WAFD INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report. 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. 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 The Company has determined that the only accounting policy critical to an understanding of its consolidated financial statements relates to the methodology for determining the amount of the allowance for credit losses (“ACL”). Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on individually evaluated loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Going forward, the methodology used to calculate the ACL will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility in our reported earnings. 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.” 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 (In thousands) Beginning balance $ 171,300 $ 166,955 $ 131,534 $ 129,257 $ 123,073 Charge-offs: Commercial loans Multi-Family — — — — — Commercial Real Estate 529 — 111 428 36 Commercial & Industrial Loans 1,202 31 4,196 5,782 3,574 Construction — — — — — Land – Acquisition & Development 11 2 11 107 13 Total commercial loans 1,742 33 4,318 6,317 3,623 Consumer loans Single-Family Residential — 106 131 268 1,142 Construction – Custom — — — 1,973 50 Land – Consumer Lot Loans 27 — 237 804 67 HELOC — — — 1,086 668 Consumer 370 286 1,069 1,028 382 Total consumer loans 397 392 1,437 5,159 2,309 2,139 425 5,755 11,476 5,932 Recoveries: Commercial loans Multi-Family — — 498 — — Commercial Real Estate 984 2,789 2,447 1,102 189 Commercial & Industrial Loans 73 92 443 3,443 714 Construction 2,179 — 188 99 — Land – Acquisition & Development 70 622 2,070 7,457 14,223 Total commercial loans 3,306 3,503 5,646 12,101 15,126 Consumer loans Single-Family Residential 1,002 2,026 1,394 1,020 757 Construction – Custom — — — — — Land – Consumer Lot Loans 48 168 639 719 35 HELOC 351 52 95 46 71 Consumer 940 1,021 1,252 1,167 993 Total consumer loans 2,341 3,267 3,380 2,952 1,856 5,647 6,770 9,026 15,053 16,982 Net charge-offs (recoveries) (3,508) (6,345) (3,271) (3,577) (11,050) ASC 326 Adoption Impact — — 17,750 — — Provision (release) for loan losses and transfers (2,000) (2,000) 14,400 (1,300) (4,866) Ending balance (1) $ 172,808 $ 171,300 $ 166,955 $ 131,534 $ 129,257 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. 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows changes in the Company's allowance for credit losses since the prior year. September 30, 2022 September 30, 2021 $ Change % Change (In thousands) Allowance for credit losses: Commercial loans Multi-family $ 12,013 $ 16,949 $ (4,936) (29) % Commercial real estate 25,814 23,437 2,377 10 % Commercial & industrial 57,210 45,957 11,253 24 % Construction 26,161 25,585 576 2 % Land - acquisition & development 12,278 13,447 (1,169) (9) % Total commercial loans 133,476 125,375 8,101 6 % Consumer loans Single-family residential 25,518 30,978 (5,460) (18) % Construction - custom 3,410 4,907 (1,497) (31) % Land - consumer lot loans 5,047 4,939 108 2 % HELOC 2,482 2,390 92 4 % Consumer 2,875 2,711 164 6 % Total consumer loans 39,332 45,925 (6,593) (14) % Total allowance for loan losses 172,808 171,300 1,508 1 % Reserve for unfunded commitments 32,500 27,500 5,000 18 % Total allowance for credit losses $ 205,308 $ 198,800 $ 6,508 3 % The allowance for loan losses increased by $1,508,000, or 0.88%, from $171,300,000 as of September 30, 2021, to $172,808,000 at September 30, 2022. As of September 30, 2022, the allowance of $172,808,000 is for loans that are evaluated on a pooled basis, which was comprised of $115,245,000 related to the quantitative component and $57,563,000 related to management's qualitative overlays. The Company recorded a provision for credit losses of $3,000,000 in 2022, compared to a provision of $500,000 for 2021. 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 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 $27,500,000 as of September 30, 2021. Management believes the total ACL is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments. 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the amount of the Company’s allowance for loan losses by loan portfolio and class (periods prior to 2020 applied the incurred loss model as the current expected credit loss methodology ("CECL") was implemented in 2020). September 30, 2022 2021 2020 2019 2018 Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) Allowance Loans to Total Loans (1) Coverage Ratio (2) ($ in thousands) Commercial loans Multi-family $ 12,013 16.2 % 0.5 % $ 16,949 16.3 % 0.8 % $ 13,853 11.8 % 0.9 % $ 7,391 11.7 % 0.5 % $ 8,329 11.9 % 0.6 % Commercial real estate 25,814 19.1 0.8 23,437 17.4 1.0 22,516 14.4 1.2 13,170 13.5 0.8 11,852 12.5 0.8 Commercial & industrial 57,210 14.2 2.5 45,957 16.3 2.0 38,665 16.5 1.8 31,450 10.5 2.5 28,702 9.8 2.5 Construction 26,161 8.7 1.9 25,585 7.9 2.3 24,156 10.5 1.8 32,304 9.6 2.8 31,317 9.1 3.0 Land – acquisition & development 12,278 1.3 5.8 13,447 1.3 7.5 10,733 1.2 7.0 9,155 1.3 5.7 7,978 1.1 6.5 Total commercial loans 133,476 125,375 109,923 93,470 88,178 Consumer loans Single-family residential 25,518 35.4 0.4 30,978 35.5 0.6 45,186 40.8 0.9 30,988 48.2 0.5 33,033 49.7 0.6 Construction – custom 3,410 2.4 0.9 4,907 2.5 1.4 3,555 2.3 1.2 1,369 2.1 0.5 1,842 2.5 0.6 Land – consumer lot loans 5,047 0.9 3.4 4,939 1.0 3.4 2,729 0.8 2.7 2,143 0.8 2.2 2,164 0.8 2.2 HELOC 2,482 1.3 1.2 2,390 1.2 1.5 2,571 1.1 1.8 1,103 1.2 0.8 781 1.1 0.6 Consumer 2,875 0.5 4.0 2,711 0.6 3.2 2,991 0.6 3.6 2,461 1.1 1.9 3,259 1.5 1.9 Total consumer loans 39,332 45,925 57,032 38,064 41,079 Total allowance for loan losses (3) $ 172,808 100 % $ 171,300 100 % $ 166,955 100 % $ 131,534 100 % $ 129,257 100 % ___________________ (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. 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. 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSET QUALITY Troubled debt restructured loans ("TDRs"). TDRs are reserved for under the Company's CECL methodology. Most TDRs are performing and accruing loans where the borrower has proactively approached the Company about modifications due to temporary financial difficulties. Each request is individually evaluated for merit and likelihood of success. The concession for these loans is typically a payment reduction through a rate reduction of 100 to 200 basis points for a specific term, usually six to twelve months. Interest-only payments may also be approved during the modification period. Concessions for construction, land A&D and multi-family loans are typically an extension of maturity combined with a rate reduction of normally 100 basis points. Before granting approval to modify a loan in a TDR, a borrower’s ability to repay is considered by evaluating current income levels, debt-to-income ratio, credit score, loan payment history and an updated evaluation of the secondary repayment source. If a loan is on non-accrual status before becoming a TDR, it will stay on non-accrual status following restructuring until it has been performing for at least six months, at which point it may be moved to accrual status. If a loan is on accrual status before it becomes a TDR, and it is concluded that a full repayment is highly probable, it will remain on accrual status following restructuring. If the homogeneous restructured loan does not perform, it is placed in non-accrual status when it is 90 days delinquent. For commercial loans, six consecutive payments on newly restructured loan terms are required prior to returning the loan to accrual status. After the required six consecutive payments are made, a management assessment may conclude that collection of the entire principal and interest due is still in doubt. In those instances, the loan will remain on non-accrual. A loan that defaults and is subsequently modified would impact the Company's delinquency trend, which is part of the qualitative risk factors component of the CECL methodology. Any modified loan that re-defaults and is charged-off would impact the quantitative component of the CECL methodology. Non-Performing Assets. When a borrower violates a condition of a loan, the Bank attempts to cure the default by contacting the borrower. In most cases, defaults are cured promptly. If the default is not cured within an appropriate time frame, typically 90 days, the Bank may institute appropriate action to collect the loan, such as making demand for payment or initiating foreclosure proceedings on the collateral. If foreclosure occurs, the collateral will typically be sold at public auction and may be purchased by the Bank. Loans are placed on nonaccrual status when, in the judgment of management, the probability of collecting interest or principal is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. The Bank does not accrue interest on loans 90 days past due or more. See Note A to the Consolidated Financial Statements included in Item 8 hereof for additional information. The Bank will consider modifying the interest rate and terms of a loan if it determines that a modification is deemed to be the best option available for collection in full or to minimize the loss to the Bank. Most loans restructured in 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 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. Principal forgiveness generally is not an available option for restructured loans. As of September 30, 2022, single-family residential loans comprised 82.5% 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. 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth information regarding the Company's restructured loans and non-performing assets. September 30, 2022 2021 2020 2019 2018 (In thousands) Performing restructured loans $ 55,823 $ 63,655 $ 89,072 $ 116,659 $ 150,667 Non-performing restructured loans 994 1,473 2,336 5,018 6,191 Total restructured loans 56,817 65,128 91,408 121,677 156,858 Non-accrual loans: Commercial loans Multi-family 5,912 475 — — 27,643 Commercial real estate 4,691 8,038 3,771 5,835 2,427 Commercial & industrial 5,693 365 329 1,292 — Construction — 505 1,669 — 920 Land – acquisition & development — 2,340 — 169 787 Total commercial loans 16,296 11,723 5,769 7,296 31,777 Consumer loans Single-family residential 17,450 19,320 22,431 25,271 — Construction – custom 435 — — — 8,971 Land – consumer lot loans 84 359 243 246 14,394 HELOC 233 287 553 907 523 Consumer 36 60 60 11 21 Total consumer loans 18,238 20,026 23,287 26,435 23,909 Total non-accrual loans (1) 34,534 31,749 29,056 33,731 55,686 Real estate owned 6,667 8,204 4,966 6,781 11,298 Other property owned 3,353 3,672 3,673 3,314 3,109 Total non-performing assets 44,554 43,625 37,695 43,826 70,093 Total non-performing assets and performing restructured loans $ 100,377 $ 107,280 $ 126,767 $ 160,485 $ 220,760 Total non-performing assets and restructured loans as a percent of total assets 0.48 % 0.55 % 0.67 % 0.97 % 1.39 % Total non-performing assets to total assets 0.21 % 0.22 % 0.20 % 0.27 % 0.44 % ___________________ (1) For the year ended September 30, 2022, the Company recognized $3,334,000 in interest income on cash payments received from borrowers on non-accrual loans. The Company would have recognized interest income of $1,330,000 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 $173,348,000 of loans that were less than 90 days delinquent at September 30, 2022 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 1.32% at September 30, 2022. For a discussion of the Company's policy for placing loans on non-accrual status, see Note A to the Consolidated Financial Statements included in Item 8 of this report. 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 $2,785,000 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. As of September 30, 2022, $55,823,000 or 98.3% of TDRs were performing. Non-performing TDRs of $994,000 are included in NPAs. Total NPAs 45 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, 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. The majority of REO properties are former bank premises that are expected to be sold. The ratio of the allowance for loan losses to non-accrual loans decreased to 500% as of September 30, 2022, from 540% as of September 30, 2021. 46 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION 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 $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. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. The remaining securities are issued by highly-rated municipalities or corporate borrowers. The Company does not believe that any of its available-for-sale debt securities have credit loss impairment as of September 30, 2022, therefore, no allowance was recorded. The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods. Held-to-maturity investment securities : 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, 2022, the net unrealized loss on held-to-maturity securities was $56,439,000, which management attributes to the change in interest rates since acquisition. Substantially all of the Company’s held-to-maturity debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. The Company did not record an allowance for credit losses for held-to-maturity securities as of September 30, 2022 as the investment portfolio consists primarily of U.S. government agency mortgage-backed securities that management deems to have immaterial risk of loss. The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods. The table below shows the available-for-sale and held-for-investment securities portfolios categorized by maturity band. September 30, 2022 Amortized Cost Weighted Average Yield ($ in thousands) Due in less than 1 year $ 75,000 3.74 % Due after 1 year through 5 years 214,341 3.50 Due after 5 years through 10 years 358,617 3.05 Due after 10 years 1,978,078 3.27 $ 2,626,036 3.28 % For further information on our investment portfolio, see Note C to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Loans receivable: Loans receivable, net of related contra accounts, increased $2,279,994,000, or 16.5%, to $16,113,564,000 at September 30, 2022, from $13,833,570,000 one year earlier. The increase resulted primarily from originations of $8,736,193,000 and loan purchases of $564,584,000, partially offset by loan repayments of $6,194,448,000 and a $773,187,000 increase to loans-in-process during the year ended September 30, 2022. Commercial loan originations accounted for 77.7% of 47 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS total originations and consumer originations were 22.3% as the Company continues to focus on commercial lending, coupled with growing economies in all major markets in which we operate. The following table presents loan balances by category and the year-over-year change. September 30, 2022 September 30, 2021 Change ($ in thousands) ($ in thousands) $ % Gross loans by category Commercial loans Multi-family $ 2,645,801 13.6 % $ 2,291,477 14.1 % $ 354,324 15.5% Commercial real estate 3,133,660 16.2 2,443,845 15.0 689,815 28.2 Commercial & industrial (1) 2,350,984 12.1 2,314,654 14.2 36,330 1.6 Construction 3,784,388 19.5 2,888,214 17.7 896,174 31.0 Land - acquisition & development 291,301 1.5 222,457 1.4 68,844 30.9 Total commercial loans 12,206,134 63.1 10,160,647 62.3 2,045,487 20.1 Consumer loans Single-family residential 5,771,862 29.8 4,951,627 30.4 820,235 16.6 Construction - custom 974,652 5.0 783,221 4.8 191,431 24.4 Land - consumer lot loans 153,240 0.8 149,956 0.9 3,284 2.2 HELOC 203,528 1.0 165,989 1.0 37,539 22.6 Consumer 75,543 0.4 87,892 0.5 (12,349) (14.1) Total consumer loans 7,178,825 36.9 6,138,685 37.7 1,040,140 16.9 Total gross loans 19,384,959 100 % 16,299,332 100 % 3,085,627 18.9% Less: Allowance for loan losses 172,808 171,300 1,508 0.9 Loans in process 3,006,023 2,232,836 773,187 34.6 Net deferred fees, costs and discounts 92,564 61,626 30,938 50.2 Total loan contra accounts 3,271,395 2,465,762 805,633 32.7 Net loans $ 16,113,564 $ 13,833,570 $ 2,279,994 16.5% (1) Includes $10,237,000 of SBA Payroll Protection Program loans as of September 30, 2022. 48 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 1 Year 1 to 5 Years 5 to 15 Years After 15 Years (In thousands) Commercial loans Multi-family $ 2,626,479 $ 804,188 $ 844,632 $ 943,280 $ 34,379 Commercial real estate 3,111,112 1,178,997 833,770 1,088,338 10,007 Commercial & industrial 2,343,403 1,363,572 519,991 395,508 64,332 Construction 1,423,891 1,190,975 52,986 172,793 7,137 Land - acquisition & development 223,616 210,088 11,237 2,291 — Total commercial loans 9,728,501 4,747,820 2,262,616 2,602,210 115,855 Consumer loans Single-family residential 5,726,979 65,329 38,782 385,768 5,237,100 Construction - custom 397,343 — — 3,306 394,037 Land - consumer lot loans 151,945 26,585 25,113 9,634 90,613 HELOC 206,033 205,811 145 77 — Consumer 75,571 31,452 2,379 34,309 7,431 Total consumer loans 6,557,871 329,177 66,419 433,094 5,729,181 $ 16,286,372 $ 5,076,997 $ 2,329,035 $ 3,035,304 $ 5,845,036 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 approximately five years. 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following tables provide information regarding loans receivable by loan class and geography. September 30, 2022 Multi- family Commercial Real Estate Commercial and Industrial Construction Land - A & D Single - Family Residential Construction - custom Land - Lot Loans Consumer HELOC Total (In thousands) Washington $ 283,434 $ 492,925 $ 964,779 $ 270,403 $ 68,403 $ 2,787,331 $ 220,476 $ 84,514 $ 111,276 $ 31,472 $ 5,315,013 Oregon 500,748 383,981 240,020 156,781 54,767 817,868 39,884 15,912 26,091 387 2,236,439 Arizona 583,341 537,134 123,129 249,684 15,883 720,414 47,847 21,998 22,570 291 2,322,291 Utah 285,807 265,358 95,718 370,829 29,853 448,050 34,451 5,299 11,294 11,709 1,558,368 Texas 423,277 650,279 576,134 184,670 23,218 147,709 2,131 207 2,908 25 2,010,558 New Mexico 153,519 237,446 18,261 62,062 9,470 193,004 11,518 3,212 10,681 664 699,837 Idaho 122,474 204,419 23,558 50,491 16,413 342,086 27,230 14,461 14,291 57 815,480 Nevada 143,749 157,897 47,409 39,782 5,609 252,109 13,806 6,342 6,922 11,833 685,458 Other 130,130 181,673 254,395 39,189 — 18,408 — — — 19,133 642,928 $ 2,626,479 $ 3,111,112 $ 2,343,403 $ 1,423,891 $ 223,616 $ 5,726,979 $ 397,343 $ 151,945 $ 206,033 $ 75,571 $ 16,286,372 Percentage by geographic area September 30, 2022 Multi- family Commercial Real Estate Commercial and Industrial Construction Land - A & D Single - Family Residential Construction - custom Land - Lot Loans Consumer HELOC Total As % of total gross loans Washington 1.7 % 3.0 % 5.9 % 1.7 % 0.4 % 17.1 % 1.3 % 0.5 % 0.7 % 0.2 % 32.5 % Oregon 3.1 2.3 1.5 1.0 0.4 5.0 0.2 0.1 0.2 — 13.8 Arizona 3.6 3.3 0.8 1.5 0.1 4.4 0.3 0.2 0.1 — 14.3 Utah 1.7 1.6 0.6 2.3 0.2 2.8 0.2 — 0.1 0.1 9.6 Texas 2.6 4.0 3.5 1.1 0.1 0.9 — — — — 12.2 New Mexico 0.9 1.5 0.1 0.4 0.1 1.2 0.1 — 0.1 — 4.4 Idaho 0.8 1.3 0.1 0.3 0.1 2.1 0.2 0.1 0.1 — 5.1 Nevada 0.9 1.0 0.3 0.2 — 1.6 0.1 — — 0.1 4.2 Other 0.8 1.1 1.6 0.2 — 0.1 — — — 0.1 3.9 16.1 % 19.1 % 14.4 % 8.7 % 1.4 % 35.2 % 2.4 % 0.9 % 1.3 % 0.5 % 100 % Percentage by geographic area as a % of each loan type September 30, 2022 Multi- family Commercial Real Estate Commercial and Industrial Construction Land - A & D Single - Family Residential Construction - custom Land - Lot Loans Consumer HELOC As % of total gross loans Washington 10.8 % 15.8 % 41.2 % 19.0 % 30.6 % 48.6 % 55.5 % 55.6 % 54.0 % 41.6 % Oregon 19.1 12.3 10.2 11.0 24.5 14.3 10.0 10.5 12.7 0.5 Arizona 22.2 17.3 5.3 17.5 7.1 12.6 12.0 14.5 10.9 0.4 Utah 10.9 8.5 4.1 26.0 13.4 7.8 8.7 3.5 5.5 15.5 Texas 16.1 20.9 24.6 13.0 10.4 2.6 0.5 0.1 1.4 — New Mexico 5.8 7.6 0.8 4.4 4.2 3.4 2.9 2.1 5.2 0.9 Idaho 4.7 6.6 1.0 3.5 7.3 6.0 6.9 9.5 6.9 0.1 Nevada 5.5 5.1 2.0 2.8 2.5 4.4 3.5 4.2 3.4 15.7 Other 4.9 5.9 10.8 2.8 — 0.3 — — — 25.3 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 50 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows the change in the geographic distribution by state of the loan portfolio since the prior year. September 30, 2022 2021 Change Washington 32.5 % 36.1 % (3.6) Oregon 13.8 15.9 (2.1) Arizona 14.3 11.9 2.4 Utah 9.6 8.0 1.6 Texas 12.2 10.1 2.1 New Mexico 4.4 4.6 (0.2) Idaho 5.1 5.1 — Nevada 4.2 4.0 0.2 Other (1) 3.9 4.3 (0.4) 100 % 100 % (1) Includes loans from outside of our eight state footprint. CARES Act and PPP Program : Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress, the Company offered payment deferrals on consumer loans and commercial loans. The Company also made loans to small businesses through the Small Business Administration Paycheck Protection Program. For further information on these activities, see Note D to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Allowance for credit losses : For details, see the “Allowance for Credit Losses" section above in this report. Non-performing assets : For details, see the “Asset Quality" section above in this report. Troubled debt restructured loans ("TDRs") : For details, see the “Asset Quality" section above in this report. Real estate owned : For details, see the “Asset Quality" section above in this report. Interest receivable : 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 : Bank-owned life insurance increased to $237,931,000 as of September 30, 2022 from $233,263,000 as of September 30, 2021, primarily as a result of increases in the cash surrender value of the policies. The investments in bank-owned life insurance serve to assist in funding growing employee benefit costs. Intangible assets : The Company's intangible assets totaled $309,009,000 at September 30, 2022 compared to $310,019,000 as of September 30, 2021. The balance at September 30, 2022 is comprised of $303,457,000 of goodwill and the unamortized balance of the core deposit and other intangibles of $5,552,000. Customer accounts : As of September 30, 2022, customer deposits totaled $16,029,570,000 compared with $15,542,112,000 at September 30, 2021, a $487,458,000, or 3.1%, increase. During 2022, the Company was able to increase transaction accounts by $583,502,000 or 4.8% while time deposits decreased by $96,044,000 or 2.8%. 51 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows customer deposits by account type. ($ in thousands) September 30, 2022 September 30, 2021 Deposit Account Balance As a % of Total Deposits Weighted Average Rate Deposit Account Balance As a % of Total Deposits Weighted Average Rate Non-interest checking $ 3,266,734 20.4 % — % $ 3,122,397 20.1 % — % Interest checking 3,497,795 21.8 0.90 3,566,322 22.9 0.20 Savings 1,059,093 6.6 0.13 1,039,336 6.7 0.11 Money market 4,867,905 30.4 0.49 4,379,970 28.2 0.19 Time deposits 3,338,043 20.8 0.74 3,434,087 22.1 0.54 Total $ 16,029,570 100 % 0.51 % $ 15,542,112 100 % 0.23 % The following table shows the geographic distribution by state for customer deposits. ($ in thousands) September 30, 2022 September 30, 2021 $ Change % Change Washington $ 7,209,123 45.0 % $ 6,742,208 43.4 % $ 466,915 6.9 % Oregon 2,878,933 18.0 3,006,222 19.3 (127,289) (4.2) % Arizona 1,625,957 10.1 1,551,671 10.0 74,286 4.8 % New Mexico 1,363,525 8.5 1,292,965 8.3 70,560 5.5 % Idaho 1,052,550 6.6 1,067,834 6.9 (15,284) (1.4) % Utah 802,635 5.0 1,027,317 6.6 (224,682) (21.9) % Nevada 534,655 3.3 522,988 3.4 11,667 2.2 % Texas 562,192 3.5 330,907 2.1 231,285 69.9 % $ 16,029,570 100 % $ 15,542,112 100 % $ 487,458 3.1 % 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, 2022 1 to 3 Months 4 to 6 Months 7 to 12 Months 13 to 24 Months 25 to 36 Months 37 to 60 Months Total (In thousands) Fixed-rate time deposits: Under 1.00% $ 921,215 $ 805,638 $ 762,799 $ 104,030 $ 42,473 $ 69,058 $ 2,705,213 1.00% to 1.99% 16,134 1,300 — 223,747 63,520 — 304,701 2.00% to 2.99% 70,386 159,584 47,882 50,000 — — 327,852 3.00% to 3.99% — 277 — — — — 277 Total $ 1,007,735 $ 966,799 $ 810,681 $ 377,777 $ 105,993 $ 69,058 $ 3,338,043 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, 2022, the Bank had $804,410,000 of time deposits in amounts of $250,000 or more outstanding, maturing as follows: $232,735,000 within 3 months; $277,930,000 over 3 months through 6 months; $167,565,000 over 6 months through 12 months; and $126,180,000 thereafter. 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 52 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS greater than four years, the penalty is 365 days of interest. Early withdrawal penalty fee income for the years ended 2022, 2021 and 2020 amounted to $267,000, $198,000 and $539,000, respectively. For additional details on customer accounts, including uninsured deposits, see Note K to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. FHLB advances : 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. Taking into account these hedges, the weighted average effective maturity of FHLB advances at September 30, 2022 is 3.25 years. 53 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF 2022 RESULTS WITH 2021 Net Income : Net income increased $52,715,000, or 28.7%, to $236,330,000 for the year ended September 30, 2022, as compared to $183,615,000 for the year ended September 30, 2021. The change was due to the factors described below. Net Interest Income : For the year ended September 30, 2022, net interest income was $594,589,000, an increase of $89,480,000 or 17.7% from the year ended September 30, 2021. 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 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 increasing by 26 basis points while the average rate paid on interest-bearing liabilities declined by 11 basis points. 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, 2022 vs. 2021 Increase (Decrease) Due to 2021 vs. 2020 Increase (Decrease) Due to 2020 vs. 2019 Increase (Decrease) Due to Volume Rate Total Volume Rate Total Volume Rate Total (In thousands) (In thousands) (In thousands) Interest income: Loan portfolio $ 74,710 $ (10,778) $ 63,932 $ 40,365 $ (48,413) $ (8,048) $ 21,197 $ (43,585) $ (22,388) Mortgage-backed securities (3,101) 4,725 1,624 (16,011) (8,593) (24,604) (13,094) (12,079) (25,173) Investments (1) (9,347) 18,540 9,193 18,824 (15,827) 2,997 19,566 (22,206) (2,640) All interest-earning assets 62,262 12,487 74,749 43,178 (72,833) (29,655) 27,669 (77,870) (50,201) Interest expense: Customer accounts 2,170 (1,442) 728 11,184 (69,183) (57,999) 9,781 (31,685) (21,904) FHLB advances and other borrowings (9,002) (6,457) (15,459) (6,003) (1,254) (7,257) (35) (16,710) (16,745) All interest-bearing liabilities (6,832) (7,899) (14,731) 5,181 (70,437) (65,256) 9,746 (48,395) (38,649) Change in net interest income $ 69,094 $ 20,386 $ 89,480 $ 37,997 $ (2,396) $ 35,601 $ 17,923 $ (29,475) $ (11,552) ___________________ (1) Includes interest on cash equivalents and dividends on stock of the FHLB of Des Moines and FRB of San Francisco. Provision (Release) for Credit Losses : The Company recorded a provision for credit losses of $3,000,000 in 2022, compared to a provision of $500,000 for 2021. 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. 54 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income : 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 : Operating expense was $358,575,000 for the year ended September 30, 2022, an increase of $26,116,000, or 7.9%, from the $332,459,000 for the year ended September 30, 2021. 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 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. The number of staff, including part-time employees on a full-time equivalent basis, was 2,132 and 2,082 at September 30, 2022 and 2021, respectively. Total operating expense for the years ended September 30, 2022, and 2021 were 1.78% and 1.72%, respectively, of average assets. Gain (Loss) on Real Estate Owned : Net gain on real estate owned was $651,000 for the year ended September 30, 2022, compared to a net gain of $427,000 for the year ended September 30, 2021. This amount includes ongoing maintenance expense, periodic valuation adjustments, and gains (losses) on sales of REO. Income Tax Expense : Income tax expense was $63,707,000 for the year ended September 30, 2022, an increase of $14,184,000, or 28.6%, from the $49,523,000 for the year ended September 30, 2021. The increase is mostly due to a 28.7% increase in pre-tax income. 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 21.23% 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 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. 55 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The principal sources of funds for the Company's activities are loan repayments (including prepayments), net deposit inflows, borrowings, repayments and sales of investments and retained earnings, if applicable. The Company's principal sources of revenue are interest on loans and interest and dividends on investments. Additionally, the Company earns fee income for loan, deposit, insurance and other services. On February 8, 2021, in connection with an underwritten public offering, the Company issued 300,000 shares of 4.875% Noncumulative Perpetual Series A Preferred Stock (“Series A Preferred Stock”). Net proceeds, after underwriting discounts and expenses, were $293,325,000. The public offering consisted of the issuance and sale of 12,000,000 depositary shares, each representing a 1/40th interest in a share of the Series A Preferred Stock, at a public offering price of $25.00 per depositary share. Holders of the depositary shares are entitled to all proportional rights and preferences of the Series A Preferred Stock (including dividend, voting, redemption and liquidation rights). The depositary shares are traded on the NASDAQ under the symbol "WAFDP." The Series A Preferred Stock is redeemable at the option of the Company, subject to all applicable regulatory approvals, on or after April 15, 2026. The Company'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 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. For the year ended September 30, 2022, the Company returned 27.4% of net income to shareholders in the form of cash dividends and share repurchases as compared to 226% for the year ended September 30, 2021. 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. 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 FHLB up to 45% of total assets depending on specific collateral eligibility. This line provides a substantial source of additional liquidity if needed. Based on collateral pledged as of September 30, 2022, the Bank had $3,564,720,000 of additional borrowing capacity at the FHLB. The Bank has entered into borrowing agreements with the FHLB to borrow funds under a short-term floating rate cash management advance program and fixed-rate term advance agreements. All borrowings are secured by stock of the FHLB, deposits with the FHLB, and a blanket pledge of qualifying loans receivable as provided in the agreements with the FHLB. The Bank is also eligible to borrow under the Federal Reserve Bank's primary credit program. 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. 56 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 1 Year 1 to 5 Years Over 5 Years (In thousands) Customer accounts (1) $ 16,029,570 $ 15,476,743 $ 552,827 $ — Debt obligations (2) 2,125,000 2,025,000 100,000 — Operating lease obligations 30,695 6,215 16,697 7,783 $ 18,185,265 $ 17,507,958 $ 669,524 $ 7,783 (1) Includes non-maturing customer transaction accounts. (2) Represents contractual maturities of FHLB advances. Taking into account cash flow hedges, the weighted average effective maturity of FHLB advances at September 30, 2022 is 3.25 years. These obligations are included in the Consolidated Statements of Financial Condition. The payment amounts of the operating lease obligations represent those amounts contractually due. 57