What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-18 compared with 2021-11-19 · 47 added, 54 removed, 509 unchanged (17% of the section changed)

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In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date for the previous year.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

For management's review of the factors that affected our results of operations for the years ended September 30, 2021 and 2020, refer to our Annual Report on Form 10-K for the year ended September 30, 2021, which was filed with the Securities and Exchange Commission on November 19, 2021.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility in our reported earnings.

Select information regarding the ACL is below in "Allowance for Credit Losses." For further details, see Note s A and E to the Consolidated Financial Statements in “Item 8.

Select information regarding the ACL is below in "Allowance for Credit Losses." For further details, see Notes A and E to the Consolidated Financial Statements in “Item 8.

Financial Statements and Supplementary Data.”

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ALLOWANCE FOR CREDIT LOSSES

The following table provides detail regarding the Company's allowance for credit losses.

The following table provides detail regarding the Company's allowance for credit losses (periods prior to 2020 applied the incurred loss model as the current expected credit loss methodology ("CECL") was implemented in 2020).

Twelve Months Ended September 30, 2022 2021 2020 2019 2018

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Ratio of net charge-offs (recoveries) to average loans outstanding (0.02) % (0.05) % (0.03) % (0.03) % (0.10) %

__________________

(1) This does not include a reserve for unfunded commitments of $32,500,000, $27,500,000, $25,000,000, $6,900,000 and $7,250,000 as of September 30, 2022, 2021, 2020, 2019 and 2018 respectively.

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The Company recorded a provision for credit losses of $3,000,000 in 2022, compared to a provision of $500,000 for 2021.

The significant provision in 2020 was due to higher expected losses with the onset of the global pandemic.

In 2021, provisioning for net growth in the loan portfolio was mostly offset by releases related to improvements in macroeconomic variables used in the forecast component of the reserve.

In 2022, provisioning for net growth in unfunded commitments and the loan portfolio was mostly offset by improvements in the credit quality of certain loan portfolios related to strong real estate markets and collateral conditions.

For the year ended September 30, 2022, net recoveries were $3,508,000, compared to $6,345,000 in the prior year.

No allowance was recorded as of September 30, 2021 for the $305,162,000 of PPP loans, which are included in the commercial & industrial loan category, due to the government guarantee.

The ratio of the total ACL to total gross loans decreased to 1.22% as of September 30, 2021, as compared to 1.33% as of September 30, 2020.

The decrease was primarily related to improvements in macroeconomic variables used in the forecast component of the ACL.

No allowance was recorded for PPP loans, which are included in the commercial & industrial loan category, due to the government guarantee.

The ratio of the total ACL to total gross loans, excluding PPP loans, decreased to 1.06% as of September 30, 2022, as compared to 1.22% as of September 30, 2021.

The decrease was primarily related to improvements in the credit quality of certain loan portfolios related to strong real estate markets and collateral conditions.

The reserve for unfunded loan commitments was $32,500,000 as of September 30, 2022, compared to $27,500,000 as of September 30, 2021.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth the amount of the Company’s allowance for loan losses by loan portfolio and class.

The following table sets forth the amount of the Company’s allowance for loan losses by loan portfolio and class (periods prior to 2020 applied the incurred loss model as the current expected credit loss methodology ("CECL") was implemented in 2020).

September 30, 2022 2021 2020 2019 2018

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(2) Represents the allowance for each respective loan class as a % of loans receivable for that same loan class.

The underlying commercial & industrial loan balances for September 30, 2022, 2021, 2020 include PPP loans for which no allowance was recorded.

These PPP loan balances were $10,000,000, $312,000,000, and $745,000,000 as of September 30, 2022, 2021, and 2020, respectively.

(3) This does not include a reserve for unfunded commitments of $32,500,000, $27,500,000, $25,000,000, $6,900,000 and $7,250,000 as of September 30, 2022, 2021, 2020, 2019 and 2018, respectively.

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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.

The modification of these loans is typically a payment reduction through a rate reduction of between 100 to 200 bps for a specific term, usually six to twelve months.

Interest-only payments may also be approved during the modification period.

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Non-performing assets increased 2.1% to $44,554,000, or 0.21% of total assets, at September 30, 2022, compared to $43,625,000, or 0.22% of total assets, at September 30, 2021.

The increase was primarily a result of $2,693,000 higher non-accrual loans and $3,238,000 higher real estate owned.

Other property owned of $3,672,000 as of September 30, 2021 is comprised of $896,000 of equipment acquired through foreclosure on a commercial loan and a $2,776,000 government guarantee related to that same loan.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increase was primarily a result of $2,785,000 higher non-accrual loans partially offset by a $1,537,000 decline in real estate owned.

Other property owned of $3,353,000 as of September 30, 2022 is comprised entirely of a government guarantee related to equipment obtained via a commercial loan foreclosure.

TDRs declined to $56,817,000 as of September 30, 2022, from $65,128,000 as of September 30, 2021.

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Non-performing TDRs of $994,000 are included in NPAs.

Total NPAs and performing TDRs as a percent of total assets has declined to 0.55% as of September 30, 2021, from 0.67% as of September 30, 2020.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and performing TDRs as a percent of total assets has declined to 0.48% as of September 30, 2022, from 0.55% as of September 30, 2021.

During 2022, there were TDR additions of $5,950,000 and reductions of $14,261,000 due to prepayments and transfers to REO.

As of September 30, 2022, 82.5% of TDRs are comprised of single-family residential loans.

As of September 30, 2021, real estate owned totaled $8,204,000, an increase of $3,238,000, or 65.2%, from $4,966,000 as of September 30, 2020, as new REO properties were partially offset by sales of foreclosed properties.

As of September 30, 2022, real estate owned totaled $6,667,000, a decrease of $1,537,000, or 18.7%, from $8,204,000 as of September 30, 2021, primarily due to sales of REO properties partially offset by new REO additions.

During 2022, the Company sold real estate owned properties for total net proceeds of $6,978,000.

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Cash and cash equivalents :

Cash and cash equivalents increased to $2,090,809,000 at September 30, 2021, as compared to $1,702,977,000 at September 30, 2020.

The change was primarily due to the $1,762,488,000 increase in customer accounts, the majority of which was used to fund growth in the loan portfolio and pay down FHLB borrowings.

Changes in investment securities balances discussed below also contributed to growth in cash and cash equivalents.

Cash and cash equivalents decreased to $683,965,000 at September 30, 2022, as compared to $2,090,809,000 at September 30, 2021.

The change was primarily due to funding growth in the loan portfolio of $2,279,994,000 partially offset by the $487,458,000 increase in customer accounts and $405,000,000 increase in FHLB borrowings.

Available-for-sale investment securities :

Available-for-sale securities decreased $111,233,000, or 4.9%, during the year ended September 30, 2021, to $2,138,259,000, primarily due to principal repayments of $646,532,000 and sales of $1,499,000, partially offset by purchases of $530,227,000.

As of September 30, 2021, the Company had a net unrealized gain on available-for-sale securities of $48,189,000, which is recorded net of tax as part of shareholders' equity.

Available-for-sale securities decreased $87,222,000, or 4.1%, during the year ended September 30, 2022, to $2,051,037,000, primarily due to a $123,077,000 decline in the value of available-for-sale securities, principal repayments of $510,156,000 and sales of $5,020,000, partially offset by purchases of $587,942,000.

As of September 30, 2022, the Company had a net unrealized loss on available-for-sale securities of $111,700,000, which is recorded net of tax as part of shareholders' equity.

Substantially all of the Company’s available-for-sale debt securities are issued by U.S.

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Held-to-maturity investment securities :

Held-to-maturity securities decreased by $339,813,000, or 48.1%, during the year ended September 30, 2021, to $366,025,000 primarily due to principal repayments and maturities of $332,001,000.

There were no held-to-maturity securities purchased or sold during the year ended September 30, 2021.

Held-to-maturity securities increased by $97,274,000 to $463,299,000, or 26.6%, during the year ended September 30, 2022, primarily due to purchases of $195,357,000 partially offset by principal repayments and maturities of $95,326,000.

There were no held-to-maturity securities sold during the year ended September 30, 2022.

Rising interest rates may cause these securities to be subject to unrealized losses.

As of September 30, 2021, the net unrealized gain on held-to-maturity securities was $13,522,000, which management attributes to the change of interest rates since acquisition.

As of September 30, 2022, the net unrealized loss on held-to-maturity securities was $56,439,000, which management attributes to the change in interest rates since acquisition.

Substantially all of the Company’s held-to-maturity debt securities are issued by U.S.

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(1) Includes $10,237,000 of SBA Payroll Protection Program loans as of September 30, 2022.

The following table summarizes the Company’s loan portfolio, due for the periods indicated based on contractual terms to maturity or repricing.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the Company’s loan portfolio, due for the periods indicated based on contractual terms to maturity or repricing.

September 30, 2022 Total Less than

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Interest receivable :

Interest receivable was $50,636,000 as of September 30, 2021, a decrease of $3,163,000, or 5.9%, since September 30, 2020.

The decrease was primarily a result of payments on previously deferred amounts on CARES Act loan modifications.

Interest receivable was $63,872,000 as of September 30, 2022, an increase of $13,236,000, or 26.1%, since September 30, 2021.

The increase was primarily a result of a 16.5% increase in loans receivable and the increase in interest rates.

Bank Owned Life Insurance :

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During 2022, the Company was able to increase transaction accounts by $583,502,000 or 4.8% while time deposits decreased by $96,044,000 or 2.8%.

The following table shows customer deposits by account type.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table shows customer deposits by account type.

($ in thousands) September 30, 2022 September 30, 2021

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FHLB advances :

FHLB advances declined to $1,720,000,000 as of September 30, 2021, as compared to $2,700,000,000 at September 30, 2020.

Strong growth in customer deposits allowed the Company to reduce FHLB borrowings.

Since September 30, 2020, cash flow hedges totaling $600,000,000 were terminated and the associated FHLB advances were paid off.

An additional $150,000,000 of unhedged advances were repaid prior to maturity (resulting in a prepayment fee of $13,788,000) and the remaining $230,000,000 of unhedged borrowings were not renewed upon maturity.

The weighted average rate for FHLB borrowings was 1.51% as of September 30, 2021, versus 1.79% at September 30, 2020, the decrease being primarily due to repayment of advances with higher rates.

FHLB advances increased to $2,125,000,000 as of September 30, 2022, as compared to $1,720,000,000 at September 30, 2021.

Strong growth in in loans receivable were partially funded by new FHLB borrowings.

The weighted average rate for FHLB borrowings was 2.02% as of September 30, 2022, versus 1.51% at September 30, 2021, the increase being primarily due to higher rates on new short-term borrowings.

The Company has entered into interest rate swaps to hedge interest rate risk and convert certain FHLB advances to fixed rate payments.

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The increase in net interest income from the prior year was primarily due to average interest-earning assets increasing by $776,307,000 or 4.3% while average interest-bearing liabilities increased by $273,037,000 or 1.9%.

During 2021, the average balance of loans receivable increased $943,212,000 or 7.7%, while the combined average balances of mortgage backed securities, other investment securities and cash increased by $1,054,758,000 or 28.9%.

During 2022, the average balance of loans receivable increased $1,873,469,000 or 14.2%, while the combined average balances of mortgage backed securities, other investment securities and cash decreased by $1,061,655,000 or 22.6%.

Average noninterest-bearing deposits grew by $569,347,000 over the same period.

The change in net interest income was also impacted by the average rate earned on interest-earning assets declining by 58 basis points while the average rate paid on interest-bearing liabilities declined by 54 basis points.

The change in net interest income was also impacted by the average rate earned on interest-earning assets increasing by 26 basis points while the average rate paid on interest-bearing liabilities declined by 11 basis points.

Rate/Volume Analysis

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Provision (Release) for Credit Losses :

The Company recorded a provision for credit losses of $500,000 in fiscal 2021, compared to provision of $21,750,000 in 2020.

The significant provision in 2020 was due to higher expected losses with the onset of the global pandemic.

In 2021, provisioning for net growth in the loan portfolio was mostly offset by releases related to improvements in macroeconomic variables used in the forecast component of the reserve.

The Company had recoveries, net of

The Company recorded a provision for credit losses of $3,000,000 in 2022, compared to a provision of $500,000 for 2021.

For the year ended September 30, 2022, net recoveries were $3,508,000, compared to $6,345,000 in the prior year.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

charge-offs, of $6,345,000 for the year ended September 30, 2021, compared with $3,271,000 of net recoveries for the year ended September 30, 2020.

Other Income :

Other income was $60,561,000 for the year ended September 30, 2021, a decrease of $26,399,000, or 30.4%, from $86,960,000 for the year ended September 30, 2020.

The decrease is primarily due to the recognition of a net gain of $30,700,000 in 2020 from the sale and valuation adjustments of fixed assets, including a branch property in Bellevue, Washington.

In 2021, a gain of $4,700,000 was recorded for equity investments based on updated valuations, a gain of $14,110,000 was recognized on the partial termination of an interest rate swap being used to hedge a FHLB borrowing, and these amounts were partially offset by a $13,788,000 loss on early repayment of a fixed-rate FHLB borrowing.

Other income was $66,372,000 for the year ended September 30, 2022, an increase of $5,811,000, or 9.6%, from $60,561,000 for the year ended September 30, 2021.

The increase is primarily due to unrealized gains recorded for certain equity investments being $3,555,000 higher in the year ended September 30, 2022.

Other Expense :

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Compensation and benefits costs increased $17,811,000 or 10.1% year-over-year primarily due to annual merit increases, higher bonus compensation accruals related to strong deposit and loan growth, and strategic investments in top talent as well as contract staff to support strategic projects.

Information technology costs decreased by $10,165,000 in 2021, as 2020 reflected larger investments in new hardware and software as well as a $5,900,000 impairment charge.

In September 2021, the company recognized a $2,500,000 civil money penalty paid to the Office of the Comptroller of the Currency (“OCC”) related to the previously-disclosed February 2018, Consent Order for Anti-Money Laundering and Bank Secrecy Act (“AML/BSA”) deficiencies.

Information technology costs increased by $4,465,000 in 2022 as compared to 2021 as we continue to execute becoming a digital first bank.

The Company’s efficiency ratio was 54.3% for 2022 as compared to 58.8% for the prior year.

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The effective tax rate for 2022 was 21.23% as compared to 21.24% for the year ended September 30, 2021.

The effective tax rate of 21.24% for 2021 differs from the statutory rate mainly due to the effects of state taxes, bank-owned life insurance, tax credit investments, tax-exempt loans to municipal entities and other qualified borrowers as well as adjustments to deferred tax items.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The effective tax rate of 21.23% for 2022 differs from the statutory rate of 21% mainly due to the effects of state taxes, tax exempt income, tax credit investments and certain differences in book and tax deductions.

COMPARISON OF 2021 RESULTS WITH 2020

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The Company's shareholders' equity at September 30, 2022, was $2,274,260,000, or 10.95% of total assets, as compared to $2,126,064,000, or 10.82% of total assets, at September 30, 2021.

The Company's shareholders' equity was impacted in the year by the February 8, 2021 issuance of Series A Preferred Stock and the receipt of net proceeds, after underwriting discounts and expenses of $293,325,000.

Additionally, net income of $183,615,000, the payment of $65,876,000 in common stock dividends, payment of $6,378,000 in preferred stock dividends, $348,651,000 of treasury stock purchases, as well as other comprehensive income of $52,832,000 impacted shareholders' equity.

The Company's shareholders' equity was impacted in the year by net income of $236,330,000, the payment of $61,576,000 in common stock dividends, payment of $14,625,000 in preferred stock dividends, $3,260,000 of treasury stock purchases, as well as other comprehensive loss of $17,304,000.

The Company paid out 28.0% of its 2022 earnings in cash dividends to common shareholders, compared with 38.1% last year.

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Management believes the Company's strong net worth position allows it to manage balance sheet risk and provide the capital support needed for controlled growth in a regulated environment.

Share repurchases were temporarily suspended during the COVID-19 pandemic but resumed in 2021.

The Company’s share repurchase program may be modified, suspended or terminated at any time, and the timing and amount of share repurchases is subject to market conditions and the market price of the Company’s common stock, as well as other factors.

The Bank has a credit line with the Federal Home Loan Bank of Des Moines ("FHLB") up to 45% of total assets depending on specific collateral eligibility.

The Bank has a credit line with the FHLB up to 45% of total assets depending on specific collateral eligibility.

This line provides a substantial source of additional liquidity if needed.

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The Bank is also eligible to borrow under the Federal Reserve Bank's primary credit program.

The Company's cash and cash equivalents were $2,090,809,000 at September 30, 2021, which is a 22.8% increase from the balance of $1,702,977,000 as of September 30, 2020.

This increase was primarily due to the $1,762,488,000 increase in customer deposits, the majority of which was used to fund growth in the loan portfolio and paydown FHLB borrowings.

The Company's cash and cash equivalents were $683,965,000 at September 30, 2022, which is a 67.3% decrease from the balance of $2,090,809,000 as of September 30, 2021.

The change was primarily due to funding growth in the loan portfolio of $2,279,994,000 partially offset by the $487,458,000 increase in customer accounts and $405,000,000 increase in FHLB borrowings.

See “Changes in Financial Condition” above and the “Statement of Cash Flows” included in the financial statements for additional details regarding this change.

The following table presents the Company's significant fixed and determinable contractual obligations, within the categories described below, by contractual maturity or payment amount.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the Company's significant fixed and determinable contractual obligations, within the categories described below, by contractual maturity or payment amount.

September 30, 2022 Total Less than

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis