Washington Federal, Inc.
10-K on 11/23/2020   Download
SEC Document
SEC Filing

United States
Securities and Exchange Commission
Washington, D.C. 20549
____________________________________________________________
 FORM 10-K
____________________________________________________________ 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
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: (206624-7930
_____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol
Name of each exchange on which registered
Common Stock, $1.00 par value per share
WAFD
NASDAQ Stock Market
Securities registered pursuant to section 12(g) of the Act:
None
____________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      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  

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      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 (§ 229.405 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.     Yes       No  

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



The aggregate market value of the registrant's common stock ("Common Stock") held on March 31, 2020, the last business day of the registrant's second fiscal quarter by non-affiliates was $1,945,306,499 based on the NASDAQ Stock Market closing price of $25.96 per share on that date. This is based on 74,934,765 shares of Common Stock that were issued and outstanding on this date, which excludes 771,335 shares held by all affiliates.

At November 20, 2020, there were 75,815,930 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated:
(1) Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended September 30, 2020, 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 Shareholders to be held on January 26, 2021 are incorporated into Part III, Items 10-14 of this Form 10-K.



PART I
Washington Federal, Inc. (the "Company") makes statements in this Annual Report on Form 10-K that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “intends,” “forecasts,” “projects” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to help identify such forward-looking statements. These statements are not historical facts, but instead represent current expectations, plans or forecasts of the Company and are based on the beliefs and assumptions of the management of the Company and the information available to management at the time that these disclosures were prepared. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Company's forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this report, including under Item 1A. “Risk Factors,” and in any of the Company's other subsequent Securities and Exchange Commission filings, which could cause the Company's future results to differ materially from the plans, objectives, goals, estimates, intentions and expectations expressed in forward-looking statements:
a deterioration in economic conditions, including declines in the real estate market and home sale volumes and financial stress on borrowers (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 a severe economic downturn, including high unemployment rates and declines in housing prices and property values, in the Company's primary market areas;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government, 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, assets, liabilities, 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; and governmental authorities undertake enforcement actions or legal proceedings with respect to the Bank’s BSA program beyond those contemplated by the Consent Order, and the potential impact of such matters on the success, timing and ability to pursue the Company’s growth or other business initiatives;
the success of the Company at managing the risks involved in the remediation efforts associated with its Home Mortgage Disclosure Act (“HMDA”) compliance and reporting, costs of enhancements to the Bank’s HMDA program are greater than anticipated; and 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 “CFPB”);
the success of the Company at managing the risks involved in the foregoing and managing its business; and
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company's control.

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


3


Item 1.                 Business

General

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, including the Bank, 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, 2019 and 2018 represent balances as of September 30, 2020, September 30, 2019 and September 30, 2018, respectively, or activity for the fiscal years then ended.
The business of the Bank consists primarily of accepting deposits from the general public and investing these funds in loans of various types, including first lien mortgages on single-family dwellings, construction loans, land acquisition and development loans, loans on multi-family, commercial real estate and other income producing properties, home equity loans and business loans. It also invests in certain United States government and agency obligations and other investments permitted by applicable laws and regulations. As of September 30, 2020, Washington Federal Bank has 234 branches located in Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. Through the Bank's subsidiaries, the Company is also engaged in insurance brokerage activities.

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

The Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"), its primary federal regulator, the Consumer Financial Protection Bureau ("CFPB") and the Federal Deposit Insurance Corporation ("FDIC"), which insures its deposits up to applicable limits. The Company, as a bank holding company, is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System (" Federal Reserve").

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

A summary of the Company’s principal sources of revenue and expenses by average balances over the past three fiscal years is below:



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Average Statements of Financial Condition
 Year Ended September 30,
 202020192018
 Average
Balance
InterestAverage
Rate
Average
Balance
InterestAverage
Rate
Average
Balance
InterestAverage
Rate
 ($ in thousands)
Assets
Loans receivable (1)$12,266,430 $545,708 4.44 %$11,814,480 $568,096 4.81 %$11,202,129 $515,807 4.60 %
Mortgage-backed securities2,060,804 49,312 2.39 2,554,653 74,485 2.92 2,543,796 70,407 2.77 
Cash and other investment securities (2)1,587,602 20,112 1.26 699,340 22,290 3.19 584,145 15,456 2.65 
FHLB & FRB stock135,294 6,133 4.52 135,346 6,595 4.87 129,382 5,413 4.18 
Total interest-earning assets16,050,130 621,265 3.86 %15,203,819 671,466 4.42 %14,459,452 607,083 4.20 %
Other assets1,254,061 1,160,302 1,155,819 
Total assets$17,304,191 $16,364,121 $15,615,271 
Liabilities and Shareholders’ Equity
Interest-bearing customer accounts$10,647,044 100,312 0.94 %$10,198,032 122,216 1.20 %$9,700,000 72,492 0.75 %
FHLB advances2,532,596 51,445 2.03 2,533,890 68,190 2.69 2,384,795 62,452 2.62 
Other borrowings19 — 0.46 — — — — — — 
Total interest-bearing liabilities13,179,659 151,757 1.15 %12,731,922 190,406 1.50 %12,084,795 134,944 1.12 %
Noninterest-bearing customer accounts1,870,032 1,465,110 1,368,461 
Other liabilities244,203 156,557 155,950 
Total liabilities15,293,894 14,353,589 13,609,206 
Shareholders’ equity2,010,297 2,010,532 2,006,065 
Total liabilities and shareholders’ equity$17,304,191 $16,364,121 $15,615,271 
Net interest income/interest rate spread$469,508 2.71 %$481,060 2.92 %$472,139 3.08 %
Net interest margin (3)2.93 %3.16 %3.27 %

   ___________________
(1)Interest income includes net amortization-accretion of deferred loan fees, costs, discounts and premiums of $25,060,000, $14,057,000 and $15,199,000 for year ended 2020, 2019 and 2018, respectively.
(2)Includes cash equivalents and non-mortgage backed security investments, such as U.S. agency obligations, mutual funds, corporate bonds, and municipal bonds.
(3)Net interest income divided by average interest-earning assets.


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Lending Activities

General. The Company's net portfolio of loans totaled $12,792,317,000 at September 30, 2020 and represents 68.1% of total assets. Lending activities include the origination of loans secured by real estate, including long-term fixed-rate and adjustable-rate mortgage loans, adjustable-rate construction loans, adjustable-rate land development loans, fixed-rate and adjustable-rate multi-family loans, fixed-rate and adjustable-rate commercial real estate loans and fixed-rate and adjustable-rate business loans.

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

 September 30, 2020September 30, 2019September 30, 2018September 30, 2017September 30, 2016
 ($ in thousands)
Gross loans by category
Commercial loans
   Multi-family$1,538,762 10.6 %$1,422,674 10.7 %$1,385,125 10.8 %$1,303,148 10.7 %$1,124,290 10.3 %
   Commercial real estate1,895,086 13.1 1,631,170 12.3 1,452,168 11.3 1,434,610 11.8 1,093,639 10.0 
   Commercial & industrial2,132,160 14.7 1,268,695 9.5 1,140,874 8.9 1,093,360 9.0 978,589 8.9 
   Construction2,403,276 16.6 2,038,052 15.3 1,890,668 14.7 1,597,996 13.1 1,110,411 10.1 
   Land - acquisition & development193,745 1.3 204,107 1.5 155,204 1.2 124,308 1.0 118,497 1.1 
 Total commercial loans8,163,029 56.3 6,564,698 49.3 6,024,039 46.9 5,553,422 45.5 4,425,426 40.4 
Consumer loans
 Single-family residential5,304,689 36.7 5,835,194 43.8 5,798,966 45.1 5,711,004 46.8 5,658,830 51.7 
 Construction - custom674,879 4.7 540,741 4.1 624,479 4.9 602,631 4.9 473,069 4.3 
 Land - consumer lot loans102,263 0.7 99,694 0.7 102,036 0.8 104,405 0.9 104,567 1.0 
   HELOC139,703 1.0 142,178 1.1 130,852 1.0 144,850 1.2 149,716 1.4 
   Consumer83,159 0.6 129,883 1.0 173,306 1.3 85,075 0.7 139,000 1.3 
 Total consumer loans6,304,693 43.7 6,747,690 50.7 6,829,639 53.1 6,647,965 54.5 6,525,182 59.6 
Total gross loans14,467,722 100 %13,312,388 100 %12,853,678 100 %12,201,387 100 %10,950,608 100 %
   Less:
      Allowance for credit losses166,955 131,534 129,257 123,073 113,494 
      Loans in process1,456,072 1,201,341 1,195,506 1,149,934 879,484 
      Net deferred fees, costs and discounts52,378 48,938 51,834 45,758 46,710 
Total loan contra accounts1,675,405 1,381,813 1,376,597 1,318,765 1,039,688 
Net loans$12,792,317 $11,930,575 $11,477,081 $10,882,622 $9,910,920 

 
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The following table summarizes the Company’s loan portfolio, due for the periods indicated based on contractual terms to maturity or repricing.
 
September 30, 2020TotalLess than
1 Year
1 to 5
Years
After 5
Years
 (In thousands)
Commercial loans
  Multi-family$1,538,240 $352,327 $831,188 $354,725 
  Commercial real estate1,884,688 863,985 605,022 415,681 
  Commercial & industrial2,115,513 907,789 930,666 277,058 
  Construction1,352,414 1,136,378 57,745 158,291 
  Land - acquisition & development153,571 146,271 4,079 3,221 
    Total commercial loans7,044,426 3,406,750 2,428,700 1,208,976 
Consumer loans
  Single-family residential5,293,962 149,998 138,240 5,005,724 
  Construction - custom295,953 1,376 — 294,577 
  Land - consumer lot loans101,394 8,971 23,824 68,599 
  HELOC140,222 139,700 320 202 
  Consumer83,315 14,148 15,597 53,570 
    Total consumer loans5,914,846 314,193 177,981 5,422,672 
$12,959,272 $3,720,943 $2,606,681 $6,631,648 

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

The following summary breaks down the Company's fixed rate and adjustable rate loans by contractual time to maturity or to rate adjustment.
September 30, 2020
Fixed-RateAdjustable-Rate
Term To MaturityLoans ReceivableTerm To Rate AdjustmentLoans Receivable
 (In thousands) (In thousands)
Within 1 year$128,254 Less than 1 year$3,592,689 
1 to 3 years1,179,316 1 to 3 years440,980 
3 to 5 years398,019 3 to 5 years588,366 
5 to 10 years1,044,581 5 to 10 years46,473 
10 to 20 years983,856 10 to 20 years25,190 
Over 20 years4,517,836 Over 20 years13,712 
$8,251,862 $4,707,410 


7


The following tables provide information regarding loans receivable by loan class and geography.
 
September 30, 2020Multi-
family
Commercial
Real Estate
Commercial
and Industrial
ConstructionLand -
A & D
Single -
Family
Residential
Construction -
custom
Land -
Lot Loans
ConsumerHELOCTotal
 (In thousands)
Washington$309,785 $494,741 $898,260 $244,531 $62,047 $2,774,254 $173,708 $59,520 $56,282 $77,523 $5,150,651 
Oregon395,308 359,664 435,239 339,949 45,290 687,876 31,374 11,914 899 18,378 2,325,891 
Arizona425,753 223,529 131,669 172,890 6,648 510,413 22,146 14,647 845 13,618 1,522,158 
Utah88,105 69,412 43,441 149,672 — 459,402 29,754 3,360 2,029 7,341 852,516 
Texas110,024 273,118 270,302 256,869 2,351 136,420 2,810 330 208 904 1,053,336 
New Mexico163,548 197,790 72,762 39,344 24,439 189,643 12,820 1,821 1,142 10,122 713,431 
Idaho39,199 105,435 51,000 72,898 12,796 303,719 16,854 6,675 78 9,085 617,739 
Nevada6,400 121,576 51,717 45,222 — 203,375 6,487 3,119 44 3,251 441,191 
Other118 39,423 161,123 31,039 — 28,860 — 21,788 — 282,359 
$1,538,240 $1,884,688 $2,115,513 $1,352,414 $153,571 $5,293,962 $295,953 $101,394 $83,315 $140,222 $12,959,272 

Percentage by geographic area
September 30, 2020Multi-
family
Commercial
Real Estate
Commercial
and Industrial
ConstructionLand -
A & D
Single -
Family
Residential
Construction -
custom
Land -
Lot Loans
ConsumerHELOCTotal
 As % of total gross loans
Washington2.4 %3.9 %6.9 %1.9 %0.5 %21.5 %1.4 %0.5 %0.4 %0.6 %40.0 %
Oregon3.1 2.8 3.4 2.6 0.3 5.3 0.2 0.1 — 0.1 17.9 
Arizona3.3 1.7 1.0 1.3 0.1 3.9 0.2 0.1 — 0.1 11.7 
Utah0.7 0.5 0.3 1.2 — 3.5 0.2 — — 0.1 6.5 
Texas0.8 2.1 2.1 2.0 — 1.1 — — — — 8.1 
New Mexico1.3 1.5 0.6 0.3 0.2 1.5 0.1 — — 0.1 5.6 
Idaho0.3 0.8 0.4 0.6 0.1 2.3 0.1 0.1 — 0.1 4.8 
Nevada— 0.9 0.4 0.3 — 1.6 0.1 — — — 3.3 
Other— 0.3 1.2 0.2 — 0.2 — — 0.2 — 2.1 
11.9 %14.5 %16.3 %10.4 %1.2 %40.9 %2.3 %0.8 %0.6 %1.1 %100 %

Percentage by geographic area as a % of each loan type
September 30, 2020Multi-
family
Commercial
Real Estate
Commercial
and Industrial
ConstructionLand -
A & D
Single -
Family
Residential
Construction -
custom
Land -
Lot Loans
ConsumerHELOC
As % of total gross loans
Washington20.2 %26.2 %42.5 %18.1 %40.4 %52.4 %58.7 %58.7 %67.5 %55.3 %
Oregon25.7 19.1 20.6 25.1 29.5 13.0 10.6 11.8 1.1 13.1 
Arizona27.7 11.9 6.2 12.8 4.3 9.6 7.5 14.4 1.0 9.7 
Utah5.7 3.7 2.1 11.1 — 8.7 10.1 3.3 2.4 5.2 
Texas7.2 14.5 12.8 19.0 1.5 2.6 0.9 0.3 0.2 0.7 
New Mexico10.6 10.5 3.4 2.9 15.9 3.6 4.3 1.8 1.4 7.2 
Idaho2.5 5.6 2.4 5.4 8.4 5.7 5.7 6.6 0.1 6.5 
Nevada0.4 6.4 2.4 3.3 — 3.8 2.2 3.1 0.1 2.3 
Other— 2.1 7.6 2.3 — 0.6 — — 26.2 — 
100 %100 %100 %100 %100 %100 %100 %100 %100 %100 %


Lending Programs and Policies. The Bank's lending activities include commercial and consumer loans, including the following loan categories.
Multi-family residential loans. Multi-family residential (five or more dwelling units) loans generally are secured by multi-family rental properties, such as apartment buildings. In underwriting multi-family residential loans, the Bank considers a number of factors, which include the projected net cash flow to the loan's debt service requirement, the age and condition of the collateral, the
8


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 different credit risk than single-family residential loans and carry larger loan balances. This different 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, the primary source of cash flow for repayment being spread across multiple tenants and the increased difficulty of evaluating and monitoring these types of loans. Repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. The Bank seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio.
It is the Bank's policy to obtain title insurance ensuring that it has a valid first lien on the mortgaged real estate serving as collateral for the loan. Borrowers must also obtain hazard insurance prior to closing and, when required by regulation, flood insurance. Borrowers may be required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums when due.
Commercial and industrial loans. The Bank makes various types of business loans to customers in its market area for working capital, acquiring real estate, equipment or other business purposes, such as acquisitions. The terms of these loans generally range from less than one year to a maximum of ten years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to the LIBOR rate, prime rate or another market rate. In most cases, these loan agreements include language that will provide for a replacement for LIBOR as the index rate.
 
Commercial loans are made based upon assessment of the borrower's ability and willingness to repay along with an evaluation of secondary repayment sources such as the value and marketability of collateral. Most such loans are extended to closely held businesses and the personal guaranty of the principals is usually obtained. Commercial loans have a relatively high risk of default compared to residential real estate loans. Pricing of commercial loans is based on the credit risk of the borrower with consideration given to the overall relationship of the borrower, including deposits. The acquisition of business deposits is an important focus of this business line. The Bank provides a full line of treasury management products to support the depository needs of its clients.

The Company also participated in the Small Business Administration’s Paycheck Protection Program and made various business loans pursuant to this.
Construction loans. The Bank originates construction loans to finance construction of single-family and multi-family residences as well as commercial properties. Loans made to builders are generally tied to an interest rate index and normally have maturities of two years or less or are structured such that they convert to a permanent loan after the completion of construction or stabilization of the property. Loans made to individuals for construction of their home generally are 30 year fixed rate loans. The Bank's policies provide that for residential construction loans, loans may be made for 85% or less of the appraised value of the property upon completion. As a result of activity over the past four decades, the Bank believes that builders of single-family residences in its primary market areas consider the Bank to be a construction lender of choice. Because of this history, the Bank has developed a staff with in-depth land development and construction experience and working relationships with selected builders based on their operating histories and financial stability.
Construction lending involves a higher level of risk than single-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions in the home building industry. Moreover, a construction loan can involve additional risks because of the complexities of completing the construction, the inherent difficulty in estimating both the estimated cost (including interest) of the project and the property's value at completion of the project.
Land development loans. The Bank's land development loans are of a short-term nature and are generally made for 75% or less of the appraised value of the unimproved property. Funds are disbursed periodically at various stages of completion as authorized by the Company's personnel. The interest rate on these loans typically adjust daily or monthly 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.
Permanent land loans. The Bank's permanent land loans (also called consumer lot loans) are generally made on improved land, with the intent of building a primary or secondary residence. These loans are limited to 80% or less of the appraised value of the property, up to a maximum loan amount of $350,000. The interest rate on permanent land loans is generally fixed for 20 years.
9


Single-family residential loans. The Bank primarily originates 30 year fixed-rate mortgage loans secured by single-family residences. Moreover, it is the Bank's general policy to include in the documentation evidencing its conventional mortgage loans a due-on-sale clause, which facilitates adjustment of interest rates on such loans when the property securing the loan is sold or transferred.
All of the Bank's mortgage lending is subject to written, nondiscriminatory underwriting standards, loan origination procedures and lending policies approved by the Company's Board of Directors (the "Board"). Property valuations are required on all real estate loans. Appraisals are prepared by independent appraisers, reviewed by staff of the Bank, and approved by the Bank's management. Property evaluations are sometimes utilized in lieu of appraisals on single-family real estate loans of $250,000 or less and are reviewed by the Bank's staff. Detailed loan applications are obtained to determine the borrower's ability to repay and the more significant items on these applications are verified through the use of credit reports, financial statements or written confirmations.
Depending on the size of the loan involved, a varying number of officers of the Bank must approve the loan application before the loan can be granted. Federal guidelines limit the amount of a real estate loan made to a specified percentage of the value of the property securing the loan, as determined by an evaluation at the time the loan is originated. This is referred to as the loan-to-value ratio. The Board sets the maximum loan-to-value ratios for each type of real estate loan offered by the Bank.
When establishing general reserves for loans with loan-to-value ratios exceeding 80% that are not insured by private mortgage insurance, the Bank considers the additional risk inherent in these products, as well as their relative loan loss experience, and provides reserves when deemed appropriate. The total balance for loans with loan-to-value ratios exceeding 80% at origination as of September 30, 2020, was $314,242,000, with allocated reserves of $10,123,000.
Consumer loans. The Bank's non-mortgage consumer loan portfolio consists of prime quality student loans acquired from an independent financial investment firm that retains 1% of each loan, plus various other non-mortgage consumer loans including personal lines of credit.

Home equity loans. The Bank extends revolving lines of credit to consumers that are secured by a first or second mortgage on a single family residence. The interest rate on these loans adjusts monthly indexed to prime. Total loan-to-value ratios when combined with any underlying first liens held by the Bank are limited to 85% or less. Total loan-to-value ratios are limited to 80% or less when underlying first liens are held by any other investor. Loan terms are a ten year draw period followed by a fifteen year amortization period.
Origination and Purchase of Loans. The Bank has general authority to lend anywhere in the United States; however, its primary lending areas are within the states of Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico and Texas. Loan originations come from a variety of sources. Residential loan originations result from referrals from real estate brokers, walk-in customers, purchasers of property in connection with builder projects that are financed by the Bank, mortgage brokers and refinance activity for existing customers. Business purpose loans are obtained primarily by direct solicitation of borrowers and ongoing relationships.

The Bank also purchases loans and mortgage-backed securities when lending rates and mortgage volume for new loan originations in its market area do not fulfill its needs.

The table below shows the Company's total loan origination, purchase and repayment activities.

10


Twelve Months Ended September 30,20202019201820172016
 (In thousands)
Loans originated (1):
Commercial loans
Multi-family$403,118 $210,589 $272,046 $299,359 $361,261 
Commercial Real Estate466,322 343,172 274,242 443,687 353,265 
Commercial & Industrial2,168,908 1,020,296 869,337 931,840 1,051,950 
Construction1,457,602 1,271,167 1,068,443 1,081,464 900,649 
Land – Acquisition & Development88,379 123,758 85,208 79,876 59,511 
          Total commercial loans4,584,329 2,968,982 2,569,276 2,836,226 2,726,636 
Consumer loans
Single-family residential910,571 547,057 621,431 757,116 692,575 
Construction – custom576,342 457,328 523,951 530,435 421,816 
Land – Consumer Lot Loans51,678 37,125 33,820 39,151 29,661 
HELOC93,285 101,399 82,508 72,913 74,538 
Consumer4,395 8,580 3,008 3,137 3,308 
          Total consumer loans1,636,271 1,151,489 1,264,718 1,402,752 1,221,898 
Total loans originated6,220,600 4,120,471 3,833,994 4,238,978 3,948,534 
Loans purchased15,456 — 143,605 72,856 105,420 
Loan principal repayments(5,096,622)(3,638,622)(3,335,896)(3,099,851)(2,935,167)
Net change in loans in process, discounts, etc. (2)
(277,692)(28,355)(47,244)(240,281)(378,501)
Net loan activity increase (decrease)$861,742 $453,494 $594,459 $971,702 $740,286 
Beginning balance$11,930,575 $11,477,081 $10,882,622 $9,910,920 $9,170,634 
Ending balance$12,792,317 $11,930,575 $11,477,081 $10,882,622 $9,910,920 
 ___________________
(1)Includes undisbursed loan in process.
(2)Includes non-cash transactions.

Interest Rates, Loan Fees and Service Charges. Interest rates charged by the Bank on mortgage loans are primarily determined by the competitive loan rates offered in its lending areas and in the secondary market. Mortgage loan rates reflect factors such as general interest rates, the supply of money available to the industry and the demand for such loans. General economic conditions, the regulatory programs and policies of federal and state agencies, including the FRB’s monetary policies, changes in tax laws and governmental budgetary programs influence these factors.
The Bank receives fees for originating loans in addition to various fees and charges related to existing loans, including prepayment charges, late charges and assumption fees. In making one-to-four- family home mortgage loans, the Bank normally charges an origination fee and as part of the loan application, the borrower pays the Bank for out-of-pocket costs, such as the appraisal fee, whether or not the borrower closes the loan. The interest rate charged is normally the prevailing rate at the time the loan application is approved and accepted. In the case of construction loans, the Bank normally charges an origination fee. Loan origination fees and other terms of multi-family residential loans are individually negotiated.
Non-Performing Assets. When a borrower violates a condition of a loan, the Bank attempts to cure the default by contacting the borrower. In most cases, defaults are cured promptly. If the default is not cured within an appropriate time frame, typically 90 days, the Bank may institute appropriate action to collect the loan, such as making demand for payment or initiating foreclosure proceedings on the collateral. If foreclosure occurs, the collateral will typically be sold at public auction and may be purchased by the Bank.
Loans are placed on nonaccrual status when, in the judgment of management, the probability of collecting interest or principal is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days past due or more. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.
11


The Bank will consider modifying the interest rate and terms of a loan if it determines that a modification is deemed to be the best option available for collection in full or to minimize the loss to the Bank. Most loans restructured in troubled debt restructurings ("TDRs") are accruing and performing loans where the borrower has proactively approached the Bank about a modification due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The modification of these loans is typically a payment reduction through a rate reduction of from 100 to 200 bps for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness generally is not an available option for restructured loans. As of September 30, 2020, single-family residential loans comprised 93.6% of restructured loans. The Bank reserves for restructured loans within its pool based general reserve methodology, except in instances where management considers it appropriate to evaluate individually.
Real estate acquired by foreclosure or deed-in-lieu thereof (“REO” or “Real Estate Owned”) is classified as real estate held for sale. When property is acquired, it is recorded at the fair market value less estimated selling costs at the date of acquisition. Interest accrual ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expensed as incurred. Costs incurred for the improvement or development of such property is capitalized. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information.
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The following table sets forth information regarding the Company's restructured and non-accrual loans and REO.
 
September 30,20202019201820172016
 (In thousands)
Performing restructured loans$89,072 $116,659 $150,667 $202,272 $251,583 
Non-performing restructured loans2,336 5,018 6,191 5,105 9,948 
Total restructured loans91,408 121,677 156,858 207,377 261,531 
Non-accrual loans:
Commercial loans
Multi-family— — 27,643 27,930 33,148 
Commercial real estate3,771 5,835 2,427 — — 
Commercial & industrial329 1,292 — 91 — 
Construction1,669 — 920 296 58 
Land – acquisition & development— 169 787 605 510 
  Total commercial loans5,769 7,296 31,777 28,922 33,716 
Consumer loans
Single-family residential22,431 25,271 — 139 776 
Construction – custom— — 8,971 11,815 7,100 
Land – consumer lot loans243 246 14,394 8,082 583 
HELOC553 907 523 531 239 
Consumer60 11 21 91 — 
  Total consumer loans23,287 26,435 23,909 20,658 8,698 
Total non-accrual loans (1)29,056 33,731 55,686 49,580 42,414 
Real estate owned4,966 6,781 11,298 20,658 29,027 
Other property owned3,673 3,314 3,109 — — 
Total non-performing assets37,695 43,826 70,093 70,238 71,441 
Total non-performing assets and performing restructured loans$126,767 $160,485 $220,760 $272,510 $323,024 
Total non-performing assets and restructured loans as a percent of total assets0.67 %0.97 %1.39 %1.79 %2.17 %
Total non-performing assets to total assets0.20 %0.27 %0.44 %0.46 %0.48 %
 ___________________
(1)     For the year ended September 30, 2020, the Company recognized $3,748,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $1,329,000 for the same period had these loans performed according to their original contract terms. The recognized interest income may include more than twelve months of interest for some of the non-accrual loans that were brought current or paid off. In addition to the non-accrual loans reflected in the above table, the Company had $379,569,000 of loans that were less than 90 days delinquent at September 30, 2020 but were classified as substandard for one or more reasons. If these loans were deemed non-performing, the Company's ratio of total non-performing assets and performing restructured loans as a percent of total assets would have increased to 2.69% at September 30, 2020. For a discussion of the Company's policy for placing loans on nonaccrual status, see Note A to the Consolidated Financial Statements included in Item 8 hereof.

Allowance for Credit Losses. The Company maintains an allowance for credit losses ("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 credit 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
13


for each loan type, for example, the impact of COVID-19 and related economic uncertainty surrounding the pandemic. 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 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 as compared to the periods for which historical loss experience was used to arrive at the quantitative portion of the ACL 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, 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. Unfunded commitments tend to vary depending on the Company's loan mix and the proportionate share of commercial loans.
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 estimated.
The following table provides detail regarding the Company's allowance for credit losses.
 
14


Twelve Months Ended September 30,20202019201820172016
 (In thousands)
Beginning balance$131,534 $129,257 $123,073 $113,494 $106,829 
Charge-offs:
Commercial loans
Multi-Family— — — — — 
Commercial Real Estate111 428 36 11 103 
Commercial & Industrial Loans4,196 5,782 3,574 173 941 
Construction— — — — — 
Land – Acquisition & Development11 107 13 280 42 
   Total commercial loans4,318 6,317 3,623 464 1,086 
Consumer loans
Single-Family Residential131 268 1,142 1,229 3,106 
Construction – Custom— 1,973 50 16 60 
Land – Consumer Lot Loans237 804 67 17 732 
HELOC— 1,086 668 90 54 
Consumer1,069 1,028 382 884 962 
   Total consumer loans1,437 5,159 2,309 2,236 4,914 
5,755 11,476 5,932 2,700 6,000 
Recoveries:
Commercial loans
Multi-Family498 — — — — 
Commercial Real Estate2,447 1,102 189 1,684 1,812 
Commercial & Industrial Loans443 3,443 714 1,833 2,933 
Construction188 99 — — 745 
Land – Acquisition & Development2,070 7,457 14,223 11,038 8,220 
   Total commercial loans5,646 12,101 15,126 14,555 13,710 
Consumer loans
Single-Family Residential1,394 1,020 757 653 3,251 
Construction – Custom— — — — 60 
Land – Consumer Lot Loans639 719 35 481 
HELOC95 46 71 21 21 
Consumer1,252 1,167 993 1,297 2,018 
   Total consumer loans3,380 2,952 1,856 2,452 5,355 
9,026 15,053 16,982 17,007 19,065 
Net charge-offs (recoveries)(3,271)(3,577)(11,050)(14,307)(13,065)
ASC 326 Adoption Impact17,750 — — — — 
Provision (release) for loan losses and transfers14,400 (1,300)(4,866)(4,728)(6,400)
Ending balance (1)$166,955 $131,534 $129,257 $123,073 $113,494 
Ratio of net charge-offs (recoveries) to average loans outstanding(0.03)%(0.03)%(0.10)%(0.14)%(0.14)%
 __________________
(1) This does not include a reserve for unfunded commitments of $25,000,000, $6,900,000, $7,250,000, $7,750,000 and $3,235,000 as of September 30, 2020, 2019, 2018, 2017 and 2016 respectively.


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The following table sets forth the amount of the Company’s allowance for loan losses by loan class.
 
September 30,20202019201820172016
 AllowanceLoans to Total Loans (1)Coverage Ratio (2)AllowanceLoans to Total Loans (1)Coverage Ratio (2)AllowanceLoans to Total Loans (1)Coverage Ratio (2)AllowanceLoans to Total Loans (1)Coverage Ratio (2)AllowanceLoans to Total Loans (1)Coverage Ratio (2)
 ($ in thousands)
Commercial loans
Multi-family$13,853 11.8 %0.9 %$7,391 11.7 %0.5 %$8,329 11.9 %0.6 %$7,862 11.8 %0.6 %$6,925 10.3 %0.6 %
Commercial real estate22,516 14.4 1.2 13,170 13.5 0.8 11,852 12.5 0.8 11,818 12.8 0.8 8,588 10.0 0.9 
Commercial & industrial38,665 16.5 1.8 31,450 10.5 2.5 28,702 9.8 2.5 28,524 9.9 2.6 28,008 8.9 2.9 
Construction24,156 10.5 1.8 32,304 9.6 2.8 31,317 9.1 3.0 24,556 7.2 3.1 19,838 10.1 4.0 
Land – acquisition & development10,733 1.2 7.0 9,155 1.3 5.7 7,978 1.1 6.5 6,829 1.0 6.5 6,023 1.1 6.6 
   Total commercial loans109,923 93,470 88,178 79,589 69,382 
Consumer loans
Single-family residential45,186 40.8 0.9 30,988 48.2 0.5 33,033 49.7 0.6 36,892 51.8 0.6 37,796 51.5 0.7 
Construction – custom3,555 2.3 1.2 1,369 2.1 0.5 1,842 2.5 0.6 1,944 2.5 0.7 1,080 4.3 0.5 
Land – consumer lot loans2,729 0.8 2.7 2,143 0.8 2.2 2,164 0.8 2.2 2,649 0.9 2.7 2,535 1.0 2.7 
HELOC2,571 1.1 1.8 1,103 1.2 0.8 781 1.1 0.6 855 1.3 0.6 813 1.3 0.6 
Consumer2,991 0.6 3.6 2,461 1.1 1.9 3,259 1.5 1.9 1,144 0.8 1.4 1,888 1.3 1.4 
   Total consumer loans57,032 38,064 41,079 43,484 44,112 
       Covered loans— — — — — — — — — 0.2 
Total allowance for loan losses (3)$166,955 100 %$131,534 100 %$129,257 100 %$123,073 100 %$113,494 100 %
 ___________________
(1)Represents the loans receivable for each respective loan class as a % of total loans receivable.
(2)Represents the allowance for each respective loan class as a % of loans receivable for that same loan class.
(3)This does not include a reserve for unfunded commitments of $25,000,000, $6,900,000, $7,250,000, $7,750,000 and $3,235,000 as of September 30, 2020, 2019, 2018, 2017 and 2016, respectively.

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Investment Activities
As a national association, the Bank is obligated to maintain adequate liquidity and does so by holding cash and cash equivalents and by investing in securities. These investments may include, among other things, certain certificates of deposit, repurchase agreements, bankers’ acceptances, loans to financial institutions whose deposits are federally-insured, federal funds, United States government and agency obligations and mortgage-backed securities.
The following table sets forth the composition of the Company’s investment portfolio. 

September 30,202020192018
 Amortized
Cost
Fair ValueAmortized
Cost
Fair ValueAmortized
Cost
Fair Value
 (In thousands)
U.S. government and agency securities$18,448 $18,824 $21,049 $21,088 $22,592 $21,386 
Asset-backed securities944,778 936,917 251,305 249,690 186,379 185,907 
Equity securities— — — — 500 488 
Corporate debt securities279,655 287,184 206,834 209,763 183,727 184,695 
Municipal bonds37,505 38,315 21,733 22,642 21,721 22,978 
Agency pass-through certificates1,628,647 1,688,768 2,385,630 2,430,647 2,518,512 2,429,783 
Commercial MBS6,904 6,852 15,000 15,007 18,460 18,490 
$2,915,937 $2,976,860 $2,901,551 $2,948,837 $2,951,891 $2,863,727 

The table below shows the investment portfolio categorized by maturity band. 

September 30, 2020Amortized
Cost
Weighted Average Yield
 ($ in thousands)
Due in less than 1 year$54,209 1.22 %
Due after 1 year through 5 years149,981 1.61 
Due after 5 years through 10 years153,894 1.40 
Due after 10 years2,557,853 2.36 
$2,915,937 2.25 %

Sources of Funds

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

Deposits. The Bank relies on a mix of deposit types, including business and personal checking accounts, term certificates of deposit, and other savings deposit alternatives that have no fixed term, such as money market accounts and passbook savings accounts. The Bank offers several consumer checking account products, both interest bearing and non-interest bearing and three business checking accounts, two of which target small businesses with relatively simple and straightforward banking needs and one for larger, more complex business depositors with an account that prices monthly based on the volume and type of activity. Savings and money market accounts are offered to both businesses and consumers, with interest paid after certain threshold amounts are exceeded.
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Time deposits 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 of interest. Early withdrawal penalty fee income for the years ended 2020, 2019 and 2018 amounted to $539,000, $895,000 and $756,000, respectively.

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

The following table sets forth certain information relating to the Company’s deposits.
 
September 30,202020192018
 AmountRateAmountRateAmountRate
 ($ in thousands)
Balance by interest rate:
Checking accounts$5,193,6470.13 %$3,605,9190.34 %$3,179,7460.28 %
Savings accounts872,087 0.11 753,573 0.13 836,501 0.11 
Money market accounts3,740,698 0.30 2,724,309 0.82 2,566,096 0.65 
9,806,432 7,083,801 6,582,343 
Fixed-rate time deposit accounts:
Under 1.00%920,220 21,281 629,589 
1.00% to 1.99%2,967,345 3,588,689 3,761,543 
2.00% to 2.99%85,533 1,294,889 413,671 
3.00% to 3.99%94 2,104 — 
3,973,192 4,906,963 4,804,803 
$13,779,624 $11,990,764 $11,387,146 

The following table sets forth, by various interest rate categories, the amount of fixed-rate time deposits that mature during the periods indicated. 
 Maturing in
September 30, 20201 to 3
Months
4 to 6
Months
7 to 12
Months
13 to 24
Months
25 to 36
Months
37 to 60
Months
Total
 (In thousands)
Fixed-rate time deposits:
Under 1.00%$61,721 $4,579 $606,141 $215,316 $— $32,464 $920,221 
1.00% to 1.99%1,176,463 1,277,345 502 281,986 111,204 119,844 2,967,344 
2.00% to 2.99%— 127 538 34,868 — 50,000 85,533 
3.00% to 3.99%— — — 94 — — 94 
Total$1,238,184 $1,282,051 $607,181 $532,264 $111,204 $202,308 $3,973,192 

Historically, a significant number of time deposit account holders roll over their balances into new time deposits of the same term at the Bank’s then current rate. To ensure a continuity of this trend, the Bank expects to continue to offer market rates of interest. The ability to retain maturing time deposits is difficult to project; however, the Bank believes that by competitively pricing these certificates, levels deemed appropriate by management can be achieved on a continuing basis.
At September 30, 2020, the Bank had $670,235,000 of time deposits in amounts of $250,000 or more outstanding, maturing as follows: $218,142,000 within 3 months; $188,373,000 over 3 months through 6 months; $78,014,000 over 6 months through 12 months; and $185,706,000 thereafter.


Borrowings. The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") for up to 45% of total assets, subject to availability of collateral. The Bank obtains advances from the FHLB upon the security of the FHLB capital stock it owns and certain of its loans, provided certain standards related to credit worthiness have been met. See “Regulation-
18


Washington Federal-Federal Home Loan Bank System” below. Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes acceptable uses to which the advances pursuant to each program may be put, as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of assets or the Company's credit worthiness. FHLB advances have, from time to time, been available to meet seasonal and other withdrawals of savings accounts and to expand the Bank's lending program. The Bank had $2,700,000,000 of FHLB advances outstanding at September 30, 2020.
The Bank may need to borrow funds for short periods of time to meet day-to-day financing needs. In these instances, funds are borrowed from other financial institutions or the Federal Reserve, for periods generally ranging from one to seven days at the then current borrowing rate. At September 30, 2020, the Bank had no such short-term borrowings.
 
The following table presents additional information regarding the Company's borrowings.
 
Twelve Months Ended September 30,202020192018
 ($ in thousands)
FHLB advances:
Average balance outstanding$2,532,596 $2,533,890 $2,384,795 
Maximum amount outstanding at any month-end during the period3,050,000 2,665,000 2,620,000 
Weighted-average interest rate, net of cash flow hedges, during the period (1)2.03 %2.69 %2.62 %
__________________
(1)Interest expense divided by average daily balances.

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Other Ratios
The following table sets forth certain ratios related to the Company.
 
 Twelve Months Ended September 30,
 202020192018
Return on assets (1)1.00 %1.28 %1.31 %
Return on equity (2)8.63 10.46 10.16 
Average equity to average assets10.72 12.34 12.59 
Dividend payout ratio (3)38.34 30.11 27.47 
___________________
(1)Net income divided by average total assets.
(2)Net income divided by average equity.
(3)Dividends paid per share divided by net income per share.

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
 
 Twelve Months Ended September 30,
 2020 vs. 2019
Increase (Decrease) Due to
2019 vs. 2018
Increase (Decrease) Due to
2018 vs. 2017
Increase (Decrease) Due to
 VolumeRateTotalVolumeRateTotalVolumeRateTotal
 (In thousands)(In thousands)(In thousands)
Interest income:
Loan portfolio$21,197 $(43,585)$(22,388)$28,489 $23,800 $52,289 $36,820 $8,464 $45,284 
Mortgage-backed securities(13,094)(12,079)(25,173)298 3,780 4,078 (418)10,213 9,795 
Investments (1)19,566 (22,206)(2,640)3,878 4,138 8,016 (2,970)6,056 3,086 
All interest-earning assets27,669 (77,870)(50,201)32,665 31,718 64,383 33,432 24,733 58,165 
Interest expense:
Customer accounts9,781 (31,685)(21,904)3,992 45,732 49,724 2,371 18,098 20,469 
FHLB advances and other borrowings(35)(16,710)(16,745)4,020 1,718 5,738 6,160 (8,677)(2,517)
All interest-bearing liabilities9,746 (48,395)(38,649)8,012 47,450 55,462 8,531 9,421 17,952 
Change in net interest income$17,923 $(29,475)$(11,552)$24,653 $(15,732)$8,921 $24,901 $15,312 $40,213 
___________________
(1)Includes interest on cash equivalents and dividends on stock of the FHLB of Des Moines and FRB of San Francisco.

Interest Rate Risk

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

The net interest margin is measured using the net interest income divided by average interest-earning assets for the period. The net interest margin decreased to 2.93% for the year ended September 30, 2020, from 3.16% for the year ended September 30, 2019. The yield on interest-earning assets decreased 56 basis points to 3.86% and the cost of interest-bearing liabilities decreased by 35 basis points to 1.15%. The lower yield on interest-earning assets is due primarily to the rapid drop in short-term rates by the Federal Reserve Bank in response to the COVID-19 pandemic which resulted in variable rate loans decreasing in yield and repayments of fixed rate loans with higher yields than newly originated loans, as well as prepayments of fixed rate mortgage-backed securities at higher rates than those on newly purchased mortgage-backed securities and other investments. The lower cost on interest-bearing liabilities is due primarily to the rapid drop in short-term rates by the Federal Reserve Bank discussed above which resulted in a drop in interest rates on customer deposits and short-term FHLB borrowings.

Interest rate risk arises in part due to the Bank's significant holdings of fixed-rate single-family home loans, which are longer-term than customer accounts that constitute its primary liabilities. Accordingly, assets do not usually respond as quickly to changes in interest rates as liabilities. In the absence of management action, net interest income can be expected to decline when interest rates rise and to expand when interest rates fall. Shortening the maturity or repricing of the investment portfolio is one action that management can take. The composition of the investment portfolio was 33.3% variable rate and 66.7% fixed rate as of September 30, 2020 to provide some protection against rising rates. In addition, the Bank is producing more commercial loans that have shorter terms and/or variable rates and has increased less rate sensitive transaction deposit accounts to 71.2% of the deposit portfolio.

The Company's balance sheet strategy, in conjunction with low operating costs, has allowed the Company to manage interest rate risk, within guidelines established by the Board, through all interest rate cycles. It is management's objective to grow the dollar amount of net interest income, through the rate cycles, acknowledging that there will be some periods of time when that will not be feasible. Cash and cash equivalents of $1,702,977,000 and shareholders' equity of $2,014,133,000 provide management with flexibility in managing interest rate risk.

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

wfsl-20200930_g4.jpg

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The following table shows the potential impact of rising interest rates on net income for one year. The Company's focus is primarily on the impact of rising rates, given the negative gap position which implies that generally when rates fall income should increase and when rates increase income is at risk to decrease (assuming no change in the size or composition of the balance sheet).
It is important to note that this is not a forecast or prediction of future events, but is used as a tool for measuring potential risk. This analysis assumes zero balance sheet growth and a constant percentage composition of assets and liabilities.
 
Potential Impact on Net Interest Income
Basis Point Increase in Interest RatesSeptember 30, 2020September 30, 2019
 (In thousands, except percentages)
100$7,931 1.82 %$3,859 0.85 %
20014,742 3.38 %6,098 1.35 %
30018,445 4.23 %6,624 1.46 %

Actual results will differ from the assumptions used in this model, as management monitors and adjusts both the size and the composition of the balance sheet in order to respond to changing interest rates. In a rising interest rate environment, it is likely that the Company will grow its balance sheet to offset margin compression that may occur. Improvement in the net interest income sensitivity during the year is primarily the result of interest rate swap activity and extension of the maturity of certain borrowings.

Another method used to quantify interest rate risk is the net portfolio value (“NPV”) analysis. This analysis calculates the difference between the present value of interest-bearing liabilities and the present value of expected cash flows from interest-earning assets and off-balance-sheet contracts. The following tables set forth an analysis of the Company’s interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (measured in 100-basis-point increments).
The tables below express the NPV under varying interest scenarios.

 
September 30, 2020
Change in
Interest Rates
Estimated
NPV Amount
Estimated (Decrease) in NPV
Amount
NPV as
% of Assets
(Basis Points)(In thousands)(In thousands) 
300 $2,690,713 $(3,238)15.22 %
200 2,835,361 141,410 15.55 
100 2,845,411 151,460 15.20 
No change2,693,951 — 14.10 


September 30, 2019
Change in
Interest Rates
Estimated
NPV Amount
Estimated (Decrease) in NPV
Amount
NPV as
% of Assets
(Basis Points)(In thousands)(In thousands) 
300 $1,934,212 $(531,677)12.64 %
200 2,208,252 (257,637)13.90 
100 2,396,037 (69,852)14.59 
No change2,465,889 — 14.61 

As of September 30, 2020, the Company was in compliance with all of its interest rate risk policy guidelines.

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Subsidiaries
The Company is a bank holding company that conducts its primary business through its only directly-owned subsidiary, the Bank. The Bank has a national bank charter with the OCC. The Bank has four active wholly-owned subsidiaries, discussed further below.
WAFD Insurance Group, Inc. is incorporated under the laws of the state of Washington and is an insurance agency that offers a full line of individual and business insurance policies to customers of the Bank, as well as to the general public. As of September 30, 2020 and September 30, 2019, WAFD Insurance Group, Inc. had total assets of $19,607,000 and $16,939,000, respectively.
Statewide Mortgage Services Company is incorporated under the laws of the state of Washington and it holds and markets real estate owned. As of September 30, 2020 and September 30, 2019, Statewide Mortgage Services Company had total assets of $785,000 and $785,000, respectively.
Washington Services, Inc. is incorporated under the laws of the state of Washington. It acts as a trustee under deeds of trust as to which the Bank is beneficiary. As of September 30, 2020 and September 30, 2019, Washington Services, Inc. had total assets of $13,000 and $13,000, respectively.

Pike Street Labs, LLC was formed in 2019 and is organized under the laws of the state of Washington. It provides data and technology services to the Bank. As of September 30, 2020 and September 30, 2019, Pike Street Labs had total assets of $681,000 and zero, respectively.
Regulation
The Company operates in a highly regulated industry. The regulatory structure governing the Company’s operations is designed primarily for the protection of the deposit insurance funds and consumers, and not to benefit our shareholders. As part of this regulatory structure, the Company is subject to policies and other guidance developed by the regulatory agencies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Under this structure, regulators have broad discretion to impose restrictions and limitations on the Company’s operations if they determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

Failure to comply with applicable laws and regulations can result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal agreements and cease and desist orders. In order to comply with regulatory requirements, the Bank has and will continue to incur additional significant costs in order to bring programs and operations into compliance.

On October 9, 2013, the CFPB entered a Consent Order against the Bank that required the Bank to pay a civil money penalty of $34,000, and to adopt an enhanced compliance program related to reporting Home Mortgage Disclosure Act ("HMDA") data. The Bank has adopted an enhanced HMDA program, which continues to be subject to review by the CFPB. On October 27, 2020 the CFPB entered a second Consent Order against the Bank for violations related to the Bank’s HMDA reporting obligations. The 2020 Consent Order required the Bank to pay a $200,000 civil money penalty and develop and implement a HMDA compliance management system.
Set forth below is a description of certain laws and regulations that relate to the regulation of the Company and the Bank. The description of these laws and regulations, and descriptions of laws and regulations contained elsewhere herein, do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) amended certain federal banking laws.

Human Capital
At WaFd Bank, our culture is defined by our corporate values of integrity, teamwork, ownership, simplicity, service and discipline. We value our employees by investing in a healthy work-life balance, competitive compensation and benefit packages and a vibrant, team-oriented environment centered on professional service and open communication amongst employees. We strive to build and maintain a high-performing culture and be an “employer of choice” by creating a work environment that attracts and retains outstanding, engaged employees who embody our company mantra of “Love what you do. Make a difference.”
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Demographics. As of September 30, 2020 we employed 2,080 full and part time employees across our eight-state footprint. None of these employees are represented by a collective bargaining agreement. During fiscal year 2020 we hired 519 employees. Our voluntary turnover rate was 17.64% in fiscal year 2020 and has declined for five consecutive years.

Diversity and Inclusion. We strive toward having a powerful and diverse team of employees, knowing we are better together with our combined wisdom and intellect. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the differences between people. To accomplish this, we have established a Diversity & Inclusion Advisory Council made up of 15 employee representatives throughout our footprint. We continued our commitment to equal employment opportunity through a robust affirmative action plan which includes annual compensation analyses and ongoing reviews of our selection and hiring practices alongside a continued focus on building and maintaining a diverse workforce.

As of September 30, 2020, the population of our workforce was as follows:

ETHNICITY% of Total
American Indian or Alaska Native1.10 %
Asian7.93 %
Black or African American2.15 %
Hispanic or Latino15.38 %
Hawaiian Native or other Pacific Islander0.76 %
Two or more races3.01 %
White69.67 %



wfsl-20200930_g9.jpg


Compensation and Benefits. We provide a competitive compensation and benefits program to help meet the needs of our employees. In addition to salaries, these programs include annual bonuses, stock awards, a 401(k) Plan with an employer matching contribution in addition to an employer annual contribution, healthcare and insurance benefits, health savings, flexible spending accounts, paid time off, family leave and an employee assistance program.

Learning and Development. We invest in the growth and development of our employees by providing a multi-dimensional approach to learning that empowers, intellectually grows, and professionally develops our colleagues. Our employees receive continuing education courses that are relevant to the banking industry and their job function within the
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Company. In addition, we have created learning paths for specific positions that are designed to encourage an employee’s advancement and growth within our organization. We also offer a peer mentor program, leadership and customer service training. These resources provide employees with the skills they need to achieve their career goals, build management skills and become leaders within our Company.

Corporate Social and Environmental Responsibility
We recognize the social and environmental responsibility that arises from the impact of our activities on peoples’ lives and society as a whole. To comply with this responsibility, we have adopted a Corporate and Social Environmental Policy that integrates social, environmental and ethical concerns into our daily business activities and our approach to stakeholder relationships. Through this policy, we strive to carry out our banking activities in a responsible manner, placing the financial needs of our clients and economic health of our communities at the core of our focus.

The Company

General. The Company is registered as a bank holding company and is subject to regulation, examination, supervision and reporting requirements of the Federal Reserve.

Restrictions on Activities and Acquisitions. Bank holding companies are subject to a variety of restrictions on their activities and the acquisitions they can make. Generally, the activities or acquisition of a bank holding company that is not a financial holding company are limited to those that constitute banking or managing or controlling banks or which are closely related to banking. In addition, without the prior approval of the Federal Reserve, bank holding companies are generally prohibited from acquiring more than 5% of the outstanding shares of any class of voting securities of a bank or bank holding company, taking any action that causes a bank to become a subsidiary of the bank holding company, acquiring all or substantially all of the assets of a bank, or merging with another bank holding company.

Control of Company or Bank. Pursuant to the Change in Bank Control Act, (the “CIBC Act”) individuals, corporations or other entities acquiring Company equity interests may, alone or together with other investors, be deemed to control a holding company or a bank. If an acquisition is deemed to constitute control of the holding company or bank and is not subject to approval under the Bank Holding Company Act or certain other statutes, such person or group will be required to file a notice under the CIBC Act. Generally, ownership of, or power to vote, more than 25% of any class of voting securities constitutes control. In the case of a bank or bank holding company the securities of which are registered with the Securities and Exchange Commission ("SEC"), ownership of or power to vote more than 10% of any class of voting securities creates a presumption of control.

Source of Strength. Under long-standing Federal Reserve policy, a bank holding company is expected to serve as a source of financial and management strength to its subsidiary bank. Under this policy, a bank holding company is expected to stand ready to provide adequate capital funds to its subsidiary bank during periods of financial adversity and to maintain financial flexibility and capital raising capacity to assist its subsidiary bank. The Dodd-Frank Act codified the source of strength doctrine by adopting a statutory provision requiring, among other things, that bank holding companies serve as a source of financial strength to their subsidiary banks.

Restrictions on Company Dividends. The Company’s ability to pay dividends to its shareholders is affected by several factors. Since the Company is a separate legal entity from the Bank and its subsidiaries and does not have significant operations of its own, the Company may not be able to pay dividends to its shareholders if the Bank is unable to pay dividends to the Company. The Bank’s ability to pay dividends is subject to various regulatory restrictions.

In addition, the Company’s ability to pay dividends is subject to rules and policies of the Federal Reserve. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends only out of income available over the past year and only if prospective earnings retention is consistent with the company’s expected future needs and financial condition. Capital rules adopted by the Federal Reserve, effective January 2015, may limit the Company’s ability to pay dividends if the Company fails to meet certain requirements under the rules.

See “Washington Federal Bank, National Association, wholly-owned subsidiary ("Bank" or "WaFd Bank") - Restrictions on Dividends.”

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Since the Company is a Washington state corporation, it is also subject to restrictions under Washington corporate law relating to dividends. Generally, under Washington law, a corporation may not pay a dividend if, after giving effect to the dividend, the corporation would be unable to pay its liabilities as they become due in the ordinary course of business or the corporation’s total assets would be less than the sum of its total liabilities plus (with some exceptions) the amount that would be needed, if the corporation were to be dissolved at the time of the dividend payment, to satisfy the dissolution preferences of senior equity securities.

Washington Federal Bank, National Association, wholly-owned operating subsidiary ("Bank" or "WaFd Bank")

General. The Bank is a federally-chartered national bank and certain deposits of the bank are federally insured and backed by the full faith and credit of the United States government. Accordingly, the Bank is subject to broad federal regulation and oversight by its primary regulator, the OCC, extending to all aspects of its operations. The Bank is a member of the FDIC and its deposits are insured up to applicable limits of the Depository Insurance Fund (“DIF”), which is administered by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Bank.

As a national bank, the Bank is required to be a member of the Federal Reserve. As a member, it is required to purchase and maintain stock in the Federal Reserve Bank of San Francisco (“FRBSF”) in an amount equal to 3.00% of the paid-up capital stock and surplus of the Bank and have available another 3.00% in reserves. At September 30, 2020, the Bank had $24.0 million in FRBSF stock, which was in compliance with this requirement.

Federal Institution Regulations. On July 17, 2013, the Bank completed its conversion from a federally chartered savings association to a national bank charter with the OCC. In addition, the Company became a bank holding company registered with the Federal Reserve. The OCC has extensive authority over the operations of national banks. As part of this authority, national banks are required to file periodic reports with the OCC and are subject to periodic examinations by the OCC. Federal laws and regulations prescribe the investment and lending authority of the Bank, and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations. While the Bank has broad authority to engage in all types of lending activities, a variety of restrictions apply to certain other investments by the Bank.

Financial Modernization. On July 21, 2010 the Dodd-Frank Act became effective. This law has broadly affected the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services industry, and will continue to significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company and the Bank. Some of the changes that are significant to the Company and the Bank include the following:

The CFPB was established on July 21, 2011 and took over responsibility for the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others. The CFPB has broad rule-making authority in this area, and also has primary supervisory and examination authority on these issues over institutions such as the Bank with assets of $10 billion or more. The Dodd-Frank Act also gives the CFPB expanded data collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices.

Interstate Banking. Subject to certain limitations and restrictions, a bank holding company, with prior approval of the Federal Reserve, may acquire an out-of-state bank; banks in states that do not prohibit out-of-state mergers may merge with the approval of the appropriate federal banking agency, and a bank may establish a de novo branch out of state if such branching is permitted by the other state for state banks chartered by such other state.

Insurance of Deposit Accounts. Under the Dodd-Frank Act, the maximum amount of federal deposit insurance coverage was permanently increased from $100,000 to $250,000 per depositor, per institution. Due to the significant number of bank failures and the current balance of the DIF, the Company anticipates continued elevated FDIC premiums for the industry going forward. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. In addition, the Dodd-Frank Act raised the minimum designated reserve ratio, which the FDIC is required to set each year for the DIF, to 1.35%. The Dodd-Frank Act eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The FDIC has established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute.

Transactions with Affiliates; Insider Loans. Under current federal law, all transactions between and among a national bank and its affiliates, including holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit extensions of credit and certain other such transactions by the bank to affiliates to a percentage of the institution's capital and generally such transactions must be collateralized. Generally, all
26


affiliate transactions must be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities that are not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The OCC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a national bank.

Extensions of credit by a national bank to executive officers, directors and principal shareholders are subject to Section 22(h) of the Federal Reserve Act, which, among other things, generally prohibits loans to any such individual where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral. Section 22(h) permits loans to directors, executive officers and principal shareholders made pursuant to a benefit or compensation program that is widely available to employees of a subject bank provided that no preference is given to any officer, director or principal shareholder, or related interest thereto, over any other employee. In addition, the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution's unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

Effective on July 21, 2012, the affiliate transaction rules in Sections 23A and 23B of the Federal Reserve Act were expanded to broaden the definition of affiliate and to apply these rules to securities lending, repurchase agreements and derivatives. These revisions also strengthened collateral requirements and limited Federal Reserve exemptive authority. Further, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders was expanded to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement or a securities lending or borrowing transaction. These provisions have not had a material effect on the Company or the Bank.

Restrictions on Dividends. OCC regulations govern dividends by a national bank. A national bank must file an application for approval of a dividend if:

the total dividends for the applicable calendar year exceed the sum of the institution's net income for that year to date plus the institution's retained net income for the preceding two years;
the institution would not be at least adequately capitalized following the dividend;
the dividend would violate any applicable statute, regulation, agreement or OCC imposed condition; or
the dividend is paid in property other than cash or stock of the bank.
 

Other capital distributions, such as stock repurchases, generally require the approval of the OCC. Failure to meet minimum capital requirements may place certain restrictions on the payment of dividends and stock repurchases. 

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of 11 regional FHLBs that provide funding to their members for making home mortgage loans, as well as loans for affordable housing and community development. Each FHLB serves members within its assigned region and is funded primarily through proceeds derived from the sale of consolidated obligations of the FHLB system. Loans are made to members in accordance with the policies and procedures established by the Board of Directors of the FHLB. At September 30, 2020, FHLB advances to the Company amounted to $2,700,000,000. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. At September 30, 2020, the Company held $118,000,000 in FHLB of Des Moines stock, which was in compliance with this requirement.

Community Reinvestment Act and Fair Lending Laws. National banks have a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OCC to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. Failure to comply with the Fair Lending Laws could result in enforcement actions by the OCC, the CFPB and other federal regulatory agencies, including the U.S. Department of Justice.

USA Patriot Act of 2001. The USA PATRIOT Act of 2001 ("Patriot Act"), through amendments to the federal Bank Secrecy Act (“BSA”), substantially broadened the scope of United States anti money-laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial scope of United States jurisdiction. The United States Treasury Department has issued a number of regulations under the Patriot Act that apply to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to
27


combat money laundering and terrorist financing, or to comply satisfactorily with all relevant Patriot Act and BSA requirements, could have serious legal and reputational consequences for the institution.

On February 28, 2018, pursuant to a Stipulation and Consent to the Issuance of a Consent Order (the “Consent Order”), the Office of the Comptroller of the Currency issued a Consent Order relating to the Bank, the terms of which are intended to further enhance its BSA program. 

The Consent Order requires, among other things, that the Bank: (1) maintain a Compliance Committee of at least three directors; (2) employ a permanent, qualified, and experienced BSA Officer and be provided sufficient staffing and oversight resources; (3) review, update and implement an ongoing BSA risk assessment; (4) ensure adherence to a written program of policies and procedures to provide compliance with the BSA; (5) develop and implement a written program of policies and procedures to ensure timely and appropriate review of transaction activity, disposition of alerts, and timely filing of SARs; (6) develop and implement a written program of policies and procedures to provide for implementation of an automated suspicious activity monitoring system, including appropriate model governance; (7) engage an independent consultant to review account and transaction activity (“Look-Back”); (8) review and update risk-based processes to obtain and analyze appropriate customer due diligence information at the time of account opening and on an ongoing basis; (9) complete independent testing; (10) develop and implement a comprehensive, ongoing BSA and OFAC training program; and (11) submit certain reports to the OCC.

Copies of the Stipulation and the Consent Order were filed with the SEC on March 1, 2018 as exhibits to the Company’s Current Report on Form 8-K. See Item 1A. Risk Factors for additional details.


Regulatory Capital Requirements. Bank holding companies and federally insured banks are required to maintain minimum levels of regulatory capital. The Federal Reserve establishes capital standards applicable to all bank holding companies, and the OCC establishes capital standards applicable to all national banks. The Federal Reserve and the OCC implemented new capital rules, effective January 1, 2015, that substantially amended the existing capital rules for bank holding companies and banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.

The rules require a new capital ratio of common equity Tier 1 capital to risk based assets. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments) as well as accumulated other comprehensive income (“AOCI”) except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI, which the Company and the Bank have done. Tier 1 capital also includes non-cumulative perpetual preferred stock and limited amounts of minority interests. Regulatory deductions from capital include goodwill and intangible assets. The new rules modify the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. Total capital consists of Tier 1 capital and supplementary capital. Supplementary capital consists of certain capital instruments that do not qualify as core capital as well as general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only in an amount equal to the amount of Tier 1 capital.

In determining the required amount of risk-based capital, total assets, including certain off-balance-sheet items, are multiplied by a risk-weight factor based on the risks inherent in the type of assets held by an institution. The risk categories range from 0% for low-risk assets such as U.S. Treasury securities and GNMA securities to 1,250% for various types of loans and other assets deemed to be of higher risk. Single-family residential loans having loan-to-value ratios not exceeding 80% and meeting certain additional criteria, as well as certain multi-family residential loans, qualify for a 50% risk-weight treatment. The book value of each asset is multiplied by the risk factor applicable to the asset category, and the sum of the products of this calculation equals total risk-weighted assets. The rules make changes in the methods of calculating certain risk-based assets, which in turn affects the calculation of risk-based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, among which are commercial real estate, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets.

Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%. In addition, both the Company and the Bank are required to have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. Both the Company and the Bank are required to establish a “conservation buffer,” consisting of common
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equity Tier 1 capital, equal to 2.5%. The capital conservation buffer is designed to ensure that banks build up capital buffers outside periods of stress, which can be drawn down as losses are incurred. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.

The Federal Reserve and the OCC are also authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis. Management believes that the current capital levels of the Company and the Bank are sufficient to be in compliance with the fully phased-in standards under the rules.

Any bank holding company or national bank that fails the capital requirements is subject to possible enforcement actions. Such actions could include a capital directive, a cease and desist or consent order, civil money penalties, restrictions on an institution's operations and/or the appointment of a conservator or receiver. Federal Reserve and OCC capital regulations provide that such supervisory actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.     
For information regarding compliance with each of these capital requirements by the Company and the Bank as of September 30, 2020, see Note P to the Consolidated Financial Statements included in Item 8 hereof.

Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon its capital levels in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors. The federal banking agencies have adopted regulations that implement this statutory framework.

The prompt corrective action rules, which apply to the Bank but not the Company, are modified to include a common equity Tier 1 risk-based ratio and to increase certain other capital requirements for the various thresholds. For example, the requirements for the Bank to be considered well-capitalized under the rules are a 5.0% Tier 1 leverage ratio, a 6.5% common equity Tier 1 risk-based ratio, an 8.0% Tier 1 risk-based capital ratio and a 10.0% total risk-based capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%. 6.0% and 8.0%, respectively.

An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits, generally. Any institution that is neither well capitalized nor adequately capitalized is considered undercapitalized. Federal law authorizes the OCC to reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category. The OCC may not reclassify a significantly undercapitalized institution as critically undercapitalized. As of September 30, 2020, the Bank exceeded the requirements of a well capitalized institution.

Dodd-Frank Act Stress Tests ("DFAST"). On July 6, 2018, bank regulatory agencies (the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency) issued a joint interagency statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA") on financial institutions. The EGRRCPA gave immediate relief from stress testing for applicable bank holding companies but not financial institutions until November 25, 2019. Pursuant to direction from the Bank's regulators, the Bank was provided similar relief and is no longer required to submit company-run annual stress tests. Notwithstanding these amendments to the stress testing requirements, the federal banking agencies indicated through interagency guidance that the capital planning and risk management practices of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process. Although the Bank will continue to monitor its capital consistent with the safety and soundness expectations of the federal regulators, the Bank will no longer conduct company-run stress testing as a result of the legislative and regulatory amendments. The Bank continues to use customized stress testing to support the business and as part of its risk management and capital planning process.

EGRRCPA also enacted several important changes in some technical compliance areas that we believe will help reduce our regulatory burden, including:
 
Prohibiting federal banking regulators from imposing higher capital standards on High Volatility Commercial Real Estate (“HVCRE”) exposures unless they are for acquisition, development or construction (“ADC”), and clarifying ADC status;
Requiring the federal banking agencies to amend the Liquidity Coverage Ratio Rule such that all qualifying investment-grade, liquid and readily-marketable municipal securities are treated as level 2B liquid assets, making them more attractive investment alternatives;
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Exempting from appraisal requirements certain transactions involving real property in rural areas and valued at less than $400,000; and
Directing the Consumer Financial Protection Bureau to provide guidance on the applicability of the TILA-RESPA Integrated Disclosure rule to mortgage assumption transactions and construction-to-permanent home loans, as well the extent to which lenders can rely on model disclosures that do not reflect recent regulatory changes.
 
Despite the improvements for mid-size financial institutions such as the Company that has resulted from EGRRCPA, many  provisions of the Dodd-Frank Act and its implementing regulations remain in place and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, and results of operation. In addition, the EGRRCPA requires the enactment of a number of implementing regulations, the details of which may have a material effect on the ultimate impact of the law.

Taxation

Federal Taxation. For federal and state income tax purposes, the Company reports its income and expenses on the accrual basis method of accounting and files its federal and state income tax returns on a September 30 fiscal year end basis. The Company files consolidated federal and state income tax returns with its subsidiaries. The Company's federal income tax returns are open and subject to potential examination by the IRS for fiscal year 2017 and later.

State Taxation. The states of Washington and Nevada do not have state income taxes. Washington state has a business and occupation tax based on a percentage of gross receipts; however, interest received on loans secured by first mortgages or deeds of trust on non-transient residential properties is not subject to this tax.

The state of Idaho has a corporate income tax with a statutory rate of 6.925% of apportionable income.
The state of Oregon has a corporate excise tax with a statutory rate of 6.6% on the first $1 million of apportionable income and then 7.6% on any excess income over $1 million. There is a minimum tax that applies if the minimum tax exceeds the calculated tax. Beginning in 2020, Oregon also has a new Corporate Activity Tax on gross receipts in addition to the existing corporate excise tax on net income. The new Corporate Activity Tax is imposed on taxable commercial activity in excess of $1 million at the rate of 0.57%, plus a flat tax of $250.
The state of Utah has a corporate franchise tax with a statutory rate of 4.95% of apportionable income.
The state of Arizona has a corporate income tax with a statutory rate of 4.9% of apportionable income.
The state of Texas has a corporate franchise tax with a statutory rate of 0.75% on apportionable taxable margin.
The state of New Mexico has a corporate income tax with a current statutory rate of 4.8% on the first $500,000 of apportionable income, and 5.9% on any excess income over $500,000.
The state of California has a corporate franchise tax with a statutory rate of 10.84% of apportionable income for banks and financial institutions.

Competition

We operate in a highly competitive environment. Our competitors include other national banks, savings associations, community banks, credit unions and other financial intermediaries, and new market participants offering services similar to those that we offer. We compete with some competitors within our geographic market area, and with others on a product specific basis, such as the residential mortgage market. Our ability to compete effectively depends on our ability to provide first-rate, friendly and professional customer service and deliver the banking solutions that our customers want and need. We are also dependent upon our ability to attract and retain employees while managing compensation and other costs.

Availability of Financial Data

Under the Securities Exchange Act of 1934 ("Exchange Act"), the Company is required to file annual, quarterly and current reports, proxy statements and other information with the SEC. We file reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, with the SEC. The public may obtain copies of these reports at the SEC's website: www.sec.gov.

The Company has adopted and posted on its website a code of ethics that applies to its senior financial officers. The Company’s website also includes the charters for its audit committee, compensation committee, risk management committee, nominating and governance committee and regulatory compliance committee. The address for the Company’s website is www.wafdbank.com. The Company will provide a printed copy of any of the aforementioned documents to any requesting shareholder. The information found on our website is not part of this or any other report that we file or furnish to the SEC.
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Item 1A.              Risk Factors

Ownership of our common stock involves risk. Investors should carefully consider, in addition to the other information included in this Annual Report on Form 10-K, the following risk factors. The risks described below may adversely affect our business, financial condition and results of operations. These risks are not the only risks we face; additional risks and uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely affect our business.

Operational Risks
The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.

The spread of COVID-19 has created a global public-health crisis that has impacted household, business, economic, and market conditions, including in the western United States where we conduct nearly all of our business.

During 2020, the most notable impact of the COVID-19 pandemic on our results of operations was a higher provision expense for credit losses. Our provision expense was $21,750,000 in 2020, primarily due to the unfavorable market conditions associated with COVID-19, as compared to a $1,650,000 release of allowance for loan losses for the year ended September 30, 2019. As of September 30, 2020, our allowance for credit losses increased to $191,955,000. Additionally, our operations have been impacted by the need to