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EX-32 - EXHIBIT 32 - WASHINGTON FEDERAL INCwafdex3209302016.htm
EX-31.2 - EXHIBIT 31.2 - WASHINGTON FEDERAL INCwafdex31209302016.htm
EX-31.1 - EXHIBIT 31.1 - WASHINGTON FEDERAL INCwafdex31109302016.htm
EX-23.1 - EXHIBIT 23.1 - WASHINGTON FEDERAL INCwafdex231dtconsent09302016.htm
EX-13 - EXHIBIT 13 - WASHINGTON FEDERAL INCa9302016annualreportex13.htm
EX-10.2 - EXHIBIT 10.2 - WASHINGTON FEDERAL INCwafdex1022011incentiveplan.htm

United States
Securities and Exchange Commission
Washington, D.C. 20549
____________________________________________________________
 FORM 10-K
____________________________________________________________ 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2016.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number: 001-34654
____________________________________________________________
 Washington Federal, Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________________
Washington
 
91-1661606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
425 Pike Street, Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 624-7930
_____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
 
Name of each exchange on which registered
Common Stock, $1.00 par value per share
 
NASDAQ Stock Market
Securities registered pursuant to section 12(g) of the Act:
None
____________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required 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  ¨
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 (§ 229.405 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  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
The aggregate market value of the registrant's common stock ("Common Stock") held on March 31, 2016, by non-affiliates was $2,044,610,449 based on the NASDAQ Stock Market closing price of $22.65 per share on that date. This is based on 90,269,777 shares of Common Stock that were issued and outstanding on this date, which excludes 1,000,464 shares held by all directors and executive officers of the Registrant.

At November 17, 2016, there were 89,081,623 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended September 30, 2016, are incorporated into Part II, Items 5-8 and Part III, Item 12 of this Form 10-K.
(2) Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be held on January 18, 2017 are incorporated into Part III, Items 10-14 of this Form 10-K.



PART I
Washington Federal, Inc. (the "Company") makes statements in this Annual Report on Form 10-K 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 as a result of the uncertain economic environment;
the severe effects of the continued economic downturn, including high unemployment rates and declines in housing prices and property values, in the Company's primary market areas;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
fluctuations in interest rate risk and changes in market interest rates;
the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
the Company's ability to successfully complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such activities;
legislative and regulatory limitations, including those arising under the Dodd-Frank Act and potential limitations in the manner in which the Company conducts its business and undertake new investments and activities;
the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms;
changes in other economic, competitive, governmental, regulatory, and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
the success of the Company at managing the risks involved in the 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.



2


Item 1.
Business

General
Washington Federal, Inc., formed in November 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a bank holding company that conducts its operations through a federally-insured national bank subsidiary, Washington Federal, National Association (“Bank”). As used throughout this document, the terms “Washington Federal” or the “Company” refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary Washington Federal, National Association.
The Company's fiscal year end is September 30th. All references to 2016, 2015 and 2014 represent balances as of September 30, 2016September 30, 2015 and September 30, 2014, respectively, or activity for the fiscal years then ended.
The business of the Bank consists primarily of accepting deposits from the general public and investing these funds in loans of various types, including first lien mortgages on single-family dwellings, construction loans, land acquisition and development loans, loans on multi-family, commercial real estate and other income producing properties, home equity loans and business loans. It also invests in certain United States government and agency obligations and other investments permitted by applicable laws and regulations. As of September 30, 2016, Washington Federal has 238 branches located in Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. Through its subsidiaries, the Company is also engaged in real estate investment and insurance brokerage activities.

The principal sources of funds for the Company's activities are retained earnings, loan repayments, net deposit inflows, repayments and sales of investments and borrowings. Washington Federal's principal sources of revenue are interest on loans and interest and dividends on investments. Its principal expenses are interest paid on deposits, credit costs, general and administrative expenses, interest on borrowings and income taxes.

The Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"), its primary federal regulator, the Consumer Financial Protection Bureau ("CFPB") and the Federal Deposit Insurance Corporation ("FDIC"), which insures its deposits up to applicable limits. Washington Federal, as a bank holding company, is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System (" Federal Reserve"). The CFPB has broad authority to regulate providers of credit, payments and other consumer financial products and services and to bring actions to enforce federal consumer protection legislation as necessary.

The regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in such regulation, whether by the OCC, the FDIC, the Federal Reserve, the CFPB or the U.S. Congress, could have a significant impact on the Company and its operations. See “Regulation” section below.

          




3


 
Average Statements of Financial Condition
 
Year Ended September 30,
 
2016
 
2015
 
2014
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable (1)
$
9,511,351

 
$
454,085

 
4.77
%
 
$
8,598,435

 
$
437,002

 
5.08
%
 
$
7,997,566

 
$
430,850

 
5.39
%
Mortgage-backed securities
2,737,947

 
62,949

 
2.30

 
3,073,180

 
71,392

 
2.32

 
3,275,846

 
80,260

 
2.45

Cash and other investment securities (2)
1,167,596

 
16,282

 
1.39

 
1,634,441

 
20,363

 
1.25

 
1,866,560

 
20,964

 
1.12

FHLB & FRB stock
113,664

 
3,477

 
3.06

 
138,443

 
1,796

 
1.30

 
168,078

 
1,623

 
.97

Total interest-earning assets
13,530,558

 
536,793

 
3.97
%
 
13,444,499

 
530,553

 
3.95
%
 
13,308,050

 
533,697

 
4.01
%
Other assets
1,181,975

 
 
 
 
 
1,102,827

 
 
 
 
 
969,653

 
 
 
 
Total assets
$
14,712,533

 
 
 
 
 
$
14,547,326

 
 
 
 
 
$
14,277,703

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
$
10,589,817

 
52,485

 
.50
%
 
$
10,656,687

 
51,054

 
.48
%
 
$
10,325,110

 
58,524

 
.57
%
FHLB advances
1,992,434

 
64,059

 
3.22

 
1,848,904

 
66,018

 
3.57

 
1,955,205

 
69,553

 
3.56

Total interest-bearing liabilities
12,582,251

 
116,544

 
.93
%
 
12,505,591

 
117,072

 
.94
%
 
12,280,315

 
128,077

 
1.05
%
Other liabilities
161,446

 
 
 
 
 
89,140

 
 
 
 
 
27,437

 
 
 
 
Total liabilities
12,743,697

 
 
 
 
 
12,594,731

 
 
 
 
 
12,307,752

 
 
 
 
Stockholders’ equity
1,968,836

 
 
 
 
 
1,952,595

 
 
 
 
 
1,969,951

 
 
 
 
Total liabilities and stockholders’ equity
$
14,712,533

 
 
 
 
 
$
14,547,326

 
 
 
 
 
$
14,277,703

 
 
 
 
Net interest income/Interest rate spread
 
 
$
420,249

 
3.04
%
 
 
 
$
413,481

 
3.01
%
 
 
 
$
405,620

 
2.96
%
Net interest margin (3)
 
 
 
 
3.11
%
 
 
 
 
 
3.08
%
 
 
 
 
 
3.05
%

   ___________________
(1)
Interest income includes net accretion of deferred loan fees and costs of $29.9 million, $29.7 million, and $27.8 million for year ended 2016, 2015 and 2014, respectively.
(2)
Includes cash equivalents and non-mortgage backed security investments, such as U.S. agency obligations, mutual funds, corporate bonds, and municipal bonds.
(3)
Net interest income divided by average interest-earning assets.


Lending Activities


4


General. The Company's net portfolio of loans totaled $9.9 billion at September 30, 2016 and represents 66.6% of total assets. The Bank's lending activities include the origination of loans secured by real estate, including long-term fixed-rate and adjustable-rate mortgage loans, adjustable-rate construction loans, adjustable-rate land development loans, fixed-rate and adjustable-rate multi-family loans, fixed-rate and adjustable-rate commercial real estate loans and fixed-rate and adjustable-rate business loans.

The following table sets forth the composition of the Bank’s loan portfolio. 

 
September 30, 2016
September 30, 2015
September 30, 2014
September 30, 2013
September 30, 2012
 
(In thousands)
Non-Acquired loans
 
 
 
 
 
 
 
 
 
 
   Single-family residential
$
5,621,066

51.3
%
$
5,651,845

57.5
%
$
5,560,203

62.6
%
$
5,359,149

64.2
%
$
5,778,922

70.1
%
   Construction
1,110,411

10.1

200,509

2.0

140,060

1.6

130,778

1.6

129,637

1.6

   Construction - custom
473,069

4.3

396,307

4.0

385,824

4.3

302,722

3.6

211,690

2.6

   Land - acquisition & development
116,156

1.1

94,208

1.0

77,832

0.9

77,775

0.9

124,677

1.5

   Land - consumer lot loans
101,853

0.9

103,989

1.1

108,623

1.2

121,671

1.5

141,844

1.7

   Multi-family
1,118,801

10.2

1,125,722

11.5

917,286

10.3

831,684

10.0

710,140

8.6

   Commercial real estate
956,164

8.7

986,270

10.0

591,336

6.7

414,961

5.0

319,210

3.9

   Commercial & industrial
946,648

8.6

612,836

6.2

379,226

4.3

243,199

2.9

162,823

2.0

   HELOC
134,785

1.2

127,646

1.3

116,042

1.3

112,186

1.3

112,902

1.4

   Consumer
137,450

1.3

194,655

2.0

132,590

1.5

47,141

0.6

63,374

0.8

Total non-acquired loans
10,716,403

97.9
%
9,493,987

96.6
%
8,409,022

94.7
%
7,641,266

91.5
%
7,755,219

94.1
%
Acquired loans
115,394

1.1

166,293

1.7

184,188

2.1

250,379

3.0



Credit impaired acquired loans
89,837

0.8

87,081

0.9

76,507

0.9

98,900

1.2

111,117

1.3

Covered loans
28,974

0.3

75,909

0.8

213,203

2.4

363,046

4.3

374,356

4.5

Total gross loans
10,950,608

100
%
9,823,270

100
%
8,882,920

100
%
8,353,591

100
%
8,240,692

100
%
   Less:
 
 
 
 
 
 
 
 
 
 
      Allowance for probable losses
113,494

 
106,829

 
114,591

 
116,741

 
133,147

 
      Loans in process
879,484

 
476,796

 
346,172

 
276,375

 
214,187

 
      Discount on acquired loans
11,306

 
30,095

 
59,874

 
100,444

 
118,563

 
      Deferred net origination fees
35,404

 
38,916

 
37,485

 
36,054

 
34,421

 
Total loan contra accounts
1,039,688

 
652,636

 
558,122

 
529,614

 
500,318

 
Net Loans
$
9,910,920

 
$
9,170,634

 
$
8,324,798

 
$
7,823,977

 
$
7,740,374

 

 


5



The following table summarizes the Company’s loan portfolio, due for the periods indicated based on contractual terms to maturity or repricing. Amounts are presented prior to deduction of net discounts and premiums, loans in process, deferred net loan origination fees and costs and allowance for loan losses.
 
September 30, 2016
Total
 
Less than
1 Year
 
1 to 5
Years
 
After 5
Years
 
(In thousands)
Single-family residential
$
5,658,830

 
$
1,051,400

 
$
2,146,460

 
$
2,460,970

Construction
1,110,411

 
859,981

 
120,611

 
129,819

Construction – custom
473,068

 
50,076

 
156,494

 
266,498

Land – acquisition and development
118,497

 
113,726

 
4,771

 

Land – consumer lot loans
104,567

 
33,170

 
56,031

 
15,366

Multi-family
855,972

 
9,356

 
54,396

 
792,220

Commercial real estate
1,361,957

 
451,045

 
910,912

 

Commercial & industrial
978,589

 
582,958

 
181,447

 
214,184

HELOC
149,716

 
149,164

 
552

 

Consumer
139,001

 
74,796

 
37,168

 
27,037

 
$
10,950,608

 
$
3,375,672

 
$
3,668,842

 
$
3,906,094

The contractual loan payment period for residential mortgage loans originated by the Company normally ranges from 15 to 30 years. Experience during recent years has indicated that, because of prepayments in connection with refinancing and sales of property, residential loans have a weighted average life of four to ten years.

The following summary breaks down the Company's fixed rate and adjustable rate loans by time to maturity or to rate adjustment.
September 30, 2016
Fixed-Rate
 
Adjustable-Rate
Term To Maturity
Gross Loans
 
Term To Rate Adjustment
Gross Loans
 
(In thousands)
 
 
(In thousands)
Within 1 year
$
29,428

 
Less than 1 year
$
1,362,480

1 to 3 years
326,859

 
1 to 3 years
1,457,584

3 to 5 years
192,202

 
3 to 5 years
552,402

5 to 10 years
693,099

 
5 to 10 years
625,852

10 to 20 years
1,020,654

 
10 to 20 years

Over 20 years
4,690,048

 
Over 20 years

 
$
6,952,290

 
 
$
3,998,318


Lending Programs and Policies. The Bank's lending activities include the commercial and consumer loans, including the following loan categories.
Single-family residential loans. The Bank primarily originates 30 year fixed-rate mortgage loans secured by single-family residences. Moreover, it is the Bank's general policy to include in the documentation evidencing its conventional mortgage loans a due-on-sale clause, which facilitates adjustment of interest rates on such loans when the property securing the loan is sold or transferred.
All of the Bank's mortgage lending is subject to written, nondiscriminatory underwriting standards, loan origination procedures and lending policies approved by the Company's Board of Directors (the "Board"). Property valuations are required on all real estate loans. Appraisals are prepared by independent appraisers, reviewed by staff of the Bank, and approved by the Bank's management. Property evaluations are sometimes utilized in lieu of appraisals on single-family real estate loans of $250,000 or less and are reviewed by the Bank's staff. Detailed loan applications are obtained to determine the borrower's ability to repay and the more significant items on these applications are verified through the use of credit reports, financial statements or written confirmations.

6


Depending on the size of the loan involved, a varying number of officers of the Bank must approve the loan application before the loan can be granted. Federal guidelines limit the amount of a real estate loan made to a specified percentage of the value of the property securing the loan, as determined by an evaluation at the time the loan is originated. This is referred to as the loan-to-value ratio. The Board sets the maximum loan-to-value ratios for each type of real estate loan offered by the Bank.
When establishing general reserves for loans with loan-to-value ratios exceeding 80% that are not insured by private mortgage insurance, the Bank considers the additional risk inherent in these products, as well as their relative loan loss experience, and provides reserves when deemed appropriate. The total balance for loans with loan-to-value ratios exceeding 80% at origination as of September 30, 2016, was $477 million, with allocated reserves of $9.8 million.
Construction loans. The Bank originates construction loans to finance construction of single-family and multi-family residences as well as commercial properties. Loans made to builders are generally tied to an interest rate index and normally have maturities of two years or less. Loans made to individuals for construction of their home generally are 30 year fixed rate loans. The Bank's policies provide that for residential construction loans, loans may be made for 85% or less of the appraised value of the property upon completion. As a result of activity over the past four decades, the Bank believes that builders of single-family residences in its primary market areas consider it to be a construction lender of choice. Because of this history, the Bank has developed a staff with in-depth land development and construction experience and working relationships with selected builders based on their operating histories and financial stability.
Construction lending involves a higher level of risk than single-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions in the homebuilding industry. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both the estimated cost (including interest) of the project and the property's value at completion of the project.
Land loans. The Bank's land development loans are of a short-term nature and are generally made for 75% or less of the appraised value of the unimproved property. Funds are disbursed periodically at various stages of completion as authorized by the Company's personnel. The interest rate on these loans generally adjusts daily in accordance with a designated index.
Land development loans involve a higher degree of credit risk than long-term financing on owner-occupied real estate. Mitigation of risk of loss on a land development loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of development compared to the estimated cost (including interest) of development and the financial strength of the borrower.
The Bank's permanent land loans (also called consumer lot loans) are generally made on improved land, with the intent of building a primary or secondary residence. These loans are limited to 80% or less of the appraised value of the property, up to a maximum loan amount of $350,000. The interest rate on permanent land loans is generally fixed for 20 years.
Multi-family residential loans. Multi-family residential (five or more dwelling units) loans generally are secured by multi-family rental properties, such as apartment buildings. In underwriting multi-family residential loans, the Bank considers a number of factors, which include the projected net cash flow to the loan's debt service requirement, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower's experience in owning or managing similar properties. Multi-family residential loans are originated in amounts up to 80% of the appraised value of the property securing the loan.
Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than single-family residential loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. The Bank seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio.
It is the Bank's policy to obtain title insurance ensuring that it has a valid first lien on the mortgaged real estate serving as collateral for the loan. Borrowers must also obtain hazard insurance prior to closing and, when required by regulation, flood insurance. Borrowers may be required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums when due.
Commercial and industrial loans. The Bank makes various types of business loans to customers in its market area for working capital, acquiring real estate, equipment or other business purposes, such as acquisitions. The terms of these loans generally range from less than one year to a maximum of ten years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to the LIBOR rate, prime rate or another market rate.
 

7


Commercial loans are made based upon assessment of the borrower's ability and willingness to repay along with an evaluation of secondary repayment sources such as the value and marketability of collateral. Most such loans are extended to closely held businesses and the personal guaranty of the principals is usually obtained. Commercial loans have a relatively high risk of default compared to residential real estate loans. Pricing of commercial loans is based on the credit risk of the borrower with consideration given to the overall relationship of the borrower, including deposits. The acquisition of business deposits is an important focus of this business line. The Bank provides a full line of treasury management products to support the depository needs of its clients.

Consumer loans. The Bank's non-mortgage consumer loan portfolio consists of approximately $118.4 million prime quality student loans acquired from an independent financial investment firm that retains 1% of each loan, plus various other non-mortgage consumer loans obtained through acquisitions.

Home equity loans. The Bank extends revolving lines of credit to consumers that are secured by a first or second mortgage on a single family residence. The interest rate on these loans adjusts monthly indexed to prime. Total loan-to-value ratios when combined with any underlying first liens are limited to 80% or less. Loan terms are a ten year draw period followed by a fifteen year amortization period.
Origination and Purchase of Loans. The Bank has general authority to lend anywhere in the United States; however, its primary lending areas are within the states of Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. Loan originations come from a variety of sources. Residential loan originations result from referrals from real estate brokers, walk-in customers, purchasers of property in connection with builder projects that are financed by the Bank, mortgage brokers and refinancings for existing customers. Business purpose loans are obtained primarily by direct solicitation of borrowers and ongoing relationships.

The Bank also purchases loans and mortgage-backed securities when lending rates and mortgage volume for new loan originations in its market area do not fulfill its needs. Over the past few years, single-family residential loan originations were lower than historical levels due to the low interest rate environment and excessive government participation in the mortgage market.

The table below shows the Company's total loan origination, purchase and repayment activities.
Twelve Months Ended September 30,
2016

2015

2014

2013

2012
 
(In thousands)
Loans originated (1):
 
 
 
 
 
 
 
 
 
Single-family residential
$
692,575

 
$
705,741

 
$
696,999

 
$
707,310

 
$
539,222

Construction
900,649

 
263,532

 
170,539

 
173,446

 
146,494

Construction – custom
421,816

 
365,220

 
359,073

 
304,156

 
210,308

Land – acquisition & development
59,511

 
78,818

 
53,960

 
22,590

 
21,323

Land – consumer lot loans
29,661

 
21,422

 
12,441

 
14,324

 
13,169

Multi-family
361,261

 
349,442

 
239,352

 
309,636

 
189,692

Commercial real estate
353,265

 
600,610

 
258,367

 
163,577

 
87,471

Commercial & industrial
1,051,950

 
642,309

 
332,871

 
225,809

 
143,849

HELOC
74,538

 
74,455

 
47,054

 
44,872

 
38,750

Consumer
3,308

 
1,966

 
1,359

 
315

 

Total loans originated
3,948,534

 
3,103,515

 
2,172,015

 
1,966,035

 
1,390,278

Loans purchased (2)
105,420

 
279,936

 
211,228

 
646,408

 
129,670

Loan principal repayments
(2,935,167
)
 
(2,418,547
)
 
(1,857,597
)
 
(2,353,061
)
 
(1,964,593
)
Net change in loans in process, discounts, etc. (3)
(378,501
)
 
(119,068
)
 
(24,825
)
 
(175,779
)
 
(133,041
)
Net loan activity increase (decrease)
$
740,286

 
$
845,836

 
$
500,821

 
$
83,603

 
$
(577,686
)
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
9,170,634

 
$
8,324,798

 
$
7,823,977

 
$
7,740,374

 
$
8,318,060

Ending balance
$
9,910,920

 
$
9,170,634

 
$
8,324,798

 
$
7,823,977

 
$
7,740,374

 ___________________
(1)
Includes undisbursed loan in process and for years prior to 2016 does not include savings account loans, which were not material during the periods indicated.
(2)
Includes non-covered loans acquired through acquisitions and whole loan purchases.
(3) Includes non-cash transactions.


8


Interest Rates, Loan Fees and Service Charges. Interest rates charged by the Bank on mortgage loans are primarily determined by the competitive loan rates offered in its lending areas and in the secondary market. Mortgage loan rates reflect factors such as general interest rates, the supply of money available to the industry and the demand for such loans. General economic conditions, the regulatory programs and policies of federal and state agencies, including the FRB’s monetary policies, changes in tax laws and governmental budgetary programs influence these factors.
The Bank receives fees for originating loans in addition to various fees and charges related to existing loans, including prepayment charges, late charges and assumption fees. In making one-to-four- family home mortgage loans, the Bank normally charges an origination fee and as part of the loan application, the borrower pays the Bank for out-of-pocket costs, such as the appraisal fee, whether or not the borrower closes the loan. The interest rate charged is normally the prevailing rate at the time the loan application is approved and accepted. In the case of construction loans, the Bank normally charges an origination fee. Loan origination fees and other terms of multi-family residential loans are individually negotiated.
Non-Performing Assets. When a borrower violates a condition of a loan, the Bank attempts to cure the default by contacting the borrower. In most cases, defaults are cured promptly. If the default is not cured within an appropriate time frame, typically 90 days, the Bank may institute appropriate action to collect the loan, such as making demand for payment or initiating foreclosure proceedings on the collateral. If foreclosure occurs, the collateral will typically be sold at public auction and may be purchased by the Bank.
Loans are placed on nonaccrual status when, in the judgment of management, the probability of collecting interest or principal is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days past due or more. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.
The Bank will consider modifying the interest rate and terms of a loan if it determines that a modification is deemed to be the best option available for collection in full or to minimize the loss to the Bank. Most loans restructured in troubled debt restructurings ("TDRs") are accruing and performing loans where the borrower has proactively approached the Bank about a modification due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The modification of these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness generally is not an available option for restructured loans. As of September 30, 2016, single-family residential loans comprised 87.2% of restructured loans. The Bank 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 market conditions.
Real estate acquired by foreclosure or deed-in-lieu thereof (“REO” or “Real Estate Owned”) is classified as real estate held for sale. When property is acquired, it is recorded at the fair market value less estimated selling costs at the date of acquisition. Interest accrual ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expensed as incurred. Costs incurred for the improvement or development of such property is capitalized. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.

9


The following table sets forth information regarding the Company's restructured and non-accrual loans and REO.
 
September 30,
2016

2015

2014

2013

2012
 
(In thousands)
Performing restructured loans
$
251,583

 
$
289,587

 
$
350,653

 
$
391,415

 
$
403,238

Non-performing restructured loans
9,948

 
13,126

 
24,090

 
24,281

 
30,040

Total restructured loans
261,531

 
302,713

 
374,743

 
415,696

 
433,278

Non-accrual loans:
 
 
 
 
 
 
 
 
 
Single-family residential
33,148

 
59,074

 
74,067

 
100,460

 
131,193

Construction

 
754

 
1,477

 
4,560

 
10,634

Construction – custom

 
732

 

 

 
539

Land – acquisition & development
58

 

 
811

 
2,903

 
13,477

Land – consumer lot loans
510

 
1,273

 
2,637

 
3,337

 
5,149

Multi-family
776

 
2,558

 
1,742

 
6,573

 
4,185

Commercial real estate
7,100

 
2,176

 
5,106

 
11,736

 
7,653

Commercial & industrial
583

 

 
7

 
477

 
16

HELOC
239

 
563

 
795

 
263

 
198

Consumer

 
680

 
789

 
990

 
383

Total non-accrual loans (1)
42,414

 
67,810

 
87,431

 
131,299

 
173,427

Real estate owned
29,027

 
61,098

 
59,880

 
82,317

 
99,478

Total non-performing assets
71,441

 
128,908

 
147,311

 
213,616

 
272,905

Total non-performing assets and performing restructured loans
$
323,024

 
$
418,495

 
$
497,964

 
$
605,031

 
$
676,143

Total non-performing assets and restructured loans as a percent of total assets
2.17
%
 
2.87
%
 
3.37
%
 
4.62
%
 
5.42
%
Total non-performing assets to total assets
0.48
%
 
0.88
%
 
1.00
%
 
1.63
%
 
2.19
%
 ___________________
(1)
For the year ended September 30, 2016, the Company recognized $5,434,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $2,348,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than twelve months of interest for some of the non-accrual loans that were brought current or paid off. In addition to the non-accrual loans reflected in the above table, the Company had $117,536,000 of loans that were less than 90 days delinquent at September 30, 2016 but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total non-performing assets and performing restructured loans as a percent of total assets would have increased to 2.96% at September 30, 2016. For a discussion of the Company's policy for placing loans on nonaccrual status, see Note A to the Consolidated Financial Statements included in Item 8 hereof.


Allowance for Loan Losses. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The amount of this allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. The Bank’s method for assessing the appropriateness of the allowance is to apply a loss percentage factor to the different loan types. The loss percentage factor is made up of two parts - the historical loss factor (“HLF”) and the qualitative loss factor (“QLF”). The HLF takes into account historical charge-offs by loan type. The Company uses an average of historical loss rates for each loan category multiplied by an estimated loss emergence period. The QLFs are based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, collateral values, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, and the duration of the current business cycle. These factors are considered by loan type. Specific allowances are established in cases where management has identified conditions or circumstances related to a loan that management believes indicate the probability that a loss has been incurred. The Company has also established a reserve for unfunded commitments.
As part of the process for determining the adequacy of the allowance for loan losses, management reviews the loan portfolio for specific weaknesses and considers the factors noted above. The recovery of the carrying value of loans is susceptible to future market conditions

10


beyond the Bank's control, which may result in losses or recoveries differing from those provided. In those cases, a portion of the allowance is then allocated to reflect the estimated loss exposure.
The following table provides detail regarding the Company's allowance for loan losses.
 
Twelve Months Ended September 30,
2016
 
2015
 
2014
 
2013
 
2012
 
(In thousands)
Beginning balance
$
106,829

 
$
114,591

 
$
116,741

 
$
133,147

 
$
160,926

Charge-offs:
 
 
 
 
 
 
 
 
 
Single-family residential
3,106

 
5,524

 
8,529

 
20,947

 
53,789

Construction

 
388

 
949

 
1,446

 
4,916

Construction – custom
60

 

 

 
481

 

Land – Acquisition & development
42

 
38

 
541

 
3,983

 
16,978

Land – consumer lot loans
732

 
459

 
658

 
1,363

 
2,670

Multi-family

 

 

 
1,043

 
1,393

Commercial real estate
103

 
1,711

 
105

 
747

 
814

Commercial & industrial loans
941

 
3,354

 
826

 
1,145

 
249

HELOC
54

 
66

 
48

 
163

 
232

Consumer
962

 
3,060

 
3,443

 
2,783

 
3,538

 
6,000

 
14,600

 
15,099

 
34,101

 
84,579

Recoveries:
 
 
 
 
 
 
 
 
 
Single-family residential
3,251

 
13,403

 
17,684

 
9,416

 
8,164

Construction
745

 
120

 
97

 
501

 
711

Construction – custom
60

 

 

 

 

Land – Acquisition & development
8,220

 
207

 
3,071

 
4,105

 
1,341

Land – consumer lot loans
5

 
221

 
22

 
40

 

Multi-family

 
220

 

 
171

 
504

Commercial real estate
1,812

 
735

 
33

 
17

 
225

Commercial & industrial loans
2,933

 
1,374

 
5,043

 
95

 
2,366

HELOC
21

 
2

 

 

 
66

Consumer
2,018

 
3,688

 
3,513

 
2,000

 
1,480

 
19,065

 
19,970

 
29,463

 
16,345

 
14,857

Net charge-offs (recoveries)
(13,065
)
 
(5,370
)
 
(14,364
)
 
17,756

 
69,722

Provision (release) for loan losses and transfers
(6,400
)
 
(13,132
)
 
(16,514
)
 
1,350

 
41,943

Ending balance (1)
$
113,494

 
$
106,829

 
$
114,591

 
$
116,741

 
$
133,147

Ratio of net charge-offs (recoveries) to average loans outstanding
(0.14
)%
 
(0.06
)%
 
(0.18
)%
 
0.23
%
 
0.87
%
 __________________
(1) This does not include a reserve for unfunded commitments of $3,235,000; $3,085,000, and $2,910,000 as of September 30, 2016, 2015 and 2014, respectively.



11


The following table sets forth the amount of the Company’s allowance for loan losses by loan category.
 
September 30,
2016
 
 
2015
 
 
2014
 
 
2013
 
 
2012
 
 
ALLL Amount
 
Loans to Total Loans (1)
Coverage Ratio (2)
 
ALLL Amount
 
Loans to Total Loans (1)
Coverage Ratio (2)
 
ALLL Amount
 
Loans to Total Loans (1)
Coverage Ratio (2)
 
ALLL Amount
 
Loans to Total Loans (1)
Coverage Ratio (2)
 
ALLL Amount
 
Loans to Total Loans (1)
Coverage Ratio (2)
 
(In thousands)
 
Allowance allocation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
$
37,796

 
51.5
%
0.7
%
 
$
47,347

 
57.8
%
0.8
%
 
$
62,067

 
62.6
%
0.8
%
 
$
64,184

 
64.3
%
0.8
%
 
$
81,815

 
70.2
%
0.8
%
Construction
19,838

 
10.1

4.0

 
6,680

 
2.0

5.1

 
6,742

 
1.6

5.1

 
8,407

 
1.6

5.1

 
12,060

 
1.6

5.1

Construction – custom
1,080

 
4.3

0.5

 
990

 
4.0

0.5

 
1,695

 
4.3

50.0

 
882

 
3.6

50.0

 
347

 
2.6

50.0

Land – acquisition & development
6,023

 
1.1

6.6

 
5,781

 
1.0

7.7

 
5,592

 
0.9

7.7

 
9,165

 
1.0

7.7

 
15,598

 
1.6

7.7

Land – consumer lot loans
2,535

 
1.0

2.7

 
2,946

 
1.1

2.8

 
3,077

 
1.3

2.8

 
3,552

 
1.5

2.8

 
4,937

 
1.7

2.8

Multi-family
6,925

 
10.3

0.6

 
5,304

 
11.6

0.5

 
4,248

 
10.4

0.5

 
3,816

 
10.0

0.5

 
5,280

 
8.6

0.5

Commercial real estate
8,588

 
10.0

0.9

 
8,960

 
11.7

1.0

 
7,548

 
8.5

1.0

 
5,595

 
7.5

1.0

 
1,956

 
4.9

1.0

Commercial & industrial
28,008

 
8.9

2.9

 
24,980

 
6.7

3.9

 
17,223

 
4.9

3.9

 
16,614

 
3.9

3.9

 
7,626

 
2.0

3.9

HELOC
813

 
1.3

0.6

 
902

 
1.4

0.7

 
928

 
1.5

0.7

 
1,002

 
1.6

0.7

 
965

 
1.5

0.7

Consumer
1,888

 
1.3

1.4

 
2,939

 
2.0

1.5

 
3,227

 
1.6

1.5

 
3,524

 
0.7

1.5

 
2,563

 
0.8

1.5

       Covered loans

 
0.2

 
 

 
0.7

 
 
2,244

 
2.4

 
 

 
4.3

 
 

 
4.5

 
Total allowance for loan losses (3)
$
113,494

 
100
%
 
 
$
106,829

 
100
%
 
 
$
114,591

 
100
%
 
 
$
116,741

 
100
%
 
 
$
133,147

 
100
%
 
 ___________________
(1)
Represents the gross loan amount for each respective loan category as a % of total gross loans.
(2)
Represents the allocated allowance for each respective loan category as a % of gross loans for that same category, excluding covered loans and acquired loans outstanding that are not subject to the allowance for loan loss.
(3)
This does not include a reserve for unfunded commitments of $3,235,000; $3,085,000; and $2,910,000 as of September 30, 2016, 2015 and 2014, respectively.


12


Investment Activities
As a national association, the Bank is obligated to maintain adequate liquidity and does so by holding cash and cash equivalents and by investing in securities. These investments may include, among other things, certain certificates of deposit, repurchase agreements, bankers’ acceptances, loans to financial institutions whose deposits are federally-insured, federal funds, United States government and agency obligations and mortgage-backed securities.
The following table sets forth the composition of the Company’s investment portfolio. 
September 30,
2016
 
2015
 
2014
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In thousands)
U.S. government and agency securities
$
263,946

 
$
259,351

 
$
486,968

 
$
482,464

 
$
729,299

 
$
731,943

Equity securities
100,422

 
101,824

 
100,422

 
101,952

 
100,500

 
101,387

Corporate debt securities
461,530

 
461,138

 
506,172

 
505,800

 
505,741

 
509,007

Municipal bonds
24,013

 
27,670

 
23,970

 
27,123

 
20,402

 
23,681

Agency pass-through certificates
2,396,554

 
2,434,597

 
2,788,003

 
2,797,938

 
3,109,904

 
3,083,726

Commercial MBS
80,318

 
79,870

 
103,131

 
102,706

 
98,851

 
98,916

 
$
3,326,783

 
$
3,364,450

 
$
4,008,666

 
$
4,017,983

 
$
4,564,697

 
$
4,548,660

The table below shows the investment portfolio categorized by maturity band. 
September 30, 2016
Amortized
Cost
 
Weighted Average Yield
 
(In thousands)
Due in less than 1 year
$
299,434

 
1.29
%
Due after 1 year through 5 years
237,954

 
2.32

Due after 5 years through 10 years
165,710

 
1.45

Due after 10 years
2,623,685

 
2.88

 
$
3,326,783

 
2.62
%

Sources of Funds

General. Deposits are the primary source of the Bank’s funds for use in lending and other general business purposes. In addition to deposits, the Bank derives funds from loan repayments, advances from the FHLB, other borrowings, and from investment repayments and sales. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced by general interest rates, money market conditions, the availability of FDIC insurance and the market perception of the Company’s financial stability. Borrowings may be used on a short-term basis to compensate for reductions in normal sources of funds, such as deposit inflows at lower than projected levels. Borrowings may also be used on a longer-term basis to support expanded activities and to manage interest rate risk.

Deposits. The Bank relies on a mix of deposit types, including business and personal checking accounts, term certificates of deposit, and other savings deposit alternatives that have no fixed term, such as money market accounts and passbook savings accounts The Bank offers several consumer checking account products, both interest bearing and non-interest bearing and three business checking accounts, two of which target small businesses with relatively simple and straightforward banking needs and one for larger, more complex business depositors with an account that prices monthly based on the volume and type of activity. Savings and money market accounts are offered to both businesses and consumers, with interest paid after certain threshold amounts are exceeded.

Certificates of deposit with a maturity of one year or less have penalties for premature withdrawal equal to 90 days of interest. When the maturity is greater than one year but less than four years, the penalty is 180 days of interest. When the maturity is greater than four years, the penalty is 365 days interest. Early withdrawal penalty fee income for the year ended 2016, 2015 and 2014 amounted to $450,000, $546,000 and $552,000, respectively.


13


The Bank’s deposits are obtained primarily from residents of Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. The Bank does not advertise for deposits outside of these states.

The following table sets forth certain information relating to the Company’s deposits.
 
September 30,
2016
 
2015
2014
 
Amount
 
Rate
 
Amount
 
Rate
Amount
 
Rate
 
(In thousands)
Balance by interest rate:
 
 
 
 
 
 
 
 
 
 
Checking accounts
$2,721,721
 
0.06
%
 
$2,555,766
 
0.06
%
$2,331,170
 
0.06
%
Passbook and statement accounts
820,980

 
0.10

 
700,794

 
0.10

622,546

 
0.10

Money market accounts
2,462,891

 
0.15

 
2,564,318

 
0.13

2,536,971

 
0.18

 
6,005,592

 
 
 
5,820,878

 
 
5,490,687

 
 
Fixed-rate time deposit accounts:
 
 
 
 
 
 
 
 
 
 
Under 1.00%
3,268,272

 
 
 
3,126,119

 
 
3,454,682

 
 
1.00% to 1.99%
1,292,612

 
 
 
1,177,356

 
 
1,069,476

 
 
2.00% to 2.99%
34,376

 
 
 
501,409

 
 
602,683

 
 
3.00% to 3.99%

 
 
 
5,156

 
 
98,610

 
 
4.00% or higher

 
 
 
785

 
 
790

 
 
 
4,595,260

 
 
 
4,810,825

 
 
5,226,241

 
 
 
$
10,600,852

 
 
 
$
10,631,703

 
 
$
10,716,928

 
 
The following table sets forth, by various interest rate categories, the amount of fixed-rate time deposits that mature during the periods indicated.
 
 
Maturing in
September 30, 2016
1 to 3
Months
 
4 to 6
Months
 
7 to 12
Months
 
13 to 24
Months
 
25 to 36
Months
 
37 to 60
Months
 
Total
 
(In thousands)
Fixed-rate time deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 1.00%
$
865,407

 
$
900,163

 
$
1,126,800

 
$
375,090

 
$
812

 
$

 
$
3,268,272

1.00 to 1.99%
264

 
772

 
956

 
418,345

 
297,121

 
575,154

 
1,292,612

2.00% to 2.99%

 
538

 

 

 

 
33,838

 
34,376

3.00 to 3.99%

 

 

 

 

 

 

4.00% or higher

 

 

 

 

 

 

Total
$
865,671

 
$
901,473

 
$
1,127,756

 
$
793,435

 
$
297,933

 
$
608,992

 
$
4,595,260


Historically, a significant number of certificate of deposit holders roll over their balances into new certificates of the same term at the Bank’s then current rate. To ensure a continuity of this trend, the Bank expects to continue to offer market rates of interest. Its ability to retain maturing deposits in certificate accounts is difficult to project; however, the Bank believes that by competitively pricing these certificates, levels deemed appropriate by management can be achieved on a continuing basis.
At September 30, 2016, the Bank had $442,510,000 of certificates of deposit in amounts of $250,000 or more outstanding, maturing as follows: $88,667,000 within 3 months; $89,305,000 over 3 months through 6 months; $97,485,000 over 6 months through 12 months; and $167,053,000 thereafter.





14



Borrowings. The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") equal to 49.0% of total assets. The Bank obtains advances from the FHLB upon the security of the FHLB capital stock it owns and certain of its loans, provided certain standards related to credit worthiness have been met. See “Regulation-Washington Federal-Federal Home Loan Bank System” below. Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes acceptable uses to which the advances pursuant to each program may be put, as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of assets or the Company's credit worthiness. The FHLB is required to review its credit limitations and standards at least every two years. FHLB advances have, from time to time, been available to meet seasonal and other withdrawals of savings accounts and to expand the Bank's lending program. The Bank had $2,080,000,000 of FHLB advances outstanding at September 30, 2016.
The Bank may need to borrow funds for short periods of time to meet day-to-day financing needs. In these instances, funds are borrowed from other financial institutions or the Federal Reserve, for periods generally ranging from one to seven days at the then current borrowing rate. At September 30, 2016, the Bank had no such short-term borrowings.
 
The Bank also offers two forms of repurchase agreements to its customers. One form has an interest rate that floats like that of a money market deposit account. The other form has a fixed rate and is offered in a minimum denomination of $100,000. Both forms are fully collateralized by securities. These obligations are not insured by the FDIC and are classified as borrowings for regulatory purposes. The Bank had $48,920,000 of such agreements outstanding at September 30, 2016.
The following table presents additional information regarding the Company's borrowings.
 
Twelve Months Ended September 30,
2016

2015

2014
 
(In thousands)
FHLB advances:
 
 
 
 
 
Average balance outstanding
$
1,992,434

 
$
1,848,904

 
$
1,955,205

Maximum amount outstanding at any month-end during the period
2,080,000

 
1,930,000

 
2,083,226

Weighted-average interest rate during the period (1)
3.22
%
 
3.57
%
 
3.56
%
 
 
 
 
 
 
Securities sold to customers under agreements to repurchase:
 
 
 
 
 
Average balance outstanding
$
49,885

 
$
52,382

 
$
46,905

Maximum amount outstanding at any month-end during the period
56,310

 
62,315

 
51,615

Weighted-average interest rate during the period (1)
0.22
%
 
0.23
%
 
0.25
%
 
 
 
 
 
 
Total average borrowings:
$
2,042,319

 
$
1,901,286

 
$
2,002,110

Weighted-average interest rate on total average borrowings (1)
3.14
%
 
3.48
%
 
3.42
%
 ___________________
(1)
Interest expense divided by average daily balances.

 
Other Ratios
The following table sets forth certain ratios related to the Company.
 
 
Twelve Months Ended September 30,
 
2016
 
2015
 
2014
Return on assets (1)
1.12
%
 
1.10
%
 
1.10
%
Return on equity (2)
8.33

 
8.21

 
7.99

Average equity to average assets
13.27

 
13.42

 
13.37

Dividend payout ratio (3)
30.43

 
31.85

 
26.45

___________________
(1)
Net income divided by average total assets.
(2)
Net income divided by average equity.
(3)
Dividends paid per share divided by net income per share.

15



Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. 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 average 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.
 
 
Twelve Months Ended September 30,
 
2016 vs. 2015
Increase (Decrease) Due to
 
2015 vs. 2014
Increase (Decrease) Due to
 
2014 vs. 2013
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(In thousands)
 
(In thousands)
 
(In thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan portfolio
$
44,395

 
$
(27,312
)
 
$
17,083

 
$
30,507

 
$
(24,355
)
 
$
6,152

 
$
10,399

 
$
(34,464
)
 
$
(24,065
)
Mortgage-backed securities
(7,824
)
 
(619
)
 
(8,443
)
 
(4,941
)
 
(3,927
)
 
(8,868
)
 
15,032

 
16,708

 
31,740

Investments (1)
(7,283
)
 
4,883

 
(2,400
)
 
(2,594
)
 
2,166

 
(428
)
 
4,291

 
5,440

 
9,731

All interest-earning assets
29,288

 
(23,048
)
 
6,240

 
22,972

 
(26,116
)
 
(3,144
)
 
29,722

 
(12,316
)
 
17,406

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
(370
)
 
1,801

 
1,431

 
1,879

 
(9,349
)
 
(7,470
)
 
8,670

 
(18,049
)
 
(9,379
)
FHLB advances and other borrowings
3,900

 
(5,859
)
 
(1,959
)
 
(3,358
)
 
(177
)
 
(3,535
)
 
2,340

 
(1,043
)
 
1,297

All interest-bearing liabilities
3,530

 
(4,058
)
 
(528
)
 
(1,479
)
 
(9,526
)
 
(11,005
)
 
11,010

 
(19,092
)
 
(8,082
)
Change in net interest income
$
25,758

 
$
(18,990
)
 
$
6,768

 
$
24,451

 
$
(16,590
)
 
$
7,861

 
$
18,712

 
$
6,776

 
$
25,488

___________________
(1)
Includes interest on cash equivalents and dividends on stock of the FHLB of Des Moines and FRB of San Francisco.

Interest Rate Risk

The primary source of income for the Company is net interest income, which is the difference between the interest income generated by interest-earning assets and the interest expense incurred for interest-bearing liabilities. The level of net interest income is a function of the average balance of interest-earning assets and interest-bearing liabilities and the difference between the yield on earning assets and the cost of interest-bearing liabilities. Both the pricing and mix of the Company's interest-earning assets and interest-bearing liabilities influence these factors. All else being equal, if the interest rates on the Company's interest-bearing liabilities increase at a faster pace than the interest rates on its interest-earning assets, the result would be a reduction in net interest income and with it, a reduction in net earnings.

The net interest margin is measured using the interest income and expense over the average assets and liabilities for the period. The net interest margin increased to 3.11% for the year ended September 30, 2016 from 3.08% for the year ended September 30, 2015. The yield on earning assets increased 2 basis points to 3.97% and the cost of interest bearing liabilities declined by 1 basis point to 0.93%. The higher yield on earning assets is the result of changes in the asset mix as the average balance of mortgage-backed securities and other investment securities decreased while the average balance of loans receivable increased. The decrease in interest cost was due to changes in the mix of customer deposits and FHLB advances.

Interest rate risk arises in part due to the Bank's significant holdings of fixed-rate single-family home loans, which are longer-term than customer accounts that constitute its primary liabilities. Accordingly, assets do not usually respond as quickly to changes in interest rates as liabilities. In the absence of management action, net interest income can be expected to decline when interest rates rise and to expand when interest rates fall. Shortening the maturity or repricing of the investment portfolio is one action that management can take. The composition of the investment portfolio was 39.7% variable rate and 60.3% fixed rate as of September 30, 2016 to provide some protection against rising rates. In addition, the Bank is producing more short term or variable rate loans and has increased less rate sensitive transaction accounts to 56.7% of the deposit portfolio.

16



The Company's balance sheet strategy, in conjunction with low operating costs, has allowed the Company to manage interest rate risk, within guidelines established by the Board, through all interest rate cycles. It is management's objective to grow the dollar amount of net interest income, through the rate cycles, acknowledging that there will be some periods of time when that will not be feasible.

The chart below shows the volatility of the Company's period end net interest spread (dotted line which is measured against the right axis) compared to the relatively consistent growth in net interest income (solid line which is measured against the left axis). As noted above, this consistency is accomplished by managing the size and composition of the balance sheet through different rate cycles.

spreadniigrapha01.jpg
The following table shows the estimated repricing periods for earning assets and paying liabilities.
September 30, 2016
Repricing Period
 
 
 
Within One
Year
 
After 1 year -
before 6 Years
 
Thereafter
 
Total
 
(In thousands)
 
 
Earning assets (1)
$
5,095,776

 
$
4,885,359

 
$
3,763,346

 
$
13,744,481

Paying liabilities
(6,599,318
)
 
(3,922,868
)
 
(2,174,161
)
 
(12,696,347
)
Excess (liabilities) assets
$
(1,503,542
)
 
$
962,491

 
$
1,589,185

 
 
 
 
 
 
 
 
 
 
Excess as % of total assets
(10.10
)%
 
 
 
 
 
 
Policy limit for one year excess
(20.00
)%
 
 
 
 
 
 
(1) Asset repricing period includes estimated prepayments based on historical activity


At September 30, 2016, the Company had approximately $1,503,542,000 more in liabilities subject to maturity or repricing in the next year than assets, which resulted in a one-year repricing gap of (10.1)% of total assets. This compares to the (13.4)% gap as of September 30, 2015. A negative repricing gap implies that funding costs will change more rapidly than interest income on earning assets with movements in interest rates. A negative repricing gap typically results in lower margins when interest rates rise and higher margins when interest rates decline. The interest rate gap analysis provides management with a high-level indication of interest rate risk, but it is

17


considered less reliable than more detailed modeling. Cash and cash equivalents of $450,368,000 and stockholders' equity of $1,975,731,000 provide management with additional flexibility in managing interest rate risk going forward. If management were to take steps to change the size and/or mix of the balance sheet or slow the repricing of deposit rates upward, rising rates might not cause a decrease in net interest income.
The following table shows the potential impact of rising interest rates on net income for one year. The Company's focus is primarily on the impact of rising rates, given the negative gap position which implies that generally when rates fall income should increase and when rates increase income is at risk to decrease (assuming no change in the size or composition of the balance sheet).
It is important to note that this is not a forecast or prediction of future events, but is used as a tool for measuring potential risk. This analysis assumes zero balance sheet growth and a constant percentage composition of assets and liabilities.
 
 
Potential Impact on Net Interest Income
Basis Point Increase in Interest Rates
September 30, 2016
 
September 30, 2015
 
(In thousands)
100
$
4,834

 
$
(413
)
200
12,938

 
(9,288
)
300
7,382

 
(22,292
)

Actual results will differ from the assumptions used in this model, as management monitors and adjusts both the size and the composition of the balance sheet in order to respond to changing interest rates. In a rising interest rate environment, it is likely that the Company will grow its balance sheet to offset margin compression that may occur. Improvement in the net income sensitivity during the year is the result of changing the loan and deposit mix toward shorter term and/or floating rate instruments.
Another method used to quantify interest rate risk is the net portfolio value (“NPV”) analysis. This analysis calculates the difference between the present value of interest-bearing liabilities and the present value of expected cash flows from interest-earning assets and off-balance-sheet contracts. The following tables set forth an analysis of the Company’s interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (measured in 100-basis-point increments).
The tables below express the NPV under varying interest scenarios.

 
September 30, 2016
Change in
Interest Rates
 
Estimated
NPV Amount
 
Estimated (Decrease) in NPV
Amount
 
NPV as
% of Assets
(Basis Points)
 
(In thousands)
 
(In thousands)
 
 
300

 
$
1,784,802

 
$
(784,757
)
 
13.19
%
200

 
2,090,469

 
(479,090
)
 
14.83
%
100

 
2,354,413

 
(215,146
)