WAFD INC 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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 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. 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 39.1% variable rate and 60.9% fixed rate as of September 30, 2022 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 79.2% 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 $683,965,000 and shareholders' equity of $2,274,260,000 provide management with flexibility in managing interest rate risk. Based on management's assessment of the current interest rate environment, the Company has taken steps, including growing commercial loans having shorter average lives and transaction deposit accounts, to position itself for changing interest rates. Net Interest Income Sensitivity. We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earning assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. The analysis presented below assumes a constant balance sheet. Actual results would differ from the assumptions used in this model, as management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates. In the event of an immediate and parallel increase of 200 basis points in both short- and long-term interest rates, the model estimates that net interest income would increase by 1.9% in the next year. This compares to an estimated increase of 9.7% as of the September 30, 2021 analysis. It is noted that a flattening yield curve where the spread between short-term rates and long-term rates decreases would likely result in lower net interest income and vice versa for a steepening yield curve. Management estimates that a gradual increase of 300 basis points in short-term rates and 100 basis points in long-term rates over two years would result in a 0.5% increase in net interest income in the first year and an increase of 1.8% in the second year, assuming a constant balance sheet and no management intervention. Net Portfolio Value ("NPV") Sensitivity. The NPV is an estimate of the market value of shareholders' equity at a point in time. It is derived by calculating the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities and off-balance-sheet contracts. The sensitivity of the NPV to changes in interest rates provides a longer term view of interest rate risk of the current balance sheet as it incorporates all future expected cash flows. As of September 30, 2022, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $617,000,000, or 20.9%, and the NPV-to-total assets ratio to decline to 12.6% from a base of 14.9%. As of September 30, 2021, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV was estimated to decrease by $207,000,000, or 6.8%, and the NPV-to-total assets ratio to decline to 15.2% from a base of 15.5%. The change in the sensitivity of the NPV ratio to this assumed change in interest rates is primarily due to the flattening of the yield curve and changes in balance sheet mix year over year. 58 Interest Rate Spread. The interest rate spread is measured as the difference between the rate on interest-earning assets and the rate on interest-bearing liabilities at the end of each period. The period end interest rate spread was 3.36% at September 30, 2022 and 2.45% at September 30, 2021. As of September 30, 2022, the weighted-average rate on interest-earning assets increased by 124 basis points to 4.04% compared to September 30, 2021. The higher rate on interest-earning assets is due primarily to the Federal Reserve Bank's rate increases which have led to higher rates on adjustable rate loans, investment securities and cash as well as asset mix shifting to loans receivable. As of September 30, 2022, the weighted-average rate on interest-bearing liabilities increased by 33 basis points to 0.68% compared to September 30, 2021. The higher rate on interest-bearing liabilities primarily resulted from customer deposits repricing and a higher rate on new FHLB borrowings. The period end interest rate spread for the last eight fiscal quarters is shown below: SEP 2022 JUN 2022 MAR 2022 DEC 2021 SEP 2021 JUN 2021 MAR 2021 DEC 2020 Interest rate on loans and mortgage-backed securities 4.13 % 3.67 % 3.37 % 3.30 % 3.37 % 3.30 % 3.38 % 3.48 % Interest rate on other interest-earning assets 3.16 2.02 0.85 0.67 0.53 0.58 0.54 0.64 Combined, all interest-earning assets 4.04 3.50 2.93 2.83 2.80 2.72 2.75 2.92 Interest rate on customer accounts 0.51 0.32 0.24 0.23 0.23 0.24 0.25 0.36 Interest rate on borrowings (1) 2.02 1.43 1.55 1.49 1.51 1.74 1.84 1.82 Combined cost of funds 0.68 0.43 0.36 0.35 0.35 0.41 0.45 0.58 Interest rate spread 3.36 % 3.07 % 2.57 % 2.48 % 2.45 % 2.31 % 2.30 % 2.34 % (1) Represents the effective rate taking into consideration cash flow hedges on FHLB borrowings. The chart below shows the volatility of our period end net interest spread (dashed line measured against the right axis) compared to the relatively consistent growth in net interest income (solid line measured against the left axis). The relative consistency of net interest income is accomplished by actively managing the size and composition of the balance sheet through different rate cycles. Net Interest Margin. The net interest margin is measured using net interest income divided by average interest-earning assets for the period. The net interest margin increased to 3.16% for the year ended September 30, 2022, from 2.80% for the year 59 ended September 30, 2021. The yield on interest-earning assets increased 26 basis points to 3.54% and the cost of interest-bearing liabilities decreased by 11 basis points to 0.50%. The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable rate assets and cash. Amortization of net loan origination fees on PPP loans declined to $6,536,000 during the year ended September 30, 2022 compared to $10,291,000 in the prior year. The lower rate in interest-bearing liabilities was primarily due to replacing high-yielding, long-term FHLB borrowings with new borrowings at lower rates. For the year ended September 30, 2022, average interest-earning assets increased by 4.3% to $18,812,481,000, up from $18,036,174,000 for the year ended September 30, 2021. The substantial balance sheet growth in 2022 was primarily due to the growth in loans receivable. During 2022, average 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%. Management views organic loan growth as the highest and best use of capital; thus the focus on primarily growing loans receivable. During 2022, average interest-bearing customer deposit accounts increased $775,955,000 or 6.5% and the average balance of FHLB borrowings decreased by $502,917,000, or 22.5%, from 2021. 60 The following table sets forth the information explaining the changes in the net interest income and net interest margin. Net Interest Income Summary Year Ended September 30, 2022 2021 2020 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Loans receivable (1) $ 15,083,111 $ 601,593 3.99 % $ 13,209,642 $ 537,660 4.07 % $ 12,266,430 $ 545,708 4.44 % Mortgage-backed securities 1,141,501 26,332 2.31 1,290,901 24,707 1.91 2,060,804 49,312 2.39 Cash and other investment securities (2) 2,500,008 33,555 1.34 3,412,263 23,051 0.68 1,587,602 20,112 1.26 FHLB & FRB stock 87,861 4,879 5.55 123,368 6,192 5.02 135,294 6,133 4.52 Total interest-earning assets 18,812,481 666,359 3.54 % 18,036,174 591,610 3.28 % 16,050,130 621,265 3.86 % Other assets 1,343,848 1,279,085 1,254,061 Total assets $ 20,156,329 $ 19,315,259 $ 17,304,191 Liabilities and Shareholders’ Equity Interest-bearing customer accounts $ 12,738,719 43,041 0.34 % $ 11,962,764 42,312 0.35 % $ 10,647,044 100,312 0.94 % FHLB advances 1,731,110 28,729 1.66 2,234,027 44,188 1.98 2,532,596 51,445 2.03 Other borrowings 10 — 2.49 11 — 0.69 19 — 0.46 Total interest-bearing liabilities 14,469,839 71,770 0.50 % 14,196,802 86,500 0.61 % 13,179,659 151,757 1.15 % Noninterest-bearing customer accounts 3,249,120 2,679,773 1,870,032 Other liabilities 245,213 249,134 244,203 Total liabilities 17,964,172 17,125,709 15,293,894 Shareholders’ equity 2,195,157 2,189,550 2,010,297 Total liabilities and shareholders’ equity $ 20,159,329 $ 19,315,259 $ 17,304,191 Net interest income/interest rate spread $ 594,589 3.04 % $ 505,110 2.67 % $ 469,508 2.71 % Net interest margin (3) 3.16 % 2.80 % 2.93 % ___________________ (1) Interest income includes net amortization-accretion of deferred loan fees, costs, discounts and premiums of $29,156,000, $48,079,000 and $25,060,000 for year ended 2022, 2021 and 2020, 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. 61 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 abrupt upward or downward changes in short term rates. 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 Increase (Decrease) in Net Interest Income Basis Point Increase (Decrease) in Interest Rates September 30, 2022 September 30, 2021 (In thousands, except percentages) (200) $ (18,501) (2.40) % N/A N/A (100) (10,525) (1.37) N/A N/A 100 4,788 0.62 $ 24,612 4.76 % 200 14,381 1.87 50,065 9.67 300 21,110 2.74 72,721 14.05 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 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, 2022 Change in Interest Rates Estimated NPV Amount Estimated Increase/(Decrease) in NPV Amount NPV as % of Assets (Basis Points) (In thousands) (In thousands) 300 $ 1,987,904 $ (956,559) 11.06 % 200 2,327,875 (616,588) 12.57 100 2,647,946 (296,517) 13.86 No change 2,944,463 — 14.93 September 30, 2021 Change in Interest Rates Estimated NPV Amount Estimated Increase/(Decrease) in NPV Amount NPV as % of Assets (Basis Points) (In thousands) (In thousands) 300 $ 2,705,037 $ (353,315) 14.88 % 200 2,851,010 (207,342) 15.24 100 2,973,814 (84,538) 15.45 No change 3,058,352 — 15.46 As of September 30, 2022, the Company was in compliance with all of its interest rate risk policy guidelines. 62