688

 
$
688

 
$
(507
)
Real estate owned (2)

 

 
2,055

 
2,055

 
(180
)
Balance at end of period
$

 
$

 
$
2,743

 
$
2,743

 
$
(687
)

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

 
December 31, 2016
 
Three Months Ended December 31, 2016
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Gains (Losses)
 
(In thousands)
Impaired loans (1)
$

 
$

 
$
3,353

 
$
3,353

 
$
(422
)
Real estate owned (2)

 

 
2,299

 
2,299

 
(241
)
Balance at end of period
$

 
$

 
$
5,652

 
$
5,652

 
$
(663
)

(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

26

Table of Contents
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. 

27

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


 
 
 
 
December 31, 2017
 
September 30, 2017
 
 
Level in Fair Value Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
309,713

 
$
309,713

 
$
313,070

 
$
313,070

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Equity securities
 
1
 
503

 
503

 
522

 
522

U.S. government and agency securities
 
2
 
194,869

 
194,869

 
211,077

 
211,077

Municipal bonds
 
2
 
26,212

 
26,212

 
26,624

 
26,624

Corporate debt securities
 
2
 
184,416

 
184,416

 
185,298

 
185,298

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
831,489

 
831,489

 
834,297

 
834,297

Commercial MBS
 
2
 
8,366

 
8,366

 
8,391

 
8,391

Total available-for-sale securities
 
 
 
1,245,855

 
1,245,855

 
1,266,209

 
1,266,209

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,750,886

 
1,738,337

 
1,646,856

 
1,635,913

                           Commercial MBS
 
2
 
15,000

 
15,005

 

 

Total held-to-maturity securities
 
 
 
1,765,886

 
1,753,342

 
1,646,856

 
1,635,913

 
 
 
 
 
 
 
 
 
 
 
Loans receivable
 
3
 
11,107,042

 
11,503,407

 
10,882,622

 
11,247,586

FHLB and FRB stock
 
2
 
130,590

 
130,590

 
122,990

 
122,990

        Other assets - interest rate contracts
 
2
 
7,587

 
7,587

 
1,139

 
1,139

        Other assets - borrowings hedges
 
2
 
4,997

 
4,997

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Customer accounts
 
2
 
11,001,579

 
10,483,114

 
10,835,008

 
10,411,686

FHLB advances
 
2
 
2,415,000

 
2,431,792

 
2,225,000

 
2,266,791

        Other liabilities - interest rate contracts
 
2
 
7,587

 
7,587

 
1,139

 
1,139

Other liabilities - commercial loan hedges
 
2
 
36

 
36

 
174

 
174

        Other liabilities - borrowings hedges
 
2
 

 

 
1,693

 
1,693

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.
FHLB and FRB stock – The fair value is based upon the par value of the stock which equates to its carrying value.

28

Table of Contents
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.
 
December 31, 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
$
3,300

 
$
70

 
$

 
$
3,370

 
9.80
%
1 to 5 years
2,123

 

 

 
2,123

 
1.61

5 to 10 years
68,326

 

 
(1,174
)
 
67,152

 
2.03

Over 10 years
122,171

 
215

 
(162
)
 
122,224

 
2.09

Equity securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
500

 
3

 

 
503

 
1.80

Corporate debt securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
63,657

 
1,936

 

 
65,593

 
3.14

5 to 10 years
119,962

 
213

 
(1,352
)
 
118,823

 
2.66

Over 10 years

 

 

 

 

Municipal bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
2,352

 

 
(4
)
 
2,348

 
1.23

1 to 5 years
1,374

 
8

 

 
1,382

 
2.05

Over 10 years
20,338

 
2,144

 

 
22,482

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
825,744

 
8,181

 
(2,436
)
 
831,489

 
3.11

Commercial MBS
8,350

 
16

 

 
8,366

 
3.55

 
1,238,197

 
12,786

 
(5,128
)
 
1,245,855

 
2.98

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,750,886

 
6,218

 
(18,767
)
 
1,738,337

 
3.16

Commercial MBS
15,000

 
5

 

 
15,005

 
2.23

 
1,765,886

 
6,223

 
(18,767
)
 
1,753,342

 
3.15

 
$
3,004,083

 
$
19,009

 
$
(23,895
)
 
$
2,999,197

 
3.08
%
 

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


 
September 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

 
$
146

 
$

 
$
9,446

 
10.38
%
1 to 5 years
5,688

 
2

 

 
5,690

 
1.51

5 to 10 years
69,108

 

 
(1,238
)
 
67,870

 
1.93

Over 10 years
127,936

 
353

 
(218
)
 
128,071

 
1.92

Equity Securities
 
 
 
 
 
 
 
 
 
1 to 5 years
500

 
22

 

 
522

 
1.80

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year

 

 

 

 

1 to 5 years
63,622

 
2,083

 

 
65,705

 
2.96

5 to 10 years
119,960

 
210

 
(577
)
 
119,593

 
2.62

Over 10 years

 

 

 

 

Municipal bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
2,344

 
10

 

 
2,354

 
1.23

1 to 5 years
1,367

 
55

 

 
1,422

 
2.05

5 to 10 years

 

 

 

 

Over 10 years
20,343

 
2,505

 

 
22,848

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
828,069

 
8,402

 
(2,174
)
 
834,297

 
2.96

Commercial MBS
8,350

 
41

 

 
8,391

 
3.31

 
1,256,587

 
13,829

 
(4,207
)
 
1,266,209

 
2.86

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,646,856

 
7,143

 
(18,086
)
 
1,635,913

 
3.14

 
1,646,856

 
7,143

 
(18,086
)
 
1,635,913

 

 
$
2,903,443

 
$
20,972

 
$
(22,293
)
 
$
2,902,122

 
3.02
%

For available-for-sale investment securities, there were no sales during the three months ended December 31, 2017 and sales totaling $350,890,000 during the three months ended December 31, 2016. There were purchases of $40,884,000 of available-for-sale investment securities during the three months ended December 31, 2017 and no purchases during the three months ended December 31, 2016. For held-to-maturity investment securities, there were purchases totaling $170,836,000 during the three months ended December 31, 2017 and purchases of $415,729,000 during the three months ended December 31, 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 December 31, 2017 and September 30, 2017, 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.

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


 
December 31, 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
$

 
$

 
$
(1,352
)
 
$
98,648

 
$
(1,352
)
 
98,648

Municipal bonds due

 

 
(4
)
 
2,347

 
(4
)
 
2,347

U.S. government and agency securities

 

 
(1,336
)
 
104,572

 
(1,336
)
 
104,572

Agency pass-through certificates
(131
)
 
71,537

 
(21,072
)
 
1,218,036

 
(21,203
)
 
1,289,573

 
$
(131
)
 
$
71,537

 
$
(23,764
)
 
$
1,423,603

 
$
(23,895
)
 
$
1,495,140


September 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
$

 
$

 
$
(577
)
 
$
49,423

 
$
(577
)
 
$
49,423

U.S. government and agency securities
(759
)
 
24,400

 
(697
)
 
96,195

 
(1,456
)
 
120,595

Agency pass-through certificates
(17,683
)
 
1,163,358

 
(2,577
)
 
249,304

 
(20,260
)
 
1,412,662

 
$
(18,442
)
 
$
1,187,758

 
$
(3,851
)
 
$
394,922

 
$
(22,293
)
 
$
1,582,680



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


NOTE G – Derivatives and Hedging Activities

The Company 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 Company retains a variable rate loan. Under these agreements, the Company 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 Company 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 Company had $956,247,000 and $1,035,573,000 notional in interest rate swaps to hedge this exposure as of December 31, 2017 and September 30, 2017, 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 three months ended December 31, 2017 and 2016 as the changes in value for the asset and liability side of the swaps offset each other.

The Company 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 Company had $700,000,000 notional in interest rate swaps to hedge existing and anticipated future borrowings as of December 31, 2017 and September 30, 2017.

The Company has also enters into interest rate swaps to hedge the interest rate risk of individual fixed rate commercial loans and these relationships qualify as a fair value hedges under ASC 815, which provides for offsetting of the recognition of gains and losses of the respective interest rate swap and the hedged item. The interest rate swaps in these hedging relationships had a notional amount of $97,927,000 and $52,936,000 as of December 31, 2017 and September 30, 2017, respectively.

The following table presents the fair value and balance sheet classification of derivatives at December 31, 2017 and September 30, 2017:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
December 31, 2017
 
September 30, 2017
 
December 31, 2017
 
September 30, 2017
 
 
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
 
$
7,587

 
Other assets
 
$
1,139

 
Other liabilities
 
$
7,587

 
Other liabilities
 
$
1,139

Commercial loan hedges
 
Other assets
 

 
Other assets
 

 
Other liabilities
 
36

 
Other liabilities
 
174

Borrowings hedges
 
Other assets
 
4,997

 
Other assets
 

 
Other liabilities
 

 
Other liabilities
 
1,693

 
 
 
 
$
12,584

 
 
 
$
1,139

 
 
 
$
7,623

 
 
 
$
3,006



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


NOTE H – Income Taxes

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. Because the Company has a fiscal year end of September 30, the reduced corporate tax rate will result in the application of a blended federal statutory tax rate for its fiscal year 2018 and then a flat 21% thereafter.

Under generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. At September 30, 2017, the Company’s deferred tax assets and liabilities were determined based on the then-current enacted federal tax rate of 35%. As a result of the reduction in the corporate income tax rate under the Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets and liabilities expected to be realized in fiscal year 2018 were re-measured using the aforementioned blended rate. All remaining deferred tax assets and liabilities were re-measured using the new statutory federal rate of 21%. These re-measurements collectively resulted in a discrete tax benefit of $3,700,000 that was recognized during the three months ended December 31, 2017. The Company’s revaluation of its deferred tax assets and liabilities is subject to further clarification of the Tax Act and refinements of its estimates. As a result, the actual impact on the deferred tax assets and liabilities and income tax expense due to the Tax Act may vary from the amounts estimated.

FORWARD LOOKING STATEMENTS

Washington Federal, Inc. (the "Company") makes statements in this Quarterly Report on Form 10-Q that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under Item 1A. “Risk Factors,” and in any of the Company's other subsequent Securities and Exchange Commission filings, which could cause the Company's future results to differ materially from the plans, objectives, goals, estimates, intentions and expectations expressed in forward-looking statements:
a deterioration in economic conditions, including declines in the real estate market and home sale volumes and financial stress on borrowers (consumers and businesses) as a result of the uncertain economic environment;
the effects of a severe economic downturn, including high unemployment rates and declines in housing prices and property values, in the Company's primary market areas;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
fluctuations in interest rate risk and changes in market interest rates;
the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
the Company's ability to successfully complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such activities;
legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential limitations in the manner in which the Company conducts its business and undertake new investments and activities;
the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms;

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

changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
the success, timeliness and cost of the Company’s remediation efforts associated with its Bank Secrecy Act program, possible actions of government authorities related thereto and the potential impact of such matters on the success, timing and ability to pursue the Company’s growth or other business initiatives;
the success of the Company at managing the risks involved in the foregoing and managing its business; and
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.

All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.
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 2017 represent balances as of September 30, 2017 or activity for the fiscal year then ended.

INTEREST RATE RISK
Based on Management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term loans and transaction deposit accounts, to reduce its interest rate risk profile. The mix of transaction and savings accounts is 59% of total deposits as of December 31, 2017 while the composition of the investment securities portfolio is 25% variable and 75% 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 $1,765,886,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of December 31, 2017, the net unrealized loss on these securities was $12,544,000. The Company has $1,245,855,000 of available-for-sale securities that are carried at fair value. As of December 31, 2017, the net unrealized gain on these securities was $7,658,000. The Bank has executed interest rate swaps to hedge interest rate risk on existing FHLB borrowings. The unrealized gain on these interest rate swaps as of December 31, 2017 was $4,997,000. All of the above are pre-tax net unrealized gains or losses.

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

In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 1.3% in the next year. This compares to an estimated increase of 3.0% as of the September 30, 2017 analysis. 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 0.5% in the first year and increase of 2.1% in the second year assuming a constant balance sheet and no management intervention.


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

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 December 31, 2017, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $528,601,000 or 20.4% and the NPV to total assets ratio to decline to 14.2% from a base of 16.6%. As of September 30, 2017, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $462,604,000 or 18.2% and the NPV to total assets ratio to decline to 14.6% from a base of 16.6%. The increased NPV sensitivity and higher base NPV ratio is due primarily to higher interest rates and lower prices as of December 31, 2017.

Repricing Gap Analysis. At December 31, 2017, the Company had approximately $2,013,901,000 more in liabilities subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (12.9)% of total assets. This was an increase from the (15.7)% gap as of September 30, 2017. 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 2.92% at December 31, 2017 from 2.90% at September 30, 2017. The spread increase of 2 basis points is primarily due to the rise in short-term interest rates, which resulted in an increased rate being earned on cash and adjustable rate loans and investment securities. As of December 31, 2017, the weighted average rate on earning assets increased by 3 basis points to 3.85% compared to September 30, 2017, while the weighted average cost of funds increased by 1 basis point to 0.93%. The interest rate spread increased to 2.92% at December 31, 2017 from 2.73% at December 31, 2016.
Net Interest Margin. The net interest margin is measured using the net interest income divided by average earning assets for the period. The net interest margin increased to 3.26% for the quarter ended December 31, 2017 from 3.02% for the quarter ended December 31, 2016. The yield on earning assets increased 23 basis points to 4.08% and the cost of interest bearing liabilities decreased 2 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 lower rate in interest bearing liabilities was primarily due to the maturity of certain long-term FHLB advances.
The following table sets forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago.

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Table of Contents
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 December 31, 2017
 
Three Months Ended December 31, 2016
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
 
(In thousands)
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
10,984,886

 
$
124,511

 
4.50
%
 
$
10,013,798

 
$
114,835

 
4.55
%
Mortgaged-backed securities
2,521,407

 
16,899

 
2.66

 
2,537,585

 
12,789

 
2.00

Cash & Investments
559,370

 
3,273

 
2.32

 
1,010,299

 
4,246

 
1.67

FHLB & FRB stock
126,229

 
1,097

 
3.45

 
117,210

 
894

 
3.03

 
 
 
 
 
 
 
 
 
 
 
 
 Total interest-earning assets
14,191,892

 
145,780

 
4.08
%
 
13,678,892

 
132,764

 
3.85
%
Other assets
1,149,607

 
 
 
 
 
1,197,304

 
 
 
 
Total assets
$
15,341,499

 
 
 
 
 
$
14,876,196

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,850,742

 
$
14,638

 
0.54
%
 
$
10,610,314

 
$
13,017

 
0.49
%
FHLB advances
2,305,978

 
15,407

 
2.65

 
2,080,000

 
16,595

 
3.17

 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
13,156,720

 
30,045

 
0.91
%
 
12,690,314

 
29,612

 
0.93
%
Other liabilities
168,382

 
 
 
 
 
201,233

 
 
 
 
               Total liabilities
13,325,102

 
 
 
 
 
12,891,547

 
 
 
 
Stockholders' equity
2,016,397

 
 
 
 
 
1,984,649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
15,341,499

 
 
 
 
 
$
14,876,196

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
115,735

 
 
 
 
 
$
103,152

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.26
%
 
 
 
 
 
3.02
%
As of December 31, 2017, total assets had increased by $330,433,000 to $15,584,013,000 from $15,253,580,000 at September 30, 2017. During the three months ended December 31, 2017, cash and cash equivalents decreased by $3,357,000, loans receivable increased $224,420,000 and investment securities increased by $98,676,000.
Cash and cash equivalents of $309,713,000 and stockholders’ equity of $2,009,618,000 as of December 31, 2017 provide 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") up to 45% of total assets depending on specific collateral eligibility. This line provides 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,

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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 $309,713,000 at December 31, 2017, a decrease from $313,070,000 at September 30, 2017. These amounts include the Bank's operating cash.
The Company’s net worth at December 31, 2017 was $2,009,618,000, or 12.90% of total assets. This was a increase of $3,930,000 from September 30, 2017 when net worth was $2,005,688,000, or 13.15% of total assets. The Company’s net worth was impacted in the three months ended December 31, 2017 by net income of $51,670,000, the payment of $13,043,000 in cash dividends, treasury stock purchases of $38,984,000, as well as other comprehensive income of $2,989,000. The ratio of tangible capital to tangible assets at December 31, 2017 was 11.12%. 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.

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PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.
 
Actual
 
Minimum Capital
Adequacy Guidelines
 
Minimum Well-Capitalized Guidelines
 
Capital
 
Ratio
 
Ratio
 
Ratio
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
Common Equity Tier I risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
$
1,691,303

 
16.14
%
 
4.50
%
 
NA

      The Bank
1,662,981

 
15.87
%
 
4.50
%
 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,691,303

 
16.14
%
 
6.00
%
 
NA

      The Bank
1,662,981

 
15.87
%
 
6.00
%
 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,822,321

 
17.39
%
 
8.00
%
 
NA

      The Bank
1,794,017

 
17.12
%
 
8.00
%
 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
      The Company
1,691,303

 
11.26
%
 
4.00
%
 
NA

      The Bank
1,662,981

 
11.07
%
 
4.00
%
 
5.00
%
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
Common Equity Tier 1 risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,701,327

 
16.67
%
 
4.50
%
 
NA

      The Bank
1,668,314

 
16.35
%
 
4.50
%
 
6.50
%
Tier I risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,701,327

 
16.67
%
 
6.00
%
 
NA

      The Bank
1,668,314

 
16.35
%
 
6.00
%
 
8.00
%
Total risk-based capital ratio:
 
 
 
 
 
 
 
      The Company
1,828,935

 
17.92
%
 
8.00
%
 
NA

      The Bank
1,795,929

 
17.60
%
 
8.00
%
 
10.00
%
Tier 1 Leverage ratio:
 
 
 
 
 
 
 
      The Company
1,701,327

 
11.49
%
 
4.00
%
 
NA

      The Bank
1,668,314

 
11.27
%
 
4.00
%
 
5.00
%

CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents: Cash and cash equivalents are $309,713,000 at December 31, 2017, a decrease of $3,357,000, or 1.1%, since September 30, 2017.

Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $20,354,000, or 1.6%, during the three months ended December 31, 2017, mostly due to principal repayments and maturities of $58,261,000 partially offset by purchases of $40,884,000. During the same period, the balance of held-to-maturity securities increased by $119,030,000 due to purchases of $170,836,000 partially offset by principal paydowns and maturities of $50,653,000. As of December 31, 2017, the Company

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PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

had a net unrealized gain on available-for-sale securities of $7,658,000, 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 $11,107,042,000 at December 31, 2017 compared to $10,882,622,000 at September 30, 2017. The increase resulted primarily from originations of $953,552,000 and purchases of $143,605,000, partially offset by loan principal repayments of $859,583,000. Commercial loan originations accounted for 70% of total originations and consumer loan originations were 30% during the period. Purchased loans during the quarter were pools of consumer loans. The increase in the loan portfolio is consistent with management's strategy during low rate environments to produce more multifamily, commercial real estate, and commercial and industrial loans that generally have adjustable interest rates or a shorter duration.
The following table shows the loan portfolio by category and the change.

 
December 31, 2017
 
September 30, 2017
 
Change
 
(In thousands)
 
(In thousands)
 
$
%
Gross loans by category
 
 
 
 
 
 
 
 
   Single-family residential
$
5,693,318

45.7
%
 
$
5,711,004

46.8
%
 
$
(17,686
)
(0.3
)%
   Construction
1,710,418

13.7

 
1,597,996

13.1

 
112,422

7.0

   Construction - custom
583,580

4.7

 
602,631

4.9

 
(19,051
)
(3.2
)
   Land - acquisition & development
136,938

1.1

 
124,308

1.0

 
12,630

10.2

   Land - consumer lot loans
105,086

0.8

 
104,405

0.9

 
681

0.7

   Multi-family
1,312,695

10.5

 
1,303,148

10.7

 
9,547

0.7

   Commercial real estate
1,436,508

11.5

 
1,434,610

11.8

 
1,898

0.1

   Commercial & industrial
1,120,707

9.0

 
1,093,360

9.0

 
27,347

2.5

   HELOC
136,995

1.1

 
144,850

1.2

 
(7,855
)
(5.4
)
   Consumer
219,971

1.8

 
85,075

0.7

 
134,896

158.6

Total gross loans
12,456,216

100
%
 
12,201,387

100
%
 
254,829

2.1
 %
   Less:
 
 
 
 
 
 
 
 
      Allowance for loan losses
127,155

 
 
123,073

 
 
4,082

3.3
 %
      Loans in process
1,175,642

 
 
1,149,934

 
 
25,708

2.2

      Net deferred fees, costs and discounts
46,377

 
 
45,758

 
 
619

1.4

Total loan contra accounts
1,349,174

 
 
1,318,765

 
 
30,409

2.3

Net Loans
$
11,107,042

 
 
$
10,882,622

 
 
$
224,420

2.1
 %
 
Non-performing assets: Non-performing assets decreased $6,790,000 during the three months ended December 31, 2017 to $63,448,000 from $70,238,000 at September 30, 2017. The change is due to the $4,060,000 decrease in non-accrual loans and $2,730,000 decline in REO. Non-performing assets as a percentage of total assets decreased to 0.41% at December 31, 2017 compared to 0.46% at September 30, 2017.




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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.
 
December 31,
2017
 
September 30,
2017
 
(In thousands)
Restructured loans:
 
 
 
 
 
 
 
Single-family residential
$
170,601

 
85.7
%
 
$
181,941

 
87.8
%
Land - acquisition & development

 

 
90

 

Land - consumer lot loans
7,405

 
3.7

 
7,949

 
3.8

Multi - family
480

 
0.2

 
493

 
0.2

Commercial real estate
11,910

 
6.0

 
15,079

 
7.3

Commercial & industrial
7,256

 
3.6

 

 

HELOC
1,432

 
0.7

 
1,728

 
0.8

Consumer
91

 

 
97

 

Total restructured loans (1)
$
199,175

 
100
%
 
$
207,377

 
100
%
 
 
 
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
26,219

 
57.6
%
 
$
27,930

 
56.3
%
Construction
364

 
0.8

 

 

Construction - custom

 

 
91

 
0.2

Land - acquisition & development
1,326

 
2.9

 
296

 
0.6

Land - consumer lot loans
976

 
2.1

 
605

 
1.2

Multi-family
250

 
0.5

 
139

 
0.3

Commercial real estate
8,241

 
18.1

 
11,815

 
23.8

Commercial & industrial
7,596

 
16.7

 
8,082

 
16.3

HELOC
476

 
1.0

 
531

 
1.1

Consumer
72

 
0.2

 
91

 
0.2

Total non-accrual loans (2)
45,520

 
100
%
 
49,580

 
100
%
Real estate owned
17,928

 
 
 
20,658

 
 
Total non-performing assets
$
63,448

 
 
 
$
70,238

 
 
Total non-performing assets and performing restructured loans as a percentage of total assets
1.65
%
 
 
 
1.79
%
 
 
 
 
 
 
 
 
 
 
(1)    Restructured loans were as follows:
 
 
 
 
 
 
 
Performing
$
194,359

 
97.6
%
 
$
202,272

 
97.5
%
Non-performing (included in non-accrual loans above)
4,816

 
2.4

 
5,105

 
2.5

 
$
199,175

 
100
%
 
$
207,377

 
100
%

(2)
For the three months ended December 31, 2017, the Company recognized $2,551,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $489,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than three 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 $56,133,000 of loans that were less than 90 days delinquent at December 31, 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 2.01% at December 31, 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.

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PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
Most restructured loans are accruing and performing loans where the borrower has proactively approached the Bank about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 85.7% of restructured loans as of December 31, 2017. The concession for these loans is 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.
December 31, 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)
 
 
 
(In thousands)
Single-family residential
$
35,928

 
$
5,676,565

 
0.6
%
 
$

 
$
24,083

 
%
Construction
25,214

 
851,800

 
3.0

 

 
364

 

Construction - custom
2,052

 
292,255

 
0.7

 

 

 

Land - acquisition & development
7,355

 
110,884

 
6.6

 

 
1,376

 

Land - consumer lot loans
2,906

 
97,291

 
3.0

 

 
416

 

Multi-family
7,899

 
1,311,943

 
0.6

 
5

 
730

 
0.7

Commercial real estate
11,519

 
1,389,749

 
0.8

 
106

 
27,535

 
0.4

Commercial & industrial
28,744

 
1,108,961

 
2.6

 
524

 
11,694

 
4.5

HELOC
808

 
134,320

 
0.6

 

 
620

 

Consumer
4,095

 
219,784

 
1.9

 

 
70

 

 
$
126,520

 
$
11,193,552

 
1.1
%
 
$
635

 
$
66,888

 
0.9
%



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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, 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)
 
 
 
(In thousands)
Single-family residential
$
36,893

 
$
5,713,576

 
0.7
%
 
$

 
$
5,552

 
%
Construction
24,556

 
793,958

 
3.1

 

 

 

Construction - custom
1,944

 
277,495

 
0.7

 

 
105

 

Land - acquisition & development
6,828

 
104,767

 
6.5

 
1

 
89

 
1.0

Land - consumer lot loans
2,649

 
96,337

 
2.8

 

 
171

 

Multi-family
7,857

 
1,302,625

 
0.6

 
5

 
493

 
1.0

Commercial real estate
11,697

 
1,391,668

 
0.8

 
120

 
21,765

 
0.6

Commercial & industrial
28,524

 
1,093,210

 
2.6

 

 
81

 

HELOC
855

 
141,689

 
0.6

 

 
215

 

Consumer
1,144

 
84,887

 
1.4

 

 
82

 

 
$
122,947

 
$
11,000,212

 
1.1
%
 
$
126

 
$
28,553

 
0.4
%

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 $6,750,000 as of December 31, 2017, 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 $133,905,000, 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 December 31, 2017.

Real estate owned: Real estate owned decreased during the three months ended December 31, 2017 by $2,730,000 to $17,928,000. The decrease is primarily due to sales of REO properties during the period.

Intangible assets: Intangible assets increased to $310,578,000 as of December 31, 2017 from $298,682,000 as of September 30, 2017. The increase was due to an immaterial correction related to acquisitions of insurance agency businesses in prior years that 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.



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PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Customer accounts: Customer accounts increased $166,571,000, or 1.5%, to $11,001,579,000 at December 31, 2017 compared with $10,835,008,000 at September 30, 2017.

The following table shows the composition of the Bank’s customer accounts by deposit type.
  
December 31, 2017
 
September 30, 2017
 
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
$
1,299,602

 
11.8
%
 
%
 
$
1,258,274

 
11.6
%
 
%
Interest checking
1,848,594

 
16.8

 
0.28

 
1,760,821

 
16.3

 
0.23

Savings (passbook/statement)
894,879

 
8.1

 
0.12

 
888,881

 
8.2

 
0.11

Money market
2,439,537

 
22.2

 
0.19

 
2,453,182

 
22.6

 
0.19

Time deposits
4,518,967

 
41.1

 
1.14

 
4,473,850

 
41.3

 
1.09

Total
$
11,001,579

 
100
%
 
0.57
%
 
$
10,835,008

 
100
%
 
0.54
%

FHLB advances and other borrowings: Total borrowings increased to $2,415,000,000 as of December 31, 2017 from $2,225,000,000 as of September 30, 2017. The weighted average rate for FHLB borrowings was 2.56% as of December 31, 2017 and 2.80% at September 30, 2017. The decrease in the rate was primarily due to the maturity of certain long-term FHLB advances.

RESULTS OF OPERATIONS
Net Income: The Company recorded net income of $51,670,000 for the three months ended December 31, 2017 compared to $41,246,000 for the prior year quarter.
Net Interest Income: For the three months ended December 31, 2017, net interest income was $115,735,000 which is $12,583,000 higher than the same quarter of the prior year. Net interest margin was 3.26% for the quarter ended December 31, 2017 compared to 3.02% for the quarter ended December 31, 2016. The increase in net interest income was primarily due to average earning assets increasing by $513,000,000 as well as the yield on earning assets increasing to 4.08% from 3.85%. 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.
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.

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PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Rate / Volume Analysis:
 
Comparison of Three Months Ended
12/31/17 and 12/31/16
 
Volume
 
Rate
 
Total
 
(In thousands)
Interest income:
 
 
 
 
 
Loans receivable
$
10,935

 
$
(1,259
)
 
$
9,676

Mortgaged-backed securities
(81
)
 
4,191

 
4,110

Investments (1)
(2,401
)
 
1,631

 
(770
)
All interest-earning assets
8,453

 
4,563

 
13,016

Interest expense:
 
 
 
 
 
Customer accounts
295

 
1,326

 
1,621

FHLB advances and other borrowings
1,681

 
(2,869
)
 
(1,188
)
All interest-bearing liabilities
1,976

 
(1,543
)
 
433

Change in net interest income
$
6,477

 
$
6,106

 
$
12,583

___________________ 
(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 during the three months ended December 31, 2017 or December 31, 2016. 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 $3,082,000 for the three months ended December 31, 2017, compared to net recoveries of $5,296,000 during the three months ended December 31, 2016.

Other Income: The three months ended December 31, 2017 results include total other income of $6,795,000 compared to $11,896,000 for the same period one year ago. The decrease during the three months ended December 31, 2017 is primarily due to a $8,550,000 charge from asset and liability valuation adjustments associated with FDIC loss share agreements. The Company is actively pursuing the early termination of its remaining FDIC loss share agreements. The impact of these valuation adjustments was partially offset by a $2,416,000 gain recognized on bank-owned life insurance and a $1,501,000 increase in deposit fee income, which was driven by the 2017 launch of the Company's new "Green Checking" product. Deposit fee income was $6,686,000 for the three months ended December 31, 2017 compared to $5,185,000 for the three months ended December 31, 2016.

Other Expense: The three months ended December 31, 2017 results include total other expense of $61,941,000 compared to $54,341,000 for the same period one year ago, a $7,600,000 or 14.0% increase. Compensation and benefits costs increased $2,625,000 primarily due to headcount increases and cost of living adjustments since last year. The number of staff, including part-time employees on a full-time equivalent basis, was 1,829 and 1,813 at December 31, 2017 and 2016, respectively. Information technology costs increased by $1,478,000 for the three months ended December 31, 2017 due mostly to consulting and audit work to enhance the Company's Bank Secrecy Act Program. Additionally, charitable contributions increased by $1,000,000 from the prior year as the Company fulfilled the first year of its previously announced commitment to fund its foundation by $1,000,000 annually for the next five years. Product delivery costs increased by $595,000 primarily due to enhanced features provided with the "Green Checking" product. Total other expense for the three months ended ended December 31, 2017 and 2016 equaled 1.62% and 1.46%, respectively, of average assets.

Gain (Loss) on Real Estate Owned: Results for the three months ended December 31, 2017 include a net gain on real estate owned of $46,000, compared to a gain of $398,000 for the same period one year ago.

Income Tax Expense: Income tax expense totaled $8,965,000 for the three months ended December 31, 2017, as compared to $19,859,000 for the same period one year ago. The effective tax rate for the three months ended December 31, 2017 was 14.79% compared to 32.50% for the quarter ended December 31, 2016 and 32.27% for the fiscal year ended September 30, 2017. On December 22, 2017, the Tax Cuts and Jobs Act was enacted and it provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, such as a reduction in the statutory federal corporate tax rate from 35% to 21% effective from January 1, 2018 forward and changes or limitations to certain tax deductions. The Company has a fiscal year end of September 30, so the change to the statutory corporate tax rate results in a blended federal statutory tax rate of 24.5% for its fiscal year 2018. The

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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

financial statements for the first fiscal quarter 2018 were also impacted by a one-time revaluation of the Company’s deferred tax assets and liabilities and this was recognized as a discrete income tax benefit in the period. The Company estimates that its annual effective tax rate for fiscal 2018 (blended rate year) will be approximately 22-23%. The effective tax rate for the current quarter was lower than the new 2018 statutory rate due to discrete tax benefits of $3,743,000 recognized related to the revaluation of deferred tax assets and liabilities expected to be utilized in 2018 as well as tax benefits of $2,205,000 related to stock based compensation.

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, 2017. 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 2017 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 2017 Form 10-K for the year ended September 30, 2017. 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 December 31, 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)
October 1, 2017 to October 31, 2017
74,453

 
$
34.79

 
74,453

 
1,826,502

November 1, 2017 to November 30, 2017
744,353

 
33.75

 
744,353

 
1,082,149

December 1, 2017 to December 31, 2017
328,564

 
34.30

 
328,564

 
753,585

Total
1,147,370

  
$
33.98

  
1,147,370

 
753,585

 ___________________
(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. This does not include the 5,000,000 additional shares authorized by the Board of Directors on January 24, 2018.
(2)
Shares remaining available reflects the impact of TARP warrants that have been repurchased for cash as management also counts these against the maximum number of shares that may be repurchased under the Plan.

Item 3.        Defaults Upon Senior Securities
Not applicable

Item 4.        Mine Safety Disclosures
Not applicable

Item 5.        Other Information
Not applicable


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Item 6.        Exhibits
(a)
 
Exhibits
 
 
 
31.1
 
 
 
31.2
 
 
 
32
 
 
 
101
 
Financial Statements from the Company’s Form 10-Q for the three months ended December 31, 2017 formatted in XBRL

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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.
 
January 25, 2018
/S/    BRENT J. BEARDALL        
 
BRENT J. BEARDALL
President & Chief Executive Officer
 
 
January 25, 2018
/S/    VINCENT L. BEATTY       
 
VINCENT L. BEATTY
Executive Vice President and Chief Financial Officer
 
 
January 25, 2018
/S/    CORY D. STEWART      
 
CORY D. STEWART
Senior Vice President and Principal Accounting Officer

48