WAFD 10-Q Quarterly Report Dec. 31, 2013

WASHINGTON FEDERAL INC

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10-Q 1 wafd1231201310-q.htm 10-Q WAFD 12.31.2013 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2013



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 January 31, 2014
Common stock, $1.00 par value	102,510,030

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES



PART I

Item 1.	Financial Statements (Unaudited)

	The Consolidated Financial Statements of Washington Federal, Inc. and Subsidiaries filed as a part of the report are as follows:

	Consolidated Statements of Financial Condition as of December 31, 2013 and December 31, 2012	3

	Consolidated Statements of Operations for the quarter ended December 31, 2013 and December 31, 2012	4

	Consolidated Statements of Comprehensive Income for the quarter ended December 31, 2013 and December 31, 2012	5

	Consolidated Statements of Stockholders' Equity for the quarter ended December 31, 2013 and December 31, 2012	6

	Consolidated Statements of Cash Flows for the quarter ended December 31, 2013 and December 31, 2012	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

PART II

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Mine Safety Disclosures	48

Item 5.	Other Information	48

Item 6.	Exhibits	48

	Signatures	50

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)



	December 31, 2013			September 30, 2013
	(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	967,348		$	203,563
Available-for-sale securities, at fair value	2,838,504			2,360,948
Held-to-maturity securities, at amortized cost	1,630,936			1,654,666
Loans receivable, net	7,651,558			7,528,030
Covered loans, net	252,693			295,947
Interest receivable	49,629			49,218
Premises and equipment, net	224,745			206,172
Real estate held for sale	71,537			72,925
Real estate held for investment	11,656			9,392
Covered real estate held for sale	24,650			30,980
FDIC indemnification asset	57,818			64,615
FHLB & FRB stock	171,480			173,009
Intangible assets, net	299,019			264,318
Federal and state income tax assets, net	24,964			44,000
Other assets	127,836			125,076
	$	14,404,373		$	13,082,859
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts	$	4,713,924		$	3,540,842
Time deposit accounts	5,688,802			5,549,429
	10,402,726			9,090,271
FHLB advances	1,930,000			1,930,000
Advance payments by borrowers for taxes and insurance	17,791			42,443
Accrued expenses and other liabilities	100,872			82,510
	12,451,389			11,145,224
Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized; 133,272,280 and 132,572,475 shares issued; 102 ,329,576 an d 102,484,671 shares outstanding	133,273			132,573
Paid-in capital	1,634,771			1,625,051
Accumulated other comprehensive income, net of taxes	195			6,378
Treasury stock, at cost; 30 ,942,704 and 30,087,804 shares	(439,762		)	(420,817		)
Retained earnings	624,507			594,450
	1,952,984			1,937,635
	$	14,404,373		$	13,082,859

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Quarter Ended December 31,
	2013			2012
	(In thousands, except per share data)
INTEREST INCOME
Loans	$	107,227		$	116,843
Mortgage-backed securities	19,368			11,732
Investment securities and cash equivalents	4,663			2,734
	131,258			131,309
INTEREST EXPENSE
Customer accounts	15,499			18,772
FHLB advances and other borrowings	17,447			17,103
	32,946			35,875
Net interest income	98,312			95,434
Provision (recovery) for loan losses	(4,600		)	3,600
Net interest income after provision (recovery) for loan losses	102,912			91,834

OTHER INCOME	5,788			4,957

OTHER EXPENSE
Compensation and benefits	25,126			21,072
Occupancy	5,618			4,446
FDIC insurance premiums	2,934			3,342
Information technology	2,929			2,438
Amortization of intangible assets	820			354
Other	6,693			6,646
	44,120			38,298

Loss on real estate acquired through foreclosure, net	(1,951		)	(3,319		)
Income before income taxes	62,629			55,174
Income tax provision	22,393			19,892
NET INCOME	$	40,236		$	35,282

PER SHARE DATA
Basic earnings	$	0.39		$	0.33
Diluted earnings	0.39			0.33
Basic weighted average number of shares outstanding	102,329,578			105,998,184
Diluted weighted average number of shares outstanding, including dilutive stock options	102,813,154			106,043,914

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Quarter Ended December 31,
	2013			2012
	(In thousands)

Net income	$	40,236		$	35,282
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on available-for-sale securities	(9,661		)	(2,636		)
Related tax benefit (expense)	3,478			969
Other comprehensive loss	(6,183		)	(1,667		)
Comprehensive income	$	34,053		$	33,615

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)



	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total
Balance at October 1, 2013	$	132,573	$	1,625,051	$	594,450		$	6,378		$	(420,817	)	$	1,937,635
Net income					$	40,236								$	40,236
Other comprehensive income adjustment								(6,183		)				(6,183		)
Dividends paid on common stock					(10,179		)							(10,179		)
Compensation expense related to common stock options			300											300
Proceeds from exercise of common stock options	700		8,580											9,280
Restricted stock			840											840
Treasury stock acquired											(18,945		)	(18,945		)
Balance at December 31, 2013	$	133,273	$	1,634,771	$	624,507		$	195		$	(439,762	)	1,952,984

	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total
Balance at October 1, 2012	$	129,950	$	1,586,295	$	480,780		$	13,306		$	(310,579	)	$	1,899,752
Net income					35,282									35,282
Other comprehensive income adjustment								(1,667		)				(1,667		)
Dividends paid on common stock					(8,690		)							(8,690		)
Compensation expense related to common stock options			300											300
Proceeds from exercise of common stock options	6		57											63
Proceeds from issuance of common stock	1,996		31,496											33,492
Restricted stock	15		878											893
Treasury stock acquired											(44,747		)	(44,747		)
Balance at December 31, 2012	$	131,967	$	1,619,026	$	507,372		$	11,639		$	(355,326	)	$	1,914,678

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Quarter Ended December 31,
	2013			2012
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	40,236		$	35,282
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of fees, discounts, premiums and intangible assets, net	1,057			536
Cash received from FDIC under loss share	1,295			4,566
Depreciation	2,700			2,300
Stock option compensation expense	300			300
Provision for (reversal of) loan losses	(4,600		)	3,600
Loss (gain) on real estate held for sale, net	(597		)	1,193
Decrease (increase) in accrued interest receivable	(411		)	1,058
Decrease (increase) in income taxes receivable	22,629			(3,038		)
Decrease in other assets	1,649			30,191
Decrease in accrued expenses and other liabilities	(12,768		)	(15,437		)
Net cash provided by operating activities	51,490			60,551
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal collections (loan originations)	(68,870		)	187,382
FHLB stock redemptions	1,376			1,382
Available-for-sale securities purchased	(565,080		)	(261,966		)
Principal payments and maturities of available-for-sale securities	76,805			31,404
Available-for-sale securities sold	—			43,899
Held-to-maturity securities purchased	—			(264,781		)
Principal payments and maturities of held-to-maturity securities	23,117			50,522
Net cash received from acquisition	1,280,077			202,308
Proceeds from sales of real estate held for sale	12,566			24,370
Proceeds from sales of covered REO	6,098			3,043
Proceeds from sales of real estate held for investment	1,729			5,775
Premises and equipment purchased and REO improvements	(9,232		)	(12,185		)
Net cash provided by investing activities	758,586			11,153
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer accounts	(1,795		)	(77,942		)
Proceeds from borrowings	625,000			—
Repayments of borrowings	(625,000		)	(22,471		)
Proceeds from exercise of common stock options	9,280			63
Dividends paid on common stock	(10,179		)	(17,250		)
Treasury stock purchased	(18,945		)	(44,747		)
Decrease in advance payments by borrowers for taxes and insurance	(24,652		)	(23,489		)
Net cash used by financing activities	(46,291		)	(185,836		)
Increase (decrease) in cash and cash equivalents	763,785			(114,132		)
Cash and cash equivalents at beginning of period	203,563			751,430
Cash and cash equivalents at end of period	$	967,348		$	637,298

(CONTINUED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)



	Quarter Ended December 31,
	2013			2012
	(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Non-covered real estate acquired through foreclosure	$	9,956		$	22,762
Covered real estate acquired through foreclosure	179			3,096
Cash paid during the period for
Interest	33,644			37,457
Income taxes	(236		)	—
The following summarizes the non-cash activities related to acquisitions
Fair value of assets acquired	$	65,531		$	810,766
Fair value of liabilities assumed	(1,345,608		)	(766,871		)
Net fair value of assets (liabilities)	$	(1,280,077	)	$	43,895

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(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” or "Washington Federal"). 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, 2013 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 2013 Annual Report on Form 10-K (“2013 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 2013 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 2013 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, 2013 , excluding covered loans, of $304 million . 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.

Reclassification of Real Estate Held for Investment into its own line item and out of Real Estate Held for Sale have been made to the financial statements for years prior to September 30, 2013 to conform to current year classifications.

NOTE B - Acquisitions

Certain Branches of Bank of America, National Association

Effective as of the close of business on October 31, 2013, Washington Federal completed the acquisition of eleven branches from Bank of America, National Association; these branches are located in New Mexico. Effective as of the close of business on December 6, 2013, Washington Federal completed the acquisition of another forty branches from Bank of America, National Association; these branches are located in Washington, Oregon, and Idaho. The combined acquisitions provided recorded book values of $1.3 billion in deposit accounts, $9 million of loans, and $16 million in branch properties. Washington Federal paid a 2.60% premium on the total deposits. The cash received by Washington Federal in the transaction was $1.3 billion .

The acquisition will be accounted for under the acquisition method of accounting. The purchased assets and assumed liabilities are recorded at their respective acquisition date estimated fair values. The purchase accounting is incomplete as the core deposit intangible valuation is not yet finalized, and the acquired loans, properties, and equipment had not yet been recorded at their fair values as of December 31, 2013. The purchase accounting fair value analysis is expected to be completed as of March 31, 2014.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the first eleven branches for the period from November 1, 2013 to December 31, 2013 and for the additional forty branches from December 7, 2013 to December 31, 2013.

The table below displays the adjusted fair value as of the acquisition date for each major class of assets acquired and liabilities assumed:

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)




	Adjusted Fair Value Recorded by
	Washington Federal
	(In thousands)
Assets:
Cash and cash equivalents	$	1,280,077
Loans receivable, net	8,278
Property and equipment, net	17,476
Intangible Assets	35,522
Other assets	4,255
Total Assets	1,345,608

Liabilities:
Customer accounts	1,314,478
Other liabilities	31,130
Total Liabilities	1,345,608

Net assets acquired	$	—

NOTE C – Dividends

On January 17, 2014, the Company paid its 124th consecutive quarterly cash dividend on common stock. Dividends per share were $ .10 and $ .08 for the quarters ended December 31, 2013 and 2012 , respectively.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

NOTE D – Loans Receivable (excluding Covered Loans)



	December 31, 2013				September 30, 2013
	(In thousands)
Non-acquired loans
Single-family residential	$	5,421,896	66.9	%	$	5,359,149	67.1	%
Construction - speculative	135,868		1.7		130,778		1.6
Construction - custom	333,954		4.1		302,722		3.8
Land - acquisition & development	72,075		0.9		77,775		1.1
Land - consumer lot loans	119,206		1.5		121,671		1.5
Multi-family	842,343		10.4		831,684		10.4
Commercial real estate	433,361		5.3		414,961		5.1
Commercial & industrial	274,432		3.4		243,199		3.0
HELOC	111,577		1.4		112,186		1.4
Consumer	44,142		0.5		47,141		0.6
Total non-acquired loans	7,788,854		96.1		7,641,266		95.6
Acquired loans
Single-family residential	13,856		0.2		14,468		0.2
Construction - speculative	—		—		—		—
Construction - custom	—		—		—		—
Land - acquisition & development	1,206		—		1,489		—
Land - consumer lot loans	3,261		—		3,313		—
Multi-family	3,773		0.1		3,914		0.1
Commercial real estate	117,038		1.4		133,423		1.7
Commercial & industrial	72,594		0.9		75,326		0.9
HELOC	9,538		0.1		10,179		0.1
Consumer	7,754		0.1		8,267		0.1
Total acquired loans	229,020		2.8		250,379		3.1
Credit-impaired acquired loans
Single-family residential	331		—		333		—
Construction - speculative	—		—		—		—
Land - acquisition & development	2,225		—		2,396		—
Multi-family	—		—		—		—
Commercial real estate	71,841		1.0		76,909		1.1
Commercial & industrial	7,140		0.1		7,925		0.1
HELOC	10,834		0.1		11,266		0.1
Consumer	64		—		71		—
Total credit-impaired acquired loans	92,435		1.2		98,900		1.3
Total loans
Single-family residential	5,436,083		67.0		5,373,950		67.3
Construction - speculative	135,868		1.7		130,778		1.6
Construction - custom	333,954		4.1		302,722		3.8
Land - acquisition & development	75,506		0.9		81,660		1.1
Land - consumer lot loans	122,467		1.5		124,984		1.5
Multi-family	846,116		10.5		835,598		10.5
Commercial real estate	622,240		7.7		625,293		7.9
Commercial & industrial	354,166		4.4		326,450		4.0

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



HELOC	131,949		1.6		133,631		1.6
Consumer	51,960		0.6		55,479		0.7
Total loans	8,110,309		100	%	7,990,545		100	%
Less:
Allowance for probable losses	118,158				116,741
Loans in process	273,263				275,577
Discount on acquired loans	31,485				34,143
Deferred net origination fees	35,845				36,054
	458,751				462,515
	$	7,651,558			$	7,528,030

Changes in the carrying amount and accretable yield for acquired credit impaired and non-impaired loans for the three months ended December 31, 2013 and the fiscal year ended September 30, 2013 were as follows:



December 31, 2013	Acquired Impaired						Acquired Non-impaired
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
	(In thousands)
Balance as of beginning of period	$	37,236		$	69,718		$	4,977		$	245,373
Accretion	(2,715		)	2,715			(319		)	319
Transfers to REO	—			(346		)	—			(1,124		)
Payments received, net	—			(6,495		)	—			(20,453		)
Balance as of end of period	$	34,521		$	65,592		$	4,658		$	224,115



September 30, 2013	Acquired Impaired						Acquired Non-impaired
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
	(In thousands)
Balance as of beginning of period	$	16,928		$	77,613		$	—		$	—
Reclassification from nonaccretable balance, net (1)	30,026			—			—			—
Additions (2)	—			9,865			10,804			351,335
Accretion	(9,718		)	9,718			(5,827		)	5,827
Transfers to REO	—			(3,975		)	—			(7,755		)
Payments received, net	—			(23,503		)	—			(104,034		)
Balance as of end of period	$	37,236		$	69,718		$	4,977		$	245,373
(1) reclassification due to improvements in expected cash flows of the underlying loans.
(2) includes acquired loans which were acquired as part of the South Valley acquisition.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

The following table sets forth information regarding non-accrual loans held by the Company as of the dates indicated:



	December 31, 2013				September 30, 2013
	(In thousands)
Non-accrual loans:
Single-family residential	$	89,075	77.5	%	$	100,460	76.5	%
Construction - speculative	3,053		2.7		4,560		3.5
Construction - custom	—		—		—		—
Land - acquisition & development	2,813		2.5		2,903		2.2
Land - consumer lot loans	3,548		3.1		3,337		2.5
Multi-family	2,494		2.2		6,573		5.0
Commercial real estate	11,613		10.1		11,736		8.9
Commercial & industrial	655		0.6		477		0.4
HELOC	471		0.4		263		0.2
Consumer	995		0.9		990		0.8
Total non-accrual loans	$	114,717	100	%	$	131,299	100	%

The following tables provide an analysis of the age of loans in past due status as of December 31, 2013 and September 30, 2013 , respectively.



December 31, 2013	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		% based on $
	(In thousands)
Non-acquired loans
Single-Family Residential	$	5,418,864	$	5,304,409	$	33,199	$	10,318	$	70,938	$	114,455	2.11	%
Construction - Speculative	87,485		86,398		37		92		958		1,087		1.24
Construction - Custom	154,776		154,610		166		—		—		166		0.11
Land - Acquisition & Development	66,028		63,890		1		119		2,018		2,138		3.24
Land - Consumer Lot Loans	119,024		114,493		989		320		3,222		4,531		3.81
Multi-Family	812,635		810,050		1,031		—		1,554		2,585		0.32
Commercial Real Estate	426,898		422,781		951		—		3,166		4,117		0.96
Commercial & Industrial	274,424		272,589		1,835		—		—		1,835		0.67
HELOC	111,577		110,995		346		114		122		582		0.52
Consumer	44,143		42,545		901		305		392		1,598		3.62
Total non-acquired loans	7,515,854		7,382,760		39,456		11,268		82,370		133,094		1.77	%

Acquired loans
Single-Family Residential	13,856		13,813		$	—	—		43		43		0.31	%
Construction - Speculative	—		—		—		—		—		—		—
Construction - Custom	—		—		—		—		—		—		—
Land - Acquisition & Development	1,206		1,123		83		—		—		83		6.88
Land - Consumer Lot Loans	3,261		2,935		—		—		326		326		10.00

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



Multi-Family	3,773		3,636		137		—		—		137		3.63
Commercial Real Estate	116,810		112,685		44		—		4,081		4,125		3.53
Commercial & Industrial	72,575		71,903		364		146		162		672		0.93
HELOC	9,538		9,263		16		—		259		275		2.88
Consumer	7,754		7,076		59		16		603		678		8.74
Total acquired loans	228,773		222,434		703		162		5,474		6,339		2.77	%

Credit-impaired acquired loans
Single-Family Residential	331		331		—		—		—		—		—	%
Construction - Speculative	—		—		—		—		—		—		—
Construction - Custom	—		—		—		—		—		—		—
Land - Acquisition & Development	2,224		1,845		—		—		379		379		17.04
Land - Consumer Lot Loans	—		—		—		—		—		—		—
Multi-Family	—		—		—		—		—		—		—
Commercial Real Estate	71,826		70,490		379		64		893		1,336		1.86
Commercial & Industrial	7,140		6,647		—		—		493		493		6.90
HELOC	10,834		10,431		313		—		90		403		3.72
Consumer	64		64		—		—		—		—		—
Total credit-impaired acquired loans	92,419		89,808		692		64		1,855		2,611		2.83	%

Total loans	$	7,837,046	$	7,695,002	$	40,851	$	11,494	$	89,699	$	142,044	1.81	%



September 30, 2013	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		% based on $
	(In thousands)
Single-Family Residential	$	5,356,200	$	5,237,413	$	26,888	$	12,373	$	79,526	$	118,787	2.22	%
Construction - Speculative	82,422		80,047		—		—		2,375		2,375		2.88
Construction - Custom	130,095		129,678		417		—		—		417		0.32
Land - Acquisition & Development	71,567		70,106		—		—		1,461		1,461		2.04
Land - Consumer Lot Loans	121,473		117,076		806		355		3,236		4,397		3.62
Multi-Family	790,564		785,793		—		—		4,771		4,771		0.60
Commercial Real Estate	404,680		398,114		2,942		351		3,273		6,566		1.62
Commercial & Industrial	249,405		249,363		42		—		—		42		0.02
HELOC	112,186		111,407		493		213		73		779		0.69
Consumer	47,142		45,620		849		283		390		1,522		3.23
Total non-acquired loans	7,365,734		7,224,617		32,437		13,575		95,105		141,117		1.92

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



Acquired loans
Single-Family Residential	14,468		14,343		82		—		43		125		0.86
Construction - Speculative	—		—		—		—		—		—		NM
Construction - Custom	—		—		—		—		—		—		NM
Land - Acquisition & Development	1,489		1,241		—		—		248		248		16.66
Land - Consumer Lot Loans	3,313		2,987		125		100		101		326		9.84
Multi-Family	3,914		3,914		—		—		—		—		—
Commercial Real Estate	133,398		128,610		134		617		4,037		4,788		3.59
Commercial & Industrial	75,323		74,992		10		153		168		331		0.44
HELOC	10,179		10,063		—		16		100		116		1.14
Consumer	8,266		7,568		90		8		600		698		8.44
Total acquired loans	250,350		243,718		441		894		5,297		6,632		2.65

Credit-impaired acquired loans
Single-Family Residential	333		333		—		—		—		—		—
Construction - Speculative	—		—		—		—		—		—		NM
Construction - Custom	—		—		—		—		—		—		—
Land - Acquisition & Development	2,393		1,929		—		464		—		464		19.39
Land - Consumer Lot Loans	—		—		—		—		—		—		—
Multi-Family	—		—		—		—		—		—		—
Commercial Real Estate	83,116		80,095		2,301		—		720		3,021		3.63
Commercial & Industrial	1,705		1,396		—		—		309		309		18.12
HELOC	11,266		11,176		—		—		90		90		0.80
Consumer	71		71		—		—		—		—		—
Total credit-impaired acquired loans	98,884		95,000		2,301		464		1,119		3,884		3.93	%

Total loans	$	7,714,968	$	7,563,335	$	35,179	$	14,933	$	101,521	$	151,633	1.97	%

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, 2013 , single-family residential loans comprised 85.8% of TDRs.

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

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

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



	Quarter Ended December 31,
	2013					2012
		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	113	$	23,607	$	23,607	105	$	29,339	$	29,339
Construction - Speculative	—	—		—		1	2,503		2,503
Construction - Custom	—	—		—		—	—		—
Land - Acquisition & Development	—	—		—		—	—		—
Land - Consumer Lot Loans	5	1,098		1,098		11	1,836		1,836
Multi-Family	2	1,213		1,213		1	68		68
Commercial Real Estate	1	810		810		—	—		—
Commercial & Industrial	—	—		—		—	—		—
HELOC	1	261		261		—	—		—
Consumer	2	39		39		—	—		—
	124	$	27,028	$	27,028	118	$	33,746	$	33,746

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,
	2013			2012
	Number of	Recorded		Number of	Recorded
	Contracts	Investment		Contracts	Investment
	(In thousands)			(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Single-Family Residential	24	$	3,624	31	$	7,498
Construction - Speculative	—	—		5	904
Construction - Custom	—	—		—	—
Land - Acquisition & Development	—	—		—	—
Land - Consumer Lot Loans	2	166		—	—
Multi-Family	—	—		—	—
Commercial Real Estate	—	—		—	—
Commercial & Industrial	—	—		—	—
HELOC	—	—		—	—
Consumer	—	—		—	—
	26	$	3,790	36	$	8,402

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

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.

•

Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible. Partial charge-off versus full charge-off may be taken if the collateral offers some identifiable protection.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

The following table summarizes the activity in the allowance for loan losses for the quarter ended December 31, 2013 and fiscal year ended September 30, 2013 :



Quarter Ended December 31, 2013	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	64,184	$	(2,334	)	$	8,827	$	(2,985	)	$	67,692
Construction - speculative	8,407		(450		)	95		90			8,142
Construction - custom	882		—			—		592			1,474
Land - acquisition & development	9,165		(456		)	439		(2,064		)	7,084
Land - consumer lot loans	3,552		(242		)	22		(58		)	3,274
Multi-family	3,816		—			—		293			4,109
Commercial real estate	5,595		—			—		273			5,868
Commercial & industrial	16,614		(248		)	421		(282		)	16,505
HELOC	1,002		—			—		(59		)	943
Consumer	3,524		(1,082		)	1,025		(400		)	3,067
	$	116,741	$	(4,812	)	$	10,829	$	(4,600	)	$	118,158



Fiscal Year Ended September 30, 2013	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	81,815	$	(20,947	)	$	9,416	$	(6,100	)	$	64,184
Construction - speculative	12,060		(1,446		)	501		(2,708		)	8,407
Construction - custom	347		(481		)	—		1,016			882
Land - acquisition & development	15,598		(3,983		)	4,105		(6,555		)	9,165
Land - consumer lot loans	4,937		(1,363		)	40		(62		)	3,552
Multi-family	5,280		(1,043		)	171		(592		)	3,816
Commercial real estate	1,956		(747		)	17		4,369			5,595
Commercial & industrial	7,626		(1,145		)	95		10,038			16,614
HELOC	965		(163		)	—		200			1,002
Consumer	2,563		(2,783		)	2,000		1,744			3,524
	$	133,147	$	(34,101	)	$	16,345	$	1,350		$	116,741

The Company recorded a $ 4,600,000 recovery for loan losses during the quarter ended December 31, 2013 , while a $ 3,600,000 provision was recorded for the same quarter one year ago. The primary reason was the favorable settlement of a lawsuit related to previously purchased loans. In addition, the credit quality of the portfolio has been improving significantly and economic conditions are more favorable.

Non-performing assets (“NPAs”) amounted to $ 197,910,000 , or 1.37% , of total assets at December 31, 2013 , compared to $264,219,000 , or 2.02% , 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, 2013 as the associated discount is adequate to absorb potential losses. Non-accrual loans decreased from $163,116,000 at December 31, 2012 , to $114,717,000 at December 31, 2013 , a 29.7% decrease.

The Company had net recoveries of $6,017,000 for the quarter ended December 31, 2013 , compared with $9,920,000 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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

For the period ending December 31, 2013 , $116,552,000 of the allowance was calculated under our general allowance methodology and the remaining $1,606,000 was made up of specific reserves on loans that were deemed to be impaired. For the period ending September 30, 2013 , these amounts were $113,268,000 and $ 3,473,000 , respectively. 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, 2013 and September 30, 2013 :



December 31, 2013	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	$	67,692	$	5,336,460	1.3	%	$	—	$	85,436	—	%
Construction - speculative	7,607		122,994		6.2		535		12,874		4.2
Construction - custom	1,474		333,954		0.4		—		—		—
Land - acquisition & development	6,013		63,875		9.4		1,071		8,200		13.1
Land - consumer lot loans	3,274		104,675		3.1		—		14,531		—
Multi-family	4,109		833,508		0.5		—		8,835		—
Commercial real estate	5,868		416,440		1.4		—		16,921		—
Commercial & industrial	16,505		287,251		5.7		—		17		—
HELOC	943		110,570		0.9		—		1,007		—
Consumer	3,067		44,142		6.9		—		—		—
	$	116,552	$	7,653,869	1.5	%	$	1,606	$	147,821	1.1	%


(1)	Excludes acquired and covered loans



September 30, 2013	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	$	64,184	$	5,262,159	1.2	%	$	—	$	96,989	—	%
Construction - speculative	7,307		115,554		6.3		1,100		15,224		7.2
Construction - custom	882		302,722		0.3		—		—		—
Land - acquisition & development	6,943		67,521		10.3		2,222		10,254		21.7
Land - consumer lot loans	3,506		107,216		3.3		46		14,455		0.3
Multi-family	3,711		824,279		0.5		105		7,405		1.4
Commercial real estate	5,595		400,789		1.4		—		14,172		—
Commercial & industrial	16,614		256,954		6.5		—		48		—
HELOC	1,002		111,169		0.9		—		1,017		—
Consumer	3,524		47,141		7.5		—		—		—
	$	113,268	$	7,495,504	1.5	%	$	3,473	$	159,564	2.2	%


(1)	Excludes acquired and covered loans

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

The following tables provide information on loans based on credit quality indicators (defined above) as of December 31, 2013 and September 30, 2013 .

Credit Risk Profile by Internally Assigned Grade (excludes covered loans):



December 31, 2013	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,250,349		$	4,572		$	166,975		$	—		$	—		$	5,421,896
Construction - speculative	113,527			3,724			18,617			—			—			135,868
Construction - custom	333,954			—			—			—			—			333,954
Land - acquisition & development	62,085			—			9,990			—			—			72,075
Land - consumer lot loans	118,579			—			627			—			—			119,206
Multi-family	833,758			1,241			7,344			—			—			842,343
Commercial real estate	395,736			17,808			19,817			—			—			433,361
Commercial & industrial	256,375			16,332			1,725			—			—			274,432
HELOC	111,577			—			—			—			—			111,577
Consumer	43,715			—			427			—			—			44,142
	7,519,655			43,677			225,522			—			—			7,788,854

Acquired loans
Single-family residential	13,856			—			—			—			—			13,856
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	794			—			412			—			—			1,206
Land - consumer lot loans	3,261			—			—			—			—			3,261
Multi-family	3,636			—			137			—			—			3,773
Commercial real estate	92,287			3,543			21,062			146			—			117,038
Commercial & industrial	65,882			1,041			5,671			—			—			72,594
HELOC	9,538			—			—			—			—			9,538
Consumer	7,754			—			—			—			—			7,754
	197,008			4,584			27,282			146			—			229,020

Credit impaired acquired loans
Pool 1 - Construction and land A&D	1,434			—			791			—			—			2,225
Pool 2 - Single-family residential	331			—			—			—			—			331
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	10,898			—			—			—			—			10,898
Pool 5 - Commercial real estate	54,278			—			17,563			—			—			71,841
Pool 6 - Commercial & industrial	1,178			3,321			96			2,545			—			7,140
Total credit impaired acquired loans	68,119			3,321			18,450			2,545			—			92,435
Total gross loans	$	7,784,782		$	51,582		$	271,254		$	2,691		$	—		$	8,110,309

Total grade as a % of total gross loans	96.0		%	0.6		%	3.4		%	—		%	—		%

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



September 30, 2013	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,184,101		$	4,595		$	170,453		$	—		$	—		$	5,359,149
Construction - speculative	99,436			3,199			28,143			—			—			130,778
Construction - custom	302,722			—			—			—			—			302,722
Land - acquisition & development	64,355			775			12,645			—			—			77,775
Land - consumer lot loans	121,039			—			632			—			—			121,671
Multi-family	819,911			2,114			9,659			—			—			831,684
Commercial real estate	373,012			21,652			20,297			—			—			414,961
Commercial & industrial	240,441			1,049			1,709			—			—			243,199
HELOC	112,186			—			—			—			—			112,186
Consumer	46,720			—			421			—			—			47,141
	7,363,923			$	33,384		$	243,959		$	—		$	—		$	7,641,266

Acquired loans
Single-family residential	14,468			—			—			—			—			14,468
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	312			—			1,177			—			—			1,489
Land - consumer lot loans	3,313			—			—			—			—			3,313
Multi-family	3,227			—			687			—			—			3,914
Commercial real estate	105,055			4,190			24,178			—			—			133,423
Commercial & industrial	64,933			1,309			9,084			—			—			75,326
HELOC	10,179			—			—			—			—			10,179
Consumer	8,267			—			—			—			—			8,267
	209,754			5,499			35,126			—			—			250,379

Credit impaired acquired loans
Pool 1 - Construction and land A&D	980			461			955			—			—			2,396
Pool 2 - Single-family residential	333			—			—			—			—			333
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	11,337			—			—			—			—			11,337
Pool 5 - Commercial real estate	52,509			3,155			21,245			—			—			76,909
Pool 6 - Commercial & industrial	881			—			7,044			—			—			7,925
Total credit impaired acquired loans	66,040			3,616			29,244			—			—			98,900
Total gross loans	$	7,639,717		$	42,499		$	308,329		$	—		$	—		$	7,990,545
Total grade as a % of total gross loans	95.6		%	0.5		%	3.9		%	—		%	—		%

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):



December 31, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,332,821	98.4	%	$	89,075	1.6	%
Construction - speculative	132,815		97.8		3,053		2.2
Construction - custom	333,954		100.0		—		—
Land - acquisition & development	69,262		96.1		2,813		3.9
Land - consumer lot loans	115,658		97.0		3,548		3.0
Multi-family	839,849		99.7		2,494		0.3
Commercial real estate	421,748		97.3		11,613		2.7
Commercial & industrial	273,777		99.8		655		0.2
HELOC	111,106		99.6		471		0.4
Consumer	43,147		97.7		995		2.3
	$	7,674,137	98.5	%	$	114,717	1.5	%



September 30, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,258,688	98.1	%	$	100,460	1.9	%
Construction - speculative	126,218		96.5		4,560		3.5
Construction - custom	302,722		100.0		—		—
Land - acquisition & development	74,872		96.3		2,903		3.7
Land - consumer lot loans	118,334		97.3		3,337		2.7
Multi-family	825,111		99.2		6,573		0.8
Commercial real estate	389,423		97.1		11,736		2.9
Commercial & industrial	256,525		99.8		477		0.2
HELOC	111,923		99.8		263		0.2
Consumer	46,151		97.9		990		0.2
	$	7,509,967	98.3	%	$	131,299	1.7	%

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

The following table provides information on impaired loan balances and the related allowances by loan types as of December 31, 2013 and September 30, 2013 :




December 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	32,815	$	36,758	$	—		$	26,315
Construction - speculative	2,324		2,602		—			1,734
Construction - custom	—		—		—			—
Land - acquisition & development	3,071		10,527		—			2,846
Land - consumer lot loans	3,039		3,184		—			3,697
Multi-family	807		848		—			605
Commercial real estate	21,258		29,657		—			15,872
Commercial & industrial	6,983		30,732		—			5,130
HELOC	392		1,055		—			1,128
Consumer	604		640		—			3,252
	71,293		116,003		—			60,579
With an allowance recorded:
Single-family residential	355,448		361,771		13,973			343,662
Construction - speculative	11,435		11,885		535			9,452
Construction - custom	1,196		1,196		—			660
Land - acquisition & development	9,865		11,104		1,071			5,832
Land - consumer lot loans	13,411		13,794		—			15,550
Multi-family	8,701		8,921		—			5,345
Commercial real estate	18,749		19,686		—			12,097
Commercial & industrial	44		44		—			135
HELOC	1,198		1,198		—			2,504
Consumer	71		71		—			431
	420,118		429,670		15,579		(1)	395,668
Total:
Single-family residential	388,263		398,529		13,973			369,977
Construction - speculative	13,759		14,487		535			11,186
Construction - custom	1,196		1,196		—			660
Land - acquisition & development	12,936		21,631		1,071			8,678
Land - consumer lot loans	16,450		16,978		—			19,247
Multi-family	9,508		9,769		—			5,950
Commercial real estate	40,007		49,343		—			27,969
Commercial & industrial	7,027		30,776		—			5,265
HELOC	1,590		2,253		—			3,632
Consumer	675		711		—			3,683
	$	491,411	$	545,673	$	15,579	(1)	$	456,247

(1) Includes $1,606,000 of specific reserves and $13,973,000 included in the general reserves.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



September 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			2013 Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	33,883	$	38,928	$	—		$	21,458
Construction - speculative	3,891		4,099		—			3,339
Construction - custom	—		—		—			—
Land - acquisition & development	3,020		10,705		—			2,548
Land - consumer lot loans	3,186		3,376		—			1,839
Multi-family	4,929		4,929		—			1,734
Commercial real estate	23,537		31,876		—			9,651
Commercial & industrial	7,279		31,197		—			3,123
HELOC	446		946		—			133
Consumer	601		618		—			127
	80,772		126,674		—			43,952
With an allowance recorded:
Single-family residential	335,140		341,910		15,137			330,407
Construction - speculative	8,892		9,342		1,100			12,362
Construction - custom	—		—		—			—
Land - acquisition & development	2,598		4,002		—			8,315
Land - consumer lot loans	12,631		13,014		2,222			12,301
Multi-family	5,958		6,178		46			7,731
Commercial real estate	7,539		8,476		105			9,321
Commercial & industrial	56		56		—			11
HELOC	938		938		—			858
Consumer	33		33		—			9
	373,785		383,949		18,610		(1)	381,315
Total:
Single-family residential	369,023		380,838		15,137			351,865
Construction - speculative	12,783		13,441		1,100			15,701
Construction - custom	—		—		—			—
Land - acquisition & development	5,618		14,707		—			10,863
Land - consumer lot loans	15,817		16,390		2,222			14,140
Multi-family	10,887		11,107		46			9,465
Commercial real estate	31,076		40,352		105			18,972
Commercial & industrial	7,335		31,253		—			3,134
HELOC	1,384		1,884		—			991
Consumer	634		651		—			136
	$	454,557	$	510,623	$	18,610	(1)	$	425,267


(1)	Includes $3,473,000 of specific reserves and $15,137,000 included in the general reserves.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

NOTE F – New Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. This ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in this ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The amendments in this ASU should be applied retrospectively to all periods presented. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company has chosen to adopt this ASU as of December 31, 2013. It is being adopted prospectively, as the retrospective adjustments were not material. The amount of affordable housing tax credits that are expected to be recognized during the 2014 calendar year is $3 million . The net investment balance recognized as of December 31, 2013 is $25 million . Using the proportional amortization method, the amount recognized as a component of income tax expense for the 2014 calendar year is $4 million . Contingent commitments for equity contributions during the 2014 calendar year are $27 million . Overall, this adoption does not have a material impact on the Company's consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists. Some entities present unrecognized tax benefits as a liability unless the unrecognized tax benefit is directly associated with a tax position taken in a tax year that results in, or that resulted in, the recognition of a net operating loss or tax credit carryforward for that year and the net operating loss or tax credit carryforward has not been utilized. Other entities present unrecognized tax benefits as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward in certain circumstances. The objective of the amendments in this Update is to eliminate that diversity in practice. The guidance in this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This new guidance is not expected to have a material impact on the Company's consolidated financial statements.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

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. Most 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. Securities that are traded on active exchanges are considered a Level 1 input method.

The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2013 and September 30, 2013:



	Fair Value at December 31, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Available-for-sale securities
Equity securities	$	100,246	$	503	$	—	$	100,749
Obligations of U.S. government	—		631,326		—		631,326
Obligations of states and political subdivisions	—		22,640		—		22,640
Corporate debt securities	—		450,113		—		450,113
Mortgage-backed securities					—
Agency pass-through certificates	—		1,633,676		—		1,633,676
Balance at end of period	$	100,246	$	2,738,258	$	—	$	2,838,504

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended December 31, 2013 .

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



	Fair Value at September 30, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Available-for-sale securities
Equity securities	$	100,726	$	511	$	—	$	101,237
Obligations of U.S. government	—		533,975		—		533,975
Obligations of states and political subdivisions	—		22,545		—		22,545
Obligations of foreign governments	—		—		—		—
Corporate debt securities	—		452,015		—		452,015
Mortgage-backed securities
Agency pass-through certificates	—		1,251,176		—		1,251,176
Balance at end of period	$	100,726	$	2,260,222	$	—	$	2,360,948

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended September 30, 2013 other than a transfer from Level 2 to Level 1 of $511 in Equity Securities.

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, 2013 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 tables present the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the three months ended December 31, 2013 and December 31, 2012, and the total losses resulting from those fair value adjustments for the quarters ended December 31, 2013 and December 31, 2012. These estimated fair values are shown gross of estimated selling costs.



	Through December 31, 2013								Quarter Ended December 31, 2013
	Level 1		Level 2		Level 3		Total		Total Losses
	(In thousands)
Impaired loans (1)	$	—	$	—	$	5,580	$	5,580	$	(805	)
Covered REO (2)	—		—		1,286		1,286		65
Real estate held for sale (2)	—		—		10,342		10,342		3,725
Balance at end of period	$	—	$	—	$	17,208	$	17,208	$	2,985

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



	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, 2013 or 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 & lease 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 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.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

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.



		December 31, 2013				September 30, 2013
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(In thousands)
Financial assets
Cash and cash equivalents	1	$	967,348	$	967,348	$	203,563	$	203,563
Available-for-sale securities
Equity securities	1	100,749		100,749		101,237		101,237
Obligations of U.S. government	2	631,326		631,326		533,975		533,975
Obligations of states and political subdivisions	2	22,640		22,640		22,545		22,545
Corporate debt securities	2	450,113		450,113		452,015		452,015
Mortgage-backed securities
Agency pass-through certificates	2	1,633,676		1,633,676		1,251,176		1,251,176
Total available-for-sale securities		2,838,504		2,838,504		2,360,948		2,360,948
Held-to-maturity securities	2
Total held-to-maturity securities		1,630,936		1,521,390		1,654,666		1,582,849

Loans receivable	3	7,651,558		8,174,920		7,528,030		8,070,279
Covered loans	3	252,693		255,885		295,947		300,610
FDIC indemnification asset	3	57,818		56,848		64,615		62,300
FHLB stock	2	171,480		171,480		173,009		173,009

Financial liabilities
Customer accounts	2	10,402,726		9,728,207		9,090,271		8,585,068
FHLB advances and other borrowings	2	1,930,000		2,053,910		1,930,000		2,064,248

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.

Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

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 tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities as of December 31, 2013 and September 30, 2013:



	December 31, 2013
	Amortized Cost		Gross Unrealized					Fair Value		Yield
			Gains		Losses
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years	61,002		3,021		(196		)	63,827		1.98
5 to 10 years	237,101		—		(2,396		)	234,705		1.64
Over 10 years	335,626		465		(3,297		)	332,794		0.93
Equity Securities
Within 1 year	500		3		—			503		2.17
1 to 5 years	100,000		246		—			100,246		1.80
5 to 10 years	—		—		—			—		—
Corporate bonds due
Within 1 year	—		—		—			—		—
1 to 5 years	334,278		2,051		(93		)	336,236		0.80
5 to 10 years	113,095		1,523		(741		)	113,877		1.53
Municipal bonds due
Over 10 years	20,417		2,223		—			22,640		6.45
Mortgage-backed securities
Agency pass-through certificates	1,636,178		4,896		(7,398		)	1,633,676		2.51
	2,838,197		14,428		(14,121		)	2,838,504		2.00
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,630,936		1,409		(110,955		)	1,521,390		3.13
	$	4,469,133	$	15,837	$	(125,076	)	$	4,359,894	2.41	%

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



	September 30, 2013
	Amortized Cost		Gross Unrealized						Fair Value		Yield
			Gains		Losses
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years	61,002		3,393			(252		)	64,143		1.98
5 to 10 years	129,219		—			(1,547		)	127,672		0.86
Over 10 years	344,571		—			(2,411		)	342,160		0.93
Equity Securities
1 to 5 years	500		11			—			511		2.17
5 to 10 years	100,000		726			—			100,726		1.80
Corporate bonds due
Within 1 year	19,500		3			—			19,503		0.49
1 to 5 years	317,190		1,980			(130		)	319,040		0.75
5 to 10 years	113,060		1,180			(768		)	113,472		1.53
Municipal bonds due
Over 10 years	20,422		2,123			—			22,545		6.45
Mortgage-backed securities
Agency pass-through certificates	1,245,400		10,270			(4,494		)	1,251,176		2.18
	2,350,864		19,686			(9,602		)	2,360,948		1.70
Mortgage-backed securities
Agency pass-through certificates	1,654,666		3,387			(75,204		)	1,582,849		3.14
	$	4,005,530	$	23,073		$	(84,806	)	$	3,943,797	2.30	%

During the quarter ended December 31, 2013 , there were no available-for-sale securities sold. There were $43,899,000 of available-for-sale securities sold during the quarter ended December 31, 2012 , resulting in a gain of $ 0 . These securities were acquired from South Valley Bank and sold on the same day. Substantially all mortgage-backed securities have contractual due dates that exceed 10 years .

The following tables show the unrealized gross losses and fair value of securities at December 31, 2013 and September 30, 2013, 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.



December 31, 2013	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	$	(522	)	$	54,478	$	(312	)	$	32,782	$	(834	)	$	87,260
U.S. government and agency securities due	(5,819		)	523,034		(70		)	13,067		(5,889		)	536,101
Agency pass-through certificates	(102,068		)	2,211,194		(16,285		)	388,526		(118,353		)	2,599,720
	$	(108,409	)	$	2,788,706	$	(16,667	)	$	434,375	$	(125,076	)	$	3,223,081

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



September 30, 2013	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	$	(660	)	$	52,434	$	(238	)	$	9,763	$	(898	)	$	62,197
U.S. government and agency securities due	(4,144		)	309,109		(66		)	14,091		(4,210		)	323,200
Agency pass-through certificates	(78,291		)	1,703,948		(1,407		)	166,503		(79,698		)	1,870,451
	$	(83,095	)	$	2,065,491	$	(1,711	)	$	190,357	$	(84,806	)	$	2,255,848

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

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 $277,343,000 as of December 31, 2013 , versus $326,927,000 as of September 30, 2013 .

Changes in the carrying amount and accretable yield for acquired impaired and non-impaired loans for the quarter ended December 31, 2013 and the fiscal year ended September 30, 2013 were as follows:



December 31, 2013	Acquired Impaired						Acquired Non-impaired
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
	(In thousands)
Balance at beginning of period	$	78,277		$	138,091		$	17,263		$	157,856
Accretion	(7,862		)	7,862			(1,347		)	1,347
Transfers to REO	—			(399		)	—			—
Payments received, net	—			(39,402		)	—			(12,662		)
Balance at end of period	$	70,415		$	106,152		$	15,916		$	146,541



September 30, 2013	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)	43,299			107,946			—			—
Reclassification from nonaccretable balance, net	17,850			—			—			—
Accretion	(33,774		)	33,774			(6,526		)	6,526
Transfers to REO	—			(11,196		)	—			—
Payments received, net	—			(67,386		)	—			(62,093		)
Balance at end of period	$	78,277		$	138,091		$	17,263		$	157,856
(1) includes FDIC covered loans which were acquired as part of the South Valley acquisition.

At December 31, 2013 , 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 $313,204,000 and $362,248,000 as of December 31, 2013 and September 30, 2013 , respectively. The discount balance related to the acquired loans was $60,511,000 and $66,301,000 as of December 31, 2013 and September 30, 2013 , respectively.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

The following table shows the year to date activity for the FDIC indemnification asset:



	December 31, 2013			September 30, 2013
	(In thousands)
Balance at beginning of fiscal year 2014 and 2013	$	64,615		$	87,571
Additions (1)	—			18,101
Payments made (received)	(1,295		)	(13,421		)
Amortization	(5,717		)	(28,722		)
Accretion	215			1,086
Balance at end of period	$	57,818		$	64,615
(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 E ) as of December 31, 2013 and September 30, 2013 :



December 31, 2013	Internally Assigned Grade															Total Net Loans
	Pass			Special mention			Substandard			Doubtful			Loss
	(In thousands)
Purchased non credit-impaired loans:
Single-family residential	$	23,971		$	—		$	2,717		$	—		$	—		$	26,688
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	3,648			—			719			—			—			4,367
Land - consumer lot loans	197			—			33			—			—			230
Multi-family	17,000			—			—			—			—			17,000
Commercial real estate	55,109			9,136			18,126			—			—			82,371
Commercial & industrial	4,599			—			3,752			—			—			8,351
HELOC	14,164			—			39			—			—			14,203
Consumer	588			—			—			—			—			588
	119,276			9,136			25,386			—			—			153,798
Total grade as a % of total net loans	77.6		%	5.9		%	16.5		%	—		%	—		%

Purchased credit-impaired loans:
Pool 1 - Construction and land A&D	15,610			360			25,727			—			—			41,697
Pool 2 - Single-family residential	20,478			—			92			—			—			20,570
Pool 3 - Multi-family	56			—			1,063			—			—			1,119
Pool 4 - HELOC & other consumer	4,098			—			1,775			—			—			5,873
Pool 5 - Commercial real estate	35,694			3,799			39,464			—			—			78,957
Pool 6 - Commercial & industrial	6,604			485			4,101			—			—			11,190
	$	82,540		$	4,644		$	72,222		$	—		$	—		159,406
										Total covered loans						313,204
													Discount			(60,511		)
													Allowance			—
													Covered loans, net			$	252,693

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)



September 30, 2013	Internally Assigned Grade															Total Net Loans
	Pass			Special mention			Substandard			Doubtful			Loss
	(In thousands)
Purchased non credit-impaired loans:
Single-family residential	$	26,426		$	—		$	2,034		$	—		$	—		$	28,460
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	3,069			1,019			722			—			—			4,810
Land - consumer lot loans	245			—			—			—			—			245
Multi-family	17,217			—			1,635			—			—			18,852
Commercial real estate	56,120			9,235			24,144			—			—			89,499
Commercial & industrial	5,175			500			3,741			—			—			9,416
HELOC	14,750			—			—			—			—			14,750
Consumer	604			—			—			—			—			604
	123,606			10,754			32,276			—			—			166,636
Total grade as a % of total net loans	74.2		%	6.4		%	19.4		%	—		%	—		%

Purchased credit-impaired loans:
Pool 1 - Construction and land A&D	14,361			4,296			25,363			—			—			44,020
Pool 2 - Single-family residential	21,541			—			—			—			—			21,541
Pool 3 - Multi-family	4,131			—			1,100			—			—			5,231
Pool 4 - HELOC & other consumer	4,111			—			1,880			—			—			5,991
Pool 5 - Commercial real estate	36,494			15,113			53,946			—			—			105,553
Pool 6 - Commercial & industrial	4,265			204			8,807			—			—			13,276
	$	84,903		$	19,613		$	91,096		$	—		$	—		195,612
										Total covered loans						362,248
													Discount			(66,301		)
													Allowance			—
													Covered loans, net			$	295,947

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

The following tables provide an analysis of the age of purchased non credit-impaired loans in past due status as of December 31, 2013 and September 30, 2013 :



December 31, 2013	Amount of Loans Net of LIP & Chg.-Offs		Days Delinquent Based on $ Amount of Loans										% based on $
Type of Loans	Amount of Loans Net of LIP & Chg.-Offs		Current		30		60		90		Total		% based on $
Single-Family Residential	$	26,688	$	24,351	$	286	$	63	$	1,988	$	2,337	8.76	%
Construction - Speculative	—		—		—		—		—		—		NM
Construction - Custom	—		—		—		—		—		—		NM
Land - Acquisition & Development	4,367		4,331		—		—		36		36		0.82
Land - Consumer Lot Loans	230		196		—		—		34		34		14.78
Multi-Family	17,000		17,000		—		—		—		—		—
Commercial Real Estate	82,371		80,820		—		—		1,551		1,551		1.88
Commercial & Industrial	8,351		8,308		—		43		—		43		0.51
HELOC	14,203		14,164		—		—		39		39		0.27
Consumer	588		588		—		—		—		—		—
	$	153,798	$	149,758	$	286	$	106	$	3,648	$	4,040	1.51	%



September 30, 2013	Amount of Loans Net of LIP & Chg.-Offs		Days Delinquent Based on $ Amount of Loans										% based on $
Type of Loans	Amount of Loans Net of LIP & Chg.-Offs		Current		30		60		90		Total		% based on $
Single-Family Residential	$	28,460	$	27,411	$	78	$	—	$	971	$	1,049	3.69	%
Construction - Speculative	—		—		—		—		—		—		NM
Construction - Custom	—		—		—		—		—		—		NM
Land - Acquisition & Development	4,810		4,774		—		—		36		36		0.75
Land - Consumer Lot Loans	245		199		—		—		46		46		18.78
Multi-Family	18,852		17,511		—		—		1,341		1,341		7.11
Commercial Real Estate	89,499		84,949		2,779		455		1,316		4,550		5.08
Commercial & Industrial	9,416		9,416		—		—		—		—		—
HELOC	14,750		14,334		103		74		239		416		2.82
Consumer	604		601		3		—		—		3		0.50
	$	166,636	$	159,195	$	2,963	$	529	$	3,949	$	7,441	4.47	%

NM - not meaningful

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED DECEMBER 31, 2013 AND 2012

(UNAUDITED)

NOTE I – Derivatives and Hedging Activities

The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the bank retains a variable rate loan. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under ASC 815, the Derivatives and Hedging topic, the instruments are marked to market in earnings.

The notional amount of open interest rate swap agreements at December 31, 2013 was $95,135,000 compared to $83,594,000 as of September 30, 2013. There was no impact to the statement of operations for the three months ended December 31, 2013 as the asset and liability side of the swaps offset each other. The fee income related to swaps was $ 252,000 for the Quarter Ended December 31, 2013 .

The Company periodically enters into forward contracts to purchase mortgage-backed securities as part of its interest rate risk management program. The notional amount of commitments to purchase mortgage-backed securities at December 31, 2013 was $0 and at September 30, 2013 was $200,000,000 . When there is a balance, the fair value of these contracts is included with the available-for-sale securities on the statement of financial condition.

The following table presents the fair value and balance sheet classification of derivatives not designated as hedging instruments at December 31, 2013 and September 30, 2013 :

Asset Derivatives

Liability Derivatives

December 31, 2013

September 30, 2013

December 31, 2013

September 30, 2013

Balance Sheet

Location

Fair Value

Location

Fair Value

Location

Fair Value

Location

Fair Value

(In thousands)

Interest rate contracts

Other assets

406

Other assets

Other liabilities

406

Other liabilities

Commitments to purchase MBS

AFS securities

—

AFS securities

3,188

N/A

NOTE J – Subsequent Events

Branch acquisition - Effective January 23, 2014, Washington Federal, the wholly owned subsidiary of the Company, entered into a Purchase and Assumption Agreement for the acquisition of deposits expected to total approximately $610 million , loans totaling approximately $4 million , and related assets, from Bank of America, National Association, for an aggregate purchase price of 1.30% of the average daily closing deposits, which is estimated to be $8 million . This acquisition represents a total of 23 branches located in Arizona and Nevada. Subject to regulatory approval and the satisfaction of customary closing conditions, the transaction is expected to close in the second calendar quarter of 2014.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

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 being promulgated thereunder; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

GENERAL

Washington Federal, Inc. (the “Company”) formed in 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a federally-insured national bank subsidiary, Washington Federal, National Association (the "Bank"). As used throughout this document, the terms "Washington Federal" or the "Company" refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.

On July 17, 2013, the Bank converted from a federal savings association to a national bank charter with the Office of the Comptroller of the Currency and is now a national bank. At the same time, the Company which had previously been a savings and loan holding company, became a bank holding company under the Bank Holding Company Act.

The Company's fiscal year end is September 30th. All references to 2013 and 2012 represent balances as of September 30, 2013 and September 30, 2012, respectively, or activity for the fiscal years then ended.

The results discussed below were impacted by the acquisition on close of business October 31, 2013 of eleven branches from Bank of America, National Association; these branches are located in New Mexico. Effective as of the close of business on December 6, 2013, Washington Federal completed the acquisition of another forty branches from Bank of America, National Association; these branches are located in Washington, Oregon, and Idaho. The combined acquisitions provided recorded book values of $1.3 billion in deposit accounts, $9 million of loans, and $16 million in branch properties. Washington Federal paid a 2.60% premium on the total deposits. The cash received by Washington Federal in the transactions was $1.3 billion.

INTEREST RATE RISK

Historically, the Company accepted a higher level of interest rate risk 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 shorter-term business loans, transaction deposit accounts and extending the maturity on borrowings, to reduce its interest rate risk profile compared to its historical norms. The recent branch acquisitions have accelerated these efforts. The acquired $1.3 billion in deposits are 83% transaction accounts. The Company has also been purchasing more variable rate investments. The composition of the investment portfolio is now 43% variable and 57% fixed rate. In addition, $1.6 billion of its purchased 30-year fixed rate mortgage-backed securities have been designated as held-to-maturity. With rising interest rates, these securities may be subject to unrealized losses. As of December 31, 2013, the unrealized losses on these securities were $110 million.

The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) the Company.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

Maturity Gap Analysis. At December 31, 2013 , the Company had approximately $2.873 billion more in liabilities subject to repricing in the next year than assets, which amounted to a negative one-year maturity gap of 19.95% of total assets. This was an increase from the 12.9% negative gap as of September 30, 2013 . The increase is partly due to the recently acquired deposits as transaction accounts are subject to repricing at any time. This is combined with some shortening of maturities by existing clients. Additionally, the estimated maturities of mortgage securities has extended as prepayments have slowed. A negative maturity gap implies that funding costs will change more rapidly than interest income on earning assets with movement in interest rates. A negative maturity gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. Gap analysis provides management with a high-level indication of interest rate risk, but is considered less reliable than more detailed modeling.

Net Interest Income Sensitivity. The potential impact of rising interest rates on net interest income in the future is estimated using a model that is based on account level detail for loans and deposits. In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income will decrease by 5.8% in the next year. This compares to an estimated decrease of 1.6% in the prior quarter's analysis. The increased sensitivity is due to some maturity extension in the investment portfolio. In the event of a gradual increase from current rates by 200 basis points over a twelve-month period, the model forecasts a decrease in net interest income of 2.1% in the first year. This analysis assumes zero balance sheet growth and a 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.

NPV Sensitivity. The NPV estimates the market of value of shareholder's equity based upon forecasted interest rate scenarios. It is derived by calculating the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of the NPV to changes in interest rates 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 $520 million and the NPV to total assets ratio to decline to 15.48%. As of September 30, 2013 , the estimated decrease in NPV in the event of a 200 basis point increase in rates was estimated to decline by $314 million and the NPV to total assets ratio to decline to 17.42%. The increased NPV sensitivity is due to higher interest rates and lower prices as of December 31, 2013. The base NPV ratio is also lower compared to the prior quarter due to the impact of the branch acquisitions.

Interest Rate Spread. The interest rate spread decreased to 2.58% at December 31, 2013 from 2.73% at September 30, 2013 . The spread decreased due to a decline in the average rate on loans and investment securities. As of December 31, 2013 , the weighted average rate on customer deposit accounts and borrowings decreased by 12 basis points compared to September 30, 2013 , while the weighted average rates on earning assets decreased by 27 basis points over the same period.

As of December 31, 2013 , the Company had increased total assets by $1,321,514,000 from $13,082,859,000 at September 30, 2013 due to the recent branch acquisitions that brought $1,314,477,000 in deposits. For the quarter ended December 31, 2013 , compared to September 30, 2013 , loans (both non-covered and covered) increased $80,274,000, or 1%. Investment securities increased $453,826,000, or 11.3%. Cash and cash equivalents of $967,348,000 and stockholders’ equity of $1,952,984,000 as of December 31, 2013 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net worth at December 31, 2013 was $1,952,984,000 , or 13.56% of total assets. This was an increase of $23,140,000 from September 30, 2013 when net worth was $1,937,635,000 , or 14.81% of total assets. The Company’s net worth was impacted in the three months ended December 31, 2013 by net income of $40,236,000 , the payment of $10,179,000 in cash dividends, treasury stock purchases that totaled $18,945,000 , as well as a decrease in other comprehensive income of $6,183,000 .

Management believes this strong net worth position will help the Company manage its inherent risks and resultant profitability 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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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



	Actual			Capital Adequacy Guidelines			Categorized as Well Capitalized Under Prompt Corrective Action Provisions
	Capital	Ratio		Capital	Ratio		Capital	Ratio
	(In thousands)
December 31, 2013
Total capital (to risk-weighted assets)
The Company	$1,737,481	25.62	%	$542,535	8.00	%	NA	NA
The Bank	1,700,455	25.06	%	542,845	8.00	%	$678,557	10.00	%
Tier I capital (to risk-weighted assets)
The Company	1,652,186	24.36	%	271,268	4.00	%	NA	NA
The Bank	1,615,112	23.80	%	271,423	4.00	%	407,134	6.00	%
Tier I Capital (to average assets)
The Company	1,652,186	12.29	%	537,721	4.00	%	NA	NA
The Bank	1,615,112	12.01	%	537,831	4.00	%	272,289	5.00	%

September 30, 2013
Total capital (to risk-weighted assets)
The Company	1,749,383	26.49	%	528,243	8.00	%	NA	NA
The Bank	1,693,227	25.64	%	528,380	8.00	%	660,475	10.00	%
Tier I capital (to risk-weighted assets)
The Company	1,666,091	25.23	%	264,121	4.00	%	NA	NA
The Bank	1,609,914	24.38	%	264,190	4.00	%	396,285	6.00	%
Tier I Capital (to average assets)
The Company	1,666,091	13.03	%	511,334	4.00	%	NA	N/A
The Bank	1,609,914	12.59	%	511,358	4.00	%	639,197	5.00	%

The Company's cash and cash equivalents amounted to $967,348,000 at December 31, 2013 , an increase from $203,563,000 at September 30, 2013 . The Company is in the process of investing the liquid assets that were acquired in the recent branch acquisitions. Previously, it was holding higher than normal amounts of liquidity due to concern about potentially rising interest rates in the future. Additionally, see "Interest Rate Risk" above and the "Statement of Cash Flows" included in the financial statements.

CHANGES IN FINANCIAL CONDITION

Available-for-sale and held-to-maturity securities : Available-for-sale securities increased $477,566,000, or 20%, during the three months ended December 31, 2013 , which included the purchase of $565,080,000 of available-for-sale securities. There were no available-for-sale securities sold during the three months ended December 31, 2013 . During the same period, there were no held-to-maturity securities purchased and no sales. As of December 31, 2013 , the Company had net unrealized gains on available-for-sale securities of $195,000 , net of tax, which were recorded as part of stockholders’ equity. The Company increased its available-for-sale portfolio with investments made with the proceeds from the recent branch acquisitions.

Loans receivable : During the three months ended December 31, 2013 , the balance of loans receivable increased to $7,651,558,000 compared to $7,528,030,000 at September 30, 2013 . This increase includes net loan activity (originations less principal payments and maturities) for non covered loans of $127,367,000 and the acquisition of $8,278,000 in loans as described in Note B. Additionally, during the three month period, $9,956,000 of loans were transferred to REO.

Covered loans : As of December 31, 2013 , covered loans decreased 14.6%, or $43,254,000 to $252,693,000 , compared to September 30, 2013 due primarily to $50,220,000 of principal payments and maturities.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

The following table shows the loan portfolio by category for the last three quarters.



Loan Portfolio by Category *	December 31, 2013				September 30, 2013				June 30, 2013
Non-Acquired loans	(In thousands)
Single-family residential	$	5,421,896	66.8	%	$	5,359,149	67.1	%	$	5,253,604	67.6	%
Construction - speculative	135,868		1.7		130,778		1.6		116,363		1.5
Construction - custom	333,954		4.1		302,722		3.8		237,952		3.1
Land - acquisition & development	72,075		0.9		77,775		1.1		85,248		1.1
Land - consumer lot loans	119,206		1.5		121,671		1.5		128,745		1.7
Multi-family	842,343		10.4		831,684		10.4		741,870		9.5
Commercial real estate	433,361		5.3		414,961		5.1		398,130		5.1
Commercial & industrial	274,432		3.4		243,199		3.0		239,469		3.1
HELOC	111,577		1.4		112,186		1.4		111,418		1.4
Consumer	44,142		0.5		47,141		0.6		51,515		0.7
Total non-acquired loans	7,788,854		96		7,641,266		95.6		7,364,314		94.8
Acquired loans
Single-family residential	13,856		0.2		14,468		0.2		15,354		0.2
Construction - speculative	—		—		—		—		—		—
Construction - custom	—		—		—		—		—		—
Land - acquisition & development	1,206		—		1,489		—		3,720		—
Land - consumer lot loans	3,261		—		3,313		—		3,615		0.1
Multi-family	3,773		0.1		3,914		0.1		7,383		0.1
Commercial real estate	117,038		1.4		133,423		1.7		162,724		2.1
Commercial & industrial	72,594		0.9		75,326		0.9		88,768		1.1
HELOC	9,538		0.1		10,179		0.1		11,466		0.1
Consumer	7,754		0.1		8,267		0.1		9,035		0.1
Total acquired loans	229,020		2.8		250,379		3.1		302,065		3.8
Credit-impaired acquired loans
Single-family residential	331		—		333		—		335		—
Construction - speculative	—		—		—		—		—		—
Construction - custom	—		—		—		—		—		—
Land - acquisition & development	2,225		—		2,396		—		2,484		—
Land - consumer lot loans	—		—		—		—		—		—
Multi-family	—		—		—		—		—		—
Commercial real estate	71,841		1.0		76,909		1.1		78,519		1.1
Commercial & industrial	7,140		0.1		7,925		0.1		8,606		0.1
HELOC	10,834		0.1		11,266		0.1		12,015		0.2
Consumer	64		—		71		—		79		—
Total credit-impaired acquired loans	92,435		1.2		98,900		1.3		102,038		1.4
Total loans
Single-family residential	5,436,083		67.0		5,373,950		67.3		5,269,293		67.8
Construction - speculative	135,868		1.7		130,778		1.6		116,363		1.5
Construction - custom	333,954		4.1		302,722		3.8		237,952		3.1
Land - acquisition & development	75,506		0.9		81,660		1.1		91,452		1.1
Land - consumer lot loans	122,467		1.5		124,984		1.5		132,360		1.8

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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



Multi-family	846,116		10.5		835,598		10.5		749,253		9.6
Commercial real estate	622,240		7.7		625,293		7.9		639,373		8.3
Commercial & industrial	354,166		4.4		326,450		4		336,843		4.3
HELOC	131,949		1.6		133,631		1.6		134,899		1.7
Consumer	51,960		0.6		55,479		0.7		60,629		0.8
Total loans	8,110,309		100	%	7,990,545		100	%	7,768,417		100	%
Less:
Allowance for probable losses	118,158				116,741				118,104
Loans in process	273,263				275,577				189,677
Discount on acquired loans	31,485				34,143				37,568
Deferred net origination fees	35,845				36,054				32,562
	458,751				462,515				377,911
	$	7,651,558			$	7,528,030			$	7,390,506

____________________

* Excludes covered loans

Non-performing assets : Non-performing assets, which excludes discounted acquired assets, decreased during the quarter ended December 31, 2013 to $197,910,000 from $213,617,000 at September 30, 2013 , a 7.4% 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 which began in 2007. Non-performing assets as a percentage of total assets was 1.37% at December 31, 2013 compared to 1.63% at September 30, 2013 . This level of NPAs remains significantly higher than the 0.96% 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.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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



	December 31, 2013					September 30, 2013
	(In thousands)
Restructured loans:
Single-family residential	$	355,449		85.7	%	$	356,576		85.7	%
Construction - speculative	9,705			2.3		10,733			2.6
Construction - custom	1,196			0.3		1,196			0.3
Land - acquisition & development	6,037			1.5		7,211			1.7
Land - consumer lot loans	13,411			3.2		12,706			3.1
Multi - family	8,701			2.1		7,557			1.8
Commercial real estate	18,749			4.5		18,539			4.5
Commercial & industrial	44			—		56			—
HELOC	1,198			0.3		1,088			0.3
Consumer	71			—		33			—
Total restructured loans (1)	414,561			100	%	415,695			100	%

Non-accrual loans:
Single-family residential	89,075			77.6	%	100,460			76.5	%
Construction - speculative	3,053			2.7		4,560			3.5
Construction - custom	—			—		—			—
Land - acquisition & development	2,813			2.5		2,903			2.2
Land - consumer lot loans	3,548			3.1		3,337			2.5
Multi-family	2,494			2.2		6,573			5.0
Commercial real estate	11,613			10.1		11,736			8.9
Commercial & industrial	655			0.6		477			0.4
HELOC	471			0.4		263			0.2
Consumer	995			0.9		990			0.8
Total non-accrual loans (2)	114,717			100	%	131,299			100	%
Total REO (3)	71,537					72,925
Total REHI (3)	11,656					9,392
Total non-performing assets	$	197,910				$	213,616
Total non-performing assets and performing restructured loans as a percentage of total assets	4.09		%			4.52		%
(1) Restructured loans were as follows:
Performing	$	390,841		94.3	%	$	391,415		94.2	%
Non-accrual *	23,720			5.7		24,281			5.8
	$	414,561		100	%	$	415,696		100	%


*	Included in "Total non-accrual loans" above

(2)

The Company recognized interest income on nonaccrual loans of approximately $1,507,000 in the three months ended December 31, 2013 . Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $1,512,000 for the three months ended December 31, 2013 . The recognized interest income may include more than three months of interest for some of the loans that were brought current. In addition to the nonaccrual loans reflected in the above table, at December 31, 2013 the Company had $94,334,000 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 4.43% at December 31, 2013 .

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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


(3)	Total REO and REHI includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. Excludes covered REO.

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 85.8% of restructured loans as of December 31, 2013 . 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, 2013						September 30, 2013
	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	$	67,692	69.5	%	1.2	%	$	64,184	69.9	%	1.2	%
Construction - speculative	8,142		1.7		6.0		8,407		1.7		6.4
Construction - custom	1,474		4.3		0.4		882		4.0		0.3
Land - acquisition & development	7,084		0.9		9.8		9,165		1.0		11.8
Land - consumer lot loans	3,274		1.5		2.7		3,552		1.6		2.9
Multi-family	4,109		10.8		0.5		3,816		10.9		0.5
Commercial real estate	5,868		5.6		1.4		5,595		5.4		1.3
Commercial & industrial	16,505		3.7		5.7		16,614		3.4		6.5
HELOC	943		1.4		0.8		1,002		1.5		0.9
Consumer	3,067		0.6		6.9		3,524		0.6		7.5
	$	118,158	100	%			$	116,741	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.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

Customer accounts : Customer accounts increased $1,312,455,000 , or 14.44% , to $10,402,726,000 at December 31, 2013 compared with $9,090,271,000 at September 30, 2013 .

The following table shows the composition of the Company’s customer accounts by deposit type as of the dates shown:



	December 31, 2013						September 30, 2013
	(In thousands)
					Wtd. Avg. Rate						Wtd. Avg. Rate
Non-interest checking	$	674,824	6.5	%	—	%	$	447,368	4.9	%	—	%
Interest checking	1,227,548		11.8		0.13	%	800,516		8.8		0.13	%
Savings (passbook/stmt)	542,573		5.2		0.15	%	404,938		4.5		0.15	%
Money Market	2,268,979		21.8		0.22	%	1,888,020		20.8		0.23	%
CD’s	5,688,802		54.7		0.98	%	5,549,429		61.0		1.03	%
Total	$	10,402,726	100	%	0.61	%	$	9,090,271	100	%	0.69	%

FHLB advances and other borrowings : Total borrowings were $1,930,000,000 as of December 31, 2013 which is the same balance as of September 30, 2013 . During the quarter ended December 31, 2013, there were short term borrowings of $625,000,000 that were used to make investments in anticipation of the receipt of cash related to the acquisition of branches from Bank of America, National Association as described in Note E. These were repaid prior to the quarter end.

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.

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

RESULTS OF OPERATIONS

Net Income : The quarter ended December 31, 2013 produced net income of $40,236,000 compared to $35,282,000 for the same quarter one year ago. Net income for the quarter ended December 31, 2013 benefited from overall lower credit costs, which included the recovery for loan losses and reduced losses on real estate acquired through foreclosure. The provision for loan losses amounted to a recovery of $4,600,000 for the quarter ended December 31, 2013 as compared to a provision of $3,600,000 for the quarter 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. Gains/losses recognized on real estate acquired through foreclosure was a net loss of $1,951,000 for the quarter ended December 31, 2013 as compared to a net loss of $3,319,000 for the same quarter one year ago.

Net Interest Income : Net interest income was $98,312,000 for the quarter ended December 31, 2013, compared to $95,434,000 for the same quarter one year ago, due to lower rates on customer deposits.

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 12/31/13 and 12/31/12
	Volume			Rate			Total
	(In thousands)
Interest income:
Loans and covered loans	$	(1,759	)	$	(7,857	)	$	(9,616	)
Mortgaged-backed securities	3,224			4,412			7,636
Investments (1)	617			1,312			1,929
All interest-earning assets	2,082			(2,133		)	(51		)
Interest expense:
Customer accounts	1,168			(4,441		)	(3,273		)
FHLB advances and other borrowings	1,419			(1,075		)	344
All interest-bearing liabilities	2,587			(5,516		)	(2,929		)
Change in net interest income	$	(505	)	$	3,383		$	2,878

___________________


(1)	Includes interest on cash equivalents and dividends on FHLB stock

Provision for Loan Losses : The Company recorded a $ 4,600,000 recovery for loan losses during the quarter ended December 31, 2013 , while a $ 3,600,000 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $197,910,000 , or 1.37% , of total assets at December 31, 2013 , compared to $264,219,000 , or 2.02% , of total assets one year ago. Non-accrual loans decreased from $163,116,000 at December 31, 2012 , to $114,717,000 at December 31, 2013 , a 29.7% decrease. The Company had net recoveries of $6,017,000 for the quarter ended December 31, 2013 , compared with $9,920,000 of net charge-offs for the same quarter one year ago. The improvement 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 2.14% at December 31, 2012 , to 1.50% at December 31, 2013 ; third, the percentage of loans 30 days or more delinquent decreased from 2.80% at December 31, 2012 , to 1.81% at December 31, 2013 ; 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 3.0% of the gross loan portfolio at December 31, 2012 , to 2.3% at December 31, 2013 .

Management believes the allowance for loan losses, totaling $118,158,000 , or 1.46% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio. See Note E for further discussion and analysis of the allowance for loan losses for the quarter ended December 31, 2013 .

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

PART I – Financial Information

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

Other Income : The quarter ended December 31, 2013 produced total other income of $5,788,000 compared to $4,957,000 for the same quarter one year ago, an increase of $831,000, due primarily to increased transaction fee income related to deposit accounts acquired as part of the acquisition of branches from Bank of America, National Association as of the close of business on October 31, 2013 and December 6, 2013. Please see Note B for additional information.

Other Expense : The quarter ended December 31, 2013 , produced total other expense of $44,120,000 compared to $38,298,000 for the same quarter one year ago, a 15.2% increase. Total other expense for the quarters ended December 31, 2013 and 2012 equaled 1.30% and 1.20%, respectively, of average assets. The number of staff, including part-time employees on a full-time equivalent basis, was 1,848 and 1,430 at December 31, 2013 and 2012 , respectively. Higher occupancy expense was due to an increase in the number of branches from 190 as of December 31, 2012 to 235 as of December 31, 2013.

Loss on Real Estate Acquired Through Foreclosure: The quarter ended December 31, 2013 , produced a net loss on the sale of real estate acquired through foreclosure of $1,951,000 compared to $3,319,000 for the same quarter one year ago, a 41.2% decrease. The table below indicates some of the activity in the gain (loss) on real estate acquired through foreclosure.



	Quarter Ended December 31,
	2013			2012
	(In thousands)

Net Gain on Sale	$	2,333		$	1,697
REO Writedowns	(2,219		)	(2,659		)
REO Operating Expenses	(2,065		)	(2,357		)
Gain (Loss) on real estate acquired through foreclosure, net	$	(1,951	)	$	(3,319	)

Taxes : Income taxes increased to $22,393,000 for the quarter ended December 31, 2013 , as compared to $19,892,000 for the same period one year ago. The effective tax rate for the quarter ended December 31, 2013 was 35.75% compared to 36.00% for the quarter ended December 31, 2012. The Company expects an effective tax rate of 35.75% 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, 2013 . 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 2013 Form 10-K.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures . The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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.

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, 2013 . 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, 2013 .



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, 2013 to October 31, 2013	154,900	$	20.54	154,900	9,717,934
November 1, 2013 to November 30, 2013	700,000	22.52		700,000	9,017,934
December 1, 2013 to December 31, 2013	—	—		—	9,017,934
Total	854,900	$	22.16	854,900	9,017,934

___________________


(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 41,956,264 shares have been authorized for repurchase.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

Table of Contents



(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, 2013 formatted in XBRL

Table of Contents

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 7, 2014	/ S / R OY M. W HITEHEAD
	ROY M. WHITEHEAD Chairman, President and Chief Executive Officer

February 7, 2014	/ S / B RENT J. B EARDALL
	BRENT J. BEARDALL Executive Vice President and Chief Financial Officer

TABLE OF CONTENTS

Part I Financial Information Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

WAFD 10-Q Quarter ended Dec. 31, 2013