UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-34654
WASHINGTON FEDERAL, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1661606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
425 Pike Street Seattle, Washington 98101
(Address of principal executive offices and zip code)
(206) 624-7930
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of class:
at January 31, 2015
Common stock, $1.00 par value
96,383,502


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


2



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
 
December 31, 2014
 
September 30, 2014
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
542,769

 
$
781,843

Available-for-sale securities, at fair value
2,895,056

 
3,049,442

Held-to-maturity securities, at amortized cost
1,516,219

 
1,548,265

Loans receivable, net
8,253,917

 
8,148,322

Covered loans, net
161,478

 
176,476

Interest receivable
40,757

 
52,037

Premises and equipment, net
254,284

 
257,543

Real estate held for sale
61,970

 
55,072

Real estate held for investment
3,994

 
4,808

Covered real estate held for sale
19,405

 
24,082

FDIC indemnification asset
30,356

 
36,860

FHLB and FRB stock
154,870

 
158,839

Bank owned life insurance
100,216

 
—

Intangible assets, net
301,885

 
302,909

Federal and state income tax assets, net
—

 
16,515

Other assets
157,580

 
143,028

 
$
14,494,756

 
$
14,756,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
5,464,198

 
$
5,490,687

Time deposit accounts
5,114,655

 
5,226,241

 
10,578,853

 
10,716,928

FHLB advances
1,830,000

 
1,930,000

Advance payments by borrowers for taxes and insurance
19,301

 
29,004

Federal and state income taxes, net
4,278

 
—

Accrued expenses and other liabilities
80,985

 
106,826

 
12,513,417

 
12,782,758

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized;
133,590,428 and 133,322,909 shares issued; 97,556,077 and 98,404,705 shares outstanding
133,591

 
133,323

Paid-in capital
1,639,350

 
1,638,211

Accumulated other comprehensive income, net of taxes
23,435

 
20,708

Treasury stock, at cost; 36,034,351 and 34,918,204 shares
(549,434
)
 
(525,108
)
Retained earnings
734,397

 
706,149

 
1,981,339

 
1,973,283

 
$
14,494,756

 
$
14,756,041

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended December 31,
 
2014
 
2013
 
(In thousands, except per share data)
INTEREST INCOME
 
 
 
Loans
$
108,293

 
$
107,227

Mortgage-backed securities
19,175

 
19,368

Investment securities and cash equivalents
5,816

 
4,663

 
133,284

 
131,258

INTEREST EXPENSE
 
 
 
Customer accounts
13,445

 
15,499

FHLB advances and other borrowings
17,656

 
17,447

 
31,101

 
32,946

Net interest income
102,183

 
98,312

Reversal of provision for loan losses
(5,500
)
 
(4,600
)
Net interest income after reversal of provision for loan losses
107,683

 
102,912

 
 
 
 
OTHER INCOME


 


Loan fee income
2,065

 
2,046

Deposit fee income
5,977

 
1,704

Other income (loss)
(2,662
)
 
2,038

 
5,380

 
5,788

 
 
 
 
OTHER EXPENSE
 
 
 
Compensation and benefits
29,160

 
25,126

Occupancy
8,135

 
7,050

FDIC insurance premiums
674

 
2,934

Information technology
4,030

 
1,318

Product delivery
5,627

 
2,929

Other expense
5,974

 
4,763

 
53,600

 
44,120

 
 
 
 
Gain (loss) on real estate acquired through foreclosure, net
315

 
(1,951
)
Income before income taxes
59,778

 
62,629

Income tax provision
21,371

 
22,393

NET INCOME
$
38,407

 
$
40,236

 
 
 
 
PER SHARE DATA
 
 
 
Basic earnings
$
0.39

 
$
0.39

Diluted earnings
0.39

 
0.39

Dividends paid on common stock per share
0.15

 
0.10

Basic weighted average number of shares outstanding
98,147,939

 
102,329,578

Diluted weighted average number of shares outstanding, including dilutive stock options
98,524,839

 
102,813,154

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Quarter Ended December 31,
 
 
2014
 
2013
 
 
(In thousands)
Net income
$
38,407

 
$
40,236

 
Other comprehensive income (loss) net of tax:
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities
8,560

 
(9,661
)
 
Net unrealized (loss) on long-term borrowing hedge
(4,249
)
 
—

 
Related tax benefit (expense)
(1,584
)
 
3,478

 
Other comprehensive income (loss)
2,727

 
(6,183
)
 
Comprehensive income
$
41,134

 
$
34,053

 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED) 
 
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Total
Balance at October 1, 2014
$
133,323

$
1,638,211

$
706,149

$
20,708

$
(525,108
)
$
1,973,283

Net income




38,407





38,407

Other comprehensive income



2,727


2,727

Dividends on common stock




(10,159
)




(10,159
)
Compensation expense related to common stock options


300







300

Proceeds from exercise of common stock options
18

248







266

Restricted stock
250

591







841

Treasury stock acquired








(24,326
)
(24,326
)
Balance at December 31, 2014
$
133,591

$
1,639,350

$
734,397

$
23,435

$
(549,434
)
1,981,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Total
Balance at October 1, 2013
$
132,573

$
1,625,051

$
594,450

$
6,378

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

Net income




40,236





40,236

Other comprehensive loss



(6,183
)

(6,183
)
Dividends on common stock




(10,179
)




(10,179
)
Compensation expense related to common stock options


300







300

Proceeds from exercise of common stock options
444

8,836







9,280

Restricted stock
256

584







840

Treasury stock acquired








(18,945
)
(18,945
)
Balance at December 31, 2013
$
133,273

$
1,634,771

$
624,507

$
195

$
(439,762
)
$
1,952,984

 
 
 
 
 
 
 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
38,407

 
$
40,236

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
       Depreciation and Amortization
5,299

 
3,757

       Cash received from (paid to) FDIC under loss share
(431
)
 
1,295

       Stock option compensation expense
300

 
300

       Reversal of provision for loan losses
(5,500
)
 
(4,600
)
       Gain on real estate held for sale
(9,606
)
 
(597
)
       Decrease (increase) in accrued interest receivable
11,280

 
(411
)
       Decrease in federal and state income tax
19,208

 
22,629

       Decrease (increase) in cash surrender value in bank owned life insurance
(216
)
 
—

       Decrease (increase) in other assets
(14,552
)
 
1,649

       Decrease in accrued expenses and other liabilities
(25,890
)
 
(12,768
)
       Net cash provided by operating activities
18,299

 
51,490

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net (loan originations) principal collections
(36,993
)
 
(68,870
)
Loans purchased
(46,831
)
 
—

FHLB & FRB stock redemption
3,969

 
1,376

Available-for-sale securities purchased
(41,225
)
 
(565,080
)
Principal payments and maturities of available-for-sale securities
202,760

 
76,805

Principal payments and maturities of held-to-maturity securities
31,178

 
23,117

Net cash received from acquisition
—

 
1,280,077

Proceeds from sales of real estate held for sale and investment
13,496

 
14,295

Proceeds from sales of covered REO
4,413

 
6,098

Purchase of bank owned life insurance
(100,000
)
 
—

Premises and equipment purchased and REO improvements
(2,019
)
 
(9,232
)
Net cash provided by investing activities
28,748

 
758,586

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in customer accounts
(137,999
)
 
(1,795
)
Proceeds from borrowings
—

 
625,000

Repayments of borrowings
(100,000
)
 
(625,000
)
Proceeds from exercise of common stock options and related tax benefit
266

 
9,280

Dividends paid on common stock
(14,359
)
 
(10,179
)
Treasury stock purchased
(24,326
)
 
(18,945
)
Decrease in advance payments by borrowers for taxes and insurance
(9,703
)
 
(24,652
)
Net cash used by financing activities
(286,121
)
 
(46,291
)
Increase (decrease) in cash and cash equivalents
(239,074
)
 
763,785

Cash and cash equivalents at beginning of period
781,843

 
203,563

Cash and cash equivalents at end of period
$
542,769

 
$
967,348

(CONTINUED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
 
Non-cash investing activities
 
 
 
Non-covered real estate acquired through foreclosure
$
8,852

 
$
9,956

Covered real estate acquired through foreclosure
51

 
179

 
 
 
 
Cash paid during the period for
 
 
 
Interest
34,653

 
33,644

Income taxes
23

 
(236
)
 
 
 
 
The following summarizes the non-cash activities related to acquisitions
 
 
 
Fair value of assets and intangibles acquired, including goodwill
$
—

 
$
65,531

Fair value of liabilities assumed
—

 
(1,345,608
)
Net fair value of assets (liabilities)
$
—

 
$
(1,280,077
)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)

NOTE A – Summary of Significant Accounting Policies
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 federally-insured national bank subsidiary. The Bank is principally engaged in the business of attracting deposits from the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential real estate loans, multi-family real estate loans and commercial loans. As used throughout this document, the terms "Washington Federal" or the "Company" refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.
Basis of Presentation - The unaudited interim financial statements included in this report have been prepared by Washington Federal. All intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The September 30, 2014 Consolidated Statement of Financial Condition was derived from audited financial statements.
The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company’s 2014 Annual Report on Form 10-K (“2014 Form 10-K”) as filed with the SEC. Interim results are not necessarily indicative of results for a full year.
Summary of Significant Accounting Policies - The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2014 Form 10-K. Other than as discussed below, there have not been any material changes in our significant accounting policies compared to those contained in our 2014 Form 10-K disclosure for the year ended September 30, 2014.
Correction of Immaterial Errors Related to Prior Periods - During the three months ended December 31, 2014, the Company made an $8,200,000 adjustment which increased the value of real estate owned and other income to correct an error in prior years. The adjustment reflects a one-time correction necessary to change the accounting for real estate owned to be in conformity with GAAP. The Company also made an $8,900,000 adjustment which decreased accrued interest receivable and other income as a result of the Company identifying a reconciliation error which had overstated interest income and accrued interest receivable. Based upon an evaluation of all relevant factors, management believes these correcting adjustments did not have a material impact on the Company’s current quarter financial statement or on any previously reported quarterly or yearly results.
Off-Balance-Sheet Credit Exposures – The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance at December 31, 2014 and September 30, 2014, excluding covered loans, of $584,227,000 and $583,838,000, respectively. The Company estimates losses on off-balance-sheet credit exposures by allocating a loss percentage derived from historical loss factors for each asset class.

Reclassifications - Reclassification of Other Expenses into Product delivery and Information technology line items have been made to the financial statements for years prior to September 30, 2014 to conform to current year classifications.

NOTE B - Acquisitions

There were no acquisitions completed during the quarter ended December 31, 2014. During the fiscal year 2014, the Bank acquired seventy-four branches from Bank of America, National Association. Effective as of the close of business on October 31, 2013, the Bank completed the acquisition of eleven branches that are located in New Mexico. Effective as of the close of business on December 6, 2013, the Bank completed the acquisition of another forty branches that are located in Washington, Oregon, and Idaho. Effective as of the close of business on May 2, 2014, the Bank completed the acquisition of another twenty-three branches that are located in Arizona and Nevada. Management believes that these transactions represent a significant enhancement of our branch network. This transaction will bring new customers to the Company and improve the deposit mix and reduce overall funding costs. The combined acquisitions provided $1,853,798,000 in deposit accounts, $12,881,000 of loans, and $25,097,000 in branch properties. The Bank paid a 1.99% premium on the total deposits and received $1,776,660,000 in cash from the transactions. The acquisition method of accounting was used to account for the acquisitions. The purchased assets and assumed liabilities are recorded at their respective acquisition date estimated fair values. The Bank recorded $11,040,000 in core deposit intangible and $31,225,000 in goodwill related to these transactions.

9
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)



The operating results of the Company include the operating results produced by the first eleven branches for the period from November 1, 2013 to December 31, 2014, for the additional forty branches from December 7, 2013 to December 31, 2014, and for the most recent twenty-three branches from May 3, 2014 to December 31, 2014.

The table below displays the adjusted fair value as of the acquisition date for each major class of assets acquired and liabilities assumed:
 
 
Adjusted Fair Value Recorded by
 
 
Washington Federal
 
 
(In thousands)
 Assets:
 
 
 Cash
 
$
1,776,660

 Available for sale securities
 
—

 FHLB stock
 
—

 Loans receivable, net
 
12,881

 Covered loans receivable, net
 
—

 FDIC indemnification asset
 
—

 Property and equipment, net
 
25,097

 Core deposit intangible
 
11,040

 Real estate held for sale
 
—

 Covered real estate held for sale
 
—

Goodwill
 
31,225

Other assets
 
70

   Total Assets
 
1,856,973

 
 
 
 Liabilities:
 
 
 Customer accounts
 
1,853,798

 FHLB advances
 
—

 Other liabilities
 
3,175

   Total Liabilities
 
1,856,973

 
 
 
 Net assets acquired
 
$
—



NOTE C – Dividends
On October 17, 2014, the Company paid its 127th consecutive quarterly cash dividend on common stock. Dividends paid per share were $.15 and $.10 for the quarters ended December 31, 2014 and 2013, respectively. Due to a one-time change in the schedule of quarterly dividends, the Company increased the normal $.11 per share payout for pro-ration over four months for the most recent dividend payment.
On January 21, 2015, the Company announced its 128th consecutive quarterly cash dividend on common stock of $.13 per share. This payout represents an increase of $.02, or 18%, over the prior quarterly dividend rate of $.11 per share. The current dividend will be paid on February 16, 2015 to common stockholders of record on February 2, 2015.


10
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


NOTE D – Loans Receivable (excluding Covered Loans)

 
December 31, 2014
 
September 30, 2014
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
  Single-family residential
$
5,608,208

 
63.9
%
 
$
5,560,203

 
64.1
%
  Construction - speculative
152,450

 
1.7

 
140,060

 
1.6

  Construction - custom
377,561

 
4.3

 
385,824

 
4.5

  Land - acquisition & development
84,000

 
1.0

 
77,832

 
0.9

  Land - consumer lot loans
104,492

 
1.2

 
108,623

 
1.3

  Multi-family
977,752

 
11.2

 
917,286

 
10.6

  Commercial real estate
597,436

 
6.8

 
591,336

 
6.9

  Commercial & industrial
391,327

 
4.5

 
379,226

 
4.4

  HELOC
118,047

 
1.3

 
116,042

 
1.4

  Consumer
126,929

 
1.4

 
132,590

 
1.5

Total non-acquired loans
8,538,202

 
97.3

 
8,409,022

 
97.2

Acquired loans
 
 
 
 
 
 
 
  Single-family residential
11,163

 
0.1

 
11,716

 
0.1

  Land - acquisition & development
872

 
—

 
905

 
—

  Land - consumer lot loans
2,496

 
—

 
2,507

 
—

  Multi-family
2,954

 
—

 
2,999

 
—

  Commercial real estate
92,133

 
1.0

 
97,898

 
1.1

  Commercial & industrial
58,836

 
0.7

 
51,386

 
0.6

  HELOC
7,749

 
0.1

 
8,274

 
0.1

  Consumer
4,369

 
—

 
5,670

 
0.1

Total acquired loans
180,572

 
1.9

 
181,355

 
2.0

Credit-impaired acquired loans
 
 
 
 
 
 
 
  Single-family residential
323

 
—

 
325

 
—

  Land - acquisition & development
1,533

 
—

 
1,622

 
—

  Commercial real estate
60,287

 
0.7

 
63,723

 
0.7

  Commercial & industrial
3,255

 
—

 
3,476

 
—

  HELOC
9,202

 
0.1

 
10,139

 
0.1

  Consumer
54

 
—

 
55

 
—

Total credit-impaired acquired loans
74,654

 
0.8

 
79,340

 
0.8

Total loans
 
 
 
 
 
 
 
   Single-family residential
5,619,694

 
64.0

 
5,572,244

 
64.2

   Construction - speculative
152,450

 
1.7

 
140,060

 
1.6

   Construction - custom
377,561

 
4.3

 
385,824

 
4.5

   Land - acquisition & development
86,405

 
1.0

 
80,359

 
0.9

   Land - consumer lot loans
106,988

 
1.2

 
111,130

 
1.3

   Multi-family
980,706

 
11.2

 
920,285

 
10.6

   Commercial real estate
749,856

 
8.5

 
752,957

 
8.7

   Commercial & industrial
453,418

 
5.2

 
434,088

 
5.0

   HELOC
134,998

 
1.5

 
134,455

 
1.6

   Consumer
131,352

 
1.4

 
138,315

 
1.6

Total loans
8,793,428

 
100
%
 
8,669,717

 
100
%
 
 
 
 
 
 
 
 

11
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Less:
 
 
 
 
 
 
 
Allowance for probable losses
108,700

 
 
 
112,347

 
 
Loans in process
370,655

 
 
 
346,172

 
 
Discount on acquired loans
22,535

 
 
 
25,391

 
 
Deferred net origination fees
37,621

 
 
 
37,485

 
 
 
539,511

 
 
 
521,395

 
 
 
$
8,253,917

 
 
 
$
8,148,322

 
 

Changes in the carrying amount and accretable yield for acquired credit impaired and non-impaired loans for the three months ended December 31, 2014 and the fiscal year ended September 30, 2014 were as follows:
December 31, 2014
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance as of beginning of period
$
32,591

 
$
57,771

 
$
4,254

 
$
177,440

Accretion
(2,970
)
 
2,970

 
(1,424
)
 
1,424

Payments received, net
—

 
(6,455
)
 
—

 
(1,193
)
Balance as of end of period
$
29,621

 
$
54,286

 
$
2,830

 
$
177,671

September 30, 2014
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance as of beginning of period
$
37,236

 
$
69,718

 
$
4,977

 
$
245,373

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

 
—

 
—

 
—

Accretion
(11,945
)
 
11,945

 
(723
)
 
723

Transfers to REO
—

 
(1,188
)
 
—

 
(4,710
)
Payments received, net
—

 
(22,704
)
 
—

 
(63,946
)
Balance as of end of period
$
32,591

 
$
57,771

 
$
4,254

 
$
177,440

(1) reclassification due to improvements in expected cash flows of the underlying loans.

12
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


The following table sets forth information regarding non-accrual loans held by the Company as of the dates indicated:
 
 
December 31, 2014
 
September 30, 2014
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
74,416

 
75.6
%
 
$
74,067

 
84.8
%
Construction - speculative
1,329

 
1.4

 
1,477

 
1.7

Land - acquisition & development
—

 
—

 
811

 
0.9

Land - consumer lot loans
2,260

 
2.3

 
2,637

 
3.0

Multi-family
1,019

 
1.0

 
1,742

 
2.0

Commercial real estate
15,970

 
16.2

 
5,106

 
5.8

Commercial & industrial
672

 
0.7

 
7

 
—

HELOC
1,454

 
1.5

 
795

 
0.9

Consumer
1,233

 
1.3

 
789

 
0.9

Total non-accrual loans
$
98,353

 
100.0
%
 
$
87,431

 
100
%

The following tables provide an analysis of the age of loans in past due status as of December 31, 2014 and September 30, 2014, respectively.

13
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


 
December 31, 2014
Amount of Loans
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
 
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
$
5,605,917

 
$
5,518,834

 
$
17,503

 
$
7,804

 
$
61,776

 
$
87,083

 
1.55
%
Construction - Speculative
95,367

 
95,199

 
168

 
—

 
—

 
168

 
0.18

Construction - Custom
191,787

 
191,670

 
114

 
3

 
—

 
117

 
0.06

Land - Acquisition & Development
70,347

 
68,008

 
2,339

 
—

 
—

 
2,339

 
3.32

Land - Consumer Lot Loans
104,444

 
100,639

 
596

 
368

 
2,841

 
3,805

 
3.64

Multi-Family
906,295

 
905,532

 
—

 
—

 
763

 
763

 
0.08

Commercial Real Estate
559,808

 
541,939

 
2,607

 
—

 
15,262

 
17,869

 
3.19

Commercial & Industrial
388,588

 
387,149

 
339

 
—

 
1,100

 
1,439

 
0.37

HELOC
118,143

 
117,362

 
162

 
58

 
561

 
781

 
0.66

Consumer
126,929

 
125,745

 
756

 
230

 
198

 
1,184

 
0.93

Total non-acquired loans
8,167,625

 
8,052,077

 
24,584

 
8,463

 
82,501

 
115,548

 
1.41
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
11,164

 
10,907

 
232

 
—

 
25

 
257

 
2.30
%
Land - Acquisition & Development
872

 
872

 
—

 
—

 
—

 
—

 
—

Land - Consumer Lot Loans
2,495

 
1,686

 
560

 
—

 
249

 
809

 
—

Multi-Family
2,954

 
2,954

 
—

 
—

 
—

 
—

 
—

Commercial Real Estate
92,066

 
91,211

 
—

 
97

 
758

 
855

 
0.93

Commercial & Industrial
58,832

 
58,733

 
—

 
—

 
99

 
99

 
0.17

HELOC
7,749

 
7,290

 
241

 
—

 
218

 
459

 
5.92

Consumer
4,369

 
3,301

 
412

 
—

 
656

 
1,068

 
24.44

Total acquired loans
180,501

 
176,954

 
1,445

 
97

 
2,005

 
3,547

 
1.97
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit-impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
323

 
323

 
—

 
—

 
—

 
—

 
—
%
Land - Acquisition & Development
1,533

 
1,533

 
—

 
—

 
—

 
—

 
—

Commercial Real Estate
60,280

 
56,301

 
2,064

 
430

 
1,485

 
3,979

 
6.60

Commercial & Industrial
3,255

 
3,255

 
—

 
—

 
—

 
—

 
—

HELOC
9,201

 
8,799

 
—

 
—

 
402

 
402

 
4.37

Consumer
54

 
54

 
—

 
—

 
—

 
—

 
—

Total credit-impaired acquired loans
74,646

 
70,265

 
2,064

 
430

 
1,887

 
4,381

 
5.87
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
8,422,772

 
$
8,299,296

 
$
28,093

 
$
8,990

 
$
86,393

 
$
123,476

 
1.47
%




14
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)





September 30, 2014
Amount of Loans
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
 
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
Single-Family Residential
$
5,557,753

 
$
5,467,239

 
$
15,926

 
$
9,139

 
$
65,449

 
$
90,514

 
1.63
%
Construction - Speculative
87,035

 
87,035

 
—

 
—

 
—

 
—

 
—

Construction - Custom
192,098

 
191,262

 
836

 
—

 
—

 
836

 
0.44

Land - Acquisition & Development
68,066

 
67,911

 
155

 
—

 
—

 
155

 
0.23

Land - Consumer Lot Loans
108,589

 
104,571

 
1,246

 
304

 
2,468

 
4,018

 
3.70

Multi-Family
892,196

 
891,372

 
205

 
16

 
603

 
824

 
0.09

Commercial Real Estate
529,453

 
513,409

 
67

 
15,118

 
859

 
16,044

 
3.03

Commercial & Industrial
379,226

 
377,848

 
53

 
1,318

 
7

 
1,378

 
0.36

HELOC
116,262

 
115,262

 
335

 
292

 
373

 
1,000

 
0.86

Consumer
132,686

 
131,642

 
654

 
262

 
128

 
1,044

 
0.79

Total non-acquired loans
8,063,364

 
7,947,551

 
19,477

 
26,449

 
69,887

 
115,813

 
1.44
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
11,716

 
11,693

 
—

 
—

 
23

 
23

 
0.20

Land - Acquisition & Development
905

 
905

 
—

 
—

 
—

 
—

 
—

Land - Consumer Lot Loans
2,502

 
2,132

 
—

 
370

 
—

 
370

 
14.79

Multi-Family
2,999

 
2,999

 
—

 
—

 
—

 
—

 
—

Commercial Real Estate
97,715

 
96,948

 
104

 
—

 
663

 
767

 
0.78

Commercial & Industrial
51,329

 
51,229

 
—

 
100

 
—

 
100

 
0.19

HELOC
8,056

 
8,056

 
—

 
—

 
—

 
—

 
—

Consumer
5,670

 
4,983

 
22

 
4

 
661

 
687

 
12.12

Total acquired loans
180,892

 
178,945

 
126

 
474

 
1,347

 
1,947

 
1.08
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit-impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
325

 
325

 
—

 
—

 
—

 
—

 
—
%
Land - Acquisition & Development
1,581

 
1,581

 
—

 
—

 
—

 
—

 
—

Commercial Real Estate
63,713

 
61,713

 
152

 
909

 
939

 
2,000

 
3.14

Commercial & Industrial
3,477

 
3,470

 
7

 
—

 
—

 
7

 
0.20

HELOC
10,138

 
9,641

 
—

 
75

 
422

 
497

 
4.90

Consumer
54

 
54

 
—

 
—

 
—

 
—

 
—

Total credit-impaired acquired loans
79,288

 
76,784

 
159

 
984

 
1,361

 
2,504

 
3.16
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
8,323,544

 
$
8,203,280

 
$
19,762

 
$
27,907

 
$
72,595

 
$
120,264

 
1.44
%




15
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Most loans restructured in troubled debt restructurings ("TDRs") are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The concession for these loans is typically a payment reduction through a rate reduction of between 100 to 200 basis points for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. As of December 31, 2014, single-family residential loans comprised 86.6% of TDRs.

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

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

 
Quarter Ended December 31,
 
2014
 
2013
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Recorded
 
Recorded
 
Contracts
 
Investment
 
Investment
 
Contracts
 
Investment
 
Investment
 
 
 
(In thousands)
 
 
 
(In thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
   Single-Family Residential
35

 
$
9,600

 
$
9,600

 
113

 
$
23,607

 
$
23,607

   Construction - Speculative
2

 
718

 
718

 
—

 
—

 
—

   Land - Consumer Lot Loans
2

 
532

 
532

 
5

 
1,098

 
1,098

   Multi-Family
—

 
—

 
—

 
2

 
1,213

 
1,213

   Commercial Real Estate
—

 
—

 
—

 
1

 
810

 
810

   HELOC
—

 
—

 
—

 
1

 
261

 
261

   Consumer
1

 
85

 
85

 
2

 
39

 
39

 
40

 
$
10,935

 
$
10,935

 
124

 
$
27,028

 
$
27,028



The following tables provide information on restructured loans for which a payment default occurred during the periods indicated and that had been modified as a TDR within 12 months or less of the payment default:

 
Quarter Ended December 31,
 
2014
 
2013
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-Family Residential
8

 
$
1,431

 
24

 
$
3,624

   Land - Consumer Lot Loans
3

 
389

 
2

 
166

 
11

 
$
1,820

 
26

 
$
3,790





16
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


NOTE E – Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the quarter ended December 31, 2014 and fiscal year ended September 30, 2014: 
Quarter Ended December 31, 2014
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
62,763

 
$
(1,694
)
 
$
2,553

 
$
(8,127
)
 
$
55,495

Construction - speculative
6,742

 
(388
)
 
—

 
(903
)
 
5,451

Construction - custom
1,695

 
—

 
—

 
(730
)
 
965

Land - acquisition & development
5,592

 
(38
)
 
1

 
1,116

 
6,671

Land - consumer lot loans
3,077

 
(35
)
 
—

 
71

 
3,113

Multi-family
4,248

 
—

 
220

 
32

 
4,500

Commercial real estate
7,548

 
(27
)
 
28

 
(1,677
)
 
5,872

Commercial & industrial
16,527

 
—

 
34

 
6,767

 
23,328

HELOC
928

 
—

 
—

 
(36
)
 
892

Consumer
3,227

 
(427
)
 
615

 
(1,002
)
 
2,413

 
$
112,347

 
$
(2,609
)
 
$
3,451

 
$
(4,489
)
 
$
108,700

Fiscal Year Ended September 30, 2014
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
64,184

 
$
(8,529
)
 
$
17,684

 
$
(10,576
)
 
$
62,763

Construction - speculative
8,407

 
(949
)
 
97

 
(813
)
 
6,742

Construction - custom
882

 
—

 
—

 
813

 
1,695

Land - acquisition & development
9,165

 
(541
)
 
3,071

 
(6,103
)
 
5,592

Land - consumer lot loans
3,552

 
(658
)
 
22

 
161

 
3,077

Multi-family
3,816

 
—

 
—

 
432

 
4,248

Commercial real estate
5,595

 
(105
)
 
33

 
2,025

 
7,548

Commercial & industrial
16,614

 
(826
)
 
5,043

 
(4,304
)
 
16,527

HELOC
1,002

 
(48
)
 
—

 
(26
)
 
928

Consumer
3,524

 
(3,443
)
 
3,513

 
(367
)
 
3,227

 
$
116,741

 
$
(15,099
)
 
$
29,463

 
$
(18,758
)
 
$
112,347


The Company recorded a $5,500,000 reversal for loan losses during the quarter ended December 31, 2014, while a $4,600,000 reversal was recorded for the same quarter one year ago. The credit quality of the portfolio has been improving significantly and economic conditions are more favorable. The primary reason for the reversal in the quarter ended December 31, 2013, was the favorable settlement of a lawsuit related to previously purchased loans. During the fiscal year ended September 30, 2014, there was a transfer of $2,910,000 to establish a reserve for unfunded commitments. This reserve was $1,898,000 as of December 31, 2014.
Non-performing assets (“NPAs”) amounted to $164,317,000, or 1.13%, of total assets at December 31, 2014, compared to $197,910,000, or 1.37%, of total assets one year ago. Acquired loans, including covered loans, are not classified as non-performing loans because at acquisition the carrying value of these loans was adjusted to reflect fair value. As of December 31, 2014, $37,136,000 in acquired loans were subject to the general allowance as the discount related to these balances is not sufficient to absorb potential losses. There was no additional provision for loan losses recorded on acquired or covered loans during the quarter ended December 31, 2014. Non-accrual loans decreased from $114,717,000 at December 31, 2013, to $98,352,555 at December 31, 2014, a 14.3% decrease.

17
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


The Company had net recoveries of $841,000 for the quarter ended December 31, 2014, compared with $6,017,000 of net recoveries for the same quarter one year ago largely attributed to the lawsuit settlement discussed above. A loan is charged-off when the loss is estimable and it is confirmed that the borrower will not be able to meet its contractual obligations.
At December 31, 2014, $108,700,000 of the allowance was calculated under the formulas contained in our general allowance methodology. At September 30, 2014, $112,287,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $60,000 was made up of specific reserves on loans that were deemed to be impaired.
The following tables shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of December 31, 2014 and September 30, 2014:
 
December 31, 2014
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
General  Reserve
Allocation
 
Gross Loans Subject  to
General Reserve (1)
 
Ratio
 
Specific  Reserve
Allocation
 
Gross Loans Subject  to
Specific Reserve (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
55,495

 
$
5,542,825

 
1.0
%
 
$
—

 
$
63,091

 
—
%
Construction - speculative
5,451

 
87,711

 
6.2

 
—

 
7,656

 
—

Construction - custom
965

 
191,787

 
0.5

 
—

 
—

 
—

Land - acquisition & development
6,671

 
66,953

 
10.0

 
—

 
3,394

 
—

Land - consumer lot loans
3,113

 
91,588

 
3.4

 
—

 
12,856

 
—

Multi-family
4,500

 
901,277

 
0.5

 
—

 
5,019

 
—

Commercial real estate
5,872

 
533,593

 
1.1

 
—

 
26,217

 
—

Commercial & industrial
23,328

 
425,724

 
5.4

 
—

 
—

 
—

HELOC
892

 
116,544

 
0.8

 
—

 
1,598

 
—

Consumer
2,413

 
126,920

 
1.9

 
—

 
9

 
—

 
$
108,700

 
$
8,084,922

 
1.4
%
 
$
—

 
$
119,840

 
—
%
(1)
Excludes acquired loans with sufficient discounts and covered loans
September 30, 2014
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
General  Reserve
Allocation
 
Gross Loans Subject  to
General Reserve (1)
 
Ratio
 
Specific  Reserve
Allocation
 
Gross Loans Subject  to
Specific Reserve (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
62,067

 
$
5,487,331

 
1.1
%
 
$
—

 
$
72,869

 
—
%
Construction - speculative
6,682

 
130,901

 
5.5

 
60

 
9,159

 
0.7

Construction - custom
1,695

 
385,464

 
0.5

 
—

 
360

 
—

Land - acquisition & development
5,592

 
73,999

 
7.6

 
—

 
3,833

 
—

Land - consumer lot loans
3,077

 
95,684

 
3.2

 
—

 
12,939

 
—

Multi-family
4,248

 
911,162

 
0.5

 
—

 
6,124

 
—

Commercial real estate
7,548

 
563,534

 
1.4

 
—

 
27,802

 
—

Commercial & industrial
17,223

 
421,816

 
4.6

 
—

 
—

 
—

HELOC
928

 
114,393

 
0.9

 
—

 
1,650

 
—

Consumer
3,227

 
132,590

 
2.4

 
—

 
—

 
—

 
$
112,287

 
$
8,316,874

 
1.4
%
 
$
60

 
$
134,736

 
—
%
(1)
Excludes acquired loans with sufficient discounts and covered loans

18
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


The Company has an asset quality review function that analyzes its loan portfolios and reports the results of the review to the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as follows:

•
Pass – the credit does not meet one of the definitions below.

•
Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and Management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

•
Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.

•
Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

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

The following tables provide information on loans based on credit quality indicators (defined above) as of December 31, 2014 and September 30, 2014.

19
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Credit Risk Profile by Internally Assigned Grade (excludes covered loans):
December 31, 2014
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,484,864

 
$
2,357

 
$
120,987

 
$
—

 
$
—

 
$
5,608,208

  Construction - speculative
147,979

 
—

 
4,471

 
—

 
—

 
152,450

  Construction - custom
377,561

 
—

 
—

 
—

 
—

 
377,561

  Land - acquisition & development
78,428

 
—

 
5,572

 
—

 
—

 
84,000

  Land - consumer lot loans
103,890

 
—

 
602

 
—

 
—

 
104,492

  Multi-family
971,647

 
—

 
6,105

 
—

 
—

 
977,752

  Commercial real estate
566,553

 
1,955

 
28,928

 
—

 
—

 
597,436

  Commercial & industrial
333,082

 
13,653

 
44,592

 
—

 
—

 
391,327

  HELOC
117,799

 
—

 
248

 
—

 
—

 
118,047

  Consumer
126,929

 
—

 
—

 
—

 
—

 
126,929

 
8,308,732

 
17,965

 
211,505

 
—

 
—

 
8,538,202

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
11,163

 
—

 
—

 
—

 
—

 
11,163

  Land - acquisition & development
479

 
—

 
393

 
—

 
—

 
872

  Land - consumer lot loans
2,496

 
—

 
—

 
—

 
—

 
2,496

  Multi-family
2,954

 
—

 
—

 
—

 
—

 
2,954

  Commercial real estate
83,991

 
742

 
7,400

 
—

 
—

 
92,133

  Commercial & industrial
45,643

 
13,001

 
171

 
21

 
—

 
58,836

  HELOC
7,749

 
—

 
—

 
—

 
—

 
7,749

  Consumer
4,369

 
—

 
—

 
—

 
—

 
4,369

 
158,844

 
13,743

 
7,964

 
21

 
—

 
180,572

 
 
 
 
 
 
 
 
 
 
 
 
 Credit impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Pool 1 - Construction and land A&D
1,244

 
—

 
289

 
—

 
—

 
1,533

  Pool 2 - Single-family residential
323

 
—

 
—

 
—

 
—

 
323

  Pool 3 - Multi-family
—

 
—

 
—

 
—

 
—

 
—

  Pool 4 - HELOC & other consumer
9,256

 
—

 
—

 
—

 
—

 
9,256

  Pool 5 - Commercial real estate
48,716

 
—

 
11,571

 
—

 
—

 
60,287

  Pool 6 - Commercial & industrial
452

 
2,803

 
—

 
—

 
—

 
3,255

Total credit impaired acquired loans
59,991

 
2,803

 
11,860

 
—

 
—

 
74,654

Total gross loans
$
8,527,567

 
$
34,511

 
$
231,329

 
$
21

 
$
—

 
$
8,793,428

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
97.0
%
 
0.4
%
 
2.6
%
 
—
%
 
—
%
 
 



20
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


September 30, 2014
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 Single-family residential
$
5,426,895

 
$
2,793

 
$
130,515

 
$
—

 
$
—

 
$
5,560,203

 Construction - speculative
134,950

 
—

 
5,110

 
—

 
—

 
140,060

 Construction - custom
385,824

 
—

 
—

 
—

 
—

 
385,824

 Land - acquisition & development
71,692

 
—

 
6,140

 
—

 
—

 
77,832

 Land - consumer lot loans
108,013

 
—

 
610

 
—

 
—

 
108,623

 Multi-family
912,728

 
—

 
4,558

 
—

 
—

 
917,286

 Commercial real estate
557,914

 
1,971

 
31,451

 
—

 
—

 
591,336

 Commercial & industrial
359,221

 
14,740

 
5,265

 
—

 
—

 
379,226

 HELOC
115,794

 
—

 
248

 
—

 
—

 
116,042

 Consumer
132,349

 
—

 
241

 
—

 
—

 
132,590

 
8,205,380

 
19,504

 
184,138

 
—

 
—

 
8,409,022

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
11,716

 
—

 
—

 
—

 
—

 
11,716

  Land - acquisition & development
503

 
—

 
402

 
—

 
—

 
905

  Land - consumer lot loans
2,507

 
—

 
—

 
—

 
—

 
2,507

  Multi-family
2,999

 
—

 
—

 
—

 
—

 
2,999

  Commercial real estate
88,974

 
2,571

 
6,353

 
—

 
—

 
97,898

  Commercial & industrial
36,311

 
13,642

 
1,375

 
58

 
—

 
51,386

  HELOC
8,274

 
—

 
—

 
—

 
—

 
8,274

  Consumer
5,670

 
—

 
—

 
—

 
—

 
5,670

 
156,954

 
16,213

 
8,130

 
58

 
—

 
181,355

 
 
 
 
 
 
 
 
 
 
 
 
Credit impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Pool 1 - Construction and land A&D
1,292

 
—

 
330

 
—

 
—

 
1,622

  Pool 2 - Single-family residential
325

 
—

 
—

 
—

 
—

 
325

  Pool 3 - Multi-family
—

 
—

 
—

 
—

 
—

 
—

  Pool 4 - HELOC & other consumer
10,194

 
—

 
—

 
—

 
—

 
10,194

  Pool 5 - Commercial real estate
48,878

 
2,143

 
12,702

 
—

 
—

 
63,723

  Pool 6 - Commercial & industrial
643

 
—

 
2,833

 
—

 
—

 
3,476

Total credit impaired acquired loans
61,332

 
2,143

 
15,865

 
—

 
—

 
79,340

Total gross loans
$
8,423,666

 
$
37,860

 
$
208,133

 
$
58

 
$
—

 
$
8,669,717

Total grade as a % of total gross loans
97.2
%
 
0.4
%
 
2.4
%
 
—
%
 
—
%
 
 


21
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):
 
December 31, 2014
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,533,792

 
98.7
%
 
$
74,416

 
1.3
%
Construction - speculative
151,121

 
99.1

 
1,329

 
0.9

Construction - custom
377,561

 
100.0

 
—

 
—

Land - acquisition & development
84,000

 
100.0

 
—

 
—

Land - consumer lot loans
102,232

 
97.8

 
2,260

 
2.2

Multi-family
976,733

 
99.9

 
1,019

 
0.1

Commercial real estate
581,466

 
97.3

 
15,970

 
2.7

Commercial & industrial
390,655

 
99.8

 
672

 
0.2

HELOC
116,593

 
98.8

 
1,454

 
1.2

Consumer
125,696

 
99.0

 
1,233

 
1.0

 
$
8,439,849

 
98.8
%
 
$
98,353

 
1.2
%

September 30, 2014
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,486,136

 
98.7
%
 
$
74,067

 
1.3
%
Construction - speculative
138,583

 
98.9

 
1,477

 
1.1

Construction - custom
385,824

 
100.0

 
—

 
—

Land - acquisition & development
77,021

 
99.0

 
811

 
1.0

Land - consumer lot loans
105,986

 
97.6

 
2,637

 
2.4

Multi-family
915,544

 
99.8

 
1,742

 
0.2

Commercial real estate
586,230

 
99.1

 
5,106

 
0.9

Commercial & industrial
379,219

 
100.0

 
7

 
—

HELOC
115,247

 
99.3

 
795

 
0.7

Consumer
131,801

 
99.4

 
789

 
0.6

 
$
8,321,591

 
99.0
%
 
$
87,431

 
1.0
%

22
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


The following table provides information on impaired loan balances and the related allowances by loan types as of December 31, 2014 and September 30, 2014: 
 
 
 
 
 
 
 
 
December 31, 2014
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average Recorded Investment
 
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
 
Single-family residential
$
24,441

 
$
26,661

 
$
—

 
$
21,251

 
Construction - speculative
1,006

 
1,201

 
—

 
1,040

 
Land - acquisition & development
790

 
2,163

 
—

 
813

 
Land - consumer lot loans
1,689

 
1,787

 
—

 
1,268

 
Multi-family
1,255

 
1,255

 
—

 
1,068

 
Commercial real estate
27,233

 
33,352

 
—

 
26,902

 
Commercial & industrial
4,429

 
16,320

 
—

 
3,812

 
HELOC
1,163

 
1,948

 
—

 
1,075

 
Consumer
651

 
836

 
—

 
647

 
 
62,657

 
85,523

 
—

 
57,876

 
With an allowance recorded:
 
 
 
 
 
 
 
 
Single-family residential
304,029

 
309,207

 
9,964

 
304,359

 
Construction - speculative
6,317

 
7,182

 
—

 
6,506

 
Land - acquisition & development
4,238

 
5,178

 
—

 
4,467

 
Land - consumer lot loans
12,231

 
12,614

 
—

 
12,446

 
Multi-family
3,492

 
3,492

 
—

 
3,828

 
Commercial real estate
18,028

 
18,896

 
—

 
18,072

 
HELOC
1,486

 
1,486

 
—

 
1,486

 
Consumer
126

 
297

 
—

 
85

 
 
349,947

 
358,352

 
9,964

(1)
351,249

 
Total:
 
 
 
 
 
 
 
 
Single-family residential
328,470

 
335,868

 
9,964

 
325,610

 
Construction - speculative
7,323

 
8,383

 
—

 
7,546

 
Land - acquisition & development
5,028

 
7,341

 
—

 
5,280

 
Land - consumer lot loans
13,920

 
14,401

 
—

 
13,714

 
Multi-family
4,747

 
4,747

 
—

 
4,896

 
Commercial real estate
45,261

 
52,248

 
—

 
44,974

 
Commercial & industrial
4,429

 
16,320

 
—

 
3,812

 
HELOC
2,649

 
3,434

 
—

 
2,561

 
Consumer
777

 
1,133

 
—

 
732

 
 
$
412,604

 
$
443,875

 
$
9,964

(1)
$
409,125

 

(1)Included in the general reserves.


23
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


September 30, 2014
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
24,044

 
$
26,628

 
$
—

 
$
16,843

Construction - speculative
1,603

 
2,173

 
—

 
1,804

Land - acquisition & development
837

 
2,325

 
—

 
1,038

Land - consumer lot loans
974

 
1,072

 
—

 
713

Multi-family
1,111

 
1,111

 
—

 
327

Commercial real estate
13,234

 
20,085

 
—

 
11,720

Commercial & industrial
3,195

 
17,166

 
—

 
3,900

HELOC
1,019

 
1,730

 
—

 
612

Consumer
663

 
833

 
—

 
517

 
46,680

 
73,123

 
—

 
37,474

With an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
322,320

 
327,869

 
10,527

 
316,348

Construction - speculative
7,556

 
7,986

 
60

 
7,532

Land - acquisition & development
4,696

 
5,636

 
—

 
4,114

Land - consumer lot loans
13,002

 
13,385

 
—

 
12,858

Multi-family
5,243

 
5,463

 
—

 
4,957

Commercial real estate
34,159

 
35,028

 
—

 
18,572

HELOC
1,486

 
1,486

 
—

 
1,204

Consumer
43

 
214

 
—

 
79

 
388,505

 
397,067

 
10,587

(1)
365,664

Total:
 
 
 
 
 
 
 
Single-family residential
346,364

 
354,497

 
10,527

 
333,191

Construction - speculative
9,159

 
10,159

 
60

 
9,336

Land - acquisition & development
5,533

 
7,961

 
—

 
5,152

Land - consumer lot loans
13,976

 
14,457

 
—

 
13,571

Multi-family
6,354

 
6,574

 
—

 
5,284

Commercial real estate
47,393

 
55,113

 
—

 
30,292

Commercial & industrial
3,195

 
17,166

 
—

 
3,900

HELOC
2,505

 
3,216

 
—

 
1,816

Consumer
706

 
1,047

 
—

 
596

 
$
435,185

 
$
470,190

 
$
10,587

(1)
$
403,138


(1)
Includes $60,000 of specific reserves and $10,527,000 included in the general reserves.


24
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)





NOTE F – New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-11, Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures. Under this new accounting guidance, repurchase-to-maturity transactions will be accounted for as secured borrowings rather than sales of an asset, and transfers of financial assets with contemporaneous repurchase financings will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts. The new guidance also prescribes additional disclosures particularly on the nature of collateral pledged in repurchase financings accounted for as secured borrowings. The amendments in this update will be effective for the first interim or annual period beginning after December 31, 2014, with the exception of the collateral disclosures which will be effective for interim periods beginning after March 15, 2015. Early application is not permitted. 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). This new accounting guidance clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance does not apply to financial instruments. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016. The Company does not expect the new guidance to have a material impact on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This new guidance clarifies that if an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. ASU 2014-04 is effective for annual and interim reporting periods within those annual periods, beginning after December 15, 2014. Adoption of the new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.


NOTE G – Fair Value Measurements
U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
We have established and documented the Company's process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis:


25
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Measured on a Recurring Basis
Securities
Securities available for sale are recorded at fair value on a recurring basis. Most securities at fair value are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Securities that are traded on active exchanges are considered a Level 1 input method.
 
The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2014 and September 30, 2014:
 
Fair Value at December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Equity securities
$
101,636

 
$
—

 
$
—

 
$
101,636

Obligations of U.S. government
—

 
620,018

 
—

 
620,018

Obligations of states and political subdivisions
—

 
24,068

 
—

 
24,068

Corporate debt securities
—

 
527,938

 
—

 
527,938

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates
—

 
1,527,810

 
—

 
1,527,810

       Other commercial MBS
—

 
93,586

 
—

 
93,586

Balance at end of period
$
101,636

 
$
2,793,420

 
$
—

 
$
2,895,056

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended December 31, 2014.
 
Fair Value at September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Equity securities
$
101,387

 
$
—

 
$
—

 
$
101,387

Obligations of U.S. government
—

 
731,943

 
—

 
731,943

Obligations of states and political subdivisions
—

 
23,681

 
—

 
23,681

Corporate debt securities
—

 
509,007

 
—

 
509,007

Mortgage-backed securities
 
 
 
 
 
 
 
Agency pass-through certificates
—

 
1,584,508

 
—

 
1,584,508

       Other commercial MBS
—

 
98,916

 
—

 
98,916

Balance at end of period
$
101,387

 
$
2,948,055

 
$
—

 
$
3,049,442

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended September 30, 2014.
Measured on a Nonrecurring Basis
Impaired Loans & Real Estate Held for Sale
From time to time, and on a nonrecurring basis, fair value adjustments to collateral-dependent loans are recorded to reflect write-downs of principal balances based on the current appraised or estimated value of the collateral.
Real estate held for sale consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, fair value adjustments are recorded to reflect write-downs or write-ups, but only up to the fair value of the real estate owned as of the initial transfer date, of principal balances based on the current appraised or estimated value of the collateral.

26
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


When management determines that the fair value of the loan collateral or the real estate held for sale requires additional adjustments, either as a result of a non-current appraisal value or when there is no observable market price, the Company classifies the impaired loan or real estate held for sale as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2014 included loans for which a partial charge-off was recorded based on the fair value of collateral, as well as covered REO and real estate held for sale for which fair value of the properties was less than the cost basis.
The following tables present the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the three months ended December 31, 2014 and December 31, 2013, and the total losses (gains) resulting from those fair value adjustments for the quarters ended December 31, 2014 and December 31, 2013. These estimated fair values are shown gross of estimated selling costs.
 
 
Through December 31, 2014
 
Quarter
Ended
December 31, 2014
 
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Losses (Gains)
 
(In thousands)
 
Impaired loans (1)
$
—

 
$
—

 
$
146

 
$
146

 
$
64

 
Covered REO (1)
—

 
—

 
1,041

 
1,041

 
75

 
Real estate held for sale (2)
—

 
—

 
36,901

 
36,901

 
(8,312
)
 
Balance at end of period
$
—

 
$
—

 
$
38,088

 
$
38,088

 
$
(8,173
)
 

(1)
The losses represent remeasurements of collateral-dependent loans.
(2)
The gains in this period include a one-time correction of $8.2 million (see Note A for description).

 
Through December 31, 2013
 
Quarter
Ended
December 31, 2013
 
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Losses (Gains)
 
 
(In thousands)
 
Impaired loans (1)
$
—

 
$
—

 
$
5,580

 
$
5,580

 
$
(805
)
 
Covered REO (2)
—

 
—

 
1,286

 
1,286

 
65

 
Real estate held for sale (2)
—

 
—

 
10,342

 
10,342

 
3,725

 
Balance at end of period
$
—

 
$
—

 
$
17,208

 
$
17,208

 
$
2,985

 

(1)
The gains represent remeasurements of collateral-dependent loans.
(2)
The losses represent aggregate writedowns and charge-offs on real estate held for sale.
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2014 or December 31, 2013.
Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.
The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for probable loan & lease losses process. Applicable loans 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.

27
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following method is used to value impaired loans:
•
The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.
Real estate held for sale ("REO") - When a loan is reclassified from loan status to real estate held for sale due to the Company taking possession of the collateral, a Special Credits officer, along with the Special Credits manager, obtains a valuation, which may include appraisals or third-party price opinions, 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. The following method is used to value real estate held for sale:
•
The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the lower of cost or fair value as necessary. After foreclosure, valuations are updated periodically and current market conditions may require the assets to be written down further or up to the cost basis established on the date of transfer. The carrying balance of REO assets are also written down or up once a bona fide offer is contractually accepted, through execution of a Purchase and Sale Agreement, where the accepted price is lower than the cost basis established on the transfer date.

28
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Fair Values of Financial Instruments
U. S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been comprehensively revalued for purposes of these financial statements since the dates shown, and therefore, estimates of fair value subsequent to those dates may differ significantly from the amounts presented below. 
 
 
 
 
December 31, 2014
 
September 30, 2014
 
 
Level in Fair Value Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
542,769

 
$
542,769

 
$
781,843

 
$
781,843

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Equity securities
 
1
 
101,636

 
101,636

 
101,387

 
101,387

Obligations of U.S. government
 
2
 
620,018

 
620,018

 
731,943

 
731,943

Obligations of states and political subdivisions
 
2
 
24,068

 
24,068

 
23,681

 
23,681

Corporate debt securities
 
2
 
527,938

 
527,938

 
509,007

 
509,007

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,527,810

 
1,527,810

 
1,584,508

 
1,584,508

           Other commercial MBS
 
2
 
93,586

 
93,586

 
98,916

 
98,916

Total available-for-sale securities
 
 
 
2,895,056

 
2,895,056

 
3,049,442

 
3,049,442

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
2
 
1,516,219

 
1,503,781

 
1,548,265

 
1,499,218

Total held-to-maturity securities
 
 
 
1,516,219

 
1,503,781

 
1,548,265

 
1,499,218

 
 
 
 
 
 
 
 
 
 
 
Loans receivable, net
 
3
 
8,253,917

 
8,816,245

 
8,148,322

 
8,667,771

Covered loans, net
 
3
 
161,478

 
167,129

 
176,476

 
176,761

FDIC indemnification asset
 
3
 
30,356

 
29,559

 
36,860

 
35,976

FHLB and FRB stock
 
2
 
154,870

 
154,870

 
158,839

 
158,839

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Customer accounts
 
2
 
10,578,853

 
9,936,221

 
10,716,928

 
9,946,586

FHLB advances
 
2
 
1,830,000

 
1,953,751

 
1,930,000

 
2,054,437

 
 
 
 
 
 
 
 
 
 
 
Off balance sheet - interest rate swaps
 
2
 
—

 
(4,517
)
 
—

 
(170
)
 
 
 
 
 
 
 
 
 
 
 
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value. 
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 input method.

29
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


Loans receivable and covered loans – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.
FDIC indemnification asset – The fair value of the indemnification asset is estimated by discounting the expected future cash flows using the current rates.
FHLB and FRB stock – The fair value is based upon the par value of the stock which equates to its carrying value.
Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.
FHLB advances and other borrowings – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities as of December 31, 2014 and September 30, 2014:
 
December 31, 2014
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
 
Losses
 
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
$
120,467

 
$
2,396

 
$
(426
)
 
$
122,437

 
1.47

5 to 10 years
153,525

 
64

 
(5
)
 
153,584

 
1.12

Over 10 years
344,088

 
336

 
(427
)
 
343,997

 
1.26

Equity Securities
 
 
 
 
 
 
 
 
 
Within 1 year
500

 
16

 
—

 
516

 
1.80

1 to 5 years
100,000

 
1,120

 
—

 
101,120

 
1.90

5 to 10 years
—

 
—

 
—

 
—

 
—

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
15,000

 
67

 
—

 
15,067

 
1.00

1 to 5 years
302,627

 
1,524

 
(6
)
 
304,145

 
0.71

5 to 10 years
158,236

 
1,787

 
(1,297
)
 
158,726

 
1.42

        Over 10 years
50,000

 
—

 
—

 
50,000

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
Over 10 years
20,397

 
3,671

 
—

 
24,068

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,495,114

 
34,386

 
(1,690
)
 
1,527,810

 
2.57

Other commercial MBS
93,533

 
53

 
—

 
93,586

 
1.51

 
2,853,487

 
45,420

 
(3,851
)
 
2,895,056

 
1.99

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,516,219

 
9,084

 
(21,522
)
 
1,503,781

 
3.13

 
$
4,369,706

 
$
54,504

 
$
(25,373
)
 
$
4,398,837

 
2.39
%
 

30
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


 
September 30, 2014
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
Losses
 
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
1 to 5 years
$
171,154

 
$
2,585

 
$
(748
)
 
$
172,991

 
1.26

5 to 10 years
203,317

 
300

 
(102
)
 
203,515

 
1.45

Over 10 years
354,828

 
1,028

 
(419
)
 
355,437

 
1.25

Equity Securities
 
 
 
 
 
 
 
 
 
1 to 5 years
100,500

 
887

 
—

 
101,387

 
1.90

5 to 10 years
—

 
—

 
—

 
—

 
—

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
15,000

 
75

 
—

 
15,075

 
1.00

1 to 5 years
302,540

 
2,372

 
—

 
304,912

 
0.71

5 to 10 years
138,201

 
1,789

 
(970
)
 
139,020

 
1.43

       Over 10 years
50,000

 
—

 
—

 
50,000

 
3.00

Municipal bonds due
 
 
 
 
 
 
 
 
 
Over 10 years
20,402

 
3,279

 
—

 
23,681

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,561,639

 
24,893

 
(2,024
)
 
1,584,508

 
2.57

Other commercial MBS
98,851

 
65

 
—

 
98,916

 
1.49

 
3,016,432

 
37,273

 
(4,263
)
 
3,049,442

 
1.99

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,548,265

 
4,855

 
(53,902
)
 
1,499,218

 
3.13

 
$
4,564,697

 
$
42,128

 
$
(58,165
)
 
$
4,548,660

 
2.38
%
During the quarter ended December 31, 2014, there were no available-for-sale securities sold. There were no available-for-sale securities sold during the quarter ended December 31, 2013. Substantially all agency mortgage-backed securities have contractual due dates that exceed 10 years.
The following tables show the unrealized gross losses and fair value of securities at December 31, 2014 and September 30, 2014, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other than temporarily impaired.
 
December 31, 2014
Less than 12 months
 
12 months or more
 
Total
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
(In thousands)
 
 
Corporate bonds due
$
(406
)
 
$
72,688

 
$
(897
)
 
$
24,104

 
$
(1,303
)
 
$
96,792

U.S. government and agency securities due
(422
)
 
246,045

 
(436
)
 
99,564

 
(858
)
 
345,609

Agency pass-through certificates
(421
)
 
62,689

 
(22,791
)
 
1,332,778

 
(23,212
)
 
1,395,467

 
$
(1,249
)
 
$
381,422

 
$
(24,124
)
 
$
1,456,446

 
$
(25,373
)
 
$
1,837,868



31
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


September 30, 2014
Less than 12 months
 
12 months or more
 
Total
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
(In thousands)
 
 
Corporate bonds due
$
(125
)
 
$
24,875

 
$
(845
)
 
$
24,155

 
$
(970
)
 
$
49,030

U.S. government and agency securities due
(472
)
 
316,578

 
(797
)
 
109,354

 
(1,269
)
 
425,932

Agency pass-through certificates
(215
)
 
19,212

 
(55,711
)
 
1,509,209

 
(55,926
)
 
1,528,421

 
$
(812
)
 
$
360,665

 
$
(57,353
)
 
$
1,642,718

 
$
(58,165
)
 
$
2,003,383



32
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)



NOTE H – Covered Assets
Covered assets represent loans and real estate held for sale acquired from the FDIC that are subject to loss sharing agreements and were $180,883,000 as of December 31, 2014, versus $200,558,000 as of September 30, 2014.
Changes in the carrying amount and accretable yield for acquired impaired and non-impaired loans for the quarter ended December 31, 2014 and the fiscal year ended September 30, 2014 were as follows:
 
December 31, 2014
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance at beginning of period
$
64,534

 
$
78,055

 
$
10,259

 
$
98,422

Accretion
(4,509
)
 
4,509

 
(1,909
)
 
1,909

Transfers to REO
—

 
(51
)
 
—

 
—

Payments received, net
—

 
(4,025
)
 
—

 
(16,942
)
Balance at end of period
$
60,025

 
$
78,488

 
$
8,350

 
$
83,389

 
 
 
 
 
September 30, 2014
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance at beginning of period
$
78,277

 
$
138,091

 
$
17,263

 
$
157,856

Reclassification from nonaccretable balance, net
10,186

 
(2,069
)
 
—

 
—

Accretion
(23,929
)
 
23,929

 
(7,004
)
 
7,004

Transfers to REO
—

 
(8,943
)
 
—

 
—

Payments received, net
—

 
(72,953
)
 
—

 
(66,438
)
Balance at end of period
$
64,534

 
$
78,055

 
$
10,259

 
$
98,422


At December 31, 2014, none of the acquired impaired or non-impaired loans were classified as non-performing assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans. The allowance for credit losses related to the acquired loans results from decreased expectations of future cash flows due to increased credit losses for certain acquired loan pools.
The outstanding principal balance of acquired loans was $192,637,000 and $213,203,000 as of December 31, 2014 and September 30, 2014, respectively. The discount balance related to the acquired loans was $28,916,000 and $34,483,000 as of December 31, 2014 and September 30, 2014, respectively.

33
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)



The following table shows the year to date activity for the FDIC indemnification asset:
 
December 31, 2014
 
September 30, 2014
 
(In thousands)
Balance at beginning of fiscal year 2014 and 2013
$
36,860

 
$
64,615

Additions
—

 
1,795

Payments made (received)
430

 
(2,502
)
Amortization
(7,074
)
 
(27,850
)
Accretion
140

 
802

Balance at end of period
$
30,356

 
$
36,860


The following tables provide information on covered loans based on credit quality indicators (defined in Note E ) as of December 31, 2014 and September 30, 2014:
 
December 31, 2014
Internally Assigned Grade
 
Total
Net  Loans
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
 
(In thousands)
Purchased non credit-impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
$
20,664

 
$
—

 
$
1,212

 
$
—

 
$
—

 
$
21,876

Land - acquisition & development
353

 
—

 
36

 
—

 
—

 
389

Land - consumer lot loans
73

 
—

 
—

 
—

 
—

 
73

Multi-family
4,250

 
—

 
—

 
—

 
—

 
4,250

Commercial real estate
25,317

 
—

 
14,810

 
—

 
—

 
40,127

Commercial & industrial
2,476

 
—

 
2,635

 
—

 
—

 
5,111

HELOC
11,226

 
—

 
—

 
—

 
—

 
11,226

Consumer
393

 
—

 
—

 
—

 
—

 
393

 
64,752

 
—

 
18,693

 
—

 
—

 
83,445

Total grade as a % of total net loans
77.6
%
 
—
%
 
22.4
%
 
—
%
 
—
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit-impaired loans:
 
 
 
 
 
 
 
 
Pool 1 - Construction and land A&D
7,128

 
—

 
12,142

 
—

 
—

 
19,270

Pool 2 - Single-family residential
15,061

 
—

 
324

 
—

 
—

 
15,385

Pool 3 - Multi-family
51

 
—

 
440

 
—

 
—

 
491

Pool 4 - HELOC & other consumer
2,772

 
—

 
1,167

 
—

 
—

 
3,939

Pool 5 - Commercial real estate
33,543

 
692

 
28,437

 
—

 
—

 
62,672

Pool 6 - Commercial & industrial
3,125

 
—

 
3,793

 
517

 
—

 
7,435

 
$
61,680

 
$
692

 
$
46,303

 
$
517

 
$
—

 
109,192

 
 
 
 
 
 
 
Total covered loans
 
192,637

 
 
 
 
 
 
 
 
 
Discount
 
(28,916
)
 
 
 
 
 
 
 
 
 
Allowance
 
(2,243
)
 
 
 
 
 
 
 
 
 
Covered loans, net
 
$
161,478



34
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


September 30, 2014
Internally Assigned Grade
 
Total
Net  Loans
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
 
(In thousands)
Purchased non credit-impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
$
21,311

 
$
—

 
$
1,756

 
$
—

 
$
—

 
$
23,067

Land - acquisition & development
972

 
—

 
392

 
—

 
—

 
1,364

Land - consumer lot loans
73

 
—

 
—

 
—

 
—

 
73

Multi-family
6,598

 
—

 
—

 
—

 
—

 
6,598

Commercial real estate
26,940

 
115

 
24,281

 
—

 
—

 
51,336

Commercial & industrial
2,801

 
—

 
2,691

 
—

 
—

 
5,492

HELOC
11,777

 
—

 
—

 
—

 
—

 
11,777

Consumer
454

 
—

 
—

 
—

 
—

 
454

 
70,926

 
115

 
29,120

 
—

 
—

 
100,161

Total grade as a % of total net loans
70.8
%
 
0.1
%
 
29.1
%
 
—
%
 
—
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit-impaired loans:
 
 
 
 
 
 
 
 
Pool 1 - Construction and land A&D
8,349

 
—

 
11,912

 
—

 
—

 
20,261

Pool 2 - Single-family residential
15,585

 
—

 
379

 
—

 
—

 
15,964

Pool 3 - Multi-family
52

 
—

 
471

 
—

 
—

 
523

Pool 4 - HELOC & other consumer
2,804

 
—

 
1,173

 
—

 
—

 
3,977

Pool 5 - Commercial real estate
33,909

 
700

 
29,782

 
—

 
—

 
64,391

Pool 6 - Commercial & industrial
3,509

 
—

 
3,892

 
525

 
—

 
7,926

 
$
64,208

 
$
700

 
$
47,609

 
$
525

 
$
—

 
113,042

 
 
 
 
 
 
 
Total covered loans
 
213,203

 
 
 
 
 
 
 
 
 
Discount
 
(34,483
)
 
 
 
 
 
 
 
 
 
Allowance
 
(2,244
)
 
 
 
 
 
 
 
 
 
Covered loans, net
 
$
176,476














35
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


The following tables provide an analysis of the age of purchased non credit-impaired loans in past due status as of December 31, 2014 and September 30, 2014:
 
December 31, 2014
Amount of  Loans
Net of LIP & Chg.-Offs
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loans
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
 
 
Single-Family Residential
$
21,876

 
$
21,306

 
$
27

 
$
201

 
$
342

 
$
570

 
2.61
%
Land - Acquisition & Development
389

 
353

 
—

 
—

 
36

 
36

 
9.25

Land - Consumer Lot Loans
73

 
73

 
—

 
—

 
—

 
—

 
—

Multi-Family
4,250

 
4,250

 
—

 
—

 
—

 
—

 
—

Commercial Real Estate
40,127

 
40,127

 
—

 
—

 
—

 
—

 
—

Commercial & Industrial
5,111

 
5,111

 
—

 
—

 
—

 
—

 
—

HELOC
11,226

 
11,197

 
29

 
—

 
—

 
29

 
0.26

Consumer
393

 
390

 
—

 
3

 
—

 
3

 
0.76

 
$
83,445

 
$
82,807

 
$
56

 
$
204

 
$
378

 
$
638

 
0.76
%


September 30, 2014
Amount of  Loans
Net of LIP & Chg.-Offs
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loans
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
 
 
Single-Family Residential
$
23,067

 
$
22,391

 
$
230

 
$
40

 
$
406

 
$
676

 
2.93
%
Land - Acquisition & Development
1,364

 
1,328

 
—

 
—

 
36

 
36

 
2.64

Land - Consumer Lot Loans
73

 
73

 
—

 
—

 
—

 
—

 
—

Multi-Family
6,598

 
5,502

 
—

 
—

 
1,096

 
1,096

 
16.61

Commercial Real Estate
51,336

 
51,336

 
—

 
—

 
—

 
—

 
—

Commercial & Industrial
5,492

 
5,492

 
—

 
—

 
—

 
—

 
—

HELOC
11,777

 
11,777

 
—

 
—

 
—

 
—

 
—

Consumer
454

 
443

 
11

 
—

 
—

 
11

 
2.42

 
$
100,161

 
$
98,342

 
$
241

 
$
40

 
$
1,538

 
$
1,819

 
1.82
%


36
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)


NOTE I – Derivatives and Hedging Activities

The Bank periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the bank retains a variable rate loan. Under these agreements, the Bank enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Bank then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under ASC 815, the Derivatives and Hedging topic, the instruments are marked to market in earnings.
The notional amount of open interest rate swap agreements at December 31, 2014 was $291,896,000 compared to $264,169,000 as of September 30, 2014. There was no impact to the statement of operations for the three months ended December 31, 2014 as the asset and liability side of the swaps offset each other. The fee income related to swaps was $196,000 for the Quarter Ended December 31, 2014.
Additionally, the Bank had $200,000,000 in forward starting interest rate swaps to hedge future borrowing rates. Their impact on accumulated other comprehensive income as of December 31, 2014 was an after-tax loss of $2,857,000.
The following table presents the fair value and balance sheet classification of derivatives at December 31, 2014 and September 30, 2014:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
December 31, 2014
 
September 30, 2014
 
December 31, 2014
 
September 30, 2014
 
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Location
 
Fair Value
 
 
(In thousands)
Interest rate contracts
 
Other assets
 
$
5,626

 
Other assets
 
$
2,879

 
Other liabilities
 
$
5,626

 
Other liabilities
 
$
2,879

Long term borrowing hedge
 
Other assets
 
—

 
Other assets
 
—

 
Other liabilities
 
4,517

 
Other liabilities
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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



FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes, including without limitation the potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations being promulgated thereunder; monetary fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; cost of funds; demand for loan products; demand for financial services; competition; changes in the quality or composition of the Company’s loan and investment portfolios; changes in accounting principles; policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
GENERAL
Washington Federal, Inc., formed in 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a federally-insured national bank subsidiary, Washington Federal, National Association. The Bank converted from a federal savings association to a national bank charter with the Office of the Comptroller of the Currency on July 17, 2013. At the same time, the Company which had previously been a savings and loan holding company, became a bank holding company under the Bank Holding Company Act.
The Company's fiscal year end is September 30th. All references to 2014 and 2013 represent balances as of September 30, 2014 and September 30, 2013, respectively, or activity for the fiscal years then ended.
INTEREST RATE RISK

Based on Management's assessment of the current interest rate environment, the Bank has taken steps to reduce its interest rate risk profile compared to its historical norms, including growing shorter-term business loans, transaction deposit accounts and extending the maturity on borrowings. Last year's branch acquisitions accelerated these efforts. The mix of transaction accounts is now 52% of total deposits. The Bank has also been purchasing more variable rate investments. The composition of the investment portfolio is now 46% variable and 54% fixed rate. In addition, $1,516,219,000 of its purchased 30-year fixed rate mortgage-backed securities have been designated as held-to-maturity. With rising interest rates, these securities may be subject to unrealized losses. As of December 31, 2014, the net unrealized losses on these securities was $12,438,000. The net unrealized gain on the Available for sale securities of $2,853,487,000 was $41,569,000 as of December 31, 2014. The Bank has executed $200,000,000 in forward starting interest rate swaps to hedge future borrowing rates. The net unrealized loss on the interest rate swaps as of December 31, 2014 was $4,517,000. These are pre-tax net unrealized gains/(losses).

The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, the sensitivity of net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) the Company.
Maturity Gap (Term to Reprice) Analysis. At December 31, 2014, the Company had approximately $1,593,442,000 more in liabilities subject to repricing in the next year than assets, which amounted to a negative one-year maturity gap of 11.0% of total assets. This was an decrease from the 11.3% negative gap as of September 30, 2014. A negative maturity gap implies that funding costs will change more rapidly than interest income on earning assets with movement in interest rates. A negative maturity gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. Gap analysis provides management with a high-level indication of interest rate risk, but is considered less reliable than more detailed modeling.

Net Interest Income Sensitivity. The potential impact of rising interest rates on net interest income in the future under various rate change scenarios is estimated using a model that is based on account level detail for loans and deposits. In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income will decrease by 1.4% in the next year. This compares to an estimated decrease of 1.5% in the prior quarter's analysis. In the event

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



of a gradual increase from current rates by 200 basis points over a twelve-month period, the model forecasts a decrease in net interest income of 2.2% in the first year. This analysis assumes zero balance sheet growth and a constant percentage composition of assets and liabilities. It also assumes that loan and deposit prices respond in full to the increase in market rates. Actual results will differ from the assumptions used in this model, as Management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates.

NPV Sensitivity. The NPV is an estimate of the market of value of shareholder's equity. It is derived by calculating the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of the NPV to changes in interest rates provides a longer term view of interest rate risk as it incorporates all future expected cash flows. In the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $531,000,000 or 18.9% and the NPV to total assets ratio to decline to 16.56% from a base of 18.99%. As of September 30, 2014, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $598,000,000 or 21.7% and the NPV to total assets ratio to decline to 15.68% from a base of 18.53%. The decreased NPV sensitivity and higher base NPV ratio is due to lower interest rates and higher prices as of December 31, 2014.
Interest Rate Spread. The interest rate spread increased to 2.74% at December 31, 2014 from 2.66% at September 30, 2014. The spread increased due to an increase in the average rate on investment securities and decline in the average rate of borrowings. As of December 31, 2014, the weighted average rate on customer deposit accounts and borrowings decreased by 3 basis points compared to September 30, 2014, while the weighted average rates on earning assets increased by 5 basis points over the same period.

Net Interest Margin. The net interest margin decreased to 3.01% for the quarter ended December 31, 2014 from 3.12% for the quarter ended December 31, 2013. The yield on earning assets declined 24 basis points to 3.89% and the cost of interest bearing liabilities declined 15 basis points to 0.98%. The greater decline in the yield on earning assets was due to lower loan yields on new originations compared to prepaying and maturing loans. In addition, there is a greater portion of floating rate loans and securities than in the prior year.

The following table sets forth the information explaining the changes in the net interest margin for the periods indicated compared to the same periods one year ago.
























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



 
December 31, 2014
 
December 31, 2013
 
Average Balance
 
Interest
 
Average Rate
 
Average Balance
 
Interest
 
Average Rate
 
(In thousands)
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans and covered loans
$
8,367,285

 
$
108,293

 
5.13
%
 
$
7,826,159

 
$
107,227

 
5.44
%
Mortgaged-backed securities
3,191,365

 
19,175

 
2.38

 
3,129,915

 
19,368

 
2.46

Cash & Investments
1,876,824

 
5,415

 
1.14

 
1,474,296

 
4,261

 
1.15

FHLB & FRB stock
158,194

 
401

 
1.01

 
172,607

 
402

 
0.92

 
 
 
 
 
 
 
 
 
 
 
 
 Total interest-earning assets
13,593,668

 
133,284

 
3.89
%
 
12,602,977

 
131,258

 
4.13
%
Other assets
1,062,770

 
 
 
 
 
946,963

 
 
 
 
Total assets
$
14,656,438

 
 
 
 
 
$
13,549,940

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,680,974

 
$
13,445

 
0.50
%
 
$
9,538,339

 
$
15,499

 
0.64
%
FHLB advances
1,920,217

 
17,656

 
3.65

 
2,030,000

 
17,447

 
3.41

Other borrowings
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
12,601,191

 
31,101

 
0.98
%
 
11,568,339

 
32,946

 
1.13
%
Other liabilities
95,026

 
 
 
 
 
28,618

 
 
 
 
               Total liabilities
12,696,217

 
 
 
 
 
11,596,957

 
 
 
 
Stockholder's equity
1,960,221

 
 
 
 
 
1,952,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
14,656,438

 
 
 
 
 
$
13,549,940

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
102,183

 
 
 
 
 
$
98,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
3.01
%
 
 
 
 
 
3.12
%

As of December 31, 2014, total assets decreased by $261,285,000 to $14,494,756,000 compared to $14,756,041,000 at September 30, 2014. For the quarter ended December 31, 2014, compared to September 30, 2014, loans (both non-covered and covered) increased $90,597,000, or 1.1%. Investment securities decreased $186,432,000, or 4.1%. Cash and cash equivalents of $542,769,000 and stockholders’ equity of $1,981,339,000 as of December 31, 2014 provides management with flexibility in managing interest rate risk going forward.



LIQUIDITY AND CAPITAL RESOURCES
The Company’s net worth at December 31, 2014 was $1,981,339,000, or 13.67% of total assets. This was an increase of $8,056,000 from September 30, 2014 when net worth was $1,973,283,000, or 13.37% of total assets. The Company’s net worth was impacted in the three months ended December 31, 2014 by net income of $38,407,000, cash dividends of $10,159,000, treasury stock purchases that totaled $24,326,000, as well as an increase in other comprehensive income of $2,727,000.

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



Management believes this strong net worth position will help the Company manage its inherent risks and resultant profitability and provide the capital support needed for controlled growth in a regulated environment. To be categorized as well capitalized, Washington Federal must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
 
Actual
 
Capital
Adequacy Guidelines
 
Categorized as
Well Capitalized Under
Prompt Corrective
Action Provisions
 
Capital
 
Ratio
 
Capital
 
Ratio
 
Capital
 
Ratio
 
(In thousands)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
The Company
$1,741,484
 
23.51
%
 
$592,659
 
8.00
%
 
NA

 
NA

The Bank
1,715,440

 
23.16
%
 
592,596

 
8.00
%
 
$740,745
 
10.00
%
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
The Company
1,648,120

 
22.25
%
 
296,330

 
4.00
%
 
NA

 
NA

The Bank
1,622,086

 
21.90
%
 
296,298

 
4.00
%
 
444,447

 
6.00
%
Tier I Capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
The Company
1,648,120

 
11.51
%
 
572,941

 
4.00
%
 
NA

 
NA

The Bank
1,622,086

 
11.33
%
 
572,648

 
4.00
%
 
715,810

 
5.00
%
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
The Company
1,739,658

 
23.97
%
 
580,671

 
8.00
%
 
NA

 
NA

The Bank
1,750,179

 
24.11
%
 
580,772

 
8.00
%
 
725,965

 
10.00
%
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
The Company
1,648,199

 
22.71
%
 
290,335

 
4.00
%
 
NA

 
NA

The Bank
1,658,704

 
22.85
%
 
290,386

 
4.00
%
 
435,579

 
6.00
%
Tier I Capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
The Company
1,648,199

 
11.39
%
 
578,804

 
4.00
%
 
NA

 
N/A

The Bank
1,658,704

 
11.46
%
 
578,816

 
4.00
%
 
723,520

 
5.00
%
In July 2013, federal banking agencies released new regulatory capital rules which became effective January 1, 2015. These new rules raise the minimum capital ratios and establish new criteria for regulatory capital. The Company has estimated its capital ratios using the new rules and does not expect this change to have a material impact on its consolidated financial statements.
The Company's cash and cash equivalents amounted to $542,769,000 at December 31, 2014, a decrease from $781,843,000 at September 30, 2014. The Company is holding higher than normal amounts of liquidity due to concern about potentially rising interest rates in the future. Additionally, see "Interest Rate Risk" above and the "Statement of Cash Flows" included in the financial statements.
CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $154,386,000, or 5.1%, during the three months ended December 31, 2014, which included the purchase of $41,225,000 of available-for-sale securities. There were no available-for-sale securities sold during the three months ended December 31, 2014. During the same period, there were no held-to-maturity securities purchased or sold. As of December 31, 2014, the Company had net unrealized gains on available-for-sale securities of $26,292,000, net of tax, which were recorded as part of stockholders’ equity.

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



Loans receivable: During the three months ended December 31, 2014, the balance of loans receivable increased to $8,253,917,000 compared to $8,148,322,000 at September 30, 2014. This increase includes net loan activity (originations and purchases less principal payments and maturities) for non covered loans of $105,595,000. During the three month period, $8,852,000 of loans were transferred to REO.
Covered loans: As of December 31, 2014, covered loans decreased 8.5%, or $14,998,000 to $161,478,000, compared to September 30, 2014 due primarily to principal payments and maturities. The FDIC loss share coverage for the majority of these loans will expire during fiscal year 2015. If all FDIC loss share coverage had expired as of December 31, 2014, the NPA ratio would increase from 1.13% to 1.33% and the delinquency rate would rise from 1.47% to 1.61%.
The following table shows the loan portfolio by category for the last three quarters.
Loan Portfolio by Category *
December 31, 2014
 
September 30, 2014
 
June 30, 2014
Non-Acquired loans
(In thousands)
Single-family residential
$
5,608,208

 
63.9
%
 
$
5,560,203

 
64.1
%
 
$
5,466,771

 
64.7
%
Construction - speculative
152,450

 
1.7

 
140,060

 
1.6

 
126,926

 
1.5

Construction - custom
377,561

 
4.3

 
385,824

 
4.5

 
372,789

 
4.4

Land - acquisition & development
84,000

 
1.0

 
77,832

 
0.9

 
88,319

 
1.1

Land - consumer lot loans
104,492

 
1.2

 
108,623

 
1.3

 
111,919

 
1.4

Multi-family
977,752

 
11.2

 
917,286

 
10.6

 
893,742

 
10.6

Commercial real estate
597,436

 
6.8

 
591,336

 
6.9

 
523,850

 
6.2

Commercial & industrial
391,327

 
4.5

 
379,226

 
4.4

 
333,552

 
3.9

HELOC
118,047

 
1.3

 
116,042

 
1.4

 
117,177

 
1.4

Consumer
126,929

 
1.4

 
132,590

 
1.5

 
132,062

 
1.5

Total non-acquired loans
8,538,202

 
97.3

 
8,409,022

 
97.2

 
8,167,107

 
96.7

Acquired loans
 
Single-family residential
11,163

 
0.1

 
11,716

 
0.1

 
12,014

 
0.2

Land - acquisition & development
872

 
—

 
905

 
—

 
1,069

 
—

Land - consumer lot loans
2,496

 
—

 
2,507

 
—

 
2,654

 
—

Multi-family
2,954

 
—

 
2,999

 
—

 
3,057

 
—

Commercial real estate
92,133

 
1.0

 
97,898

 
1.1

 
103,215

 
1.1

Commercial & industrial
58,836

 
0.7

 
51,386

 
0.6

 
60,349

 
0.7

HELOC
7,749

 
0.1

 
8,274

 
0.1

 
8,469

 
0.1

Consumer
4,369

 
—

 
5,670

 
0.1

 
6,427

 
0.1

Total acquired loans
180,572

 
1.9

 
181,355

 
2.0

 
197,254

 
2.2

Credit-impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
323

 
—

 
325

 
—

 
326

 
—

Land - acquisition & development
1,533

 
—

 
1,622

 
—

 
1,670

 
—

Commercial real estate
60,287

 
0.7

 
63,723

 
0.7

 
66,356

 
0.9

Commercial & industrial
3,255

 
—

 
3,476

 
—

 
4,280

 
0.1

HELOC
9,202

 
0.1

 
10,139

 
0.1

 
10,658

 
0.1

Consumer
54

 
—

 
55

 
—

 
58

 
—

Total credit-impaired acquired loans
74,654

 
0.8

 
79,340

 
0.8

 
83,348

 
1.1

Total loans
 
 
 
 
 
 
 
 
 
 
 
   Single-family residential
5,619,694

 
64.0

 
5,572,244

 
64.2

 
5,479,111

 
64.9

   Construction - speculative
152,450

 
1.7

 
140,060

 
1.6

 
126,926

 
1.5

   Construction - custom
377,561

 
4.3

 
385,824

 
4.5

 
372,789

 
4.4


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



   Land - acquisition & development
86,405

 
1.0

 
80,359

 
0.9

 
91,058

 
1.1

   Land - consumer lot loans
106,988

 
1.2

 
111,130

 
1.3

 
114,573

 
1.4

   Multi-family
980,706

 
11.2

 
920,285

 
10.6

 
896,799

 
10.6

   Commercial real estate
749,856

 
8.5

 
752,957

 
8.7

 
693,421

 
8.2

   Commercial & industrial
453,418

 
5.2

 
434,088

 
5.0

 
398,181

 
4.7

   HELOC
134,998

 
1.5

 
134,455

 
1.6

 
136,304

 
1.6

   Consumer
131,352

 
1.4

 
138,315

 
1.6

 
138,547

 
1.6

Total loans
8,793,428

 
100
%
 
8,669,717

 
100
%
 
8,447,709

 
100
%
Less:
 
 
 
 
 
 
 
 
 
 
 
Allowance for probable losses
108,700

 
 
 
112,347

 
 
 
114,150

 
 
Loans in process
370,655

 
 
 
346,172

 
 
 
303,084

 
 
Discount on acquired loans
22,535

 
 
 
25,391

 
 
 
28,480

 
 
Deferred net origination fees
37,621

 
 
 
37,485

 
 
 
36,041

 
 
 
539,511

 
 
 
521,395

 
 
 
481,755

 
 
 
$
8,253,917

 
 
 
$
8,148,322

 
 
 
$
7,965,954

 
 
 ____________________
* Excludes covered loans
Non-performing assets: Non-performing assets ("NPA's"), which excludes discounted acquired assets, increased during the quarter ended December 31, 2014 to $164,317,173 from $147,310,850 at September 30, 2014, an 11.5% increase. The increase was largely attributable to a single commercial loan, at a balance of $15,127,000, which subsequently paid off in full during the current quarter. Non-performing assets as a percentage of total assets was 1.13% at December 31, 2014 compared to 1.00% at September 30, 2014.
The continued elevated level of NPAs is a result of the significant decline in housing values in the western United States and the national recession which began in 2007. This level of NPAs remains higher than the 0.96% average in the Company’s 29+ year history as a public company.

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



The following table sets forth information regarding restructured and non-accrual loans and REO held by the Company at the dates indicated.
 
December 31,
2014
 
September 30,
2014
 
(In thousands)
Restructured loans:
 
 
 
 
 
 
 
Single-family residential
$
304,784

 
86.6
%
 
$
323,732

 
86.3
%
Construction - speculative
6,651

 
1.9

 
7,360

 
2.0

Land - acquisition & development
4,238

 
1.2

 
4,737

 
1.3

Land - consumer lot loans
12,528

 
3.6

 
13,002

 
3.5

Multi - family
4,141

 
1.2

 
5,243

 
1.4

Commercial real estate
18,028

 
5.1

 
19,140

 
5.1

HELOC
1,486

 
0.4

 
1,486

 
0.4

Consumer
126

 
—

 
43

 
—

Total restructured loans (1)
351,982

 
100
%
 
374,743

 
100
%
 
 
 
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
74,415

 
75.7
%
 
74,067

 
84.8
%
Construction - speculative
1,329

 
1.4

 
1,477

 
1.7

Land - consumer lot loans
2,260

 
2.3

 
2,637

 
3.0

Multi-family
1,019

 
1.0

 
1,742

 
2.0

Commercial real estate
15,970

 
16.2

 
5,106

 
5.8

Commercial & industrial
673

 
0.7

 
7

 
—

HELOC
1,454

 
1.5

 
795

 
0.9

Consumer
1,233

 
1.3

 
789

 
0.9

Total non-accrual loans (2)
98,353

 
100
%
 
87,431

 
100
%
Total REO (3)
61,970

 
 
 
55,072

 
 
Total REHI (3)
3,994

 
 
 
4,808

 
 
Total non-performing assets
$
164,317

 
 
 
$
147,311

 
 
Total non-performing assets and performing restructured loans as a percentage of total assets
3.44
%
 
 
 
3.37
%
 
 
(1)    Restructured loans were as follows:
 
 
 
 
 
 
 
Performing
$
333,854

 
94.8
%
 
$
350,653

 
93.6
%
Non-accrual *
18,128

 
5.2

 
24,090

 
6.4

 
$
351,982

 
100
%
 
$
374,743

 
100
%
*
Included in "Total non-accrual loans" above

(2)
The Company received interest income on nonaccrual loans of approximately $2,001,000 in the three months ended December 31, 2014. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $1,089,000 for the three months ended December 31, 2014. The received interest income may include more than three months of interest for some of the loans that were brought current. In addition to the nonaccrual loans reflected in the above table, at December 31, 2014 the Company had $87,842,000 of loans that were less than 90 days delinquent but which it had classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company’s ratio of total NPAs and performing restructured loans as a percent of total assets would have increased to 4.04% at December 31, 2014.
(3)
Total REO and REHI includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. Excludes covered REO.

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



Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted. Most restructured loans are accruing and performing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 86.6% of restructured loans as of December 31, 2014. The concession for these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform it will be placed in non-accrual status when it is 90 days delinquent.
A loan that defaults and is subsequently modified would impact the Company’s delinquency trend, which is part of the qualitative risk factors component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the historical loss factors component of our general reserve calculation.
Allocation of the allowance for loan losses: The following table shows the allocation of the Company’s allowance for loan losses at the dates indicated. 
 
December 31, 2014
 
September 30, 2014
 
Amount
 
Loans to
Total Loans (1)
 
Coverage
Ratio (2)
 
Amount
 
Loans to
Total Loans (1)
 
Coverage
Ratio (2)
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
 
 
Single-family residential
$
55,495

 
69.4
%
 
1.0
%
 
$
62,763

 
65.6
%
 
1.1
%
Construction - speculative
5,451

 
1.2

 
5.7

 
6,742

 
1.7

 
5.2

Construction - custom
965

 
2.4

 
0.5

 
1,695

 
4.6

 
0.5

Land - acquisition & development
6,671

 
0.9

 
9.5

 
5,592

 
0.9

 
7.2

Land - consumer lot loans
3,113

 
1.3

 
3.0

 
3,077

 
1.3

 
2.8

Multi-family
4,500

 
11.2

 
0.5

 
4,248

 
10.9

 
0.5

Commercial real estate
5,872

 
6.9

 
1.0

 
7,548

 
7.0

 
1.3

Commercial & industrial
23,328

 
3.6

 
5.4

 
16,527

 
5.0

 
4.6

HELOC
892

 
1.5

 
0.8

 
928

 
1.4

 
0.9

Consumer
2,413

 
1.6

 
1.9

 
3,227

 
1.6

 
2.4

 
$
108,700

 
100
%
 
 
 
$
112,347

 
100
%
 
 
 __________________
(1)
Represents the total amount of the loan category as a % of total gross non-acquired and non-covered loans outstanding.
(2)
Represents the allocated allowance as a % of total gross non-acquired or covered loans outstanding for the same loan category.

Real Estate Held for Sale: Real estate held for sale increased during the quarter by $6,898,000 to $61,970,000, including upward net market value adjustments from prior period corrections of $8,164,000 which are partially offset by a net decline in balances due to current period activities.
Interest Receivable: Interest receivable decreased by $11,280,000, primarily as a result of the correction for the over-accrual of interest income of $8,872,000 that had accumulated since fiscal 2011 and was recently detected. Management believes this error and correction had no material impact to any prior reporting period.

Bank Owned Life Insurance: The Company purchased $100,000,000 in bank-owned life insurance, with a pro forma 2015 pre-tax equivalent yield of 5.14%, to assist in funding the growth of employee benefit costs.

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




Customer accounts: Customer accounts decreased $138,075,000, or 1.29%, to $10,578,853,000 at December 31, 2014 compared with $10,716,928,000 at September 30, 2014.
The following table shows the composition of the Company’s customer accounts by deposit type as of the dates shown:
  
December 31, 2014
 
September 30, 2014
 
(In thousands)
 
 
 
Wtd. Avg.
Rate
 
 
 
Wtd. Avg.
Rate
Non-interest checking
$
870,981

 
8.2
%
 
—
%
 
$
883,601

 
8.2
%
 
—
%
Interest checking
1,436,922

 
13.6

 
0.06
%
 
1,447,569

 
13.5

 
0.09
%
Savings (passbook/stmt)
640,731

 
6.1

 
0.10
%
 
622,546

 
5.8

 
0.10
%
Money Market
2,515,564

 
23.8

 
0.18
%
 
2,536,971

 
23.7

 
0.18
%
CD’s
5,114,655

 
48.3

 
0.91
%
 
5,226,241

 
48.8

 
0.92
%
Total
$
10,578,853

 
100
%
 
0.50
%
 
$
10,716,928

 
100
%
 
0.51
%

FHLB advances and other borrowings: Total borrowings were $1,830,000,000 as of December 31, 2014 which is a decrease of $100,000,000 compared to the balance of $1,930,000,000 as of September 30, 2014, due to a repayment of a FHLB advance with a maturity date of September 2015, resulting in a prepayment penalty of $2,600,000.
The Company has a credit line with the FHLB Seattle equal to 50% of total assets, providing a substantial source of liquidity if needed. FHLB advances are collateralized as provided for in the Advances, Pledge and Security Agreement by all FHLB stock owned by the Company, deposits with the FHLB and certain mortgages or deeds of trust securing such properties as provided in the agreements with the FHLB.
The Federal Housing Finance Agency has approved the merger application submitted by the Federal Home Loan Banks of Seattle and Des Moines to merge, and the next step in the process is ratification of the merger agreement by the members of both banks. The Company does not expect this change to have a material impact on its borrowing or liquidity position.

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



RESULTS OF OPERATIONS
Net Income: The quarter ended December 31, 2014 produced net income of $38,407,000 compared to $40,236,000 for the same quarter one year ago. Net income for the quarter ended December 31, 2014 was lower by $1,829,000 due to higher expenses that were partially offset by higher net interest margin, a slight gain instead of losses on sales of real estate acquired through foreclosure and additional recovery of loan loss provisions. Please see the related discussions below about these changes.
Net Interest Income: Net interest income increased to $102,183,000 for the quarter ended December 31, 2014, compared to $98,312,000 for the same quarter one year ago. This main reason is that average earning assets are higher by $990,691,000 as a result of the loans and investments that were made with the lower costing liabilities from last year's branch acquisitions. The net interest margin declined to 3.01% from 3.12% in the same quarter of the prior year as the decline in the yield on interest earning assets of 24 bps has been more than the decline in the cost of funds of 15 bps.
The following table sets forth certain information explaining changes in interest income and interest expense for the periods indicated compared to the same periods one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Interest Rate and Volume Analysis of Net Interest Income: 
 
Comparison of Quarters Ended
12/31/14 and 12/31/13
 
 
Volume
 
Rate
 
Total
 
 
(In thousands)
 
Interest income:
 
 
 
 
 
 
Loans and covered loans
$
6,961

 
$
(5,895
)
 
$
1,066

 
Mortgaged-backed securities
354

 
(547
)
 
(193
)
 
Investments (1)
1,310

 
(157
)
 
1,153

 
All interest-earning assets
8,625

 
(6,599
)
 
2,026

 
Interest expense:
 
 
 
 
 
 
Customer accounts
1,638

 
(3,692
)
 
(2,054
)
 
FHLB advances and other borrowings
(784
)
 
993

 
209

 
All interest-bearing liabilities
854

 
(2,699
)
 
(1,845
)
 
Change in net interest income
$
7,771

 
$
(3,900
)
 
$
3,871

 
___________________ 
(1)
Includes interest on cash equivalents and dividends on FHLB stock
Provision (Reversal) for Loan Losses: The Company recorded a $5,500,000 reversal for loan losses during the quarter ended December 31, 2014, while a $4,600,000 reversal was recorded for the same quarter one year ago. The reversal of the provision for loan losses in the recent quarter is the result of the continued improvement of the Company's loan portfolio. The Compnay had net recoveries of $841,000 for the quarter ended December 31, 2014, compared with $6,017,000 of net recoveries for the same quarter one year ago. The recoveries in the prior year included the favorable settlement of a lawsuit related to previously purchased loans. The improvement in the provision for loan losses is in response to three primary factors: first, the amount of NPA's improved year-over-year; second, non-accrual loans as a percentage of net loans decreased from 1.50% at December 31, 2013, to 1.20% at December 31, 2014; and third, the percentage of loans 30 days or more delinquent decreased from 1.81% at December 31, 2013, to 1.47% at December 31, 2014.
Non-performing assets amounted to $164,317,000, or 1.13% , of total assets at December 31, 2014, compared to $197,910,000, or 1.37%, of total assets one year ago. Non-accrual loans decreased from $114,717,000 at December 31, 2013, to $98,352,555 at December 31, 2014, a 14.3% decrease. Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $110,598,000, or 1.26% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio. Please see Note E for further discussion and analysis of the allowance for loan losses for the quarter ended December 31, 2014.


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



Other Income: The quarter ended December 31, 2014 produced total other income of $5,380,000 compared to $5,788,000 for the same quarter one year ago. Deposit fee income of $5,977,000 was $4,273,000 higher than the same quarter of the prior year due to the increased number of clients and branches. Loan fee income of $2,065,000 was similar to the same quarter of the prior year.
The remaining other income was a loss of $2,662,000 in the current quarter compared to $2,038,000 in the same quarter of the prior year due primarily to four unusual items. First, Management corrected an over-accrual of interest income on loans of $8,872,000 that had accumulated since fiscal 2011 and was recently detected. Second, there was also an upward net market value adjustment of REO of $8,164,000 which is a correction from prior periods. Management believes that these errors and their corrections were not material to any reporting period. Third, there was a prepayment charge of $2,600,000 on a $100,000,000 Federal Home Loan Bank advance that was accruing interest at 4% and scheduled to mature in September 2015. The prepayment charge will be offset by a corresponding reduction in interest expense over the remaining nine months of the fiscal year. Fourth, Management recorded a $2,000,000 FDIC indemnification asset write-down related to the commercial loans acquired from Horizon Bank in 2010. The portion of that agreement related to commercial loans expires on March 31, 2015.
Other Expense: The quarter ended December 31, 2014, produced total other expense of $53,600,000 compared to $44,120,000 for the same quarter one year ago, a 21.5% increase. This increase was driven primarily by an increase in employees as well as occupancy, product delivery and technology expenses related to the branch acquisitions from Bank of America during the 2014 fiscal year. Technology expenses are also higher in preparation for an upgrade of core systems in 2015. FDIC insurance premiums are lower by $1,700,000 this quarter due to recoveries from prior periods that reflect improvements in credit quality. FDIC insurance premiums were $2,300,000 in the quarter, prior to this recovery.
Total other expense for the quarters ended December 31, 2014 and 2013 equaled 1.46% and 1.30%, respectively, of average assets. The number of staff, including part-time employees on a full-time equivalent basis, was 1,862 and 1,848 at December 31, 2014 and 2013, respectively. The number of branches increased from 235 as of December 31, 2013 to 247 as of December 31, 2014.
Loss on Real Estate Acquired Through Foreclosure: The quarter ended December 31, 2014, produced a net gain on the sale of real estate acquired through foreclosure of $315,000 compared to a net loss of $1,951,000 for the same quarter one year ago, a 116.20% increase. The table below indicates some of the activity in the gain (loss) on real estate acquired through foreclosure.
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
 
 
 
 
Net Gain on Sale
$
2,588

 
$
2,333

REO Adjustments
(817
)
 
(2,219
)
REO Operating Expenses
(1,456
)
 
(2,065
)
Gain (Loss) on real estate acquired through foreclosure, net
$
315

 
$
(1,951
)

Taxes: Income taxes decreased to $21,371,000 for the quarter ended December 31, 2014, as compared to $22,393,000 for the same period one year ago. The effective tax rate for both the quarters ended December 31, 2014 and December 31, 2013 was 35.75% . The Company expects an effective tax rate of 35.75% going forward.



48

Item 3.        Quantitative and Qualitative Disclosures About Market Risk
Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since September 30, 2014. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2014 Form 10-K.

Item 4.        Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Company’s President and Chief Executive Officer, along with the Company’s Senior Vice President and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.

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

49


WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
 
PART II – Other Information
Item 1. Legal Proceedings
From time to time the Company or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company’s financial position or results of operations.

Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in our Form 10-K for the year ended September 30, 2014. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended December 31, 2014. 
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of  Publicly
Announced Plan (1)
 
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan at the
End of the Period
October 1, 2014 to October 31, 2014
64,295

 
$
20.49

 
64,295

 
4,978,139

November 1, 2014 to November 30, 2014
340,052

 
21.87

 
340,052

 
4,638,087

December 1, 2014 to December 31, 2014
711,800

 
21.88

 
711,800

 
3,926,287

Total
1,116,147

  
$
21.79

  
1,116,147

 
3,926,287

 ___________________
(1)
The Company's only stock repurchase program was publicly announced by the Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 41,956,264 shares have been authorized for repurchase.

Item 3.        Defaults Upon Senior Securities
Not applicable

Item 4.        Mine Safety Disclosures
Not applicable

Item 5.        Other Information

The Company is refiling its Bylaws dated December 17, 2007, which were attached to the report on Form 8-K dated December 21, 2007, to correct a reference error in our exhibit table to the 10K.  The Bylaws have not been amended since December 17, 2007.

50

Item 6.        Exhibits
(a)
 
Exhibits
 
 
 
3.2
 
Bylaws of the Company dated December 17, 2007
 
 
 
 
 
 
 
31.1
 
Section 302 Certification by the Chief Executive Officer
 
 
 
31.2
 
Section 302 Certification by the Chief Financial Officer
 
 
 
32
 
Section 906 Certification by the Chief Executive Officer and the Chief Financial Officer
 
 
 
101
 
Financial Statements from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2014 formatted in XBRL

51

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
February 10, 2015
/S/    ROY M. WHITEHEAD        
 
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer
 
 
February 10, 2015
/S/    Diane L. Kelleher      
 
Diane L. Kelleher
Senior Vice President and Chief
Financial Officer

52




Exhibit 3.2
As Amended and Restated on 12.17.07

BYLAWS
OF
WASHINGTON FEDERAL, INC.

ARTICLE I.     OFFICES
1.1     Registered Office and Registered Agent. The registered office of Washington Federal, Inc. (the “Corporation”) shall be located in the State of Washington at such place as may be fixed from time to time by the Board of Directors upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office.
1.2     Other Offices. The Corporation may have other offices within or without the State of Washington at such place or places as the Board of Directors may from time to time determine.
ARTICLE II. STOCKHOLDERS’ MEETINGS
2.1     Meeting Place. All meetings of the stockholders shall be held at the principal place of business of the Corporation, or at such other place within or without the State of Washington as shall be determined from time to time by the Board of Directors, and the place at which any such meeting shall be held shall be stated in the notice of the meeting.
2.2     Annual Meeting Time. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on the fourth Wednesday of January at the hour of 2:00 p.m., if not a legal holiday, and if a legal holiday, then on the day following, at the same hour, or at such other date and time as may be determined by the Board of Directors and stated in the notice of such meeting.
2.3     Organization. Each meeting of the stockholders shall be presided over by the Chairman of the Board, or in his absence by the Vice Chairman. The Secretary, or in his absence a temporary Secretary, shall act as secretary of each meeting of the stockholders. In the absence of the Secretary and any temporary Secretary, the chairman of the meeting may appoint any person present to act as secretary of the meeting. The chairman of any meeting of the stockholders shall announce the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting and, unless prescribed by law or regulation or unless the Board of Directors has otherwise determined, shall determine the order of the business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussions as seem to him in order.
2.4     Special Meetings. Except as otherwise required by law and subject to the rights of the holders of any class or series of Preferred Stock, special meetings of the stockholders may be called by the Chairman of the Board, the President or a majority of the Board of Directors and shall be called by the Chairman of the Board, the President or the Secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Corporation entitled to vote at the meeting.
2.5     Notice.
Notice of the time and place of a meeting of stockholders, and in the case of special meeting of stockholders the purpose or purposes for which the meeting is called, shall be given by delivering personally or by mailing a written notice of the same, not less than ten days and not more than sixty days prior to the




date of the meeting, to each stockholder of record entitled to vote at such meeting, provided that notice of a meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange or other disposition of all or substantially all of the Corporation’s assets other than in the regular course of business or the dissolution of the Corporation shall be given not less than twenty nor more than sixty days prior to the date of the meeting. When any stockholders’ meeting, either annual or special, is adjourned for more than one hundred twenty days, or if a new record date is fixed for an adjourned meeting of stockholders, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for one hundred twenty days or less (unless a new record date is fixed therefor), other than an announcement at the meeting at which such adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting.
2.6     Stockholders’ List for Meeting. At least ten days before each meeting of stockholders, a complete record of the stockholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, with the address of and number of shares registered in the name of each, which record shall be kept open to the examination of any stockholder (or the stockholders’ agent or attorney), for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to such meeting, at the Corporation’s principal office or at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting. The record also shall be kept open at the time and place of such meeting for the inspection of any stockholder (or the stockholders’ agent or attorney). :
2.7     Quorum; Actions of Stockholders. Except as otherwise required by the Articles of Incorporation or the Washington Business Corporation Act:  

(a)     A majority of the votes entitled to be cast on a matter by the holders of shares that, pursuant to the Articles of Incorporation or the Washington Business Corporation Act, are entitled to vote and be counted collectively upon such matter, represented in person or by proxy, shall constitute a quorum of such shares at a meeting of shareholders. If less than a majority of such votes are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice if the new date, time or place is announced at the meeting before adjournment. Any business may be transacted at a reconvened meeting that might have been transacted at the meeting as originally called, provided a quorum is present or represented thereat. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or transacting business thereat, it is deemed present for quorum purposes for the remainder of the meeting and any adjournment thereof (unless a new record date is or must be set for the adjourned meeting) notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
(b)     If a quorum exists, in all matters other than the election of directors, the matter shall be approved if the votes cast in favor of the matter by the holders of the shares entitled to vote thereon exceed the votes cast against the matter by such holders. Directors shall be elected in the manner set forth in the Articles of Incorporation of the Corporation.
2.8     Meetings by Communication Equipment. Stockholders may participate in any meeting of the stockholders by any technological means of communication by which all persons participating in the meeting can hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting.
2.9     Voting of Shares. Except as otherwise provided in these Bylaws or to the extent that voting rights of the shares of any class or classes are specified, limited or denied by the Articles of Incorporation, each stockholder, on each matter submitted to a vote at a meeting of stockholders, shall have one vote for each share of stock registered in his name on the books of the Corporation.




2.10     Closing of Transfer Books and Fixing of the Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or entitled to receive payment of any dividend, the Board of Directors shall fix in advance a record date for any such determination of stockholders, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than seventy days and, in case of a meeting of stockholders, not less than ten days (twenty days in the case of a meeting of stockholders referred to in the proviso clause to the first sentence of Section 2.5 hereof) prior to the date on which the particular action requiring such determination of stockholders is to be taken.
2.11     Proxies. A stockholder may vote either in person or by proxy executed in writing by the stockholder or his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. A proxy with respect to a specified meeting shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof.
2.12     Waiver of Notice. A waiver of any notice required to be given any stockholder, signed by the person or persons entitled to such notice, whether before or after the time stated therein for the meeting, shall be equivalent to the giving of such notice. Further, notice of the time, place and purpose of any meeting will be deemed to be a waiver by any stockholder by attendance thereat in person or by proxy, unless such stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting.
2.13     Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary of the Corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, at any meeting of the stockholders of the Corporation any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.
2.14     Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by an officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.
2.15     Proposals. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, or (b) otherwise properly brought before the meeting by a stockholder. For business




to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not later than ninety days prior to the anniversary date of the mailing of proxy materials by the Corporation in connection with the immediately preceding annual meeting of stockholders of the Corporation or, in the case of the first annual meeting of stockholders of the Corporation following its acquisition of all of the outstanding capital stock of Washington Federal Savings and Loan Association (“Washington Federal”), ninety days prior to the anniversary date of the mailing of proxy materials by Washington Federal in connection with the immediately preceding annual meeting of Washington Federal prior to such acquisition. A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address, as they appear on the Corporation’s books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article II, Section 2.15, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. This provision is not a limitation on any other applicable laws and regulations.
2.16     Inspectors. For each meeting of stockholders, the Board of Directors shall appoint one or more inspectors of election, who shall make a written report of such meeting. If for any meeting the inspector(s) appointed by the Board of Directors shall be unable to act or the Board of Directors shall fail to appoint any inspector, one or more inspectors shall be appointed at the meeting by the chairman thereof. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. An inspector or inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and (v) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. An inspector or inspectors shall not accept a ballot, proxy or vote, nor any revocations thereof or changes thereto, after the closing of the polls for a matter upon which the stockholders vote and may appoint or retain other persons or entities to assist them in the performance of their duties. Inspectors need not be stockholders and may not be nominees for election as directors.
 
ARTICLE III. CAPITAL STOCK

3.1     Certificates. Certificates of stock shall be issued in numerical order, and each stockholder shall be entitled to a certificate signed by the Chairman of the Board or the Vice Chairman, and the Secretary or the Treasurer, and may be sealed with the seal of the Corporation or facsimile thereof. The signatures of such officers may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If an officer who has signed or whose facsimile signature has been placed upon such certificate ceases to be an officer before the certificate is issued, it may be issued by the Corporation with the same effect as if the person were an officer on the date of issue. Each certificate of stock shall state:
(a) that the Corporation is organized under the laws of the State of Washington;
(b) the name of the person to whom issued;




(c) the number and class of shares and the designation of the series, if any, which such certificate represents; and
(d) the par value of each share represented by such certificate, or a statement that such shares are without par value.
3.2     Transfers.
(a)     Transfers of stock shall be made only upon the stock transfer books of the Corporation, kept at the registered office of the Corporation or at its principal place of business, or at the office of its transfer agent or registrar, and before a new certificate is issued the old certificate shall be surrendered for cancellation. The Board of Directors may, by resolution, open a share register in any state of the United States, and may employ an agent or agents to keep such register, and to record transfers of shares therein.
(b)     Shares of stock shall be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificate or an assignment separate from the certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the holder of said certificate. No shares of stock shall be transferred on the books of the Corporation until the outstanding certificates therefor have been surrendered to the Corporation.
(c)     A written restriction on the transfer or registration of transfer of a certificate evidencing stock of the Corporation, if permitted by the Washington Business Corporation Act and noted conspicuously on such certificate, may be enforced against the holder of the restricted certificate or any successor or transferee of the holder, including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder.
3.3     Registered Owner. Registered stockholders shall be treated by the Corporation as the holders in fact of the stock standing in their respective names and the Corporation shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the Washington Business Corporation Act, provided that the corporation may establish a procedure by which the beneficial owner of shares that are registered in the name of a nominee is recognized by the Corporation as the stockholder to the extent permitted by the Washington Business Corporation Act.
3.4     Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate of stock in place of any certificate previously issued by it which is alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.
3.5     Fractional Shares or Scrip. The Corporation may (a) issue fractions of a share which shall entitle the holder to exercise voting rights, to receive dividends thereon and to participate in any of the assets of the Corporation in the event of liquidation; (b) arrange for the disposition of fractional interests by those entitled thereto; (c) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such shares are determined; or (d) issue scrip in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip aggregating a full share.
3.6     Shares of Another Corporation. Shares owned by the Corporation in another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the Board of Directors may determine or, in the absence of such determination, by the President of the Corporation.






ARTICLE IV. BOARD OF DIRECTORS
4.1     Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, a Board of Directors, which may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders.
4.2     Classification and Term. The Board of Directors shall be divided into three classes as nearly equal in number as possible. The term of office of the initial directors shall be as follows: the term of directors of the first class shall expire at the first annual meeting of stockholders after the effective date of the Corporation’s Articles of Incorporation; the term of office of the directors of the second class shall expire at the second annual meeting of stockholders after the effective date of the Corporation’s Articles of Incorporation; and the term of office of the third class shall expire at the third annual meeting of stockholders after the effective date of the Corporation’s Articles of Incorporation; and as to directors of each class, when their respective successors are elected and qualified. At each annual meeting of stockholders, directors elected to succeed those whose terms are expiring shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders and when their respective successors are elected and qualified.
4.3     Number of Directors. The initial Board of Directors shall consist of nine persons. The number of directors may at any time be increased or decreased by a vote of a majority of the Board of Directors, provided that no decrease shall have the effect of shortening the term of any incumbent director. Notwithstanding anything to the contrary contained within these Bylaws, the number of directors may not be less than five nor more than fifteen.
4.4     Vacancies. Except as otherwise fixed pursuant to the provisions of Article 3 of the Corporation’s Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors, any vacancy occurring in the Board of Directors, including any vacancy created by reason of an increase in the number of directors, may be filled by a majority vote of the directors then in office, whether or not a quorum is present, or by a sole remaining director, and any director so chosen shall hold office until the next stockholders’ meeting at which directors are elected and until such director’s successor shall have been elected and qualified.
4.5     Removal of Directors. Directors may be removed in the manner provided in the Corporation’s Articles of Incorporation.
4.6     Regular Meetings. Regular meetings of the Board of Directors or any committee thereof may be held without notice at the principal place of business of the Corporation or at such other place or places, either within or without the State of Washington, as the Board of Directors or such committee, as the case may be, may from time to time designate. Unless otherwise determined by the Board of Directors, the annual meeting of the Board of Directors shall be held without notice immediately after the adjournment of the annual meeting of stockholders.
4.7     Special Meetings.
(a) Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the President or by a majority of the authorized number of directors, to be held at the principal place of business of the Corporation or at such other place or places as the Board of Directors or the person or persons calling such meeting may from time to time designate. Notice of all special meetings of the Board of Directors shall be given to each director by no less than two days’ service of the same by telegram, by letter or personally. Such notice need not specify the business to be transacted at; nor the purpose of, the meeting.




(b)     Special meetings of any committee of the Board of Directors may be called at any time by such person or persons and with such notice as shall be specified for such committee by the Board of Directors, or in the absence of such specification, in the manner and with the notice required for special meetings of the Board of Directors.
4.8     Waiver of Notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. A waiver of notice signed by the director or directors, whether before or after the time stated for the meeting, shall be equivalent to the giving of notice.
4.9     Quorum: Actions of the Board of Directors. Except as may be otherwise specifically provided by law, the Articles of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
4.10     Action by Directors Without a Meeting. Any action required or which may be taken at a meeting of the directors, or of a committee thereof, may be taken without a meeting if one or more written consents setting forth the action so taken or to be taken, shall be signed by all of the directors, or all of the members of the committee, as the case may be, and such consents are filed with the minutes of proceedings of the Board of Directors or committee, as the case may be. Such consent shall have the same effect as a unanimous vote and shall be effective when the last director signs the consent, unless the consent specifies a later effective date.
4.11     Action by Directors by Communications Equipment. Any action required or which may be taken at a meeting of directors, or of a committee thereof, may be taken by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time.
4.12     Registering Dissent. A director who is present at a meeting of the Board of Directors at which action on a corporate matter is taken shall be presumed to have assented to such action unless: (i) the director objects at the beginning of the meeting, or promptly upon the director’s arrival, to holding it or transacting business at the meeting, (ii) the director’s dissent or abstention from the action taken is entered in the minutes of the meeting, or (iii) the director delivers written notice of the director’s dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation within a reasonable time after adjournment of the meeting. Such right to dissent or abstain shall not apply to a director who voted in favor of such action.
4.13     Committees. The Board of Directors may, by resolution adopted by the greater of a majority of the directors then in office and the number of directors required to take action in accordance with these Bylaws, designate one or more committees which in each case consist of two or more directors of the Corporation, who shall serve at the pleasure of the Board of Directors, and may from time to time invest such committees with such powers as it may see fit, subject to such conditions as may be prescribed by the Board of Directors, these Bylaws and applicable law. Each committee shall have and may exercise all of the authority of the Board of Directors to the extent provided in the resolution of the Board creating the committee and any subsequent resolutions pertaining thereto and adopted in like manner, except that no such committee shall have the authority to: (1) authorize or approve a distribution except according to a general formula or method prescribed by the Board of Directors, (2) approve or propose to stockholders actions or proposals required by the Washington Business Corporation Act to be approved by stockholders, (3) fill vacancies on the Board of Directors or any committee thereof, (4) adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation pursuant to Section 23B.10.020 of the Washington Business Corporation Act, (6) approve




a plan of merger not requiring stockholder approval or (7) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares except that the Board of Directors may authorize a committee or a senior executive officer of the Corporation to do so within limits specifically prescribed by the Board of Directors. The designation of any such committee, and the delegation of authority thereto, shall not relieve the Board of Directors, or any member thereof, of any responsibility imposed by law.
4.14     Remuneration. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors, a stated salary as director and/or such other compensation as may be fixed by the Board of Directors. Members of special or standing committees may be allowed like compensation for serving on committees of the Board of Directors. No such payments shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.
4.15     Nominations of Directors. Subject to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or committee appointed by the Board of Directors or by any stockholder entitled to vote generally in an election of directors. However, any stockholder entitled to vote generally in an election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder’s intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid to the Secretary of the Corporation not later than (i) ninety days prior to the anniversary date of the mailing of proxy materials by the Corporation in connection with the immediately preceding annual meeting of stockholders of the Corporation or, in the case of the first annual meeting of stockholders of the Corporation following its acquisition of all of the outstanding capital stock of Washington Federal, ninety days prior to the anniversary date of the mailing of proxy materials by Washington Federal in connection with the immediately preceding annual meeting of Washington Federal prior to such acquisition, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures.
ARTICLE V. OFFICERS
5.1     Appointment and Term. The officers of the Corporation shall be those officers appointed from time to time by the Board of Directors or by any other officer empowered to do so. The Board of Directors shall have sole power and authority to appoint executive officers. As used herein, the term “executive officer” shall mean the President, any Executive or Senior Vice President in charge of a principal corporate function or any other officer who performs a policy-making function. The Board of Directors or the President may appoint such other officers and assistant officers to hold office for such period, have such authority and perform such duties as may be prescribed. The Board of Directors may delegate to any other officer the




power to appoint any subordinate officers and to prescribe their respective terms of office, authority and duties. Any two or more offices may be held by the same person. Unless an officer dies, resigns or is removed from office, he shall hold office until his successor is appointed.
 
5.2     Vacancies. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting of the Board.
5.3     Removal. Any officer may be removed by the Board of Directors at any time, with or without cause. An officer or assistant officer, if appointed by another officer, may be removed by any officer authorized to appoint officers or assistant officers.
5.4     Compensation. The compensation of officers shall be fixed from time to time by the Board of Directors or by any person or persons to whom the Board of Directors has delegated such authority. No officer shall be prevented from receiving such compensation by reason of the fact that he also is a director of the Corporation.
5.5     Bonds. The Board of Directors may, by resolution, require any and all of the officers to give bonds to the Corporation, with sufficient surety or sureties, conditions for the faithful performance of the duties of their respective offices, and to comply with such other conditions as may from time to time be required by the Board of Directors.
ARTICLE VI. INDEMNIFICATION
6.1     Right to Indemnification. Each person who was, is or is threatened to be made a named party to or is otherwise involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (hereinafter a “proceeding”), by reason of the fact that he is or was a director, officer or employee of the Corporation or, that being or having been such a director, officer or an employee of the Corporation, he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation or of a partnership, joint venture, trust, employee benefit plan or other enterprise (hereinafter an “indemnitee”), shall be indemnified and held harmless by the Corporation against all expense, liability and loss (including counsel fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith, and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, partner, trustee, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. Except as provided in Section 6.4 with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if a proceeding (or part thereof) was authorized or ratified by the Board of Directors. Notwithstanding the foregoing, the Corporation shall not be liable for any amounts which may be due to any person in connection with a settlement of any proceeding effected without its prior written consent. The right to indemnification conferred in this Article VI shall be a contract right.
 
6.2     Restrictions on Indemnification. No indemnification shall be provided to any indemnitee for acts or omissions of the indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such indemnitee personally received a benefit in money, property or services to which the indemnitee was not legally entitled or if the Corporation is otherwise prohibited by applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision of the Washington Business




Corporation Act is hereafter amended, the restrictions on indemnification set forth in this Section 6.2 shall be as set forth in such amended statutory provision.
6.3     Advancement of Expenses. The right to indemnification conferred in this Article VI shall include the right to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition (hereinafter an “advancement of expenses”). An advancement of expenses shall be made upon delivery to the Corporation of an undertaking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified under this Article VI.
6.4     Right of Indemnitee to Bring Suit. If a claim under Section 6.1 or 6.3 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part, in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit.
6.5     Procedures Exclusive. Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article VI are in lieu of the procedures required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act.
6.6     Nonexclusivity of Rights. The right to indemnification and the advancement of expenses conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation or Bylaws of the Corporation, action of the Board of Directors or otherwise.
6.7     Insurance, Contracts and Funding. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The Corporation may enter into contracts with any director, officer, employee or agent of the Corporation in furtherance of the provisions of this Article VI and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article VI.
6.8     Persons Serving Other Entities. Any person who, while a director, officer or employee of the Corporation, is or was serving as a director, officer or employee of another foreign or domestic corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Corporation shall be deemed to be so serving at the request of the Corporation and entitled to indemnification and advancement of expenses under Sections 6.1 and 6.3 of this Article VI.
ARTICLE VII. DIVIDENDS; FINANCE; AND FISCAL YEAR
7.1     Dividends. Subject to the applicable provisions of the Washington Business Corporation Act, dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property or in shares of the capital stock of the Corporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, may deem




proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any other proper purpose, and the Board of Directors may modify or abolish any such reserve.
7.2     Disbursements. All checks or demand for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.
7.3     Depositories. The monies of the Corporation shall be deposited in the name of the Corporation in such bank or banks or trust company or trust companies as the Board of Directors shall designate, and shall be drawn out only by check or other order for payment of money signed by such persons and in such manner as may be determined by resolution of the Board of Directors.
7.4     Fiscal Year. The fiscal year of the Corporation shall end on the 30th day of September of each year.
ARTICLE VIII. NOTICES
Except as may otherwise be required by law, any notice to any stockholder or director may be delivered personally or by mail. If mailed, the notice shall be deemed to have been delivered when deposited in the United States mail, addressed to the addressee at his last known address in the records of the Corporation, with postage thereon prepaid.
ARTICLE IX. SEAL
The corporate seal of the Corporation shall be in such form and bear such inscription as may be adopted by resolution of the Board of Directors, or by usage of the officers on behalf of the Corporation.
ARTICLE X. BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of account and shall keep minutes and proceedings of its stockholders and Board of Directors (including committees thereof); and it shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. Any books, records and minutes may be in written form or any other form capable of being converted into written form within a reasonable time.
ARTICLE XI. AMENDMENTS
11.1     Amendments. These Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the Board of Directors, provided that the Board of Directors may not alter, amend or repeal any Bylaw that the stockholders have expressly provided, in altering, amending or repealing such Bylaw, may not be altered, amended or repealed by the Board of Directors. These Bylaws also may be altered, amended or repealed by the affirmative vote of the holders of a majority of the votes cast by stockholders of the Corporation at an annual or special meeting of the stockholders.
11.2     Emergency Bylaws. The Board of Directors may adopt emergency Bylaws, subject to repeal or change or by action of the stockholders, which shall be operative during any emergency, which for purposes of this section shall exist if a quorum of the directors of the Corporation cannot readily be assembled because of some catastrophic event.

ARTICLE XII. USE OF PRONOUNS
Use of the masculine gender in these Bylaws shall be considered to represent either masculine or feminine gender whenever appropriate.






Exhibit 31.1
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CERTIFICATION
I, Roy M. Whitehead, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Washington Federal, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:
February 10, 2015
 
/s/ Roy M. Whitehead
 
 
 
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer








Exhibit 31.2
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CERTIFICATION
I, Diane L. Kelleher, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Washington Federal, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Date:
February 10, 2015
  
/s/ Diane L.Kelleher
 
 
  
DIANE L. KELLEHER
 
 
  
Senior Vice President and Chief Financial Officer








Exhibit 32
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Washington Federal, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned's best knowledge and belief:
(a)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 10, 2015
 
 
Washington Federal, Inc.
 
(Company)
 
 
 
/s/ Roy M. Whitehead
 
ROY M. WHITEHEAD
 
Chairman, President and Chief Executive Officer
 
 
 
/s/ Diane L. Kelleher
 
DIANE L. KELLEHER
 
Senior Vice President and Chief Financial Officer




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