WAFD 10-Q Quarterly Report Dec. 31, 2012 | Alphaminr
WASHINGTON FEDERAL INC
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WAFD 10-Q Quarter ended Dec. 31, 2012

Balance Sheet
Cash Flow
Income Statement
WASHINGTON FEDERAL INC
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10-Q 1 wafd1231201210-q.htm 10-Q WAFD 12.31.2012 10-Q
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, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34654
WASHINGTON FEDERAL, INC.
(Exact name of registrant as specified in its charter)
Washington
91-1661606
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
425 Pike Street Seattle, Washington 98101
(Address of principal executive offices and zip code)
(206) 624-7930
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of class:
at February 1, 2013
Common stock, $1.00 par value
105,203,448


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
The Condensed Consolidated Financial Statements of Washington Federal, Inc. and Subsidiaries filed as a part of the report are as follows:


2



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
December 31, 2012
September 30, 2012
(In thousands, except share data)
ASSETS
Cash and cash equivalents
$
637,298

$
751,430

Available-for-sale securities, at fair value
2,003,777

1,781,705

Held-to-maturity securities, at amortized cost
1,407,246

1,191,487

Loans receivable, net
7,614,910

7,451,998

Covered loans, net
380,594

288,376

Interest receivable
47,830

46,857

Premises and equipment, net
207,185

178,845

Real estate held for sale
101,103

99,478

Covered real estate held for sale
36,030

29,549

FDIC indemnification asset
90,415

87,571

FHLB stock
153,542

149,840

Intangible assets, net
267,389

256,076

Federal and state income tax assets, net
26,519

22,513

Other assets
133,004

137,219

$
13,106,842

$
12,472,944

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts
$
3,571,987

$
2,946,453

Time deposit accounts
5,662,104

5,630,165

9,234,091

8,576,618

FHLB advances
1,880,000

1,880,000

Advance payments by borrowers for taxes and insurance
16,552

40,041

Federal and State income tax liabilities, net
—

—

Accrued expenses and other liabilities
61,521

76,533

11,192,164

10,573,192

Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized;
131,966,720 and 129,950,223 shares issued; 105 ,498,098 an d 106,177,615 shares outstanding
131,967

129,950

Paid-in capital
1,619,026

1,586,295

Accumulated other comprehensive income, net of taxes
11,639

13,306

Treasury stock, at cost; 26 ,468,622 and 23,772,608 shares
(355,326
)
(310,579
)
Retained earnings
507,372

480,780

1,914,678

1,899,752

$
13,106,842

$
12,472,944

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended December 31,
2012
2011
(In thousands, except per share data)
INTEREST INCOME
Loans
$
116,843

$
127,479

Mortgage-backed securities
11,732

26,296

Investment securities and cash equivalents
2,734

2,151

131,309

155,926

INTEREST EXPENSE
Customer accounts
18,772

23,949

FHLB advances and other borrowings
17,103

28,263

35,875

52,212

Net interest income
95,434

103,714

Provision for loan losses
3,600

11,210

Net interest income after provision for loan losses
91,834

92,504

OTHER INCOME
Gain on sale of investments
—

—

Other
4,957

4,645

4,957

4,645

OTHER EXPENSE
Compensation and benefits
21,072

18,675

Occupancy
4,446

3,931

FDIC insurance premiums
3,342

4,193

Other
9,438

7,564

38,298

34,363

Loss on real estate acquired through foreclosure, net
(3,319
)
(10,570
)
Income before income taxes
55,174

52,216

Income tax provision
19,892

18,798

NET INCOME
$
35,282

$
33,418



PER SHARE DATA
Basic earnings
$
0.33

$
0.31

Diluted earnings
0.33

0.31

Cash dividends per share
0.08

0.08

Basic weighted average number of shares outstanding
105,998,184

107,845,011

Diluted weighted average number of shares outstanding, including dilutive stock options
106,043,914

107,894,572

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarter Ended December 31,
2012
2011
(In thousands)
Net income
$
35,282

$
33,418

Other comprehensive income (loss) net of tax:
Net unrealized losses on available-for-sales securities
(2,636
)
(2,519
)
Related tax benefit
969

926

Reclassification adjustment of net gain from sale
of available-for-sale securities included in net income
—

—

Related tax benefit (expense)
—

—

Other comprehensive loss
(1,667
)
(1,593
)
Comprehensive income
$
33,615

$
31,825

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31, 2012
December 31, 2011
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
35,282

$
33,418

Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of fees, discounts, premiums and intangible assets, net
536

6,890

Cash received from FDIC under loss share
4,566

6,761

Depreciation
2,300

1,875

Stock option compensation expense
300

300

Provision for loan losses
3,600

11,210

Loss on real estate held for sale, net
1,193

19,859

Decrease (increase) in accrued interest receivable
1,058

(1,391
)
Increase in FDIC loss share receivable
—

(1,356
)
Increase (decrease) in income taxes payable
(3,038
)
18,813

Decrease in other assets
30,191

3,868

Increase (decrease) in accrued expenses and other liabilities
(15,437
)
2,021

Net cash provided by operating activities
60,551

102,268

CASH FLOWS FROM INVESTING ACTIVITIES
Net principal collections (loan originations)
187,382

203,949

FHLB stock redemptions
1,382

—

Available-for-sale securities purchased
(261,966
)
(581,337
)
Principal payments and maturities of available-for-sale securities
31,404

276,982

Available-for-sale securities sold
43,899

3,500

Held-to-maturity securities purchased
(264,781
)
—

Principal payments and maturities of held-to-maturity securities
50,522

4,845

Net cash received from acquisition
202,308

50,451

Proceeds from sales of real estate held for sale
30,145

28,801

Proceeds from sales of covered REO
3,043

11,881

Premises and equipment purchased and REO improvements
(12,185
)
(9,308
)
Net cash provided (used) by investing activities
11,153

(10,236
)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts
(77,942
)
73,982

Net decrease in borrowings
(22,471
)
(18,873
)
Proceeds from exercise of common stock options
63

2

Dividends paid on common stock
(17,250
)
(8,517
)
Treasury stock purchased
(44,747
)
(20,311
)
Decrease in advance payments by borrowers for taxes and insurance
(23,489
)
(24,406
)
Net cash provided (used) by financing activities
(185,836
)
1,877

Increase (decrease) in cash and cash equivalents
(114,132
)
93,909

Cash and cash equivalents at beginning of period
751,430

816,002

Cash and cash equivalents at end of period
$
637,298

$
909,911


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



6


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended
December 31, 2012
December 31, 2011
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Non-covered real estate acquired through foreclosure
$
22,762

$
42,774

Covered real estate acquired through foreclosure
3,096

5,472

Cash paid during the period for
Interest
37,457

53,776

Income taxes
—

—

The following summarizes the non-cash activities related to acquisitions
Fair value of assets acquired
$
810,766

$
124,594

Fair value of liabilities assumed
(766,871
)
(154,493
)
Net fair value of assets (liabilities)
43,895

(29,899
)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)

NOTE A – Summary of Significant Accounting Policies
The consolidated unaudited interim financial statements included in this report have been prepared by Washington Federal, Inc. (“The Company”). 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 accruals) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 2012 Consolidated Statement of Financial Condition was derived from audited financial statements.
The information included in this Form 10-Q should be read in conjunction with Company’s 2012 Annual Report on Form 10-K (“2012 Form 10-K”) as filed with the SEC. Interim results are not necessarily indicative of results for a full year.
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2012 Form 10-K. Other than as discussed below, there have not been any material changes in our significant accounting policies compared to those contained in our 2012 Form 10-K.
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 at December 31, 2012 , excluding covered loans, of $252,553,000 . The Company estimates losses on off-balance-sheet credit exposures by including the exposures with the related principal balance outstanding and then applying its general reserve methodology.
Certain reclassifications have been made to the financial statements to conform prior periods to current classifications.

NOTE B - Acquisitions

South Valley Bank and Trust
Effective as of the close of business October 31, 2012, Washington Federal completed the acquisition of South Valley Bank and Trust, headquartered in Klamath Falls, Oregon (“South Valley”). The acquisition provided $383 million of net loans, $107 million of net covered loans, $735 million of deposit accounts, including $533 million in transaction deposit accounts and 24 branch locations in Central and Southern Oregon. Total consideration at closing of $44 million , including $33 million of Washington Federal, Inc. stock and $10 million of cash resulting from the collection of certain earn-out assets. If other earn out assets are collected over time, the total purchase price could be reduced by up to $14 million .

The acquisition was accounted for under the acquisition method of accounting. The purchased assets and assumed liabilities were recorded at their respective acquisition date estimated fair values. The purchase accounting for acquired assets and liabilities is subject to future adjustment based on the completion of valuations. All fair adjustment amounts currently recognized in the financial statements at December 31, 2012 were determined provisionally as the purchase accounting fair value analysis was incomplete as of December 31, 2012. The determination of whether a loan is impaired and accounted for under ASC 310 was still in process as part of the acquisition date loan valuation; therefore, all loans are categorized as acquired loans without differentiation between non-impaired and credit impaired at December 31, 2012.

Loans that were classified as non-performing loans by South Valley are no longer classified as non-performing because, at acquisition, the carrying value of the loans was adjusted to reflect fair value. Management believes that the new book value reflects an amount that will ultimately be collected.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period from November 1, 2012 to December 31, 2012.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:


8
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


Fair Value Recorded by
Washington Federal
(In thousands)
Assets:
Cash and cash equivalents
$
212,711

Available for sale securities
43,899

FHLB stock
5,211

Loans receivable, net
343,510

Covered loans receivable, net
107,075

FDIC indemnification asset
17,364

Property and equipment, net
24,561

Core deposit intangible
3,000

Real estate held for sale
10,857

Covered real estate held for sale
6,031

Goodwill
8,692

Other assets
27,855

Total Assets
810,766

Liabilities:
Customer accounts
735,415

FHLB advances
22,471

Other liabilities
8,985

Total Liabilities
766,871

Net assets acquired
$
43,895

Consideration provided:
Equity Issued
$
33,492

Cash paid
10,403

$
43,895






9
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)



NOTE C – Dividends
On December 31, 2012, the Company paid its 120 th consecutive quarterly cash dividend on common stock. Dividends per share were $ .08 and $ .08 for the quarters ended December 31, 2012 and 2011 , respectively.


10
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


NOTE D – Loans Receivable (excluding Covered Loans)

December 31, 2012
September 30, 2012
(In thousands)
Non-acquired loans
Single-family residential
$
5,573,590

69.4
%
$
5,778,922

73.5
%
Construction - speculative
123,871

1.5

129,637

1.6

Construction - custom
228,140

2.9

211,690

2.7

Land - acquisition & development
109,458

1.4

124,677

1.6

Land - consumer lot loans
137,106

1.7

141,844

1.8

Multi-family
721,802

9.0

710,140

9.0

Commercial real estate
347,564

4.3

319,210

4.1

Commercial & industrial
171,644

2.1

162,823

2.1

HELOC
111,986

1.4

112,902

1.4

Consumer
59,131

0.7

63,374

0.8

Total non-acquired loans
7,584,292

94.4

7,755,219

98.6

Acquired loans
Single-family residential
15,495

0.2

—

—

Construction - speculative
90

—

—

—

Construction - custom
994

—

—

—

Land - acquisition & development
3,520

—

—

—

Land - consumer lot loans
3,891

0.1

—

—

Multi-family
9,333

0.2

—

—

Commercial real estate
178,727

2.2

—

—

Commercial & industrial
106,931

1.3

—

—

HELOC
13,810

0.2

—

—

Consumer
10,759

0.1

—

—

Total credit-impaired acquired loans
343,550

4.3

—

—

Credit-impaired acquired loans
Single-family residential
340

—

342

—

Construction - speculative
1,755

—

1,889

—

Land - acquisition & development
2,677

—

3,702

0.1

Multi-family
—

—

601

—

Commercial real estate
83,657

1.1

87,154

1.1

Commercial & industrial
1,883

—

3,292

—

HELOC
12,849

0.2

14,040

0.2

Consumer
90

—

97

—

Total credit-impaired acquired loans
103,251

1.3

111,117

1.4

Total loans
Single-family residential
5,589,425

69.6

5,779,264

73.5

Construction - speculative
125,716

1.5

131,526

1.6

Construction - custom
229,134

2.9

211,690

2.7

Land - acquisition & development
115,655

1.4

128,379

1.7

Land - consumer lot loans
140,997

1.8

141,844

1.8

Multi-family
731,135

9.2

710,741

9

Commercial real estate
609,948

7.6

406,364

5.2

Commercial & industrial
280,458

3.4

166,115

2.1


11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


HELOC
138,645

1.8

126,942

1.6

Consumer
69,980

0.8

63,471

0.8

Total loans
8,031,093

100
%
7,866,336

100
%
Less:
Allowance for probable losses
126,827

133,147

Loans in process
204,566

213,286

Discount on acquired loans
50,817

33,484

Deferred net origination fees
33,973

34,421

416,183

414,338

$
7,614,910

$
7,451,998


12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


The following table presents the changes in the accretable yield for credit impaired acquired loans as of December 31, 2012 :
Credit impaired acquired loans
Accretable
Yield
Carrying
Amount of
Loans
(In thousands)
Balance as of October 1, 2012
$
16,928

$
77,613

Additions
—

—

Accretion
(1,360
)
1,360

Transfers to REO
—

(957
)
Payments received, net
—

(8,677
)
Balance as of December 31, 2012
$
15,568

$
69,339


The following table sets forth information regarding non-accrual loans held by the Company as of the dates indicated:
December 31, 2012
September 30, 2012
(In thousands)
Non-accrual loans:
Single-family residential
$
108,570

66.6
%
$
131,193

75.7
%
Construction - speculative
9,471

5.8

10,634

6.1

Construction - custom
39

—

539

0.3

Land - acquisition & development
14,318

8.8

13,477

7.8

Land - consumer lot loans
4,024

2.5

5,149

3.0

Multi-family
7,907

4.8

4,185

2.4

Commercial real estate
16,958

10.4

7,653

4.4

Commercial & industrial
987

0.6

16

—

HELOC
489

0.3

198

0.1

Consumer
353

0.2

383

0.2

Total non-accrual loans
$
163,116

100
%
$
173,427

100
%

13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


The following tables provide an analysis of the age of loans in past due status as of December 31, 2012 and September 30, 2012 , respectively.
December 31, 2012
Amount of Loans
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
Current
30
60
90
Total
(In thousands)
Non-acquired loans
Single-Family Residential
$
5,570,390

$
5,414,979

$
36,484

$
25,122

$
93,805

$
155,411

2.79
%
Construction - Speculative
86,902

78,536

1,373

1,911

5,082

8,366

9.63

Construction - Custom
120,382

120,164

32

147

39

218

0.18

Land - Acquisition & Development
106,679

94,278

557

231

11,613

12,401

11.62

Land - Consumer Lot Loans
136,928

132,135

776

45

3,972

4,793

3.50

Multi-Family
689,164

681,849

3,102

130

4,083

7,315

1.06

Commercial Real Estate
326,551

311,428

7,471

767

6,885

15,123

4.63

Commercial & Industrial
171,634

170,760

223

636

15

874

0.51

HELOC
111,986

111,473

112

—

401

513

0.46

Consumer
59,131

57,104

1,282

393

352

2,027

3.43

Total non-acquired loans
7,379,747

7,172,706

51,412

29,382

126,247

207,041

2.81

Acquired loans
Single-Family Residential
15,495

15,306

$
108

26

55

189

1.22
%
Construction - Speculative
90

90

—

—

—

—

—
%
Construction - Custom
994

994

—

—

—

—

—
%
Land - Acquisition & Development
3,520

3,520

—

—

—

—

—
%
Land - Consumer Lot Loans
3,891

3,839

—

—

52

52

—
%
Multi-Family
9,333

5,659

—

—

3,674

3,674

—
%
Commercial Real Estate
178,727

175,712

—

1,661

1,354

3,015

1.69
%
Commercial & Industrial
106,931

101,134

5,130

—

667

5,797

5.42
%
HELOC
13,810

13,706

16

—

88

104

0.75
%
Consumer
10,759

10,640

84

35

—

119

1.11
%
Total credit-impaired acquired loans
343,550

330,600

5,338

1,722

5,890

12,950

3.77
%
Credit-impaired acquired loans
Single-Family Residential
340

340

—

—

—

—

—

Construction - Speculative
1,755

1,755

—

—

—

—

—

Construction - Custom
—

—

—

—

—

—

—

Land - Acquisition & Development
2,676

2,612

—

—

64

64

2.39

Land - Consumer Lot Loans
—

—

—

—

—

—

—

Multi-Family
—

—

—

—

—

—

—

Commercial Real Estate
83,637

77,474

—

722

5,441

6,163

7.37

Commercial & Industrial
1,883

1,527

51

—

305

356

18.91


14
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


HELOC
12,849

12,849

—

—

—

—

—

Consumer
90

89

—

—

1

1

1.11

Total credit-impaired acquired loans
103,230

96,646

51

722

5,811

6,584

6.38

Total loans
$
7,826,527

$
7,599,952

$
56,801

$
31,826

$
137,948

$
226,575

2.89


September 30, 2012
Amount of Loans
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
Current
30
60
90
Total
(In thousands)
Single-Family Residential
$
5,776,002

$
5,618,261

$
34,035

$
16,276

$
107,430

$
157,741

2.73
%
Construction - Speculative
88,849

85,785

142

190

2,732

3,064

3.45

Construction - Custom
107,882

107,215

128

—

539

667

0.62

Land - Acquisition & Development
119,192

106,321

853

1,004

11,014

12,871

10.80

Land - Consumer Lot Loans
141,772

134,560

1,688

375

5,149

7,212

5.09

Multi-Family
676,917

672,263

718

67

3,869

4,654

0.69

Commercial Real Estate
292,261

284,427

699

3,153

3,982

7,834

2.68

Commercial & Industrial
162,802

162,778

8

—

16

24

0.01

HELOC
112,902

112,482

158

64

198

420

0.37

Consumer
63,374

61,405

1,155

431

383

1,969

3.11

Total non-acquired loans
$
7,541,953

$
7,345,497

$
39,584

$
21,560

$
135,312

$
196,456

2.60
%
Credit-impaired acquired loans
Single-Family Residential
342

342

—

—

—

—

—
%
Construction - Speculative
1,889

1,889

—

—

—

—

—

Construction - Custom
—

—

—

—

—

—

—

Land - Acquisition & Development
3,702

3,219

365

—

118

483

13.05

Land - Consumer Lot Loans
—

—

—

—

—

—

—

Multi-Family
601

—

601

—

—

601

—

Commercial Real Estate
87,134

78,959

412

2,549

5,214

8,175

9.38

Commercial & Industrial
3,292

3,054

238

—

—

238

7.23

HELOC
14,040

13,950

—

90

—

90

0.64

Consumer
97

95

2

—

—

2

2.06

Total credit-impaired acquired loans
111,097

101,508

1,618

2,639

5,332

9,589

8.63
%
Total loans
$
7,653,050

$
7,447,005

$
41,202

$
24,199

$
140,644

$
206,045

2.69
%

Most loans restructured in troubled debt restructurings ("TDRs") are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The concession for these loans is typically a payment reduction through a rate reduction of between 100 to 200 basis points for a specific term, usually six to twelve 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, 2012 , single-family residential loans comprised 84.0% of TDRs.

15
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)



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

The following tables provide information related to loans that were restructured during the periods indicated:

Quarter Ended December 31,
2012
2011
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
105

$
29,339

$
29,339

700

$
183,492

$
183,492

Construction - Speculative
1

2,503

2,503

24

6,409

6,409

Construction - Custom
—

—

—

1

1,196

1,196

Land - Acquisition & Development
—

—

—

25

8,524

8,524

Land - Consumer Lot Loans
11

1,836

1,836

65

9,017

9,017

Multi-Family
1

68

68

5

3,161

3,161

Commercial Real Estate
—

—

—

1

308

308

Commercial & Industrial
—

—

—

1

5

5

HELOC
—

—

—

3

185

185

Consumer
—

—

—

—

—

—

118

$
33,746

$
33,746

825

$
212,297

$
212,297



























16
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


The following tables provide information on restructured loans for which a payment default occurred during the periods indicated and that had been modified as a TDR within 12 months or less of the payment default:
Quarter Ended December 31,
2012
2011
Number of
Recorded
Number of
Recorded
Contracts
Investment
Contracts
Investment
(In thousands)
(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Single-Family Residential
31

$
7,498

36

$
8,413

Construction - Speculative
5

904

—

—

Construction - Custom
—

—

—

—

Land - Acquisition & Development
—

—

—

—

Land - Consumer Lot Loans
—

—

3

653

Multi-Family
—

—

—

—

Commercial Real Estate
—

—

—

—

Commercial & Industrial
—

—

—

—

HELOC
—

—

—

—

Consumer
—

—

—

—

36

$
8,402

39

$
9,066





NOTE E – Allowance for Losses on Loans
The Company has an asset quality review function that analyzes its loan portfolios and reports the results of the review to the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as follows:
•
Pass – the credit does not meet one of the definitions below.
•
Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and Management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.
•
Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well defined weakness or weaknesses that jeopardize the 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.

17
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


•
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.

The following table summarizes the activity in the allowance for loan losses for the quarter ended December 31, 2012 and fiscal year ended September 30, 2012 :
Quarter Ended December 31, 2012
Beginning
Allowance
Charge-offs
Recoveries
Provision &
Transfers
Ending
Allowance
(In thousands)
Single-family residential
$
81,815

$
(6,932
)
$
1,582

$
1,043

$
77,508

Construction - speculative
12,060

(927
)
54

(2,527
)
8,660

Construction - custom
347

—

—

(72
)
275

Land - acquisition & development
15,598

(2,328
)
51

1,735

15,056

Land - consumer lot loans
4,937

(317
)
—

343

4,963

Multi-family
5,280

(391
)
6

212

5,107

Commercial real estate
1,956

(212
)
3

904

2,651

Commercial & industrial
7,626

(46
)
25

457

8,062

HELOC
965

(55
)
—

134

1,044

Consumer
2,563

(801
)
368

1,371

3,501

$
133,147

$
(12,009
)
$
2,089

$
3,600

$
126,827

Fiscal Year Ended September 30, 2012
Beginning
Allowance
Charge-offs
Recoveries
Provision &
Transfers
Ending
Allowance
(In thousands)
Single-family residential
$
83,307

$
(53,789
)
$
8,164

$
44,133

$
81,815

Construction - speculative
13,828

(4,916
)
711

2,437

12,060

Construction - custom
623

—

—

(276
)
347

Land - acquisition & development
32,719

(16,978
)
1,341

(1,484
)
15,598

Land - consumer lot loans
5,520

(2,670
)
—

2,087

4,937

Multi-family
7,623

(1,393
)
504

(1,454
)
5,280

Commercial real estate
4,331

(814
)
225

(1,786
)
1,956

Commercial & industrial
5,099

(249
)
2,366

410

7,626

HELOC
1,139

(232
)
66

(8
)
965

Consumer
2,971

(3,538
)
1,480

1,650

2,563

$
157,160

$
(84,579
)
$
14,857

$
45,709

$
133,147

The Company recorded a $ 3,600,000 provision for loan losses during the quarter ended December 31, 2012 , while an $ 11,210,000 provision was recorded for the same quarter one year ago. Non-performing assets (“NPAs”) amounted to $ 264,219,000 , or 2.02% , of total assets at December 31, 2012 , compared to $343,665,000 , or 2.52% , of total assets one year ago. Acquired loans, including covered loans, are not classified as non-performing loans because, at acquisition, the carrying value of these loans was adjusted to reflect fair value. There was no additional provision for loan losses recorded on acquired or covered loans during the quarter ended December 31, 2012 . Non-accrual loans decreased from $185,783,000 at December 31, 2011 , to $163,116,000 at December 31, 2012 , a 12.2% decrease. The Company had net charge-offs of $9,920,000 for the quarter ended December 31, 2012 , compared with $13,829,000 of net charge-offs for the same quarter one year ago. A loan is charged-off when the loss is estimable and it is confirmed that the borrower will not be able to meet its contractual obligations. $115,141,000 of the allowance

18
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


was calculated under our general allowance methodology and the remaining $11,686,000 was made up of specific reserves on loans that were deemed to be impaired at December 31, 2012 . For the period ending December 31, 2011 , $ 114,552,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $39,988,000 was made up of specific reserves on loans that were deemed to be impaired. The primary reasons for the shift in total allowance allocation from specific reserves to general reserves is due to the Company having already addressed many of the problem loans focused in the speculative construction and land A&D portfolios, combined with an increase in delinquencies and elevated charge-offs in the single family residential portfolio.
The following tables shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of December 31, 2012 and September 30, 2012 :
December 31, 2012
Loans Collectively Evaluated for Impairment
Loans Individually Evaluated for Impairment
General  Reserve
Allocation
Gross Loans Subject  to
General Reserve (1)
Ratio
Specific  Reserve
Allocation
Gross Loans Subject  to
Specific Reserve (1)
Ratio
(In thousands)
(In thousands)
Single-family residential
$
77,473

$
5,468,956

1.4
%
$
35

$
104,634

—
%
Construction - speculative
6,567

106,292

6.2

2,093

17,579

11.9

Construction - custom
275

228,140

0.1

—

—

—

Land - acquisition & development
9,097

78,188

11.6

5,959

31,270

19.1

Land - consumer lot loans
4,217

134,610

3.1

746

2,496

29.9

Multi-family
2,862

707,153

0.4

2,245

14,649

15.3

Commercial real estate
2,043

333,610

0.6

608

13,954

4.4

Commercial & industrial
8,062

171,148

4.7

—

496

—

HELOC
1,044

111,986

0.9

—

—

—

Consumer
3,501

59,131

5.9

—

—

—

$
115,141

$
7,399,214

1.6

$
11,686

$
185,078

6.3

___________________
(1)
Excludes acquired and covered loans
September 30, 2012
Loans Collectively Evaluated for Impairment
Loans Individually Evaluated for Impairment
General  Reserve
Allocation
Gross Loans Subject  to
General Reserve (1)
Ratio
Specific  Reserve
Allocation
Gross Loans Subject  to
Specific Reserve (1)
Ratio
(In thousands)
(In thousands)
Single-family residential
$
81,737

$
5,694,337

1.4
%
$
78

$
84,584

0.1
%
Construction - speculative
9,079

104,312

8.7

2,981

25,325

11.8

Construction - custom
347

211,690

0.2

—

—

—

Land - acquisition & development
6,697

47,294

14.2

8,901

77,383

11.5

Land - consumer lot loans
4,176

138,666

3.0

761

3,178

23.9

Multi-family
2,818

694,140

0.4

2,462

16,000

15.4

Commercial real estate
1,158

292,550

0.4

798

26,660

3.0

Commercial & industrial
7,624

161,689

4.7

2

1,134

0.2

HELOC
965

112,812

0.9

—

90

—

Consumer
2,563

63,374

4.0

—

—

—

$
117,164

$
7,520,864

1.6

$
15,983

$
234,354

6.8



19
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


(1)
Excludes acquired and covered loans
The following tables provide information on loans based on credit quality indicators (defined in Note A) as of December 31, 2012 and September 30, 2012 :
Credit Risk Profile by Internally Assigned Grade (excludes covered loans):

20
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


December 31, 2012
Internally Assigned Grade
Total
Pass
Special mention
Substandard
Doubtful
Loss
Gross Loans
(In thousands)
Non-acquired loans
Single-family residential
$
5,394,895

$
2,537

$
176,158

$
—

$
—

$
5,573,590

Construction - speculative
84,207

11,241

28,423

—

—

123,871

Construction - custom
228,140

—

—

—

—

228,140

Land - acquisition & development
67,717

3,430

38,311

—

—

109,458

Land - consumer lot loans
135,240

124

1,742

—

—

137,106

Multi-family
697,812

2,243

21,747

—

—

721,802

Commercial real estate
292,210

22,490

32,864

—

—

347,564

Commercial & industrial
167,026

1,673

2,906

—

39

171,644

HELOC
111,986

—

—

—

—

111,986

Consumer
58,363

411

357

—

—

59,131

7,237,596

44,149

302,508

—

39

7,584,292

Acquired loans
Single-family residential
15,495

—

—

—

—

15,495

Construction - speculative
—

—

90

—

—

90

Construction - custom
994

—

—

—

—

994

Land - acquisition & development
2,247

—

1,273

—

—

3,520

Land - consumer lot loans
3,760

86

45

—

—

3,891

Multi-family
3,310

179

5,844

—

—

9,333

Commercial real estate
135,480

6,569

34,059

—

2,619

178,727

Commercial & industrial
67,857

16,319

20,592

—

2,163

106,931

HELOC
12,342

—

674

—

794

13,810

Consumer
10,748

—

11

—

—

10,759

252,233

23,153

62,588

—

5,576

343,550

Credit impaired acquired loans
Pool 1 - Construction and land A&D
1,611

—

2,820

—

—

4,431

Pool 2 - Single-family residential
340

—

—

—

—

340

Pool 3 - Multi-family
—

—

—

—

—

—

Pool 4 - HELOC & other consumer
12,940

—

—

—

—

12,940

Pool 5 - Commercial real estate
52,982

1,025

28,654

996

—

83,657

Pool 6 - Commercial & industrial
1,031

73

523

256

—

1,883

Total credit impaired acquired loans
68,904

1,098

31,997

1,252

—

103,251

Total gross loans
$
7,558,733

$
68,400

$
397,093

$
1,252

$
5,615

$
8,031,093

Total grade as a % of total gross loans
94.6
%
0.8
%
4.6
%
—
%
—
%



21
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


September 30, 2012
Internally Assigned Grade
Total
Pass
Special mention
Substandard
Doubtful
Loss
Gross Loans
(In thousands)
Non-acquired loans
Single-family residential
$
5,588,252

$
844

$
189,826

$
—

$
—

$
5,778,922

Construction - speculative
86,126

10,113

33,398

—

—

129,637

Construction - custom
211,690

—

—

—

—

211,690

Land - acquisition & development
73,661

4,637

46,379

—

—

124,677

Land - consumer lot loans
140,006

223

1,615

—

—

141,844

Multi-family
684,649

5,098

20,393

—

—

710,140

Commercial real estate
278,022

16,282

24,906

—

—

319,210

Commercial & industrial
158,421

1,071

3,331

—

—

162,823

HELOC
112,902

—

—

—

—

112,902

Consumer
62,611

354

409

—

—

63,374

7,396,340

$
38,622

$
320,257

$
—

$
—

$
7,755,219

Credit impaired acquired loans
Pool 1 - Construction and land A&D
2,466

—

3,125

—

—

5,591

Pool 2 - Single-family residential
342

—

—

—

—

342

Pool 3 - Multi-family
—

—

601

—

—

601

Pool 4 - HELOC & other consumer
14,137

—

—

—

—

14,137

Pool 5 - Commercial real estate
53,683

4,308

28,200

963

—

87,154

Pool 6 - Commercial & industrial
1,566

58

733

935

—

3,292

Total credit impaired acquired loans
72,194

4,366

32,659

1,898

—

111,117

Total gross loans
$
7,468,534

$
42,988

$
352,916

$
1,898

$
—

$
7,866,336

Total grade as a % of total gross loans
94.9
%
0.6
%
4.5
%
—
%
—
%

Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):
December 31, 2012
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross  Loans
Amount
% of Total
Gross  Loans
(In thousands)
Single-family residential
$
5,465,020

98.1
%
$
108,570

1.9
%
Construction - speculative
114,400

92.4

9,471

7.6

Construction - custom
228,101

100.0

39

—

Land - acquisition & development
95,140

86.9

14,318

13.1

Land - consumer lot loans
133,082

97.1

4,024

2.9

Multi-family
713,895

98.9

7,907

1.1

Commercial real estate
330,606

95.1

16,958

4.9

Commercial & industrial
170,657

99.4

987

0.6

HELOC
111,497

99.6

489

0.4

Consumer
58,778

99.4

353

0.6

$
7,421,176

97.8

$
163,116

2.2


22
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)



September 30, 2012
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross  Loans
Amount
% of Total
Gross  Loans
(In thousands)
Single-family residential
$
5,647,729

97.7
%
$
131,193

2.3
%
Construction - speculative
119,003

91.8

10,634

8.2

Construction - custom
211,151

99.7

539

0.3

Land - acquisition & development
111,200

89.2

13,477

10.8

Land - consumer lot loans
136,695

96.4

5,149

3.6

Multi-family
705,955

99.4

4,185

0.6

Commercial real estate
311,557

97.6

7,653

2.4

Commercial & industrial
162,807

100.0

16

—

HELOC
112,704

99.8

198

0.2

Consumer
62,991

99.4

383

0.6

$
7,581,792

97.8
%
$
173,427

2.2
%
The following table provides information on impaired loans based on loan types as of December 31, 2012 and September 30, 2012 :

23
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


Average Recorded Investment
December 31, 2012
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Quarter Ended December 31, 2012
(In thousands)
With no related allowance recorded:
Single-family residential
$
42,110

$
49,559

$
—

$
43,478

Construction - speculative
4,637

5,529

—

4,681

Construction - custom
568

568

—

568

Land - acquisition & development
11,875

23,244

—

12,020

Land - consumer lot loans
3,094

3,316

—

2,982

Multi-family
5,022

5,022

—

4,281

Commercial real estate
12,857

14,198

—

11,101

Commercial & industrial
3,164

8,469

—

2,387

HELOC
1,163

1,163

—

737

Consumer
1

17

—

13

84,491

111,085

—

82,248

With an allowance recorded:
Single-family residential
355,311

363,996

19,073

356,506

Construction - speculative
19,533

20,438

2,093

19,975

Construction - custom
—

—

—

—

Land - acquisition & development
20,994

23,763

5,959

22,418

Land - consumer lot loans
13,785

13,857

746

13,803

Multi-family
18,524

18,639

2,245

18,620

Commercial real estate
8,360

8,360

608

8,382

Commercial & industrial
—

—

—

—

HELOC
741

741

—

737

Consumer
—

—

—

—

437,248

449,794

30,724

(1)
440,441

Total:
Single-family residential
397,421

413,555

19,073

399,984

Construction - speculative
24,170

25,967

2,093

24,656

Construction - custom
568

568

—

568

Land - acquisition & development
32,869

47,007

5,959

34,438

Land - consumer lot loans
16,879

17,173

746

16,785

Multi-family
23,546

23,661

2,245

22,901

Commercial real estate
21,217

22,558

608

19,483

Commercial & industrial
3,164

$
8,469

—

2,387

HELOC
1,904

1,904

—

1,474

Consumer
1

17

—

13

$
521,739

$
560,879

$
30,724

(1)
$
522,689

____________________
(1) Includes $11,686,000 of specific reserves and $19,038,000 included in the general reserves.


24
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


September 30, 2012
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In thousands)
With no related allowance recorded:
Single-family residential
$
106,955

$
124,342

$
—

$
49,524

Construction - speculative
13,726

16,568

—

13,581

Construction - custom
—

—

—

—

Land - acquisition & development
18,000

30,209

—

16,417

Land - consumer lot loans
1,677

2,185

—

487

Multi-family
8,792

8,991

—

6,935

Commercial real estate
31,190

42,656

—

12,946

Commercial & industrial
1,146

7,363

—

581

HELOC
90

1,066

—

36

Consumer
—

4

—

—

181,576

233,384

—

100,507

With an allowance recorded:
Single-family residential
317,901

317,901

25,723

305,350

Construction - speculative
12,836

12,836

2,981

12,822

Construction - custom
—

—

—

—

Land - acquisition & development
20,750

20,750

8,901

21,650

Land - consumer lot loans
13,881

13,881

761

13,126

Multi-family
14,153

14,555

2,462

14,279

Commercial real estate
3,722

3,722

798

2,897

Commercial & industrial
—

2

2

22

HELOC
734

734

—

743

Consumer
—

—

—

—

383,977

384,381

41,628

(1)
370,889

Total:
Single-family residential
424,856

442,243

25,723

354,874

Construction - speculative
26,562

29,404

2,981

26,403

Construction - custom
—

—

—

—

Land - acquisition & development
38,750

50,959

8,901

38,067

Land - consumer lot loans
15,558

16,066

761

13,613

Multi-family
22,945

23,546

2,462

21,214

Commercial real estate
34,912

46,378

798

15,843

Commercial & industrial
1,146

7,365

2

603

HELOC
824

1,800

—

779

Consumer
—

4

—

—

$
565,553

$
617,765

$
41,628

(1)
$
471,396

(1)
Includes $15,983,000 of specific reserves and $25,645,000 included in the general reserves.

25
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)





NOTE F – New Accounting Pronouncements

There were no new accounting pronouncements issued since the Company's 2012 Form 10-K was filed.



NOTE G – Fair Value Measurements
U.S. GAAP 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. U.S. GAAP 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 our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis:
Measured on a Recurring Basis
Securities
Securities available for sale are recorded at fair value on a recurring basis. Securities at fair value are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method.
The following table presents the balance of assets measured at fair value on a recurring basis at December 31, 2012 :
Fair Value at December 31, 2012
Level 1
Level 2
Level 3
Total
(In thousands)
Available-for-sale securities
Equity securities
$
—

$
—

$
—

$
—

Obligations of U.S. government
—

407,372

—

407,372

Obligations of states and political subdivisions
—

25,060

—

25,060

Obligations of foreign governments
—

—

—

—

Corporate debt securities
—

403,357

—

403,357

Mortgage-backed securities
—

Agency pass-through certificates
—

1,167,988

—

1,167,988

Other debt securities
—

—

—

—

Balance at end of period
$
—

$
2,003,777

$
—

$
2,003,777


26
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended December 31, 2012 .
Measured on a Nonrecurring Basis
Impaired Loans & Real Estate Held for Sale
From time to time, and on a nonrecurring basis, fair value adjustments to collateral-dependent loans and real estate held for sale are recorded to reflect write-downs of principal balances based on the current appraised or estimated value of the collateral. When management determines that the fair value of the collateral or the real estate held for sale requires additional adjustments, either as a result of a non-current appraisal value or when there is no observable market price, the Company classifies the impaired loan or real estate held for sale as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2012 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 covered REO and real estate held for sale for which fair value of the properties was less than the cost basis.
Real estate held for sale consists principally of properties acquired through foreclosure.
The following table presents the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the quarter ended December 31, 2012 , and the total losses resulting from those fair value adjustments for the quarter ended December 31, 2012. The following estimated fair values are shown gross of estimated selling costs:
Through December 31, 2012
Quarter
Ended
December 31, 2012
Level 1
Level  2
Level  3
Total
Total Losses
(In thousands)
Impaired loans (1)
$
—

$
—

$
21,238

$
21,238

$
9,813

Covered REO (2)
—

—

3,080

3,080

91

Real estate held for sale (2)
—

—

25,426

25,426

7,536

Balance at end of period
$
—

$
—

$
49,744

$
49,744

$
17,440

___________________
(1)
The losses represents remeasurements of collateral-dependent loans.
(2)
The losses represents aggregate writedowns and charge-offs on real estate held for sale.
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2012 .
The following describes the process used to value Level 3 assets measured on a nonrecurring basis:
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 ("ALLL") process.
Applicable loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following method is 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

27
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.
Real estate held for sale ("REO") - These assets are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Assets that are acquired through foreclosure are recorded initially at the lower of the loan balance or fair value at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions my require the assets to be written down further to a new cost basis. The following method is used to value real estate held for sale:
•
When a loan is reclassified from loan status to real estate held for sale 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 a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value, to the extent it does not exceed the carrying value of the loan, becomes the carrying value of the REO asset. In addition to the valuations from independent third-party sources, the carrying balance of REO assets are 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 current balance of the particular REO asset. The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the lower of cost or fair value as necessary.
Fair Values of Financial Instruments
U. S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below.

28
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


December 31, 2012
September 30, 2012
Level in Fair Value Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(In thousands)
Financial assets
Cash and cash equivalents
1
$
637,298

$
637,298

$
751,430

$
751,430

Available-for-sale securities
2
Equity securities
—

—

—

—

Obligations of U.S. government
407,372

407,372

183,560

183,560

Obligations of states and political subdivisions
25,060

25,060

24,844

24,844

Obligations of foreign governments
—

—

—

—

Corporate debt securities
403,357

403,357

403,325

403,325

Mortgage-backed securities
Agency pass-through certificates
1,167,988

1,167,988

1,169,976

1,169,976

Other debt securities
—

—

—

—

Total available-for-sale securities
2,003,777

2,003,777

1,781,705

1,781,705

Held-to-maturity securities
2
Equity securities
—

—

—

—

Obligations of U.S. government
—

—

—

—

Obligations of states and political subdivisions
—

—

795

802

Obligations of foreign governments
—

—

—

—

Corporate debt securities
—

—

—

—

Mortgage-backed securities
Agency pass-through certificates
1,407,246

1,423,571

1,190,692

1,216,421

Other debt securities
—

—

—

—

Total held-to-maturity securities
1,407,246

1,423,571

1,191,487

1,217,223

Loans receivable
3
7,614,910

8,324,457

7,451,998

7,949,892

Covered loans
3
380,594

389,921

288,376

289,754

FDIC indemnification asset
3
90,415

88,033

87,571

85,846

FHLB stock
2
153,542

153,542

149,840

149,840

Financial liabilities
Customer accounts
2
9,234,091

8,902,278

8,576,618

8,406,432

FHLB advances and other borrowings
2
1,880,000

2,105,789

1,880,000

2,110,223

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 priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of

29
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method.
Loans receivable and covered loans – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.
FDIC indemnification asset – The fair value of the indemnification asset is estimated by discounting the expected future cash flows using the current rates.
FHLB stock – The fair value is based upon the par value of the stock which equates to its carrying value.
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 and other borrowings – 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.
The following is a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities:

30
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


December 31, 2012
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
$
18,133

$
36

$
(51
)
$
18,118

0.44
%
1 to 5 years
58,000

2,597

—

60,597

1.55

5 to 10 years
33,300

1,435

—

34,735

1.75

Over 10 years
293,922

—

—

293,922

0.93

Corporate bonds due
Within 1 year
19,500

5

—

19,505

0.49

1 to 5 years
316,928

2,656

(292
)
319,292

0.84

5 to 10 years
62,954

1,612

(6
)
64,560

2.02

Municipal bonds due
Over 10 years
20,437

4,623

—

25,060

6.45

Mortgage-backed securities
Agency pass-through certificates
1,162,202

6,418

(632
)
1,167,988

2.07

1,985,376

19,382

(981
)
2,003,777

4.11

Held-to-maturity securities
Tax-exempt municipal bonds due
Within 1 year
—

—

—

—

—

1 to 5 years
—

—

—

—

—

5 to 10 years
—

—

—

—

—

Over 10 years
—

—

—

—

—

U.S. government and agency securities due
1 to 5 years
—

—

—

—

—

Mortgage-backed securities
Agency pass-through certificates
1,407,246

16,616

(291
)
1,423,571

3.05

1,407,246

16,616

(291
)
1,423,571

3.05

$
3,392,622

$
35,998

$
(1,272
)
$
3,427,348

2.26
%

31
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


September 30, 2012
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
$
19,999

$
42

$
(6
)
$
20,035

0.57
%
1 to 5 years
—

—

—

—

—

5 to 10 years
59,300

4,225

—

63,525

2.21

Over 10 years
100,000

—

—

100,000

1.05

Corporate bonds due
1 to 5 years
336,340

2,810

(61
)
339,089

0.91

5 to 10 years
62,919

1,324

(7
)
64,236

2.73

Municipal bonds due
Over 10 years
20,442

4,402

—

24,844

6.45

Mortgage-backed securities
Agency pass-through certificates
1,161,668

9,358

(1,050
)
1,169,976

2.28

1,760,668

22,161

(1,124
)
1,781,705

1.99

Held-to-maturity securities
Tax-exempt municipal bonds due
Within 1 year
795

7

—

802

5.80

1 to 5 years
—

—

—

—

—

5 to 10 years
—

—

—

—

—

Over 10 years
—

—

—

—

—

U.S. government and agency securities due
1 to 5 years
—

—

—

—

—

Mortgage-backed securities
Agency pass-through certificates
1,190,692

25,729

—

1,216,421

3.10

1,191,487

25,736

—

1,217,223

3.10

$
2,952,155

$
47,897

$
(1,124
)
$
2,998,928

2.44
%
During the period ending December 31, 2012 , $43,899,000 of available-for-sale securities were sold, resulting in a gain of $0 . $3,500,000 of available-for-sale securities were sold during the period ending December 31, 2011 , resulting in a gain of $ 0 .
Substantially all mortgage-backed securities have contractual due dates that exceed 10 years .
The following table shows the unrealized gross losses and fair value of securities at December 31, 2012 , by length of time that individual securities in each category have been in a continuous loss position. Management believes that the declines in fair value of these investments are not an other than temporary impairment.

32
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


Less than 12 months
12 months or more
Total
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Corporate bonds due
$
(292
)
$
37,802

$
(6
)
$
9,994

$
(298
)
$
47,796

U.S. government and agency securities due
(51
)
17,582

—

—

(51
)
17,582

Agency pass-through certificates
(844
)
429,745

(79
)
62,556

(923
)
492,301

(1,187
)
$
485,129

$
(85
)
$
72,550

(1,272
)
$
557,679


NOTE H – Covered Assets
Covered assets represent loans and real estate held for sale acquired from the FDIC that are subject to loss sharing agreements and were $416,624,000 as of December 31, 2012 , versus $317,925,000 as of September 30, 2012 .

As of the close of business October 31, 2012, the Company acquired covered assets as part of the South Valley acquisition as described in Note B. The purchase accounting, for acquired assets and liabilities, mainly related to the valuation of the acquired loans, is subject to future adjustment based on the completion of valuations. The carrying balance of acquired covered loans have been included in the following tables; however, the balances are subject to future adjustment based on the completion of the purchase accounting valuations.
Changes in the carrying amount and accretable yield for acquired impaired and non-impaired loans for the quarter ended December 31, 2012 and the fiscal year ended September 30, 2012 were as follows:
December 31, 2012
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Carrying
Amount of
Loans
Accretable
Yield
Carrying
Amount of
Loans
(In thousands)
Balance at beginning of period
$
50,902

$
74,953

$
23,789

$
213,423

Additions (1)
—

107,075

—

—

Accretion
(12,487
)
12,487

(1,803
)
1,803

Transfers to REO
—

(2,512
)
—

—

Payments received, net
—

(9,591
)
—

(17,044
)
Balance at end of period
$
38,415

$
182,412

$
21,986

$
198,182

(1) includes FDIC covered loans which were acquired as part of the South Valley acquisition.


33
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


September 30, 2012
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Carrying
Amount of
Loans
Accretable
Yield
Carrying
Amount of
Loans
(In thousands)
Balance at beginning of period
$
37,072

$
116,061

$
30,370

$
269,888

Reclassification from nonaccretable balance, net
34,690

—

—

—

Accretion
(20,860
)
20,860

(6,581
)
6,581

Transfers to REO
—

(15,905
)
—

—

Payments received, net
—

(46,063
)
—

(63,046
)
Balance at end of period
$
50,902

$
74,953

$
23,789

$
213,423


At December 31, 2012 , none of the acquired impaired or non-impaired loans were classified as non-performing assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.
The outstanding principal balance of acquired loans was $465,882,000 and $373,455,000 as of December 31, 2012 and September 30, 2012 , respectively. The discount balance related to the acquired loans was $85,288,000 and $85,079,000 as of December 31, 2012 and September 30, 2012 , respectively.
The following table shows the year to date activity for the FDIC indemnification asset:
December 31, 2012
September 30, 2012
(In thousands)
Balance at beginning of period
$
87,571

$
101,634

Additions (1)
17,364

3,284

Payments made (received)
(4,566
)
(3,456
)
Amortization
(10,224
)
(15,510
)
Accretion
270

1,619

Balance at end of period
$
90,415

$
87,571

(1) includes FDIC covered loans which were acquired as part of the South Valley acquisition.
The following tables provide information on covered loans based on credit quality indicators (defined in Note A) as of December 31, 2012 and September 30, 2012 :
Credit Risk Profile by Internally Assigned Grade:

34
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


December 31, 2012
Internally Assigned Grade
Total
Net  Loans
Pass
Special mention
Substandard
Doubtful
Loss
(In thousands)
Purchased non credit-impaired loans:
Single-family residential
$
31,560

$
—

$
3,085

$
—

$
—

$
34,645

Construction - speculative
102

—

—

—

—

102

Construction - custom
—

—

—

—

—

—

Land - acquisition & development
3,065

1,482

6,321

—

—

10,868

Land - consumer lot loans
443

—

—

—

—

443

Multi-family
23,902

—

2,740

—

—

26,642

Commercial real estate
70,032

10,637

29,123

—

—

109,792

Commercial & industrial
6,444

500

5,066

—

—

12,010

HELOC
16,556

—

—

—

—

16,556

Consumer
721

—

—

—

—

721

152,825

12,619

46,335

—

—

211,779

Total grade as a % of total net loans
72.2
%
6.0
%
21.9
%
—
%
—
%
Purchased credit-impaired loans:
Pool 1 - Construction and land A&D
—

9,782

5,049

30,539

45,370

54,857

Pool 2 - Single-family residential
—

665

—

1,783

2,448

26,815

Pool 3 - Multi-family
—

—

—

2,973

2,973

5,872

Pool 4 - HELOC & other consumer
—

905

—

2,980

3,885

8,322

Pool 5 - Commercial real estate
—

400

25,636

40,775

66,811

133,471

Pool 6 - Commercial & industrial
—

3,633

994

10,144

14,771

24,766

$
—

$
15,385

$
31,679

$
89,194

$
136,258

254,103

Total covered loans
465,882

Discount
(85,288
)
Allowance
—

Covered loans, net
$
380,594



35
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


September 30, 2012
Internally Assigned Grade
Total
Net  Loans
Pass
Special mention
Substandard
Doubtful
Loss
(In thousands)
Purchased non credit-impaired loans:
Single-family residential
$
32,272

$
—

$
3,404

$
—

$
—

$
35,676

Construction - speculative
90

—

—

—

—

90

Construction - custom
—

—

—

—

—

—

Land - acquisition & development
3,440

1,970

6,020

—

—

11,430

Land - consumer lot loans
498

—

—

—

—

498

Multi-family
24,898

—

2,747

—

—

27,645

Commercial real estate
89,530

298

31,764

—

—

121,592

Commercial & industrial
7,146

510

5,367

—

—

13,023

HELOC
17,971

—

—

—

—

17,971

Consumer
918

—

—

—

—

918

176,763

2,778

49,302

—

—

228,843

Total grade as a % of total net loans
77.3
%
1.2
%
21.5
%
—
%
—
%
Purchased credit-impaired loans:
Pool 1 - Construction and land A&D
9,795

5,301

35,857

—

—

50,953

Pool 2 - Single-family residential
669

—

2,953

—

—

3,622

Pool 3 - Multi-family
—

—

2,996

—

—

2,996

Pool 4 - HELOC & other consumer
1,094

—

3,096

—

—

4,190

Pool 5 - Commercial real estate
404

25,785

41,403

—

—

67,592

Pool 6 - Commercial & industrial
3,787

1,006

10,466

—

—

15,259

$
15,749

$
32,092

$
96,771

$
—

$
—

144,612

Total covered loans
373,455

Discount
(85,079
)
Allowance
—

Covered loans, net
$
288,376













36
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED DECEMBER 31, 2012 AND 2011
(UNAUDITED)


The following tables provide an analysis of the age of purchased non credit-impaired loans in past due status for the periods ended December 31, 2012 and September 30, 2012 :
December 31, 2012
Amount of  Loans
Net of LIP & Chg.-Offs
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loans
Current
30
60
90
Total
Single-Family Residential
$
34,645

$
31,887

$
50

$
—

$
2,708

$
2,758

7.96
%
Construction - Speculative
102

102

—

—

—

—

NM

Construction - Custom
—

—

—

—

—

—

NM

Land - Acquisition & Development
10,868

9,495

—

36

1,337

1,373

12.63

Land - Consumer Lot Loans
443

345

—

—

98

98

22.12

Multi-Family
26,642

24,934

200

—

1,508

1,708

6.41

Commercial Real Estate
109,792

107,753

192

—

1,847

2,039

1.86

Commercial & Industrial
12,010

8,213

369

—

3,428

3,797

31.62

HELOC
16,556

16,247

29

—

280

309

1.87

Consumer
721

719

1

1

—

2

0.28

$
211,779

$
199,695

$
841

$
37

$
11,206

$
12,084

5.71
%


September 30, 2012
Amount of  Loans
Net of LIP & Chg.-Offs
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loans
Current
30
60
90
Total
Single-Family Residential
$
35,676

$
32,601

$
2,075

$
—

$
1,000

$
3,075

8.62
%
Construction - Speculative
90

90

—

—

—

—

NM

Construction - Custom
—

—

—

—

—

—

NM

Land - Acquisition & Development
11,430

9,922

—

—

1,508

1,508

13.19

Land - Consumer Lot Loans
498

385

—

—

113

113

22.69

Multi-Family
27,645

26,137

—

—

1,508

1,508

5.45

Commercial Real Estate
121,592

115,206

17

4,447

1,922

6,386

5.25

Commercial & Industrial
13,023

9,513

—

69

3,441

3,510

26.95

HELOC
17,971

17,440

97

50

384

531

2.95

Consumer
918

916

—

1

1

2

2.20

$
228,843

$
212,210

$
2,189

$
4,567

$
9,877

$
16,633

7.27
%

NM - not meaningful

37
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes, including without limitation the potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations to be promulgated thereunder; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees, including without limitation the Bank’s ability to comply in a timely and satisfactory manner with the requirements of the memorandum of understanding entered into with the Office of The Comptroller of the Currency. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
GENERAL
Washington Federal, Inc. (“Company”) is a savings and loan holding company. The Company’s primary operating subsidiary is Washington Federal.
The results discussed below were impacted by the acquisition on close of business October 31, 2012, of South Valley Bank and Trust, headquartered in Klamath Falls, Oregon (“South Valley”). The acquisition pro vided $383 million of net loans, $107 million of net covered loans, $735 million of deposit accounts, including $533 million in transaction deposit accounts and 24 branch locations in Central and Southern Oregon. Total consideration at closing of $44 million , including $33 million of Washington Federal, Inc. stock and $10 million of cash resulting from the collection of certain earn-out assets.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period from November 1, 2012 to December 31, 2012.


INTEREST RATE RISK
Historically, the Company accepted a higher level of interest rate volatility as a result of its significant holdings of fixed-rate single-family home loans that are longer in term than the characteristics of its primary liabilities of customer accounts and borrowings. Based on Management's assessment of the current interest rate environment, the Company has taken steps, including growing business loans, transaction deposit accounts and extending the maturity on borrowings, to reduce its interest rate risk profile compared to its historical norms.
At December 31, 2012 , the Company had approximately $1.6 billion more liabilities subject to repricing in the next year than assets, which amounted to a negative one-year maturity gap of 12.3% of total assets. This was a Increase from the 10.1% negative gap as of September 30, 2012 .
The negative one-year maturity gap described above signifies that assets do not respond as quickly to changes in interest rates as liabilities and net interest income typically declines when interest rates rise and expands when interest rates fall as compared to a portfolio of matched maturities of assets and liabilities.
The potential impact of rising interest rates on net income for one year has also been estimated using a model that is based on account level of detail for loans and deposits. In the event of an immediate and parallel increase of 200 basis points in interest rates, we would expect net interest income to decrease by 1.7%. In the event of a gradual increase from current rates by 200 basis points over a twelve-month period, we would expect a decrease in net interest income of .76%.

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



This analysis assumes zero balance sheet growth and constant percentage composition of assets and liabilities. It also assumes that loan and deposit prices respond in full to the increase in market rates. Actual results will 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.
The net portfolio value (“NPV”) is 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 is another measure of interest rate risk. This approach provides a longer term view of interest rate risk as it incorporates all future expected cash flows. In the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $315 million and the NPV to total assets ratio to decline to 16.14%. As of September 30, 2012 the estimated decrease in NPV in the event of a 200 basis point increase in rates was estimated to decline by $296 million and the NPV to total assets ratio to decline to 15%.
The interest rate spread increased to 2.83% at December 31, 2012 from 2.80% at September 30, 2012 . The spread increased due to a decline in the average rate on customer deposit accounts and borrowings. As of December 31, 2012 , the weighted average rate on customer deposit accounts and borrowings decreased by 12 basis points compared to September 30, 2012 , while the weighted average rates on earning assets decreased by 9 basis points over the same period.
As of December 31, 2012 , the Company had increased total assets by $633,898,000 from $12,472,944,000 at September 30, 2012 . For the quarter ended December 31, 2012 , compared to September 30, 2012 , loans (both non-covered and covered) increased $255,130,000, or 3.3%. To help offset the reduced income from loans, investment securities increased $437,831,000, or 14.7%. Cash and cash equivalents of $637,298,000 and stockholders’ equity of $1,914,678,000 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The Company’s net worth at December 31, 2012 was $1,914,678,000 , or 14.61% of total assets. This was an increase of $14,926,000 from September 30, 2012 when net worth was $1,899,752,000 , or 15.23% of total assets. The Company’s net worth was impacted in the three months ended December 31, 2012 by net income of $35,282,000 , the payment of $17,250,000 in cash dividends, treasury stock purchases that totaled $44,747,000 , as well as a decrease in other comprehensive income of $1,667,000.
Management believes this strong net worth position will help the Company manage its interest rate risk and provide the capital support needed for controlled growth in a regulated environment. To be categorized as well capitalized, Washington Federal must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
Actual
Capital
Adequacy Guidelines
Categorized as
Well Capitalized Under
Prompt Corrective
Action Provisions
Capital
Ratio
Capital
Ratio
Capital
Ratio
(In thousands)
December 31, 2012
Total capital to risk-weighted assets
$
1,684,606

26.25
%
$
513,443

8.00
%
$
641,804

10.00
%
Tier I capital to risk-weighted assets
1,603,789

24.99
%
N/A

N/A

385,082

6.00
%
Core capital to adjusted tangible assets
1,603,789

12.49
%
N/A

N/A

642,126

5.00
%
Core capital to total assets
1,603,789

12.49
%
385,276

3.00
%
N/A

N/A

Tangible capital to tangible assets
1,603,789

12.49
%
192,638

1.50
%
N/A

N/A

September 30, 2012
Total capital to risk-weighted assets
1,653,760

27.29
%
484,822

8.00
%
606,028

10.00
%
Tier I capital to risk-weighted assets
1,577,280

26.03
%
N/A

N/A

363,617

6.00
%
Core capital to adjusted tangible assets
1,577,280

12.92
%
N/A

N/A

610,556

5.00
%
Core capital to total assets
1,577,280

12.92
%
366,334

3.00
%
N/A

N/A

Tangible capital to tangible assets
1,577,280

12.92
%
183,167

1.50
%
N/A

N/A


39
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 FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities : Available-for-sale securities increased $222,072,000, or 12.5%, during the three months ended December 31, 2012 , which included the purchase of $261,966,000 of available-for-sale securities. There were $43,899,000 of available-for-sale securities sold during the three months ended December 31, 2012 , resulting in no gain or loss. During the same period, there were 264,781,000 of held-to-maturity securities purchased and no sales of held-to-maturity securities. As of December 31, 2012 , the Company had net unrealized gains on available-for-sale securities of $11,639,000 , net of tax, which were recorded as part of stockholders’ equity. The Company increased its available-for-sale and held-to-maturity investment portfolios to help offset some of the lost interest income on maturing and prepaying loans and mortgage-backed securities.
Loans receivable : During the three months ended December 31, 2012 , the balance of loans receivable increased 2.2% to $7,614,910,000 compared to $7,451,998,000 at September 30, 2012 . This increase is a result of the acquisition of $344 million in loans from South Valley offset by declining balances consistent with management’s strategy to reduce the Company’s exposure to land and construction loans and not aggressively compete for 30 year fixed-rate loans at rates below 4%, due to the duration risk associated with such low mortgage rates. Additionally, during the quarter, $22,762,000 of loans were transferred to REO. If the current low rates on 30 year fixed-rate mortgages persist, management will consider continuing to shrink the Company's loan portfolio. The following table shows the loan portfolio by category for the last three quarters.
Loan Portfolio by Category *
December 31, 2012
September 30, 2012
June 30, 2012
Non-Acquired loans
(In thousands)
Single-family residential
$
5,573,590

69.4
%
$
5,778,922

73.5
%
$
5,904,805

74.0
%
Construction - speculative
123,871

1.5

129,637

1.6

130,741

1.6

Construction - custom
228,140

2.9

211,690

2.7

210,488

2.6

Land - acquisition & development
109,458

1.4

124,677

1.6

135,392

1.7

Land - consumer lot loans
137,106

1.7

141,844

1.8

145,129

1.8

Multi-family
721,802

9.0

710,140

9.0

692,763

8.7

Commercial real estate
347,564

4.3

319,210

4.1

310,588

3.9

Commercial & industrial
171,644

2.1

162,823

2.1

148,577

1.9

HELOC
111,986

1.4

112,902

1.4

113,559

1.4

Consumer
59,131

0.7

63,374

0.8

68,202

0.9

Total non-acquired loans
7,584,292

94.4

7,755,219

98.6

7,860,244

98.5

Acquired loans
(In thousands)
Single-family residential
15,495

—

—

—

—

—

Construction - speculative
90

—

—

—

—

—

Construction - custom
994

—

—

—

—

—

Land - acquisition & development
3,520

—

—

—

—

—

Land - consumer lot loans
3,891

0.1

—

—

—

—

Multi-family
9,333

0.2

—

—

—

—

Commercial real estate
178,727

2.2

—

—

—

—

Commercial & industrial
106,931

1.3

—

—

—

—

HELOC
13,810

0.2

—

—

—

—

Consumer
10,759

0.1

—

—

—

—

Total acquired loans
343,550

4.1

—

—

—

—

Credit-impaired acquired loans
Single-family residential
340

—

342

—

343

—

Construction - speculative
1,755

—

1,889

—

1,889

—

Land - acquisition & development
2,677

—

3,702

0.1

4,211

0.1

Multi-family
—

—

601

—

1,074

—


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



Commercial real estate
83,657

1.1

87,154

1.1

91,006

1.0

Commercial & industrial
1,883

—

3,292

—

5,100

0.1

HELOC
12,849

0.2

14,040

0.2

15,037

0.2

Consumer
90

—

97

—

115

—

Total credit-impaired acquired loans
103,251

1.4

111,117

1.4

118,775

1.5

Total loans
Single-family residential
5,589,425

69.4

5,779,264

73.5

5,905,148

74.0

Construction - speculative
125,716

1.5

131,526

1.6

132,630

1.6

Construction - custom
229,134

2.9

211,690

2.7

210,488

2.6

Land - acquisition & development
115,655

1.4

128,379

1.7

139,603

1.8

Land - consumer lot loans
140,997

1.8

141,844

1.8

145,129

1.8

Multi-family
731,135

9.2

710,741

9.0

693,837

8.7

Commercial real estate
609,948

7.6

406,364

5.2

401,594

4.9

Commercial & industrial
280,458

3.4

166,115

2.1

153,677

2

HELOC
138,645

1.8

126,942

1.6

128,596

1.6

Consumer
69,980

0.8

63,471

0.8

68,317

0.9

Total loans
8,031,093

99.8
%
7,866,336

100
%
7,979,019

100
%
Less:
Allowance for probable losses
126,827

133,147

137,951

Loans in process
204,566

213,286

155,051

Discount on acquired loans
50,817

33,484

35,200

Deferred net origination fees
33,973

34,421

34,612

416,183

414,338

362,814

$
7,614,910

$
7,451,998

$
7,616,205

____________________
* Excludes covered loans
Covered loans : As of December 31, 2012 , covered loans increased 32.0%, or $92,218,000, to $380,594,000 , compared to September 30, 2012 , due to acquisition of FDIC covered loans as part of the South Valley acquisition described in Note B.
Non-performing assets : Non-performing assets, which excludes discounted acquired assets, decreased during the quarter ended December 31, 2012 to $264,219,000 from $272,905,000 at September 30, 2012 , a 3.2% decrease. The continued elevated level of NPAs is a result of the significant decline in housing values in the western United States and the national recession over the last three years. Non-performing assets as a percentage of total assets was 2.02% at December 31, 2012 compared to 2.19% at September 30, 2012 . This level of NPAs remains significantly higher than the 0.94% average in the Company’s 28+ year history as a public company.
The following table sets forth information regarding restructured and non-accrual loans and REO held by the Company at the dates indicated.

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



December 31,
2012
September 30,
2012
(In thousands)
Restructured loans:
Single-family residential
$
356,546

84.0
%
$
361,640

83.4
%
Construction - speculative
14,244

3.4

15,907

3.7

Construction - custom
1,196

0.3

1,196

0.3

Land - acquisition & development
13,009

3.1

14,985

3.5

Land - consumer lot loans
13,622

3.2

13,782

3.2

Multi - family
17,517

4.1

17,507

4.0

Commercial real estate
7,337

1.7

7,377

1.7

Commercial & industrial
—

—

—

—

HELOC
891

0.2

884

0.2

Consumer
—

—

—

—

Total restructured loans (1)
424,362

100
%
433,278

100
%
Non-accrual loans:
Single-family residential
108,570

66.6
%
131,193

75.7
%
Construction - speculative
9,471

5.8

10,634

6.1

Construction - custom
39

—

539

0.3

Land - acquisition & development
14,318

8.8

13,477

7.8

Land - consumer lot loans
4,024

2.5

5,149

3.0

Multi-family
7,907

4.8

4,185

2.4

Commercial real estate
16,958

10.4

7,653

4.4

Commercial & industrial
987

0.6

16

—

HELOC
489

0.3

198

0.1

Consumer
353

0.2

383

0.2

Total non-accrual loans (2)
163,116

100
%
173,427

100
%
Total REO (3)
83,000

80,800

Total REHI (3)
18,103

18,678

Total non-performing assets
$
264,219

$
272,905

Total non-performing assets and performing restructured loans as a percentage of total assets
5.05
%
5.42
%
(1)    Restructured loans were as follows:
Performing
$
397,045

93.6
%
$
403,238

93.1
%
Non-accrual *
27,317

6.4

30,040

6.9

$
424,362

100
%
$
433,278

100
%
*
Included in "Total non-accrual loans" above
(2)
The Company recognized interest income on nonaccrual loans of approximately $790,000 in the three months ended December 31, 2012 . Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $2,250,000 for the three months ended December 31, 2012 .

In addition to the nonaccrual loans reflected in the above table, at December 31, 2012 , the Company had $134,816,000 of loans that were less than 90 days delinquent 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 6.07% at December 31, 2012 .
(3)
Total REO and REHI (included in real estate held for sale on the Statement of Financial Condition) includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. Excludes covered REO.

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



Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.
Most restructured loans are accruing and performing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 84.0% of restructured loans as of December 31, 2012 . The concession for these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are 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 our general reserve calculation.
Allocation of the allowance for loan losses : The following table shows the allocation of the Company’s allowance for loan losses at the dates indicated.
December 31, 2012
September 30, 2012
Amount
Loans to
Total Loans (1)
Coverage
Ratio (2)
Amount
Loans to
Total Loans (1)
Coverage
Ratio (2)
(In thousands)
(In thousands)
Single-family residential
$
77,508

73.5
%
1.4
%
$
81,815

74.5
%
1.4
%
Construction - speculative
8,660

1.6

7.0

12,060

1.7

9.3

Construction - custom
275

3.0

0.1

347

2.7

0.2

Land - acquisition & development
15,056

1.4

13.8

15,598

1.6

12.5

Land - consumer lot loans
4,963

1.8

3.6

4,937

1.8

3.5

Multi-family
5,107

9.5

0.7

5,280

9.2

0.7

Commercial real estate
2,651

4.6

0.8

1,956

4.1

0.6

Commercial & industrial
8,062

2.3

4.7

7,626

2.1

4.7

HELOC
1,044

1.5

0.9

965

1.5

0.9

Consumer
3,501

0.8

5.9

2,563

0.8

4.0

$
126,827

100
%
$
133,147

100
%
__________________
(1)
Represents the total amount of the loan category as a % of total gross non-acquired and non-covered loans outstanding.
(2)
Represents the allocated allowance of the loan category as a % of total gross non-acquired and non-covered loans outstanding for the same loan category.
Customer accounts : Customer accounts increased $657,473,000 , or 7.67% , to $9,234,091,000 at December 31, 2012 compared with $8,576,618,000 at September 30, 2012 . The following table shows the composition of the Company’s customer accounts as of the dates shown:




43
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



Deposits by Type
December 31, 2012
September 30, 2012
(In thousands)
Wtd. Avg.
Rate
Wtd. Avg.
Rate
Non-interest checking
$
437,533

4.7
%
—
%
$
272,242

3.2
%
—
%
Interest checking
853,727

9.2

0.13
%
622,397

7.3

0.14
%
Savings (passbook/stmt)
366,339

4.0

0.19
%
314,634

3.7

0.20
%
Money Market
1,914,388

20.7

0.26
%
1,737,180

20.2

0.26
%
CD’s
5,662,104

61.4

1.18
%
5,630,165

65.6

1.27
%
Total
$
9,234,091

100
%
0.79
%
$
8,576,618

100
%
0.90
%
FHLB advances and other borrowings : Total borrowings was unchanged at $1,880,000,000 as of December 31, 2012 and September 30, 2012 . The Company has a credit line with the FHLB Seattle equal to 50% of total assets, providing a substantial source of liquidity if needed. FHLB advances are collateralized as provided for in the Advances, Pledge and Security Agreement by all FHLB stock owned by the Company, deposits with the FHLB and certain mortgages or deeds of trust securing such properties as provided in the agreements with the FHLB.


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



RESULTS OF OPERATIONS
Net Income : The quarter ended December 31, 2012 , produced net income of $35,282,000 compared to $33,418,000 for the same quarter one year ago. The net income for the quarter ended December 31, 2012 benefited from overall lower credit costs, which included the provision for loan losses, and gains/losses on sales of REO. The provision for loan losses amounted to $3,600,000 and for the quarter ended December 31, 2012 , as compared to $11,210,000 for the three month period one year ago. See related discussion in “Provision for Loan Losses” section below for reasons for the decrease in the provision for loan losses. In addition, gains/losses recognized on real estate acquired through foreclosure was a net loss of $3,319,000 for the three months ended December 31, 2012 as compared to net losses of $10,570,000 for the three month period one year ago.
Net Interest Income : The largest component of the Company’s earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Net interest income is impacted primarily by two factors; first, the volume of earning assets and liabilities and second, the rate earned on those assets or the rate paid on those liabilities.
The following table sets forth certain information explaining changes in interest income and interest expense for the periods indicated compared to the same periods one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis:
Comparison of Quarters Ended
12/31/12 and 12/31/11
Volume
Rate
Total
(In thousands)
Interest income:
Loans and covered loans
$
(4,304
)
$
(6,332
)
$
(10,636
)
Mortgaged-backed securities
(4,991
)
(9,573
)
(14,564
)
Investments (1)
427

156

583

All interest-earning assets
(8,868
)
(15,749
)
(24,617
)
Interest expense:
Customer accounts
518

(5,695
)
(5,177
)
FHLB advances and other borrowings
(8,240
)
(2,920
)
(11,160
)
All interest-bearing liabilities
(7,722
)
(8,615
)
(16,337
)
Change in net interest income
$
(1,146
)
$
(7,134
)
$
(8,280
)
___________________
(1)
Includes interest on cash equivalents and dividends on FHLB stock
Provision for Loan Losses : The Company recorded a $ 3,600,000 provision for loan losses during the quarter ended December 31, 2012 , while a $ 11,210,000 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $264,219,000 , or 2.02% , of total assets at December 31, 2012 , compared to $343,665,000 , or 2.52% , of total assets one year ago. Non-accrual loans decreased from $185,783,000 at December 31, 2011 , to $163,116,000 at December 31, 2012 , a 12.2% decrease. The Company had net charge-offs of $9,920,000 for the quarter ended December 31, 2012 , compared with $13,829,000 of net charge-offs for the same quarter one year ago. The decrease in the provision for loan losses is in response to four primary factors: first, the amount of NPA's improved year-over-year; second, non-accrual loans as a percentage of net loans decreased from 2.38% at December 31, 2011 , to 2.14% at December 31, 2012 ; third, the percentage of loans 30 days or more delinquent decreased from from 3.13% at December 31, 2011 , to 2.80% at December 31, 2012 ; and finally, the Company's exposure in the land A&D and speculative construction portfolios, the source of the majority of losses during this credit cycle, has decreased from a combined 3.7% of the gross loan portfolio at December 31, 2011 , to 3.0% at December 31, 2012 . Management believes the allowance for loan losses, totaling $126,827,000 , or 1.58% of gross loans is sufficient to absorb estimated losses inherent in the portfolio.
See Note F for further discussion and analysis of the allowance for loan losses for the quarter ended December 31, 2012 .

45
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



Other Income : The quarter ended December 31, 2012 produced total other income of $4,957,000 compared to $4,645,000 for the same quarter one year ago, an increase of $312,000.
Other Expense : The quarter ended December 31, 2012 , produced total other expense of $38,298,000 compared to $34,363,000 for the same quarter one year ago, a 11.5% increase. The increase in total other expense over the same comparable period one year ago was primarily due to the increase of $2,397,000 in compensation and benefits, which, for the quarter ended December 31, 2012 included the addition of the employees from the South Valley acquisition as of October 31, 2012 and the Western National Bank transaction with the FDIC in December 2011. Also impacted by these acquisitions were the increases in occupancy expense and other expense of $515,000 and $1,874,000 respectively, for the quarter ended December 31, 2012 as compared to the prior year. Total other expense for the quarters ended December 31, 2012 and 2011 equaled 1.20% and 1.01%, r espectively, of average assets. The number of staff, including part-time employees on a full-time equivalent basis, was 1,430 and 1,241 at December 31, 2012 and 2011 , respectively. FDIC insurance expense decreased to $ 3,342,000 for the three months ended December 31, 2012 as compared to $ 4,193,000 for the same quarter one year ago. The FDIC instituted a new assessment basis in the fourth quarter of fiscal 2011, which resulted in an overall lower insurance expense for the Company.
Taxes : Income taxes increased to $19,892,000 for the quarter ended December 31, 2012 , as compared to $18,798,000 for the same period one year ago. The effective tax rate for the quarters ended December 31, 2012 and 2011, was 36.00%. The Company expects an effective tax rate of 36.00% going forward.

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, 2012 . 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 2012 Form 10-K.

(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 Securities Exchange Act of 1934, as amended (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 President and Chief Executive Officer along with the Company’s Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s President and Chief Executive Officer, along with the Company’s Executive Vice President 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 President and Chief Executive Officer along with the Company’s Executive Vice President and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.

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

46


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART II – Other Information
Item 1. Legal Proceedings
From time to time the Company or 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 financial position or results of operations.

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 our Form 10-K for the year ended September 30, 2012 . These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our 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, 2012 .
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
October 1, 2012 to October 31, 2012
1,100,000

$
16.76

1,100,000

5,088,030

November 1, 2012 to November 30, 2012
1,008,200

16.61

1,008,200

4,079,830

December 1, 2012 to December 31, 2012
587,814

16.27

587,814

3,492,016

Total
2,696,014

$
—

2,696,014

3,492,016

___________________
(1)
The Company's only stock repurchase program was publicly announced by the Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 31,956,264 shares have been authorized for repurchase.


Item 3.        Defaults Upon Senior Securities
Not applicable

Item 5.        Other Information
Not applicable

Item 6.        Exhibits
(a)
Exhibits
31.1
Section 302 Certification by the Chief Executive Officer
31.2
Section 302 Certification by the Chief Financial Officer
32
Section 906 Certification by the Chief Executive Officer and the Chief Financial Officer
101
Financial Statements from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2012 formatted in XBRL

47

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
February 5, 2013
/ S /    R OY M. W HITEHEAD
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer
February 5, 2013
/ S /    B RENT J. B EARDALL
BRENT J. BEARDALL
Executive Vice President and Chief
Financial Officer

48
TABLE OF CONTENTS