10-K 1 wfsl930201110k.htm ANNUAL REPORT ON FORM 10-K WFSL 9.30.2011 10K


United States
Securities and Exchange Commission
Washington, D.C. 20549
____________________________________
 FORM 10-K
____________________________________ 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2011.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number: 001-34654
_____________________________________
 Washington Federal, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________ 
Washington
 
91-1661606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
425 Pike Street, Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 624-7930
_____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class NA Name of each exchange on which registered NA
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 par value per share (title of class)
____________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of March 31, 2011, the aggregate market value of the 108,033,478 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 942,932 shares held by all directors and executive officers of the Registrant as a group, was $1,873,300,509. This figure is based on the closing sale price of $17.34 per share of the Registrant's Common Stock on March 31, 2011, as reported by Bloomberg.
Number of shares of Common Stock outstanding as of November 11, 2011: 107,620,110
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended September 30, 2011, are incorporated into Part II, Items 5-8 and Part III, Item 12 of this Form 10-K.
(2) Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be held on January 18, 2012 are incorporated into Part III, Items 10-14 of this Form 10-K.


PART I
We make statements in this Annual Report on Form 10-K, and we may from time to time make other statements 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 identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under Item 1A. “Risk Factors,” and in any of the Company's other subsequent Securities and Exchange Commission filings, which could cause our future results to differ materially from the plans, objectives, goals, estimates, intentions, and expectations expressed in forward-looking statements:
•
a deterioration in economic conditions, including declines in the real estate market and home sale volumes and financial stress on borrowers as a result of the uncertain economic environment;
•
the severe effects of the continued economic downturn, including high unemployment rates and declines in housing prices and property values, in our primary market areas;
•
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
•
fluctuations in interest rate risk and changes in market interest rates;
•
the Company's ability to make accurate assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the assets securing these loans;
•
the Company's ability to successfully complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such activities;
•
the Bank's ability to comply with the terms of its memorandum of understanding with the Office of Thrift Supervision (which will be determined by the Office of the Comptroller of the Currency);
•
legislative and regulatory limitations, including those arising under the Dodd-Frank Wall Street Reform Act and potential limitations in the manner in which we conduct our business and undertake new investments and activities;
•
the ability of the Company to obtain external financing to fund its operations or obtain this financing on favorable terms;
•
changes in other economic, competitive, governmental, regulatory, and technological factors affecting the Company's markets, operations, pricing, products, services and fees;
•
the success of the Company at managing the risks involved in the foregoing and managing its business; and
•
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.
All forward-looking statements speak only as of the date on which such statements are made, and Washington Federal undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, changes to future operating results over time, or the impact of circumstances arising after the date the forward-looking statement was made.



2


Item 1.
Business

General
Washington Federal, Inc., formed in November 1994, is a Washington corporation headquartered in Seattle, Washington. The Company is a non-diversified unitary savings and loan holding company within the meaning of the Home Owners' Loan Act (“HOLA”),that conducts its operations through a federally insured savings and loan association subsidiary, Washington Federal (“Bank”). As used throughout this document, the terms “Washington Federal” or the “Company” refer to Washington Federal, Inc. and its consolidated subsidiaries and the term "Bank" refers to the operating subsidiary "Washington Federal".
The Bank is a federally-chartered savings and loan association that began operations in Washington as a state-chartered mutual company in 1917. In 1935, the Company converted to a federal charter and became a member of the Federal Home Loan Bank (“FHLB”) system. On November 9, 1982, Washington Federal converted from a federal mutual to a federal capital stock savings association.
The Company's fiscal year end is September 30th. All references to 2011, 2010 and 2009 represent balances as of September 30, 2011, September 30, 2010 and September 30, 2009, respectively, or activity for the fiscal years then ended.
The business of the Bank consists primarily of attracting deposits from the general public and investing these funds in loans of various types, including first lien mortgages on single-family dwellings, construction loans, land acquisition and development loans, loans on multi-family and other income producing properties, home equity loans and business loans. It also invests in certain United States government and agency obligations and other investments permitted by applicable laws and regulations. Washington Federal has 160 full service branches located in Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. Through its subsidiaries, the Company is also engaged in real estate investment and insurance brokerage activities.
 
The principal sources of funds for the Company's activities are retained earnings, loan repayments (including prepayments), net deposit inflows, repayments and sales of investments and borrowings. Washington Federal's principal sources of revenue are interest on loans and interest and dividends on investments. Its principal expenses are interest paid on deposits, credit costs, general and administrative expenses, interest on borrowings and income taxes.
The Company's growth has been generated both internally and as a result of 14 acquisitions. Six of those acquisitions involved government assistance in some form.
On January 8, 2010, the Bank acquired certain assets and liabilities, including most of the loans and deposits, of Horizon Bank ("Horizon"), headquartered in Bellingham, Washington from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Horizon. Horizon operated through eighteen full-service offices, four commercial loan centers and four real estate loan centers in Washington. Through consolidation with existing Washington Federal branches, there was a net increase of 10 branches as a result of the Horizon acquisition.
The loans and foreclosed real estate purchased as part of the Horizon acquisition are covered by two loss share agreements between the FDIC and the Bank (one for single family loans and the other for all other loans and foreclosed real estate), which affords the Bank significant loss protection. Under the loss share agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to $536 million and 95% of losses in excess of that amount. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years with respect to losses and eight years with respect to loss recoveries. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements. As a result of the loss sharing agreements with the FDIC, the Bank recorded a receivable of $228 million at the time of acquisition. To account for the transaction, the balance sheet has three related items, as follows:
“Covered loans” represents the loans acquired from Horizon recorded at their estimated fair market value;
“Covered real estate held for sale” represents the estimated fair market value of the repossessed real estate acquired in the transaction. The covered loans and covered real estate held for sale are collectively referred to as “covered assets”;
“FDIC indemnification asset” represents the estimated fair value of the guarantee provided by the FDIC on the covered assets.

3


Loans that were classified as non-performing loans by Horizon are no longer classified as non-performing because, at acquisition, the carrying value of these loans was adjusted to reflect fair value, and because they are covered under the FDIC loss sharing agreements. Management believes that the new book value reflects an amount that will ultimately be collected.

The Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”), its primary federal regulator, and by the Federal Deposit Insurance Corporation (FDIC), which insures its deposits up to applicable limits. Washington Federal, as a savings and loan holding company, is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System ( Federal Reserve). Such regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the deposits and the Deposit Insurance Fund (DIF) administered by the FDIC. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in such regulation, whether by the OCC, the FDIC, the Federal Reserve, or the U.S. Congress, could have a significant impact on the Company and its operations. See “Regulation” section below.

The Dodd-Frank Act establishes a Bureau of Consumer Financial Protection (CFPB) having broad authority to regulate providers of credit, payment and other consumer financial products and services, and may narrow the scope of federal preemption of state consumer laws and expand the authority of state attorneys general to bring actions to enforce federal consumer protection legislation.



4



 
Average Statements of Financial Condition
 
Year Ended September 30,
 
2009
 
2010
 
2011
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
9,422,953

 
$
579,244

 
6.15
%
 
$
9,215,231

 
$
561,069

 
6.09
%
 
$
8,622,994

 
$
522,230

 
6.06
%
Mortgage-backed securities
1,974,954

 
109,486

 
5.54

 
1,989,979

 
91,775

 
4.61

 
2,587,369

 
108,207

 
4.18

Investment securities (2)
212,490

 
2,634

 
1.24

 
1,103,888

 
10,709

 
.97

 
1,084,716

 
14,190

 
1.31

FHLB stock
144,522

 
410

 
.28

 
149,103

 
7

 
—

 
151,751

 
8

 
.01

Total interest-earning assets
11,754,919

 
691,774

 
5.88
%
 
12,458,201

 
663,560

 
5.33
%
 
12,446,830

 
644,635

 
5.18
%
Other assets
499,324

 
 
 
 
 
915,566

 
 
 
 
 
975,714

 
 
 
 
Total assets
$
12,254,243

 
 
 
 
 
$
13,373,767

 
 
 
 
 
$
13,422,544

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking accounts
$
494,152

 
3,144

 
.64
%
 
$
644,999

 
2,299

 
.36
%
 
$
735,399

 
1,908

 
.26
%
Passbook and statement accounts
192,141

 
1,441

 
.75

 
215,629

 
1,192

 
.55

 
242,037

 
682

 
.28

Insured money market accounts
1,232,723

 
16,488

 
1.34

 
1,475,920

 
12,029

 
.82

 
1,647,363

 
7,148

 
.43

Certificate accounts (time deposits)
5,525,855

 
169,301

 
3.06

 
6,255,530

 
130,552

 
2.09

 
6,143,456

 
105,845

 
1.72

Repurchase agreements with customers
38,922

 
1,061

 
2.73

 
46,112

 
288

 
.62

 
35,211

 
252

 
.72

FHLB advances
2,243,242

 
94,804

 
4.23

 
2,070,843

 
92,400

 
4.46

 
1,883,135

 
81,994

 
4.35

Securities sold under agreements to repurchase
800,000

 
31,061

 
3.88

 
800,000

 
29,869

 
3.73

 
800,000

 
29,867

 
3.73

Other borrowings
191,989

 
1,327

 
.69

 
9,479

 
472

 
4.98

 
—

 
—

 
—

Total interest-bearing liabilities
10,719,024

 
318,627

 
2.97
%
 
11,518,512

 
269,101

 
2.34
%
 
11,486,601

 
227,696

 
1.98
%
Other liabilities
116,929

 
 
 
 
 
44,511

 
 
 
 
 
44,511

 
 
 
 
Total liabilities
10,835,953

 
 
 
 
 
11,563,023

 
 
 
 
 
11,531,112

 
 
 
 
Stockholders’ equity
1,418,290

 
 
 
 
 
1,810,744

 
 
 
 
 
1,854,343

 
 
 
 
Total liabilities and stockholders’ equity
$
12,254,243

 
 
 
 
 
$
13,373,767

 
 
 
 
 
$
13,385,455

 
 
 
 
Net interest income/Interest rate spread
 
 
$
373,147

 
2.91
%
 
 
 
$
394,459

 
2.99
%
 
 
 
$
416,939

 
3.20
%
Net interest margin (3)
 
 
 
 
3.17
%
 
 
 
 
 
3.17
%
 
 
 
 
 
3.35
%
   ___________________
(1)
The average balance of loans includes nonaccruing loans and covered loans, interest on which is recognized on a cash basis. It also includes net accretion of deferred loan fees and costs of $11.5 million, $10.2 million and $11.6 million for years 2009, 2010 and 2011, respectively.
(2)
Includes cash equivalents and repurchase agreements.
(3)
Net interest income divided by average interest-earning assets.

5


Lending Activities
General. The Company's net portfolio of loans totaled $7.9 billion at September 30, 2011, representing approximately 59% of its total assets. The Company concentrates its lending activities on the origination of conventional mortgage loans, which are neither insured nor guaranteed by agencies of the United States government.
Washington Federal's lending activity is concentrated on the origination of loans secured by real estate, including long-term fixed-rate mortgage loans, adjustable-rate construction loans, adjustable-rate land development loans, fixed-rate multi-family loans and business loans.

The following table sets forth the composition of the Company’s gross loan portfolio, by loan type, as of September 30 for the years indicated. 
 
2007
 
2008
 
2009
 
2010
 
2011
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
Loans (excluding covered loans):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
$
6,067,194

 
69.4
%
 
$
6,868,956

 
69.5
%
 
$
6,785,723

 
72.3
%
 
$
6,551,837

 
74.8
%
 
$
6,218,878

 
74.9
%
Construction – speculative
707,503

 
8.1

 
439,616

 
4.4

 
267,430

 
2.8

 
169,712

 
1.9

 
140,459

 
1.7

Construction – custom
328,929

 
3.8

 
317,894

 
3.2

 
258,839

 
2.8

 
256,384

 
2.9

 
279,851

 
3.4

Land – acquisition and development
755,577

 
8.6

 
724,421

 
7.3

 
519,130

 
5.5

 
307,230

 
3.5

 
200,692

 
2.4

Land – consumer lot loans
159,001

 
1.8

 
210,816

 
2.1

 
195,812

 
2.1

 
186,840

 
2.1

 
163,146

 
2.0

Multi-family
558,846

 
6.4

 
683,508

 
6.9

 
705,212

 
7.5

 
697,351

 
7.9

 
700,673

 
8.4

Commercial real estate
112,659

 
1.3

 
282,138

 
2.8

 
294,109

 
3.1

 
315,915

 
3.6

 
303,442

 
3.7

Commercial & industrial
23,251

 
.3

 
151,844

 
1.5

 
119,019

 
1.3

 
83,070

 
.9

 
109,332

 
1.3

HELOC
13,690

 
.2

 
80,407

 
.8

 
122,184

 
1.3

 
116,143

 
1.3

 
115,092

 
1.4

Consumer
10,377

 
.1

 
153,072

 
1.5

 
120,081

 
1.3

 
92,624

 
1.1

 
67,509

 
.8

GROSS LOANS
$
8,737,027

 
100.0
%
 
$
9,912,672

 
100.0
%
 
$
9,387,539

 
100.0
%
 
$
8,777,106

 
100.0
%
 
$
8,299,074

 
100.0
%
Less LIP, Allowance and net def. costs & fees
(548,749
)
 
 
 
(411,052
)
 
 
 
(404,109
)
 
 
 
(353,403
)
 
 
 
(363,197
)
 
 
NET LOANS
$
8,188,278

 
 
 
$
9,501,620

 
 
 
$
8,983,430

 
 
 
$
8,423,703

 
 
 
$
7,935,877

 
 
 ___________________





6


The following table sets forth the composition of the Company’s covered loan portfolio, by loan type, as of September 30, for the years indicated. There were no covered loans in the years prior to the acquisition of Horizon Bank on January 8, 2010.
 
 
2010
 
2011
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
Loans:
 
 
 
 
 
 
 
Single-family residential
$
66,735

 
9.7
%
 
$
55,449

 
11.3
%
Construction – speculative
29,630

 
4.4

 
9,321

 
2.2

Construction – custom
6,927

 
1.0

 
2,799

 
.6

Land – acquisition and development
102,982

 
15.0

 
47,217

 
9.5

Land – consumer lot loans
1,813

 
.1

 
1,153

 
.2

Multi-family
54,258

 
8.1

 
44,239

 
8.9

Commercial real estate
308,987

 
45.1

 
250,063

 
50.2

Commercial & industrial
83,554

 
12.1

 
58,874

 
11.9

HELOC
26,587

 
3.9

 
23,559

 
4.7

Consumer
3,911

 
.6

 
2,684

 
.5

Total covered loans
$
685,384

 
100.0
%
 
$
495,358

 
100.0
%
Allowance for losses
—

 
 
 
(3,766
)
 
 
 
$
685,384

 
 
 
$
491,592

 
 
Discount
(150,910
)
 
 
 
(109,409
)
 
 
Covered loans, net
$
534,474

 
 
 
$
382,183

 
 



7




The following table summarizes the scheduled contractual gross loan maturities for the Company’s total loan portfolio due for the periods indicated as of September 30, 2011. Amounts are presented prior to deduction of discounts, premiums, loans in process, deferred net loan origination fees and allowance for loan losses. Adjustable-rate loans are shown in the period in which loan principal payments are contractually due.
Contractual Maturities (excludes covered loans):
 
 
Total
 
Less than
1 Year
 
1 to 5
Years
 
After 5
Years
 
(In thousands)
Single-family residential
$
6,218,878

 
$
21,702

 
$
60,830

 
$
6,136,346

Construction – speculative
140,459

 
65,862

 
74,597

 
—

Construction – custom
279,851

 
247,990

 
26,461

 
5,400

Land – acquisition and development
200,692

 
153,488

 
46,161

 
1,043

Land – consumer lot loans
163,146

 
14,145

 
17,991

 
131,010

Multi-family
700,673

 
20,132

 
163,227

 
517,314

Commercial real estate
303,442

 
65,122

 
123,386

 
114,934

Commercial & industrial
109,332

 
32,851

 
75,311

 
1,170

HELOC
115,092

 
137

 
635

 
114,320

Consumer
67,509

 
5,026

 
20,441

 
42,042

 
$
8,299,074

 
$
626,455

 
$
609,040

 
$
7,063,579

Loans maturing after one year:
 
 
 
 
 
 
 
Adjustable-rate
$
568,587

 
 
 
 
 
 
Fixed-rate
7,104,032

 
 
 
 
 
 
Total
$
7,672,619

 
 
 
 
 
 
The original contractual loan payment period for residential mortgage loans originated by the Company normally ranges from 15 to 30 years. Experience during recent years has indicated that, because of prepayments in connection with refinancing and sales of property, residential loans have a weighted average life of from four to eight years.
Lending Programs and Policies. The Company's principal lending activity is the origination of real estate mortgage loans to purchase or refinance single-family residences. The Company also originates a significant number of construction and land development loans, along with multi-family residential and commercial loans. At September 30, 2011, single-family residential loans totaled $6.2 billion, or 74.9% of the Company's gross loan portfolio; construction- speculative loans totaled $140 million, or 1.7% of the Company's gross loan portfolio; construction - custom loans totaled $280 million, or 3.4% of the Company's gross loan portfolio; land acquisition and development loans totaled $201 million, or 2.4% of the Company's gross loan portfolio; land - consumer lot loans totaled $163 million, or 2.0% of the Company's gross loan portfolio; multi-family loans totaled $701 million, or 8.4% of the Company's gross loan portfolio; commercial real estate loans totaled $303 million, or 3.7% of the Company's gross loan portfolio; commercial and industrial loans totaled $109 million, or 1.3% of the Company's gross loan portfolio; HELOC loans totaled $115 million, or 1.4% of the Company's gross loan portfolio and consumer loans totaled $68 million, or .8% of the Company's gross loan portfolio.
Single-family residential loans. The Company primarily originates 30 year fixed-rate loans secured by single-family residences. Generally, these loans are made on terms, conditions and documentation that permit sale in the secondary market. Moreover, it is the Company's general policy to include in the documentation evidencing its conventional mortgage loans a due-on-sale clause, which facilitates adjustment of interest rates on such loans when the property securing the loan is sold or transferred.
All of the Company's mortgage lending is subject to written, nondiscriminatory underwriting standards, loan origination procedures and lending policies prescribed by the Company's Board of Directors. Property valuations are required on all real estate loans. Appraisals are prepared by independent appraisers approved by the Company's management, and reviewed by the Company's staff. Property evaluations are sometimes utilized in lieu of appraisals on single-family real estate loans of $250,000 or less and are reviewed by the Company's staff. Detailed loan applications are obtained to determine the borrower's ability to repay and the more significant items on these applications are verified through the use of credit reports, financial statements or written confirmations. Depending on the size of the loan involved, a varying number of officers of the Company must approve the application before the loan can be granted.
Federal guidelines limit the amount of a real estate loan made by a federally-chartered savings institution, such as Washington Federal, to

8


a specified percentage of the value of the property securing the loan, as determined by an evaluation at the time the loan is originated. This is referred to as the loan-to-value ratio. Maximum loan-to-value ratios for each type of real estate loan are established by the Company's Board of Directors. When establishing general reserves for loans with loan-to-value ratios exceeding 80% that are not insured by private mortgage insurance, Washington Federal considers the additional risk inherent in these products, as well as their relative loan loss experience, and provides reserves when deemed appropriate. The total balance for loans with loan-to-value ratios exceeding 80% at origination as of September 30, 2011, was $523 million, with allocated reserves of $9.4 million.
Construction loans. The Company originates construction loans to finance construction of single-family and multi-family residences as well as commercial properties. These loans to builders are generally indexed to the Prime rate and normally have maturities of two years or less. Loans made to individuals for construction of their home generally are 30 year fixed rate loans. The Company's policies provide that for residential construction loans, loans may be made for 80% or less of the appraised value of the property upon completion. As a result of activity over the past three decades, the Company believes that builders of single-family residences in its primary market areas consider it to be a construction lender of choice. Because of this history, the Company has developed a staff with in-depth land development and construction experience and working relationships with selected builders based on their operating histories and financial stability.
Construction lending involves a higher level of risk than single-family residential lending due to the concentration of principal in a limited number of loans and borrowers, and the effects of general economic conditions in the homebuilding industry. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. These loans are generally more difficult to evaluate and monitor.
Land loans. The Company's land development loans are of a short-term nature and are generally made for 75% or less of the appraised value of the property. Funds are disbursed periodically at various stages of completion as authorized by the Company's personnel. The interest rate on these loans generally adjusts every 90 days in accordance with a designated index.
Land development loans involve a higher degree of credit risk than long-term financing on owner-occupied real estate. Mitigation of risk of loss on a land development loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of development compared to the estimated cost (including interest) of development and the financial strength of the borrower.
The Company's permanent land loans (also called consumer lot loans) are generally made on improved land, with the intent of building a primary or secondary residence. These loans are limited to 80% or less of the appraised value of the property, up to a maximum loan amount of $350,000. The interest rate on permanent land loans is generally fixed for 20 years.
Multi-family residential loans. Multi-family residential (five or more dwelling units) loans generally are secured by multi-family rental properties, such as apartment buildings. In underwriting multi-family residential loans, the Company considers a number of factors, which include the projected net cash flow to the loan's debt service requirement, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower's experience in owning or managing similar properties. Multi-family residential loans are originated in amounts up to 80% of the appraised value of the property securing the loan.
Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than single-family residential loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. The Company seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio. The Company generally limits its multi-family residential loans to $10.0 million on any one loan.

It is the Company's policy to obtain title insurance ensuring that the Company has a valid first lien on the mortgaged real estate serving as collateral. Borrowers must also obtain hazard insurance prior to closing and, when required by regulation, flood insurance. Borrowers may be required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Company makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums when due.
Commercial and industrial loans. The Company makes various types of business loans to customers in its market area for working capital, acquiring real estate, equipment or other business purposes, such as acquisitions. The terms of these loans generally range from less than one year to a maximum of ten years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to Prime or another market rate.
 
Commercial credit decisions are based upon the Company's assessment of the borrower's ability and willingness to repay along with an evaluation of secondary repayment sources such as the liquidity and marketability of collateral. Most such loans are extended to closely held businesses and the personal guaranty of the principals is usually obtained. Non real estate commercial loans have a relatively high risk of

9


default, compared to residential real estate loans. Pricing of commercial loans is based on the credit risk of the borrower with consideration given to the overall relationship of the borrower, including deposits. The acquisition of business deposits is an important focus of this business line. The cost of funds from businesses is usually lower than the cost of funds raised through CDs in our retail branches.
 
Consumer loans. Through its two most recent acquisitions prior to Horizon, the Company obtained its portfolio of $68 million of consumer loans. These loans are primarily home improvement loans made through third party originators that bear interest at rates of 10% and higher. Due to the nature of these loans the average charge-off rate has been 3-5% per year. After extensive review of this program, the Company decided in fiscal 2009 to cease origination of these consumer loans, as the risk profile did not match with the Company's long term business plan. The Company will continue to service the portfolio until the balances are repaid.

Home equity loans. The Company extends revolving lines of credit to consumers that are secured by a first or second mortgage on a single family residence. The interest rates on these loans adjust monthly indexed to Prime. Total loan-to-value ratios when combined with any underlying first liens are limited to 75% or less. Terms are a ten year draw period followed by a fifteen year amortization period.
Origination and Purchase of Loans. The Company has general authority to lend anywhere in the United States; however, its primary lending areas are within the states of Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas.
Loan originations come from a number of sources. Residential loan originations result from referrals from real estate brokers, walk-in customers, purchasers of property in connection with builder projects financed by the Company, mortgage brokers and refinancings for existing customers. Business purpose loans are obtained primarily by direct solicitation of borrowers and continued business from borrowers who have previously borrowed from the Company.

The Company also purchases loans and mortgage-backed securities when lending rates and mortgage volume for new loan originations in its market area do not fulfill its needs. The table below shows total loan origination, purchase and repayment activities on non-covered loans of the Company for the years indicated.

 
 
2007
 
2008
 
2009
 
2010
 
2011
 
(In thousands)
Loans originated (1, 3):
 
 
 
 
 
 
 
 
 
Single-family residential
$
827,270

 
$
857,334

 
$
855,212

 
$
583,429

 
$
557,902

Construction – speculative
518,024

 
218,145

 
102,630

 
132,328

 
126,042

Construction – custom
337,575

 
303,844

 
262,952

 
276,057

 
289,113

Land – acquisition & development
443,793

 
148,221

 
45,425

 
31,179

 
14,957

Land – consumer lot loans
42,299

 
25,909

 
14,681

 
11,334

 
9,968

Multi-family
98,453

 
105,805

 
97,621

 
49,179

 
122,618

Commercial real estate
16,266

 
66,876

 
117,447

 
59,600

 
18,120

Commercial & industrial
10,320

 
187,748

 
243,240

 
272,102

 
134,940

HELOC
5,074

 
63,855

 
85,755

 
59,084

 
33,711

Consumer
2,871

 
96,438

 
15,497

 
3,241

 
219

Total loans originated
2,301,945

 
2,074,175

 
1,840,460

 
1,477,533

 
1,307,590

Loans purchased (2,3)
414,153

 
946,826

 
385,645

 
1,922

 
400

Loan principal repayments
(1,718,798
)
 
(1,845,324
)
 
(2,116,355
)
 
(1,855,560
)
 
(1,704,826
)
Net change in loans in process, discounts, etc.
112,535

 
137,665

 
(627,940
)
 
(183,622
)
 
(90,990
)
Net loan activity increase (decrease)
$
1,109,835

 
$
1,313,342

 
$
(518,190
)
 
$
(559,727
)
 
$
(487,826
)
Beginning balance
$
7,078,443

 
$
8,188,278

 
$
9,501,620

 
$
8,983,430

 
$
8,423,703

Ending balance
$
8,188,278

 
$
9,501,620

 
$
8,983,430

 
$
8,423,703

 
$
7,935,877

 ___________________
(1)
Includes undisbursed loan in process and does not include savings account loans, which were not material during the periods indicated.
(2)
Includes loans acquired through acquisitions and whole loan purchases.
(3)
Excludes covered loans.


10


The table below shows total loan purchases and repayment activities on covered loans of the Company for the years indicated.
Prior to the acquisition of Horizon Bank in 2010 the company had no covered loans.
 
 
2010
2011
 
(In thousands)
Total loans originated
$
—

$
—

Loans purchased
671,383

—

Loan principal repayments
(122,272
)
(117,302
)
Net change in loans in process, discounts, etc
(14,637
)
(34,989
)
Net loan activity
$
534,474

$
(152,291
)
Beginning balance
—

534,474

Ending balance
$
534,474

$
382,183

Interest Rates, Loan Fees and Service Charges. Interest rates charged by the Company on mortgage loans are primarily determined by the competitive loan rates offered in its lending areas and in the secondary market. Mortgage loan rates reflect factors such as general interest rates, the supply of money available to the industry and the demand for such loans. These factors are in turn affected by general economic conditions, the regulatory programs and policies of federal and state agencies, changes in tax laws and governmental budgetary programs.
The Company receives fees for originating loans in addition to various fees and charges related to existing loans, including prepayment charges, late charges and assumption fees.
In making one-to-four- family home mortgage loans, the Company does not normally charge a commitment fee. As part of the loan application, the borrower pays the Company for out-of-pocket costs, such as the appraisal fee, in reviewing the application, whether or not the borrower closes the loan. The interest rate charged is normally the prevailing rate at the time the loan application is approved and accepted. In the case of construction loans, the Company normally charges an origination fee. Loan origination fees and other terms of multi-family residential loans are individually negotiated.
Non-performing Assets. When a borrower fails to make a required payment on a loan, the Company attempts to cure the deficiency by contacting the borrower. Contact is made after a payment becomes past due. In most cases, deficiencies are cured promptly. If the delinquency is not cured within 90 days, the Company may institute appropriate action to foreclose on the property. If foreclosed, the property will be sold at a public sale and may be purchased by the Company. There are circumstances under which the Company may choose to foreclose a deed of trust as mortgagee, and when this procedure is followed, certain redemption rights are involved.
The company will consider modifying the interest rates and terms of a loan if it determines that a modification is a better alternative to foreclosure.
Loans are placed on nonaccrual 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 nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Company does not accrue interest on loans 90 days past due or more. See Note A to the Consolidated Financial Statements included in Item 8 hereof.
Real estate acquired by foreclosure or deed-in-lieu thereof (“REO” or “Real Estate Owned”) is classified as real estate held for sale until it is sold or transferred to Real Estate Held for Investment(“REHI”). When property is acquired, it is recorded at the lower of carrying cost or fair value at the date of acquisition, and any write-down resulting therefrom is charged to the allowance for loan losses. Interest accrual ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expensed as incurred. Costs incurred for the improvement or development of such property are capitalized. See Note A to the Consolidated Financial Statements included in Item 8 hereof.

11


The following table sets forth information regarding restructured and non-accrual loans and REO held by the Company at the dates indicated.
 
 
 
2007
 
2008
 
2009
 
2010
 
2011
 
 
(In thousands)
Performing restructured loans
 
$
—

 
$
—

 
$
117,234

 
$
225,195

 
$
320,018

Non-Performing restructured loans
 
250

 
6,210

 
19,660

 
47,727

 
57,478

Total restructured loans
 
250

 
6,210

 
136,894

 
272,922

 
377,496

Non-accrual loans:
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
9,820

 
38,017

 
116,268

 
123,624

 
126,624

Construction – speculative
 
2,446

 
33,003

 
50,348

 
39,915

 
15,383

Construction – custom
 
 
 
1,315

 
—

 
—

 
635

Land – Acquisition & development
 
1,809

 
51,562

 
187,061

 
64,883

 
37,339

Land – consumer lot loans
 
 
 
—

 
—

 
—

 
8,843

Multi-family
 
148

 
748

 
4,368

 
4,931

 
7,664

Commercial real estate
 
253

 
1,929

 
2,733

 
10,831

 
11,380

Commercial & industrial
 
42

 
—

 
18,823

 
371

 
1,679

HELOC
 
 
 
—

 
—

 
—

 
481

Consumer
 
 
 
535

 
656

 
977

 
437

Total non-accrual loans (1)
 
14,518

 
127,109

 
380,257

 
245,532

 
210,465

Total REO (2)
 
1,413

 
37,082

 
120,105

 
160,754

 
129,175

Total REHI(3)
 
—

 
—

 
56,758

 
28,244

 
30,654

Total non-performing assets
 
$
15,931

 
$
164,191

 
$
557,120

 
$
434,530

 
$
370,294

Total non-performing assets and performing restructured loans
 
$
15,931

 
$
164,191

 
$
674,354

 
$
659,725

 
$
690,312

Total non-performing assets and restructured loans as a percent of total assets
 
0.15
%
 
1.39
%
 
5.36
%
 
4.89
%
 
5.14
%
Total non-performing assets to total assets
 
0.15
%
 
1.39
%
 
4.43
%
 
3.22
%
 
2.76
%
 ___________________
(1)
Had these loans performed according to their original contract terms, the Company would have recognized interest income of approximately $13,156,000 in 2011. In addition to the nonaccrual loans reflected in the above table, at September 30, 2011, the Company had $197.9 million of loans that were less than 90 days delinquent but that were classified as substandard for one or more reasons. If these loans were deemed nonperforming, the Company's ratio of total nonperforming assets and restructured loans as a percent of total assets would have been 6.66% at September 30, 2011. For a discussion of the Company's policy for placing loans on nonaccrual status, see Note A to the Consolidated Financial Statements included in Item 8 hereof.
(2)
Total REO includes real estate held for sale acquired in settlement of loans or acquired from purchased institutions in settlement of loans. Excludes covered REO.
(3)
Total REHI includes real estate held for investment acquired in settlement of loans.


12


The following table analyzes the Company’s allowance for loan losses at the dates indicated.
 
 
September 30,
 
2007
 
2008
 
2009
 
2010
 
2011
 
(In thousands)
Beginning balance
$
24,993

 
$
28,520

 
$
85,058

 
$
166,836

 
$
163,094

Charge-offs:
 
 
 
 
 
 
 
 
 
Single-family residential
40

 
2,177

 
18,013

 
33,812

 
38,465

Construction – speculative
1,024

 
6,858

 
22,604

 
28,930

 
13,197

Construction – custom
—

 
—

 
289

 
359

 
237

Land – Acquisition & development
58

 
3,513

 
50,552

 
105,576

 
39,797

Land – consumer lot loans
—

 
140

 
1,822

 
359

 
4,196

Multi-family
34

 
25

 
1,028

 
2,010

 
1,950

Commercial real estate
—

 
225

 
—

 
651

 
1,593

Commercial & industrial loans
—

 
14

 
11,573

 
8,902

 
4,733

HELOC
—

 
—

 
151

 
118

 
939

Consumer
—

 
2,471

 
6,841

 
6,670

 
4,602

 
1,156

 
15,423

 
112,873

 
187,387

 
109,709

Recoveries:
 
 
 
 
 
 
 
 
 
Single-family residential
1

 
—

 
117

 
104

 
3,072

Construction – speculative
—

 
34

 
8

 
523

 
2,143

Construction – custom
—

 
—

 
—

 
188

 
—

Land – Acquisition & development
—

 
—

 
16

 
844

 
2,271

Land – consumer lot loans
—

 
—

 
—

 
11

 
—

Multi-family
—

 
—

 
—

 
—

 
71

Commercial real estate
2

 
—

 
—

 
3

 
328

Commercial & industrial loans
—

 
—

 
948

 
923

 
1,925

HELOC
—

 
—

 
—

 
—

 
185

Consumer
—

 
230

 
562

 
1,140

 
1,429

 
3

 
264

 
1,651

 
3,736

 
11,424

Net charge-offs
1,153

 
15,159

 
111,222

 
183,651

 
98,285

Acquired through acquisition
3,130

 
11,181

 
—

 
—

 
—

Provision (reversal of reserve) for loan losses
1,550

 
60,516

 
193,000

 
179,909

 
92,351

Ending balance
$
28,520

 
$
85,058

 
$
166,836

 
$
163,094

 
$
157,160

Ratio of net charge-offs to average loans outstanding
.02
%
 
.17
%
 
1.18
%
 
1.99
%
 
1.14
%


13


The following table sets forth the allocation of the Company’s allowance for loan losses at the dates indicated.
 
 
 
September 30,
 
 
2007
 
2008
 
2009
 
2010
 
2011
 
 
Amount
 
%(1)
 
Amount
 
%(1)
 
Amount
 
%(1)
 
Amount
 
%(1)
 
Amount
 
%(1)
 
 
(In thousands)
Allowance allocation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
$
10,083

 
69.4
%
 
$
17,055

 
69.5
%
 
$
18,547

 
72.3
%
 
$
21,575

 
74.8
%
 
$
83,307

 
74.9
%
Construction – speculative
 
4,716

 
8.1

 
10,069

 
4.4

 
21,841

 
2.8

 
26,346

 
1.9

 
13,828

 
1.7

Construction – custom
 
1,163

 
3.8

 
1,328

 
3.2

 
81

 
2.8

 
26,355

 
2.9

 
623

 
3.4

Land – acquisition & development
 
4,506

 
8.6

 
28,679

 
7.3

 
104,569

 
5.5

 
61,637

 
3.5

 
32,719

 
2.4

Land – consumer lot loans
 
1,136

 
1.8

 
2,279

 
2.1

 
1,298

 
2.1

 
4,793

 
2.1

 
5,520

 
2.0

Multi-family
 
5,299

 
6.4

 
4,514

 
6.9

 
1,878

 
7.5

 
5,050

 
7.9

 
7,623

 
8.4

Commercial real estate
 
1,297

 
1.3

 
4,536

 
2.8

 
1,344

 
3.1

 
3,165

 
3.6

 
4,331

 
3.7

Commercial & industrial
 
320

 
.3

 
3,807

 
1.5

 
7,327

 
1.3

 
6,193

 
.9

 
5,099

 
1.3

HELOC
 
—

 
.2

 
1,338

 
.8

 
377

 
1.3

 
586

 
1.3

 
1,139

 
1.4

Consumer
 
—

 
.1

 
11,453

 
1.5

 
9,574

 
1.3

 
7,394

 
1.1

 
2,971

 
.8

Unallocated
 
—

 
 
 
—

 
 
 
—

 
 
 
—

 
 
 
—

 
 
Total allowance for loan losses
 
$
28,520

 
 
 
$
85,058

 
 
 
$
166,836

 
 
 
$
163,094

 
 
 
$
157,160

 
 
 ___________________
(1)
Represents the total amount of the loan category as a percentage of total loans outstanding.
The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The amount of this allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. The Company’s method for assessing the appropriateness of the allowance consists of two components, which include the general allowance and specific allowance. As part of the process for determining the adequacy of the allowance for loan losses, management reviews the loan portfolio for specific weaknesses.
The general loan loss allowance is established by applying a loss percentage factor to each of the different loan types. The allowance is based on management’s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, and the duration of the current business cycle. The recovery of the carrying value of loans is susceptible to future market conditions beyond the Company’s control, which may result in losses or recoveries differing from those provided. In those cases, a portion of the allowance is then allocated to reflect the estimated loss exposure. Residential real estate loans are not individually analyzed for impairment and loss exposure because of the significant number of loans, their relatively small balances and their historically low level of losses. In determining the adequacy of reserves, management considers the above mentioned factors.
Specific allowances are established in cases where management has identified conditions or circumstances related to a loan that management believes indicate the probability that a loss has been incurred.


14



Investment Activities
As a federally-chartered savings institution, the Bank is obligated to maintain adequate liquidity and does so by investing in securities. These investments may include, among other things, certain certificates of deposit, repurchase agreements, bankers’ acceptances, loans to financial institutions whose deposits are federally-insured, federal funds, United States government and agency obligations and mortgage-backed securities.
The following table sets forth the composition of the Company’s investment portfolio at the dates indicated.
 
 
September 30,
 
2009
 
2010
 
2011
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In thousands)
U.S. government and agency obligations
$
9,800

 
$
13,824

 
$
344,415

 
$
352,660

 
$
215,315

 
$
220,486

State and political subdivisions
7,435

 
7,980

 
7,055

 
7,268

 
22,411

 
25,591

Agency mortgage-backed securities
2,200,834

 
2,286,542

 
2,131,182

 
2,207,719

 
2,928,820

 
3,059,683

 
$
2,218,069

 
$
2,308,346

 
$
2,482,652

 
$
2,567,647

 
$
3,166,546

 
$
3,305,760

The investment portfolio at September 30, 2011 was categorized by maturity as follows:
 
 
Amortized
Cost
 
Wtd Avg
Yield
 
(In thousands)
Due in less than 1 year
$
500

 
4.00
%
Due after 1 year through 5 years
405

 
6.52

Due after 5 years through 10 years
40,845

 
5.51

Due after 10 years
3,124,796

 
4.62

 
$
3,166,546

 
4.63
%
Sources of Funds
General. Deposits are the primary source of the Company’s funds for use in lending and other general business purposes. In addition to deposits, Washington Federal derives funds from loan repayments, advances from the FHLB and other borrowings and, to a lesser extent, from investment repayments and sales. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in normal sources of funds, such as deposit inflows at lower than projected levels. Borrowings may also be used on a longer-term basis to support expanded activities.
Deposits. The Company chooses to rely on term certificate accounts and other deposit alternatives that have no fixed term and that pay interest rates more responsive to market interest rates than those of passbook accounts. This greater variety of deposits allows the Company to be more competitive in obtaining funds and to manage its liabilities more effectively.
Certificates with a maturity of one year or less have penalties for premature withdrawal equal to 90 days of interest. When the maturity is greater than one year but less than four years, the penalty is 180 days of interest. When the maturity is greater than four years, the penalty is 365 days interest. Early withdrawal penalties during 2009, 2010 and 2011 amounted to approximately $700,000, $727,000 and $781,000, respectively.
The Company offers several checking account products; interest is paid for accounts with monthly average balances over $1,000 and $10,000 respectively, depending on the type of account.
The Company’s deposits are obtained primarily from residents of Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. The Company does not advertise for deposits outside of these states.

15


The following table sets forth certain information relating to the Company’s savings deposits at the dates indicated.
 
 
September 30,
 
2009
 
2010
2011
 
Amount
 
Rate
 
Amount
 
Rate
Amount
 
Rate
 
(In thousands)
 
 
 
 
 
 
 
 
 
Balance by interest rate:
 
 
 
 
 
 
 
 
 
 
Checking accounts
$526,321
 
.39
%
 
$666,372
 
.29
%
$779,053
 
.09
%
Passbook and statement accounts
197,025

 
.50

 
234,673

 
.51

255,396

 
.20

Money market accounts
1,214,812

 
.87

 
1,653,717

 
.66

1,627,739

 
.26

 
1,938,158

 
 
 
2,554,762

 
 
2,662,188

 
 
Fixed-rate certificates:
 
 
 
 
 
 
 
 
 
 
Under 2.00%
1,777,286

 
 
 
3,608,935

 
 
4,170,232

 
 
2.00% to 2.99%
3,256,031

 
 
 
1,929,112

 
 
1,229,918

 
 
3.00% to 3.99%
466,665

 
 
 
498,956

 
 
418,720

 
 
4.00% to 4.99%
370,967

 
 
 
237,852

 
 
174,854

 
 
5.00% to 5.99%
32,982

 
 
 
22,923

 
 
9,991

 
 
6.00% and above
221

 
 
 
—

 
 
—

 
 
 
5,904,152

 
 
 
6,297,778

 
 
6,003,715

 
 
 
$
7,842,310

 
 
 
$
8,852,540

 
 
$
8,665,903

 
 
The following table sets forth, by various interest rate categories, the amount of certificates of deposit of the Company at September 30, 2011, which mature during the periods indicated.
 
 
Maturing in
 
1 to 3
Months
 
4 to 6
Months
 
7 to 12
Months
 
13 to 24
Months
 
25 to 36
Months
 
37 to 60
Months
 
Total
 
(In thousands)
Fixed-rate certificates:
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 2.00%
$
1,076,027

 
$
790,633

 
$
1,263,984

 
$
874,358

 
$
145,155

 
$
20,075

 
$
4,170,232

2.00% to 2.99%
429,076

 
236,044

 
58,004

 
235,912

 
21,029

 
249,853

 
1,229,918

3.00 to 3.99%
15,519

 
12,522

 
5,527

 
206,778

 
81,884

 
96,490

 
418,720

4.00 to 4.99%
18,739

 
17,749

 
40,075

 
71,837

 
26,386

 
68

 
174,854

5.00 to 5.99%
6,838

 
1,629

 
662

 
—

 
250

 
612

 
9,991

Total
$
1,546,199

 
$
1,058,577

 
$
1,368,252

 
$
1,388,885

 
$
274,704

 
$
367,098

 
$
6,003,715

Historically, a significant number of certificate holders roll over their balances into new certificates of the same term at the Company’s then current rate. To ensure a continuity of this trend, the Company expects to continue to offer market rates of interest. Its ability to retain maturing deposits in certificate accounts is difficult to project; however, the Company is confident that by competitively pricing these certificates, levels deemed appropriate by management can be achieved on a continuing basis.
At September 30, 2011, the Company had $382.5 million of certificates of deposit in amounts of $250,000 or more outstanding, maturing as follows: $98.4 million within 3 months; $67.1 million over 3 months through 6 months; $48.0 million over 6 months through 12 months; and $169.0 million thereafter.

16


The following table sets forth the customer account and customer repurchase activities of the Company for the years indicated.
 
 
September 30,
 
2009
 
2010
 
2011
 
(In thousands)
Deposits
$
9,900,370

 
$
8,258,975

 
$
2,989,003

Acquired deposits
—

 
820,000

 
—

Withdrawals
(9,419,034
)
 
(8,215,105
)
 
(3,291,475
)
Net increase (decrease) in deposits before interest credited
481,336

 
863,870

 
(302,472
)
Interest credited
191,435

 
146,360

 
115,835

Net increase (decrease) in customer accounts
$
672,771

 
$
1,010,230

 
$
(186,637
)
Borrowings. The Company obtains advances from the FHLB upon the security of the FHLB capital stock it owns and certain of its loans, provided certain standards related to credit worthiness have been met. See “Regulation-Washington Federal-Federal Home Loan Bank System” below. Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes acceptable uses to which the advances pursuant to each program may be put, as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of assets or the Company's creditworthiness. The FHLB is required to review its credit limitations and standards at least annually. FHLB advances have, from time to time, been available to meet seasonal and other withdrawals of savings accounts and to expand Washington Federal's lending program. The Company had $2.0 billion of FHLB advances outstanding at September 30, 2011.
The Company also uses reverse repurchase agreements as a form of borrowing. Under reverse repurchase agreements, the Company sells an investment security to a dealer for a period of time and agrees to buy back that security at the end of the period and pay the dealer a stated interest rate for the use of the dealer's funds. The amount of securities sold under such agreements depends on many factors, including the terms available for such transactions, the perceived ability to apply the proceeds to investments yielding a higher return, the demand for the securities and management's perception of trends in interest rates. The Company had $800 million of securities sold under such agreements at September 30, 2011. See Note I to the Consolidated Financial Statements included in Item 8 hereof for additional information.
The Company may need to borrow funds for short periods of time to meet day-to-day financing needs. In these instances, funds are borrowed from other financial institutions for periods generally ranging from one to seven days at the then current borrowing rate. At September 30, 2011, the Company had no such short-term borrowings.
 
The Company also offers two forms of repurchase agreements to its customers. One form has an interest rate that floats like that of a money market deposit account. The other form has a fixed rate and is offered in a minimum denomination of $100,000. Both forms are fully collateralized by securities. These obligations are not insured by FDIC and are classified as borrowings for regulatory purposes. The Company had $32.2 million of such agreements outstanding at September 30, 2011.

17


The following table presents certain information regarding borrowings of Washington Federal for the years indicated.
 
 
September 30,
 
2009
 
2010
 
2011
 
(In thousands)
Federal funds and securities sold to dealers under agreements to repurchase:
 
 
 
 
 
Average balance outstanding
$
991,989

 
$
809,479

 
$
800,000

Maximum amount outstanding at any month-end during the period
1,040,600

 
800,211

 
800,000

Weighted-average interest rate during the period (1)
3.26
%
 
3.75
%
 
3.73
%
FHLB advances:
 
 
 
 
 
Average balance outstanding
$
2,243,242

 
$
2,070,843

 
$
1,883,135

Maximum amount outstanding at any month-end during the period
2,743,026

 
2,078,695

 
1,962,616

Weighted-average interest rate during the period (1)
4.23
%
 
4.46
%
 
4.35
%
Securities sold to customers under agreements to repurchase:
 
 
 
 
 
Average balance outstanding
$
38,922

 
$
45,393

 
$
35,211

Maximum amount outstanding at any month-end during the period
55,843

 
55,222

 
44,078

Weighted-average interest rate during the period (1)
2.73
%
 
2.24
%
 
0.78
%
Total average borrowings:
$
3,274,153

 
$
2,925,715

 
$
2,718,396

Weighted-average interest rate on total average borrowings (1)
3.92
%
 
4.23
%
 
4.13
%
 ___________________
(1)
Interest expense divided by average daily balances.

Other Ratios
The following table sets forth certain ratios related to the Company for the periods indicated.
 
 
September 30,
 
2009
 
2010
 
2011
Return on assets (1)
.33
%
 
.89
%
 
.83
%
Return on equity (2)
2.87

 
6.55

 
5.99

Average equity to average assets
11.57

 
13.54

 
13.82

Dividend payout ratio (3)
43.48

 
19.05

 
23.00

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

18


Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
 
 
September 30,
 
2009 vs. 2008
Increase (Decrease) Due to
 
2010 vs. 2009
Increase (Decrease) Due to
 
2011 vs. 2010
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(In thousands)
 
(In thousands)
 
(In thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan portfolio
$
26,547

 
$
(47,181
)
 
$
(20,634
)
 
$
(8,770
)
 
$
(9,405
)
 
$
(18,175
)
 
$
(36,101
)
 
$
(2,738
)
 
$
(38,839
)
Mortgage-backed securities
22,807

 
(1,746
)
 
21,061

 
825

 
(18,536
)
 
(17,711
)
 
25,601

 
(9,169
)
 
16,432

Investments (1)
58

 
(10,139
)
 
(10,081
)
 
7,672

 
—

 
7,672

 
(142
)
 
3,624

 
3,482

All interest-earning assets
49,412

 
(59,066
)
 
(9,654
)
 
(273
)
 
(27,941
)
 
(28,214
)
 
(10,642
)
 
(8,283
)
 
(18,925
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer accounts
27,267

 
(95,601
)
 
(68,334
)
 
26,602

 
(71,677
)
 
(45,075
)
 
2,684

 
(33,209
)
 
(30,525
)
FHLB advances and other borrowings
4,792

 
(15,472
)
 
(10,680
)
 
(14,599
)
 
10,148

 
(4,451
)
 
(8,315
)
 
(2,565
)
 
(10,880
)
All interest-bearing liabilities
32,059

 
(111,073
)
 
(79,014
)
 
12,003

 
(61,529
)
 
(49,526
)
 
(5,631
)
 
(35,774
)
 
(41,405
)
Change in net interest income
$
17,353