Washington Federal, Inc.
Annual Report 2016.
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2016 ANNUAL REPORT
TABLE OF CONTENTS
Business Description
Letter to Stockholders
Management’s Discussion and Analysis
Selected Financial Data
Audited Financial Statements
Notes to the Financial Statements
Management’s Report on Internal Controls
Audit Reports
Stock Performance Graphs
General Corporate Information
1
2
5
18
19
25
62
62
64
65
BuSiNESS DESCripTiON
BuSiNESS DESCripTiON
Washington Federal, Inc. (“Company” or “Washington Federal”) is a bank holding company headquartered in Seattle,
Washington that conducts its operations through Washington Federal, National Association (“Bank”), a federally chartered
national bank subsidiary.
The Company had its origins on April 24, 1917 in Ballard, Washington and this year is celebrating its First 100 Years in
business. Washington Federal is engaged primarily in providing lending, depository, insurance and other banking services
to consumers, mid-sized to large businesses, and owners and developers of commercial real estate. On November 9, 1982
the Company listed and began trading on the NASDAQ. Profitable operations have been recorded every year since and the
Company is often leading the industry in important measures of financial performance such as efficiency and capital strength.
Today the stock trades at 85 times its original 1982 offering price, has paid 135 consecutive quarterly cash dividends and, with
cash dividends reinvested, has returned 12,177% total shareholder return to those who invested 34 years ago.
Over the years, the Company has expanded to serve banking clients in eight western states. While much has changed
since its founding, one constant has been the commitment to doing business with integrity and treating employees, clients and
investors fairly. Our tagline “invested here” is intended to reflect our people-first values and express the Company’s dedication
to helping our neighborhoods and communities thrive.
FiNANCiAL HiGHLiGHTS
As of and for the year end September 30,
2016
2015
% Change
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands, except per share data)
$ 14,568,324
284,049
1,117,339
9,170,634
2,906,440
10,631,703
1,830,000
1,955,679
160,316
1.67
0.54
21.04
92,936
$14,888,063
450,368
849,983
9,910,920
2,490,510
10,600,852
2,080,000
1,975,731
164,049
1.78
0.55
22.03
89,681
8.33%
1.12
50.80
8.21%
1.10
49.54
+2.2%
+58.6
(23.9)
+8.1
(14.3)
(0.3)
+13.7
+1.0
+2.3
+6.6
+1.9
+4.7
(3.5)
+1.5
1.8
+2.5
(1) Calculated as total operating costs divided by net interest income, plus other income (excluding non-operating gains).
1
TO Our STOCkHOLDErS
Fellow Stockholder,
It is my privilege to report that in 2016 your Company completed its ninety-ninth year in business with record results.
Net income for the year totaled $164,049,000, a 2.3% increase over prior year earnings of $160,316,000. Earnings per share
improved for the sixth year in succession to $1.78 from $1.67, a 6.6% increase from fiscal 2015 and also the highest in our
history. It was a great year in virtually all regards. Washington Federal has now reported profitable operations to shareholders
for 34 consecutive years since our initial public offering in 1982.
The strong financial performance of the Company translated to healthy rewards for shareholders, with total return for the
year of 19.69%. In January, the cash dividend increased by 7.7% to fourteen cents per share. Contributing to increasing
shareholder returns over the last few years has been our disciplined approach to repurchasing shares. During the fiscal year,
3,867,563 shares, representing 4.16% of those outstanding, were repurchased at a weighted average price of $22.72, and in
September the Board of Directors approved an additional five million shares for the program. We believe that repurchase of our
stock continues to be a viable alternative for excess capital, although investment in growth is always preferable. I’d like to call
your attention to the accompanying chart that compares the performance of the Company’s stock to some of the peer banks
within our market going back to the onset of the last recession. The chart visually displays the value of long-term thinking and
our conservative approach to financial management.
1.20
1.60
1.40
40
4.44
Stock Performance Comparison
Several operational accomplishments contributed to our
good results. For example, one of our key strategies is
to diversify the loan portfolio by increasing the volume
of loans originated for business purposes. I am pleased
to report that management delivered on the strategy as
commercial loans represented nearly 70% of all new loan
originations, which totaled a record $3.9 billion. We favor
commercial over consumer loans at present for two reasons:
1) Reduced exposure to rising interest rates due to shorter
terms and floating rates, and 2) Fewer regulatory burdens as
commercial borrowers are presumed by the government to
be sophisticated. Consumer loans outstanding are centered
in plain vanilla, thirty-year fixed-rate mortgages that we
originate for our own portfolio. Mortgage lending is still a
large part of our business and remains very important to our
long-term prosperity. That portfolio is composed of the highest quality loans we place on the books, and has historically been a
source of earnings stability during recessionary periods. We are in the mortgage business for the long haul.
*Stock prices obtained from Yahoo! Finance and reflect monthly adjusted (stock
splits and dividends) close prices. Chart reflects the value of $1 invested in each
stock on 1/07.
January 2007 month end chosen to coincide with average peak in stock price
among the 6 banks
Banner BanZions Bank Western Al Umpqua Bank
UMPQ-Adj Close
WAFD-Adj Close
BANR-Adj Close
COLB-Adj Close
ZION-Adj Close
WAL-Adj Close
WAFD
Jan-10
Jan-07
Jan-14
Jan-15
Jan-11
Jan-16
Jan-09
Jan-13
Jan-08
Jan-12
0.60
0.80
0.20
0.40
0.00
1.00
We also made substantial progress toward the goal of improving the bank’s deposit mix. Ten years ago certificates of deposit
(“CDs”) represented nearly 80% of total deposits. At September 30th, the funding concentration in CDs had been reduced to
43%. Our goal is to increase transaction accounts until CDs represent 20% or less of total deposits. While more expensive to
service, transaction accounts are a more stable source of funds over time and through business cycles.
A strong capital position is the keystone of our financial management philosophy. Like equity in your own home,
the capital on our balance sheet allows us to operate with less debt and enhances our financial stability. Our conservative
approach has always led us to hold more capital than other banks of similar size. We know that there is a measurable cost of
underleveraged capital during periods of economic prosperity, but we have yet to develop a formula that can tell us exactly
the right amount of cushion needed to get through the next recession. We gladly pay a reasonable opportunity cost in times
of economic expansion to insure that Washington Federal will be standing strong after the next crisis passes, just as we were
after the Great Recession. At fiscal year-end, SNL, an independent bank rating agency, listed Washington Federal as having the
strongest capital position among the 100 largest banks in the United States after adjusting for the riskiness of assets.
2
TO Our STOCkHOLDErS (CONTINUED)
The primary driver of profits in our business is known as Net Interest Income, which is the net difference between interest
income from earning assets and interest expense paid for funding. Despite ultra low yields on loans and investments, Net
interest Income improved by $6.8 million over the prior year. The improvement was accomplished largely by shifting funds from
lower yielding investments to higher yielding loans. We have also worked tenaciously over the last several years to position the
Company to benefit somewhat from higher interest rates. Should both long and short term rates move higher in tandem, we
expect that Net Interest Income would improve.
Our business model has historically focused on margin and therefore has not generated a prodigious amount of fee income.
Although Other Income increased during the past year, this is one area that holds prospects for improved performance. One
strategic initiative will add significant economic value to our consumer checking products that we believe clients will welcome
with a willingness to pay. Another opportunity is to begin collecting fees that we chose to forego last year due to the impact to
clients of the system conversion described below. Lastly, we hope to continue to grow our insurance revenues.
Expenses increased from the prior year by $10.6 million, generally due to higher spending on technology early in the fiscal
year, although costs are now trending lower. Our efficiency ratio, a measure of pennies spent to produce one dollar of revenue,
amounted to 50.8%; a high ratio by our standards yet still among the best in the industry. We expect the efficiency ratio to
improve this year, although investors should know that cost pressures, particularly labor related expenses, are increasing.
Finally, net income was bolstered by several events, including a $10 million pre-tax gain on the sale of real estate owned.
Improved asset quality also enabled the Company to recapture $6.3 million in expense previously taken for expected loan losses
that did not materialize. It seems each year we experience some unexpected gains and that may continue; however, investors
should be aware that there is always the potential for non-recurrence. The sum of the parts enabled Return on Assets to increase
to 1.12%, versus 1.10% in the prior year, while Return on Equity increased from 8.21% to 8.33%.
Financial results were especially impressive given that the first half of the fiscal year found management attention laser-
focused on the conversion of virtually all of the Company’s operating systems. Planning, implementation and the subsequent
cleanup activities were incredibly intense and did not really abate until the end of the second fiscal quarter, leaving many of
my colleagues in need of a well-earned vacation. The project was a terrific team building experience though that created great
confidence in our ability to execute on even the biggest and most complex tasks. Improving our competitiveness, the new
systems provide real time processing consistent with the expectation of today’s market, and should also provide growth capacity
for at least a generation. The total upgrade investment amounted to approximately $40 million and will increase the baseline
cost of information technology expense by $2-3 million per year. Technology continues to advance, so ongoing investment
will be needed to maintain competitive products and provide for ever-improving security measures to protect sensitive client
information. The conversion did entail some disruption and we are ever so thankful to our clients for their patience with
this process.
Although we wish that the endless rulemaking driven by Congress would stop, we appreciate our regulators and believe
that over time we have built a relationship of mutual trust that makes it easier for all of us to function within an amazingly
complex environment. This year a brief comment on our consumer sales practices is necessary in light of well-publicized
shortcomings found at another institution. Investors and clients alike should know that our branch personnel have never
operated on commission, and do not face hard cross-selling goals. Rather, they are trained to have conversations with our clients
to identify needs that can be matched against the benefits of our products. They are also trained that accounts are to be opened
and fee services provided only when the client both wants and needs them. Our view has always been that if we simply treat
people fairly and conduct business with integrity, in the long run the world will find a path to our door. For the sake of society,
I hope that we’re right.
3
This year there have been some executive management changes that deserve
acknowledgement. Executive Vice Presidents Linda Brower, Tom Kasanders and Jack
Jacobson have been virtually indispensable in building our capabilities over the past many
years. As Chief Administrative Officer, Linda transformed our back office operations to
support a much larger and more complex institution than she found, while Tom and Jack
led unprecedented growth in the Business Banking and Commercial Real Estate segments,
respectively. Their retirements come too soon for me, but are healthy for the organization as
they open new opportunities for those they have trained so well for succession. On behalf
of everyone at Washington Federal, I thank them for their professionalism, hard work,
support and friendship and wish them the very best futures. I also wish to acknowledge and
congratulate Brent Beardall for his title promotion. In July, he became only the sixth person
in nearly a century to be awarded the title of President.
We also continue to update and diversify the Board of Directors. In September we
added Erin Lantz to the Board. Erin is Vice President and General Manager of Mortgages
at Zillow Group, Inc. She brings deep knowledge of the entire home buying and financing
process, along with a keen understanding of consumer behaviors and the value of big data. I look forward to introducing her to
you at the upcoming Annual Meeting.
Looking to the future, prospects for growth in our core business are as promising as they’ve been in some time. The
Company is in great shape financially, with the deepest management bench in our long history. New systems are stable and
being steadily enhanced, asset quality is nearing historic highs, the pipeline for lending activity is robust and most of our
Western U.S markets are prosperous and experiencing faster than average growth. While we haven’t forgotten the hard lessons
of the last economic downturn, it’s exciting to have the systems, leadership and financial wherewithal to be once again focused
on growth and service to our clients as we celebrate our First 100 Years. We won’t be here to see it, but as always we’ll go about
our business with a spirit of stewardship intended to enable a future generation to have a chance at celebrating the Second
100 Years.
In closing, allow me to thank the Board of Directors and my colleagues on the Executive Management Committee and
throughout our eight state territory for their hard work and support of the Company’s values throughout a very interesting,
challenging and in the end, a most rewarding year.
I look forward to seeing you at the Sheraton Hotel in downtown Seattle on January 18, 2017 at 2:00 P.M for the Annual
Meeting of Shareholders. In the meantime, you can help our business grow and prosper by referring your friends, neighbors and
the businesses you associate with to Washington Federal for all their banking needs.
Sincerely,
Roy M. Whitehead
Chairman of the Board and Chief Executive Officer
4
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS
We make statements in this Annual Report that constitute forward-looking statements. Words such as “expects,”
“anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions as well as future
or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking
statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of
the Company and are based on the beliefs and assumptions of the management of the Company and the information
available to management at the time that these disclosures were prepared. The Company intends for all such forward-
looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results
or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are
beyond the Company’s control. Actual outcomes and results may differ materially from those expressed in, or implied
by, the Company’s forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following
uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under
“Item 1A. Risk Factors” contained in our Form 10-K and in any of the Company’s other subsequent Securities and
Exchange Commission filings, which could cause our future results to differ materially from the plans, objectives,
goals, estimates, intentions, and expectations expressed in forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
a deterioration in economic conditions, including declines in the real estate market and home sale volumes
and financial stress on borrowers as a result of the uncertain economic environment;
economic downturn, including high unemployment rates and declines in housing prices and
property values;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve
System and the U.S. Government;
fluctuations in interest rate risk and changes in market interest rates;
the Company’s ability to make accurate assumptions and judgments about the collectability of its loan
portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
the Company’s ability to successfully complete merger and acquisition activities and realize expected
strategic and operating efficiencies associated with such activities;
the Company’s ability to manage its expenses to remain at levels that are appropriate for its business
activities and their level of complexity;
legislative and regulatory limitations, including those arising under the Dodd-Frank Wall Street Reform Act
and potential limitations in the manner in which we conduct our business and undertake new investments
and activities;
the ability of the Company to obtain external financing, including client deposits and wholesale borrowing
sources, to fund its operations or obtain this financing on favorable terms;
changes in other economic, competitive, governmental, regulatory, and technological factors affecting the
Company’s markets, operations, pricing, products, services and fees;
the ability of the Company to identify and mitigate information security risks;
the success of the Company at managing the risks involved in the foregoing and managing its business; and
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the
Company’s control.
All forward-looking statements speak only as of the date on which such statements are made, and Washington Federal
undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances
arising after the date the forward-looking statement was made.
5
GENERAL
Washington Federal, Inc. is a Washington corporation headquartered in Seattle, Washington. The Company is
a bank holding company that conducts its operations through a national bank subsidiary, Washington Federal,
National Association. 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 commercial and consumer 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.
The Company’s fiscal year end is September 30th. All references to 2016, 2015 and 2014 represent balances as of
September 30, 2016, September 30, 2015 and September 30, 2014, or activity for the fiscal years then ended.
CRITICAL
ACCOUNTING
POLICIES
Preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires the use of estimates and assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses in the Company’s consolidated financial statements. Accordingly, estimated amounts may
fluctuate from one reporting period to another due to changes in assumptions underlying estimated values.
INTEREST
RATE RISK
The Company has determined that the only accounting policy critical to an understanding of the consolidated
financial statements of Washington Federal relates to the methodology for determining the amount of the allowance
for loan losses. The Company maintains an allowance to absorb losses inherent in the loan portfolio. The allowance
is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio.
The general loan loss allowance is established by applying a loss percentage factor to the different loan types. For
example, residential real estate loans are not individually analyzed for impairment and loss exposure because of the
significant number of loans, their relatively small balances and their historically low level of losses. See the “Asset
Quality and Allowance for Loan Losses” section below for additional information about establishing the loss factors.
Specific allowances may be established for loans that are individually evaluated.
The primary source of income for the Company is net interest income, which is the difference between the interest
income generated by interest-earning assets and the interest expense incurred for interest-bearing liabilities. The level
of net interest income is a function of the average balance of interest-earning assets and interest-bearing liabilities and
the difference between the yield on earning assets and the cost of interest-bearing liabilities. Both the pricing and mix
of the Company’s interest-earning assets and interest-bearing liabilities influence these factors. All else being equal,
if the interest rates on the Company’s interest-bearing liabilities increase at a faster pace than the interest rates on its
interest-earning assets, the result would be a reduction in net interest income and with it, a reduction in net earnings.
Based on Management’s assessment of the current interest rate environment, the Company has taken steps, including
growing shorter-term loans and transaction deposit accounts, investing in variable-rate securities and extending the
maturity on borrowings, to position the Company for changing interest rates.
The Company’s balance sheet strategy, in conjunction with low operating costs, has allowed the Company to manage
interest rate risk, within guidelines established by the Board, through all interest rate cycles. It is management’s
objective to grow the dollar amount of net interest income, through the rate cycles, acknowledging that there will be
some periods of time when that will not be feasible.
Management relies on various measures of interest rate risk, including modeling of changes in the Company’s
forecasted net interest income under various rate change scenarios, the impact of interest rate changes on the net
portfolio value (“NPV”) and an asset/liability maturity gap analysis.
Net Interest Income Sensitivity. We estimate the sensitivity of our net interest income to changes in market interest
rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth,
deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate
sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities,
including the maturity structure of assets and liabilities and their repricing characteristics during the periods of
changes in market interest rates. The analysis assumes a constant balance sheet. Actual results would differ from the
assumptions used in this model, as Management monitors and adjusts loan and deposit pricing and the size and
composition of the balance sheet to respond to changing interest rates.
In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the
model estimates that net interest income would increase by 3.2% in the next year. This compares to an estimated
decrease of 2.2% as of the September 30, 2015 analysis. It is noted that a flattening yield curve where the spread
between short-term rates and long-term rates decreases would likely result in lower net interest income. However,
Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long
term rates over two years would result in a net interest income increase of 2.1% in the first year and increase of 4.4%
in the second year assuming a constant balance sheet and no management intervention.
6
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS (CONTINUED)
NPV Sensitivity. The NPV is an estimate of the market value of shareholders’ equity at a point in time. It is derived
by calculating the difference between the present value of expected cash flows from interest-earning assets and the
present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity
of the NPV to changes in interest rates provides a longer term view of interest rate risk as it incorporates all future
expected cash flows. As of September 30, 2016, in the event of an immediate and parallel increase of 200 basis points
in interest rates, the NPV is estimated to decline by $479 million or 18.6% and the NPV to total assets ratio to
decline to 14.8% from a base of 16.9%. As of September 30, 2015, the NPV in the event of a 200 basis point increase
in rates was estimated to decline by $536 million or 19.7% and the NPV to total assets ratio to decline to 15.9% from
a base of 18.4%. The decreased NPV sensitivity and lower base NPV ratio is primarily due to lower interest rates as of
September 30, 2016.
Repricing Gap Analysis. At September 30, 2016, the Company had approximately $1.5 billion more in liabilities
subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (10.1)% of
total assets. This compares to the (13.4)% gap as of September 30, 2015. A negative repricing gap implies that funding
costs will change more rapidly than interest income on earning assets with movements in interest rates. A negative
repricing gap typically results in lower margins when interest rates rise and higher margins when interest rates
decline. The interest rate gap analysis provides management with a high-level indication of interest rate risk, but it is
considered less reliable than more detailed modeling. Cash and cash equivalents of $450 million and stockholders’
equity of $2.0 billion provide management with additional flexibility in managing interest rate risk going forward.
The following table shows the estimated repricing periods for earning assets and paying liabilities:
September 30, 2016
Within One
Year
Repricing Period
After 1 year -
before 6 Years
(In thousands)
Thereafter
Total
Earning Assets (1) . . . . . . . . . . . . . . . .
$
5,095,776
$
4,885,359
$
3,763,346
$ 13,744,481
Paying Liabilities (2) . . . . . . . . . . . . . .
(6,599,318)
(3,922,868)
(2,174,161)
(12,696,347)
Excess (Liabilities) Assets . . . . . . . . . . .
$ (1,503,542)
$
962,491
$
1,589,185
Excess as % of Total Assets . . . . . . . . .
Policy limit for one year excess . . . . . .
(10.10)%
(20.00)%
(1) Asset repricing period includes estimated prepayments based on historical activity.
(2) Liability repricing includes estimated duration of non-maturity deposits.
Interest Rate Spread. The interest rate spread is measured as the difference between the rate on total loans and
investments and the rate on costing liabilities at the end of each period. The interest rate spread decreased to 2.65%
at September 30, 2016 from 2.73% at September 30, 2015. The spread decrease of 8 basis points is primarily due to
payoffs of loans at generally higher interest rates and new loan originations being at lower interest rates, as well as an
increase in the proportion of funding provided by FHLB advances at rates higher than the average cost of customer
deposits. As of September 30, 2016, the weighted average rate on loans, mortgage backed securities and investments
decreased by 5 basis points to 3.58% compared to September 30, 2015, while the weighted average cost of funds
increased by 3 basis point to 0.93%.
SEP
2016
JUN
2016
MAR
2016
DEC
2015
SEP
2015
JUN
2015
MAR
2015
DEC
2014
Interest rate on loans and mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.86% 3.92% 3.94% 3.90% 3.94% 3.96% 4.10% 4.14%
Interest rate on investment securities . . . . . . .
Combined earning assets . . . . . . . . . . . . . . . .
Interest rate on customer accounts . . . . . . . . .
Interest rate on borrowings . . . . . . . . . . . . . . .
Combined cost of funds . . . . . . . . . . . . . . . . .
1.25
3.58
0.50
3.15
0.93
1.17
3.61
0.51
3.13
0.94
1.29
3.69
0.50
3.23
0.93
1.25
3.61
0.48
3.20
0.90
1.19
3.63
0.48
3.35
0.90
1.12
3.61
0.48
3.43
0.90
0.94
3.63
0.48
3.49
0.92
1.02
3.68
0.50
3.49
0.94
Interest rate spread . . . . . . . . . . . . . . . . . . . . .
2.65% 2.67% 2.76% 2.71% 2.73% 2.71% 2.71% 2.74%
7
The chart below shows the volatility of our period end net interest spread (dashed line measured against the right
axis) compared to the relatively consistent growth in net interest income (solid line measured against the left axis).
The relative consistency of net interest income is accomplished by actively managing the size and composition of the
balance sheet through different rate cycles.
Net Interest Margin. The net interest margin is measured using the interest income and expense over the average
assets and liabilities for the period. The net interest margin increased to 3.11% for the year ended September 30, 2016
from 3.08% for the year ended September 30, 2015. The yield on earning assets increased 2 basis points to 3.97%
and the cost of interest bearing liabilities declined by 1 basis point to 0.93%. The higher yield on earning assets is the
result of changes in the asset mix as the average balance of mortgage-backed securities and other investment securities
decreased while the average balance of loans receivable increased. The decrease in interest cost was due to changes in
the mix of customer deposits and FHLB advances.
For the year ended September 30, 2016, average earning assets increased by 0.6% to $13,530,558,000, up from
$13,444,499,000 for the year ended September 30, 2015. During 2016, average loans receivable increased
$912,916,000 or 10.6%, while the combined average balances of mortgage backed securities, other investment
securities and cash decreased by $802,078,000 or 17.0%. Management views organic loan growth as the highest and
best use of capital, thus the shift in earning assets away from investment securities and into loans receivable is seen
as beneficial.
During 2016, average customer deposit accounts decreased $66,870,000 or 0.6% and the average balance of
borrowings increased by $143,530,000 or 7.8% from 2015.
8
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS (CONTINUED)
The following table sets forth the information explaining the changes in the net interest income and net interest
margin for 2016 compared to the prior year.
Twelve Months Ended
September 30, 2016
Twelve Months Ended
September 30, 2015
Average
Balance
Interest
(In thousands)
Average
Rate
Average
Balance
Interest
Average
Rate
(In thousands)
Assets
Loans and covered loans . . . . . .
$
9,511,351 $ 454,085
4.77%
$ 8,598,435 $ 437,002
5.08%
Mortgaged-backed securities . . .
Cash & Investments . . . . . . . . .
2,737,947
1,167,596
62,949
16,282
FHLB & FRB stock . . . . . . . . . .
113,664
3,477
Total interest-earning assets . . .
13,530,558
536,793
2.30
1.39
3.06
3.97%
3,073,180
1,634,441
71,392
20,363
138,443
1,796
2.32
1.25
1.30
13,444,499
530,553
3.95%
Other assets . . . . . . . . . . . . . . . .
1,181,975
Total assets . . . . . . . . . . . . . . . . . . .
$ 14,712,533
Liabilities and Equity
1,102,827
$ 14,547,326
Customer accounts . . . . . . . . . .
$ 10,589,817 $
52,485
FHLB advances . . . . . . . . . . . . .
1,992,434
64,059
Total interest-bearing liabilities
12,582,251
116,544
0.50%
3.22
0.93%
$ 10,656,687 $ 51,054
0.48%
1,848,904
66,018
3.57
12,505,591
117,072
0.94%
Other liabilities . . . . . . . . . . . . .
161,446
Total liabilities . . . . . . . . . . .
12,743,697
Stockholders’ equity . . . . . . . . .
1,968,836
Total liabilities and equity . . . . . . .
$ 14,712,533
89,140
12,594,731
1,952,595
$ 14,547,326
Net interest income . . . . . . . . . . . .
$ 420,249
$ 413,481
Net interest margin . . . . . . . . . . . .
3.11%
3.08%
ASSET QUALITY &
ALLOWANCE FOR
LOAN LOSSES
The Company maintains an allowance to absorb losses inherent in the loan portfolio. The amount of the allowance
is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio.
The Company’s methodology for determining the appropriateness of the allowance is primarily based on a general
allowance methodology and also includes specific allowances. The Company also has a reserve for unfunded
commitments.
The loan loss allowance is primarily established by applying a loss percentage factor to the different loan types.
Management believes loan types are the most relevant factor in the allowance calculation for groups of homogeneous
loans as the risk characteristics within these groups are similar. The loss percentage factor is made up of two parts -
the historical loss factor (“HLF”) and the qualitative loss factor (“QLF”).
The HLF takes into account historical charge-offs by loan type. The Company uses a 10 year average of historical loss
rates for each loan category multiplied by an estimated loss emergence period. The loss emergence period is the likely
period of time during which a residential or commercial loan borrower experiencing financial difficulties might be
utilizing their cash reserves prior to becoming delinquent on their loan, plus the period of time that it takes the bank
to work out the loans. The Company’s use of a 10 year average is intended to encompass a full credit cycle.
The QLF is based on management’s continuing evaluation of the pertinent factors underlying the quality of the
loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience,
delinquency trends, current economic conditions, collateral values, geographic concentrations, seasoning of the loan
portfolio, specific industry conditions, and the duration of the current business cycle. These factors are considered
by loan type. Single family residential loan sub-types are evaluated in groups by loan to value, non-owner or owner
occupied, and delinquency status. Credit quality has been improving in most loan categories during the year, but at
different paces. In addition, loan growth or declines for each loan category are taken into consideration.
9
The total allowance for loan loss increased by $6,665,000, or 6.2% from $106,829,000 as of September 30, 2015 to
$113,494,000 at September 30, 2016. As of September 30, 2016, the Company had $366,000 of specific reserves for
individually evaluated loans and the remaining balance of $113,128,000 is general allowance, which was comprised
of $89,918,000 related to HLF and $23,210,000 related to qualitative factors. The Company released $6,400,000 of
allowance for loan losses in 2016 due in large part to net recoveries of previously charged off loans of $13,065,000.
This was comprised of $19,065,000 in recoveries and $6,000,000 in charge offs in 2016.
The ratio of the allowance for loan losses and reserves for unfunded commitments to total gross loans decreased to
1.07% as of September 30, 2016 from 1.13% as of September 30, 2015 due to the combination of improving credit
quality and loan growth.
The reserve for unfunded commitments was $3,235,000 as of September 30, 2016 compared to $3,085,000 as of
September 30, 2015.
The recovery of the carrying value of loans is susceptible to future market conditions beyond the Company’s control,
which may result in losses or recoveries differing from those estimated.
Restructured loans. Restructured single-family residential loans are reserved for under the Company’s loan loss
reserve methodology. Most troubled debt restructured (“TDR”) 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. As of September 30, 2016, single-family
residential loans comprised 87.2% of restructured loans. The concession for these loans is typically a payment
reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twelve months. Interest-only
payments may also be approved during the modification period.
Outstanding TDRs decreased to $261,531,000 as of September 30, 2016 from $302,713,000 as of the prior year end.
As of September 30, 2016, 96.2% of the restructured loans were performing. During 2016, there were additions of
$27,184,000 and reductions of $68,366,000 due to prepayments and transfers to real estate owned (“REO”).
Concessions for construction, land A&D and multi-family loans are typically an extension of maturity combined
with a rate reduction of normally 100 bps. Before granting approval to modify a loan in a TDR, a borrower’s ability
to repay is considered by evaluating its current income levels, debt to income ratio, credit score, loan payment history,
and an updated evaluation of the secondary repayment source.
If a loan is on non-accrual status before becoming a TDR it will stay on non-accrual status following restructuring
until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on
accrual status before it becomes a TDR, and it is concluded that a full repayment is highly probable, it will remain on
accrual status following restructuring. If the homogeneous restructured loan does not perform, it is placed in non-
accrual status when it is 90 days delinquent. For commercial loans, six consecutive payments on newly restructured
loan terms are required prior to returning the loan to accrual status. After the required six consecutive payments
are made, a management assessment may conclude that collection of the entire principal and interest due is still in
doubt. In those instances, the loan will remain on non-accrual. A loan that defaults and is subsequently modified
would impact the Company’s delinquency trend, which is part of the QLF component of the general reserve
calculation. Any modified loan that re-defaults and is charged-off would impact the HLF component of our general
reserve calculation.
Non-performing assets. Non-performing assets were $71,441,000, or 0.48% of total assets, at September 30, 2016
compared to $128,908,000, or 0.88% of total assets, at September 30, 2015.
10
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS (CONTINUED)
The following table provides detail related to the Company’s non-performing assets.
September 30,
Non-Performing Assets
2016
2015
$ Change
% Change
(In thousands)
Non-accrual loans:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,148
$
59,074
$
(25,926)
(43.9)%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction – custom . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land – acquisition & development (A&D) . . . . . . . . . . .
Land – consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . .
Multi-Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
58
510
776
7,100
583
239
754
732
—
1,273
2,558
2,176
—
563
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
680
(754)
(732)
58
(763)
(1,782)
4,924
583
(324)
(680 )
Total non-accrual loans . . . . . . . . . . . . . . . . . . . . . . .
42,414
67,810
(25,396)
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,027
61,098
(32,071 )
(100.0)
(100.0)
N/M
(59.9)
(69.7)
226.3
N/M
(57.5)
(100.0)
(37.5)
(52.5)
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . .
$ 71,441 $ 128,908 $
(57,467 )
(44.6)%
The ratio of the allowance for loan losses to non-accrual loans increased to 267.59% as of September 30, 2016 from
157.54% as of September 30, 2015. This is primarily due to the 37.5% decrease in non-accrual loans.
The principal sources of funds for the Company’s activities are loan repayments, net deposit inflows, repayments and
sales of investments, borrowings and retained earnings. Washington Federal’s principal sources of revenue are interest
on loans and interest and dividends on investments.
The Company’s net worth at September 30, 2016 was $1,975,731,000 or 13.27% of total assets as compared to
$1,955,679,000 or 13.42% of total assets at September 30, 2015. The Company’s net worth was impacted in the year
by net income of $164,049,000, the payment of $49,926,000 in cash dividends, treasury stock purchases that totaled
$87,850,000, as well as a decrease in accumulated other comprehensive income (loss) of $11,509,000. The Company
paid out 30.4% of its 2016 earnings in cash dividends to common shareholders, compared with 31.9% last year. For
the year ended September 30, 2016, the Company returned 88.7% of net income to shareholders in the form of cash
dividends, stock repurchases and warrant repurchases as compared to 110.9% for the year ended September 30, 2015.
Management believes the Company’s strong net worth position allows it to manage balance sheet risk and provide the
capital support needed for controlled growth in a regulated environment.
The Bank has a credit line with the Federal Home Loan Bank of Des Moines (“FHLB”) equal to 49.0% of total assets,
providing a substantial source of additional liquidity if needed. The level of FHLB stock held varies depending on the
amount of advances and other activities with the FHLB. As of September 30, 2016, the Bank had $2,391,411,000 of
additional borrowing capacity at the FHLB.
The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate
cash management advance program and fixed-rate term loan agreements. All borrowings are secured by stock of the
FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements
with the FHLB.
The Company’s cash and cash equivalents were $450,368,000 at September 30, 2016, which is an 58.6% increase
from the balance of $284,049,000 as of the prior year end. See “Interest Rate Risk” above and the “Statement of
Cash Flows” included in the financial statements for details regarding this change.
Available-for-sale and held-to-maturity securities. Available-for-sale securities decreased $457,669,000, or 19.23%,
during the year ended September 30, 2016 to $1,922,894,000 due to principal repayments of $537,255,000 and the
sale of $50,741,000 of available-for-sale securities that were partially offset by purchases of $137,591,000 of available-
for-sale securities. As of September 30, 2016, the Company had a net unrealized gain on available-for-sale securities of
$13,710,000, which is recorded net of tax as part of stockholders’ equity.
LIQUIDITY AND
CAPITAL
RESOURCES
CHANGES IN
FINANCIAL
CONDITION
11
Held-to-maturity securities declined by $225,617,000, or 13.73%, during the year ended September 30, 2016 to
$1,417,599,000 due to paydowns and maturities. There were no held to maturity securities purchased or sold during
the year ended September 30, 2016. Rising interest rates may cause these securities to be subject to unrealized losses.
As of September 30, 2016, the net unrealized gain on held-to-maturity securities was $23,957,000, which management
attributes to the change of interest rates since acquisition.
Loans receivable. Loans receivable, net of related contra accounts, increased $740,286,000, or 8.1%, to
$9,910,920,000 at September 30, 2016, from $9,170,634,000 one year earlier. This increase resulted primarily from
record high originations of $3,948,534,000, which represented a 27.2% increase over originations in the prior year.
There were also loan purchases of $105,420,000 during the year ended September 30, 2016. Commercial loan
originations accounted for 69.1% of total originations and consumer originations were 30.9%. The significant
increase in loan origination resulted from a strategic emphasis on commercial lending, coupled with growing
economies in all major markets. Loan repayments for 2016 totaled $2,935,167,000, a $516,620,000 or 21.4% increase
from the total repayments of $2,418,547,000 in 2015. Loan repayments continue to be relatively high due to the
ongoing historically low interest rate environment.
The following table presents the gross loan balances by category and the year over year change.
September 30, 2016
September 30, 2015
Change
(In thousands)
(In thousands)
$
%
Non-Acquired loans
Single-family residential . . . . . . . .
$ 5,621,066 51.3% $ 5,651,845
57.5% $
(30,779)
(0.5)%
Construction . . . . . . . . . . . . . . . .
1,110,411 10.1
Construction - custom . . . . . . . . .
Land - acquisition & development
Land - consumer lot loans . . . . . .
473,069
116,156
101,853
4.3
1.1
0.9
200,509
396,307
94,208
103,989
Multi-family . . . . . . . . . . . . . . . . .
1,118,801 10.2
1,125,722
Commercial real estate . . . . . . . . .
Commercial & industrial . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . .
956,164
946,648
134,785
8.7
8.6
1.2
986,270
612,836
127,646
2.0
4.0
1.0
1.1
11.5
10.0
6.2
1.3
909,902
453.8
76,762
21,948
(2,136)
(6,921)
(30,106)
333,812
7,139
19.4
23.3
(2.1)
(0.6)
(3.1)
54.5
5.6
Consumer . . . . . . . . . . . . . . . . . .
137,450
1.3
194,655
2.0
(57,205)
(29.4)
Total non-acquired loans . . . . . . . . . . .
10,716,403 97.9%
9,493,987
96.6%
1,222,416
12.9%
Acquired loans . . . . . . . . . . . . . . . . . . .
Credit impaired acquired loans . . . . . .
115,394
89,837
1.1
0.8
166,293
87,081
1.7
0.9
(50,899)
(30.6)
2,756
3.2
Covered loans . . . . . . . . . . . . . . . . . . . .
28,974
0.3
75,909
0.8
(46,935)
(61.8)
Total gross loans . . . . . . . . . . . . . . . . . .
10,950,608 100%
9,823,270
100%
1,127,338
11.5%
Less:
Allowance for probable losses . . .
Loans in process . . . . . . . . . . . . .
Discount on acquired loans . . . . .
Deferred net origination fees . . . .
113,494
879,484
11,306
35,404
Total loan contra accounts . . . . . . . . .
1,039,688
106,829
476,796
30,095
38,916
652,636
6,665
402,688
6.2
84.5
(18,789)
(62.4)
(3,512)
(9.0)
387,052
59.3
Net Loans . . . . . . . . . . . . . . . . . . . . . . .
$ 9,910,920
$ 9,170,634
$
740,286
8.1%
12
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS (CONTINUED)
The following table shows the change in the geographic distribution by state of the gross loan portfolio.
September 30,
2016
2015
Change
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.6%
49.8%
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.5
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.5
7.5
7.0
4.2
4.2
3.8
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.7
15.6
10.7
3.3
6.8
4.2
4.8
3.1
1.7
(2.2)
(1.1)
(1.2)
4.2
0.2
—
(0.6)
0.7
—
100% 100%
(1) Includes loans in other states and purchased loan pools and other loans without state property information.
As of September 30, 2016, FDIC covered loans net of related discounts were $28,974,000, a decrease of $46,935,000
or 61.8%, from $75,909,000 as of September 30, 2015. The decrease is attributable to FDIC loss share coverage on
commercial loans from the former Home Valley Bank that expired after September 30, 2015. The FDIC loss share
coverage for single family residential loans will continue for another four years. The remaining portfolio of covered
loans is expected to continue to decline over time, absent another FDIC assisted transaction. When FDIC loss share
agreements expire, any remaining loans will be transferred to the non covered portfolio. The Company continues to
accrue a liability for the termination of the loss share agreements for what is known as the clawback provision of the
agreement with the FDIC. The Company estimates the amount of this liability based on actual loss experience and
projected future losses and recoveries. Contractually, the amount that will have to be paid to the FDIC for a clawback
liability, if any, will be determined in 2020, after full expiry of the loss share agreements.
Non-performing assets. NPAs (excludes discounted acquired assets) decreased to $71,441,000 as of September 30,
2016 from $128,908,000 at September 30, 2015, a 44.6% decrease. The decrease is due to improving credit
conditions and credit quality as well as sales of REO. Non-performing assets as a percentage of total assets was 0.48%
at September 30, 2016 compared to 0.88% at September 30, 2015.
Restructured Loans. Total restructured loans declined to $261,531,000 as of September 30, 2016 from $302,713,000
as of September 30, 2015. As of September 30, 2016, 96.2% of the restructured loans were performing. The
$9,948,000 of non-performing restructured loans are included in the NPAs total. Total non-performing assets and
restructured loans as a percent of total assets has declined to 2.17% as of September 30, 2016 from 2.89% as of
September 30, 2015.
Real estate owned. As of September 30, 2016, real estate owned totaled $29,027,000, a decrease of $32,071,000 or
52.5% from $61,098,000 as of September 30, 2015 as the Bank continued to liquidate foreclosed properties. During
2016, the Company sold real estate owned properties for total net proceeds of $61,132,000.
Interest Receivable. Interest receivable was $37,669,000 as of September 30, 2016, a decrease of $2,760,000 or 6.83%
since September 30, 2015. The change is primarily due to lower yields on earning assets.
Bank Owned Life Insurance. Bank owned life insurance increased to $208,123,000 as of September 30, 2016
from $102,496,000 as of September 30, 2015. The Company purchased another $100,000,000 in bank-owned life
insurance during 2016 to assist in funding the growth of employee benefit costs.
Intangible assets. The Company’s intangible assets are made up of $291,503,000 of goodwill and the unamortized
balance of the core deposit intangible of $5,486,000 at September 30, 2016.
Customer deposits. As of September 30, 2016, customer deposits totaled $10,600,852,000 compared with
$10,631,703,000 at September 30, 2015, a $30,851,000 or 0.29% decrease due primarily to a reduction in time
deposits. Consistent with its management strategy, the Company was able to increase transaction accounts by
$184,714,000 or 3.2%, while time deposits decreased by $215,565,000 or 4.5%. The weighted average rate paid on
customer deposits during the year was 0.50%, an increase of 2 basis points from 2015, as a result of the low interest
rate environment.
13
FHLB advances and other borrowings. Total FHLB advances were $2,080,000,000 at September 30, 2016 as
compared to $1,830,000,000 at September 30, 2015. During 2016, new FHLB advances totaling $300,000,000
were executed coterminously with interest rate swaps to effectively fix the weighted average interest rate at 1.38% for
6.7 years as a hedge against rising interest rates. Partially offsetting these additional borrowings was the maturity of
$50,000,000 of short term borrowings with a rate of 0.61%.
Contractual obligations. The following table presents the Company’s significant fixed and determinable contractual
obligations, within the categories described below, by contractual maturity or payment amount.
September 30, 2016
Total
Less than
1 Year
1 to 5
Years
Over 5
Years
(In thousands)
Customer accounts (1) . . . . . . . . . . . . . . . . . . . . . .
$ 10,600,852
$ 8,900,492
$ 1,694,398
$
5,962
Debt obligations (2) . . . . . . . . . . . . . . . . . . . . . . . .
2,080,000
200,000
1,480,000
Operating lease obligations . . . . . . . . . . . . . . . . . .
31,191
4,902
13,130
400,000
13,159
$ 12,712,043 $ 9,105,394 $ 3,187,528 $
419,121
(1) Includes non-maturing customer transaction accounts.
(2) Represents final maturities of debt obligations.
These obligations, except for the operating leases, are included in the Consolidated Statements of Financial
Condition. The payment amounts of the operating lease obligations represent those amounts contractually due.
For highlights of the quarter-by-quarter results for the years ended September 30, 2016 and 2015, see Note Q,
“Selected Quarterly Financial Data (Unaudited)”.
COMPARISON OF 2016 RESULTS WITH 2015
Net Income: Net income increased $3,733,000, or 2.3%, to $164,049,000 for the year ended September 30, 2016 as
compared to $160,316,000 for the year ended September 30, 2015.
Net Interest Income: For the year ended September 30, 2016, net interest income was $420,249,000, an increase
of $6,768,000 from the year ended September 30, 2015. The increase was primarily driven by a higher average
balance on loans receivable. For the year ended September 30, 2016, average earning assets increased by 0.6% to
$13,530,558,000, up from $13,444,499,000 for the year ended September 30, 2015. During 2016, average loans
receivable increased $912,916,000 or 10.6%, while the combined average balances of mortgage backed securities,
other investment securities and cash decreased by $802,078,000 or 17.0%. The net interest margin increased to 3.11%
for the year ended September 30, 2016 from 3.08% for the year ended September 30, 2015. The yield on earning
assets increased 2 basis points to 3.97% and the cost of interest bearing liabilities declined by 1 basis point to 0.93%.
The higher yield on earning assets is the result of changes in the asset mix as the average balance of mortgage-backed
securities and other investment securities decreased while the average balance of loans receivable increased. The
decrease in interest cost was due to changes in the mix of customer deposits and FHLB advances.
RESULTS OF
OPERATIONS
14
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS (CONTINUED)
The following table sets forth certain information explaining changes in interest income and interest expense for
the period indicated compared to the same period one year ago. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest
income and interest expense attributable to changes in both volume and rate has been allocated proportionately to
the change due to volume and the change due to rate.
Rate / Volume Analysis:
($ in thousands)
Interest income:
Comparison of Year Ended
September 30, 2016 and
September 30, 2015
Volume
Rate
Total
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,395
$ (27,312)
$
17,083
Mortgaged-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,824)
(7,283)
29,288
(619)
4,883
(23,048)
Interest expense:
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(370)
1,801
FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,900
(5,859)
All interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,530
(4,058)
(8,443)
(2,400)
6,240
1,431
(1,959)
(528)
$
6,768
$ 25,758 $ (18,990)
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Includes interest on cash equivalents and dividends on FHLB & FRB stock.
Provision (Release) for Loan Losses: The Company recorded a release of allowance for loan losses of $6,400,000 for
the year ended September 30, 2016, which compares to a release of $11,162,000 for the year ended September 30,
2015. The releases recorded for both periods was a result of continued improvement in credit quality of the loan
portfolio offset by net growth in the loan portfolio. The related improvement in the credit quality of the loan
portfolio relates to the following factors.
The Company had recoveries, net of charge-offs, of $13,065,000 for the year ended September 30, 2016, compared
with $5,370,000 of net recoveries for the year ended September 30, 2015. Non-accrual loans were $42,414,000, or
0.28% of total assets, at September 30, 2016, as compared to $67,810,000, or 0.47% of total assets, at September 30,
2015, representing a decrease of 37.5%.
Unfunded commitments tend to vary depending on our loan mix and the proportion share of commercial loans.
The reserve for unfunded commitments was $3,235,000 as of September 30, 2016, which is an increase from
$3,085,000 at September 30, 2015. Management believes the allowance for loan losses plus the reserve for unfunded
commitments, totaling $116,729,000, or 1.07% of gross loans, is sufficient to absorb estimated losses inherent in the
portfolio. See Note E for further discussion and analysis of the allowance for loan losses as of and for the year ended
September 30, 2016.
Other Income: Other income was $47,036,000 for the year ended September 30, 2016, an increase of $6,613,000 or
16.4% from the $40,423,000 for the year ended September 30, 2015. The increase is primarily because 2016 included
a gain of $3,800,000 resulting from the sale-leaseback of a branch property. During 2015, the Company sold available-
for-sale securities for $246,826,000 and recognized a $9,641,000 gain on sale and recorded $10,554,000 of expense
related to prepayment of a Federal Home Loan Bank advance. Deposit fee income was $21,738,000 for the year
ended September 30, 2016 compared to $22,459,000 for the year ended September 30, 2015.
Other Expense: Operating expense was $235,447,000 for the year ended September 30, 2016, an increase of
$10,596,000 or 4.7% from the $224,851,000 for the year ended September 30, 2015. The increase in 2016 is
primarily due to higher information technology costs, which increased by $15,006,000, and other expense, which
increased by $4,390,000. These expenses were elevated due to the Company’s implementation of new core systems in
November 2015. Management believes that the new technology and systems better position the Company to support
future growth and expansion. These increases were partially offset by lower compensation and benefits expense,
which declined by $7,055,000. The number of staff, including part-time employees on a full-time equivalent basis,
was 1,806 and 1,838 at September 30, 2016 and 2015, respectively. Total operating expense for the years ended
September 30, 2016 and 2015 equaled 1.60% and 1.55%, respectively, of average assets.
15
Gain (Loss) on Real Estate Owned: Net gain on real estate owned was $10,046,000 for the year ended September 30,
2016, an increase of $742,000 or 8.0% from the $9,304,000 for the year ended September 30, 2015. This amount
includes ongoing maintenance expense, periodic valuation adjustments, and gains (losses) on sales of REO.
Income Tax Expense: Income tax expense was $84,085,000 for the year ended September 30, 2016, a decrease of
$5,118,000 or 5.74% from the $89,203,000 for the year ended September 30, 2015. The effective tax rate for 2016
was 33.89% as compared to 35.75% for the year ended September 30, 2015. The lower effective tax rate is primarily
due to the effects of the addition of bank owned life insurance and increased investment in low income housing tax
credit partnerships as well as tax free loans.
COMPARISON OF 2015 RESULTS WITH 2014
Net income increased $2,952,000, or 1.9%, to $160,316,000 for the year ended September 30, 2015 as compared
to $157,364,000 for the year ended September 30, 2014. Net interest income was higher in 2015 by $7,861,000
primarily due to loan growth and reduced cost of funds. Increases in operating expenses were attributable to a full
year of operations of 74 branches that were acquired in fiscal 2014 and the related increase in customer transactions.
Other income increased by $9,764,000 or 31.8% driven by increased volume of fee generating services related to the
acquired branches and transaction deposit accounts. Net income for the year ended September 30, 2015 continued to
benefit from improving credit quality. The release of allowance for loan losses amounted to $11,162,000 for the year
ended September 30, 2015 as compared to a release of $15,401,000 for the year ended September 30, 2014.
The following table sets forth certain information explaining changes in interest income and interest expense for
the period indicated compared to the same period one year ago. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest
income and interest expense attributable to changes in both volume and rate has been allocated proportionately to
the change due to volume and the change due to rate.
Rate / Volume Analysis:
($ in thousands)
Interest income:
Comparison of Year Ended
September 30, 2015 and
September 30, 2014
Volume
Rate
Total
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
30,507
$ (24,355)
$
6,152
Mortgaged-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense:
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,941)
(2,594)
22,972
1,879
(3,358)
(1,479)
(3,927)
2,166
(26,116)
(9,349)
(177)
(9,526)
(8,868)
(428)
(3,144)
(7,470)
(3,535)
(11,005)
$
7,861
24,451 $ (16,590)
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1) Includes interest on cash equivalents and dividends on FHLB & FRB stock.
Provision (Release) for Loan Losses: The Company recorded a release of allowance for loan losses of $11,162,000 for
the year ended September 30, 2015, which compares to a release of $15,401,000 for the year ended September 30,
2014. The releases recorded for both periods was a result of continued improvement in credit quality of the loan
portfolio offset by net growth in the loan portfolio. The related improvement in the credit quality of the loan
portfolio relates to the following factors.
The Company had recoveries, net of charge-offs, of $5,370,000 for the year ended September 30, 2015, compared
with $14,365,000 of net recoveries for the year ended September 30, 2014. Non-accrual loans were $67,810,000, or
0.47% of total assets, at September 30, 2015, as compared to $87,431,000, or 0.59% of total assets, at September 30,
2014, representing a decrease of 37.5%.
Unfunded commitments tend to vary depending on our loan mix and the proportion share of commercial loans. The
reserve for unfunded commitments was $3,085,000 at September 30, 2015, which is an increase from $2,910,000 at
September 30, 2014.
16
MANAGEMENT’S DiSCuSSiON AND ANALYSiS OF
FiNANCiAL CONDiTiON AND rESuLTS OF OpErATiONS (CONTINUED)
Other Income: Other income was $40,423,000 for the year ended September 30, 2015, an increase of $9,764,000
or 31.8% from the $30,659,000 for the year ended September 30, 2014. The increase is primarily due to deposit
fee income rising by $8,153,000 in 2015 as compared to 2014 because of an increase in the number of transaction
accounts and higher fees from client derivatives. In 2015, the Company had a $9,641,000 gain on sales of investment
securities and $10,554,000 of expense related to prepayment of a Federal Home Loan Bank advance.
Other Expense: Operating expense was $224,851,000 for the year ended September 30, 2015, an increase of
$20,842,000 or 10.22% from the $204,009,000 for the year ended September 30, 2014. The increase is primarily
due to an increase of $10,209,000 for compensation expense and $7,352,000 for product delivery expense. These
increases mostly relate to the addition of the employees from branches acquired during 2014 as they were with the
Company for a full year in 2015 and also from growth in our commercial banking business. The number of staff,
including part-time employees on a full-time equivalent basis, was 1,838 and 1,909 at September 30, 2015 and
2014, respectively. The decline in full-time equivalent employees occurred as the Company continues to consolidate
under-performing branches and streamline back-office operations. Total operating expense for the years ended
September 30, 2015 and 2014 equaled 1.55% and 1.43%, respectively, of average assets.
Gain (Loss) on Real Estate Owned: Net gain on real estate owned was $9,304,000 for the year ended September 30,
2015, compared to a loss of $2,743,000 for the year ended September 30, 2014. This amount includes ongoing
maintenance expense, periodic valuation adjustments, and gains (losses) on sales of REO.
Income Tax Expense: Income tax expense was $89,203,000 for the year ended September 30, 2015, an increase of
$1,639,000 or 1.9% from the $87,564,000 for the year ended September 30, 2014. The effective tax rate for was
35.75% for the years ended September 30, 2015 and 2014.
17
SELECTED FiNANCiAL DATA
Year ended September 30,
2016
Interest income . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . .
Provision (reversal) for loan losses . . . .
Other income . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Per share data
Basic earnings . . . . . . . . . . . . . . . . . .
Diluted earnings . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . .
September 30,
Total assets . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . .
Investment securities . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . .
Customer accounts . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . .
Number of
Customer accounts . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . .
Offices . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2015
2013
$
$
2014
(In thousands, except per share data)
530,553
117,072
413,481
(11,162)
49,727
224,851
249,519
89,203
160,316 $
533,697
128,077
405,620
(15,401)
27,916
204,009
244,928
87,564
157,364 $
$
516,291
136,159
380,132
1,350
20,074
164,240
234,616
83,111
151,505 $
536,793
$
116,544
420,249
(6,250)
57,082
235,447
248,134
84,085
164,049 $
$
1.79
1.78
0.55
$
1.68
1.67
0.54
$
1.56
1.55
0.41
$
1.45
1.45
0.36
2012
590,271
193,249
397,022
44,955
6,698
142,854
215,911
77,728
138,183
1.29
1.29
0.32
2016
$ 14,888,063
9,910,920
2,490,510
849,983
450,368
10,600,852
2,080,000
1,975,731
2015
$ 14,568,324
9,170,634
2,906,440
1,117,339
284,049
10,631,703
1,830,000
1,955,679
2014
$ 14,756,041
8,324,798
3,231,691
1,366,018
781,843
10,716,928
1,930,000
1,973,283
2013
$ 13,082,859
7,823,977
2,902,655
1,109,772
203,563
9,090,271
1,930,000
1,937,635
2012
$ 12,472,944
7,740,374
2,360,668
612,524
751,430
8,576,618
1,880,000
1,899,752
491,098
41,418
238
517,871
41,036
247
548,872
43,569
251
332,177
44,838
182
308,282
48,030
166
18
CONSOLiDATED STATEMENTS OF FiNANCiAL CONDiTiON
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity securities, at amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net of allowance for loan losses of $113,494 and $106,829 . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB & FRB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, including goodwill of $291,503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advance payments by borrowers for taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized; 134,307,818 and
133,695,803 shares issued; 89,680,847 and 92,936,395 shares outstanding . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss), net of taxes . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost; 44,626,971 and 40,759,408 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30,
September 30,
2016
2015
(In thousands, except
share data)
$
$
$
$
$
450,368
1,922,894
1,417,599
9,910,920
37,669
281,951
29,027
117,205
208,123
296,989
16,047
199,271
14,888,063 $
284,049
2,380,563
1,643,216
9,170,634
40,429
276,247
61,098
107,198
102,496
299,358
14,513
188,523
14,568,324
$
6,005,592
4,595,260
10,600,852
2,080,000
42,898
188,582
12,912,332
5,820,878
4,810,825
10,631,703
1,830,000
50,224
100,718
12,612,645
134,308
1,648,388
(11,156)
(739,686)
943,877
1,975,731
14,888,063 $
133,696
1,643,712
353
(651,836)
829,754
1,955,679
14,568,324
19
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLiDATED STATEMENTS OF OpErATiONS
Year ended September 30,
2016
2015
(In thousands, except share data)
2014
INTEREST INCOME
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
454,085
62,949
19,759
$
437,002
71,392
22,159
536,793
530,553
INTEREST EXPENSE
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (release) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision (release) for loan losses . . . . . . . . . . . .
OTHER INCOME
Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayment penalty on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER EXPENSE
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PER SHARE DATA
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock per share . . . . . . . . . . . . . . . . . . . . . . . .
Basic weighted average number of shares outstanding . . . . . . . . . . . . . . . . .
Diluted weighted average number of shares outstanding . . . . . . . . . . . . . . .
$
$
430,850
80,260
22,587
533,697
58,524
69,553
128,077
405,620
(15,401)
421,021
—
—
7,706
14,306
8,647
30,659
109,730
30,452
11,009
14,973
14,303
23,542
204,009
(2,743)
244,928
75,784
11,780
87,564
157,364
52,485
64,059
116,544
420,249
(6,250)
426,499
—
—
5,548
21,738
19,750
47,036
112,884
33,568
11,824
17,060
30,982
29,129
235,447
10,046
248,134
51,054
66,018
117,072
413,481
(11,162)
424,643
9,641
(10,554)
8,788
22,459
10,089
40,423
119,939
33,956
7,916
22,325
15,976
24,739
224,851
9,304
249,519
60,773
23,312
84,085
164,049 $
86,477
2,726
89,203
160,316 $
1.79
1.78
0.55
91,399,038
91,912,918
$
1.68
1.67
0.54
95,644,639
96,053,959
$
1.56
1.55
0.41
101,154,030
101,590,351
20
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLiDATED STATEMENTS OF COMprEHENSiVE iNCOME
Year ended September 30,
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) net of tax:
$ 164,049
2015
(In thousands)
$ 160,316
2014
$ 157,364
Net unrealized gains (losses) on available-for-sale securities . . . . . . . . . . . . . . . . .
Reclassification adjustment of net gains from sale of available-for-sale securities
included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on long-term borrowing hedges . . . . . . . . . . . . . . . . . .
Related tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,403)
(27,536)
22,924
—
516
(887)
(16,793)
6,171
(10,622)
(11,509)
$ 152,540
9,641
6,577
(11,318)
(14,287)
5,250
(9,037)
(20,355)
$ 139,961
—
(8,425)
14,499
(268)
99
(169)
14,330
$ 171,694
21
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLiDATED STATEMENTS OF STOCkHOLDErS' EQuiTY
(In thousands)
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Balance at September 30, 2013 . . . . . . . . . . . . . . .
$ 132,573 $ 1,625,051 $ 594,450
$
6,378 $ (420,817)
$ 1,937,635
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Dividends on common stock . . . . . . . . . . . . . . . . .
Compensation expense related to common stock
options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of common stock options . .
Restricted stock expense . . . . . . . . . . . . . . . . . . . . .
Treasury stock purchased . . . . . . . . . . . . . . . . . . . .
501
249
324
9,641
3,195
157,364
(45,665)
14,330
157,364
14,330
(45,665)
324
10,142
3,444
(104,291)
(104,291)
Balance at September 30, 2014 . . . . . . . . . . . . . . .
$ 133,323 $ 1,638,211 $ 706,149
$ 20,708 $ (525,108)
$ 1,973,283
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Dividends on common stock . . . . . . . . . . . . . . . . .
Compensation expense related to common stock
options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of common stock options . .
Restricted stock expense . . . . . . . . . . . . . . . . . . . . .
Treasury stock purchased . . . . . . . . . . . . . . . . . . . .
129
244
231
1,941
3,329
160,316
(36,711)
(20,355)
160,316
(20,355)
(36,711)
231
2,070
3,573
(126,728)
(126,728)
Balance at September 30, 2015 . . . . . . . . . . . . . . .
$ 133,696 $ 1,643,712 $ 829,754
$
353 $ (651,836)
$1,955,679
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Dividends on common stock . . . . . . . . . . . . . . . . .
Compensation expense related to common stock
options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of common stock options . .
Restricted stock expense . . . . . . . . . . . . . . . . . . . . .
Repurchase of stock warrants . . . . . . . . . . . . . . . . .
Treasury stock purchased . . . . . . . . . . . . . . . . . . . .
433
179
90
8,850
3,480
(7,744)
164,049
(49,926)
(11,509)
164,049
(11,509)
(49,926)
90
9,283
3,659
(7,744)
(87,850)
(87,850)
Balance at September 30, 2016 . . . . . . . . . . . . . . .
$ 134,308 $1,648,388 $ 943,877
$ (11,156)
$ (739,686)
$ 1,975,731
22
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLiDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, accretion and restricted stock expense . . . . . . . . .
Cash received from (paid to) FDIC under loss share . . . . . . . . . . . . . . . . . . . . .
Stock option compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (release) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on sale of investment securities and real estate owned, net . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in FDIC loss share receivable . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in federal and state income tax receivable . . . . . . . . . . . . .
Decrease (increase) in cash surrender value of bank owned life insurance . . . .
Net realized (gain) loss on sales of premises and equipment . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accrued expenses and other liabilities . . . . . . . . . . . . . . .
Net cash provided (used) by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans and principal repayments, net . . . . . . . . . . . . . . . . . . . . . . . .
Loans purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB & FRB stock purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB & FRB stock redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments and maturities of available-for-sale securities . . . . . . . . . . . . . .
Proceeds from sales of available-for-sale investment securities . . . . . . . . . . . . . . . .
Held-to-maturity securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments and maturities of held-to-maturity securities . . . . . . . . . . . . . .
Net cash received from mergers and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment purchased and REO improvements . . . . . . . . . . . . . . . .
Net cash provided (used) by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of common stock options and related tax benefit . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in advance payments by borrowers for taxes and insurance . . .
Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
(In thousands)
2014
$ 164,049
$ 160,316
$
157,364
22,988
1,730
90
(6,250)
(16,476)
—
2,760
—
5,153
(5,627)
(3,563)
(14,204)
71,071
221,721
(622,884)
(105,420)
(36,347)
26,340
(137,591)
537,255
50,741
—
218,958
—
61,132
(100,000)
14,685
(37,933)
(131,064)
21,217
720
231
(11,162)
(28,527)
10,554
11,608
1,795
13,829
(2,496)
—
(29,220)
(5,994)
142,871
(554,350)
(279,936)
(4,067)
55,708
(315,114)
721,951
246,826
(259,489)
159,947
—
74,895
(100,000)
—
(36,860)
(290,489)
(30,775)
1,118,000
(868,000)
9,283
(49,926)
(7,744)
(87,850)
(7,326)
75,662
166,319
284,049
$ 450,368
(85,073)
100,000
(210,554)
2,070
(51,111)
—
(126,728)
21,220
(350,176)
(497,794)
781,843
$ 284,049
$
17,347
2,502
324
(15,401)
(2,510)
—
(2,819)
(1,795)
18,890
—
—
(17,799)
17,612
173,715
(261,401)
(218,544)
—
14,017
(1,280,477)
609,395
—
—
103,617
1,776,660
89,549
—
—
(51,794)
781,022
(226,914)
—
—
10,252
(42,065)
—
(104,291)
(13,439)
(376,457)
578,280
203,563
781,843
23
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended September 30,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of non-cash activities related to acquisitions
Fair value of assets and intangibles acquired, including goodwill . . . . . . . . . . . .
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net fair value of acquired assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2016
2015
(In thousands)
2014
16,535
$
31,916
114,506
$ 116,226
65,720
$
$
46,469
128,733
64,372
—
—
—
$
$
—
—
—
80,242
$
(1,856,902)
$ (1,776,660)
24
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2016, 2015 AND 2014
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company and nature of operations. Washington Federal, Inc. is a Washington corporation headquartered in
Seattle, Washington. The Company is a bank holding company that conducts its operations through a national bank
subsidiary, Washington Federal, National Association. 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. The
Bank conducts its activities through a network of 238 offices located in Washington, Oregon, Idaho, Utah, Arizona,
Nevada, New Mexico, and Texas.
Basis of presentation and use of estimates. The Company’s accounting and financial reporting policies conform to
accounting principles generally accepted in the United States of America (U.S. GAAP). Inter-company balances and
transactions have been eliminated in consolidation. In preparing the consolidated financial statements, the Company
makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the
financial statements and revenues and expenses during the reporting periods and related disclosures. The areas that
require application of significant management judgments often result in the need to make estimates about the effect
of matters that are inherently uncertain and may change in future periods. Actual results could differ materially from
those estimates. In certain instances, amounts in text are presented by rounding to the nearest thousand.
The Company’s fiscal year end is September 30th. All references to 2016, 2015 and 2014 represent balances as of
September 30, 2016, September 30, 2015 and September 30, 2014, or activity for the fiscal years then ended.
Acquisitions. Certain Branches of Bank of America, National Association. During the 2014 fiscal year, the Bank acquired
74 branches from Bank of America, National Association. This included: effective as of the close of business on
October 31, 2013, 11 branches located in New Mexico; effective as of the close of business on December 6, 2013,
40 branches located in Washington, Oregon, and Idaho; and effective as of the close of business on May 2, 2014,
23 branches located in Arizona and Nevada. 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
11 branches beginning November 1, 2013, for the additional 40 branches beginning December 7, 2013, and for the
most recent 23 branches from May 3, 2014 forward.
Cash and cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, overnight
investments and repurchase agreements with an initial maturity of three months or less.
Investments and mortgage-backed securities. The Company accounts for investments and mortgage-backed securities
in two categories: held-to-maturity and available-for-sale. Premiums and discounts on investments are deferred and
recognized into income over the life of the asset using the effective interest method.
Held-to-maturity securities are accounted for at amortized cost, but the Company must have both the positive intent
and the ability to hold those securities to maturity. There are very limited circumstances under which securities in
the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the
securities in this category.
Available-for-sale securities are accounted for at fair value. Gains and losses realized on the sale of these securities are
accounted for based on the specific identification method. Unrealized gains and losses for available-for-sale securities
are excluded from earnings and reported net of the related tax effect in the accumulated other comprehensive income
component of stockholders’ equity.
Realized gains and losses on securities sold as well as other than temporary impairment charges, if any, are shown
on the Consolidated Statements of Operations under the Other Income heading. Management evaluates debt and
equity securities for other than temporary impairment on a quarterly basis based on the securities’ current credit
quality, market interest rates, term to maturity and management’s intent and ability to hold the securities until the
net book value is recovered.
Loans receivable. Loans that are performing in accordance with their contractual terms are carried at their amortized
cost and expected interest is accrued. The Bank also receives fees for originating loans in addition to various fees and
charges related to existing loans, which may include prepayment charges, late charges and assumption fees.
25
When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting
the borrower. Contact is made after a payment is 30 days past its grace period. In most cases, deficiencies are cured
promptly. If the delinquency is not cured within 90 days, the Bank may institute appropriate action to foreclose on
the property. If foreclosed, the property is sold at a public sale and may be purchased by the Bank.
Restructured loans. The Bank will consider modifying the interest rates and terms of a loan if it determines that a
modification is a better alternative to foreclosure. Most troubled debt restructured (“TDR”) loans are accruing and
performing loans where the borrower has proactively approached the Bank about modifications due to temporary
financial difficulties. Each request is individually evaluated for merit and likelihood of success. The concession for
these loans is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six
to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness
is generally not an available option for restructured loans. Before granting approval to modify a loan in a TDR,
the borrower’s ability to repay is evaluated, including: current income levels and debt to income ratio, borrower’s
credit score, payment history of the loan, and updated evaluation of the secondary repayment source. The Bank also
modifies some loans that are not classified as TDRs as the modification is due to a restructuring where the effective
interest rate on the debt is reduced to reflect a decrease in market interest rates.
Non accrual loans. Loans are placed on nonaccrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual
status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest
on loans 90 days or more past due. If payment is made on a loan so that the loan becomes less than 90 days past due,
and the Bank expects full collection of principal and interest, the loan is returned to full accrual status. Any interest
ultimately collected is credited to income in the period of recovery. A loan is charged-off when the loss is estimable
and it is confirmed that the borrower is not expected be able to meet contractual obligations.
If a consumer loan is on non-accrual status before becoming a TDR it will stay on non-accrual status following
restructuring until it has been performing for at least six months, at which point it may be moved to accrual status.
If a loan is on accrual status before it becomes a TDR, and management concludes that full repayment is probable
based on internal evaluation, it will remain on accrual status following restructuring. If the restructured consumer
loan does not perform, it is placed on non-accrual status when it is 90 days delinquent. 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 management will conclude that collection of the
entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual.
Impaired loans. Impaired loans consist of loans receivable that are not expected to have their principal and interest
repaid in accordance with their contractual terms. This includes TDRs that are on non-accrual status. Collateral
dependent impaired loans are measured using the fair value of the collateral less selling costs. Non-collateral
dependent loans are measured at the present value of expected future cash flows.
Deferred fees and discounts on loans. Loan discounts and loan fees are deferred and recognized over the life of the
loans using the effective interest method.
Allowance for loan losses. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan
portfolio. The allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in
the loan portfolio. The Bank’s general methodology for assessing the appropriateness of the allowance is to apply a
loss percentage factor to the different loan types. The loss percentage factor is made up of two parts - the historical
loss factor (“HLF”) and the qualitative loss factor (“QLF”). The HLF takes into account historical charge-offs by loan
type. The Bank uses an average of historical loss rates for each loan category multiplied by a loss emergence period.
This is the likely period of time during which a residential or commercial loan borrower experiencing financial
difficulties might deplete their cash prior to becoming delinquent on their loan, plus the period of time that it takes
the bank to work out the loans. The QLF are based on management’s continuing evaluation of the pertinent factors
underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio,
actual loan loss experience, current economic conditions, collateral values, geographic concentrations, seasoning
of the loan portfolio, specific industry conditions, and the duration of the current business cycle. These factors are
considered by loan type.
Specific allowances are established for loans which are individually evaluated, in cases where management has
identified significant conditions or circumstances related to a loan that management believes indicate the probability
that a loss has been incurred. The Bank has also established a reserve for unfunded commitments.
26
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The recovery of the carrying value of loans is susceptible to future market conditions beyond the Bank’s control,
which may result in losses or recoveries differing from those estimated.
Acquired credit impaired loans. Acquired credit impaired loans are accounted for under Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30 when there is evidence of credit
deterioration since origination and for which it is probable, at acquisition, that the Company would be unable to
collect all contractually required payments. Interest income, through accretion of the difference between the carrying
amount of the loans and the expected cash flows, are recognized on all acquired loans.
Covered assets. Covered loans consist of single family loans acquired from Horizon Bank in 2010 and certain loans
acquired from South Valley Bank and Trust (“SVBT”) in fiscal 2013 that were originally recorded at their estimated
fair value at the time acquired. Loans that were classified as non-performing loans by Horizon Bank and SVBT are no
longer classified as non-performing because, at acquisition, the carrying value of these loans was adjusted to reflect
fair value and are covered under the FDIC loss sharing agreements. Management believes that the book value reflects
an amount that will ultimately be collected. Covered real estate held for sale represents the foreclosed properties that
were originally Horizon Bank loans or certain SVBT loans. Covered real estate held for sale is carried at the estimated
fair value of the repossessed real estate. The covered loans and covered real estate held for sale are collectively referred
to as “covered assets.” When FDIC loss share agreements expire, any remaining loans will be transferred to the
non covered portfolio. Covered loans are included within loans receivable on the statement of financial condition.
Covered real estate owned are included within real estate owned on the statement of financial condition.
FDIC indemnification asset. FDIC indemnification asset is the receivable recorded due to the guarantee provided
by the FDIC on the covered assets. This asset declines due to collections from the FDIC on claims or the eventual
expiration of the FDIC loss share agreements. The FDIC indemnification asset is included within other assets on the
statement of financial condition.
Client derivatives. Interest rate swap agreements are provided to certain clients who desire to convert their
obligations from variable to fixed interest rates. Under these agreements, the Bank enters into a variable-rate loan
agreement with a customer in addition to a swap agreement, and then enters into a corresponding swap agreement
with a third party in order to offset its exposure on the customer swap agreement. As the interest rate swap
agreements with the customers and third parties are not designated as hedges under FASB ASC 815, Derivatives
and Hedging, the instruments are marked to market in earnings. The change in fair value of the offsetting swaps are
included in interest income and interest expense and there is no impact on net income. There is fee income earned
on the swaps that is included in loan fee income.
Long term borrowing hedges. The Company has entered into interest rate swaps to convert a series of future short-
term borrowings to fixed-rate payments. These interest rate swaps qualify as cash flow hedging instruments under
ASC 815 so gains and losses are recorded in Other Comprehensive Income to the extent the hedge is effective. Gains
and losses on the interest rate swaps are reclassified from OCI to earnings in the period the hedged transaction affects
earnings and are included in the same income statement line item that the hedged transaction is recorded.
Commercial loan hedges. The Company has entered into interest rate swaps to hedge long term fixed rate
commercial loans. These hedges qualify as fair value hedges under ASC 815 and provide for matching of the
recognition of the gains and losses on the interest rate swap and the related hedged loan.
Premises and equipment. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation
is computed on the straight-line method over the estimated useful lives of the respective assets. Expenditures are
capitalized for betterments and major renewals. Charges for ordinary maintenance and repairs are expensed to
operations as incurred.
Real estate owned. Real estate properties acquired through foreclosure of loans or through acquisitions are recorded
initially at fair value less selling costs and are subsequent recorded at lower of cost or fair value. Any gains (losses) are
shown on the real estate acquired through foreclosure line item.
Intangible assets. Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets
acquired. The core deposit intangibles are acquired assets that lack physical substance but can be distinguished from
goodwill. Goodwill is evaluated for impairment on an annual basis during the fourth quarter. Other intangible assets
are amortized over their estimated lives and are subject to impairment testing when events or circumstances change.
If circumstances indicate that the carrying value of the assets may not be recoverable, an impairment charge could be
recorded. The Bank amortizes the core deposit intangibles over their estimated lives using an accelerated method.
27
The table below provides detail regarding the Company’s intangible assets.
Goodwill
Core
Deposit
Intangible
(In thousands)
Total
Balance at September 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$291,503
$11,406
$302,909
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(3,551)
(3,551)
Balance at September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,503
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
7,855
(2,369)
299,358
(2,369)
Balance at September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$291,503
$ 5,486
$296,989
The table below presents the estimated core deposit intangible asset amortization expense for the next five years.
Fiscal Year
Expense
(In thousands)
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,648
1,204
1,157
1,157
320
Income taxes. Income taxes are accounted for using the asset and liability method, which requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in
the financial statements. Under this method, a deferred tax asset or liability is determined based on the differences
between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The provision for income taxes includes current and deferred income
tax expense based on net income adjusted for temporary and permanent differences such as depreciation, interest
on state and municipal securities, and affordable housing tax credits. Income tax related interest and penalties, if
applicable, and amortization of affordable housing tax credit investments are recorded within income tax expense.
Accounting for stock-based compensation. We recognize in the statement of operations the grant-date fair value of
stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service
period (generally the vesting period). The requisite service period may be subject to performance conditions. Stock
options and restricted stock awards generally vest ratably over three to ten years and are recognized as expense over
that same period of time. The exercise price of each option equals the market price of the Company’s common stock
on the date of the grant, and the maximum term is ten years. No stock options were granted in 2016, 2015 or 2014.
Certain grants of restricted stock are subject to performance-based and market-based vesting as well as other approved
vesting conditions and cliff vest based on those conditions. Compensation expense is recognized over the service
period to the extent restricted stock awards are expected to vest. See Note N for additional information.
Business segments. As the Company manages its business and operations on a consolidated basis, management has
determined that there is one reportable business segment.
Subsequent events. The Company has evaluated subsequent events for adjustment to or disclosure in the Company’s
consolidated financial statements through the date of this report, and the Company has not identified any recordable
or disclosable events, not otherwise reported in these consolidated financial statements or the notes thereto, except
for the following:
The Company paid its 135th consecutive quarterly cash dividend totaling $12,421,733 on November 18, 2016 to
common stockholders of record on November 4, 2016.
28
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
NOTE B
NEW ACCOUNTING PRONOUNCEMENTS
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15, Classification of Certain Cash
Receipts and Cash Payments. The amendments in this ASU address eight specific cash flow issues with the objective
of reducing diversity in practice. The specific issues identified include: debt prepayments or extinguishment costs;
contingent consideration payments made after a business combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance
policies); distributions received from equity method investees; beneficial interests in securitization transactions; and
separately identifiable cash flows and application of the predominance principle. This ASU is effective for fiscal years
beginning after December 15, 2017 including interim periods within that reporting period; however, early adoption is
permitted. The Company is currently evaluating the guidance to determine its adoption method and does not expect
this guidance to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendments in this ASU
were issued to provide financial statement users with more decision-useful information about the expected credit
losses on financial instruments that are not accounted for at fair value through net income, including loans held
for investment, held-to- maturity debt securities, trade and other receivables, net investments in leases and other
commitments to extend credit held by a reporting entity at each reporting date. The amendments require that
financial assets measured at amortized cost be presented at the net amount expected to be collected, through an
allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the current framework
of recognizing probable incurred losses and instead requires an entity to use its current estimate of all expected credit
losses over the contractual life. The measurement of expected credit losses is based upon historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.
For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD
assets”) that are measured at amortized cost, an allowance for expected credit losses is recorded as an adjustment to
the cost basis of the asset. Subsequent changes in estimated cash flows would be recorded as an adjustment to the
allowance and through the statement of income.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather
than as a direct write-down to the security’s cost basis.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. For most debt securities, the transition approach requires a cumulative-effect
adjustment to the statement of financial position as of the beginning of the first reporting period the guidance
is effective. For other-than-temporarily impaired debt securities and PCD assets, the guidance will be applied
prospectively. The Company is currently evaluating the provisions of this ASU to determine the impact the new
standard will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation- Improvements to Employee Share-Based
Payment Accounting, which involves several aspects of the accounting for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. Under the guidance, income tax benefits and deficiencies are to be recognized as income tax expense
or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete
items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of
whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with
other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide
accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures
when they occur. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods
within that reporting period; however, early adoption is permitted. The Company is currently evaluating the guidance
to determine its adoption method and does not expect this guidance to have a material impact on its consolidated
financial statements.
29
In February 2016, the FASB issued ASU 2016-02, Leases. The amendments require lessees to recognize a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset
that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The guidance also
simplifies the accounting for sale and leaseback transactions. The amendments are effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon
issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases)
must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements. The modified retrospective approach would not
require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and
lessors may not apply a full retrospective transition approach. The Company is currently evaluating the provisions of
this ASU to determine the impact the new standard will have on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities,
to require all equity investments to be measured at fair value with changes in the fair value recognized through net
income (other than those accounted for under equity method of accounting or those that result in consolidation
of the investee). The amendments in this ASU also require an entity to present separately in other comprehensive
income the portion of the total change in the fair value of a liability resulting from a change in the instrument-
specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value
option for financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017 including
interim periods within that reporting period. The Company does not expect this guidance to have a material impact
on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments,
which will require that the acquirer recognize adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustment amount is determined. The acquirer is
required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to
the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an
entity is required to present separately on the face of the income statement or disclose in the notes to the financial
statements the portion of the amount recorded in current-period earnings by line item that would have been recorded
in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition
date. The amendments in ASU 2015-16 are effective for years beginning after December 15, 2015. Early adoption is
permitted for reporting periods for which financial statements have not been issued. The Company does not expect
this guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in Cloud Computing Arrangement. The
ASU was issued to clarify a customer’s accounting for fees paid in a cloud computing arrangement. The amendments
provide guidance to customers in determining whether a cloud computing arrangement includes a software license
that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would
be accounted for as a service contract. The guidance in this ASU is effective for interim and annual periods beginning
after December 15, 2015 and can be adopted either (1) prospectively to all arrangements entered into or materially
modified after the effective date or (2) retrospectively. The Company does not expect this guidance to have a material
impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in
this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most
industry-specific guidance throughout the industry topics of the codification. For public companies, this update was
to be effective for interim and annual periods beginning after December 15, 2016. However, in August 2015, the
FASB issued ASU 2015-14, which delayed the effective date of ASU 2014-09 by one year and permits companies to
voluntarily adopt the new standard as of the original effective date. The Company does not expect this guidance to
have a material impact on its consolidated financial statements.
30
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
NOTE C
INVESTMENT SECURITIES
The tables below provide detail regarding the amortized cost and fair value of available-for-sale and held-to-maturity
investment securities.
September 30,
2016
Amortized
Cost
Gross Unrealized
Losses
Gains
Fair Value
Yield
(In thousands)
Available-for-sale securities
U.S. government and agency securities due
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Equity Securities
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities due
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds due
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . . . . . . . . . . . . . . . . .
21,284
12,477
48,134
182,051
—
100,422
278,094
63,481
69,955
50,000
2,315
1,335
20,363
$
—
1,027
—
27
—
1,402
325
928
—
938
2
38
3,617
$
$
(59)
(11)
(1,589)
(3,990)
—
—
(53)
(113)
(2,417)
—
—
—
—
21,225
13,493
46,545
178,088
—
101,824
278,366
64,296
67,538
50,938
2,317
1,373
23,980
978,955
80,318
1,909,184
17,118
—
25,422
(3,032)
(448)
(11,712)
993,041
79,870
1,922,894
0.81%
7.94
1.14
1.33
—
1.90
1.33
2.47
1.96
3.00
1.23
2.05
6.45
2.58
1.91
2.22
1,417,599
1,417,599
$ 3,326,783
24,171
24,171
$ 49,593
(214)
(214)
$ (11,926)
1,441,556
1,441,556
$ 3,364,450
3.18
3.18
2.62%
September 30,
2015
Amortized
Cost
Gross Unrealized
Losses
Gains
Fair Value
Yield
(In thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 105,065
119,071
262,832
$ 1,923
35
—
$
(274)
(1,247)
(4,941)
$ 106,714
117,859
257,891
1.74%
1.54
1.23
Equity Securities
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities due
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds due
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . . . . . . . . . . . . . . . . .
500
99,922
24,787
311,435
100,000
69,950
2,285
1,303
20,382
17
1,513
191
1,190
876
953
8
7
3,138
—
—
—
(58)
(3,524)
—
—
—
—
517
101,435
24,978
312,567
97,352
70,903
2,293
1,310
23,520
1,144,787
103,131
2,365,450
18,222
85
28,158
(2,491)
(510)
(13,045)
1,160,518
102,706
2,380,563
1.80
1.90
0.53
0.88
1.47
3.00
1.23
2.05
6.45
2.48
1.51
1.97
1,643,216
1,643,216
$ 4,008,666
10,516
10,516
$ 38,674
(16,312)
(16,312)
$ (29,357)
1,637,420
1,637,420
$ 4,017,983
3.19
3.19
2.46%
31
The Company purchased $137,591,000 of available-for-sale investment securities and no held-to-maturity investment
securities during 2016. The Company sold $50,741,000 of available-for-sale securities and there were no sales of held-
to-maturity investment securities in 2016. Substantially all mortgage-backed securities have contractual due dates that
exceed twenty-five years.
The following table shows the gross unrealized losses and fair value of securities at September 30, 2016 and
September 30, 2015, by length of time that individual securities in each category have been in a continuous loss
position. Management believes that the declines in fair value of these investments are not an other than temporary
impairment as these losses are due to a change in interest rates rather than any credit deterioration. The impairment
is also deemed to be temporary because: 1) the Bank does not intend to sell the security, and 2) it is not more likely
than not that it will be required to sell the security before recovery of the entire amortized cost basis of the security.
September 30,
2016
Less than 12 months
12 months or more
Total
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
(In thousands)
Corporate debt securities . . . . .
$ —
$
—
$ (2,582)
$ 100,467
$ (2,582)
$ 100,467
U.S. agency securities . . . . . . . .
(11)
3,167
(5,638)
220,613
(5,649)
223,780
Agency pass-through
certificates . . . . . . . . . . . . . . .
(1,278)
301,030
(2,417)
232,407
(3,695)
533,437
$(1,289)
$ 304,197
$(10,637)
$ 553,487
$ (11,926)
$ 857,684
September 30,
2015
Less than 12 months
12 months or more
Total
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
(In thousands)
Corporate debt securities . . . . .
$ (183)
$ 72,862
$ (3,399)
$
46,601
$ (3,582)
$ 119,463
U.S. agency securities . . . . . . . .
(5,010)
336,243
(1,452)
57,344
(6,462)
393,587
Agency pass-through
certificates . . . . . . . . . . . . . . .
(1,036)
169,541
(18,277)
1,193,463
(19,313)
1,363,004
$(6,229)
$ 578,646
$(23,128)
$ 1,297,408
$(29,357)
$ 1,876,054
32
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
NOTE D
LOANS RECEIVABLE
The following table is a summary of loans receivable.
September 30, 2016
September 30, 2015
(In thousands)
(In thousands)
Non-Acquired loans
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,621,066
51.3%
$ 5,651,845
57.5%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,110,411
10.1
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
473,069
116,156
101,853
4.3
1.1
0.9
200,509
396,307
94,208
103,989
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,118,801
10.2
1,125,722
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
956,164
946,648
134,785
137,450
8.7
8.6
1.2
1.3
986,270
612,836
127,646
194,655
2.0
4.0
1.0
1.1
11.5
10.0
6.2
1.3
2.0
Total non-acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,716,403
97.9%
9,493,987
96.6%
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit impaired acquired loans . . . . . . . . . . . . . . . . . . . . . .
Covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115,394
89,837
28,974
1.1
0.8
0.3
166,293
87,081
75,909
1.7
0.9
0.8
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,950,608
100%
9,823,270
100%
Less:
Allowance for probable losses . . . . . . . . . . . . . . . . . . . .
Loans in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on acquired loans . . . . . . . . . . . . . . . . . . . . .
Deferred net origination fees . . . . . . . . . . . . . . . . . . . .
113,494
879,484
11,306
35,404
Total loan contra accounts . . . . . . . . . . . . . . . . . . . . . . . . . .
1,039,688
106,829
476,796
30,095
38,916
652,636
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,910,920
$ 9,170,634
33
The following summary breaks down the Company’s fixed rate and adjustable rate loans by time to maturity or to rate adjustment.
September 30, 2016
Fixed-Rate
Term To Maturity
Gross Loans
(In thousands)
Term To Rate Adjustment
Adjustable-Rate
Gross Loans
(In thousands)
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29,428
Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . .
$1,362,480
1 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 to 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . .
326,859
192,202
693,099
1,020,654
4,690,048
$6,952,290
1 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,457,584
3 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 to 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . .
552,402
625,852
—
—
$3,998,318
The following tables provide information regarding loans receivable by loan category and geography.
September 30, 2016
Single-family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction -
custom
Washington . . . . . . . . . .
Oregon . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . .
Texas . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . .
$2,926,555
664,932
546,080
216,902
474,390
284,212
186,061
202,541
157,154
$ 287,999 $ 74,017 $ 59,371
12,403
9,014
11,157
3,448
3,910
1,274
979
3,012
332,311
292,830
2,448
47,374
33,043
97,699
29,458
1,127
310,953
4,142
443
958
4,761
12,417
10,806
—
$277,877
52,709
45,536
11,228
33,036
17,120
18,128
10,610
6,825
Construction
(In thousands)
$ 470,720
122,958
43,300
110,843
143,246
64,510
47,763
107,071
—
Commercial
real estate
Commercial
and industrial Consumer HELOC
Total
$ 482,802
171,093
38,302
277,438
11,499
34,075
68,385
6,151
3,894
$500,540
203,377
47,584
94,215
46,497
16,627
10,860
42,594
16,295
$ 41,212
3,152
309
91,874
39
141
1,110
1,085
80
$ 88,681 $ 5,209,774
1,587,599
1,042,935
817,578
768,060
465,372
457,487
411,600
190,203
13,711
15,838
1,030
7,573
6,973
13,790
305
1,816
$5,658,827
$ 1,124,289 $ 118,497 $ 104,568
$473,069
$1,110,411
$1,093,639
$978,589
$139,002
$ 149,717 $ 10,950,608
Percentage by geographic area
September 30, 2016
Single-family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction -
custom
Construction
Commercial
real estate
Commercial
and industrial Consumer HELOC Total
Washington . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . .
26.8%
6.1
5.0
2.0
4.3
2.5
1.8
1.8
1.4
51.7%
2.6%
3.0
2.7
—
0.5
0.3
0.9
0.3
—
10.3%
0.7%
0.1
—
—
—
—
0.1
0.1
0.1
1.1%
0.5%
0.1
0.1
0.2
—
—
—
—
—
0.9%
Percentage by geographic area as a % of each loan type
As % of total gross loans
4.3%
1.1
0.4
1.0
1.3
0.6
0.4
1.0
—
10.1%
4.4%
1.6
0.3
2.5
0.1
0.3
0.6
0.1
—
9.9%
2.5%
0.5
0.4
0.1
0.3
0.2
0.2
0.1
0.1
4.4%
4.6%
1.9
0.4
0.9
0.4
0.2
0.1
0.4
0.1
9.0%
0.4%
—
—
0.8
—
—
—
—
—
1.2%
0.8%
0.1
0.2
—
0.1
0.1
0.1
—
—
1.4%
47.6%
14.5
9.5
7.5
7.0
4.2
4.2
3.8
1.7
100%
September 30, 2016
Single-family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction -
custom
Construction
Commercial
real estate
Commercial
and industrial Consumer HELOC
Washington . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . .
As % of total gross loans
51.6%
11.8
9.7
3.8
8.4
5.0
3.3
3.6
2.8
100%
25.7% 62.5% 56.8%
9.2
29.6
3.5
26.0
0.4
0.2
0.8
4.2
4.0
2.9
10.5
8.7
9.1
2.6
—
0.1
11.9
8.6
10.7
3.3
3.7
1.2
0.9
2.9
100% 100%
100%
58.9%
11.1
9.6
2.4
7.0
3.6
3.8
2.2
1.4
100%
42.4%
11.1
3.9
10.0
12.9
5.8
4.3
9.6
—
100%
44.0%
15.6
3.5
25.4
1.1
3.1
6.3
0.6
0.4
100%
51.0%
20.8
4.9
9.6
4.8
1.7
1.1
4.4
1.7
100%
29.6%
2.3
0.2
66.1
—
0.1
0.8
0.8
0.1
100%
59.1%
9.2
10.6
0.7
5.1
4.7
9.2
0.2
1.2
100%
34
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The Company has granted loans to officers and directors of the Company and related interests. These loans are made
on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount
of these loans, including unfunded commitments to lend, was $57,153,000 and $55,965,000 at September 30, 2016
and 2015, respectively.
The following table provides additional information on impaired loans, loan commitments and loans serviced
for others.
September 30, 2016
September 30, 2015
(In thousands)
Recorded investment in impaired loans . . . . . . . . . . . . . . . . . . . . . . . .
TDRs included in impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated reserves on impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Specific reserves on impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance of impaired loans for year ended . . . . . . . . . . . . . . . .
Interest income from impaired loans for year ended . . . . . . . . . . . . . .
Outstanding fixed-rate origination commitments . . . . . . . . . . . . . . . . .
Gross loans serviced for others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The following table sets forth information regarding non-accrual loans.
$285,243
261,531
1,980
366
265,771
11,314
331,947
80,896
$341,579
302,713
2,323
275
333,815
14,855
230,869
72,083
September 30, 2016
September 30, 2015
(In thousands)
Non-accrual loans:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,148
78.2%
$59,074
87.1%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
58
510
776
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,100
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
583
239
—
—
—
0.1
1.2
1.8
16.7
1.4
0.6
—
754
732
—
1,273
2,558
2,176
—
563
680
1.1
1.1
—
1.9
3.8
3.2
—
0.8
1.0
Total non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42,414
100%
$67,810
100%
35
The following table breaks down delinquent loans by loan category and delinquency bucket.
September 30, 2016
Type of Loan
Amount of
Loans
Net of
Loans in
Process
Days Delinquent Based on $ Amount of Loans
Current
30
60
90
Total
% based
on $
(In thousands)
Non-acquired loans
Single-family residential . . . . . . . . .
Construction . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . .
Land - acquisition &
development . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . .
Commercial & industrial . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . .
Acquired loans . . . . . . . . . . . . . . . . .
Credit impaired acquired loans . . . .
Covered loans . . . . . . . . . . . . . . . . . .
$ 5,624,783
497,393
229,957
$ 5,574,384
497,393
229,419
$ 20,917
—
538
$ 5,173
—
—
$ 24,309
—
—
$ 50,399
—
538
0.90%
—
0.23
88,662
102,386
1,119,042
955,944
947,703
134,214
136,835
9,836,919
115,394
89,837
28,974
88,662
100,373
1,117,453
955,604
947,661
133,683
135,926
9,780,558
114,770
84,625
22,891
—
816
1,190
—
—
490
705
24,656
124
227
—
—
687
399
183
42
—
124
6,608
2
142
262
—
510
—
157
—
41
80
25,097
498
4,843
5,821
—
2,013
1,589
340
42
531
909
56,361
624
5,212
6,083
—
1.97
0.14
0.04
—
0.40
0.66
0.57
0.54
5.80
20.99
Total Loans . . . . . . . . . . . . . . . . . . . .
$ 10,071,124
$ 10,002,844
$ 25,007
$ 7,014
$ 36,259
$ 68,280
0.68%
0.68%
Delinquency % . . . . . . . . . . . . . . . . .
The percentage of total delinquent loans was 0.68% as of September 30, 2016, as compared to 0.88% as of
September 30, 2015.
99.32%
0.25%
0.36%
0.07%
Most loans restructured in troubled debt restructurings (“TDRs”) 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. The concession for these loans is typically
a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twelve months.
Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available
option for restructured loans. As of September 30, 2016, the outstanding balance of TDR’s was $261,531,000 as
compared to $302,713,000 as of September 30, 2015. As of September 30, 2016, 96.2% of the restructured loans were
performing. Single-family residential loans comprised 87.2% of TDR loans as of September 30, 2016. The Company
reserves for restructured loans within its allowance for loan loss methodology by taking into account the following
performance indicators: 1) time since modification, 2) current payment status and 3) geographic area.
The following table provides information related to loans that were modified in a TDR during the periods presented.
Twelve Months Ended September 30, 2016
Twelve Months Ended September 30, 2015
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Number of
Contracts
(In thousands)
(In thousands)
120
—
10
7
1
1
139
$23,541
—
970
2,523
126
24
$ 27,184
$23,541
—
970
2,523
126
24
$27,184
62
2
9
3
1
1
78
$13,378
701
1,546
3,175
50
80
$18,930
$13,378
701
1,546
3,175
50
80
$18,930
Troubled Debt Restructurings:
Single-family residential . . . .
Construction . . . . . . . . . . . .
Land - consumer lot loans . .
Commercial real estate . . . .
HELOC . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . .
36
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The following table provides information on payment defaults occurring during the periods presented where the loan had been modified in a
TDR within 12 months of the payment default.
TDRs That Subsequently Defaulted:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Twelve Months Ended
September 30, 2016
Twelve Months Ended
September 30, 2015
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(In thousands)
17
1
5
2
$4,875
279
606
326
(In thousands)
18
—
2
—
$2,917
—
301
—
25
$6,086
20
$3,218
The excess of cash flows expected to be collected over the initial fair value of acquired impaired loans is referred to as the accretable yield and
this amount is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments
to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes in
the indices for acquired loans with variable interest rates.
The following table shows the changes in accretable yield for acquired impaired loans and acquired non-impaired loans including covered
loans for the years ended September 30, 2016 and 2015.
Twelve Months Ended September 30, 2016
Twelve Months Ended September 30, 2015
Acquired Impaired
Acquired Non-impaired
Acquired Impaired
Acquired Non-impaired
Accretable
Yield
Carrying
Amount of
Loans
Accretable
Yield
Carrying
Amount of
Loans
Accretable
Yield
Carrying
Amount of
Loans
Accretable
Yield
Carrying
Amount of
Loans
(In thousands)
(In thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . .
Net reclassification from non-accretable . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to REO . . . . . . . . . . . . . . . . . . . . . . . .
Payments received, net . . . . . . . . . . . . . . . . . . . . .
$ 72,705
4,867
(18,730)
—
—
$111,300
—
18,730
(175)
(38,094)
$ 7,204
—
(2,982)
—
—
$187,080
—
2,982
—
(58,930)
$ 97,125
6,307
(30,727)
—
—
$135,826
—
30,727
(2,975)
(52,278)
$14,513
346
(7,655)
—
—
$275,862
—
7,655
(150)
(96,287)
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58,842
$ 91,761
$ 4,222
$ 131,132
$ 72,705
$111,300
$ 7,204
$187,080
At September 30, 2016 and September 30, 2015, none of the acquired impaired or non-impaired loans were classified as non-performing
assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows,
was recognized on all acquired loans.
The FDIC loss share coverage for the acquired commercial loans from the former Horizon Bank expired after March 31, 2015. These loans
were transferred to loans receivable. The FDIC loss share coverage for the acquired commercial loans from the former Home Valley Bank
expired after of September 30, 2015 with final reporting as of October 31, 2015. Recoveries to the extent that claims were made will continue
to be shared for three years. The FDIC loss share coverage for single family residential loans will continue for another four years.
The outstanding principal balance of covered loans was $28,974,000 as of September 30, 2016, as compared to $75,909,000 as of September 30,
2015. The discount balance related to the covered loans was $2,738,000 as of September 30, 2016.
37
The following table shows the year to date activity for the FDIC indemnification asset.
Twelve Months Ended
September 30, 2016
Twelve Months Ended
September 30, 2015
(In thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,275
Additions and impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(1,730)
(2,012)
236
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,769
$ 36,860
(1,795)
(720)
(18,588)
518
$ 16,275
NOTE E
ALLOWANCE FOR LOSSES ON LOANS
The following tables summarize the activity in the allowance for loan losses.
Twelve Months Ended September 30, 2016
Beginning
Allowance
Charge-offs
Recoveries
(In thousands)
Provision &
Transfers
Ending
Allowance
Single-family residential . . . . . . . . . . . . . . . . .
$ 47,347
$ (3,106)
$ 3,251
$ (9,696)
$ 37,796
Construction . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,680
990
5,781
2,946
5,304
8,960
24,980
902
2,939
—
(60)
(42)
(732)
—
(103)
(941)
(54)
(962)
745
60
8,220
5
—
1,812
2,933
21
2,018
12,413
90
(7,936)
316
1,621
(2,081)
1,036
(56)
(2,107)
19,838
1,080
6,023
2,535
6,925
8,588
28,008
813
1,888
Twelve Months Ended September 30, 2015
$106,829
$ (6,000)
$19,065
$ (6,400)
$113,494
Beginning
Allowance Charge-offs
Provision &
Transfers
Ending
Allowance
Recoveries
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . .
$ 62,763
$ (5,524)
$13,403
$(23,295)
$ 47,347
Construction
Construction - custom
Land - acquisition & development
Land - consumer lot loans
Multi-family
Commercial real estate
Commercial & industrial
HELOC
Consumer
Covered loans
6,742
1,695
5,592
3,077
4,248
7,548
16,527
928
3,227
2,244
(388)
—
(38)
(459)
—
(1,711)
(3,354)
(66)
(3,060)
—
120
—
207
221
220
735
1,374
2
3,688
—
206
(705)
20
107
836
2,388
10,433
38
(916)
(2,244)
6,680
990
5,781
2,946
5,304
8,960
24,980
902
2,939
—
$ 114,591
$(14,600)
$19,970
$ (13,132)
$106,829
38
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The Company recorded a release of allowance for loan losses of $6,400,000 during the year ended September 30,
2016, as compared to a release of $11,162,000 for the year ended September 30, 2015. The credit quality of the port-
folio has been improving significantly and economic conditions are more stable.
The Company had recoveries, net of charge-offs, of $13,065,000 for the year ended September 30, 2016, compared
with net recoveries of $5,370,000 for the year ended September 30, 2015. A loan is charged-off when the loss is
estimable and it is confirmed that the borrower is not expected to be able to meet its contractual obligations.
Non-accrual loans decreased to $42,414,000 as of September 30, 2016 from $67,810,000 as of September 30, 2015.
Non-performing assets (“NPAs”) totaled $71,441,000, or 0.48% of total assets, at September 30, 2016, compared to
$128,908,000, or 0.88% of total assets, as of September 30, 2015. Acquired loans, including covered loans, are not
classified as non-performing loans because they are recorded at fair value at acquisition and reflect lifetime estimated
losses at that time. As of September 30, 2016, $20,175,000 in acquired loans were subject to the general allowance as
the discount related to these balances was not sufficient to absorb potential losses.
There is no allowance for covered loans as of September 30, 2016 or September 30, 2015.
At September 30, 2016, $113,128,000 of the allowance was calculated under the formulas contained in our general
allowance methodology and the remaining $366,000 represents specific reserves on loans that were deemed to
be impaired.
The following tables show a summary of loans collectively and individually evaluated for impairment and the related allocation of general and
specific reserves.
September 30, 2016
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 . . . . . . . . . . . .
$
37,536
$
5,585,912
0.7%
260
$
19,629
1.3%
Construction . . . . . . . . . . . . . . . . . . . .
19,838
Construction - custom . . . . . . . . . . . . .
Land - acquisition & development . . .
Land - consumer lot loans . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . .
1,080
6,022
2,535
6,911
8,497
28,008
813
1,888
498,450
229,298
90,850
92,828
1,091,974
957,380
966,930
133,203
137,315
4.0
0.5
6.6
2.7
0.6
0.9
2.9
0.6
1.4
—
—
2
—
13
91
—
—
—
—
330
850
558
1,505
11,157
—
239
3
—
—
0.2
—
0.9
0.8
—
—
—
(1) Excludes acquired loans with discounts sufficient to absorb potential losses and covered loans.
$ 113,128
$
9,784,140
1.2%
366
$
34,271
1.1%
39
September 30, 2015
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 . . . . . . . . . . . .
$
47,073
$
5,595,752
0.8% $
275
$
Construction . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . .
Land - acquisition & development . . .
Land - consumer lot loans . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . .
6,680
990
5,781
2,946
5,304
8,960
24,980
902
2,938
124,679
205,692
72,602
93,103
1,062,194
844,691
643,577
126,594
194,569
5.4
0.5
8.0
3.2
0.5
1.1
3.9
0.7
1.5
—
—
—
—
—
—
—
—
—
(1) Excludes acquired loans with discounts sufficient to absorb potential losses and covered loans.
$ 106,554
$
8,963,453
1.2% $
275
$
51,718
5,441
—
2,198
10,824
5,348
8,826
—
1,072
86
85,513
0.5%
—
—
—
—
—
—
—
—
—
0.3%
The Company has an asset quality review function that analyzes the loan portfolio and reports the results of the
review to the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios
are evaluated based on their performance as a pool of loans, since no single loan is individually significant or
judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate
and commercial and industrial loans are risk rated on a loan by 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 defined 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.
40
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The following tables provide information on loans based on credit quality indicators (defined above).
September 30, 2016
Non-acquired loans
Internally Assigned Grade
Pass
Special
mention
Substandard Doubtful Loss
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . .
$ 5,570,634
$
—
$
50,432
$
Construction . . . . . . . . . . . . . . . . . . . . . . . . . .
1,098,549
8,595
Construction - custom . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . .
473,069
110,125
100,862
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,112,342
Commercial real estate . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
928,032
900,571
134,298
137,367
—
—
—
3,237
13,446
7,160
—
—
Total non-acquired loans . . . . . . . . . . . . . . . . . . . .
10,565,849
32,438
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit impaired acquired loans . . . . . . . . . . . . . . .
Covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,616
60,985
28,647
47
—
—
3,267
—
6,031
991
3,222
14,686
38,917
487
83
118,116
6,731
28,852
327
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,764,097
$
32,485
$
154,026
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total grade as a % of total gross loans . . . . . . . . . .
98.3%
0.3%
1.4%
—%
—%
September 30, 2015
Non-acquired loans
Internally Assigned Grade
Pass
Special
mention
Substandard Doubtful Loss
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . .
$ 5,558,700
$
Construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . .
197,935
396,307
89,656
103,569
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,118,673
Commercial real estate . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
971,510
575,034
127,398
194,451
—
—
—
—
—
865
4,360
1,496
—
—
$
93,145
$
2,574
—
4,552
420
6,184
10,400
36,306
248
204
Total non-acquired loans . . . . . . . . . . . . . . . . . . . .
9,333,233
6,721
154,033
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit impaired acquired loans . . . . . . . . . . . . . . .
Covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149,891
61,019
61,776
—
—
—
16,402
26,062
14,133
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,605,919
$
6,721
$
210,630
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total grade as a % of total gross loans . . . . . . . . . .
97.8%
0.1%
2.1%
—%
—%
Total
Gross Loans
$ 5,621,066
1,110,411
473,069
116,156
101,853
1,118,801
956,164
946,648
134,785
137,450
10,716,403
115,394
89,837
28,974
$ 10,950,608
Total
Gross Loans
$ 5,651,845
200,509
396,307
94,208
103,989
1,125,722
986,270
612,836
127,646
194,655
9,493,987
166,293
87,081
75,909
$ 9,823,270
41
The following tables provide information on loans based on payment activity.
September 30, 2016
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross Loans Amount
% of Total
Gross Loans
(In thousands)
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . . . . . . .
$ 5,587,919
99.4% $
33,148
0.6%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,110,411
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . .
473,069
116,097
101,343
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,118,025
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
949,064
946,065
134,546
137,450
100.0
100.0
99.9
99.5
99.9
99.3
99.9
99.8
100.0
—
—
58
510
776
7,100
583
239
—
—
—
0.1
0.5
0.1
0.7
0.1
0.2
—
September 30, 2015
$10,673,989
99.6% $
42,414
0.4%
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross Loans Amount
% of Total
Gross Loans
(In thousands)
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . . . . . . .
$ 5,592,771
99.0% $
59,074
1.0%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . .
199,755
395,575
94,208
102,716
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,123,165
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
984,093
612,836
127,083
193,975
99.6
99.8
100.0
98.8
99.8
99.8
100.0
99.6
99.7
754
732
—
1,273
2,558
2,176
—
563
680
0.4
0.2
—
1.2
0.2
0.2
—
0.4
0.3
$ 9,426,177
99.3% $
67,810
0.7%
42
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The following tables provide information on impaired loans by loan category.
September 30, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,627
$
11,366
$
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with an allowance recorded:
—
—
138
499
394
11,741
1,030
209
74
—
—
9,001
609
3,972
21,301
3,082
315
550
23,712
50,196
—
—
—
—
—
—
—
—
—
—
—
$
6,511
—
—
614
317
638
6,260
863
165
111
15,479
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
228,186
232,595
3,809
216,632
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1,154
9,630
1,505
19,434
—
1,506
116
—
—
2,094
10,678
1,505
22,848
—
1,521
306
—
—
1
1
13
91
—
—
—
—
—
1,766
9,548
1,522
19,311
—
1,413
100
261,531
271,547
3,915(1)
250,292
Total:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
237,813
243,961
3,809
223,143
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1,292
10,129
1,899
31,175
1,030
1,715
190
—
—
11,095
11,287
5,477
44,149
3,082
1,836
856
—
—
1
1
13
91
—
—
—
—
—
2,380
9,865
2,160
25,571
863
1,578
211
$ 285,243
$ 321,743
$
3,915 (1) $ 265,771
(1)
Includes $366,000 of specific reserves and $3,549,000 included in the general reserves.
43
September 30, 2015
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17,250
$
19,644
$
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with an allowance recorded:
453
554
2,570
727
3,770
9,427
2,955
683
477
38,866
2,151
554
9,426
814
7,054
15,620
13,066
1,532
703
70,564
—
—
—
—
—
—
—
—
—
—
—
$
14,069
471
182
926
544
1,545
8,130
2,681
536
390
29,474
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
259,461
263,268
6,678
260,028
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,988
—
2,486
11,289
3,823
19,124
—
1,443
99
5,778
—
3,426
11,554
3,823
21,078
—
1,443
289
—
—
—
—
—
—
—
—
—
5,432
—
3,478
11,324
3,732
18,886
—
1,359
102
Total:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
276,711
282,912
6,678
274,097
302,713
310,659
6,678(1)
304,341
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,441
554
5,056
12,016
7,593
28,551
2,955
2,126
576
7,929
554
12,852
12,368
10,877
36,698
13,066
2,975
992
—
—
—
—
—
—
—
—
—
5,903
182
4,404
11,868
5,277
27,016
2,681
1,895
492
$ 341,579
$ 381,223
$
6,678(1) $ 333,815
(1)
Includes $275,000 of specific reserves and $6,403,000 included in the general reserves.
44
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
NOTE F
FAIR VALUE MEASUREMENTS
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
We have established and documented the Company’s process for determining the fair values of the Company’s assets
and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar
assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-
party appraisals. The following is a description of the valuation methodologies used to measure and report the fair
value of financial assets and liabilities on a recurring or nonrecurring basis.
Measured on a Recurring Basis
Available-for-sale investment securities and derivative contracts
Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced
using model pricing based on the securities’ relationship to other benchmark quoted prices as provided by an
independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active
exchanges, including the Company’s equity securities, are measured using the closing price in an active market and
are considered a Level 1 input method.
The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At
the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The
Company has also entered into a commercial loan hedge as well as long term borrowing hedges using interest rate
swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash
flow technique. These are considered a Level 2 input method.
45
The following table presents the balance and ASC 825 level of assets measured at fair value on a recurring basis.
September 30, 2016
Level 1
Level 2
Level 3
Total
(In thousands)
Available-for-sale securities
Equity securities . . . . . . . . . . . . . . . . . . . . .
$
101,824
$
—
$
U.S. government and agency securities . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . .
Mortgage-backed securities
Agency pass-through certificates . . . . . . .
Commercial MBS . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . .
Total Available-for-sale securities . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . .
Total Financial Assets . . . . . . . . . . . . . . . . .
Financial Liabilities
Interest rate contracts . . . . . . . . . . . . . . .
Commercial loan hedges . . . . . . . . . . . .
Long term borrowing hedges . . . . . . . . .
Total Financial Liabilities . . . . . . . . . . . . . .
$
$
$
—
—
—
—
—
—
101,824
—
259,351
27,670
461,138
993,041
79,870
—
1,821,070
20,895
101,824
$
1,841,965
$
—
—
—
—
$
$
20,895
$
3,312
31,347
55,554
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
101,824
259,351
27,670
461,138
993,041
79,870
—
1,922,894
20,895
$
1,943,789
$
$
20,895
3,312
31,347
55,554
There were no transfers between, into and/or out of Levels 1, 2 or 3 during the year ended September 30, 2016.
46
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
September 30, 2015
Level 1
Level 2
Level 3
Total
(In thousands)
Available-for-sale securities
Equity securities . . . . . . . . . . . . . . . . . . . . .
$
101,952
$
—
$
U.S. government and agency securities . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . .
Agency pass-through certificates
Commercial MBS . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . .
Total Available-for-sale securities . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . .
—
—
—
—
—
101,952
—
482,464
27,123
505,800
1,160,518
102,706
2,278,611
11,879
Total Financial Assets . . . . . . . . . . . . . . . . .
$
101,952
$
2,290,490
$
Financial Liabilities
Interest rate contracts . . . . . . . . . . . . . . .
$
Commercial loan hedges . . . . . . . . . . . .
Long term borrowing hedges . . . . . . . . .
Total Financial Liabilities . . . . . . . . . . . . . .
$
—
—
—
—
$
$
11,879
$
966
14,555
27,400
$
—
—
—
—
—
—
—
—
—
—
—
—
—
$
101,952
482,464
27,123
505,800
—
1,160,518
102,706
2,380,563
11,879
$
2,392,442
$
$
11,879
966
14,555
27,400
There were no transfers between, into and/or out of Level 1, 2 or 3 during the year ended September 30, 2015.
Measured on a Nonrecurring Basis
Impaired Loans & Real Estate Owned
Real estate owned (“REO”) consists principally of properties acquired through foreclosure. From time to time, and on
a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based
on the current appraisal or estimated value of the collateral, but only up to the fair value of the real estate owned as
of the initial transfer date less selling costs.
When management determines that the fair value of the collateral or the real estate owned requires additional
adjustments, either as a result of an updated appraised value or when there is no observable market price, the
Company classifies the impaired loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a
nonrecurring basis represent impaired loans for which a specific reserve is recorded or a partial charge-off was
recorded based on the fair value of collateral, as well as real estate owned where the fair value of the property was less
than the cost basis.
47
The following table presents the recorded balance of assets that were measured at estimated fair value on a nonrecurring basis for the periods
presented, and the total gains (losses) resulting from those fair value adjustments for the periods presented. These estimated fair values are
shown gross of estimated selling costs:
September 30, 2016
Three
Months
Ended
September 30,
2016
Twelve
Months
Ended
September 30,
2016
Level 1
Level 2
Level 3
Total
Total Gains (Losses)
(In thousands)
Impaired loans (1) . . . . . . . . . . . . . . . . . . . . .
Real estate owned (2) . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . .
$
$
—
—
—
$
$
—
—
—
$
$
17,476
25,190
42,666
$
$
17,476
25,190
42,666
$
$
(474)
(1,003)
(1,477)
$
$
(4,236)
(3,947)
(8,183)
(1) The gains (losses) represent remeasurements of collateral-dependent impaired loans.
(2) The gains (losses) represent aggregate writedowns and charge-offs on real estate owned.
September 30, 2015
Three
Months
Ended
September 30,
2015
Twelve
Months
Ended
September 30,
2015
Level 1
Level 2
Level 3
Total
Total Gains (Losses)
(In thousands)
Impaired loans (1) . . . . . . . . . . . . . . . . . . . . .
Real estate owned (2) . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . .
$
$
—
—
—
$
$
—
—
—
$
$
6,735
81,448
88,183
$
$
6,735
81,448
88,183
$
$
(40)
(654)
(694)
$
$
(4,241)
7,749
3,508
(1) The gains (losses) represent remeasurements of collateral-dependent impaired loans.
(2) The gains (losses) represent aggregate writedowns and charge-offs on real estate owned.
The following describes the process used to value Level 3 assets measured on a nonrecurring basis:
Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair
value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value
of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis
or the value of the underlying collateral are classified as Level 3 assets.
The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and
includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as
applicable. These evaluations are performed in conjunction with the quarterly allowance for loan loss process.
Applicable loans that were included in the previous quarter’s review are reevaluated and if their values are materially different from the
prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated
for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and
determine if any adjustment is necessary.
The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral
values. The following methods are used to value impaired loans:
• The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field
observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms
valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent
information is available and relevant with respect to the fair value of the collateral.
48
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
• The present value of the expected future cash flows of the loans is used for measurement of non collateral-
dependent loans to test for impairment. The Company estimates the future cash flows and then discounts
those using the contractual interest rate.
Real estate owned - When a loan is reclassified from loan status to real estate owned due to the Company taking
possession of the collateral, a Special Credits officer, along with the Special Credits manager, obtains a valuation,
which may include appraisals or third-party price options, which is used to establish the fair value of the underlying
collateral. The determined fair value, less selling costs, becomes the carrying value of the REO asset.
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.
Financial assets
Cash and cash equivalents . . . . . . . . . . . . . .
Available-for-sale securities:
Equity securities . . . . . . . . . . . . . . . . . . . .
U.S. government and agency securities . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . .
Mortgage-backed securities
Agency pass-through certificates . . . . . .
Commercial MBS . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . .
Held-to-maturity securities:
Mortgage-backed securities
Agency pass-through certificates . . . . . .
Total held-to-maturity securities . . . . . .
Loans receivable . . . . . . . . . . . . . . . . . . . . . .
FDIC indemnification asset . . . . . . . . . . . . .
FHLB and FRB stock . . . . . . . . . . . . . . . . . .
Other assets - interest rate contracts . . . . . . .
Financial liabilities
Customer accounts . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . .
Other liabilities - interest rate contracts . . . .
Other liabilities - commercial loan hedges . .
Other liabilities - long term
borrowing hedges . . . . . . . . . . . . . . . . . . .
September 30, 2016
September 30, 2015
Level
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(In thousands)
1
1
2
2
2
2
2
2
3
3
2
2
2
2
2
2
2
$
450,368 $
450,368 $
284,049 $
284,049
101,824
259,351
27,670
461,138
993,041
79,870
101,824
259,351
27,670
461,138
101,952
482,464
27,123
505,800
101,952
482,464
27,123
505,800
993,041
79,870
1,160,518
1,160,518
102,706
102,706
1,922,894
1,922,894
2,380,563
2,380,563
1,417,599
1,441,556
1,643,216
1,637,420
1,417,599
1,441,556
1,643,216
1,637,420
9,910,920
10,414,794
9,170,634
9,667,750
12,769
117,205
20,895
12,095
117,205
20,895
16,275
107,198
11,879
15,522
107,198
11,879
10,600,852
10,184,321
10,631,703
10,004,290
2,080,000
2,184,671
1,830,000
1,938,384
20,895
3,312
20,895
3,312
11,879
966
11,879
966
31,347
31,347
14,555
14,555
49
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing
based on the securities’ relationship to other benchmark quoted prices as provided by an independent third party,
and are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1
input method.
Loans receivable – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages,
fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the
same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by
discounting the future cash flows and estimated prepayments using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued
at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not
included in the fair value calculation but are included in the carrying amount.
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 – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated
future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest Rate Contracts – The Bank offers interest rate swaps to its variable rate borrowers who want to manage their
interest rate risk. At the same time, the Bank enters into the opposite trade with a counterparty to offset its interest
rate risk. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted
cash flow technique.
Commercial Loan Hedges – The fair value of the interest rate swaps are estimated by a third party pricing service using a
discounted cash flow technique.
Long Term Borrowing Hedges – The fair value of the interest rate swaps are estimated by a third party pricing service
using a discounted cash flow technique.
NOTE G
DERIVATIVES AND HEDGING ACTIVITIES
The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan
customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable
rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement
with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company
enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and
fixed components of the client’s swap agreement. The Company had $840,935,000 and $439,416,000 notional in
interest rate swaps to hedge this exposure as of September 30, 2016 and September 30, 2015, respectively. As of
September 30, 2016, $34,432,000 of the outstanding notional balance related to a related party loan. The interest rate
swaps are derivatives under FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in earnings.
There was no net impact to the statement of operations for the year ended September 30, 2016 as the changes in
value for the asset and liability side of the swaps offset each other.
The Company has also entered into interest rate swaps, some of which are forward-starting, to convert certain existing
and future short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk
of rising interest rates, specifically LIBOR rates, which are a benchmark for the short term borrowings. The hedging
program qualifies as a cash flow hedge under ASC 815, which provides for offsetting of the recognition of gains and
losses of the interest rate swaps and the hedged items. The hedged item is the LIBOR portion of the series of existing
or future short-term fixed rate borrowings over the term of the interest rate swap. The change in the fair value of the
interest rate swaps is recorded in other comprehensive income. The Company had $700,000,000 and $400,000,000
notional in interest rate swaps to hedge existing and anticipated future borrowings as of September 30, 2016 and
September 30, 2015, respectively. The unrealized loss, gross of the related tax benefit, on these interest rate swaps as
of September 30, 2016 was $31,347,000.
50
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The Company has also entered into an interest rate swap to hedge the interest rate risk of an individual fixed rate
commercial loan and this relationship qualifies as a fair value hedge under ASC 815, which provides for offsetting
of the recognition of gains and losses of the interest rate swap and the hedged item. The Company hedges this loan
using an interest rate swap with a notional amount of $54,155,000 and $54,815,000 as of September 30, 2016 and
September 30, 2015, respectively.
The following table presents the fair value and balance sheet classification of derivatives outstanding.
Asset Derivatives
Liability Derivatives
September 30, 2016
September 30, 2015
September 30, 2016
September 30, 2015
(In thousands)
Balance
Sheet
Fair
Value
Balance
Sheet
Fair Value
Interest rate contracts . .
Commercial loan
hedges . . . . . . . . . . . .
Long term borrowing
hedges . . . . . . . . . . . .
Other
assets
Other
assets
Other
assets
$ 20,895
—
—
Other
assets
Other
assets
Other
assets
Balance
Sheet
Other
Fair
Value
Balance
Sheet
Other
Fair
Value
$
11,879
liabilities $ 20,895
liabilities $ 11,879
Other
liabilities
Other
liabilities
—
—
3,312
31,347
$ 55,554
Other
liabilities
Other
liabilities
966
14,555
$ 27,400
$ 20,895
$
11,879
NOTE H
INTEREST RECEIVABLE
The following table provides a summary of interest receivable by interest earning asset type.
September 30, 2016
September 30, 2015
(In thousands)
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
29,858
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,670
2,141
$
37,669
$
30,930
6,695
2,804
40,429
Interest receivable was $37,669,000 at September 30, 2016 as compared to $40,429,000 as of September 30,
2015. The decrease is primarily due to lower rates as the average period rate for earning assets was 3.58% as of
September 30, 2016 compared to 3.63% as of September 30, 2015.
NOTE I
PREMISES AND EQUIPMENT
The following table provides a summary of premises and equipment by asset type.
September 30,
2016
September 30,
2015
(In thousands)
Estimated
Useful Life
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$
109,414
$
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, software and equipment . . . . . . . . . . . . . . . . . . . . . .
25 - 40
7 - 15
2 - 10
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
143,841
18,365
115,199
386,819
(104,868)
$
281,951 $
113,347
147,757
10,193
89,919
361,216
(84,969)
276,247
The Company has non-cancelable operating leases for certain branch offices. Future minimum net rental commitments
for all non-cancelable leases, including maintenance and associated costs, are as follows: $4,902,000 for 2017, $3,942,000
for 2018, $3,422,000 for 2019, $3,228,000 for 2020, $2,538,000 for 2021 and $13,159,000 thereafter.
Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $5,300,000,
$6,600,000 and $6,600,000 in 2016, 2015, and 2014, respectively.
51
NOTE J
CUSTOMER ACCOUNTS
The following table provides the composition of the Company’s customer accounts, including interest rate buckets
and maturity buckets for time deposits.
September 30,
2016
September 30,
2015
(In thousands)
Checking accounts, .15% and under . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,721,721
$
2,555,766
Passbook and statement accounts, .10% and under . . . . . . . . . . . . . . . . . . . . . . .
Insured money market accounts, .01% to .15% . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposit accounts
Less than 1.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.00% to 1.99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.00% to 2.99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.00% to 3.99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.00% and higher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
820,980
2,462,891
3,268,272
1,292,612
34,376
—
—
700,794
2,564,318
3,126,119
1,177,356
501,409
5,156
785
Total time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,595,260
4,810,825
Time deposit maturities are as follows:
$
10,600,852 $
10,631,703
September 30,
2016
September 30,
2015
(In thousands)
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,894,900
$
2,862,313
1 to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
798,309
293,058
Over 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
608,993
1,068,792
321,118
558,602
$
4,595,260 $
4,810,825
Customer accounts over $250,000 totaled $2,250,622,000 as of September 30, 2016 and $2,096,690,000 as of
September 30, 2015.
Interest expense on customer accounts consisted of the following:
Year ended September 30,
2016
2015
2014
(In thousands)
Checking accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,491
$
1,036
$ 1,259
Passbook and statement accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insured money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
734
3,285
47,425
52,935
Less early withdrawal penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(450)
660
3,631
607
4,574
46,273
52,636
51,600
(546)
59,076
(552)
$
52,485
$
51,054
$
58,524
Weighted average interest rate at end of year . . . . . . . . . . . . . . . . . . .
Weighted daily average interest rate during the year . . . . . . . . . . . . . .
0.50%
0.50%
0.48%
0.48%
0.51%
0.57%
52
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
NOTE K
FHLB ADVANCES AND OTHER BORROWINGS
The table below shows the maturity dates of outstanding FHLB advances.
September 30,
2016
September 30,
2015
(In thousands)
FHLB advances
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
200,000
$
1 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
880,000
700,000
More than 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300,000
250,000
750,000
430,000
400,000
$
2,080,000 $
1,830,000
There were no advances included in the above table which are callable by the FHLB.
Financial data pertaining to the weighted-average cost and the amount of FHLB advances were as follows.
2016
2015
2014
(In thousands)
Weighted average interest rate at end of year . . . . . . . . . . . . . . .
Weighted daily average interest rate during the year . . . . . . . . .
3.15%
3.22%
3.35%
3.57%
3.52%
3.56%
Daily average of FHLB advances during the year . . . . . . . . . . . .
$ 1,992,434
$ 1,848,904
$ 1,955,205
Maximum amount of FHLB advances at any month end . . . . .
$ 2,080,000
$ 1,930,000
$ 2,205,000
Interest expense during the year (excludes interest rate
swap expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
64,058
$
64,331
$
68,307
On June 1, 2015, the FHLB of Seattle merged into the FHLB of Des Moines to create a larger, financially stronger,
member-owned cooperative. The Bank has a credit line with the Federal Home Loan Bank of Des Moines (“FHLB”)
equal to 49.0% of total assets. The FHLB of Des Moines has assumed the Bank’s advances with the FHLB of Seattle
as of the merger date.
The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate
cash management advance program and a fixed-rate term loan agreements. All borrowings are secured by stock of the
FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements
with the FHLB.
As of September 30, 2016, 2015 and 2014, respectively, there were no reverse repurchase agreements or other
borrowings. The Bank has historically entered into sales of reverse repurchase agreements which are an additional
source of liquidity. Fixed-coupon reverse repurchase agreements have been treated as financings, and the obligations
to repurchase securities sold have been reflected as a liability in the consolidated statements of financial condition in
prior years.
53
NOTE L
INCOME TAXES
The table below provides a summary of the Company’s tax assets and liabilities, including deferred tax assets and
deferred tax liabilities by major source. Deferred tax balances represent temporary differences between the tax basis
and the financial statement carrying amounts of assets and liabilities.
September 30,
2016
September 30,
2015
(In thousands)
Deferred tax assets
Loan loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
45,531
$
REO reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustment on available-for-sale securities and cash flow hedges . . .
Asset purchase tax basis difference (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Delinquent accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC loss share guarantee receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustment on available-for-sale securities and cash flow hedges . . .
Asset purchase tax basis difference (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan origination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset (liability). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,018
6,482
—
2,812
9,598
3,210
71,651
24,135
—
2,830
14,826
34,936
76,727
(5,076)
21,123
Net tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,047 $
43,749
11,213
—
5,973
3,069
7,803
3,891
75,698
24,135
205
13,875
25,934
64,149
11,549
2,964
14,513
The table below presents a reconciliation of the statutory federal income tax rate to the Company’s effective income
tax rate.
Year ended September 30,
Statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
2014
35%
1
(2)
34%
35%
2
(1)
36%
35%
2
(1)
36%
54
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The following table summarizes the Company’s income tax expense (benefit) for the respective periods.
Year ended September 30,
Federal:
2016
2015
2014
(In thousands)
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
57,173
$
79,841
$
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,961
3,244
79,134
83,085
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,600
6,636
$
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,351
4,951
(518)
6,118
Total
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,773
86,477
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,312
2,726
$
84,085 $
89,203 $
70,797
10,591
81,388
4,987
1,189
6,176
75,784
11,780
87,564
Based on current information the Company does not expect that changes in the amount of unrecognized tax
benefits over the next twelve months will have a significant impact on its results of operations or financial position.
The Company’s liability for uncertain tax positions was $105,000 as of September 30, 2016 and $110,000 as of
September 30, 2015. These amounts, if recognized, would affect the Company’s effective tax rate. The Company
records interest and penalties related to uncertain tax positions in income tax expense.
The Company’s federal income tax returns are open for the tax years 2013 forward. The Company has been examined
by the Internal Revenue Service through the year ended September 30, 2012.
State income tax returns are generally subject to examination for a period of three to five years after filing of the
respective return. The state impact of any federal changes remains subject to examination by various states for a
period of up to two years after formal notification to the states. The Company’s unrecognized tax benefits are related
to state tax returns open from 2013 through 2016.
NOTE M
401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains a 401(k) and Employee Stock Ownership Plan (the “Plan”) for the benefit of its employees.
Company contributions are made annually as approved by the Board of Directors. Such amounts are not in excess of
amounts permitted by the Employee Retirement Income Security Act of 1974.
Plan participants may make voluntary after-tax contributions of their considered earnings as defined by the Plan. In
addition, participants may make pre-tax contributions up to the statutory limits through the 401(k) provisions of the
Plan. The annual addition from contributions to an individual participant’s account in this Plan cannot exceed the
lesser of 100% of base salary or $53,000.
Effective January 1, 2016, new employees become eligible to participate in the Plan upon completion of one year of
service. Such eligible employees become a participant in the Plan on the first day of the calendar quarter (January 1,
April 1, July 1 or October 1) coincident with or following the completion of the one year of service requirement. The
Plan defines “year of service” as a 12-month period in which the eligible employee works at least 1,000 hours of service
and the first eligibility service period starts on the first day of employment. After the first 12-month eligibility service
period, if the Plan needs to measure another eligibility service period (e.g., if the employee does not complete 1,000
hours of service in the first 12-month period), the Plan will measure the eligibility service period on a Plan Year basis.
Effective January 1, 2014, the Company added a guaranteed safe harbor matching contribution component to the
plan equal to 100% of the first 4% of compensation that employee’s contribute to their account. In addition to the
new match being guaranteed, all safe harbor matching contributions are immediately vested. The new match is not
subject to the 6 year vesting schedule of the current profit sharing contribution. This provides plan participants more
investment flexibility. The Company anticipates that all eligible employees, regardless of personal plan participation,
will continue to receive an annual discretionary profit sharing contribution from the Company, now capped at 7% of
eligible compensation with this change.
Company contributions to the Plan amounted to $7,600,000, $8,700,000 and $7,314,000 for the years ended 2016,
2015 and 2014, respectively.
55
NOTE N
STOCK AWARD PLANS
The Company’s stock based compensation plan (‘2011 Incentive Plan’) provides for grants of stock options and
restricted stock. Stockholders authorized 5,000,000 shares of common stock to be reserved pursuant to the 2011
Incentive Plan and 3,348,400 shares remain available for issuance as of September 30, 2016.
When applicable, stock options are granted with an exercise price equal to the market price of the Company’s stock
at the date of grant; those option awards generally vest based on 5 years of continuous service and have 10-year
contractual terms. The Company’s policy is to issue new shares upon option exercises. The fair value of stock options
granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires input of
highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may
be other factors that would otherwise have a significant effect on the value of employee stock options granted but are
not considered by the model. Expected volatility is based on the historical volatility of the Company’s stock. The risk-
free interest rate is based on the U.S. Treasury yield curve that is in effect at the time of grant with a remaining term
equal to the options’ expected life. The expected term represents the period of time that options granted are expected
to be outstanding.
Stock Option Awards:
There were no stock options granted under the 2011 Incentive Plan during 2016, 2015 and 2014.
A summary of stock option activity and changes during the year are as follows.
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at September 30, 2015 . . . . . . . . .
1,027,374
$
21.64
3
$
1,867
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at September 30, 2016 . . . . . . . . . .
Exercisable at September 30, 2016 . . . . . . . . . . .
—
(438,456)
(129,475)
459,443 $
459,443 $
—
21.51
22.32
21.47
21.47
The table below presents other information regarding stock options.
2 $
2 $
2,392
2,392
Year ended September 30,
2016
2015
2014
(In thousands, except fair value
of options granted)
Compensation cost for stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
89
$
Weighted average grant date fair value per stock option . . . . . . . . . . . . . . . . .
Total intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant date FV of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit realized for option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.73
1,651
1,422
9,283
—
232
2.96
831
368
2,069
—
$
324
2.95
1,136
1,962
10,142
159
56
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
The following is a summary of activity related to non-vested stock options.
Year ended September 30,
2016
2015
2014
Non-vested Stock Options
Outstanding at beginning of
period . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . .
Outstanding at end of period
— $
Weighted
Average
Grant Date
Fair Value
Options
Outstanding
Weighted
Average
Grant Date
Fair Value
Options
Outstanding
Weighted
Average
Grant Date
Fair Value
Options
Outstanding
69,287 $
—
(62,227)
(7,060)
3.85
—
3.91
3.89
—
145,795 $
—
(61,018)
(15,490)
69,287 $
3.87
—
3.88
3.90
3.85
287,750 $
—
(119,520)
(22,435)
145,795 $
3.44
—
2.88
3.63
3.87
As of September 30, 2016, there was no remaining unrecognized compensation cost for stock options.
Restricted Stock Awards:
The Company grants shares of restricted stock pursuant to the 2011 Incentive Plan. The restricted stock grants are
subject to a service condition and vest over a period of one to seven years.
Certain grants of restricted stock to executive officers are also subject to additional performance conditions based
upon meeting certain total shareholder return targets pre-established by the Board. The Company had a total of
490,363 shares of restricted stock outstanding as of September 30, 2016, with a fair market value at the date of grant
of $7,845,808.
The following table summarizes information about nonvested restricted stock activity.
Year ended September 30,
2016
2015
2014
Non-vested Restricted Stock
Outstanding
Outstanding at beginning of
period . . . . . . . . . . . . . . . . .
521,302 $
Granted . . . . . . . . . . . . . . . . .
229,450
Vested . . . . . . . . . . . . . . . . . . .
(165,965)
Forfeited . . . . . . . . . . . . . . . . .
(94,424)
Outstanding at end of period
490,363 $
Weighted
Average
Fair Value Outstanding
Weighted
Average
Fair Value Outstanding
Weighted
Average
Fair Value
15.03
17.20
15.96
13.64
16.00
515,845 $
301,750 $
(223,043)
(73,250)
521,302 $
14.10
14.26
13.24
10.72
15.03
480,904 $
300,500
(202,014)
(63,545)
515,845 $
11.52
15.43
11.68
8.50
14.10
Compensation expense related to restricted stock awards was $3,357,108, $3,271,564, and $3,085,081 for the years
ended 2016, 2015 and 2014, respectively.
NOTE O
STOCKHOLDERS’ EQUITY
The Company and the Bank are subject to various regulatory capital requirements. Quantitative measures established
by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the following table) of Common Equity Tier 1, Tier 1 and Total capital to risk weighted
assets (as defined in the regulations) and Tier 1 capital to average assets (as defined in the regulations). Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action
by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The
Company and the Bank are also subject to certain restrictions on the amount of dividends that they may declare
without prior regulatory approval.
As of September 30, 2016 and 2015, the Company and the Bank met all capital adequacy requirements to which
they are subject, and the OCC categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum Common Equity Tier
1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios as set forth in the following table. The Bank’s
actual capital amounts and ratios as of these dates are also presented. There are no conditions or events since that
management believes have changed the Bank’s categorization.
57
Categorized as
Well Capitalized
Under Prompt
Corrective Action
Provisions
Capital
Adequacy
Guidelines
Actual
Capital
Ratio
Ratio
Ratio
(In thousands)
September 30, 2016
Common Equity Tier 1 risk-based
capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
$
1,690,380
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,828
17.54%
17.32
4.50%
4.50
Tier 1 risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015
Common Equity Tier 1 risk-based
capital ratio:
1,690,380
1,668,828
1,807,740
1,786,188
1,690,380
1,668,828
17.54
17.32
18.76
18.54
11.60
11.45
The Company . . . . . . . . . . . . . . . . . . . . . .
$
1,658,985
18.81%
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
1,652,569
18.73
Tier 1 risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio:
The Company . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . .
1,658,985
1,652,569
1,769,587
1,763,171
1,658,985
1,652,569
18.81
18.73
20.07
19.98
11.71
11.66
6.00
6.00
8.00
8.00
4.00
4.00
4.50%
4.50
6.00
6.00
8.00
8.00
4.00
4.00
NA
6.50%
NA
8.00
NA
10.00
NA
5.00
NA
6.50%
NA
8.00
NA
10.00
N/A
5.00
At periodic intervals, the Federal Reserve, the OCC and the FDIC routinely examine the Company’s and the Bank’s
financial statements as part of their oversight. Based on their examinations, these regulators can direct that the
Company’s or Bank’s financial statements be adjusted in accordance with their findings.
The federal banking agencies released new regulatory capital rules which became effective on January 1, 2015.
These new rules raised the minimum capital ratios and established new criteria for regulatory capital. Minimum
capital ratios for four measures are now established for capital adequacy purposes as indicated in the table above.
The Common Equity Tier 1 capital ratio is new; it recognizes common equity as the highest form of capital.
The denominator for all except the leverage ratio is risk weighted assets. The new rules also set forth a “capital
conversation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus
these buffers, restrictions can be placed on the bank by its regulators. These restrictions include reducing dividend
payments, share-backs and staff bonus payments. The purpose of these buffers is to require banks to build up capital
outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where
58
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
losses are incurred, the minimum capital ratios can still be met. The new capital rules detail a phase-in period for the
new minimum ratios and the capital buffers before the full minimum ratios take effect in 2019. The Company has
calculated its capital ratios using the new rules since March 31, 2015 and the change did not have a material impact
on its consolidated financial statements. There are also new standards for Adequate and Well Capitalized criteria that
are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank must maintain
minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios as set
forth in the above table. These rules are further described in the 10-K report under “Washington Federal, National
Association (Bank) - Regulatory Capital Requirements”. Both the Company and the Bank have sufficient capital to
meet these new rules.
The Company and the Bank are subject to regulatory restrictions on paying dividends.
The Company has an ongoing stock repurchase program and 3,867,563 shares were repurchased during 2016 at a
weighted average price of $22.72. In 2015, 5,841,204 shares were repurchased at a weighted average price of $21.70.
As of September 30, 2016, Management had authorization from the Board of Directors to repurchase up to 5,039,310
additional shares.
In connection with the 2008 Troubled Asset Relief Program (“TARP”), the Company issued 1,707,456 warrants to
purchase common stock at an exercise price of $17.57. In September 2016, the Company repurchased 892,240 of
these warrants with a value of $7,718,158. Warrants remaining outstanding were 808,616 as of September 30, 2016
and 1,700,856 as of September 30, 2015, and they have an expiration date of November 14, 2018. The outstanding
warrants are considered in the calculation of diluted shares outstanding using the treasury stock method.
The following table sets forth information regarding earnings per share calculations.
Year ended September 30,
2016
2015
2014
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . .
91,399,038
95,644,639
101,154,030
Weighted average dilutive warrants . . . . . . . . . . . . . . . . . . . . . .
440,366
340,016
Weighted average dilutive options . . . . . . . . . . . . . . . . . . . . . . .
73,514
69,304
352,171
84,150
Weighted average diluted shares . . . . . . . . . . . . . . . . . . . . . . . . .
91,912,918
96,053,959
101,590,351
Net income (In thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
164,049
1.79
1.78
$
$
160,316
1.68
1.67
157,364
1.56
1.55
59
NOTE P
FINANCIAL INFORMATION – WASHINGTON FEDERAL, INC.
The following Washington Federal, Inc. (parent company only) financial information should be read in conjunction
with the other notes to the Consolidated Financial Statements.
Condensed Statements of Financial Condition
September 30,
2016
September 30,
2015
(In thousands)
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
24,300
$
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
7,628
—
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,954,179
1,949,262
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,978,494 $
1,956,890
Liabilities
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,763 $
2,763
1,211
1,211
Stockholders’ equity
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,975,731
1,955,679
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,978,494 $
1,956,890
Condensed Statements of Operations
Twelve Months Ended September 30,
Income
2016
2015
2014
(In thousands)
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 148,000 $ 175,000 $
70,000
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148,000
175,000
70,000
Expense
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
435
435
439
439
485
485
Net income (loss) before equity in undistributed net income (loss)
of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,565
174,561
69,515
Equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . . . .
16,336
(14,402)
87,675
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
163,901
160,159
157,190
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148
157
174
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 164,049 $ 160,316 $ 157,364
60
NOTES TO THE CONSOLiDATED FiNANCiAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
Twelve Months Ended September 30,
Cash Flows From Operating Activities
2016
2015
2014
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
164,049
$
160,316
$
157,364
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries . . . . . . . . . . . .
(12,677)
32,375
(87,943)
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . .
(15)
—
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,552
(13,189)
Net cash provided by (used in) operating activities . . . . . . . . . . . . .
152,909
179,502
Cash Flows From Financing Activities
Proceeds from exercise of common stock options and related
tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,283
(7,744)
(87,850)
(49,926)
2,070
—
(126,728)
(51,111)
Net cash provided by (used in) financing activities . . . . . . . . . . . .
(136,237)
(175,769)
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,672
7,628
3,733
3,895
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
24,300 $
7,628 $
NOTE Q
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited interim results of operations by quarter for the years presented.
1
4,152
73,574
10,252
—
(104,291)
(42,065)
(136,104)
(62,530)
66,425
3,895
Twelve Months Ended September 30, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 135,124
$ 135,063
$ 133,735
$ 132,872
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,255
28,738
29,495
30,056
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106,869
106,325
104,240
102,816
Provision (release) for loan losses . . . . . . . . . . . . . . . . . . . . .
—
Other operating income (including REO gain (loss), net) .
12,055
(1,500)
14,623
(1,650)
15,573
(3,100)
14,830
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,509
59,226
56,305
55,407
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
54,415
63,222
65,158
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,317
21,499
22,154
65,339
21,115
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . . . .
$
$
35,098 $
41,723 $
43,004 $
44,224
$
0.38
0.38
0.13
$
0.45
0.45
0.14
$
0.47
0.47
0.14
0.49
0.49
0.14
61
Twelve Months Ended September 30, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 132,741
$ 132,630
$ 129,300
$ 135,339
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,558
28,750
28,735
28,486
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,183
103,880
100,565
106,853
Provision (release) for loan losses . . . . . . . . . . . . . . . . . . . . .
Other operating income (REO expense) . . . . . . . . . . . . . . .
(5,500)
5,695
(3,949)
12,314
(1,932)
14,999
219
16,719
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,600
57,324
56,719
57,208
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
59,778
62,819
60,777
66,145
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,371
22,458
21,727
23,647
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . . . .
$
$
38,407 $
40,361 $
39,050 $
42,498
$
0.39
0.39
0.15
$
0.42
0.42
0.13
$
0.41
0.41
0.13
0.46
0.45
0.13
62
MANAGEMENT’S rEpOrT ON iNTErNAL
CONTrOL OVEr FiNANCiAL rEpOrTiNG
rEpOrT OF iNDEpENDENT rEGiSTErED
puBLiC ACCOuNTiNG FirM
The management of Washington Federal, Inc. (the
“Company”) is responsible for establishing and maintaining
adequate internal control over financial reporting. The
Company’s internal control system was designed to provide
reasonable assurance to the Company’s management and
Board of Directors regarding the preparation and fair
presentation of published financial statements.
The Company’s management assessed the effectiveness
of the Company’s internal control over financial reporting
as of September 30, 2016. In making this assessment, the
Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in the 2013 version of its Internal
Control-Integrated Framework. Based on its assessment, the
Company’s management believes that as of September 30,
2016, the Company’s internal control over financial reporting
was effective based on those criteria.
The Company’s independent auditors, Deloitte &
Touche LLP, an independent registered public accounting
firm, have issued an audit report on the Company’s internal
control over financial reporting and their report follows.
November 21, 2016
Roy M. Whitehead
Chairman of the Board and
Chief Executive Officer
Vincent L. Beatty
Senior Vice President and
Chief Financial Officer
To the Board of Directors and Stockholders of
Washington Federal, Inc.
Seattle, Washington
We have audited the accompanying consolidated
statements of financial condition of Washington Federal, Inc.
and subsidiaries (the “Company”) as of September 30,
2016 and 2015, and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and
cash flows for each of the three years in the period ended
September 30, 2016. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the consolidated
financial position of Washington Federal, Inc. and
subsidiaries as of September 30, 2016 and 2015, and the
results of their operations and their cash flows for each of
the three years in the period ended September 30, 2016, in
conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial
reporting as of September 30, 2016, based on the criteria
established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated November 21,
2016 expressed an unqualified opinion on the Company’s
internal control over financial reporting.
Seattle, Washington
November 21, 2016
63
rEpOrT OF iNDEpENDENT rEGiSTErED puBLiC ACCOuNTiNG FirM
To the Board of Directors and Stockholders of
Washington Federal, Inc.
Seattle, Washington
We have audited the internal control over financial reporting of Washington Federal, Inc. and subsidiaries (the
“Company”) as of September 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), management’s assertion and our audit of the Company’s internal control over financial reporting included controls
over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the
Office of the Comptroller of the Currency Instructions for Call Reports for Balance Sheet on schedule RC, Income Statement
on schedule RI, and Changes in Bank Equity Capital on schedule RI-A. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management Report’s on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended September 30, 2016, of the Company and our report
dated November 21, 2016, expressed an unqualified opinion on those consolidated financial statements.
Seattle, Washington
November 21, 2016
64
pErFOrMANCE GrApHS
The following graphs compare the cumulative total return to Washington Federal stockholders (stock price appreciation
plus reinvested dividends) to the cumulative total return of the Nasdaq Stock Market Index (U.S. Companies) and the Nasdaq
Financial Stocks Index for the five year period ended September 30, 2016 and since Washington Federal first became a publicly
traded company on November 9, 1982, respectively. The graphs assume that $100 was invested on September 30, 2011 and
November 9, 1982, respectively, in Washington Federal Common Stock, the Nasdaq Stock Market Index and the Nasdaq
Financial Stocks Index, and that all dividends were reinvested. Management of Washington Federal cautions that the stock price
performance shown in the graphs below should not be considered indicative of potential future stock price performance.
$260
$240
$220
$200
$180
$160
$140
$120
$100
2011
2012
2013
2014
2015
2016
$14,100
$12,100
$10,100
$8,100
$6,100
$4,100
$2,100
$100
65
WAFD
NASDAQ
INDEX
NASDAQ
FINANCIAL
INDEX
WAFD
Nasdaq
Nasdaq-Fin
GENErAL COrpOrATE AND STOCkHOLDErS’ iNFOrMATiON
Corporate
Headquarters
Independent
Auditors
Transfer Agent,
Registrar and
Dividend
Disbursing Agent
Annual Meeting
Form 10-K
425 Pike Street
Seattle, Washington 98101
(206) 624-7930
Deloitte & Touche LLP
Seattle, Washington
Stockholder inquiries regarding transfer requirements, cash or stock dividends, lost certificates,
consolidating records, correcting a name or changing an address should be directed to the transfer agent:
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
Telephone: 1-888-888-0315
www.amstock.com
The annual meeting of stockholders will be held at the Sheraton Hotel in downtown Seattle on
January 18, 2017, at 2 p.m., Pacific Time.
To find out more about the Company, please visit our website. The Company uses its website to distribute
financial and other material information about the Company. This report and all SEC filings of the
Company are available through the Company’s website:
www.washingtonfederal.com
Stock Information
Washington Federal, Inc. is traded on the NASDAQ Global Select Market. The common stock symbol is
WAFD. At September 30, 2016, there were approximately 1,400 stockholders of record.
Quarter Ended
Stock Prices
High
Low
Dividends
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22.49
$ 19.67
$
March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.14
24.16
23.93
26.05
23.23
25.22
26.98
19.86
21.46
21.39
22.61
19.87
21.79
23.73
0.15
0.13
0.13
0.13
0.13
0.14
0.14
0.14
Our Board of Directors’ dividend policy is to review our financial performance, capital adequacy, regulatory
compliance and cash resources on a quarterly basis, and, if such review is favorable, to declare and pay a cash
dividend to shareholders.
66
DirECTOrS AND EXECuTiVE OFFiCErS
EXECUTIVE
MANAGEMENT
COMMITTEE
ROY M. WHITEHEAD
Chairman of the Board and
Chief Executive Officer
BRENT J. BEARDALL
President and Chief Banking Officer
VINCENT L. BEATTY
Senior Vice President
Chief Financial Officer
CATHY E. COOPER
Executive Vice President
Retail Banking Group Manager
MARK A. SCHOONOVER
Executive Vice President
Chief Credit Officer
BOARD OF
DIRECTORS
ROY M. WHITEHEAD
Chairman of the Board and
Chief Executive Officer
DAVID K. GRANT
Managing Partner of Catalyst
Storage Partners. Former Chief
Executive Officer of Shurgard
Storage Centers, Inc.
ANNA C. JOHNSON
Senior Partner
Scan East West Travel
THOMAS J. KELLEY
Retired Partner,
Arthur Andersen LLP
ERIN N. LANTZ
Vice President and General
Manager, Zillow Group
BARBARA L. SMITH, PhD.
Owner, B. Smith Consulting Group
MARK N. TABBUTT
Chairman of Saltchuk Resources
RANDALL H. TALBOT
Managing Director of Talbot
Financial, LLC. Former President,
Chief Executive Officer and
Director of Symetra Financial
Corporation, Inc.
DIRECTOR
EMERITUS
W. ALDEN HARRIS
67
WASHINGTON FEDERAL LOCATIONS
Go to www.washingtonfederal.com
to find a full list of all the locations
to serve you.
Washington Federal, Inc.
425 Pike Street, Seattle, WA 98101
www.washingtonfederal.com