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WAFD Washington Federal

Filed: 4 May 21, 11:08am

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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)
 
Washington91-1661606
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
425 Pike StreetSeattleWashington98101
(Address of Principal Executive Offices)(Zip Code)
Registrant’s telephone number, including area code (206) 624-7930
 
(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each ClassTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1.00 par value per shareWAFDNASDAQ Stock Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 4.875% Fixed Rate Series A Non-Cumulative Perpetual Preferred StockWAFDPNASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

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

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


The registrant had outstanding 72,404,471 shares of common stock as of April 30, 2021.



WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
 

2

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)




March 31, 2021September 30, 2020
(In thousands, except share data)
ASSETS
Cash and cash equivalents$2,318,447 $1,702,977 
Available-for-sale securities, at fair value2,438,902 2,249,492 
Held-to-maturity securities, at amortized cost494,089 705,838 
Loans receivable, net of allowance for loan losses of $172,653 and $166,95513,035,423 12,792,317 
Interest receivable54,073 53,799 
Premises and equipment, net259,560 252,805 
Real estate owned5,316 4,966 
FHLB and FRB stock119,991 141,990 
Bank owned life insurance230,520 227,749 
Intangible assets, including goodwill of $302,707 and $302,707309,086 309,906 
Federal and state income tax assets, net5,708 
Other assets268,174 346,508 
$19,533,581 $18,794,055 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Customer accounts
Transaction deposit accounts$11,228,666 $9,806,432 
Time deposit accounts3,590,755 3,973,192 
14,819,421 13,779,624 
FHLB advances2,150,000 2,700,000 
Advance payments by borrowers for taxes and insurance36,289 49,462 
Federal and state income tax liabilities, net13,424 
Accrued expenses and other liabilities181,494 250,836 
17,200,628 16,779,922 
Commitments and contingencies (see Note I)00
Shareholders’ equity
Preferred stock, $1.00 par value, 5,000,000 shares authorized; 300,000 and 0 shares issued; 300,000 and 0 shares outstanding300,000 
Common stock, $1.00 par value, 300,000,000 shares authorized; 135,980,008 and 135,727,237 shares issued; 73,084,591 and 75,689,364 shares outstanding135,980 135,727 
Additional paid-in capital1,675,772 1,678,843 
Accumulated other comprehensive income (loss), net of taxes81,176 16,953 
Treasury stock, at cost; 62,895,417 and 60,037,873 shares(1,328,068)(1,238,296)
Retained earnings1,468,093 1,420,906 
2,332,953 2,014,133 
$19,533,581 $18,794,055 


SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 Three Months Ended March 31,Six Months Ended March 31,
 2021202020212020
(In thousands, except share data)(In thousands, except share data)
INTEREST INCOME
Loans receivable$132,757 $138,549 $266,428 $280,695 
Mortgage-backed securities6,696 14,341 13,926 29,953 
Investment securities and cash equivalents7,301 6,728 14,222 13,794 
146,754 159,618 294,576 324,442 
INTEREST EXPENSE
Customer accounts10,729 28,638 24,839 60,119 
FHLB advances11,991 13,368 25,189 27,026 
22,720 42,006 50,028 87,145 
Net interest income124,034 117,612 244,548 237,297 
Provision (release) for credit losses8,200 3,000 4,450 
Net interest income after provision (release)124,034 109,412 241,548 232,847 
OTHER INCOME
Gain (loss) on sale of investment securities15,028 15,028 
Gain (loss) on termination of hedging derivatives14,110 14,110 
Prepayment penalty on long-term debt(13,788)(13,809)(13,788)(13,809)
Loan fee income872 3,048 3,264 4,852 
Deposit fee income5,960 6,099 11,986 12,359 
Other income7,323 5,875 12,775 44,187 
14,477 16,241 28,347 62,617 
OTHER EXPENSE
Compensation and benefits43,632 38,617 86,355 75,248 
Occupancy10,473 10,913 20,065 21,048 
FDIC insurance premiums3,755 2,470 7,018 4,940 
Product delivery4,401 3,897 9,338 8,164 
Information technology10,696 11,501 22,527 28,608 
Other expense8,789 12,035 17,853 24,061 
81,746 79,433 163,156 162,069 
Gain (loss) on real estate owned, net34 31 (415)(855)
Income before income taxes56,799 46,251 106,324 132,540 
Income tax expense11,928 9,874 22,502 28,297 
Net income44,871 36,377 83,822 104,243 
Dividends on preferred stock2,722 2,722 
Net income available to common shareholders$42,149 $36,377 $81,100 $104,243 
PER SHARE DATA
Basic earnings per common share$0.56 $0.47 $1.07 $1.34 
Diluted earnings per common share0.56 0.47 1.07 1.34 
Dividends paid on common stock per share0.23 0.22 0.45 0.43 
Basic weighted average number of shares outstanding75,354,76576,987,53275,576,28877,737,977
Diluted weighted average number of shares outstanding75,393,46477,007,11875,582,42677,776,304

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 Three Months Ended March 31,
 20212020
(In thousands)
Net income$44,871 $36,377 
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) during the period on available-for-sale investment securities, net of tax of $1,114 and $(3,468)(3,729)11,617 
Reclassification adjustment of net (gain) loss from sale of available-for-sale securities included in net income, net of tax of $0 and $3,456(11,572)
(3,729)45 
Net unrealized gain (loss) during the period on borrowings cash flow hedges, net of tax of $(16,230) and $2,85854,335 (9,570)
Reclassification adjustment of net (gain) loss included in net income during the period from hedging derivatives, net of tax of $3,245 and $0(10,865)
43,470 (9,570)
Other comprehensive income (loss)39,741 (9,525)
Comprehensive income$84,612 $26,852 

 Six Months Ended March 31,
 20212020
(In thousands)
Net income$83,822 $104,243 
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) during the period on available-for-sale investment securities, net of tax of $(1,572) and $(3,043)5,262 9,893 
Reclassification adjustment of net (gain) loss from sale of available-for-sale securities included in net income, net of tax of $0 and $3,456(11,572)
5,262 (1,679)
Net unrealized gain (loss) during the period on borrowings cash flow hedges, net of tax of $(20,857) and $2,16169,826 (7,152)
Reclassification adjustment of net (gain) loss included in net income during the period from hedging derivatives, net of tax of $3,245 and $0(10,865)
58,961 (7,152)
Other comprehensive income (loss)64,223 (8,831)
Comprehensive income$148,045 $95,412 


SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED) 

(in thousands)Preferred StockCommon StockPaid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance at January 1, 2021$$135,938 $1,680,111 $1,443,280 $41,435 $(1,238,997)$2,061,767 
Net income  — 44,871 — — 44,871 
Other comprehensive income (loss)— — — — 39,741 — 39,741 
Issuance of preferred stock, net300,000 — (6,675)— — — 293,325 
Dividends on common stock ($0.23 per share)  — (17,336)— — (17,336)
Dividends on preferred stock ($9.0729 per share)  — (2,722)— — (2,722)
Proceeds from stock-based awards— 18 282 — — — 300 
Stock-based compensation expense— 24 2,054 — — — 2,078 
Treasury stock acquired  — — — (89,071)(89,071)
Balance at March 31, 2021$300,000 $135,980 $1,675,772 $1,468,093 $81,176 $(1,328,068)$2,332,953 
(in thousands)Preferred StockCommon StockPaid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance at January 1, 2020$— $135,720 $1,673,666 $1,365,397 $15,986 $(1,159,642)$2,031,127 
Net income  — 36,377 — — 36,377 
Other comprehensive income (loss)— — — — (9,525)— (9,525)
Dividends on common stock ($0.22 per share)  — (16,941)— — (16,941)
Proceeds from stock-based awards— 62 — — — 65 
Stock-based compensation expense— 19 2,100 — — — 2,119 
Treasury stock acquired  — — — (78,610)(78,610)
Balance at March 31, 2020$ $135,742 $1,675,828 $1,384,833 $6,461 $(1,238,252)$1,964,612 




(CONTINUED)






SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED) 
(in thousands)Preferred StockCommon StockPaid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance at October 1, 2020$$135,727 $1,678,843 $1,420,906 $16,953 $(1,238,296)$2,014,133 
Net income  — 83,822 — — 83,822 
Other comprehensive income (loss)— — — — 64,223 — 64,223 
Issuance of preferred stock, net300,000  (6,675)— — — 293,325 
Dividends on common stock ($0.45 per share)  — (33,913)— — (33,913)
Dividends on preferred stock ($9.0729 per share)— — — (2,722)— — (2,722)
Proceeds from stock-based awards— 20 310 — — — 330 
Stock-based compensation expense— 233 3,294 — — — 3,527 
Treasury stock acquired  — — — (89,772)(89,772)
Balance at March 31, 2021$300,000 $135,980 $1,675,772 $1,468,093 $81,176 $(1,328,068)$2,332,953 
(in thousands)Preferred StockCommon StockPaid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance at October 1, 2019$— $135,540 $1,672,417 $1,335,909 $15,292 $(1,126,163)$2,032,995 
Adjustment pursuant to adoption of ASU 2016-13  — (21,945)— — (21,945)
Net income  — 104,243 — — 104,243 
Other comprehensive income (loss)— — — — (8,831)— (8,831)
Dividends on common stock ($0.43 per share)  — (33,374)— — (33,374)
Proceeds from stock-based awards— 109 — — — 115 
Stock-based compensation expense— 196 3,302 — — — 3,498 
Treasury stock acquired  — — — (112,089)(112,089)
Balance at March 31, 2020$ $135,742 $1,675,828 $1,384,833 $6,461 $(1,238,252)$1,964,612 










SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 Six Months Ended March 31,
 20212020
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$83,822 $104,243 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, accretion and other, net36,608 464 
Stock-based compensation expense3,527 3,498 
Provision (release) for credit losses3,000 4,450 
Loss (gain) on sale of investment securities(15,028)
Net realized (gain) loss on sales of premises, equipment, and real estate owned37 (33,115)
Impairment loss on premises and equipment5,931 
Prepayment penalty from repayment of borrowings13,788 13,809 
Gain on early termination of long term borrowing hedge(14,110)
Decrease (increase) in accrued interest receivable(274)2,781 
Decrease (increase) in federal and state income tax receivable5,708 
Decrease (increase) in cash surrender value of bank owned life insurance(2,771)(2,850)
Decrease (increase) in other assets156,599 (99,335)
Increase (decrease) in federal and state income tax liabilities(5,760)60 
Increase (decrease) in accrued expenses and other liabilities(75,419)66,049 
Net cash provided by (used in) operating activities204,755 50,957 
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans and principal repayments, net(192,028)(31,259)
Loans purchased(73,208)
FHLB & FRB stock purchased(188,001)(201,200)
FHLB & FRB stock redeemed210,000 169,200 
Available-for-sale securities purchased(522,454)(159,884)
Principal payments and maturities of available-for-sale securities338,869 132,690 
Proceeds from sales of available-for-sale securities204,351 
Principal payments and maturities of held-to-maturity securities206,868 147,142 
Proceeds from sales of real estate owned637 2,116 
Net cash received (paid) in business combinations(2,777)
Proceeds from sales of premises and equipment3,376 53,790 
Premises and equipment purchased and REO improvements(20,260)(10,868)
Net cash provided by (used in) investing activities(236,201)303,301 
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in customer accounts1,039,797 97,657 
Proceeds from borrowings4,700,007 5,030,000 
Repayments of borrowings(5,263,795)(4,243,809)
Proceeds from the early termination of long term borrowing hedge14,110 
Proceeds from stock-based awards330 115 
Proceeds from issuance of preferred stock, net293,325 
Dividends paid on common stock(33,913)(33,374)
Treasury stock purchased(89,772)(112,089)
Increase (decrease) in advances payments by borrowers for taxes and insurance(13,173)(16,342)
Net cash provided by (used in) financing activities646,916 722,158 
Increase (decrease) in cash and cash equivalents615,470 1,076,416 
Cash, cash equivalents and restricted cash at beginning of period1,702,977 419,158 
Cash, cash equivalents and restricted cash at end of period$2,318,447 $1,495,574 

(CONTINUED)
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six Months Ended March 31,
 20212020
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities
Real estate acquired through foreclosure$105 $317 
Non-cash financing activities
Preferred stock dividend payable2,722 
Cash paid (received) during the period for
Interest41,707 87,948 
Income taxes14,745 21,000 


SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
9

Table of Contents

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

NOTE A – Summary of Significant Accounting Policies

Company and Nature of Operations - Washington Federal Bank, National Association, a federally-insured national bank dba WaFd Bank (the “Bank” or “WaFd Bank”), was founded on April 24, 1917 in Ballard, Washington and is engaged primarily in providing lending, depository, insurance and other banking services to consumers, mid-sized to large businesses, and owners and developers of commercial real estate. Washington Federal, Inc., a Washington corporation (the “Company”), was formed as the Bank’s holding company in November, 1994. As used throughout this document, the terms “Washington Federal” or the “Company” refer to the Company and its consolidated subsidiaries, and the term “Bank” refers to the operating subsidiary, Washington Federal Bank, National Association. The Company is headquartered in Seattle, Washington. The Bank conducts its activities through a network of 232 bank branches located in Washington, Oregon, Idaho, Utah, Arizona, Nevada, New Mexico and Texas.

Risks and Uncertainties - The worldwide spread of coronavirus (“COVID-19”) has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 and the related government actions impact the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

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

The information included in this Form 10-Q should be read in conjunction with the financial statements and related notes in the Company's 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on November 23, 2020 ("2020 Annual Financial Statements"). Interim results are not necessarily indicative of results for a full year.

The Company early adopted FASB Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses ("ASC 326") during fiscal 2020 and based on the application of the modified retrospective method it became effective on October 1, 2019 for all financial assets measured at amortized cost (primarily loans receivable and held-to-maturity debt securities) and off-balance-sheet credit exposures. The Company recorded a decrease to retained earnings of $21,945,000 as of October 1, 2019 for the cumulative effect of adopting ASC 326.

Summary of Significant Accounting Policies - The significant accounting policies used in preparation of the Company's consolidated financial statements are disclosed in its 2020 Annual Financial Statements. There have not been any significant changes in the Company's significant accounting policies compared to those contained in its 2020 Annual Financial Statements for the year ended September 30, 2020.

Preferred Stock - On February 8, 2021, in connection with an underwritten public offering, the Company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock (“Series A Preferred Stock”). Net proceeds, after underwriting discounts and expenses, were $293,325,000. The public offering consisted of the issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series A Preferred Stock, at a public offering price of $25.00 per depositary share. Holders of the depositary shares are entitled to all proportional rights and preferences of the Series A Preferred Stock (including, dividend, voting, redemption and liquidation rights). The depositary shares are traded on the NASDAQ Global Select Market under the symbol "WAFDP." The Series A Preferred Stock is redeemable at the option of the Company, subject to all applicable regulatory approvals, on or after April 15, 2026.

Restricted Cash Balances - Based on the level of vault cash on hand, the Company was not required to maintain cash reserve balances with the Federal Reserve Bank as of March 31, 2021. As of March 31, 2021 and September 30, 2020, the Company pledged cash collateral related to derivative contracts of $1,500,000 and $97,600,000, respectively.

Equity Securities - The Company records equity securities within Other assets in its Consolidated Statements of Financial Condition. Investments in equity securities with readily determinable fair values (marketable) are measured at fair value, with
10

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


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

Allowance for Credit Losses (Loans Receivable) - Effective October 1, 2019, the Company has applied ASC 326 for the periods presented herein, so the allowance calculation is based on current expected credit loss methodology ("CECL"). Prior to October 1, 2019, the calculation was based on incurred loss methodology. The Company maintains an allowance for credit losses (“ACL”) for the expected credit losses of the loan portfolio as well as unfunded loan commitments. The amount of ACL is based on ongoing, quarterly assessments by management. The CECL methodology requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures) and replaces the incurred loss methodology’s threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred.

The ACL consists of the allowance for loan losses and the reserve for unfunded commitments. The estimate of expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period that historical experience was based for each loan type. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ACL. The Company has designated two loan portfolio segments, commercial loans and consumer loans. These loan portfolio segments are further disaggregated into classes, which represent loans of similar type, risk characteristics, and methods for monitoring and assessing credit risk. The commercial loan portfolio segment is disaggregated into five classes: multi-family, commercial real estate, commercial and industrial, construction, and land acquisition and development. The risk of loss for the commercial loan portfolio segment is generally most indicated by the credit risk rating assigned to each borrower. Commercial loan risk ratings are determined by experienced senior credit officers based on specific facts and circumstances and are subject to periodic review by an independent internal team of credit specialists. The consumer loan portfolio segment is disaggregated into five classes: single-family-residential mortgage, custom construction, consumer lot loans, home equity lines of credit, and other consumer. The risk of loss for the consumer loan portfolio segment is generally most indicated by delinquency status and general economic factors. Each commercial and consumer loan portfolio class may also be further segmented based on risk characteristics.

For most of our loan portfolio classes, the historical loss experience is determined using a cohort methodology. This method pools loans into groups (“cohorts”) sharing similar risk characteristics and tracks each cohort’s net charge-offs over the lives of the loans to calculate a historical loss rate. The historical loss rates for each cohort are then averaged to calculate an overall historical loss rate which is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class. For certain loan portfolio classes, the Company determined there was not sufficient historical loss information to calculate a meaningful historical loss rate using the cohort methodology. For any such loan portfolio class, the weighted-average remaining maturity (“WARM”) methodology is being utilized until sufficient historical loss data is obtained. The WARM method multiplies an average annual loss rate by the expected remaining life of the loan pool to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class.

The Company also considers qualitative adjustments to the historical loss rate for each loan portfolio class. The qualitative adjustments for each loan class consider the conditions over the period from which historical loss experience was based and are split into two components: 1) asset or class specific risk characteristics or current conditions at the reporting date related to portfolio credit quality, remaining payments, volume and nature, credit culture and management, business environment or other management factors and 2) reasonable and supportable forecast of future economic conditions and collateral values.

The Company performs a quarterly asset quality review which includes a review of forecasted gross charge-offs and recoveries, nonperforming assets, criticized loans, risk rating migration, delinquencies, etc. The asset quality review is performed by management and the results are used to consider a qualitative overlay to the quantitative baseline. The second qualitative adjustment noted above, economic conditions and collateral values, encompasses a one-year reasonable and supportable
11

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


forecast period. The overlay adjustment for the reasonable and supportable forecast assumes an immediate reversion after the one-year forecast period to historical loss rates for the remaining life of the respective loan pool.

When management deems it to be appropriate, the Company establishes a specific reserve for individually evaluated loans that do not share similar risk characteristics with the loans included in each respective loan pool. These individually evaluated loans are removed from their respective pools and typically represent collateral dependent loans but may also include other non-performing loans or troubled debt restructurings (“TDRs”). In addition, the Company individually evaluates “reasonably expected” TDRs, which are identified by the Company as a loan expected to be classified as a TDR within the next six months. Management judgment is utilized to make this determination.

Allowance for Credit Losses (Held-to-Maturity Debt Securities) - For held-to-maturity (“HTM”) debt securities, the Company is required to utilize a CECL methodology to estimate expected credit losses. Substantially all of the Company’s HTM debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. See Note F "Fair Value Measurements" for more information about HTM debt securities.

Allowance for Credit Losses (Available-for-Sale Debt Securities) - The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL methodology applied for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Under the new guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. Changes in the allowance for credit losses are recorded as a provision (or release) for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note F "Fair Value Measurements" for more information about AFS debt securities.

Accrued Interest Receivable - Upon adoption of ASC 326, the Company made the following elections regarding accrued interest receivable:

Presenting accrued interest receivable balances separately from their underlying instruments within the consolidated statements of financial condition.
Excluding accrued interest receivable that is included in the amortized cost of financing receivables from related disclosure requirements.
Continuing our policy to write off accrued interest receivable by reversing interest income in cases where the Company does not reasonably expect to receive payment.
Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above.

Non-Accrual Loans - Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days or more past due. If payment is made on a loan so that the loan becomes less than 90 days past due, and the Bank expects full collection of principal and interest, the loan is returned to full accrual status. Any interest ultimately collected is credited to income in the period of recovery. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet contractual obligations.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



If a consumer loan is on non-accrual status before becoming a TDR it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on accrual status before it becomes a TDR, and management concludes that full repayment is probable based on internal evaluation, it will remain on accrual status following restructuring. If the restructured consumer loan does not perform, it is placed on non-accrual status when it is 90 days delinquent. For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. In some instances, after the required six consecutive payments are made, management will conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual status.

Collateral-Dependent Loans - A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans and leases deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral consists of various types of real estate including residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.

Off-balance-sheet credit exposures - The only material off-balance-sheet credit exposures are unfunded loan commitments, which had a combined balance of $3,348,654,000 and $2,738,095,000 at March 31, 2021 and September 30, 2020, respectively. The reserve for unfunded commitments is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized through provision for credit losses in the consolidated statements of income. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class. See Note I "Commitments and Contingencies" for more information.


NOTE B – New Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU provide temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The ASU primarily includes relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company is currently in the process of evaluating the amendments and determining the impact to its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including reasonably certain renewal periods. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted this ASU beginning October 1, 2020 and it did not have a material impact on its consolidated financial statements.


NOTE C – Dividends and Share Repurchases

On February 19, 2021, the Company paid a regular dividend on common stock of $0.23 per share, which represented the 152nd consecutive quarterly cash dividend. Dividends per share were $0.23 and $0.22 for the quarters ended March 31, 2021 and 2020, respectively. On April 27, 2021, the Company declared a regular dividend on common stock of $0.23 per share, which
13

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


represents its 153rd consecutive quarterly cash dividend. This dividend will be paid on May 21, 2021 to common shareholders of record on May 7, 2021.

For the three months ended March 31, 2021, the Company repurchased 2,824,588 shares at an average price of $31.53. This total includes 1,715,335 shares of common stock repurchased under the modified "Dutch auction" tender offer that was completed in March 2021 for a total cost of $53,780,000, including fees and expenses. As of March 31, 2021, there are 11,769,687 remaining shares authorized to be repurchased under the current Board approved share repurchase program. On January 26, 2021 the Board authorized an additional 10,000,000 shares for repurchase under the program.

On April 2, 2021, the Company declared a cash dividend of $9.0729 per share on its Series A Preferred Stock. This dividend equals $0.22682250 per depositary share. The Series A Preferred Stock dividend was paid on April 15, 2021, to shareholders of record as of April 13, 2021.

NOTE D – Loans Receivable

For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies" above.

The Company's loans held for investment are divided into two portfolio segments, commercial loans and consumer loans, with each of those segments further split into loan classes for purposes of estimating the allowance for credit losses.

The following table is a summary of loans receivable by loan portfolio segment and class.

 March 31, 2021September 30, 2020
(In thousands)(In thousands)
Commercial loans
Multi-family$2,008,192 13.2 %$1,538,762 10.6 %
Commercial real estate2,226,560 14.6 1,895,086 13.1 
Commercial & industrial (1)2,471,823 16.2 2,132,160 14.7 
Construction2,495,961 16.3 2,403,276 16.6 
Land - acquisition & development185,024 1.2 193,745 1.3 
Total commercial loans9,387,560 61.5 8,163,029 56.3 
Consumer loans
Single-family residential4,828,535 31.6 5,304,689 36.7 
Construction - custom678,469 4.5 674,879 4.7 
   Land - consumer lot loans123,351 0.8 102,263 0.7 
   HELOC144,528 0.9 139,703 1.0 
   Consumer103,145 0.7 83,159 0.6 
Total consumer loans5,878,028 38.5 6,304,693 43.7 
Total gross loans15,265,588 100 %14,467,722 100 %
   Less:
      Allowance for credit losses on loans172,653 166,955 
      Loans in process1,982,225 1,456,072 
      Net deferred fees, costs and discounts75,287 52,378 
Total loan contra accounts2,230,165 1,675,405 
Net loans$13,035,423 $12,792,317 

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


(1) Includes $711,405,000 and $762,004,000 of SBA Payroll Protection Program loans as of March 31, 2021 and September 30, 2020, respectively.

The Company elected to exclude accrued interest receivable ("AIR") from the amortized cost basis of loans for disclosure purposes and from the calculations of estimated credit losses. As of March 31, 2021, and September 30, 2020, AIR for loans totaled $48,676,000 and $48,704,000, respectively, and is included in the “accrued interest receivable” line item on the Company’s consolidated statements of financial condition.
Loans in the amount of $6,314,864,000 and $5,361,504,000 at March 31, 2021 and September 30, 2020, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.
The following table sets forth the amortized cost basis of non-accrual loans and loans 90 days or more past due and accruing.
 
 March 31, 2021September 30, 2020
 (In thousands, except ratio data)
Non-accrualNon-accrual with no ACL90 days or more past due and accruingNon-accrualNon-accrual with no ACL90 days or more past due and accruing
Commercial loans
Multi-family$$$$$$
Commercial real estate9,226 3,771 
Commercial & industrial832 329 
Construction1,423 1,669 
Land - acquisition & development2,340 
   Total commercial loans13,821 5,769 
Consumer loans
Single-family residential25,599 22,431 933 
Construction - custom
Land - consumer lot loans177 243 
HELOC306 553 
Consumer52 60 17 
   Total consumer loans26,134 23,287 950 
Total non-accrual loans$39,955 $$$29,056 $$950 
% of total loans0.30 %0.22 %

The Company recognized interest income on non-accrual loans of approximately $5,228,000 in the six months ended March 31, 2021. Had these loans been on accrual status and performed according to their original contract terms, the Company would have recognized interest income of approximately $769,000 for the six months ended March 31, 2021. Recognized interest income for the six months ended March 31, 2021 was higher than what otherwise would have been recognized in the period due to the collection of past due amounts. Interest cash flows collected on non-accrual loans vary from period to period as those loans are brought current or are paid off.

15

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


The following tables provide details regarding loan delinquencies by loan portfolio and class.
 
March 31, 2021Days Delinquent Based on $ Amount of Loans% based
on $
Type of LoanLoans Receivable (Amortized Cost)Current306090Total Delinquent
(In thousands, except ratio data)
Commercial Loans
Multi-family$1,987,120 $1,986,645 $$475 $$475 0.02 %
Commercial real estate2,211,065 2,206,097 37 111 4,820 4,968 0.22 
Commercial & industrial2,452,585 2,450,623 1,175 787 1,962 0.08 
Construction925,017 923,864 1,153 1,153 0.12 
Land - acquisition & development150,311 147,971 2,340 2,340 1.56 
   Total commercial loans7,726,098 7,715,200 1,212 586 9,100 10,898 0.14 
Consumer Loans
Single-family residential4,802,575 4,776,367 5,868 960 19,380 26,208 0.55 
Construction - custom308,831 308,831 
Land - consumer lot loans122,211 121,858 93 185 75 353 0.29 
HELOC145,066 144,667 118 281 399 0.28 
Consumer103,294 102,979 174 139 315 0.30 
   Total consumer loans5,481,977 5,454,702 6,253 1,147 19,875 27,275 0.50 
Total Loans$13,208,075 $13,169,902 $7,465 $1,733 $28,975 $38,173 0.29 %
Delinquency %99.71%0.06%0.01%0.22%0.29%


September 30, 2020Days Delinquent Based on $ Amount of Loans% based
on $
Type of LoanLoans Receivable (Amortized Cost)Current306090Total Delinquent
(In thousands, except ratio data)
Commercial Loans
Multi-family$1,538,240 $1,538,240 $$$$%
Commercial real estate1,884,688 1,884,210 195 283 478 0.03 
Commercial & industrial2,115,513 2,114,650 583 280 863 0.04 
Construction1,352,414 1,350,752 1,662 1,662 0.12 
Land - acquisition & development153,571 153,571 
  Total commercial loans7,044,426 7,041,423 778 2,225 3,003 0.04 
Consumer Loans
Single-family residential5,293,962 5,267,608 3,922 3,108 19,324 26,354 0.50 
Construction - custom295,953 295,953 
Land - consumer lot loans101,394 101,029 152 213 365 0.36 
HELOC140,222 139,491 275 76 380 731 0.52 
Consumer83,315 82,959 121 11 224 356 0.43 
  Total consumer loans5,914,846 5,887,040 4,470 3,195 20,141 27,806 0.47 
Total Loans$12,959,272 $12,928,463 $4,470 $3,973 $22,366 $30,809 0.24 %
Delinquency %99.76%0.03%0.03%0.17%0.24%


16

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


The Company participated in the Small Business Administration’s Paycheck Protection Program ("PPP"). This program came about through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress to help small businesses keep their employees employed through the COVID-19 shelter in place orders. In 2020, the Company assisted over 6,500 businesses with more than $780,000,000 in PPP loans. Fiscal 2021 year to date we have assisted over 2,000 small businesses with $235,000,000 in PPP loans.
The Company has actively worked with its borrowers to modify consumer mortgage and commercial loans to provide payment deferrals as a result of the COVID-19 pandemic. The terms of the payment deferrals are generally 90 days for consumer mortgage loans and up to 180 days for commercial loans and borrowers may be eligible for multiple deferrals. Pursuant to the CARES Act, these loan modifications are not accounted for as TDRs. As of March 31, 2021, 45 mortgage loans totaling $14,000,000 and 10 commercial loans totaling $89,000,000 that had been modified remain in deferral. These loans are not considered past due until after the deferral period is over and scheduled payments have resumed.

Most TDRs are accruing and performing loans where the borrower has proactively approached the Company about modification due to temporary financial difficulties. 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 March 31, 2021, 97.7% of the Company's $78,282,000 in TDRs were classified as performing. As of March 31, 2021, single-family residential loans comprised 92.6% of TDRs.

We evaluate the credit quality of our loans based on regulatory risk ratings and also consider other factors. Based on this evaluation, 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.

The following tables present by primary credit quality indicator, loan class, and year of origination, the amortized cost basis of loans receivable as of March 31, 2021.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Term Loans Amortized Cost Basis by Origination Year
YTD 20212020201920182017Prior to 2017Revolving LoansRevolving to Term LoansTotal Loans
Commercial loans
Multi-family
Pass$267,297 $507,301 $248,237 $295,532 $247,043 $344,441 $8,221 $$1,918,072 
Special Mention1,769 4,039 2,844 1,934 10,586 
Substandard7,546 651 3,746 46,519 58,462 
Total$267,297 $509,070 $255,783 $300,222 $253,633 $392,894 $8,221 $$1,987,120 
Commercial real estate
Pass$252,949 $443,877 $282,617 $274,651 $240,058 $440,678 $2,203 $$1,937,033 
Special Mention194 4,432 33,380 1,697 23,144 62,847 
Substandard9,012 69,855 22,619 47,503 62,196 211,185 
Total$252,949 $453,083 $356,904 $330,650 $289,258 $526,018 $2,203 $$2,211,065 
Commercial & industrial
Pass$547,764 $631,137 $57,479 $52,576 $78,044 $159,841 $635,066 $11,944 $2,173,851 
Special Mention0��9,798 6,785 630 18 31,636 48,867 
Substandard12,363 48,216 4,126 6,443 94 48,126 110,227 272 229,867 
Total$560,127 $689,151 $68,390 $59,649 $78,156 $207,967 $776,929 $12,216 $2,452,585 
Construction
Pass$136,932 $311,836 $270,277 $67,312 $$$94,845 $$881,202 
Substandard4,321 2,348 37,146 43,815 
Total$136,932 $316,157 $272,625 $67,312 $37,146 $$94,845 $$925,017 
Land - acquisition & development
Pass$22,127 $39,505 $28,645 $18,007 $14,789 $4,011 $5,314 $$132,398 
Special Mention15,573 15,573 
Substandard2,340 2,340 
Total$22,127 $39,505 $28,645 $18,007 $17,129 $19,584 $5,314 $$150,311 
Total commercial loans
Pass$1,227,069 $1,933,656 $887,255 $708,078 $579,934 $948,971 $745,649 $11,944 $7,042,556 
Special Mention11,761 11,217 38,049 4,559 40,651 31,636 137,873 
Substandard12,363 61,549 83,875 29,713 90,829 156,841 110,227 272 545,669 
Total$1,239,432 $2,006,966 $982,347 $775,840 $675,322 $1,146,463 $887,512 $12,216 $7,726,098 

18

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


Term Loans Amortized Cost Basis by Origination Year
YTD 20212020201920182017Prior to 2017Revolving LoansRevolving to Term LoansTotal Loans
Consumer loans
Single-family residential
Current$499,799 $825,204 $512,811 $458,566 $514,115 $1,965,872 $$$4,776,367 
30 days past due115 5,753 5,868 
60 days past due960 960 
90+ days past due466 169 18,745 19,380 
Total$499,799 $825,204 $512,811 $459,147 $514,284 $1,991,330 $$$4,802,575 
Construction - custom
Current$50,146 $242,667 $14,955 $1,063 $$$$$308,831 
Total$50,146 $242,667 $14,955 $1,063 $$$$$308,831 
Land - consumer lot loans
Current$41,526 $35,849 $13,856 $5,304 $6,565 $18,758 $$$121,858 
30 days past due93 93 
60 days past due185 185 
90+ days past due75 75 
Total$41,526 $35,849 $13,856 $5,489 $6,565 $18,926 $$$122,211 
HELOC
Current$$$$$$5,917 $137,531 $1,219 $144,667 
30 days past due93 25 118 
90+ days past due30 251 281 
Total$$$$$$6,040 $137,807 $1,219 $145,066 
Consumer
Current$10,891 $8,245 $1,011 $45,983 $$14,000 $22,849 $$102,979 
30 days past due75 94 174 
60 days past due
90+ days past due37 96 139 
Total$10,891 $8,245 $1,055 $45,983 $171 $14,100 $22,849 $$103,294 
Total consumer loans
Current$602,362 $1,111,965 $542,633 $510,916 $520,680 $2,004,547 $160,380 $1,219 $5,454,702 
30 days past due115 75 6,033 25 6,253 
60 days past due185 960 1,147 
90+ days past due37 466 265 18,856 251 19,875 
Total$602,362 $1,111,965 $542,677 $511,682 $521,020 $2,030,396 $160,656 $1,219 $5,481,977 


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


NOTE E – Allowance for Losses on Loans

For a detailed discussion of loans and credit quality, including accounting policies and the CECL methodology used to estimate the allowance for credit losses, see Note A "Summary of Significant Accounting Policies."

The following tables summarize the activity in the allowance for loan losses by loan portfolio segment and class. 
Three Months Ended March 31, 2021Beginning AllowanceCharge-offsRecoveriesProvision &
Transfers
Ending Allowance
 (In thousands)
Commercial loans
   Multi-family$14,363 $$$3,413 $17,776 
   Commercial real estate23,496 1,457 1,869 26,822 
   Commercial & industrial44,317 (18)11 3,484 47,794 
   Construction26,365 (3,816)22,549 
   Land - acquisition & development10,666 410 (573)10,503 
      Total commercial loans119,207 (18)1,878 4,377 125,444 
Consumer loans
   Single-family residential38,613 (106)497 (3,896)35,108 
   Construction - custom3,594 (346)3,248 
   Land - consumer lot loans2,958 327 3,292 
   HELOC2,362 (136)2,226 
   Consumer3,455 (84)290 (326)3,335 
      Total consumer loans50,982 (190)794 (4,377)47,209 
Total loans$170,189 $(208)$2,672 $$172,653 

Three Months Ended March 31, 2020Beginning AllowanceCharge-offsRecoveries
Provision &
Transfers (1)
Ending Allowance
 (In thousands)
Commercial loans
   Multi-family$10,506 $$$1,236 $11,742 
   Commercial real estate13,067 (13)1,020 565 14,639 
   Commercial & industrial33,676 (129)57 4,972 38,576 
   Construction21,919 1,424 23,348 
   Land - acquisition & development10,413 126 (140)10,399 
      Total commercial loans89,581 (142)1,208 8,057 98,704 
Consumer loans
   Single-family residential46,356 192 268 46,816 
   Construction - custom2,930 245 3,175 
   Land - consumer lot loans2,567 (77)476 (388)2,578 
   HELOC2,034 211 2,246 
   Consumer4,045 (230)360 (593)3,582 
      Total consumer loans57,932 (307)1,029 (257)58,397 
Total loans$147,513 $(449)$2,237 $7,800 $157,101 
(1) Provision & transfer amounts within the table do not include the provision for unfunded commitments of $400,000
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Six Months Ended March 31, 2021Beginning AllowanceCharge-offsRecoveries
Provision &
Transfers (1)
Ending Allowance
 (In thousands)
Commercial loans
   Multi-family$13,853 $$$3,923 $17,776 
   Commercial real estate22,516 2,246 2,060 26,822 
   Commercial & industrial38,665 (20)61 9,088 47,794 
   Construction24,156 (1,607)22,549 
   Land - acquisition & development10,733 445 (675)10,503 
      Total commercial loans109,923 (20)2,752 12,789 125,444 
Consumer loans
   Single-family residential45,186 (106)1,276 (11,248)35,108 
   Construction - custom3,555 (307)3,248 
   Land - consumer lot loans2,729 14 549 3,292 
   HELOC2,571 (345)2,226 
   Consumer2,991 (234)516 62 3,335 
      Total consumer loans57,032 (340)1,806 (11,289)47,209 
Total loans$166,955 $(360)$4,558 $1,500 $172,653 
(1) Provision & transfer amounts within the table do not include the provision for unfunded commitments of $1,500,000

Six Months Ended March 31, 2020Beginning AllowanceCharge-offsRecoveries
Provision &
Transfers (1)
Ending Allowance
 (In thousands)
Commercial loans
   Multi-family$10,404 $$498 $840 $11,742 
   Commercial real estate13,024 (111)1,388 338 14,639 
   Commercial & industrial32,235 (179)201 6,319 38,576 
   Construction22,768 59 521 23,348 
   Land - acquisition & development10,904 (11)1,586 (2,080)10,399 
      Total commercial loans89,335 (301)3,732 5,938 98,704 
Consumer loans
   Single-family residential47,771 (15)453 (1,393)46,816 
   Construction - custom2,880 295 3,175 
   Land - consumer lot loans2,635 (147)486 (396)2,578 
   HELOC2,048 94 104 2,246 
   Consumer4,615 (604)669 (1,098)3,582 
      Total consumer loans59,949 (766)1,702 (2,488)58,397 
Total loans$149,284 $(1,067)$5,434 $3,450 $157,101 
(1) Provision & transfer amounts within the table do not include the provision for unfunded commitments of $1,000,000

The Company recorded no provision for credit losses for the three months ended March 31, 2021, compared with a provision for credit losses of $8,200,000 for the three months ended March 31, 2020. The relatively large credit loss provision for the three months ended March 31, 2020 is primarily due to the onset of the global pandemic. The Company recorded a provision
21

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


for credit losses of $3,000,000 for the six months ended March 31, 2021, compared with a provision for credit losses of $4,450,000 for the six months ended March 31, 2020. Recoveries, net of charge-offs, totaled $2,464,000 for the three months ended March 31, 2021, compared to net recoveries of $1,788,000 during the three months ended March 31, 2020. Recoveries, net of charge-offs, totaled $4,198,000 for the six months ended March 31, 2021, compared to net recoveries of $4,367,000 during the six months ended March 31, 2020. NaN allowance was recorded as of March 31, 2021 or as of September 30, 2020 for the $695,752,000 and $745,081,000 of PPP loans in the portfolio on each date, respectively, which are included in the commercial & industrial loan category, due to the government guarantee.

Non-performing assets were $48,943,000, or 0.25% of total assets, at March 31, 2021, compared to $37,695,000, or 0.20% of total assets, at September 30, 2020. Non-accrual loans were $39,955,000 at March 31, 2021, compared to $29,056,000 at September 30, 2020. Delinquencies, as a percent of total loans, were 0.29% at March 31, 2021, compared to 0.24% at September 30, 2020.

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


The following tables provide the amortized cost of loans receivable based on risk rating categories as previously defined.

March 31, 2021Internally Assigned Grade
 PassSpecial mentionSubstandardDoubtfulLossTotal
 (In thousands, except ratio data)
Loan type
Commercial loans
  Multi-family$1,918,072 $10,586 $58,462 $$$1,987,120 
  Commercial real estate1,937,033 62,847 211,185 2,211,065 
  Commercial & industrial2,173,851 48,867 229,867 2,452,585 
  Construction881,202 43,815 925,017 
  Land - acquisition & development132,398 15,573 2,340 150,311 
    Total commercial loans7,042,556 137,873 545,669 7,726,098 
Consumer loans
  Single-family residential4,773,261 189 29,125 4,802,575 
  Construction - custom308,831 308,831 
  Land - consumer lot loans122,034 177 122,211 
  HELOC143,167 1,899 145,066 
  Consumer103,274 20 103,294 
    Total consumer loans5,450,567 189 31,221 5,481,977 
Total$12,493,123 $138,062 $576,890 $$$13,208,075 
Total grade as a % of total loans94.59 %1.05 %4.37 %%%


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



September 30, 2020Internally Assigned Grade
 PassSpecial mentionSubstandardDoubtfulLossTotal Gross Loans
 (In thousands, except ratio data)
Loan type
Commercial loans
  Multi-family$1,506,692 $13,721 $17,827 $$$1,538,240 
  Commercial real estate1,681,230 92,184 111,274 1,884,688 
  Commercial & industrial1,898,709 64,695 152,109 2,115,513 
  Construction1,187,786 61,178 103,450 1,352,414 
  Land - acquisition & development137,998 15,573 153,571 
    Total commercial loans6,412,415 247,351 384,660 7,044,426 
Consumer loans
  Single-family residential5,270,666 192 23,104 5,293,962 
  Construction - custom295,953 295,953 
  Land - consumer lot loans101,151 243 101,394 
  HELOC139,646 576 140,222 
  Consumer83,304 11 83,315 
    Total consumer loans5,890,720 192 23,934 5,914,846 
Total loans$12,303,135 $247,543 $408,594 $$$12,959,272 
Total grade as a % of total gross loans94.94 %1.91 %3.15 %%%



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


The following tables provide information on amortized cost of loans receivable based on borrower payment activity.

March 31, 2021Performing LoansNon-Performing Loans
 Amount% of Total
Loans
Amount% of Total
Loans
 (In thousands, except ratio data)
Commercial loans
   Multi-family$1,987,120 100.0 %$%
   Commercial real estate2,201,839 99.6 9,226 0.4 
   Commercial & industrial2,451,753 100.0 832 
   Construction923,594 99.8 1,423 0.2 
   Land - acquisition & development147,971 98.4 2,340 1.6 
      Total commercial loans7,712,277 99.8 13,821 0.2 
Consumer loans
   Single-family residential4,776,976 99.5 25,599 0.5 
   Construction - custom308,831 100.0 
   Land - consumer lot loans122,034 99.9 177 0.1 
   HELOC144,760 99.8 306 0.2 
   Consumer103,242 99.9 52 0.1 
      Total consumer loans5,455,843 99.5 26,134 0.5 
Total loans$13,168,120 99.7 %$39,955 0.3 %

September 30, 2020Performing LoansNon-Performing Loans
 Amount% of Total
Loans
Amount% of Total
Loans
 (In thousands, except ratio data)
Commercial loans
   Multi-family$1,538,240 100.0 %$%
   Commercial real estate1,880,917 99.8 3,771 0.2 
   Commercial & industrial2,115,184 100.0 329 
   Construction1,350,745 99.9 1,669 0.1 
   Land - acquisition & development153,571 100.0 
      Total commercial loans7,038,657 99.9 5,769 0.1 
Consumer loans
   Single-family residential5,271,531 99.6 22,431 0.4 
   Construction - custom295,953 100.0 
   Land - consumer lot loans101,151 99.8 243 0.2 
   HELOC139,669 99.6 553 0.4 
   Consumer83,255 99.9 60 0.1 
      Total consumer loans5,891,559 99.6 23,287 0.4 
Total loans$12,930,216 99.8 %$29,056 0.2 %


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


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

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active exchange markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Available-for-Sale Securities and Derivative Contracts
Securities available for sale are recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input method. Securities that are traded on active exchanges are measured using the closing price in an active market and are considered a Level 1 input method.
The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counter party to offset its interest rate risk. The Company has also entered into commercial loan hedges, mortgage pool hedges and borrowings hedges using interest rate swaps. The fair value of these interest rate swaps are estimated by a third party pricing service using a discounted cash flow technique. These are considered a Level 2 input method.
 
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following tables present the balance and level in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis.

 March 31, 2021
 Level 1Level 2Level 3Total
 (In thousands)
Financial Assets
Available-for-sale securities:
U.S. government and agency securities$$71,512 $$71,512 
Asset-backed securities1,183,977 1,183,977 
Municipal bonds38,669 38,669 
Corporate debt securities380,115 380,115 
Mortgage-backed securities
Agency pass-through certificates764,629 764,629 
Total available-for-sale securities2,438,902 2,438,902 
Client swap program hedges5,104 5,104 
Mortgage loan fair value hedges2,135 2,135 
Borrowings cash flow hedges59,198 59,198 
Total financial assets$$2,505,339 $$2,505,339 
Financial Liabilities
Client swap program hedges$$5,104 $$5,104 
Commercial loan fair value hedges4,610 4,610 
Total financial liabilities$$9,714 $$9,714 

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


 September 30, 2020
 Level 1Level 2Level 3Total
 (In thousands)
Financial Assets
Available-for-sale securities:
U.S. government and agency securities$$18,824 $$18,824 
Asset-backed securities936,917 0936,917 
Municipal bonds38,315 38,315 
Corporate debt securities287,184 287,184 
Mortgage-backed securities
Agency pass-through certificates968,252 968,252 
Total available-for-sale securities2,249,492 2,249,492 
Client swap program hedges48,201 48,201 
Total financial assets$$2,297,693 $$2,297,693 
Financial Liabilities
Client swap program hedges$$48,201 $$48,201 
Commercial loan fair value hedges8,492 8,492 
Mortgage loan fair value hedges016,061 016,061 
Borrowings cash flow hedges17,375 17,375 
Total financial liabilities$$90,129 $$90,129 

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


Measured on a Nonrecurring Basis

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

When management determines that the fair value of the collateral or the REO requires additional adjustments, either as a result of an updated appraised value or when there is no observable market price, the Company classifies the collateral dependent loan or real estate owned as Level 3. Level 3 assets recorded at fair value on a nonrecurring basis at March 31, 2021 included loans for which an 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 March 31, 2021 and March 31, 2020, and the total gains (losses) resulting from those fair value adjustments during the respective periods. The estimated fair value measurements are shown gross of estimated selling costs.
 
 March 31, 2021Three Months Ended March 31, 2021Six Months Ended March 31, 2021
 Level 1Level  2Level  3TotalTotal Gains (Losses)
 (In thousands)(In thousands)
Loans (1)$$$$$(25)$(69)
Real estate owned (2)722 722 148 101 
Balance at end of period$$$722 $722 $123 $32 

(1)The gains (losses) represent re-measurements of collateral-dependent loans.
(2)The gains (losses) represent aggregate write-downs and charge-offs on real estate owned.

March 31, 2020Three Months Ended March 31, 2020Six Months Ended March 31, 2020
Level 1Level  2Level  3TotalTotal Gains (Losses)
(In thousands)(In thousands)
Loans (1)$$$810 $810 $(246)$(545)
Real estate owned (2)1,675 1,675 145 143 
Balance at end of period$$$2,485 $2,485 $(101)$(402)

(1)The gains (losses) represent re-measurements of collateral-dependent loans.
(2)The gains (losses) represent aggregate write-downs and charge-offs on real estate owned.
At March 31, 2021, there were $676,000 in foreclosed residential real estate properties held as REO. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $3,134,000.
Fair Values of Financial Instruments
FASB ASC 825, Financial Instruments ("ASC 825") requires disclosure of fair value information about financial instruments, whether or not recognized on the statement of financial condition, for which it is practicable to estimate those values. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value estimates presented do not reflect the underlying fair value of the Company. Although management is not aware of any factors that would materially affect the estimated fair value amounts presented below, such amounts have not been
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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. 
 March 31, 2021September 30, 2020
 Level in Fair Value HierarchyCarrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
 ($ in thousands)
Financial assets
Cash and cash equivalents1$2,318,447 $2,318,447 $1,702,977 $1,702,977 
Available-for-sale securities
U.S. government and agency securities271,512 71,512 18,824 18,824 
Asset-backed securities21,183,977 1,183,977 936,917 936,917 
Municipal bonds238,669 38,669 38,315 38,315 
Corporate debt securities2380,115 380,115 287,184 287,184 
Mortgage-backed securities
Agency pass-through certificates2764,629 764,629 968,252 968,252 
Total available-for-sale securities2,438,902 2,438,902 2,249,492 2,249,492 
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates2489,915 503,723 698,934 720,516 
                           Commercial MBS24,174 4,174 6,904 6,852 
Total held-to-maturity securities494,089 507,897 705,838 727,368 
Loans receivable313,035,423 13,419,101 12,792,317 13,392,089 
FHLB and FRB stock2119,991 119,991 141,990 141,990 
        Other assets - client swap program hedges25,104 5,104 48,201 48,201 
        Other assets - commercial fair value loan hedges2
        Other assets - mortgage loan fair value hedges22,135 2,135 
        Other assets - borrowings cash flow hedges259,198 59,198 
Financial liabilities
Time deposits23,590,755 3,543,588 3,973,192 3,963,203 
FHLB advances22,150,000 2,115,171 2,700,000 2,722,509 
        Other liabilities - client swap program hedges25,104 5,104 48,201 48,201 
Other liabilities - commercial loan fair value hedges24,610 4,610 8,492 8,492 
Other liabilities - mortgage loan fair value hedges216,061 16,061 
        Other liabilities - borrowings cash flow hedges217,375 17,375 

The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value. 
Available-for-sale securities and held-to-maturity securities – Securities at fair value are primarily priced using model pricing based on the securities' relationship to other benchmark quoted prices as provided by an independent third party, and are considered a Level 2 input method. Equity securities that are exchange traded are considered a Level 1 input method.
Loans receivable – Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multi-family real estate, residential mortgage, construction, commercial, consumer and land loans. Each loan category is further segmented into fixed- and adjustable-rate interest terms. For residential mortgages and multi-family loans, the bank determined that its best exit price was by securitization. MBS benchmark prices are used as a base
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


price, with further loan level pricing adjustments made based on individual loan characteristics such as FICO score, LTV, Property Type and occupancy. For all other loan categories an estimate of fair value is then calculated based on discounted cash flows using a discount rate offered and observed in the market on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as an annual loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
FHLB and FRB stock – The fair value is based upon the par value of the stock that equates to its carrying value.
Time deposits – The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits with similar remaining maturities.
FHLB advances – The fair value of FHLB advances and other borrowings is estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.
Interest rate swaps – The Company offers interest rate swaps to its variable rate borrowers who want to manage their interest rate risk. At the same time, the Company enters into the opposite trade with a counterparty to offset its interest rate risk. The Company also uses interest rate swaps for various fair value hedges and cash flow hedges. The fair value of these interest rate swaps is estimated by a third party pricing service using a discounted cash flow technique.
The following tables provide details about the amortized cost and fair value of available-for-sale and held-to-maturity securities.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 March 31, 2021
 Amortized
Cost
Gross UnrealizedFair
Value
Yield
 GainsLosses
 ($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
1 to 5 years$54,992 $516 $$55,508 0.50 %
5 to 10 years15,897 107 16,004 2.05 
Asset-backed securities
5 to 10 years102,141 447 (718)101,870 0.68 
Over 10 years1,071,530 10,994 (417)1,082,107 1.07 
Corporate debt securities due
Within 1 year31,742 126 (28)31,840 1.98 
1 to 5 years195,442 7,120 202,562 1.67 
5 to 10 years65,888 751 (710)65,929 3.14 
Over 10 years80,560 (776)79,784 3.44 
Municipal bonds due
1 to 5 years1,477 28 1,505 
5 to 10 years5,797 275 6,072 0.27 
Over 10 years29,929 1,163 31,092 5.85 
Mortgage-backed securities
Agency pass-through certificates737,281 29,622 (2,274)764,629 2.67 
2,392,676 51,149 (4,923)2,438,902 1.80 
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates489,915 13,808 503,723 3.16 
Commercial MBS4,174 4,174 0.98 
494,089 13,808 507,897 3.14 
$2,886,765 $64,957 $(4,923)$2,946,799 2.02 %
 
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 September 30, 2020
 Amortized
Cost
Gross UnrealizedFair
Value
Yield
 GainsLosses
 ($ in thousands)
Available-for-sale securities
U.S. government and agency securities due
5 to 10 years$18,448 $376 $$18,824 2.05 %
Asset-backed securities
5 to 10 years38,289 (1,600)36,689 0.83 
Over 10 years906,489 647 (6,908)900,228 1.14 
Corporate debt securities due
Within 1 year54,209 337 (51)54,495 1.22 
1 to 5 years128,289 3,366 (428)131,227 1.78 
5 to 10 years97,157 4,305 101,462 1.50 
Municipal bonds due
1 to 5 years1,461 36 1,497 
Over 10 years36,044 774 36,818 5.40 
Mortgage-backed securities
Agency pass-through certificates929,713 39,166 (627)968,252 2.82 
2,210,099 49,007 (9,614)2,249,492 1.97 
Held-to-maturity securities
Mortgage-backed securities
Agency pass-through certificates698,934 21,582 720,516 3.16 
Commercial MBS6,904 (52)6,852 1.02 
705,838 21,582 (52)727,368 3.14 
$2,915,937 $70,589 $(9,666)$2,976,860 2.25 %


During fiscal 2020, as permitted in conjunction with the adoption of ASU 2019-04, the Company reclassified $374,680,000 of prepayable debt securities from held-to-maturity to available-for-sale. For available-for-sale investment securities, there were purchases of $522,454,000 during the six months ended March 31, 2021 and purchases of $159,884,000 during the six months ended March 31, 2020. There were 0 sales of available-for-sale investment securities during the six months ended March 31, 2021 and sales totaled $204,351,000 during the prior year same period. For held-to-maturity investment securities, there were 0 purchases during the six months ended March 31, 2021 and 0 purchases during the six months ended March 31, 2020. There were 0 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 Company elected to exclude AIR from the amortized cost basis of debt securities disclosed throughout this footnote. For AFS securities, AIR totaled $4,128,000 and $3,285,000 as of March 31, 2021 and September 30, 2020, respectively. For HTM debt securities, AIR totaled $1,269,000 and $1,811,000 as of March 31, 2021 and September 30, 2020, respectively. AIR is included in the “accrued interest receivable” line item on the Company’s consolidated statements of financial condition.
The following tables show the gross unrealized losses and fair value of securities as of March 31, 2021 and September 30, 2020, by length of time that individual securities in each category have been in a continuous loss position. There were 38 and 51 securities with an unrealized loss as of March 31, 2021 and September 30, 2020, respectively. 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 have any credit impairment.
 
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


March 31, 2021Less than 12 months12 months or moreTotal
 Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
 (In thousands)
Available-for-sale securities
Corporate debt securities$(1,514)$125,191 $$$(1,514)$125,191 
Asset-backed securities(77)80,046 (1,058)125,681 (1,135)205,727 
Mortgage-backed securities(1,963)55,679 (311)31,951 (2,274)87,630 
(3,554)260,916 (1,369)157,632 (4,923)418,548 
Held-to-maturity securities
Mortgage-backed securities
$(3,554)$260,916 $(1,369)$157,632 $(4,923)$418,548 

September 30, 2020Less than 12 months12 months or moreTotal
 Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
Unrealized
Gross Losses
Fair
Value
 (In thousands)
Available-for-sale securities
Corporate debt securities$(74)$45,875 $(405)$24,596 $(479)$70,471 
Asset-backed securities(5,481)587,746 (3,027)204,369 (8,508)792,115 
Mortgage-backed securities(278)41,897 (349)56,196 (627)98,093 
(5,833)675,518 (3,781)285,161 (9,614)960,679 
Held-to-maturity securities
Mortgage-backed securities(52)6,853 (52)6,853 
$(5,885)$682,371 $(3,781)$285,161 $(9,666)$967,532 


Substantially all of the Company’s held-to-maturity debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of March 31, 2021 or September 30, 2020.

The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position have any credit loss impairment as of March 31, 2021 or September 30, 2020. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Available-for-sale debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Corporate debt securities and municipal bonds are considered to have an issuer of high credit quality (rated AA or higher) and the decline in fair value is due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
33

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


NOTE G – Derivatives and Hedging Activities

The following tables present the fair value, notional amount and balance sheet classification of derivative assets and liabilities at March 31, 2021 and September 30, 2020.

March 31, 2021Derivative AssetsDerivative Liabilities
Interest rate contract purposeBalance Sheet LocationNotionalFair ValueBalance Sheet LocationNotionalFair Value
(In thousands)(In thousands)
Client swap program hedgesOther assets$653,904 $5,104 Other liabilities$653,904 $5,104 
Commercial loan fair value hedgesOther assetsOther liabilities90,918 4,610 
Mortgage loan fair value hedgesOther assets500,000 2,135 Other liabilities
Borrowings cash flow hedgesOther assets1,200,000 59,198 Other liabilities
$2,353,904 $66,437 $744,822 $9,714 


September 30, 2020Derivative AssetsDerivative Liabilities
Interest rate contract purposeBalance Sheet LocationNotionalFair ValueBalance Sheet LocationNotionalFair Value
(In thousands)(In thousands)
Client swap program hedgesOther assets$656,074 $48,201 Other liabilities$656,074 $48,201 
Commercial loan fair value hedgesOther assetsOther liabilities93,316 8,492 
Mortgage loan fair value hedgesOther assetsOther liabilities500,000 16,061 
Borrowings cash flow hedgesOther assetsOther liabilities1,600,000 17,375 
$656,074 $48,201 $2,849,390 $90,129 

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

Upon electing to apply ASC 815 fair value hedge accounting, the carrying value of the hedged item is adjusted to reflect the cumulative impact of changes in fair value attributable to the hedged risk. The hedge basis adjustment remains with the hedged item until the hedged item is de-recognized from the balance sheet. The following tables present the impact of fair value hedge accounting on the carrying value of the hedged items at March 31, 2021 and September 30, 2020.

(In thousands)March 31, 2021
Balance sheet line item in which hedged item is recordedCarrying value of hedged itemsCumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items
Loans receivable (1) (2)$1,934,688 $2,831 
$1,934,688 $2,831 

(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At March 31, 2021, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $1,839,169,000, the cumulative basis adjustment associated with the hedging relationships was $(1,929,000), and the amount of the designated hedged items was $500,000,000.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At March 31, 2021, the amortized cost basis of the hedged commercial loans was $95,519,000 and the cumulative basis adjustment associated with the hedging relationships was $4,760,000.

(In thousands)September 30, 2020
Balance sheet line item in which hedged item is recordedCarrying value of hedged itemsCumulative gain (loss) fair value hedge adjustment included in carrying amount of hedged items
Loans receivable (1) (2)$2,562,765 $24,664 
$2,562,765 $24,664 

(1) Includes the amortized cost basis of the closed mortgage loan portfolios used to designate the hedging relationships in which the hedged items are the last layer expected to be remaining at the end of the hedging relationships. At September 30, 2020, the amortized cost basis of the closed loan portfolios used in the hedging relationships was $2,461,008,000, the cumulative basis adjustment associated with the hedging relationships was $16,049,000, and the amount of the designated hedged items was $500,000,000.

(2) Includes the amortized cost basis of commercial loans designated in fair value hedging relationships. At September 30, 2020, the amortized cost basis of the hedged commercial loans was $101,757,000 and the cumulative basis adjustment associated with the hedging relationships was $8,615,000.


The Company has entered into interest rate swaps to convert certain short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of changes in future cash flows resulting from increasing interest rates. For qualifying cash flow hedges under ASC 815, gains and losses on the interest rate swaps are recorded in accumulated other comprehensive income ("AOCI") and then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line item as the hedged cash flows. During the six months ended March 31, 2021, $200,000,000 of cash flow hedges with an average effective rate of 1.37% were terminated and the associated FHLB borrowings were repaid at their 90-day call date. Additionally, a $200,000,000 partial termination of a cash flow hedge with an average effective rate of 0.79% was executed with the associated FHLB borrowing being repaid and a $14,110,000 gain recorded on the swap. Lastly, a $150,000,000 FHLB borrowing (unhedged) with a rate of 2.91% was repaid prior to maturity. As of March 31, 2021, the maturities for hedges of adjustable rate borrowings ranged from less than one year to ten years, with the weighted average being 6.7 years.

The following tables present the gain (loss) recognized in AOCI on derivative instruments related to cash flow hedges on borrowings for the periods presented, as well as the effect of reclassification adjustments.

(In thousands)Three Months Ended March 31,
Amounts recognized in AOCI20212020
Interest rate contracts:
Pay fixed/receive floating swaps on borrowings cash flow hedges$70,565 $(12,428)
Reclassification adjustment of net (gain)/loss included in net income(14,110)
Total pre-tax gain/(loss) recognized in AOCI$56,455 $(12,428)


35

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


(In thousands)Six Months Ended March 31,
Amounts recognized in AOCI20212020
Interest rate contracts:
Pay fixed/receive floating swaps on borrowings cash flow hedges$90,683 $(9,313)
Reclassification adjustment of net (gain)/loss included in net income(14,110)
Total pre-tax gain/(loss) recognized in AOCI$76,573 $(9,313)

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

Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Interest income on loans receivableInterest expense on FHLB advancesInterest income on loans receivableInterest expense on FHLB advances
(In thousands)(In thousands)
Interest income/(expense), including the effects of fair value and cash flow hedges$132,757 $(11,991)$138,549 $(13,368)
Gain/(loss) on fair value hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$(1,563)$(112)
Recognized on derivatives17,491 (24,676)
Recognized on hedged items(17,377)24,666 
Net income/(expense) recognized on fair value hedges$(1,449)$(122)
Gain/(loss) on cash flow hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$3,066 $498 
Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense14,110 
Net income/(expense) recognized on cash flow hedges$17,176 $498 


36

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


Six months ended March 31, 2021Six months ended March 31, 2020
Interest income on loans receivableInterest expense on FHLB advancesInterest income on loans receivableInterest expense on FHLB advances
(In thousands)(In thousands)
Interest income/(expense), including the effects of fair value and cash flow hedges$266,428 $(25,189)$280,695 $(27,026)
Gain/(loss) on fair value hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$(3,104)$(186)
Recognized on derivatives22,078 (19,984)
Recognized on hedged items(21,833)20,073 
Net income/(expense) recognized on fair value hedges$(2,859)$(97)
Gain/(loss) on cash flow hedging relationships:
Interest rate contracts
Amounts related to interest settlements on derivatives$6,664 $284 
Amount of derivative gain/(loss) reclassified from AOCI into interest income/expense14,110 
Net income/(expense) recognized on cash flow hedges$20,774 $284 

The Company periodically enters into certain interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rate payments, while the Company retains a variable rate loan. Under these agreements, the Company enters into a variable rate loan agreement and a swap agreement with the client. The swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the client's swap agreement. The interest rate swaps are derivatives under ASC 815, with changes in fair value recorded in earnings. There was no net impact to the statement of operations for the six months ended March 31, 2021 and 2020 as the changes in fair value of the receive fixed swap and pay fixed swap offset each other.

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

(In thousands)Three Months Ended March 31,
Derivative instrumentsClassification of gain/(loss) recognized in income on derivative instrument20212020
Interest rate contracts:
Pay fixed/receive floating swapOther noninterest income$40,929 $(28,184)
Receive fixed/pay floating swapOther noninterest income(40,929)28,184 
$$


37

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


(In thousands)Six Months Ended March 31,
Derivative instrumentsClassification of gain/(loss) recognized in income on derivative instrument20212020
Interest rate contracts:
Pay fixed/receive floating swapOther noninterest income$53,305 $(22,776)
Receive fixed/pay floating swapOther noninterest income(53,305)22,776 
$$

38

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


NOTE H – Revenue from Contracts with Customers

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

Revenue streams that are within the scope of ASC 606 are presented within non-interest income and are, in general, recognized as revenue at the same time the Company's obligation to the customer is satisfied. Most of the Company's customer contracts that are within the scope of the new guidance are cancelable by either party without penalty and are short-term in nature. These sources of revenue include depositor and other consumer and business banking fees, commission income, as well as debit and credit card interchange fees. In scope revenue streams represented approximately 5.7% of our total revenues for the six months ended March 31, 2021, compared to 4.7% for the six months ended March 31, 2020. As this standard is immaterial to our consolidated financial statements, the Company has omitted certain disclosures in ASC 606, including the disaggregation of revenue table. Sources of non-interest income within the scope of the guidance include the following:

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

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

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


NOTE I – Commitments and Contingencies

Lease Commitments - The Company’s lease commitments consist primarily of real estate property for branches and office space under various non-cancellable operating leases that expire between 2021 and 2070. The majority of the leases contain renewal options and provisions for increases in rental rates based on a predetermined schedule or an agreed upon index.
Financial Instruments with Off-Balance Sheet Risk - The only material off-balance-sheet credit exposures are loans in process and unused lines of credit, which had a combined balance of $3,348,654,000 and $2,738,095,000 at March 31, 2021 and September 30, 2020, respectively. The reserve was $26,500,000 as of March 31, 2021, which is an increase from $25,000,000 at September 30, 2020. See Note A "Summary of Significant Accounting Policies" for details regarding the reserve methodology.

Legal Proceedings - The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
39

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

FORWARD LOOKING STATEMENTS

Washington Federal, Inc. (the "Company" or "Washington Federal") makes statements in this Quarterly Report on Form 10-Q that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, and including the Risk Factors included in the Company’s 2020 Form 10-K for the year ended September 30, 2020, and in any of the Company's other subsequent Securities and Exchange Commission ("SEC") filings, which could cause the Company's future results to differ materially from the plans, objectives, goals, estimates, intentions and expectations expressed in forward-looking statements:
a deterioration in economic conditions in the Company's primary market areas, including high unemployment rates, declines in housing prices and property values, and other financial stress on borrowers (consumers and businesses) as a result of the uncertain economic environment;
the effects of natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as the COVID-19 pandemic), including on our asset credit quality and business operations, as well as its impact on general economic and financial market conditions;
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, including responses to the COVID-19 pandemic;
fluctuations in interest rate risk and changes in market interest rates, including risk related to LIBOR reform and risk of negative 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;
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 undertakes new investments and activities;
the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms;
changes in other economic, competitive, governmental, regulatory and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
the success of the Company at managing the risks involved in the remediation efforts associated with its Bank Secrecy Act ("BSA") program, costs of enhancements to the Bank’s BSA program are greater than anticipated; governmental authorities undertake enforcement actions or legal proceedings with respect to the Bank’s BSA program beyond those contemplated by the Consent Order, civil money penalties are levied by government authorities against the Bank, 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 remediation efforts associated with its Home Mortgage Disclosure Act (“HMDA”) compliance and reporting, risks the costs of enhancements to the Bank’s HMDA program are greater than anticipated; and risks governmental authorities undertake enforcement actions or legal proceedings with respect to the Bank’s HMDA program beyond those contemplated by the Consent Orders that have been entered into with the Consumer Financial Protection Bureau;
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
40

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.
GENERAL & BUSINESS DESCRIPTION

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

The Company's fiscal year end is September 30th. All references to 2020 represent balances as of September 30, 2020 or activity for the fiscal year then ended.

CRITICAL ACCOUNTING POLICIES

The Company has determined that the only accounting policy critical to an understanding of the consolidated financial statements of Washington Federal relates to the methodology for determining the amount of the allowance for credit losses (“ACL”). The Company maintains an allowance based on the expected credit losses over the contractual life of the loan portfolio as well as unfunded loan commitments. The allowance is based on ongoing, quarterly assessments by management.

The ACL consists of the allowance for loan losses and the reserve for unfunded commitments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”). The ASC, as amended is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income.

The Company early adopted ASC 326 during fiscal 2020 and based on the application of the modified retrospective method it became effective on October 1, 2019 for all financial assets measured at amortized cost (primarily loans receivable and held-to-maturity debt securities) and off-balance-sheet credit exposures. The Company recorded a decrease to retained earnings of $21,945,000 as of October 1, 2019 for the cumulative effect of adopting ASC 326.

As a result of our adoption of ASC 326, our methodology for estimating the ACL changed significantly from September 30, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss (“CECL”). The CECL methodology requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures) and it removes the incurred loss methodology’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was deemed to be “incurred.”

The estimate of expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was based. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.

Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on criticized loans, significant reliance on historical loss rates on homogeneous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Going forward, the impact of utilizing the CECL methodology to calculate the ACL will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility in our reported earnings. See Notes A, D and E to the Consolidated Financial Statements and the “Asset Quality and Allowance for Credit Losses” section below for more information on loans receivable and the allowance for credit losses.

41

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
ASSET QUALITY & ALLOWANCE FOR CREDIT LOSSES

The Company maintains an ACL for the expected credit losses over the contractual life of the loan portfolio as well as unfunded loan commitments. The amount of ACL is based on ongoing, quarterly assessments by management.

The ACL consists of the allowance for loan losses and the reserve for unfunded commitments. The estimate of expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period that historical experience was based for each loan type. Finally, we consider forecasts about future economic conditions or changes in collateral values that are reasonable and supportable.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ACL. The Company has designated two loan portfolio segments, commercial loans and consumer loans. These loan portfolio segments are further disaggregated into classes, which represent loans of similar type, risk characteristics, and methods for monitoring and assessing credit risk. The commercial loan portfolio segment is disaggregated into five classes: multi-family, commercial real estate, commercial and industrial, construction, and land acquisition and development. The risk of loss for the commercial loan portfolio segment is generally most indicated by the credit risk rating assigned to each borrower. Commercial loan risk ratings are determined by experienced senior credit officers based on specific facts and circumstances and are subject to periodic review by an independent internal team of credit specialists. The consumer loan portfolio segment is disaggregated into five classes: single-family-residential mortgage, custom construction, consumer lot loans, home equity lines of credit, and other consumer. The risk of loss for the consumer loan portfolio segment is generally most indicated by delinquency status and general economic factors. Each commercial and consumer loan portfolio class may also be further segmented based on risk characteristics.

For most of our loan portfolio classes, the historical loss experience is determined using a cohort methodology. This method pools loans into groups (“cohorts”) sharing similar risk characteristics and tracks each cohort’s net charge-offs over the lives of the loans to calculate a historical loss rate. The historical loss rates for each cohort are then averaged to calculate an overall historical loss rate which is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class. For certain loan portfolio classes, the Company determined there was not sufficient historical loss information to calculate a meaningful historical loss rate using the cohort methodology. For any such loan portfolio class, the weighted-average remaining maturity (“WARM”) methodology is being utilized until sufficient historical loss data is obtained. The WARM method multiplies an average annual loss rate by the expected remaining life of the loan pool to arrive at the quantitative baseline portion of the allowance for credit losses for the respective loan portfolio class.

The Company also considers qualitative adjustments to the historical loss rate for each loan portfolio class. The qualitative adjustments for each loan class consider the conditions over the period from which historical loss experience was based and are split into two components: 1) asset or class specific risk characteristics or current conditions at the reporting date related to portfolio credit quality, remaining payments, volume and nature, credit culture and management, business environment or other management factors and 2) reasonable and supportable forecast of future economic conditions and collateral values.

The Company performs a quarterly asset quality review which includes a review of forecasted gross charge-offs and recoveries, nonperforming assets, criticized loans, risk rating migration, delinquencies, etc. The asset quality review is performed by management and the results are used to consider a qualitative overlay to the quantitative baseline. The second qualitative adjustment noted above, economic conditions and collateral values, encompasses a one-year reasonable and supportable forecast period. The overlay adjustment for the reasonable and supportable forecast assumes an immediate reversion after the one-year forecast period to historical loss rates for the remaining life of the respective loan pool.

When management deems it to be appropriate, the Company establishes a specific reserve for individually evaluated loans that do not share similar risk characteristics with the loans included in each respective loan pool. These individually evaluated loans are removed from their respective pools and typically represent collateral dependent loans but may also include other non-performing loans or troubled debt restructurings (“TDRs”). In addition, the Company individually evaluates “reasonably expected” TDRs, which are identified by the Company as a loan expected to be classified as a TDR within the next six months. Management judgment is utilized to make this determination.

The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws,
42

WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class.
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 76% of total deposits as of March 31, 2021 while the composition of the investment securities portfolio is 54% variable and 47% 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 $494,089,000 of mortgage-backed securities that it has designated as held-to-maturity and are carried at amortized cost. As of March 31, 2021, the net unrealized gain on these securities was $13,808,000. The Company has $2,438,902,000 of available-for-sale securities that are carried at fair value. As of March 31, 2021, the net unrealized gain on these securities was $46,226,000. The Company has executed interest rate swaps to hedge interest rate risk on certain FHLB borrowings. The unrealized gain on these interest rate swaps as of March 31, 2021 was $59,198,000. All of the above are pre-tax net unrealized gains or losses.

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

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

As of March 31, 2021, 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 9.9% in the next year. This compares to an estimated increase of 3.4% as of the September 30, 2020 analysis. The change is primarily due to the steepening of the yield curve as well as shifts in the mix of fixed versus adjustable rate assets and liabilities. 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 1.4% in the first year and increase of 4.9% in the second year assuming a constant balance sheet and no management intervention. We have not provided an estimate of any impact on net interest income of a decrease in interest rates at March 31, 2021 as many of our interest rate sensitive assets and liabilities are tied to interest rates that are already at or near their historical minimum levels (i.e., Prime and LIBOR) and, therefore, are not expected to materially decrease further assuming U.S. market interest rates continue to remain above zero percent. Sustained negative interest rates for an economy with the size and complexity of the United States would likely lead to broad macroeconomic impacts that are difficult to foresee. While there is a possibility that U.S market interest rates could fall below zero percent, this has not occurred in the United States.

NPV Sensitivity - NPV is an estimate of the market value of shareholders' equity. NPV is calculated as the difference between the present value of expected cash flows from interest-earning assets and the present value of expected cash flows from interest-paying liabilities and off-balance-sheet contracts. The sensitivity of NPV to changes in interest rates provides a view of interest rate risk as it incorporates all future expected cash flows. As of March 31, 2021, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $37,000,000 or 1.1% and the NPV to total assets ratio to increase to 18.2% from a base of 17.4%. As of September 30, 2020, the NPV in the event of a 200 basis point increase in rates was estimated to increase by $141,000,000 or 5.3% and the NPV to total assets ratio to increase to 15.6% from a base of 14.1%. The change in NPV sensitivity is due primarily to changes in interest rates that has impacted asset prices and sensitivity to expected prepayment speeds on fixed rate loans and mortgage-backed securities as well as changes in mix of fixed versus adjustable rate assets and liabilities as of March 31, 2021.
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 was 2.30% at March 31, 2021 and 2.34% at September 30, 2020. As of March 31, 2021, the weighted average rate on interest-earning assets decreased by 28 basis points to 2.75% compared to September 30, 2020, while the weighted average rate on interest-bearing liabilities decreased by 24 basis
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
points to 0.45%. The interest rate spread decreased to 2.30% at March 31, 2021 from 2.70% at March 31, 2020 due to the same factors described above.
Net Interest Margin - Net interest margin is measured as net interest income divided by average earning assets for the period. Net interest margin decreased to 2.75% for the quarter ended March 31, 2021 from 3.10% for the quarter ended March 31, 2020. The yield on interest-earning assets decreased 92 basis points to 3.30% and the cost of interest-bearing liabilities decreased 70 basis points to 0.65% over that same period. The compression in the net interest margin since the prior year same quarter is primarily due to the rapid drop in short-term rates by the Federal Reserve Bank in response to the COVID-19 pandemic which resulted in the changes in average rates noted above. Additionally, the balance of low yielding cash was relatively high at $2,318,447,000 as of March 31, 2021 and the Company had $711,405,000 in PPP loans as of that date that have a relatively low yield and were originated since the prior year same quarter. The lower rate in interest-bearing liabilities was primarily due to lower rates paid on interest-bearing deposits as well as FHLB advances. Net interest margin decreased to 2.75% for the six months ended March 31, 2021 from 3.13% for the prior year same period. The change was due to the same factors noted above.
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.

Three Months Ended March 31, 2021Three Months Ended March 31, 2020
 Average BalanceInterestAverage RateAverage BalanceInterestAverage Rate
($ in thousands)($ in thousands)
Assets
Loans receivable$12,842,392 $132,756 4.19 %$11,890,545 $138,549 4.67 %
Mortgage-backed securities1,359,631 6,696 2.00 2,194,479 14,341 2.62 
Cash & Investments3,702,861 5,720 0.63 951,719 5,281 2.23 
FHLB & FRB stock130,502 1,582 4.92 122,320 1,447 4.74 
Total interest-earning assets18,035,386 146,754 3.30 %15,159,063 159,618 4.22 %
Other assets1,252,122 1,204,060 
Total assets$19,287,508 $16,363,123 
Liabilities and Equity
Interest-bearing customer accounts$11,816,399 $10,729 0.37 %$10,309,374 $28,638 1.11 %
FHLB advances2,412,778 11,991 2.02 2,208,242 13,368 2.43 
Other borrowings44 — — 77 — — 
Total interest-bearing liabilities14,229,221 22,720 0.65 %12,517,693 42,006 1.35 %
Noninterest-bearing customer accounts2,579,497 1,610,077 
Other liabilities248,210 212,129 
               Total liabilities17,056,928 14,339,899 
Shareholders' equity2,230,580 2,023,224 
Total liabilities and equity$19,287,508 $16,363,123 
Net interest income$124,034 $117,612 
Net interest margin (NIM)2.75 %3.10 %


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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Six Months Ended March 31, 2021Six Months Ended March 31, 2020
 Average BalanceInterestAverage RateAverage BalanceInterestAverage Rate
($ in thousands)($ in thousands)
Assets
Loans receivable$12,833,535 $266,428 4.16 %$11,907,755 $280,695 4.70 %
Mortgage-backed securities1,472,181 13,926 1.90 2,277,880 29,953 2.62 
Cash & Investments3,349,703 10,985 0.66 863,698 10,706 2.47 
FHLB & FRB stock135,672 3,238 4.79 123,450 3,088 4.99 
Total interest-earning assets17,791,091 294,577 3.32 %15,172,783 324,442 4.26 %
Other assets1,280,338 1,196,990 
Total assets$19,071,429 $16,369,773 
Liabilities and Equity
Interest-bearing customer accounts$11,717,048 $24,838 0.43 %$10,278,073 $60,119 1.17 %
FHLB advances2,542,033 25,190 1.99 2,236,503 27,026 2.41 
Other borrowings22 — — 38 — — 
Total interest-bearing liabilities14,259,103 50,028 0.70 %12,514,614 87,145 1.39 %
Noninterest-bearing customer accounts2,417,328 1,625,650 
Other liabilities262,174 209,490 
               Total liabilities16,938,605 14,349,754 
Shareholders' equity2,132,824 2,020,019 
Total liabilities and equity$19,071,429 $16,369,773 
Net interest income$244,549 $237,297 
Net interest margin (NIM)2.75 %3.13 %

As of March 31, 2021, total assets had increased by $739,526,000 to $19,533,581,000 from $18,794,055,000 at September 30, 2020. During the six months ended March 31, 2021, cash and cash equivalents increased by $615,470,000 and loans receivable increased $243,106,000.
Cash and cash equivalents of $2,318,447,000 and shareholders’ equity of $2,332,953,000 as of March 31, 2021 provide management with flexibility in managing interest rate risk going forward.

LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, repayments and sales of investments and borrowings and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments. Additionally, the Company earns fee income for loan, deposit, insurance and other services.
On February 8, 2021, in connection with an underwritten public offering, the Company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock (“Series A Preferred Stock”). Net proceeds, after underwriting discounts and expenses, were $293,325,000. The public offering consisted of the issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series A Preferred Stock, at a public offering price of $25.00 per depositary share. Holders of the depositary shares are entitled to all proportional rights and preferences of the Series A Preferred Stock (including dividend, voting, redemption and liquidation rights). The depositary shares are traded on the NASDAQ under the symbol "WAFDP." The Series A Preferred Stock is redeemable at the option of the Company, subject to all applicable regulatory approvals, on or after April 15, 2026.
The Company participated in the Small Business Administration’s Paycheck Protection Program ("PPP"). This program came about through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress to help small businesses keep their employees employed through the COVID-19 shelter in place orders. In 2020, the Company assisted over
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
6,500 businesses with more than $780,000,000 in PPP loans. Fiscal 2021 year to date we have assisted over 2,000 small businesses with $235,000,000 in PPP loans. To date, approximately 3,800 PPP loans totaling $350,000,000 have been forgiven by the SBA.
The Company has actively worked with its borrowers to modify consumer mortgage and commercial loans to provide payment deferrals as a result of the COVID-19 pandemic. The terms of the payment deferrals are generally 90 days for consumer mortgage loans and up to 180 days for commercial loans and borrowers may be eligible for multiple deferrals. Pursuant to the CARES Act, these loan modifications are not accounted for as TDRs. As of March 31, 2021, 45 mortgage loans totaling $14,000,000 and 10 commercial loans totaling $89,000,000 that had been modified remain in deferral. These loans are not considered past due until after the deferral period is over and scheduled payments have resumed.
The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") of 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, 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.
Strong growth in customer deposit accounts has resulted in excess liquidity and consequently the Company has reduced FHLB borrowings. Customer accounts increased $1,039,797,000, or 7.5%, to $14,819,421,000 at March 31, 2021 compared with $13,779,624,000 at September 30, 2020. Total FHLB borrowings totaled $2,150,000,000 as of March 31, 2021, a decrease from $2,700,000,000 as of September 30, 2020.
The Company's cash and cash equivalents totaled $2,318,447,000 at March 31, 2021, an increase from $1,702,977,000 at September 30, 2020. These amounts include the Bank's operating cash.
The Company’s shareholders' equity at March 31, 2021 was $2,332,953,000, or 11.94% of total assets. This is an increase of $318,820,000 from September 30, 2020 when net worth was $2,014,133,000, or 10.72% of total assets. The Company’s shareholders' equity was impacted in the six months ended March 31, 2021 as a result of the February 8, 2021 issuance of Series A Preferred Stock and the receipt of net proceeds, after underwriting discounts and expenses, of $293,325,000. Additionally, net income of $83,822,000, the payment of $33,913,000 in cash dividends, treasury stock purchases of $89,772,000, as well as the change in other comprehensive income of $64,223,000 impacted shareholders' equity. The ratio of tangible capital to tangible assets at March 31, 2021 was 10.53%. Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment.
Washington Federal, Inc. and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's financial statements.
Federal banking agencies establish regulatory capital rules that require minimum capital ratios and establish criteria for calculating regulatory capital. Minimum capital ratios for four measures are used for assessing capital adequacy. The standards are indicated in the table below. The common equity tier 1 capital ratio recognizes common equity as the highest form of capital. The denominator for all except the leverage ratio is risk weighted assets. The rules set forth a “capital conservation buffer” of up to 2.5%. In the event that a bank’s capital levels fall below the minimum ratios plus these buffers, the bank's regulators may place restrictions on it. These restrictions include reducing dividend payments, share buy-backs, and staff bonus payments. The purpose of these buffers is to require banks to build up capital outside of periods of stress that can be drawn down during periods of stress. As a result, even during periods where losses are incurred, the minimum capital ratios can still be met.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
There are also standards for Adequate and Well Capitalized criteria that are used for “Prompt Corrective Action” purposes. To remain categorized as well capitalized, the Bank and the Company must maintain minimum common equity risk-based, tier 1 risk-based, total risk-based and tier 1 leverage ratios as set forth in the following table.
ActualMinimum Capital
Adequacy Guidelines
Minimum Well-Capitalized Guidelines
($ in thousands)CapitalRatioRatioRatio
 
March 31, 2021
Common Equity Tier I risk-based capital ratio:
      The Company$1,643,068 12.09 %4.50 %NA
      The Bank1,710,441 12.58 %4.50 %6.50 %
Tier I risk-based capital ratio:
      The Company1,943,068 14.29 %6.00 %NA
      The Bank1,710,441 12.58 %6.00 %8.00 %
Total risk-based capital ratio:
      The Company2,113,350 15.55 %8.00 %NA
      The Bank1,880,747 13.83 %8.00 %10.00 %
Tier 1 Leverage ratio:
      The Company1,943,068 10.27 %4.00 %NA
      The Bank1,710,441 9.04 %4.00 %5.00 %
September 30, 2020
Common Equity Tier 1 risk-based capital ratio:
      The Company$1,687,676 12.93 %4.50 %NA
      The Bank1,625,478 12.46 %4.50 %6.50 %
Tier I risk-based capital ratio:
      The Company1,687,676 12.93 %6.00 %NA
      The Bank1,625,478 12.46 %6.00 %8.00 %
Total risk-based capital ratio:
      The Company1,851,136 14.19 %8.00 %NA
      The Bank1,788,904 13.71 %8.00 %10.00 %
Tier 1 Leverage ratio:
      The Company1,687,676 9.28 %4.00 %NA
      The Bank1,625,478 8.94 %4.00 %5.00 %

CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents - Cash and cash equivalents were $2,318,447,000 at March 31, 2021, an increase of $615,470,000, or 36.1%, since September 30, 2020. The change is primarily due to the large increase in customer transaction deposit accounts.

Available-for-sale and held-to-maturity investment securities - Available-for-sale securities increased $189,410,000, or 8.4%, during the six months ended March 31, 2021, mostly due to purchases of $522,454,000, offset by principal repayments and maturities of $338,869,000. During the same period, the balance of held-to-maturity securities decreased by $211,749,000 primarily due to principal pay-downs and maturities of $206,868,000. As of March 31, 2021, the Company had a net unrealized gain on available-for-sale securities of $46,226,000, which is included on a net of tax basis in accumulated other comprehensive income (loss).

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Substantially all of the Company’s held-to-maturity and available-for-sale debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. The Company did not record an allowance for credit losses for held-to-maturity securities as of March 31, 2021 or September 30, 2020 as the investment portfolio consists primarily of U.S. government agency mortgage-backed securities that management deems to have immaterial risk of loss. The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods. The Company does not believe that any of its available-for-sale debt securities had credit loss impairment as of March 31, 2021 or September 30, 2020, therefore, no allowance was recorded.

Loans receivable - Loans receivable, net of related contra accounts, increased by $243,106,000 to $13,035,423,000 at March 31, 2021, compared to $12,792,317,000 at September 30, 2020. The increase was primarily the net result of originations of $3,890,544,000 partially offset by loan principal repayments of $3,147,829,000 as well as a $526,153,000 increase in loans in process. Commercial loan originations accounted for 78% of total originations and consumer loan originations were 22% during the period. The mix of loan originations is consistent with management's strategy during low rate environments to produce more construction, multifamily, commercial real estate, and commercial and industrial loans that generally have adjustable interest rates or a shorter duration.
The following table shows the loan portfolio by category and the change.
 March 31, 2021September 30, 2020Change
($ in thousands)($ in thousands)$%
Commercial loans
Multi-family$2,008,192 13.2 %$1,538,762 10.6 %$469,430 30.5 %
Commercial real estate2,226,560 14.6 1,895,086 13.1 331,474 17.5 
Commercial & industrial (1)2,471,823 16.2 2,132,160 14.7 339,663 15.9 
Construction2,495,961 16.3 2,403,276 16.6 92,685 3.9 
Land - acquisition & development185,024 1.2 193,745 1.3 (8,721)(4.5)
Total commercial loans9,387,560 61.5 8,163,029 56.3 1,224,531 15.0 
Consumer loans
Single-family residential4,828,535 31.6 5,304,689 36.7 (476,154)(9.0)
Construction - custom678,469 4.5 674,879 4.7 3,590 0.5 
   Land - consumer lot loans123,351 0.8 102,263 0.7 21,088 20.6 
   HELOC144,528 0.9 139,703 1.0 4,825 3.5 
   Consumer103,145 0.7 83,159 0.6 19,986 24.0 
Total consumer loans5,878,028 38.5 6,304,693 43.7 (426,665)(6.8)
Total gross loans15,265,588 100 %14,467,722 100 %797,866 5.5 
   Less:
      Allowance for credit losses on loans172,653 166,955 5,698 3.4 
      Loans in process1,982,225 1,456,072 526,153 36.1 
      Net deferred fees, costs and discounts75,287 52,378 22,909 43.7 
Total loan contra accounts2,230,165 1,675,405 554,760 33.1 
Net loans$13,035,423 $12,792,317 $243,106 1.9 %
(1) Includes $711,405,000 of PPP loans as of March 31, 2021 and $762,004,000 as of September 30, 2020.

Non-performing assets - Non-performing assets increased $11,248,000 during the six months ended March 31, 2021 to $48,943,000 from $37,695,000 at September 30, 2020. The change is primarily due to a $10,899,000 increase in non-accrual loans. Non-performing assets as a percentage of total assets was 0.25% at March 31, 2021 compared to 0.20% at September 30, 2020.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
The following table sets forth information regarding troubled debt restructured loans and non-performing assets.
March 31,
2021
September 30,
2020
 ($ in thousands)
Troubled debt restructured loans:
Multi - family$267 0.3 %$304 0.3 %
Commercial real estate2,327 3.0 1,462 1.6 
Commercial & industrial45 0.1 51 0.1 
Construction— — — — 
Land - acquisition & development— — — — 
Single-family residential72,512 92.6 85,607 93.6 
Construction - custom— — — — 
Land - consumer lot loans2,630 3.3 3,106 3.4 
HELOC454 0.6 826 0.9 
Consumer47 0.1 52 0.1 
Total restructured loans (1)$78,282 100 %$91,408 100 %
Non-accrual loans:
Multi - family$— — %$— — %
Commercial real estate9,226 23.1 3,771 13.0 
Commercial & industrial832 2.1 329 1.1 
Construction1,423 3.6 1,669 5.8 
Land - acquisition & development2,340 5.8 — — 
Single-family residential25,599 64.1 22,431 77.2 
Construction - custom— — — — 
Land - consumer lot loans177 0.4 243 0.8 
HELOC306 0.8 553 1.9 
Consumer52 0.1 60 0.2 
Total non-accrual loans39,955 100 %29,056 100 %
Real estate owned5,316 4,966 
Other property owned3,672 3,673 
Total non-performing assets$48,943 $37,695 
Total non-performing assets and performing restructured loans as a percentage of total assets0.64 %0.67 %
Total Assets
(1)    Restructured loans were as follows:
Performing$76,458 97.7 %$89,072 97.4 %
Non-performing (included in non-accrual loans above)1,824 2.3 2,336 2.6 
$78,282 100 %$91,408 100 %

For the six months ended March 31, 2021, the Company recognized $5,228,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $769,000 for the same period had these loans performed according to their original contract terms. Recognized interest income for the six months ended March 31, 2021 was higher than what otherwise would have been recognized in the period due to the collection of past due amounts. In addition to the non-accrual loans reflected in the above table, the Company had $549,262,000 of loans that were less than 90 days delinquent at March 31, 2021 but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total NPAs and performing restructured loans as a percent of total assets would have increased to 3.45% at March 31, 2021.
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Restructured single-family residential loans are reserved for under the Company’s general reserve methodology. If any individual loan is significant in balance, the Company may establish a specific reserve as warranted.
 
Most restructured loans are accruing and performing loans where the borrower has proactively approached the Bank about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. Single-family residential loans comprised 92.6% of restructured loans as of March 31, 2021. 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 allowance for credit losses 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 credit losses - The following table shows the composition of the Company’s allowance for credit losses.
December 31, 2020September 30, 2020Change
Allowance for credit losses:($ in thousands)($ in thousands)$%
Commercial loans
   Multi-family$17,776 10.3 %$13,853 8.3 %$3,923 28.3 %
   Commercial real estate26,822 15.5 22,516 13.5 4,306 19.1 
   Commercial & industrial47,794 27.7 38,665 23.2 9,129 23.6 
   Construction22,549 13.1 24,156 14.5 (1,607)(6.7)
   Land - acquisition & development10,503 6.1 10,733 6.4 (230)(2.1)
      Total commercial loans125,444 72.7 109,923 65.8 15,521 14.1 
Consumer loans
   Single-family residential35,108 20.3 45,186 27.1 (10,078)(22.3)
   Construction - custom3,248 1.9 3,555 2.1 (307)(8.6)
   Land - consumer lot loans3,292 1.9 2,729 1.6 563 20.6 
   HELOC2,226 1.3 2,571 1.5 (345)(13.4)
   Consumer3,335 1.9 2,991 1.8 344 11.5 
      Total consumer loans47,209 27.3 57,032 34.2 (9,823)(17.2)
Total allowance for loan losses172,653 100.0 %166,955 100.0 %5,698 3.4 
Reserve for unfunded commitments26,500 25,000 1,500 2.2 
Total allowance for credit losses$199,153 $191,955 $7,198 3.7 %

No allowance was recorded as of March 31, 2021 or as of September 30, 2020 for the $695,752,000 and $745,081,000 of SBA Payroll Protection Program loans in the portfolio on each date, respectively, which are included in the commercial & industrial loan category, due to the government guarantee. Management believes the allowance for credit losses of $199,153,000, or 1.30% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. See Note E and Note I for further details of the allowance for loan losses and reserve for unfunded commitments as of and for the period ended March 31, 2021 and September 30, 2020.

Real estate owned ("REO") - REO increased during the six months ended March 31, 2021 by $350,000 to $5,316,000.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Intangible assets - Intangible assets decreased to $309,086,000 as of March 31, 2021 from $309,906,000 as of September 30, 2020. The decrease was due to normal amortization of finite-lived intangible assets.

Customer accounts - Customer accounts increased $1,039,797,000, or 7.5%, to $14,819,421,000 at March 31, 2021 compared with $13,779,624,000 at September 30, 2020. Transaction accounts increased by $1,422,234,000 or 14.5% during that period, while time deposits decreased $382,437,000 or 9.6%. The shift in deposit mix has been a result of a deliberate deposit pricing and customer growth strategy. The focus on transaction accounts is intended to lessen sensitivity to rising interest rates and manage interest expense.

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

  
March 31, 2021September 30, 2020
 Deposit Account BalanceAs a % of Total DepositsWeighted
Average
Rate
Deposit Account BalanceAs a % of Total DepositsWeighted
Average
Rate
($ in thousands)
Non-interest checking$2,655,195 17.9 %— %$2,164,071 15.7 %— %
Interest checking3,353,239 22.6 0.20 3,029,576 22.0 0.24 
Savings976,064 6.6 0.11 872,087 6.3 0.11 
Money market4,244,168 28.6 0.19 3,740,698 27.1 0.30 
Time deposits3,590,755 24.2 0.61 3,973,192 28.8 1.17 
Total$14,819,421 100 %0.25 %$13,779,624 100 %0.48 %

FHLB advances and other borrowings - Total borrowings totaled $2,150,000,000 as of March 31, 2021, a decrease from $2,700,000,000 as of September 30, 2020. Strong growth in deposits has resulted in excess liquidity and consequently the Company has reduced FHLB borrowings. Since September 30, 2020, $200,000,000 of cash flow hedges with an average effective rate of 1.37% were terminated and the associated FHLB borrowings were repaid at their 90-day call date. Additionally, a $200,000,000 partial termination of a cash flow hedge with an average effective rate of 0.79% was terminated and the associated FHLB borrowing was repaid. Lastly, a $150,000,000 FHLB borrowing (unhedged) with a rate of 2.91% was repaid prior to maturity. The weighted average rate for FHLB borrowings was 1.84% as of March 31, 2021 and 1.79% at September 30, 2020.

Shareholders' equity - The Company’s shareholders' equity at March 31, 2021 was $2,332,953,000, or 11.94% of total assets. This is an increase of $318,820,000 from September 30, 2020 when net worth was $2,014,133,000, or 10.72% of total assets. The Company’s shareholders' equity was impacted in the six months ended March 31, 2021 as a result of the February 8, 2021 issuance of Series A Preferred Stock with net proceeds, after underwriting discounts and expenses, of $293,325,000. Additionally, net income of $83,822,000, the payment of $33,913,000 in cash dividends, treasury stock purchases of $89,772,000, as well as the change in other comprehensive income of $64,223,000 impacted shareholders' equity.


RESULTS OF OPERATIONS

Net Income - The Company recorded net income of $44,871,000 for the three months ended March 31, 2021 compared to $36,377,000 for the prior year quarter. The Company recorded net income of $83,822,000 for the six months ended March 31, 2021 compared to $104,243,000 for the same period one year ago. The changes are due to the factors described below.

Net Interest Income - For the three months ended March 31, 2021, net interest income was $124,034,000, which is $6,422,000 higher than the same quarter of the prior year. Net interest margin was 2.75% for the quarter ended March 31, 2021 compared to 3.10% for the quarter ended March 31, 2020. The increase in net interest income is mostly due to average interest-earning assets increasing by $2,876,323,000 or 18.97% from the prior year while average interest-bearing liabilities increased $1,711,528,000 or 13.67%. The average rate earned on interest-earning assets declined by 92 basis points to 3.30% while the average rate paid on interest-bearing liabilities declined by 70 basis points to 0.65%. The compression in the net interest margin since the prior year same quarter is primarily due to the rapid drop in short-term rates by the Federal Reserve Bank in response to the COVID-19 pandemic which led to changes in the rates on earning assets and bearing liabilities noted above. Additionally, the balance of cash was higher at $2,318,447,000 as of March 31, 2021 and the loan portfolio at March 31, 2021 contained $695,752,000 (inclusive of $15,652,000 of unamortized net fees) in PPP loans, which carry a 1% note rate. During
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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
the three months ended and six months ended March 31, 2021, net interest income included $6,313,000 and $11,199,000, respectively, of net fee amortization on PPP loans. For the six months ended March 31, 2021, net interest income was $244,548,000, which is $7,251,000 higher than the same period of the prior year. Net interest margin was 2.75% for the six months ended March 31, 2021 compared to 3.13% for the quarter ended March 31, 2020. The changes period over period are primarily due to the aforementioned factors.

The following table sets forth certain information explaining changes in interest income and interest expense for the period indicated compared to the same period one year ago. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
Rate / Volume Analysis:
 Comparison of Three Months Ended
3/31/21 and 3/31/20
Comparison of Six Months Ended
3/31/21 and 3/31/20
($ in thousands)VolumeRateTotalVolumeRateTotal
Interest income:
Loans receivable$9,953 $(15,745)$(5,792)$20,207 $(34,474)$(14,267)
Mortgage-backed securities(4,709)(2,936)(7,645)(9,027)(7,000)(16,027)
Investments (1)7,780 (7,207)573 15,585 (15,157)428 
All interest-earning assets13,024 (25,888)(12,864)26,765 (56,631)(29,866)
Interest expense:
Customer accounts3,639 (21,548)(17,909)7,398 (42,678)(35,280)
FHLB advances and other borrowings1,118 (2,495)(1,377)3,320 (5,157)(1,837)
All interest-bearing liabilities4,757 (24,043)(19,286)10,718 (47,835)(37,117)
Change in net interest income$8,267 $(1,845)$6,422 $16,047 $(8,796)$7,251 
___________________ 
(1)Includes interest on cash equivalents and dividends on FHLB & FRB stock.
Provision (Release) for Credit Losses - The Company recorded no provision for credit losses for the three months ended March 31, 2021, compared with a provision for credit losses of $8,200,000 for the three months ended March 31, 2020. The relatively large credit loss provision for the three months ended March 31, 2020 is primarily due to the onset of the global pandemic. The Company recorded a provision for credit losses of $3,000,000 for the six months ended March 31, 2021, compared with a provision for credit losses of $4,450,000 for the six months ended March 31, 2020. Recoveries, net of charge-offs, totaled $2,464,000 for the three months ended March 31, 2021, compared to net recoveries of $1,788,000 during the three months ended March 31, 2020. Recoveries, net of charge-offs, totaled $4,198,000 for the six months ended March 31, 2021, compared to net recoveries of $4,367,000 during the six months ended March 31, 2020.

Other Income - The three months ended March 31, 2021 results include total other income of $14,477,000 compared to $16,241,000 for the same period one year ago, a $1,764,000 decrease. The quarter ended March 31, 2021 included a gain of $14,110,000 on the partial termination of an interest rate swap being used to hedge a FHLB borrowing and this was mostly offset by a $13,788,000 loss on early repayment of a fixed-rate FHLB borrowing. The six months ended March 31, 2021 results include total other income of $28,347,000 compared to $62,617,000 for the same period one year ago, a $34,270,000 decrease. The decrease was primarily due to a net gain of $30,700,000 from the sale of fixed assets, including a branch property in Bellevue, Washington during the first quarter of fiscal 2020.

Other Expense - Total other expense was $81,746,000 for the three months ended March 31, 2021, an increase of $2,313,000 from $79,433,000 for the prior year quarter. Compensation and benefits costs increased by $5,015,000, or 13.0%, over the prior year quarter due to a 1.9% rise in headcount, annual merit increases as well as higher bonus compensation that reflects increased loan production activity. Total other expense was $163,156,000 for the six months ended March 31, 2021, an increase of $1,087,000 from $162,069,000 for the same period one year ago. Compensation and benefits costs increased by $11,107,000 over the prior year period while information technology costs decreased by $6,081,000, primarily due to the prior year including a $5,900,000 impairment charge on systems hardware and software, and other expenses including professional fees decreased by $6,208,000. Total other expense for the six months ended March 31, 2021 and March 31, 2020 equaled 1.71% and 1.98%, respectively, of average assets.

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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Gain (Loss) on Real Estate Owned - Results for the three months ended March 31, 2021 include a net gain on real estate owned of $34,000, compared to a net gain of $31,000 for the prior year quarter. Results for the six months ended March 31, 2021 include a net loss on real estate owned of $415,000, compared to a net loss of $855,000 for the prior year same period.

Income Tax Expense - Income tax expense totaled $11,928,000 for the three months ended March 31, 2021, compared to $9,874,000 for the prior year quarter. Income tax expense totaled $22,502,000 for the six months ended March 31, 2021, compared to $28,297,000 for the prior year same period. The effective tax rate was 21.16% and 21.35% for the six months ended March 31, 2021 and March 31, 2020, respectively. The Company’s effective tax rate varies from the statutory rate mainly due to state taxes, tax-exempt income and tax-credit investments.

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, 2020. 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 2020 Form 10-K.

PART I – Financial Information

Item 4.                Controls and Procedures


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

(b) Changes in Internal Control over Financial Reporting. During the period to which this report relates, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.
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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 Company's Form 10-K for the year ended September 30, 2020. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.


Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the three months ended March 31, 2021. 
PeriodTotal Number of
Shares Purchased
 Average Price
Paid Per Share
 Total Number of
Shares Purchased
as Part of  Publicly
Announced Plan (1)
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan at the
End of the Period
January 1, 2021 to January 31, 20212,083 $25.74 2,083 14,592,192 
February 1, 2021 to February 28, 2021830 29.97 830 14,591,362 
March 1, 2021 to March 31, 20212,821,675 31.54 2,821,675 11,769,687 
Total2,824,588   $31.53   2,824,588 11,769,687 
 ___________________
(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 76,956,264 shares were authorized for repurchase. This includes the 10,000,000 additional shares authorized by the Board of Directors on January 26, 2021.

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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WASHINGTON FEDERAL, INC. AND SUBSIDIARIES
Item 6.                Exhibits

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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.
 
May 4, 2021
/S/    BRENT J. BEARDALL        
BRENT J. BEARDALL
President & Chief Executive Officer
May 4, 2021
/S/    VINCENT L. BEATTY       
VINCENT L. BEATTY
Executive Vice President and Chief Financial Officer
May 4, 2021
/S/    CORY D. STEWART      
CORY D. STEWART
Senior Vice President and Principal Accounting Officer

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