Washington Federal, Inc.
Annual Report 2016.7
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
2017 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
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BUSINESS DESCRIPTION
Washington Federal, Inc. 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. In this annual report,
‘‘we,’’ ‘‘our,’’ ‘‘Company’’ and ‘‘Washington Federal’’ refer to Washington Federal, Inc. and its consolidated wholly owned
subsidiary, the Bank.
The Company had its origins on April 24, 1917 in Ballard, Washington, and just celebrated 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. As of September 30, 2017, the
stock traded at 91 times its original 1982 offering price, has paid 138 consecutive quarterly cash dividends and, with cash dividends
reinvested, has returned 12,938% total shareholder return to those who invested 35 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,
2017
2016
% Change
(In thousands, except per share data)
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,253,580
$14,888,063
+2.5%
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
313,070
423,521
10,882,622
2,489,544
450,368
849,983
9,910,920
2,490,510
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,835,008
10,600,852
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,225,000
2,005,688
173,532
2,080,000
1,975,731
164,049
1.94
0.84
23.00
87,193
8.64%
1.16
47.82
1.78
0.55
22.03
89,681
8.33%
1.12
50.80
(30.5)
(50.2)
+9.8
—
+2.2
+7.0
+1.5
+5.8
+9.0
+52.7
+4.4
(2.8)
+3.7
3.6
(5.9)
(1) Calculated as total operating costs divided by net interest income, plus other income (excluding non-operating gains)
1
ANNUAL REPORT 2017
Fellow Shareholder,
It is a privilege to report the results of your Company’s 100th year of operations. Fiscal 2017 was a record year for
Washington Federal on several fronts. Net income for the year was a record $173,532,000, a meaningful increase over the
$164,049,000 generated last year. Earnings per share, perhaps the most important measure of performance for shareholders,
increased to $1.94 per share, 9.0% higher than 2016. And, after many years during which financial stocks had underperformed the
market, Washington Federal's shareholders were rewarded in 2017 with a 29% total return.
One of the reasons for optimism about the Company’s future prospects is that the growth in earnings was driven by
fundamental improvements in its balance sheet. Most notably, loan growth of $972 million, or 9.8%, was a key driver and marks
the fourth consecutive year of loan growth in excess of 6%.
In an economy growing at a rate of just above 2%, how is it that
Washington Federal is able to grow its loans at a significantly
faster pace? The answer is relatively simple: Our markets are
growing and business leaders are recognizing the capabilities
Washington Federal has to offer. We are the beneficiaries of
several generations of employees committed to doing what is
right for our clients. Our reputation as a trusted business partner
is growing. Over the last 20 years, we have expanded our
commercial lending capabilities, which now account for 67% of
current-year loan production and 43% of net loans outstanding.
Our position as a mid-sized regional bank makes us capable of
meeting the credit needs of larger commercial clients while
remaining nimble enough to be more responsive to clients than
the trillion-dollar banks.
$11,000
$10,500
$10,000
$9,500
$9,000
$8,500
$8,000
$7,500
$7,000
$6,500
$6,000
Growth in Loans
10.16%
8.07%
6.40%
1.07%
12.00%
9.81%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2013
2014
2015
2016
2017
$ Net Loans (in millions - le! axis)
% Change (right axis)
We have the good fortune of operating in some of the most robust regional economies in the United States. The consistent
themes we see in these growing markets are above-average job growth, low unemployment rates, vibrant technology sectors,
educated workforces and appreciating real estate values. How long these good times will last is something we debate regularly. We
cannot predict what will cause the next downturn in the economy or when it will occur, but we carefully watch monetary and fiscal
policies, geopolitical risk and cybersecurity events. Banks typically fail because of undue credit risk, so we are consistently mindful
of our client selection and tried-and-true concepts such as meaningful borrower equity and the diversification of cash flows for loan
repayments.
Funding for loan growth has come from a combination of sources: shrinking our investment portfolio, increasing wholesale
borrowings and growing deposits. Since our acquisition four years ago of nearly $2 billion of deposits, our primary focus has been
on growing loans to get those funds deployed in higher yielding assets. This year, for the first time since 2013, our loan-to-deposit
ratio crossed over 100%. Another way to look at it is that our deposits are 100% utilized to fund loans, which is a good thing.
Barring an unforeseen hiccup in the economy, we expect loan demand in the next few years to continue to be robust. To fund this
expected growth, we need to grow deposits organically, and so we are investing in improving our digital delivery for both
consumers and businesses. At year end, only 11% of our clients’ transactions occurred at a physical branch, while 89% of
transactions happened through mobile banking, online banking, ATMs or automated processes. Increasingly, our clients’
perception of us is what they see on the screen. We need our digital channels to be secure, reliable, and intuitive. We are
committed to improving in all these categories and are implementing strategies to make banking with Washington Federal even
easier and more convenient on a daily basis.
During 2017, we put into action a new value-added checking account product called ‘‘Green Checking." Green Checking
offers the normal benefits that a customer expects from a checking account, such as low cost ATMs, EMV-chip debit cards, check
writing and electronic statements. Moreover, we have also added features that differentiate us from other institutions while
providing tangible customer value. For a small monthly fee, Green Checking provides identity theft monitoring and resolution
services, discounts on travel and entertainment, plus mobile phone damage insurance. The early returns are positive for both
clients and our bank.
2
ANNUAL REPORT 2017 (CONTINUED)
Capital has always been a key ingredient to the formula of success at Washington Federal. We ended the year in a very strong
capital position with the Bank's Tier 1 Leverage Ratio at 11.27%. Federal banking regulations require a ratio of 5.00% or greater to
be considered ‘‘well capitalized.’’ Often, we hear from analysts and potential investors that we could easily improve our return on
equity and thus boost the stock price by simply reducing the amount of equity. While correct mathematically, from our perspective
this move would be imprudent because no one can predict exactly how much capital we will need in the next down cycle.
Certainly, we have run all the ‘‘stress tests’’ prescribed by regulation as well as our internal stress scenarios. However, we know from
experience that models can be precisely wrong because one cannot reliably predict the future. Our perspective is if we can run the
business in a way that provides a reasonable return to shareholders while maintaining a strong capital position, then we will have a
margin of error to mitigate both current and future risks.
But we also recognize that too much capital can lead to excessive risk taking, so there is an appropriate balance to be found.
Our philosophy is generally to deploy our retained earnings through organic growth. If that growth is not available, we seek to
return earnings back to shareholders. In 2017, we returned 100% of earnings to shareholders in the form of cash dividends and
share repurchases. In the last five years, Washington Federal has repurchased 24.3 million shares at a weighted average price of
$22.04. We look to be opportunistic with the share repurchase program, being more aggressive when the stock price is down and
holding back when the stock moves up. This year, for the first time in our history we also declared a special cash dividend of $0.25
per share on top of our annual cash dividend of $0.60 per share. Cash dividends continue to be important to many of our
shareholders and also serve as a governor on growth, which has contributed nicely to the disciplined expansion the Company has
experienced over its first 100 years.
One of the reasons I have chosen to build my career at Washington Federal for the past 17 years is the authenticity of the
people who work here. Our culture is strong and wholesome, where hard work and results are recognized and rewarded. When
faced with a difficult situation, we try to ask the question, ‘‘What is best for the bank in the long-run?’’ We work as a team,
believing that together we can accomplish more than we can individually. In today's age of mobility and choice, I believe our
employees have remained with the Bank because our culture is engaging and encourages each of us to be kind to both clients and
fellow employees. Our values of integrity, teamwork, ownership, service and simplicity govern how we live and work. In a mature
industry such as banking, there are few competitive advantages. Increasingly, our employees ‘‘are’’ the Washington Federal brand
and provide our clients with the ‘‘why’’ they bank with us. We aspire to be a relationship bank. Having highly engaged and
motivated employees drives the record financial results described above.
I wish to acknowledge the contributions of an individual who has served us as shareholders tirelessly over the last 19 years,
our Executive Chairman Roy M. Whitehead. I have had the good fortune of working side-by-side with Roy for the majority of my
professional career and can honestly say that I have never known a person of such noble character, impeccable integrity and
uncanny business acumen. Under Roy’s leadership, this bank has survived the greatest economic shock since the Great Depression
and has thrived to the benefit of shareholders, clients, and employees. His hand is steady at the helm, leading Washington Federal
forward. His belief is that if you treat people with respect and provide good value, the market will come to you. This continues to
be a guiding principle. One of his favorite sayings is that ‘‘we can stand to lose a little money, but we cannot afford to lose our
good reputation.’’ Perhaps his greatest legacy is the reputation that Washington Federal enjoys today in our communities. We
pride ourselves in the consistency and predictability of Washington Federal. Our belief is that investors and employees anticipated
this management transition and, to this point, it has been a smooth transition.
During the year, we welcomed three new members to our Executive Management Committee, which manages the day-to-day
operations of the Bank. In October of last year, Cathy Cooper was promoted to run our retail banking activities. Cathy has been
with Washington Federal for 29 years and has deep experience in consumer banking, marketing and digital channels. Robert
Peters was promoted in December last year to head our commercial banking operations. Bob has been with us now for three years
after more than 25 years at a large commercial bank, where he often dealt with the region’s most sophisticated clients. In April,
Kim Robison was promoted to manage our operations functions. She has been with Washington Federal for nine years and her
organizational skills and ability to improve our processes make her an outstanding addition to our management team.
I conclude by saying that it is an honor to serve as only the sixth President of Washington Federal. What has been created
here over the last 100 years is much bigger than any one individual. The entire management team and I consider ourselves
stewards of an asset that has been entrusted to our care. As a Boy Scout growing up, I was taught the principle of leaving your
campsite in better condition than you found it. We take this same approach toward our responsibilities at Washington Federal.
3
ANNUAL REPORT 2017 (CONTINUED)
Thank you to the Board of Directors and my colleagues who serve our clients every day. Both have been immensely supportive
of our new management team, as we have gone through this once-in-a-generation transition. I challenge all Washington Federal
employees to love what they do, then make a difference. I have been heartened by the numerous stories of the employees of
Washington Federal doing the extraordinary to positively impact others. I am bullish on our future prospects in large part because
of our great people. We are pleased with the financial results of the past year, but we know we can do even better.
I look forward to seeing you at the Motif Hotel in downtown Seattle on January 24, 2018 at 2 p.m. for the Annual Meeting of
Shareholders. In the meantime, we invite you to 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. We look forward to serving you in the coming
new year.
Sincerely,
Brent J. Beardall
President and Chief Executive Officer
From left to right: Bob Peters, Executive Vice President Commercial Banking; Vince Beatty, Executive Vice President & Chief
Financial Officer; Kim Robison, Senior Vice President Operations; Cathy Cooper, Executive Vice President Retail Banking; Brent
Beardall, President & Chief Executive Officer; and Mark Schoonover, Executive Vice President & Chief Credit 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, and under ‘‘Item 1A. Risk Factors’’
contained in our Form 10-K for the fiscal year ended September 30, 2017, 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;
the severe effects of the continued economic downturn, including high unemployment rates and declines in
housing prices and property values, in the Company’s primary market areas;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve
System and the U.S. Government;
fluctuations in interest rate risk and changes in market interest rates;
the Company’s ability to make accurate assumptions and judgments about the collectability of its loan
portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
the Company’s ability to successfully complete merger and acquisition activities and realize expected strategic
and operating efficiencies associated with such activities;
legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential
limitations in the manner in which the Company conducts its business and undertakes new investments and
activities;
the ability of the Company to obtain external financing 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 success, timeliness and cost of the Company’s remediation efforts associated with its Bank Secrecy Act
program, possible actions of government authorities related thereto and the potential impact of such matters
on the success, timing and ability to pursue the Company’s growth or other business initiatives;
the success of the Company at managing the risks involved in the foregoing and managing its business; and
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the
Company’s control.
All forward-looking statements speak only as of the date on which such statements are made, and the Company
undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising
after the date the forward-looking statement was made.
5
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 businesses and 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 30. All references to 2017, 2016 and 2015 represent balances as of
September 30, 2017, September 30, 2016, and September 30, 2015, 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.
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, 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 3.0% in the next year. This compares to an estimated
increase of 3.2% as of the September 30, 2016, 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 0.5% in the first year and an increase of 1.6% in
the second year, assuming a constant balance sheet and no management intervention.
INTEREST
RATE RISK
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, 2017, in the event of an immediate and parallel increase of 200 basis points in interest rates, the
NPV is estimated to decline by $463 million, or 18.2%, and the NPV-to-total assets ratio to decline to 14.6% from a
base of 16.6%. As of September 30, 2016, the NPV in the event of a 200 basis point increase in rates was 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%. The
decreased NPV sensitivity and lower base NPV ratio is primarily due to lower interest rates as of September 30, 2017.
Repricing Gap Analysis. At September 30, 2017, the Company had approximately $2.4 billion more in liabilities
subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (15.7)% of
total assets. This compares to the (10.1)% gap as of September 30, 2016. 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 $313 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, 2017
Within One
Year
Repricing Period
After 1 Year -
Before 6 Years
(In thousands)
Thereafter
Total
Earning assets (1) . . . . . . . . . . . . . . .
$
4,426,361
$
5,288,964
$
4,461,038
$
14,176,363
Paying liabilities (2) . . . . . . . . . . . . . .
(6,815,708)
(4,126,527)
(2,154,702)
(13,096,937)
Excess (liabilities) assets . . . . . . . . . . .
$ (2,389,347)
$ 1,162,437
$ 2,306,336
Excess as % of total assets. . . . . . . . . .
Policy limit for one year excess . . . . . .
(15.66)%
(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 increased to 2.91% at
September 30, 2017, from 2.65% at September 30, 2016. The spread increase of 26 basis points is primarily due to
changes in the mix of interest earning assets and rising short-term interest rates, which causes the yield on adjustable-rate
loans and investments as well as cash to increase. As of September 30, 2017, the weighted average rate on loans,
mortgage-backed securities and investments increased by 24 basis points to 3.82% compared to September 30, 2016,
while the weighted average cost of funds decreased by 2 basis points to 0.91%.
SEP
2017
JUN
2017
MAR
2017
DEC
2016
SEP
2016
JUN
2016
MAR
2016
DEC
2015
Interest rate on loans and mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate on cash and investment securities . .
Combined earning assets . . . . . . . . . . . . . . . . .
Interest rate on customer accounts . . . . . . . . . .
Interest rate on borrowings. . . . . . . . . . . . . . . .
Combined cost of funds. . . . . . . . . . . . . . . . . .
Interest rate spread . . . . . . . . . . . . . . . . . . . . .
3.96% 3.93% 3.88% 3.84% 3.86% 3.92% 3.94% 3.90%
1.85
3.82
0.54
2.80
0.91
2.91% 2.85% 2.84% 2.73% 2.65% 2.67% 2.76% 2.71%
1.43
3.65
0.48
3.15
0.92
1.25
3.58
0.50
3.15
0.93
1.73
3.73
0.47
2.97
0.89
1.29
3.69
0.50
3.23
0.93
1.17
3.61
0.51
3.13
0.94
1.25
3.61
0.48
3.20
0.90
1.79
3.77
0.50
2.88
0.92
7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Net Interest Income (in millions)- le! axis
Year End Spread - right axis
Net Interest Margin. The net interest margin is measured using the net interest income divided by average earning
assets for the period. The net interest margin increased to 3.13% for the year ended September 30, 2017, from 3.11%
for the year ended September 30, 2016. The yield on earning assets increased 1 basis point to 3.98% and the cost of
interest-bearing liabilities decreased by 1 basis point to 0.92%. 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.
For the year ended September 30, 2017, average earning assets increased by 2.0% to $13,803,646,000, up from
$13,530,558,000 for the year ended September 30, 2016. During 2017, average loans receivable increased
$890,995,000, or 9.4%, while the combined average balances of mortgage-backed securities, other investment securities
and cash decreased by $624,968,000 or 16.0%. 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 2017, average customer deposit accounts increased $25,694,000 or 0.2% and the average balance of FHLB
borrowings increased by $175,552,000, or 8.8%, from 2016.
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 2017 compared to the prior year.
Twelve Months Ended
September 30, 2017
Average
Balance
Interest
(In thousands)
Twelve Months Ended
September 30, 2016
Average
Rate
Average
Balance
Interest
(In thousands)
Average
Rate
Assets
Loans receivable. . . . . . . . . . . . $ 10,402,346 $
Mortgaged-backed securities . . .
Cash & investments . . . . . . . . .
FHLB & FRB stock . . . . . . . . .
Total interest-earning assets . . . .
Other assets. . . . . . . . . . . . . . .
2,561,400
719,175
120,725
13,803,646
1,161,408
Total assets . . . . . . . . . . . . . . . . . $ 14,965,054
Liabilities and Equity
Customer accounts. . . . . . . . . . $ 10,615,511 $
FHLB advances . . . . . . . . . . . .
Total interest-bearing liabilities .
Other liabilities . . . . . . . . . . . .
Total liabilities . . . . . . . . . . .
Stockholders’ equity . . . . . . . . .
2,167,986
12,783,497
173,495
12,956,992
2,008,062
Total liabilities and equity . . . . . . . $ 14,965,054
470,523
60,612
14,187
3,596
548,918
52,023
64,969
116,992
4.52% $
2.37
1.97
2.98
3.98%
9,511,351 $
2,737,947
1,167,596
113,664
13,530,558
1,181,975
$ 14,712,533
0.49% $ 10,589,817 $
3.00
0.92%
1,992,434
12,582,251
161,446
12,743,697
1,968,836
$ 14,712,533
454,085
62,949
16,282
3,477
536,793
4.77%
2.30
1.39
3.06
3.97%
52,485
64,059
116,544
0.50%
3.22
0.93%
Net interest income . . . . . . . . . . .
$
431,926
$
420,249
Net interest margin . . . . . . . . . . .
3.13%
3.11%
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 estimates a loss rate for each loan category by
using charge-off data over a historical period that encompasses a full credit cycle. These rates are then 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.
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 size, loan to value, as well as non-owner or owner occupied. 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The total allowance for loan loss increased by $9,579,000, or 8.44%, from $113,494,000 as of September 30, 2016, to
$123,073,000 at September 30, 2017. As of September 30, 2017, the Company had $126,000 of specific reserves for
individually evaluated loans and the remaining balance of $122,947,000 is general allowance, which was comprised of
$87,166,000 related to HLF and $35,781,000 related to qualitative factors. The Company released $2,100,000 of allowance
for loan losses in 2017 due in large part to net recoveries of previously charged off loans of $14,307,000 partially offset by loan
growth. This was comprised of $17,007,000 in recoveries and $2,700,000 in charge offs in 2017.
The ratio of the allowance for loan losses and reserves for unfunded loan commitments to total gross loans was 1.07% as of
September 30, 2017, and 1.07% as of September 30, 2016.
The reserve for unfunded loan commitments was $7,750,000 as of September 30, 2017, compared to $3,235,000 as of
September 30, 2016.
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, 2017, single-family residential loans comprised 87.7% 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.
The balance of outstanding TDRs decreased to $207,377,000 as of September 30, 2017, from $261,531,000 as of the prior
year end. As of September 30, 2017, 97.5% of the restructured loans were performing. During 2017, there were additions of
$7,878,000 and reductions of $62,032,000 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 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 $70,238,000, or 0.46% of total assets, at September 30, 2017, compared
to $71,441,000, or 0.48% of total assets, at September 30, 2016.
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.
Non-Performing Assets
2017
2016
$ Change
% Change
September 30,
(In thousands)
Non-accrual loans:
Single-family residential . . . . . . . . . . . . . . . . . . . . . . .
$ 27,930
$ 33,148
$ (5,218)
(15.7)%
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction – custom. . . . . . . . . . . . . . . . . . . . . . . .
Land – acquisition & development (A&D) . . . . . . . . . .
Land – consumer lot loans . . . . . . . . . . . . . . . . . . . . .
Multi-Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-accrual loans . . . . . . . . . . . . . . . . . . . . .
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
91
296
605
139
11,815
8,082
531
91
49,580
20,658
—
—
58
510
776
7,100
583
239
—
42,414
29,027
—
91
238
95
(637)
4,715
7,499
292
91
7,166
(8,369)
N/M
N/M
410.3
18.6
(82.1)
66.4
1,286.3
122.2
N/M
16.9
(28.8)
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . .
$ 70,238
$ 71,441
$ (1,203)
(1.7)%
The ratio of the allowance for loan losses to non-accrual loans decreased to 248% as of September 30, 2017, from 268%
as of September 30, 2016. This is primarily due to the 16.9% increase in non-accrual loans.
LIQUIDITY AND
CAPITAL
RESOURCES
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, 2017, was $2,005,688,000, or 13.15%, of total assets as compared to
$1,975,731,000, or 13.27%, of total assets, at September 30, 2016. The Company’s net worth was impacted in the year
by net income of $173,532,000, the payment of $74,519,000 in cash dividends, $98,374,000 of treasury stock
purchases, as well as an increase in accumulated other comprehensive income (loss) of $16,171,000. The Company paid
out 42.9% of its 2017 earnings in cash dividends to common shareholders, compared with 30.4% last year. For the year
ended September 30, 2017, the Company returned 99.6% of net income to shareholders in the form of cash dividends,
stock repurchases and warrant repurchases as compared to 88.7% for the year ended September 30, 2016. 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 48% 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, 2017, the Bank had $2,254,134,000 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 advance 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 $313,070,000 at September 30, 2017, which is a 30.5% decrease from
the balance of $450,368,000 as of September 30, 2016. See ‘‘Interest Rate Risk’’ above and the ‘‘Statement of Cash
Flows’’ included in the financial statements for details regarding this change.
11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CHANGES IN
FINANCIAL
CONDITION
Cash and cash equivalents: Cash and cash equivalents decreased to $313,070,000 at September 30, 2017, as compared
to $450,368,000 at September 30, 2016. The decrease was primarily due to balances being shifted to loans receivable.
Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $656,685,000, or 34.2%, during
the year ended September 30, 2017, to $1,266,209,000, primarily due to principal repayments of $367,713,000 and the
sale of $362,829,000 of available-for-sale securities. As of September 30, 2017, the Company had a net unrealized gain
on available-for-sale securities of $9,622,000, which is recorded net of tax as part of stockholders’ equity.
Held-to-maturity securities: Held-to-maturity securities increased by $229,257,000, or 16.2%, during the year ended
September 30, 2017, to $1,646,856,000 primarily due to purchases of $466,058,000 partially offset by principal
repayments of $229,716,000. There were no held-to-maturity securities sold during the year ended September 30, 2017.
Rising interest rates may cause these securities to be subject to unrealized losses. As of September 30, 2017, the net
unrealized loss on held-to-maturity securities was $10,943,000, which management attributes to the change of interest
rates since acquisition.
Loans receivable: Loans receivable, net of related contra accounts, increased $971,702,000, or 9.8%, to $10,882,622,000
at September 30, 2017, from $9,910,920,000 one year earlier. This increase resulted primarily from record high
originations of $4,238,978,000, which represented a 7.4% increase over originations in the prior year. There were also
loan purchases of $72,856,000 during the year ended September 30, 2017. Commercial loan originations accounted for
66.9% of total originations and consumer originations were 33.1%. The increase in loan originations resulted largely
from the continued focus on commercial lending, coupled with growing economies in all major markets. Loan
repayments for 2017 totaled $3,099,851,000, a $164,684,000 or 5.6% increase from the total repayments of
$2,935,167,000 in 2016. Loan repayments continue to be relatively high due to the continued low interest rate
environment and the increase in shorter duration commercial loans.
The following table presents the gross loan balances by category and the year-over-year change.
September 30, 2017
(In thousands)
September 30, 2016
(In thousands)
Change
$
%
Gross loans by category
Single-family residential . . . . . . . .
Construction . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . .
Land - acquisition & development
Land - consumer lot loans . . . . . .
Multi-family . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . .
Commercial & industrial . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . .
Total gross loans . . . . . . . . . . . . . . . . .
Less:
Allowance for probable losses . . . .
Loans in process . . . . . . . . . . . . .
Net deferred fees, costs and
$
5,711,004
1,597,996
602,631
124,308
104,405
1,303,148
1,434,610
1,093,360
144,850
85,075
12,201,387
123,073
1,149,934
discounts . . . . . . . . . . . . . . . .
Total loan contra accounts . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . .
45,758
1,318,765
$ 10,882,622
46.8% $
13.1
4.9
1.0
0.9
10.7
11.8
9.0
1.2
0.7
100%
5,658,830
1,110,411
473,069
118,497
104,567
1,124,290
1,093,639
978,589
149,716
139,000
10,950,608
51.7% $
10.1
4.3
1.1
1.0
10.3
10.0
8.9
1.4
1.3
100%
52,174
487,585
129,562
5,811
(162)
178,858
340,971
114,771
(4,866)
(53,925)
1,250,779
0.9%
43.9
27.4
4.9
(0.2)
15.9
31.2
11.7
(3.3)
(38.8)
11.4%
113,494
879,484
46,710
1,039,688
$ 9,910,920
9,579
270,450
8.4
30.8
(952)
279,077
971,702
(2.0)
26.8
9.8%
$
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,
2017
2016
Change
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.8%
47.6%
Oregon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.6
11.4
2.9
7.9
4.5
4.9
4.6
2.4
14.5
9.5
7.5
7.0
4.2
4.2
3.8
1.7
(1.8)
1.1
1.9
(4.6)
0.9
0.3
0.7
0.8
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, 2017, FDIC covered loans net of related discounts were $20,572,000, a decrease of $8,402,000 or
29%, from $28,974,000 as of September 30, 2016. The decrease is attributable to net principal payments, maturities and
transfers to REO. The FDIC loss share coverage for single-family residential loans will continue for another three 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 decreased to $70,238,000 as of September 30, 2017, from $71,441,000 at September 30,
2016, a 1.7% decrease. The decrease was a result of an increase of $7,166,000 in non-accrual loans offset by a
$8,369,000 decrease in real estate owned. Non-performing assets as a percentage of total assets was 0.46% at September
30, 2017, compared to 0.48% at September 30, 2016.
Restructured Loans: Total restructured loans declined to $207,377,000 as of September 30, 2017, from $261,531,000
as of September 30, 2016. As of September 30, 2017, $202,272,000 or 97.5% of the restructured loans were
performing. The $5,105,000 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 1.79% as of September 30,
2017, from 2.17% as of September 30, 2016.
Real estate owned: As of September 30, 2017, real estate owned totaled $20,658,000, a decrease of $8,369,000, or
28.8%, from $29,027,000 as of September 30, 2016, as the Bank continued to liquidate foreclosed properties. During
2017, the Company sold real estate owned properties for total net proceeds of $16,248,000.
Interest Receivable: Interest receivable was $41,643,000 as of September 30, 2017, an increase of $3,974,000, or 10.5%,
since September 30, 2016. The increase was primarily a result of the 9.8% rise in loans receivable.
Bank Owned Life Insurance: Bank-owned life insurance increased to $211,330,000 as of September 30, 2017 from
$208,123,000 as of September 30, 2016. The investments in bank-owned life insurance serve to assist in funding the
growth of employee benefit costs.
Intangible assets: The Company’s intangible assets are made up of $293,153,000 of goodwill and the unamortized
balance of the core deposit and other intangibles of $5,529,000 at September 30, 2017.
Customer deposits: As of September 30, 2017, customer deposits totaled $10,835,008,000 compared with
$10,600,852,000 at September 30, 2016, a $234,156,000, or 2.2%, increase. During 2017 and consistent with its
strategy, the Company was able to increase transaction accounts by $355,566,000 or 5.9%, while time deposits
decreased by $121,410,000 or 2.6%. The weighted average rate on customer deposits was 0.54% as of September 30,
2017, and 0.50% at September 30, 2016.
13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table shows the geographic distribution by state for customer deposits.
September 30, 2017
(In thousands)
2017
2016
$ Change
Washington. . . . . . . . . . . . . . . . . . . . . . .
$
5,383,764
49.7% $
5,100,754
48.1% $
283,010
Idaho . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . .
786,974
1,964,490
267,717
326,436
97,670
1,164,743
843,214
7.3%
18.1%
2.5%
3.0%
0.9%
10.7%
7.8%
782,413
7.4% $
1,964,173
18.5% $
285,234
340,324
94,113
2.7% $
3.2% $
0.9% $
4,561
317
(17,517)
(13,888)
3,557
1,188,335
11.2% $
(23,592)
845,506
8.0% $
(2,292)
$ 10,835,008
100% $ 10,600,852
100% $
234,156
FHLB advances and other borrowings: Total FHLB advances were $2,225,000,000 at September 30, 2017, as compared
to $2,080,000,000 at September 30, 2016. The weighted average rate for FHLB borrowings was 2.80% as of September
30, 2017 and 3.15% at September 30, 2016.
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, 2017
Total
Less than
1 Year
1 to 5
Years
Over 5
Years
(In thousands)
Customer accounts (1). . . . . . . . . . . . . . . . . .
$ 10,835,008
$
8,914,869
$
1,920,009
$
130
Debt obligations (2). . . . . . . . . . . . . . . . . . . .
2,225,000
1,395,000
Operating lease obligations . . . . . . . . . . . . . .
41,017
5,956
430,000
18,056
400,000
17,005
$ 13,101,025
$ 10,315,825
$ 2,368,065
$
417,135
(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.
RESULTS OF
OPERATIONS
For highlights of the quarter-by-quarter results for the years ended September 30, 2017, and 2016, see Note Q,
‘‘Selected Quarterly Financial Data (Unaudited)’’.
COMPARISON OF 2017 RESULTS WITH 2016
Net Income: Net income increased $9,483,000, or 5.8%, to $173,532,000 for the year ended September 30, 2017, as
compared to $164,049,000 for the year ended September 30, 2016.
Net Interest Income: For the year ended September 30, 2017, net interest income was $431,926,000, an increase of
$11,677,000 or 2.8% from the year ended September 30, 2016. The increase was primarily driven by a higher average
balance on loans receivable. For the year ended September 30, 2017, average earning assets increased by 2.0% to
$13,803,646,000, up from $13,530,558,000 for the year ended September 30, 2016. During 2017, average loans
receivable increased $890,995,000 or 9.4%, while the combined average balances of mortgage backed securities, other
investment securities and cash decreased by $624,968,000 or 16.0%. The net interest margin increased to 3.13% for the
year ended September 30, 2017, from 3.11% for the year ended September 30, 2016. The yield on earning assets
increased 1 basis point to 3.98% and the cost of interest bearing liabilities decreased by 1 basis point to 0.92%. The
higher yield on interest earning assets is primarily the result of changes in the asset mix.
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth certain information explaining changes in interest income and interest expense for the
period indicated compared to the same period one year ago. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income
and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate.
Rate / Volume Analysis:
($ in thousands)
Interest income:
Comparison of Year Ended
September 30, 2017 and
September 30, 2016
Rate
Total
Volume
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgaged-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense:
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 40,942
(4,192)
(8,050)
28,700
180
3,518
3,698
$ 25,002
$ (24,504)
1,855
6,074
(16,575)
(642)
(2,608)
(3,250)
$ (13,325)
$ 16,438
(2,337)
(1,976)
12,125
(462)
910
448
$ 11,677
(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 $2,100,000 for the
year ended September 30, 2017, which compares to a release of $6,400,000 for the year ended September 30, 2016. 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 $14,307,000 for the year ended September 30, 2017, compared with
$13,065,000 of net recoveries for the year ended September 30, 2016. Non-accrual loans were $49,580,000, or 0.33% of
total assets, at September 30, 2017, as compared to $42,414,000, or 0.28% of total assets, at September 30, 2016,
representing an increase of 16.9%.
Unfunded commitments tend to vary depending on our loan mix and the proportional share of commercial loans. The
reserve for unfunded commitments was $7,750,000 as of September 30, 2017, which is an increase from $3,235,000 at
September 30, 2016. Management believes the allowance for loan losses plus the reserve for unfunded commitments,
totaling $130,823,000, 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,
2017.
Other Income: Other income was $52,215,000 for the year ended September 30, 2017, an increase of $5,179,000, or
11.0%, from the $47,036,000 for the year ended September 30, 2016. The increase is primarily because 2017 included
a $3,499,000 gain on sale of investment securities as well as a $6,100,000 gain on bank-owned life insurance. During
2016, the Company recorded a gain of $3,800,000 resulting from the sale of a branch property. Deposit fee income was
$22,643,000 for the year ended September 30, 2017, compared to $21,738,000 for the year ended September 30, 2016.
Other Expense: Operating expense was $231,519,000 for the year ended September 30, 2017, a decrease of $3,928,000
or 1.7% from the $235,447,000 for the year ended September 30, 2016. The improvement in 2017 is primarily due to a
$2,123,000 decrease in information technology costs and a $3,088,000 decrease in product delivery costs related to the
Company’s fiscal 2016 implementation of new systems. These decreases were partially offset by $1,692,000 higher
occupancy expense. The number of staff, including part-time employees on a full-time equivalent basis, was 1,818 and
1,806 at September 30, 2017 and 2016, respectively. Total operating expense for the years ended September 30, 2017,
and 2016 equaled 1.55% and 1.60%, respectively, of average assets.
15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gain (Loss) on Real Estate Owned: Net gain on real estate owned was $1,494,000 for the year ended September 30,
2017, a decrease of $8,552,000, or 85.1%, from the $10,046,000 for the year ended September 30, 2016. This amount
includes ongoing maintenance expense, periodic valuation adjustments, and gains (losses) on sales of REO.
Income Tax Expense: Income tax expense was $82,684,000 for the year ended September 30, 2017, a decrease of
$1,401,000, or 1.67%, from the $84,085,000 for the year ended September 30, 2016. The effective tax rate for 2017 was
32.27% as compared to 33.89% for the year ended September 30, 2016. 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 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 $802,078,000 or 17.0%. The net interest margin increased to 3.11% for the year ended
September 30, 2016 from 3.08% for the year ended September 30, 2015. The yield on earning assets increased 2 basis
points to 3.97% and the cost of interest bearing liabilities declined by 1 basis point to 0.93%. The higher yield on
earning assets is the result of changes in the asset mix as the average balance of mortgage-backed securities and other
investment securities decreased while the average balance of loans receivable increased. The decrease in interest cost was
due to changes in the mix of customer deposits and FHLB advances.
The following table sets forth certain information explaining changes in interest income and interest expense for the
period indicated compared to the same period one year ago. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income
and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate.
Rate / Volume Analysis:
($ in thousands)
Interest income:
Comparison of Year Ended
September 30, 2016 and
September 30, 2015
Rate
Total
Volume
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,395
$ (27,312)
$ 17,083
Mortgaged-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense:
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
All interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,824)
(7,283)
29,288
(370)
3,900
3,530
(619)
4,883
(23,048)
1,801
(5,859)
(4,058)
(8,443)
(2,400)
6,240
1,431
(1,959)
(528)
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,758
$ (18,990)
$
6,768
(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.
16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 proportional 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.
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.
17
SELECTED FINANCIAL DATA
Year ended September 30,
2017
2016
2015
2014
2013
(In thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $
548,918
$
536,793
$
530,553
$
533,697
$
516,291
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . .
Provision (reversal) for loan losses . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . .
Income taxes
116,992
431,926
(2,100)
53,709
231,519
256,216
82,684
116,544
420,249
(6,250)
57,082
235,447
248,134
84,085
117,072
413,481
(11,162)
49,727
224,851
249,519
89,203
128,077
405,620
(15,401)
27,916
204,009
244,928
87,564
136,159
380,132
1,350
20,074
164,240
234,616
83,111
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
173,532
$
164,049
$
160,316
$
157,364
$
151,505
Per share data . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . .
1.95
1.94
0.84
$
1.79
$
1.68
$
1.78
0.55
1.67
0.54
$
1.56
1.55
0.41
1.45
1.45
0.36
September 30,
2017
2016
2015
2014
2013
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,253,580
$ 14,888,063
$ 14,568,324
$ 14,756,041
$ 13,082,859
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents. . . . . . . . . . . . . . . . . .
10,882,622
2,489,544
423,521
313,070
9,910,920
2,490,510
849,983
450,368
9,170,634
2,906,440
1,117,339
284,049
8,324,798
3,231,691
1,366,018
781,843
Customer accounts . . . . . . . . . . . . . . . . . . . . . . .
10,835,008
10,600,852
10,631,703
10,716,928
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . .
2,225,000
2,005,688
2,080,000
1,975,731
1,830,000
1,955,679
1,930,000
1,973,283
Number of
Customer accounts . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
449,793
39,688
237
491,098
41,418
238
517,871
41,036
247
548,872
43,569
251
7,823,977
2,902,655
1,109,772
203,563
9,090,271
1,930,000
1,937,635
332,177
44,838
182
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 $123,073 and $113,494 . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB & FRB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, including goodwill of $293,153 and $291,503 . . . . . . . . . . . . . . . . . . . . . .
Federal and state income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30,
2017
September 30,
2016
(In thousands, except
share data)
$
313,070
1,266,209
1,646,856
10,882,622
41,643
263,694
20,658
122,990
211,330
298,682
—
185,826
$
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
$ 15,253,580
$ 14,888,063
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,361,158
4,473,850
$
6,005,592
4,595,260
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; 134,957,511 and
134,307,818 shares issued; 87,193,362 and 89,680,847 shares outstanding. . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss), net of taxes . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost; 47,764,149 and 44,626,971 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,835,008
2,225,000
56,631
131,253
13,247,892
134,958
1,660,885
5,015
(838,060)
1,042,890
2,005,688
10,600,852
2,080,000
42,898
188,582
12,912,332
134,308
1,648,388
(11,156)
(739,686)
943,877
1,975,731
$ 15,253,580
$ 14,888,063
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
2017
2016
2015
(In thousands, except share data)
INTEREST INCOME
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
470,523 $
60,612
17,783
454,085 $
62,949
19,759
548,918
536,793
INTEREST EXPENSE
Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 (benefit)
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,023
64,969
116,992
431,926
(2,100)
434,026
3,499
—
4,290
22,643
21,783
52,215
112,257
35,260
11,410
13,972
28,859
29,761
231,519
1,494
256,216
92,795
(10,111)
82,684
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
60,773
23,312
84,085
437,002
71,392
22,159
530,553
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
86,477
2,726
89,203
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
173,532 $
164,049 $
160,316
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 . . . . . . . . . . . . . . . . . . . . . . .
1.95 $
1.94
0.84
88,905,457
89,224,207
1.79 $
1.78
0.55
91,399,038
91,912,918
1.68
1.67
0.54
95,644,639
96,053,959
20
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
2017
2016
2015
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
173,532 $
164,049 $
160,316
Other comprehensive income (loss) net of tax:
Net unrealized gains (losses) on available-for-sale securities . . . . . . . . . . . . . . . . . . . .
(7,587)
(1,403)
(27,536)
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,499
1,503
(2,585)
29,653
(10,897)
18,756
16,171
—
516
(887)
(16,793)
6,171
(10,622)
(11,509)
9,641
6,577
(11,318)
(14,287)
5,250
(9,037)
(20,355)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
189,703 $
152,540 $
139,961
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
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, 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. . . . . . . . . . . . . . . . . . . . .
231
1,941
3,329
129
244
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
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . .
Dividends on common stock . . . . . . . . . . . . . . . . . .
Proceeds from exercise of common stock options . . . .
Restricted stock expense . . . . . . . . . . . . . . . . . . . . .
Repurchase of stock warrants . . . . . . . . . . . . . . . . . .
Treasury stock purchased. . . . . . . . . . . . . . . . . . . . .
317
105
228
6,921
5,804
(228)
173,532
(74,519)
16,171
173,532
16,171
(74,519)
7,238
5,909
—
(98,374)
(98,374)
Balance at September 30, 2017 . . . . . . . . . . . . . . . .
$ 134,958
$1,660,885
$1,042,890
$ 5,015
$(838,060)
$ 2,005,688
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 and accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from (paid to) FDIC under loss share . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (release) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . .
Gain on bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized (gain) loss on sales of premises and equipment and real estate owned. .
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. . . . . . . . . . . . . . . . . .
Proceeds from sales of real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from settlements of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash received (paid) in business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
(In thousands)
2015
173,532 $
164,049 $
160,316
41,680
584
5,909
(2,100)
(3,499)
—
(3,974)
—
16,047
(6,498)
(6,805)
(1,673)
7,974
(41,477)
179,700
(896,450)
(72,856)
(183,609)
177,824
(76,367)
367,713
362,829
(466,058)
229,716
16,248
10,096
—
(3,370)
5,209
(15,461)
(544,536)
19,509
1,730
3,569
(6,250)
—
—
2,760
—
5,153
(5,627)
—
(20,039)
(14,204)
71,071
221,721
(619,046)
(105,420)
(36,347)
26,340
(137,591)
537,255
50,741
—
218,958
61,132
—
(100,000)
—
14,685
(41,771)
(131,064)
234,460
4,590,000
(4,445,000)
7,238
(74,519)
—
(98,374)
13,733
227,538
(137,298)
450,368
313,070 $
(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 $
17,888
720
3,561
(11,162)
(9,641)
10,554
11,608
1,795
13,829
(2,496)
—
(18,887)
(29,220)
(5,994)
142,871
(551,168)
(279,936)
(4,067)
55,708
(315,114)
721,951
246,826
(259,489)
159,947
74,895
—
(100,000)
—
6,397
(46,439)
(290,489)
(85,073)
100,000
(210,554)
2,070
(51,111)
—
(126,728)
21,220
(350,176)
(497,794)
781,843
284,049
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-cash financing activities
Stock issued upon exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
3,266 $
12,697 $
28,735
7,632
—
—
111,333
54,078
114,506
68,507
116,226
65,720
24
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2017, 2016 AND 2015
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
businesses and 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 237 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. Certain amounts in the financial statements from prior periods have been reclassified to conform to the
current financial statement presentation. In certain instances, amounts in text are presented by rounding to the nearest
thousand.
The Company’s fiscal year end is September 30. All references to 2017, 2016 and 2015 represent balances as of
September 30, 2017, September 30, 2016, and September 30, 2015, or activity for the fiscal years then ended.
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 contractual 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 the unpaid
principal balance, net of premiums, discounts and net deferred loan fees. Net deferred loan fees include nonrefundable
loan origination fees less direct loan origination costs. Net deferred loan fees, premiums and discounts are amortized
into interest income using either the interest method or straight-line method over the terms of the loans, adjusted for
actual prepayments. In addition to fees and costs for originating loans, various other fees and charges related to existing
loans may occur, including prepayment charges, late charges and assumption fees.
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.
25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 12
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. 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.
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.
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.
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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. The 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 subsequently recorded at lower of cost or fair value. Any gains (losses) and
maintenance costs 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. Other intangibles, including 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. During the 4th quarter of 2017, an immaterial correction of $1.5 million was recorded to
amortization expense for intangible assets stemming from acquisitions of insurance agency businesses in prior years.
27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below provides detail regarding the Company’s intangible assets.
Goodwill
Core
Deposit
and Other
Intangibles
(In thousands)
Total
Balance at September 30, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$291,503
$ 7,855
$299,358
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2,369)
(2,369)
Balance at September 30, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,503
Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,650
5,486
1,720
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(1,677)
296,989
3,370
(1,677)
Balance at September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$293,153
$ 5,529
$ 298,682
The table below presents the estimated future amortization expense of core deposit and other intangibles for the next
five years.
Fiscal Year
Expense
(In thousands)
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,376
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,324
1,295
457
138
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 2017, 2016 or 2015.
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.
On September 27, 2017, the Company issued a joint press release with Anchor Bancorp ("Anchor") announcing that
they have entered into Amendment No. 1 ("Amendment No. 1") to the Agreement and Plan of Merger (the "Merger
Agreement") dated as of April 11, 2017. Amendment No. 1 extends from December 31, 2017, to June 30, 2018, the
date after which either party can elect to terminate the Merger Agreement if the merger transaction (the "Merger")
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contemplated by the Merger Agreement has not yet been completed. Amendment No. 1 also provides for up to three
additional six month extensions beyond June 30, 2018, and addresses certain Anchor personnel and other matters in
light of the extension. Except as explicitly provided in Amendment No. 1, the Merger Agreement remains in full force
and effect as originally executed on April 11, 2017.
On October 25, 2017, the Company issued a press release announcing a quarterly cash dividend of 15 cents per share to
be paid on November 20, 2017, to common stockholders of record as of November 6, 2017. This is Washington
Federal’s 139th consecutive quarterly cash dividend.
NOTE B
NEW ACCOUNTING PRONOUNCEMENTS
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU expands
and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and
presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain
targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The
effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a
modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the
initial adoption date. The Company does not anticipate that this guidance will have a material impact on its
consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium
Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt
securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date.
The amendments do not require an accounting change for securities held at a discount; the discount continues to be
amortized to maturity. The ASU is effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If
an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year
that includes that interim period. The amendments should be applied on a modified retrospective basis, with a
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company
does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets. The ASU clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in
substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments
clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a
legal entity to a counterparty. A contract that includes the transfer of ownership interests in one or more consolidated
subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to
the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should
identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize
each asset when a counterparty obtains control of it. The ASU is effective for public business entities for annual periods
beginning after December 15, 2017, and interim periods therein. Entities may use either a full or modified approach to
adopt the ASU. The Company does not anticipate that this guidance will have a material impact on its consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The ASU also eliminates the
requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if
it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform
the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is
effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early
adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1,
2017. The Company does not anticipate that this guidance will have a material impact on its consolidated financial
statements.
29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2017, the FASB issued ASU 2017-01, Business Combinations Clarifying the Definition of a Business (Topic 805),
for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The
ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15,
2017, with early adoption permitted for transactions that occurred before the issuance date or effective date of the
standard if the transactions were not reported in financial statements that have been issued or made available for
issuance. The ASU must be applied prospectively and upon adoption the standard will impact how we assess
acquisitions (or disposals) of assets or businesses. The Company does not anticipate that this guidance will have a
material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash: a Consensus of the
FASB Emerging Issues Task Force. This ASU requires a company’s cash flow statement to explain the changes during a
reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally,
amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash
flow statement includes a reconciliation of the total cash balances for a reporting period. This ASU is effective for public
business entities for annual periods, including interim periods within those annual periods, beginning after
December 15, 2017, with early application permitted. The Company does not anticipate that this guidance will have a
material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The
amendments in this ASU address eight specific cash flow issues with the objective of reducing diversity in practice. The
specific issues identified include: debt prepayments or extinguishment costs; contingent consideration payments made
after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from
equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and
application of the predominance principle. This ASU is effective for fiscal years beginning after December 15, 2017,
including interim periods within that reporting period; however, early adoption is permitted. The Company is currently
evaluating the guidance to determine its adoption method and does not expect this guidance to have a material impact
on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendments in this ASU were
issued to provide financial statement users with more decision-useful information about the expected credit losses on
financial instruments that are not accounted for at fair value through net income, including loans held for investment,
held-to-maturity debt securities, trade and other receivables, net investments in leases and other commitments to extend
credit held by a reporting entity at each reporting date. The amendments require that financial assets measured at
amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is
deducted from the amortized cost basis. The ASU eliminates the current framework of recognizing probable incurred
losses and instead requires an entity to use its current estimate of all expected credit losses over the contractual life. The
measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the financial assets.
For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (‘‘PCD
assets’’) that are measured at amortized cost, an allowance for expected credit losses is recorded as an adjustment to the
cost basis of the asset. Subsequent changes in estimated cash flows would be recorded as an adjustment to the allowance
and through the statement of income.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather
than as a direct write-down to the security’s cost basis.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. For most debt securities, the transition approach requires a cumulative-effect adjustment to the
statement of financial position as of the beginning of the first reporting period the guidance is effective. For
other-than-temporarily impaired debt securities and PCD assets, the guidance will be applied prospectively. While the
Company is currently in the process of evaluating the impact of the amended guidance on its consolidated financial
statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover
the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S.
GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition
of the Company’s loan and lease portfolio at the time of adoption.
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 2016, the FASB issued ASU 2016-02, Leases. The amendments require lessees to recognize a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that
represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The guidance also simplifies
the accounting for sale and leaseback transactions. The amendments are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a
modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any
transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may
not apply a full retrospective transition approach. The Company is currently in the process of accumulating the lease
data necessary to apply the amended guidance. The Company is continuing to evaluate the impact of the amended
guidance on its consolidated financial statements, but the effects of recognizing most operating leases is not expected to
be material. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating
lease commitments based on the present value of unpaid lease payments as of the date of adoption.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities,
to require all equity investments to be measured at fair value with changes in the fair value recognized through net
income (other than those accounted for under equity method of accounting or those that result in consolidation of the
investee). The amendments in this ASU also require an entity to present separately in other comprehensive income the
portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within
that reporting period. The Company does not expect this guidance to have a material impact on its consolidated
financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this
update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most
industry-specific guidance throughout the industry topics of the codification. For public companies, this update was to
be effective for interim and annual periods beginning after December 15, 2016. However, in August 2015, the FASB
issued ASU 2015-14, which delayed the effective date of ASU 2014-09 by one year and permits companies to voluntarily
adopt the new standard as of the original effective date. The Company does not expect this guidance to have a material
impact on its consolidated financial statements.
31
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,
Available-for-sale securities
U.S. government and agency securities due
Amortized
Cost
2017
Gross Unrealized
Losses
Gains
(In thousands)
Fair Value Yield
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,300 $
5,688
69,108
127,936
146 $
2
—
353
— $
—
(1,238)
(218)
9,446 10.38%
5,690
67,870
128,071
1.51
1.93
1.92
Equity Securities
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
22
—
522
1.80
Corporate debt securities due
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,622
119,960
Municipal bonds due
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,344
1,367
20,343
2,083
210
10
55
2,505
—
(577)
65,705
119,593
—
—
—
2,354
1,422
22,848
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . . . . . . . . . . . . . . . . . .
828,069
8,350
1,256,587
8,402
41
13,829
(2,174)
—
(4,207)
834,297
8,391
1,266,209
1,646,856
1,646,856
1,635,913
1,635,913
$2,903,443 $20,972 $(22,293) $ 2,902,122
(18,086)
(18,086)
7,143
7,143
2.96
2.62
1.23
2.05
6.45
2.96
3.31
2.86
3.14
3.14
3.02%
September 30,
Available-for-sale securities
U.S. government and agency securities due
2016
Amortized
Cost
Gross Unrealized
Losses
Gains
Fair Value Yield
(In thousands)
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,284 $
12,477
48,134
182,051
— $
1,027
—
27
(59) $
(11)
(1,589)
(3,990)
21,225
13,493
46,545
178,088
0.81%
7.94
1.14
1.33
Equity Securities
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,422
1,402
—
101,824
1.90
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
32
278,094
63,481
69,955
50,000
2,315
1,335
20,363
325
928
—
938
2
38
3,617
(53)
(113)
(2,417)
—
—
—
—
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
1,441,556
1,417,599
1,417,599
1,441,556
$ 3,326,783 $49,593 $(11,926) $3,364,450
24,171
24,171
(214)
(214)
1.33
2.47
1.96
3.00
1.23
2.05
6.45
2.58
1.91
2.22
3.18
3.18
2.62%
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company purchased $76,367,000 available-for-sale investment securities and $466,058,000 of held-to-maturity
investment securities during 2017. The Company sold $362,829,000 of available-for-sale securities and there were no
sales of held-to-maturity investment securities in 2017. Substantially all mortgage-backed securities have contractual due
dates that exceed 25 years.
The following table shows the gross unrealized losses and fair value of securities at September 30, 2017, and September
30, 2016, 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,
2017
Less than 12 months
12 months or more
Total
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
(In thousands)
Corporate debt securities . . . .
$
—
$
—
$ (577)
$ 49,423
$
(577)
$
49,423
U.S. agency securities. . . . . . .
(759)
24,400
(697)
96,195
(1,456)
120,595
Agency pass-through
certificates . . . . . . . . . . . .
(17,683)
1,163,358
(2,577)
249,304
(20,260)
1,412,662
$(18,442)
$1,187,758
$(3,851)
$ 394,922
$ (22,293)
$1,582,680
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
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D
LOANS RECEIVABLE
The following table is a summary of loans receivable.
September 30, 2017
September 30, 2016
(In thousands)
(In thousands)
Gross loans by category
Single-family residential
. . . . . . . . . . . . . . . . . . . . . . . .
$
5,711,004
46.8%
$
5,658,830
51.7%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,597,996
13.1
1,110,411
10.1
Construction - custom . . . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . .
Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
602,631
124,308
104,405
1,303,148
1,434,610
1,093,360
144,850
85,075
4.9
1.0
0.9
10.7
11.8
9.0
1.2
0.7
473,069
118,497
104,567
1,124,290
1,093,639
978,589
149,716
139,000
4.3
1.1
1.0
10.3
10.0
8.9
1.4
1.3
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,201,387
100%
10,950,608
100%
Less:
Allowance for probable losses . . . . . . . . . . . . . . . . . .
Loans in process. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred fees, costs and discounts. . . . . . . . . . . . .
123,073
1,149,934
45,758
Total loan contra accounts . . . . . . . . . . . . . . . . . . . . . . . .
1,318,765
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,882,622
113,494
879,484
46,710
1,039,688
$ 9,910,920
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summary breaks down the Company’s fixed rate and adjustable rate loans by time to maturity or to rate adjustment.
Fixed-Rate
Adjustable-Rate
September 30, 2017
Term To Maturity
Within 1 year. . . . . . . . . . . . . . . . .
1 to 3 years . . . . . . . . . . . . . . . . . .
3 to 5 years . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . .
10 to 20 years. . . . . . . . . . . . . . . . .
Over 20 years . . . . . . . . . . . . . . . . .
Gross Loans
(In thousands)
$
71,810
216,724
308,967
847,518
1,047,541
4,915,900
$7,408,460
% of
Gross
Loans
0.6%
1.8
2.5
6.9
8.6
40.3
60.7%
Term To Rate Adjustment
Less than 1 year . . . . . . . . . . . . . . .
1 to 3 years . . . . . . . . . . . . . . . . . .
3 to 5 years . . . . . . . . . . . . . . . . . .
5 to 10 years. . . . . . . . . . . . . . . . . .
10 to 20 years. . . . . . . . . . . . . . . . .
Over 20 years . . . . . . . . . . . . . . . . .
Gross Loans
(In thousands)
$3,157,055
498,844
624,254
512,774
—
—
$ 4,792,927
% of
Gross
Loans
25.9%
4.1
5.1
4.2
—
—
39.3%
The following tables provide information regarding loans receivable by loan category and geography.
September 30, 2017
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 . . . . . . . . . . . . .
$3,013,957
659,602
581,137
57,891
514,922
306,853
202,703
185,835
188,104
$5,711,004
Percentage by geographic area
$ 315,356 $ 55,794 $ 65,449
13,535
11,446
69
4,321
4,586
2,108
106
2,785
$1,303,148 $124,308 $104,405
378,588
340,609
3,423
40,014
41,243
115,289
43,493
25,133
33,109
4,801
—
90
14,593
10,272
5,649
—
$357,080
59,861
77,315
—
55,064
23,721
17,406
3,534
8,650
$602,631
(In thousands)
$ 613,362
269,037
102,546
4,360
272,723
45,603
62,635
205,595
22,135
$1,597,996
$ 528,762
254,513
218,200
95,304
28,586
65,342
173,774
61,439
8,690
$1,434,610
$ 555,651
217,813
50,506
106,226
38,328
29,529
14,186
59,484
21,637
$1,093,360
$ 2,186
2,252
296
78,614
22
123
768
775
39
$85,075
$ 87,290 $ 5,594,887
1,901,887
1,400,637
345,940
961,893
538,886
612,473
565,910
278,874
$144,850 $12,201,387
13,577
13,781
53
7,823
7,293
13,332
—
1,701
September 30, 2017
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 . . . . . . . . . . . . .
24.6%
5.4
4.8
0.5
4.2
2.5
1.7
1.5
1.5
46.7%
2.6%
3.1
2.8
—
0.3
0.4
0.9
0.4
0.2
10.7%
0.4%
0.3
—
—
—
0.1
0.1
—
0.1
1.0%
0.5%
0.1
0.1
—
0.1
0.1
—
—
—
0.9%
Percentage by geographic area as a % of each loan type
As % of total gross loans
5.1%
2.2
0.8
—
2.2
0.4
0.5
1.7
0.2
13.1%
4.4%
2.1
1.8
0.8
0.2
0.5
1.4
0.5
0.1
11.8%
2.9%
0.5
0.6
—
0.5
0.2
0.1
—
0.1
4.9%
4.6%
1.8
0.4
0.9
0.3
0.2
0.1
0.5
0.2
9.0%
—%
—
—
0.7
—
—
—
—
—
0.7%
0.7%
0.1
0.1
—
0.1
0.1
0.1
—
—
1.2%
45.8%
15.6
11.4
2.9
7.9
4.5
4.9
4.6
2.4
100%
September 30, 2017
Single-family
residential
Multi-
family
Land -
A & D
Land -
lot loans
Construction -
custom
Construction
Commercial
real estate
Commercial
and industrial
Consumer HELOC
As % of total gross loans
Washington . . . . . . . . . .
Oregon . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . .
Other. . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . .
New Mexico . . . . . . . . . .
Texas . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . .
52.8%
11.5
10.2
1.0
9.0
5.4
3.5
3.3
3.3
100%
24.2% 44.9%
29.1
26.1
0.3
3.1
3.2
8.8
3.3
1.9
100%
26.6
3.9
—
0.1
11.7
8.3
4.5
—
100%
62.6%
13.0
11.0
0.1
4.1
4.4
2.0
0.1
2.7
100%
59.4%
9.9
12.8
—
9.1
3.9
2.9
0.6
1.4
100%
38.3%
16.8
6.4
0.3
17.1
2.9
3.9
12.9
1.4
100%
36.9%
17.7
15.2
6.6
2.0
4.6
12.1
4.3
0.6
100%
50.9%
19.9
4.6
9.7
3.5
2.7
1.3
5.4
2.0
100%
2.8%
2.6
0.3
92.4
—
0.1
0.9
0.9
—
100%
60.3%
9.4
9.5
—
5.4
5.0
9.2
—
1.2
100%
35
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 $84,166,000 and $57,153,000 at September 30, 2017 and
2016, respectively. As of September 30, 2017, all of these loans were performing in accordance with contractual terms.
The following table provides additional information on impaired loans, loan commitments and loans serviced for
others.
September 30, 2017 September 30, 2016
(In thousands)
Recorded investment in impaired loans . . . . . . . . . . . . . . . . . . . . . . . . .
$ 251,274
TDRs included in impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207,377
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.
1,363
126
274,530
11,736
425,130
77,119
$ 285,243
261,531
1,980
366
301,685
12,843
331,947
80,896
September 30, 2017
September 30, 2016
(In thousands)
(In thousands)
Non-accrual loans:
Single-family residential . . . . . . . . . . . . . . . . . . . . . .
$27,930
56.3%
$33,148
78.2%
Construction - custom . . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development. . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91
296
605
139
11,815
8,082
531
91
0.2
0.6
1.2
0.3
23.8
16.3
1.1
0.2
—
58
510
776
—
0.1
1.2
1.8
7,100
16.7
583
239
—
1.4
0.6
—
Total non-accrual loans . . . . . . . . . . . . . . . . . . . .
$49,580
100%
$42,414
100%
Non-accrual loans as % of total loans. . . . . . . . . . .
0.46%
0.43%
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table breaks down delinquent loans by loan category and delinquency bucket.
September 30, 2017
Loan type
Single-family residential . . . . . . . . .
Construction . . . . . . . . . . . . . . .
Construction - custom. . . . . . . . . .
Land - acquisition & development . .
Land - consumer lot loans . . . . . . .
Multi-family . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . .
Commercial & industrial . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . .
Total Loans . . . . . . . . . . . . . . . . . .
Amount of
Loans
Net of
Loans in
Process
$ 5,709,690
793,959
277,599
104,856
104,335
1,303,119
1,434,610
1,093,360
144,850
85,075
Days Delinquent Based on $ Amount of Loans
Current
30
60
90
Total
(In thousands)
$ 5,671,933
793,959
277,508
104,526
103,389
1,302,720
1,432,052
1,092,735
143,974
84,644
$10,925
—
—
—
112
5
507
—
221
245
$4,810
—
—
—
680
255
—
51
342
107
$6,245
$22,022
—
91
330
154
139
2,051
574
313
79
$37,757
—
91
330
946
399
2,558
625
876
431
$25,753
$44,013
% based
on $
0.66%
—
0.03
0.31
0.91
0.03
0.18
0.06
0.60
0.51
0.40%
$11,051,453
$11,007,440
$12,015
Delinquency % . . . . . . . . . . . . . . . .
99.60%
0.11%
0.06%
0.23%
0.40%
The percentage of total delinquent loans was 0.40% as of September 30, 2017, as compared to 0.68% as of September
30, 2016.
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 12 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, 2017, the outstanding balance of TDR’s was $207,377,000 as compared to
$261,531,000 as of September 30, 2016. As of September 30, 2017, 97.5% of the restructured loans were performing.
Single-family residential loans comprised 87.7% of TDR loans as of September 30, 2017. 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, 2017
Twelve Months Ended September 30, 2016
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Troubled Debt Restructurings:
(In thousands)
(In thousands)
Single-family residential. . . .
Land - consumer lot loans . .
Commercial real estate . . . .
HELOC . . . . . . . . . . . . .
Consumer . . . . . . . . . . . .
38
2
—
4
—
44
$7,115
211
—
552
—
$7,878
$7,115
211
—
552
—
$7,878
120
10
7
1
1
139
$23,541
970
2,523
126
24
$27,184
$23,541
970
2,523
126
24
$27,184
37
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.
Twelve Months Ended
September 30, 2017
Twelve Months Ended
September 30, 2016
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
TDRs That Subsequently Defaulted:
(In thousands)
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
—
—
2
26
$4,214
—
—
267
$4,481
17
1
5
2
25
$4,875
279
606
326
$6,086
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
September 30, 2015 with final reporting as of October 31, 2015. Recoveries, to the extent that claims were made, will continue to be shared
through March 31, 2018 for the former Horizon Bank and September 30, 2018 for the former Home Valley Bank. The FDIC loss share coverage
for single-family residential loans will continue for another three years.
The outstanding principal balance of covered loans was $20,572,000 as of September 30, 2017, as compared to $28,974,000 as of September 30, 2016.
The following table shows the year to date activity for the FDIC indemnification asset.
Twelve Months Ended
September 30, 2017
Twelve Months Ended
September 30, 2016
(In thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,769
Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(584)
(3,450)
232
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,967
$16,275
(1,730)
(2,012)
236
$12,769
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E
ALLOWANCE FOR LOSSES ON LOANS
The following tables summarize the activity in the allowance for loan losses.
Twelve Months Ended September 30, 2017
Beginning
Allowance Charge-offs Recoveries
Provision &
Transfers
Ending
Allowance
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . . .
$ 37,796
$ (1,229)
$
653
$ (328)
$ 36,892
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . .
19,838
Construction - custom . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . .
Land - consumer lot loans. . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
1,080
6,023
2,535
6,925
8,588
Commercial & industrial . . . . . . . . . . . . . . . . . .
28,008
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
813
1,888
—
(16)
(280)
(17)
—
(11)
(173)
(90)
(884)
—
—
4,718
880
11,038
(9,952)
481
—
1,684
1,833
21
1,297
(350)
937
1,557
(1,144)
111
(1,157)
24,556
1,944
6,829
2,649
7,862
11,818
28,524
855
1,144
$113,494
$(2,700)
$17,007
$ (4,728)
$123,073
Twelve Months Ended September 30, 2016
Beginning
Allowance Charge-offs Recoveries
Provision &
Transfers
Ending
Allowance
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . . . .
$ 47,347
$(3,106)
$ 3,251
$ (9,696)
$ 37,796
12,413
19,838
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . .
Land - consumer lot loans. . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
6,680
990
5,781
2,946
5,304
8,960
Commercial & industrial . . . . . . . . . . . . . . . . . .
24,980
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
902
2,939
—
(60)
(42)
(732)
—
(103)
(941)
(54)
(962)
745
60
90
8,220
(7,936)
5
—
1,812
2,933
21
2,018
316
1,621
(2,081)
1,036
(56)
(2,107)
1,080
6,023
2,535
6,925
8,588
28,008
813
1,888
$106,829
$(6,000)
$19,065
$ (6,400)
$113,494
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recorded a release of allowance for loan losses of $2,100,000 during the year ended September 30, 2017,
as compared to a release of $6,400,000 for the year ended September 30, 2016. The credit quality of the portfolio has
continued to improve and economic conditions remain relatively stable.
The Company had recoveries, net of charge-offs, of $14,307,000 for the year ended September 30, 2017, compared with
net recoveries of $13,065,000 for the year ended September 30, 2016. 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 increased to $49,580,000 as of September 30, 2017, from $42,414,000 as of September 30, 2016.
Non-performing assets (‘‘NPAs’’) totaled $70,238,000, or 0.46% of total assets, at September 30, 2017, compared to
$71,441,000, or 0.48% of total assets, as of September 30, 2016.
At September 30, 2017, $122,947,000 of the allowance was calculated under the formulas contained in our general
allowance methodology and the remaining $126,000 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, 2017
Loans Collectively Evaluated for Impairment
General
Reserve
Allocation
Recorded
Investment
of Loans
(In thousands)
Ratio
Loans Individually Evaluated for Impairment
Recorded
Investment
of Loans
Specific
Reserve
Allocation
Ratio
(In thousands)
Single-family residential . . . . . . . . . . . .
$
Construction . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . .
Land - acquisition & development. . . . .
Land - consumer lot loans . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
36,893
24,556
1,944
6,828
2,649
7,857
11,697
28,524
855
1,144
$ 5,713,576
0.7%
$
793,958
277,495
104,767
96,337
1,302,625
1,391,668
1,093,210
141,689
84,887
3.1
0.7
6.5
2.8
0.6
0.8
2.6
0.6
1.4
—
—
—
1
—
5
—
105
89
171
493
120
21,765
—
—
—
81
215
82
—
—
1.0
—
1.0
0.6
—
—
—
$
5,552
—%
$
122,947
$11,000,212
1.1%
$
126
$
28,553
0.4%
September 30, 2016
Loans Collectively Evaluated for Impairment
General
Reserve
Allocation
Recorded
Investment
of Loans
(In thousands)
Ratio
Loans Individually Evaluated for Impairment
Recorded
Investment
of Loans
Specific
Reserve
Allocation
Ratio
(In thousands)
Single-family residential . . . . . . . . . . . .
$
Construction . . . . . . . . . . . . . . . . . . .
Construction - custom . . . . . . . . . . . . .
Land - acquisition & development. . . . .
Land - consumer lot loans . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
37,536
19,838
1,080
6,022
2,535
6,911
8,497
28,008
813
1,888
$ 5,585,912
0.7%
$
260
$
19,629
1.3%
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
—
—
—
$
113,128
$ 9,784,140
1.2%
$
366
$
34,271
1.1%
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide information on loans based on credit quality indicators (defined above).
Internally Assigned Grade
Pass
Special
mention
Substandard
Doubtful
Loss
Total
Gross Loans
September 30, 2017
Loan type
Single-family residential . . . . . . . . . . . . . . . . .
$ 5,671,229
$
Construction. . . . . . . . . . . . . . . . . . . . . . . . .
1,594,926
Construction - custom . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . .
Land - consumer lot loans. . . . . . . . . . . . . . . .
602,540
123,028
103,787
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . .
1,295,261
Commercial real estate . . . . . . . . . . . . . . . . . .
1,391,996
Commercial & industrial . . . . . . . . . . . . . . . .
1,054,972
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . .
144,229
84,984
—
—
—
207
—
5,795
5,944
14,814
—
—
(In thousands)
$
39,775
$
3,070
91
1,073
618
2,092
36,670
23,574
621
91
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
$ 5,711,004
1,597,996
602,631
124,308
104,405
1,303,148
1,434,610
1,093,360
144,850
85,075
$12,201,387
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . .
$12,066,952
$
26,760
$
107,675
$
Total grade as a % of total gross loans . . . . . . . . .
98.9%
0.2%
0.9%
—%
—%
September 30, 2016
Loan type
Internally Assigned Grade
Pass
Special
mention
Substandard
Doubtful
Loss
Total
Gross Loans
(In thousands)
Single-family residential . . . . . . . . . . . . . . . . .
$ 5,607,521
$
—
$
51,309
$
Construction. . . . . . . . . . . . . . . . . . . . . . . . .
1,098,549
8,595
Construction - custom . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . .
Land - consumer lot loans. . . . . . . . . . . . . . . .
473,069
111,225
103,528
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . .
1,117,437
Commercial real estate . . . . . . . . . . . . . . . . . .
1,033,880
Commercial & industrial . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . .
930,776
149,195
138,917
—
—
—
3,237
13,446
7,207
—
—
3,267
—
7,272
1,039
3,616
46,313
40,606
521
83
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . .
$10,764,097
$
32,485
$
154,026
$
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
$ 5,658,830
1,110,411
473,069
118,497
104,567
1,124,290
1,093,639
978,589
149,716
139,000
$10,950,608
Total grade as a % of total gross loans . . . . . . . . .
98.3%
0.3%
1.4%
—%
—%
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The balance of loans internally graded as ’substandard’ above includes $20,224,000 as of September 30, 2017, and
$35,910,000 as of September 30, 2016 of acquired loans and covered loans.
The following tables provide information on loans based on payment activity.
September 30, 2017
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross Loans
Amount
% of Total
Gross Loans
(In thousands)
(In thousands)
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
$ 5,683,074
99.5% $
27,930
0.5%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,597,996
100.0
Construction - custom. . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . .
602,540
124,012
103,800
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,303,009
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
1,422,795
Commercial & industrial
. . . . . . . . . . . . . . . . . . . .
1,085,278
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,319
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,984
99.9
99.8
99.4
99.9
99.2
99.3
99.6
99.9
—
91
296
605
139
11,815
8,082
531
91
—
0.1
0.2
0.6
0.1
0.8
0.7
0.4
0.1
September 30, 2016
$12,151,807
99.6% $
49,580
0.4%
Performing Loans
Non-Performing Loans
Amount
% of Total
Gross Loans
Amount
% of Total
Gross Loans
(In thousands)
(In thousands)
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
$ 5,625,682
99.4% $
33,148
0.6%
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,110,411
Construction - custom. . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . .
473,069
118,439
104,057
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,123,583
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
1,086,470
Commercial & industrial
. . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
978,006
149,477
139,000
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
—
$10,908,194
99.6% $
42,414
0.4%
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide information on impaired loans by loan category.
September 30, 2017
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
$
21,325
$
23,880
$
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:
—
148
330
208
139
12,890
8,279
490
88
43,897
—
165
8,208
330
3,231
22,487
14,321
1,212
1,433
75,267
—
—
—
—
—
—
—
—
—
—
—
$
19,371
—
231
176
431
748
11,466
7,425
487
57
40,392
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
181,941
186,167
4,030
204,723
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom. . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial
. . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
90
7,949
493
15,079
—
1,728
97
—
—
90
8,526
493
16,707
—
1,806
284
—
—
1
—
5
—
—
576
8,976
1,024
120
16,991
—
—
—
297
1,451
100
207,377
214,073
4,156 (1)
234,138
Total:
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
203,266
210,047
4,030
224,094
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom. . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial
. . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
148
420
8,157
632
27,969
8,279
2,218
185
—
165
8,298
8,856
3,724
39,194
14,321
3,018
1,717
—
—
1
—
5
120
—
—
—
—
231
752
9,407
1,772
28,457
7,722
1,938
157
$
251,274
$
289,340
$
4,156 (1) $
274,530
(1)
Includes $126,000 of specific reserves and $4,030,000 included in the general reserves.
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment (2)
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
138
499
394
11,741
1,030
209
74
—
—
9,001
609
3,972
21,301
3,082
315
550
23,712
50,196
Impaired loans with an allowance recorded:
—
—
—
—
—
—
—
—
—
—
—
$
12,618
91
603
720
587
1,279
7,994
1,205
392
236
25,725
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
228,186
232,595
3,809
238,187
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction - custom. . . . . . . . . . . . . . . . . . . . . . .
Land - acquisition & development . . . . . . . . . . . . . .
Land - consumer lot loans . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1,154
9,630
1,505
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
19,434
Commercial & industrial
. . . . . . . . . . . . . . . . . . . .
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,506
116
—
—
2,094
10,678
1,505
22,848
—
1,521
306
—
—
1
1
13
91
—
—
—
998
—
1,765
10,330
2,159
20,998
—
1,423
100
Total:
Single-family residential. . . . . . . . . . . . . . . . . . . . . .
237,813
243,961
3,809
250,805
261,531
271,547
3,915 (1)
275,960
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
—
—
—
1,089
603
2,485
10,917
3,438
28,992
1,205
1,815
336
$
285,243
$
321,743
$
3,915 (1) $
301,685
(1)
Includes $366,000 of specific reserves and $3,549,000 included in the general reserves.
(2) The average recorded investment changed from $265,771,000, as previously disclosed, to $301,685,000 in order to
correct for an immaterial error in the previous year’s disclosure.
45
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.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the balance and level in the fair value hierarchy for assets and liabilities that are measured
at fair value on a recurring basis.
September 30, 2017
Level 1
Level 2
Level 3
Total
(In thousands)
Available-for-sale securities
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
522
$
—
$
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 . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . .
Total Financial Assets. . . . . . . . . . . . . . . . . . . . . . .
$
Financial Liabilities
Interest rate contracts . . . . . . . . . . . . . . . . . . . . .
$
Commercial loan hedges . . . . . . . . . . . . . . . . . . .
Long term borrowing hedges . . . . . . . . . . . . . . . .
Total Financial Liabilities . . . . . . . . . . . . . . . . . . . .
$
—
—
—
—
—
522
—
522
—
—
—
—
211,077
26,624
185,298
834,297
8,391
1,265,687
1,139
$1,266,826
$
$
1,139
$
174
1,693
$
3,006
$
—
—
—
—
—
—
—
—
—
—
—
—
—
$
522
211,077
26,624
185,298
834,297
8,391
1,266,209
1,139
$1,267,348
$
1,139
174
1,693
$
3,006
There were no transfers between, into and/or out of Levels 1, 2 or 3 during the year ended September 30, 2017.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
259,351
27,670
461,138
993,041
79,870
Total Available-for-sale securities . . . . . . . . . . .
101,824
1,821,070
Interest rate contracts . . . . . . . . . . . . . . . .
—
20,895
Total Financial Assets . . . . . . . . . . . . . . . . . .
$
101,824
$
1,841,965
$
Financial Liabilities
Interest rate contracts . . . . . . . . . . . . . . . .
$
Commercial loan hedges . . . . . . . . . . . . . .
Long term borrowing hedges . . . . . . . . . . .
Total Financial Liabilities . . . . . . . . . . . . . . .
$
—
—
—
—
$
$
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 Level 1, 2 or 3 during the year ended September 30, 2016.
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.
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Level 1
September 30, 2017
Level 2
Level 3
Three
Months
Ended
September 30,
2017
Twelve
Months
Ended
September 30,
2017
Total
Total Gains (Losses)
(In thousands)
Impaired loans (1) . . . . . . . . . . . . . . . .
Real estate owned (2) . . . . . . . . . . . . . .
Balance at end of period. . . . . . . . . . . .
$
$
—
—
—
$
$
—
—
—
$
$
9,088
12,662
21,750
$
$
9,088
12,662
21,750
$
$
(250)
(376)
(626)
$
$
(1,916)
(1,463)
(3,379)
(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, 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.
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.
49
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.
September 30, 2017
September 30, 2016
Level
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(In thousands)
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 . . . . . . . . . . . . . . . . . . . .
1
1
2
2
2
2
2
$
313,070 $
313,070 $
450,368 $
450,368
522
522
211,077
211,077
26,624
185,298
26,624
185,298
101,824
259,351
27,670
101,824
259,351
27,670
461,138
461,138
834,297
834,297
993,041
993,041
8,391
8,391
79,870
79,870
Total available-for-sale securities . . . . . . . . . .
1,266,209
1,266,209
1,922,894
1,922,894
Held-to-maturity securities:
Mortgage-backed securities
Agency pass-through certificates . . . . . . . . . .
2
1,646,856
1,635,913
1,417,599
1,441,556
Total held-to-maturity securities . . . . . . . . . .
1,646,856
1,635,913
1,417,599
1,441,556
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 . . . .
3
3
2
2
2
2
2
2
2
10,882,622
11,247,586
9,910,920
10,414,794
8,968
8,564
12,769
12,095
122,990
122,990
117,205
117,205
1,139
1,139
20,895
20,895
10,835,008
10,411,686
10,600,852
10,184,321
2,225,000
2,266,791
2,080,000
2,184,671
1,139
174
1,693
1,139
174
1,693
20,895
3,312
31,347
20,895
3,312
31,347
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $1,035,573,000 and $840,935,000 notional in interest rate swaps to
hedge this exposure as of September 30, 2017, and September 30, 2016, respectively. As of September 30, 2017,
$33,645,000 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 years ended September 30, 2017, and 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 $700,000,000
notional in interest rate swaps to hedge existing and anticipated future borrowings as of September 30, 2017, and
September 30, 2016, respectively. The unrealized loss, gross of the related tax benefit, on these interest rate swaps as of
September 30, 2017, was $1,693,000.
51
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 the interest rate
risk of this loan using a swap with a notional amount of $52,936,000 and $54,155,000 as of September 30, 2017, and
September 30, 2016, respectively.
The following table presents the fair value and balance sheet classification of derivatives outstanding.
Asset Derivatives
Liability Derivatives
September 30, 2017
September 30, 2016
September 30, 2017
September 30, 2016
(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
$1,139
—
—
Other
assets
Other
assets
Other
assets
$20,895
—
—
$1,139
$20,895
Balance
Sheet
Other
liabilities
Other
liabilities
Other
liabilities
Fair
Value
$1,139
174
1,693
$3,006
Balance
Sheet
Other
liabilities
Other
liabilities
Other
liabilities
Fair
Value
$20,895
3,312
31,347
$55,554
NOTE H
INTEREST RECEIVABLE
The following table provides a summary of interest receivable by interest earning asset type.
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(In thousands)
33,688
6,049
1,906
41,643
$
$
29,858
5,670
2,141
37,669
September 30, 2017 September 30, 2016
Interest receivable was $41,643,000 at September 30, 2017, as compared to $37,669,000 as of September 30, 2016. The
increase was primarily a result of the 9.8% rise in loans receivable.
NOTE I
PREMISES AND EQUIPMENT
The following table provides a summary of premises and equipment by asset type.
September 30,
2017
September 30,
2016
(In thousands)
Estimated
Useful Life
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, software and equipment . . . . . . . . . . . . . . . . . .
25 - 40
7 - 15
2 - 10
$
102,381
149,805
18,587
119,518
390,291
109,414
143,841
18,365
115,199
386,819
Less accumulated depreciation and amortization . . . . . . . . .
(126,597)
(104,868)
$
263,694
$
281,951
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: $5,956,000 for 2018,
$5,107,000 for 2019, $4,923,000 for 2020, $4,276,000 for 2021, $3,750,000 for 2022 and $17,005,000 thereafter.
Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $5,500,000, $5,300,000
and $6,600,000 in 2017, 2016, and 2015, respectively.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
2017
September 30,
2016
(In thousands)
Checking accounts, 0.15% and under . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,019,095 $
2,721,721
Savings accounts, 0.10% and under . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
888,881
820,980
Money market accounts, 0.01% to 0.15%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,453,182
2,462,891
Time deposit accounts
Less than 1.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.00% to 1.99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.00% to 2.99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,204,756
2,099,841
169,253
3,268,272
1,292,612
34,376
Total time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,473,850
4,595,260
Time deposit maturities are as follows:
$
10,835,008 $
10,600,852
September 30,
2017
September 30,
2016
(In thousands)
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,553,712 $
2,894,900
1 to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
975,351
386,763
558,024
798,309
293,058
608,993
$
4,473,850 $
4,595,260
Customer accounts over $250,000 totaled $2,674,914,000 as of September 30, 2017, and $2,250,622,000 as of
September 30, 2016.
Interest expense on customer accounts consisted of the following:
Year ended September 30,
2017
2016
2015
(In thousands)
Checking accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,721 $
1,491 $
1,036
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
978
3,592
45,256
52,547
734
3,285
47,425
52,935
660
3,631
46,273
51,600
Less early withdrawal penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(524)
(450)
(546)
$
52,023 $
52,485 $
51,054
Weighted average interest rate at end of year . . . . . . . . . . . . . . . . . . . . . . . .
Weighted daily average interest rate during the year . . . . . . . . . . . . . . . . . . .
0.54%
0.49%
0.50%
0.50%
0.48%
0.48%
53
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,
2017
September 30,
2016
(In thousands)
FHLB advances
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,395,000 $
1 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
More than 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,000
400,000
—
200,000
880,000
700,000
300,000
$
2,225,000 $
2,080,000
There were no advances included in the above table that are callable by the FHLB.
Financial data pertaining to the weighted-average cost and the amount of FHLB advances were as follows.
2017
2016
2015
(In thousands)
Weighted average interest rate, net of cash flow hedges, at end of
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.80%
3.15%
3.35%
Weighted daily average interest rate, net of cash flow hedges,
during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.00%
3.22%
3.57%
Daily average of FHLB advances during the year . . . . . . . . . . . . . .
$2,167,986
$1,992,434
$1,848,904
Maximum amount of FHLB advances at any month end . . . . . . . .
$2,350,000
$2,080,000
$1,930,000
Interest expense during the year (excludes interest rate swap
expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
64,968
$
64,058
$
64,331
The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") equal to 48% of total assets.
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.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
2017
September 30,
2016
(In thousands)
Deferred tax assets
Loan loss reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
50,411 $
45,531
REO reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustment on available-for-sale securities and cash flow hedges . . . . . .
Non-accrual loan interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC assisted transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,693
—
2,262
12,236
3,939
3,037
2,259
1,274
4,018
6,482
2,812
9,598
1,791
2,359
925
625
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,111
74,141
Deferred tax liabilities
FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustment on available-for-sale securities and cash flow hedges . . . . . .
Loan origination fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,135
2,914
13,643
35,950
2,145
78,787
(1,676)
(3,920)
Net tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(5,596) $
24,135
—
14,826
34,936
5,320
79,217
(5,076)
21,123
16,047
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
35%
1
(4)
2016
35%
1
(2)
2015
35%
2
(1)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32%
34%
36%
55
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:
2017
2016
2015
(In thousands)
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
87,804
$
57,173
$
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,142)
77,662
21,961
79,134
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,991
$
3,600
$
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
5,022
92,795
(10,111)
1,351
4,951
60,773
23,312
$
82,684
$
84,085
$
79,841
3,244
83,085
6,636
(518)
6,118
86,477
2,726
89,203
Based on current information the Company does not expect that changes in the amount of unrecognized tax benefits
over the next 12 months will have a significant impact on its results of operations or financial position. The Company’s
liability for uncertain tax positions was $104,000 as of September 30, 2017, and $105,000 as of September 30, 2016.
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 2017.
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 $54,000.
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 employees 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 six 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 $6,433,000, $7,600,000 and $8,700,000 for the years ended 2017,
2016 and 2015, respectively.
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 3,113,050 shares remain available for issuance as of September 30, 2017.
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 five 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. 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 2017, 2016 and 2015.
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, 2016 . . . . . . . . . . . . .
459,443
$
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(311,168)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,745)
Outstanding at September 30, 2017 . . . . . . . . . . . . .
122,530
Exercisable at September 30, 2017 . . . . . . . . . . . . . .
122,530
$
$
21.47
22.83
18.61
18.64
18.64
2
2
2
$
$
$
2,392
1,839
1,839
The table below presents other information regarding stock options.
Year ended September 30,
2017
2016
2015
(In thousands, except fair value
of options granted)
Compensation cost for stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$
Weighted average grant date fair value per stock option . . . . . . . . . . . . . .
Total intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . .
Grant date fair value of options exercised . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.06
2,605
1,328
7,238
89
2.73
1,651
1,422
9,283
$
232
2.96
831
368
2,070
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of activity related to unvested stock options.
Year ended September 30,
2017
2016
2015
Non-vested Stock Options
Outstanding at beginning of
period. . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . .
Outstanding at end of
period. . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
Options
Outstanding
Options
Outstanding
Weighted
Average
Grant Date
Fair Value
Options
Outstanding
Weighted
Average
Grant Date
Fair Value
—
—
—
—
$
$
—
—
—
—
69,287
$
(62,227)
(7,060)
3.85
3.91
3.89
145,795
$
(61,018)
(15,490)
3.87
3.88
3.90
—
$
—
69,287
$
3.85
As of September 30, 2017, 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 466,681
shares of restricted stock outstanding as of September 30, 2017, with a fair market value at the date of grant of
$8,661,599.
The following table summarizes information about unvested restricted stock activity.
Year ended September 30,
2017
2016
2015
Non-vested Restricted
Stock
Outstanding
Outstanding at beginning of
period. . . . . . . . . . . . . .
490,363
$
Granted . . . . . . . . . . . . . .
238,450
Vested . . . . . . . . . . . . . . .
(116,878)
Forfeited . . . . . . . . . . . . . .
(145,254)
Outstanding at end of
Weighted
Average
Fair Value
Outstanding
Weighted
Average
Fair Value
Outstanding
Weighted
Average
Fair Value
16.00
18.89
20.95
8.56
521,302
229,450
$
$
(165,965)
(94,424)
15.03
17.20
15.96
13.64
515,845
$
301,750
(223,043)
(73,250)
14.10
14.26
13.24
10.72
period. . . . . . . . . . . . . .
466,681
$
18.56
490,363
$
16.00
521,302
$
15.03
Compensation expense related to restricted stock awards was $3,658,539, $3,357,108, and $3,271,564 for the years
ended 2017, 2016 and 2015, 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, 2017, and 2016, 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.
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Categorized as
Well Capitalized
Under Prompt
Corrective Action
Provisions
Capital
Adequacy
Guidelines
Actual
Capital
Ratio
Ratio
Ratio
September 30, 2017
(In thousands)
Common Equity Tier 1 risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,701,327
16.67%
4.50%
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,314
16.35
4.50
Tier 1 risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
1,701,327
16.67
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,314
16.35
Total risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
1,828,935
17.92
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,795,929
17.60
Tier 1 leverage ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
1,701,327
11.49
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,314
11.27
6.00
6.00
8.00
8.00
4.00
4.00
September 30, 2016
Common Equity Tier 1 risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,690,380
17.54%
4.50%
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,828
17.32
4.50
Tier 1 risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
1,690,380
17.54
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,828
17.32
Total risk-based capital ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
1,807,740
18.76
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,786,188
18.54
Tier 1 leverage ratio:
The Company . . . . . . . . . . . . . . . . . . . . . . . . . .
1,690,380
11.60
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668,828
11.45
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
NA
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 Company and the Bank are subject to regulatory restrictions on paying dividends.
The Company has an ongoing share repurchase program and 3,137,178 shares were repurchased during 2017 at a
weighted average price of $31.36. In 2016, 3,867,563 shares were repurchased at a weighted average price of $22.72. As
of September 30, 2017, management had authorization from the Board of Directors to repurchase up to 1,902,412
additional shares.
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2017, the Company repurchased 478,399 of these warrants
with a value of $7,631,576. Warrants remaining outstanding were 330,217 as of September 30, 2017, and 808,616 as of
September 30, 2016, 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,
2017
2016
2015
Weighted average shares outstanding . . . . . . . . . . . . . . . . .
88,905,457
91,399,038
95,644,639
Weighted average dilutive warrants . . . . . . . . . . . . . . . . . .
Weighted average dilutive options . . . . . . . . . . . . . . . . . . .
242,979
75,771
440,366
73,514
340,016
69,304
Weighted average diluted shares. . . . . . . . . . . . . . . . . . . . .
89,224,207
91,912,918
96,053,959
Net income (In thousands) . . . . . . . . . . . . . . . . . . . . . . . .
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
173,532
1.95
1.94
$
$
164,049
1.79
1.78
$
$
160,316
1.68
1.67
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
2017
September 30,
2016
(In thousands)
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,077 $
—
1,972,675
24,300
15
1,954,179
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,005,752 $
1,978,494
Liabilities
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64 $
64
2,763
2,763
Stockholders’ equity
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,005,688
1,975,731
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,005,752 $
1,978,494
Condensed Statements of Operations
Twelve Months Ended September 30,
Income
2017
2016
(In thousands)
2015
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
171,500
$
148,000
$
175,000
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,500
148,000
175,000
Expense
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
435
435
435
435
439
439
Net income (loss) before equity in undistributed net income (loss) of
subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,065
2,326
173,391
141
147,565
16,336
163,901
148
174,561
(14,402)
160,159
157
$
173,532
$
164,049
$
160,316
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
Twelve Months Ended September 30,
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income (loss) of subsidiaries. . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
$ 173,532
$ 164,049
$ 160,316
3,584
15
(2,699)
(12,677)
(15)
1,552
32,375
—
(13,189)
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . .
174,432
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,238
—
(98,374)
(74,519)
9,283
(7,744)
(87,850)
(49,926)
2,070
—
(126,728)
(51,111)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . .
(165,655)
(136,237)
(175,769)
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,777
24,300
16,672
7,628
$
33,077
$
24,300
$
3,733
3,895
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.
Twelve Months Ended September 30, 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
132,764 $
136,198 $
137,716 $
142,240
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,612
28,471
29,101
29,808
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103,152
107,727
108,615
112,432
Provision (release) for loan losses . . . . . . . . . . . . . . . . . . .
—
(1,600)
—
(500)
Other operating income (including REO gain (loss), net) . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,294
54,341
61,105
19,859
10,931
57,467
62,791
20,721
13,798
57,062
65,351
21,239
16,686
62,649
66,969
20,865
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
41,246 $
42,070 $
44,112 $
46,104
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.46 $
0.47 $
0.49 $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . .
0.46
0.14
0.47
0.40
0.49
0.15
0.53
0.52
0.15
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 . . . . . . . . . . . . . . . . . . . .
—
(1,500)
(1,650)
(3,100)
Other operating income (REO expense) . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,055
64,509
54,415
19,317
14,623
59,226
63,222
21,499
15,573
56,305
65,158
22,154
14,830
55,407
65,339
21,115
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35,098 $
41,723 $
43,004 $
44,224
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.38 $
0.45 $
0.47 $
Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . . .
0.38
0.13
0.45
0.14
0.47
0.14
0.49
0.49
0.14
63
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The management of 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, 2017. 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, 2017, 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 20, 2017
Brent J. Beardall
President and Chief Executive Officer
Vincent L. Beatty
Executive 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, 2017
and 2016, 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, 2017. 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, 2017, and 2016, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2017, 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, 2017, 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 20, 2017,
expressed an unqualified opinion on the Company’s internal
control over financial reporting.
Seattle, Washington
November 20, 2017
64
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, 2017, 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’s Report 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, 2017, 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, 2017, of the Company and our report dated
November 20, 2017, expressed an unqualified opinion on those consolidated financial statements.
Seattle, Washington
November 20, 2017
65
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, 2017, 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, 2012, 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.
$235
$215
$195
$175
$155
$135
$115
$95
2012
2013
2014
2015
2016
2017
$18,100
$16,100
$14,100
$12,100
$10,100
$8,100
$6,100
$4,100
$2,100
$100
66
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
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
Annual Meeting
Available Information
The annual meeting of shareholders will be held at the Motif Hotel, 1415 Fifth Avenue, Seattle, Washington
98101 on January 24, 2018, 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. Our annual report on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other 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, 2017, there were approximately 1,300 stockholders of record.
Quarter Ended
December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Prices
High
Low
Dividends
$
26.05
$
22.61
$
23.23
25.22
26.98
35.30
35.15
34.85
34.40
19.87
21.79
23.73
26.38
31.70
31.55
29.85
0.13
0.14
0.14
0.14
0.14
0.40
0.15
0.15
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
quarterly cash dividend to shareholders.
67
DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE
MANAGEMENT
COMMITTEE
BRENT J. BEARDALL
President and Chief Executive
Officer
VINCENT L. BEATTY
Executive Vice President
Chief Financial Officer
CATHY E. COOPER
Executive Vice President
Retail Banking Group Manager
BOB PETERS
Executive Vice President
Commercial Banking Group
Manager
KIM ROBISON
Senior Vice President
Operations Group Manager
MARK A. SCHOONOVER
Executive Vice President
Chief Credit Officer
BOARD OF
DIRECTORS
ROY M. WHITEHEAD
Executive Chairman of the Board
BRENT J. BEARDALL
President and Chief
Executive Officer
DAVID K. GRANT
Managing Partner of
Catalyst Storage Partners.
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.
DIRECTOR
EMERITUS
W. ALDEN HARRIS
UTAH AND NEVADA
REGION
21 Office Locations
MARLISE FISHER
Regional President
405 S. Main St., Suite 100
Salt Lake City, UT 84111
NEW MEXICO REGION
27 Office Locations
MICHELLE COONS
Regional President
4400 Osuna Road NE
Osuna, NM 87109
ARIZONA REGION
31 Office Locations
MIKE BROWN
Regional President
6720 N. Scottsdale Rd., Suite 111
Scottsdale, AZ 85253
TEXAS REGION
6 Office Locations
TONY BARNARD
Regional President
5430 LBJ Freeway, Suite 100
Dallas, Texas 75240
SUBSIDIARIES
WAFD Insurance Group, Inc.
DUANE HENSON
1501 Riverside Dr.
Mount Vernon, WA 98273
SOUTHERN
WASHINGTON
REGION
44 Office Locations
GREG TOSO
Regional President
4221 Bridgeport Way W.
University Place, WA 98466
NORTHERN
WASHINGTON
REGION
44 Office Locations
TOM KENNEY
Regional President
1500 Cornwall Avenue
Bellingham, WA 98225
IDAHO REGION
23 Office Locations
TOM VAN HEMELRYCK
Regional President
1001 W. Idaho St.
Boise, ID 83702
NORTHERN OREGON
REGION
17 Office Locations
GARY HAINES
Regional President
530 SW 5th Avenue
Portland, OR 97204
SOUTHERN OREGON
REGION
27 Office Locations
PEGGY HOBIN
Regional President
300 Ellsworth St. SW
Albany, OR 97321
68
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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