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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
or
☐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)
(Zip Code)
Registrant’s telephone number, including area code (206) 624-7930
 
(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 ("Exchange Act") 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  ☒    No  ☐ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes   ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐   No  ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

The registrant had outstanding 77,761,773 shares of common stock as of January 29, 2020.

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


2
Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)



December 31, 2019September 30, 2019
(In thousands, except share data)
ASSETS
Cash and cash equivalents$483,805  $419,158  
Available-for-sale securities, at fair value
1,495,586  1,485,742  
Held-to-maturity securities, at amortized cost
1,360,694  1,443,480  
Loans receivable, net of allowance for loan losses of $132,513 and $131,534
11,904,861  11,930,575  
Interest receivable46,725  48,857  
Premises and equipment, net245,792  274,015  
Real estate owned6,339  6,781  
FHLB and FRB stock123,990  123,990  
Bank owned life insurance223,533  222,076  
Intangible assets, including goodwill of $302,231 and $301,368
310,477  309,247  
Other assets221,359  210,989  
$16,423,161  $16,474,910  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts$7,315,121  $7,083,801  
Time deposit accounts4,617,017  4,906,963  
11,932,138  11,990,764  
FHLB advances2,250,000  2,250,000  
Advance payments by borrowers for taxes and insurance20,899  57,830  
Federal and state income tax liabilities, net19,443  5,104  
Accrued expenses and other liabilities149,772  138,217  
14,372,252  14,441,915  
Commitments and contingencies (see Note I)
Shareholders’ equity
Common stock, $1.00 par value, $300,000,000 shares authorized; 135,720,374 and 135,539,806 shares issued; 78,107,870 and 78,841,463 shares outstanding
135,720  135,540  
Additional paid-in capital1,673,666  1,672,417  
Accumulated other comprehensive income (loss), net of taxes15,986  15,292  
Treasury stock, at cost; 57,612,504 and 56,698,343 shares
(1,159,642) (1,126,163) 
Retained earnings1,385,179  1,335,909  
2,050,909  2,032,995  
$16,423,161  $16,474,910  



SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended December 31,
 20192018
(In thousands, except share data)
INTEREST INCOME
Loans receivable$142,146  $137,065  
Mortgage-backed securities15,612  19,192  
Investment securities and cash equivalents7,066  6,365  
164,824  162,622  
INTEREST EXPENSE
Customer accounts31,481  26,579  
FHLB advances13,658  16,891  
45,139  43,470  
Net interest income119,685  119,152  
Provision (release) for loan losses(1,000) (500) 
Net interest income after provision (release)120,685  119,652  
OTHER INCOME
Gain (loss) on sale of investment securities—  (9) 
Loan fee income1,804  970  
Deposit fee income6,260  6,243  
Other income38,312  11,805  
46,376  19,009  
OTHER EXPENSE
Compensation and benefits36,631  33,883  
Occupancy10,135  9,268  
FDIC insurance premiums2,470  2,862  
Product delivery4,267  4,021  
Information technology17,107  9,040  
Other expense12,026  12,598  
82,636  71,672  
Gain (loss) on real estate owned, net(886) 320  
Income before income taxes83,539  67,309  
Income tax expense17,836  14,367  
NET INCOME$65,703  $52,942  
PER SHARE DATA
Basic earnings per share$0.84  $0.65  
Diluted earnings per share0.84  0.65  
Dividends paid on common stock per share0.21  0.18  
Basic weighted average number of shares outstanding78,480,26481,791,852
Diluted weighted average number of shares outstanding78,535,29981,831,478

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4
Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 Three Months Ended December 31,
 20192018
(In thousands)
Net income$65,703  $52,942  
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on available-for-sale investment securities(2,149) 3,515  
Reclassification adjustment of net gain (loss) from sale of available-for-sale securities included in net income—  (9) 
Related tax benefit (expense)425  (799) 
(1,724) 2,707  
Net unrealized gain (loss) on borrowings cash flow hedges3,115  (10,499) 
Related tax benefit (expense)(697) 2,389  
2,418  (8,110) 
Other comprehensive income (loss) net of tax694  (5,403) 
Comprehensive income$66,397  $47,539  



SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5
Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED) 
(in thousands)Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance at October 1, 2019$135,540  $1,672,417  $1,335,909  $15,292  $(1,126,163) $2,032,995  
Net income—  —  65,703  —  —  65,703  
Other comprehensive income (loss)—  —  —  694  —  694  
Dividends on common stock ($0.21 per share)
—  —  (16,433) —  —  (16,433) 
Proceeds from stock-based awards3  47  —  —  —  50  
Stock-based compensation expense177  1,202  —  —  —  1,379  
Treasury stock acquired—  —  —  —  (33,479) (33,479) 
Balance at December 31, 2019$135,720  $1,673,666  $1,385,179  $15,986  $(1,159,642) $2,050,909  
(in thousands)Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance at October 1, 2018$135,343  $1,666,609  $1,188,971  $8,294  $(1,002,309) $1,996,908  
Net income—  —  52,942  —  —  52,942  
Other comprehensive income (loss)—  —  —  (5,403) —  (5,403) 
Dividends on common stock ($0.18 per share)
—  —  (14,638) —  —  (14,638) 
Proceeds from stock-based awards17  442  —  —  —  459  
Stock-based compensation expense97  1,654  —  —  —  1,751  
Exercise of stock warrants39  (39) —  —  —  —  
Treasury stock acquired—  —  —  —  (48,930) (48,930) 
Balance at December 31, 2018$135,496  $1,668,666  $1,227,275  $2,891  $(1,051,239) $1,983,089  


















SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6
Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 Three Months Ended December 31,
 20192018
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$65,703  $52,942  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion expense, net15,275  7,388  
Stock-based compensation expense1,379  1,751  
Provision (release) for loan losses(1,000) (500) 
Loss (gain) on sale of investment securities—  9  
Net realized (gain) loss on sales of premises, equipment, and real estate owned(32,734) (7,054) 
Impairment loss on premises and equipment5,931  —  
Decrease (increase) in accrued interest receivable2,132  (912) 
Decrease (increase) in federal and state income tax receivable—  1,804  
Decrease (increase) in cash surrender value of bank owned life insurance(1,457) (1,497) 
Decrease (increase) in other assets(3,793) 16,816  
Increase (decrease) in federal and state income tax liabilities14,067  —  
Increase (decrease) in accrued expenses and other liabilities8,092  (10,482) 
Net cash provided by (used in) operating activities73,595  60,265  
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans and principal repayments, net20,131  (222,257) 
FHLB & FRB stock purchased(77,200) (164,200) 
FHLB & FRB stock redeemed77,200  155,800  
Available-for-sale securities purchased(82,028) (172,076) 
Principal payments and maturities of available-for-sale securities69,085  38,118  
Proceeds from sales of available-for-sale securities—  491  
Principal payments and maturities of held-to-maturity securities81,329  37,736  
Proceeds from sales of real estate owned820  3,915  
Cash paid for acquisitions(1,725) —  
Proceeds from sales of premises and equipment53,790  10,233  
Premises and equipment purchased and REO improvements(4,931) (18,562) 
Net cash provided by (used in) investing activities136,471  (330,802) 
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts(58,626) 174,623  
Proceeds from borrowings1,930,000  4,105,000  
Repayments of borrowings(1,930,000) (3,895,000) 
Proceeds from stock-based awards50  459  
Dividends paid on common stock(16,433) (14,638) 
Treasury stock purchased(33,479) (48,930) 
Increase (decrease) in borrower advances related to taxes and insurance, net(36,931) (36,252) 
Net cash provided by (used in) financing activities(145,419) 285,262  
Increase (decrease) in cash and cash equivalents64,647  14,725  
Cash, cash equivalents and restricted cash at beginning of period419,158  268,650  
Cash, cash equivalents and restricted cash at end of period$483,805  $283,375  

(CONTINUED)
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months Ended December 31,
 20192018
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure$272  $116  
Non-cash financing activities
Stock issued upon exercise of warrants—  1,082  
Cash paid during the period for
Interest45,954  44,177  



SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – Summary of Significant Accounting Policies

Company and Nature of Operations - Washington Federal Bank, National Association, a federally-insured national bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 24, 1917 in Ballard, Washington and is engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate. Washington Federal, Inc., a Washington corporation (the “Company”), was formed as the Bank’s holding company in November, 1994. As used throughout this document, the terms “Washington Federal” or the “Company” refer to the Company and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank, National Association. The Company is headquartered in Seattle, Washington. The Bank conducts its activities through a network of 234 bank branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico and Texas.

Basis of Presentation - The Company has prepared the consolidated unaudited interim financial statements included in this report. All intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation are reflected in the interim financial statements.

The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2019 Annual Report on Form 10-K (“2019 Annual Financial Statements”). Interim results are not necessarily indicative of results for a full year.

Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2019 Annual Financial Statements. There have not been any material changes in the Company's significant accounting policies compared to those contained in its 2019 Annual Financial Statements for the year ended September 30, 2019.

Restricted Cash Balances - Based on the level of vault cash on hand, the Company was not required to maintain cash reserve balances with the Federal Reserve Bank as of December 31, 2019. As of December 31, 2019 and September 30, 2019, the Company pledged cash collateral related to derivative contracts of $20,400,000 and $31,850,000, respectively.

Equity Securities - The Company records equity securities within Other assets in its Consolidated Statements of Financial Condition. Investments in equity securities with readily determinable fair values (marketable) are measured at fair value, with changes in the fair value recognized as a component of Other income in the Consolidated Statements of Operations. Investments in equity investments that do not have readily determinable fair values (non-marketable) are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, also referred to as the measurement alternative. Any adjustments to the carrying value of these investments are recorded in Other income in the Consolidated Statements of Operations.


NOTE B – New Accounting Pronouncements

In April 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period; early adoption is permitted. The Company previously adopted both ASU 2017-12 and ASU 2016-01 and does not expect the amendments of ASU 2019-04 will have a material impact on its consolidated financial statements. The Company is continuing to evaluate the impact of ASU 2016-13 and will consider the amendments of ASU 2019-04 as part of that process.

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


In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including reasonably certain renewal periods. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is assessing the impact that this guidance will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU adds, eliminates, and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the added disclosure requirements until their effective date. The Company early adopted this ASU beginning October 1, 2019 and removed or modified disclosures as permitted.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements. The ASU provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect to not separate non-lease components from leases when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (October 1, 2019 for the Company). The Company adopted this ASU beginning October 1, 2019 and elected both transition options.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The ASU, as amended, is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investments in leases and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the current framework of recognizing probable incurred losses and instead requires an entity to use its current estimate of all expected credit losses over the contractual life. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, an allowance for expected credit losses is recorded as an adjustment to the cost basis of the asset. Subsequent changes in estimated cash flows would be recorded as an adjustment to the allowance and through the statement of income.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security's cost basis.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For most debt securities, the transition approach requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period the guidance is effective. For other-than-temporarily impaired debt securities and PCD assets, the guidance will be applied prospectively. The Company is currently in the process of evaluating the impact of the amended guidance on its consolidated financial statements and the reserve for credit losses may increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Company’s loan, lease and held-to-maturity securities portfolios at the time of adoption.

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


In February 2016, the FASB issued ASU 2016-02, Leases. The ASU, as amended, requires lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The guidance also simplifies the accounting for sale and leaseback transactions and introduces new disclosure requirements for leasing arrangements. Accounting by lessors is largely unchanged. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU beginning October 1, 2019 utilizing the transition method allowed under ASU 2018-11 and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our historical lease classifications and our assessment on whether a contract is or contains a lease. We also elected to keep leases with an initial term of 12 months or less off the balance sheet. The adoption of this ASU resulted in an increase in other assets and an increase in other liabilities of $29,013,000 and $29,013,000, respectively. The Company recognized no cumulative effect adjustment to the beginning balance of retained earnings upon adoption.

NOTE C – Dividends and Share Repurchases

On November 22, 2019, the Company paid a regular dividend on common stock of $0.21 per share, which represented the 147th consecutive quarterly cash dividend. Dividends per share were $0.21 and $0.18 for the quarters ended December 31, 2019 and 2018, respectively. On January 22, 2020, the Company declared a regular dividend on common stock of $0.22 per share, which represents its 148th consecutive quarterly cash dividend. This dividend will be paid on February 21, 2020 to common shareholders of record on February 7, 2020.

For the three months ended December 31, 2019, the Company repurchased 914,161 shares at an average price of $36.62. As of December 31, 2019, there are 7,052,600 remaining shares authorized to be repurchased under the current Board approved share repurchase program.

NOTE D – Loans Receivable

The following table is a summary of loans receivable.
 December 31, 2019September 30, 2019
(In thousands)(In thousands)
Gross loans by category
   Single-family residential$5,702,071  42.5 %$5,835,194  43.8 %
   Construction2,174,313  16.2  2,038,052  15.3  
   Construction - custom538,234  4.0  540,741  4.1  
   Land - acquisition & development203,043  1.5  204,107  1.5  
   Land - consumer lot loans97,097  0.7  99,694  0.7  
   Multi-family1,436,715  10.7  1,422,674  10.7  
   Commercial real estate1,643,099  12.3  1,631,170  12.3  
   Commercial & industrial1,352,738  10.1  1,268,695  9.5  
   HELOC141,274  1.1  142,178  1.1  
   Consumer115,829  0.9  129,883  1.0  
Total gross loans13,404,413  100 %13,312,388  100 %
   Less:
      Allowance for loan losses132,513  131,534  
      Loans in process1,312,282  1,201,341  
      Net deferred fees, costs and discounts54,757  48,938  
Total loan contra accounts1,499,552  1,381,813  
Net loans$11,904,861  $11,930,575  

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


The following table sets forth information regarding non-accrual loans.
 
 December 31, 2019September 30, 2019
 (In thousands, except ratio data)
Non-accrual loans:
Single-family residential$23,014  76.5 %$25,271  74.9 %
Land - acquisition & development86  0.3  169  0.5  
Land - consumer lot loans334  1.1  246  0.7  
Commercial real estate5,557  18.5  5,835  17.3  
Commercial & industrial467  1.5  1,292  3.8  
HELOC630  2.1  907  2.7  
Consumer1  0.0  11  0.0  
Total non-accrual loans$30,089  100 %$33,731  100 %
% of total net loans0.25 %0.28 %

The Company recognized interest income on non-accrual loans of approximately $497,000 in the three months ended December 31, 2019. Had these loans been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $353,000 for the three months ended December 31, 2019. Recognized interest income for the three months ended December 31, 2019 was higher than what otherwise would have been recognized in the period due to the collection of past due amounts. Interest cash flows collected on non-accrual loans vary from period to period as those loans are brought current or are paid off.

The following tables provide details regarding delinquent loans.
 
December 31, 2019Loans ReceivableDays Delinquent Based on $ Amount of Loans% based
on $
Type of LoanNet of Loans In ProcessCurrent30  60  90  Total Delinquent
(In thousands, except ratio data)
Single-family residential$5,702,058  $5,675,672  $6,077  $3,718  $16,591  $26,386  0.46 %
Construction1,189,457  1,188,042  —  1,415  —  1,415  0.12  
Construction - custom259,944  259,944  —  —  —  —  —  
Land - acquisition & development153,942  153,056  810  76  —  886  0.58  
Land - consumer lot loans97,097  96,635  180  136  146  462  0.48  
Multi-family1,436,693  1,436,556  137  —  —  137  0.01  
Commercial real estate1,643,099  1,638,407  602  60  4,030  4,692  0.29  
Commercial & industrial1,352,738  1,352,449  223  10  56  289  0.02  
HELOC141,274  139,892  530  427  425  1,382  0.98  
Consumer115,829  115,248  294  184  103  581  0.50  
Total Loans$12,092,131  $12,055,901  $8,853  $6,026  $21,351  $36,230  0.30 %
Delinquency %99.70%  0.07%  0.05%  0.18%  0.30%  


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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


September 30, 2019Loans ReceivableDays Delinquent Based on $ Amount of Loans% based
on $
Type of LoanNet of Loans In ProcessCurrent30  60  90  Total Delinquent
(In thousands, except ratio data)
Single-family residential$5,835,186  $5,809,239  $3,672  $3,211  $19,064  $25,947  0.44 %
Construction1,164,889  1,164,889  —  —  —  —  —  
Construction - custom255,505  255,505  —  —  —  —  —  
Land - acquisition & development161,194  161,194  —  —  —  —  —  
Land - consumer lot loans99,694  98,916  112  619  47  778  0.78  
Multi-family1,422,652  1,422,652  —  —  —  —  —  
Commercial real estate1,631,171  1,625,509  1,614  285  3,763  5,662  0.35  
Commercial & industrial1,268,695  1,267,828  —  —  867  867  0.07  
HELOC142,178  140,718  580  183  697  1,460  1.03  
Consumer129,883  129,227  295  117  244  656  0.51  
Total Loans$12,111,047  $12,075,677  $6,273  $4,415  $24,682  $35,370  0.29 %
Delinquency %99.71%  0.05%  0.04%  0.20%  0.29%  

There are no loans greater than 90 days delinquent and still accruing interest as of either date.

Most loans restructured in TDRs are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. As of December 31, 2019, 96.0% of the Company's $110,835,000 in TDRs were classified as performing. Each request for modification is individually evaluated for merit and likelihood of success. The concession granted in a loan modification is typically a payment reduction through a rate reduction of between 100 to 200 basis points for a specific term, usually six to twenty four months. Interest-only payments may also be approved during the modification period. Principal forgiveness is not an available option for restructured loans. As of December 31, 2019, single-family residential loans comprised 92.2% of TDRs.

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

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE E – Allowance for Losses on Loans
The following tables summarize the activity in the allowance for loan losses. 

Three Months Ended December 31, 2019Beginning
Allowance		Charge-offsRecoveriesProvision &
Transfers		Ending
Allowance
 (In thousands)
Single-family residential$30,988  $(15) $261  $(534) $30,700  
Construction32,304  —  54  (66) 32,292  
Construction - custom1,369  —  —  30  1,399  
Land - acquisition & development9,155  (11) 1,460  (1,858) 8,746  
Land - consumer lot loans2,143  (70) 10  7  2,090  
Multi-family7,391  —  498  (485) 7,404  
Commercial real estate13,170  (98) 368  (405) 13,035  
Commercial & industrial31,450  (50) 144  1,996  33,540  
HELOC1,103  —  93  (92) 1,104  
Consumer2,461  (374) 309  (193) 2,203  
$131,534  $(618) $3,197  $(1,600) $132,513  

Three Months Ended December 31, 2018Beginning
Allowance		Charge-offsRecoveriesProvision &
Transfers		Ending
Allowance
 (In thousands)
Single-family residential$33,033  $(25) $230  $(1,754) $31,484  
Construction31,317  —  —  146  31,463  
Construction - custom1,842  —  —  84  1,926  
Land - acquisition & development7,978  —  1,782  (604) 9,156  
Land - consumer lot loans2,164  (72) 265  (213) 2,144  
Multi-family8,329  —  —  (445) 7,884  
Commercial real estate11,852  (339) 525  673  12,711  
Commercial & industrial28,702  (179) 33  1,723  30,279  
HELOC781  (886) 1  1,168  1,064  
Consumer3,259  (140) 213  (278) 3,054  
$129,257  $(1,641) $3,049  $500  $131,165  

The Company recorded a $1,000,000 release of loan loss allowance for the three months ended December 31, 2019, compared to a $500,000 release for the three months ended December 31, 2018. Reserving for new loan originations has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $2,579,000 for the three months ended December 31, 2019, compared to net recoveries of $1,408,000 during the three months ended December 31, 2018.

Non-performing assets were $39,742,000, or 0.24% of total assets, at December 31, 2019, compared to $43,826,000, or 0.27% of total assets, at September 30, 2019. Non-accrual loans were $30,089,000 at December 31, 2019, compared to $33,731,000 at September 30, 2019. Delinquencies, as a percent of total loans, were 0.30% at December 31, 2019, compared to 0.29% at September 30, 2019.

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


The following tables show loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves.
 
December 31, 2019Loans Collectively Evaluated for ImpairmentLoans Individually Evaluated for Impairment
 Allowance AllocationRecorded Investment of LoansRatioAllowance AllocationRecorded Investment of LoansRatio
 (In thousands, except ratio data)(In thousands, except ratio data)
Single-family residential$30,700  $5,686,482  0.5 %$—  $19,993  0.0 %
Construction32,292  1,189,457  2.7  —  —  —  
Construction - custom1,399  259,944  0.5  —  —  —  
Land - acquisition & development8,731  153,856  5.7  15  86  17.4  
Land - consumer lot loans2,090  93,272  2.2  —  295  0.0  
Multi-family7,403  1,436,313  0.5  1  380  0.3  
Commercial real estate12,861  1,632,612  0.8  174  10,487  1.7  
Commercial & industrial33,470  1,352,116  2.5  70  641  10.9  
HELOC1,104  139,963  0.8  —  483  0.0  
Consumer2,203  115,749  1.9  —  2  0.0  
$132,253  $12,059,764  1.1 %$260  $32,367  0.8 %

September 30, 2019Loans Collectively Evaluated for ImpairmentLoans Individually Evaluated for Impairment
 Allowance AllocationRecorded Investment of LoansRatioAllowance AllocationRecorded Investment of LoansRatio
 (In thousands, except ratio data)(In thousands, except ratio data)
Single-family residential$30,988  $5,822,200  0.5 %$—  $17,978  0.0 %
Construction32,304  1,164,889  2.8  —  —  —  
Construction - custom1,369  255,505  0.5  —  —  —  
Land - acquisition & development9,135  160,964  5.7  20  230  8.7  
Land - consumer lot loans2,143  95,574  2.2  —  375  0.0  
Multi-family7,387  1,422,266  0.5  4  385  1.0  
Commercial real estate12,847  1,618,406  0.8  323  12,765  2.5  
Commercial & industrial31,358  1,266,913  2.5  92  1,805  5.1  
HELOC1,103  140,378  0.8  —  837  0.0  
Consumer2,461  129,527  1.9  —  50  0.0  
$131,095  $12,076,622  1.1 %$439  $34,425  1.3 %

As of December 31, 2019, $132,253,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $260,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2019, $131,095,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $439,000 was specific reserves on loans deemed to be individually impaired.

The Company has an asset quality review function that analyzes its loan portfolio and reports the results of the review to its 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
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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 collection or liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.

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

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

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on loans based on risk rating categories as defined above.

December 31, 2019Internally Assigned Grade
 PassSpecial mentionSubstandardDoubtfulLossTotal Gross Loans
 (In thousands, except ratio data)
Loan type
  Single-family residential$5,676,712  $—  $25,359  $—  $—  $5,702,071  
  Construction2,174,313  —  —  —  —  2,174,313  
  Construction - custom538,234  —  —  —  —  538,234  
  Land - acquisition & development200,533  —  2,510  —  —  203,043  
  Land - consumer lot loans96,627  —  470  —  —  97,097  
  Multi-family1,432,895  —  3,820  —  —  1,436,715  
  Commercial real estate1,619,197  3,426  20,476  —  —  1,643,099  
  Commercial & industrial1,313,816  714  38,194  14  —  1,352,738  
  HELOC140,644  —  630  —  —  141,274  
  Consumer115,828  —  1  —  —  115,829  
Total gross loans$13,308,799  $4,140  $91,460  $14  $—  $13,404,413  
Total grade as a % of total gross loans99.29 %0.03 %0.68 %0.00 %— %


September 30, 2019Internally Assigned Grade
 PassSpecial mentionSubstandardDoubtfulLossTotal Gross Loans
 (In thousands, except ratio data)
Loan type
 Single-family residential$5,808,444  $—  $26,750  $—  $—  $5,835,194  
 Construction2,038,052  —  —  —  —  2,038,052  
 Construction - custom540,741  —  —  —  —  540,741  
 Land - acquisition & development200,283  —  3,824  —  —  204,107  
 Land - consumer lot loans98,828  —  866  —  —  99,694  
 Multi-family1,418,837  —  3,837  —  —  1,422,674  
 Commercial real estate1,602,634  2,754  25,782  —  —  1,631,170  
 Commercial & industrial1,229,891  18,125  20,679  —  —  1,268,695  
 HELOC141,271  —  907  —  —  142,178  
 Consumer129,872  —  11  —  —  129,883  
Total gross loans$13,208,853  $20,879  $82,656  $—  $—  $13,312,388  
Total grade as a % of total gross loans99.22 %0.16 %0.62 %— %— %









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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on gross loans based on borrower payment activity.

December 31, 2019Performing LoansNon-Performing Loans
 Amount% of Total
Gross  Loans		Amount% of Total
Gross  Loans
 (In thousands, except ratio data)
Single-family residential$5,679,057  99.6 %$23,014  0.4 %
Construction2,174,313  100.0  —  —  
Construction - custom538,234  100.0  —  —  
Land - acquisition & development202,957  100.0  86  0.0  
Land - consumer lot loans96,763  99.7  334  0.3  
Multi-family1,436,715  100.0  —  —  
Commercial real estate1,637,542  99.7  5,557  0.3  
Commercial & industrial1,352,271  100.0  467  0.0  
HELOC140,644  99.6  630  0.4  
Consumer115,828  100.0  1  0.0  
$13,374,324  99.8 %$30,089  0.2 %

September 30, 2019Performing LoansNon-Performing Loans
 Amount% of Total
Gross  Loans		Amount% of Total
Gross  Loans
 (In thousands, except ratio data)
Single-family residential$5,809,923  99.6 %$25,271  0.4 %
Construction2,038,052  100.0  —  —  
Construction - custom540,741  100.0  —  —  
Land - acquisition & development203,938  99.9  169  0.1  
Land - consumer lot loans99,448  99.8  246  0.2  
Multi-family1,422,674  100.0  —  —  
Commercial real estate1,625,335  99.6  5,835  0.4  
Commercial & industrial1,267,403  99.9  1,292  0.1  
HELOC141,271  99.4  907  0.6  
Consumer129,872  100.0  11  0.0  
$13,278,657  99.7 %$33,731  0.3 %

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables provide information on impaired loan balances and the related allowances by loan types. 

December 31, 2019Recorded
Investment		Unpaid
Principal
Balance		Related
Allowance		Average Recorded Investment
(Year-To-Date)
 (In thousands)
Impaired loans with no related allowance recorded:
Single-family residential$16,505  $17,474  $—  $17,242  
Land - acquisition & development—  —  —  39  
Land - consumer lot loans269  845  —  307  
Commercial real estate7,249  11,585  —  7,358  
Commercial & industrial437  4,508  —  776  
HELOC369  369  —  603  
Consumer2  84  —  26  
24,831  34,865  —  26,351  
Impaired loans with an allowance recorded:
Single-family residential102,164  104,506  1,110  107,103  
Land - acquisition & development86  150  15  89  
Land - consumer lot loans3,556  3,650  —  3,556  
Multi-family380  380  1  383  
Commercial real estate3,238  3,462  174  3,703  
Commercial & industrial411  519  70  419  
HELOC942  957  —  946  
Consumer58  58  —  59  
110,835  113,682  1,370  (1) 116,258  
Total impaired loans:
Single-family residential118,669  121,980  1,110  124,345  
Land - acquisition & development86  150  15  128  
Land - consumer lot loans3,825  4,495  —  3,863  
Multi-family380  380  1  383  
Commercial real estate10,487  15,047  174  11,061  
Commercial & industrial848  5,027  70  1,195  
HELOC1,311  1,326  —  1,549  
Consumer60  142  —  85  
$135,666  $148,547  $1,370  (1) $142,609  

(1)Includes $260,000 of specific reserves and $1,110,000 included in the general reserves.


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(UNAUDITED)


September 30, 2019Recorded
Investment		Unpaid
Principal
Balance		Related
Allowance		Average Recorded Investment
(Year-To-Date)
 (In thousands)
Impaired loans with no related allowance recorded:
Single-family residential$17,979  $19,252  $—  $16,685  
Construction—  —  —  1,172  
Construction - custom—  —  —  251  
Land - acquisition & development78  143  —  290  
Land - consumer lot loans344  848  —  287  
Multi-family—  —  —  286  
Commercial real estate7,467  11,881  —  8,890  
Commercial & industrial1,114  5,312  —  7,168  
HELOC837  931  —  597  
Consumer50  119  —  23  
27,869  38,486  —  35,649  
Impaired loans with an allowance recorded:
Single-family residential112,042  114,609  2,208  125,976  
Land - acquisition & development91  152  —  99  
Land - consumer lot loans3,556  3,695  20  4,324  
Multi-family385  385  4  418  
Commercial real estate4,168  5,298  323  5,160  
Commercial & industrial426  691  92  2,535  
HELOC949  963  —  961  
Consumer60  282  —  65  
121,677  126,075  2,647  (1) 139,538  
Total impaired loans:
Single-family residential130,021  133,861  2,208  142,661  
Construction—  —  —  1,172  
Construction - custom—  —  —  251  
Land - acquisition & development169  295  —  389  
Land - consumer lot loans3,900  4,543  20  4,611  
Multi-family385  385  4  704  
Commercial real estate11,635  17,179  323  14,050  
Commercial & industrial1,540  6,003  92  9,703  
HELOC1,786  1,894  —  1,558  
Consumer110  401  —  88  
$149,546  $164,561  $2,647  (1) $175,187  

(1)Includes $439,000 of specific reserves and $2,208,000 included in the general reserves.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE F – Fair Value Measurements
FASB ASC 820, Fair Value Measurement ("ASC 820") defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that 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.

The Company has established and documented the process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis.
Measured on a Recurring Basis
Available-for-Sale Securities and Derivative Contracts
Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges are measured using the closing price in an active market and are considered a Level 1 input method.
The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges, mortgage pool hedges and borrowings hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.
 
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables present the balance of assets and liabilities measured at fair value on a recurring basis.

 December 31, 2019
 Level 1Level 2Level 3Total
 (In thousands)
Financial Assets
Available-for-sale securities:
U.S. government and agency securities$—  $333,514  $—  $333,514  
Municipal bonds—  22,490  —  22,490  
Corporate debt securities—  210,649  —  210,649  
Mortgage-backed securities
Agency pass-through certificates—  928,933  —  928,933  
Total available-for-sale securities—  1,495,586  —  1,495,586  
Client swap program hedges—  14,973  —  14,973  
Mortgage loan fair value hedges—  4,765  —  4,765  
Total financial assets$—  $1,515,324  $—  $1,515,324  
Financial Liabilities
Client swap program hedges$—  $14,973  $—  $14,973  
Commercial loan fair value hedges—  2,753  —  2,753  
Borrowings cash flow hedges—  4,762  —  4,762  
Total financial liabilities$—  $22,488  $—  $22,488  

 September 30, 2019
 Level 1Level 2Level 3Total
 (In thousands)
Financial Assets
Available-for-sale securities:
U.S. government and agency securities$—  $270,778  $—  $270,778  
Municipal bonds—  22,642  —  22,642  
Corporate debt securities—  209,763  —  209,763  
Mortgage-backed securities
Agency pass-through certificates—  982,559  —  982,559  
Total available-for-sale securities—  1,485,742  —  1,485,742  
Client swap program hedges—  20,381  —  20,381  
Mortgage loan fair value hedges—  1,608  —  1,608  
Total financial assets$—  $1,507,731  $—  $1,507,731  
Financial Liabilities
Client swap program hedges$—  $20,381  $—  $20,381  
Commercial loan fair value hedges—  4,288  —  4,288  
Borrowings cash flow hedges—  7,877  —  7,877  
Total financial liabilities$—  $32,546  $—  $32,546  

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(UNAUDITED)


Measured on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned ("REO"). REO consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral or REO property.

When management determines that the fair value of the collateral or the real estate owned requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the impaired loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2019 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 real estate owned where the fair value of the property was less than the cost basis.

The following tables present the aggregated balance of assets that were measured at fair value on a nonrecurring basis at December 31, 2019 and December 31, 2018, and the total gains (losses) resulting from those fair value adjustments during the respective periods. The estimated fair value measurements are shown gross of estimated selling costs.
 
 December 31, 2019Three Months Ended December 31, 2019
 Level 1Level  2Level  3TotalTotal Gains (Losses)
 (In thousands)(In thousands)
Impaired loans (1)$—  $—  $70  $70  $(299) 
Real estate owned (2)—  —  976  976  (2) 
Balance at end of period$—  $—  $1,046  $1,046  $(301) 

(1)The gains (losses) represent remeasurements of collateral-dependent loans.
(2)The gains (losses) represent remeasurements of REO.

December 31, 2018Three Months Ended December 31, 2018
Level 1Level  2Level  3TotalTotal Gains (Losses)
(In thousands)(In thousands)
Impaired loans (1)$—  $—  $1,970  $1,970  $(726) 
Real estate owned (2)—  —  520  520  (32) 
Balance at end of period$—  $—  $2,490  $2,490  $(758) 

(1)The gains (losses) represent remeasurements of collateral-dependent loans.
(2)The gains (losses) represent remeasurements of REO.

Fair Values of Financial Instruments
FASB ASC 825, Financial Instruments ("ASC 825") 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. 
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 December 31, 2019September 30, 2019
 Level in Fair Value HierarchyCarrying
Amount		Estimated
Fair Value		Carrying
Amount		Estimated
Fair Value
 ($ in thousands)
Financial assets
Cash and cash equivalents1  $483,805  $483,805  $419,158  $419,158  
Available-for-sale securities
U.S. government and agency securities2  333,514  333,514  270,778  270,778  
Municipal bonds2  22,490  22,490  22,642  22,642  
Corporate debt securities2  210,649  210,649  209,763  209,763  
Mortgage-backed securities
Agency pass-through certificates2  928,933  928,933  982,559  982,559  
Total available-for-sale securities1,495,586  1,495,586  1,485,742  1,485,742  
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates2  1,348,594  1,368,314  1,428,480  1,448,088  
                           Commercial MBS2  12,100  12,106  15,000  15,007  
Total held-to-maturity securities1,360,694  1,380,420  1,443,480  1,463,095  
Loans receivable3  11,904,861  12,479,483  11,930,575  12,617,600  
FHLB and FRB stock2  123,990  123,990  123,990  123,990  
        Other assets - client swap program hedges2  14,973  14,973  20,381  20,381  
        Other assets - mortgage loan fair value hedges2  4,765  4,765  1,608  1,608  
Financial liabilities
Time deposits2  4,617,017  4,642,830  4,906,963  4,937,847  
FHLB advances2  2,250,000  2,279,222  2,250,000  2,282,887  
        Other liabilities - client swap program hedges2  14,973  14,973  20,381  20,381  
Other liabilities - commercial loan fair value hedges2  2,753  2,753  4,288  4,288  
        Other liabilities - borrowings cash flow hedges2  4,762  4,762  7,877  7,877  

The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value. 
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities that are exchange traded are considered a Level 1 input method.
Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base price, with further loan level pricing adjustments made based on individual loan characteristics such as FICO score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using a discount rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as, a annual loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
FHLB and FRB stock – The fair value is based upon the par value of the stock that equates to its carrying value.
Time deposits – The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits with similar remaining maturities.
FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest rate swaps – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counterparty to offset its interest rate risk. The Company also uses interest rate swaps for various fair value hedges and cash flow hedges. The fair value of these interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.
The following tables provide details about the amortized cost and fair value of available-for-sale and held-to-maturity securities.
 December 31, 2019
 Amortized
Cost		Gross UnrealizedFair
Value		Yield
 GainsLosses
 ($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
5 to 10 years$63,512  $2  $(979) $62,535  2.27 %
Over 10 years272,314  14  (1,349) 270,979  2.82  
Corporate debt securities due
Within 1 year43,938  307  —  44,245  3.41  
1 to 5 years70,000  977  —  70,977  3.01  
5 to 10 years93,008  2,419  —  95,427  2.95  
Municipal bonds due
1 to 5 years1,437  23  —  1,460  1.95  
Over 10 years20,298  732  —  21,030  6.45  
Mortgage-backed securities
Agency pass-through certificates905,556  24,998  (1,621) 928,933  3.19  
1,470,063  29,472  (3,949) 1,495,586  3.11  
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates1,348,594  20,018  (298) 1,368,314  3.15  
Commercial MBS12,100  6  —  12,106  2.61  
1,360,694  20,024  (298) 1,380,420  3.14  
$2,830,757  $49,496  $(4,247) $2,876,006  3.12 %
 
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 September 30, 2019
 Amortized
Cost		Gross UnrealizedFair
Value		Yield
 GainsLosses
 ($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
5 to 10 years$65,287  $39  $(629) $64,697  2.43 %
Over 10 years207,067  1  (987) 206,081  3.02  
Corporate debt securities due
Within 1 year43,903  411  —  44,314  3.65  
1 to 5 years70,000  689  (50) 70,639  3.29  
5 to 10 years92,931  1,879  —  94,810  3.27  
Municipal bonds due
1 to 5 years1,430  14  —  1,444  1.94  
Over 10 years20,303  895  —  21,198  6.45  
Mortgage-backed securities
Agency pass-through certificates957,150  26,533  (1,124) 982,559  3.29  
1,458,071  30,461  (2,790) 1,485,742  3.27  
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates1,428,480  19,945  (337) 1,448,088  3.15  
Commercial MBS15,000  7  —  15,007  2.89  
1,443,480  19,952  (337) 1,463,095  3.15  
$2,901,551  $50,413  $(3,127) $2,948,837  3.21 %

For available-for-sale investment securities, there were purchases of $82,028,000 during the three months ended December 31, 2019 and purchases of $172,076,000 during the three months ended December 31, 2018. There were no sales of available-for-sale investment securities during the three months ended December 31, 2019 and sales of $491,000 during the three months ended December 31, 2018. For held-to-maturity investment securities, there were no purchases during the three months ended December 31, 2019 and no purchases during the three months ended December 31, 2018. There were no sales of held-to-maturity investment securities during either period. Substantially all of the agency mortgage-backed securities have contractual due dates that exceed 10 years.
The following tables show the gross unrealized losses and fair value of securities as of December 31, 2019 and September 30, 2019, by length of time that individual securities in each category have been in a continuous loss position. The decline in fair value since purchase is attributable to changes in interest rates. Because the Company does not intend to sell these securities and does not consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired.
 
December 31, 2019Less than 12 months12 months or moreTotal
 Unrealized
Gross Losses		Fair
Value		Unrealized
Gross Losses		Fair
Value		Unrealized
Gross Losses		Fair
Value
 (In thousands)
U.S. government and agency securities$(701) $156,068  $(1,627) $122,155  $(2,328) $278,223  
Mortgage-backed securities(660) 125,407  (1,259) 209,355  (1,919) 334,762  
$(1,361) $281,475  $(2,886) $331,510  $(4,247) $612,985  

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


September 30, 2019Less than 12 months12 months or moreTotal
 Unrealized
Gross Losses		Fair
Value		Unrealized
Gross Losses		Fair
Value		Unrealized
Gross Losses		Fair
Value
 (In thousands)
Corporate debt securities$—  $—  $(50) $24,950  $(50) $24,950  
U.S. government and agency securities(656) 152,715  (960) 77,391  (1,616) 230,106  
Mortgage-backed securities(148) 87,895  (1,313) 270,802  (1,461) 358,697  
$(804) $240,610  $(2,323) $373,143  $(3,127) $613,753  


NOTE G – Derivatives and Hedging Activities

The following tables present the fair value, notional amount and balance sheet classification of derivative assets and liabilities at December 31, 2019 and September 30, 2019.

December 31, 2019Derivative AssetsDerivative Liabilities
Interest rate contract purposeBalance Sheet LocationNotionalFair ValueBalance Sheet LocationNotionalFair Value
(In thousands)(In thousands)
Client swap program hedgesOther assets$435,349  $14,973  Other liabilities$435,349  $14,973  
Commercial loan fair value hedgesOther assets—  —  Other liabilities93,316  2,753  
Mortgage loan fair value hedgesOther assets200,000  4,765  Other liabilities—  —  
Borrowings cash flow hedgesOther assets—  —  Other liabilities700,000  4,762  
$635,349  $19,738  $1,228,665  $22,488  


September 30, 2019Derivative AssetsDerivative Liabilities
Interest rate contract purposeBalance Sheet LocationNotionalFair ValueBalance Sheet LocationNotionalFair Value
(In thousands)(In thousands)
Client swap program hedgesOther assets$425,607  $20,381  Other liabilities$425,607  $20,381  
Commercial loan fair value hedgesOther assets—  —  Other liabilities95,645  4,288  
Mortgage loan fair value hedgesOther assets200,000  1,608  Other liabilities—  —  
Borrowings cash flow hedgesOther assets—  —  Other liabilities700,000  7,877  
$625,607  $21,989  $1,221,252  $32,546  

The Company enters into interest rate swaps to hedge interest rate risk. These arrangements include hedges of individual fixed rate commercial loans and also hedges of a specified portion of pools of prepayable fixed rate mortgage loans under the "last of layer" method. These relationships qualify as fair value hedges under FASB ASC 815, Derivatives and Hedging ("ASC 815"), which provides for offsetting of the recognition of gains and losses of the respective interest rate swap and the hedged items. Gains and losses on interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.

Upon electing to apply ASC 815 fair value hedge accounting, the carrying value of the hedged item is adjusted to reflect the cumulative impact of changes in fair value attributable to the hedged risk. The hedge basis adjustment remains with the hedged item until the hedged item is de-recognized from the balance sheet. The following tables present the impact of fair value hedge accounting on the carrying value of the hedged items at December 31, 2019 and September 30, 2019.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


December 31, 2019
Balance sheet line item in which hedged item is recordedCarrying value of hedged itemsCumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items
(In thousands) 
Loans receivable (1) (2)$1,529,862  $2,012  
$1,529,862  $2,012  

(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At December 31, 2019, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $1,439,103,000, the cumulative basis adjustment associated with the hedging relationships was $4,765,000, and the amount of the designated hedged items was $200,000,000.

(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At December 31, 2019, the amortized cost basis of the hedged commercial loans was $90,759,000 and the cumulative basis adjustment associated with the hedging relationships was $(2,753,000).

September 30, 2019
Balance sheet line item in which hedged item is recordedCarrying value of hedged itemsCumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items
(In thousands) 
Loans receivable (1) (2)$1,612,208  $(2,680) 
$1,612,208  $(2,680) 

(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At September 30, 2019, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $1,520,647,000, the cumulative basis adjustment associated with the hedging relationships was $1,608,000, and the amount of the designated hedged items was $200,000,000.

(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At September 30, 2019, the amortized cost basis of the hedged commercial loans was $91,561,000 and the cumulative basis adjustment associated with the hedging relationships was $(4,288,000).


The Company has entered into interest rate swaps to convert certain short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of changes in future cash flows resulting from increasing interest rates. For qualifying cash flow hedges under ASC 815, gains and losses on the interest rate swaps are recorded in accumulated other comprehensive income ("AOCI") and then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line item as the hedged cash flows. As of December 31, 2019, the maturities for hedges of adjustable rate borrowings ranged from less than one to seven years, with the weighted average being 2.4 years.

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


The following tables present the gain (loss) recognized in AOCI on derivative instruments related to cash flow hedges on borrowings for the periods presented.

(In thousands)Three Months Ended December 31,
Amount of gain/(loss) recognized in AOCI2019
Interest rate contracts:
Pay fixed/receive floating swaps on borrowings cash flow hedges$3,115  
Total pre-tax gain/(loss) recognized in AOCI $3,115  


(In thousands)Three Months Ended December 31,
Amount of gain/(loss) recognized in AOCI2018
Interest rate contracts:
Pay fixed/receive floating swaps on borrowings cash flow hedges$(10,499) 
Total pre-tax gain/(loss) recognized in AOCI$(10,499) 


The following tables present the gain (loss) on derivative instruments in fair value and cash flow accounting hedging relationships under ASC 815 for the periods presented.

Three Months Ended December 31, 2019Interest income on loans receivableInterest expense on FHLB advances
(In thousands) 
Interest income/(expense), including the effects of fair value and cash flow hedges$142,146  $(13,658) 
Gain/(loss) on fair value hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$(7) 
Recognized on derivatives4,692  
Recognized on hedged items(4,593) 
Net income/(expense) recognized on fair value hedges$92  
Gain/(loss) on cash flow hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$(214) 
Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense—  
Net income/(expense) recognized on cash flow hedges$(214) 


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


Three Months Ended December 31, 2018Interest income on loans receivableInterest expense on FHLB advances
(In thousands) 
Interest income/(expense), including the effects of fair value and cash flow hedges$137,065  $(16,891) 
Gain/(loss) on fair value hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$19  
Recognized on derivatives(2,317) 
Recognized on hedged items2,279  
Net income/(expense) recognized on fair value hedges$(19) 
Gain/(loss) on cash flow hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$(551) 
Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense—  
Net income/(expense) recognized on cash flow hedges$(551) 

The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The interest rate swaps are derivatives under ASC 815, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the three months ended December 31, 2019 and 2018 as the changes in fair value of the receive fixed swap and pay fixed swap offset each other.

The following tables present the impact of derivative instruments (client swap program) that are not designated in accounting hedges under ASC 815 for the periods presented.

(In thousands)Three Months Ended December 31,
Derivative instrumentsClassification of gain/(loss) recognized in income on derivative instrument2019
Interest rate contracts:
Pay fixed/receive floating swapOther noninterest income$5,408  
Receive fixed/pay floating swapOther noninterest income(5,408) 
$—  


(In thousands)Three Months Ended December 31,
Derivative instrumentsClassification of gain/(loss) recognized in income on derivative instrument2018
Interest rate contracts:
Pay fixed/receive floating swapOther noninterest income$(9,390) 
Receive fixed/pay floating swapOther noninterest income9,390  
$—  

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


NOTE H – Revenue from Contracts with Customers

Since net interest income on financial assets and liabilities is outside the scope of ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"), a significant majority of our revenues are not subject to that guidance.

Revenue streams that are within the scope of ASC 606 are presented within non-interest income and are, in general, recognized as revenue at the same time the Company's obligation to the customer is satisfied. Most of the Company's customer contracts that are within the scope of the new guidance are cancelable by either party without penalty and are short-term in nature. These sources of revenue include depositor and other consumer and business banking fees, commission income, as well as debit and credit card interchange fees. In scope revenue streams represented approximately 4.4% of our total revenues for the three months ended December 31, 2019, compared to 4.9% for the three months ended December 31, 2018. As this standard is immaterial to our consolidated financial statements, the Company has omitted certain disclosures in ASC 606, including the disaggregation of revenue table. Sources of non-interest income within the scope of the guidance include the following:

Deposit related and other service charges (recognized in Deposit fee income) - The Company's deposit accounts are governed by standardized contracts customary in the industry. Revenues are earned at a point in time or over time (monthly) from account maintenance fees and charges for specific transactions such as wire transfers, stop payment orders, overdrafts, debit card replacements, check orders and cashier’s checks. The Company’s performance obligation related to each of these fees is generally satisfied, and the related revenue recognized, at the time the service is provided (point in time or monthly). The Company is principal in each of these contracts.

Debit and Credit Card Interchange Fees (recognized in Deposit fee income) - The Company receives interchange fees from the debit card or credit card payment network based on transactions involving debit or credit cards issued by the Company, generally measured as a percentage of the underlying transaction. Interchange fees from debit and credit card transactions are recognized as the transaction processing services are provided by the network. The Company acts as an agent in the card payment network arrangement so the interchange fees are recorded net of any expenses paid to the principal (the card payment network in this case).

Insurance Agency Commissions (recognized in Other income) - WAFD Insurance Group, Inc. is a wholly-owned subsidiary of Washington Federal Bank, N.A. that operates as an insurance agency, selling and marketing property and casualty insurance policies for a small number of high-quality insurance carriers. WAFD Insurance Group, Inc. earns revenue in the form of commissions paid by the insurance carriers for policies that have been sold. In addition to the origination commission, WAFD Insurance Group, Inc. may also receive contingent incentive fees based on the volume of business generated for the insurance carrier and based on policy renewal rates.


NOTE I – Commitments and Contingencies

Lease Commitments - The Company’s lease commitments consist primarily of real estate property for branches and office space under various non-cancellable operating leases that expire between 2020 and 2070. The majority of the leases contain renewal options and provisions for increases in rental rates based on a predetermined schedule or an agreed upon index. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability.

Operating lease liabilities and right-of-use assets are recognized on the lease commencement date based on the present value of the future minimum lease payments over the lease term. The future lease payments are discounted at a rate that represents the Company's collateralized borrowing rate for financing instruments of a similar term and are included in Accrued expenses and other liabilities. The related right-of-use asset is included in Other assets.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The table below presents the Company’s operating lease right-of-use asset and the related lease liability.


(In thousands)December 31, 2019
Operating lease asset$30,220  
Operating lease liability$31,636  


As of December 31, 2019, the Company’s operating leases have a weighted average remaining lease term of 8.9 years and a weighted average discount rate of 2.0%. Cash paid for amounts included in the measurement of the above operating lease liability was $1,488,000 for the three months ended December 31, 2019. Right-of-use assets obtained in exchange for new operating lease liabilities during the same period were $2,083,000.

The following table presents the components of net lease costs, a component of Occupancy expense. The Company elected not to separate lease and non-lease components and instead account for them as a single lease component. Variable lease costs include subsequent increases in index-based rents and variable payments such as common area maintenance.

(In thousands)Three Months Ended December 31,
2019
Operating lease cost$1,602  
Variable lease cost220  
Sublease income(86) 
      Net lease cost$1,736  


The following table shows future minimum payments for operating leases as of December 31, 2019 for the respective periods.

(In thousands)Year ending September 30,
remainder of 2020$4,623  
20215,693  
20225,177  
20234,518  
20243,763  
Thereafter11,035  
Total minimum payments34,809  
Amounts representing interest(3,173) 
Present value of minimum lease payments$31,636  


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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Future minimum lease payments for the Company’s operating leases as of September 30, 2019, prior to the adoption of the new lease guidance, were as follows.

(In thousands)Year ending September 30,
2020$5,838  
20215,246  
20224,698  
20234,302  
20243,596  
Thereafter10,531  
Total minimum payments$34,211  

Financial Instruments with Off-Balance Sheet Risk - The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance of $2,639,733,000 and $2,379,089,000 at December 31, 2019 and September 30, 2019, respectively. The Company reserves for estimated losses on these off-balance-sheet credit exposures using historical loss factors for each type of credit. The reserve was $7,500,000 as of December 31, 2019, which is an increase from $6,900,000 at September 30, 2019

Legal Proceedings - The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
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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

FORWARD LOOKING STATEMENTS

Washington Federal, Inc. (the "Company" or "Washington Federal") makes statements in this Quarterly Report on Form 10-Q that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under Item 1A. “Risk Factors,” and in any of the Company's other subsequent Securities and Exchange Commission ("SEC") filings, which could cause the Company's future results to differ materially from the plans, objectives, goals, estimates, intentions and expectations expressed in forward-looking statements:
•a deterioration in economic conditions, including declines in the real estate market and home sale volumes and financial stress on borrowers (consumers and businesses) as a result of the uncertain economic environment;
•the effects of a severe economic downturn, including high unemployment rates and declines in housing prices and property values, in the Company's primary market areas;
•the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
•fluctuations in interest rate risk and changes in market interest rates, including risk related to LIBOR reform;
•the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
•legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential limitations
in the manner in which the Company conducts its business and undertake new investments and activities;
•the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms;
•changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
•the success of the Company at managing the risks involved in the remediation efforts associated with its Bank Secrecy Act program, costs of enhancements to the Bank’s BSA program are greater than anticipated; and governmental authorities undertake enforcement actions or legal proceedings with respect to the Bank’s BSA program beyond those contemplated by the Consent Order, and the potential impact of such matters on the success, timing and ability to pursue the Company’s growth or other business initiatives;
•the success of the Company at managing the risks involved in the foregoing and managing its business; and
•the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.

All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.
GENERAL & BUSINESS DESCRIPTION
Washington Federal Bank, National Association, a federally-insured national bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 24, 1917 in Ballard, Washington and is engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate. Washington Federal, Inc., a Washington corporation (the “Company”), was formed as the Bank’s holding company
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
in November, 1994. As used throughout this document, the terms “Washington Federal” or the “Company” refer to the Company and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank, National Association. The Company is headquartered in Seattle, Washington.

The Company's fiscal year end is September 30th. All references to 2019 represent balances as of September 30, 2019 or activity for the fiscal year then ended.
INTEREST RATE RISK
Based on management's assessment of the current interest rate environment, the Company has taken steps, including growing shorter-term loans and transaction deposit accounts, to reduce its interest rate risk profile. The mix of transaction and savings accounts is 61% of total deposits as of December 31, 2019 while the composition of the investment securities portfolio is 25% variable and 75% fixed rate. When interest rates rise, the fair value of the investment securities with fixed rates will decrease and vice versa when interest rates decline. The Company has $1,360,694,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of December 31, 2019, the net unrealized gain on these securities was $19,726,000. The Company has $1,495,586,000 of available-for-sale securities that are carried at fair value. As of December 31, 2019, the net unrealized gain on these securities was $25,523,000. The Company has executed interest rate swaps to hedge interest rate risk on certain FHLB borrowings. The unrealized loss on these interest rate swaps as of December 31, 2019 was $4,762,000. All of the above are pre-tax net unrealized gains or losses.

The Company relies on various measures of interest rate risk, including an asset/liability analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) of the Company.

Net Interest Income Sensitivity - The Company estimates the sensitivity of its net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in the Company's interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. The analysis assumes a constant balance sheet. Actual results would differ from the assumptions used in this model, as management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates.

As of December 31, 2019, in the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 0.7% in the next year. This compares to an estimated increase of 1.4% as of the September 30, 2019 analysis. The change is primarily due to fluctuating interest rates and the impact to expected prepayment speeds as well as shifts in the mix of fixed versus adjustable rate assets and updated deposit betas used for transaction deposits in the Company's asset liability management model. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long term rates over two years would result in a net interest income decrease of 0.1% in the first year and decrease of 3.6% in the second year assuming a constant balance sheet and no management intervention.

NPV Sensitivity - NPV is an estimate of the market value of shareholders' equity. NPV is calculated as 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 NPV to changes in interest rates provides a view of interest rate risk as it incorporates all future expected cash flows. As of December 31, 2019, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $369,764,000 or 14.5% and the NPV to total assets ratio to decline to 13.9% from a base of 15.2%. As of September 30, 2019, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $257,638,000 or 10.5% and the NPV to total assets ratio to decline to 13.9% from a base of 14.6%. The change in NPV sensitivity is due primarily to fluctuating interest rates that have impacted asset prices as well as sensitivity to expected prepayment speeds on fixed rate loans and mortgage-backed securities as of December 31, 2019.
Interest Rate Spread - The interest rate spread is measured as the difference between the rate on total loans and investments and the rate on costing liabilities at the end of each period. The interest rate spread decreased to 2.76% at December 31, 2019 from 2.80% at September 30, 2019. The spread compression of 4 basis points is primarily due to the decrease in short-term interest rates, which resulted in a lower rate on interest earning assets partially offset by a lower rate on interest-bearing liabilities. As of December 31, 2019, the weighted average rate earned on interest-earning assets decreased by 10 basis points to 4.00% compared to September 30, 2019, while the weighted average rate being paid on interest-bearing liabilities decreased by 6 basis
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
points to 1.24%. The interest rate spread decreased to 2.76% at December 31, 2019 from 2.86% at December 31, 2018 due to the same factors described above.
Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin decreased to 3.15% for the quarter ended December 31, 2019 from 3.21% for the quarter ended December 31, 2018. The yield on interest-earning assets decreased 5 basis points to 4.30% and the cost of interest-bearing liabilities increased 3 basis points to 1.27% over that same period. The lower yield on interest-earning assets is the result of the decrease in short-term interest rates, which resulted in a lower rate being earned on cash and adjustable rate loans and investment securities. The higher rate in interest-bearing liabilities was primarily due to the increase in rates on interest-bearing deposits partially offset by lower rates paid on FHLB advances.
The following tables set forth the information explaining the changes in the net interest margin for the period indicated compared to the same period one year ago.
Three Months Ended December 31, 2019Three Months Ended December 31, 2018
 Average BalanceInterestAverage RateAverage BalanceInterestAverage Rate
($ in thousands)($ in thousands)
Assets
Loans receivable$11,942,498  $142,146  4.72 %$11,542,621  $137,065  4.71 %
Mortgaged-backed securities2,360,374  15,612  2.62  2,592,535  19,192  2.94  
Cash & Investments776,633  5,425  2.77  579,580  4,752  3.25  
FHLB & FRB stock124,568  1,641  5.23  132,305  1,613  4.84  
Total interest-earning assets15,204,073  164,824  4.30 %14,847,041  162,622  4.35 %
Other assets1,189,996  1,167,575  
Total assets$16,394,069  $16,014,616  
Liabilities and Equity
Customer accounts$11,888,167  $31,481  1.05 %$11,436,685  $26,579  0.92 %
FHLB advances2,264,457  13,658  2.39  2,457,880  16,891  2.73  
Total interest-bearing liabilities14,152,624  45,139  1.27 %13,894,565  43,470  1.24 %
Other liabilities202,675  129,396  
               Total liabilities14,355,299  14,023,961  
Shareholders' equity2,038,770  1,990,655  
Total liabilities and equity$16,394,069  $16,014,616  
Net interest income$119,685  $119,152  
Net interest margin (NIM)3.15 %3.21 %

As of December 31, 2019, total assets had decreased by $51,749,000 to $16,423,161,000 from $16,474,910,000 at September 30, 2019. During the three months ended December 31, 2019, cash and cash equivalents increased by $64,647,000, loans receivable decreased $25,714,000, and investment securities decreased by $72,942,000.
Cash and cash equivalents of $483,805,000 and shareholders’ equity of $2,050,909,000 as of December 31, 2019 provide management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, repayments and sales of investments and borrowings and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments. Additionally, the Company earns fee income for loan, deposit, insurance and other services.
The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") up to 45% of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity if needed.
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The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term loan agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB. The Bank is also eligible to borrow under the Federal Reserve Bank's primary credit program.
The Company's cash and cash equivalents totaled $483,805,000 at December 31, 2019, an increase from $419,158,000 at September 30, 2019. These amounts include the Bank's operating cash.
The Company’s shareholders' equity at December 31, 2019 was $2,050,909,000, or 12.49% of total assets. This is an increase of $17,914,000 from September 30, 2019 when net worth was $2,032,995,000, or 12.34% of total assets. The Company’s shareholders' equity was impacted in the three months ended December 31, 2019 by net income of $65,703,000, the payment of $16,433,000 in cash dividends, treasury stock purchases of $33,479,000, as well as other comprehensive income of $694,000. The ratio of tangible capital to tangible assets at December 31, 2019 was 10.80%. Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment.
Washington Federal, Inc. and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.
Federal banking agencies establish regulatory capital rules that require minimum capital ratios and establish criteria for calculating regulatory capital. Minimum capital ratios for four measures are used for assessing capital adequacy. The standards are indicated in the table below. The common equity tier 1 capital ratio recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The rules set forth a “capital conservation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus these buffers, the bank's regulators may place restrictions on it. These restrictions include reducing dividend payments, share buy-backs, and staff bonus payments. The purpose of these buffers is to require banks to build up capital outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where losses are incurred, the minimum capital ratios can still be met.
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There are also standards for Adequate and Well Capitalized criteria that are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank and the Company must maintain minimum common equity risk-based, tier 1 risk-based, total risk-based and tier 1 leverage ratios as set forth in the following table.
ActualMinimum Capital
Adequacy Guidelines		Minimum Well-Capitalized Guidelines
($ in thousands)CapitalRatioRatioRatio
 
December 31, 2019
Common Equity Tier I risk-based capital ratio:
      The Company$1,726,579  14.17 %4.50 %NA  
      The Bank1,679,075  13.88 %4.50 %6.50 %
Tier I risk-based capital ratio:
      The Company1,726,579  14.17 %6.00 %NA  
      The Bank1,679,075  13.88 %6.00 %8.00 %
Total risk-based capital ratio:
      The Company1,866,593  15.32 %8.00 %NA  
      The Bank1,819,089  15.04 %8.00 %10.00 %
Tier 1 Leverage ratio:
      The Company1,726,579  10.72 %4.00 %NA  
      The Bank1,679,075  10.42 %4.00 %5.00 %
September 30, 2019
Common Equity Tier 1 risk-based capital ratio:
      The Company$1,710,147  14.30 %4.50 %NA  
      The Bank1,666,426  13.93 %4.50 %6.50 %
Tier I risk-based capital ratio:
      The Company1,710,147  14.30 %6.00 %NA  
      The Bank1,666,426  13.93 %6.00 %8.00 %
Total risk-based capital ratio:
      The Company1,848,581  15.45 %8.00 %NA  
      The Bank1,804,860  15.09 %8.00 %10.00 %
Tier 1 Leverage ratio:
      The Company1,710,147  10.51 %4.00 %NA
      The Bank1,666,426  10.24 %4.00 %5.00 %

CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents - Cash and cash equivalents are $483,805,000 at December 31, 2019, an increase of $64,647,000, or 15.4%, since September 30, 2019.

Available-for-sale and held-to-maturity investment securities - Available-for-sale securities increased $9,844,000, or 0.7%, during the three months ended December 31, 2019, mostly due to purchases of $82,028,000, partially offset by principal repayments and maturities of $69,085,000 and a decrease to net unrealized gain of $2,149,000. During the same period, the balance of held-to-maturity securities decreased by $82,786,000 primarily due to principal pay-downs and maturities of $81,329,000. As of December 31, 2019, the Company had a net unrealized gain on available-for-sale securities of $25,523,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

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Loans receivable - Loans receivable, net of related contra accounts, decreased by $25,714,000 to $11,904,861,000 at December 31, 2019, compared to $11,930,575,000 at September 30, 2019. The decrease resulted primarily from loan principal repayments of $1,301,419,000 and an increase in loans in process of $110,941,000, partially offset by originations of $1,371,315,000. Commercial loan originations accounted for 76% of total originations and consumer loan originations were 24% during the period. The mix of loan originations is consistent with management's strategy during low rate environments to produce more construction, multifamily, commercial real estate, and commercial and industrial loans that generally have adjustable interest rates or a shorter duration.
The following table shows the loan portfolio by category and the change.

 December 31, 2019September 30, 2019Change
 ($ in thousands)($ in thousands)$%
Gross loans by category
   Single-family residential$5,702,071  42.5 %$5,835,194  43.8 %$(133,123) (2.3)%
   Construction2,174,313  16.2  2,038,052  15.3  136,261  6.7  
   Construction - custom538,234  4.0  540,741  4.1  (2,507) (0.5) 
   Land - acquisition & development203,043  1.5  204,107  1.5  (1,064) (0.5) 
   Land - consumer lot loans97,097  0.7  99,694  0.7  (2,597) (2.6) 
   Multi-family1,436,715  10.7  1,422,674  10.7  14,041  1.0  
   Commercial real estate1,643,099  12.3  1,631,170  12.3  11,929  0.7  
   Commercial & industrial1,352,738  10.1  1,268,695  9.5  84,043  6.6  
   HELOC141,274  1.1  142,178  1.1  (904) (0.6) 
   Consumer115,829  0.9  129,883  1.0  (14,054) (10.8) 
Total gross loans13,404,413  100 %13,312,388  100 %92,025  0.7 %
   Less:
      Allowance for loan losses132,513  131,534  979  0.7 %
      Loans in process1,312,282  1,201,341  110,941  9.2  
      Net deferred fees, costs and discounts54,757  48,938  5,819  11.9  
Total loan contra accounts1,499,552  1,381,813  117,739  8.5  
Net Loans$11,904,861  $11,930,575  $(25,714) (0.2)%
 
Non-performing assets - Non-performing assets decreased $4,084,000 during the three months ended December 31, 2019 to $39,742,000 from $43,826,000 at September 30, 2019. The change is due to a $3,642,000 decrease in non-accrual loans and $442,000 decline in real estate owned ("REO"). Non-performing assets as a percentage of total assets was 0.24% at December 31, 2019 compared to 0.27% at September 30, 2019.



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The following table sets forth information regarding restructured loans and non-performing assets.
December 31,
2019		September 30,
2019
 ($ in thousands)
Restructured loans:
Single-family residential$102,164  92.2 %$111,886  92.0 %
Land - acquisition & development86  0.1  90  0.1  
Land - consumer lot loans3,556  3.2  3,714  3.1  
Multi - family380  0.3  385  0.3  
Commercial real estate3,238  2.9  4,168  3.4  
Commercial & industrial411  0.4  425  0.3  
HELOC942  0.8  949  0.8  
Consumer58  0.1  60  —  
Total restructured loans (1)$110,835  100 %$121,677  100 %
Non-accrual loans:
Single-family residential$23,014  76.5 %$25,271  74.9 %
Land - acquisition & development86  0.3  169  0.5  
Land - consumer lot loans334  1.1  246  0.7  
Commercial real estate5,557  18.5  5,835  17.3  
Commercial & industrial467  1.6  1,292  3.8  
HELOC630  2.1  907  2.7  
Consumer1  —  11  —  
Total non-accrual loans30,089  100 %33,731  100 %
Real estate owned6,339  6,781  
Other property owned3,314  3,314  
Total non-performing assets$39,742  $43,826  
Total non-performing assets and performing restructured loans as a percentage of total assets0.89 %0.97 %
Total Assets
(1)    Restructured loans were as follows:
Performing$106,380  96.0 %$116,659  95.9 %
Non-performing (included in non-accrual loans above)4,455  4.0  5,018  4.1  
$110,835  100 %$121,677  100 %

For the three months ended December 31, 2019, the Company recognized $497,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $353,000 for the same period had these loans performed according to their original contract terms. Recognized interest income for the three months ended December 31, 2019 was higher than what otherwise would have been recognized in the period due to the collection of past due amounts. In addition to the non-accrual loans reflected in the above table, the Company had $64,511,000 of loans that were less than 90 days delinquent at December 31, 2019 but were 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 1.28% at December 31, 2019.
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 Bank about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 92.2% of restructured loans as of December 31, 2019. The concession for these loans
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is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to twenty-four months. Interest-only payments may also be approved during the modification period.
For commercial loans, six consecutive payments on newly restructured loan terms are generally required prior to returning the loan to accrual status. In some instances after the required six consecutive payments are made, a management assessment will conclude that collection of the entire principal balance is still in doubt. In those instances, the loan will remain on non-accrual. Homogeneous loans may or may not be on accrual status at the time of restructuring, but all are placed on accrual status upon the restructuring of the loan. Homogeneous loans are restructured only if the borrower can demonstrate the ability to meet the restructured payment terms; otherwise, collection is pursued and the loan remains on non-accrual status until liquidated. If the homogeneous restructured loan does not perform, it will be placed in non-accrual status when it is 90 days delinquent.
A loan that defaults and is subsequently modified would impact the Company’s delinquency trend, which is part of the qualitative risk factors component of the general reserve calculation. Any modified loan that re-defaults and is charged-off would impact the historical loss factors component of the Company's general reserve calculation.
Allowance for loan losses - The following tables show the Company’s allowance for loan losses by loan category.
December 31, 2019Loans Collectively Evaluated for ImpairmentLoans Individually Evaluated for Impairment
 Allowance AllocationRecorded Investment of LoansRatioAllowance AllocationRecorded Investment of LoansRatio
 ($ in thousands)($ in thousands)
Single-family residential$30,700  $5,686,482  0.5 %$—  $19,993  — %
Construction32,292  1,189,457  2.7  —  —  —  
Construction - custom1,399  259,944  0.5  —  —  —  
Land - acquisition & development8,731  153,856  5.7  15  86  17.4  
Land - consumer lot loans2,090  93,272  2.2  —  295  —  
Multi-family7,403  1,436,313  0.5  1  380  0.3  
Commercial real estate12,861  1,632,612  0.8  174  10,487  1.7  
Commercial & industrial33,470  1,352,116  2.5  70  641  10.9  
HELOC1,104  139,963  0.8  —  483  —  
Consumer2,203  115,749  1.9  —  2  —  
$132,253  $12,059,764  1.1 %$260  $32,367  0.8 %


September 30, 2019Loans Collectively Evaluated for ImpairmentLoans Individually Evaluated for Impairment
 Allowance AllocationRecorded Investment of LoansRatioAllowance AllocationRecorded Investment of LoansRatio
 ($ in thousands)($ in thousands)
Single-family residential$30,988  $5,822,200  0.5 %$—  $17,978  — %
Construction32,304  1,164,889  2.8  —  —  —  
Construction - custom1,369  255,505  0.5  —  —  —  
Land - acquisition & development9,135  160,964  5.7  20  230  8.7  
Land - consumer lot loans2,143  95,574  2.2  —  375  —  
Multi-family7,387  1,422,266  0.5  4  385  1.0  
Commercial real estate12,847  1,618,406  0.8  323  12,765  2.5  
Commercial & industrial31,358  1,266,913  2.5  92  1,805  5.1  
HELOC1,103  140,378  0.8  —  837  —  
Consumer2,461  129,527  1.9  —  50  —  
$131,095  $12,076,622  1.1 %$439  $34,425  1.3 %

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Reserve for losses on unfunded commitments - Unfunded commitments tend to vary depending on the Company's loan mix and the proportionate share of commercial loans. The balance of unfunded commitments was $2,639,733,000 and $2,379,089,000 at December 31, 2019 and September 30, 2019, respectively. The Company reserves for estimated losses on these off-balance-sheet credit exposures using historical loss factors for each type of credit. The reserve for unfunded commitments was $7,500,000 as of December 31, 2019, which is an increase from $6,900,000 at September 30, 2019.
Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $140,013,000, or 1.04% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. See Note E and Note I for further details of the allowance for loan losses and reserve for unfunded commitments as of and for the period ended December 31, 2019.

Real estate owned - REO decreased during the three months ended December 31, 2019 by $442,000 to $6,339,000, primarily due to sales of REO properties during the period.

Intangible assets - Intangible assets increased to $310,477,000 as of December 31, 2019 from $309,247,000 as of September 30, 2019. The increase was due to the purchase of a small insurance agency, partially offset by amortization of finite-lived intangible assets.

Customer accounts - Customer accounts decreased $58,626,000, or 0.5%, to $11,932,138,000 at December 31, 2019 compared with $11,990,764,000 at September 30, 2019.

The following table shows the composition of the Bank’s customer accounts by deposit type.
  
December 31, 2019September 30, 2019
 Deposit Account BalanceAs a % of Total DepositsWeighted
Average
Rate		Deposit Account BalanceAs a % of Total DepositsWeighted
Average
Rate
($ in thousands)
Non-interest checking$1,593,392  13.4 %— %$1,621,343  13.5 %— %
Interest checking2,125,878  17.8  0.57  1,984,576  16.6  0.61  
Savings748,505  6.3  0.12  753,574  6.3  0.13  
Money market2,847,346  23.8  0.84  2,724,308  22.7  0.82  
Time deposits4,617,017  38.7  1.82  4,906,963  40.9  1.91  
Total$11,932,138  100 %1.02 %$11,990,764  100 %1.08 %

FHLB advances and other borrowings - Total borrowings totaled $2,250,000,000 as of December 31, 2019, unchanged from $2,250,000,000 as of September 30, 2019. The weighted average rate for FHLB borrowings was 2.46% as of December 31, 2019 and 2.49% at September 30, 2019. The decrease was due to lower rates on new FHLB advances.

Shareholders' equity - The Company’s total shareholders' equity at December 31, 2019 was $2,050,909,000, or 12.49% of total assets. This was an increase of $17,914,000 from the September 30, 2019 total of $2,032,995,000, or 12.34% of total assets. The Company’s equity was impacted in the three months ended December 31, 2019 by net income of $65,703,000, the payment of $16,433,000 in cash dividends, treasury stock purchases of $33,479,000, as well as other comprehensive income of $694,000.


RESULTS OF OPERATIONS
Net Income - The Company recorded net income of $65,703,000 for the three months ended December 31, 2019 compared to $52,942,000 for the prior year quarter.

Net Interest Income - For the three months ended December 31, 2019, net interest income was $119,685,000, which is $533,000 higher than the same quarter of the prior year. Net interest margin was 3.15% for the quarter ended December 31, 2019 compared to 3.21% for the quarter ended December 31, 2018. The increase in net interest income was primarily due to the average balance of earning assets increasing by $357,032,000, partially offset by a $258,059,000 increase in average balance on interest-bearing liabilities. The compression in net interest margin to 3.15% for the quarter ended December 31, 2019 from
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3.21% for the quarter ended December 31, 2018 was due to the yield on earning assets decreasing by 5 basis points to 4.30% and the cost of interest bearing liabilities increasing 3 basis points to 1.27% over that same period. The lower yield on earning assets is the result of the decrease in short-term interest rates, which resulted in a lower rate being earned on cash and adjustable rate loans and investment securities. The higher rate in interest-bearing liabilities was primarily due to the increase in rates on interest-bearing deposits partially offset by lower rates paid on FHLB advances

The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis:
 Comparison of Three Months Ended
12/31/19 and 12/31/18
($ in thousands)VolumeRateTotal
Interest income:
Loans receivable$4,787  $294  $5,081  
Mortgaged-backed securities(1,616) (1,964) (3,580) 
Investments (1)1,547  (846) 701  
All interest-earning assets4,718  (2,516) 2,202  
Interest expense:
Customer accounts1,070  3,832  4,902  
FHLB advances and other borrowings(1,251) (1,982) (3,233) 
All interest-bearing liabilities(181) 1,850  1,669  
Change in net interest income$4,899  $(4,366) $533  
___________________ 
(1)Includes interest on cash equivalents and dividends on FHLB & FRB stock.
Provision (Release) for Loan Losses - The Company recorded a $1,000,000 release of loan loss allowance for the three months ended December 31, 2019, compared with a $500,000 release for the three months ended December 31, 2018. Reserving for new loan originations has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $2,579,000 for the three months ended December 31, 2019, compared to net recoveries of $1,408,000 during the three months ended December 31, 2018.

Other Income - The three months ended December 31, 2019 results include total other income of $46,376,000 compared to $19,009,000 for the same period one year ago, a $27,367,000 increase. The increase is primarily due to the three months ended December 31, 2019 including a gain of $32,600,000 on sales of fixed assets, while the three months ended December 31, 2018 included a net gain of $6,400,000 recognized on the sale and valuation adjustments of fixed assets.

Other Expense - Other expenses have increased as a result of ongoing investments in people, process and technology with the objective of growing market share and ultimately earnings. The three months ended December 31, 2019 results include total other expense of $82,636,000 compared to $71,672,000 for the same period one year ago, a $10,964,000 increase. The increase is primarily due to information technology being higher by $8,067,000 which was largely from a $5,931,000 impairment charge on systems hardware and software. In addition, compensation and benefits costs increased by $2,748,000 primarily due to an increase in headcount. The number of staff, including part-time employees on a full-time equivalent basis, increased by 4.8% to 2,001 at December 31, 2019 from 1,910 at December 31, 2018. Total other expense for the three months ended December 31, 2019 and December 31, 2018 equaled 2.02% and 1.79%, respectively, of average assets.

Gain (Loss) on Real Estate Owned - Results for the three months ended December 31, 2019 include a net loss on real estate owned of $886,000, compared to a net gain of $320,000 for the same period one year ago.

Income Tax Expense - Income tax expense totaled $17,836,000 for the three months ended December 31, 2019, compared to $14,367,000 for the same period one year ago. The effective tax rate for the three months ended December 31, 2019 was 21.35% compared to 21.34% for the three months ended December 31, 2018. The effective tax rate for the three months ended December 31, 2019 differs from the statutory rate mainly due to state taxes and tax-exempt income.

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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, 2019. 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 2019 Form 10-K.

PART I – Financial Information

Item 4.                Controls and Procedures


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

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PART II – Other Information
Item 1. Legal Proceedings
From time to time, the Company and 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 consolidated financial statements.

Item 1A. Risk Factors

In addition to the other information set forth below and in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the 2019 Form 10-K for the year ended September 30, 2019. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.

Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended December 31, 2019. 
PeriodTotal Number of
Shares Purchased		 Average Price
Paid Per Share		 Total Number of
Shares Purchased
as Part of  Publicly
Announced Plan (1)		Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan at the
End of the Period
October 1, 2019 to October 31, 2019270,038  $36.43  270,038  7,696,723  
November 1, 2019 to November 30, 2019375,419  36.80  375,419  7,321,304  
December 1, 2019 to December 31, 2019268,704  36.58  268,704  7,052,600  
Total914,161    $36.62    914,161  7,052,600  
 ___________________
(1)The Company's stock repurchase program was publicly announced by its Board of Directors on February 3, 1995 and has no expiration date. Under this ongoing program, a total of 66,956,264 shares were authorized for repurchase.

Item 3.                Defaults Upon Senior Securities
Not applicable

Item 4.                Mine Safety Disclosures
Not applicable

Item 5.                Other Information
Not applicable

Item 6.                Exhibits
(a) Exhibits  
31.1  
31.2  
32  
101  Financial Statements from the Company’s Form 10-Q for the three months ended December 31, 2019 formatted in iXBRL

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Table of Contents
WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
January 30, 2020
/S/    BRENT J. BEARDALL        
BRENT J. BEARDALL
President & Chief Executive Officer
January 30, 2020
/S/    VINCENT L. BEATTY       
VINCENT L. BEATTY
Executive Vice President and Chief Financial Officer
January 30, 2020
/S/    CORY D. STEWART      
CORY D. STEWART
Senior Vice President and Principal Accounting Officer

46