WAFD 03.31.2013 10-Q/A
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
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.


Table of Contents

Title of class:
at May 3, 2013
Common stock, $1.00 par value
104,190,859
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A (“Amendment”) amends our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2013, as filed with the Securities and Exchange Commission on May 8, 2013 (“Original Form 10-Q”), and is being filed solely to correct typographical errors contained in Note D - Loans Receivable (Excluding Covered Loans) and Note E - Allowance for Loan Losses of Part I, Item 1. The corrected information can be found in the table analyzing the age of loans under Non-acquired loans (Note D) and in the Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans) table under Non-Performing Loans (Note E).
No other sections were affected, but for the convenience of the reader, this Amendment contains the complete text of the original report with the corrected information appearing in Part I, Item 1, Notes D and E. Except as specifically noted above, this Form 10-Q/A does not modify or update disclosures in the Original Form 10-Q and continues to speak as of the original filing date of the Original Form 10-Q.


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


2

Table of Contents



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
 
March 31, 2013
 
September 30, 2012
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
782,059

 
$
751,430

Available-for-sale securities, at fair value
2,022,668

 
1,781,705

Held-to-maturity securities, at amortized cost
1,469,983

 
1,191,487

Loans receivable, net
7,444,216

 
7,451,998

Covered loans, net
355,515

 
288,376

Interest receivable
45,448

 
46,857

Premises and equipment, net
206,797

 
178,845

Real estate held for sale
97,042

 
99,478

Covered real estate held for sale
32,274

 
29,549

FDIC indemnification asset
80,391

 
87,571

FHLB stock
152,038

 
149,840

Intangible assets, net
263,816

 
256,076

Federal and state income tax assets, net
37,229

 
22,513

Other assets
126,357

 
137,219

 
$
13,115,833

 
$
12,472,944

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Customer accounts
 
 
 
Transaction deposit accounts
$
3,556,616

 
$
2,946,453

Time deposit accounts
5,595,609

 
5,630,165

 
9,152,225

 
8,576,618

FHLB advances
1,930,000

 
1,880,000

Advance payments by borrowers for taxes and insurance
16,192

 
40,041

Federal and State income tax liabilities, net

 

Accrued expenses and other liabilities
83,066

 
76,533

 
11,181,483

 
10,573,192

Stockholders’ equity
 
 
 
Common stock, $1.00 par value, 300,000,000 shares authorized;
131,979,030 and 129,950,223 shares issued; 105,011,626 and 106,177,615 shares outstanding
131,979

 
129,950

Paid-in capital
1,620,327

 
1,586,295

Accumulated other comprehensive income, net of taxes
11,897

 
13,306

Treasury stock, at cost; 26,967,404 and 23,772,608 shares
(363,803
)
 
(310,579
)
Retained earnings
533,950

 
480,780

 
1,934,350

 
1,899,752

 
$
13,115,833

 
$
12,472,944

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share data)
INTEREST INCOME
 
 
 
 
 
 
 
Loans
$
112,879

 
$
123,772

 
$
229,722

 
$
251,251

Mortgage-backed securities
10,642

 
28,682

 
22,374

 
54,978

Investment securities and cash equivalents
2,984

 
2,127

 
5,717

 
4,278

 
126,505

 
154,581

 
257,813

 
310,507

INTEREST EXPENSE
 
 
 
 
 
 
 
Customer accounts
16,695

 
22,016

 
35,466

 
45,965

FHLB advances and other borrowings
16,787

 
27,963

 
33,890

 
56,226

 
33,482

 
49,979

 
69,356

 
102,191

Net interest income
93,023

 
104,602

 
188,457

 
208,316

Provision for loan losses

 
18,000

 
3,600

 
29,210

Net interest income after provision for loan losses
93,023

 
86,602

 
184,857

 
179,106

OTHER INCOME
 
 
 
 
 
 
 
Gain on sale of investments

 

 

 

Other
6,046

 
5,028

 
11,003

 
9,674

 
6,046

 
5,028

 
11,003

 
9,674

OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
23,077

 
20,185

 
44,149

 
38,860

Occupancy
4,825

 
4,094

 
9,272

 
8,025

FDIC insurance premiums
3,107

 
4,350

 
6,450

 
8,543

Other
10,155

 
8,183

 
19,591

 
15,749

 
41,164

 
36,812

 
79,462

 
71,177

Loss on real estate acquired through foreclosure, net
(4,003
)
 
(1,582
)
 
(7,322
)
 
(12,151
)
Income before income taxes
53,902

 
53,236

 
109,076

 
105,452

Income tax provision
17,924

 
19,165

 
37,816

 
37,963

NET INCOME
$
35,978

 
$
34,071

 
$
71,260

 
$
67,489

 

 

 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings
$
0.34

 
$
0.32

 
$
0.67

 
$
0.63

Diluted earnings
0.34

 
0.32

 
0.67

 
0.63

Cash dividends per share
0.09

 
0.08

 
0.17

 
0.16

Basic weighted average number of shares outstanding
105,206,491

 
107,198,829

 
105,606,688

 
107,523,686

Diluted weighted average number of shares outstanding, including dilutive stock options
105,258,240

 
107,237,972

 
105,655,770

 
107,549,396

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Net income
$
35,978

 
$
34,071

 
$
71,260

 
$
67,489

Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sales securities
408

 
(30,060
)
 
(2,228
)
 
(32,579
)
Related tax benefit (expense)
(150
)
 
11,047

 
819

 
11,973

Reclassification adjustment of net gain (loss) from sale
 
 
 
 
 
 
 
     of available-for-sale securities included in net income

 

 

 

Related tax benefit (expense)

 

 

 

Other comprehensive income (loss)
258

 
(19,013
)
 
(1,409
)
 
(20,606
)
Comprehensive income
$
36,236

 
$
15,058

 
$
69,851

 
$
46,883

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Six Months Ended
 
March 31, 2013
 
March 31, 2012
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net income
$
71,260

 
$
67,489

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization (accretion) of fees, discounts, premiums and intangible assets, net
2,488

 
20,703

Cash received from (paid to) FDIC under loss share
11,668

 
(4,068
)
Depreciation
4,600

 
3,750

Stock option compensation expense
600

 
600

Provision for loan losses
3,600

 
29,210

Loss (gain) on real estate held for sale, net
3,028

 
(1,285
)
Decrease (increase) in accrued interest receivable
3,440

 
(1,536
)
Increase in FDIC loss share receivable
(777
)
 
(2,052
)
Increase (decrease) in income taxes payable
(13,937
)
 
6,031

Decrease in other assets
35,712

 
8,832

Increase (decrease) in accrued expenses and other liabilities
(8,770
)
 
1,955

Net cash provided by operating activities
112,912

 
129,629

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net principal collections (loan originations)
381,932

 
342,513

FHLB stock redemptions
1,382

 
1,512

Available-for-sale securities purchased
(356,966
)
 
(1,241,126
)
Principal payments and maturities of available-for-sale securities
100,906

 
758,676

Available-for-sale securities sold
43,199

 
3,500

Held-to-maturity securities purchased
(407,135
)
 

Principal payments and maturities of held-to-maturity securities
132,755

 
8,394

Net cash received from acquisition
202,308

 
50,451

Proceeds from sales of real estate held for sale
59,773

 
90,017

Proceeds from sales of covered REO
7,645

 
22,959

Premises and equipment purchased and REO improvements
(18,048
)
 
(11,737
)
Net cash provided by investing activities
147,751

 
25,159

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in customer accounts
(161,712
)
 
(3,253
)
Net increase (decrease) in borrowings
27,529

 
(19,700
)
Proceeds from exercise of common stock options
152

 
28

Dividends paid on common stock
(18,930
)
 
(17,078
)
Treasury stock purchased
(53,224
)
 
(30,307
)
Decrease in advance payments by borrowers for taxes and insurance
(23,849
)
 
(10,133
)
Net cash used by financing activities
(230,034
)
 
(80,443
)
Increase in cash and cash equivalents
30,629

 
74,345

Cash and cash equivalents at beginning of period
751,430

 
816,002

Cash and cash equivalents at end of period
$
782,059

 
$
890,347


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



6

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
 
Six Months Ended
 
March 31, 2013
 
March 31, 2012
 
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Non-cash investing activities
 
 
 
Non-covered real estate acquired through foreclosure
$
52,760

 
$
73,466

Covered real estate acquired through foreclosure
5,954

 
6,304

Cash paid during the period for
 
 
 
Interest
71,092

 
103,170

Income taxes
32,465

 
31,947

The following summarizes the non-cash activities related to acquisitions
 
 
 
Fair value of assets acquired
$
819,904

 
$
124,726

Fair value of liabilities assumed
(776,009
)
 
(154,500
)
Net fair value of assets (liabilities)
43,895

 
(29,774
)
 
 
 
 
 
 
 
 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)

NOTE A – Summary of Significant Accounting Policies
The consolidated unaudited interim financial statements included in this report have been prepared by Washington Federal, Inc. (“The Company”). 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, 2012 Consolidated Statement of Financial Condition was derived from audited financial statements.
The information included in this Form 10-Q should be read in conjunction with Company’s 2012 Annual Report on Form 10-K (“2012 Form 10-K”) as filed with the SEC. Interim results are not necessarily indicative of results for a full year.
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2012 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 2012 Form 10-K.
Off-Balance-Sheet Credit Exposures – The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance at March 31, 2013, excluding covered loans, of $259,266,000. The Company estimates losses on off-balance-sheet credit exposures by including the exposures with the related principal balance outstanding and then applying its general reserve methodology.
Certain reclassifications have been made to the financial statements to conform prior periods to current classifications.

NOTE B - Acquisitions

South Valley Bank and Trust
Effective as of the close of business October 31, 2012, Washington Federal completed the acquisition of South Valley Bank and Trust, headquartered in Klamath Falls, Oregon (“South Valley”). The acquisition provided recorded book values of $383 million of net loans, $107 million of net covered loans, $735 million of deposit accounts, including $533 million in transaction deposit accounts and 24 branch locations in Central and Southern Oregon. Total consideration paid at closing was $44 million, including $34 million of Washington Federal, Inc. stock and $10 million of cash resulting from the collection of certain earn-out assets. If other earn out assets are collected over time, the total purchase price could be reduced by up to $14 million.

The acquisition was accounted for under the acquisition method of accounting. The purchased assets and assumed liabilities were recorded at their respective acquisition date estimated fair values. The purchase accounting for acquired assets and liabilities is subject to future adjustment based on the completion of valuations. All fair value adjustment amounts currently recognized in the financial statements at March 31, 2013 were determined provisionally as the purchase accounting fair value analysis was incomplete as of March 31, 2013. The determination of whether a non-covered loan is impaired and accounted for under ASC 310 was still in process as part of the acquisition date loan valuation; therefore, all non-covered loans are categorized as acquired loans without differentiation between non-impaired and credit impaired at March 31, 2013.

Loans that were classified as non-performing loans by South Valley are no longer classified as non-performing because, at acquisition, the carrying value of the loans was adjusted to reflect fair value. Management believes that the new book value reflects an amount that will ultimately be collected.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period from November 1, 2012 to March 31, 2013.
 
The table below displays the adjusted fair value as of the acquisition date for each major class of assets acquired and liabilities assumed:


8

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
 
 
 
 
Adjusted Fair Value Recorded by
 
 
Washington Federal
 
 
(In thousands)
 Assets:
 
 
 Cash and cash equivalents
 
$
212,711

 Available for sale securities
 
43,679

 FHLB stock
 
5,211

 Loans receivable, net
 
360,719

 Covered loans receivable, net
 
107,946

 FDIC indemnification asset
 
16,596

 Property and equipment, net
 
24,259

 Core deposit intangible
 
1,433

 Real estate held for sale
 
9,794

 Covered real estate held for sale
 
5,224

 Goodwill
 
7,107

 Other assets
 
25,225

   Total Assets
 
819,904

 
 
 
 Liabilities:
 
 
 Customer accounts
 
737,395

 FHLB advances
 
22,471

 Other liabilities
 
16,143

   Total Liabilities
 
776,009

 
 
 
 Net assets acquired
 
$
43,895

 
 
 
Consideration provided:
 
 
 Equity Issued
 
$
33,492

 Cash paid
 
10,403

 
 
$
43,895






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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)



NOTE C – Dividends
On April 19, 2013, the Company paid its 121st consecutive quarterly cash dividend on common stock. Dividends per share were $.09 and $.08 for the quarters ended March 31, 2013 and 2012, respectively.


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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


NOTE D – Loans Receivable (excluding Covered Loans)

 
March 31, 2013
 
September 30, 2012
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
  Single-family residential
$
5,374,977

 
68.6
%
 
$
5,778,922

 
73.5
%
  Construction - speculative
120,617

 
1.5

 
129,637

 
1.6

  Construction - custom
217,036

 
2.8

 
211,690

 
2.7

  Land - acquisition & development
93,496

 
1.2

 
124,677

 
1.6

  Land - consumer lot loans
130,056

 
1.7

 
141,844

 
1.8

  Multi-family
725,322

 
9.3

 
710,140

 
9.0

  Commercial real estate
385,587

 
4.9

 
319,210

 
4.1

  Commercial & industrial
190,598

 
2.4

 
162,823

 
2.1

  HELOC
111,622

 
1.4

 
112,902

 
1.4

  Consumer
53,956

 
0.7

 
63,374

 
0.8

Total non-acquired loans
7,403,267

 
94.5

 
7,755,219

 
98.6

Acquired loans
 
 
 
 
 
 
 
  Single-family residential
15,428

 
0.2

 

 

  Construction - speculative
177

 

 

 

  Construction - custom
313

 

 

 

  Land - acquisition & development
3,436

 

 

 

  Land - consumer lot loans
3,819

 
0.1

 

 

  Multi-family
7,714

 
0.2

 

 

  Commercial real estate
177,101

 
2.1

 

 

  Commercial & industrial
96,255

 
1.3

 

 

  HELOC
13,094

 
0.2

 

 

  Consumer
10,046

 
0.1

 

 

Total acquired loans
327,383

 
4.2

 

 

Credit-impaired acquired loans
 
 
 
 
 
 
 
  Single-family residential
338

 

 
342

 

  Construction - speculative
1,750

 

 
1,889

 

  Land - acquisition & development
2,577

 

 
3,702

 
0.1

  Multi-family

 

 
601

 

  Commercial real estate
79,868

 
1.1

 
87,154

 
1.1

  Commercial & industrial
2,091

 

 
3,292

 

  HELOC
12,757

 
0.2

 
14,040

 
0.2

  Consumer
81

 

 
97

 

Total credit-impaired acquired loans
99,462

 
1.3

 
111,117

 
1.4

Total loans
 
 
 
 
 
 
 
   Single-family residential
5,390,743

 
68.8

 
5,779,264

 
73.5

   Construction - speculative
122,544

 
1.5

 
131,526

 
1.6

   Construction - custom
217,349

 
2.8

 
211,690

 
2.7

   Land - acquisition & development
99,509

 
1.2

 
128,379

 
1.7

   Land - consumer lot loans
133,875

 
1.8

 
141,844

 
1.8

   Multi-family
733,036

 
9.5

 
710,741

 
9

   Commercial real estate
642,556

 
8.1

 
406,364

 
5.2

   Commercial & industrial
288,944

 
3.7

 
166,115

 
2.1


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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


   HELOC
137,473

 
1.8

 
126,942

 
1.6

   Consumer
64,083

 
0.8

 
63,471

 
0.8

Total loans
7,830,112

 
100
%
 
7,866,336

 
100
%
Less:
 
 
 
 
 
 
 
Allowance for probable losses
122,884

 
 
 
133,147

 
 
Loans in process
189,336

 
 
 
213,286

 
 
Discount on acquired loans
40,346

 
 
 
33,484

 
 
Deferred net origination fees
33,330

 
 
 
34,421

 
 
 
385,896

 
 
 
414,338

 
 
 
$
7,444,216

 
 
 
$
7,451,998

 
 

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


Changes in the carrying amount and accretable yield for acquired impaired and non-impaired loans for the six months ended March 31, 2013 and the fiscal year ended September 30, 2012 were as follows:

March 31, 2013
Credit impaired acquired loans
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance as of beginning of period
$
16,928

 
$
77,613

 
$

 
$

Reclassification from nonaccretable balance, net
30,026

 
 
 
 
 
 
Additions (1)

 

 
10,804

 
360,719

Accretion
(4,278
)
 
4,278

 
(658
)
 
658

Transfers to REO

 
(3,120
)
 

 
(2,681
)
Payments received, net

 
(11,233
)
 

 
(39,752
)
Balance as of end of period
$
42,676

 
$
67,538

 
$
10,146

 
$
318,944

(1) includes acquired loans which were acquired as part of the South Valley acquisition.
 
 
 
 

September 30, 2012
Credit impaired acquired loans
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance as of beginning of period
$

 
$

 
$

 
$

Additions (1)
21,384

 
93,691

 

 

Accretion
(4,456
)
 
4,456

 

 

Transfers to REO

 
(2,616
)
 

 

Payments received, net

 
(17,918
)
 

 

Balance as of end of period
$
16,928

 
$
77,613

 
$

 
$

(1) includes acquired impaired loans which were acquired as part of the WNB acquisition.
 
 
 
 

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

13

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
March 31, 2013
 
September 30, 2012
 
(In thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
$
111,572

 
74.8
%
 
$
131,193

 
75.7
%
Construction - speculative
7,943

 
5.3

 
10,634

 
6.1

Construction - custom
105

 
0.1

 
539

 
0.3

Land - acquisition & development
12,177

 
8.2

 
13,477

 
7.8

Land - consumer lot loans
3,385

 
2.3

 
5,149

 
3.0

Multi-family
2,802

 
1.9

 
4,185

 
2.4

Commercial real estate
10,395

 
7.0

 
7,653

 
4.4

Commercial & industrial
210

 
0.1

 
16

 

HELOC
247

 
0.2

 
198

 
0.1

Consumer
197

 
0.1

 
383

 
0.2

Total non-accrual loans
$
149,033

 
100
%
 
$
173,427

 
100
%

14

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


The following tables provide an analysis of the age of loans in past due status as of March 31, 2013 and September 30, 2012, respectively.
 
March 31, 2013
Amount of Loans
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loan
Net of LIP & Chg.-Offs
 
Current
 
30
 
60
 
90
 
Total
 
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
$
5,371,033

 
$
5,233,702

 
$
33,155

 
$
19,819

 
$
84,357

 
$
137,331

 
2.56
%
Construction - Speculative
81,265

 
76,540

 
992

 

 
3,733

 
4,725

 
5.81

Construction - Custom
120,793

 
120,582

 

 
106

 
105

 
211

 
0.17

Land - Acquisition & Development
88,357

 
74,850

 
3,227

 

 
10,280

 
13,507

 
15.29

Land - Consumer Lot Loans
129,887

 
125,256

 
805

 
441

 
3,385

 
4,631

 
3.57

Multi-Family
697,943

 
696,286

 
55

 

 
1,602

 
1,657

 
0.24

Commercial Real Estate
360,607

 
352,194

 
2,652

 

 
5,761

 
8,413

 
2.33

Commercial & Industrial
198,488

 
198,246

 
32

 

 
210

 
242

 
0.12

HELOC
111,622

 
111,104

 
281

 
80

 
157

 
518

 
0.46

Consumer
53,955

 
52,480

 
942

 
355

 
178

 
1,475

 
2.73

Total non-acquired loans
7,213,950

 
7,041,240

 
42,141

 
20,801

 
109,768

 
172,710

 
2.39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
15,428

 
15,312

 
$
116

 

 

 
116

 
0.75
%
Construction - Speculative
177

 
177

 

 

 

 

 

Construction - Custom
313

 
313

 

 

 

 

 

Land - Acquisition & Development
3,436

 
3,436

 

 

 

 

 

Land - Consumer Lot Loans
3,819

 
3,767

 
52

 

 

 
52

 
1.36

Multi-Family
7,714

 
7,714

 

 

 

 

 

Commercial Real Estate
177,101

 
176,444

 
657

 

 

 
657

 
0.37

Commercial & Industrial
96,255

 
95,258

 
997

 

 

 
997

 
1.04

HELOC
13,094

 
13,094

 

 

 

 

 

Consumer
10,046

 
9,946

 
77

 
5

 
18

 
100

 
1.00

Total acquired loans
327,383

 
325,461

 
1,899

 
5

 
18

 
1,922

 
0.59
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit-impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
338

 
338

 

 

 

 

 
%
Construction - Speculative
1,749

 
1,749

 

 

 

 

 

Construction - Custom

 

 

 

 

 

 

Land - Acquisition & Development
2,577

 
2,577

 

 

 

 

 

Land - Consumer Lot Loans

 

 

 

 

 

 

Multi-Family

 

 

 

 

 

 

Commercial Real Estate
79,850

 
75,772

 
1,660

 
292

 
2,126

 
4,078

 
5.11

Commercial & Industrial
2,091

 
2,070

 
21

 

 

 
21

 
1.00


15

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


HELOC
12,757

 
12,440

 

 
227

 
90

 
317

 
2.48

Consumer
81

 
81

 

 

 

 

 

Total credit-impaired acquired loans
99,443

 
95,027

 
1,681

 
519

 
2,216

 
4,416

 
4.44
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
7,640,776

 
$
7,461,728

 
$
45,721

 
$
21,325

 
$
112,002

 
$
179,048

 
2.34
%

September 30, 2012
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
$
5,776,002

 
$
5,618,261

 
$
34,035

 
$
16,276

 
$
107,430

 
$
157,741

 
2.73
%
Construction - Speculative
88,849

 
85,785

 
142

 
190

 
2,732

 
3,064

 
3.45

Construction - Custom
107,882

 
107,215

 
128

 

 
539

 
667

 
0.62

Land - Acquisition & Development
119,192

 
106,321

 
853

 
1,004

 
11,014

 
12,871

 
10.80

Land - Consumer Lot Loans
141,772

 
134,560

 
1,688

 
375

 
5,149

 
7,212

 
5.09

Multi-Family
676,917

 
672,263

 
718

 
67

 
3,869

 
4,654

 
0.69

Commercial Real Estate
292,261

 
284,427

 
699

 
3,153

 
3,982

 
7,834

 
2.68

Commercial & Industrial
162,802

 
162,778

 
8

 

 
16

 
24

 
0.01

HELOC
112,902

 
112,482

 
158

 
64

 
198

 
420

 
0.37

Consumer
63,374

 
61,405

 
1,155

 
431

 
383

 
1,969

 
3.11

Total non-acquired loans
$
7,541,953

 
$
7,345,497

 
$
39,584

 
$
21,560

 
$
135,312

 
$
196,456

 
2.60
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit-impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-Family Residential
342

 
342

 

 

 

 

 
%
Construction - Speculative
1,889

 
1,889

 

 

 

 

 

Construction - Custom

 

 

 

 

 

 

Land - Acquisition & Development
3,702

 
3,219

 
365

 

 
118

 
483

 
13.05

Land - Consumer Lot Loans

 

 

 

 

 

 

Multi-Family
601

 

 
601

 

 

 
601

 

Commercial Real Estate
87,134

 
78,959

 
412

 
2,549

 
5,214

 
8,175

 
9.38

Commercial & Industrial
3,292

 
3,054

 
238

 

 

 
238

 
7.23

HELOC
14,040

 
13,950

 

 
90

 

 
90

 
0.64

Consumer
97

 
95

 
2

 

 

 
2

 
2.06

Total credit-impaired acquired loans
111,097

 
101,508

 
1,618

 
2,639

 
5,332

 
9,589

 
8.63
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
7,653,050

 
$
7,447,005

 
$
41,202

 
$
24,199

 
$
140,644

 
$
206,045

 
2.69
%

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 March 31, 2013, single-family residential loans comprised 86.4% of TDRs.

16

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)



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 March 31,
 
2013
 
2012
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Recorded
 
Recorded
 
Contracts
 
Investment
 
Investment
 
Contracts
 
Investment
 
Investment
 
 
 
(In thousands)
 
 
 
(In thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
   Single-Family Residential
130

 
$
36,059

 
$
36,059

 
312

 
$
68,460

 
$
68,460

   Construction - Speculative

 

 

 
12

 
4,049

 
4,049

   Construction - Custom

 

 

 

 

 

   Land - Acquisition & Development

 

 

 
4

 
1,823

 
1,823

   Land - Consumer Lot Loans
9

 
1,350

 
1,350

 
14

 
2,116

 
2,116

   Multi-Family

 

 

 
2

 
1,871

 
1,871

   Commercial Real Estate

 

 

 

 

 

   Commercial & Industrial

 

 

 

 

 

   HELOC
1

 
200

 
200

 

 

 

   Consumer

 

 

 

 

 

 
140

 
$
37,609

 
$
37,609

 
344

 
$
78,319

 
$
78,319




17

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
Six Months Ended March 31,
 
2013
 
2012
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Pre-Modification
 
Post-Modification
 
 
 
Outstanding
 
Outstanding
 
 
 
Outstanding
 
Outstanding
 
Number of
 
Recorded
 
Recorded
 
Number of
 
Recorded
 
Recorded
 
Contracts
 
Investment
 
Investment
 
Contracts
 
Investment
 
Investment
 
 
 
(In thousands)
 
 
 
(In thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
   Single-Family Residential
230

 
$
63,146

 
$
63,146

 
491

 
$
121,145

 
$
121,145

   Construction - Speculative
1

 
2,492

 
2,492

 
23

 
7,428

 
7,428

   Construction - Custom

 

 

 

 

 

   Land - Acquisition & Development

 

 

 
26

 
6,173

 
6,173

   Land - Consumer Lot Loans
18

 
2,761

 
2,761

 
25

 
3,824

 
3,824

   Multi-Family
1

 
55

 
55

 
2

 
1,871

 
1,871

   Commercial Real Estate

 

 

 
1

 
308

 
308

   Commercial & Industrial

 

 

 
1

 
4

 
4

   HELOC
1

 
200

 
200

 

 

 

   Consumer

 

 

 

 

 

 
251

 
$
68,654

 
$
68,654

 
569

 
$
140,753

 
$
140,753



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 March 31,
 
2013
 
2012
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-Family Residential
37

 
$
8,579

 
108

 
$
20,419

   Construction - Speculative

 

 

 

   Construction - Custom

 

 

 

   Land - Acquisition & Development

 

 

 

   Land - Consumer Lot Loans
1

 
139

 
5

 
865

   Multi-Family
1

 
55

 

 

   Commercial Real Estate

 

 

 

   Commercial & Industrial

 

 

 

   HELOC
2

 
113

 

 

   Consumer

 

 

 

 
41

 
$
8,886

 
113

 
$
21,284




18

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
Six Months Ended March 31,
 
2013
 
2012
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(In thousands)
 
(In thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
 
 
 
 
 
 
 
   Single-Family Residential
55

 
$
13,704

 
125

 
$
24,783

   Construction - Speculative

 

 

 

   Construction - Custom

 

 

 

   Land - Acquisition & Development

 

 

 

   Land - Consumer Lot Loans
1

 
139

 
7

 
1,312

   Multi-Family
1

 
55

 

 

   Commercial Real Estate
1

 
302

 

 

   Commercial & Industrial

 

 

 

   HELOC
2

 
113

 

 

   Consumer

 

 

 

 
60

 
$
14,313

 
132

 
$
26,095




NOTE E – Allowance for Losses on Loans
The Company has an asset quality review function that analyzes its loan portfolios and reports the results of the review to the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as follows:
Pass – the credit does not meet one of the definitions below.
Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and Management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.
Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.
Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the

19

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


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 table summarizes the activity in the allowance for loan losses for the quarter ended March 31, 2013 and fiscal year ended September 30, 2012:
 
Quarter Ended March 31, 2013
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
77,508

 
$
(5,140
)
 
$
2,368

 
$
2,686

 
$
77,422

Construction - speculative
8,660

 
(68
)
 
146

 
(981
)
 
7,757

Construction - custom
275

 

 

 
(13
)
 
262

Land - acquisition & development
15,056

 
(308
)
 
737

 
(3,264
)
 
12,221

Land - consumer lot loans
4,963

 
(574
)
 

 
(448
)
 
3,941

Multi-family
5,107

 
(653
)
 
9

 
(191
)
 
4,272

Commercial real estate
2,651

 
(147
)
 
10

 
1,642

 
4,156

Commercial & industrial
8,062

 
(55
)
 
40

 
581

 
8,628

HELOC
1,044

 
(15
)
 

 
2

 
1,031

Consumer
3,501

 
(814
)
 
521

 
(14
)
 
3,194

 
$
126,827

 
$
(7,774
)
 
$
3,831

 
$

 
$
122,884

Fiscal Year Ended September 30, 2012
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
83,307

 
$
(53,789
)
 
$
8,164

 
$
44,133

 
$
81,815

Construction - speculative
13,828

 
(4,916
)
 
711

 
2,437

 
12,060

Construction - custom
623

 

 

 
(276
)
 
347

Land - acquisition & development
32,719

 
(16,978
)
 
1,341

 
(1,484
)
 
15,598

Land - consumer lot loans
5,520

 
(2,670
)
 

 
2,087

 
4,937

Multi-family
7,623

 
(1,393
)
 
504

 
(1,454
)
 
5,280

Commercial real estate
4,331

 
(814
)
 
225

 
(1,786
)
 
1,956

Commercial & industrial
5,099

 
(249
)
 
2,366

 
410

 
7,626

HELOC
1,139

 
(232
)
 
66

 
(8
)
 
965

Consumer
2,971

 
(3,538
)
 
1,480

 
1,650

 
2,563

 
$
157,160

 
$
(84,579
)
 
$
14,857

 
$
45,709

 
$
133,147

The Company recorded a $0 provision for loan losses during the quarter ended March 31, 2013, while an $18,000,000 provision was recorded for the same quarter one year ago. Non-performing assets (“NPAs”) amounted to $246,075,000, or 1.88%, of total assets at March 31, 2013, compared to $286,248,000, or 2.11%, of total assets one year ago. Acquired loans, including covered loans, are not classified as non-performing loans because, at acquisition, the carrying value of these loans was adjusted to reflect fair value. There was no additional provision for loan losses recorded on acquired or covered loans during the quarter ended March 31, 2013 as the associated discount is adequate to absorb potential losses. Non-accrual loans decreased from $166,153,000 at March 31, 2012, to $149,033,000 at March 31, 2013, a 10.3% decrease. The Company had net charge-offs of $3,943,000 for the quarter ended March 31, 2013, compared with $28,721,000 of net charge-offs for the same quarter one year ago. A loan is charged-off when the loss is estimable and it is confirmed that the borrower will not be able to meet its contractual obligations. $114,039,000 of the allowance was calculated under our general allowance methodology and the remaining $8,845,000 was made up of specific reserves on loans that were deemed to be impaired at March 31, 2013. For the period ending March 31, 2012, $114,039,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the

20

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


remaining $29,781,000 was made up of specific reserves on loans that were deemed to be impaired. The primary reasons for the shift in total allowance allocation from specific reserves to general reserves is due to the Company having already addressed many of the problem loans focused in the speculative construction and land A&D portfolios, combined with an increase in delinquencies and elevated charge-offs in the single family residential portfolio.
The following tables shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of March 31, 2013 and September 30, 2012:
 
March 31, 2013
Loans Collectively Evaluated for Impairment
 
Loans Individually Evaluated for Impairment
 
General  Reserve
Allocation
 
Gross Loans Subject  to
General Reserve (1)
 
Ratio
 
Specific  Reserve
Allocation
 
Gross Loans Subject  to
Specific Reserve (1)
 
Ratio
 
(In thousands)
 
 
 
(In thousands)
Single-family residential
$
77,422

 
$
5,264,505

 
1.5
%
 
$

 
$
110,471

 
%
Construction - speculative
5,749

 
99,513

 
5.8

 
2,008

 
21,104

 
9.5

Construction - custom
262

 
217,036

 
0.1

 

 

 

Land - acquisition & development
7,331

 
66,863

 
11.0

 
4,890

 
26,633

 
18.4

Land - consumer lot loans
3,630

 
115,399

 
3.1

 
311

 
14,657

 
2.1

Multi-family
2,892

 
714,430

 
0.4

 
1,380

 
10,892

 
12.7

Commercial real estate
3,900

 
370,717

 
1.1

 
256

 
14,870

 
1.7

Commercial & industrial
8,628

 
190,472

 
4.5

 

 
126

 

HELOC
1,031

 
110,570

 
0.9

 

 
1,052

 

Consumer
3,194

 
53,955

 
5.9

 

 

 

 
$
114,039

 
$
7,203,460

 
1.6

 
$
8,845

 
$
199,805

 
4.4

 ___________________
(1)
Excludes acquired and covered loans
September 30, 2012
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
$
81,737

 
$
5,694,337

 
1.4
%
 
$
78

 
$
84,584

 
0.1
%
Construction - speculative
9,079

 
104,312

 
8.7

 
2,981

 
25,325

 
11.8

Construction - custom
347

 
211,690

 
0.2

 

 

 

Land - acquisition & development
6,697

 
47,294

 
14.2

 
8,901

 
77,383

 
11.5

Land - consumer lot loans
4,176

 
138,666

 
3.0

 
761

 
3,178

 
23.9

Multi-family
2,818

 
694,140

 
0.4

 
2,462

 
16,000

 
15.4

Commercial real estate
1,158

 
292,550

 
0.4

 
798

 
26,660

 
3.0

Commercial & industrial
7,624

 
161,689

 
4.7

 
2

 
1,134

 
0.2

HELOC
965

 
112,812

 
0.9

 

 
90

 

Consumer
2,563

 
63,374

 
4.0

 

 

 

 
$
117,164

 
$
7,520,864

 
1.6

 
$
15,983

 
$
234,354

 
6.8


(1)
Excludes acquired and covered loans
The following tables provide information on loans based on credit quality indicators (defined in Note A) as of March 31, 2013 and September 30, 2012:

21

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


Credit Risk Profile by Internally Assigned Grade (excludes covered loans):
 
March 31, 2013
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
$
5,210,626

 
$
1,742

 
$
162,609

 
$

 
$

 
$
5,374,977

  Construction - speculative
94,497

 
362

 
25,758

 

 

 
120,617

  Construction - custom
217,036

 

 

 

 

 
217,036

  Land - acquisition & development
64,282

 
840

 
28,374

 

 

 
93,496

  Land - consumer lot loans
129,175

 
123

 
758

 

 

 
130,056

  Multi-family
707,869

 
1,886

 
15,567

 

 

 
725,322

  Commercial real estate
341,175

 
13,016

 
31,396

 

 

 
385,587

  Commercial & industrial
186,296

 
1,391

 
2,702

 

 
209

 
190,598

  HELOC
111,622

 

 

 

 

 
111,622

  Consumer
53,359

 
411

 
186

 

 

 
53,956

 
7,115,937

 
19,771

 
267,350

 

 
209

 
7,403,267

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Single-family residential
15,428

 

 

 

 

 
15,428

  Construction - speculative

 

 
177

 

 

 
177

  Construction - custom
313

 

 

 

 

 
313

  Land - acquisition & development
2,198

 

 
1,238

 

 

 
3,436

  Land - consumer lot loans
3,800

 

 
19

 

 

 
3,819

  Multi-family
3,349

 

 
4,365

 

 

 
7,714

  Commercial real estate
137,416

 
4,832

 
34,853

 

 

 
177,101

  Commercial & industrial
80,507

 
1,379

 
14,115

 
254

 

 
96,255

  HELOC
13,094

 

 

 

 

 
13,094

  Consumer
10,046

 

 

 

 

 
10,046

 
266,151

 
6,211

 
54,767

 
254

 

 
327,383

 
 
 
 
 
 
 
 
 
 
 
 
 Credit impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Pool 1 - Construction and land A&D
1,513

 
484

 
2,330

 

 

 
4,327

  Pool 2 - Single-family residential
338

 

 

 

 

 
338

  Pool 3 - Multi-family

 

 

 

 

 

  Pool 4 - HELOC & other consumer
12,838

 

 

 

 

 
12,838

  Pool 5 - Commercial real estate
52,254

 
1,014

 
25,651

 
949

 

 
79,868

  Pool 6 - Commercial & industrial
1,018

 
195

 
499

 
379

 

 
2,091

Total credit impaired acquired loans
67,961

 
1,693

 
28,480

 
1,328

 

 
99,462

Total gross loans
$
7,450,049

 
$
27,675

 
$
350,597

 
$
1,582

 
$
209

 
$
7,830,112

 
 
 
 
 
 
 
 
 
 
 
 
Total grade as a % of total gross loans
95.1
%
 
0.4
%
 
4.5
%
 
%
 
%
 
 



22

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


September 30, 2012
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Non-acquired loans
 
 
 
 
 
 
 
 
 
 
 
 Single-family residential
$
5,588,252

 
$
844

 
$
189,826

 
$

 
$

 
$
5,778,922

 Construction - speculative
86,126

 
10,113

 
33,398

 

 

 
129,637

 Construction - custom
211,690

 

 

 

 

 
211,690

 Land - acquisition & development
73,661

 
4,637

 
46,379

 

 

 
124,677

 Land - consumer lot loans
140,006

 
223

 
1,615

 

 

 
141,844

 Multi-family
684,649

 
5,098

 
20,393

 

 

 
710,140

 Commercial real estate
278,022

 
16,282

 
24,906

 

 

 
319,210

 Commercial & industrial
158,421

 
1,071

 
3,331

 

 

 
162,823

 HELOC
112,902

 

 

 

 

 
112,902

 Consumer
62,611

 
354

 
409

 

 

 
63,374

 
7,396,340

 
$
38,622

 
$
320,257

 
$

 
$

 
$
7,755,219

 
 
 
 
 
 
 
 
 
 
 
 
Credit impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
  Pool 1 - Construction and land A&D
2,466

 

 
3,125

 

 

 
5,591

  Pool 2 - Single-family residential
342

 

 

 

 

 
342

  Pool 3 - Multi-family

 

 
601

 

 

 
601

  Pool 4 - HELOC & other consumer
14,137

 

 

 

 

 
14,137

  Pool 5 - Commercial real estate
53,683

 
4,308

 
28,200

 
963

 

 
87,154

  Pool 6 - Commercial & industrial
1,566

 
58

 
733

 
935

 

 
3,292

Total credit impaired acquired loans
72,194

 
4,366

 
32,659

 
1,898

 

 
111,117

Total gross loans
$
7,468,534

 
$
42,988

 
$
352,916

 
$
1,898

 
$

 
$
7,866,336

Total grade as a % of total gross loans
94.9
%
 
0.6
%
 
4.5
%
 
%
 
%
 
 

Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):
 
March 31, 2013
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,266,407

 
98.0
%
 
$
111,572

 
2.1
%
Construction - speculative
111,146

 
92.1

 
7,943

 
6.6

Construction - custom
216,997

 
100.0

 
105

 

Land - acquisition & development
79,178

 
84.7

 
12,177

 
13.0

Land - consumer lot loans
126,032

 
96.9

 
3,385

 
2.6

Multi-family
717,415

 
98.9

 
2,802

 
0.4

Commercial real estate
368,629

 
95.6

 
10,395

 
2.7

Commercial & industrial
189,611

 
99.5

 
210

 
0.1

HELOC
111,133

 
99.6

 
247

 
0.2

Consumer
53,603

 
99.3

 
197

 
0.4

 
$
7,240,151

 
97.8

 
$
149,033

 
2.0


23

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)



September 30, 2012
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
5,647,729

 
97.7
%
 
$
131,193

 
2.3
%
Construction - speculative
119,003

 
91.8

 
10,634

 
8.2

Construction - custom
211,151

 
99.7

 
539

 
0.3

Land - acquisition & development
111,200

 
89.2

 
13,477

 
10.8

Land - consumer lot loans
136,695

 
96.4

 
5,149

 
3.6

Multi-family
705,955

 
99.4

 
4,185

 
0.6

Commercial real estate
311,557

 
97.6

 
7,653

 
2.4

Commercial & industrial
162,807

 
100.0

 
16

 

HELOC
112,704

 
99.8

 
198

 
0.2

Consumer
62,991

 
99.4

 
383

 
0.6

 
$
7,581,792

 
97.8
%
 
$
173,427

 
2.2
%
The following table provides information on impaired loan balances and the related allowances by loan types as of March 31, 2013 and September 30, 2012:
 

24

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
 
 
 
 
 
 
Average Recorded Investment
March 31, 2013
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Quarter Ended March 31, 2013
 
Six Months Ended March 31, 2013
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Single-family residential
$
41,125

 
$
48,331

 
$

 
$
34,045

 
$
32,492

Construction - speculative
4,377

 
5,217

 

 
4,135

 
4,066

Construction - custom
120

 
120

 

 
60

 
40

Land - acquisition & development
10,026

 
21,395

 

 
9,855

 
10,099

Land - consumer lot loans
3,000

 
3,246

 

 
2,498

 
2,325

Multi-family
5,498

 
5,498

 

 
3,218

 
2,460

Commercial real estate
15,616

 
16,956

 

 
12,968

 
11,244

Commercial & industrial
1,629

 
6,938

 

 
1,153

 
1,077

HELOC
157

 
172

 

 
165

 
167

Consumer
18

 
31

 

 
9

 
9

 
81,566

 
107,904

 

 
68,106

 
63,979

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Single-family residential
357,645

 
365,192

 
18,392

 
349,958

 
347,976

Construction - speculative
16,903

 
17,748

 
2,008

 
17,325

 
17,683

Construction - custom

 

 

 

 

Land - acquisition & development
17,763

 
20,424

 
4,890

 
19,028

 
20,195

Land - consumer lot loans
13,306

 
13,452

 
311

 
13,217

 
13,199

Multi-family
11,053

 
11,769

 
1,380

 
12,079

 
12,478

Commercial real estate
7,455

 
7,455

 
256

 
7,475

 
7,494

Commercial & industrial

 

 

 

 

HELOC
940

 
940

 

 
841

 
805

Consumer

 

 

 

 

 
425,065

 
436,980

 
27,237

(1)
419,923

 
419,830

Total:
 
 
 
 
 
 
 
 
 
Single-family residential
398,770

 
413,523

 
18,392

 
384,003

 
380,468

Construction - speculative
21,280

 
22,965

 
2,008

 
21,460

 
21,749

Construction - custom
120

 
120

 

 
60

 
40

Land - acquisition & development
27,789

 
41,819

 
4,890

 
28,883

 
30,294

Land - consumer lot loans
16,306

 
16,698

 
311

 
15,715

 
15,524

Multi-family
16,551

 
17,267

 
1,380

 
15,297

 
14,938

Commercial real estate
23,071

 
24,411

 
256

 
20,443

 
18,738

Commercial & industrial
1,629

 
$
6,938

 

 
1,153

 
1,077

HELOC
1,097

 
1,112

 

 
1,006

 
972

Consumer
18

 
31

 

 
9

 
9

 
$
506,631

 
$
544,884

 
$
27,237

(1)
$
488,029

 
$
483,809

____________________ 
(1)Includes $8,845,000 of specific reserves and $18,392,000 included in the general reserves.


25

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


September 30, 2012
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$
106,955

 
$
124,342

 
$

 
$
49,524

Construction - speculative
13,726

 
16,568

 

 
13,581

Construction - custom

 

 

 

Land - acquisition & development
18,000

 
30,209

 

 
16,417

Land - consumer lot loans
1,677

 
2,185

 

 
487

Multi-family
8,792

 
8,991

 

 
6,935

Commercial real estate
31,190

 
42,656

 

 
12,946

Commercial & industrial
1,146

 
7,363

 

 
581

HELOC
90

 
1,066

 

 
36

Consumer

 
4

 

 

 
181,576

 
233,384

 

 
100,507

With an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
317,901

 
317,901

 
25,723

 
305,350

Construction - speculative
12,836

 
12,836

 
2,981

 
12,822

Construction - custom

 

 

 

Land - acquisition & development
20,750

 
20,750

 
8,901

 
21,650

Land - consumer lot loans
13,881

 
13,881

 
761

 
13,126

Multi-family
14,153

 
14,555

 
2,462

 
14,279

Commercial real estate
3,722

 
3,722

 
798

 
2,897

Commercial & industrial

 
2

 
2

 
22

HELOC
734

 
734

 

 
743

Consumer

 

 

 

 
383,977

 
384,381

 
41,628

(1)
370,889

Total:
 
 
 
 
 
 
 
Single-family residential
424,856

 
442,243

 
25,723

 
354,874

Construction - speculative
26,562

 
29,404

 
2,981

 
26,403

Construction - custom

 

 

 

Land - acquisition & development
38,750

 
50,959

 
8,901

 
38,067

Land - consumer lot loans
15,558

 
16,066

 
761

 
13,613

Multi-family
22,945

 
23,546

 
2,462

 
21,214

Commercial real estate
34,912

 
46,378

 
798

 
15,843

Commercial & industrial
1,146

 
7,365

 
2

 
603

HELOC
824

 
1,800

 

 
779

Consumer

 
4

 

 

 
$
565,553

 
$
617,765

 
$
41,628

(1)
$
471,396

(1)
Includes $15,983,000 of specific reserves and $25,645,000 included in the general reserves.

26

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)





NOTE F – New Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The main objective of this Update is to address implementation issues about the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The guidance in this ASU is effective for the first interim or annual period beginning on or after January 1, 2013 and should be applied retrospectively. This new guidance is not expected to have a material impact on the Company's consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements; rather, they require the entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance in this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, and should be applied prospectively. This new guidance is not expected to have a material 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:
Measured on a Recurring Basis
Securities
Securities available for sale are recorded at fair value on a recurring basis. 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.
 
The following table presents the balance of assets measured at fair value on a recurring basis at March 31, 2013:
 

27

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
Fair Value at March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Equity securities
$

 
$
531

 
$

 
$
531

Obligations of U.S. government

 
489,523

 

 
489,523

Obligations of states and political subdivisions

 
24,803

 

 
24,803

Obligations of foreign governments

 

 

 

Corporate debt securities

 
404,112

 

 
404,112

Mortgage-backed securities
 
 
 
 

 
 
Agency pass-through certificates

 
1,103,699

 

 
1,103,699

Other debt securities

 

 

 

Balance at end of period
$

 
$
2,022,668

 
$

 
$
2,022,668

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the quarter ended March 31, 2013.
Measured on a Nonrecurring Basis
Impaired Loans & Real Estate Held for Sale
From time to time, and on a nonrecurring basis, fair value adjustments to collateral-dependent loans and real estate held for sale are recorded to reflect write-downs of principal balances based on the current appraised or estimated value of the collateral. When management determines that the fair value of the collateral or the real estate held for sale requires additional adjustments, either as a result of a non-current appraisal value or when there is no observable market price, the Company classifies the impaired loan or real estate held for sale as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at March 31, 2013 included loans for which a specific reserve allowance was established or a partial charge-off was recorded based on the fair value of collateral, as well as covered REO and real estate held for sale for which fair value of the properties was less than the cost basis.
Real estate held for sale consists principally of properties acquired through foreclosure.
The following table presents the aggregated balance of assets measured at estimated fair value on a nonrecurring basis through the six months ended March 31, 2013, and the total losses resulting from those fair value adjustments for the quarter and six months ended March 31, 2013. The following estimated fair values are shown gross of estimated selling costs:
 
 
Through March 31, 2013
 
Quarter
Ended
March 31, 2013
 
Six Months
Ended March 31, 2013
 
Level 1
 
Level  2
 
Level  3
 
Total
 
Total Losses
 
(In thousands)
 
 
Impaired loans (1)
$

 
$

 
$
45,966

 
$
45,966

 
$
1,225

 
$
11,038

Covered REO (2)

 

 
13,988

 
13,988

 
281

 
372

Real estate held for sale (2)

 

 
54,069

 
54,069

 
6,488

 
14,024

Balance at end of period
$

 
$

 
$
114,023

 
$
114,023

 
$
7,994

 
$
25,434

 ___________________
(1)
The losses represents remeasurements of collateral-dependent loans.
(2)
The losses represents aggregate writedowns and charge-offs on real estate held for sale.
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at March 31, 2013.
The following describes the process used to value Level 3 assets measured on a nonrecurring basis:
Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on

28

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.
The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for loan & lease loss ("ALLL") process.
Applicable loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following method is used to value impaired loans:
The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.
Real estate held for sale ("REO") - These assets are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Assets that are acquired through foreclosure are recorded initially at the lower of the loan balance or fair value at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions my require the assets to be written down further to a new cost basis. The following method is used to value real estate held for sale:
When a loan is reclassified from loan status to real estate held for sale due to the Company taking possession of the collateral, a Special Credits officer, along with the Special Credits manager, obtains a valuation, which may include a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value, to the extent it does not exceed the carrying value of the loan, becomes the carrying value of the REO asset. In addition to the valuations from independent third-party sources, the carrying balance of REO assets are written down once a bona fide offer is contractually accepted, through execution of a Purchase and Sale Agreement, where the accepted price is lower than the current balance of the particular REO asset. The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the lower of cost or fair value as necessary.
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.
 

29

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
 
 
 
March 31, 2013
 
September 30, 2012
 
 
Level in Fair Value Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
782,059

 
$
782,059

 
$
751,430

 
$
751,430

Available-for-sale securities
 
2
 
 
 
 
 
 
 
 
Equity securities
 
 
 
531

 
531

 

 

Obligations of U.S. government
 
 
 
489,523

 
489,523

 
183,560

 
183,560

Obligations of states and political subdivisions
 
 
 
24,803

 
24,803

 
24,844

 
24,844

Obligations of foreign governments
 
 
 

 

 

 

Corporate debt securities
 
 
 
404,112

 
404,112

 
403,325

 
403,325

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
 
 
1,103,699

 
1,103,699

 
1,169,976

 
1,169,976

Other debt securities
 
 
 

 

 

 

Total available-for-sale securities
 
 
 
2,022,668

 
2,022,668

 
1,781,705

 
1,781,705

Held-to-maturity securities
 
2
 
 
 
 
 
 
 
 
Equity securities
 
 
 

 

 

 

Obligations of U.S. government
 
 
 

 

 

 

Obligations of states and political subdivisions
 
 
 

 

 
795

 
802

Obligations of foreign governments
 
 
 

 

 

 

Corporate debt securities
 
 
 

 

 

 

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
 
 
 
1,469,983

 
1,469,229

 
1,190,692

 
1,216,421

Other debt securities
 
 
 

 

 

 

Total held-to-maturity securities
 
 
 
1,469,983

 
1,469,229

 
1,191,487

 
1,217,223

Loans receivable
 
3
 
7,444,216

 
8,059,053

 
7,451,998

 
7,949,892

Covered loans
 
3
 
355,515

 
365,138

 
288,376

 
289,754

FDIC indemnification asset
 
3
 
80,391

 
78,108

 
87,571

 
85,846

FHLB stock
 
2
 
152,038

 
152,038

 
149,840

 
149,840

Financial liabilities
 
 
 
 
 
 
 
 
 
 
Customer accounts
 
2
 
9,152,225

 
8,861,670

 
8,576,618

 
8,406,432

FHLB advances and other borrowings
 
2
 
1,930,000

 
2,145,399

 
1,880,000

 
2,110,223

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 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.
Loans receivable and covered loans – For certain homogeneous categories of loans, such as fixed- and variable-rate residential mortgages, fair value is estimated for securities backed by similar loans, adjusted for differences in loan characteristics, using the same methodology described above for AFS and HTM securities. The fair value of other loan types is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics. Net deferred loan fees are not included in the fair value calculation but are included in the carrying amount.

30

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


FDIC indemnification asset – The fair value of the indemnification asset is estimated by discounting the expected future cash flows using the current rates.
FHLB stock – The fair value is based upon the par value of the stock which equates to its carrying value.
Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.
FHLB advances and other borrowings – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
The following is a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities:
 
 
March 31, 2013
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
 
Losses
 
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
Within 1 year
$
16,952

 
$
31

 
$
(29
)
 
$
16,954

 
0.45
%
1 to 5 years
58,000

 
2,576

 

 
60,576

 
1.55

5 to 10 years
83,300

 
1,664

 

 
84,964

 
1.36

Over 10 years
327,404

 
156

 

 
327,560

 
0.90

Corporate bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
19,500

 
11

 

 
19,511

 
0.49

1 to 5 years
317,044

 
4,078

 

 
321,122

 
0.84

5 to 10 years
62,962

 
998

 
(481
)
 
63,479

 
2.02

Municipal bonds due
 
 
 
 
 
 
 
 
 
Over 10 years
20,430

 
4,373

 

 
24,803

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,098,266

 
6,421

 
(988
)
 
1,103,699

 
1.99

 
2,003,858

 
20,308

 
(1,498
)
 
2,022,668

 
1.61

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds due
 
 
 
 
 
 
 
 
 
Within 1 year

 

 

 

 

1 to 5 years

 

 

 

 

5 to 10 years

 

 

 

 

Over 10 years

 

 

 

 

U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
1 to 5 years

 

 

 

 

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,469,983

 
3,302

 
(4,056
)
 
1,469,229

 
3.04

 
1,469,983

 
3,302

 
(4,056
)
 
1,469,229

 
3.04

 
$
3,473,841

 
$
23,610

 
$
(5,554
)
 
$
3,491,897

 
2.22
%
 

31

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
September 30, 2012
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Yield
 
Gains
Losses
 
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
Within 1 year
$
19,999

 
$
42

 
$
(6
)
 
$
20,035

 
0.57
%
1 to 5 years

 

 

 

 

5 to 10 years
59,300

 
4,225

 

 
63,525

 
2.21

Over 10 years
100,000

 

 

 
100,000

 
1.05

Corporate bonds due
 
 
 
 
 
 
 
 
 
1 to 5 years
336,340

 
2,810

 
(61
)
 
339,089

 
0.91

5 to 10 years
62,919

 
1,324

 
(7
)
 
64,236

 
2.73

Municipal bonds due
 
 
 
 
 
 
 
 
 
Over 10 years
20,442

 
4,402

 

 
24,844

 
6.45

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,161,668

 
9,358

 
(1,050
)
 
1,169,976

 
2.28

 
1,760,668

 
22,161

 
(1,124
)
 
1,781,705

 
1.99

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds due
 
 
 
 
 
 
 
 
 
Within 1 year
795

 
7

 

 
802

 
5.80

1 to 5 years

 

 

 

 

5 to 10 years

 

 

 

 

Over 10 years

 

 

 

 

U.S. government and agency securities due
 
 
 
 
 
 
 
 
 
1 to 5 years

 

 

 

 

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Agency pass-through certificates
1,190,692

 
25,729

 

 
1,216,421

 
3.10

 
1,191,487

 
25,736

 

 
1,217,223

 
3.10

 
$
2,952,155

 
$
47,897

 
$
(1,124
)
 
$
2,998,928

 
2.44
%
During the period ending March 31, 2013, $43,199,000 of available-for-sale securities were sold, resulting in a gain of $0. $3,500,000 of available-for-sale securities were sold during the period ending March 31, 2012, resulting in a gain of $0.
Substantially all mortgage-backed securities have contractual due dates that exceed 10 years.
The following table shows the unrealized gross losses and fair value of securities at March 31, 2013, by length of time that individual securities in each category have been in a continuous loss position. Management believes that the declines in fair value of these investments are not an other than temporary impairment.
 

32

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


 
Less than 12 months
 
12 months or more
 
Total
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
Unrealized
Gross Losses
 
Fair
Value
 
 
Corporate bonds due
$

 
$

 
$
(481
)
 
$
9,519

 
$
(481
)
 
$
9,519

U.S. government and agency securities due
(29
)
 
16,423

 

 

 
(29
)
 
16,423

Agency pass-through certificates
(4,239
)
 
943,909

 
(805
)
 
175,871

 
(5,044
)
 
1,119,780

 
(4,268
)
 
$
960,332

 
$
(1,286
)
 
$
185,390

 
(5,554
)
 
$
1,145,722


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 $387,789,000 as of March 31, 2013, versus $317,925,000 as of September 30, 2012.
As of the close of business October 31, 2012, the Company acquired covered assets as part of the South Valley acquisition as described in Note B. The purchase accounting, for acquired assets and liabilities, mainly related to the valuation of the acquired loans, is subject to future adjustment based on the completion of valuations. The carrying balance of acquired covered loans have been included in the following tables; however, the balances are subject to future adjustment based on the completion of the purchase accounting valuations.
Changes in the carrying amount and accretable yield for acquired impaired and non-impaired loans for the year to date period ended March 31, 2013 and the fiscal year ended September 30, 2012 were as follows:
 
March 31, 2013
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance at beginning of period
$
50,902

 
$
74,953

 
$
23,789

 
$
213,423

Additions (1)
43,299

 
107,946

 

 

Accretion
(18,463
)
 
18,463

 
(3,543
)
 
3,543

Transfers to REO

 
(7,403
)
 

 

Payments received, net

 
(21,828
)
 

 
(33,582
)
Balance at end of period
$
75,738

 
$
172,131

 
$
20,246

 
$
183,384

(1) includes FDIC covered loans which were acquired as part of the South Valley acquisition.
 
 
 
 

September 30, 2012
Acquired Impaired
 
Acquired Non-impaired
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
(In thousands)
Balance at beginning of period
$
37,072

 
$
116,061

 
$
30,370

 
$
269,888

Reclassification from nonaccretable balance, net
34,690

 

 

 

Accretion
(20,860
)
 
20,860

 
(6,581
)
 
6,581

Transfers to REO

 
(15,905
)
 

 

Payments received, net

 
(46,063
)
 

 
(63,046
)
Balance at end of period
$
50,902

 
$
74,953

 
$
23,789

 
$
213,423


33

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)



At March 31, 2013, none of the acquired impaired or non-impaired loans were classified as non-performing assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.
The outstanding principal balance of acquired loans was $435,533,000 and $373,455,000 as of March 31, 2013 and September 30, 2012, respectively. The discount balance related to the acquired loans was $80,018,000 and $85,079,000 as of March 31, 2013 and September 30, 2012, respectively.
The following table shows the year to date activity for the FDIC indemnification asset:
 
 
March 31, 2013
 
September 30, 2012
 
(In thousands)
Balance at beginning of period
$
87,571

 
$
101,634

Additions (1)
17,373

 
3,284

Payments made (received)
(11,668
)
 
(3,456
)
Amortization
(13,451
)
 
(15,510
)
Accretion
566

 
1,619

Balance at end of period
$
80,391

 
$
87,571

(1) includes FDIC covered loans which were acquired as part of the South Valley acquisition.
The following tables provide information on covered loans based on credit quality indicators (defined in Note A) as of March 31, 2013 and September 30, 2012:
Credit Risk Profile by Internally Assigned Grade:
 

34

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


March 31, 2013
Internally Assigned Grade
 
Total
Net  Loans
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
 
(In thousands)
Purchased non credit-impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
$
30,319

 
$

 
$
2,827

 
$

 
$

 
$
33,146

Construction - speculative
102

 

 

 

 

 
102

Construction - custom

 

 

 

 

 

Land - acquisition & development
3,056

 
1,289

 
5,837

 

 

 
10,182

Land - consumer lot loans
440

 

 

 

 

 
440

Multi-family
23,286

 

 
1,224

 

 

 
24,510

Commercial real estate
59,863

 
9,725

 
30,140

 

 

 
99,728

Commercial & industrial
6,527

 
500

 
3,996

 

 

 
11,023

HELOC
15,315

 

 

 

 

 
15,315

Consumer
680

 

 

 

 

 
680

 
139,588

 
11,514

 
44,024

 

 

 
195,126

Total grade as a % of total net loans
71.5
%
 
5.9
%
 
22.6
%
 
%
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit-impaired loans:
 
 
 
 
 
 
 
 
Pool 1 - Construction and land A&D
11,674

 
4,298

 
36,623

 

 

 
52,595

Pool 2 - Single-family residential
24,290

 

 
1,045

 

 

 
25,335

Pool 3 - Multi-family
1,251

 

 
4,549

 

 

 
5,800

Pool 4 - HELOC & other consumer
4,096

 

 
3,531

 

 

 
7,627

Pool 5 - Commercial real estate
34,518

 
16,691

 
76,158

 

 

 
127,367

Pool 6 - Commercial & industrial
8,173

 
499

 
12,731

 
280

 

 
21,683

 
$
84,002

 
$
21,488

 
$
134,637

 
$
280

 
$

 
240,407

 
 
 
 
 
 
 
 
 
Total covered loans
 
435,533

 
 
 
 
 
 
 
 
 
Discount
 
(80,018
)
 
 
 
 
 
 
 
 
 
Allowance
 

 
 
 
 
 
 
 
 
 
Covered loans, net
 
$
355,515



35

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


September 30, 2012
Internally Assigned Grade
 
Total
Net  Loans
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
 
(In thousands)
Purchased non credit-impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
$
32,272

 
$

 
$
3,404

 
$

 
$

 
$
35,676

Construction - speculative
90

 

 

 

 

 
90

Construction - custom

 

 

 

 

 

Land - acquisition & development
3,440

 
1,970

 
6,020

 

 

 
11,430

Land - consumer lot loans
498

 

 

 

 

 
498

Multi-family
24,898

 

 
2,747

 

 

 
27,645

Commercial real estate
89,530

 
298

 
31,764

 

 

 
121,592

Commercial & industrial
7,146

 
510

 
5,367

 

 

 
13,023

HELOC
17,971

 

 

 

 

 
17,971

Consumer
918

 

 

 

 

 
918

 
176,763

 
2,778

 
49,302

 

 

 
228,843

Total grade as a % of total net loans
77.3
%
 
1.2
%
 
21.5
%
 
%
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit-impaired loans:
 
 
 
 
 
 
 
 
Pool 1 - Construction and land A&D
9,795

 
5,301

 
35,857

 

 

 
50,953

Pool 2 - Single-family residential
669

 

 
2,953

 

 

 
3,622

Pool 3 - Multi-family

 

 
2,996

 

 

 
2,996

Pool 4 - HELOC & other consumer
1,094

 

 
3,096

 

 

 
4,190

Pool 5 - Commercial real estate
404

 
25,785

 
41,403

 

 

 
67,592

Pool 6 - Commercial & industrial
3,787

 
1,006

 
10,466

 

 

 
15,259

 
$
15,749

 
$
32,092

 
$
96,771

 
$

 
$

 
144,612

 
 
 
 
 
 
 
 
 
Total covered loans
 
373,455

 
 
 
 
 
 
 
 
 
Discount
 
(85,079
)
 
 
 
 
 
 
 
 
 
Allowance
 

 
 
 
 
 
 
 
 
 
Covered loans, net
 
$
288,376













36

Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)


The following tables provide an analysis of the age of purchased non credit-impaired loans in past due status for the periods ended March 31, 2013 and September 30, 2012:
 
March 31, 2013
Amount of  Loans
Net of LIP & Chg.-Offs
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loans
Current
 
30
 
60
 
90
 
Total
 
Single-Family Residential
$
33,146

 
$
32,414

 
$
148

 
$

 
$
584

 
$
732

 
2.21
%
Construction - Speculative
102

 
102

 

 

 

 

 
NM

Construction - Custom

 

 

 

 

 

 
NM

Land - Acquisition & Development
10,182

 
10,145

 

 

 
37

 
37

 
0.36

Land - Consumer Lot Loans
440

 
342

 

 

 
98

 
98

 
22.27

Multi-Family
24,510

 
24,310

 

 

 
200

 
200

 
0.82

Commercial Real Estate
99,728

 
95,069

 
2,651

 

 
2,008

 
4,659

 
4.67

Commercial & Industrial
11,023

 
7,608

 

 

 
3,415

 
3,415

 
30.98

HELOC
15,315

 
15,080

 
59

 

 
176

 
235

 
1.53

Consumer
680

 
680

 

 

 

 

 

 
$
195,126

 
$
185,750

 
$
2,858

 
$

 
$
6,518

 
$
9,376

 
4.81
%


September 30, 2012
Amount of  Loans
Net of LIP & Chg.-Offs
 
Days Delinquent Based on $ Amount of Loans
 
% based
on $
Type of Loans
Current
 
30
 
60
 
90
 
Total
 
Single-Family Residential
$
35,676

 
$
32,601

 
$
2,075

 
$

 
$
1,000

 
$
3,075

 
8.62
%
Construction - Speculative
90

 
90

 

 

 

 

 
NM

Construction - Custom

 

 

 

 

 

 
NM

Land - Acquisition & Development
11,430

 
9,922

 

 

 
1,508

 
1,508

 
13.19

Land - Consumer Lot Loans
498

 
385

 

 

 
113

 
113

 
22.69

Multi-Family
27,645

 
26,137

 

 

 
1,508

 
1,508

 
5.45

Commercial Real Estate
121,592

 
115,206

 
17

 
4,447

 
1,922

 
6,386

 
5.25

Commercial & Industrial
13,023

 
9,513

 

 
69

 
3,441

 
3,510

 
26.95

HELOC
17,971

 
17,440

 
97

 
50

 
384

 
531

 
2.95

Consumer
918

 
916

 

 
1

 
1

 
2

 
2.20

 
$
228,843

 
$
212,210

 
$
2,189

 
$
4,567

 
$
9,877

 
$
16,633

 
7.27
%

NM - not meaningful

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



FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements,” as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. Actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding the Company’s intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to: general economic conditions; legislative and regulatory changes, including without limitation the potential effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations to be 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, including without limitation the Bank’s ability to comply in a timely and satisfactory manner with the requirements of the memorandum of understanding entered into with the Office of The Comptroller of the Currency. 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. (“Company”) is a savings and loan holding company. The Company’s primary operating subsidiary is Washington Federal.
The results discussed below were impacted by the acquisition on close of business on October 31, 2012, of South Valley Bank and Trust, headquartered in Klamath Falls, Oregon (“South Valley”). The acquisition provided $383 million of net loans, $107 million of net covered loans, $735 million of deposit accounts, including $533 million in transaction deposit accounts and 24 branch locations in Central and Southern Oregon. Total consideration paid at closing was $44 million, including $34 million of Washington Federal, Inc. stock and $10 million of cash resulting from the collection of certain earn-out assets.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period from November 1, 2012 to March 31, 2013.


INTEREST RATE RISK
Historically, the Company accepted a higher level of interest rate risk as a result of its significant holdings of fixed-rate single-family home loans that are longer in term than the characteristics of its primary liabilities of customer accounts and borrowings. Based on Management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term business loans, transaction deposit accounts and extending the maturity on borrowings, to reduce its interest rate risk profile compared to its historical norms.

The Company relies on various measures of interest rate risk, including an asset/liability maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) the Company.
At March 31, 2013, the Company had approximately $1.077 billion more in liabilities subject to repricing in the next year than assets, which amounted to a negative one-year maturity gap of 8.21% of total assets. This was a decrease from the 10.1% negative gap as of September 30, 2012.

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 higher margins when interest rates decline and lower

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



margins when interest rates rise. Gap analysis provides management with a high-level indication of interest rate risk, but is considered less reliable than more detailed modeling.
The potential impact of rising interest rates on net interest income in the future is estimated using a model that is based on account level detail for loans and deposits. In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income will increase by 2.01% in year one. In the event of a gradual increase from current rates by 200 basis points over a twelve-month period, the model forecasts an increase in net interest income of 1.60% in year one. 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.

The NPV estimates the market of value of shareholder's equity based upon forecasted interest rate scenarios. It is derived by calculating the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of the NPV to changes in interest rates is another measure of interest rate risk. This approach provides a longer term view of interest rate risk as it incorporates all future expected cash flows. In the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $186 million and the NPV to total assets ratio to decline to 16.83%. As of September 30, 2012 the estimated decrease in NPV in the event of a 200 basis point increase in rates was estimated to decline by $296 million and the NPV to total assets ratio to decline to 15.00%.
The interest rate spread decreased to 2.72% at March 31, 2013 from 2.80% at September 30, 2012. The spread decreased due to a decline in the average rate on loans and investment securities. As of March 31, 2013, the weighted average rate on customer deposit accounts and borrowings decreased by 16 basis points compared to September 30, 2012, while the weighted average rates on earning assets decreased by 24 basis points over the same period.
As of March 31, 2013, the Company had increased total assets by $642,889,000 from $12,472,944,000 at September 30, 2012. For the quarter ended March 31, 2013, compared to September 30, 2012, loans (both non-covered and covered) increased $59,357,000, or .77%. To help offset the reduced income from loans, investment securities increased $519,459,000, or 17.5%. Cash and cash equivalents of $782,059,000 and stockholders’ equity of $1,934,350,000 provides management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The Company’s net worth at March 31, 2013 was $1,934,350,000, or 14.75% of total assets. This was an increase of $34,598,000 from September 30, 2012 when net worth was $1,899,752,000, or 15.23% of total assets. The Company’s net worth was impacted in the six months ended March 31, 2013 by net income of $71,260,000, the payment of $18,930,000 in cash dividends, treasury stock purchases that totaled $53,224,000, as well as a decrease in other comprehensive income of $1,409,000.
Management believes this strong net worth position will help the Company manage its inherent risks and resultant profitability and provide the capital support needed for controlled growth in a regulated environment. To be categorized as well capitalized, Washington Federal must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
 

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



 
Actual
 
Capital
Adequacy Guidelines
 
Categorized as
Well Capitalized Under
Prompt Corrective
Action Provisions
 
Capital
 
Ratio
 
Capital
 
Ratio
 
Capital
 
Ratio
 
(In thousands)
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
$
1,693,170

 
26.69
%
 
$
507,479

 
8.00
%
 
$
634,349

 
10.00
%
Tier I capital to risk-weighted assets
1,613,324

 
25.43
%
 
NA

 
NA

 
380,609

 
6.00
%
Core capital to adjusted tangible assets
1,613,324

 
12.55
%
 
NA

 
NA

 
642,727

 
5.00
%
Core capital to total assets
1,613,324

 
12.55
%
 
385,636

 
3.00
%
 
NA

 
NA

Tangible capital to tangible assets
1,613,324

 
12.55
%
 
192,818

 
1.50
%
 
NA

 
NA

 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
1,653,760

 
27.29
%
 
484,822

 
8.00
%
 
606,028

 
10.00
%
Tier I capital to risk-weighted assets
1,577,280

 
26.03
%
 
N/A

 
N/A

 
363,617

 
6.00
%
Core capital to adjusted tangible assets
1,577,280

 
12.92
%
 
N/A

 
N/A

 
610,556

 
5.00
%
Core capital to total assets
1,577,280

 
12.92
%
 
366,334

 
3.00
%
 
N/A

 
N/A

Tangible capital to tangible assets
1,577,280

 
12.92
%
 
183,167

 
1.50
%
 
N/A

 
N/A

CHANGES IN FINANCIAL CONDITION
Available-for-sale and held-to-maturity securities: Available-for-sale securities increased $240,963,000, or 13.5%, during the six months ended March 31, 2013, which included the purchase of $356,966,000 of available-for-sale securities. There were $43,199,000 of available-for-sale securities sold during the six months ended March 31, 2013, resulting in no gain or loss. During the same period, there were 407,135,000 of held-to-maturity securities purchased and no sales of held-to-maturity securities. As of March 31, 2013, the Company had net unrealized gains on available-for-sale securities of $11,897,000, net of tax, which were recorded as part of stockholders’ equity. The Company increased its available-for-sale and held-to-maturity investment portfolios to help offset some of the lost interest income on maturing and prepaying loans and mortgage-backed securities.
Loans receivable: During the six months ended March 31, 2013, the balance of loans receivable decreased slightly to $7,444,216,000 compared to $7,451,998,000 at September 30, 2012. This net decrease is a result of the acquisition of $361 million in loans from South Valley offset by declining balances consistent with management’s strategy to reduce the Company’s exposure to land and construction loans and not aggressively compete for 30 year fixed-rate loans at rates below 4%, due to the duration risk associated with such low mortgage rates. Additionally, during the six month period, $52,760,000 of loans were transferred to REO. If the current low rates on 30 year fixed-rate mortgages persist, management will consider continuing to shrink the Company's loan portfolio. The following table shows the loan portfolio by category for the last three quarters.
 
Loan Portfolio by Category *
March 31, 2013
 
December 31, 2012
 
September 30, 2012
Non-Acquired loans
(In thousands)
Single-family residential
$
5,374,977

 
68.6
%
 
$
5,573,590

 
69.4
%
 
$
5,778,922

 
73.5
%
Construction - speculative
120,617

 
1.5

 
123,871

 
1.5

 
129,637

 
1.6

Construction - custom
217,036

 
2.8

 
228,140

 
2.9

 
211,690

 
2.7

Land - acquisition & development
93,496

 
1.2

 
109,458

 
1.4

 
124,677

 
1.6

Land - consumer lot loans
130,056

 
1.7

 
137,106

 
1.7

 
141,844

 
1.8

Multi-family
725,322

 
9.3

 
721,802

 
9.0

 
710,140

 
9.0

Commercial real estate
385,587

 
4.9

 
347,564

 
4.3

 
319,210

 
4.1

Commercial & industrial
190,598

 
2.4

 
171,644

 
2.1

 
162,823

 
2.1

HELOC
111,622

 
1.4

 
111,986

 
1.4

 
112,902

 
1.4

Consumer
53,956

 
0.7

 
59,131

 
0.7

 
63,374

 
0.8


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



Total non-acquired loans
7,403,267

 
94.5

 
7,584,292

 
94.4

 
7,755,219

 
98.6

Acquired loans
 
Single-family residential
15,428

 
0.2

 
15,495

 
0.2

 

 

Construction - speculative
177

 

 
90

 

 

 

Construction - custom
313

 

 
994

 

 

 

Land - acquisition & development
3,436

 

 
3,520

 

 

 

Land - consumer lot loans
3,819

 
0.1

 
3,891

 
0.1

 

 

Multi-family
7,714

 
0.2

 
9,333

 
0.2

 

 

Commercial real estate
177,101

 
2.1

 
178,727

 
2.2

 

 

Commercial & industrial
96,255

 
1.3

 
106,931

 
1.3

 

 

HELOC
13,094

 
0.2

 
13,810

 
0.2

 

 

Consumer
10,046

 
0.1

 
10,759

 
0.1

 

 

Total acquired loans
327,383

 
4.2

 
343,550

 
4.3

 

 

Credit-impaired acquired loans
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
338

 

 
340

 

 
342

 

Construction - speculative
1,750

 

 
1,755

 

 
1,889

 

Land - acquisition & development
2,577

 

 
2,677

 

 
3,702

 
0.1

Multi-family

 

 

 

 
601

 

Commercial real estate
79,868

 
1.1

 
83,657

 
1.1

 
87,154

 
1.1

Commercial & industrial
2,091

 

 
1,883

 

 
3,292

 

HELOC
12,757

 
0.2

 
12,849

 
0.2

 
14,040

 
0.2

Consumer
81

 

 
90

 

 
97

 

Total credit-impaired acquired loans
99,462

 
1.3

 
103,251

 
1.3

 
111,117

 
1.4

Total loans
 
 
 
 
 
 
 
 
 
 
 
   Single-family residential
5,390,743

 
68.8

 
5,589,425

 
69.6

 
5,779,264

 
73.5

   Construction - speculative
122,544

 
1.5

 
125,716

 
1.5

 
131,526

 
1.6

   Construction - custom
217,349

 
2.8

 
229,134

 
2.9

 
211,690

 
2.7

   Land - acquisition & development
99,509

 
1.2

 
115,655

 
1.4

 
128,379

 
1.7

   Land - consumer lot loans
133,875

 
1.8

 
140,997

 
1.8

 
141,844

 
1.8

   Multi-family
733,036

 
9.5

 
731,135

 
9.2

 
710,741

 
9.0

   Commercial real estate
642,556

 
8.1

 
609,948

 
7.6

 
406,364

 
5.2

   Commercial & industrial
288,944

 
3.7

 
280,458

 
3.4

 
166,115

 
2.1

   HELOC
137,473

 
1.8

 
138,645

 
1.8

 
126,942

 
1.6

   Consumer
64,083

 
0.8

 
69,980

 
0.8

 
63,471

 
0.8

Total loans
7,830,112

 
100
%
 
8,031,093

 
100
%
 
7,866,336

 
100
%
Less:
 
 
 
 
 
 
 
 
 
 
 
Allowance for probable losses
122,884

 
 
 
126,827

 
 
 
133,147

 
 
Loans in process
189,336

 
 
 
204,566

 
 
 
213,286

 
 
Discount on acquired loans
40,346

 
 
 
50,817

 
 
 
33,484

 
 
Deferred net origination fees
33,330

 
 
 
33,973

 
 
 
34,421

 
 
 
385,896

 
 
 
416,183

 
 
 
414,338

 
 
 
$
7,444,216

 
 
 
$
7,614,910

 
 
 
$
7,451,998

 
 
 ____________________
* Excludes covered loans

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



Covered loans: As of March 31, 2013, covered loans increased 23.3%, or $67,139,000, to $355,515,000, compared to September 30, 2012, due to acquisition of FDIC covered loans as part of the South Valley acquisition described in Note B.
Non-performing assets: Non-performing assets, which excludes discounted acquired assets, decreased during the quarter ended March 31, 2013 to $246,075,000 from $272,905,000 at September 30, 2012, a 9.8% decrease. The continued elevated level of NPAs is a result of the significant decline in housing values in the western United States and the national recession which began in 2007. Non-performing assets as a percentage of total assets was 1.88% at March 31, 2013 compared to 2.19% at September 30, 2012. This level of NPAs remains significantly higher than the 0.95% average in the Company’s 28+ year history as a public company.
The following table sets forth information regarding restructured and non-accrual loans and REO held by the Company at the dates indicated.
 

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



 
March 31,
2013
 
September 30,
2012
 
(In thousands)
Restructured loans:
 
 
 
 
 
 
 
Single-family residential
$
360,721

 
86.4
%
 
$
361,640

 
83.4
%
Construction - speculative
12,033

 
2.9

 
15,907

 
3.7

Construction - custom
1,196

 
0.3

 
1,196

 
0.3

Land - acquisition & development
10,731

 
2.6

 
14,985

 
3.5

Land - consumer lot loans
13,522

 
3.2

 
13,782

 
3.2

Multi - family
10,250

 
2.5

 
17,507

 
4.0

Commercial real estate
7,295

 
1.8

 
7,377

 
1.7

Commercial & industrial

 

 

 

HELOC
1,090

 
0.3

 
884

 
0.2

Consumer

 

 

 

Total restructured loans (1)
416,838

 
100
%
 
433,278

 
100
%
 
 
 
 
 
 
 
 
Non-accrual loans:
 
 
 
 
 
 
 
Single-family residential
111,572

 
74.8
%
 
131,193

 
75.7
%
Construction - speculative
7,943

 
5.3

 
10,634

 
6.1

Construction - custom
105

 
0.1

 
539

 
0.3

Land - acquisition & development
12,177

 
8.2

 
13,477

 
7.8

Land - consumer lot loans
3,385

 
2.3

 
5,149

 
3.0

Multi-family
2,802

 
1.9

 
4,185

 
2.4

Commercial real estate
10,395

 
7.0

 
7,653

 
4.4

Commercial & industrial
210

 
0.1

 
16

 

HELOC
247

 
0.2

 
198

 
0.1

Consumer
197

 
0.1

 
383

 
0.2

Total non-accrual loans (2)
149,033

 
100
%
 
173,427

 
100
%
Total REO (3)
83,141

 
 
 
80,800

 
 
Total REHI (3)
13,901

 
 
 
18,678

 
 
Total non-performing assets
$
246,075

 
 
 
$
272,905

 
 
Total non-performing assets and performing restructured loans as a percentage of total assets
4.89
%
 
 
 
5.42
%
 
 
(1)    Restructured loans were as follows:
 
 
 
 
 
 
 
Performing
$
395,077

 
94.8
%
 
$
403,238

 
93.1
%
Non-accrual *
21,761

 
5.2

 
30,040

 
6.9

 
$
416,838

 
100
%
 
$
433,278

 
100
%
*
Included in "Total non-accrual loans" above
(2)
The Company recognized interest income on nonaccrual loans of approximately $1,576,000 in the six months ended March 31, 2013. Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $4,236,000 for the six months ended March 31, 2013.

In addition to the nonaccrual loans reflected in the above table, at March 31, 2013, the Company had $118,329,000 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 5.79% at March 31, 2013.

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



(3)
Total REO and REHI (included in real estate held for sale on the Statement of Financial Condition) includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. Excludes covered REO.
Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.
 
Most restructured loans are accruing and performing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 86.4% of restructured loans as of March 31, 2013. The concession for these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform it will be placed in non-accrual status when it is 90 days delinquent.
A loan that defaults and is subsequently modified would impact the Company’s delinquency trend, which is part of the qualitative risk factors component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the historical loss factors component of our general reserve calculation.
Allocation of the allowance for loan losses: The following table shows the allocation of the Company’s allowance for loan losses at the dates indicated.
 
 
March 31, 2013
 
September 30, 2012
 
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
$
77,422

 
72.6
%
 
1.4
%
 
$
81,815

 
74.5
%
 
1.4
%
Construction - speculative
7,757

 
1.6

 
6.4

 
12,060

 
1.7

 
9.3

Construction - custom
262

 
2.9

 
0.1

 
347

 
2.7

 
0.2

Land - acquisition & development
12,221

 
1.3

 
13.1

 
15,598

 
1.6

 
12.5

Land - consumer lot loans
3,941

 
1.8

 
3.0

 
4,937

 
1.8

 
3.5

Multi-family
4,272

 
9.8

 
0.6

 
5,280

 
9.2

 
0.7

Commercial real estate
4,156

 
5.2

 
1.1

 
1,956

 
4.1

 
0.6

Commercial & industrial
8,628

 
2.6

 
4.5

 
7,626

 
2.1

 
4.7

HELOC
1,031

 
1.5

 
0.9

 
965

 
1.5

 
0.9

Consumer
3,194

 
0.7

 
5.9

 
2,563

 
0.8

 
4.0

 
$
122,884

 
100
%
 
 
 
$
133,147

 
100
%
 
 
 __________________
(1)
Represents the total amount of the loan category as a % of total gross non-acquired and non-covered loans outstanding.
(2)
Represents the allocated allowance of the loan category as a % of total gross non-acquired and non-covered loans outstanding for the same loan category.
Customer accounts: Customer accounts increased $575,607,000, or 6.71%, to $9,152,225,000 at March 31, 2013 compared with $8,576,618,000 at September 30, 2012. The following table shows the composition of the Company’s customer accounts as of the dates shown:


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PART I – Financial Information
Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations





Deposits by Type
 
  
March 31, 2013
 
September 30, 2012
 
(In thousands)
 
 
 
Wtd. Avg.
Rate
 
 
 
Wtd. Avg.
Rate
Non-interest checking
$
424,844

 
4.6
%
 
%
 
$
272,242

 
3.2
%
 
%
Interest checking
827,364

 
9.0

 
0.12
%
 
622,397

 
7.3

 
0.14
%
Savings (passbook/stmt)
383,421

 
4.2

 
0.19
%
 
314,634

 
3.7

 
0.20
%
Money Market
1,889,084

 
20.6

 
0.22
%
 
1,737,180

 
20.2

 
0.26
%
CD’s
5,627,512

 
61.6

 
1.09
%
 
5,630,165

 
65.6

 
1.27
%
Total
$
9,152,225

 
100
%
 
0.73
%
 
$
8,576,618

 
100
%
 
0.90
%
FHLB advances and other borrowings: Total borrowings was increased $50,000,000 to $1,930,000,000 as of March 31, 2013 compared to $1,880,000,000 as of September 30, 2012. 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.


45

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



RESULTS OF OPERATIONS
Net Income: The quarter ended March 31, 2013, produced net income of $35,978,000 compared to $34,071,000 for the same quarter one year ago. For the six months ended March 31, 2013, net income totaled $71,260,000 compared to $67,489,000 for the same period one year ago. Net income for the quarter and six months ended March 31, 2013 benefited from overall lower credit costs, which included the provision for loan losses, and gains/losses on sales of REO. The provision for loan losses amounted to $0 and $3,600,000 for the quarter and six months ended March 31, 2013, respectively, as compared to $18,000,000 and $29,210,000 for the quarter and six month period one year ago. See related discussion in “Provision for Loan Losses” section below for reasons for the decrease in the provision for loan losses. In addition, gains/losses recognized on real estate acquired through foreclosure was a net loss of $4,003,000 and $7,322,000 for the quarter and six months ended March 31, 2013, respectively, as compared to net losses of $1,582,000 and $12,151,000 for the quarter and six month periods one year ago, respectively.
Net Interest Income: The largest component of the Company’s earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Net interest income is impacted primarily by two factors; first, the volume of earning assets and liabilities and second, the rate earned on those assets or the rate paid on those liabilities.
The following table sets forth certain information explaining changes in interest income and interest expense for the periods indicated compared to the same periods one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis:
 
 
Comparison of Quarters Ended
3/31/13 and 3/31/12
 
Comparison of Six months Ended
3/31/13 and 3/31/12
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(In thousands)
 
(In thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Loans and covered loans
$
(3,502
)
 
$
(7,391
)
 
$
(10,893
)
 
$
(7,768
)
 
$
(13,761
)
 
$
(21,529
)
Mortgaged-backed securities
(6,909
)
 
(11,131
)
 
(18,040
)
 
(11,924
)
 
(20,680
)
 
(32,604
)
Investments (1)
1,003

 
(146
)
 
857

 
1,439

 

 
1,439

All interest-earning assets
(9,408
)
 
(18,668
)
 
(28,076
)
 
(18,253
)
 
(34,441
)
 
(52,694
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
652

 
(5,973
)
 
(5,321
)
 
1,184

 
(11,683
)
 
(10,499
)
FHLB advances and other borrowings
(8,246
)
 
(2,930
)
 
(11,176
)
 
(16,486
)
 
(5,850
)
 
(22,336
)
All interest-bearing liabilities
(7,594
)
 
(8,903
)
 
(16,497
)
 
(15,302
)
 
(17,533
)
 
(32,835
)
Change in net interest income
$
(1,814
)
 
$
(9,765
)
 
$
(11,579
)
 
$
(2,951
)
 
$
(16,908
)
 
$
(19,859
)
___________________ 
(1)
Includes interest on cash equivalents and dividends on FHLB stock
Provision for Loan Losses: The Company recorded a $0 provision for loan losses during the quarter ended March 31, 2013, while an $18,000,000 provision was recorded for the same quarter one year ago. Non-performing assets amounted to $246,075,000, or 1.88% , of total assets at March 31, 2013, compared to $286,248,000, or 2.11%, of total assets one year ago. Non-accrual loans decreased from $166,153,000 at March 31, 2012, to $149,033,000 at March 31, 2013, a 10.3% decrease. The Company had net charge-offs of $3,943,000 for the quarter ended March 31, 2013, compared with $28,721,000 of net charge-offs for the same quarter one year ago. The decrease in the provision for loan losses is in response to four primary factors: first, the amount of NPA's improved year-over-year; second, non-accrual loans as a percentage of net loans decreased from 2.16% at March 31, 2012, to 2.00% at March 31, 2013; third, the percentage of loans 30 days or more delinquent decreased from from 2.95% at March 31, 2012, to 2.34% at March 31, 2013; and finally, the Company's exposure in the land A&D and speculative construction portfolios, the source of the majority of losses during this credit cycle, has decreased from a combined 3.5% of the gross loan portfolio at

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



March 31, 2012, to 2.9% at March 31, 2013. Management believes the allowance for loan losses, totaling $122,884,000, or 1.57% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio.
See Note F for further discussion and analysis of the allowance for loan losses for the quarter ended March 31, 2013.
Other Income: The quarter ended March 31, 2013 produced total other income of $6,046,000 compared to $5,028,000 for the same quarter one year ago, an increase of $1,018,000. The Company recognized a one time transaction fee of $1,000,000 related to new business products offerings during the quarter ended March 31, 2013.
Other Expense: The quarter ended March 31, 2013, produced total other expense of $41,164,000 compared to $36,812,000 for the same quarter one year ago, an 11.8% increase. The increase in total other expense over the same comparable period one year ago was primarily due to the increase of $2,892,000 in compensation and benefits, which, for the quarter ended March 31, 2013 included the addition of the employees from the South Valley acquisition as of October 31, 2012. Also impacted by this acquisition were the increases in occupancy expense and other expense of $731,000 and $1,972,000 respectively, for the quarter ended March 31, 2013 as compared to the prior year. Total other expense for the quarters ended March 31, 2013 and 2012 equaled 1.26% and 1.08%, respectively, of average assets. The number of staff, including part-time employees on a full-time equivalent basis, was 1,439 and 1,248 at March 31, 2013 and 2012, respectively. FDIC insurance expense decreased to $3,107,000 for the three months ended March 31, 2013 as compared to $4,350,000 for the same quarter one year ago. The FDIC instituted a new assessment basis in the fourth quarter of fiscal 2011, which resulted in an overall lower insurance expense for the Company.
Taxes: Income taxes decreased to $17,924,000 for the quarter ended March 31, 2013, as compared to $19,165,000 for the same period one year ago. During the quarter ended March 31, 2013, the Company settled a tax dispute in its favor, resulting in a reduced effective tax rate of 33.25% compared to the quarter ended March 31, 2012 of 36.00%. The Company expects an effective tax rate of 36.00% going forward.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk
Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since September 30, 2012. 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 2012 Form 10-K.

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

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

47



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, 2012. 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 March 31, 2013.
 
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of  Publicly
Announced Plan (1)
 
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan at the
End of the Period
January 1, 2013 to January 31, 2013
302,400

 
$
16.69

 
302,400

 
3,189,616

February 1, 2013 to February 28, 2013

 

 

 
3,189,616

March 1, 2013 to March 31, 2013
196,382

 
17.46

 
196,382

 
2,993,234

Total
498,782

  
$
16.99

  
498,782

 
2,993,234

 ___________________
(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 31,956,264 shares have been authorized for repurchase.

 
 
 
 

Item 3.        Defaults Upon Senior Securities
Not applicable

Item 5.        Other Information
Not applicable

Item 6.        Exhibits
(a)
 
Exhibits
 
 
 
31.1
  
Section 302 Certification by the Chief Executive Officer
 
 
 
31.2
  
Section 302 Certification by the Chief Financial Officer
 
 
 
32
  
Section 906 Certification by the Chief Executive Officer and the Chief Financial Officer
 
 
 
101
  
Financial Statements from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2012 formatted in XBRL

48

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
May 13, 2013
/S/    ROY M. WHITEHEAD        
 
ROY M. WHITEHEAD
Chairman, President and Chief Executive Officer
 
 
May 13, 2013
/S/    BRENT J. BEARDALL        
 
BRENT J. BEARDALL
Executive Vice President and Chief
Financial Officer

49