WAFD INC - Quarter Report: 2017 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34654

WASHINGTON FEDERAL, INC.

(Exact name of registrant as specified in its charter)



Washington		91-1661606
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

425 Pike Street Seattle, Washington 98101
(Address of principal executive offices and zip code)
(206) 624-7930
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
Emerging growth company	o

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. o

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Title of class:	January 24, 2018
Common stock, $1.00 par value	85,973,665

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES



PART I

Item 1.	Financial Statements (Unaudited)

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

	Consolidated Statements of Financial Condition as of December 31, 2017 and September 30, 2017	3

	Consolidated Statements of Operations for the three months ended December 31, 2017 and December 31, 2016	4

	Consolidated Statements of Comprehensive Income for the three months ended December 31, 2017 and December 31, 2016	5

	Consolidated Statements of Stockholders' Equity for the three months ended December 31, 2017 and December 31, 2016	6

	Consolidated Statements of Cash Flows for the three months ended December 31, 2017 and December 31, 2016	7

	Notes to Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

PART II

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

	Signatures	48

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)



	December 31, 2017			September 30, 2017
	(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	309,713		$	313,070
Available-for-sale securities, at fair value	1,245,855			1,266,209
Held-to-maturity securities, at amortized cost	1,765,886			1,646,856
Loans receivable, net of allowance for loan losses of $127,155 and $123,073	11,107,042			10,882,622
Interest receivable	42,146			41,643
Premises and equipment, net	264,643			263,694
Real estate owned	17,928			20,658
FHLB and FRB stock	130,590			122,990
Bank owned life insurance	211,833			211,330
Intangible assets, including goodwill of $300,288 and $293,153	310,578			298,682
Other assets	177,799			185,826
	$	15,584,013		$	15,253,580
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts	$	6,482,612		$	6,361,158
Time deposit accounts	4,518,967			4,473,850
	11,001,579			10,835,008
FHLB advances	2,415,000			2,225,000
Advance payments by borrowers for taxes and insurance	23,924			56,631
Accrued expenses and other liabilities	133,892			131,253
	13,574,395			13,247,892
Stockholders’ equity
Common stock, $1.00 par value, 300,000,000 shares authorized; 135,274,618 and 134,957,511 shares issued; 86,363,099 and 87,193,362 shares outstanding	135,275			134,958
Additional paid-in capital	1,661,866			1,660,885
Accumulated other comprehensive income (loss), net of taxes	8,004			5,015
Treasury stock, at cost; 48,911,519 and 47,764,149 shares	(877,044		)	(838,060		)
Retained earnings	1,081,517			1,042,890
	2,009,618			2,005,688
	$	15,584,013		$	15,253,580

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended December 31,
	2017			2016
	(In thousands, except share data)
INTEREST INCOME
Loans receivable	$	124,511		$	114,835
Mortgage-backed securities	16,899			12,789
Investment securities and cash equivalents	4,370			5,140
	145,780			132,764
INTEREST EXPENSE
Customer accounts	14,638			13,017
FHLB advances	15,407			16,595
	30,045			29,612
Net interest income	115,735			103,152
Provision (release) for loan losses	—			—
Net interest income after provision (release) for loan losses	115,735			103,152

OTHER INCOME
Gain on sale of investment securities	—			968
FDIC loss share valuation adjustments	(8,550		)	—
Loan fee income	1,035			1,334
Deposit fee income	6,686			5,185
Other income	7,624			4,409
	6,795			11,896

OTHER EXPENSE
Compensation and benefits	29,619			26,994
Occupancy	8,671			8,450
FDIC insurance premiums	2,820			2,839
Product delivery	3,956			3,361
Information technology	7,929			6,451
Other expense	8,946			6,246
	61,941			54,341
Gain (loss) on real estate owned, net	46			398
Income before income taxes	60,635			61,105
Income tax expense	8,965			19,859
NET INCOME	$	51,670		$	41,246

PER SHARE DATA
Basic earnings per share	$	0.59		$	0.46
Diluted earnings per share	0.59			0.46
Dividends paid on common stock per share	0.15			0.14
Basic weighted average number of shares outstanding	86,938,095			89,310,958
Diluted weighted average number of shares outstanding	87,082,499			89,731,024

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended December 31,
	2017			2016
	(In thousands)
Net income	$	51,670		$	41,246

Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on available-for-sale investment securities	(1,964		)	(17,079		)
Reclassification adjustment of net gain (loss) from sale of available-for-sale securities included in net income	—			968
Related tax benefit (expense)	722			5,921
	(1,242		)	(10,190		)

Net unrealized gain (loss) on cash flow hedges of borrowings	6,690			29,271
Related tax benefit (expense)	(2,459		)	(10,757		)
	4,231			18,514

Other comprehensive income (loss) net of tax	2,989			8,324
Comprehensive income	$	54,659		$	49,570

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)



(in thousands)	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at October 1, 2017	$	134,958	$	1,660,885		$	1,042,890		$	5,015		$	(838,060	)	$	2,005,688
Net income						51,670									51,670
Other comprehensive income (loss)									2,989						2,989
Dividends on common stock						(13,043		)							(13,043		)
Compensation expense related to common stock options															—
Proceeds from exercise of common stock options	14		272												286
Restricted stock expense	194		818												1,012
Exercise of stock warrants	109		(109		)										—
Treasury stock acquired												(38,984		)	(38,984		)
Balance at December 31, 2017	$	135,275	$	1,661,866		$	1,081,517		$	8,004		$	(877,044	)	$	2,009,618

(in thousands)	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at October 1, 2016	$	134,308	$	1,648,388		$	943,877		$	(11,156	)	$	(739,686	)	$	1,975,731
Net income						41,246									41,246
Other comprehensive income (loss)									8,324						8,324
Dividends on common stock						(12,422		)							(12,422		)
Proceeds from exercise of common stock options	190		4,172												4,362
Restricted stock expense	109		2,636												2,745
Exercise of stock warrants	50		(50		)										—
Treasury stock acquired												(20,385		)	(20,385		)
Balance at December 31, 2016	$	134,657	$	1,655,146		$	972,701		$	(2,832	)	$	(760,071	)	$	1,999,601

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,
	2017			2016
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	51,670		$	41,246
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion expense, net	15,273			12,087
Stock based compensation expense	1,012			2,745
Loss (gain) on sale of investment securities	—			(968		)
Decrease (increase) in accrued interest receivable	(503		)	(449		)
Decrease (increase) in federal and state income tax receivable	—			16,047
Decrease (increase) in cash surrender value of bank owned life insurance	(1,571		)	(1,739		)
Gain on bank owned life insurance	(2,416		)	(649		)
Net realized (gain) loss on sales of premises, equipment, and real estate owned	(241		)	657
Decrease (increase) in other assets	(7,715		)	14,153
Increase (decrease) in accrued expenses and other liabilities	2,595			(41,265		)
Net cash provided by (used in) operating activities	58,104			41,865
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans and principal repayments, net	(80,089		)	(226,080		)
Loans purchased	(143,605		)	—
FHLB & FRB stock purchased	(123,600		)	(9		)
FHLB & FRB stock redeemed	116,000			24
Available-for-sale securities purchased	(40,884		)	—
Principal payments and maturities of available-for-sale securities	58,261			112,469
Proceeds from sales of available-for-sale securities	—			350,890
Held-to-maturity securities purchased	(170,836		)	(415,729		)
Principal payments and maturities of held-to-maturity securities	50,653			78,778
Proceeds from sales of real estate owned	3,440			6,457
Proceeds from settlement of bank owned life insurance	3,484			1,231
Proceeds from sales of premises and equipment	1			1,722
Premises and equipment purchased and REO improvements	(6,485		)	(2,200		)
Net cash provided by (used in) investing activities	(333,660		)	(92,447		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts	166,647			46,799
Proceeds from borrowings	3,090,000			—
Repayments of borrowings	(2,900,000		)	—
Proceeds from exercise of common stock options and related tax benefit	286			4,362
Dividends paid on common stock	(13,043		)	(12,422		)
Treasury stock purchased	(38,984		)	(20,385		)
Increase (decrease) in borrower advances related to taxes and insurance, net	(32,707		)	(19,302		)
Net cash provided by (used in) financing activities	272,199			(948		)
Increase (decrease) in cash and cash equivalents	(3,357		)	(51,530		)
Cash and cash equivalents at beginning of period	313,070			450,368
Cash and cash equivalents at end of period	$	309,713		$	398,838

(CONTINUED)

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Three Months Ended December 31,
	2017		2016
	(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure	$	773	$	1,589
Non-cash financing activities
Stock issued upon exercise of warrants	3,761		1,523
Cash paid during the period for
Interest	29,986		28,737
Income taxes	5,225		—

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

Nature of Operations - Washington Federal, Inc. (the "Company") is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through its national bank subsidiary, Washington Federal, National Association (the "Bank"). The Bank is principally engaged in the business of attracting deposits from businesses and the general public and investing these funds, together with borrowings and other funds, in one-to-four family residential mortgage and construction loans, home equity loans, lines of credit, commercial real estate loans, commercial and industrial loans, multi-family and other forms of real estate loans. As used throughout this document, the terms "Washington Federal" or the "Company" refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.

Basis of Presentation - The 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. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2017 Annual Report on Form 10-K (“2017 Annual Financial Statements”). Interim results are not necessarily indicative of results for a full year.

During the three months ended December 31, 2017, an immaterial correction was recorded related to acquisitions of insurance agency businesses in prior years. The balance sheet classification correction resulted in an increase in goodwill of $7,135,000 and finite-lived intangible assets of $5,106,000 and a corresponding decrease in other assets of $12,241,000.

Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2017 Annual Financial Statements. There have not been any material changes in our significant accounting policies compared to those contained in our 2017 Annual Financial Statements for the year ended September 30, 2017.

Off-Balance-Sheet Credit Exposures – The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance of $2,088,669,000 and $1,992,905,000 at December 31, 2017 and September 30, 2017, respectively. The Company estimates losses on off-balance-sheet credit exposures by allocating a loss percentage derived from historical loss factors for each asset class.

NOTE B – New Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

of the period of adoption. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The ASU clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The ASU is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods therein. Entities may use either a full or modified approach to adopt the ASU. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations Clarifying the Definition of a Business (Topic 805), for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The ASU must be applied prospectively and upon adoption the standard will impact how we assess acquisitions (or disposals) of assets or businesses. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash: a Consensus of the FASB Emerging Issues Task Force. This ASU requires a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period. This ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU address eight specific cash flow issues with the objective of reducing diversity in practice. The specific issues identified include: debt prepayments or extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period; however, early adoption is permitted. The Company is currently evaluating the guidance to determine its adoption method and does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendments in this ASU were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investments in leases and other commitments to extend credit held by a reporting entity at each

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

reporting date. The amendments require that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the current framework of recognizing probable incurred losses and instead requires an entity to use its current estimate of all expected credit losses over the contractual life. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

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

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

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

In February 2016, the FASB issued ASU 2016-02, Leases. The amendments require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The guidance also simplifies the accounting for sale and leaseback transactions. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently in the process of accumulating the lease data necessary to apply the amended guidance. The Company is continuing to evaluate the impact of the amended guidance on its consolidated financial statements, but the effects of recognizing most operating leases is not expected to be material. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this ASU also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, which delayed the effective date of ASU 2014-09 by one year and permits companies to voluntarily adopt the new standard as of the original effective date. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

NOTE C – Dividends and Share Repurchases

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On November 20, 2017, the Company paid a regular dividend on common stock of $0.15 per share, which represented the 139th consecutive quarterly cash dividend. Dividends per share were $0.15 and $0.14 for the quarters ended December 31, 2017 and 2016, respectively. On January 24, 2018, the Company declared a regular dividend on common stock of $0.17 per share, which represents its 140th consecutive quarterly cash dividend. This dividend will be paid on February 23, 2018 to common shareholders of record on February 9, 2018.

For the three months ended December 31, 2017, the Company repurchased 1,147,370 shares at an average price of $33.98. Additionally, 108,704 shares of common stock were issued during the three months ended December 31, 2017 to investors that exercised warrants previously issued as part of the 2008 Troubled Asset Relief Program ("TARP"). As of December 31, 2017, 112,649 such warrants remain outstanding. Net of warrant cash repurchase activity, there are 753,585 remaining shares authorized to be repurchased under the current Board approved share repurchase program. On January 24, 2018, the Board approved an additional 5,000,000 shares available under the repurchase program.

NOTE D – Loans Receivable

The following table is a summary of loans receivable.



	December 31, 2017				September 30, 2017
	(In thousands)				(In thousands)
Gross loans by category
Single-family residential	$	5,693,318	45.7	%	$	5,711,004	46.8	%
Construction	1,710,418		13.7		1,597,996		13.1
Construction - custom	583,580		4.7		602,631		4.9
Land - acquisition & development	136,938		1.1		124,308		1.0
Land - consumer lot loans	105,086		0.8		104,405		0.9
Multi-family	1,312,695		10.5		1,303,148		10.7
Commercial real estate	1,436,508		11.5		1,434,610		11.8
Commercial & industrial	1,120,707		9.0		1,093,360		9.0
HELOC	136,995		1.1		144,850		1.2
Consumer	219,971		1.8		85,075		0.7
Total gross loans	12,456,216		100	%	12,201,387		100	%
Less:
Allowance for loan losses	127,155				123,073
Loans in process	1,175,642				1,149,934
Net deferred fees, costs and discounts	46,377				45,758
Total loan contra accounts	1,349,174				1,318,765
Net loans	$	11,107,042			$	10,882,622

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The following table sets forth information regarding non-accrual loans.



	December 31, 2017					September 30, 2017
	(In thousands)
Non-accrual loans:
Single-family residential	$	26,219		57.7	%	$	27,930		56.3	%
Construction	364			0.8		—			—
Construction - custom	—			—		91			0.2
Land - acquisition & development	1,326			2.9		296			0.6
Land - consumer lot loans	976			2.1		605			1.2
Multi-family	250			0.5		139			0.3
Commercial real estate	8,241			18.1		11,815			23.8
Commercial & industrial	7,596			16.7		8,082			16.3
HELOC	476			1.0		531			1.1
Consumer	72			0.2		91			0.2
Total non-accrual loans	$	45,520		100	%	$	49,580		100	%
% of total net loans	0.41		%			0.46		%

The Company recognized interest income on non-accrual loans of approximately $2,551,000 in the three months ended December 31, 2017. Had these loans been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $489,000 for the three months ended December 31, 2017. Interest cash flows collected on non-accrual loans varies from period to period as those loans are brought current or are paid off.

The following tables provide details regarding delinquent loans.



December 31, 2017	Loans Receivable		Days Delinquent Based on $ Amount of Loans										% based on $
Type of Loan	Net of Loans In Process		Current		30		60		90		Total Delinquent		% based on $
	(In thousands)
Single-family residential	$	5,692,045	$	5,655,873	$	9,801	$	6,073	$	20,298	$	36,172	0.64	%
Construction	852,164		847,793		1,500		2,507		364		4,371		0.51
Construction - custom	292,255		292,255		—		—		—		—		—
Land - acquisition & development	112,260		111,018		—		—		1,242		1,242		1.11
Land - consumer lot loans	104,996		104,246		107		153		490		750		0.71
Multi-family	1,312,673		1,312,423		—		—		250		250		0.02
Commercial real estate	1,436,508		1,436,064		129		—		315		444		0.03
Commercial & industrial	1,120,707		1,117,240		2,894		—		573		3,467		0.31
HELOC	136,995		136,004		439		147		405		991		0.72
Consumer	219,971		219,404		352		154		61		567		0.26
Total Loans	$	11,280,574	$	11,232,320	$	15,222	$	9,034	$	23,998	$	48,254	0.43	%
Delinquency %			99.57%		0.13%		0.08%		0.21%		0.43%

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September 30, 2017	Loans Receivable		Days Delinquent Based on $ Amount of Loans										% based on $
Type of Loan	Net of Loans In Process		Current		30		60		90		Total Delinquent		% based on $
	(In thousands)
Single-family residential	$	5,709,690	$	5,671,933	$	10,925	$	4,810	$	22,022	$	37,757	0.66	%
Construction	793,959		793,959		—		—		—		—		—
Construction - custom	277,599		277,508		—		—		91		91		0.03
Land - acquisition & development	104,856		104,526		—		—		330		330		0.31
Land - consumer lot loans	104,335		103,389		112		680		154		946		0.91
Multi-family	1,303,119		1,302,720		5		255		139		399		0.03
Commercial real estate	1,434,610		1,432,052		507		—		2,051		2,558		0.18
Commercial & industrial	1,093,360		1,092,735		—		51		574		625		0.06
HELOC	144,850		143,974		221		342		313		876		0.60
Consumer	85,075		84,644		245		107		79		431		0.51
Total Loans	$	11,051,453	$	11,007,440	$	12,015	$	6,245	$	25,753	$	44,013	0.40	%
Delinquency %			99.60%		0.11%		0.06%		0.23%		0.40%

The percentage of total delinquent loans increased from 0.40% as of September 30, 2017 to 0.43% as of December 31, 2017 and there are no loans greater than 90 days delinquent and still accruing interest as of either date.

The following table provides information related to loans that were restructured in a troubled debt restructuring ("TDR") during the periods presented:



	Three Months Ended December 31,
	2017					2016
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	Contracts	Investment		Investment		Contracts	Investment		Investment
		(In thousands)					(In thousands)
Troubled Debt Restructurings:
Single-family residential	8	$	2,012	$	2,012	12	$	2,134	$	2,134
Land - consumer lot loans	—	—		—		1	204		204
Commercial & Industrial	3	7,256		7,256		—	—		—
HELOC	—	—		—		1	228		228
	11	$	9,268	$	9,268	14	$	2,566	$	2,566

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The following table provides information on payment defaults occurring during the periods presented where the loan had been modified in a TDR within 12 months of the payment default.



	Three Months Ended December 31,
	2017			2016
	Number of	Recorded		Number of	Recorded
	Contracts	Investment		Contracts	Investment
	(In thousands)			(In thousands)
TDRs That Subsequently Defaulted:
Single-family residential	1	$	44	6	$	1,993
Commercial real estate	—	—		2	267
	1	$	44	8	$	2,260

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, 2017, 97.6% of the Company's $199,175,000 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, 2017, single-family residential loans comprised 85.7% of TDRs.

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

The Company's remaining outstanding balance of assets subject to FDIC loss share agreements was $58,699,000 (including $54,865,000 of loans receivable) at December 31, 2017 compared to $67,914,000 (including $61,810,114 of loans receivable) as of September 30, 2017. As of December 31, 2017, the associated FDIC indemnification asset was $0 compared to a balance of $8,967,000 as of September 30, 2017. The FDIC clawback liability was $39,906,000 as of December 31, 2017 and $37,143,000 as of September 30, 2017. The Company has made a proposal to the FDIC to early terminate its remaining FDIC loss share agreements, which relate to the Horizon Bank and Home Valley Bank acquisitions. During the three months ended December 31, 2017, the Company recorded an $8,550,000 charge resulting from valuation adjustments related to the FDIC indemnification asset and FDIC clawback liability. The valuation adjustments were based on management's estimate of the amount that would be due to the FDIC to early terminate the loss share agreements.

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NOTE E – Allowance for Losses on Loans

The following tables summarize the activity in the allowance for loan losses.



Three Months Ended December 31, 2017	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	36,892	$	(461	)	$	121	$	(624	)	$	35,928
Construction	24,556		—			—		658			25,214
Construction - custom	1,944		(50		)	—		158			2,052
Land - acquisition & development	6,829		—			3,372		(2,846		)	7,355
Land - consumer lot loans	2,649		(47		)	—		304			2,906
Multi-family	7,862		—			—		42			7,904
Commercial real estate	11,818		—			—		(193		)	11,625
Commercial & industrial	28,524		(116		)	55		805			29,268
HELOC	855		—			—		(47		)	808
Consumer	1,144		(78		)	286		2,743			4,095
	$	123,073	$	(752	)	$	3,834	$	1,000		$	127,155



Three Months Ended December 31, 2016	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	37,796	$	(115	)	$	151	$	374		$	38,206
Construction	19,838		—			—		2,096			21,934
Construction - custom	1,080		—			—		30			1,110
Land - acquisition & development	6,023		(20		)	4,018		(3,356		)	6,665
Land - consumer lot loans	2,535		(17		)	70		(87		)	2,501
Multi-family	6,925		—			—		704			7,629
Commercial real estate	8,588		(11		)	356		1,235			10,168
Commercial & industrial	28,008		(58		)	725		(939		)	27,736
HELOC	813		(37		)	1		55			832
Consumer	1,888		(146		)	379		(446		)	1,675
	$	113,494	$	(404	)	$	5,700	$	(334	)	$	118,456

The Company recorded no provision for loan losses during the three months ended December 31, 2017 or December 31, 2016. Reserving for new loan originations as the loan portfolio grows and the mix changes has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $3,082,000 for the three months ended December 31, 2017, compared with $5,296,000 of net recoveries for the same period one year ago.

Non-performing assets were $63,448,000, or 0.41%, of total assets at December 31, 2017, compared to $70,238,000, or 0.46%, of total assets at September 30, 2017. Non-accrual loans were $45,520,000 at December 31, 2017, compared to $49,580,000 at September 30, 2017. Delinquencies, as a percent of total loans, were 0.43% at December 31, 2017, compared to 0.40% at September 30, 2017.

The reserve for unfunded commitments was $6,750,000 as of December 31, 2017, which is a decrease from $7,750,000 at September 30, 2017.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $133,905,000, or 1.08% of gross loans as of December 31, 2017, is sufficient to absorb estimated inherent losses.

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(UNAUDITED)

The following tables show loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves.



December 31, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	35,928	$	5,676,565	0.6	%	$	—	$	24,083	—	%
Construction	25,214		851,800		3.0		—		364		—
Construction - custom	2,052		292,255		0.7		—		—		—
Land - acquisition & development	7,355		110,884		6.6		—		1,376		—
Land - consumer lot loans	2,906		97,291		3.0		—		416		—
Multi-family	7,899		1,311,943		0.6		5		730		0.7
Commercial real estate	11,519		1,389,749		0.8		106		27,535		0.4
Commercial & industrial	28,744		1,108,961		2.6		524		11,694		4.5
HELOC	808		134,320		0.6		—		620		—
Consumer	4,095		219,784		1.9		—		70		—
	$	126,520	$	11,193,552	1.1	%	$	635	$	66,888	0.9	%



September 30, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	36,893	$	5,713,576	0.7	%	$	—	$	5,552	—	%
Construction	24,556		793,958		3.1		—		—		—
Construction - custom	1,944		277,495		0.7		—		105		—
Land - acquisition & development	6,828		104,767		6.5		1		89		1.0
Land - consumer lot loans	2,649		96,337		2.8		—		171		—
Multi-family	7,857		1,302,625		0.6		5		493		1.0
Commercial real estate	11,697		1,391,668		0.8		120		21,765		0.6
Commercial & industrial	28,524		1,093,210		2.6		—		81		—
HELOC	855		141,689		0.6		—		215		—
Consumer	1,144		84,887		1.4		—		82		—
	$	122,947	$	11,000,212	1.1	%	$	126	$	28,553	0.4	%

As of December 31, 2017, $126,520,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $635,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2017, $122,947,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $126,000 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 the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by

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



December 31, 2017	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Loan type
Single-family residential	$	5,657,731		$	—		$	35,587		$	—		$	—		$	5,693,318
Construction	1,707,044			—			3,374			—			—			1,710,418
Construction - custom	583,580			—			—			—			—			583,580
Land - acquisition & development	134,625			—			2,313			—			—			136,938
Land - consumer lot loans	104,105			—			981			—			—			105,086
Multi-family	1,304,991			3,159			4,545			—			—			1,312,695
Commercial real estate	1,401,236			3,764			31,508			—			—			1,436,508
Commercial & industrial	1,077,207			10,423			33,077			—			—			1,120,707
HELOC	136,287			—			708			—			—			136,995
Consumer	219,899			—			72			—			—			219,971
Total gross loans	$	12,326,705		$	17,346		$	112,165		$	—		$	—		$	12,456,216

Total grade as a % of total gross loans	99.0		%	0.1		%	0.9		%	—		%	—		%



September 30, 2017	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Loan type
Single-family residential	$	5,671,229		$	—		$	39,775		$	—		$	—		$	5,711,004
Construction	1,594,926			—			3,070			—			—			1,597,996
Construction - custom	602,540			—			91			—			—			602,631
Land - acquisition & development	123,028			207			1,073			—			—			124,308
Land - consumer lot loans	103,787			—			618			—			—			104,405
Multi-family	1,295,261			5,795			2,092			—			—			1,303,148
Commercial real estate	1,391,996			5,944			36,670			—			—			1,434,610
Commercial & industrial	1,054,972			14,814			23,574			—			—			1,093,360
HELOC	144,229			—			621			—			—			144,850
Consumer	84,984			—			91			—			—			85,075
Total gross loans	$	12,066,952		$	26,760		$	107,675		$	—		$	—		$	12,201,387

Total grade as a % of total gross loans	98.9		%	0.2		%	0.9		%	—		%	—		%

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(UNAUDITED)

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



December 31, 2017	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,667,099	99.5	%	$	26,219	0.5	%
Construction	1,710,054		100.0		364		—
Construction - custom	583,580		100.0		—		—
Land - acquisition & development	135,612		99.0		1,326		1.0
Land - consumer lot loans	104,110		99.1		976		0.9
Multi-family	1,312,445		100.0		250		—
Commercial real estate	1,428,267		99.4		8,241		0.6
Commercial & industrial	1,113,111		99.3		7,596		0.7
HELOC	136,519		99.7		476		0.3
Consumer	219,899		100.0		72		—
	$	12,410,696	99.6	%	$	45,520	0.4	%



September 30, 2017	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,683,074	99.5	%	$	27,930	0.5	%
Construction	1,597,996		100.0		—		—
Construction - custom	602,540		99.9		91		0.1
Land - acquisition & development	124,012		99.8		296		0.2
Land - consumer lot loans	103,800		99.4		605		0.6
Multi-family	1,303,009		99.9		139		0.1
Commercial real estate	1,422,795		99.2		11,815		0.8
Commercial & industrial	1,085,278		99.3		8,082		0.7
HELOC	144,319		99.6		531		0.4
Consumer	84,984		99.9		91		0.1
	$	12,151,807	99.6	%	$	49,580	0.4	%

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




December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	20,405	$	21,860	$	—		$	20,864
Construction	969		969		—			485
Construction - custom	—		—		—			74
Land - acquisition & development	1,376		1,405		—			853
Land - consumer lot loans	300		375		—			254
Multi-family	250		254		—			195
Commercial real estate	16,372		21,720		—			14,631
Commercial & industrial	4,439		4,506		—			6,359
HELOC	620		747		—			555
Consumer	70		134		—			79
	44,801		51,970		—			44,349
Impaired loans with an allowance recorded:
Single-family residential	170,677		174,162		3,412			176,308
Land - acquisition & development	—		—		—			45
Land - consumer lot loans	7,405		7,776		—			7,677
Multi-family	480		480		5			487
Commercial real estate	11,910		12,755		106			13,495
Commercial & industrial	7,256		7,256		524			3,628
HELOC	1,356		1,435		—			1,542
Consumer	91		91		—			94
	199,175		203,955		4,047		(1)	203,276
Total impaired loans:
Single-family residential	191,082		196,022		3,412			197,172
Construction	969		969		—			485
Construction - custom	—		—		—			74
Land - acquisition & development	1,376		1,405		—			898
Land - consumer lot loans	7,705		8,151		—			7,931
Multi-family	730		734		5			682
Commercial real estate	28,282		34,475		106			28,126
Commercial & industrial	11,695		11,762		524			9,987
HELOC	1,976		2,182		—			2,097
Consumer	161		225		—			173
	$	243,976	$	255,925	$	4,047	(1)	$	247,625


(1)	Includes $635,000 of specific reserves and $3,412,000 included in the general reserves.

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(UNAUDITED)



September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	21,325	$	23,880	$	—		$	19,371
Construction - custom	148		165		—			231
Land - acquisition & development	330		8,208		—			176
Land - consumer lot loans	208		330		—			431
Multi-family	139		3,231		—			748
Commercial real estate	12,890		22,487		—			11,466
Commercial & industrial	8,279		14,321		—			7,425
HELOC	490		1,212		—			487
Consumer	88		1,433		—			57
	43,897		75,267		—			40,392
Impaired loans with an allowance recorded:
Single-family residential	181,941		186,167		4,030			204,723
Land - acquisition & development	90		90		1			576
Land - consumer lot loans	7,949		8,526		—			8,976
Multi-family	493		493		5			1,024
Commercial real estate	15,079		16,707		120			16,991
Commercial & industrial	—		—		—			297
HELOC	1,728		1,806		—			1,451
Consumer	97		284		—			100
	207,377		214,073		4,156		(1)	234,138
Total impaired loans:
Single-family residential	203,266		210,047		4,030			224,094
Construction - custom	148		165		—			231
Land - acquisition & development	420		8,298		1			752
Land - consumer lot loans	8,157		8,856		—			9,407
Multi-family	632		3,724		5			1,772
Commercial real estate	27,969		39,194		120			28,457
Commercial & industrial	8,279		14,321		—			7,722
HELOC	2,218		3,018		—			1,938
Consumer	185		1,717		—			157
	$	251,274	$	289,340	$	4,156	(1)	$	274,530


(1)	Includes $126,000 of specific reserves and $4,030,000 included in the general reserves.

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(UNAUDITED)

NOTE F – Fair Value Measurements

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

We have established and documented the Company's process for determining the fair values of the Company's assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, fair value is determined using valuation models or third-party appraisals. The following is a description of the valuation methodologies used to measure and report the fair value of financial assets and liabilities on a recurring or nonrecurring basis.

Measured on a Recurring Basis

Available-for-Sale Securities and Derivative Contracts

Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges, including the Company's equity securities, are measured using the closing price in an active market and are considered a Level 1 input method.

The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges as well as 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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(UNAUDITED)

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



	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Available-for-sale securities:
Equity securities	$	503	$	—	$	—	$	503
U.S. government and agency securities	—		194,869		—		194,869
Municipal bonds	—		26,212		—		26,212
Corporate debt securities	—		184,416		—		184,416
Mortgage-backed securities
Agency pass-through certificates	—		831,489		—		831,489
Commercial MBS	—		8,366		—		8,366
Total available-for-sale securities	503		1,245,352		—		1,245,855
Interest rate contracts	—		7,587		—		7,587
Borrowings hedges	—		4,997		—		4,997
Total financial assets	$	503	$	1,257,936	$	—	$	1,258,439

Financial Liabilities
Interest rate contracts	$	—	$	7,587	$	—	$	7,587
Commercial loan hedges	—		36		—		36
Total financial liabilities	$	—	$	7,623	$	—	$	7,623

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the three months ended December 31, 2017.

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(UNAUDITED)



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Available-for-sale securities:
Equity securities	$	522	$	—	$	—	$	522
U.S. government and agency securities	—		211,077		—		211,077
Municipal bonds	—		26,624		—		26,624
Corporate debt securities	—		185,298		—		185,298
Mortgage-backed securities
Agency pass-through certificates	—		834,297		—		834,297
Commercial MBS	—		8,391		—		8,391
Total available-for-sale securities	522		1,265,687		—		1,266,209
Interest rate contracts	—		1,139		—		1,139
Total financial assets	$	522	$	1,266,826	$	—	$	1,267,348

Financial Liabilities
Interest rate contracts	$	—	$	1,139	$	—	$	1,139
Commercial loan hedges	—		174		—		174
Borrowings hedges	—		1,693		—		1,693
Total financial liabilities	$	—	$	3,006	$	—	$	3,006

There were no transfers between, into and/or out of Levels 1, 2 or 3 during the fiscal year ended September 30, 2017.

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(UNAUDITED)

Measured on a Nonrecurring Basis

Impaired Loans & Real Estate Owned

Real estate owned ("REO") consists principally of properties acquired through foreclosure. From time to time, and on a nonrecurring basis, adjustments using fair value measurements are recorded to reflect increases or decreases based on the discounted cash flows, the current appraisal or estimated value of the collateral, but only up to the fair value of the real estate owned as of the initial transfer date less selling costs.

When management determines that the fair value of the collateral or the real estate owned requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the impaired loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at December 31, 2017 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, 2017 and December 31, 2016, and the total gains (losses) resulting from those fair value adjustments for the three months ended December 31, 2017 and December 31, 2016. The estimated fair value measurements are shown gross of estimated selling costs.



	December 31, 2017								Three Months Ended December 31, 2017
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(In thousands)
Impaired loans (1)	$	—	$	—	$	688	$	688	$	(507	)
Real estate owned (2)	—		—		2,055		2,055		(180		)
Balance at end of period	$	—	$	—	$	2,743	$	2,743	$	(687	)


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


(2)	The gains (losses) represent aggregate writedowns and charge-offs on REO.



	December 31, 2016								Three Months Ended December 31, 2016
	Level 1		Level 2		Level 3		Total		Total Gains (Losses)
	(In thousands)
Impaired loans (1)	$	—	$	—	$	3,353	$	3,353	$	(422	)
Real estate owned (2)	—		—		2,299		2,299		(241		)
Balance at end of period	$	—	$	—	$	5,652	$	5,652	$	(663	)


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


(2)	The gains (losses) represent aggregate writedowns and charge-offs on REO.

Impaired loans - The Company adjusts the carrying amount of impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows or the fair value of the underlying collateral. Impaired loans with a specific reserve allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets.

The evaluations for impairment are prepared by the Problem Loan Review Committee, which is chaired by the Chief Credit Officer and includes the Loan Review manager and Special Credits manager, as well as senior credit officers, division managers and group executives, as applicable. These evaluations are performed in conjunction with the quarterly allowance for loan loss process.

Applicable loans that were included in the previous quarter's review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and collateral value) are compared. Material differences

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(UNAUDITED)

are evaluated for reasonableness and discussions are held between the relationship manager and their division manager to understand the difference and determine if any adjustment is necessary.

The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values. The following methods are used to value impaired loans:

•

The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, assessments provided by third-party appraisers and other valuation models. The Company performs or reaffirms valuations of collateral-dependent impaired loans at least annually. Adjustments are made if management believes that more recent information is available and relevant with respect to the fair value of the collateral.


•	The present value of the expected future cash flows of the loans is used for measurement of non collateral-dependent loans to test for impairment.

Real estate owned - When a loan is reclassified from loan status to real estate owned due to the Company taking possession of the collateral, a special credits officer, along with the special credits manager, obtains a valuation, which may include appraisals or third-party price opinions, which is used to establish the fair value of the underlying collateral. The determined fair value, less selling costs, becomes the carrying value of the REO asset.

The fair value of REO assets is re-evaluated quarterly and the REO asset is adjusted to reflect the fair value as necessary. After foreclosure, the valuations are updated periodically and current market conditions may require the assets to be written down further or up to the cost basis established on the date of transfer. The carrying balance of REO assets are also written down once a bona fide offer is contractually accepted, through execution of a purchase and sale agreement, where the accepted price is lower than the cost established on the transfer date.

Fair Values of 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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(UNAUDITED)



		December 31, 2017				September 30, 2017
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(In thousands)
Financial assets
Cash and cash equivalents	1	$	309,713	$	309,713	$	313,070	$	313,070
Available-for-sale securities
Equity securities	1	503		503		522		522
U.S. government and agency securities	2	194,869		194,869		211,077		211,077
Municipal bonds	2	26,212		26,212		26,624		26,624
Corporate debt securities	2	184,416		184,416		185,298		185,298
Mortgage-backed securities
Agency pass-through certificates	2	831,489		831,489		834,297		834,297
Commercial MBS	2	8,366		8,366		8,391		8,391
Total available-for-sale securities		1,245,855		1,245,855		1,266,209		1,266,209
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	2	1,750,886		1,738,337		1,646,856		1,635,913
Commercial MBS	2	15,000		15,005		—		—
Total held-to-maturity securities		1,765,886		1,753,342		1,646,856		1,635,913

Loans receivable	3	11,107,042		11,503,407		10,882,622		11,247,586
FHLB and FRB stock	2	130,590		130,590		122,990		122,990
Other assets - interest rate contracts	2	7,587		7,587		1,139		1,139
Other assets - borrowings hedges	2	4,997		4,997		—		—

Financial liabilities
Customer accounts	2	11,001,579		10,483,114		10,835,008		10,411,686
FHLB advances	2	2,415,000		2,431,792		2,225,000		2,266,791
Other liabilities - interest rate contracts	2	7,587		7,587		1,139		1,139
Other liabilities - commercial loan hedges	2	36		36		174		174
Other liabilities - borrowings hedges	2	—		—		1,693		1,693

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value.

Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities which are exchange traded are considered a Level 1 input method.

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

FHLB and FRB stock – The fair value is based upon the par value of the stock which equates to its carrying value.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Customer accounts – The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.

Interest rate contracts – The bank offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the bank enters into the opposite trade with a counterparty to offset its interest rate risk. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.

Commercial loan hedges – The fair value of the interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.

Borrowings hedges – The fair value of the interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique.

The following tables provide a reconciliation of amortized cost to fair value of available-for-sale and held-to-maturity securities.



	December 31, 2017
	Amortized Cost		Gross Unrealized					Fair Value		Yield
	Amortized Cost		Gains		Losses			Fair Value		Yield
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
Within 1 year	$	3,300	$	70	$	—		$	3,370	9.80	%
1 to 5 years	2,123		—		—			2,123		1.61
5 to 10 years	68,326		—		(1,174		)	67,152		2.03
Over 10 years	122,171		215		(162		)	122,224		2.09
Equity securities due
1 to 5 years	500		3		—			503		1.80
Corporate debt securities due
1 to 5 years	63,657		1,936		—			65,593		3.14
5 to 10 years	119,962		213		(1,352		)	118,823		2.66
Over 10 years	—		—		—			—		—
Municipal bonds due
Within 1 year	2,352		—		(4		)	2,348		1.23
1 to 5 years	1,374		8		—			1,382		2.05
Over 10 years	20,338		2,144		—			22,482		6.45
Mortgage-backed securities
Agency pass-through certificates	825,744		8,181		(2,436		)	831,489		3.11
Commercial MBS	8,350		16		—			8,366		3.55
	1,238,197		12,786		(5,128		)	1,245,855		2.98
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,750,886		6,218		(18,767		)	1,738,337		3.16
Commercial MBS	15,000		5		—			15,005		2.23
	1,765,886		6,223		(18,767		)	1,753,342		3.15
	$	3,004,083	$	19,009	$	(23,895	)	$	2,999,197	3.08	%

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	September 30, 2017
	Amortized Cost		Gross Unrealized						Fair Value		Yield
	Amortized Cost		Gains		Losses				Fair Value		Yield
	(In thousands)
Available-for-sale securities
U.S. government and agency securities due
Within 1 year	$	9,300	$	146		$	—		$	9,446	10.38	%
1 to 5 years	5,688		2			—			5,690		1.51
5 to 10 years	69,108		—			(1,238		)	67,870		1.93
Over 10 years	127,936		353			(218		)	128,071		1.92
Equity Securities
1 to 5 years	500		22			—			522		1.80
Corporate bonds due
Within 1 year	—		—			—			—		—
1 to 5 years	63,622		2,083			—			65,705		2.96
5 to 10 years	119,960		210			(577		)	119,593		2.62
Over 10 years	—		—			—			—		—
Municipal bonds due
Within 1 year	2,344		10			—			2,354		1.23
1 to 5 years	1,367		55			—			1,422		2.05
5 to 10 years	—		—			—			—		—
Over 10 years	20,343		2,505			—			22,848		6.45
Mortgage-backed securities
Agency pass-through certificates	828,069		8,402			(2,174		)	834,297		2.96
Commercial MBS	8,350		41			—			8,391		3.31
	1,256,587		13,829			(4,207		)	1,266,209		2.86
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates	1,646,856		7,143			(18,086		)	1,635,913		3.14
	1,646,856		7,143			(18,086		)	1,635,913		—
	$	2,903,443	$	20,972		$	(22,293	)	$	2,902,122	3.02	%

For available-for-sale investment securities, there were no sales during the three months ended December 31, 2017 and sales totaling $350,890,000 during the three months ended December 31, 2016. There were purchases of $40,884,000 of available-for-sale investment securities during the three months ended December 31, 2017 and no purchases during the three months ended December 31, 2016. For held-to-maturity investment securities, there were purchases totaling $170,836,000 during the three months ended December 31, 2017 and purchases of $415,729,000 during the three months ended December 31, 2016. 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 unrealized gross losses and fair value of securities as of December 31, 2017 and September 30, 2017, 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.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



December 31, 2017	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value
	(In thousands)
Corporate debt securities	$	—		$	—	$	(1,352	)	$	98,648	$	(1,352	)	98,648
Municipal bonds due	—			—		(4		)	2,347		(4		)	2,347
U.S. government and agency securities	—			—		(1,336		)	104,572		(1,336		)	104,572
Agency pass-through certificates	(131		)	71,537		(21,072		)	1,218,036		(21,203		)	1,289,573
	$	(131	)	$	71,537	$	(23,764	)	$	1,423,603	$	(23,895	)	$	1,495,140



September 30, 2017	Less than 12 months					12 months or more					Total
	Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value		Unrealized Gross Losses			Fair Value
	(In thousands)
Corporate debt securities	$	—		$	—	$	(577	)	$	49,423	$	(577	)	$	49,423
U.S. government and agency securities	(759		)	24,400		(697		)	96,195		(1,456		)	120,595
Agency pass-through certificates	(17,683		)	1,163,358		(2,577		)	249,304		(20,260		)	1,412,662
	$	(18,442	)	$	1,187,758	$	(3,851	)	$	394,922	$	(22,293	)	$	1,582,680

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(UNAUDITED)

NOTE G – Derivatives and Hedging Activities

The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The Company had $956,247,000 and $1,035,573,000 notional in interest rate swaps to hedge this exposure as of December 31, 2017 and September 30, 2017, respectively. The interest rate swaps are derivatives under FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the three months ended December 31, 2017 and 2016 as the changes in value for the asset and liability side of the swaps offset each other.

The Company has also entered into interest rate swaps to convert certain existing and future short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of rising interest rates, specifically LIBOR rates, which are a benchmark for the short term borrowings. The hedging program qualifies as a cash flow hedge under ASC 815, which provides for offsetting of the recognition of gains and losses of the interest rate swaps and the hedged items. The hedged item is the LIBOR portion of the series of existing or future short-term fixed rate borrowings over the term of the interest rate swap. The change in the fair value of the interest rate swaps is recorded in other comprehensive income. The Company had $700,000,000 notional in interest rate swaps to hedge existing and anticipated future borrowings as of December 31, 2017 and September 30, 2017.

The Company has also enters into interest rate swaps to hedge the interest rate risk of individual fixed rate commercial loans and these relationships qualify as a fair value hedges under ASC 815, which provides for offsetting of the recognition of gains and losses of the respective interest rate swap and the hedged item. The interest rate swaps in these hedging relationships had a notional amount of $97,927,000 and $52,936,000 as of December 31, 2017 and September 30, 2017, respectively.

The following table presents the fair value and balance sheet classification of derivatives at December 31, 2017 and September 30, 2017:



	Asset Derivatives						Liability Derivatives
	December 31, 2017			September 30, 2017			December 31, 2017			September 30, 2017
	Balance Sheet			Balance Sheet			Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value		Location	Fair Value		Location	Fair Value
	(In thousands)
Interest rate contracts	Other assets	$	7,587	Other assets	$	1,139	Other liabilities	$	7,587	Other liabilities	$	1,139
Commercial loan hedges	Other assets	—		Other assets	—		Other liabilities	36		Other liabilities	174
Borrowings hedges	Other assets	4,997		Other assets	—		Other liabilities	—		Other liabilities	1,693
		$	12,584		$	1,139		$	7,623		$	3,006

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE H – Income Taxes

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. Because the Company has a fiscal year end of September 30, the reduced corporate tax rate will result in the application of a blended federal statutory tax rate for its fiscal year 2018 and then a flat 21% thereafter.

Under generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. At September 30, 2017, the Company’s deferred tax assets and liabilities were determined based on the then-current enacted federal tax rate of 35%. As a result of the reduction in the corporate income tax rate under the Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets and liabilities expected to be realized in fiscal year 2018 were re-measured using the aforementioned blended rate. All remaining deferred tax assets and liabilities were re-measured using the new statutory federal rate of 21%. These re-measurements collectively resulted in a discrete tax benefit of $3,700,000 that was recognized during the three months ended December 31, 2017. The Company’s revaluation of its deferred tax assets and liabilities is subject to further clarification of the Tax Act and refinements of its estimates. As a result, the actual impact on the deferred tax assets and liabilities and income tax expense due to the Tax Act may vary from the amounts estimated.

FORWARD LOOKING STATEMENTS

Washington Federal, Inc. (the "Company") 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 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;


•	the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;


•	the Company's ability to successfully complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such activities;


•	legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential limitations in the manner in which the Company conducts its business and 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;

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


•	changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees;


•	the success, timeliness and cost of the Company’s remediation efforts associated with its Bank Secrecy Act program, possible actions of government authorities related thereto and the potential impact of such matters on the success, timing and ability to pursue the Company’s growth or other business initiatives;


•	the success of the Company at managing the risks involved in the foregoing and managing its business; and


•	the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.

All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.

GENERAL & BUSINESS DESCRIPTION

Washington Federal, Inc. (“Company” or “Washington Federal”) is a bank holding company headquartered in Seattle, Washington that conducts its operations through Washington Federal, National Association (“Bank”), a federally chartered national bank subsidiary. Washington Federal and its subsidiaries are 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.

The Company's fiscal year end is September 30^th. All references to 2017 represent balances as of September 30, 2017 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 59% of total deposits as of December 31, 2017 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 $1,765,886,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of December 31, 2017, the net unrealized loss on these securities was $12,544,000. The Company has $1,245,855,000 of available-for-sale securities that are carried at fair value. As of December 31, 2017, the net unrealized gain on these securities was $7,658,000. The Bank has executed interest rate swaps to hedge interest rate risk on existing FHLB borrowings. The unrealized gain on these interest rate swaps as of December 31, 2017 was $4,997,000. 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 maturity gap analysis, modeling of changes in forecasted net interest income under various rate change scenarios, and the impact of interest rate changes on the net portfolio value (“NPV”) of the Company.

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

In the event of an immediate and parallel increase of 200 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 1.3% in the next year. This compares to an estimated increase of 3.0% as of the September 30, 2017 analysis. Management estimates that a gradual increase of 300 basis points in short term rates and 100 basis points in long term rates over two years would result in a net interest income increase of 0.5% in the first year and increase of 2.1% in the second year assuming a constant balance sheet and no management intervention.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

NPV Sensitivity. The NPV is an estimate of the market value of shareholders' equity. It is derived by calculating the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of the NPV to changes in interest rates provides a longer term view of interest rate risk as it incorporates all future expected cash flows. As of December 31, 2017, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decline by $528,601,000 or 20.4% and the NPV to total assets ratio to decline to 14.2% from a base of 16.6%. As of September 30, 2017, the NPV in the event of a 200 basis point increase in rates was estimated to decline by $462,604,000 or 18.2% and the NPV to total assets ratio to decline to 14.6% from a base of 16.6%. The increased NPV sensitivity and higher base NPV ratio is due primarily to higher interest rates and lower prices as of December 31, 2017.

Repricing Gap Analysis. At December 31, 2017, the Company had approximately $2,013,901,000 more in liabilities subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (12.9)% of total assets. This was an increase from the (15.7)% gap as of September 30, 2017. A negative repricing gap implies that funding costs will change more rapidly than interest income on earning assets with movements in interest rates. A negative repricing gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. This interest rate gap analysis provides management with a high-level indication of interest rate risk, but it is considered less reliable than more detailed modeling.

Interest Rate Spread. The interest rate spread is measured as the difference between the rate on total loans and investments and the rate on costing liabilities at the end of each period. The interest rate spread increased to 2.92% at December 31, 2017 from 2.90% at September 30, 2017. The spread increase of 2 basis points is primarily due to the rise in short-term interest rates, which resulted in an increased rate being earned on cash and adjustable rate loans and investment securities. As of December 31, 2017, the weighted average rate on earning assets increased by 3 basis points to 3.85% compared to September 30, 2017, while the weighted average cost of funds increased by 1 basis point to 0.93%. The interest rate spread increased to 2.92% at December 31, 2017 from 2.73% at December 31, 2016.

Net Interest Margin. The net interest margin is measured using the net interest income divided by average earning assets for the period. The net interest margin increased to 3.26% for the quarter ended December 31, 2017 from 3.02% for the quarter ended December 31, 2016. The yield on earning assets increased 23 basis points to 4.08% and the cost of interest bearing liabilities decreased 2 basis point to 0.91%. The higher yield on earning assets is the result of the shift in mix from investment securities into a higher proportion of loans receivable which carry higher yields on average. The lower rate in interest bearing liabilities was primarily due to the maturity of certain long-term FHLB advances.

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

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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



	Three Months Ended December 31, 2017						Three Months Ended December 31, 2016
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(In thousands)						(In thousands)
Assets
Loans receivable	$	10,984,886	$	124,511	4.50	%	$	10,013,798	$	114,835	4.55	%
Mortgaged-backed securities	2,521,407		16,899		2.66		2,537,585		12,789		2.00
Cash & Investments	559,370		3,273		2.32		1,010,299		4,246		1.67
FHLB & FRB stock	126,229		1,097		3.45		117,210		894		3.03

Total interest-earning assets	14,191,892		145,780		4.08	%	13,678,892		132,764		3.85	%
Other assets	1,149,607						1,197,304
Total assets	$	15,341,499					$	14,876,196

Liabilities and Equity
Customer accounts	$	10,850,742	$	14,638	0.54	%	$	10,610,314	$	13,017	0.49	%
FHLB advances	2,305,978		15,407		2.65		2,080,000		16,595		3.17

Total interest-bearing liabilities	13,156,720		30,045		0.91	%	12,690,314		29,612		0.93	%
Other liabilities	168,382						201,233
Total liabilities	13,325,102						12,891,547
Stockholders' equity	2,016,397						1,984,649

Total liabilities and equity	$	15,341,499					$	14,876,196

Net interest income			$	115,735					$	103,152

Net interest margin					3.26	%					3.02	%

As of December 31, 2017, total assets had increased by $330,433,000 to $15,584,013,000 from $15,253,580,000 at September 30, 2017. During the three months ended December 31, 2017, cash and cash equivalents decreased by $3,357,000, loans receivable increased $224,420,000 and investment securities increased by $98,676,000.

Cash and cash equivalents of $309,713,000 and stockholders’ equity of $2,009,618,000 as of December 31, 2017 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.

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.

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,

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 $309,713,000 at December 31, 2017, a decrease from $313,070,000 at September 30, 2017. These amounts include the Bank's operating cash.

The Company’s net worth at December 31, 2017 was $2,009,618,000, or 12.90% of total assets. This was a increase of $3,930,000 from September 30, 2017 when net worth was $2,005,688,000, or 13.15% of total assets. The Company’s net worth was impacted in the three months ended December 31, 2017 by net income of $51,670,000, the payment of $13,043,000 in cash dividends, treasury stock purchases of $38,984,000, as well as other comprehensive income of $2,989,000. The ratio of tangible capital to tangible assets at December 31, 2017 was 11.12%. Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment.

The Company (on a consolidated basis) 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 and the Bank's financial statements.

Federal banking agencies establish regulatory capital rules which 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, restrictions can be placed on the bank by its regulators. 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. The capital rules that became effective in January 2015 include a phase-in period for certain minimum ratios and the capital buffers, before the full minimum ratios take effect in 2019. Management continues to monitor the financial position of the Company and its capital ratios as the rules phase in.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.



	Actual				Minimum Capital Adequacy Guidelines		Minimum Well-Capitalized Guidelines
	Capital		Ratio		Ratio		Ratio
	(In thousands)
December 31, 2017
Common Equity Tier I risk-based capital ratio:
The Company	$	1,691,303	16.14	%	4.50	%	NA
The Bank	1,662,981		15.87	%	4.50	%	6.50	%
Tier I risk-based capital ratio:
The Company	1,691,303		16.14	%	6.00	%	NA
The Bank	1,662,981		15.87	%	6.00	%	8.00	%
Total risk-based capital ratio:
The Company	1,822,321		17.39	%	8.00	%	NA
The Bank	1,794,017		17.12	%	8.00	%	10.00	%
Tier 1 Leverage ratio:
The Company	1,691,303		11.26	%	4.00	%	NA
The Bank	1,662,981		11.07	%	4.00	%	5.00	%

September 30, 2017
Common Equity Tier 1 risk-based capital ratio:
The Company	1,701,327		16.67	%	4.50	%	NA
The Bank	1,668,314		16.35	%	4.50	%	6.50	%
Tier I risk-based capital ratio:
The Company	1,701,327		16.67	%	6.00	%	NA
The Bank	1,668,314		16.35	%	6.00	%	8.00	%
Total risk-based capital ratio:
The Company	1,828,935		17.92	%	8.00	%	NA
The Bank	1,795,929		17.60	%	8.00	%	10.00	%
Tier 1 Leverage ratio:
The Company	1,701,327		11.49	%	4.00	%	NA
The Bank	1,668,314		11.27	%	4.00	%	5.00	%

CHANGES IN FINANCIAL CONDITION

Cash and cash equivalents: Cash and cash equivalents are $309,713,000 at December 31, 2017, a decrease of $3,357,000, or 1.1%, since September 30, 2017.

Available-for-sale and held-to-maturity securities: Available-for-sale securities decreased $20,354,000, or 1.6%, during the three months ended December 31, 2017, mostly due to principal repayments and maturities of $58,261,000 partially offset by purchases of $40,884,000. During the same period, the balance of held-to-maturity securities increased by $119,030,000 due to purchases of $170,836,000 partially offset by principal paydowns and maturities of $50,653,000. As of December 31, 2017, the Company

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

had a net unrealized gain on available-for-sale securities of $7,658,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

Loans receivable: Loans receivable, net of related contra accounts, increased to $11,107,042,000 at December 31, 2017 compared to $10,882,622,000 at September 30, 2017. The increase resulted primarily from originations of $953,552,000 and purchases of $143,605,000, partially offset by loan principal repayments of $859,583,000. Commercial loan originations accounted for 70% of total originations and consumer loan originations were 30% during the period. Purchased loans during the quarter were pools of consumer loans. The increase in the loan portfolio is consistent with management's strategy during low rate environments to produce more 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, 2017				September 30, 2017				Change
	(In thousands)				(In thousands)				$			%
Gross loans by category
Single-family residential	$	5,693,318	45.7	%	$	5,711,004	46.8	%	$	(17,686	)	(0.3	)%
Construction	1,710,418		13.7		1,597,996		13.1		112,422			7.0
Construction - custom	583,580		4.7		602,631		4.9		(19,051		)	(3.2	)
Land - acquisition & development	136,938		1.1		124,308		1.0		12,630			10.2
Land - consumer lot loans	105,086		0.8		104,405		0.9		681			0.7
Multi-family	1,312,695		10.5		1,303,148		10.7		9,547			0.7
Commercial real estate	1,436,508		11.5		1,434,610		11.8		1,898			0.1
Commercial & industrial	1,120,707		9.0		1,093,360		9.0		27,347			2.5
HELOC	136,995		1.1		144,850		1.2		(7,855		)	(5.4	)
Consumer	219,971		1.8		85,075		0.7		134,896			158.6
Total gross loans	12,456,216		100	%	12,201,387		100	%	254,829			2.1	%
Less:
Allowance for loan losses	127,155				123,073				4,082			3.3	%
Loans in process	1,175,642				1,149,934				25,708			2.2
Net deferred fees, costs and discounts	46,377				45,758				619			1.4
Total loan contra accounts	1,349,174				1,318,765				30,409			2.3
Net Loans	$	11,107,042			$	10,882,622			$	224,420		2.1	%

Non-performing assets: Non-performing assets decreased $6,790,000 during the three months ended December 31, 2017 to $63,448,000 from $70,238,000 at September 30, 2017. The change is due to the $4,060,000 decrease in non-accrual loans and $2,730,000 decline in REO. Non-performing assets as a percentage of total assets decreased to 0.41% at December 31, 2017 compared to 0.46% at September 30, 2017.

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PART I – Financial Information

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table sets forth information regarding restructured loans and non-performing assets.



	December 31, 2017					September 30, 2017
	(In thousands)
Restructured loans:
Single-family residential	$	170,601		85.7	%	$	181,941		87.8	%
Land - acquisition & development	—			—		90			—
Land - consumer lot loans	7,405			3.7		7,949			3.8
Multi - family	480			0.2		493			0.2
Commercial real estate	11,910			6.0		15,079			7.3
Commercial & industrial	7,256			3.6		—			—
HELOC	1,432			0.7		1,728			0.8
Consumer	91			—		97			—
Total restructured loans (1)	$	199,175		100	%	$	207,377		100	%

Non-accrual loans:
Single-family residential	$	26,219		57.6	%	$	27,930		56.3	%
Construction	364			0.8		—			—
Construction - custom	—			—		91			0.2
Land - acquisition & development	1,326			2.9		296			0.6
Land - consumer lot loans	976			2.1		605			1.2
Multi-family	250			0.5		139			0.3
Commercial real estate	8,241			18.1		11,815			23.8
Commercial & industrial	7,596			16.7		8,082			16.3
HELOC	476			1.0		531			1.1
Consumer	72			0.2		91			0.2
Total non-accrual loans (2)	45,520			100	%	49,580			100	%
Real estate owned	17,928					20,658
Total non-performing assets	$	63,448				$	70,238
Total non-performing assets and performing restructured loans as a percentage of total assets	1.65		%			1.79		%

(1) Restructured loans were as follows:
Performing	$	194,359		97.6	%	$	202,272		97.5	%
Non-performing (included in non-accrual loans above)	4,816			2.4		5,105			2.5
	$	199,175		100	%	$	207,377		100	%

(2)

For the three months ended December 31, 2017, the Company recognized $2,551,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $489,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than three months of interest for some of the loans that were brought current. In addition to the non-accrual loans reflected in the above table, the Company had $56,133,000 of loans that were less than 90 days delinquent at December 31, 2017 but which it had classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs and performing restructured loans as a percent of total assets would have increased to 2.01% at December 31, 2017.

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.

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PART I – Financial Information

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 85.7% of restructured loans as of December 31, 2017. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 bps for a specific term, usually six to 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 table shows the Company’s allowance for loan losses by loan category.



December 31, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	35,928	$	5,676,565	0.6	%	$	—	$	24,083	—	%
Construction	25,214		851,800		3.0		—		364		—
Construction - custom	2,052		292,255		0.7		—		—		—
Land - acquisition & development	7,355		110,884		6.6		—		1,376		—
Land - consumer lot loans	2,906		97,291		3.0		—		416		—
Multi-family	7,899		1,311,943		0.6		5		730		0.7
Commercial real estate	11,519		1,389,749		0.8		106		27,535		0.4
Commercial & industrial	28,744		1,108,961		2.6		524		11,694		4.5
HELOC	808		134,320		0.6		—		620		—
Consumer	4,095		219,784		1.9		—		70		—
	$	126,520	$	11,193,552	1.1	%	$	635	$	66,888	0.9	%

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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



September 30, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	36,893	$	5,713,576	0.7	%	$	—	$	5,552	—	%
Construction	24,556		793,958		3.1		—		—		—
Construction - custom	1,944		277,495		0.7		—		105		—
Land - acquisition & development	6,828		104,767		6.5		1		89		1.0
Land - consumer lot loans	2,649		96,337		2.8		—		171		—
Multi-family	7,857		1,302,625		0.6		5		493		1.0
Commercial real estate	11,697		1,391,668		0.8		120		21,765		0.6
Commercial & industrial	28,524		1,093,210		2.6		—		81		—
HELOC	855		141,689		0.6		—		215		—
Consumer	1,144		84,887		1.4		—		82		—
	$	122,947	$	11,000,212	1.1	%	$	126	$	28,553	0.4	%

Reserve for losses on unfunded commitments: Unfunded commitments tend to vary depending on our loan mix and the proportion share of commercial loans. The reserve for unfunded commitments was $6,750,000 as of December 31, 2017, which is a decrease from $7,750,000 at September 30, 2017. Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $133,905,000, or 1.08% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio. See Note E for further discussion and analysis of the allowance for loan losses as of and for the period ended December 31, 2017.

Real estate owned: Real estate owned decreased during the three months ended December 31, 2017 by $2,730,000 to $17,928,000. The decrease is primarily due to sales of REO properties during the period.

Intangible assets: Intangible assets increased to $310,578,000 as of December 31, 2017 from $298,682,000 as of September 30, 2017. The increase was due to an immaterial correction related to acquisitions of insurance agency businesses in prior years that resulted in an increase in goodwill of $7,135,000 and finite-lived intangible assets of $5,106,000 and a corresponding decrease in other assets of $12,241,000.

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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

Customer accounts: Customer accounts increased $166,571,000, or 1.5%, to $11,001,579,000 at December 31, 2017 compared with $10,835,008,000 at September 30, 2017.

The following table shows the composition of the Bank’s customer accounts by deposit type.



	December 31, 2017						September 30, 2017
	Deposit Account Balance		As a % of Total Deposits		Wtd. Avg. Rate		Deposit Account Balance		As a % of Total Deposits		Wtd. Avg. Rate
	(In thousands)						(In thousands)
Non-interest checking	$	1,299,602	11.8	%	—	%	$	1,258,274	11.6	%	—	%
Interest checking	1,848,594		16.8		0.28		1,760,821		16.3		0.23
Savings (passbook/statement)	894,879		8.1		0.12		888,881		8.2		0.11
Money market	2,439,537		22.2		0.19		2,453,182		22.6		0.19
Time deposits	4,518,967		41.1		1.14		4,473,850		41.3		1.09
Total	$	11,001,579	100	%	0.57	%	$	10,835,008	100	%	0.54	%

FHLB advances and other borrowings: Total borrowings increased to $2,415,000,000 as of December 31, 2017 from $2,225,000,000 as of September 30, 2017. The weighted average rate for FHLB borrowings was 2.56% as of December 31, 2017 and 2.80% at September 30, 2017. The decrease in the rate was primarily due to the maturity of certain long-term FHLB advances.

RESULTS OF OPERATIONS

Net Income: The Company recorded net income of $51,670,000 for the three months ended December 31, 2017 compared to $41,246,000 for the prior year quarter.

Net Interest Income: For the three months ended December 31, 2017, net interest income was $115,735,000 which is $12,583,000 higher than the same quarter of the prior year. Net interest margin was 3.26% for the quarter ended December 31, 2017 compared to 3.02% for the quarter ended December 31, 2016. The increase in net interest income was primarily due to average earning assets increasing by $513,000,000 as well as the yield on earning assets increasing to 4.08% from 3.85%. The increase in net interest margin was primarily due to the shift in asset mix from cash and investment securities to higher yielding loans receivable.

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.

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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

Rate / Volume Analysis:



	Comparison of Three Months Ended 12/31/17 and 12/31/16
	Volume			Rate			Total
	(In thousands)
Interest income:
Loans receivable	$	10,935		$	(1,259	)	$	9,676
Mortgaged-backed securities	(81		)	4,191			4,110
Investments (1)	(2,401		)	1,631			(770		)
All interest-earning assets	8,453			4,563			13,016
Interest expense:
Customer accounts	295			1,326			1,621
FHLB advances and other borrowings	1,681			(2,869		)	(1,188		)
All interest-bearing liabilities	1,976			(1,543		)	433
Change in net interest income	$	6,477		$	6,106		$	12,583

___________________


(1)	Includes interest on cash equivalents and dividends on FHLB & FRB stock

Provision (Release) for Loan Losses: The Company recorded no provision for loan losses during the three months ended December 31, 2017 or December 31, 2016. Reserving for new loan originations as the loan portfolio grows has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $3,082,000 for the three months ended December 31, 2017, compared to net recoveries of $5,296,000 during the three months ended December 31, 2016.

Other Income: The three months ended December 31, 2017 results include total other income of $6,795,000 compared to $11,896,000 for the same period one year ago. The decrease during the three months ended December 31, 2017 is primarily due to a $8,550,000 charge from asset and liability valuation adjustments associated with FDIC loss share agreements. The Company is actively pursuing the early termination of its remaining FDIC loss share agreements. The impact of these valuation adjustments was partially offset by a $2,416,000 gain recognized on bank-owned life insurance and a $1,501,000 increase in deposit fee income, which was driven by the 2017 launch of the Company's new "Green Checking" product. Deposit fee income was $6,686,000 for the three months ended December 31, 2017 compared to $5,185,000 for the three months ended December 31, 2016.

Other Expense: The three months ended December 31, 2017 results include total other expense of $61,941,000 compared to $54,341,000 for the same period one year ago, a $7,600,000 or 14.0% increase. Compensation and benefits costs increased $2,625,000 primarily due to headcount increases and cost of living adjustments since last year. The number of staff, including part-time employees on a full-time equivalent basis, was 1,829 and 1,813 at December 31, 2017 and 2016, respectively. Information technology costs increased by $1,478,000 for the three months ended December 31, 2017 due mostly to consulting and audit work to enhance the Company's Bank Secrecy Act Program. Additionally, charitable contributions increased by $1,000,000 from the prior year as the Company fulfilled the first year of its previously announced commitment to fund its foundation by $1,000,000 annually for the next five years. Product delivery costs increased by $595,000 primarily due to enhanced features provided with the "Green Checking" product. Total other expense for the three months ended ended December 31, 2017 and 2016 equaled 1.62% and 1.46%, respectively, of average assets.

Gain (Loss) on Real Estate Owned: Results for the three months ended December 31, 2017 include a net gain on real estate owned of $46,000, compared to a gain of $398,000 for the same period one year ago.

Income Tax Expense: Income tax expense totaled $8,965,000 for the three months ended December 31, 2017, as compared to $19,859,000 for the same period one year ago. The effective tax rate for the three months ended December 31, 2017 was 14.79% compared to 32.50% for the quarter ended December 31, 2016 and 32.27% for the fiscal year ended September 30, 2017. On December 22, 2017, the Tax Cuts and Jobs Act was enacted and it provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, such as a reduction in the statutory federal corporate tax rate from 35% to 21% effective from January 1, 2018 forward and changes or limitations to certain tax deductions. The Company has a fiscal year end of September 30, so the change to the statutory corporate tax rate results in a blended federal statutory tax rate of 24.5% for its fiscal year 2018. The

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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

financial statements for the first fiscal quarter 2018 were also impacted by a one-time revaluation of the Company’s deferred tax assets and liabilities and this was recognized as a discrete income tax benefit in the period. The Company estimates that its annual effective tax rate for fiscal 2018 (blended rate year) will be approximately 22-23%. The effective tax rate for the current quarter was lower than the new 2018 statutory rate due to discrete tax benefits of $3,743,000 recognized related to the revaluation of deferred tax assets and liabilities expected to be utilized in 2018 as well as tax benefits of $2,205,000 related to stock based compensation.

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, 2017. 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 2017 Form 10-K.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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.

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES

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 in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the 2017 Form 10-K for the year ended September 30, 2017. 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 our historical results or the results contemplated by the forward-looking statements contained in this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended December 31, 2017.



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan (1)	Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period (2)
October 1, 2017 to October 31, 2017	74,453	$	34.79	74,453	1,826,502
November 1, 2017 to November 30, 2017	744,353	33.75		744,353	1,082,149
December 1, 2017 to December 31, 2017	328,564	34.30		328,564	753,585
Total	1,147,370	$	33.98	1,147,370	753,585

___________________

(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 51,956,264 shares have been authorized for repurchase. This includes the authorization of an additional 5,000,000 shares that may be repurchased under Washington Federal's share repurchase program that was approved in September 2016. This does not include the 5,000,000 additional shares authorized by the Board of Directors on January 24, 2018.


(2)	Shares remaining available reflects the impact of TARP warrants that have been repurchased for cash as management also counts these against the maximum number of shares that may be repurchased under the Plan.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

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Item 6. Exhibits



(a)	Exhibits

	31.1	Section 302 Certification by the Chief Executive Officer
	31.2	Section 302 Certification by the Chief Financial Officer
	32	Section 906 Certification by the Chief Executive Officer and Chief Financial Officer
	101	Financial Statements from the Company’s Form 10-Q for the three months ended December 31, 2017 formatted in XBRL

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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 25, 2018	/S/ BRENT J. BEARDALL
	BRENT J. BEARDALL President & Chief Executive Officer

January 25, 2018	/S/ VINCENT L. BEATTY
	VINCENT L. BEATTY Executive Vice President and Chief Financial Officer

January 25, 2018	/S/ CORY D. STEWART
	CORY D. STEWART Senior Vice President and Principal Accounting Officer