WAFD 10-Q Quarterly Report June 30, 2014 | Alphaminr
WASHINGTON FEDERAL INC
ALPHAMINR

WAFD 10-Q Quarter ended June 30, 2014

Balance Sheet
Cash Flow
Income Statement
WASHINGTON FEDERAL INC
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10-Q 1 wafd630201410-q.htm 10-Q WAFD 6.30.2014 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34654
WASHINGTON FEDERAL, INC.
(Exact name of registrant as specified in its charter)
Washington
91-1661606
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
425 Pike Street Seattle, Washington 98101
(Address of principal executive offices and zip code)
(206) 624-7930
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of class:
at July 31, 2014
Common stock, $1.00 par value
99,512,647


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


2



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 2014
September 30, 2013
(In thousands, except share data)
ASSETS
Cash and cash equivalents
$
861,304

$
203,563

Available-for-sale securities, at fair value
3,103,021

2,360,948

Held-to-maturity securities, at amortized cost
1,583,853

1,654,666

Loans receivable, net
7,965,954

7,528,030

Covered loans, net
207,207

295,947

Interest receivable
51,392

49,218

Premises and equipment, net
246,800

206,172

Real estate held for sale
57,352

72,925

Real estate held for investment
10,780

9,392

Covered real estate held for sale
26,339

30,980

FDIC indemnification asset
44,065

64,615

FHLB & FRB stock
162,904

173,009

Intangible assets, net
303,983

264,318

Federal and state income tax assets, net
25,258

44,000

Other assets
139,743

125,076

$
14,789,955

$
13,082,859

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts
$
5,315,781

$
3,540,842

Time deposit accounts
5,449,899

5,549,429

10,765,680

9,090,271

FHLB advances
1,930,000

1,930,000

Advance payments by borrowers for taxes and insurance
28,513

42,443

Accrued expenses and other liabilities
75,127

82,510

12,799,320

11,145,224

Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized;
133,332,272 and 132,572,475 shares issued; 100,296,268 an d 102,484,671 shares outstanding
133,332

132,573

Paid-in capital
1,638,070

1,625,051

Accumulated other comprehensive income, net of taxes
24,421

6,378

Treasury stock, at cost; 33,036,004 and 30,087,804 shares
(485,048
)
(420,817
)
Retained earnings
679,860

594,450

1,990,635

1,937,635

$
14,789,955

$
13,082,859

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended June 30,
Nine Months Ended June 30,
2014
2013
2014
2013
(In thousands, except per share data)
INTEREST INCOME
Loans
$
108,089

$
112,932

$
321,650

$
342,654

Mortgage-backed securities
20,507

11,951

60,947

34,325

Investment securities and cash equivalents
6,415

3,293

16,023

9,010

135,011

128,176

398,620

385,989

INTEREST EXPENSE
Customer accounts
14,238

16,385

44,517

51,851

FHLB advances and other borrowings
17,494

17,075

51,877

50,966

31,732

33,460

96,394

102,817

Net interest income
103,279

94,716

302,226

283,172

Provision for (reversal of) loan losses
(3,000
)
—

(11,936
)
3,600

Net interest income after provision for (reversal of) loan losses
106,279

94,716

314,162

279,572

OTHER INCOME
8,072

5,059

20,562

16,062

OTHER EXPENSE
Compensation and benefits
28,946

24,582

81,908

68,731

Occupancy
6,060

4,530

17,668

13,801

FDIC insurance premiums
2,978

2,831

8,679

9,280

Information technology
3,505

2,371

10,365

7,661

Amortization of intangible assets
1,052

660

2,601

1,386

Other
10,752

6,636

28,250

20,214

53,293

41,610

149,471

121,073

Gain (loss) on real estate acquired through foreclosure, net
(2,056
)
176

(3,454
)
(7,145
)
Income before income taxes
59,002

58,341

181,799

167,416

Income tax provision
21,092

21,003

64,996

58,818

NET INCOME
$
37,910

$
37,338

$
116,803

$
108,598




PER SHARE DATA
Basic earnings
$
0.38

$
0.36

$
1.15

$
1.03

Diluted earnings
0.37

0.36

1.14

1.03

Basic weighted average number of shares outstanding
100,979,219

104,143,915

101,777,112

105,119,097

Diluted weighted average number of shares outstanding, including dilutive stock options
101,393,936

104,192,444

102,234,350

105,167,959

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarter Ended June 30,
Nine Months Ended June 30,
2014
2013
2014
2013
(In thousands)
Net income
$
37,910

$
37,338

$
116,803

$
108,598

Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on available-for-sale securities
22,026

(10,697
)
28,527

(12,925
)
Related tax benefit (expense)
(8,095
)
3,931

(10,484
)
4,750

Other comprehensive income (loss)
13,931

(6,766
)
18,043

(8,175
)
Comprehensive income
$
51,841

$
30,572

$
134,846

$
100,423

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5

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
(In thousands)
Balance at October 1, 2013
$
132,573

$
1,625,051

$
594,450

$
6,378

$
(420,817
)
$
1,937,635

Net income




116,803





116,803

Other comprehensive income adjustment



18,043


18,043

Dividends paid on common stock




(31,393
)




(31,393
)
Compensation expense related to common stock options


900







900

Proceeds from exercise of common stock options
759

9,599







10,358

Restricted stock


2,520







2,520

Treasury stock acquired








(64,231
)
(64,231
)
Balance at June 30, 2014
$
133,332

$
1,638,070

$
679,860

$
24,421

$
(485,048
)
$
1,990,635

(In thousands)
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Total
(In thousands)
Balance at October 1, 2012
$
129,950

$
1,586,295

$
480,780

$
13,306

$
(310,579
)
$
1,899,752

Net income




108,598





108,598

Other comprehensive income adjustment



(8,175
)

(8,175
)
Dividends paid on common stock




(27,591
)




(27,591
)
Compensation expense related to common stock options


900







900

Proceeds from exercise of common stock options
26

271







297

Proceeds from issuance of common stock
1,996

31,495







33,491

Restricted stock
418

2,239







2,657

Treasury stock acquired








(87,037
)
(87,037
)
Balance at June 30, 2013
$
132,390

$
1,621,200

$
561,787

$
5,131

$
(397,616
)
$
1,922,892

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30,
2014
2013
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
116,803

$
108,598

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
8,467

10,507

Cash received from FDIC under loss share
949

13,014

Stock option compensation expense
900

900

(Reversal of) provision for loan losses
(11,936
)
3,600

Loss (gain) on real estate held for sale, net
598

(18
)
(Increase) decrease in accrued interest receivable
(2,174
)
872

Increase in FDIC loss share receivable
(2,029
)
(1,346
)
Increase (decrease) in income taxes payable
8,258

(9,446
)
(Increase) decrease in other assets
(14,514
)
36,665

Decrease in accrued expenses and other liabilities
(10,487
)
(23,177
)
Net cash provided by operating activities
94,835

140,169

CASH FLOWS FROM INVESTING ACTIVITIES
Net (loan originations) principal collections
(329,076
)
475,354

FHLB & FRB stock redemption
9,952

4,391

Available-for-sale securities purchased
(1,080,476
)
(506,966
)
Principal payments and maturities of available-for-sale securities
363,103

198,555

Available-for-sale securities sold
—

43,198

Held-to-maturity securities purchased
—

(821,215
)
Principal payments and maturities of held-to-maturity securities
68,981

428,827

Net cash received from acquisitions
1,776,660

202,308

Proceeds from real estate owned and held for investment
66,766

104,360

Premises and equipment purchased
(35,647
)
(22,941
)
Net cash provided by investing activities
840,263

105,871

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in customer accounts
(178,161
)
(250,364
)
Net proceeds from borrowings
—

27,529

Proceeds from exercise of common stock options and related tax benefit
10,358

297

Dividends paid on common stock
(31,393
)
(26,651
)
Treasury stock purchased
(64,231
)
(87,037
)
Decrease in advance payments by borrowers for taxes and insurance
(13,930
)
(14,387
)
Net cash used by financing activities
(277,357
)
(350,613
)
Increase (decrease) in cash and cash equivalents
657,741

(104,573
)
Cash and cash equivalents at beginning of period
203,563

751,430

Cash and cash equivalents at end of period
$
861,304

$
646,857

(CONTINUED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

7

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended June 30,
2014
2013
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Non-covered real estate acquired through foreclosure
$
32,818

$
72,762

Covered real estate acquired through foreclosure
6,163

10,245

Cash paid during the period for
Interest
97,485

104,370

Income taxes
54,072

48,111

The following summarizes the non-cash activities related to acquisitions
Fair value of assets acquired
$
80,384

$
819,904

Fair value of liabilities assumed
(1,857,044
)
(776,009
)
Net fair value of (liabilities) assets
$
(1,776,660
)
$
43,895


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 2014 AND 2013
(UNAUDITED)

NOTE A – Summary of Significant Accounting Policies
Nature of Operations. Washington Federal is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a federally-insured national bank subsidiary. The Bank is principally engaged in the business of attracting deposits from the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential real estate loans, multi-family real estate loans and commercial loans. As used throughout this document, the terms "Washington Federal" or the "Company" refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.
Use of Estimates. The consolidated unaudited interim financial statements included in this report have been prepared by 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.
Summary of Significant Accounting Policies. The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2013 Form 10-K. Other than as discussed below, there have not been any additions or material changes in its significant accounting policies compared to those contained in its 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 June 30, 2014 , excluding covered loans, of $528 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.
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 Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.

NOTE B - Acquisitions

Certain Branches of Bank of America, National Association

During this fiscal year, the Bank has acquired seventy-four branches from Bank of America, National Association. Effective as of the close of business on October 31, 2013, the Bank completed the acquisition of eleven branches that are located in New Mexico. Effective as of the close of business on December 6, 2013, the Bank completed the acquisition of another forty branches that are located in Washington, Oregon, and Idaho. Effective as of the close of business on May 2, 2014, the Bank completed the acquisition of another twenty-three branches that are located in Arizona and Nevada.

Management believes that these transactions represent a significant enhancement of our branch network. This transaction will bring new customers to the Company and improve the deposit mix and reduce overall funding costs.

The combined acquisitions provided $1.9 billion in deposit accounts, $13 million of loans, and $25 million in branch properties. The Bank paid a 1.99% premium on the total deposits and received $1.8 billion in cash from the transactions.

The acquisition method of accounting was used to account for the acquisitions. The purchased assets and assumed liabilities are recorded at their respective acquisition date estimated fair values. The Bank recorded $11 million in core deposit intangible and $31 million in goodwill related to these transactions.

The operating results of the Company include the operating results produced by the first eleven branches for the period from November 1, 2013 to June 30, 2014, for the additional forty branches from December 7, 2013 to June 30, 2014, and for the most recent twenty-three branches from May 3, 2014 to June 30, 2014.

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

9
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Adjusted Fair Value Recorded by
Washington Federal
(In thousands)
Assets:
Cash
$
1,776,660

Loans receivable, net
12,881

Property and equipment, net
25,097

Core deposit intangible
11,040

Goodwill
31,225

Other assets
70

Total Assets
1,856,973

Liabilities:
Customer accounts
1,853,798

Other liabilities
3,175

Total Liabilities
1,856,973

Net assets acquired
$
—






NOTE C – Dividends
On July 18, 2014, the Company paid its 126th consecutive quarterly cash dividend. Dividends per share were $ .11 and $ .09 for the quarters ended June 30, 2014 and 2013 , respectively.


10
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE D – Loans Receivable (excluding Covered Loans)

June 30, 2014
September 30, 2013
(In thousands)
Non-acquired loans
Single-family residential
$
5,466,771

64.7
%
$
5,359,149

67.1
%
Construction - speculative
126,926

1.5

130,778

1.6

Construction - custom
372,789

4.4

302,722

3.8

Land - acquisition & development
88,319

1.1

77,775

1.1

Land - consumer lot loans
111,919

1.4

121,671

1.5

Multi-family
893,742

10.6

831,684

10.4

Commercial real estate
523,850

6.2

414,961

5.1

Commercial & industrial
333,552

3.9

243,199

3.0

HELOC
117,177

1.4

112,186

1.4

Consumer
132,062

1.5

47,141

0.6

Total non-acquired loans
8,167,107

96.7

7,641,266

95.6

Non-impaired acquired loans
Single-family residential
12,014

0.2

14,468

0.2

Construction - speculative
—

—

—

—

Construction - custom
—

—

—

—

Land - acquisition & development
1,069

—

1,489

—

Land - consumer lot loans
2,654

—

3,313

—

Multi-family
3,057

—

3,914

0.1

Commercial real estate
103,215

1.1

133,423

1.7

Commercial & industrial
60,349

0.7

75,326

0.9

HELOC
8,469

0.1

10,179

0.1

Consumer
6,427

0.1

8,267

0.1

Total non-impaired acquired loans
197,254

2.2

250,379

3.1

Credit-impaired acquired loans
Single-family residential
326

—

333

—

Construction - speculative
—

—

—

—

Land - acquisition & development
1,670

—

2,396

—

Multi-family
—

—

—

—

Commercial real estate
66,356

0.9

76,909

1.1

Commercial & industrial
4,280

0.1

7,925

0.1

HELOC
10,658

0.1

11,266

0.1

Consumer
58

—

71

—

Total credit-impaired acquired loans
83,348

1.1

98,900

1.3

Total loans
Single-family residential
5,479,111

64.9

5,373,950

67.3

Construction - speculative
126,926

1.5

130,778

1.6

Construction - custom
372,789

4.4

302,722

3.8

Land - acquisition & development
91,058

1.1

81,660

1.1

Land - consumer lot loans
114,573

1.4

124,984

1.5

Multi-family
896,799

10.6

835,598

10.5

Commercial real estate
693,421

8.2

625,293

7.9

Commercial & industrial
398,181

4.7

326,450

4.0


11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


HELOC
136,304

1.6

133,631

1.6

Consumer
138,547

1.6

55,479

0.7

Total Loans
8,447,709

100
%
7,990,545

100
%
Less:
Allowance for probable losses
114,150

116,741

Loans in process
303,084

275,577

Discount on acquired loans
28,480

34,143

Deferred net origination fees
36,041

36,054

481,755

462,515

$
7,965,954

$
7,528,030


Changes in the carrying amount and accretable yield for acquired non-impaired and credit-impaired loans (excluding covered loans) for the nine months ended June 30, 2014 and the fiscal year ended September 30, 2013 were as follows:
June 30, 2014
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Net 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

Reclassification from nonaccretable balance, net (1)
7,300

—

—

—

Accretion
(8,884
)
8,884

(606
)
606

Transfers to REO
—

(1,188
)
—

(4,710
)
Payments received, net
—

(17,616
)
—

(48,988
)
Balance as of end of period
$
35,652

$
59,798

$
4,371

$
192,281

(1) reclassification due to improvements in expected cash flows of the underlying loans.
September 30, 2013
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Net 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 loans which were acquired as part of the South Valley Bank acquisition.

12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following table sets forth information regarding non-accrual loans (excluding covered loans) held by the Company as of the dates indicated:
June 30, 2014
September 30, 2013
(In thousands)
Non-accrual loans:
Single-family residential
$
78,317

83.2
%
$
100,460

76.5
%
Construction - speculative
1,966

2.1

4,560

3.5

Construction - custom
143

0.2

—

—

Land - acquisition & development
2,295

2.4

2,903

2.2

Land - consumer lot loans
1,879

2.0

3,337

2.5

Multi-family
2,103

2.2

6,573

5.0

Commercial real estate
5,442

5.8

11,736

8.9

Commercial & industrial
516

0.5

477

0.4

HELOC
970

1.0

263

0.2

Consumer
595

0.6

990

0.8

Total non-accrual loans
$
94,226

100
%
$
131,299

100
%

The following tables provide an analysis of the age of loans (excluding covered loans) in past due status as of June 30, 2014 and September 30, 2013 , respectively. These balances are net of LIP and charge-offs only.
June 30, 2014
Amount of Loans
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
Current
30
60
90
Total
(In thousands)
Non-acquired loans
Single-Family Residential
$
5,464,370

$
5,367,245

$
18,990

$
12,878

$
65,257

$
97,125

1.78
%
Construction - Speculative
85,412

84,635

301

—

476

777

0.91

Construction - Custom
201,475

201,288

44

—

143

187

0.09

Land - Acquisition & Development
72,241

70,183

227

—

1,831

2,058

2.85

Land - Consumer Lot Loans
111,860

108,591

1,220

170

1,879

3,269

2.92

Multi-Family
868,968

865,518

2,829

214

407

3,450

0.40

Commercial Real Estate
476,863

474,923

95

—

1,845

1,940

0.41

Commercial & Industrial
333,543

333,430

3

—

110

113

0.03

HELOC
117,178

116,188

53

370

567

990

0.84

Consumer
132,156

130,797

774

421

164

1,359

1.03

Total non-acquired loans
7,864,066

7,752,798

24,536

14,053

72,679

111,268

1.41
%
Non-impaired acquired loans
Single-Family Residential
12,014

11,990

—

—

24

24

0.20
%
Construction - Speculative
—

—

—

—

—

—

NM

Construction - Custom
—

—

—

—

—

—

NM

Land - Acquisition & Development
1,069

663

—

—

406

406

37.98


13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Land - Consumer Lot Loans
2,651

2,651

—

—

—

—

—

Multi-Family
3,057

3,057

—

—

—

—

—

Commercial Real Estate
103,189

102,421

—

—

768

768

0.74

Commercial & Industrial
60,348

60,136

212

—

—

212

0.35

HELOC
8,468

8,335

133

—

—

133

1.57

Consumer
6,427

5,626

12

358

431

801

12.46

Total non-impaired acquired loans
197,223

194,879

357

358

1,629

2,344

1.19
%
Credit-impaired acquired loans
Single-Family Residential
326

326

—

—

—

—

—
%
Construction - Speculative
—

—

—

—

—

—

NM

Construction - Custom
—

—

—

—

—

—

NM

Land - Acquisition & Development
1,670

1,670

—

—

—

—

—

Land - Consumer Lot Loans
—

—

—

—

—

—

NM

Multi-Family
—

—

—

—

—

—

NM

Commercial Real Estate
66,344

65,996

—

—

348

348

0.52

Commercial & Industrial
4,281

3,863

12

—

406

418

9.76

HELOC
10,658

10,027

228

—

403

631

5.92

Consumer
58

58

—

—

—

—

—

Total credit-impaired acquired loans
83,337

81,940

240

—

1,157

1,397

1.68
%
Total Loans
$
8,144,626

$
8,029,617

$
25,133

$
14,411

$
75,465

$
115,009

1.41
%


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
(In thousands)
Non-acquired loans
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
%

14
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Non-impaired acquired loans
Single-Family Residential
14,468

14,343

82

—

43

125

0.86
%
Construction - Speculative
—

—

—

—

—

—

—

Construction - Custom
—

—

—

—

—

—

—

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 non-impaired 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
—

—

—

—

—

—

—

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 twenty-four months . Interest-only payments may also be approved during the modification period. As of June 30, 2014 , single-family residential loans comprised 86.1% 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.


15
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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

Quarter Ended June 30,
2014
2013
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
48

$
10,693

$
10,693

111

$
27,619

$
27,619

Construction - Speculative
—

—

—

—

—

—

Construction - Custom
—

—

—

—

—

—

Land - Acquisition & Development
3

756

756

—

—

—

Land - Consumer Lot Loans
5

573

573

4

685

685

Multi-Family
—

—

—

—

—

—

Commercial Real Estate
2

1,398

1,398

1

2,411

2,411

Commercial & Industrial
—

—

—

—

—

—

HELOC
—

—

—

—

—

—

Consumer
—

—

—

1

11

11

58

$
13,420

$
13,420

117

$
30,726

$
30,726

Nine Months Ended June 30,
2014
2013
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
199

45,132

45,132

337

88,085

88,085

Construction - Speculative
—

—

—

1

2,481

2,481

Construction - Custom
—

—

—

—

—

—

Land - Acquisition & Development
3

756

756

—

—

—

Land - Consumer Lot Loans
10

1,746

1,746

20

3,027

3,027

Multi-Family
2

1,201

1,201

1

44

44

Commercial Real Estate
3

2,197

2,197

1

2,411

2,411

Commercial & Industrial
—

—

—

—

—

—

HELOC
1

261

261

1

199

199

Consumer
3

207

207

1

11

11

221

$
51,500

$
51,500

362

$
96,258

$
96,258




16
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on restructured loans for which a payment default occurred during the periods indicated and that had been modified as a TDR within 12 months or less of the payment default:
Quarter Ended June 30,
2014
2013
Number of
Recorded
Number of
Recorded
Contracts
Investment
Contracts
Investment
(In thousands)
(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Single-Family Residential
17

$
3,088

25

$
6,833

Construction - Speculative
—

—

—

—

Construction - Custom
—

—

—

—

Land - Acquisition & Development
—

—

—

—

Land - Consumer Lot Loans
1

69

1

109

Multi-Family
—

—

—

—

Commercial Real Estate
—

—

—

—

Commercial & Industrial
—

—

—

—

HELOC
—

—

1

79

Consumer
1

170

—

—

19

$
3,327

27

$
7,021

Nine Months Ended June 30,
2014
2013
Number of
Recorded
Number of
Recorded
Contracts
Investment
Contracts
Investment
(In thousands)
(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Single-Family Residential
42

$
9,206

65

$
15,366

Construction - Speculative
—

—

—

—

Construction - Custom
—

—

—

—

Land - Acquisition & Development
—

—

1

838

Land - Consumer Lot Loans
4

445

2

237

Multi-Family
—

—

—

—

Commercial Real Estate
—

—

—

—

Commercial & Industrial
—

—

—

—

HELOC
—

—

2

113

Consumer
1

170

—

—

47

$
9,821

70

$
16,554





17
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.


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


The following table summarizes the activity in the allowance for loan losses (excluding acquired and covered loans) for the quarter ended June 30, 2014 and fiscal year ended September 30, 2013 :
Quarter Ended June 30, 2014
Beginning
Allowance
Charge-offs
Recoveries
Provision &
Transfers
Ending
Allowance
(In thousands)
Single-family residential
$
63,348

$
(2,530
)
$
4,717

$
(3,175
)
$
62,360

Construction - speculative
6,773

—

2

(388
)
6,387

Construction - custom
1,599

—

—

79

1,678

Land - acquisition & development
6,027

—

85

843

6,955

Land - consumer lot loans
2,974

(86
)
—

(26
)
2,862

Multi-family
4,187

—

—

(46
)
4,141

Commercial real estate
5,924

(32
)
24

773

6,689

Commercial & industrial
20,403

(38
)
4

(1,673
)
18,696

HELOC
975

(18
)
—

58

1,015

Consumer
2,721

(696
)
787

555

3,367

$
114,931

$
(3,400
)
$
5,619

$
(3,000
)
$
114,150

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 $ 3,000,000 reversal of the provision for loan losses during the quarter ended June 30, 2014 , while $ 0 provision was recorded for the same quarter one year ago. The primary reason for the current period recovery is the credit quality of the portfolio has been improving significantly and economic conditions are more favorable.
Non-performing assets (“NPAs”) amounted to $162,357,000 , or 1.10% , of total assets at June 30, 2014 , compared to $ 213,616,000 , or 1.63% , of total assets as of September 30, 2013. Acquired loans, including covered loans, are not initially classified as non-performing loans because, at acquisition, the carrying value of these loans is adjusted to reflect fair value. Non-accrual loans decreased from $131,299,000 at September 30, 2013 , to $94,226,000 at June 30, 2014 , a 28.2% decrease.
The Company had net recoveries of $2,219,000 for the quarter ended June 30, 2014 , compared with $4,780,000 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.
For the period ending June 30, 2014 , $114,090,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $60,000 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

19
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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 as compared to prior to the 2009-2011 financial crisis.
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 June 30, 2014 and September 30, 2013 :
June 30, 2014
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
$
62,360

$
5,388,306

1.2
%
$
—

$
78,464

—
%
Construction - speculative
6,327

116,420

5.4

60

10,506

0.6

Construction - custom
1,678

372,789

0.5

—

—

—

Land - acquisition & development
6,955

86,030

8.1

—

2,289

—

Land - consumer lot loans
2,862

98,860

2.9

—

13,059

—

Multi-family
4,141

888,346

0.5

—

5,395

—

Commercial real estate
6,689

495,988

1.4

—

27,863

—

Commercial & industrial
18,696

377,271

5.0

—

40

—

HELOC
1,015

116,174

0.9

—

1,004

—

Consumer
3,367

132,061

2.6

—

—

—

$
114,090

$
8,072,245

1.4
%
$
60

$
138,620

—
%
(1)
Excludes acquired loans with discounts sufficient to absorb potential losses 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 loans with discounts sufficient to absorb potential losses and covered loans

The following tables provide information on loans based on credit quality indicators (defined above) as of June 30, 2014 and September 30, 2013 .

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


Credit Risk Profile by Internally Assigned Grade (excludes covered loans):
June 30, 2014
Internally Assigned Grade
Total
Pass
Special mention
Substandard
Doubtful
Loss
Gross Loans
(In thousands)
Non-acquired loans
Single-family residential
$
5,325,757

$
2,993

$
138,021

$
—

$
—

$
5,466,771

Construction - speculative
116,002

—

10,924

—

—

126,926

Construction - custom
372,789

—

—

—

—

372,789

Land - acquisition & development
79,820

—

8,499

—

—

88,319

Land - consumer lot loans
111,459

—

460

—

—

111,919

Multi-family
888,836

—

4,906

—

—

893,742

Commercial real estate
490,940

17,097

15,813

—

—

523,850

Commercial & industrial
312,811

16,508

4,123

110

—

333,552

HELOC
116,929

—

248

—

—

117,177

Consumer
131,910

—

152

—

—

132,062

7,947,253

36,598

183,146

110

—

8,167,107

Non-impaired acquired loans
Single-family residential
12,014

—

—

—

—

12,014

Construction - speculative
—

—

—

—

—

—

Construction - custom
—

—

—

—

—

—

Land - acquisition & development
663

—

406

—

—

1,069

Land - consumer lot loans
2,654

—

—

—

—

2,654

Multi-family
3,057

—

—

—

—

3,057

Commercial real estate
89,566

2,516

11,133

—

—

103,215

Commercial & industrial
42,571

13,600

4,144

34

—

60,349

HELOC
8,469

—

—

—

—

8,469

Consumer
6,427

—

—

—

—

6,427

165,421

16,116

15,683

34

—

197,254

Credit-impaired acquired loans
Pool 1 - Construction and land A&D
1,340

—

330

—

—

1,670

Pool 2 - Single-family residential
326

—

—

—

—

326

Pool 3 - Multi-family
—

—

—

—

—

—

Pool 4 - HELOC & other consumer
10,716

—

—

—

—

10,716

Pool 5 - Commercial real estate
50,556

2,155

13,645

—

—

66,356

Pool 6 - Commercial & industrial
712

3,162

—

406

—

4,280

Total credit impaired acquired loans
63,650

5,317

13,975

406

—

83,348

Total gross loans
$
8,176,324

$
58,031

$
212,804

$
550

$
—

$
8,447,709

Total grade as a % of total gross loans
96.9
%
0.7
%
2.4
%
—
%
—
%



21
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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

Non-impaired 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
%
—
%
—
%


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


Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):
June 30, 2014
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross  Loans
Amount
% of Total
Gross  Loans
(In thousands)
Single-family residential
$
5,388,454

98.6
%
$
78,317

1.4
%
Construction - speculative
124,960

98.5

1,966

1.5

Construction - custom
372,646

100.0

143

—

Land - acquisition & development
86,024

97.4

2,295

2.6

Land - consumer lot loans
110,040

98.3

1,879

1.7

Multi-family
891,639

99.8

2,103

0.2

Commercial real estate
518,408

99.0

5,442

1.0

Commercial & industrial
333,036

99.8

516

0.2

HELOC
116,207

99.2

970

0.8

Consumer
131,467

99.5

595

0.5

$
8,072,881

98.8
%
$
94,226

1.2
%

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

2.1

$
7,509,967

98.3
%
$
131,299

1.7
%

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


The following table provides information on impaired loan balances and the related allowances by loan types as of June 30, 2014 and September 30, 2013 :
June 30, 2014
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average Recorded Investment
(In thousands)
With no related allowance recorded:
Single-family residential
$
24,929

$
27,853

$
—

$
22,460

Construction - speculative
1,755

2,378

—

1,762

Construction - custom
360

360

—

180

Land - acquisition & development
1,934

8,931

—

1,794

Land - consumer lot loans
812

910

—

714

Multi-family
130

130

—

130

Commercial real estate
28,024

34,904

—

23,625

Commercial & industrial
3,916

24,183

—

3,809

HELOC
1,154

1,835

—

708

Consumer
439

554

—

380

63,453

102,038

—

55,562

With an allowance recorded:
Single-family residential
333,814

339,578

10,956

333,527

Construction - speculative
8,751

9,181

60

8,927

Construction - custom
1,196

1,196

—

1,196

Land - acquisition & development
5,092

6,032

—

5,085

Land - consumer lot loans
12,922

13,305

—

12,852

Multi-family
5,266

5,486

—

5,278

Commercial real estate
19,292

20,160

—

16,837

Commercial & industrial
23

23

—

27

HELOC
1,198

1,198

—

1,198

Consumer
236

236

—

152

387,790

396,395

11,016

(1)
385,079

Total:
Single-family residential
358,743

367,431

10,956

355,987

Construction - speculative
10,506

11,559

60

10,689

Construction - custom
1,556

1,556

—

1,376

Land - acquisition & development
7,026

14,963

—

6,879

Land - consumer lot loans
13,734

14,215

—

13,566

Multi-family
5,396

5,616

—

5,408

Commercial real estate
47,316

55,064

—

40,462

Commercial & industrial
3,939

24,206

—

3,836

HELOC
2,352

3,033

—

1,906

Consumer
675

790

—

532

$
451,243

$
498,433

$
11,016

(1)
$
440,641


(1) Includes $60,000 of specific reserves and $10,956,000 included in the general reserves.

24
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.



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


NOTE F – New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-11, Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures. Under this new accounting guidance, repurchase-to-maturity transactions will be accounted for as secured borrowings rather than sales of an asset, and transfers of financial assets with contemporaneous repurchase financings will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts. The new guidance also prescribes additional disclosures particularly on the nature of collateral pledged in repurchase financings accounted for as secured borrowings. The new guidance is effective beginning on January 1, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial position or results of operation.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new accounting guidance clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2017. The Company does not expect the new guidance to have a material impact on its consolidated financial position or results of operation.

In January 2014, the FASB issued ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. This new guidance permits 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. This new guidance is effective on a retrospective basis beginning after December 15, 2014 with early adoption permitted. The Company has adopted this ASU prospectively as of December 31, 2013 as the retrospective adjustments were not material. The amount of affordable housing tax credits that are expected to be recognized during the 2014 fiscal year is $3 million . The net investment balance recognized as of June 30, 2014 is $38 million . Using the proportional amortization method, the amount recognized as a component of income tax expense for the 2014 fiscal year is $4 million . Contingent commitments for equity contributions during the 2014 calendar year are $31 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 new guidance clarifies 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 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 new guidance is to eliminate this diversity in practice. The new guidance is effective 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.




26
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 the Company's assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis:
Measured on a Recurring Basis
Securities
Securities available for sale are recorded at fair value on a recurring basis. 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 June 30, 2014 and September 30, 2013:
Fair Value at June 30, 2014
Level 1
Level 2
Level 3
Total
(In thousands)
Available-for-sale securities
Equity securities
$
101,981

$
—

$
—

$
101,981

Obligations of U.S. government
—

721,312

—

721,312

Obligations of states and political subdivisions
—

23,277

—

23,277

Corporate debt securities
—

485,083

—

485,083

Mortgage-backed securities
—

Agency pass-through certificates
—

1,662,001

—

1,662,001

Other Commercial MBS
—

109,367

—

109,367

Total balance at end of period
$
101,981

$
3,001,040

$
—

$
3,103,021

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended June 30, 2014 .

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


Fair Value at September 30, 2013
Level 1
Level 2
Level 3
Total
(In thousands)
Available-for-sale securities
Equity securities
$
101,237

$
—

$
—

$
101,237

Obligations of U.S. government
—

533,975

—

533,975

Obligations of states and political subdivisions
—

22,545

—

22,545

Corporate debt securities
—

452,015

—

452,015

Mortgage-backed securities
Agency pass-through certificates
—

1,251,176

—

1,251,176

Total balance at end of period
$
101,237

$
2,259,711

$
—

$
2,360,948

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the fiscal year 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 June 30, 2014 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 that were measured at estimated fair value on a nonrecurring basis through the nine months ended June 30, 2014 and June 30, 2013, and the total losses (gains) resulting from those fair value adjustments for the quarters and nine months ended June 30, 2014 and June 30, 2013. These estimated fair values are shown gross of estimated selling costs.
Nine Months Ended June 30, 2014
Quarter
Ended
June 30, 2014
Nine Months
Ended June 30, 2014
Level 1
Level  2
Level  3
Total
Total Losses (Gains)
(In thousands)
Impaired loans (1)
$
—

$
—

$
10,156

$
10,156

$
(775
)
$
(1,311
)
Covered REO (2)
—

—

8,935

8,935

374

503

Real estate held for sale (2)
—

—

43,082

43,082

10,400

16,782

Balance at end of period
$
—

$
—

$
62,173

$
62,173

$
9,999

$
15,974






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


Nine Months Ended June 30, 2013
Quarter
Ended
June 30, 2013
Nine Months
Ended June 30, 2013
Level 1
Level  2
Level  3
Total
Total Losses
(In thousands)
Impaired loans (1)
$
—

$
—

$
64,500

$
64,500

$
1,967

$
13,005

Covered REO (2)
—

—

18,312

18,312

231

603

Real estate held for sale (2)
—

—

77,080

77,080

5,626

19,650

Balance at end of period
$
—

$
—

$
159,892

$
159,892

$
7,824

$
33,258




___________________
(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 June 30, 2014 or June 30, 2013.
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 probable loan & lease losses 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 may 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 net of selling costs, 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.

29
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
June 30, 2014
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
$
861,304

$
861,304

$
203,563

$
203,563

Available-for-sale securities
Equity securities
1
101,981

101,981

101,237

101,237

Obligations of U.S. government
2
721,312

721,312

533,975

533,975

Obligations of states and political subdivisions
2
23,277

23,277

22,545

22,545

Corporate debt securities
2
485,083

485,083

452,015

452,015

Mortgage-backed securities
Agency pass-through certificates
2
1,662,001

1,662,001

1,251,176

1,251,176

Other Commercial MBS
2
109,367

109,367

—

—

Total available-for-sale securities
3,103,021

3,103,021

2,360,948

2,360,948

Held-to-maturity securities
2
Total held-to-maturity securities
1,583,852

1,534,239

1,654,666

1,582,849

Loans receivable
3
7,965,954

8,516,535

7,528,030

8,070,279

Covered loans
3
207,207

212,002

295,947

300,610

FDIC indemnification asset
3
44,065

43,117

64,615

62,300

FHLB and FRB stock
2
162,904

162,904

173,009

173,009

Financial liabilities
Customer accounts
2
10,765,680

10,050,132

9,090,271

8,585,068

FHLB advances and other borrowings
2
1,930,000

2,055,239

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.

30
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and FRB 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 June 30, 2014 , and September 30, 2013:
June 30, 2014
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
$
111,002

$
2,834

$
(381
)
$
113,455

1.57

5 to 10 years
140,989

562

(62
)
141,489

1.55

Over 10 years
465,229

1,761

(622
)
466,368

1.56

Equity Securities
Within 1 year
500

13

—

513

1.80

1 to 5 years
100,000

1,468

—

101,468

1.90

5 to 10 years
—

—

—

—

—

Corporate bonds due
Within 1 year
—

—

—

—

—

1 to 5 years
317,452

2,562

—

320,014

0.72

5 to 10 years
113,165

2,064

(160
)
115,069

1.49

Over 10 years
50,000

—

—

50,000

3.00

Municipal bonds due
Over 10 years
20,407

2,870

—

23,277

6.45

Mortgage-backed securities
Agency pass-through certificates
1,636,366

27,896

(2,261
)
1,662,001

2.59

Other Commercial MBS
109,300

67

—

109,367

1.69

3,064,410

42,097

(3,486
)
3,103,021

2.09

Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates
1,583,853

6,010

(55,623
)
1,534,240

3.13

$
4,648,263

$
48,107

$
(59,109
)
$
4,637,261

2.46
%

31
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 June 30, 2014 , there were no available-for-sale securities sold. There were $43,198,000 of available-for-sale securities sold during the fiscal year ended June 30, 2013 , 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 .

32
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



The following tables indicate the total unrealized gross losses in the securities portfolio (shown above). The unrealized gross losses and fair value of securities as of June 30, 2014 and September 30, 2013 are also shown by the 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.
June 30, 2014
Less than 12 months
12 months or more
Total
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
(In thousands)
Corporate bonds due
$
(98
)
$
24,903

$
(62
)
$
9,938

$
(160
)
$
34,841

U.S. government and agency securities due
(464
)
74,536

(602
)
217,016

(1,066
)
291,552

Agency pass-through certificates
(3,332
)
156,691

(54,551
)
1,434,549

(57,883
)
1,591,240

$
(3,894
)
$
256,130

$
(55,215
)
$
1,661,503

$
(59,109
)
$
1,917,633


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
(In thousands)
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



33
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $233,546,000 as of June 30, 2014 compared to $326,927,000 as of September 30, 2013 .
Changes in the net carrying amount and accretable yield for acquired impaired and non-impaired covered loans for the year to date period ended June 30, 2014 and the fiscal year ended September 30, 2013 were as follows:
June 30, 2014
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Net Carrying
Amount of
Loans
Accretable
Yield
Net Carrying
Amount of
Loans
(In thousands)
Balance at beginning of period
$
78,277

$
138,091

$
17,263

$
157,856

Reclassification from nonaccretable balance, net (1)
5,885

(2,069
)
—

—

Accretion
(20,230
)
20,230

(4,409
)
4,409

Transfers to REO
—

(6,359
)
—

—

Payments received, net
—

(62,946
)
—

(42,005
)
Balance at end of period
$
63,932

$
86,947

$
12,854

$
120,260

(1) reclassification due to improvements/impairments in expected cash flows of the underlying pools.
September 30, 2013
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Net 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 (2)
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 Bank acquisition.
(2) reclassification due to improvements/impairments in expected cash flows of the underlying pools.
At June 30, 2014 , none of the acquired impaired or non-impaired covered 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 allowance for credit losses related to the acquired loans results from decreased expectations of future cash flows due to increased credit losses for certain acquired loan pools.
The outstanding principal balance of acquired covered loans was $251,520,000 and $362,248,000 as of June 30, 2014 and September 30, 2013 , respectively. The discount balance related to the acquired covered loans was $42,244,000 and $66,301,000 as of June 30, 2014 and September 30, 2013 , respectively.

34
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



The following table shows the year to date activity for the FDIC indemnification asset:
June 30, 2014
September 30, 2013
(In thousands)
Balance at beginning of fiscal year 2014 and 2013
$
64,615

$
87,571

Additions (1)
2,029

18,101

Payments made (received)
(949
)
(13,421
)
Amortization
(22,236
)
(28,722
)
Accretion
606

1,086

Balance at end of period
$
44,065

$
64,615

(1) Includes FDIC covered loans which were acquired as part of the South Valley Bank acquisition in 2013.


35
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on covered loans based on credit quality indicators (defined in Note E ) as of June 30, 2014 and September 30, 2013 :
June 30, 2014
Internally Assigned Grade
Total
Net  Loans
Pass
Special mention
Substandard
Doubtful
Loss
(In thousands)
Acquired non-impaired loans:
Single-family residential
$
21,812

$
—

$
2,656

$
—

$
—

$
24,468

Construction - speculative
—

—

—

—

—

—

Construction - custom
—

—

—

—

—

—

Land - acquisition & development
1,441

—

395

—

—

1,836

Land - consumer lot loans
74

—

—

—

—

74

Multi-family
16,472

—

—

—

—

16,472

Commercial real estate
38,410

136

24,486

—

—

63,032

Commercial & industrial
2,831

—

2,748

—

—

5,579

HELOC
12,725

—

—

—

—

12,725

Consumer
501

—

—

—

—

501

$
94,266

$
136

$
30,285

$
—

$
—

$
124,687

Total grade as a % of total net loans
75.6
%
0.1
%
24.3
%
—
%
—
%
Acquired credit-impaired loans:
Pool 1 - Construction and land A&D
$
9,429

$
—

$
17,919

$
—

$
—

$
27,348

Pool 2 - Single-family residential
16,429

—

982

—

—

17,411

Pool 3 - Multi-family
54

—

836

—

—

890

Pool 4 - HELOC & other consumer
2,938

—

1,227

—

—

4,165

Pool 5 - Commercial real estate
36,298

707

31,377

—

—

68,382

Pool 6 - Commercial & industrial
4,982

—

3,121

534

—

8,637

$
70,130

$
707

$
55,462

$
534

$
—

$
126,833

Total covered loans
251,520

Discount
(42,244
)
Allowance
(2,069
)
Covered loans, net
$
207,207



36
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


September 30, 2013
Internally Assigned Grade
Total
Net  Loans
Pass
Special mention
Substandard
Doubtful
Loss
(In thousands)
Acquired non-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
%
—
%
—
%
Acquired 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












37
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




The following tables provide an analysis of the age of acquired non credit-impaired covered loans in past due status as of June 30, 2014 and September 30, 2013 :
June 30, 2014
Amount of  Loans
Net of LIP & Chg.-Offs
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loans
Current
30
60
90
Total
Single-Family Residential
$
24,468

$
23,056

$
108

$
13

$
1,291

$
1,412

5.77
%
Construction - Speculative
—

—

—

—

—

—

—

Construction - Custom
—

—

—

—

—

—

—

Land - Acquisition & Development
1,836

1,800

—

—

36

36

1.96

Land - Consumer Lot Loans
74

74

—

—

—

—

—

Multi-Family
16,472

16,472

—

—

—

—

—

Commercial Real Estate
63,032

61,937

—

—

1,095

1,095

1.74

Commercial & Industrial
5,579

5,579

—

—

—

—

—

HELOC
12,725

12,628

97

—

—

97

0.76

Consumer
501

486

2

13

—

15

2.99

$
124,687

$
122,032

$
207

$
26

$
2,422

$
2,655

2.13
%


September 30, 2013
Amount of  Loans
Net of LIP & Chg.-Offs
Days Delinquent Based on $ Amount of Loans
% based
on $
Type of Loans
Current
30
60
90
Total
Single-Family Residential
$
28,460

$
27,411

$
78

$
—

$
971

$
1,049

3.69
%
Construction - Speculative
—

—

—

—

—

—

—

Construction - Custom
—

—

—

—

—

—

—

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
%



38
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE I – Derivatives and Hedging Activities

The Bank 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 Bank enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Bank enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The interest rate swap agreements with the clients 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 June 30, 2014 was $256,007,000 compared to $83,594,000 as of September 30, 2013. There was no impact to the statement of operations for the nine months ended June 30, 2014 as the asset and liability side of the swaps offset each other. The fee income related to swaps was $ 838,005 for the nine months ended June 30, 2014 .
The Bank 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 June 30, 2014 was $50,000,000 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 June 30, 2014 and September 30, 2013 :
Asset Derivatives
Liability Derivatives
June 30, 2014
September 30, 2013
June 30, 2014
September 30, 2013
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Location
Fair Value
Location
Fair Value
(In thousands)
Interest rate contracts
Other assets
$
2,731

Other assets
$
7

Other liabilities
$
2,731

Other liabilities
$
7

Commitments to purchase MBS
AFS securities
—

AFS securities
$
3,188

N/A
N/A
N/A
N/A



39
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended (the "Exchange Act"), based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes, including without limitation the potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations being promulgated thereunder; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
GENERAL
Washington Federal is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through the Bank, a federally-insured national bank subsidiary.
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, the Bank completed the acquisition of another forty branches from Bank of America, National Association; these branches are located in Washington, Oregon, and Idaho. Effective as of the close of business on May 2, 2014, the Bank completed the acquisition of an additional twenty-three branches from Bank of America, National Association; these branches are located in Arizona and Nevada. The combined acquisitions provided $1.9 billion in deposit accounts, $13 million of loans, and $28 million in branch properties. Washington Federal paid a 1.99% premium on the total deposits and received $1.8 billion in cash from the transactions.
The operating results of the Company include the operating results produced by the first eleven branches for the period from November 1, 2013 to June 30, 2014, the additional forty branches from December 7, 2013 to June 30, 2014 and the twenty-three branches from May 3, 2014 to June 30, 2014.
INTEREST RATE RISK
Based on Management's assessment of the current interest rate environment, the Bank has taken steps to reduce its interest rate risk profile compared to its historical norms, including growing shorter-term business loans, transaction deposit accounts and extending the maturity on borrowings. The recent branch acquisitions have accelerated these efforts. The mix of transaction accounts is now approximately 50% of total deposits. The Bank has also been purchasing more variable rate investments. The composition of the investment portfolio is now 45% variable and 55% 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 June 30, 2014 , the unrealized net losses on these securities were $50 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”) of the Company.

40
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 June 30, 2014 , the Company had approximately $1.6 billion more in liabilities subject to repricing in the next year than assets, which resulted in a negative one-year maturity gap of 10.6% of total assets. There were $1.7 billion more in liabilities subject to repricing as of September 30, 2013 , resulting in a 12.9% negative gap. The percentage decrease in the negative gap is primarily due to an increase in total assets. Additionally, the estimated maturities of mortgage securities and loans 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 movements in interest rates. Typically, a negative maturity gap 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 it is considered less reliable than more detailed modeling.

Net Interest Income Sensitivity. The potential impact of rising interest rates on future net interest income 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 0.5% in the next year. This compares to an estimated decrease of 1.6% as of the September 30, 2013 analysis. This analysis assumes zero balance sheet growth and a constant percentage composition of assets and liabilities for consistency. 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 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 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 $493 million and the NPV to total assets ratio to decline to 16.32% from a base of 18.51%. As of September 30, 2013 , the estimated decrease in NPV in this event was $314 million and the NPV to total assets ratio was estimated to decline to 17.42% from a base of 18.74%. The increased NPV sensitivity and lower base NPV ratio as of June 30, 2014 is due to the impact of the branch acquisitions, including the characteristics of the acquired deposits and the deployment of cash into securities.
Interest Rate Spread. The interest rate spread decreased to 2.65% at June 30, 2014 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 June 30, 2014 , the weighted average rate on customer deposit accounts and borrowings decreased by 21 basis points compared to September 30, 2013 , while the weighted average rates on earning assets decreased by 29 basis points over the same period.
Net Interest Margin. The net interest margin decreased to 3.05% for the quarter ended June 30, 2014 from 3.15% for the quarter ended June 30, 2013. The yield on earning assets declined 28 basis points to 3.99% and the cost of interest bearing liabilities declined 21 basis points to 1.02%. The greater decline in the yield on earning assets was due to lower loan yields on new originations compared to prepaying and maturing loans. In addition, there is a greater portion of floating rate loans and securities than in the prior year.
As of June 30, 2014 , the Company had increased total assets by $1,707,096,000 from $13,082,859,000 at September 30, 2013 due to the branch acquisitions during the fiscal year that brought $1,853,798,000 in deposits. For the quarter ended June 30, 2014 , compared to September 30, 2013 , loans (both non-covered and covered) increased $349,184,000, or 4.5%. Investment securities increased $671,260,000, or 16.7%. Cash and cash equivalents of $861,304,000 and stockholders’ equity of $1,990,635,000 as of June 30, 2014 provides management with flexibility in managing interest rate risk going forward.


LIQUIDITY AND CAPITAL RESOURCES
The Company’s net worth at June 30, 2014 was $1,990,635,000 , or 13.46% of total assets. This was an increase of $53,000,000 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 nine months ended June 30, 2014 by net income of $116,803,000 , the payment of $31,393,000 in cash dividends, treasury stock purchases of $64,231,000 , as well as an increase in other comprehensive income of $18,043,000 .
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.

41
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)
June 30, 2014
Total capital (to risk-weighted assets)
The Company
$
1,751,035

24.52
%
$
571,202

8.00
%
NA

NA

The Bank
1,743,057

24.41
%
571,334

8.00
%
$714,168
10.00
%
Tier I capital (to risk-weighted assets)
The Company
1,660,786

23.26
%
285,601

4.00
%
NA

NA

The Bank
1,652,787

23.14
%
285,667

4.00
%
428,501

6.00
%
Tier I Capital (to average assets)
The Company
1,660,786

11.64
%
570,874

4.00
%
NA

NA

The Bank
1,652,787

11.58
%
570,970

4.00
%
713,712

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 $861,304,000 at June 30, 2014 , an increase from $203,563,000 at September 30, 2013 . The Company continues to hold higher than normal amounts of liquidity due to concern about potentially rising interest rates. It is anticipated that the funds will be invested opportunistically over time as risk adjusted investment opportunities to enhance yields improve. 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 $742,073,000, or 31.4%, during the nine months ended June 30, 2014 , which included the purchase of $1,080,476,000 of available-for-sale securities. Most of these investments made with the proceeds from the recent branch acquisitions. There were no available-for-sale securities sold during the nine months ended June 30, 2014 . During the same period, there were no held-to-maturity securities purchased or sold. As of June 30, 2014 , the Company had net unrealized gains on available-for-sale securities of $24,421,000 , net of tax, which were recorded as part of stockholders’ equity.
Loans receivable : During the nine months ended June 30, 2014 , the balance of loans receivable increased to $7,965,954,000 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 $451,916,000, which includes the acquisition of $12,881,000 in loans as described in Note B. During the nine month period, $32,818,000 of non covered loans were transferred to REO.
Covered loans : As of June 30, 2014 , FDIC covered loans decreased 30.0%, or $88,740,000 to $207,207,000 , compared to September 30, 2013 due primarily to $104,951,000 of net principal payments and maturities. The FDIC loss share coverage for the majority of these loans will expire during fiscal year 2015. If all FDIC loss share coverage had expired as of June 30, 2014, the NPA ratio would increase from 1.10% to 1.16% and the delinquency rate would rise from 1.41% to 1.57%.

42
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 *
June 30, 2014
March 31, 2014
December 31, 2013
Total Loans
Single-family residential
5,479,111

64.9

5,462,093

66.7

5,436,083

67.0

Construction - speculative
126,926

1.5

135,001

1.7

135,868

1.7

Construction - custom
372,789

4.4

354,279

4.3

333,954

4.1

Land - acquisition & development
91,058

1.1

77,049

0.9

75,506

0.9

Land - consumer lot loans
114,573

1.4

116,864

1.4

122,467

1.5

Multi-family
896,799

10.6

869,635

10.6

846,116

10.5

Commercial real estate
693,421

8.2

634,457

7.8

622,240

7.7

Commercial & industrial
398,181

4.7

351,705

4.4

354,166

4.4

HELOC
136,304

1.6

131,852

1.6

131,949

1.6

Consumer
138,547

1.6

48,239

0.6

51,960

0.6

Total Loans
8,447,709

100.0

8,181,174

100
%
8,110,309

100
%
Less:
Allowance for probable losses
114,150

114,931

118,158

Loans in process
303,084

264,946

273,263

Discount on acquired loans
28,480

29,286

31,485

Deferred net origination fees
36,041

34,902

35,845

481,755

444,065

458,751

$
7,965,954

$
7,737,109

$
7,651,558

____________________
* Excludes covered loans
Non-performing assets (excludes discounted acquired assets) : NPAs decreased during the quarter ended June 30, 2014 to $162,357,000 from $213,616,000 at September 30, 2013 , a 24.0% decrease, due to improving credit conditions and credit quality. Non-performing assets as a percentage of total assets was 1.10% at June 30, 2014 compared to 1.63% at September 30, 2013 .
This level of NPAs is significantly higher than the Company's history prior to 2007 of 0.50%. The Company’s 30-year average of NPAs is 0.97%.

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



The following table sets forth information regarding restructured and non-accrual loans and REO held by the Company at the dates indicated.
June 30,
2014
September 30,
2013
(In thousands)
Restructured loans:
Single-family residential
$
333,814

86.1
%
$
356,577

85.7
%
Construction - speculative
8,554

2.2

10,733

2.6

Construction - custom
1,196

0.3

1,196

0.3

Land - acquisition & development
5,092

1.3

7,211

1.7

Land - consumer lot loans
12,922

3.3

12,706

3.1

Multi - family
5,266

1.4

7,557

1.8

Commercial real estate
19,292

5.0

18,539

4.5

Commercial & industrial
23

—

56

—

HELOC
1,198

0.3

1,088

0.3

Consumer
236

0.1

33

—

Total restructured loans (1)
$
387,593

100
%
$
415,696

100
%
Non-accrual loans:
Single-family residential
$
78,317

83.2
%
$
100,460

76.5
%
Construction - speculative
1,966

2.1

4,560

3.5

Construction - custom
143

0.2

—

—

Land - acquisition & development
2,295

2.4

2,903

2.2

Land - consumer lot loans
1,879

2.0

3,337

2.5

Multi-family
2,103

2.2

6,573

5.0

Commercial real estate
5,442

5.8

11,736

8.9

Commercial & industrial
516

0.5

477

0.4

HELOC
970

1.0

263

0.2

Consumer
595

0.6

990

0.8

Total non-accrual loans (2)
94,226

100
%
131,299

100
%
Total REO (3)
57,352

72,925

Total REHI (3)
10,780

9,392

Total non-performing assets
$
162,358

$
213,616

Total non-performing assets and performing restructured loans as a percentage of total assets
3.54
%
4.62
%
(1)    Restructured loans were as follows:
Performing
$
361,918

93.4
%
$
391,415

94.2
%
Non-performing (included in non-accrual loans above)
25,675

6.6

24,281

5.8

$
387,593

100
%
$
415,696

100
%

(2)
The Company recognized interest income on nonaccrual loans of approximately $4,460,000 in the nine months ended June 30, 2014 . Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $3,988,000 for the nine months ended June 30, 2014 . The recognized interest income may include more than nine months of interest for some of the loans that were brought current.

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



In addition to the nonaccrual loans reflected in the above table, at June 30, 2014 the Company had $49,806,000 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 3.88% at June 30, 2014 .

(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 86.1% of restructured loans as of June 30, 2014 . 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 the Company's 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.
June 30, 2014
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
$
62,360

66.6
%
1.1
%
$
64,184

69.9
%
1.2
%
Construction - speculative
6,387

1.5

5.0

8,407

1.7

6.4

Construction - custom
1,678

4.5

0.5

882

4.0

0.3

Land - acquisition & development
6,955

1.1

7.9

9,165

1.0

11.8

Land - consumer lot loans
2,862

1.4

2.6

3,552

1.6

2.9

Multi-family
4,141

10.9

0.5

3,816

10.9

0.5

Commercial real estate
6,689

6.4

1.3

5,595

5.4

1.3

Commercial & industrial
18,696

4.6

5.0

16,614

3.4

6.5

HELOC
1,015

1.4

0.9

1,002

1.5

0.9

Consumer
3,367

1.6

2.5

3,524

0.6

7.5

$
114,150

100
%
1.4
%
$
116,741

100
%
1.5
%

(1)
Represents the total amount of the loan category as a % of total gross loans, excluding non-acquired and non-covered loans outstanding not subject to the allowance for loan loss.
(2)
Represents the allocated allowance of the loan category as a % of total gross loans, excluding non-acquired and non-covered loans outstanding not subject to the allowance for loan loss, for the same loan category.

45
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 $1,675,409,000 , or 18.43% , to $10,765,680,000 at June 30, 2014 compared with $9,090,271,000 at September 30, 2013 .
The following table shows the composition of the Bank’s customer accounts by deposit type as of the dates shown:
June 30, 2014
September 30, 2013
(In thousands)
Wtd. Avg.
Rate
Wtd. Avg.
Rate
Non-interest checking
$
818,273

7.6
%
—
%
$
447,368

4.9
%
—
%
Interest checking
1,378,379

12.8

0.03
%
800,516

8.8

0.13
%
Savings (passbook/stmt)
620,415

5.8

0.10
%
404,938

4.5

0.15
%
Money Market
2,498,714

23.2

0.19
%
1,888,020

20.8

0.23
%
CD’s
5,449,899

50.6

0.94
%
5,549,429

61.0

1.03
%
Total
$
10,765,680

100
%
0.53
%
$
9,090,271

100
%
0.69
%
FHLB advances and other borrowings : Total borrowings were $1,930,000,000 as of June 30, 2014 which is the same balance as of September 30, 2013 . The Bank 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 Bank, deposits with the FHLB and certain mortgages or deeds of trust securing such properties as provided in the agreements with the FHLB.

RESULTS OF OPERATIONS
Net Income : The quarter ended June 30, 2014 produced net income of $37,910,000 compared to $37,338,000 for the same quarter one year ago. For the nine months ended June 30, 2014 , net income totaled $116,803,000 compared to $108,598,000 for the same period one year ago. Net income for the quarter and nine months ended June 30, 2014 benefited from higher net interest income and overall lower credit costs, which included the reversal of loan loss provision and reduced losses on real estate acquired through foreclosure for the nine month period. Some of this benefit was offset by higher other expense during these periods.
For the quarter and nine months ended June 30, 2014, net interest income was higher by $8,563,000 and $19,054,000, respectively. The provision for loan losses amounted to a reversal of $3,000,000 and $11,936,000 for the quarter and nine months ended June 30, 2014 , respectively, as compared to a provision of $0 and $3,600,000 for the quarter and nine months ended June 30, 2013 , respectively. Gains/losses recognized on real estate acquired through foreclosure was a net loss of $2,056,000 and $3,454,000 for the quarter and nine months ended June 30, 2014 , respectively, as compared to a net gain of $176,000 and a net loss of $7,145,000 for the quarter and nine month periods one year ago, respectively. For the quarter and nine months ended June 30, 2014, other income was $3,013,000 and $4,500,000 higher, respectively, and other expense was $11,683,000 and $28,398,000 higher, respectively. Income tax provision was $89,000 and $6,178,000 higher for the quarter and nine months ended June 30, 2014, respectively. Please see the related discussions below about these changes.
Net Interest Income : Net interest income was $103,279,000 for the quarter ended June 30, 2014 , compared to $94,716,000 for the same quarter one year ago, due to increased interest income on mortgage-backed securities and 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.

46
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



Rate / Volume Analysis:
Comparison of Quarters Ended
6/30/14 and 6/30/13
Comparison of Nine months Ended
6/30/14 and 6/30/13
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
(In thousands)
Interest income:
Loans and covered loans
$
4,536

$
(9,379
)
$
(4,843
)
$
3,516

$
(24,520
)
$
(21,004
)
Mortgaged-backed securities
4,471

4,085

8,556

11,985

14,637

26,622

Investments (1)
933

2,189

3,122

2,394

4,619

7,013

All interest-earning assets
9,940

(3,105
)
6,835

17,895

(5,264
)
12,631

Interest expense:
Customer accounts
2,622

(4,769
)
(2,147
)
6,031

(13,365
)
(7,334
)
FHLB advances and other borrowings
—

419

419

2,154

(1,243
)
911

All interest-bearing liabilities
2,622

(4,350
)
(1,728
)
8,185

(14,608
)
(6,423
)
Change in net interest income
$
7,318

$
1,245

$
8,563

$
9,710

$
9,344

$
19,054

___________________
(1)
Includes interest on cash equivalents and dividends on FHLB stock
Provision for Loan Losses : The Company recorded a $ 3,000,000 reversal of the provision for loan losses during the quarter ended June 30, 2014 , while $ 0 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $162,357,000 , or 1.10% , of total assets at June 30, 2014 , compared to $233,403,000 , or 1.79% , of total assets one year ago. Non-accrual loans decreased from $148,655,000 at June 30, 2013 , to $94,226,000 at June 30, 2014 , a 36.6% decrease. The Company had net recoveries of $2,219,000 for the quarter ended June 30, 2014 , compared with $4,780,000 of net charge-offs for the same quarter one year ago. The improvement in the provision for loan losses is in response to three primary factors: first, the amount of NPAs improved year-over-year; second, non-accrual loans as a percentage of net loans decreased from 2.01% at June 30, 2013 , to 1.20% at June 30, 2014 ; and third, the percentage of loans 30 days or more delinquent decreased from 2.27% at June 30, 2013 , to 1.41% at June 30, 2014 . Management believes the allowance for loan losses, totaling $114,150,000 , or 1.35% 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 June 30, 2014 .
Other Income : The quarter ended June 30, 2014 produced total other income of $8,072,000 compared to $5,059,000 for the same quarter one year ago, an increase of $3,013,000, 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, December 6, 2013, and May 2, 2014. Please see Note B for additional information.
Other Expense : The quarter ended June 30, 2014 produced total other expense of $53,293,000 compared to $41,610,000 for the same quarter one year ago, a 28.1% increase. Total other expense for the quarters ended June 30, 2014 and 2013 equaled 1.47% and 1.28%, respectively, of average assets. The number of staff, including part-time employees on a full-time equivalent basis, was 1,948 and 1,423 at June 30, 2014 and 2013 , respectively. Higher staff and occupancy expense was due to an increase in the number of branches from 185 as of June 30, 2013 to 253 as of June 30, 2014 . Additionally, information technology, ATM expenses and debit card charges were higher.
Loss on Real Estate Acquired Through Foreclosure: The quarter ended June 30, 2014 , produced a net loss on the sale of real estate acquired through foreclosure of $2,056,000 compared to a net gain of $176,000 for the same quarter one year ago. The table below indicates some of the activity in the gain (loss) on real estate acquired through foreclosure.

47
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations



Quarter Ended June 30,
2014
2013
(In thousands)
Net Gain on Sale
$
2,466

$
2,973

REO Writedowns
(2,953
)
(2,032
)
REO Operating Expenses
(1,569
)
(765
)
Gain (loss) on real estate acquired through foreclosure, net
$
(2,056
)
$
176

Taxes : Income taxes increased to $21,092,000 for the quarter ended June 30, 2014 , as compared to $21,003,000 for the same period one year ago. The effective tax rate for the quarter ended June 30, 2014 was 35.75% compared to 36.00% for the quarter ended June 30, 2013 . 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 Exchange Act that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Company’s Chief Executive Officer and the Company’s 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.

48


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 the 2013 Form 10-K for the year ended September 30, 2013 . These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended June 30, 2014 .
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
April 1, 2014 to April 30, 2014
441,033

$
22.10

441,033

7,983,601

May 1, 2014 to May 31, 2014
742,900

21.14

742,900

7,240,701

June 1, 2014 to June 30, 2014
316,067

22.23

316,067

6,924,634

Total
1,500,000

$
21.64

1,500,000

6,924,634

___________________
(1)
The Company's only stock repurchase program was publicly announced by its Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 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

49

(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 June 30, 2014 formatted in XBRL

50

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 11, 2014
/ S /    R OY M. W HITEHEAD
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer
August 11, 2014
/S/    DIANE L. KELLEHER
DIANE L. KELLEHER
Senior Vice President and Chief Financial Officer

51
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